SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________________ to _________________
Commission File Number 0-29312
MONTGOMERY FINANCIAL CORPORATION
(Exact Name of Small Business Issuer in its Charter)
Indiana 35-1962246
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
119 East Main Street
Crawfordsville, Indiana 47933
(Address of Principal Executive Offices) Zip Code
Issuer's telephone number, including area code: (765) 362-4710
Securities Registered under Section 12(b) of the Exchange Act:
None
Securities Registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such requirements for the past 90 days. YES X . NO ___.
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The Issuer had $7,219,541 in revenues for the fiscal year ended June
30, 1997.
<PAGE>
As of August 31, 1997, there were issued and outstanding 1,653,032
shares of the Issuer's Common Stock. The aggregate market value of the voting
stock held by non-affiliates of the Issuer, computed by reference to the last
known sale price of such stock as of August 31, 1997, was $19.7 million. (The
exclusion from such amount of the market value of the shares owned by any person
shall not be deemed an admission by the Issuer that such person is an affiliate
of the Issuer.)
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Portions of Annual Report to Stockholders for the
Fiscal Year Ended June 30, 1997.
Part III of Form 10-KSB - Portions of the Proxy Statement for the
1997 Annual Meeting of Shareholders.
<PAGE>
PART I
Item 1. Description of Business
Forward-Looking Statements
When used in this Form 10-KSB or future filings by Montgomery Financial
Corporation ("Montgomery" or the "Company) with the Securities and Exchange
Commission, in the Company's press releases or other public or 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. The Company
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 the Company's
financial performance and could cause the Company's actual results for future
periods to differ materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligations, to revise any forward-looking statements to reflect the occurrence
of anticipated or unanticipated events or circumstances after the date of such
statements.
General
Montgomery is an Indiana corporation which was organized in April, 1997
by Montgomery Savings, a Federal Association for the purpose of becoming a
savings and loan holding company. Montgomery Savings Association, a Federal
Association, was established in 1888 as an Indiana state-chartered mutual
savings and loan association known as The Montgomery Savings Association. It was
converted in 1985 to a federally chartered, mutual savings and loan association.
On August 11, 1995, Montgomery Savings Association, a Federal Association,
transferred substantially all its assets and liabilities to a
federally-chartered stock savings and loan association named Montgomery Savings,
a Federal Association (the "Association").
In June 1997, the Company became the holding company of the Association
and issued shares of common stock, par value $.01 per share ("Common Stock"), to
the public. Pursuant to a Plan of Conversion and Agreement and Plan of
Reorganization (the "Plan") adopted by the Association and Montgomery Mutual
Holding Company, a federally chartered mutual holding company, (the "Mutual
Holding Company") the Mutual Holding Company converted from mutual form to a
federal interim stock savings institution and was simultaneously merged with and
into the Association, with the Association being the surviving entity and a
subsidiary of the Company. At the same time, the Company completed its initial
public offering of 1,186,778 shares of Common Stock and exchanged 466,254 shares
of Common Stock for the shares of the Association previously held by public
stockholders.
The principal asset of the Company is the outstanding stock of the
Association, its wholly owned subsidiary. The Company presently has no separate
operations and its business consists of
1
<PAGE>
the business of the Association. All references to the Company, unless otherwise
indicated, at or before June 30, 1997 refer to the Association.
Montgomery conducts business from four offices, two in Crawfordsville
(Montgomery County), one in Covington (Fountain County), and one in Williamsport
(Warren County), Indiana. At June 30, 1997, Montgomery and its subsidiaries (on
a consolidated basis) had total assets of $103.4 million, total liabilities of
$84.0 million, including $71.3 million of deposits, $11.4 million of Federal
Home Loan Bank advances, and total stockholders' equity of $19.4 million. The
deposits of Montgomery are insured by the Federal Deposit Insurance Corporation
("FDIC") under the Savings Association Insurance Fund ("SAIF"). Montgomery is
subject to regulation and examination by the Office of Thrift Supervision (the
"OTS").
Montgomery's principal executive offices are located at 119 East Main
Street, Crawfordsville, Indiana 47933, and its telephone number is (765)
362-4710.
Montgomery is primarily engaged in attracting deposits from the general
public through its offices and using those and other available sources of funds
to originate loans secured by one- to four-family residences. Approximately
99.5% of Montgomery's depositors reside in the State of Indiana. One- to
four-family residential loans amounted to $73.6 million, or 84.0%, of
Montgomery's total loan portfolio at June 30, 1997. To a lesser extent,
Montgomery originates loans secured by existing multi-family residential and
nonresidential real estate, which amounted to $8.1 million, or 9.3%, of the
total loan portfolio at June 30, 1997, as well as construction loans and
consumer loans, which amounted to $1.9 million, or 2.2%, of the total loan
portfolio and $4.0 million, or 4.5%, of the total loan portfolio at such date,
respectively. Montgomery also invests in U.S. Government and federal agency
obligations and mortgage-backed securities which are insured by federal
agencies. Montgomery has one wholly owned subsidiary corporation, MSA Service
Corporation ("MSA"). MSA engages in real estate management and real estate
appraisals.
At June 30, 1997, Montgomery exceeded all of its minimum capital
requirements. Management attributes its strong capital position to its focus on
loans secured by residential properties and a conservative lending philosophy on
other types of loans.
Lending Activities
General. Montgomery's revenue consists primarily of interest income
generated by lending activities, including the origination of conventional
fixed-rate and variable-rate mortgage loans on one- to four-family homes located
in Montgomery's primary market area and consumer loans secured by savings
deposits, residential real estate, and various other items of collateral. To a
lesser extent mortgage loans on multi-unit and nonresidential properties are
also offered by Montgomery. Montgomery does not make loans insured by the
Federal Housing Authority ("FHA loans") or loans guaranteed by the Veterans
Administration ("VA loans").
At June 30, 1997, Montgomery's net loan portfolio totalled $86.9
million. Loans secured by first mortgages on one- to four-family residences
totalled $73.6 million, or 84.0% of Montgomery's loan portfolio at June 30,
1997, before net items. Montgomery originates and retains its mortgage loan
portfolio, and currently does not originate mortgage loans for sale to the
secondary market.
2
<PAGE>
Loans to One Borrower. Under OTS regulations, the aggregate amount of
the loans that the Association can make to any one borrower (including related
entities, with certain exceptions, is limited to an amount equal to 15% of
unimpaired capital and retained income on an unsecured basis and an additional
amount equal to 10% of unimpaired capital and retained income if the loan is
secured by readily marketable collateral (generally financial instruments, not
real estate) or $500,000, whichever is higher. Montgomery's maximum loan-to-one
borrower limit was approximately $2.2 million as of June 30, 1997. Montgomery's
largest amount outstanding to one borrower or group of related borrowers was a
group of loans secured by residential and commercial real estate in the
aggregate amount of $1.2 million. All of the loans to this borrower have
performed in accordance with their terms since their origination.
3
<PAGE>
Loan Portfolio Composition. The following table presents certain
information about the composition of Montgomery's loan portfolio at the dates
indicated:
<TABLE>
<CAPTION>
June 30
------------------------------------------------------------------------------------
1997 1996 1995 1994
------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Loan:
Mortgage loans:
Residential............................... $74,270 85.45% $68,961 86.12% $65,890 84.55% $62,672 86.79%
Land...................................... 1,658 1.91 1,656 2.07 1,866 2.39 422 0.58
Nonresidential............................ 5,793 6.67 5,866 7.33 6,076 7.80 5,694 7.88
Construction:
Residential........................... 1,892 2.18 1,261 1.57 1,345 1.73 1,602 2.22
------- ------ ------- ------ ------- ------ ------- ------
Total mortgage loans................ 83,613 96.21 77,744 97.09 75,177 96.47 70,390 97.47
------- ------ ------- ------ ------- ------ ------- ------
Other loans:
Home equity............................... 2,727 3.14 2,444 3.05 2,653 3.40 2,673 3.70
Savings account and unsecured 201 28
consumer loans........................... 1,252 1.44 574 0.72 576 0.74 0.
------- ------ ------- ------ ------- ------ ------- ------
Total other loans................... 3,979 4.58 3,018 3.77 3,229 4.14 2,874 3.98
------- ------ ------- ------ ------- ------ ------- ------
Less:
Loans in process.......................... 668 0.77 683 0.85 455 .58 955 1.32
Deferred loan fees (cost)................. (164) (0.19) (153) (0.19) (118) (0.15) (64) (0.09)
Loan loss reserves........................ 180 0.21 158 0.20 138 0.18 158 0.22
------- ------ ------- ------ ------- ------ ------- ------
Total adjustments................... 684 0.79 688 0.86 476 0.61 1,049 1.45
------- ------ ------- ------ ------- ------ ------- ------
Total loans, net............................ $86,908 100.00% $80,074 100.00% $77,929 100.00% $72,215 100.00%
======= ====== ======= ====== ======= ====== ======= ======
<PAGE>
<CAPTION>
June 30
------------------------------------------------------------------------------------
1997 1996 1995 1994
------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Security:
Residential:
1-4 family................................ $75,498 86.87% $69,353 86.61% $66,048 84.76% $63,126 87.42%
5 or more units........................... 664 0.76 869 1.08 1,187 1.52 1,148 1.59
Nonresidential.............................. 5,793 6.67 5,866 7.33 6,076 7.80 5,694 7.88
Land........................................ 1,658 1.91 1,656 2.07 1,866 2.39 422 0.58
Residential--second mortgage................ 2,727 3.14 2,444 3.05 2,653 3.40 2,673 3.70
Savings accounts and unsecured 28
consumer loans.............................. 1,252 1.44 574 0.72 576 0.74 201 0.
------- ------ ------- ------ ------- ------ ------- ------
Total loans......................... 87,592 100.79 80,762 100.86 78,406 100.61 73,264 101.45
====== ====== ====== ====== ====== ====== ====== ======
Less:
Loans in process.......................... 668 0.77 683 0.85 455 .58 955 1.32
Deferred loan fees (cost)................. (164) (0.19) (153) (0.19) (118) (0.15) (64) (0.09)
Loan loss reserves........................ 180 0.21 158 0.20 138 0.18 158 0.22
------- ------ ------- ------ ------- ------ ------- ------
Total loans, net............................ $86,908 100.00% $80,074 100.00% $77,929 100.00% $72,215 100.00%
======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
4
<PAGE>
Loan Maturity Schedule. The following table illustrates the maturities
of Montgomery's loan portfolio at June 30, 1997. Mortgages which have adjustable
or renegotiable interest rates are shown as maturing in the period during which
the contract is subject to repricing. The schedule does not reflect the effects
of possible prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Due During Years Ended June 30,
--------------------------------------------------------------------------------------------------
2001 2003 2008 2013 Balance
And Through Through And June 30,
1998 1999 2000 2002 2007 2012 Following 1997
---- ---- ---- ---- ---- ---- --------- ----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential mortgage......... $25,357 $ 62 $ 831 $11,011 $5,597 $17,577 $13,835 $74,270
Nonresidential mortgage...... 1,671 11 --- 619 383 2,719 390 5,793
Residential construction..... 757 --- --- 294 --- 262 579 1,892
Land loans................... 939 --- 484 146 59 30 --- 1,658
Home equity loans............ 431 106 170 815 953 197 55 2,727
Savings account and
unsecured consumer loans.... 1,056 22 46 68 46 2 12 1,252
------- ---- ------ ------- ------ ------- ------- -------
Total............... $30,211 $201 $1,531 $12,953 $7,038 $20,787 $14,871 $87,592
======= ==== ====== ======= ====== ======= ======= =======
</TABLE>
The following table sets forth as of June 30, 1997 the dollar amount of
all loans due after one year which have fixed and floating or adjustable
interest rates.
<TABLE>
<CAPTION>
Fixed Variable
Rates Rates Total
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Residential mortgage............................................ $38,012 $10,901 $48,913
Nonresidential mortgage ........................................ 3,682 440 4,122
Residential construction........................................ 841 294 1,135
Land loans ..................................................... 444 275 719
Home equity loans............................................... 2,296 --- 2,296
Savings account and unsecured consumer loans.................... 196 --- 196
------- ------- -------
Total.................................................... $45,471 $11,910 $57,381
======= ======= =======
</TABLE>
<PAGE>
Residential Loans. The primary lending activity of Montgomery has been
the origination of conventional loans for the acquisition or construction of
single-family residences. Montgomery also originates loans on two- to
four-family dwellings and multi-family housing (over four units). Each of these
types of loans is secured by a mortgage on the underlying real estate and
improvements thereon, if any.
OTS regulations limit the amount which Montgomery may lend in
relationship to the appraised value of the underlying real estate at the time of
loan origination. In accordance with such regulations and law, Montgomery makes
loans on single family residences up to 90% of the value of the real estate and
improvements (the "Loan-to-Value Ratio" or "LTV"). Montgomery makes loans from
time to time of between 90% and 95% of the value of the real estate and obtains
private mortgage insurance on those loans to reduce its exposure to 80% of the
real estate's value or makes such loans on an uninsured basis as a part of
Montgomery's Community Reinvestment Program for first-time buyers with low to
moderate incomes.
Adjustable-rate mortgage loans ("ARMs") are offered by Montgomery for
terms of normally 15 to 20 years, although Montgomery will offer such loans up
to terms of 25 years. The interest rate
5
<PAGE>
adjustment periods on the ARMs are usually one year. The maximum adjustment at
each adjustment date is usually 1% with a maximum average adjustment of 4% over
the term of the loan. The interest rate adjustments on ARMs presently originated
by Montgomery are tied to changes in the monthly average yield of U.S. Treasury
securities adjusted to a constant maturity of one year.
Montgomery offers fixed-rate mortgage loans for terms of up to 20
years. Due to the nature of an investment in fixed-rate mortgage loans, such
loans could have a negative effect upon Montgomery's interest rate spread
because such loans do not reprice as quickly as Montgomery's cost of funds.
Actual experience reveals, however, that, as a result of prepayments in
connection with refinancings and sales of the underlying properties, residential
loans generally remain outstanding for periods which are shorter than the
maturity of such loans, although not as short as the periods in which the cost
of funds is typically repricing.
Of the total real estate loans originated by Montgomery during the year
ended June 30, 1997, 17.6% were ARMs and 82.4% were fixed-rate loans.
Montgomery's residential loan portfolio, including residential
construction loans, totalled approximately $76.2 million at June 30, 1997, and
represented 73.7% of total assets and 87.0% of total outstanding loans.
Adjustable-rate residential loans comprised 41.7% and fixed rate loans totalled
45.3% of Montgomery's total loans at June 30, 1997.
Construction Loans. Montgomery offers residential construction loans to
owner-occupants and occasionally to builders. At June 30, 1997, Montgomery had
$1.9 million in outstanding construction loans.
Construction loans generally involve greater underwriting and default
risks than do loans secured by mortgages on existing properties. Loan funds are
advanced upon the security of the project under construction, which is more
difficult to value before the completion of construction. Moreover, because of
the uncertainties inherent in estimating construction costs, it is relatively
difficult to evaluate accurately the total loan funds required to complete a
project and the related Loan-to-Value Ratios. In the event a default on a
construction loan occurs and foreclosure follows, Montgomery would have to take
control of the project and attempt either to arrange for completion of
construction or dispose of the unfinished project.
Nonresidential Real Estate Loans. Montgomery makes loans secured by
nonresidential real estate consisting of farms and various retail and other
income-producing properties. At June 30, 1997, these loans totalled $5.8 million
or approximately 6.6% of Montgomery's total loans.
Nonresidential real estate lending is generally considered to involve a
higher degree of risk than residential lending due to the relatively larger loan
amounts and the effects of general economic conditions on the successful
operation of income-producing properties. Montgomery has endeavored to reduce
this risk by carefully evaluating the credit history and past performance of the
borrower, the location of the real estate, the quality of the management, the
debt service ratio, the quality and characteristics of the income stream
generated by the property and appraisals supporting the property's valuation.
Federal regulations limit the amount of nonresidential mortgage loans which an
association can make.
6
<PAGE>
Consumer Loans. Montgomery makes two types of consumer loans -- loans
made to depositors on the security of their savings deposits and loans secured
by second real estate mortgages. Second mortgage loans may have terms as long as
15 years depending upon the nature of the request. Such loans are limited in
amount by determining 100% of the value of the real estate and subtracting any
prior liens.
Although regulations permit Montgomery to loan up to 100% of the value
of savings deposits pledged as collateral for loans, Montgomery's normal policy
is to loan no more than 95% of the current principal balance of pledged
accounts. The current interest rate charged on such pledged accounts is usually
2% above the rate paid on the underlying deposit.
At June 30, 1997, consumer loans totalled $4.0 million or 4.6% of
Montgomery's total loans.
Loan Originations, Solicitation, and Processing. Loan originations are
developed from a number of sources, including solicitations by Montgomery's
staff, continuing business with depositors and other borrowers, real estate
agents, newspaper and radio advertising, and walk-in customers.
Mortgage loan applications are taken by one of Montgomery's loan
officers. Montgomery obtains a credit report, verification of employment and
other documentation concerning the creditworthiness of the borrower and an
appraisal of the fair market value of the real estate which will be given as
security for the loan. Appraisals are performed by a designated licensed fee
appraiser approved by the Board of Directors. Such loans are subject to approval
upon the completion of the appraisal and the receipt of all necessary
information on the credit history and creditworthiness of the borrower. At least
two Board members must approve all loans over $175,000. All approved loans are
reported to the full Board at their regular monthly meeting.
If a mortgage loan application is approved, satisfactory evidence of
merchantable title is obtained on the real estate and improvements which will
secure the mortgage loan. Borrowers are required to carry satisfactory fire and
casualty insurance and flood insurance, if applicable, and to name Montgomery as
an insured mortgagee.
The procedure for approval of construction/permanent loans is the same
as for residential mortgage loans, except that for construction/permanent loans
Montgomery evaluates the building plans, construction specifications and
estimates of construction costs. Montgomery also evaluates the feasibility of
the proposed construction project and the experience and record of the builder.
Consumer loans are underwritten on the basis of the borrower's credit
history, the value of the collateral, and an analysis of the borrower's income
and expenses and ability to repay the loan.
7
<PAGE>
The following table shows total loans originated and repaid during the
periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------------------
1997 1996 1995
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Total gross loans at beginning
of period.................................. $80,762 $78,406 $73,264
Loans originated:
Residential mortgage...................... 22,269 23,285 15,008
Nonresidential mortgage................... 2,299 1,270 1,027
Residential construction.................. 3,500 1,764 2,742
Land loans................................ 743 618 1,158
Other loans............................... 1,372 523 1,550
------- ------- -------
Total loans originated................ 30,183 27,460 21,485
Participation loans purchased:
Nonresidential mortgage................... --- --- 553
Participation loans sold:
Nonresidential mortgage................... --- --- (559)
Loan principal payments..................... (11,185) (12,668) (10,793)
Other changes, net(1)....................... (12,168) (12,436) (5,544)
------- ------- -------
Total gross loans at end of
period..................................... $87,592 $80,762 $78,406
======= ======= =======
</TABLE>
---------------------
(1) Represents changes except cash repayments of principal (i.e.,
refinanced portion of new loans and foreclosed loans to real estate
owned).
Loan Origination and Other Fees. Montgomery realizes interest income
from its lending activities and also realizes income from late payment charges,
credit life and disability insurance premium commissions, and fees for other
miscellaneous services.
Loan origination fees and other fees are a volatile source of income,
varying with the volume of lending and economic conditions. Compliance with SFAS
No. 91 has resulted in a change from Montgomery's past accounting practice and
has reduced the amount of revenue recognized by Montgomery at the time such
loans are originated or acquired, but will increase the yield reported on such
loans as such deferred fees are amortized, thereby spreading the income over a
greater number of years.
Delinquent Loans and Classified Assets. Montgomery attempts to minimize
loan delinquencies through careful underwriting procedures. When mortgage loans
become delinquent, Montgomery attempts to bring the loans current through the
assessment of late charges and adherence to its established collection
procedures. Generally, after a loan payment is 15 days delinquent, a late charge
of 5% of the amount of the payment is assessed and Montgomery will contact the
borrower to request payment. Montgomery generally will initiate foreclosure
8
<PAGE>
proceedings only after attempts to obtain a deed in lieu of foreclosure are
unsuccessful or inappropriate and when it becomes apparent that the loan will
not be collectable or when the collateral is becoming inadequate to support
payments of the total debt. The above procedure similarly applies to consumer
loans.
Real estate acquired by Montgomery as a result of foreclosure or by
deed in lieu of foreclosure and real estate securing loans deemed to be
foreclosed in substance are classified as "real estate owned" until sold. When
property is so acquired, or deemed to have been acquired, it is recorded at the
lower of the unpaid principal balance of the loan or the fair value of the real
estate at the date of acquisition, not to exceed net fair value minus estimated
costs to sell. Periodically, real estate owned is reviewed to ensure that the
fair value minus estimated costs to sell is no less than the carrying value and,
if it is, the difference is charged to earnings as a loss. Costs relating to
development and improvement of property are capitalized, whereas costs relating
to the holding of property are expensed.
The following table reflects the amount of loans in a delinquent status
as of the dates indicated:
<TABLE>
<CAPTION>
June 30,
------------------------------------------
1997 1996 1995
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Loans delinquent for:
30 to 59 days............................. $1,013 $ 988 $ 795
60 to 89 days............................. 640 542 255
90 or more days........................... 502 661 817
------ ------ ------
Total delinquent loans................ $2,155 $2,191 $1,867
====== ====== ======
Ratio of total delinquent loans
to total loans............................. 2.46% 2.73% 2.39%
</TABLE>
All loans are reviewed on a regular basis and are placed on non-accrual
status when, in the opinion of management, the collection of principal or
interest is doubtful. Interest accrued and unpaid at the time a loan is placed
on non-accrual status is charged against interest income. Subsequent payments
are either applied to the outstanding principal balance or recorded as interest
income, depending on management's assessment of the ultimate collectability of
the loan.
9
<PAGE>
The following table sets forth information with respect to Montgomery's
non-performing assets at the dates indicated:
<TABLE>
<CAPTION>
June 30,
------------------------------------------
1997 1996 1995
------ ------ -------
(Dollars In Thousands)
<S> <C> <C> <C>
Nonaccrual loans:
Residential mortgage loans................ $ 255 $ 614 $ 503
Nonresidential mortgage loans............. 18 19 19
Consumer loans............................ --- --- ---
------ ------ -------
Total nonaccrual loans.................. 273 633 522
Accruing loans contractually past due 90
days or more:
Residential mortgage ..................... 229 --- 277
Nonresidential mortgage .................. --- --- ---
Consumer loans ........................... --- 28 18
------ ------ -------
Total accruing loans contractually past
due 90 days or more ..................... 229 28 295
Total non-performing loans ................. 502 661 817
Real estate acquired in
settlement of loans (net).................. 109 148 124
------ ------ -------
Total non-performing
assets................................ $ 611 $ 809 $ 941
====== ===== =====
</TABLE>
During the periods shown, Montgomery had no restructured loans within
the meaning of SFAS No. 15. At June 30, 1997, there were no loans other than
those disclosed in the table above about which management has concerns as to the
ability of the borrowers to comply with repayment terms.
On July 1, 1995, Montgomery adopted SFAS Nos. 114 and 118 Accounting by
Creditors for Impairment of a Loan and Accounting by Creditors for Impairment of
a Loan - Income Recognition and Disclosures. At June 30, 1997, the Association
had no impaired loans. The average balance of impaired loans for the year ended
June 30, 1997, was $25,000. Montgomery had no interest income or cash receipts
on impaired loans during the year ended June 30, 1997.
For the years ended June 30, 1997, 1996 and 1995, the income that would
have been recorded had the non-accrual loans other than the impaired loan
mentioned above not been in a non-performing status totaled $50,000, $36,000 and
$42,000, respectively, compared to actual income recorded of $25,000, $18,000
and $16,000, respectively.
Current OTS regulations require each savings institution to classify
its assets on a regular basis. Under such regulations, problem assets are to be
classified as either (i) "substandard," (ii) "doubtful" or (iii) "loss."
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Doubtful assets have the same weaknesses as
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full highly questionable and improbable on the
basis of existing facts, conditions and value. Assets classified as "Loss" are
considered uncollectible and of such little value that their treatment as assets
without
10
<PAGE>
the establishment of a specific reserve is unwarranted. The regulations also
have a "special mention" category for assets which do not currently expose an
association to a sufficient degree of risk to warrant classification, but which
possess credit deficiencies or potential weaknesses deserving management's close
attention.
At June 30, 1997, 1996 and 1995, the aggregate amounts of Montgomery's
classified assets were as follows:
<TABLE>
<CAPTION>
June 30,
-------------------------------------------
1997 1996 1995
----- ------ ------
(Dollars in Thousands)
<S> <C> <C> <C>
Classified assets:
Special mention........................... $ --- $ 671 $ 401
Substandard............................... 611 809 941
Doubtful.................................. --- --- ---
Loss...................................... --- --- ---
----- ------ ------
Total classified assets............... $ 611 $1,480 $1,342
===== ====== ======
General loans loss allowance................ $ 180 $ 158 $ 138
===== ====== ======
</TABLE>
Montgomery is required to establish general allowances for loan losses
for assets classified as substandard or doubtful. If an asset, or portion
thereof, is classified as loss, Montgomery must either establish specific
allowances for loan losses in the amount of 100% of the portion of the asset
classified loss, or charge off such amount. Federal examiners are authorized to
classify an association's assets. If an association does not agree with an
examiner's classification of an asset, it may appeal this determination to the
District Director of the OTS. As of the date of its most recent examination,
Montgomery had no disagreement with the Office of Thrift Supervision as to asset
classifications.
11
<PAGE>
The following tables set forth an analysis of Montgomery's allowances
for loan losses for the periods indicated:
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------
1997 1996 1995
----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C>
Balance of allowance at beginning of period............................ $158 $138 $158
Add: Recoveries on loans previously charged off........................ --- --- ---
Less: Charge-offs--residential real estate loans....................... --- --- 5
----- ----- -----
Net charge-offs........................................................ --- --- 5
----- ----- -----
Provision (adjustment) for losses on loans............................. 22 20 (15)
----- ----- -----
Balance of allowance at end of period.................................. $180 $158 $138
==== ==== ====
Net charge-offs to total average loans outstanding
for period............................................................ --- --- 0.01%
Allowance at end of period to net loans receivable
at end of period...................................................... 0.21% 0.20% 0.18
Non-performing assets to total assets.................................. 0.59 0.92 1.08
Non-performing loans to total loans.................................... 0.58 0.83 1.05
Allowance to non-performing loans...................................... 35.86 23.90 16.89
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------------------------
1997 1996 1995
------------------------ ----------------------- ------------------------
Percent of Percent of Percent of
loans in loans in loans in
each each each
category to category to category to
Amount total loans Amount total loans Amount total loans
------ ----------- ------ ----------- ------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to:
Residential....................... $ 45 84.79% $ 37 85.39% $ 40 84.04%
Commercial real estate 3 13
and land......................... 3 8.51 --- 9. 1 --- 10.
Construction loans................ --- 2.16 --- 1.56 --- 1.71
Home equity and consumer loans.... 23 4.54 17 3.74 17 4.12
Unallocated....................... 109 --- 104 --- 81 ---
----- ------ ---- ------ ---- ------
Total......................... $ 180 100.00% $158 100.00% $138 100.00%
===== ====== ==== ====== ==== ======
</TABLE>
Investment Activities
OTS regulations require that Montgomery maintain a minimum amount of
liquid assets, which may be invested in United States Treasury obligations,
securities of various federal agencies, certificates of deposit at insured
banks, deposits with the Federal Home Loan Bank ("FHLB") of
12
<PAGE>
Indianapolis, bankers' acceptances, and federal funds. Montgomery is also
permitted to make investments in certain commercial paper, corporate debt
securities and certain mutual funds, as well as other investments permitted by
federal regulations. On July 1, 1994, Montgomery adopted Statement of Financial
Accounting Standards ("SFAS") No. 115. Montgomery considers all its investment
and mortgage-backed securities to be available for sale and pursuant to the
requirements of SFAS No. 115 these securities are reported at fair value. Prior
to the adoption of SFAS No. 115 these securities were reported at amortized
cost.
The following tables set forth information regarding Montgomery's
investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------------------
1997 1996 1995
---------------------- ------------------------- -------------------------
Book Book Book
Value % of Total Value % of Total Value % of Total
----- ---------- ----- ---------- ----- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits with banks $ 100 100.00% $ 100 100.00% $ 100 100.00%
====== ====== ======= ====== ====== ======
Investment securities:
U.S. Treasury..................... $ --- ---% $ --- ---% $ 250 16.10%
Federal agencies.................. --- --- 250 23.54 257 16.55
Municipals........................ 42 4.36 62 5.84 71 4.57
Corporate obligations............. --- --- --- --- 225 14.49
------ ------ ------ ------ ------ ------
Total investment securities... 42 4.36 312 29.38 803 51.71
FHLB stock 922 95.64 750 70.62 750 48.29
------ ------ ------ ------ ------ ------
Total investment securities
and FHLB stock $ 964 100.00% $1,062 100.00% $1,553 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
<PAGE>
The composition and maturities of the available for sale securities
portfolio at June 30, 1997, excluding FHLB of Indianapolis stock, are indicated
in the following table.
<TABLE>
<CAPTION>
June 30, 1997
--------------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over 10
1 Year Years Years Years Total Investment Securities
---------- ---------- ---------- ---------- ---------------------------
Book Value Book Value Book Value Book Value Book Value Fair Value
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total investment securities --
municipals........................ $ 42 $ --- $ --- $ --- $ 42 $ 42
======= ======= ====== ====== ======= =======
Weighted average yield.............. 7.00% ---% ---% ---% 7.00%
======= ======= ====== ====== =======
</TABLE>
Deposits and Borrowings
General. Deposits have traditionally been the primary source of
Montgomery's funds for use in lending and other investment activities. In
addition to deposits, Montgomery derives funds from interest payments and
principal repayments on loans and income on earning assets. Loan payments are a
relatively stable source of funds, while deposit inflows and outflows fluctuate
more in response to general interest rates and money market conditions.
Borrowings from the FHLB of
13
<PAGE>
Indianapolis are used on a short-term basis to compensate for reductions in the
availability of funds from other sources or on a longer term basis for general
business purposes.
Deposits. Deposits are attracted principally from within Montgomery's
primary market area through the offering of a selection of deposit instruments,
including NOW accounts, regular passbook savings accounts, term certificate
accounts and retirement savings plans. Interest rates paid, maturity terms,
service fees and withdrawal penalties for the various types of accounts are
established on a periodic basis by Montgomery's chief executive officer, subject
to review by the Board of Directors, based on Montgomery's liquidity
requirements, growth goals and interest rates paid by competitors. Montgomery
does not presently use brokers to attract deposits.
Montgomery's deposits as of June 30, 1997 were represented by the
various types of savings programs described below:
<TABLE>
<CAPTION>
Weighted
Average Balance Percent
Interest Term Minimum June 30, of Total
Rate (Months) Category Amount 1997 Deposits
- ------------ -------- ----------------------------- ------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
3.00% NOW accounts N/A $ 3,540 4.97%
3.80 Regular savings N/A 4,405 6.18
3.80 Money market demand accounts N/A 7,142 10.02
Demand accounts N/A 1,165 1.63
-------- ------
16,252 22.80
-------- ------
5.65 18 IRA fixed rate and term 500 2,064 2.90
5.49 30 IRA fixed rate and term 500 90 0.13
4.79 3 Fixed rate and term N/A 419 0.59
5.13 6 Fixed rate and term N/A 4,298 6.03
5.53 12 Fixed rate and term N/A 10,254 14.39
5.95 18 Fixed rate and term N/A 7,868 11.04
5.90 24 Fixed rate and term N/A 6,290 8.83
6.13 30 Fixed rate and term N/A 4,330 6.08
6.21 36 Fixed rate and term N/A 3,146 4.41
6.35 48 Fixed rate and term N/A 2,028 2.85
6.24 60 Fixed rate and term N/A 10,372 14.55
6.24 3 Fixed rate and term N/A 365 0.51
5.50 Various Public funds N/A 3,489 4.89
------- ------
55,013 77.20
------- ------
$71,265 100.00%
======= ======
</TABLE>
<PAGE>
The following table presents the certificates of deposit issued by
Montgomery, classified by rates at the dates indicated:
<TABLE>
<CAPTION>
June 30,
---------------------------------------------
1997 1996 1995
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
4.00% and below.............. $ --- $ 136 $ 469
4.01 to 6.00%................ 31,664 31,059 21,451
6.01 to 8.00%................ 23,341 23,323 31,333
8.01 to 10.00%............... 8 17 219
------- ------- -------
$55,013 $54,535 $53,472
======= ======= =======
</TABLE>
14
<PAGE>
The following table presents the amount and maturities of the
certificates of deposit at June 30, 1997:
<TABLE>
<CAPTION>
Two To Percent of
Less Than One To Three Three To Total
One Year Two Years Years Four Years Thereafter Total Certificates
-------- --------- ----- ---------- ---------- ----- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Certificate maturities at June 30, 1997:
4.00% and below.......... $ --- $ --- $ --- $ --- $ --- $ --- ---%
4.01 to 6.00%............ 20,332 8,843 1,557 450 482 31,664 57.56
6.01 to 8.00%............ 14,404 5,246 2,300 1,115 276 23,341 42.43
8.01 to 10.00%........... ---- 8 --- --- --- 8 .01
------- ------- -------- -------- --------- ------- ------
$34,736 $14,097 $ 3,857 $ 1,565 $ 758 $55,013 100.00%
======= ======= ======== ======== ========= ======= ======
</TABLE>
The following table presents the amount of Montgomery's certificates of
deposit of $100,000 or more by the time remaining until maturity as of June 30,
1997 (dollars in thousands):
Three months or less $ 3,522
Four through six months 1,023
Seven through twelve months 5,624
Over twelve months 2,597
-------
TOTAL $12,766
=======
<PAGE>
The following table presents the change in dollar amount of deposit
accounts by savings type for years ended June 30, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------- ------------------------------- ------------------------------
Increase Increase Increase
Percent of or Percent of or Percent of or
Amount Total Decrease Amount Total Decrease Amount Total Decrease
------ ----- -------- ------ ----- -------- ------ ----- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand accounts........... $ 1,165 1.63% $ 552 $ 613 0.88% $ 130 $ 483 0.71% $ 268
NOW accounts.............. 3,540 4.97 962 2,578 3.70 569 2,009 2.94 387
Regular savings........... 4,405 6.18 (543) 4,948 7.10 (87) 5,035 7.37 (48)
Money market demand
accounts................. 7,142 10.02 107 7,035 10.09 (252) 7,287 10.67 (2,798)
Certificate of deposit.... 55,013 77.20 478 54,535 78.23 1,063 53,472 78.31 8,131
-------- ------ ------ ------- ------ ----- ------- ------ ------
Total................ $ 71,265 100.00% $1,556 $69,709 100.00% 1,423 $68,286 100.00% $5,940
======== ====== ====== ======= ====== ===== ======= ====== ======
</TABLE>
15
<PAGE>
The following table sets forth the savings activities of Montgomery for
the periods indicated:
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Balance, beginning of period................ $69,709 $68,286 $62,346
------- ------- -------
Net (decrease) increase before
interest credited.......................... (2,238) (2,429) 2,896
Interest credited........................... 3,794 3,852 3,044
------- ------- -------
Net increase in deposits................ 1,556 1,423 5,940
------- ------- -------
Balance, end of period...................... $71,265 $69,709 $68,286
======= ======= =======
</TABLE>
Deposit flows historically have been related to general economic
conditions. To resist these historical trends, Montgomery, as well as the thrift
industry as a whole, has increasingly relied on short-term certificate accounts
and other deposit alternatives that are more responsive to market conditions
than passbook accounts and long-term certificates. This greater variety of
deposit accounts has allowed Montgomery to be more competitive in obtaining
funds. At the same time, however, these sources of funds can be more costly than
traditional sources. In addition, Montgomery at times has become increasingly
subject to short-term fluctuations in deposit flows as customers have become
more interest-rate conscious. The ability of Montgomery to attract and maintain
savings deposits and Montgomery's cost of funds have been, and will continue to
be, significantly affected by money market conditions. Montgomery continues to
rely upon its core deposits to support its operations.
Borrowings. The FHLB System functions as a central reserve bank
providing credit for its member institutions and certain other financial
institutions.
As a member in good standing of the FHLB of Indianapolis, Montgomery is
authorized to apply for advances from the FHLB of Indianapolis, provided certain
standards of creditworthiness have been met. Advances are made pursuant to
several different programs, each having its own interest rate and range of
maturities. Depending on the program, limitations on the amount of advances are
based either on a fixed percentage of an institution's regulatory capital or on
the FHLB's assessment of the institution's creditworthiness. Under current
regulations, an association must meet certain qualifications to be eligible for
FHLB advances. The extent to which an association is eligible for such advances
will depend upon whether it meets the Qualified Thrift Lender Test (the "QTL
Test"). If a savings institution meets the QTL Test, it will be eligible for
100% of the advances it would otherwise be eligible to receive. If a savings
institution does not meet the QTL Test, it will be eligible for such advances
only to the extent it holds specified QTL Test assets. At June 30, 1997,
Montgomery was in compliance with the QTL Test.
16
<PAGE>
The following table sets forth the maximum amount of Montgomery's FHLB
advances during the years ended June 30, 1997, 1996 and 1995, along with the
balance of FHLB advances outstanding at the end of each such period:
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------
1997 1996 1995
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum balance outstanding
at any month end.......................... $12,000 $10,500 $13,000
Period end balance......................... 11,428 8,000 10,500
Weighted average interest rate
of FHLB advances at period
end....................................... 5.98% 5.76% 6.82%
</TABLE>
Market Area and Competition
The Association's market area consists of Montgomery, Fountain, and
Warren Counties, Indiana. The home office of the Association is located in
Crawfordsville, Montgomery County, Indiana. The Association has branch offices
in Fountain and Warren Counties. The Association's market area is characterized
by a lower growth rate in population, moderately lower than average levels of
household income, much lower housing values and a moderately lower unemployment
level. The market area's strongest employment categories are manufacturing,
services and wholesale/retail trade with a lower level of residents employed in
the agriculture and mining industry category. The major employers in the
Association's market area are: R. R. Donnelley & Sons (3,100 employees),
Raybesto Products (802 employees), Hi-Tek Lithonia Light (550 employees), NUCOR
Steel (466 employees), H-C Industries (417 employees), ATAPCO (Crawfordsville)
(332 employees), Mid- States (283 employees), Heritage Products (265 employees)
and Pace Dairy Foods (250 employees).
Montgomery competes for deposits with other savings institutions,
commercial banks and credit unions in its market area. The primary factors in
competing for deposits are interest rates and convenience of office location. In
making loans, Montgomery competes with other savings institutions, commercial
banks, consumer finance companies, credit unions, leasing companies and other
lenders. Montgomery competes for loan originations primarily through the
interest rates and loan fees it charges and through the efficiency and quality
of services it provides to borrowers. Competition is affected by, among other
things, the general availability of lendable funds, general and local economic
conditions, current interest rate levels and other factors which are not readily
predictable.
On June 30, 1996, the latest date for which such data is available,
there were approximately 13 different commercial banks and savings institutions
which had a total of 36 offices in Montgomery, Fountain and Warren counties.
According to information provided by the FDIC, these institutions held
approximately $756.9 million in deposits in those 36 banking offices. Montgomery
held approximately 9.2% of those deposits. Similar information is not readily
available for loans.
17
<PAGE>
The number and size of financial institutions competing with Montgomery
may increase as a result of changes in federal statutes and regulations. Such
increased competition may have an adverse effect upon Montgomery.
MSA SERVICE CORPORATION
MSA, a real estate management company, is wholly owned by Montgomery.
MSA owns a residential complex, comprised of an 8-unit apartment and an adjacent
single-family residence, which is currently being converted to condominiums.
At June 30, 1997, MSA had total assets of $492,000, liabilities of
$70,000, and net worth of $422,000. MSA had net income of $25,000 and net loss
of $4,000 for the years ended June 30, 1997 and 1996, respectively.
18
<PAGE>
REGULATION
General
Montgomery is a federally chartered savings association, the deposits
of which are federally insured and backed by the full faith and credit of the
United States Government. Accordingly, Montgomery is subject to broad federal
regulation and oversight extending to all its operations. Montgomery is a member
of the FHLB of Indianapolis and is subject to certain limited regulation by the
Board of Governors of the Federal Reserve System ("Federal Reserve Board"). As
the savings and loan holding company of Montgomery, the Company also is subject
to federal regulation and oversight. The purpose of the regulation of the
Company and other holding companies is to protect subsidiary savings
associations. Montgomery is a member of the Savings Association Insurance Fund
(the "SAIF"), which together with the Bank Insurance Fund (the "BIF") are the
two deposit insurance funds administered by the FDIC, and the deposits of
Montgomery are insured by the FDIC. As a result, the FDIC has certain regulatory
and examination authority over Montgomery.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations
The OTS has extensive authority over the operations of savings
associations. As part of this authority, Montgomery is required to file periodic
reports with the OTS and is subject to periodic examinations by the OTS and the
FDIC. The last regular OTS examination of Montgomery was as of September 30,
1996. Under agency scheduling guidelines, it is likely that another examination
will be initiated in the near future. When these examinations are conducted by
the OTS and the FDIC, the examiners may require the Association to provide for
higher general or specific loan loss reserves. All savings associations are
subject to a semi-annual assessment, based upon the savings association's total
assets, to fund the operations of the OTS. The Association's OTS assessment for
the fiscal year ended June 30, 1997, was $29,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including Montgomery and the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the
Association is prescribed by federal laws and it is prohibited from engaging in
any activities not permitted by such laws. For instance, no savings institution
may invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to branch nationwide. Montgomery is in compliance with the noted restrictions.
19
<PAGE>
Montgomery's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At June 30, 1997, the Association's lending
limit under this restriction was $2.2 million. Montgomery is in compliance with
the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or to comply
with an approved plan will subject the institution to further enforcement
action.
Insurance of Accounts and Regulation by the FDIC
Montgomery is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the United States Government. As insurer,
the FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured institutions. It also
may prohibit any FDIC-insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious risk to the SAIF or the BIF.
The FDIC also has the authority to initiate enforcement actions against savings
associations, after giving the OTS an opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has
engaged in unsafe or unsound practices or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
For the first six months of 1995, the assessment schedule for BIF
members and SAIF members ranged from .23% to .31% of deposits. As is the case
with the SAIF, the FDIC is authorized to adjust the insurance premium rates for
banks that are insured by the BIF of the FDIC in order to maintain the reserve
ratio of the BIF at 1.25% of BIF insured deposits. As a result of the BIF
reaching its statutory reserve ratio the FDIC revised the premium schedule for
BIF insured
20
<PAGE>
institutions to provide a range of .04% to .31% of deposits. The revisions
became effective in the third quarter of 1995. In addition, the BIF rates were
further revised, effective January 1996, to provide a range of 0% to .27%. The
SAIF rates, however, were not adjusted. At the time the FDIC revised the BIF
premium schedule, it noted that, absent legislative action (as discussed
below),the SAIF would not attain its designated reserve ratio until the year
2002. As a result, SAIF insured members would continue to be generally subject
to higher deposit insurance premiums than BIF insured institutions until, all
things being equal, the SAIF attained its required reserve ratio.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation provides for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the
SAIF. It also provides for the merger of the BIF and the SAIF on January 1, 1999
if no savings associations then exist. The special assessment rate was
established at .657% of deposits by the FDIC and the resulting assessment of
$428,000 was paid in November 1996. This special assessment significantly
increased noninterest expense and adversely affected Montgomery's results of
operations for the year ended June 30, 1997. As a result of the special
assessment, Montgomery's deposit insurance premiums was reduced to .0648% based
upon its current risk classification and the new assessment schedule for SAIF
insured institutions. These premiums are subject to change in future periods.
Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on savings associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for resolving
the thrift crisis in the 1980s. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing obligation. Although the legislation also now
requires assessments to be made on BIF- assessable deposits for this purpose,
effective January 1, 1997, that assessment will be limited to 20% of the rate
imposed on SAIF assessable deposits until the earlier of December 31, 1999 or
when no savings association continues to exist, thereby imposing a greater
burden on SAIF member institutions such as Montgomery. Thereafter, however,
assessments on BIF-member institutions will be made on the same basis as
SAIF-member institutions. The rates to be established by the FDIC to implement
this requirement for all FDIC-insured institutions is uncertain at this time,
but are anticipated to be about a 6.5 basis points assessment on SAIF deposits
and 1.5 basis points on BIF deposits until BIF insured institutions participate
fully in the assessment.
Regulatory Capital Requirements
Federally insured savings associations, such as Montgomery, are
required to maintain a minimum level of regulatory capital. The OTS has
established capital standards, including a tangible capital requirement, a
leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations. These capital requirements
must be generally as stringent as the comparable capital requirements for
national banks. The OTS is also authorized to impose capital requirements in
excess of these standards on individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In
21
<PAGE>
addition, all intangible assets, other than a limited amount of purchased
mortgage servicing rights, must be deducted from tangible capital for
calculating compliance with the requirement. At June 30, 1997, the Association
did not have any intangible assets.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. Montgomery does not have any subsidiaries.
At June 30, 1997, Montgomery had tangible capital of $14.7 million, or
14.3% of total assets, which is approximately $13.1 million above the minimum
requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At June 30, 1997,
Montgomery had no intangibles which were subject to these tests.
At June 30, 1997, Montgomery had core capital equal to $14.7 million,
or 14.3% of adjusted total assets, which is $11.6 million above the minimum
leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At June 30, 1997, Montgomery had
$180,000 of general loss reserves, which was less than 1.25% of risk-weighted
assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. As of June 30, 1997,
Montgomery had a $1.2 million exclusion from capital for real estate held for
investment.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to
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such ratio by an insurer approved by the Federal National Mortgage Association
("FNMA") or Federal Home Loan Mortgage Corporation ("FHLMC").
OTS regulations also require that every savings association with more
than normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings association, greater than 2% of the present value of its
assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule will not become effective until the OTS
evaluates the process by which savings associations may appeal an interest rate
risk deduction determination. It is uncertain as to when this evaluation may be
completed. Any savings association with less than $300 million in assets and a
total capital ratio in excess of 12%, such as the Association, is exempt from
this requirement unless the OTS determines otherwise.
On June 30, 1997, Montgomery had total risk-based capital of $13.7
million (including $14.7 million in core capital plus $180,000 in qualifying
supplementary capital, less $1.2 million in real estate held for investment) and
risk-weighted assets of $59.8 million; or total capital of 22.9% of
risk-weighted assets. This amount was $8.9 million above the 8% requirement in
effect on that date.
Prompt Corrective Action. The OTS and the FDIC are authorized and,
under certain circumstances required, to take certain actions against savings
associations that fail to meet their capital requirements. The OTS is generally
required to take action to restrict the activities of an "undercapitalized
association" (generally defined to be one with less than either a 4% core
capital ratio, a 4% Tier 1 risked-based capital ratio or an 8% risk-based
capital ratio). Any such association must submit a capital restoration plan and
until such plan is approved by the OTS may not increase its assets, acquire
another institution, establish a branch or engage in any new activities, and
generally may not make capital distributions. The OTS is authorized to impose
the additional restrictions that are applicable to significantly
undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.
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The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Association may have a substantial adverse effect on its operations and
profitability. Montgomery shareholders do not have preemptive rights and
therefore, if the Company is directed by the OTS or the FDIC to issue additional
shares of Common Stock, such issuance may result in the dilution in the
percentage of ownership of the Company.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions on savings associations
with respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
savings association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result, the regulatory capital of the association
would be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion.
Generally, savings associations such as Montgomery, that before and
after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of their net income for the most recent four quarter
period. However, an association deemed to be in need of more than normal
supervision by the OTS may have its divided authority restricted by the OTS.
Montgomery may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following, a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period notice based on safety and soundness
concerns.
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
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Liquidity
All savings associations, including Montgomery, are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. For a discussion of what Montgomery
includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources." This liquid asset ratio requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
savings associations. At the present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. At June 30, 1997, the Association was in compliance with both
requirements, with an overall liquid asset ratio of 14.05% and a short-term
liquid assets ratio of 14.05%.
Accounting
An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of and
accounting for loans and securities (i.e., whether held for investment, sale or
trading) with appropriate documentation. The Association is in compliance with
these amended rules.
The OTS has adopted an amendment to its accounting regulations, which
may be made more stringent than GAAP by the OTS, to require that transactions be
reported in a manner that best reflects their underlying economic substance and
inherent risk and that financial reports must incorporate any other accounting
regulations or orders prescribed by the OTS.
Qualified Thrift Lender Test
All savings associations, including Montgomery, are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings association to have at least 65% of its
portfolio assets (as defined by regulation) in qualified thrift investments on a
monthly average for nine out of every 12 months on a rolling basis. As an
alternative, the savings association may maintain 60% of its assets in those
assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under
either test, such assets primarily consist of residential housing related loans
and investments. At June 30, 1997, the Association met the test and has always
met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings
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association and a national bank, and it is limited to national bank branching
rights in its home state. In addition, the association is immediately ineligible
to receive any new FHLB borrowings and is subject to national bank limits for
payment of dividends. If such association has not requalified or converted to a
national bank within three years after the failure, it must divest of all
investments and cease all activities not permissible for a national bank. In
addition, it must repay promptly any outstanding FHLB borrowings, which may
result in prepayment penalties. If any association that fails the QTL test is
controlled by a holding company, then within one year after the failure, the
holding company must register as a bank holding company and become subject to
all restrictions on bank holding companies. See "- Company Regulation."
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of
Montgomery, to assess the institution's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by Montgomery.
An unsatisfactory rating may be used as the basis for the denial of an
application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Association may be required to devote additional
funds for investment and lending in its local community. The Association was
examined for CRA compliance in 1995 and received a rating of satisfactory.
Transactions with Affiliates
Generally, transactions between a savings association or its
subsidiaries and its affiliates are required to be on terms as favorable to the
association as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the association's capital. Affiliates of Montgomery include the Company and any
company which is under common control with the Association. In addition, a
savings association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of most
affiliates. Montgomery's subsidiaries are not deemed affiliates, however, the
OTS has the discretion to treat subsidiaries of savings associations as
affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
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Company Regulation
The Company is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings association subsidiaries which also permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings association.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than Montgomery or any other SAIF-insured savings
association) would become subject to such restrictions unless such other
associations each qualify as a QTL and were acquired in a supervisory
acquisition.
If Montgomery fails the QTL test, the Company must obtain the approval
of the OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company. See
"--Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law
The stock of the Company is registered with the Securities and Exchange
Commission ("SEC") under the Securities Exchange Act of 1934 (the "Exchange
Act"). The Company will be subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the SEC under the
Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At June 30, 1997, Montgomery was in compliance with these reserve requirements.
The balances maintained to meet the reserve requirements imposed by the
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Federal Reserve Board may be used to satisfy liquidity requirements that may be
imposed by the OTS. See "--Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
Montgomery is a member of the FHLB of Indianapolis, which is one of 12
regional FHLBs, that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures, established
by the board of directors of the FHLB, which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
As a member, Montgomery is required to purchase and maintain stock in
the FHLB of Indianapolis. At June 30, 1997, Montgomery had $922,000 in FHLB
stock, which was in compliance with this requirement. In past years, Montgomery
has received substantial dividends on its FHLB stock. Over the past five fiscal
years such dividends have averaged 7.66% and were 7.84% for calendar year 1996.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of Montgomery's FHLB stock may result in a corresponding
reduction in Montgomery's capital.
For the year ended June 30, 1997, dividends paid by the FHLB of
Indianapolis to Montgomery totaled $60,000, which constituted a $4,000 increase
over the amount of dividends received in fiscal year 1996. The $60,000 dividend
for the twelve months ended June 30, 1997 reflected an annualized rate of 7.84%,
or 0.37% above the rate for fiscal 1996.
Federal and State Taxation
Federal Taxation. Savings associations such as the Association that met
certain definitional tests relating to the composition of assets and other
conditions prescribed by the Code, were permitted to establish reserves for bad
debts and to make annual additions thereto which were, within specified formula
limits, taken as a deduction in computing taxable income for federal income tax
purposes. The amount of the bad debt reserve deduction for "non-qualifying
loans" was computed under the experience method. The amount of the bad debt
reserve deduction for "qualifying real
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property loans" (generally loans secured by improved real estate) were computed
under either the experience method or the percentage of taxable income method
(based on an annual election).
Under the experience method, the bad debt reserve deduction was an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
The percentage of specially-computed taxable income that was used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") was 8%. The
percentage bad debt deduction thus computed was reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permitted qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction).
If an association's specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constituted less than 60% of its total assets, the
association could not deduct any addition to a bad debt reserve and generally
had to include existing reserves in income over a four year period.
Under the percentage of taxable income method, the percentage bad debt
deduction could not exceed the amount necessary to increase the balance in the
reserve for qualifying real property loans to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for non-qualifying loans equaled the amount by
which 12% of the amount comprising savings accounts at year-end exceeded the sum
of surplus, undivided profits and reserves at the beginning of the year.
In August 1996, legislation was enacted that repealed the reserve
method of accounting (including the percentage of taxable income method) used by
many thrifts, including the Association, to calculate their bad debt reserve for
federal income tax purposes. As a result, large thrifts must recapture that
portion of the reserve that exceeds the amount that could have been taken under
the specific charge-off method for post-1987 tax years. The legislation also
requires thrifts to account for bad debts for federal income tax purposes on the
same basis as commercial banks for tax years beginning after December 31, 1995.
The recapture will occur over a six-year period, the commencement of which will
be delayed until the first taxable year beginning after December 31, 1997,
provided the institution meets certain residential lending requirements. The
management of the Company does not believe that the legislation will have a
material impact on the Company or the Association.
In addition to the regular income tax, corporations, including savings
associations such as the Association, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations,
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including savings associations such as the Association, are also subject to an
environmental tax equal to 0.12% of the excess of alternative minimum taxable
income for the taxable year (determined without regard to net operating losses
and the deduction for the environmental tax) over $2 million.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of June 30, 1997, the Association's Excess for tax purposes totaled
approximately $232,000.
Montgomery and its subsidiaries file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting. The
Company and the Association have not been audited by the IRS recently with
respect to federal income tax returns. In the opinion of management, any
examination of still open returns would not result in a deficiency which could
have a material adverse effect on the financial condition of the Company or the
Association.
Indiana Taxation. Montgomery and the Association are subject to
Indiana's Financial Institutions Tax ("FIT"), which is imposed at a flat rate of
8.5% on "adjusted gross income." "Adjusted gross income," for purposes of FIT,
begins with taxable income as defined by Section 63 of the Code and, thus,
incorporates federal tax law to the extent that it affects the computation of
taxable income. Federal taxable income is then adjusted by several Indiana
modifications, the most notable of which is the required addback of interest
that is tax-free for federal income tax purposes. Other applicable state taxes
include generally applicable sales and use taxes plus real and personal property
taxes. The Association's state income tax returns have not been audited in
recent years.
Executive Officers
The following table sets forth certain information relating to the
executive officers of Montgomery as of June 30, 1997.
Name Age Offices Held
- ------------------ ----- --------------------------------------------
Earl F. Elliott 63 President, Chief Executive Officer
J. Lee Walden 49 Vice President and Chief Financial Officer
Nancy L. McCormick 41 Secretary and Treasurer
Officers are elected annually by the Board of Directors and serve for a
one-year period and until their successors are elected. There are no family
relationships between or among the persons named. Each of the officers has held
the same or similar position with Montgomery for the past five years.
Employment Agreements. The Association has entered into employment
agreements with Chief Executive Officer Elliott and President Walden providing
for an initial term of three years. The employment agreements became effective
upon completion of the Conversion and Reorganization and provide for an annual
base salary in an amount not less than each individual's
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respective prior salary and provide for an annual extension subject to the
performance of an annual formal evaluation by disinterested members of the Board
of Directors of the Association. The agreements also provide for termination
upon the employee's death, for cause or in certain events specified by OTS
regulations. The employment agreements are also terminable by the employee upon
90 days' notice of the Association.
The employment agreements each provide for payment in an amount equal
to 299% of the five-year annual average base compensation, in the event a
"change of control" of the Association where employment involuntarily terminates
in connection with such change in control or within twelve months thereafter.
For the purposes of the employment agreements, a "change in control" is defined
as any event which would require the filing of an application for acquisition of
control or notice of change in control pursuant to 12 C.F.R. ss. 574.3 or 4.
Such events are generally triggered prior to the acquisition or control of 10%
of the Company's Common Stock. If the employment of Chief Executive Officer
Elliott or President Walden had been terminated as of June 30, 1997 under
circumstances entitling them to severance pay as described above, they would
have been entitled to receive a lump sum cash payment of approximately $258,000
and $176,000, respectively. The agreements also provide for the continued
payment to each employee of health benefits for the remainder of the term of
their contract in the event such individual is involuntarily terminated in the
event of change in control.
For information concerning the Directors of Montgomery, see
Montgomery's Proxy Statement.
Employees
At June 30, 1997, Montgomery had 30 full-time equivalent employees.
Montgomery believes that relations with its employees are excellent. Montgomery
offers life, health, and disability insurance benefits and a 401 (k) retirement
plan. None of the employees of Montgomery is represented by a collective
bargaining unit.
ITEM 2. DESCRIPTION OF PROPERTY
Montgomery conducts its business from four offices, consisting of its
main office at 119 East Main Street in Crawfordsville, its Mill Street office at
816 South Mill Street in Crawfordsville, its Covington office at 417 Liberty
Street in Covington and its Williamsport office at 118 North Monroe Street in
Williamsport. The main office, which is owned by Montgomery, has approximately
16,000 square feet, including the basement, all of which is used for business
and operations. The Mill Street office, also owned by Montgomery, was opened in
March, 1995, to offer Montgomery's first office with drive-up facilities. The
building, containing approximately 3,200 square feet, is located in a low to
intermediate income area. Montgomery occupies approximately 1,700 square feet of
this building with the remainder being leased to an unaffiliated business.
The Williamsport office, owned by Montgomery, has 2,300 square feet of
office space and an additional 1,800 square feet of storage space on the second
floor. The Covington office is leased from an independent lessor and contains
approximately 1,600 square feet of office space, all but one office of which is
used by Montgomery. Montgomery also owns two buildings adjacent to its main
office for future expansion, both of which are leased to unaffiliated
businesses. The net book value of the buildings, furniture, fixtures and various
bookkeeping, accounting and data processing
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equipment was $1.6 million at June 30, 1997. See "Real Estate Owned" and
"Premises and Equipment" in the Notes to Consolidated Financial Statements for
additional information.
ITEM 3. LEGAL PROCEEDINGS
From time to time, Montgomery is a party to legal proceedings
incidental to its business to enforce its security interest in collateral
pledged to secure loans. Montgomery is not aware of any potential litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended June 30, 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Page 46 of the attached 1997 Annual Report to Stockholder is herein
incorporated by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Pages 7 to 21of the attached 1997 Annual Report to Stockholders are
herein incorporated by reference.
ITEM 7. FINANCIAL STATEMENTS
Pages 22 to 43 of the Company's 1997 Annual Report to Stockholders are
herein incorporated by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) IF THE EXCHANGE ACT
Directors
Information concerning directors and executive officers of the Company
is incorporated herein by reference from the Company's definitive Proxy
Statement for the Annual Meeting of Shareholders, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
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Executive Officers
Information regarding the business experience of the executive officers
of the Company and the Bank who are not also directors contained in Part I of
this Form 10-KSB is incorporated herein by reference.
Compliance With Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the SEC initial reports of
ownership and reports of changes in ownership of Company common stock and other
equity securities of the Company by the tenth of the month following a change.
Officers, directors and greater than 10% stockholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended June 30, 1997, all Section
16(a) filing requirements applicable to its officers, directors and 10%
beneficial owners were complied with.
ITEM 10. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Shareholders, a copy of which will be filed not later than 120 days after the
close of the fiscal year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders, a copy of which will be
filed not later than 120 days after the close of the fiscal year.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and transactions is
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Reference to
Prior Filing or
Regulation S-B Exhibit Number
Exhibit Number Document Attached Hereto
-------------- -------- ---------------
<S> <C> <C>
2 Plan of Acquisition, Reorganization, Arrangement, None
Liquidation or Succession
4.1 Articles of Incorporation and *
amendments thereto
4.2 Bylaws *
9 Voting Trust Agreement None
10 Executive Compensation Plans and Arrangements:
10.1 Form of Stock Option and Incentive *
10.2 Form of Employment Agreement with Earl F. Elliott *
10.3 Form of Employment Agreement with J. Lee Walden *
10.4 Employee Stock Ownership Plan *
10.5 Management Recognition and Retention Plan *
11 Statement re computation of per share earnings None
13 Annual Report to Security Holders 13
16 Letter re change in certifying accountant None
18 Letter re change in accounting principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matter submitted None
to vote
23 Consent of Accountants None
24 Power of Attorney Not Required
27 Financial Data Schedule 27
99 Additional Exhibits None
</TABLE>
- ---------------------
* Filed on April 7, 1997, as exhibits to the Company's Form S-1 registration
statement (File number 333-24721) as amended on Forms S-1/A filed on May
13, 1997 and May 15, 1997. All of such previously filed documents are
hereby incorporated herein by reference in accordance with Item 601 of
Regulation S-B.
(b) Reports on Form 8-K:
No current reports on Form 8-K were filed by the Company during the
three months ended June 30, 1997.
34
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MONTGOMERY FINANCIAL CORPORATION
Date: September 25, 1997 By:/s/ Earl F. Elliott
------------------ -------------------
Earl F. Elliott, President
In accordance with Exchange Act, this report has been signed by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated.
Date: September 25, 1997 /s/ Earl F. Elliott
------------------ -------------------------------
Earl F. Elliott, President and Director
(Principal Executive Officer)
Date: September 25, 1997 /s/ J. Lee Walden
------------------ -------------------------------
J. Lee Walden, Chief Financial Officer and
Director (Principal Financial and Accounting
Officer)
Date: September 25, 1997 /s/ Mark E. Foster
------------------ -------------------------------
Mark E. Foster, Director
Date: September 25, 1997 /s/ C. Rex Henthorn
------------------ -------------------------------
C. Rex Henthorn, Director
Date: September 25, 1997 /s/ Joseph M. Malott
------------------ -------------------------------
Joseph M. Malott, Director
Date: September 25, 1997 /s/ John E. Woodward
------------------ -------------------------------
John E. Woodward, Director
35
EXHIBIT 13
MONTGOMERY FINANCIAL CORPORATION
1997 Annual Report
<PAGE>
MONTGOMERY FINANCIAL CORPORATION
TABLE OF CONTENTS
Letter to Stockholders............................. 3
Selected Consolidated Financial Information.........4
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................ 7
Report of Independent Auditors.....................22
Consolidated Financial Statements..................23
Directors and Executive Officers...................46
Stockholder Information............................47
CONSOLIDATED FINANCIAL HIGHLIGHTS
June 30, 1997
(Dollars in Thousands)
Total assets.................................$103,399
Total loans, net...............................86,908
Investment securities and other
earning assets................................12,437
Deposits.......................................71,265
Borrowings ..................................11,428
Net income........................................313
Stockholders' equity...........................19,367
Stockholders' equity as a percent of
assets.........................................18.7%
------------------------------------------------------
ANNUAL MEETING
The Annual Meeting of Stockholders of Montgomery
Financial Corporation will be held on October 21,
1997 at 2:00 P.M. at the office of the Company,
located at 119 East Main Street, Crawfordsville,
Indiana.
------------------------------------------------------
2
<PAGE>
MONTGOMERY FINANCIAL CORPORATION
119 East Main Street
Crawfordsville, Indiana 47933
September 22, 1997
Dear Fellow Stockholders:
It is with pleasure that the board of directors, officers, and staff
of Montgomery Financial Corporation and our wholly owned subsidiary, Montgomery
Savings, A Federal Association, provide you with our first annual report. During
the fiscal year ended June 30, 1997, we completed our Conversion and
Reorganization pursuant to which (i) Montgomery Financial Corporation (the
"Company" or "Montgomery"), an Indiana corporation, was formed to become the
holding company for Montgomery Savings, A Federal Association ("Montgomery
Savings"); (ii) all shares of Montgomery Savings held by the Montgomery Mutual
Holding Company were canceled; (iii) all shares of Montgomery Savings held by
Montgomery Savings' public shareholders were converted into shares of common
stock of the Company; (iv) the Company became the sole stockholder of Montgomery
Savings; and (v) shares of common stock of the Company were sold pursuant to an
initial public offering ("IPO"). The IPO was very successful with 1,186,778
shares being sold at a price of $10.00 per share. Currently we have in excess of
^ 300 stockholders of record giving our stock added liquidity in the stock
market. We are confident this event will help Montgomery to meet the challenges
and opportunities in the ever changing financial services industry.
Net earnings for the year ending June 30, 1997 were $571,000 before
the net effect of the one time special assessment required by the Deposit
Insurance Funds Act of 1996. This represented an increase of 32.5 percent over
last year. The after tax effect of this one time assessment was approximately
$258,000, causing net income to decrease to $313,000. Capital levels grew to
$19.4 million compared to $9.1 million at June 30, 1996. This results in a
capital ratio in excess of 18 percent and growth in capital over the same period
of 112.2 percent. Total assets grew from $88.2 million to $103.4 million, an
increase of $15.2 million or 17.2 percent when compared to June 30, 1996.
Montgomery Savings, A Federal Association is committed to growth and
performance betterment. We have over one hundred years of stability and quality
service in our community. Our directors, officers and employees are dedicated to
efficiently serving our many customers while working to enhance stockholders'
value. We look to the future with confidence and enthusiasm. We thank our
customers for their loyalty and you, our stockholders, for your support.
Sincerely,
/s/Earl F. Elliott
Earl F. Elliott
Chairman and Chief Executive Officer
3
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following consolidated financial data as of and for the periods
ended June 30, 1997, 1996, 1995, 1994 and 1993 have been derived from the
audited consolidated financial statements of Montgomery. The financial data
presented below is qualified in its entirety by the more detailed financial data
appearing elsewhere herein, including Montgomery's audited consolidated
financial statements and notes thereto.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------
1997 1996 1995 1994 1993
-------- ------- ------- ------- -------
(in Thousands)
<S> <C> <C> <C> <C> <C>
Summary of Financial Condition:
Total assets................................................. $103,399 $88,211 $87,324 $79,633 $73,862
Interest-bearing deposits in other financial institutions ... 11,473 3,607 3,871 1,735 4,735
Investment securities available for sale(1).................. 42 312 803 1,781 1,762
Loans^ receivable, net....................................... 86,908 80,074 77,929 72,215 63,566
Deposits..................................................... 71,265 69,709 68,286 62,346 64,681
Borrowings................................................... 11,428 8,000 10,868 10,338 2,730
Stockholders' equity......................................... 19,367 9,127 6,678 6,290 5,686
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Summary of Operating Results:
Interest income(2)................... $7,220 $6,777 $6,178 $5,594 $5,796
Interest expense..................... 4,456 4,434 3,907 3,107 3,338
------ ------ ------- ------- -------
Net interest income............... 2,764 2,343 2,271 2,487 2,458
Provision (adjustment) for losses on loans 22 20 (15) 25 38
------ ------ ------- ------- -------
Net interest income after provision
for losses on loans.............. 2,742 2,323 2,286 2,462 2,420
Other income........................... 30 23 79 147 162
Other expenses:
Salaries and employee benefits....... 934 879 902 833 825
Other................................ 1,284 871 847 823 764
------ ------ ------- ------- -------
Total non-interest expense......... 2,218 1,750 1,749 1,656 1,589
------ ------ ------- ------- -------
Income before income tax and cumulative
effect of change in accounting method. 554 596 616 953 993
Income tax expense..................... 241 165 231 349 433
------ ------ ------- ------- -------
Income before cumulative effect of
change in accounting method......... 313 431 385 604 560
Cumulative effect of change in
accounting method.................. --- --- --- --- 228
------ ------ ------- ------- -------
Net income....................... $ 313 $ 431 $ 385 $ 604 $ 332
====== ====== ======= ======= =======
<PAGE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Net income per share(3)................ $ 0.67 --- --- --- ---
Net income per share without the special
SAIF assessment(3).................... 1.22 --- --- --- ---
Dividends declared per share(4)........ 0.21 $ 0.30 --- --- ---
Dividend pay out ratio(5).............. 31.3% --- --- --- ---
Performance Ratios:
Return on average assets(6)............ 0.32% 0.49% 0.46% 0.79% 0.46%
Return on average equity(7)............ 3.39 4.89 5.78 9.90 5.67
Average equity to average assets....... 9.88 9.99 7.91 7.96 8.19
Equity to assets at end of period...... 18.73 10.35 7.65 7.90 7.70
Interest rate spread(8)................ 2.64 2.27 2.54 3.19 3.38
Net interest margin(9)................. 3.09 2.77 2.82 3.41 3.61
Average interest-earning assets to average
interest-bearing liabilities.......... 108.91 109.47 105.78 104.96 104.61
Non-interest expenses to average
assets................................ 2.37 1.98 2.08 2.16 2.22
Net interest income after provision for
loan losses to non-interest expenses.. 1.24x 1.33x 1.31x 1.49x 1.52x
Asset Quality Ratios:
Non-performing assets to total assets.. 0.59 0.92 1.08 0.70 1.19
Allowance for loan losses to net loans
receivable at end of period........... 0.21 0.20 0.18 0.22 0.21
Allowance for loan losses to non-
performing loans at end of period..... 35.86 23.90 16.89 28.21 20.24
Non-performing loans to total loans.... 0.58 0.83 1.05 0.77 1.03
</TABLE>
- ------------------
(1) Investment securities are all available for sale beginning July 1,
1994, due to the adoption of Statement of Financial Accounting,
Standards No. 115 ("SFAS 115").
(2) Loan origination fees are included in interest income, on a deferral
basis.
(3) Computed based upon the weighted average of the 250,000 shares of
publicly owned common stock of the Association that were outstanding
during the year ended June 30, 1997 converted to 466,254 shares of
Montgomery common stock in connection with the Conversion.
(4) Adjusted for conversion ratio.
(5) Dividends per share divided by net income per share.
(6) Net income divided by average total assets.
(7) Net income divided by average total equity.
(8) Interest rate spread is calculated by subtracting combined weighted
average interest rate cost from combined weighted average interest rate
earned for the period indicated.
(9) Net interest income divided by average interest-earning assets.
5
<PAGE>
Capital Requirements. The following table sets forth Montgomery
Savings' compliance with its capital requirements at June 30, 1997.
<TABLE>
<CAPTION>
Capital Level
OTS Requirement at June 30, 1997(1)
--------------- -------------------
% of % of Amount
Assets Amount Assets Amount of Excess
------ ------ ------ ------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Capital Standard
Tangible capital.................................. 1.50% $1,544 14.3% $14,690 $13,146
Core capital...................................... 3.00% $3,087 14.3% $14,690 $11,603
Risk-based capital................................ 8.00% $4,787 22.9% $13,678 $ 8,891
</TABLE>
- -------------------
(1) Tangible and core capital figures are determined as a percentage of
adjusted total assets; risk-based capital figures are determined as a
percentage of risk-weighted assets in accordance with OTS regulations.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Montgomery Financial Corporation ("Montgomery" or the "Company) is an
Indiana corporation which was organized in April 1997 by Montgomery Savings, a
Federal Association for the purpose of becoming a savings and loan holding
company. Montgomery Savings Association, a Federal Association, was established
in 1888 as an Indiana state-chartered mutual savings and loan association known
as The Montgomery Savings Association. It was converted in 1985 to a federally
chartered, mutual savings and loan association. On August 11, 1995, Montgomery
Savings Association, a Federal Association, transferred substantially all its
assets and liabilities to a federally-chartered stock savings and loan
association named Montgomery Savings, a Federal Association (the "Association").
In June 1997, the Company became the holding company of the
Association and issued shares of common stock, par value $.01 per share ("Common
Stock"), to the public. Pursuant to a Plan of Conversion and Agreement and Plan
of Reorganization (the "Plan") adopted by the Association and Montgomery Mutual
Holding Company, a federally chartered mutual holding company, (the "Mutual
Holding Company") the Mutual Holding Company converted from mutual form to a
federal interim stock savings institution and was simultaneously merged with and
into the Association, with the Association being the surviving entity and a
subsidiary of the Company. At the same time, the Company completed its initial
public offering of 1,186,778 shares of Common Stock and exchanged 466,254 shares
of Common Stock for the shares of the Association previously held by public
stockholders. The principal asset of the Company is the outstanding stock of the
Association, its wholly owned subsidiary.
The principal business of savings associations, including Montgomery
Savings, has historically consisted of attracting deposits from the general
public and making loans secured by residential and commercial real estate. The
Association and all other savings associations are significantly affected by
prevailing economic conditions as well as government policies and regulations
concerning, among other things, monetary and fiscal affairs, housing and
financial institutions. Deposit flows are influenced by a number of factors,
including interest rates paid on competing investments, account maturities and
level of personal income and savings. In addition, deposit growth is also
affected by how customers perceive the stability of the financial services
industry amid various current events such as regulatory changes, failures of
other financial institutions and financing of the deposit insurance fund.
Lending activities are influenced by the demand for and supply of housing
lenders, the availability of cost of funds and various other items. Sources of
funds for lending activities include deposits, payments on loans, borrowings,
and funds provided from operations. Montgomery's earnings are primarily
dependent upon its net interest income, the difference between interest income
and interest expense. Interest income is a function of the balances of loans and
investments outstanding during a given period and the yield earned on such loans
and investments. Interest expense is a function of the amounts of deposits and
borrowings outstanding during the same period and rates paid on such deposits
and borrowings. Montgomery's earnings are also affected by provisions for loan
and real estate losses, service charges, income from subsidiary activities,
operating expenses and income taxes.
7
<PAGE>
Average Balances and Interest Rates and Yields
The following table presents for the periods indicated the month-end
average balances of each category of the Company's interest-earning assets and
interest-bearing liabilities, and the average yields earned and interest rates
paid on such balances. Such yields and costs are determined by dividing income
or expense by the average balance of assets or liabilities, respectively, for
the periods presented.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------
1997 1996
------------------------------ -------------------------------
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Cost Balance Paid Cost
------- ---- ---- ------- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits................. $ 5,136 $ 269 5.24% $ 5,146 $ 282 5.48
Investment securities..................... 145 11 7.59 411 29 7.06
Loans(1).................................. 83,485 6,880 8.24 78,380 6,410 8.18
Stock in FHLB of Indianapolis............. 765 60 7.84 750 56 7.47
-------- ------ ------- ------
Total interest-earning assets............... 89,531 7,220 8.06 84,687 6,777 8.00
Non-interest earning assets................. 4,006 --- 3,643 ---
-------- ------ ------- ------
Total Assets................................ $ 93,537 7,220 $88,330 6,777
======== ----- ======= -----
Interest-bearing liabilities:
Savings accounts.......................... $ 5,447 188 3.45 $ 5,242 219 4.18
NOW and money market accounts............. 10,459 355 3.39 9,314 345 3.70
Certificates of deposit................... 55,734 3,270 5.87 54,208 3,303 6.09
-------- ------ ------- ------
Total deposits............................ 71,640 3,813 5.32 68,764 3,867 5.62
Borrowings................................ 10,564 643 6.09 8,594 567 6.60
-------- ------ ------- ------
Total interest-bearing liabilities...... 82,204 4,456 5.42 77,358 4,434 5.73
Other liabilities........................... 2,090 --- 2,152
-------- ------ ------- ------
Total liabilities........................... 84,294 4,456 79,510 4,434
Total stockholders' equity................ 9,243 ------ 8,820 ------
-------- -------
Total liabilities and
stockholders' equity $ 93,537 $88,330
======== =======
Net interest-earning assets................. $ 7,327 $ 7,329
======== =======
Net interest income/interest rate spread.... $2,764 2.64 $2,343 2.27
====== ======
Average interest-earning assets to
average interest-bearing liabilities....... 108.91% 109.47%
Net interest margin(2)...................... 3.09 2.77
<PAGE>
<CAPTION>
Year Ended June 30,
-------------------------------
1995
-------------------------------
Average Interest Average
Outstanding Earned/ Yield/
Balance Paid Cost
------- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits................. $ 2,687 $ 156 5.81%
Investment securities..................... 1,174 78 6.64
Loans(1).................................. 75,961 5,894 7.76
Stock in FHLB of Indianapolis............. 697 50 7.17
------- ------
Total interest-earning assets............... 80,519 6,178 7.67
Non-interest earning assets................. 3,686 ---
------- ------
Total Assets................................ $84,205 6,178
======= -----
Interest-bearing liabilities:
Savings accounts.......................... $ 4,579 178 3.89
NOW and money market accounts............. 11,013 394 3.58
Certificates of deposit................... 48,558 2,617 5.39
------- ------
Total deposits............................ 64,150 3,189 4.97
Borrowings................................ 11,968 718 6.00
------- ------
Total interest-bearing liabilities...... 76,118 3,907 5.13
Other liabilities........................... 1,423 ---
------- ------
Total liabilities........................... 77,541 3,907
Total stockholders' equity................ 6,664 ------
-------
Total liabilities and
stockholders' equity $84,205
=======
Net interest-earning assets................. $ 4,401
=======
Net interest income/interest rate spread.... $2,271 2.54
======
Average interest-earning assets to
average interest-bearing liabilities....... 105.78%
Net interest margin(2)...................... 2.82
</TABLE>
- ---------------------
(1) The average balance includes nonaccrual loans.
(2) Net interest margin is net interest income divided by average
interest-earning assets.
8
<PAGE>
The following table sets forth the weighted average effective interest
rates earned by the Company on its loan and investment portfolios, the weighted
average effective cost of the Company's deposits, the interest rate spread of
the Company, and the net yield on weighted average interest-earning assets for
the periods and as of the dates shown. The table sets forth for the periods and
at the dates indicated the weighted average yields earned on the Company's
assets, the weighted average interest rates paid on the Company's liabilities,
together with the net yield on interest-earning assets.
<TABLE>
<CAPTION>
Year Ended June 30,
As of --------------------------
June 30, 1997 1997 1996 1995
------------- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average yield on:
Loans................................................. 8.29% 8.24% 8.18% 7.76%
Investment securities................................. 7.00 7.59 7.06 6.64
Total interest-earning assets......................... 8.06 8.06 8.00 7.67
Weighted average rate on:
Deposits.............................................. 4.92 5.32 5.62 4.97
Borrowings............................................ 5.98 6.09 6.60 6.00
Total interest-bearing liabilities.................... 5.07 5.42 5.73 5.13
Interest rate spread (spread between weighted average
yield on total interest-earning assets and total
interest-bearing liabilities)......................... 2.99 2.64 2.27 2.54
Net interest margin (net interest income as a
percentage of average interest-earnings assets)....... N/A 3.09 2.77 2.82
</TABLE>
<PAGE>
Rate/Volume Analysis
The following table discloses the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities have
affected the Company's interest income and expense during the periods indicated.
For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to (1) changes in rate (changes
in rate multiplied by prior period volume) and (2) changes in volume (change in
volume multiplied by prior period rate). Changes attributable to both rate and
volume that cannot be segregated have been allocated proportionally to the
change due to volume and the change due to rate.
<TABLE>
<CAPTION>
Increase (Decrease) in Net Interest Income
----------------------------------------------------------------------------
Year Ended June 30, 1997 vs. Year ended June 30, 1996 vs.
Year Ended June 30, 1996 Year ended June 30, 1995
----------------------------------- -----------------------------------
Increase (Decrease) Increase (Decrease)
Due to Total Due to Total
------------------- Increase --------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Interest-earning deposits .................... $ (1) $ (12) $ (13) $ 139 $ (13) $ 126
Investment securities ........................ (20) 2 (18) (53) 4 (49)
Loans ........................................ 420 50 470 192 324 516
Stock in FHLB of Indianapolis ................ 1 3 4 4 2 6
----- ----- ----- ----- ----- -----
Total .................................. 400 43 443 282 317 599
----- ----- ----- ----- ----- -----
Interest-Bearing Liabilities:
Savings accounts ............................. 8 (39) (31) 27 14 41
NOW and money market accounts ................ 40 (30) 10 (62) 13 (49)
Certificates of deposit ...................... 91 (124) (33) 326 360 686
Borrowings ................................... 122 (46) 76 (213) 62 (151)
----- ----- ----- ----- ----- -----
Total .................................. 261 (239) 22 78 449 527
----- ----- ----- ----- ----- -----
Change in net interest income .................. $ 139 $ 282 $ 421 $ 204 $(132) $ 72
===== ===== ===== ===== ===== =====
</TABLE>
9
<PAGE>
Changes in Financial Condition
Financial Condition. Montgomery's total assets were $103.4 million at
June 30, 1997, an increase of $15.2 million, or 17.2 percent from June 30, 1996.
During fiscal 1997 interest-earning assets increased $14.6 million, or 17.2
percent. Short-term interest-bearing deposits increased $7.9 million, or 224.3
percent primarily due to Montgomery's net proceeds from the sale of common stock
in the reorganization effective June 30, 1997. Loans increased $6.9 million, or
8.6 percent which is the approximate budgeted increase. Investment securities
declined $269,000, or 86.4 percent due to the maturity of one security during
the year ended June 30, 1997. Loan growth in excess of deposit growth has caused
Montgomery to use proceeds from the maturity of investment securities to
partially fund loan growth due to the potential income on investment securities
being below the actual cost of other sources of loan funding. Real estate owned
and held for development increased $393,000 to $1.3 million or 1.3% of total
assets, primarily due to the foreclosure of an eight unit apartment complex
which had been reported as a nonperforming asset in the over 90 day delinquent
category at June 30, 1996 (and was first reflected as non-accrual during the
year ended June 30, 1995). It has been determined by Montgomery that the best
use for this apartment complex is to convert it to condominiums for resale.
Based on this decision, as of September 30, 1996, the complex was classified as
investment real estate and removed from nonperforming assets. Based on the
current demand for this type of housing in Crawfordsville, Indiana, it is
anticipated that the current book value of the project plus the additional costs
of converting to condominiums will be received from the sale of these units at
current comparable market prices. Work is complete in connection with the
condominium conversion, and initial sales efforts have commenced. Savings
deposits increased $1.6 million, or 2.3 percent and borrowings increased $3.4
million, or 42.5 percent causing an increase in interest-bearing liabilities of
6.4 percent. The increase in borrowings was used to fund loan growth during the
year. A decrease in borrowings since period end has occurred due to the
redeployment of funds from the increase in capital from the sale of common
stock.
Montgomery's total assets at June 30, 1996, were $88.2 million compared
to $87.3 million at June 30, 1995, an increase of $0.9 million, or 1.0 percent.
Asset growth was minimal due to a very competitive local market for mortgage and
savings products. It was management's decision to concentrate on increasing
interest rate spread when pricing Montgomery's products and to put less emphasis
on growth. Interest-earning assets increased $1.4 million, or 1.7 percent,
during the twelve month period. Loans increased $2.1 million, or 2.7 percent,
while interest-bearing deposits decreased $264,000, or 6.8 percent, and
investment securities decreased $491,000, or 61.1 percent. Interest-bearing
liabilities decreased $1.6 million, or 2.0 percent. Savings deposits increased
$1.3 million, or 1.9 percent, and FHLB advances and other borrowings decreased
$2.9 million, or 26.6 percent.^ Net proceeds of $2.2 million from the sale of
common stock, an increase to equity, was received in August, 1995, and was
primarily used to decrease FHLB advances.
Comparison of Operating Results for the
Years Ended June 30, 1997 and June 30, 1996
General. For the year ended June 30, 1997, the most significant factor
effecting Montgomery's operations was the one time Savings Association Insurance
Fund ("SAIF") special assessment (the "SAIF Special Assessment") required by the
Deposit Insurance Funds Act of 1996. The after tax effect of this one time
assessment was approximately $258,000. Net income was $313,000 for the year
ended June 30, 1997, compared to net income of $431,000 for the year ended June
30, 1996, a decrease of $118,000, or 27.4 percent. Net income for the year ended
June 30, 1997
10
<PAGE>
was $571,000 before the net effect of the SAIF Special Assessment. The increase
from the $431,000 for the year ended June 30, 1996 was also primarily due to an
increase in interest rate spread from 2.27 percent to ^ 2.64 percent due to
management's efforts to attract lower cost deposit accounts and the use of FHLB
advances. Total other expenses for the year ended June 30, 1997 was $1,791,000
before the SAIF Special Assessment of $428,000 compared to $1,750,000 for the
year ended June 30, 1996.
Interest Income. Interest income for the year ended June 30, 1997 was
$7.2 million, an increase of $433,000, or 6.5 percent, from interest income for
the same period in 1996. The average balance of interest-earning assets for the
1997 period was $89.5 million compared to $84.7 million for the 1996 period, an
increase of $4.8 million, or 5.7 percent. The average yield was 8.06 percent for
the year ended June 30, 1997, compared to 8.00 percent for the same period in
1996. The average yield on loans increased from 8.18 percent for the year ended
June 30, 1996 to 8.24 percent for 1997, due to an increase in demand for fixed
rate mortgage loans (which generally carry a higher rate of interest than one
year adjustable rate loans).
Interest Expense. Interest expense for the year ended June 30, 1997 was
$4.5 million which was a decrease of $22,000 or 2.5 percent compared to ^ 1996.
Average interest-bearing liabilities increased $4.8 million, or ^ 6.3 percent,
from $77.4 million for the year ended June 30, 1996, to $82.2 million for the
same period in 1997. The average cost of these funds decreased from 5.73 percent
for fiscal 1996 to 5.42 percent for fiscal 1997. This decrease was a result of
management's efforts to attract lower cost deposit accounts and the use of lower
cost FHLB advances, instead of paying a premium to attract new certificate of
deposit accounts.
Provision for Losses on Loans. The provision for losses on loans was
$22,000 for the year ended June 30, 1997, compared to $20,000 for the year ended
June 30, 1996. Provision or adjustment entries are made based on the Internal
Loan and Asset Review Policy. A review is performed at least quarterly to
determine the adequacy of the current balance in the ^ allowance for loss
accounts. Based on the quarterly reviews, to comply with the current review
policy, it was necessary to make provisions totaling $22,000 during the one year
period.^ Both the $22,000 and the $20,000 provisions for losses on loans were
made, primarily due to increased loan growth^. Ninety day delinquent loans had
decreased from $661,000 at June 30, 1996 to $502,000 at June 30, 1997.
Non-performing loans to total loans at June 30, 1997 ^ were 0.58 percent
compared to 0.83 percent at June 30, 1996. Non-performing assets were $611,000,
or 0.59 percent of assets, compared to $809,000, or 0.92 percent at June 30,
1996. At June 30, 1997, non-performing assets consisted of non-performing loans
in the amount of ^ $502,000 and other real estate in the amount of $109,000. As
of the June 30, 1997 review, the appraised value of real estate acquired in
settlement of loans, net, was in excess of the current book value. The allowance
for loan losses to non-performing loans was 35.9 percent at June 30, 1997
compared to 23.9 percent at June 30, 1996. The allowance for losses to
non-performing assets was 29.5 percent at June 30, 1997 and 19.5 percent at June
30, 1996. The allowance to total loans was 0.21 percent at June 30, 1997 and
0.20 percent at June 30, 1996. As new loan products are offered, and Montgomery
increases its amount of non-residential and consumer loans, management will
re-evaluate the level of the allowance for loan losses.
Non-Interest Income. Other income for the year ended June 30, 1997, was
$30,000, an increase of $7,000, or 30.4 percent from the $23,000 recorded in
fiscal 1996. During the year ended June 30, 1997, service charges on deposit
accounts increased $4,000 due to a substantial increase
11
<PAGE>
in demand deposit accounts and appraisal income increased $5,000 from 1996^ due
to the change from an in-house appraiser to an independent appraiser.
Non-Interest Expense. Non-interest expense for the year ended June 30,
1997, was $2.2 million compared to $1.8 million, an increase $469,000, or 26.8
percent, from year ended June 30, 1996. Salary and employee benefits increased
$56,000 primarily due to an increase in branch office personnel to accommodate
growth. Deposit insurance expense increased $367,000 for the year ended June 30,
1997 compared to fiscal 1996 due to the one time SAIF Special Assessment of
approximately $428,000 partially offset by a reduction in the assessment for the
quarters ending December 31, 1996, March 31, 1997 and June 30, 1997 of $5,000,
$29,000 and $27,000, respectively. The one time SAIF Special Assessment has
allowed Montgomery's annual SAIF premium to be reduced from 23 basis points to
6.4 basis points, or a decrease of approximately $118,000 in annual expense
based on deposits as of June 30, 1997. Real estate operations generated net
income for the year ended June 30, 1997 of $75,000 compared to $7,000 for fiscal
1996. This increase was caused by an increase in gross rental income and a gain
on the sale of real estate in fiscal 1997 as compared to fiscal 1996. Data
processing expense increased $13,000 due to the cost of supporting the ATM and ^
normal growth. Other expenses for the year ended June 30, 1997, were $455,000
compared to $362,000 for fiscal 1996, an increase of $93,000, or 25.7 percent.
Stockholder related expense increased $12,000 and directors' fees increased
$10,000 due to the change from a mutual association annual meeting in January in
1995 to a stock association annual meeting in October in 1996 and the increase
in the number of directors from six to seven in December 1996. Education and
training, stationary and office supplies and FHLB service charges and fees
increased $19,000 primarily due to the installation of Montgomery's first ATM,
an increase in demand deposit transactions and preparations for introduction of
a new open-end line of credit mortgage program to supplement its existing home
equity loan program. Audit and accounting services and liability insurance
expense increased $8,000 primarily due to the change to a stock association.
Miscellaneous operating expenses increased $27,000 primarily due to the payment
of interest on stock purchase escrow deposits in the amount of $25,000. The
balance of the increase in other expenses was due to normal growth.
Income Tax Expense. Income tax for the year ended June 30, 1997 was
$241,000 compared to $165,000 for the year ended June 30, 1996. This increase
was primarily due to the $74,000 adjustment to deferred income tax for the 1996
period.
Comparison of Operating Results for the
Years Ended June 30, 1996 and June 30, 1995
General. Montgomery's net income for the year ended June 30, 1996 was
$431,000, compared to $385,000 for the year ended June 30, 1995, an increase of
$46,000, or 11.9%. Net interest income increased $72,000 due to an increase in
average interest-earning assets of $4.2 million compared to an increase in
average interest-bearing liabilities of only $1.2 million which was partially
offset by a decrease in interest rate spread from 2.54% for the year ended June
30, 1995, to 2.27% for the year ended June 30, 1996. The decrease in interest
rate spread was caused primarily by the increase in deposit rates on new and
renewal accounts exceeding the increase in adjustable rate mortgages due to a 1%
maximum allowable annual adjustment on most adjustable rate loans. Interest rate
spread was as low as 2.09% for the month ended July 31, 1995, and has been
increasing since that period to a spread of 2.59% at June 30, 1996. Interest
rate spread is expected to continue to improve due to scheduled increases in
rates on adjustable rate loans and a decrease in deposit interest rates.
Provision for losses on loans (expense) for the year ended June 30, 1996, was
$20,000
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<PAGE>
compared to an adjustment (income) for the year ended June 30, 1995, of $15,000,
resulting in a decrease in income of $35,000 for the 1996 period compared to the
1995 period. For the year ended June 30, 1996, total other income decreased
$56,000 and income tax expense decreased $65,000 compared to the year ended June
30, 1995.
Interest Income. Montgomery's total interest income for the year ended
June 30, 1996 was $6.8 million, an increase of $599,000 or 9.7%, from interest
income for the year ended June 30, 1995. Average interest-earning assets for the
1996 period was $84.7 million compared to $80.5 million for the 1995 period, an
increase of $4.2 million, or 5.2%. The average yield was 8.00% for the year
ended June 30, 1996, compared to 7.67% for the year ended June 30,1995. This
increase in yield was primarily due to the increase in yield on loans increasing
from 7.76% to 8.18% caused by the rate increase on adjustable rate mortgage
loans at their annual adjustment date. Due to the 1% per year adjustment cap,
most one year adjustable loans increased a full 1%.
Interest Expense. Total interest expense for the year ended June 30,
1996 was $4.4 million compared to $3.9 million for the year ended June 30, 1995,
an increase of $527,000, or 13.5%. Average interest-bearing liabilities
increased $1.2 million, or 1.6%, for the comparable periods. The average cost of
these funds increased from 5.13% for the 1995 twelve month period to 5.73% for
the 1996 twelve month period. The increase was caused by an increase in costs on
borrowed money and certificates of deposit. These increases were due to a very
competitive local market for deposits and an increase in rates on one year
adjustable rate FHLB advances. The cost of funds on interest-bearing liabilities
at June 30, 1996, was 5.48%.
Provision (Adjustment) for Losses on Loans. The provision for loan
losses for the year ended June 30, 1996 was $20,000. This compares to an
adjustment for the year ended June 30, 1995 of $15,000. The provision or
adjustment is made based on a review performed each quarter by the Internal Loan
and Asset Review Committee. Based on the review performed as of June 30, 1995,
the committee determined that a reduction in the allowance of $15,000 was
reasonable due to the amount of non-performing assets and the limited projected
loss on any of the existing non-performing assets. The provision for the 1996
period was made to increase the allowance due to loan growth.
Non-Interest Income. Montgomery's other income for the year ended June
30, 1996, totaled $23,000 compared to $79,000 for the year ended June 30, 1995,
a decrease of $56,000, or 70.9%. During the year ended June 30, 1995, Montgomery
recorded income of $9,000 from the sale of mortgage-backed securities and
$16,000 from the sale of its insurance subsidiary. During the year ended June
30, 1996, service charges on deposit accounts increased $14,000 compared to the
year ended June 30, 1995. Appraisal income decreased $45,000 due to the change
from an in-house appraiser to an independent appraiser. The decrease in
appraisal income was substantially offset by a decrease in salary and employee
benefit expense.
Non-Interest Expense. Non-interest expense for the year ended June 30,
1996, was $1,750,000 compared to $1,749,000 for the year ended June 30, 1995, an
increase of $1,000, or 0.01%. Salary and employee benefits decreased $23,000 due
to a combination of normal increases associated with growth and a decrease in
cost of the in-house appraiser. For the year ended June 30, 1996, compared to
the year ended June 30, 1995, occupancy expense increased $9,000, equipment
expense increased $8,000, deposit insurance expense increased $11,000 and
advertising expense increased $2,000. These increases are all related to
Montgomery's growth and the opening of the
13
<PAGE>
Mill Street Office, Montgomery's only drive-up facility. Net real estate
operations increased $11,000 primarily due to a loss on sale of real estate of
$26,000 and an increase in net rental income of $15,000.
Income Tax Expense. Montgomery's income tax expense for the year ended
June 30, 1996, was $165,000 compared to $230,000 for the year ended June
30,1995. The decrease of $65,000, or 28.3% was due to an adjustment to the
deferred income tax liability of $74,000 and a decrease in taxable income.
Liquidity and Capital Resources
Montgomery's primary source of funds is its deposits. To a lesser
extent, Montgomery has also relied upon loan payments and payoffs and FHLB
advances as sources of funds. Scheduled loan payments are a relatively stable
source of funds, but loan payoffs and deposit flows can fluctuate significantly,
being influenced by interest rates, general economic conditions and competition.
Montgomery attempts to price its deposits to meet its asset/liability management
objectives consistent with local market conditions.
Federal regulations have historically required Montgomery to maintain
minimum levels of liquid assets. The required percentage has varied from time to
time based upon economic conditions and savings flows. At June 30, 1997, the
requirement was 5%, subject to reduction for aggregate net withdrawals provided
such ratio is not reduced below 4%. Liquid assets for purposes of this ratio
include cash, cash equivalents consisting of short-term interest-earning
deposits, certain other time deposits, and other obligations generally having
remaining maturities of less than five years. Montgomery has historically
maintained its liquidity ratio at a level in excess of that required.
Montgomery's average liquidity ratio for the year ended June 30, 1997 was 6.92
percent. Liquidity management is both a daily and long-term responsibility of
management. Montgomery adjusts liquid assets based upon management's assessment
of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available
on interest-bearing deposits, and (iv) the objectives of its asset/liability
management program. Excess liquidity is invested generally in federal funds and
short-term interest-bearing deposit accounts. If Montgomery requires funds
beyond its ability to generate them internally, it has additional borrowing
capacity with the FHLB and collateral eligible for repurchase agreements.
Cash flows for Montgomery are of three major types. Cash flows from
operating activities consist primarily of income provided by cash. Investing
activities generate cash flows through the origination, sale and principal
collections on loans as well as the purchases and sales of investments.
Montgomery's cash flows from investments resulted primarily from purchases and
maturities of investment securities. Cash flows from financing activities
include savings deposits, withdrawals and maturities and changes in borrowings.
Montgomery considers its liquidity and capital resources to be adequate
to meet its foreseeable short and long-term needs. Montgomery anticipates that
it will have sufficient funds available to meet current loan commitments and to
fund or refinance, on a timely basis, its other material commitments and
long-term liabilities. At June 30, 1997, Montgomery had outstanding commitments
to originate loans of $1.9 million and no commitments to sell loans.
Certificates of deposit scheduled to mature in one year or less at June 30, 1997
totaled $34.7 million. Management
14
<PAGE>
believes that a significant portion of such deposits will remain with
Montgomery. At June 30, 1997, Montgomery had $5.0 million of FHLB advances which
reprice in one year or less.
The Association is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate actions by the regulatory agencies that, if
undertaken, could have a material effect on the Association's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Association must meet specific capital guidelines
that involve quantitative measures of the Association's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Association's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors.
At June 30, 1997, the Association believes that it meets all capital
adequacy requirements to which it is subject and the most recent notification
from the regulatory agency categorized the Association as well capitalized under
the regulatory framework for prompt corrective action.
The Association's actual and required capital amounts and ratios are as
follows:
<TABLE>
<CAPTION>
June 30, 1997
-----------------------------------------------------------------------------
Required for Adequate To Be Well
Capital(1) Capitalized(1)
Actual ----------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital(1) (to risk
weighted assets) $13,678 22.9% $4,787 8.0% $5,984 10.0%
Core (to adjusted tangible assets) 14,690 14.3 3,087 3.0% 6,174 6.0%
Core capital(1) (to adjusted total assets) 14,690 14.3 3,087 3.0% 5,145 5.0%
</TABLE>
- -----------------
(1) As defined by the regulatory agencies
The Association's tangible capital at June 30, 1997 has $14,690,000
which amount was 14.3% of tangible assets and exceeded the required ratio of
1.5%.
Asset/Liability Management
Montgomery, like other financial institutions, is subject to interest
rate risk to the extent that its interest-bearing liabilities reprice on a
different basis than its interest-earning assets. OTS regulations provide a Net
Portfolio Value ("NPV") approach to the quantification of interest rate risk. In
essence, this approach calculates the difference between the present value of
liabilities, expected cash flows from assets and cash flows from off balance
sheet contracts. Under OTS regulations, an institution's "normal" level of
interest rate risk in the event of an immediate and sustained 200 basis point
change in interest rates is a decrease in the institution's NPV in an amount not
exceeding 2% of the present value of its assets. Thrift institutions with
greater than "normal" interest rate exposure must take a deduction from their
total capital available to meet their risk-based capital requirement. The amount
of that deduction is one-half of the difference between (a) the institution's
actual calculated exposure to the 200 basis point interest rate increase or
decrease (whichever results in the greater pro forma decrease in NPV) and (b)
its "normal" level of exposure which is 2% of the present value of its assets.
Regulations do exempt all institutions under $300 million in assets and risk
based
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<PAGE>
capital exceeding 12% from reporting information to calculate exposure and
making any deduction from risk-based capital. At June 30, 1997, Montgomery's
total assets were $103.4 million and risk-based capital was 22.9 percent;
therefore Montgomery would have been exempt from calculating or making any
risk-based capital reduction. Montgomery's management believes interest-rate
risk is an important factor and makes all reports necessary to OTS to calculate
interest-rate risk on a voluntary basis. At June 30, 1997, 2.0% of the present
value of Montgomery's assets was approximately $2.12 million, which was less
than $3.64 million, the greatest decrease in NPV resulting from a 200 basis
point change in interest rates. As a result, Montgomery, for OTS reporting
purposes, would have been required to make a deduction from total capital in
calculating its risk-based capital requirement had this rule been in effect and
had Montgomery not been exempt from reporting on such date. Based on June 30,
1997 NPV information, the amount of Montgomery's deduction from capital, had it
been subject to reporting, would have been approximately $758,000.
It has been and continues to be a priority of Montgomery's Board of
Directors and management to manage interest rate risk and thereby limit any
negative effect of changes in interest rates on Montgomery's NPV. Montgomery's
Interest Rate Risk Policy, established by the Board of Directors, promulgates
acceptable limits on the amount of change in NPV given certain changes in
interest rates. Specific strategies have included shortening the amortized
maturity of fixed-rate loans and increasing the volume of adjustable rate loans
to reduce the average maturity of Montgomery's interest-earning assets. FHLB
advances are used in an effort to match the effective maturity of Montgomery's
interest-bearing liabilities to its interest-earning assets.
Presented below, as of June 30, 1997, and June 30, 1996, is an analysis
of Montgomery's estimated interest rate risk as measured by changes in NPV for
instantaneous and sustained parallel shifts in interest rates, up and down 300
basis points in 100 point increments, compared to the limits set by the Board.
Assumptions used in calculating the amounts in this table are those assumptions
utilized by the OTS in assessing the interest risk of the thrifts it regulates.
Based upon assumptions at June 30, 1997 and June 30, 1996, the NPV of Montgomery
was $18.4 million and $10.7 million, respectively. NPV is calculated by the OTS
for the purposes of interest rate risk assessment and should not be considered
as an indicator of value of Montgomery.
<PAGE>
<TABLE>
<CAPTION>
At June 30, 1997 At June 30, 1996
------------------------------ ------------------------------
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)
<S> <C> <C> <C> <C> <C>
+300 -60 (5,754) (43) (4,823) (45)
+200 -50 (3,637) (31) (3,042) (29)
+100 -30 (1,622) (20) (1,351) (13)
0 0 0 0 0 0
-100 -30 988 5 838 8
-200 -50 1,237 7 1,097 10
-300 -60 1,347 7 1,112 10
</TABLE>
In the event of a 300 basis point change in interest rate based upon
estimates as of June 30, 1997, Montgomery would experience a 7% increase in NPV
in a declining rate environment and a
16
<PAGE>
43% decrease in NPV in a rising environment. During periods of rising rates, the
value of monetary assets and liabilities decline. Conversely, during periods of
falling rates, the value of monetary assets and liabilities increase. However,
the amount of change in value of specific assets and liabilities due to changes
in rates is not the same in a rising rate environment as in a falling rate
environment (i.e., the amount of value increase under a specific rate decline
may not equal the amount of value decrease under an identical upward rate
movement). Based upon the NPV methodology, the increased level of interest rate
risk experienced by Montgomery in recent periods was primarily due to the
interest rate on interest- bearing liabilities increasing more than the interest
rate on interest-earning assets because of the per adjustment rate limitation on
adjustable rate loans due to lag in rate adjustments for such loans as compared
to interest-bearing liabilities.
Recent Accounting Issues
The Financial Accounting Standards Board ("FASB") has issued Statement
of Financial Accounting Standards ("SFAS") No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
This Statement establishes guidance for recognizing and measuring impairment
losses and requires that the carrying amount of impaired assets be reduced to
fair value.
The Statement requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable.
In performing the review for recoverability, the entity must estimate
the future cash flows expected to result from the use of the asset and its
eventual disposition. If the sum of the expected future net cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss must be recognized and the reduced carrying value
of the asset becomes its new cost. For depreciable assets, this new cost is
depreciated over the asset's remaining useful life. Restoration of previously
recognized impairment losses is prohibited.
An impairment loss for assets to be held and used would be reported as
a component of income from continuing operations before income taxes and would
require additional disclosures.
Long-lived assets and identifiable intangibles that will be disposed of
must be reported at the lower of carrying amount or fair value less cost to
sell, except for assets covered by Accounting Principles Board ("APB") Opinion
No. 30, which will continue to be reported at the lower of cost or net
realizable value.
Gains and losses resulting from impairment of assets that will be
disposed of are reported as components of income from continuing operations and
would also require additional disclosures.
The Statement ^ which was effective for Montgomery for its fiscal year
ending June 30, 1997, had no material impact on financial condition or results
of operations. Initial application of SFAS No. 121 is to be accounted for as a
cumulative effect of a change in accounting principle. Restatement of previously
issued financial statement is not permitted.
During 1995, the FASB issued SFAS No. 122, entitled Accounting for
Mortgage Servicing Rights. SFAS No. 122 pertains to mortgage banking enterprises
and financial institutions that
17
<PAGE>
conduct operations that are substantially similar to the primary operations of a
mortgage banking enterprise. The Statement eliminates the accounting distinction
between mortgage servicing rights that are acquired through loan origination
activities and those acquired through purchase transactions. Under this
Statement, if a mortgage banking enterprise sells or securitizes loans and
retains the mortgage servicing rights, the enterprise must allocate the total
cost of the mortgage loans to the mortgage servicing rights and the loans
(without the rights) based on their relative fair values if it is practicable to
estimate those fair values. If it is not practicable, the entire cost should be
allocated to the mortgage loans and no cost should be allocated to the mortgage
servicing rights. An entity would measure impairment of mortgage servicing
rights and loans based on the excess of the carrying amount of the mortgage
servicing rights portfolio over the fair value of that portfolio.
The adoption of this Statement by the Association during the year ended
June 30, 1996 did not have a material impact on financial condition or results
of operations.
The FASB has issued SFAS No. 123, Accounting for Stock-based
Compensation. This Statement establishes a fair value based method of accounting
for stock-based compensation plans. The FASB encourages all entities to adopt
this method for accounting for all arrangements under which employees receive
shares of stock or other equity instruments of the employer, or the employer
incurs liabilities to employees in amounts based on the price of its stock.
Due to the extremely controversial nature of this project, the
Statement permits a company to continue the accounting for stock-based
compensation prescribed in APB Opinion No. 25, Accounting for Stock Issued to
Employees. If a company elects that option, proforma disclosures of net income
(and EPS, if presented) are required in the footnotes as if the provisions of
this Statement had been used to measure stock-based compensation.
The disclosure requirements of APB Opinion No. 25 have been superseded
by the disclosure requirements of this Statement.
Once an entity adopts the fair value based method for accounting for
these transactions, that election cannot be reversed.
Equity instruments granted or otherwise transferred directly to an
employee by a principal stockholder are stock-based employee compensation to be
accounted for in accordance with either Opinion 25 or this Statement, unless the
transfer clearly is for a purpose other than compensation.
The accounting requirements of this Statement and related disclosure
requirements are effective for transactions entered into by Montgomery for the
fiscal year ending June 30, 1997. Proforma disclosures required for entities
that elect to continue to measure compensation cost using Opinion 25 must
include the effects of all awards granted in fiscal years that begin after
December 15, 1994.
In general, during the initial phase-in period, the effects of applying
this Statement are not likely to be representative of the effects on reported
net income for future years because options vest over several years and
additional awards generally are made each year. If that situation exists,
Montgomery must include a statement to that effect.
18
<PAGE>
SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, breaks new ground in resolving
long-standing questions about whether transactions should be accounted for as
secured borrowings or as sales. The Statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are considered secured borrowings.
A transfer of financial assets in which the transferor surrenders
control over those assets is accounted for as a sale to the extent that
consideration other than beneficial interests in the transferred assets is
received in exchange. The transferor has surrendered control over transferred
assets only if all of the following conditions are met:
o The transferred assets have been isolated from the transferor
-- put presumptively beyond the reach of the transferor and
its creditors, even in bankruptcy or other receivership.
o Each transferee obtains the right -- free of conditions that
constrain it from taking advantage of that right -- to pledge
or exchange the transferred assets, or the transferee is a
qualifying special-purpose entity and the holders of
beneficial interests in that entity have the right free of
conditions that constrain them from taking advantage of that
right -- to pledge or exchange those interests.
o The transferor does not maintain effective control over the
transferred assets through an agreement that both entitles and
obligates the transferor to repurchase or redeem them before
their maturity, or all agreement that entitles the transferor
to repurchase or redeem transferred assets that are not
readily obtainable.
This Statement provides detailed measurement standards for assets and
liabilities included in these transactions. It also includes implementation
guidance for assessing isolation of transferred assets and for accounting for
transfers of partial interests, servicing of financial assets, securitizations,
transfers of sales-type and direct financing lease receivables, securities
lending transactions, repurchase agreements, "wash sales," loan syndications and
participations, risk participations in banker's acceptances, factoring
arrangements, transfers of receivables with recourse, and extinguishments of
liabilities.
The Statement supersedes FASB SFAS No. 76, Extinguishment of Debt, and
No. 77, Reporting by Transferors for Transfers of Receivables with Recourse, and
No. 122, Accounting for Mortgage Servicing Rights and amends FASB SFAS No. 115,
Accounting or Certain Investments in Debt and Equity Securities, in addition to
clarifying or amending a number of other statements and technical bulletins.
This Statement is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996 and
is to be applied prospectively. Earlier or retroactive application is not
permitted. ^ The adoption of SFAS No. 125, has not had a material effect on
Montgomery's financial position and results of operations.
In February 1997, the FASB issued SFAS No. 128, Earnings per Share,
establishing standards for computing and presenting earnings per share (EPS) and
applies to entities with publicly
19
<PAGE>
held common stock or potential common stock, as well, as any other entity that
chooses to present EPS in its financial statements.
This Statement simplifies the current standards of APB Opinion No. 15,
Earnings per Share, and makes them comparable to international EPS standards. It
eliminates the presentation of primary EPS and requires presentation of basic
EPS (the principal difference being that common stock equilvalents are not
considered in the computation of basic EPS). It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation.
Basic EPS includes no dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if the potential common shares were exercised or converted into
common stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. Diluted EPS is computed similarly to that of fully
diluted EPS pursuant to Opinion No. 15.
The Statement is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods. Earlier application
is not permitted. The Statement requires restatement of all prior-period EPS
data presented.
In February 1997, the FASB issued SFAS No. 129, Disclosure of
Information about Capital Structure, continuing the current requirements to
disclose certain information about an entity's capital structure found in APB
Opinion No. 10, Omnibus Opinion -- 1966, Opinion No. 15, and SFAS No. 47,
Disclosure of Long-Term Obligations. It consolidates specific disclosure
requirements from those standards. SFAS No. 129 is effective for financial
statements issued by Montgomery for periods ending after December 15, 1997,
including interim periods.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income, establishing standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. It requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This Statement does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement.
SFAS No. 130 will also require Montgomery to (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in-capital in the equity section of a
statement of financial position.
The Statement is effective for fiscal years beginning after December
15, 1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required.
20
<PAGE>
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, establishing standards for the way
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. This Statement
supersedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, but retains the requirements to report information about major
customers. It amends SFAS No. 94, Consolidation of All Majority-Owned
Subsidiaries, to remove the special disclosure requirements for previously
unconsolidated subsidiaries.
SFAS No. 131 requires that a public business enterprise report
financial and descriptive information about its reportable operating segments.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments.
This Statement requires that a public business enterprise report a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets. It requires reconciliations of total segment revenues, total
segment profit or loss, total segment assets, and other amounts disclosed for
segments to corresponding amounts in the enterprise's general-purpose financial
statements. This Statement also requires that a public business enterprise
report descriptive information about the way that the operating segments were
determined, the products and services provided by the operating segments,
differences between the measurements used in reporting segment information and
those used in the enterprise's general-purpose financial statements, and changes
in the measurement of segment amounts from period to period.
SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated. This Statement need
not be applied to interim financial statements in the initial year of its
application, but comparative information for interim periods in the initial year
of application is to be reported in financial statements for interim periods in
the second year of application.
Impact of Inflation and Changing Prices
The consolidated financial statements and related financial information
presented elsewhere herein have been prepared in accordance with GAAP, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the changes in the relative purchasing
power of money over time due to inflation.
The effect of inflation on savings associations and other financial
institutions differs from the impact on nonfinancial institutions. Savings
associations, as financial intermediaries, have assets and liabilities which may
move in concert with inflation. This is especially true for savings institutions
with a high percentage of rate-sensitive interest-earning assets and
interest-bearing liabilities. A financial institution can reduce the impact of
inflation by managing its rate sensitivity gap.
21
<PAGE>
[GRAPHIC -- COMPANY LOGO]
GEO. S. OLIVE & CO. LLC
Independent Auditor's Report
To the Stockholders and
Board of Directors
Montgomery Financial Corporation
Crawfordsville, Indiana
We have audited the consolidated statement of financial condition of Montgomery
Financial Corporation (formerly Montgomery Savings, A Federal Association) and
subsidiary as of June 30, 1997 and 1996, and the related consolidated statements
of income, changes in stockholders' equity and cash flows for each of the three
years in the period ended June 30, 1997. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above present
fairly, in all material respects, the consolidated financial position of
Montgomery Financial Corporation and Subsidiary as of June 30, 1997 and 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended June 30, 1997, in conformity with generally accepted
accounting principles.
/s/Geo. S. Olive & Co. LLC
Geo. S. Olive & Co. LLC
Indianapolis, Indiana
August 5, 1997
A member of Moores Rowland International
An association of independent accounting firms throughout the world.
700 CAPITAL CENTER SOUTH, 201 NORTHILLINOIS STREET
INDIANAPOLIS, INDIANA 46204-1904
(317) 383-4000 FAX: (317) 383 4200
OFFICES LOCATED IN INDIANA, ILLINOIS AND OHIO
22
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Consolidated Statement of Financial Condition
<TABLE>
<CAPTION>
June 30 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash ................................................. $ 221,456 $ 129,519
Short-term interest-bearing deposits ................. 11,373,316 3,506,685
------------- -------------
Total cash and cash equivalents ................ 11,594,772 3,636,204
Interest-bearing deposits ............................ 100,000 100,000
Investment securities available for sale ............. 42,494 311,656
Loans ................................................ 87,088,294 80,232,496
Allowance for loan loses ............................. (180,000) (158,000)
------------- -------------
Net loans ...................................... 86,908,294 80,074,496
Real estate owned and held for development, net ...... 1,301,734 908,913
Premises and equipment ............................... 1,620,885 1,595,966
Federal Home Loan Bank stock ......................... 921,500 750,000
Interest receivable .................................. 684,479 595,158
Other assets ......................................... 225,147 238,351
------------- -------------
Total assets ................................... $ 103,399,305 $ 88,210,744
============= =============
Liabilities
Deposits
Noninterest bearing ................................ $ 1,165,223 $ 613,242
Interest bearing ................................... 70,100,001 69,095,279
------------- -------------
Total deposits ................................. 71,265,224 69,708,521
Federal Home Loan Bank advances ...................... 11,428,373 8,000,000
Interest payable ..................................... 423,305 428,178
Deferred tax liability ............................... 360,156 364,395
Other liabilities .................................... 555,669 582,322
------------- -------------
Total liabilities .............................. 84,032,727 79,083,416
============= =============
<PAGE>
<CAPTION>
June 30 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Stockholders' Equity
Preferred stock, $.01 par value
Authorized and unissued--2,000,000 shares
Common stock, $.01 par value
Authorized--8,000,000 and 2,000,000 shares
Issued and outstanding--1,653,032 and 850,000 shares 16,530 8,500
Paid-in capital ...................................... 13,547,619 2,194,128
Retained earnings--substantially restricted .......... 7,136,492 6,924,757
Unearned ESOP shares ................................. (1,322,500)
Unearned compensation ................................ (11,563)
Net unrealized loss on securities available for sale . -- (57)
------------- -------------
Total stockholders' equity ..................... 19,366,578 9,127,328
------------- -------------
Total liabilities and stockholders' equity ..... $ 103,399,305 $ 88,210,744
============= =============
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Consolidated Statement of Income
<TABLE>
<CAPTION>
Year Ended June 30 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and Dividend Income
Loans ..................................................... $ 6,879,742 $ 6,409,666 $ 5,894,188
Investment securities ..................................... 10,956 28,678 77,962
Deposits with financial institutions ...................... 268,876 281,805 156,417
Dividend income ........................................... 59,967 56,472 49,645
----------- ----------- -----------
Total interest and dividend income .................. 7,219,541 6,776,621 6,178,212
----------- ----------- -----------
Interest Expense
Deposits .................................................. 3,812,759 3,866,674 3,188,701
Short-term borrowings ..................................... -- 8,000 34,525
Federal Home Loan Bank advances ........................... 643,127 559,393 684,032
----------- ----------- -----------
Total interest expense .............................. 4,455,886 4,434,067 3,907,258
----------- ----------- -----------
Net Interest Income .......................................... 2,763,655 2,342,554 2,270,954
Provision (adjustment) for losses on loans ................ 22,000 19,750 (15,000)
----------- ----------- -----------
Net Interest Income After Provision (Adjustment)
for Losses on Loans ....................................... 2,741,655 2,322,804 2,285,954
----------- ----------- -----------
Other Income
Service charges on deposit accounts ....................... 25,749 22,184 8,285
Net realized gains on sale of available-for-sale securities -- -- 9,033
Net appraisal income (expense) ............................ 390 (5,007) 39,540
Other income .............................................. 4,122 6,043 22,276
----------- ----------- -----------
Total other income .................................. 30,261 23,220 79,134
----------- ----------- -----------
Other Expenses
Salaries and employee benefits ............................ 934,453 878,536 901,945
Net occupancy expenses .................................... 106,413 100,999 91,774
Equipment expenses ........................................ 142,518 140,000 132,022
Data processing expense ................................... 100,009 86,684 87,069
Deposit insurance expense ................................. 523,184 156,199 145,529
Real estate operations, net ............................... (74,993) (7,364) (18,378)
Advertising expense ....................................... 32,028 33,408 31,250
Other expenses ............................................ 455,053 361,942 378,158
----------- ----------- -----------
Total other expenses ................................ 2,218,665 1,750,404 1,749,369
----------- ----------- -----------
Income Before Income Tax ..................................... 553,251 595,620 615,719
Income tax expense ........................................ 240,556 164,993 230,462
----------- ----------- -----------
Net Income ................................................... $ 312,695 $ 430,627 $ 385,257
=========== =========== ===========
Net Income Per Share ......................................... $ .67
Weighted Average Shares Outstanding .......................... 466,350
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Consolidated Statement of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock
----------------------
Shares Paid-in Retained Unearned Unearned
Outstanding Amount Capital Earnings ESOP Shares Compensation
----------- ------ ------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances, July 1, 1994 $6,289,873
Net income for 1995 385,257
Cumulative effect of
change in method of
accounting for securities
Net change in unrealized
gain (loss) on securities
available for sale
--------- ------- ----------- ---------- ----------- --------
Balances, June 30, 1995 6,675,130
Net income for 1996 430,627
Common stock issued in
reorganization, net of 600,000 $ 6,000 (106,000)
assets retained by
Montgomery Mutual Holding
Company
Common stock sold, net of costs 250,000 2,500 $ 2,194,128
Cash dividends ($.30 per share) (75,000)
Net change in unrealized
gain (loss) on securities
available for sale
--------- ------- ----------- ---------- ----------- --------
Balances, June 30, 1996 850,000 8,500 2,194,128 6,924,757
Net income for 1997 312,695
Cash dividends ($.40 per share) (100,000)
Purchase of stock for
Management Recognition Trust $(11,563)
(unearned compensation)
Merger with Montgomery Mutual
Holding Company (600,000) (6,000) 110,547
Exchange of shares 216,254 2,162 (2,162) (960)
Common stock sold, net of costs 1,186,778 11,868 11,245,106
Contribution for unearned
ESOP shares $(1,322,500)
Net change in unrealized
gain (loss) on securities
available for sale
--------- ------- ----------- ---------- ----------- --------
Balances, June 30, 1997 1,653,032 $16,530 $13,547,619 $7,136,492 $(1,322,500) $(11,563)
========= ======= =========== ========== =========== ========
<PAGE>
<CAPTION>
Net Unrealized
Gain (Loss) On
Securities
Available For Sale Total
------------------ -----
<S> <C> <C>
Balances, July 1, 1994 $ 6,289,873
Net income for 1995 385,257
Cumulative effect of
change in method of $17,092 17,092
accounting for securities
Net change in unrealized
gain (loss) on securities (13,839) (13,839)
available for sale
------- -----------
Balances, June 30, 1995 3,253 6,678,383
Net income for 1996 430,627
Common stock issued in
reorganization, net of (100,000)
assets retained by
Montgomery Mutual Holding
Company
Common stock sold, net of costs 2,196,628
Cash dividends ($.30 per share) (75,000)
Net change in unrealized
gain (loss) on securities (3,310) (3,310)
available for sale
------- -----------
Balances, June 30, 1996 (57) 9,127,328
Net income for 1997 312,695
Cash dividends ($.40 per share) (100,000)
Purchase of stock for
Management Recognition Trust (11,563)
(unearned compensation)
Merger with Montgomery Mutual
Holding Company 104,547
Exchange of shares (960)
Common stock sold, net of costs 11,256,974
Contribution for unearned
ESOP shares (1,322,500)
Net change in unrealized
gain (loss) on securities 57 57
available for sale
------- -----------
Balances, June 30, 1997 $ 0 $19,366,578
======= ===========
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
<TABLE>
<CAPTION>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Consolidated Statement of Cash Flows
Year Ended June 30 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income ......................................... $ 312,695 $ 430,627 $ 385,257
Adjustments to reconcile net income
to net cash provided by operating
activities
Provision (adjustment) for loan losses ........... 22,000 19,750 (15,000)
Provision for loss on real estate owned .......... 15,000
Depreciation ..................................... 206,945 195,837 160,073
Investment securities gains ...................... (9,033)
Gain on sale of subsidiary ....................... (15,525)
(Gain) loss on sale of real estate owned ......... (7,682) 25,572 (1,148)
Deferred income tax .............................. (4,275) (23,421) 30,532
Change in
Interest receivable ............................ (89,321) (27,919) (127,839)
Interest payable ............................... (4,873) 9,320 171,263
Other assets ................................... 13,204 121,095 (180,945)
Other liabilities .............................. (26,653) 199,197 628,522
Other adjustments ................................ 24,189 15,523 (5,355)
------------ ------------ ------------
Net cash provided by operating activities .... 446,229 965,581 1,035,802
------------ ------------ ------------
Investing Activities
Net change in interest-bearing deposits ............ 100,000
Proceeds from sale of subsidiary ................... 1,400
Proceeds from maturities and paydowns
of securities available for sale .............. 269,161 484,098 343,058
Proceeds from sales of securities available for sale 640,464
Net change in loans ................................ (7,088,289) (2,248,278) (5,808,863)
Additions to real estate owned ..................... (210,496) (93,633) (56,496)
Proceeds from real estate owned sales .............. 59,549 248,363
Purchase of premises and equipment ................. (199,111) (60,410) (428,139)
Purchase of FHLB of Indianapolis stock ............. (171,500) (139,800)
Other investing activities ......................... 1,000
------------ ------------ ------------
Net cash used by investing activities ........ (7,399,235) (1,858,674) (5,100,013)
------------ ------------ ------------
26
<PAGE>
<CAPTION>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Consolidated Statement of Cash Flows
Year Ended June 30 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
(continued)
<S> <C> <C> <C>
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand
and savings deposits .......................... $ 1,078,794 $ 359,419 $ (2,191,209)
Certificates of deposit .......................... 477,909 1,063,495 8,130,834
Short-term borrowings ............................ -- (368,250) (969,851)
Proceeds from FHLB advances ........................ 7,000,000 8,000,000 4,000,000
Repayment of FHLB advances ......................... (3,571,627) (10,500,000) (2,500,000)
Cash paid in lieu of fractional shares ............. (960)
Proceeds from sale of stock, net of costs .......... 10,039,021 2,089,819
Stock issued in reorganization, net of assets
retained by Montgomery Mutual Holding Company .... (100,000)
Purchase of stock for Management Recognition Trust . (11,563)
Dividends paid ..................................... (100,000) (50,000)
------------ ------------ ------------
Net cash provided by financing activities .... 14,911,574 494,483 6,469,774
------------ ------------ ------------
Net Change in Cash and Cash Equivalents ............... 7,958,568 (398,610) 2,405,563
Cash and Cash Equivalents, Beginning of Period ........ 3,636,204 4,034,814 1,629,251
------------ ------------ ------------
Cash and Cash Equivalents, End of Period .............. $ 11,594,772 $ 3,636,204 $ 4,034,814
============ ============ ============
Additional Cash Flow and Supplementary Information
Interest paid ...................................... $ 4,461,000 $ 4,425,000 $ 3,736,000
Income tax paid .................................... 173,000 143,000 211,000
Loan balances transferred to real estate owned ..... 352,000 69,000 124,000
Conversion costs transferred from other assets
to stockholders' equity .......................... 218,000
Dividends payable .................................. 25,000 25,000
Transfer stock purchase deposits from liabilities
to proceeds from sale of stock ................... 325,000
Common stock issued to ESOP leveraged with
a employer loan ................................. 1,322,500
</TABLE>
See notes to consolidated financial statements.
27
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
0 Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of Montgomery Financial Corporation
("Company") and its wholly owned subsidiary, Montgomery Savings, A Federal
Association ("Association"), and the Association's wholly owned subsidiary, MSA
Service Corporation ("MSA"), conform to generally accepted accounting principles
and reporting practices followed by the thrift industry. The more significant of
the policies are described below.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company is a thrift holding company whose principal activity is the
ownership and management of the Association. The Association operates under a
federal thrift charter and provides full banking services. As a
federally-chartered thrift, the Association is subject to regulation by the
Office of Thrift Supervision, and the Federal Deposit Insurance Corporation.
The Association generates mortgage and consumer loans and receives deposits from
customers located primarily in central Indiana. The Association's loans are
generally secured by specific items of collateral including real property and
consumer assets.
MSA is a real estate management and development company. For years ending prior
to June 30, 1996, MSA owned Clements-Roscher Corporation ("CRC"). CRC was a
casualty insurance agency that sold a broad range of casualty insurance,
including building, homeowners, and auto insurance. MSA sold its wholly owned
subsidiary, CRC, in a stock sale effective July 1, 1994. The purchase price
totaled $75,000, consisting of cash and a note, and MSA recorded a gain of
$15,525 on the sale.
Consolidation--The consolidated financial statements include the accounts of the
Company, the Association and MSA after elimination of all material intercompany
transactions and accounts.
Investment Securities--Debt securities are classified as held to maturity when
the Association has the positive intent and ability to hold the securities to
maturity. Securities held to maturity are carried at amortized cost.
Debt securities not classified as held to maturity are classified as available
for sale. Securities available for sale are carried at fair value with
unrealized gains and losses reported separately, net of tax, in stockholders'
equity.
Amortization of premiums and accretion of discounts are recorded using the
interest method as interest income from securities. Realized gains and losses
are recorded as net security gains (losses). Gains and losses on sales of
securities are determined on the specific-identification method.
28
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Loans are carried at the principal amount outstanding. A loan is impaired when,
based on current information or events, it is probable that the Association will
be unable to collect all amounts due (principal and interest) according to the
contractual terms of the loan agreement. Payments with insignificant delays not
exceeding 90 days outstanding are not considered impaired. Certain nonaccrual
and substantially delinquent loans may be considered impaired. The Association
considers its investment in one-to-four family residential loans and consumer
loans to be homogeneous and therefore excluded from separate identification for
evaluation of impairment. Interest income is accrued on the principal balances
of loans. The accrual of interest on impaired and nonaccrual loans is
discontinued when, in management's opinion, the borrower may be unable to meet
payments as they become due. When interest accrual is discontinued, all unpaid
accrued interest is reversed when considered uncollectible. Interest income is
subsequently recognized only to the extent cash payments are received. Certain
loan fees and direct costs are being deferred and amortized as an adjustment of
yield on the loans over the contractual lives of the loans. When a loan is paid
off or sold, any unamortized loan origination fee balance is credited to income.
Real estate owned and held for development, net arises from loan foreclosure or
deed in lieu of foreclosure and acquisition of real estate for development and
is carried at the lower of cost or fair value less estimated selling costs.
Costs relating to development and improvement of property are capitalized,
whereas costs relating to the holding of property, net of rental and other
income are expensed.
Allowances for loan and real estate losses are maintained to absorb loan and
real estate losses based on management's continuing review and evaluation of the
loan and real estate portfolios and its judgment as to the impact of economic
conditions on the portfolios. The evaluation by management includes
consideration of past loss experience, changes in the composition of the
portfolios, the current condition and amount of loans and real estate owned
outstanding, and the probability of collecting all amounts due. Impaired loans
are measured by the present value of expected future cash flows, or the fair
value of the collateral of the loan, if collateral dependent.
The determination of the adequacy of the allowance for loan losses and the
valuation of real estate is based on estimates that are particularly susceptible
to significant changes in the economic environment and market conditions.
Management believes that as of June 30, 1997, the allowance for loan losses and
carrying value of real estate owned are adequate based on information currently
available. A worsening or protracted economic decline in the area within which
the Association operates would increase the likelihood of additional losses due
to credit and market risks and could create the need for additional loss
reserves.
Premises and equipment are carried at cost net of accumulated depreciation.
Depreciation is computed using the straight-line method based principally on the
estimated useful lives of the assets, which range from 3 to 35 years.
Maintenance and repairs are expensed as incurred while major additions and
improvements are capitalized. Gains and losses on dispositions are included in
current operations.
29
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Federal Home Loan Bank stock is a required investment for institutions that are
members of the Federal Home Loan Bank system. The required investment in the
common stock is based on a predetermined formula.
Income tax in the consolidated statement of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. The Company
files consolidated income tax returns with its subsidiary.
Earnings per share is computed based upon the weighted average of the 250,000
shares of publicly owned common stock of the Association that were outstanding
during the year ended June 30, 1997 converted to 466,350 shares of Company
common stock in connection with the second conversion and reorganization, as
more fully discussed below. Net income per share for the periods before the
conversion to a stock savings association on August 11, 1995 is not meaningful.
0 Conversion
On November 17, 1992, the Board of Directors of the Association unanimously
adopted a Plan of Reorganization whereby Montgomery Savings Association, A
Federal Association ("Montgomery"), was reorganized into a federal mutual
holding company on August 11, 1995 and became known as "Montgomery Mutual
Holding Company". Substantially all of the assets and liabilities of Montgomery
were transferred to a newly-chartered federal savings and loan association known
as Montgomery Financial Corporation ("Association"), in exchange for 600,000
shares of the Association's common stock, par value of $.01 per share, $100,000
was retained by Montgomery to capitalize Montgomery Mutual Holding Company. The
transaction was accounted for at historical cost in a manner similar to that
utilized in a pooling of interests.
As part of the reorganization, the Association sold 250,000 shares of common
stock at $10.00 per share in an offering completed on August 11, 1995.
Reorganization costs of $303,372 were charged to stockholders' equity upon
completion of the offering.
As a result of the transaction, Montgomery Mutual Holding Company owned 70.6
percent of Montgomery and minority stockholders owned 29.4 percent.
On December 26, 1996, the Boards of Directors of Montgomery Mutual Holding
Company and the Association adopted a Plan of Conversion of Montgomery Mutual
Holding Company and an Agreement and Plan of Reorganization between Montgomery
Holding Company and the Association.
30
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
In connection with the conversion and reorganization, the Association formed a
new first-tier, wholly owned subsidiary, the Company, which became the holding
company of the Association upon consummation of the conversion and
reorganization. The Company in turn formed Interim as a wholly owned subsidiary.
Montgomery Mutual Holding Company converted from the mutual form to a federal
interim stock savings association and simultaneously merged with and into the
Association pursuant to the Plan of Merger. As a result, Montgomery Mutual
Holding Company ceased to exist, assets of $104,547 were contributed to the
Association and the 600,000 shares of Association common stock it owned were
cancelled. Interim then merged with and into the Association pursuant to the
Plan of Merger and the Association became a wholly owned subsidiary of the
Company. In connection therewith, 250,000 shares of Association common stock
owned by the minority stockholders of the Association and outstanding
immediately prior to the effective time thereof was automatically converted,
without further action by the holder thereof, into 466,254 shares of the Company
common stock based on the exchange ratio, plus $960 cash in lieu of fractional
share interest. The transaction has been recorded at historical cost in a manner
similar to that utilized in a pooling of interest.
As part of the transaction, the Company sold 1,186,778 shares of Company common
stock at $10.00 per share in an offering completed June 30, 1997. Net proceeds
of the Company's stock sale, after costs of $610,806 and reduction of $1,322,500
for common stock issued to the ESOP leveraged with an employer loan, were
$10,039,021.
0 Investment Securities
<TABLE>
<CAPTION>
1997
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30 Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
Municipal due January 1, 1998 $ 42 $ 42
================================================
<CAPTION>
1996
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30 Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
Federal agencies $250 $250
Municipal 62 62
------------------------------------------------
Total available for sale $312 $0 $0 $312
================================================
</TABLE>
Proceeds from sales of securities held to maturity during 1995 were $640,464.
Gross gains of $10,029 and gross losses of $996 were realized on those sales.
There were no sales of securities during the years ended June 30, 1997 and 1996.
31
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
0 Loans and Allowance
<TABLE>
<CAPTION>
June 30 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Loans
Real estate mortgage loans
One-to-four family $ 73,606 $ 68,092
Multi-family and nonresidential 8,115 8,391
Real estate construction loans 1,892 1,261
Home equity loans 2,727 2,444
Consumer loans 665 251
Share loans 587 323
-------- --------
87,592 80,762
Undisbursed portion of loans (668) (683)
Deferred loan costs 164 153
-------- --------
$ 87,088 $ 80,232
======== ========
<CAPTION>
Year Ended June 30 1997 1996 1995
- --------------------------------------------------------------------------------
Allowance for loan losses
Balances, July 1 $ 158 $ 138 $ 158
Provision (adjustment) for loan losses 22 20 (15)
Loans charged off (5)
----- ----- -----
Balances, June 30 $ 180 $ 158 $ 138
===== ===== =====
</TABLE>
On July 1, 1995, the Association adopted SFAS Nos. 114 and No. 118, Accounting
by Creditors for Impairment of a Loan and Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures. At June 30, 1997, the
Association had no impaired loans. At June 30, 1996, the Association had an
impaired loan of $308,000 for which an allowance for losses was not deemed
necessary. The average balance of impaired loans for the year ended June 30,
1997 and 1996 was $25,000 and $272,000. The Association had no interest income
or cash receipts on impaired loans during the year ended June 30, 1997. Interest
income and cash receipts of interest totaled $33,000 and $6,000 during the
period in the year ended June 30, 1996 that the loan was impaired.
32
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
In addition, at June 30, 1997, 1996 and 1995, the Association had nonaccrual
loans of approximately $273,000, $325,000 and $522,000, for which impairment had
not been recognized. If interest on these loans had been recognized at the
original interest rates, interest income would have increased approximately
$25,000, $18,000 and $26,000 for years ended June 30, 1997, 1996 and 1995.
The Association has no commitments to loan additional funds to the borrowers of
impaired or nonaccrual loans.
0 Real Estate Owned
<TABLE>
<CAPTION>
June 30 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Real estate acquired in settlement of loans $ 109 $ 148
Real estate held for development 1,367 906
Allowance for losses
------- -------
1,476 1,054
Accumulated depreciation (174) (145)
------- -------
Net $ 1,302 $ 909
======= =======
<CAPTION>
Year Ended June 30 1996 1995
- --------------------------------------------------------------------------------
Allowance for losses on real estate owned
Balances, July 1 $ 15
Provision (adjustment) for losses (15) $ 15
---- ----
Balances, June 30 $ 0 $ 15
==== ====
</TABLE>
0 Premises and Equipment
<TABLE>
<CAPTION>
June 30 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 151 $ 91
Building and parking lot 1,447 1,441
Equipment 1,011 1,020
------- -------
Total cost 2,609 2,552
Accumulated depreciation (988) (956)
------- -------
Net $ 1,621 $ 1,596
======= =======
</TABLE>
33
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
0 Deposits
<TABLE>
<CAPTION>
June 30 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Noninterest-bearing $ 1,165 $ 613
Interest-bearing demand 10,682 9,613
Savings deposits 4,405 4,948
Certificates and other time deposits of $100,000 or more 12,766 12,948
Other certificates and time deposits 42,247 41,587
------- -------
Total deposits $71,265 $69,709
======= =======
</TABLE>
Certificates maturing in years ending June 30:
1998 $34,736
1999 14,097
2000 3,857
2001 1,565
2002 722
Thereafter 36
-------
$55,013
=======
<TABLE>
<CAPTION>
Year Ended June 30 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest expense on deposits
Interest-bearing demand $ 355 $ 345 $ 394
Savings deposits 188 219 178
Certificates 3,270 3,303 2,617
------ ------ ------
$3,813 $3,867 $3,189
====== ====== ======
</TABLE>
34
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
0 FHLB Advances
<TABLE>
<CAPTION>
1997
-----------------------------
Weighted
June 30 Amount Average Rate
- --------------------------------------------------------------------------------
<S> <C> <C>
Advances from FHLB
Maturities in years ending June 30
1998 $ 5,000 5.83%
1999 2,000 5.99
2000 2,000 6.15
2001 2,428 6.14
-------
$11,428 5.98%
=======
</TABLE>
The Association has an available line of credit with the FHLB totaling
$5,000,000. The line of credit expires September 5, 1997 and bears interest at a
rate equal to the current variable advance rate. There were no drawings on this
line of credit at June 30, 1997.
The FHLB advances are secured by first mortgage loans totaling $69,820,000.
Advances are subject to restrictions or penalties in the event of prepayment.
<PAGE>
0 Income Tax
<TABLE>
<CAPTION>
Year Ended June 30 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense
Currently payable
Federal $ 186 $ 163 $ 155
State 59 26 44
Deferred
Federal (7) (33) 27
State 3 9 4
----- ----- -----
Total income tax expense $ 241 $ 165 $ 230
===== ===== =====
Reconciliation of federal statutory to
actual tax expense
Federal statutory income tax at 34% $ 188 $ 202 $ 209
Effect of state income taxes 40 23 32
Other 13 (60) (11)
----- ----- -----
Actual tax expense $ 241 $ 165 $ 230
===== ===== =====
Effective tax rate 43.6% 27.7% 37.4%
</TABLE>
The tax expense related to securities gains was $3,600 for the year ended June
30, 1995.
35
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The components of the deferred tax liability are as follows at:
<TABLE>
<CAPTION>
June 30 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Differences in depreciation methods $(239) $(244)
Differences in accounting for loan losses (3) (28)
Differences in accounting for loan costs (141) (110)
Differences in accounting for retirement plans
and other employee benefits 42 32
FHLB of Indianapolis stock dividend (30) (30)
Deferred state income taxes 20 20
Other (9) (4)
----- -----
$(360) $(364)
===== =====
Assets $ 62 $ 52
Liabilities (422) (416)
----- -----
$(360) $(364)
===== =====
</TABLE>
Retained earnings at June 30, 1997 and 1996, include approximately $1,500,000
for which no deferred federal income tax liability has been recognized. These
amounts represent an allocation of income to bad debt deductions for tax
purposes only. Reduction of amounts so allocated for purposes other than tax bad
debt losses or adjustments arising from carryback of net operating losses or
loss of "bank" status, would create income for tax purposes only, which income
would be subject to the then-current corporate income tax rate. The unrecorded
deferred income tax liability on the above amounts was approximately $590,000 at
June 30, 1997 and 1996.
0 Regulatory Capital
The Association is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate actions by the regulatory agencies that, if
undertaken, could have a material effect on the Association's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Association must meet specific capital guidelines
that involve quantitative measures of the Association's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Association's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors.
At June 30, 1997, the Association believes that it meets all capital adequacy
requirements to which it is subject and the most recent notification from the
regulatory agency categorized the Association as well capitalized under the
regulatory framework for prompt corrective action. There have been no conditions
or events since that notification that management believes have changed this
categorization.
36
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The Association's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
1997
--------------------------------------------------------------------
Required for To Be Well
Actual Adequate Capital (1) Capitalized (1)
--------------------------------------------------------------------
June 30 Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital (1)
(to risk-weighted assets) $13,678 22.9% $4,787 8.0% $5,984 10.0%
Core capital (1) (to adjusted tangible assets) 14,690 14.3 3,087 3.0% 6,174 6.0%
Core capital (1) (to adjusted total assets) 14,690 14.3 3,087 3.0% 5,145 5.0%
</TABLE>
(1) As defined by regulatory agencies
The Association's tangible capital at June 30, 1997 was $14,690,000, which
amount was 14.3 percent of tangible assets and exceeded the required ratio of
1.5 percent.
0 Restriction on Dividends
The Company is not subject to any regulatory restrictions on the payment of
dividends to its stockholders. The Office of Thrift Supervision ("OTS")
regulations provide that a savings association which meets fully phased-in
capital requirements and is subject only to "normal supervision" may pay out, as
a dividend, 100 percent of net income to date over the calendar year and 50
percent of surplus capital existing at the beginning of the calendar year
without supervisory approval, but with 30 days prior notice to the OTS. OTS
regulations also prohibit a savings association from declaring or paying any
dividends if, as a result, the regulatory capital of the Association would be
reduced below the minimum amount required to be maintained for the liquidation
account established in connection with the conversion. Any additional amount of
capital distributions would require prior regulatory approval. A savings
association failing to meet current capital standards may only pay dividends
with supervisory approval.
At the time of conversion on June 30, 1997, a liquidation account was
established in an amount equal to $420,000 of dividends waived by Montgomery
Mutual Holding Company plus the Association's net worth at March 31, 1995. The
liquidation account is maintained for the benefit of eligible deposit account
holders who maintain their deposit account in the Association after conversion.
In the event of a complete liquidation (and only in such event), each eligible
deposit account holder will be entitled to receive a liquidation distribution
from the liquidation account in the amount of the then current adjusted
subaccount balance for deposit accounts then held, before any liquidation
distribution may be made to stockholders. Except for the repurchase of stock and
payment of dividends, the existence of the liquidation account will not restrict
the use or application of net worth. The initial balance of the liquidation
account was $7,062,000.
At June 30, 1997, the stockholder's equity of the Association was $15,112,000,
of which approximately $8,050,000 was available for the payment of dividends.
37
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
0 Commitments and Contingent Liabilities
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit, which are not
included in the accompanying consolidated financial statements. The
Association's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit is
represented by the contractual or notional amount of those instruments. The
Association uses the same credit policies in making such commitments as it does
for instruments that are included in the consolidated statement of financial
condition.
Financial instruments whose contract amount represents credit risk as of June 30
were as follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loan commitments
At variable rates $1,712 $ 318
At fixed rates ranging from 7.90 to 9.75%
for 1997 and 7.50 to 9.50% for 1996 143 2,472
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Association evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Association upon extension of credit, is based on
management's credit evaluation. Collateral held varies, but may include
residential real estate or other assets of the borrower.
The Company and Association are also subject to claims and lawsuits which arise
primarily in the ordinary course of business. It is the opinion of management
that the disposition or ultimate determination of such possible claims or
lawsuits will not have a material adverse effect on the consolidated financial
position of the Association.
0 Employee Benefit Plans
The Association has a retirement savings Section 401(k) plan in which
substantially all employees may participate. The Association matches employees'
contributions at the rate of 100 percent of the first 7 percent of base salary
contributed by participants. The Association's expense for the plan was $48,000
for 1997, $45,000 for 1996 and $46,000 for 1995.
38
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
On October 15, 1996, the stockholders of the Association approved a Management
Recognition Plan ("MRP"). This plan was assumed by the Company in connection
with the second conversion and reorganization. The plan allows for the purchase
in the open market or through the issuance of authorized and unissued shares of
up to 13,990 shares of common stock. On November 25, 1996, Montgomery purchased
1,000 shares for the MRP at a cost of $11,563 which was recorded as unearned
compensation in stockholders' equity. Restricted stock awards covering 13,988
shares of common stock, of which 12,988 will be purchased on the open market,
were awarded to Montgomery's officers and key employees under the MRP. Expense
under the plan for fiscal year ended June 30, 1997 was not material.
As part of the second conversion, the Company established an Employee Stock
Ownership Plan ("ESOP") covering substantially all employees of the Association.
The ESOP acquired 132,250 shares at $10.00 per share in the conversion with
funds provided by a loan from the Company. Accordingly, the $1,322,500 of stock
acquired by the ESOP is shown as a reduction to stockholders' equity. Unearned
ESOP shares totaled 132,250 at June 30, 1997 and had a fair value of $1,322,500.
Shares are released to participants proportionately as the loan is repaid.
Dividends on allocated shares are recorded as dividends and charged to retained
earnings. Dividends on unallocated shares, which will be distributed to
participants, are treated as compensation expense. Compensation expense is
recorded equal to the fair market value of the stock when contributions, which
are determined annually by the Board of Directors of the Bank, are made to the
ESOP. There was no expense under the ESOP for the year ended June 30, 1997. At
June 30, 1997, the ESOP had no allocated shares, 132,250 suspense shares and no
committed-to-be released shares.
In addition, the Board of Directors has approved a 1997 Recognition Plan
("RRP"). The Plan is subject to stockholder's approval. Restricted stock awards
covering up to 4% of the common stock to be outstanding upon consummation of the
conversion less the number of shares held in the MRP may be awarded to the
Association's directors, officers, and key employees under the RRP.
0 Stock Option Plans
On October 15, 1996, the stockholders of the Association approved a 1995 Stock
Option Plan and a 1995 Director Stock Option Plan. These plans were assumed by
the Company in connection with the second conversion and reorganization. These
plans allow for the purchase in the open market or through the issuance of
authorized and unissued shares of up to 34,973 shares of common stock for the
Stock Option Plan and the Director Stock Option Plan. Under the stock option
plans, stock option rights covering 24,483 shares of common stock may be granted
to officers and other key employees and 10,490 shares of common stock may be
granted to directors of Montgomery.
39
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The Company's 1995 stock option plans are accounted for in accordance with
Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Stock option awards vest and are
exercisable one year following the date of stockholder approval and thereafter
at a rate not in excess of 20% per year. All options become fully vested and
exercisable in the event of the death of disability of the optionee. The
incentive stock option exercise price will not be less than the fair market
value of the common stock on the date of the grant of the option. The date on
which the options are first exercisable is determined by the Board of Directors,
and the terms of the stock options will not exceed ten years from the date of
grant. The exercise price of each option was equal to the market price of the
Company's stock on the date of grant; therefore, no compensation expense was
recognized.
SFAS No. 123, Stock-Based Compensation, is effective for the Company for the
year ended June 30, 1997. This Statement establishes a fair value based method
of accounting for stock-based compensation plans. Although the Company has
elected to follow APB No. 25, SFAS No. 123 requires pro forma disclosures of net
income and earnings per share as if the Company had accounted for its employee
stock options under that Statement. The fair value of each option grant was
estimated on the grant date using an option-pricing model with the following
assumptions:
June 30 1997
- --------------------------------------------------------------------------------
Risk-free interest rates 6.4%
Dividend yields 3.37
Expected volatility factor of market price of common stock 11.0
Weighted-average expected life of the options 7 years
Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair value of the options and amortized to expense over the options'
vesting period. The pro forma effect on net income and earnings per share of
this Statement are as follows:
Year Ended June 30 1997
- --------------------------------------------------------------------------------
Net income As reported $313
Pro forma 305
Earnings per share As reported .67
Pro forma .65
40
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The following is a summary of the status of the Company's stock option plan and
changes in that plan as of and for the year ended June 30, 1997.
<TABLE>
<CAPTION>
Year Ended June 30 1997
- --------------------------------------------------------------------------------
Weighted-
Average
Options Shares Exercise Price
- --------------------------------------------------------------------------------
<S> <C> <C>
Outstanding, beginning of year 0
Granted 34,973 $6.97
------
Outstanding, end of year 34,973 6.97
======
Options exercisable at year end 0
Weighted-average fair value of options
granted during the year $1.25
</TABLE>
As of June 30, 1997, options outstanding totaling 34,973 have an exercise price
of $6.97 and a weighted- average remaining contractual life of 9.6 years.
In addition, the Board of Directors has approved a 1997 Stock Option Plan. The
Plan is subject to stockholders' approval. Under the 1997 Plan, stock option and
stock appreciation rights covering shares representing an aggregate of up to 10%
of the common stock sold in the conversion may be granted to directors, officers
and employees of the Company or its subsidiaries.
0 Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash and Cash Equivalents--The fair value of cash and cash equivalents
approximates carrying value.
Interest-Bearing Deposits--The fair value of interest-bearing deposits
approximate carrying value.
Investment Securities--Fair values are based on quoted market prices.
Loans--The fair value for loans is estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
Interest Receivable/Payable--The fair value of accrued interest
receivable/payable approximates carrying values.
FHLB Stock--Fair value of FHLB stock is based on the price at which it may be
resold to the FHLB.
41
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Deposits--Fair values for certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
on such time deposits.
Federal Home Loan Bank Advances--The fair value of these borrowings are
estimated using a discounted cash flow calculation, based on current rates for
similar debt.
Advance Payments by Borrowers for Taxes and Insurance--The fair value
approximates carrying value.
The estimated fair values of the Association's financial instruments are as
follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------------
Carrying Fair Carrying Fair
June 30 Amount Value Amount Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $11,595 $11,595 $3,636 $3,636
Interest-bearing deposits 100 100 100 100
Investment securities available for sale 42 42 312 312
Loans, net 86,908 87,494 80,074 81,432
Stock in FHLB 922 922 750 750
Interest receivable 684 684 595 595
Liabilities
Deposits 71,265 71,189 69,709 70,212
FHLB advances 11,428 11,272 8,000 7,954
Interest payable 423 423 428 428
Advances by borrowers for taxes and insurance 139 139 382 382
</TABLE>
0 Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company:
<TABLE>
<CAPTION>
Condensed Balance Sheet
June 30 1997
- --------------------------------------------------------------------------------
<S> <C>
Assets
Cash $ 4,256
Investment in subsidiaries 15,112
-------
Total assets $19,368
=======
Liabilities $ 1
Stockholders' Equity 19,367
-------
Total liabilities and stockholders' equity $19,368
=======
</TABLE>
42
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Condensed Statement of Income
Year Ended June 30 1997
- --------------------------------------------------------------------------------
<S> <C>
Net Income--equity in earnings of subsidiaries $313
====
<CAPTION>
Condensed Statement of Cash Flows
Year Ended June 30 1997
- --------------------------------------------------------------------------------
<S> <C>
Operating Activities
Net income $ 313
Adjustments to reconcile net income to net cash
provided by operating activities (313)
-----------
Net cash provided by operating activities 0
-----------
Financing Activities
Proceeds from sale of stock and reorganization,
net of cost 9,934
Capital contribution to Association (5,678)
-----------
Net cash provided by financing activities 4,256
-----------
Net Change in Cash 4,256
Cash at Beginning of Year
-----------
Cash at End of Year $ 4,256
===========
Additional Cash Flow and Supplementary Information
Common stock issued to ESOP leveraged with an
employer loan 1,322,500
</TABLE>
43
<PAGE>
MONTGOMERY FINANCIAL CORPORATION
and
Montgomery Savings, A Federal Association
Directors and Executive Officers
Directors
Earl F. Elliott Mark E. Foster
Director, Chief Executive Officer Director of the Company and
and President of the Company and and the Association
Chairman of the Board and Chief
Executive Officer of the Association
Robert C. Wright Joseph M. Malott
Director of the Company and the Director of the Company and
Association the Association
J. Lee Walden John E. Woodward
Director, Chief Operating Officer and Director of the Company and the
Chief Financial Officer of the Company Association
and Director, President and Chief
Financial Officer of the Association
C. Rex Henthorn
Director and Chairman of the Board
of the Company and Director
of the Association
Executive Officers
Earl F. Elliott J. Lee Walden
Director, Chief Executive Officer and Director, Vice President, Chief
President of the Company and Operating and Chief Financial
Chairman of the Board and Chief Officer of the Company and
Executive Officer of the Association Director, President and Chief
Financial Officer of the
Association
Nancy L. McCormick
Secretary and Treasurer of the Company and
Senior Vice President and Secretary
of the Association
44
<PAGE>
STOCKHOLDER INFORMATION
Corporate Profile
Montgomery Financial Corporation is an Indiana corporation which was
organized in 1997 by the Association for the purpose of holding all of the
capital stock of the Association and in order to facilitate the Conversion and
Reorganization. The Association was organized in 1888 and converted to a federal
savings and loan charter in 1985. In August 1995, the Association converted to
the stock form of organization and concurrently formed Montgomery Mutual Holding
Company, owner of 70.59 percent of the shares of the Association's Common Stock.
In June 1997, the Association became the wholly owned subsidiary of Montgomery
Financial Corporation through the sale and issuance of common stock. The
principal asset of Montgomery Financial Corporation is the outstanding stock of
the Association, its wholly owned subsidiary. Montgomery Financial Corporation
presently has no separate operations and its business consists only of the
business of the Association. The Association's primary business consists of
attracting deposits from the general public and using these deposits to provide
financing of residential and, to a lesser extent, other properties.
Main Office Mill Street Office
119 East Main Street 816 South Mill Street
Crawfordsville, Indiana 47933 Crawfordsville, Indiana 47933
Williamsport Office Covington Office
120 North Monroe Street 417 East Liberty Street
Williamsport, Indiana 47993 Covington, Indiana 47932
Independent Auditors Local Counsel
Geo. S. Olive & Co. LLC. Henthorn, Harris, Taylor & Weliever PC
201 North Illinois Street 122 East Main Street
Indianapolis, Indiana 46204 Crawfordsville, Indiana 47933
Transfer Agent Special Counsel
Registrar & Transfer Co. Silver, Freedman & Taff, L.L.P.
10 Commerce Drive 1100 New York Avenue, N.W.
Cranford, New Jersey 07016 Washington, D.C. 20005
Form 10-KSB Report
A copy of Montgomery Financial's Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1997 including financial statements, as filed with
the SEC, will be furnished without charge to stockholders of Montgomery
Financial upon written request to the Secretary, Montgomery Financial
Corporation, 119 East Main Street, Crawfordsville, Indiana 47933.
45
<PAGE>
Stock Listing
Montgomery Financial's common stock is reported on the Nasdaq SmallCap
Market under the symbol "MONT". As of June 30, 1997, Montgomery Financial had
369 stockholders of record and ^ 1,653,032 outstanding shares of common stock.
Price Range of Common Stock
The table below shows the range of high and low bid prices. These
prices do not represent actual transactions and do not include retail markups,
markdowns or commissions.
<TABLE>
<CAPTION>
1997
------------------------------
High Low
------- ------
<S> <C> <C>
Fourth quarter(1)...................... $10.00 $10.00
</TABLE>
- ----------
(1) The IPO closed on June 30, 1997, and the common stock began trading July
1, 1997, therefore the common stock of Montgomery did not trade in fiscal
1997 and the price listed above reflects the IPO price.
The Company has paid no dividend to date.
46
Exhibit 21
<TABLE>
<CAPTION>
SUBSIDIARIES OF THE REGISTRANT
Parent Subsidiary Ownership Organization
- ------------------------------------- ------------------------------------ --------------- ----------------
<S> <C> <C> <C>
Montgomery Financial Corporation Montgomery Savings, A Federal 100% Federal
Association
Montgomery Savings MSA Service Corp. 100% Indiana
</TABLE>
The financial statements of the Registrant are consolidated with those of
its subsidiaries.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-KSB FOR THE YEAR ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 221
<INT-BEARING-DEPOSITS> 11,473
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 42
<INVESTMENTS-CARRYING> 42
<INVESTMENTS-MARKET> 42
<LOANS> 87,088
<ALLOWANCE> 180
<TOTAL-ASSETS> 103,399
<DEPOSITS> 71,265
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,339
<LONG-TERM> 11,428
0
0
<COMMON> 17
<OTHER-SE> 19,350
<TOTAL-LIABILITIES-AND-EQUITY> 103,399
<INTEREST-LOAN> 6,880
<INTEREST-INVEST> 11
<INTEREST-OTHER> 329
<INTEREST-TOTAL> 7,220
<INTEREST-DEPOSIT> 3,813
<INTEREST-EXPENSE> 4,459
<INTEREST-INCOME-NET> 2,764
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<EPS-PRIMARY> 0.67
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<YIELD-ACTUAL> 3.09
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<ALLOWANCE-DOMESTIC> 180
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 109
</TABLE>
