SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For the transition period from __________ to __________
Commission File No. 0-27714
Crazy Woman Creek Bancorp Incorporated
(Exact name of registrant as specified in its charter)
Wyoming 83-0315410
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
106 Fort Street, Buffalo, Wyoming 82834
(Address of principal executive offices)
(307) 684-5591
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Sections
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.
Class:Common Stock, par value $.10 per share
Outstanding at August 2, 1996: 1,058,000
Transitional Small Business Disclosure Format (check one): Yes No X
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CRAZY WOMAN CREEK BANCORP INCORPORATED
INDEX TO FORM 10-QSB
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition
at June 30, 1996 (unaudited) and September 30, 1995
(audited) 1
Consolidated Statements of Income for the three
and nine months ended June 30, 1996 and 1995
(unaudited). 2
Consolidated Statements of Cash Flows for the
nine months ended June 30, 1996 and 1995
(unaudited) 3
Notes to Unaudited Interim Consolidated Financial
Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES
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<TABLE>
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CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Consolidated Statements of Financial Condition
June 30, September 30,
1996 1995
(unaudited) (audited)
(In Thousands)
Assets
<S> <C> <C>
Cash and cash equivalents ............................................... $ 1,071 $ 268
Interest bearing time deposits .......................................... 99 693
Investment and mortgage-backed securities available-for-sale ............ 11,747 2,230
Investment and mortgage-backed securities held-to-maturity
(estimated market value of $10,293 in 1996 and $9,975 in 1995) ........ 10,506 9,954
Stock in Federal Home Loan Bank of Seattle, at cost ..................... 392 371
Loans receivable, net ................................................... 25,514 23,006
Accrued interest receivable ............................................. 410 357
Real estate owned ....................................................... -- 55
Deferred income taxes ................................................... 29 --
Premises and equipment, net ............................................. 514 543
Other assets ............................................................ 42 33
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Total assets ........................................................ $ 50,324 $ 37,510
======= =======
Liabilities and Stockholders' Equity
Liabilities
Deposits .............................................................. 28,458 28,208
Advances from Federal Home Loan Bank .................................. 6,141 3,183
Advances from borrowers for taxes and insurance ....................... 43 47
Federal income tax payable ............................................ 129 58
Deferred income taxes ................................................. -- 66
Accrued expenses and other liabilities ................................ 100 91
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Total liabilities ................................................... 34,871 31,653
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Stockholders' equity
Preferred stock, par value $.10 per share, 2,000,000 shares authorized $ -- $ --
none issued and outstanding
Common stock, par value $.10 per share, 5,000,000 shares authorized; --
1,058,000 issued and outstanding at June 30, 1996 ................... 106
Additional paid-in surplus ............................................ 10,027 --
Retained earnings, substantially restricted ........................... 6,128 5,852
Unrealized gain(loss) on securities available-for-sale ................ (179) 5
Less stock acquired by ESOP ........................................... (629) --
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Total stockholders' equity .......................................... 15,453 5,857
------- -------
Total liabilities and stockholders' equity .......................... $ 50,324 $ 37,510
======= =======
</TABLE>
See notes to unaudited interim consolidated financial statements.
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<TABLE>
<CAPTION>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Consolidated Statements of Income
Three Months Ended Nine Months Ended
June 30, June 30,
1996 1995 1996 1995
-------- ------ ------ -----
(Unaudited) (Unaudited)
Interest Income: (Dollars in Thousands except earnings per share)
<S> <C> <C> <C> <C>
Loans receivable........................ $515 $485 $1,511 $1,435
Mortgage-backed securities.............. 162 82 329 239
Investment securities................... 188 104 407 284
Interest bearing time deposits.......... 7 10 24 30
Other................................... 24 11 72 32
--- --- ----- -----
Total interest income................ 896 692 2,343 2,020
--- --- ----- -----
Interest expense:
Deposits................................ 344 352 1,081 994
Advances from FHLB of Seattle........... 78 31 174 56
--- --- ----- -----
Total interest expense............... 422 383 1,255 1,050
--- --- ----- -----
Net interest income.................. 474 309 1,088 970
Provision for loan losses (loan loss benefit) - (8) - (8)
--- --- ----- -----
Net interest income after provision for loan
losses 474 317 1,088 978
Non-interest income:
Customer service charges................ 10 10 31 23
Other operating income.................. 8 10 24 25
Gain on sale of investment and mortgage-
backed securities 9 - 30 -
Gain on sale of other real estate owned. - - 13 90
--- --- ----- -----
Total non-interest income............ 27 20 98 138
Non-interest expense:
Compensation and benefits............... 119 100 330 313
Occupancy and equipment................. 22 25 82 76
FDIC/SAIF deposit insurance premiums.... 16 17 49 48
Advertising............................. 7 8 25 31
Data processing services................ 71 30 126 81
Loss on sale of premises and equipment.. 22 - 22 -
Other................................... 46 37 114 103
--- --- ----- -----
Total non-interest expense........... 303 217 748 652
--- --- ----- -----
Income before income taxes........... 198 120 438 464
Income tax expense........................ 63 11 162 120
--- --- ----- -----
Net income........................... $ 135 $109 $ 276 $ 344
==== === ==== =====
Dividends declared per common share....... $0.05 N/A $0.05 N/A
==== === ==== =====
Earnings per common share................. $0.14 N/A $ 0.28 N/A
==== === ==== =====
</TABLE>
See notes to unaudited interim consolidated financial statements.
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<TABLE>
<CAPTION>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Consolidated Statements of Cash Flows
Nine Months Ended
June 30,
1996 1995
(In Thousands)
Cash flows from operating activities: (Unaudited)
<S> <C> <C>
Net income ............................................................................ $ 276 $ 344
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses (loan loss benefit) ....................................... -- 8
Amortization of premiums and discounts on investment securities held-to-maturity, net -- (1)
Federal Home Loan Bank stock dividend ............................................... (21) (16)
Depreciation ........................................................................ 58 25
Gain on sale of investment and mortgage-backed securities held-to-maturity.......... (21) --
Gain on sale of investment and mortgage-backed securities available-for-sale (9) --
Loss on sale of premises and equipment .............................................. 22 --
Gain on sale of other real estate owned ............................................. (13) (90)
Change in:
Accrued interest receivable ..................................................... (53) 15
Other assets .................................................................... (9) 13
Federal income taxes payable .................................................... 70 (27)
Accrued expenses and other liabilities .......................................... 9 25
-------- --------
Net cash provided by operating activities .................................... 309 296
Cash flows from investing activities:
Net change in interest bearing deposits ............................................... 594 (70)
Purchases of investment and mortgage-backed securities available-for-sale (10,894) (343)
------- -------
Maturities of investment and mortgage-backed securities available-for-sale ............ 102 436
Proceeds from the sale of investment and mortgage-backed securities available-for-sale 1,006 --
Purchases of investment and mortgage-backed securities held-to-maturity................ (6,710) (2,400)
Maturities of investment and mortgage-backed securities held-to-maturity............... 5,507 1,430
Proceeds from the sale of investment and mortgage-backed securities held-to-maturity 672 --
Net change in loans receivable ........................................................ (2,508) (142)
Purchases of premises and equipment ................................................... (51) (200)
Proceeds from sale of other real estate owned ......................................... 68 210
------- -------
Net cash used in investing activities ............................................... (12,214) (1,079)
Cash flows from financing activities:
Net change in deposits ................................................................ 250 (853)
Net changes in advances from Federal Home Loan Bank ................................... 2,958 1,641
Net change in advances from borrowers for taxes and insurance ......................... (4) (5)
Sale of common stock, net of offering costs ........................................... 9,504 --
------- -------
Net cash provided in financing activities ........................................... 12,708 783
------- -------
Net increase (decrease) in cash and cash equivalents .................................... 803 0
Cash and cash equivalents at beginning of year .......................................... 268 1,212
------- -------
Cash and cash equivalents at end of period .............................................. $ 1,071 $ 1,212
======= =======
</TABLE>
See notes to unaudited interim consolidated financial statements.
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Notes to Unaudited Interim Consolidated Financial Statements
June 30, 1996
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. For further information, the reader should refer to the
prospectus of Crazy Woman Creek Bancorp Incorporated (the "Corporation") dated
February 12, 1996 (File No. 33-80557).
The accompanying consolidated financial statements include the accounts of the
Corporation and Buffalo Federal Savings Bank (the "Bank"), a wholly owned
subsidiary of the Corporation. All significant intercompany balances and
transactions have been eliminated in consolidation.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for fair presentations have been included. The
results of operations for the interim periods ended June 30, 1996 and 1995 are
not necessarily indicative of the results which may be expected for an entire
year or any other period.
NOTE 2: CHANGE IN ACCOUNTING PRINCIPLE
Effective October 1, 1994, the Bank adopted Financial Accounting Standards Board
Statement 115 (FASB 115), "Accounting for Certain Investments in Debt and Equity
Securities," which resulted in the reclassification of investment securities and
mortgage-backed securities into those which are available for sale and those
which are intended to be held to maturity. The unrealized gain or loss on the
securities classified as available for sale, along with those of the marketable
equity securities, are recognized, net of the expected income tax effect, as a
separate component of retained earnings. For securities held to maturity, the
Bank has both the intent and ability to hold these securities to maturity.
For the nine months ended June 30, 1996, the Corporation's consolidated
statement of income reflects the gain on sale of investments held-to-maturity.
These gains represent the sale of certain mortgage-backed securities with
principal balances of less than 15% of the original balance. The sale of such
securities is allowed because these securities are considered matured by FASB
115.
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NOTE 3: CONVERSION FROM MUTUAL SAVINGS BANK TO STOCK SAVINGS
BANK AND FORMATION OF SAVINGS AND LOAN HOLDING COMPANY
On March 29, 1996, the Bank consummated its conversion from a
federally-chartered mutual savings and loan association to a stock savings bank
pursuant to a Plan of Conversion (the "Conversion") via the issuance of common
stock. In connection with the Conversion, the Corporation sold 1,058,000 shares
of common stock which, after giving effect to offering expenses of $410,000,
resulting in net proceeds of $10.13 million ($9.49 million net of ESOP
purchases). Pursuant to the Conversion, the Bank transferred all of its
outstanding shares to its newly organized holding company, the Corporation, in
exchange for 50% of the net proceeds.
Upon consummation of the Conversion, the preexisting liquidation rights of the
depositors of the Bank were unchanged. Specifically, such rights were retained
and will be accounted for by the Bank for the benefit of such depositors in
proportion to their liquidation interests as of the Eligibility Record Date
(November 15, 1994) and Supplemental Eligibility Record Date
(December 31, 1995).
NOTE 4: RECENT ACCOUNTING PRONOUNCEMENTS
Effective October 1, 1995, the Bank adopted FASB Statement Nos. 114, "Accounting
by Creditors for Impairment of a Loan" and 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures." The provision of
these statements are applicable to all loans, uncollateralized as well as
collateralized, except for large groups of smaller-balance homogeneous loans
that are collectively evaluated for impairment and loans that are measured at
fair value or at the lower of cost or fair value. Additionally, such provisions
apply to all loans that are renegotiated in troubled debt restructurings
involving a modification of terms.
Statement No. 114 requires that impaired loans be measured based on the present
value of expected future cash flows discounted at the loan's effective interest
rate or, as a practical expedient, at the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent, except that
loans renegotiated as part of a troubled debt restructuring subsequent to the
adoption of Statement Nos. 114 and 118 must be measured for impairment by
discounting the total expected cash flow under the renegotiated terms at each
loan's original effective interest rate.
A loan evaluated for impairment pursuant to Statement No. 114 is deemed to be
impaired when, based on current information and events, it is probable that the
Bank will be unable to collect all amounts due according to the contractual
terms of the loan agreement. An insignificant payment delay, which is defined by
the Bank as up to ninety days, will not cause a loan to be classified as
impaired. A loan is not impaired during the period of delay in payment if the
Bank expects to collect all amounts due, including interest accrued at the
contractual interest rate for the period of delay. Thus, a demand loan or other
loan with no stated maturity is not impaired if the Bank expects to collect all
amounts due, including interest accrued at the contractual
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interest rate, during the period the loan is outstanding. All loans identified
as impaired are evaluated independently. The Bank does not aggregate such loans
for evaluation purposes.
The adoption of Statement Nos. 114 and 118 did not have a material adverse
impact on financial condition or operations.
Payments received on impaired loans are applied first to interest receivable and
then to principal.
The FASB has recently issued Statement No. 123 "Accounting for Stock-Based
Compensation" which the Company must adopt in its year ended September 30, 1997
with earlier adoption permitted. Management is currently studying the
requirements of the Statement but does not currently anticipate adopting this
Statement prior to fiscal year 1997.
NOTE 5: EARNINGS PER SHARE
Earnings per common share is calculated by dividing net income by the weighted
average number of common shares and common stock equivalents outstanding during
the period. Shares sold in the conversion from mutual to stock ownership on
March 29, 1996, are assumed to have been outstanding for all of fiscal year
1996, for purposes of computing weighted average shares outstanding.
Additionally, unallocated ESOP shares are excluded from the weighted average
common shares outstanding calculation, while allocated shares are considered to
be outstanding. At June 30, 1996, there were no allocated ESOP shares. The
weighted average shares outstanding was computed at 994,000, net of ESOP shares
(64,000).
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Corporation is a unitary savings and loan holding company of the Bank.
Because the Corporation has only recently been formed, the operations of the
Corporation are essentially those of the Bank on a consolidated basis. The Bank
operates as a traditional savings association, attracting deposit accounts from
the general public and using those deposits, together with other funds,
primarily to originate and invest in long-term, fixed-rate conventional loans
secured by single-family residential real estate. The Bank also originates home
equity, land and other consumer loans and invests in mortgage-backed (including
Real Estate Mortgage Investment Conduits ("REMICs") and short-term government
securities. To a lesser extent, the Bank invests in commercial real estate
loans.
The Bank's net earnings are dependent primarily on its net interest income,
which is the difference between interest income earned on its interest-earning
assets and interest expense paid on interest-bearing liabilities. Net interest
income is determined by (i) the difference between yields earned on
interest-earning assets and rate paid on interest-bearing liabilities (interest
rate spread) and (ii) the relative amounts of interest-earning assets and
interest-bearing liabilities. The Bank's interest rate spread is affected by
regulatory, economic and competitive factors that influence interest rates, loan
demand and deposit flows. To a lesser extent, the Bank's net earnings also are
affected by the level of non-interest income, which primarily consists of
service charges and other operating income. In addition, net earnings are
affected by the level of non-interest (general and administrative) expenses.
FINANCIAL CONDITION
Total assets increased by $12.8 million or 34.1% from $37.5 million at September
30, 1995 to $50.3 million at June 30, 1996. This increase was due primarily to
receipt of funds from an initial stock offering that was finalized on March 29,
1996, and from additional FHLB advances. Proceeds from the stock offering and
additional FHLB advances were primarily utilized to purchase investment and
mortgage-backed securities available-for-sale and to fund loan growth.
As indicated, stock proceeds were used to purchase additional investment and
mortgage-backed securities. Investment and mortgage-backed securities
available-for-sale increased by $9.5 million from $2.2 million at September 30,
1995 to $11.7 million at June 30, 1996. Meanwhile, investment and
mortgage-backed securities held-to-maturity increased by $552,000 for the same
period.
The Corporation continues to experience loan growth as evidenced by an increase
of $2.5 million or 10.9% in net loans receivable from $23.0 million at September
30, 1996 to $25.5 million at June 20, 1996. The growth in loans is attributed to
a strong local housing market.
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Deposits increased by $250,000 or 1.1% from $28.2 million at September 30, 1995
to $28.5 million at June 30, 1996. The increase is due, in part, to an increase
in funds placed at the Bank by local municipalities, offset somewhat by deposits
used to purchase stock in the stock offering. FHLB advances increased by $2.9
million from $3.2 million at September 30, 1995 to $6.1 million at June 30,
1996. Additional FHLB advances were used to fund loan growth and to purchase
investment and mortgage-backed securities with the goal of earning income on the
interest rate differential between the yield earned on the investments and the
rate paid on FHLB advances.
Equity increased from $5.8 million at September 30, 1995, to $15.5 million at
June 30. 1996. The increase in equity is primarily attributed to proceeds
received from the stock offering. As a result of an increase in market interest
rates, the unrealized gain(loss) on investments available for sale component of
equity changed from $5,000 at September 30, 1995 to negative $179,000 at June
30, 1996.
ASSET QUALITY
Non-performing assets totaled $140,000 at June 30, 1996, or 0.3% of total
assets. This compares to $123,000 at September 30, 1995 or 0.3%. Non-performing
assets at June 30, 1996 were primarily comprised of loans secured by
single-family dwellings. See also "Key Operating Ratios."
RESULTS OF OPERATIONS
Comparison of Nine Months Ended June 30, 1996 and 1995.
Net Income. The Corporation reported net income of $276,000 for the nine months
ended June 30, 1996 as compared to net income of $344,000 for the nine months
ended June 30, 1995. The decline in net income is attributed to (i) an increase
in the cost of interest-bearing liabilities, (ii) costs associated with a change
in the Bank's data processor, (iii) a decline in the gain on the sale of real
estate owned, and (v) an increase in compensation related expenses.
Interest Income. Total interest income increased by $323,000 from $2.0 million
for the nine months ended June 30, 1995 to $2.3 million for the nine months
ended June 30, 1996. The improvement is primarily attributed to an increase in
average earning assets from $35.2 million for the nine-month period ended June
30, 1995 to $42.6 million for the nine-month period ended June 30, 1996. The
increase in interest income was somewhat offset by the decline in the yield on
earning assets. The yield on earning assets declined from 7.64% for the
nine-months ended June 30, 1995 to 7.33% for the nine months ended June 30,
1996. The decline in yield can be attributed to the Bank's purchase of lower
yielding adjustable-rate mortgage-backed securities and to the fact that stock
proceeds were not fully invested in higher yielding securities until the end of
April 1996. Adjustable-rate mortgage-backed securities tend to have lower coupon
rates than fixed-rate securities at the time of purchase, but their interest
rates can increase with market interest rates thereby providing the Bank with a
hedge against rising interest rates.
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Interest Expense. Interest expense increased from $1.1 million for the nine
months ended June 30, 1995 to $1.3 million for the nine months ended June 30,
1996. The increase is primarily attributed to the rise in the cost of
interest-bearing deposits and an increase FHLB advances. The cost of
interest-bearing deposits increased from 4.66% for the nine months ended June
30, 1995 to 5.14% for the nine months ended June 30, 1996. Average
interest-bearing deposits declined slightly from $28.4 million for the
nine-month period ended June 30, 1995 to $28.1 million for the nine-month period
ended June 30, 1996. Conversely, the average balance of FHLB advances increased
from $1.5 million to $4.9 million for the periods covered.
Provisions for Credit Losses. There was no provision for loan losses for either
the nine months ended June 30, 1996 or June 30, 1995; however an $8,000 loan
loss benefit was recognized in fiscal year 1995. Loan charge-offs for the nine
months ended June 30, 1995 were less than $500. There were no credit losses for
the nine-months ended June 30, 1996. In determining the provision for loan
losses, management analyzes, among other things, the Bank's loan portfolio,
market conditions and the Bank's market area. Management has determined that the
reserve for loan losses was adequate to cover any anticipated credit losses.
There can be no assurance that the allowance for losses will be adequate to
cover losses which may in fact be realized in the future and that additional
provisions will not be required.
Net Interest Income. Net interest income increased by $110,000 from $978,000 at
September 30, 1995 to $1.1 million at June 30, 1996 primarily as a result of an
increase in earnings assets. For the periods covered average earning assets
increased from $35.2 million for the nine-month period ended June 30, 1995 to
$42.6 million for the nine month period ended June 30, 1996. As a result of the
increase in earning assets, interest income increased by $323,000 for the
periods covered. For the periods covered the ratio of interest earning assets to
interest-bearing assets increased from 117.64% to 129.44%.
Despite the increase in net interest income, the net interest margin decline
from 3.67% for the nine months ended June 30, 1995 to 3.41% for the nine months
ended June 30, 1996. The decline in the net interest margin is primarily
attributed to a decline in the yield of interest earnings assets from 7.64% for
the nine months ended June 30, 1995 to 7.33% for the nine months ended June 30,
1996, and to an increase in the cost of interest-bearing liabilities from 4.67%
to 5.08% for the periods covered.
Total Non-interest Income. Non-interest income declined by $40,000 from $138,000
for the nine months ended June 30, 1996 to $98,000 for the nine months ended
June 30, 1996. The decrease was primarily attributed to a reduction in the
amount of gain from the sale of real estate owned properties from $90,000 for
the nine-month period ended June 30, 1995 to $13,000 for the nine-month period
ended June 30, 1996. Future gains from the sale of real estate owned properties
are not likely to continue because all repossessed properties have been sold,
and the Bank does not anticipate, at this time, any additional foreclosures.
Non-interest income was augmented by an increase in customer service charges
from $23,000 for the nine months ended June 30, 1996 to $31,000 for the nine
months ended June 30, 1996. A $30,000 gain on the sale of certain
mortgage-backed securities and REMICs for the nine months ended June 30, 1996
somewhat offset the above-mentioned declines in non-interest income. See also
"--Comparison of Three Months Ended March 31, 1996 and 1995 -- Total
Non-interest Income."
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Total Non-interest Expense. Non-interest expense increased by $96,000 or 14.7%
from $652,000 for the nine months ended June 30, 1995 to $748,000 for the nine
months ended June 30, 1996. The increase is attributed to (i) a $34,000 charge
from the Bank's prior data processor to de-covert the Bank's data, (ii) a
$22,000 loss on the abandonment/disposition of equipment and software utilized
with the prior data processing system, (iii) $8,000 in other costs associated
with the data processing conversion such as travel costs and documentation
set-up fees and, (iv) a $4,000 increase in benefit costs. The balance of the
increase in non-interest expenses were caused by an increase in salaries,
director fees and other operating expenses. Future extraordinary data processing
and equipment costs are not expected. The Corporation expects increased costs
due to expenses associated with being a public company and the Employee Stock
Ownership Plan and other stock benefit plans, if adopted.
Provision for Income Taxes. The effective tax rate for the nine months ended
June 30, 1996 and 1995 was 36.99% and 25.86%, respectively.
Comparison of Three Months Ended June 30, 1996 and 1995
General. For the three months ended June 30, 1996 the Corporation posted a net
profit of $135,000 as compared with net income of $109,000 for the three months
ended June 30, 1995. The increase in net income is primarily attributed an
increase in earning assets as a result of the proceeds received from the stock
offering. Net income for the period ended June 30, 1996, was negatively affected
by costs associated with a change in the Bank's data processor and increased
compensation and benefit costs.
Interest Income. Total interest income increased by $204,000 from $692,000 for
the three months ended June 30, 1995 to $896,000 for the three months ended June
30, 1996. The increase in interest income is due to an increase in the average
balance of interest-earning assets. From June 30, 1995 to June 30, 1996 the
average balance of earning assets increased from $36.9 million to $49.0 million,
respectively. This represents an increase of 36.5%. The increase in earning
assets was primarily funded by the stock proceeds and additional FHLB advances.
Interest Expense. Total interest expense increased by $39,000 from $383,000 for
the three months ended June 30, 1995 to $422,000 for the three months ended June
30, 1996 as a result of an increase in the average balance of FHLB advances. The
average balance of FHLB advances increased from $2.4 million for the three-month
period ended June 30, 1995 to $6.2 million for the three-month period ended June
30, 1996. The cost of funds for the periods covered declined slightly from 5.01%
to 4.96%. See also "--Comparison of Six Months Ended March 31, 1996 and 1995 --
Total Interest Expense."
Provision for Credit Losses. There was no loan loss provision made for the
three months ended June 30, 1996 and 1995. See also "--Comparison of Six Months
Ended March 31, 1996 and 1995 -- Provision for Credit Losses."
Net Interest Income. Net interest income increased by $157,000 from $317,000 for
the three months ended June 30, 1995 to $474,000 for the three months ended June
30, 1996. The net interest margin increased 42 basis points from 3.44% to 3.86%
for the periods covered. The reason for the increase in net interest income and
net interest margin is primarily attributed to
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the influx of funds from the stock offering. These funds were used to purchase
interest-bearing assets. During the periods covered, the average balance of
earning assets increased from $35.9 million to $49.0 million. As a result of
this increase in earning assets, the ratio of earning assets to interest-bearing
liabilities increased from 117.49% for the three month period ended June 30,
1995 to 143.98% for the three month period ended June 30, 1996.
The increase in net interest income was negatively affected by a decline in the
yield on interest earning assets from 7.70% for the three months ended June 30,
1995 to 7.31% for the three months ended June 30, 1996. There was no significant
decline in the cost of interest-bearing liabilities for the periods covered. The
three month period ended June 30, 1995 includes a $8,000 loan loss benefit. See
also -- "Comparison of Nine Months Ended June 30, 1996 and 1995 -- Net Interest
Income."
Total Non-Interest Income. Total non-interest income increased by $7,000 from
$20,000 for the three-months ended June 30, 1995 to $27,000 for the three months
ended June 30, 1996. The increase is attributed to a $9,000 gain on the sale of
certain mortgage-backed securities that were available for sale. The gain was
offset by a $2,000 decrease in other operating income for the periods covered.
Total Non-Interest Expense. Total non-interest expense increased by $86,000 from
$217,000 for the three months ended June 30, 1995 to $303,000 for the three
months ended June 30, 1996. The increase is primarily due (i) a de-conversion
charge from the Bank's previous data processor, (ii) a loss on the abandonment
of equipment and software used with the prior data processing system, (iii)
other costs associated with the data processing change such as training and
document set-up fees, and (v) increased compensation and benefit costs. In April
1996, an additional employee was hired. Excluding increased compensation and
benefit costs, these extraordinary expenses are not expected to continue. See
also "-- Comparison of Nine Months Ended June 30, 1996, and 1995 -- Total
Non-Interest Expenses."
The Corporation expects increased costs due to expenses associated with being a
public company and the Employee Stock Ownership Plan and other stock benefit
plans, if adopted.
Provision for Income Taxes. The effective tax rate for the three months
ended June 30, 1996 and 1995 was 31.82% and 9.17%.
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<PAGE>
CAPITAL COMPLIANCE AND LIQUIDITY
Capital Compliance. The following table presents the Bank's compliance with
its regulatory capital requirements of June 30, 1996.
At June 30, 1996
Percentage
Amount of Assets
(Dollars in Thousands)
GAAP Capital......................................... $10,346 20.45%
Tangible capital..................................... $10,525 20.80%
Tangible capital requirement......................... 759 1.50%
------ -----
Excess............................................... $ 9,766 19.30%
====== =====
Core capital......................................... $10,525 20.80%
Core capital requirements............................ 1,518 3.00%
------ -----
Excess............................................... $ 9,007 17.80%
====== =====
Total risk-based capital (1)......................... $10,707 52.29%
Total risk-based capital requirement (1)............. 1,638 8.00%
------ -----
Excess (1)........................................... $ 9,069 44.29%
====== =====
- ------------
(1) Based on risk-weighted assets of $20,477.
Management believes that under current regulations, the Bank will continue to
meet its minimum capital requirements in the foreseeable future. Events beyond
the control of the Bank, such as increased interest rates or a downturn in the
economy in areas in which the Bank operates could adversely affect future
earnings and, as a result, the ability of the Bank to meet its future minimum
capital requirements. Increased borrowings were necessary to meet the increased
loan demand.
Liquidity. The Bank's liquidity is a measure of its ability to fund loans, pay
withdrawals of deposits, and other cash outflows in an efficient, cost effective
manner. The Bank's primary source of funds are deposits and scheduled
amortization and prepayment of loans. During the past several years, the Bank
has used such funds primarily to fund maturing time deposits, pay savings
withdrawals, fund lending commitments, purchase new investments, and increase
liquidity. The Bank funds its operations internally but has, in the past,
borrowed funds from
- 12 -
<PAGE>
the FHLB of Seattle. As of June 30, 1996, such borrowed funds totaled $6.2
million. Loan payments and maturing investments are greatly influenced by
general interest rates, economic conditions and competition.
The Bank is required under federal regulations to maintain certain specified
levels of "liquid investments," which include certain United States government
obligations and other approved investments. Current regulations require the Bank
to maintain liquid assets of not less than 5% of its net withdrawable accounts
plus short-term borrowings. Short-term liquid assets must consist of not less
than 1% of such accounts and borrowings, which amount is also included within
the 5% requirement. Those levels may be changed from time to time by the
regulators to reflect current economic conditions. The Bank has generally
maintained liquidity far in excess of regulatory requirements. The Bank's
regulatory liquidity was 17.90% and 19.08% at June 30, 1996 and 1995,
respectively, and its short term liquidity was 4.36% and 4.26%, at such dates,
respectively.
The amount of certificate accounts which are scheduled to mature during the
twelve months ending June 30, 1997 is approximately $13.8 million. To the extent
that these deposits do not remain at the Bank upon maturity, the Bank believes
that it can replace these funds with deposits, excess liquidity, FHLB advances
or outside borrowings. It has been the Bank's experience that a substantial
portion of such maturing deposits remain at the Bank.
At June 30, 1996, the Bank had loan commitments outstanding of $342,000. Funds
required to fill these commitments are derived primarily from current excess
liquidity, deposit inflows or loan and investment and mortgage-backed security
repayments.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of the Corporation and notes thereto,
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 change in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of the Corporation's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Corporation are
financial. As a result, interest rates have a greater impact on the
Corporation's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.
RECENT DEVELOPMENTS
Disparity in Insurance Premiums and Special Assessment
Federal law requires that the FDIC maintain the reserve level of each of SAIF
and the Bank Insurance Fund ("BIF") at 1.25% of insured deposits. Reserves are
funded through payments by insured institutions of insurance premiums. On
September 30, 1995, due to the BIF reaching the required reserve level, the FDIC
reduced the insurance premiums for members of BIF to a range of between 0.04%
and 0.31% of deposits while maintaining the current range of between 0.23% and
0.31% of deposits for members of SAIF. In November 1995, the FDIC lowered BIF
- 13 -
<PAGE>
premiums further, whereby approximately 92% of BIF-insured institutions pay only
the statutory minimum of $2,000 annually. This reduction in insurance premiums
for BIF members could place SAIF members, primarily thrift institutions, such as
the Bank, at a material competitive disadvantage to BIF members and, for the
reasons set forth below, could have a material adverse effect on the results of
operations and financial condition of the Bank in future periods thereby
effecting the value of the Common Stock.
A disparity in insurance premiums between those required for SAIF members, such
as the Bank, and BIF members will allow BIF members to attract and retain
deposits at a lower effective cost than that of SAIF members. In the event BIF
members in the Bank's market area, as a result of the reduction in insurance
premiums, increase the interest rates paid on deposits, this could put
competitive pressure on the Bank to raise the interest rates paid on deposits
thus increasing its cost of funds and possibly reducing net interest income. The
resultant competitive disadvantage could result in the Bank losing deposits to
BIF members who have a lower cost of funds and are therefore able to pay higher
rates of interest on deposits. Although the Bank has other sources of funds,
these other sources may have higher costs than those of deposits, resulting in
lower net yields on loans originated using such funds.
Several alternatives to mitigate the effect of the BIF/SAIF insurance premium
disparity have recently been proposed by the U.S. Congress, federal regulators,
industry lobbyists and the executive branch of the United States Government. One
plan that has gained support of several sponsors would require all SAIF member
institutions, including the Bank, to pay a one-time fee of approximately 0.85%
($0.85 for every $100 of deposits) on the amount of deposits held as of March
31, 1995 by the member institution to recapitalize the SAIF. Thereafter, deposit
insurance premiums would be similar for all FDIC insured institutions. If an 85
basis point (0.85%) assessment was effected, based on deposits as of March 31,
1995, the Bank's pro rata share would amount to $241,000 before taxes. This
assessment would have resulted in the Bank reporting a loss for the quarter
ended June 30, 1996. Management of the Bank is unable to predict whether this
proposal or any similar proposal will be enacted or whether ongoing SAIF
premiums will be reduced to a level comparable to that of BIF premiums.
Possible Elimination of Thrift Charter and Bad Debt Deduction
In connection with Congress' debate regarding the disparity between the BIF and
the SAIF premium assessments various proposals have been put forth to merge the
two insurance funds and, in the process, eliminate the thrift charter. In
addition, certain of these proposals call for the consolidation of the OTS into
one of the other federal banking agencies, such as the Comptroller of the
Currency. Under these proposals, the two insurance funds would be merged by 1998
and at that time, all federally chartered thrift institutions, would be required
to become either national commercial banks, state commercial banks, or state
chartered thrifts. Congress also proposes doing away with state thrift charters
and certain aspects of the Bank's bad debt deduction. If the Bank is required to
become a commercial bank or Congress changes the existing law as it relates to
the bad debt deduction, the Bank may incur adverse tax consequences as the Bank
may be required to recapture into income some or all of its bad debt deduction
for prior years. At the present time, the Bank's management is unable to predict
whether any of these proposals will be passed by Congress, in what form they may
be passed by Congress, or what effect they may have on the Bank, its financial
condition, or its results of operations.
- 14 -
<PAGE>
On August 2, 1996, both the U.S. House of Representatives and the U.S. Senate
passed the Small Business Job Protection Act of 1996. This bill will, if signed
by the President, among other things, equalize the taxation of thrifts and
banks. Previously, thrifts had been able to deduct a portion of their bad-debt
reserves set aside to cover potential loan losses ("bad-debt reserves").
Furthermore, the bill will repeal current law mandating recapture of thrifts'
bad debt reserves if they convert to banks. Bad debt reserves set aside through
1987 will not be taxed, however, any reserves taken since January 1, 1988 will
be taxed over a six year period beginning in 1997. Institutions can delay these
taxes for two years if they meet a residential-lending test. At June 30, 1996,
the Bank had $201,426 of post 1987 bad-debt reserves. Any recapture of the
Bank's bad-debt reserves may have an adverse effect on net income. The Bank is
currently evaluating this legislation to determine the effect on the Bank's
financial condition.
KEY OPERATING RATIOS
Three Months Ended Nine Months Ended
June 30, June 30,
1996 (1) 1995 (1) 1996 (1) 1995 (1)
-------- -------- -------- --------
(Dollars in Thousands, (Dollars in Thousands,
except per share data) except per share data)
(Unaudited) (Unaudited)
Return on average assets............ 1.08% 1.18% 0.84% 1.27%
Return on average equity............ 3.49% 7.53% 3.60% 8.07%
Interest rate spread................ 2.35% 2.69% 2.25% 2.97%
Net interest margin................. 3.86% 3.44% 3.41% 3.67%
Noninterest expense to average assets 2.42% 2.35% 2.28% 2.40%
Net charge-offs to average outstanding
loan 0.00% 0.00% 0.00% 0.00%
At June 30, At September 30,
1996 1995
Nonaccrual and 90 days past due loans 140 68
Repossessed real estate............ 0 55
Total nonperforming assets........ 140 123
Allowance for credit losses to non-
performing assets 49.12% 44.73%
Nonperforming loans to total loans.. 0.54% 0.52%
Nonperforming assets to total assets 0.28% 0.33%
Book value per share (2)(3)......... $14.61 N/A
- ----------------
(1) The ratios for the three- and nine-month periods are annualized.
(2) There were no shares outstanding prior to consummation of the
Corporation's initial public offering on March 29, 1996.
(3) The number of shares outstanding as of June 30, 1996 was 1,058,000. This
includes shares purchased by the ESOP.
- 15 -
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Corporation nor the Bank was engaged in any legal
proceeding of a material nature at June 30, 1996. From time to time,
the Corporation is a party to legal proceedings in the ordinary
course of business wherein it enforces its security interest in
loans.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
On April 1, 1996, the Corporation filed an 8-K with the
Commission announcing the completion of the Bank's
mutual-to-stock conversion, including the initial sale of
common stock by the Corporation.
- 16 -
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CRAZY WOMAN CREEK BANCORP INCORPORATED
Date: August 2, 1996 By: /s/ Deane D. Bjerke
Deane D. Bjerke
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 2, 1996 By: /s/ Dalen C. Slater
Dalen C. Slater
Senior Vice President and Chief Financial
Officer
(Principal Accounting and Financial Officer)
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