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
For the Fiscal Year Ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
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]
<PAGE>
The Issuer had $8,382,075 in revenues for the fiscal year ended June
30, 1998.
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, 1998, was $14.6 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, 1998. Part III of Form 10-KSB - Portions of the Proxy
Statement for the 1998 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
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.
<PAGE>
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 the business of the Association. All
references to the Company, unless otherwise indicated, at or before June 30,
1997 refer to the Association.
The Association 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, 1998, the Company and its
subsidiaries (on a consolidated basis) had total assets of $117.2 million, total
liabilities of $97.1 million, including $84.0 million of deposits, $11.3 million
of Federal Home Loan Bank advances, and total stockholders' equity of $20.1
million. The deposits of the Association are insured by the Federal Deposit
Insurance Corporation ("FDIC") under the Savings Association Insurance Fund
("SAIF"). The Association is subject to regulation and examination by the Office
of Thrift Supervision (the "OTS").
The Company's principal executive offices are located at 119 East Main
Street, Crawfordsville, Indiana 47933, and its telephone number is (765)
362-4710.
The Association 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 the Association's depositors reside in the State of
Indiana. One- to four-family residential loans amounted to $81.4 million, or
80.7%, of the Association's total loan portfolio at June 30, 1998. To a lesser
extent, the Association originates loans secured by existing multi-family
residential and nonresidential real estate, which amounted to $10.0 million, or
9.9%, of the total loan portfolio at June 30, 1998, as well as construction
loans and consumer loans, which amounted to $4.0 million, or 4.0%, of the total
loan portfolio and $5.5 million, or 5.4%, of the total loan portfolio at such
date, respectively. The Association also invests in U.S. Government and federal
agency obligations and mortgage-backed securities which are insured by federal
agencies. The Association has one wholly owned subsidiary corporation, MSA
Service Corporation ("MSA"). MSA engages in real estate management.
At June 30, 1998, the Association 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. The Association'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 the Association'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 the Association. The Association does not make
loans insured by the Federal Housing Authority ("FHA loans") or loans guaranteed
by the Veterans Administration ("VA loans").
<PAGE>
At June 30, 1998, the Association's net loan portfolio totalled $100.2
million. Loans secured by first mortgages on one- to four-family residences
totalled $82.7 million, or 82.5% of the Association's loan portfolio at June 30,
1998, before net items. The Association originates and retains its mortgage loan
portfolio, and currently does not originate mortgage loans for sale to the
secondary market.
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. The Association's maximum
loan-to-one borrower limit was approximately $2.4 million as of June 30, 1998.
The Association's largest amount outstanding to one borrower or group of related
borrowers was a group of loans secured by residential real estate in the
aggregate amount of $2.2 million. All of the loans to this borrower have
performed in accordance with their terms since their origination.
<PAGE>
Loan Portfolio Composition. The following table presents certain
information about the composition of the Association's loan portfolio at the
dates indicated:
<TABLE>
<CAPTION>
June 30
-----------------------------------------------------------------------------------------------
1998 1997 1996 1995
------------------- ------------------- ------------------- --------------------
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 ................. $ 82,546 82.37% $ 74,270 85.45% $ 68,961 86.12% $ 65,890 84.55%
Land ........................ 1,316 1.32 1,658 1.91 1,656 2.07 1,866 2.39
Nonresidential .............. 7,549 7.53 5,793 6.67 5,866 7.33 6,076 7.80
Construction:
Residential ............. 1,331 1.33 1,892 2.18 1,261 1.57 1,345 1.73
Nonresidential .......... 2,667 2.66 -- -- -- -- -- --
--------- ------ -------- ------ -------- ------ -------- ------
Total mortgage loans .. 95,409 95.21 83,613 96.21 77,744 97.09 75,177 96.47
--------- ------ -------- ------ -------- ------ -------- ------
Other loans:
Home equity ................. 4,091 4.08 2,727 3.14 2,444 3.05 2,653 3.40
Savings account and unsecured
consumer loans ............. 1,383 1.38 1,252 1.44 574 0.72 576 0.74
--------- ------ -------- ------ -------- ------ -------- ------
Total other loans ..... 5,474 5.46 3,979 4.58 3,018 3.77 3,229 4.14
--------- ------ -------- ------ -------- ------ -------- ------
Less:
Loans in process ............ 707 0.70 668 0.77 683 0.85 455 .58
Deferred loan fees (cost) ... (220) (0.22) (164) (0.19) (153) (0.19) (118) (0.15)
Loan loss reserves .......... 186 0.19 180 0.21 158 0.20 138 0.18
--------- ------ -------- ------ -------- ------ -------- ------
Total adjustments ..... 673 0.67 684 0.79 688 0.86 476 0.61
--------- ------ -------- ------ -------- ------ -------- ------
Total loans, net .............. $ 100,210 100.00% $ 86,908 100.00% $ 80,074 100.00% $ 77,929 100.00%
========= ====== ======== ====== ======== ====== ======== ======
Type of Security:
Residential:
1-4 family .................. $ 82,714 82.54% $ 75,498 86.87% $ 69,353 86.61% $ 66,048 84.76%
5 or more units ............. 1,163 1.16 664 0.76 869 1.08 1,187 1.52
Nonresidential ................ 10,216 10.19 5,793 6.67 5,866 7.33 6,076 7.80
Land .......................... 1,316 1.32 1,658 1.91 1,656 2.07 1,866 2.39
Residential--second mortgage .. 4,091 4.08 2,727 3.14 2,444 3.05 2,653 3.40
Savings accounts and unsecured
consumer loans ................ 1,383 1.38 1,252 1.44 574 0.72 576 0.74
--------- ------ -------- ------ -------- ------ -------- ------
Total loans ........... 100,883 100.67 87,592 100.79 80,762 100.86 78,406 100.61
--------- ------ -------- ------ -------- ------ -------- ------
Less:
Loans in process ............ 707 0.70 668 0.77 683 0.85 455 .58
Deferred loan fees (cost) ... (220) (0.22) (164) (0.19) (153) (0.19) (118) (0.15)
Loan loss reserves .......... 186 0.19 180 0.21 158 0.20 138 0.18
--------- ------ -------- ------ -------- ------ -------- ------
Total loans, net .............. $ 100,210 100.00% $ 86,908 100.00% $ 80,074 100.00% $ 77,929 100.00%
========= ====== ======== ====== ======== ====== ======== ======
</TABLE>
<PAGE>
Loan Maturity Schedule. The following table illustrates the maturities
of the Association's loan portfolio at June 30, 1998. 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,
------------------------------------------------------------------------------------------------
2002 2004 2009 2014 Balance
And Through Through And June 30,
1999 2000 2001 2003 2008 2013 Following 1998
---- ---- ---- ---- ---- ---- --------- ----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential mortgage......... $16,878 $ 782 $4,785 $ 9,402 $5,840 $23,093 $21,766 $ 82,546
Nonresidential mortgage...... 1,394 --- 502 1,099 541 3,534 479 7,549
Residential construction..... 200 600 --- 278 --- 26 227 1,331
Nonresidential construction.. --- --- --- --- --- --- 2,667 2,667
Land loans................... 769 296 29 109 --- 113 --- 1,316
Home equity loans............ 792 101 159 912 1,868 213 46 4,091
Savings account and
unsecured consumer loans.... 1,040 53 93 131 17 45 4 1,383
-------- --------- -------- --------- -------- ---------- ------------ -----------
Total............... $21,073 $1,832 $5,568 $11,931 $8,266 $27,024 $25,189 $100,883
======= ====== ====== ======= ====== ======= ======= ========
</TABLE>
The following table sets forth as of June 30, 1998 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............................ $52,280 $13,388 $65,668
Nonresidential mortgage ........................ 4,640 1,515 6,155
Residential construction........................ 453 678 1,131
Nonresidential construction..................... 2,667 --- 2,667
Land loans ..................................... 450 97 547
Home equity loans............................... 3,299 --- 3,299
Savings account and unsecured consumer loans.... 343 --- 343
---------- ------------ ----------
Total.................................... $64,132 $15,678 $79,810
======= ======= =======
</TABLE>
Residential Loans. The primary lending activity of the Association has
been the origination of conventional loans for the acquisition or construction
of single-family residences. The Association 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.
<PAGE>
OTS regulations limit the amount which the Association 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, the Association
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"). The Association
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 the Association's Community Reinvestment Program for
first-time buyers with low to moderate incomes.
Adjustable-rate mortgage loans ("ARMs") are offered by the Association
for terms of normally 15 to 20 years, although Montgomery will offer such loans
up to terms of 25 years. The interest rate 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 the Association are tied to
changes in the monthly average yield of U.S. Treasury securities adjusted to a
constant maturity of one year.
The Association 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 the Association's interest rate spread
because such loans do not reprice as quickly as the Association'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 the Association during the
year ended June 30, 1998, 23% were ARMs and 77% were fixed-rate loans.
The Association's one- to four-family residential loan portfolio,
including residential construction loans, totalled approximately $82.7 million
at June 30, 1998, and represented 70.6% of total assets and 82.0% of total
outstanding loans. Adjustable-rate one- to four-family residential loans
comprised 29.2% and fixed rate loans totalled 52.8% of the Association's total
loans at June 30, 1998.
Construction Loans. The Association offers residential construction
loans to owner-occupants and occasionally to builders. At June 30, 1998, the
Association had $1.3 million in outstanding residential construction loans. At
June 30, 1998, the Association also had $2.7 million in non-residential
construction loans, secured by land and buildings under construction.
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, the Association would have to
take control of the project and attempt either to arrange for completion of
construction or dispose of the unfinished project.
<PAGE>
Nonresidential Real Estate Loans. The Association makes loans secured
by raw land and nonresidential real estate consisting of farms and various
retail and other income-producing properties. At June 30, 1998, these loans
totalled $8.9 million or approximately 8.9% of the Association'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. The Association 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.
Consumer Loans. The Association 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 the Association to loan up to 100% of the
value of savings deposits pledged as collateral for loans, the Association'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, 1998, consumer loans totalled $5.5 million or 5.4% of the
Association's total loans.
Loan Originations, Solicitation, and Processing. Loan originations are
developed from a number of sources, including solicitations by the Association'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 the Association's loan
officers. The Association 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 the
Association as an insured mortgagee.
<PAGE>
The procedure for approval of construction/permanent loans is the same
as for residential mortgage loans, except that for construction/permanent loans
the Association evaluates the building plans, construction specifications and
estimates of construction costs. The Association 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.
The following table shows total loans originated and repaid during the
periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------
1998 1997 1996
--------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Total gross loans at beginning
of period .......................... $ 87,592 $ 80,762 $ 78,406
Loans originated:
Residential mortgage .............. 32,628 22,269 23,285
Nonresidential mortgage ........... 5,241 2,299 1,270
Residential construction .......... 2,534 3,500 1,764
Nonresidential construction ....... 2,667
Land loans ........................ 269 743 618
Other loans ....................... 2,761 1,372 523
--------- -------- --------
Total loans originated ........ 46,100 30,183 27,460
Participation loans purchased:
Nonresidential mortgage ........... -- -- --
Participation loans sold:
Nonresidential mortgage ........... -- -- --
Loan principal payments ............. (15,268) (11,185) (12,668)
Other changes, net(1) ............... (17,541) (12,168) (12,436)
--------- -------- --------
Total gross loans at end of
period ............................. $ 100,883 $ 87,592 $ 80,762
--------- ======== ========
</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. The Association 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.
<PAGE>
Delinquent Loans and Classified Assets. The Association attempts to
minimize loan delinquencies through careful underwriting procedures. When
mortgage loans become delinquent, the Association 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 the Association
will contact the borrower to request payment. The Association generally will
initiate foreclosure 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 the Association 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,
---------------------------------
1998 1997 1996
----- ------ ------
(In Thousands)
Loans delinquent for:
<S> <C> <C> <C>
30 to 59 days ...................... $1,242 $1,013 $ 988
60 to 89 days ...................... 647 640 542
90 or more days .................... 724 502 661
------ ------ ------
Total delinquent loans ......... $2,613 $2,155 $2,191
------ ====== ======
Ratio of total delinquent loans
to total loans ...................... 2.59% 2.46% 2.73%
</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.
<PAGE>
The following table sets forth information with respect to the
Association's non-performing assets at the dates indicated:
<TABLE>
<CAPTION>
June 30,
------------------------
1998 1997 1996
---- ---- ----
(Dollars In Thousands)
<S> <C> <C> <C>
Nonaccrual loans:
Residential mortgage loans ......................... $635 $255 $614
Nonresidential mortgage loans ...................... 17 18 19
Consumer loans ..................................... -- -- --
---- ---- ----
Total nonaccrual loans ........................... 652 273 633
Accruing loans contractually past due 90 days or more:
Residential mortgage ............................... 36 229 --
Nonresidential mortgage ............................ -- -- --
Consumer loans ..................................... 36 -- 28
---- ---- ----
Total accruing loans contractually past
due 90 days or more ............................... 72 229 28
---- ---- ----
Total non-performing loans ........................... 724 502 661
Real estate acquired in
settlement of loans (net) ........................... 189 109 148
---- ---- ----
Total non-performing
assets ......................................... $913 $611 $809
---- ==== ====
</TABLE>
During the periods shown, the Association had no restructured loans
within the meaning of SFAS No. 15. At June 30, 1998, 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, the Association 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, 1998 and
during the year ended June 30, 1998, the Association had no impaired loans.
For the years ended June 30, 1998, 1997 and 1996, the income that would
have been recorded had the non-accrual loans not been in a non-performing status
totalled $72,000, $50,000, and $36,000, respectively, compared to actual income
recorded of $26,000, $25,000, and $18,000, 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
<PAGE>
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 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, 1998, 1997 and 1996, the aggregate amounts of the
Association's classified assets were as follows:
<TABLE>
<CAPTION>
June 30,
----------------------------------
1998 1997 1996
----------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Classified assets:
Special mention ................... $ 755 $-- $ 671
Substandard ....................... 913 611 809
Doubtful .......................... -- -- --
Loss .............................. -- -- --
------ ---- ------
Total classified assets ....... $1,668 $611 $1,480
====== ==== ======
General loans loss allowance ........ $ 186 $180 $ 158
====== ==== ======
</TABLE>
The Association 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, the Association 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, the
Association had no disagreement with the Office of Thrift Supervision as to
asset classifications.
<PAGE>
The following tables set forth an analysis of the Association's
allowances for loan losses for the periods indicated:
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------
1998 1997 1996
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance of allowance at beginning of period ...... $ 180 $ 158 $ 138
Add: Recoveries on loans previously charged off .. -- -- --
Less: Charge-offs--residential real estate loans . -- -- --
------- -------
Net charge-offs .................................. -- -- --
------- ------- -------
Provision for losses on loans .................... 6 22 20
------- ------- -------
Balance of allowance at end of period ............ $ 186 $ 180 $ 158
======= ======= =======
Net charge-offs to total average loans outstanding
for period ...................................... -- -- --
Allowance at end of period to net loans receivable
at end of period ................................ 0.19% 0.21% 0.20%
Non-performing assets to total assets ............ 0.78 0.59 0.92
Non-performing loans to total loans .............. 0.72 0.58 0.83
Allowance to non-performing loans ................ 25.69 35.86 23.90
<CAPTION>
1998 1997 1996
------------------------- ------------------------ ------------------------
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 .................. $ 76 81.82% $ 45 84.79% $ 37 85.39%
Commercial real estate
and land .................... 3 8.79 3 8.51 -- 9.31
Construction loans ........... -- 3.96 -- 2.16 -- 1.56
Home equity and consumer loans 43 5.43 23 4.54 17 3.74
Unallocated .................. 64 -- 109 -- 104 --
---- ------ ---- ------ ---- ------
Total .................... $186 100.00% $180 100.00% $158 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
<PAGE>
Investment Activities
OTS regulations require that the Association 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 Indianapolis,
bankers' acceptances, and federal funds. The Association 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. The Association 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.
The following tables set forth information regarding the Association's
investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- --------------------- ----------------------
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 $ 215 100.00% $ 100 100.00% $ 100 100.00%
====== ====== ====== ====== ======= ======
Investment securities:
Federal agencies .............. $ -- 0.00% $ -- 0.00% $ 250 23.54%
Municipals .................... 22 1.78 42 4.36 62 5.84
Marketable equity securities ... 290 23.50 -- -- -- --
------ ------ ------ ------ ------ ------
Total investment securities 312 25.28 42 4.36 312 29.38
FHLB stock ...................... 922 74.72 922 95.64 750 70.62
------ ------ ------ ------ ------ ------
Total investment securities
and FHLB stock ........... $1,234 100.00% $ 964 100.00% $1,062 100.00%
====== ------ ====== ====== ====== ======
</TABLE>
The composition and maturities of the available for sale securities
portfolio at June 30, 1998, excluding marketable equity securities FHLB of
Indianapolis stock, are indicated in the following table.
<TABLE>
<CAPTION>
June 30, 1998
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........................ $ 22 $--- $--- $--- $ 22 $ 22
===== ==== ==== ==== ===== =====
Weighted average yield.............. 7.00% 0% 0% 0% 7.00%
===== ==== ==== ==== =====
</TABLE>
<PAGE>
Deposits and Borrowings
General. Deposits have traditionally been the primary source of the
Association's funds for use in lending and other investment activities. In
addition to deposits, the Association 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 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 the
Association'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 the Association's chief executive
officer, subject to review by the Board of Directors, based on the Association's
liquidity requirements, growth goals and interest rates paid by competitors. The
Association does not presently use brokers to attract deposits.
The Association's deposits as of June 30, 1998 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 1998 Deposits
---- -------- -------- ------ ---- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
3.00% NOW accounts N/A $ 3,762 4.48%
4.36 Regular savings N/A 7,967 9.49
3.80 Money market demand accounts N/A 5,804 6.91
--- Demand accounts N/A 1,865 2.22
------- ------
19,398 23.10
------- ------
5.81 18 IRA fixed rate and term 500 2,228 2.65
5.51 30 IRA fixed rate and term 500 100 0.12
4.14 3 Fixed rate and term N/A 25 0.03
5.15 6 Fixed rate and term N/A 3,981 4.74
5.58 12 Fixed rate and term N/A 11,064 13.17
5.57 18 Fixed rate and term N/A 6,162 7.34
5.95 24 Fixed rate and term N/A 6,517 7.76
5.96 30 Fixed rate and term N/A 6,325 7.53
6.03 36 Fixed rate and term N/A 2,836 3.38
6.24 48 Fixed rate and term N/A 2,523 3.00
6.19 60 Fixed rate and term N/A 9,227 10.99
6.25 3 Fixed rate and term N/A 359 0.43
5.69 Various Public funds N/A 13,237 15.76
------- -------
64,584 76.90
------- -------
$83,982 100.00%
======= =======
</TABLE>
<PAGE>
The following table presents the certificates of deposit issued by
Montgomery, classified by rates at the dates indicated:
<TABLE>
<CAPTION>
June 30,
-----------------------------------------
1998 1997 1996
------- -------- -------
(In Thousands)
<S> <C> <C> <C>
4.00% and below ............. $ -- $ -- $ 136
4.01 to 6.00% ............... 45,810 31,664 31,059
6.01 to 8.00% ............... 18,766 23,341 23,323
8.01 to 10.00% .............. 8 8 17
------- ------- -------
$64,584 $55,013 $54,535
======= ======= =======
</TABLE>
The following table presents the amount and maturities of the
certificates of deposit at June 30, 1998:
<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)
Certificate maturities
at June 30, 1998:
<S> <C> <C> <C> <C> <C> <C> <C>
4.01 to 6.00%............ $33,690 $ 8,593 $1,321 $1,219 $ 987 $45,810 70.93%
6.01 to 8.00%............ 9,280 6,762 1,739 247 738 18,766 29.06
8.01 to 10.00%........... 8 --- --- --- --- 8 0.01
------- ------- ------ ------ ------ ------- -------
$42,978 $15,355 $3,060 $1,466 $1,725 $64,584 100.00%
======= ======= ====== ====== ====== ======= ======
</TABLE>
<PAGE>
The following table presents the amount of the Association's
certificates of deposit of $100,000 or more by the time remaining until maturity
as of June 30, 1998 (dollars in thousands):
Three months or less $ 6,983
Four through six months 2,685
Seven through twelve months 10,288
Over twelve months 3,629
--------
TOTAL $ 23,585
========
The following table presents the change in dollar amount of deposit
accounts by savings type for years ended June 30, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- --------------------------------- ---------------------------------
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 ...... $ 1,865 2.22% $ 700 $ 1,165 1.63% $ 552 $ 613 0.88% $ 130
NOW accounts ......... 3,762 4.48 222 3,540 4.97 962 2,578 3.70 569
Regular savings ...... 7,967 9.49 3,562 4,405 6.18 (543) 4,948 7.10 (87)
Money market demand
accounts ............ 5,804 6.91 (1,338) 7,142 10.02 107 7,035 10.09 (252)
Certificate of deposit 64,584 76.90 9,571 55,013 77.20 478 54,535 78.23 1,063
------- ------ -------- ------- ------ ------- ------- ------ -------
Total ........... $83,982 100.00% $ 12,717 $71,265 100.00% $ 1,556 $69,709 100.00% $ 1,423
======= ====== ======== ======= ====== ======= ======= ====== =======
</TABLE>
<PAGE>
The following table sets forth the savings activities of the
Association for the periods indicated:
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------
1998 1997 1996
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance, beginning of period................ $71,265 $69,709 $68,286
------- ------- -------
Net (decrease) increase before
interest credited.......................... 8,738 (2,238) (2,429)
Interest credited........................... 3,979 3,794 3,852
------- --------- --------
Net increase in deposits................ 12,717 1,556 1,423
------ --------- --------
Balance, end of period...................... $83,982 $71,265 $69,709
======= ======= =======
</TABLE>
Deposit flows historically have been related to general economic
conditions. To resist these historical trends, the Association, 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 the Association 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, the Association at times has
become increasingly subject to short-term fluctuations in deposit flows as
customers have become more interest-rate conscious. The ability of the
Association to attract and maintain savings deposits and the Association's cost
of funds have been, and will continue to be, significantly affected by money
market conditions. The Association 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, the
Association 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,
1998, the Association was in compliance with the QTL Test.
<PAGE>
The following table sets forth the maximum amount of the Association's
FHLB advances during the years ended June 30, 1998, 1997and 1996 along with the
balance of FHLB advances outstanding at the end of each such period:
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum balance outstanding
at any month end ................. $11,261 $12,000 $10,500
Period end balance ................ 11,261 11,428 8,000
Weighted average interest rate
of FHLB advances at period
end .............................. 5.88% 5.98% 5.76%
</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 (2,000 employees),
Raybesto Products (802 employees), Hi-Tek Lithonia Light (575 employees), NUCOR
Steel (480 employees), H-C Industries (425 employees), ATAPCO (Crawfordsville)
(332 employees), Mid- States (283 employees), Heritage Products (265 employees)
and Pace Dairy Foods (300 employees).
The Association 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, the Association competes with other savings institutions,
commercial banks, consumer finance companies, credit unions, leasing companies
and other lenders. The Association 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, 1998, 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 $775.3 million in deposits in those 36 banking offices. The
Association held approximately 9.2% of those deposits. Similar information is
not readily available for loans.
<PAGE>
The number and size of financial institutions competing with the
Association may increase as a result of changes in federal statutes and
regulations. Such increased competition may have an adverse effect upon the
Association.
MSA SERVICE CORP
MSA, a real estate management company, is wholly owned by the
Association. 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, 1998, MSA had total assets of $506,000, liabilities of
$92,000, and net worth of $414,000. MSA had net income (loss) of $(8,000) and
$25,000 for the years ended June 30, 1998 and 1997, respectively.
<PAGE>
REGULATION
General
The Association 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, the Association is subject to
broad federal regulation and oversight extending to all its operations. The
Association 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 the
Association, 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. The Association 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 the Association are insured by the FDIC. As a
result, the FDIC has certain regulatory and examination authority over the
Association.
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, the Association 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 the Association was as of
March 2, 1998. 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, 1998, was $31,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Association 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. The Association is in compliance with the noted
restrictions.
<PAGE>
The Association'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, 1998, the Association's lending
limit under this restriction was $2.4 million. The Association 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
The Association 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.
<PAGE>
Legislation to recapitalize the SAIF was enacted in September 1996. The
legislation provided 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 provided 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, the Association'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 the Association. 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 the Association, 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 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, 1998, the Association did not have any intangible
assets.
<PAGE>
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. MSA Service Corp is an excludable subsidiary.
At June 30, 1998, the Association had tangible capital of $15.6
million, or 13.4% of total assets, which is approximately $13.9 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, 1998, the
Association had no intangibles which were subject to these tests.
At June 30, 1998, the Association had core capital equal to $15.6
million, or 13.4% of adjusted total assets, which is $12.1 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, 1998, the Association
had $186,000 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, 1998, the
Association 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 such ratio by an insurer approved by the Federal National
Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation
("FHLMC").
<PAGE>
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, 1998, the Association had total risk-based capital of $14.6
million (including $15.6 million in core capital plus $186,000 in qualifying
supplementary capital, less $1.2 million in real estate held for investment) and
risk-weighted assets of $69.7 million; or total capital of 20.9% of
risk-weighted assets. This amount was $9.0 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.
<PAGE>
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 the Association, 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. The
Association 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.
<PAGE>
Liquidity
All savings associations, including the Association, 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 4%.
Penalties may be imposed upon associations for violations of either liquid asset
ratio. At June 30, 1998, the Association was in compliance with this
requirement, with liquid asset ratio of 11.56%.
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 the Association, 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, 1998, 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 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
<PAGE>
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 the
Association, 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 Association was examined for CRA compliance in 1997 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 the Association 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. The Association'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.
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.
<PAGE>
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 the Association 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 the Association 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, 1998, the Association was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the 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.
<PAGE>
Federal Home Loan Bank System
The Association 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, the Association is required to purchase and maintain stock
in the FHLB of Indianapolis. At June 30, 1998, the Association had $921,500 in
FHLB stock, which was in compliance with this requirement. In past years, the
Association has received substantial dividends on its FHLB stock. Over the past
five fiscal years such dividends have averaged 7.37% and were 8.03% for fiscal
year 1998.
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 the Association's FHLB stock may result in a corresponding
reduction in the Association's capital.
For the year ended June 30, 1998, dividends paid by the FHLB of
Indianapolis to the Association totalled $74,000, which constituted a $14,000
increase over the amount of dividends received in fiscal year 1997. The $74,000
dividend for the twelve months ended June 30, 1998 reflected an annualized rate
of 8.03%, or 0.19% above the rate for fiscal 1997.
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 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.
<PAGE>
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, 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.
<PAGE>
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, 1998, the Association's Excess for tax purposes totalled
approximately $232,000.
The Company 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. The Company 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, 1998.
Name Age Offices Held
---- --- ------------
Earl F. Elliott 64 President, Chief Executive Officer
J. Lee Walden 50 Vice President and Chief Financial Officer
Nancy L. McCormick 42 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 respective prior salary
<PAGE>
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, 1998 under
circumstances entitling them to severance pay as described above, they would
have been entitled to receive a lump sum cash payment of approximately $268,000
and $187,000, 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, 1998, Montgomery had 32 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.
<PAGE>
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 equipment was $2.0 million at June
30, 1998. 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, 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Page 47 of the attached 1998 Annual Report to Stockholder is herein
incorporated by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Pages 7 to 21 of the attached 1998 Annual Report to Stockholders are
herein incorporated by reference.
ITEM 7. FINANCIAL STATEMENTS
Pages 22 to 44 of the Company's 1998 Annual Report to Stockholders are
herein incorporated by reference.
<PAGE>
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.
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, 1998, 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.
<PAGE>
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.
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Reference to
Prior Filing or
Regulation S-B Exhibit Number
Exhibit Number Document Attached Hereto
-------------- -------- ---------------
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
- ---------------------
* 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, 1998.
<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 28, 1998 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 28, 1998 /s/ Earl F. Elliott
--------------------
Earl F. Elliott, President and Director
(Principal Executive Officer)
Date: September 28, 1998 /s/ J. Lee Walden
-----------------
J. Lee Walden, Chief Financial
Officer and Director
(Principal Financial and Accounting
Officer)
Date:
------------------
Mark E. Foster, Director
Date: September 28, 1998 /s/ C. Rex Henthorn
-------------------
C. Rex Henthorn, Director
Date: September 28, 1998 /s/ Joseph M. Malott
--------------------
Joseph M. Malott, Director
Date: September 28, 1998 /s/ John E. Woodward
--------------------
John E. Woodward, Director
Date: September 28, 1998 /s/ Robert C. Wright
--------------------
Robert C. Wright, Director
MONTGOMERY FINANCIAL CORPORATION
1998 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 Auditor......................22
Consolidated Financial Statements..................23
Directors and Executive Officers...................45
Stockholder Information............................46
CONSOLIDATED FINANCIAL HIGHLIGHTS
June 30, 1998
(Dollars in Thousands)
Total assets.................................$117,163
Total loans, net..............................100,210
Investment securities and other
earning assets................................11,097
Deposits.......................................83,982
Borrowings ..................................11,261
Net income........................................981
Stockholders' equity...........................20,065
Stockholders' equity as a percent of
assets.........................................17.1%
------------------------
ANNUAL MEETING
The Annual Meeting of Stockholders of
Montgomery Financial Corporation will be held
on October 20, 1998 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 11, 1998
Dear Fellow Stockholders:
It is with pleasure that the board of directors, officers, and staff
of Montgomery Financial Corporation and our wholly owned subsidiary, Montgomery
Savings, A Federal Association, provide you with our annual report.
Net earnings for the year ending June 30, 1998 were $981,000. This
represented an increase of 213.4 percent over last year. Capital levels grew to
$20.1 million compared to $19.4 million at June 30, 1997. This results in a
capital ratio in excess of 17.1 percent and growth in capital over the same
period of 3.6 percent. Total assets grew from $103.4 million to $117.2 million,
an increase of $13.8 million or 13.3 percent when compared to June 30, 1997.
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,
Earl F. Elliott
President and Chief Executive Officer
3
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following consolidated financial data as of and for the periods
ended June 30, 1998, 1997, 1996, 1995 and 1994 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,
----------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- ------- ------- -------
(in Thousands)
Summary of Financial Condition:
<S> <C> <C> <C> <C> <C>
Total assets......................................... $117,163 $103,399 $88,211 $87,324 $79,633
Interest-bearing deposits in other financial institutions 10,785 11,473 3,607 3,871 1,735
Investment securities available for sale(1).......... 312 42 312 803 1,781
Loans receivable, net................................ 100,210 86,908 80,074 77,929 72,215
Deposits............................................. 83,982 71,265 69,709 68,286 62,346
Borrowings........................................... 11,261 11,428 8,000 10,868 10,338
Stockholders' equity................................. 20,065 19,367 9,127 6,678 6,290
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------
1998 1997 1996 1995 1994
------ ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Summary of Operating Results:
Interest income(2)..................... $8,335 $7,220 $6,777 $6,178 $5,594
Interest expense....................... 4,570 4,456 4,434 3,907 3,107
------ ------- ------- ------- -------
Net interest income............... 3,765 2,764 2,343 2,271 2,487
Provision (adjustment) for losses on loans 6 22 20 (15) 25
-------- --------- --------- -------- --------
Net interest income after provision
for losses on loans.............. 3,759 2,742 2,323 2,286 2,462
Other income........................... 47 30 23 79 147
Other expenses:
Salaries and employee benefits....... 1,200 934 879 902 833
Other................................ 970 1,284 871 847 823
------- ------ -------- -------- --------
Total non-interest expense......... 2,170 2,218 1,750 1,749 1,656
------ ------ ------- ------- --------
Income before income tax and cumulative
effect of change in accounting method. 1,636 554 596 616 953
Income tax expense..................... 655 241 165 231 349
------ ------- ------- -------- --------
Net income....................... $ 981 $ 313 $ 431 $ 385 $ 604
====== ====== ====== ======= =======
Net income per share(3)................ --- --- ---
Basic............................ $ 0.64 $ 0.67 -- -- --
Diluted.......................... 0.64 0.67 -- -- --
Net income per share without the special
SAIF assessment(3):
Basic............................ 0.64 1.23 -- -- --
Diluted.......................... 0.64 1.23 -- -- --
Dividends declared per share(4)........ 0.22 0.21 $ 0.30 --- ---
Dividend pay out ratio(5).............. 34.38% 31.34% --- --- ---
Performance Ratios:
Return on average assets(6)............ 0.92 0.32 0.49% 0.46% 0.79%
Return on average equity(7)............ 4.97 3.39 4.89 5.78 9.90
Average equity to average assets....... 18.60 9.88 9.99 7.91 7.96
Equity to assets at end of period...... 17.13 18.73 10.35 7.65 7.90
Interest rate spread(8)................ 2.70 2.64 2.27 2.54 3.19
Net interest margin(9)................. 3.70 3.09 2.77 2.82 3.41
Average interest-earning assets to average
interest-bearing liabilities.......... 122.17 108.91 109.47 105.78 104.96
Non-interest expenses to average
assets................................ 2.05 2.37 1.98 2.08 2.16
Net interest income after provision for
loan losses to non-interest expenses.. 1.73x 1.24x 1.33x 1.31x 1.49x
Asset Quality Ratios:
Non-performing assets to total assets.. 0.78 0.59 0.92 1.08 0.70
Allowance for loan losses to net loans
receivable at end of period........... 0.19 0.21 0.20 0.18 0.22
Allowance for loan losses to non-
performing loans at end of period..... 25.69 35.86 23.90 16.89 28.21
Non-performing loans to total loans.... 0.72 0.58 0.83 1.05 0.77
</TABLE>
<PAGE>
- ------------------
(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, 1998.
<TABLE>
<CAPTION>
Capital Level
OTS Requirement at June 30, 1998(1)
------------------- ---------------------------------
% of % of Amount
Assets Amount Assets Amount of Excess
------ ------ ------ ------ ---------
(Dollars in Thousands)
Capital Standard
<S> <C> <C> <C> <C> <C>
Tangible capital.................................. 1.50% $1,741 13.42% $15,579 $13,838
Core capital...................................... 3.00 3,482 13.42 15,579 12,097
Risk-based capital................................ 8.00 5,573 20.94 14,586 9,013
</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.
7
<PAGE>
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.
Forward-Looking Statements
When used in this Annual Report, the words or phrases "would be," "will
allow," "intends to," "will likely result," "are expected to," "will continue,"
"is anticipated," "estimate," "project" or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are subject to risks
and uncertainties, including but not limited to changes in economic conditions
in the Company's market area, changes in policies by regulatory agencies,
fluctuations in interest rates, demand for loans in the Company's market area
and competition, all or some of which could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected.
The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made, and
advises readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could cause affect the Company's financial performance and could cause
the Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.
8
<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,
---------------------------------------------------------------------
1998 1997
---------------------------------------------------------------------
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 ........................ $ 6,298 $ 355 5.62% $ 5,136 $ 269 5.24%
Investment securities ............................ 154 5 3.25 145 11 7.59
Loans(1) ......................................... 94,399 7,901 8.37 83,485 6,880 8.24
Stock in FHLB of Indianapolis .................... 921 74 8.03 765 60 7.84
-------- ------- ------- -------
Total interest-earning assets ...................... 101,772 8,334 8.19 89,531 7,220 8.06
Non-interest earning assets ........................ 4,283 -- 4,006 --
-------- ------- ------- -------
Total Assets ....................................... $106,055 8,334 $93,537 7,220
======== ======= ======= =======
Interest-bearing liabilities:
Savings accounts ................................. $ 5,644 $ 241 4.27 $ 5,447 188 3.45
NOW and money market accounts .................... 9,487 380 4.01 10,459 355 3.39
Certificates of deposit .......................... 59,192 3,388 5.72 55,734 3,270 5.87
-------- ------- ------- -------
Total deposits ................................... 74,323 4,009 5.39 71,640 3,813 5.32
Borrowings ....................................... 8,982 561 6.25 10,564 643 6.09
-------- ------- ------- -------
Total interest-bearing liabilities ............. 83,305 4,570 5.49 82,204 4,456 5.42
Other liabilities .................................. 3,027 -- 2,090 --
-------- ------- ------- -------
Total liabilities .................................. 86,332 4,570 84,294 4,456
Total stockholders' equity ......................... 19,723 9,243
-------- -------
Total liabilities and stockholders' equity ......... $106,055 $93,537
======== =======
Net interest-earning assets ........................ $ 18,967 $ 7,327
======== =======
Net interest income/interest rate spread ........... $ 3,764 2.70 $ 2,764 2.64
======== =======
Average interest-earning assets to average interest-
bearing liabilities ............................... 122.17% 108.91%
Net interest margin(2) ............................. 3.70 3.09
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------
1996
---------------------------------
Average Interest Average
Outstanding Earned/ Yield/
Balance Paid Cost
------- ---- ----
<S> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits ........................ $ 5,146 $ 282 5.48%
Investment securities ............................ 411 29 7.06
Loans(1) ......................................... 78,380 6,410 8.18
Stock in FHLB of Indianapolis .................... 750 56 7.47
------- -------
Total interest-earning assets ...................... 84,687 6,777 8.00
Non-interest earning assets ........................ 3,643 --
------- -------
Total Assets ....................................... $88,330 6,777
Interest-bearing liabilities:
Savings accounts ................................. $ 5,242 219 4.18
NOW and money market accounts .................... 9,314 345 3.70
Certificates of deposit .......................... 54,208 3,303 6.09
------- -------
Total deposits ................................... 68,764 3,867 5.62
Borrowings ....................................... 8,594 567 6.60
------- -------
Total interest-bearing liabilities ............. 77,358 4,434 5.73
-------
Other liabilities .................................. 2,152 --
Total liabilities .................................. 79,510 4,434
Total stockholders' equity ......................... 8,820
-------
Total liabilities and stockholders' equity ......... $88,330
=======
Net interest-earning assets ........................ $ 7,329
=======
Net interest income/interest rate spread ........... $ 2,343 2.27
=======
Average interest-earning assets to average interest-
bearing liabilities ............................... 109.47%
Net interest margin(2) ............................. 2.77
</TABLE>
(1) The average balance includes nonaccrual loans.
(2) Net interest margin is net interest income divided by average
interest-earning assets.
9
<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, 1998 1998 1997 1996
------------- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average yield on:
Loans................................................. 8.34% 8.37% 8.24% 8.18%
Investment securities................................. 2.88 3.25 7.59 7.06
Total interest-earning assets......................... 8.05 8.19 8.06 8.00
Weighted average rate on:
Deposits.............................................. 5.38 5.39 5.32 5.62
Borrowings............................................ 5.88 6.25 6.09 6.60
Total interest-bearing liabilities.................... 5.44 5.49 5.42 5.73
Interest rate spread (spread between weighted average yield on
total interest-earning assets and total interest-bearing
liabilities).......................................... 2.61 2.70 2.64 2.27
Net interest margin (net interest income as a percentage of
average interest-earnings assets)..................... N/A 3.70 3.09 2.77
</TABLE>
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.
<PAGE>
<TABLE>
<CAPTION>
Increase (Decrease) in Net Interest Income
Year Ended June 30, 1998 vs. Year ended June 30, 1997 vs.
Year Ended June 30, 1997 Year ended June 30, 1996
-------------------------------- --------------------------------
Increase (Decrease) Total Increase (Decrease) Total
Due to Increase Due to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Interest-earning deposits......... $ 63 $ 22 $ 85 $ (1) $(12) $(13)
Investment securities............. 1 (7) (6) (20) 2 (18)
Loans............................. 906 115 1,021 420 50 470
Stock in FHLB of Indianapolis..... 12 2 14 1 3 4
---- ----- ------- ----- ----- -----
Total....................... 982 132 1,114 400 43 443
--- --- ----- --- --- ---
Interest-Bearing Liabilities:
Savings accounts.................. 8 46 54 8 (39) (31)
NOW and money market accounts..... (36) 58 22 40 (30) 10
Certificates of deposit........... 199 (79) 120 91 (124) (33)
Borrowings........................ (97) 15 (82) 122 (46) 76
----- --- --------- --- ----- ----
Total....................... 74 40 114 261 (239) 22
---- ----- -------- --- ----- ----
Change in net interest income....... $908 $ 92 $1,000 $139 $282 $421
==== ==== ====== ==== ==== ====
</TABLE>
10
<PAGE>
Changes in Financial Condition
Financial Condition. Montgomery's total assets were $117.2 million at
June 30, 1998, an increase of $13.8 million, or 13.3 percent from June 30, 1997.
During fiscal 1998 interest-earning assets increased $12.9 million, or 13.0%.
Short-term interest-bearing deposits decreased $803,000, or 7.1 percent. Loans
increased $13.3 million, or 15.3 percent, which is approximately $1.3 million
above the increase budgeted for the fiscal year. This increase was the result of
Montgomery's efforts to attract new business in the local nonresidential
mortgage market and its continued commitment to residential lending. Real estate
owned and held for development increased $166,000 or 12.8 percent. Real estate
acquired in settlement of loans increased $80,000 due to a net increase of two
single family residences. All real estate acquired, in the amount of $189,000,
is currently available for sale. The appraised value of the real estate acquired
equals or exceeds the book value. Therefore, no loss is expected to be realized
upon the sale of the real estate acquired in settlement of loans. Real estate
held for investment totals $1,279,000, an increase of $86,000, or 7.2 percent
compared to June 30, 1997. Included in real estate owned is an eight-unit
apartment complex and a single family residence with a current book value of
approximately $496,000. Subsequent to year end, a purchase agreement with a
local, not-for-profit organization was executed for the purchase of this
complex. It is anticipated an approximate loss of $10,000 will be realized upon
the final settlement of this sale. A reserve in the amount of the estimated loss
was established during the fourth quarter of fiscal 1998. Premises and equipment
increased $381,000 or 23.5 percent primarily due to the addition of a drive-up
facility at the Williamsport Office and the investment to date for the
construction of a new branch office facility in Lafayette, Indiana. Deposits
increased $12.7 million, or 17.8 percent and borrowings decreased $168,000, or
1.5 percent resulting in a net increase in interest-bearing liabilities of $12.5
million, or 15.2 percent. The increase in deposits was primarily the result of
an increase in public funds deposits with maturities from one month to one year,
which were acquired at rates below comparable Federal Home Loan Bank advances.
Other liabilities increased primarily due to an increase in accrued income taxes
of $279,000.
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
11
<PAGE>
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.
Comparison of Operating Results for the Years Ended June 30, 1998 and June 30,
1997
General. Net income for the year ended June 30, 1998 was $981,000
compared to $313,000 for the year ended June 30, 1997, an increase of $668,000,
or 213.7 percent. Net income for 1997 included the after tax effect of the one
time Savings Association Insurance Fund special assessment in the amount of
$258,000. Had this special assessment not been made in the year ended June 30,
1997, the increase in income for the year ended June 30, 1998 would have been
$410,000 or 71.8 percent. This increase in income was primarily due to an
increase in net interest income of $1.0 million. Net interest income increased
as a result of an increase in interest rate spread from 2.64 percent to 2.70
percent and an increase in net interest margin from 3.09 percent to 3.70 percent
due to an increase in the ratio of average interest-earning assets to
interest-bearing liabilities from 108.91 percent to 122.17 percent. The increase
in average interest-earning assets was primarily due to the sale of stock on
June 30, 1997.
Interest Income. Interest income for the year ended June 30, 1998 was
$8.3 million, an increase of $1.1 million, or 15.4 percent, from interest income
for the same period in 1997. The average balance of interest-earning assets for
the 1998 period was $101.8 million compared to $89.5 million for the 1997
period, an increase of $12.2 million, or 13.7 percent. This increase was
primarily due to an increase in the average balance of loans in the amount of
$10.9 million. The average yield on interest-earning assets increased from 8.06
percent for the 1997 period to 8.19 percent for the twelve months ended June 30,
1998. This increase was primarily due to an increase in demand for fixed rate
residential loans and an increase in non-residential mortgage loans (both of
which generally carry a higher rate of interest than one year adjustable rate
residential mortgage loans).
Interest Expense. Interest expense for the year ended June 30, 1998 was
$4.6 million compared to $4.5 million for the year ended June 30, 1997, an
increase of $114,000, or 2.6 percent. Average interest-bearing liabilities
increased from $82.2 million for the 1997 period to $83.3 million for the 1998
period, an increase of $1.1 million, or 1.3 percent. The average cost of all
interest-bearing liabilities increased from 5.42 percent for fiscal 1997 to 5.49
percent for fiscal 1998. The average cost of deposits increased from 5.32
percent for the 1997 period to 5.39 percent for the year ended June 30, 1998.
The average cost of borrowings increased 6.09 percent to 6.25 percent for the
12
<PAGE>
comparable periods due to converting some short term Federal Home Loan Bank
advances to longer term fixed rate advances.
Provision for Losses on Loans. The provision for losses on loans was
$6,000 for the year ended June 30, 1998, compared to $22,000 for the year ended
June 30, 1997. Provisions for losses on loans are made based on the Internal
Loan and Asset Review Policy. A review is performed at least quarterly to
determine the adequacy of the current balance in the allowance for loss
accounts. Loans delinquent ninety days or more increased from $502,000 at June
30, 1997 to $724,000 on June 30, 1998. Non-performing loans to total loans at
June 30, 1998 was 0.72 percent compared to 0.58 percent at June 30, 1997. The
allowance for loan losses to non-performing loans was 25.7 percent at June 30,
1998 compared to 35.9 percent at June 30, 1997. The allowance to total loans was
0.19 percent and 0.21 percent for the comparable periods. Montgomery is
continually re-evaluating the level of the allowance for loan losses as the
amount of non-residential mortgage loans and other new loan products are
offered.
Non-interest Income. Other income for the year ended June 30, 1998 was
$47,000 compared to $30,000 for the 1997 period, an increase of $17,000 or 56.7
percent. Service charges on deposit accounts increased $4,000 due to the
increase in demand deposit accounts. Miscellaneous other income increased
$16,000 primarily due to an increase in ATM transaction income of $5,000, fee
income from Montgomery's check clearing agent of $8,000 and an increase in other
miscellaneous fee income of $3,000.
Non-interest Expense. Non-interest expense for the year ended June 30,
1998 was $2.2 million, a decrease of $49,000, or 2.2 percent from the comparable
1997 period. Salary and employee benefits increased $266,000 from $934,000 for
the 1997 period to $1,200,000 for the 1998 period. Year ended June 30, 1998 was
the first year compensation cost had to be recorded for the MRP and ESOP and the
cost of these plans for fiscal 1998 was $154,000. The balance of the increase
was primarily due to an increase in branch office personnel to accommodate
growth. This includes management trainees for staffing the new Lafayette office
projected to be opened in late 1998. Net occupancy expense increased $4,000,
equipment expense increased $25,000 and data processing expense increased
$21,000. These increases are primarily due to Montgomery's growth. Deposit
insurance expense decreased $475,000 for the year ended June 30, 1998 compared
to the same period in 1997 due to the one time SAIF assessment of $428,000 and
the reduction in the regular assessment from 23 basis points to 6.4 basis
points. Net real estate operations generated a net income of $17,000 for the
1998 period compared to a net income of $75,000 for the 1997 period. This
decrease in income was primarily due to a gain on the sale of real estate owned
during the 1997 period. The decrease during the 1998 period also included a
provision for loss on non-interest earning assets in the amount of $10,000. This
provision was recorded to reflect the possible loss on the sale of an apartment
complex as was previously discussed. Other expenses increased $48,000, or 10.6
percent, from $455,000 for the year ended June 30, 1997 to $503,000 for the year
ended June
13
<PAGE>
30, 1998. Audit and accounting expense increased $11,000 and stockholder related
expenses increased $36,000 primarily due to the additional cost of operation of
a publically held company.
Income Tax Expense. Income tax expense for the year ended June 30, 1998
increased to $655,000 compared to $241,000 for the year ended June 30, 1997 due
to the increase in taxable income.
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 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
14
<PAGE>
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 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
15
<PAGE>
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.
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, 1998, 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, 1998 was 7.62
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.
16
<PAGE>
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, 1998, Montgomery had outstanding commitments
to originate loans of $2.2 million and no commitments to sell loans.
Certificates of deposit scheduled to mature in one year or less at June 30, 1998
totaled $43.0 million. Management believes that a significant portion of such
deposits will remain with Montgomery. At June 30, 1998, Montgomery had $2.0
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, 1998, 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, 1998
Required for Adequate To Be Well
Actual Capital(1) Capitalized(1)
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) $14,586 20.9% $5,573 8.0% $6,967 10.0%
Core (to adjusted tangible assets) 15,579 13.4 3,482 3.0 6,964 6.0
Core capital(1) (to adjusted total assets) 15,579 13.4 3,482 3.0 5,804 5.0
</TABLE>
- -----------------
(1) As defined by the regulatory agencies
The Association's tangible capital at June 30, 1998 was $15,579,000
which amount was 13.4% 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.
17
<PAGE>
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 capital exceeding 12% from reporting information to calculate exposure and
making any deduction from risk-based capital. At June 30, 1998, Montgomery's
total assets were $116.6 million and risk-based capital was 20.9 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, 1998, 2.0% of the present
value of Montgomery's assets was approximately $2.39 million, which was less
than $3.46 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,
1998 NPV information, the amount of Montgomery's deduction from capital, had it
been subject to reporting, would have been approximately $535,000.
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, 1998, and June 30, 1997, 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, 1998 and June 30, 1997, the NPV of Montgomery
was $18.9 million and $18.4 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.
18
<PAGE>
<TABLE>
<CAPTION>
At June 30, 1998 At June 30, 1997
------------------------- ---------------------------
Assumed Board
Change in Limit
Interest Rates % Change $ Change % Change $ Change % Change
(Basis Points) in NPV in NPV in NPV in NPV in NPV
-------------- ------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+300 -60 (5,717) (30) (5,754) (43)
+200 -50 (3,463) (18) (3,637) (31)
+100 -30 (1,452) (8) (1,622) (20)
0 0 0 0 0 0
-100 -30 1,020 5 988 5
-200 -50 1,761 9 1,237 7
-300 -60 2,782 15 1,347 7
</TABLE>
In the event of a 300 basis point change in interest rate based upon
estimates as of June 30, 1998, Montgomery would experience a 15% increase in NPV
in a declining rate environment and a 30% 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 decreased level of interest rate risk experienced by Montgomery
in recent periods was primarily due to the interest rate on interest-earning
assets increasing more than the interest rate on interest-bearing liabilities
due to the increase in fixed rate residential mortgage loans and non-residential
loans, which generally carry a higher rate of interest than one year adjustable
rate loans.
Recent Accounting Issues
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 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 equivalents 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.
19
<PAGE>
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.
Montgomery adopted this statement effective January 1, 1998 and has
restated all prior period EPS data presented in its 1998 Financial Statements
included in this 1998 Annual Report.
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.
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.
20
<PAGE>
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>
Impact of the Year 2000
The Company has conducted a comprehensive review of its computer
systems to identify applications that could be affected by the "Year 2000"
issue, and has developed an implementation plan to address the issue. The
Company's data processing is performed primarily by outside vendors. The Company
has already contacted each vendor to request time tables for year 2000
compliance and expected costs, if any, to be passed along to the Company. To
date, the Company anticipates that its primary service provider will complete
all reprogramming efforts by March 31, 1999; however, the Company will pursue
other options if it appears that any vendors will be unable to comply.
Management does not expect these costs to have a significant impact on its
financial position or results of operations, however, there can be no assurance
that the vendors systems will be Year 2000 compliant, consequently the Company
could incur incremental costs to convert to another vendor or move data
processing in house. The Company has established a budget of $75,000 for testing
and remediation relating to the Year 2000 issue.
22
<PAGE>
Independent Auditor's Report
To the Stockholders and
Board of Directors
Montgomery Financial Corporation
Crawfordsville, Indiana
We have audited the consolidated statement of financial
condition of Montgomery Financial Corporation and subsidiary
as of June 30, 1998 and 1997, 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,
1998. 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, 1998 and 1997, and
the results of their operations and their cash flows for each
of the three years in the period ended June 30, 1998, in
conformity with generally accepted accounting principles.
Olive LLP
Indianapolis, Indiana
July 30, 1998
23
<PAGE>
<TABLE>
<CAPTION>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Consolidated Statement of Financial Condition
June 30 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash ............................................... $ 326,922 $ 221,456
Short-term interest-bearing deposits ............... 10,569,823 11,373,316
------------- -------------
Total cash and cash equivalents .............. 10,896,745 11,594,772
Interest-bearing deposits .......................... 215,000 100,000
Investment securities available for sale ........... 311,967 42,494
Loans .............................................. 100,395,554 87,088,294
Allowance for loan loses ........................... (186,000) (180,000)
------------- -------------
Net loans .................................... 100,209,554 86,908,294
Real estate owned and held for development, net .... 1,468,199 1,301,734
Premises and equipment ............................. 2,001,544 1,620,885
Federal Home Loan Bank stock ....................... 921,500 921,500
Interest receivable ................................ 843,799 684,479
Other assets ....................................... 294,324 225,147
------------- -------------
Total assets ................................. $ 117,162,632 $ 103,399,305
============= =============
Liabilities
Deposits
Noninterest bearing .............................. $ 1,864,658 $ 1,165,223
Interest bearing ................................. 82,117,324 70,100,001
------------- -------------
Total deposits ............................... 83,981,982 71,265,224
Federal Home Loan Bank advances .................... 11,260,715 11,428,373
Interest payable ................................... 538,451 423,305
Deferred tax liability ............................. 371,197 360,156
Other liabilities .................................. 945,136 555,669
------------- -------------
Total liabilities ............................ 97,097,481 84,032,727
------------- -------------
Stockholders' Equity
Preferred stock, $.01 par value
Authorized and unissued--2,000,000 shares
Common stock, $.01 par value
Authorized--8,000,000 shares
Issued and outstanding--1,653,032 shares ......... 16,530 16,530
Paid-in capital .................................... 13,571,387 13,547,619
Retained earnings--substantially restricted ........ 7,782,192 7,136,492
Unearned ESOP shares ............................... (1,230,802) (1,322,500)
Unearned compensation .............................. (128,507) (11,563)
Net unrealized gain on securities available for sale 54,351
------------- -------------
Total stockholders' equity ................... 20,065,151 19,366,578
------------- -------------
Total liabilities and stockholders' equity ... $ 117,162,632 $ 103,399,305
============= =============
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
<TABLE>
<CAPTION>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Consolidated Statement of Income
Year Ended June 30 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and Dividend Income
Loans ............................................... $ 7,901,380 $ 6,879,742 $ 6,409,666
Investment securities ............................... 5,103 10,956 28,678
Deposits with financial institutions ................ 353,810 268,876 281,805
Federal Home Loan Bank stock ........................ 74,301 59,967 56,472
----------- ----------- -----------
Total interest and dividend income ............ 8,334,594 7,219,541 6,776,621
----------- ----------- -----------
Interest Expense
Deposits ............................................ 4,009,250 3,812,759 3,866,674
Short-term borrowings ............................... 8,000
Federal Home Loan Bank advances ..................... 560,910 643,127 559,393
----------- ----------- -----------
Total interest expense ........................ 4,570,160 4,455,886 4,434,067
----------- ----------- -----------
Net Interest Income .................................... 3,764,434 2,763,655 2,342,554
Provision for losses on loans ....................... 6,000 22,000 19,750
----------- ----------- -----------
Net Interest Income After Provision for Losses on Loans 3,758,434 2,741,655 2,322,804
----------- ----------- -----------
Other Income
Service charges on deposit accounts ................. 29,624 25,749 22,184
Net appraisal income (expense) ...................... (2,940) 390 (5,007)
Other income ........................................ 20,797 4,122 6,043
----------- ----------- -----------
Total other income ............................ 47,481 30,261 23,220
----------- ----------- -----------
Other Expenses
Salaries and employee benefits ...................... 1,200,339 934,453 878,536
Net occupancy expenses .............................. 110,085 106,413 100,999
Equipment expenses .................................. 167,462 142,518 140,000
Data processing expense ............................. 121,061 100,009 86,684
Deposit insurance expense ........................... 47,687 523,184 156,199
Real estate operations, net ......................... (17,482) (74,993) (7,364)
Advertising expense ................................. 37,766 32,028 33,408
Other expenses ...................................... 503,228 455,053 361,942
----------- ----------- -----------
Total other expenses .......................... 2,170,146 2,218,665 1,750,404
----------- ----------- -----------
Income Before Income Tax ............................... 1,635,769 553,251 595,620
Income tax expense .................................. 654,991 240,556 164,993
----------- ----------- -----------
Net Income ............................................. $ 980,778 $ 312,695 $ 430,627
=========== =========== ===========
Net Income Per Share
Basic $ .64 $ .67
Diluted .64 .67
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
<TABLE>
<CAPTION>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Consolidated Statement of Changes in Stockholders' Equity
Common Stock
---------------------------
Shares Paid-in Retained
Outstanding Amount Capital Earnings
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances, July 1, 1995 ........................ $ 6,675,130
Net income for 1996 ........................... 430,627
Common stock issued in reorganization, net of
assets retained by Montgomery Mutual Holding
Company .................................... 600,000 $ 6,000 (106,000)
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
Plan ("MRP") (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 .........
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
Net income for 1998 ........................... 980,778
Cash dividends ($.22 per share) ............... (335,078)
Net change in unrealized gain (loss) on
securities available for sale ..............
ESOP shares earned ............................ 23,768
Purchase of stock for MRP .....................
Amortization of unearned compensation expense .
----------- ----------- ------------ ------------
Balances, June 30, 1998 ....................... 1,653,032 $ 16,530 $ 13,571,387 $ 7,782,192
=========== =========== ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss) On
Unearned Unearned Securities
ESOP Shares Compensation Available For Sale Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances, July 1, 1995 ........................ $ 3,253 $ 6,678,383
Net income for 1996 ........................... 430,627
Common stock issued in reorganization, net of
assets retained by Montgomery Mutual Holding
Company .................................... (100,000)
Common stock sold, net of costs ............... 2,196,628
Cash dividends ($.30 per share) ............... (75,000)
Net change in unrealized gain (loss) on
securities available for sale .............. (3,310) (3,310)
----------- ----------- ------------ ------------
Balances, June 30, 1996 ....................... (57) 9,127,328
Net income for 1997 ........................... 312,695
Cash dividends ($.40 per share) ............... (100,000)
Purchase of stock for Management Recognition
Plan ("MRP") (unearned compensation) ....... $ (11,563) (11,563)
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 ......... $(1,322,500) (1,322,500)
Net change in unrealized gain (loss) on
securities available for sale .............. 57 57
----------- ----------- ------------ ------------
Balances, June 30, 1997 ....................... (1,322,500) (11,563) 19,366,578
Net income for 1998 ........................... 980,778
Cash dividends ($.22 per share) ............... (335,078)
Net change in unrealized gain (loss) on
securities available for sale .............. 54,351 54,351
ESOP shares earned ............................ 91,698 115,466
Purchase of stock for MRP ..................... (155,325) (155,325)
Amortization of unearned compensation expense . 38,381 38,381
----------- ----------- ----------- -----------
Balances, June 30, 1998 ....................... $(1,230,802) $ (128,507) $ 54,351 $20,065,151
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
26
<PAGE>
<TABLE>
<CAPTION>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Consolidated Statement of Cash Flows
Year Ended June 30 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income ........................................................ $ 980,778 $ 312,695 $ 430,627
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for loan losses ...................................... 6,000 22,000 19,750
Provision for loss on real estate owned ......................... 10,000
Depreciation .................................................... 211,375 206,945 195,837
(Gain) loss on sale of real estate owned ........................ (7,682) 25,572
ESOP shares earned .............................................. 115,466
Amortization of unearned compensation ........................... 38,381
Deferred income tax ............................................. (24,608) (4,275) (23,421)
Change in
Interest receivable ........................................... (159,320) (89,321) (27,919)
Interest payable .............................................. 115,146 (4,873) 9,320
Other assets .................................................. (69,177) 13,204 121,095
Other liabilities ............................................. 330,319 (26,653) 199,197
Other adjustments ............................................... (8,829) 24,189 15,523
------------ ------------ ------------
Net cash provided by operating activities ................... 1,545,531 446,229 965,581
------------ ------------ ------------
Investing Activities
Net change in interest-bearing deposits ........................... (115,000)
Proceeds from maturities and paydowns of securities available for
sale ............................................................ 20,527 269,161 484,098
Purchase of securities available for sale ......................... (200,000)
Net change in loans ............................................... (13,479,138) (7,088,289) (2,248,278)
Additions to real estate owned .................................... (193,525) (210,496) (93,633)
Proceeds from real estate owned sales ............................. 163,887 59,549
Purchase of premises and equipment ................................ (558,154) (199,111) (60,410)
Purchase of FHLB of Indianapolis stock ............................ (171,500)
Other investing activities ........................................ 1,000
------------ ------------ ------------
Net cash used by investing activities ....................... (14,361,403) (7,399,235) (1,858,674)
------------ ------------ ------------
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand and savings deposits 3,145,705 1,078,794 359,419
Certificates of deposit ......................................... 9,571,053 477,909 1,063,495
Short-term borrowings ........................................... (368,250)
Proceeds from FHLB advances ....................................... 5,000,000 7,000,000 8,000,000
Repayment of FHLB advances ........................................ (5,167,658) (3,571,627) (10,500,000)
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 MRP ......................................... (155,325) (11,563)
Dividends paid .................................................... (275,930) (100,000) (50,000)
------------ ------------ ------------
Net cash provided by financing activities ................... 12,117,845 14,911,574 494,483
------------ ------------ ------------
</TABLE>
(continued)
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net Change in Cash and Cash Equivalents .............................. (698,027) 7,958,568 (398,610)
Cash and Cash Equivalents, Beginning of Period ....................... 11,594,772 3,636,204 4,034,814
------------ ------------ ------------
Cash and Cash Equivalents, End of Period ............................. $ 10,896,745 $ 11,594,772 $ 3,636,204
============ ============ ============
Additional Cash Flow and Supplementary Information
Interest paid ..................................................... $ 4,455,014 $ 4,461,000 $ 4,425,000
Income tax paid ................................................... 307,156 173,000 143,000
Loan balances transferred to real estate owned .................... 180,707 352,000 69,000
Conversion costs transferred from other assets to stockholders' ... 218,000
equity
Dividends payable ................................................. 90,917 25,000 25,000
Transfer stock purchase deposits from liabilities to proceeds from 325,000
sale of stock
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)
Note 1 -- Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of Montgomery Financial Corporation
("Company") and its wholly owned subsidiary, Montgomery Savings, A Federal
Association ("Association"), and the Association's wholly owned subsidiary, MSA
Service Corporation ("MSA"), conform to generally accepted accounting principles
and reporting practices followed by the thrift industry. The more significant of
the policies are described below.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company is a thrift holding company whose principal activity is the
ownership and management of the Association. The Association operates under a
federal thrift charter and provides full banking services. As a
federally-chartered thrift, the Association is subject to regulation by the
Office of Thrift Supervision, and the Federal Deposit Insurance Corporation.
The Association generates mortgage and consumer loans and receives deposits from
customers located primarily in central Indiana. The Association's loans are
generally secured by specific items of collateral including real property and
consumer assets.
MSA is a real estate management and development company.
Consolidation--The consolidated financial statements include the accounts of the
Company, the Association and MSA after elimination of all material intercompany
transactions 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, 1998, 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.
Stock options are granted for a fixed number of shares with an exercise price
equal to the fair value of the shares at the date of grant. The Company accounts
for and will continue to account for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and, accordingly, recognizes no compensation expense for the stock
option grants.
Income tax in the consolidated statement of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. The Company
files consolidated income tax returns with its subsidiary.
Earnings per share have been computed based upon the weighted average common and
potential common shares outstanding during each year. Unearned Employee Stock
Ownership Plan ("ESOP") shares have been excluded from the computation of
average common shares and potential common shares outstanding. For the year
ended June 30, 1997, earnings per share was 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 Company common stock in connection with the second conversion and
reorganization, as more fully discussed in Note 2. Net income per share for the
period before and including the conversion to a stock savings association on
August 11, 1995 is not meaningful. Earnings per share have been restated to
conform to Statement of Financial Accounting Standards (SFAS) No. 128, Earnings
Per Share.
Note 2 -- 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.
Note 3 -- Investment Securities
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30 Cost Gains Losses Value
- --------------------------------------------------- ---------------- ----------------- ----------
<S> <C> <C> <C> <C>
Available for sale
Municipal due January 1, 1999 $ 22 $ 22
Marketable equity securities 200 $ 90 290
----- ---- ----- -----
$ 222 $ 90 $ 312
===== ==== ===== =====
<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, 1999 $ 42 $ 42
==== ==== ===== =====
</TABLE>
31
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 4 -- Loans and Allowance
June 30 1998 1997
- --------------------------------------------------------------------------------
Loans
Real estate mortgage loans
One-to-four family ................... $ 81,383 $ 73,606
Multi-family ......................... 1,163 651
Commercial ........................... 8,865 7,464
Real estate construction loans ......... 3,998 1,892
Home equity loans ...................... 4,091 2,727
Consumer loans ......................... 620 665
Share loans ............................ 763 587
--------- --------
100,883 87,592
Undisbursed portion of loans ........... (707) (668)
Deferred loan costs .................... 220 164
--------- --------
$ 100,396 $ 87,088
========= ========
Year Ended June 30 1998 1997 1996
- --------------------------------------------------------------------------------
Allowance for loan losses
Balances, July 1 ..................... $180 $158 $138
Provision for loan losses ............ 6 22 20
---- ---- ----
Balances, June 30 .................... $186 $180 $158
==== ==== ====
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, 1998 and 1997, the
Association had no impaired loans. No loans were considered impaired during the
year ended June 30, 1998. 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 years ended June
30, 1998 and 1997. Interest income and cash receipts of interest from impaired
loans totaled $33,000 and $6,000 during the year ended June 30, 1996.
32
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 5 -- Real Estate Owned
June 30 1998 1997
- --------------------------------------------------------------------------------
Real estate acquired in settlement of loans ...... $ 189 $ 109
Real estate held for development ................. 1,492 1,367
Allowance for losses ............................. (10)
------- -------
1,671 1,476
Accumulated depreciation ......................... (203) (174)
------- -------
Net ....................................... $ 1,468 $ 1,302
======= =======
Year Ended June 30 ......................... 1998 1997 1996
- --------------------------------------------------------------------------------
Allowance for losses on real estate owned
Balances, July 1 ............................ $15
Provision (adjustment) for losses ........... $10 (15) $15
--- ---- ---
Balances, June 30 ........................... $10 $ 0 $15
=== ==== ===
Note 6 -- Premises and Equipment
June 30 1998 1997
- --------------------------------------------------------------------------------
Land ..................................... $ 347 $ 151
Building ................................. 1,615 1,447
Equipment ................................ 1,192 1,011
------- -------
Total cost ........................ 3,154 2,609
Accumulated depreciation ................. (1,152) (988)
------- -------
Net ............................... $ 2,002 $ 1,621
======= =======
33
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 7 -- Deposits
June 30 1998 1997
- --------------------------------------------------------------------------------
Noninterest-bearing .................................... $ 1,865 $ 1,165
Interest-bearing demand ................................ 9,566 10,682
Savings deposits ....................................... 7,967 4,405
Certificates and other time deposits of $100,000 or more 23,585 12,766
Other certificates and time deposits ................... 40,999 42,247
------- -------
Total deposits .................................. $83,982 $71,265
======= =======
Certificates maturing in years ending June 30:
1999 $42,978
2000 15,355
2001 3,060
2002 1,466
2003 1,685
Thereafter 40
-------
$64,584
=======
Year Ended June 30 1998 1997 1996
-------------------------------------------------------------------------------
Interest expense on deposits
Interest-bearing demand ........... $ 380 $ 355 $ 345
Savings deposits .................. 241 188 219
Certificates ...................... 3,388 3,270 3,303
------ ------ ------
$4,009 $3,813 $3,867
====== ====== ======
34
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 8 -- FHLB Advances
1998
----------------------------
Weighted
Average
June 30 Amount Rate
- ----------------------------------------------------------------------------
Advances from FHLB
Maturities in years ending June 30
1999 $ 2,000 5.99%
2000 2,000 6.15
2001 4,261 5.93
2003 3,000 5.57
--------
$ 11,261 5.88%
========
The Association has an available line of credit with the FHLB totaling
$5,000,000. The line of credit expires September 8, 1998 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, 1998 and 1997.
The FHLB advances are secured by first mortgage loans totaling $76,715,000.
Advances are subject to restrictions or penalties in the event of prepayment.
Note 9 -- Income Tax
<TABLE>
<CAPTION>
Year Ended June 30 1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense
Currently payable
Federal ............................................ $ 536 $ 186 $ 163
State .............................................. 144 59 26
Deferred
Federal ............................................ (23) (7) (33)
State .............................................. (2) 3 9
----- ----- -----
Total income tax expense ......................... $ 655 $ 241 $ 165
===== ===== =====
Reconciliation of federal statutory to actual tax expense
Federal statutory income tax at 34% .................. $ 556 $ 188 $ 202
Effect of state income taxes ......................... 94 40 23
Other ................................................ 5 13 (60)
----- ----- -----
Actual tax expense ............................... $ 655 $ 241 $ 165
===== ===== =====
Effective tax rate ...................................... 40.0% 43.6% 27.7%
</TABLE>
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 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets
Allowance for loan losses ......................... $ 20
State income tax .................................. 19 $ 20
Retirement plans and other employee benefits ...... 70 42
Other ............................................. 14
----- -----
Total assets ................................ 123 62
----- -----
Liabilities
Depreciation ...................................... 234 239
Allowance for loan losses ......................... 3
FHLB of Indianapolis stock dividend ............... 30 30
Loan costs ........................................ 194 141
Securities available for sale ..................... 36
Other ............................................. 9
----- -----
Total liabilities ........................... 494 422
----- -----
$(371) $(360)
===== =====
</TABLE>
Retained earnings at June 30, 1998, include approximately $1,500,000 for which
no deferred federal income tax liability has been recognized. This amount
represents an allocation of income to bad debt deductions for tax purposes only.
Reduction of amounts so allocated for purposes other than tax bad debt losses or
adjustments arising from carryback of net operating losses or loss of "bank"
status, would create income for tax purposes only, which income would be subject
to the then-current corporate income tax rate. The unrecorded deferred income
tax liability on the above amounts was approximately $590,000 at June 30, 1998.
Note 10 -- Regulatory Capital
The Association is subject to various regulatory capital requirements
administered by the federal banking agencies and are assigned to a capital
category. The assigned capital category is largely determined by three ratios
that are calculated according to the regulations: total risk adjusted capital,
Core 1 capital, and Core 1 leverage ratios. The ratios are intended to measure
capital relative to assets and credit risk associated with those assets and
off-balance sheet exposures of the entity. The capital category assigned to an
entity can also be affected by qualitative judgments made by regulatory agencies
about the risk inherent in the entity's activities that are not part of the
calculated ratios.
36
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
There are five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized. Classification of an association in
any of the undercapitalized categories can result in actions by regulators that
could have a material effect on an association's operations. At June 30, 1998
and 1997, the Association is categorized as well capitalized and met all subject
capital adequacy requirements. There are no conditions or events since June 30,
1998 that management believes have changed the Association's classification.
The Association's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
Required for Adequate To Be Well
Actual Capital (1) Capitalized (1)
--------------------------------------------------------------------
As of June 30, 1998 Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital 1 (to risk-weighted assets) $14,586 20.9% $5,573 8.0% $6,967 10.0%
Core capital 1 (to adjusted tangible assets) 15,579 13.4 3,482 3.0 6,964 6.0
Core capital 1 (to adjusted total assets) 15,579 13.4 3,482 3.0 5,804 5.0
<CAPTION>
As of June 30, 1997
- ----------------------------------------------------------------------------------------------------------------------------
<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, 1998 was $15,579,000, which
amount was 13.4 percent of tangible assets and exceeded the required ratio of
1.5 percent.
Note 11 -- Dividends and Capital Restrictions
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.
37
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
At the time of conversion on June 30, 1997, a liquidation account was
established in an amount equal to $420,000 of dividends waived by Montgomery
Mutual Holding Company plus the Association's net worth at March 31, 1995. The
liquidation account is maintained for the benefit of eligible deposit account
holders who maintain their deposit account in the Association after conversion.
In the event of a complete liquidation (and only in such event), each eligible
deposit account holder will be entitled to receive a liquidation distribution
from the liquidation account in the amount of the then current adjusted
subaccount balance for deposit accounts then held, before any liquidation
distribution may be made to stockholders. Except for the repurchase of stock and
payment of dividends, the existence of the liquidation account will not restrict
the use or application of net worth. The initial balance of the liquidation
account was $7,062,000.
At June 30, 1998, the stockholder's equity of the Association was $15,993,000,
of which approximately $8,931,000 was available for the payment of dividends.
Note 12 -- Earnings Per Share
Earnings per share were computed as follows:
<TABLE>
<CAPTION>
Year Ended June 30 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Weighted- Weighted-
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings Per Share
Income available to common shareholders $981 1,521,616 $.64 $313 465,235 $.67
Effect of dilutive securities
MRP awards and stock options 17,215
---- --------- ----- -------
Diluted Earnings Per Share
Income available to common
stockholders and assumed conversions $981 1,538,831 $.64 $313 465,235 $.67
==== ========= ==== =======
</TABLE>
Note 13 -- 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.
38
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Financial instruments whose contract amount represents credit risk as of June 30
were as follows:
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loan commitments
At variable rates $196 $143
At fixed rates ranging from 7.50 to 10.00% for 1998 and 7.90 to 9.75% for 1997 1,957 1,712
</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.
Note 14 -- 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 $52,000
for 1998, $48,000 for 1997 and $45,000 for 1996.
On October 15, 1996, the stockholders of the Association approved a Management
Recognition Plan ("MRP"). This plan was assumed by the Company in connection
with the second conversion and reorganization. The plan allows for the purchase
in the open market or through the issuance of authorized and unissued shares of
up to 13,990 shares of common stock. On November 25, 1996, Montgomery purchased
1,865 shares for the MRP at a cost of $11,563 which was recorded as unearned
compensation in stockholders' equity. On June 26, 1998, the Company purchased
the remaining 12,123 shares necessary to fund the MRP at a cost of $155,326
which was recorded as unearned compensation in stockholders' equity. Restricted
stock awards covering 13,988 shares of common stock have been awarded to
Montgomery's officers and key employees under the MRP. The awards are to vest
and be earned by the recipient at a rate of 20 percent per year. Expense under
the plan for fiscal year ended June 30, 1998 was $38,000. Expense under the plan
for fiscal year ended June 30, 1997 was not material.
39
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
As part of the second conversion, the Company established an 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 123,080 and 132,250 at June 30, 1998 and 1997 and had a fair
value of $1,508,000 and $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 are used to repay the loan. Compensation expense is recorded equal to the
fair market value of the stock when contributions, which are determined annually
by the Board of Directors of the Bank, are made to the ESOP. The expense under
the ESOP was $116,000 for the year ended June 30, 1998. There was no expense
under the ESOP for the year ended June 30, 1997. At June 30, 1998, the ESOP had
9,170 allocated shares, 123,080 suspense shares and no shares committed-to-be
released. At June 30, 1997, the ESOP had 132,250 suspense shares and no shares
allocated or committed-to-be released.
In addition, the Board of Directors has approved a 1997 Recognition Plan
("RRP"). 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.
Note 15 -- 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.
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.
40
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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 1998 1997
- -------------------------------------------------------------------------------
Net income As reported $981 $313
Pro forma 973 305
Basic earnings per share As reported .64 .67
Pro forma .64 .67
Diluted earnings per share As reported .64 .67
Pro forma .63 .66
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, 1998 and 1997.
<TABLE>
<CAPTION>
Year Ended June 30 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Weighted- Weighted-
Average Average
Options Shares Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 34,973 $6.97
Granted 34,973 $6.97
------ ------
Outstanding, end of year 34,973 6.97 34,973 6.97
====== ======
Options exercisable at year end 6,994 6.97
Weighted-average fair value of options granted during
the year $1.25
</TABLE>
41
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
As of June 30, 1998, options outstanding totaling 34,973 have an exercise price
of $6.97 and a weighted-average remaining contractual life of 8.6 years.
In addition, the Board of Directors has approved a 1997 Stock Option Plan. Under
the 1997 Plan, stock option and stock appreciation rights covering shares
representing an aggregate of up to 10 percent of the common stock sold in the
conversion may be granted to directors, officers and employees of the Company or
its subsidiaries. The 1997 Plan is subject to stockholder approval.
Note 16 -- Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash and Cash Equivalents--The fair value of cash and cash equivalents
approximates carrying value.
Interest-Bearing Deposits--The fair value of interest-bearing deposits
approximate carrying value.
Investment Securities--Fair values are based on quoted market prices.
Loans--The fair value for loans is estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
Interest Receivable/Payable--The fair value of 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.
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.
42
<PAGE>
MONTGOMERY FINANCIAL CORPORATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The estimated fair values of the Association's financial instruments are as
follows:
<TABLE>
<CAPTION>
1998 1997
------------------------ -----------------------
Carrying Fair Carrying Fair
June 30 Amount Value Amount Value
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $10,897 $10,897 $11,595 $11,595
Interest-bearing deposits 215 215 100 100
Investment securities available for sale 312 312 42 42
Loans, net 100,210 102,992 86,908 87,494
Stock in FHLB 922 922 922 922
Interest receivable 844 844 684 684
Liabilities
Deposits 83,982 84,153 71,265 71,189
FHLB advances 11,261 11,232 11,428 11,272
Interest payable 538 538 423 423
Advances by borrowers for taxes and insurance 190 190 139 139
</TABLE>
Note 17 -- Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company:
<TABLE>
<CAPTION>
Condensed Balance Sheet
June 30 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents ......................... $ 3,732 $ 4,256
Interest-bearing deposits ......................... 115
Investment securities available for sale .......... 290
Real estate held for development .................. 100
Other assets ...................................... 51
Investment in subsidiaries ........................ 15,993 15,112
------- -------
Total assets .................................. $20,281 $19,368
======= =======
Liabilities .......................................... $ 216 $ 1
Stockholders' Equity ................................. 20,065 19,367
------- -------
Total liabilities and stockholders' equity .... $20,281 $19,368
======= =======
</TABLE>
43
<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 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest and dividend income .................................................... $310
----
Expenses
Salaries and employee benefits ............................................... 71
Other expenses ............................................................... 60
----
Total expenses ......................................................... 131
----
Income before income tax expense and equity in undistributed income of subsidiary 179
Income tax expense .............................................................. 80
----
Income before equity in undistributed income of subsidiary ...................... 99
Equity in undistributed income of subsidiary .................................... 882 $313
---- ----
Net Income ...................................................................... $981 $313
==== ====
<CAPTION>
Condensed Statement of Cash Flows
Year Ended June 30 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income ..................................................................... $ 981 $ 313
Adjustments to reconcile net income to net cash provided by operating activities (659) (313)
------- -------
Net cash provided by operating activities .................................. 322
------- -------
Investing Activities
Net change in interest bearing deposits ........................................ (115)
Purchase of securities available for sale ...................................... (200)
Additions to real estate owned ................................................. (100)
------- -------
Net cash used by investing activities ...................................... (415)
------- -------
Financing Activities
Purchase of stock for MRP ...................................................... (155)
Proceeds from sale of stock and reorganization, net of cost .................... 9,934
Cash dividends ................................................................. (276)
Capital contribution to Association ............................................ (5,678)
------- -------
Net cash provided (used) by financing activities ........................... (431) 4,256
------- -------
Net Change in Cash ................................................................ (524) 4,256
Cash at Beginning of Year ......................................................... 4,256
======= =======
Cash at End of Year ............................................................... $ 3,732 $ 4,256
======= =======
Additional Cash Flow and Supplementary Information
Common stock issued to ESOP leveraged with an employer loan 1,322,500
</TABLE>
44
<PAGE>
MONTGOMERY FINANCIAL CORPORATION
and
MONTGOMERY SAVINGS, A FEDERAL ASSOCIATION
DIRECTORS AND EXECUTIVE OFFICERS
Directors
Earl F. Elliott
Director, Chief Executive Officer
and President of the Company and
Chairman of the Board and Chief
Executive Officer of the Association
Robert C. Wright
Director of the Company and the
Association
J. Lee Walden
Director, Chief Operating Officer and
Chief Financial Officer of the Company
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
Mark E. Foster
Director of the Company and
and the Association
Joseph M. Malott
Director of the Company and
the Association
John E. Woodward
Director of the Company and the
Association
Executive Officers
Earl F. Elliott
Director, Chief Executive Officer and
President of the Company and
Chairman of the Board and Chief
Executive Officer of the Association
Nancy L. McCormick
Secretary and Treasurer of the Company and
Senior Vice President and Secretary
of the Association
<PAGE>
J. Lee Walden
Director, Vice President, Chief Operating
and Chief Financial Officer of the
Company and Director, President
and Chief Financial Officer of the Association
45
<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 Auditor Local Counsel
Olive LLP Henthorn, Harris, Taylor & Weliever PC
201 North Illinois Street 122 East Main Street
Indianapolis, Indiana 46204 Crawfordsville, Indiana 47933
Transfer Agent Special Counsel
Registrar & Transfer Co. Silver, Freedman & Taff, L.L.P.
10 Commerce Drive 1100 New York Avenue, N.W.
Cranford, New Jersey 07016 Washington, D.C. 20005
46
<PAGE>
Form 10-KSB Report
A copy of Montgomery Financial's Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1998 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. The Securities
and Exchange Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission, including the Corporation; that address is
http://www.sec.gov.
Stock Listing
Montgomery Financial's common stock is reported on the Nasdaq SmallCap
Market under the symbol "MONT." As of June 30, 1998 Montgomery Financial had 310
stockholders of record and 1,653,032 outstanding shares of common stock.
Price Range of Common Stock and Dividends
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.
Declared Dividends
High Low Per Share
---- --- ---------
1998
First Quarter.............. $12.375 $10.375 $ 0.055
Second Quarter............. 13.375 12.000 0.055
Third Quarter.............. 13.750 12.750 0.055
Fourth Quarter............. 13.250 12.250 0.055
1997
Fourth Quarter(1).......... $10.000 $10.000 ---
- ---------------
(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.
47
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, 1998 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-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 327
<INT-BEARING-DEPOSITS> 10,785
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 312
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 100,396
<ALLOWANCE> 186
<TOTAL-ASSETS> 117,163
<DEPOSITS> 83,982
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,855
<LONG-TERM> 11,261
0
0
<COMMON> 17
<OTHER-SE> 20,048
<TOTAL-LIABILITIES-AND-EQUITY> 117,163
<INTEREST-LOAN> 7,901
<INTEREST-INVEST> 5
<INTEREST-OTHER> 428
<INTEREST-TOTAL> 8,335
<INTEREST-DEPOSIT> 4,009
<INTEREST-EXPENSE> 4,570
<INTEREST-INCOME-NET> 3,765
<LOAN-LOSSES> 6
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,170
<INCOME-PRETAX> 1,636
<INCOME-PRE-EXTRAORDINARY> 1,636
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 981
<EPS-PRIMARY> 0.64
<EPS-DILUTED> 0.64
<YIELD-ACTUAL> 3.70
<LOANS-NON> 652
<LOANS-PAST> 72
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 180
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 186
<ALLOWANCE-DOMESTIC> 186
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 64
</TABLE>
