SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One):
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] For the fiscal year ended September 30, 1996,
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period
from ____________________ to _________________.
Commission File No. 0-27714
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CRAZY WOMAN CREEK BANCORP INCORPORATED
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(Name of Small Business Issuer 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 (Zip Code)
Issuer's Telephone Number, Including Area Code: (307) 684-5591
--------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
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(Title of Class)
Check whether the issuer: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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 ___.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
[ ]
State issuer's revenues for its most recent fiscal year. $3,391,000
As of December 6, 1996, there were issued and outstanding 1,058,000 shares
of the registrant's Common Stock.
The Registrant's voting stock trades on the Nasdaq SmallCap Market under
the symbol "CRZY." The aggregate market value of the voting stock held by
non-affiliates of the registrant, based on the average bid and asked price of
the registrant's Common Stock on December 6, 1996, was $10,752,846 ($11.50 per
share based on 935,030 shares of Common Stock outstanding).
Transition Small Business Disclosure Format (check one)
YES NO X
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year
ended September 30, 1996. (Parts I, II, and IV)
2. Portions of the Proxy Statement for the Annual Meeting of
Stockholders. (Part III)
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ITEM I
Business of the Company
Crazy Woman Creek Bancorp Incorporated (the "Company") is a Wyoming
corporation organized in December 1995 at the direction of Buffalo Federal
Savings Bank (the "Bank") to acquire all of the capital stock that the Bank
issued upon its conversion from the mutual to stock form of ownership on March
29, 1996. The Company is a unitary savings and loan holding company which, under
existing laws, generally is not restricted in the types of business activities
in which it may engage provided that the Bank retains a specified amount of its
assets in housing-related investments. The Company does not conduct any active
business. The Company does not employ any persons other than officers but
utilizes the support staff of the Bank from time to time.
Business of the Bank
The Bank attracts deposits from the general public and uses such deposits
primarily to originate fixed-rate loans secured by first mortgages on one- to
four-family residences in its market area. The Bank also originates consumer
loans, commercial loans and loans secured by savings accounts.
The principal sources of funds for the Bank's lending activities are
deposits, the amortization, repayment, and maturity of loans and FHLB advances.
Principal sources of income are interest on loans, mortgage-backed securities
and investment securities and principal expense is interest paid on deposits and
FHLB advances.
The Bank's Primary Market Area consists of all of Johnson County, Wyoming.
The Bank also attracts customers from the Banner/Story area which is located in
Southern Sheridan County. The Johnson County economy has its roots in the
agriculture and mining industries. Agriculture continues to play a major role in
overall Johnson County revenues, most notably in the cattle and sheep
industries. In fact, Johnson County has the largest concentration of sheep among
all of the counties in Wyoming. Mining has steadily declined as an employment
sector in Johnson County, a reflection of the general decline of the U.S. oil
and gas industry over the past decade. Most of the non-agricultural employment
in Johnson County is found in and around Buffalo, primarily within service
industries, state and local government, and retail trade. The largest employer
in the Johnson County is the public school system, followed by the Johnson
County Memorial Hospital. Tourism also provides a major boost to jobs in
services and retail trade in Johnson County, as Buffalo is located at the edge
of the Big Horn National Forest and the area is a popular destination for people
seeking outdoor recreation. The three-way junction of Interstates 90 and 25 and
State Highway 16 also brings a large number of travelers through Buffalo.
Buffalo, the largest town in Johnson County, has a population estimated at
3,800 (approximately 54 percent of the county population resides in the Buffalo
area). Because Johnson County is primarily a rural area where most of the land
is used for agricultural purposes, Buffalo acts as somewhat of a hub for
commerce in Johnson County. Economic growth in the Bank's market area remains
dependent upon the local economy. In addition, the deposit and loan activity of
the Bank is significantly affected by economic conditions in its market area.
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Competition
The Bank is the only savings and loan association in its Primary Market
Area. There are, however, two commercial banks headquartered in the Primary
Market Area and a branch of a larger out- of-area commercial bank.
The Bank believes it is a primary source of residential mortgage loans in
the community. The Bank has competition from all three banks in originating
residential mortgage loans along with some competition from a mortgage banker in
a city thirty five miles away. All of the competition sells the majority of
their residential mortgage loans on the secondary market, while Buffalo Federal
has been traditionally placing mortgage loan originations in their portfolio.
There is also extensive competition for deposits. Based on data provided
periodically by the Office of Thrift Supervision ("OTS"), Buffalo Federal has
been able to maintain a market share of approximately 25% of the total deposits
in financial institutions in the community. Insurance companies and securities
dealers offer further competition for deposits. The competition for deposits is
expected to continue in the future.
Lending Activities
Analysis of Loan Portfolio. The following table sets forth information
concerning the composition of the Bank's loan portfolio in dollar amounts and in
percentages of the total loan portfolio (before deductions for loans in process,
net deferred loan origination fees and allowance for loan losses) as of the
dates indicated.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------
1996 1995
------------------- --------------------
Percent Percent
Amount of Total Amount of Total
------ -------- ------ --------
(In Thousands)
Type of Loans:
<S> <C> <C> <C> <C>
One- to four-family.................. $ 20,002 75.86% $17,715 75.30%
Residential construction............. 513 1.95 601 2.56
Multi-family......................... 571 2.16 403 1.71
Commercial real estate(1)............ 1,758 6.67 1,975 8.40
Commercial........................... 163 0.62 227 0.96
Consumer:
Automobile......................... 1,043 3.96 863 3.67
Home equity/Line of credit......... 1,317 5.00 925 3.93
Share.............................. 425 1.61 341 1.45
Other.............................. 573 2.17 475 2.02
------ ------ ------ ------
Total consumer................... 3,358 12.74% 2,604 11.07
Total loans...................... 26,365 100.00% 23,525 100.00%
====== ====== ====== ======
Less:
Loans in process..................... (85) (111)
Net deferred loan origination fees... (145) (133)
Allowance for loan losses............ (276) (275)
------- -------
Total loans, net....................... $25,859 $23,006
======= =======
</TABLE>
- --------------------------------
(1) Includes agricultural real estate loans.
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Origination, Purchase and Sale of Loans. The following table sets forth
the Bank's loan organizations and loan sales and principal repayments for the
periods indicated.
Year Ended September 30,
------------------------
1996 1995
-------- ---------
(In Thousands)
Total gross loans receivable at
beginning of period......... $23,525 $22,984
Loans originated:
One- to four-family.......... $ 5,386 $ 3,187
Multi-family................. 215 40
Commercial real estate....... 131 12
Construction................. 591 578
Commercial................... 69 80
Consumer..................... 2,515 1,806
------- -------
Total loans originated......... $ 8,907 $ 5,703
======= =======
Loans sold:
Total loans sold............... $ -- $ --
Loan principal repayments...... $ 6,067 $ 5,162
Net loan activity.............. $ 2,840 $ 541
======= =======
Total gross loans receivable at
end of period.............. $26,365 $23,525
======= =======
4
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Loan Maturity Tables. The following table sets forth the maturity of
Buffalo Federal's loan portfolio at September 30, 1996. The table does not
include prepayments or scheduled principal repayments. Prepayments and scheduled
principal repayments on loans totaled $6.1 million and $5.2 million, for the
years ended September 30, 1996 and 1995, respectively. Adjustable-rate mortgage
loans are shown as maturing based on contractual maturities.
<TABLE>
<CAPTION>
Commercial Residential
1-4 Family Multi-family Real Estate Construction Commercial Consumer Total
---------- ------------ ----------- ------------ ---------- -------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Non-performing loans ............ $ 10 $ -- $ -- $ -- $ -- $ 22 $ 32
Amounts Due:
Within 3 months ................... 1 -- 232 308 50 574
1,165
3 months to 1 year ................ 3 -- 24 205 27 289 548
After 1 year:
1 to 3 years .................... 845 200 933 -- 24 861 2,863
3 to 5 years .................... 1,015 -- 119 -- 34 1,454 2,622
5 to 10 years ................... 3,660 12 212 -- 28 158 4,070
10 to 20 years .................. 13,956 359 238 -- -- -- 14,553
Over 20 years ................... 512 -- -- -- -- -- 512
------- ------ ------ --- ------ ------- -------
Total due after one year .......... 19,988 571 1,502 -- 86 2,473 24,620
------- ------ ------ --- ------ ------- -------
Total amount due .................. $20,002 $ 571 $1,758 513 $ 163 $ 3,358 $26,365
======= ====== ====== === ====== ======= =======
Less:
Allowance for loan loss ........... 132 4 $ 40 5 10 85 276
Loans in process .................. -- -- -- 77 8 -- 85
Net deferred loan fees ............ 138 4 3 -- -- -- 145
------- ------ ------ --- ------ ------- -------
Loans receivable, net............ $19,732 $ 563 $1,715 431 $ 145 3,273 $25,859
======= ====== ====== === ====== ======= =======
</TABLE>
The next table sets forth at September 30, 1996, the dollar amount of all
loans due one year after September 30, 1996 which have fixed interest rates and
have floating or adjustable interest rates.
Floating or
Fixed Adjustable
Rates Rates Total
----- ----------- -----
(In Thousands)
One- to four-family..... $19,811 $ 177 $19,988
Multi-family............ 571 - 571
Construction............ - - -
Commercial real estate.. 1,502 - 1,502
Commercial.............. 86 - 86
Consumer................ $2,185 288 $ 2,473
------- ------- -------
Total.............. $24,155 $ 465 $24,620
======= ======= =======
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One- to Four-Family Residential Loans. The Bank's primary lending activity
consists of the origination of one- to four-family residential mortgage loans
secured by property located in the Bank's Primary Market Area. The Bank
generally originates one- to four-family residential mortgage loans in amounts
up to 80% of the lesser of the appraised value or selling price of the mortgaged
property. Loans in excess of 80% of the lesser of the appraised value or selling
price of property require private mortgage insurance for the borrower. The
Bank's strategy is to originate for its portfolio adjustable-rate loans, and
five-year balloon loans as well as 20-year or less fixed-rate loans for
retention in its portfolio. The Bank intends to sell fixed-rate loans with
maturities of greater than 20 years in the secondary market, without recourse
and servicing released.
The Bank offers adjustable-rate loans using primarily a one-year constant
maturity treasury interest rate index. During fiscal 1996, the Bank originated
one adjustable rate loan that totalled $100,000. Interest rates charged on
mortgage loans are competitively priced based on market conditions and the
Bank's cost of funds. Generally, the Bank's standard underwriting guidelines for
mortgage loans conform to secondary market guidelines. It is the current policy
of the Bank to remain a portfolio lender. At September 30, 1996, the Bank
serviced loans for others totalling $81,000.
Loan originations are generally obtained from existing customers, members
of the local community, and referrals from realtors, past customers and
contractors within the Bank's lending area. Mortgage loans originated and held
by the Bank in its portfolio generally include due-on-sale clauses which provide
the Bank with the contractual right to deem the loan immediately due and payable
in the event that the borrower transfers ownership of the property without the
Bank's consent.
The Bank originates five-year balloon mortgage loans with a 30-year
amortization period. Management believes that balloon loans have a pricing
characteristic that helps offset the detrimental affect that rising rates could
have on net interest income. At September 30, 1996, balloon mortgages totalled
$1.48 million, or 5.61% of the Bank's loan portfolio.
Residential Construction Loans. Residential construction loans are made on
one- to four-family residential property to the individuals who will be the
owners and occupants upon completion of construction. These loans are made on a
short term basis and permanent long-term financing is available to these
borrowers. No principal payments are required during the construction period,
however, interest is due monthly. The maximum loan to value ratio is 80%. If
permanent financing is obtained from the Bank, these loans are made on terms
similar to those of the Bank's single family residential loans and may be
amortized over terms of up to 30 years.
In addition to loans originated for the construction of a residence for
which the ultimate purchaser has been identified, the Bank on a limited basis
originates speculative loans to residential builders who have established
business relationships with the Bank. These speculative loans are typically made
for a 12 month period and require interest only payments during the term of the
loan. In underwriting such loans, the Bank considers the number of units that
the builder has on a speculative bid basis that remain unsold. The Bank's
experience during the past three years has been that most speculative loans are
repaid well within the 12 month period. Speculative loans are generally
originated with a loan to value ratio that does not exceed 80%. At September 30,
1996, there were no speculative construction loans.
Construction lending is generally considered to involve a higher degree of
credit risk than long-term financing of residential properties. The Bank's risk
of loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction or
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development and the estimated cost of construction. If the estimate of
construction cost and the marketability of the property upon completion of the
project prove to be inaccurate, the Bank may be compelled to advance additional
funds to complete the development. Furthermore, if the estimate of value proves
to be inaccurate, the Bank may be confronted, at or prior to the maturity of the
loan, with a property with a value that is insufficient to assure full
repayment. For speculative loans originated to builders, the ability of the
builder to sell completed dwelling units will depend, among other things, on
demand, pricing and availability of comparable properties, and economic
conditions.
Commercial Real Estate Loans. At September 30, 1996, the commercial real
estate portfolio totalled $1.76 million, or 6.67% (of which $625,000 or 2.37%
were agricultural land loans) of the loan portfolio. In order to serve its
community and enhance yields on its assets, the Bank originates loans secured by
commercial real estate. The commercial real estate loans originated by the Bank
have generally been made to individuals, small businesses, and partnerships.
They have primarily been secured by first mortgages on a motel and restaurant,
office buildings and other properties located in its Primary Market Area. The
Bank benefits from originating such loans due to higher origination fees and
shorter term maturities. Buffalo Federal's commercial real estate loans are
fixed-rate and balloon loans with terms of 15 years or less, with loan-to-value
ratios not exceeding 75%.
Loans secured by commercial real estate generally involve a greater degree
of risk than residential mortgage loans and carry larger loan balances. This
increased credit risk is a result of several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income producing properties, and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by commercial real estate is
typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced, the borrower's ability to
repay the loan may be impaired. To minimize these risks, Buffalo Federal
generally limits loans of this type to its market area and to borrowers with
which it has substantial experience or who are otherwise well known to the Bank.
The Bank's underwriting procedures require verification of the borrower's credit
history, income, financial statements, banking relationships, credit references,
and income projections for the property. It is the Bank's current practice to
obtain personal guarantees from all principals obtaining this type of loan. The
Bank also obtains appraisals on each property in accordance with applicable
regulations and appraisal policies. All appraisals on commercial real estate are
reviewed by the Bank's management.
Agricultural Loans. Buffalo Federal engages in lending on improved farm
land with no dwelling, building lots and building acreage sites. These
properties must have good road access. The loan to value ratio for this type of
loan is 75% or less with a maximum loan term of 15 years.
Buffalo Federal also engages in loans for improved farm land with
dwelling. The loan to value ratio for this type of loan is 75% or less with a
maximum term of 20 years. These loans can be set up with payment of intervals of
interest collected semi-annually and principal annually as well as monthly
principal and interest payments. As of September 30, 1996, agricultural farm
loans constituted approximately $625,000, or 2.37% of the Bank's loan portfolio.
Agricultural land loans are included in commercial real estate loan total. See
also "-- Commercial Real Estate Loans."
Multi-Family Loans. The Bank also makes multi-family loans, including
loans on apartment complexes located in the Bank's Primary Market Area.
Multi-family loans generally provide higher interest rates than can be obtained
from single-family mortgage loans. Multi-family lending, however, entails
significant additional risks compared with one- to four-family residential
lending. For example,
7
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multi-family loans typically involve larger loan balances to single borrowers or
groups of related borrowers, the payment experience on such loans typically is
dependent on the successful operation of the real estate project, and these
risks can be significantly impacted by supply and demand conditions in the
market for multi-family residential units and commercial office, retail and
warehouse space.
Consumer Loans. The Bank's consumer loans consist of home equity loans
secured by second mortgages on single-family residences in the Bank's market
area, automobiles, demand loans secured by savings accounts at the Bank, student
loans and other loans. The Bank has increased its emphasis on consumer lending
in recent years, including new and used automobile loans, to provide a wide
range of financial services to the Bank's customers while increasing the Bank's
portfolio yields.
The Bank makes second mortgage loans secured by the borrower's residence.
These loans, combined with the first mortgage loan, which usually is from the
Bank, generally are limited to 80% of the appraised value of the residence.
The Bank generally makes savings account loans for up to 90% of the
balance of the account. The interest rate on these loans generally is indexed to
the rate paid on the secured savings account, and interest is due at maturity.
These loans are payable on demand, and the account must be pledged as collateral
to secure the loan.
Consumer loans generally involve more risk than first mortgage loans.
Repossessed collateral for a defaulted loan may not provide an adequate source
of repayment of the outstanding loan balance as a result of damage, loss or
depreciation, and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In addition, loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. Further, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
which can be recovered. These loans may also give rise to claims and defenses by
a borrower against the Bank and a borrower may be able to assert against the
Bank claims and defenses which it has against the seller of the underlying
collateral. In underwriting consumer loans, the Bank considers the borrower's
credit history, an analysis of the borrower's income, expenses and ability to
repay the loan and the value of the collateral.
Commercial Loans. The Bank on occasion will make commercial loans,
primarily to existing customers. At September 30, 1996, commercial loans,
consisted primarily of small business loans (primarily secured by livestock,
office equipment, and machinery).
Loan Approval Authority and Underwriting. The Bank's Loan Committee, which
consists of the three senior officers, has authority to approve loans up to
$125,000. Loans in excess of $125,000 requires approval by the Board of
Directors. Individual loan officers have lending authority for consumer loans up
to $20,000.
Upon receipt of a completed loan application from a prospective borrower,
a credit report is ordered, income and certain other information is verified
and, if necessary, additional financial information is requested. An appraisal
of the real estate intended to be used as security for the proposed loan is
obtained. Appraisals are conducted by four independent appraisers which have
been approved by the Bank. The Bank makes construction/permanent loans on
individual properties. Funds advanced during the construction phase are held in
a loan-in-process account and disbursed based upon various
8
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stages of completion in accordance with the results of inspection reports that
are based upon physical inspection of the construction by a loan officer. For
real estate loans, the Bank requires a title commitment. Borrowers must also
obtain fire and casualty insurance (for loans on property located in a flood
zone, flood insurance is required) prior to the closing of the loan.
The Bank receives fees in connection with loan originations, loan
modifications, late payments and changes of property ownership and for
miscellaneous services related to its loans. Loan origination fees are
calculated as a percentage of the loan principal. The Bank typically receives
fees of up to 2 points (one point being equivalent to 1% of the principal amount
of the loan) in connection with the origination of fixed-rate and
adjustable-rate residential mortgage loans. The excess, if any, of loan
origination fees over direct loan origination expenses is deferred and credited
into income over the contractual life of the loan using the level-yield method.
If a loan is prepaid, refinanced or sold, all remaining deferred fees with
respect to such loan are taken into income at such time.
Loan Commitments. The Bank issues verbal commitments to prospective
borrowers on all approved real estate loans. Generally, the commitment requires
acceptance within 60 days of the date of issuance. At September 30, 1996, the
Bank had $708,000 of commitments to cover originations and $85,000 in
undisbursed funds for loans in process. Management believes that virtually all
of the Bank's commitments will be funded.
Loans-to-One Borrower. Regulations limit loans-to-one borrower in an
amount equal to 15% of unimpaired capital and unimpaired surplus of the Bank.
The Bank is authorized to lend up to an additional 10% of unimpaired capital and
unimpaired surplus if the loan is fully secured by readily marketable
collateral. The Bank's maximum loan-to-one borrower limit was approximately
$1.62 million at September 30, 1996.
At September 30, 1996, the Bank's largest amount of loans to one borrower
were all performing residential and commercial real estate loans aggregating
approximately $511,000, secured by single-family residential and commercial
properties located in the Bank's Primary Market Area.
Non-Performing and Problem Assets
Loan Delinquencies. The Bank's collection procedures provide that when a
mortgage loan is 30 days past due, a notice of nonpayment is sent. If payment is
still delinquent after 60 days, the customer will receive a letter and/or
telephone call and may receive a visit from a representative of the Bank. If the
delinquency continues, similar subsequent efforts are made to eliminate the
delinquency. If the loan continues in a delinquent status for 90 days past due
and no repayment plan is in effect, a notice of right to cure default is mailed
to the customer giving 30 additional days to bring the account current before
foreclosure is commenced. The loan committee meets regularly to determine when
foreclosure proceedings should be initiated and the customer is notified when
foreclosure has been commenced. At September 30, 1996, loans past due 30 to 89
days totalled $208,000.
Loans are reviewed on a monthly basis and are generally placed on a
non-accrual status when the loan becomes more than 90 days delinquent or when,
in the opinion of management, the collection of additional interest is doubtful.
Interest accrued and unpaid at the time a loan is placed on non-accrual status
is charged against interest income. Subsequent interest payments, if any, are
either applied to the outstanding principal balance or recorded as interest
income, depending on the assessment of the ultimate collectibility of the loan.
9
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Non-Performing Assets. The following table sets forth information
regarding non-accrual loans, real estate owned, and certain other repossessed
assets and loans.
At September 30,
1996 1995
(In Thousands)
Loans accounted for on a non-accrual basis:
One- to four-family .................................. $ 10 $ --
Commercial real estate ............................... -- --
Construction ......................................... -- 68
Commercial ........................................... -- --
Consumer ............................................. 22 --
---- ----
Total .................................................. $ 32 $ 68
==== ====
REO .................................................... $ -- $ 55
---- ----
Other non-performing assets ............................ $ -- $ --
---- ----
Total non-performing assets ............................ $ 32 $123
==== ====
Total non-performing loans to net
loans ................................................ 0.12% 0.30%
==== ====
Total non-performing assets to total
assets ............................................... 0.06% 0.33%
==== ====
Interest income that would have been recorded on loans accounted for on a
non-accrual basis under the original terms of such loans was immaterial for the
year ended September 30, 1996. Amounts included in the Bank's interest income
for the year ended September 30, 1996 were, likewise, immaterial.
Classified Assets. OTS regulations provide for a classification system for
problem assets of insured institutions which covers all problem assets. Under
this classification system, problem assets of insured institutions are
classified as "substandard," "doubtful," or "loss." An asset is considered
substandard if it is inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Substandard assets
include those characterized by the "distinct possibility" that the insured
institution will sustain "some loss" if the deficiencies are not corrected.
Assets classified as doubtful have all of the weaknesses inherent in those
classified substandard, with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions, and values, "highly questionable and improbable."
Assets classified as loss are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted. Assets may be designated "special
mention" because of potential weaknesses that do not currently warrant
classification in one of the aforementioned categories.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as loss, it is required either to
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establish a specific allowance for losses equal to 100% of that portion of the
asset so classified or to charge off such amount. An institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the OTS, which may order the establishment of
additional general or specific loss allowances. A portion of general loss
allowances established to cover possible losses related to assets classified as
substandard or doubtful may be included in determining an institution's
regulatory capital, while specific valuation allowances for loan losses
generally do not qualify as regulatory capital.
At September 30, 1996, the Bank had $63,000 of assets classified as
substandard (which consisted of one home loan and eight small dollar consumer
loans) and no assets classified as doubtful or loss.
Furthermore, the Bank had no special mention loans at that date.
Foreclosed Real Estate. Real estate acquired by the Bank as a result of
foreclosure or by deed in lieu of foreclosure is classified as REO until it is
sold. When property is acquired it is recorded at the fair value at the date of
foreclosure less estimated costs of disposition. At September 30, 1996, the Bank
had no repossessed assets.
Allowances for Loan Losses. It is management's policy to provide for
unidentified losses on loans in its loan portfolio. A provision for loan losses
is charged to operations based on management's evaluation of the potential
losses that may be incurred in the Bank's loan portfolio. Such evaluation, which
includes a review of all loans of which full collectibility of interest and
principal may not be reasonably assured, considers the Bank's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, estimated value of any underlying
collateral and current economic conditions.
The amount of provisions recorded in future periods may be significantly
greater or lesser than the provisions taken in the past. The allowance for loan
losses, as a ratio of total net loans was 1.06% at September 30, 1996.
Management will continue to review the entire loan portfolio to determine
the extent, if any, to which further additional loss provisions may be deemed
necessary. 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 for losses will not be required.
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of the Bank's allowance for loan losses by loan category and the
percent of loans in each category to total loans receivable for the periods
indicated. The portion of the loan loss allowance allocated to each loan
category does not represent the total available for future losses that may occur
within the loan category because the total loan loss allowance is a valuation
reserve applicable to the entire loan portfolio.
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At September 30,
-------------------------------------------
1996 1995
-------------------------------------------
Percent of Percent of
Loans to Loans to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in Thousands)
At end of period allocated to:
One-to four-family..... $ 132 75.86% $132 75.30%
Multi-family........... 4 2.16 4 1.71
Commercial real estate. 40 6.67 40 8.40
Construction........... 5 1.95 5 2.56
Commercial............. 10 0.62 10 0.96
Consumer............... 85 12.74 84 11.07
------ ------ ---- ------
Total allowance........ $ 276 100.00% $275 100.00%
====== ====== ==== ======
Analysis of the Allowance for Loan Losses. The following table sets forth
information with respect to the Bank's allowance for loan losses at the dates
indicated:
Year Ended September 30,
-------------------------
1996 1995
---------- ---------
(Dollars in Thousands)
Total loans outstanding ........................ $ 26,365 $ 23,525
Allowance balances (at beginning of
period) ........................................ 275 207
Provision (loan loss benefit):
One- to four-family .......................... -- 50
Commercial real estate ....................... -- --
Commercial ................................... -- --
Consumer ..................................... -- (8)
----- -----
Net provision (loan loss benefit) .......... -- 42
Net charge-offs (recoveries):
One- to four-family .......................... (11) (13)
Commercial real estate ....................... -- --
Commercial ................................... -- (4)
Consumer ..................................... 10 (9)
----- -----
Net charge-offs (recoveries) ............... (1) (26)
----- -----
Allowance balance (at end of period)$ .......... 276 $ 275
===== =====
Allowance for loan losses to total
loans, net ................................... 1.06 % 1.18 %
===== =====
Net charge-offs (recoveries) to
loans receivable, net ....................... (0.01)% (0.11)%
===== =====
12
<PAGE>
Investment Activities
General. Buffalo Federal is required under federal regulations to maintain
a minimum amount of liquid assets which may be invested in specified short-term
securities and certain other investments. See also " -- Bank Regulation --
Federal Home Loan Bank System." The Bank has maintained a liquidity portfolio in
excess of regulatory requirements. Liquidity levels may be increased or
decreased depending upon the yields on investment alternatives and upon
management's judgment as to the attractiveness of the yields then available in
relation to other opportunities and its expectation of future yield levels, as
well as management's projections as to the short-term demand for funds to be
used in the Bank's loan origination and other activities. At September 30, 1996,
the Bank's investment portfolio policy allowed investments in only U.S. Treasury
obligations, U.S. Agency securities, mortgage-backed securities, municipal
securities, federally-insured certificates of deposit, federal funds, FHLMC
stock and FHLB overnight and term deposits. The Board of Directors may authorize
additional investments.
Mortgage-Backed Securities. Primarily to supplement lending activities,
Buffalo Federal invests in residential mortgage-backed securities.
Mortgage-backed securities can serve as collateral for borrowings and, through
repayments, as a source of liquidity. Investment decisions are made by the
Bank's Investment Committee, which consists of the three senior officers. Two of
the three committee members must agree on all decisions.
Mortgage-backed securities represent a participation interest in a pool of
single-family mortgages, the principal and interest payments on which are passed
from the mortgage originators, through intermediaries (generally
quasi-governmental agencies) that pool and repackage the participation interests
in the form of securities, to investors such as the Bank. Such
quasi-governmental agencies, which guarantee the payment of principal and
interest to investors, primarily include the Federal Home Loan Mortgage
Corporation ("FHLMC"), Government National Mortgage Bank ("GNMA"), and Federal
National Mortgage Bank ("FNMA"). Pass-through certificates typically are issued
with stated principal amounts, and the securities are backed by pools of
mortgages that have loans with interest rates and maturities that are within a
specified range. The underlying pool of mortgages can be composed of either
fixed-rate mortgage loans or ARM loans. Mortgage-backed securities are generally
referred to as mortgage participation certificates or pass-through certificates.
As a result, the interest rate risk characteristics of the underlying pool of
mortgages, (i.e., fixed-rate or adjustable-rate) as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages. Mortgage-backed
securities issued by FHLMC, FNMA and GNMA make up a majority of the pass-through
market.
Mortgage-backed securities provide for monthly payments of principal and
interest and generally have contractual maturities ranging from five to 30
years. However, due to expected repayment terms being significantly less than
the underlying mortgage loan pool contractual maturities, the estimated lives of
these securities could be significantly shorter.
The Bank also purchases mortgage-backed securities issued by government
agencies which are currently qualified under the Internal Revenue Code, as
amended (the "Code") as REMICs. REMICs have been developed in response to
investor concerns regarding the uncertainty of cash flows associated with the
prepayment option of the underlying mortgagor and are typically issued by
governmental agencies, governmental sponsored enterprises and special purpose
entities, such as trusts, corporations or partnerships, established by financial
institutions or other similar institutions. Some REMIC instruments are most like
traditional debt instruments because they have stated principal amounts and
traditionally defined interest-rate terms. Purchasers of certain other REMIC
instruments are entitled to the excess, if any, of the issuer's cash inflows,
including reinvestment earnings, over the cash outflows for debt service and
administrative expenses. These mortgage related instruments may include
instruments designated as residual interests, which represent an equity
ownership interest in the underlying collateral, subject to the first lien of
the investors in the other classes of the REMIC. Certain
13
<PAGE>
residual REMIC interests may be riskier than many regular REMIC interests to the
extent that they could result in the loss of a portion of the original
investment. Moreover, cash flows from residual interests are very sensitive to
prepayments and, thus, contain a high degree of interest-rate risk.
At September 30, 1996, all of the Bank's investment in REMICs consisted of
regular interests and did not include any residual interests or interest-only or
principal-only securities. As a matter of policy, the Bank does not invest in
residuals or interest-only and principal-only securities. The REMICs held by the
Bank at September 30, 1996 consisted solely of fixed-rate tranches. The
securities are backed by mortgages on one- to four-family residential real
estate and have contractual maturities up to 30 years. The securities are PACs
(Planned Amortization Classes) and are designed to provide a specific principal
and interest cash-flow.
At September 30, 1996, the Bank had REMICs with an aggregate carrying
amount (including discounts and premiums) of $1.58 million, of which none were
privately issued.
Mortgage-backed securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which offer nominal credit risk. In addition, mortgage-backed and
related securities are more liquid than individual mortgage loans and are used
to collateralize borrowings of the Bank. Mortgage-backed securities issued or
guaranteed by the GNMA, FNMA or the FHLMC (except interest-only securities or
residuals) are weighted at no more than 20.0% for risk-based capital purposes,
compared to a weight of 50.0% to 100.0% for residential loans. See "-- Bank
Regulation -- Regulatory Capital Requirements."
During periods of rising mortgage interest rates, if the coupon rates of
the underlying mortgages are less that the prevailing market interest rates
offered for mortgage loans, refinancings generally decrease and slow the
prepayment of the underlying mortgages and the related securities. Conversely,
during periods of falling mortgage interest rates, if the coupon rates of the
underlying mortgages exceed the prevailing market interest rates offered for
mortgage loans, refinancing generally increases and accelerates the prepayment
of the underlying mortgages and the related securities. Under such
circumstances, the Bank may be subject to reinvestment risk because to the
extent that the Bank's mortgage-related securities amortize or prepay faster
than anticipated, the Bank may not be able to reinvest the proceeds of such
repayments and prepayments at a comparable rate.
Step-Up Bonds and Structured Notes. The Bank previously invested in
step-up bonds issued by the FHLB and FNMA. These securities represent
obligations of the FHLB or the FNMA to repay principal with interest that is
either fixed or fluctuates in accordance with a formula tied to various indices.
Certain of these securities involved certain risks not associated with
investments in a conventional debt security. The Bank had purchased the step-up
bonds in an effort to decrease the Bank's sensitivity to rising interest rates.
At September 30, 1996, the bonds had an amortized cost of $1.35 million, with a
market value of $1.34 million.
The Bank's step-up bonds have step-up periods ranging from one to two
years. The bonds are callable at the time they step-up. The Bank's current
intention is to discontinue purchases of step-up bonds.
In addition, the Bank maintains in its investment portfolio a structured
note issued by the FNMA. This note represents an obligation of the FNMA to repay
principal and interest that fluctuates in accordance with an interest formula
tied to the Ten-year Constant Maturity Treasuries ("CMT"). The interest rate
floor on the note is 5%. The note, with an amortized cost of $500,000 and a
market value of $471,000 at September 30, 1996 has a maturity date of April 21,
2000. The Bank invested in this note (an "inverse floater") to hedge against
falling interest rates.
14
<PAGE>
Investments in such notes and bonds entail certain risks not associated
with investments in a conventional debt security. If the interest rate on a note
is indexed, the change in the interest rate may result in an interest rate that
is less than that payable on a conventional fixed-rate debt security issued at
the same time. Moreover, the secondary market for such notes is affected by
factors independent of the creditworthiness of the issuer and the value of the
index, including other interest rates, the volatility of the index to which the
notes is tied, time remaining to maturity, and the amount of such notes
outstanding. The value of the index to which interest on the notes is tied may
depend on a number of interrelated factions, including, economical, financial,
and political events over which the issuer has no control. Structured notes may
also expose institutions to greater interest rate risk due to the presence of
imbedded call options as well as interest rate caps and floors.
Investment Securities Portfolio. The following table sets forth the
carrying value of the Bank's investment securities portfolio, securities
available for sale portfolio, short-term investments and FHLB stock at the dates
indicated. At September 30, 1996, the market value of the Bank's investment
securities portfolio was $10.18 million and securities available for sale
portfolio was $13.37.
At September 30,
----------------
1996 1995
---- ----
(In Thousands)
Investment securities held to
maturity
U.S. Agency securities ............................ $ 5,751 $ 6,491
Municipal securities .............................. 223 215
FHLMC preferred stock ............................. 100 100
GNMA .............................................. 1,695 1,544
FNMA .............................................. 775 869
FHLMC ............................................. 1,749 721
Other pass-throughs ............................... 10 15
------- -------
Total investment securities held to
maturity ....................................... $10,303 $ 9,955
======= =======
Securities available for sale(1)(2)................. 11,898 700
REMICS available for sale(2) ....................... 1,567 1,522
------- -------
Total securities available for sale.............. $13,465 $ 2,222
======= =======
Interest-bearing deposits .......................... 99 693
FHLB stock ......................................... 400 371
------- -------
Total ........................................... $24,267 $13,241
======= =======
- ---------------------------------
(1) Includes U.S. Agency securities, GNMA and FHLMC mortgage-backed
securities.
(2) Amounts shown at amortized costs, but carried at fair value.
15
<PAGE>
The following table sets forth information regarding the scheduled
maturities, carrying value, market value and weighted average yields for the
Bank's investment securities at September 30, 1996.
<TABLE>
<CAPTION>
As of September 30, 196
----------------------------------------------------------------------------------------------------
Total
One Year or Less One to Five Years Five to Ten Years More than Ten Years Investment Securities
----------------- ----------------- ----------------- ------------------- ---------------------
Amortized Average Amoritized Average Amortized Average Amortized Average Amortized Average Market
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield Value
--------- ------- ---------- ------- --------- ------- --------- ------- --------- ------- ------
(Dollars in Thousands)
Investment securities held to
maturity:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Agency securities ....... $ -- % $2,853 6.00% $ 2,898 6.68% $ -- % $ 5,751 6.34% $ 5,625
Municipal securities .......... -- 20 9.30 203 5.70 -- 223 6.02 228
Mortgage-backed securities and
other pass-throughs .......... -- 10 7.50 437 8.20 3,782 5.83 4,229 6.81 4,226
FHLMC stock ................... 100 7.90 -- -- -- -- -- 100 7.90 102
Securities available for sale(1) -- 3,450 6.73 4,400 7.39 4,048 5.83 11,898 6.67 11,846
REMICs available for sale ..... -- 500 6.63 360 5.75 707 6.50 1,567 6.37 1,519
------ ---- ------ ---- ------- ---- ------ ---- ------- ---- -------
Total ....................... $ 100 7.90% $6,833 6.42% $ 8,298 7.07% $8,537 6.26% $23,768 6.61% $23,546
====== ==== ====== ==== ======= ==== ====== ==== ======= ==== =======
</TABLE>
- -------------------------
(1) Includes U.S. Agency securities and mortgage-backed securities.
16
<PAGE>
Sources of Funds
General. Deposits are the major external source of the Bank's funds for
lending and other investment purposes. Buffalo Federal derives funds from
amortization and prepayment of loans and, to a lesser extent, maturities of
investment securities, borrowings, maturities of mortgage-backed securities and
operations. Scheduled loan principal repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments are
significantly influenced by general interest rates and market conditions.
Buffalo Federal also utilizes FHLB advances to meet liquidity and investing
needs.
Deposits. Deposits are attracted principally from within the Bank's
primary market area through the offering of a selection of deposit instruments
including regular savings accounts, money market accounts, NOW accounts, and
term certificate accounts. The Bank also offers IRA accounts. Deposit account
terms vary according to the minimum balance required, the time period the funds
must remain on deposit, and the interest rate, among other factors.
The interest rates paid by the Bank on deposits are set weekly at the
direction of senior management. The Bank determines the interest rate to offer
the public on new and maturing accounts by reviewing the market interest rates
offered by competitors and the national market. The Bank reviews, weekly, the
interest rates being offered by other financial institutions within its primary
market area.
Passbook savings, money market and NOW accounts constituted $10.05
million, or 34.2%, of the Bank's deposit portfolio at September 30, 1996.
Certificates of deposit (or time deposits) constituted $19.32 million, or 65.8%
of the deposit portfolio of which $5.04 million, or 17.2% of the deposit
portfolio were certificates of deposit with balances of $100,000 or more. As of
September 30, 1996, the Bank had no brokered deposits.
Time Deposits by Rate. The following table sets forth the time deposits in
the Bank classified by interest rate as of the dates indicated.
At September 30,
----------------
1996 1995
---- ----
(In Thousands)
Interest Rate
2.01 - 4.00%............................ $ -- $ --
4.01 - 6.00%............................ 16,574 13,486
6.01 - 8.00%............................ 2,748 5,668
8.01 -10.00%............................ - 4
------- ------
Total................. $ 19,322 $19,158
======= ======
17
<PAGE>
Time Deposits Maturity Schedule. The following table sets forth the amount
and maturities of time deposits at September 30, 1996.
<TABLE>
<CAPTION>
Amount Due
---------------------------------------------------------------------
After
September 30, September 30, September 30, September 30,
Interest Rate 1997 1998 1999 2000 Total
- ------------- ----- ------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C> <C>
4.01-6.00%............... $ 13,267 $ 2,007 $ 1,107 $ 193 $ 16,574
6.01-8.00%............... 938 1,008 642 160 2,748
8.01-10.00%.............. - - - - -
--------- --------- --------- -------- ---------
Total.............. $ 14,205 $ 3,015 $ 1,749 $ 353 $ 19,322
========= ========= ========= ======== =========
</TABLE>
Jumbo Certificates of Deposit. The following table indicates the amount of
the Bank's certificates of deposit of $100,000 or more by time remaining until
maturity as of September 30, 1996.
Certificates
Maturity Period of Deposit
- --------------- --------------
(In Thousands)
Within three months ........................................... $1,132
More than three through six months............................. 983
More than six through twelve months............................ 2,620
Over twelve months ............................................ 305
Total ...................................................... $5,040
======
Savings Deposit Activity. The following table sets forth the savings
activities of the Bank for the periods indicated:
Year Ended
September 30,
---------------
1996 1995
---- ----
(In Thousands)
Net increase (decrease)
before interest credited..... $ (9) $(1,764)
Interest credited.............. 1,171 993
----- ------
Net increase (decrease) in
savings deposits............. $ 1,162 $ (771)
===== ======
Borrowings. The Bank may obtain advances from the FHLB of Seattle to
supplement its supply of lendable funds. Advances from the FHLB of Seattle are
typically secured by a pledge of the Bank's stock in the FHLB of Seattle and a
portion of the Bank's first mortgage loans and certain other assets. The Bank
utilizes short-term FHLB advances primarily to fund loan originations and as a
hedge against interest rates whereby funds from advances are invested in
callable government agencies with terms to maturity of three to ten years. Each
FHLB credit program has its own interest rate, which may be fixed
18
<PAGE>
or variable, and range of maturities. The Bank, if the need arises, may also
access the Federal Reserve Bank discount window to supplement its supply of
lendable funds and to meet deposit withdrawal requirements. At September 30,
1996, the Bank had $6.11 million of borrowings from the FHLB of Seattle that
consisted of $6.00 million in fixed-rate advances with rates of 5.26% to 6.54%,
and a $113,000 amortizing advance at 4.36%. FHLB advances have been utilized by
the Bank to fund loan demand and to purchase investment securities. The Bank has
used FHLB advances to fund the purchase of investment and mortgage-backed
securities with the goal of earning income on the interest rate differential
between the rate earned on the investment securities and the rate paid on the
FHLB advances.
The following table sets forth information concerning only short-term
borrowings (those maturing within one year or less) the Bank had during the
periods indicated.
Year ended September 30,
------------------------
1996 1995
----------- ----------
Short-term FHLB advances:
Average balance outstanding $3,723,000 $1,439,000
Maximum amount outstanding at any month-end
during the period $5,500,000 $2,469,000
Weighted average interest rate during the period 5.58% 4.70%
Total short-term borrowings at end of period $5,213,000 $2,469,000
Personnel
At September 30, 1996 the Bank had ten full-time and two part-time
employees. None of the Bank's employees are represented by a collective
bargaining group. The Bank believes that its relationship with its employees is
good.
Regulation
Set forth below is a brief description of certain laws which relate to the
regulation of the Bank and the Company. The description does not purport to be
complete and is qualified in its entirety by reference to applicable laws and
regulations.
Bank Regulation
General. As a federally chartered, SAIF-insured savings association, the
Bank is subject to extensive regulation by the OTS and the FDIC. Lending
activities and other investments must comply with various federal statutory and
regulatory requirements. The Bank is also subject to certain reserve
requirements promulgated by the Board of Governors of the Federal Reserve System
("Federal Reserve System").
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that they find in the Bank's
19
<PAGE>
operations. The Bank's relationship with its depositors and borrowers is also
regulated to a great extent by federal law, especially in such matters as the
ownership of savings accounts and the form and content of the Bank's mortgage
documents.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulations, whether by the OTS, the FDIC or the
United States Congress could have a material adverse impact on the Company and
the Bank and their operations.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured by
the SAIF to a maximum of $100,000 for each insured member (as defined by law and
regulation). If an institution has no tangible capital, the FDIC has the
authority, should it initiate proceedings to terminate an institution's deposit
insurance, to suspend the insurance of any such institution. However, if a
savings association has positive capital when it includes qualifying intangible
assets, the FDIC cannot suspend deposit insurance unless capital declines
materially, the institution fails to enter into and remain in compliance with an
approved capital plan or the institution is operating in an unsafe or unsound
manner.
Regardless of an institution's capital level, insurance of deposits may be
terminated by the FDIC upon a finding that the institution has engaged in unsafe
or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the institution's primary regulator. The
management of the Bank is unaware of any practice, condition or violation that
might lead to termination of its deposit insurance.
The FDIC charges an annual assessment for the insurance of deposits based
on the risk a particular institution poses to its deposit insurance fund. Under
this system as of September 30, 1996, SAIF members paid within a range of 23
cents to 31 cents per $100 of domestic deposits, depending upon the
institution's risk classification. This risk classification is based on an
institution's capital group and supervisory subgroup assignment. Pursuant to the
Economic Growth and Paperwork Reduction Act of 1996 (the "Act"), the FDIC
imposed a special assessment on SAIF members to capitalize the SAIF at the
designated reserve level of 1.25% as of October 1, 1996. Based on the Bank's
deposits as of March 31, 1995, the date for measuring the amount of the special
assessment pursuant to the Act, the Bank paid a special assessment of $186,569
on November 27, 1996 to recapitalize the SAIF. This expense was recognized
during the fourth quarter of fiscal 1996. The FDIC is expected to lower the
premium for deposit insurance to a level necessary to maintain the SAIF at its
required reserve level; however, the range of premiums has not been determined
at this time.
Pursuant to the Act, the Bank will pay, in addition to its normal deposit
insurance premium as a member of the SAIF, an amount equal to approximately 6.4
basis points toward the retirement of the Financing Corporation bonds ("Fico
Bonds") issued in the 1980's to assist in the recovery of the savings and loan
industry. A member of the Bank Insurance Fund ("BIF"), by contrast, will pay, in
addition to their normal deposit insurance premium, approximately 1.3 basis
points. Based on total deposits as of September 30, 1996, had the Act been in
effect, the Bank's Fico Bond premium would have been approximately $19,000 in
addition to its normal deposit insurance premium. Beginning no later than
January 1, 2000, the rate paid to retire the Fico Bonds will be equal for
members of the BIF and the
20
<PAGE>
SAIF. The Act also provides for the merging of the BIF and the SAIF by January
1, 1999 provided there are no financial institutions still chartered as savings
associations at that time. Should the insurance funds be merged before January
1, 2000, the rate paid by all members of this new fund to retire the Fico Bonds
would be equal.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets, (2) core capital equal to at least 3% of total
adjusted assets and (3) risk-based capital equal to 8% of total risk-weighted
assets.
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), plus purchased mortgage servicing rights
valued at the lower of the maximum percentage established by the OTS or the
amount includable in core capital. Core capital is defined as common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and minority interests in the equity accounts of consolidated
subsidiaries, and qualifying supervisory goodwill, less nonqualifying intangible
assets.
The OTS requires a core capital ratio of at least 3% for those savings
associations in the strongest financial and managerial condition. All other
savings associations are required to maintain minimum core capital of at least
4% of total adjusted assets, with a maximum core capital ratio requirement of
5%. In determining the required minimum core capital ratio, the OTS assesses the
quality of risk management and the level of risk in each savings association on
a case-by-case basis.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock and the portion of the allowance for loan
losses not designated for specific loan losses. The portion of the allowance for
loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is
limited to 100% of core capital. A savings association must calculate its
risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the OTS, which range from 0% for cash to
100% for delinquent loans, property acquired through foreclosure, commercial
loans and other assets.
21
<PAGE>
Set forth below is information regarding the Bank's regulatory capital at
September 30, 1996.
Percent of
Amount Adjusted Assets
------- ---------------
(In Thousands)
GAAP Capital $10,523
Tangible Capital:
Regulatory requirement 774 1.50%
Actual capital 10,589 20.51%
Excess 9,815 19.01%
Core Capital:
Regulatory requirement 1,549 3.00%
Actual capital 10,589 20.51%
Excess 9,040 17.51%
Risk-Based Capital:
Regulatory Requirement 1,655 8.00%
Actual capital 10,847 52.42%
Excess 9,192 44.43%
Net Portfolio Value. In order to encourage associations to reduce their
interest rate risk, the OTS adopted a rule incorporating an interest rate risk
("IRR") component into the risk-based capital rules. Using data from the Bank's
quarterly reports to the OTS, the Bank receives a report which measures interest
rate risk by modeling the change in the Net Portfolio Value ("NPV") over a
variety of interest rate scenarios. NPV is the present value of expected cash
flows from assets, liabilities and off-balance sheet contracts. The calculation
is intended to illustrate the change in NPV that will occur in the event of an
immediate change in interest rates of at least 200 basis points with no effect
given to any steps which management might take to counter the effect of that
interest rate movement. Under the OTS regulations, an institution with a greater
than "normal" level of interest rate risk will be subject to a deduction from
total capital for purposes of calculating its risk-based capital. Institutions
with assets of less than $300 million and a risk-based capital ratio of more
than 12.0% are exempt. The Bank meets these qualifications and therefore is
exempt. Assuming this proposed rule was in effect at September 30, 1996 and the
Bank was not exempt from the rule, the Bank's level of interest rat risk would
have caused it to be treated as an institution with greater than "normal"
interest rate. This would have resulted in a reduction in the risk-based capital
ratio from the September 30, 1996 calculation of 52.42% to 48.22%, which is in
excess of the required minimum of 8.00%. Utilizing the NPV measurement concept,
at September 30, 1996, this would have resulted in a $2.79 million, or 24.49%
decrease in the Bank's NPV, assuming a 200 basis point increase in interest
rates with no effect given to steps management may take to counter the effect of
that interest rate movement.
22
<PAGE>
The following table is provided by the OTS and illustrates the change in
NPV at September 30, 1996, based on OTS assumptions, that will occur in the
event of an immediate change in interest rate with no effect given to any steps
which management might take to counter the effect of that interest rate
movement.
<TABLE>
<CAPTION>
Net Portfolio as % of
Net Portfolio Value Portfolio Value of Assets
-------------------- -------------------------
Basis Point ("bp")
Change in Rates $ Amount $ Change(1) % Change NPV Ratio (2) Change(3)
- ----------------- --------- ------------ ----------- -------------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
400 bp 5,880 (5,509) (48) 12.69% (900)bp
300 bp 7,204 (4,185) (37) 15.06 (662)bp
200 bp 8,600 (2,790) (24) 17.41 (427)bp
100 bp 10,017 (1,372) (12) 19.65 (203)bp
0 bp 11,389 21.68
(100) bp 12,613 1,223 11 23.39 170 bp
(200) bp 13,579 2,189 19 24.65 296 bp
(300) bp 14,414 3,025 27 25.68 400 bp
(400) bp 15,395 4,005 35 26.86 517 bp
</TABLE>
- -----------------
(1) Represents the increase (decrease) of the estimated NPV at the indicated
change in interest rates compared to the NPV assuming no change in
interest rates.
(2) Calculated as the estimated NPV divided by the portfolio value of total
assets ("PV"). The Bank's PV is the estimated present value of total
assets. The PV of the Bank as of September 30, 1996, assuming no changes
in interest rates, was $52.53 million.
(3) Calculated as the increase (decrease) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming
no change in interest rates.
Under the OTS interest rate risk capital rule, those institutions with
greater than "normal" levels of interest rate risk will be subject to an
interest rate risk component in calculating their risk-based capital ratio. An
institution with a "normal" level of interest rate risk is defined as one whose
"Measured Interest Rate Risk" is less than 2.0%.
23
<PAGE>
The following table is provided by the OTS and is based on the
calculations in the above table. It sets forth the IRR capital component that
will be deducted from risk-based capital in determining the level of risk-based
capital. At September 30, 1996, the change in NPV as a percentage of portfolio
value of total assets is negative 5.31%, which is greater than negative 2.0%,
indicating that the Bank has a greater than "normal" level of interest rate
risk. As mentioned earlier, the Bank is exempt from any additional capital
requirements; however, had the Bank been subject to the IRR capital component,
its IRR capital component at September 30, 1996 would be approximately $869,000.
September 30, September 30,
1996 1995
------------- -------------
RISK MEASURES: 200 BP RATE SHOCK:
Pre-Shock NPV Ratio: NPV as % of PV of Assets 21.68% 15.95%
Exposure Measure: Post-Shock NPV Ratio...... 17.41% 13.26%
Sensitivity Measure: Change in NPV Ratio.... (427)bp (269) bp
CALCULATION OF CAPITAL COMPONENT:
Change in NPV as % of PV of Assets.......... (5.31)% (3.24)%
Interest Rate Risk Capital Component ($000) (1) -- --
- --------------------
(1) No amounts are shown on the interest rate risk capital component line
because the Bank is exempt from the IRR capital component.
Certain shortcomings are inherent in the methodology used in the above
table. Modeling changes in NPV requires the making of certain assumptions that
may tend to oversimplify the manner in which actual yields and costs respond to
changes in market interest rates. First, the models assume that the composition
of the Bank's interest sensitive assets and liabilities existing at the
beginning of a period remains constant over the period being measured. Second,
the models assume that a particular change in interest rates is reflected
uniformly across the yield curve regardless of the duration to maturity or
repricing of specific assets and liabilities. Accordingly, although the NPV
measurements do provide an indication of the Bank's interest rate risk exposure
at a particular point in time, such measurements are not intended to provide a
precise forecast of the effect of changes in market interest rates on the Bank's
net interest income. Furthermore, in times of decreasing interest rates, the
value of fixed-rate assets could increase in value and the lag in repricing of
interest rate sensitive assets could be expected to have a positive effect on
the Bank.
Management believes that the NPV method of assessing the Bank's exposure
to interest rate risk and potential reductions in net interest income is a
useful tool for measuring risk. Management also believes that strategies
employed to respond to changing interest rate environments can have a
significant impact upon the net value of assets and extent of earnings
fluctuations. Also, management believes that a strong equity capital position
and existence of the corporate authority to raise additional capital as
necessary act as valuable tools to absorb interest rate risk.
24
<PAGE>
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Bank to give the OTS 30 days' advance notice of any proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company. In
addition, the Bank may not declare or pay a cash dividend on its capital stock
if the effect thereof would be to reduce the regulatory capital of the Bank
below the amount required for the liquidation account to be established pursuant
to the Bank's Plan of Conversion.
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory notice. As of
September 30, 1996, the Bank was a Tier 1 institution.
In the event the Bank's capital fell below its fully phased-in requirement
or the OTS notified it that it was in need of more than normal supervision, the
Bank would become a Tier 2 or Tier 3 institution and, as a result, its ability
to make capital distributions could be restricted. Tier 2 associations, which
are associations that before and after the proposed distribution meet their
current minimum capital requirements, may only 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.
In addition, the OTS could prohibit a proposed capital distribution by any
institution, which would otherwise be permitted by the regulation, if the OTS
determines that such distribution would constitute an unsafe or unsound
practice. The OTS has proposed rules relaxing certain approval and notice
requirements for well-capitalized institutions.
A savings association is prohibited from making a capital distribution if,
after making the distribution, the savings association would be undercapitalized
(i.e., not meet any one of its minimum regulatory capital requirements).
Further, a savings association cannot distribute regulatory capital that is
needed for the liquidation account.
Qualified Thrift Lender Test. Savings institutions must meet a Qualified
Thrift Lender ("QTL") test. If the Bank maintains an appropriate level of
Qualified Thrift Investments ("QTIs") (primarily residential mortgages and
related investments, including certain mortgage-related securities) and
otherwise qualifies as a QTL, it will continue to enjoy full borrowing
privileges from the FHLB of Seattle. The required percentage of QTIs is 65% of
portfolio assets (defined as all assets minus intangible assets, property used
by the institution in conducting its business and liquid assets equal to 10% of
total assets). Certain assets are subject to a percentage limitation of 20% of
portfolio assets. In addition, savings associations may include shares of stock
of the Federal Home Loan Banks ("FHLBs"), FNMA and FHLMC as qualifying QTIs.
Compliance with the QTL test is determined on a monthly basis in nine out of
every 12 months. As of September 30, 1996, the Bank was in compliance with its
QTL requirement with 77.37% of its assets invested in QTIs.
25
<PAGE>
Transactions With Affiliates. Generally, restrictions on transactions with
affiliates require that transactions between a savings association or its
subsidiaries and its affiliates be on terms as favorable to the Bank as
comparable transactions with non-affiliates. In addition, certain of these
transactions are restricted to an aggregate percentage of the Bank's capital and
collateral in specified amounts must usually be provided by affiliates to
receive loans from the Bank. Affiliates of the Bank include the Company and any
company which would be under common control with the Bank. 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 any
affiliate that is not a subsidiary. The OTS has the discretion to treat
subsidiaries of savings associations as affiliates on a case-by-case basis.
Liquidity Requirements. All savings associations 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. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At September 30, 1996, the Bank's liquidity
ratio was 18.88%. Monetary penalties may be imposed upon associations for
violations of liquidity requirements.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Seattle, which is one of 12 regional FHLBs that administer the home financing
credit function of savings associations and other financial institutions. 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.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Seattle in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. At September 30, 1996, the Bank had $400,000 in FHLB
stock, which was in compliance with this requirement. The FHLB imposes various
limitations on advances such as limiting the amount of certain types of real
estate related collateral to 20% of a member's total assets and limiting total
advances to a member. At September 30, 1996, this limit was approximately $10.30
million for the Bank.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. For the year ended September 30, 1996, dividends paid by the FHLB
of Seattle to the Bank totalled $29,000.
Federal Reserve System. The Federal Reserve System requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve System may be used
to satisfy the liquidity requirements that are imposed by the OTS. At September
30, 1996, the Bank's total transaction accounts were below the minimum level for
which the Federal Reserve System requires a reserve.
Savings associations have authority to borrow from the Federal Reserve
System "discount window," but Federal Reserve System policy generally requires
savings associations to exhaust all other sources before borrowing from the
Federal Reserve System. The Bank had no borrowings from the Federal Reserve
System at September 30, 1996.
26
<PAGE>
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, a savings association has a continuing and
affirmative obligation consistent with its safe and sound operation 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 its examination of a savings institution,
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
by such institution. Current law requires public disclosure of an institution's
CRA rating and requires the OTS to provide a written evaluation of an
institution's CRA performance utilizing a four-tiered descriptive rating system
in lieu of the existing five-tiered numerical rating system. The OTS reported
that Buffalo Federal had a "satisfactory record of meeting community credit
needs," in its examination dated September 5, 1995.
Company Regulation
General. The Company is a unitary savings and loan holding company subject
to regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings association subsidiaries, should such subsidiaries be formed, which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association. This regulation and
oversight is intended primarily for the protection of the depositors of the Bank
and not for the benefit of stockholders of the Company. The Company is be
required to file certain reports with, and otherwise comply with, the rules and
regulations of the OTS and the Securities and Exchange Commission ("SEC").
QTL Test. As a unitary savings and loan holding company, the Company
generally will not be subject to activity restrictions, provided the Bank
satisfies the QTL test. If the Company acquires control of another savings
association as a separate subsidiary, it would become a multiple savings and
loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings association)
would become subject to restrictions applicable to bank holding companies and
those activities specified by the OTS as permissible for a multiple savings and
loan holding company unless such other associations each also qualify as a QTL
or were acquired in a supervised acquisition.
Restrictions on Acquisitions. 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 law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally insured
savings institution without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition. In
addition, no company may acquire control of such an institution without prior
OTS approval.
Federal Securities Law. The Company's Common Stock is registered with the
SEC under the Exchange Act. The Company is subject to the information, proxy
solicitation, insider trading restrictions, and other requirements under the
Exchange Act.
27
<PAGE>
Other Regulatory Events
Recapture of Post-1987 Bad-Debt Reserves. Prior to the enactment of the
Small Business Jobs Protection Act, which was signed into law on August 21,
1996, certain thrift institutions such as the Bank were allowed income tax
deductions for bad debts under methods more favorable than those granted to
other taxpayers. The Small Business Job Protection Act repealed the Code Section
593 reserve method of accounting for bad debts by thrift institutions, effective
for tax years beginning after 1995. Thrift institutions that are treated as
small banks are allowed to utilize the experience method applicable to such
institutions, while thrift institutions that are treated as large banks (banks
with assets of more than $500 million) are required to use only the specific
charge off method.
The amount of the applicable excess reserves will be included in taxable
income ratably over a six taxable year period, beginning with the first taxable
year beginning after 1995. However, because the Company meets certain
residential loan requirements it will defer the beginning of such six year
period for two years.
For the Bank, a small bank, the amount of the institution's applicable
excess reserves generally is the excess of (i) the balances of its reserve for
losses on qualifying real property loans and its reserve for losses on
nonqualifying loans as of the close of its last taxable year beginning before
January 1, 1996, over (ii) the greater of the balance of (a) its pre-1988
reserves or (b) what the Bank's reserves would have been at the close of its
last tax year beginning before January 1, 1996, had the Bank always used the
experience method. At September 30, 1996, the Bank had $398,000 of pre-1988
bad-debt reserves (base year reserve). Since the percentage of taxable income
method for tax bad debt deduction and the corresponding increase in the tax bad
debt reserve in excess of the base year have been recorded as temporary
differences pursuant to SFAS No. 109, this change in the tax law will not have a
material effect on the Company's financial statements.
Item 2. Description of Property
(a) Properties.
The Company owns no real property but utilizes the office owned by the
Bank. The Bank owns and operates from its office located at 106 Fort Street,
Buffalo, Wyoming 82834. The Bank has a total investment in office property and
equipment of $972,000 with a net book value of $502,000 at September 30, 1996.
(b) Investment Policies.
See "Item 1. Business" above for a general description of the Bank's
investment policies and any regulatory or Board of Directors' percentage of
assets limitations regarding certain investments. All of the Bank's investment
policies are reviewed and approved by the Board of Directors of the Bank, and
such policies, subject to regulatory restrictions (if any), can be changed
without a vote of stockholders. The Bank's investments are primarily acquired to
produce income, and to a lesser extent, possible capital gain.
(1) Investments in Real Estate or Interests in Real Estate. See "Item 1.
Business -- Lending Activities," "Item 1. Business -- Regulation of the Bank,"
and "Item 2. Description of Property. (a) Properties" above.
(2) Investments in Real Estate Mortgages. See "Item 1. Business -- Lending
Activities" and "Item 1. Business -- Regulation of the Bank."
28
<PAGE>
(3) Investments in Securities of or Interests in Persons Primarily Engaged
in Real Estate Activities. See "Item 1. Business -- Lending Activities," "Item
1. Business -- Regulation of the Bank," and "Item 1. Business -- Subsidiary
Activity."
(c) Description of Real Estate and Operating Data.
Not Applicable.
Item 3. Legal Proceedings
The Company, from time to time, is a party to ordinary routine litigation,
which arises in the normal course of business, such as claims to enforce liens,
condemnation proceedings on properties in which the Bank holds security
interests, claims involving the making and servicing of real property loans, and
other issues incident to the business of the Company. In the opinion of
management, currently there are no such claims or lawsuits that would have a
material adverse effect on the Company's results of operations or financial
condition.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held a special meeting of stockholders on October 2, 1996 (the
"Special Meeting"). The purpose of the Special Meeting was to seek stockholder
approval of the Company's stock option plan (the "Option Plan") and the Bank's
management stock bonus plan ("MSBP"). The following table indicates the voting
on each matter considered.
For Against Abstain
-------------------------------
Option Plan 588,858 203,603 30,358
MSBP 687,616 106,316 30,358
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The information contained under the section captioned "Stock Market
Information" in the Company's Annual Report to Stockholders for the fiscal year
ended September 30, 1996 (the "Annual Report"), is incorporated herein by
reference.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The required information is contained in the section captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Annual Report and is incorporated herein by reference.
Item 7. Financial Statements
The Company's consolidated financial statements required herein are
contained in the Annual Report and are incorporated herein by reference.
29
<PAGE>
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not Applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(b) of the Exchange Act
The information contained under the sections captioned "Filing of
Beneficial Ownership Reports" and "Information with Respect to Nominees for
Director, Directors Continuing in Office, and Executive Officers" in the
Company's definitive proxy statement for the Company's Annual Meeting of
Stockholders (the "Proxy Statement") is incorporated herein by reference.
Item 10. Executive Compensation
The information contained under the section captioned "Director and
Executive Officer Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and Principal
Holders Thereof" in the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the section captioned "Information with Respect to
Nominees for Director, Directors Continuing in Office, and Executive
Officers" in the Proxy Statement.
(c) Management of the Company knows of no arrangements, including any
pledge by any person of securities of the Company, the operation of
which may at a subsequent date result in a change in control of the
Registrant.
Item 12. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference
to the section captioned "Certain Relationships and Related Transactions" and
"Voting Securities and Principal Holders Thereof" in the Proxy Statement.
30
<PAGE>
Item 13. Exhibits, List and Reports on Form 8-K
(a) Exhibits are either attached as part of this Report or incorporated herein
by reference.
3.1 Articles of Incorporation of Crazy Woman Creek Bancorp Incorporated*
3.2 Bylaws of Crazy Woman Creek Bancorp Incorporated*
10 Employment contract with Crazy Woman Creek Bancorp Incorporated*
11 Statement regarding computation of earnings per share (see Note 1 to
the Notes to Consolidated Financial Statements in the Annual Report)
13 Annual Report to Stockholders for the fiscal year ended September 30,
1996.
21 Subsidiaries of the Registrant (See "Item 1. Business of the Company"
and "-- Business of the Bank".)
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
* Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 (33-80557) declared effective by the Commission on February 12,
1996.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.
CRAZY WOMAN CREEK BANCORP INCORPORATED
By: /s/ Deane D. Bjerke
------------------------------------
Deane D. Bjerke
President and Chief Executive Officer
(Duly Authorized Representative)
In accordance with the requirement of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Deane D. Bjerke Dalen C. Slater
President and Chief Executive Officer Senior Vice President
(Principal Executive Officer) (Principal Financial and Accounting
Officer)
Dated: December 27, 1996 Dated: December 27, 1996
Richard Reimann Douglas D. Osborn
Chairman of the Board Director
Dated: December 27, 1996 Dated: December 27, 1996
Greg L. Goddard Thomas J. Berry
Director Director
Dated: December 27, 1996 Dated: December 18, 1996
Sandra K. Todd
Director
Dated: December 18, 1996
32
EXHIBIT 13
<PAGE>
[LOGO]
CRAZY WOMAN CREEK BANCORP
------------------------------------------------
1996 ANNUAL REPORT
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED
1996 ANNUAL REPORT
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
Letter to Stockholders................................................... 1
Corporate Profile and Stock Market Information............................ 2
Financial Highlights..................................................... 3
Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................... 4
Report of Independent Auditors ........................................ 12
Consolidated Balance Sheets............................................ 13
Consolidated Statements of Income...................................... 14
Consolidated Statements of Change in Stockholders Equity............... 15
Consolidated Statements of Cash Flows.................................. 16
Notes to Consolidated Financial Statements............................. 17
Office Locations and Other Corporate Information....................... 36
<PAGE>
[CRAZY WOMAN CREEK BANCORP LETTERHEAD]
To Our Stockholders:
We are proud to present to you our first annual report since becoming a public
company in March 1996. Crazy Woman Creek Bancorp Incorporated completed the year
profitably and in good financial condition despite a one-time special assessment
to recapitalize the Savings Association Insurance Fund. Furthermore, we were
pleased to see single-family mortgage and consumer loan originations continue to
increase over the previous year.
As we approach fiscal 1997, we retain our goal of providing personal service to
our customers and stockholders. As a community-based financial institution,
Buffalo Federal Savings Bank plays a special role in serving the lending needs
of the communities in our market area. At the same time, we will concentrate our
energies on achieving solid financial results and enhancing stockholder value.
Each member of your Board of Directors, and our employees, join me in thanking
you for your continued dedication, loyalty, and trust. Despite the ever-changing
economic challenges, you have our commitment that we will utilize our very best
efforts to continue producing profitable results of operations.
Sincerely,
Deane D. Bjerke
President
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED
Corporate Profile
Crazy Woman Creek Bancorp Incorporated (the "Company") is the parent company for
Buffalo Federal Savings Bank ("Buffalo Federal" or the "Bank"). The Company was
formed as a Wyoming corporation in December 1995 at the direction of the Bank to
acquire all of the capital stock that Buffalo Federal issued upon its conversion
from the mutual to stock form of ownership in March 1996 (the "Conversion"),
whereby the Company sold 1,058,000 shares of common stock for net proceeds of
$9.49 million. The Company is a savings and loan holding company which, under
existing laws, is not restricted in the types of activities in which it can
engage. At the present time, since the Company does not conduct any active
business, the Company does not intend to employ any persons other than officers
but utilizes the support staff and facilities of the Bank from time to time.
Buffalo Federal is a federally-chartered stock savings bank headquartered in
Buffalo, Wyoming, which was originally chartered in 1932 under the name "Buffalo
Building and Loan Association." Deposits are insured up to the maximum allowable
by the Federal Deposit Insurance Corporation (the "FDIC"). The Bank is a
community oriented savings institution offering a variety of financial services
to meet the needs of the communities that it serves. Buffalo Federal conducts
its business from its office in Buffalo, Wyoming.
Buffalo Federal attracts deposits from the general public and uses such
deposits, together with borrowings and other funds, primarily to originate and
fund loans secured by first mortgages on owner-occupied, one-to-four family
residences in its market area. The Bank also makes home equity loans, loans
secured by deposits, automobile loans and personal loans and invests in
municipal obligations, mortgages-backed securities, and other investments.
Stock Market Information
Since its issuance in March 1996, the Company's common stock has been traded on
the Nasdaq SmallCap Market under the symbol "CRZY." The following table reflects
the stock price as reported by Nasdaq.
HIGH LOW
---- ---
July 1, 1996 - September 30, 1996 $11.50 $10.00
April 1, 1996 - June 30, 1996 11.00 10.00
Quotations reflect inter-dealer prices without retail mark-up, mark-down or
commission, and may not represent actual transactions. The number of
shareholders of record of common stock as of December 19, 1996, was
approximately 230. This does not reflect the number of persons or entities who
held stock in nominee or "street" name through various brokerage firms. At
December 19, 1996, there were 1,058,000 shares outstanding. On July 16, 1996 and
on October 16, 1996 dividends of $.05 and $.10 per share were paid,
respectively.
The Company's ability to pay dividends to stockholders is dependent in part upon
the dividends it receives from the Bank. The Bank may not declare or pay a cash
dividend on any of its stock if the effect thereof would cause the Bank's
regulatory capital to be reduced below (1) the amount required for the
liquidation account established in connection with the Bank's conversion from
mutual to stock form, or (2) the regulatory capital requirements imposed by the
Office of Thrift Supervision ("OTS").
- 2 -
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
- ------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------
At or for the Year Ended September 30, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans receivable, net ......................... $ 25,859 $ 23,006 $ 22,503 $ 19,642 $ 18,693
Mortgage-backed securities .................... 4,228 3,148 2,473 6,377 6,893
Investment securities ......................... 6,075 6,806 5,385 3,519 2,729
Investment and mortgage-backed
securities available for sale ............... 13,365(1) 2,230 2,276 -- --
Assets ........................................ 51,517(1) 37,510 35,751 32,738 31,744
Deposits ...................................... 29,371 28,209 28,980 26,322 26,868
FHLB advances ................................. 6,113 3,183 1,095 1,257 --
Total stockholders' equity .................... 15,508(1) 5,857 5,449 4,997 4,510
Interest income ............................... 3,274(1) 2,722 2,505 2,482 2,609
Interest expense .............................. 1,702 1,455 1,143 1,256 1,606
Net interest income ........................... 1,572 1,267 1,362 1,226 1,003
Provision for loan losses (loan loss benefit).. - 42 (10) 117 23
Net income .................................... $ 355(2) $ 352 $ 502 $ 488 $ 170
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
OTHER SELECTED DATA
- ------------------------------------------------------------------------------------------------------------
At or for Year Ended September 30, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------
Return on average assets (net income
<S> <C> <C> <C> <C> <C>
divided by average total assets)(2) .... 0.80% 0.96 % 1.48% 1.51% 0.53%
Return on average equity (net income
divided by average equity)(1)(2) ....... 3.07% 6.10 % 9.39% 10.13% 3.71%
Average interest-earning assets to average
interest-bearing liabilities(1) ....... 133.47% 117.59 % 117.23% 115.35% 113.39%
Net interest income after provision for
loan losses, to average assets ......... 3.47% 3.35 % 4.04% 3.43% 3.03%
Net interest rate spread ................. 2.26% 2.84 % 3.53% 3.30% 2.55%
Average equity to average assets ratio
(average equity divided by average
total assets)(1) ....................... 25.50% 15.76 % 15.74% 14.89% 14.16%
Equity to assets at period end(1) ....... 30.10% 15.6 % 15.24% 15.26% 14.21%
Non-performing assets to total assets .... 0.06% 0.33 % 0.38% 3.28% 4.44%
Non-performing loans to net loans ........ 0.12% 0.30 % 0.08% 4.72% 6.25%
Allowance for loan losses, REO and other
repossessed assets to non-performing
assets ................................. 862.50% 223.58 % 151.09% 29.08% 15.54%
Allowance for loan losses to total
loans, net ............................. 1.06% 1.18 % 0.91% 1.56% 1.16%
Net charge-offs (recoveries) to loans
receivable .............................. (0.01)% (0.11)% 0.41% 0.11% 0.45%
Earnings per share(3) .................... $ 0.36 n/a n/a n/a n/a
Book value per share(3) .................. $ 14.66 n/a n/a n/a n/a
</TABLE>
- -------------------------
(1) The change in fiscal 1996 is primarily due to the conversion from a mutual
to a stock company in March 1996.
(2) Includes a one time assessment in fiscal year 1996 to recapitalize the
SAIF.
(3) There were no shares outstanding prior to the consummation of the Company's
initial public offering on March 29, 1996.
- 3 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company was formed in 1995 and acquired control of the Bank through a
mutual-to-stock conversion that was consummated on March 29, 1996. At the
present time, the Company's only assets are its investment in the Bank and loans
to the Bank's Employee Stock Ownership Plan ("ESOP") and the Bank. 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. For the year ended
September 30, 1996, the Bank's interest income was $3.27 million, or
approximately 96.5% of gross earnings (e.g., interest income and non-interest
income). 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.
The operations of the Bank and the entire thrift industry are
significantly affected by prevailing economic conditions, competition and the
monetary and fiscal policies of the federal government and governmental
agencies. Lending activities are influenced by the demand for and supply of
housing, competition among lenders, the level of interest rates and the
availability of funds. Deposit flows and costs of funds are influenced by
prevailing market rates of interest, primarily on competing investments, account
maturities, and the levels of personal income and savings in the Bank's market
area.
Asset/Liability Management and Interest Rate Risk
For the year ended September 30, 1996, the Bank's net interest rate spread
was 2.26%. An asset or liability is interest rate sensitive within a specific
time period if it will mature or reprice within that time period. If the Bank's
assets mature or reprice more quickly or to a greater extent than its
liabilities, the Bank's net portfolio value and net interest income would tend
to increase during periods of rising interest rates but decrease during periods
of falling interest rates. If the Bank's assets mature or reprice more slowly or
to a lesser extent than its liabilities, the Bank's net portfolio value and net
interest income would tend to decrease during periods of rising interest rates
but increase during periods of falling interest rates. The Bank's policy has
been to mitigate the interest rate risk inherent in the historical savings
institution business of originating long-term loans funded by short-term
deposits by pursuing certain strategies designed to decrease the vulnerability
of its earnings to material and prolonged changes in interest rates.
The Bank is subject to significant interest rate risk as a result of its
historical emphasis on the origination for portfolio of fixed-rate one- to
four-family mortgage loans. In order to improve the Bank's interest rate
sensitivity, however, management has attempted to shorten the maturities of the
Bank's assets and lengthen the maturities of its liabilities, while maintaining
asset quality. This strategy has been implemented by (i) emphasizing the
origination for portfolio of 15-and 20-year fixed-rate mortgage loans; (ii)
originating 30-year fixed-rate mortgage loans for sale in the secondary market;
(iii) offering adjustable rate home equity and shorter-term installment loans;
(iv) emphasizing the solicitation and retention of core deposits and lengthening
the average maturity of deposits by adopting a tiered pricing program for its
certificates of deposit (offering higher rates on longer term certificates); (v)
purchasing for its own portfolio adjustable-rate mortgage-backed securities,
(vi) investing in short- and intermediate-term investment securities, (vii)
emphasizing the origination of adjustable-rate mortgage loans; (viii) managing
- 4 -
<PAGE>
deposit interest rates; and (ix) utilizing FHLB advances to facilitate growth
and lengthen liabilities. These measures, while significant, may only partially
offset the Bank's interest rate risk. Furthermore, the Bank believes it has
sufficient capital to accept a certain degree of interest rate risk.
The Bank's Board of Directors is responsible for revising the Bank's asset
and liability policies. The Bank's management is responsible for administering
the policies and determinations of the Board of Directors with respect to the
Bank's asset and liability goals and strategies.
Analysis of Net Interest Income
Average Balances, Interest, Yields and Rates. The following table sets
forth certain information relating to the Bank's average balance sheet and
reflects the average yield on assets and average cost of liabilities for the
periods indicated and the average yields earned and rates paid. Such yields and
costs are derived by dividing income or expense by the average balance of assets
or liabilities, respectively, for the periods presented. Average balances are
derived from month-end balances. Management does not believe that the use of
month-end balances instead of daily average balances has caused any material
differences in the information presented. The table also presents information
for the periods and at the date indicated with respect to the difference between
the average yield earned on interest-earning assets and average rate paid on
interest-bearing liabilities, or "interest rate spread," which savings
institutions have traditionally used as an indicator of profitability. Another
indicator of an institution's net interest income is its "net interest margin,"
which is its net interest income divided by the average balance of
interest-earning assets. When interest-earning assets approximate or exceed
interest-bearing liabilities, any positive interest rate spread will generate
net interest income.
- 5 -
<PAGE>
<TABLE>
<CAPTION>
At September 30, Year Ended September 30,
--------------- --------------------------------------------------------------
1996 1996 1995
---------- ------------------------------- ------------------------------
Average Average Average Average
Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
---------- ------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C>
Loans receivable(1)..... 7.90% $24,675 $2,043 8.28% $22,786 $1,917 8.41%
Mortgage-backed securities 6.22 4,052 263 6.49 2,726 198 7.26
Investment securities(2) 7.42 7,937 487 6.14 7,390 424 5.74
Securities available for sale 3.38 7,183 452 6.29 2,361 160 6.78
Other interest-earning assets 7.25 384 29 7.55 362 23 6.35
------- ------ ------- ------
Total interest-earning assets 6.49 $44,231 $3,274 7.40 $35,625 $2,722 7.64
------ ----- ------ -----
Non-interest-earning assets 1,072 968
------- -------
Total assets........... $45,303 $36,593
====== ======
Interest-bearing liabilities:
Interest checking...... 3.61 5,675 215 3.79 5,736 227 3.96
Time Deposits/Passbook. 5.29 22,627 1,224 5.41 22,499 1,129 5.02
------- ------ ------- -------
Total deposit accounts. 4.94 28,302 1,439 5.08 28,235 1,356 4.80
FHLB advances........... 4.30 4,837 263 5.44 2,062 99 4.80
------- ------ ------- -------
Total interest-bearing
liabilities.......... 4.83 $33,139 $1,702 5.14 $30,297 $ 1,455 4.80
------- ------ ------- -------
Non-interest-bearing liabilities 613 530
--- ------
Total liabilities....... $33,752 $30,827
------ ------
Total equity............ 11,551 5,766
------ ------
Total liabilities and equity $45,303 $36,593
====== ======
Net interest income...... $1,572 $1,267
===== =====
Interest rate spread..... 2.26% 2.84%
======= =======
Net interest margin...... 3.55% 3.56%
======= =======
Ratio of average interest-
earning assets to average
interest-bearing liabilities 133.47% 117.59%
====== ======
</TABLE>
- ---------------------------------
(1) Average balances include non-accrual loans, and are net of reserve for loan
losses and deferred loan fees.
(2) Includes interest-bearing deposits in other financial institutions.
- 6 -
<PAGE>
Rate/Volume Analysis. The table below sets forth certain information
regarding changes in interest income and interest expense of the Bank for the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (changes in average volume multiplied by old rate); (ii)
changes in rates (changes in rate multiplied by old average volume); (iii)
changes in rate-volume (changes in rate multiplied by the change in average
volume).
Year Ended September 30,
---------------------------------
1996 vs. 1995
---------------------------------
Increase (Decrease)
Due to
---------------------------------
Rate/
Volume Rate Volume Net
-------- ------ -------- ----
(In Thousands)
Interest income:
Loans receivable .............. $ 158 $ (30) $ (2) $ 126
Mortgage-backed securities .... 96 (21) (10) 65
Investment securities ......... 31 30 2 63
Securities available for sale.. 327 (11) (23) 293
Other interest-earning assets.. 1 4 0 5
----- ----- ----- -----
Total interest-earning assets. $ 613 $ (28) $ (33) $ 552
===== ===== ===== =====
Interest expense:
Deposit accounts .............. $ 4 $ 79 $ 0 $ 83
FHLB advances ................. 133 13 18 164
----- ----- ----- -----
Total interest-bearing
liabilities ................ $ 137 $ 92 $ 18 $ 247
===== ===== ===== =====
Net change in net interest
income ......................... $ 476 $(120) $ (51) $ 305
===== ===== ===== =====
Financial Condition
The Bank's total assets increased by $14.0 million or 37.3% from $37.5
million at September 30, 1995 to $51.5 million at September 30, 1996. The
increase in assets was primarily attributed to an increase in investment
securities and net loans receivable. The increase in assets was primarily funded
through the $9.49 million in net proceeds received from the initial stock
offering and from a $2.9 million increase in advances from the FHLB of Seattle.
The Bank's net investment in investment securities available-for-sale and
held-to-maturity significantly increased during 1996. Such assets increased by
$11.5 million from $12.2 million at September 30, 1995 to $23.7 million at
September 30, 1996. An increase in investment securities available-for-sale
accounted for most of the increase. From September 30, 1995 to September 30,
1996 investment securities available-for-sale increased from $2.2 million to
$13.4 million, respectively. Meanwhile, investment securities held-to-maturity
only increased by approximately $300,000 during the period.
Net loans increased by $2.8 million or 12.4% from $23.0 million at
September 30, 1995 to $25.9 million at September 30, 1996 as a result of
increased loan originations. The majority of this growth occurred in residential
real estate loans and in consumer loans.
- 7 -
<PAGE>
Deposits increased by $1.2 million or 4.1% to $29.4 million at September
30, 1996 from $28.2 million at September 30, 1995. Interest-bearing checking
accounts (NOW and money market) increased by approximately $483,000 while
passbook and time deposits increased by $733,000. Meanwhile, business checking
showed a slight decline of $54,000 for the period.
The Bank increased its level of borrowing from the FHLB of Seattle from
$3.2 million at September 30, 1995 to $6.1 million at September 30, 1996. The
increase in FHLB advances was used to fund loan originations and to purchase
investment securities. The Bank utilizes FHLB advances to manage interest rate
risk and to take advantage of investment opportunities with the goal of earning
income on the interest rate differential between the yield earned on the
investments and the rate paid on the FHLB advances.
The Company's stockholders' equity significantly increased as a result of
the mutual to stock conversion. Stockholders' equity increased from $5.9 million
at September 30, 1995 to $15.5 million at September 30, 1996, representing an
increase of 164.8%.
Non-performing Assets
The following table sets forth information regarding non-performing assets
at September 30, 1996 and 1995, respectively.
At September 30,
-------------------------
1996 1995
---------- --------
(Dollars in Thousands)
Total non-performing loans................. $ 32 $ 68
====== ======
Real estate owned.......................... $ -- $ 55
------ ------
Total non-performing assets................ $ 32 $ 123
====== ======
Total non-performing loans to net loans.... 0.12% 0.30%
====== ======
Total non-performing loans to total assets. 0.06% 0.18%
====== ======
Total non-performing assets to total assets 0.06% 0.33%
====== ======
Comparison of Results of Operations for the Years Ended September 30, 1996 and
1995
Net Income. Net income increased slightly from $352,000 for the year ended
September 30, 1995 to $355,000 for the year ended September 30, 1996. Net income
for 1996 was negatively affected by a one-time special assessment to
recapitalize the Savings Association Insurance Fund (SAIF). This special
assessment was $187,000 and the after tax effect was $123,000. Net income for
1996 was also reduced by (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, (iv) an increase
in compensation related costs, and (v) increased costs due to expenses
associated with being a public company. Net income for the year ended September
30, 1995 included a one-time gain of $90,000 on the sale of a repossessed
commercial property.
Net Interest Income. Net interest income increased by $347,000 from $1.23
million for the year ended September 30, 1995 to $1.57 million for the year
ended September 30, 1996. The increase in net interest income is primarily
attributed to an increase in the volume of average interest-earning assets and
to the fact that no provisions for loan losses were made in fiscal year 1996.
The primary cause for the increase in average volume of interest-earning assets
was attributed to the net proceeds of $9.49 million
- 8 -
<PAGE>
received from the initial stock offering that was consummated on March 29, 1996.
In fiscal year 1995, a $42,000 loan loss provision was recorded.
Interest Income. Total interest income increased by $552,000 or 20.3% from
1995 to 1996. In 1996, interest income totaled $3.27 million compared to $2.72
million in 1995. The increase in interest income is primarily due to an increase
in the average volume of interest-bearing assets from 1995 to 1996. Such average
assets increased from $35.63 million for the twelve-month period ended September
30, 1995 to $44.23 million for the twelve-month period ended September 30, 1996.
This increase in volume caused interest income to increase by $613,000.
A decline in the yield on interest-earning assets from 7.64% for 1995 to
7.40% for 1996 reduced net income by approximately $28,000. The decline in the
yield on interest-earning assets is due, in part, to the purchase of
adjustable-rate mortgage-backed securities. Such 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.
Interest income on loans increased by $126,000 or 6.6% from 1995 to 1996.
An increase in the volume of mortgage loans helped augment interest income on
mortgage loans. From 1995 to 1996, the average volume of net loans receivable
increased from $22.79 million to $24.68 million, respectively.
Interest Expense. From 1995 to 1996, interest expense increase by $247,000
due to an increase in the average volume of interest-bearing liabilities and to
an increase in the interest rate paid on such liabilities. The increase in the
volume of average interest-bearing liabilities was attributed to additional
advances from the FHLB of Seattle. The average of such advances increased from
$2.06 million for the twelve-month period ended September 30, 1995 to $4.84
million for the twelve-month period ended September 30, 1996. The increase in
advances caused interest expense to increase by $164,000. FHLB advances were
utilized to fund loan originations and to purchase investment securities with
the goal of increasing net interest income. The increase in interest rates paid
on interest-bearing liabilities from 4.80% in 1995 to 5.14% in 1996 also caused
interest expense to increase.
Provision for Loan Losses. No provisions for loan losses were made in 1996
compared to $42,000 for 1995. Loan charge-offs for 1996 totaled $11,000 while
recoveries totaled $12,000. In 1995, recoveries were also greater than
charge-offs resulting in a net increase to loan loss reserves of $26,000. The
1995 increase in loan loss reserves was due in part to management's desire to
increase loan loss reserves based on management's assessment of its loan
portfolio (increase in total mortgage loans outstanding) and the general economy
(continued slow economic growth). Management's periodic evaluation of the
adequacy of the allowance is based on factors such as the Bank's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, estimated value of any underlying
collateral, current and prospective economic conditions, and independent
appraisals. Any increase or decrease in the provision for loan losses has a
corresponding negative or positive effect on net income. At September 30, 1996,
the allowance represented 1.06% of loans receivable as compared to 1.18% of
loans receivable at September 30, 1995.
Assessment of the adequacy of the allowance for credit losses involves
subjective judgments regarding future events, and thus, there can be no
assurance that additional provisions for credit losses will not be required in
future periods.
Non-Interest Income. Non-interest income declined by $40,000 from $157,000
in 1995 to $117,000 in 1996. The decrease is primarily due to a reduction in the
amount of gain from the sale of real estate owned properties from $90,000 for
the year ended September 30, 1995 to $14,000 for the year
- 9 -
<PAGE>
ended September 30, 1996. Future gains from the sale of real estate owned
properties is not likely because all such properties have been sold, and the
Bank does not anticipate, at this time, any material foreclosures.
A $30,000 gain from the sale of certain mortgage-backed securities and
REMICs in 1996 somewhat offset the reduction in non-interest income. An increase
in customer service charges from $33,000 in 1995 to $41,000 in 1996 also helped
offset the reduction in non-interest income.
Non-Interest Expense. Non-interest expense significantly increased in
fiscal 1996 as a result of several one-time charges. From 1995 to 1996,
non-interest expense increased from $859,000 to $1.18 million, representing an
increase of 37.7%. The increase is due to (i) a one-time special assessment of
$187,000 to recapitalize the SAIF, (ii) a $34,000 charge from the Bank's prior
data processor to de- convert the Bank's data, (iii) a $21,000 loss on the
abandonment/disposition of equipment and software utilized with the prior data
processing system, (iv) $8,000 in other costs associated with the data
processing conversation such as travel and documentation set-up fees, (v) a
$30,000 increase in compensation expenses, and (vi) a $36,000 increase in other
operating expense such as legal fees and costs associated with being a public
company. The increase in compensation expense was due in part to the hiring of
an additional employee in May 1996. Other non-interest items remained relatively
stable.
Recent legislation required all qualifying members of the SAIF (including
the Bank) to recapitalize the SAIF by paying a one-time special assessment equal
to .65% of the Bank's deposits as of March 31, 1995. This assessment, expensed
during the fourth quarter of fiscal 1996, cost the Bank approximately $187,000
prior to any tax benefit. Due to the special assessment, it is anticipated that
future SAIF premiums will be lowered from levels paid during fiscal 1996 and
1995.
Income Taxes. The effective tax rates for 1996 and 1995 were 29.84% and
32.70%, respectively. There is no state income tax imposed on the Company.
Liquidity and Capital Resources
The Bank is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which varies from time to time
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short term borrowings. The required liquidity ratio currently is
5.0% and the Bank's liquidity ratio average was 18.88% at September 30, 1996
compared to 17.30% at September 30, 1995.
The Bank's primary sources of funds are deposits, prepayment and
amortization of loans and mortgage-backed securities, maturities of investment
securities, earnings from operations, and advances from the FHLB of Seattle.
While scheduled principal repayments are greatly influenced by general interest
rates, economic conditions, competition and other factors, the Bank manages the
pricing of its deposits to maintain desired levels and invests in short-term
interest-earning assets, which provide liquidity to meet its lending
requirements.
During the years ended September 30, 1995 and 1994, the Bank had positive
net cash flows of $444,000 and $289,000 from operating activities and $13.55
million and $1.32 million from financing activities, respectively. The Bank,
however, experienced negative net cash flows of $13.81 million and $2.55
million, respectively, from investing activities.
The primary investing activity of the Bank is the origination of
fixed-rate mortgages with maturities of less than 20 years. During fiscal 1996
and 1995, the Bank originated mortgage loans in the
- 10 -
<PAGE>
amounts of $8.91 million and $5.70 million, respectively. The sharp increase in
cash flows in 1996 from financing activities and the decrease in cash flows from
investing activities were primarily attributed to receipt and use of funds
received from the stock offering that was consummated on March 29, 1996. These
proceeds along with additional borrowings from the FHLB of Seattle were used to
fund such investment activities as the origination of loans and the purchase of
investment securities available for sale.
Cash flows from operating activities during fiscal 1996 and 1995 were
primarily related to net income adjusted by gains on the sale of real estate
owned and securities, dividends from the FHLB of Seattle, accrued interest
receivable, the special assessment due to the FDIC, and federal income taxes,
all of which are non-cash or non-operating adjustments to operating cash flows.
Furthermore, cash flows during fiscal 1995 also were affected by the provision
for loan losses. As a result, net income, adjusted for the non-cash and
non-operating items, was the primary source of cash flows from operation
activities.
During fiscal 1996 and 1995, investing activities used $13.81 million and
$2.55 million, respectively, primarily to purchase investment securities and to
fund the origination of loans. This use of cash was offset somewhat by
maturities and calls of investment securities and the repayment of principal on
loans.
Changes in cash flows from financing activities during these periods have
primarily been related to changes in deposits and borrowings. The primary
financing activity of the Bank is the attraction of deposits. During fiscal year
1996, deposits increased $1.16 million, or 4.1%. The Bank also supplements its
deposits with advances from the FHLB of Seattle to manage interest rate risks
and to take advantage of investment opportunities with the goal of earning
income on the interest rate differential between the yield earned on the
investments and the rate paid on the advances. During fiscal year 1996, FHLB
advances increased by $2.93 million. Additional FHLB advances were used to
purchase investment securities and to fund loan originations. Generally, the
cost of advances is greater than the cost of deposits .
The Bank anticipates that it will have sufficient funds available to meet
its current commitments. At September 30, 1996, the Bank had commitments to
originate loans of $708,000. Certificates of deposit and State of Wyoming
deposits which are scheduled to mature in less than one year at September 30,
1996 totalled $14.2 million. Based on historical experience, management believes
that a significant portion of such deposits will remain with the Bank.
Impact of Inflation and Changing Prices
The financial statements of the Bank and notes thereto, presented
elsewhere herein, have been prepared in accordance with generally accepted
accounting principles, 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 and due to inflation. The
impact of inflation is reflected in the increased cost of the Bank's operations.
Unlike most industrial companies, nearly all the assets and liabilities of the
Bank are monetary.
As a result, interest rates have a greater impact on the Bank'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 price
of goods and services.
- 11 -
<PAGE>
[KPMG Peat Marwick LLP Letterhead]
1000 First Interstate Center
401 N. 31st Street
P.O. Box 7108
Billings, MT 59103
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
Crazy Woman Creek Bancorp Incorporated:
We have audited the accompanying consolidated balance sheets of Crazy Woman
Creek Bancorp Incorporated and subsidiary as of September 30, 1996 and 1995, and
the related consolidated statements of income, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 financial statements referred to above present fairly, in
all material respects, the financial position of Crazy Woman Creek Bancorp
Incorporated and subsidiary as of September 30, 1996 and 1995, and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
November 1, 1996
-12-
<PAGE>
<TABLE>
<CAPTION>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Consolidated Balance Sheets
September 30, 1996 and 1995
Assets 1996 1995
------ ---- ----
<S> <C> <C>
Cash and cash equivalents 451,445 267,896
Interest bearing deposits 99,000 693,000
Investment and mortgage-backed securities available-for-
sale 13,364,698 2,229,579
Investment and mortgage-backed securities held-to-maturity
(estimated market value of $10,180,716 in 1996 and
$9,975,072 in 1995) 10,302,645 9,954,383
Stock in Federal Home Loan Bank of Seattle, at cost 399,900 371,000
Loans receivable, net 25,858,760 23,005,940
Accrued interest receivable 495,750 357,316
Premises and equipment, net 502,055 542,757
Other real estate owned, net - 55,111
Other assets 42,664 33,442
---------- ----------
$51,516,917 37,510,424
=========== ==========
</TABLE>
Liabilities and Stockholders' Equity
------------------------------------
<TABLE>
<CAPTION>
Liabilities:
<S> <C> <C>
Deposits $29,370,985 28,208,532
Advances from Federal Home Loan Bank 6,113,438 3,182,658
Advances from borrowers for taxes and insurance 53,427 47,059
Federal income taxes payable 14,953 58,312
Deferred tax liability 80,925 65,818
Dividends payable 105,800 -
Accrued expenses and other liabilities 269,381 90,644
---------- ----------
Total liabilities 36,008,909 31,653,023
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 in 1996 105,800 -
Additional paid-in capital 10,027,393 -
Unearned ESOP compensation (617,143) -
Retained earnings 6,057,879 5,852,134
Unrealized gain (loss) on securities available-for-sale, net (65,921) 5,267
---------- ----------
Total stockholders' equity 15,508,008 5,857,401
---------- ----------
$51,516,917 37,510,424
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-13-
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Consolidated Statements of Income
Years ended September 30, 1996 and 1995
1996 1995
---- ----
Interest income:
Loans receivable $2,043,167 1,916,893
Mortgage-backed securities 485,571 324,824
Investment securities 627,593 395,495
Interest bearing deposits 26,452 38,718
Other 90,975 45,741
--------- ---------
Total interest income 3,273,758 2,721,671
Interest expense:
Deposits 1,438,562 1,355,476
Advances from Federal Home Loan Bank 263,155 99,171
--------- ---------
Total interest expense 1,701,717 1,454,647
--------- ---------
Net interest income 1,572,041 1,267,024
Provision for loan losses - 42,000
--------- ---------
Net interest income after provision
for loan losses 1,572,041 1,225,024
--------- ---------
Non-interest income:
Customer service charges 41,213 32,813
Other operating income 31,605 33,996
Gain on sale of securities 30,198 -
Gain on sale of other real estate owned 13,599 90,022
--------- ---------
Total non-interest income 116,615 156,831
--------- ---------
Non-interest expense:
Compensation and benefits 440,771 410,662
Occupancy and equipment 107,820 95,625
FDIC/SAIF deposit insurance premiums 66,684 64,900
Special assessment by the SAIF 186,569 -
Advertising 37,349 42,282
Data processing services 150,162 109,208
Loss on sale of equipment 21,097 -
Other 171,939 136,345
--------- ---------
Total non-interest expense 1,182,391 859,022
--------- ---------
Income before income taxes 506,265 522,833
Income tax expense 151,420 170,585
--------- ---------
Net income $ 354,845 352,248
========= =========
Net income per share $ .36 -
========= =========
Average common and common equivalent shares 995,143 -
========= =========
See accompanying notes to consolidated financial statements.
-14-
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
Additional Unearned securities stock-
Common paid-in ESOP Retained gain holders'
stock capital compensation earnings (loss), net equity
-------- ---------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Balances at September 30, 1994 $ - - - 5,499,886 (50,820) 5,449,066
Net income - - - 352,248 - 352,248
Change in unrealized gain (loss)
on securities available-for-
sale - - - - 56,087 56,087
-------- ---------- -------- --------- ------- ----------
Balances at September 30, 1995 - - - 5,852,134 5,267 5,857,401
Net proceeds from issuance of
common stock 99,400 9,392,409 - - - 9,491,809
Common stock acquired by
ESOP 6,400 633,600 (640,000) - - -
ESOP shares committed to be
released - 1,384 22,857 - - 24,241
Change in net unrealized gain
(loss) on securities
available-for-sale - - - - (71,188) (71,188)
Net income - - - 354,845 - 354,845
cash dividends declared ($.15
per share) - - - (149,100) - (149,100)
-------- ---------- -------- --------- ------- ----------
Balances at September 30, 1996 $105,800 10,027,393 (617,143) 6,057,879 (65,921) 15,508,008
======== ========== ======== ========= ======= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-15-
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income $ 354,845 352,248
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses - 42,000
Amortization of premiums and discounts on securities held-to-
maturity, net 358 (1,185)
Amortization of premiums and discounts on securities available-
for-sale, net (2,741) -
Federal Home Loan Bank stock dividend (28,900) (22,400)
Depreciation 78,910 56,652
Gain on sale of securities (30,198) -
Loss on sale of equipment 21,097 -
Gain on sale of other real estate owned (13,599) (90,022)
ESOP shares committed to be released 24,241 -
Change in:
Accrued interest receivable (138,434) (49,025)
Other assets (9,222) (3,745)
Federal income taxes payable (43,359) (46,681)
Deferred tax liability 51,779 29,925
Accrued expenses and other liabilities 178,737 21,443
----------- ----------
Net cash provided by operating activities 443,514 289,210
----------- ----------
Cash flows from investing activities:
Net change in interest bearing deposits 594,000 25,751
Purchases of securities available-for-sale (12,444,335) (343,000)
Maturities of securities available-for-sale 206,385 473,975
Sales of securities available-for-sale 1,006,339 -
Purchases of securities held-to-maturity (6,709,353) (4,606,636)
Maturities and calls of securities held-to-maturity 6,382,304 2,511,579
Origination of loans receivable (8,907,000) (5,703,000)
Repayment of principal on loans receivable 6,054,180 5,102,485
Purchases of premises and equipment (59,305) (221,606)
Proceeds from sale of other real estate owned 68,710 210,286
----------- ----------
Net cash used in investing activities (13,808,075) (2,550,166)
----------- ----------
Cash flows from financing activities:
Net change in deposits 1,162,453 (771,387)
Advances from Federal Home Loan Bank 5,400,000 2,087,500
Repayment of advances from Federal Home Loan Bank (2,469,220) -
Net change in advances from borrowers for taxes and insurance 6,368 1,175
Sale of common stock, net of offering costs 9,491,809 -
Dividends paid to stockholders (43,300) -
----------- -----------
Net cash provided by financing activities 13,548,110 1,317,288
Net (decrease) increase in cash and cash equivalents 183,549 (943,668)
Cash and cash equivalents at beginning of year 267,896 1,211,564
----------- ----------
Cash and cash equivalents at end of year $ 451,445 267,896
=========== ==========
Cash paid during the year for (in thousands):
Interest $ 1,477,000 1,334,000
Income taxes 143,000 187,000
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-16-
<PAGE>
(1) Summary of Significant Accounting Policies
-------------------------------------------
The accompanying consolidated financial statements include the accounts of
Crazy Woman Creek Bancorp Incorporated (the Holding Company) and its
wholly-owned subsidiary, Buffalo Federal Savings Bank (BFSB). The term
"Bank" refers to the Holding Company and Buffalo Federal Savings Bank. All
significant intercompany balances and transactions have been eliminated.
The Bank provides a full range of banking services to customers in the
Buffalo, Wyoming area. The Bank is subject to competition from other
financial institutions and financial service providers. The Bank and the
Holding Company are subject to the regulations of certain Federal and state
agencies and undergo periodic examinations by those regulatory authorities.
Significant accounting policies of BFSB and the Holding Company not
described elsewhere in the notes to the consolidated financial statements
are described below.
Basis of Presentation
---------------------
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as
of the date of the balance sheet and income and expenses for the period.
Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the allowance for loan
losses and the valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans. In connection with the
determination of the allowances for loan losses and real estate owned,
management obtains independent appraisals for significant properties.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review the Bank's allowance for
losses on loans. Such agencies may require the Bank to recognize additions
to the allowance based on their judgments about information available to
them at the time of their examination.
Conversion to Stock Ownership
-----------------------------
Crazy Woman Creek Bancorp Incorporated was formed in December 1995, and is
the holding company and owner of 100 percent of the common stock of BFSB, a
federally chartered stock savings bank. On March 29, 1996, BFSB completed
its conversion from a mutual to a stock form savings bank at which time the
Holding Company issued 1,058,000 shares of common stock at $10 per share
realizing $9,491,809 after deducting stock offering expense of $448,191.
The Employee Stock Ownership Plan (the ESOP) borrowed $640,000 from the
Holding Company to purchase 64,000 of these shares. The Holding Company
contributed $5,065,904 of the net offering proceeds to BFSB.
(Continued)
-17-
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
As part of the conversion, BFSB established a liquidation account for the
benefit of eligible depositors who continue to maintain their deposit
accounts in BFSB after conversion. In the unlikely event of a complete
liquidation of BFSB, each eligible depositor will be entitled to receive a
liquidation distribution from the liquidation account, in the proportionate
amount of the then current adjusted balance for deposit accounts held,
before distribution may be made with respect to BFSB's common stock. BFSB
may not declare or pay a cash dividend to the Holding Company on, or
repurchase any of, its common stock if the effect thereof would cause the
regulatory capital of BFSB to be reduced below the amount required for the
liquidation account. Except for such restrictions, the existence of the
liquidation account does not restrict the use or application of retained
earnings. In addition, savings banks that before and after proposed
dividend distributions meet or exceed their fully phased-in capital
requirements, may make capital distributions with prior notice to the
Office of Thrift Supervision (OTS) during any calendar year up to 100% of
year-to-date net income plus 50% of the amount in excess of their fully
phased-in capital requirements as of the beginning of the calendar year.
However, the OTS may impose greater restrictions if an institution is
deemed to be in need of more than normal supervision. BFSB currently
exceeds its fully phased-in capital requirements and has not been notified
of a need for more than normal supervision.
Cash Equivalents
----------------
For purposes of the statements of cash flows, the Bank considers all cash,
daily interest demand deposits, and amounts due from banks to be cash
equivalents.
Investment and Mortgage-Backed Securities
-----------------------------------------
Investment and mortgage-backed securities available-for-sale include
securities that management intends to use as part of its overall
asset/liability management strategy and that may be sold in response to
changes in interest rates and resultant prepayment risk and other related
factors. Securities available-for-sale are carried at fair value and
unrealized gains and losses (net of related tax effects) are excluded from
earnings and reported as a separate component of stockholders' equity.
Investment securities and mortgage-backed securities, other than those
designated as available-for-sale or trading, are comprised of debt
securities for which the Bank has positive intent and ability to hold to
maturity and are carried at cost, adjusted for amortization of premiums and
accretion of discounts using the level-yield method over the estimated
lives of the securities.
Debt and equity securities held for the purpose of selling them in the
near-term are classified as trading securities and reported at fair value,
with unrealized gains and losses included in operating results. There were
no securities classified as trading during the years ended September 30,
1996 or 1995.
Management determines the appropriate classification of investment and
mortgage-backed securities as either available-for-sale, held-to-maturity,
or held for trading at the purchase date.
Upon realization, gains and losses are included in earnings using the
specific identification method.
Stock in Federal Home Loan Bank
-------------------------------
Federal law requires a member institution of the Federal Home Loan Bank
(FHLB) System to hold common stock of its district FHLB according to
predetermined formulas.
(Continued)
-18-
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Loans Receivable
----------------
Loans receivable are stated at unpaid principal balances, less net deferred
loan origination fees. Interest on loans is credited to income as earned.
Accrued interest on loans that are contractually ninety days or more past
due is generally charged against income. Interest is subsequently
recognized only to the extent cash payments are received until, in
management's judgment, the borrower's ability to make periodic interest and
principal payments is reasonably assured, in which case the loan is
returned to accrual status.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on factors such as the
Bank's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to
repay, estimated value of any underlying collateral, current and
prospective economic conditions, and independent appraisals.
Effective July 1, 1995, the Bank adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures," (collectively,
the Statements). The Statements provide guidance for establishing a reserve
for losses on specific loans which are deemed to be impaired and apply only
to specific impaired loans. Groups of small balance homogeneous loans
(generally residential real estate and consumer loans) are evaluated for
impairment collectively. A loan is considered impaired when, based upon
current information and events, it is probable that the Bank will be unable
to collect, in a timely basis, all principal and interest according to the
contractual terms of the loan's original agreement. When a specific loan is
determined to be impaired, the allowance for loan losses is increased
through a charge to expense for the amount of the impairment. For all loans
secured by real estate, the amount of the impairment is generally measured
based on the value of the underlying collateral. The Bank's impaired loans
are those loans currently reported as non-accrual. The Bank recognizes
interest income on impaired loans only to the extent that cash payments are
received. The Bank's adoption of the Statements did not have a material
impact on consolidated financial position or results of operations.
The allowance for loan losses, as described above, includes the reserve for
impaired loans. The Bank's existing policies for evaluating the adequacy of
the allowance for loan losses and policies for discontinuing the accrual of
interest on loans are used to establish the basis for determining whether a
loan is impaired.
Loan Origination Fees and Related Costs
---------------------------------------
Loan origination fees and certain direct loan origination costs are
deferred, and the net fees are being recognized as income using the
level-yield method over the contractual life of the loans, adjusted for
estimated prepayments based on actual prepayment experience. The
amortization of deferred loan fees and costs on non-accrual loans is
discontinued during periods of non-performance.
(Continued)
-19-
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Other Real Estate Owned
-----------------------
Other real estate owned represents real estate acquired through foreclosure
or in satisfaction of loans and is initially recorded at the lower of the
related loan balance, less any specific allowance for loss, or estimated
fair value less estimated costs to sell. Valuations are periodically
performed by management and an allowance for losses is established by a
charge to operations if the carrying value of a property exceeds its
estimated fair value less estimated costs to sell.
Premises and Equipment
----------------------
Premises and equipment are stated at depreciated cost. Depreciation is
provided using straight-line and accelerated methods over the estimated
useful lives of 39 years for the building and 5 to 7 years for furniture,
fixtures and equipment.
Income Taxes
------------
The Holding Company and its subsidiary have elected to file separate
Federal income tax returns.
The Bank utilizes the asset and liability method of accounting for income
taxes whereby deferred tax assets and liabilities are recognized for the
estimated future consequences attributable to differences between the
financial statement carrying amounts of assets and liabilities and their
respective tax bases. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in tax expense in the period that
includes the enactment date.
Net Income Per Share
--------------------
Net income per common share is calculated by dividing net income by the
weighted average number of common shares and common share 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 the purposes of computing weighted average
shares outstanding. Additionally, unallocated ESOP shares are excluded from
the weighted average common shares outstanding calculation, while allocated
and shares committed to be released are considered to be outstanding.
Reclassification
----------------
Certain reclassifications have been made to the 1995 amounts to conform to
the 1996 presentation.
(Continued)
-20-
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
(2) Investment and Mortgage-Backed Securities Available-for-Sale
------------------------------------------------------------
The amortized cost, unrealized gains and losses, and estimated fair
values of investment and mortgage-backed securities available-for-sale
at September 30 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
1996 Cost Gains Losses Value
---- --------- -------- --------- ------
U.S. Agency obligations $ 7,849,767 13,934 (27,699) 7,836,002
Mortgage-backed
securities 5,614,811 - (86,115) 5,528,696
----------- ------ -------- ----------
$13,464,578 13,934 (113,814) 13,364,698
=========== ====== ======== ==========
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
1995 Cost Gains Losses Value
---- --------- -------- --------- ------
U.S. Agency obligations $ 700,000 - (14,310) 685,690
Mortgage-backed
securities 1,521,599 22,290 - 1,543,889
----------- ------ -------- ----------
$ 2,221,599 22,290 (14,310) 2,229,579
=========== ====== ======= =========
A comparison of the amortized cost and estimated fair values of investment
and mortgage-backed securities available-for-sale by maturity at September
30, 1996 is as follows:
Estimated
Amortized Fair
Cost Value
--------- ---------
Due within one year $ 3,350,686 3,352,056
Due after one year through five years 6,066,315 6,003,335
Due after five years through ten years 4,047,577 4,009,307
---------- ---------
$ 13,464,578 13,364,698
========== ==========
Mortgage-backed securities are included in the above maturity schedule
based on their expected average lives.
Gross gains on the sale of investment and mortgage-backed securities
available-for-sale were $8,628 during the year ended September 30, 1996. No
losses were realized on the sale of investment or mortgage-backed
securities available-for-sale during the year ended September 30, 1996.
There were no sales of investment or mortgage-backed securities
available-for-sale during the year ended September 30, 1995.
(Continued)
-21-
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
(3) Investment and Mortgage-Backed Securities Held-to-Maturity
----------------------------------------------------------
The amortized cost, unrealized gains and losses, and estimated fair
values of investment and mortgage-backed securities held-to-maturity
at September 30 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
1996 Cost Gains Losses Value
---- --------- -------- -------- ------
U.S. Agency obligations $ 5,751,062 6,679 (132,508) 5,625,233
Municipal securities 223,250 4,602 (282) 227,570
Other 109,624 1,500 - 111,124
Mortgage-backed
securities:
FNMA certificates 775,016 9,813 - 784,829
GNMA certificates 1,694,666 11,885 (7,118) 1,699,433
FHLMC certificates 1,749,027 8,073 (24,573) 1,732,527
----------- ------ -------- ----------
4,218,709 29,771 (31,691) 4,216,789
----------- ------ -------- ----------
$10,302,645 42,552 (164,481) 10,180,716
=========== ====== ======== ==========
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
1995 Cost Gains Losses Value
---- --------- -------- -------- ------
U.S. Agency obligations $6,490,726 21,608 (73,812) 6,438,522
Municipal securities 215,000 7,426 - 222,425
Other 115,438 3,500 - 118,938
Mortgage-backed
securities:
FNMA certificates 868,226 4,275 (5,535) 866,966
GNMA certificates 1,544,056 26,891 (1,553) 1,569,394
FHLMC certificates 720,937 39,093 (1,203) 758,827
---------- ------- ------- ---------
3,133,219 70,259 (8,291) 3,195,187
---------- ------- ------- ---------
$9,954,383 102,793 (82,103) 9,975,072
========== ======= ======= =========
A comparison of the amortized cost and estimated fair values of investment
and mortgage-backed securities held-to-maturity by maturity at September
30, 1996 is as follows:
Estimated
Amortized Fair
Cost Value
--------- ----------
Due within one year $ 1,109,211 1,108,643
Due after one year through five years 5,080,167 4,986,128
Due after five years through ten years 4,113,267 4,085,945
---------- ---------
$10,302,645 10,180,716
========== ==========
Mortgage-backed securities are included in the above maturity schedule
based on their expected average lives.
(Continued)
-22-
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Gross gains of $21,570 and no losses were realized on the sale of
investment and mortgage-backed securities held-to-maturity during the year
ended September 30, 1996. Amortized cost of the securities sold was
approximately $651,000. Such sales were considered maturities for purposes
of classification under the provisions of SFAS No. 115.
There were no sales of investment or mortgage-backed securities
held-to-maturity during the year ended September 30, 1995.
(4) Loans Receivable, Net
---------------------
Net loans receivable at September 30 are summarized as follows:
1996 1995
---- ----
Real estate mortgage loans, including commercial
real estate $22,218,028 20,161,016
Consumer loans 1,524,451 1,228,460
Home equity loans 1,316,976 925,461
Agricultural loans 701,298 581,725
Commercial loans 86,586 176,575
Savings account and other loans 516,812 451,862
---------- ----------
26,364,151 23,525,099
Less:
Loans in process $ 84,815 111,386
Allowance for loan losses 275,588 275,266
Net deferred loan origination fees 144,988 132,507
---------- ----------
$25,858,760 23,005,940
========== ==========
Adjustable rate mortgages included in the loans receivable balance above
were approximately $177,000 and $84,000 at September 30, 1996 and 1995,
respectively.
The weighted average stated interest rate of loans receivable at September
30, 1996 and 1995 was 8.05% and 8.10%, respectively. The average yield on
loans receivable, including amortization of unearned discounts and deferred
loan origination fees, was 8.01% and 8.09% for the years ended September
30, 1996 and 1995, respectively.
Real estate loans serviced for others were approximately $81,000 and
$128,000 at September 30, 1996 and 1995, respectively.
First mortgage loans pledged as collateral for public funds or for other
funds on deposit with the Bank approximated $4,787,000 and $3,537,000 at
September 30, 1996 and 1995, respectively.
A summary of activity in the allowance for loan losses is as follows:
1996 1995
---- ----
Balance at beginning of year $ 275,266 207,356
Provision for loan losses - 42,000
Losses charged against the allowance (11,584) (930)
Recoveries of amounts previously charged off 11,906 26,840
--------- -------
Balance at end of year $ 275,588 275,266
========= =======
(Continued)
-23-
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Nonaccrual and renegotiated loans for which interest has been reduced
totaled approximately $55,000 and $93,000 at September 30, 1996 and 1995,
respectively. The resulting impact on interest income is nominal.
The Bank is not committed to lend additional funds to debtors whose loans
have been modified. The Bank's impaired loans, which include those loans
currently reported as nonaccrual, amounted to approximately $32,000 at
September 30, 1996 and were not subject to a related allowance for credit
losses because of the estimated net realizable value of loan collateral,
guarantees and other factors.
(5) Accrued Interest Receivable
---------------------------
Accrued interest receivable at September 30 is summarized as follows:
1996 1995
---- ----
Investment securities $ 257,790 122,197
Mortgage-backed securities 52,287 33,201
Loans receivable 185,673 201,918
------- --------
$ 495,750 357,316
======= =======
(6) Premises and Equipment
----------------------
Premises and equipment at September 30 are summarized as follows:
1996 1995
---- ----
Land and building $ 507,395 502,562
Furniture, fixtures and equipment 465,028 471,815
-------- ---------
972,423 974,377
Less accumulated depreciation 470,368 431,620
-------- ---------
$ 502,055 542,757
======== =========
(7) Deposits
--------
Deposits at September 30 are summarized as follows:
<TABLE>
<CAPTION>
Weighted
average 1996 1995
-------------------- --------------------
rate Amount Percent Amount Percent
------------- -------- ------- ------ -------
Certificates of deposit,
<S> <C> <C> <C> <C> <C>
by interest rate 3.01 to 4.00% $ - - % $ 791,000 2.8%
4.01 to 5.00 2,123,194 7.2 2,447,155 8.7
5.01 to 6.00 14,450,989 49.2 10,252,544 36.3
6.01 to 7.00 2,515,333 8.6 5,362,409 19.0
7.01 to 8.00 232,932 .8 301,111 1.1
8.01 to 9.00 - - 3,988 -
---------- ---- ---------- ----
19,322,448 65.8 19,158,207 67.9
---------- ---- ---------- ----
NOW accounts and
MMDA 3.00 to 4.70 6,219,911 21.2 5,790,132 20.5
Passbook savings 3.7 to 4.25 3,828,626 13.0 3,260,193 11.6
---------- ---- ---------- ----
Total deposits 4.88% $29,370,985 100.0% $ 28,208,532 100.0%
========== ===== ========== =====
</TABLE>
(Continued)
-24-
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Certificates of deposit and savings accounts of $100,000 or greater were
approximately $5,040,000 and $3,955,000 at September 30, 1996 and 1995,
respectively.
Certificates of deposit at September 30, 1996 are scheduled to mature as
follows:
Due in:
One year or less $14,204,958
Greater than one year through three years 4,764,591
Greater than three years through five years 352,899
----------
$19,322,448
Interest expense on deposits for the years ended September 30 is summarized
as follows:
1996 1995
---- ----
Certificates of deposit and savings $1,223,577 1,128,299
NOW accounts 214,985 227,177
--------- ---------
$1,438,562 1,355,476
(8) Advances From Federal Home Loan Bank
------------------------------------
Advances from Federal Home Loan Bank at September 30 are summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
5.26%-6.54% Fixed Rate Advances, interest
<S> <C> <C>
payable monthly $6,000,000 2,600,000
4.35% Amortizing Advance, paid in 1996 - 56,720
4.36% Amortizing Advance, due in monthly
installments of $9,375 plus interest, through
September 1997 113,438 225,938
Variable rate Cash Management Advance, paid in 1996 - 300,000
--------- ---------
$6,113,438 3,182,658
</TABLE>
At September 30, 1996, the Bank had a Cash Management Advance note with a
maximum allowable advance of $1,035,300 maturing on May 29, 1997. There was
no outstanding balance as of September 30, 1996.
Principal payments on advances from Federal Home Loan Bank subsequent to
September 30, 1996 are as follows:
Year ending
September 30, Amount
------------- ------
1997 $ 5,213,438
1998 600,000
1999 300,000
---------
$ 6,113,438
=========
(Continued)
-25-
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
The advances are subject to a "blanket pledge agreement" whereby
substantially all assets of the Bank are pledged to the Federal Home Loan
Bank.
(9) Income Taxes
------------
U.S. Federal income tax expense for the year ended September 30 consists of:
1996 1995
---- ----
Current $ 99,641 140,660
Deferred 51,779 29,925
-------- --------
Total $ 151,420 170,585
======== ========
Income tax expense for the year ended September 30 differed from the
amounts computed by applying the U.S. Federal income tax rate of 34% to
income before income taxes as a result of the following:
1996 1995
---- ----
Computed "expected" tax expense $172,130 177,763
Decrease resulting from tax exempt interest (7,359) (7,178)
Other (13,351) -
------- -------
$151,420 170,585
At September 30, 1996, the Bank has capital loss carryforwards totaling
approximately $259,000 which expire December 31, 1996.
Temporary differences between the financial statement carrying amounts and
the tax bases of assets and liabilities that give rise to significant
portions of the deferred tax liability at September 30 relate to the
following:
1996 1995
---- ----
Deferred tax assets:
Deferred loan fees $ 30,904 43,628
Allowance for loan losses 93,700 93,590
Available-for-sale securities 33,959 -
-------- ---------
Gross deferred tax assets 158,563 137,218
-------- ---------
Deferred tax liabilities:
FHLB stock dividends 135,966 126,140
Tax bad reserve in excess of base year amount 83,731 74,183
Prepaid deposit insurance premium 11,461 -
Available-for-sale securities - 2,713
Other 8,330 -
-------- ---------
Gross deferred tax liabilities 239,488 203,036
-------- ---------
Net deferred tax liability $ 80,925 65,818
======== ==========
(Continued)
-26-
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the existence of, or generation of, taxable income
in the periods which those temporary differences are deductible. Management
considers the scheduled reversal of deferred tax liabilities, taxes paid in
carryback years, projected future taxable income, and tax planning
strategies in making this assessment. Based upon the level of historical
taxable income and estimates of future taxable income over the periods
which the deferred tax assets are deductible, at September 30, 1996
management believes it is more likely than not that the Bank will realize
the benefits of these deductible differences.
If certain conditions are met, the Bank is allowed a special bad debt
deduction for income tax purposes. The deduction is based on either a
specified experience formula or a percentage of taxable income before such
deduction (presently 8%). The Bank does not qualify for use of either bad
debt deduction. As such, no bad debt deduction has been included in the
provision for federal income taxes for the years ended September 30, 1996
and 1995. Under new legislation enacted in August 1996, the percentage of
income bad debt deduction was eliminated beginning January 1, 1996.
Retained earnings at September 30, 1996 include approximately $398,000 for
which no provision for federal income tax has been made. This amount
represents the base year tax bad debt reserve which is essentially income
offset by the percentage bad debt deduction for income tax purposes only.
This amount is treated as a permanent difference and deferred taxes are not
recognized unless it appears that this amount will be reduced and thereby
result in taxable income in the foreseeable future. Under current tax
regulations, management does not foresee any changes in its business or
operations which would result in a recapture of its federal bad debt
reserve into taxable income.
A deferred tax liability of $83,731 has been recognized by the Bank for the
tax bad debt reserve in excess of the base year reserve. The new tax
legislation enacted in August 1996 requires this excess be recaptured and
included in taxable income over a six year period beginning with the tax
return filed for the year ending December 31, 1996 (Bank is a calendar year
taxpayer) or December 31, 1998 if certain residential lending requirements
are met.
(10) Employee Benefit Plans
----------------------
Retirement Plan. The Bank has a non-contributory defined contribution
retirement plan for all eligible employees. The Plan provides for a minimum
Bank contribution of 5% of taxable income before provision for income
taxes, but not to exceed 15% of salaries and wages. Total pension expense
for the years ended September 30, 1996 and 1995 was approximately $29,000
and $38,000, respectively.
(Continued)
-27-
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Employee Stock Ownership Plan (ESOP). Effective January 1, 1996 the Board
of Directors approved the adoption of an ESOP covering substantially all
employees. The ESOP purchased 64,000 shares of the Holding Company's common
stock for $10 per share in connection with the conversion to stock
ownership. The ESOP borrowed $640,000 from the Holding Company to fund the
purchase, evidenced by a note receivable recorded by the Holding Company
and secured by the common stock purchased by the ESOP. The terms of the
note require quarterly principal payments from the ESOP of approximately
$11,400, bearing interest at prime (8.25% at September 30, 1996), maturing
February, 2010. Contributions of cash or common stock are made from BFSB to
the ESOP at the discretion of the Board of Directors. For financial
reporting purposes, the unearned ESOP compensation is classified as a
reduction of consolidated stockholders' equity and amounts paid to the
Holding Company for interest have been eliminated in consolidation.
The Bank records compensation expense equal to the fair value of shares at
the date such shares are committed to be released. Shares are committed to
be released as the ESOP repays the note receivable recorded by the Holding
Company. Shares committed to be released are allocated to participant
accounts at the end of each calendar year. For the year ended September 30,
1996, ESOP principal and interest payments of approximately $49,000 were
funded by Bank contributions of approximately $39,000 to the ESOP. The
remainder of the ESOP payments was funded by dividends on the unallocated
ESOP shares. At September 30, 1996, 2,286 shares were committed to be
released to participant accounts and the fair value of the remaining shares
was approximately $654,000. The Bank recognized compensation expense
relating to the ESOP of $24,241 during the year ended September 30, 1996.
Restricted Stock Plan. Within one year of the conversion from mutual to
stock ownership which occurred March 29, 1996, the Bank intends to adopt a
restricted stock plan which would purchase up to 42,320 shares for grant to
officers and directors of BFSB. Such awards would vest over a five year
period beginning one year after the date of the grant of the award. The
plan is subject to approval by the Board of Directors and stockholders.
Option Plan. With one year of the conversion from mutual to stock ownership
which occurred March 29, 1996, the Bank intends to adopt an option plan
which would purchase up to 105,800 shares for grant to employees, officers
and directors of BFSB. The options would vest over a five year period
beginning one year after the date of the grant of the option. The plan is
subject to approval by the Board of Directors and stockholders.
(11) Regulatory Capital
------------------
BFSB is required to meet three OTS capital requirements: a tangible capital
requirement equal to not less than 1.5% of tangible assets (as defined in
the regulations), a core capital requirement, comprised of tangible capital
adjusted for supervisory goodwill and other defined factors, equal to not
less than 3% of tangible assets, and a risk-based capital requirement equal
to at least 8% of all risk-weighted assets. For risk-weighting, selected
assets are given a risk assignment of 0% to 100%. The Bank's total
risk-weighted assets at September 30, 1996 were approximately $20,691,000.
(Continued)
-28-
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
The following table presents, as of September 30, 1996, the extent to
which BFSB exceeds in dollars and in percent, the three minimum capital
requirements.
Regulatory Basis
(dollars rounded to thousands)
-------------------------------------
Approximate
Actual requirement Excess
------ ----------- ------
Tangible capital:
Dollar amount $10,589 774,000 9,815,000
Percent of tangible assets 20.5% 1.5% 19.0%
Core capital:
Dollar amount $10,589 1,548,000 9,041,000
Percent of adjusted tangible assets 20.5% 3.0% 17.5%
Risk-based capital:
Dollar amount $10,847 1,655,000 9,192,000
Percent of risk-weighted assets 52.4% 8.0% 44.4%
Failure to comply with applicable regulatory capital requirements can
result in capital directives from the director of the OTS, restrictions on
growth, and other limitations on a savings bank's operations.
Generally accepted accounting principles (GAAP) capital differs from
tangible, core, and risk- based capital at September 30 as a result of the
following (dollars rounded to thousands):
1996 1995
---- ----
Consolidated capital measured by GAAP $15,508,000 5,857,000
Less Holding Company assets 4,985,000 -
---------- ---------
Bank capital measured by GAAP 10,523,000 5,857,000
Unrealized gain (loss) on securities available-
for-sale, net 66,000 (5,000)
---------- ---------
Tangible and core capital 10,589,000 5,852,000
Allowance for loan losses (limited to 1.25% of
risk-weighted assets) 258,000 220,000
---------- ---------
Risk-based capital $10,847,000 6,072,000
========== =========
(12) Financial Instruments With Off-Balance-Sheet Risk
-------------------------------------------------
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and
involve, to varying degrees, elements of credit risk.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Bank uses
the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments.
(Continued)
-29-
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Financial instruments outstanding at September 30, 1996 whose contract
amounts represent credit risk are fixed-rate commitments to extend credit
totaling approximately $708,000.
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 Bank evaluates
each customers' creditworthiness on a case by case basis. The amount of
collateral obtained, if deemed necessary, by the Bank upon extension of
credit is based on management's evaluation of the counter-party. Collateral
held varies but may include personal property, residential real property,
and income-producing commercial properties.
(13) Commitments and Contingencies
-----------------------------
Special Assessment by the SAIF. The deposits of BFSB are insured by the
Savings Association Insurance Fund ("SAIF"), one of two funds administered
by the Federal Deposit Insurance Corporation ("FDIC"). BFSB previously paid
premiums of approximately 0.23% of certain deposits. On September 30, 1996,
the Deposit Insurance Funds Act of 1996 was signed, which authorizes the
FDIC to impose a special assessment on certain deposits held by thrift
institutions. This special assessment, which is based on $.657 per $100 of
outstanding thrift deposits at March 31, 1995, is intended to recapitalize
the SAIF. The special assessment resulted in an additional expense of
approximately $187,000 and a related tax benefit of approximately $63,000
which were recorded by the Bank on September 30, 1996. The assessment is
payable no later than November 29, 1996.
Severance Agreements. On March 29, 1996 the Bank entered into employment
agreements with its executive officers. Such agreements have a term of
three years and provide for payments to be made to the officers equal to
three times average salary for the previous five years, in the event the
Bank experiences a change in control. A change in control is defined as (1)
a sale of more than 25% of the assets of BFSB or the Holding Company; (2)
any merger or recapitalization whereby BFSB or the Holding Company is not
the surviving entity; (3) a change in control as determined by the OTS; or
(4) acquisition directly or indirectly of 25% or more of the voting stock
of BFSB or the Holding Company by an individual, entity or group. The
agreement may be extended for an additional one year term upon approval of
the Board of Directors.
(14) Recent Accounting Pronouncements Not Yet Adopted
------------------------------------------------
On March 31, 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." SFAS No. 121 provides that long-lived assets and identifiable
intangibles should be reviewed for impairment whenever events or
circumstances provide evidence that suggests the carrying amount of the
asset may not be recoverable. An impairment loss is recognized if the sum
of the expected future cash flows is less than the carrying amount of the
asset. SFAS No. 121 is effective for financial statements issued with
fiscal years beginning after December 15, 1995, although earlier
application is encouraged. The Bank intends to adopt the provisions of SFAS
No. 121 on October 1, 1996, and management expects adoption will not have a
material effect on the financial position or results of operations of the
Bank.
(Continued)
-30-
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 defines a "fair value based method" of
accounting for stock- based compensation whereby compensation costs is
measured at the grant date based on the value of the award and is
recognized over the service period. The FASB encourages all entities to
adopt the fair value based method, however, it will allow entities to
continue to use the "intrinsic value based method" prescribed by previous
pronouncements for grants to employees. Under the intrinsic value based
method, compensation cost is the excess of the market price of the stock at
the grant date over the amount an employee must pay to acquire the stock.
Entities electing to continue use of the accounting treatment of previous
pronouncements must make certain pro forma disclosures as if the fair value
based method had been applied. The accounting requirements of SFAS No. 123
are effective for transactions entered into in fiscal years beginning after
December 15, 1995. Pro forma disclosures are required for fiscal years
beginning after December 15, 1995 and must include the effects of all
awards granted in fiscal years beginning after December 15, 1994.
Management has elected to follow the accounting requirements of previous
pronouncements and does not expect adoption to have a material impact on
the Bank's financial position or results of operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No.
125 provides guidance on accounting for transfers and servicing of
financial assets, recognition and measurement of servicing assets and
liabilities, financial assets subject to prepayment, secured borrowings and
collateral, and extinguishment of liabilities.
SFAS No. 125 generally requires the Bank recognize as separate assets the
rights to service mortgage loans for others, whether the servicing rights
are acquired through purchases or loan originations. Servicing rights are
initially recorded at fair value based upon the present value of estimated
future cash flows. Subsequently, the servicing rights are assessed for
impairment, which is recognized in the statement of earnings in the period
the impairment occurs. For purposes of performing the impairment
evaluation, the related portfolio must be stratified on the basis of
certain risk characteristics including loan type and note rate. SFAS No.
125 also specifies that financial assets subject to prepayment, including
loans that can be contractually prepaid or otherwise settled in such a way
that the holder would not recover substantially all of its recorded
investment, be measured like debt securities available-for-sale or trading
securities under SFAS No. 115. The Bank intends to adopt the provisions of
SFAS No. 125 on January 1, 1997, and management expects adoption will not
have a material effect on the financial position or operations of the Bank.
(15) Noncash Investing Activities
----------------------------
The Bank acquired $55,111 of other real estate owned by foreclosing on
loans receivable during the year ended September 30, 1995.
(16) Loans to Directors and Executive Officers
-----------------------------------------
Activity in loans to directors and executive officers for the year ended
September 30, 1996 follows:
Balance at October 1, 1995 $ 332,602
Additional borrowings 311,710
Principal repayments (93,458)
--------
Balance at September 30, 1996 $ 550,854
========
(Continued)
-31-
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
(17) Disclosures About Fair Value of Financial Instruments
-----------------------------------------------------
The following disclosures of fair value information about financial
instruments are presented, whether or not recognized in the balance sheet,
for which it is practicable to estimate that value. In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot always be substantiated by comparison to independent
markets and, in certain cases, could not be realized in immediate
settlement of the instrument. These disclosures exclude certain financial
instruments and all nonfinancial instruments. Accordingly, the aggregate
fair value amounts presented do not represent the underlying value of the
Bank.
The following methods and assumptions were used by the Bank in estimating
the fair value of its financial instruments:
Cash and Cash Equivalents and Interest Bearing Deposits. The carrying
amounts for cash and cash equivalents and interest bearing deposits
approximate fair value because they mature in 90 days or less and do
not present unanticipated credit concerns.
Investment Securities, Mortgage-Backed Securities and Stock in Federal
Home Loan Bank. The fair value of investment securities is estimated
based on bid prices published in financial newspapers or bid
quotations received from securities dealers. The fair value of stock
in Federal Home Loan Bank approximates redemption value.
Loans Receivable. Fair values are estimated by stratifying the loan
portfolio into groups of loans with similar financial characteristics.
Loans are segregated by type such as real estate, commercial, and
consumer, with each category further segmented into fixed and
adjustable rate interest categories.
The fair value of fixed rate loans is calculated by discounting
scheduled cash flows through the anticipated maturity adjusted for
prepayment estimates. For mortgage loans, the Bank uses secondary
market interest rates for loans of similar size as the discount rate.
For other fixed rate loans, cash flows are discounted at prime rate.
Adjustable interest rate loans are assumed to approximate fair value
because they generally reprice within the near-term.
The fair values are adjusted for credit risk based on assessment of
risk identified with specific loans, and risk adjustments on the
remaining portfolio based on credit loss experience. Assumptions
regarding credit risk are judgmentally determined using specific
borrower information, internal credit quality analysis, and historical
information on segmented loan categories for non-specific borrowers.
Accrued Interest Receivable. The fair value of accrued interest
receivable approximates carrying value as the Bank expects to collect
accrued interest in the near-term.
Deposits. The fair value of deposits with no stated maturity, such as
savings accounts, NOW accounts, and money market accounts, is equal to
the amount payable on demand as of September 30, 1996. The fair value
of certificates of deposit is based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates
offered as of September 30, 1996 for deposits of similar maturities.
(Continued)
-32-
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Advances from Federal Home Loan Bank. The fair value of the fixed rate
long-term advances is calculated by discounting scheduled payments
using the Bank's FHLB long-term borrowing rate as of September 30,
1996.
Accrued Expenses and Other Liabilities. The fair value of accrued
expenses and other liabilities approximates carrying value as the
amounts accrued will be paid in the near-term.
Commitments to Extend Credit. The fair value of commitments to extend
credit is estimated using the fees currently charged to enter into
similar arrangements. The commitments to extend credit are fixed rate
loans. No fair value adjustment for interest rates is necessary as the
stated rates do not differ materially from market rates at September
30, 1996.
Limitations. Fair value estimates are made at a specific point in
time, based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the
Bank's entire holdings of a particular financial instrument. Because
no market exists for a portion of the Bank's financial instruments,
fair value estimates are based on judgements regarding future expected
loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on existing on- and off-balance-sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Significant assets and
liabilities that are not considered financial instruments include
deferred tax assets and liabilities and premises and equipment. In
addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair
value estimates and have not been considered in the estimates.
The carrying and estimated fair values of the Company's financial
instruments as of September 30, 1996 are as follows:
Estimated
Carrying fair
value value
--------- ---------
Assets:
Cash and cash equivalents $ 451,445 451,000
Interest-bearing deposits 99,000 99,000
Investment and mortgage-backed securities
available-for-sale 13,364,698 13,365,000
Investment and mortgage-backed securities
held-to-maturity 10,302,645 10,181,000
Stock in Federal Home Loan Bank 399,900 400,000
Loans receivable, net 25,858,760 25,869,000
Accrued interest receivable 495,750 496,000
Liabilities:
Deposits 29,370,985 29,356,000
Advances from Federal Home Loan Bank 6,113,438 6,107,000
Accrued expenses and other liabilities 269,381 269,000
Off-balance-sheet items:
Commitments to extend credit - 6,150
(Continued)
-33-
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
(18) Holding Company Information (Condensed)
---------------------------------------
The summarized financial information for Crazy Woman Creek Bancorp
Incorporated is presented below. Intercompany balances and transactions are
noted parenthetically.
Condensed Balance Sheet
September 30,
Assets 1996
------ ----
Cash (NOW account with BFSB) $ 54,233
Investment in subsidiary 11,140,175
Loan to BFSB 4,424,000
-----------
Total assets $15,618,408
===========
Liabilities and Stockholders' Equity
Income taxes payable 4,600
Dividends payable 105,800
Stockholders' equity:
Common stock 105,800
Additional paid-in capital 10,027,393
ESOP loan (617,143)
Retained earnings 6,057,879
Unrealized gain (loss) on securities available-for-sale,
net (65,921)
-----------
Total stockholders' equity 15,508,008
-----------
Total liabilities and stockholders' equity $15,618,408
===========
Condensed Statement of Income
Year ended
September 30, 1996
------------------
Interest income (Passbook account, ESOP loan, loan to BFSB) $159,235
Management fee from BFSB (2,300)
Other operating expenses (39,363)
-------
Income before equity in undistributed earnings of
subsidiary 117,572
Equity in undistributed earnings of subsidiary 277,073
Income before income taxes 394,645
Income taxes 39,800
Net income $354,845
=======
(Continued)
-34-
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
Year ended
September 30, 1996
<S> <C>
Net income $ 354,845
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of subsidiary (277,073)
Increase in income taxes payable 4,600
Net cash provided by operating activities 82,372
Cash flows from investing activities:
Loan to BFSB (4,424,000)
Principal payments on ESOP note receivable 13,257
Investment in BFSB (5,065,905)
Net cash used in investing activities (9,476,648)
Cash flows from financing activities:
Sale of common stock, net of offering costs 9,491,809
Cash dividends paid (43,300)
Net cash provided by financing activities 9,448,509
Net increase in cash 54,233
Cash at inception -
Cash at end of year $ 54,233
=========
</TABLE>
<PAGE>
Corporate Office
Crazy Woman Creek Bancorp Incorporated and Buffalo Federal Savings Bank
106 Fort Street
Buffalo, Wyoming 82834-1889
(307) 684-5591
Board of Directors of Crazy Woman Creek Bancorp Incorporated
Richard Reimann Greg L. Goddard
Chairman of the Board
Deane D. Bjerke Douglas D. Osborn
Thomas J. Berry Sandra K. Todd
Executive Officers
Deane D. Bjerke Arnold R. Griffith, Jr.
President and Chief Executive Officer Senior Vice President
Dalen C. Slater
Senior Vice President and
Chief Financial Officer
Corporate Counsel Special Counsel
Kirven and Kirven Malizia, Spidi, Sloane & Fisch, P.C.
104 Fort Street One Franklin Square
Buffalo, WY 82834 1301 K Street, N.W., Suite 700 East
Washington, D.C. 20005
Independent Auditors Transfer Agent and Registrar
KPMG Peat Marwick LLP American Securities Transfer & Trust,
1000 First Interstate Center Incorporated
401 North 31st Street 1825 Lawrence Street, Suite 444
Billings, MT 59103 Denver, CO 80202
Form 10-KSB
Crazy Woman Creek Bancorp Incorporated's Annual Report for the year
ended September 30, 1996 filed with the Securities and Exchange
Commission on Form 10- KSB, excluding exhibits, is available without
charge upon written request. For a copy of the Form 10-KSB or any
other investor information, please write or call the Corporate
Secretary at the Company's Corporate Office in Buffalo, Wyoming. The
Annual Meeting of Stockholders will be held on January 29, 1997 at
3:00 p.m. at the Company's main office located at 106 Fort Street,
Buffalo, Wyoming.
- 36 -
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 451
<INT-BEARING-DEPOSITS> 99
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,365
<INVESTMENTS-CARRYING> 10,303
<INVESTMENTS-MARKET> 10,181
<LOANS> 25,859
<ALLOWANCE> 276
<TOTAL-ASSETS> 51,517
<DEPOSITS> 29,371
<SHORT-TERM> 6,113
<LIABILITIES-OTHER> 524
<LONG-TERM> 0
0
0
<COMMON> 106
<OTHER-SE> 15,402
<TOTAL-LIABILITIES-AND-EQUITY> 51,517
<INTEREST-LOAN> 2,043
<INTEREST-INVEST> 1,202
<INTEREST-OTHER> 29
<INTEREST-TOTAL> 3,274
<INTEREST-DEPOSIT> 1,439
<INTEREST-EXPENSE> 1,702
<INTEREST-INCOME-NET> 1,572
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 30
<EXPENSE-OTHER> 1,182
<INCOME-PRETAX> 506
<INCOME-PRE-EXTRAORDINARY> 355
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 355
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
<YIELD-ACTUAL> 3.55
<LOANS-NON> 32
<LOANS-PAST> 0
<LOANS-TROUBLED> 23
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 275
<CHARGE-OFFS> 10
<RECOVERIES> 11
<ALLOWANCE-CLOSE> 276
<ALLOWANCE-DOMESTIC> 276
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
