MONTGOMERY FINANCIAL CORPORATION
TABLE OF CONTENTS
Letter to Stockholders........................................................ 3
Business of Montgomery Financial Corporation.................................. 4
Selected Consolidated Financial Information................................... 5
Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 7
Report of Independent Auditor.................................................17
Consolidated Financial Statements.............................................18
Directors and Executive Officers..............................................39
Stockholder Information.......................................................40
CONSOLIDATED FINANCIAL HIGHLIGHTS
June 30, 2000
(Dollars in Thousands)
Total assets.........................................................$ 138,122
Total loans, net..................................................... 119,131
Investment securities and other earning assets....................... 10,834
Deposits............................................................. 91,507
Borrowings........................................................... 28,241
Net income........................................................... 699
Stockholders' equity................................................. 16,981
Stockholders' equity as a percent of Assets.......................... 12.3%
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ANNUAL MEETING
The Annual Meeting of Stockholders of
Montgomery Financial Corporation will be held
on October 17, 2000 at 2:00 P.M. at the office of
the Company, located at 119 East Main Street,
Crawfordsville, Indiana.
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MONTGOMERY FINANCIAL CORPORATION
119 East Main Street
Crawfordsville, Indiana 47933
September 15, 2000
Dear Fellow Stockholders:
It is with pleasure that the board of directors, officers and staff of
Montgomery Financial Corporation and our wholly owned subsidiary, Montgomery
Savings, A Federal Association, provide you with our annual report.
Net earnings for the year ending June 30, 2000 were $699,000. This
represented a decrease of 26.9 percent over last year. The decrease in net
income can be primarily attributed to the costs of operating the Lafayette,
Indiana office which opened in April 1999. Capital levels decreased from $19.4
million at June 30, 1999 to $17.0 million due to the stock repurchase programs
instituted by the Company. This results in a capital ratio of 12.3 percent.
Total assets grew from $124.0 million to $138.1 million, an increase of $14.1
million, or 11.4 percent, as compared to June 30, 1999.
Montgomery Savings, A Federal Association, is committed to growth and
performance betterment. We have over one hundred years of stability and quality
service in our community. Our directors, officers and employees are dedicated to
efficiently serving our many customers while working to enhance stockholders'
value. We look to the future with confidence and enthusiasm. We thank our
customers for their loyalty and you, our stockholders, for your support.
Sincerely,
/s/ Earl F. Elliott
Earl F. Elliott
Chairman and Chief Executive Officer
BUSINESS OF MONTGOMERY FINANCIAL CORPORATION
Montgomery Financial Corporation ("Montgomery" or 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 $0.01 per share ("Common Stock"),
to the public. Pursuant to a Plan of Conversion and Agreement and Plan of
Reorganization (the "Plan") adopted by the Association and Montgomery Mutual
Holding Company, a federally chartered mutual holding company (the "Mutual
Holding Company"), the Mutual Holding Company converted from mutual form to a
federal interim stock savings institution and was simultaneously merged with and
into the Association, with the Association being the surviving entity and a
subsidiary of the Company. At the same time, the Company completed its initial
public offering of 1,186,778 shares of Common Stock and exchanged 466,254 shares
of Common Stock for shares of the Association previously held by public
stockholders. The principal asset of the Company is the outstanding stock of the
Association, its wholly owned subsidiary.
The principal business of savings association, including the
Association, has historically consisted of attracting deposits from the general
public and making loans secured by residential and commercial real estate. The
Association and all other savings associations are significantly affected by
prevailing economic conditions as well as government policies and regulations
concerning, among other things, monetary and fiscal affairs, housing and
financial institutions. Deposit flows are influenced by a number of factors,
including interest rates paid on competing investments, account maturities and
personal income and savings levels. In addition, deposit growth is also affected
by customer perception of the stability of the financial services industry amid
various current events such as regulatory changes, failures of other financial
institutions and financing of the deposit insurance fund. Lending activities are
influenced by the demand for and supply of housing lenders, the availability of
cost of funds and various other items. Sources of funds for lending activities
include deposits, payments on loans, borrowings and funds provided from
operations. The Company's earnings are primarily dependent upon its net interest
income, the difference between interest income and interest expense. Interest
income is a function of the balances of loans and investments outstanding during
a given period and the yield earned on such loans and investments. Interest
expense is a function of the amounts of deposits and borrowings outstanding
during the same period and rates paid on such deposits and borrowings. The
Company's earnings are also affected by provision for loan and real estate
losses, service charges, income from subsidiary activities, operating expenses
and income taxes.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following consolidated financial data as of and for the periods
ended June 30, 2000, 1999, 1998, 1997 and 1996 have been derived from the
audited consolidated financial statements of Montgomery Financial Corporation.
The financial data presented below is qualified in its entirety by the more
detailed financial data appearing elsewhere herein, including the Company's
audited consolidated financial statements and notes thereto.
At June 30,
--------------------------------------------------------------
2000 1999 1998 1997 1996
--------- -------- -------- -------- -------
(In Thousands)
Summary of Financial Condition:
Total assets........................................$ 138,122 $123,959 $117,163 $103,399 $88,211
Interest-bearing deposits in other
financial institutions.......................... 10,390 4,629 10,785 11,473 3,607
Investment securities available for sale............. 444 881 312 42 312
Loans receivable, net................................ 119,131 111,415 100,210 86,908 80,074
Deposits ............................................ 91,507 82,468 83,982 71,265 69,709
Borrowings........................................... 28,241 20,632 11,261 11,428 8,000
Stockholders' equity................................. 16,981 19,397 20,065 19,367 9,127
Year Ended June 30,
--------------------------------------------------------------
2000 1999 1998 1997 1996
--------- -------- -------- -------- -------
(In Thousands)
Summary of Operating Results:
Interest income(1)...................................$ 9,912 $9,149 $8,335 $7,220 $6,777
Interest expense..................................... 5,953 5,150 4,570 4,456 4,434
------ -------- -------- ------- --------
Net interest income............................. 3,959 3,999 3,765 2,764 2,343
Provision for losses on loans........................ --- 40 6 22 20
------ -------- -------- ------- --------
Net interest income after provision
for losses on loans......................... 3,959 3,959 3,759 2,742 2,323
Other income......................................... 166 86 65 105 30
Other expenses:
Salaries and employee benefits.................. 1,647 1,337 1,200 934 879
Other........................................... 1,320 1,124 988 1,359 878
------ -------- -------- ------- --------
Total non-interest expense.................. 2,967 2,461 2,188 2,293 1,757
------ -------- -------- ------- --------
Income before income tax............................. 1,158 1,584 1,636 554 596
Income tax expense................................... 459 628 655 241 165
------ -------- -------- ------- --------
Net income.................................. $ 699 $ 956 $ 981 $ 313 $ 431
====== ======== ======== ======= ========
Net income per share(2)
Basic........................................... $ 0.56 $ 0.65 $ 0.64 $ 0.67 ---
Diluted......................................... 0.56 0.65 0.64 0.67 ---
Net income per share without the special
SAIF assessment(2)
Basic........................................... 0.56 0.65 0.64 1.23 ---
Diluted......................................... 0.56 0.65 0.64 1.23 ---
Dividends declared per share(3)...................... 0.22 0.22 0.22 0.21 $ 0.30
Dividend payout ratio(4)............................. 39.29% 33.85% 34.38% 31.34% ---
Performance Ratios:
Return on average assets(5).......................... 0.52% 0.79% 0.92% 0.32% 0.49%
Return on average equity(6).......................... 3.86 4.81 4.97 3.39 4.89
Average equity to average assets..................... 13.56 16.48 18.60 9.88 9.99
Equity to assets at end of period.................... 12.29 15.65 17.13 18.73 10.35
Interest rate spread(7).............................. 2.44 2.65 2.70 2.64 2.27
Net interest margin(8)............................... 3.10 3.46 3.70 3.09 2.77
Average interest-earning assets to average
interest-bearing liabilities.................... 114.17 118.34 122.17 108.91 109.47
Non-interest expenses to average assets.............. 2.22 2.01 2.05 2.37 1.98
Net interest income after provision for
loan losses to non-interest expenses............ 1.33x 1.63x 1.73x 1.24x 1.33x
Asset Quality Ratios:
Non-performing assets to total assets................ 1.01% 0.66% 0.78% 0.59% 0.92%
Allowance for loan losses to net loans
receivable at end of period..................... 0.19 0.20 0.19 0.21 0.20
Allowance for loan losses to non- performing
loans at end of period.......................... 22.83 41.32 25.69 35.86 23.90
Non-performing loans to total loans.................. 0.83 0.49 0.72 0.58 0.83
- ----------------
(1) Loan origination fees are included in interest income on a deferral basis.
(2) Computed based upon the weighted average of the 250,000 shares of publicly
owned common stock of the Association that were outstanding during the year
ended June 30, 1997 converted to 466,254 shares of Montgomery common stock
in connection with the Conversion.
(3) Adjusted for conversion ratio.
(4) Dividends per share divided by net income per share.
(5) Net income divided by average total assets.
(6) Net income divided by average total equity.
(7) Interest rate spread is calculated by subtracting combined weighted average
interest rate cost from combined weighted average interest rate earned for
the period indicated.
(8) Net interest income divided by average interest-earning assets.
Capital Requirements. The following table sets forth the Association's
compliance with its capital requirements at June 30, 2000.
Capital Level
OTS Requirement at June 30, 2000(1)
--------------- -------------------
% of % of Amount
Assets Amount Assets Amount of Excess
------ ------ ------ ------ ---------
(Dollars in Thousands)
Capital Standard
Total risk-based capital
(to risk weighted assets) 8.00% $6,831 17.14% $14,636 $7,805
Core (to adjusted tangible assets) 2.00 2,739 11.06 15,142 12,403
Core capital (to adjusted total assets) 4.00 5,477 11.06 15,142 9,665
- ---------------
(1) Core capital figures are determined as a percentage of adjusted total
assets; risk-based capital figures are determined as a percentage of
risk-weighted assets in accordance with OTS regulations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
As discussed previously, the Company was incorporated for the primary
purpose of serving as the holding company for the Association. The following
discussion and analysis of the Company's financial condition as of June 30, 2000
and results of operation should be read in conjunction with and with reference
to the consolidated financial statements and the notes thereto included herein.
In addition to the historical information contained herein, the
following discussion contains forward-looking statements that are subject to
risks and uncertainties, including but not limited to, changes in economic
conditions in the Company's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the Company's
market area and competition, all or some of which could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected.
The Company cautions readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and advises
readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.
Average Balances and Interest Rates and Yields
The following table presents for the periods indicated the month-end
average balances of each category of the Company's interest-earning assets and
interest-bearing liabilities and the average yields earned and interest rates
paid on such balances. Such yields and costs are determined by dividing income
or expense by the average balance of assets or liabilities, respectively, for
the periods presented.
Year Ended June 30,
-------------------------------------------------------------------------------------------
2000 1999 1998
--------------------------- --------------------------- -----------------------------
Average Interest Average Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Cost Balance Paid Cost Balance Paid Cost
------- ---- ---- ------- ---- ---- ------- ---- ----
(Dollars in Thousands)
Interest-earning assets:
Interest-earning deposits......$ 8,982 $ 492 5.48% $ 8,183 $401 4.90% $ 6,298 $ 355 5.62%
Investment securities.......... 643 21 3.27 607 22 3.62 154 5 3.25
Loans(1)....................... 116,395 9,258 7.95 105,575 8,637 8.18 94,399 7,900 8.37
Stock in FHLB of Indianapolis.. 1,762 141 8.00 1,116 89 7.97 921 74 8.03
-------- ----- -------- ----- --------- -----
Total interest-earning assets..... 127,782 9,912 7.76 115,481 9,149 7.92 101,722 8,334 8.19
Noninterest-earning assets........ 5,651 --- 5,207 --- 4,283 ---
-------- ----- -------- ----- --------- -----
Total assets...................... $133,433 9,912 $120,688 9,149 $106,055 8,334
======== ----- ======== ----- ========= -----
Interest-bearing liabilities:
Savings accounts............... $ 13,699 634 4.63 $ 9,806 422 4.30 $ 5,644 241 4.27
NOW and money
market accounts.............. 10,012 328 3.28 9,794 329 3.36 9,487 380 4.01
Certificates of deposits....... 61,769 3,454 5.59 61,295 3,431 5.60 59,192 3,388 5.72
-------- ----- -------- ----- --------- -----
Total deposits................. 85,480 4,416 5.17 80,895 4,182 5.17 74,323 4,009 5.39
Borrowings..................... 26,444 1,537 5.81 16,690 968 5.80 8,982 561 6.25
-------- ----- -------- ----- --------- -----
Total interest-bearing
liabilities................... 111,924 5,593 5.32 97,585 5,150 5.28 83,305 4,570 5.49
Other liabilities................. 3,414 --- 3,213 --- 3,027 ---
-------- ----- -------- ----- --------- -----
Total liabilities................. 115,338 5,953 100,798 5,150 86,332 4,570
Total stockholders' equity........ 18,095 --- 19,890 --- 19,723 ---
-------- ----- -------- ----- --------- -----
Total liabilities and
stockholders' equity........... $133,433 5,953 $120,688 5,150 $ 106,055 4,570
======== ----- ======== ----- ========= -----
Net interest-earning assets....... $ 15,858 $ 17,896 $ 18,967
======== ======== =========
Net interest income/
interest rate spread.......... $3,959 2.44 $3,999 2.64 $3,764 2.70
====== ====== ======
Average interest-earning
assets to average
interest-bearing liabilities.. 114.17% 118.34% 122.17%
Net interest margin(2).......... 3.10 3.46 3.70
(1) The average balance includes nonaccrual loans.
(2) Net interest margin is net interest income divided by average
interest-earning assets.
The following table sets forth the weighted average effective interest
rates earned by the Company on its loan and investment portfolios, the weighted
average effective cost of the Company's deposits, the interest rate spread of
the Company and the net yield on weighted average interest-earning assets for
the periods and as of the dates shown. The table provides for the periods and at
the dates indicated the weighted average yields earned on the Company's assets
and the weighted average interest rates paid on the Company's liabilities,
together with the net yield on interest earning assets.
Year Ended June 30,
As of -----------------------------------------
June 30, 2000 2000 1999 1998
------------- ------ ------ -------
Weighted average yield on:
Loans.................................. 8.06% 7.95% 8.18% 8.37%
Investment securities.................. 3.55 3.27 3.62 3.25
Total interest-earning assets.......... 7.87 7.76 7.92 8.19
Weighted average rate on:
Deposits............................... 5.36 5.17 5.17 5.39
Borrowings............................. 6.04 5.81 5.80 6.25
Total interest-bearing liabilities..... 5.53 5.32 5.28 5.49
Interest rate spread (spread between
weighted average yield on total
interest-earning assets and
total interest-bearing
liabilities)........................... 2.34 2.44 2.64 2.70
Net interest margin (net interest
income as a percentage of
average interest-earning assets)....... 2.96 3.10 3.46 3.70
Rate/Volume Analysis
The following table discloses the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities have
affected the Company's interest income and expense during the periods indicated.
For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to (1) changes in rate (changes
in rate multiplied by prior period volume) and (2) changes in volume (change in
volume multiplied by prior period rate). Changes attributable to both rate and
volume that cannot be segregated have been allocated proportionally to the
change due to volume and the change due to rate.
Increase (Decrease) in Net Interest Income
Year ended June 30, 2000 vs. Year ended June 30, 1999 vs.
Year ended June 30, 1999 Year ended June 30, 1998
------------------------------ -----------------------------
Increase (Decrease) Increase (Decrease)
Due to Total Due to Total
------------------- Increase ------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(Dollars in Thousands)
Interest-earning assets:
Interest-earning deposits........ $ 41 $ 50 $ 91 $ 99 $ (52) $ 47
Investment securities............ 1 (2) (1) 16 1 17
Loans............................ 873 (252) 621 924 (188) 736
Stock in FHLB of Indianapolis.... 52 --- 52 16 (1) 15
----- ----- ----- ------ ------ -----
Total........................ 967 (204) 763 1,055 (240) 815
----- ----- ----- ------ ------ -----
Interest-bearing liabilities:
Savings accounts................. 174 38 212 179 2 181
NOW and money market accounts.... 7 (8) (1) 11 (62) (51)
Certificates of deposit.......... 28 (5) 23 121 (78) 43
Borrowings....................... 566 3 569 458 (51) 407
----- ----- ----- ------ ------ -----
Total........................ 775 28 803 769 (189) 580
----- ----- ----- ------ ------ -----
Change in net interest income......... $ 192 $(232) $ (40) $ 286 $ (51) $ 235
===== ===== ===== ====== ====== =====
Changes in Financial Condition
Financial Condition at June 30, 2000 Compared to Financial Condidtion
at June 30, 1999. Montgomery's total assets were $138.1 million at June 30,
2000, an increase of $14.2 million, or 11.4 percent, from June 30, 1999. During
fiscal 2000, interest-earning assets increased $13.7 million or 11.6 percent.
Short-term interest-bearing deposits increased $5.7 million or 129.8 percent.
Loans increased $7.7 million, or 6.9 percent. Interest-bearing deposits
increased $39,000 to $259,000 and investment securities decreased $437,000 to
$444,000 during the twelve month period. Federal Home Loan Bank stock increased
from $1.3 million to $1.9 million. Real estate owned and held for development
increased $120,000 or 10.2 percent. Real estate acquired in settlement of loans
increased $138,000 due to a net increase during the twelve month period of two
single family residences due to foreclosure. Two properties held at June 30,
1999 were sold during the twelve month period. All real estate acquired in
settlement of loans, in the amount of $405,000, is currently available for sale.
The appraised value of the real estate acquired equals or exceeds the book
value. Therefore, no loss is expected to be realized upon the sale of the real
estate acquired in settlement of loans. Real estate held for investment totals
$897,000, a decrease of $18,000, or 2.0 percent, compared to June 30, 1999.
Premises and equipment increased $397,000, or 14.0 percent, primarily due to an
upgrade to the computer network system and the remodeling of the Covington
office to accommodate the installation of a drive-up facility and an automated
teller machine. Deposits increased $9.0 million, or 11.0 percent, and borrowings
increased $7.6 million, or 36.9 percent, resulting in a net increase in
interest-bearing liabilities of $16.6 million or 16.2 percent. The increase in
deposits was primarily the result of an increase of approximately $7.1 million
in deposits in the Lafayette office which opened in April 1999 and the Covington
office which began offering drive-up and ATM services during the fiscal year.
Borrowings increased $7.6 million, or 36.9 percent, primarily to fund loan
growth. Due to the increase in deposits near fiscal year end, reductions to
these advances will be made as the advances mature. Stockholders' equity
decreased $2.4 million, or 12.5 percent, primarily due to the use of $2.9
million for stock repurchase programs.
Financial Condition at June 30, 1999 Compared to Financial Condition at
June 30, 1998. Montgomery's total assets were $124.0 million at June 30, 1999,
an increase of $6.8 million, or 5.8 percent, from June 30, 1998. During fiscal
1999, interest-earning assets increased $5.9 million or 5.3 percent. Short-term
interest-bearing deposits decreased $6.2 million, or 58.3 percent. Loans
increased $11.2 million, or 11.2 percent. This increase was the result of
Montgomery's efforts to attract new business in the local nonresidential
mortgage market and its continued commitment to residential lending.
Interest-bearing deposits increased $4,000 to $219,000 and investment securities
increased $569,000 to $881,000 during the twelve month period. Federal Home Loan
Bank stock increased from $922,000 to $1,251,000. Real estate owned and held for
development decreased $286,000 or 19.5 percent. Real estate acquired in
settlement of loans increased $78,000 due to a net increase during the twelve
month period of two single family residences due to foreclosure. All real estate
acquired in settlement of loans, in the amount of $267,000, is currently
available for sale. The appraised value of the real estate acquired equals or
exceeds the book value. Therefore, no loss is expected to be realized upon the
sale of the real estate acquired in settlement of loans. Real estate held for
investment totals $914,000, a decrease of $364,000, or 28.5 percent, compared to
June 30, 1998. This decrease was primarily due to the sale of an eight-unit
apartment complex to a local not-for-profit organization. Premises and equipment
increased $838,000, or 41.9 percent, primarily due the construction and
furnishing of the new branch office facility in Lafayette, Indiana which opened
in April, 1999. Deposits decreased $1.5 million, or 1.8 percent, and borrowings
increased $9.4 million, or 83.2 percent, resulting in a net increase in
interest-bearing liabilities of $7.9 million, or 8.2 percent. The decrease in
deposits was primarily the result of a decrease of approximately $7.0 million in
public funds deposits. Interest rates required to retain these deposits were
above comparable Federal Home Loan Bank advances. Other liabilities decreased
$421,000, or 32.0 percent, to $896,000 primarily due to a decrease in accrued
income taxes of $420,000.
Comparison of Operating Results for the Years Ended June 30, 2000 and June 30,
1999
General. Net income for the year ended June 30, 2000 was $699,000
compared to $956,000 for the year ended June 30, 1999, a decrease of $257,000,
or 26.9 percent. Net interest income increased $40,000 during the year ended
June 30, 2000 as compared to the year ended June 30, 1999. Other income
increased $80,000, or 93.8 percent, primarily due to the gain on sale of
available for sale securities. Non-interest expense increased $506,000, or 20.6
percent, primarily due to the increased costs of staffing, advertising and
operating the Lafayette office opened in April 1999. Growth in other offices
also contributed to the increase in expense.
Interest Income. Interest income for the year ended June 30, 2000 was
$9.9 million, an increase of $762,000, or 8.3 percent, from interest income for
the same period in 1999. The average balance of interest-earning assets for the
2000 period was $127.8 million compared to $115.5 million for the 1999 period,
an increase of $12.3 million, or 10.7 percent. This increase was primarily due
to an increase in the average balance of loans in the amount of $10.8 million.
Average interest earning deposits increased $800,000 from $8.2 million to $9.0
million. The average yield on interest-earning assets decreased from 7.92
percent for the 1999 period to 7.76 percent for the twelve months ended June 30,
2000. This decrease was primarily due to a decrease in mortgage loan interest
rates during most of the twelve month period.
Interest Expense. Interest expense for the year ended June 30, 2000 was
$6.0 million compared to $5.2 million for the year ended June 30, 1999, an
increase of $802,000, or 15.6 percent. Average interest-bearing liabilities
increased from $97.6 million for the 1999 period to $111.9 million for the 2000
period, an increase of $14.3 million, or 14.7 percent. The average cost of all
interest-bearing liabilities increased from 5.28 percent for fiscal 1999 to 5.32
percent for fiscal 2000. The average cost of deposits remained the same at 5.17
percent for the 2000 period compared to the period ending June 30, 1999. The
average cost of borrowings increased from 5.80 percent to 5.81 percent for the
comparable periods.
Provision for Loan Losses. The provision for loan losses was $40,000
for the year ended June 30, 1999, compared to no provision being made for the
year ended June 30, 2000. Provision or adjustment entries are made based on the
Internal Loan and Asset Review Policy. A review is performed at least quarterly
to determine the adequacy of the current balance in the allowance for loss
accounts. Loans delinquent ninety days or more increased from $547,000 at June
30, 1999 to $990,000 on June 30, 2000. Non-performing loans to total loans at
June 30, 2000 was 0.83 percent compared to 0.49 percent at June 30, 1999. The
allowance for loan losses to non-performing loans was 22.8 percent at June 30,
2000 compared to 41.3 percent at June 30, 1999. The allowance to total loans was
0.19 percent and 0.20 percent for the comparable periods. Montgomery is
continually re-evaluating the level of the allowance for loan losses as the
amount of non-residential mortgage loans and other new loan products are
offered.
Non-Interest Income. Other income for the year ended June 30, 2000 was
$166,000 compared to $86,000 for the 1999 period, an increase of $80,000, or
93.0 percent. Service charges on deposit accounts increased $19,000 due to the
increase in demand deposit accounts. Income from real estate operations
decreased $13,000, or 44.8 percent, from $29,000 for the year ended June 30,
1999 to $16,000 for the current period. Net rental income included in the income
from real estate income operations increased $8,000, but was offset due to a
decrease in the provision for noninterest earning assets of $10,000 in the 1999
period and an increase of $11,000 in the 2000 period. During the year ended June
30, 2000, a profit on the sale of securities available for sale in the amount of
$55,000 was realized. Miscellaneous other income increased $20,000 primarily due
to increased fee income related to debit card and ATM usage and appraisal fee
income.
Non-Interest Expense. Non-interest expense for the year ended June 30,
2000 was $3.0 million compared to $2.5 million, an increase of $506,000, or 20.6
percent, from the comparable 1999 period. Salary and employee benefits increased
$310,000, or 23.2 percent, from $1.3 million for the 1999 period to $1.6 million
for the 2000 period. This increase was primarily due to an increase in branch
office personnel to accommodate growth and to staff the Lafayette, Indiana
office which opened in 1999. Net occupancy expense increased $53,000, equipment
expense increased $46,000 and data processing expense increased $5,000 due to
the increase in expenses associated with growth and expansion. Advertising
expense increased $33,000 from the 1999 period primarily due to increased
advertising to promote the Lafayette, Indiana office. Other expenses for the
year ended June 30, 2000 were $612,000 compared to $537,000 for the year ended
June 30, 1999, an increase of $75,000, or 14.0 percent. Included in other
expenses for the 2000 period is approximately $6,000 in expense related to
customer awareness of the Y2K issue with the balance of the increase being
generally reflective of Montgomery's growth.
Income Tax Expense. Income tax expense for the year ended June 30, 2000
was $459,000 compared to $628,000 for the year ended June 30, 1999. The decrease
in income tax expense was due to the decrease in income before tax.
Comparison of Operating Results for the Years Ended June 30, 1999 and June 30,
1998
General. Net income for the year ended June 30, 1999 was $956,000
compared to $981,000 for the year ended June 30, 1998, a decrease of $25,000, or
2.5 percent. Net interest income increased $234,000 during the year ended June
30, 1999 as compared to the year ended June 30, 1998. This increase was
primarily offset by the increased costs of staffing, advertising and operating
the Lafayette office opened in April 1999.
Interest Income. Interest income for the year ended June 30, 1999 was
$9.1 million, an increase of $815,000, or 9.8 percent, from interest income for
the same period in 1998. The average balance of interest-earning assets for the
1998 period was $115.5 million compared to $101.8 million for the 1998 period,
an increase of $13.7 million, or 13.5 percent. This increase was primarily due
to an increase in the average balance of loans in the amount of $11.2 million.
Average interest-earning deposits increased $1.9 million from $6.3 million to
$8.2 million. The average yield on interest-earning assets decreased from 8.19
percent for the 1998 period to 7.92 percent for the twelve months ended June 30,
1999. This decrease was primarily due to a general decrease in interest rates
during most of the twelve month period.
Interest Expense. Interest expense for the year ended June 30, 1999 was
$5.2 million compared to $4.6 million for the year ended June 30, 1998, an
increase of $580,000, or 12.7 percent. Average interest-bearing liabilities
increased from $83.3 million for the 1998 period to $97.6 million for the 1999
period, an increase of $14.3 million, or 17.1 percent. The average cost of all
interest-bearing liabilities decreased from 5.49 percent for fiscal 1998 to 5.28
percent for fiscal 1999. The average cost of deposits decreased from 5.39
percent for the 1998 period to 5.17 percent for the year ended June 30, 1999.
The average cost of borrowings decreased from 6.25 percent to 5.80 percent for
the comparable periods. Decreases in rates on interest-bearing liabilities are
again due to a general decrease in interest rates during most of the twelve
month period.
Provision for Loan Losses. The provision for loan losses was $40,000
for the year ended June 30, 1999 compared to $6,000 for the year ended June 30,
1998. Provision for loan losses is made based on the Internal Loan and Asset
Review Policy. A review is performed at least quarterly to determine the
adequacy of the current balance in the allowance for loss accounts. Loans
delinquent ninety days or more decreased from $724,000 at June 30, 1998 to
$547,000 on June 30, 1999. Non-performing loans to total loans at June 30, 1999
was 0.49 percent compared to 0.72 percent at June 30, 1998. The allowance for
loan losses to non-performing loans was 41.3 percent at June 30, 1999 compared
to 25.7 percent at June 30, 1998. The allowance to total loans was 0.20 percent
and 0.19 percent for the comparable periods. Montgomery is continually
re-evaluating the level of the allowance for loan losses as the amount of
non-residential mortgage loans and other new loan products are offered.
Non-Interest Income. Other income for the year ended June 30, 1999 was
$86,000 compared to $65,000 for the 1998 period, an increase of $21,000, or 32.3
percent. Service charges on deposit accounts increased $12,000 due to the
increase in demand deposit accounts. Income from real estate operations
increased $12,000. Miscellaneous other income decreased $4,000.
Non-Interest Expense. Non-interest expense for the year ended June 30,
1999 was $2.4 million, an increase of $273,000, or 12.5 percent, from the
comparable 1998 period. Salary and employee benefits increased $137,000 from
$1.2 million for the 1998 period to $1.3 million for the 1999 period. This
increase was primarily due to an increase in branch office personnel to
accommodate growth. This includes staffing the new Lafayette office opened in
April 1999. Net occupancy expense increased $10,000, equipment expense increased
$18,000, data processing expense increased $56,000 and deposit insurance expense
increased $3,000. With the exception of approximately $30,000 included in data
processing expense for Year 2000 testing, the balance of the increases were
primarily due to Montgomery's growth. Advertising expense increased $16,000 from
the 1998 period due to opening of the Lafayette office. Other expenses increased
$34,000, or 6.6 percent, from $503,000 for the year ended June 30, 1998 to
$537,000 for the year ended June 30, 1999. These increases are generally
reflective of Montgomery's growth.
Income Tax Expense. Income tax expense for the year ended June 30, 1999
was $628,000 compared to $655,000 for the year ended June 30, 1998. The decrease
in income tax expense was due to the decrease in income before tax of $52,000.
Liquidity and Capital Resources
Montgomery's primary source of funds is its deposits. To a lesser
extent, Montgomery has also relied upon loan payments and payoffs and FHLB
advances as sources of funds. Scheduled loan payments are a relatively stable
source of funds, but loan payoffs and deposit flows can fluctuate significantly,
being influenced by interest rates, general economic conditions and competition.
Montgomery attempts to price its deposits to meet its asset/liability management
objectives consistent with local market conditions.
Federal regulations have historically required Montgomery to maintain
minimum levels of liquid assets. The required percentage has varied from time to
time based upon economic conditions and savings flows. At June 30, 2000, the
requirement was 4%. Liquid assets for purposes of this ratio include cash, cash
equivalents consisting of short-term interest-earning deposits, certain other
time deposits and other obligations generally having remaining maturities of
less than five years. Montgomery has historically maintained its liquidity ratio
at a level in excess of that required. Montgomery's average liquidity ratio for
the year ended June 30, 2000 was 8.2 percent. Liquidity management is both a
daily and long-term responsibility of management. Montgomery adjusts liquid
assets based upon management's assessment of (i) expected loan demand, (ii)
expected deposit flows, (iii) yields available on interest-bearing deposits and
(iv) the objectives of its asset/liability management program. Excess liquidity
is invested generally in federal funds and short-term interest-bearing deposit
accounts. If Montgomery requires funds beyond its ability to generate them
internally, it has additional borrowing capacity with the FHLB and collateral
eligible for repurchase agreements.
Cash flows for Montgomery are of three major types. Cash flows from
operating activities consist primarily of net income. Investing activities
generate cash flows through the origination, sale and principal collections on
loans as well as the purchases and sales of investments. Montgomery's cash flows
from investment resulted primarily from purchases and maturities of investment
securities. Cash flows from financing activities include savings deposits,
withdrawals and maturities and changes in borrowings.
Montgomery considers its liquidity and capital resources to be adequate
to meet its foreseeable short and long-term needs. Montgomery anticipates that
it will have sufficient funds available to meet current loan commitments and to
fund or refinance, on a timely basis, its other material commitments and
long-term liabilities. At June 30, 2000, Montgomery had outstanding commitments
to originate loans of $1.1 million and no commitments to sell loans.
Certificates of deposit scheduled to mature in one year or less at June 30, 2000
totaled $33.3 million. Management believes that a significant portion of such
deposits will remain with Montgomery. At June 30, 2000, Montgomery had $6.8
million of FHLB advances which reprice in one year or less.
The Association is subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate actions by the regulatory agencies that, if
undertaken, could have a material effect on the Association's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Association must meet specific capital guidelines
that involve quantitative measures of the Association's assets, liabilities and
certain off balance sheet items as calculated under regulatory accounting
practices. The Association's capital amount and classification are also subject
to qualitative judgments by the regulators about components, risk weightings and
other factors.
At June 30, 2000, the Association believes that it meets all capital
adequacy requirements to which it is subject and the most recent notification
from the regulatory agency categorized the Association as well capitalized under
the regulatory framework for prompt corrective action. The Association's actual
and required capital amounts and ratios are as follows:
June 30, 2000
------------------------------------------------------------------------
Required for Adequate To Be Well
Actual Capital(1) Capitalized(1)
------------------- --------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Total risk-based capital(1)
(to risk Weighted assets) $14,636 17.14% $6,831 8.0% $8,539 10.0%
Core (to adjusted tangible assets) 15,142 11.06 2,739 2.0 N/A N/A
Core capital(1)
(to adjusted total assets) 15,142 11.06 5,477 4.0 6,847 5.0
- ---------------
(1) As defined by the regulatory agencies
Asset/Liability Management
Montgomery, like other financial institutions, is subject to interest
rate risk to the extent that its interest-bearing liabilities reprice on a
different basis than its interest-earning assets. OTS regulations provide a Net
Portfolio Value ("NPV") approach to the quantification of interest rate risk. In
essence, this approach calculates the difference between the present value of
liabilities, expected cash flows from assets and cash flows from off balance
sheet contracts. Under OTS regulations, an institution's "normal" level of
interest rate risk in the event of an immediate and sustained 200 basis point
change in interest rates is a decrease in the institution's NPV in an amount not
exceeding 2 percent of the present value of its assets. Thrift institutions with
greater than "normal" interest rate exposure must take a deduction from their
total capital available to meet their risk-based capital requirement. The amount
of that deduction is one-half of the difference between (a) the institution's
actual calculated exposure to the 200 basis point interest rate increase or
decrease (whichever results in the greater pro forma decrease in NPV) and (b)
its "normal" level of exposure which is 2 percent of the present value of its
assets. Regulations do exempt all institutions under $300 million in assets and
risk based capital exceeding 12 percent from reporting information to calculate
exposure and making any deduction from risk-based capital. At June 30, 2000,
Montgomery's total assets were $137.4 million and risk-based capital was 17.14
percent; therefore Montgomery would have been exempt from calculating or making
any risk-based capital reduction. Montgomery's management believes interest-rate
risk is an important factor and makes all reports necessary to OTS to calculate
interest-rate risk on a voluntary basis. At June 30, 2000, 2.0 percent of the
present value of Montgomery's assets was approximately $2.75 million, which was
less than $4.22 million, the greatest decrease in NPV resulting from a 200 basis
point change in interest rates. As a result, Montgomery, for OTS reporting
purposes, would have been required to make a deduction from total capital in
calculating its risk-based capital requirement had this rule been in effect and
had Montgomery not been exempt from reporting on such date. Based on June 30,
2000 NPV information, the amount of Montgomery's deduction from capital, had it
been subject to reporting, would have been approximately $730,000.
It has been and continues to be a priority of Montgomery's Board of
Directors and management to manage interest rate risk and thereby limit any
negative effect of changes in interest rates on Montgomery's NPV. Montgomery's
Interest Rate Risk Policy, established by the Board of Directors, promulgates
acceptable limits on the amount of change in NPV given certain changes in
interest rates. Specific strategies have included shortening the amortized
maturity of fixed-rate loans and increasing the volume of adjustable rate loans
to reduce the average maturity of Montgomery's interest-earning assets. FHLB
advances are used in an effort to match the effective maturity of Montgomery's
interest-bearing liabilities to its interest-earning assets.
Presented below, as of June 30, 2000 and June 30, 1999, is an analysis
of Montgomery's estimated interest rate risk as measured by changes in NPV for
instantaneous and sustained parallel shifts in interest rates, up and down 300
basis points in 100 point increments, compared to limits set by the Board.
Assumptions used in calculating the amounts in this table are those assumptions
utilized by the OTS in assessing the interest risk of the thrifts it regulates.
Based upon assumptions at June 30, 2000 and June 30, 1999, the NPV of Montgomery
was $18.5 million and $19.8 million, respectively. NPV is calculated by the OTS
for the purposes of interest rate risk assessment and should not be considered
as an indicator of value of Montgomery.
At June 30, 2000 At June 30, 1999
---------------- ----------------
Assumed Board
Change in Limit
Interest Rates % Change $ Change % Change $ Change % Change
(Basis Points) in NPV in NPV in NPV in NPV in NPV
- -------------- ------ ------ ------ ------ ------
(Dollars in Thousands)
+300 -60 (6,421) (35) (6,573) (33)
+200 -50 (4,224) (23) (4,122) (21)
+100 -30 (2,011) (11) (1,809) (9)
0 0 0 0 0 0
-100 -30 1,367 7 1,166 6
-200 -50 1,970 11 2,187 11
-300 -60 2,685 15 3,329 17
In the event of a 300 basis point change in interest rate based upon
estimates as of June 30, 2000, Montgomery would experience a 15 percent increase
in NPV in a declining rate environment and a 35 percent decrease in NPV in a
rising environment. During periods of rising rates, the value of monetary assets
and liabilities decline. Conversely, during periods of falling rates, the value
of monetary assets and liabilities increase. However, the amount of change in
value of specific assets and liabilities due to changes in rates is not the same
in a rising rate environment as in a falling rate environment (i.e., the amount
of value increase under a specific rate decline may not equal the amount of
value decrease under an identical upward rate movement). Based upon the NPV
methodology, the increased level of interest rate risk experienced by Montgomery
in recent periods was primarily due to the maturities of interest-earning assets
increasing more than the maturities on interest-bearing liabilities due to the
increase in fixed-rate residential mortgage loans and non-residential loans.
Recent Accounting Issues
Accounting for Derivative Instruments and Hedging Activities. Statement
of Financial Accounting Standards ("SFAS") No. 133 requires companies to record
derivatives on the balance sheet at their fair value. SFAS No. 133 also
acknowledges that the method of recording a gain or loss depends on the use of
the derivative. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction.
o For a derivative designated as hedging the exposure to changes
in the fair value of a recognized asset or liability or a firm
commitment (referred to as a fair value hedge), the gain or
loss recognized in earnings in the period of change together
with the offsetting loss or gain on the hedged item
attributable to the risk being hedged. The effect of that
accounting is to reflect in earnings the extent to which the
hedge is not effective in achieving offsetting changes in fair
value.
o For a derivative designated as hedging the exposure to
variable cash flows of a forecasted transaction (referred to
as a cash flow hedge), the effective portion of the
derivative's gain or loss is initially reported as a component
of other comprehensive income (outside earnings) and
subsequently reclassified into earnings when the forecasted
transaction effects earnings. The ineffective portion of the
gain or loss is reported in earnings immediately.
o For a derivative designated as hedging the foreign currency
exposure of a net investment in a foreign operation, the gain
or loss is reported in other comprehensive income (outside
earnings) as part of the cumulative translation adjustment.
The accounting for a fair value hedge described above applies
to a derivative designated as a hedge of the foreign currency
exposure of an unrecognized firm commitment or an
available-for-sale security. Similarly, the accounting for a
cash flow hedge described above applies to a derivative
designated as a hedge of the foreign currency exposure of a
foreign-currency-denominated forecasted transaction.
o For a derivative not designated as a hedging instrument, the
gain or loss is recognized in earning in the period of change.
The new Statement applies to all entities. If hedge accounting is
elected by the entity, the method of assessing the effectiveness of the hedging
derivative and the measurement approach of determining the hedge's
ineffectiveness must be established at the inception of the hedge.
SFAS No. 133 amends SFAS No. 52 and supercedes SFAS Nos. 80, 105 and
119. SFAS No. 107 is amended to include the disclosure provisions about the
concentrations of credit risk from SFAS No. 105. Several Emerging Issues Task
Force consensuses are also changed or nullified by the provisions of SFAS No.
133.
SFAS No. 133 became effective for all fiscal quarters for all fiscal
years beginning after June 15, 2000. The adoption of this Statement is not
currently expected to have a material impact on the Company's financial
statements. Early application is encouraged; however, this Statement may not be
applied retroactively to financial statements of prior periods.
Impact of Inflation and Changing Prices
The consolidated financial statements and related financial information
presented elsewhere herein have been prepared in accordance with GAAP, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the changes in the relative purchasing
power of money over time due to inflation.
The effect of inflation on savings associations and other financial
institutions differs from the impact on nonfinancial institutions. Savings
associations, as financial intermediaries, have assets and liabilities which may
move in concert with inflation. This is especially true for savings institutions
with a high percentage of rate-sensitive interest-earning assets and
interest-bearing liabilities. A financial institution can reduce the impact of
inflation by managing its rate sensitivity gap.
Independent Auditor's Report
To the Stockholders and
Board of Directors
Montgomery Financial Corporation
Crawfordsville, Indiana
We have audited the consolidated statement of financial condition of Montgomery
Financial Corporation and subsidiary as of June 30, 2000 and 1999, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended June 30, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above present
fairly, in all material respects, the consolidated financial position of
Montgomery Financial Corporation and Subsidiary as of June 30, 2000 and 1999,
and the results of their operations and their cash flows for each of the three
years in the period ended June 30, 2000, in conformity with generally accepted
accounting principles.
/s/ Olive LLP
Indianapolis, Indiana
July 28, 2000
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Consolidated Statement of Financial Condition
June 30 2000 1999
- ---------------------------------------------------------------------------------------------------------------
Assets
Cash $ 394,392 $ 523,585
Interest-bearing demand deposits 10,131,874 4,409,228
-----------------------------------
Total cash and cash equivalents 10,526,266 4,932,813
Interest-bearing deposits 258,689 219,463
Investment securities available for sale 443,917 880,900
Loans, net of allowance for loan losses of $226,000 119,130,784 111,415,224
Premises and equipment 3,236,258 2,839,409
Federal Home Loan Bank stock 1,893,300 1,250,700
Foreclosed assets and real estate held for development, net 1,301,996 1,181,720
Interest receivable 951,010 893,854
Other assets 380,038 345,036
-----------------------------------
Total assets $ 138,122,258 $ 123,959,119
===================================
Liabilities
Deposits
Noninterest bearing $ 2,580,192 $ 1,349,282
Interest bearing 88,926,339 81,118,363
-----------------------------------
Total deposits 91,506,531 82,467,645
Federal Home Loan Bank advances and line of credit 28,241,258 20,632,069
Interest payable 534,341 566,632
Other liabilities 859,417 895,701
-----------------------------------
Total liabilities 121,141,547 104,562,047
-----------------------------------
Commitments and Contingencies
Stockholders' Equity
Preferred stock, $.01 par value
Authorized and unissued--2,000,000 shares
Common stock, $.01 par value
Authorized--8,000,000 shares
Issued and outstanding--1,244,790 and 1,521,142 shares 12,448 15,211
Additional paid-in capital 10,176,190 12,464,781
Retained earnings 8,102,308 8,131,251
Unearned Employee Stock Ownership Plan (ESOP) shares (1,055,482) (1,141,796)
Unearned compensation (199,633) (92,714)
Accumulated other comprehensive income (loss) (55,120) 20,339
-----------------------------------
Total stockholders' equity 16,980,711 19,397,072
-----------------------------------
Total liabilities and stockholders' equity $ 138,122,258 $ 123,959,119
===================================
See notes to consolidated financial statements.
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
CRAWFORDSVILLE, INDIANA
Consolidated Statement of Income
Year Ended June 30 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------
Interest and Dividend Income
Loans receivable $9,257,296 $8,637,174 $7,901,380
Investment securities 21,327 21,652 5,103
Deposits with financial institutions 491,836 401,222 353,810
Federal Home Loan Bank stock 140,998 89,265 74,301
----------------------------------------
Total interest and dividend income 9,911,457 9,149,313 8,334,594
----------------------------------------
Interest Expense
Deposits 4,415,527 4,182,337 4,009,250
Federal Home Loan Bank advances 1,529,321 968,294 560,910
Other borrowings 7,883
----------------------------------------
Total interest expense 5,952,731 5,150,631 4,570,160
----------------------------------------
Net Interest Income 3,958,726 3,998,682 3,764,434
Provision for loan losses 40,000 6,000
Net Interest Income After Provision for Loan Losses 3,958,726 3,958,682 3,758,434
----------------------------------------
Other Income
Service charges on deposit accounts 59,981 41,256 29,624
Real estate operations, net 16,265 29,662 17,482
Net realized gains on sales of available for sale securities 55,134
Other income 35,058 14,977 17,857
----------------------------------------
Total other income 166,438 85,895 64,963
----------------------------------------
Other Expenses
Salaries and employee benefits 1,647,004 1,337,059 1,200,339
Net occupancy expenses 173,085 120,406 110,085
Equipment expenses 231,780 185,439 167,462
Data processing fees 181,992 176,869 121,061
Deposit insurance expense 33,840 50,427 47,687
Advertising expense 86,699 53,989 37,766
Other expenses 612,461 536,668 503,228
----------------------------------------
Total other expenses 2,966,861 2,460,857 2,187,628
----------------------------------------
Income Before Income Tax 1,158,303 1,583,720 1,635,769
Income tax expense 459,200 627,900 654,991
----------------------------------------
Net Income $ 699,103 $ 955,820 $ 980,778
========================================
Net Income Per Share
Basic $ .56 $ .65 $ .64
Diluted .56 .65 .64
See notes to consolidated financial statements.
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Consolidated Statement of Stockholders' Equity
Additional Unearned
Common Stock Paid-in Comprehensive Retained Unearned ESOP
Shares Amount Capital Income Earnings Compensation Shares
--------------------------------------------------------------------------------------------
Balances, July 1, 1997 1,653,032 $16,530 $13,547,619 $7,136,492 $(1,322,500) $ (11,563)
Comprehensive income
Net income $ 980,778 980,778
Other comprehensive income,
net of tax
Unrealized gains
on securities 54,351
----------
Comprehensive income $1,035,129
==========
Cash dividends
($.22 per share) (335,078)
ESOP shares earned 23,768 91,698
Purchase of stock
for Management
Recognition Plan (MRP) (155,325)
MRP shares earned 38,381
--------------------------------- -----------------------------------------
Balances, June 30, 1998 1,653,032 16,530 13,571,387 7,782,192 (1,230,802) (128,507)
Comprehensive income
Net income $955,820 955,820
Other comprehensive loss,
net of tax
Unrealized losses
on securities (34,012)
----------
Comprehensive income $921,808
==========
Cash dividends
($.22 per share) (321,198)
ESOP shares earned 2,661 89,006
of stock (131,890) (1,319) (1,082,155) (285,563)
MRP shares earned (27,112) 35,793
--------------------------------- -----------------------------------------
Balances, June 30, 1999 1,521,142 15,211 12,464,781 8,131,251 (1,141,796) (92,714)
Comprehensive income
Net income $699,103 699,103
Other comprehensive loss,
net of tax
Unrealized losses on
securities, net
of reclassification
adjustment (75,459)
----------
Comprehensive income $623,644
==========
Cash dividends
($.22 per share) (261,282)
ESOP shares earned (10,760) 86,314
Purchase of stock (296,052) (2,960) (2,424,718) (466,764)
Issuance of stock
for Recognition
and Retention Plan (RRP) 19,700 197 159,866 (160,063)
MRP and RRP shares earned (12,979) 53,144
--------------------------------- -----------------------------------------
Balances, June 30, 2000 1,244,790 $12,448 $10,176,190 $8,102,308 $(1,055,482) $(199,633)
================================= =========================================
(Continued)
Accumulated
Other
Comprehensive
Income (Loss) Total
-------------------------
Balances, July 1, 1997 $19,366,578
Comprehensive income
Net income 980,778
Other comprehensive income,
net of tax
Unrealized gains
on securities $54,351 54,351
Comprehensive income
Cash dividends
($.22 per share) (335,078)
ESOP shares earned 115,466
Purchase of stock
for Management
Recognition Plan (MRP) (155,325)
MRP shares earned 38,381
-------------------------
Balances, June 30, 1998 54,351 20,065,151
Comprehensive income
Net income 955,820
Other comprehensive loss,
net of tax
Unrealized losses
on securities (34,012) (34,012)
Comprehensive income
Cash dividends
($.22 per share) (321,198)
ESOP shares earned 91,667
of stock (1,369,037)
MRP shares earned 8,681
-------------------------
Balances, June 30, 1999 20,339 19,397,072
Comprehensive income
Net income 699,103
Other comprehensive loss,
net of tax
Unrealized losses on
securities, net
of reclassification
adjustment (75,459) (75,459)
Comprehensive income
Cash dividends
($.22 per share) (261,282)
ESOP shares earned 75,554
Purchase of stock (2,894,442)
Issuance of stock
for Recognition
and Retention Plan (RRP)
MRP and RRP shares earned 40,165
-------------------------
Balances, June 30, 2000 $(55,120) $16,980,711
=========================
See notes to consolidated financial statements.
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Consolidated Statement of Cash Flows
Year Ended June 30 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 699,103 $ 955,820 $ 980,778
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 40,000 6,000
Provision for loss on real estate owned 11,041 15,000 10,000
Depreciation 317,239 248,068 211,375
Gain on sale of available for sale securities (55,134)
ESOP shares earned 75,554 91,667 115,466
Amortization of unearned compensation 40,165 8,681 38,381
Deferred income tax (18,357) 25,238 (24,608)
Change in
Interest receivable (57,156) (50,055) (159,320)
Interest payable (32,291) 28,181 115,146
Other assets (35,002) (97,774) (69,177)
Other liabilities 18,374 (369,248) 330,319
Other adjustments (3,288) 708 (8,829)
------------------------------------------------
Net cash provided by operating activities 960,248 896,286 1,545,531
------------------------------------------------
Investing Activities
Net change in interest-bearing deposits (39,226) (4,463) (115,000)
Proceeds from maturities and paydowns of securities available for sale 21,967 20,527
Proceeds from sale of available-for-sale securities 367,164
Purchase of securities available for sale (647,220) (200,000)
Net change in loans (7,794,544) (11,368,796) (13,479,138)
Additions to real estate owned (118,060) (240,689) (193,525)
Proceeds from real estate owned sales 62,500 599,300 163,887
Purchase of premises and equipment (678,094) (1,050,647) (558,154)
Purchase of FHLB of Indianapolis stock (642,600) (329,200)
------------------------------------------------
Net cash used by investing activities (8,842,860) (13,019,748) (14,361,403)
------------------------------------------------
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand and savings deposits 5,350,066 2,551,618 3,145,705
Certificates of deposit 3,688,820 (4,065,955) 9,571,053
FHLB line of credit (618,767) 618,767
Proceeds from FHLB advances 11,000,000 11,000,000 5,000,000
Repayment of FHLB advances (2,772,044) (2,247,413) (5,167,658)
Proceeds from other borrowings 350,000
Repayment of other borrowings (350,000)
Purchase of stock (2,894,442) (1,369,037) (155,325)
Dividends paid (277,568) (328,450) (275,930)
------------------------------------------------
Net cash provided by financing activities 13,476,065 6,159,530 12,117,845
------------------------------------------------
Net Change in Cash and Cash Equivalents 5,593,453 (5,963,932) (698,027)
Cash and Cash Equivalents, Beginning of Period 4,932,813 10,896,745 11,594,772
------------------------------------------------
Cash and Cash Equivalents, End of Period $ 10,526,266 $ 4,932,813 $ 10,896,745
================================================
Additional Cash Flow and Supplementary Information
Interest paid $ 5,985,022 $ 5,122,450 $ 4,455,014
Income tax paid 481,144 1,082,864 307,156
Loan balances transferred to real estate owned 240,605 123,126 180,707
Dividends payable 67,380 83,666 90,917
See notes to consolidated financial statements.
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 1 -- Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of Montgomery Financial Corporation
(Company) and its wholly owned subsidiary, Montgomery Savings, A Federal
Association (Association), and the Association's wholly owned subsidiary, MSA
Service Corporation (MSA), conform to generally accepted accounting principles
and reporting practices followed by the thrift industry. The more significant of
the policies are described below.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company is a thrift holding company whose principal activity is the
ownership and management of the Association. The Association operates under a
federal thrift charter and provides full banking services. As a federally
chartered thrift, the Association is subject to regulation by the Office of
Thrift Supervision (OTS), and the Federal Deposit Insurance Corporation.
The Association generates mortgage and consumer loans and receives deposits from
customers located primarily in central Indiana. The Association's loans are
generally secured by specific items of collateral including real property and
consumer assets.
MSA is a real estate management and development company.
Consolidation--The consolidated financial statements include the accounts of the
Company, the Association and MSA after elimination of all material intercompany
transactions.
Investment Securities--Debt securities are classified as held to maturity when
the Company has the positive intent and ability to hold the securities to
maturity. Securities held to maturity are carried at amortized cost. Debt
securities not classified as held to maturity are classified as available for
sale. Securities available for sale are carried at fair value with unrealized
gains and losses reported separately in accumulated other comprehensive income,
net of tax.
Amortization of premiums and accretion of discounts are recorded using the
interest method as interest income from securities. Realized gains and losses
are recorded as net security gains (losses). Gains and losses on sales of
securities are determined on the specific-identification method.
Loans are carried at the principal amount outstanding. A loan is impaired when,
based on current information or events, it is probable that the Association will
be unable to collect all amounts due (principal and interest) according to the
contractual terms of the loan agreement. Loans whose payments have insignificant
delays not exceeding 90 days outstanding are not considered impaired. Certain
nonaccrual and substantially delinquent loans may be considered impaired. The
Association considers its investment in one-to-four family residential loans and
consumer loans to be homogeneous and therefore excluded from separate
identification for evaluation of impairment. Interest income is accrued on the
principal balances of loans. The accrual of interest on impaired and nonaccrual
loans is discontinued when, in management's opinion, the borrower may be unable
to meet payments as they become due. When interest accrual is discontinued, all
unpaid accrued interest is reversed when considered uncollectible. Interest
income is subsequently recognized only to the extent cash payments are received.
Certain loan fees and direct costs are being deferred and amortized as an
adjustment of yield on the loans over the contractual lives of the loans.
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Allowances for loan and real estate losses are maintained to absorb loan and
real estate losses based on management's continuing review and evaluation of the
loan and real estate portfolios and its judgment as to the impact of economic
conditions on the portfolios. The evaluation by management includes
consideration of past loss experience, changes in the composition of the
portfolios, the current condition and amount of loans and real estate owned
outstanding, and the probability of collecting all amounts due. Impaired loans
are measured by the present value of expected future cash flows, or the fair
value of the collateral of the loan, if collateral dependent.
The determination of the adequacy of the allowance for loan losses and the
valuation of real estate is based on estimates that are particularly susceptible
to significant changes in the economic environment and market conditions.
Management believes that as of June 30, 2000, the allowance for loan losses and
carrying value of real estate owned are adequate based on information currently
available. A worsening or protracted economic decline in the area within which
the Association operates would increase the likelihood of additional losses due
to credit and market risks and could create the need for additional loss
reserves.
Premises and equipment are carried at cost net of accumulated depreciation.
Depreciation is computed using the straight-line method based principally on the
estimated useful lives of the assets, which range from 3 to 35 years.
Maintenance and repairs are expensed as incurred while major additions and
improvements are capitalized. Gains and losses on dispositions are included in
current operations.
Federal Home Loan Bank (FHLB) stock is a required investment for institutions
that are members of the FHLB system. The required investment in the common stock
is based on a predetermined formula.
Foreclosed assets and real estate held for development, net arises from loan
foreclosure or deed in lieu of foreclosure and acquisition of real estate for
development and are carried at the lower of cost or fair value less estimated
selling costs. Costs relating to development and improvement of property are
capitalized, whereas costs relating to the holding of property, net of rental
and other income are expensed.
Stock options are granted for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant. The
Company accounts for and will continue to account for stock option grants in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and, accordingly, recognizes no compensation expense for
the stock option grants.
Income tax in the consolidated statement of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. The Company
files consolidated income tax returns with its subsidiary.
Earnings per share have been computed based upon the weighted average common and
potential common shares outstanding during each year. Unearned ESOP shares have
been excluded from the computation of average common shares and potential common
shares outstanding.
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 2 -- Investment Securities
2000
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30 Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------
Available for sale
Marketable equity securities $535 $0 $91 $444
========================================================
1999
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30 Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------
Available for sale
Marketable equity securities $847 $71 $37 $881
========================================================
Note 3 -- Loans and Allowance
June 30 2000 1999
- --------------------------------------------------------------------------------
Loans
Real estate mortgage loans
One-to-four family $ 93,929 $ 88,125
Multi-family 1,459 864
Commercial 16,698 15,110
Real estate construction loans 3,599 3,109
Home equity loans 3,945 4,195
Consumer loans 565 736
Share loans 363 463
-------------------------------
120,558 112,602
Undisbursed portion of loans (1,520) (1,261)
Deferred loan costs 319 300
Allowance for loan losses (226) (226)
-------------------------------
$ 119,131 $ 111,415
===============================
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Year Ended June 30 2000 1999 1998
- --------------------------------------------------------------------------------
Allowance for loan losses
Balances, July 1 $226 $186 $180
Provision for loan losses 40 6
--------------------------------------
Balances, June 30 $226 $226 $186
======================================
Note 4 -- Premises and Equipment
June 30 2000 1999
- --------------------------------------------------------------------------------
Land $ 493 $ 493
Building 2,546 2,149
Equipment 1,843 1,562
------------------------------------
Total cost 4,882 4,204
Accumulated depreciation (1,646) (1,365)
------------------------------------
Net $ 3,236 $ 2,839
====================================
Note 5 -- Foreclosed Assets and Real Estate Held for Development
June 30 2000 1999
- --------------------------------------------------------------------------------
Real estate acquired in settlement of loans $ 441 $ 292
Real estate held for development 1,063 1,044
Allowance for losses (36) (25)
---------------------------
1,468 1,311
Accumulated depreciation (166) (129)
---------------------------
Net $ 1,302 $ 1,182
===========================
Year Ended June 30 2000 1999 1998
- --------------------------------------------------------------------------------
Allowance for losses on real estate owned
Balances, July 1 $25 $10
Provision for losses 11 15 $10
-------------------------------
Balances, June 30 $36 $25 $10
===============================
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 6 -- Deposits
June 30 2000 1999
- --------------------------------------------------------------------------------
Noninterest-bearing $ 2,581 $ 1,349
Interest-bearing demand 9,978 9,623
Savings deposits 14,741 10,978
Certificates and other time deposits of $100,000 or more 20,676 18,585
Other certificates and time deposits 43,531 41,933
---------------------
Total deposits $91,507 $82,468
=====================
Certificates and other time deposits maturing in years ending June 30
2001 $33,297
2002 20,119
2003 6,448
2004 3,000
2005 1,289
Thereafter 54
--------
$64,207
========
Note 7 -- FHLB Advances and Line of Credit
June 30 2000 1999
- --------------------------------------------------------------------------------
FHLB line of credit $ 619
FHLB advances $28,241 20,013
----------------------------
$28,241 $20,632
============================
2000
--------------------------------
Weighted-
Average
June 30 Amount Rate
- --------------------------------------------------------------------------------
Advances from FHLB
Maturities in years ending June 30
2001 $ 7,612 6.52%
2002 1,022 5.40
2003 3,943 6.15
2004 4,009 5.38
2005 598 5.40
Thereafter 11,057 6.00
--------
$28,241 6.04
========
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The Association has an available line of credit with the FHLB totaling
$5,000,000. The line of credit expires March 1, 2001 and bears interest at a
rate equal to the current variable advance rate.
The FHLB advances are secured by first mortgage loans totaling $86,955,000.
Advances are subject to restrictions or penalties in the event of prepayment.
Note 8 -- Income Tax
Year Ended June 30 2000 1999 1998
- ---------------------------------------------------------------------------------------------
Income tax expense
Currently payable
Federal $ 373 $ 431 $ 536
State 104 172 144
Deferred
Federal (17) 16 (23)
State (1) 9 (2)
-----------------------------
Total income tax expense $ 459 $ 628 $ 655
=============================
Reconciliation of federal statutory to actual tax expense
Federal statutory income tax at 34% $ 394 $ 538 $ 556
Effect of state income taxes 68 119 94
Other (3) (29) 5
-----------------------------
Actual tax expense $ 459 $ 628 $ 655
=============================
Effective tax rate 39.6% 39.6% 40.0%
The components of the deferred tax liability are as follows at:
June 30 2000 1999
- --------------------------------------------------------------------------------
Assets
Allowance for loan losses $ 88 $ 62
State income tax 23 23
Retirement plans and other employee benefits 95 83
Securities available for sale 36
Other 2
---------------------
Total assets 244 168
---------------------
Liabilities
Depreciation (252) (242)
FHLB of Indianapolis stock dividend (30) (30)
Loan costs (268) (253)
Securities available for sale (13)
Other (3)
---------------------
Total liabilities (550) (541)
---------------------
$(306) $(373)
=====================
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Retained earnings at June 30, 2000, include approximately $1,500,000 for which
no deferred federal income tax liability has been recognized. This amount
represents an allocation of income to bad debt deductions for tax purposes only.
Reduction of amounts so allocated for purposes other than tax bad debt losses or
adjustments arising from carryback of net operating losses or loss of "bank"
status, would create income for tax purposes only, which income would be subject
to the then-current corporate income tax rate. The unrecorded deferred income
tax liability on the above amounts was approximately $590,000 at June 30, 2000.
Note 9 -- Other Comprehensive Income
2000
--------------------------------------------------------
Before-Tax Tax Net-of-Tax
Year Ended June 30 Amount Benefit Amount
- ----------------------------------------------------------------------------------------------------------------
Unrealized losses on securities
Unrealized holding losses arising
during the year $ (69) $27 $(42)
Less: reclassification adjustment for gains
realized in net income 55 (22) 33
--------------------------------------------------------
Net unrealized losses $(124) $49 $(75)
========================================================
1999
--------------------------------------------------------
Before-Tax Tax Net-of-Tax
Year Ended June 30 Amount Benefit Amount
- ----------------------------------------------------------------------------------------------------------------
Unrealized losses on securities
Unrealized holding losses arising during the year $ (56) $22 $(34)
========================================================
1998
--------------------------------------------------------
Before-Tax Tax Net-of-Tax
Year Ended June 30 Amount Benefit Amount
- ----------------------------------------------------------------------------------------------------------------
Unrealized gains on securities
Unrealized holding gains arising during the year $ 89 $(35) $54
========================================================
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 10 -- Commitments and Contingent Liabilities
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit, which are not
included in the accompanying consolidated financial statements. The
Association's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit is
represented by the contractual or notional amount of those instruments. The
Association uses the same credit policies in making such commitments as it does
for instruments that are included in the consolidated statement of financial
condition.
Financial instruments whose contract amount represents credit risk as of June 30
were as follows:
2000 1999
- --------------------------------------------------------------------------------
Mortgage loan commitments
At variable rates $ 195
At fixed rates ranging from 8.5 to 10.5% for 2000
and 6.75 to 9.00% for 1999 $1,067 2,749
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Association evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Association upon extension of credit, is based on
management's credit evaluation. Collateral held varies but may include
residential real estate or other assets of the borrower.
The Company and Association are also subject to claims and lawsuits which arise
primarily in the ordinary course of business. It is the opinion of management
that the disposition or ultimate determination of such possible claims or
lawsuits will not have a material adverse effect on the consolidated financial
position of the Company.
Note 11 -- Dividends and Capital Restrictions
The Company is not subject to any regulatory restrictions on the payment of
dividends to its stockholders.
Without prior approval, current regulations allow the Association to pay
dividends to the Company not exceeding retained net income for the current
calendar year plus those for the previous two calendar years. The Association
normally restricts dividends to a lesser amount because of the need to maintain
an adequate capital structure. OTS regulations also prohibit a savings
association from declaring or paying any dividends if, as a result, the
regulatory capital of the Association would be reduced below the minimum amount
required to be maintained for the liquidation account established in connection
with the conversion. Any additional amount of capital distributions would
require prior regulatory approval.
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
At the time of conversion on June 30, 1997, a liquidation account was
established in an amount equal to $420,000 of dividends waived by Montgomery
Mutual Holding Company plus the Association's net worth at March 31, 1995. The
liquidation account is maintained for the benefit of eligible deposit account
holders who maintain their deposit account in the Association after conversion.
In the event of a complete liquidation, and only in such event, each eligible
deposit account holder will be entitled to receive a liquidation distribution
from the liquidation account in the amount of the then current adjusted
subaccount balance for deposit accounts then held, before any liquidation
distribution may be made to stockholders. Except for the repurchase of stock and
payment of dividends, the existence of the liquidation account will not restrict
the use or application of net worth. The initial balance of the liquidation
account was $7,062,000.
At June 30, 2000, the stockholder's equity of the Association was $15,548,000,
of which approximately $79,000 was available for the payment of dividends.
Note 12 -- Regulatory Capital
The Association is subject to various regulatory capital requirements
administered by the federal banking agencies and is assigned to a capital
category. The assigned capital category is largely determined by three ratios
that are calculated according to the regulations: total risk adjusted capital,
Core 1 capital, and Core 1 leverage ratios. The ratios are intended to measure
capital relative to assets and credit risk associated with those assets and
off-balance sheet exposures of the entity. The capital category assigned to an
entity can also be affected by qualitative judgments made by regulatory agencies
about the risk inherent in the entity's activities that are not part of the
calculated ratios.
There are five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized. Classification of an association in
any of the undercapitalized categories can result in actions by regulators that
could have a material effect on an association's operations. At June 30, 2000
and 1999, the Association is categorized as well capitalized and met all subject
capital adequacy requirements. There are no conditions or events since June 30,
2000 that management believes have changed the Association's classification.
The Association's actual and required capital amounts and ratios are as follows:
Required
for Adequate To Be Well
Actual Capital 1 Capitalized 1
----------------------------------------------------------------------------
As of June 30, 2000 Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------
Total risk-based capital 1
(to risk-weighted assets) $14,636 17.14% $6,831 8.0% $8,539 10.0%
Tier 1 capital 1
(to risk-weighted assets) 15,142 17.73 3,415 4.0 5,123 6.0
Core capital 1
(to adjusted total assets) 15,142 11.06 5,477 4.0 6,847 5.0
Core capital 1
(to adjusted tangible assets) 15,142 11.06 2,739 2.0 N/A N/A
Tangible capital 1
(to adjusted total assets) 15,142 11.06 2,054 1.5 N/A N/A
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Required
for Adequate To Be Well
Actual Capital 1 Capitalized 1
----------------------------------------------------------------------------
As of June 30, 1999 Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------
Total risk-based capital 1
(to risk-weighted assets) $16,005 20.3% $6,324 8.0% $7,905 10.0%
Tier 1 capital 1
(to risk-weighted assets) 16,529 20.9 3,162 4.0 4,743 6.0
Core capital 1
(to adjusted total assets) 16,529 13.5 4,896 4.0 6,120 5.0
Core capital 1
(to adjusted tangible assets) 16,529 13.5 2,448 2.0 N/A N/A
Tangible capital 1
(to adjusted total assets) 16,529 13.5 1,836 1.5 N/A N/A
1 As defined by regulatory agencies
Note 13 -- Employee Benefit Plans
The Company has a retirement savings Section 401(k) plan in which substantially
all employees may participate. The Company matches employees' contributions at
the rate of 100 percent of the first 7 percent of base salary contributed by
participants. The Company's expense for the plan was $66,000 for 2000, $59,000
for 1999 and $52,000 for 1998.
On October 15, 1996, the stockholders of the Association approved a Management
Recognition Plan (MRP). This plan was assumed by the Company in connection with
the second conversion and reorganization. The plan allows for the purchase in
the open market or through the issuance of authorized and unissued shares of up
to 13,990 shares of common stock. On November 25, 1996, Montgomery purchased
1,865 shares for the MRP at a cost of $11,563 which was recorded as unearned
compensation in stockholders' equity. On June 26, 1998, the Company purchased
the remaining 12,123 shares necessary to fund the MRP at a cost of $155,325
which was recorded as unearned compensation in stockholders' equity. Restricted
stock awards covering 13,988 shares of common stock have been awarded to
Montgomery's officers and key employees under the MRP. The awards are to vest
and be earned by the recipient at a rate of 20 percent per year. Expense under
the plan for fiscal years ended June 30, 2000, 1999 and 1998 was $20,000, $9,000
and $38,000, respectively.
The Board of Directors approved a 1997 Revenue and Recognition plan (RRP) that
covered up to 4% of the common stock outstanding less the shares held in the MRP
Plan. The RRP plan allows for the Company to issue 19,700 shares of common
stock. On May 16, 2000, awards of 19,700 common shares were granted under the
RRP to Montgomery's Directors, Officers and key employees and unearned
compensation was recorded at the current market value of $8.125 per share at the
grant date. The restricted stock awards covering 19,700 shares of common stock
have been awarded. The awards granted to Montgomery's Directors, Chief Executive
Officer, and President are to vest and be earned by the recipient at the rate of
20 percent per year. The remaining awards vested upon granting. Expense under
the RRP for fiscal year ended June 30, 2000 was $20,000.
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
As part of the second conversion, the Company established an ESOP covering
substantially all employees of the Company. The ESOP acquired 132,250 shares at
$10.00 per share in the conversion with funds provided by a loan from the
Company. Accordingly, the $1,322,500 of stock acquired by the ESOP is shown as a
reduction to stockholders' equity. Unearned ESOP shares totaled 105,548 and
114,180 at June 30, 2000 and 1999 and had a fair value of $930,000 and
$1,080,000. Shares are released to participants proportionately as the loan is
repaid. Dividends on allocated shares are recorded as dividends and charged to
retained earnings. Dividends on unallocated shares are used to repay the loan.
Compensation expense is recorded equal to the fair market value of the stock
when contributions, which are determined annually by the Board of Directors of
the Bank, are made to the ESOP. The expense under the ESOP was approximately
$76,000, $92,000 and $115,000 for the years ended June 30, 2000, 1999 and 1998.
At June 30, 2000, the ESOP had 26,702 shares allocated, 105,548 suspense shares
and no shares committed-to-be-released. At June 30, 1999, the ESOP had 18,070
allocated shares, 114,180 suspense shares and no shares committed-to-be
released.
Note 14 -- Stock Option Plans
On October 15, 1996, the stockholders of the Association approved a 1995 Stock
Option Plan and a 1995 Director Stock Option Plan. These plans were assumed by
the Company in connection with the second conversion and reorganization. These
plans allow for the purchase in the open market or through the issuance of
authorized and unissued shares of up to 34,973 shares of common stock for the
Stock Option Plan and the Director Stock Option Plan. Under the stock option
plans, stock option rights covering 24,483 shares of common stock may be granted
to officers and other key employees and 10,490 shares of common stock may be
granted to directors of the Company.
The Company's 1995 stock option plans are accounted for in accordance with
Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Stock option awards vest and are
exercisable one year following the date of stockholder approval and thereafter
at a rate not in excess of 20% per year. All options become fully vested and
exercisable in the event of the death or disability of the optionee. The
incentive stock option exercise price will not be less than the fair market
value of the common stock on the date of the grant of the option. The date on
which the options are first exercisable is determined by the Board of Directors,
and the terms of the stock options will not exceed ten years from the date of
grant. The exercise price of each option was equal to the market price of the
Company's stock on the date of grant; therefore, no compensation expense was
recognized.
Although the Company has elected to follow APB No. 25, SFAS No. 123 requires pro
forma disclosures of net income and earnings per share as if the Company had
accounted for its employee stock options under that Statement. The fair value of
options granted in 1997 was estimated on the grant date using an option-pricing
model with the following assumptions:
- --------------------------------------------------------------------------------
Risk-free interest rates 6.4%
Dividend yields 3.37
Expected volatility factor of market price of common stock 11.0
Weighted-average expected life of the options 7 years
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair value of the options and amortized to expense over the options'
vesting period which is five years. The pro forma effect on net income and
earnings per share of this Statement are as follows:
2000 1999 1998
- --------------------------------------------------------------------------------
Net income As reported $699 $956 $981
Pro forma 691 948 973
Basic earnings per share As reported .56 .65 .64
Pro forma .56 .64 .64
Diluted earnings per share As reported .56 .65 .64
Pro forma .56 .64 .63
The following is a summary of the status of the Company's stock option plan and
changes in that plan as of and for the years ended June 30, 2000, 1999 and 1998.
Year Ended June 30 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of year 34,973 $6.97 34,973 $6.97 34,973 $6.97
Granted
------ ------ ------
Outstanding, end of year 34,973 $6.97 34,973 $6.97 34,973 $6.97
====== ====== ======
Options exercisable at year end 20,982 $6.97 13,988 $6.97 6,994 $6.97
As of June 30, 2000, options outstanding totaling 34,973 have an exercise price
of $6.97 and a weighted-average remaining contractual life of 6.6 years.
In addition, the Board of Directors and stockholders have approved a 1997 Stock
Option Plan. Under the 1997 Plan, stock option and stock appreciation rights
covering shares representing an aggregate of up to 10 percent of the common
stock sold in the conversion may be granted to directors, officers and employees
of the Company or its subsidiaries. As of June 30, 2000, no grants under the
1997 Plan have been made.
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 15 -- Earnings Per Share
Earnings per share were computed as follows:
Year Ended June 30 2000
- ---------------------------------------------------------------------------------------------------------------
Weighted Per
Average Share
Income Shares Amount
- ---------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
Income available to common stockholders $699 1,238,567 $.56
Effect of dilutive securities
MRP and RRP awards and stock options 7,062
-----------------------------
Diluted Earnings Per Share
Income available to common stockholders
and assumed conversions $699 1,245,629 $.56
=============================
Year Ended June 30 1999
- ---------------------------------------------------------------------------------------------------------------
Weighted Per
Average Share
Income Shares Amount
- ---------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
Income available to common stockholders $956 1,469,942 $.65
Effect of dilutive securities
MRP awards and stock options 11,838
-----------------------------
Diluted Earnings Per Share
Income available to common stockholders
and assumed conversions $956 1,481,780 $.65
=============================
Year Ended June 30 1998
- ---------------------------------------------------------------------------------------------------------------
Weighted Per
Average Share
Income Shares Amount
- ---------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
Income available to common stockholders $981 1,521,616 $.64
Effect of dilutive securities
MRP awards and stock options 17,215
-----------------------------
Diluted Earnings Per Share
Income available to common stockholders
and assumed conversions $981 1,538,831 $.64
=============================
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 16 -- Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash and Cash Equivalents--The fair value of cash and cash equivalents
approximates carrying value.
Interest-bearing Deposits--The fair value of interest-bearing deposits
approximate carrying value.
Investment Securities--Fair values are based on quoted market prices.
Loans--The fair value for loans is estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Interest Receivable/Payable--The
fair value of interest receivable/payable approximates carrying values.
FHLB Stock--Fair value of FHLB stock is based on the price at which it may be
resold to the FHLB.
Deposits--Fair values for certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
on such time deposits.
Federal Home Loan Bank Advances and Line of Credit--The fair value of these
borrowings are estimated using a discounted cash flow calculation, based on
current rates for similar debt.
Advance Payments by Borrowers for Taxes and Insurance--The fair value
approximates carrying value.
Off-Balance Sheet Commitments--Commitments include commitments to originate
mortgage loans, and extend lines of credit and are generally of a short-term
nature. The fair value of such commitments are based on fees currently charged
to enter into of a similar agreements, taking into account the remaining terms
of the agreements and the counterparties' credit standing.
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The estimated fair values of the Company's financial instruments are as follows:
2000 1999
---------------------------------------------------------
Carrying Fair Carrying Fair
June 30 Amount Value Amount Value
- -------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 10,526 $ 10,526 $ 4,933 $ 4,933
Interest-bearing deposits 259 259 219 219
Investment securities available for sale 444 444 881 881
Loans, net 119,131 117,853 111,415 112,022
Stock in FHLB 1,893 1,893 1,251 1,251
Interest receivable 951 951 894 894
Liabilities
Deposits 91,507 90,846 82,468 82,259
FHLB advances and line of credit 28,241 26,713 20,632 20,044
Interest payable 534 534 567 567
Off-Balance Sheet Assets
Commitments to extend credit
Note 17 -- Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company:
Condensed Balance Sheet
June 30 2000 1999
- --------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 664 $ 1,405
Interest-bearing deposits 59 119
Investment securities available for sale 444 881
Real estate held for development 165 164
Other assets 185 68
Investment in subsidiary 15,551 16,889
----------------------
Total assets $17,068 $19,526
======================
Liabilities $ 87 $ 129
Stockholders' Equity 16,981 19,397
----------------------
Total liabilities and stockholders' equity $17,068 $19,526
======================
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Condensed Statement of Income
Year Ended June 30 2000 1999 1998
- -------------------------------------------------------------------------------------------------
Interest and dividend income $ 151 $ 235 $ 310
Gain on sale of available for sale securities 55
Dividends from subsidiary 2,000
--------------------------------
2,206 235 310
--------------------------------
Expenses
Salaries and employee benefits 35 53 71
Other expenses 112 88 60
--------------------------------
Total expenses 147 141 131
--------------------------------
Income before income tax expense and
equity in undistributed income of subsidiary 2,059 94 179
Income tax expense 19 34 80
--------------------------------
Income before equity in undistributed income of subsidiary 2,040 60 99
Equity in undistributed (distribution in excess of)
income of subsidiary (1,341) 896 882
--------------------------------
Net Income $ 699 $ 956 $ 981
================================
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Condensed Statement of Cash Flows
Year Ended June 30 2000 1999 1998
- --------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 699 $ 956 $ 981
Adjustments to reconcile net income to net cash
provided by operating activities 1,305 (871) (659)
---------------------------------------------
Net cash provided by operating activities 2,004 85 322
---------------------------------------------
Investing Activities
Net change in interest bearing deposits 60 (4) (115)
Purchase of securities available for sale (647) (200)
Proceeds from sale of available for sale securities 367
Additions to real estate owned (1) (64) (100)
---------------------------------------------
Net cash provided (used) by
investing activities 426 (715) (415)
---------------------------------------------
Financing Activities
Purchase of stock (2,894) (1,369)
Purchase of stock for MRP (155)
Cash dividends (277) (328) (276)
---------------------------------------------
Net cash used by financing activities (3,171) (1,697) (431)
---------------------------------------------
Net Change in Cash (741) (2,327) (524)
Cash at Beginning of Year 1,405 3,732 4,256
---------------------------------------------
Cash at End of Year $ 664 $ 1,405 $ 3,732
=============================================
Additional Cash Flow and
Supplementary Information
Common stock issued to ESOP leveraged
with an employer loan $ 1,322,500
Montgomery Financial Corporation
and
Montgomery Savings, a Federal Association
Directors and Executive Officers
Directors
Earl F. Elliott
Director, Chief Executive Officer
and President of the Company and
Chairman of the Board and Chief
Executive Officer of the Association
Mark E. Foster C. Rex Henthorn Joseph M. Malott
Director of the Company Director and Chairman of the Board Director of the Company
and the Association of the Company and Director and the Association
of the Association
J. Lee Walden John E. Woodward Robert C. Wright
Director, Chief Operating Officer Director of the Company Director of the Company and
and Chief Financial Officer and the Association and the Association
of the Company and
Director, President and
Chief Financial Officer
of the Association
Executive Officers
Steven V. Brier Earl F. Elliott Thomas J. Henthorn
First Vice President Director, Chief Executive Officer First Vice President
and Treasurer of and President of the Company and of the Association
the Association Chairman of the Board and
Chief Executive Officer
of the Association
Nancy L. McCormick J. Lee Walden
Secretary and Treasurer Director, Chief Operating Officer
of the Company and Chief Financial Officer
and Senior Vice President of the Company and
and Secretary Director, President and
of the Association Chief Financial Officer
of the Association
STOCKHOLDER INFORMATION
Corporate Profile
Montgomery Financial Corporation is an Indiana corporation organized in
1997 by the Association for the purpose of holding all of the capital stock of
the Association and in order to facilitate the conversion and reorganization.
The Association was organized in 1888 and converted to a federal savings and
loan charter in 1985. In August 1995, the Association converted to the stock
form of organization and concurrently formed Montgomery Mutual Holding Company,
owner of 70.59 percent of the shares of the Association's common stock. In June
1997, the Association became the wholly owned subsidiary of Montgomery Financial
Corporation through the sale and issuance of common stock. The principal asset
of Montgomery Financial Corporation is the outstanding stock of the Association,
its wholly owned subsidiary. Montgomery Financial Corporation presently has no
separate operations and its business consists only of the business of the
Association. The Association's primary business consists of attracting deposits
from the general public and using these deposits to provide financing of
residential property and, to a lesser extent, other properties.
Market Information
Montgomery's common stock is traded on the Nasdaq SmallCap Market under
the symbol "MONT." As of June 30, 2000, Montgomery Financial had 275
stockholders of record and 1,244,790 outstanding shares of common stock. The
table below sets forth market price information for Montgomery's common stock
for the periods indicated. These prices do not represent actual transactions and
do not include retail markups, markdowns, or commissions.
Declared Dividends
High Low Per Share
---- --- ---------
2000
First Quarter............ $10.500 $9.250 $0.055
Second Quarter........... 9.875 8.000 0.055
Third Quarter............ 10.250 7.250 0.055
Fourth Quarter........... 9.500 8.000 0.055
Declared Dividends
High Low Per Share
---- --- ---------
1999
First Quarter............ $12.625 $ 9.500 $0.055
Second Quarter........... 12.000 10.000 0.055
Third Quarter............ 10.750 9.063 0.055
Fourth Quarter........... 9.875 8.750 0.055
Form 10-KSB Report
A copy of Montgomery's Annual Report on Form 10-KSB for the fiscal year
ended June 30, 2000, including financial statements, as filed with the
Securities and Exchange Commission, will be furnished without charge to
stockholders of Montgomery upon written request to the Secretary, Montgomery
Financial Corporation, 119 East Main Street, Crawfordsville, Indiana 47933. The
Securities and Exchange Commission maintains a web site that contains reports,
proxy and information statements, and other information regarding registrants
that file electronically with the Commission, including the Corporation; that
address is http://www.sec.gov.
Main Office
119 East Main Street
Crawfordsville, Indiana 47933
Covington Office Mill Street Office
417 Liberty Street 816 South Mill Street
Covington, Indiana 47932 Crawfordsville, Indiana 47933
Lafayette Office Williamsport Office
50 West 250 South 120 North Monroe Street
Lafayette, Indiana 47909 Williamsport, Indiana 47993
Independent Auditor Legal Counsel
Olive LLP Henthorn, Harris, Taylor & Weliever PC
201 North Illinois Street 122 East Main Street
Indianapolis, Indiana 46204 Crawfordsville, Indiana 47933
Transfer Agent Special Counsel
Registrar & Transfer Co. Barnes & Thornburg
10 Commerce Drive 11 South Meridian Street
Cranford, New Jersey 07016 Indianapolis, IN 46204