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 March 31, 1999
OR
[X] 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 Identification Number)
Incorporation or organization)
119 East Main Street 47933
Crawfordsville, Indiana -----
----------------------- (Zip Code)
(Address of Principal Executive Offices)
(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 April 30, 1999, there were 1,570,381 shares of the Registrant's
common stock issued and outstanding.
1
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 March 31, 1999 and June 30, 1998 3
Consolidated Condensed Statement of Income for the Three
And Nine Months Ended March 31, 1999 and 1998 4
Consolidated Condensed Statement of Cash Flows for the
Nine Months Ended March 31, 1999 and 1998 5
Consolidated Condensed Statement of Changes in Stockholders'
Equity for the Nine Months Ended March 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 in 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)
March 31, June 30,
1999 1998
------------- -------------
Assets
Cash $ 403,394 $ 326,922
Short-term interest-bearing deposits 9,387,971 10,569,823
------------- -------------
Total cash and cash equivalents 9,791,365 10,896,745
Interest-bearing deposits 215,000 215,000
Securities available for sale 670,356 311,967
Loans 107,562,240 100,395,554
Allowance for loan losses (226,000) (186,000)
------------- -------------
Net loans 107,336,240 100,209,554
Real estate owned and held for
development, net 1,399,128 1,468,199
Premises and equipment 2,772,395 2,001,544
Federal Home Loan Bank Stock 1,250,700 921,500
Interest receivable 840,260 843,799
Other assets 431,493 294,324
------------- -------------
Total assets $ 124,706,937 $ 117,162,632
============= =============
Liabilities
Deposits
Noninterest bearing $ 2,008,636 $ 1,864,658
Interest bearing 81,361,409 82,117,324
------------- -------------
Total deposits 83,370,045 83,981,982
Federal Home Loan Bank advances 20,013,302 11,260,715
Interest payable 511,971 538,451
Deferred tax liability 347,089 371,197
Other liabilities 751,991 945,136
------------- -------------
Total liabilities 104,994,398 97,097,481
------------- -------------
Stockholders' Equity
Preferred stock, $.01 par value
authorized and unissued - 2,000,000 shares
Common stock, $.01 par value - 8,000,000 shares
authorized; 1,570,381 and 1,653,032 issued 15,704 16,530
Paid-in capital 12,876,416 13,571,387
Retained earnings - substantially restricted 8,068,534 7,782,192
Unearned ESOP shares - 116,405 and 123,080 (1,164,048) (1,230,802)
Unearned compensation (101,662) (128,507)
Accumulated other comprehensive income 17,595 54,351
------------- -------------
Total stockholders' equity 19,712,539 20,065,151
------------- -------------
Total liabilities and stockholders' equity $ 124,706,937 $ 117,162,632
============= =============
See notes to Consolidated Condensed Financial Statements
3
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Consolidated Condensed Statement of Income
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Interest and Dividend Income
Loans $ 2,147,964 $ 2,028,082 $ 6,419,724 $ 5,823,466
Investment securities 7,114 1,885 16,362 3,019
Deposits with financial institutions 121,015 72,354 316,933 261,646
Dividend Income 24,672 18,177 64,320 55,921
------------ ------------ ------------ ------------
Total interest and dividend income 2,300,765 2,120,498 6,817,339 6,144,052
------------ ------------ ------------ ------------
Interest Expense
Deposits 1,015,877 1,008,740 3,179,019 2,958,806
Federal Home Loan Bank advances 281,431 131,567 678,093 402,575
------------ ------------ ------------ ------------
Total interest expense 1,297,308 1,140,307 3,857,112 3,361,381
------------ ------------ ------------ ------------
Net Interest Income 1,003,457 980,191 2,960,227 2,782,671
Provision for losses on loans 15,000 40,000 3,000
------------ ------------ ------------ ------------
Net Interest Income After
Provision for Losses on Loans 988,457 980,191 2,920,227 2,779,671
------------ ------------ ------------ ------------
Other Income
Service charges on deposit accounts 11,814 8,836 35,613 24,787
Net appraisal income (expense) 1,032 (2,203) (3,503) (3,146)
Other income 1,976 966 5,365 3,347
------------ ------------ ------------ ------------
Total other income 14,822 7,599 37,475 24,988
------------ ------------ ------------ ------------
Other Expenses
Salaries and employee benefits 334,954 308,048 978,267 901,540
Net occupancy expense 31,506 29,215 84,953 80,589
Equipment expense 43,147 46,975 135,662 119,794
Data processing expense 48,401 32,550 126,451 89,901
Deposit insurance expense 13,113 12,021 38,305 35,227
Real estate operations, net (4,302) (5,690) (20,499) (18,094)
Advertising expense 11,201 9,628 34,714 28,497
Other expenses 128,805 119,853 392,603 370,846
------------ ------------ ------------ ------------
Total other expenses 606,825 552,600 1,770,456 1,608,300
------------ ------------ ------------ ------------
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Income Before Income Tax 396,454 435,190 1,187,246 1,196,359
Income tax expense 145,610 178,582 445,500 514,407
------------ ------------ ------------ ------------
Net Income $ 250,844 $ 256,608 $ 741,746 $ 681,952
=========== =========== =========== ===========
Net Income Per Share:
Basic $ 0.17 $ 0.17 $ 0.50 $ 0.45
Diluted $ 0.17 $ 0.17 $ 0.50 $ 0.44
Dividends Per Share $ 0.055 $ 0.055 $ 0.165 $ 0.165
See Notes to Consolidated Condensed Financial Statements.
4
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Consolidated Condensed Statement of Cash Flows
(Unaudited)
Nine Months Ended
March 31,
----------- ------------
1999 1998
----------- ------------
Operating Activities
Net income $ 741,746 $ 681,952
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 40,000 3,000
Depreciation 177,191 153,539
ESOP stock amortization 70,659 78,125
Amortization of unearned compensation 6,511
Change In
Interest receivable 3,539 (110,431)
Interest payable (26,480) 40,310
Other assets (137,169) (58,287)
Other liabilities (181,829) 400,743
----------- ------------
Net cash provided by operating activities 694,168 1,188,951
----------- ------------
Investing Activities
Purchase of interest-bearing deposits (95,000)
Proceeds from paydowns of
securities available for sale 21,967 20,527
Purchase of securities available for sale (441,220) (200,000)
Net change in loans (7,278,877) (11,719,727)
Additions to real estate owned and held for investment (164,257) (90,556)
Proceeds from real estate owned sales 319,222 52,795
Purchases of premises and equipment (921,745) (253,474)
Purchase of FHLB of Indianapolis Stock (329,200)
------------
Net cash used by investing activities (8,794,110) (12,285,435)
----------- ------------
5
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Consolidated Condensed Statement of Cash Flows
(Continued)
Nine Months Ended
March 31,
------------------------------
1999 1998
------------ ------------
Financing Activities
Net Change In
Noninterest-bearing, interest-bearing demand and
savings deposits $ 3,141,514 $ 1,383,820
Certificates of deposit (3,753,451) 5,578,681
Proceeds from FHLB advances 11,000,000 2,807,056
Repayment of FHLB advances (2,247,413) (5,167,658)
Stock Purchase (890,960)
Dividends paid (255,128) (181,834)
------------ ------------
Net cash provided by financing activities 6,994,562 4,420,065
------------ ------------
Net Change in Cash and Cash Equivalents (1,105,380) (6,676,419)
Cash and Cash Equivalents, Beginning of Period 10,896,745 11,594,772
------------ ------------
Cash and Cash Equivalents, End of Period $ 9,791,365 $ 4,918,353
Additional Cash Flow and Supplementary Information
Interest paid $ 3,883,592 $ 3,321,071
Income tax paid 935,789 230,527
Transfer from loans to other real
estate owned 112,191 121,917
Cash dividends payable 79,601 90,917
See Notes to Consolidated Condensed Financial Statements
6
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 nine months
ended March 31, 1999 $ 741,746 741,746
Comprehensive income,
net of tax
Unrealized loss on securities (36,756)
-----------
Comprehensive income $ 704,990
===========
Cash dividends ($.165 per share) (243,812)
Stock purchase (82,651) (826) (678,542) (211,592)
ESOP shares earned 3,905
Amortization of unearned
compensation expense (20,334)
- ------------------------------------------------------------------------------------------------------------------
Balance March 31, 1999 1,570,381 $ 15,704 $ 12,876,416 $ 8,068,534
- ------------------------------------------------------------------------------------------------------------------
(continued)
Other
Unearned Unearned Comprehensive
ESOP Shares Compensation Income Total
- -------------------------------------------------------------------------------------------------------
Balance July 1, 1998 $(1,230,802) $(128,507) $54,351 $20,065,151
Net income for the nine months
ended March 31, 1999 741,746
Comprehensive income,
net of tax
Unrealized loss on securities (36,756) (36,756)
Comprehensive income
Cash dividends ($.165 per share) (243,812)
Stock purchase (890,960)
ESOP shares earned 66,754 70,659
Amortization of unearned
compensation expense 26,845 6,511
- -------------------------------------------------------------------------------------------------------
Balance March 31, 1999 $(1,164,048) $(101,662) $17,595 $19,712,539
- -------------------------------------------------------------------------------------------------------
See Notes to Consolidated Condensed Financial Statements
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 March 31, 1999, results of
operations for the three and nine month periods ending March 31, 1999 and 1998,
and cash flows for the nine month periods ended March 31, 1999 and 1998. The
results of operations for the three and nine month periods ended March 31, 1999
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 nine month periods ended March 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 March 31, 1999 March 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 $250,844 1,445,724 $ 0.17 $256,608 1,524,221 $ 0.17
======== ========
Effect of Dilutive Stock Options
and Grants 0 10,662 0 26,421
-------- --------- -------- ---------
Diluted Net Income Per Share:
Net Income Available
To Common Stockholders $250,844 1,456,386 $ 0.17 $256,608 1,550,642 $ 0.17
======== ========= ======== ======== ========= ========
8
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
For the Three Months Ended March 31, 1999 March 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 $741,746 1,485,529 $ 0.50 $681,952 1,521,493 $ 0.45
======== =======
Effect of Dilutive Stock Options
and Grants 0 12,654 0 25,634
-------- --------- -------- ---------
Diluted Net Income Per Share:
Net Income Available
To Common Stockholders $741,746 1,498,183 $ 0.50 $681,952 1,547,127 $ 0.44
======== ========= ======== ======== ========= =======
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-Q or future
filings by Montgomery with the Office of Thrift Supervision, 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 $124.7 million at
March 31, 1999, an increase of $7.5 million, or 6.4 percent from June 30, 1998.
During the nine month period ending March 31, 1999, interest-earning assets,
including Federal Home Loan Bank stock, increased $6.7 million, or 5.9 percent.
Short-term interest-earning deposits decreased $1.2 million, or 11.2 percent.
Loans increased $7.2 million, or 7.1 percent. Investment securities increased
$358,000 to $670,000 during the nine months ended March 31, 1999. Premises and
equipment increased $771,000 primarily due to the investment in the
Association's new Lafayette, Indiana office to be opened in April 1999. This
will be Montgomery's fifth office in a four county area. Deposits decreased
$612,000, or 0.7 percent and borrowings increased $8.8 million, or 77.7 percent,
causing a net increase in interest-bearing liabilities of 8.5 percent. The
increase in borrowings was used to replace the decrease in deposits and to fund
loan growth.
Capital and Liquidity. At March 31, 1999, stockholders' equity was
$19,713,000 or 15.8 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
it outstanding common stock. The repurchase was completed on February 4, 1999 at
a total cost of $891,000. The Association continues to exceed all minimum
capital requirements. At March 31, 1999, the Association's tangible and core
capital was $16,275,000, or 13.2 percent of tangible assets, $14,428,000 in
excess of the 1.5 percent minimum required tangible capital and $11,348,000 in
excess of the 4.0 percent minimum required core capital. Risk-based capital
equaled $15,531,000, or 20.3 percent of risk-weighted assets, $9,508,000 more
than the minimum 8.0 percent risk-based level required. Tier 1 risk-based
capital ratio equaled 21.6 percent at March 31, 1999. 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.
Montgomery's average liquidity ratio for the nine months ended March 31, 1998,
was 8.9 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. 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 March 31, 1999 the Association's total
assets were $123.6 million and risk based capital was 21.6 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 December 31, 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 $2.47 million, which was less than
$2.64 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
December 31, 1998 NPV information, the amount of the Association's deduction
from capital, had it been subject to reporting, would have been approximately
$85,000.
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 December 31, 1998, and December 31, 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 December 31, 1998 and December 31,
1997, the NPV of the Association was $19.2 million and $18.3 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 December 31, 1998 At December 31, 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 -4,644 -24 -6,010 -33
+200 -50 -2,637 -14 -3,703 -20
+100 -30 -1,026 -5 -1,621 -9
0 0 0 0 0 0
100 30 +633 +3 +934 +5
200 50 +1,286 +7 +1,315 +7
300 60 +2,157 +11 +1,867 +10
In the event of a 300 basis point change in interest rate based upon
estimates as of December 31, 1998, the Association would experience an 11%
increase in NPV in a declining rate environment and a 24% 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).
Results of Operations. Montgomery's net income for the three months
ended March 31, 1999, was $251,000 compared to $257,000 for the three months
ended March 31, 1998, a decrease of $6,000, or 2.3 percent. Net interest income
increased $180,000, or 8.5 percent, primarily due to an increase in average
interest-earning assets of $15.8 million, or 15.4 percent. Average
interest-earning assets were $118.6 million for the three months ended March 31,
1999 compared to $102.8 million for the 1998 three-month period. Average
interest-bearing liabilities increased $17.0 million, or 20.2 percent, from
$84.3 million to $101.3 million during the comparable three-month periods.
Interest rate spread decreased from 2.84 percent for the three months ended
March 31, 1998, to 2.64 percent for the three months ended March 31, 1999. Net
interest margin decreased to 3.38 percent for the three months ended March 31,
1999 from 3.81 percent for the three months ended March 31, 1998. Non-interest
income was $15,000 for the 1999 three-month period compared to $8,000 for the
1998 period. Non-interest expense was $607,000 for the three months ended March
31, 1999 compared to $553,000 for the 1998 three-month period, an increase of
$54,000, or 9.8 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.
12
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
For the nine months ended March 31, 1999, net income was $742,000
compared to $682,000 for the nine months ended March 31, 1998, an increase of
$60,000, or 8.8 percent. Net interest income increased from $2.8 million for the
1998 period to $3.0 million for the 1999 nine-month period, an increase of
$178,000, or 6.4 percent. Average interest-earning assets increased from $102.8
million for the nine months ended March 31, 1998 to $114.5 million for the 1998
nine-month period while average interest bearing liabilities increased $18.4
during the comparable periods. Non-interest income increased $12,000, or 50.0
percent, from $25,000 for the 1998 nine-month period to $37,000 for the 1999
comparable period. Non-interest expense increased $162,000, or 10.1 percent. An
increase in personnel and an increase in operational costs due to growth and
expansion primarily caused this increase. Income tax expense was $446,000 for
the nine months ended March 31, 1999, compared to $514,000 for the nine months
ended March 31, 1998.
Interest Income. Montgomery's total interest income for the three
months ended March 31, 1999, was $2.3 million, an increase of $180,000, or 8.5
percent, compared to interest income for the three months ended March 31, 1998.
This increase was primarily caused by an increase in average interest-earning
assets from $102.8 million for the three months ended March 31, 1998, to $118.6
million for the three months ended March 31, 1999, an increase of $15.8 million,
or 15.4 percent principally due to loan growth. Average loans increased from
$96.7 million for the 1998 three-month period to $105.9 million for the 1999
three month period and average interest-earning deposits increased from $4.9
million to $10.8 million for the respective periods. The average yield on
interest-earning assets was 7.76 percent for the three months ended March 31,
1999, compared to 8.25 percent for the three months ended March 31, 1998.
Interest income for the nine months ended March 31, 1999, was $6.8
million, an increase of $673,000, or 11.0 percent, from interest income for the
same period in 1998. Average interest-earning assets for the nine months ended
March 31, 1999, was $114.5 million compared to $99.8 million for the 1998 nine
month period, an increase of $14.7 million, or 14.7 percent, principally due to
loan growth. The average yield for the 1999 period was 7.94 percent compared to
8.25 percent for the 1998 period.
Interest Expense. Interest expense for the three months ended March
31, 1999, was $1.3 million, which was an increase of $157,000, or 13.8 percent,
from the three months ended March 31, 1998. Average interest-bearing liabilities
increased $17.0 million, or 20.2 percent, from $84.3 million for the three
months ended March 31, 1998, to $101.3 million for the three months ended March
31, 1999. The average cost of funds decreased from 5.41 percent to 5.12 percent
for the comparable periods. The average cost of deposits decreased from 5.31
percent to 5.00 percent for the comparable three-month periods. The average cost
of borrowings decreased from 6.31 percent to 5.62 percent for the comparable
periods.
Interest expense for the nine months ended March 31, 1999, was $3.9
million, an increase of $496,000, or 14.7 percent, from the nine months ended
March 31, 1998. The average cost of funds for the 1999 period was 5.34 percent
compared to 5.51 percent for the 1998 period. Average interest-bearing
liabilities increased from $81.4 million for the nine months ended March 31,
1998 to $96.3 million for the 1999 nine-month period.
13
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Provision for Losses on Loans. The provision for losses on loans was
$15,000 for the three months ended March 31, 1999 compared to no provision for
the three months ended March 31, 1998. During the nine months ended March 31,
1999, a $40,000 provision was made compared to a $3,000 provision being made in
the comparable 1998 nine-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. Both the $40,000 and $3,000 provisions were made
primarily due to increased loan growth. Loans delinquent ninety days or more
were $643,000 at March 31, 1999, compared to $724,000 at June 30, 1998.
Non-performing loans to total loans at March 31, 1999 were 0.60 percent compared
to 0.72 percent at June 30, 1998. The allowance to total loans was 0.21 percent
at March 31, 1999 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 March 31, 1999, totalled $15,000 compared to $8,000 for the three months
ended March 31, 1998, an increase of $7,000, or 95.1 percent. This increase was
primarily due to an increase in service charges on deposit accounts in the
amount of $3,000 and a increase in net appraisal income of $3,000.
Other income for the nine months ended March 31, 1999, was $37,000, an
increase of $12,000, or 50.0 percent, from the comparable 1998 nine month
period. During the nine months ended March 31, 1999, service charges on deposit
accounts increased $11,000.
Non-Interest Expense. Montgomery's other expenses for the three months
ended March 31, 1999, totalled $607,000, an increase of $54,000, or 9.8 percent,
from the three months ended March 31, 1998. Salaries and employee benefits
increased $27,000. The increase was primarily due to an increase in branch
office personnel to accommodate growth and to prepare for staffing of a fifth
office in Lafayette, Indiana to be opened in April 1999. Data processing expense
increased $16,000, which includes $8,000 in expense related to Year 2000
testing. Other miscellaneous expenses increased $9,000 for the three months
ending March 31, 1999 compared the 1998 three-month period. The balance of the
increase in data processing expense and the increase in other expense are
generally reflective of Montgomery's growth.
Non-interest expense for the nine months ended March 31, 1999, was $1.8
million compared to $1.6 million, an increase of $162,000, or 10.1 percent, from
the nine months ended March 31, 1998. Salary and employee benefits increased
$77,000, or 8.5 percent, primarily due to an increase in branch office personnel
to accommodate growth. Occupancy expense increased $4,000, equipment expense
increased $16,000 and data processing expense increased $37,000. With the
exception of $22,000 included in data processing expense for Year 2000 testing,
the balance of the increases were primarily due to Montgomery's growth.
Advertising expense increased $6,000 from the 1998 period. Other expenses for
the nine months ended March 31, 1999, were $393,000 compared to $371,000 for the
nine months ended March 31, 1998, an increase of $22,000, or 5.9 percent. These
increases are generally reflective of Montgomery's growth.
14
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
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 has been completed.
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 June 30, 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 March 31, 1999 Montgomery has spent
approximately $50,000 in connection with Year 2000 compliance. Of the $50,000
approximately $27,000 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.
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 None.
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: April 30, 1999 By: /s/ Earl F. Elliott
---------------------
Earl F. Elliott, President and Chief
Executive Officer
Date: April 30, 1999 By: /s/ J. Lee Walden
-------------------
J. Lee Walden, Vice President and Chief
Financial Officer