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 SEPTEMBER 30, 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 November 13, 2000 was 1,368,173.
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
September 30, 2000 and June 30, 2000....................2
Consolidated Condensed Statement of
Income for the three-month
periods ended September 30, 2000 and 1999...............3
Consolidated Condensed Statement of
Shareholders' Equity for the three
months ended September 30, 2000 and 1999................4
Consolidated Condensed Statement of
Cash Flows for the three months
ended September 30, 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.
MARION CAPITAL HOLDINGS, INC.
AND WHOLLY-OWNED SUBSIDIARY
FIRST FEDERAL SAVINGS BANK OF MARION
CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL CONDITION
(Unaudited)
September 30, June 30,
2000 2000
ASSETS
Cash $ 2,227,783 $ 3,064,789
Short-term interest bearing deposits 4,214,175 3,480,337
----------------------------------
Total cash and cash equivalents 6,441,958 6,545,126
Investment securities available for sale 2,982,500 2,975,750
Loans held for sale 89,300 0
Loans receivable, net of allowance for loan losses
of $2,185,781 and $2,282,634 164,569,938 164,977,577
Real estate owned, net 41,000 70,303
Premises and equipment 1,659,131 1,694,771
Stock in Federal Home Loan Bank (at cost which
approximates market) 1,654,900 1,654,900
Investment in limited partnerships 3,857,375 3,941,675
Investment in other affiliate 650,000 650,000
Core deposit intangibles and goodwill 578,343 601,789
Cash value of life insurance 11,522,868 11,422,443
Other assets 4,395,298 4,332,590
----------------------------------
Total assets $198,442,611 $198,866,924
==================================
LIABILITIES
Deposits $129,693,053 $130,683,323
Federal Home Loan Bank Advances 28,750,237 29,008,495
Other borrowings 2,437,368 2,825,560
Advances by borrowers for taxes and
insurance 336,966 186,956
Other liabilities 5,190,106 4,377,392
----------------------------------
Total liabilities 166,407,730 167,081,726
SHAREHOLDERS' EQUITY
Preferred stock:
Authorized and unissued -- 2,000,000 shares
Common stock, without par value:
Authorized -- 5,000,000 shares
Issued and outstanding -- 1,366,506 and
1,364,695 shares 8,089,802 8,107,140
Retained earnings 23,946,745 23,673,789
Accumulated other comprehensive income (loss) (1,666) 4,269
----------------------------------
Total shareholders' equity 32,034,881 31,785,198
----------------------------------
Total liabilities and shareholders' equity $198,442,611 $198,866,924
==================================
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
September 30,
2000 1999
Interest income
Loans $3,597,148 $3,532,902
Interest-bearing deposits 63,358 95,106
Investment securities 48,716 48,600
Other interest and dividend income 35,359 23,463
---------------------------------
Total interest income 3,744,581 3,700,071
Interest expense
Deposits 1,645,592 1,660,355
Federal Home Loan Bank Advances 470,626 255,422
---------------------------------
Total interest expense 2,116,218 1,915,777
Net interest income 1,628,363 1,784,294
Provision for losses on loans 20,000 205,000
---------------------------------
Net interest income after provision 1,608,363 1,579,294
Other income
Net loan servicing fees 15,423 21,221
Annuity and other commissions 58,160 44,023
Losses from limited
partnerships (84,300) (129,000)
Life insurance income and
death benefits 100,425 39,050
Gain on sale of branch office 0 231,626
Net gains on loan sales 9,863 11,090
Service charges on deposit accounts 74,671 66,109
Other income 39,208 32,995
---------------------------------
Total other income 213,450 317,114
---------------------------------
Other expenses
Salaries and employee benefits 684,040 658,226
Occupancy expense 63,212 68,710
Equipment expense 31,948 36,670
Deposit insurance expense 18,858 32,117
Real estate operations, net (1,262) 161
Data processing expense 79,823 75,900
Advertising 12,084 17,957
Amortization of core deposit
intangibles and goodwill 23,446 25,250
Merger expenses 5,367 0
Other expenses 199,550 223,462
---------------------------------
Total other expenses 1,117,066 1,138,453
---------------------------------
Income before income taxes 704,747 757,955
Income tax expense 151,510 178,540
---------------------------------
Net income $553,237 $579,415
=================================
Per share
Basic earnings per share $0.41 $0.41
Diluted earnings per share $0.40 $0.40
Dividends $0.22 $0.22
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 SHAREHOLDERS' EQUITY
(Unaudited)
Total
Shareholders'
Equity
--------------------------------------
Balances, July, 1 2000 and 1999 $31,785,198 $31,743,567
Comprehensive income
Net income 553,237 579,415
Other comprehensive income, net of tax
Unrealized losses on securities (5,935) (7,084)
--------------------------------------
Comprehensive income 547,302 572,331
Exercise of stock options 3,012 19,000
Cash dividends (300,631) (313,599)
--------------------------------------
Balances, September 30, 2000 and 1999 $32,034,881 $32,021,299
======================================
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)
Three Months Ended
September 30
OPERATING ACTIVITIES 2000 1999
---------------- ----------------
Net Income $ 553,237 $ 579,415
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 20,000 205,000
Losses from limited partnerships 84,300 129,000
Amortization of net loan origination fees (42,639) (54,641)
Net amortization of investment securities'
premiums and discounts (16,579) 570
Amortization of core deposits and goodwill 23,446 25,250
Depreciation 48,390 49,378
Deferred income tax (199,073) (249,789)
Gain on sale of branch office 0 (231,626)
Gain on sale of loans (9,863) (6,121)
Origination of loans for sale (126,825) (301,189)
Proceeds from sale of loans 47,388 612,138
Change in:
Interest receivable (27,066) 137,925
Interest payable and other liabilities 812,714 1,075,723
Cash value of insurance (100,425) (128,550)
Prepaid expense and other assets 167,325 385,986
---------------- ----------------
Net cash provided by operating activities 1,234,330 2,228,469
---------------- -------------------
INVESTING ACTIVITIES
Proceeds from maturity of investment securities
held to maturity 0 1,000,000
Purchase of investment securities available
for sale 0 (959,070)
Net changes in loans 407,409 718,841
Proceeds from real estate owned sales 52,172 0
Purchases of premises and equipment (12,750) (13,777)
Net cash disbursed in sale of branch office 0 (8,593,288)
---------------- ----------------
Net cash provided (used) by investing
activities 446,831 (7,847,294)
---------------- ----------------
FINANCING ACTIVITIES
Net change in:
Interest-bearing demand and savings deposits (1,637,859) (858,540)
Certificates of deposit 647,589 941,516
Proceeds from FHLB advances 4,000,000 4,000,000
Repayment of FHLB advances (4,258,258) (232,000)
Repayment of other borrowings (388,192) (414,784)
Net change in advances by borrowers for taxes
and insurance 150,010 109,985
Proceeds from exercise of stock options 3,012 19,000
Dividends paid (300,631) (313,599)
---------------- ----------------
Net cash provided (used) by financing activities (1,784,329) 3,251,578
---------------- ----------------
Net change in cash and cash equivalents (103,168) (2,367,247)
Cash and Cash Equivalents, Beginning of Period 6,545,126 8,852,688
---------------- ----------------
Cash and Cash Equivalents, End of Period $6,441,958 $6,485,441
================ ================
ADDITIONAL CASH FLOWS AND
SUPPLEMENTARY INFORMATION
Interest paid $1,343,824 $1,132,098
Income tax paid 265,000 0
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 September 30, 2000, results of operations for the three-month
periods ended September 30, 2000 and 1999, and cash flows for the three month
periods ended September 30, 2000 and 1999.
NOTE B: Dividends and Earnings Per Share
On August 21, 2000, the Board of Directors declared a quarterly cash dividend of
$.22 per share. This dividend was paid on September 15, 2000 to shareholders of
record as of August 31, 2000. On October 23, 2000, the Board of Directors
declared a quarterly cash dividend of $.22 per share. This dividend will be paid
on November 29, 2000, to shareholders of record as of November 15, 2000. This
dividend, normally payable December 15, was declared early to facilitate the
anticipated alliance with MutualFirst Financial Inc. in December, 2000.
Earnings per share (EPS) were computed as follows:
Three Months Ended Three Months Ended
September 30, 2000 September 30, 1999
------------------ ------------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
Basic earnings per share
Income available to
common shareholders $553,237 1,365,655 $.41 $579,415 1,425,064 $.41
==== ====
Effect of dilutive securities
Stock options 4,244 8,581
----- -----
Diluted earnings per share
Income available to
common shareholders and
assumed conversions $553,237 1,369,899 $.40 $579,415 1,433,645 $.40
======== ========= ==== ======== ========= ====
NOTE C: Reporting Comprehensive Income
The Company adopted Statement of financial Accounting Standards No. 130,
Reporting comprehensive Income. Comprehensive income includes unrealized gains
on securities available for sale, net of tax. Accumulated other comprehensive
income and income tax on such income reported are as follows:
Three Months Ended
September 30
------------
2000 1999
---- ----
Accumulated other comprehensive income (loss)
Balance, July 1 $ 4,269 $ 13,624
Net unrealized losses ( 5,935) ( 7,084)
--------- ---------
Balance, September 30 $( 1,666) $ 6,540
========= =========
Income tax credit
Unrealized holding losses $( 3,893) $( 4,646)
========= =========
NOTE D: Merger Information
In June 2000, the Company entered into a definitive agreement (agreement) to
merge with MutualFirst Financial Inc. (MutualFirst), Muncie, Indiana. Under the
agreement, shareholders of the Company would have 1.862 shares of MutualFirst
common stock for each share of Company common stock owned. The merger will be
accounted for using the purchase method of accounting. The merger is subject to
approval by the Company shareholders and regulatory agencies and is expected to
be consummated before the end of the calendar year 2000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Additional Merger Information.
On October 13, 2000, MutualFirst common stock closed at $13.00 per share. Based
on that price, the value of 1.862 shares of MutualFirst common stock would have
been approximately $24.21 and the aggregate market value of the merger
consideration would have been approximately $33.1 million, excluding outstanding
stock options. These values, however, may increase or decrease as a result of
fluctuations in the market price of MutualFirst common stock.
Each outstanding option to purchase shares of Company common stock will be
converted into an option to purchase 1.862 times as many shares of MutualFirst
common stock. The per share exercise price will be divided by 1.862, but the
other terms and conditions of the converted option will not change. Fractional
shares will be rounded down to the nearest whole share and per share exercise
prices will be rounded down to the nearest whole cent. Options for 31,308 shares
of Company common stock were outstanding on October 13, 2000.
The combined banking operation will have a total of 16 branch locations
throughout the counties of Delaware, Grant, Kosciusko and Randolph in Indiana,
and will be called Mutual Federal Savings Bank.
MutualFirst's Board of Directors will be comprised of four directors from the
Company and seven directors from Muncie. Steven L. Banks, the current President
and Chief Executive Officer of the Company, will serve as Senior Vice President
and Chief Operating Officer of Grant County for Mutual Federal Savings Bank, a
subsidiary of MutualFirst and he will be one of the four directors joining the
Board of Directors. The other three Company directors who will be joining the
Board are John M. Dalton, Jon R. Marler and Jerry D. McVicker.
General.
The Company's total assets were $198.4 million at September 30, 2000 compared to
$198.9 million at June 30, 2000. Cash and cash equivalents decreased $103,000
and investment securities remained unchanged from June 30, 2000 to September 30,
2000. Net loans receivable were $164.6 million at September 30, 2000, a decrease
of $408,000, or .2%, from June 30, 2000. The Company owned real estate owned at
September 30, 2000 in the amount of $41,000, compared to the real estate owned
at June 30, 2000 of $70,000.
Deposits decreased to $129.7 million at September 30, 2000 compared to $130.7
million at June 30, 2000, a .8% decrease. Passbook and transaction accounts
decreased by $1.6 million and certificate of deposit accounts increased by $.6
million.
Federal Home Loan Bank advances decreased to $28.8 million at September 30,
2000, compared to $29.0 million at June 30, 2000, a .9% decrease.
Other liabilities increased from $4.4 million at June 30, 2000, to $5.2 million
at September 30, 2000, primarily as the result of an increase in accrued
interest payable on deposits. A large portion of the Company's deposits pay
interest semi-annually at June 30 and December 31 of each year.
Shareholders' equity was $32.0 million at September 30, 2000, compared to $31.8
million at June 30, 2000.
Results of Operations Comparison of Three Months Ended September 30, 2000 and
September 30, 1999.
Net income for the three months ended September 30, 2000 of $553,237 was a 4.5%
decrease from the three months ended September 30, 1999, of $579,415. Net
interest income for the quarter ended September 30, 2000, equaled $1,628,363, a
decrease of 8.7% from the quarter ended September 30, 1999, of $1,784,294.
Interest income increased by $44,510 for the three months ended September 30,
2000, compared to the prior period, while interest expense increased by $200,441
for the three months ended September 30, 2000 compared to the prior period. The
interest on Federal Home Loan Bank advances increased by $215,204, while
interest on deposits decreased by $14,763 from the prior period. The increase in
Federal Home Loan Bank advances interest is the result of increased borrowings
and a general overall increase in interest rates. These borrowings were used to
provide funding to sell the Decatur Branch deposits in September 1999 and fund
life insurance policies on directors and officers.
A provision of $20,000 for losses on loans was made for the three months ended
September 30, 2000 compared to a $205,000 provision in the same period last
year. The large loan loss provision was made in the prior year as a result of
the Company's ongoing evaluation of its impaired loans and their net realizable
value. As foreclosure actions were proceeding and receivers were appointed
during the quarter ended September 30, 1999, on non-residential real estate
loans totaling approximately $1,400,000, the Company was able to obtain detailed
information to evaluate the properties and length of time to complete legal
proceedings to acquire the assets. The Company charged off $327,000 of these
loans for the period ending September 30, 1999. These loans remain in the
process of foreclosure as of September 30, 2000, and the Company believes that
the loan loss allowance at September 30, 2000, remains adequate to absorb future
losses.
Total other income decreased by $103,664 for the three months ended September
30, 2000, compared to the same period in the prior year. This decrease is
attributable to the sale of the Decatur branch deposits and facilities,
resulting in a gain of $231,626 included in the quarter ended September 30,
1999. The Company experienced an increase in commissions from annuity and mutual
fund sales of $14,137 over the same period last year and an increase of fee
income amounting to approximately $8,562. Equity losses in limited partnerships
decreased from $129,000 for the quarter ended September 30, 1999 to a $84,000
loss for the quarter ended September 30, 2000. It is projected that the
partnership will operate at a loss as designed from inception. Life insurance
income increased by $61,375 for the three-month period ending September 30,
2000.
Total other expenses decreased by $21,387 for the three months ended September
30, 2000, compared to the same period in the prior year.
Income tax expense for the three months ended September 30, 2000 amounted to
$151,510, a decrease of $27,030 from the three months ended September 30, 1999.
The Company's effective tax rate for the three months ended September 30, 2000
was 21%, compared to 24% for the comparable period in 1999. The decrease in the
effective tax rate was primarily attributed to the increase life insurance
income and death benefits.
Allowance for loan losses amounted to $2.2 million at September 30, 2000, which
decreased $96,853 from June 30, 2000 after adjusting for charge-offs and
recoveries. The $20,000 provision for the three months ended September 30, 2000
and the resulting level of the allowance for loan losses was determined, as for
any period, based on the evaluation of nonperforming loans and other classified
loans, changes in the composition of the loan portfolio with allowance
allocations made by loan type, past loss experience, the amount of loans
outstanding and current economic conditions.
The allowance for loan losses is computed by assigning an estimated loss
percentage to loans outstanding in each category of loans held in the portfolio.
All categories of loans, including multi-family, commercial real estate and
other commercial, and consumer loans, are assigned a higher percentage than
single-family loans based on greater risk factors inherent in these types of
loans. In addition to maintaining the allowance as a percentage of the
outstanding loans in the portfolio, additional reserves are provided for
nonperforming loans and other classified loans based on management's assessment
of impairment, if any. Individual loans are specifically analyzed to determine
an estimate of loss, and those specific allocations are then included as part of
the loan loss allowance. Historically, the Company has been able to minimize its
losses on loans in relation to the allowance and loans outstanding. Management
considers the allowance to be adequate and will continue monitor the allowance
for loan losses at least on a quarterly basis and adjust the provision
accordingly to maintain the allowance for loan losses at the prescribed level.
The following table illustrates the changes affecting the allowance for loan
losses for the three months ended September 30, 2000.
Allowance For
Loan Losses
Balances at July 1, 2000......................$2,282,634
Provision for losses..............................20,000
Recoveries...........................................217
Loans charged off..............................( 117,070)
----------
Balances at September 30, 2000................$2,185,781
==========
The loan loss reserves to total loans at September 30, 2000 equaled 1.31% of
total loans outstanding, compared to 1.36% of total loans outstanding at June
30, 2000. Total non-performing assets increased during the three months ended
September 30, 2000, from $2.1 million at June 30, 2000 to $2.3 million at
September 30, 2000. Non-performing assets at September 30, 2000, consisted of
non-accruing loans in the amount of $2,224,000 and real estate owned of $41,000.
Total non-performing loans totaled 1.33% of total loans outstanding at September
30, 2000 compared to 1.22% of total loans at June 30, 2000.
The following table further depicts the amounts and categories of the Bank's
non-performing assets. All loans delinquent over 90 days are placed in
non-accrual status. Any loan deemed to be uncollectible is charged off.
September 30, June 30,
2000 2000
---- ----
(Dollars in Thousands)
Accruing loans delinquent
more than 90 days................ $ --- $ ---
Non-accruing loans:
Residential...................... 719 551
Multi-family..................... --- ---
Commercial real estate........... 1,224 1,305
Commercial loans................. 220 152
Consumer......................... 61 28
Troubled debt restructurings......... --- ---
--------- ---------
Total non-performing loans........ 2,224 2,036
Real estate owned, net............... 41 72
-------- ---------
Total non-performing assets...... $ 2,265 $ 2,108
========= =========
Non-performing loans to
total loans...................... 1.33% 1.22%
Non-performing assets to
total assets..................... 1.14% 1.06%
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 September 30
-------------------------
2000 1999
------------------------------- ----------------------------------
(Dollars in Thousands)
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ----- ------- -------- ----
Total interest-
earnings assets.......... $176,169 $3,744 8.50% $179,258 $3,700 8.26%
Total interest-
bearing liabilities...... 158,817 2,116 5.33% 156,586 1,916 4.89%
------ -----
Net interest income/
Interest rate spread....... $1,628 3.17% $1,784 3.37%
====== ======
Shareholders' Equity.
Shareholders' equity at September 30, 2000 was $32,034,881, an increase of
$249,683 from June 30, 2000. The Company's equity to asset ratio was 16.14% at
September 30, 2000, compared to 15.98% at June 30, 2000. 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 September 30, 2000, the Bank is
categorized as well capitalized and met all subject capital adequacy
requirements. There are no conditions or events since September 30, 2000, that
management believes have changed the Bank's classification.
September 30, 2000
--------------------------------------------------
Required
for Adequate To Be Well
Actual Capital Capitalized
------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------
Total risk-based capital
(to risk-weighted assets) $29,043 20.5% $11,307 8.0% $14,134 10.0%
Tier I risk based capital
(to risk-weighted assets) 27,273 19.3% 11,307 8.0% 14,134 10.0%
Core capital
(to adjusted tangible assets) 27,273 14.3% 5,727 3.0% 11,455 6.0%
Core capital
(to adjusted total assets) 27,273 14.3% 5,727 3.0% 9,546 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%, of which 1%
must be comprised of short-term investments. At September 30, 2000, the Bank's
liquidity ratio was 8.7%.
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 87% 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 changed 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 that 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 2% of the present value of its assets.
Presented below, as of September 30, 2000 and September 30, 1999, 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 September 30, 2000, 2%
of the present value of the Bank's assets was approximately $3.9 million.
Because the interest rate risk of a 200 basis point decrease in market rates
(which was greater than the interest rate risk of a 200 basis point increase)
was $1.3 million at September 30, 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.
September 30, 2000
------------------
Net Portfolio Value NPV as % of PV of Assets
Change
In Rates $ Amount $Change %Change NPV Ratio Change
- ---------------------------------------------------------------------------
(Dollars in Thousands)
+300 bp $ 29,662 $ -902 -3% 15.85% +9 bp
+200 bp 30,424 -140 0% 16.02% +27 bp
+100 bp 30,737 172 1% 16.00% +24 bp
0 bp 30,565 15.75%
- -100 bp 29,953 -612 -2% 15.32% -43 bp
- -200 bp 29,273 -1,291 -4% 14.86% -90 bp
- -300 bp 28,908 -1,657 -5% 14.53% -122 bp
September 30, 1999
------------------
Net Portfolio Value NPV as % of PV of Assets
Change
In Rates $ Amount $Change %Change NPV Ratio Change
- ---------------------------------------------------------------------------
(Dollars in Thousands)
+300 bp $ 29,135 $-2.459 -8% 16.03% -73 bp
+200 bp 30,446 -1,148 -4% 16.50% -25 bp
+100 bp 31,287 -307 -1% 16.75% 0 bp
0 bp 31,594 16.75%
- -100 bp 31,441 -153 0% 16.55% -21 bp
- -200 bp 31,279 -315 -1% 16.34% -42 bp
- -300 bp 31,431 -163 -1% 16.26% -50 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 that 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.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor the Bank were, during the quarter ended September 30,
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).
27 Financial Data Schedule
b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended September
30, 2000.
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: November 14, 2000 By:/s/ Steven L. Banks
--------------------------------------
Steven L. Banks, President
Date: November 14, 2000 By:/s/ Larry G. Phillips
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Larry G. Phillips, Vice President,
Secretary and Treasurer