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, 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 November 10, 1999 was 1,360,750.
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, 1999 and June 30, 1999 2
Consolidated Condensed Statement of Income for the
three-month periods ended September 30, 1999 and 1998 3
Consolidated Condensed Statement of Shareholders' Equity
for the three months ended September 30, 1999 4
Consolidated Condensed Statement of Cash Flows for the
three months ended September 30, 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 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
FORWARD LOOKING STATEMENTS
Except for historical information contained herein, the discussion in this Form
10-Q quarterly report includes certain forward-looking statements based upon
management expectations. Factors which could cause future results to differ from
these expectations include the following: general economic conditions,
legislative and regulatory initiatives, monetary and fiscal policies of the
federal government, deposit flows, the costs of funds, general market rates of
interest, interest rates on competing investments, demand for loan products,
demand for financial services, changes in accounting policies or guidelines, and
changes in the quality or composition of the Company's loan and investment
portfolios.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect the occurrence of anticipated
or unanticipated events or circumstances after the date of such statements.
MARION CAPITAL HOLDINGS, INC.
AND WHOLLY-OWNED SUBSIDIARY
FIRST FEDERAL SAVINGS BANK OF MARION
CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL CONDITION
September 30, June 30,
1999 1999
ASSETS
Cash $1,740,991 $2,225,804
Short-term interest bearing deposits 4,744,450 6,626,884
-----------------------------------------------
Total cash and cash equivalents 6,485,441 8,852,688
Investment securities available for sale 2,966,775 3,020,000
Loans held for sale 15,952 326,901
Loans receivable, net 164,926,954 165,797,406
Real estate owned, net 0 0
Premises and equipment 1,813,273 2,008,157
Stock in Federal Home Loan Bank (at cost which
approximates market) 1,163,600 1,163,600
Investment in limited partnerships 4,583,675 4,712,675
Investment in other affiliate 650,000 650,000
Core deposit intangibles and goodwill 673,330 698,580
Other assets 9,730,556 9,871,482
-----------------------------------------------
Total assets $193,009,556 $197,101,489
===============================================
LIABILITIES
Deposits $133,238,863 $142,087,269
Advances from FHLB 19,301,732 15,533,732
Other borrowings 2,825,560 3,240,344
Advances by borrowers for taxes and
insurance 311,904 201,919
Other liabilities 5,310,198 4,294,658
-----------------------------------------------
Total liabilities 160,988,257 165,357,922
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 -- 1,426,450 and
1,424,550 shares 8,020,048 8,001,048
Retained earnings 23,994,711 23,728,895
Accumulated other comprehensive income 6,540 13,624
-----------------------------------------------
Total shareholder's equity 32,021,299 31,743,567
-----------------------------------------------
Total liabilities and shareholders' equity $193,009,556 $197,101,489
===============================================
MARION CAPITAL HOLDINGS, INC.
AND WHOLLY-OWNED SUBSIDIARY
FIRST FEDERAL SAVINGS BANK OF MARION
CONSOLIDATED CONDENSED STATEMENT OF INCOME
Three Months Ended
September 30,
1999 1998
Interest income
Loans $3,532,902 $3,643,893
Mortgage-backed securities 0 427
Interest-bearing deposits 95,106 37,663
Investment securities 48,600 73,803
Other interest and dividend income 23,463 22,960
----------------------------------
Total interest income 3,700,071 3,778,746
Interest expense
Deposits 1,660,355 1,714,329
Advances from FHLB 255,422 232,064
----------------------------------
Total interest expense 1,915,777 1,946,393
Net interest income 1,784,294 1,832,353
Provision for losses on loans 205,000 9,303
----------------------------------
Net interest income after provision 1,579,294 1,823,050
Other income
Net loan servicing fees 21,221 20,552
Annuity and other commissions 44,023 21,457
Equity in losses of limited
partnerships (129,000) (40,500)
Life insurance income and
death benefits 39,050 41,250
Gain on sale of branch office 231,626 0
Other income 110,194 81,859
----------------------------------
Total other income 317,114 124,618
----------------------------------
Other expenses
Salaries and employee benefits 658,226 670,542
Occupancy expense 68,710 64,677
Equipment expense 36,670 30,242
Deposit insurance expense 32,117 33,872
Real estate operations, net 161 (1,266)
Data processing expense 75,900 74,862
Advertising 17,957 27,987
Amortization of core deposit
intangibles and goodwill 25,250 27,053
Other expenses 223,462 209,489
----------------------------------
Total other expenses 1,138,453 1,137,458
----------------------------------
Income before income taxes 757,955 810,210
Income tax expense 178,540 293,080
----------------------------------
Net income $579,415 $517,130
==================================
Per share
Basic earnings per share $0.41 $0.32
Diluted earnings per share $0.40 $0.31
Dividends $0.22 $0.22
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 1999 and July 1, 1998 $31,743,567 $37,656,627
Comprehensive income
Net income 579,415 517,130
Other comprehensive income, net of tax
Unrealized gains on securities (7,084) 39,551
-----------------------------------------
Comprehensive income 572,331 556,681
Exercise of stock options 19,000 10,830
Repurchase of common stock 0 (2,228,062)
Cash dividends (313,599) (360,460)
-----------------------------------------
Balances, September 30, 1999 and September 30, 1998 $32,021,299 $35,635,616
=========================================
MARION CAPITAL HOLDINGS, INC.
AND WHOLLY-OWNED SUBSIDIARY
FIRST FEDERAL SAVINGS BANK OF MARION
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
Three Months Ended
September 30,
OPERATING ACTIVITIES 1999 1998
------------------------
Net Income $579,415 $517,130
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 205,000 9,303
Equity in loss of limited partnerships 129,000 40,500
Amortization of net loan origination fees (54,641) (45,728)
Net amortization of investment securities'
premiums and discounts 570 159
Amortization of core deposits and goodwill 25,250 27,053
Depreciation 49,378 43,273
Deferred income tax (249,789) 35,792
Gain on sale of branch office (231,626) 0
Gain on sale of loans (6,121) (20,840)
Origination of loans for sale (301,189) (1,891,518)
Proceeds from sale of loans 612,138 1,910,123
Change in:
Interest receivable 137,925 128,728
Interest payable and other liabilities 1,075,723 671,461
Cash value of insurance (128,550) (41,250)
Prepaid expense and other assets 385,986 (93,932)
-------------------------
Net cash provided by operating activities 2,228,469 1,290,254
-------------------------
INVESTING ACTIVITIES
Proceeds from maturity of investment securities
held to maturity 1,000,000 0
Purchase of investment securities available
for sale (959,070) 0
Payments on mortgage-backed securities 0 2,770
Net changes in loans 718,841 (1,856,942)
Purchases of premises and equipment (13,777) (37,371)
Net cash disposed in sale of branch office (8,593,288) 0
-------------------------
Net cash used by investing activities (7,847,294) (1,891,543)
-------------------------
FINANCING ACTIVITIES
Net change in:
Interest-bearing demand and savings deposits (858,540) (2,100,500)
Certificates of deposit 941,516 4,314,448
Proceeds from FHLB advances 4,000,000 7,000,000
Repayment of FHLB advances (232,000) (5,227,000)
Repayment of other borrowings (414,784) (394,062)
Net change in advances by borrowers for taxes
and insurance 109,985 114,047
Proceeds from exercise of stock options 19,000 10,830
Repurchase of common stock 0 (2,228,062)
Dividends paid (313,599) (360,460)
-------------------------
Net cash provided by financing activities 3,251,578 1,129,241
-------------------------
Net change in cash and cash equivalents (2,367,247) 527,952
Cash and Cash Equivalents, Beginning of Period 8,852,688 5,134,764
-------------------------
Cash and Cash Equivalents, End of Period $6,485,441 $5,662,716
=========================
ADDITIONAL CASH FLOWS AND
SUPPLEMENTARY INFORMATION
Interest paid $1,132,098 $1,142,209
Income tax paid 0 80,000
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, 1999, results of operations for the three-month
periods ended September 30, 1999 and 1998, and cash flows for the three month
periods ended September 30, 1999 and 1998.
NOTE B: Dividends and Earnings Per Share
On August 16, 1999, the Board of Directors declared a quarterly cash dividend of
$.22 per share. This dividend was paid on September 15, 1999 to shareholders of
record as of August 27, 1999.
Earnings per share (EPS) were computed as follows:
Three Months Ended Three Months Ended
September 30, 1999 September 31, 1998
---------------------------------------- ---------------------------------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
Basic earnings per share
Income available to
common shareholders $ 579,415 1,425,064 $ .41 $ 517,130 1,640,284 $ .32
======= =======
Effect of dilutive securities
Stock Options 8,581 27,180
--------- ---------
Diluted earnings per share
Income available to
common shareholders and
assumed conversions $ 579,415 1,433,645 $ .40 $ 517,130 1,667,464 $ .31
========= ========= ======= ========= ========= =======
NOTE C: Reporting Comprehensive Income
The Company adopted Statement of financial Accounting Standards No. 130,
Reporting comprehensive Income. Comprehensive income includes unrealized gains
on securities available for sale, net of tax. Accumulated other comprehensive
income and income tax on such income reported are as follows:
Three Months Ended
September 30
------------------------
1999 1998
-------- --------
Accumulated other comprehensive income
Balance, July 1 13,624 $ 30,332
Net unrealized gains(losses) (7,084) 39,551
-------- --------
Balance, September 30 $ 6,540 $ 69,883
======== ========
Income tax expense(benefit)
Unrealized holding gains(losses) $ (4,646) $ 25,942
======== ========
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company's total assets were $193.0 million at September 30, 1999 compared to
$197.1 million at June 30, 1999. Cash and cash equivalents decreased $2.4
million and investment securities remained relatively unchanged from June 30,
1999 to September 30, 1999. Net loans receivable were $164.9 million at
September 30, 1999, a decrease of $1.2 million, or .7%, from June 30, 1999. The
Company owned no real estate owned at September 30, 1999 and June 30, 1999.
Deposits decreased to $133.2 million at September 30, 1999 compared to $142.0
million at June 30, 1999, a 6.2% decrease. This $8.8 million decrease was a
result of the Company selling its Decatur branch deposits on September 3, 1999
to another financial institution. The deposits sold amounted to $9.0 million.
Passbook and transaction accounts decreased by $.9 million and certificate of
deposit accounts decreased by $7.9 million.
Federal Home Loan Bank advances increased to $19.3 million at September 30,
1999, compared to $15.5 million at June 30, 1999, a 24.3% increase. Advances
were used to partially fund the sale of the Decatur branch deposits.
Shareholders' equity was $32.0 million at September 30, 1999, compared to $31.7
million at June 30, 1999.
Results of Operations Comparison of Three Months Ended September 30, 1999 and
September 30, 1998
Net income for the three months ended September 30, 1999 of $579,415 was a 12.0%
increase from the three months ended September 30, 1998 of $517,130. Net
interest income for the quarter ended September 30, 1999, equaled $1,784,294, a
decrease of 2.6% over the quarter ended September 30, 1998 of $1,832,353.
Pre-tax income for the quarter ended September 30, 1999, equaled $757,955, a
decrease of 6.5% over the quarter ended September 30, 1998 of $810,210. The
increase of federal income tax credits for the three months ended September 30,
1999, caused the Company's effective tax rate to decrease to 24% from the prior
year's effective tax rate of 36%. A recent investment has generated new credits
beginning in July 1999 and will increase to approximately $370,000 per year
based on current projections. The Company experienced a higher effective tax
rate in the prior period since its tax credits from a previous investment had
expired.
A provision of $205,000 for losses on loans was made for the three months ended
September 30, 1999 compared to a $9,303 provision in the same period last year.
The large loan loss provision was made as a result of the Company's ongoing
evaluation of its impaired loans and their net realizable value. As foreclosure
actions were proceeding and receivers were appointed during the quarter ended
September 30, 1999, on non-residential real estate loans totaling approximately
$1,400,000, the Company was able to obtain detailed information to evaluate the
properties and the length of time necessary to complete legal proceedings to
acquire the assets. The Company charged off $327,000 of these loans during the
quarter. These loans will be continually evaluated each quarter so that the
Company's loan loss allowance remains adequate to absorb future losses.
Total other income increased by $192,496 for the three months ended September
30, 1999, compared to the same period in the prior year. This increase is
attributable to the sale of the Decatur branch deposits and facilities,
resulting in a gain of $231,626 on September 3, 1999. The Company also
experienced an increase in commissions from annuity and mutual fund sales of
$22,566 over the same period last year and an increase of fee income amounting
to approximately $14,000. Equity losses in limited partnerships increased from
$40,500 for the quarter ended September 30, 1998 to a $129,000 loss for the
quarter ended September 30, 1999, as the new limited partnership begin
operations in July 1999. It is projected that the partnership will operate at a
loss for many years as designed from inception.
Total other expenses increased by $995 for the three months ended September 30,
1999, compared to the same period in the prior year.
Income tax expense for the three months ended September 30, 1999 amounted to
$178,540, a decrease of $114,540 over the three months ended September 30, 1998,
which resulted in a decreased effective rate. The Company's effective tax rate
for the three months ended September 30, 1999 was 24%, compared to 36% for the
comparable period in 1998. The decrease in the effective tax rate was attributed
to the increase of low income housing tax credits as described above.
Allowance for loan losses amounted to $2.1 million at September 30, 1999, which
decreased $121,458 from June 30, 1999 after adjusting for charge-offs and
recoveries. The $205,000 1999 provision and resulting level of the allowance for
loan losses was determined, as for any period, based on the evaluation of
nonperforming loans and other classified loans, changes in the composition of
the loan portfolio with allowance allocations made by loan type, past loss
experience, the amount of loans outstanding and current economic conditions.
The allowance for loan losses is computed by assigning an estimated loss
percentage to loans outstanding in each category of loans held in the portfolio.
All categories of loans, including multi-family, commercial real estate and
other commercial, and consumer loans, are assigned a higher percentage than
single-family loans based on greater risk factors inherent in these types of
loans. In addition to maintaining the allowance as a percentage of the
outstanding loans in the portfolio, additional reserves are provided for
nonperforming loans and other classified loans based on management's assessment
of impairment, if any. Individual loans are specifically analyzed to determine
an estimate of loss, and those specific allocations are then included as part of
the loan loss allowance. Historically, MCHI has been able to minimize its losses
on loans in relation to the allowance and loans outstanding. Management
considers the allowance to be adequate and will continue to monitor the
allowance for loan losses at least on a quarterly basis and adjust the provision
accordingly to maintain the allowance for loan losses at the prescribed level.
The following table illustrates the changes affecting the allowance for loan
losses for the three months ended September 30, 1999.
Allowance For Allowance For Total
Loan Losses REO Loses Allowance
Balances at July 1, 1999 ........... $ 2,271,701 $ 0 $ 2,271,701
Provision for losses ............... 205,000 0 205,000
Recoveries ......................... 542 0 542
Loans and REO charged off .......... (327,000) 0 (327,000)
----------- ----------- -----------
Balances at September 30, 1999...... $ 2,150,243 $ 0 $ 2,150,243
=========== =========== ===========
The loan loss reserves to total loans at September 30, 1999 equaled 1.29% of
total loans outstanding, compared to 1.35% of total loans outstanding at June
30, 1999. Total non-performing assets decreased during the three months ended
September 30, 1999, from $3.3 million at June 30, 1999 to $3.1 million at
September 30, 1999. Non-performing assets at September 30, 1999 consisted
entirely of loans delinquent greater than 90 days.
Total non-performing loans totaled 1.83% of total loans outstanding at September
30, 1999 compared to 1.98% of total loans at June 30, 1999.
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.
September 30, June 30,
1999 1999
------------- --------
(Dollars in Thousands)
Accruing loans delinquent
more than 90 days .................. $ -- $ --
Non-accruing loans:
Residential ........................ 752 1,108
Multi-family ....................... 461 462
Commercial real estate ............. 1,645 1,585
Commercial loans ................... 54 153
Consumer ........................... 44 21
Troubled debt restructurings ........... -- --
------ ------
Total non-performing loans .......... 3,056 3,329
Real estate owned, net ................. 0 2
------ ------
Total non-performing assets......... $3,056 $3,331
====== ======
Non-performing loans to
total loans ........................ 1.83% 1.98%
Non-performing assets to
total assets ....................... 1.58% 1.69%
Average Balances and Interest
The following table presents for the periods indicated the monthly average
balances of the Company's interest-earning assets and interest-bearing
liabilities, the interest earned or paid on such amounts, and the average yields
earned and rates paid. Such yields and costs are determined by dividing income
or expense by the average balance of assets or liabilities for the periods
presented.
Three Months September 30
------------------------------------------------------------------------------
1999 1998
----------------------------------- --------------------------------
(Dollars in thousands)
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Total interest-
earnings assets............ $179,258 $3,700 8.26% $176,490 $3,779 8.56%
Total interest-
bearing liabilities........ 156,586 1,916 4.89% 150,767 1,947 5.16%
----- -----
Net interest income/
Interest rate spread......... $1,784 3.37% $1,832 3.40%
===== ======
Shareholders' Equity
Shareholders' equity at September 30, 1999 was $32,021,299, an increase of
$277,732 from June 30, 1999. The Company's equity to asset ratio was 16.59% at
September 30, 1999 compared to 16.11% at June 30, 1999. There are five capital
categories defined in the regulations, ranging from well capitalized to
critically undercapitalized. Classification of a bank in any of the
undercapitalized categories can result in actions by regulators that could have
a material effect on a bank's operations. At September 30, 1999 the Bank is
categorized as well capitalized and met all subject capital adequacy
requirements. There are no conditions or events since September 30, 1999 that
management believes have changed the Bank's classification.
1999
-------------------------------------------------------------------------
Required
for Adequate To Be Well
Actual Capital Capitalized
-------------------------------------------------------------------------
September 30 Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------
Total risk-based capital
(to risk-weighted assets) $28,375 20.7% $10,943 8.0% $13,678 10.0%
Tier I risk based capital
(to risk-weighted assets) 26,663 19.4% 10,943 8.0% 13,678 10.0%
Core capital
(to adjusted tangible assets) 26,663 14.4% 5,537 3.0% 11,073 6.0%
Core capital
(to adjusted total assets) 26,663 14.4% 5,537 3.0% 9,228 5.0%
Liquidity and Capital Resources
The standard measure of liquidity for savings associations is the ratio of cash
and eligible investments to a certain percentage of net withdrawable savings
accounts and borrowings due within one year. The minimum required ratio is
currently set by the Office of Thrift Supervision regulation at 5%, of which 1%
must be comprised of short-term investments. At September 30, 1999, the Bank's
liquidity ratio was 5.9% of which 4.0% 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
September 30, 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 during the quarter ended
September 30, 1999. The results from these extensive tests disclosed no
significant weakness or problems in processing and operating beyond December 31,
1999.
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.
Costs associated with Year 2000 issues have been immaterial. Although management
believes it has taken 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 1998 and 1997 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 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" lev7el 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 September 30, 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 September 30, 1999, 2% of the present value of
the Bank's assets was approximately $3.8 million. Because the interest rate risk
of a 200 basis
point increase in market rates (which was greater than the interest rate risk of
a 200 basis point decrease) was $1.1 million at September 30, 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 29,135 -2,459 -8% 16.03% 73 bp
+200 bp 30,446 -1,148 -4% 16.50% -25 bp
+100 bp 31,287 -307 -1% 16.75% 0 bp
0 bp 31,594 16.75%
- -100 bp 31,441 -153 0% 16.55% -21 bp
- -200 bp 31,279 -315 -1% 16.34% -42 bp
- -300 bp 31,431 -163 -1% 16.26% -50 bp
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the methods of analysis presented above. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
assets, such as adjustable rate loans, have features 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.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor the Bank were, during the nine-month period ended
September 30, 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
September 30, 1999.
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 10, 1999 By: /s/ Steven L. Banks
-------------------
Steven L. Banks, President
Date: November 10, 1999 By: /s/ Larry G. Phillips
----------------------
Larry G. Phillips, Vice President,
Secretary and Treasurer