SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
MONTGOMERY FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer in its Charter)
Indiana 35-1962246
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
119 East Main Street
Crawfordsville, Indiana 47933
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(765) 362-4710
--------------
(Registrant's telephone number, including area code)
Check here whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15 (D) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
As of January 31, 2000, there were 1,361,210 shares of the Registrant's
common stock issued and outstanding.
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Form 10-QSB
Index
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statement of Financial Condition
As of December 31, 1999 and June 30, 1999 3
Consolidated Condensed Statement of Income for the Three
And Six Months Ended December 31, 1999 and 1998 4
Consolidated Condensed Statement of Cash Flows for the
Six Months Ended December 31, 1999 and 1998 5
Consolidated Condensed Statement of Stockholders'
Equity for the Six Months Ended December 31, 1999 7
Notes to Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Consolidated Condensed Statement of Financial Condition
(Unaudited)
December 31, June 30,
1999 1999
------------- -------------
Assets
Cash ................................................ $ 488,146 $ 523,585
Short-term interest-bearing deposits ................ 10,883,077 4,409,228
------------- -------------
Total cash and cash equivalents .............. 11,371,223 4,932,813
Interest-bearing deposits ........................... 169,463 219,463
Securities available for sale ....................... 507,826 880,900
Loans ............................................... 117,350,287 111,641,224
Allowance for loan losses ........................... (226,000) (226,000)
------------- -------------
Net loans ...................................... 117,124,287 111,415,224
Real estate owned and held for development, net 1,051,918 1,181,720
Premises and equipment .............................. 3,170,501 2,839,409
Federal Home Loan Bank Stock ........................ 1,893,300 1,250,700
Interest receivable ................................. 1,002,311 893,854
Other assets ........................................ 341,580 345,036
------------- -------------
Total assets ................................. $ 136,632,409 $ 123,959,119
============= =============
Liabilities
Deposits
Noninterest bearing ............................. $ 1,976,530 $ 1,349,282
Interest bearing ................................ 84,683,989 81,118,363
------------- -------------
Total deposits ............................... 86,660,519 82,467,645
Federal Home Loan Bank advances
and other borrowings ............................ 30,391,258 20,632,069
Interest payable .................................... 590,688 566,632
Deferred tax liability .............................. 325,382 347,089
Other liabilities ................................... 642,014 548,612
------------- -------------
Total liabilities ............................ 118,609,861 104,562,047
Stockholders' Equity
Preferred stock, $.01 par value
authorized and unissued - 2,000,000 shares
Common stock, $.01 par value - 8,000,000 shares
authorized; 1,361,210 and 1,521,142 issued ..... 13,612 15,211
Paid-in capital ..................................... 11,144,674 12,464,781
Retained earnings - substantially restricted ........ 8,059,697 8,131,251
Unearned ESOP shares - 109,864 and 114,180 ......... (1,098,639) (1,141,796)
Unearned compensation .............................. (74,818) (92,714)
Accumulated other comprehensive income (loss) ...... (21,978) 20,339
------------- -------------
Total stockholders' equity ................... 18,022,548 19,397,072
------------- -------------
Total liabilities and stockholders' equity ... $ 136,632,409 $ 123,959,119
============= =============
See notes to Consolidated Condensed Financial Statements.
3
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Consolidated Condensed Statement of Income
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
----------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Interest and Dividend Income
Loans ................................. $ 2,291,716 $ 2,171,744 $ 4,529,093 $ 4,271,760
Investment securities ................. 4,491 5,757 12,037 9,248
Deposits with financial institutions .. 134,978 85,360 232,259 195,918
Dividend Income ....................... 36,635 20,933 65,680 39,648
----------- ----------- ----------- -----------
Total interest and dividend income 2,467,820 2,283,788 4,839,069 4,516,574
----------- ----------- ----------- -----------
Interest Expense
Deposits .............................. 1,097,181 1,063,559 2,148,177 2,163,142
Federal Home Loan Bank advances
and other borrowings ............. 370,080 230,489 691,016 396,662
----------- ----------- ----------- -----------
Total interest expense ........... 1,467,261 1,294,048 2,839,193 2,559,804
----------- ----------- ----------- -----------
Net Interest Income ..................... 1,000,559 989,740 1,999,876 1,956,770
Provision for losses on loans ......... 10,000 25,000
----------- ----------- ----------- -----------
Net Interest Income After
Provision for Losses on Loans ......... 1,000,559 979,740 1,999,876 1,931,770
----------- ----------- ----------- -----------
Other Income
Service charges on deposit accounts ... 14,863 13,181 28,678 23,799
Gain on sale of investment securities . 55,644 55,644
Net appraisal income (expense) ........ 4,260 (5,940) 5,271 (4,535)
Other income .......................... 7,148 1,638 14,366 3,389
----------- ----------- ----------- -----------
Total other income ............... 81,915 8,879 103,959 22,653
----------- ----------- ----------- -----------
Other Expenses
Salaries and employee benefits ........ 423,416 359,398 789,739 643,313
Net occupancy expense ................. 38,224 25,918 80,911 53,447
Equipment expense ..................... 57,487 45,958 118,306 92,515
Data processing expense ............... 38,055 42,197 88,790 78,050
Deposit insurance expense ............. 12,424 12,695 24,773 25,192
Real estate operations, net ........... (13,093) (10,954) (18,794) (16,197)
Advertising expense ................... 20,847 12,221 45,991 23,513
Other expenses ........................ 161,433 139,922 316,851 263,798
----------- ----------- ----------- -----------
Total other expenses ......... 738,793 627,355 1,446,567 1,163,631
----------- ----------- ----------- -----------
Income Before Income Tax ................ 343,681 361,264 657,268 790,792
Income tax expense .................... 148,235 125,390 270,460 299,890
----------- ----------- ----------- -----------
Net Income .............................. $ 195,446 $ 235,874 $ 386,808 $ 490,902
=========== =========== =========== ===========
Net Income Per Share:
Basic ............................. $ 0.16 $ 0.16 $ 0.30 $ 0.33
Diluted ........................... $ 0.16 $ 0.16 $ 0.29 $ 0.32
Dividends Per Share ..................... $ 0.055 $ 0.055 $ 0.110 $ 0.110
See Notes to Consolidated Condensed Financial Statements.
4
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Consolidated Condensed Statement of Cash Flows
(Unaudited)
Six Months Ended
December 31,
----------------------------
1999 1998
----------- -----------
Operating Activities
Net income ........................................... $ 386,808 $ 490,902
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses ........................ 25,000
Depreciation ..................................... 156,030 125,155
ESOP stock amortization .......................... 39,390 48,762
Amortization of unearned compensation ............ 10,636 4,341
Change In
Interest receivable .......................... (108,457) (38,988)
Interest payable ............................. 24,056 108,680
Other assets ................................. 3,456 (89,591)
Other liabilities ............................ 156,819 (419,220)
----------- -----------
Net cash provided by operating activities . 668,738 255,041
----------- -----------
Investing Activities
Proceeds from paydowns of
securities available for sale .................... 10,805
Proceeds from sale of securities
available for sale .............................. 303,000
Purchase of securities available for sale ........... (441,220)
Net change in loans .................................. (5,709,063) (5,256,388)
Additions to real estate owned and held for investment (76,021) (46,308)
Proceeds from Real Estate Owned Sales ................ 187,853 319,222
Purchases of premises and equipment .................. (469,152) (650,008)
Purchase of FHLB of Indianapolis stock ............... (642,600) (329,200)
----------- -----------
Net cash used by investing activities ..... (6,405,983) (6,393,097)
----------- -----------
5
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Consolidated Condensed Statement of Cash Flows
(Continued)
Six Months Ended
December 31,
------------------------------
1999 1998
------------ ------------
Financing Activities
Net Change In
Noninterest-bearing, interest-bearing demand and
savings deposits ............................ $ 4,433,645 $ 1,960,057
Certificates of deposit ......................... (240,771) (5,669,920)
Proceeds from FHLB advances
and other borrowings ............................ 13,500,000 11,000,000
Repayment of FHLB advances
and other borrowings ............................ (3,740,811) (2,247,413)
Stock purchase ........................................ (1,630,436) (693,924)
Dividends paid ........................................ (145,972) (174,465)
------------ ------------
Net cash provided by financing activities 12,175,655 4,174,335
------------ ------------
Net Change in Cash and Cash Equivalents ............... 6,438,410 (1,963,721)
Cash and Cash Equivalents, Beginning of Period ........ 4,932,813 10,896,745
------------ ------------
Cash and Cash Equivalents, End of Period .............. $ 11,371,223 $ 8,933,024
Additional Cash Flow and Supplementary Information
Interest Paid ....................................... $ 2,815,137 $ 2,451,124
Income Tax Paid ..................................... 277,824 755,589
Transfer from Loans to Other Real Estate Owned ........ 112,191
Cash Dividends Payable ............................. 68,587 80,663
See Notes to Consolidated Condensed Financial Statements
6
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Consolidated Condensed Statement of Stockholders' Equity
(Unaudited)
Common Stock
--------------- Paid-in Comprehensive Retained
Shares Amount Capital Income Earnings
------ ------ ------- ------ --------
Balance July 1, 1999 1,521,142 $15,211 $12,464,781 $8,131,251
Net income for the six months
ended December 31, 1999 $386,808 386,808
--------
Other comprehensive income,
net of tax
Unrealized holdings arising
during the period, net of tax
benefit of $5,716 (8,714)
Less: Reclassification adjustment
for gain included in net income,
net of tax benefit of $22,041 33,603
--------
Unrealized loss on securities (42,317)
---------
Other comprehensive income $344,491
========
Cash dividends ($.110 per share) (138,605)
Stock purchase (159,932) (1,599) (1,309,080) (319,757)
ESOP shares earned (3,767)
Amortization of unearned
compensation expense (7,260)
--------- ------- ----------- -------- ----------
Balance December 31, 1999 1,361,210 $13,612 $11,144,674 $8,059,697
========= ======= =========== ======== ==========
Accumulated
Other
Unearned Unearned Comprehensive
ESOP Shares Compensation Income (Loss) Total
----------- ------------ ------------- -----
Balance July 1, 1999 $(1,141,796) $ (92,714) $ 20,339 $19,397,072
Net income for the six months
ended December 31, 1999 386,808
Other comprehensive income,
net of tax
Unrealized holdings arising
during the period, net of tax
benefit of $5,716
Less: Reclassification adjustment
for gain included in net income,
net of tax benefit of $22,041
Unrealized loss on securities (42,317) (42,317)
Other comprehensive income
Cash dividends ($.110 per share) (138,605)
Stock purchase (1,630,436)
ESOP shares earned 43,157 39,390
Amortization of unearned
compensation expense 17,896 10,636
----------- ---------- -------- -----------
Balance December 31, 1999 $(1,098,639) $ (74,818) $(21,978) $18,022,548
=========== ========== ======== ===========
See Notes to Consolidated Condensed Financial Statement
7
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Basis of Presentation
The unaudited interim consolidated condensed financial statements include the
accounts of Montgomery Financial Corporation ("Montgomery"), its subsidiary,
Montgomery Savings, A Federal Association (the "Association") and its
subsidiary, MSA SERVICE CORP.
The unaudited interim consolidated condensed financial statements have been
prepared in accordance with the instructions to Form 10-QSB and, therefore, do
not include all information and disclosures required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the financial statements reflect all adjustments necessary to
present fairly Montgomery's financial position as of December 31, 1999, results
of operations for the three and six month periods ending December 31, 1999 and
1998, and cash flows for the six month periods ended December 31, 1999 and 1998.
The results of operations for the three and six month periods ended December 31,
1999 are not necessarily indicative of the results of operations which may be
expected for the fiscal year ending June 30, 2000.
Net Income Per Share
Net income per share for the three and six month periods ended December 31, 1999
and 1998 are computed by dividing net earnings by the weighted average shares of
common stock outstanding during the period.
For the Three Months Ended December 31, 1999 December 31, 1998
----------------- -----------------
Weighted Per Weighted Per
Average Share Average Share
Income Shares Amount Income Shares Amount
-------- --------- -------- -------- --------- ----------
Basic Net Income Per Share:
Net Income Available
to Common Stockholders ...... $195,446 1,237,994 $ 0.16 $235,874 1,490,103 $ 0.16
======== =========
Effect of Dilutive Stock Options
and Grants .................. 0 6,588 0 12,897
-------- --------- -------- ---------
Diluted Net Income Per Share:
Net Income Available
To Common Stockholders ...... $195,445 1,244,582 $ 0.16 $235,874 1,502,999 $ 0.16
======== ========= ======== ======== ========= =========
8
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
For the Six Months Ended December 31, 1999 December 31, 1998
----------------- -----------------
Weighted Per Weighted Per
Average Share Average Share
Income Shares Amount Income Shares Amount
-------- --------- -------- -------- --------- -------------
Basic Net Income Per Share:
Net Income Available
to Common Stockholders ...... $386,808 1,303,570 $ 0.30 $490,902 1,504,986 $ 0.33
======== =======
Effect of Dilutive Stock Options
and Grants .................. 0 8,367 0 13,650
-------- --------- --------- ----------
Diluted Net Income Per Share:
Net Income Available
To Common Stockholders ...... $386,808 1,311,937 $ 0.29 $490,902 1,518,636 $ 0.32
======== ========= ======== ======== ========= =======
9
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements. When used in this Form 10-QSB or future
filings by Montgomery with the Securities and Exchange Commission, in
Montgomery's press releases or other public shareholder communications, or in
oral statements made with the approval of an authorized executive officer, the
words or phrases, "will likely result", "are expected to", "will continue", "is
anticipated", "estimate", "project", "believe", or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Montgomery wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made, and to advise readers that various
factors, including regional and national economic conditions, changes in levels
of market interest rates, credit risks of lending activities, and competitive
and regulatory factors, could affect Montgomery' financial performance and could
cause Montgomery's actual results for future periods to differ materially from
those anticipated or projected. Montgomery does not undertake, and specifically
disclaims any obligation, to revise any forward-looking statements to reflect
the occurrence of anticipated or unanticipated events or circumstances after the
date of such statements.
Financial Condition. Montgomery's total assets were $136.6 million at
December 31, 1999, an increase of $12.7 million, or 10.2 percent from June 30,
1999. During this six month period interest-earning assets, including Federal
Home Loan Bank stock, increased $12.4 million, or 10.5 percent. Short-term
interest-earning deposits increased $6.4 million, or 138.8 percent. This
increase was primarily due to the possible need for increased liquidity due to
the Year 2000 issue. Loans increased $5.7 million, or 5.1 percent. Federal Home
Loan Bank Stock increased $643,000, or 51.4 percent due to an increase in
Federal Home Loan Bank advances. Deposits increased $4.2 million, or 5.1 percent
and borrowings increased $9.8 million, or 47.3 percent, causing a net increase
in interest-bearing liabilities of $14.0 million, or 13.5 percent. The increase
in advances was used to fund loan growth and to increase liquidity to acceptable
levels as required by Montgomery's Year 2000 contingency planning.
Capital and Liquidity. At December 31, 1999, Montgomery's
stockholders' equity was $18.0 million, or 13.2 percent of total assets,
compared with stockholders' equity of $19.4 million, or 15.7 percent, at June
30, 1999. With the approval of the OTS on May 5, 1999, Montgomery began to
repurchase 209,171 of its outstanding common stock. The repurchase was completed
on September 24, 1999 at a total cost of $2.1 million. The repurchase of stock
during the six months ended December 31, 1999 reduced capital in the amount of
$1.6 million. The Association continues to exceed all minimum capital
requirements. At December 31, 1999, the Association's tangible and core capital
was $16.8 million, or 12.5 percent of tangible assets, $14.8 million in excess
of the 1.5 percent minimum required tangible capital and $11.4 million in excess
of the 4.0 percent minimum required core capital. Risk-based capital equaled
$16.3 million, or 19.9 percent of risk-weighted assets, $9.8 million more than
the minimum 8.0 percent risk based level required. The director of the OTS is
required to set minimum liquidity levels between four and 10 percent of assets.
Current regulations require a minimum liquidity level of four percent. The
Association's average liquidity ratio for the six months ended December 31,
1999, was 8.4 percent.
10
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Asset/Liability Management. The Association, 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-bearing assets. The OTS issued a regulation which provides 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 this OTS regulation, 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. Under the regulation,
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) or (b) its "normal" level of exposure which is 2% of the present value
of its assets. The regulation does exempt all institutions under $300 million in
assets with risk-based capital above 12 percent from reporting information to
OTS to calculate exposure and making any deduction from risk-based capital. At
December 31, 1999 the Association's total assets were $136.6 million and risk
based capital was 19.9 percent; therefore the Association would have been exempt
from calculating or making any risk-based capital reduction. The Association's
management believes however, interest-rate risk is an important factor and makes
all reports necessary to OTS to calculate interest-rate risk on a voluntary
basis. At September 30, 1999, the most recent date for which information was
available from the OTS, 2.0% of the present value of the Association's assets
was approximately $2.58 million, which was less than $4.50 million, the greatest
decrease in NPV resulting from a 200 basis point change in interest rates. As a
result, the Association, 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 the Association not been exempt
from reporting on such date. Based on September 30, 1999 NPV information, the
amount of the Association's deduction from capital, had it been subject to
reporting, would have been approximately $825,000.
It has been and continues to be a priority of the Association'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. The
Association'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 the Association's interest-earning
assets. FHLB advances are used in an effort to match the effective maturity of
the Association's interest-bearing liabilities to its interest-earning assets.
Presented below, as of September 30, 1999, and September 30, 1998, is
an analysis of the Association'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
assumptions utilized by the OTS in assessing the interest risk of the thrifts it
regulates. Based upon these assumptions at September 30, 1999 and September 30,
1998, the NPV of the Association was $19.9 million and $18.5 million
respectively. NPV is calculated by the OTS for the purpose of interest rate risk
assessment and should not be considered as an indicator of value of the
Association.
11
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
- -------------------- ----------------- ------------------------------------ ------------------------------
At September 30, 1999 At September 30, 1998
- -------------------- ----------------- ------------------------------------ ------------------------------
Assumed Board
Change in Limit
Interest Rates % Change $ Change % Change $ Change % Change
(Basis Points) in NPV in NPV in NPV in NPV in NPV
- -------------------- ----------------- ----------------- ------------------ ----------------- ------------
(Dollars in Thousands)
- -------------------- ----------------- ------------------ ----------------- ----------------- ------------
+300 -60 -7,061 -35 -4,882 -26
- -------------------- ----------------- ------------------ ----------------- ----------------- ------------
+200 -50 -4,503 -23 -2,815 -15
- -------------------- ----------------- ------------------ ----------------- ----------------- ------------
+100 -30 -2,029 -10 -1,159 -6
- -------------------- ----------------- ------------------ ----------------- ----------------- ------------
0 0 0 0 0 0
- -------------------- ----------------- ------------------ ----------------- ----------------- ------------
-100 -30 +1,242 +6 +829 +5
- -------------------- ----------------- ------------------ ----------------- ----------------- ------------
-200 -50 +1,221 +11 +1,840 +10
- -------------------- ----------------- ------------------ ----------------- ----------------- ------------
-300 -60 +3,281 +16 +4,363 +24
- -------------------- ----------------- ------------------ ----------------- ----------------- ------------
In the event of a 300 basis point change in interest rate based upon
estimates as of September 30, 1999 the Association would experience a 16%
increase, compared to a 24% increase at September 30, 1998, in NPV in a
declining rate environment and a 35% decrease, compared to a 26% decrease at
September 30, 1998, 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 the Association in recent periods was primarily due to
the maturities of interest-bearing assets increasing more than the maturities on
interest-bearing liabilities due to the increase in fixed-rate residential
mortgage loans and non-residential loans.
Results of Operations. Montgomery's net income for the three months
ended December 31, 1999, was $195,000 compared to $236,000 for the three months
ended December 31, 1998, an decrease of $41,000, or 17.4 percent. Net interest
income increased $11,000, or 1.1 percent. Average interest-earning assets
increased $15.5 million, or 13.8 percent, from $112.7 million for the three
months ended December 31, 1998 to $128.2 million for the 1999 three-month
period. Average interest-bearing liabilities increased $18.3 million from $94.4
million to $112.7 million during the comparable three-month periods. Interest
rate spread decreased from 2.62 percent for the three months ended December 31,
1998, to 2.49 percent for the three months ended December 31, 1999. Net interest
margin decreased to 3.12 percent for the three months ended December 31, 1999
from 3.51 percent for the three months ended December 31, 1998. Non-interest
income was $82,000 for the 1999 three-month period compared to $9,000 for the
1998 period primarily due to a gain on the sale of available for sale investment
securities. Non-interest expense was $739,000 for the three months ended
December 31, 1999 compared to $627,000 for the 1998 three-month period, an
increase of $112,000, or 17.8 percent, primarily due to expenses associated with
the operation of the Lafayette, Indiana office which opened in April, 1999.
Income before income tax was $344,000 for the three months ended December 31,
1999 compared to $361,000 for the 1998 period, a decrease of $17,000, or 4.9
percent. Income tax expense increased from $125,000 to $148,000 for the
comparable periods.
12
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
For the six months ended December 31, 1999, net income was $387,000
compared to $491,000 for the six months ended December 31, 1998, a decrease of
$104,000, or 21.2 percent. Net interest income increased from $1,957,000 for the
six months ended December 31, 1998 to $2,000,000 for the six months ended
December 31, 1999, an increase of $43,000, or 2.2 percent. Average
interest-earning assets increased $13.0 million from $112.5 million for the six
months ended December 31, 1998 to $125.5 million for the 1999 six-month period
while average interest-bearing liabilities increased $15.3 million during the
comparable periods. Non-interest income increased $81,000 primarily due to a
gain on the sale of available for sale investment securities. Non-interest
expense increased $283,000, or 24.3 percent. This increase was primarily due to
an increase in personnel and operational costs in connection with the Lafayette,
Indiana office. Growth in other offices also contributed to the increase in
expense. Income tax expense was $270,000 for the six months ended December 31,
1999, compared to $300,000 for the six months ended December 31, 1998.
Interest Income. Montgomery's total interest income for the three
months ended December 31, 1999, was $2.5 million, an increase of $184,000, or
8.1 percent, compared to interest income for the three months ended December 31,
1998. This increase was primarily caused by an increase in average
interest-earning assets from $112.7 million for the three months ended December
31, 1998, to $128.2 million for the three months ended December 31, 1999, an
increase of $15.5 million, or 13.8 percent principally due to loan growth.
Average loans increased from $105.2 million for the 1998 three-month period to
$115.9 million for the 1998 three-month period and average interest-earning
deposits increased from $5.8 million to $9.8 million for the respective periods.
The average yield on interest-earning assets was 7.70 percent for the three
months ended December 31, 1999, compared to 8.10 percent for the three months
ended December 31, 1998.
Interest income for the six months ended December 31, 1999, was $4.8
million, an increase of $322,000, or 7.1 percent, from interest income for the
same period in 1998. Average interest-earning assets for the six months ended
December 31, 1999, was $125.9 million compared to $112.4 million for the 1998
six month period, an increase of $13.5 million, or 12.0 percent, principally due
to loan growth. The average yield for the 1999 period was 7.71 percent compared
to 8.03 percent for the 1998 period.
Interest Expense. Interest expense for the three months ended December
31, 1999, was $1.5 million, which was an increase of $173,000, or 13.4 percent,
from the three months ended December 31, 1998. Average interest-bearing
liabilities increased $18.3 million, or 19.4 percent, from $94.4 million for the
three months ended December 31, 1998, to $112.7 million for the three months
ended December 31, 1999. Average interest-bearing deposits increased $7.5
million and average borrowings increased $10.8 million for the comparable
periods. The average cost of funds decreased from 5.48 percent to 5.21 percent
for the comparable periods. The average cost of deposits decreased from 5.41
percent to 5.10 percent for the comparable three-month periods. The average cost
of borrowings decreased from 5.85 percent to 5.57 percent for the comparable
periods due.
Interest expense for the six months ended December 31, 1999, was $2.8
million, an increase of $279,000, or 10.9 percent, from the six months ended
December 31, 1998. The average cost of funds for the 1999 period was 5.20
percent compared to 5.45 percent for the 1998 period. Average interest-bearing
liabilities increased from $93.8 million for the six months ended December 31,
1998 to $112.7 million for the 1999 six-month period.
13
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Provision for Losses on Loans. There was no provision for losses on
loans for the three months ended December 31, 1999 compared to $10,000 for the
three months ended December 31, 1998. During the six months ended December 31,
1998, a $25,000 provision was made compared to a no provision being made in the
comparable 1999 six-month period. 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
losses on loans. Loans delinquent ninety days or more were $1,166,000 at
December 31, 1999, compared to $547,000 at June 30, 1999. Non-performing loans
to total loans at December 31, 1999 were 0.99 percent compared to 0.49 percent
at June 30, 1999. The allowance for losses to non-performing loans was 19.4
percent at December 31, 1999 compared to 41.3 percent at June 30, 1999. The
allowance to total loans was 0.19 percent at December 31, 1999 and 0.20 percent
at June 30, 1999. 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. Montgomery's other income for the three months
ended December 31, 1999, totalled $82,000 compared to $9,000 for the three
months ended December 31, 1998, an increase of $73,000. This increase was
primarily due to a gain on the sale of available for sale securities in the
amount of $56,000 in the 1999 period compared to no gain during the 1998 period.
Service charges on deposit accounts increased of $2,000, net appraisal income
increased $10,000 and other income increased $5,000.
Other income for the six months ended December 31, 1999, was $104,000,
an increase of $81,000 from the comparable 1998 six month period. As mentioned
above, this increase was primarily due to a gain on the sale of available for
sale securities in the amount of $56,000 in the 1999 period compared to no gain
during the 1998 period. During the six months ended December 31, 1999, service
charges on deposit accounts increased $5,000, appraisal income increased $10,000
and other income increased $11,000 from the 1998 six-month period. These
increases are primarily due to the growth of the institution and increased usage
of debit cards and related ATM transactions.
Non-Interest Expense. Montgomery's other expenses for the three months
ended December 31, 1999, totalled $739,000, an increase of $111,000, or 17.8
percent, from the three months ended December 31, 1998. Salaries and employee
benefits increased $64,000 primarily due to an increase in personnel to
accommodate growth and to staff the Lafayette Office which opened in April 1999.
Net occupancy expense increased $12,000 and equipment expense increased $12,000
primarily due to the increase in expenses associated with the operation of the
Lafayette Office. Advertising expense increased $9,000 and other expenses
increased $22,000 primarily due to Montgomery's growth and expansion.
Non-interest expense for the six months ended December 31, 1999, was
$1.4 million compared to $1.2 million, an increase of $283,000, or 24.3 percent,
from the six months ended December 31, 1998. Salary and employee benefits
increased $146,000, or 22.8 percent. An increase in personnel due to branch
office growth and the operation of the new Lafayette office was the primary
factor for the increase in salary and employee benefits. Net occupancy expense
increased $24,000, equipment expense increased $26,000 and data processing
expense increased $11,000. These increases were primarily due to Montgomery's
growth and expansion. Advertising expense increased $22,000 primarily due to the
advertising increase to promote the Lafayette office. Other expenses for the six
months ended December 31, 1999, were $317,000 compared to $264,000 for the six
months ended December 31, 1998, an increase of $53,000, or 20.1 percent.
Included in other expenses 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.
14
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Impact of the Year 2000. Montgomery conducted testing of all computer systems,
programs and equipment on January 1, 2000. This testing reflecting no failures
due to the "Year 2000" issue. No items were found which would have any effect on
Montgomery or the customers of Montgomery. As of January 31, 2000 all systems
appear to be operating properly. Although management believes no future problems
will arise due to the "Year 2000" issue, continued monitoring of all computer
systems and programs will continue into the year 2000.
15
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Part II. OTHER INFORMATION
Item 1. Legal Proceedings None.
- --------------------------
Item 2. Changes in Securities None.
- ------------------------------
Item 3. Defaults Upon Senior Securities None.
- ----------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The Annual Meeting of Shareholders of Montgomery Financial Corporation
("Montgomery") was held at the principal office of Montgomery, 119 East Main
Street, Crawfordsville, Indiana 47933, on Tuesday, October 19, 1999, at 2:00
p.m., Crawfordsville time for purposes of electing two Directors, to ratifying
the appointment of Olive LLP, as Montgomery's independent auditors for the 2000
fiscal year and transacting such other business as may properly come before the
Annual Meeting. Proxy Statements were furnished to such holders on or about
September 14, 1999. A total of 1,487,242 shares of common stock of Montgomery
were outstanding on August 31, 1999, and a total of 1,349,896 shares were
represented at the meeting. Of the 1,349,896 shares, 1,339,896 were voted by
proxy and 10,000 were voted in person.
C. Rex Henthorn and John E. Woodward were nominated to hold office as directors
until the year 2002 Annual Meeting of Shareholders. Mr. Henthorn has been a
director since 1981 and Mr. Woodward since 1975. No other nominations were made
at the meeting. C. Rex Henthorn was elected as a director receiving 1,318,596
votes for, with 31,300 votes withheld. John E. Woodward was elected as a
director receiving 1,316,224 votes for, with 33,672 votes withheld. With the
election of Messrs. Henthorn and Woodward, the terms of the Directors as of
October 19, 1999, expire as follows: 2000 - Earl F. Elliott, Mark E. Foster and
Robert C. Wright; 2001 - Joseph M. Malott and J. Lee Walden; 2002 - C. Rex
Henthorn and John E. Woodward.
Olive LLP ("Olive"), served as independent auditors for Montgomery in fiscal
1999. The Board of Directors approved the appointment of Olive as independent
auditors for fiscal 2000, subject to ratification by the shareholders. The
appointment of the independent auditors is ratified if more votes are cast in
favor of the appointment than against the appointment. The ratification of Olive
was approved by 1,340,289 votes in favor, 5,107 votes against and 4,500
abstentions.
Item 5. Other Information None.
- --------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
16
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Montgomery Financial Corporation
Date: February 10, 2000 By: /s/ Earl F. Elliott
---------------------
Earl F. Elliott, President and Chief
Executive Officer
Date: February 10, 2000 By:/s/ J. Lee Walden
-------------------
J. Lee Walden, Vice President and Chief
Financial Officer
17