SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 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 0-29312
MONTGOMERY FINANCIAL CORPORATION
(Exact Name of Small Business Issuer in its Charter)
Indiana 35-1962246
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
119 East Main Street 47933
Crawfordsville, Indiana Zip Code
(Address of Principal Executive Offices)
Issuer's telephone number, including area code: (765) 362-4710
Securities Registered under Section 12(b) of the Exchange Act:
None
Securities Registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such requirements for the past 90 days. YES [ X ] NO [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The Issuer had $9,205,564 in revenues for the fiscal year ended June
30, 1999.
<PAGE>
As of August 31, 1999, there were issued and outstanding 1,487,242
shares of the Issuer's Common Stock. The aggregate market value of the voting
stock held by non-affiliates of the Issuer, computed by reference to the last
known sale price of such stock as of August 31, 1999, was $14.4 million. (The
exclusion from such amount of the market value of the shares owned by any person
shall not be deemed an admission by the Issuer that such person is an affiliate
of the Issuer.)
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Portions of Annual Report to Stockholders for
the Fiscal Year Ended June 30, 1999. Part III of Form 10-KSB - Portions of the
Proxy Statement for the 1999 Annual Meeting of Shareholders.
<PAGE>
PART I
Item 1. Description of Business
-----------------------
Forward-Looking Statements
When used in this Form 10-KSB or future filings by Montgomery Financial
Corporation ("Montgomery" or the "Company) with the Securities and Exchange
Commission, in the Company's press releases or other public or shareholder
communications, or in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result," "are expected to,"
"will continue," "is anticipated," "estimate," "project," "believe" or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including regional and national economic
conditions, changes in levels of market interest rates, credit risks of lending
activities, and competitive and regulatory factors, could affect the Company's
financial performance and could cause the Company's actual results for future
periods to differ materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligations, to revise any forward-looking statements to reflect the occurrence
of anticipated or unanticipated events or circumstances after the date of such
statements.
General
The Company is an Indiana corporation which was organized in April 1997
by Montgomery Savings, a Federal Association for the purpose of becoming a
savings and loan holding company. Montgomery Savings Association, a Federal
Association, was established in 1888 as an Indiana state-chartered mutual
savings and loan association known as The Montgomery Savings Association. It was
converted in 1985 to a federally chartered, mutual savings and loan association.
On August 11, 1995, Montgomery Savings Association, a Federal Association,
transferred substantially all its assets and liabilities to a
federally-chartered stock savings and loan association named Montgomery Savings,
a Federal Association (the "Association").
In June 1997, the Company became the holding company of the Association
and issued shares of common stock, par value $.01 per share ("Common Stock"), to
the public. Pursuant to a Plan of Conversion and Agreement and Plan of
Reorganization (the "Plan") adopted by the Association and Montgomery Mutual
Holding Company, a federally chartered mutual holding company, (the "Mutual
Holding Company") the Mutual Holding Company converted from mutual form to a
federal interim stock savings institution and was simultaneously merged with and
into the Association, with the Association being the surviving entity and a
subsidiary of the Company. At the same time, the Company completed its initial
public offering of 1,186,778 shares of Common Stock and exchanged 466,254 shares
of Common Stock for the shares of the Association previously held by public
stockholders.
1
<PAGE>
The principal asset of the Company is the outstanding stock of the
Association, its wholly owned subsidiary. The Company presently has no separate
operations and its business consists of the business of the Association. All
references to the Company, unless otherwise indicated, at or before June 30,
1997 refer to the Association.
The Association conducts business from five offices, two in
Crawfordsville (Montgomery County), one in Covington (Fountain County), one in
Williamsport (Warren County), and one in Lafayette (Tippecanoe County), Indiana.
At June 30, 1999, the Company and its subsidiaries (on a consolidated basis) had
total assets of $124.0 million, total liabilities of $104.6 million, including
$82.5 million of deposits, $20.6 million of Federal Home Loan Bank advances, and
total stockholders' equity of $19.4 million. The deposits of the Association are
insured by the Federal Deposit Insurance Corporation ("FDIC") under the Savings
Association Insurance Fund ("SAIF"). The Association is subject to regulation
and examination by the Office of Thrift Supervision (the "OTS").
The Company's principal executive offices are located at 119 East Main
Street, Crawfordsville, Indiana 47933, and its telephone number is (765)
362-4710.
The Association is primarily engaged in attracting deposits from the
general public through its offices and using those and other available sources
of funds to originate loans secured by one- to four-family residences.
Approximately 99.5% of the Association's depositors reside in the State of
Indiana. One- to four-family residential loans amounted to $88.1 million, or
78.3%, of the Association's total loan portfolio at June 30, 1999. To a lesser
extent, the Association originates loans secured by existing multi-family
residential and nonresidential real estate, which amounted to $16.0 million, or
14.2%, of the total loan portfolio at June 30, 1999, as well as construction
loans and consumer loans, which amounted to $3.1 million, or 2.7%, of the total
loan portfolio and $5.4 million, or 4.8%, of the total loan portfolio at such
date, respectively. The Association also invests in U.S. Government and federal
agency obligations and mortgage-backed securities which are insured by federal
agencies. The Association has one wholly owned subsidiary corporation, MSA
Service Corporation ("MSA"). MSA engages in real estate management.
At June 30, 1999, the Association exceeded all of its minimum capital
requirements. Management attributes its strong capital position to its focus on
loans secured by residential properties and a conservative lending philosophy on
other types of loans.
Lending Activities
General. The Association's revenue consists primarily of interest
income generated by lending activities, including the origination of
conventional fixed-rate and variable-rate mortgage loans on one- to four-family
homes located in the Association's primary market area and consumer loans
secured by savings deposits, residential real estate, and various other items of
collateral. To a lesser extent mortgage loans on multi-unit and nonresidential
properties are also offered by the Association. The Association does not make
loans insured by the Federal Housing Authority ("FHA loans") or loans guaranteed
by the Veterans Administration ("VA loans").
At June 30, 1999, the Association's net loan portfolio totaled $111.4
million. Loans secured by first mortgages on one- to four-family residences,
including construction loans, totaled $90.9
2
<PAGE>
million, or 80.7% of the Association's loan portfolio at June 30, 1999, before
net items. The Association originates and retains its mortgage loan portfolio,
and currently does not originate mortgage loans for sale to the secondary
market.
Loans to One Borrower. Under OTS regulations, the aggregate amount of
the loans that the Association can make to any one borrower (including related
entities, with certain exceptions), is limited to an amount equal to 15% of
unimpaired capital and retained income on an unsecured basis and an additional
amount equal to 10% of unimpaired capital and retained income if the loan is
secured by readily marketable collateral (generally financial instruments, not
real estate) or $500,000, whichever is higher. The Association's maximum
loan-to-one borrower limit was approximately $2.5 million as of June 30, 1999.
The Association's largest amount outstanding to one borrower or group of related
borrowers was a group of loans secured by unimproved land and a motel in the
aggregate amount of $2.4 million. All of the loans to this borrower have
performed in accordance with their terms since their origination.
3
<PAGE>
Loan Portfolio Composition. The following table presents certain
information about the composition of the Association's loan portfolio at the
dates indicated:
<TABLE>
<CAPTION>
June 30
---------------------------------------------------------------------------------------
1999 1998 1997
------------------------ ------------------------- ----------------------
Amount Percent Amount Percent Amount Percent
--------- ------ --------- ------ -------- ------
(Dollars in Thousands)
Type of Loan:
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C>
Residential $ 88,989 79.87% $ 82,546 82.37% $ 74,270 85.45%
Land 1,644 1.47 1,316 1.32 1,658 1.91
Nonresidential 13,467 12.09 7,549 7.53 5,793 6.67
Construction:
Residential 2,783 2.50 1,331 1.33 1,892 2.18
Nonresidential 325 0.29 2,667 2.66 -- --
--------- ------ --------- ------ -------- ------
Total mortgage loans 107,208 96.22 95,409 95.21 83,613 96.21
--------- ------ --------- ------ -------- ------
Other loans:
Home equity 4,195 3.76 4,091 4.08 2,727 3.14
Savings account and unsecured
consumer loans 1,199 1.08 1,383 1.38 1,252 1.44
--------- ------ --------- ------ -------- ------
Total other loans 5,394 4.84 5,474 5.46 3,979 4.58
--------- ------ --------- ------ -------- ------
Less:
Loans in process 1,261 1.13 707 0.70 668 0.77
Deferred loan fees (cost) (300) (0.27) (220) (0.22) (164) (0.19)
Loan loss reserves 226 0.20 186 0.19 180 0.21
--------- ------ --------- ------ -------- ------
Total adjustments 1,187 1.06 673 0.67 684 0.79
--------- ------ --------- ------ -------- ------
Total loans, net $ 111,415 100.00% $ 100,210 100.00% $ 86,908 100.00%
========= ====== ========= ====== ======== ======
Type of Security:
Residential:
1-4 family $ 90,908 81.59% $ 82,714 82.54% $ 75,498 86.87%
5 or more units 864 0.77 1,163 1.16 664 0.76
Nonresidential 13,792 12.38 10,216 10.19 5,793 6.67
Land 1,644 1.47 1,316 1.32 1,658 1.91
Residential--second mortgage 4,195 3.77 4,091 4.08 2,727 3.14
Savings accounts and unsecured
consumer loans 1,199 1.08 1,383 1.38 1,252 1.44
--------- ------ --------- ------ -------- ------
Total loans 112,602 101.06 100,883 100.67 87,592 100.79
--------- ------ --------- ------ -------- ------
Less:
Loans in process 1,261 1.13 707 0.70 668 0.77
Deferred loan fees (cost) (300) (0.27) (220) (0.22) (164) (0.19)
Loan loss reserves 226 0.20 186 0.19 180 0.21
--------- ------ --------- ------ -------- ------
Total loans, net $ 111,415 100.00% $ 100,210 100.00% $ 86,908 100.00%
========= ====== ========= ====== ======== ======
</TABLE>
4
<PAGE>
Loan Maturity Schedule. The following table illustrates the maturities
of the Association's loan portfolio at June 30, 1999. Mortgages which have
adjustable or renegotiable interest rates are shown as maturing in the period
during which the contract is subject to repricing. The schedule does not reflect
the effects of possible prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Due During Years Ended June 30,
--------------------------------------------------------------------------------------------------
2003 2005 2010 2015 Balance
And Through Through And June 30,
2000 2001 2002 2004 2006 2014 Following 1999
------- ------- ------ ------- ------ ------- ------- --------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential mortgage......... $11,686 $1,005 $2,110 $11,410 $7,380 $26,410 $28,988 $ 88,989
Nonresidential mortgage...... 2,107 149 --- 408 578 9,380 845 13,467
Residential construction..... 1,663 --- --- 299 --- 294 527 2,783
Nonresidential construction.. --- --- --- --- --- 225 100 325
Land loans................... 994 264 3 --- 325 58 --- 1,644
Home equity loans............ 883 83 2 36 1,568 1,550 73 4,195
Savings account and
unsecured consumer loans 875 61 79 184 --- --- --- 1,119
------- ------- ------ ------- ------ ------- ------- --------
Total............... $18,208 $ 1,562 $2,194 $12,337 $9,851 $37,917 $30,533 $112,602
======= ======= ====== ======= ====== ======= ======= ========
</TABLE>
The following table sets forth as of June 30, 1999 the dollar amount of
all loans due after one year which have fixed and floating or adjustable
interest rates.
<TABLE>
<CAPTION>
Fixed Variable
Rates Rates Total
----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C>
Residential mortgage............................................ $64,529 $12,774 $77,303
Nonresidential mortgage ........................................ 10,905 455 11,360
Residential construction........................................ 821 299 1,120
Nonresidential construction..................................... 325 --- 325
Land loans ..................................................... 387 263 650
Home equity loans............................................... 3,312 --- 3,312
Savings account and unsecured consumer loans.................... 324 --- 324
-------- --------- --------
Total.................................................... $80,603 $13,791 $94,394
======= ======= =======
</TABLE>
Residential Loans. The primary lending activity of the Association has
been the origination of conventional loans for the acquisition or construction
of single-family residences. The Association also originates loans on two- to
four-family dwellings and multi-family housing (over four units). Each of these
types of loans is secured by a mortgage on the underlying real estate and
improvements thereon, if any.
<PAGE>
OTS regulations limit the amount which the Association may lend in
relationship to the appraised value of the underlying real estate at the time of
loan origination. In accordance with such regulations and law, the Association
makes loans on single family residences up to 90% of the value of the real
estate and improvements (the "Loan-to-Value Ratio" or "LTV"). The Association
makes loans from time to time of between 90% and 95% of the value of the real
estate and obtains private mortgage insurance on those loans to reduce its
exposure to 80% of the real estate's value or makes such loans on an uninsured
basis as a part of the Association's Community Reinvestment Program for
first-time buyers with low to moderate incomes.
Adjustable-rate mortgage loans ("ARMs") are offered by the Association
for terms of normally 15 to 20 years, although Montgomery will offer such loans
up to terms of 25 years. The interest rate adjustment periods on the ARMs are
usually one year. The maximum adjustment at each adjustment date is usually 1%
5
<PAGE>
with a maximum average adjustment of 4% over the term of the loan. The interest
rate adjustments on ARMs presently originated by the Association are tied to
changes in the monthly average yield of U.S. Treasury securities adjusted to a
constant maturity of one year.
The Association offers fixed-rate mortgage loans for terms of up to 20
years. Due to the nature of an investment in fixed-rate mortgage loans, such
loans could have a negative effect upon the Association's interest rate spread
because such loans do not reprice as quickly as the Association's cost of funds.
Actual experience reveals, however, that, as a result of prepayments in
connection with refinancings and sales of the underlying properties, residential
loans generally remain outstanding for periods which are shorter than the
maturity of such loans, although not as short as the periods in which the cost
of funds is typically repricing.
Of the total real estate loans originated by the Association during the
year ended June 30, 1999, 15.3% were ARMs and 84.7% were fixed-rate loans.
The Association's one- to four-family residential loan portfolio,
including residential construction loans, totaled approximately $90.9 million at
June 30, 1999, and represented 73.3% of total assets and 80.7% of total
outstanding loans. Adjustable-rate one- to four-family residential loans
comprised 20.8% and fixed rate loans totaled 59.9% of the Association's total
loans at June 30, 1999.
Construction Loans. The Association offers residential construction
loans to owner-occupants and occasionally to builders. At June 30, 1999, the
Association had $2.8 million in outstanding residential construction loans. At
June 30, 1999, the Association also had $0.3 million in non-residential
construction loans, secured by land and buildings under construction.
Construction loans generally involve greater underwriting and default
risks than do loans secured by mortgages on existing properties. Loan funds are
advanced upon the security of the project under construction, which is more
difficult to value before the completion of construction. Moreover, because of
the uncertainties inherent in estimating construction costs, it is relatively
difficult to evaluate accurately the total loan funds required to complete a
project and the related Loan-to-Value Ratios. In the event a default on a
construction loan occurs and foreclosure follows, the Association would have to
take control of the project and attempt either to arrange for completion of
construction or dispose of the unfinished project.
Nonresidential Real Estate Loans. The Association makes loans secured
by raw land and nonresidential real estate consisting of farms and various
retail and other income-producing properties. At June 30, 1999, these loans
totaled $15.1 million or approximately 13.4% of the Association's total loans.
Nonresidential real estate lending is generally considered to involve a
higher degree of risk than residential lending due to the relatively larger loan
amounts and the effects of general economic conditions on the successful
operation of income-producing properties. The Association has endeavored to
reduce this risk by carefully evaluating the credit history and past performance
of the borrower, the location of the real estate, the quality of the management,
the debt service ratio, the quality and characteristics of the income stream
generated by the property and appraisals supporting the property's valuation.
Federal regulations limit the amount of nonresidential mortgage loans which an
association can make.
6
<PAGE>
Consumer Loans. The Association makes two types of consumer loans --
loans made to depositors on the security of their savings deposits and loans
secured by second real estate mortgages. Second mortgage loans may have terms as
long as 15 years depending upon the nature of the request. Such loans are
limited in amount by determining 100% of the value of the real estate and
subtracting any prior liens.
Although regulations permit the Association to lend up to 100% of the
value of savings deposits pledged as collateral for loans, the Association's
normal policy is to loan no more than 95% of the current principal balance of
pledged accounts. The current interest rate charged on such pledged accounts is
usually 2% above the rate paid on the underlying deposit.
At June 30, 1999, consumer loans totaled $5.4 million or 4.8% of the
Association's total loans.
Loan Originations, Solicitation, and Processing. Loan originations are
developed from a number of sources, including solicitations by the Association's
staff, continuing business with depositors and other borrowers, real estate
agents, newspaper and radio advertising, and walk-in customers.
Mortgage loan applications are taken by one of the Association's loan
officers. The Association obtains a credit report, verification of employment
and other documentation concerning the creditworthiness of the borrower and an
appraisal of the fair market value of the real estate which will be given as
security for the loan. Appraisals are performed by a designated licensed fee
appraiser approved by the Board of Directors. Such loans are subject to approval
upon the completion of the appraisal and the receipt of all necessary
information on the credit history and creditworthiness of the borrower. At least
two Board members must approve all loans over $250,000. All approved loans are
reported to the full Board at their regular monthly meeting.
If a mortgage loan application is approved, satisfactory evidence of
merchantable title is obtained on the real estate and improvements which will
secure the mortgage loan. Borrowers are required to carry satisfactory fire and
casualty insurance and flood insurance, if applicable, and to name the
Association as an insured mortgagee.
The procedure for approval of construction/permanent loans is the same
as for residential mortgage loans, except that for construction/permanent loans
the Association evaluates the building plans, construction specifications and
estimates of construction costs. The Association also evaluates the feasibility
of the proposed construction project and the experience and record of the
builder.
Consumer loans are underwritten on the basis of the borrower's credit
history, the value of the collateral, and an analysis of the borrower's income
and expenses and ability to repay the loan.
7
<PAGE>
The following table shows total loans originated and repaid during the
periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------------
1999 1998 1997
--------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Total gross loans at beginning
of period ......................... $ 100,883 $ 87,592 $ 80,762
--------- --------- --------
Loans originated:
Residential mortgage ............. 34,179 32,628 22,269
Nonresidential mortgage .......... 8,001 5,241 2,299
Residential construction ......... 3,180 2,534 3,500
Nonresidential construction ...... 555 2,667
Land loans ....................... 471 269 743
Other loans ...................... 2,077 2,761 1,372
--------- --------- --------
Total loans originated ....... 48,463 46,100 30,183
Participation loans purchased:
Nonresidential mortgage .......... --- --- ---
Participation loans sold:
Nonresidential mortgage .......... --- --- ---
Loan principal payments ............ (15,631) (15,268) (11,185)
Other changes, net(1) .............. (21,113) (17,541) (12,168)
--------- --------- --------
Total gross loans at end of
period ............................ $ 112,602 $ 100,883 $ 87,592
========= ========= ========
</TABLE>
- ---------------------
(1) Represents changes other than cash repayments of principal (i.e.,
refinanced portion of new loans and foreclosed loans to real estate owned).
Loan Origination and Other Fees. The Association realizes interest
income from its lending activities and also realizes income from late payment
charges, credit life and disability insurance premium commissions, and fees for
other miscellaneous services.
Delinquent Loans and Classified Assets. The Association attempts to
minimize loan delinquencies through careful underwriting procedures. When
mortgage loans become delinquent, the Association attempts to bring the loans
current through the assessment of late charges and adherence to its established
collection procedures. Generally, after a loan payment is 15 days delinquent, a
late charge of 5% of the amount of the payment is assessed and the Association
will contact the borrower to request payment. The Association generally will
initiate foreclosure proceedings only after attempts to obtain a deed in lieu of
foreclosure are unsuccessful or inappropriate and when it becomes apparent that
the loan will not be collectable or when the collateral is becoming inadequate
to support payments of the total debt. The above procedure similarly applies to
consumer loans.
<PAGE>
Real estate acquired by the Association as a result of foreclosure or
by deed in lieu of foreclosure and real estate securing loans deemed to be
foreclosed in substance are classified as "real estate owned" until sold. When
property is so acquired, or deemed to have been acquired, it is recorded at the
lower of the unpaid principal balance of the loan or the fair value of the real
estate at the date of acquisition, not to exceed
8
<PAGE>
net fair value minus estimated costs to sell. Periodically, real estate owned is
reviewed to ensure that the fair value minus estimated costs to sell is no less
than the carrying value and, if it is, the difference is charged to earnings as
a loss. Costs relating to development and improvement of property are
capitalized, whereas costs relating to the holding of property are expensed.
The following table reflects the amount of loans in a delinquent status
as of the dates indicated:
<TABLE>
<CAPTION>
June 30,
--------------------------------------------
1999 1998 1997
------- -------- -------
(In Thousands)
<S> <C> <C> <C>
Loans delinquent for:
30 to 59 days............................. $1,940 $1,242 $1,013
60 to 89 days............................. 885 647 640
90 or more days........................... 547 724 502
------- -------- -------
Total delinquent loans................ $3,372 $2,613 $2,155
====== ------ ======
Ratio of total delinquent loans
to total loans............................. 2.99% 2.59% 2.46%
</TABLE>
All loans are reviewed on a regular basis and are placed on non-accrual
status when, in the opinion of management, the collection of principal or
interest is doubtful. Interest accrued and unpaid at the time a loan is placed
on non-accrual status is charged against interest income. Subsequent payments
are either applied to the outstanding principal balance or recorded as interest
income, depending on management's assessment of the ultimate collectability of
the loan.
<PAGE>
The following table sets forth information with respect to the
Association's non-performing assets at the dates indicated:
<TABLE>
<CAPTION>
June 30,
----------------------
1999 1998 1997
---- ---- ----
(Dollars In Thousands)
<S> <C> <C> <C>
Nonaccrual loans:
Residential mortgage loans ......................... $422 $635 $255
Nonresidential mortgage loans ...................... 16 17 18
Consumer loans ..................................... --- --- ---
---- ---- ----
Total nonaccrual loans ........................... 438 652 273
Accruing loans contractually past due 90 days or more:
Residential mortgage ............................... 69 36 229
Nonresidential mortgage ............................ --- --- ---
Consumer loans ..................................... 40 36 ---
---- ---- ----
Total accruing loans contractually past
due 90 days or more ............................... 109 72 229
---- ---- ----
Total non-performing loans ........................... 547 724 502
Real estate acquired in
settlement of loans (net) ........................... 267 189 109
---- ---- ----
Total non-performing
assets ......................................... $814 $913 $611
==== ==== ====
</TABLE>
9
<PAGE>
During the periods shown, the Association had no restructured loans
within the meaning of SFAS No. 15. At June 30, 1999, there were no loans other
than those disclosed in the table above about which management has concerns as
to the ability of the borrowers to comply with repayment terms.
On July 1, 1995, the Association adopted SFAS Nos. 114 and 118
Accounting by Creditors for Impairment of a Loan and Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures. At June 30, 1999 and
during the year ended June 30, 1999, the Association had no impaired loans.
For the years ended June 30, 1999, 1998 and 1997, the income that would
have been recorded had the non-accruing loans not been in a non-performing
status totaled $46,000, $72,000 and $50,000, respectively, compared to actual
income recorded of $26,000, $26,000 and $25,000, respectively.
OTS regulations require each savings institution to classify its assets
on a regular basis. Under such regulations, problem assets are to be classified
as either (i) "substandard," (ii) "doubtful" or (iii) "loss." Substandard assets
have one or more defined weaknesses and are characterized by the distinct
possibility that the insured institution will sustain some loss if the
deficiencies are not corrected. Doubtful assets have the same weaknesses as
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full highly questionable and improbable on the
basis of existing facts, conditions and value. Assets classified as "Loss" are
considered uncollectible and of such little value that their treatment as assets
without the establishment of a specific reserve is unwarranted. The regulations
also have a "special mention" category for assets which do not currently expose
an association to a sufficient degree of risk to warrant classification, but
which possess credit deficiencies or potential weaknesses deserving management's
close attention.
At June 30, 1999, 1998 and 1997, the aggregate amounts of the
Association's classified assets were as follows:
<TABLE>
<CAPTION>
June 30,
-------------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
Classified assets:
<S> <C> <C> <C>
Special mention........................... $ --- $ 755 $ ---
Substandard............................... 852 913 611
Doubtful.................................. --- --- ---
Loss...................................... --- --- ---
----- ---------- --------
Total classified assets............... $852 $1,668 $ 611
==== ====== =====
General loan loss allowance................. $226 $ 186 $ 180
==== ====== =====
</TABLE>
The Association is required to establish general allowances for loan
losses for assets classified as substandard or doubtful. If an asset, or portion
thereof, is classified as loss, the Association must either establish specific
<PAGE>
allowances for loan losses in the amount of 100% of the portion of the asset
classified loss, or charge off such amount. Federal examiners are authorized to
classify an association's assets. If an association does not agree with an
examiner's classification of an asset, it may appeal this determination to the
District Director of the OTS. As of the date of its most recent examination, the
Association had no disagreement with the Office of Thrift Supervision as to
asset classifications.
10
<PAGE>
The following tables set forth an analysis of the Association's
allowances for loan losses for the periods indicated:
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------
1999 1998 1997
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance of allowance at beginning of period ...... $ 186 $ 180 $ 158
Add: Recoveries on loans previously charged off .. --- --- ---
Less: Charge-offs--residential real estate loans . --- --- ---
------- ------- -------
Net charge-offs .................................. --- --- ---
------- ------- -------
Provision for losses on loans .................... 40 6 22
------- ------- -------
Balance of allowance at end of period ............ $ 226 $ 186 $ 180
======= ======= =======
Net charge-offs to total average loans outstanding
for period ...................................... --- --- ---
Allowance at end of period to net loans receivable
at end of period ................................ 0.20% 0.19% 0.21%
Non-performing assets to total assets ............ 0.66 0.78 0.59
Non-performing loans to total loans .............. 0.49 0.72 0.58
Allowance to non-performing loans ................ 41.32 25.69 35.86
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------------------------
1999 1998 1997
------------------------ ----------------------- ------------------------
Percent of Percent of Percent of
loans in loans in loans in
each each each
category to category to category to
Amount total loans Amount total loans Amount total loans
------ ----------- ------ ----------- ------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to:
Residential .................. $ 80 79.03% $ 76 81.82% $ 45 84.79%
Commercial real estate
and land .................... 33 13.42 3 8.79 3 8.51
Construction loans ........... --- 2.76 --- 3.96 --- 2.16
Home equity and consumer loans 44 4.79 43 5.43 23 4.54
Unallocated .................. 69 --- 64 --- 109 ---
---- ------ ---- ------ ---- ------
Total .................... $226 100.00% $186 100.00% $180 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
11
<PAGE>
Investment Activities
OTS regulations require that the Association maintain a minimum amount
of liquid assets, which may be invested in United States Treasury obligations,
securities of various federal agencies, certificates of deposit at insured
banks, deposits with the Federal Home Loan Bank ("FHLB") of Indianapolis,
bankers' acceptances, and federal funds. The Association is also permitted to
make investments in certain commercial paper, corporate debt securities and
certain mutual funds, as well as other investments permitted by federal
regulations. The Association considers all its investment to be available for
sale and pursuant to the requirements of SFAS No. 115 these securities are
reported at fair value.
The following tables set forth information regarding the Association's
investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- ---------------------
Book Book Book
Value % of Total Value % of Total Value % of Total
----- ---------- ----- ---------- ----- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits with banks $ 219 100.00% $ 215 100.00% $100 100.00%
====== ====== ====== ====== ==== ======
Investment securities:
Municipals ....................... $ --- 0.00% $ 22 1.78% $ 42 4.36%
Marketable equity securities ...... 881 41.32 290 23.50 --- ---
------ ------ ------ ------ ---- ------
Total investment securities .. 881 41.32 312 25.28 42 4.36
FHLB stock ......................... 1,251 58.68 922 74.72 922 95.64
------ ------ ------ ------ ---- ------
Total investment securities
and FHLB stock .............. $2,132 100.00% $1,234 100.00% $964 100.00%
====== ====== ====== ------ ==== ======
</TABLE>
Deposits and Borrowings
General. Deposits have traditionally been the primary source of the
Association's funds for use in lending and other investment activities. In
addition to deposits, the Association derives funds from interest payments and
principal repayments on loans and income on earning assets. Loan payments are a
relatively stable source of funds, while deposit inflows and outflows fluctuate
more in response to general interest rates and money market conditions.
Borrowings from the FHLB of Indianapolis are used on a short-term basis to
compensate for reductions in the availability of funds from other sources or on
a longer term basis for general business purposes.
<PAGE>
Deposits. Deposits are attracted principally from within the
Association's primary market area through the offering of a selection of deposit
instruments, including NOW accounts, regular passbook savings accounts, term
certificate accounts and retirement savings plans. Interest rates paid, maturity
terms, service fees and withdrawal penalties for the various types of accounts
are established on a periodic basis by the Association's chief executive
officer, subject to review by the Board of Directors, based on the Association's
liquidity requirements, growth goals and interest rates paid by competitors. The
Association does not presently use brokers to attract deposits.
12
<PAGE>
The Association's deposits as of June 30, 1999 were represented by the
various types of savings programs described below:
<TABLE>
<CAPTION>
Weighted
Average Balance Percent
Interest Term Minimum June 30, of Total
Rate (Months) Category Amount 1999 Deposits
---- -------- -------- ------ ---- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
3.00% NOW accounts N/A $ 3,882 4.71%
4.17 Regular savings N/A 10,978 13.31
3.49 Money market demand accounts N/A 5,741 6.96
--- Demand accounts N/A 1,349 1.64
--------- ------
21,950 26.62
-------- ------
5.26 18 IRA fixed rate and term 500 2,183 2.65
5.03 30 IRA fixed rate and term 500 108 0.13
3.94 3 Fixed rate and term N/A 85 0.10
4.72 6 Fixed rate and term N/A 6,216 7.54
5.06 12 Fixed rate and term N/A 11,735 14.23
5.54 18 Fixed rate and term N/A 8,154 9.89
5.34 24 Fixed rate and term N/A 5,718 6.93
5.87 30 Fixed rate and term N/A 6,572 7.97
5.54 36 Fixed rate and term N/A 2,707 3.28
5.83 48 Fixed rate and term N/A 2,547 3.09
5.95 60 Fixed rate and term N/A 7,938 9.62
6.19 3 to 60 Fixed rate and term N/A 319 0.39
5.02 Various Public funds N/A 6,236 7.56
--------- ------
60,518 73.38
--------- ------
$ 82,468 100.00%
========= ======
</TABLE>
The following table presents the certificates of deposit issued by
Montgomery, classified by rates at the dates indicated:
<TABLE>
<CAPTION>
June 30,
------------------------------------------
1999 1998 1997
-------- ----------- ----------
(In Thousands)
<S> <C> <C> <C>
4.00% and below ............. $ 85 $ --- $ ---
4.01 to 6.00% ............... 50,810 45,810 31,664
6.01 to 8.00% ............... 9,623 18,766 23,341
8.01 to 10.00% .............. --- 8 8
------- ------- -------
$60,518 $64,584 $55,013
======= ======= =======
</TABLE>
<PAGE>
The following table presents the amount and maturities of the
certificates of deposit at June 30, 1999:
<TABLE>
<CAPTION>
Two To Percent of
Less Than One To Three Three To Total
One Year Two Years Years Four Years Thereafter Total Certificates
-------- --------- ----- ---------- ---------- ----- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Certificate maturities at June 30, 1999:
4% and below .......................... $ 85 $ --- $ --- $ --- $ --- $ 85 0.14%
4.01 to 6.00% ......................... 35,237 6,972 3,423 2,126 3,052 50,810 83.96
6.01 to 8.00% ......................... 6,893 1,611 251 836 32 9,623 15.90
------- ------ ------ ------ ------- ------- ------
$42,215 $8,583 $3,674 $2,962 $ 3,084 $60,518 100.00%
======= ====== ====== ====== ======= ======= ======
</TABLE>
13
<PAGE>
The following table presents the amount of the Association's
certificates of deposit of $100,000 or more by the time remaining until maturity
as of June 30, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
Three months or less ..................................... $ 7,643
Four through six months .................................. 2,185
Seven through twelve months .............................. 6,416
Over twelve months ....................................... 2,341
-------
TOTAL .................................................... $18,585
=======
</TABLE>
The following table presents the change in dollar amount of deposit
accounts by savings type for years ended June 30, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------- -------------------------------- -------------------------------
Increase Increase Increase
Percent of or Percent of or Percent of or
Amount Total Decrease Amount Total Decrease Amount Total Decrease
------ ----- -------- ------ ----- -------- ------ ----- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand accounts ...... $ 1,349 1.64% $ (516) $ 1,865 2.22% $ 700 $ 1,165 1.63% $ 552
NOW accounts ......... 3,882 4.71 120 3,762 4.48 222 3,540 4.97 962
Regular savings ...... 10,978 13.31 3,011 7,967 9.49 3,562 4,405 6.18 (543)
Money market demand
accounts ............ 5,741 6.96 (63) 5,804 6.91 (1,338) 7,142 10.02 107
Certificate of deposit 60,518 73.38 (4,066) 64,584 76.90 9,571 55,013 77.20 478
------- ------ ------- ------- ------ -------- ------- ------- -------
Total ........... $82,468 100.00% $(1,514) $83,982 100.00% $ 12,717 $71,265 100.00% $ 1,556
======= ====== ======= ======= ====== ======== ======= ======= =======
</TABLE>
<PAGE>
The following table sets forth the savings activities of the
Association for the periods indicated:
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------
1999 1998 1997
-------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance, beginning of period ........... $ 83,982 $71,265 $ 69,709
-------- ------- --------
Net (decrease) increase before
interest credited ..................... (6,199) 8,738 (2,238)
Interest credited ...................... 4,685 3,979 3,794
-------- ------- --------
Net increase (decrease) in deposits (1,514) 12,717 1,556
-------- ------- --------
Balance, end of period ................. $ 82,468 $83,982 $ 71,265
======== ======= ========
</TABLE>
Deposit flows historically have been related to general economic
conditions. To resist these historical trends, the Association, as well as the
thrift industry as a whole, has increasingly relied on short-term certificate
accounts and other deposit alternatives that are more responsive to market
conditions than passbook accounts and long-term certificates. This greater
variety of deposit
14
<PAGE>
accounts has allowed the Association to be more competitive in obtaining funds.
At the same time, however, these sources of funds can be more costly than
traditional sources. In addition, the Association at times has become
increasingly subject to short-term fluctuations in deposit flows as customers
have become more interest-rate conscious. The ability of the Association to
attract and maintain savings deposits and the Association's cost of funds have
been, and will continue to be, significantly affected by money market
conditions. The Association continues to rely upon its core deposits to support
its operations.
Borrowings. The FHLB System functions as a central reserve bank
providing credit for its member institutions and certain other financial
institutions.
As a member in good standing of the FHLB of Indianapolis, the
Association is authorized to apply for advances from the FHLB of Indianapolis,
provided certain standards of creditworthiness have been met. Advances are made
pursuant to several different programs, each having its own interest rate and
range of maturities. Depending on the program, limitations on the amount of
advances are based either on a fixed percentage of an institution's regulatory
capital or on the FHLB's assessment of the institution's creditworthiness. Under
current regulations, an association must meet certain qualifications to be
eligible for FHLB advances. The extent to which an association is eligible for
such advances will depend upon whether it meets the Qualified Thrift Lender Test
(the "QTL Test"). If a savings institution meets the QTL Test, it will be
eligible for 100% of the advances it would otherwise be eligible to receive. If
a savings institution does not meet the QTL Test, it will be eligible for such
advances only to the extent it holds specified QTL Test assets. At June 30,
1999, the Association was in compliance with the QTL Test.
The following table sets forth the maximum amount of the Association's
FHLB advances during the years ended June 30, 1999, 1998, and 1997 along with
the balance of FHLB advances outstanding at the end of each such period:
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------------
1999 1998 1997
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum balance outstanding
at any month end.......................... $20,013 $11,261 $12,000
Period end balance......................... 20,013 11,261 11,428
Weighted average interest rate
of FHLB advances at period end............ 5.60% 5.88% 5.98%
</TABLE>
Market Area and Competition
The Association's market area consists of Montgomery, Fountain,
Tippecanoe and Warren Counties, Indiana. The home office of the Association is
located in Crawfordsville, Montgomery County, Indiana. The Association has
branch offices in Fountain, Tippecanoe and Warren Counties. The branch office in
Tippecanoe County was opened in April 1999. The market area in Montgomery,
Fountain and Warren Counties is characterized by a lower growth rate in
population,
15
<PAGE>
moderately lower unemployment level. This market area's strongest employment
categories are manufacturing, services and wholesale/retail trade with a lower
level of residents employed in the agriculture and mining industry category. In
addition to a large agricultural based, Montgomery, Fountain and Warren Counties
have over 40 major industrial businesses employing over 10,000 workers. These
businesses manufacture travel trailers, bottle caps, industrial lighting, steel
and care parts as well as many other products. The addition of the branch office
in Lafayette, Tippecanoe County has entered Montgomery into a market area with a
higher growth rate in population and higher average household income levels than
was experienced in our previous three county market area. Economic activity in
Tippecanoe County continues to grow as new and existing businesses and
manufacturers regularly announce expansion and workforce additions. Tippecanoe
County's labor force totals nearly 100,000 workers. In 1998 Industry Week
magazine ranked Lafayette among the nation's top 25 growth and total number of
manufacturing jobs.
The Association competes for deposits with other savings institutions,
commercial banks and credit unions in its market area. The primary factors in
competing for deposits are interest rates and convenience of office location. In
lending, the Association competes with other savings institutions, commercial
banks, consumer finance companies, credit unions, leasing companies and other
lenders. The Association competes for loan originations primarily through the
interest rates and loan fees it charges and through the efficiency and quality
of services it provides to borrowers. Competition is affected by, among other
things, the general availability of lendable funds, general and local economic
conditions, current interest rate levels and other factors which are not readily
predictable.
On June 30, 1998, the latest date for which such data is available,
there were approximately 17 different financial institutions with a total of 38
offices in Montgomery, Fountain and Warren counties. According to information
provided by the FDIC, these institutions held approximately $814.3 million in
deposits in those 38 banking offices. The Association held approximately 10.8%
of the deposits in the three county area. As of June 30, 1998, Tippecanoe County
had 17 different financial institutions with $1.8 billion in deposits in 52
offices. The April 1999 opening of the Lafayette office has allowed us to enter
a market area with the same number of financial institutions and over two times
the available deposits as was in our previous three county market area. Similar
information is not readily available for loans.
MSA SERVICE CORP
MSA, a real estate management company, is wholly owned by the
Association. MSA owns a tract of land which is currently being developed for the
construction of 15 condominium units.
At June 30, 1999, MSA had total assets of $462,000, liabilities of
$59,000, and net worth of $403,000. MSA had a net loss of $11,000 and $8,000 for
the years ended June 30, 1999 and 1998, respectively.
REGULATION
General
The Association is a federally chartered savings association, the
deposits of which are federally insured and backed by the full faith and credit
of the United States Government.
16
<PAGE>
Accordingly, the Association is subject to broad federal regulation and
oversight extending to all its operations. The Association is a member of the
FHLB of Indianapolis and is subject to certain limited regulation by the Board
of Governors of the Federal Reserve System ("Federal Reserve Board"). As the
savings and loan holding company of the Association, the Company also is subject
to federal regulation and oversight. The purpose of the regulation of the
Company and other holding companies is to protect subsidiary savings
associations. The Association is a member of the Savings Association Insurance
Fund (the "SAIF"), which together with the Bank Insurance Fund (the "BIF") are
the two deposit insurance funds administered by the FDIC, and the deposits of
the Association are insured by the FDIC. As a result, the FDIC has certain
regulatory and examination authority over the Association.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations
The OTS has extensive authority over the operations of savings
associations. As part of this authority, the Association is required to file
periodic reports with the OTS and is subject to periodic examinations by the OTS
and the FDIC. The last regular OTS examination of the Association was as of
March 2, 1998. When these examinations are conducted by the OTS and the FDIC,
the examiners may require the Association to provide for higher general or
specific loan loss reserves. All savings associations are subject to a
semi-annual assessment, based upon the savings association's total assets, to
fund the operations of the OTS. The Association's OTS assessment for the fiscal
year ended June 30, 1999, was $34,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Association and the
Company. This enforcement authority includes, among other things, the ability to
assess civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the
Association is prescribed by federal laws and it is prohibited from engaging in
any activities not permitted by such laws. For instance, no savings institution
may invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to branch nationwide. The Association is in compliance with the noted
restrictions.
The Association's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At June 30, 1999, the Association's lending
limit under this restriction was $2.5 million. The Association is in compliance
with the loans-to-one-borrower limitation.
17
<PAGE>
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or to comply
with an approved plan will subject the institution to further enforcement
action.
Insurance of Accounts and Regulation by the FDIC
The Association is a member of the SAIF, which is administered by the
FDIC. Deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the United States
Government. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious risk
to the SAIF or the BIF. The FDIC also has the authority to initiate enforcement
actions against savings associations, after giving the OTS an opportunity to
take such action, and may terminate the deposit insurance if it determines that
the institution has engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
Effective January 1, 1997, the premium schedule for Bank Insurance Fund
and Savings Association Insurance Fund insured institutions ranged from 0 to 27
basis points. However, Savings Association Insurance Fund insured institutions
and Bank Insurance Fund insured institutions are required to pay a Financing
Corporation assessment in order to fund the interest on bonds issued to resolve
thrift failures in the 1980s. This amount is currently equal to about six basis
points for each $100 in domestic deposits for Savings Association Insurance Fund
members while Bank Insurance Fund insured institutions pay an assessment equal
to about 1.50 basis points for each $100 in domestic deposits. The savings
institutions assessment is expected to be reduced to about two basis points no
later than January 1, 2000, when Bank Insurance Fund insured institutions fully
participate in the assessment. These assessments, which may be revised based
upon the level of Bank Insurance Fund and Savings Association Insurance Fund
deposits, will continue until the bonds mature in the year 2015.
Regulatory Capital Requirements
Federally insured savings associations, such as the Association, are
required to maintain a minimum level of regulatory capital. The OTS has
established capital standards, including a tangible
18
<PAGE>
capital requirement, a leverage ratio (or core capital) requirement and a
risk-based capital requirement applicable to such savings associations. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At June 30, 1999, the Association did not have any intangible
assets.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the Association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. MSA Service Corp is an excludable subsidiary.
At June 30, 1999, the Association had tangible capital of $16.5
million, or 13.5% of total assets, which is approximately $14.7 million above
the minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain 3% ratio. At June 30, 1999, the
Association had no intangibles which were subject to these tests.
At June 30, 1999, the Association had core capital equal to $16.5
million, or 13.5% of adjusted total assets, which is $11.6 million above the
minimum leverage ratio requirement of 4% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At June 30, 1999, the Association
had $226,000 of general loss reserves, which was less than 1.25% of
risk-weighted assets.
19
<PAGE>
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. As of June 30, 1999, the
Association had a $750,000 exclusion from capital for real estate held for
investment.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the Federal National
Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation
("FHLMC").
On June 30, 1999, the Association had total risk-based capital of $16.0
million (including $16.5 million in core capital plus $226,000 in qualifying
supplementary capital, less $750,000 in real estate held for investment) and
risk-weighted assets of $79.0 million; or total capital of 20.3% of
risk-weighted assets. This amount was $9.7 million above the 8% requirement in
effect on that date.
The Office of Thrift Supervision is authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis. The Office of Thrift Supervision and the FDIC are authorized
and, under certain circumstances required, to take certain actions against
savings associations that fail to meet their capital requirements. The Office of
Thrift Supervision is generally required to take action to restrict the
activities of an "undercapitalized association" (generally defined to be one
with less than either a 4% core capital ratio, a 4% Tier 1 risked-based capital
ratio or an 8% risk-based capital ratio). Any such association must submit a
capital restoration plan and until such plan is approved by the Office of Thrift
Supervision may not increase its assets, acquire another institution, establish
a branch or engage in any new activities, and generally may not make capital
distributions. The Office of Thrift Supervision is authorized to impose the
additional restrictions that are applicable to significantly undercapitalized
associations.
The Office of Thrift Supervision is also generally authorized to
reclassify an association into a lower capital category and impose the
restrictions applicable to such category if the institution is engaged in unsafe
or unsound practices or is in an unsafe or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Association may have a substantial adverse effect on its operations and
profitability. Montgomery shareholders do not have preemptive rights and
therefore, if the Company is directed by the OTS or the FDIC to issue additional
shares of Common Stock, such issuance may result in the dilution in the
percentage of ownership of the Company.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions on savings associations
with respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
savings association from declaring or paying any dividends or from repurchasing
any of
20
<PAGE>
its stock if, as a result, the regulatory capital of the Association would be
reduced below the amount required to be maintained for the liquidation account
established in connection with its mutual to stock conversion. A savings
association like the Association which is a subsidiary of a holding company must
submit written notice to the OTS 30 days prior to such distribution.
Liquidity
All savings associations, including the Association, are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. For a discussion of what Montgomery
includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources." This liquid asset ratio requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
savings associations. At the present time, the minimum liquid asset ratio is 4%.
Penalties may be imposed upon associations for violations of the liquid asset
ratio. At June 30, 1999, the Association was in compliance with this
requirement, with a liquid asset ratio of 8.45%.
Accounting
An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of and
accounting for loans and securities (i.e., whether held for investment, sale or
trading) with appropriate documentation. The Association is in compliance with
these amended rules.
The OTS has adopted an amendment to its accounting regulations, which
may be made more stringent than GAAP by the OTS, to require that transactions be
reported in a manner that best reflects their underlying economic substance and
inherent risk and that financial reports must incorporate any other accounting
regulations or orders prescribed by the OTS.
Qualified Thrift Lender Test
All savings associations, including the Association, are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. This test requires a savings association to have at least 65%
of its portfolio assets (as defined by regulation) in qualified thrift
investments on a monthly average for nine out of every 12 months on a rolling
basis. As an alternative, the savings association may maintain 60% of its assets
in those assets specified in Section 7701(a)(19) of the Internal Revenue Code.
Under either test, such assets primarily consist of residential housing related
loans and investments. At June 30, 1999, the Association met the test and has
always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
21
<PAGE>
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
Association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Company Regulation."
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of the
Association, to assess the institution's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by Montgomery.
An unsatisfactory rating may be used as the basis for the denial of an
application by the OTS.
The Association was examined for CRA compliance in 1997 and received a
rating of satisfactory.
Transactions with Affiliates
Generally, transactions between a savings association or its
subsidiaries and its affiliates are required to be on terms as favorable to the
Association as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the Association's capital. Affiliates of the Association include the Company and
any company which is under common control with the Association. In addition, a
savings association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of most
affiliates. The Association's subsidiaries are not deemed affiliates, however,
the OTS has the discretion to treat subsidiaries of savings associations as
affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
22
<PAGE>
Company Regulation
The Company is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings association subsidiaries which also permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings association.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Association or any other SAIF-insured savings
association) would become subject to such restrictions unless such other
associations each qualify as a QTL and were acquired in a supervisory
acquisition.
If the Association fails the QTL test, the Company must obtain the
approval of the OTS prior to continuing after such failure, directly or through
its other subsidiaries, any business activity other than those approved for
multiple savings and loan holding companies or their subsidiaries. In addition,
within one year of such failure the Company must register as, and will become
subject to, the restrictions applicable to bank holding companies. The
activities authorized for a bank holding company are more limited than are the
activities authorized for a unitary or multiple savings and loan holding
company. See "--Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law
The stock of the Company is registered with the Securities and Exchange
Commission ("SEC") under the Securities Exchange Act of 1934 (the "Exchange
Act"). The Company will be subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the SEC under the
Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At June 30, 1999, the Association was in compliance with these
23
<PAGE>
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS. See "--Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
The Association is a member of the FHLB of Indianapolis, which is one
of 12 regional FHLBs, that administers the home financing credit function of
savings associations. Each FHLB serves as a reserve or central bank for its
members within its assigned region. It is funded primarily from proceeds derived
from the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures, established
by the board of directors of the FHLB, which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
As a member, the Association is required to purchase and maintain stock
in the FHLB of Indianapolis. At June 30, 1999, the Association had $1.3 million
in FHLB stock, which was in compliance with this requirement. In past years, the
Association has received substantial dividends on its FHLB stock. Over the past
five fiscal years such dividends have averaged 7.74% and were 7.97% for fiscal
year 1999.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Association's FHLB stock may result in a corresponding
reduction in the Association's capital.
For the year ended June 30, 1999, dividends paid by the FHLB of
Indianapolis to the Association totaled $89,000, which constituted a $15,000
increase over the amount of dividends received in fiscal year 1998. The $89,000
dividend for the twelve months ended June 30, 1999 reflected an annualized rate
of 7.97%, or 0.06% below the rate for fiscal 1998.
Federal and State Taxation
Federal Taxation. Savings associations such as the Association that met
certain definitional tests relating to the composition of assets and other
conditions prescribed by the Code, were permitted to establish reserves for bad
debts and to make annual additions thereto which were, within specified formula
limits, taken as a deduction in computing taxable income for federal income tax
purposes. The amount of the bad debt reserve deduction for "non-qualifying
loans" was computed
24
<PAGE>
under the experience method. The amount of the bad debt reserve deduction for
"qualifying real property loans" (generally loans secured by improved real
estate) were computed under either the experience method or the percentage of
taxable income method (based on an annual election).
Under the experience method, the bad debt reserve deduction was an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
The percentage of specially-computed taxable income that was used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") was 8%. The
percentage bad debt deduction thus computed was reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permitted qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction).
If an association's specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constituted less than 60% of its total assets, the
Association could not deduct any addition to a bad debt reserve and generally
had to include existing reserves in income over a four year period.
Under the percentage of taxable income method, the percentage bad debt
deduction could not exceed the amount necessary to increase the balance in the
reserve for qualifying real property loans to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for non-qualifying loans equaled the amount by
which 12% of the amount comprising savings accounts at year-end exceeded the sum
of surplus, undivided profits and reserves at the beginning of the year.
In August 1996, legislation was enacted that repealed the reserve
method of accounting (including the percentage of taxable income method) used by
many thrifts, including the Association, to calculate their bad debt reserve for
federal income tax purposes. As a result, large thrifts must recapture that
portion of the reserve that exceeds the amount that could have been taken under
the specific charge-off method for post-1987 tax years. The legislation also
requires thrifts to account for bad debts for federal income tax purposes on the
same basis as commercial banks for tax years beginning after December 31, 1995.
The recapture will occur over a six-year period, the commencement of which will
be delayed until the first taxable year beginning after December 31, 1997,
provided the institution meets certain residential lending requirements. The
management of the Company does not believe that the legislation will have a
material impact on the Company or the Association.
In addition to the regular income tax, corporations, including savings
associations such as the Association, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
25
<PAGE>
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the Association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of June 30, 1999, the Association's Excess for tax purposes totaled
approximately $1.5 million.
The Company and its subsidiaries file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting. The
Company and the Association have not been audited by the IRS recently with
respect to federal income tax returns. In the opinion of management, any
examination of still open returns would not result in a deficiency which could
have a material adverse effect on the financial condition of the Company or the
Association.
Indiana Taxation. The Company and the Association are subject to
Indiana's Financial Institutions Tax ("FIT"), which is imposed at a flat rate of
8.5% on "adjusted gross income." "Adjusted gross income," for purposes of FIT,
begins with taxable income as defined by Section 63 of the Code and, thus,
incorporates federal tax law to the extent that it affects the computation of
taxable income. Federal taxable income is then adjusted by several Indiana
modifications, the most notable of which is the required addback of interest
that is tax-free for federal income tax purposes. Other applicable state taxes
include generally applicable sales and use taxes plus real and personal property
taxes. The Association's state income tax returns have not been audited in
recent years.
Executive Officers
The following table sets forth certain information relating to the
executive officers of Montgomery as of June 30, 1999.
<TABLE>
<CAPTION>
Name Age Offices Held
---- --- ------------
<S> <C> <C>
Earl F. Elliott 65 President, Chief Executive Officer
J. Lee Walden 51 Vice President and Chief Financial Officer
Nancy L. McCormick 43 Secretary and Treasurer
</TABLE>
Officers are elected annually by the Board of Directors and serve for a
one-year period and until their successors are elected. There are no family
relationships between or among the persons named. Each of the officers has held
the same or similar position with Montgomery for the past five years.
Employment Agreements. The Association has entered into employment
agreements with Chief Executive Officer Elliott and Vice President Walden
providing for an initial term of three years. The employment agreements became
effective upon completion of the Conversion and Reorganization and provide for
an annual base salary in an amount not less than each individual's
26
<PAGE>
respective prior salary and provide for an annual extension subject to the
performance of an annual formal evaluation by disinterested members of the Board
of Directors of the Association. The agreements also provide for termination
upon the employee's death, for cause or in certain events specified by OTS
regulations. The employment agreements are also terminable by the employee upon
90 days' notice of the Association.
The employment agreements each provide for payment in an amount equal
to 299% of the five-year annual average base compensation, in the event a
"change of control" of the Association where employment involuntarily terminates
in connection with such change in control or within twelve months thereafter.
For the purposes of the employment agreements, a "change in control" is defined
as any event which would require the filing of an application for acquisition of
control or notice of change in control pursuant to 12 C.F.R. ss. 574.3 or 4.
Such events are generally triggered prior to the acquisition or control of 10%
of the Company's Common Stock. If the employment of Chief Executive Officer
Elliott or President Walden had been terminated as of June 30, 1999 under
circumstances entitling them to severance pay as described above, they would
have been entitled to receive a lump sum cash payment of approximately $283,000
and $202,000, respectively. The agreements also provide for the continued
payment to each employee of health benefits for the remainder of the term of
their contract in the event such individual is involuntarily terminated in the
event of change in control.
Employees
At June 30, 1999, Montgomery had 43 full-time equivalent employees.
Montgomery believes that relations with its employees are excellent. Montgomery
offers life, health, and disability insurance benefits and a 401(k) retirement
plan. None of the employees of Montgomery is represented by a collective
bargaining unit.
ITEM 2. DESCRIPTION OF PROPERTY
-----------------------
Montgomery conducts its business from five offices, all owned by
Montgomery, consisting of its main office at 119 East Main Street in
Crawfordsville, its Mill Street office at 816 South Mill Street in
Crawfordsville, its Covington office at 417 Liberty Street in Covington, its
Williamsport office at 118 North Monroe Street in Williamsport and its Lafayette
office at 50 West 250 South in Lafayette. The main office has approximately
16,000 square feet, including the basement, all of which is used for business
and operations. The Mill Street office was opened in March 1995 to offer
Montgomery's first office with drive-up facilities. The building, containing
approximately 3,200 square feet, all of which is used for deposit and loan
functions, is located in a low to intermediate income area. The Williamsport
office has 2,300 square feed of office space and an additional 1,800 square feet
of storage space on the second floor. During calendar year 1998 a drive-up was
added to this facility. The Covington office contains approximately 1,600 square
feet. Approximately 1,200 square feet is currently being added to the Covington
office to facilitate the addition of a drive-up and additional office space due
to office growth.
The Lafayette office, opened in April 1999, contains approximately
3,700 square feet. This office, located approximately 23 miles from the main
office, offers residents and businesses located
27
<PAGE>
in southwest Tippecanoe County a full service office including ATM, drive-up,
lock boxes and all deposit and loan products offered by Montgomery. Montgomery
also owns two buildings adjacent to its main office for future expansion, both
of which are leased to unaffiliated businesses. The net book value of the
buildings, furniture, fixtures and various bookkeeping, accounting and data
processing equipment was $2.8 million at June 30, 1999. See "Real Estate Owned"
and "Premises and Equipment" in the Notes to Consolidated Financial Statements
for additional information.
ITEM 3. LEGAL PROCEEDINGS
-----------------
From time to time, Montgomery is a party to legal proceedings
incidental to its business to enforce its security interest in collateral
pledged to secure loans. Montgomery is not aware of any potential litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended June 30, 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
------------------------------------------------
MATTERS
-------
Page 47 of the attached 1999 Annual Report to Stockholder is herein
incorporated by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
----------------------------------------------------------
Pages 7 to 19 of the attached 1999 Annual Report to Stockholders are
herein incorporated by reference.
ITEM 7. FINANCIAL STATEMENTS
--------------------
Pages 21 to 44 of the Company's 1999 Annual Report to Stockholders are
herein incorporated by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
----------------------------------------------------
PERSONS; COMPLIANCE WITH SECTION 16(a) IF THE EXCHANGE ACT
----------------------------------------------------------
Directors
28
<PAGE>
Information concerning directors and executive officers of the Company
is incorporated herein by reference from the Company's definitive Proxy
Statement for the Annual Meeting of Shareholders, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
Executive Officers
Information regarding the business experience of the executive officers
of the Company and the Bank who are not also directors contained in Part I of
this Form 10-KSB is incorporated herein by reference.
Compliance With Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the SEC initial reports of
ownership and reports of changes in ownership of Company common stock and other
equity securities of the Company by the tenth of the month following a change.
Officers, directors and greater than 10% stockholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended June 30, 1999, all Section
16(a) filing requirements applicable to its officers, directors and 10%
beneficial owners were complied with.
ITEM 10. EXECUTIVE COMPENSATION
----------------------
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Shareholders, a copy of which will be filed not later than 120 days after the
close of the fiscal year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT
----------
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders, a copy of which will be
filed not later than 120 days after the close of the fiscal year.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Information concerning certain relationships and transactions is
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits:
--------------
29
<PAGE>
<TABLE>
<CAPTION>
Reference to
Prior Filing or
Regulation S-B Exhibit Number
Exhibit Number Document Attached Hereto
-------------- -------- ---------------
<S> <C> <C> <C>
2 Plan of Acquisition, Reorganization, Arrangement, None
Liquidation or Succession
4.1 Articles of Incorporation and *
amendments thereto
4.2 Bylaws *
9 Voting Trust Agreement None
10 Executive Compensation Plans and Arrangements:
10.1 Form of Stock Option and Incentive *
10.2 Form of Employment Agreement with Earl F. Elliott *
10.3 Form of Employment Agreement with J. Lee Walden *
10.4 Employee Stock Ownership Plan *
10.5 Management Recognition and Retention Plan *
10.6 1997 Stock Option and Incentive Plan **
10.7 1997 Recognition and Retention Plan **
11 Statement re computation of per share earnings None
13 Annual Report to Security Holders 13
16 Letter re change in certifying accountant None
18 Letter re change in accounting principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matter submitted None
to vote
23 Consent of Accountants 23
24 Power of Attorney Not Required
27 Financial Data Schedule 27
99 Additional Exhibits None
</TABLE>
- ---------------------
* Filed on April 7, 1997, as exhibits to the Company's Form S-1 registration
statement (file number 333-24721) as amended on Forms S-1/A filed on May
13, 1997 and May 15, 1997. All of such previously filed documents are
hereby incorporated herein by reference in accordance with Item 601 of
Regulation S-B.
** Filed on September 14, 1998 as exhibits to the Company's Schedule 14A proxy
statement (file number 001-12987-21).
(b) Reports on Form 8-K:
------------------------
No current reports on Form 8-K were filed by the Company during the
three months ended June 30, 1999.
30
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MONTGOMERY FINANCIAL CORPORATION
Date: September 27, 1999 By:/s/ Earl F. Elliott
-------------------
Earl F. Elliott, President
In accordance with Exchange Act, this report has been signed by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated.
Date: September 27, 1999 /s/ Earl F. Elliott
-------------------
Earl F. Elliott, President and Director
(Principal Executive Officer)
Date: September 27, 1999 /s/ J. Lee Walden
-----------------
J. Lee Walden, Chief Financial Officer and
Director (Principal Financial and Accounting
Officer)
Date: September 27, 1999 /s/ Mark E. Foster
------------------
Mark E. Foster, Director
Date: September 27, 1999 /s/ C. Rex Henthorn
-------------------
C. Rex Henthorn, Director
Date: September __, 1999
Joseph M. Malott, Director
Date: September __, 1999
John E. Woodward, Director
Date: September 27, 1999 /s/ Robert C. Wright
--------------------
Robert C. Wright, Director
MONTGOMERY FINANCIAL
CORPORATION
1999 ANNUAL REPORT
<PAGE>
MONTGOMERY FINANCIAL CORPORATION
TABLE OF CONTENTS
Letter to Stockholders.................................... 3
Selected Consolidated Financial Information............... 4
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................................. 7
Report of Independent Auditor............................. 20
Consolidated Financial Statements......................... 21
Directors and Executive Officers.......................... 45
Stockholder Information................................... 46
CONSOLIDATED FINANCIAL HIGHLIGHTS
June 30, 1999
(Dollars in Thousands)
Total assets.............................. $123,959
Total loans, net.......................... 111,415
Investment securities and other
earning assets.......................... 5,510
Deposits.................................. 82,468
Borrowings................................ 20,632
Net income................................ 956
Stockholders' equity...................... 19,397
Stockholders' equity as a percent of
Assets................................... 15.6%
------------------
ANNUAL MEETING
The Annual Meeting of Stockholders of
Montgomery Financial Corporation will be held
on October 19, 1999 at 2:00 P.M. at the office of
the Company, located at 119 East Main Street,
Crawfordsville, Indiana.
------------------
2
<PAGE>
MONTGOMERY FINANCIAL CORPORATION
119 East Main Street
Crawfordsville, Indiana 47933
September 14, 1999
Dear Fellow Stockholders:
It is with pleasure that the board of directors, officers, and
staff of Montgomery Financial Corporation and our wholly owned subsidiary,
Montgomery Savings, A Federal Association, provide you with our annual report.
Net earnings for the year ending June 30, 1999 were $956,000.
This represented a decrease of 2.5 percent over last year. Capital levels
decreased to $19.4 million compared to $20.1 million at June 30, 1998 due to the
stock repurchase programs instituted by the Company. This results in a capital
ratio of 15.6 percent. Total assets grew from $117.2 million to $124.0 million,
an increase of $6.8 million or 5.8 percent when compared to June 30, 1998.
Montgomery Savings, A Federal Association is committed to growth
and performance betterment. We have over one hundred years of stability and
quality service in our community. Our directors, officers and employees are
dedicated to efficiently serving our many customers while working to enhance
stockholders' value. We look to the future with confidence and enthusiasm. We
thank our customers for their loyalty and you, our stockholders, for your
support.
Sincerely,
Earl F. Elliott
President and Chief Executive Officer
3
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following consolidated financial data as of and for the
periods ended June 30, 1999, 1998, 1997, 1996 and 1995 have been derived from
the audited consolidated financial statements of Montgomery Financial
Corporation ("Montgomery"). The financial data presented below is qualified in
its entirety by the more detailed financial data appearing elsewhere herein,
including Montgomery's audited consolidated financial statements and notes
thereto.
At June 30,
----------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands)
Summary of Financial Condition:
<S> <C> <C> <C> <C> <C>
Total assets $123,959 $117,163 $103,399 $88,211 $87,234
Interest-bearing deposits in other financial institutions 4,629 10,785 11,473 3,607 3,871
Investment securities available for sale 881 312 42 312 803
Loans receivable, net 111,415 100,210 86,908 80,074 77,929
Deposits 82,468 83,982 71,265 69,709 68,286
Borrowings 20,632 11,261 11,428 8,000 10,868
Stockholders' equity 19,397 20,065 19,367 9,127 6,678
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Summary of Operating Results:
Interest income(1) $ 9,149 $ 8,335 $ 7,220 $ 6,777 $ 6,178
Interest expense 5,150 4,570 4,456 4,434 3,907
--------- --------- --------- --------- ---------
Net interest income 3,999 3,765 2,764 2,343 2,271
Provision (adjustment) for loan losses 40 6 22 20 (15)
--------- --------- --------- --------- ---------
Net interest income after provision
for loan losses 3,959 3,759 2,742 2,323 2,286
Other income 56 47 30 23 79
Other expenses:
Salaries and employee benefits 1,337 1,200 934 879 902
Other 1,094 970 1,284 871 847
--------- --------- --------- --------- ---------
Total non-interest expense 2,431 2,170 2,218 1,750 1,749
--------- --------- --------- --------- ---------
Income before income tax 1,584 1,636 554 596 616
Income tax expense 628 655 241 165 231
--------- --------- --------- --------- ---------
Net income $ 956 $ 981 $ 313 $ 431 $ 385
========= ========= ========= ========= =========
Net income per share(2)
Basic $ 0.65 $ 0.64 $ 0.67 ----- -----
Diluted 0.65 0.64 0.67 ----- -----
Net income per share without the special
SAIF assessment(2)
Basic 0.65 0.64 1.23 ----- -----
Diluted 0.65 0.64 1.23 ----- -----
Dividends declared per share(3) 0.22 0.22 0.21 $ 0.30 -----
Dividend payout ratio(4) 33.85% 34.38% 31.34% ----- -----
Performance Ratios:
Return on average assets(5) 0.79 0.92 0.32 0.49% 0.46%
Return on average equity(6) 4.81 4.97 3.39 4.89 5.78
Average equity to average assets 16.48 18.60 9.88 9.99 7.91
Equity to assets at end of period 15.65 17.13 18.73 10.35 7.65
Interest rate spread(7) 2.65 2.70 2.64 2.27 2.54
Net interest margin(8) 3.46 3.70 3.09 2.77 2.82
Average interest-earning assets to average
interest-bearing liabilities 118.34 122.17 108.91 109.47 105.78
Non-interest expenses to average
assets 2.01 2.05 2.37 1.98 2.08
Net interest income after provision for
loan losses to non-interest expenses 1.63x 1.73x 1.24x 1.33x 1.31x
Asset Quality Ratios:
Non-performing assets to total assets 0.66% 0.78% 0.59% 0.92% 1.08%
Allowance for loan losses to net loans
receivable at end of period 0.20 0.19 0.21 0.20 0.18
Allowance for loan losses to non-
performing loans at end of period 41.32 25.69 35.86 23.90 16.89
Non-performing loans to total loans 0.49 0.72 0.58 0.83 1.05
</TABLE>
<PAGE>
- --------
(1) Loan origination fees are included in interest income, on a deferral
basis.
(2) Computed based upon the weighted average of the 250,000 shares of
publicly owned common stock of the Association that were outstanding
during the year ended June 30, 1997 converted to 466,254 shares of
Montgomery common stock in connection with the Conversion.
(3) Adjusted for conversion ratio.
(4) Dividends per share divided by net income per share.
(5) Net income divided by average total assets.
(6) Net income divided by average total equity.
(7) Interest rate spread is calculated by subtracting combined weighted
average interest rate cost from combined weighted average interest
rate earned for the period indicated.
(8) Net interest income divided by average interest-earning assets.
5
<PAGE>
Capital Requirements. The following table sets forth Montgomery
Savings' compliance with its capital requirements at June 30, 1999.
<TABLE>
<CAPTION>
Capital Level
OTS Requirement at June 30, 1999(1)
---------------- ---------------------------------
% of % of Amount
Assets Amount Assets Amount of Excess
------ ------ ------ ------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Capital Standard
Total risk-based capital (to risk weighted assets) 8.00% $6,324 20.25% $16,005 $ 9,681
Core (to adjusted tangible assets) 4.00 4,896 13.50 16,529 11,633
Core capital (to adjusted total assets) 4.00 4,896 13.50 16,529 11,633
</TABLE>
(1) Core capital figures are determined as a percentage of adjusted total
assets; risk-based capital figures are determined as a percentage of
risk-weighted assets in accordance with OTS regulations.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Montgomery Financial Corporation ("Montgomery" or the "Company")
is an Indiana corporation which was organized in April 1997 by Montgomery
Savings, a Federal Association for the purpose of becoming a savings and loan
holding company. Montgomery Savings Association, a Federal Association, was
established in 1888 as an Indiana state-chartered mutual savings and loan
association known as The Montgomery Savings Association. It was converted in
1985 to a federally chartered, mutual savings and loan association. On August
11, 1995, Montgomery Savings Association, a Federal Association, transferred
substantially all its assets and liabilities to a federally-chartered stock
savings and loan association named Montgomery Savings, a Federal Association
(the "Association").
In June 1997, the Company became the holding company of the
Association and issued shares of common stock, par value $0.01 per share
("Common Stock"), to the public. Pursuant to a Plan of Conversion and agreement
and Plan of Reorganization (the "Plan") adopted by the Association and
Montgomery Mutual Holding Company, a federally chartered mutual holding company,
(the "Mutual Holding Company"), the Mutual Holding Company converted from mutual
form to a federal interim stock savings institution and was simultaneously
merged with and into the Association, with the Association being the surviving
entity and a subsidiary of the Company. At the same time, the Company completed
its initial public offering of 1,186,778 shares of Common Stock and exchanged
466,254 shares of Common Stock for the shares of the Association previously held
by public stockholders. The principal asset of the Company is the outstanding
stock of the Association, its wholly owned subsidiary.
The principal business of savings association, including
Montgomery Savings, has historically consisted of attracting deposits from the
general public and making loans secured by residential and commercial real
estate. The Association and all other savings associations are significantly
affected by prevailing economic conditions as well as government policies and
regulations concerning, among other things, monetary and fiscal affairs, housing
and financial institutions. Deposit flows are influenced by a number of factors,
including interest rates paid on competing investments, account maturities and
level of personal income and savings. In addition, deposit growth is also
affected by how customers perceive the stability of the financial services
industry amid various current events such as regulatory changes, failures of
other financial institutions and financing of the deposit insurance fund.
Lending activities are influenced by the demand for and supply of housing
lenders, the availability of cost of funds and various other items. Sources of
funds for lending activities include deposits, payments on loans, borrowings,
and funds provided from operations. Montgomery's earnings are primarily
dependent upon its net interest income, the difference between interest income
and interest expense. Interest income is a function of the balances of loans and
investments outstanding during a given period and the yield earned on such loans
and investments. Interest expense is a function of the amounts of deposits and
borrowings outstanding during the same period and rates paid on such deposits
and borrowings. Montgomery's earnings are also affected by provision for loan
and real estate losses, service charges, income from subsidiary activities,
operating expenses and income taxes.
7
<PAGE>
Forward-Looking Statements
When used in this Annual Report, the words or phrases "would be,"
"will allow," "intends to," "will likely result," "are expected to," "will
continue," "is anticipated," "estimate," "project" or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
risks and uncertainties, including but not limited to changes in economic
conditions in the Company's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the Company's
market area and competition, all or some of which could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected.
The Company wishes to caution readers not to place undue reliance
on any such forward-looking statements, which speak only as of the date made,
and advises readers that various factors, including regional and national
economic conditions, substantial changes in levels of market interest rates,
credit and other risks of lending and investment activities and competitive and
regulatory factors, could cause affect the Company's financial performance and
could cause the Company's actual results for future periods to differ materially
from those anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.
8
<PAGE>
Average Balances and Interest Rates and Yields
The following table presents for the periods indicated the
month-end average balances of each category of the Company's interest-earning
assets and interest-bearing liabilities, and the average yields earned and
interest rates paid on such balances. Such yields and costs are determined by
dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods presented.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
1999 1998
---- ----
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Cost Balance Paid Cost
------- ---- ---- ------- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits $ 8,183 $ 401 4.90% $ 6,298 $ 355 5.62%
Investment securities 607 22 3.62 154 5 3.25
Loans(1) 105,575 8,637 8.18 94,399 7,900 8.37
Stock in FHLB of Indianapolis 1,116 89 7.97 921 74 8.03
-------- ------- -------- -------
Total interest-earning assets 115,481 9,149 7.92 101,722 8,334 8.19
Noninterest-earning assets 5,207 ----- 4,283 -----
-------- ------- -------- -------
Total assets $120,688 9,149 $106,055 8,334
======== ------- ======== -------
Interest-bearing liabilities:
Savings accounts $ 9,806 422 4.30 $ 5,644 241 4.27
NOW and money market accounts 9,794 329 3.36 9,487 380 4.01
Certificates of deposits 61,295 3,431 5.60 59,192 3,388 5.72
-------- ------- -------- -------
Total deposits 80,895 4,182 5.17 74,323 4,009 5.39
Borrowings 16,690 968 5.80 8,982 561 6.25
-------- ------- -------- -------
Total interest-bearing liabilities 97,585 5,150 5.28 83,305 4,570 5.49
Other liabilities 3,213 ----- 3,027 -----
-------- ------- -------- -------
Total liabilities 100,798 5,150 86,332 4,570
Total stockholders' equity 19,890 ----- 19,723 -----
-------- ------- -------- -------
Total liabilities and stockholders' equity $120,688 5,150 $106,055 4,570
======== -------- ======== --------
Net interest-earning assets $ 17,896 $ 18,967
======== ========
Net interest income/interest rate spread $ 3,999 2.64 $ 3,764 2.70
======== ========
Average interest-earning assets to average
interest-bearing liabilities 118.34% 122.17%
Net interest margin(2) 3.46 3.70
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1997
----
Average Interest Average
Outstanding Earned/ Yield/
Balance Paid Cost
<S> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits $ 5,136 $ 269 5.24%
Investment securities 145 11 7.59
Loans(1) 83,485 6,880 8.24
Stock in FHLB of Indianapolis 765 60 7.84
-------- --------
Total interest-earning assets 89,531 7,220 8.06
Noninterest-earning assets 4,006 -----
-------- --------
Total assets $ 93,537 7,220
======== --------
Interest-bearing liabilities:
Savings accounts $ 5,447 188 3.45
NOW and money market accounts 10,459 355 3.39
Certificates of deposits 55,734 3,270 5.87
-------- --------
Total deposits 71,640 3,813 5.32
Borrowings 10,564 643 6.09
-------- --------
Total interest-bearing liabilities 82,204 4,456 5.42
Other liabilities 2,090 -----
-------- --------
Total liabilities 84,294 4,456
Total stockholders' equity 9,243 -----
-------- --------
Total liabilities and stockholders' equity $ 93,537 4,456
======== --------
Net interest-earning assets $ 7,327
========
Net interest income/interest rate spread $ 2,764 2.64
Average interest-earning assets to average ========
interest-bearing liabilities 108.91%
Net interest margin(2) 3.09
</TABLE>
- -------------
(1) The average balance includes nonaccrual loans.
(2) Net interest margin is net interest income divided by average
interest-earning assets.
9
<PAGE>
The following table sets forth the weighted average effective
interest rates earned by the Company on its loan and investment portfolios, the
weighted average effective cost of the Company's deposits, the interest rate
spread of the Company, and the net yield on weighted average interest-earning
assets for the periods and as of the dates shown. The table sets forth for the
periods and at the dates indicated the weighted average yields earned on the
Company's assets, the weighted average interest rates paid on the Company's
liabilities, together with the net yield on interest earning assets.
<TABLE>
<CAPTION>
Year Ended June 30,
As of -----------------------
June 30, 1999 1999 1998 1997
------------- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average yield on:
Loans 7.97% 8.18% 8.37% 8.24%
Investment securities 3.06 3.62 3.25 7.59
Total interest-earning assets 7.85 7.92 8.19 8.06
Weighted average rate on:
Deposits 4.97 5.17 5.39 5.32
Borrowings 5.55 5.80 6.25 6.09
Total interest-bearing liabilities 5.09 5.28 5.49 5.42
Interest rate spread (spread between weighted average yield on
total interest-earning assets and total interest-bearing
liabilities) 2.76 2.64 2.70 2.64
Net interest margin (net interest income as a percentage of
average interest-earning assets) N/A 3.46 3.70 3.09
</TABLE>
Rate/Volume Analysis
The following table discloses the extent to which changes in
interest rates and changes in volume of interest-related assets and liabilities
have affected the Company's interest income and expense during the periods
indicated. For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributable to (1) changes in
rate (changes in rate multiplied by prior period volume) and (2) changes in
volume (change in volume multiplied by prior period rate). Changes attributable
to both rate and volume that cannot be segregated have been allocated
proportionally to the change due to volume and the change due to rate.
<PAGE>
<TABLE>
<CAPTION>
Increase (Decrease) in Net Interest Income
--------------------------------------------------------------------------------
Year ended June 30, 1999 vs. Year ended June 30, 1998 vs.
Year ended June 30,1998 Year ended June 30, 1997
Increase (Decrease) Total Increase (Decrease) Total
Due to Increase Due to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits $ 99 $ (52) $ 47 $ 63 $ 22 $ 85
Investment securities 16 1 17 1 (7) (6)
Loans 924 (188) 736 906 115 1,021
Stock in FHLB of Indianapolis 16 (1) 15 12 2 14
------ ----- ----- ----- ----- -------
Total 1,055 (240) 815 982 132 1,114
------ ----- ----- ----- ----- -------
Interest-bearing liabilities:
Savings accounts 179 2 181 8 46 54
NOW and money market accounts 11 (62) (51) (36) 58 22
Certificates of deposit 121 (78) 43 199 (79) 120
Borrowings 458 (51) 407 (97) 15 (82)
------ ----- ----- ----- ----- -------
Total 769 (189) 580 74 40 114
------ ----- ----- ----- ----- -------
Change in net interest income $ 286 $ (51) $ 235 $ 908 $ 92 $ 1,000
====== ===== ===== ===== ===== =======
</TABLE>
10
<PAGE>
Changes in Financial Condition
Financial Condition. Montgomery's total assets were $124.0
million at June 30, 1999, an increase of $6.8 million, or 5.8 percent from June
30, 1998. During fiscal 1999, interest-earning assets increased $5.9 million, or
5.3 percent. Short-term interest-bearing deposits decreased $6.2 million, or
58.3 percent. Loans increased $11.2 million, or 11.2 percent, which is
approximately the increase budgeted for the fiscal year. This increase was the
result of Montgomery's efforts to attract new business in the local
nonresidential mortgage market and its continued commitment to residential
lending. Interest-bearing deposits increased $4,000 to $219,000 and investment
securities increased $569,000 to $881,000 during the twelve month period.
Federal Home Loan Bank stock increased from $922,000 to $1,251,000. Real estate
owned and held for development decreased $286,000 or 19.5 percent. Real estate
acquired in settlement of loans increased $78,000 due to a net increase during
the twelve month period of two single family residences due to foreclosure. All
real estate acquired in settlement of loans, in the amount of $267,000, is
currently available for sale. The appraised value of the real estate acquired
equals or exceeds the book value. Therefore, no loss is expected to be realized
upon the sale of the real estate acquired in settlement of loans. Real estate
held for investment totals $914,000, a decrease of $364,000, or 28.5 percent
compared to June 30, 1998. This decrease was primarily due to the sale of an
eight-unit apartment complex to a local not-for-profit organization. Premises
and equipment increased $838,000, or 41.9 percent primarily due the construction
and furnishing of a new branch office facility in Lafayette, Indiana which
opened in April, 1999. Deposits decreased $1.5 million, or 1.8 percent and
borrowings increased $9.4 million, or 83.2 percent resulting in a net increase
in interest-bearing liabilities of $7.9 million, or 8.2 percent. The decrease in
deposits was primarily the result of a decrease of approximately $7.0 million in
public funds deposits. Interest rates required to retain these deposits were
above comparable Federal Home Loan Bank advances. Other liabilities decreased
$421,000, or 32.0 percent to $896,000 primarily due to a decrease in accrued
income taxes of $420,000.
Montgomery's total assets were $117.2 million at June 30, 1998,
an increase of $13.8 million, or 13.3 percent from June 30, 1997. During fiscal
1998 interest-earning assets increased $12.9 million, or 13.0%. Short-term
interest-bearing deposits decreased $803,000, or 7.1 percent. Loans increased
$13.3 million, or 15.3 percent, which was approximately $1.3 million above the
increase budgeted for the fiscal year. This increase was the result of
Montgomery's efforts to attract new business in the local nonresidential
mortgage market and its continued commitment to residential lending. Real estate
owned and held for development increased $166,000 or 12.8 percent. Real estate
acquired in settlement of loans increased $80,000 due to a net increase of two
single family residences. All real estate acquired in settlement of loans, in
the amount of $189,000, was available for sale. The appraised value of the real
estate acquired equals or exceeded the book value. Therefore, no loss was
expected to be realized upon the sale of the real estate acquired in settlement
of loans. Real estate held for investment totaled $1,279,000, an increase of
$86,000, or 7.2 percent compared to June 30, 1997. Included in real estate owned
was an eight-unit apartment complex and a single family residence with a book
value of approximately $496,000. Subsequent to year end, a purchase agreement
with a local, not-for-profit organization was executed for the purchase of this
complex. It was anticipated an approximate loss of $10,000 would be realized
upon the final settlement of this sale. A reserve in the amount of the estimated
loss was established during the fourth quarter of fiscal 1998. Premises and
<PAGE>
equipment increased $381,000 or 25.3 percent primarily due to the addition of a
drive-up facility at the Williamsport Office and the investment to date for the
construction of a new branch office facility in Lafayette, Indiana. Deposits
increased $12.7 million, or 17.8 percent and borrowings decreased $168,000, or
1.5 percent resulting in a net increase in interest bearing liabilities of $12.5
million, or 15.2 percent. The increase in deposits was primarily the result of
an increase in public funds deposits with maturities from one month to one year,
which were acquired at rate below comparable Federal Home Loan Bank advances.
Other liabilities increased primarily due to an increase in accrued income taxes
of $279,000.
11
<PAGE>
Comparison of Operating Results for the Years Ended June 30, 1999 and June 30,
1998
General. Net income for the year ended June 30, 1999 was $956,000
compared to $981,000 for the year ended June 30, 1998, a decrease of $25,000, or
2.5 percent. Net interest income increased $234,000 during the year ended June
30, 1999 as compared to the year ended June 30, 1998. This increase was
primarily offset by the increased costs of staffing, advertising and operation
of the Lafayette Office opened in April 1999.
Interest Income. Interest income for the year ended June 30, 1999
was $9.1 million, an increase of $815,000, or 9.8 percent, from interest income
for the same period in 1998. The average balance of interest-earning assets for
the 1998 period was $115.5 million compared to $101.8 million for the 1998
period, an increase of $13.7 million, or 13.5 percent. This increase was
primarily due to an increase in the average balance of loans in the amount of
$11.2 million. Average interest-earning deposits increased $1.9 million from
$6.3 million to $8.2 million. The average yield on interest-earning assets
decreased from 8.19 percent for the 1998 period to 7.92 percent for the twelve
months ended June 30, 1999. This decrease was primarily due to a general
decrease in interest rates during most of the twelve month period.
Interest Expense. Interest expense for the year ended June 30,
1999 was $5.2 million compared to $4.6 million for the year ended June 30, 1998,
an increase of $580,000, or 12.7 percent. Average interest-bearing liabilities
increased from $83.3 million for the 1998 period to $97.6 million for the 1999
period, an increase of $14.3 million, or 17.1 percent. The average cost of all
interest-bearing liabilities decreased from 5.49 percent for fiscal 1998 to 5.28
percent for fiscal 1999. The average cost of deposits decreased from 5.39
percent for the 1998 period to 5.17 percent for the year ended June 30, 1999.
The average cost of borrowings decreased from 6.25 percent to 5.80 percent for
the comparable periods. Decreases in rates on interest-bearing liabilities are
again due to a general decrease in interest rates during most of the twelve
month period.
Provision for Loan Losses. The provision for loan losses was
$40,000 for the year ended June 30, 1999, compared to $6,000 for the year ended
June 30, 1998. Provision for loan losses is made based on the Internal Loan and
Asset Review Policy. A review is performed at least quarterly to determine the
adequacy of the current balance in the allowance for loss accounts. Loans
delinquent ninety days or more decreased from $724,000 at June 30, 1998 to
$547,000 on June 30, 1999. Non-performing loans to total loans at June 30, 1999
was 0.49 percent compared to 0.72 percent at June 30, 1998. The allowance for
loan losses to non-performing loans was 41.3 percent at June 30, 1999 compared
to 25.7 percent at June 30, 1998. The allowance to total loans was 0.20 percent
and 0.19 percent for the comparable periods. Montgomery is continually
re-evaluating the level of the allowance for loan losses as the amount of
non-residential mortgage loans and other new loan products are offered.
Non-interest Income. Other income for the year ended June 30,
1999 was $56,000 compared to $47,000 for the 1998 period, an increase of $9,000,
or 18.4 percent. Service charges on deposit accounts increased $12,000 due to
the increase in demand deposit accounts. Miscellaneous other income decreased
$4,000.
<PAGE>
Non-Interest Expense. Non-interest expense for the year ended
June 30, 1999 was $2.4 million, an increase of $261,000, or 12.0 percent from
the comparable 1998 period. Salary and employee benefits increased $137,000 from
$1.2 million for the 1998 period to $1.3 million for the 1999 period. This
increase was primarily due to an increase in branch office personnel to
accommodate growth. This includes staffing the new Lafayette Office opened in
April 1999. Net occupancy expense increased $10,000, equipment expense increased
$18,000, data processing expense increased $56,000 and deposit insurance expense
increased $3,000. With the exception of approximately $30,000 included in data
processing expense for Year 2000 testing, the balance of the increases were
12
<PAGE>
primarily due to Montgomery's growth. Net real estate operations generated a net
income of $30,000 for the 1999 period compared to a net income of $17,000 for
the 1998 period. This increase in income was primarily due to an increase in
rental income and the provision for loss on non-interest earning assets in the
amount of $10,000 during the 1998 period. Advertising expense increased $16,000
from the 1998 period due to opening of the Lafayette Office. Other expenses
increased $34,000, or 6.6 percent, from $503,000 for the year ended June 30,
1998 to $537,000 for the year ended June 30, 1999. These increases are generally
reflective of Montgomery's growth.
Income Tax Expense. Income tax expense for the year ended June
30, 1999 was $628,000 compared to $655,000 for the year ended June 30, 1998. The
decrease in income tax expense was due to the decrease in income before tax of
$52,000.
Comparison of Operating Results for the Years Ended June 30, 1998 and June 30,
1997
General. Net income for the year ended June 30, 1998 was $981,000
compared to $313,000 for the year ended June 30, 1997, an increase of $668,000,
or 213.7 percent. Net income for 1997 included the after tax effect of the one
time Savings Association Insurance Fund special assessment in the amount of
$258,000. Had this special assessment not been made in the year ended June 30,
1997, the increase in income for the year ended June 30, 1998 would have been
$410,000 or 71.8 percent. This increase in income was primarily due to an
increase in net interest income of $1.0 million. Net interest income increased
as a result of an increase in interest rate spread from 2.64 percent to 2.70
percent and an increase in net interest margin from 3.09 percent to 3.70 percent
due to an increase in the ratio of average interest-earning assets to
interest-bearing liabilities from 108.91 percent to 122.17 percent. The increase
in average interest-earning assets was primarily due to the sale of stock on
June 30, 1997.
Interest Income. Interest income for the year ended June 30, 1998
was $8.3 million, an increase of $1.1 million, or 15.4 percent, from interest
income for the same period in 1997. The average balance of interest-earning
assets for the 1998 period was $101.8 million compared to $89.5 million for the
1997 period, an increase of $12.2 million, or 13.7 percent. This increase was
primarily due to an increase in the average balance of loans in the amount of
$10.9 million. The average yield on interest-earning assets increased from 8.06
percent for the 1997 period to 8.19 percent for the twelve months ended June 30,
1998. This increase was primarily due to an increase in demand for fixed rate
residential loans and an increase in non-residential mortgage loans (both of
which generally carry a higher rate of interest than one year adjustable rate
residential mortgage loans).
Interest Expense. Interest expense for the year ended June 30,
1998 was $4.6 million compared to $4.5 million for the year ended June 30, 1997,
an increase of $114,000, or 2.6 percent. Average interest-bearing liabilities
increased from $82.2 million for the 1997 period to $83.3 million for the 1998
period, an increase of $1.1 million, or 1.3 percent. The average cost of all
interest-bearing liabilities increased from 5.42 percent for fiscal 1997 to 5.49
percent for fiscal 1998. The average cost of deposits increased from 5.32
percent for the 1997 period to 5.39 percent for the year ended June 30, 1998.
The average cost of borrowings increased 6.09 percent to 6.25 percent for the
comparable periods due to converting some short term Federal Home Loan Bank
advances to longer term fixed rate advances.
<PAGE>
Provision for Loan Losses. The provision for loan losses was
$6,000 for the year ended June 30, 1998, compared to $22,000 for the year ended
June 30, 1997. Provision are made based on the Internal Loan and Asset Review
Policy. A review is performed at least quarterly to determine the adequacy of
the current balance in the allowance for loss accounts. Loans delinquent ninety
days or more increased from $502,000 at June 30, 1997 to $724,000 on June 30,
1998. Non-performing loans to total loans at June 30, 1998 was 0.72 percent
compared to 0.58 percent at June 30, 1997. The allowance for loan losses to
non-performing loans was 25.7 percent at June 30, 1998 compared to 35.9 percent
at June 30, 1997. The allowance to total loans was 0.19 percent and 0.21 percent
for the comparable periods. Montgomery is continually re-evaluating the level of
13
<PAGE>
the allowance for loan losses as the amount of non-residential mortgage loans
and other new loan products are offered.
Non-interest Income. Other income for the year ended June 30,
1998 was $47,000 compared to $30,000 for the 1997 period, an increase of
$17,000, or 56.7 percent. Service charges on deposit accounts increased $4,000
due to the increase in demand deposit accounts. Miscellaneous other income
increased $16,000 primarily due to an increase in ATM transaction income of
$5,000, fee income from Montgomery's check clearing agent of $8,000 and an
increase in other miscellaneous fee income of $3,000.
Non-Interest Expense. Non-interest expense for the year ended
June 30, 1998 was $2.2 million, a decrease of $49,000, or 2.2 percent from the
comparable 1997 period. Salary and employee benefits increased $266,000 from
$934,000 for the 1997 period to $1,200,000 for the 1998 period. Year ended June
30, 1998 was the first year compensation cost had to be recorded for the MRP and
ESOP and the cost of these plans for fiscal 1998 was $154,000. The balance of
the increase was primarily due to an increase in branch office personnel to
accommodate growth. This includes management trainees for staffing the new
Lafayette office projected to be opened in late 1998. Net occupancy expense
increased $4,000, equipment expense increased $25,000 and data processing
expense increased $21,000. These increases are primarily due to Montgomery's
growth. Deposit insurance expense decreased $475,000 for the year ended June 30,
1998 compared to the same period in 1997 due to the one time SAIF assessment of
$428,000 and the reduction in the regular assessment from 23 basis points to 6.4
basis points. Net real estate operations generated a net income of $17,000 for
the 1998 period compared to a net income of $75,000 for the 1997 period. This
decrease in income was primarily due to a gain on the sale of real estate owned
during the 1997 period. The decrease during the 1998 period also included a
provision for loss on non-interest earning assets in the amount of $10,000. This
provision was recorded to reflect the possible loss on the sale of an apartment
complex as was previously discussed. Other expenses increased $48,000, or 10.6
percent, from $455,000 for the year ended June 30, 1997 to $503,000 for the year
ended June 30, 1998. Audit and accounting expense increased $11,000 and
stockholder related expenses increased $36,000 primarily due to the additional
cost of operation of a publicly held company.
Income Tax Expense. Income tax expense for the year ended June
30, 1998 increased to $655,000 compared to $241,000 for the year ended June 30,
1997 due to the increase in taxable income.
Liquidity and Capital Resources
Montgomery's primary source of funds is its deposits. To a lesser
extent, Montgomery has also relied upon loan payments and payoffs and FHLB
advances as sources of funds. Scheduled loan payments are a relatively stable
source of funds, but loan payoffs and deposit flows can fluctuate significantly,
being influenced by interest rates, general economic conditions and competition.
Montgomery attempts to price its deposits to meet its asset /liability
management objectives consistent with local market conditions.
<PAGE>
Federal regulations have historically required Montgomery to
maintain minimum levels of liquid assets. The required percentage has varied
from time to time based upon economic conditions and savings flows. At June 30,
1999, the requirement was 5%, subject to reduction for aggregate net withdrawals
provided such ratio is not reduced below 4%. Liquid assets for purposes of this
ratio include cash, cash equivalents consisting of short-term interest-earning
deposits, certain other time deposits, and other obligations generally having
remaining maturities of less than five years. Montgomery has historically
maintained its liquidity ratio at a level in excess of that required.
Montgomery's average liquidity ratio for the year ended June 30, 1999 was 8.45
percent. Liquidity management is both a daily and long-term responsibility of
management. Montgomery adjusts liquid assets based upon management's assessment
of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available
14
<PAGE>
on interest-bearing deposits, and (iv) the objectives of its asset/liability
management program. Excess liquidity is invested generally in federal funds and
short-term interest-bearing deposit accounts. If Montgomery requires funds
beyond its ability to generate them internally, it has additional borrowing
capacity with the FHLB and collateral eligible for repurchase agreements.
Cash flows for Montgomery are of three major types. Cash flows
from operating activities consist primarily of net income. Investing activities
generate cash flows through the origination, sale and principal collections on
loans as well as the purchases and sales of investments. Montgomery's cash flows
from investment resulted primarily from purchases and maturities of investment
securities. Cash flows from financing activities include savings deposits,
withdrawals and maturities and changes in borrowings.
Montgomery considers its liquidity and capital resources to be
adequate to meet its foreseeable short and long-term needs. Montgomery
anticipates that it will have sufficient funds available to meet current loan
commitments and to fund or refinance, on a timely basis, its other material
commitments and long-term liabilities. At June 30, 1999, Montgomery had
outstanding commitments to originate loans of $2.9 million and no commitments to
sell loans. Certificates of deposit scheduled to mature in one year or less at
June 30, 1999 totaled $42.2 million. Management believes that a significant
portion of such deposits will remain with Montgomery. At June 30, 1999,
Montgomery had $2.0 million of FHLB advances which reprice in one year or less.
The Association is subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate actions by the regulatory agencies
that, if undertake, could have a material effect on the Association's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Association must meet specific capital guidelines
that involve quantitative measures of the Association's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Association's capital amount and classification are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors.
<PAGE>
At June 30, 1999, the Association believes that it meets all
capital adequacy requirements to which it is subject and the most recent
notification from the regulatory agency categorized the Association as well
capitalized under the regulatory framework for prompt corrective action. The
Association's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
June 30, 1999
-------------
Required for Adequate To Be Well
Actual Capital(1) Capitalized(1)
------------------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital(1) (to risk
Weighted assets) $16,005 20.3% $6,324 8.0% $7,905 10.0%
Core ( to adjusted tangible assets) 16,529 13.5 4,896 4.0 7,344 6.0
Core capital(1) (to adjusted total assets) 16,529 13.5 4,896 4.0 6,120 5.0
</TABLE>
- --------------
(1) As defined by the regulatory agencies
15
<PAGE>
Asset/Liability Management
Montgomery, like other financial institutions, is subject to
interest rate risk to the extent that its interest-bearing liabilities reprice
on a different basis than its interest-earning assets. OTS regulations provide a
Net Portfolio Value ("NPV") approach to the quantification of interest rate
risk. In essence, this approach calculates the difference between the present
value of liabilities, expected cash flows from assets and cash flows from off
balance sheet contracts. Under OTS regulations, an institution's "normal" level
of interest rate risk in the event of an immediate and sustained 200 basis point
change in interest rates is a decrease in the institution's NPV in an amount not
exceeding 2 percent of the present value of its assets. Thrift institutions with
greater than "normal" interest rate exposure must take a deduction from their
total capital available to meet their risk-based capital requirement. The amount
of that deduction is one-half of the difference between (a) the institution's
actual calculated exposure to the 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 percent of the present value of its
assets. Regulations do exempt all institutions under $300 million in assets and
risk based capital exceeding 12 percent from reporting information to calculate
exposure and making any deduction from risk-based capital. At June 30, 1999,
Montgomery's total assets were $123.6 million and risk-based capital was 20.3
percent; therefore Montgomery would have been exempt from calculating or making
any risk-based capital reduction. Montgomery's management believes interest-rate
risk is an important factor and makes all reports necessary to OTS to calculate
interest-rate risk on a voluntary basis. At June 30, 1999, 2.0 percent of the
present value of Montgomery's assets was approximately $2.49 million, which was
less than $4.12 million, the greatest decrease in NPV resulting from a 200 basis
point change in interest rates. As a result, Montgomery, for OTS reporting
purposes, would have been required to make a deduction from total capital in
calculating its risk-based capital requirement had this rule been in effect and
had Montgomery not been exempt from reporting on such date. Based on June 30,
1999 NPV information, the amount of Montgomery's deduction from capital, had it
been subject to reporting, would have been approximately $815,000.
It has been and continues to be a priority of Montgomery's Board
of Directors and management to manage interest rate risk and thereby limit any
negative effect of changes in interest rates on Montgomery's NPV. Montgomery's
Interest Rate Risk Policy, established by the Board of Directors, promulgates
acceptable limits on the amount of change in NPV given certain changes in
interest rates. Specific strategies have included shortening the amortized
maturity of fixed-rate loans and increasing the volume of adjustable rate loans
to reduce the average maturity of Montgomery's interest-earning assets. FHLB
advances are used in an effort to match the effective maturity of Montgomery's
interest-bearing liabilities to its interest-earning assets.
Presented below, as of June 30, 1999, and June 30, 1998, is an
analysis of Montgomery's estimated interest rate risk as measured by changes in
NPV for instantaneous and sustained parallel shifts in interest rates, up and
down 300 basis points in 100 point increments, compared to limits set by the
Board. Assumptions used in calculating the amounts in this table are those
assumptions utilized by the OTS in assessing the interest risk of the thrifts it
regulates. Based upon assumptions at June 30, 1999 and June 30, 1998, the NPV of
Montgomery was $19.8 million and $18.9 million, respectively. NPV is calculated
by the OTS for the purposes of interest rate risk assessment and should not be
considered as an indicator of value of Montgomery.
16
<PAGE>
<TABLE>
<CAPTION>
At June 30, 1999 At June 30, 1998
Assumed Board ---------------- ----------------
Change in Limit
Interest Rates % Change $ Change % Change $ Change % Change
(Basis Points) in NPV in NPV in NPV in NPV in NPV
-------------- ------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
+300 -60 (6,573) (33) (5,717) (30)
+200 -50 (4,122) (21) (3,463) (18)
+100 -30 (1,809) (9) (1,452) (8)
0 0 0 0 0 0
-100 -30 1,166 6 1,020 5
-200 -50 2,187 11 1,761 9
-300 -60 3,329 17 2,782 15
</TABLE>
In the event of a 300 basis point change in interest rate based
upon estimates as of June 30, 1999, Montgomery would experience a 17 percent
increase in NPV in a declining rate environment and a 33 percent decrease in NPV
in a rising environment. During periods of rising rates, the value of monetary
assets and liabilities decline. Conversely, during periods of falling rates, the
value of monetary assets and liabilities increase. However, the amount of change
in value of specific assets and liabilities due to changes in rates is not the
same in a rising rate environment as in a falling rate environment (i.e., the
amount of value increase under a specific rate decline may not equal the amount
of value decrease under an identical upward rate movement). Based upon the NPV
methodology, the increased level of interest rate risk experienced by Montgomery
in recent periods was primarily due to the maturities of interest-earning assets
increasing more than the maturities on interest-bearing liabilities due to the
increase in fixed-rate residential mortgage loans and non-residential loans.
Recent Accounting Issues
Accounting for Derivative Instruments and Hedging Activities.
Statement of Financial Accounting Standards ("SFAS") No. 133 requires companies
to record derivatives on the balance sheet at their fair value. SFAS No. 133
also acknowledges that the method of recording a gain or loss depends on the use
of the derivative. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction.
o For a derivative designated as hedging the exposure to changes in
the fair value of a recognized asset or liability or a firm
commitment (referred to as a fair value hedge), the gain or loss
recognized in earnings in the period of change together with the
offsetting loss or gain on the hedged item attributable to the
risk being hedged. The effect of that accounting is to reflect in
earnings the extent to which the hedge is not effective in
achieving offsetting changes in fair value.
<PAGE>
o For a derivative designated as hedging the exposure to variable
cash flows of a forecasted transaction (referred to as a cash
flow hedge), the effective portion of the derivative's gain or
loss is initially reported as a component of other comprehensive
income (outside earnings) and subsequently reclassified into
earnings when the forecasted transaction affects earnings. The
ineffective portion of the gain or loss is reported in earnings
immediately.
17
<PAGE>
o For a derivative designated as hedging the foreign currency
exposure of a net investment in a foreign operation, the gain or
loss is reported in other comprehensive income (outside earnings)
as part of the cumulative translation adjustment. The accounting
for a fair value hedge described above applies to a derivative
designated as a hedge of the foreign currency exposure of an
unrecognized firm commitment or an available-for-sale security.
Similarly, the accounting for a cash flow hedge described above
applies to a derivative designated as a hedge of the foreign
currency exposure of a foreign-currency-denominated forecasted
transaction.
o For a derivative not designated as a hedging instrument, the gain
or loss is recognized in earning in the period of change.
The new Statement applies to all entities. If hedge accounting is
elected by the entity, the method of assessing the effectiveness of the hedging
derivative and the measurement approach of determining the hedge's
ineffectiveness must be established at the inception of the hedge.
SFAS No. 133 amends SFAS No. 52 and supercedes SFAS Nos. 80,105,
and 119. SFAS No. 107 is amended to include the disclosure provisions about the
concentrations of credit risk from SFAS No. 105. Several Emerging Issues Task
Force consensuses are also changed or nullified by the provisions of SFAS No.
133.
SFAS No. 133 was to be effective for all fiscal years beginning
after June 15, 1999. The implementation date has been deferred and SFAS No. 133
will now be effective for all fiscal quarters for all fiscal years beginning
after June 15, 2000. The adoption of this Statement is not currently expected to
have a material impact on the Company's financial statements. Early application
is encouraged; however, this Statement may not be applied retroactively to
financial statements of prior periods.
Impact of Inflation and Changing Prices
The consolidated financial statements and related financial
information presented elsewhere herein have been prepared in accordance with
GAAP, which require the measurement of financial position and operating results
in terms of historical dollars without considering the changes in the relative
purchasing power of money over time due to inflation.
The effect of inflation on savings associations and other
financial institutions differs from the impact on nonfinancial institutions.
Savings associations, as financial intermediaries, have assets and liabilities
which may move in concert with inflation. This is especially true for savings
institutions with a high percentage of rate-sensitive interest-earning assets
and interest-bearing liabilities. A financial institution can reduce the impact
of inflation by managing its rate sensitivity gap.
<PAGE>
Impact of the Year 2000
The Company has conducted a comprehensive review of its computer
systems to identify any applications that could be affected by the "Year 2000"
issue. Applications found in the review that could be affected have been
corrected by either replacement of hardware or software updates. The Company's
data processing is performed primarily by outside venders. Testing has been
completed to verify Year 2000 compliance by the vendors. For the remainder of
calendar 1999, the Company will test and evaluate contingency plans and work
closely with critical service providers to make sure their systems will be ready
for the Year 2000 date change.
18
<PAGE>
As part of the Y2K planning process, contingency plans have been
established for mission-critical systems. These plans will provide for
alternative methods of doing business, which include provisions for manual
processing procedures, if needed. These contingency plans will continue to be
reviewed, tested and refined as Year 2000 approaches.
Although management believes it has taken the necessary steps to
address the Y2K compliance issue, no assurances can be given that some problems
will not occur or that the Company will not incur significant additional
expenses in future periods. In the event that the Company is ultimately required
to purchase replacement computer systems, programs or equipment, or to incur
substantial expenses to make its current systems, programs and equipment Y2K
compliant, its financial position and results of operations could be adversely
impacted. Amounts expensed in fiscal 1998 and 1999 for Y2K readiness were
immaterial.
19
<PAGE>
[Olive letterhead]
Independent Auditor's Report
To the Stockholders and
Board of Directors
Montgomery Financial Corporation
Crawfordsville, Indiana
We have audited the consolidated statement of financial condition of
Montgomery Financial Corporation and subsidiary as of June 30, 1999 and
1998, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended June
30, 1999. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above
present fairly, in all material respects, the consolidated financial
position of Montgomery Financial Corporation and Subsidiary as of June 30,
1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended June 30, 1999, in conformity
with generally accepted accounting principles.
/s/Olive LLP
------------
Olive LLP
Indianapolis, Indiana
July 30, 1999
20
<PAGE>
<TABLE>
<CAPTION>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Consolidated Statement of Financial Condition
June 30 1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 523,585 $ 326,922
Interest-bearing demand deposits 4,409,228 10,569,823
------------- -------------
Total cash and cash equivalents 4,932,813 10,896,745
Interest-bearing deposits 219,463 215,000
Investment securities available for sale 880,900 311,967
Loans, net of allowance for loan losses of $226,000 and $186,000 111,415,224 100,209,554
Premises and equipment 2,839,409 2,001,544
Federal Home Loan Bank stock 1,250,700 921,500
Foreclosed assets and real estate held for development, net 1,181,720 1,468,199
Interest receivable 893,854 843,799
Other assets 345,036 294,324
------------- -------------
Total assets $ 123,959,119 $ 117,162,632
============= =============
Liabilities
Deposits
Noninterest bearing $ 1,349,282 $ 1,864,658
Interest bearing 81,118,363 82,117,324
------------- -------------
Total deposits 82,467,645 83,981,982
Federal Home Loan Bank advances and line of credit 20,632,069 11,260,715
Interest payable 566,632 538,451
Other liabilities 895,701 1,316,333
------------- -------------
Total liabilities 104,562,047 97,097,481
------------- -------------
Commitments and Contingencies
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Stockholders' Equity
Preferred stock, $.01 par value
Authorized and unissued--2,000,000 shares
Common stock, $.01 par value
Authorized--8,000,000 shares
Issued and outstanding--1,521,142 and 1,653,032 shares 15,211 16,530
Additional paid-in capital 12,464,781 13,571,387
Retained earnings 8,131,251 7,782,192
Unearned Employee Stock Ownership Plan ("ESOP") shares (1,141,796) (1,230,802)
Unearned compensation (92,714) (128,507)
Accumulated other comprehensive income 20,339 54,351
------------- -------------
Total stockholders' equity 19,397,072 20,065,151
------------- -------------
Total liabilities and stockholders' equity $ 123,959,119 $ 117,162,632
============= =============
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
<TABLE>
<CAPTION>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Consolidated Statement of Income
Year Ended June 30 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and Dividend Income
Loans receivable $ 8,637,174 $ 7,901,380 $ 6,879,742
Investment securities 21,652 5,103 10,956
Deposits with financial institutions 401,222 353,810 268,876
Federal Home Loan Bank stock 89,265 74,301 59,967
----------- ----------- -----------
Total interest and dividend income 9,149,313 8,334,594 7,219,541
----------- ----------- -----------
Interest Expense
Deposits 4,182,337 4,009,250 3,812,759
Federal Home Loan Bank advances 968,294 560,910 643,127
----------- ----------- -----------
Total interest expense 5,150,631 4,570,160 4,455,886
----------- ----------- -----------
Net Interest Income 3,998,682 3,764,434 2,763,655
Provision for loan losses 40,000 6,000 22,000
----------- ----------- -----------
Net Interest Income After Provision for Loan Losses 3,958,682 3,758,434 2,741,655
----------- ----------- -----------
Other Income
Service charges on deposit accounts 41,256 29,624 25,749
Net appraisal income (expense) (2,159) (2,940) 390
Other income 17,136 20,797 4,122
----------- ----------- -----------
Total other income 56,233 47,481 30,261
----------- ----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Other Expenses
Salaries and employee benefits 1,337,059 1,200,339 934,453
Net occupancy expenses 120,406 110,085 106,413
Equipment expenses 185,439 167,462 142,518
Data processing fees 176,869 121,061 100,009
Deposit insurance expense 50,427 47,687 523,184
Real estate operations, net (29,662) (17,482) (74,993)
Advertising expense 53,989 37,766 32,028
Other expenses 536,668 503,228 455,053
----------- ----------- -----------
Total other expenses 2,431,195 2,170,146 2,218,665
----------- ----------- -----------
Income Before Income Tax 1,583,720 1,635,769 553,251
Income tax expense 627,900 654,991 240,556
----------- ----------- -----------
Net Income $ 955,820 $ 980,778 $ 312,695
=========== =========== ===========
Net Income Per Share
Basic $ .65 $ .64 $ .67
Diluted .65 .64 .67
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
<TABLE>
<CAPTION>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Consolidated Statement of Stockholders' Equity
Common Stock
------------------------ Additional
Shares Paid-in Comprehensive Retained
Outstanding Amount Capital Income Earnings
----------- ------ ------- ------ --------
<S> <C> <C> <C> <C>
Balances, July 1, 1996 850,000 $ 8,500 $ 2,194,128 $6,924,757
Comprehensive income
Net income $ 312,695 312,695
Other comprehensive income, net of tax
Unrealized gains on securities 57
----------
Comprehensive income $ 312,752
==========
Cash dividends ($.40 per share) (100,000)
Purchase of stock for Management Recognition Plan
("MRP") (unearned compensation)
Merger with Montgomery Mutual Holding Company (600,000) (6,000) 110,547
Exchange of shares 216,254 2,162 (2,162) (960)
Sale of stock, net of costs 1,186,778 11,868 11,245,106
Contribution for unearned ESOP shares
------------------------------------------- ----------
Balances, June 30, 1997 1,653,032 16,530 13,547,619 7,136,492
Comprehensive income
Net income $ 980,778 980,778
Other comprehensive income, net of tax
Unrealized gains on securities 54,351
----------
Comprehensive income $1,035,129
==========
Cash dividends ($.22 per share) (335,078)
ESOP shares earned 23,768
Purchase of stock for MRP
MRP shares earned
------------------------------------------- ----------
Balances, June 30, 1998 1,653,032 16,530 13,571,387 7,782,192
Comprehensive income
Net income $ 955,820 955,820
Other comprehensive income, net of tax
Unrealized losses on securities (34,012)
----------
Comprehensive income $ 921,808
==========
Cash dividends ($.22 per share) (321,198)
ESOP shares earned 2,661
Purchase of stock (131,890) (1,319) (1,082,155) (285,563)
MRP shares earned (27,112)
------------------------------------------- ----------
Balances, June 30, 1999 1,521,142 $15,211 $12,464,781 $8,131,251
========= ======= =========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Accumulated
Other
Unearned Unearned Comprehensive
ESOP Shares Compensation Income Total
----------- -------- ------- -----------
<S> <C> <C> <C> <C>
Balances, July 1, 1996 $ (57) $ 9,127,328
Comprehensive income
Net income 312,695
Other comprehensive income, net of tax
Unrealized gains on securities 57 57
Comprehensive income
Cash dividends ($.40 per share) (100,000)
Purchase of stock for Management Recognition Plan
("MRP") (unearned compensation) $(11,563) (11,563)
Merger with Montgomery Mutual Holding Company 104,547
Exchange of shares (960)
Sale of stock, net of costs 11,256,974
Contribution for unearned ESOP shares $(1,322,500) (1,322,500)
-----------------------------------------------------------------------
Balances, June 30, 1997 (1,322,500) (11,563) 19,366,578
Comprehensive income
Net income 980,778
Other comprehensive income, net of tax
Unrealized gains on securities 54,351 54,351
Comprehensive income
Cash dividends ($.22 per share) (335,078)
ESOP shares earned 91,698 115,466
Purchase of stock for MRP (155,325) (155,325)
MRP shares earned 38,381 38,381
-----------------------------------------------------------------------
Balances, June 30, 1998 (1,230,802) (128,507) 54,351 20,065,151
Comprehensive income
Net income 955,820
Other comprehensive income, net of tax
Unrealized losses on securities (34,012) (34,012)
Comprehensive income
Cash dividends ($.22 per share) (321,198)
ESOP shares earned 89,006 91,667
Purchase of stock (1,369,037)
MRP shares earned 35,793 8,681
-----------------------------------------------------------------------
Balances, June 30, 1999 $(1,141,796) $(92,714) $20,339 $19,397,072
=======================================================================
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
<TABLE>
<CAPTION>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Consolidated Statement of Cash Flows
Year Ended June 30 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 955,820 $ 980,778 $ 312,695
Adjustments to reconcile net income to net cash provided
by operating activities
Provision for loan losses 40,000 6,000 22,000
Provision for loss on real estate owned 15,000 10,000
Depreciation 248,068 211,375 206,945
(Gain) loss on sale of real estate owned 708 (7,682)
ESOP shares earned 91,667 115,466
Amortization of unearned compensation 8,681 38,381
Deferred income tax 25,238 (24,608) (4,275)
Change in
Interest receivable (50,055) (159,320) (89,321)
Interest payable 28,181 115,146 (4,873)
Other assets (97,774) (69,177) 13,204
Other liabilities (369,248) 330,319 (26,653)
Other adjustments (8,829) 24,189
------------ ------------ ------------
Net cash provided by operating activities 896,286 1,545,531 446,229
------------ ------------ ------------
Investing Activities
Net change in interest-bearing deposits (4,463) (115,000)
Proceeds from maturities and paydowns of securities
available for sale 21,967 20,527 269,161
Purchase of securities available for sale (647,220) (200,000)
Net change in loans (11,368,796) (13,479,138) (7,088,289)
Additions to real estate owned (240,689) (193,525) (210,496)
Proceeds from real estate owned sales 599,300 163,887
Purchase of premises and equipment (1,050,647) (558,154) (199,111)
Purchase of FHLB of Indianapolis stock (329,200) (171,500)
Other investing activities 1,000
------------ ------------ ------------
Net cash used by investing activities (13,019,748) (14,361,403) (7,399,235)
------------ ------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand
and savings deposits 2,551,618 3,145,705 1,078,794
Certificates of deposit (4,065,955) 9,571,053 477,909
FHLB line of credit 618,767
Proceeds from FHLB advances 11,000,000 5,000,000 7,000,000
Repayment of FHLB advances (2,247,413) (5,167,658) (3,571,627)
Cash paid in lieu of fractional shares (960)
Proceeds from sale of stock, net of costs 10,039,021
Purchase of stock for MRP (1,369,037) (155,325) (11,563)
Dividends paid (328,450) (275,930) (100,000)
------------ ------------ ------------
Net cash provided by financing activities 6,159,530 12,117,845 14,911,574
------------ ------------ ------------
Net Change in Cash and Cash Equivalents (5,963,932) (698,027) 7,958,568
Cash and Cash Equivalents, Beginning of Period 10,896,745 11,594,772 3,636,204
------------ ------------ ------------
Cash and Cash Equivalents, End of Period $ 4,932,813 $ 10,896,745 $ 11,594,772
============ ============ ============
</TABLE>
(continued)
24
<PAGE>
<TABLE>
<CAPTION>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Consolidated Statement of Cash Flows
Year Ended June 30 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Additional Cash Flow and Supplementary Information
Interest paid $5,122,450 $4,455,014 $4,461,000
Income tax paid 1,082,864 307,156 173,000
Loan balances transferred to real estate owned 123,126 180,707 352,000
Dividends payable 83,666 90,917 25,000
Common stock issued to ESOP leveraged with an employer loan 1,322,500
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 1 --Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of Montgomery Financial Corporation
(Company) and its wholly owned subsidiary, Montgomery Savings, A Federal
Association (Association), and the Association's wholly owned subsidiary, MSA
Service Corporation (MSA), conform to generally accepted accounting principles
and reporting practices followed by the thrift industry. The more significant of
the policies are described below.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company is a thrift holding company whose principal activity is the
ownership and management of the Association. The Association operates under a
federal thrift charter and provides full banking services. As a federally
chartered thrift, the Association is subject to regulation by the Office of
Thrift Supervision, and the Federal Deposit Insurance Corporation.
The Association generates mortgage and consumer loans and receives deposits from
customers located primarily in central Indiana. The Association's loans are
generally secured by specific items of collateral including real property and
consumer assets.
MSA is a real estate management and development company.
Consolidation--The consolidated financial statements include the accounts of the
Company, the Association and MSA after elimination of all material intercompany
transactions and accounts.
Investment Securities--Debt securities are classified as held to maturity when
the Company has the positive intent and ability to hold the securities to
maturity. Securities held to maturity are carried at amortized cost. Debt
securities not classified as held to maturity are classified as available for
sale. Securities available for sale are carried at fair value with unrealized
gains and losses reported separately, net of tax, in accumulated other
comprehensive income.
Amortization of premiums and accretion of discounts are recorded using the
interest method as interest income from securities. Realized gains and losses
are recorded as net security gains (losses). Gains and losses on sales of
securities are determined on the specific-identification method.
26
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Loans are carried at the principal amount outstanding. A loan is impaired when,
based on current information or events, it is probable that the Association will
be unable to collect all amounts due (principal and interest) according to the
contractual terms of the loan agreement. Loans whose payments have insignificant
delays not exceeding 90 days outstanding are not considered impaired. Certain
nonaccrual and substantially delinquent loans may be considered impaired. The
Association considers its investment in one-to-four family residential loans and
consumer loans to be homogeneous and therefore excluded from separate
identification for evaluation of impairment. Interest income is accrued on the
principal balances of loans. The accrual of interest on impaired and nonaccrual
loans is discontinued when, in management's opinion, the borrower may be unable
to meet payments as they become due. When interest accrual is discontinued, all
unpaid accrued interest is reversed when considered uncollectible. Interest
income is subsequently recognized only to the extent cash payments are received.
Certain loan fees and direct costs are being deferred and amortized as an
adjustment of yield on the loans over the contractual lives of the loans.
Allowances for loan and real estate losses are maintained to absorb loan and
real estate losses based on management's continuing review and evaluation of the
loan and real estate portfolios and its judgment as to the impact of economic
conditions on the portfolios. The evaluation by management includes
consideration of past loss experience, changes in the composition of the
portfolios, the current condition and amount of loans and real estate owned
outstanding, and the probability of collecting all amounts due. Impaired loans
are measured by the present value of expected future cash flows, or the fair
value of the collateral of the loan, if collateral dependent.
The determination of the adequacy of the allowance for loan losses and the
valuation of real estate is based on estimates that are particularly susceptible
to significant changes in the economic environment and market conditions.
Management believes that as of June 30, 1999, the allowance for loan losses and
carrying value of real estate owned are adequate based on information currently
available. A worsening or protracted economic decline in the area within which
the Association operates would increase the likelihood of additional losses due
to credit and market risks and could create the need for additional loss
reserves.
Premises and equipment are carried at cost net of accumulated depreciation.
Depreciation is computed using the straight-line method based principally on the
estimated useful lives of the assets, which range from 3 to 35 years.
Maintenance and repairs are expensed as incurred while major additions and
improvements are capitalized. Gains and losses on dispositions are included in
current operations.
Federal Home Loan Bank ("FHLB") stock is a required investment for institutions
that are members of the FHLB system. The required investment in the common stock
is based on a predetermined formula.
Foreclosed assets and real estate held for development, net arises from loan
foreclosure or deed in lieu of foreclosure and acquisition of real estate for
development and are carried at the lower of cost or fair value less estimated
selling costs. Costs relating to development and improvement of property are
capitalized, whereas costs relating to the holding of property, net of rental
and other income are expensed.
27
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Stock options are granted for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant. The
Company accounts for and will continue to account for stock option grants in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and, accordingly, recognizes no compensation expense for
the stock option grants.
Income tax in the consolidated statement of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. The Company
files consolidated income tax returns with its subsidiary.
Earnings per share have been computed based upon the weighted average common and
potential common shares outstanding during each year. Unearned ESOP shares have
been excluded from the computation of average common shares and potential common
shares outstanding. For the year ended June 30, 1997, earnings per share was
computed based upon the weighted average of the 250,000 shares of publicly owned
common stock of the Association that were outstanding during the year ended June
30, 1997 converted to 466,254 shares of Company common stock in connection with
the second conversion and reorganization, as more fully discussed in Note 2.
Note 2 --Conversion
On November 17, 1992, the Board of Directors of the Association unanimously
adopted a Plan of Reorganization whereby Montgomery Savings Association, A
Federal Association (Montgomery), was reorganized into a federal mutual holding
company on August 11, 1995 and became known as "Montgomery Mutual Holding
Company." Substantially all of the assets and liabilities of Montgomery were
transferred to a newly chartered federal savings and loan association known as
Montgomery Financial Corporation (Association), in exchange for 600,000 shares
of the Association's common stock, par value of $.01 per share, $100,000 was
retained by Montgomery to capitalize Montgomery Mutual Holding Company. The
transaction was accounted for at historical cost in a manner similar to that
utilized in a pooling of interests.
As part of the reorganization, the Association sold 250,000 shares of common
stock at $10.00 per share in an offering completed on August 11, 1995.
Reorganization costs of $303,372 were charged to stockholders' equity upon
completion of the offering.
As a result of the transaction, Montgomery Mutual Holding Company owned 70.6
percent of Montgomery and minority stockholders owned 29.4 percent.
On December 26, 1996, the Boards of Directors of Montgomery Mutual Holding
Company and the Association adopted a Plan of Conversion of Montgomery Mutual
Holding Company and an Agreement and Plan of Reorganization between Montgomery
Holding Company and the Association.
28
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
In connection with the conversion and reorganization, the Association formed a
new first-tier, wholly owned subsidiary, the Company, which became the holding
company of the Association upon consummation of the conversion and
reorganization. The Company in turn formed Interim as a wholly owned subsidiary.
Montgomery Mutual Holding Company converted from the mutual form to a federal
interim stock savings association and simultaneously merged with and into the
Association pursuant to the Plan of Merger. As a result, Montgomery Mutual
Holding Company ceased to exist, assets of $104,547 were contributed to the
Association and the 600,000 shares of Association common stock it owned were
cancelled. Interim then merged with and into the Association pursuant to the
Plan of Merger and the Association became a wholly owned subsidiary of the
Company. In connection therewith, 250,000 shares of Association common stock
owned by the minority stockholders of the Association and outstanding
immediately prior to the effective time thereof was automatically converted,
without further action by the holder thereof, into 466,254 shares of the Company
common stock based on the exchange ratio, plus $960 cash in lieu of fractional
share interest. The transaction has been recorded at historical cost in a manner
similar to that utilized in a pooling of interest.
As part of the transaction, the Company sold 1,186,778 shares of Company common
stock at $10.00 per share in an offering completed June 30, 1997. Net proceeds
of the Company's stock sale, after costs of $610,806 and reduction of $1,322,500
for common stock issued to the ESOP leveraged with an employer loan, were
$10,039,021.
Note 3 --Investment Securities
<TABLE>
<CAPTION>
1999
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
Marketable equity securities $847 $71 $37 $881
==== === === ====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1998
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
Municipal due January 1, 1999 $ 22 $ 22
Marketable equity securities 200 $ 90 290
---- ---- ----
$222 $ 90 $312
==== ==== ====
</TABLE>
29
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 4 --Loans and Allowance
<TABLE>
<CAPTION>
June 30 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Loans
Real estate mortgage loans
One-to-four family $ 88,125 $ 81,383
Multi-family 864 1,163
Commercial 15,110 8,865
Real estate construction loans 3,109 3,998
Home equity loans 4,195 4,091
Consumer loans 736 620
Share loans 463 763
--------- ---------
112,602 100,883
Undisbursed portion of loans (1,261) (707)
Deferred loan costs 300 220
Allowance for loan losses (226) (186)
--------- ---------
$ 111,415 $ 100,210
========= =========
<CAPTION>
Year Ended June 30 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for loan losses
Balances, July 1 $186 $180 $158
Provision for loan losses 40 6 22
---- ---- ----
Balances, June 30 $226 $186 $180
==== ==== ====
</TABLE>
<PAGE>
Note 5 --Premises and Equipment
<TABLE>
<CAPTION>
June 30 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 418 $ 347
Building 2,224 1,615
Equipment 1,562 1,192
------- -------
Total cost 4,204 3,154
Accumulated depreciation (1,365) (1,152)
------- -------
Net $ 2,839 $ 2,002
======= =======
</TABLE>
30
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 6 --Foreclosed Assets and Real Estate Held for Development
<TABLE>
<CAPTION>
June 30 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Real estate acquired in settlement of loans $ 292 $ 189
Real estate held for development 1,044 1,492
Allowance for losses (25) (10)
------- -------
1,311 1,671
Accumulated depreciation (130) (203)
------- -------
Net $ 1,181 $ 1,468
======= =======
<CAPTION>
Year Ended June 30 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for losses on real estate owned
Balances, July 1 $10 $15
Provision (adjustment) for losses 15 $10 (15)
--- --- ----
Balances, June 30 $25 $10 $ 0
=== === ====
</TABLE>
<PAGE>
Note 7 --Deposits
<TABLE>
<CAPTION>
June 30 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Noninterest-bearing $ 1,349 $ 1,865
Interest-bearing demand 9,623 9,566
Savings deposits 10,978 7,967
Certificates and other time deposits of $100,000 or more 18,585 23,585
Other certificates and time deposits 41,933 40,999
------- -------
Total deposits $82,468 $83,982
======= =======
</TABLE>
Certificates maturing in years ending June 30:
2000 $42,215
2001 8,583
2002 3,674
2003 2,962
2004 3,042
Thereafter 42
-------
$60,518
=======
31
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 8 --FHLB Advances and Line of Credit
<TABLE>
<CAPTION>
June 30 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
FHLB line of credit $ 619
FHLB advances 20,013 $11,261
------- -------
$20,632 $11,261
======= =======
<CAPTION>
1999
-----------------------------------
Weighted
Average
June 30 Amount Rate
- --------------------------------------------------------------------------------
Advances from FHLB
Maturities in years ending June 30
<S> <C> <C> <C>
2000 $ 2,000 6.15%
2001 4,013 5.91
2003 3,000 5.57
2004 4,000 5.38
2006 7,000 5.40
-------
$20,013 5.60%
=======
</TABLE>
The Association has an available line of credit with the FHLB totaling
$5,000,000. The line of credit expires September 8, 1999 and bears interest at a
rate equal to the current variable advance rate.
The FHLB advances are secured by first mortgage loans totaling $82,622,000.
Advances are subject to restrictions or penalties in the event of prepayment.
32
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 9 --Income Tax
<TABLE>
<CAPTION>
Year Ended June 30 1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense
Currently payable
Federal $ 431 $ 536 $ 186
State 172 144 59
Deferred
Federal 16 (23) (7)
State 9 (2) 3
----- ----- -----
Total income tax expense $ 628 $ 655 $ 241
===== ===== =====
Reconciliation of federal statutory to actual tax expense
Federal statutory income tax at 34% $ 538 $ 556 $ 188
Effect of state income taxes 119 94 41
Other (29) 5 12
----- ----- -----
Actual tax expense $ 628 $ 655 $ 241
===== ===== =====
Effective tax rate 39.6% 40.0% 43.6%
</TABLE>
<PAGE>
The components of the deferred tax liability are as follows at:
<TABLE>
<CAPTION>
June 30 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets
Allowance for loan losses $ 62 $ 20
State income tax 23 19
Retirement plans and other employee benefits 83 70
Other 14
----- -----
Total assets 168 123
----- -----
Liabilities
Depreciation 242 234
FHLB of Indianapolis stock dividend 30 30
Loan costs 253 194
Securities available for sale 13 36
Other 3
----- -----
Total liabilities 541 494
----- -----
$(373) $(371)
===== =====
</TABLE>
33
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Retained earnings at June 30, 1999, include approximately $1,500,000 for which
no deferred federal income tax liability has been recognized. This amount
represents an allocation of income to bad debt deductions for tax purposes only.
Reduction of amounts so allocated for purposes other than tax bad debt losses or
adjustments arising from carryback of net operating losses or loss of "bank"
status, would create income for tax purposes only, which income would be subject
to the then-current corporate income tax rate. The unrecorded deferred income
tax liability on the above amounts was approximately $590,000 at June 30, 1999.
Note 10 --Other Comprehensive Income
<TABLE>
<CAPTION>
1999
-------------------------------------------
Tax
Before-Tax (Expense) Net-of-Tax
Year Ended June 30 Amount Benefit Amount
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding losses on securities
available for sale arising during the year $ (56) $22 $(34)
==========================================
<CAPTION>
1998
--------------------------------------------
Tax
Before-Tax (Expense) Net-of-Tax
Year Ended June 30 Amount Benefit Amount
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding gains on securities
available for sale arising during the year $89 $(35) $54
==========================================
</TABLE>
Note 11 --Commitments and Contingent Liabilities
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit, which are not
included in the accompanying consolidated financial statements. The
Association's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit is
represented by the contractual or notional amount of those instruments. The
Association uses the same credit policies in making such commitments as it does
for instruments that are included in the consolidated statement of financial
condition.
<PAGE>
Financial instruments whose contract amount represents credit risk as of June 30
were as follows:
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loan commitments
At variable rates $ 195 $ 196
At fixed rates ranging from 6.75 to 9.00% for 1999
and 7.50 to 10.00% for 1998 2,749 1,957
</TABLE>
34
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Association evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Association upon extension of credit, is based on
management's credit evaluation. Collateral held varies, but may include
residential real estate or other assets of the borrower.
The Company and Association are also subject to claims and lawsuits which arise
primarily in the ordinary course of business. It is the opinion of management
that the disposition or ultimate determination of such possible claims or
lawsuits will not have a material adverse effect on the consolidated financial
position of the Association.
Note 12 --Year 2000
Like all entities, the Company and subsidiary are exposed to risks associated
with the Year 2000 Issue, which affects computer software and hardware;
transactions with customers, vendors, and other entities; and equipment
dependent upon microchips. The Company has begun, but not yet completed, the
process of identifying and remediating potential Year 2000 problems. It is not
possible for any entity to guarantee the results of its own remediation efforts
or to accurately predict the impact of the Year 2000 Issue on third parties with
which the Company and subsidiary do business. If remediation efforts of the
Company or third parties with which the Company and subsidiary do business are
not successful, the Year 2000 Issue could have negative effects on the Company's
financial condition and results of operations in the near term.
Note 13 --Dividends and Capital Restrictions
The Company is not subject to any regulatory restrictions on the payment of
dividends to its stockholders.
Without prior approval, current regulations allow the Association to pay
dividends to the Company not exceeding retained net income for the current
calendar year plus those for the previous two calendar years. The Association
normally restricts dividends to a lesser amount because of the need to maintain
an adequate capital structure. OTS regulations also prohibit a savings
association from declaring or paying any dividends if, as a result, the
regulatory capital of the Association would be reduced below the minimum amount
required to be maintained for the liquidation account established in connection
with the conversion. Any additional amount of capital distributions would
require prior regulatory approval.
35
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
At the time of conversion on June 30, 1997, a liquidation account was
established in an amount equal to $420,000 of dividends waived by Montgomery
Mutual Holding Company plus the Association's net worth at March 31, 1995. The
liquidation account is maintained for the benefit of eligible deposit account
holders who maintain their deposit account in the Association after conversion.
In the event of a complete liquidation (and only in such event), each eligible
deposit account holder will be entitled to receive a liquidation distribution
from the liquidation account in the amount of the then current adjusted
subaccount balance for deposit accounts then held, before any liquidation
distribution may be made to stockholders. Except for the repurchase of stock and
payment of dividends, the existence of the liquidation account will not restrict
the use or application of net worth. The initial balance of the liquidation
account was $7,062,000.
At June 30, 1999, the stockholder's equity of the Association was $16,932,000,
of which approximately $2,117,000 was available for the payment of dividends.
Note 14 --Regulatory Capital
The Association is subject to various regulatory capital requirements
administered by the federal banking agencies and is assigned to a capital
category. The assigned capital category is largely determined by three ratios
that are calculated according to the regulations: total risk adjusted capital,
Core 1 capital, and Core 1 leverage ratios. The ratios are intended to measure
capital relative to assets and credit risk associated with those assets and
off-balance sheet exposures of the entity. The capital category assigned to an
entity can also be affected by qualitative judgments made by regulatory agencies
about the risk inherent in the entity's activities that are not part of the
calculated ratios.
There are five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized. Classification of an association in
any of the undercapitalized categories can result in actions by regulators that
could have a material effect on an association's operations. At June 30, 1999
and 1998, the Association is categorized as well capitalized and met all subject
capital adequacy requirements. There are no conditions or events since June 30,
1999 that management believes have changed the Association's classification.
36
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The Association's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
Required for To Be Well
Actual Adequate Capital (1) Capitalized (1)
-------------------------------------------------------------------------
As of June 30, 1999 Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital 1 (to risk-weighted assets) $16,005 20.3% $6,324 8.0% $7,905 10.0%
Tier 1 risked-based capital 1 (to risk-weighted assets
16,529 20.9 6,324 8.0 7,905 10.0
Core capital 1 (to adjusted tangible assets) 16,529 13.5 4,896 4.0 7,344 6.0
Core capital 1 (to adjusted total assets) 16,529 13.5 4,896 4.0 6,120 5.0
<CAPTION>
As of June 30, 1998
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital 1 (to risk-weighted assets) $14,586 20.9% $5,573 8.0% $6,967 10.0%
Tier 1 risked-based capital 1 (to risk-weighted assets
15,579 22.4 5,573 8.0 6,967 10.0
Core capital 1 (to adjusted tangible assets) 15,579 13.4 3,482 3.0 6,964 6.0
Core capital 1 (to adjusted total assets) 15,579 13.4 3,482 3.0 5,804 5.0
1 As defined by regulatory agencies
</TABLE>
Note 15 --Employee Benefit Plans
The Company has a retirement savings Section 401(k) plan in which substantially
all employees may participate. The Company matches employees' contributions at
the rate of 100 percent of the first 7 percent of base salary contributed by
participants. The Company's expense for the plan was $58,700 for 1999, $52,000
for 1998 and $48,000 for 1997.
<PAGE>
On October 15, 1996, the stockholders of the Association approved a Management
Recognition Plan ("MRP"). This plan was assumed by the Company in connection
with the second conversion and reorganization. The plan allows for the purchase
in the open market or through the issuance of authorized and unissued shares of
up to 13,990 shares of common stock. On November 25, 1996, Montgomery purchased
1,865 shares for the MRP at a cost of $11,563 which was recorded as unearned
compensation in stockholders' equity. On June 26, 1998, the Company purchased
the remaining 12,123 shares necessary to fund the MRP at a cost of $155,325
which was recorded as unearned compensation in stockholders' equity. Restricted
stock awards covering 13,988 shares of common stock have been awarded to
Montgomery's officers and key employees under the MRP. The awards are to vest
and be earned by the recipient at a rate of 20 percent per year. Expense under
the plan for fiscal years ended June 30, 1999 and 1998 was $8,700 and $38,000.
Expense under the plan for fiscal year ended June 30, 1997 was not material.
37
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
As part of the second conversion, the Company established an ESOP covering
substantially all employees of the Company. The ESOP acquired 132,250 shares at
$10.00 per share in the conversion with funds provided by a loan from the
Company. Accordingly, the $1,322,500 of stock acquired by the ESOP is shown as a
reduction to stockholders' equity. Unearned ESOP shares totaled 114,180 and
123,080 at June 30, 1999 and 1998 and had a fair value of $1,080,000 and
$1,508,000. Shares are released to participants proportionately as the loan is
repaid. Dividends on allocated shares are recorded as dividends and charged to
retained earnings. Dividends on unallocated shares are used to repay the loan.
Compensation expense is recorded equal to the fair market value of the stock
when contributions, which are determined annually by the Board of Directors of
the Bank, are made to the ESOP. The expense under the ESOP was $92,000 and
$116,000 for the years ended June 30, 1999 and 1998. There was no expense under
the ESOP for the year ended June 30, 1997. At June 30, 1999, the ESOP had 18,070
allocated shares, 114,180 suspense shares and no shares committed-to-be
released. At June 30, 1998, the ESOP had 9,170 shares allocated, 123,080
suspense shares and no shares committed-to-be released.
In addition, the Board of Directors has approved a 1997 Recognition Plan
("RRP"). Restricted stock awards covering up to 4% of the common stock to be
outstanding upon consummation of the conversion less the number of shares held
in the MRP may be awarded to the Association's directors, officers, and key
employees under the RRP. As of June 30, 1999, no grants had been made under the
1997 RRP.
Note 16 --Stock Option Plans
On October 15, 1996, the stockholders of the Association approved a 1995 Stock
Option Plan and a 1995 Director Stock Option Plan. These plans were assumed by
the Company in connection with the second conversion and reorganization. These
plans allow for the purchase in the open market or through the issuance of
authorized and unissued shares of up to 34,973 shares of common stock for the
Stock Option Plan and the Director Stock Option Plan. Under the stock option
plans, stock option rights covering 24,483 shares of common stock may be granted
to officers and other key employees and 10,490 shares of common stock may be
granted to directors of the Company.
The Company's 1995 stock option plans are accounted for in accordance with
Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Stock option awards vest and are
exercisable one year following the date of stockholder approval and thereafter
at a rate not in excess of 20% per year. All options become fully vested and
exercisable in the event of the death or disability of the optionee. The
incentive stock option exercise price will not be less than the fair market
value of the common stock on the date of the grant of the option. The date on
which the options are first exercisable is determined by the Board of Directors,
and the terms of the stock options will not exceed ten years from the date of
grant. The exercise price of each option was equal to the market price of the
Company's stock on the date of grant; therefore, no compensation expense was
recognized.
38
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Although the Company has elected to follow APB No. 25, SFAS No. 123 requires pro
forma disclosures of net income and earnings per share as if the Company had
accounted for its employee stock options under that Statement. The fair value of
each option grant was estimated on the grant date using an option-pricing model
with the following assumptions:
<TABLE>
<CAPTION>
June 30 1997
- -------------------------------------------------------------------------------
<S> <C>
Risk-free interest rates 6.4%
Dividend yields 3.37
Expected volatility factor of market price of common stock 11.0
Weighted-average expected life of the options 7 years
</TABLE>
Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair value of the options and amortized to expense over the options'
vesting period. The pro forma effect on net income and earnings per share of
this Statement are as follows:
<TABLE>
<CAPTION>
Year Ended June 30 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income As reported $956 $981 $313
Pro forma 948 973 305
Basic earnings per share As reported .65 .64 .67
Pro forma .64 .64 .67
Diluted earnings per share As reported .65 .64 .67
Pro forma .64 .63 .66
</TABLE>
<PAGE>
The following is a summary of the status of the Company's stock option plan and
changes in that plan as of and for the years ended June 30, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Year Ended June 30 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 34,973 $ 6.97 34,973 $ 6.97
Granted 34,973 $ 6.97
------ ------ ------
Outstanding, end of year 34,973 $ 6.97 34,973 $ 6.97 34,973 $ 6.97
====== ====== ======
Options exercisable at year end 13,988 6,994 $ 6.97
Weighted-average fair value of options
granted during the year
$ 1.25
</TABLE>
39
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
As of June 30, 1999, options outstanding totaling 34,973 have an exercise price
of $6.97 and a weighted-average remaining contractual life of 7.6 years.
In addition, the Board of Directors and stockholders have approved a 1997 Stock
Option Plan. Under the 1997 Plan, stock option and stock appreciation rights
covering shares representing an aggregate of up to 10 percent of the common
stock sold in the conversion may be granted to directors, officers and employees
of the Company or its subsidiaries. As of June 30, 1999, no grants under the
1997 Plan have been made.
Note 17 --Earnings Per Share
Earnings per share were computed as follows:
<TABLE>
<CAPTION>
Year Ended June 30 1999
- ------------------------------------------------------------------------------------------------------------------
Weighted-
Average Per share
Income Shares Amount
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic Earnings Per Share
Income available to common shareholders $ 956 1,469,942 $.65
Effect of dilutive securities
MRP awards and stock options 11,838
----------------------------
Diluted Earnings Per Share
Income available to common stockholders and assumed conversions
$ 956 1,481,780 $.65
============================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30 1998
- ------------------------------------------------------------------------------------------------------------------
Weighted-
Average Per share
Income Shares Amount
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic Earnings Per Share
Income available to common shareholders $981 1,521,616 $.64
Effect of dilutive securities
MRP awards and stock options 17,215
----------------------------
Diluted Earnings Per Share
Income available to common stockholders and assumed conversions
$981 1,538,831 $.64
============================
</TABLE>
40
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Year Ended June 30 1997
- ------------------------------------------------------------------------------------------------------------------
Weighted-
Average Per share
Income Shares Amount
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic Earnings Per Share
Income available to common shareholders $313 465,235 $.67
Effect of dilutive securities
MRP awards and stock options --
---------------------------
Diluted Earnings Per Share
Income available to common stockholders and assumed conversions
$313 465,235 $.67
==========================
</TABLE>
Note 18 --Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash and Cash Equivalents--The fair value of cash and cash equivalents
approximates carrying value.
Interest-Bearing Deposits--The fair value of interest-bearing deposits
approximate carrying value.
Investment Securities--Fair values are based on quoted market prices.
Loans--The fair value for loans is estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
Interest Receivable/Payable--The fair value of accrued interest
receivable/payable approximates carrying values.
FHLB Stock--Fair value of FHLB stock is based on the price at which it may be
resold to the FHLB.
Deposits--Fair values for certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
on such time deposits.
Federal Home Loan Bank Advances and Line of Credit--The fair value of these
borrowings are estimated using a discounted cash flow calculation, based on
current rates for similar debt.
Advance Payments by Borrowers for Taxes and Insurance--The fair value
approximates carrying value.
41
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Off-Balance Sheet Commitments--Commitments include commitments to originate
mortgage loans, and extend lines of credit and are generally short-term nature.
The fair value of such commitments are based on fees currently charged to enter
into of a similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing.
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
Carrying Fair Carrying Fair
June 30 Amount Value Amount Value
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 4,933 $ 4,933 $ 10,897 $ 10,897
Interest-bearing deposits 219 219 215 215
Investment securities available for sale 881 881 312 312
Loans, net 111,415 112,022 100,210 102,992
Stock in FHLB 1,251 1,251 922 922
Interest receivable 894 894 844 844
Liabilities
Deposits 82,468 82,259 83,982 84,153
FHLB advances and line of credit 20,632 20,044 11,261 11,232
Interest payable 567 567 538 538
Advances by borrowers for taxes and insurance 220 220 190 190
Off-Balance Sheet Assets
Commitments to extend credit
</TABLE>
42
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 19 --Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company:
<TABLE>
<CAPTION>
Condensed Balance Sheet
June 30 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 1,405 $ 3,732
Interest-bearing deposits 119 115
Investment securities available for sale 881 290
Real estate held for development 164 100
Other assets 62 51
Investment in subsidiary 16,889 15,993
------- -------
Total assets $19,520 $20,281
======= =======
Liabilities $ 123 $ 216
Stockholders' Equity 19,397 20,065
------- -------
Total liabilities and stockholders' equity $19,520 $20,281
======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Condensed Statement of Income
Year Ended June 30 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and dividend income $235 $310
----------------------
Expenses
Salaries and employee benefits 53 71
Other expenses 88 60
----------------------
Total expenses 141 131
----------------------
Income before income tax expense and equity in undistributed income of subsidiary
94 179
Income tax expense 34 80
----------------------
Income before equity in undistributed income of subsidiary 60 99
Equity in undistributed income of subsidiary 896 882 $313
----------------------
Net Income $956 $981 $313
======================
</TABLE>
43
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Condensed Statement of Cash Flows
Year Ended June 30 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 956 $ 981 $ 313
Adjustments to reconcile net income to net cash provided by operating activities
(871) (659) (313)
-------------------------------------
Net cash provided by operating activities 85 322
--------------------------------------
Investing Activities
Net change in interest bearing deposits (4) (115)
Purchase of securities available for sale (647) (200)
Additions to real estate owned (64) (100)
-------------------------------------
Net cash used by investing activities (715) (415)
-------------------------------------
Financing Activities
Purchase of stock (1,369)
Purchase of stock for MRP (155)
Proceeds from sale of stock and reorganization, net of cost 9,934
Cash dividends (328) (276)
Capital contribution to Association (5,678)
-------------------------------------
Net cash provided (used) by financing activities (1,697) (431) 4,256
-------------------------------------
Net Change in Cash (2,327) (524) 4,256
Cash at Beginning of Year 3,732 4,256
-------------------------------------
Cash at End of Year $ 1,405 $ 3,732 $ 4,256
=====================================
Additional Cash Flow and Supplementary Information
Common stock issued to ESOP leveraged with an employer loan $ 1,322,500
</TABLE>
44
<PAGE>
MONTGOMERY FINANCIAL CORPORATION
and
MONTGOMERY SAVINGS, A FEDERAL ASSOCIATION
DIRECTORS AND EXECUTIVE OFFICERS
Directors
Earl F. Elliott
Director, Chief Executive Officer
and President of the Company and
Chairman of the Board and Chief
Executive Officer of the Association
Robert C. Wright
Director of the Company and the
Association
J. Lee Walden
Director, Chief Operating Officer and
Chief Financial Officer of the Company
and Director, President and Chief
Financial Officer of the Association
C. Rex Henthorn
Director and Chairman of the Board
of the Company and Director
of the Association
Executive Officers
Earl F. Elliott
Director, Chief Executive Officer
and President of the Company and
Chairman of the Board and Chief
Executive Officer of the Association
Nancy L. McCormick
Secretary and Treasurer of the Company and
Senior Vice President and Secretary
of the Association
<PAGE>
Mark E. Foster
Director of the Company and the
Association
Joseph M. Malott
Director of the Company and the
Association
John E. Woodward
Director of the Company and the
Association
J. Lee Walden
Director, Chief Operating Officer and
Chief Financial Officer of the Company
and Director, President and Chief
Financial Officer of the Association
45
<PAGE>
STOCKHOLDER INFORMATION
Corporate Profile
Montgomery Financial Corporation is an Indiana corporation which
was organized in 1997 by the Association for the purpose of holding all of the
capital stock of the Association and in order to facilitate the Conversion and
Reorganization. The Association was organized in 1888 and converted to a federal
savings and loan charter in 1985. In August 1995, the Association converted to
the stock form of organization and concurrently formed Montgomery Mutual Holding
Company, owner of 70.59 percent of the shares of the Association's Common Stock.
In June 1997, the Association became the wholly owned subsidiary of Montgomery
Financial Corporation through the sale and issuance of common stock. The
principal asset of Montgomery Financial Corporation is the outstanding stock of
the Association, its wholly owned subsidiary. Montgomery Financial Corporation
presently has no separate operations and its business consists only of the
business of the Association. The Association's primary business consists of
attracting deposits from the general public and using these deposits provide
financing of residential and, to a lesser extent, other properties.
Main Office Mill Street Office
119 East Main Street 816 South Mill Street
Crawfordsville, Indiana 47933 Crawfordsville, Indiana 47933
Williamsport Office Covington Office
120 North Monroe Street 417 Liberty Street
Williamsport, Indiana 47993 Covington, Indiana 47932
Lafayette Office
50 West 250 South
Lafayette, Indiana 47909
Independent Auditor Legal Counsel
Olive LLP Henthorn, Harris, Taylor & Weliever PC
201 North Illinois Street 122 East Main Street
Indianapolis, Indiana 46204 Crawfordsville, Indiana 47933
Transfer Agent Special Counsel
Registrar & Transfer Co. Silver, Freedman & Taff, L.L.P.
10 Commerce Drive 1100 New York Avenue, N.W.
Cranford, New Jersey 07016 Washington, D.C. 20005
46
<PAGE>
Form 10-KSB Report
A copy of Montgomery Financial's Annual Report on Form 10-KSB for
the fiscal year ended June 30, 1999 including financial statements, as filed
with the SEC, will be furnished without charge to stockholders of Montgomery
Financial upon written request to the Secretary, Montgomery Financial
Corporation, 119 East Main Street, Crawfordsville, Indiana 47933. The Securities
and Exchange Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission, including the Corporation; that address is
http://www.sec.gov.
Stock Listing
Montgomery Financial's common stock is reported on the Nasdaq
SmallCap Market under the symbol "MONT." As of June 30, 1999, Montgomery
Financial had 285 stockholders of record and 1,521,142 outstanding shares of
common stock.
Price Range of Common Stock and Dividends
The table below shows the range of high and low bid prices. These
prices do not represent actual transactions and do not include retail markups,
markdowns or commissions.
<TABLE>
<CAPTION>
Declared Dividends
High Low Per Share
---- --- ---------
1999
<S> <C> <C> <C>
First Quarter..... $12.625 $ 9.500 $ 0.055
Second Quarter.... 12.000 10.000 0.055
Third Quarter..... 10.750 9.063 0.055
Fourth Quarter.... 9.875 8.750 0.055
<CAPTION>
Declared Dividends
High Low Per Share
---- --- ---------
<S> <C> <C> <C>
1998
First Quarter..... $12.375 $ 10.375 $ 0.055
Second Quarter.... 13.375 12.000 0.055
Third Quarter..... 13.750 12.750 0.055
Fourth Quarter.... 13.250 12.250 0.055
</TABLE>
47
Exhibit 21
<TABLE>
<CAPTION>
SUBSIDIARIES OF THE REGISTRANT
Parent Subsidiary Ownership Organization
------ ---------- --------- ------------
<S> <C> <C> <C>
Montgomery Financial Corporation Montgomery Savings, A Federal 100% Federal
Association
Montgomery Savings MSA Service Corp. 100% Indiana
</TABLE>
The financial statements of the Registrant are consolidated with those of
its subsidiaries.
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference to the Registration
Statements on Form S-8, file number 333- 87807, 333-87809, 333-87811, 333-87813
and 333-87827, of our report dated July 30, 1999, on the consolidated financial
statements of Montgomery Financial Corporation, Crawfordsville, Indiana, which
report is incorporated by reference in the Annual Report on Form 10-K of
Montgomery Financial Corporation, Crawfordsville, Indiana.
/s/ Olive LLP
- -------------
Olive LLP
Indianapolis, IN
September 27, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-KSB FOR THE YEAR ENDED June 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 524
<INT-BEARING-DEPOSITS> 4,629
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 881
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 111,641
<ALLOWANCE> 226
<TOTAL-ASSETS> 123,959
<DEPOSITS> 82,468
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,462
<LONG-TERM> 20,632
0
0
<COMMON> 15
<OTHER-SE> 19,382
<TOTAL-LIABILITIES-AND-EQUITY> 123,959
<INTEREST-LOAN> 8,637
<INTEREST-INVEST> 22
<INTEREST-OTHER> 490
<INTEREST-TOTAL> 9,149
<INTEREST-DEPOSIT> 4,182
<INTEREST-EXPENSE> 5,150
<INTEREST-INCOME-NET> 3,999
<LOAN-LOSSES> 40
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,431
<INCOME-PRETAX> 1,584
<INCOME-PRE-EXTRAORDINARY> 1,584
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 956
<EPS-BASIC> 0.65
<EPS-DILUTED> 0.65
<YIELD-ACTUAL> 3.46
<LOANS-NON> 438
<LOANS-PAST> 109
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 186
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 226
<ALLOWANCE-DOMESTIC> 226
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 69
</TABLE>
