SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
__________________ TO _________________
Commission file number: 0-21108
MARION CAPITAL HOLDINGS, INC.
(Exact name of registrant specified in its charter)
Indiana 35-1872393
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 West Third Street
P.O. Box 367
Marion, Indiana 46952
(Address of principal executive offices,
including Zip Code)
(317) 664-0556
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the Registrant's common stock, without par value,
outstanding as of May 4, 1999 was 1,494,854.
Marion Capital Holdings, Inc.
Form 10-Q
Index
Page No.
Forward Looking Statements.....................................................1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements...............................................2
Consolidated Condensed Statement of Financial Condition as of
March 31, 1999 and June 30, 1998................................2
Consolidated Condensed Statement of Income for the three-month
and nine-month periods ended March 31, 1999 and 1998............3
Consolidated Condensed Statement of Shareholders' Equity
for the nine months ended March 31, 1999........................4
Consolidated Condensed Statement of Cash Flows for
the nine months ended March 31, 1999 and 1998...................5
Notes to Consolidated Financial Statements......................7
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations........................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk........16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................18
Item 6. Exhibits and Reports on Form 8-K..................................18
SIGNATURES....................................................................19
FORWARD LOOKING STATEMENTS
Except for historical information contained herein, the discussion in this Form
10-Q quarterly report includes certain forward-looking statements based upon
management expectations. Factors which could cause future results to differ from
these expectations include the following: general economic conditions,
legislative and regulatory initiatives, monetary and fiscal policies of the
federal government, deposit flows, the costs of funds, general market rates of
interest, interest rates on competing investments, demand for loan products,
demand for financial services, changes in accounting policies or guidelines, and
changes in the quality or composition of the Company's loan and investment
portfolios.
The Company does not undertake and specifically disclaims any obligation to
update any forward- looking statements to reflect the occurrence of anticipated
or unanticipated events or circumstances after the date of such statements.
1
Item 1. Financial Statements
MARION CAPITAL HOLDINGS, INC.
AND WHOLLY-OWNED SUBSIDIARY
FIRST FEDERAL SAVINGS BANK OF MARION
CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL CONDITION
March 31, June 30,
1999 1998
------------ ------------
ASSETS
Cash $ 2,883,109 $ 3,211,191
Short-term interest bearing deposits 6,333,266 1,923,573
------------ ------------
Total cash and cash equivalents 9,216,375 5,134,764
Investment securities available for sale 3,051,249 3,048,751
Investment securities held to maturity
(market value $0 and $2,001,520) 0 2,002,917
Loans receivable, net 164,897,545 164,475,289
Real estate owned, net 0 30,735
Premises and equipment 1,987,795 1,928,772
Stock in Federal Home Loan Bank (at cost which
approximates market) 1,134,400 1,134,400
Investment in limited partnerships 4,742,675 4,883,175
Investment in other affiliate 650,000 650,000
Core deposit intangibles and goodwill 723,830 802,586
Other assets 9,850,632 9,871,520
------------ ------------
Total assets $196,254,501 $193,962,909
============ ============
LIABILITIES
Deposits $138,951,469 $134,415,469
Advances from FHLB 15,181,300 13,684,302
Advances by borrowers for taxes and
insurance 433,521 208,331
Other liabilities 8,579,701 7,998,180
------------ ------------
Total liabilities 163,145,991 156,306,282
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 -- 1,492,756 and
1,699,307 shares 7,954,074 7,785,191
Retained earnings 25,123,178 29,841,104
Accumulated other comprehensive income 31,258 30,332
------------ ------------
Total shareholder's equity 33,108,510 37,656,627
------------ ------------
Total liabilities and shareholders' equity $196,254,501 $193,962,909
============ ============
2
MARION CAPITAL HOLDINGS, INC.
AND WHOLLY-OWNED SUBSIDIARY
FIRST FEDERAL SAVINGS BANK OF MARION
CONSOLIDATED CONDENSED STATEMENT OF INCOME
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Interest income
Loans $ 3,624,006 $ 3,400,099 $ 10,971,215 $ 10,038,485
Mortgage-backed securities 0 171 31 2,505
Interest-bearing deposits 52,533 111,262 123,964 232,310
Investment securities 47,824 77,947 182,199 256,717
Other interest and dividend income 22,377 20,659 68,212 63,555
------------ ------------ ------------ ------------
Total interest income 3,746,740 3,610,138 11,345,621 10,593,572
Interest expense
Deposits 1,651,935 1,640,979 5,068,533 4,791,744
Advances from FHLB 220,991 162,044 686,323 476,506
------------ ------------ ------------ ------------
Total interest expense 1,872,926 1,803,023 5,754,856 5,268,250
Net interest income 1,873,814 1,807,115 5,590,765 5,325,322
Provision for losses on loans 1,400 7,534 17,589 23,088
------------ ------------ ------------ ------------
Net interest income after provision 1,872,414 1,799,581 5,573,176 5,302,234
Other income
Net loan servicing fees 23,057 19,566 62,463 58,604
Annuity and other commissions 52,743 27,013 98,263 94,472
Equity in losses of limited
partnerships (35,000) (22,500) (140,500) (147,600)
Life insurance income and
death benefits 39,750 41,251 142,250 133,794
Other income 87,110 53,568 261,262 130,893
------------ ------------ ------------ ------------
Total other income 167,660 118,898 423,738 270,163
------------ ------------ ------------ ------------
Other expenses
Salaries and employee benefits 724,474 681,122 2,003,670 1,902,142
Occupancy expense 69,688 74,053 199,516 180,721
Equipment expense 34,549 27,731 96,849 69,221
Deposit insurance expense 32,855 33,119 99,703 96,409
Real estate operations, net (1,628) 85,592 (2,875) 216,372
Data processing expense 77,498 60,242 228,632 146,981
Advertising 20,641 27,944 89,944 105,447
Amortization of core deposit
intangibles and goodwill 25,249 27,053 78,755 36,071
Other expenses 204,046 191,545 608,255 532,721
------------ ------------ ------------ ------------
Total other expenses 1,187,372 1,208,401 3,402,449 3,286,085
------------ ------------ ------------ ------------
Income before income taxes 852,702 710,078 2,594,465 2,286,312
Income tax expense 328,751 189,333 968,845 602,756
------------ ------------ ------------ ------------
Net income $ 523,951 $ 520,745 $ 1,625,620 $ 1,683,556
============ ============ ============ ============
Per share
Basic earnings per share $ 0.35 $ 0.29 $ 1.04 $ 0.95
Diluted earnings per share $ 0.35 $ 0.29 $ 1.02 $ 0.93
Dividends $ 0.22 $ 0.22 $ 0.66 $ 0.66
MARION CAPITAL HOLDINGS, INC.
AND WHOLLY-OWNED SUBSIDIARY
FIRST FEDERAL SAVINGS BANK OF MARION
CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
Total
Shareholders'
Equity
-------------------------------
Balances, July, 1 1998 and July 1, 1997 $ 37,656,627 $ 39,065,819
Comprehensive income
Net income 1,625,620 1,683,556
Other comprehensive income, net of tax
Unrealized gains on securities 926 34,533
------------ ------------
Comprehensive income 1,626,546 1,718,089
Exercise of stock options 61,901 238,453
Repurchase of common stock (5,311,296) (501,000)
Amortization of unearned compensation 0 124,540
Tax benefit of stock options excercised and RRP 106,982 96,186
Cash dividends (1,032,250) (1,176,670)
------------ ------------
Balances, March 31, 1999 and March 31, 1998 $ 33,108,510 $ 39,565,417
============ ============
MARION CAPITAL HOLDINGS, INC.
AND WHOLLY-OWNED SUBSIDIARY
FIRST FEDERAL SAVINGS BANK OF MARION
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
Nine Months Ended
March 31,
-------------------------------
OPERATING ACTIVITIES 1999 1998
------------ ------------
Net Income $ 1,625,620 $ 1,683,556
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 17,589 23,088
Equity in loss of limited partnerships 140,500 147,600
Amortization of net loan origination fees (196,806) (136,567)
Net amortization of investment securities'
premiums and discounts 817 2,957
Amortization of unearned compensation 0 124,540
Amortization of core deposits and goodwill 25,249 27,053
Depreciation 135,101 91,370
Deferred income tax 14,825 (70,271)
Origination of loans for sale (6,743,872) (2,950,851)
Proceeds from sale of loans 7,479,681 2,950,851
Change in:
Interest receivable 174,463 (162,349)
Interest payable and other liabilities 581,521 940,877
Cash value of insurance (142,250) (133,793)
Prepaid expense and other assets 34,584 (27,887)
------------ ------------
Net cash provided by operating activities 3,147,022 2,510,174
------------ ------------
INVESTING ACTIVITIES
Proceeds from maturity of investment securities
held to maturity 2,000,000 2,610,000
Payments on mortgage-backed securities 2,917 228,717
Net changes in loans (850,747) (11,608,444)
Purchases of premises and equipment (194,124) (463,552)
Death benefits received on life insurance 0 553,793
Cash received in branch acquisition 0 11,544,302
------------ ------------
Net cash provided by investing activities 958,046 2,864,816
------------ ------------
(CONTINUED)
FINANCING ACTIVITIES
Net change in:
Interest-bearing demand and savings deposits (1,563,053) 3,159,127
Certificates of deposit 6,099,053 (4,371,150)
Proceeds from FHLB advances 8,909,000 6,656,000
Repayment of FHLB advances (7,412,002) (4,195,907)
Net change in advances by borrowers for taxes
and insurance 225,190 152,125
Proceeds from exercise of stock options 61,901 238,453
Repurchase of common stock (5,311,296) (501,000)
Dividends paid (1,032,250) (1,176,670)
------------ ------------
Net cash used by financing activities (23,457) (39,022)
------------ ------------
Net change in cash and cash equivalents 4,081,611 5,335,968
Cash and Cash Equivalents, Beginning of Period 5,134,764 3,622,739
------------ ------------
Cash and Cash Equivalents, End of Period $ 9,216,375 $ 8,958,707
============ ============
ADDITIONAL CASH FLOWS AND
SUPPLEMENTARY INFORMATION
Interest paid $ 5,014,576 $ 4,464,777
Income tax paid 585,000 596,139
Loan balances transferred to real estate owned 0 1,141,907
Loans to finance the sale of real estate owned 8,500 1,248,715
Loan payable to limited partnership 0 3,634,406
MARION CAPITAL HOLDINGS, INC.
AND WHOLLY-OWNED SUBSIDIARY
FIRST FEDERAL SAVINGS BANK OF MARION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE A: Basis of Presentation
The unaudited interim consolidated condensed financial statements include the
accounts of Marion Capital Holdings, Inc. (the "Company") and its subsidiary
First Federal Savings Bank of Marion (the "Bank").
The unaudited interim consolidated condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do not
include all information and disclosures required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the financial statements reflect all adjustments, comprising only
normal recurring accruals, necessary to present fairly the Company's financial
position as of March 31, 1999, results of operations for the three-month and
nine month periods ended March 31, 1999 and 1998, and cash flows for the nine
month periods ended March 31, 1999 and 1998.
NOTE B: Dividends and Earnings Per Share
On February 16, 1999, the Board of Directors declared a quarterly cash dividend
of $.22 per share. This dividend was paid on March 15, 1999 to shareholders of
record as of March 1, 1999.
Earnings per share (EPS) were computed as follows:
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
-------------- --------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
Basis earnings per share
Income available to
common shareholders $ 523,951 1,493,227 $ .35 $ 520,745 1,770,586 $ .29
======= ==========
Effect of dilutive securities
RRP program 3,102
Stock Options 17,432 36,595
--------- ---------- --------- ----------
Diluted earnings per share
Income available to
common shareholders and
assumed conversions $ 523,951 1,510,659 $ .35 $ 520,745 1,810,283 $ .29
========== ========= ======= ========= ========= ==========
7
Nine Months Ended Nine Months ended
March 31, 1999 March 31, 1998
-------------- --------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
Basis earnings per share
Income available to
common shareholders $1,625,620 1,568,802 $1.04 $1,683,556 1,765,161 $.95
===== ====
Effect of dilutive securities
RRP program -- 3,324
Stock Options 22,198 41,086
---------- --------- --------- ---------
Diluted earnings per share
Income available to
common shareholders and
assumed conversions $1,625,620 1,591,000 $1.02 $1,683,556 1,809,571 $.93
========== ========= ===== ========== ========= ====
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:
Nine Months Ended
March 31
---------------------
1999 1998
-------- --------
Accumulated other comprehensive income
Balance, July 1 $ 30,332 $ (1,961)
Net unrealized gains 926 34,533
-------- --------
Balance, March 31 $ 31,258 $ 32,572
======== ========
Income tax expense
Unrealized holding gains $ 607 $ 22,650
======== ========
8
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company's total assets were $196.3 million at March 31, 1999 compared to
$194.0 million at June 30, 1998. Cash and cash equivalents increased $4.1
million and investment securities decreased $2.0 million from June 30, 1998 to
March 31, 1999. Net loans receivable were $164.9 million at March 31, 1999, an
increase of $.4 million, or .3%, from June 30, 1998. The Company owned no real
estate owned at March 31, 1999, down from the $31,000 reported at June 30, 1998.
Deposits increased to $138.9 million at March 31, 1999 compared to $134.4
million at June 30, 1998, a 3.4% increase. This $4.5 million increase
represented a $1.6 million decrease in passbook and transaction accounts and an
approximate $6.1 million increase in certificate of deposit accounts.
Federal Home Loan Bank advances increased to $15.2 million at March 31, 1999,
compared to $13.7 million at June 30, 1998, an 10.9% increase.
Shareholders' equity was $33.1 million at March 31, 1999, compared to $37.7
million at June 30, 1998. During the nine months ended March 31, 1999, the
Company repurchased 217,550 shares of common stock in the open market at a cost
of $5.3 million, or an average price of $24.41 per share. During the quarter
ended March 31, 1999, the Company repurchased 69,493 shares of common stock in
the open market at an average price of $21.94. This reduced the number of shares
outstanding to 1,492,756 at March 31, 1999.
Net income for the nine months ended March 31, 1999 of $1.6 million represents a
3.4% decrease in income reported for the same period in the prior year. Net
interest income, other income and other expenses increased resulting in an
increase in pre-tax income of $308,000, or 13.5%, for the nine months ended
March 31, 1999, compared to the same prior year period. Income tax expense
increased by $366,000 for the period ended March 31, 1999, due to the increase
in pre-tax income and a reduction in tax credits recorded causing the decreased
in net income.
Results of Operations Comparison of Three Months Ended March 31, 1999 and March
31, 1998
Net income for the three months ended March 31, 1999 of $523,951 was a .6%
increase from the three months ended March 31, 1998 of $520,745. Net interest
income for the quarter ended March 31, 1999, equaled $1,873,814, an increase of
3.7% over the quarter ended March 31, 1998 of $1,807,115. Pre-tax income for the
quarter ended March 31, 1999, equaled $852,702, an increase of 20.1% over the
quarter ended March 31, 1998 of $710,078. The reduction of federal income tax
credits for the three months ended March 31, 1999, caused the Company's
effective tax rate to increase to 38% from the prior year's effective tax rate
of 27%. Although certain credits have been fully utilized, a more recent
investment should generate new credits beginning in mid 1999
9
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 $1,400 for losses on loans was made for the three months ended
March 31, 1999 compared to a $7,534 provision in the same period last year. The
Company has reduced its provision for losses since desired reserve levels have
been obtained in prior years.
Total other income increased by $48,762 for the three months ended March 31,
1999, compared to the same period in the prior year. This increase is
attributable to an increase in fee income on deposit accounts which includes ATM
fees and transaction account fees and increased commissions from annuity and
mutual fund sales.
Total other expenses decreased by $21,029, or 1.7% for the three months ended
March 31, 1999, compared to the same period in the prior year. Real estate
operations expense decreased $87,220 as a result of the 1998 period including
expenses of operating the nursing home received by deed in lieu of foreclosure.
Data processing expense, salaries and benefits increased as the result of adding
the two new branch locations in October and December of 1998, as well as adding
additional features including a voice response unit and Sunday processing for
our Wal-Mart branch location.
Income tax expense for the three months ended March 31, 1999 amounted to
$328,751, an increase of $139,418 over the three months ended March 31, 1998,
which resulted in an increased effective rate. The Company's effective tax rate
for the three months ended December 31, 1998 was 38%, compared to 27% for the
comparable period in 1998. 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 Nine Months Ended March 31, 1999 and March
31, 1998
Net income for the nine months ended March 31, 1999, was $1,625,620 compared
with $1,683,556 for the nine months ended March 31, 1998, a decrease of $57,936,
or 3.4%. Interest income for the nine months ended March 31, 1999, increased
$752,049 or 7.1% compared to the same period in the prior year, while interest
expense for the nine months ended March 31, 1999, increased $486,606 or 9.2%
compared to the same period in the prior year. As a result, net interest income
for the nine months ended March 31, 1999, amounted to $5,590,765, an increase of
$265,443 or 5.0% compared to the same period in the prior year. Earnings for the
nine months ended March 31, 1998, included an additional $225,000 in federal
income tax credits as compared to the nine months ended March 31, 1999. This
reduction of tax credits had the effect of increasing the effective tax rate of
the Company from approximately 26% for the nine months ended March 31, 1998, to
37% for the nine months ended March 31, 1999.
A $17,589 provision for loss on loans for the nine months ended March 31, 1999,
was made compared to a $23,088 provision reported in the same period last year.
10
Total other income increased by $153,575 for the nine months ended March 31,
1999, compared to the same period in the prior year. This increase is primarily
attributable to increased fee income from ATM and transaction accounts.
Total other expenses increased by $116,364 or 3.5% for the nine months ended
March 31, 1999, compared to the same period in the prior year. Salaries and
employee benefits increased $101,528 or 5.3%, due to normal operational
increases. Real estate operating expense decreased by $219,247 for the nine
months ended March 31, 1999, compared to the same period in the prior year as a
result of the expenses associated with operating the nursing home in the prior
period. Data processing expense increased $81,651 as the result of adding the
two new branch locations in October and December of 1998, as well as adding
additional features including a voice response unit and Sunday processing for
our Wal-Mart branch location. Other operational expense increases of $75,534
were generally normal operational increases and included the amortization of the
premium for the purchase of the Gas City branch which amounted to $78,755 for
the nine months ended March 31, 1999, compared to $36,071 for the prior nine
month period.
Income tax expense for the nine months ended March 31, 1999, amounted to
$968,845, an increase of $366,089 from the nine months ended March 31, 1998,
resulting in an increase in the effective tax rate from 26% for the nine months
ended March 31, 1998 to 37% for the nine months ended March 31, 1999. This
change in effective tax rate is the result of an increase in pre-tax income and
a reduction in federal income tax credits as previously described above.
Allowance for loan losses amounted to $2.1 million at March 31, 1999, 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 March
31, 1999, to be adequate to cover estimated losses inherent in those portfolios
at that date, and its consideration included probable losses that could be
reasonably estimated. Such belief is based upon an analysis of loans currently
outstanding, real estate owned, past loss experience, current economic
conditions and other factors and estimates which are subject to change over
time. The following table illustrates the changes affecting the allowance for
loan losses for the three months ended March 31, 1999.
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 ........... 17,589 2,255 19,844
Recoveries ..................... 0 130 130
Loans and REO charged off....... (29,487) (2,660) (32,147)
----------- ----------- -----------
Balances at March 31, 1999...... $ 2,075,514 $ 0 $ 2,075,514
=========== =========== ===========
11
The loan loss reserves to total loans at March 31, 1999 equaled 1.24% of total
loans outstanding, compared to 1.25% of total loans outstanding at June 30,
1998. Total non-performing assets decreased during the nine months ended March
31, 1999, from $2.0 million at June 30, 1998 to $1.6 million at March 31, 1999.
Non-performing assets at March 31, 1999 consisted entirely of loans delinquent
greater than 90 days.
Total non-performing loans totaled .93% of total loans outstanding at March 31,
1999 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 uncollectable for any loan past due in
excess of 90 days. All loans delinquent over 90 days are placed in non-accrual
status. Any loan deemed to be uncollectible is charged off.
March 31, June 30,
1998 1998
------ ------
(Dollars in Thousands)
Accruing loans delinquent
more than 90 days ......... $--- $---
Non-accruing loans:
Residential ............... 985 1,454
Multi-family .............. 464 193
Commercial ................ 71 5
Consumer .................. 33 286
Troubled debt restructurings .. -- --
------ ------
Total non-performing loans . 1,553 1,938
Real estate owned, net ........ 0 31
------ ------
Total non-performing assets $1,553 $1,969
====== ======
Non-performing loans to
total loans ............... 0.93% 1.16%
Non-performing assets to
total assets .............. 0.79% 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.
12
Three Months Ended March 31
-------------------------------------------------------------------
1999 1998
-------------------------------- -------------------------------
(Dollars in thousands)
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Total interest-
earnings assets ........... $175,724 $ 3,747 8.53% $175,316 $ 3,610 8.24%
Total interest-
bearing liabilities ....... 153,192 1,873 4.89% 143,532 1,803 5.02%
-------- --------
Net interest income/
Interest rate spread ........ $ 1,874 3.64% $ 1,807 3.21%
======== ========
Nine Months Ended March 31
-------------------------------------------------------------------
1999 1998
-------------------------------- -------------------------------
(Dollars in thousands)
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Total interest-
earnings assets ........... $176,260 $ 11,346 8.58% $169,202 $ 10,594 .35%
Total interest-
bearing liabilities ....... 150,421 5,755 5.10% 135,768 5,268 5.17%
-------- --------
Net interest income/
Interest rate spread ........ $ 5,591 3.48% $ 5,326 3.18%
======== ========
Shareholders' Equity
Shareholders' equity at March 31, 1999 was $33,108,510, a decrease of $4,548,117
from June 30, 1998. The Company's equity to asset ratio was 16.87% at March 31,
1999 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 March 31, 1999, under each of the three
regulatory capital requirements (tangible, core, and fully phased-in risk
based):
13
Tangible Core Risk-Based
Capital Capital Capital
------- ------- -------
(Dollars in thousands)
Amount ............................. $28,184 $28,184 $29,764
As a percent of assets, as defined.. 15.0% 15.0% 23.6%
Required amount .................... $ 3,755 $ 7,511 $10,091
As a percent of assets, as defined.. 2.0% 4.0% 8.0%
Capital in excess of
required amount ................. $24,429 $20,673 $19,673
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 March 31, 1999, the Bank's
liquidity ratio was 8.4% of which 6.3% 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 March 31, 1999, the Company has completed an inventory of all
hardware and software systems and has made all mission critical classifications.
The Company has implemented both an employee awareness program and a customer
awareness program aimed at educating people about the efforts being made by the
Company as well as bank regulators regarding the Year 2000 issue.
The Company's data processing is performed primarily by a third party
servicer. In November, 1998, the Company began testing the systems of its
primary service provider. Such testing was continued and completed the quarter
ended March 31, 1999. The results from these extensive tests disclosed no
significant weakness or problems in processing and operating beyond December 31,
1999.
14
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 were sent questionnaires to assess their readiness. Those who
did not respond to the initial inquiry have been sent a second request. The
Company is still in the process of collecting that information.
The Company has completed a Year 2000 Business Continuity Plan which
addresses the ability to continue operations in the event of power or
telecommunication outages. Although complete, the Year 2000 Committee will
systematically monitor the Plan and make changes where necessary.
At this time, it is estimated that costs associated with Year 2000 issues
will be less than $75,000 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 t he Company
will not incur additional expenses in future periods. Amounts expensed in fiscal
1998 and 1998 were immaterial.
Other
The Securities and Exchange Commission maintains a Web site that contains
reports, proxy information statements, and other information regarding
registrants that file electronically with the Commission, including the Company.
The address is (http://www.sec.gov).
15
Item 3: Quantitative and Qualitative Disclosure About Market Risk
The Bank is subject to interest rate risk to the degree that its
interest-bearing liabilities, primarily deposits with short- and medium-term
maturities, mature or reprice at different rates than our interest-earning
assets. Although having liabilities that mature or reprice less frequently on
average than assets will be beneficial in times of rising interest rates, such
an asset/liability structure will result in lower net income during periods of
declining interest rates, unless offset by other factors.
The Bank protects against problems arising in a falling interest rate
environment by requiring interest rate minimums on its residential and
commercial real estate adjustable-rate mortgages and against problems arising in
a rising interest rate environment by having in excess of 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 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).
Associates 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 no voluntarily. Under the regulation, associations which must file are
required to take a deduction (the interest rate risk capital component) form
their total capital available to calculate their risk based capital requirement
of their interest rate exposure is greater than "normal". The amount of that
deduction is one-half of the difference between (a) the institution's actual
calculated exposure to a 200 basis point interest rate increase or decrease
(whichever results in the greater pro forma decrease in NPV) and (b) its
"normal" level of exposure which is 2% of the present value of its assets.
Presented below, as of March 31, 1999, is an analysis performed by the OTS
of the Bank's interest rate risk as measured by changed in NPV for instantaneous
and sustained parallel shifts in the yield curve, in 100 basis point increments,
up and down 300 basis points. At March 31, 1999,
16
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 $.8 million at March 31, 1999, the Bank would not have been required to make
a deduction from its total capital available to calculate its risk based capital
requirement if it had been subject to the OTS's reporting requirements under
this methodology.
Net Portfolio Value NPV as % of PV of Assets
Change
in Rates $ Amount $ Change % Change NPV Ratio Change
- ---------------------------------------------------------------------------------------
(Dollars in Thousands)
+300 bp 31,673 - 296 - 1% 16.89% +30 bp
+200 bp 32,374 405 1% 17.06% +47 bp
+100 bp 32,455 486 2% 16.96% +36 bp
0 bp 31,969 16.59%
- -100 bp 31,436 - 533 - 2% 16.21% -38 bp
- -200 bp 31,216 - 752 - 2% 15.97% -62 bp
- -300 bp 31,292 - 677 - 2% 15.85% -74 bp
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the methods of analysis presented above. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
assets, such as adjustable rate loans, have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. Most of the
Bank's adjustable rate loans have interest rate minimums of 6.00% for
residential loans and 8.50% for commercial real estate loans. Currently,
originations of residential adjustable rate mortgages have interest rate
minimums of 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 2.0% above the origination rate. The Company
considers all of these factors in monitoring its exposure to interest rate risk.
17
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor the Bank were, during the nine-month period ended
March 31, 1999, or are, as of the date hereof, involved in any legal proceeding
of a material nature. From time to time, the Bank is a party to legal
proceedings wherein it enforces its security interests in connection with its
mortgage loans.
Item 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 March
31, 1999.
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: May 14, 1999 By:/s/ Steven L. Banks
----------------------------
Steven L. Banks, President
Date: May 14, 1999 By: /s/ Larry G. Phillips
----------------------------
Larry G. Phillips, Vice President,
Secretary and Treasurer