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, 2000
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
Incorporation or Organization) Identification No.)
119 East Main Street
Crawfordsville, Indiana 47933
(Address of Principal Executive Offices) Zip Code
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 $10,078,000 in revenues for the fiscal year ended June 30, 2000.
As of September 6, 2000, there were issued and outstanding 1,244,790 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 September 6, 2000, was $1.2 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended June 30, 2000,
are incorporated into Part II. Portions of the Proxy Statement for the 2000
Annual Meeting of Shareholders are incorporated in Part III.
Exhibit Index on Page 29
Page 1 of 30 Pages
<PAGE>
MONTGOMERY FINANCIAL CORPORATION
Form 10-KSB
INDEX
Page
Forward Looking Statement..................................................... 3
PART I
Item 1. Description of Business................................... 3
Item 2. Description of Property...................................27
Item 3. Legal Proceedings.........................................27
Item 4. Submission of Matters to a Vote of Security Holders.......27
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters...................................28
Item 6. Management's Discussion and Analysis
or Plan of Operation..................................28
Item 7. Financial Statements......................................28
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................28
PART III
Item 9. Directors, Executive Officers, Promoters
and Control Persons;
Compliance with Section 16(a) of the Exchange Act....28
Item 10. Executive Compensation....................................28
Item 11. Security Ownership of Certain Beneficial
Owners and Management.................................28
Item 12. Certain Relationships and Related Transactions............29
Item 13. Exhibits and Reports on Form 8-K..........................29
Signatures....................................................................30
<PAGE>
FORWARD LOOKING STATEMENT
This Annual Report on Form 10-KSB ("Form 10-KSB") contains statements
which constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-KSB and include statements regarding the intent, belief,
outlook, estimates or expectations of the Company (as defined below), its
directors, or its officers primarily with respect to future events and the
future financial performance of the Company. Readers of this Form 10-KSB are
cautioned that any such forward looking statements are not guarantees of future
events or performance and involve risks and uncertainties, and that actual
results may differ materially from those in the forward looking statements as a
result of various factors. The accompanying information contained in this Form
10-KSB identifies important factors that could cause such differences. These
factors include but are not limited to changes in interest rates; loss of
deposits and loan demand to other savings and financial institutions;
substantial changes in financial markets; changes in real estate values and the
real estate market; regulatory changes; or unanticipated results in pending
legal proceedings.
PART I
Item 1. Description of Business
General
Montgomery Financial Corporation (the "Company") is an Indiana
corporation organized in April 1997 by Montgomery Savings, a Federal
Association, for the purpose of serving as 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.
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), Indiana, one in Covington (Fountain county),
Indiana, one in Williamsport (Warren county), Indiana, and one in Lafayette
(Tippecanoe county), Indiana. The Company's principal executive offices are
located at 119 East Main Street, Crawfordsville, Indiana 47933, and its
telephone number is (765) 362-4710. At June 30, 2000, the Company and its
subsidiaries (on a consolidated basis) had total assets of $138.1 million, total
liabilities of $121.1 million, including $91.5 million of deposits, $28.2
million of Federal Home Loan Bank advances, and total stockholders' equity of
$17.0 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 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 $93.9 million, or
77.9%, of the Association's total loan portfolio at June 30, 2000. To a lesser
extent, the Association originates loans secured by existing multi-family
residential and nonresidential real estate, which amounted to $18.2 million, or
15.1%, of the total loan portfolio at June 30, 2000, as well as construction
loans and consumer loans, which amounted to $3.6 million, or 3.0%, of the total
loan portfolio and $4.9 million, or 4.0%, 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 CORP ("MSA"). MSA engages in real estate management.
At June 30, 2000, 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
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, 2000, the Association's net loan portfolio totaled $119.1
million. Loans secured by first mortgages on one- to four-family residences,
including construction loans, totaled $97.5 million, or 80.9%, of the
Association's loan portfolio at June 30, 2000, 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
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 $2.3 million as of June 30, 2000.
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 $2.2 million. All of the loans to this borrower have
performed in accordance with their terms since their origination.
Loan Portfolio Data. The following table presents certain information
about the composition of the Association's loan portfolio by loan type and
security type as of the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------------
2000 1999 1998
-------------------- --------------------- --------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Type of Loan:
Mortgage loans:
Residential $95,388 80.07% $88,989 79.87% $82,546 82.37%
Land 1,176 0.99 1,644 1.47 1,316 1.32
Nonresidential 15,522 13.03 13,467 12.09 7,549 7.53
Construction:
Residential 3,599 3.02 2,783 2.50 1,331 1.33
Nonresidential --- 0.00 325 0.29 2,667 2.66
-------- ------ -------- ------ -------- ------
Total mortgage loans 115,685 97.11 107,208 96.22 95,409 95.21
-------- ------ -------- ------ -------- ------
Other loans:
Home equity 3,945 3.31 4,195 3.76 4,091 4.08
Savings account and
unsecured consumer loans 928 0.78 1,199 1.08 1,383 1.38
-------- ------ -------- ------ -------- ------
Total other loans 4,873 4.09 5,394 4.84 5,474 5.46
-------- ------ -------- ------ -------- ------
Less:
Loans in process 1,520 1.28 1,261 1.13 707 0.70
Deferred loan fees (cost) (319) (0.27) (300) (0.27) (220) (0.22)
Loan loss reserves 226 0.19 226 0.20 186 0.19
-------- ------ -------- ------ -------- ------
Total adjustments 1,427 1.20 1,187 1.06 673 0.67
-------- ------ -------- ------ -------- ------
Total loans, net $119,131 100.00% $111,415 100.00% $100,210 100.00%
======== ====== ======== ====== ======== ======
Type of Security:
Residential:
1-4 family $97,528 81.87% $90,908 81.59% $82,714 82.54%
5 or more units 1,459 1.22 864 0.77 1,163 1.16
Nonresidential 15,522 13.03 13,792 12.38 10,216 10.19
Land 1,176 0.99 1,644 1.47 1,316 1.32
Residential-second mortgage 3,945 3.31 4,195 3.77 4,091 4.08
Savings accounts and
unsecured consumer loans 928 0.78 1,199 1.08 1,383 1.38
-------- ------ -------- ------ -------- ------
Total loans 120,558 101.20 112,602 101.06 100,883 100.67
-------- ------ -------- ------ -------- ------
Less:
Loans in process 1,520 1.28 1,261 1.13 707 0.70
Deferred loan fees (cost) (319) (0.27) (300) (0.27) (220) (0.22)
Loan loss reserves 226 0.19 226 0.20 186 0.19
-------- ------ -------- ------ -------- ------
Total loans, net $119,131 100.00% $111,415 100.00% $100,210 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
The following table illustrates the maturities of the Association's
loan portfolio at June 30, 2000. 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,
-------------------------------------------------------------------
Balance at 2004 2006 2011 2016
June 30, and to to and
2000 2001 2002 2003 2005 2010 2015 following
-------- ------- ------ ------ ------ ------ ------- ---------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential mortgage............. $95,388 $10,022 $1,793 $3,318 $7,215 $6,832 $28,468 $37,740
Nonresidential mortgage.......... 15,522 1,382 9 706 634 517 11,108 1,166
Residential construction......... 3,599 2,457 --- 150 112 --- --- 880
Land loans....................... 1,176 925 2 --- --- 21 228 ---
Home equity loans................ 3,945 660 96 175 928 1,766 276 44
Savings account and
unsecured consumer loans...... 928 449 108 66 250 18 37 ---
-------- ------- ------ ------ ------ ------ ------- -------
Total......................... $120,558 $15,895 $2,008 $4,415 $9,139 $9,154 $40,117 $39,830
======== ======= ====== ====== ====== ====== ======= =======
</TABLE>
The following table sets forth as of June 30, 2000, 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............................ $73,972 $11,394 $ 85,366
Nonresidential mortgage......................... 13,216 924 14,140
Residential construction........................ 880 262 1,142
Land loans...................................... 251 --- 251
Home equity loans............................... 3,285 --- 3,285
Savings account and unsecured consumer loans.... 479 --- 479
------- ------- --------
Total...................................... $92,083 $12,580 $104,663
======= ======= ========
</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.
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, 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 Association 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 2%
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, 2000, 10.1% were ARMs and 89.9% were fixed-rate loans.
The Association's one- to four-family residential loan portfolio,
including residential construction loans, totaled approximately $97.5 million at
June 30, 2000, and represented 70.6% of total assets and 80.9% of total
outstanding loans. Adjustable-rate one- to four-family residential loans
comprised 16.5% and fixed- rate loans totaled 61.4% of the Association's total
loans at June 30, 2000.
Construction Loans. The Association offers residential construction
loans to owner-occupants and occasionally to builders. At June 30, 2000, the
Association had $3.6 million in outstanding residential construction loans.
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 to 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, 2000, these loans
totaled $16.7 million, or approximately 13.9%, 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 to 400% of its capital.
Consumer Loans. The Association makes consumer loans primarily to
depositors on the security of their savings deposits and loans secured by second
real estate mortgages. To a lesser extent, unsecured loans are made to credit
worthy deposit and mortgage customers of the Association. 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 substracting 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, 2000, consumer loans totaled $4.9 million, or 4.0%, of the
Association's total loans.
Originations, Purchase and Sale of Loans. 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.
The following table shows total loans originated and repaid during the
periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------
2000 1999 1998
-------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Total gross loans at beginning of period........ $112,602 $100,883 $87,592
Loans originated:
Residential mortgage....................... 28,480 34,179 32,628
Nonresidential mortgage.................... 3,768 8,001 5,241
Residential construction................... 4,460 3,180 2,534
Nonresidential construction................ --- 555 2,667
Land loans................................. 1,698 471 269
Other loans................................ 845 2,077 2,761
-------- -------- --------
Total loans originated................... 39,251 48,463 46,100
-------- -------- --------
Participation loans purchased:
Nonresidential mortgage.................... --- --- ---
Participation loans sold:
Nonresidential mortgage.................... --- --- ---
Loan principal payments.................... (16,609) (15,631) (15,268)
Other changes, net(1)...................... (14,686) (21,113) (17,541)
-------- -------- --------
Total gross loans at end of period....... $120,558 $112,602 $100,883
======== ======== ========
</TABLE>
(1) Represents changes other than cash repayments of principal (i.e.,
refinanced portion of new loans and foreclosed loans to real estate owned).
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.
Non-Performing and Problem 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 contacts 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 collectible or the collateral
is becoming inadequate to support payments of the total debt. The above
procedure similarly applies to consumer loans.
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 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.
Non-Performing Assets. At June 30, 2000, $1,431,000, or 1.01%, of the
Association's total assets were non-performing assets compared to $814,000, or
0.66%, of its total assets at June 30, 1999. At June 30, 2000, residential loans
and consumer loans accounted for $928,000 and $37,000, respectively, of
non-performing assets. The balance of non-performing assets consisted of $25,000
in nonresidential mortgage loans and $441,000 of real estate acquired in
settlement of loans.
The following table sets forth the amounts and categories of the
Association's non-performing assets.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------
2000 1999 1998
------ ---- ----
(Dollars in Thousands)
Nonaccrual loans:
<S> <C> <C> <C>
Residential mortgage loans.................... $856 $422 $635
Nonresidential mortgage loans................. 25 16 17
Consumer loans................................ --- --- ---
------ ---- ----
Total nonaccrual loans.................... 881 438 652
------ ---- ----
Accruing loans contractually past due
90 days or more:
Residential mortgage.......................... 72 69 36
Nonresidential mortgage....................... --- --- ---
Consumer loans................................ 37 40 36
------ ---- ----
Total accruing loans contractually past
due 90 days or more..................... 109 109 72
------ ---- ----
Total non-performing loans................ 990 547 724
Real estate acquired in
settlement of loans (net)................... 441 267 189
------ ---- ----
Total non-performing assets...................... $1,431 $814 $913
====== ==== ====
</TABLE>
Delinquent Loans. The following table reflects the amount of loans in a
delinquent status as of the dates indicated.
Years Ended June 30,
-----------------------------------------
2000 1999 1998
------ ------ ------
(Dollars in Thousands)
Loans delinquent for:
30 to 59 days.................. $2,011 $1,940 $1,242
60 to 89 days.................. 666 885 647
90 or more days................ 990 547 724
------ ------ ------
Total delinquent loans..... $3,667 $3,372 $2,613
====== ====== ======
Ratio of total delinquent loans
to total loans................. 3.04% 2.99% 2.59%
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 collectibility of
the loan.
Classified Assets. Federal regulations and the Association's Asset
Classification Policy provide for the classification of loans and other assets
such as debt and equity securities considered by the OTS to be of lesser quality
as "substandard," "doubtful," or "loss" assets. An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the weaknesses inherent
in those classified "substandard," with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of specific loss reserve is not warranted.
An insured institution is required to establish general allowances for
loan losses in an amount deemed prudent by management for loans classified
substandard or doubtful, as well as for other problem loans. General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss," it is required to establish a
specific allowance for losses equal to 100% of the amount of the asset so
classified or to charge off such amount. An institution's determination as to
the classification of its assets and the amount of its valuation allowances is
subject to review by the OTS which can order the establishment of additional
general or specific loss allowances.
At June 30, 2000, 1999 and 1998, the aggregate amounts of the
Association's classified assets were as follows:
June 30,
----------------------------------------
2000 1999 1998
------ ----- ------
(Dollars in Thousands)
Classified assets:
Special mention................. $ --- $ --- $ 755
Substandard..................... 1,395 852 913
Doubtful........................ --- --- ---
Loss............................ --- --- ---
------ ----- ------
Total classified assets..... $1,395 $ 852 $1,668
====== ===== ======
General loan loss allowance..... $ 226 $ 226 $ 186
Specific loan loss allowance.... --- --- ---
------ ----- ------
Total allowances............ $ 226 $ 226 $ 186
====== ===== ======
The Association regularly reviews its loan portfolio to determine
whether any loans require classification in accordance with applicable
regulations. As of the date of its most recent examination, the Association had
no disagreement with the Office of Thrift Supervision as to asset
classifications.
Allowance for Loan Losses
The allowance for loan losses is maintained through the provision for
loan losses, which is charged to earnings. The allowance for loan losses is
determined in conjunction with the Association's review and evaluation of
current economic conditions (including those of its lending area), changes in
the character and size of the loan portfolio, loan delinquencies (current status
as well as past and anticipated trends) and adequacy of collateral securing loan
delinquencies, historical and estimated net charge-offs and other pertinent
information derived from review of the loan portfolio. In management's opinion,
the Association's allowance for loan losses is adequate to absorb probable
losses inherent in the loan portfolio at June 30, 2000. However, there can be no
assurance that regulators, when reviewing the Association's loan portfolio in
the future, will not require increases in its allowances for loan losses or that
changes in economic conditions will not adversely affect its loan portfolio.
Summary of Loan Loss Experience. The following tables presents changes
in the allowance during the past three fiscal years ended June 30, 2000.
<TABLE>
<CAPTION>
June 30,
------------------------------------------
2000 1999 1998
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Balance of allowance at beginning of period................... $226 $186 $180
Add: Recoveries on loans previously charged off............ --- --- ---
Less: Charge-offs--residential real estate loans............ --- --- ---
---- ---- ----
Net charge-offs.......................................... --- --- ---
Provision for losses on loans.............................. --- 40 6
---- ---- ----
Balance of allowance at end of period......................... $226 $226 $186
==== ==== ====
Net charge-offs to total average loans outstanding
for period............................................... --- --- ---
Allowance at end of period to net loans receivable
at end of period......................................... 0.19% 0.20% 0.19%
Non-performing assets to total assets...................... 1.01 0.66 0.78
Non-performing loans to total loans........................ 0.83 0.49 0.72
Allowance to non-performing loans.......................... 22.83 41.32 25.69
</TABLE>
Allocation of Allowance for Loan Losses. The following table provides
an analysis of the allocation of the Association's allowance for loan losses at
the date indicated.
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------------------
2000 1999 1998
----------------------- ---------------------- ----------------------
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............................. $ 93 79.12% $ 80 79.03% $ 76 81.82%
Commercial real estate
and land............................. 31 13.85 33 13.42 3 8.79
Construction loans...................... --- 2.99 --- 2.76 --- 3.96
Home equity and consumer loans.......... 44 4.04 44 4.79 43 5.43
Unallocated............................. 58 --- 69 --- 64 ---
---- ------ ---- ------ ---- ------
Total.............................. $226 100.00% $226 100.00% $186 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
Investments
At June 30, 2000, the Company's investment portfolio consists of
interest-bearing deposit accounts, marketable equity securities and Federal Home
Loan Bank ("FHLB") stock. The following table sets forth information regarding
the Company's investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------------------
2000 1999 1998
---------------------- --------------------- ---------------------
Book % Book % Book %
Value of Total Value of Total Value of Total
------- -------- ------- -------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits
with banks...........................$ 259 100.00% $ 219 100.00% $ 215 100.00%
====== ====== ======= ====== ======= ======
Investment securities:
Municipals...........................$ --- 0.00% $ --- 0.00% $ 22 1.78%
Marketable equity securities......... 444 19.00 881 41.32 290 23.50
------ ------ ------ ------ ------ ------
Total investment securities...... 444 19.00 881 41.32 312 25.28
FHLB stock.............................. 1,893 81.00 1,251 58.68 922 74.72
------ ------ ------ ------ ------ ------
Total investment securities
and FHLB stock.......................$2,337 100.00% $2,132 100.00% $1,234 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
Sources of Funds
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.
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.
The Association's deposits as of June 30, 2000 were represented by the
various types of savings programs described below.
<TABLE>
<CAPTION>
Weighted
Average Balance at Percent
Interest Term Minimum June 30, of Total
Rate (Months) Category Amount 2000 Deposits
---- -------- -------- ------ ---- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
3.00% NOW accounts N/A $ 4,769 5.21%
5.04 Regular savings N/A 14,741 16.11
3.74 Money market demand accounts N/A 5,209 5.69
--- Demand accounts N/A 2,581 2.82
------ -----
Total withdrawable 27,300 29.83
------ -----
5.69 18 IRA fixed rate and term 500 2,291 2.50
5.14 30 IRA fixed rate and term 500 112 0.12
6.12 3 Fixed rate and term 500 144 0.16
5.71 6 Fixed rate and term 500 4,683 5.12
5.83 12 Fixed rate and term 500 10,460 11.43
6.04 18 Fixed rate and term 500 8,279 9.05
6.00 24 Fixed rate and term 500 12,665 13.84
5.77 30 Fixed rate and term 500 4,429 4.84
5.83 36 Fixed rate and term 500 4,022 4.40
5.82 48 Fixed rate and term 500 2,254 2.46
5.97 60 Fixed rate and term 500 7,882 8.62
6.52 3 to 60 Fixed rate and term 500 57 0.06
6.56 Various Public funds 500 6,929 7.57
------ -----
Total certificates 64,207 70.17
------ -----
Total deposits $91,507 100.00%
======= ======
</TABLE>
The following table presents the certificates of deposit issued by the
Association, classified by rates at the dates indicated.
June 30,
--------------------------------------------
2000 1999 1998
------- ------- -------
(Dollars in Thousands)
4.00% and below...............$ --- $ 85 $ ---
4.01 to 6.00%................. 33,273 50,810 45,810
6.01 to 8.00%................. 30,934 9,623 18,766
8.01 to 10.00%................ --- --- 8
------- ------- -------
$64,207 $60,518 $64,584
======= ======= =======
An analysis of the certificates of deposit issued by the Association by
amount and maturity at June 30, 2000, is as follows:
<TABLE>
<CAPTION>
Amounts at June 30, 2000 Maturing In
--------------------------------------------------------------------------------------------
Two To Greater Percent of
Less Than One To Three than Four Total
One Year Two Years Years Years Thereafter Total Certificates
-------- --------- ----- ----- ---------- ----- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
4.01 to 6.00% $19,434 $ 8,502 $2,732 $2,547 $ 58 $33,273 51.82%
6.01 to 8.00% 13,863 11,617 3,716 454 1,284 30,934 48.18
</TABLE>
The following table indicates the amount of the Association's
certificates of deposit of $100,000 or more by the time remaining until maturity
as of June 30, 2000.
At June 30, 2000
----------------
Maturity Period (In thousands)
Three months or less.................. $ 4,123
Four through six months............... 4,539
Seven through twelve months........... 6,754
Over twelve months.................... 5,260
-------
Total............................. $20,676
=======
The following table presents the change in dollar amount of deposit
accounts by savings type for the years ended June 30, 2000, 1999 and 1998.
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------- ----------------------------- -----------------------------
Percent Increase Percent Increase Percent Increase
of or of or 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 $ 2,581 2.82%$ 1,232 $ 1,349 1.64%$ (516) $ 1,865 2.22% $ 700
NOW accounts 4,769 5.21 887 3,882 4.71 120 3,762 4.48 222
Regular savings 14,741 16.11 3,763 10,978 13.31 3,011 7,967 9.49 3,562
Money market demand
accounts 5,209 5.69 (532) 5,741 6.96 (63) 5,804 6.91 (1,338)
Certificate of deposit 64,207 70.17 3,689 60,518 73.38 (4,066) 64,584 76.90 9,571
-------- ------ -------- -------- ------ -------- -------- ------ --------
Total $ 91,507 100.00%$ 9,039 $ 82,468 100.00%$ (1,514) $ 83,982 100.00% $ 12,717
======== ====== ======== ======== ====== ======== ======== ====== ========
</TABLE>
The following table sets forth the savings activities of the
Association for the periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------------
2000 1999 1998
------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance, beginning of period.............................. $82,468 $83,982 $71,265
Net (decrease) increase before interest credited.......... 4,241 (6,199) 8,738
Interest credited......................................... 4,798 4,685 3,979
----- ----- -----
Net increase (decrease) in deposits....................... 9,039 (1,514) 12,717
------- ------- -------
Balance, end of period.................................... $91,507 $82,468 $83,982
======= ======= =======
</TABLE>
Deposit flows historically have been related to general economic
conditions. To address 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 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 depends 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,
2000, 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, 2000, 1999 and 1998 along with the
balance of FHLB advances outstanding at the end of each such period.
Years Ended June 30,
-------------------------------------
2000 1999 1998
------ ---- --------
(Dollars in Thousands)
Maximum balance outstanding
at any month end................. $28,241 $20,013 $11,261
Period end balance.................. 28,241 20,013 11,261
Weighted average interest rate
of FHLB advances at period end... 6.04% 5.60% 5.88%
Service Corporation
OTS regulations permit federal savings associations to invest in the
capital stock, obligations or other specified types of securities of
subsidiaries (referred to as "service corporations") and to make loans to such
subsidiaries and joint ventures in which such subsidiaries are participants in
an aggregate amount not exceeding 2% of the association's assets, plus an
additional 1% of assets if the amount over 2% is used for specified community or
inner-city development purposes. In addition, federal regulations permit
associations to make specified types of loans to such subsidiaries (other than
special purpose finance subsidiaries) in which the association owns more than
10% of the stock, in an aggregate amount not exceeding 50% of the association's
regulatory capital if the association's regulatory capital is in compliance with
applicable regulations. A savings association that acquires a non-savings
association subsidiary, or that elects to conduct a new activity within a
subsidiary, must give the FDIC and the OTS at least 30 days advance written
notice. The FDIC may, after consultation with the OTS, prohibit specified
activities if it determines such activities pose a serious threat to the SAIF.
Moreover, a savings association must deduct from capital, for purposes of
meeting the core capital, tangible capital and risk-based capital requirements,
its entire investment in and loans to a subsidiary engaged in activities not
permissible for a national bank (other than exclusively agency activities for
its customers or mortgage banking subsidiaries).
The Association currently owns one subsidiary, MSA Service Corporation
("MSA"), a real estate management company. At present, MSA owns a tract of land
which is being developed for the construction of 15 condominium units. At June
30, 2000, MSA had total assets of $502,000, liabilities of $93,000 and net worth
of $409,000. MSA had net income of $7,000 and a net loss of $11,000 for the
years ended June 30, 2000 and 1999, respectively.
Employees
As of June 30, 2000, the Association employed 48 persons, of which 48
are full-time equivalent employees. None of the employees of Association are
represented by a collective bargaining unit and management considers employee
relations to be excellent. Employee benefits for the Association's full-time
employees include, among other thing, health insurance, disability insurance,
life insurance and participation in a 401(k) retirement plan.
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 and its branch offices are
in Fountain, Tippecanoe and Warren counties. The market area in Montgomery,
Fountain and Warren counties is characterized by a lower growth rate in
population and moderately lower unemployment levels. 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 base, 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 car parts as well as many other products.
The Association's branch office in Tippecanoe county was opened in
April 1999. The addition of this branch office has provided the Association with
an opportunity to enter into a market area with a higher growth rate in
population and higher average household income levels than in the Association's
other three county market area. Economic activity in Tippecanoe county continues
to grow as new and existing businesses and manufacturers 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 in growth and total number of manufacturing jobs.
In its market area, the Association competes for deposits with other
savings institutions, commercial banks and credit unions. 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, 1999, the latest date for which such data is available,
there were approximately 23 different financial institutions with a total of 46
offices in Montgomery, Fountain and Warren counties. According to information
provided by the FDIC, these institutions held approximately $820.3 million in
deposits in those 46 banking offices. The Association held approximately 11.2%
of the deposits in the three county area. As of June 30, 1999, Tippecanoe county
had 17 different financial institutions with $1.9 billion in deposits in 52
offices. The April 1999 opening of the Lafayette office has allowed the
Association to enter into a market area with the same number of financial
institutions and over two times the available deposits as compared to the
Association's other three county market area. Similar information is not readily
available for loans.
REGULATION
General
As a federally chartered, SAIF-insured savings association, the
Association is subject to extensive regulation by the OTS and the FDIC. For
example, the Association must obtain OTS approval before it may engage in
certain activities and must file reports with the OTS regarding its activities
and financial condition. The OTS periodically examines the Association's books
and records and, in conjunction with the FDIC in certain situations, has
examination and enforcement powers. This supervision and regulation are intended
primarily for the protection of depositors and federal deposit insurance funds.
A savings association must pay a semi-annual assessment to the OTS based upon a
marginal assessment rate that decreases as the asset size of the savings
association increases, and which includes a fixed-cost component that is
assessed on all savings associations. The assessment rate that applies to a
savings association depends upon the institution's size, condition, and the
complexity of its operations. The Association's semi-annual assessment is
approximately $18,000.
The Association is also subject to federal and state regulation as to
such matters as loans to officers, directors, or principal shareholders,
required reserves, limitations as to the nature and amount of its loans and
investments, regulatory approval of any merger or consolidation, issuances or
retirements of the Association's securities, and limitations upon other aspects
of banking operations. In addition, the Association's activities and operations
are subject to a number of additional detailed, complex and sometimes
overlapping federal and state laws and regulations. These include state usury
and consumer credit laws, state laws relating to fiduciaries, the Federal
Truth-In-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act
and Regulation B, the Fair Credit Reporting Act, the Community Reinvestment Act,
anti-redlining legislation and antitrust laws.
Savings and Loan Holding Company Regulation
The Company, as the holding company for the Association, is regulated
as a "non-diversified savings and loan holding company" within the meaning of
the Home Owners' Loan Act, as amended (the "HOLA"), and subject to regulatory
oversight of the Director of the OTS. As such, the Company is registered with
the OTS and is thereby subject to OTS regulations, examinations, supervision and
reporting requirements. As a subsidiary of a savings and loan holding company,
the Association is subject to certain restrictions in its dealings with the
Company and with other companies affiliated with the Company.
In general, the HOLA prohibits a savings and loan holding company,
without obtaining the prior approval of the Director of the OTS, from acquiring
control of another savings association or savings and loan holding company or
retaining more than 5% of the voting shares of a savings association or of
another holding company which is not a subsidiary. The HOLA also restricts the
ability of a director or officer of the Company, or any person who owns more
than 25% of the common stock of the Company, from acquiring control of another
savings association or savings and loan holding company without obtaining the
prior approval of the Director of the OTS.
The Company currently operates as a unitary savings and loan holding
company. Prior to the enactment of the Gramm-Leach-Bliley Act (the "GLB Act") on
November 12, 1999, there were no restrictions on the permissible business
activities of a unitary savings and loan holding company. The GLB Act included a
provision that prohibits any new unitary savings and loan holding company,
defined as a company that acquires a thrift after May 4, 1999, from engaging in
commercial activities. This provision also includes a grandfather clause,
however, that permits a company that was a savings and loan holding company as
of May 4, 1999, or had an application to become a savings and loan holding
company on file with the OTS as of that date, to acquire and continue to control
a thrift and to continue to engage in commercial activities. Because the Company
qualifies under this grandfather provision, the GLB Act did not affect the
Company's authority to engage in diversified business activities.
Notwithstanding the above rules as to permissible business activities
of unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet the QTL test, then such
unitary holding company would be deemed to be a bank holding company subject to
all of the provisions of the Bank Holding Company Act of 1956 and other statutes
applicable to bank holding companies, to the same extent as if the holding
company were a bank holding company and its subsidiary savings association were
a bank. See "-Qualified Thrift Lender." At June 30, 2000, the Association's
asset composition exceeded that required to qualify the respective institutions
as Qualified Thrift Lenders.
If the Company were to acquire control of another savings association
other than through a merger or other business combination with the Association,
the Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings association meets the QTL
test, the activities of the Company and any of its subsidiaries (other than the
Association or other subsidiary savings associations) would thereafter be
subject to further restrictions. The HOLA provides that, among other things, no
multiple savings and loan holding company or subsidiary thereof which is not a
savings association shall commence or continue for a limited period of time
after becoming a multiple savings and loan holding company or subsidiary
thereof, any business activity other than (i) furnishing or performing
management services for a subsidiary savings association, (ii) conducting an
insurance agency or escrow business, (iii) holding, managing, or liquidating
assets owned by or acquired from a subsidiary savings association, (iv) holding
or managing properties used or occupied by a subsidiary savings association, (v)
acting as trustee under deeds of trust, (vi) those activities previously
directly authorized by the FSLIC by regulation as of March 5, 1987, to be
engaged in by multiple holding companies, or (vii) those activities authorized
by the Federal Reserve Board (the "FRB") as permissible for bank holding
companies, unless the Director of the OTS by regulation prohibits or limits such
activities for savings and loan holding companies. Those activities described in
(vii) above must also be approved by the Director of the OTS before a multiple
holding company may engage in such activities.
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5, 1987, or if
the laws of the state in which the association to be acquired is located
specifically permit associations to be acquired by state-chartered associations
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings associations). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
Indiana law permits federal and state savings association holding
companies with their home offices located outside of Indiana to acquire savings
associations whose home offices are located in Indiana and savings association
holding companies with their principal place of business in Indiana ("Indiana
Savings Association Holding Companies") upon receipt of approval by the Indiana
Department of Financial Institutions. Moreover, Indiana Savings Association
Holding Companies may acquire savings associations with their home offices
located outside of Indiana and savings association holding companies with their
principal place of business located outside of Indiana upon receipt of approval
by the Indiana Department of Financial Institutions.
No subsidiary savings association of a savings and loan holding company
may declare or pay a dividend on its permanent or nonwithdrawable stock unless
it first gives the Director of the OTS 30 days advance notice of such
declaration and payment. Any dividend declared during such period or without
giving notice shall be invalid.
Federal Home Loan Bank System
The Association is a member of the FHLB of Indianapolis, which is one
of twelve regional FHLBs. Each FHLB serves as a reserve or central bank for its
members within its assigned region. The FHLB is funded primarily from funds
deposited by banks and savings associations and 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. All FHLB advances must be fully secured by sufficient
collateral as determined by the FHLB. The Federal Housing Finance Board
("FHFB"), an independent agency, controls the FHLB System, including the FHLB of
Indianapolis.
Prior to the enactment of the GLB Act, a federal savings association
was required to become a member of the FHLB for the district in which the thrift
is located. The GLB Act abolished this requirement, effective six months
following the enactment of the statute. At that time, membership with the FHLB
became voluntary. Any savings association that chooses to become (or remain) a
member of the FHLB following the expiration of this six-month period must
qualify for membership under the criteria that existed prior to the enactment of
the GLB Act. The Association currently intends to remain a member of the FHLB of
Indianapolis.
As a member of the FHLB, the Association is required to purchase and
maintain stock in the FHLB of Indianapolis in an amount equal to at least 1% of
its aggregate unpaid residential mortgage loans, home purchase contracts, or
similar obligations at the beginning of each year. At June 30, 2000, the
Company's investment in stock of the FHLB of Indianapolis was $1.9 million. The
FHLB imposes various limitations on advances such as limiting the amount of
certain types of real estate-related collateral to 30% of a member's capital and
limiting total advances to a member. Interest rates charged for advances vary
depending upon maturity, the cost of funds to the FHLB of Indianapolis and the
purpose of the borrowing.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. For the fiscal year ended June
30, 2000, dividends paid by the FHLB of Indianapolis to the Association totaled
approximately $141,000, for an annual rate of 8.0%.
Insurance of Deposits
Deposit Insurance. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of banks and thrifts
and safeguards the safety and soundness of the banking and thrift industries.
The FDIC administers two separate insurance funds, the BIF for commercial banks
and state savings banks and the SAIF for savings associations, such as the
Association, and for banks that have acquired deposits from savings
associations. The FDIC is required to maintain designated levels of reserves in
each fund. During 1996, the reserves of the SAIF were below the level required
by law, primarily because a significant portion of the assessments paid into the
SAIF had been used to pay the cost of prior thrift failures, while the reserves
of the BIF met the level required by law. In 1996, however, legislation was
enacted to recapitalize the SAIF and eliminate the premium disparity between the
BIF and SAIF. See "- Assessments" below.
Assessments. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance for members of the BIF and members of the
SAIF. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to the target level
within a reasonable time and may decrease these rates if the target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary depending on the risk the
institution poses to its deposit insurance fund. An institution's risk level is
determined based on its capital level and the FDIC's level of supervisory
concern about the institution.
In 1996, legislation was enacted that included provisions designed to
recapitalize the SAIF and eliminate the significant premium disparity between
the BIF and the SAIF. Under the new law, the Association was charged a one-time
special assessment equal to $.657 per $100 in assessable deposits at March 31,
1995. The Association recognized this one-time assessment as a non-recurring
operating expense during the three-month period ending September 30, 1996 and
paid this assessment during the fourth quarter of 1996. The assessment was fully
deductible for both federal and state income tax purposes. Beginning January 1,
1997, the Association's annual deposit insurance premium was reduced from .23%
to .0644% of total assessable deposits. BIF institutions pay lower assessments
than comparable SAIF institutions because BIF institutions pay only 20% of the
rate paid by SAIF institutions on their deposits with respect to obligations
issued by the federally-chartered corporation which provided some of the
financing to resolve the thrift crisis in the 1980's ("FICO"). Although Congress
has considered merging the SAIF and the BIF, until such a merger occurs, savings
associations with SAIF deposits may not transfer deposits into the BIF system
without paying various exit and entrance fees, and SAIF institutions will
continue to pay higher FICO assessments. Such exit and entrance fees need not be
paid if a SAIF institution converts to a bank charter or merges with a bank, as
long as the resulting bank continues to pay applicable insurance assessments to
the SAIF, and as long as certain other conditions are met.
Savings Association Regulatory Capital
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. Core capital is generally defined as common shareholders' equity
(including retained income), noncumulative perpetual preferred stock and related
surplus, certain minority equity interests in subsidiaries, qualifying
supervisory goodwill, purchased mortgage servicing rights and purchased credit
card relationships (subject to certain limits) less nonqualifying intangibles.
The OTS recently amended this requirement to require a core capital level of 3%
of total adjusted assets for savings associations that receive the highest
rating for safety and soundness, and 4% to 5% for all other savings
associations. This amendment became effective April 1, 1999. Under the tangible
capital requirement, a savings association must maintain tangible capital (core
capital less all intangible assets except purchased mortgage servicing rights
which may be included after making the above-noted adjustment in an amount up to
100% of tangible capital) of at least 1.5% of total assets. Under the risk-based
capital requirements, a minimum amount of capital must be maintained by a
savings association to account for the relative risks inherent in the type and
amount of assets held by the savings association. The risk-based capital
requirement requires a savings association to maintain capital (defined
generally for these purposes as core capital plus general valuation allowances
and permanent or maturing capital instruments such as preferred stock and
subordinated debt, less assets required to be deducted) equal to 8.0% of
risk-weighted assets. Assets are ranked as to risk in one of four categories
(0-100%). A credit risk-free asset, such as cash, requires no risk-based
capital, while an asset with a significant credit risk, such as a non-accrual
loan, requires a risk factor of 100%. Moreover, a savings association must
deduct from capital, for purposes of meeting the core capital, tangible capital
and risk-based capital requirements, its entire investment in and loans to a
subsidiary engaged in activities not permissible for a national bank (other than
exclusively agency activities for its customers or mortgage banking
subsidiaries). At June 30, 2000, the Association was in compliance with all
capital requirements imposed by law.
The OTS has promulgated a rule which sets forth the methodology for
calculating an interest rate risk component to be used by savings associations
in calculating regulatory capital. The OTS has delayed the implementation of
this rule, however. The rule requires savings associations with "above normal"
interest rate risk (institutions whose portfolio equity would decline in value
by more than 2% of assets in the event of a hypothetical 200-basis-point move in
interest rates) to maintain additional capital for interest rate risk under the
risk-based capital framework. Even though the OTS has delayed implementing this
rule, the Association nevertheless measures its interest rate risk in conformity
with the OTS regulation. As of June 30, 2000, the Association, had it been
subject to reporting, would have been required to deduct approximately $730,000
from its total capital available to calculate its risk-based capital
requirement. The OTS recently updated its standards regarding the management of
interest rate risk to include summary guidelines to assist savings associations
in determining their exposures to interest rate risk.
If an association is not in compliance with the capital requirements,
the OTS is required to prohibit asset growth and to impose a capital directive
that may restrict, among other things, the payment of dividends and officers'
compensation. In addition, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings association that fails to meet its capital
requirements. These actions may include restricting the operating activities of
the association, imposing a capital directive, cease and desist order, or civil
money penalties, or imposing harsher measures such as appointing a receiver or
conservator or forcing the association to merge into another institution.
Prompt Corrective Regulatory Action
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FedICIA") requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to institutions that do
not meet minimum capital requirements. For these purposes, FedICIA establishes
five capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. At June 30,
2000, the Association was categorized as "well capitalized," meaning that its
total risk-based capital ratio exceeded 10%, its Tier I risk-based capital ratio
exceeded 6%, its leverage ratio exceeded 5%, and it was not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure.
The FDIC may order savings associations which have insufficient capital
to take corrective actions. For example, a savings association which is
categorized as "undercapitalized" would be subject to growth limitations and
would be required to submit a capital restoration plan, and a holding company
that controls such a savings association would be required to guarantee that the
savings association complies with the restoration plan. "Significantly
undercapitalized" savings associations would be subject to additional
restrictions. Savings associations deemed by the FDIC to be "critically
undercapitalized" would be subject to the appointment of a receiver or
conservator.
Dividend Limitations
The OTS adopted a regulation, which became effective on April 1, 1999,
that revised the restrictions that apply to "capital distributions" by savings
associations. The amended regulation defines a capital distribution as a
distribution of cash or other property to a savings association's owners, made
on account of their ownership. This definition includes a savings association's
payment of cash dividends to shareholders, or any payment by a savings
association to repurchase, redeem, retire, or otherwise acquire any of its
shares or debt instruments that are included in total capital, and any extension
of credit to finance an affiliate's acquisition of those shares or interests.
The amended regulation does not apply to dividends consisting only of a savings
association's shares or rights to purchase such shares.
The amended regulation exempts certain savings associations from the
requirement under the prior version of the regulation that all savings
associations file either a notice or an application with the OTS before making
any capital distribution. As revised, the regulation requires a savings
association to file an application for approval of a proposed capital
distribution with the OTS if the association is not eligible for expedited
treatment under OTS's application processing rules, or the total amount of all
capital distributions, including the proposed capital distribution, for the
applicable calendar year would exceed an amount equal to the savings
association's net income for that year to date plus the savings association's
retained net income for the preceding two years (the "retained net income
standard"). At June 30, 2000, the Association's retained net income standard was
approximately $79,000. A savings association must also file an application for
approval of a proposed capital distribution if, following the proposed
distribution, the association would not be at least adequately capitalized under
the OTS prompt corrective action regulations, or if the proposed distribution
would violate a prohibition contained in any applicable statute, regulation, or
agreement between the association and the OTS or the FDIC.
The amended regulation requires a savings association to file a notice
of a proposed capital distribution in lieu of an application if the association
or the proposed capital distribution do not meet the conditions described above,
and: (1) the savings association will not be at least well capitalized (as
defined under the OTS prompt corrective action regulations) following the
capital distribution; (2) the capital distribution would reduce the amount of,
or retire any part of the savings association's common or preferred stock, or
retire any part of debt instruments such as notes or debentures included in the
association's capital under the OTS capital regulation; or (3) the savings
association is a subsidiary of a savings and loan holding company. Because the
Association is a subsidiary of savings and loan holding companies, this latter
provision requires, at a minimum, that the Association file a notice with the
OTS 30 days before making any capital distributions to the their respective
holding companies.
In addition to these regulatory restrictions, the Association's Plan of
Conversion imposes additional limitations on the amount of capital distributions
it may make to the Company. The Plan of Conversion requires the Association to
establish and maintain a liquidation account for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders (as defined in the Plan) and
prohibits the Association from making capital distributions if its net worth
would be reduced below the amount required for the liquidation accounts.
Limitations on Rates Paid for Deposits
Regulations promulgated by the FDIC pursuant to FedICIA place
limitations on the ability of insured depository institutions to accept, renew
or roll over deposits by offering rates of interest which are significantly
higher than the prevailing rates of interest on deposits offered by other
insured depository institutions having the same type of charter in the
institution's normal market area. Under these regulations, "well-capitalized"
depository institutions may accept, renew or roll such deposits over without
restriction, "adequately capitalized" depository institutions may accept, renew
or roll such deposits over with a waiver from the FDIC (subject to certain
restrictions on payments of rates) and "undercapitalized" depository
institutions may not accept, renew or roll such deposits over. The regulations
contemplate that the definitions of "well-capitalized," "adequately-capitalized"
and "undercapitalized" will be the same as the definition adopted by the
agencies to implement the corrective action provisions of FedICIA. Management
does not believe that these regulations will have a materially adverse effect on
the Association's current operations.
Safety and Soundness Standards
In 1995, the federal banking agencies adopted final safety and
soundness standards for all insured depository institutions. The standards,
which were issued in the form of guidelines rather than regulations, relate to
internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
proceedings. During 1996, the federal banking agencies added asset quality and
earning standards to the safety and soundness guidelines.
Real Estate Lending Standards
OTS regulations require savings associations to establish and maintain
written internal real estate lending policies. Each savings association's
lending policies must be consistent with safe and sound banking practices and be
appropriate to the size of the savings association and the nature and scope of
its operations. The policies must establish loan portfolio diversification
standards; establish prudent underwriting standards, including loan-to-value
limits, that are clear and measurable; establish loan administration procedures
for the savings association's real estate portfolio; and establish
documentation, approval, and reporting requirements to monitor compliance with
the savings association's real estate lending policies. The savings
association's written real estate lending policies must be reviewed and approved
by the savings association's Board of Directors at least annually. Further, each
association is expected to monitor conditions in its real estate market to
ensure that its lending policies continue to be appropriate for current market
conditions.
Loans to One Borrower
Under OTS regulations, the Association may not make a loan or extend
credit to a single or related group of borrowers in excess of 15% of its
unimpaired capital and surplus. Additional amounts may be lent, not in excess of
10% of unimpaired capital and surplus, if such loans or extensions of credit are
fully secured by readily marketable collateral, including certain debt and
equity securities but not including real estate. In some cases, a savings
association may lend up to 30% of unimpaired capital and surplus to one borrower
for purposes of developing domestic residential housing, provided that the
association meets its regulatory capital requirements and the OTS authorizes the
association to use this expanded lending authority. At June 30, 2000, the
Association's lending limit under this restrictions was $2.3 million. The
Association did not have any loans or extensions of credit to a single or
related group of borrowers in excess of its lending limits. Management does not
believe that the loans-to-one-borrower limits will have a significant impact on
the Company's business operations or earnings following the effective time or
the merger.
Qualified Thrift Lender
Savings associations must meet a QTL Test that requires the association
to maintain an appropriate level of qualified thrift investments ("QTIs")
(primarily residential mortgages and related investments, including certain
mortgage-related securities) and otherwise to qualify as a QTL. The required
percentage of QTIs is 65% of portfolio assets (defined as all assets minus
intangible assets, property used by the association in conducting its business
and liquid assets equal to 10% of total assets). Certain assets are subject to a
percentage limitation of 20% of portfolio assets. In addition, savings
associations may include shares of stock of the FHLBs, FNMA, and FHLMC as QTIs.
Compliance with the QTL test is determined on a monthly basis in nine out of
every twelve months. As of June 30, 2000, the Association was in compliance with
its QTL requirement, with approximately 87.32% of its assets invested in QTIs.
A savings association which fails to meet the QTL test must either
convert to a bank (but its deposit insurance assessments and payments will be
those of and paid to the SAIF) or be subject to the following penalties: (i) it
may not enter into any new activity except for those permissible for a national
bank and for a savings association; (ii) its branching activities shall be
limited to those of a national bank; (iii) it shall be bound by regulations
applicable to national banks respecting payment of dividends. Three years after
failing the QTL test the association must dispose of any investment or activity
not permissible for a national bank and a savings association. If such a savings
association is controlled by a savings and loan holding company, then such
holding company must, within a prescribed time period, become registered as a
bank holding company and become subject to all rules and regulations applicable
to bank holding companies (including restrictions as to the scope of permissible
business activities).
Acquisitions or Dispositions and Branching
The Bank Holding Company Act specifically authorizes a bank holding
company, upon receipt of appropriate regulatory approvals, to acquire control of
any savings association or holding company thereof wherever located. Similarly,
a savings and loan holding company may acquire control of a bank. Moreover,
federal savings associations may acquire or be acquired by any insured
depository institution. Regulations promulgated by the FRB restrict the
branching authority of savings associations acquired by bank holding companies.
Savings associations acquired by bank holding companies may be converted to
banks if they continue to pay SAIF premiums, but as such they become subject to
branching and activity restrictions applicable to banks.
Subject to certain exceptions, commonly-controlled banks and savings
associations must reimburse the FDIC for any losses suffered in connection with
a failed bank or savings association affiliate. Institutions are commonly
controlled if one is owned by another or if both are owned by the same holding
company. Such claims by the FDIC under this provision are subordinate to claims
of depositors, secured creditors, and holders of subordinated debt, other than
affiliates.
The OTS has adopted regulations which permit nationwide branching to
the extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in ss. 7701(a)(19) of the Code or the asset
composition test of ss. 7701(c) of the Code. Branching that would result in the
formation of a multiple savings and loan holding company controlling savings
associations in more than one state is permitted if the law of the state in
which the savings association to be acquired is located specifically authorizes
acquisitions of its state-chartered associations by state-chartered associations
or their holding companies in the state where the acquiring association or
holding company is located. Moreover, Indiana banks and savings associations are
permitted to acquire other Indiana banks and savings associations and to
establish branches throughout Indiana.
Finally, The Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire
banks in other states and, with state consent and subject to certain
limitations, allows banks to acquire out-of-state branches either through merger
or de novo expansion. The State of Indiana enacted legislation establishing
interstate branching provisions for Indiana state-chartered banks consistent
with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The
Indiana Branching Law, which became effective in 1996, authorizes Indiana banks
to branch interstate by merger or de novo expansion, provided that such
transactions are not permitted to out-of-state banks unless the laws of their
home states permit Indiana banks to merge or establish de novo banks on a
reciprocal basis.
Transactions with Affiliates
The Association is subject to Sections 22(h), 23A and 23B of the
Federal Reserve Act, which restrict financial transactions between banks and
their directors, executive officers and affiliated companies. The statute limits
credit transactions between a bank or savings association and its executive
officers and its affiliates, prescribes terms and conditions for bank affiliate
transactions deemed to be consistent with safe and sound banking practices, and
restricts the types of collateral security permitted in connection with a bank's
extension of credit to an affiliate.
Federal Securities Law
The shares of common stock of the Company have been registered with the
SEC under the 1934 Act and, as a result, the Company is subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the 1934 Act and the rules of the SEC thereunder. After three
years following the Association's conversion to stock form, if the Company has
fewer than 300 shareholders, it may deregister its shares under the 1934 Act and
cease to be subject to the foregoing requirements.
Shares of common stock held by persons who are affiliates of the
Company may not be resold without registration unless sold in accordance with
the resale restrictions of Rule 144 under the 1933 Act. If the Company meets the
current public information requirements under Rule 144, each affiliate of the
Company who complies with the other conditions of Rule 144 (including those that
require the affiliate's sale to be aggregated with those of certain other
persons) would be able to sell in the public market, without registration, a
number of shares not to exceed, in any three-month period, the greater of (i) 1%
of the outstanding shares of the Company or (ii) the average weekly volume of
trading in such shares during the preceding four calendar weeks.
Community Reinvestment Act Matters
Federal law requires that ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes
both a four-unit descriptive rating -- outstanding, satisfactory, needs to
improve, and substantial noncompliance -- and a written evaluation of an
institution's performance. Each FHLB is required to establish standards of
community investment or service that its members must maintain for continued
access to long-term advances from the FHLBs. The standards take into account a
member's performance under the CRA and its record of lending to first-time home
buyers. The OTS has designated the Association's record of meeting community
credit needs as satisfactory.
TAXATION
Federal Taxation
Historically, savings associations, such as the Association, have been
permitted to compute bad debt deductions using either the bank experience method
or the percentage of taxable income method. However, for years beginning after
December 31, 1995, no savings association may use the percentage of taxable
income method of computing its allowable bad debt deduction for tax purposes.
Instead, all savings associations are required to compute their allowable
deduction using experience method. As a result fo the repeal of the percentage
of taxable income method, reserves taken after 1987 using the percentage of
taxable income method must be included in future taxable income over a six-year
period, although a two-year delay may be permitted for associations meeting a
residential mortgage loan origination test. In addition, the pre-1988 reserve,
for which no deferred taxes have been recorded, need not be recaptured unless
(i) the savings association no longer qualifies as a bank under the Code, or
(ii) the savings association pays out excess dividends or distributions.
Depending on the composition of its items of income and expense, a
savings association may be subject to the alternative minimum tax. A savings
association must pay an alternative minimum tax on the amount (if any) by which
20% of alternative minimum taxable income ("AMTI"), as reduced by an exemption
varying with AMTI, exceeds the regular tax due. AMTI equals regular taxable
income increased or decreased by certain tax preferences and adjustments,
including depreciation deductions in excess of that allowable for alternative
minimum tax purposes, tax-exempt interest on most private activity bonds issued
after August 7, 1986 (reduced by any related interest expense disallowed for
regular tax purposes), the amount of the bad debt reserve deducted claimed in
excess of the deduction based on the experience method and 75% of the excess of
adjusted current earnings over AMTI (before this adjustment and before any
alternative tax net operating loss). AMTI may be reduced only up to 90% by net
operating loss carryovers, but alternative minimum tax paid can be credited
against regular tax due in later years.
The Company and its subsidiaries file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting. The
federal income tax returns of the Company have not been audited in recent years.
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.
State Taxation
The Company is 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. Other applicable state taxes
include generally applicable sales and use taxes plus real and personal property
taxes. The Company's state income tax returns have not been audited in recent
years.
Item 2. Description of Property
The following table provides certain information with respect to the
Association's offices as of June 30, 2000.
Year Opened Approximate
Description and Address Ownership or Acquired Square Footage
----------------------- --------- -------------- ---------------
Main Office:
119 East Main Street
Crawfordsville, IN 47933 Owned 1888 16,000
Mill Street Office:
816 South Mill Street
Crawfordsville, IN 47933 Owned 1995 3,200
Covington Office:
417 Liberty Street
Covington, IN 47932 Owned 1991 2,800
Williamsport Office:
118 North Monroe Street
Williamsport, IN 47993 Owned 1990 4,100
Lafayette Office:
50 West 250 South
Lafayette, IN 47909 Owned 1999 3,700
The Association conducts its business and offers services from five
offices consisting of its main office in Crawfordsville, its Mill Street office
in Crawfordsville, its Covington office, its Williamsport office and its
Lafayette office. The main office has approximately 16,000 square feet,
including a basement, all of which is used for business and operations. The Mill
Street office, the Association's first office to offer drive-up facilities, is
located in a low to intermediate income area and contains approximately 3,200
square feet, all of which is used for deposit and loan functions. The
Williamsport office has 2,300 square feet of office space and an additional
1,800 square feet of storage space on a second floor and also offers drive-up
facilities. The Covington office contains approximately 1,600 square feet in
addition to the approximately 1,200 square feet that was recently 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, has
approximately 3,700 square feet. This office, located approximately 23 miles
from the main office, offers residents and businesses located in southwest
Tippecanoe county a full service office including ATM, drive-up, lock boxes and
all deposit and loan products offered by the Association.
The Company 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 $3.2 million at June 30, 2000. See
"Premises and Equipment" in the Notes to Consolidated Financial Statements for
additional information.
Item 3. Legal Proceedings
Although the Company and the Association are involved, from time to
time, in various legal proceedings in the normal course of business, there are
no material legal proceedings to which they presently are a party or to which
any of the Company's or the Association's property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the Company's security holders,
through the solicitation of proxies or otherwise, during the quarter ended June
30, 2000.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The information required by this item is incorporated by reference to
the material under the heading "Stockholder Information" on page 40 of the
Company's 2000 Shareholder Annual Report (the "Shareholder Annual Report").
Item 6. Management's Discussion and Analysis or Plan of Operations
The information required by this item is incorporated by reference to
the material under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operation" on pages 7 to 16 of the
Shareholder Annual Report
Item 7. Financial Statements
The Company's Consolidated Financial Statements and Notes thereto
contained on pages 17 to 38 in the Shareholder Annual Report are incorporated
herein by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no such changes or disagreements during the applicable
period.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act
Directors and Executive Officers
The information required by this item with respect to directors and
executive officers is incorporated by reference to pages 2 through 5 of the
Company's Proxy Statement for its 2000 Annual Shareholder Meeting (the "2000
Proxy Statement").
Section 16(a) Beneficial Ownership Reporting Compliance
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, 2000, all Section
16(a) filing requirements applicable to its officers, directors and 10%
beneficial owners were complied with.
Item 10. Executive Compensation
The information required by this item is incorporated by reference to
pages 6 through 8 of the 2000 Proxy Statement.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to
pages 1 through 3 of the 2000 Proxy Statement.
Item 12. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to
pages 7 through 8 of the 2000 Proxy Statement.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit Index Page
3(1) The Articles of Incorporation of the Registrant are
incorporated by reference to Exhibit 3.1 to the
Registration Statement on Form S-1 (Registration No.
333-24721)(the "Registration Statement"), as amended.
3(2) The By-Laws of the Registrant are incorporated by
reference to Exhibit 3.2 to the Registration
Statement.
10(1) Form of Stock Option and Incentive Plan of the
Registrant is incorporated by reference to Exhibit
10.1 to the Registration Statement.
10(2) Employment Agreement between Montgomery Savings, A
Federal Association and Earl F. Elliot is
incorporated by reference to Exhibit 10.2 to the
Registration Statement.
10(3) Employment Agreement between Montgomery Savings, A
Federal Association and J. Lee Walden is incorporated
by reference to Exhibit 10.3 to the Registration
Statement.
10(4) Employee Stock Ownership Plan is incorporated by
reference to Exhibit 10.4 to the Registration
Statement.
10(5) Management Recognition and Retention Plan is
incorporated by reference to Exhibit 10.5 to the
Registration Statement.
10(6) 1997 Stock Option and Incentive Plan is incorporated
by reference to Exhibit A to the Registrant's proxy
statement for the fiscal year ended June 30, 1998.
10(7) 1997 Recognition and Retention Plan is incorporated
by reference to Exhibit B to the Registrant's proxy
statement for the fiscal year ended June 30, 1998.
13 Shareholder Annual Report
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
(b) Reports of Form 8-K.
The Company filed no reports on Form 8-K during the quarter ended June
30, 2000.
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Exchange
Act, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
MONTGOMERY FINANCIAL CORPORATION
Date: September 25, 2000 By: /s/ Earl F. Elliott
---------------------------
Earl F. Elliott, President
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this day of September, 2000.
Signatures Title Date
---------- -------------------- ----
(1) Principal Executive Officer:
/s/ Earl F. Elliot President and Director )
------------------------------- )
Earl F. Elliot )
)
)
(2) Principal Financing and )
Accounting Officer: )
)
)
/s/ J. Lee Walden )
------------------------------- Chief Financial Officer )
J. Lee Walden and Director )
)
(3) Board of Directors: )
)
)
/s/ Mark E. Foster Director )
------------------------------- )
Mark E. Foster )
)September 25, 2000
)
)
/s/ C. Rex Henthorn Director )
------------------------------- )
C. Rex Henthorn )
)
)
/s/ Joseph M. Mallott Director )
------------------------------- )
Joseph M. Mallott )
)
)
/s/ John E. Woodward Director )
------------------------------- )
John E. Woodward )
)
)
/s/ Robert C. Wright Director )
------------------------------- )
Robert C. Wright )
