SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Commission File Number: 0-25284
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Fiscal Year Ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
BIG SKY BANCORP, INC.
(name of small business issuer in its charter)
Delaware 81-0494188
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) I.D. Number)
711 South First Street, Hamilton, Montana 59840
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (406) 363-4400
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 $.01 per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the 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 .
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
The registrant's revenues for the fiscal year ended March 31, 1996 were
approximately $5.5 million.
At the present time, there is no established market in which shares of
the registrant's Common Stock are regularly traded, nor are there any
uniformly quoted prices for such shares. The last trade of shares of the
Common Stock known by management and between parties unaffiliated with the
registrant was on April 25, 1996 at $15.50 per share.
As of June 21, 1996, there were issued and outstanding 304,744 shares of
the registrant's Common Stock. The aggregate value of the Common Stock
outstanding held by nonaffiliates of the registrant on June 21, 1996 was
$4,723,532 (307,744 shares at $15.50 per share). For purposes of this
calculation, officers and directors of the registrant are considered
nonaffiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
March 31, 1996 (the "Annual Report") (Parts I and II).
2. Portions of registrant's Definitive Proxy Statement for the 1996
Annual Meeting of Stockholders (the "Proxy Statement") (Part III).
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Part I
Item 1. Business
General
Big Sky Bancorp, Inc. ("Big Sky" or the "Corporation") was incorporated
in the State of Delaware on April 27, 1994, for the purpose of becoming a
savings and loan holding company for First Federal Savings and Loan
Association of Montana ("First Federal" or the "Association"). On July 27,
1994, the stockholders of the Association approved a plan to reorganize the
Association into the holding company form of ownership. The reorganization
was completed on December 1, 1994, on which date the Association became the
wholly-owned subsidiary of the Corporation, and the stockholders of the
Association became stockholders of the Corporation. Prior to completion of
the reorganization, the Corporation had no material assets or liabilities and
engaged in no business activities. Subsequent to the acquisition of First
Federal, the Corporation has engaged in no significant activity other than
holding the stock of the Association. Accordingly, the information set forth
in this report, including financial statements and related data, relates
primarily to the Association.
In conjunction with the holding company reorganization, holders of
85,602 of the Association's common shares elected to exercise their rights
under the plan of reorganization to have their shares repurchased by the
Corporation. Management of the Corporation offered $14.375 per share, which
was considered fair value by the Corporation's Board of Directors, and was
accepted by holders of 25,400 shares. Payment was made on February 27, 1995.
Holders of the remaining 60,202 shares did not accept the buyout price and
requested that an appraisal be performed by the Office of Thrift Supervision
("OTS") in accordance with the plan of reorganization. An accrual for
$865,000, representing $14.375 per share was, made for the ultimate redemption
of the remaining shares.
During the year, the OTS selected Kaplan and Associates, Inc. of
Washington, D.C. to perform the appraisal. On October 25, 1995, Kaplan and
Associates, Inc. completed the appraisal of the fair market value of the
Association's common stock as of December 1, 1994, the date of the
Corporation's reorganization, and determined the value to be $13.625 per
share.
On December 19, 1995, the OTS issued a letter to the Corporation
directing management to pay $13.625 per share for the remaining 60,202 shares,
less expenses associated with the valuation. In addition, management paid
interest at the Association's passbook rate for the period from December 1,
1994 through December 28, 1995 on the final payout value. The final net
payment for the 60,202 shares was $831,000.
First Federal was organized in 1911 under the name Missoula Building and
Loan Association. On May 21, 1992, the Association completed its conversion
from a federal mutual savings and loan association to a federal capital stock
savings and loan association. The Association is a member of the Federal Home
Loan Bank ("FHLB") System, and its deposit accounts are insured to the maximum
allowable amount by the Federal Deposit Insurance Corporation ("FDIC") under
the Savings Association Insurance Fund ("SAIF").
First Federal is primarily engaged in the business of attracting
deposits from the general public and using such deposits, together with other
funding sources, to originate or invest in residential and other mortgage
loans and, to a lesser extent, commercial real estate and consumer loans, for
its portfolio as well as for investments, and other assets. Because the
Association is primarily dependent on net interest margin (interest income
from loans and investments minus interest expense on deposit accounts and
borrowings) for earnings, the focus of the Association's planning has been to
devise and employ strategies that provide a stable, positive spread between
the yield on interest-earning assets and the cost of interest-bearing
liabilities in order to maximize the dollar amount of net interest income.
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Market Area
The Association conducts operations from two offices in the city of
Missoula, the largest city in Western Montana, and from one office in
Hamilton, in Ravalli County.
The Association's market area encompasses metropolitan Missoula and the
surrounding suburbs in Missoula County, as well as Hamilton and the greater
Ravalli County area, which areas combined have a population of approximately
116,000. The largest employers in the Association's market area are the
University of Montana, St. Patrick Hospital, Community Medical Center, the
United States Forest Service, Washington Corporations (a corporate
conglomerate), Rocky Mountain Laboratories (a government-owned research and
development center), Stone Container Corporation and Ribi Immunochem (a
biotechnology company).
Selected Financial and Other Data
The information contained under the section captioned "Selected
Financial and Other Data" in the Corporation's 1996 Annual Report to
Stockholders ("Annual Report") is incorporated herein by reference.
Lending Activities
General. The principal lending activity of the Association is the
origination of single-family residential mortgage and construction loans and,
to a lesser extent, multi-family residential and commercial real estate loans.
The Association also makes consumer and student loans.
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Loan Portfolio Analysis. The following table sets forth the composition of the Association's loan
portfolio by type of loan as of the dates indicated.
March 31,
1994 1995 1996
Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
Type of Loan:
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
Residential(1):
Conventional. . . . . . . . . . $35,885 87.49% $35,597 89.73% $34,183 91.40%
Federal Housing Administration
("FHA") and Veterans' Admin-
istration ("VA") . . . . . . . 1,066 2.60 734 1.85 638 1.71
Construction. . . . . . . . . . . 536 1.31 148 0.37 -- --
Commercial. . . . . . . . . . . . 3,497 8.53 2,950 7.44 2,028 5.42
Total mortgage loans . . . . . 40,984 99.92 39,429 99.39 36,849 98.53%
Other Loans:
Commercial business loans. . . . 18 0.04 28 0.07 -- --
Home equity loans. . . . . . . . 414 1.01 469 1.18 668 1.79
Education loans. . . . . . . . . 69 0.17 47 0.12 14 0.04
Automobile loans . . . . . . . . 56 0.14 68 0.17 125 0.33
Other. . . . . . . . . . . . . . 420 1.02 461 1.16 551 1.47
Total other loans . . . . . . . 977 2.38 1,073 2.70 1,358 3.63%
Total loans . . . . . . . . . . 41,961 102.30 40,502 102.09 38,207 102.16
Less:
Due to borrowers on
construction loans. . . . . . . 194 (.47) 54 (0.13) -- --
Unearned discounts . . . . . . . 9 (.02) 9 (0.02) 8 (.02)
Unearned income. . . . . . . . . 361 (.88) 344 (0.87) 331 (.89)
Allowance for possible loan
losses. . . . . . . . . . . . . 382 (.93) 425 (1.07) 468 (1.25)
Total loans receivable, net. . . $41,015 100.00% $39,670 100.00% $37,400 100.00%
(1) Includes construction loans converted to permanent loans.
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The following table sets forth scheduled contractual amortization of
loans and mortgage-backed securities at March 31, 1996 and the dollar amount
of such securities and loans at those dates. Demand loans, loans having no
stated schedule of repayments and no stated maturity and overdraft loans are
reported as due in one year or less.
March 31, 1996
Mortgage-
Mortgage Consumer Total Backed
Loans Loans Loans Securities
(Dollars in thousands)
Amounts due:
Within one year. . . . . $ 9,830 $ 454 $10,284 $ --
After 1 year through
3 years . . . . . . . 725 416 1,141 --
After 3 years through
5 years. . . . . . . 614 147 761 --
After 5 years. . . . . . 25,680 341 26,021 3,338
Total. . . . . . . . $36,849 $1,358 $38,207 $3,338
Amounts due after 1 year:
Fixed. . . . . . . . . 26,388 $ 904 $27,292 $1,729
Adjustable . . . . . . 631 -- 631 1,609
Residential Loans. The Association's lending activities have
concentrated on the origination of residential mortgages, primarily for
retention in the Association's loan portfolio. At March 31, 1996, residential
mortgages constituted 92.0% of total loans. Virtually all residential
mortgages are collateralized by properties within the Association's market
area. Also included in the residential portfolio are a limited number of
out-of-state loan participations that were purchased by the Association from
Capitol Savings and Loan Association, Denver, Colorado, in 1970. At March 31,
1996, such loan participations (which were primarily collateralized by
residences in Colorado) amounted to approximately $183,000.
The Association presently offers both fixed-rate mortgage and
adjustable-rate mortgages ("ARMs") with loan terms of 15 to 30 years. ARMs
originated have interest rates that generally adjust at regular intervals of
one year based upon changes in the prevailing interest rates on United States
Treasury Bills. The majority of these loans provide that the amount of any
increase or decrease in the interest rate is limited to two percentage points
(upward or downward) per adjustment period and generally contain minimum and
maximum interest rates. Borrower demand for ARMs versus fixed rate mortgage
loans is a function of the level of interest rates, the expectations of
changes in the level of interest rates and the difference between the interest
rates and loan fees offered for fixed rate mortgage loans and interest rates
for ARMs. The relative amount of fixed rate and ARMs that can be originated
at any time is largely determined by the demand for each in a competitive
environment.
The Association also has originated loans pursuant to the Montana Board
of Housing Program under which it receives a fee for the origination of
residential loans to low-income and moderate-income families. At March 31,
1996, the Association had $1.45 million of such loans outstanding.
Income Property Loans. The Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 ("FIRREA") permits federal savings and loan
associations and savings banks to invest in non-residential real estate loans
up to 400% of their capital as computed under generally accepted accounting
principles
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("GAAP"), plus general loan loss reserves and valuation adjustments resulting
from SFAS No. 115. At March 31, 1996, this would limit the Association's
aggregate non-residential real estate loans to approximately $26.42 million.
At such time, the Association had commercial real estate loans outstanding of
$2.03 million. Loans collateralized by commercial properties have been the
most prominent type of lending diversification exhibited by the Association,
amounting to approximately 5.4% of total loans outstanding at March 31, 1996.
Included in the portfolio are loans collateralized by convenience stores,
retail businesses, commercial offices and mobile home parks. The
Association's largest commercial real estate loan, which had an outstanding
balance of $348,000 at March 31, 1996, is collateralized by an office building
in downtown Missoula.
Commercial real estate lending entails significant additional risks
compared to residential lending. Commercial real estate loans typically
involve large loan balances to single borrowers or groups of related
borrowers. The payment experience of such loans is typically dependent upon
the successful operation of the real estate project. These risks can be
significantly affected by supply and demand conditions in the market for
office and retail space and for apartments and, as such, may be subject, to a
greater extent, to adverse conditions in the economy. In dealing with these
risk factors, the Association generally limits itself to a real estate market
or to borrowers with which it has substantial experience. The Association
concentrates on originating commercial real estate loans secured by properties
located within its primary market area.
The Association has also diversified its lending portfolio by investing
in multi-family residential loans with five units or more. The largest
multi-family real estate loan, which had an outstanding balance of $578,000 at
March 31, 1996, is collateralized by a 35 unit apartment complex.
The Association also had a loan of $152,000 at March 31, 1996 that is
collateralized by an owner-occupied ranch.
Consumer Loans. The Association views consumer lending as an additional
component of its business operations because consumer loans generally have
shorter terms and higher yields, thus reducing exposure to changes in interest
rates. In addition, the Association believes that offering consumer loans
helps to expand and create stronger ties to its customer base.
The Association offers a variety of secured or guaranteed consumer
loans, including direct automobile loans, home equity loans, home improvement
loans, student loans and loans secured by savings deposits. In addition, the
Association offers unsecured consumer loans. Consumer loans totaled $1.36
million, including $668,000 of loans secured by subordinate liens on real
property, at March 31, 1996, or 1.8% of the Association's total loan
portfolio.
The Association employs very strict underwriting standards for consumer
loans. These procedures include an assessment of the applicant's payment
history on other debts and ability to meet existing obligations and payments
on the proposed loans. Although the applicant's creditworthiness is a primary
consideration, the underwriting process also includes a comparison of the
value of the security, if any, to the proposed loan amount. The Association
underwrites and originates its consumer loans internally, which management
believes limits exposure to credit risks relating to loans underwritten or
purchased from brokers or other outside sources.
Of the Association's consumer loan portfolio, only $4,000 of the
portfolio was delinquent at March 31, 1996. However, consumer loans may
entail greater risk than do residential mortgage loans, particularly in the
case of consumer loans which are unsecured or secured by assets that
depreciate rapidly, such as automobiles. In the latter case, repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment for the outstanding loan and the remaining deficiency often does not
warrant further substantial collection
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efforts against the borrower. In addition, consumer 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. Furthermore, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the
amount which can be recovered on such loans. Such loans may also give rise to
claims and defenses by the borrower against the Association as the holder of
the loan, and a borrower may be able to assert claims and defenses which it
has against the seller of the underlying collateral.
Regulations permit federally chartered thrift institutions to invest up
to 30% of their assets in unsecured loans and loans secured by property other
than real estate. However, a thrift institution has lending authority above
the 30% category for certain secured consumer loans, such as home equity
loans, property improvement loans, mobile home loans and loans secured by
savings accounts.
Construction Loans. The Association occasionally makes loans to finance
the construction of single family residences. These loans primarily are loans
that will convert to permanent financing after the construction is completed.
At March 31, 1996 the Association had no construction loans outstanding.
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Loan Maturity and Repricing
The following table sets forth certain information at March 31, 1996
regarding the dollar amount of loans maturing in the Association's portfolio
based on their contractual terms to maturity, but does not include scheduled
payments or potential prepayments. Demand loans, loans having no stated
schedule of repayments and no stated maturity, and overdrafts are reported as
due in one year or less. Mortgage loans which have adjustable rates are shown
as maturing at their next repricing date. The next repricing date is used
rather than contractual maturities as information regarding contractual
maturities is not readily available. Loan balances do not include undisbursed
loan proceeds, unearned discounts, unearned income and allowance for loan
losses.
After One After 3 After 5
Within Year Years Years Beyond
One Through Through Through 10
Year 3 Years 5 Years 10 Years Years Total
(In thousands)
Real estate
mortgage . . . $ 9,694 $ 475 $685 $3,370 $21,265 $35,489
Commercial
real estate . . 319 350 -- 1,267 92 2,028
Commercial
business. . . . -- -- -- -- -- --
Construction . . -- -- -- -- -- --
Education. . . . 14 -- -- -- -- 14
Mobile home. . . 30 -- -- -- -- 30
Automobile . . . 8 50 67 -- -- 125
Savings account. 163 249 9 -- -- 421
Other. . . . . . 56 17 -- 27 -- 100
Total loans .$10,284 $1,141 $761 $4,664 $21,357 $38,207
The following table sets forth the dollar amount of all fixed-rate and
adjustable-rate loans in the Association's portfolio at March 31, 1996.
Fixed Rate Adjustable Rate Total
(In thousands)
Real estate mortgage . . . . . $25,981 $9,508 $35,489
Commercial real estate . . . . 1,400 628 2,028
Commercial business. . . . . . -- -- --
Construction . . . . . . . . . -- -- --
Education. . . . . . . . . . . 14 -- 14
Mobile home. . . . . . . . . . 30 -- 30
Automobile . . . . . . . . . . 125 -- 125
Savings account. . . . . . . . 421 -- 421
Other. . . . . . . . . . . . . 100 -- 100
Total loans $28,071 $10,136 $38,207
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Mortgage Loan Solicitation and Processing. A majority of the loans
originated by the Association are made to existing customers of the
Association. Loan originations are also derived from a number of additional
sources, such as realtors, builders and referrals. Upon receipt of a loan
application, a credit report is ordered to verify specific information
relating to the loan applicant's employment, income and credit standing. A
loan applicant's income is verified through the applicant's employer or from
the applicant's tax returns. In the case of a real estate loan, an appraisal
of the real estate intended to secure the proposed loan is undertaken,
generally by the Association's staff and in some cases by an independent
appraiser approved by the Association. The mortgage loan documents used by
the Association generally conform to standards imposed by the Federal Home
Loan Mortgage Corporation ("FHLMC").
The Senior Loan Committee of the Association, which consists of Michael
E. McKee, Collette E. Maxwell and Thomas H. Boone, is authorized to approve
loans up to $200,000, and loans from $200,000 to $500,000 must be approved by
the Executive Committee of the Board of Directors. Loans in excess of
$500,000 require approval by a majority of the Board of Directors.
The Association's policy is to require borrowers to obtain certain types
of insurance to protect the Association's interest in the collateral securing
the loan. The Association requires a title insurance policy insuring that the
Association has a valid first lien on the mortgaged real estate. In addition,
the Association requires an opinion by an attorney regarding the validity of
title. Fire and casualty insurance is also required on collateral for loans.
The Association requires escrows for insurance unless waived by the Senior
Loan Approval Committee.
The Association's lending practices generally limit the maximum loan to
value ratio on conventional residential mortgage loans to 80% of the appraised
value of the property as determined by an appraisal or the purchase price,
whichever is less, and 75% for commercial real estate loans. The Senior Loan
Committee may permit a loan-to-value ratio on a residential mortgage loan to
exceed 80%, although the Association requires a borrower to obtain private
mortgage insurance if the ratio exceeds 90%.
Loan Sales. Most of the sales of loans by the Association in the recent
past have included loans originated under the Montana Board of Housing
program, FHA/VA loans and conventional loans sold to FHLMC. The Association
evaluates on an ongoing basis the interest rate sensitivity of its loan
portfolio and determines on a loan by loan basis whether the loan will be sold
in the secondary market or retained in its portfolio.
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The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
Year Ended March 31,
1994 1995 1996
(In thousands)
Total gross loans at
beginning of period. . . . . . . . . $41,827 $41,961 $40,502
Loans originated:
Single-family residential . . . . . . 8,280 2,779 3,947
Multi-family residential and
commercial real estate . . . . . . . 310 619 460
Construction. . . . . . . . . . . . . 1,025 538 62
Consumer. . . . . . . . . . . . . . . 327 414 282
Commercial business . . . . . . . . . 18 20 --
Total loans originated. . . . . . . 9,960 4,370 4,751
Loans sold:
Total whole loans sold. . . . . . . . 59 -- --
Total loans sold. . . . . . . . . . 59 -- --
Mortgage loan principal repayments . . 9,767 5,534 6,429
Net loan activity. . . . . . . . . . . 134 (295) (617)
Total gross loans at end of period . . $41,961 $40,502 $38,207
Loan Commitments. The Association issues commitments for fixed and
adjustable rate single-family residential mortgage loans conditioned upon the
occurrence of certain events. Such commitments are made in writing on
specified terms and conditions and are honored for up to 30 days from
approval, depending on the type of transaction. At March 31, 1996, the
Association had outstanding net loan commitments to originate fixed rate
mortgage loans and adjustable rate mortgage loans of approximately $269,000
and $0, respectively. See Note 5 of Notes to Financial Statements.
Loan Origination and Other Fees. The Association, in most instances,
receives loan origination fees and discount "points." Loan fees and points
are a percentage of the principal amount of the mortgage loan that are charged
to the borrower for funding the loan. The Association usually charges
origination fees of 1.0% to 3.0% on one-to-four family residential real estate
loans, long-term commercial real estate loans and residential construction
loans.
Statement of Financial Accounting Standard ("SFAS") No. 91, issued by the
Financial Accounting Standards Board ("FASB"), requires that all loan
origination fees and certain related direct loan origination costs be offset
against all fees and costs associated with loan origination. The resulting
net amount must be deferred and amortized over the contractual life of the
related loans as an adjustment to the yield on such loans, unless prepayments
of a large group of similar loans are probable and the timing and amount of
prepayments can be reasonably estimated. Deferred fees associated with loans
that are sold are recognized as income at the time of sale. The Association
had $331,000 of net deferred loan fees at March 31, 1996.
SFAS No. 91 also requires that commitment fees be offset against related
direct costs and that the resulting net amount be recognized over the
contractual life of the related loans as an adjustment of yield if the
commitment is
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exercised. If the commitment expires unexercised, the fees collected are
recognized as non-interest income upon expiration of the commitment. The
Association applied SFAS No. 91 beginning in its 1989 fiscal year. The
application of SFAS No. 91 reduced the Association's earnings before income
taxes by approximately $70,000 for the year ended March 31, 1996.
The Association also receives loan servicing fees on the loans it sells
and on which it retains the servicing responsibilities. The following table
sets forth certain information concerning the loan origination and commitment
fees of First Federal at the dates and for the periods indicated.
Year Ended March 31,
1994 1995 1996
(Dollars in thousands)
Loan origination and commitment fees
earned as non-interest income during
the period on mortgage loans
originated and purchased. . . . . . . . . $ 1 -- --
Loan origination and commitment fees
earned as non-interest income as a
percentage of mortgage loans
originated and purchased during
the period. . . . . . . . . . . . . . . . .04% -- --
Deferred loan fees amortized to
interest income . . . . . . . . . . . . . $149 $82 $98
Deferred loan fees amortized to
interest income as a percentage of
interest on real estate loans . . . . . . 3.57% 2.20% 2.66%
Deferred loan fees at end of period. . . . $361 $344 $331
Delinquencies. The Association's collection procedures provide for a
series of contacts with delinquent borrowers. When payment becomes 60 days
past due, the Loan Collection Committee of the Board of Directors generally
meets and decides on the appropriate course of action for the Association. If
a loan continues in a delinquent status for 90 days or more, the Association
generally initiates foreclosure proceedings. In certain instances, however,
the Loan Collection Committee may decide to modify the loan or grant a limited
moratorium on loan payments to enable the borrower to reorganize his financial
affairs.
Nonperforming Assets. Loans are reviewed on a regular basis and a
reserve for uncollectible interest is established on loans where collection is
questionable, generally when such loans become 90 days delinquent. Typically,
payments received on a nonaccrual loan are applied to the outstanding
principal and interest as determined at the time of collection of the loan.
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The following table sets forth information with respect to the
Association's nonperforming assets for the periods indicated. During the
periods shown, the Association had no restructured loans in which the terms of
restructure require disclosure under SFAS No. 15.
March 31,
1992 1993 1994 1995 1996
(Dollars in thousands)
Loans accounted for on
a nonaccrual basis:
Real estate -
Residential. . . . . . . . . $34 $58 $283 $127 $35
Consumer. . . . . . . . . . . -- 13 -- -- --
Total . . . . . . . . . . 34 71 283 127 35
Accruing loans which are
contractually past due
90 days or more:
Real estate -
Residential. . . . . . . . . -- 147 -- -- --
Consumer . . . . . . . . . . 13 -- -- -- --
Total . . . . . . . . . . 13 147 -- -- --
Total of nonaccrual and 90
days past due loans. . . . . 47 218 283 127 35
Real estate owned. . . . . . . -- -- -- 196 --
Total nonperforming
assets . . . . . . . . . $47 $218 $283 $323 $35
Total nonaccrual loans
delinquent 90 days or
more to net loans. . . . . . .12% .54% .69% .32% .09%
Total loans delinquent 90
days or more to total
assets . . . . . . . . . . . .08% .35% .44% .21% .06%
Total onperforming assets
to total assets. . . . . . . .08% .35% .44% .54% .06%
If interest on nonaccrual loans had been accrued, interest income of
approximately $1,000 would have been recorded for the year ended March 31,
1996.
Asset Classification. The OTS over time has adopted various changes in
its regulations regarding problem assets of savings institutions. These
regulations are intended to comply with directives to the FHLBB (as
predecessor to the OTS) in the Competitive Equality Banking Act ("CEBA"). The
regulations conform the OTS's asset classification system to commercial
banking practices, eliminate the FHLBB's previous regulation that had
classified certain problem assets as "scheduled items" and put the
establishment of loan loss allowances on a basis consistent with the
requirements of GAAP.
The regulations require that each insured institution review and
classify its assets on a regular basis. In addition, in connection with
examinations of insured institutions, OTS examiners have authority to identify
problem assets and, if appropriate, require them to be classified. There are
three classifications for problem assets: substandard, doubtful and loss.
Substandard assets must have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of
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substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss.
An asset classified loss is considered uncollectible and of such little value
that continuance as an asset of the institution is not warranted. The
regulations have also created a special mention category, described as assets
which do not currently expose an insured institution to a sufficient degree of
risk to warrant classification but do possess credit deficiencies or potential
weaknesses deserving management's close attention. Assets classified as
substandard or doubtful require the institution to establish general
allowances for loan losses. If an asset or portion thereof is classified
loss, the insured institution must either establish specific allowances for
loan losses in the amount of 100% of the portion of the asset classified loss
or charge off such amount. A portion of general loss allowances established
to cover possible losses related to assets classified 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.
The following table sets forth information with respect to the
Association's nonperforming assets at the periods indicated.
March 31,
1994 1995 1996
(Dollars in thousands)
Slow home loans (60 to 90 days
delinquent) . . . . . . . . . . . . $364 $204 $ 35
Foreclosed real estate and
repossessions . . . . . . . . . . . -- 196 --
Total slow home loans and
nonperforming assets . . . . . $364 $400 $ 35
Total loans delinquent 90 days
or more to net loans. . . . . . . . .69% .52% .09%
Total slow home loans and loans
delinquent 90 days or more
to total assets . . . . . . . . . . .57 .34 .06
Total slow home loans and
nonperforming assets to
total assets. . . . . . . . . . . . .57 .67 .06
<PAGE>
<PAGE>
At March 31, 1995 and 1996, the aggregate amounts of the Association's
classified assets, and of the Association's general loss allowances were as
follows:
March 31,
1995 1996
(In thousands)
Classified assets. . . . . . $400 $ 35
General loss allowances. . . 424 468
Real Estate Owned. Real estate acquired by the Association as a result
of foreclosure or by deed in lieu of foreclosure is classified as real estate
owned until it is sold. When property is acquired it is recorded at the
unpaid principal balance of the related loan plus foreclosure costs. Upon
receipt of a new appraisal and market analysis, the carrying value is written
down to the lower of anticipated sales price less selling and holding costs or
cost. At March 31, 1996, the Association did not hold any real estate owned.
Allowance for Loan Losses. The Association's management evaluates the
need to establish reserves against losses on loans and other assets each year
based on estimated losses on specific loans and on any real estate held for
sale or investment when a finding is made that a probable and estimable
decline in value has occurred or when the fair value of the asset minus
estimated cost to sell the asset is less than the cost. Such evaluation
includes a review of all loans for which full collectibility may not be
reasonably assured and considers, among other matters, the estimated market
value of the underlying collateral of problem loans, prior loss experience,
economic conditions and overall portfolio quality. These provisions for
losses are charged against earnings in the year they are established. At
March 31, 1996 the Association had an allowance for loan losses of $468,000
which represented 1.25% of total loans. The increase in the provision for
potential loan losses was implemented by management as a prudent
risk-management strategy, as the Association has historically maintained loan
loss reserves at lower levels than many peer group institutions. Based on
past experience and future expectations, management believes that loan loss
reserves are adequate. The Association believes that its loan loss reserve as
a percentage of total loans at March 31, 1996 is comparable with similar
institutions in its market area.
While the Association believes it has established its existing allowance
for loan losses in accordance with GAAP there can be no assurance that
regulators, in reviewing the Association's loan portfolio, will not request
the Association to significantly increase its allowance for loan losses,
therefore negatively affecting the Association's financial condition and
earnings.
Loan Loss Allowance Analysis
The following table sets forth an analysis of the Association's gross
allowance for possible loan losses for the periods indicated. Where specific
loan loss reserves have been established, any difference between the loss
reserve and the amount of loss realized has been charged or credited to
current income.
<PAGE>
<PAGE>
Year Ended March 31,
1992 1993 1994 1995 1996
(Dollars in thousands)
Allowance at beginning
of period. . . . . . . . . . . $196 $251 $340 $382 $424
Provision for loan losses. . . . 74 70 42 42 44
Total. . . . . . . . . . . . . 270 321 382 424 468
Recoveries:
Residential real estate . . . . 20 20 -- -- --
Consumer. . . . . . . . . . . . -- -- -- -- --
Total recoveries . . . . . . . 20 20 -- -- --
Charge-offs:
Residential real estate . . . . 39 -- -- -- --
Consumer. . . . . . . . . . . . -- 1 -- -- --
Total charge-offs. . . . . . . 39 1 -- -- --
Net charge-offs (recoveries) . 19 (19) -- -- --
Balance at end of period . . . $251 $340 $382 $424 $468
Ratio of allowance to total
loans outstanding at the
end of the period. . . . . . .. .63% .81% .91% 1.05% 1.25%
Ratio of net charge-offs
(recoveries) to average loans
outstanding during the period . .05 (.05) -- -- --
<PAGE>
<TABLE>
<PAGE>
Loan Loss Allowance by Category
The following table sets forth the breakdown of the allowance for loan losses by loan category at the
periods indicated.
March 31,
1992 1993 1994
% of % of % of
Loans in Loans in Loans in
As a % Category As a % Category As a % Category
of Out- to Out- of Out- to Out- of Out- to Out-
standing standing standing standing standing standing
Loans in Total Loans in Total Loans in Total
Amount Category Loans Amount Category Loans Amount Category Loans
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate -- mortgage:
Residential . . . . . . .$209 .61% 82.54% $298 .81% 87.81% $333 .90% 88.06%
Consumer . . . . . . . . . .42 2.82 3.71 43 4.34 2.37 49 5.02 2.33
Total allowance
for loan losses . . .$251 -- -- $341 -- -- $382 -- --
March 31,
1995 1996
% of % of
Loans in Loans in
As a % Category As a % Category
of Out- to Out- of Out- to Out-
standing standing standing standing
Loans in Total Loans in Total
Amount Category Loans Amount Category Loans
(Dollars in thousands)
Real estate -- mortgage:
Residential . . . . . . $370 1.02% 89.70% $406 1.17% 91.14%
Consumer . . . . . . . . 55 5.13 .97 62 4.57 3.55
Total allowance for
loan losses . . . . $425 -- -- $468 -- --
</TABLE>
<PAGE>
<PAGE>
Investment Activities
Federally chartered savings institutions have authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various Federal agencies and of state and municipal governments,
deposits at the applicable FHLB, certificates of deposit of federally insured
institutions, certain bankers' acceptances and federal funds. Subject to
various restrictions, such savings institutions may also invest a portion of
their assets in commercial paper, corporate debt securities and mutual funds,
the assets of which conform to the investments that federally chartered
savings institutions are otherwise authorized to make directly. Savings
institutions are also required to maintain minimum levels of liquid assets
which vary from time to time. See "REGULATION OF FIRST FEDERAL -- Federal
Home Loan Bank System." The Association may decide to increase its liquidity
above the required levels depending upon the availability of funds and
comparative yields on investments in relation to return on loans.
Investment decisions are made by the Asset/Liability Management
Committee. Mr. Kwiatkowski, the Association's investment manager, is
responsible for executing investment strategy as established by the Committee.
The Association's investment objectives are: (i) to provide and maintain
liquidity within regulatory guidelines; (ii) to maintain a balance of high
quality, diversified investments to minimize risk; (iii) to provide collateral
for pledging requirements; (iv) to serve as a balance to earnings; and (v) to
maximize returns. It is the intention of management to hold securities with
short maturities in the Association's investment portfolio in order to enable
the Association to match more closely the interest-rate sensitivities of its
assets and liabilities.
<PAGE>
<TABLE>
<PAGE>
Investment Securities Analysis
The following table sets forth the Association's investment securities portfolio at book value at the
dates indicated.
March 31,
1994 1995 1996
Book Percent of Book Percent of Book Percent of
Value(1) Portfolio Value(1) Portfolio Value(1) Portfolio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Marketable equity
securities. . . . . . . $ 485 2.89% $ 296 2.01% $ 396 2.33%
U.S. treasury
securities . . . . . . 997 5.95 499 3.38 -- --
Agency securities. . . . 8,949 53.35 9,950 67.40 12,948 76.33
Mortgage-backed
securities . . . . . . 3,624 21.61 3,173 21.49 2,849 16.80
Collateralized mortgage
obligations . . . . . . 487 2.90 459 3.11 485 2.86
Municipal securities . . 185 1.10 185 1.25 185 1.09
Deposits with other
depository
institutions. . . . . . 2,046 12.20 200 1.36 100 0.59
Total . . . . . . . . $16,773 100.00% $14,762 100.00% $16,963 100.00%
(1) The market value of the Association's investment securities portfolio amounted to $16.4 million, $14.0
million and $16.7 million at March 31, 1994, 1995 and 1996, respectively.
</TABLE>
<PAGE>
<PAGE>
The following table sets forth the maturities and weighted average
yields of the debt securities in the Association's investment securities
portfolio at March 31, 1996.
Less Than One to Five to Over Ten
One Year Five Years Ten Years Years
Amount Yield Amount Yield Amount Yield Amount Yield
(Dollars in thousands)
Marketable
equity
securities. . . $ -- --% $ -- --% $ -- --% $ 396 6.98%
U.S. treasury
securities. . .
Agency
securities. . . 250 4.52 4,450 4.97 7,749 6.01 499 7.13
Mortgage-backed
securities. . . -- -- -- -- 749 8.88 2,100 6.78
Collateralized
mortgage
obligations . . -- -- -- -- -- -- 485 5.75
Municipal
securities . . -- -- 185 6.37 -- -- -- --
Deposits with
other
depository
institutions. . -- -- 100 5.20 -- -- -- --
Total . . . . $250 4.52% $4,375 5.03% $8,498 6.26% $3,480 6.71%
<PAGE>
<PAGE>
The following table sets forth certain information with respect to the
aggregate amount of securities of any one issuer in the Association's
investment securities portfolio that has a book value in excess of 10% of the
Association's stockholders' equity at the dates indicated.
March 31,
1994 1995 1996
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
(Dollars in thousands)
FHLMC
Participation
Certificate . . . $ -- $ -- $ 701 $ 721 $ -- $ --
Government
National
Mortgage
Association
("GNMA")
Mortgage-backed
Securities . . . 1,858 1,853 2,484 2,475 2,229 2,285
Federal National
Mortgage
Association
("FNMA")
Agency Bonds . . . 1,000 980 1,250 1,185 1,000 984
FHLB Agency Bonds. . 6,000 5,784 8,700 7,958 11,948 11,673
Total. . . . . . . $8,858 $8,617 $13,135 $12,339 $15,177 $14,942
FHLB time
certificates . . . $ 750 $ 750 $ -- $ -- $ -- $ --
<PAGE>
<PAGE>
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major source of the
Association's funds for lending and other investment purposes. Loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are significantly influenced by general interest
rates and money market conditions. Borrowings may be used on a short-term
basis to compensate for reductions in the availability of funds from other
sources. They may also be used on a longer term basis for general business
purposes.
Deposit Accounts. Deposits are attracted from within the Association's
primary market area through the offering of a broad selection of deposit
instruments, including negotiable order of withdrawal ("NOW") accounts, money
market accounts, regular savings accounts, certificates of deposit and
retirement savings plans. Deposit account terms vary, according to the
minimum balance required, the time periods the funds must remain on deposit
and the interest rate, among other factors. In determining the terms of its
deposit accounts, the Association considers the rates offered by its
competitors, profitability to the Association, matching deposit and loan
products and its customer preferences and concerns. The Association generally
reviews its deposit mix and pricing weekly.
<PAGE>
<TABLE>
<PAGE>
Deposit Balances
The following table sets forth information concerning the Association's time deposits and other
interest- bearing deposits at March 31, 1996.
Percentage
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
(Dollars in thousands, except for minimum amounts)
<S> <C> <C> <C> <C> <C>
2.25 None NOW Accounts $ 10 $ 4,075 7.71%
3.00 None Regular Savings 1 9,990 18.90
2.70 None Money Market Accounts 2,500 1,041 1.97
Certificates of Deposit
4.18 90 days 90 day passbook 2,500 154 0.29
4.06 4-6 months Fixed term, fixed rate 2,500 4,787 9.06
5.10 7-12 months Fixed term, fixed rate 100 16,448 31.13
4.59 13-24 months Fixed term, fixed rate 100 3,349 6.34
5.17 25-48 months Fixed term, fixed rate 100 2,807 5.31
6.09 49-120 months Fixed term, fixed rate 100 10,192 19.29
$52,843 100.00%
Jumbo certificates of deposit require minimum deposits of $100,000 and rates paid on such accounts are
negotiable. At March 31, 1996, the Association did not have any jumbo certificates of deposit.
</TABLE>
<PAGE>
<TABLE>
<PAGE>
Deposit Flow
The following table sets forth the balances of savings deposits in the various types of savings accounts
offered by the Association at the dates indicated.
March 31,
1994 1995 1996
Percent Percent Percent
of of Increase of Increase
Amount Total Amount Total (Decrease) Amount Total (Decrease)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NOW checking. . . . . . $ 1,195 2.12% $ 862 1.65% $ (333) $ 674 1.28% $ (188)
Super NOW checking. . . 3,741 6.62 3,442 6.58 (299) 3,401 6.43 (41)
Regular savings
accounts . . . . . . . 13,279 23.49 11,459 21.90 (1,820) 9,990 18.90 (1,469)
Money market deposit. . 1,518 2.69 1,321 2.52 (197) 1,041 1.97 (280)
Fixed-rate certificates
which mature in: (1)
1 - 12 months. . . . 23,780 42.08 19,307 36.90 (4,473) 21,389 40.48 2,082
13 - 24 months. . . . 4,236 7.50 3,660 6.99 (576) 3,349 6.34 (311)
25 - 36 months. . . . 1,944 3.44 2,878 5.50 934 2,807 5.31 (71)
Certificates maturing
thereafter . . . . . 6,814 12.06 9,395 17.96 2,581 10,192 19.29 797
Total. . . . . . . $56,507 100.00% $52,324 100.00% $(4,183) $52,843 100.00% $ 519
NOTE: Individual retirement accounts ("IRA") are included in certificate balances: Amounts are $3.6
million, $3.53 million and $3.62 million for March 31, 1994, 1995 and 1996, respectively.
- --------
(1) At March 31, 1994, 1995 and 1996 jumbo certificates amounted to $-0-, $-0- and $-0-, respectively.
</TABLE>
<PAGE>
<PAGE>
Time Deposits by Rates
The following table sets forth the dollar amount of deposits in the various
types of deposit programs offered by the Association for the periods indicated.
At March 31,
1994 1995 1996
(Dollars in thousands)
2.76 - 3.75% . . . . . $10,984 $ 6,441 $ --
3.76 - 4.00% . . . . . 8,452 462 668
4.01 - 5.00% . . . . . 5,567 9,283 6,589
5.01 - 6.00% . . . . . 6,207 6,847 17,121
6.01 - 7.00% . . . . . 3,643 11,342 13,271
7.01 - 8.00% . . . . . 1,214 865 88
8.01 - 9.00% . . . . . 707 -- --
<TABLE>
The following table sets forth the amount and maturities of time deposits at March 31, 1996.
Amount Due
(Dollars in thousands)
Percent
of
Total
Less Than 1-2 2-3 3-4 After Certificate
One Year Years Years Years 4 Years Total Accounts
<S> <C> <C> <C> <C> <C> <C> <C>
3.76 - 4.00%. . $ 668 $ -- $ -- $ -- $ -- $ 668 $ 1.77%
4.01 - 5.00%. . 6,375 214 -- -- -- 6,589 17.46
5.01 - 6.00%. . 10,369 2,210 3,785 573 184 17,121 45.37
6.01 - 7.00%. . 7,009 3,308 1,014 727 1,213 13,271 35.17
7.01 - 8.00%. . 88 -- -- -- -- 88 0.23
</TABLE>
<PAGE>
<PAGE>
The following table sets forth the savings activities of the Association
for the periods indicated.
Year Ended March 31,
1994 1995 1996
(Dollars in thousands)
Beginning balance. . . . . . . . . . . . $55,145 $56,507 $52,324
Net increase (decrease)
before interest
credited . . . . . . . . . . . . . . . (937) (6,373) (2,002)
Interest credited. . . . . . . . . . . . 2,299 2,190 2,521
Net increase (decrease)
in savings deposits. . . . . . . . . . 1,362 (4,183) 519
Ending balance . . . . . . . . . . . . . $56,507 $52,324 $52,843
Borrowings. Savings deposits are the primary source of funds for the
Association's lending and investment activities and for its general business
purposes. The Association has at times relied upon advances from the FHLB-
Seattle to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. Advances from the FHLB are typically secured by the
Association's first mortgage loans.
The FHLB functions as a central reserve bank providing credit for
savings and loan associations and certain other member financial institutions.
As a member, the Association is required to own capital stock in the FHLB and
is authorized to apply for advances on the security of such stock and certain
of its mortgage loans and other assets (principally securities which are
obligations of, or guaranteed by, the United States) provided certain
standards related to creditworthiness have been met. Advances are made
pursuant to several different programs. Each credit program has its own
interest rate and range of maturities. Depending on the program, limitations
on the amount of advances are based either on a fixed percentage of an
institution's net worth or on the FHLB's assessment of the institution's
creditworthiness. Under its current credit policies, the FHLB generally
limits advances to 20% of a member's assets, and short-term borrowings of less
than one year may not exceed 10% of the institution's assets. The FHLB
determines specific lines of credit for each member institution.
Competition
Missoula and Ravalli counties have a relatively large number of
financial institutions and thus the Association faces strong competition in
the attraction of savings deposits (its primary source of lendable funds) and
in the origination of loans. Its most direct competition for savings deposits
and loans has historically come from other thrift institutions, credit unions
and commercial banks located in its market area. Particularly in times of
high interest rates, the Association has faced additional significant
competition for investors' funds from brokers' offering short-term money
market securities and other corporate and government securities. In the
current low interest rate environment, the Association has faced significant
competition from brokers offering mutual funds, stocks and insurance products
to investors seeking to obtain higher yields than are available in insured
deposit investments. The Association's competition for loans comes
principally from other thrift institutions, credit unions, commercial banks,
mortgage banking companies and mortgage brokers.
<PAGE>
<PAGE>
REGULATION OF THE CORPORATION
The Corporation is a unitary savings and loan holding company within the
meaning of the Home Owners' Loan Act of 1933, as amended ("HOLA"). As such,
the Corporation is registered with the OTS and subject to OTS regulations,
examinations, supervision and reporting requirements. Big Sky is required to
file certain reports with, and otherwise comply with the regulations of, the
OTS and the SEC. As a subsidiary of a savings and loan holding company, First
Federal is subject to certain restrictions in its dealings with Big Sky and
with other companies affiliated with Big Sky and is subject to regulatory
requirements and provisions as a federal savings institution.
Holding Company Acquisitions
The HOLA and OTS regulations issued thereunder generally prohibit a
savings and loan holding company, without prior OTS approval, from acquiring
more than 5% of the voting stock of any other savings association or savings
and loan holding company or controlling the assets thereof. They also
prohibit, among other things, any director or officer of a savings and loan
holding company, or any individual who owns or controls more than 25% of the
voting shares of such holding company, from acquiring control of any savings
association not a subsidiary of such savings and loan holding company, unless
the acquisition is approved by the OTS.
Holding Company Activities
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of
another savings association as a separate subsidiary other than in a
supervisory acquisition, it would become a multiple savings and loan holding
company. There generally are more restrictions on the activities of a
multiple savings and loan holding company than on those of a unitary savings
and loan holding company. The HOLA provides that, among other things, no
multiple savings and loan holding company or subsidiary thereof which is not
an insured association shall commence or continue for more than two years
after becoming a multiple savings and loan association holding company or
subsidiary thereof, any business activity other than: (i) furnishing or
performing management services for a subsidiary insured institution, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary insured institution,
(iv) holding or managing properties used or occupied by a subsidiary insured
institution, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by regulation as of March 5, 1987 to be engaged
in by multiple holding companies or (vii) those activities authorized by the
Federal Reserve Board as permissible for bank holding companies, unless the
OTS by regulation, prohibits or limits such activities for savings and loan
holding companies. Those activities described in (vii) above also must be
approved by the OTS prior to being engaged in by a multiple holding company.
Qualified Thrift Lender Test
The HOLA requires any savings and loan holding company that controls a
savings association that fails the QTL test, as explained under "-- Federal
Regulation of Savings Associations -- Qualified Thrift Lender Test," must,
within one year after the date on which the association ceases to be a QTL,
register as and be deemed a bank holding company subject to all applicable
laws and regulations.
<PAGE>
<PAGE>
REGULATION OF FIRST FEDERAL
General
The Association is subject to extensive regulation, examination and
supervision by the OTS as its chartering agency, and the FDIC, as the insurer
of its deposits. The activities of federal savings institutions are governed
by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDIA") and the regulations
issued by the OTS and the FDIC to implement these statutes. These laws and
regulations delineate the nature and extent of the activities in which federal
savings associations may engage. Lending activities and other investments
must comply with various statutory and regulatory capital requirements. In
addition, the Association's relationship with its depositors and borrowers is
also regulated to a great extent, especially in such matters as the ownership
of deposit accounts and the form and content of the Association's mortgage
documents. The Association 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 financial institutions. There are
periodic examinations by the OTS and the FDIC to review the Association's
compliance with various regulatory requirements. 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 policies, whether by the OTS, the FDIC or Congress, could have
a material adverse impact on the Corporation, the Association and their
operations. The Corporation, as a savings and loan holding company, will also
be required to file certain reports with, and otherwise comply with the rules
and regulations of, the OTS.
Federal Regulation of Savings Associations
Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the
Treasury. The OTS generally possesses the supervisory and regulatory duties
and responsibilities formerly vested in the Federal Home Loan Bank Board.
Among other functions, the OTS issues and enforces regulations affecting
federally insured savings associations and regularly examines these
institutions.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs,
is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to: supervise the FHLBs; ensure that the
FHLBs carry out their housing finance mission; ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets; and
ensure that the FHLBs operate in a safe and sound manner.
The Association, as a member of the FHLB-Seattle, is required to acquire
and hold shares of capital stock in the FHLB-Seattle in an amount equal to the
greater of (i) 1.0% of the aggregate outstanding principal amount of
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or (ii) 1/20 of its advances (borrowings) from the
FHLB-Seattle. The Association is in compliance with this requirement with an
investment in FHLB-Seattle of $1.73 million at March 31, 1996.
Among other benefits, the FHLB provides a central credit facility
primarily for member institutions. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It
makes advances to members in accordance with policies and procedures
established by the FHFB and the Board of Directors of the FHLB-Seattle.
<PAGE>
<PAGE>
Federal Deposit Insurance Corporation. The FDIC is an independent
federal agency established originally to insure the deposits, up to prescribed
statutory limits, of federally insured banks and to preserve the safety and
soundness of the banking industry. In 1989 the FDIC also became the insurer,
up to the prescribed limits, of the deposit accounts held at federally insured
savings associations and established two separate insurance funds: the Bank
Insurance Fund ("BIF") and the SAIF. As insurer of deposits, the FDIC has
examination, supervisory and enforcement authority over all savings
associations.
The Association's accounts are insured by the SAIF. The FDIC insures
deposits at the Association to the maximum extent permitted by law. The
Association currently pays deposit insurance premiums to the FDIC based on a
risk-based assessment system established by the FDIC for all SAIF-member
institutions. Under applicable regulations, institutions are assigned to one
of three capital groups that are based solely on the level of an institution's
capital -- "well capitalized," "adequately capitalized," and
"undercapitalized" -- which are defined in the same manner as the regulations
establishing the prompt corrective action system under Section 38 of the FDIA,
as discussed below. These three groups are then divided into three subgroups
which reflect varying levels of supervisory concern, from those which are
considered to be healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
classifications, with rates currently ranging from .23% for well capitalized,
financially sound institutions with only a few minor weaknesses to .31% for
undercapitalized institutions that pose a substantial risk of loss to the SAIF
unless effective corrective action is taken. Until the second half of 1995,
the same matrix applied to BIF-member institutions. The FDIC is authorized to
raise assessment rates in certain circumstances. The Association's
assessments expensed for the year ended March 31, 1996, equaled $144,000.
Effective January 1, 1996, the FDIC substantially reduced deposit
insurance premiums for well-capitalized, well-managed financial institutions
that are members of the BIF. Under the new assessment schedule, rates were
reduced to a range of 0 to 27 basis points, with approximately 92% of BIF
members paying the statutory minimum annual assessment rate of $2,000. With
respect to SAIF member institutions, the FDIC has retained the existing rate
schedule of 23 to 31 basis points subject to contain pending legislative
proposals which would include a one time assessment to recapitalize SAF. At
March 31, 1996 the Association estimated that the impact of the assessment
would be a change to earnings of $253,000,000 after tax. The Association is a
member of the SAIF rather than the BIF.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances that could
result in termination of the deposit insurance of the Association.
Liquidity Requirements. Under OTS regulations, each savings institution
is required to maintain an average daily balance of liquid assets (cash,
certain time deposits and savings accounts, bankers' acceptances, and
specified U.S. Government, state or federal agency obligations and certain
other investments) equal to a monthly average of not less than a specified
percentage (currently 5.0%) of its net withdrawable accounts plus short-term
borrowings. OTS regulations also require each savings institution to maintain
an average daily balance of short-term liquid assets at a specified percentage
(currently 1.0%) of the total of its net withdrawable savings accounts and
borrowings payable in one year or less. Monetary penalties may be imposed for
failure to meet liquidity requirements.
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Prompt Corrective Action. Under Section 38 of the FDIA, as added by the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), each
federal banking agency is required to implement a system of prompt corrective
action for institutions that it regulates. The federal banking agencies have
promulgated substantially similar regulations to implement this system of
prompt corrective action. Under the regulations, an institution shall be
deemed to be (i) "well capitalized" if it has a total risk-based capital ratio
of 10.0% or more, has a Tier I risk-based capital ratio of 6.0% or more, has a
leverage ratio of 5.0% or more and is not subject to specified requirements to
meet and maintain a specific capital level for any capital measure; (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or
more, a Tier I risk-based capital ratio of 4.0% or more and a leverage ratio
of 4.0% or more (3.0% under certain circumstances) and does not meet the
definition of "well capitalized;" (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital
ratio that is less than 4.0% or a leverage ratio that is less than 4.0% (3.0%
under certain circumstances); (iv) "significantly undercapitalized" if it has
a total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a leverage ratio that is less than
3.0%; and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%.
Section 38 of the FDIA and the implementing regulations also provide
that a federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized
and may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has
received in its most recent examination, and has not corrected, a less than
satisfactory rating for asset quality, management, earnings or liquidity.
(The OTS may not, however, reclassify a significantly undercapitalized
institution as critically undercapitalized.)
An institution generally must file a written capital restoration plan
that meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to the provisions of
Section 38 of the FDIA, which sets forth various mandatory and discretionary
restrictions on its operations.
At March 31, 1996, the Association was categorized as "well capitalized"
under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The FDIA requires the federal
banking regulatory agencies to prescribe, by regulation, standards for all
insured depository institutions relating to: (i) internal controls,
information systems and internal audit systems; (ii) loan documentation; (iii)
credit underwriting; (iv) interest rate risk exposure; (v) asset growth; and
(vi) compensation, fees and benefits. The federal banking agencies recently
adopted final regulations and Interagency Guidelines Prescribing Standards for
Safety and Soundness ("Guidelines") to implement safety and soundness
standards required by the FDIA. The Guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. The agencies also proposed asset quality and earnings standards
which, if adopted in final, would be added to the Guidelines. Under the final
regulations, if the OTS determines that the Association fails to meet any
standard prescribed by the Guidelines, the agency may require the Association
to submit to the agency an acceptable plan to achieve compliance with the
standard, as required by the FDIA. The final regulations
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establish deadlines for the submission and review of such safety and soundness
compliance plans.
Qualified Thrift Lender Test. All savings associations are required to
meet a qualified thrift lender ("QTL") test set forth in Section 10(m) of the
HOLA and regulations of the OTS thereunder to avoid certain restrictions on
their operations. A savings institution that fails to become or remain a QTL
shall either become a national bank or be subject to the following
restrictions on its operations: (i) the association may not make any new
investment or engage in activities that would not be permissible for national
banks; (ii) the association may not establish any new branch office where a
national bank located in the savings institution's home state would not be
able to establish a branch office; (iii) the association shall be ineligible
to obtain new advances from any FHLB; and (iv) the payment of dividends by the
association shall be subject to the rules regarding the statutory and
regulatory dividend restrictions applicable to national banks. Also,
beginning three years after the date on which the savings institution ceases
to be a QTL, the savings institution would be prohibited from retaining any
investment or engaging in any activity not permissible for a national bank and
would be required to repay any outstanding advances to any FHLB. In addition,
within one year of the date on which a savings association controlled by a
company ceases to be a QTL, the company must register as a bank holding
company and become subject to the rules applicable to such companies.
A savings institution may requalify as a QTL if it thereafter complies with
the QTL test.
Currently, the QTL test requires that 65% of an institution's "portfolio
assets" (as defined) consist of certain housing and consumer-related assets on
a monthly average basis in nine out of every 12 months. Assets that qualify
without limit for inclusion as part of the 65% requirement are loans made to
purchase, refinance, construct, improve or repair domestic residential housing
and manufactured housing; home equity loans; mortgage-backed securities (where
the mortgages are secured by domestic residential housing or manufactured
housing); FHLB stock; and direct or indirect obligations of the FDIC. In
addition, the following assets, among others, may be included in meeting the
test subject to an overall limit of 20% of the savings institution's portfolio
assets: 50% of residential mortgage loans originated and sold within 90 days
of origination; 100% of consumer and educational loans (limited to 10% of
total portfolio assets); and stock issued by the FHLMC or Fannie Mae.
Portfolio assets consist of total assets minus the sum of (i) goodwill and
other intangible assets, (ii) property used by the savings institution to
conduct its business, and (iii) liquid assets up to 20% of the institution's
total assets. At March 31, 1996, the qualified thrift investments of the
Association were approximately 78% of its portfolio assets.
Capital Requirements. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in
order to comply with the capital requirements. The Corporation is not subject
to any minimum capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital
is defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion
of certain assets from
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capital and to account appropriately for the investments in and assets of both
includable and nonincludable subsidiaries. Institutions that fail to meet the
core capital requirement would be required to file with the OTS a capital plan
that details the steps they will take to reach compliance. In addition, the
OTS's prompt corrective action regulation provides that a savings institution
that has a leverage ratio of less than 4% (3% for institutions receiving the
highest CAMEL examination rating) will be deemed to be "undercapitalized" and
may be subject to certain restrictions. See "-- Federal Regulation of Savings
Associations -- Prompt Corrective Action."
As required by federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks. The OTS has proposed that only those savings associations
rated a composite one (the highest rating) under the CAMEL rating system for
savings associations will be permitted to operate at or near the regulatory
minimum leverage ratio of 3%. All other savings associations will be required
to maintain a minimum leverage ratio of 4% to 5%. The OTS will assess each
individual savings association through the supervisory process on a
case-by-case basis to determine the applicable requirement. No assurance can
be given as to the final form of any such regulation, the date of its
effectiveness or the requirement applicable to the Association.
Savings associations also must maintain "tangible capital" not less than
1.5% of the Association's adjusted total assets. "Tangible capital" is
defined, generally, as core capital minus any "intangible assets" other than
purchased mortgage servicing rights.
Each savings institution must maintain total risk-based capital equal to
at least 8% of risk-weighted assets. Total risk-based capital consists of the
sum of core and supplementary capital, provided that supplementary capital
cannot exceed core capital, as previously defined. Supplementary capital
includes (i) permanent capital instruments such as cumulative perpetual
preferred stock, perpetual subordinated debt and mandatory convertible
subordinated debt, (ii) maturing capital instruments such as subordinated
debt, intermediate-term preferred stock and mandatory convertible subordinated
debt, subject to an amortization schedule, and (iii) general valuation loan
and lease loss allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held
by a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities
that are backed by the full faith and credit of the U.S. Government to 100%
for repossessed assets or assets more than 90 days past due. Qualifying
residential mortgage loans (including multi-family mortgage loans) are
assigned a 50% risk weight. Consumer, commercial, home equity and residential
construction loans are assigned a 100% risk weight, as are nonqualifying
residential mortgage loans and that portion of land loans and nonresidential
construction loans that do not exceed an 80% loan-to-value ratio. The book
value of assets in each category is multiplied by the weighing factor (from 0%
to 100%) assigned to that category. These products are then totalled to
arrive at total risk-weighted assets. Off-balance sheet items are included in
risk-weighted assets by converting them to an approximate balance sheet
"credit equivalent amount" based on a conversion schedule. These credit
equivalent amounts are then assigned to risk categories in the same manner as
balance sheet assets and included risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
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portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of
the association's assets, as calculated in accordance with guidelines set
forth by the OTS. A savings association whose measured interest rate risk
exposure exceeds 2% must deduct an interest rate risk component in calculating
its total capital under the risk-based capital rule. The interest rate risk
component is an amount equal to one-half of the difference between the
institution's measured interest rate risk and 2%, multiplied by the estimated
economic value of the association's assets. That dollar amount is deducted
from an association's total capital in calculating compliance with its
risk-based capital requirement. Under the rule, there is a two quarter lag
between the reporting date of an institution's financial data and the
effective date for the new capital requirement based on that data. A savings
association with assets of less than $300 million and risk-based capital
ratios in excess of 12% is not subject to the interest rate risk component,
unless the OTS determines otherwise. The rule also provides that the Director
of the OTS may waive or defer an association's interest rate risk component on
a case-by-case basis. Under certain circumstances, a savings association may
request an adjustment to its interest rate risk component if it believes that
the OTS-calculated interest rate risk component overstates its interest rate
risk exposure. In addition, certain "well-capitalized" institutions may
obtain authorization to use their own interest rate risk model to calculate
their interest rate risk component in lieu of the OTS-calculated amount. The
OTS has postponed the date that the component will first be deducted from an
institution's total capital until savings associations become familiar with
the process for requesting an adjustment to its interest rate risk component.
At March 31, 1996, the Association's tangible capital totaled $6.3
million, or 10.4%, of adjusted total assets, which exceeded the minimum 1.50%
requirement by approximately $5.4 million. The Association's core capital at
March 31, 1996 totaled $6.3 million, or 10.4%, which was approximately $4.5
million above the minimum requirement of 3.0%. Finally, at March 31, 1996,
First Federal's risk- based capital at that date totaled $6.7 million, which
is $4.5 million above the
8.0% requirement.
Limitations On Capital Distributions. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require the Association to give the OTS
30 days' advance notice of any proposed declaration of dividends, and the OTS
has the authority under its supervisory powers to prohibit the payment of
dividends. The regulation utilizes a three-tiered approach which permits
various levels of distributions based primarily upon a savings association's
capital level.
A Tier 1 savings association has capital in excess of its fully
phased-in capital requirement (both before and after the proposed capital
distribution). Tier 1 savings association may make (without application but
upon prior notice to, and no objection made by, the OTS) capital distributions
during a calendar year up to 100% of its net income to date during the
calendar year plus one-half its surplus capital ratio (i.e., the amount of
capital in excess of its fully phased-in requirement) at the beginning of the
calendar year or the amount authorized for a Tier 2 association. Capital
distributions in excess of such amount require advance notice to the OTS. A
Tier 2 savings association has capital equal to or in excess of its minimum
capital requirement but below its fully phased-in capital requirement (both
before and after the proposed capital distribution). Such an association may
make (without application) capital distributions up to an amount equal to 75%
of its net income during the previous four quarters depending on how close the
association is to meeting its fully phased-in capital requirement. Capital
distributions exceeding this amount require prior OTS approval. Tier 3
associations are savings associations with
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capital below the minimum capital requirement (either before or after the
proposed capital distribution). Tier 3 associations may not make any capital
distributions without prior approval from the OTS.
The Association is currently meeting the criteria to be designated a
Tier 1 association and, consequently, could at its option (after prior notice
to, and no objection made by, the OTS) distribute up to 100% of its net income
during the calendar year plus 50% of its surplus capital ratio at the
beginning of the calendar year less any distributions previously paid during
the year.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans to one borrower.
Generally, this limit is 15% of the Association's unimpaired capital and
surplus, plus an additional 10% of unimpaired capital and surplus, if such
loan is secured by readily-marketable collateral, which is defined to include
certain financial instruments and bullion. The OTS by regulation has amended
the loans to one borrower rule to permit savings associations meeting certain
requirements, including capital requirements, to extend loans to one borrower
in additional amounts under circumstances limited essentially to loans to
develop or complete residential housing units.
Activities of Associations and Their Subsidiaries. When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the FDIC and the OTS 30 days in advance and provide
the information each agency may, by regulation, require. Savings associations
also must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
The OTS may determine that the continuation by a savings association of
its ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The
FDIC also may determine by regulation or order that any specific activity
poses a serious threat to the SAIF. If so, it may require that no SAIF member
engage in that activity directly.
Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B")
relative to transactions with affiliates in the same manner and to the same
extent as if the savings association were a Federal Reserve member bank. A
savings and loan holding company, its subsidiaries and any other company under
common control are considered affiliates of the subsidiary savings association
under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to
which the insured association or its subsidiaries may engage in certain
covered transactions with an affiliate to an amount equal to 10% of such
institution's capital and surplus and place an aggregate limit on all such
transactions with affiliates to an amount equal to 20% of such capital and
surplus, and (ii) require that all such transactions be on terms substantially
the same, or at least as favorable to the institution or subsidiary, as those
provided to a non-affiliate. The term "covered transaction" includes the
making of loans, the purchase of assets, the issuance of a guarantee and
similar types of transactions.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank
holding companies; (ii) a savings association may not purchase or invest in
securities issued by an affiliate (other than securities of a subsidiary); and
(iii) the OTS may, for reasons of safety and soundness, impose more stringent
restrictions on savings associations but may not exempt transactions from or
otherwise abridge
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Section 23A or 23B. Exemptions from Section 23A or 23B may be granted only by
the Federal Reserve Board, as is currently the case with respect to all
FDIC-insured banks. The Association has not been significantly affected by
the rules regarding transactions with affiliates.
The Association's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by such
persons, is currently governed by Sections 22(g) and 22(h) of the Federal
Reserve Act, and Regulation O thereunder. Among other things, these
regulations require that such loans be made on terms and conditions
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. Regulation O also places
individual and aggregate limits on the amount of loans the Association may
make to such persons based, in part, on the Association's capital position,
and requires certain board approval procedures to be followed. The OTS
regulations, with certain minor variances, apply Regulation O to savings
institutions.
FEDERAL AND STATE TAXATION
Federal Taxation
The following discussion summarizes certain Federal income tax
provisions applicable to the Association as a thrift institution and discusses
all material terms of the Federal tax law as it applies to the Association.
This summary is based on the Internal Revenue Code of 1986, as amended
("Code"), regulations, rulings and decisions currently in effect, all of which
are subject to change.
Thrift institutions are subject to the provisions of the Code in the
same general manner as other corporations. However, savings institutions,
such as First Federal, which meet QTL tests and certain other conditions
prescribed by the Code may benefit from certain favorable provisions regarding
their deductions from taxable income, for annual additions to their bad debt
reserve. For purposes of the bad debt reserve deduction, loans are separated
into "qualifying real property loans," which generally are loans secured by
interests in real property, and nonqualifying loans, which are all other
loans. The bad debt reserve deduction with respect to nonqualifying loans
must be based on actual loss experience. The amount of the bad debt reserve
deduction with respect to qualifying real property loans may be based upon
actual loss experience (the "experience method") or a percentage of taxable
income determined without regard to such deduction (the "percentage of taxable
income method").
First Federal, annually, has elected to use the method which results in
the greatest deduction for federal income tax purposes. Under the percentage
of taxable income method, the bad debt reserve deduction for qualifying real
property loans is computed as a percentage, which Congress has reduced from as
much as 40% in recent years to 8% of taxable income with certain adjustments
effective for taxable years beginning after 1986. The allowable deduction
under the percentage of taxable income method (the "percentage bad debt
deduction") for taxable years beginning before 1987 was scaled downward in the
event that less than 82% of the total dollar amount of the assets of an
association qualified within certain designated categories. When the
percentage of bad debt deduction was lowered to 8%, the 82% qualifying assets
requirement was lowered to 60%. For all taxable years, there is no percentage
bad debt deduction in the event that less than 60% of the total dollar amount
of the assets of an association falls within such categories. Moreover, in
such case, an association could be required to recapture, generally over a
period of up to four years, its existing bad debt reserve. As of March 31,
1996 more than the required amount of First Federal's total assets fell within
such categories.
The bad debt deduction under the percentage of taxable income method is
limited to the extent that (i) the amount accumulated in reserves for
qualifying real property loans may not exceed 6.0% of such loans outstanding
at the end of
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the taxable year, and (ii) such amount when added to the bad debt reserve for
losses on nonqualifying loans, equals the amount by which 12% of total
deposits or withdrawable accounts of depositors at year-end exceeds the sum of
surplus, undivided profits and reserves at the beginning of the year. It is
not expected that either limitation will restrict the Association from making
the maximum addition to its bad debt reserve. The percentage bad debt
deduction is reduced by the deduction for losses on nonqualifying loans.
The availability of the percentage of taxable income method has
historically permitted qualifying thrifts to be taxed at a significantly lower
maximum marginal federal income tax rate than that applicable to corporations
generally. The bad debt reserve deduction of up to 8.0% of taxable income,
together with the reduced maximum corporate income tax rate of 34.0% (40% in
1987), has resulted in a negligible change after 1987 in the maximum effective
rate of federal income tax payable by a qualifying thrift fully able to use
the percentage of taxable income method.
For taxable years beginning before 1987, in addition to the regular
income tax to which First Federal was subject, a minimum tax was imposed at a
rate of 15% of (i) tax preference items, including 59.8% (71.6% for years
beginning after 1982 and before 1985) of the excess of First Federal's bad
debt deduction over the allowable provision under the experience method, less
(ii) the greater of $10,000 or First Federal's regular tax liability, less
certain credits.
Under the Tax Reform Act of 1986, for taxable years beginning after
December 31, 1986, the existing corporate minimum tax has been replaced by a
new corporate alternative minimum tax which is imposed to the extent it
exceeds the corporation's regular income tax for the year. The alternative
minimum tax will be imposed at the rate of 20% of a specially computed tax
base. Included in this base will be a number of preference items, including
the following: (i) 100% of the excess of a thrift institution's bad debt
deduction over the amount that would have been allowable on the basis of
actual experience; (ii) interest on certain tax-exempt bonds issued after
August 7, 1986; and (iii) for years beginning in 1987, 1988 and 1989, an
amount equal to one-half of the amount by which a corporation's "book income"
(as defined in the Tax Reform Act) exceeds its taxable income, with certain
adjustments, including the addition of preference items (for taxable years
commencing after 1989, this preference item is replaced with a new preference
item relating to "adjusted current earnings", as specially computed). In
addition, for purposes of the new alternative minimum tax, the amount of
alternative minimum taxable income that may be offset by net operating losses
is limited to 90.0% of alternative minimum taxable income.
Earnings appropriated to First Federal's bad debt reserve and claimed as
a tax deduction will not be available for the payment of cash dividends or for
distribution to stockholders (including distributions made on dissolution or
liquidation), unless First Federal includes the amount in income with the
amount deemed necessary to pay the resulting federal income tax. As of March
31, 1996, First Federal had approximately $765,000 of accumulated earnings for
which federal income tax has not been provided. If such amount is used for
any purpose other than bad debt losses, including a dividend distribution or a
distribution in liquidation, it will be subject to federal income tax at the
then current rate.
First Federal has not been examined by any federal, state or local
taxing authority within the last ten years. The Association files its federal
and state income tax returns on a calendar year basis.
State Taxation
First Federal is subject to the Montana Corporation License Tax, which
is imposed under Montana law at the rate of 6.75% of Montana taxable income.
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Item 2. Properties
The Association's main office, which is owned, is located in Missoula,
Montana. The Association has two branch offices, one of which is located in
Missoula, Montana, which is leased, and the other of which is located in
Hamilton, Montana, which is owned. The lease on the Missoula branch expires
in 1998, although the Association has options to extend the term for four
five-year periods. The Corporation's net investment in its office, properties
and equipment totalled $1.3 million at March 31, 1996.
Item 3. Legal Proceedings
Periodically, there have been various claims and lawsuits involving the
Association, such as claims to enforce liens, condemnation proceedings on
properties in which the Association holds security interests, claims involving
the making and servicing of real property loans and other issues incident to
the Association's business. In the opinion of management and the
Association's legal counsel, no significant loss is expected from any of such
pending claims or lawsuits. Aside from such pending claims and lawsuits which
are incident to the conduct of the Association's ordinary business, the
Association is not a party to any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended March 31, 1996.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The information contained under the section captioned "Market Price of
the Corporation's Common Stock and Related Security Holder Matters" in the
Annual Report is incorporated herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
the Annual Report is incorporated herein by reference.
Item 7. Financial Statements
The financial statements contained in the Annual Report which are listed
under Item 14 herein, are incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The information contained under the section captioned "Proposal I -
Election of Directors" contained in the Proxy Statement, is incorporated
herein by reference.
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The following table sets forth information with respect to the executive
officers of the Association.
Name Age(a) Position
Michael E. McKee 51 President and Chief Executive Officer
Collette E. Maxwell 47 Executive Vice President
Ernest M. Kwiatkowski 45 Vice President, Treasurer and Secretary
(a) As of March 31, 1996.
Mr. McKee, Ms. Maxwell and Mr. Kwiatkowski each have held their
respective positions for at least five years.
Item 10. Executive Compensation
The information contained under the sections captioned "Director's
Compensation" and "Executive Compensation" under "Proposal I - Election of
Directors" 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" of the Proxy Statement.
(b) Security Ownership of Management
The information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and
Principal Holders Thereof."
(c) Changes in Control
The Corporation is not aware of any arrangements, including any
pledge by any person of securities of the Corporation, the
operation of which may at a subsequent date result in a change in
control of the Corporation.
The information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and Principal Holders
Thereof" of the Proxy Statement.
Item 12. Certain Relationships and Related Transactions
The information set forth under the section captioned "Proposal I -
Election of Directors - Certain Transactions with the Association" of the
Proxy Statement is incorporated herein by reference.
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PART IV
Item 13. Exhibits List, and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Incorporation of Big Sky Bancorp, Inc.
(incorporated by reference to Exhibit 3.1 to the
Corporation's Registration Statement on Form S-4 File No.
33-79018)
3.2 Bylaws of Big Sky Bancorp, Inc. (incorporated by reference
to Exhibit 3.2 to the Corporation's Registration Statement
on Form S-4 File No. 33-79018)
10.1 First Federal Savings and Loan Association of Montana 1992
Stock Option Plan (incorporated by reference from the
Registration Statement on Form 10 filed by the Association
with the OTS on May 15, 1992)
10.2 Employment Agreement between Michael E. McKee and First
Federal Savings and Loan Association of Montana
(incorporated by reference from the Registration Statement
on Form 10 filed by the Association with the OTS on May
15, 1992)
10.3 Employment Agreement between Collette E. Maxwell and First
Federal Savings and Loan Association of Montana
(incorporated by reference from the Registration Statement
on Form 10 filed by the Association with the OTS on May
15, 1992)
10.4 Employment Agreement between Ernest M. Kwiatkowski and
First Federal Savings and Loan Association of Montana
(incorporated by reference from the Registration Statement
on Form 10 filed by the Association with the OTS on May
15, 1992)
13 Big Sky Bancorp, Inc. 1996 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
(b) Reports on Form 8-K
No Forms 8-K were filed during the quarter ended March 31, 1996.
<PAGE>
<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, thereunto duly authorized.
BIG SKY BANCORP, INC.
Date: June 21, 1996 By: /s/ Michael E. McKee
_____________________
Michael E. McKee
President and Chief
Executive Officer
(Duly Authorized
Representative)
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
By: /s/ Michael E. McKee By: /s/ Collette E. Maxwell
_________________________ ___________________________
Michael E. McKee Collette E. Maxwell
President and Chief Executive Vice President
Executive Officer and Director
(Principal Executive (Principal Accounting
Officer) Officer)
Date: June 21, 1996 Date: June 21, 1996
By: /s/ Ernest M. Kwiatkowski By: /s/ Kurt F. Ingold
_________________________ ___________________________
Ernest M. Kwiatkowski Kurt F. Ingold
Vice President, Treasurer Director
and Secretary
(Principal Financial
Officer)
Date: June 21, 1996 Date: June 21, 1996
By: /s/ Thomas H. Boone By: /s/ Robert K. Ford
_________________________ ___________________________
Thomas H. Boone Robert K. Ford
Director Director
Date: June 21, 1996 Date: June 21, 1996
By: /s/ Douglas N. Klein
_________________________
Douglas N. Klein
Director
Date: June 21, 1996
<PAGE>
<PAGE>
EXHIBIT 13
Big Sky Bancorp, Inc.
1996 Annual Report to Stockholders
TABLE OF CONTENTS
-----------------
President's Message to Stockholders.....................1
Selected Financial and Other Data.....................2-3
Corporate Profile.......................................4
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................5-14
Independent Auditors' Report..........................F-1
Financial Statements...............................F-2-23
Notice of Annual Meeting...............................15
10-KSB Information.....................................15
Common Stock Information...............................15
Directors and Officers.................................16
Corporate Information..................................16
-----------------
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<PAGE>
TO OUR STOCKHOLDERS:
Your Company had the third highest year of profitability since it was
founded in 1911, surpassed only by the record earnings achieved in 1993
and 1994. In fact, the past five years (1992-1996) have been the most
profitable years in the 85 year history of the company.
1996 was another very interesting and challenging year. During the
year, our new Southside Missoula office at 2237 34th Street was
constructed, and opened for business in early November, 1995. The sale
of the former main office at 3600 Brooks Street in Missoula was
completed on October 2, 1995, which resulted in a pre-tax gain on sale
of $616,000.
As a result of the gain on sale and earnings, net income for 1996 was
$915,000. Earnings per share were $2.84 in 1996, as compared to
$1.80 per share in 1995 (See Note 1 "Summary of Significant Accounting
Policies - Net Income Per Share" of the consolidated financial
statements). Excluding the extra-ordinary gain from the sale of the
office building in 1996 and the gain on sale of investment and mortgage-
backed securities in 1995, core earnings were $538,000, or $1.67 per
share in 1996, as compared to $613,000, or $1.61 per share in 1995.
Although core earnings were lower in 1996 as compared to 1995, the
earnings per share were increased in 1996 due to the reduction in the
total number of shares outstanding as a result of the redemption of
dissenters' stock in connection with the formation of Big Sky Bancorp,
Inc., a holding company, during 1995 (See Note 11 "Stockholder
Redemption" of the consolidated financial statements).
Total stockholders' equity was 10.4% of total assets at year end, as
compared to 9.0% last year.
Return on average assets was 1.49%, and return on average equity was
14.62% in 1996. Return on beginning equity was 16.04%.
Net interest margin is a benchmark of a financial institution's earning
ability. The Company's net interest margin was reduced to 3.34% in
1996, as compared to 3.51% in 1995, primarily resulting from an increase
in the cost of funds during the year. Interest paid savers was
increased by $343,000, to $2,540,000 in 1996, as compared to
$2,197,000 in 1995.
In 1997 we expect that First Federal Savings and Loan Association of
Montana will be required to record the one-time assessment which all
financial institutions having deposits insured by the Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC") will be required to pay. Although this special
assessment will affect net income for the year in which it is paid, it
is anticipated that the assessment will result in the significant
reduction in deposit insurance premiums in the future as the SAIF
maintains reserves at the federally mandated reserve level.
We look forward with confidence to the challenges and opportunities
which lie ahead. Your continued support of our efforts is greatly
appreciated.
Sincerely,
Michael E. McKee
President
<PAGE>
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
The following tables set forth certain information concerning the financial
position and results of operations of the Association for the periods
indicated.
Year Ended March 31,
(Dollars in Thousands)
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
FINANCIAL CONDITION DATA
Total assets.......................$61,606 $61,585 $64,045 $60,127 $60,922
Loans receivable, net.............. 39,345 40,398 41,015 39,663 37,400
Mortgage-backed securities ........ 5,097 9,209 4,111 3,632 3,334
Cash, interest bearing deposits
and investment securities (1) .... 13,295 8,369 15,213 12,782 16,687
Deposits .......................... 58,333 55,145 56,507 52,324 52,843
Common stock ...................... -- 391 391 3 3
Capital surplus ................... -- 1,383 1,383 540 605
Unrealized appreciation on
securities available for sale..... -- -- 144 49 161
Retained earnings, substantially
restricted .......................$ 2,056 $ 3,345 $ 4,427 $ 5,112 $ 6,027
OPERATING DATA
Interest income ...................$ 5,356 $ 5,346 $ 4,934 $ 4,604 $ 4,673
Interest expense .................. 3,416 2,653 2,289 2,197 2,540
Net interest income ............... 1,940 2,693 2,645 2,407 2,133
Provision for loan losses ......... 74 70 42 42 43
Net interest income after
provision for loan losses ........ 1,866 2,623 2,603 2,365 2,090
Gain on sale of
investments ...................... -- 485 158 110 --
Gain on sale of
mortgage-backed securities ....... -- 75 116 8 --
Gain on sale of premises and
equipment ........................ -- -- -- -- 616
Non-interest income ............... 286 290 268 251 251
Non-interest expense .............. 1,300 1,371 1,471 1,572 1,461
Income before income tax provision. 852 2,102 1,674 1,162 1,496
Provision for income taxes......... (332) (813) (592) (477) (581)
NET INCOME ........................ $520 $1,289 $1,082 $685 $915
NET INCOME PER SHARE .............. -- $ 3.30 $ 2.66 $1.80 $2.84
(1) Includes interest-bearing deposits in other depository institutions.
<PAGE>
<PAGE>
Year Ended March 31,
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
OTHER DATA
Number of:
Total loans outstanding ......... 998 941 927 830 801
Deposit accounts ................ 7,355 6,821 6,585 6,121 5,904
Branch offices .................. 3 3 3 3 3
The table below sets forth certain performance ratios of the Association for
the periods indicated.
Year Ended March 31,
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
KEY OPERATING RATIOS
Return on assets (net income
divided by average assets) ..... .89% 2.05% 1.70% 1.10% 1.49%
Return on average equity (net income
divided by average equity) .... 28.96 28.00 18.89 11.01 14.62
Average equity to average assets 3.09 7.33 9.00 9.95 10.19
Interest rate spread (difference
between yield on interest-earning
assets and average cost of interest-
bearing liabilities) .......... 3.30 4.17 3.17 3.19 2.82
Net interest margin (net interest
income as a percentage of
interest-earning assets) ...... 3.27 4.53 3.54 3.51 3.34
Non-interest expense to total assets 2.11 2.23 2.30 2.61 2.40
Non-interest expense to ave. assets 2.24 2.18 2.31 2.51 2.38
Average interest-earning assets to
ave. interest-bearing liabilities 101.65 106.10 109.26 110.92 111.69
Allowance for loan losses to total
loans at end of period ........ .63 .81 .91 1.05 1.25
Net charge-offs (recoveries) to average
outstanding loans during the period .05 (.05) -- -- --
Ratio of nonperforming assets to
total assets .................. .08% .35% .57% .67% .06%
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<PAGE>
CORPORATE PROFILE
Big Sky Bancorp, Inc., ("Corporation" or "Company") was incorporated in the
State of Delaware on April 27, 1994, for the purpose of becoming a savings and
loan holding company for First Federal Savings and Loan Association of Montana
("First Federal" or "Association"). The reorganization was completed on
December 1, 1994, on which date the Association became the wholly-owned
subsidiary of the Corporation, and the stockholders of the Association became
stockholders of the Corporation. Prior to completion of the reorganization,
the Corporation had no material assets or liabilities and engaged in
no business activities. Subsequent to the acquisition of First Federal, the
Corporation has engaged in no significant activity other than holding the
stock of the Association. Accordingly, the information set forth in this
report, including financial statements and related data, relates primarily to
the Association.
First Federal was organized in 1911 in Missoula, Montana under the name
"Missoula Building and Loan Association". On May 21, 1992, the Association
converted to a federal stock savings and loan association and changed its name
to "First Federal Savings and Loan Association of Montana".
The Association conducts its business from two offices in Missoula, Montana,
the largest city in Western Montana, and one office in Hamilton, Montana. Its
primary market area consists of Missoula and Ravalli Counties, which have a
combined population of approximately 116,000. The Downtown Missoula office is
located in the historic Higgins building at the corner of Higgins Avenue and
Main Streets (200-210 North Higgins Avenue), and the Southside Missoula office
is located at 2237 34th Street. The Association's administrative office is
located at 711 South First Street in Hamilton, Montana.
The Association is a member of the Federal Home Loan Bank ("FHLB") System, and
its deposit accounts are insured to the maximum allowable amount by the
Federal Deposit Insurance Corporation ("FDIC") under the Savings Association
Insurance Fund ("SAIF").
At March 31, 1996, the Association had total assets of $60,922,000, total
deposits of $52,843,000, and total stockholders' equity of $6,796,000. At
that same date, the Association's ratio of tangible capital under generally
accepted accounting principles ("GAAP") to total assets was 10.4%.
The Association is primarily engaged in the business of attracting deposits
from the general public and using such deposits, together with other funding
sources, to originate or invest in residential and other mortgage loans and,
to a lesser extent, commercial real estate and consumer loans, for its
portfolio as well as for investments, and other assets. Because the
Association is primarily dependent on net interest margin (interest income
from loans and investments minus interest expense on deposit accounts and
borrowings) for earnings, the focus of the Association's planning has been to
devise and employ strategies that provide a stable, positive spread between
the yield on interest-earning assets and the cost of interest-bearing
liabilities in order to maximize the dollar amount of net interest income.
<PAGE>
<PAGE>
MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Asset and Liability Management
The Association has employed various strategies intended to minimize the
adverse effect of interest-rate risk on future operations by more closely
matching the repricing frequency of its assets and liabilities at a level
determined to be prudent by management. The Association's Asset/Liability
Management Policies generally seek to increase the interest rate sensitivity
of the Association's interest-earning assets by shortening their repricing
intervals and maturities, and to reduce the interest rate sensitivity of its
interest-bearing liabilities by increasing their repricing intervals and
maturities.
The Association's Asset/Liability Management Committee meets periodically to
review market conditions and implement strategies designed to manage the
balance between asset and liability interest rate sensitivity. These
strategies generally include restructuring the Association's balance sheet,
new product development and marketing. Because interest rate risk management
involves all areas of operation of the Association, the responsibilities of
the Asset/Liability Management Committee also include savings, checking and
loan product development, pricing and marketing, and supervision and
investment of liquid assets.
Pricing Policy
Liability pricing is established by senior management of the Association.
Treasury yield information, other relevant money market rate data, prior
period deposit activity and a survey of local deposit rates are reviewed
before the Association's rates are adjusted. Funding requirements for the
acquisition of assets are also considered in setting deposit rates and in
determining the mix of liabilities to be used to fund asset growth.
Interest Rate Sensitivity of Net Portfolio Value (NPV)
First Federal, like other financial institutions, is subject to interest rate
risk to the extent that its interest-bearing liabilities reprice on a
different basis than its interest-earning assets. The Office of Thrift
Supervision ("OTS") has incorporated an interest rate risk ("IRR") component
into its regulatory capital rule. Under the rule, savings associations with
"above normal" interest rate risk exposure would be subject to a deduction
from total capital for purposes of calculating their risk-based capital
requirements. The IRR component is a dollar amount that will be deducted from
total capital for the purpose of calculating an institution's risk-based
capital requirement, and is measured in terms of the sensitivity of its net
portfolio value ("NPV") to changes in interest rates. NPV is the difference
between incoming and outgoing discounted cash flows from assets, liabilities,
and off-balance sheet contracts. An institution's IRR is measured as the
change to its NPV as a result of a hypothetical 200 basis point change in
market interest rates. A savings association whose measured interest rate
risk exposure exceeds 2% must deduct from its capital 50% of that excess
change. The OTS has postponed the date that the component will first be
deducted from an
<PAGE>
<PAGE>
institution's total capital until savings associations become
familiar with the process for requesting an adjustment to its interest rate
risk component.
Savings institutions with less than $300 million in assets and risk-based
capital in excess of 12% are not subject to the interest rate risk component,
unless the OTS determines otherwise. The rule also provides that the Director
of the OTS may waive or defer an association's interest rate risk component on
a case-by-case basis.
The following table presents the Association's NPV at March 31, 1996, as
calculated by the OTS, based on information provided to the OTS by the
Association.
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE
Net Portfolio Value NPV as % of PV of Assets
Change in Interest
Rate in Basis
Points $ Amount $ Change % Change NPV Ratio Change
- --------------- -------- -------- -------- -------- ------
( Dollars in Thousands )
+400 bp 5,971 -3,440 -37 % 10.20 % -459 bp
+300 bp 6,921 -2,490 -26 % 11.56 % -323 bp
+200 bp 7,835 -1,576 -17 % 12.80 % -199 bp
+100 bp 8,757 - 655 - 7 % 14.00 % - 79 bp
0 bp 9,411 14.79 %
-100 bp 9,789 378 +4 % 15.19 % + 40 bp
-200 bp 9,846 435 +5 % 15.16 % + 37 bp
-300 bp 10,012 601 +6 % 15.27 % + 47 bp
-400 bp 10,387 976 +10 % 15.63 % + 84 bp
<PAGE>
<PAGE>
Yields Earned and Rates Paid
The earnings of the Association depend largely on the spread between the yield
on interest-earning assets (primarily loans and investments) and the cost of
interest-bearing liabilities (primarily deposit accounts and borrowings), as
well as the relative size of the Association's interest-earning assets and
interest-bearing liability portfolios.
Average total assets decreased $1,163,000, or 1.86%, to $61.42 million in 1996
from $62.58 million in 1995.
During the year ended March 31, 1996, the yield on average interest-earning
assets increased 29 basis points, as compared to the year ending March 31,
1995. The increase in yield on average interest-earning assets, however, was
negatively offset by a 77 basis point increase in the average cost of funds.
The average weighted balance on deposit accounts decreased by $1,589,000, or
2.93%, to $52.68 million in 1996 from $54.27 million in 1995. The
Association's interest rate spread (difference between yield on
interest-earning assets and average cost of interest-bearing liabilities)
decreased 48 basis points, to 3.12% in 1996 from 3.60% in 1995. The net
interest margin (net interest income as a percentage of average
interest-earning assets) decreased 37 basis points, to 3.63% in 1996 from
4.00% in 1995.
The average investment securities portfolio decreased $1,412,000 or 11.34%, to
$11.04 million in 1996 from $12.46 million in 1995.
Daily interest-bearing deposits and other earning assets increased $1.86
million, or 70.49%, to $4.51 million in 1996 from $2.64 million in 1995.
The following tables set forth, for the periods indicated, information
regarding average balances of assets and liabilities as well as the total
dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities, resultant yields,
interest rate spread, ratio of interest-earning assets to interest-bearing
liabilities and net interest margin. Average balances for a period have been
calculated using the average of month-end balances during such period. Such
average balances are considered to be representative of the average daily
balance for each period presented.
<PAGE>
<PAGE>
<TABLE>
AVERAGE CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AND ANALYSIS OF NET INTEREST SPREADS WERE AS FOLLOWS:
Year Ended March 31, At
1994 1995 1996 March 31
Interest Interest Interest 1996
Average and Yield/ Average and Yield/ Average and Yield/ Yield/
Balance Dividend Cost Balance Dividend Cost Balance Dividend Cost Cost
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets(1): ------- -------- ---- ------- -------- ---- ------- -------- ---- -----
(Dollars in thousands)
Loans............................$ 42,000 $ 3,875 9.23% $ 41,395 $ 3,563 8.61% $ 39,795 $ 3,535 8.88% 8.65%
Mortgage-backed securities....... 5,639 396 7.02 3,704 258 6.97 3,492 250 7.16 6.58
Investment securities............ 7,917 362 4.57 12,455 634 5.09 11,043 608 5.51 5.59
Daily interest-bearing deposits
and other earning assets........ 5,295 301 5.68 2,643 149 5.64 4,506 280 6.21 6.42
------ ----- ----- ------ ----- ----- ------ ----- ---- ----
Total interest-earning assets.... 60,851 4,934 8.11 60,197 4,604 7.65 58,836 4,673 7.94 7.68
Non interest-earning assets....... 2,782 2,384 2,582
------ ----- ----- ------ ------ ----- ------ ----- ---- ----
Total assets.....................$ 63,633 $ 62,581 $ 61,418
====== ====== ======
Interest-bearing liabilities:
Total deposits and other
interest-bearing liabilities....$ 55,692 $2,289 4.11% $ 54,269 $2,197 4.05% $ 52,680 $2,540 4.82% 4.86%
------ ----- ----- ------ ----- ----- ------ ----- ----- ----
Non interest-bearing
liabilities...................... 2,214 2,088 2,479
------ ------ ------
Total liabilities................ 57,906 56,357 55,159
------ ------ ------
Stockholders' equity
Common stock 391 262 3
Capital surplus 1,383 1,104 556
Retained earnings and unrealized gains
on available for sale securities 3,953 4,858 5,700
------ ------ ------
Total liabilities and
stockholders' equity............$ 63,633 $ 62,581 $ 61,418
====== ====== ======
Net interest income............... $ 2,645 $ 2,407 $ 2,133
===== ===== =====
Interest rate spread.............. 4.00% 3.60% 3.12% 2.82%
Net interest margin............... 4.35% 4.00% 3.63%
Ratio of average interest-earning
assets to average interest-
bearing liabilities.............. 109.26% 110.92% 111.69%
(1) Does not include interest on loans 90 days or more past due.
</TABLE>
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<TABLE>
<PAGE>
RATE/VOLUME ANALYSIS
- ------------------------------
1994 Compared to 1993 1995 Compared to 1994 1996 Compared to 1995
Increase (Decrease) Increase (Decrease) Increase (Decrease)
--------------------------- --------------------------- -------------------------
Rate/ Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net Rate Volume Volume Net
---- ------ ------ ---- ---- ------ ------ ---- ---- ------ ------ ----
(Dollars in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans(1)..................... $(344) 164 (15) (195) (260) (56) 4 (312) 112 (137) (4) (29)
Mortgage-backed securities..... (70) (183) 20 (233) (3) (136) 1 (138) 7 (14) (1) (8)
Investment securities........ (43) 15 (1) (29) 41 207 24 272 52 (72) (5) (25)
Daily interest-bearing
deposits and other earning
assets...................... (34) 90 (11) 45 (2) (151) 1 (152) 15 105 11 131
Total net change in income
on interest-earning assets... (491) 86 (7) (412) (224) (136) 30 (330) 186 (118) 1 69
Interest-bearing liabilities:
Total net change in expense
on interest-bearing
liabilities.................. $(333) $(35) $ 4 $(364) $(34) (59) $ 1 $ (92) (418) $ (64) (11) 343
Net change in net interest
income....................... $ (48) $ (238) $ (274)
(1) Does not include interest on loans 90 days or more past due.
</TABLE>
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<PAGE>
Liquidity
The Association's primary sources of funds are deposits, amortization and
prepayment of loan principal (including mortgage-backed securities) and, to a
lesser extent, maturities of investment securities, and short-term investments
and operations. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan repayments are more
influenced by interest rates, general economic conditions, and competition.
The Association attempts to price its deposits to meet its asset/liability
objectives discussed above, consistent with local market conditions. Excess
balances are invested in overnight funds. In addition, the Association is
eligible to borrow funds from the FHLB of Seattle. The Association is
required to maintain cash and certain investment securities in an amount equal
to 5% of its deposit accounts and short-term borrowings. The Association's
liquidity position at March 31, 1996 was 17.50%, as compared to 12.49% at
March 31, 1995.
Capital Resources
At March 31, 1996, the Association met all capital requirements of the Office
of Thrift Supervision ("OTS"). The Association exceeded the minimum capital
requirements for tangible, core and risk-based capital by $5.42 million, $4.50
million and $4.46 million, respectively. (See Note 13 of the Notes to
Financial Statements for further discussion of these capital requirements.)
RESULTS OF OPERATIONS
COMPARISON OF THE YEAR ENDED MARCH 31, 1996 TO THE YEAR ENDED MARCH 31, 1995
Net Income
Net income increased by $230,000, or 34%, to $915,000 in 1996 from $685,000 in
1995, primarily due to a $616,000 pre-tax gain on sale of the Association's
former Southside Missoula office building, and an increase in income from
Federal Home Loan Bank ("FHLB") dividends and other income.
The increase in net income was partially offset, however, by reductions in
income from loans receivable, loan fees and service charges, investment and
mortgage-backed securities, other income resulting from gains on sale of
investments, and rental income.
Interest expense increased by $343,000, or 15.61%, to $2,540,000 in 1996 from
$2,197,000 in 1995, as a result of higher interest rates paid on deposits
during the year. Total tax expense increased by $104,000, or 21.80%, to
$581,000 in 1996 as compared to $477,000 in 1995.
The increase in interest and tax expense was partially offset, however, by
reductions in expense for employee salary and benefits, occupancy, FDIC/SAIF
insurance, advertising and other expense.
<PAGE>
<PAGE>
Interest Income
Total interest income increased by $69,000, or 1.50%, to $4.67 million in 1996
from $4.60 million in 1995.
FHLB dividends and other income increased by $131,000, or 87.92%, to $280,000
in 1996, as compared to $149,000 in 1995.
Interest on loans receivable decreased by $28,000, or .79%, to $3,535,000 in
1996 from $3,563,000 in 1995, primarily as a result of a reduction of $1.6
million, or 3.86%, in average balances of loans receivable, to $39.8 million
in 1996, from $41.4 million in 1995.
Interest on mortgage-backed securities decreased by $8,000, or 3.10%, to
$250,000 in 1996 from $258,000 in 1995, primarily as a result of a $212,000,
or 5.73%, reduction in average balances of the mortgage-backed securities
portfolio, to $3.5 million in 1996 from $3.7 million in 1995.
Interest on investment securities decreased by $26,000, or 4.10%, to $608,000
in 1996 from $634,000 in 1995, primarily as a result of a $1.4 million, or
11.34%, reduction in average balances of the investment portfolio, to $11.0
million in 1996 from $12.4 million in 1995.
Other interest and dividends increased by $131,000, or 87.92%, to $280,000 in
1996 from $149,000 in 1995.
Interest expense increased by $343,000, or 15.61%, to $2.54 million in 1996
from $2.20 million in 1995, as a result of higher interest rates during the
year.
Loan Loss Reserves
The provision for loan losses increased slightly to $43,000 in 1996, as
compared to $42,000 in 1995.
The allowance for loan losses was increased by $43,000, or 10.14%, to $468,000
at March 31, 1996 from $424,000 at March 31, 1995. The allowance for loan
losses as a percentage of total loans increased to 1.25% at March 31, 1996
from 1.05% at March 31, 1995.
The allowance is based upon management's consideration of current and
anticipated economic conditions which may affect the ability of the borrowers
in the loan portfolio to repay the loans. Management also reviews individual
loans for which full collectibility may not be reasonably assured and
considers, among other matters, the estimated net realizable value of the
underlying collateral. The allowance for potential loan losses was continued
by management as a prudent risk-management strategy, as the Association has
historically maintained loan loss reserves at lower levels than many peer
group and other financial institutions.
Non-Interest Income
Non-interest income increased by $498,000, or 134.96%, to $867,000 in 1996
from $369,000 in 1995, primarily as a result of recognizing a
<PAGE>
<PAGE>
$616,000 gain on the sale of office premises and equipment in 1996. The
increase in non-interest income resulting from the sale of the office building
was partially offset by a reduction of $118,000 in gain on sale of investments
and mortgage-backed securities in 1996, as compared to 1995, as no gain on the
sale of investments and mortgage-backed securities was recognized in 1996.
Income from loan fees and service charges decreased $18,000, or 17.31%, to
$86,000 in 1996 from $104,000 in 1995.
Rental income decreased $25,000, or 17.86%, to $115,000 in 1996 from $140,000
in 1995, primarily as a result of the sale of the Association's Southside
Missoula office property and the loss of rental income generated by that
property.
Other non-interest income increased by $43,000, to $50,000 in 1996 from $7,000
in 1995, resulting from an accounting gain on sale of real estate owned as a
result of foreclosure, and the reversal of an accrual established in 1995 for
estimated appraisal costs connected with the dissenters' rights issue
resulting from the reorganization of the institution into the holding company
form of ownership.
Other Expense
Total other expense decreased by $111,000, or 7.06%, to $1.46 million in 1996
from $1.57 million in 1995. The decrease was primarily due to a $25,000, or
3.46%, decrease in salaries and employee benefits (including director fees), a
$22,000, or 9.40%, decrease in occupancy expense, a $4,000, or 2.70% decrease
in FDIC/SAIF insurance, a decrease of $3,000, or 5.45% advertising expense.
Other expense decreased by $62,000, or 19.75%, to $252,000 in 1996 from
$314,000 in 1995, primarily due to expenses related to the formation of a
holding company for the Association which were incurred in 1995.
Income Taxes
Income tax expense increased $104,000, or 21.80%, to $581,000 in 1996 from
$477,000 in 1995.
COMPARISON OF THE YEAR ENDED MARCH 31, 1995 TO THE YEAR ENDED MARCH 31, 1994
Net Income
Net income decreased by $397,000, or 37%, to $685,000 in 1995 from $1,082,000
in 1994, primarily because of decreases in interest income on loans and
investments and a reduction in the mortgage-backed securities portfolio,
decreases in other income resulting from gains on sale of investments and
mortgage-backed securities, decreases in income from FHLB dividends, decreases
in loan fees and service charges, and increased expense for salaries and
employee benefits and other expenses primarily connected with the formation of
a holding company for the Association, and an increase in FDIC insurance
premiums. The decrease in net income was partially offset by an
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<PAGE>
increase in rental income, a reduction in interest expense on deposits, a
reduction in occupancy expense and a reduction in income tax expense.
Interest Income
Total interest income decreased by $330,000, or 6.69%, to $4.60 million in
1995 from $4.93 million in 1994, primarily as a result of the impact of lower
yielding loans in the portfolio which had been originated during the preceding
year and reduced loan volume during the current year. Interest and fees on
loans receivable decreased by $312,000, or 8.05%, to $3.56 million in 1995
from $3.88 million in 1994.
Interest on mortgage-backed securities decreased by $138,000, or 34.85%, to
$258,000 in 1995 from $396,000 in 1994, primarily as a result of a $1.94
million, or 34.31%, reduction in average balances of the mortgage-backed
securities portfolio, to $3.70 million in 1995 from $5.64 million in 1994.
Interest on investment securities increased by $272,000, or 75.14%, to
$634,000 in 1995 from $362,000 in 1994. Other interest and dividends
decreased by $152,000, or 50.50%, to $149,000 in 1995 from $301,000 in 1994.
Interest expense decreased by $92,000, or 4.02%, to $2.20 million in 1995 from
$2.29 million in 1994, primarily as a result of a reduction in deposits during
the year.
Loan Loss Reserves
The provision for loan losses remained the same at $42,000 for each of the
years 1995 and 1994.
The allowance for loan losses was increased by $42,000, or 10.99%, to $424,000
at March 31, 1995 from $382,000 at March 31, 1994. The allowance for loan
losses as a percentage of total loans increased to 1.05% at March 31, 1995
from .91% at March 31, 1994.
The allowance is based upon management's consideration of current and
anticipated economic conditions which may affect the ability of the borrowers
in the loan portfolio to repay the loans. Management also reviews individual
loans for which full collectibility may not be reasonably assured and
considers, among other matters, the estimated net realizable value of the
underlying collateral. The allowance for potential loan losses was continued
by management as a prudent risk-management strategy, as the Association has
historically maintained loan loss reserves at lower levels than many peer
group and other financial institutions.
Non-Interest Income
Non-interest income decreased by $173,000, or 31.92%, to $369,000 in 1995 from
$542,000 in 1994, primarily as a result of recognizing a $118,000 gain on the
sale of investments and mortgage-backed securities in 1995 as compared to a
$274,000 gain on the sale of investments and mortgage-backed securities in
1994.
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Income from loan fees and service charges decreased $19,000, or 15.45%, to
$104,000 in 1995 from $123,000 in 1994.
Rental income increased $7,000, or 5.26%, to $140,000 in 1995 from $133,000 in
1994.
Other non-interest income decreased $5,000, or 41.67%, to $7,000 in 1995 from
$12,000 in 1994.
Other Expense
Total other expense increased by $101,000, or 6.87%, to $1.57 million in 1995
from $1.47 million in 1994. The increase was primarily due to a $61,000, or
9.21%, increase in salaries and employee benefits (including director fees)
and premiums for key man insurance policies, and a $65,000 increase in legal,
accounting and other expenses related to the formation of a holding company
for the Association. The increase in total other expense was partially offset
by a decrease in occupancy expense of $25,000, or 9.7%, to $234,000 in 1995
from $259,000 in 1994.
Income Taxes
Income tax expense decreased $115,000, or 19.43%, to $477,000 in 1995 from
$592,000 in 1994.
GENERAL
Effect of Inflation and Changing Prices
The financial statements and related financial data presented herein have been
prepared in accordance with GAAP which requires the measurement of financial
position and operating results in terms of historical dollars, without
considering the changes in relative purchasing power of money over time due to
inflation. The primary impact of inflation on operations of the Association
is reflected in increased operating costs. Unlike most industrial companies,
virtually all the assets and liabilities of a financial institution are
monetary in nature. As a result, interest rates generally have a more
significant impact on a financial institution's performance than do general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
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BIG SKY BANCORP, INC.
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
YEARS ENDED MARCH 31, 1996, AND INDEPENDENT
AUDITORS' REPORT
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<PAGE>
DELOITTE & TOUCHE LLP
INDEPENDENT AUDITORS' REPORT
Board of Directors
Big Sky Bancorp, Inc.
Hamilton, Montana
We have audited the accompanying consolidated statements of financial
condition of Big Sky Bancorp, Inc. (the "Company") and its subsidiary, First
Federal Savings and Loan Association of Montana (the "Association") as of
March 31, 1996 and 1995, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended March 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based upon 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Big Sky Bancorp, Inc. and
subsidiary as of March 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1996, in conformity with generally accepted accounting principles.
/s/Deloitte & Touche, LLP
- -------------------------
DELOITTE & TOUCHE, LLP
May 17, 1996
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BIG SKY BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 1996 AND 1995
Assets 1996 1995
Cash, including interest-bearing accounts of
$2,228,000 and $613,000 $ 3,058,000 $1,652,000
Investment securities available for sale, at
fair value, cost $182,000 and $176,000 396,000 296,000
Mortgage-backed securities available for sale,
at fair value, cost $2,600,000 and $2,876,000 2,649,000 2,835,000
Investment securities held to maturity, at
amortized cost, fair value $12,938,000 and
$10,016,000 13,233,000 10,834,000
Mortgage-backed securities held to maturity,
at amortized cost, fair value $714,000 and
$820,000 685,000 797,000
Loans receivable, net 37,400,000 39,663,000
Accrued interest receivable 322,000 322,000
Real estate owned -- 196,000
Federal Home Loan Bank stock, at cost 1,725,000 1,610,000
Premises and equipment 1,343,000 1,705,000
Prepaid expenses and other assets 111,000 217,000
Total $60,922,000 $60,127,000
Liabilities and Stockholders' Equity
Liabilities:
Deposits $52,843,000 $52,324,000
Advances from borrowers for taxes and insurance 550,000 557,000
Accrued expenses and other liabilities 155,000 222,000
Stockholder redemption accrual -- 865,000
Deferred taxes 578,000 455,000
Total liabilities 54,126,000 54,423,000
Stockholders' Equity:
Common stock, $.01 par value - amortized 1,500,000
shares; outstanding, 307,000 and 305,000 3,000 3,000
Capital surplus 605,000 540,000
Unrealized appreciation on securities available
for sale 161,000 49,000
Retailed earnings 6,027,000 5,112,000
Total stockholders' equity 6,796,000 5,704,000
Total $60,922,000 $60,127,000
See notes to consolidated financial statements.
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BIG SKY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
1996 1995 1994
--------- --------- ---------
Interest Income:
Loans receivable $3,535,000 $3,563,000 $3,875,000
Investment securities 608,000 634,000 362,000
Mortgage-backed securities 250,000 258,000 396,000
FHLB stock, dividends, and other 280,000 149,000 301,000
Total interest income 4,673,000 4,604,000 4,934,000
Interest Expense 2,540,000 2,197,000 2,289,000
Net interest income 2,133,000 2,407,000 2,645,000
Provision for Loan Losses (43,000) (42,000) (42,000)
Net interest income after provision
for loan losses 2,090,000 2,365,000 2,603,000
Other Income:
Gain on sale of premises and equipment 616,000 -- --
Rental income 115,000 140,000 133,000
Loan fees and service charges 86,000 104,000 123,000
Gain on sale of investments and mortgage
-backed securities -- 118,000 274,000
Other 50,000 7,000 12,000
Total other income 867,000 369,000 542,000
Other Expense:
Salaries and employee benefits 698,000 723,000 662,000
Occupancy 212,000 234,000 259,000
FDIC insurance 144,000 148,000 145,000
Outside services 103,000 98,000 101,000
Advertising 52,000 55,000 55,000
Other 252,000 314,000 249,000
Total other expense 1,461,000 1,572,000 1,471,000
Income Before Income Taxes 1,496,000 1,162,000 1,674,000
Income Tax Expense 581,000 477,000 592,000
Net Income 915,000 685,000 1,082,000
Net Income Per Share $ 2.84 $ 1.80 $ 2.66
See notes to consolidated financial statements.
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<TABLE>
BIG SKY BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1996, 1995, AND 1994
Unrealized
Appreciation
Common Stock on Securities
Capital Available Retained
Shares Amount Surplus For Sale Earnings Total
<S> <C> <C> <C> <C> <C> <C>
Balance, April 1, 1993 391,000 $391,000 $1,383,000 $ -- $3,345,000 $5,119,000
Net income -- -- -- -- 1,082,000 1,082,000
Unrealized appreciation on securities
available for sale, net of tax -- -- -- 144,000 -- 144,000
Balance, March 31, 1994 391,000 391,000 1,383,000 144,000 4,427,000 6,345,000
Restatement of common stock and
capital surplus par value from
$1 to $.01 -- (302,000) 302,000 -- -- --
Net income -- -- -- -- 685,000 685,000
Stockholder redemption (86,000) (86,000) (1,145,000) -- -- (1,231,000)
Unrealized depreciation on securities
available for sale, net of tax -- -- -- (95,000) -- (95,000)
Balance, March 31, 1995 305,000 3,000 540,000 49,000 5,112,000 5,704,000
Net income -- -- -- -- 915,000 915,000
Stock options exercised, 2,346 shares
issued at $5 per share 2,000 -- 20,000 -- -- 20,000
Unrealized appreciation on securities
available for sale, net of tax -- -- -- 112,000 -- 112,000
Adjustment of stockholder redemption
price from $14.38 to $13.63 per share -- -- 45,000 -- -- 45,000
Balance, March 31, 1996 307,000 $3,000 $605,000 $161,000 $6,027,000 $6,796,000
See notes to consolidated financial statements.
</TABLE>
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BIG SKY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1996, 1995, AND 1994
1996 1995 1994
Cash Flows From Operating Activities:
Net income $ 915,000 $ 685,000 $1,082,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 72,000 76,000 96,000
Provision for loan losses 43,000 42,000 42,000
Gain on sale of premises and
equipment (616,000) -- --
Gain on sale of real estate owned (27,000) -- --
Gain on sale of investments -- (110,000) (158,000)
Gain on sale of mortgage-backed
securities -- (8,000) (116,000)
Federal Home Loan Bank stock dividend (115,000) (96,000) (178,000)
Cash provided (used) by changes in
operating assets and liabilities:
Accrued interest receivable -- 6,000 38,000
Prepaid expenses and other assets 106,000 (85,000) (52,000)
Accrued expenses and other liabilities (67,000) 25,000 (17,000)
Deferred taxes 123,000 (15,000) (153,000)
Deferred loan fees, net 14,000 (17,000) 38,000
Other -- -- (8,000)
Net cash provided by operating
activities 448,000 503,000 614,000
Cash Flows From Investing Activities:
Principal repayments on loans 6,429,000 5,534,000 9,726,000
Loan originations (4,075,000)(4,365,000) (10,415,000)
Proceeds from sale of loans -- -- 59,000
Principal repayments on mortgage-
backed securities available for sale 282,000 315,000 1,322,000
Purchase of mortgage-backed
securities available for sale -- (476,000) (1,479,000)
Proceeds from sale of mortgage-
backed securities available
for sale -- 500,000 5,343,000
Principal repayments on mortgage-
backed securities held to maturity 115,000 77,000 68,000
Proceeds from maturity of
investment securities 4,350,000 5,090,000 10,957,000
Purchase of investment securities
held to maturity (6,749,000)(3,741,000) (18,408,000)
Purchase of investment securities
available for sale -- (99,000) --
Proceeds from sale of investment
securities available for sale -- 330,000 223,000
Purchase of premises and equipment (694,000) (49,000) --
Proceeds from sale of premises
and equipment 1,566,000 -- --
Proceeds from sale of real
estate owned 41,000 -- --
Other -- -- (61,000)
Net cash provided (used)
by investing activities 1,265,000 3,116,000 (2,665,000)
Cash Flows from Financing Activities:
Net increase (decrease) in deposit
accounts due on demand (1,977,000) (2,649,000) (100,000)
Net increase (decrease) in
certificates accounts 2,497,000 (1,534,000) 1,462,000
Net increase (decrease) in advances
from borrowers for taxes
and insurance (7,000) 31,000 (50,000)
Issuance of common stock, net of
related costs
Stockholder redemption (820,000) (366,000) --
Borrowings with the FHLB -- 1,525,000 --
Repayment on borrowings with the FHLB -- (1,525,000) --
Net cash provided (used)
by financing activities (307,000) (4,518,000) 1,312,000
Net increase (decrease) in cash 1,406,000 (899,000) (739,000)
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BIG SKY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1996, 1995, AND 1994
Net increase (decrease) in cash $ 1,406,000 $ (899,000) $(739,000)
Cash, beginning of year 1,652,000 2,551,000 3,290,000
Cash, end of year $ 3,058,000 $1,652,000 $2,551,000
Supplemental Schedule of Noncash
Investing and Financing Activities:
Loans arising from sale of real
estate owned $ 235,000 $ 89,000 $ --
Loans transferred to real
estate owned -- 196,000 --
Fair value adjustment to
investment and mortgage-backed
securities available for sale 263,000 80,000 235,000
Income tax effect related
to fair value adjustment (102,000) (31,000) (91,000)
Cash paid during the year for:
Interest 2,541,000 2,181,000 2,290,000
Income taxes 520,000 385,000 792,000
Stockholder redemption accrual -- 865,000 --
Adjustment of stockholder
redemption accrual (45,000) -- --
See notes to consolidated financial statements.
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BIG SKY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1996, 1995, AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reorganization - Big Sky Bancorp, Inc. (the "Company") was formed on
December 1, 1994 as the holding company for First Federal Savings and Loan
Association of Montana (the "Association") by exchange of outstanding
Association shares for Company shares. The Association provides banking and
limited non-banking services to its customers who are located principally in
western Montana.
Basis of Presentation - The consolidated financial statements include the
accounts of the Company and its subsidiary. The par value of common stock and
capital surplus of the Association have been restated to reflect the new par
value of the holding company form of organization which became effective
December 1, 1994. All significant intercompany transactions and balances have
been eliminated.
Use of Accounting Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash includes amounts on hand, due from banks and interest-bearing deposits
in other banks (excluding time certificates of deposit).
Interest Income on loans and investments is accrued as earned unless the
collectibility of the interest is in doubt, at which time the accrual of
interest ceases and a reserve for any nonrecoverable accrued interest is
established and charged against operations. Premiums or discounts on loans and
mortgage-backed securities purchased or sold are amortized or accreted on a
level-yield basis.
Deferred Loan Fees - Loan origination fee income, net of the direct costs
of underwriting, processing, and closing loans, is deferred and accreted to
interest income by the level-yield method over the life of the loan.
Sale of Loans - The Association sells certain loans or participating
interests in loans to generate servicing income and to provide funds for
additional lending. At March 31, 1996 and 1995, management had determined that
there were no loans in the Association's portfolio which were held for sale.
Under servicing agreements, the Association retains the servicing and
agrees to remit to the investor loan principal and interest at agreed-upon
rates. These rates generally differ from the loan's contractual interest rate
resulting in a yield differential. Income as a result of this yield
differential is deferred and recorded when received due to uncertainties in
the prepayment and discount assumptions used for the calculation of a yield
differential asset. The effect of deferring this income is not material to the
accompanying financial statements.
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Real Estate Owned ("REO") includes properties acquired through foreclosure
that are transferred into REO at the lower of cost or fair value which
represents the new recorded basis of the property. Subsequently, properties
are evaluated and any additional declines in value are provided for in the REO
reserve for losses. The amount the Association will ultimately recover from
REO may differ substantially from the amounts used in arriving at the net
carrying value of these assets because of future market factors beyond the
Association's control or because of changes in the Association's strategy for
the sale of the property.
Allowance for Loan Losses is maintained at a level sufficient to provide
for estimated loan losses based on evaluating known and inherent risks in the
loan portfolio. The allowance is provided based upon management's continuing
analysis of the pertinent factors underlying the quality of the loan
portfolio. These factors include changes in the size and composition of the
loan portfolio, actual loan loss experience, loan delinquency trends, current
and anticipated economic conditions, and detailed analysis of individual loans
and credits for which full collectibility may not be assured.
The detailed analysis includes techniques to estimate the fair value of
loan collateral and the existence of potential alternative sources of
repayment. The appropriate allowance level is estimated based upon factors
and trends identified by management at the time consolidated financial
statements are prepared.
Effective April 1, 1995, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for
Impairment of a Loan, issued in May 1993 and SFAS No. 118, an amendment of
SFAS No. 114 issued in October 1994. These statements require each impaired
loan within its scope to be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair value,
less expected costs of disposal, of the collateral if the loan is collateral
dependent. Adoption of these statements had no material effect on the
Association's results of operations or financial condition.
Investment Securities - The Association accounts for investment securities
in accordance with the provisions of SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. This statement requires debt and
equity securities to be segregated into the following three categories:
trading, held to maturity, and available for sale. The Association does not
engage in the trading of debt or equity securities.
Investments classified as held to maturity are accounted for at amortized
cost, but an institution must have both the positive intent and the ability
to hold such securities to maturity. There are very limited circumstances
under which securities in the held to maturity category can be sold without
jeopardizing the cost basis of accounting for the remainder of the securities
in this category. Recognition is provided for unrealized losses in the
investment portfolios if any market valuation differences are deemed to be
other than temporary.
Securities not classified as either trading or held to maturity are
considered to be available for sale. Gains and losses realized on the sale of
these securities are based on the specific identification method. Unrealized
gains and losses for available for sale securities are excluded from earnings
and reported as a net amount in a separate component of stockholders' equity
until realized. As of March 31, 1996, the net unrealized gain (on an
after-tax basis) of $161,000 associated with the available for sale securities
was included as a separate component of stockholders' equity.
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Premises and Equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed on the straight-line
method over the estimated useful lives as follows:
Buildings and improvements 15 - 39 years
Furniture and equipment 3 - 10 years
Net Income Per Share is based on net income and the weighted average number
of shares outstanding during the year, which were 305,882, 362,622, and
391,000, during the years ended March 31, 1996, 1995, and 1994.
The dilutive effect of outstanding stock options is included in earnings
per share.
Income Taxes - The Association accounts for income taxes in accordance with
the provisions of SFAS No. 109, Accounting for Income Taxes, which requires
the use of the liability method in accounting for income taxes and eliminates
on a prospective basis the former exemption from provision of deferred income
taxes related to thrift bad debt reserves.
Recently Issued Accounting Pronouncements - The Financial Accounting
Standards Board has recently issued several accounting pronouncements some of
which are described below. Adoption of these statements is not expected to
have a significant impact to the Company's results of operations or financial
position.
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of was issued in March 1995. This Statement
addresses the accounting for the impairment of long-lived assets, such as
premises, furniture and equipment, certain identifiable intangibles and
goodwill related to those assets. Long-lived assets and certain identifiable
intangibles are to be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss is recognized when the sum of the future cash
flows (undiscounted and without interest charges expected from the use of the
asset and its eventual disposition) is less than the carrying amount of the
asset. The Statement also requires that long-lived assets and identifiable
intangibles, except for assets of a discontinued operation held for disposal
to be accounted for at the lower of cost or fair value less cost to sell.
SFAS No. 122, Accounting for Mortgage Servicing Rights, an amendment to
SFAS No. 65, Accounting for Certain Mortgage Banking Activities, was issued
in May 1995. This Statement requires the recognition of a separate asset for
mortgage servicing rights regardless of how such rights are acquired.
Previously, only purchased servicing rights were capitalizable as an asset
whereas the cost of internally originated mortgage servicing rights was
expensed. This Statement also requires that mortgage servicing rights assets
be assessed for impairment based on fair value rather than an estimate of
future cash flows.
<PAGE>
<PAGE>
SFAS No. 123, Accounting for Stock-Based Compensation, was issued in
October 1995. This Statement prescribes accounting and reporting standards for
all stock-based compensation plans including employee stock options,
restricted stock, and stock appreciation rights. The Statement defines a "fair
value based method" of accounting for employee stock options and encourages
all entities to adopt that method of accounting for all of their employee
stock compensation plans. However, it also allows an entity to continue to
measure compensation for those plans using the "intrinsic value based method"
under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees (Opinion No. 25).
Under the fair value based method, compensation cost is measured at the
grant date of the option based on the value of the award and is recognized
over the service period, which is usually the vesting period. Under the
intrinsic value based method, compensation cost is the excess, if any, of the
quoted market price of the stock at the grant date or other measurement date
over the amount an employee must pay to acquire the stock. No compensation
cost is recognized for stock options that have no intrinsic value at the grant
date under this method. Compensation cost is recognized for other types of
stock-based compensation plans under Opinion No. 25, including plans with
variable, usually performance-based features.
SFAS No. 123 requires that an employer's financial statements include
certain disclosures about stock-based compensation arrangements regardless of
the method used to account for them. An employer that continues to apply the
accounting provisions of Opinion No. 25 will disclose pro forma amounts that
reflect the difference between compensation cost, if any, included in net
income and the related cost measured by the fair value based method, including
tax effects, that would have been recognized in the income statement if the
fair value based method had been used. The Company anticipates it will
continue to apply Opinion No. 25 in accounting for stock-based compensation
plans, with appropriate disclosures of pro forma amounts. SFAS 123 is
effective for the Company April 1, 1996.
2. INTEREST RATE RISK MANAGEMENT
Strategies used by the Association to minimize its exposure to interest
rate fluctuations include origination and purchase of adjustable-rate mortgage
loans and adjustable-rate mortgage-backed securities and the sale of
fixed-rate residential mortgage loan production, depending on management's
assessment of the need to retain such loans to maintain the portfolio during
periods of significant prepayment activity.
At March 31, 1996, the Association had interest-earning assets of
$59,104,000 having a weighted effective yield of 7.68%. Interest-bearing
liabilities totaled $52,843,000 with a weighted effective cost of 4.85%. At
March 31, 1996, interest-sensitive assets of $12,762,000 and
interest-sensitive liabilities of $39,614,000 mature or reprice within one
year.
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3. SECURITIES AVAILABLE FOR SALE
Securities available for sale classified by type and contractual maturity
date, consist of the following at March 31:
March 31, 1996
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Yield
Investment securities:
Equity securities:
Mutual Fund $ 118,000 $ -- $ 7,000 $ 111,000 5.24%
FHLMC stock 9,000 181,000 -- 190,000 31.92
Other 55,000 40,000 -- 95,000 2.78
182,000 221,000 7,000 396,000 6.98
Mortgage-backed securities:
U.S. Government and agency
obligations:
Due after five but within
ten years 715,000 34,000 -- 749,000 8.88
After ten years 1,395,000 20,000 -- 1,415,000 6.61
2,110,000 54,000 -- 2,164,000 7.38
Collateralized mortgage
obligations:
U.S. Government agency
obligations:
Due after ten years 490,000 -- 5,000 485,000 5.75
$2,782,000 $275,000 $12,000 $3,045,000 5.78%
March 31, 1995
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Yield
Investment securities:
Equity securities:
Mutual Fund $ 112,000 $ -- $ 9,000 $ 103,000 4.90%
FHLMC stock 9,000 125,000 -- 134,000 29.79
Other 55,000 4,000 -- 59,000 2.40
176,000 129,000 9,000 296,000 5.39
Mortgage-backed securities:
U.S. Government and agency
obligations:
Due after five but within
ten years 858,000 25,000 -- 883,000 8.34
After ten years 1,530,000 14,000 51,000 1,493,000 6.02
2,388,000 39,000 51,000 2,376,000 7.03
Collateralized mortgage
obligations:
U.S. Government agency
obligations:
Due after ten years 488,000 -- 29,000 459,000 5.75
$3,052,000 $168,000 $89,000 $3,131,000 6.73%
Expected maturities on mortgage-backed securities and collateralized
mortgage obligations will differ from contractual maturities because borrowers
may have the right to prepay obligations with or without prepayment penalties.
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At March 31, 1996 and 1995, accrued interest on investment securities was
$48,000 and $51,000, respectively. Accrued interest on mortgage-backed
securities was $24,000 and $26,000 at March 31, 1996 and 1995, respectively.
There were no sales of securities available for sale during the year
ended March 31, 1996. Proceeds from sale of investment securities available
for sale were $332,000 during the year ended March 31, 1995. Realized gains
and losses on those sales were $133,000 and $23,000, respectively. Proceeds
from sales of mortgage-backed securities available for sale were $500,000
during the year ended March 31, 1995. Realized gains on those sales were
$8,000.
4. SECURITIES HELD TO MATURITY
Securities held to maturity classified by type and contractual maturity
date consist of the following at March 31:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Yield*
Investment securities:
U.S. Government and agency
obligations:
Due within one year $ 250,000 $ -- $ 3,000 $ 247,000 4.52%
Due after one but
within five years 4,450,000 -- 99,000 4,351,000 4.97
Due after five but
within ten years 7,749,000 -- 186,000 7,563,000 6.01
Due after ten years 499,000 -- 3,000 496,000 7.13
12,948,000 -- 291,000 12,657,000 5.67
Certificates of deposit:
Due after one but
within five years 100,000 -- -- 100,000 5.20
Municipal obligations**:
Due after one but
within five years 185,000 -- 4,000 181,000 6.37
Mortgage-backed securities:
U.S. Government and agency
obligations:
Due after ten years 685,000 29,000 -- 714,000 7.14
$13,918,000 $29,000 $295,000 $13,652,000 5.76%
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Amortized Unrealized Unrealized Fair
1995 Cost Gains Losses Value Yield*
Investment securities:
U.S. Government and agency
obligations:
Due within one year $ 499,000 $ -- $ 1,000 $ 498,000 4.13%
Due after one but
within five years 3,500,000 -- 228,000 3,272,000 4.57
Due after five but
within ten years 5,450,000 -- 562,000 4,888,000 5.64
Due after ten years 1,000,000 -- 17,000 983,000 7.56
10,449,000 -- 808,000 9,641,000 5.39
Certificates of deposit:
Due within one year 100,000 -- -- 100,000 6.05
Due after one but
within five years 100,000 -- -- 100,000 5.20
200,000 -- -- 200,000 5.63
Municipal obligations**:
Due after five but
within ten years 185,000 -- 10,000 175,000 6.37
10,834,000 -- 818,000 10,016,000 5.42
Mortgage-backed securities:
U.S. Government and agency
obligations:
Due after ten years 797,000 23,000 -- 820,000 6.00
$11,631,000 $23,000 $818,000 $10,836,000 5.46%
*Weighted average yield at March 31.
**The yield was adjusted to reflect tax equivalent yields on nontaxable
investment income.
There were no sales of securities held to maturity during the year ended
March 31, 1996 or 1995. Expected maturities on mortgage-backed securities and
collateralized mortgage obligations will differ from contractual maturities
because borrowers may have the right to prepay obligations with or without
prepayment penalties.
5. LOANS RECEIVABLE
Loans consisted of the following at March 31:
1996 1995
Conventional $36,211,000 $38,688,000
FHA and VA 638,000 734,000
Consumer and other 1,358,000 1,074,000
38,207,000 40,496,000
Less:
Deferred loan fees, net 331,000 344,000
Allowance for loan losses 468,000 425,000
Undisbursed loans in process -- 55,000
Unearned discounts 8,000 9,000
807,000 833,000
Loans receivable, net $37,400,000 $39,663,000
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Loans by maturity or repricing date were as follows at March 31:
1996 1995
Adjustable rate loans:
Due within one year $ 9,505,000 $10,835,000
After one but within five years 631,000 995,000
After ten years -- 73,000
10,136,000 11,903,000
Fixed rate loans:
Due within one year 779,000 1,429,000
After one but within five years 1,271,000 1,098,000
After five but within ten years 4,664,000 3,992,000
After ten years 21,357,000 22,074,000
28,071,000 28,593,000
$38,207,000 $40,496,000
The Association serviced loans for others totaling $3,141,000 and
$3,854,000, as of March 31, 1996 and 1995, respectively. These loan balances
are not included in the statements of financial condition as they are not
assets of the Association.
At March 31, 1996, the Association had commitments outstanding to
originate fixed rate mortgage loans of $269,000 with interest rates ranging
from 7.875% to 8.375%. As of March 31, 1996, the Association was in compliance
with limitations on loans to one borrower.
At March 31, 1996 and 1995, accrued interest on loans were $236,000 and
$237,000, respectively.
Over 99% of the mortgage loans in the portfolio at March 31, 1996 and
1995, were secured by property located in western Montana.
Aggregate loans to officers and directors, all of which are current,
consist of the following for the years ended March 31:
1996 1995 1994
Beginning balance $905,000 $928,000 $730,000
Originations 30,000 -- 303,000
Principal repayments (212,000) (28,000) (105,000)
$723,000 $905,000 $928,000
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6. ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses is as follows
for the years ended March 31:
1996 1995 1994
Balance, beginning of period $425,000 $383,000 $341,000
Loans charged off -- -- --
Recoveries -- -- --
Net recoveries -- -- --
Provision for loan losses 43,000 42,000 42,000
Balance, end of period $468,000 $425,000 $383,000
7. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at March 31:
1996 1995
Buildings and improvements $1,470,000 $2,057,000
Furniture and equipment 764,000 683,000
2,234,000 2,740,000
Less accumulated depreciation 1,081,000 1,556,000
1,153,000 1,184,000
Land 190,000 482,000
Construction in progress -- 39,000
$1,343,000 $1,705,000
On October 2, 1996, the Association completed its agreement to sell its
south side Missoula office, including specified personal property, for
$1,600,000, which resulted in the recognition of a gain of $616,000 as
reported in the consolidated statements of income.
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8. DEPOSITS
Deposit accounts consisted of the following:
Average
Interest March 31, Interest March 31,
Account Type Rate 1996 Rates 1995
Checking accounts 2.21% $ 4,075,000 2.19% $ 4,304,000
Money market 2.76 1,041,000 2.80 1,321,000
Passbook accounts 3.14 9,990,000 3.00 11,459,000
Certificate accounts 5.64 37,737,000 5.23 35,240,000
$52,843,000 $52,324,000
Weighted average interest rate 4.85% 4.43%
Deposit accounts as of March 31, 1996, mature as follows:
Less than one year $39,614,000
One year to two years 5,732,000
Two years to three years 4,800,000
Three years to four years 1,300,000
Four years to five years 1,397,000
$52,843,000
Interest expense by deposit type for the years ended March 31 consisted
of the following:
1996 1995 1994
Checking and money market accounts $ 125,000 $ 141,000 $ 170,000
Savings and passbook accounts 337,000 369,000 410,000
Certificate accounts 2,059,000 1,647,000 1,709,000
2,521,000 2,157,000 2,289,000
Certificates of deposit in amounts of $100,000 or more totaled $3,656,000
and $2,833,000 at March 31, 1996 and 1995, respectively.
9. BORROWINGS WITH THE FEDERAL HOME LOAN BANK
Borrowings with the Federal Home Loan Bank ("FHLB") consist of FHLB
advances and short-term borrowings under the Cash Management Advance Program
(the "Program").
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FHLB advances are collateralized as provided for in the Advance, Pledge,
and Security Agreements with the FHLB, by FHLB stock owned by the Association,
deposits with the FHLB, and certain mortgages or deeds of trust securing such
properties as provided in the agreements with the FHLB. As a member of the
FHLB of Seattle, the Association currently has a credit line of 15% of the
total assets of the Association, subject to collateralization requirements.
There were no FHLB advances outstanding at March 31, 1996 or 1995.
Under the Program, which was granted on February 28, 1995, the
Association has been approved a facility of $3,095,000. Borrowings under the
facility are payable on demand or in one year. There was no outstanding
balance at March 31, 1996.
10. INCOME TAXES
Federal income tax laws permit qualifying associations to deduct a bad
debt deduction from taxable income. As a result of the bad debt deductions,
retained earnings at March 31, 1996 include accumulated earnings of
approximately $765,000 on which federal income taxes have not been provided.
If, in the future, such untaxed income is used for any purpose other than to
absorb bad debt losses, the Association will incur a tax liability at the then
prevailing corporate tax rates. The Association does not anticipate that the
statutory bad debt reserve will be used in any way which would result in the
payment of taxes.
The provision for income taxes consisted of the following for the years
ended March 31:
1996 1995 1994
Current $426,000 $492,000 $485,000
Deferred (benefit) provision 155,000 (15,000) 107,000
$581,000 $477,000 $592,000
Reconciliations between income taxes computed at statutory rates and
income taxes included in the statements of income were as follows for the
years ended March 31:
1996 1995 1994
Federal income taxes computed as
statutory rates $508,000 $402,000 $569,000
State taxes, net of federal income
tax benefit 70,000 56,000 78,000
Tax effect of recognition of loan
losses -- -- (50,000)
Other, net 3,000 19,000 (5,000)
Income tax expense included in the
statements of income $581,000 $477,000 $592,000
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The tax effect of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at March 31 are
presented below:
1996 1995
Deferred tax assets:
Loan loss reserve $ 181,000 $ 164,000
Deferred loan fees 129,000 129,000
Other 3,000 6,000
313,000 299,000
Deferred tax liabilities:
Accumulated depreciation (148,000) (148,000)
Unrealized appreciation on securities
available for sale (102,000) (31,000)
FHLB stock dividends (434,000) (389,000)
Tax qualified loan loss reserve (207,000) (163,000)
Other -- (23,000)
(891,000) (754,000)
Net deferred liabilities $(578,000) $(455,000)
There was no valuation allowance for deferred tax assets as of March 31,
1996 or 1995.
Taxes related to gains on sales of investments were zero, $45,000 and
$106,000 for the three years ended March 31, 1996.
11. STOCKHOLDER REDEMPTION
In conjunction with the formation of Big Sky Bancorp, Inc., a holding
company, effective December 1, 1994, holders of 85,602 common shares elected
to exercise their rights under the plan of reorganization to have their shares
repurchased by the Company. Management of the Company offered $14.375 per
share which was considered fair value by the Company's Board of Directors and
was accepted by holders of 25,400 shares. Payment was made on February 27,
1995. Holders of the remaining 60,202 shares did not accept the buyout price
and requested that an appraisal be performed by the Office of Thrift
Supervision (the "OTS") in accordance with the plan of reorganization. An
accrual for $865,000 representing $14.375 per share was made for the ultimate
redemption of the remaining shares.
During the year, the OTS selected Kaplan and Associates, Inc. of
Washington, D.C. to perform the appraisal review. On October 25, 1995, Kaplan
and Associates, Inc. completed the appraisal of the fair market value of the
Association's common stock as of December 1, 1994, the date of the Company's
reorganization, and determined the value to be $13.625 per share.
On December 19, 1995, the OTS issued a letter to the Company directing
management to pay $13.625 per share for the remaining 60,202 shares less
expenses associated with the valuation. In addition, management paid interest
at the Association's passbook rate for the period from December 1, 1994 though
December 28, 1995 on final payout value. The final net payment for the 60,202
shares was $831,000.
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12. PENSION PLAN
The Association has a noncontributory defined benefit retirement plan
(the "Plan") for substantially all employees as a participant in an
industrywide plan, the Financial Institutions Retirement Fund (the "Fund").
The Fund was fully funded for the Plan year beginning July 1, 1990,
resulting in the suspension of the Association's contributions for periods
subsequent to the Plan year ended June 30, 1991. Since the Association is a
member of the Fund, it is not practicable to determine the Association's
portion of net assets available for vested or nonvested benefits as of March
31, 1996 and 1995.
13. REGULATORY FINANCIAL INFORMATION
Under FIRREA, the Association must have (1) tangible capital equal to
1.5% of adjusted total assets, (2) core capital equal to 3% of adjusted total
assets, and (3) total capital equal to 8% of risk-weighted assets.
The Association had the following capital ratios calculated in accordance
with FIRREA's capital standards at March 31:
1996 1995
% of % of
Amount Assets Amount Assets
Tangible capital $6,328,000 10.4% $5,408,000 9.0%
Minimum requirements 913,000 1.5 902,000 1.5
Excess $5,415,000 8.9% $4,506,000 7.5%
Core capital $6,328,000 10.4% $5,408,000 9.0%
Minimum requirement 1,825,000 3.0 1,803,000 3.0
Excess $4,503,000 7.4% $3,605,000 6.0%
Risk-based capital $6,676,000 24.1% $5,758,000 20.6%
Minimum requirement 2,216,000 8.0 2,232,000 8.0
Excess $4,460,000 16.1% $3,526,000 12.6%
Regulatory risk-based capital is based on the Association's stockholders'
equity calculated in accordance with generally accepted accounting principles
("GAAP") adjusted for unrealized gains on available for sale securities and
the allowance for loan losses of $161,000 and $468,000 at March 31, 1996 and
1995, respectively.
During 1992, the Federal Deposit Insurance Corporation ("FDIC")
implemented new regulations that establish the amount of capital for each of
the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
established categories of institutions. Depending on the Association's FDICIA
category classification, the FDIC may restrict certain activities of the
Association including acceptance of brokered deposits or offering interest
rates on deposits that are significantly higher than prevailing interest
rates.
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The primary elements of the capital definitions are as follows:
Risk-
Based Tangible Core
FDICIA Category Capital Capital Capital
Well-capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized Below 8% Below 4% Below 4%
Significantly Below 6% Below 3% Below 3%
undercapitalized
Critically undercapitalized 2% or
less
At March 31, 1996, the Association met the well-capitalized requirements
as defined above.
At periodic intervals, the OTS and the FDIC routinely examine the
Association's financial statements as part of their legally prescribed
oversight of the savings and loan industry. Based on their examinations, the
regulators can direct that the Association's financial statements be adjusted
in accordance with their findings. No adjustments were proposed by regulatory
authorities which would affect the Association's financial statements as of
and for the year ended March 31, 1996 and management is not aware of any basis
for any such adjustments.
14. STOCKHOLDERS' EQUITY
Upon conversion from a federal mutual savings and loan association to a
federal capital stock savings and loan association, a liquidation account was
established in the amount of $1,774,000, which is equal to its net worth as of
September 30, 1991. The liquidation account will be maintained for the benefit
of eligible deposit account holders as of June 30, 1991, who continue to
maintain their deposit accounts in the Association after conversion. The
liquidation account will be reduced annually to the extent the eligible
deposit account holders have reduced their qualifying account. The interest
in the liquidation account would never be increased despite any increase in
the related deposit account after the conversion. Only in the event of a
complete liquidation, each eligible deposit account holder will be entitled to
receive a liquidation distribution from the liquidation account in the amount
of the then current adjusted subaccount balance before any liquidation
distribution may be made with respect to common stock.
At March 31, 1996, shares of common stock reserved for issuance to
directors, officers, and key employees under stock option plans totaled
39,100. Under the terms of the option agreement, the option price is the
market price of stock at the date the option is granted, the option period
cannot exceed ten years from the date granted, and options are exercisable
over the period stated in each option. The options are generally exercisable
immediately upon grant. Upon exercise, all options proceeds are credited to
the capital accounts. During the year ended March 31, 1993, options for
27,370 shares were granted at an exercise price of $5.00 per share. No
options were granted during the years ended March 31, 1996, 1995, or 1994.
During the year ended March 31, 1996, there were 2,346 stock options exercised
at $5 per share. No stock options were exercised during 1995 or 1994.
The Association may not declare or pay a cash dividend on or repurchase
any of its common stock if the effect thereof would cause its net worth to be
reduced below either the amount required for the liquidation account or the
regulatory capital requirements imposed by the OTS.
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15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures about Fair Value of Financial Instruments. The estimated fair
value amounts have been determined by the Association using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessary to interpret market data in the development of the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
The estimated fair value of financial instruments is as follows at March
31, 1996:
Carrying Fair
Assets Value Value
Cash $ 3,058,000 $ 3,058,000
Investment securities available for sale 182,000 396,000
Mortgage-backed securities available for sale 2,600,000 2,649,000
Investment securities held to maturity 13,233,000 12,938,000
Mortgage-backed securities held to maturity 685,000 714,000
Loans receivable, net 37,400,000 38,985,000
FHLB stock 1,725,000 1,725,000
Accrued interest receivable 322,000 322,000
Liabilities
Checking, money market, and passbook accounts 15,106,000 15,106,000
Certificate accounts 37,737,000 38,023,000
Accrued expenses and other liabilities 155,000 155,000
Advance payments by borrowers for taxes
and insurance 550,000 550,000
Fair value estimates, methods, and assumptions are set forth below.
Investments and Mortgage-Backed Securities - Fair values were based on
quoted market rates and dealer quotes.
Loans Receivable - Market prices were used to estimate the value of loans
with similar characteristics to securities within the Company's
mortgage-backed securities portfolio. Loans which did not have quoted market
prices were priced using the discounted cash flow method. The discount rate
used was the rate currently offered on similar products; risk adjusted for
credit concerns or dissimilar characteristics.
No adjustment was made to the interest rates for changes in credit of
performing loans for which there are no known credit concerns. Management
believes that the risk factor embedded in the interest rates, along with the
general reserves applicable to the loan portfolio for which there are no known
credit concerns, result in a fair valuation of such loans.
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<PAGE>
Deposits - The fair value of deposits with no stated maturity such as
noninterest-bearing demand deposits, savings, NOW accounts, and money market
and checking accounts is equal to the amount payable on demand. The fair
value of certificates of deposit was based on the discounted value of
contractual cash flows. The discount rate was estimated using rates available
in the local market.
Other - The carrying value of other financial instruments was determined
to be a reasonable estimate of their fair value.
Limitations - The fair value estimates presented herein were based on
pertinent information available to management as of March 31, 1996. Although
management was not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date and,
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
Fair value estimates were based on existing financial instruments without
attempting to estimate the value of anticipated future business. The fair
value has not been estimated for assets and liabilities that were not
considered financial instruments. Significant assets and liabilities that were
not financial instruments include deferred tax liabilities and premises and
equipment.
16. PARENT COMPANY ONLY FINANCIAL INFORMATION
Big Sky Bancorp, Inc. was formed on December 1, 1994. The following Big
Sky Bancorp, Inc. (parent company only) financial information should be read
in conjunction with the other notes to consolidated financial statements.
The statements of financial condition at March 31, 1996 and 1995 are as
follows:
1996 1995
Assets:
Cash $ 320,000 $ --
Investment in subsidiary 6,489,000 5,434,000
Other assets 8,000 1,135,000
Total $6,817,000 $6,569,000
Liabilities and Stockholders' Equity:
Liabilities:
Franchise tax accrual $ 3,000 $ --
Other liabilities 18,000 865,000
Stockholders' equity 6,796,000 5,704,000
Total $6,817,000 $6,569,000
On December 21, 1994, the Board of Directors of the Association declared
a $1,500,000 dividend payable to the Company.
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The statements of income for the year ended March 31, 1996 and the period
from December 1, 1994 (inception) to March 31, 1995 are as follows:
1996 1995
Other income:
Equity in undistributed income of subsidiary $921,000 $181,000
Interest income from investments 20,000 --
Other nonoperating income 8,000 --
Other expense:
Interest and other 34,000 22,000
Net income $915,000 $159,000
The statements of cash flows for the period from December 1, 1994
(inception) to March 31, 1995 and for the year ended March 31, 1996 are as
follows:
1996 1995
Operating activities:
Net income $ 915,000 $ 159,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed income of subsidiary (921,000) (181,000)
Dividends received 1,135,000 --
Cash provided (used) by changes in operating
assets and liabilities:
Other assets (8,000) --
Other liabilities 15,000 22,000
Franchise tax accrual 3,000 --
Net cash provided by operating activities 1,139,000 --
Financing activities:
Stockholder redemption (831,000) --
Stock options exercised 12,000 --
Net cash used in financing activities (819,000) --
Net increase in cash 320,000 --
Cash:
Beginning of period $ -- --
End of period $ 320,000 $ --
Supplemental disclosures related to the
statement of cash flows:
Noncash activities:
Accounts receivable due from subsidiary,
net $ -- 1,135,000
Stockholder redemption accrual -- 865,000
Adjustment of stockholder redemption
accrual 45,000 --
* * * * * *
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NOTICE OF ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 3600 Brooks Street in
Missoula, Montana, on Tuesday, July 23, 1996, at 10:00 A.M.
10-KSB INFORMATION
A copy of the Form 10-KSB as filed with the Securities and Exchange Commission
will be furnished to stockholders upon written request to the Secretary, Big
Sky Bancorp, Inc., 711 South First Street, P.O. Box 1160, Hamilton, Montana,
59840-1160.
COMMON STOCK INFORMATION
Big Sky Bancorp's voting stock is not regularly and actively traded in any
established market, and there are no regularly quoted bid and asked prices for
the registrant's voting stock. During the quarter ended March 31, 1996 the
stock was traded at prices ranging between $13.50 and $15.50. The last known
trade occurred on April 25, 1996 at $15.50. All information regarding the
price of the common stock has been provided to the Company from brokers that
serve as market makers for the common stock, and information obtained from
other publicly available sources. The Company believes that these limited
trades may not necessarily reflect the actual market value of the common
stock.
As of May 31, 1996 there were 314 stockholders of record as evidenced by the
number of stock certificates which have been issued, and 307,744 common shares
issued and outstanding.
DIVIDENDS
The Company's ability to pay dividends is dependent on the dividend payments
it receives from its subsidiary, First Federal Savings and Loan Association of
Montana, which are subject to regulations and the Association's continued
compliance with all regulatory capital requirements. See Note 14 of the Notes
to Consolidated Financial Statements for information regarding limitations of
the Association's ability to pay dividends to the Company. In order to retain
capital for operations and expansion, the Company does not expect to declare
cash dividends on the common stock in the near future.
<PAGE>
<PAGE>
BIG SKY BANCORP, INC.
AND
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF MONTANA
DIRECTORS
Kurt F. Ingold, CPA - Chairman of the Board
Ingold & Company, CPA'S, P.C.
Michael E. McKee - President/CEO
Big Sky Bancorp and First Federal Savings and Loan
Collette E. Maxwell - Executive Vice President/COO
Big Sky Bancorp and First Federal Savings and Loan
Thomas H. Boone - Law Partner
Boone, Karlberg and Haddon
Douglas N. Klein - Co-Owner
Collection Bureau Services
Robert K. Ford, CPA - Retired
Champion International Corporation
OFFICERS
Michael E. McKee Collette E. Maxwell
President Executive Vice President
Chief Executive Officer Chief Operating Officer
Ernest M. Kwiatkowski Richard D. Johns
Vice President-Treasurer Assistant Vice President
Corporate Secretary Property Valuation
Anna M. Vandehey
Assistant Vice President
Downtown Office Manager
CORPORATE INFORMATION
Corporate Offices General Counsel
711 South First Street Boone, Karlberg and Haddon
P.O. Box 1160 201 West Main, Suite 301
Hamilton, Montana 59840 Missoula, Montana 59802
Independent Auditors Special Securities Counsel
Deloitte & Touche LLP Breyer & Aguggia
111 S.W. Fifth Avenue 1300 I Street N.W., Suite 470
East
Portland, Oregon 97204 Washington, D.C. 20005
Transfer Agent
Big Sky Bancorp, Inc.
P.O. Box 1160
Hamilton, Montana 59840
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EXHIBIT 21
Subsidiaries of Registrant
Percentage Jurisdiction or
Subsidiaries (1) Owned State of Incorporation
First Federal Savings and 100% United States
Loan Association of
Montana
(1) The operations of the Corporation's subsidiaries are included in the
Corporation's consolidated financial statements.
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Exhibit 23
Consent of Deloitte & Touche LLP
Independent Auditor's Consent
We consent to the incorporation by reference in the Registration Statement of
Big Sky Bancorp, Inc. on Form S-8 (File No. 33-91248) of our report dated May
17, 1996, on the financial statements appearing in the Annual Report to
Stockholders of Big Sky Bancorp, Inc. for the year ended March 31, 1996
/s/ Deloitte & Touche LLP
- --------------------------
DELOITTE & TOUCHE LLP
PORTLAND, OREGON
June 28, 1996
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Exhibit 27
Financial Data Schedule (in thousands)
This schedule contains financial information extracted from the consolidated
financial statements of Big Sky Bancorp, Inc. for the year ended March 31,
1996 and is qualified in its entirety by reference to such financial
statements.
Financial Data
as of or for the year
Item Number ended March 31, 1996 Item Description
9-03 (1) 3,058 Cash and Due from Banks
9-03 (2) 2,228 Interest - bearing deposits
9-03 (3) -- Federal funds sold - purchased
securities for resale
9-03 (4) -- Trading account assets
9-03 (6) 3,045 Investment and mortgage backed
securities held to sale
9-03 (6) 13,918 Investment and mortgage backed
securities held to
maturity - carrying value
9-03 (6) 13,652 Investment and mortgage backed
securities held to
maturity - market value
9-03 (7) 37,400 Loans
9-03 (7)(2) 468 Allowance for loan losses
9-03 (11) 60,922 Total assets
9-03 (12) 52,843 Deposits
9-03 (13) -- Short - term borrowings
9-03 (15) 1,283 Other liabilities
9-03 (16) -- Long - term debt
9-03 (19) -- Preferred stock - mandatory
redemption
9-03 (20) -- Preferred stock - no mandatory
redemption
9-03 (21) 3 Common stocks
9-03 (22) 6,793 Other stockholders' equity
9-03 (23) 60,922 Total liabilities and
stockholders'
equity
9-04 (1) 3,535 Interest and fees on loans
9-04 (2) 858 Interest and dividends on
investments
9-04 (4) 280 Other interest income
9-04 (5) 4,673 Total interest income
9-04 (6) 2,540 Interest on deposits
9-04 (9) 2,540 Total interest expense
9-04 (10) 2,133 Net interest income
9-04 (11) 44 Provision for loan losses
9-04 (13)(h) -- Investment securities
gains/(losses)
9-04 (14) 1,461 Other expenses
9-04 (15) 1,496 Income/loss before income tax
9-04 (17) 1,496 Income/loss before
extraordinary items
9-04 (18) -- Extraordinary items, less tax
9-04 (19) -- Cumulative change in
accounting
principles
9-04 (20) 915 Net income or loss
9-04 (21) 2.84 Earnings per share - primary
9-04 (21) 2.84 Earnings per share - fully
diluted
I.B. 5 7.08 Net yield - interest earnings
- actual
III.C.1. (a) 35 Loans on non - accrual
III.C.1. (b) -- Accruing loans past due 90
days or more
III.C.2. (c) -- Troubled debt restructuring
III.C.2 35 Potential problem loans
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IV.A.1 424 Allowance for loan loss -
beginning of
period
IV.A.2 -- Total chargeoffs
IV.A.3 -- Total recoveries
IV.A.4 468 Allowance for loan loss - end
of period
IV.B.1 468 Loan loss allowance allocated
to
domestic loans
IV.B.2 -- Loan loss allowance allocated
to
foreign loans
IV.B.3 -- Loan loss allowance -
unallocated
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<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 3058
<INT-BEARING-DEPOSITS> 2228
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3045
<INVESTMENTS-CARRYING> 13918
<INVESTMENTS-MARKET> 13652
<LOANS> 37400
<ALLOWANCE> 468
<TOTAL-ASSETS> 60922
<DEPOSITS> 52843
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1283
<LONG-TERM> 0
0
0
<COMMON> 3
<OTHER-SE> 6793
<TOTAL-LIABILITIES-AND-EQUITY> 60922
<INTEREST-LOAN> 3535
<INTEREST-INVEST> 858
<INTEREST-OTHER> 280
<INTEREST-TOTAL> 4673
<INTEREST-DEPOSIT> 2540
<INTEREST-EXPENSE> 2540
<INTEREST-INCOME-NET> 2133
<LOAN-LOSSES> 44
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1461
<INCOME-PRETAX> 1496
<INCOME-PRE-EXTRAORDINARY> 1496
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 915
<EPS-PRIMARY> 2.84
<EPS-DILUTED> 2.84
<YIELD-ACTUAL> 7.08
<LOANS-NON> 35
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 35
<ALLOWANCE-OPEN> 424
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 468
<ALLOWANCE-DOMESTIC> 468
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
