SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31,
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 February 1, 1999 was 1,486,341.
Marion Capital Holdings, Inc.
Form 10-Q
Index
Page No.
Forward Looking Statements.....................................................1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements...............................................2
Consolidated Condensed Statement of Financial Condition as of
December 31, 1998 and June 30, 1998..........................2
Consolidated Condensed Statement of Income for the three-month
and six-month periods ended December 31, 1998 and 1997.......3
Consolidated Condensed Statement of Changes
in Shareholders' Equity for the six months
ended December 31, 1998......................................4
Consolidated Condensed Statement of
Cash Flows for the six months
ended December 31, 1998 and 1997.............................5
Notes to Consolidated Financial Statements......................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................8
Item 3. Quantitative and Qualitative Disclosures About Market Risk........14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................17
Item 4. Submission of Matters to Vote of Security Holders.................18
Item 6. Exhibits and Reports on Form 8-K..................................18
SIGNATURES....................................................................19
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-Q ("Form 10-Q") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-Q and include statements regarding the intent, belief,
outlook, estimate or expectations of the Company (as defined below), its
directors or its officers primarily with respect to future events and the future
financial performance of the Company. Readers of this Form 10-Q are cautioned
that any such forward looking statements are not guarantees of future events or
performance and involve risks and uncertainties, and that actual results may
differ materially from those in the forward looking statements as a result of
various factors. The accompanying information contained in this Form 10-Q
identifies important factors that could cause such differences. These factors
include changes in interest rates; loss of deposits and loan demand to other
savings and financial institutions; substantial changes in financial markets;
changes in real estate values and the real estate market; regulatory changes; or
unanticipated results in pending legal proceedings.
1
MARION CAPITAL HOLDINGS, INC.
AND WHOLLY-OWNED SUBSIDIARY
FIRST FEDERAL SAVINGS BANK
CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL CONDITION
December 31, June 30,
1998 1998
--------------------------- ---------------------------
ASSETS
Cash $2,641,152 $3,211,191
Short-term interest bearing deposits 2,690,334 1,923,573
---------------- ----------------
Total cash and cash equivalents 5,331,486 5,134,764
Investment securities available for sale 3,079,321 3,048,751
Investment securities held to maturity
(market value $0 and $2,001,520) 0 2,002,917
Loans receivable, net 167,262,121 164,475,289
Real estate owned, net 30,735
Premises and equipment 1,915,478 1,928,772
Stock in Federal Home Loan Bank (at cost
which approximates market) 1,134,400 1,134,400
Investment in limited partnerships 4,777,675 4,883,175
Investment in other affiliate 650,000 650,000
Core deposit intangibles and goodwill 749,080 802,586
Other assets 9,744,122 9,871,520
---------------- ----------------
Total assets $194,643,683 $193,962,909
================ ================
LIABILITIES
Deposits $137,128,384 $134,415,469
Advances from FHLB 15,272,300 13,684,302
Advances by borrowers for taxes and
insurance 240,159 208,331
Other liabilities 7,568,471 7,998,180
---------------- ----------------
Total liabilities 160,209,314 156,306,282
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--1,555,834 and
1,699,307 shares 4,059,811 7,785,191
Retained earnings 30,325,610 29,841,104
Unrealized gain on securities available for sale 48,948 30,332
---------------- ----------------
Total shareholders' equity 34,434,369 37,656,627
---------------- ----------------
Total liabilities and shareholders' equity $194,643,683 $193,962,909
================ ================
2
MARION CAPITAL HOLDINGS, INC.
AND WHOLLY-OWNED SUBSIDIARY
FIRST FEDERAL SAVINGS BANK
CONSOLIDATED CONDENSED STATEMENT OF INCOME
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Interest Income
Loans $ 3,703,316 $ 3,380,286 $ 7,347,209 $ 6,638,386
Mortgage-backed securities (396) 392 31 2,334
Interest-bearing deposits 33,768 62,621 71,431 121,048
Investment securities 60,572 86,688 134,375 178,770
Other interest and dividend
income 22,875 21,118 45,835 42,896
----------- ----------- ----------- -----------
Total interest income 3,820,135 3,551,105 7,598,881 6,983,434
Interest expense
Deposits 1,702,269 1,588,499 3,416,598 3,150,765
Advances from FHLB 233,268 167,537 465,332 314,462
----------- ----------- ----------- -----------
Total interest expense 1,935,537 1,756,036 3,881,930 3,465,227
Net interest income 1,884,598 1,795,069 3,716,951 3,518,207
Provision for losses on loans 6,886 6,729 16,189 15,554
----------- ----------- ----------- -----------
Net interest income after
provision 1,877,712 1,788,340 3,700,762 3,502,653
Other income
Net loan servicing fees 18,854 19,467 39,406 39,038
Annuity and other commissions 24,063 29,562 45,520 67,459
Equity in losses of limited
partnerships (65,000) (36,000) (105,500) (125,100)
Life insurance income and death
benefits 61,250 43,750 102,500 92,543
Other income 92,293 42,171 174,152 77,325
----------- ----------- ----------- -----------
Total other income 131,460 98,950 256,078 151,265
----------- ----------- ----------- -----------
Other expenses
Salaries and employee benefits 608,654 637,059 1,279,196 1,221,020
Occupancy expense 65,151 59,281 129,828 106,668
Equipment expense 32,058 23,616 62,300 41,490
Deposit insurance expense 32,976 31,652 66,848 63,290
Real estate operations, net 19 131,713 (1,247) 130,780
Data processing expense 76,272 47,260 151,134 86,739
Advertising 41,316 50,819 69,303 77,503
Amortization of core deposit
intangibles and goodwill 26,453 9,018 53,506 9,018
Other expenses 194,720 184,389 404,209 341,176
----------- ----------- ----------- -----------
Total other expenses 1,077,619 1,174,807 2,215,077 2,077,684
----------- ----------- ----------- -----------
Income before income taxes 931,553 712,483 1,741,763 1,576,234
Income tax expense 347,014 209,865 640,094 413,423
----------- ----------- ----------- -----------
Net income $ 584,539 $ 502,618 $ 1,101,669 $ 1,162,811
=========== =========== =========== ===========
Per share
Basic earnings per share $ 0.37 $ 0.28 $ 0.69 $ 0.66
Diluted earnings per share $ 0.37 $ 0.28 $ 0.68 $ 0.64
Dividends $ 0.22 $ 0.22 $ 0.44 $ 0.44
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 1,101,669 1,162,811
Other comprehensive income, net of tax
Unrealized gains on securities 18,616 27,040
------------ ------------
Comprehensive income 1,120,285 1,189,851
Exercise of stock options 40,893 211,413
Repurchase of common stock (3,786,575) 0
Amortization of unearned compensation 0 87,912
Tax benefit of stock options exercised and RRP 106,982 96,186
Cash dividends (703,843) (782,233)
------------ ------------
Balances, December 31 $ 34,434,369 $ 39,868,948
============ ============
4
MARION CAPITAL HOLDINGS, INC.
AND WHOLLY-OWNED SUBSIDIARY
FIRST FEDERAL SAVINGS BANK
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
Six Months Ended
December 31,
------------------------------
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,101,669 $ 1,162,811
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 16,189 15,554
Equity in loss of limited partnerships 105,500 125,100
Amortization of net loan origination fees (125,680) (98,561)
Net amortization of investment
securities' premiums and discounts 403 2,226
Amortization of unearned compensation 0 87,912
Amortization of core deposits and goodwill 53,506 9,018
Depreciation 88,267 50,127
Deferred income tax 20,009 (13,582)
Origination of loans for sale (5,681,074) (2,844,192)
Proceeds from sale of loans 3,946,464 2,844,192
Change in:
Interest receivable 197,948 170,545
Interest payable and other liabilities (429,709) (147,342)
Cash value of insurance (102,500) (92,543)
Prepaid expense and other assets (4,102) 57,546
------------ ------------
Net cash provided (used) by operating (813,110) 1,328,811
activities ------------ ------------
INVESTING ACTIVITIES
Proceeds from maturity of investment
securities held to maturity 2,000,000 1,610,000
Payments on mortgage-backed securities 2,917 214,928
Net changes in loans (801,328) (7,900,288)
Purchases of premises and equipment (74,973) (481,181)
Death benefits received on life insurance 0 553,793
Cash received in branch acquisition 0 11,544,302
------------ ------------
Net cash provided (used) by investing
activities 1,126,616 5,541,554
------------ ------------
(CONTINUED)
5
MARION CAPITAL HOLDINGS, INC.
AND WHOLLY-OWNED SUBSIDIARY
FIRST FEDERAL SAVINGS BANK
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (continued)
Six Months Ended
December 31,
1998 1997
------------ ------------
FINANCING ACTIVITIES
Net change in:
Interest-bearing demand and savings deposits (2,298,743) 2,688,133
Certificates of deposit 5,011,658 (3,681,801)
Proceeds from FHLB advances 8,000,000 6,656,069
Repayment of FHLB advances (6,412,002) (4,195,907)
Net change on advances by borrowers for taxes
and insurance 31,828 41,231
Proceeds from exercise of stock options 40,893 211,413
Repurchase of common stock (3,786,575) 0
Dividends paid (703,843) (782,233)
------------ ------------
Net cash provided (used) by
financing activities (116,784) 936,905
------------ ------------
Net change in cash and cash equivalents 196,722 7,807,270
Cash and Cash Equivalents,
Beginning of Period 5,134,764 3,622,739
------------ ------------
Cash and Cash Equivalents,
End of Period 5,331,486 $ 11,430,009
============ ============
ADDITIONAL CASH FLOWS AND
SUPPLEMENTARY INFORMATION
Interest paid 3,906,877 $ 3,417,949
Income tax paid 435,000 543,139
Loan balances transferred to real
estate owned 0 875,342
Loans to finance the sale of real
estate owned 8,500 68,500
Loan payable to limited partnership 0 3,634,406
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 December 31, 1998, results of operations for the three-month and
six-month periods ended December 31, 1998 and 1997, and cash flows for the
six-month periods ended December 31, 1998 and 1997.
NOTE B: Dividends and Earnings Per Share
On November 16, 1998, the Board of Directors declared a quarterly cash dividend
of $.22 per share. This dividend was paid on December 15, 1998 to shareholders
of record as of November 27, 1998.
Earnings per share (EPS) were computed as follows:
Three Months Ended Three Months Ended
December 31, 1998 December 31, 1997
----------------- -----------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic earnings per share
Income available to
common shareholders $584,539 1,571,252 $ .37 $502,618 1,766,427 $ .28
========= =========
Effect of dilutive securities
RRP program -- 3,702
Stock options 21,976 44,000
--------- --------- ---------- ------
Diluted earnings per share
Income available to
common shareholders and
assumed conversions $584,539 1,593,228 $ .37 $502,618 1,814,618 $ .28
======== ========= ========= ======== ========= =========
7
Six Months Ended Six Months Ended
December 31, 1998 December 31, 1997
----------------- -----------------
Weighted Weighted
Average Per Average Per Share
Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic earnings per share
Income available to common
shareholders $1,101,669 1,605,768 $ .69 $1,162,811 1,762,492 $ .66
========= =========
Effect of dilutive securities
RRP program -- 3,435
Stock options 24,578 43,332
------------ ------ ----------- ------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $1,101,669 1,630,346 $ .68 $1,162,811 1,809,259 $ .64
========== ========= ========= ========== ========= =========
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:
Six Months Ended
December 31,
--------------------------------
1998 1997
------- --------
Accumulated comprehensive income
Balance, July 1 $30,332 $( 1,961)
Net unrealized gains 18,616 27,040
------ ------
Balance December 31 $48,948 $25,079
======= =======
Income tax expense
Unrealized holding losses $12,210 $17,736
======= =======
Item. 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General:
8
The Company's total assets were $194.6 million at December 31, 1998 compared to
$194.0 million at June 30, 1998. Cash and cash equivalents increased $.2 million
and investment securities decreased $2.0 million from June 30, 1998 to December
31, 1998. Loans receivable were $167.3 million at December 31, 1998, an increase
of $2.8 million, or 1.7%, from June 30, 1998. The Company owned no real estate
owned at December 31, 1998, down from the $31,000 reported at June 30, 1998.
Deposits increased to $137.1 million at December 31, 1998 compared to $134.4
million at June 30, 1998, a 2.0% increase. This $2.7 million increase
represented a $2.3 million decrease in passbook and transaction accounts and an
approximate $5.0 million increase in certificate of deposit accounts.
Federal Home Loan Bank advances increased to $15.3 million at December 31, 1998,
compared to $13.7 million at June 30, 1998, an 11.6% increase.
Other liabilities decreased from $8.0 million at June 30, 1998 to $7.6 million
at December 31, 1998 as a result of normal operational decreases.
Shareholders' equity was $34.4 million at December 31, 1998, compared to $37.7
million at June 30, 1998. As of December 31, 1998, the Company was in the
process of repurchasing an additional 5% of its outstanding shares. The current
repurchase program was announced in November 1998, totaling 77,891 shares of
which 5,000 shares had been repurchased by December 31, 1998. Subsequent to
December 31, 1998, 69,493 shares were repurchased in the open market at an
average price of $21.94. This reduced the number of shares outstanding to
1,486,341.
Net income for the six months ended December 31, 1998 of $1.1 million represents
a 5.3% decrease in income reported for the same period in the prior year.
Although net income decreased 5.3%, net interest income increased by $199,000,
or 5.6%, for the six month period ended December 31, 1998, compared to the prior
period. Also, other income increased by $105,000 due primarily to an increase in
fee income for the six months ended December 31, 1998, compared to the six
months ended December 31, 1997. Total other expenses increased $137,000, or
6.6%, for the six months ended December 31, 1998. This resulted in pre-tax
income increasing by $165,000, or 10.5%, for the six months ended December 31,
1998 compared to the same prior year period.
For the six months ended December 31, 1998, the Bank made a provision of $16,189
for general loan losses compared to $15,554 in loss provisions for the same
period in the prior year. Management continues to review its current portfolio
to ensure that total loss reserves remain adequate.
Results of Operations Comparison of Three Months Ended December 31. 1998 and
December 31,1997
Net interest income for the quarter ended December 31, 1998, equaled $1,884,598,
an increase of 5.0% over the quarter ended December 31, 1997 of $1,795,069. Net
income for the three months ended December 31, 1998 of $584,539 was a 16.3%
increase from the three months ended December
9
31, 1997 of $502,618. The increase in net income is due in part to the Company
incurring $132,000 in additional operating expenses in the prior year's second
quarter from operating a nursing home received by a deed in lieu of foreclosure.
The after-tax effect amounted to $80,000. Also, as mentioned above, the
reduction of federal income tax credits for the three months ended December 31,
1998, caused the Company's effective tax rate to increase to 37% from the prior
year's effective tax rate of 29%. 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.
A provision of $6,886 for losses on loans was made for the three months ended
December 31, 1998, compared to a $6,729 provision in the same period last year.
Total other income increased by $32,510 for the three months ended December 31,
1998, compared to the same period in the prior year. This increase is attributed
to an increase in fee income on deposit accounts which includes ATM fees and
transaction account fees.
Total other expenses increased by $97,188, or 8.3% for the three months ended
December 31, 1998, compared to the same period in the prior year. Real estate
operations expense decreased $131,694 as the result of operating the nursing
home described above. Data processing expense increased as the result of adding
the two new branch locations in October and December of 1997, as well as adding
additional features including a voice response unit and Sunday processing for
our Wal-Mart branch location. Other expense increases were normal operational
increases.
Income tax expense for the three months ended December 31, 1998 amounted to
$347,024, an increase of $137,149 over the three months ended December 31, 1997,
as the result of an increased effective rate. The Company's effective tax rate
for the three months ended December 31, 1998 was 37% compared to 29% for the
comparable period in 1997. The increase in the effective tax rate was attributed
to the expiration of low income housing tax credits as described above.
Results of Operations Comparison of Six Months Ended December 31, 1998 and
December 31, 1997.
Net income for the six months ended December 31, 1998 was $1,101,669 compared
with $1,162,811 for the six months ended December 31,1997, a decrease of $61,142
or 5.3%. Earnings for the six months ended December 31, 1997, included an
additional $150,000 in federal income tax credits as compared to the six months
ended December 31, 1998. This reduction of tax credits had the effect of
increasing the effective tax rate of the Company from approximately 26% for the
six months ended December 31, 1997, to 37% for the six months ended December 31,
1998. Also, in the prior period the Company experienced an additional $132,000
in additional operating expenses from operating a nursing home received by a
deed in lieu of foreclosure. The after-tax effect amounted to $79,550. Interest
income for the six months ended December 31, 1998, increased to $615,447 or 8.8%
compared to the same period in the prior year, while interest expense for the
six months ended December 31, 1998, increased $416,703 or 12.0% compared to the
same period in the prior year.
10
As a result, net interest income for the six months ended December 31, 1998,
amounted to $3,716,951, an increase of $198,744 or 5.6% compared to the same
period in the prior year.
A $16,189 provision for loss on loans for the six months ended December 31,
1998, was made compared to a $15,554 provision reported in the same period last
year.
Total other income increased by $104,813 for the six months ended December 31,
1998, compared to the same period in the prior year. This increase is primarily
attributable to increased fee income from ATM and transaction accounts. Annuity
and security product sales commissions were down $21,939, or 32.5% for the six
months ended December 31, 1998, compared to the same period in the prior year.
Total other expenses increased by $137,393 or 6.6% for the six months ended
December 31, 1998, compared to the same period in the prior year. Salaries and
employee benefits increased $58,176 or 4.8%. Real estate operating expense
decreased by $132,027 for the six months ended December 31, 1998, compared to
the same period in the prior year as a result of operating the nursing home
discussed above. Data processing expense increased as the result of adding the
two new branch locations in October and December of 1997, as well as adding
additional features including a voice response unit and Sunday processing for
our Wal-Mart branch location. Other operational expense increases were normal
operational increases and includes the amortization expense of the core deposit
premium for the purchase of the Gas City branch which amounted to $53,506 for
the six months ended December 31, 1998, compared to $9,018 for the prior six
month period.
Income tax expense for the six months ended December 31, 1998, amounted to
$640,094, an increase of $226,671 from the six months ended December 31, 1997,
as a result of an increase in effective tax rate from 26% for the six months
ended December 31, 1997 to 37% for the six months ended December 31, 1998. This
change in effective tax rate is primarily the result of a reduction in federal
income tax credits as previously described above.
Allowance for loan losses amounted to $2.1 million at December 31, 1998, which
was unchanged from June 30, 1998 after adjusting for charge-offs and recoveries.
Management considered the allowances for loan and real estate losses at December
31, 1998, to be adequate to cover estimated losses inherent in those portfolios
at that date, and its consideration included probable losses that could be
reasonably estimated. Such belief is based upon an analysis of loans currently
outstanding, real estate owned, past loss experience, current economic
conditions and other factors and estimates which are subject to change over
time. The following table illustrates the changes affecting the allowance for
loan losses for the three months ended December 31, 1998.
11
Allowance For Allowance For Total
Loan Losses REO Losses Allowance
------------- ------------ ----------
Balances at July 1, 1998............................ $2,087,412 $ 275 $2,087,687
Provision for losses................................ 16,189 2,255 18,444
Recoveries.......................................... 0 130 130
Loans and REO charged off........................... (21,327) (2,660) (23,987)
----------- ------- -----------
Balances at December 31, 1998....................... $2,082,274 $ 0 $2,082,274
========== ============ ==========
The loan loss reserves to total loans at December 31, 1998 equaled 1.23% of
total loans outstanding, compared to 1.25% of total loans outstanding at June
30, 1998. Total non-performing assets decreased during the six months ended
December 31, 1998, from $2.0 million at June 30, 1998 to $1.6 million at
December 31, 1998. Non-performing assets at December 31, 1998 consisted entirely
of loans delinquent greater than 90 days.
Total non-performing loans totaled .96% of total loans outstanding at December
31, 1998 compared to 1.16% of total loans at June 30, 1998.
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.
December 31, June 30,
1998 1998
------------ --------
(Dollars in Thousands)
Accruing loans delinquent
more than 90 days..................... $ --- $ ---
Non-accruing loans:
Residential........................... 1,090 1,454
Multi-family.......................... 465 193
Commercial............................ 24 5
Consumer.............................. 40 286
Troubled debt restructurings................... --- ---
------ ------
Total non-performing loans............ 1,619 1,938
Real estate owned, net......................... 0 31
------ ------
Total non-performing assets........... $1,619 $1,969
====== ======
Non-performing loans to
total loans........................... 0.96% 1.16%
Non-performing assets to
total assets.......................... 0.83% 1.02%
12
Average Balances and Interest
The following table presents for the periods indicated the monthly average
balances of the Company's interest-earning assets and interest-bearing
liabilities, the interest earned or paid on such amounts, and the average yields
earned and rates paid. Such yields and costs are determined by dividing income
or expense by the average balance of assets or liabilities for the periods
presented.
Three Months Ended December 31,
------------------------------------------------------------------------------
1998 1997
------------------------------------- ---------------------------------
(Dollars in thousands)
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Total interest-
earnings assets.............. $176,858 $3,820 8.64% $167,954 $3,551 8.46%
Total interest-
bearing liabilities.......... 152,063 1,936 5.09% 134,199 1,756 5.23%
----- -----
Net interest income/
Interest rate spread............ $1,884 3.55% $1,795 3.23%
====== ======
Six Months Ended December 31,
------------------------------------------------------------------------------
1998 1997
------------------------------------- ---------------------------------
(Dollars in thousands)
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Total interest-
earnings assets.............. $176,470 $7,599 8.61% $166,379 $6,983 8.39%
Total interest-
bearing liabilities.......... 151,311 3,882 5.13% 132,429 3,465 5.23%
----- -----
Net interest income/
Interest rate spread............ $3,717 3.48% $3,518 3.16%
====== ======
Financial Condition
Shareholders' equity at December 31, 1998 was $34,434,369, a decrease of
$3,222,258 from June 30, 1998. The Company's equity to asset ratio was 17.69% at
December 31, 1998 compared to 19.41% at June 30, 1998. All fully phased-in
capital requirements are currently met.
13
The following table depicts the amounts and ratios of the Bank's capital as of
December 31, 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........................................... $ 29,675 $ 29,675 $ 31,237
As a percent of assets, as defined............... 15.9% 15.9% 25.1%
Required amount.................................. $ 3,728 $ 7,455 $ 9,974
As a percent of assets, as defined............... 2.0% 4.0% 8.0%
Capital in excess of
required amount.............................. $ 25,947 $ 22,220 $ 21,263
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 December 31, 1998, the Bank's
liquidity ratio was 5.8% of which 3.8% 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 from the year 1999 to the year
2000, which would 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
December 31, 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.
In November, 1998, the Company began testing the systems of its primary service
provider. Such testing will continue through the next fiscal quarter. The
results from these initial tests disclosed no
14
significant weakness or problems in processing and operating beyond December 31,
1999. Additional tests will continue through the next three quarters.
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 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://wwwsec.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
a rising interest rate environment by having in excess of 85% of its
15
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 units on the amount of change in NPV which is acceptable given
certain interest rate changes.
The OTS issued a regulation, which uses a net market value methodology to
measure the interest rate risk exposure of savings associations. Under this OTS
regulation, an institution's "normal" level of interest rate risk in the event
of an assumed change in interest rates is a decrease in the institution's NPV in
an amount not exceeding 2% of the present value of its assets. Savings
associations with over $300 million in assets or less than a 12% risk-based
capital ratio are required to file OTS Schedule CMR. Data from Schedule CMR is
used by the OTS to calculate changes in NPV (and the related "Normal" level of
interest rate risk) based upon certain interest rate changes (discussed below).
Associations which do not meet either of the filing requirements are not
required to file OTS Schedule CMR, but may do so voluntarily. As the Bank does
not meet either of these requirements, it is not required to file Schedule CMR,
although it does so voluntarily. Under the regulation, associations which must
file are required to take a deduction (the interest rate risk capital component)
from their total capital available to calculate their risk based capital
requirement of their interest rate exposure is greater than "normal." The amount
of that deduction is one-half of the difference between (a) the institution's
actual calculated exposure to a 200 basis point interest rate increase or
decrease (whichever results in the greater pro forma decrease in NPV) and (b)
its "normal" level of exposure which is 1% of the present value of its assets.
Presented below, as of September 30, 1998, since data from the most recent
quarter (December 31, 1998) is not yet available from the OTS, 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. Management believes there has been no significant change
in the interest rate risk measures since September 30, 1998.
16
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
- -100bp 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 does 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.
17
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor the Bank were, during the six-month period ended
December 31, 1998, or are as of the date hereof, involved in any legal
proceeding of a material nature. From time to time, the Bank is a party to legal
proceedings wherein it enforces its security interests in connection with its
mortgage loans.
Item 4. Submission of Matters to Vote of Security Holders
On October 8, 1998, the Company held its annual meeting of shareholders, at
which time matters submitted to a vote of the shareholders included the election
of two Company directors and the approval and ratification of the appointment of
Olive LLP as auditors for the fiscal year ending June 30, 1999.
Both director nominees were elected and the appointment of auditors was approved
and ratified by a majority of the 1,638,157 issued and outstanding share votes.
A tabulation of votes cast as to each matter submitted to shareholders is
presented below:
Broker
Director Nominees For Against Abstain Non-Votes
- ----------------- --- ------- ------- ---------
John M. Dalton 1,512,868 21,986 -0- -0-
Jack O. Murrell 1,512,418 22,436 -0- -0-
Other Matters
- -------------
Approval and
Ratification of Auditors 1,530,064 3,240 1,550 -0-
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
December 31, 1998.
18
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARION CAPITAL HOLDINGS, INC.
Date: February 11, 1999 By: /s/ John M. Dalton
--------------------------------------
John M. Dalton, President
Date: February 11, 1999 By: /s/ Larry G. Phillips
--------------------------------------
Larry G. Phillips, Vice President,
Secretary and Treasurer