SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One):
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, 1997,
|_| 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 .
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Commission File No. 0-27714
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 Incorporation I.R.S. Employer
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. $4,015,000
As of December 11, 1997, there were issued and outstanding 954,845
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 11, 1997, was $12,168,913 ($15.375)
per share based on 954,845 shares of Common Stock outstanding).
Transition Small Business Disclosure Format (check one)
YES NO X
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DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal
Year ended September 30, 1997. (Parts I, II, and IV)
2. Portions of the Proxy Statement for the Annual Meeting of
Stockholders. (Part III)
1
<PAGE>
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 other than the investment in mutual funds. 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.
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.
2
<PAGE>
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 few out of area
mortgage bankers. 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 21% 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,
-------------------------------------------------------------------
1997 1996
------------------------------- -------------------------------
Percent Percent
Amount of Total Amount of Total
------------ --------- ------------ ----------
(In Thousands)
<S> <C> <C> <C> <C>
Type of Loans:
- -------------
One- to four-family................................... $21,826 74.79% $20,002 75.86%
Residential construction.............................. 404 1.38 513 1.95
Multi-family.......................................... 457 1.57 571 2.16
Commercial real estate(1)............................. 2,470 8.46 1,758 6.67
Commercial............................................ 358 1.23 163 0.62
Consumer:
Automobile.......................................... 1,191 4.08 1,043 3.96
Home equity/Line of credit.......................... 1,658 5.68 1,317 5.00
Share............................................... 247 0.85 425 1.61
Other............................................... 573 1.96 573 2.17
------ ------ ------- ------
Total consumer.................................... 3,669 12.57 3,358 12.74
------ ------ ------- ------
Total loans....................................... 29,184 100.00% 26,365 100.00%
------- ====== ------- ======
Less:
Loans in process...................................... (95) (85)
Net deferred loan origination fees.................... (151) (145)
Allowance for loan losses............................. (302) (276)
------- -------
Total loans, net........................................ $28,636 $25,859
======= =======
</TABLE>
- ----------------
(1) Includes agricultural real estate loans.
3
<PAGE>
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.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------
1997 1996
---- ----
(In Thousands)
<S> <C> <C>
Total gross loans receivable at
beginning of period ...................... $26,365 $23,525
Loans originated:
One- to four-family........................ $ 5,769 $ 5,386
Multi-family............................... 0 215
Commercial real estate..................... 630 131
Construction............................... 758 591
Commercial................................. 422 69
Consumer................................... 2,426 2,515
------- -------
Total loans originated....................... $10,005 $ 8,907
------- -------
Loans sold:
Total loans sold............................. $ -- $ --
------- -------
Principal Repayments:
Loan principal repayments.................... $ 7,186 $ 6,067
------- -------
Net loan activity............................ $ 2,819 $ 2,840
------- -------
Total gross loans receivable at
end of period............................ $29,184 $26,365
======= =======
</TABLE>
4
<PAGE>
Loan Maturity Tables. The following table sets forth the maturity of
Buffalo Federal's loan portfolio at September 30, 1997. The table does not
include prepayments or scheduled principal repayments. Prepayments and scheduled
principal repayments on loans totaled $7.2 million and $6.1 million, for the
years ended September 30, 1997 and 1996, 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 ... $ 101 $ -- $ 70 $ -- $ 32 $ 22 $ 225
------- ------- ------- ------- ------- ------- -------
Amounts Due:
Within 3 months ........ -- -- 3 186 23 685 897
3 months to 1 year ..... 4 -- 262 218 135 300 919
After 1 year:
1 to 3 years ......... 1,289 198 652 -- 28 945 3,112
3 to 5 years ......... 1,353 -- 1,060 -- 116 1,528 4,057
5 to 10 years ........ 4,003 11 218 -- 24 189 4,445
10 to 20 years ....... 14,328 248 205 -- -- -- 14,781
Over 20 years ........ 748 -- -- -- -- -- 748
------- ------- ------- ------- ------- ------- -------
Total due after one year 21,721 457 2,135 -- 168 2,662 27,143
------- ------- ------- ------- ------- ------- -------
Total amount due ....... 21,826 457 2,470 404 358 3,669 29,184
------- ------- ------- ------- ------- ------- -------
Less:
Allowance for loan loss 145 4 40 5 10 98 302
Loans in process ....... 30 -- -- 53 5 7 95
Net deferred loan fees . 146 2 3 -- -- -- 151
------- ------- ------- ------- ------- ------- -------
Loans receivable, net $21,505 $ 451 $ 2,427 $ 346 $ 343 $ 3,564 $28,636
======= ======= ======= ======= ======= ======= =======
</TABLE>
The next table sets forth at September 30, 1997, the dollar amount of
all loans due one year after September 30, 1997 which have fixed interest rates
and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed Adjustable
Rates Rates Total
----- ----------- -------
(In Thousands)
<S> <C> <C> <C>
One- to four-family............ $21,609 $ 217 $21,826
Multi-family................... 457 457
Construction................... 404 404
Commercial real estate......... 2,470 2,470
Commercial..................... 358 358
Consumer....................... 3,370 299 3,669
------ --- ------
Total..................... $28,668 $516 $29,184
====== === ======
</TABLE>
5
<PAGE>
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 1997, the Bank
originated two adjustable rate loans that totaled $119,000. 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 primarily remain a portfolio lender. At September
30, 1997, the Bank serviced loans for others totaling $77,000.
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, 1997, balloon mortgages totalled
$2.02 million, or 6.92% of the Bank's loan portfolio.
Residential Construction Loans. Residential construction loans are made
on one- to four-family residential properties 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,
1997, 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
6
<PAGE>
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. 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 are
primarily 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. See also "--Non- performing and Problem Assets
- -- Classified Assets." 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, 1997, agricultural land
loans constituted approximately $722,000, or 2.47% of the Bank's loan portfolio.
Agricultural land loans are included in the 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, multi-family loans typically involve larger loan balances
to single borrowers or groups of related
7
<PAGE>
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, 1997, 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 stages of completion
in accordance with the results of inspection reports that are based upon
physical
8
<PAGE>
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, 1997, the
Bank had $104,000 of commitments to cover originations and $95,000 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
$1.67 million at September 30, 1997.
At September 30, 1997, the Bank's largest amount of loans to one
borrower were all performing residential and commercial real estate loans
aggregating approximately $541,000, 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 the
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 until 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, 1997, loans past due 30 to
89 days totaled $302,000.
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
<PAGE>
Non-Performing Assets. The following table sets forth information
regarding non-accrual loans, real estate owned, and certain other repossessed
assets and loans.
<TABLE>
<CAPTION>
At September 30,
----------------------------
1997 1996
---- -----
(In Thousands)
<S> <C> <C>
Loans accounted for on a non-accrual basis:
One- to four-family........................ $ 101 $ 10
Commercial real estate..................... 70 --
Construction............................... -- --
Commercial................................. 32 --
Consumer................................... 22 22
----- -----
Total Non-performing loans................... 225 32
----- -----
REO.......................................... -- --
----- -----
Other non-performing assets.................. -- --
----- -----
Total non-performing assets.................. $ 225 $ 32
===== =====
Total non-performing loans to net
loans........................................ 0.79% 0.12%
===== =====
Total non-performing assets to total
assets....................................... 0.38% 0.06%
===== =====
</TABLE>
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, 1997. Amounts included in the Bank's interest
income for the year ended September 30, 1997 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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<PAGE>
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, 1997, the Bank had $278,000 of assets classified as
substandard (which consisted of four home loans, one restaurant/convenience
store, four commercial loans and twelve 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, 1997, 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 less than the provisions taken in the past. The
allowance for loan losses, as a ratio of total net loans was 1.04% at September
30, 1997.
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.
11
<PAGE>
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------
1997 1996
-------------------------- ---------------------------
Percent of Percent of
Loans to Loans to
Amount Total Loans Amount Total Loans
--------- ------------ -------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
At end of period allocated to:
One-to four-family............... $145 74.79% $132 75.86%
Multi-family..................... 4 1.57 4 2.16
Commercial real estate........... 40 8.46 40 6.67
Construction..................... 5 1.38 5 1.95
Commercial....................... 10 1.23 10 0.62
Consumer......................... 98 12.57 85 12.74
---- ------ ---- ------
Total allowance.................. $302 100.00% $276 100.00%
==== ====== ==== ======
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------
1997 1996
------ -------
(Dollars in Thousands)
<S> <C> <C>
Total loans outstanding..................... $29,184 $26,365
======= =======
Allowance balances (at beginning of
period)..................................... $ 276 $ 275
Provision (loan loss benefit):
One- to four-family....................... -- --
Commercial real estate.................... -- --
Commercial................................ -- --
Consumer.................................. -- --
------- -------
Net provision (loan loss benefit)....... -- --
------- -------
Net charge-offs (recoveries):
One- to four-family....................... (12) (11)
Commercial real estate.................... -- --
Commercial ............................... (9) --
Consumer ................................. (5) 10
------- -------
Net charge-offs (recoveries)............ (26) (1)
------- -------
Allowance balance (at end of period)........ $ 302 $ 276
======= =======
Allowance for loan losses to total
loans, net................................ 1.04 % 1.06 %
======= =======
Net charge-offs (recoveries) to
loans receivable, net.................... (0.09)% (0.01)%
======= =======
</TABLE>
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, 1997, 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. Investment
decisions are made by the Bank's Investment Committee, which is comprised of the
three senior officers. Two of the three committee members must agree on all
decisions. The Board of Directors may authorize additional investments.
In 1997, the Board of Directors of the Company authorized the
investment in quality mutual funds. At September 30, 1997, the Company had a
total investment of $601,000 in three different mutual funds. The market value
of these funds was $660,000 at that date. The Board of Directors has established
a maximum investment limit of $1.00 million in such funds. The mutual funds
purchased by the Company invest in equity securities and accordingly, the mutual
funds are subject to market risk including potential loss of principal.
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.
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 Association ("GNMA"), and
Federal National Mortgage Association ("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
13
<PAGE>
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 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, 1997, 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, 1997 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, 1997, the Bank had REMICs with an aggregate carrying
amount (including discounts and premiums) of $2.6 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 than that of 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.
Structured Notes. 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 $490,000 at September 30, 1997 has a maturity
date of April 21, 2000. The Bank invested in this note (an "inverse floater") to
hedge against falling interest rates.
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
14
<PAGE>
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
amortized cost of the Company's investment securities portfolio, securities
available for sale portfolio, short-term investments and FHLB stock at the dates
indicated. At September 30, 1997, the market value of the Company's investment
securities held to maturity was $9.07 million and securities available for sale
portfolio was $19.15 million.
At September 30,
-------------------------
1997 1996
-------- -------
(In Thousands)
Investment securities held to maturity:
U.S. Agency securities....................... $ 4,742 $ 5,751
Municipal securities......................... 623 223
FHLMC preferred stock........................ -- 100
Mortgage-backed securities:
GNMA....................................... 1,392 1,695
FNMA....................................... 722 775
FHLMC...................................... 1,530 1,749
Other pass-throughs........................ -- 10
------- -------
Total investment securities held to
maturity.................................. 9,009 10,303
------- -------
Securities available for sale(1)(2)........... 15,877 11,898
REMICS available for sale(2).................. 2,560 1,567
Investment in mutual funds(2)(3).............. 601 --
------- -------
Total securities available for sale........ 19,038 13,465
------- -------
Interest-bearing deposits..................... 99 99
FHLB stock.................................... 802 400
------- -------
Total...................................... $28,948 $24,267
======= =======
- ------------------
(1) Includes U.S. Agency securities, GNMA and FHLMC mortgage-backed
securities.
(2) Amounts shown at amortized costs, but carried at fair value.
(3) Includes three mutual funds held as available for sale.
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, 1997.
<TABLE>
<CAPTION>
As of September 30, 1997
---------------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Securities
---------------- ----------------- ----------------- ------------------- ---------------------------
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average Market
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield Value
--------- ------- --------- ------- --------- ------- --------- -------- --------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities held
to maturity:
U. S. Agency
securities............... $ -- % $ 2,742 6.19% $ 2,000 6.62% $ -- % $ 4,742 6.37% $ 4,728
Municipal securities....... 40 4.50 400 4.92 183 6.17 -- 623 5.26 628
Mortgage-backed securities
and other pass-
throughs................. -- 62 7.50 275 8.40 3,307 6.88 3,644 7.01 3,711
Securities available for
sale(1).................. -- 1,449 7.34 10,052 7.34 4,376 6.21 15,877 7.03 15,932
REMICs available for sale.. -- 2,560 7.02 2,560 7.02 2,563
--- ---- ------- ---- ------- ---- ------- ---- -------- ---- -------
Total.................... $40 4.50% $ 4,653 6.46% $12,510 7.23% $10,243 6.63% $ 27,446 6.87% $27,562
=== ==== ======= ==== ======= ==== ======= ==== ======== ==== =======
</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 $10.92
million, or 37.02%, of the Bank's deposit portfolio at September 30, 1997.
Certificates of deposit (or time deposits) constituted $18.58 million, or 62.98%
of the deposit portfolio of which $4.69 million, or 15.89% of the deposit
portfolio were certificates of deposit with balances of $100,000 or more. As of
September 30, 1997, 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,
-----------------------
1997 1996
---- ----
(In Thousands)
Interest Rate
2.01 - 4.00%................................ $ -- $ --
4.01 - 6.00%................................ 14,475 16,574
6.01 - 8.00%................................ 4,107 2,748
8.01 -10.00%................................ -- --
------- ---------
Total............ $18,582 $ 19,322
======= =========
17
<PAGE>
Time Deposits Maturity Schedule. The following table sets forth the
amount and maturities of time deposits at September 30, 1997.
<TABLE>
<CAPTION>
Amount Due
------------------------------------------------------------------------------------
After
September 30, September 30, September 30, September 30,
Interest Rate 1998 1999 2000 2001 Total
- ------------- ----- ------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C> <C>
4.01-6.00%........................... $11,770 $ 1,944 $ 736 $ 25 $14,475
6.01-8.00%........................... 1,650 1,537 786 134 4,107
8.01-10.00%.......................... -- -- -- -- --
------- ------- ------- ------- -------
Total....................... $13,420 $ 3,481 $ 1,522 $ 159 $18,582
======= ======= ======= ======= =======
</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, 1997.
Certificates
Maturity Period of Deposit
- --------------- ------------
(In Thousands)
Within three months........................... $ 927
More than three through six months............ 950
More than six through twelve months........... 2,301
Over twelve months............................ 511
------
Total...................................... $4,689
======
Savings Deposit Activity. The following table sets forth the savings
activities of the Bank for the periods indicated:
Year Ended
September 30,
-----------------------
1997 1996
-------- --------
(In Thousands)
Net increase (decrease)
before interest credited................... $(1,241) $ (9)
Interest credited............................ 1,376 1,171
------- ------
Net increase (decrease) in
savings deposits........................... $ 135 $1,162
======= ======
18
<PAGE>
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 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, 1997, the Bank had
$15.70 million of borrowings from the FHLB of Seattle that consisted of $14.70
million in fixed-rate advances with rates of 5.63% to 6.38%, and a $1.00 million
putable advance at 5.39%. 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.
<TABLE>
<CAPTION>
Year ended September 30,
--------------------------------
1997 1996
------------ -----------
<S> <C> <C>
Short-term FHLB advances:
Average balance outstanding $ 8,094,000 $3,723,000
Maximum amount outstanding at any month-end
during the period $13,500,000 $5,500,000
Weighted average interest rate during the period 5.68% 5.58%
Total short-term borrowings at end of period $13,500,000 $5,213,000
</TABLE>
Personnel
At September 30, 1997 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
19
<PAGE>
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 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, 1997, SAIF members paid within a range of
0 cents to 27 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 Bank pays, in addition to any insurance premium paid 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. In 1997, the
Bank paid insurance premiums and FICO payments of $27,000. 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 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
20
<PAGE>
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, 1997.
Percent of
Amount Adjusted Assets
------ ---------------
(In Thousands)
GAAP Capital $10,832
Tangible Capital:
Regulatory requirement 889 1.50%
Actual capital 10,794 18.22%
------ -----
Excess 9,905 16.72%
Core Capital:
Regulatory requirement 1,777 3.00%
Actual capital 10,797 18.22%
------ -----
Excess 9,017 15.22%
Risk-Based Capital:
Regulatory Requirement 1,948 8.00%
Actual capital 11,096 45.57%
------ -----
Excess 9,148 37.57%
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, 1997 and the
Bank was not exempt from the rule, the Bank's level of interest rate risk would
have caused it to be treated as an institution with greater than "normal"
interest rate risk. This would have resulted in a reduction in the risk-based
capital ratio from the September 30, 1997 calculation of 45.57% to 43.53%, which
is in excess of the required minimum of 8.00%. Utilizing the NPV measurement
concept, at September 30, 1997, this would have resulted in a $2.21 million, or
18.10% 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, 1997, 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 7,641 (4,550) (37) 13.84% (625)bp
300 bp 8,802 (3,389) (28) 15.55% (454)bp
200 bp 9,984 (2,207) (18) 17.21% (288)bp
100 bp 11,145 (1,045) (9) 18.76% (133)bp
0 bp 12,191 20.09%
(100) bp 12,992 801 7 21.05% 96 bp
(200) bp 13,562 1,371 11 21.68% 160 bp
(300) bp 14,122 1,931 16 22.29% 220 bp
(400) bp 14,821 2,630 22 23.05% 296 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, 1997, assuming no
changes in interest rates, was $60.69 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, 1997, the change in NPV as a percentage of portfolio
value of total assets is negative 3.64%, 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, 1997 would be approximately $497,000.
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
RISK MEASURES: 200 BP RATE SHOCK:
Pre-Shock NPV Ratio: NPV as % of PV of Assets.................... 20.09% 21.68%
Exposure Measure: Post-Shock NPV Ratio........................... 17.21% 17.41%
Sensitivity Measure: Change in NPV Ratio......................... (288) bp (427) bp
CALCULATION OF CAPITAL COMPONENT:
Change in NPV as % of PV of Assets............................... (3.64)% (5.31)%
Interest Rate Risk Capital Component ($000) (1).................. -- --
</TABLE>
- ----------------------
(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: (i) cause the Bank to be undercapitalized
(i.e., not meet any one of its minimum regulatory capital requirements); or (ii)
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, 1997, 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.
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, 1997, the Bank was in compliance with its
QTL requirement with 71.72% of its assets invested in QTIs.
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
25
<PAGE>
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, 1997, the Bank's liquidity
ratio was 13.14%. 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, 1997, the Bank had $801,500 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 35% of a member's total assets and limiting total
advances to a member. At September 30, 1997, this limit was approximately $20.75
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, 1997, dividends paid by the FHLB
of Seattle to the Bank totalled $39,000.
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, 1997, 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, 1997.
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
26
<PAGE>
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 8, 1997.
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 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.
Restriction on Repurchases of Stock. The Company has the authority to
repurchase stock, subject to statutory and regulatory requirements. Unless
approved by the OTS, the Company, pursuant to OTS policy, is prohibited from
repurchasing any shares of the Common Stock for three years following the Bank's
mutual-to-stock conversion ("Conversion") except (i) for an offer to all
stockholders on a pro rata basis, or (ii) for the repurchase of qualifying
shares of a director. Notwithstanding the foregoing and except as provided
below, beginning one year following the completion of the Conversion, the
Company may repurchase its Common Stock so long as: (i) the repurchases within
the following two years are part of an open-market program not involving greater
than 5% of its outstanding capital stock during a twelve-month period; (ii) the
repurchases do not cause the Bank to become "undercapitalized"
27
<PAGE>
within the meaning of the OTS prompt correction action regulation; and (iii) the
Company provides to the Regional Director of the OTS no later than ten days
prior to the commencement of a repurchase program written notice containing a
full description of the program to be undertaken and such program is not
disapproved by the Regional Director.
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.
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 $925,000 with a net book value of $443,000 at September 30, 1997.
(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."
(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.
28
<PAGE>
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
- -------------------------------------------------------------
Not applicable.
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, 1997 (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.
Item 8. Changes in and Disagreements With Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
- --------------------
Not Applicable.
29
<PAGE>
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*
10.1 Form of Employment Contract with Crazy Woman Creek
Bancorp Incorporated*
10.2 Stock Option Plan**
10.3 Management Stock Bonus Plan**
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, 1997.
21 Subsidiaries of the Registrant (See "Item 1. Business
of the Company" and "-- Business of the Bank".)
27 Financial Data Schedule (in electronic filing only)
(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.
** Incorporated by reference to the Registrant's Proxy Statement filed
with the Commission on December 27, 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.
/s/Deane D. Bjerke /s/Dalen C. Slater
- ------------------------------------- -------------------------------------
Deane D. Bjerke Dalen C. Slater
President and Chief Executive Officer Senior Vice President
(Principal Executive Officer) (Principal Financial and Accounting
Officer)
Dated: December 11, 1997 Dated: December 11, 1997
/s/Richard Reimann /s/Douglas D. Osborn
- ------------------------------------- -------------------------------------
Richard Reimann Douglas D. Osborn
Chairman of the Board Director
Dated: December 11, 1997 Dated: December 11, 1997
/s/Greg L. Goddard /s/Thomas J. Berry
- ------------------------------------- -------------------------------------
Greg L. Goddard Thomas J. Berry
Director Director
Dated: December 11, 1997 Dated: December 11, 1997
/s/Sandra K. Todd
- -------------------------------------
Sandra K. Todd
Director
Dated: December 11, 1997
32
EXHIBIT 13
<PAGE>
CRAZY WOMAN CREEK BANCORP
INCORPORATED
-----------------------------------------------------------------------
1997 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 .............................................. 13
Consolidated Balance Sheets.................................................. 14
Consolidated Statements of Income............................................ 15
Consolidated Statements of Change in Stockholders' Equity.................... 16
Consolidated Statements of Cash Flows........................................ 17
Notes to Consolidated Financial Statements................................... 18
<PAGE>
CRAZY WOMAN [LOGO]
CREEK BANCORP
To Our Stockholders:
The Directors and Officers of Crazy Woman Creek Bancorp, Inc. are proud to
present our second annual report since becoming a public company in March 1996.
Since completing our conversion, the focus of our board and management has been
to enhance shareholder value through customer growth, a strong dividend program,
and the repurchase of outstanding shares. Due to the efforts of the board,
management, and staff, growth did occur in both loan originations and
investments. Dividends were paid quarterly at the rate of $.10 per share, and
14% of the outstanding shares were repurchased.
We were pleased to see continued growth in both our loan originations and our
investment portfolio. Asset size increased from $51.5 million in 1996 to $59.9
million at September 30, 1997. For the year, net earnings were $691,000 or $.73
per share compared to net income in 1996 of $355,000 or $.36 per share. Net
income during 1996 was adversely affected by a one-time special assessment of
$187,000 to recapitalize the Savings Association Insurance Fund.
As we begin 1998, management will focus on both growth in deposits and loan
originations. We will remain cognizant of our goal of providing personal service
to both our customers and shareholders. Management will be continually analyzing
products and services that will benefit our customers and serve the financial
needs of our community.
We wish to assure our fellow shareholders that we appreciate your investment in
the Corporation. The board and management will continue to work to increase the
value of your investment.
Sincerely,
/s/ Deane D. Bjerke
Deane D. Bjerke
President
- --------------------------------------------------------------------------------
106 Fort Street P.O. Box 1020 Buffalo, Wyoming 82834
Phone (307) 684-5591 Fax (307) 684-7854
<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 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 during the periods as reported by Nasdaq.
HIGH LOW
------ ------
July 1, 1997 - September 30, 1997 $15.50 $13.25
April 1, 1997 - June 30, 1997 13.75 13.00
January 1, 1997 - March 31, 1997 14.25 11.88
October 1, 1997 - December 31, 1997 12.00 11.50
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 11, 1997, was
approximately 240. This does not reflect the number of persons or entities who
held stock in nominee or "street" name through various brokerage firms. At
December 11, 1997, there were 954,845 shares outstanding. On January 16, 1997,
April 16, 1997, July 16, 1997, and on October 16, 1997 dividends of $.10 per
share were paid.
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, 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans receivable, net........................... $28,636 $25,859 $23,006 $22,503 $19,642
Mortgage-backed securities...................... 3,644 4,228 3,148 2,473 6,377
Investment securities........................... 5,365 6,075 6,806 5,385 3,519
Investment and mortgage-backed
securities available for sale................. 19,155 13,365(1) 2,230 2,276 --
Assets.......................................... 59,952 51,517(1) 37,510 35,751 32,738
Deposits........................................ 29,506 29,371 28,209 28,980 26,322
FHLB advances................................... 15,700 6,113 3,183 1,095 1,257
Total stockholders' equity...................... 14,210 15,508(1) 5,857 5,449 4,997
Interest income................................. 3,940 3,274(1) 2,722 2,505 2,482
Interest expense................................ 1,983 1,702 1,455 1,143 1,256
Net interest income............................. 1,957 1,572 1,267 1,362 1,226
Provision for loan losses (loan loss benefit)... -- - 42 (10) 117
Net income...................................... 691 355(2) 352 502 $ 488
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
OTHER SELECTED DATA
- ----------------------------------------------------------------------------------------------------------------------------------
At or for Year Ended September 30, 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on average assets (net income
divided by average total assets)(2)............. 1.28% 0.80 % 0.96 % 1.48 % 1.51 %
Return on average equity (net income
divided by average equity)(1)(2)................ 4.74 % 3.07 % 6.10 % 9.3 % 10.13 %
Average interest-earning assets to average
interest-bearing liabilities(1)................. 136.86 % 133.47 % 117.59 % 117.23 % 115.35 %
Net interest income after provision for
loan losses, to average assets.................. 3.63 % 3.47 % 3.35 % 4.04 % 3.43 %
Net interest rate spread.......................... 2.32 % 2.26 % 2.84 % 3.53 % 3.30 %
Average equity to average assets ratio
(average equity divided by average
total assets)(1)................................ 27.07 % 25.50 % 15.76 % 15.74 % 14.89 %
Equity to assets at period end(1)................. 23.70 % 30.10 % 15.61 % 15.24 % 15.26 %
Non-performing assets to total assets............. 0.38 % 0.06 % 0.33 % 0.38 % 3.28 %
Non-performing loans to net loans................. 0.79 % 0.12 % 0.30 % 0.08 % 4.72 %
Allowance for loan losses, REO and other
repossessed assets to non-performing
assets.......................................... 134.22 % 862.50 % 223.58 % 151.09 % 29.08 %
Allowance for loan losses to total
loans, net...................................... 1.09 % 1.06 % 1.18 % 0.91 % 1.56 %
Net charge-offs (recoveries) to loans
receivable....................................... (0.09)% (0.01)% (0.11)% 0.41 % 0.11 %
Earnings per share(3)............................. $ 0.73 $ 0.36 n/a n/a n/a
Book value per share(3)........................... $ 14.88 $14.66 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. The
Company's assets are comprised of its investment in the Bank, loans to the
Bank's Employee Stock Ownership Plan ("ESOP") and the Bank, and shares held in
three mutual funds. 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, 1997, the Bank's interest income
was $3.94 million, or approximately 98.4% 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, 1997, the Bank's net interest rate
spread was 2.32%. 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 reduce 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.
To monitor the Bank's interest rate risk, the Bank also utilizes
quarterly reports by the OTS which measure the Bank's interest rate risk by
modeling the change in the Bank's net portfolio value ("NPV") over a variety of
interest rate scenarios. NPV is defined as the present value of expected cash
flows from assets, liabilities and off-balance sheet contracts. Based on the
September 30, 1997 report, the Bank had a greater than "normal" level of
interest rate risk. See also "- Impact of Inflation and Changing Prices."
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 Company'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,
---------------- ----------------------------------------------------------------
1997 1997 1996
--------- ------------------------------- ------------------------------
Average Average Average Average
Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
---------- -------- -------- ---------- -------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1).............. 8.11% $27,469 $2,277 8.29% $24,675 $2,043 8.28%
Mortgage-backed securities....... 7.01 3,982 264 6.63 4,052 263 6.49
Investment securities(2)......... 6.02 6,449 384 5.95 7,937 487 6.14
Securities available for sale.... 6.61 14,396 976 6.78 7,183 452 6.29
Other interest-earning assets.... 7.00 523 39 7.46 384 29 7.55
------- ------ ------- ------
Total interest-earning assets... 7.16 52,819 3,940 7.46 44,231 3,274 7.40
------- ------ ------- ------
Non-interest-earning assets....... 1,042 1,072
------- -------
Total assets.................... $53,861 $45,303
======= =======
Interest-bearing liabilities:
Interest checking............... 4.00 6,395 248 3.88 5,675 215 3.79
Time Deposits/Passbook.......... 5.42 22,105 1,175 5.32 22,627 1,224 5.41
------- ------ ------- ------
Total deposit accounts.......... 5.04 28,500 1,423 4.99 28,302 1,439 5.08
FHLB advances................... 5.81 10,094 560 5.55 4,837 263 5.44
------- ------ ------- ------
Total int.-bearing liabilities. 5.31 $38,594 $1,983 5.14 $33,139 $1,702 5.14
------- ----- ------- ------
Non-interest-bearing liabilities:. 685 613
------- -------
Total liabilities................ $39,279 $33,752
------- -------
Total equity..................... 14,582 11,551
------- -------
Total liabilities and equity..... $53,861 $45,303
======= =======
Net interest income............... $1,957 $1,572
====== ======
Interest rate spread.............. 2.32% 2.26%
==== ====
Net interest margin............... 3.71% 3.55%
==== ====
Ratio of average interest-
earning assets to average
interest-bearing liabilities..... 136.86% 133.47%
====== ======
</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 Company 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).
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------
1997 vs. 1996
------------------------------------------------------
Increase (Decrease)
Due to
------------------------------------------------------
Rate/ Rate/
Volume Rate Volume Net
-------- ------- ---------- -------
(In Thousands)
<S> <C> <C> <C> <C>
Interest income:
Loans receivable................ $ 232 $ 2 $ -- $ 234
Mortgage-backed securities...... (5) 6 -- 1
Investment securities........... (91) (15) 3 (103)
Securities available for sale... 454 35 35 524
Other interest-earning assets... 10 -- -- 10
----- ------ ----- -----
Total interest-earning assets.. $ 600 $ 28 $ 38 $ 666
===== ====== ===== =====
Interest expense:
Deposit accounts................ $ 10 $ (26) $ -- $ (16)
FHLB advances................... 286 5 6 297
----- ------ ----- -----
Total interest-bearing
liabilities.................. $ 296 $ (21) $ 6 $ 281
===== ====== ===== =====
Net change in net interest
income........................... $ 304 $ 49 $ 32 $ 385
===== ====== ===== =====
</TABLE>
Financial Condition
The Company's assets increased by $8.43 million from $51.52 million at
September 30, 1996 to $59.95 million at September 30, 1997. The growth in assets
was primarily attributed to an increase in net loans receivable and in
investment and mortgage-backed securities available for sale. Asset growth was
primarily funded through a $9.59 million increase in advances from the FHLB of
Seattle.
The Company's net investment in investment and mortgage-backed
securities available for sale increased by $5.79 million from $13.36 million at
September 30, 1996 to $19.15 million at September 30, 1997 as the Company sought
to invest excess funds in higher-yielding assets. Meanwhile, investment and
mortgage-backed securities held to maturity decreased by $1.29 million due to
maturities and the Company's decision to invest in available for sale
investments.
The Company continues to experience loan growth. From September 30,
1996 to September 30, 1997 net loans receivable increased from $25.86 million to
$28.64 million, representing an increase of $2.78 million or 10.8%. Residential
real estate loans accounted for 65.5% of the growth while commercial real estate
loans accounted for 25.5% of the growth. The remaining balance of the growth
occurred in consumer and commercial loans.
- 7 -
<PAGE>
Deposits increased by $135,000 from $29.37 million at September 30,
1997 to $29.51 million at September 30, 1997. Interest-bearing checking accounts
(NOW and money market checking) increased by $1.09 million while passbook and
certificates of deposits declined by $858,000. Business checking showed a
decline of $97,000 for the period.
The Company continued to increase its level of borrowings from the FHLB
of Seattle from $6.11 million at September 30, 1996 to $15.70 million at
September 30, 1997. This represents an increase of $9.59 million. FHLB advances
were primarily used to fund loan originations and to purchase investment and
mortgage-backed securities available for sale. The Company utilizes FHLB
advances 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 terms of the advances
are generally matched with the purchased investments.
Total stockholders' equity declined by $1.30 million from $15.51
million at September 30, 1996 to $14.21 million at September 30, 1997 primarily
as a result of stock repurchases. After obtaining regulatory approval, the
Company repurchased a total of 103,155 shares of its common stock in January and
April of this year. The purchases totaled $1.36 million. In addition to these
stock acquisitions, the Bank's restricted stock plan purchased an additional
42,320 shares of the Company's common stock for allocation. The stock plan was
approved by stockholders at a special meeting held on October 2, 1996.
Stockholders' equity was further reduced by cash dividends declared during
fiscal year 1997. These dividends totaled $0.40 per share or $381,996.
Non-performing Assets
Non-performing assets totaled $225,000 at September 30, 1997 or 0.38%
of total assets compared to $32,000 at September 30, 1996 or 0.06% of total
assets. Non-performing assets are primarily comprised of loans secured by
residential real estate. Included in non-performing loans, is a $70,000 loan
secured by a convenience/restaurant facility. At September 30, 1997, the Company
did not have any repossessed properties.
Comparison of Results of Operations for the Years Ended September 30, 1997 and
1996
Net Income. For the year ended September 30, 1997 the Company posted
net income of $691,000 or $.73 per share compared to net income of $355,000 or
$.36 per share for the year ended September 30, 1996. Net income was higher in
1997 than in 1996 due to several one-time charges that were taken in 1996. These
charges included a one-time special assessment to recapitalize the Savings
Association Insurance Fund ("SAIF") in the amount of $187,000 and approximately
$63,000 in costs associated with the Bank's change in data processing providers.
Excluding the assessment and data processing costs, net income of $520,000 would
have been recognized in 1996. Net income was also higher in 1997 because average
earning assets were higher in 1997 than in 1996 because the Company had full use
of the net proceeds received from the Company's initial stock offering that was
consummated in 1996; net proceeds were only available for deployment for half of
fiscal 1996.
Net Interest Income. Net interest income increased by $385,000 from
$1.57 million for the year ended September 30, 1996 to $1.96 million for the
year ended September 30, 1997. The increase in net interest income was primarily
attributed to an increase in the ratio of interest earning assets to interest
bearing liabilities. This ratio increased from 133.47% for the twelve month
period ended September 30, 1996 to 136.86% for the same period in 1997. Also
contributing to the increase in net interest income was an increase in the
interest rate spread from 2.26% for the twelve month period ended September 30,
1996 to 2.32% for the twelve month period ended September 30, 1997.
- 8 -
<PAGE>
Interest Income. Total interest income increased by $666,000 from $3.27
million for the year ended September 30, 1996 to $3.94 million for the year
ended September 30,1997. The increase in interest income was primarily caused by
an increase in the volume of average interest earning assets from 1996 to 1997.
For the twelve month period ended September 30, 1996, average interest earning
assets totaled $44.23 million compared to $52.82 million for the same period in
1997. This increase in volume caused interest income to increase by $600,000 for
the periods covered.
An increase in the yield on average earning assets from 7.40% for the
twelve month period ended September 30, 1996 to 7.46% for the same period in
1997 caused interest income to increase by approximately $28,000.
Interest Expense. Interest expense increased by $281,000 from $1.70
million for the year ended September 30, 1997 to $1.98 million for the year
ended 1997 primarily as a result of an increase in average FHLB advances. Such
average advances increased from $4.84 million for the twelve month period ended
September 30, 1996 to $10.09 million for the twelve month period ended September
30, 1997. This increase in volume caused interest expense to increase by
$286,000. Meanwhile, average interest bearing deposits only increased by
$198,000 for the periods covered contributing to a $10,000 increase in interest
expense.
A decline in the cost of interest bearing deposits from 5.08% for the
twelve month period ended September 30, 1996 to 4.99% for the twelve month
period ended September 30, 1997 helped reduce interest expense by approximately
$26,000. A slight increase in the cost of FHLB advances from 5.44% in 1996 to
5.55% in 1997 accounted for a $5,000 increase in interest expense. The total
cost of interest bearing liabilities of 5.14% was the same in both 1997 and
1996.
Provision for Loan Losses. No provisions for loan losses were made in
either 1997 or in 1996. In 1997, recoveries totaled $30,000 while charge-offs
totaled $4,000. Loan recoveries were also greater than charge-offs in 1996
resulting in a net increase to loan loss reserves of $1,000. 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, 1997, the allowance represented 1.04% of net loans receivable as
compared to 1.06% of loans receivable at September 30, 1996.
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 $53,000 from
$117,000 for the year ended September 30, 1996 to $74,000 for the year ended
September 30, 1997 primarily due to a reduction in the gain on sale of
investment securities and other real estate owned. In 1996, such gains totaled
$44,000. Meanwhile in 1997, a net loss on the sale of investment securities of
$10,000 was recognized while no other real estate owned sales occurred. There
were no significant changes in the other components of non-interest income from
1996 to 1997.
Non-Interest Expense. The Company experienced a $193,000 decline in
non-interest expense from $1.18 million for the year ended September 30, 1996 to
$989,000 for the year ended September 30, 1997. Non-interest expense was less in
1997 than in 1996 primarily due to certain one-time charges
- 9 -
<PAGE>
that were recognized in 1996. These charges comprised a $187,000 one-time
special assessment to recapitalize the SAIF and a $34,000 charge from the Bank's
prior data processor to de-convert the Bank's data. Also included in 1996's
non-interest expenses were $29,000 in other costs associated with the Bank's
change in data processing providers.
Compensation and benefit expense was $86,000 higher in 1997 than in
1996 primarily as a result of costs associated with the Bank's Employee Stock
Ownership Plan ("ESOP") and Management Stock Bonus Plan ("MSBP"). General pay
increases in 1997 also caused compensation expense to increase.
Insurance premiums paid to the Federal Deposit Insurance Corporation
(the "FDIC") declined by $40,000 from $67,000 to the year ended September 30,
1996 to $27,000 for the year ended September 30, 1997 due to a drop in the
premium charged by the FDIC. Also included in 1997's non-interest expense were
$4,000 in losses resulting from the abandonment of obsolete equipment.
Other operating expenses and advertising expense were $27,000 higher in
1997 than in 1996. Included in 1997 other operating expenses were costs
associated with the preparation and mailing of documents for the Company's first
annual meeting. These costs were not present in 1996.
A significant amount of national attention has been directed at the
possible problems that may occur with computer programs and data processing
systems when they start utilizing the year 2000 in data fields. Many computer
programs that can only distinguish the final two digits of the year entered (a
common programming practice in earlier years) are expected to read entries for
the year 2000 as the year 1900 and incorrectly calculate interest and
delinquency dates. Rapid and accurate data processing is essential to the
operations of the Company. Accordingly, the Company has adopted an action plan
to identify all areas that may be affected by the change to the year 2000.
Furthermore, the plan requires that each data processing and software provider
be "certified" year 2000 compliant by December 31, 1998. The majority of the
Company's data is processed by a third party service bureau. The service bureau
of the Company has notified the Company that it will be year 2000 compliant by
December 31, 1997. The balance of the Company's data processing and software
providers have stated that they are or will be year 2000 compliant by December
31, 1998. If the Company's service bureau is unable to resolve this potential
problem in time, the Company would likely experience significant data processing
delays, mistakes or failures. These delays, mistakes or failures could have a
significant adverse impact on the financial condition and results of operation
of the Company
Income Taxes. The effective tax rates for 1997 and 1996 were 33.10% 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 13.14% at September 30, 1997
compared to 18.88% at September 30, 1996.
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
- 10 -
<PAGE>
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, 1997 and 1996, the Bank had
positive net cash flows of $731,000 and $444,000 from operating activities and
$7.46 million and $13.55 million from financing activities, respectively. The
Company, however, experienced negative net cash flows of $7.45 million and
$13.81 million, respectively, from investing activities.
The primary investing activities of the Bank are the origination of
fixed-rate mortgages with maturities of less than 20 years and the purchase of
investment securities. During fiscal 1997 and 1996, the Bank originated mortgage
loans in the amounts of $10.01 million and $8.91 million, respectively.
Reflected in 1996's investment and financing activities were the receipt and use
of funds received from the stock offering that was consummated on March 29,
1996. The proceeds from the sale of stock 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. In 1997, the Company continued its practice of using FHLB advances to
purchase investment securities available for sale.
Net income, adjusted for the non-cash and non-operating items, was the
primary source of cash flows from operating activities in both fiscal 1997 and
1996.
During fiscal 1997 and 1996, investing activities used $7.45 million
and $13.81 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, stock
repurchases in 1997 as well as completion of the stock offering in 1996. The
primary financing activities of the Bank are borrowing funds from the FHLB of
Seattle and the attraction of deposits. During fiscal year 1997, deposits
increased $135,000. 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 1997, FHLB advances increased by $9.59 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, 1997, the Bank had commitments to
originate loans of $104,000. Certificates of deposit and State of Wyoming
deposits which are scheduled to mature in less than one year at September 30,
1997 totalled $13.42 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.
- 11 -
<PAGE>
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.
The Company's subsidiary, the Bank, is a traditional thrift that
primarily originates and holds long-term home loans. These loans are primarily
funded with short-term deposits. Because of this mismatch, the Bank's financial
condition and results of operation may be adversely affected by a sudden and
prolonged increase in interest rates. See also "- Asset/Liability and Interest
Rate Risk."
- 12 -
<PAGE>
KPMG Peat Marwick LLP
1000 First Interstate
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, 1997 and 1996, 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 consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Crazy Woman Creek
Bancorp Incorporated and subsidiary as of September 30, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
November 1, 1997
Billings, Montana
Member Firm of
Klyveld Peat Marwick Goerdeler
- 13 -
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Consolidated Balance Sheets
September 30, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
------ --------------- ---------------
<S> <C> <C>
Cash and cash equivalents $ 1,193,775 451,445
Interest bearing deposits 99,000 99,000
Investment and mortgage-backed securities available-for-sale 19,154,984 13,364,698
Investment and mortgage-backed securities held-to-maturity (estimated
market value of $9,066,836 in 1997 and $10,180,716 in 1996) 9,009,175 10,302,645
Stock in Federal Home Loan Bank of Seattle, at cost 801,500 399,900
Loans receivable, net 28,636,220 25,858,760
Accrued interest receivable 558,782 495,750
Premises and equipment, net 443,323 502,055
Other assets 55,518 42,664
--------------- ---------------
$ 59,952,277 51,516,917
============== ===============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits $ 29,506,343 29,370,985
Advances from Federal Home Loan Bank 15,700,000 6,113,438
Advances from borrowers for taxes and insurance 54,388 53,427
Federal income taxes payable 155,103 14,953
Deferred income taxes 115,346 80,925
Dividends payable 95,485 105,800
Accrued expenses and other liabilities 115,273 269,381
-------------- ---------------
Total liabilities 45,741,938 36,008,909
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 105,800 105,800
Additional paid-in capital 10,041,629 10,027,393
Unearned ESOP/MSBP shares (809,272) (617,143)
Retained earnings 6,377,093 6,057,879
Unrealized gain (loss) on securities available-for-sale, net 77,007 (65,921)
Treasury stock, shares at cost (1,581,918) -
-------------- --------------
Total stockholders' equity 14,210,339 15,508,008
-------------- ---------------
$ 59,952,277 51,516,917
============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
- 14 -
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Consolidated Statements of Income
Years ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Interest income:
Loans receivable $ 2,277,142 2,043,167
Mortgage-backed securities 589,004 485,571
Investment securities 1,001,049 627,593
Interest bearing deposits 5,047 26,452
Other 68,471 90,975
-------------- --------------
Total interest income 3,940,713 3,273,758
Interest expense:
Deposits 1,422,732 1,438,562
Advances from Federal Home Loan Bank 560,672 263,155
-------------- --------------
Total interest expense 1,983,404 1,701,717
-------------- --------------
Net interest income 1,957,309 1,572,041
Provision for loan losses - -
Net interest income after provision for loan losses 1,957,309 1,572,041
-------------- --------------
Non-interest income:
Customer service charges 41,803 41,213
Other operating income 30,015 31,605
Gain (loss) on sale of securities, net (7,875) 30,198
Gain on sale of other real estate owned - 13,599
-------------- --------------
Total non-interest income 63,943 116,615
-------------- --------------
Non-interest expense:
Compensation and benefits 526,865 440,771
Occupancy and equipment 101,091 107,820
FDIC/SAIF deposit insurance premiums 26,703 66,684
Special assessment by the SAIF - 186,569
Advertising 40,184 37,349
Data processing services 94,195 150,162
Other 199,493 193,036
-------------- --------------
Total non-interest expense 988,531 1,182,391
-------------- --------------
Income before income taxes 1,032,721 506,265
Income tax expense 341,826 151,420
-------------- --------------
Net income $ 690,895 354,845
============== ==============
Net income per share $ .73 .36
============== ==============
Average common and common equivalent shares 942,515 995,143
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
- 15 -
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
Unearned Unrealized
Additional ESOP/ Securities Total
Common paid-in MSBP Retained gain Treasury stockholder's
stock capital shares earnings (loss), net stock equity
----- ------- ------ -------- ----------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
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 - - - - (17,188) - (71,188)
Net income - - - 354,845 - - 354,845
Cash dividends declared
($.15 per share) - - - (149,100) - - (149,100)
------- -------- ---------- -------- ------- --------- -----------
Balances at September
30, 1996 105,800 10,027,393 (617,143) 6,057,879 (65,921) - 15,508,008
Repurchase of common
stock - - - - - (1,879,222) (1,879,222)
MSBP shares granted - - (297,304) - - 297,304 -
ESOP shares committed
to be released - 14,236 45,714 - - - 59,950
MSBP shares vested - - 59,461 - - - 59,461
Change in net
unrealized gain (loss)
on securities
available-for-sale - - - - 142,928 - 142,928
Net income - - - 690,895 - - 690,895
Cash dividends declared
($.40 per share) - - - (371,681) - - (371,681)
------- ---------- ---------- ---------- ------- --------- -----------
Balance at September
30, 1997 $ 105,800 10,041,629 (809,272) 6,377,093 77,007 (1,581,918) 14,210,339
======= ========== ========== ========== ======= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
- 16 -
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
-------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 690,895 354,845
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of:
Premiums and discounts on securities held-to-maturity, net 5,673 358
Premiums and discounts on securities available-for-sale, net 7,822 (2,741)
Federal Home Loan Bank stock dividend (38,600) (28,900)
Depreciation 65,675 78,910
Loss (gain) on sale of securities 7,875 (30,198)
Dividends reinvested (2,060) -
Loss on sale of premises and equipment 3,542 21,097
Gain on sale of other real estate owned - (13,599)
ESOP shares committed to be released 59,950 24,241
MSBP compensation expense 59,461 -
Change in:
Accrued interest receivable (63,032) (138,434)
Other assets (12,854) (9,222)
Federal income taxes payable 140,150 (43,359)
Deferred income taxes (39,208) 51,779
Accrued expenses and other liabilities (154,108) 178,737
-------------- ----------------
Net cash provided by operating activities 731,181 443,514
-------------- ----------------
Cash flows from investing activities:
Net change in interest bearing deposits - 594,000
Purchases of securities available-for-sale (17,384,000) (12,444,335)
Maturities of securities available-for-sale 5,627,186 206,385
Sales of securities available-for-sale 6,169,448 1,006,339
Purchases of securities held-to-maturity (410,000) (6,709,353)
Maturities and calls of securities held-to-maturity 1,697,797 6,382,304
Purchase of FHLB stock (363,000) -
Origination of loans receivable (10,005,257) (8,907,000)
Repayment of principal on loans receivable 7,227,797 6,054,180
Purchases of premises and equipment (10,485) (59,305)
Proceeds from sale of other real estate owned - 68,710
-------------- ----------------
Net cash used in investing activities (7,450,514) (13,808,075)
-------------- ----------------
Cash flows from financing activities:
Net change in deposits 135,358 1,162,453
Advances from Federal Home Loan Bank 14,800,000 5,400,000
Repayment of advances from Federal Home Loan Bank (5,213,438) (2,469,220)
Net change in advances from borrowers for taxes and insurance 961 6,368
Sale of common stock, net of offering costs - 9,491,809
Repurchase of common stock (1,879,222) -
Dividends paid to stockholders (381,996) (43,300)
-------------- ----------------
Net cash provided by financing activities 7,461,663 13,548,110
-------------- ----------------
Net increase in cash and cash equivalents 742,330 183,549
Cash and cash equivalents at beginning of year 451,445 267,896
-------------- ----------------
Cash and cash equivalents at end of year $ 1,193,775 451,445
============== ================
Cash paid during the year for:
Interest $ 1,474,000 1,477,000
Income taxes 241,000 143,000
============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
- 17 -
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
(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 the Bank 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. Management believes that the allowance for loan losses is
adequate, however, future additions to the allowance may be necessary
based on changes in factors affecting the borrowers' ability to repay. In
addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for losses.
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.
- 18 -
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
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. Management determines the appropriate
classification of investment and mortgage-backed securities as either
available-for-sale or held-to-maturity at the purchase date.
The carrying value of debt securities is adjusted for amortization of
premiums and accretion of discounts using the level-yield method over the
estimated lives of the securities. Upon realization, gains and losses
from the sale of securities are included in earnings using the specific
identification method.
Stock in Federal Home Loan Bank
-------------------------------
Member institutions of the Federal Home Loan Bank (FHLB) System are
required to hold common stock of its district FHLB according to
predetermined formulas. FHLB provides a source of borrowed funds for its
member institutions which are secured by this FHLB stock.
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 off 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.
- 19 -
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
The allowance for loan losses includes a reserve for losses on specific
loans which are deemed to be impaired. 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. As such, the Bank's impaired loans are generally those loans
currently reported as non-accrual. 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 estimated impairment. For all loans
secured by real estate, the amount of the impairment is generally
measured based on the excess of the loan's balance over the value of the
underlying collateral. The Bank generally recognizes interest income on
impaired loans only to the extent that cash payments are received.
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.
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.
- 20 -
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
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.
Stock-Based Compensation
------------------------
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
for Stock-Based Compensation," which was effective for the Bank beginning
October 1, 1996. SFAS No. 123 defines a "fair value based method" of
accounting for stock-based compensation whereby compensation cost 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 intrinsic value method
for grants to employees must make certain pro forma disclosures as if the
fair value based method had been applied. Management has elected to
follow the accounting requirements of previous pronouncements for grants
to employees.
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. Additionally, unallocated ESOP and unvested
MSBP shares are excluded from the weighted average common shares
outstanding calculation, while vested MSBP and allocated vested and
committed to be released ESOP shares are considered to be outstanding.
New Accounting Pronouncements
-----------------------------
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.
- 21 -
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
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. 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 adopted the provisions of
SFAS No. 125 on January 1, 1997, and adoption did not have a material
effect on the financial position or results of operations of the Bank.
(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:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
1997 Cost Gains Losses Value
---- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
U.S. Agency obligations $ 11,501,113 56,109 (5,776) 11,551,446
Mortgage-backed securities 6,935,884 20,076 (12,324) 6,943,636
Mutual funds 601,310 58,592 - 659,902
--------------- ----------- ----------- --------------
$ 19,038,307 134,777 (18,100) 19,154,984
=============== =========== =========== ==============
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
1996 Cost Gains Losses Value
---- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
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
=============== =========== =========== ==============
</TABLE>
A comparison of the amortized cost and estimated fair values of
investment and mortgage-backed securities available-for-sale by maturity
at September 30, 1997 (other than equity securities) is as follows:
- 22 -
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
-------------- ---------------
<S> <C> <C>
Due within one year $ 9,367,322 9,398,939
Due after one year through five years 5,159,535 5,182,724
Due after five years through ten years 3,910,140 3,913,419
-------------- ---------------
$ 18,436,997 18,495,082
============== ===============
</TABLE>
Mortgage-backed securities are included in the above maturity schedule
based on current estimates of their expected average lives.
Gross realized gains and losses on the sale of investment and
mortgage-backed securities available-for-sale were $2,481 and $10,356,
respectively, during the year ended September 30, 1997. Gross realized
gains on the sale of investment and mortgage-backed securities
available-for-sale were $8,628 during the year ended September 30, 1996.
(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:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
1997 Cost Gains Losses Value
---- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Agency obligations $ 4,742,420 8,178 (22,416) 4,728,182
Municipal securities 622,609 6,024 (658) 627,975
Mortgage-backed securities:
FNMA certificates 722,409 19,363 - 741,772
GNMA certificates 1,392,151 37,731 - 1,429,882
FHLMC certificates 1,529,586 10,392 (953) 1,539,025
--------------- ----------- ------------ --------------
3,644,146 67,486 (953) 3,710,679
--------------- ----------- ------------ --------------
$ 9,009,175 81,688 (24,027) 9,066,836
=============== =========== ============ ==============
</TABLE>
- 23 -
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
1996 Cost Gains Losses Value
---- -------------- ------------ ------------ --------
<S> <C> <C> <C> <C>
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
=============== =========== ============ ==============
</TABLE>
A comparison of the amortized cost and estimated fair values of
investment and mortgage-backed securities held-to-maturity by maturity at
September 30, 1997 is as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
-------------- ---------------
<S> <C> <C>
Due within one year $ 1,240,000 1,249,769
Due after one year through five years 4,406,356 4,400,084
Due after five years through ten years 3,362,819 3,416,983
-------------- ---------------
$ 9,009,175 9,066,836
============== ===============
</TABLE>
Mortgage-backed securities are included in the above maturity schedule
based on current estimates of their expected average lives.
No gains or losses were realized on the sale of investment and
mortgage-backed securities held-to-maturity during the year ended
September 30, 1997. 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 in fiscal 1997 and 1996 was approximately $650,000 and
$651,000, respectively. Such sales were appropriately considered
maturities for purposes of classification on the statements of cash
flows.
- 24 -
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
(4) Loans Receivable, Net
---------------------
<TABLE>
<CAPTION>
Net loans receivable at September 30 are summarized as follows:
1997 1996
---------------- ----------------
<S> <C> <C>
Real estate mortgage loans, including commercial real
estate $ 24,434,691 22,218,028
Consumer loans 1,695,977 1,524,451
Home equity loans 1,652,850 1,316,976
Agricultural loans 798,580 701,298
Commercial loans 282,189 86,586
Savings account and other loans 319,837 516,812
---------------- ----------------
29,184,124 26,364,151
Less:
Loans in process 95,214 84,815
Allowance for loan losses 302,079 275,588
Net deferred loan origination fees 150,611 144,988
---------------- ----------------
$ 28,636,220 25,858,760
================ ================
</TABLE>
Adjustable rate mortgages included in the loans receivable balance above
were approximately $217,000 and $177,000 at September 30, 1997 and 1996,
respectively.
The weighted average stated interest rate of loans receivable at
September 30, 1997 and 1996 was 8.11% and 8.05%, respectively. The
average yield on loans receivable, including amortization of unearned
discounts and deferred loan origination fees, was 8.22% and 8.01% for the
years ended September 30, 1997 and 1996, respectively.
Real estate loans serviced for others were approximately $77,000 and
$81,000 at September 30, 1997 and 1996, respectively.
First mortgage loans pledged as collateral for public funds or for other
funds on deposit with the Bank approximated $5,098,000 and $4,787,000 at
September 30, 1997 and 1996, respectively.
A summary of activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1997 1996
------------- -----------
<S> <C> <C>
Balance at beginning of year $ 275,588 275,266
Losses charged against the allowance (4,108) (11,584)
Recoveries of amounts previously charged off 30,599 11,906
----------- -----------
Balance at end of year $ 302,079 275,588
=========== ===========
</TABLE>
- 25 -
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Renegotiated loans for which interest has been reduced totaled
approximately $52,000 and $55,000 at September 30, 1997 and 1996,
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 $225,000 and
$32,000 at September 30, 1997 and 1996, respectively, and were not
subject to a specific allowance for loan 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:
<TABLE>
<CAPTION>
1997 1996
-------------- -------------
<S> <C> <C>
Investment securities $ 285,597 257,790
Mortgage-backed securities 56,088 52,287
Loans receivable 217,097 185,673
----------- ------------
$ 558,782 495,750
=========== ============
</TABLE>
(6) Premises and Equipment
----------------------
Premises and equipment at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
Land and building $ 507,395 507,395
Furniture, fixtures and equipment 418,048 465,028
------------ -------------
925,443 972,423
Less accumulated depreciation 482,120 470,368
------------ -------------
$ 443,323 502,055
============ =============
</TABLE>
- 26 -
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
(7) Deposits
--------
Deposits at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1997
Weighted 1997 1996
average -------------------------- ------------------------
rate Amount Percent Amount Percent
---- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Certificates of deposit,
by interest rate 4.01 to 5.00% $ 225,789 .8% $ 2,123,194 7.2%
5.01 to 6.00 14,248,859 48.3 14,450,989 49.2
6.01 to 7.00 3,980,021 13.5 2,515,333 8.6
7.01 to 8.00 127,434 .4 232,932 .8
-------------- -------- -------------- ---------
18,582,103 63.0 19,322,448 65.8
-------------- -------- -------------- ---------
NOW accounts and MMDA 3.00 to 4.75 7,213,639 24.4 6,219,911 21.2
Passbook savings 3.75 to 3.92 3,710,601 12.6 3,828,626 13.0
-------------- -------- -------------- ---------
Total deposits 4.99% $ 29,506,343 100.0% $ 29,370,985 100.0%
============== ======== ============== =========
</TABLE>
Certificates of deposit and savings accounts of $100,000 or greater were
approximately $4,700,000 and $5,040,000 at September 30, 1997 and 1996,
respectively.
Certificates of deposit at September 30, 1997 are scheduled to mature as
follows:
<TABLE>
<CAPTION>
Due in:
<S> <C>
One year or less $ 13,419,866
Greater than one year through three years 5,003,110
Greater than three years through five years 159,127
---------------
$ 18,582,103
===============
</TABLE>
Interest expense on deposits for the years ended September 30 is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Certificates of deposit and savings $ 1,174,685 1,223,577
NOW accounts 248,047 214,985
$ 1,422,732 1,438,562
============= =============
</TABLE>
- 27 -
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
(8) Advances From Federal Home Loan Bank
------------------------------------
Advances from Federal Home Loan Bank at September 30 are summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
--------------- --------------
<S> <C> <C>
5.63% to 6.38% Fixed Rate Advances, interest payable
monthly $ 14,700,000 6,000,000
5.39% Putable Advance, put option exercisable quarterly,
interest payable monthly, through June 2002 1,000,000 -
4.36% Amortizing Advance, paid in 1997 - 113,438
------------- --------------
$ 15,700,000 6,113,438
============= =============
</TABLE>
At September 30, 1997, the Bank had a Cash Management Advance note with a
maximum allowable advance of $2,697,000 maturing on May 29, 1998. There
was no outstanding balance as of September 30, 1997 or advances during
the year then ended.
Principal payments on advances from Federal Home Loan Bank subsequent to
September 30, 1997 are as follows:
Year ending
September 30, Amount
------------- ------
1998 $ 13,700,000
1999 1,600,000
2000 400,000
--------------
$ 15,700,000
================
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:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Current $ 381,034 99,641
Deferred (39,208) 51,779
----------- -----------
Total $ 341,826 151,420
=========== ===========
</TABLE>
- 28 -
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
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:
<TABLE>
<CAPTION>
1997 1996
------------- --------------
<S> <C> <C>
Computed "expected" tax expense $ 351,125 172,130
Decrease resulting from tax exempt interest (9,669) (7,359)
Other 370 (13,351)
----------- -------------
$ 341,826 151,420
=========== =============
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
-------------- -------------
<S> <C> <C>
Deferred tax assets:
Deferred loan fees $ 26,514 30,904
Allowance for loan losses 102,707 93,700
Available-for-sale securities - 33,959
------------ -------------
Gross deferred tax assets 129,221 158,563
------------ -------------
Deferred tax liabilities:
FHLB stock dividends 149,090 135,966
Tax bad reserve in excess of base year amount 52,665 83,731
Prepaid deposit insurance premium 3,142 11,461
Available-for-sale securities 39,670 -
Other - 8,330
------------ -------------
Gross deferred tax liabilities 244,567 239,488
------------ -------------
Net deferred tax liability $ 115,346 80,925
============ =============
</TABLE>
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, 1997 management believes it is more likely than not that
the Bank will realize the benefits of these deductible differences.
- 29 -
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
In prior years, the Bank was allowed a special bad debt deduction for
income tax purposes based on a percentage of taxable income. The
percentage of income bad debt deduction was eliminated beginning January
1, 1996.
Retained earnings at September 30, 1997 includes approximately $398,000
which is essentially income offset by percentage of income bad debt
deductions for income tax purposes prior to 1988 (the "Base Year
Reserve"). This amount is treated as a permanent difference and deferred
taxes are not recognized unless it appears that the 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 the Base
Year Reserve into taxable income.
A deferred tax liability has been recognized by the Bank for the amount
of the tax bad debt reserve in excess of the Base Year Reserve. The
August 1996 tax legislation also requires this excess to be recaptured
and included in taxable income over a six year period.
(10) Employee Benefit Plans
----------------------
Retirement Plan. The Bank has a non-contributory defined contribution
retirement plan for all eligible employees. The retirement plan provides
for a discretionary Bank contribution. Total pension expense for the year
ended September 30, 1996 was approximately $29,000. The Bank elected to
make no contribution to the retirement plan during the year ended
September 30, 1997.
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 of approximately
$11,400, bearing interest at prime (8.50% and 8.25% at September 30, 1997
and 1996, respectively), maturing February 2010. Contributions of cash or
common stock are made from BFSB to the ESOP the form of which is 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.
- 30 -
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
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 on straight-line basis over the term of the note
receivable recorded by the Holding Company. Shares committed to be
released are allocated to participant accounts after the end of each
fiscal year. For the years ended September 30, 1997 and 1996, ESOP
principal and interest payments of approximately $96,000 and $49,000,
respectively, were funded by Bank contributions of approximately $70,000
and $39,000, respectively, to the ESOP. The remainder of the ESOP
payments was funded by dividends on both allocated and unallocated ESOP
shares. At September 30, 1997 and 1996, 4,571 and 2,286 shares,
respectively, were committed to be released to participant accounts and
the fair value of the remaining shares to be released in future years was
approximately $606,000. The Bank recognized compensation expense relating
to the ESOP of $59,950 and $24,241 during the years ended September 30,
1997 and 1996, respectively.
Management Stock Bonus Plan (MSBP). On October 2, 1996, the Board of
Directors approved the MSBP. The terms of the MSBP provide for the award
of up to 42,320 shares of common stock to certain officers and directors.
Deferred compensation is recorded at the date of the stock award based on
the fair value of the shares granted. Vesting in the grant occurs in five
equal, annual installments and the related deferred compensation is
expensed over the same period. For financial reporting purposes the
unearned deferred compensation balance is classified as a reduction of
consolidated stockholders' equity. Officers, directors and employees
awarded shares retain voting rights and, if dividends are paid, dividend
privileges during the vesting period. During the year ended September 30,
1997, BFSB purchased 42,320 shares for the MSBP. On October 2, 1996,
24,122 shares were granted to officers and directors. BFSB recognized
compensation expense for the MSBP of $59,461 for the year ended September
30, 1997.
Stock Option Plan. On October 2, 1996, the Board of Directors approved
the Stock Option Plan ("Stock Option Plan"). The terms of the Stock Plan
provide for the granting of up to 105,800 shares of common stock to
certain officers and directors. The Stock Option Plan provides for the
granting of both incentive and non-incentive stock options. The terms of
the options may not exceed 10 years from the date the options are
granted. Incentive stock options granted to stockholders with more than
10% of the total combined voting power of all classes of stock of the
Company shall be granted at an option price of not less than 110% of the
fair market value at the grant date, and the term of the option may not
exceed 5 years from the date of the grant.
In October 1996, the Bank granted options to acquire 74,060 common shares
at an exercise price per share of $11.75. At September 30, 1997, all of
these options were outstanding and none were exercisable. The options
expire October 2006.
- 31 -
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
The per share weighted-average fair value of stock options granted during
1997 was $2.05, determined on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: expected dividend
yield of 4%, risk-free interest rate of 6.10%, volatility of .13, and an
expected life of 10 years.
The Bank applies the provisions of Accounting Principles Bulletin Opinion
No. 25 in accounting for its Plan and, accordingly, no compensation cost
has been recognized for its stock options in the financial statements.
Had the Bank determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Bank's net
income and net income per share for the year ended September 30, 1997
would have been as follows:
Net income: As reported $ 690,895
Pro forma 665,121
===========
Earnings per share: As reported $ .73
Pro forma .71
===========
(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, 1997 were
approximately $24,347,000.
- 32 -
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
The following table presents, as of September 30, 1997, the extent to
which BFSB exceeds in dollars and in percent, the three minimum capital
requirements.
<TABLE>
<CAPTION>
Regulatory Basis
(dollars rounded to thousands)
------------------------------
1997
approximate
Actual requirement Excess
------ ----------- ------
<S> <C> <C> <C>
Tangible capital:
Dollar amount $ 10,794 889 9,905
Percent of tangible assets 18.2% 1.5% 16.7%
Core capital:
Dollar amount $ 10,794 1,777 9,017
Percent of adjusted tangible assets 18.2% 3.0% 15.2%
Risk-based capital:
Dollar amount $ 11,096 1,948 9,148
Percent of risk-weighted assets 45.6% 8.0% 37.6%
</TABLE>
<TABLE>
<CAPTION>
Regulatory Basis
(dollars rounded to thousands)
------------------------------
1996
approximate
Actual requirement Excess
------ ----------- ------
<S> <C> <C> <C>
Tangible capital:
Dollar amount $ 10,589 774 9,815
Percent of tangible assets 20.5% 1.5% 19.0%
Core capital:
Dollar amount $ 10,589 1,548 9,041
Percent of adjusted tangible assets 20.5% 3.0% 17.5%
Risk-based capital:
Dollar amount $ 10,847 1,655 9,192
Percent of risk-weighted assets 52.4% 8.0% 44.4%
</TABLE>
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.
- 33 -
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Consolidated stockholders' equity differs from BFSB's tangible, core, and
risk-based capital at September 30 as a result of the following (dollars
rounded to thousands):
<TABLE>
<CAPTION>
1997 1996
-------------- ---------------
<S> <C> <C>
Consolidated stockholders' equity $ 14,210,000 15,508,000
Less Holding Company assets 3,378,000 4,985,000
-------------- ---------------
BFSB capital 10,832,000 10,523,000
Unrealized (gain) loss on securities
available-for-sale, net (38,000) 66,000
-------------- ---------------
Tangible and core capital 10,794,000 10,589,000
Allowance for loan losses (limited to 1.25% of
risk-weighted assets) 302,000 258,000
-------------- ---------------
Risk-based capital $ 11,096,000 10,847,000
============== ===============
</TABLE>
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.
(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.
- 34 -
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
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.
Financial instruments outstanding at September 30, 1997 whose contract
amounts represent credit risk are fixed-rate commitments to extend credit
totaling approximately $104,000.
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 authorized the FDIC to impose a special assessment on certain
deposits held by thrift institutions. This special assessment, which was
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 was paid in November 1996.
Severance Agreements. Effective April 1996 the Bank entered into
severance 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 agreements were extended for an
additional year in April 1997.
- 35 -
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
(14) 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 fair 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.
- 36 -
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
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. 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 each year end for deposits of similar
maturities.
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 rates as of each
year end.
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 each
year end.
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 judgments 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.
- 37 -
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
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 approximate book value and fair value of the Company's financial
instruments as of September 30 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------- -------------------------------
Book Fair Book Fair
value value value value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 1,194,000 1,194,000 451,000 451,000
Interest-bearing deposits 99,000 99,000 99,000 99,000
Investment and mortgage-backed
securities
available-for-sale 19,155,000 19,155,000 13,365,000 13,365,000
Investment and mortgage-backed
securities held-to-maturity 9,009,000 9,067,000 10,303,000 10,181,000
Stock in Federal Home Loan Bank 802,000 802,000 400,000 400,000
Loans receivable, net 28,636,000 28,997,000 25,859,000 25,869,000
Accrued interest receivable 559,000 559,000 496,000 496,000
Liabilities:
Deposits $ 29,506,000 29,514,000 29,371,000 29,356,000
Advances from Federal Home Loan
Bank 15,700,000 15,685,000 6,113,000 6,107,000
Accrued expenses and other
liabilities 115,000 115,000 269,000 269,000
Off-balance-sheet items:
Commitments to extend credit - 4,000 - 6,150
============= ============= ============= ==============
</TABLE>
- 38 -
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
(15) Holding Company Information (Condensed)
---------------------------------------
The summarized financial information for Crazy Woman Creek Bancorp
Incorporated as of September 30 and for the years then ended is presented
below. Intercompany balances and transactions are noted parenthetically.
Condensed Balance Sheet
<TABLE>
<CAPTION>
Assets 1997 1996
------ --------------- ---------------
<S> <C> <C>
Cash (NOW account with BFSB) $ 89,864 54,233
Investment in subsidiary 11,056,696 10,523,032
Loan to BFSB 2,174,000 4,424,000
Loan to ESOP 571,429 617,143
Investments available-for-sale mutual funds 659,902 -
Other assets 1,333 -
------------- -------------
Total assets $ 14,553,224 15,618,408
============= ==============
Liabilities and Stockholders' Equity
------------------------------------
Income taxes payable $ 1,200 4,600
Deferred tax liability 19,921 -
Dividends payable 95,485 105,800
Other liabilities 2,000 -
Stockholders' equity:
Common stock 105,800 105,800
Additional paid-in capital 10,041,629 10,027,393
Unearned ESOP/MSBP shares (809,272) (617,143)
Retained earnings 6,377,093 6,057,879
Unrealized gain (loss) on securities available-for-sale, net 77,007 (65,921)
Treasury stock (1,357,639) -
------------- -------------
Total stockholders' equity 14,434,618 15,508,008
------------- --------------
Total liabilities and stockholders' equity $ 14,553,224 15,618,408
============= ==============
Condensed Statement of Income
Dividends on mutual funds $ 2,060 -
Interest income (ESOP loan and loan to BFSB) 245,041 159,235
Management fee to BFSB (27,600) (2,300)
Other operating expenses (54,208) (39,363)
---------- ---------
Income before equity in undistributed earnings of
subsidiary and income taxes 165,293 117,572
Equity in undistributed earnings of subsidiary 581,702 277,073
---------- ---------
Income before income taxes 746,995 394,645
Income taxes 56,100 39,800
---------- ---------
Net income $ 690,895 354,845
========== =========
</TABLE>
- 39 -
<PAGE>
CRAZY WOMAN CREEK BANCORP INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Condensed Statement of Cash Flows 1997 1996
-------------- --------------
<S> <C> <C>
Net income $ 690,895 354,845
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of subsidiary (581,702) (277,073)
Dividends reinvested (2,060) -
Increase (decrease) in income taxes payable (3,400) 4,600
Increase in other liabilities 2,000 -
Increase on other assets (1,333) -
------------- -------------
Net cash provided by operating activities 104,400 82,372
------------- --------------
Cash flows from investing activities:
Loan to BFSB - (4,424,000)
Principal payments on loan to BFSB 2,250,000 -
Principal payments on ESOP note receivable 45,714 13,257
Investment in BFSB - (5,065,905)
Contribution to BFSB (25,598) -
Investment in mutual funds (599,250) -
Net cash provided by (used in) investing
activities 1,670,866 (9,476,648)
------------- --------------
Cash flows from financing activities:
Sale of common stock, net of offering costs - 9,491,809
Repurchase of common stock (1,357,639) -
Cash dividends paid (381,996) (43,300)
Net cash provided by (used in) financing
activities (1,739,635) 9,448,509
------------- --------------
Net increase in cash 35,631 54,233
Cash at beginning of year 54,233 -
Cash at end of year $ 89,864 54,233
============= ==============
</TABLE>
- 40 -
<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, 1997 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 21, 1998 at 3:00 p.m.
at the Company's main office located at 106 Fort Street, Buffalo, Wyoming.
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