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, 1997
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
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(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, 1997 were
approximately $4.8 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 June 12, 1997 at $19.75 per share.
As of June 23, 1997, there were issued and outstanding 308,721 shares of
the registrant's Common Stock. The aggregate value of the Common Stock
outstanding held by nonaffiliates of the registrant on June 23, 1997 was
$6,097,240 (308,721 shares at $19.75 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, 1997 (the "Annual Report") (Parts I and II).
2. Portions of registrant's Definitive Proxy Statement for the 1997
Annual Meeting of Stockholders (the "Proxy Statement") (Part III).
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Part I
Item 1. Business
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General
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Big Sky Bancorp, Inc. ("Big Sky" or the "Company") was incorporated in
the State of Delaware in 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"). The reorganization was completed on
December 1, 1994, on which date the Association became the wholly-owned
subsidiary of the Company, and the stockholders of the Association became
stockholders of the Company. Prior to completion of the reorganization, the
Company had no material assets or liabilities and engaged in no business
activities. Subsequent to the acquisition of First Federal, the Company 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 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").
The Company 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 Company
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 Company'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.
Market Area
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The Company 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 Company'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 Company'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).
Lending Activities
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General. The principal lending activity of the Company 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 Company also makes consumer and student loans.
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Loan Portfolio Analysis. The following table sets forth the composition
of the Company's loan portfolio by type of loan as of the dates indicated.
March 31,
---------------------------------------------------
1995 1996 1997
--------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
Mortgage Loans:
Residential(1):
Conventional . . . . . $35,597 89.73% $34,183 91.40% $32,327 91.54%
Federal Housing Ad-
ministration ("FHA")
and Veterans'
Administration
("VA"). . . . . . . . 734 1.85 638 1.71 540 1.53
Construction. . . . . . 148 0.37 -- -- 188 0.53
Commercial. . . . . . . 2,950 7.44 2,028 5.42 2,005 5.68
Total mortgage ------- ------ ------- ------ ------- ------
loans. . . . . . . . 39,429 99.39 36,849 98.53 35,060 99.28
------- ------ ------- ------ ------- ------
Consumer and
other loans . . . . . 1,073 2.70 1,358 3.63 1,145 3.24
------- ------ ------- ------ ------- ------
Total loans. . . . . . 40,502 102.09 38,207 102.16 36,205 102.52
------- ------ ------- ------ ------- ------
Less:
Undisbursed loans in
process. . . . . . . . 54 (0.13) -- -- 79 (0.22)
Unearned discounts. . . 9 (0.02) 8 (0.02) 8 (0.02)
Deferred loan
fees, net. . . . . . . 344 (0.87) 331 (0.89) 295 (0.84)
Allowance for loan
losses . . . . . . . . 425 (1.07) 468 (1.25) 508 (1.44)
Loans receivable, ------- ------ ------- ------ ------- ------
net. . . . . . . . . . $39,670 100.00% $37,400 100.00% $35,315 100.00%
======= ====== ======= ====== ======= ======
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(1) Includes construction loans converted to permanent loans.
Residential Loans. The Company's lending activities have concentrated
on the origination of residential mortgages, primarily for retention in the
Company's loan portfolio. At March 31, 1997, residential mortgages
constituted 92% of total loans. Virtually all residential mortgages are
collateralized by properties within the Company's market area.
The Company 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 mortgage loans and ARMs that can
be originated at any time is largely determined by the demand for each in a
competitive environment.
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The Company 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,
1997, the Company had $1.19 million of such loans outstanding.
Commercial Real Estate Loans. At March 31, 1997, the Company had
commercial real estate loans outstanding of $2.0 million. Loans
collateralized by commercial properties have been the most prominent type of
lending diversification exhibited by the Company, amounting to approximately
5.7% of total loans outstanding at March 31, 1997. Included in the portfolio
are loans collateralized by convenience stores, retail businesses, commercial
offices and mobile home parks. The Company's largest commercial real estate
loan, which had an outstanding balance of $320,000 at March 31, 1997, is
collateralized by an office building in downtown Missoula. The Company has
also invests in loans secured by multi-family residential properties with five
units or more. The largest multi-family real estate loan, which had an
outstanding balance of $552,000 at March 31, 1997, is collateralized by a 35
unit apartment complex.
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 Company generally limits itself to a real estate market or
to borrowers with which it has substantial experience. The Company
concentrates on originating commercial real estate loans secured by properties
located within its primary market area.
Construction Loans. The Company 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, 1997 the Company had two construction loans outstanding.
Consumer Loans. The Company 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 Company believes that offering consumer loans helps
to expand and create stronger ties to its customer base.
The Company offers a variety of secured consumer loans, including direct
automobile loans, home equity loans, home improvement loans, student loans and
loans secured by savings deposits. In addition, the Company offers unsecured
consumer loans. Consumer loans totaled $1.1 million, including $595,000 of
loans secured by subordinate liens on real property, at March 31, 1997.
The Company 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 Company
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.
The Company had no consumer loans delinquent at March 31, 1997.
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
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source of repayment for the outstanding loan and the remaining deficiency
often does not warrant further substantial collection 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 Company as the holder of the loan.
Loan Maturity and Repricing
The following table sets forth certain information at March 31, 1997
regarding the dollar amount of loans maturing in the Company'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. Loan balances do not include undisbursed loan
proceeds, unearned discounts, unearned income and allowance for loan losses.
After One After 5
Within Year Years Beyond
One Through Through 10
Year 5 Years 10 Years Years Total
---- ------- -------- ----- -----
(In thousands)
Mortgage loans:
Residential. . . . $7,442 $1,597 $2,847 $20,981 $32,867
Construction . . . 188 -- -- -- 188
Commercial . . . . 610 336 856 203 2,005
Consumer and other
loans. . . . . . . 339 469 229 108 1,145
------ ------ ------ ------- -------
Total loans . . . $8,579 $2,402 $3,932 $21,292 $36,205
====== ====== ====== ======= =======
The following table sets forth the dollar amount of all fixed-rate and
adjustable-rate loans in the Company's portfolio due after March 31, 1998.
Fixed Rate Adjustable Rate Total
---------- --------------- -----
(In thousands)
Mortgage loans:
Residential. . . . . . . . . $24,868 $557 $25,425
Construction . . . . . . . . -- -- --
Commercial . . . . . . . . . 1,395 -- 1,395
Consumer and other
loans. . . . . . . . . . . . 806 -- 806
------- ---- -------
Total loans . . . . . . . . $27,069 $557 $27,626
======= ==== =======
Mortgage Loan Solicitation and Processing. A majority of the loans
originated by the Company are made to existing customers of the Company. 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 an
independent appraiser approved by the Company. The mortgage loan documents
used by the Company generally conform to standards imposed by the Federal Home
Loan Mortgage Corporation ("Freddie Mac").
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The Senior Loan Committee of the Company, which consists of Michael E.
McKee, Collette E. Maxwell and Thomas H. Boone, is authorized to approve loans
up to $200,000. 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 Company's policy is to require borrowers to obtain certain types of
insurance to protect the Company's interest in the collateral securing the
loan. The Company requires a title insurance policy insuring that the Company
has a valid first lien on the mortgaged real estate. In addition, the Company
requires an opinion by an attorney regarding the validity of title. Fire and
casualty insurance is also required on collateral for loans. The Company
requires escrows for insurance unless waived by the Senior Loan Committee.
The Company'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 Company requires a borrower to obtain private
mortgage insurance if the ratio exceeds 90%.
Loan Sales. Most of the sales of loans by the Company in the recent
past have included loans originated under the Montana Board of Housing
program, FHA/VA loans and conventional loans sold to Freddie Mac. The Company
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.
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
Year Ended March 31,
--------------------------------
1995 1996 1997
---- ---- ----
(In thousands)
Total gross loans at
beginning of period. . . . . . . . . . . $41,961 $40,502 $38,207
Loans originated:
Single-family residential . . . . . . . . 2,779 3,947 4,612
Multi-family residential and
commercial real estate . . . . . . . . . 619 460 --
Construction. . . . . . . . . . . . . . . 538 62 534
Consumer and other. . . . . . . . . . . . 434 282 438
------- ------- -------
Total loans originated. . . . . . . . . 4,370 4,751 5,584
Loans purchased. . . . . . . . . . . . . . -- -- --
Loans sold . . . . . . . . . . . . . . . . -- -- --
Mortgage loan principal repayments . . . . 5,534 6,429 7,547
Net loan activity. . . . . . . . . . . . . (295) (617) (39)
------- ------- -------
Total gross loans at end of period . . . . $40,502 $38,207 $36,205
======= ======= =======
Loan Commitments. The Company 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
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of transaction. At March 31, 1997, the Company had outstanding net loan
commitments to originate fixed rate mortgage loans and adjustable rate
mortgage loans of approximately $80,000 and $0, respectively. See Note 5 of
Notes to Financial Statements.
Loan Origination and Other Fees. The Company, 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 Company 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.
Current accounting standards require points and fees received (net of certain
loan origination costs) for originating loans to be deferred and amortized
into interest income over the contractual life of the loan. Net deferred fees
or costs associated with loans that are prepaid or sold are recognized as
income at the time of prepayment or sale. The Company had $295,000 of net
deferred mortgage loan fees at March 31, 1997.
Delinquencies. The Company'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 Company. If a loan
continues in a delinquent status for 90 days or more, the Company 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.
The following table sets forth information with respect to the Company's
nonperforming assets for the periods indicated. During the periods shown, the
Company had no restructured loans in which the terms of restructure require
disclosure under Statement of Financial Accounting Standards No. 15.
March 31,
--------------------
1995 1996 1997
---- ---- ----
(Dollars in thousands)
Loans accounted for on
a nonaccrual basis:
Real estate -
Residential. . . . . . . . . . $127 $35 --
Consumer. . . . . . . . . . . . -- -- --
---- --- --
Total . . . . . . . . . . . 127 35 0
Accruing loans which are
contractually past due
90 days or more:
Real estate -
Residential. . . . . . . . . . -- -- 38
Consumer. . . . . . . . . . . . -- -- --
---- --- --
Total . . . . . . . . . . . -- -- 38
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March 31,
--------------------
1995 1996 1997
---- ---- ----
(Dollars in thousands)
Total of nonaccrual and 90
days past due loans. . . . . . 127 35 38
Real estate owned. . . . . . . . 196 -- --
Total nonperforming ---- --- --
assets . . . . . . . . . . $323 $35 38
==== === ==
Total nonaccrual loans
delinquent 90 days or
more to net loans. . . . . . . .32% .09% --
Total loans delinquent 90
days or more to total
assets . . . . . . . . . . . . .21% .06% .06%
Total nonperforming assets
to total assets. . . . . . . . .54% .06% .06%
Interest income that would have been recorded for the year ended March
31, 1997 had nonaccruing loans been current in accordance with their original
terms amounted to $0. The amount of interest income on such loans included in
net income for the year ended March 31, 1997 amounted to $0.
Asset Classification. The OTS has adopted various regulations regarding
problem assets of savings institutions. 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 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 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 as
loss is considered uncollectible and of such little value that continuance as
an asset of the institution is not warranted. If an asset or portion thereof
is classified as loss, the insured institution establishes specific allowances
for loan losses for the full amount of the portion of the asset classified as
loss. All or a portion of general loan 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. Assets that do not currently expose the insured institution to
sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are classified as special mention and
monitored by the Company.
At March 31, 1997, the Company had no loans classified as loss, doubtful
or substandard and had two residential mortgage loans totalling $57,000
classified as special mention.
Real Estate Owned. Real estate acquired by the Company 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
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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, 1997, the Company did not hold any real estate owned as a result of
foreclosure.
Allowance for Loan Losses. The Company'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, 1997 the Company had
an allowance for loan losses of $508,000 which represented 1.4% of total
loans. The increase in the provision for potential loan losses was
implemented by management as a prudent risk-management strategy, as the
Company 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
Company believes that its loan loss reserve as a percentage of total loans at
March 31, 1997 is comparable with similar institutions in its market area.
While the Company believes it has established its existing allowance for
loan losses in accordance with GAAP there can be no assurance that regulators,
in reviewing the Company's loan portfolio, will not request the Company to
significantly increase its allowance for loan losses, therefore negatively
affecting the Company's financial condition and earnings.
Loan Loss Allowance Analysis
The following table sets forth an analysis of the Company's gross
allowance for 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.
Year Ended March 31,
-----------------------
1995 1996 1997
---- ---- ----
(Dollars in thousands)
Allowance at beginning of period . . . . . . . . . $382 $424 $468
Provision for loan losses. . . . . . . . . . . . . 42 44 41
---- ---- ----
Total. . . . . . . . . . . . . . . . . . . . . . 424 468 509
---- ---- ----
Recoveries:
Residential real estate . . . . . . . . . . . . . -- -- --
Consumer. . . . . . . . . . . . . . . . . . . . . -- -- (2)
---- ---- ----
Total recoveries . . . . . . . . . . . . . . . . -- -- (2)
---- ---- ----
Charge-offs:
Residential real estate . . . . . . . . . . . . . -- -- --
Consumer. . . . . . . . . . . . . . . . . . . . . -- -- 1
---- ---- ----
Total charge-offs. . . . . . . . . . . . . . . -- -- 1
---- ---- ----
Net charge-offs (recoveries) . . . . . . . . . . -- -- (1)
---- ---- ----
Balance at end of period . . . . . . . . . . . . $424 $468 $508
==== ==== ====
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Ratio of allowance to total loans
outstanding at the end of the period. . . . . . . 1.05% 1.25% 1.44%
Ratio of net charge-offs (recoveries)
to average loans outstanding
during the period . . . . . . . . . . . . . . . . -- -- --
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,
-----------------------------------------------------
1995 1996 1997
--------------- ----------------- ----------------
% of % of % of
Loans in Loans in Loans in
Category Category Category
to Out- to Out- to Out-
standing standing standing
Total Total Total
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Mortgage loans:
Residential . . . . . $370 89.70% $406 91.14% $442 91.30%
Consumer . . . . . . . 55 .97 62 3.55 66 3.16
---- ---- ----
Total allowance
for loan losses . . $425 -- $468 -- $508 --
==== ==== ====
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 Company 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 Company's investment manager, is responsible
for executing investment strategy as established by the Committee. The
Company'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 Company's investment portfolio in order to enable the
Company to match more closely the interest-rate sensitivities of its assets
and liabilities.
Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," requires
that investments
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be categorized as "held to maturity," "trading securities" or "available for
sale," based on management's intent as to the ultimate disposition of each
security. SFAS No. 115 allows debt securities to be classified as "held to
maturity" and reported in financial statements at amortized cost only if the
reporting entity has the positive intent and ability to hold those securities
to maturity. Securities that might be sold in response to changes in market
interest rates, changes in the security's prepayment risk, increases in loan
demand, or other similar factors cannot be classified as "held to maturity."
Debt and equity securities held for current resale are classified as "trading
securities." Such securities are reported at fair value, and unrealized gains
and losses on such securities would be included in earnings. Debt and equity
securities not classified as either "held to maturity" or "trading securities"
are classified as "available for sale." Such securities are reported at fair
value, and unrealized gains and losses on such securities are excluded from
earnings and reported as a net amount in a separate component of equity.
The following table sets forth the Company's investment securities
portfolio at carrying value at the dates indicated.
March 31,
--------------------------------------------------------
1995 1996 1997
----------------- ------------------ ------------------
Percent Percent Percent
Carrying of Carrying of Carrying of
Value Portfolio Value Portfolio Value Portfolio
----- --------- ----- --------- ----- ---------
(Dollars in thousands)
Available for sale:
Marketable equity
securities. . . . . $ 296 2.01% $ 396 2.33% $359 1.66%
Mortgage-backed
securities. . . . . 2,376 16.10 2,164 12.76 1,856 8.58
Collateralized
mortgage obliga-
tions ("CMOS"). . . 459 3.11 485 2.86 5,564 25.73
Total ------- ------ ------- ------ ------- ------
available
for sale . . . . 3,131 21.22 3,045 17.95 7,779 35.97
------- ------ ------- ------ ------- ------
Held to maturity:
U.S. Government
and agency
obligations . . . . 10,449 70.78 12,948 76.33 12,698 58.71
Certificates of
deposit . . . . . . 200 1.35 100 0.59 290 1.34
Municipal
obligations . . . . 185 1.25 185 1.09 285 1.32
Mortgage-backed
securities. . . . . 797 5.40 685 4.04 575 2.66
Total held to ------- ------ ------- ------ ------- ------
maturity . . . . 11,631 78.78 13,918 82.05 13,848 64.03
------- ------ ------- ------ ------- ------
Total . . . . . . $14,762 100.00% $16,963 100.00% $21,627 100.00%
======= ====== ======= ====== ======= ======
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The following table sets forth the maturities and weighted average
yields of the debt securities in the Company's investment securities portfolio
at March 31, 1997.
Over Over
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)
Available for sale:
Marketable equity
securities. . . . . $ -- --% $ -- --% $ -- --% $ 359 7.57%
Mortgage-backed
securities. . . . . -- -- 385 8.69 199 9.25 1,272 7.17
Collateralized
mortgage obliga-
tions ("CMOS"). . . -- -- 484 5.75 -- -- 5,080 6.60
Held to maturity:
U.S. Government
and agency
obligations . . . . 1,000 4.32 5,949 6.25 5,500 5.87 249 7.25
Certificates of
deposit . . . . . . 100 5.20 190 9.00 -- -- -- --
Municipal
obligations . . . . -- -- 185 6.37 100 7.68 -- --
Mortgage-backed
securities. . . . . -- -- -- -- -- -- 575 7.76
------ ---- ------ ---- ------ ---- ------ ----
Total . . . . . .$1,100 4.40% $7,193 6.42% $5,799 6.02% $7,535 6.85%
====== ==== ====== ==== ====== ==== ====== ====
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major source of the
Company'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 Company'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 Company considers the rates offered by its competitors,
profitability to the Company, matching deposit and loan products and its
customer preferences and concerns. The Company generally reviews its deposit
mix and pricing weekly.
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Deposit Balances. The following table sets forth information concerning
the Company's time deposits and other interest-bearing deposits at March 31,
1997.
Percentage
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
- ---- ---- -------- ------ ------- --------
(Dollars in thousands, except for minimum amounts)
2.10% None NOW Accounts $ 25 4,491 8.97
2.99 None Regular Savings 10 9,540 19.05
2.07 None Money Market Accounts 2,500 880 1.76
Certificates of Deposit
4.35 90 days Fixed term, fixed rate 2,500 295 0.59
4.75 4-6 months Fixed term, fixed rate 2,500 3,767 7.52
5.39 7-12 months Fixed term, fixed rate 100 15,732 31.42
5.77 13-24 months Fixed term, fixed rate 100 3,210 6.41
5.75 25-48 months Fixed term, fixed rate 100 1,934 3.86
6.00 49-120 months Fixed term, fixed rate 100 10,223 20.42
------- ------
$50,072 100.00%
======= ======
Jumbo certificates of deposit require minimum deposits of $100,000 and
rates paid on such accounts are negotiable. At March 31, 1997, the Company
did not have any jumbo certificates of deposit.
Deposit Flow. The following table sets forth the balances of savings
deposits in the various types of savings accounts offered by the Company at
the dates indicated.
March 31,
---------------------------------------------------------------
1995 1996 1997
-------------- ----------------------- ------------------------
Percent Percent Percent
of of Increase of Increase
Amount Total Amount Total (Decrease) Amount Total (Decrease)
------ ----- ------ ----- ---------- ------ ----- ----------
(Dollars in thousands)
NOW checking . $ 862 1.65% $ 674 1.28% $ (188) $1,020 2.04% 346
Super NOW
checking 3,442 6.58 3,401 6.43 (41) 3,471 6.93 70
Regular savings
accounts. . . 11,459 21.90 9,990 18.90 (1,469) 9,540 19.05 (450)
Money market
deposit . . . 1,321 2.52 1,041 1.97 (280) 880 1.76 (161)
Fixed-rate
certificates
which mature
in:
1-12 months 19,307 36.90 21,389 40.48 2,082 19,794 39.53 (1,595)
13-24 months 3,660 6.99 3,349 6.34 (311) 3,210 6.41 (139)
25-36 months 2,878 5.50 2,807 5.31 (71) 1,934 3.86 (873)
Certificates
maturing
there-
after . . . 9,395 17.96 10,192 19.29 797 10,223 20.42 31
------- ------ ------- ------ ------ ------- ------ -------
Total. . . $52,324 100.00% $52,843 100.00% $ 519 $50,072 100.00% $(2,771)
======= ====== ======= ====== ====== ======= ====== =======
NOTE: Individual retirement accounts ("IRA") are included in certificate
balances: Amounts are $3.53 million, $3.62 million and $3.63 million
for March 31, 1995, 1996 and 1997, respectively.
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Time Deposits by Rates. The following table sets forth the dollar
amount of deposits in the various types of deposit programs offered by the
Company for the periods indicated.
At March 31,
------------------------------
1995 1996 1997
---- ---- ----
(In thousands)
2.76 - 3.75%. . . . . . $ 6,441 $ -- $ --
3.76 - 4.00%. . . . . . 462 668 --
4.01 - 5.00%. . . . . . 9,283 6,589 4,785
5.01 - 6.00%. . . . . . 6,847 17,121 24,025
6.01 - 7.00%. . . . . . 11,342 13,271 6,351
7.01 - 8.00%. . . . . . 865 88 --
The following table sets forth the amount and maturities of time
deposits at March 31, 1997.
Amount Due
-------------------------------------------------
Less Than 1-2 2-3 3-4 After
One Year Years Years Years 4 Years
-------- ----- ----- ----- -------
(In Thousands)
4.01 - 5.00% . . . . . . $ 4,784 $ -- $ -- $ -- $ --
5.01 - 6.00% . . . . . . 17,465 4,690 1,281 165 425
6.01 - 7.00% . . . . . . 3,310 1,036 730 1,244 31
The following table sets forth the savings activities of the Company for
the periods indicated.
Year Ended March 31,
-------------------------------
1995 1996 1997
---- ---- ----
(In thousands)
Beginning balance. . . . . . . . . . . . . $56,507 $52,324 $52,843
Net increase (decrease)
before interest
credited . . . . . . . . . . . . . . . . (6,373) (2,002) (5,198)
Interest credited. . . . . . . . . . . . . 2,190 2,521 2,427
Net increase (decrease)
in savings deposits. . . . . . . . . . . (4,183) 519 (2,771)
------- ------- -------
Ending balance . . . . . . . . . . . . . . $52,324 $52,843 $50,072
======= ======= =======
Borrowings. Savings deposits are the primary source of funds for the
Company's lending and investment activities and for its general business
purposes. The Company 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 Company'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 Company 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,
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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 Company 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 Company 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 Company 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
Company's competition for loans comes principally from other thrift
institutions, credit unions, commercial banks, mortgage banking companies and
mortgage brokers.
REGULATION OF THE COMPANY
The Company 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 Company 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 under the HOLA. 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
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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 savings and loan holding
company.
Qualified Thrift Lender Test
The HOLA requires any savings and loan holding company that controls a
savings association that fails the qualified thrift lender ("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.
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 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 Company, the Association
and their operations. The Company, 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
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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 stock of $1.86 million at March 31, 1997. Among other benefits,
the FHLB-Seattle 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.
Federal Deposit Insurance Corporation. The FDIC is an independent
federal agency that insures the deposits, up to prescribed statutory limits,
of depository institutions. As insurer of the Association's deposits, the
FDIC has examination, supervisory and enforcement authority over all savings
associations.
The Association's deposit accounts are insured by the FDIC under the SAIF
to the maximum extent permitted by law. The Association 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 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 Association's assessments expensed for
the year ended March 31, 1997 equaled $459,000.
The FDIC's current assessment schedule for SAIF deposit insurance
provides that the assessment rate for well-capitalized institutions with the
highest supervisory ratings would be reduced to zero and institutions in the
lowest risk assessment classification will be assessed at the rate of 0.27% of
insured deposits. Until December 31, 1999, however, SAIF-insured
institutions, will be required to add to their assessments to the FDIC at the
rate of 6.5 basis points to help fund interest payments on certain bonds
issued by the Financing Corporation ("FICO"), an agency of the federal
government established to finance takeovers of insolvent thrifts. During this
period, BIF members will be assessed for FICO obligations at the rate of 1.3
basis points.
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
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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.
Prompt Corrective Action. Under the FDIA, 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, has a
Tier I risk-based capital ratio of 4.0% or more, has 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%, has a Tier I risk-based capital ratio
that is less than 4.0% or has 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%, has a Tier I
risk-based capital ratio that is less than 3.0% or has 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%.
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 various mandatory and
discretionary restrictions on its operations.
At March 31, 1997, the Association was categorized as "well capitalized"
under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The federal banking regulatory
agencies have prescribed, by regulation, guidelines that set forth standards
("Guidelines") for all insured depository institutions relating to:
(i) internal controls, information systems and internal
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audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; (vi) earnings; (vii) asset
quality; and (viii) compensation, fees and benefits. 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. 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. OTS regulations 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 QTL test 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 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 either an institution qualify as a
domestic building and loan association under the Internal Revenue Code or 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; direct or indirect
obligations of the FDIC; and loans for educational purposes, loans to small
businesses and loans made through credit cards. 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 loans; and stock issued by FHLMC or FNMA. 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, 1997, the qualified thrift investments of the Association were
approximately 84% 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 Company 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
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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 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."
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
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
19
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<PAGE>
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.
At March 31, 1997, the Association's tangible capital totaled $6.7
million, or 10.6%, of adjusted total assets, which exceeded the minimum 1.50%
requirement by approximately $5.8 million. The Association's core capital at
March 31, 1997 totaled $6.7 million, or 10.6%, which was approximately $4.8
million above the minimum requirement of 3.0%. Finally, at March 31, 1997,
First Federal's risk-based capital at that date totaled $7.1 million, which is
$4.9 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
20
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<PAGE>
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 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 currently meets 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. Any loan or extension of credit by the
Association to an affiliate must be secured by collateral in accordance with
Section 23A.
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 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.
21
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<PAGE>
The Association's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by such
persons, is governed by Sections 22(g) and 22(h) of the Federal Reserve Act,
and Regulation O thereunder. Among other things, these regulations generally
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. Generally, 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
General. The Company and the Association will report their income on a
fiscal year basis using the percentage of taxable income method and will be
subject to federal income taxation in the same manner as other corporations
with some exceptions, including particularly the Association's reserve for bad
debts discussed below. The following discussion of tax matters is intended
only as a summary and does not purport to be a comprehensive description of
the tax rules applicable to the Association or the Company.
Bad Debt Reserve. Historically, savings institutions such as the
Association which met certain definitional tests primarily related to their
assets and the nature of their business ("qualifying thrift") were permitted
to establish a reserve for bad debts and to make annual additions thereto,
which may have been deducted in arriving at their taxable income. The
Association's deductions with respect to "qualifying real property loans,"
which are generally loans secured by certain interest in real property, were
computed using an amount based on the Association's actual loss experience, or
a percentage equal to 8% of the Association's taxable income, computed with
certain modifications and reduced by the amount of any permitted additions to
the non-qualifying reserve. Due to the Association's loss experience, the
Association generally recognized a bad debt deduction equal to 8% of taxable
income.
In August 1996, the provisions repealing the current thrift bad debt
rules were passed by Congress as part of "The Small Business Job Protection
Act of 1996." The new rules eliminate the 8% of taxable income method for
deducting additions to the tax bad debt reserves for all thrifts for tax years
beginning after December 31, 1995. These rules also require that all
institutions recapture all or a portion of their bad debt reserves added since
the base year (last taxable year beginning before January 1, 1988). The
Association has previously recorded a deferred tax liability equal to the bad
debt recapture and as such, the new rules will have no effect on the net
income or federal income tax expense. For taxable years beginning after
December 31, 1995, the Association's bad debt deduction will be determined
under the experience method using a formula based on actual bad debt
experience over a period of years or, if the Association is a "large"
association (assets in excess of $500 million) on the basis of net charge-offs
during the taxable year. The new rules allow an institution to suspend bad
debt reserve recapture for the 1996 and 1997 tax years if the institution's
lending activity for those years is equal to or greater than the institutions
average mortgage lending activity for the six taxable years preceding 1996
adjusted for inflation. For this purpose, only home purchase or home
improvement loans are included and the institution can elect to have the tax
years with the highest and lowest lending activity removed from the average
calculation. As a result of the application of these rules, the Company
will begin the bad debt reserve capture in 1997. The determination of whether
the
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Company will be eligible to defer the bad debt reserve recapture for the
subsequent tax year will be made in 1998. The unrecaptured base year reserves
will not be subject to recapture as long as the institution continues to carry
on the business of banking. In addition, the balance of the pre-1988 bad debt
reserves continue to be subject to provision of present law referred to below
that require recapture in the case of certain excess distributions to
shareholders.
Distributions. To the extent that the Association makes "nondividend
distributions" to the Company, such distributions will be considered to result
in distributions from the balance of its bad debt reserve as of December 31,
1987 (or a letter amount if the Association's loan portfolio decreased since
December 31, 1987) and then from the supplemental reserve for losses on loans
("Excess Distributions"), and an amount based on the Excess Distributions will
be included in the Association's taxable income. Nondividend distributions
include distributions in excess of the Association's current and accumulated
earnings and profits, distributions in redemption of stock and distributions
in partial or complete liquidation. However, dividends paid out of the
Association's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not be considered to result in a
distribution from the Association's bad debt reserve. The amount of
additional taxable income created from an Excess Distribution is an amount
that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if, after the Conversion, the Association
makes a "nondividend distribution," then approximately one and one-half times
the Excess Distribution would be includable in gross income for federal income
tax purposes, assuming a 34% corporate income tax rate (exclusive of state and
local taxes). See "REGULATION OF FIRST FEDERAL" for limits on the payment of
dividends by the Association. The Association does not intend to pay
dividends that would result in a recapture of any portion of its tax bad debt
reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of
the tax bad debt reserve deduction using the percentage of taxable income
method over the deduction that would have been allowable under the experience
method is treated as a preference item for purposes of computing the AMTI. In
addition, only 90% of AMTI can be offset by net operating loss carryovers.
AMTI is increased by an amount equal to 75% of the amount by which the
Association's adjusted current earnings exceeds its AMTI (determined without
regard to this preference and prior to reduction for net operating losses).
For taxable years beginning after December 31, 1986, and before January 1,
1996, an environmental tax of .12% of the excess of AMTI (with certain
modification) over $2.0 million is imposed on corporations, including the
Association, whether or not an Alternative Minimum Tax ("AMT") is paid.
Dividends-Received Deduction. The Company may exclude from its income
100% of dividends received from the Association as a member of the same
affiliated group of corporations. The corporate dividends-received deduction
is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Association will not file a
consolidated tax return, except that if the Company or the Association owns
more than 20% of the stock of a corporation distributing a dividend, then 80%
of any dividends received may be deducted.
Audits. 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 fiscal year basis.
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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.
Item 2. Properties
- -------------------
The Company's main office, which is owned, is located in Hamilton
Montana. The Company has two branch offices in Missoula, Montana, one of
which is leased, and the other of 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 Company's net investment in its office,
properties and equipment totalled $1.3 million at March 31, 1997.
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, 1997.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
The information contained under the section captioned "Market Price of
the Company'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.
24
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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.
The following table sets forth information with respect to the executive
officers of the Association.
Name Age(a) Position
---- ------ --------
Michael E. McKee 52 President and Chief Executive Officer
Collette E. Maxwell 48 Executive Vice President
Ernest M. Kwiatkowski 46 Vice President, Treasurer and Secretary
- ------------------
(a) As of March 31, 1997.
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" of the Proxy Statement.
(c) Changes in Control
The Company is not aware of any arrangements, including any
pledge by any person of securities of the Company, the operation
of which may at a subsequent date result in a change in control
of the Company.
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.
25
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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
Company'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 Company'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. 1997 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, 1997.
26
<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 27, 1997 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 27, 1997 Date: June 27, 1997
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 27, 1997 Date: June 27, 1997
By: By: /s/ Robert K. Ford
------------------------------ ----------------------------
Thomas H. Boone Robert K. Ford
Director Director
Date: June __, 1997 Date: June 27, 1997
By: /s/ Douglas N. Klein
------------------------------
Douglas N. Klein
Director
Date: June 27, 1997
<PAGE>
<PAGE>
EXHIBIT 13
Big Sky Bancorp, Inc.
1997 Annual Report to Stockholders
<PAGE>
<PAGE>
BIG SKY BANCORP, INC.
-------------------------------------
1997
ANNUAL REPORT
[LOGO]
-------------------------------------
DOWNTOWN SOUTHSIDE HAMILTON
Higgins & Main 2237 34th St. 711 South First
P.O. Box 7849 P.O. Box 5267 P.O. Box 1160
Missoula, Montana 59807 Missoula, Montana 59806 Hamilton, Montana 59840
Phone: (406) 542-1500 Phone: (406) 251-3600 Phone: (406) 363-4400
<PAGE>
<PAGE>
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..................5-15
Independent Auditors' Report..........................F-1
Financial Statements...............................F-2-22
Notice of Annual Meeting...............................16
10-KSB Information.....................................16
Common Stock Information...............................16
Directors and Officers.................................17
Corporate Information..................................17
-----------------
<PAGE>
<PAGE>
TO OUR STOCKHOLDERS:
I am pleased to report that operating earnings increased 9.58% to $ 596,000,
or $ 1.83 per share, up from $ 538,000, or $ 1.67 per share in 1996. Reported
Net Income was $ 385,000, or $ 1.18 per share, which reflects a one-time,
after-tax charge of $ 211,000, or $ .65 per share, to recapitalize the
government's Savings Association Insurance Fund ("SAIF") of the Federal
Deposit Insurance Corporation ("FDIC").
The recapitalization of the SAIF however, resolved the disparity in FDIC
insurance premiums which had existed between commercial banks and thrift
institutions, and now allows our Association to compete for deposits on a more
equal footing with commercial bank competitors.
Operating returns for 1997, without the SAIF expense, were a return on average
assets of .99% and a return on beginning equity of 8.77%. Returns including
the SAIF expense, were a return on average assets of .64% and a return on
beginning equity of 5.67%.
Total assets increased to $ 63,572,000 at March 31, 1997, as compared to $
60,922,000 at March 31, 1996.
Total stockholders' equity increased by $ 378,000, or 5.56%, to $ 7,174,000 at
March 31, 1997, as compared to $ 6,796,000 last year.
The bid-ask price on our stock on March 31, 1997 was $ 18.375 - $ 20.00, with
a high price of $ 20.25 during the quarter ending March 31, 1997. Based on the
average of the bid-ask price at year end, the market value of our stock has
increased over 283% from our Initial Public Offering price of $ 5.00 on May
21, 1992.
Book value per share was $ 23.24 at March 31, 1997, as compared to $ 22.08 at
March 31, 1996.
We are proud of our history, and our 86 years of continuous service to Western
Montana, since 1911.
We look forward with confidence to the challenges and opportunities which lie
ahead. Your continued support of our efforts is greatly appreciated.
SINCERELY,
/s/Michael E. McKee
Michael E. McMcKee
President
1
<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, 1997
-----------------------------------------------
(Dollars in Thousands)
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
FINANCIAL CONDITION DATA
Total assets................ $ 61,585 $ 64,045 $ 60,127 $ 60,922 $ 63,572
Loans receivable, net....... 40,398 41,015 39,663 37,400 35,315
Mortgage-backed securities.. 9,209 4,111 3,632 3,334 7,995
Cash, interest bearing
deposits and investment
securities (1)............. 8,369 15,213 12,782 16,687 16,649
Deposits ................... 55,145 56,507 52,324 52,843 50,072
Advances from the Federal
Home Loan Bank............. -- -- -- -- 5,000
Common stock ............... 391 391 3 3 3
Capital surplus ............ 1,383 1,383 540 605 610
Unrealized appreciation on
securities available for
sale....................... -- 144 49 161 149
Retained earnings, substantially
restricted ................ $ 3,345 $ 4,427 $ 5,112 $ 6,027 $ 6,412
OPERATING DATA
Interest income ............ $ 5,346 $ 4,934 $ 4,604 $ 4,673 $ 4,622
Interest expense ........... 2,653 2,289 2,197 2,540 2,437
------- ------- ------- ------- -------
Net interest income ........ 2,693 2,645 2,407 2,133 2,185
Provision for loan losses .. (70) (42) (42) (43) (41)
------- ------- ------- ------- -------
Net interest income after
provision for loan losses.. 2,623 2,603 2,365 2,090 2,144
Gain on sale of
investments ............... 485 158 110 -- 46
Gain on sale of
mortgage-backed securities. 75 116 8 -- --
Gain on sale of premises and
equipment ................. -- -- -- 616 --
Non-interest income ........ 290 268 251 251 171
SAIF assessment expense..... -- -- -- -- 345
Non-interest expense ....... 1,371 1,471 1,572 1,461 1,386
------- ------- ------- ------- -------
Income before income tax
provision.................. 2,102 1,674 1,162 1,496 630
Provision for income taxes.. (813) (592) (477) (581) (245)
------- ------- ------- ------- -------
NET INCOME ................. $ 1,289 $ 1,082 $ 685 $ 915 $ 385
======= ======= ======= ======= =======
NET INCOME PER SHARE ....... $ 3.30 $ 2.66 $ 1.80 $ 2.84 $ 1.18
(1) Includes interest-bearing deposits in other depository institutions.
2
<PAGE>
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Year Ended March 31,
-------------------------------------------
1993 1994 1995 1996 1997
OTHER DATA ------- ------- ------- ------- -------
Number of:
Total loans outstanding ...... 941 927 830 801 751
Deposit accounts ............. 6,821 6,585 6,121 5,904 5,386
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,
-------------------------------------------
1993 1994 1995 1996 1997
KEY OPERATING RATIOS ------- ------- ------- ------- -------
Return on assets (net income
divided by average assets)... 2.05% 1.70% 1.10% 1.40% 0.64%
Return on assets (net income
divided by average assets -
without SAIF expense)........ -- -- -- -- 0.99 *
Return on average equity (net
income divided by average
equity)...................... 28.00 18.89 11.01 14.62 5.50
Return on beginning equity
(net income divided by
beginning equity - without
SAIF expense)................ -- -- -- -- 8.77 *
Average equity to average
assets....................... 7.33 9.00 9.95 10.19 11.54
Interest rate spread (difference
between yield on interest-
earning assets and average
cost of interest-
bearing liabilities)......... 4.17 3.17 3.19 2.82 2.80
Net interest margin (net interest
income as a percentage of
interest-earning assets)..... 4.53 3.54 3.51 3.34 3.29
Non-interest expense to
total assets................. 2.23 2.30 2.61 2.40 2.18
Non-interest expense to average
assets....................... 2.18 2.31 2.51 2.38 2.28
Average interest-earning assets
to average interest-bearing
liabilities.................. 106.10 109.26 110.92 111.69 112.67
Allowance for loan losses to
total loans at end of period. .81 .91 1.05 1.25 1.44
Net charge-offs (recoveries)
to average outstanding loans
during the per............... (.05) -- -- -- --
Ratio of nonperforming assets
to total assets.............. .35% .57% .67% .06% .06%
* Provided for informational purposes only - results excluding one-time SAIF
assessment charge
3
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<PAGE>
CORPORATE PROFILE
Big Sky Bancorp, Inc., ("Corporation" or "Company") was incorporated in the
State of Delaware in 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
completed its conversion from a federal mutual savings and loan association to
a federal capital stock savings and loan association and changed its name to
"First Federal Savings and Loan Association of 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").
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.
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 121,000. 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.
At March 31, 1997, the Association had total assets of $ 63,572,000, total
deposits of $ 50,072,000, and total stockholders' equity of $ 7,174,000. At
that same date, the Association's ratio of tangible capital under generally
accepted accounting principles ("GAAP") to total assets was 10.6%.
4
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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. On August 23, 1993, the OTS
issued a regulation which would add an interest rate risk component to the
risk capital standards (the "final IRR rule"). Institutions with a greater
than normal interest rate risk exposure will be required to take a deduction
from the total capital available to meet their risk based capital requirement.
That deduction is equal to one-half of the difference between the Company's
actual measured exposure as defined by the regulation. 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. The OTS has postponed the date that the component will first be
deducted from an institution's total capital. Although no such deduction was
required as a result of the Company's most recent
5
<PAGE>
<PAGE>
regulatory examination, a deduction may be required as a result of future
examinations.
The following table presents the Association's NPV at March 31, 1997, 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 5,685 -4,198 -42 % 9.58 % - 551 bp
+300 bp 6,776 -3,107 -31 % 11.13 % - 396 bp
+200 bp 7,910 -1,972 -20 % 12.65 % - 244 bp
+100 bp 8,995 - 887 - 9 % 14.03 % - 106 bp
0 bp 9,883 15.09 %
-100 bp 10,461 579 + 6 % 15.71 % + 62 bp
-200 bp 10,585 703 + 7 % 15.74 % + 65 bp
-300 bp 10,558 675 + 7 % 15.57 % + 48 bp
-400 bp 10,663 781 + 8 % 15.57 % + 48 bp
6
<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.
During the year ended March 31, 1997, average total assets decreased $
748,000, or 1.22%, to $ 60.67 million in 1997 from $ 61.42 million in 1996.
The average weighted balance of loans decreased by $ 2,480,000, to $ 37.32
million in 1997 from $ 39.80 million in 1996.
The average weighted balance of mortgage-backed securities increased by $
46,000, to $ 3.54 million in 1997 from $ 3.49 million in 1996.
The average investment securities portfolio increased $ 2,709,000 or 24.53%,
to $ 13.75 million in 1997 from $ 11.04 million in 1996.
Total interest-earning assets decreased by $ 768,000, or 1.30%, to $ 58.07
million in 1997 from $ 58.84 million in 1996.
Total deposits and other interest-bearing liabilities decreased by $
1,142,000, to $ 51.54 million in 1997 from $ 52.68 million in 1996.
The yield on average interest-earning assets increased 2 basis points, to
7.96% for the year ending March 31, 1997, from 7.94% for the year ending March
31, 1996. The average cost of funds decreased 9 basis points, to 4.73% for
1997, from 4.82% for 1996.
Net interest income increased $ 52,000, or 2.44%, to $ 2.19 million in 1997
from $ 2.13 million in 1996.
The Association's interest rate spread (difference between yield on
interest-earning assets and average cost of interest-bearing liabilities)
increased 11 basis points, to 3.23% in 1997 from 3.12% in 1996.
The net interest margin (net interest income as a percentage of average
interest-earning assets) increased 13 basis points, to 3.76% in 1997 from
3.63% in 1996.
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.
7
<PAGE>
<PAGE>
<TABLE>
Average consolidated statements of financial position and analysis of net interest spreads were as follows:
At
Year Ended March 31, March
---------------------------------------------------------------------------------- 31,
1995 1996 1997 1997
-------------------------- -------------------------- -------------------------- ------
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and Yield/ Yield/
Balance Dividend Cost Balance Dividend Cost Balance Dividend Cost Cost
------- -------- ---- ------- -------- ---- ------- -------- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans..............$ 41,395 $ 3,563 8.61% $ 39,795 $ 3,535 8.88% $ 37,315 $ 3,335 8.94% 8.45%
Mortgage-backed
securities........ 3,704 258 6.97 3,492 250 7.16 3,538 259 7.32 6.75
Investment
securities........ 12,455 634 5.09 11,043 608 5.51 13,752 798 5.80 5.79
Daily interest-
bearing deposits
and other earning
assets............ 2,643 149 5.64 4,506 280 6.21 3,463 230 6.64 6.68
-------- ------- ------ -------- ------- ------ -------- ------- ------ ------
Total interest-
earning assets.... 60,197 4,604 7.65 58,836 4,673 7.94 58,068 4,622 7.96 7.54
-------- ------- ------ -------- ------- ------ -------- ------- ------ ------
Non interest-
earning assets.... 2,384 2,582 2,602
-------- -------- --------
Total assets.......$ 62,581 $ 61,418 $ 60,670
======== ======== ========
Interest-bearing liabilities:
Total deposits and
other interest-
bearing liabili-
ties..............$ 54,269 $ 2,197 4.05% $ 52,680 $ 2,540 4.82% $ 51,538 $ 2,437 4.73% 4.74
-------- ------- ------ -------- ------- ------ -------- ------- ------ ------
Non interest-bearing
liabilities....... 2,088 2,479 2,129
-------- -------- --------
Total liabilities.. 56,357 55,159 53,667
-------- -------- --------
Stockholders' equity
Common stock 262 3 3
Capital surplus 1,104 556 609
Retained earnings
and unrealized
gains on available
for sale
securities....... 4,858 5,700 6,391
-------- -------- --------
Total liabilities
and stockholders'
equity............$ 62,581 $ 61,418 $ 60,670
======== ======== ========
Net interest
income............ $ 2,407 $ 2,133 $ 2,185
======= ======= =======
Interest rate
spread............ 3.60% 3.12% 3.23% 2.80%
Net interest
margin............ 4.00% 3.63% 3.76% 3.29%
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities....... 110.92% 111.69% 112.67%
- ----------------
(1) Does not include interest on loans 90 days or more past due.
8
</TABLE>
<PAGE>
<PAGE>
<TABLE>
Rate/Volume Analysis
- --------------------
1995 Compared to 1994 1996 Compared to 1995 1997 Compared to 1996
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) ........... $(260) $ (56) $ 4 (312) 112 $ (137) $ (4) $ (29) $ 23 $ (221) $ (2) $ (200)
Mortgage-backed
securities......... (3) (136) 1 (138) 7 (14) (1) (8) 5 3 1 9
Investment
securities......... 41 207 24 272 52 (72) (5) (25) 32 150 8 190
Daily interest-bearing
deposits and other
earning assets..... (2) (151) 1 (152) 15 105 11 131 19 (65) (4) (50)
Total net change in
income on interest-
earning assets..... (224) (136) 30 (330) 186 (118) 1 69 79 (133) 3 (51)
Interest-bearing liabilities:
Total net change
in expense on
interest-bearing
liabilities........ $ (34) $ (5) $ 1 (92) 418 $ (64)$ (11) $ 343 $ (48)$ (56) $ 1 $ (103)
Net change in net
interest income.... (238) $ (274) $ 52
- ------------------
(1) Does not include interest on loans 90 days or more past due.
9
</TABLE>
<PAGE>
<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, 1997 was 19.56%, as compared to 17.50% at March 31,
1996.
Capital Resources
- -----------------
At March 31, 1997, 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 $ 5.79 million, $
4.84 million and $ 4.90 million, respectively. (See Note 12 of the Notes to
Financial Statements for further discussion of these capital requirements.)
RESULTS OF OPERATIONS
COMPARISON OF THE YEAR ENDED MARCH 31, 1997 TO THE YEAR ENDED MARCH 31, 1996
- ----------------------------------------------------------------------------
Net Income
- ----------
Net income decreased by $ 530,000, or 57.92%, to $ 385,000 in 1997 from $
915,000 in 1996.
Two factors skewed the results.
Income for 1997 was substantially reduced by an industrywide assessment to
help recapitalize the government's Savings Association Insurance Fund ("SAIF")
of the Federal Deposit Insurance Corporation ("FDIC"), and income for 1996
reflected a one-time gain resulting from the sale of an office building.
Excluding the one-time SAIF charges in 1997 and the gain on sale of the
office building in 1996, net income for 1997 was $ 596,000, as compared to $
538,000 for 1996, an increase of 9.58%.
Interest Income
- ---------------
Total interest income decreased by $ 51,000, or 1.09%, to $ 4.62 million in
1997 from $ 4.67 million in 1996.
10
<PAGE>
<PAGE>
Interest and fees on loans receivable decreased by $ 200,000, or 5.66%, to $
3,335,000 in 1997 from $ 3,535,000 in 1996, primarily as a result of a
reduction of $ 2.5 million, or 6.3%, in average balances of loans receivable,
to $ 37.3 million in 1997, from $ 39.8 million in 1996.
Interest on investment securities increased by $ 190,000, or 31.25%, to $
798,000 in 1997 from $ 608,000 in 1996, primarily as a result of a $ 2.8
million, or 25.5%, increase in average balances of the investment portfolio,
to $ 13.8 million in 1997 from $ 11.0 million in 1996.
Interest on mortgage-backed securities increased by $ 9,000, or 3.60%, to $
259,000 in 1997 from $ 250,000 in 1996, primarily as a result of a $ 50,000,
or 1.4%, increase in average balances of the mortgage-backed securities
portfolio, to $ 3.54 million in 1997 from $ 3.49 million in 1996. FHLB stock
dividends and other income decreased by $ 50,000, or 17.9%, to $ 230,000 in
1997, as compared to $ 280,000 in 1996, primarily as a result of a $
1,000,000, or 22.2%, decrease in average balances of daily interest-bearing
deposits and other earning assets, to $ 3.5 million in 1997 from $ 4.5 million
in 1996.
Interest expense decreased by $ 103,000, or 4.06%, to $ 2.44 million in 1997
from $ 2.54 million in 1996, primarily as a result of a $ 1,142,000, or 2.2%,
decrease in the average balances of total deposits and other interest-bearing
liabilities, to $ 51.5 million in 1997 from $ 52.7 million in 1996.
Loan Loss Reserves
- ------------------
The provision for loan losses decreased by $ 2,000, or 4.65%, to $ 41,000 in
1997, as compared to $ 43,000 in 1996.
The allowance for loan losses was increased by $ 40,000, or 8.55%, to $
508,000 at March 31, 1997 from $ 468,000 at March 31, 1996. The allowance for
loan losses as a percentage of total loans increased to 1.44% at March 31,
1997 from 1.25% at March 31, 1996.
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 $ 650,000, or 75%, to $ 217,000 in 1997 from
$ 867,000 in 1996, primarily as a result of a one-time industrywide assessment
of $ 345,000 to recapitalize the SAIF in 1997,
11
<PAGE>
<PAGE>
and a $ 616,000 gain on the sale of office premises and equipment in 1996.
Income from loan fees and service charges decreased $ 12,000, or 13.95%, to $
74,000 in 1997 from $ 86,000 in 1996.
Rental income decreased $ 25,000, or 21.74%, to $ 90,000 in 1997 from $
115,000 in 1996, primarily as a result of the sale of office property in 1996
and the loss of rental income generated by that property.
Income of $ 46,000 resulting from gain on sale of investments was recognized
in 1997. No gains on sale of investments were recorded in 1996.
Other income decreased by $ 43,000, or 86%, to $ 7,000 in 1997 from $ 50,000
in 1996. There were two primary reasons for the reduction in other income in
1997, as compared to 1996.
First, a $ 27,000 accounting gain on sale of real estate owned as a result of
foreclosure ("REO") was recognized in 1996, and no comparable accounting gain
on the sale of REO was recognized in 1997.
Also, an accrual of $ 7,500 which was 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
was reversed in 1996, thereby increasing other income for that year.
Other Expense
- -------------
Total other expense increased by $ 270,000, or 18.48%, to $ 1,731,000 in 1997,
as compared to $ 1,461,000 in 1996, primarily as a result of a one-time
assessment of $ 345,000 to recapitalize the SAIF in 1997. No similar
assessments were incurred in 1996.
The increase in total other expense was partially offset by a reduction of $
15,000 in salaries and benefits, a reduction in occupancy expense of $ 28,000,
a decrease in FDIC/SAIF insurance of $ 30,000 and a reduction in advertising
and other expense of $ 7,000 in 1997, as compared to 1996. Expense for outside
services increased by $ 5,000, or 4.85%, to $ 108,000 in 1997, as compared to
$ 103,000 in 1996.
Income Taxes
- ------------
Income tax expense decreased $ 336,000, or 57.83%, to $ 245,000 in 1997 from $
581,000 in 1996.
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
12
<PAGE>
<PAGE>
$ 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.
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.
13
<PAGE>
<PAGE>
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 $ 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.
14
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<PAGE>
Income Taxes
- ------------
Income tax expense increased $ 104,000, or 21.80%, to $ 581,000 in 1996 from $
477,000 in 1995.
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.
15
<PAGE>
<PAGE>
BIG SKY BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
YEARS ENDED MARCH 31, 1997, AND INDEPENDENT
AUDITORS' REPORT
<PAGE>
<PAGE>
Deloitte &
Touche LLP
- ----------- -----------------------------------------------------
Suite 3900 Telephone (503) 222-1341
111 S.W. Fifth Avenue Facsimile (503) 224-2172
Portland, Oregon 97204-3698
INDEPENDENT AUDITORS' REPORT
To the Directors and Shareholders of
Big Sky Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Big Sky
Bancorp, Inc. and subsidiary (the "Company") as of March 31, 1997 and 1996,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended March 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Big Sky Bancorp, Inc. and
subsidiary as of March 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1997, in conformity with generally accepted accounting principles.
/s/Deloitte & Touche LLP
May 9, 1997
<PAGE>
<PAGE>
BIG SKY BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND 1996
- ------------------------------------------------------------------------------
ASSETS 1997 1996
Cash, including interest-bearing accounts of $1,813,000
and $2,228,000 $ 3,017,000 $ 3,058,000
Investment securities available for sale, at fair
value, cost $134,000 and $182,000 359,000 396,000
Mortgage-backed securities available for sale, at fair
value, cost $7,402,000 and $2,600,000 7,420,000 2,649,000
Investment securities held to maturity, at amortized
cost, fair value $12,911,000 and $12,938,000 13,273,000 13,233,000
Mortgage-backed securities held to maturity, at
amortized cost, fair value $606,000 and $714,000 575,000 685,000
Loans receivable, net 35,315,000 37,400,000
Accrued interest receivable 315,000 322,000
Federal Home Loan Bank stock, at cost 1,862,000 1,725,000
Premises and equipment 1,335,000 1,343,000
Prepaid expenses and other assets 101,000 111,000
----------- -----------
TOTAL $63,572,000 $60,922,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $50,072,000 $52,843,000
Advances from borrowers for taxes and insurance 527,000 550,000
Advances from the Federal Home Loan Bank 5,000,000 -
Accrued expenses and other liabilities 161,000 155,000
Deferred taxes 638,000 578,000
----------- -----------
Total liabilities 56,398,000 54,126,000
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value - authorized 1,500,000
shares; outstanding, 308,721 and 307,744 3,000 3,000
Additional paid-in capital 610,000 605,000
Unrealized appreciation on securities available for
sale, net of tax 149,000 161,000
Retained earnings 6,412,000 6,027,000
----------- -----------
Total stockholders' equity 7,174,000 6,796,000
----------- -----------
TOTAL $63,572,000 $60,922,000
=========== ===========
See notes to consolidated financial statements.
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BIG SKY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 1997, 1996, AND 1995
- ------------------------------------------------------------------------------
1997 1996 1995
INTEREST INCOME:
Loans receivable $ 3,335,000 $ 3,535,000 $ 3,563,000
Investment securities 798,000 608,000 634,000
Mortgage-backed securities 259,000 250,000 258,000
FHLB stock dividends and other 230,000 280,000 149,000
----------- ----------- -----------
Total interest income 4,622,000 4,673,000 4,604,000
INTEREST EXPENSE 2,437,000 2,540,000 2,197,000
----------- ----------- -----------
Net interest income 2,185,000 2,133,000 2,407,000
PROVISION FOR LOAN LOSSES (41,000) (43,000) (42,000)
----------- ----------- -----------
Net interest income after
provision for loan
losses 2,144,000 2,090,000 2,365,000
----------- ----------- -----------
OTHER INCOME:
Rental income 90,000 115,000 140,000
Loan fees and service charges 74,000 86,000 104,000
Gain on sale of investments and
mortgage-backed securities
available for sale 46,000 - 118,000
Gain on sale of premises and
equipment - 616,000 -
Other 7,000 50,000 7,000
----------- ----------- -----------
Total other income 217,000 867,000 369,000
----------- ----------- -----------
OTHER EXPENSE:
Salaries and employee benefits 683,000 698,000 723,000
Occupancy 184,000 212,000 234,000
FDIC insurance 114,000 144,000 148,000
SAIF assessment 345,000 - -
Outside services 108,000 103,000 98,000
Advertising 47,000 52,000 55,000
Other 250,000 252,000 314,000
----------- ----------- -----------
Total other expense 1,731,000 1,461,000 1,572,000
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 630,000 1,496,000 1,162,000
INCOME TAX EXPENSE 245,000 581,000 477,000
----------- ----------- -----------
NET INCOME $ 385,000 $ 915,000 $ 685,000
=========== =========== ===========
NET INCOME PER SHARE $ 1.18 $ 2.84 $ 1.80
=========== =========== ===========
See notes to consolidated financial statements.
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BIG SKY BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1997, 1996, AND 1995
- ------------------------------------------------------------------------------
Unrealized
Addi- (Loss) on
Common Stock tional Securities
------------------ Paid-in Available Retained
Shares Amount Capital For Sale Earnings Total
BALANCE, APRIL
1, 1994 391,000 $ 391,000 1,383,000 $ 144,000 4,427,000 $ 6,345,000
Restatement
of common
stock and
additional
paid-in
capital
par value
from $1
to $.01 - (302,000) 302,000 - - -
Net income - - - - 685,000 685,000
Stockholder
redemption (85,602) (86,000) (1,145,000) - - (1,231,000)
Unrealized
loss on
securities
available
for sale,
net of tax - - - (95,000) - (95,000)
-------- -------- ---------- --------- -------- ----------
BALANCE,
MARCH 31,
1995 305,398 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 2,346 - 20,000 - - 20,000
Unrealized
gain 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 307,744 3,000 605,000 161,000 6,027,000 6,796,000
Net income - - - - 385,000 385,000
Stock options
exercised,
977 shares
issued at
$5 per
share 977 - 5,000 - - 5,000
Unrealized
loss on
securities
available
for sale,
net of tax - - - (12,000) - (12,000)
------- --------- ---------- -------- -------- ----------
BALANCE,
MARCH 31,
1997 308,721 $ 3,000 $ 610,000 $149,000 6,412,000 7,174,000
======= ========= ========== ======== ========= ==========
See notes to consolidated financial statements.
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BIG SKY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1997, 1996, AND 1995
- ------------------------------------------------------------------------------
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 385,000 $ 915,000 $ 685,000
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 66,000 72,000 76,000
Provision for loan losses 41,000 43,000 42,000
Loss (gain) on sale of premises and
equipment - (616,000) -
Gain on sale of real estate owned - (27,000) -
Gain on sale of investments and
mortgage-backed securities
available for sale (46,000) - (118,000)
Federal Home Loan Bank stock
dividend (137,000) (115,000) (96,000)
Cash provided (used) by changes in
operating assets and liabilities:
Accrued interest receivable 7,000 - 6,000
Prepaid expenses and other assets 10,000 106,000 (85,000)
Accrued expenses and other
liabilities 6,000 (67,000) 25,000
Deferred taxes 67,000 123,000 (15,000)
Deferred loan fees, net 91,000 14,000 (17,000)
---------- ---------- ----------
Net cash provided by operating
activities 490,000 448,000 503,000
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal repayments on loans 7,547,000 6,409,000 5,534,000
Loan originations (5,584,000) (4,075,000) (4,365,000)
Principal repayments on mortgage-backed
securities available for sale 315,000 282,000 315,000
Purchase of mortgage-backed securities
available for sale (5,111,000) - (476,000)
Proceeds from sale of mortgage-backed
securities available for sale - - 500,000
Principal repayments on mortgage-backed
securities held to maturity 113,000 115,000 77,000
Proceeds from maturity of investment
securities 2,500,000 4,350,000 5,090,000
Purchase of investment securities held
to maturity (2,540,000) (6,749,000) (3,741,000)
Purchase of investment securities
available for sale (7,000) - (99,000)
Proceeds from sale of investment
securities available for sale 101,000 - 330,000
Purchase of premises and equipment (76,000) (694,000) (49,000)
Proceeds from sale of premises and
equipment - 1,566,000 -
Proceeds from sale of real estate owned - 41,000 -
---------- ---------- ----------
Net cash provided (used) by
investing activities (2,742,000) 1,245,000 3,116,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposit accounts
due on demand (195,000) (1,977,000) (2,649,000)
Net increase (decrease) in certificates
accounts (2,576,000) 2,497,000 (1,534,000)
Net increase (decrease) in advances from
borrowers for taxes and insurance (23,000) (7,000) 31,000
Proceeds from exercise of stock options 5,000 20,000 -
Stockholder redemption - (820,000) (366,000)
Proceeds from Federal home Loan Bank
borrowings 5,000,000 - 1,525,000
Repayment of Federal Home Loan Bank
borrowings - - (1,525,000)
---------- ---------- ----------
Net cash provided (used) by
financing activities 2,211,000 (287,000) (4,518,000)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH $ (41,000) $1,406,000 $ (899,000)
(Continued)
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BIG SKY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1997, 1996, AND 1995
- ------------------------------------------------------------------------------
1997 1996 1995
NET INCREASE (DECREASE) IN CASH $ (41,000) $ 1,406,000 $ (899,000)
CASH, BEGINNING OF YEAR 3,058,000 1,652,000 2,551,000
CASH, END OF YEAR $ 3,017,000 $ 3,058,000 $1,652,000
=========== =========== ==========
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 243,000 263,000 80,000
Income tax effect related to fair
value adjustment (94,000) (102,000) (31,000)
Cash paid during the year for:
Interest 2,428,000 2,541,000 2,181,000
Income taxes 178,000 520,000 385,000
Stockholder redemption accrual - - 865,000
Adjustment of stockholder redemption
accrual - (45,000) -
See notes to consolidated financial statements.
(Concluded)
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BIG SKY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1997, 1996, AND 1995
- ------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of Big Sky Bancorp, Inc. and its wholly-owned subsidiary, First
Federal Savings and Loan Association of Montana ("FFSL of Montana")
(collectively, the "Company"). All significant intercompany transactions
and balances have been eliminated. Certain prior period amounts have been
reclassified to conform to current year presentation.
USE OF ACCOUNTING ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make assumptions that result in estimates 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 Company sells certain loans or participating interests
in loans to generate servicing income and to provide funds for additional
lending. At March 31, 1997 and 1996, management had determined that there
were no loans in the Company's portfolio which were held for sale.
Under servicing agreements, the Company retains the servicing on loans
sold 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.
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 Company 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 Company's control or because of changes in the
Company's strategy for the sale of the property. There was no REO at March
31, 1997 and 1996.
-7-
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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.
The Company accounts for the impairment on loans in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No.
114, Accounting by Creditors for Impairment of a Loan. This statement
requires 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.
INVESTMENT SECURITIES - The Company 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 Company
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. Net
unrealized gains and losses for available for sale securities are excluded
from earnings and reported net of tax in a separate component of
stockholders' equity until realized.
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
ASSET IMPAIRMENT - Effective April 1, 1996, the Company adopted SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of. This statement requires that long-lived assets
and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
adoption of SFAS No. 121 had no material impact on the financial
statements.
-8-
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<PAGE>
NET INCOME PER SHARE is based on net income and the weighted average
number of shares outstanding and outstanding stock options, during the
year, which were 308,461, 305,882, and 362,622 during the years ended
March 31, 1997, 1996, and 1995.
SFAS No. 128, Earnings per Share, issued in February 1997, establishes
standards for computing and presenting earnings per share ("EPS") and
applies to entities with publicly-held common stock or potential common
stock. It replaces the presentation of primary EPS with a presentation of
basic EPS and requires the dual presentation of basic and diluted EPS on
the face of the income statement. This statement is effective for
financial statements issued for periods after December 15, 1997, including
interim periods; earlier application is not permitted. This statement
requires restatement of all prior period EPS data presented. The impact of
the adoption of this statement is not anticipated to be material to the
Company.
INCOME TAXES - The Company accounts for income taxes in accordance with
the provisions of SFAS No. 109, Accounting for Income Taxes, which
requires the use of the asset and 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.
STOCK-BASED COMPENSATION - The Company accounts for stock compensation
using the intrinsic value method as prescribed in Accounting Principles
Board APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. Under the intrinsic value based method,
compensation costs for stock options is measured as the excess, if any, of
the quoted market price of the stock at grant date over the amount an
employee must pay to acquire the stock. Stock options granted have no
intrinsic value at the grant date, and under APB No. 25 there is no
compensation cost to be recognized.
Effective April 1, 1996, the Company adopted SFAS No. 123, Accounting for
Stock-Based Compensation, which encourages, but does not require,
companies to record compensation costs for stock-based employee
compensation plans at fair value. The fair value approach measures
compensation costs based on factors such as the term of the option, the
market price at grant date, and the option exercise price, with expense
recognized over the vesting period. See Note 14 for the pro forma effect
on net income and EPS, as if the fair value method encouraged by SFAS No.
123 was used.
2. INTEREST RATE RISK MANAGEMENT
Strategies used by the Company 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, 1997, the Company had interest-earning assets of $61,409,000
having a weighted effective yield of 7.54%. Interest-bearing liabilities
totaled $55,072,000 with a weighted effective cost of 4.74%. At March 31,
1997, interest-sensitive assets of $11,392,000 and interest-sensitive
liabilities of $40,470,000 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, 1997
------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Yield
Investment securities:
Equity securities:
Mutual Fund $ 125,000 $ - $ 8,000 $ 117,000 5.46 %
FHLMC stock 9,000 233,000 - 242,000 37.02
----------- ---------- ---------- ---------- ------
134,000 233,000 8,000 359,000 7.57
----------- ---------- ---------- ---------- ------
Mortgage-backed securities:
U.S. Government and
agency obligations:
Due after one but
within five years 373,000 12,000 - 385,000 8.69
Due after five but
within ten years 190,000 9,000 - 199,000 9.25
After ten years 1,236,000 36,000 - 1,272,000 7.17
----------- ---------- ---------- ---------- ------
1,799,000 57,000 - 1,856,000 7.70
----------- ---------- ---------- ---------- ------
Collateralized mortgage
obligations:
U.S. Government and
agency obligations:
Due after one but
within five years 493,000 - 9,000 484,000 5.75
Due after ten years 5,110,000 - 30,000 5,080,000 6.60
----------- ---------- ---------- ---------- ------
5,603,000 - 39,000 5,564,000 6.52
----------- ---------- ---------- ---------- ------
$ 7,536,000 $ 290,000 $ 47,000 $7,779,000 6.82 %
=========== ========== ========== ========== ======
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 and
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 %
=========== ========== ========== ========== ====
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.
At March 31, 1997 and 1996, accrued interest on investment securities was
$60,000 and $48,000, respectively. Accrued interest on mortgage-backed
securities was $31,000 and $24,000 at March 31, 1997 and 1996,
respectively.
-10-
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Proceeds from sale of investment securities available for sale were
$101,000 and zero during the years ended March 31, 1997 and 1996. Realized
gains and losses on those sales were $46,000 and zero, respectively.
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
1997 Cost Gains Losses Value Yield*
Investment securities:
U.S. Government and
agency obligations:
Due within one year $ 1,000,000 $ - $ 8,000 $ 992,000 4.32 %
Due after one but
within five years 5,949,000 - 85,000 5,864,000 6.25
Due after five but
within ten years 5,500,000 - 252,000 5,248,000 5.87
Due after ten years 249,000 - 12,000 237,000 7.25
----------- ------- -------- ----------- ----
12,698,000 - 357,000 12,341,000 5.91
----------- ------- -------- ----------- ----
Certificates of deposit:
Due within one year 100,000 - - 100,000 5.20
Due after one but
within five years 190,000 - - 190,000 9.00
----------- ------- -------- ----------- ----
290,000 - - 290,000 7.69
----------- ------- -------- ----------- ----
Municipal obligations**:
Due after one but
within five years 185,000 - 4,000 181,000 6.37
Due after five but
within ten year 100,000 - 1,000 99,000 7.68
----------- ------- -------- ----------- ----
285,000 - 5,000 280,000 6.83
----------- ------- -------- ----------- ----
Mortgage-backed
securities:
U.S. Government and
agency obligations:
Due after ten years 575,000 31,000 - 606,000 7.76
----------- ------- -------- ----------- ----
$13,848,000 $31,000 $362,000 $13,517,000 6.06 %
=========== ======= ======== =========== ====
Amortized Unrealized Unrealized Fair
1996 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 %
=========== ======= ======== =========== ====
*Weighted average yield at March 31.
**The yield was adjusted to reflect tax equivalent yields on nontaxable
investment income.
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There were no sales of securities held to maturity during the years ended
March 31, 1997, 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:
1997 1996
Conventional $34,520,000 $36,211,000
FHA and VA 540,000 638,000
Consumer and other 1,145,000 1,358,000
----------- -----------
36,205,000 38,207,000
----------- -----------
Less:
Deferred loan fees, net 295,000 331,000
Allowance for loan losses 508,000 468,000
Undisbursed loans in process 79,000 -
Unearned discounts 8,000 8,000
----------- -----------
890,000 807,000
----------- -----------
Loans receivable, net $35,315,000 $37,400,000
=========== ===========
Loans by maturity or repricing date were as follows at March 31:
1997 1996
Adjustable rate loans:
Due within one year $ 7,953,000 $ 9,505,000
After one but within five years 557,000 631,000
----------- -----------
8,510,000 10,136,000
----------- -----------
Fixed rate loans:
Due within one year 626,000 779,000
After one but within five years 1,845,000 1,271,000
After five but within ten years 3,925,000 4,664,000
After ten years 21,299,000 21,357,000
----------- -----------
27,695,000 28,071,000
----------- -----------
$36,205,000 $38,207,000
=========== ===========
The Company serviced loans for others totaling $2,443,000, $3,141,000, and
$3,854,000 as of March 31, 1997, 1996, and 1995, respectively. These loan
balances are not included in the balance sheets as they are not assets of
the Company.
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At March 31, 1997, the Company had a commitment outstanding to originate a
fixed rate mortgage loan of $80,000 with an interest rate of 8.325%. As of
March 31, 1997, the Company was in compliance with limitations on loans to
one borrower.
At March 31, 1997 and 1996, accrued interest on loans were $215,000 and
$236,000, respectively.
Over 99% of the mortgage loans in the portfolio at March 31, 1997 and
1996, 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:
1997 1996 1995
Beginning balance $745,000 $912,000 $936,000
Originations 124,000 50,000 -
Principal repayments (204,000) (217,000) (24,000)
-------- -------- --------
$665,000 $745,000 $912,000
======== ======== ========
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:
1997 1996 1995
Balance, beginning of period $468,000 $425,000 $383,000
Loans charged off 1,000 - -
Recoveries (2,000) - -
-------- -------- --------
Net recoveries (1,000) - -
Provision for loan losses 41,000 43,000 42,000
-------- -------- --------
Balance, end of period $508,000 $468,000 $425,000
======== ======== ========
7. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at March 31:
1997 1996
Buildings and improvements $ 1,463,000 $ 1,470,000
Furniture and equipment 825,000 764,000
----------- -----------
2,288,000 2,234,000
Less accumulated depreciation 1,143,000 1,081,000
----------- -----------
1,145,000 1,153,000
Land 190,000 190,000
----------- -----------
$ 1,335,000 $ 1,343,000
=========== ===========
-13-
<PAGE>
<PAGE>
On October 2, 1995, the Company 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.
8. DEPOSITS
Deposit accounts consisted of the following:
Average Average
Interest March 31, Interest March 31,
Account Type Rate 1997 Rate 1996
Checking accounts 2.10 % $ 4,491,000 2.21 % $ 4,075,000
Money market 2.07 880,000 2.76 1,041,000
Savings and passbook
accounts 2.99 9,540,000 3.14 9,990,000
Certificate accounts 5.49 35,161,000 5.64 37,737,000
----------- -----------
$50,072,000 $52,843,000
=========== ===========
Weighted average interest 4.65 % 4.85 %
rate ==== ====
Deposit accounts as of March 31, 1997, mature as follows:
Less than one year $40,470,000
One year to two years 5,726,000
Two years to three years 2,011,000
Three years to four years 1,409,000
Four years to five years 456,000
-----------
$50,072,000
===========
Interest expense by deposit type for the years ended March 31 consisted of
the following:
1997 1996 1995
Checking and money market accounts $ 120,000 $ 125,000 $ 141,000
Savings and passbook accounts 292,000 337,000 369,000
Certificate accounts 2,002,000 2,059,000 1,647,000
---------- ---------- ----------
$2,414,000 $2,521,000 $2,157,000
========== ========== ==========
Certificates of deposit in amounts of $100,000 or more totaled $3,867,000
and $3,656,000 at March 31, 1997 and 1996, 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").
-14-
<PAGE>
<PAGE>
FHLB advances are collateralized as provided for in the Advance, Pledge,
and Security Agreements with the FHLB, by FHLB stock owned by the Company,
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 Company currently has a credit line of 15% of
the total assets of the Company, subject to collateralization
requirements. At March 31, 1997, the interest rate on the outstanding
borrowings of $5,000,000 was 5.04%.
Under the Program, which was approved on April 26, 1996, the Company has 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, 1997
or 1996.
10. INCOME TAXES
The provision for income taxes consisted of the following for the years
ended March 31:
1997 1996 1995
Current provision $185,000 $426,000 $492,000
Deferred (benefit) provision 60,000 155,000 (15,000)
-------- -------- --------
$245,000 $581,000 $477,000
======== ======== ========
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:
1997 1996 1995
Federal income taxes computed at
statutory rates $198,000 $508,000 $402,000
State taxes, net of federal income tax
benefit 30,000 70,000 56,000
Other, net 17,000 3,000 19,000
-------- -------- --------
Income tax expense included
in the statements of income $245,000 $581,000 $477,000
======== ======== ========
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:
1997 1996
Deferred tax assets:
Loan loss reserve $ 197,000 $ 181,000
Deferred loan fees 115,000 129,000
Other 3,000 3,000
--------- ---------
315,000 313,000
Deferred tax liabilities:
Accumulated depreciation (159,000) (148,000)
Unrealized appreciation on securities
available for sale (94,000) (102,000)
FHLB stock dividends (488,000) (434,000)
Tax qualified loan loss reserve (163,000) (207,000)
Other (49,000) -
--------- ---------
(953,000) (891,000)
--------- ---------
Net deferred liabilities $(638,000) $(578,000)
-15-
<PAGE>
<PAGE>
For the fiscal year ended March 31, 1996 and years prior, the Company
determined bad debt expense to be deducted from taxable income based on 8%
of taxable income before such deduction as provided by a provision in the
Internal Revenue Code ("IRC"). In August 1996, the provision in the IRC
allowing the 8% of taxable income deduction was repealed. Accordingly, the
Company is required to use the write-off method to record bad debt in the
current period and must recapture the excess reserve accumulated from
April 1, 1987 to March 31, 1996 from use of the 8% method ratably over a
six-taxable year period. The income tax position from 1987 to 1996
included an amount for the tax effect on such excess reserves. During the
period ended March 31, 1997, $95,000 of the deferred tax liability for bad
debt deductions, taken in prior periods, was recaptured.
There was no valuation allowance for deferred tax assets as of March 31,
1997 or 1996.
Taxes related to gains on sales of investments were $18,000, zero, and
$45,000 for the three years ended March 31, 1997.
11. PENSION PLAN
The Company 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 Company's contributions for periods
subsequent to the Plan year ended June 30, 1991. Since the Company is a
member of the Fund, it is not practicable to determine the Company's
portion of net assets available for vested or nonvested benefits as of
March 31, 1997 and 1996.
12. REGULATORY CAPITAL REQUIREMENTS
The Company is not subject to any regulatory capital requirements. FFSL of
Montana, however, is subject to various regulatory capital requirements
administered by the Office of Thrift Supervision ("OTS"). Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, FFSL of Montana must meet specific capital guidelines
that involve quantitative measures of FFSL of Montana's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. FFSL of Montana's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk, weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require FFSL of Montana to maintain minimum amounts and ratios of total
capital to risk-weighted assets, of core capital to total assets, and
tangible capital to tangible assets (set forth in the table below).
Management believes FFSL of Montana meets all capital adequacy
requirements to which it is subject as of March 31, 1997.
As of March 31, 1997 and 1996, the most recent notification from the OTS
categorized FFSL of Montana as "well capitalized" under the regulatory
framework for prompt corrective action. To be categorized as "well
capitalized," FFSL of Montana must maintain minimum total risk-based, Tier
I risk-based, and Tier I leverage ratios as set forth in the table below.
There are no conditions or events since that notification that management
believes have changed the institution's category.
-16-
<PAGE>
<PAGE>
FFSL of Montana's actual and required minimum capital amounts and ratios
are presented in the following table:
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
--------------- ----------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
As of March 31,
1997
Total Capital:
(To Risk
Weighted
Assets) $ 7,078,000 25.9 % $ 2,183,000 8.0 % $ 2,729,000 10.0 %
Core or Tier
I Capital:
(To Risk
Weighted
Assets) 6,735,000 24.7 % N/A N/A 1,637,000 6.0 %
Core Capital:
(To Total
Assets) 6,735,000 10.6 % 1,900,000 3.0 % 3,167,000 5.0 %
Tangible
Capital:
(To Tangible
Assets) 6,735,000 950,000 1.5 % N/A N/A
As of March 31,
1996
Total Capital:
(To Risk Weighted
Assets) 6,676,000 24.1 % 2,216,000 8.0 % 2,771,000 10.0 %
Core or Tier I
Capital:
(To Risk
Weighted
Assets) 6,328,000 22.8 % N/A N/A 1,662,000 6.0 %
Core Capital:
(To Total
Assets) 6,328,000 1,825,000 3.0 % 3,042,000 5.0 %
Tangible
Capital:
(To Tangible
Assets) 6,328,000 10.4 % 913,000 1.5 % N/A N/A
The following table is a reconciliation of the Company's capital,
calculated according to generally accepted accounting principles (GAAP),
to regulatory tangible and risk-based capital at March 31, 1997:
Equity $6,884,000
Unrealized securities gain 149,000
----------
Tangible capital 6,735,000
General valuation allowance 343,000
----------
Total capital $7,078,000
==========
On August 23, 1993, the OTS issued a regulation which would add an
interest rate risk component to the risk capital standards (the "final IRR
rule"). Institutions with a greater than normal interest rate risk
exposure will be required to take a deduction from the total capital
available to meet their risk based capital requirement. That deduction is
equal to one-half of the difference between the Company's actual measured
exposure as defined by the regulation. Although no such deduction was
required as a result of the Company's most recent regulatory examination,
a deduction may be required as a result of future examinations.
-17-
<PAGE>
<PAGE>
At periodic intervals, the OTS and the Federal Deposit Insurance
Corporation ("FDIC") routinely examine the Company'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
Company's financial statements be adjusted in accordance with their
findings. A future examination by the OTS or the FDIC could include a
review of certain transactions or other amounts reported in the Company's
1997 financial statements. In view of the uncertain regulatory
environment in which the Company operates, the extent, if any, to which a
forthcoming regulatory examination may ultimately result in adjustments to
the 1997 financial statements cannot presently be determined.
On September 30, 1996, the United States Congress passed and the President
signed into law the omnibus appropriations package (C.R.), including the
Bank Insurance Fund/Savings Association Insurance Fund ("BIF/SAIF") and
Regulatory Burden Relief packages. Included in this legislation was a
requirement for SAIF-insured institutions to recapitalize the SAIF
insurance fund through a one-time special assessment to be paid within 60
days of the first of the month following the enactment. The FDIC was
charged with the ultimate responsibility of determining the specific
assessment, which was determined to be 65.7 basis points of the March 31,
1995 SAIF deposit assessment base. As the Company is insured by the SAIF,
the assessment resulted in a pre-tax charge to other expenses of $345,000,
based on the SAIF assessment base of $52.4 million as of March 31, 1995.
13. STOCKHOLDERS' EQUITY
STOCKHOLDER REDEMPTION - In fiscal 1995, in connection with the formation
of Big Sky Bancorp, Inc., holders of 85,602 common shares elected to
redeem such shares at fair market value. Holders of 25,400 shares accepted
the Company's offer of $14.375 per share and the shares were redeemed at a
total cost of $366,000. Holders of 60,202 shares dissented with the
Company's determination of fair market value. In fiscal 1996, based upon a
per share fair market value of $13.625 as determined by an independent
appraiser and approved by the OTS, the holders redeemed the remaining
shares for $831,000 which included interest accrued from the date of
formation, net of expenses.
LIQUIDATION ACCOUNT - 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 Company 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.
The Company 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.
-18-
<PAGE>
<PAGE>
14. STOCK OPTION PLAN
Under the 1992 Employee Stock Option (the Option Plan), the Company may
grant options to purchase up to 39,100 shares of common stock to employees
and directors at prices not less than the fair value at date of grant.
Options are exercisable when granted and expire 10 years from the date of
grant.
Option activity under the plans is as follows:
Weighted
Average
Number of Exercise
Shares Price
Outstanding, April 1, 1995 27,370 $ 5.00
Granted - -
Exercised 2,346 5.00
------ ------
Outstanding, March 31, 1996 25,024 5.00
Granted 11,730 15.00
Exercised 977 5.00
------ ------
Outstanding, March 31, 1997 35,777 $ 8.28
====== ======
Additional information regarding options outstanding as of March 31, 1997
is as follows:
Options Outstanding Options Exercisable
------------------------- ----------------------
Weighted
Avg.
Remaining
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (yrs) Price Exercisable Price
$ 5.00 24,047 5 5.00 24,047 5.00
15.00 11,730 10 15.00 11,730 15.00
At March 31, 1997, there were no available shares for future grants under
the Option Plan.
ADDITIONAL STOCK PLAN INFORMATION - As discussed in Note 1, the Company
continues to account for its stock-based awards using the intrinsic value
method in accordance with Accounting Principles Board No. 25, Accounting
for Stock Issued to Employees, and its related interpretations.
Accordingly, no compensation expense has been recognized in the financial
statements for employee stock arrangements.
SFAS No. 123 requires the disclosure of pro forma net income and earnings
per share had the Company adopted the fair value method as of the
beginning of fiscal 1996. Under SFAS 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing
models, even though such models were developed to estimate the fair value
of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option
awards. These models also require subjective assumptions, including future
stock price volatility and expected time to exercise, which greatly affect
the calculated values. The Company's calculations were made using the
Black-Scholes option pricing model with the following weighted average
assumptions for fiscal year 1997: expected life, 5 years; stock
volatility, 21.68% (1996 assumptions are not applicable as there were no
stock options granted in that year); risk free interest rate, 6.69%; and
no dividends during the expected term. The Company's calculations are
based on a multiple option valuation approach and forfeitures are
recognized as they occur. If the accounting provisions of the new
pronouncement had
-19-
<PAGE>
<PAGE>
been adopted as of the beginning of 1996, 1996 and 1997 net income and
earnings per share in both years would have been decreased by $45,000 and
$.14, respectively.
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 Company 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, 1997 and 1996:
1997 1996
---------------------------------------------
Carrying Fair Carrying Fair
Assets Value Value Value Value
Cash $ 3,017,000 $ 3,017,000 $ 3,058,000 $ 3,058,000
Investment securities
available for sale 134,000 359,000 182,000 396,000
Mortgage-backed securities
available for sale 7,402,000 7,420,000 2,600,000 2,649,000
Investment securities held
to maturity 13,273,000 12,911,000 13,233,000 12,938,000
Mortgage-backed securities
held to maturity 575,000 606,000 685,000 714,000
Loans receivable, net 35,315,000 36,472,000 37,400,000 38,985,000
LIABILITIES
Checking, money market, and
passbook accounts 14,912,000 14,912,000 15,106,000 15,106,000
Certificate accounts 35,160,000 35,274,000 37,737,000 38,023,000
FHLB advances 5,000,000 4,867,000 - -
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.
-20-
<PAGE>
<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.
FHLB ADVANCE - The fair value is calculated based on the discounted value
of the contractual cash flows. The discount rate used is the result of
rates currently offered for debt with similar maturities.
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, 1997 and
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 those dates 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 balance sheets at March 31, 1997 and 1996 are as follows:
1997 1996
ASSETS:
Cash $ 283,000 $ 320,000
Investment in subsidiary 6,885,000 6,489,000
Other assets 8,000 8,000
---------- ----------
Total $7,176,000 $6,817,000
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Other liabilities $ 2,000 $ 21,000
Stockholders' equity 7,174,000 6,796,000
---------- ----------
Total $7,176,000 $6,817,000
========== ==========
On December 21, 1994, the Board of Directors of FFSL of Montana declared a
$1,500,000 dividend payable to Big Sky Bancorp, Inc.
-21-
<PAGE>
<PAGE>
The statements of income for the years ended March 31, 1997, 1996, and
1995 are as follows:
1997 1996 1995
Other income:
Equity in undistributed income of
subsidiary $407,000 $921,000 $181,000
Interest income from investments 9,000 20,000 -
Other nonoperating income - 8,000 -
Other expense:
Interest and other 31,000 34,000 22,000
-------- -------- --------
Net income $385,000 $915,000 $159,000
======== ======== ========
The statements of cash flows for the years ended March 31, 1997, 1996, and
1995 are as follows:
1997 1996 1995
Operating activities:
Net income $385,000 $ 915,000 $ 159,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed income
of subsidiary (407,000) (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 (18,000) 15,000 22,000
Franchise tax accrual (1,000) 3,000 -
-------- ---------- ----------
Net cash provided by (used
in) operating activities (41,000) 1,139,000 -
-------- ---------- ----------
Financing activities:
Stockholder redemption - (831,000) -
Stock options exercised 4,000 12,000 -
-------- ---------- ----------
Net cash provided by (used
in) financing activities 4,000 (819,000) -
-------- ---------- ----------
Net increase (decrease) in cash (37,000) 320,000 -
Cash:
Beginning of period 320,000 - -
-------- ---------- ----------
End of period $283,000 $ 320,000 $ -
======== ========== ==========
Supplemental disclosures related to the statement of cash flows:
Noncash activities:
Adjustment of stockholder
redemption accrual $ - $ 45,000 $ -
Accounts receivable due from
subsidiary - - 1,135,000
Stockholder redemption accrual - - 865,000
* * * * * *
-22-
<PAGE>
<PAGE>
NOTICE OF ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 3600 Brooks Street in
Missoula, Montana, on Wednesday, July 30, 1997, 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, 1997 the
stock was traded at prices ranging between $ 16.875 and $ 20.25. The last
known trade occurred on June 4, 1997 at $ 20.00. 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, 1997 there were 326 stockholders of record as evidenced by the
number of stock certificates which have been issued, and 308,721 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 13 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.
-23
<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 Linda Haverfield
Vice President-Treasurer Assistant Vice President
Corporate Secretary Southside Office Manager
Debra Roth
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
First Federal Savings and Loan Association of Montana
P.O. Box 1160
Hamilton, MT 59840
-24-
<PAGE>
<PAGE>
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 Company's subsidiaries are included in the
Company's consolidated financial statements.
<PAGE>
<PAGE>
Exhibit 23
Deloitte &
Touche LLP
- ----------- ----------------------------------------------------
Suite 3900 Telephone: (503) 222-1341
111 S.W. Fifth Avenue Facsimile: (503) 224-2172
Portland, Oregon 97204-3698
INDEPENDENT AUDITORS' 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
9, 1997, on the financial statements appearing in the Annual Report to
stockholders of Big Sky Bancorp, Inc. for the year ended March 31, 1997.
/s/Deloitte & Touche LLP
Portland, Oregon
June 25, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 3017
<INT-BEARING-DEPOSITS> 1813
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7779
<INVESTMENTS-CARRYING> 13848
<INVESTMENTS-MARKET> 13517
<LOANS> 35315
<ALLOWANCE> 508
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<LONG-TERM> 5000
0
0
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<INTEREST-TOTAL> 4622
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<EXPENSE-OTHER> 1731
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<INCOME-PRE-EXTRAORDINARY> 385
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<EPS-PRIMARY> 1.18
<EPS-DILUTED> 1.18
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<LOANS-NON> 0
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<RECOVERIES> 2
<ALLOWANCE-CLOSE> 508
<ALLOWANCE-DOMESTIC> 508
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
