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, 1998
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, 1998, there were 1,589,681 shares of the Registrant's
common stock issued and outstanding.
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Form 10-QSB
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statement of Financial Condition
As of December 31, 1998 and June 30, 1998
Consolidated Condensed Statement of Income for the Three
And Six Months Ended December 31, 1998 and 1997
Consolidated Condensed Statement of Cash Flows for the
Six Months Ended December 31, 1998 and 1997
Consolidated Condensed Statement of Changes in Stockholders'
Equity for the Six Months Ended December 31, 1998
Notes to Consolidated Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults in Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Consolidated Condensed Statement of Financial Condition
(Unaudited)
December 31, June 30,
1998 1998
------------- -------------
Assets
Cash ............................................ $ 214,314 $ 326,922
Short-term interest-bearing deposits ............ 8,718,710 10,569,823
------------- -------------
Total cash and cash equivalents .......... 8,933,024 10,896,745
Interest-bearing deposits ....................... 215,000 215,000
Securities available for sale ................... 641,412 311,967
Loans ........................................... 105,539,751 100,395,554
Allowance for loan losses ....................... (211,000) (186,000)
------------- -------------
Net loans .................................. 105,328,751 100,209,554
Real estate owned and held for
development, net ................................ 1,281,777 1,468,199
Premises and equipment .......................... 2,552,096 2,001,544
Federal Home Loan Bank Stock .................... 1,250,700 921,500
Interest receivable ............................. 882,787 843,799
Other assets .................................... 383,915 294,324
------------- -------------
Total assets ............................. $ 121,469,462 $ 117,162,632
============= =============
Liabilities
Deposits
Noninterest bearing ......................... $ 1,841,653 $ 1,864,658
Interest bearing ............................ 78,430,465 82,117,324
------------- -------------
Total deposits ........................... 80,272,119 83,981,982
Federal Home Loan Bank advances ................. 20,013,302 11,260,715
Interest payable ................................ 647,131 538,451
Deferred tax liability .......................... 331,203 371,197
Other liabilities ............................... 515,662 945,136
------------- -------------
Total liabilities ........................ 101,779,417 97,097,481
------------- -------------
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Consolidated Condensed Statement of Financial Condition
(Unaudited)
(continued)
December 31, June 30,
1998 1998
------------- -------------
Stockholders' Equity
Preferred stock, $.01 par value
authorized and unissued - 2,000,000 shares
Common stock, $.01 par value - 8,000,000 shares
authorized; 1,589,681 and 1,653,032 issued . 15,897 16,530
Paid-in capital ................................. 13,041,862 13,571,387
Retained earnings - substantially restricted .... 7,935,820 7,782,192
Unearned ESOP shares - 118,630 and 123,080 ..... (1,186,299) (1,230,802)
Unearned compensation .......................... (110,610) (128,507)
Accumulated other comprehensive income (loss) .. (6,625) 54,351
------------- -------------
Total stockholders' equity ............... 19,690,045 20,065,151
------------- -------------
Total liabilities and stockholders' equity $ 121,469,462 $ 117,162,632
============= =============
See notes to Consolidated Condensed Financial Statements.
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Consolidated Condensed Statement of Income
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Interest and Dividend Income
Loans ................................. $ 2,171,744 $ 1,940,951 $ 4,271,760 $ 3,795,384
Investment securities ................. 5,751 567 9,248 1,134
Deposits with financial institutions .. 85,360 74,547 195,918 189,292
Dividend Income ....................... 20,933 18,581 39,648 37,744
----------- ----------- ----------- -----------
Total interest and dividend income 2,283,788 2,034,646 4,516,574 4,023,554
----------- ----------- ----------- -----------
Interest Expense
Deposits .............................. 1,063,559 993,303 2,163,142 1,950,066
Federal Home Loan Bank advances
230,489 125,847 396,662 271,008
----------- ----------- ----------- -----------
Total interest expense ............... 1,294,048 1,119,150 2,559,804 2,221,074
----------- ----------- ----------- -----------
Net Interest Income ..................... 989,740 915,496 1,956,770 1,802,480
Provision for losses on loans ......... 10,000 25,000 3,000
----------- ----------- ----------- -----------
Net Interest Income After
Provision for Losses on Loans ......... 979,740 915,496 1,931,770 1,799,480
----------- ----------- ----------- -----------
Other Income
Service charges on deposit accounts ... 13,181 8,713 23,799 15,951
Net appraisal income (expense) ........ (5,940) 111 (4,535) (943)
Other income .......................... 1,638 1,063 3,389 2,381
----------- ----------- ----------- -----------
Total other income ............... 8,879 9,887 22,653 17,389
----------- ----------- ----------- -----------
Other Expenses
Salaries and employee benefits ........ 359,398 317,634 643,313 593,492
Net occupancy expense ................. 25,918 25,188 53,447 51,374
Equipment expense ..................... 45,958 37,486 92,515 72,819
Data processing expense ............... 42,197 29,393 78,050 57,351
Deposit insurance expense ............. 12,695 11,778 25,192 23,206
Real estate operations, net ........... (10,954) (1,719) (16,197) (12,404)
Advertising expense ..................... 12,221 10,270 23,513 18,869
Other expenses .......................... 139,922 136,811 263,798 250,993
----------- ----------- ----------- -----------
Total other expenses ......... 627,355 566,841 1,163,631 1,055,700
----------- ----------- ----------- -----------
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Consolidated Condensed Statement of Income
(Unaudited)
(continued)
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Income Before Income Tax ................ 361,264 358,542 790,792 761,169
Income tax expense .................... 125,390 158,775 299,890 335,825
----------- ----------- ----------- -----------
Net Income .............................. $ 235,874 $ 199,767 $ 490,902 $ 425,344
=========== =========== =========== ===========
Net Income Per Share:
Basic ............................. $ 0.16 $ 0.13 $ 0.33 $ 0.28
Diluted ........................... $ 0.16 $ 0.13 $ 0.32 $ 0.28
Dividends Per Share ..................... $ 0.055 $ 0.055 $ 0.110 $ 0.110
See Notes to Consolidated Condensed Financial Statements.
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Consolidated Condensed Statement of Cash Flows
(Unaudited)
Six Months Ended
December 31,
1998 1997
----------- -----------
Operating Activities
Net income ........................................... $ 490,902 $ 425,344
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses ........................ 25,000 3,000
Depreciation ..................................... 125,155 102,214
ESOP stock amortization .......................... 48,762 46,494
Amortization of unearned compensation ............ 4,341
Change In
Interest receivable .......................... (38,988) (80,294)
Interest payable ............................. 108,680 156,955
Other assets ................................. (89,591) (53,275)
Other liabilities ............................ (419,220) 21,678
----------- -----------
Net cash provided by operating activities . 255,041 622,116
----------- -----------
Investing Activities
Proceeds from paydowns of
securities available for sale .................... 10,805 10,087
Purchase of securities available for sale ........... (441,220) (200,000)
Net change in loans .................................. (5,256,388) (6,987,383)
Additions to real estate owned and held for investment (46,308) (75,460)
Proceeds from Real Estate Owned Sales ................ 319,222 52,795
Purchases of premises and equipment .................. (650,008) (178,726)
Purchase of FHLB of Indianapolis stock ............... (329,200)
Net cash used by investing activities ..... (6,393,097) (7,476,687)
----------- -----------
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Consolidated Condensed Statement of Cash Flows
(Continued)
Six Months Ended
December 31,
1998 1997
------------ ------------
Financing Activities
Net Change In
Noninterest-bearing, interest-bearing demand and
savings deposits ............................ $ 1,960,057 $ 993,652
Certificates of deposit ......................... (5,669,920) 3,885,823
Proceeds from FHLB advances ......................... 11,000,000 2,000,000
Repayment of FHLB advances .......................... (2,247,413) (5,167,658)
Stock purchase ...................................... (693,924)
Dividends paid ...................................... (174,465) (90,917)
------------ ------------
Net cash provided by financing activities 4,174,335 1,620,900
------------ ------------
Net Change in Cash and Cash Equivalents ............... (1,963,721) (5,230,671)
Cash and Cash Equivalents, Beginning of Period ........ 10,896,745 11,594,772
------------ ------------
Cash and Cash Equivalents, End of Period .............. $ 8,933,024 $ 6,364,101
============ ============
Additional Cash Flow and Supplementary Information
Interest Paid ....................................... $ 2,451,124 $ 2,064,119
Income Tax Paid ..................................... 755,589 174,450
Transfer from Loans to Other Real Estate Owned ..... 112,191 53,154
Cash Dividends Payable ............................. 80,663 90,917
See Notes to Consolidated Condensed Financial Statements
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Consolidated Condensed Statement of Changes in Stockholders' Equity
(Unaudited)
Common Stock
------------------------ Paid-in Comprehensive Retained
Shares Amount Capital Income Earnings
--------- --------- ------------ ------------- -----------
Balance July 1, 1998 ............ 1,653,032 $ 16,530 $ 13,571,387 $ 7,782,192
Net income for the six months
ended December 31, 1998 ..... $ 490,902 490,902
Other comprehensive income,
net of tax
Unrealized loss on securities (60,976) (60,976)
-----------
Other comprehensive income ...... $ 429,926
===========
Cash dividends ($.055 per share) (164,211)
Stock purchase .................. (63,351) (633) (520,228) (173,063)
ESOP shares earned .............. 4,259
Amortization of unearned
compensation expense ........ (13,556)
--------- --------- ------------ ------------ -----------
Balance December 31, 1998 ....... 1,589,681 $ 15,897 $ 13,041,862 $ 7,935,820
========= ========= ============ ============ ===========
Accumulated
Other
Unearned Unearned Comprehensive
ESOP Shares Compensation Income Total
----------- --------- -------- -----------
Balance July 1, 1998 ............ $(1,230,802) $(128,507) $ 54,351 $20,065,151
Net income for the six months
ended December 31, 1998 ..... 490,902
Other comprehensive income,
net of tax
Unrealized loss on securities (60,976)
Other comprehensive income ......
Cash dividends ($.055 per share) (164,211)
Stock purchase .................. (693,924)
ESOP shares earned .............. 44,503 48,762
Amortization of unearned
compensation expense ........ 17,897 4,341
----------- --------- -------- -----------
Balance December 31, 1998 ....... $(1,186,299) $(110,610) $ (6,625) $19,690,045
=========== ========= ======== ===========
See Notes to Consolidated Condensed Financial Statement
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, 1998, results
of operations for the three and six month periods ending December 31, 1998 and
1997, and cash flows for the six month periods ended December 31, 1998 and 1997.
The results of operations for the three and six month periods ended December 31,
1998 are not necessarily indicative of the results of operations which may be
expected for the fiscal year ending June 30, 1999.
Net Income Per Share
Net income per share for the three and six month periods ended December 31, 1998
and 1997 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, 1998 December 31, 1997
----------------------------------- -----------------------------------------
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 ...... $235,874 1,490,103 $ 0.16 $199,767 1,521,209 $ 0.13
-------- --------- ======== -------- --------- =============
Effect of Dilutive Stock Options
and Grants .................. 0 12,897 0 17,746
-------- --------- -------- ---------
Diluted Net Income Per Share:
Net Income Available
To Common Stockholders ...... $235,874 1,502,999 $ 0.16 $199,767 1,538,955 $ 0.13
======== ========= ======== ======== ========= =============
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
For the Six Months Ended December 31, 1998 December 31, 1997
----------------- -----------------
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 ...... $490,902 1,504,986 $ 0.33 $425,344 1,520,636 $ 0.28
======== ========= ======== ======== ========= ========
Effect of Dilutive Stock Options
and Grants .................. 0 13,650 0 16,896
-------- --------- -------- ---------
Diluted Net Income Per Share:
Net Income Available
To Common Stockholders ...... $490,902 1,518,636 $ 0.32 $425,344 1,537,532 $ 0.28
======== ========= ======== ======== ========= ========
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-Q 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 $121.5 million at
December 31, 1998, an increase of $4.3 million, or 3.7 percent from June 30,
1998. During this six month period interest-earning assets, including Federal
Home Loan Bank advances, increased $4.0 million, or 3.5 percent. Short-term
interest-earning deposits decreased $1.9 million, or 17.5 percent. Loans
increased $5.1 million, or 5.1 percent, which is the approximate increase
budgeted for the current year-to-date. Deposits decreased $3.7 million, or 4.4
percent and borrowings increased $8.8 million, or 77.7 percent, causing a net
increase in interest-bearing liabilities of 5.4 percent. The decrease in
deposits was primarily the result of a decrease in public funds deposits due to
short term bid rates being above the cost of longer term Federal Home Loan Bank
advance rates. The increase in advances was used to replace the decrease in
deposits and to fund loan growth.
Capital and Liquidity. At December 31, 1998, Montgomery's
stockholders' equity was $19,690,000 or 16.2 percent of total assets, compared
with stockholders' equity of $20,065,000, or 17.1 percent, at June 30, 1998.
With the approval of the OTS on September 24,1998, Montgomery began to
repurchase 82,651, or 5.0 percent of its outstanding common stock. As of
December 31, 1998 Montgomery had repurchased 63,351 shares of common stock at a
cost of $694,000, leaving 19,300 shares to be repurchased to complete the 5.0%
authorized. On February 4, 1999 Montgomery completed the repurchase program of
82,651 shares at a total cost of $891,000.00. The Association continues to
exceed all minimum capital requirements. At December 31, 1998, the Association's
tangible and core capital was $16,033,000, or 13.4 percent of tangible assets,
$14,232,000 in excess of the 1.5 percent minimum required tangible capital and
$11,230,000 in excess of the 4.0 percent minimum required core capital.
Risk-based capital equaled $15,327,000, or 20.5 percent of risk-weighted assets,
$9,344,000 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
five percent. The Association's average liquidity ratio for the six months ended
December 31, 1998, was 8.1 percent.
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. 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) or (b) its "normal" level of
exposure which is 2% of the present value of its assets. Regulations do exempt
all institutions under $300 million in assets with risk-based capital above 12
percent from reporting information to calculate exposure and making any
deduction from risk-based capital. At December 31, 1998 the Association's total
assets were $120.5 million and risk based capital was 20.5 percent; therefor the
Association would have been exempt from calculating or making any risk-based
capital reduction. The Association'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 September 30, 1998, 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 $2.42 million, which was less than
$2.82 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, 1998 NPV information, the amount of the Association's deduction
from capital, had it been subject to reporting, would have been approximately
$200,000.
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, 1998, and September 30, 1997, 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, 1998 and September 30,
1997, the NPV of the Association was $18.5 million and $18.6 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.
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
At September 30, 1998 At September 30,1997
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 -4,882 -26 -5,414 -29
+200 -50 -2,815 -15 -3,313 -18
+100 -30 -1,159 -6 -1,425 -8
0 0 0 0 0 0
-100 -30 +839 +5 +721 +4
-200 -50 +1,840 +10 +979 +5
-300 -60 +4,363 +24 +1,297 +7
In the event of a 300 basis point change in interest rate based upon
estimates as of September 30, 1998 the Association would experience a 24%
increase, compared to a 7% increase at September 30, 1997, in NPV in a declining
rate environment and a 26% decrease, compared to a 29% decrease at September 30,
1997, 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
interest rate on interest-bearing liabilities increasing more than the interest
rate on interest-earning assets because of the annual and lifetime caps on
interest rate adjustments for adjustable rate loans and because of the lag in
rate adjustments for such loans as compared to interest-bearing liabilities.
Results of Operations. Montgomery's net income for the three months
ended December 31, 1998, was $236,000 compared to $200,000 for the three months
ended December 31, 1997, an increase of $36,000, or 18.1 percent. Net interest
income increased $74,000, or 8.1 percent, primarily due an increase in average
interest-earning assets of $13.3 million, or 13.4 percent. Average
interest-earning assets were $112.7 million for the three months ended December
31, 1998 compared to $99.4 million for the 1997 three-month period. Average
interest-bearing liabilities increased $13.1 million from $81.3 million to $94.4
million during the comparable three-month periods. Interest rate spread
decreased from 2.68 percent for the three months ended December 31, 1997, to
2.62 percent for the three months ended December 31, 1998. Net interest margin
decreased to 3.51 percent for the three months ended December 31, 1998 from 3.68
percent for the three months ended December 31, 1997. Non-interest income was
$9,000 for the 1998 three-month period compared to $10,000 for the 1997 period.
Non-interest expense was $627,000 for the three months ended December 31, 1998
compared to $567,000 for the 1997 three-month period, an increase of $60,000, or
10.7 percent. This increase was primarily due to an increase in employee
benefits due to an increase in the number of employees in preparation of the
opening of a Lafayette, Indiana office.
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
For the six months ended December 31, 1998, net income was $491,000
compared to $425,000 for the six months ended December 31, 1997, an increase of
$66,000, or 15.4 percent. This increase was again primarily due to an increase
in net interest income from $1,803,000 for the six months ended December 31,
1997 to $1,957,000 for the six months ended December 31, 1998, an increase of
$154,000, or 8.6 percent. Average interest-earning assets increased $14.1
million from $98.4 million for the six months ended December 31, 1997 to $112.5
million for the 1998 six-month period while average interest-bearing liabilities
increased $13.8 million during the comparable periods. Non-interest expense
increased $108,000, or 10.2 percent. This increase was primarily caused by an
increase in personnel and an increase in operational costs due to growth and
expansion. Income tax expense was $300,000 for the six months ended December 31,
1998, compared to $336,000 for the six months ended December 31, 1997.
Interest Income. Montgomery's total interest income for the three
months ended December 31, 1998, was $2.3 million, an increase of $249,000, or
12.2 percent, compared to interest income for the three months ended December
31, 1997. This increase was primarily caused by an increase in average
interest-earning assets from $99.4 million for the three months ended December
31, 1997, to $112.7 million for the three months ended December 31, 1998, an
increase of $13.3 million, or 13.4 percent principally due to loan growth.
Average loans increased from $93.0 million for the 1997 three-month period to
$105.2 million for the 1998 three month period and average investment securities
increased from $35,000 to $687,000 for the respective periods. The average yield
on interest-earning assets was 8.10 percent for the three months ended December
31, 1998, compared to 8.19 percent for the three months ended December 31, 1997.
Interest income for the six months ended December 31, 1998, was $4.5
million, an increase of $493,000, or 12.3 percent, from interest income for the
same period in 1997. Average interest-earning assets for the six months ended
December 31, 1998, was $112.4 million compared to $98.4 million for the 1997 six
month period, an increase of $14.0 million, or 14.2 percent, principally due to
loan growth. The average yield for the 1998 period was 8.03 percent compared to
8.18 percent for the 1997 period.
Interest Expense. Interest expense for the three months ended December
31, 1998, was $1.3 million, which was an increase of $175,000, or 15.6 percent,
from the three months ended December 31, 1997. Average interest-bearing
liabilities increased $13.1 million, or 16.1 percent, from $81.3 million for the
three months ended December 31, 1997, to $94.4 million for the three months
ended December 31, 1998. The average cost of funds decreased from 5.50 percent
to 5.48 percent for the comparable periods. The average cost of deposits
decreased from 5.43 percent to 5.41 percent for the comparable three-month
periods. The average cost of borrowings decreased from 6.18 percent to 5.85
percent for the comparable periods due.
Interest expense for the six months ended December 31, 1998, was $2.6
million, an increase of $339,000, or 15.3 percent, from the six months ended
December 31, 1997. The average cost of funds for the 1998 period was 5.45
percent compared to 5.55 percent for the 1997 period. Average interest-bearing
liabilities increased from $80.0 million for the six months ended December 31,
1997 to $93.8 million for the 1997 six-month period.
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Provision for Losses on Loans. The provision for losses on loans was
$10,000 for the three months ended December 31, 1998 compared to no provision
adjustment for the three months ended December 31, 1997. During the six months
ended December 31, 1998, a $25,000 provision was made compared to a $3,000
provision in the comparable 1997 six-month period. Provision for loan losses 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. Both the $25,000 and $3,000 provisions were made
primarily due to increased loan growth. Loans delinquent ninety days or more
were $852,000 at December 31, 1998, compared to $724,000 at June 30, 1998.
Non-performing loans to total loans at December 31, 1998, were 0.81 percent
compared to 0.72 percent at June 30, 1998. The allowance for losses to
non-performing loans was 24.8 percent at December 31, 1998 compared to 25.7
percent at June 30, 1998. The allowance to total loans was 0.20 percent at
December 31, 1998 and 0.19 percent at June 30, 1998. 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, 1998, totalled $9,000 compared to $10,000 for the three
months ended December 31, 1997, a decrease of $1,000, or 10.2 percent. This
increase was primarily due to an increase in service charges on deposit accounts
of $4,000 and a decrease in net appraisal income of $6,000.
Other income for the six months ended December 31, 1998, was $23,000, a
decrease of $5,000, or 31.4 percent, from the comparable 1997 six month period.
During the six months ended December 31, 1998, service charges on deposit
accounts increased $8,000 and appraisal income decreased $3,000 from the 1997
six-month period.
Non-Interest Expense. Montgomery's other expenses for the three months
ended December 31, 1998, totalled $627,000, an increase of $60,000, or 10.7
percent, from the three months ended December 31, 1997. Salaries and employee
benefits increased $42,000. The increase was primarily due to an increase in
branch office personnel to accommodate growth to prepare for staffing of a fifth
office in Lafayette, Indiana to be opened during the first calendar quarter of
1999. Equipment expense increased $8,000 and data processing expense increased
$13,000. Included in the data processing expense is $8,100 for Year 2000
testing. This is part of an expected total expense of $40,500 to perform all
necessary testing of our service bureau provider. The increase in equipment
expense and the balance of the data processing expense are generally reflective
of Montgomery's growth. Real estate operations net income for the three months
ended December 31, 1998, was $11,000 compared to $2,000 for the 1997 comparable
period, an decrease of $9,000 due to an increase in net rental income.
Non-interest expense for the six months ended December 31, 1998, was
$1.2 million compared to $1.1 million, an increase of $108,000, or 10.2 percent,
from the six months ended December 31, 1997. Salary and employee benefits
increased $50,000, or 8.4 percent. An increase in personnel due to branch office
growth was the primary factor for the balance of the increase in salary and
employee benefits. Equipment expense increased $20,000 and data processing
expense increased $21,000. With the exception of $14,000 included in data
processing expense for Year 2000 testing, the balance of these increases were
primarily due to Montgomery's growth. Net real estate operations generated a net
income for the six months ended December 31, 1998, of $16,000 compared to a net
income of $12,000 for the 1997 comparable period. This increase was primarily
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
due to an increase in net rental income. Other expenses for the six months ended
December 31, 1998, were $264,000 compared to $251,000 for the six months ended
December 31, 1997, an increase of $13,000, or 5.1 percent. This increase is
generally reflective of Montgomery's growth.
Impact of the Year 2000. Montgomery has conducted a comprehensive review
of its computer systems to identify applications that could be affected by the
"Year 2000" issue, and has developed an implementation plan to address the
issue. The Year 2000 issue is the result of the computer programs being written
using two digits rather than four to define the applicable year. Any of
Montgomery's programs that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations. Montgomery is utilizing both internal and
external resources to identify, correct or reprogram and test the systems for
the Year 2000 compliance. Montgomery's data processing is performed primarily by
an outside vender. Montgomery began the testing phase during the third calendar
quarter of 1998. Core application testing should be completed by March 31, 1999.
Montgomery has already contacted each vendor to request time tables for
year 2000 compliance and expected costs, if any, to be passed along to
Montgomery. To date, Montgomery anticipates that its primary service provider
will complete all reprogramming efforts by March 31, 1999; however, Montgomery
will pursue other options if it appears that any vendors will be unable to
comply. In addition to possible expenses related to Montgomery's systems and
those of its service providers, Montgomery could incur losses if Year 2000
problems affect any of its depositors or borrowers. Such problems could include
delayed loan payments due to Year 2000 problems affecting any of its significant
borrowers or impairing the payroll systems of large employers in its market
area. Because Montgomery's loan portfolio is diversified and its market area
does not depend significantly upon one employer or industry, Montgomery does not
expect any such Year 2000 related difficulties that may affect its depositors or
borrowers to significantly affect its net earnings or cash flows.
The Board of Directors reviews, on at least a quarterly basis, the
progress in addressing Year 2000 issues. Montgomery has estimated a cost and
established a budget of $75,000 for testing and upgrading its systems and
software for Year 2000 compliance. As of December 31, 1998 Montgomery has spent
approximately $35,000 in connection with Year 2000 compliance. Of the $35,000
approximately $20,000 has been capitalized as non-compliant systems were
replaced and upgraded. Management does not expect these costs to have a
significant impact on its financial position or results of operations, however,
there can be no assurance that the vendors systems will be Year 2000 compliant,
consequently Montgomery could incur incremental costs to convert to another
vendor or move data processing in house in future periods.
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 20, 1998, at 2:00
p.m., Crawfordsville time for the purpose of electing two Directors, to consider
and approve or disapprove the Company's 1997 Stock Option and Incentive Plan, to
consider and approve or disapprove the Company's 1997 Recognition and Retention
Plan, to ratify the appointment of Geo. S. Olive & Co. LLC, as Montgomery's
independent auditors for the 1999 fiscal year and to transact such other
business as may properly come before the Annual Meeting. Proxy Statements were
furnished to such holders on or about September 14, 1998. A total of 1,653,032
shares of common stock of Montgomery were outstanding on August 31, 1998, and a
total of 1,513,302 shares were represented at the meeting. Of the 1,513,302
shares, 1,478,789 were represented by proxy and 34,513 were represented in
person.
Joseph M. Malott and J. Lee Walden were nominated to hold office until the year
2001 Annual Meeting of Shareholders. Mr. Malott has been a director since 1978
and Mr. Walden since 1995. No other nominations were made at the meeting. Joseph
M. Malott was elected receiving 1,496,217 votes for, with 17,085 votes withheld.
J. Lee Walden was elected receiving 1,496,142 votes for, with 17,160 votes
withheld. With the election of Messrs. Malott and Walden, the terms of the
Directors as of October 20, 1998, expire as follows: 1999 - C. Rex Henthorn and
John E. Woodward; 2000 - Earl F. Elliott, Mark E. Foster and Robert C. Wright;
2001 - Joseph M. Malott and J. Lee Walden.
Geo S. Olive & Co. LLC ("GSO"), served as independent auditors for Montgomery in
fiscal 1998. The Board of Directors approved the appointment of GSO as
independent auditors for fiscal 1999, 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 GSO was approved by 1,493,534 votes in favor, 5,755 votes
against and 14,013 abstentions.
On July 21, 1998, the Board of Directors adopted, subject to approval of the
shareholders, the 1997 Stock Option and Incentive Plan. Adoption of the Plan
reflects the belief of the Board of Directors that the granting of stock
incentive awards to directors, officers and employees is a means of enhancing
and encouraging the recruitment and retention of those individuals on whom the
continued success of the company most depends. The plan provides for the future
issuance of 118,678 shares. The affirmative vote of a majority of the votes cast
was required to approve adoption of the 1997 Stock Option and Incentive Plan.
Proxies marked to abstain and broker non-votes had no effect on this proposal.
The 1997 Stock Option and Incentive Plan was adopted by affirmative votes of
784,229 and 83,793 votes against.
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
On July 21, 1998, the Board of Directors adopted, subject to approval of the
shareholders, the 1997 Recognition and Retention Plan. Adoption of the Plan
reflects the belief of the Board of Directors that the Plan will provide to
directors, advisory directors, officers and employees a proprietary interest in
the Montgomery in a manner designed to encourage such individuals to remain with
the Montgomery and the Association. The maximum number of shares which may be
awarded under the 1997 RRP will be an amount which, when added to the number of
shares of Common Stock awarded under Montgomery's 1995 plan, will equal 66,121
shares of Common Stock. The affirmative vote of a majority of the votes cast was
required to approve adoption of the 1997 Recognition and Retention Plan. Proxies
marked to abstain and broker non-votes had no effect on this proposal. The 1997
Stock Option and Incentive Plan was adopted by affirmative votes of 760,115 and
97,608 votes against.
Item 5. Other Information None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Montgomery Financial Corporation's 1997 Stock Option and
Incentive Plan
10.2 Montgomery Financial Corporation's 1997 Recognition and Retention
Plan
(b) Reports on Form 8-K
None
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, 1999 By: /s/ Earl F. Elliott
---------------------
Earl F. Elliott, President and Chief
Executive Officer
Date: February 10, 1999 By: /s/ J. Lee Walden
-------------------
J. Lee Walden, Vice President and Chief
Financial Officer
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
EXHIBIT INDEX
Executive
Compensation
Plans and
Exhibits Page Arrangements**
- -------- ---- --------------
10.1 Montgomery Financial Corporation 20 X
1997 Stock Option and Incentive Plan
10.2 Montgomery Financial Corporation 27 X
1997 Recognition and Retention Plan
** Indicates exhibits that describe or evidence all management contracts or
compensation plans or arrangements required to be filed as exhibits to this
report.