As filed with the Securities and Exchange Commission on May 13, 1997
Registration No. 333-24721
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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PRE-EFFECTIVE AMENDMENT NO. ONE TO THE
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MONTGOMERY FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 6711 Applied For
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
119 East Main Street, Crawfordsville, Indiana 47933 (317) 362-4710
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
-------------
Earl F. Elliott
President and Chief Executive Officer
Montgomery Financial Corporation
119 East Main Street
Crawfordsville, Indiana 47933
(317) 362-4710
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-------------
Please send copies of all communications to:
Martin L. Meyrowitz, P.C.
Gary A. Lax, P.C.
SILVER, FREEDMAN & TAFF, L.L.P.
(A limited liability
partnership including
professional corporations)
1100 New York Avenue, N.W.,
Washington, DC 20005-3934
(202) 414-6100
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Approximate date of commencement of proposed
sale to the public: As soon as practicable after
this Registration Statement becomes effective.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
Title of Each Class of Securities Amount to be Proposed Maximum ..Proposed Aggregate Maximum Amount of
to be Registered Registered Offering Price Per Share(1) Offering Price(1) Registration Fee
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value 1,225,257 Shares(2) $10.00 $12,252,570 $3,713
Common Stock, $.01 par value 250,000 Shares(3) 2.22(3) 555,000 169(3)
------------------ ------- -------- ---
Total 1,475,257 Shares $ ---- $12,807,570 $3,882
====================================================================================================================================
- ---------------------
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Represents a maximum of 1,225,257 shares that may be issued in the
offering. The registration fee for these shares is calculated in accordance
with Rule 457(a).
(3) Represents a maximum of 250,000 shares that may be issued in exchange for
shares of common stock of Montgomery Savings, A Federal Association. The
registration fee for these shares is calculated in accordance with Rule
457(f) based upon an assumed exchange ratio of 25.88% and the book value of
a share of Montgomery Savings, A Federal Association common stock of $8.55
on December 31, 1996.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
PROSPECTUS
MONTGOMERY FINANCIAL CORPORATION
(Proposed Holding Company for Montgomery Savings, A Federal Association)
Up to 1,065,441 Shares of Common Stock
(Anticipated Maximum)
$10.00 Per Share Purchase Price
Montgomery Financial Corporation (the "Company"), an Indiana
corporation, is offering up to 1,065,441 shares (which may be increased to
1,225,257 shares under certain circumstances described below) of its common
stock, par value $.01 per share (the "Common Stock"), in connection with (i) the
Exchange described herein to be effected in connection with the reorganization
of Montgomery Savings, A Federal Association ("Montgomery" or the "Association")
as a subsidiary of the Company and (ii) the Offerings described herein.
(continued on next page)
For a discussion of certain factors that should be considered by each
prospective investor, see "Risk Factors" beginning on page __ hereof.
For information on how to subscribe for shares of Conversion Stock,
please call the Stock Information Center at (765) ____-______.
-----------------------------
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY OTHER
FEDERAL AGENCY OR STATE SECURITIES COMMISSION, NOR HAS SUCH
COMMISSION, OFFICE OR OTHER AGENCY PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
Estimated
Underwriting
Fees,
Commissions,
Conversion and Estimated
Subscription Reorganization Net
Price(1) Expenses(2) Proceeds(3)
-------- ----------- -----------
Minimum Per Share $ 10.00 $ 0.60 $ 9.40
Midpoint Per Share $ 10.00 $ 0.52 $ 9.48
Maximum Per Share $ 10.00 $ 0.48 $ 9.52
Maximum Per Share, as adjusted $ 10.00 $ 0.44 $ 9.56
Total Minimum(1) $ 7,875,000 $ 469,000 $ 7,406,000
Total Midpoint(1) $ 9,264,700 $ 490,000 $ 8,774,700
Total Maximum(1) $10,654,410 $ 512,000 $ 10,142,410
Total Maximum, as adjusted(1) $12,252,570 $ 537,000 $ 11,715,570
- -------------
(1) Based upon the minimum, midpoint, maximum and 15% above the maximum of the
Offering Price Range, respectively.
(2) Consists of the estimated costs to the Primary Parties to be incurred in
connection with the Conversion and Reorganization (which include an
estimate of the marketing fees and expenses to be paid to Charles Webb &
Company, a division of Keefe, Bruyette & Woods, Inc. ("Webb") in connection
with the Offerings). See "The Conversion and Reorganization - Marketing
Arrangements." The actual fees and expenses may vary from the estimates.
Such fees paid to Webb may be deemed to be underwriting fees. See "Pro
Forma Data."
(3) Actual net proceeds may vary substantially from estimated amounts depending
on the number of shares sold in the Offerings and other factors. Does not
give effect to purchases of Conversion Stock by the Employee Stock
Ownership Plan ("ESOP"), which initially will be deducted from the
Company's stockholders' equity. For the effect of such purchases, see
"Capitalization" and "Pro Forma Data."
1
(continued from prior page)
The Exchange. Pursuant to a Plan of Conversion and Agreement and Plan
of Reorganization (the "Plan" or "Plan of Conversion") adopted by the
Association and Montgomery Mutual Holding Company (the "Mutual Holding
Company"), the Association will become a subsidiary of the Company upon
consummation of the transactions described herein (collectively, with the
Offerings, the "Conversion and Reorganization"). As a result of the Conversion
and Reorganization, each share of common stock, par value $.01 per share, of the
Association ("Association Common Stock") held by the Mutual Holding Company,
which currently holds 600,000 shares or 70.59% of the outstanding Association
Common Stock, will be cancelled and each share of Association Common Stock held
by the Association's Public stockholders (the "Public Association Shares"),
which amounted to 250,000 shares or 29.41% of the outstanding Association Common
Stock at December 31, 1996, will be converted into shares of Common Stock (the
"Exchange Shares") pursuant to a ratio (the "Exchange Ratio") that will result
in the holders of such shares (the "Public Stockholders") owning in the
aggregate approximately 25.88% of the Company before giving effect to (a) the
payment of cash in lieu of fractional Exchange Shares, (b) any shares of Common
Stock purchased by such stockholders in the Offerings described herein or the
Company's ESOP thereafter or (c) any exercise of dissenters' rights (the
"Exchange"). The dilution of Public Stockholder ownership interest from a 29.41%
actual ownership interest in the Association to a 25.88% ownership interest in
the Company reflects the downward adjustment pursuant to Office of Thrift
Supervision ("OTS") policy which requires the Exchange Ratio to reflect the
amount of the dividends declared by the Association and waived by the Mutual
Holding Company. As discussed under "- Independent Valuation" below and herein,
the final Exchange Ratio will be determined based on the Public Stockholders'
ownership interest and not on the market value of the Public Association Shares.
The Offerings. In addition to the Exchange, nontransferable
subscription rights to subscribe for up to 1,065,441 shares (which may be
increased to 1,225,257 shares under certain circumstances described below) of
Common Stock (the "Conversion Stock") have been granted to certain depositors of
the Association as of specified record dates, the ESOP, directors, officers and
employees of the Mutual Holding Company and the Association, and the Public
Stockholders, subject to the limitations described herein (the "Subscription
Offering"). Commencing concurrently with the Subscription Offering, and subject
to the prior rights of holders of subscription rights, the right of the Company,
the Mutual Holding Company and the Association (the "Primary Parties") to reject
such orders in whole or in part and the other limitations described herein, the
Company is offering the shares of Conversion Stock not subscribed for in the
Subscription Offering, if any, for sale in a community offering (the "Community
Offering") to certain members of the general Public to whom a copy of this
Prospectus is delivered by or on behalf of the Company, with preference given to
natural persons residing in Montgomery, Fountain and Warren Counties, Indiana.
It is anticipated that shares of Conversion Stock not subscribed for in
the Subscription and Community Offerings, if any, will be offered by the Company
to members of the general public to whom a copy of this Prospectus is delivered
by or on behalf of the Company in a syndicated community offering (the
"Syndicated Community Offering"). The Subscription Offering, Community Offering
and any Syndicated Community Offering are referred to collectively as the
"Offerings." The Primary Parties have engaged Webb to consult with and advise
them in the Conversion and Reorganization, and Webb has agreed to use its best
efforts to solicit subscriptions and purchase orders for shares of Conversion
Stock in the Subscription and Community Offerings. See "The Conversion and
Reorganization - Marketing Arrangements."
The Subscription Offering will terminate at Noon, Crawfordsville,
Indiana Time, on _____________ __, 1997 (the "Expiration Date), unless extended
by the Primary Parties, with approval of the OTS, if necessary. The Community
Offering is expected to terminate at the same time as the Subscription Offering.
The Community Offering and/or any Syndicated Community Offering must be
completed within 45 days after the close of the Subscription Offering, or
_________ __, 1997, unless extended by the Primary Parties with the approval of
the OTS, if necessary. Orders submitted are irrevocable until the completion of
the Conversion and Reorganization; provided that, if the Conversion and
Reorganization is not completed within the 45-day period, referred to above,
unless such period has been extended with the consent of the OTS, if necessary,
all subscribers will have their funds returned promptly with interest, and all
withdrawal authorizations will be cancelled. See "The Conversion and
Reorganization - The Offerings - Subscription Offering."
2
(continued from prior page)
Independent Valuation. Pursuant to regulations of the OTS, the offering
of Conversion Stock in the Offerings is required to be based on an independent
valuation of the pro forma market value of the Association and the Mutual
Holding Company. Keller & Company ("Keller") has prepared an independent
appraisal, which states at the Midpoint of the valuation range that the
estimated pro forma market value of the Association and the Mutual Holding
Company on a combined basis was $12,500,000 as of March 4, 1997 (the
"Appraisal"). The Appraisal was multiplied by 74.12% (which represents the
Mutual Holding Company's percentage interest in the Association, adjusted upward
from 70.59% so as to reflect the $300,000 of dividends declared by the
Association and waived by the Mutual Holding Company) to determine a midpoint of
the offering range ($9,264,700), and the minimum and maximum range were set at
15% below and above the midpoint, respectively, resulting in a range of
$7,875,000 to $10,654,410 (the "Offering Price Range").
The Boards of Directors of the Primary Parties determined that the
Conversion Stock would be sold at $10.00 per share (the "Purchase Price"),
resulting in a range of 787,500 to 1,065,441 shares of Conversion Stock being
offered. Upon consummation of the Conversion and Reorganization, the Conversion
Stock and the Exchange Shares will represent approximately 74.12% and 25.88%,
respectively, of the Company's total outstanding shares. Based upon the Offering
Price Range, the Exchange Ratio is expected to range from 1.10 to 1.49,
resulting in a range of 275,000 Exchange Shares to 372,059 Exchange Shares to be
issued in the Conversion and Reorganization. The 1,437,500 shares of Common
Stock offered hereby include up to 1,065,441 shares of Conversion Stock (subject
to adjustment up to 1,225,257 shares as described herein) and up to 372,059
shares of Exchange Shares (subject to adjustment up to 427,868 shares as
described herein). The Offering Price Range may be increased or decreased to
reflect changes in market and economic conditions prior to completion of the
Conversion and Reorganization, and under certain circumstances specified herein
subscribers will be resolicited and given the right to modify or cancel their
orders. See "The Conversion and Reorganization - Stock Pricing, Exchange Ratio
and Number of Shares to be Issued."
Restrictions on Transfer of Subscription Rights and Shares. No person
may transfer or enter into any agreement or understanding to transfer the legal
or beneficial ownership of the subscription rights issued under the Plan of
Conversion or the shares of Common Stock to be issued upon their exercise. Each
person exercising subscription rights will be required to certify that a
purchase of Common Stock is solely for the purchaser's own account and that
there is no agreement or understanding regarding the sale or transfer of such
shares. See "The Conversion-Restrictions on Transfer of Subscription Rights and
Shares." The Company and the Association will pursue any and all legal and
equitable remedies in the event they become aware of the transfer of
subscription rights and will not honor orders known by them to involve the
transfer of such rights.
Purchase Limitations. The Plan sets forth various purchase limitations
which are applicable in the Offerings. The minimum purchase is 25 shares. No
Eligible Account Holder, Supplemental Eligible Account Holder, Other Member,
director, officer or employee or Public Stockholder may purchase in their
capacity as such in the Subscription Offering more than the number of shares of
Conversion Stock that, when combined with Exchange Shares received, aggregate
$200,000 of Common Stock; no person may purchase in the Offerings more than the
number of shares of Conversion Stock that when combined with Exchange Shares
received aggregate $200,000 of Common Stock; and no person together with
associates of or persons acting in concert with such person, may purchase in the
Offerings more than the number of shares of Conversion Stock that when combined
with Exchange Shares received by such person, together with associates of and
persons acting in concert with such person, aggregate more than $200,000 of
Common Stock. See "The Conversion and Reorganization - The Offerings -
Subscription Offering," "-Community Offering," "-Syndicated Community Offering
and "-Limitations on Conversion Stock Purchases."
Required Approvals. The consummation of the Conversion and
Reorganization is subject to the receipt of various regulatory approvals and the
approval of the members of the Mutual Holding Company and the stockholders of
the Association in the manner set forth herein.
The Company has applied to the National Association of Securities
Dealers to have its Common Stock quoted on the Nasdaq SmallCap Market under the
symbol "MONT." Prior to the Conversion and Reorganization, there has not been an
active and liquid market for the Public Association Shares, and there can be no
assurance that an active and liquid trading market for the Common Stock will
develop. See "Market for Common Stock."
3
--------------------
CHARLES WEBB & COMPANY,
a Division of Keefe, Bruyette & Woods, Inc.
--------------------
The date of this Subscription and Community Offering Prospectus is
___________, __ 1997.
4
[MAP]
5
SUMMARY
This summary is qualified in its entirety by the more detailed
information regarding the Association and the Mutual Holding Company and the
Consolidated Financial Statements of the Association and the Notes thereto
appearing elsewhere in this Prospectus.
Montgomery Financial Corporation
Montgomery Financial Corporation is an Indiana corporation organized in
April 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. Upon completion of the Conversion and Reorganization, the only
significant assets of the Company will be all of the outstanding Association
Common Stock, the note evidencing the Company's loan to the ESOP and the portion
of the net proceeds from the Offerings retained by the Company. The business of
the Company will initially consist of the business of the Association. See
"Business of Montgomery" and "Regulation - The Company Regulation."
Montgomery Savings, A Federal Association
Montgomery Savings, A Federal Association, is a federally chartered
stock savings association that was organized on August 11, 1995 as a subsidiary
of the Mutual Holding Company. Prior to that date, Montgomery Savings
Association, A Federal Association, in its mutual form (the "Mutual
Association") had operated in the market area now served by the Association. In
connection with the organization of the Mutual Holding Company (the "MHC
Reorganization"), the Mutual Association transferred substantially all of its
assets and liabilities to the Association in exchange for 600,000 shares of
Association Common Stock and converted its charter to that of a federal mutual
holding company known as Montgomery Mutual Holding Company. As part of the MHC
Reorganization, the Association also sold an additional 250,000 shares of
Association Common Stock to certain members of the general public. As of
December 31, 1996, there were 850,000 shares of Association Common Stock issued
and outstanding, 250,000 shares of which consisted of Public Association Shares.
At December 31, 1996, the Association had $94.6 million of total assets, $85.5
million of total liabilities, including $72.3 million of deposits, and $9.1
million of stockholders' equity. The Association Common Stock is registered with
the OTS under Section 12(g) of the Securities Exchange Act of 1934, as amended
("Exchange Act").
Montgomery Mutual Holding Company
Montgomery Mutual Holding Company is a federally chartered mutual
holding company chartered on August 11, 1995 in connection with the MHC
Reorganization. The Mutual Holding Company's primary asset is 600,000 shares of
Association Common Stock, which represents 70.59% of the shares of Association
Common Stock outstanding as of the date of this Prospectus. The Mutual Holding
Company's only other assets consist of deposit accounts in the amount of
$103,000 as of December 31, 1996 (which will become assets of the Association
upon consummation of the Conversion and Reorganization). As part of the
Conversion and
6
Reorganization, the Mutual Holding Company will convert from mutual form to a
federal interim stock savings institution and simultaneously merge with and into
the Association, with the Association being the surviving entity.
The Conversion and Reorganization
Purposes of the Conversion and Reorganization. In their decision to
pursue the Conversion and Reorganization, the Mutual Holding Company and the
Association considered various regulatory uncertainties associated with the
mutual holding company structure including the ability to waive dividends in the
future as well as the general uncertainty regarding a possible elimination of
the federal savings association charter. See "Risk Factors - Proposed Federal
Legislation." In addition, the Mutual Holding Company and the Association
considered the various advantages of a stock holding company form of
organization including: (1) a stock holding company's ability to diversify the
Company's and the Association's business activities which is expected to enhance
the long-term value of the Company on a consolidated basis; (2) the larger
capital base of a stock holding company; (3) the enhancement of the Company's
future access to the capital markets; (4) the increase in the number of
outstanding shares of publicly traded stock (which may increase the liquidity of
the Common Stock); (5) a stock holding company's enhanced ability to repurchase
shares of its common stock; and (6) the greater ability to acquire other
financial institutions. For additional information see "The Conversion and
Reorganization Purposes of the Conversion and Reorganization."
Description of the Conversion and Reorganization. On December 26, 1996,
the Boards of Directors of the Association and the Mutual Holding Company
adopted the Plan, which was amended on March 31, 1997, and in April 1997 the
Association incorporated the Company under Indiana law as a first-tier wholly
owned subsidiary of the Association. Pursuant to the Plan, (i) the Mutual
Holding Company will convert to an interim federal stock savings institution and
simultaneously merge with and into the Association, pursuant to which the Mutual
Holding Company will cease to exist and the 600,000 shares or 70.59% of the
outstanding Association Common Stock held by the Mutual Holding Company will be
cancelled, and (ii) an interim savings association ("Interim") to be formed as a
wholly owned subsidiary of the Company solely for such purpose will then merge
with and into the Association. As a result of the merger of the Interim with and
into the Association, the Association will become a wholly owned subsidiary of
the Company and the outstanding Public Association Shares, which amounted to
250,000 shares or 29.41% of the outstanding Association Common Stock at December
31, 1996, will be converted into the Exchange Shares pursuant to the Exchange
Ratio, which will result in the holders of such shares owning in the aggregate
approximately 25.88% of the Common Stock to be outstanding upon the completion
of the Conversion and Reorganization (i.e., the Conversion Stock and the
Exchange Shares) (which is approximately equal to the percentage of Association
Common Stock owned by them in the aggregate immediately prior to consummation of
the Conversion and Reorganization, adjusted downward pursuant to OTS policy in
order to reflect the $300,000 of dividends declared by the Association and
waived by the Mutual Holding Company), before giving effect to (a) the payment
of cash in lieu of issuing fractional Exchange Shares, (b) any shares of
Conversion Stock purchased by the Association's stockholders in the Offerings or
the ESOP thereafter, and (c) any exercise of dissenters' rights.
7
The following diagram outlines the current organizational structure of
the Primary Parties' and their ownership interests:
- --------------------------------- -------------------------------------
Montgomery Mutual Holders of Public
Holding Company Association Shares
- --------------------------------- -------------------------------------
70.59% 29.41%
---------------------------------------
Montgomery Savings,
A Federal Association
---------------------------------------
100%
---------------------------------------
Montgomery Financial
Corporation
---------------------------------------
100%
---------------------------------------
Interim
(to be formed)
---------------------------------------
The following diagram reflects the Conversion and Reorganization,
including (i) the merger of the Mutual Holding Company (following its conversion
into an interim federal stock savings institution) with and into the
Association, (ii) the merger of Interim with and into the Association, pursuant
to which the Public Association Shares will be converted into Exchange Shares,
and (iii) the offering of Conversion Stock. The diagram assumes that there are
no dissenters' rights exercised and no fractional shares and does not give
effect to purchases of Conversion Stock by holders of Public Association Shares
or the exercise of outstanding stock options. In addition to shares of Common
Stock to be issued pursuant to the Exchange, the Company is offering shares of
Conversion Stock in the Offerings as part of the Conversion and Reorganization.
See "- The Offerings" below and "The Conversion and Reorganization - The
Offerings."
8
- --------------------------------- -------------------------------------
Purchasers of Holders of Public
Conversion Stock Association Shares
- --------------------------------- -------------------------------------
74.12% 25.88%
---------------------------------------
Montgomery Financial
Corporation
---------------------------------------
100%
---------------------------------------
Montgomery Savings,
A Federal Association
---------------------------------------
Pursuant to OTS regulations, consummation of the Conversion and
Reorganization is conditioned upon the approval of the Plan by the OTS, as well
as (1) the approval of the holders of at least a majority of the total number of
votes eligible to be cast by the members of the Mutual Holding Company (which
consist of depositors of the Association) ("Members") as of the close of
business on _________ __, 1997 (the "Voting Record Date") at a special meeting
of Members called for the purpose of submitting the Plan for approval (the
"Members' Meeting"), and (2) the approval of the holders of at least two-thirds
of the shares of the outstanding Association Common Stock held by the Mutual
Holding Company and the Public Stockholders (collectively, the "Stockholders"),
as of the Voting Record Date at a special meeting of Stockholders called for the
purpose of considering the Plan (the "Stockholders' Meeting"). In addition, the
Primary Parties have conditioned the consummation of the Conversion and
Reorganization on the approval of the Plan by at least a majority of the votes
cast, in person or by proxy, by the Public Stockholders at the Stockholders'
Meeting. The Mutual Holding Company intends to vote its shares of Association
Common Stock, which amount to 70.59% of the outstanding shares, in favor of the
Plan at the Stockholders' Meeting. In addition, as of March 31, 1997, directors
and executive officers of the Association as a group (8 persons) beneficially
owned 28,700 shares (not including stock options) or 3.38% of the outstanding
Association Common Stock, which shares can also be expected to be voted in favor
of the Plan at the Stockholders' Meeting.
The Offerings
Pursuant to the Plan and in connection with the Conversion and
Reorganization, the Company is offering up to 1,065,441 shares of Conversion
Stock in the Offerings. Conversion Stock is first being offered in the
Subscription Offering with nontransferable subscription rights being granted, in
the following order of priority, to (i) depositors of the Association with
account balances of $50.00 or more as of the close of business on September 30,
1995 ("Eligible Account Holders"); (ii) the ESOP; (iii) depositors of the
Association with account balances of $50.00 or more as of the close of business
on March 31, 1997 ("Supplemental Eligible Account Holders"); (iv) members of the
Mutual Holding Company as of the Voting Record Date (other than Eligible Account
Holders and Supplemental Eligible Account Holders) ("Other Members"); (v)
directors, officers and employees of the Mutual Holding Company and the
Association; and (vi) Public
9
Stockholders. Subscription rights will expire if not exercised by Noon,
Crawfordsville, Indiana time, on _________ __, 1997, unless extended.
Subject to the prior rights of holders of subscription rights,
Conversion Stock not subscribed for in the Subscription Offering is being
offered in the Community Offering to certain members of the general public to
whom a copy of this Prospectus is delivered, with preference given to natural
persons residing in Montgomery, Fountain and Warren Counties, Indiana. It is
anticipated that shares not subscribed for in the Subscription and Community
Offerings may be offered to certain members of the general Public in a
Syndicated Community Offering. The Primary Parties reserve the absolute right to
reject or accept any orders in the Community Offering or the Syndicated
Community Offering, in whole or in part, either at the time of receipt of an
order or as soon as practicable following the Expiration Date. The closing of
all shares sold in the Offerings will occur simultaneously, and all shares of
Conversion Stock will be sold at a uniform price of $10.00 per share.
The Primary Parties have retained Webb as consultant and advisor in
connection with the Offerings and to assist in soliciting subscriptions in the
Offerings on a best efforts basis. See "The Conversion and Reorganization - The
Offerings - Subscription Offering," "- Community Offering," "- Syndicated
Community Offering" and "- Marketing Arrangements."
Purchase Limitations
With the exception of the ESOP, which intends to purchase up to an
aggregate of 8.0% of the number of shares of Common Stock to be outstanding upon
completion of the Conversion and Reorganization, no Eligible Account Holder,
Supplemental Eligible Account Holder, Other Member, director, officer or
employee or Public Stockholder may purchase in their capacity as such in the
Subscription Offering more than the number of shares of Conversion Stock that,
when combined with Exchange Shares received, aggregate $200,000 of Common Stock;
no person may purchase in each of the Community Offering and any Syndicated
Community Offering more than the number of shares of Conversion Stock that when
combined with Exchange Shares received aggregate $200,000 of Common Stock; and
no person together with associates of or persons acting in concert with such
person, may purchase in the Offerings more than the number of shares of
Conversion Stock that when combined with Exchange Shares received by such
person, together with associates of and persons acting in concert with such
person, aggregate more than $200,000 of Common Stock. For purposes of the
purchase limitations set forth in the Plan of Conversion, Exchange Shares will
be valued at $10.00 per share which is the same price at which shares of
Conversion Stock will be issued in the Offerings. At any time during the
Offerings, and without further approval by the Members or the Stockholders, the
Primary Parties may in their sole discretion decrease or increase any of the
purchase limitations up to 5% of the Common Stock issued in the Conversion and
Reorganization. Under certain circumstances, subscribers may be resolicited in
the event of such an increase and given the opportunity to increase, decrease or
rescind their orders. The minimum purchase is 25 shares. See "The Conversion and
Reorganization - Limitations on Conversion Stock Purchases." In the event of an
over subscription, shares will be allocated in accordance with the Plan, as
described under "The Conversion and Reorganization - The Offerings -
Subscription Offering" and "- Community
10
Offering." Because the purchase limitations contained in the Plan of Conversion
include Exchange Shares to be issued to Public Stockholders for their Public
Association Shares, certain holders of Public Association Shares may be limited
in their ability to purchase Conversion Stock in the Offerings.
Stock Pricing, Exchange Ratio and Number of Shares to be Issued in the
Conversion and Reorganization
OTS regulations require the aggregate purchase price of the Conversion
Stock to be consistent with the Appraisal of the Association and the Mutual
Holding Company, which was $12,500,000 at the midpoint of the valuation range as
of March 4, 1997. Because the holders of the Public Association Shares will
continue to hold the same aggregate percentage ownership interest in the Company
as they held in the Association adjusted downward pursuant to OTS policy in
order to reflect the dividends declared by the Association and waived by the
Mutual Holding Company (before giving effect to any shares of Common Stock
purchased by the Association's stockholders in the Offerings or the ESOP
thereafter, the payment of cash in lieu of issuing fractional Exchange Shares
and any exercise of dissenters' rights), the Appraisal was multiplied by 74.12%
(which represents the Mutual Holding Company's percentage interest in the
Association adjusted upward from 70.59% so as to reflect the $300,000 of
dividends declared by the Association and waived by the Mutual Holding Company)
to determine the midpoint of the Offering Price Range, which is $9,264,700. In
accordance with OTS regulations, the minimum and maximum of the Offering Price
Range were set at 15% below and above the midpoint, respectively, resulting in
an offering range of $7,875,000 to $10,654,410. The full text of the Appraisal
describes the procedures followed, the assumptions made, limitations on the
review undertaken and matters considered, which included the trading market for
the Association Common Stock (see "Market for Common Stock") but was not
dependent thereon. The Appraisal has been filed as an exhibit to the
Registration Statement and Application for Conversion of which this Prospectus
is a part, and is available in the manner set forth under "Additional
Information." The Appraisal is not intended and should not be construed as a
recommendation of any kind as to the advisability of purchasing such stock.
All shares of Conversion Stock will be sold at the Purchase Price of
$10.00 per share, which was established by the Boards of Directors of the
Primary Parties. The actual number of shares to be issued in the Offerings will
be determined by the Primary Parties based upon the final updated valuation of
the estimated pro forma market value of the Conversion Stock at the completion
of the Offerings. The number of shares of Conversion Stock to be issued is
expected to range from a minimum of 787,500 shares to a maximum of 1,065,441
shares. Subject to approval of the OTS, the Offering Price Range may be
increased or decreased to reflect market and economic conditions prior to the
completion of the Offerings, and under such circumstances the Primary Parties
may increase or decrease the number of shares of Conversion Stock. No
resolicitation of subscribers will be made and subscribers will not be permitted
to modify or cancel their subscriptions unless (i) the gross proceeds from the
sale of the Conversion Stock are less than the minimum or more than 15% above
the maximum of the current Offering Price Range (exclusive of a number of shares
equal to up to an additional 8.0% of the Common Stock outstanding immediately
upon completion of the Conversion and Reorganization which may be
11
issued to the ESOP out of authorized but unissued shares of Common Stock to the
extent such shares are not purchased in the Offerings due to an over
subscription by Eligible Account Holders) or (ii) the Offerings are extended
beyond _____ __, 1997. Any increase or decrease in the number of shares of
Conversion Stock will result in a corresponding change in the number of Exchange
Shares, so that upon consummation of the Conversion and Reorganization, the
Conversion Stock and the Exchange Shares will represent approximately 74.12% and
25.88%, respectively, of the Company's total outstanding shares. Nevertheless,
Exchange Shares may represent less than 25.88% of the Company's total
outstanding shares if there are insufficient shares for the ESOP to purchase
8.0% of the Common Stock outstanding immediately upon completion of the
Conversion and Reorganization and, consequently, the Company has to issue
authorized but unissued shares to the ESOP in order to satisfy its order to
purchase such amount of Conversion Stock in the Offerings. See "Pro Forma Data,"
"Risk Factors - Possible Dilutive Effect of Issuance of Additional Shares" and
"The Conversion and Reorganization - Stock Pricing, Exchange Ratio and Number of
Shares to be Issued."
Based on the 250,000 Public Association Shares outstanding at December
31, 1996, and assuming a minimum of 787,500 and a maximum of 1,065,441 shares of
Conversion Stock are issued in the Offerings, the Exchange Ratio is expected to
range from approximately 1.10 Exchange Shares to 1.49 Exchange Shares for each
Public Association Share outstanding immediately prior to the consummation of
the Conversion and Reorganization. The Exchange Ratio will be affected if any
stock options to purchase shares of Association Common Stock are exercised after
December 31, 1996 and prior to consummation of the Conversion and
Reorganization. If any of such stock options are outstanding immediately prior
to consummation of the Conversion and Reorganization, they will be converted
into options to purchase shares of Common Stock, with the number of shares
subject to the option and the exercise price per share to be adjusted based upon
the Exchange Ratio so that the aggregate exercise price remains unchanged, and
with the duration of the option remaining unchanged. As of the date of this
Prospectus, there were options to purchase 18,750 shares of Association Common
Stock outstanding, all of which had an exercise price of $13 per share, and the
Association has no plans to grant additional stock options prior to the
consummation of the Conversion and Reorganization.
The following table sets forth, based upon the minimum, midpoint,
maximum and 15% above the maximum of the Offering Price Range, the following:
(i) the total number of shares of Conversion Stock and Exchange Shares to be
issued in the Conversion and Reorganization, (ii) the percentage of the total
Common Stock represented by the Conversion Stock and the Exchange Shares, and
(iii) the Exchange Ratio. The table assumes that no holder of Public Association
Shares exercises dissenters' rights and that there is no cash paid in lieu of
issuing fractional Exchange Shares.
12
Total
Conversion Stock to Exchange Shares to Shares
Be Issued(1) Be Issued(1) of Common
------------------- ------------------ Stock to be Exchange
Amount Percent Amount Percent Outstanding(1) Ratio(1)
------ ------- ------ ------- -------------- --------
Minimum ..... 787,500 74.12% 275,000 25.88% 1,062,500 1.10
Midpoint .... 926,475 74.12 323,525 25.88 1,250,000 1.29
Maximum ..... 1,065,441 74.12 372,059 25.88 1,437,500 1.49
15% above
maximum ... 1,225,257 74.12 427,868 25.88 1,653,125 1.71
- ----------
(1) Assumes that outstanding options to purchase 18,750 shares of Association
Common Stock at December 31, 1996 are not exercised prior to consummation
of the Conversion and Reorganization. Assuming that all of such options are
exercised prior to such consummation, the percentages represented by the
Conversion Stock and the Exchange Shares would amount to 72.52% and 27.48%,
respectively, and the Exchange Ratio would amount to 1.09, 1.28, 1.47, and
1.69, at the minimum, midpoint, maximum and 15% above the maximum of the
Offering Price Range, respectively.
Differences in Stockholder Rights
The Company is an Indiana corporation subject to the provisions of the
Indiana Business Corporation Law, and the Association is a federally chartered
savings association subject to federal laws and regulations. Upon consummation
of the Conversion and Reorganization, the Public Stockholders of the Association
will become stockholders of the Company and their rights will be governed by the
Company's Articles of Incorporation and Bylaws and Indiana law. The rights of
stockholders of the Association are materially different in certain respects
from the rights of stockholders of the Company. See "Comparison of Stockholders'
Rights" and "Description of Capital Stock of the Company."
Benefits of Conversion and Reorganization to Directors and Officers
The Company intends to adopt certain stock benefit plans for the
benefit of directors, officers and employees of the Company and the Association.
The proposed benefit plans are as follows: (i) a 1997 Stock Option Plan,
pursuant to which a number of authorized but unissued shares of Common Stock
equal to 10% of the Conversion Stock to be sold in the Offerings (106,544 shares
at the maximum of the Offering Price Range) may be reserved for issuance
pursuant to stock options and stock appreciation rights to directors, officers
and employees; and (ii) a 1997 Management Recognition Plan (the "1997
Recognition Plan"), which may purchase a number of shares of Common Stock, with
funds contributed by the Company, either from the Company or in the open market
equal to an amount which, when added to the number of shares of Common Stock
held in the existing Management Recognition Plan, will equal 4.0% of the Common
Stock outstanding immediately following the Conversion and Reorganization
(57,500 shares at the maximum of the Offering Price Range) for distribution to
directors, officers and employees (without any requirement of payment by the
grantee). The Company has not determined
13
when it will implement the 1997 Stock Option Plan and the 1997 Recognition Plan.
If, however, it is implemented prior to one year following the consummation of
the Conversion and Reorganization, the Company will submit such plans to
stockholders for approval at an annual or special meeting at least six months
following the consummation of the Conversion and the Reorganization. In such
event, OTS regulations permit individual members of management to receive up to
25% of the shares reserved pursuant to any stock option or non-tax qualified
stock benefit plan, and directors who are not employees to receive up to 5% of
such stock (or stock options) reserved individually and up to 30% in the
aggregate under any such plan. See "Management of the Association - Benefit
Plans."
In the event that the 1997 Recognition Plan purchases shares of Common
Stock in the open market with funds contributed by the Company, the cost of such
shares initially will be deducted from the stockholders' equity of the Company,
but the number of outstanding shares of Common Stock will not increase and
stockholders accordingly will not experience dilution of their ownership
interest. In the event that the 1997 Recognition Plan purchases shares of Common
Stock from the Company with funds contributed by the Company, total
stockholders' equity would neither increase or decrease, but under such
circumstances stockholders would experience dilution of their ownership
interests (by approximately 3.36% at the maximum of the Offering Price Range)
and per share stockholders' equity and per share net earnings would decrease as
a result of an increase in the number of outstanding shares of Common Stock. In
either case, the Company will incur operating expense and increases in
stockholders' equity as the shares held by the 1997 Recognition Plan are granted
and issued in accordance with the terms thereof. For a presentation of the
effects of anticipated purchases of Common Stock by the 1997 Recognition Plan,
see "Pro Forma Data."
In addition, the Company has adopted an ESOP in connection with the
Conversion and Reorganization, which intends to purchase 8.0% of the Common
Stock to be outstanding upon completion of the Conversion and Reorganization
(115,000 shares or $1,150,000 of Conversion Stock at the maximum of the Offering
Price Range) with a loan funded by the Company. See "Use of Proceeds." In the
event that there are insufficient shares available to fill the ESOP's order due
to an over subscription by Eligible Account Holders, the Company may issue
authorized but unissued shares of Common Stock to the ESOP in an amount
sufficient to fill the ESOP's order, subject to approval of the OTS, and/or the
ESOP may purchase such shares in the open market, if permitted. In the event
that additional shares of Common Stock are issued to the ESOP to fill its order,
stockholders would experience dilution of their ownership interests (by up to
7.41% at the maximum of the Offering Price Range, assuming the ESOP purchased no
shares in the Offerings) and per share stockholders' equity and per share net
earnings would decrease as a result of an increase in the number of outstanding
shares of Common Stock. See "Management of the Bank - Stock Benefit Plans -
Employee Stock Ownership Plan" and "Risk Factors - Possible Dilutive Effective
of Issuance of Additional Shares."
The foregoing plans are in addition to a Stock Option Plan, a
Directors' Stock Option Plan and a Management Recognition Plan which were
adopted by the Association in connection with the MHC Reorganization and
subsequently approved by the stockholders of the Association. These plans will
continue in existence after the Conversion and Reorganization as plans of the
Company.
14
In addition, pursuant to the terms of the 1995 Stock Incentive Plan and 1995
Directors' Stock Option Plan all outstanding stock options may be exercised in
whole or in part immediately prior to consummation of the Conversion and
Reorganization. See "Management of the Association Benefit Plans" and "The
Conversion and Reorganization - Effects of the Conversion and Reorganization -
Effect on Existing Compensation Plans."
In addition to the foregoing plans, in connection with the Conversion
and Reorganization, the Company and the Association may seek to enter into
employment agreements with Earl F. Elliott, the current President and Chief
Executive Officer of the Company and Chairman and Chief Executive Officer of the
Association, and J. Lee Walden, the current Executive Vice President and Chief
Financial Officer of the Company and President and Chief Financial Officer of
the Association. If such employment agreements had been in effect as of December
31, 1996 and Messrs. Elliott and Walden were terminated as of such date in
connection with a "change in control" of the Company, as defined in the
agreements, Messrs. Elliott and Walden could be entitled to receive
approximately $240,000 and $163,000 in severance pay, respectively. See
"Management of the Association - Employment Agreements."
Use of Proceeds
Net proceeds from the sale of the Conversion Stock are estimated to be
between $7.4 million and $10.1 million, depending on the number of shares sold
and the expenses of the Conversion and Reorganization. See "Pro Forma Data." The
Company plans to contribute to the Association 50% of the net proceeds from the
Offerings and retain the remainder of the net proceeds. The Company intends to
use a portion of the net proceeds retained by it to make a loan directly to the
ESOP to enable the ESOP to purchase 8.0% of the Common Stock to be outstanding
upon completion of the Conversion and Reorganization. The amount of the loan is
expected to be between $.9 and $1.2 million at the minimum and maximum of the
Offering Price Range, respectively. It is anticipated that the loan to the ESOP
will have a term of not less than ten years and a fixed rate of interest at the
prime rate as of the date of the loan. See "Management of the Association -
Benefit Plans - Employee Stock Ownership Plan." The remaining net proceeds will
be initially used to invest primarily in short-term interest-bearing deposits
and marketable securities. Funds retained by the Company may be used to support
the future expansion of operations or diversification into other banking-related
businesses and for other business or investment purposes, including the
acquisition of other financial institutions and/or branch offices, although
there are no current plans, arrangements, understandings or agreements regarding
such expansion, diversification or acquisitions. In addition, subject to
applicable limitations, such funds also may be used in the future to repurchase
shares of Common Stock although the Company currently has no intention of
effecting any such transactions following consummation of the Conversion and
Reorganization. See "The Conversion and Reorganization - Certain Restrictions on
Purchases or Transfers of Shares after the Conversion and Reorganization." Funds
contributed to the Association from the Company will be used for general
business purposes. The proceeds will be used to support the Association's
lending and investment activities and thereby enhance the Association's
capabilities to serve the borrowing and other financial needs of the communities
it serves. The Association plans to initially use the proceeds to invest
primarily in short-term interest-bearing deposits and marketable securities. See
"Use of Proceeds."
15
Dividend Policy
Following consummation of the Conversion and Reorganization the Board
of Directors of the Company intends to declare cash dividends on the Common
Stock at an initial quarterly rate equal to $0.10 per share divided by the final
Exchange Ratio, commencing with the first full quarter following consummation of
the Conversion and Reorganization. Based upon the Valuation Price Range, the
Exchange Ratio is expected to be 1.1000, 1.2941, 1.4882 and 1.7115 at the
minimum, midpoint, maximum and 15% above the maximum of the Valuation Price
Range, respectively, resulting in an initial quarterly dividend rate of $.091,
$.077, $.067 and $.058 per share, respectively, following consummation of the
Conversion and Reorganization. Declarations of dividends by the Company's Board
of Directors will depend upon a number of factors, including the amount of the
net proceeds from the Offerings retained by the Company, investment
opportunities available to the Company or the Association, capital requirements,
regulatory limitations, the Company's and the Association's financial condition
and results of operations, tax considerations and general economic conditions.
Consequently, there can be no assurance that dividends will in fact be paid on
the Common Stock or that, if paid, such dividends will not be reduced or
eliminated in future periods. The Association intends to continue to pay regular
quarterly dividends through either the date of consummation of the Conversion
and Reorganization (on a pro rata basis) or the end of the fiscal quarter during
which the consummation of the Conversion and Reorganization occurs. See
"Dividend Policy."
Dissenters' Rights of Appraisal
Holders of Association Common Stock are entitled to appraisal rights
under Section 552.14 of the OTS' regulations as a result of the merger of the
Mutual Holding Company (following its conversion to a federal interim stock
savings institution) with and into the Association and the merger of the
Association with and into Interim, with the Association to be the surviving
entity in both mergers. Any such stockholder who wishes to exercise such
appraisal rights should review carefully the discussion of such rights in the
Association's proxy statement, including Appendix A thereto, because failure to
timely and properly comply with the procedures specified will result in the loss
of appraisal rights under Section 552.14. Pursuant to the Plan of Conversion,
consummation of the Conversion and the Reorganization is conditioned upon
holders of less than 10% of the outstanding Association Common Stock exercising
appraisal rights, which condition may, in the sole discretion of the Primary
Parties, be waived. See "The Conversion and Reorganization - Dissenters' Rights
of Appraisal."
Prospectus Delivery and Procedure for Purchasing Shares
To ensure that each purchaser receives a prospectus at least 48 hours
prior to Expiration Date in accordance with Rule 15c2-8 under the Exchange Act,
no prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the order
form will receipt or delivery in accordance with Rule 15c2-8. Order forms will
be distributed only with a prospectus. The Primary Parties will only accept for
processing orders submitted on original order forms with an executed
certification. Photocopies or facsimile
16
copies of order forms or the form of certification will not be accepted. Payment
by cash, check, money order, bank draft or debit authorization to an existing
account at the Association must accompany the order form. No wire transfers will
be accepted. See "The Conversion and Reorganization."
17
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial data as of and for the
periods ended June 30, 1996, 1995, 1994, 1993 and 1992 have been derived from
the audited consolidated financial statements of Montgomery. The selected
consolidated financial data as of December 31, 1996 and for the six months ended
December 31, 1996 and 1995 have been derived from the unaudited consolidated
financial statements of Montgomery which, in the opinion of management, reflect
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of the financial position and results of operations for
these periods. The operating results for the six months ended December 31, 1996
are not necessarily indicative of the results that may be expected for the year
ending June 30, 1997. 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.
June 30,
December 31, --------------------------------------------------------
1996 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- -------
(In Thousands)
Summary of Financial Condition:
Total assets....................... $94,623 $88,211 $87,324 $79,633 $73,862 $66,722
Interest-bearing deposits
in other financial institutions.. 5,766 3,607 3,871 1,735 4,735 2,123
Investment securities
available for sale(1) ........... 52 312 803 1,781 1,762 3,509
Loans, receivable, net............. 83,770 80,074 77,929 72,215 63,566 57,417
Deposits........................... 72,343 69,709 68,286 62,346 64,681 60,631
Borrowings.......................... 11,928 8,000 10,868 10,338 2,730 250
Stockholders' equity............ 9,082 9,127 6,678 6,290 5,686 5,354
18
Nine
Six Months Ended Months
December 31, Year Ended June 30, Ended
---------------- --------------------------------------- June 30,
1996 1995 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(Dollars in Thousands)
Summary of Operating Results:
Interest income(2)........................ $3,532 $3,373 $6,777 $6,178 $5,594 $5,796 $4,479
Interest expense.......................... 2,201 2,281 4,434 3,907 3,107 3,338 2,855
------ ------ ------ ------ ------ ------ ------
Net interest income.................... 1,331 1,092 2,343 2,271 2,487 2,458 1,624
Provision (adjustment) for losses on loans.. --- (26) 20 (15) 25 38 36
------ ------ ------ ------ ------ ------ -----
Net interest income after provision
for losses on loans................... 1,331 1,118 2,323 2,286 2,462 2,420 1,588
Other income................................ 18 35 23 79 147 162 112
Other expenses:
Salaries and employee benefits............ 449 471 879 902 833 825 533
Other..................................... 864 455 871 847 823 764 525
------ ------ ------ ------ ------ ------ ------
Total non-interest expense.............. 1,313 926 1,750 1,749 1,656 1,589 1,058
------ ------ ------ ------ ------ ------ ------
Income before income tax and cumulative
effect of change in accounting method...... 36 227 596 616 953 993 642
Income tax expense.......................... 19 79 165 231 349 433 247
------ ------ ------ ------ ------ ------ ------
Income before cumulative effect of change
in accounting method..................... 17 148 431 385 604 560 395
Cumulative effect of change in accounting
method.................................. --- --- --- --- --- 228 ---
------- -------- ------- ------- ------- ------- ------
Net income............................ $ 17 $ 148 $ 431 $ 385 $ 604 $ 332 $ 395
======= ======== ======= ======= ======= ======= ======
Net income per share........................ $0.02
Net income per share without the special SAIF
assessment................................. 0.32
Dividends declared per share................ 0.20 $0.10 $0.30 --- --- --- ---
Dividend pay out ratio...................... 1,000.00%
Performance Ratios:
Return on average assets(3)(4))(5).......... 0.32% 0.34% 0.49% 0.46% 0.79% 0.46% 0.80%
Return on average equity(3)(4)(6)........... 3.19 3.48 4.89 5.78 9.90 5.67 10.25
Average equity to average assets............ 10.10 9.64 9.99 7.91 7.96 8.19 7.76
Equity to assets at end of period........... 9.60 10.20 10.35 7.65 7.90 7.70 8.02
Interest rate spread(3)(4)(7)............... 2.59 2.12 2.27 2.54 3.19 3.38 3.12
Asset Quality Ratios:
Non-performing assets to total assets .40 1.00 .92 1.08 .70 1.19 1.00
Allowance for loan losses to net loans
receivable at end of period .19 .14 .20 .18 .22 .21 .17
Allowance for loan losses to non-performing loans
at end of period 50.32 15.38 23.90 16.89 28.21 20.24 26.46
Net interest margin(3)(4)(8)................ 3.05 2.59 2.77 2.82 3.41 3.61 3.43
Non-performing loans to total loans......... 0.37 0.92 .83 1.05 .77 1.03 0.62
Average interest-earning assets to average
interest-bearing liabilities............... 109.26 108.78 109.47 105.78 104.96 104.61 104.96
Non-interest expenses to average assets(3)(4) 2.41 2.10 1.98 2.08 2.16 2.22 2.13
Net interest income after provision for loan
losses to non-interest expenses(3)(4)...... 1.21x 1.21x 1.33x 1.31x 1.49x 1.52x 1.50x
- ------------------
(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" ). These securities are recorded at fair value and at December
31, 1996 this resulted in no change in total equity, at June 30, 1996 this
resulted in a decrease of $57,000 in total equity capital and at June 30,
1995 this resulted in an increase in total equity capital of $3,000.
(2) Loan origination fees are included in interest income, on a deferral basis.
(3) Information for the six months ended December 31, 1996, has been annualized
with the exception of the effect of the one time Savings Association
Insurance Fund ("SAIF") special assessment of $428,000 included in other
expenses, net of an income tax adjustment of $169,000 affecting net income
in the amount of $259,000 for the six month period. Information for the six
months ended December 31, 1995, has been annualized with no exceptions.
(4) Information for the nine months ended June 30, 1992 has been annualized.
The nine months ended June 30, 1992 is presented due to the change in
Montgomery's fiscal year end from September 30 to June 30.
(5) Net income divided by average total assets.
(6) Net income divided by average total equity.
(7) Interest rate spread is calculated by subtracting combined weighted average
interest rate cost from combined weighted average interest rate earned for
the period indicated.
(8) Net interest income divided by average interest-earning assets.
19
RECENT FINANCIAL DATA
The following table sets forth selected financial data of the
Association at and for the periods indicated. Financial data as of March 31,
1997, and for the three and nine months ended March 31, 1997 and 1996, are
unaudited. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation have been included.
The results of operations and other data for the three and nine months ended
March 31, 1997 are not necessarily indicative of the results of operations for
the fiscal year ending June 30, 1997.
March 31, June 30,
1997 1996
---- ----
(In Thousands)
Summary of Financial Condition:
Total assets ...................................... $93,627 $88,211
Interest-bearing deposits in other financial
institutions ................................... 5,087 3,607
Investment securities available for sale(1) ....... 42 312
Loans receivable, net ............................. 83,738 80,074
Deposits .......................................... 72,666 69,709
Borrowings ........................................ 10,428 8,000
Stockholders' equity .............................. 9,204 9,127
20
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ ------------------
1997 1996 1997 1996
------ ------ ------ ------
(Dollars in thousands)
Summary of Operating Results:
Interest income(2) ................ $1,824 $1,702 $5,356 $5,075
Interest expense .................. 1,140 1,084 3,342 3,365
------ ------ ------ ------
Net interest income ............. 684 617 2,014 1,170
Provision for losses on loans ...... 13 46 13 20
------ ------ ------ ------
Net interest income after
provision for losses on loans.. 671 571 2,001 1,690
Other income ....................... 3 17 20 51
Other expenses:
Salaries and employee benefits .... 243 240 692 711
Other ............................. 183 204 1,046 660
------ ------ ------ ------
Total non-interest expense ...... 426 444 1,738 1,371
------ ------ ------ ------
Income before income tax and
cumulative effect of change in
accounting method ............... 248 144 283 370
Income tax expense (benefit) ....... 101 (21) 120 58
------ ------ ------ ------
Income before cumulative effect of
change in accounting method ..... 147 165 163 312
Cumulative effect of change in
accounting method ............... -- -- -- --
------ ------ ------ ------
Net income ...................... $ 147 $ 165 $ 163 $ 312
====== ====== ====== ======
Net income per share ............... $ 0.17 $ 0.19 $ 0.19 $ --
Net income per share without the
special SAIF assesment .......... 0.17 0.19 0.50 --
Dividends declared per share ....... 0.10 0.10 0.30 0.20
Dividend pay out ratio ............. 58.82% 52.63% 157.89% --
Performance Ratios:
Return on average assets(3)(4) ..... 0.61 0.75 0.33 0.47%
Return on average equity(3)(5) ..... 6.43 7.30 3.31 4.79
Average equity to average assets ... 9.55 10.27 9.92 9.85
Equity to assets at end of period .. 9.83 10.19 9.83 10.19
Interest rate spread(3)(6) ......... 2.62 2.45 2.63 2.22
Asset Quality Ratios:
Non-performing assets to total assets 0.91 0.77 0.91 0.77
Allowance for loan losses to net
loans receivable at end of period 0.20 0.20 0.20 0.20
Allowance for loan losses to non-
performing loans at end of period 22.92 79.40 22.92 79.40
Net interest margin(3)(7) .......... 2.99 2.93 3.03 2.70
Non-performing loans to total loans. 0.89 0.25 0.89 0.25
Average interest-earning assets
to average interest-bearing
liabilities ..................... 107.38 109.39 108.04 109.09
Non-interest expenses to average
assets(3) ....................... 1.78 2.02 2.35 2.07
Net interest income after provision
for loan losses to non-interest
expenses(3) ..................... 1.58x 1.29x 1.23x 1.23x
- ----------
(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"). These securities are recorded at fair value and at March 31,
1997 this resulted in no change in total equity, at June 30, 1996 this
resulted in a decrease of $57,000 in total equity capital.
(2) Loan origination fees are included in interest income, on a deferral basis.
(3) Information for the three and nine months ended March 31, 1997, has been
annualized with the exception of the effect of the one time Savings
Association Insurance Fund ("SAIF") special assessment of $428,000 included
in other expenses, net of an income tax adjustment of $169,000 affecting
net income in the amount of $259,000 for the nine month period. Information
for the three and nine months ended March 31, 1996, has been annualized
with no exceptions.
(4) Net income divided by average total assets.
(5) Net income divided by average total equity.
(6) Interest rate spread is calculated by subtracting combined weighted average
interest rate cost from combined weighted average interest rate earned for
the period indicated.
(7) Net interest income divided by average interest-earning assets.
21
MANAGEMENT'S DISCUSSION OF RECENT FINANCIAL DATA
Financial Condition. Montgomery's total assets were $93.6 million at
March 31, 1997, an increase of $5.4 million, or 6.1 percent from June 30, 1996.
During this nine month period interest-earning assets increased $4.9 million, or
5.8 percent. Short-term interest-earning deposits increased $1.5 million, or
41.7 percent primarily due to the necessity to maintain an increased amount for
liquidity due to growth and in the daily balance fluctuation of short term
deposit accounts. Loans increased $3.7 million, or 4.6 percent, which is the
approximate increase budgeted for the current year-to-date. Investment
securities declined $269,000, or 86.4 percent primarily due to the maturity of
one security during the nine months ended March 31, 1997. Loan growth in excess
of deposit growth has caused Montgomery to use proceeds from the maturity of
investment securities to 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 increased $364,000, or 40.1 percent. Two properties
were acquired due to foreclosure and three properties were sold. The increase
was due to the foreclosure of an eight unit apartment complex and the
acquisition of a single family dwelling unit adjoining the apartment complex.
These properties are being converted to a nine unit condominium complex for
resale. Due to the planned use of this property, the complex has been classified
as investment real estate and removed from nonperforming assets. Work is ongoing
in connection with the condominium conversion, and initial sales efforts are
expected to commence during the last quarter of the fiscal year ending June 30,
1997. 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. Deposits increased $3.0
million, or 4.2 percent and borrowings increased $2.4 million, or 30.4 percent,
causing an increase in interest-bearing liabilities of 6.9 percent. The increase
in deposits was primarily the result of special rates being offered on certain
certificate accounts. The increase in borrowings was used to fund loan growth
and liquidity for the nine month period.
At March 31, 1997, stockholders' equity was $9,204,000 or 9.8 percent
of total assets, compared with stockholders' equity of $9,127,000, or 10.3
percent, at June 30, 1996. Montgomery continues to exceed all minimum capital
requirements. At March 31, 1997, Montgomery's tangible and core capital was
$8,781,000, or 9.4 percent of tangible assets, $7,384,000 in excess of the 1.5
percent minimum required tangible capital and $5,986,000 in excess of the 3.0
percent minimum required core capital. Risk-based capital equaled $7,788,000, or
13.8 percent of risk-weighted assets, $3,272,000 more than the minimum 8.0
percent risk-based level required.
Results of Operations. Montgomery's net income for the three months
ended March 31, 1997, was $147,000 compared to $165,000 for the three months
ended March 31, 1996, a decrease of $18,000, or 10.9 percent. Net interest
income increased $66,000, or 10.7 percent, primarily due to an increase in
interest rate spread from 2.46 percent for the three months ended March 31,
1996, to 2.62 percent for the three months ended March 31, 1997 due primarily to
more conservative pricing and market rate reductions for deposits. The provision
for loss on loans was $13,000 for the three months ended March 31, 1997 and was
$46,000 for the comparable
22
1996 period. Non-interest income was $3,000 for the 1997 three month period
compared to $17,000 for the 1996 period. Net income before income tax was
$248,000 for the three months ended March 31, 1997, compared to $144,000 for the
three months ended March 31, 1996, an increase of $104,000, or 72.2 percent.
Income tax for the three months ended March 31, 1997, was $101,000 compared to a
net income tax benefit of $21,000 for the three months ended March 31, 1996. The
income tax benefit in the amount of $74,000 for the 1996 period was due to a
recalculation of the amount of deferred tax on the tax bad debt reserve increase
since 1987. Net income for the three months ended March 31, 1996 was $91,000
before the $74,000 benefit was recorded compared to $147,000 for the current
three month period.
For the nine months ended March 31, 1997, the most significant factor
affecting Montgomery's operations was the one time special assessment required
by the Deposit Insurance Funds Act of 1996. The after tax effect of this one
time assessment was approximately $258,700. Net income for the nine months ended
March 31, 1997 was $163,000 compared to net income of $312,000 for the nine
months ended March 31, 1996, a decrease of $149,000 or 47.8 percent. Net income
for the nine months ended March 31, 1997, was $422,000 before the net effect of
the SAIF special assessment. The increase in net income before the special
assessment was caused primarily by an increase in interest rate spread from 2.23
percent for the nine months ended March 31, 1996, to 2.63 percent for the
current nine month period. Total other expenses for the nine months ended March
31, 1997, were $1,310,000 before the SAIF special assessment of $428,000
compared to $1,370,000 for the nine months ended March 31, 1996. Income tax
expense was $120,000 for the nine months ended March 31, 1997, compared to
$58,000 for the nine months ended March 31, 1996. As mentioned above, the income
tax for the 1996 period was effected by the adjustment to deferred income taxes
in the amount of $74,000.
Interest Income. Montgomery's total interest income for the three
months ended March 31, 1997, was $1.8 million, an increase of $122,000, or 7.2
percent, compared to interest income for the three months ended March 31, 1996.
This increase was primarily caused by an increase in average interest-earning
assets from $84.2 million for the three months ended March 31, 1996, to $91.5
million for the three months ended March 31, 1997, an increase of $7.3 million,
or 8.7 percent principally due to loan growth. The average yield on
interest-earning assets was 7.97 percent for the three months ended March 31,
1997, compared to 8.10 percent for the three months ended March 31, 1996. This
decrease was primarily caused by a decrease in the average yield on
interest-earning deposits from 5.51 percent to 5.07 percent for the current
three month period due to a decrease in market rates for such deposits.
Interest income for the nine months ended March 31, 1997, was $5.4
million, an increase of $281,000, or 5.5 percent, from interest income for the
same period in 1996. Average interest-earning assets for the nine months ended
March 31, 1997, were $88.6 million compared to $84.2 million for the 1996 nine
month period, an increase of $4.4 million, or 5.2 percent, principally due to
loan growth. The average yield for the 1997 period was 8.06 percent compared to
8.04 percent for the 1996 period.
Interest Expense. Interest expense for the three months ended March 31,
1997, was $1.1 million, which was a decrease of $56,000, or 5.1 percent, from
the three months ended March
23
31, 1996. Average interest-bearing liabilities increased $8.2 million, or 10.6
percent, from $77.0 million for the three months ended March, 31, 1996, to $85.2
million for the three months ended March 31, 1997 due to increased deposits and
increased borrowings to fund asset growth. The average cost of funds decreased
from 5.64 percent to 5.35 percent for the comparable periods. The average cost
of deposits decreased from 5.59 percent to 5.23 percent primarily due to a more
conservative approach by management in pricing deposit products and a general
decrease in deposit rates in the market area. The average rate on borrowings
increased from 6.04 percent to 6.18 percent for the comparable periods due to
converting some short term FHLB advances to longer term fixed rate advances.
Interest expense for the nine months ended March 31, 1997, was $3.3
million, a decrease of $24,000, or 0.7 percent, from the nine months ended March
31, 1996. The average cost of funds for the 1997 period was 5.43 percent
compared to 5.81 percent for the 1996 period. This decrease was a product of
management's efforts of attracting lower cost deposit accounts and the use of
lower cost FHLB advances as opposed to paying a premium to attract new
certificate of deposit accounts. The decrease in the cost of funds was offset by
an increase in average interest-bearing liabilities of $4.7 million, or 6.1
percent, from $77.3 million for the 1996 nine month period to $82.0 million for
the nine months ended March 31, 1997.
Provision for Losses on Loans. The provision for losses on loans was
$13,000 for the three months ended March 31, 1997, compared to $46,000 for the
three months ended March, 31, 1996. Both the $13,000 and the $46,000 provisions
for losses on loans were made primarily due to increase loan growth. The
provision for losses on loans was $13,000 for the nine months ended March 31,
1997, compared to $20,000 for the nine months ended March 31, 1996. Ninety day
delinquent loans were $746,000 at March 31, 1997, compared to $661,000 at June
30, 1996. Non-performing loans to total loans at March 31, 1997, were 0.89
percent compared to 0.83 percent at June 30, 1996. Non-performing assets,
consisting of nonperforming loans in the amount of $746,000 and other real
estate in the amount of $109,000, totaled $855,000, or 0.91 percent of total
assets, at March 31, 1997. At June 30, 1996, non-performing assets were
$809,000, or 0.92 percent of total assets. The allowance for losses to
non-performing assets was 20.0 percent at March 31, 1997, and 20.2 percent at
June 30, 1996. The allowance to total loans was 0.20 percent at both March 31,
1997 and June 30, 1996. As new loan products are offered, and the Association
increases its amount of non-residential and consumer loans, management will
re-evaluate the level of the allowance for loan losses.
Non-Interest Income. Montgomery's other income for the three months
ended March 31, 1997, totalled $3,000 compared to $17,000 for the three months
ended March, 31, 1996, a decrease of $14,000, or 82.4 percent. Appraisal income
decreased $14,000 during the comparable periods due to the change from an in
house appraiser to an independent appraiser, causing a decrease in fees charged
to borrowers for appraisal services. This change also caused a reduction in
employee expense.
Other income for the nine months ended March 31, 1997, was $20,000, a
decrease of $31,000, or 60.8 percent from the $51,000 recorded in the 1996
comparable period. During the nine months ended March 31, 1997, service charges
on deposit accounts increased $2,000 and
24
appraisal income decreased $30,000 from the 1996 nine month period for the same
reasons as indicated above.
Non-Interest Expense. Montgomery's other expenses for the three months
ended March 31, 1997, totalled $426,000, a decrease of $19,000, or 4.27 percent,
from the three months ended March 31, 1996. Salaries and employee benefits
increased $3,000, equipment expense increased $1,000 and data processing expense
increased $5,000. These increases are generally reflective of Montgomery's
growth. Real estate operations net income for the three months ended March 31,
1997, was $19,000 compared to $9,000 for the 1996 comparable period, an increase
of $10,000. This was due to an increase in the profit on the sale of real estate
and an increased occupancy rate of investment real estate causing an increase in
net rental income. Deposit insurance expense decreased $29,000 for the
comparative period due to the decrease in the quarterly premium in connection
with the one time SAIF special assessment. Advertising expense decreased $3,000
from the 1996 comparative period. Other expenses increased $14,000, or 17.5
percent, for the three months ended March 31, 1997, compared to the same 1996
period, primarily due to the growth in activity in demand deposits and the
related costs of operation of Montgomery's first ATM at its Mill Street office.
Non-interest expense for the nine months ended March 31, 1997, was $1.7
million compared to $1.4 million, an increase of $368,000, or 26.9 percent, from
the nine months ended March 31, 1996. Salary and employee benefits decreased
$19,000 of which $12,000 of the decrease was the net effect of changing from an
employee appraiser to an outside appraiser and normal salary increases. The
amount of deferred compensation expense for mortgage loan originations for the
nine months ended March 31, 1997, increased $10,000 compared to the 1996 period
causing a decrease in net salary expense. The balance of the change in salary
and employee benefits, an increase of approximately $3,000, can be attributed to
normal increases in employee related benefits. Net occupancy expense increased
$1,000 in the comparable nine month periods. Data processing expense increased
$7,000 due to the cost of supporting the ATM and additional cost due to normal
growth. Deposit insurance expense increased $394,000 for the nine months ended
March 31, 1997, compared to the same period in 1996 due to the one time SAIF
special assessment of $428,000 and a reduction in the regular assessment equal
to approximately $34,000. Net real estate operations generated a net income for
the nine months ended March 31, 1997, or $60,000 compared to a net loss of
$7,000 for the 1996 comparable period. This increase was caused by an increase
in net rental income, due to an increased occupancy rate, and a gain on the sale
of real estate in the 1997 period compared to a loss on sale of real estate
during the 1996 period. Other expenses for the nine months ended March 31, 1997,
were $313,000 compared to $264,000 for the nine months ended March 31, 1996, an
increase of $49,000, or 18.6 percent. Stockholder related expense increased
$10,000 as a result of becoming a publicly held stock company, and directors'
fees increased $8,000 due to 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 $14,000 primarily due to the
installation of Montgomery's first ATM, an increase in demand deposit
transactions and preparations for introduction of a new open-end line of credit
mortgage program to supplement its existing home equity loan program. Audit and
accounting services and liability insurance expense increased $7,000 primarily
due to the
25
change to a stock association. The balance of the increase in other expenses was
due to normal growth.
Income Tax Expense. Income tax expense for the three months ended March
31, 1997, was $101,000 compared to a tax benefit of $21,000 for the three months
ended March 31, 1996. The tax benefit for the three months ended March 31, 1996,
was caused by the adjustment to decrease deferred income tax in the amount of
$74,000 and the lower taxable income.
For the nine months ended March 31, 1997, income tax expense increased
$62,000 compared to the nine months ended March 31, 1996. This increase was due
to the $74,000 adjustment to deferred income tax for the 1996 period and the
lower taxable income due to the FDIC special assessment during the 1997 period.
RISK FACTORS
The following factors, in addition to those discussed elsewhere in this
Prospectus, should be considered by investors before deciding whether to
purchase the Common Stock offered hereby.
Vulnerability to Changes in Interest Rates
The Association's profitability, like that of many financial
institutions, is dependent to a large extent upon its net interest income, which
is the difference between its interest income on interest-earning assets, such
as loans and investments, and its interest expense on interest-bearing
liabilities, such as deposits. When interest-bearing liabilities mature or
reprice more quickly than interest-earning assets in a given period, a
significant increase in market rates of interest could adversely affect net
interest income. Similarly, when interest-earning assets mature or reprice more
quickly than interest-bearing liabilities, falling interest rates could result
in a decrease in net interest income. At December 31, 1996, fixed-rate loans
totalled $42.7 million or 50.5% of the Association's loan portfolio while
adjustable-rate loans totalled $41.9 million or 49.5% of the Association's loan
portfolio. The increased level of interest rate risk experienced by Montgomery
in recent periods was primarily due to the interest rate on interest-bearing
liabilities increasing more than the interest rate on interest-earning assets
because of the per adjustment rate limitation on adjustable rate loans due to a
lag in rate adjustments for such loans as compared to interest-bearing
liabilities. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Asset and Liability Management."
Competition
The Association experiences strong competition in its local market area
in both originating loans and attracting deposits. This competition arises from
a highly competitive market area with numerous savings institutions and
commercial banks, as well as credit unions, mortgage bankers and national and
local securities firms. The Association recognizes its need to monitor
competition and modify its products and services as necessary and possible,
taking into
26
consideration the cost impact. As a result, such competition may limit
Montgomery's growth and profitability in the future. See "Business of Montgomery
- - Market Area and Competition."
Geographical Concentration of Loans
At December 31, 1996, substantially all of the Association's real
estate mortgage loans were secured by properties located in the Association's
primary market area of Montgomery, Fountain and Warren Counties in Indiana.
While the Association currently believes that its loans are adequately secured
or reserved for, in the event that real estate prices in the Association's
market area substantially weaken or economic conditions in its market area
deteriorate, reducing the value of properties securing the Association's loans,
some borrowers may default and the value of the real estate collateral may be
insufficient to fully secure the loan. In either event, the Association may
experience increased levels of delinquencies and related losses having an
adverse impact on net income.
Certain Anti-Takeover Provisions
Certain provisions of the Company's articles of incorporation and
bylaws, including a provision limiting voting rights of beneficial owners of
more than 10% of the Common Stock, and Montgomery's stock charter and bylaws as
well as certain Indiana laws and regulations, will assist the Company in
maintaining its status as an independent publicly owned corporation and may have
certain anti-takeover effects.
Articles of Incorporation and Bylaws of the Company. The Company's
articles of incorporation and bylaws provide for, among other things, a limit on
voting more than 10% of the Common Stock described above, staggered terms for
members of its Board of Directors, noncumulative voting for directors, limits on
the calling of special meetings of stockholders and director nominations, a fair
price or supermajority stockholder approval requirement for certain business
combinations and certain shareholder proposal notice requirements.
Federal Stock Charter of the Association. Provisions in Montgomery's
federal stock charter that have an anti-takeover effect could also be applicable
to changes in control of the Company as the sole shareholder of the Association.
Montgomery's federal stock charter will include a provision applicable for five
years which prohibits the acquisition or offer to acquire directly or indirectly
the beneficial ownership of more than 10% of Montgomery's securities by any
person or entity other than the Company. Any person violating this restriction
may not vote Montgomery's securities in excess of 10%.
These provisions in the Company's and Montgomery's governing
instruments may discourage potential proxy contests and other takeover attempts
by making the Company less attractive to a potential acquiror, particularly
those takeover attempts which have not been negotiated with the Board of
Directors of the Company and/or Montgomery, as the case may be. These provisions
may also have the effect of discouraging a future takeover attempt which would
not be approved by the Company's Board, but pursuant to which stockholders may
receive a substantial premium for their shares over then current market prices.
As a result, stockholders who might desire to participate in such a transaction
may not have any opportunity to do so. In addition, certain of these provisions
that limit the ability of persons (including management or others) owning more
than 10% of the shares to vote their shares will be enforced by the Board of
Directors of the Company or Montgomery, as the case may be, to limit the voting
rights of 10% or greater stockholders and thus could have the effect in a proxy
contest or other solicitation to defeat a proposal that is desired by the
holders of a majority of the shares of Common Stock.
Federal Law and Regulations. Federal law also requires OTS approval
prior to the acquisition of "control" (as defined in OTS regulations) of an
insured institution, including a holding company thereof. In the event any
person or group of persons acquires shares in violation of these limitations,
such person or group may be restricted from voting his shares in excess of
27
10% of the outstanding Common Stock. Such laws and regulations may also limit a
person's ability without regulatory approval to solicit proxies enabling him to
elect one third or more of the Company's Board of Directors or exert a
controlling influence on the operations of Montgomery or the Company.
In addition, certain of these provisions may limit the ability of
persons (including management or others) owning more than 10% of the shares to
vote their shares (by proxy or otherwise) for proposals that they believe to be
in the best interests of shareholders. See "Management of the Association -
Benefit Plans," "Description of Capital Stock."
Voting Power of Directors and Executive Officers
Directors and executive officers of the Company expect to beneficially
own approximately 48,167 shares or 3.85% of the shares of Common Stock
outstanding (excluding stock options) upon consummation of the Conversion and
Reorganization based upon the midpoint of the Offering Price Range. See
"Beneficial Ownership of Capital Stock."
In addition, the Company may acquire Common Stock on behalf of the 1997
Recognition Plan (which will be subject to stockholder approval if implemented
prior to one year following the Conversion and Reorganization), a non-tax
qualified restricted stock plan, in an amount which, when added to the number of
shares available in the existing Management Recognition Plan, will equal 4.0% of
the Common Stock outstanding upon consummation of the Conversion and
Reorganization (57,500 shares based on the maximum of the Offering Price Range).
Under the terms of the 1997 Recognition Plan, the trustees of such plan, who
will also be directors of the Company, will have discretionary authority to vote
all shares held by such plan. The Company also may reserve for future issuance
pursuant to the 1997 Stock Option Plan (which will be subject to stockholder
approval if implemented prior to one year following the Conversion and
Reorganization) a number of authorized shares of Common Stock equal to an
aggregate of 10.0% of the Conversion Stock issued in the Offerings (106,544
shares, based on the maximum of the Offering Price Range). These options are in
addition to the options for 18,750 shares of Association Common Stock which were
previously granted and remain unexercised under the option plans adopted by the
Association in connection with the MHC Reorganization. In addition, the ESOP
intends to purchase up to 8% of the shares of Common Stock to be issued by the
Company in the Conversion and Reorganization. See "Management of the Company -
Benefits" and "Management of the Association - Stock Benefit Plans."
Management's potential voting power could, together with additional
stockholder support, preclude or make more difficult takeover attempts which do
not have the support of the Company's Board of Directors and may tend to
perpetuate existing management.
Employment Arrangements. The Company and the Association may enter into
employment agreements with Earl F. Elliot, the current President and Chief
Executive Officer of the Company and Chairman and Chief Executive Officer of the
Association and J. Lee Walden, the current Executive Vice President and Chief
Financial Officer of the Company and President and Chief Financial Officer of
the Association. The agreements may provide for severance
28
payments equal to three times such employee's average annual compensation for
the last five years if his respective employment is terminated in connection
with a change in control of the Company, as defined in the agreements. These
provisions may have the effect of increasing the cost of acquiring the Company.
See "Restrictions on Acquisition of the Company" and "Management of the
Association - Employment Agreements."
Low Return on Equity
As a result of the Association's high capital levels and the additional
capital that will be raised by the Company in the Conversion, the Company's
ability to leverage quickly the net proceeds from the Conversion may be limited.
Accordingly, for the near term, return on equity is expected to be low.
ESOP Compensation Expense
In November, 1993, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position 93-6 "Employers' Accounting
for Employee Stock Ownership Plans" ("SOP 93-6"). SOP 93-6 requires an employer
to record compensation expense in an amount equal to the fair value of shares
committed to be released to employees from an employee stock ownership plan.
Assuming shares of Common Stock appreciate in value over time, the adoption of
SOP 93-6 will increase compensation expense relating to the ESOP to be
established in connection with the Conversion. It is impossible to determine at
this time the extent of such impact on future net income. See "Pro Forma Data."
29
Absence of Market for Common Stock
The Company has never issued capital stock (other than 100 shares
issued to the Association, which will be cancelled upon consummation of the
Conversion and Reorganization), and to date an active and liquid trading market
has not developed for the 250,000 Public Association Shares outstanding prior to
the Offerings. The Company has applied to have its Common Stock quoted on the
Nasdaq SmallCap Market under the symbol "MONT" upon completion of the Conversion
and Reorganization and will seek to encourage and assist at least two market
makers to make a market in its Common Stock.
Although under no obligation to do so, Keefe, Bruyette & Woods, Inc.
has informed the Company that it intends, upon the completion of the Conversion
and Reorganization, to make a market in the Common Stock by maintaining bid and
ask quotations and trading in the Common Stock so long as the volume of trading
activity and certain other market making considerations justify it doing so.
While the Company has attempted to obtain commitments from other broker-dealers
to act as market makers, and anticipates that prior to the completion of the
Conversion and Reorganization, it will be able to obtain the commitment from at
least one other broker-dealer to act as a market maker for the Common Stock,
there can be no assurance there will be two or more market makers for the Common
Stock.
A public trading market having the desirable characteristics of depth,
liquidity and orderliness depends upon the presence in the marketplace of both
willing buyers and sellers of the Common Stock at any given time. Accordingly,
there can be no assurance that an active and liquid market for the Common Stock
will develop or be maintained or that resales of the Common Stock can be made at
or above the Purchase Price. See "Market for Common Stock" and "The Conversion
and Reorganization - Stock Pricing, Exchange Ratio and Number of Shares to be
Issued."
Proposed Federal Legislation
The United States Congress is considering legislation that would
require all federal thrift institutions, such as Montgomery, to either convert
to a national bank or a state chartered financial institution by a specified
date to be determined. In addition, under the proposed legislation the Company
would not be regulated as a thrift holding company, but rather as a bank holding
company or a financial services holding company (a new type of holding company
created by the proposed legislation). The OTS would also be abolished and its
functions transferred among the other federal banking regulators. Certain
aspects of the legislation remain to be resolved and therefore no assurance can
be given as to whether or in what form the legislation will be enacted or its
effect on the Company and the Association.
Possible Dilutive Effect of Issuance of Additional Shares
Various possible and planned issuances of Common Stock could dilute the
interests of prospective stockholders of the Company or existing stockholders of
the Association following consummation of the Conversion and Reorganization, as
noted below.
30
The number of shares to be sold in the Conversion and Reorganization
may be increased as a result of an increase in the Offering Price Range of up to
15% to reflect changes in market and financial conditions following the
commencement of the Offerings. In the event that the Offering Price Range is so
increased, it is expected that the Company will issue up to 1,225,257 shares of
Conversion Stock at the Purchase Price for an aggregate price of up to
$12,252,570. An increase in the number of shares will decrease net earnings per
share and stockholders' equity per share on a pro forma basis and will increase
the Company's consolidated stockholders' equity and net earnings. See
"Capitalization" and "Pro Forma Data."
The ESOP intends to purchase an amount of Common Stock equal to 8.0% of
the Common Stock to be outstanding upon consummation of the Conversion and
Reorganization. In the event that there are insufficient shares available to
fill the ESOP's order due to an over subscription by Eligible Account Holders
and the total number of shares of Conversion Stock issued in the Conversion and
Reorganization is increased by up to 15%, the additional shares will first be
allocated to fill the ESOP's subscription and thereafter in accordance with the
terms of the Plan of Conversion. Alternatively, the Company may issue authorized
but unissued shares of Common Stock to the ESOP in an amount sufficient to fill
the ESOP's order and/or the ESOP may purchase such shares in the open market. In
the event that additional shares of Common Stock are issued to the ESOP to fill
its order, stockholders would experience dilution of their ownership interests
(by up to 7.41% at the maximum of the Offering Price Range, assuming the ESOP
purchased no shares in the Offerings) and per share stockholders' equity and per
share net earnings would decrease as a result of an increase in the number of
outstanding shares of Common Stock. See "Management of the Association - Benefit
Plans - Employee Stock Ownership Plan" and "The Conversion and Reorganization -
The Offerings - Subscription Offering - Priority 2: ESOP."
If the 1997 Recognition Plan is implemented, the 1997 Recognition Plan
may acquire an amount of Common Stock which, when added to the number of shares
held in the Management Recognition Plan, will equal 4.0% of the shares of Common
Stock outstanding following consummation of the Conversion and Reorganization
(57,500 shares, based on the maximum of the Offering Price Range). Such shares
of Common Stock may be acquired in the open market with funds provided by the
Company, if permissible, or from authorized but unissued shares of Common Stock.
In the event that additional shares of Common Stock are issued to the 1997
Recognition Plan, stockholders would experience dilution of their ownership
interests and per share stockholders' equity and per share net earnings would
decrease as a result of an increase in the number of outstanding shares of
Common Stock. See "Pro Forma Data" and "Management of the Association - Benefit
Plans - 1997 Management Recognition Plan and Trust."
If the Company's 1997 Stock Option Plan is implemented, the Company may
reserve for future issuance pursuant to such plan a number of authorized shares
of Common Stock equal to an aggregate of 10% of the Conversion Stock issued in
the Offerings (106,544 shares, based on the maximum of the Offering Price
Range). See "Pro Forma Data" and "Management of the Association - Benefit Plans
- - 1997 Stock Option Plan."
The Association also has adopted and maintains the Stock Incentive Plan
and the Directors' Stock Option Plan which reserve for issuance 13,125 shares
and 5,625 shares of
31
Association Common Stock. As of December 31, 1996, no shares had been issued as
a result of the exercise of options granted under such option plans. Upon
consummation of the Conversion and Reorganization, these plans will become plans
of the Company and Common Stock will be issued in lieu of Association Common
Stock pursuant to the terms of such plans. See "Management of the Association -
Stock Benefit Plans."
The OTS has required that the purchase limitations contained in the
Plan of Conversion include Exchange Shares to be issued to Public Stockholders
for their Public Association Shares. As a result, certain holders of Public
Association Shares may be limited in their ability to purchase Conversion Stock
in the Offerings. For example, a Public Stockholder which acquires Exchange
Shares in an amount equal to $200,000 of Conversion Stock will not be able to
purchase any shares of Conversion Stock in the Offerings, although such a
stockholder will be able to purchase shares of Common Stock in the market during
the Offerings and thereafter. As a result, the purchase limitations may prevent
such stockholders from maintaining their current ownership percentage of the
Association after the Conversion and Reorganization through purchases of
Conversion Stock in the Offerings. See "The Conversion and Reorganization -
Limitations on Conversion Stock Purchases."
Risk of Delay
The Subscription and Community Offering will expire at Noon,
Crawfordsville, Indiana time, on ______ ___, 1997 unless extended by the Primary
Parties. However, unless waived by the Primary Parties, all orders will be
irrevocable unless the Conversion and Reorganization is not completed by ______
__, 1997. In the event the Conversion and Reorganization is not completed by
______ __, 1997, subscribers will have the right to modify or rescind their
subscriptions and to have their subscription funds returned with interest.
Possible Adverse Income Tax Consequences of the Distribution of Subscription
Rights
The Primary Parties have received an opinion of Keller that
subscription rights granted to Eligible Account Holders, Supplemental Eligible
Account Holders, Other Members, directors, officers and employees and Public
Stockholders have no value. However, this opinion is not binding on the Internal
Revenue Service ("IRS"). If the subscription rights granted to Eligible Account
Holders, Supplemental Eligible Account Holders, Other Members, directors,
officers and employees and Public Stockholders are deemed to have an
ascertainable value, receipt of such rights likely would be taxable only to
those Eligible Account Holders, Supplemental Eligible Account Holders, Other
Members, directors, officers and employees and Public Stockholders who exercise
the subscription rights (either as capital gain or ordinary income) in an amount
equal to such value. Whether subscription rights are considered to have
ascertainable value is an inherently factual determination. See "The Conversion
and Reorganization - Effects of the Conversion and Reorganization" and "- Tax
Aspects."
32
MONTGOMERY FINANCIAL CORPORATION
The Company was organized in March 1997 at the direction of the Board
of Directors of 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 Company has applied for approval from the OTS to become a
thrift holding company, and as such will be subject to regulation by the OTS.
After completion of the Conversion and Reorganization, the Company will conduct
business initially as a unitary thrift Company. See "Regulation - Company
Regulation." Upon consummation of the Conversion and Reorganization, the Company
will have no significant assets other than all of the outstanding shares of
Association Common Stock, a note evidencing the Company's loan to the ESOP and
the remaining portion of the net proceeds from the Offerings retained by the
Company, and the Company will have no significant liabilities. See "Use of
Proceeds."
Management believes that the Company structure will provide the Company
with additional flexibility to diversify, should it decide to do so, its
business activities through existing or newly formed subsidiaries, or through
acquisitions of or mergers with other financial institutions and financial
services related companies. Although there are no current arrangements,
understandings or agreements regarding any such opportunities or transactions,
the Company will be in a position after the Conversion and Reorganization,
subject to regulatory limitations and the Company's financial position, to take
advantage of any such acquisition and expansion opportunities that may arise.
The initial activities of the Company are anticipated to be funded by the
proceeds to be retained by the Company and earnings thereon, as well as
dividends from the Association. See "Dividend Policy."
The Company's executive office is located at the home office of the
Association at 119 East Main Street, Crawfordsville, Indiana 47933, and its
telephone number is (765) 362-4710.
MONTGOMERY SAVINGS, A FEDERAL ASSOCIATION
General
Montgomery 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.
In August 1995, the Mutual Association reorganized into the mutual holding
company form of organization whereby the Mutual Association (i) formed a new
stock savings association; (ii) transferred substantially all of its assets and
liabilities to the newly formed stock savings association in exchange for all of
the common stock of such institution; and (iii) reorganized from a federally
chartered, mutual savings association to a federally chartered, mutual Company
known as "Montgomery Mutual Holding Company." As part of the MHC Reorganization,
the newly formed stock savings association issued 250,000 shares of Association
Common Stock to certain members of the general Public and 600,000 shares of
Association Common Stock to the Mutual Holding Company. Montgomery conducts
business from four offices, two in Crawfordsville (Montgomery County), one in
Covington (Fountain County), and one in Williamsport (Warren County), Indiana.
At December
33
31, 1996, the Association had $94.6 million of total assets, $85.5 million of
total liabilities, including $72.3 million of deposits, and $9.1 million of
stockholders' equity.
Montgomery is primarily engaged in attracting deposits from the general
public through its offices and using those and other available sources of funds
to originate loans secured by one- to four-family residences. Approximately
99.5% of Montgomery's depositors reside in the State of Indiana. One- to
four-family residential loans amounted to $72.2 million, or 85.3%, of
Montgomery's total loan portfolio at December 31, 1996. To a lesser extent,
Montgomery originates loans secured by existing multi-family residential and
nonresidential real estate, which amounted to $7.8 million, or 9.2%, of the
total loan portfolio at December 31, 1996, as well as construction loans and
consumer loans, which amounted to $1.4 million, or 1.7%, of the total loan
portfolio and $3.2 million, or 3.8%, of the total loan portfolio at such date,
respectively. Montgomery also invests in U.S. Government and federal agency
obligations and mortgage-backed securities which are insured by federal
agencies. Montgomery has one wholly owned subsidiary corporation, MSA SERVICE
CORP ("MSA"). MSA engages in real estate management and real estate appraisals.
The Association is a community-oriented savings association which
emphasizes customer service and convenience. As part of this strategy, the
Association has sought to develop a variety of products and services which meet
the needs of its retail customers. The Association generally has sought to
achieve long-term financial strength and stability by (i) increasing the amount
and stability of its net interest income, (ii) maintaining a high level of asset
quality, (iii) maintaining a high level of regulatory capital, and (iv)
maintaining low general, administrative and other expenses. In pursuit of these
goals, the Association has adopted a number of complementary business strategies
which emphasize retail lending and deposit products and services traditionally
offered by savings institutions. Highlights of the Association's business
strategy include the following:
Emphasis on Traditional Lending and Investment Activities. Management
believes that the Association is more likely to achieve its goals of long-term
financial strength and profitability by emphasizing retail products and
services, as opposed to wholesale or commercial activities. The Association's
primary lending emphasis is the origination of loans secured by first liens on
single-family (one- to four-unit) residences. In addition, the Association
originates consumer loans, such as home equity loans, and multi-family and
nonresidential real estate loans. Such loans generally provide for higher
interest rates and shorter terms than single-family residential real estate
loans. At December 31, 1996, the Association's net loans amounted to $83.8
million or 88.5% of the Association's total assets.
Maintain Asset Quality. Management believes that high asset quality is
key to long-term financial success and, as a result, the investments which are
emphasized by the Association and its related policies and practices are
intended to maintain a high level of asset quality and reduce credit risk. At
December 31, 1996, the Association's non-performing assets, which consist of
non-accrual loans, accruing loans that are contractually past due 90 days or
more and real estate owned, amounted to $379,000 or 0.4% of the Association's
total assets. At December 31, 1996, the Association's allowance for loan losses
amounted to $158,000 or 0.2% of the Association's
34
total loans outstanding. As new loan products are offered, and the Association
increases its amount of non-residential and consumer loans, management will
re-evaluate the level of the allowance for loan losses.
Emphasis on Retail Deposits. The Association's liability strategy
emphasizes retail deposits obtained through its branch offices. This strategy is
facilitated by the Association's emphasis on lower-costing NOW, money market and
passbook deposits, which in the aggregate amounted to $15.6 million, or 21.51%,
of the Association's total deposits at December 31, 1996. At December 31, 1996,
the weighted average rate paid on the Association's NOW, money market and
passbook savings accounts amounted to 3.50%, as compared to a weighted average
rate paid of 5.85% on the Association's certificates of deposit at such date.
Maintain High Levels of Regulatory Capital. The Association seeks to
maintain high levels of regulatory capital to give it maximum flexibility in the
changing regulatory environment and to respond to changes in market and economic
conditions. At December 31, 1996, the Association's tangible, core and
risk-based capital ratios amounted to 9.2%, 9.2% and 13.5%, respectively, which
exceeded the minimum requirements of 1.5%, 3.0% and 8.0% by $7.2 million, $5.8
million and $3.1 million, respectively.
Maintain Low Expenses. The Association's general, administrative and
other expenses have amounted to 2.41%, 1.98% and 2.08% of average assets for six
months ended December 31, 1996 (annualized with the exception of the SAIF
Special Assessment) and the years ended June 30, 1996 and 1995, respectively.
However, these expenses may increase in the future should the Company implement
certain benefit plans. See "Risk Factors -- ESOP Compensation Expense" and
"Management of the Association - Benefit Plans."
Regulation
The Association is subject to examination and comprehensive regulation
by the OTS, which is the Association's chartering authority and primary
regulator, and by the Federal Deposit Insurance Corporation ("FDIC"), which as
administrator of the SAIF insures the Association's deposits up to applicable
limits. The Association also is subject to certain reserve requirements
established by the Board of Governors of the Federal Reserve System ("Federal
Reserve Board") and is a member of the Federal Home Loan Bank ("FHLB") of
Indianapolis, which is one of the 12 regional banks comprising the FHLB System.
See "Regulation - The Association."
Office
The Association's principal executive office is located at 119 East
Main Street, Crawfordsville, Indiana 47933, and its telephone number is (765)
362-4710.
35
MONTGOMERY MUTUAL HOLDING COMPANY
The Mutual Holding Company is a federally chartered mutual holding
company which was chartered on August 11, 1995 in connection with the MHC
Reorganization. The Mutual Holding Company's primary asset is 600,000 shares of
Association Common Stock, which represent 70.6% of the shares of Association
Common Stock outstanding as of December 31, 1996. The Mutual Holding Company's
only other assets consist of deposit accounts in the amount of $103,000 as of
December 31, 1996 (which will become assets of the Association upon consummation
of the Conversion and Reorganization). Prior to the Conversion and
Reorganization, each depositor in the Association has both a deposit account in
the institution and a pro rata ownership interest in the net worth of the Mutual
Holding Company based upon the value in his account, which interest may only be
realized in the event of a liquidation of the Mutual Holding Company. As part of
the Conversion and Reorganization, the Mutual Holding Company will convert from
mutual form to a federal interim stock savings institution and simultaneously
merge with and into the Association, with the Association being the surviving
entity.
USE OF PROCEEDS
Net proceeds from the sale of the Conversion Stock are estimated to be
between $7.4 million and $10.1 million ($11.7 million assuming an increase in
the Offering Price Range by 15%). See "Pro Forma Data" as to the assumptions
used to arrive at such amounts.
The Company plans to contribute to the Association 50% of the net
proceeds from the Offerings and retain the remainder of the net proceeds. The
net proceeds will be initially used to invest primarily in short-term
interest-bearing deposits and marketable securities. The Company intends to use
a portion of the net proceeds to make a loan directly to the ESOP to enable the
ESOP to purchase Conversion Stock equal to 8.0% of the Common Stock to be
outstanding upon consummation of the Conversion and Reorganization. Based upon
the issuance of 85,000 shares and 115,000 shares at the minimum and maximum of
the Offering Price Range, respectively, the loan to the ESOP would be $.9 and
$1.2 million, respectively. It is anticipated that the loan to the ESOP will
have a term of not less than ten years and a fixed rate of interest at the prime
rate as of the date of the loan. See "Management of the Association -- Benefit
Plans -- Employee Stock Ownership Plan." The net proceeds retained by the
Company also may be used to support the future expansion of operations or
diversification into other banking-related businesses and for other business or
investment purposes, including the acquisition of other financial institutions
and/or branch offices, although there are no current plans, arrangements,
understandings or agreements regarding such expansion, diversification or
acquisitions. In addition, subject to applicable regulatory limitations, the net
proceeds also may be used to repurchase shares of Common Stock, although the
Company currently has no intention of effecting any such transactions following
consummation of the Conversion and Reorganization. See "The Conversion and
Reorganization - Certain Restrictions on Purchase or Transfer of Shares after
the Conversion and Reorganization." The portion of the net proceeds contributed
to the Association will be used for general corporate purposes, primarily
investment in residential real estate loans (and will be initially used to
invest primarily in short-term interest-bearing deposits and marketable
securities) since loan growth in excess of deposit growth has caused Montgomery
to use proceeds from the
36
maturity of investment securities to fund loan growth due to the potential
income on investment securities being below the actual cost of other sources of
loan funding.
DIVIDEND POLICY
Upon completion of the Conversion and Reorganization, the Board of
Directors of the Company will have the authority to declare dividends on the
Common Stock, subject to statutory and regulatory requirements. Following
consummation of the Conversion and Reorganization, the Board of Directors of the
Company intends to pay cash dividends on the Common Stock at an initial
quarterly rate equal to $0.10 per share divided by the Exchange Ratio. Based
upon the Valuation Price Range, the Exchange Ratio is expected to be 1.1000,
1.2941, 1.4882 and 1.7115 at the minimum, midpoint, maximum and 15% above the
maximum of the Valuation Price Range, respectively, resulting in an initial
quarterly dividend rate of $.091, $.077, $.067 and $.058 per share,
respectively, commencing with the first full quarter following consummation of
the Conversion and Reorganization. Declarations of dividends by the Board of
Directors will depend upon a number of factors, including the amount of the net
proceeds from the Offerings retained by the Company, investment opportunities
available to the Company or the Association, capital requirements, regulatory
limitations, the Company's and the Association's financial condition and results
of operations, tax considerations and general economic conditions. Consequently,
there can be no assurance that dividends will in fact be paid on the Common
Stock or that, if paid, such dividends will not be reduced or eliminated in
future periods. The Association intends to continue to pay regular quarterly
dividends through either the date of consummation of the Conversion and
Reorganization (on a pro rata basis) or the end of the fiscal quarter during
which the consummation of the Conversion and Reorganization occurs. Declarations
of dividends by the Company's Board of Directors will depend upon a number of
factors, including the amount of the net proceeds from the Offerings retained by
the Company, investment opportunities available to the Company or the
Association, capital requirements, regulatory limitations, the Company's and the
Association's financial condition and results of operations, tax considerations
and general economic conditions. Consequently, there can be no assurance that
dividends will in fact be paid on the Common Stock or that, if paid, such
dividends will not be reduced or eliminated in future periods. The Association
intends to continue to pay regular quarterly dividends through either the date
of consummation of the Conversion and Reorganization (on a pro rata basis) or
the end of the fiscal quarter during which the consummation of the Conversion
and Reorganization occurs.
Dividends from the Company will depend, in part, upon receipt of
dividends from the Association, because the Company initially will have no
source of income other than dividends from the Association and earnings from the
investment of proceeds from the sale of Conversion Stock retained by the
Company. A regulation of the OTS imposes limitations on "capital distributions"
by savings institutions, including cash dividends, payments by a savings
institution to repurchase or otherwise acquire its stock, payments to
stockholders of another savings institution in a cash-out merger and other
distributions charged against capital. The regulation establishes a three-tiered
system, with the greatest flexibility being afforded to well-capitalized or Tier
1 savings institutions and the least flexibility being afforded to
under-capitalized or Tier 3 savings institutions. As of December 31, 1996, the
Association was a Tier 1 savings institution
37
and is expected to continue to so qualify immediately following the consummation
of the Conversion and Reorganization.
Any payment of dividends by the Association to the Company which would
be deemed to be a distribution from the Association's pre-1988 bad debt reserves
for federal income tax purposes would require a payment of taxes at the
then-current tax rate by the Association on the amount of earnings deemed to be
removed from the reserves for such distribution (at December 31, 1996, the
Association's retained earnings and bad debt reserves for federal income tax
purposes amounted to $6.9 million and $1.6 million, respectively, and as a
result for tax purposes (but not regulatory purposes) the Association could
declare approximately $5.3 million of dividends without having to pay taxes on
its bad debt reserves for federal income tax purposes). The Association has no
current intention of making any distribution that would create such a federal
tax liability either before or after the Conversion and Reorganization. See
"Regulation -- Federal and State Taxation."
Unlike the Association, the Company is not subject to the
aforementioned regulatory restrictions on the payment of dividends to its
stockholders, although the source of such dividends will be, in part, dependent
upon dividends from the Association in addition to the net proceeds retained by
the Company and earnings thereon. The Company is subject, however, to the
requirements of Indiana law. See "Comparison of Stockholders' Rights - Payment
of Dividends."
MARKET FOR COMMON STOCK
The Company has never issued capital stock (other than 100 shares
issued to the Association, which will be cancelled upon consummation of the
Conversion and Reorganization), and to date an active and liquid trading market
has not developed for the 250,000 Public Association Shares outstanding prior to
the Offerings. Consequently, there is no established market for the Common Stock
at this time. The Company has applied to have its Common Stock quoted on the
Nasdaq SmallCap Market under the symbol "MONT." The development of a liquid
public market depends on the existence of willing buyers and sellers, the
presence of which is not within the control of the Company, the Association or
any market maker. Accordingly, there can be no assurance that an active and
liquid trading market for the Common Stock will develop or that, if developed,
it will continue. Therefore, investors in the Common Stock could have difficulty
disposing of their shares and should not view the Common Stock as a short-term
investment. The absence of an active and liquid trading market for the Common
Stock could affect the price and liquidity of the Common Stock.
Quotation on the Nasdaq SmallCap Market is dependent upon, among other
things, the Company having at least two market makers for the Common Stock and a
minimum number of stockholders of record. Based upon the minimum of 787,500
shares of Conversion Stock being offered, the minimum of 275,000 Exchange Shares
to be issued, and the anticipated pro forma ownership of officers and directors,
the Company expects to satisfy the required minimum number of stockholders of
record. Although under no obligation to do so, Keefe, Bruyette & Woods, Inc. has
informed the Company that it intends, upon the completion of the Conversion and
Reorganization, to make a market in the Common Stock by maintaining bid and ask
quotations and
38
trading in the Common Stock so long as the volume of trading activity and
certain other market making considerations justify it doing so. While the
Company has attempted to obtain commitments from other broker-dealers to act as
market makers, and anticipates that prior to the completion of the Conversion
and Reorganization, it will be able to obtain the commitment from at least one
other broker-dealer to act as a market maker for the Common Stock, there can be
no assurance there will be two or more market makers for the Common Stock.
Making a market involves maintaining bid and ask quotations and being able, as
principal, to effect transactions in reasonable quantities at those quoted
prices, subject to various securities laws and other regulatory requirements.
Accordingly, there can be no assurance that an active and liquid trading market
for the Common Stock will develop or that, if developed, it will continue.
PRO FORMA DATA
The actual net proceeds from the sale of the Conversion Stock cannot be
determined until the Conversion and Reorganization is completed. However, net
proceeds are currently estimated to be between $7.4 million and $10.1 million
(or $11.7 million in the event the Offering Price Range is increased by 15%)
based upon the following assumptions: (i) all shares of Conversion Stock will be
sold in the Subscription and Community Offerings; (ii) no fees will be paid to
Webb on shares purchased by (x) the ESOP or by (y) officers, directors and
associates thereof; (iii) Webb will receive a fee equal to 1.75% of the
aggregate Purchase Price for sales in the Subscription and Community Offering
(excluding the sale of shares by the ESOP and to officers, directors or
employees or members of their immediate families); and (iv) total expenses,
excluding the marketing fees to be paid to Webb, will be approximately $350,000.
Actual expenses may vary from those estimated.
Pro forma net earnings and stockholders' equity have been calculated
for the six months ended December 31, 1996 and year ended June 30, 1996 as if
the Conversion Stock to be issued in the Offerings had been sold (and the
Exchange Shares issued) at the beginning of the respective periods and the net
proceeds had been invested at 5.43% and 5.91%, respectively, which represent the
yield on one-year U.S. Government securities at December 31, 1996 and June 30,
1996, respectively, (which, in light of changes in interest rates in recent
periods, are deemed to more accurately reflect pro forma reinvestment rates than
the arithmetic average method). The effect of withdrawals from deposit accounts
for the purchase of Conversion Stock has not been reflected. An effective
combined federal and state tax rate of 39.6% has been assumed for the periods,
resulting in after-tax yields of 3.28% and 3.57% for the six months ended
December 31, 1996 and the year ended June 30, 1996, respectively. Historical and
pro forma per share amounts have been calculated by dividing historical and pro
forma amounts by the indicated number of shares of Common Stock, as adjusted to
give effect to the shares purchased by the ESOP. See Note 2 to the tables below.
No effect has been given in the pro forma stockholders' equity calculations for
the assumed earnings on the net proceeds. As discussed under "Use of Proceeds,"
the Company intends to retain 50% of the net proceeds from the Offerings, from
which the Company intends to make a loan to fund the purchase an amount of
Conversion Stock equal to 8% of the Common Stock outstanding upon consummation
of the Conversion and Reorganization.
39
No effect has been given in the tables to the issuance of additional
shares of Common Stock pursuant to existing and proposed stock benefit plans.
See "Management of the Association Benefits" and "Management of the Association
- - Benefit Plans." The tables below give effect to the 1997 Recognition Plan,
which is expected to be adopted by the Company following the Conversion and
Reorganization and presented (together with the 1997 Stock Option Plan) to
stockholders for approval at an annual or special meeting of stockholders to be
held at least six months following the consummation of the Conversion and
Reorganization. If the 1997 Recognition Plan is approved by stockholders, the
1997 Recognition Plan intends to acquire an amount of Common Stock equal to 4.0%
of the shares of Conversion Stock issued in the Offerings, either through open
market purchases or from authorized but unissued shares of Common Stock. No
effect has been given to (i) the Company's results of operations after the
Conversion and Reorganization, or (ii) the market price of the Common Stock
after the Conversion and Reorganization.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma stockholders' equity represents the difference
between the stated amount of assets and liabilities of the Company computed in
accordance with generally accepted accounting principles ("GAAP"). The pro forma
stockholders' equity is not intended to represent the fair market value of the
Common Stock and may be different than amounts that would be available for
distribution to stockholders in the event of liquidation.
40
At or For the Six Months Ended December 31, 1996
-------------------------------------------------------
15% Above
Minimum Midpoint Maximum Maximum
787,500 926,470 1,065,441 1,225,257
Shares at Shares at Shares at Shares at
$10.00 per $10.00 per $10.00 per $10.00 per
Share Share Share Share
---------- ---------- ---------- ----------
(Dollars in Thousands, Except Per Share Amounts)
Gross proceeds................................ $ 7,875 $ 9,265 $ 10,654 $ 12,253
Less offering expenses and commissions........ 469 (490) (512) (537)
--------- --------- --------- ---------
Estimated net proceeds(1).................... 7,406 8,775 10,142 11,716
Less: ESOP................................... (850) (1,000) (1,150) (1,323)
Recognition Plan funding(8)............ (425) (500) (575) (661)
--------- --------- --------- ---------
Add: Other adjustments(6)..................... 115 115 115 115
Estimated proceeds available
for investment............................ $ 6,246 $ 7,390 $ 8,532 $ 9,847
========= ========= ========= =========
Net Income:
Historical.................................. $ 17 $ 17 $ 17 $ 17
Pro Forma Adjustments:
Net earnings from proceeds(2).............. 102 121 140 161
ESOP(3).................................... (26) (30) (35) (40)
Recognition Plan(8)........................ (26) (30) (35) (40)
Pro forma net income..................... $ 67 $ 78 $ 87 $ 98
========= ========= ========= =========
Net Income Per Share:
Historical(4)............................. 0.02 0.01 0.01 0.01
Pro forma Adjustments:
Net income from proceeds................. 0.10 0.10 0.11 0.11
ESOP(3).................................. (0.03) (0.03) (0.03) (0.03)
Recognition Plan(8)...................... (0.03) (0.03) (0.03) (0.03)
--------- --------- --------- ---------
Pro forma net income per share....... $ 0.06 $ 0.05 $ 0.06 $ 0.06
========= ========= ========= =========
Pro forma price to annualized earnings
per share (P/E ratio)...................... 83.33x 100.00x 83.33x 83.33x
Number of shares.............................. 981,750 1,155,000 1,328,250 1,527,488
Stockholders' Equity (Book Value)(5):
Historical(7)............................... $ 9,094 $ 9,094 $ 9,094 $ 9,094
Pro Forma Per Share Adjustments:
Estimated net proceeds...................... 7,406 8,775 10,142 11,716
Less common stock acquired by:
ESOP(3).................................... (850) (1,000) (1,150) (1,323)
Recognition Plan(8)........................ (425) (500) (575) (661)
--------- --------- --------- ---------
Pro forma stockholder's equity......... $ 15,225 $ 16,369 $ 17,511 $ 18,286
========= ========= ========= =========
Stockholders' Equity (Book Value)(5):
Per Share(4):
Historical(7)............................. $ 8.56 $ 7.28 $ 6.33 $ 5.50
Pro Forma Per Share Adjustments:
Estimated net proceeds.................... 6.97 7.02 7.06 7.09
Less common stock acquired by:
ESOP(3)................................... (0.80) (0.80) (0.80) (0.80)
Recognition Plan(8)....................... (0.40) (0.40) (.40) (0.40)
--------- --------- --------- ---------
Pro forma book value per share......... $ 14.33 $ 13.10 $ 12.19 $ 11.39
========= ========= ========= =========
Pro forma price to book value................. 69.78% 76.34% 82.03% 87.80%
Number of shares ............................. 1,062,500 1,250,000 1,437,500 1,653,125
41
At or For the Year Ended June 30, 1996
-------------------------------------------------------
15% Above
Minimum Midpoint Maximum Maximum
787,500 926,470 1,065,410 1,225,257
Shares at Shares at Shares at Shares at
$10.00 per $10.00 per $10.00 per $10.00 per
Share Share Share Share
---------- ---------- ---------- ----------
(Dollars in Thousands, Except Per Share Amounts)
Gross proceeds................................ $ 7,875 $ 9,265 $ 10,654 $ 12,253
Less offering expenses and commissions........ (469) (490) (512) (537)
--------- --------- --------- ---------
Estimated net proceeds(1).................... 7,406 8,775 10,142 11,716
Less: ESOP................................... (850) (1,000) (1,150) (1,323)
Recognition Plan(8).................... (425) (500) (575) (661)
--------- --------- --------- ---------
Add: Other adjustments(6)..................... 115 115 115 115
--------- --------- --------- ---------
Estimated proceeds available
for investment............................ $ 6,246 $ 7,390 $ 8,532 $ 9,847
========= ========= ========= =========
Net Income:
Historical.................................. $ 431 $ 431 $ 431 $ 431
Pro Forma Adjustments:
Net earnings from proceeds(2).............. 223 264 305 351
ESOP(3).................................... (51) (60) (69) (80)
Recognition Plan(8)........................ (51) (60) (69) (80)
--------- --------- --------- ---------
Pro forma net income..................... $ 552 $ 575 $ 598 $ 622
========= ========= ========= =========
Net Income Per Share:
Historical(4)............................. $ 0.44 $ 0.37 $ 0.32 $ 0.28
Pro forma Adjustments:
Net earnings from proceeds............... 0.23 0.23 0.23 0.23
ESOP(3).................................. (0.05) (0.05) (0.05) (0.05)
Recognition Plan(8)...................... (0.05) (0.05) (0.05) (0.05)
--------- --------- --------- ---------
Pro forma net income per share....... $ 0.57 $ 0.50 $ 0.45 $ 0.41
========= ========= ========= =========
Pro forma price to annualized earnings
per share (P/E ratio)...................... 17.54x 20.00x 22.22x 24.39x
Number of shares.............................. 986,000 1,160,000 1,334,000 1,534,100
Stockholders' Equity (Book Value)(5):
Historical(7)............................... $ 9,139 $9,139 $ 9,139 $ 9,139
Pro Forma Per Share Adjustments:
Estimated net proceeds...................... 7,406 8,775 10,142 11,716
Less common stock acquired by:
ESOP(3).................................... (850) (1,000) (1,150) (1,323)
Recognition Plan(8)........................ (425) (500) (575) (661)
--------- ---------- -------------- -----------
Pro forma stockholder's equity......... $ 15,270 $ 16,414 $ 17.556 $ 18,871
========= ======== ========== ==========
Stockholders' Equity (Book Value)(5):
Per Share(4):
Historical(7)............................. $ 8.60 $ 7.31 $ 6.36 $ 5.53
Pro Forma Per Share Adjustments:
Estimated net proceeds.................... 6.97 7.02 7.06 7.09
Less common stock acquired by:
ESOP(3)................................... (0.80) (0.80) (0.80) (0.80)
Recognition Plan(8)....................... (0.40) (0.40) (0.40) (0.40)
--------- -------- ------------- ------------
Pro forma book value per share......... $ 14.37 $ 13.13 $ 12.22 $ 11.42
========= ======= =========== ===========
Pro forma price to book value................. 69.59% 76.16% 81.83% 87.57%
Number of shares ............................. 1,062,500 1,250,000 1,437,500 1,653,125
<FN>
- ----------
(1) It is assumed that the cost of the ESOP will be funded from the net
proceeds retained by the Company.
(2) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing Common Stock in the Conversion. For purposes of
calculating pro forma net income, proceeds attributable to purchases by the
ESOP, which purchases are to be funded by the Holding Company and the
Association, have been deducted from net proceeds.
</FN>
42
(3) It is assumed that 8% of the shares of Common Stock offered in the
Conversion will be purchased by the ESOP. The funds used to acquire such
shares are expected to be borrowed by the ESOP from the net proceeds from
the Conversion retained by the Company. The Association intends to make
contributions to the ESOP in amounts at least equal to the principal and
interest requirement of the debt. The Association's payment of the ESOP
debt is based upon equal installments of principal and interest over a
10-year period. However, assuming the Company makes the ESOP loan, interest
income earned by the Company on the ESOP debt will offset the interest paid
by the Association. Accordingly, only the principal payments on the ESOP
debt are recorded as an expense (tax-effected) to the Company on a
consolidated basis. The amount of ESOP debt is reflected as a reduction of
stockholders' equity. In the event that the ESOP were to receive a loan
from an independent third party, both ESOP expense and earnings on the
proceeds retained by the Company would be expected to increase.
For purposes of this table, the purchase price of $10.00 per share was
utilized to calculate ESOP expense. The Company intends to record
compensation expense related to the ESOP in accordance with Statement of
Accounting Principles 93-6 ("SOP 93-6"). As a result, to the extent the
value of the Common Stock appreciates over time, compensation expense
related to the ESOP will increase. SOP 93-6 also requires that, for the
earnings per share computations for leveraged ESOPs, outstanding shares
include only such shares as have been committed to be released to
participants. See "Management of the Association - Benefit Plans - Employee
Stock Ownership Plan."
(4) Historical pro forma per share amounts have been computed as if the shares
of Common Stock indicated had been outstanding at the beginning of the
periods or on the dates shown, but without any adjustment of historical net
income or historical equity to reflect the investment of the estimated net
proceeds of the sale of shares in the Conversion as described above. All
ESOP shares have been considered outstanding for purposes of computing book
value per share. Pro forma share amounts have been computed by dividing the
pro forma net income or stockholders' equity (book value) by the number of
shares indicated.
(5) "Book value" represents the difference between the stated amounts of the
Association's assets (based on historical cost) and liabilities computed in
accordance with generally accepted accounting principles. The amounts shown
do not reflect the effect of the Liquidation Account which will be
established for the benefit of Eligible and Supplemental Eligible Account
Holders in the Conversion, or the federal income tax consequences of the
restoration to income of the Association's special bad debt reserves for
income tax purposes which would be required in the unlikely event of
liquidation. See "The Conversion and Reorganization - Effects of Conversion
and Reorganization" and "Regulation - Federal and State Taxation." The
amounts shown for book value do not represent fair market values or
amounts, if any, distributable to stockholders in the unlikely event of
liquidation.
(6) Includes assets consolidated from the mutual holding company of $103,000
plus $12,000 of previous funding of the Recognition Plan.
(7) Prior to reduction of $12,000 reflecting the previous funding of the
Recognition Plan.
(8) Assuming the receipt of shareholder approval at an annual or special
meeting of shareholders to be held at least six months following the
consummation of the Conversion, the Association and Company intend to
implement the 1997 Recognition Plan. Assuming such approval, the
Recognition Plan will eventually purchase an amount of shares equal to 4%
of the shares of Conversion Stock issued in the Offerings for issuance to
directors, officers and employees of the Company and the Association. Such
shares may be purchased from authorized and unissued shares or on the open
market. The Company currently intends that the shares be purchased on the
open market, and the estimated net conversion proceeds have been reduced
for the purchase of the shares in determining estimated proceeds available
for investment. Under terms of the Recognition Plan, shares will vest at a
rate of 20% per year. The Common Stock to be purchased by the Recognition
Plan represents unearned compensation and is, accordingly, reflected as a
reduction to pro forma stockholders' equity. As shares of the Common Stock
granted pursuant to the Recognition Plan vest, a corresponding reduction in
the charge against capital will occur. In the event the authorized but
unissued shares are acquired, the interests of existing shareholders will
be diluted. Assuming that 1,437,500 shares of Common Stock are issued in
the Conversion and that all awards under the Recognition Plan are from
authorized but unissued shares, the Company estimates that the per share
book value for the Common Stock would be diluted $0.47 per share, or 3.9%
and earnings per share would be diluted $0.01 per share, or 14.3% on a pro
forma basis at December 31, 1996.
43
PRO FORMA REGULATORY CAPITAL ANALYSIS
At December 31, 1996, the Association exceeded each of the three OTS
capital requirements. Set forth below is a summary of the Association's
compliance with the OTS capital standards as of December 31, 1996 on a
historical basis, in accordance with GAAP, and on a pro forma basis using the
assumptions contained under the caption "Pro Forma Data" and assuming that the
indicated number of shares were sold, and the Exchange Shares were issued, as of
such date.
Pro Forma at December 31, 1996
------------------------------
1,225,257 Shares
787,500 Shares 926,470 Shares 1,065,441 Shares 15% above
Historical Minimum Midpoint Maximum Maximum
---------------------------------------------------------------------------------------------------
Amount Percent(1) Amount Percent(1) Amount Percent(1) Amount Percent(1) Amount Percent(1)
------ ----------------- ---------- ------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
GAAP Capital(2)...... $ 9,082 9.6% $11,522 11.9% $11,981 12.3% $12,440 12.7% $ 12,968 13.2%
======= ==== ======== ===== ======= ==== ======= ==== ======== ====
Tangible Capital:
Capital level...... $ 8,659 9.2% $ 11,099 11.5% $11,558 11.9% $12,017 12.3% $ 12,545 12.8%
Requirement........ 1,412 1.5 1,449 1.5 1,456 1.5 1,463 1.5 1,471 1.5
-------- ---- --------- ----- -------- ----- -------- ----- --------- -----
Excess............. $ 7,247 7.7% $ 9,650 10.0% $10,102 10.4% $10,554 10.8% $ 11,074 11.3%
======= ==== ======== ===== ======= ===== ======= ==== ======== ====
Core Capital:
Capital level...... $ 8,659 9.2% $ 11,099 11.5% $11,558 11.9% $12,017 12.3% $ 12,545 12.8%
Requirement........ 2,825 3.0 2,898 3.0 2,912 3.0 2,925 3.0 2,941 3.0
-------- ---- --------- ----- -------- ----- -------- ----- --------- -----
Excess............. $ 5,834 6.2% $ 8,201 8.5% $ 8,646 8.9% $ 9,092 9.3% $ 9,604 9.8%
======= ==== ========= ===== ======= ===== ======= ===== ======== ====
Risk-Based Capital:
Capital level(3)... $ 7,630 13.5% $ 10,070 17.0% $10,529 17.7% $10,988 18.3% $ 11,516 19.0%
Requirement(4)..... 4,530 8.0 4,725 8.0 4,762 8.0 4,799 8.0 4,481 8.0
-------- ---- --------- ----- -------- ----- -------- ----- -------- -----
Excess............. $ 3,100 5.5% $ 5,345 9.0% $ 5,767 9.7% $ 6,198 10.3% $ 6,675 11.0%
======= ==== ========= ===== ======= ===== ======= ==== ======== ====
<FN>
- ----------
(1) Tangible and core capital levels are shown as a percentage of adjusted
total assets; risk-based capital levels are shown as a percentage of
risk-weighted assets.
(2) Total stockholder's equity as calculated under GAAP. Assumes that the
Association receives 50% of the net proceeds, offset in part by the
aggregate purchase price of Common Stock acquired at $10.00 per share by
the ESOP in the Conversion. The amount expected to be borrowed by the ESOP
is deducted from pro forma capital to illustrate the possible impact on the
Association. Assumes that Association funds 1997 Recognition Plan.
(3) Includes $158,000 of general valuation allowances, all of which qualify as
supplementary capital. See "Regulation - Regulatory Capital Requirements."
(4) Assumes reinvestment of net proceeds in 20% risk-weighted assets.
</FN>
44
CAPITALIZATION
The following table presents the historical consolidated
capitalization of the Association at December 31, 1996, and the pro forma
consolidated capitalization of the Company after giving effect to the Conversion
and Reorganization, based upon the sale of the number of shares shown below, the
issuance of Exchange Shares and the other assumptions set forth under "Pro Forma
Data."
The Company - Pro Forma
Based Upon Sale at $10.00 per share
------------------------------------------------------
1,225,257
The 787,500 926,470 1,065,441 Shares(1)
Association Shares Shares Shares (15% above
Historical (Minimum of (Midpoint of (Maximum of Maximum of
Capitalization Range) Range) Range) Range)
-------------- ------ ------ ------ ------
(In Thousands)
Deposits(2)................................. $72,343 $72,343 $72,343 $72,343 $72,343
Borrowings(3)............................... 11,928 11,928 11,928 11,928 11,928
Debt in connection with acquisition of
Common Stock by ESOP....................... --- --- --- --- ---
---------- --------- ---------- ---------- -----------
Total deposits and borrowings............... $84,271 $84,271 $84,271 $84,271 $84,271
======= ======= ======= ======= =======
Stockholders' Equity:
Preferred Stock ($0.01 par value)
2,000,000 shares authorized; none to be
issued.................................... $ --- $ --- $ --- $ --- $ ---
Common Stock ($0.01 par value)
8,000,000 shares authorized; 850,000
issued or to be issued as reflected(4).... 9 11 13 14 17
Additional paid-in capital(5)............. 2,194 9,598 10,965 12,331 13,902
Retained earnings(5)(6)................... 6,891 6,891 6,891 6,891 6,891
Less:
Net unrealized loss on securities
available for sale(5).................... ---
Unearned Common Stock held by the
Management Recognition Plan.............. 12
Common Stock to be acquired by the
1997 Recognition Plan(7)................. --- 425 500 575 661
Common Stock to be acquired by the
ESOP..................................... --- 850 1,000 1,150 1,323
---------- --------- --------- --------- --------
Total Stockholders' Equity.................. $ 9,082 $15,225 $16,369 $17,511 $18,826
======= ======= ======= ======= =======
- ----------
(1) As adjusted to give effect to an increase in the number of shares
which could occur due to an increase in the Offering Price Range of up
to 15% to reflect changes in market and financial conditions following
the commencement of the Offerings or pursuant to an overallotment
option which the Company intends to grant Webb in the Public Offering,
if any.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Conversion Stock in the Offerings. Such withdrawals would reduce pro
forma deposits by the amount of such withdrawals.
(3) Consists of FHLB advances.
(4) Assumes (i) that the 250,000 Public Association Shares outstanding at
December 31, 1996 are converted into 275,000, 323,525, 372,059 and
427,868 Exchange Shares at the minimum, midpoint, maximum and 15%
above the maximum of the Offering Price Range, respectively, and (ii)
that no fractional shares of Exchange Shares will be issued by the
45
Company. No effect has been given to the issuance of additional shares
of Common Stock pursuant to existing and proposed stock benefit plans.
See "Pro Forma Data," "Management of the Association - Benefit Plans."
(5) The pro forma additional paid-in capital and retained earnings reflect
a restriction of the original retained earnings of the Association
prior to the MHC Reorganization. The pro forma additional paid-in
capital reflects the $103,000 to be acquired by the Association upon
the merger of the Mutual Holding Company (following its conversion to
a federal interim stock savings institution) with and into the
Association.
(6) The retained earnings of the Association will be substantially
restricted after the Conversion and Reorganization by virtue of the
liquidation account to be established in connection with the
Conversion and Reorganization. See "The Conversion and Reorganization
- Liquidation Rights." In addition, certain distributions from the
Association's retained earnings may be treated as being from its
pre-1988 accumulated bad debt reserve for tax purposes, which would
cause the Association to have additional taxable income. See
"Regulation - Federal and State Taxation."
(7) Assuming the receipt of shareholder approval at an annual or special
meeting of shareholders to be held at least six months following the
consummation of the conversion, the Association and Company intend to
implement the 1997 Recognition Plan. Assuming such approval, the
Recognition Plan will eventually purchase an amount of shares equal to
4% of the shares of the Conversion Stock issued in the Offerings for
issuance to directors, officers and employees of the Company and the
Association. Such shares may be purchased from authorized and unissued
shares or on the open market. The Company currently intends that the
shares be purchased on the open market, and the estimated net
conversion proceeds have been reduced for the purchase of the shares
in determining estimated proceeds available for investment. Under
terms of the Recognition Plan, shares will vest at a rate of 20% per
year. The Common Stock to be purchased by the Recognition Plan
represents unearned compensation and is, accordingly, reflected as a
reduction to pro forma stockholders' equity. As shares of the Common
Stock granted pursuant to the Recognition Plan vest, a corresponding
reduction in the charge against capital will occur. In the event the
authorized but unissued shares are acquired, the interests of existing
shareholders will be diluted. Assuming that 1,437,500 shares of Common
Stock are issued in the Conversion and that all awards under the
Recognition Plan are from authorized but unissued shares, the Company
estimates that the per share book value for the Common Stock would be
diluted $0.47 per share, or 3.9% and earnings per share would be
diluted $0.01 per share, or 14.3% on a pro forma basis at December 31,
1996.
46
Montgomery Savings, A Federal Association And Subsidiary
Crawfordsville, Indiana
Consolidated Statement of Income
Six Months Ended
December 31, Year Ended June 30
-------------------------- --------------------------------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
Interest and Dividend Income
Loans .............................................. $ 3,395,258 $3,164,009 $ 6,409,666 $ 5,894,188 $ 5,315,461
Investment securities .............................. 9,469 16,333 28,678 77,962 146,518
Deposits with financial institutions ............... 97,479 160,188 281,805 156,417 99,174
Dividend income .................................... 29,598 31,981 56,472 49,645 33,227
------ ------ ------ ------ ------
Total interest and dividend income ............. 3,531,804 3,372,511 6,776,621 6,178,212 5,594,380
--------- --------- --------- --------- ---------
Interest Expense
Deposits ........................................... 1,897,595 1,956,185 3,866,674 3,188,701 2,872,410
Short-term borrowings .............................. 8,000 8,000 34,525 28,962
Federal Home Loan Bank advances .................... 303,399 316,589 559,393 684,032 205,678
------- ------- ------- ------- -------
Total interest expense ......................... 2,200,994 2,280,774 4,434,067 3,907,258 3,107,050
--------- --------- --------- --------- ---------
Net Interest Income .................................. 1,330,810 1,091,737 2,342,554 2,270,954 2,487,330
Provision (adjustment) for losses on loans ......... (26,250) 19,750 (15,000) 25,213
------- ------ ------- ------
Net Interest Income After Provision
(Adjustment) for Losses on Loans .................... 1,330,810 1,117,987 2,322,804 2,285,954 2,462,117
--------- --------- --------- --------- ---------
Other Income
Service charges on deposit accounts ................ 12,309 10,969 22,184 8,285 8,069
Commissions ........................................ 67,714
Net realized gains on sale of available for
sale securities ................................... 9,033
Net appraisal income (expense) ..................... 3,450 20,181 (5,007) 39,540 62,124
Other income ....................................... 1,989 3,743 6,043 22,276 9,415
----- ----- ----- ------ -----
Total other income ............................. 17,748 34,893 23,220 79,134 147,322
------ ------ ------ ------ -------
Other Expenses
Salaries and employee benefits ..................... 448,990 471,033 878,536 901,945 833,306
Net occupancy expenses ............................. 51,332 49,886 100,999 91,774 92,965
Equipment expenses ................................. 70,435 69,475 140,000 132,022 138,732
Data processing expense ............................ 44,995 43,090 86,684 87,069 75,989
Deposit insurance expense .......................... 500,156 77,033 156,199 145,529 146,682
Real estate operations, net ........................ (40,681) 15,943 (7,364) (18,378) (26,329)
Advertising expense ................................ 17,788 15,820 33,408 31,250 20,177
Other expenses ..................................... 219,916 183,414 361,942 378,158 374,643
------- ------- ------- ------- -------
Total other expenses ........................... 1,312,931 925,694 1,750,404 1,749,369 1,656,165
--------- ------- --------- --------- ---------
Income Before Income Tax ............................. 35,627 227,186 595,620 615,719 953,274
Income tax expense ................................. 19,118 79,672 164,993 230,462 349,237
------ ------ ------- ------- -------
Net Income ........................................... $ 16,509 $ 147,514 $ 430,627 $ 385,257 $ 604,037
=========== ========== =========== =========== ===========
Net Income Per Share ................................. $ .02
Weighted Average Shares Outstanding .................. 850,000
See notes to consolidated financial statements.
47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The principal business of savings associations, including Montgomery,
has historically consisted of attracting deposits from the general public and
making loans secured by residential and commercial real estate. Montgomery and
all other savings associations are significantly affected by prevailing economic
conditions as well as government policies and regulations concerning, among
other things, monetary and fiscal affairs, housing and financial institutions.
Deposit flows are influenced by a number of factors, including interest rates
paid on competing investments, account maturities and level of personal income
and savings. In addition, deposit growth is also affected by how customers
perceive the stability of the financial services industry amid various current
events such as regulatory changes, failures of other financial institutions and
financing of the deposit insurance fund. Lending activities are influenced by
the demand for and supply of housing lenders, the availability of cost of funds
and various other items. Sources of funds for lending activities include
deposits, payments on loans, borrowings, and funds provided from operations.
Montgomery's earnings are primarily dependent upon its net interest income, the
difference between interest income and interest expense. Interest income is a
function of the balances of loans and investments outstanding during a given
period and the yield earned on such loans and investments. Interest expense is a
function of the amounts of deposits and borrowings outstanding during the same
period and rates paid on such deposits and borrowings. Montgomery's earnings are
also affected by provisions for loan and real estate losses, service charges,
income from subsidiary activities, operating expenses and income taxes.
48
Average Balances and Interest Rates and Yields
The following table presents for the periods indicated the month-end
average balances of each category of Montgomery'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.
Six Months Ended December 31, Year Ended June 30,
------------------------------------------------------------ ------------------
1996 1995 1996
------------------------------------------------------------ ------------------
Average Average
Average Yield/ Average Yield/ Average
Balance Interest Cost(3) Balance Interest Cost(3) Balance
------------------------------------------------------------ ------------------
(Dollars in Thousands)
Interest-earning assets:
Interest-earning deposits.................... $ 3,593 $ 98 5.46% $ 5,240 $ 160 6.11% $ 5,146
Investment securities........................ 244 9 7.38 503 17 6.76 411
Loans(2)..................................... 82,553 3,395 8.23 77,706 3,164 8.14 78,380
Stock in FHLB of Indianapolis................ 750 30 8.00 750 32 8.53 750
-------- -------- -------- -------- --------
Total interest-earning assets.................. 87,140 3,532 8.11 84,199 3,373 8.01 84,687
Non-interest earning assets.................... 3,879 --- 4,038 --- 3,643
-------- --------- -------- --------- --------
Total Assets................................... $91,019 3,532 $88,237 3,373 $88,330
======= ------- ======= ------- =======
Interest-bearing liabilities:
Savings accounts............................. $ 4,319 82 3.80 $ 5,444 118 4.34 $ 5,242
NOW and money market accounts................ 10,133 182 3.59 9,335 166 3.56 9,314
Certificates of deposit...................... 55,070 1,634 5.93 53,395 1,672 6.26 54,208
-------- ------- -------- ------- --------
Total deposits............................... 69,522 1,898 5.46 68,174 1,956 5.74 68,764
Borrowings................................... 10,235 303 5.92 9,227 325 7.04 8,594
-------- -------- -------- -------- --------
Total interest-bearing liabilities......... 79,757 2,201 5.52 77,401 2,281 5.89 77,358
Other liabilities.............................. 2,067 --- 2,326 --- 2,152
-------- ---------- -------- ---------- --------
Total liabilities.............................. 81,824 2,201 79,727 2,281 79,510
-------- --------
Total stockholders' equity................... 9,195 8,510 8,820
-------- -------- --------
Total liabilities and stockholders' equity... $91,019 $88,237 $88,330
======= ======= =======
Net interest-earning assets.................... $ 7,383 $ 6,798 $ 7,329
======= ======== ========
Net interest income/interest rate spread....... $1,331 2.59 $1,092 2.12
====== ======
Average interest-earning assets to average
interest-bearing liabilities.................. 109.26% 108.78 % 109.47%
Net interest margin(1)......................... 3.05 2.59
Year Ended June 30,
-----------------------------------------------------------------------------------
1996 1995 1994
-----------------------------------------------------------------------------------
Average Average Average
Yield/ Average Yield/ Average Yield/
Interest Cost Balance Interest Cost Balance Interest Cost
-----------------------------------------------------------------------------------
(Dollars in Thousands)
Interest-earning assets:
Interest-earning deposits.................... $ 282 5.48% $ 2,687 $ 156 5.81% $ 2,547 $ 99 3.89%
Investment securities........................ 29 7.06 1,174 78 6.64 1,931 146 7.56
Loans(2)..................................... 6,410 8.18 75,961 5,894 7.76 67,975 5,316 7.82
Stock in FHLB of Indianapolis................ 56 7.47 697 50 7.17 571 33 5.78
-------- -------- ------- -------- --------
Total interest-earning assets.................. 6,777 8.00 80,519 6,178 7.67 73,024 5,594 7.66
Non-interest earning assets.................... 3,686 3,627
--------- -------- --------- --------
Total Assets................................... 6,777 $84,205 6,178 $76,651 5,594
------- ======= ------- ====== -------
Interest-bearing liabilities:
Savings accounts............................. 219 4.18 $ 4,579 178 3.8$ 5,671 188 3.32
NOW and money market accounts................ 345 3.70 11,013 394 3.58 11,494 364 3.17
Certificates of deposit...................... 3,303 6.09 48,558 2,617 5.39 46,834 2,320 4.95
------- -------- ------- -------- -------
Total deposits............................... 3,867 5.62 64,150 3,189 4.97 63,999 2,872 4.49
Borrowings................................... 567 6.60 11,968 718 6.00 5,573 235 4.22
------- -------- ------- -------- --------
Total interest-bearing liabilities......... 4,434 5.73 76,118 3,907 5.13 69,572 3,107 4.47
--------
Other liabilities.............................. 1,423 977
--------- -------- --------- --------
Total liabilities.............................. 4,434 77,541 3,907 70,549 3,107
-------- -------- -------
Total stockholders' equity................... 6,664 6,102
-------- --------
Total liabilities and stockholders' equity... $84,205 $76,651
======= ======
Net interest-earning assets.................... $ 4,401 $ 3,452
======= =======
Net interest income/interest rate spread....... $2,343 2.27 $2,271 2.54 $2,487 3.19
===== ===== =====
Average interest-earning assets to average
interest-bearing liabilities.................. 105.78% 104.96%
Net interest margin(1)......................... 2.77 2.82 3.41
<FN>
- ----------------------
(1) Net interest margin is net interest income divided by average
interest-earning assets.
(2) The average balance includes nonaccrual loans.
(3) Six months ended December 31, 1996 and 1995 have been annualized.
</FN>
49
The following table sets forth the weighted average effective interest
rates earned by Montgomery on its loan and investment portfolios, the weighted
average effective cost of Montgomery's deposits, the interest rate spread of
Montgomery, 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 Montgomery's
assets, the weighted average interest rates paid on Montgomery's liabilities,
together with the net yield on interest-earning assets.
Six Months Ended
As of December 31, Year Ended June 30,
December 31, ---------------------- ------------------------------
1996 1996 1995 1996 1995 1994
---- ---- ---- ---- ---- ----
Weighted average yield on:
Loans................................ 8.26% 8.23% 8.14% 8.18% 7.76% 7.82%
Investment securities................ 7.00 7.38 6.76 7.06 6.64 7.56
Total interest-earning assets........ 8.11 8.11 8.01 8.00 7.67 7.66
Weighted average rate on:
Deposits............................. 5.34 5.46 5.74 5.62 4.97 4.49
Borrowings........................... 6.04 5.92 7.04 6.60 6.00 4.22
Total interest-bearing liabilities... 5.44 5.52 5.89 5.73 5.13 4.47
Interest rate spread (spread between
weighted average yield on total
interest-earning assets and total
interest-bearing liabilities)......... 2.67 2.59 2.12 2.27 2.54 3.19
Net interest margin (net interest
income as a percentage of average
interest-earnings assets)............. 3.06 3.05 2.59 2.77 2.82 3.41
50
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 Montgomery'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.
Increase (Decrease) in Net Interest Income
------------------------------------------------------------------------------------
Six months ended December 31, 1996
vs. Year ended June 30, 1996 vs.
Six months ended December 31, 1995 Year ended June 30, 1995
------------------------------------------------------------------------------------
Due to Due to Due to Due to
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(Dollars in Thousands)
Interest-Earning Assets:
Interest-earning deposits.............. $ (46) $ (16) $ (62) $ 139 $ (13) $ 126
Investment securities.................. (12) 4 (8) (53) 4 (49)
Loans.................................. 199 32 231 192 324 516
Stock in FHLB of Indianapolis.......... --- (2) (2) 4 2 6
------- -------- -------- ------- ------ -------
Total............................ 141 18 159 282 317 599
------ ------ ------ ------ ----- ------
Interest-Bearing Liabilities:
Savings accounts....................... (22) (14) (36) 27 14 41
NOW and money market accounts.......... 14 2 16 (62) 13 (49)
Certificates of deposit................ 117 (155) (38) 326 360 686
Borrowings............................. 75 (97) ( 22) (213) 62 (151)
------ -------- ------ ------ ------ ------
Total............................ 184 (264) (80) 78 449 527
------- ----- ------- ------- ----- ------
Change in net interest income............ $ (43) $ 282 $ 239 $ 204 $ (132) $ 72
======== ===== ===== ====== ======= =======
Increase (Decrease) in Net Interest Income
------------------------------------------
Year ended June 30, 1995 vs.
Year ended June 30, 1994
------------------------------------------
(Dollars in Thousands)
Due to Due to
Volume Rate Total
------ ---- -----
Interest-Earning Assets:
Interest-earning deposits.............. $ 7 $ 50 $ 57
Investment securities.................. (64) (4) (68)
Loans.................................. 622 (44) 578
Stock in FHLB of Indianapolis.......... 8 9 17
------- ------ ------
Total............................ 573 11 584
------ ----- ------
Interest-Bearing Liabilities:
Savings accounts....................... (38) 28 (10)
NOW and money market accounts.......... (15) 45 30
Certificates of deposit................ 88 209 297
Borrowings............................. 353 130 483
------ ------ ------
Total............................ 388 412 800
------ ------ ------
Change in net interest income............ $ 185 $(401) $(216)
===== ===== =====
51
Changes in Financial Condition
Financial Condition. Montgomery's total assets were $94.6 million at
December 31, 1996, an increase of $6.4 million, or 7.3 percent from June 30,
1996. During this six-month period interest-earning assets increased $5.6
million, or 6.6 percent. Short-term interest-bearing deposits increased $2.2
million, or 62.9 percent primarily due to an increase in public funds deposits
received on December 31, 1996. Loans increased $3.7 million, or 4.6 percent due
to the normal high loan demand during the months of July, August and September.
Consistent with its seasonal nature, loan growth was minimal during the three
months ended December 31, 1996. Investment securities declined $259,000, or 83.0
percent due to the maturity of one security during the six months ended December
31, 1996. Loan growth in excess of deposit growth has caused Montgomery to use
proceeds from the maturity of investment securities to 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 $343,000 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 the complex to condominiums for resale. Based on this decision, as of
September 30, 1996, the complex has been classified as investment real estate
and removed from nonperforming assets. Work has commenced in connection with the
condominium conversion. 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.
Interest-bearing deposits increased $2.8 million, or 4.1 percent and borrowings
increased $3.9 million, or 48.8 percent causing an increase in interest-bearing
liabilities of 8.7 percent. The increase in borrowings was used to fund loan
growth during the six month period. A decrease in borrowings since period end
has occurred due to reduced loan demand. On October 15, 1996, the shareholders
of Montgomery approved a Stock Option Plan, a Directors' Stock Option Plan and a
Management Recognition Plan. In connection with these plans, a reduction in
stockholders' equity was made in the amount of $11,563 for the purchase of 1,000
shares of common stock to partially fund the Management Recognition Plan.
Montgomery's total assets at June 30, 1996, were $88.2 million compared
to $87.3 million at June 30, 1995, an increase of $0.9 million, or 1.0 percent.
Asset growth was minimal due to a very competitive local market for mortgage and
savings products. It was management's decision to concentrate on increasing
interest rate spread when pricing Montgomery's products and put less emphasis on
growth. Interest-earning assets increased $1.4 million, or 1.7 percent, during
the twelve month period. Loans increased $2.1 million, or 2.7 percent, while
interest-bearing deposits decreased $264,000, or 6.8 percent, and investment
securities decreased $491,000, or 61.1 percent. Interest-bearing liabilities
decreased $1.6 million, or 2.0 percent. Interest-bearing deposits increased $1.3
million, or 1.9 percent, and FHLB advances and other borrowings decreased $2.9
million, or 26.6 percent. The decrease in other assets and other liabilities was
primarily caused by the completion of the stock offering in connection with the
MHC Reorganization. Net proceeds of $2.2 million from the sale of common stock,
an increase to equity, was received in August, 1995, and was primarily used to
decrease FHLB advances.
52
Comparison of Operations for the Six Months Ended December 31, 1996 and
December 31, 1995
General. For the six months ended December 31, 1996, the most
significant factor effecting Montgomery's operations was the one time special
assessment required by the Deposit Insurance Funds Act of 1996. The after tax
effect of this one time assessment was approximately $258,700. Net income was
$17,000 for the six months ended December 31, 1996, compared to net income of
$148,000 for the six months ended December 31, 1995, a decrease of $131,000, or
88.5 %. Net income for the six months ended December 31, 1996 was $275,000
before the net effect of the SAIF special assessment. The increase from the
$148,000 for the six months ended December 31, 1995 was also primarily due to an
increase in interest rate spread from 2.04 % to 2.59 % due to deposit pricing
and the use of FHLB advances. Total other expenses for the six months ended
December 31, 1996 was $885,000 before the SAIF special assessment of $428,000
compared to $926,000 for the six months ended December 31, 1995. The decrease
was primarily due to a net income on real estate operations of $41,000 during
the 1996 period compared to a net loss of $16,000 for the 1995 period. This
increase was caused by an increase in gross rental income and a gain on the sale
of two properties in 1996 compared to a loss on the sale of real estate during
the 1995 period.
Interest Income. Interest income for the six months ended December 31,
1996 was $3.5 million, an increase of $159,000, or 4.7%, from interest income
for the same period in 1995. The average balance of interest earning assets for
the 1996 period was $87.1 million compared to $84.2 million for the 1995 period,
an increase of $2.9 million, or 3.4%. The average yield was 8.11% for the six
months ended December 31, 1996, compared to 8.01% for the same period in 1995.
The average yield on loans increased from 8.14% for the six months ended
December 31, 1995 to 8.23% for the comparable 1996 period due to the rate on one
year adjustable rate loans increasing at their annual adjustment date and 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 six months ended December
31, 1996 was $2.2 million compared to $2.3 million for the same six month period
in 1995, a decrease of $80,000, or 3.5%. Average interest-bearing liabilities
increased $2.4 million, or 3.1%, from $77.4 million for the six months ended
December 31, 1995, to $79.8 million for the same period in 1996. The average
cost of these funds decreased from 5.89% for the 1995 six month period to 5.52%
for the 1996 six month period. 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 (Adjustment) for Losses on Loans. There was no provision or
adjustment made to the allowance for losses on loans during the six month period
ending December 31, 1996, as compared to an adjustment of $26,000 during the
comparable six month period in 1995. As a result of the quarterly Internal Loan
and Asset Review performed as of December 31, 1996, management determined that
the allowance for loan losses was adequate. Ninety day delinquent loans had
decreased from $661,000 at June 30, 1996 to $314,000 at December 31, 1996.
Nonperforming loans to total loans at December 31, 1996 was 0.37% compared to
0.83% at June
53
30, 1996, and 0.93% at December 31, 1995. Non-performing assets were $379,000,
or 0.4% of assets, compared to $809,000, or 0.9% at June 30, 1996 and $941,000,
or 1.1% at June 30, 1995. At December 31, 1996, non-performing assets consisted
of non-performing loans in the amount of $314,000 and other real estate in the
amount of $65,000. As of the December 31, 1996 review, the appraised value of
real estate acquired in settlement of loans, net, owned was in excess of the
current book value. The adjustment made during the six months ended December 31,
1995, was based on the Internal Loan and Asset Review performed as of September
30, 1995, which indicated that the allowance for loan losses was sufficient to
allow the $26,000 reduction due to a decrease in non-performing loans to total
loans as compared to June 30, 1995. The allowance for loan losses to
non-performing loans was 50.3% at December 31, 1996 compared to 23.9% at June
30, 1996.
Non-Interest Income. Other income for the six months ended December 31,
1996, was $18,000, a decrease of $17,000, or 48.6% from the $35,000 recorded in
the 1995 comparable period. During the six months ended December 31, 1996,
service charges on deposit accounts increased $1,000 and appraisal income
decreased $17,000 from the 1995 six month period.
Non-Interest Expense. Non-interest expense for the six months ended
December 31, 1996, was $1.3 million compared to $926,000, an increase $387,000,
or 41.8%, from the six months ended December 31, 1995. Salary and employee
benefits decreased $22,000 primarily due to an increase in the amount of
compensation expense deferred for mortgage loan originations during the three
months ended September 30, 1996. Deposit insurance expense increased $423,000
for the six months ended December 31, 1996 compared to the same period in 1995
due to the one time SAIF special assessment of approximately $428,000 and a
reduction in the quarter ending December 31, 1996 assessment of $5,000. The one
time SAIF 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
$120,000 in annual expense based on deposits as of December 31, 1996. Net real
estate operations generated income for the six months ended December 31, 1996 of
$41,000 compared to a loss of $16,000 for the 1995 comparable period. This
increase was caused by an increase in gross rental income and a gain on the sale
of real estate in the 1996 period compared to a loss on the sale of real estate
during the 1995 period.
Income Tax Expense. Income tax for the six months ended December 31,
1996 was $19,000 compared to $80,000 for the six months ended December 31, 1995.
This was caused by the SAIF special assessment partially offset by an increase
in pre-tax income had the special assessment not been assessed.
Comparison of Operations for the Years Ended June 30, 1996 and June 30, 1995
General. Montgomery's net income for the year ended June 30, 1996 was
$431,000, compared to $385,000 for the year ended June 30, 1995, an increase of
$46,000, or 11.9%. Net interest income increased $72,000 due to an increase in
average interest-earning assets of $4.2 million compared to an increase in
average interest-bearing liabilities of only $1.2 million which was partially
offset by a decrease in interest rate spread from 2.54% for the year ended June
30, 1995, to 2.27% for the year ended June 30, 1996. The decrease in interest
rate spread was
54
caused primarily by the increase in deposit rates on new and renewal accounts
exceeding the increase in adjustable rate mortgages due to a 1% maximum
allowable annual adjustment on most adjustable rate loans. Interest rate spread
was as low as 2.09% for the month ended July 31, 1995, and has been increasing
since that period to a spread of 2.59% at June 30, 1996. Interest rate spread is
expected to continue to improve due to scheduled increases in rates on
adjustable rate loans and a decrease in deposit interest rates. Provision for
losses on loans (expense) for the year ended June 30, 1996, was $20,000 compared
to an adjustment (income) for the year ended June 30, 1995, of $15,000,
resulting in a decrease in income of $35,000 for the 1996 period compared to the
1995 period. For the year ended June 30, 1996, total other income decreased
$56,000 and income tax expense decreased $65,000 compared to the year ended June
30, 1995.
Interest Income. Montgomery's total interest income for the year ended
June 30, 1996 was $6.8 million, an increase of $599,000 or 9.7%, from interest
income for the year ended June 30, 1995. Average interest-earning assets for the
1996 period was $84.7 million compared to $80.5 million for the 1995 period, an
increase of $4.2 million, or 5.2%. The average yield was 8.00% for the year
ended June 30, 1996, compared to 7.67% for the year ended June 30,1995. This
increase in yield was primarily due to the increase in yield on mortgage loans
increasing from 7.76% to 8.18% caused by the rate increase on adjustable rate
mortgage loans at their annual adjustment date. Due to the 1% per year
adjustment cap, most one year adjustable loans increased a full 1%.
Interest Expense. Total interest expense for the year ended June 30,
1996 was $4.4 million compared to $3.9 million for the year ended June 30, 1995,
an increase of $527,000, or 13.5%. Average interest-bearing liabilities
increased $1.2 million, or 1.6%, for the comparable periods. The average cost of
these funds increased from 5.13% for the 1995 twelve month period to 5.73% for
the 1996 twelve month period. The increase was caused by an increase in costs on
borrowed money and certificates of deposit. These increases were due to a very
competitive local market for deposits and an increase in rates on one year
adjustable rate FHLB advances. The cost of funds on interest-bearing liabilities
at June 30, 1996, was 5.48%.
Provision (Adjustment) for Losses on Loans. The provision for loan
losses for the year ended June 30, 1996 was $20,000. This compares to an
adjustment for the year ended June 30, 1995 of $15,000. The provision or
adjustment is made based on a review performed each quarter by the Internal Loan
and Asset Review Committee. Based on the review performed as of June 30, 1995,
the committee determined that a reduction in the allowance of $15,000 was
reasonable due to the amount of non-performing assets and the limited projected
loss on any of the existing non-performing assets. The provision of the 1996
period was made to increase the allowance due to loan growth.
Non-Interest Income. Montgomery's other income for the year ended June
30, 1996, totalled $23,000 compared to $79,000 for the year ended June 30, 1995,
a decrease of $56,000, or 70.9%. During the year ended June 30, 1995, Montgomery
recorded income of $9,000 from the sale of mortgage-backed securities and
$16,000 from the sale of its insurance subsidiary. During the year ended June
30, 1996, service charges on deposit accounts increased $14,000
55
compared to the year ended June 30, 1995. Appraisal income decreased $45,000 due
to the change from an in-house appraiser to an independent appraiser. The
decrease in appraisal income was substantially offset by a decrease in salary
and employee benefit expense.
Non-Interest Expense. Non-interest expense for the year ended June 30,
1996, was $1,750,000 compared to $1,749,000 for the year ended June 30, 1995, an
increase of $1,000, or 0.01%. Salary and employee benefits decreased $23,000 due
to a combination of normal increases associated with growth and a decrease in
cost of the in-house appraiser. For the year ended June 30, 1996, compared to
the year ended June 30, 1995, occupancy expense increased $9,000, equipment
expense increased $8,000, deposit insurance expense increased $11,000 and
advertising expense increased $2,000. These increases are all related to
Montgomery's growth and the opening of the Mill Street Office, Montgomery's only
drive-up facility. Net real estate operations increased $11,000 primarily due to
a loss on sale of real estate of $26,000 and an increase in net rental income of
$15,000.
Income Tax Expense. Montgomery's income tax expense for the year ended
June 30, 1996, was $165,000 compared to $230,000 for the year ended June
30,1995. The decrease of $65,000, or 28.3% was due to an adjustment to the
deferred income tax liability of $74,000 and a decrease in taxable income.
Comparison of Operations for the Years Ended June 30, 1995 and June 30, 1994
General. Montgomery's net income for the year ended June 30, 1995, was
$385,000, compared to $604,000 for the year ended June 30, 1994, a decrease of
$219,000 or 36.3%, due primarily to a decrease in the interest rate spread from
3.19% for the year ended June 30, 1994, to 2.54% for the year ended June 30,
1995. Interest rate spread has increased during May and June 1995. The decrease
in interest rate spread was caused primarily by the increase in deposit rates on
new and renewal accounts exceeding the increase in adjustable rate mortgages due
to the one % maximum allowable annual adjustment on most adjustable rate loans.
Interest Income. Montgomery's total interest income for the year ended
June 30, 1995, was $6.2 million, an increase of $584,000, or 10.4%, from
interest income for the year ended June 30, 1994. This increase resulted from an
increase in the average balance of interest-earning assets to $80.5 million for
the year ended June 30, 1995, from $73.0 million for the year ended June 30,
1994, an increase of $7.5 million, or 10.3%. The average yield on
interest-earning assets was 7.67% for the year ended June 30, 1995, compared to
7.66% for the year ended June 30, 1994.
Interest Expense. Total interest expense for the year ended June 30,
1995, was $3.9 million, which was an $800,000 or 25.8% increase from the year
ended June 30, 1994. The average cost of the funds increased from 4.47% to 5.13%
and the average balance increased from $69.6 million to $76.1 million for the
comparable periods. The increase in the cost of funds was due to a general
increase in market rates paid on deposits during the year ended June 30, 1995.
This increase in rates nationally also affected the rates on FHLB borrowings and
caused an increase on all interest-bearing liabilities for financial
institutions generally.
56
Provision (Adjustment) for Losses on Loans. The provision was $25,000
for the year ended June 30, 1994. During the year ended June 30, 1995, a
decrease to the allowance for loan losses in the amount of $15,000 was made and
recorded in this account. At the time the allowance for loan losses was reduced
the allowance for loss on non-interest earning assets was increased by $15,000
and was expensed on the statement of income as a portion of other expenses. This
adjustment was made based on the internal loan and asset review performed as of
March 31, 1995, and June 30, 1995, which indicated the allowance for loan losses
was more than sufficient to allow the $15,000 reduction. During the June 30,
1995 review, it was determined that 90-day delinquent loans had increased from
$560,000 on June 30, 1994, to $817,000 on June 30, 1995, or $257,000. Included
in the June 30, 1995, 90-day delinquencies were two loans totalling $355,000.
Non-Interest Income. Montgomery's other income for the year ended June
30, 1995, totaled $79,000 compared to $147,000 for the year ended June 30, 1994,
a decrease of $68,000, or 46.3 %. This difference was primarily due to a
decrease in appraisal fee income of approximately $23,000 and a decrease in
commission income from Montgomery's insurance subsidiary of approximately
$68,000. The insurance subsidiary was sold on July 1, 1994, with the book profit
on the sale being approximately $15,000. Mortgage-backed securities were sold to
fund mortgage loan growth on which the profit on the sale was approximately
$9,000.
Non-Interest Expense. Montgomery's other expenses for the year ended
June 30, 1995, totaled $1.7 million, a $93,000 or 5.6% increase compared to the
same period ended June 30, 1994. This increase was primarily due to a $69,000
increase in salaries and employee benefits, an $11,000 increase in data
processing expense and an $11,000 increase in advertising expense. These
increases are generally reflective of Montgomery's growth and also include
additional expenses caused by the opening of the Mill Street Office during the
first quarter of 1995.
Income Tax Expense. Income tax expense decreased $119,000 for the year
ended June 30, 1995, compared to the same period ended in 1994. This was caused
by a decrease in pre-tax income.
Liquidity and Capital Resources
Montgomery's primary source of funds is its deposits. To a lesser
extent, Montgomery has also relied upon loan payments and payoffs and FHLB
advances as sources of funds. Scheduled loan payments are a relatively stable
source of funds, but loan payoffs and deposit flows can fluctuate significantly,
being influenced by interest rates, general economic conditions and competition.
Montgomery attempts to price its deposits to meet its asset/liability management
objectives consistent with local market conditions.
Federal regulations have historically required Montgomery to maintain
minimum levels of liquid assets. The required percentage has varied from time to
time based upon economic conditions and savings flows. At December 31, 1996, 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
57
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 three months ended
December 31, 1996 was 5.2%. Liquidity management is both a daily and long-term
responsibility of management. Montgomery adjusts liquid assets based upon
management's assessment of (i) expected loan demand, (ii) expected deposit
flows, (iii) yields available on interest- bearing deposits, and (iv) the
objectives of its asset/liability management program. Excess liquidity is
invested generally in federal funds and short-term interest-bearing deposit
accounts. If Montgomery requires funds beyond its ability to generate them
internally, it has additional borrowing capacity with the FHLB and collateral
eligible for repurchase agreements.
Cash flows for Montgomery are of three major types. Cash flows from
operating activities consist primarily of income provided by cash. Investing
activities generate cash flows through the origination, sale and principal
collections on loans as well as the purchases and sales of investments.
Montgomery's cash flows from investments resulted primarily from purchases and
maturities of investment securities. Cash flows from financing activities
include savings deposits, withdrawals and maturities and changes in borrowings.
Montgomery considers its liquidity and capital resources to be adequate
to meet its foreseeable short and long-term needs. Montgomery anticipates that
it will have sufficient funds available to meet current loan commitments and to
fund or refinance, on a timely basis, its other material commitments and
long-term liabilities. At December 31, 1996, Montgomery had outstanding
commitments to originate loans of $1.6 million and no commitments to sell loans.
Certificates of deposit scheduled to mature in one year or less at December 31,
1996 totalled $31.2 million. Management believes that a significant portion of
such deposits will remain with Montgomery. At December 31, 1996, Montgomery had
$5.5 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 December 31, 1996, 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.
58
The Association's actual and required capital amounts and ratios are as
follows:
December 31, 1996
-------------------------------------------------------------------------------
Required for Adequate To Be Well
Actual Capital(1) Capitalized(1)
-------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars In Thousands)
Total risk-based capital(1) (to risk
weighted assets) $7,630 13.5% $4,530 8.0% $5,663 10.0%
Core (to adjusted tangible assets)
8,659 9.2% 2,825 3.0% 5,649 6.0%
Core capital(1) (to adjusted total assets) 8,659 9.2% 2,825 3.0% 4,708 5.0%
(1) As defined by the regulatory agencies
The Association's tangible capital at December 31, 1996 was $8,659,000
which amount was 9.2% of tangible assets and exceeded the required ratio of
1.5%.
Asset/Liability Management
Montgomery, like other financial institutions, is subject to interest
rate risk to the extent that its interest-bearing liabilities reprice on a
different basis than its interest-earning assets. OTS regulations provide a Net
Portfolio Value ("NPV") approach to the quantification of interest rate risk. In
essence, this approach calculates the difference between the present value of
liabilities, expected cash flows from assets and cash flows from off balance
sheet contracts. Under OTS regulations, an institution's "normal" level of
interest rate risk in the event of an immediate and sustained 200 basis point
change in interest rates is a decrease in the institution's NPV in an amount not
exceeding 2% of the present value of its assets. Beginning September 30, 1995,
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 December
31, 1996, Montgomery's total assets were $94.6 million and risk-based capital
was 13.5 % and 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 December 31, 1996, the most recent
information available from the OTS, 2.0% of the present value of Montgomery's
assets was approximately $1.93 million, which was less than $3.28 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 December 31, 1996 NPV information,
the amount of Montgomery's deduction from capital, had it been subject to
reporting, would have been approximately $677,000.
59
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 December 31, 1996, and June 30, 1996, is an
analysis of Montgomery's estimated interest rate risk as measured by changes in
NPV for instantaneous and sustained parallel shifts in interest rates, up and
down 300 basis points in 100 point increments, compared to the limits set by the
Board. Assumptions used in calculating the amounts in this table are those
assumptions utilized by the OTS in assessing the interest risk of the thrifts it
regulates. Based upon assumptions at December 31, 1996 and June 30, 1996, the
NPV of Montgomery was $11.1 million and $10.7 million, respectively. NPV is
calculated by the OTS for the purposes of interest rate risk assessment and
should not be considered as an indicator of value of Montgomery.
60
At December 31, 1996 At June 30, 1996
- ----------------------------------------------------------------------------------------------------------------
Assumed Board
Change in Limit
Interest Rates % Change $ Change % Change $ Change % Change
(Basis Points) in NPV in NPV in NPV in NPV in NPV
-------------- ------ ------ ------ ------ ------
(Dollars in Thousands)
+300 -60 -5,247 -47 -4,823 -45
+200 -50 -3,283 -30 -3,042 -29
+100 -30 -1,452 -13 -1,351 -13
0 0 0 0 0 0
-100 -30 +876 +8 +838 +8
-200 -50 +1,092 +10 +1,097 +10
-300 -60 +1,102 +10 +1,112 +10
In the event of a 300 basis point change in interest rate based upon
estimates as of December 31, 1996, Montgomery would experience a 10% increase in
NPV in a declining rate environment and a 47% decrease in NPV in a rising
environment. During periods of rising rates, the value of monetary assets and
liabilities decline. Conversely, during periods of falling rates, the value of
monetary assets and liabilities increase. However, the amount of change in value
of specific assets and liabilities due to changes in rates is not the same in a
rising rate environment as in a falling rate environment (i.e., the amount of
value increase under a specific rate decline may not equal the amount of value
decrease under an identical upward rate movement). Based upon the NPV
methodology, the increased level of interest rate risk experienced by Montgomery
in recent periods was primarily due to the interest rate on interest- bearing
liabilities increasing more than the interest rate on interest-earning assets
because of the per adjustment rate limitation on adjustable rate loans due to
lag in rate adjustments for such loans as compared to interest-bearing
liabilities.
Current Accounting Issues [ACCOUNTANTS TO UPDATE AS APPROPRIATE]
The Financial Accounting Standards Board ("FASB") has issued Statement
of Financial Accounting Standards ("SFAS") No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
This Statement establishes guidance for recognizing and measuring impairment
losses and requires that the carrying amount of impaired assets be reduced to
fair value.
The Statement requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable.
In performing the review for recoverability, the entity must estimate
the future cash flows expected to result from the use of the asset and its
eventual disposition. If the sum of the expected future net cash flows
(undiscounted and without interest charges) is less than the carrying amount
61
of the asset, an impairment loss must be recognized and the reduced carrying
value of the asset becomes its new cost. For depreciable assets, this new cost
is depreciated over the asset's remaining useful life. Restoration of previously
recognized impairment losses is prohibited.
An impairment loss for assets to be held and used would be reported as
a component of income from continuing operations before income taxes and would
require additional disclosures.
Long-lived assets and identifiable intangibles that will be disposed of
must be reported at the lower of carrying amount or fair value less cost to
sell, except for assets covered by Accounting Principles Board ("APB") Opinion
No. 30, which will continue to be reported at the lower of cost or net
realizable value.
Gains and losses resulting from impairment of assets that will be
disposed of are reported as components of income from continuing operations and
would also require additional disclosures.
The Statement is effective for Montgomery for its fiscal year ending
June 30, 1997. Initial application of SFAS No. 121 is to be accounted for as a
cumulative effect of a change in accounting principle. Restatement of previously
issued financial statement is not permitted.
During 1995, the FASB issued SFAS No. 122, entitled Accounting for
Mortgage Servicing Rights. SFAS No. 122 pertains to mortgage banking enterprises
and financial institutions that conduct operations that are substantially
similar to the primary operations of a mortgage banking enterprise. The
Statement eliminates the accounting distinction between mortgage servicing
rights that are acquired through loan origination activities and those acquired
through purchase transactions. Under this Statement, if a mortgage banking
enterprise sells or securitizes loans and retains the mortgage servicing rights,
the enterprise must allocate the total cost of the mortgage loans to the
mortgage servicing rights and the loans (without the rights) based on their
relative fair values if it is practicable to estimate those fair values. If it
is not practicable, the entire cost should be allocated to the mortgage loans
and no cost should be allocated to the mortgage servicing rights. An entity
would measure impairment of mortgage servicing rights and loans based on the
excess of the carrying amount of the mortgage servicing rights portfolio over
the fair value of that portfolio.
The adoption of this Statement by the Association during the year ended
June 30, 1996 did not have a material impact on financial condition or results
of operations.
The FASB has issued SFAS No. 123, Accounting for Stock-based
Compensation. This Statement establishes a fair value based method of accounting
for stock-based compensation plans. The FASB encourages all entities to adopt
this method for accounting for all arrangements under which employees receive
shares of stock or other equity instruments of the employer, or the employer
incurs liabilities to employees in amounts based on the price of its stock.
Due to the extremely controversial nature of this project, the
Statement permits a company to continue the accounting for stock-based
compensation prescribed in APB Opinion No. 25,
62
Accounting for Stock Issued to Employees. If a company elects that option,
proforma disclosures of net income (and EPS, if presented) are required in the
footnotes as if the provisions of this Statement had been used to measure
stock-based compensation.
The disclosure requirements of APB Opinion No. 25 have been superseded
by the disclosure requirements of this Statement.
Once an entity adopts the fair value based method for accounting for
these transactions, that election cannot be reversed.
Equity instruments granted or otherwise transferred directly to an
employee by a principal stockholder are stock-based employee compensation to be
accounted for in accordance with either Opinion 25 or this Statement, unless the
transfer clearly is for a purpose other than compensation.
The accounting requirements of this Statement and related disclosure
requirements are effective for transactions entered into by Montgomery for the
fiscal year ending June 30, 1997. Proforma disclosures required for entities
that elect to continue to measure compensation cost using Opinion 25 must
include the effects of all awards granted in fiscal years that begin after
December 15, 1994.
In general, during the initial phase-in period, the effects of applying
this Statement are not likely to be representative of the effects on reported
net income for future years because options vest over several years and
additional awards generally are made each year. If that situation exists,
Montgomery must include a statement to that effect.
SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, breaks new ground in resolving
long-standing questions about whether transactions should be accounted for as
secured borrowings or as sales. The Statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are considered secured borrowings.
A transfer of financial assets in which the transferor surrenders
control over those assets is accounted for as a sale to the extent that
consideration other than beneficial interests in the transferred assets is
received in exchange. The transferor has surrendered control over transferred
assets only if all of the following conditions are met:
o The transferred assets have been isolated from the transferor
-- put presumptively beyond the reach of the transferor and
its creditors, even in bankruptcy or other receivership.
o Each transferee obtains the right -- free of conditions that
constrain it from taking advantage of that right -- to pledge
or exchange the transferred assets, or the transferee is a
qualifying special-purpose entity and the holders of
beneficial interests in that entity have the right free of
conditions that constrain them from taking advantage of that
right -- to pledge or exchange those interests.
63
o The transferor does not maintain effective control over the
transferred assets through an agreement that both entitles and
obligates the transferor to repurchase or redeem them before
their maturity, or all agreement that entitles the transferor
to repurchase or redeem transferred assets that are not
readily obtainable.
This Statement provides detailed measurement standards for assets and
liabilities included in these transactions. It also includes implementation
guidance for assessing isolation of transferred assets and for accounting for
transfers of partial interests, servicing of financial assets, securitizations,
transfers of sales-type and direct financing lease receivables, securities
lending transactions, repurchase agreements, "wash sales," loan syndications and
participations, risk participations in banker's acceptances, factoring
arrangements, transfers of receivables with recourse, and extinguishments of
liabilities.
The Statement supersedes FASB SFAS No. 76, Extinguishment of Debt, and
No. 77, Reporting by Transferors for Transfers of Receivables with Recourse, and
No. 122, Accounting for Mortgage Servicing Rights and amends FASB SFAS No. 115,
Accounting or Certain Investments in Debt and Equity Securities, in addition to
clarifying or amending a number of other statements and technical bulletins.
This Statement is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996 and
is to be applied prospectively. Earlier or retroactive application is not
permitted.
Impact of Inflation
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.
64
BUSINESS OF MONTGOMERY
General
Montgomery is principally engaged in the business of making first
mortgage loans to finance the purchase, construction or improvement of
residential homes or other real property. To a lesser extent, Montgomery also
offers various types of loans to individuals and businesses. Loan funds are
obtained primarily from savings deposits (which are insured up to applicable
limits by the FDIC), loan principal repayments, and borrowings (primarily in the
form of advances from the FHLB of Indianapolis). Montgomery invests in
interest-bearing deposits in other financial institutions and other investments
permitted by applicable law.
Interest on loans and investments is Montgomery's primary source of
income. Montgomery's principal expense is interest paid on deposit accounts and
borrowings. Operating results are dependent to a significant degree on the "net
interest income" of Montgomery, which is the difference between interest income
from loans and investments and interest expense on deposits and borrowings. Like
most thrift institutions, Montgomery's interest income and interest expense are
significantly affected by general economic conditions and by the policies of
various regulatory authorities.
Lending Activities
General. Montgomery's revenue consists primarily of interest income
generated by lending activities, including the origination of conventional
fixed-rate and variable-rate mortgage loans on one-to four-family homes located
in Montgomery's primary market area and consumer loans secured by savings
deposits, residential real estate, and various other items of collateral. To a
lesser extent mortgage loans on multi-unit and nonresidential properties are
also offered by Montgomery. Montgomery does not make loans insured by the
Federal Housing Authority ("FHA loans") or loans guaranteed by the Veterans
Administration ("VA loans").
65
Loan Portfolio Composition. The following table presents certain
information about the composition of Montgomery's loan portfolio at the dates
indicated:
June 30,
December 31, -----------------------------------------------------------------
1996 1996 1995 1994
----------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Type of Loan:
Mortgage loans:
Residential........................... $72,891 87.01% $68,961 86.12% $65,890 84.55% $62,672 86.79%
Land.................................. 1,852 2.21 1,656 2.07 1,866 2.39 422 0.58
Nonresidential........................ 5,263 6.28 5,866 7.33 6,076 7.80 5,694 7.88
Construction:
Residential....................... 1,448 1.73 1,261 1.57 1,345 1.73 1,602 2.22
-------- ------- ------- ------- -------- ------- -------- -------
Total mortgage loans............ 81,454 97.23 77,744 97.09 75,177 96.47 70,390 97.47
------- ------ ------- ------- -------- ------ -------- ------
Consumer loans:
Home equity........................... 2,536 3.03 2,444 3.05 2,653 3.40 2,673 3.70
Savings account and unsecured
consumer loans.................... 638 0.76 574 0.72 576 0.74 201 0.28
--------- ------ -------- ------- -------- ------ -------- ------
Total other loans............... 3,174 3.79 3,018 3.77 3,229 4.14 2,874 3.98
-------- ------ ------- ------- -------- ------ ------- ------
Less:
Loans in process...................... 861 1.02 683 0.85 456 .58 955 1.32
Deferred loan fees (costs)............ (161) (0.19) (153) (0.19) (117) (0.15) (64) (0.09)
Allowance for loan losses............. 158 0.19 158 0.20 138 0.18 158 0.22
-------- ------- -------- ------- --------- ------ -------- -------
Total adjustments............... 858 1.02 688 0.86 477 0.61 1,049 1.45
-------- ------- -------- ------- --------- ------ -------- -------
Total loans, net........................ $83,770 100.00% $80,074 100.00% $77,929 100.00% $72,215 100.00%
====== ====== ======= ====== ======= ====== ======= ======
Type of Security:
Residential:
1-4 family............................ $73,651 87.92% $69,353 86.61% $66,048 84.76% $63,126 87.42%
5 or more units....................... 688 0.82 869 1.08 1,187 1.52 1,148 1.59
Nonresidential.......................... 5,263 6.28 5,866 7.33 6,076 7.80 5,694 7.88
Land.................................... 1,852 2.21 1,656 2.07 1,866 2.39 422 0.58
Residential--second mortgage............ 2,536 3.03 2,444 3.05 2,653 3.40 2,673 3.70
Savings accounts and unsecured
consumer loans...................... 638 0.76 574 0.72 576 0.74 201 0.28
-------- ------- --------- ------- -------- ------- -------- -------
Total loans..................... 84,628 101.02 80,762 100.86 78,406 100.61 73,264 101.45
------- ------ -------- ------ ------- ------ ------- ------
Less:
Loans in process...................... 861 1.02 683 0.85 456 .58 955 1.32
Deferred loan fees (cost)............. (161) (0.19) (153) (0.19) (117) (0.15) (64) (0.09)
Allowance for loan losses............. 158 0.19 158 0.20 138 0.18 158 0.22
-------- ------- --------- ------- -------- ------- -------- -------
Total loans, net........................ $83,770 100.00% $80,074 100.00% $77,929 100.00% $72,215 100.00%
====== ====== ======= ====== ======= ====== ======= ======
66
Loan Maturity Schedule. The following table illustrates the maturities
of Montgomery's loan portfolio at December 31, 1996. 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.
Due During Years Ended December 31,
-----------------------------------
2000 2002 2007 2012 Balance
And Through Through And December 31,
1997 1998 1999 2001 2006 2011 Following 1996
----------- ----------- ----------- ---------- ----------- ------------ ------------ ------------
(In Thousands)
Residential mortgage....... $28,239 $ 737 $343 $10,657 $5,468 $16,315 $11,132 $72,891
Nonresidential mortgage.... 1,832 --- 14 635 361 2,163 258 5,263
Residential construction... 673 --- --- 118 --- 80 577 1,448
Land loans................. 982 81 --- 732 57 --- --- 1,852
Home equity loans.......... 422 71 242 732 797 272 --- 2,536
Savings account loans...... 386 145 21 70 16 --- --- 638
--------- -------- ------ --------- -------- ---------- -------- --------
Total............. $32,534 $1,034 $ 620 $12,944 $6,699 $18,830 $11,967 $84,628
======= ====== ===== ======= ====== ======= ======= =======
The following table sets forth as of December 31, 1996 the dollar
amount of all loans due after one year which have fixed and floating or
adjustable interest rates.
Fixed Variable
Rates Rates Total
----- ----- -----
(Dollars in Thousands)
Residential mortgage............................................ $34,072 $10,580 $44,652
Nonresidential mortgage ........................................ 2,984 447 3,431
Residential construction........................................ 657 118 775
Land loans ..................................................... 552 318 870
Home equity loans............................................... 2,114 --- 2,114
Savings account and unsecured consumer
loans.......................................................... 252 --- 252
--------- --------- --------
Total.................................................... $40,631 $11,463 $52,094
======= ======= =======
Residential Loans. The primary lending activity of Montgomery has been
the origination of conventional loans for the acquisition or construction of
single-family residences. Montgomery also originates loans on two-to four-family
dwellings and multi-family housing (over four units). Each of these types of
loans is secured by a mortgage on the underlying real estate and improvements
thereon, if any.
OTS regulations limit the amount which Montgomery may lend in
relationship to the appraised value of the underlying real estate at the time of
loan origination. In accordance with such regulations and law, Montgomery makes
loans on single family residences up to 90% of the value of the real estate and
improvements (the "Loan-to-Value Ratio" or "LTV"). Montgomery makes loans from
time to time of between 90% and 95% of the value of the real estate and obtains
private mortgage insurance on those loans to reduce its exposure to 80% of the
real estate's value
67
or makes such loans on an uninsured basis as a part of Montgomery's Community
Reinvestment Program for first-time buyers with low to moderate incomes.
Adjustable-rate mortgage loans ("ARMs") are offered by Montgomery for
terms of normally 15 to 20 years, although Montgomery will offer such loans up
to terms of 25 years. The interest rate adjustment periods on the ARMs are
usually one year. The maximum adjustment at each adjustment date is usually 1%
with a maximum average adjustment of 4% over the term of the loan. The interest
rate adjustments on ARMs presently originated by Montgomery are tied to changes
in the monthly average yield of U.S. Treasury securities adjusted to a constant
maturity of one or five years.
Montgomery offers fixed-rate mortgage loans for terms of up to 20
years. Due to the nature of an investment in fixed-rate mortgage loans, such
loans could have a negative effect upon Montgomery's interest rate spread
because such loans do not reprice as quickly as Montgomery's cost of funds.
Actual experience reveals, however, that, as a result of prepayments in
connection with refinancings and sales of the underlying properties, residential
loans generally remain outstanding for periods which are shorter than the
maturity of such loans, although not as short as the periods in which the cost
of funds is typically repricing.
Of the total real estate loans originated by Montgomery during the six
months ended December 31, 1996, 22.7% were ARMs and 77.3% were fixed-rate loans.
Montgomery's residential loan portfolio, including residential
construction loans, totalled approximately $74.3 million at December 31, 1996,
and represented 78.5% of total assets and 88.8% of total outstanding loans.
Adjustable-rate residential loans comprised 45.9% and fixed rate loans totalled
42.9% of Montgomery's total loans at December 31, 1996.
Construction Loans. Montgomery offers residential construction loans to
owner-occupants and occasionally to builders. At December 31, 1996, Montgomery
had $1.4 million in outstanding construction loans.
Construction loans generally involve greater underwriting and default
risks than do loans secured by mortgages on existing properties. Loan funds are
advanced upon the security of the project under construction, which is more
difficult to value before the completion of construction. Moreover, because of
the uncertainties inherent in estimating construction costs, it is relatively
difficult to evaluate accurately the total loan funds required to complete a
project and the related Loan-to-Value Ratios. In the event a default on a
construction loan occurs and foreclosure follows, Montgomery would have to take
control of the project and attempt either to arrange for completion of
construction or dispose of the unfinished project.
Nonresidential Real Estate and Land Loans. Montgomery makes loans
secured by nonresidential real estate consisting of farms and various retail and
other income-producing properties. At December 31, 1996, these loans totalled
$7.1 million or approximately 8.4% of Montgomery's total loans.
68
Nonresidential real estate lending is generally considered to involve a
higher degree of risk than residential lending due to the relatively larger loan
amounts and the effects of general economic conditions on the successful
operation of income-producing properties. Montgomery has endeavored to reduce
this risk by carefully evaluating the credit history and past performance of the
borrower, the location of the real estate, the quality of the management, the
debt service ratio, the quality and characteristics of the income stream
generated by the property and appraisals supporting the property's valuation.
Federal regulations limit the amount of nonresidential mortgage loans which an
association can make.
Consumer Loans. Montgomery makes two types of consumer loans -- loans
made to depositors on the security of their savings deposits and loans secured
by second real estate mortgages. Second mortgage loans may have terms as long as
15 years depending upon the nature of the request. Such loans are limited in
amount by determining 100% of the value of the real estate and subtracting any
prior liens.
Although regulations permit Montgomery to loan up to 100% of the value
of savings deposits pledged as collateral for loans, Montgomery's normal policy
is to loan no more than 95% of the current principal balance of pledged
accounts. The current interest rate charged on such pledged accounts is usually
2% above the rate paid on the underlying deposit.
At December 31, 1996, consumer loans totalled $3.2 million or 3.8% of
Montgomery's total loans. The Association may seek to emphasize the origination
of equity lines of credit in the future.
Loan Originations, Solicitation, and Processing. Loan originations are
developed from a number of sources, including solicitations by Montgomery's
staff, continuing business with depositors and other borrowers, real estate
agents, newspaper and radio advertising, and walk-in customers.
Mortgage loan applications are taken by one of Montgomery's loan
officers. Montgomery obtains a credit report, verification of employment and
other documentation concerning the credit-worthiness 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 credit-worthiness of the borrower. At
least two Board members must approve all loans over $175,000. All approved loans
are reported to the full Board at their regular monthly meeting.
If a mortgage loan application is approved, satisfactory evidence of
merchantable title is obtained on the real estate and improvements which will
secure the mortgage loan. Borrowers are required to carry satisfactory fire and
casualty insurance and flood insurance, if applicable, and to name Montgomery as
an insured mortgagee.
The procedure for approval of construction/permanent loans is the same
as for residential mortgage loans, except that the appraiser evaluates the
building plans, construction specifications
69
and estimates of construction costs. Montgomery also evaluates the feasibility
of the proposed construction project and the experience and record of the
builder.
Consumer loans are underwritten on the basis of the borrower's credit
history, the value of the collateral, and an analysis of the borrower's income
and expenses and ability to repay the loan.
The following table shows total loans originated and repaid during the
periods indicated.
Six Months Ended
December 31, Years Ended June 30,
--------------------------- ------------------------------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands)
Total gross loans at beginning
of period.................................. $80,762 78,406 $78,406 $73,264 $64,029
Loans originated:
Residential mortgage...................... 11,984 9,345 23,285 15,008 25,232
Nonresidential mortgage................... 1,450 558 1,270 1,027 1,891
Residential construction.................. 1,653 1,124 1,764 2,742 1,959
Nonresidential construction............... --- --- --- --- 120
Land loans................................ 364 270 618 1,158 323
Other loans............................... 427 280 523 1,550 2,020
---------- --------- --------- ------- --------
Total loans originated................ 15,878 11,577 27,460 21,485 31,545
Participation loans purchased:
Nonresidential mortgage................... --- --- 553 768
Participation loans sold:
Nonresidential mortgage................... --- --- (559) (156)
Loan principal payments..................... (6,195) (5,695) (12,668) (10,793) (13,424)
Other changes, net(1)....................... (5,817) (5,522) (12,436) (5,544) (9,498)
--------- ------- -------- -------- --------
Total gross loans at end of
period..................................... $84,628 $78,766 $80,762 $78,406 $73,264
======= ======= ======= ======= =======
(1) Represents changes except cash repayments of principal (i.e., refinanced
portion of new loans and foreclosed loans to real estate owned).
Under OTS regulations, the aggregate amount of loans that Montgomery
may make to any one borrower (including related entities), with certain
exceptions, is limited in general to 15% of its unimpaired capital and surplus,
or approximately $1.4 million. The largest amount which
70
Montgomery had outstanding to one borrower at December 31, 1996 was for $1.0
million, consisting of eight loans, all of which were performing in accordance
with their terms.
Loan Origination and Other Fees. Montgomery realizes interest income
from its lending activities and also realizes income from late payment charges,
credit life and disability insurance premium commissions, and fees for other
miscellaneous services.
Loan origination fees and other fees are a volatile source of income,
varying with the volume of lending and economic conditions. Compliance with SFAS
No. 91 has resulted in a change from Montgomery's past accounting practice and
has reduced the amount of revenue recognized by Montgomery at the time such
loans are originated or acquired, but will increase the yield reported on such
loans as such deferred fees are amortized, thereby spreading the income over a
greater number of years.
Delinquent Loans and Classified Assets. Montgomery attempts to minimize
loan delinquencies through careful underwriting procedures. When mortgage loans
become delinquent, Montgomery attempts to bring the loans current through the
assessment of late charges and adherence to its established collection
procedures. Generally, after a loan payment is 15 days delinquent, a late charge
of 5% of the amount of the payment is assessed and Montgomery will contact the
borrower to request payment. Montgomery generally will initiate foreclosure
proceedings only after attempts to obtain a deed in lieu of foreclosure are
unsuccessful or inappropriate and when it becomes apparent that the loan will
not be collectable or when the collateral is becoming inadequate to support
payments of the total debt. The above procedure similarly applies to consumer
loans.
Real estate acquired by Montgomery as a result of foreclosure or by
deed in lieu of foreclosure and real estate securing loans deemed to be
foreclosed in substance are classified as "real estate owned" until sold. When
property is so acquired, or deemed to have been acquired, it is recorded at the
lower of the unpaid principal balance of the loan or the fair value of the real
estate at the date of acquisition, not to exceed net fair value minus estimated
costs to sell. Periodically, real estate owned is reviewed to ensure that the
fair value minus estimated costs to sell is no less than 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.
71
The following table reflects the amount of loans in a delinquent status
as of the dates indicated:
June 30,
December 31, -------------------------------------------
1996 1996 1995 1994
---- ---- ---- ----
(In Thousands)
Loans delinquent for:
30 to 59 days............................. $1,068 $ 988 $ 795 $ 688
60 to 89 days............................. 707 542 255 379
90 or more days........................... 314 661 817 560
------ ------- ------- -------
Total delinquent loans................ $2,089 $2,191 $1,867 $1,627
===== ====== ====== ======
Ratio of total delinquent loans 2.49% 2.73% 2.39% 2.18%
to total loans.............................
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.
The following table sets forth information with respect to Montgomery's
non-performing assets at the dates indicated:
June 30,
December 31, -------------------------------------------
1996 1996 1995 1994
---- ---- ---- ----
(Dollars in Thousands)
Nonaccrual loans:
Residential mortgage loans................ $ 242 $ 614 $ 503 $ 527
Nonresidential mortgage loans............. 18 19 19 18
Consumer loans............................ --- --- --- ---
-------- -------- --------- --------
Total nonaccrual loans.................. 260 633 522 545
Loans contractually past due 90 days or more:
Residential mortgage --- --- 277
Nonresidential mortgage --- --- --- ---
Consumer loans 54 28 18 15
------- -------- -------- -------
Total loans contractually past due 90
days or more 54 28 295 15
------- -------- ------- -------
Total non-performing loans 314 661 817 560
Real estate acquired in
settlement of loans (net).................. 65 148 124 ---
------- ------- ------- --------
Total non-performing
assets................................ $ 379 $ 809 $ 941 $ 560
====== ===== ===== ======
During the periods shown, Montgomery had no restructured loans within the
meaning of SFAS No. 15. There were no loans which are not currently classified
as non-accrual, 90 days past
72
due or restructured but which may be so classified in the near future because
management has concerns as to the ability of the borrowers to comply with
repayment terms.
On July 1, 1995, Montgomery adopted SFAS Nos. 114 and 118 Accounting by
Creditors for Impairment of a Loan and Accounting by Creditors for Impairment of
a Loan - Income Recognition and Disclosures. Included in residential mortgage
loans at June 30, 1996, in the above table of non-performing loans is an
impaired loan of $308,000 for which an allowance for losses was not deemed
necessary. There were no loans considered impaired as of December 31, 1996. The
average balance of impaired loans for the six months ended December 31, 1996 was
$51,000 and for the year ended June 30, 1996, was $272,000. Interest income and
cash receipts of interest totaled $33,000 and $6,000 during the period in the
year ended June 30, 1996, that the loan was impaired. There was no interest
income or cash receipts on impaired loans during the six months ended December
31, 1996.
For the six months ended December 31, 1996 and the year ended June 30,
1996, the income that would have been recorded had the non-accrual loans other
than the impaired loan mentioned above not been in a non-performing status
totaled $23,000 and $36,000, respectively, compared to actual income recorded of
$3,000 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
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.
73
At December 31, 1996 and June 30, 1996, 1995 and 1994, the aggregate
amounts of Montgomery's special mention and classified assets were as follows:
June 30,
December 31, -------------------------------------------
1996 1996 1995 1994
---- ---- ---- ----
(Dollars in Thousands)
Special mention............................ $ --- $ 671 $ 401 $ 274
Classified assets:
Substandard............................... 379 809 941 560
Doubtful.................................. --- --- --- ---
Loss...................................... --- --- --- ---
------- --------- -------- --------
Total classified and special mention
assets.............................. $ 379 $1,480 $1,342 $ 834
====== ====== ====== ======
Allowance for loan losses................... $ 158 $ 158 $ 138 $ 158
====== ====== ====== ======
Montgomery is required to establish general allowances for loan losses
for assets classified as substandard or doubtful. If an asset, or portion
thereof, is classified as loss, Montgomery must either establish specific
allowances for loan losses in the amount of 100% of the portion of the asset
classified loss, or charge off such amount. Federal examiners are authorized to
classify an association's assets. If an association does not agree with an
examiner's classification of an asset, it may appeal this determination to the
District Director of the OTS.
74
The following tables set forth an analysis of Montgomery's allowances
for loan losses for the periods indicated:
Six Months Ended
December 31, Years Ended June 30,
----------------- -------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
Balance of allowance at beginning of
period............................... $ 158 $ 138 $138 $158 $133
Add: Recoveries on loans previously
charged off.......................... --- --- --- --- ---
Less: Charge-offs--residential real
estate loans......................... --- --- --- 5 ---
----- ----- ----- ----- -----
Net charge-offs........................ --- --- --- 5 ---
----- ----- ----- ----- -----
Provision (adjustment) for losses on
loans................................ --- (26) 20 (15) 25
----- ----- ----- ----- ----
Balance of allowance at end of period.. $ 158 $ 112 $158 $138 $158
===== ===== ==== ==== ====
Net charge-offs to total average loans
outstanding for period............... --- --- --- 0.01% ---
Allowance at end of period to net loans
receivable at end of period.......... 0.19% 0.14% 0.20% 0.18% 0.22%
Non-performing assets to total assets.. 0.40 1.00 0.92 1.08 0.70
Non-performing loans to total loans.... 0.37 0.92 0.83 1.05 0.77
Allowance to non-performing loans...... 50.32 15.38 23.90 16.89 28.21
June 30,
-------------------------------------------------------------------------
December 31, 1996 1996 1995 1994
------------------- -------------------- ------------------- --------------------
Percent of Percent of Percent of Percent of
loans in loans in loans in loans in
each each each each
category to category to category to category to
Amount total loans Amount total loans Amount total loans Amount total loans
------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in Thousands)
Balance at end of period
applicable to:
Residential................. $ 48 86.13% $ 37 85.39% $ 40 84.04% $ 85.54%
Nonresidential and land...... 3 8.41 --- 9.31 --- 10.13 --- 8.35
Construction loans.......... --- 1.71 --- 1.56 --- 1.71 --- 2.19
Consumer loans............... 21 3.75 17 3.74 17 4.12 11 3.92
Unallocated................. 86 --- 104 --- 81 --- 112 ---
----- ------ ----- ------ ----- ------ ----- ------
Total................... $ 158 100.00% $ 158 100.00% $ 138 100.00% $ 158 100.00%
===== ====== ===== ====== ===== ====== ===== ======
Investment Activities
OTS regulations require that Montgomery maintain a minimum amount of
liquid assets, which may be invested in United States Treasury obligations,
securities of various federal agencies, certificates of deposit at insured
banks, deposits with the FHLB of Indianapolis, bankers' acceptances, and federal
funds. Montgomery is also permitted to make investments in certain commercial
paper, corporate debt securities and certain mutual funds, as well as other
investments permitted by federal regulations. On July 1, 1994, Montgomery
adopted SFAS No. 115. Montgomery considers all its investment and
mortgage-backed securities to be available for
75
sale and pursuant to the requirements of SFAS No. 115 these securities are
reported at fair value. Prior to the adoption of SFAS No. 115 these securities
were reported at amortized cost.
The following tables set forth information regarding Montgomery's
investment portfolio at the dates indicated.
June 30,
December 31, -----------------------------------------------------------------
1996 1996 1995 1994
--------------------- -------------------- --------------------- --------------------
Book % Book % Book % Book %
Value of Total Value of Total Value of Total Value of Total
----- -------- ----- -------- ----- -------- ----- --------
(Dollars in Thousands)
Interest-bearing deposits with
banks......................... $ 100 100.00% $ 100 100.00% $ 100 100.00% $ 200 100.00%
======= ====== ======= ====== ====== ====== ======= ======
Investment securities:
U.S. Treasury................ $ --- ---% $ --- ---% $ 250 16.10% $ 250 10.46%
Federal agencies............. --- --- 250 23.54 257 16.55 251 10.50
Municipals................... 52 6.48 62 5.84 71 4.57 88 3.68
Corporate obligations........ --- --- --- --- 225 14.49 485 20.28
Mortgage-backed securities... --- --- --- --- --- --- 707 29.57
-------- -------- -------- -------- -------- ------- -------- ------
Total investment securities 52 6.48 312 29.38 803 51.71 1,781 74.49
FHLB stock..................... 750 93.52 750 70.62 750 48.29 610 25.51
------- ------ ------- ------ ------ ------- -------- ------
Total investment securities,
mortgage-backed securities,
and FHLB stock.......... $ 802 100.00% $1,062 100.00% $1,553 100.00% $2,391 100.00%
====== ====== ====== ====== ====== ====== ====== ======
The composition and maturities of the available for sale securities
portfolio at December 31, 1996, excluding FHLB of Indianapolis stock, are
indicated in the following table.
December 31, 1996
------------------------------------------------------------------------------------
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)
Municipals.......................... --- $ 52 --- --- $ 52 $ 52
------ ---- ----- ----- ----- -----
Total investment securities...... --- $ 52 --- --- $ 52 $ 52
====== ==== ===== ===== ===== =====
Weighted average yield.............. 7.00% 7.00%
Deposits and Borrowings
General. Deposits have traditionally been the primary source of
Montgomery's funds for use in lending and other investment activities. In
addition to deposits, Montgomery derives funds from interest payments and
principal repayments on loans and income on earning assets. Loan payments are a
relatively stable source of funds, while deposit inflows and outflows fluctuate
more in response to general interest rates and money market conditions.
Borrowings from the FHLB of Indianapolis are used on a short-term basis to
compensate for reductions in the availability of funds from other sources or on
a longer term basis for general business purposes.
Deposits. Deposits are attracted principally from within Montgomery's
primary market area through the offering of a selection of deposit instruments,
including NOW accounts, regular passbook savings accounts, term certificate
accounts and retirement savings plans. Interest rates paid, maturity terms,
service fees and withdrawal penalties for the various types of accounts are
76
established on a periodic basis by Montgomery's chief executive officer, subject
to review by the Board of Directors, based on Montgomery's liquidity
requirements, growth goals and interest rates paid by competitors. Montgomery
does not use brokers to attract deposits.
Montgomery's deposits as of December 31, 1996 were represented by the
various types of savings programs described below:
Weighted
Average Balance Percent
Interest Term Minimum December 31, of Total
Rate (Months) Category Amount 1996 Deposits
- ------------- ------------- ----------------------------------- ------------ ---------------- ----------
(In Thousands)
2.91% NOW accounts N/A $ 3,091 4.27%
3.74 Regular savings N/A 4,289 5.93
3.80 Money market demand accounts N/A 7,719 10.67
--- Demand accounts N/A 465 0.64
-------- -------
15,564 21.51
-------- -------
5.71 18 IRA fixed rate and term 500 2,068 2.86
5.36 30 IRA fixed rate and term 500 88 0.12
4.11 3 Fixed rate and term N/A 144 0.20
5.01 6 Fixed rate and term N/A 4,018 5.56
5.54 12 Fixed rate and term N/A 11,107 15.35
5.98 18 Fixed rate and term N/A 8,447 11.68
6.10 24 Fixed rate and term N/A 4,111 5.68
6.12 30 Fixed rate and term N/A 3,699 5.11
6.15 36 Fixed rate and term N/A 3,331 4.61
6.34 48 Fixed rate and term N/A 2,032 2.81
6.24 60 Fixed rate and term N/A 10,916 15.09
6.26 3 Fixed rate and term N/A 364 0.50
5.49 Various Public funds N/A 6,454 8.92
-------- -------
56,779 78.49
-------- -------
$72,343 100.00%
======= =======
The following table presents the certificates of deposit in Montgomery
classified by rates at the dates indicated:
June 30,
December 31, -------------------------------------------------
1996 1996 1995 1994
---- ---- ---- ----
(In Thousands)
4.00% and below.............. $ 65 $ 136 $ 469 $14,773
4.01 to 6.00%................ 34,763 31,059 21,451 24,377
6.01 to 8.00%................ 21,944 23,323 31,333 5,169
8.01 to 10.00%............... 7 17 219 1,022
------- ------- ------- -------
$56,779 $54,535 $53,472 $45,341
======= ======= ======= =======
77
The following table presents the amount and maturities of the
certificates of deposit at December 31, 1996:
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 December 31, 1996:
4.00% and below.......... $ 65 $ --- $ --- $ --- $ --- $ 65 0.11%
4.01 to 6.00%............ 24,830 6,653 2,337 221 722 34,763 61.23
6.01 to 8.00%............ 6,286 11,601 1,733 1,827 497 21,944 38.65
8.01 to 10.00%........... --- --- 7 --- --- 7 0.01
---------- ---------- -------- -------- --------- --------- -------
$31,181 $18,254 $4,077 $2,048 $1,219 $56,779 100.00%
======= ======= ====== ====== ====== ======= ======
The following table presents the amount of Montgomery's certificates of
deposit of $100,000 or more by the time remaining until maturity as of December
31, 1996 (in thousands):
Three months or less $ 9,229
Four through six months 2,194
Seven through twelve months 1,243
Over twelve months 2,929
-------
TOTAL $15,595
78
The following table presents the change in dollar amount of deposit
accounts by savings type for the six months ended December 31, 1996 and the
years ended June 30, 1996, 1995 and 1994.
June 30,
December 31, ----------------------------------------------------------------------
1996 1996 1995
----------------------------------- ------------------------------------ ---------------------------------
Increase Increase Increase
Percent of or Percent of or Percent of or
Amount Total Decrease Amount Total Decrease Amount Total Decrease
------ ----- -------- ------ ----- -------- ------ ----- --------
(Dollars in Thousands)
Demand accounts.......... $ 465 0.64% $ (148) $ 613 0.88% $ 130 $ 483 0.71% $ 268
NOW accounts............. 3,091 4.27 513 2,578 3.70 569 2,009 2.94 387
Regular savings.......... 4,289 5.93 (659) 4,948 7.10 (87) 5,035 7.37 (48)
Money market demand
accounts................ 7,719 10.67 684 7,035 10.09 (252) 7,287 10.67 (2,798)
Certificate of deposit... 56,779 78.49 2,244 54,535 78.23 1,063 53,472 78.31 8,131
------- ------ ------ ------- ------ ------ ------- ------ --------
Total............... $72,343 100.00% $2,634 $69,709 100.00% 1,423 $68,286 100.00% $5,940
======= ====== ====== ======= ====== ===== ======= ====== ======
June 30,
1994
-------------------------
Percent of
Amount Total
------ -----
(Dollars in Thousands)
Demand accounts.......... $ 215 0.34%
NOW accounts............. 1,622 2.60
Regular savings.......... 5,083 8.15
Money market demand
accounts................ 10,085 16.18
Certificate of deposit... 45,341 72.73
-------- ------
Total............... $62,346 100.00%
======= ======
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The following table sets forth the savings activities of Montgomery for
the periods indicated:
Six Months Ended
December 31, Years Ended June 30,
----------------------- ----------------------------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
Balance, beginning of period................ $69,709 $68,286 $68,286 $62,346 $64,681
------- ------- ------- ------- -------
Net (decrease) increase before
interest credited.......................... 825 (2,291) (2,429) 2,896 (5,206)
Interest credited........................... 1,809 1,797 3,852 3,044 2,871
-------- -------- -------- -------- --------
Net increase in deposits................ 2,634 (494) 1,423 5,940 (2,335)
-------- ---------- -------- -------- --------
Balance, end of period...................... $72,343 $67,792 $69,709 $68,286 $62,346
======= ======= ======= ======= =======
Deposit flows historically have been related to general economic
conditions. To resist these historical trends, Montgomery, as well as the thrift
industry as a whole, has increasingly relied on short-term certificate accounts
and other deposit alternatives that are more responsive to market conditions
than passbook accounts and long-term certificates. This greater variety of
deposit accounts has allowed Montgomery to be more competitive in obtaining
funds. At the same time, however, these sources of funds can be more costly than
traditional sources. In addition, Montgomery at times has become increasingly
subject to short-term fluctuations in deposit flows as customers have become
more interest-rate conscious. The ability of Montgomery to attract and maintain
savings deposits and Montgomery's cost of funds have been, and will continue to
be, significantly affected by money market conditions. Montgomery continues to
rely upon its core deposits to support its operations.
Borrowings. The FHLB System functions as a central reserve bank
providing credit for its member institutions and certain other financial
institutions.
As a member in good standing of the FHLB of Indianapolis, Montgomery is
authorized to apply for advances from the FHLB of Indianapolis, provided certain
standards of creditworthiness have been met. Advances are made pursuant to
several different programs, each having its own interest rate and range of
maturities. Depending on the program, limitations on the amount of advances are
based either on a fixed percentage of an institution's regulatory capital or on
the FHLB's assessment of the institution's creditworthiness. Under current
regulations, an association must meet certain qualifications to be eligible for
FHLB advances. The extent to which an association is eligible for such advances
will depend upon whether it meets the Qualified Thrift Lender Test (the "QTL
Test"). If a savings institution meets the QTL Test, it will be eligible for
100% of the advances it would otherwise be eligible to receive. If a savings
institution does not meet the QTL Test, it will be eligible for such advances
only to the extent it holds specified QTL Test assets. At December 31, 1996,
Montgomery was in compliance with the QTL Test.
80
The following table sets forth the maximum amount of Montgomery's FHLB
advances during the six months ended December 31, 1996 and the years ended June
30, 1996, 1995, and 1994, along with the ending balances of FHLB advances
outstanding at the end of each such period:
Six Months Ended
December 31, Years Ended June 30,
------------------------ ----------------------------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
Maximum balance outstanding
at any month end.......................... $12,000 $13,000 $10,500 $13,000 $9,000
Period end balance......................... 11,928 9,000 8,000 10,500 9,000
Weighted average interest rate
of FHLB advances at period
end....................................... 6.04% 5.93% 5.76% 6.82% 4.63%
Market Area and Competition
The Association's market area consists of Montgomery, Fountain, and
Warren Counties, Indiana. The home office of the Association is located in
Crawfordsville, Montgomery County, Indiana. The Association has branch offices
in Fountain and Warren Counties. The Association's market area is characterized
by a lower growth rate in population, moderately lower than average levels of
household income, much lower housing values and a moderately lower unemployment
level. The market area's strongest employment categories are manufacturing,
services and wholesale/retail trade with a lower level of residents employed in
the agriculture and mining industry category. The major employers in the
Association's market area are: R. R. Donnelley & Sons (3,100 employees),
Raybesto Products (802 employees), Hi-Tek Lithonia Light (550 employees), NUCOR
Steel (466 employees), H-C Industries (417 employees), ATAPCO (Crawfordsville)
(332 employees), Mid- States (283 employees), Heritage Products (265 employees)
and Pace Dairy Foods (250 employees).
Montgomery competes for deposits with other savings institutions,
commercial banks and credit unions in its market area. The primary factors in
competing for deposits are interest rates and convenience of office location. In
making loans, Montgomery competes with other savings institutions, commercial
banks, consumer finance companies, credit unions, leasing companies and other
lenders. Montgomery competes for loan originations primarily through the
interest rates and loan fees it charges and through the efficiency and quality
of services it provides to borrowers. Competition is affected by, among other
things, the general availability of lendable funds, general and local economic
conditions, current interest rate levels and other factors which are not readily
predictable.
On June 30, 1996 (the latest date for which data is available), there
were approximately 13 different commercial banks and savings institutions which
had a total of 36 offices in
81
Montgomery, Fountain, and Warren counties. According to information provided by
the FDIC, these institutions held approximately $756.9 million in deposits in
those 36 banking offices. Montgomery held approximately 9.2% of those deposits.
Similar information is not readily available for loans.
The number and size of financial institutions competing with Montgomery
may increase as a result of changes in federal statutes and regulations. Such
increased competition may have an adverse effect upon Montgomery.
MSA SERVICE CORPORATION
MSA, a real estate management company, is wholly owned by Montgomery.
MSA owns a residential complex, comprised of an 8-unit apartment and an adjacent
single-family resident, which is currently being converted to condominiums.
At December 31, 1996, MSA had total assets of $465,000, liabilities of
$42,000, and net worth of $423,000. MSA had net income of $27,000 and net loss
of $4,000 for the six months ended December 31, 1996 and the year ended June 30,
1996, respectively.
Personnel
At December 31, 1996, Montgomery had only 27 full-time equivalent
employees. Montgomery believes that relations with its employees are good.
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.
Properties
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
82
equipment was $1.6 million at December 31, 1996. See the Notes to Consolidated
Financial for additional information.
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.
REGULATION
General
Montgomery is a federally chartered savings association, the deposits
of which are federally insured and backed by the full faith and credit of the
United States Government. Accordingly, Montgomery is subject to broad federal
regulation and oversight extending to all its operations. Montgomery is a member
of the FHLB of Indianapolis and is subject to certain limited regulation by the
Board of Governors of the Federal Reserve System ("Federal Reserve Board"). As
the savings and loan holding company of Montgomery, the Company also is subject
to federal regulation and oversight. The purpose of the regulation of the
Company and other holding companies is to protect subsidiary savings
associations. Montgomery is a member of the SAIF, which together with the BIF
are the two deposit insurance funds administered by the FDIC, and the deposits
of Montgomery are insured by the FDIC. As a result, the FDIC has certain
regulatory and examination authority over Montgomery.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations
The OTS has extensive authority over the operations of savings
associations. As part of this authority, Montgomery is required to file periodic
reports with the OTS and is subject to periodic examinations by the OTS and the
FDIC. The last regular OTS examination of Montgomery was as of September 30,
1996. Under agency scheduling guidelines, it is likely that another examination
will be initiated in the near future. When these examinations are conducted by
the OTS and the FDIC, the examiners may require the Association to provide for
higher general or specific loan loss reserves. All savings associations are
subject to a semi-annual assessment, based upon the savings association's total
assets, to fund the operations of the OTS. The Association's OTS assessment for
the fiscal year ended June 30, 1996, was $28,610.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including Montgomery and the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may
83
be initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the
Association is prescribed by federal laws and it is prohibited from engaging in
any activities not permitted by such laws. For instance, no savings institution
may invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to branch nationwide. Montgomery is in compliance with the noted restrictions.
Montgomery's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At December 31, 1996, the Association's lending
limit under this restriction was $1.4 million. Assuming the sale of the minimum
number of shares in the Conversion at December 31, 1996, that limit would be
increased to $2.5 million. Montgomery is in compliance with the
loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan.
Insurance of Accounts and Regulation by the FDIC
Montgomery is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the United States Government. As insurer,
the FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured institutions. It also
may prohibit any FDIC-insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious risk to the SAIF or the BIF.
The FDIC also has the authority to initiate enforcement actions against savings
associations, after giving the OTS an opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has
engaged in unsafe or unsound practices or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and
84
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.
In order to equalize the deposit insurance premium schedules for BIF
and SAIF insured institutions, the FDIC imposed a one-time special assessment on
all SAIF-assessable deposits pursuant to federal legislation passed on September
30, 1996. The Association's special assessment, which was $428,000, was paid in
November 1996, but accrued as of September 30, 1996. Effective January 1, 1997,
the premium schedule for BIF and SAIF insured institutions ranged from 0 to 27
basis points. However, SAIF-insured institutions are required to pay a Financing
Corporation (FICO) assessment, in order to fund the interest on bonds issued to
resolve thrift failures in the 1980s, equal to 6.48 basis points for each $100
in domestic deposits, while BIF-insured institutions pay an assessment equal to
1.52 basis points for each $100 in domestic deposits. The assessment is expected
to be reduced to 2.43 no later than January 1, 2000, when BIF insured
institutions fully participate in the assessment. These assessments, which may
be revised based upon the level of BIF and SAIF deposits will continue until the
bonds mature in the year 2017.
Regulatory Capital Requirements
Federally insured savings associations, such as Montgomery, are
required to maintain a minimum level of regulatory capital. The OTS has
established capital standards, including a tangible capital requirement, a
leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations. These capital requirements
must be generally as stringent as the comparable capital requirements for
national banks. The OTS is also authorized to impose capital requirements in
excess of these standards on individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In 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 December 31, 1996, the Association did not have any
intangible assets.
85
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. Montgomery does not have any subsidiaries.
At December 31, 1996, Montgomery had tangible capital of $8.7 million,
or 9.2% of total assets, which is approximately $7.3 million above the minimum
requirement of 1.5% of adjusted total assets in effect on that date. On a pro
forma basis, after giving effect to the sale of the minimum, midpoint and
maximum number of shares of Common Stock offered in the Conversion and
investment of 50% of the net proceeds in assets not excluded for tangible
capital purposes, Montgomery would have had tangible capital equal to 11.5%,
11.9% and 12.3%, respectively, of adjusted total assets at December 31, 1996,
which is $9.7 million, $10.1 million and $10.6 million, respectively, above the
requirement.
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 December 31, 1996,
Montgomery had no intangibles which were subject to these tests.
At December 31, 1996, Montgomery had core capital equal to $8.7
million, or 9.2% of adjusted total assets, which is $5.9 million above the
minimum leverage ratio requirement of 3% as in effect on that date. On a pro
forma basis, after giving effect to the sale of the minimum, midpoint and
maximum number of shares of Common Stock offered in the Conversion and
investment of 50% of the net proceeds in assets not excluded from core capital,
Montgomery would have had core capital equal to 11.5%, 11.9% and 12.3%,
respectively, of adjusted total assets at December 31, 1996, which is $8.2
million, $8.6 million and $9.1 million, respectively, above the requirement.
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 December 31, 1996, Montgomery had
$158,000 of general loss reserves, which was less than 1.25% of risk-weighted
assets.
86
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").
The OTS has adopted a final rule that requires 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 provides for a two quarter
lag between calculating interest rate risk and recognizing any deduction from
capital. 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 December 31, 1996, Montgomery had total capital of $7.6 million
(including $8.7 million in core capital, $158,000 in qualifying supplementary
capital and less $1.2 million in real estate held for investment) and
risk-weighted assets of $56.6 million; or total capital of 13.5% of
risk-weighted assets. This amount was $3.1 million above the 8% requirement in
effect on that date. On a pro forma basis, after giving effect to the sale of
the minimum, midpoint and maximum number of shares of Common Stock offered in
the Conversion, the infusion to the Association of 50% of the net Conversion
proceeds and the investment of those proceeds in 20% risk-weighted government
securities, Montgomery would have had total capital of 17.0%, 17.7% and 18.3%,
respectively, of risk-weighted assets, which is above the current 8% requirement
by $5.3 million, $5.8 million and $6.2 million, respectively.
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.
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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.
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.
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. See "The
Conversion and Reorganization -- Effects of the Conversion and Reorganization"
and "-- Certain Restrictions on Purchase or Transfer of Shares After the
Conversion and Reorganization".
The OTS utilizes a three-tiered approach to permit associations, based
on their capital level and supervisory condition, to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers and
other transactions charged to the capital account. See "--Regulatory Capital
Requirements."
Generally, Tier 1 associations, which are associations that before and
after the proposed distribution meet their current 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 fully
phased-in capital requirement for such capital component, as measured at the
beginning of
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the calendar year, or the amount authorized for a Tier 2 association. However, a
Tier 1 association deemed to be in need of more than normal supervision by the
OTS may be downgraded to a Tier 2 or Tier 3 association as a result of such a
determination. The Association meets the requirements for a Tier 1 association
and has not been notified of a need for more than normal supervision. Tier 2
associations, which are associations that before and after the proposed
distribution meet their current minimum capital requirements, may make capital
distributions of up to 75% of net income over the most recent four quarter
period.
Tier 3 associations (which are associations that do not meet current
minimum capital requirements) that propose to make any capital distribution and
Tier 2 associations that propose to make a capital distribution in excess of the
noted safe harbor level must obtain OTS approval prior to making such
distribution. Tier 2 associations proposing to make a capital distribution
within the safe harbor provisions and Tier 1 associations proposing to make any
capital distribution need only submit written notice to the OTS 30 days prior to
such distribution. The OTS may object to the distribution during that 30-day
period based on safety and soundness concerns. 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. See "-
Regulatory Capital Requirements."
Liquidity
All savings associations, including Montgomery, are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. For a discussion of what Montgomery
includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources." This liquid asset ratio requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
savings associations. At the present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. At December 31, 1996, the Association was in compliance with
both requirements, with an overall liquid asset ratio of 7.73% and a short-term
liquid assets ratio of 7.73%.
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.
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The OTS has adopted an amendment to its accounting regulations, which
may be made more stringent than GAAP by the OTS, to require that transactions be
reported in a manner that best reflects their underlying economic substance and
inherent risk and that financial reports must incorporate any other accounting
regulations or orders prescribed by the OTS.
Qualified Thrift Lender Test
All savings associations, including Montgomery, are required to meet a
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 of 1986, as amended ("Code"). Under either test,
such assets primarily consist of residential housing related loans and
investments. At December 31, 1996, 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
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Company Regulation."
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of
Montgomery, to assess the institution's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by Montgomery.
An unsatisfactory rating may be used as the basis for the denial of an
application by the OTS.
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The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Association may be required to devote additional
funds for investment and lending in its local community. The Association was
examined for CRA compliance in 1995 and received a rating of satisfactory.
Transactions with Affiliates
Generally, transactions between a savings association or its
subsidiaries and its affiliates are required to be on terms as favorable to the
association as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the association's capital. Affiliates of Montgomery include the Company and any
company which is under common control with the Association. In addition, a
savings association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of most
affiliates. 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 will be a unitary savings and loan holding company subject
to regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings association subsidiaries which also permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings association.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than Montgomery or any other SAIF-insured savings
association) would become subject to such restrictions unless such other
associations each qualify as a QTL and were acquired in a supervisory
acquisition.
If Montgomery fails the QTL test, the Company must obtain the approval
of the OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
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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 will be registered with the Securities and
Exchange Commission ("SEC") under 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 noninterest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At December 31, 1996, Montgomery 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.
Federal Home Loan Bank System
Montgomery is a member of the FHLB of Indianapolis, which is one of 12
regional FHLBs, that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures, established
by the board of directors of the FHLB, which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured
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by sufficient collateral as determined by the FHLB. In addition, all long-term
advances are required to provide funds for residential home financing.
As a member, Montgomery is required to purchase and maintain stock in
the FHLB of Indianapolis. At December 31, 1996, Montgomery had $750,000 in FHLB
stock, which was in compliance with this requirement. In past years, Montgomery
has received substantial dividends on its FHLB stock. Over the past five fiscal
years such dividends have averaged 8.35% and were 7.21% for calendar year 1996.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of Montgomery's FHLB stock may result in a corresponding
reduction in Montgomery's capital.
For the year ended June 30, 1996, dividends paid by the FHLB of
Indianapolis to Montgomery totaled $56,000, which constitutes a $6,000 increase
over the amount of dividends received in fiscal year 1995. The $30,000 dividend
for the six months ended December 31, 1996 reflects an annualized rate of 8.00%,
or 0.53% above the rate for fiscal 1996.
Federal and State Taxation
Federal Taxation. Savings associations such as the Association that
meet certain definitional tests relating to the composition of assets and other
conditions prescribed by the Code, are permitted to establish reserves for bad
debts and to make annual additions thereto which may, within specified formula
limits, be 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" is 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) may be 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 is an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
Since 1987, 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
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bad debt deduction). Under changes in federal tax law enacted in August 1996,
the percentage bad debt deduction has been eliminated for tax years beginning
after December 31, 1995. Accordingly, this method will not be available to the
Association for its tax years ending June 30, 1997 and thereafter.
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 equals the amount by
which 12% of the amount comprising savings accounts at year-end exceeds the sum
of surplus, undivided profits and reserves at the beginning of the year. Through
June 30, 1996, the 6% and 12% limitations did not restrict the percentage bad
debt deduction available to the Association.
The federal tax legislation enacted in August 1996 also imposes a
requirement to recapture into taxable income the portion of the qualifying and
non-qualifying loan reserves in excess of the "base-year" balances of such
reserves. For the Association, the base-year reserves are the balances as of
June 30, 1988. Recapture of the excess reserves will occur over a six-year
period which could begin for the Association as early as the tax year ending
June 30, 1997 (commencement of the recapture period may be delayed, however, for
up to two years provided the Association meets certain residential lending
requirements). This delay of the recapture is not available to the Association
if it converts to a national bank. The Association previously established, and
will continue to maintain, a deferred tax liability with respect to its federal
tax bad debt reserves in excess of the base-year balances; accordingly, the
legislative changes will have no effect on total income tax expense for
financial reporting purposes.
Also, under the August 1996 legislation, the Association's base-year
federal tax bad debt reserves are "frozen" and subject to current recapture only
in very limited circumstances. Generally, recapture of all or a portion of the
base-year reserves will be required if the Association pays a dividend in excess
of the greater of its current or accumulated earnings and profits, redeems any
of its stock, or is liquidated. The Association has not established a deferred
federal tax liability under SFAS No. 109 for its base-year federal tax bad debt
reserves, as it does not anticipate engaging in any of the transactions that
would cause such reserves to be recaptured.
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.
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The Association files federal income tax returns on a fiscal year basis
using the accrual method of accounting.
The Association has 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 Association.
Indiana Taxation. For its taxable period beginning January 1, 1990, the
Association became subject to Indiana's new 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.
MANAGEMENT OF THE COMPANY
Directors and Executive Officers
The Board of Directors of the Company consists of Earl F. Elliott, J.
Lee Walden, John E. Woodward, Mark E. Foster, Joseph M. Malott, C. Rex Henthorn
and Robert C. Wright, all of whom are current members of the Board of Directors
of the Association. See "Management of the Association - Directors." Each
Director of the Company has served as such since the Company's incorporation in
1997. Directors of the Company will serve three-year staggered terms so that
approximately one-third of the directors will be elected at each annual meeting
of stockholders. The terms of the current directors of the Company are the same
as their terms as directors of the Association. The Company does not intend to
pay directors a fee for participation on the Board of Directors of the Company.
The executive officers of the Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors. The executive
officers of the Company are also executive officers of the Association. It is
not anticipated that the executive officers of the Company will receive any
remuneration in their capacity as Company executive officers. For information
regarding compensation of directors and executive officers of the Association,
see "Management of the Association - Meetings and Committees of the Board of
Directors" and "- Executive Compensation."
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Indemnification
The Articles of Incorporation of the Company provides that a director
or officer of the Company shall be indemnified by the Company to the fullest
extent authorized by the corporate law of the State of Indiana against all
expenses, liability and loss reasonably incurred or suffered by such person in
connection with his activities as a director or officer or as a director or
officer of another company, if the director or officer held such position at the
request of the Company. Indiana law requires that such director, officer,
employee or agent, in order to be indemnified, must have acted in good faith and
in a manner reasonably believed to be not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, did not have
reasonable cause to believe his conduct was unlawful.
The Articles of Incorporation and Indiana law also provide that the
indemnification provisions of such Certificate and the statute are not exclusive
of any other right which a person seeking indemnification may have or later
acquire under any statute, provision of the Articles of Incorporation, Bylaws of
the Company, agreement, vote of stockholders or disinterested directors or
otherwise.
These provisions may have the effect of deterring shareholder
derivative actions, since the Company may ultimately be responsible for expenses
for both parties to the action. A similar effect would not be expected for third
party claims.
In addition, the Articles of Incorporation and Indiana law also provide
that the Company may maintain insurance, at its expense, to protect itself and
any director, officer, employee or agent of the Company or another corporation,
partnership, joint venture, trust or other enterprise against any expense,
liability or loss, whether or not the Company has the power to indemnify such
person against such expense, liability or loss under the Indiana corporate law.
The Company intends to obtain such insurance.
MANAGEMENT OF THE ASSOCIATION
Directors
The Board of Directors of the Association currently consists of seven
directors. The directors are divided into three classes. Approximately one-third
of the directors are elected at each annual meeting of members. Because the
Company will own all of the issued and outstanding shares of capital stock of
the Association after the Conversion, the Company, through its directors, will
elect the directors of the Association.
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The following table sets forth certain information regarding the
directors of the Association.
Position(s) Held Director Term
With the Association Age(1) Since Expires
-------------------- ------ ----- -------
Earl F. Elliott Chairman of the Board and 63 1973 1997
Chief Executive Officer
Mark E. Foster Director 44 1990 1997
Robert C. Wright Director 52 1996 1997
Joseph M. Malott Director 59 1978 1998
J. Lee Walden Director, President and Chief 48 1995 1998
Financial Officer
John E. Woodward Director 68 1975 1999
C. Rex Henthorn Director 59 1981 1999
- -------------------
(1) At December 31, 1996.
The business experience of each director is set forth below. All
directors have held their present positions for at least the past five years,
except as otherwise indicated.
Earl F. Elliott. Mr. Elliott is the Chairman of the Board of Directors and Chief
Executive Officer of the Association. Mr. Elliott first joined the Association
in 1973.
Mark E. Foster. Mr. Foster is the General Manager of a retail farm equipment and
automobile dealership located in Montgomery County, Indiana, a position he has
held since 1983.
Robert C. Wright. Mr. Wright is the owner and manager of a restaurant located in
Montgomery County, Indiana, a position he has held since 1975.
Joseph M. Malott. For the past five years, Mr. Malott has been self-employed as
a consultant to financial institutions.
J. Lee Walden. Mr. Walden is currently the Association's President and Chief
Financial Officer. Mr Walden first joined the Association in 1984.
John E. Woodward. Mr. Woodward is the President of a collection agency and
credit reporting bureau located in Montgomery County, Indiana, a position he has
held since 1959.
C. Rex Henthorn. Since 1963, Mr. Henthorn has practiced law in the State of
Indiana.
Executive Officers
The following table sets forth certain information relating to the
executive officers of Montgomery as of December 31, 1996.
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Name Age- Offices Held
---- ---- ------------
Earl F. Elliott 63 Chairman of the Board and Chief
Executive Officer
J. Lee Walden 48 President & Chief Financial Officer
Nancy L. McCormick 41 Senior Vice President and Secretary
Executive Officer Who Is Not A Director
Nancy L. McCormick, age 41, is the Association's Senior Vice President and
Secretary. Ms. McCormick first joined the Association in 1983 and was appointed
Secretary in 1984. Ms. McCormick is the custodian of the Association's records
and assists the Chief Executive Officer in various management duties.
Officers are elected annually by the Board of Directors and serve for a
one-year period and until their successors are elected. No officers have
employment contracts. 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.
Meetings and Committees of the Board of Directors
The Company. The Company's Board of Directors intends to meet on a
monthly basis. Since the Company was not established in 1996, no meetings were
held. The Company does not intend to pay directors a fee.
The Association. The Association's Board of Directors meets monthly.
Additional special meetings may be called by the Chief Executive Officer or the
Board of Directors. The Board of Directors met 13 times during the year ended
June 30, 1996. During fiscal year 1996, no director of the Association attended
fewer than 75% of the aggregate of the total number of Board meetings and the
total number of meetings held by the committees of the Board of Directors on
which he served. Directors receive an annual stipend of $4,800 plus $200 for
each meeting of the Board of Directors attended. In addition, Directors receive
$100 for attendance at committee meetings lasting one hour or less and $200 per
committee meeting lasting over one hour (except that Messrs. Elliott and Walden
receive no fees for attending committee meetings held during their normal
working hours). The Association has standing Audit, Nominating and Compensation
Committees.
The members of the Audit Committee are Messrs. Woodward, Malott,
Henthorn, and Foster. This Committee is responsible for developing and
monitoring Montgomery's audit program. The Committee selects Montgomery's
outside auditor and meets with him to discuss the results of the annual audit
and any related matters. The members of the Committee also receive and review
all the reports and findings and other information presented to them by
Montgomery's officers regarding financial reporting policies and practices. Two
members of the
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Committee meet to audit all cash items and teller cash and reconcile such items
to the general ledger. The Audit Committee met three times during fiscal 1996.
The entire Board of Directors acts as the Nominating Committee. The
Board as Nominating Committee makes nominations for director candidates for
election to the Board of Directors but has no procedures or plans for
considering nominees recommended by shareholders. The Board as Nominating
Committee did not meet during fiscal 1996; however, it did meet in July of 1996
to nominate the two persons standing for election identified above.
The members of the Compensation Committee are Messrs. Malott, Foster,
Elliott and Walden. The Compensation Committee reviews and approves all salaries
for officers and employees of Montgomery. The Compensation Committee met three
times during fiscal 1996.
Executive Compensation
The following table sets forth information concerning the compensation
paid or granted to the Association's and Company's Chief Executive Officer. No
other executive officer of the Company had aggregate cash compensation exceeding
$100,000.
Summary Compensation Table
Annual
Compensation All Other
Name and Principal Position Year Salary($) Bonus($) Compensation($)
--------------------------- ---- --------- -------- ---------------
Earl F. Elliott, Chairman and 1996 $86,250 $ 500 $34,039(1)
Chief Executive Officer 1995 82,500 5,000 33,800(2)
1994 77,500 7,000 32,475(3)
- ----------
<FN>
(1) Represents $8,000 in Directors and committee fees, a contribution by
Montgomery of $6,039 pursuant to its 401(k) plan, and $20,000 of
deferred compensation payable to Mr. Elliott upon his retirement.
(2) Represents $7,675 in Directors and committee fees, a contribution by
Montgomery of $6,125 pursuant to its 401(k) plan, and $20,000 of
deferred compensation payable to Mr. Elliott upon his retirement.
(3) Represents $7,050 in Directors and committee fees, a contribution by
Montgomery of $5,425 pursuant to its 401(k) plan, and $20,000 of
deferred compensation payable to Mr. Elliott upon his retirement.
</FN>
Supplemental Retirement Benefit
The Association provides for a Supplemental Retirement Benefit to Mr.
Elliott. The Benefit consists of life insurance on Mr. Elliott's life equal in
amount to twice his annual salary in the event of his death prior to retirement.
In addition, the Association has agreed to pay Mr.
99
Elliott a cash retirement payment, payable either in a lump sum within 30 days
after his date of retirement or, at his election, in equal annual installments
of not less than $20,000 over such period of time as he shall elect, in an
amount determined pursuant to the following table:
Retirement Date
Occurs After Amount of Cash
December 31 of: Retirement Payment
- --------------------------- ----------------------
1994 $ 40,000
1995 60,000
1996 80,000
1997 100,000
As a condition to his receiving the above-indicated cash retirement payments,
Mr. Elliott will be required to enter into a written consulting agreement with
the Association obligating him, during the remainder of his lifetime but subject
to such limitation as his physical condition might impose, to render such
reasonable business consulting and advisory services to the Association as the
Board might request, and further obligating him not to enter into or engage in
any activity or enterprise that would directly or indirectly involve substantial
competition with the Association.
Benefit Plans
General. Montgomery currently provides health care benefits to its
employees, including hospitalization, disability and major medical insurance,
subject to certain deductibles and copayments by employees.
Incentive Bonus Plan. The Association has an incentive bonus plan which
provides for annual cash bonuses to certain officers as a means of recognizing
achievement on the part of such employees. The bonuses are determined based on a
combination of Montgomery's and the individual employee's performance during the
year. The Association's bonus expense was $13,000 for the fiscal year ended June
30, 1996.
401(k) Plan. The Association established a qualified, tax-exempt
retirement plan with a "cash-or-deferred arrangement" qualifying under Section
401(k) of the Code (the "401(k) Plan"). With certain exceptions, all employees
who have attained age 21 and who have completed one year of employment, during
which they worked at least 1,000 hours, are eligible to participate in the
401(k) Plan as of the earlier of the first day of the plan year or the next July
1 or January 1. Eligible employees are permitted to contribute up to 15% of
their compensation to the 401(k) Plan on a pre-tax basis, up to a maximum of
$9,500. The Association matches 100% of the first 7% of each participant's
salary reduction contribution to the 401(k) Plan.
Participant contributions to the 401(k) Plan are fully and immediately
vested. Withdrawals are not permitted before age 59-1/2 except in the event of
death, disability, termination of employment or reasons of proven financial
hardship. With certain limitations, participants may
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make withdrawals from their accounts while actively employed. Upon termination
of employment, the participant's accounts will be distributed, unless he or she
elects to defer the payment.
The 401(k) Plan may be amended by the Board of Directors, except that no
amendment may be made which would reduce the interest of any participant in the
401(k) Plan trust fund or divert any of the assets of the 401(k) Plan trust fund
to purposes other than the benefit of participants or their beneficiaries. The
Association's accrued expense for the Plan was $23,000 for the six months ended
December 31, 1996 and $45,000 for year ended June 30, 1996.
Employee Stock Ownership Plan. The Boards of Directors of Montgomery and
the Company have approved the adoption of an ESOP for the benefit of employees
of the Company and its subsidiaries, including Montgomery. The ESOP is designed
to meet the requirements of an employee stock ownership plan as described at
Section 4975(e)(7) of the Code and Section 407(d)(6) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"). The ESOP may borrow in order
to finance purchases of the Company's Common Stock.
It is anticipated that the ESOP will be funded with a loan from the
Company (not to exceed an amount equal to 8% of the total number of shares of
Common Stock to be outstanding upon completion of the Conversion and
Reorganization). The interest rate of the ESOP loan will be equal to the prime
rate of interest on the date the loan is made.
GAAP generally requires that any borrowing by the ESOP from an
unaffiliated lender be reflected as a liability in the Company's consolidated
financial statements, whether or not such borrowing is guaranteed by, or
constitutes a legally binding contribution commitment of, the Company or the
Association. The funds used to acquire the ESOP shares are expected to be
borrowed from the Company. If the Company finances the ESOP debt, the ESOP debt
will be eliminated through consolidation and no liability will be reflected on
the Company's consolidated financial statements. In addition, shares purchased
with borrowed funds will, to the extent of the borrowings, be excluded from
stockholders' equity, representing unearned compensation to employees for future
services not yet performed. Consequently, if the ESOP purchases already- issued
shares in the open market, the Company's consolidated liabilities will increase
to the extent of the ESOP's borrowings, and total and per share stockholders'
equity will be reduced to reflect such borrowings. If the ESOP purchases newly
issued shares from the Company, total stockholders' equity would neither
increase nor decrease, but per share stockholders' equity and per share net
income would decrease because of the increase in the number of outstanding
shares. In either case, as the borrowings used to fund ESOP purchases are
repaid, total stockholders' equity will correspondingly increase.
All employees of the Association are eligible to participate in the ESOP
after they attain age 21 and complete one year of service. Employees will be
credited for years of service to the Association prior to the adoption of the
ESOP for participation and vesting purposes. The Association's contribution to
the ESOP is allocated among participants on the basis of compen sation. Each
participant's account will be credited with cash and shares of Company Common
Stock based upon compensation earned during the year with respect to which the
contribution is
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made. Contributions credited to a participant's account are vested on a
graduated basis and become fully vested when such participant completes ten
years of service. ESOP participants are entitled to receive distributions from
their ESOP accounts only upon termination of service. Distributions will be made
in cash and in whole shares of the Company's Common Stock. Fractional shares
will be paid in cash. Participants will not incur a tax liability until a
distribution is made.
Each participating employee is entitled to instruct the trustee of the
ESOP as to how to vote the shares allocated to his or her account. The trustee
will not be affiliated with the Company or Montgomery.
The ESOP may be amended by the Board of Directors, except that no
amendment may be made which would reduce the interest of any participant in the
ESOP trust fund or divert any of the assets of the ESOP trust fund to purposes
other than the benefit of participants or their beneficiaries.
Other Stock Benefit Plans. The Company intends to adopt certain stock
benefit plans following consummation of the Conversion and Reorganization.
Moreover, existing stock benefit plans of the Association, consisting of the
1995 Stock Incentive Plan, 1995 Directors' Stock Option Plan and the Management
Recognition Plan, will be assumed by the Company in connection with the
Conversion and Reorganization, with the effect that shares of Common Stock will
be issuable pursuant thereto and not shares of Association Common Stock.
1997 Stock Option Plan. The Board of Directors of the Company intends to
adopt the 1997 Stock Option Plan (the "1997 Plan") and may submit the 1997 Plan
to stockholders at an annual or special meeting of stockholders to be held at
least six months following the consummation of the Conversion and
Reorganization.
The 1997 Plan is designed to attract and retain qualified personnel key
positions, provide directors, officers and key employees with a proprietary
interest in the Company as an incentive to contribute to the success of the
Company and reward key employees for outstanding performance and the attainment
of targeted goals. Options granted under the 1997 Plan may be either options
that qualify under the Code as "incentive stock options" (options that afford
preferable tax treatment to recipients upon compliance with certain restrictions
and that do not normally result in tax deductions to the employer) or options
that do not so qualify. The exercise price of stock options granted under the
1997 Plan is required to be at least equal to the fair market value per share of
the stock on the date of grant. All grants will be made in consideration of past
and future services rendered to the Association, and in an amount deemed
appropriate to encourage the continued retention of the officers and directors
who are considered necessary for the continued success of the Association.
The 1997 Plan provides for the grant of stock appreciation rights
("SARs") at any time, whether or not the participant then holds stock options,
granting the right to receive the excess of the market value of the shares
represented by the SARs on the date exercised over the exercise
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price. SARs generally will be subject to the same terms and conditions and
exercisable to the same extent as stock options.
Limited SARs may be granted at the time of, and must be related to, the
grant of a stock option or SAR. The exercise of one will reduce to that extent
the number of shares represented by the other. Limited SARs will be exercisable
only for the 45 days following the expiration of the tender or exchange offer,
during which period the related stock option or SAR will be exercisable.
However, no SAR or Limited SAR will be exercisable by a 10% beneficial owner,
director or senior officer within six months of the date of its grant. The
Company has no present intention to grant any SARs or Limited SARs.
The 1997 Plan will be administered by the Company's Stock Plan Committee
which will consist of at least two non-employee directors. The Stock Plan
Committee will select the recipients and terms of awards made pursuant to the
Stock Option Plan. Assuming the 1997 Plan is submitted to stockholders prior to
one year following the consummation of the Conversion and Reorganization, OTS
regulations limit the amount of shares that may be awarded pursuant to such
stock-based plans to each individual officer, each non-employee director and all
non-employee directors as a group to 25%, 5% and 30%, respectively, of the total
shares reserved for issuance under each such stock-based plan. In addition, all
options would be required to vest in five equal annual installments, commencing
one year from the date of grant, subject to the continued service of the holder
of such option.
The 1997 Plan is intended to be funded either with shares purchased in
the open market or with authorized but unissued shares of Common Stock. The use
of authorized but unissued shares to fund the 1997 Plan could dilute the
holdings of stockholders who purchase Conversion Stock in the Offerings. See
"Pro Forma Data."
1997 Recognition Plan. The Company intends to establish the 1997
Recognition Plan in order to provide employees with a proprietary interest in
the Company in a manner designed to encourage such persons to remain with the
Company and the Association. The 1997 Recognition Plan may be subject to
ratification by stockholders at a meeting to be held not earlier than six months
after the completion of the Conversion and Reorganization. The Company will
contribute funds to the 1997 Recognition Plan to enable it to acquire in the
open market or from authorized but unissued shares (with the decision between
open market or authorized but unissued shares based on the Company's future
stock price, alternative investment opportunities and capital needs), following
stockholder ratification of such plan, an amount of stock equal to 4.0% of the
shares of Common Stock to be outstanding upon consummation of the Conversion and
Reorganization, less the number of shares in the Management Recognition Plan.
The Stock Plan Committee of the Board of Directors of the Company will
administer the proposed 1997 Recognition Plan. Under the terms of the proposed
1997 Recognition Plan, awards ("Awards") can be granted to key employees in the
form of shares of Common Stock held by the 1997 Recognition Plan. Awards are
non-transferable and non-assignable. In the event the 1997 Recognition Plan is
submitted to a vote of stockholders prior to one year following consummation of
the Conversion and Reorganization, OTS regulations limit the amount of shares
103
that may be awarded pursuant to such stock-based plans to each individual
officer, each non-employee director and all non-employee directors as a group to
25%, 5% and 30%, respectively, of the total shares reserved for issuance under
each such stock-based plan.
Recipients will earn (i.e., become vested in), over a period of time,
the shares of Common Stock covered by the Award. Awards made pursuant to the
1997 Recognition Plan will vest in five equal annual installments commencing one
year from the date of grant. Awards will be 100% vested upon termination of
employment due to death or disability. In addition, no awards under the 1997
Recognition Plan to directors and executive officers shall vest in any year in
which the Association is not meeting all of its fully phased-in capital
requirements. When shares become vested and are actually distributed in
accordance with the 1997 Recognition Plan, but in no event prior to such time,
the participants will also receive amounts equal to any accrued dividends with
respect thereto. Earned shares are distributed to recipients as soon as
practicable following the date on which they are earned. No determination has
been made regarding any possible grants under the 1997 Recognition Plan.
Employment Agreements. The Association intends to enter into employment
agreements with Chief Executive Officer Elliott and President Walden providing
for an initial term of three years. The agreements have been filed with the OTS
as part of the application of the Company for approval to become a savings and
loan holding company. The employment agreements become 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 current salary and provide for
an annual extension subject to the performance of an annual formal evaluation by
disinterested members of the Board of Directors of the Association. The
agreements also provide for termination upon the employee's death, for cause or
in certain events specified by OTS regulations. The employment agreements are
also terminable by the employee upon 90 days's 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
in 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 December 31, 1996 under
circumstances entitling them to severance pay as described above, they would
have been entitled to receive a lump such cash payment of approximately
$________ and $______, 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.
104
Certain Transactions
The Association has followed a policy of granting loans to eligible
directors, officers, employees and members of their immediate families for the
financing of their personal residences and for consumer purposes. Under the
Association's current policy, all such loans to directors and senior officers
are required to be made in the ordinary course of business and on the same
terms, including collateral and interest rates, as those prevailing at the time
for comparable transactions and do not involve more than the normal risk of
collectibility. However, prior to August 1989, the Association waived loan
origination fees on loans to directors and employees. Montgomery has had, and
expects to have in the future, banking transactions in the ordinary course of
its business with Directors, officers, and their associates. These transactions
have been on substantially the same terms, including interest rates, collateral,
and repayment terms on extensions of credit, as those prevailing at the same
time for comparable transactions with others and did not involve more than the
normal risk of collectibility or present other unfavorable features.
From time to time Montgomery has paid fees to Henthorn, Harris & Taylor,
P.C., a law firm in which Director Henthorn is a principal, for legal services
performed for Montgomery. During the year ended June 30, 1996, Montgomery paid
fees totalling $6,441 to such law firm for services provided to Montgomery. In
addition, Henthron, Harris & Taylor, P.C. provides legal services from time to
time in connection with loans made by Montgomery, for which services such law
firm is compensated by the borrowers.
At December 31, 1996, the Association's loans to directors, officers and
employees totalled approximately $1,189,000 or 7.8%, 7.3%, 6.8% and 6.3% of pro
forma stockholders' equity based on the sale of the dollar amount of shares
aggregating the minimum, midpoint, maximum and 15% above the Offering Price
Range, respectively.
BENEFICIAL OWNERSHIP OF CAPITAL STOCK
Beneficial Ownership of Association Common Stock
The following table includes, as of December 31, 1996, certain
information as to the Association's Common Stock beneficially owned by (1) the
only persons or entities, including any "group" as that term is used in Section
13(d)(3) of the Exchange Act, who or which was known to the Association to be
the beneficial owner of more than 5% of the issued and outstanding Association
Common Stock, (ii) the directors of the Association, (iii) certain executive
officers of the Association, and (iv) all directors and executive officers of
the Association as a group. For information concerning proposed subscriptions by
directors and executive officers and the anticipated ownership of Common Stock
by such persons upon consummation of the Conversion and Reorganization, see "The
Conversion and Reorganization Proposed Subscriptions by Directors and Executive
Officers."
105
Amount and Nature
Name of Beneficial of Beneficial Percent of
Owner or Number of Ownership as of Association
Persons in Group December 31, 1996(1)(2) Common Stock
---------------- ----------------------- ------------
Montgomery Mutual Holding 600,000 70.58%(3)
Company
119 East Main Street
Crawfordsville, Indiana
Directors:
Earl F. Elliott 5,000 *
Mark E. Foster 1,100 *
C. Rex Henthorn 5,000 *
Joseph M. Malott 5,000 *
J. Lee Walden 2,500 *
John E. Woodward 5,000 *
Robert Wright 100 *
Executive Officers:
Nancy L. McCormick 5,000 *
All directors and executive 28,700 3.4
officers as a group (8 persons)
- ------------
* Represent less than 1% of the outstanding Association's Common Stock.
(1) Based upon filing made pursuant to the Exchange Act and information
furnished by the respective individuals. Under regulations promulgated
pursuant to the Exchange Act, shares of the Association's Common Stock
are deemed to be beneficially owned by a person if he or she directly or
indirectly has or shares (i) voting power, which includes the power to
vote or to direct the voting of the shares, or (ii) investment power,
which includes the power to dispose or to direct the disposition of the
shares. Unless otherwise indicated, the named beneficial owner has sole
voting and dispositive power with respect to the shares.
(2) Under applicable regulations, a person is deemed to have beneficial
ownership of any shares of the Association's Common Stock which may be
acquired within 60 days of December 31, 1996 pursuant to the exercise of
outstanding stock options. Shares of the Association's Common Stock
which are subject to stock options are deemed to be outstanding for the
purpose of computing the percentage of outstanding Association's Common
Stock owned by such person or group but not deemed outstanding for the
purpose of computing the percentage of the Association's Common Stock
owned by any other person or group.
(3) The members of the Board of Directors of the Association also constitute
the members of the Board of Directors of the Mutual Holding Company and
in such capacity direct the voting of Mutual Holding Company
106
owned shares. The shares of the Association's Common Stock owned by the
Mutual Holding Company are to be cancelled in connection with the
Conversion and Reorganization.
Proposed Subscriptions by Directors and Executive Officers
The following table sets forth, for each of the Company's directors and
for all of the directors and executive officers as a group, (1) the number of
Exchange Shares to be held upon consummation of the Conversion and
Reorganization, based upon their beneficial ownership of Association Common
Stock as of December 31, 1996, (2) the proposed purchases of Conversion Stock,
assuming sufficient shares are available to satisfy their subscriptions, and (3)
the total amount of Common Stock to be held upon consummation of the Conversion
and Reorganization, in each case assuming that 926,470 shares of Conversion
Stock are sold, which is the midpoint of the Offering Price Range.
Proposed Purchase of Total Common Stock
Conversion Stock to be Held
--------------------------------- ---------------------------------
Number of
Exchange
Shares to
be Held Number Number Percentage
Name (1)(2)(3) Amount of Shares of Shares of Total
- ------------------------------------ ---------------- ---------------- --------------- ---------------- ----------------
Earl F. Elliott 8,896 8,896 0.71%
Mark E. Foster 1,423 1,423 0.11
C. Rex Henthorn 6,470 $60,300 6,030 12,500 1.00
Joseph M. Malott 6,470 6,470 0.52
J. Lee Walden 5,176 5,176 0.41
John E. Woodward 6,470 6,470 0.52
Robert Wright 129 50,000 5,000 5,129 0.41
Nancy L. McCormick 7,925 7,925 0.32
All directors and executive
officers as a group (8 persons) 42,959 53,989 4.32
- ------------
(1) Excludes shares which may be received upon the exercise of outstanding
stock option. Based upon the Exchange Ratio of 1.2941 Exchange Shares
for each Public Association Shares at the midpoint of the Offering
Price Range, the persons named in the table would have options to
purchase Common Stock as follows: Mr. Elliott, 1,963 shares; Mr.
Foster, 1,455 shares; Mr. Henthorn, 1,455 shares; Mr. Malott, 1,455
shares; Mr. Walden, 1,021 shares; Mr. Woodward, 1,455 shares; Mr.
Wright, 1,455 shares; and all directors and executive officers as a
group, 11,358 shares.
107
(2) Includes shares awarded under the 1995 Recognition Plan, based upon the
above Exchange Ratio, in the following amounts: Mr. Elliott, 2,246
shares; Mr. Walden 1,941 shares; and all directors and executive
officers as a group 5,822 shares.
(3) Excludes stock options and awards to be granted under the Company's
1997 Stock Option Plan and 1997 Recognition Plan if such plans are
approved by stockholders at an annual or special meeting of
shareholders at least six months following the Conversion and
Reorganization. See "Management of the Company - Benefits."
(*) Less than 1%.
THE CONVERSION AND REORGANIZATION
The Boards of Directors of the Mutual Holding Company, the Association
and the Company have approved the Plan of Conversion and Reorganization, as has
the OTS, subject to approval by the Members of the Mutual Holding Company and
the Stockholders of the Association entitled to vote on the matter and the
satisfaction of certain other conditions. Such OTS approval, however, does not
constitute a recommendation or endorsement of the Plan by such agency.
General
The Boards of Directors of the Mutual Holding Company and the
Association unanimously adopted the Plan as of December 26, 1996, which was
amended on March 31, 1997. The Plan has been approved by the OTS, subject to,
among other things, approval of the Plan by the Members of the Mutual Holding
Company and the Stockholders of the Association. The Members' Meeting and the
Stockholders' Meeting have been called for this purpose on_________ __, 1997.
The following is a brief summary of pertinent aspects of the Plan and
the Conversion and Reorganization. The summary is qualified in its entirety by
reference to the provisions of the Plan, which is available for inspection at
each branch office of the Association and at the offices of the OTS. The Plan
also is filed as an exhibit to the Registration Statement of which this
Prospectus is a part, copies of which may be obtained from the SEC. See
"Additional Information."
Purposes of the Conversion and Reorganization
The Mutual Holding Company, as a federally chartered mutual holding
company, does not have stockholders and has no authority to issue capital stock.
As a result of the Conversion and Reorganization, the Company will be structured
in the form used by holding companies of commercial banks, most business
entities and a growing number of savings institutions. The holding company form
of organization will provide the Company with the ability to diversify the
108
Company's and the Association's business activities through acquisition of or
mergers with both stock savings institutions and commercial banks, as well as
other companies. Although there are no current arrangements, understandings or
agreements regarding any such opportunities, the Company will be in a position
after the Conversion and Reorganization, subject to regulatory limitations and
the Company's financial position, to take advantage of any such opportunities
that may arise.
In their decision to pursue the Conversion and Reorganization, the Board
of Directors of the Mutual Holding Company and the Association considered
various regulatory uncertainties associated with the mutual holding company
structure including the ability to waive dividends in the future as well as the
general uncertainty regarding a possible elimination of the federal savings
association charter. See "Risk Factors - Proposed Federal Legislation."
The Conversion and Reorganization will be important to the future growth
and performance of the holding company organization by providing a larger
capital base to support the operations of the Association and Company and by
enhancing their future access to capital markets, their ability to diversify
into other financial services related activities, and their ability to provide
services to the public. Although the Association currently has the ability to
raise additional capital through the sale of additional shares of Association
Common Stock, that ability is limited by the mutual holding company structure
which, among other things, requires that the Mutual Holding Company hold a
majority of the outstanding shares of Association Common Stock.
The Conversion and Reorganization also will result in an increase in the
number of shares of Common Stock to be outstanding as compared to the number of
outstanding shares of Public Association Shares which will increase the
likelihood of the development of an active and liquid trading market for the
Common Stock. See "Market for Common Stock." In addition, the Conversion and
Reorganization will enhance the Association's ability to engage in stock
repurchases.
An additional benefit of the Conversion and Reorganization will be an
increase in the accumulated earnings and profits of the Association for federal
income tax purposes. When the Mutual Association transferred substantially all
of its assets and liabilities to the Association in connection with the MHC
Reorganization, its accumulated earnings and profits tax attribute was not able
to be transferred to the Association because no tax-free reorganization was
involved. Accordingly, this tax attribute was retained by the Mutual Association
when it converted its charter to that of the Mutual Holding Company, even though
the underlying retained earnings were transferred to the Association. The
Conversion and Reorganization has been structured to re-unite the accumulated
earnings and profits tax attribute retained by the Mutual Holding Company in the
MHC Reorganization with the retained earnings of the Association by merging the
Mutual Holding Company with and into the Association in a tax-free
reorganization. This transaction will increase the Association's ability to pay
dividends to the Company in the future. See "Dividend Policy."
109
If the Mutual Association had undertaken a standard conversion involving
the formation of a stock holding company in 1995, applicable OTS regulations
would have required a greater amount of common stock to be sold than the amount
of net proceeds raised in the MHC Reorganization. Management of Montgomery
believed that it was advisable to profitably invest the $2.1 million of net
proceeds raised in the MHC Reorganization prior to raising the larger amount of
capital that would have been raised in a standard conversion. A standard
conversion in 1995 also would have immediately eliminated all aspects of the
mutual form of organization.
In light of the foregoing, the Boards of Directors of the Association
and the Mutual Holding Company believe that the Conversion and Reorganization is
in the best interests of such companies and their respective Stockholders and
Members.
Description of the Conversion and Reorganization
On December 26, 1996, the Boards of Directors of the Association and the
Mutual Holding Company adopted the Plan, which was amended on March 31, 1997 and
in March 1997 the Association incorporated the Company under Indiana law as a
first-tier wholly owned subsidiary of the Association. Pursuant to the Plan, (i)
the Mutual Holding Company will convert from mutual form to a federal interim
stock savings institution and simultaneously merge with and into the
Association, pursuant to which the Mutual Holding Company will cease to exist
and the shares of Association Common Stock held by the Mutual Holding Company
will be cancelled, and (ii) Interim will then merge with and into the
Association. As a result of the merger of Interim with and into the Association,
the Association will become a wholly owned subsidiary of the Company and the
Public Association Shares will be converted into the Exchange Shares pursuant to
the Exchange Ratio, which will result in the holders of such shares owning in
the aggregate approximately the same percentage of the Common Stock to be
outstanding upon the completion of the Conversion and Reorganization (i.e., the
Conversion Stock and the Exchange Shares) as the percentage of Association
Common Stock owned by them in the aggregate immediately prior to consummation of
the Conversion and Reorganization, adjusted downward pursuant to OTS policy
which requires that the Exchange Ratio reflect the $300,000 of special dividends
declared by the Association and waived by the Mutual Holding Company, but before
giving effect to (a) the payment of cash in lieu of issuing fractional Exchange
Shares, (b) any shares of Conversion Stock purchased by the Association's
stockholders in the Offerings or the ESOP thereafter, and (c) any exercise of
dissenters' rights.
Pursuant to OTS regulations, consummation of the Conversion and
Reorganization (including the offering of Conversion Stock in the Offerings, as
described below) is conditioned upon the approval of the Plan by (1) the OTS,
(2) at least a majority of the total number of votes eligible to be cast by
Members of the Mutual Holding Company at the Members' Meeting, and (3) holders
of at least two-thirds of the shares of the outstanding Association Common Stock
at the Stockholders' Meeting. In addition, the Primary Parties have conditioned
the consummation of the Conversion and Reorganization on the approval of the
Plan by at least a majority of the votes cast, in person or by proxy, by the
Public Stockholders at the Stockholders' Meeting.
110
Effects of the Conversion and Reorganization
General. Prior to the Conversion and Reorganization, each depositor in
the Association has both a deposit account in the institution and a pro rata
ownership interest in the net worth of the Mutual Holding Company based upon the
balance in his account, which interest may only be realized in the event of a
liquidation of the Mutual Holding Company. However, this ownership interest is
tied to the depositor's account and has no tangible market value separate from
such deposit account. A depositor who reduces or closes his account receives a
portion or all of the balance in the account but nothing for his ownership
interest in the net worth of the Mutual Holding Company, which is lost to the
extent that the balance in the account is reduced.
Consequently, the depositors of the Association normally have no way to
realize the value of their ownership interest in the Mutual Holding Company,
which has realizable value only in the unlikely event that the Mutual Holding
Company is liquidated. In such event, the depositors of record at that time, as
owners, would share pro rata in any residual surplus and reserves of the Mutual
Holding Company after other claims are paid.
Upon consummation of the Conversion and Reorganization, permanent
nonwithdrawable capital stock will be created to represent the ownership of the
net worth of the Company. The Common Stock of the Company is separate and apart
from deposit accounts and cannot be and is not insured by the FDIC or any other
governmental agency. Certificates are issued to evidence ownership of the
permanent stock. The stock certificates are transferable, and therefore the
stock may be sold or traded if a purchaser is available with no effect on any
account the seller may hold in the Association.
Continuity. While the Conversion and Reorganization is being
accomplished, the normal business of the Association of accepting deposits and
making loans will continue without interruption. The Association will continue
to be subject to regulation by the OTS and the FDIC. After the Conversion and
Reorganization, the Association will continue to provide services for depositors
and borrowers under current policies by its present management and staff.
The directors and officers of the Association at the time of the
Conversion and Reorganization will continue to serve as directors and officers
of the Association after the Conversion and Reorganization. The directors and
officers of the Company consist of individuals currently serving as directors
and officers of the Mutual Holding Company and the Association, and they
generally will retain their positions in the Company after the Conversion and
Reorganization.
Effect on Public Association Shares. Under the Plan, upon consummation
of the Conversion and Reorganization, the Public Association Shares shall be
converted into Common Stock based upon the Exchange Ratio without any further
action on the part of the holder thereof. Upon surrender of the Public
Association Shares, Common Stock will be issued in exchange for such shares. See
"- Delivery and Exchange of Certificates."
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Upon consummation of the Conversion and Reorganization, the Public
Stockholders of the Association, a federally chartered savings association will
become stockholders of the Company, an Indiana corporation. For a description of
certain changes in the rights of stockholders as a result of the Conversion and
Reorganization, see "Comparison of Stockholders' Rights" below.
Effect on Deposit Accounts. Under the Plan, each depositor in the
Association at the time of the Conversion and Reorganization will automatically
continue as a depositor after the Conversion and Reorganization, and each such
deposit account will remain the same with respect to deposit balance, interest
rate and other terms, except to the extent that funds in the account are
withdrawn to purchase Conversion Stock to be issued in the Offerings. Each such
account will be insured by the FDIC to the same extent as before the Conversion
and Reorganization. Depositors will continue to hold their existing
certificates, passbooks and other evidences of their accounts.
Effect on Loans. No loan outstanding from the Association will be
affected by the Conversion and Reorganization, and the amount, interest rate,
maturity and security for each loan will remain as they were contractually filed
prior to the Conversion and Reorganization.
Effect on Voting Rights of Members. At present, all depositors of the
Association are members of, and have voting rights in, the Mutual Holding
Company as to all matters requiring membership action. Upon completion of the
Conversion and Reorganization, depositors will cease to be members and will no
longer be entitled to vote at meetings of the Mutual Holding Company (which will
cease to exist). Upon completion of the Conversion and Reorganization, all
voting rights in the Association will be vested in the Company as the sole
stockholder of the Association. Exclusive voting rights with respect to the
Company will be vested in the holders of Common Stock. Depositors of the
Association will not have voting rights in the Company after the Conversion and
Reorganization, except to the extent that they become stockholders of the
Company.
Tax Effects. Consummation of the Conversion and Reorganization is
conditioned on prior receipt by the Primary Parties of rulings or opinions with
regard to federal and Indiana income taxation which indicate that the adoption
and implementation of the Plan of Conversion set forth herein will not be
taxable for federal or Indiana income tax purposes to the Primary Parties or the
Association's Eligible Account Holders, Supplemental Eligible Account Holders or
Other Members, except as discussed below. See "- Tax Aspects" below.
Effect on Liquidation Rights. Were the Mutual Holding Company to
liquidate, all claims of the Mutual Holding Company's creditors would be paid
first. Thereafter, if there were any assets remaining, Members of the Mutual
Holding Company would receive such remaining assets, pro rata, based upon the
deposit balances in their deposit accounts at the Association immediately prior
to liquidation. In the unlikely event that the Association were to liquidate
after the Conversion and Reorganization, all claims of creditors (including
those of depositors, to the extent of their deposit balances) also would be paid
first, followed by distribution of the "liquidation account" to certain
depositors (see "- Liquidation Rights" below), with any assets remaining
thereafter distributed to the Company as the holder of the Association's capital
stock.
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Pursuant to the rules and regulations of the OTS, a merger, consolidation, sale
of bulk assets or similar combination or transaction with another insured
institution would not be considered a liquidation for this purpose and, in such
a transaction, the liquidation account would be required to be assumed by the
surviving institution.
Effect on Existing Compensation Plans. Under the Plan, the
Association's existing Stock Incentive Plan, Directors' Stock Option Plan and
the Management Recognition Plan will become stock benefit plans of the Company
and shares of Common Stock will be issued (or reserved for issuance) pursuant to
such benefit plans rather than shares of Association Common Stock. See
"Management of the Association - Benefit Plans."
The Offerings
Subscription Offering. In accordance with the Plan of Conversion, rights
to subscribe for the purchase of Conversion Stock have been granted under the
Plan of Conversion to the following persons in the following order of descending
priority: ( 1) Eligible Account Holders, (2) the ESOP, (3) Supplemental Eligible
Account Holders, (4) Other Members, (5) directors, officers and employees of the
Mutual Holding Company and the Association and (6) Public Stockholders. All
subscriptions received will be subject to the availability of Conversion Stock
after satisfaction of all subscriptions of all persons having prior rights in
the Subscription Offering and to the maximum and minimum purchase limitations
set forth in the Plan of Conversion and as described below under "- Limitations
on Conversion Stock Purchases."
Priority 1: Eligible Account Holders. Each Eligible Account Holder will
receive, without payment therefor, first priority, nontransferable subscription
rights to subscribe for in the Subscription Offering up to the greater of (i)
the number of shares of Conversion Stock that when combined with Exchange Shares
received aggregate $200,000 of Common Stock, (ii) one-tenth of one percent
(.10%) of the total offering of shares of Conversion Stock in the Subscription
Offering and (iii) 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of Conversion Stock offered
in the Subscription Offering by a fraction, of which the numerator is the amount
of the Eligible Account Holder's qualifying deposit and the denominator of which
is the total amount of qualifying deposits of all Eligible Account Holders, in
each case as of the close of business on September 30, 1995 (the "Eligibility
Record Date"), subject to the overall purchase limitations. See "- Limitations
on Conversion Stock Purchases."
If there are not sufficient shares available to satisfy all
subscriptions, shares first will be allocated so as to permit each subscribing
Eligible Account Holder to purchase a number of shares sufficient to make his
total allocation equal to the lesser of the number of shares subscribed for or
100 shares. Thereafter, unallocated shares will be allocated to subscribing
Eligible Account Holders whose subscriptions remain unfilled in the proportion
that the amounts of their respective eligible deposits bear to the total amount
of eligible deposits of all subscribing Eligible Account Holders whose
subscriptions remain unfilled, provided that no fractional shares shall be
issued. The subscription rights of Eligible Account Holders who are also
directors or officers of the Mutual Holding Company or the Association and their
associates will be subordinated to the
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subscription rights of other Eligible Account Holders to the extent attributable
to increased deposits in the year preceding September 30, 1995.
Priority 2: ESOP. The ESOP will receive, without payment therefore,
second priority nontransferable subscription rights to purchase a number of
shares of Conversion Stock which will, in the aggregate, equal up to 8% of the
Common Stock to be outstanding upon completion of the Conversion and
Reorganization, including any increase in the number of shares of Conversion
Stock after the date hereof as a result of an increase of up to 15% in the
maximum of the Offering Price Range. The ESOP intends to purchase 115,000 shares
based on the maximum of the Offering Price Range. Subscriptions by the ESOP will
not be aggregated with shares of Conversion Stock purchased directly by or which
are otherwise attributable to any other participants in the Subscription and
Community Offerings, including subscriptions of any of the Association's
directors, officers, employees or associates thereof. See "Management of the
Association - Benefit Plans - Employee Stock Ownership Plan."
In the event that there are insufficient shares for the ESOP to fulfill
its subscription order, the Company may issue additional shares of Common Stock
directly to the ESOP at the Purchase Price to satisfy the ESOP's order to
purchase such amount of Conversion Stock in the Offerings and/or the ESOP, may
purchase shares of Common Stock in the open market. Purchases of additional
shares of Common Stock from the Company would dilute the interests of other
stockholders. See "- Limitations on Conversion Stock Purchases" and "Risk
Factors - Possible Dilutive Effect of Issuance of Additional Shares."
Priority 3: Supplemental Eligible Account Holders. Each Supplemental
Eligible Account Holder will receive, without payment therefor, third priority,
nontransferable subscription rights to subscribe for in the Subscription
Offering up to the greater of (i) the number of shares of Conversion Stock that
when combined with Exchange Shares received aggregate $200,000 of Common Stock,
(ii) one-tenth of one percent (.10%) of the total offering of shares of
Conversion Stock in the Subscription Offering and (iii) 15 times the product
(rounded down to the next whole number) obtained by multiplying the total number
of shares of Conversion Stock offered in the Subscription Offering by a
fraction, of which the numerator is the amount of the Supplemental Eligible
Account Holder's qualifying deposit and the denominator of which is the total
amount of qualifying deposits of all Supplemental Eligible Account Holders, in
each case as of the close of business on March 31, 1997 (the "Supplemental
Eligibility Record Date"), subject to the overall purchase limitations. See "-
Limitations on Conversion Stock Purchases."
If there are not sufficient shares available to satisfy all
subscriptions, shares first will be allocated so as to permit each subscribing
Supplemental Eligible Account Holder to purchase a number of shares sufficient
to make his total allocation equal to the lesser of the number of shares
subscribed for or 100 shares. Thereafter, unallocated shares will be allocated
to subscribing Supplemental Eligible Account Holders whose subscriptions remain
unfilled in the proportion that the amounts of their respective eligible
deposits bear to the total amount of eligible deposits of all such subscribing
Supplemental Eligible Account Holders whose subscriptions remain unfilled,
provided that no fractional shares shall be issued.
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Priority 4: Other Members. To the extent that there are sufficient
shares remaining after satisfaction of subscriptions by Eligible Account Holders
and Supplemental Eligible Account Holders, each Other Member will receive,
without payment therefor, fourth priority, nontransferable subscription rights
to subscribe for Conversion Stock in the Subscription Offering up to the greater
of (i) the number of shares of Conversion Stock that when combined with Exchange
Shares received aggregate $200,000 of Common Stock and (ii) one-tenth of one
percent (.10%) of the total offering of shares of Conversion Stock in the
Subscription Offering, subject to the overall purchase limitations. See "-
Limitations on Conversion Stock Purchases."
In the event the Other Members subscribe for a number of shares which,
when added to the shares subscribed for by Eligible Account Holders, the ESOP
and Supplemental Eligible Account Holders is in excess of the total number of
shares of Conversion Stock offered in the Subscription Offering, shares first
will be allocated so as to permit each subscribing Other Member to purchase a
number of shares sufficient to make his total allocation equal to the lesser of
the number of shares subscribed for or 100 shares. Thereafter, any remaining
shares will be allocated among subscribing Other Members on a pro rata basis in
the same proportion as each Other Member's subscription bears to the total
subscriptions of all subscribing Other Members, provided that no fractional
shares shall be issued.
Priority 5: Directors, Officers and Employees. To the extent that there
are sufficient shares remaining after satisfaction of all subscriptions by
Eligible Account Holders, the ESOP, Supplemental Eligible Account Holders and
Other Members, then directors, officers and employees of the Mutual Holding
Company and the Association will receive, without payment therefor, fifth
priority, nontransferable subscription rights to subscribe for, in this
category, up to an aggregate of 19.0% of the shares of Conversion Stock offered
in the Subscription Offering. The ability of directors, officers and employees
to purchase Conversion Stock under this category is in addition to rights which
are otherwise available to them under the Plan, which generally allows such
persons to purchase in the aggregate up to 29.0% of the total number of shares
of Conversion Stock sold in the Offerings. See "- Limitations on Conversion
Stock Purchases."
In the event of an oversubscription in this category, subscription
rights will be allocated on a pro rata basis in the same proportion that orders
of each person bear to the total orders of all subscribers in this category.
Priority 6: Public Stockholders. To the extent that there are
sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders, the ESOP, Supplemental Eligible Account Holders, Other Members
and directors, officers and employees, each Public Stockholder as of the Voting
Record Date will receive, without payment therefor, fifth priority,
nontransferable subscription rights to subscribe for Conversion Stock in the
Subscription Offering up to the greater of (i) the number of shares of
Conversion Stock that when combined with Exchange Shares received aggregate
$200,000 of Common Stock and (ii) one-tenth of one percent (.10%) of the total
offering of shares of Conversion Stock in the Subscription Offering, subject to
the overall purchase limitations. See "- Limitations on Conversion Stock
Purchases."
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In the event the Public Stockholders as of the Voting Record Date
subscribe for a number of shares which, when added to the shares subscribed for
by Eligible Account Holders, the ESOP, Supplemental Eligible Account Holders,
Other Members and directors, officers and employees, is in excess of the total
number of shares of Conversion Stock offered in the Subscription Offering,
available shares will be allocated among subscribing Public Stockholders as of
the Voting Record Date on a pro rata basis in the same proportion as each Public
Stockholder's subscription bears to the total subscriptions of all subscribing
Public Stockholders, provided that no fractional shares shall be issued.
Expiration date for Subscription Offering. The Subscription Offering
will expire at Noon, Crawfordsville, Indiana time, on ________ __, 1997, unless
extended for up to 45 days or such additional periods by the Primary Parties
with the approval of the OTS. Such extensions may not be extended beyond
_____________ __, 1999. Subscription rights which have not been exercised prior
to the Expiration Date will become void.
The Primary Parties will not execute orders until at least the minimum
number of shares of Conversion Stock (787,500 shares) have been subscribed for
or otherwise sold. If all shares have not been subscribed for or sold within 45
days after the Expiration Date, unless such period is extended with the consent
of the OTS, all funds delivered to the Association pursuant to the Subscription
Offering will be returned promptly to the subscribers with interest and all
withdrawal authorizations will be cancelled. If an extension beyond the 45-day
period following the Expiration Date is granted, the Primary Parties will notify
subscribers of the extension of time and subscribers will be resolicited and
permitted to modify or cancel their subscriptions.
Community Offering. To the extent that shares remain available for
purchase after satisfaction of all subscriptions of Eligible Account Holders,
the ESOP, Supplemental Eligible Account Holders, Other Members, directors,
officers and employees of the Mutual Holding Company and the Association and
Public Stockholders, the Primary Parties have determined to offer shares
pursuant to the Plan to certain members of the general public, with preference
given to natural persons residing in Montgomery, Fountain and Warren Counties,
Indiana (such natural persons referred to as "Preferred Subscribers"). Such
persons, together with associates of and persons acting in concert with such
persons, may purchase up to the greater of (i) the number of shares of
Conversion Stock that when combined with Exchange Shares received aggregate
$200,000 of Common Stock, and (ii) one-tenth of one percent (.10%) of the total
offering of shares of Conversion Stock in the Subscription Offering, subject to
the maximum purchase limitations. See "- Limitations on Conversion Stock
Purchases." This amount may be increased at the sole discretion of the Primary
Parties. The opportunity to subscribe for shares of Conversion Stock in the
Community Offering category is subject to the right of the Primary Parties, in
their sole discretion, to accept or reject any such orders in whole or in part
either at the time of receipt of an order or as soon as practicable following
the Expiration Date.
If there are not sufficient shares available to fill the orders of
Preferred Subscribers after completion of the Subscription and Community
Offerings, such stock will be allocated first to each Preferred Subscriber whose
order is accepted by the Primary Parties, in an amount equal to the lesser of
100 shares or the number of shares subscribed for by each such Preferred
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Subscriber, if possible. Thereafter, unallocated shares will be allocated among
the Preferred Subscribers whose orders remain unsatisfied in the same proportion
that the unfilled subscription of each bears to the total unfilled subscriptions
of all Preferred Subscribers whose subscription remains unsatisfied. If there
are any shares remaining, shares will be allocated to other members of the
general public who subscribe in the Community Offering applying the same
allocation described above for Preferred Subscribers.
Syndicated Community Offering. The Plan provides that, if feasible, all
shares of Conversion Stock not purchased in the Subscription and Community
Offerings may be offered for sale to the general public in a Syndicated
Community Offering through a syndicate of registered broker-dealers to be
formed. No person will be permitted to subscribe in the Syndicated Community
Offering for more than the number of shares of Conversion Stock that when
combined with Exchange Shares received aggregate $200,000 of Common Stock,
subject to the maximum purchase limitations. The Primary Parties have the right
to reject orders in whole or part in their sole discretion in the Syndicated
Community Offering. Neither Webb nor any registered broker-dealer shall have any
obligation to take or purchase any shares of Conversion Stock in the Syndicated
Community Offering; however, Webb has agreed to use its best efforts in the sale
of shares in the Syndicated Community Offering.
In addition to the foregoing, if a syndicate of broker-dealers
("selected dealers") is formed to assist in a Syndicated Community Offering, a
purchaser may pay for his shares with funds held by or deposited with a selected
dealer. If an order form is executed and forwarded to the selected dealer or if
the selected dealer is authorized to execute the order form on behalf of a
purchaser, the selected dealer is required to forward the order form and funds
to the Association for deposit in a segregated account on or before noon of the
business day following receipt of the order form or execution of the order form
by the selected dealer. Alternatively, selected dealers may solicit indications
of interest from their customers to place orders for shares. Such selected
dealers shall subsequently contact their customers who indicated an interest and
seek their confirmation as to their intent to purchase. The selected dealer will
acknowledge receipt of the order to its customer in writing on the following
business day and will debit such customer's account on the third business day
after the customer has confirmed his intent to purchase (the "debit date") and
on or before noon of the next business day following the debit date will send
funds to the Association for deposit in a segregated account. If such
alternative procedure is employed, purchasers' funds are not required to be in
their accounts with selected dealers until the debit date.
Any Syndicated Community Offering will terminate no more than 45 days
following the Expiration Date, unless extended by the Primary Parties with the
approval of the OTS. See "Stock Pricing, Exchange Ratio and Number of Shares to
be Issued" below for a discussion of rights of subscribers, if any, in the event
an extension is granted.
Stock Pricing, Exchange Ratio and Number of Shares to be Issued
The Plan of Conversion requires that the purchase price of the
Conversion Stock must be based on the appraised pro forma market value of the
Conversion Stock, as determined on the basis of an independent valuation. The
Primary Parties have retained Keller to make such
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valuation. For its services in making such appraisal and any expenses incurred
in connection therewith, Keller will receive a maximum fee of $15,000 plus out
of pocket expenses, together with a fee of no greater than $5,000 plus out of
pocket expenses for the preparation of a business plan and other services
performed in connection with the Company's holding company application to the
OTS. The Primary Parties have agreed to indemnify Keller's and its employees and
affiliates against certain losses (including any losses in connection with
claims under the federal securities laws) arising out of its services as
appraiser, except where Keller's liability results from its negligence or bad
faith.
The Appraisal has been prepared by Keller in reliance upon the
information contained in this Prospectus, including the Financial Statements.
Keller also considered the following factors, among others: the present and
projected operating results and financial condition of the Primary Parties and
the economic and demographic conditions in the Association's existing market
area; certain historical, financial and other information relating to the
Association; a comparative evaluation of the operating and financial statistics
of the Association with those of other similarly situated publicly traded
companies located in Indiana and other regions of the United States; the
aggregate size of the offering of the Conversion Stock; the impact of the
Conversion and Reorganization on the Association's capital and earnings
potential; the proposed dividend policy of the Company and the Association; and
the trading market for the Association Common Stock and securities of comparable
companies and general conditions in the market for such securities.
On the basis of the foregoing, Keller has advised the Primary Parties in
its opinion that the estimated pro forma market value of the Association and the
Mutual Holding Company on a combined basis was $12,500,000 at the Midpoint of
the Valuation Range as of March 4, 1997. Because the holders of the Public
Association Shares will continue to hold the same aggregate percentage ownership
interest in the Company as they currently hold in the Association, adjusted
downward pursuant to OTS policy which requires the Exchange Ratio to reflect
dividends waived by the Mutual Holding Company (before giving effect to the
payment of cash in lieu of issuing fractional Exchange Shares, any exercise of
dissenters' rights and any shares of Conversion Stock purchased by the
Association's stockholder in the Offerings or by the ESOP thereafter), the
Appraisal was multiplied by 74.12% (which represents the Mutual Holding
Company's percentage interest in the Association adjusted upward in order to
reflect the $300,000 of dividends declared by the Association and waived by the
Mutual Holding Company). The resulting amount represents the midpoint of the
valuation ($9,264,700), and the minimum and maximum of the valuation were set at
15% below and above the midpoint, respectively, resulting in a range of
$7,875,000 to $10,654,410. The Boards of Directors of the Primary Parties
determined that the Conversion Stock would be sold at $10.00 per share,
resulting in a range of 787,500 to 1,065,441 shares of Conversion Stock being
offered. Upon consummation of the Conversion and Reorganization, the Conversion
Stock and the Exchange Shares will represent approximately 74.12% and 25.88%,
respectively, of the Company's total outstanding shares. The Boards of Directors
of the Primary Parties reviewed Keller's appraisal report, including the
methodology and the assumptions used by Keller, and determined that the Offering
Price Range was reasonable and adequate. The Boards of Directors of the Primary
Parties also established the formula for determining the Exchange Ratio. Based
upon such formula and the Offering Price Range, the Exchange Ratio ranged from a
minimum of 1.10 to a maximum of 1.49 Exchange
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Shares for each Public Association Share, with a midpoint of 1.29. Based upon
these Exchange Ratios, the Company expects to issue between 275,000 and 372,059
shares of Exchange Shares to the holders of Public Association Shares
outstanding immediately prior to the consummation of the Conversion and
Reorganization. The Offering Price Range and the Exchange Ratio may be amended
with the approval of the OTS, if required, or if necessitated by subsequent
developments in the financial condition of any of the Primary Parties or market
conditions generally. In the event the Appraisal is updated to below $7,875,000
or above $12,252,570 (the maximum of the Offering Price Range, as adjusted by
15%), such Appraisal will be filed with the SEC by post-effective amendment.
Based upon current market and financial conditions and recent practices
and policies of the OTS, in the event the Company receives orders for Conversion
Stock in excess of $10,654,410 (the maximum of the Offering Price Range) and up
to $12,252,570 (the maximum of the Offering Price Range, as adjusted by 15%),
the Company may be required by the OTS to accept all such orders. No assurances,
however, can be made that the Company will receive orders for Conversion Stock
in excess of the maximum of the Offering Price Range or that, if such orders are
received, that all such orders will be accepted because the Company's final
valuation and number of shares to be issued are subject to the receipt of an
updated appraisal from Keller which reflects such an increase in the valuation
and the approval of such increase by the OTS. There is no obligation or
understanding on the part of management to take and/or pay for any shares of
Conversion Stock in order to complete the Offerings.
The Appraisal is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing such shares. The
Appraiser did not independently verify the Financial Statements and other
information provided by the Association and the Mutual Holding Company, nor did
Keller value independently the assets or liabilities of the Association. The
Appraisal considers the Association and the Mutual Holding Company as going
concerns and should not be considered as an indication of the liquidation value
of the Association and the Mutual Holding Company. Moreover, because the
Appraisal is necessarily based upon estimates and projections of a number of
matters, all of which are subject to change from time to time, no assurance can
be given that persons purchasing Conversion Stock or receiving Exchange Shares
in the Conversion and Reorganization will thereafter be able to sell such shares
at prices at or above the Purchase Price or in the range of the foregoing
valuation of the pro forma market value thereof.
No sale of shares of Conversion Stock or issuance of Exchange Shares may
be consummated unless prior to such consummation Keller confirms that nothing of
a material nature has occurred which, taking into account all relevant factors,
would cause it to conclude that the Purchase Price is materially incompatible
with the estimate of the pro forma market value of a share of Common Stock upon
consummation of the Conversion and Reorganization. If such is not the case, a
new Offering Price Range may be set, a new Exchange Ratio may be determined
based upon the new Offering Price Range, a new Subscription and Community
Offering and/or Syndicated Community Offering may be held or such other action
may be taken as the Primary Parties shall determine and the OTS may permit or
require.
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Depending upon market or financial conditions following the commencement
of the Subscription Offering, the total number of shares of Conversion Stock to
be issued in the Offerings may be increased or decreased without a
resolicitation of subscribers, provided that the product of the total number of
shares times the Purchase Price is not below the minimum or more than 15% above
the maximum of the Offering Price Range (exclusive of a number of shares equal
to up to an additional 8.0% of the Common Stock which may be issued to the ESOP
out of authorized but unissued shares of Common Stock to the extent such shares
are not purchased in the Offerings due to an oversubscription). In the event
market or financial conditions change so as to cause the aggregate Purchase
Price of the shares to be below the minimum of the Offering Price Range or more
than 15% above the maximum of such range (exclusive of additional shares that
may be issued to the ESOP), purchasers will be resolicited (i.e., permitted to
continue their orders, in which case they will need to affirmatively reconfirm
their subscriptions prior to the expiration of the resolicitation offering or
their subscription funds will be promptly refunded with interest at the
Association's passbook rate of interest, or be permitted to modify or rescind
their subscriptions). Any increase or decrease in the number of shares of
Conversion Stock will result in a corresponding change in the number of Exchange
Shares, so that upon consummation of the Conversion and Reorganization the
Conversion Stock and the Exchange Shares will represent approximately 74.12% and
25.88%, respectively, of the Company's total outstanding shares of Common Stock
(exclusive of the effects of the exercise of outstanding stock options).
An increase in the number of shares of Conversion Stock, either as a
result of an increase in the appraisal of the estimated pro forma market value
or due to the purchase by the ESOP of authorized but unissued shares (see "The
Offerings - Subscription Offering - Priority 2: ESOP"), would decrease both a
subscriber's ownership interest and the Company's pro forma net earnings and
stockholders' equity on a per share basis while increasing pro forma net
earnings and stockholders' equity on an aggregate basis. A decrease in the
number of shares of Conversion Stock would increase both a subscriber's
ownership interest and the Company's pro forma net earnings and stockholders'
equity on a per share basis while decreasing pro forma net earnings and
stockholders' equity on an aggregate basis. See "Risk Factors - Possible
Dilutive Effect of Issuance of Additional Shares" and "Pro Forma Data."
The Appraisal report has been filed as an exhibit to this Registration
Statement and Application for Conversion of which this Prospectus is a part and
is available for inspection in the manner set forth under "Additional
Information."
Persons in Nonqualified States or Foreign Countries
The Primary Parties will make reasonable efforts to comply with the
securities laws of all states in the United States in which persons entitled to
subscribe for stock pursuant to the Plan reside. However, the Primary Parties
are not required to offer stock in the Subscription Offering to any person who
resides in a foreign country or resides in a state of the United States with
respect to which all of the following apply: (a) the number of persons otherwise
eligible to subscribe for shares under the Plan who reside in such jurisdiction
is small; (b) the granting of subscription rights or the offer or sale of shares
of Conversion Stock to such persons would require any of the Primary Parties or
their officers, directors or employees, under the laws of
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such jurisdiction, to register as a broker, dealer, salesman or selling agent or
to register or otherwise qualify its securities for sale in such jurisdiction or
to qualify as a foreign corporation or file a consent to service of process in
such jurisdiction; and (c) such registration, qualification or filing in the
judgment of the Primary Parties would be impracticable or unduly burdensome for
reasons of costs or otherwise. Where the number of persons eligible to subscribe
for shares in one state is small, the Primary Parties will base their decision
as to whether or not to offer the Conversion Stock in such state on a number of
factors, including but not limited to the size of accounts held by account
holders in the state, the cost of registering or qualifying the shares or the
need to register the Company, its officers, directors or employees as brokers,
dealers or salesmen.
Limitations on Conversion Stock Purchases
In addition to the purchase limitations for each priority category
described above under "The Offerings - Subscription Offering" and for purchases
in the Community Offering and the Syndicated Community Offering, the Plan also
provides for certain additional limitations to be placed upon the aggregate
purchase of shares in the Conversion. Specifically, no person (other than a
Tax-Qualified Employee Stock Benefit Plan or certain large depositors) by
himself or herself or with an associate, and no group of persons acting in
concert, may subscribe for or purchase more than $200,000 of Common Stock,
without regard to an increase in the number of shares to be issued. For purposes
of this limitation, an associate of a person does not include a Tax-Qualified
Employee Stock Benefit Plan or Non-Tax Qualified Employee Stock Benefit Plan in
which the person has a substantial beneficial interest or serves as a trustee or
in a similar fiduciary capacity. Moreover, for purposes of this paragraph,
shares held by one or more Tax Qualified or Non-Tax Qualified Employee Stock
Benefit Plans attributed to a person shall not be aggregated with shares
purchased directly by or otherwise attributable to that person except for that
portion of a plan which is self-directed by a person. Officers and directors of
the Mutual Holding Company or the Association and their associates may not
purchase, in the aggregate, more than 29% of the shares to be sold in the
Offering. For purposes of the Plan, the members of the Board of Directors are
not deemed to be acting in concert solely by reason of their Board membership.
For purposes of this limitation, an associate of an officer or director does not
include a Tax-Qualified Employee Stock Benefit Plan. Moreover, any shares
attributable to the officers and directors and their associates, but held by a
Tax-Qualified Employee Stock Benefit Plan (other than that portion of a plan
which is self-directed) shall not be included in calculating the number of
shares which may be purchased under the limitations in this paragraph. Shares
purchased by employees who are not officers or directors of the Mutual Holding
Company or the Association, or their associates, are not subject to this
limitation.
For purposes of the purchase limitations set forth in the Plan of
Conversion, Exchange Shares will be valued at the same price that shares of
Conversion Stock are issued in the Offerings.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the Members of
the Mutual Holding Company or the Stockholders of the Association both the
individual amount permitted to be subscribed for and
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the overall purchase limitation may be decreased or increased up to a maximum of
5% of the total shares of Common Stock to be issued in the Conversion and
Reorganization at the sole discretion of the Primary Parties. If such amount is
increased, subscribers for the maximum amount will be, and certain other large
subscribers in the sole discretion of the Primary Parties may be, given the
opportunity to increase their subscriptions up to the then applicable limit.
In the event that the overall purchase limitation is increased (but the
individual amount is not changed), an individual Eligible Account Holder,
Supplemental Eligible Account Holder, Other Member or Public Stockholder may not
purchase individually in the Subscription Offering the new, higher overall
maximum purchase limit, but may make such purchase, together with associates of
and persons acting in concert with such person, by also purchasing in other
available categories, subject to availability of shares and the maximum overall
purchase limit for purchases in the Offerings, including Exchange Shares
received by Public Stockholders for Public Association Shares. However, Public
Stockholders will not have to sell any Public Association Shares or be limited
in receiving Exchange Shares even if their current ownership of Public
Association Shares when converted into Exchange Shares exceeds an applicable
purchase limitation, including the maximum purchase limitation of $200,000 of
the Common Stock.
In the event of an increase in the total number of shares of Conversion
Stock offered in the Conversion due to an increase in the Offering Price Range
of up to 15% (the "Adjusted Maximum"), the additional shares will be allocated
in the following order of priority in accordance with the Plan: (i) in the event
that there is an oversubscription by Eligible Account Holders, to fill the
ESOP's subscription of 8.0% of the Common Stock to be outstanding upon
consummation of the Conversion and Reorganization; (ii) in the event that there
is an oversubscription by Eligible Account Holders, to fill unfulfilled
subscriptions of Eligible Account Holders, inclusive of the Adjusted Maximum;
(iii) in the event that there is an oversubscription by Supplemental Eligible
Account Holders, to fill unfulfilled subscriptions of Supplemental Eligible
Account Holders, inclusive of the Adjusted Maximum; (iv) in the event that there
is an oversubscription by Other Members, to fill unfulfilled subscriptions of
Other Members, inclusive of the Adjusted Maximum; (v) in the event there is an
oversubscription by directors, officers and employees of the Mutual Holding
Company and the Association, to fill unfilled subscriptions of directors,
officers and employees, inclusive of the Adjusted Maximum; (vi) in the event
that there is an oversubscription by Public Stockholders, to fill unfulfilled
subscriptions of Public Stockholders, inclusive of the Adjusted Maximum; and
(vii) to fill unfulfilled subscriptions in the Community Offering to the extent
possible, inclusive of the Adjusted Maximum.
The term "associate" of a person is defined to mean (i) any corporation
or other organization (other than the Primary Parties or a majority-owned
subsidiary of the Association) of which such person is a director, officer or
partner or is directly or indirectly the beneficial owner of 10% or more of any
class of equity securities; (ii) any trust or other estate in which such person
has a substantial beneficial interest or as to which such person serves as
trustee or in a similar fiduciary capacity, provided, however, that such term
shall not include any tax-qualified employee stock benefit plan of the Primary
Parties in which such person has a substantial beneficial interest or serves as
a trustee or in a similar fiduciary capacity; and (iii) any
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relative or spouse of such person, or any relative of such spouse, who either
has the same home as such person or who is a director or officer of the Primary
Parties or any of their subsidiaries.
The Boards of Directors of the Primary Parties, in their sole
discretion, may increase the maximum purchase limitations referred to above up
to 9.99% of the total shares sold in the Offerings, provided that the percentage
by which each such order exceeds 5% of the shares being offered in the Offerings
shall not exceed, in the aggregate, 10% of the shares being offered in the
Subscription and Community Offering. Requests to purchase additional shares of
Conversion Stock under this provision will be allocated by the Boards of
Directors on a pro rata basis giving priority in accordance with the priority
rights set forth above. Depending on market and financial conditions, the Boards
of Directors of the Primary Parties, with the approval of the OTS and without
further approval of the members, may increase any of the above purchase
limitations or decrease the maximum purchase limitation to as low as 1% of the
Conversion Stock.
To the extent that shares are available, each subscriber must subscribe
for a minimum of 25 shares. In computing the number of shares to be allocated,
all numbers will be rounded down to the next whole number.
Common Stock purchased in the Offerings will be freely transferable
except for shares purchased by executive officers and directors of the Primary
Parties. See "- Restrictions on Transfer of Subscription Rights and Shares."
Marketing Arrangements
The Primary Parties have engaged Webb as a financial advisor and
marketing agent in connection with the offering of the Conversion Stock, and
Webb has agreed to use its best efforts to solicit subscriptions and purchase
orders for shares of Conversion Stock in the Offerings. Webb will provide
various services including, but not limited to, (1) training and educating the
Association's employees who will be performing certain ministerial functions in
the Offerings regarding the mechanics and regulatory requirements of the stock
sales process; (2) providing its employees to staff the Stock Information Center
to assist the Association's customers and internal stock purchasers and to keep
records of orders for shares of Conversion Stock; (3) targeting the Company's
sales efforts, including preparation of marketing materials; and (4) assisting
in the solicitation of proxies of Members and Stockholders for use at the
Members' Meeting and the Stockholders' Meeting, respectively. Based upon
negotiations between the Primary Parties and Webb, Webb will receive a fee of
1.75% of the total amount of common stock sold, excluding the exchange shares
issued for the Public Association shares, subscriptions by directors, officers,
and employees of the Association and the Company and their immediate family
members, and the ESOP. In the event that a selected dealers agreement is entered
into in connection with a Syndicated Community Offering, the Association will
pay a fee of up to 5.5% of the aggregate Purchase Price of the Conversion Stock
to selected broker-dealers, for shares sold by such NASD member firm pursuant to
a selected dealers agreement. Webb has received fees totalling $25,000 for
consulting and advisory services relating to the conversion, which fees will be
in addition to the marketing fees payable to Webb. Fees paid to Webb and to any
other broker-dealers may be deemed to be underwriting fees, and Webb and such
broker-dealers may
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be deemed to be underwriters. Webb also will be reimbursed for its reasonable
out-of-pocket expenses and reasonable legal fees not to exceed $30,000. The
Primary Parties have agreed to indemnify Webb for reasonable costs and expenses
in connection with certain claims or liabilities, including certain liabilities
under the Securities Act.
Directors and executive officers of the Primary Parties may participate
in the solicitation of offers to purchase Conversion Stock. Other employees of
the Association may participate in the Offerings in ministerial capacities or
providing clerical work in effecting a sales transaction. Such other employees
have been instructed not to solicit offers to purchase Conversion Stock or
provide advice regarding the purchase of Conversion Stock. Questions of
prospective purchasers will be directed to executive officers or registered
representatives. The Company will rely on Rule 3a4-1 under the Exchange Act, and
sales of Conversion Stock will be conducted within the requirements of Rule
3a4-1, so as to permit officers, directors and employees to participate in the
sale of Conversion Stock. No officer, director or employee of the Primary
Parties will be compensated in connection with his solicitations or other
participation in the Offerings or the Exchange by the payment of commissions or
other remuneration based either directly or indirectly on transactions in the
Conversion Stock and Exchange Shares, respectively.
Procedure for Purchasing Shares in the Offerings
To ensure that each purchaser receives a Prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act,
no Prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the order
form will confirm receipt or delivery of the Prospectus in accordance with Rule
15c2-8. Order forms will only be distributed with a Prospectus.
To purchase shares in the Subscription and Community Offerings, an
executed order form with the required payment for each share subscribed for, or
with appropriate authorization for withdrawal from a deposit account at the
Association (which may be given by completing the appropriate blanks in the
order form), must be received by the Association at any of its offices by 5:00
p.m., Eastern Time, on the Expiration Date. In addition, the Primary Parties
will require a prospective purchaser to execute a certification in the form
required by applicable OTS regulations in connection with any sale of Conversion
Stock. Order forms which are not received by such time or are executed
defectively or are received without full payment (or appropriate withdrawal
instructions) are not required to be accepted. In addition the Association will
not accept orders submitted on photocopied or facsimiled order forms nor other
forms unaccompanied by an executed certification form. The Primary Parties have
the right to waive or permit the correction of incomplete or improperly executed
forms, but do not represent that they will do so. Once received, an executed
order form may not be modified, amended or rescinded without the consent of the
Primary Parties, unless the Offerings have not been completed within 45 days
after the end of the Subscription and Community Offerings, unless such period
has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priority, depositors as of the close of business on the Eligibility
Record Date (September 30, 1995) or the Supplemental
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Eligibility Record Date (March 31, 1997) and depositors as of the close of
business on the Voting Record Date (_____________ __, 1996) must list on the
order form all accounts in which they have an ownership interest, giving all
names in each account and the account numbers.
Payment for subscriptions may be made (i) in cash if delivered in person
at any office of the Association, (ii) by check or money order or (iii) by
authorization of withdrawal from deposit accounts maintained with the
Association. Interest will be paid on payments made by cash, check or money
order at the Association's passbook rate of interest from the date payment is
received until completion or termination of the Conversion and Reorganization.
If payment is made by authorization of withdrawal from deposit accounts, the
funds authorized to be withdrawn from a deposit account will continue to accrue
interest at the contractual rates until completion or termination of the
Conversion and Reorganization, but a hold will be placed on such funds, thereby
making them unavailable to the depositor until completion or termination of the
Conversion and Reorganization.
If a subscriber authorizes the Association to withdraw the aggregate
amount of the purchase price from a deposit account, the Association will do so
as of the effective date of the Conversion and Reorganization. The Association
will waive any applicable penalties for early withdrawal from certificate
accounts. If the remaining balance in a certificate account is reduced below the
applicable minimum balance requirement at the time that the funds actually are
transferred under the authorization, the certificate will be cancelled at the
time of the withdrawal, without penalty, and the remaining balance will earn
interest at the passbook rate.
Owners of self-directed Individual Retirement Accounts ("IRAs") may use
the assets of such IRAs to purchase shares of Conversion Stock in the Offerings,
provided that such IRAs are not maintained at the Association. Persons with
self-directed IRAs maintained at the Association must have their accounts
transferred to an unaffiliated institution or broker to purchase shares of
Conversion Stock in the Subscription and Community Offerings. In addition, ERISA
provisions and IRS regulations require that officers, directors and 10%
stockholders who use self-directed IRA funds to purchase shares of Conversion
Stock in the Subscription and Community Offerings make such purchases for the
exclusive benefit of the IRAs. Any interested parties wishing to use IRA funds
for stock purchases are advised to contact the Stock Information Center for
additional information and allow sufficient time for the account to be
transferred as required.
Restrictions on Transfer of Subscription Rights and Shares
Pursuant to the rules and regulations of the OTS, no person with
subscription rights may transfer or enter into any agreement or understanding to
transfer the legal or beneficial ownership of the subscription rights issued
under the Plan or the shares of Conversion Stock to be issued upon their
exercise. Such rights may be exercised only by the person to whom they are
granted and only for his account. Each person exercising such subscription
rights will be required to certify that he is purchasing shares solely for his
own account and that he has no agreement or understanding regarding the sale or
transfer of such shares. Federal regulations also prohibit any person from
offering or making an announcement of an offer or intent to make an offer to
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purchase such subscription rights or shares of Conversion Stock prior to the
completion of the Conversion and Reorganization.
The Primary Parties will pursue any and all legal and equitable remedies
in the event they become aware of the transfer of subscription rights and will
not honor orders known by them to involve the transfer of such rights.
Liquidation Rights
In the unlikely event of a complete liquidation of the Mutual Holding
Company in its present mutual form, each depositor of the Association would
receive his pro rata share of any assets of the Mutual Holding Company remaining
after payment of claims of all creditors. Each depositor's pro rata share of
such remaining assets would be in the same proportion as the value of his
deposit account was to the total value of all deposit accounts in the
Association at the time of liquidation. After the Conversion and Reorganization,
each depositor, in the event of a complete liquidation of the Association, would
have a claim as a creditor of the same general priority as the claims of all
other general creditors of the Association. However, except as described below,
his claim would be solely in the amount of the balance in his deposit account
plus accrued interest. He would not have an interest in the value or assets of
the Association or the Company above that amount.
The Plan provides for the establishment, upon the completion of the
Conversion and Reorganization, of a special "liquidation account" for the
benefit of Eligible Account Holders and Supplemental Eligible Account Holders in
an amount equal to the amount of any dividends waived by the Mutual Holding
Company plus the greater of (1) the Association's retained earnings of
$6,642,000 at March 31, 1995, the date of the latest statement of financial
condition contained in the final offering circular utilized in the MHC
Reorganization, or (2) 70.29% of the Association's total stockholders' equity as
reflected in its latest statement of financial condition contained in the final
Prospectus utilized in the Offerings. As of the date of this Prospectus, the
initial balance of the liquidation account would be $6.7 million. Each Eligible
Account Holder and Supplemental Eligible Account Holder, if he were to continue
to maintain his deposit account at the Association, would be entitled, upon a
complete liquidation of the Association after the Conversion and Reorganization
to an interest in the liquidation account prior to any payment to the Company as
the sole stockholder of the Association. Each Eligible Account Holder and
Supplemental Eligible Account Holder would have an initial interest in such
liquidation account for each deposit account, including passbook accounts,
transaction accounts such as checking accounts, money market deposit accounts
and certificates of deposit, held in the Association at the close of business on
September 30, 1995 or March 31, 1997, as the case may be. Each Eligible Account
Holder and Supplemental Eligible Account Holder will have a pro rata interest in
the total liquidation account for each of his deposit accounts based on the
proportion that the balance of each such deposit account on the September 30,
1995 Eligibility Record Date (or the March 31, 1997 Supplemental Eligibility
Record Date, as the case may be) bore to the balance of all deposit accounts in
the Association on such date.
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If, however, on any June 30 annual closing date of the Association,
commencing June 30, 1997, the amount in any deposit account is less than the
amount in such deposit account on September 30, 1995 or March 31, 1997, as the
case may be, or any other annual closing date, then the interest in the
liquidation account relating to such deposit account would be reduced by the
proportion of any such reduction, and such interest will cease to exist if such
deposit account is closed. In addition, no interest in the liquidation account
would ever be increased despite any subsequent increase in the related deposit
account. Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders are satisfied would be
distributed to the Company as the sole stockholder of the Association.
Tax Aspects
Consummation of the Conversion and Reorganization is expressly
conditioned upon prior receipt of either a ruling or an opinion of counsel with
respect to federal tax laws, and either a ruling or an opinion with respect to
Indiana tax laws, to the effect that consummation of the transactions
contemplated hereby will not result in a taxable reorganization under the
provisions of the applicable codes or otherwise result in any adverse tax
consequences to the Mutual Holding Company, the Association, the Company or to
account holders receiving subscription rights, except to the extent, if any,
that subscription rights are deemed to have fair market value on the date such
rights are issued. This condition may not be waived by the Primary Parties.
Silver, Freedman & Taff, L.L.P., Washington, D.C., has issued an opinion
to the Company and the Association that, for federal income tax purposes: (1)
the conversion of the Mutual Holding Company from mutual form to a federal
interim stock savings institution and its simultaneous merger with and into the
Association, with the Association being the surviving institution will qualify
as a reorganization within the meaning of Section 368(a)(1)(A) of the Code, (2)
no gain or loss will be recognized by the Association upon the receipt of the
assets of the Mutual Holding Company in such merger, (3) the merger of Interim
with and into the Association, with the Association being the surviving
institution, will qualify as a reorganization within the meaning of Section
368(a)(1)(A) of the Code, (4) no gain or loss will be recognized by Interim upon
the transfer of its assets to the Association, (5) no gain or loss will be
recognized by the Association upon the receipt of the assets of Interim, (6) no
gain or loss will be recognized by the Company upon the receipt of Association
Common Stock solely in exchange for Common Stock, (7) no gain or loss will be
recognized by the Public Stockholders upon the receipt of Common Stock solely in
exchange for their Public Association Shares, (8) the basis of the Common Stock
to be received by the Public Stockholders will be the same as the basis of the
Public Association Shares surrendered in exchange therefor, before giving effect
to any payment of cash in lieu of fractional shares, (9) the holding period of
the Common Stock to be received by the Public Stockholders will include the
holding period of the Public Association Shares, provided that the Public
Association Shares were held as a capital asset on the date of the exchange,
(10) no gain or loss will be recognized by the Company upon the sale of shares
of Conversion Stock in the Offerings, (11) the Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members will recognize gain, if
any, upon the issuance to them of withdrawable savings accounts in the
Association following the Conversion and Reorganization, interests in the
liquidation account and nontransferable subscription rights to purchase
Conversion
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Stock, but only to the extent of the value, if any, of the subscription rights,
and (12) the tax basis to the holders of Conversion Stock purchased in the
Offerings will be the amount paid therefor, and the holding period for the
shares of Conversion Stock will begin on the date of consummation of the
Offerings if purchased through the exercise of subscription rights and on the
day after the date of purchase if purchased in the Community Offering or the
Syndicated Community Offering.
Geo. S. Olive & Co. LLC, has issued an opinion to the Company and the
Association that the income tax consequences of the Conversion and
Reorganization are substantially the same under Indiana law as they are under
the Code.
In the opinion of Keller, which opinion is not binding on the IRS, the
subscription rights do not have any value, based on the fact that such rights
are acquired by the recipients without cost, are nontransferable and of short
duration, and afford the recipients the right only to purchase the Conversion
Stock at a price equal to its estimated fair market value, which will be the
same price as the Purchase Price for the unsubscribed shares of Conversion
Stock. If the subscription rights granted to eligible subscribers are deemed to
have an ascertainable value, receipt of such rights likely would be taxable only
to those eligible subscribers who exercise the subscription rights (either as a
capital gain or ordinary income) in an amount equal to such value, and the
Primary Parties could recognize gain on such distribution. Eligible subscribers
are encouraged to consult with their own tax advisor as to the tax consequences
in the event that such subscription rights are deemed to have an ascertainable
value.
Unlike private rulings, an opinion is not binding on the IRS and the IRS
could disagree with conclusions reached therein. In the event of such
disagreement, there can be no assurance that the IRS would not prevail in a
judicial or administrative proceeding.
Delivery and Exchange of Certificates
Conversion Stock. Certificates representing Conversion Stock issued in
connection with the Offerings will be mailed by the Company's transfer agent for
the Common Stock to the persons entitled thereto at the addresses of such
persons appearing on the stock order form for Conversion Stock as soon as
practicable following consummation of the Conversion and Reorganization. Any
certificates returned as undeliverable will be held by the Company until claimed
by persons legally entitled thereto or otherwise disposed of in accordance with
applicable law. Until certificates for Conversion Stock are available and
delivered to subscribers, subscribers may not be able to sell such shares.
Exchange Shares. After consummation of the Conversion and
Reorganization, each holder of a certificate or certificates theretofore
evidencing issued and outstanding shares of Association Common Stock (other than
the Mutual Holding Company), upon surrender of the same to an agent, duly
appointed by the Company, which is anticipated to be the transfer agent for the
Common Stock (the "Exchange Agent"), shall be entitled to receive in exchange
therefor a certificate or certificates representing the number of full shares of
Common Stock for which the shares of Association Common Stock theretofore
represented by the certificate or certificates so surrendered shall have been
converted based on the Exchange Ratio. The Exchange Agent shall
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promptly mail to each such holder of record of an outstanding certificate which
immediately prior to the consummation of the Conversion and Reorganization
evidenced shares of Association Common Stock, and which is to be exchanged for
Common Stock based on the Exchange Ratio as provided in the Plan, a form of
letter of transmittal (which shall specify that delivery shall be effected, and
risk of loss and title to such certificate shall pass, only upon delivery of
such certificate to the Exchange Agent) advising such holder of the terms of the
exchange effected by the Conversion and Reorganization and of the procedure for
surrendering to the Exchange Agent such certificate in exchange for a
certificate or certificates evidencing Common Stock. The Association
Stockholders should not forward Association Common Stock certificates to the
Association or the Exchange Agent until they have received the transmittal
letter.
No holder of a certificate theretofore representing shares of
Association Common Stock shall be entitled to receive any dividends in respect
of the Common Stock into which such shares shall have been converted by virtue
of the Conversion and Reorganization until the certificate representing such
shares of Association Common Stock is surrendered in exchange for certificates
representing shares of Common Stock. In the event that dividends are declared
and paid by the Company in respect of Common Stock after the consummation of the
Conversion and Reorganization but prior to surrender of certificates
representing shares of Association Common Stock, dividends payable in respect of
shares of Common Stock not then issued shall accrue (without interest). Any such
dividends shall be paid (without interest) upon surrender of the certificates
representing such shares of Association Common Stock. The Company shall be
entitled, after the consummation of the Conversion and Reorganization, to treat
certificates representing shares of Association Common Stock as evidencing
ownership of the number of full shares of Common Stock into which the shares of
Association Common Stock represented by such certificates shall have been
converted, notwithstanding the failure on the part of the holder thereof to
surrender such certificates.
The Company shall not be obligated to deliver a certificate or
certificates representing shares of Common Stock to which a holder of
Association Common Stock would otherwise be entitled as a result of the
Conversion and Reorganization until such holder surrenders the certificate or
certificates representing the shares of Association Common Stock for exchange as
provided above, or, in default thereof, an appropriate affidavit of loss and
indemnity agreement and/or a bond as may be required in each case by the
Company. If any certificate evidencing shares of Common Stock is to be issued in
a name other than that in which the certificate evidencing Association Common
Stock surrendered in exchange therefor is registered, it shall be a condition of
the issuance thereof that the certificate so surrendered shall be properly
endorsed and otherwise in proper form for transfer and that the person
requesting such exchange pay to the Exchange Agent any transfer or other tax
required by reason of the issuance of a certificate for shares of Common Stock
in any name other than that of the registered holder of the certificate
surrendered or otherwise establish to the satisfaction of the Exchange Agent
that such tax has been paid or is not payable.
Various approvals of the OTS are required in order to consummate the
Conversion and Reorganization. The OTS has approved the Plan of Conversion
subject to approval by the Mutual Holding Company's Members and the
Association's Stockholders. In addition, consummation of
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the Conversion and Reorganization is subject to OTS approval of the Company's
application to acquire all of the to-be-outstanding Association Common Stock and
the applications with respect to the merger of the Mutual Holding Company
(following its conversion to a federal interim stock savings institution) into
the Association and the merger of Interim into the Association, with the
Association being the surviving entity in both mergers. Applications for these
approvals have been filed and are currently pending. There can be no assurances
that the requisite OTS approvals will be received in a timely manner, in which
event the consummation of the Conversion and Reorganization may be delayed
beyond the expiration of the Offerings.
Pursuant to OTS regulations, the Plan of Conversion also must be
approved by (1) at least a majority of the total number of votes eligible to be
cast by Members of the Mutual Holding Company at the Members' Meeting, and (2)
holders of at least two-thirds of the outstanding Association Common Stock at
the Stockholders' Meeting. In addition, the Primary Parties have conditioned the
consummation of the Conversion and Reorganization on the approval of the Plan by
at least a majority of the votes cast, in person or by proxy, by the Public
Stockholders at the Stockholders' Meeting.
Dissenters' Rights of Appraisal
Holders of Association Common Stock are entitled to appraisal rights
under Section 552.14 of the OTS regulations as a result of the merger of the
Mutual Holding Company (following its conversion to a federal interim stock
savings institution) with and into the Association and the merger of the
Association with and into Interim, with the Association to be the surviving
entity in both mergers. A holder of shares of Association Common Stock wishing
to exercise his appraisal rights must deliver to the Secretary of the
Association before the vote on the Plan of Conversion at the Stockholders'
Meeting, a writing which identifies such stockholder and which states his
intention to demand appraisal of and payment for his shares of Association
Common Stock. Such demand must be in addition to and separate from any proxy or
vote against the Plan of Conversion. Any such stockholder who wishes to exercise
such appraisal rights should review carefully the discussion of such rights in
the Association's proxy statement, including Appendix A thereto, because failure
to timely and properly comply with the procedures specified will result in the
loss of appraisal rights under Section 552.14. All written demands for appraisal
should be sent or delivered to the attention of the Secretary of the
Association, 119 East Main Street, Crawfordsville, Indiana 47933 so as to be
received prior to the vote at the Stockholders' Meeting with respect to the Plan
of Conversion. Pursuant to the Plan of Conversion, consummation of the
Conversion and the Reorganization is conditioned upon holders of less than 10%
of the outstanding Association Common Stock exercising appraisal rights, which
condition may, in the sole discretion of the Primary Parties, be waived.
In determining whether or not to exercise appraisal rights, current
Stockholders should review the comparison of their rights as Stockholders with
their rights as stockholders of the Company following consummation of the
Conversion. Such comparison is contained in the Association's proxy statement to
its stockholders under "The Conversion and Reorganization Comparison of
Stockholder Rights." Because the Company is governed by the Indiana Business
Corporation Law and the Association is governed by federal law, including OTS
regulations,
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there are material differences between the rights of stockholders of the
Association and stockholders of the Company.
Certain Restrictions on Purchase or Transfer of Shares after the Conversion and
Reorganization
All shares of Conversion Stock purchased in connection with the
Conversion and Reorganization by a director or an executive officer of the
Primary Parties will be subject to a restriction that the shares not be sold for
a period of one year following the Conversion and Reorganization, except in the
event of the death of such director or executive officer or pursuant to a merger
or similar transaction approved by the OTS. Each certificate for restricted
shares will bear a legend giving notice of this restriction on transfer, and
appropriate stop-transfer instructions will be issued to the Company's transfer
agent. Any shares of Common Stock issued within this one-year period as a stock
dividend, stock split or otherwise with respect to such restricted stock will be
subject to the same restrictions. The directors and executive officers of the
Company will also be subject to the insider trading rules promulgated pursuant
to the Exchange Act.
Purchases of Common Stock of the Company by directors, executive
officers and their associates during the three-year period following completion
of the Conversion and Reorganization may be made only through a broker or dealer
registered with the SEC, except with the prior written approval of the OTS. This
restriction does not apply, however, to negotiated transactions involving more
than 1.0% of the Company's outstanding Common Stock or to the purchase of stock
pursuant to any tax-qualified employee stock benefit plan, such as the ESOP, or
by any non-tax-qualified employee stock benefit plan, such as the Management
Recognition Plan or the 1997 Recognition Plan.
Pursuant to OTS regulations, the Company will generally be prohibited
from repurchasing any shares of Common Stock within one year following
consummation of the Conversion and Reorganization. During the second and third
years following consummation of the Conversion and Reorganization, the Company
may not repurchase any shares of its Common Stock other than pursuant to (i) an
offer to all stockholders on a pro rata basis which is approved by the OTS; (ii)
the repurchase of qualifying shares of a director, if any; (iii) purchases in
the open market by a tax-qualified or non-tax-qualified employee stock benefit
plan in an amount reasonable and appropriate to fund the plan; or (iv) purchases
that are part of an open-market program not involving more than 5% of its
outstanding capital stock during a 12-month period, if the repurchases do not
cause the Association to become undercapitalized and the Association provides to
the Regional Director of the OTS no later than 10 days prior to the commencement
of a repurchase program written notice containing a full description of the
program to be undertaken and such program is not disapproved by the Regional
Director. However, the Regional Director has authority to permit repurchases
during the first year following consummation of the Conversion and
Reorganization and to permit repurchases in excess of 5% during the second and
third years upon the establishment of exceptional circumstances (i.e., where
such repurchases would be in the best interests of the institution and its
stockholders).
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COMPARISON OF STOCKHOLDERS' RIGHTS
General. As a result of the Conversion and Reorganization, holders of
the Association Common Stock will become stockholders of the Company, an Indiana
corporation. There are certain differences in stockholder rights arising from
distinctions between the Association's Charter and Bylaws and the Company's
Articles of Incorporation and Bylaws and from distinctions between laws with
respect to federally chartered savings institutions and Indiana law.
The discussion herein is not intended to be a complete statement of the
differences affecting the rights of stockholders, but rather summarizes the more
significant differences and certain important similarities. The discussion
herein is qualified in its entirety by reference to the Articles of
Incorporation and Bylaws of the Company and the Indiana Business Corporation
Law.
Authorized Capital Stock. The Company's authorized capital stock
consists of 8,000,000 shares of Common Stock, par value $.01 per share and
2,000,000 shares of Preferred Stock, par value $.01 per share. The Association's
authorized capital stock consists of 2,000,000 shares of Association common
stock, par value $.01 per share. The shares of Common Stock and Preferred Stock
were authorized in an amount greater than that to be issued in the Conversion
and Reorganization to provide the Company's Board of Directors with as much
flexibility as possible to effect, among other transactions, financings,
acquisitions, stock dividends, stock splits and employee stock options. However,
these additional authorized shares may also be used by the Board of Directors
consistent with its fiduciary duty to deter future attempts to gain control of
the Company. The Board of Directors also has sole authority to determine the
terms of any one or more series of Preferred Stock, including voting rights,
conversion rates, and liquidation preferences. As a result of the ability to fix
voting rights for a series of Preferred Stock, the Board has the power, to the
extent consistent with its fiduciary duty, to issue a series of Preferred Stock
to persons friendly to management in order to attempt to block, a post tender
offer merger or other transaction by which a third party seeks control, and
thereby assist management to retain its position. The Company's Board currently
has no plan for the issuance of additional shares, other than the issuance of
additional shares pursuant to stock benefit plans.
Issuance of Capital Stock. Pursuant to applicable laws and regulations,
the Mutual Holding Company is required to own not less than a majority of the
outstanding Association Common Stock. There will be no such restriction
applicable to the Company following consummation of the Conversion and
Reorganization.
The Articles of Incorporation of the Company do not contain restrictions
on the issuance of shares of capital stock to directors, officers or controlling
persons of the Company, whereas the Charter of the Association restricts such
issuance to general public offerings, or if qualifying shares, to directors,
unless the share issuance or the plan under which they would be issued has been
approved by a majority of the total votes eligible to be cast at a legal
meeting. Thus, stock-related compensation plans such as stock option plans could
be adopted by the Company without stockholder approval and shares of Company
capital stock could be issued directly to directors or officers without
stockholder approval. The Bylaws of the National Association of
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Securities Dealers, Inc. ("NASD"), however, generally require corporations with
securities which are quoted on the Nasdaq National Market System to obtain
stockholder approval of most stock compensation plans for directors, officers
and key employees of the corporation. Moreover, although generally not required,
stockholder approval of stock related compensation plans may be sought in
certain instances in order to qualify such plans for favorable federal income
tax and securities law treatment under current laws and regulations. The Company
plans to submit the stock compensation plans discussed herein to its
stockholders for approval.
Voting Rights. Neither the Association's Charter or Bylaws nor the
Company's Articles of Incorporation or Bylaws currently provide for cumulative
voting in elections of directors.
For additional information relating to voting rights, see "- Limitations
on Acquisitions of Voting Stock and Voting Rights" below.
Payment of Dividends. The ability of the Association to pay dividends on
its capital stock is restricted by OTS regulations and by tax considerations
related to savings institutions such as the Association. See "Regulation -
Federal Regulation of Savings Association - Capital Requirements" and
"Regulation - Federal and State Taxation." Although the Company is not subject
to these restrictions as an Indiana corporation, such restrictions will
indirectly affect the Company because dividends from the Association will be a
primary source of funds of the Company for the payment of dividends to
stockholders of the Company.
The Indiana Business Corporation Law generally provides that, subject to
any restrictions in the corporation's articles of incorporation, a corporation
may make distributions to its stockholders, provided (i) the corporation would
be able to pay its debts as they become due in the usual course of business and
(ii) the corporation's total assets would not be less than the sum of its total
liabilities plus the amount that would be needed, if the corporation were to be
dissolved at the time of the distribution to satisfy the preferential rights
which are superior to those receiving the distribution.
Board of Directors. The Association's Charter and Bylaws and the
Articles of Incorporation and Bylaws of the Company respectively require the
Board of Directors of the Association and the Company to be divided into three
classes as nearly equal in number as possible and that the members of each class
shall be elected for a term of three years and until their successors are
elected and qualified, with one class being elected annually.
Under the Association's Bylaws, any vacancies in the Board of Directors
of the Association may be filled by the affirmative vote of a majority of the
remaining directors although less than a quorum of the Board of Directors.
Persons elected by the directors of the Association to fill vacancies may only
serve until the next annual meeting of stockholders. However, under the
Company's Articles of Incorporation, any vacancy occurring in the Board of
Directors of the Company, including any vacancy created by reason of an increase
in the number of directors, may be filled by the remaining directors, and any
director so chosen shall hold office for the remainder of the term to which the
director has been elected and until his or her successor is elected and
qualified.
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Under the Association's Bylaws, any director may be removed for cause by
the holders of a majority of the outstanding voting shares. The Company's
Articles of Incorporation provide that any director may be removed for cause by
the holders of two-thirds of the outstanding voting shares of the Company.
Limitations on Liability. The Company's Articles of Incorporation
provide that no director shall be personally liable to the Company or its
stockholders for monetary damages or injunctive relief for any act or omission
by such director as a director unless the director has breached or failed to
perform the duties of the director's office in compliance with Section 23-1-35-1
of the Indiana Business Corporation Law, or any successor provision thereto.
Section 23-1-35-1 of the Indiana Business Corporation Law currently provides
that directors will not be liable for any action taken as a director, or any
failure to take any action, unless (i) the director has breached or failed to
perform the duties of the director's office in compliance with said section
(i.e., in good faith, with the care an ordinarily prudent person in a like
position would exercise under similar circumstances and in a manner the director
reasonably believes to be in the best interests of the corporation) and (ii) the
breach or failure to perform constitutes willful misconduct or recklessness.
Currently, the scope of the provision in the Company's Articles of
Incorporation limiting the personal liability of directors is uncertain because
of the absence of judicial precedent interpreting similar provisions. In
addition, the SEC takes the position that similar provisions limiting the
liability of directors under state laws would not protect those corporations'
directors from liability for violations of the federal securities laws. Federal
banking regulators also may take the same position with respect to violations of
federal banking laws and regulations.
The provision limiting the personal liability of the Company's directors
does not eliminate or alter the duty of the Company's directors; it merely
limits personal liability for monetary damages to the extent permitted by the
Indiana Business Corporation Law. Moreover, it applies only to claims against a
director arising out of his role as a director; it currently does not apply to
claims arising out of his role as an officer (if he is also an officer) or
arising out of any other capacity in which he serves because the Indiana
Business Corporation Law does not authorize such a !imitation of liability.
The provision in the Company's Articles of Incorporation which limits
the personal liability of directors is designed to ensure that the ability of
the Company's directors to exercise their best business judgment in managing the
Company's affairs is not unreasonably impeded by exposure to the potentially
high personal costs or other uncertainties of litigation. The nature of the
tasks and responsibilities undertaken by directors of publicly held corporations
often require such persons to make difficult judgments of great importance which
can expose such persons to personal liability, but from which they will acquire
no personal benefit. In recent years, litigation against publicly held
corporations and their directors and officers challenging good faith business
judgments and involving no allegations of personal wrongdoing has become common.
Such litigation regularly involves damage claims in huge amounts which bear no
relationship to the amount of compensation received by the directors or
officers, particularly in the case of directors who are not employees of the
corporation. The expense of such litigation, whether it is
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well-founded or not, can be enormous. The provision of the Articles of
Incorporation relating to director liability is intended to reduce, in
appropriate cases, the risk incident to serving as a director and to enable the
Company to elect and retain the persons most qualified to serve as directors.
Currently, federal law does not permit federally chartered savings
institutions such as the Association to limit the personal liability of
directors in the manner provided by the Indiana Business Corporation Law and the
laws of many other states.
Indemnification of Directors, Officers, Employees and Agents. The
Association's Charter and Bylaws do not contain any provision relating to
indemnification of directors and officers of the Association. Under present OTS
regulations, however, the Association shall indemnify its directors, officers
and employees for any costs incurred in connection with any litigation involving
any such person's activities as a director, officer or employee if such person
obtains a final judgment on the merits in his or her favor. In addition,
indemnification is permitted in the case of a settlement, a final judgment
against such person or final judgment other than on the merits, if a majority of
disinterested directors determine that such person was acting in good faith
within the scope of his or her employment as he or she could reasonably have
perceived it under the circumstances and for a purpose he or she could
reasonably have believed under the circumstances was in the best interest of the
Association or its stockholders. The Association also is permitted to pay
ongoing expenses incurred by a director, officer or employee if a majority of
disinterested directors concludes that such person may ultimately be entitled to
indemnification. Before making any indemnification payment, the Association is
required to notify the OTS of its intention and such payment cannot be made if
the OTS objects thereto.
The Company's Articles of Incorporation provide that the Company shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed formal or informal action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that such person is or was a director, officer, employee or agent of
the Company or any predecessor of the Company, or is or was serving at the
request of the Company or any predecessor of the Company as a director, officer,
partner, member, manager, employee or agent of another corporation, partnership,
limited liability company, joint venture, trust, employee benefit plan or other
enterprise, against liability and expenses (including court costs and attorneys'
fees), judgments, fines, excise taxes and amounts paid in satisfaction,
settlement or compromise actually and reasonably incurred by such person in
connection with such action, suit or proceeding to the fullest extent authorized
by law. Such indemnity shall be made only if (i) such person's conduct was in
good faith; (ii) such person reasonably believed (a) in the case of conduct in
the person's official capacity with the Company, that the person's conduct was
in its best interests and (b) in all other cases, the person's conduct was at
least not opposed to the Company's best interests; and (iii) in the case of any
criminal proceeding, the person either (a) had reasonable cause to believe the
person's conduct was lawful, or (b) had no reasonable cause to believe that such
person's conduct was unlawful.
The Company's Articles of Incorporation also provide that reasonable
expenses incurred by a director, officer, employee or agent of the Company in
defending an action, suit or
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proceeding described above shall be paid by the Company in advance of the final
disposition of such action, suit or proceeding as authorized by the Board of
Directors upon receipt of a written affirmation by or on behalf of such person
of his good faith belief that he has met the standard of conduct necessary for
indemnification under relevant law and a written undertaking, executed
personally or on the person's behalf, to repay such amount if it shall
ultimately be determined that the person is not entitled to be indemnified by
the Company.
Special Meetings of Stockholders. The Association's Bylaws provide that
special meetings of the stockholders of the Association may be called by the
Chairman, President, a majority of the Board of Directors or the holders of not
less than one-tenth of the outstanding capital stock of the Association entitled
to vote at the meeting. The Company's Articles of Incorporation and Bylaws
contain a provision pursuant to which special meetings of stockholders of the
Company only may be called by a majority of directors then in office or the
Chairman of the Board or Chief Executive Officer.
Stockholder Nominations and Proposals. The Association's Bylaws
generally provide that stockholders may submit nominations for election as
director at an annual meeting of stockholders and any new business to be taken
up at such a meeting by filing such in writing with the Association at least
thirty days before the date of any such meeting.
The Company's Articles of Incorporation provide that, subject to the
rights of the holders of any class or series of stock having a preference over
the Common Stock as to dividends or upon liquidation, all nominations for
election to the Board of Directors, other than those made by the Board or a
committee thereof, shall be made by a stockholder who has complied with the
notice provisions in the Bylaws. Written notice of a stockholder nomination must
be communicated to the attention of the secretary and either delivered to, or
mailed and received at, the principal executive offices of the Company not later
than (i) with respect to an annual meeting of the stockholders of the Company,
60 days prior to the anniversary date of the mailing of proxy materials by the
Company in connection with the immediately preceding annual meeting of
stockholders of the Company, or in the case of the first annual meeting
following the Conversion and Reorganization, the close of business on the tenth
day following the day on which notice of the date of the scheduled annual
meeting was mailed, and (ii) with respect to a special meeting of stockholders
for the election of directors, the close of business on the tenth day following
the date on which notice of such meeting is first given to the stockholders.
Each such notice shall set forth: (a) as to each person whom the stockholder
proposes to nominate as a director, and as to the stockholder giving the notice,
(i) the name, age, business address and residence address of such person; (ii)
the principal occupation or employment of such person; (iii) the class and
number of shares of the Company's stock beneficially owned by such person on the
date of the stockholder notice; and (iv) such other information regarding such
person as would be required to be included in a proxy statement filed pursuant
to the proxy rules of the SEC; and (b) to the extent known by the stockholder
giving the notice, (i) the name and address of any other stockholders supporting
such nominees; and (ii) the class and number of shares of the Company's stock
beneficially owned by any other stockholders supporting such nominees, on the
date of such stockholder notice. The presiding officer of the meeting may refuse
to acknowledge the nomination of any person not made in compliance with the
foregoing procedure.
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The Company's Bylaws also provide that only such business as shall have
been properly brought before an annual meeting of stockholders shall be
conducted at the annual meeting. To be properly brought before an annual
meeting, business must be brought before the meeting by or at the direction of
the Board of Directors or otherwise properly brought before the meeting by a
stockholder. For business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Secretary of the Company. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Company not less than 60 days prior to the anniversary date of the mailing of
proxy materials by the Company in connection with the immediately preceding
annual meeting of stockholders of the Company; provided, however, that with
respect to the first scheduled annual meeting following completion of the
Conversion and Reorganization, such written notice must be delivered or received
by the Company no later than the close of business on the tenth day following
the day on which notice of the meeting was first mailed to stockholders. A
stockholder's notice shall set forth as to each matter the stockholder proposes
to bring before the annual meeting (a) a brief description of the business
desired to be brought before the annual meeting and the reasons for conducting
such business at the annual meeting, (b) the name and address, as they appear on
the Company's books, of the stockholder proposing such business, and, to the
extent known, any other stockholders known by such stockholder to be supporting
such proposal, (c) the class and number of shares of the Company which are
beneficially owned by the stockholder and, to the extent known, by any other
stockholders known by such stockholder to be supporting such proposal on the
date of such stockholder notice, and (d) any financial interest of the
stockholder in such business. The presiding officer of an annual meeting shall
determine and declare to the meeting whether the business was properly brought
before the meeting in accordance with the provisions of the Articles of
Incorporation and any such business not properly brought before the meeting
shall not be transacted.
The procedures regarding stockholder proposals and nominations are
intended to provide the Board of Directors of the Company with the information
deemed necessary to evaluate a stockholder proposal or nomination and other
relevant information, such as existing stockholder support, as well as the time
necessary to consider and evaluate such information in advance of the applicable
meeting. The proposed procedures, however, will give incumbent directors advance
notice of a business proposal or nomination. This may make it easier for the
incumbent directors to defeat a stockholder proposal or nomination, even when
certain stockholders view such proposal or nomination as in the best interests
of the Company or its stockholders.
Inspectors of Election. The Association's Bylaws provide that the Board
of Directors may appoint any persons, other than nominees for office, as
inspectors of election at a meeting of stockholders and that if inspectors of
election are not so appointed, the Chairman of the Board or the President may,
and on the request of not less than 10% of the votes represented at the meeting
shall, make such appointment at the meeting. In accordance with Indiana law, the
Company's Bylaws provide that the Board of Directors of the Company may appoint
one or more persons as inspectors of election, and that the chairman of any
meeting of stockholders shall make such an appointment in the event that the
inspector(s) appointed by the Board of Directors shall be unable to act or the
Board shall fail to appoint any inspector. The Bylaws of the Association and the
Company also specify the duties of inspectors of election.
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Stockholder Action Without a Meeting. The Bylaws of the Association
provide that any action to be taken or which may be taken at any annual or
special meeting of stockholders may be taken if a consent in writing, setting
forth the actions so taken, is given by the holders of all outstanding shares
entitled to vote. The Articles of Incorporation and Bylaws of the Company
similarly provide that any action permitted to be taken by the stockholders at a
meeting, may be taken without a meeting if a consent in writing setting forth
the action so taken shall be signed by all of the stockholders entitled to vote
and filed with the Secretary of the Company.
Stockholder's Right to Examine Books and Records. A federal regulation
which is applicable to the Association provides that stockholders may inspect
and copy specified books and records of a federally chartered savings
institution after proper written notice for a proper purpose. The Indiana
Business Corporation Law similarly provides that a stockholder may inspect books
and records upon written demand stating the purpose of the inspection, if such
purpose is reasonably related to such person's interest as a stockholder.
Limitations on Acquisitions of Voting Stock and Voting Rights. The
Company's Articles of Incorporation provide that no person shall directly or
indirectly offer to acquire or acquire the beneficial ownership of (i) more than
10% of the issued and outstanding shares of any class of an equity security of
the Company, or (ii) any securities convertible into, or exercisable for, any
equity securities of the Company if, assuming conversion or exercise by such
person of all securities of which such person is the beneficial owner which are
convertible into, or exercisable for, such equity securities (but of no
securities convertible into, or exercisable for, such equity securities of which
such person is not the beneficial owner), such person would be the beneficial
owner of more than 10% of any class of an equity security of the Company. The
term "person" is broadly defined in the Articles of Incorporation to prevent
circumvention of this restriction.
The foregoing restrictions do not apply to (i) any offer with a view
toward public resale made exclusively to the Company by underwriters or a
selling group acting on its behalf, (ii) any employee benefit plan established
by the Company or the Association, and (iii) any other offer or acquisition
approved in advance by the affirmative vote of two-thirds of the Company's Board
of Directors. In the event that shares are acquired in violation of this
restriction, all shares beneficially owned by any person in excess of 10% shall
not be counted as shares entitled to vote and shall not be voted by any person
or counted as voting shares in connection with any matters submitted to
stockholders for a vote.
Neither the Charter nor the Bylaws of the Association contains a
provision which restricts voting rights of certain stockholders of the
Association in the manner set forth above.
Mergers, Consolidations and Sales of Assets. A federal regulation
requires the approval of the Board of Directors of the Association and the
holders of two-thirds of the outstanding stock of the Association entitled to
vote thereon for mergers, consolidations and sales of all or substantially all
of the Association's assets. Such regulation permits the Association to merge
with another corporation without obtaining the approval of its stockholders if:
(i) it does not involve an interim savings institution; (ii) the Association's
Charter is not changed; (iii) each share of the Association's stock outstanding
immediately prior to the effective date of the transaction is to be
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an identical outstanding share or a treasury share of the Association after such
effective date; and (iv) either: (A) no shares of voting stock of the
Association and no securities convertible into such stock are to be issued or
delivered under the plan of combination or (B) the authorized unissued shares or
the treasury shares of voting stock of the Association to be issued or delivered
under the plan of combination, plus those initially issuable upon conversion of
any securities to be issued or delivered under such plan, do not exceed 15% of
the total shares of voting stock of the Association outstanding immediately
prior to the effective date of the transaction.
The Indiana Business Corporation Law requires the approval of the Board
of Directors and, unless the Articles of Incorporation provide for a higher
vote, the holders of a majority of the outstanding stock of the Company entitled
to vote thereon for mergers or consolidations, and for sales, leases or
exchanges of all or substantially all of the Company's assets. The Indiana
Business Corporation Law permits the Company to merge with another corporation
without obtaining the approval of the Company's stockholders if: (i) the
Company's Articles of Incorporation will not differ (subject to certain limited
exceptions) from its Articles of Incorporation before the merger; (ii) each
stockholder of the Company whose shares were outstanding immediately before the
effective date of the merger will hold the same proportionate number of shares
after the merger; and (iii) the number of voting shares outstanding immediately
after the merger, plus the number of voting shares issuable as a result of the
merger, will not exceed 20% of the shares of Common Stock outstanding
immediately prior to the merger.
As holder of all of the outstanding Association Common Stock after
consummation of the Conversion and Reorganization, the Company generally will be
able to authorize a merger, consolidation or other business combination
involving the Association without the approval of the stockholders of the
Company.
Business Combinations. Article IX of the Company's Articles of
Incorporation govern any proposed "Business Combination" (defined generally to
include certain sales, purchases, exchanges, leases, transfers, dispositions or
acquisitions of assets or businesses, mergers or consolidations, or certain
reclassifications of securities of the Company) between the Company or any
subsidiaries, on the one hand, and a Related Person, on the other hand. A
"Related Person" is defined generally to include any person, partnership,
corporation, group or other entity (other than the Company and its subsidiaries)
which is the Beneficial Owners (as defined) of 10.0% or more of the shares of
the Company entitled to vote generally in an election of directors (the "Voting
Shares").
Under Section 1 of Article IX, if certain specified conditions
(discussed briefly in the following four paragraphs) are not met, neither the
Company nor any of its subsidiaries may become a party to any Business
Combination, without the prior affirmative vote at a meeting of the Company's
stockholders by the holders of at least 80.0% of the Voting Shares, voting
separately as a class, and by an Independent Majority of Stockholders, which is
defined to mean the holders of a majority of the outstanding Voting Shares that
are not Beneficially Owned (as defined), directly or indirectly, by a Related
Person. If such approval were obtained, the special conditions would not have to
be met. Such conditions also would not have to be met if the Board
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of Directors approved the Business Combination at times and by votes specified
in the Articles of Incorporation.
The conditions necessary to avoid the vote of 80.0% of the Company's
outstanding Voting Shares and of an Independent Majority of Stockholders include
conditions providing that, upon consummation of the Business Combination, all of
the Company's stockholders would receive at least a certain minimum price per
share for their shares. The ratio of the price to be received by the
stockholders (other than the Related Person) in the Business Combination to the
market price of the Company's shares immediately before the announcement of the
Business Combination would have to be at least as great as the ratio of (i) the
highest per share price paid by the Related Person in acquiring any of the
Company's Common Stock prior to the Business Combination to (ii) the market
price per share of the Company's Common Stock immediately before the initial
acquisition of any shares by the Related Person. A similar condition would apply
in the case of the price to be paid for any outstanding shares of the Company's
Preferred Stock. These requirements generally are designed to ensure that the
stockholders receive the benefit of any premium paid by the Related Person in
acquiring any of its holdings. The price to be received by stockholders in the
Business Combination also would have to be not less than the highest per share
price paid by the Related Person in acquiring any of its holdings.
Another condition necessary to avoid the increased vote requirements is
that the consideration to be received in the Business Combination by holders of
stock (whether common stock or preferred stock) must be in the same form and of
the same kind as the consideration paid by the Related Person in acquiring stock
already owned by it (except to the extent that each individual stockholder might
agree to accept consideration of a different form or kind in exchange for all or
part of the shares which he owns). Thus, for example, if the Related Person had
acquired his initial share interest for cash, the remaining stockholders would
have to be offered cash in the Business Combination and would not have to accept
stock or debt of another corporation or institution.
In order to avoid the supermajority voting requirements of Section 1 of
Article IX, the Related Person also would have to comply with certain other
conditions after he acquired his 10.0% interest in the Company. These conditions
include the following: (i) the Related Person must ensure that the Company's
Board of Directors included representation by "Continuing Directors" (generally,
those directors at the time of effectiveness of the Articles of Incorporation,
whether or not a Related Person or Associate or Affiliate (as defined) of a
Related Person, and those directors who are not affiliated with the Related
Person and who are elected as directors prior to the time the Related Person
became such or with the recommendation of a majority of other Continuing
Directors) in proportion to the holdings of the other stockholders; (ii) the
Related Person must have refrained from acquiring additional capital stock of
the Company with certain limited exceptions, and must have refrained from
acquiring additional Voting Shares, or securities convertible into or
exchangeable for Voting Shares, after he became a Related Person; (iii) the
Related Person must not have received certain specified benefits from the
Company, such as loans or guarantees, and, except with the approval of a
majority of the directors and a majority of the Continuing Directors, must not
have made any change in the Company's business or equity capital structure or
entered into any contract, arrangement or understanding with the Company;
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and (iv) except as approved by a majority of the directors and a majority of the
Continuing Directors (who must total at least 3), there must have been no
failure to pay full quarterly dividends on any outstanding Company Preferred
Stock, no reduction in annual dividends paid on the Company's Common Stock, and
there must have been increases in annual dividends as necessary to reflect any
reclassification, recapitalization, reorganization or similar transaction which
has the effect of reducing the number of outstanding shares of stock. Finally, a
proxy statement must have been sent to stockholders in connection with the
Business Combination. Such proxy statement must contain the recommendations, if
any, of the Continuing Directors, and of any investment banking firm selected by
a majority of the Continuing Directors, as to the fairness of the Business
Combination from the point of view of the stockholders.
If all of the foregoing conditions are met, the increased voting
requirements described above are dispensed with and the Business Combination
would require only such approval, if any, as would otherwise be required by
Indiana law.
Sections 1 and 2 of Article IX. are intended to provide minimum
safeguards for stockholders who do not accept a takeover attempt and continue to
hold their shares after the attempt succeeds and the control of the Company is
acquired by a Related Person. The requirement of an 80.0% stockholder vote
probably means that a Business Combination which fails to meet the minimum price
and other conditions might not be accomplished against the opposition of the
incumbent Board of Directors.
The provisions would not restrict another company which merely desired
to exercise control over the Company and did not intend to effect a subsequent
Business Combination. Moreover, these provisions may not apply to an attempted
combination with a person not a Related Person. On the other hand, if another
company obtaining control over the Company were not willing to meet the price
and other conditions of Section 2 of Article IX, the holders of just over
one-fifth of the outstanding Voting Shares could block a Business Combination
supported by the remaining stockholders. The result is that Business
Combinations favored by a majority of stockholders might not be approved.
Section 2 of Article IX might also discourage a tender offer for the Company's
stock because of the resulting need either to observe the minimum price
requirements or to obtain an 80.0% stockholder vote as a precondition to any
subsequent Business Combination. This might have the effect of preventing
temporary fluctuations in the market price of the stock of the Company which
could result from actual or rumored takeover attempts.
Neither the Association's Charter and Bylaws nor federal laws and
regulations contain a provision which restricts business combinations between
the Association and any Related Persons in the manner set forth above.
Control Share Acquisitions. The Indiana Business Corporation Law
contains a provision which, unless explicitly provided for otherwise in a
corporation's articles of incorporation or bylaws, restricts the voting rights
of shares acquired by a person in excess of 20% of the outstanding shares,
unless voting rights are granted by resolution approved by a majority of the
disinterested stockholders of the corporation. Furthermore, Article VIII of the
Company's Articles of Incorporation provides that any shares in excess of 10% of
the outstanding shares
141
owned directly or indirectly by any one person shall not be counted as shares
entitled to vote in connection with any matter submitted to shareholders for a
vote.
Neither the Association's Charter and Bylaws nor federal laws and
regulations contain a provision which restricts voting rights of certain
stockholders of the Association in the manner set forth above.
Dissenters' Rights of Appraisal. A federal regulation which is
applicable to the Association generally provides that a stockholder of a
federally chartered savings institution which engages in a merger, consolidation
or sale of all or substantially all of its assets shall have the right to demand
from such institution payment of the fair or appraised value of his or her stock
in the institution, subject to specified procedural requirements. This
regulation also provides, however, that the stockholders of a federally
chartered savings institution with stock which is listed on a national
securities exchange or quoted on the Nasdaq System are not entitled to
dissenters' rights in connection with a merger involving such savings
institution if the stockholder is required to accept only "qualified
consideration" for his or her stock, which is defined to include cash, shares of
stock of any institution or corporation which at the effective date of the
merger will be listed on a national securities exchange or quoted on the Nasdaq
System or any combination of such shares of stock and cash.
After the Conversion and Reorganization, the rights of appraisal of
dissenting stockholders of the Company will be governed by the Indiana Business
Corporation Law. Pursuant thereto, a stockholder of an Indiana corporation
generally has the right to dissent from any merger or consolidation involving
the corporation or sale of all or substantially all of the corporation's assets,
subject to specified procedural requirements. However, no such appraisal rights
are available for the shares of any class or series of a corporation's capital
stock if as of the record date fixed to determine the stockholders entitled to
receive notice of and to vote at the meeting of stockholders to act upon the
agreement of merger or consolidation, such shares were either listed on a United
States securities exchange registered under the Exchange Act or traded on the
Nasdaq National Market System or a similar market.
Amendment of Governing Instruments. No amendment of the Association's
Charter may be made unless it is first proposed by the Board of Directors of the
Association, then preliminarily approved by the OTS, and thereafter approved by
the holders of a majority of the total votes eligible to be cast at a legal
meeting. Article VII of the Company's Articles of Incorporation generally
provides that the Articles of Incorporation may be amended as set forth by
Indiana law (i.e., generally upon the recommendation of the board of directors
and the affirmative vote of a majority of all of the stockholder votes entitled
to be cast on the matter), except that any amendment to Articles V (Share
Terms), Article VI (Directors) Article VIII (Ownership and Voting Restrictions),
Article IX (2 Provisions for Certain Business Combinations) and Article X
(Indemnification) must be approved by the affirmative vote of the holders of at
least 80% of the then outstanding shares of the class or classes entitled to
vote thereon at that meeting, voting together as a single class.
142
The Bylaws of the Association may be amended by a majority vote of the
full Board of Directors of the Association or by a majority vote of the votes
cast by the stockholders of the Association at any legal meeting. The Bylaws of
the Company may only be amended by a majority vote of the Board of Directors of
the Company.
RESTRICTIONS ON ACQUISITION OF THE COMPANY
Restrictions in the Company's Articles of Incorporation and Bylaws and Indiana
Law
Certain provisions of the Company's Articles of Incorporation and Bylaws
which deal with matters of corporate governance and rights of stockholders might
be deemed to have a potential anti-takeover effect. These provisions, which are
described under "Comparison of Stockholders' Rights" above, provide, among other
things, (i) that the Board of Directors of the Company shall be divided into
three classes as nearly equal in number as possible and that the members of each
class shall be elected for a term of three years, with one class being elected
annually; (ii) that special meetings of stockholders may only be called by the
Board of Directors of the Company; (iii) that stockholders generally must
provide the Company notice of stockholder nominations for director and proposals
and related information at least 60 days prior to the anniversary date of the
mailing of proxy materials by the Company in connection with the immediately
preceding annual meeting of stockholders of the Company; (iv) that no person may
acquire more than 10% of the issued and outstanding shares of any class of an
equity security of the Company and the loss of voting rights on any shares
acquired in violation of this provision; (v) the authority to issue shares of
authorized but unissued Common Stock and Preferred Stock and to establish the
terms of any one or more series of Preferred Stock, including voting rights; and
(vi) restrictions on the Company's ability to engage in certain business
combinations with "related persons." In addition to the foregoing, and also as
described under "Comparison of Stockholders' Rights" above, the Indiana Business
Corporation Law generally restricts the voting rights of shares acquired by a
person in excess of 20% of the outstanding shares.
The foregoing provisions of the Articles of Incorporation and Bylaws of
the Company and Indiana law could have the effect of discouraging an acquisition
of the Company or stock purchases in furtherance of an acquisition, and could
accordingly, under certain circumstances, discourage transactions which might
otherwise have a favorable effect on the price of the Common Stock.
The Board of Directors believes that the provisions described above are
prudent and will reduce vulnerability to takeover attempts and certain other
transactions that are not negotiated with and approved by the Board of Directors
of the Company. The Board of Directors believes that these provisions are in the
best interests of the Company and its future stockholders. In the Board of
Directors' judgment, the Board of Directors is in the best position to determine
the true value of the Company and to negotiate more effectively for what may be
in the best interests of its stockholders. Accordingly, the Board of Directors
believes that it is in the best interests of the Company and its future
stockholders to encourage potential acquirors to negotiate directly with
143
the Board of Directors and that these provisions will encourage such
negotiations and discourage hostile takeover attempts. It is also the Board of
Directors' view that these provisions should not discourage persons from
proposing a merger or other transaction at prices reflective of the true value
of the Company and where the transaction is in the best interests of all
stockholders.
Regulatory Restrictions
The Change in Bank Control Act provides that no person, acting directly
or indirectly or through or in concert with one or more other persons, may
acquire control of a savings institution unless the OTS has been given 60 days'
prior written notice. The Home Owners Loan Act, as amended ("HOLA") provides
that no company may acquire "control" of a savings institution without the prior
approval of the OTS. Any company that acquires such control becomes a thrift
holding company subject to registration, examination and regulation by the OTS.
Pursuant to federal regulations, control of a savings institution is
conclusively deemed to have been acquired by, among other things, the
acquisition of more than 25% of any class of voting stock of the institution or
the ability to control the election of a majority of the directors of an
institution. Moreover, control is presumed to have been acquired, subject to
rebuttal, upon the acquisition of more than 10% of any class of voting stock, or
of more than 25% of any class of stock, of a savings institution where certain
enumerated "control factors" are also present in the acquisition. The OTS may
prohibit an acquisition if (i) it would result in a monopoly or substantially
lessen competition, (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the institution, or (iii) the competence,
experience or integrity of the acquiring person indicates that it would not be
in the interest of the depositors or of the public to permit the acquisition of
control by such person. The foregoing restrictions do not apply to the
acquisition of a savings institution's capital stock by one or more
tax-qualified employee stock benefit plans, provided that the plan or plans do
not have beneficial ownership in the aggregate of more than 25% of any class of
equity security of the savings institution.
For three years following the Conversion and Reorganization, OTS
regulations prohibit any person from acquiring, either directly or indirectly,
or making an offer to acquire more than 10% of the stock of any converted
savings institution, without the prior written approval of the OTS, except for
(i) any offer with a view toward public resale made exclusively to the
institution or to underwriters or a selling group acting on its behalf, (ii)
offers that if consummated would not result in the acquisition by such person
during the preceding 12-month period of more than 1% of such stock, (iii) offers
in the aggregate for up to 24.9% by the ESOP or other tax-qualified plans of the
Company or the Association, and (iv) an offer to acquire or acquisition of
beneficial ownership of more than 10% of the common stock of the savings
institution by a corporation whose ownership is or will be substantially the
same as the ownership of the savings institution, provided that the offer or
acquisition is made more than one year following the date of completion of the
Conversion and Reorganization. Such prohibition also is applicable to the
acquisition of the Common Stock. In the event that any person, directly or
indirectly, violates this regulation, the securities beneficially owned by such
person in excess of 10% shall not be counted as shares entitled to vote and
shall not be voted by any person or counted as voting shares in connection with
any matters submitted to a vote of stockholders. The definition of beneficial
ownership for this regulation extends to persons holding revocable or
irrevocable proxies for an institution's
144
stock under circumstances that give rise to a conclusive or rebuttable
determination of control under OTS regulations.
In addition to the foregoing, the Plan prohibits any person, prior to
the completion of the Conversion and Reorganization, from offering, or making an
announcement of an intent to make an offer, to purchase subscription rights or
Common Stock. See "The Conversion and Reorganization - Restrictions on Transfer
of Subscription Rights and Shares."
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
General
The Company is authorized to issue 8,000,000 shares of Common Stock and
2,000,000 shares of Preferred Stock. The Company currently expects to issue up
to a maximum of _______ shares of Common Stock, including _______ shares of
Conversion Stock and _______ shares of Exchange Shares, and no shares of
Preferred Stock in the Conversion and Reorganization. Each share of Common Stock
will have the same relative rights as, and will be identical in all respects
with, each other share of Common Stock. Upon payment of the Purchase Price for
the Conversion Stock and the issuance of the Exchange Shares in accordance with
the Plan of Conversion, all such stock will be duly authorized, fully paid and
nonassessable.
The Common Stock will represent nonwithdrawable capital, will not be an
account of an insurable type and will not be insured by the FDIC or any other
governmental authority.
Common Stock
Dividends. The Company can pay dividends if, as and when declared by.
its Board of Directors, subject to compliance with limitations which are imposed
by law. See "Dividend Policy." The holders of Common Stock will be entitled to
receive and share equally in such dividends as may be declared by the Board of
Directors of the Company out of funds legally available therefor. If the Company
issues Preferred Stock, the holders thereof may have a priority over the holders
of the Common Stock with respect to dividends.
Voting Rights. Upon completion of the Conversion and Reorganization, the
holders of Common Stock of the Company will possess exclusive voting rights in
the Company. They will elect the Company's Board of Directors and act on such
other matters as are required to be presented to them under Indiana law or the
Company's Articles of Incorporation or as are otherwise presented to them by the
Board of Directors. Except as discussed in "Comparison of Stockholders' Rights -
Limitations on Acquisitions of Voting Stock and Voting Rights," each holder of
Common Stock will be entitled to one vote per share and will not have any right
to cumulate votes in the election of directors. If the Company issues Preferred
Stock, holders of the Preferred Stock may have the right to vote with the
holders of Common Stock as a single class or have voting rights as a separate
class.
145
Liquidation. In the event of any liquidation, dissolution or winding up
of the Company, the holders of the then-outstanding Common Stock would be
entitled to receive, after payment or provision for payment of all its debts and
liabilities, all of the assets of the Company available for distribution. If
Preferred Stock is issued, the holders thereof may have a priority over the
holders of the Common Stock in the event of liquidation or dissolution.
Preemptive Rights. Holders of the Common Stock will not be entitled to
preemptive rights with respect to any shares which may be issued in the future.
The Common Stock is not subject to redemption.
Preferred Stock
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion and Reorganization. Such stock may be issued with such
preferences and designations as the Board of Directors may from time to time
determine. The Board of Directors can, without stockholder approval, issue
Preferred Stock with voting, dividend, liquidation and conversion rights which
could dilute the voting strength of the holders of the Common Stock and may
assist management in impeding an unfriendly takeover or attempted change in
control.
EXPERTS
The consolidated financial statements of the Association as of June 30,
1996 and 1995, and for each of the years in the three-year period ended June 30,
1996, have been included herein in reliance upon the report of Geo. S. Olive &
Co. LLC, Indianapolis, Indiana, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
Keller has consented to the publication herein of the summary of its
report to the Company and the Association setting forth its opinion as to the
estimated pro forma market value of the Common Stock to be outstanding upon
completion of the Conversion and Reorganization and its opinion with respect to
subscription rights.
LEGAL AND TAX MATTERS
The legality of the Common Stock and the federal income tax consequences
of the Conversion and Reorganization will be passed upon for the Company and the
Association by Silver, Freedman & Taff, L.L.P. (a limited liability partnership
including professional corporations), Washington, D.C., special counsel to the
Company and the Association. The Indiana income tax consequences of the
Conversion and Reorganization will be passed upon for the Company and the
Association by Geo. S. Olive & Co. LLC has consented to references herein to its
opinion. Certain legal matters will be passed upon for Webb by Breyer & Aguggia,
Washington, D.C.
146
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement under the
Securities Act of 1933, as amended, with respect to the Conversion Stock and the
Exchange Shares offered hereby. As permitted by the rules and regulations of the
SEC, this Prospectus does not contain all the information set forth in the
Registration Statement. Such information can be examined without charge at the
public reference facilities of the SEC located at 450 Fifth Street, N.W.,
Washington, D.C 20549, and copies of such material can be obtained from the SEC
at prescribed rates. The SEC maintains a World Wide Web site on the Internet
that contains reports, proxy and information statements and other information
regarding registrants such as the Company that file electronically with the SEC.
The address of such site is: http://www.sec.gov. The statements contained in
this Prospectus as to the contents of any contract or other document filed as an
exhibit to the Registration Statement describe all material provisions of such
contracts or other documents. Nevertheless, such statements are, of necessity,
brief descriptions thereof and are not necessarily complete; each such statement
is qualified by reference to such contract or document.
The Mutual Holding Company has filed an Application for Conversion with
the OTS with respect to the Conversion and Reorganization. This Prospectus omits
certain information contained in that application. The application may be
examined at the principal office of the OTS, 1700 G Street, N.W., Washington,
D.C. 20552, and at the Central Regional Office of the OTS located at 200 West
Madison Street, Suite 1300, Chicago, Illinois 60606.
In connection with the Conversion and Reorganization, the Company will
register its Common Stock with the SEC under Section 12(g) of the Exchange Act,
and, upon such registration, the Company and the holders of its stock will
become subject to the proxy solicitation rules, reporting requirements and
restrictions on stock purchases and sales by directors, officers and greater
than 10% stockholders, the annual and periodic reporting requirements and
certain other requirements of the Exchange Act. Under the Plan, the Company has
undertaken that it will not terminate such registration for a period of at least
three years following the Conversion and Reorganization.
147
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditor's Report............................................. F-2
Consolidated Statements of Financial Condition - December 31, 1996
(unaudited) and June 30, 1996 and 1995................................. F-3
Consolidated Statements of Income for the six months ended
December 31, 1996 and 1995 (unaudited) and the years ended
June 30, 1996, 1995 and 1994............................................ 47
Consolidated Statements of Stockholders' Equity for the six months
ended December 31, 1996 (unaudited) and the years ended June 30,
1996, 1995 and 1994.................................................... F-4
Consolidated Statements of Cash Flows for the six months ended
December 31, 1996 and 1995 (unaudited) and the years ended
June 30, 1996, 1995 and 1994............................................ F-5
Notes to Consolidated Financial Statements............................... F-7
All financial statement schedules are omitted because the required
information either is not applicable or is shown in the financial statements or
in the notes thereto.
Montgomery Mutual Holding Company has limited assets other than its
shares of Association Common Stock (which will be cancelled in connection with
the Conversion and Reorganization) and has engaged in only minimal activities to
date; accordingly, the financial statements of the Mutual Holding Company have
been omitted because of their immateriality.
Montgomery Financial Corporation was incorporated April 1997 with an
initial capitalization of $1,000 and has engaged in only organizational
activities to date; accordingly, the financial statements of the Company have
been omitted because of their immateriality.
F-1
Independent Auditor's Report
Board of Directors
Montgomery Savings, A Federal Association
Crawfordsville, Indiana
We have audited the consolidated statement of financial condition of Montgomery
Savings, A Federal Association and subsidiary as of June 30, 1996 and 1995 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, 1996.
These consolidated financial statements are the responsibility of the
Association'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 Savings, A Federal Association and subsidiary as of June 30, 1996 and
1995 and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 1996, in conformity with generally
accepted accounting principles.
As discussed in the notes to the consolidated financial statements, the
Association changed its method of accounting for investment securities on July
1, 1994.
GEO. S. OLIVE & CO. LLC
Indianapolis, Indiana
August 14, 1996
F-2
Montgomery Savings, A Federal Association And Subsidiary
Crawfordsville, Indiana
Consolidated Statement of Financial Condition
June 30
December 31, -------------------------------
1996 1996 1995
---- ---- ----
(Unaudited)
Assets
Cash ................................................................... $ 252,320 $ 129,519 $ 263,796
Short-term interest-bearing deposits ................................... 5,665,534 3,506,685 3,771,018
--------- --------- ---------
Total cash and cash equivalents .................................. 5,917,854 3,636,204 4,034,814
Interest-bearing deposits .............................................. 100,000 100,000 100,000
Investment securities available for sale ............................... 52,239 311,656 802,631
Loans .................................................................. 83,928,087 80,232,496 78,067,573
Allowance for loan loses ............................................... (158,000) (158,000) (138,250)
-------- -------- --------
Net loans ........................................................ 83,770,087 80,074,496 77,929,323
Real estate owned and held for development, net ........................ 1,251,940 908,913 858,349
Premises and equipment ................................................. 1,638,070 1,595,966 1,704,163
Federal Home Loan Bank stock ........................................... 750,000 750,000 750,000
Interest receivable
Loans ................................................................ 637,045 586,174 550,993
Investment and interest-bearing deposits ............................. 6,804 8,984 16,246
Other assets ........................................................... 498,491 238,351 577,637
------- ------- -------
Total assets ..................................................... $ 94,622,530 $ 88,210,744 $ 87,324,156
============ ============ ============
Liabilities
Deposits
Noninterest-bearing .................................................. $ 465,336 $ 613,242 $ 483,225
Interest-bearing ..................................................... 71,877,173 69,095,279 67,802,382
---------- ---------- ----------
Total deposits ................................................... 72,342,509 69,708,521 68,285,607
Borrowings ............................................................. 11,928,373 8,000,000 10,868,250
Interest payable ....................................................... 542,432 428,178 418,858
Deferred tax liability ................................................. 376,360 364,395 389,933
Other liabilities ...................................................... 350,525 582,322 683,125
------- ------- -------
Total liabilities ................................................ 85,540,199 79,083,416 80,645,773
---------- ---------- ----------
Commitments and Contingent Liabilities
Stockholders' Equity
Common stock, $.01 par value
Authorized--2,000,000 shares
Issued and outstanding--850,000 shares ............................... 8,500 8,500
Paid-in capital ........................................................ 2,194,128 2,194,128
Retained earnings--substantially restricted ............................ 6,891,266 6,924,757 6,675,130
Unearned compensation .................................................. (11,563)
Net unrealized gain (loss) on securities available for sale ............ (57) 3,253
--- -----
Total stockholders' equity ....................................... 9,082,331 9,127,328 6,678,383
--------- --------- ---------
Total liabilities and stockholders' equity ....................... $ 94,622,530 $ 88,210,744 $ 87,324,156
============ ============ ============
See notes to consolidated financial statements.
F-3
Montgomery Savings, A Federal Association and Subsidiary
Crawfordsville, Indiana
Consolidated Statement of Changes in Stockholders' Equity
Net
Unrealized
Gain (Loss)
Common Stock On
-------------------- Securities
Shares Paid-in Retained Unearned Available
Outstanding Amount Capital Earnings Compensation For Sale Total
----------- ------ ------- -------- ------------ ----------- -----
Balances, July 1, 1993 .................. $ 5,685,836 $5,685,836
Net income for 1994 ..................... 604,037 604,037
------- -------- ---------- --------- -------- --------- ----------
Balances, June 30, 1994 ................. 6,289,873 6,289,873
Net income for 1995 ..................... 385,257 385,257
Cumulative effect of change in
method of accounting for securities .... $ 17,092 17,092
Net change in unrealized gain (loss)
on securities available for sale ....... (13,839) (13,839)
------- -------- ---------- ---------- -------- ------ ----------
Balances, June 30, 1995 ................. 6,675,130 3,253 6,678,383
Net income for 1996 ..................... 430,627 430,627
Common stock issued in reorganization,
net of assets retained by Montgomery
Mutual Holding Company ................. 600,000 $ 6,000 (106,000) (100,000)
Common stock sold, net of costs ......... 250,000 2,500 $2,194,128 2,196,628
Cash dividends ($.30 per share) ......... (75,000) (75,000)
Net change in unrealized gain (loss)
on securities available for sale ....... (3,310) (3,310)
------- -------- ---------- ----------- -------- ------ -------
Balances, June 30, 1996 ................. 850,000 8,500 2,194,128 6,924,757 (57) 9,127,328
Net income for the six months ended
December 31, 1996 (unaudited) .......... 16,509 16,509
Cash dividends ($.20 per share)
(unaudited) ............................ (50,000) (50,000)
Purchase of stock for Management
Recognition Trust (unearned
compensation) (unaudited) .............. (11,563) (11,563)
Net change in unrealized gain
(loss) on securities available for
sale (unaudited) ....................... 57 57
------- -------- --------- ----------- -------- -- ----------
Balances, December 31, 1996
(unaudited) ............................ 850,000 $ 8,500 $2,194,12 $ 6,891,266 $(11,563) $ 0 $9,082,33
======= ======== ========= =========== ======== === =========
See notes to consolidated financial statements.
F-4
Montgomery Savings, A Federal Association And Subsidiary
Crawfordsville, Indiana
Consolidated Statement of Cash Flows
Six Months Ended
December 31 Year Ended June 30
-------------------------- ----------------------------------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
Operating Activities
Net income ..................................... $ 16,509 $ 147,514 $ 430,627 $ 385,257 $ 604,037
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Provision (adjustment) for loan losses ....... (26,250) 19,750 (15,000) 25,213
Provision for loss on real estate owned ...... 15,000
Depreciation ................................. 105,607 89,331 195,837 160,073 150,605
Amortization of intangibles .................. 14,405
Investment securities gains .................. (9,033)
Gain on sale of subsidiary ................... (15,525)
(Gain) loss on sale of real estate owned ..... (17,915) 25,572 (1,148) (5,375)
Deferred income tax .......................... 11,965 (57,511) (23,421) 30,532 52,665
Change in
Interest receivable ........................ (48,691) (10,117) (27,919) (127,839) (47,245)
Interest payable ........................... 114,253 164,210 9,320 171,263 (1,384)
Other assets ............................... (260,140) 101,984 121,095 (180,945) (86,811)
Other liabilities .......................... (233,146) 90,320 199,197 628,522 (156,783)
Other adjustments ............................ 1,370 (1,930) 15,523 (5,355) (49,077)
----- ------ ------ ------ -------
Net cash provided (used) by
operating activities .................. (310,188) 497,551 965,581 1,035,802 500,250
-------- ------- ------- --------- -------
Investing Activities
Net change in interest-bearing deposits ........ 100,000
Proceeds from sale of subsidiary ............... 1,400
Purchases of securities held to maturity ....... (475,000)
Proceeds from maturities and paydowns of
securities available for sale ................ 259,454 475,000 484,098 343,058
Proceeds from maturities and paydowns of
securities held to maturity .................. 464,588
Proceeds from sales of securities
available for sale ........................... 640,464
Net change in loans ............................ (4,003,485) (664,550) (2,248,278) (5,808,863) (8,676,846)
Additions to real estate owned ................. (173,586) (97,158) (93,633) (56,496) (85,206)
Proceeds from real estate owned sales .......... 107,315 25,865 59,549 248,363 202,612
Purchase of premises and equipment ............. (98,658) (28,997) (60,410) (428,139) (154,608)
Purchase of FHLB of Indianapolis stock ......... (139,800) (51,900)
Other investing activities ..................... 5,306
---------- -------- ---------- ---------- ----------
Net cash used by investing
activities ............................ (3,908,960) (289,840) (1,858,674) (5,100,013) (8,771,054)
---------- -------- ---------- ---------- ----------
F-5
Montgomery Savings, A Federal Association And Subsidiary
Crawfordsville, Indiana
Consolidated Statement of Cash Flows
Six Months Ended
December 31 Year Ended June 30
---------------------------- ---------------------------------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
(Continued)
Financing Activities
Net change in
Noninterest-bearing, interest-bearing
demand and savings deposits ............. $ 390,689 $ 23,856 $ 359,419 $(2,191,209) $ 1,193,826
Certificates of deposit ................... 2,243,299 (517,095) 1,063,495 8,130,834 (3,529,043)
Short-term borrowings ..................... (168,250) (368,250) (969,851) 1,108,102
Proceeds from FHLB advances ................. 4,000,000 5,500,000 8,000,000 4,000,000 6,500,000
Repayment of FHLB advances .................. (71,627) (7,000,000) (10,500,000) (2,500,000)
Proceeds from sale of stock, net of
costs ..................................... 2,089,951 2,089,819
Stock issued in reorganization, net
of assets retained by Montgomery
Mutual Holding Company .................... (100,000) (100,000)
Purchase of stock for Management
Recognition and Retention Plan ............ (11,563)
Dividends paid .............................. (50,000) (50,000)
--------- --------- ---------- --------- ----------
Net cash provided (used) by
financing activities .............. 6,500,798 (171,538) 494,483 6,469,774 5,272,885
--------- -------- ------- --------- ---------
Net Change in Cash and Cash
Equivalents ................................ 2,281,650 36,173 (398,610) 2,405,563 (2,997,919)
Cash and Cash Equivalents,
Beginning of Period ........................ 3,636,204 4,034,814 4,034,814 1,629,251 4,627,170
--------- --------- --------- --------- ---------
Cash and Cash Equivalents, End of
Period ..................................... $ 5,917,854 $ 4,070,987 $ 3,636,204 $ 4,034,814 $ 1,629,251
=========== =========== ============ =========== ===========
Additional Cash Flow and
Supplementary Information
Interest paid .............................. $ 2,087,000 $ 2,117,000 $ 4,425,000 $ 3,736,000 $ 3,107,000
Income tax paid ............................ 63,000 65,000 143,000 211,000 422,000
Loan balances transferred to real
estate owned ............................. 308,000 69,000 124,000 43,000
Conversion costs transferred from
other assets to stockholders'
equity ................................... 218,000 218,000
Dividends payable .......................... 25,000 25,000
Transfer stock purchases deposits
from liabilities to proceeds from
sale of stock ............................ 325,000 325,000
See notes to consolidated financial statements.
F-6
MONTGOMERY SAVINGS, A FEDERAL ASSOCIATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of Montgomery Savings, A Federal
Association ("Association"), and its wholly owned subsidiary, MSA Service
Corporation ("MSA"), conform to generally accepted accounting principles and
reporting practices followed by the thrift industry. The Association is a 70.6
percent owned subsidiary of Montgomery Mutual Holding Company. 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 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.
The Association generates mortgage and consumer loans and receives deposits from
customers located primarily in central Indiana. The Association's loans are
generally secured by specific items of collateral including real property and
consumer assets.
MSA is a real estate management and development company. For years ending prior
to June 30, 1996, MSA owned Clements-Roscher Corporation ("CRC"). CRC was a
casualty insurance agency that sold a broad range of casualty insurance,
including building, homeowners, and auto insurance. MSA sold its wholly owned
subsidiary, CRC, in a stock sale effective July 1, 1994. The purchase price
totaled $75,000, consisting of cash and a note, and MSA recorded a gain of
$15,525 on the sale. CRC's net income for the years ended June 30, 1994 and 1993
included in the Association's consolidated net income totaled $14,000 and
$29,500.
Consolidation--The consolidated financial statements include the accounts of the
Association and subsidiaries after elimination of all material intercompany
transactions and accounts.
Investment Securities--The Association adopted Statement of Financial Accounting
Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and
Equity Securities, on July 1, 1994.
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.
F-7
MONTGOMERY SAVINGS, A FEDERAL ASSOCIATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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.
At July 1, 1994, investment securities and mortgage-backed securities with
approximate carrying values of $1,074,000 and $707,000 were reclassified as
available for sale. This reclassification resulted in an increase in
stockholders' equity, net of taxes, of approximately $17,000.
Prior to the adoption of SFAS No. 115, investment securities were carried at
cost, adjusted for amortization of premiums and discounts, and securities held
for sale and marketable equity securities were carried at the lower of aggregate
cost or market. Realized gains and losses on sales were included in other
income. Unrealized gains and losses on securities held for sale were included in
other income. Unrealized losses on marketable equity securities were charged to
equity capital. Gains and losses on the sale of securities were determined on
the specific-identification method.
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 to be 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 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.
Allowance 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.
F-8
MONTGOMERY SAVINGS, A FEDERAL ASSOCIATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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 December 31, 1996 (unaudited) and June 30, 1996,
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.
Federal Home Loan Bank stock is a required investment for institutions that are
members of the Federal Home Loan Bank ("FHLB") system. The required investment
in the common stock is based on a predetermined formula.
Income tax in the consolidated statement of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. The
Association files consolidated income tax returns with its subsidiary.
Earnings per share for the six-month period ended December 31, 1996 (unaudited)
is computed based upon the weighted average common shares outstanding during the
period. Net income per share for the periods before the conversion to a stock
savings association on August 11, 1995 is not meaningful.
Conversions
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" and whereby substantially all of the assets and liabilities of
Montgomery were transferred to a newly-chartered federal savings and loan
association known as Montgomery Savings, A Federal Association ("Association"),
in exchange for 600,000 shares of the Association's common stock, par value of
$.01 per share. The amount of $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 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 owns 70.6
percent of Montgomery and minority stockholders own 29.4 percent.
F-9
MONTGOMERY SAVINGS, A FEDERAL ASSOCIATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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.
In connection with the conversion and reorganization, the Association will form
a new first-tier, wholly owned subsidiary, (the "Holding Company"), which will
become the Holding Company upon consummation of the conversion and
reorganization. The Holding Company will in turn form Interim as a wholly owned
subsidiary. Montgomery Mutual Holding Company will convert from the mutual form
to a federal interim stock savings association and simultaneously merge with and
into the Association pursuant to the Plan of Merger. As a result, Montgomery
Mutual Holding Company will cease to exist and a liquidation account will be
established by the Association for the benefit of depositor members as of
specified dates. Interim will then merge with and into the Association pursuant
to the Plan of Merger and the Association will become a wholly owned subsidiary
of the Holding Company. In connection therewith, each share of Association
common stock outstanding immediately prior to the effective time thereof shall
be automatically converted, without further action by the holder thereof, into
and become the right to receive shares of the Holding Company common stock based
on the exchange ratio, plus cash in lieu of any fractional share interest.
In connection with the conversion and reorganization, the Holding Company will
offer shares of conversion stock in a subscription offering in descending order
of priority to eligible account holders, tax-qualified employee stock benefit
plans, supplemental account holders, other members, directors, officers and
employees and public stockholders. Any shares of conversion stock remaining
unsold after the subscription offering will be offered for sale to the public
through a community offering and/or syndicated community offering, as determined
by the Boards of Directors of the Holding Company and the Association in their
sole discretion.
The reorganization is subject to the approval of stockholders and the OTS. The
expected completion date of the reorganization is not currently known.
No reorganization costs had been incurred at December 31, 1996 (unaudited). Such
costs will be charged to stockholders' equity on the completion of the
reorganization or, if the reorganization is not completed, these costs will be
charged to earnings by the Association.
F-10
MONTGOMERY SAVINGS, A FEDERAL ASSOCIATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Investment Securities
1996
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
- ----------- ---- ----- ------ -----
(Unaudited)
Available for sale
Municipal ..................... $52 $52
--- --- --- ---
Total available for sale ... $52 $ 0 $ 0 $52
=== === === ===
1996
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30 Cost Gains Losses Value
- ------- ---- ----- ------ -----
Available for sale
Federal agencies ............. $250 $250
Municipal .................... 62 62
---- --- --- ----
Total available for sale .. $312 $ 0 $ 0 $312
==== === === ====
1995
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30 Cost Gains Losses Value
- ------- ---- ----- ------ -----
Available for sale
U. S. Treasury ............... $250 $250
Federal agencies ............. 250 $ 7 257
Municipal .................... 71 71
Corporate obligations ......... 226 $ 1 225
---- --- --- ----
Total available for sale .. $797 $ 7 $ 1 $803
==== === === ====
F-11
MONTGOMERY SAVINGS, A FEDERAL ASSOCIATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The amortized cost and fair value of securities available for sale at December
31, 1996 and June 30, 1996, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
December 31, 1996 June 30, 1996
----------------- -----------------
Amortized Fair Amortized Fair
Maturity distribution at June 30 Cost Value Cost Value
- -------------------------------- ---- ----- ---- -----
(Unaudited)
Due in one year or less ................ $250 $250
Due in one through five years .......... $ 52 $ 52 62 62
---- ---- ---- ----
Totals ............................. $ 52 $ 52 $312 $312
==== ==== ==== ====
Proceeds from sales of mortgage-backed securities available for sale during 1995
were $640,464. Gross gains of $10,029 and gross losses of $996 were realized on
those sales. There were no sales of securities during the six months ended
December 31, 1996 (unaudited) and the years ended June 30, 1996 and 1994.
Loans and Allowance
June 30,
December 31, --------------------
1996 1996 1995
---- ---- ----
(Unaudited)
Loans
Real estate mortgage loans
One-to-four family ................... $ 72,203 $ 68,092 $ 64,703
Multi-family and nonresidential ...... 7,803 8,391 9,129
Residential construction loans ......... 1,448 1,261 1,345
Home equity loans ...................... 2,536 2,444 2,653
Consumer loans ......................... 304 251 97
Share loans ............................ 334 323 479
--- --- ---
84,628 80,762 78,406
------ ------ ------
Undisbursed portion of loans ........... (861) (683) (455)
Deferred loan costs .................... 161 153 117
--- --- ---
$ 83,928 $ 80,232 $ 78,068
======== ======== ========
F-12
MONTGOMERY SAVINGS, A FEDERAL ASSOCIATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Six Months Ended
December 31 Year Ended June 30
-------------- -------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
Allowance for loan losses
Balances, Beginning of Period ........ $ 158 $138 $ 138 $158 $133
Provision (adjustment) for loan losses (26) 20 (15) 25
Loans charged off .................... (5)
----- ----- ----- ----- ----
Balances, End of Period .............. $ 158 $112 $ 158 $138 $158
===== ==== ===== ==== ====
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 December 31, 1996, (unaudited)
the Association had no impaired loans. At June 30, 1996, the Association had an
impaired loan of $308,000 for which an allowance for losses was not deemed
necessary. The average balance of impaired loans for the six months ended
December 31, 1996 (unaudited) and the year ended June 30, 1996 was $51,000 and
$272,000. The Association had no interest income or cash receipts on impaired
loans during the six months ended December 31, 1996 (unaudited). Interest income
and cash receipts of interest totaled $33,000 and $6,000 during the year ended
June 30, 1996 that the loans were impaired.
In addition, at December 31, 1996 (unaudited) and June 30, 1996, the Association
had nonaccrual loans of approximately $260,000 and $325,000, for which
impairment had not been recognized. If interest on these loans had been
recognized at the original interest rates, interest income would have increased
approximately $20,000 and $18,000 for six months ended December 31, 1996
(unaudited) and for the year ended June 30, 1996.
The Association has no commitments to loan additional funds to the borrowers of
impaired or nonaccrual loans.
Nonaccruing loans totaled $522,000 and $527,000 at June 30, 1995 and 1994.
Additional interest income of approximately $26,000 for 1995 and $16,000 for
1994 would have been recorded had income on those loans been considered
collectible and accounted for on the accrual basis under the original terms of
the loans.
F-13
MONTGOMERY SAVINGS, A FEDERAL ASSOCIATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Real Estate Owned
June 30
December 31, ---------------
1996 1996 1995
---- ---- ----
(Unaudited)
Real estate acquired in settlement of loans ..... $ 65 $ 148 $ 124
Real estate held for development ................ 1,348 906 867
Allowance for losses ............................ (15)
------- ------- ------
1,413 1,054 976
Accumulated depreciation ........................ (161) (145) (118)
---- ---- ----
Net ........................................ $ 1,252 $ 909 $ 858
======= ======= =====
Six Months Ended
December 31 Year Ended June 30
---------------- ------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
Allowance for losses on real estate
owned
Balance, Beginning of Period ............. $ 0 $ 15 $15 $ 0 $0
Provision for losses ..................... (15) (15) 15
---- ----- ---- --- ---
Balance, End of Period .............. $ 0 $ 0 $ 0 $15 $0
==== ==== === === ==
Premises and Equipment
June 30
December 31, ----------------------
1996 1996 1995
---- ---- ----
(Unaudited)
Land ................................. $ 134 $ 91 $ 91
Building and parking lot ............. 1,442 1,441 1,437
Equipment ............................ 1,075 1,020 964
----- ----- ---
Total cost ...................... 2,651 2,552 2,492
Accumulated depreciation ............. (1,013) (956) (788)
------ ---- ----
Net ............................. $ 1,638 $ 1,596 $ 1,704
======= ======= =======
F-14
MONTGOMERY SAVINGS, A FEDERAL ASSOCIATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Deposits
June 30
December 31, -------------------
1996 1996 1995
---- ---- ----
(Unaudited)
Noninterest-bearing ........................ $ 465 $ 613 $ 483
Interest-bearing demand .................... 10,810 9,613 9,296
Savings deposits ........................... 4,289 4,948 5,035
Certificates and other time
deposits of $100,000 or more .............. 15,595 12,948 12,519
Other certificates and time deposits ....... 41,184 41,587 40,953
------ ------ ------
Total deposits ......................... $72,343 $69,709 $68,286
======= ======= =======
Certificates maturing in years ending December 31 June 30
- ------------------------------------- ----------- -------
(Unaudited)
1997 .................................. $31,181 $33,841
1998 .................................. 18,254 9,631
1999 .................................. 4,077 7,806
2000 .................................. 2,048 1,811
2001 .................................. 1,183 1,419
Thereafter ............................ 36 27
------- -------
$56,779 $54,535
======= =======
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $15,595,000 (unaudited), $12,948,000, and $12,519,000
at December 31, 1996, June 30, 1996 and 1995. Deposits in excess of $100,000 are
not federally insured.
Six Months Ended
December 31 Year Ended June 30
--------------- ------------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
Interest expense on deposits
Interest-bearing demand ......... $ 182 $ 166 $ 345 $ 394 $ 364
Savings deposits ................ 82 118 219 178 188
Certificates .................... 1,634 1,672 3,303 2,617 2,320
----- ----- ----- ----- -----
$1,898 $1,956 $3,867 $3,189 $2,872
====== ====== ====== ====== ======
F-15
MONTGOMERY SAVINGS, A FEDERAL ASSOCIATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Borrowings
June 30
December 31, ----------------------
1996 1996 1995
---- ---- ----
(Unaudited)
Line of credit ..................... $ 168
Notes payable ...................... 200
FHLB advances ...................... $11,928 $8,000 10,500
------- ------ ------
Total borrowings ............... $11,928 $8,000 $10,868
======= ====== =======
December 31, 1996 June 30, 1996
----------------- -----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
(Unaudited)
Advances from FHLB
Maturities in years ending
1997 $ 5,500 5.97% $3,500 5.64%
1998 2,000 5.99 2,000 5.50
1999 2,000 6.15
2000 2,428 6.14 2,500 6.14
------- ------
$11,928 6.04% $8,000 5.76%
======= ======
The Association has an available line of credit with the FHLB totaling
$2,000,000. The line of credit expires September 30, 1997 as of December 31,
1996 (unaudited) and September 30, 1996 as of June 30, 1996 and bears interest
at a rate equal to the current variable advance rate. There were no drawings on
this line of credit at December 31, 1996 (unaudited) and June 30, 1996.
Notes payable bearing on interest rate of 7%, collateralized by real estate,
matured on January 3, 1996.
The FHLB advances are secured by first mortgage loans totaling $68,200,000
(unaudited) and $64,600,000 at December 31, 1996 and June 30, 1996. Advances are
subject to restrictions or penalties in the event of prepayment.
F-16
MONTGOMERY SAVINGS, A FEDERAL ASSOCIATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Income Tax
Six Months Ended
December 31 Year Ended June 30
---------------- ------------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
Income tax expense
Currently payable
Federal .......................... $ 3 $ 120 $ 163 $ 155 $ 190
State ............................ 4 18 26 44 106
Deferred
Federal .......................... 9 (62) (33) 27 74
State ............................ 3 4 9 4 (21)
--- ----- ----- ----- -----
Total income tax expense ....... $19 $ 80 $ 165 $ 230 $ 349
=== ===== ===== ===== =====
Reconciliation of federal
statutory to actual tax expense
Federal statutory income tax at 34% $12 $ 77 $ 202 $ 209 $ 324
Effect of state income taxes ...... 5 15 23 32 56
Other ............................. 2 (12) (60) (11) (31)
--- ----- ----- ----- -----
Actual tax expense ............. $19 $ 80 $ 165 $ 230 $ 349
=== ===== ===== ===== =====
Effective tax rate ................. 53.7% 35.1% 27.7% 37.4% 36.6%
The tax expense related to securities gains was $3,600 for the year ended June
30, 1995.
F-17
MONTGOMERY SAVINGS, A FEDERAL ASSOCIATION 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:
December 31, June 30
------------ ----------------
1996 1996 1995
---- ---- ----
(Unaudited)
Differences in depreciation methods ........... $(246) $(244) $(235)
Differences in accounting for loan losses ..... (28) (28) (104)
Differences in accounting for loan costs ...... (124) (110) (63)
Differences in accounting for retirement
plans and other employee benefits ............ 34 32 22
FHLB of Indianapolis stock dividend ........... (30) (30) (30)
Deferred state income taxes ................... 20 20 16
Unrealized gain or loss on securities
available for sale ........................... (2)
Other ......................................... (2) (4) 6
----- ----- -----
$(376) $(364) $(390)
===== ===== =====
Assets ....................................... $ 54 $ 52 $ 44
Liabilities ................................... (430) (416) (434)
---- ---- ----
$(376) $(364) $(390)
===== ===== =====
Retained earnings at December 31, 1996 (unaudited) and June 30, 1996 and 1995,
include approximately $1,500,000 for which no deferred federal income tax
liability has been recognized. This amounts represents an allocation of income
to bad debt deductions as of December 31, 1987 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 December 31,
1996 (unaudited) and June 30, 1996 and 1995.
Regulatory Capital
The Association is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate actions by the regulatory agencies that, if
undertaken, could have a material effect on the Association's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Association must meet specific capital guidelines
that involve quantitative measures of the Association's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Association's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors.
F-18
MONTGOMERY SAVINGS, A FEDERAL ASSOCIATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
At December 31, 1996 (unaudited) and June 30, 1996, 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:
1996
------------------------------------------------
Required
for Adequate To Be Well
Actual Capital(1) Capitalized(1)
--------------- -------------- --------------
December 31 Amount Ratio Amount Ratio Amount Ratio
- ----------- ------ ----- ------ ----- ------ -----
(Unaudited)
Total risk-based capital(1)
(to risk weighted assets) ... $7,630 13.5% $4,530 8.0% $5,663 10.0%
Core capital(1) (to adjusted
tangible assets) ............ 8,659 9.2% 2,825 3.0% 5,649 6.0%
Core capital(1)
(to adjusted total assets) .. 8,659 9.2% 2,825 3.0% 4,708 5.0%
1996
-----------------------------------------------
Required
for Adequate To Be Well
Actual Capital(1) Capitalized(1)
-------------- ------------- --------------
June 30 Amount Ratio Amount Ratio Amount Ratio
- ------- ------ ----- ------ ----- ------ -----
Total risk-based capital(1)
(to risk weighted assets) ... $8,129 15.1% $4,314 8.0% $5,393 10.0%
Core capital(1) (to adjusted
tangible assets) ............ 8,731 9.9% 2,633 3.0% 5,266 6.0%
Core capital(1)
(to total assets) ........... 8,731 9.9% 2,633 3.0% 4,388 5.0%
- ----------
(1) As defined by the regulatory agencies
The Association's tangible capital at December 31, 1996 (unaudited) and June 30,
1996 was $8,659,000 and $8,731,000 which amount was 9.2 percent and 9.9 percent
of tangible assets and exceeded the required ratio of 1.5 percent.
F-19
MONTGOMERY SAVINGS, A FEDERAL ASSOCIATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Reconciliation of stockholders' equity to regulatory capital was as follows:
December 31, 1996 June 30, 1996
-------------------------------- ------------------------------
Core Tangible Risk-Based Core Tangible Risk-Based
Capital Capital Capital Capital Capital Capital
------- ------- ------- ------- ------- -------
(Unaudited)
Stockholders' equity ................ $ 9,082 $ 9,082 $ 9,082 $ 9,127 $ 9,127 $ 9,127
Less
Investments in and advances to
nonincludable subsidiaries ........ (423) (423) (423) (396) (396) (396)
Goodwill and other intangible assets
Real estate held for investment .... (1,187) (760)
Add
General loan and lease valuation
allowance ......................... 158 158
------- ------- ------- ------- ------- --------
Regulatory capital .................. $ 8,659 $ 8,659 $ 7,630 $ 8,731 $ 8,731 $ 8,129
======= ======= ======= ======= ======= ========
Restriction on Dividends
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. 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.
The Association and the Holding Company applied to and received from the Office
of Thrift Supervision a waiver of payment of dividends from the Association to
the Holding Company. The total dividends waived by the Holding Company for the
six months ended December 31, 1996 (unaudited) and for the year ended June 30,
1996 were $300,000 and $180,000 and such amounts will not be available for
payment of future dividends.
At the time of conversion, a liquidation account was established in an amount
equal to the Association's net worth as reflected in the latest statement of
condition used in its final conversion offering circular. 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
$6,642,000.
At December 31, 1996 (unaudited) and June 30, 1996, the stockholder's equity of
the Association was $9,082,000 and $9,127,000, of which approximately $2,185,000
and $2,305,000 was available for the payments of dividends.
F-20
MONTGOMERY SAVINGS, A FEDERAL ASSOCIATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Commitments and Contingent Liabilities
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit, which are not
included in the accompanying consolidated financial statements. The
Association's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit is
represented by the contractual or notional amount of those instruments. The
Association uses the same credit policies in making such commitments as it does
for instruments that are included in the consolidated statement of financial
condition.
Financial instruments whose contract amount represents credit risk were as
follows:
June 30
December 31, ----------------
1996 1996 1995
---- ---- ----
(Unaudited)
Mortgage loan commitments
At variable rates ........................... $ 175 $ 318 $680
At fixed rates ranging from 8.50 to
9.50% for December 31, 1996, 7.50
to 9.50% for 1996 and 8.00 to 10.00%
for 1995 ................................... 1,423 2,472 402
Consumer loan commitments .................... 27
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 Association and subsidiaries 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.
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 $23,000
and $23,000 for the six months ended December 31, 1996 and 1995 (unaudited) and
$45,000 for 1996, $46,000 for 1995 and $46,000 for 1994.
F-21
MONTGOMERY SAVINGS, A FEDERAL ASSOCIATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
On October 15, 1996, the stockholders of the Association approved a Stock Option
Plan, a Director Stock Option Plan and a Management Recognition Plan ("MRP").
These plans allow for the purchase in the open market or through the issuance of
authorized and unissued shares of up to 7,500 shares of common stock for the MRP
and 18,750 shares of common stock for the Stock Option Plan and the Director
Stock Option Plan. On November 25, 1996 (unaudited), Montgomery purchased 1,000
shares for the MRP at a cost of $11,563 which was recorded as unearned
compensation in stockholders' equity. Under the stock option plans, stock option
rights covering 13,125 shares of common stock may be granted to officers and
other key employees and 5,625 shares of common stock may be granted to directors
of Montgomery. Restricted stock awards covering 7,500 shares of common stock may
be awarded to Montgomery's officers and key employees under the MRP. There have
not been any grants or options allotted at this time.
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.
F-22
MONTGOMERY SAVINGS, A FEDERAL ASSOCIATION AND SUBSIDIARY
Crawfordsville, Indiana
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Off-Balance Sheet Commitments--Commitments include commitments to originate
mortgage and consumer loans, and are generally of a short-term nature. The fair
value of such commitments are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the counterparties' credit standing. The carrying amounts of these
commitments, which are immaterial, are reasonable estimates of the fair value of
these financial instruments.
The estimated fair values of the Association's financial instruments are as
follows:
December 31, 1996 June 30, 1996
------------------ -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(Unaudited)
Assets
Cash and cash equivalents ...... $ 5,918 $ 5,918 $ 3,636 $ 3,636
Interest-bearing deposits ...... 100 100 100 100
Investment securities
available for sale ........... 52 52 312 312
Loans, net ..................... 83,770 84,848 80,074 81,432
Stock in FHLB .................. 750 750 750 750
Interest receivable ............ 644 644 595 595
Liabilities
Deposits ....................... 72,343 72,694 69,709 70,212
FHLB advances .................. 11,928 11,873 8,000 7,954
Interest payable ............... 542 542 428 428
Advances by borrowers for
taxes and insurance .......... 183 183 382 382
Unaudited Financial Statements
The accompanying consolidated statement of financial condition as of December
31, 1996, and the consolidated statements of income, stockholders' equity and
cash flows for the six months ended December 31, 1996 and 1995 are unaudited,
but management is of the opinion that all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the results of the
periods reported, have been included in the accompanying financial statements.
The results of operations for the six months ended December 31, 1996 are not
necessarily indicative of those expected for the remainder of the year.
F-23
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Holding
Company. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Holding Company since the date hereof or that the
information contained herein is correct as of any time subsequent to its date.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any securities other than the registered securities to which it
relates. This Prospectus does not constitute an offer to sell or a solicitation
of a offer to buy such securities in any circumstances or jurisdictions in which
such offer or solicitation is unlawful.
TABLE OF CONTENTS
Page
----
Summary.............................................. 6
Selected Consolidated Financial Information.......... 18
Recent Financial Data................................ 20
Risk Factors......................................... 26
Montgomery Financial Corporation..................... 33
Montgomery Savings, A Federal Association............ 33
Montgomery Mutual Holding Company.................... 36
Use of Proceeds...................................... 36
Dividend Policy...................................... 37
Market for Common Stock.............................. 38
Pro Forma Data....................................... 39
Pro Forma Regulatory Capital Analysis................ 44
Capitalization....................................... 45
Management's Discussion and Analysis of
Financial Condition and Results of Operations....... 48
Business of Montgomery............................... 65
Regulation........................................... 83
Management of the Company............................ 95
Management of the Association........................ 96
Beneficial Ownership of Capital Stock................ 105
The Conversion and Reorganization.................... 108
Comparison of Stockholders' Rights................... 132
Restrictions on Acquisition of the Company........... 143
Description of Capital Stock of the Company.......... 145
Experts.............................................. 146
Legal Matters........................................ 146
Additional Information............................... 147
Index to Financial Statements........................ F-1
Until the later of ____________, 1997 or 25 days after commencement of the
Offering all dealers effecting transactions in the registered securities,
whether or not participating in this distribution, may be required to deliver a
prospectus. This is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
Up to 1,065,441 Shares
[LOGO]
MONTGOMERY FINANCIAL
CORPORATION
(Proposed Holding Company for
Montgomery Savings,
A Federal Association)
Common Stock
----------
Prospectus
----------
Charles Webb & Company
A Division of
Keefe, Bruyette & Woods, Inc.
___________, 1997
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Set forth below is an estimate of the amount of fees and expenses
(other than underwriting discounts and commissions) to be incurred in connection
with the issuance of the shares.
Counsel fees and expenses................................... $ 120,000
Accounting fees and expenses................................ 30,000
Appraisal and business plan
preparation fees and expenses............................. 30,000
Conversion Agent fees and expenses.......................... 5,000
Underwriting fees(1) (including financial
advisory fee and expenses)............................... 162,000
Underwriter's counsel fees and expenses..................... 30,500
Printing, postage and mailing............................... 50,000
Registration and Filing Fees................................ 18,000
Blue Sky fees and expenses.................................. 6,000
Other expenses(1)........................................... 39,000
---------
TOTAL.................................................. $490,000
========
- ------------------
(1) Based on maximum of Estimated Valuation Range.
Item 14. Indemnification of Directors and Officers
Article Eleventh of the Holding Company's Certificate of Incorporation provides
for indemnification of directors and officers of the Holding Company against any
and all liabilities, judgments, fines and reasonable settlements, costs,
expenses and attorneys' fees incurred in any actual, threatened or potential
proceeding, except to the extent that such indemnification is limited by
Delaware law and such law cannot be varied by contract or bylaw. Article
Eleventh also provides for the authority to purchase insurance with respect
thereto.
Section 23 of the Business Corporation Law of the State of Indiana authorizes a
corporation's Board of Directors to grant indemnity under certain circumstances
to directors and officers, when made, or threatened to be made, parties to
certain proceedings by reason of such status with the corporation, against
judgments, fines, settlements and expenses, including attorneys' fees. In
addition, under certain circumstances such persons may be indemnified against
expenses actually and reasonably incurred in defense of a proceeding by or on
behalf of the corporation. Similarly, the corporation, under certain
circumstances, is authorized to indemnify directors and officers of other
corporations or enterprises who are serving as such at the request of the
corporation, when such persons are made, or threatened to be made, parties to
certain proceedings by reason of such
II-1
status, against judgments, fines, settlements and expenses, including attorneys'
fees; and under certain circumstances, such persons may be indemnified against
expenses actually and reasonably incurred in connection with the defense or
settlement of a proceeding by or in the right of such other corporation or
enterprise. Indemnification is permitted where such person (i) was acting in
good faith; (ii) was acting in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation or other corporation or
enterprise, as appropriate; (iii) with respect to a criminal proceeding, has no
reasonable cause to believe his conduct was unlawful; and (iv) was not adjudged
to be liable to the corporation or other corporation or enterprise (unless the
court where the proceeding was brought determines that such person is fairly and
reasonably entitled to indemnity).
Unless ordered by a court, indemnification may be made only following a
determination that such indemnification is permissible because the person being
indemnified has met the requisite standard of conduct. Such determination may be
made (i) by the Board of Directors of the Holding Company by a majority vote of
a quorum consisting of directors not at the time parties to such proceeding; or
(ii) if such a quorum cannot be obtained or the quorum so directs, then by
independent legal counsel in a written opinion; or (iii) by the stockholders.
Section 23 also permits expenses incurred by directors and officers in defending
a proceeding to be paid by the corporation in advance of the final disposition
of such proceedings upon the receipt of an undertaking by the director or
officer to repay such amount if it is ultimately determined that he is not
entitled to be indemnified by the corporation against such expenses.
Item 15. Recent Sales of Unregistered Securities
The Registrant is newly incorporated, solely for the purpose of acting as the
holding company of Montgomery Savings, A Federal Association pursuant to the
Plan of Conversion and Agreement and Plan of Reorganization (filed as Exhibit 2
herein), and no sales of its securities have occurred to date.
II-2
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits:
1.1 Letter Agreement regarding marketing and consulting services*
1.2 Form of Agency Agreement
2 Plan of Conversion and Agreement and Plan of Reorganization*
3.1 Certificate of Incorporation of the Montgomery Financial
Corporation*
3.2 Bylaws of the Montgomery Financial Corporation
3.3 Charter of Montgomery Savings in stock form*
3.4 Bylaws of Montgomery Savings in stock form*
4 Form of Stock Certificate of the Montgomery Financial Corporation*
5 Opinion of Silver, Freedman & Taff, L.L.P. with respect to legality
of stock*
8.1 Opinion of Silver, Freedman & Taff, L.L.P. with respect to Federal
income tax consequences of the Conversion
8.2 Opinion of Geo. S. Olive & Co. LLC with respect to Indiana income tax
consequences of the Conversion
8.3 Opinion of Keller & Company, Inc. with respect to Subscription Rights*
10.1 Form of Proposed Stock Option and Incentive Plan*
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 Form of Proposed Management's Recognition and Retention Plan*
22 Subsidiaries*
24.1 Consent of Silver, Freedman & Taff, L.L.P.
24.2 Consent of Geo. S. Olive & Co. LLC
24.3 Consent of Keller & Company, Inc.*
25 Power of Attorney (set forth on signature page)
99.1 Appraisal
99.2 Proxy Statement and form of proxy to be furnished to Montgomery Savings'
account holders*
99.3 Proxy Statement and form of proxy to be furnished to Mutual Holding Company
members*
99.4 Stock Order Form and Order Form Instructions
99.5 Certification*
99.6 Question and Answer Brochure*
99.7 Advertising, Training and Community Informational Meeting Materials*
- ----------
* Previously filed
II-3
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and it will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant
II-4
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Crawfordsville, State of
Indiana on May 13, 1997.
MONTGOMERY FINANCIAL CORPORATION
By: /s/ Earl F. Elliott
------------------------------------
Earl F. Elliott, President and Chief
Executive Officer
(Duly Authorized Representative)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Earl F. Elliott and J. Lee Walden his true and
lawful attorney-in-fact and agent, with full power of substitution and
re-substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto,
and all other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming said attorney-in-fact and agent or
his substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
/s/ Earl F. Elliott /s/ J. Lee Walden
- ------------------------------------ ------------------------------------
Earl F. Elliott, President and Chief J. Lee Walden, Vice President, Chief
Executive Officer Financial Officer and Director
(Principal Executive and (Principal Financial and
Operating Officer) Accounting Officer)
Date: May 13, 1997 Date: May 13, 1997
II-6
/s/ C. Rex Henthorn /s/ John E. Woodward
- -------------------------------------- ------------------------------------
C. Rex Henthorn, Chairman of the Board John E. Woodward, Director
Date: May 13, 1997 Date: May 13, 1997
/s/ Mark E. Foster /s/ Joseph E. Malott
- -------------------------------------- ------------------------------------
Mark E. Foster, Director Joseph M. Malott, Director
Date: May 13, 1997 Date: May 13, 1997
/s/ Robert C. Wright
- --------------------------------------
Robert C. Wright, Director
Date: May 13, 1997
II-7
As filed with the Securities and Exchange Commission on May 13, 1997
Registration No. 333-24721
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------------
EXHIBITS TO
PRE-EFFECTIVE AMENDMENT NO. ONE TO THE
FORM S-1
UNDER
THE SECURITIES ACT OF 1933
---------------------------
MONTGOMERY FINANCIAL CORPORATION
119 East Main Street
Crawfordsville, Indiana 47933
================================================================================
EXHIBIT INDEX
Exhibits:
1.1 Letter Agreement regarding marketing and consulting services*
1.2 Form of Agency Agreement
2 Plan of Conversion and Agreement and Plan of Reorganization*
3.1 Certificate of Incorporation of the Montgomery Financial Corporation*
3.2 Bylaws of the Montgomery Financial Corporation
3.3 Charter of Montgomery Savings in stock form*
3.4 Bylaws of Montgomery Savings in stock form*
4 Form of Stock Certificate of Montgomery Financial Corporation*
5 Opinion of Silver, Freedman & Taff, L.L.P. with Respect to Legality of Stock*
8.1 Opinion of Silver, Freedman & Taff, L.L.P. with respect to Federal income tax
consequences of the Conversion
8.2 Opinion of Geo. S. Olive & Co. LLC with respect to Indiana income tax
consequences of the Conversion
8.3 Opinion of Keller & Company, Inc. with respect to Subscription Rights*
10.1 Form of Proposed Stock Option and Incentive Plan*
10.2 Form of Employment Agreement with Earl F. Elliott*
10.3 Form of Employment Agreement with J. Lee Walden*
10.7 Employee Stock Ownership Plan*
10.8 Form of Proposed Management's Recognition and Retention Plan*
22 Subsidiaries*
24.1 Consent of Silver, Freedman & Taff, L.L.P.
24.2 Consent of Geo. S. Olive & Co. LLC
24.3 Consent of Keller & Company, Inc.*
25 Power of Attorney (set forth on signature page)
99.1 Appraisal
99.2 Proxy Statement and form of proxy to be furnished to Montgomery Savings' account
holders*
99.3 Proxy Statement and form of proxy to be furnished to Mutual Holding Company
members*
99.4 Stock Order Form and Order Form Instructions
99.5 Certification*
99.6 Question and Answer Brochure*
99.7 Advertising, Training and Community Informational Meeting Materials*
- ------------
* Previously filed