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,
1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
__________________ TO _________________
Commission file number: 0-21108
MARION CAPITAL HOLDINGS, INC.
(Exact name of registrant specified in its charter)
Indiana 35-1872393
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 West Third Street
P.O. Box 367
Marion, Indiana 46952
(Address of principal executive offices,
including Zip Code)
(317) 664-0556
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the Registrant's common stock, without par value,
outstanding as of November 10, 1998 was 1,557,828.
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, 1998 and June 30, 1998.............................2
Consolidated Condensed Statement of Income for the three-month
periods ended September 30, 1998 and 1997........................3
Consolidated Condensed Statement of Changes in
Shareholders' Equity for the three months ended
September 30, 1998 and 1997......................................4
Consolidated Condensed Statement of Cash Flows
for the three months ended September 30, 1998 and 1997...........5
Notes to Consolidated Financial Statements.......................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................8
Item 3. Quantitative and Qualitative Disclosures About Market Risk........12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................15
Item 6. Exhibits and Reports on Form 8-K..................................15
SIGNATURES....................................................................16
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q ("Form 10-Q") may contain statements
which constitute forward looking statements within the meaning of the Private
Securities Litigation reform Act of 1995. These statements appear in a number of
places in this Form 10-Q and include statements regarding the intent, belief,
outlook, estimate or expectations of the Company primarily with respect to
future events and future financial performance. Readers of this Form 10-Q are
cautioned that any such forward looking statements are not guarantees of future
events or performance and involve risks and uncertainties, and that actual
results may differ materially from those in the forward looking statements as a
result of various factors. The accompanying information contained in this Form
10-Q identifies important factors that could cause such differences. These
factors include changes in interest rates; loss of deposits and loan demand to
other financial institutions; substantial changes in financial markets; changes
in real estate values and the real estate market or regulatory changes.
1
MARION CAPITAL HOLDINGS, INC.
AND WHOLLY-OWNED SUBSIDIARY
FIRST FEDERAL SAVINGS BANK
CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL CONDITION
September 30, June 30,
1998 1998
--------------------------- ---------------------------
ASSETS
Cash $1,826,492 $3,211,191
Short-term interest bearing deposits 3,836,224 1,923,573
---------------- ----------------
Total cash and cash equivalents 5,662,716 5,134,764
Investment securities available for sale 3,114,400 3,048,751
Investment securities held to maturity
(market value $2,037,500 and $2,001,520) 1,999,832 2,002,917
Loans receivable, net 166,950,970 164,475,289
Real estate owned, net 10,595 30,735
Premises and equipment 1,922,870 1,928,772
Stock in Federal Home Loan Bank (at cost
which approximates market) 1,134,400 1,134,400
Investment in limited partnerships 4,842,675 4,883,175
Investment in other affiliate 650,000 650,000
Core deposit intangibles and goodwill 775,532 802,586
Other assets 9,650,364 9,871,520
---------------- ----------------
Total assets $196,714,354 $193,962,909
================ ================
LIABILITIES
Deposits $136,629,417 $134,415,469
Advances from FHLB 15,457,302 13,684,302
Advances by borrowers for taxes and
insurance 322,378 208,331
Other liabilities 8,669,641 7,998,180
---------------- ----------------
Total liabilities 161,078,738 156,306,282
SHAREHOLDERS' EQUITY
Preferred Stock:
Authorized and unissued--2,000,000 shares 0 0
Common stock, without par value:
Authorized--5,000,000 shares
Issued and outstanding--1,619,240 and
1,699,307 shares 5,567,959 7,785,191
Retained earnings 29,997,774 29,841,104
Unrealized gain on securities available for sale 69,883 30,332
---------------- ----------------
Total shareholders' equity 35,635,616 37,656,627
---------------- ----------------
Total Liabilities and Shareholders' Equity $196,714,354 $193,962,909
================ ================
2
MARION CAPITAL HOLDINGS, INC.
AND WHOLLY-OWNED SUBSIDIARY
FIRST FEDERAL SAVINGS BANK
CONSOLIDATED CONDENSED STATEMENT OF INCOME
Three Months Ended
September 30,
-----------------------------
1998 1997
----------- -----------
Interest Income
Loans $ 3,643,893 $ 3,258,100
Mortgage-backed securities 427 1,942
Interest-bearing deposits 37,663 58,427
Investment securities 73,803 92,082
Other interest and dividend income 22,960 21,778
----------- -----------
Total interest income 3,778,746 3,432,329
Interest expense
Deposits 1,714,329 1,562,266
Advances from FHLB 232,064 146,925
----------- -----------
Total interest expense 1,946,393 1,709,191
----------- -----------
Net interest income 1,832,353 1,723,138
Provision for losses on loans 9,303 8,825
----------- -----------
Net interest income after
provision for losses on loans 1,823,050 1,714,313
----------- -----------
Other Income
Net loan servicing fees 20,552 19,571
Annuity and other commissions 21,457 37,897
Equity in losses of limited partnerships (40,500) (89,100)
Life insurance income and death benefits 41,250 48,793
Other income 81,859 35,154
----------- -----------
Total other income 124,618 52,315
----------- -----------
Other expenses
Salaries and employee benefits 670,542 583,961
Occupancy expense 64,677 47,387
Equipment expense 30,242 17,874
Deposit insurance expense 33,872 31,638
Real estate operations, net (1,266) (933)
Data processing expense 74,862 39,479
Advertising 27,987 26,684
Other expenses 236,542 156,787
----------- -----------
Total other expenses 1,137,458 902,877
----------- -----------
Income before income taxes 810,210 863,751
Income tax expense 293,080 203,558
----------- -----------
Net income $ 517,130 $ 660,193
=========== ===========
Per Share
Basic earnings per share $ 0.32 $ 0.38
Diluted earnings per share $ 0.31 $ 0.37
Dividends $ 0.22 $ 0.22
3
MARION CAPITAL HOLDINGS, INC.
AND WHOLLY-OWNED SUBSIDIARY
FIRST FEDERAL SAVINGS BANK
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Total
Shareholders'
Equity
-------------------------------
1998 1997
------------ ------------
Balances, July 1 $ 37,656,627 $ 39,065,819
Comprehensive income
Net income 517,130 660,193
Other comprehensive income, net of tax
Unrealized gains on securities 39,551 18,367
------------ ------------
Comprehensive income 556,681 678,560
Exercise of stock options 10,830 69,067
Repurchase of common stock (2,228,062)
Amortization of unearned compensation 43,956
Cash Dividends (360,460) (390,268)
------------ ------------
Balances, September 30 $ 35,635,616 $ 39,467,134
============ ============
4
MARION CAPITAL HOLDINGS, INC.
AND WHOLLY-OWNED SUBSIDIARY
FIRST FEDERAL SAVINGS BANK
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
Three Months Ended
September 30,
-----------------------------
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 517,130 $ 660,193
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 9,303 8,825
Equity in loss of limited partnerships 40,500 89,100
Amortization of net loan origination fees (45,728) (38,263)
Net amortization of investment
securities' premiums and discounts 159 1,113
Amortization of unearned compensation 0 43,956
Amortization of core deposits and goodwill 27,053 0
Depreciation 43,273 23,706
Deferred income tax 35,792 3,811
Origination of loans for sale (1,891,518) (1,416,307)
Proceeds from sale of loans 1,910,123 1,416,307
Change in:
Interest receivable 128,728 (57,997)
Interest payable and other liabilities 671,461 971,054
Cash value of insurance (41,250) (48,793)
Prepaid expense and other assets (93,932) (31,108)
----------- -----------
Net cash provided by operating activities 1,311,094 1,625,597
----------- -----------
INVESTING ACTIVITIES
Proceeds from maturity of investment
securities held to maturity 0 1,610,000
Contribution to limited partnership 394,062 0
Payments on mortgage-backed securities 2,770 174,970
Net changes in loans (2,665,906) (3,817,317)
Purchases of premises and equipment (37,371) (113,395)
Death benefits received on life insurance 0 553,793
----------- -----------
Net cash used by investing
activities (2,306,445) (1,591,949)
----------- -----------
5
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (continued)
Three Months Ended
September 30,
1998 1997
FINANCING ACTIVITIES
Net change in:
Noninterest-bearing deposits, NOW
passbook and money market savings
accounts (2,100,500) 322,812
Certificates of deposit 4,314,448 (1,513,645)
Proceeds from FHLB advances 7,000,000 5,656,000
Repayment of FHLB advances (5,227,000) (3,000,000)
Net change in advances by borrowers for
taxes and insurance 114,047 76,606
Proceeds from exercise of stock options 10,830 69,067
Stock repurchases (2,228,062) 0
Dividends paid (360,460) (390,268)
----------- -----------
Net cash provided by
financing activities 1,523,303 1,220,572
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 527,952 1,254,220
Cash and Cash Equivalents,
Beginning of Period 5,134,764 3,622,739
----------- -----------
Cash and Cash Equivalents,
End of Period $ 5,662,716 $ 4,876,959
=========== ===========
ADDITIONAL CASH FLOWS AND
SUPPLEMENTARY INFORMATION
Interest paid $ 1,142,209 $ 911,814
Income tax paid 80,000 153,139
Loan balances transferred to real
estate owned 0 69,694
6
MARION CAPITAL HOLDINGS, INC.
AND WHOLLY-OWNED SUBSIDIARY
FIRST FEDERAL SAVINGS BANK OF MARION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE A: Basis of Presentation
The unaudited interim consolidated condensed financial statements include the
accounts of Marion Capital Holdings, Inc. (the "Company") and its subsidiary
First Federal Savings Bank of Marion (the "Bank").
The unaudited interim consolidated condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do not
include all information and disclosures required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the financial statements reflect all adjustments, comprising only
normal recurring accruals, necessary to present fairly the Company's financial
position as of September 30, 1998, results of operations for the three-month
period ended September 30, 1998 and 1997, and cash flows for the three-month
period ended September 30, 1998 and 1997.
NOTE B: Dividends and Earnings Per Share
On August 17, 1998, the Board of Directors declared a quarterly cash dividend of
$.22 per share. This dividend was paid on September 15, 1998 to shareholders of
record as of August 28, 1998.
Earnings per share (EPS) were computed as follows:
Three Months Ended Three Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
Basic earnings per share
Income available to
common shareholders $ 517,130 1,640,284 $ .32 $ 660,193 1,771,260 $ .38
======= ======
Effect of dilutive securities
RRP program 3,324 6,012
Stock Options 41,086 47,342
------------- ---------- ------- ----------- ---------- ------
Diluted earnings per share
Income available to
common shareholders and
assumed conversions $ 517,130 1,667,464 $ .31 $ 660,193 1,804,389 $ .37
============= ========= ======= =========== ========= ======
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:
7
Three Months Ended
September 30,
1998 1997
---------- ----------
Accumulated comprehensive income
Balance, July 1 $ 30,337 ($ 1,961)
Net unrealized gains 39,551 18,367
---------- ----------
Balance, September 30 $ 69,883 $ 16,406
========== ==========
Income tax expense
Unrealized holding gains $ 25,942 $ 12,047
========== ==========
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General:
The Company's total assets were $196.7 million at September 30, 1998 compared to
$194.0 million at June 30, 1998. Cash and cash equivalents increased $528,000 or
10.28% from June 30, 1998 to September 30, 1998. Loans receivable were $167.0
million at September 30, 1998, an increase of $2.5 million, or 1.5%, from June
30, 1998. This increase is largely due to the origination of 1-4 family and
consumer loans.
Deposits increased to $136.6 million at September 30, 1998 compared to $134.4
million at June 30, 1998, a 1.6% increase. This $2.2 million increase
represented a $2.1 million decrease in passbook and transaction accounts and an
approximate $4.3 million increase in certificate of deposit accounts. This
increase in total deposits could partially be attributed to investors looking
for less volatile investments due to current stock market conditions.
Other liabilities increased from $8.0 million at June 30, 1998 to $8.7 million
at September 30, 1998 as a result of normal operational increases. The increase
consisted primarily of a $792,000 increase in accrued interest payable on
deposits since a majority of the certificates of deposit compound semi-annually
at June 30 and December 31.
Shareholders' equity was $35.6 million at September 30, 1998, compared to $37.7
million at June 30, 1998. This decrease was primarily the result of the
Company's stock repurchases during the three months ended September 30, 1998.
The Company completed the stock repurchase program from May 1998, during the
quarter ended September 30, 1998. In addition, a new repurchase program was
announced in August 1998 calling for 81,907 shares to be acquired, of which
61,907 remained outstanding at September 30, 1998.
Net income amounted to $517,130 for the three months ended September 30, 1998.
This amount represents a $143,063 decrease from the earnings for the three
months ended September 30, 1997 of $660,193. Earnings for the three months ended
September 30, 1997 included an additional $100,000 in federal income tax credits
as compared to the three months ended September 30, 1998. This reduction of tax
credits had the effect of increasing the effective tax rate of the Company from
approximately 24% to 36%. Although certain credits have been fully utilized, a
more recent investment should generate new credits beginning in 1999 increasing
to approximately $370,000 per year based on current projections. Until tax
credits resume, the Company will experience this higher effective tax rate. The
Company is also experiencing an increase in operating expenses due to two new
branches that were opened in October and December, 1997, respectively. As these
branches continue to grow, the increased revenues should offset their operating
expenses. For the three months ended September 30, 1998, the Bank made a
provision of $9,303 for general loan losses compared to $8,825 in loss
provisions for the same period in the prior year. Management continues to review
its current portfolio to ensure that total loss reserves remain adequate.
8
Results of Operations Comparison of Three Months Ended September 30, 1998 and
September 30, 1997
Net income for the three months ended September 30, 1998 was $517,130 compared
with $660,193 for the three months ended September 30, 1997, a decrease of
$143,063. Interest income for the three months ended September 30, 1998
increased $346,000 or 10.1% compared to the same period in the prior year, while
interest expense for the three months ended September 30, 1998 increased
$237,000 or 13.9% compared to the same period in the prior year. As a result,
net interest income for the three months ended September 30, 1998 amounted to
$1,832,353, an increase of $109,000 or 6.4% compared to the same period in the
prior year.
A provision of $9,303 for losses on loans was made for the three months ended
September 30, 1998 compared to a provision of $8,825 in the same period last
year.
Total other income increased by $72,000 for the three months ended September 30,
1998, compared to the same period in the prior year. This increase was
attributed to both a reduction in the amount of losses of limited partnerships
and an increase in other income resulting primarily from fee income received in
relation to transaction accounts and debit card products.
Total other expenses increased by $235,000, for the three months ended September
30, 1998, compared to the same period in the prior year. The majority of these
increases are directly related to the opening of two new branches in late 1997.
As a result, the Company has seen an increase in the following areas: salaries
and employee benefits, occupancy expense, equipment expense and data processing
expense. Other expenses have increased as a result of more transaction accounts
and the added costs of operating four ATM's during the quarter ended September
30, 1998, compared to one ATM in the same period of the prior year.
Income tax expense for the three months ended September 30, 1998 amounted to
$293,080 compared to income tax expense of $203,558 for the three months ended
September 30, 1997. The Company's effective tax rate increased to 36% for the
quarter ended September 30, 1998, compared to 24% during the quarter ended
September 30, 1997. This was a direct result of a reduction of $100,000 in tax
credits for 1998 compared to the prior year's quarter ended September 30, 1997.
The allowance for loan losses amounted to $2.1 million at September 30, 1998,
which was unchanged from June 30, 1998 after adjusting for charge-offs and
recoveries. Management considered the allowance for loan losses at September 30,
1998, to be adequate to cover estimated losses inherent in the portfolio 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,
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 three months ended
September 30, 1998.
Allowance For
Loan Losses
Balances at July 1, 1998 $ 2,087,412
Provision for losses 9,303
Recoveries 0
Loans charged off (20,010)
---------------
Balances at September 30, 1998 2,076,705
===============
The loan loss reserves to total loans at September 30, 1998 equaled 1.23% of
total loans outstanding, compared to 1.25% of total loans outstanding at June
30, 1998. Total nonperforming assets decreased during the three months ended
September 30, 1998, from $2.0 million at June 30, 1997 to $1.6 million at
September 30, 1998.
9
Non-performing assets at September 30, 1998 consisted of $1.6 million of loans
delinquent greater than 90 days and $11,000 of other real estate owned.
Total non-performing loans totaled .94% of total loans outstanding at September
30, 1998 compared to 1.16% of total loans at June 30, 1998.
As a result of the most recent operating statements of two multi-family real
estate loans that the Bank has participated in with another lender, the loans
were classified as doubtful or loss. A portion of the Bank's loan loss reserves
in the amount of $242,000 has been allocated for potential losses on these
projects. As of September 30, 1998, both loans were current.
The following table further depicts the amounts and categories of the Bank's
non-performing assets. It is the policy of the Bank that all earned but
uncollected interest on all loans be reviewed monthly to determine if any
portion thereof should be classified as uncollectible for any loan past due in
excess of 90 days.
September 30, June 30,
1998 1998
(Dollars in Thousands)
Accruing loans delinquent
more than 90 days $--- $---
Non-accruing loans:
Residential 1,330 1,454
Multi-family -- --
Commercial Real Estate -- 198
Commercial 215 268
Consumer 50 18
Troubled debt restructurings -- --
------ ------
Total non-performing loans 1,595 1,938
Real estate owned, net 11 31
------ ------
Total nonperforming assets $1,606 $1,969
====== ======
Non-performing loans to
total loans .94% 1.16%
Non-performing assets to
total assets .82% 1.02%
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.
10
Three Months Ended September 30
1998 1997
(Dollars in thousands)
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Total interest-
earnings assets $176,490 $3,779 8.56% $164,550 $3,432 8.34%
Total interest-
bearing liabilities 150,767 1,946 5.16% 130,149 1,709 5.25%
------- -------
Net interest income/
interest rate spread $1,833 3.40% $1,723 3.09%
====== =====
Financial Condition
Shareholders' equity at September 30, 1998 was $35,635,616, a decrease of
$2,021,011 from June 30, 1998. The Company's equity to asset ratio was 18.12% at
September 30, 1998 compared to 19.41% at June 30, 1998. All fully phased-in
capital requirements are currently met. The following table depicts the amounts
and ratios of the Bank's capital as of September 30, 1998, under each of the
three regulatory capital requirements (tangible, core, and fully phased-in risk
based):
Tangible Core Risk-Based
Capital Capital Capital
------- ------- -------
(Dollars in thousands)
Amount $ 31,010 $ 31,010 $32,586
As a percent of assets, as defined 16.42% 16.42% 25.95%
Required amount $ 2,828 $ 5,656 $10,047
As a percent of assets, as defined 1.5% 3.0% 8.0%
Capital in excess of
required amount $ 28,182 $ 25,354 $22,539
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, 1998, the Bank's
liquidity ratio was 7.5% of which 4.8% was comprised of short-term investments.
Year 2000
The Company's lending and deposit activities, like those of most financial
institutions, depend significantly upon computer systems. The Company is
addressing the potential 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. This could cause some computer
applications to be unable to recognize the change
11
from the year 1999 to the year 2000, which could cause computer systems to
generate erroneous data or to fail.
Management recognizes the possibility of certain risks associated with Year 2000
and is continuing to evaluate appropriate courses of corrective action. As of
September 30, 1998, 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 been informed that its primary service provider anticipates that
all reprogramming efforts will be completed by October, 1998, allowing the
Company adequate time for testing. In November, 1998, the Company began testing
the systems of its primary service provider. Such testing will continue through
the next fiscal quarter.
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. Most of the Company's vendors have provided
responses as to where they stand regarding Year 2000 readiness. Those who have
not responded to the Company's status requests are being contacted again.
Depending on the responses received from the third party vendors, the Company
will make decisions as to whether to continue those relationships or to search
for new providers of those services.
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. Such problems could
include delayed loan payments due to Year 2000 problems affecting the borrower.
Selected borrowers have been sent questionnaires to assess their readiness. The
Company is still in the process of collecting that information.
At this time, it is estimated that costs associated with Year 2000 issues will
be less than $50,000 for fiscal 1999. Although management believes it is taking
the necessary steps to address the Year 2000 compliance issue, 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 1997 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).
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Bank is subject to interest rate risk to the degree that its
interest-bearing liabilities, primarily deposits with short- and medium-term
maturities, mature or reprice at different rates than our interest-earning
assets. Although having liabilities that mature or reprice less frequently on
average than assets will be beneficial in times of rising interest rates, such
an asset/liability structure will result in lower net income during periods of
declining interest rates, unless offset by other factors.
The Bank protects against problems arising in a falling interest rate
environment by requiring interest rate minimums on its residential and
commercial real estate adjustable-rate mortgages and against problems arising in
12
a rising interest rate environment by having in excess of 85% of its mortgage
loans with adjustable rate features. Management believes that these minimums,
which establish floors below which the loan interest rate cannot decline, will
continue to reduce its interest rate vulnerability in a declining interest rate
environment. For the loans which do not adjust because of the interest rate
minimums, there is an increased risk of prepayment.
The Bank believes it is critical to manage the relationship between interest
rates and the effect on its net portfolio value ("NPV"). This approach
calculates the difference between the present value of expected cash flows from
assets and the present value of expected cash flows from liabilities, as well as
cash flows from off-balance sheet contracts. The Bank manages assets and
liabilities within the context of the marketplace, regulatory limitations and
within is limits on the amount of change in NPV which is acceptable given
certain interest rate changes.
The OTS issued a regulation, which uses a net market value methodology to
measure the interest rate risk exposure of savings associations. Under this OTS
regulation, an institution's "normal" level of interest rate risk in the event
of an assumed change in interest rates is a decrease in the institution's NPV in
an amount not exceeding 2% of the present value of its assets. Savings
associations with over $300 million in assets or less than a 12% risk-based
capital ratio are required to file OTS Schedule CMR. Data from Schedule CMR is
used by the OTS to calculate changes in NPV (and the relates "normal" level of
interest rate risk) based upon certain interest rate changes (discussed below).
Associations which do not meet either of the filing requirements are not
required to file OTS Schedule CMR, but may do so voluntarily. As the Bank does
not meet either of these requirements, it is not required to file Schedule CMR,
although it does so voluntarily. Under the regulation, associations which must
file are required to take a deduction (the interest rate risk capital component)
from their total capital available to calculate their risk based capital
requirement 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 70 of the present value of its assets.
Presented below, as of September 30, 1998, is an analysis performed by the OTS
of the Bank's interest rate risk as measured by changes in NPV for instantaneous
and sustained parallel shifts in the yield curve, in 100 basis point increments,
up and down 400 basis points. At September 30, 1998, 2% of the present value of
the Bank's assets was approximately $3.8 million. Because the interest rate risk
of a 200 basis point decrease in market rates (which was greater than the
interest rate risk of a 200 basis point increase) was $.3 million at September
30, 1998, 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.
13
Net Portfolio Value NPV as % of PV of Assets
Change ------------------------------- ------------------------
in Rates $ Amount $Change %Change NPV Ratio Change
- ------------------------------------------------------------------------
(Dollars in Thousands)
+400 bp 33,427 -271 -1% 17.86% +47 bp
+300 bp 34,307 663 2% 18.11% +71 bp
+200 bp 34,627 982 3% 18.10% +71 bp
+100 bp 34,274 629 2% 17.81% +41 bp
0 bp 33,645
- -100 bp 33,290 -354 -1% 17.10% -30 bp
- -200 bp 33,392 -253 -1% 16.99% -40 bp
- -300 bp 33,815 171 1% 17.02% -37 bp
- -400 bp 34,405 761 2% 17.11% -28 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 8.25% for commercial real estate loans. Currently,
originations of residential adjustable-rate-mortgages have interest rate
minimums of 6.25%. 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 dos underwrite these
mortgages at approximately 4.0% above the origination rate. The Company
considers all of these factors in monitoring its exposure to interest rate risk.
14
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor the Bank were during the three-month period ended
September 30, 1998, or are as of the date hereof involved in any legal
proceeding of a material nature. From time to time, the Bank is a party to legal
proceedings wherein it enforces its security interests in connection with its
mortgage loans.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
3(1) The Articles of Incorporation of the Registrant are
incorporated by reference to Exhibit 3(1) to the
Registration Statement on Form S-1 (Registration No.
33-55052).
3(2) The Code of By-Laws of the Registrant is incorporated by
reference to Exhibit 3(2) to the Registration Statement on
Form S-1 (Registration No. 33-55052).
27.1 Financial Data Schedule for Period Ended September 30, 1998
27.2 Restated Financial Data Schedule for Period Ended September
30, 1997
b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended
September 30, 1998.
15
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 11, 1998 By: /s/ John M. Dalton
--------------------------
John M. Dalton, President
Date: November 11, 1998 By: /s/ Larry G. Phillips
----------------------------
Larry G. Phillips, Vice President,
Secretary and Treasurer