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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
BIG SKY BANCORP, INC.
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(name of small business issuer in its charter)
Delaware 81-0494188
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) I.D. Number)
711 South First Street, Hamilton, Montana 59840
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (406) 363-4400
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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. [X]
The registrant's revenues for the fiscal year ended March 31, 1998 were
approximately $5 million.
The last trade of shares of the Common Stock known by management and
between parties unaffiliated with the registrant was on May 12, 1998 at $31.00
per share. As of June 9, 1998, 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 9, 1998 was
$9,570,351 (308,721 shares at $31.00 per share). For purposes of this
calculation, officers and directors of the registrant are considered
nonaffiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
None
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Part I
Item 1. Business
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General
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.
On April 23, 1998, the Company entered into a definitive merger agreement
("Agreement") with Sterling Financial Corporation ("Sterling") pursuant to
which the Company will be merged into Sterling and the Association will be
merged into Sterling's wholly-owned subsidiary, Sterling Savings Association.
The Agreement provides that each share of the Company's common stock will be
exchanged for 1.384 shares of Sterling common stock. The merger is intended
to constitute a tax-free reorganization and to be accounted for as a pooling-
of-interests. Consummation of the merger is subject to several conditions,
including receipt of applicable regulatory approval and approval by the
Company's shareholders.
Market Area
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 121,000. 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).
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Selected Financial Information
The following tables set forth certain information concerning the
consolidated financial position and results of operations of the Company at
the dates and for the periods indicated.
At March 31,
-------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(In Thousands)
FINANCIAL CONDITION DATA:
Total assets . . . . . . . . . . . . $64,045 $60,127 $60,922 $63,572 $62,268
Loans receivable, net. . . . . . . . 41,015 39,663 37,400 35,315 35,042
Mortgage-backed securities . . . . . 4,111 3,632 3,334 7,995 8,109
Cash, interest bearing deposits and
investment securities . . . . . . . 15,213 12,782 16,687 16,649 15,401
Deposits . . . . . . . . . . . . . . 56,507 52,324 52,843 50,072 47,770
Advances from the FHLB . . . . . . . -- -- -- 5,000 5,000
Stockholders' equity . . . . . . . . 6,345 5,704 6,796 7,174 7,947
At March 31,
-------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(In Thousands)
OPERATING DATA:
Interest income. . . . . . . . . . . $ 4,934 $ 4,604 $ 4,673 $ 4,622 $ 4,768
Interest expense . . . . . . . . . . 2,289 2,197 2,540 2,437 2,607
------- ------- ------- ------- -------
Net interest income . . . . . . . . 2,645 2,407 2,133 2,185 2,179
Provision for loan losses. . . . . . (42) (42) (43) (41) (30)
------- ------- ------- ------- -------
Net interest income after provision
for loan losses . . . . . . . . . . 2,603 2,365 2,090 2,144 2,149
Gain on sale of investments. . . . . 158 110 -- 46 --
Gain on sale of mortgage-backed
securities. . . . . . . . . . . . . 116 8 -- -- --
Gain on sale of premises and
equipment . . . . . . . . . . . . . -- -- 616 -- --
Other income . . . . . . . . . . . . 268 251 251 171 179
------- ------- ------- ------- -------
Total other income . . . . . . . . . 542 369 867 217 179
------- ------- ------- ------- -------
SAIF assessment expense. . . . . . . -- -- -- 345 --
Other expense. . . . . . . . . . . . 1,471 1,572 1,461 1,386 1,346
------- ------- ------- ------- -------
Total other expense. . . . . . . . . 1,471 1,572 1,461 1,731 1,346
------- ------- ------- ------- -------
Income before income tax provision . 1,674 1,162 1,496 630 982
Provision for income taxes . . . . . (592) (477) (581) (245) (410)
------- ------- ------- ------- -------
Net income . . . . . . . . . . . . . $ 1,082 $ 685 $ 915 $ 385 $ 572
======= ======= ======= ======= =======
Basic earnings per share . . . . . . $ 2.77 $ 1.89 $ 2.99 $ 1.25 $ 1.85
Diluted earnings per share . . . . . $ 2.66 $ 1.80 $ 2.84 $ 1.18 $ 1.72
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Year Ended March 31,
------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
OTHER DATA:
Number of:
Total loans outstanding . . . . . . 927 830 801 751 819
Deposit accounts. . . . . . . . . . 6,585 6,121 5,904 5,386 5,098
Full-service offices. . . . . . . . 3 3 3 3 3
KEY OPERATING RATIOS:
At or For the
Year Ended March 31,
------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Performance Ratios:
Return on average assets (net
income divided by average
assets) . . . . . . . . . . . . . . 1.70% 1.10% 1.49% 0.64% 0.92%
Return on assets (net income
divided by average assets -
without SAIF expense). . . . . . . . -- -- -- 0.99 --
Return on average equity (net
income divided by average equity). . 18.89 11.01 14.62 5.50 7.55
Return on beginning equity (net
income divided by beginning equity -
without SAIF expense). . . . . . . . -- -- -- 8.77 --
Interest rate spread (difference
between yield on interest-earning
assets and average cost of interest-
bearing liabilities for the period). 3.17 3.19 2.82 2.80 2.76
Net interest margin (net interest
income as a percentage of average
interest-earning assets for the
period). . . . . . . . . . . . . . . 3.54 3.51 3.34 3.29 3.36
Non-interest expense to total assets. 2.30 2.61 2.40 2.18 2.16
Non-interest expense to average assets 2.31 2.51 2.38 2.28 2.15
Average interest-earning assets to
average interest-bearing liabilities 109.26 110.92 111.69 112.67 113.92
Asset Quality Ratios:
Allowance for loan losses to total
loans at end of period . . . . . . . .91 1.05 1.25 1.44 1.52
Net charge-offs to average outstanding
loans during the period. . . . . . . -- -- -- -- .01
Ratio of non-performing assets to
total assets . . . . . . . . . . . . .57 .67 .06 .06 --
Capital Ratios:
Average equity to average assets. . . 9.00 9.95 10.19 11.54 12.12
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Lending Activities
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.
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,
-----------------------------------------------------
1996 1997 1998
--------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
Mortgage Loans:
Residential(1):
Conventional . . . $34,183 91.40% $32,327 91.54% $31,239 89.15%
Federal Housing
Administration
("FHA") and
Veterans' Admin-
istration ("VA"). 638 1.71 540 1.53 492 1.40
Construction. . . . -- -- 188 0.53 1,134 3.24
Commercial. . . . . 2,028 5.42 2,005 5.68 1,743 4.97
Total mortgage ------- ------ ------- ------ ------- ------
loans. . . . . . 36,849 98.53 35,060 99.28 34,608 98.76
------- ------ ------- ------ ------- ------
Consumer and other
loans . . . . . . 1,358 3.63 1,145 3.24 1,400 3.99
------- ------ ------- ------ ------- ------
Total loans. . . . 38,207 102.16 36,205 102.52 36,008 102.75
------- ------ ------- ------ ------- ------
Less:
Undisbursed loans in
process. . . . . . -- -- 79 (0.22) 140 (0.40)
Unearned discounts. 8 (0.02) 8 (0.02) 8 (0.02)
Deferred loan fees,
net. . . . . . . . 331 (0.89) 295 (0.84) 284 (.81)
Allowance for loan
losses . . . . . . 468 (1.25) 508 (1.44) 534 (1.52)
Loans receivable, ------- ------ ------- ------ ------- ------
net. . . . . . . . $37,400 100.00% $35,315 100.00% $35,042 100.00%
======= ====== ======= ====== ======= ======
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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, 1998, residential mortgages
constituted approximately 89% 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
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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.
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,
1998, the Company had $1.01 million of such loans outstanding.
Commercial Real Estate Loans. At March 31, 1998, the Company had
commercial real estate loans outstanding of $1.7 million. Loans
collateralized by commercial properties have been the most prominent type of
lending diversification exhibited by the Company, amounting to approximately
5% of total loans outstanding at March 31, 1998. 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 $294,000 at March 31, 1998, 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 $520,000 at March 31, 1998, 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, 1998 the Company had $1.1 million 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 $1.4 million, including $491,000 of
loans secured by subordinate liens on real property, at March 31, 1998.
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 $11,000 consumer loans delinquent at March 31, 1998.
However, consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or
secured by assets that depreciate rapidly, such as automobiles. In the latter
case, repossessed collateral for a defaulted consumer loan may not provide an
adequate source of repayment for the outstanding loan and the remaining
deficiency
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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, 1998
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. . . . . . $4,438 $1,084 $4,380 $21,829 $31,731
Construction . . . . . 1,134 -- -- -- 1,134
Commercial . . . . . . 479 483 504 277 1,743
Consumer and other
loans. . . . . . . . . 492 677 143 88 1,400
------ ------ ------ ------- -------
Total loans . . . . . $6,543 $2,244 $5,027 $22,194 $36,008
====== ====== ====== ======= =======
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, 1999.
Fixed Rate Adjustable Rate Total
---------- --------------- -----
(In thousands)
Mortgage loans:
Residential. . . . . . . . . . . $28,235 $3,496 $31,731
Construction . . . . . . . . . . 1,134 -- 1,134
Commercial . . . . . . . . . . . 1,743 -- 1,743
Consumer and other loans . . . . . 1,400 -- 1,400
------- ------ -------
Total loans . . . . . . . . . . $32,512 $3,496 $36,008
======= ====== =======
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,
---------------------------
1996 1997 1998
---- ---- ----
(In thousands)
Total gross loans at
beginning of period. . . . . . . . . . . $40,502 $38,207 $36,205
Loans originated:
Single-family residential . . . . . . . . 3,947 4,612 2,968
Multi-family residential and
commercial real estate . . . . . . . . . 460 -- --
Construction. . . . . . . . . . . . . . . 62 534 2,215
Consumer and other. . . . . . . . . . . . 282 438 770
------- ------- -------
Total loans originated. . . . . . . . . 4,751 5,584 5,953
Loans purchased. . . . . . . . . . . . . . -- -- --
Loans sold . . . . . . . . . . . . . . . . -- -- --
Mortgage loan principal repayments . . . . 6,429 7,547 6,693
Net loan activity. . . . . . . . . . . . . (617) (39) 163
------- ------- -------
Total gross loans at end of period . . . . $38,207 $36,205 $36,208
======= ======= =======
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
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terms and conditions and are honored for up to 30 days from approval,
depending on the type of transaction. At March 31, 1998, the Company had
outstanding net loan commitments to originate fixed rate mortgage loans and
adjustable rate mortgage loans of approximately $31,000 and $-0-,
respectively.
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 $284,000 of net
deferred mortgage loan fees at March 31, 1998.
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 ("SFAS") No. 15.
March 31,
----------------------
1996 1997 1998
---- ---- ----
(In thousands)
Loans accounted for on
a nonaccrual basis:
Real estate -
Residential. . . . . . . . . . . $35 $-- $--
Consumer. . . . . . . . . . . . . -- -- --
--- --- ---
Total . . . . . . . . . . . . $35 $-- $--
Accruing loans which are contractually
past due 90 days or more:
Real estate -
Residential. . . . . . . . . . . $-- $38 $--
Consumer. . . . . . . . . . . . . -- -- --
--- --- ---
Total . . . . . . . . . . . . $-- $38 $--
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March 31,
----------------------
1996 1997 1998
---- ---- ----
(In thousands)
Total of nonaccrual and 90
days past due loans. . . . . . . $35 $38 $--
Real estate owned. . . . . . . . . -- -- --
Total nonperforming --- --- ---
assets. . . . . . . . . . . $35 $38 $--
=== === ===
Total nonaccrual loans
delinquent 90 days or
more to net loans. . . . . . . . .09% -- --
Total loans delinquent 90
days or more to total
assets . . . . . . . . . . . . . .06% .06% --
Total nonperforming assets
to total assets. . . . . . . . . .06% .06% --
Interest income that would have been recorded for the year ended March
31, 1998 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, 1998 amounted to $-0-.
Asset Classification. The Office of Thrift Supervision ("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, 1998, the Company had no loans classified as loss, doubtful
or substandard and had two residential mortgage loans totaling $53,000
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 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, 1998, the Company did not hold any real estate owned as a
result of foreclosure.
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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, 1998 the Company had
an allowance for loan losses of $534,000 which represented 1.5% 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, 1998 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,
-----------------------
1996 1997 1998
---- ---- ----
(Dollars in thousands)
Allowance at beginning of period . . . . . . . . $424 $468 $508
Provision for loan losses. . . . . . . . . . . . 44 41 30
---- ---- ----
Total. . . . . . . . . . . . . . . . . . . . . 468 509 538
---- ---- ----
Charge-offs:
Residential real estate . . . . . . . . . . . . -- -- --
Consumer. . . . . . . . . . . . . . . . . . . . -- (2) (5)
---- ---- ----
Total charge-offs. . . . . . . . . . . . . . . -- (2) (5)
---- ---- ----
.Recoveries:
Residential real estate . . . . . . . . . . . . -- -- --
Consumer. . . . . . . . . . . . . . . . . . . . -- 1 1
---- ---- ----
Total recoveries . . . . . . . . . . . . . . . -- 1 1
---- ---- ----
Net charge-offs . . . . . . . . . . . . . . . -- (1) (4)
---- ---- ----
Balance at end of period . . . . . . . . . . . $468 $508 $534
==== ==== ====
Ratio of allowance to total loans
outstanding at the end of the period. . . . . . 1.25% 1.44% 1.52%
Ratio of net charge-offs (recoveries)
to average loans outstanding
during the period . . . . . . . . . . . . . . . -- -- .01%
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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,
---------------------------------------------------------
1996 1997 1998
------------------- ------------------ -----------------
% 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 . . . $406 91.14% $442 91.30% $467 91.27%
Consumer . . . . . 62 3.55 66 3.16 67 3.17
---- ---- ----
Total allowance
for loan losses. $468 -- $508 -- $534 --
==== ==== ====
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.
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," requires that investments 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
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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,
----------------------------------------------------
1996 1997 1998
---------------- ---------------- ----------------
Percent Percent Percent
of of of
Carrying Port- Carrying Port- Carrying Port-
Value folio Value folio Value folio
----- ----- ----- ----- ----- -----
(Dollars in thousands)
Available for sale:
Marketable equity
securities. . . . . . . $ 396 2.33% $ 359 1.66% $ 547 3.32%
Mortgage-backed
securities. . . . . . . 2,164 12.76 1,856 8.58 1,986 12.05
Collateralized
mortgage obligations
("CMOs"). . . . . . . 485 2.86 5,564 25.73 5,665 34.37
Total available ------- ------ ------- ------ ------- ------
for sale . . . . . . 3,045 17.95 7,779 35.97 8,198 49.74
------- ------ ------- ------ ------- ------
Held to maturity:
U.S. Government
and agency obligations. 12,948 46.33 12,698 58.71 7,250 43.99
Certificates of deposit. 100 0.59 290 1.34 290 1.76
Municipal obligations. . 185 1.09 285 1.32 285 1.73
Mortgage-backed
securities . . . . . . 685 4.04 575 2.66 458 2.78
Total held to ------- ------ ------- ------ ------- ------
maturity . . . . . . 13,913 82.05 13,848 64.03 8,283 50.26
------- ------ ------- ------ ------- ------
Total . . . . . . . . $16,963 100.00% $21,627 100.00% $16,481 100.00%
======= ====== ======= ====== ======= ======
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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, 1998.
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. . . $ -- --% $ -- --% $ -- --% $ 547 7.88%
Mortgage-backed
securities. . . -- -- 279 8.66 986 7.00 721 7.03
CMOs . . . . . . -- -- -- -- 496 5.75 5,169 6.60
---- ---- ------ ---- ------ ---- ------ ----
Held to maturity:
U.S. Government
and agency
obligations . . 750 5.02 1,000 6.31 5,250 5.81 250 7.04
Certificates
of deposit. . . 100 5.85 -- -- 95 6.13 95 7.00
Municipal
obligations . . -- -- 185 6.37 100 7.68 -- --
Mortgage-backed
securities . . -- -- -- -- -- -- 458 7.92
---- ---- ------ ---- ------ ---- ------ ----
Total . . . . . $850 5.12% $1,464 7.20% $6,927 6.01% $7,240 6.84%
==== ==== ====== ==== ====== ==== ====== ====
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,
1998.
Percent-
age
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
- ---- ---- -------- ------ ------- --------
(Dollars in thousands, except for minimum amounts)
2.10% None NOW Accounts $ 25 $ 4,260 8.91%
2.99 None Regular Savings 10 8,556 17.91
3.07 None Money Market Accounts 2,500 776 1.62
Certificates of Deposit
-----------------------
5.00 90 days Fixed term, fixed rate 2,500 496 1.03
5.35 4-6 months Fixed term, fixed rate 2,500 3,533 7.39
5.79 7-12 months Fixed term, fixed rate 100 15,394 32.22
5.75 13-24 months Fixed term, fixed rate 100 3,266 6.84
5.89 25-48 months Fixed term, fixed rate 100 2,267 4.75
6.05 49-120 months Fixed term, fixed rate 100 9,222 19.33
------- ------
$47,770 100.00%
======= ======
Jumbo certificates of deposit require minimum deposits of $100,000 and
rates paid on such accounts are negotiable. At March 31, 1998, 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,
--------------------------------------------------------------------
1996 1997 1998
--------------- ----------------------- --------------------------
Percent Percent Percent
of of Increase of Increase
Amount Total Amount Total (Decrease) Amount Total (Decrease)
------ ----- ------ ----- ---------- ------ ----- ----------
(Dollars in thousands)
NOW
check-
ing $ 674 1.28% $1,020 2.04% $ 346 $ 979 2.05% $ (41)
Super
NOW
checking 3,401 6.43 3,471 6.93 70 3,281 6.86 (190)
Regular
savings
accounts 9,990 18.90 9,540 19.05 (450) 8,556 17.91 (984)
Money
market
deposit 1,041 1.97 880 1.76 (161) 776 1.62 (104)
Fixed-rate
certificates
which
mature in:
1-12
months 21,389 40.48 19,794 39.53 (1,595) 19,423 40.66 (371)
13-24
months 3,349 6.34 3,210 6.41 (139) 3,266 6.84 56
25-36
months 2,807 5.31 1,934 3.86 (873) 2,267 4.75 333
Certificates
maturing
there-
after . 10,192 19.29 10,223 20.42 31 9,222 19.31 (1,001)
------- ------ ------- ------ ------- ------- ------ -------
Total. $52,843 100.00% $50,072 100.00% $(2,771) $47,770 100.00% $(2,302)
======= ====== ======= ====== ======= ======= ====== =======
NOTE: Individual retirement accounts ("IRA") are included in certificate
balances: Amounts are $3.62 million, $3.63 million and $3.35
million for March 31, 1996, 1997 and 1998, 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,
-------------------------------
1996 1997 1998
---- ---- ----
(In thousands)
3.01 - 4.00%. . . . . . $ 668 $ -- $ --
4.01 - 5.00%. . . . . . 6,589 4,785 496
5.01 - 6.00%. . . . . . 17,121 24,025 24,371
6.01 - 7.00%. . . . . . 13,271 6,351 9,311
7.01 - 8.00%. . . . . . 88 -- --
The following table sets forth the amount and maturities of time deposits
at March 31, 1998.
Amount Due
-----------------------------------------------------
Less Than 1-2 2-3 3-4 After
One Year Years Years Years 4 Years
-------- ----- ----- ----- -------
(In thousands)
4.01 - 5.00% . . . . . . $ 496 $ -- $ -- $ -- $ --
5.01 - 6.00% . . . . . . 19,496 3,565 915 395 --
6.01 - 7.00% . . . . . . 4,913 772 1,222 33 2,371
The following table sets forth the savings activities of the Company for
the periods indicated.
Year Ended March 31,
-------------------------
1996 1997 1998
---- ---- ----
(In thousands)
Beginning balance. . . . . . . . . . . . . $52,324 $52,843 $50,072
Net increase (decrease)
before interest
credited . . . . . . . . . . . . . . . . (2,002) (5,198) (4,648)
Interest credited. . . . . . . . . . . . . 2,521 2,427 2,346
Net increase (decrease)
in savings deposits . . . . . . . . . . 519 (2,771) (2,302)
------- ------- -------
Ending balance . . . . . . . . . . . . . . $52,843 $50,072 $47,770
======= ======= =======
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, 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
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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.
The following table sets forth certain information regarding the
Company's use of FHLB advances during the periods indicated.
Years Ended March 31,
---------------------
1997 1998
---- ----
(Dollars in Thousands)
Maximum balance at any month end . . . . . . $5,000 $5,000
Average balance. . . . . . . . . . . . . . . 5,000 452
Year end balance . . . . . . . . . . . . . . 5,000 5,000
Weighted average interest rate:
At end of year . . . . . . . . . . . . . . 5.39% 5.04%
During the year. . . . . . . . . . . . . . 5.33 5.04
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 Securities and Exchange Commission ("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.
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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 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 provides that any savings and loan holding company that controls
a savings association that fails the QTL test, as explained under "REGULATION
OF FIRST FEDERAL -- 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 the Home Owners' Loan Act, as amended ("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
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<PAGE>
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, is also
required to file certain reports with, and otherwise comply with the rules and
regulations of, the OTS and the SEC.
Federal Regulation of Savings Associations
Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the
Treasury. The OTS generally possesses the supervisory and regulatory duties
and responsibilities formerly vested in the Federal Home Loan Bank Board.
Among other functions, the OTS issues and enforces regulations affecting
federally insured savings associations and regularly examines these
institutions.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs,
is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to: supervise the FHLBs; ensure that the
FHLBs carry out their housing finance mission; ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets; and
ensure that the FHLBs operate in a safe and sound manner. The Association, as
a member of the FHLB-Seattle, is required to acquire and hold shares of
capital stock in the FHLB-Seattle in an amount equal to the greater of (i)
1.0% of the aggregate outstanding principal amount of residential mortgage
loans, home purchase contracts and similar obligations at the beginning of
each year, or (ii) 1/20 of its advances (borrowings) from the FHLB-Seattle.
The Association is in compliance with this requirement with an investment in
FHLB-Seattle stock of $2.01 million at March 31, 1998. 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. The FDIC maintains two separate insurance funds:
the Bank Insurance Fund ("BIF") and the SAIF. 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" or "undercapitalized"), which are defined in the same
manner as the regulations establishing the prompt corrective action system
under the FDIA as discussed below. The matrix so created results in nine
assessment risk classifications, with rates that until September 30, 1996
ranged from 0.23% for well capitalized, financially sound institutions with
only a few minor weaknesses to 0.31% for undercapitalized institutions that
pose a substantial risk of loss to the SAIF unless effective corrective action
is taken.
Pursuant to the Deposit Insurance Fund Act ("DIF Act"), which was enacted
on September 30, 1996, the FDIC imposed a special assessment on each
depository institution with SAIF-assessable deposits which resulted in the
SAIF achieving its designated reserve ratio. In connection therewith, the
FDIC reduced the assessment schedule for SAIF members, effective January 1,
1997, to a range of 0% to 0.27%, with most institutions, including the
Association, paying 0%. This assessment schedule is the same as that for the
BIF, which reached its designated reserve ratio in 1995. In addition, since
January 1, 1997, SAIF members are charged an assessment of 0.065% of SAIF-
assessable deposits for the purpose of paying interest on the obligations
issued by the Financing Corporation ("FICO") in the 1980's to help fund the
losses incurred by failed institutions. BIF-assessable deposits will be
charged an assessment to help pay interest on the FICO bonds at a rate of
approximately .013% until the earlier of December 31,
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1999 or the date upon which the last savings association ceases to exist,
after which time the assessment will be the same for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF Act contemplates
the development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter
may take and what effect, if any, the adoption of a new charter would have on
the operation of the Association.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances that could
result in termination of the deposit insurance of the Association.
Liquidity Requirements. Under OTS regulations, each savings institution
is required to maintain an average daily balance of liquid assets (cash,
certain time deposits and savings accounts, bankers' acceptances, and
specified U.S. Government, state or federal agency obligations and certain
other investments) equal to a monthly average of not less than a specified
percentage (currently 4.0%) of its net withdrawable accounts plus short-term
borrowings. Monetary penalties may be imposed for failure to meet liquidity
requirements. See Item 6. "Management's Discussion and Analysis or Plan of
Operation" contained herein.
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, a
Tier I risk-based capital ratio of 4.0% or more and a leverage ratio of 4.0%
or more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized;" (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that
is less than 4.0% or a leverage ratio that is less than 4.0% (3.0% under
certain circumstances); (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a leverage ratio that is less than
3.0%; and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%.
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.
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At March 31, 1998, 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, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). 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 qualified thrift lender ("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, 1998, the Association satisfied the QTL test.
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
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
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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. An institution that fails to meet the core
capital requirement would be required to file with the OTS a capital plan that
details the steps they will take to reach compliance. In addition, the OTS's
prompt corrective action regulation provides that a savings institution that
has a leverage ratio of less than 4% (3% for institutions receiving the
highest CAMEL examination rating) will be deemed to be "undercapitalized" and
may be subject to certain restrictions. See "-- Federal Regulation of Savings
Associations -- Prompt Corrective Action."
As required by federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks. The OTS has proposed that only those savings associations
rated a composite one (the highest rating) under the CAMEL rating system for
savings associations will be permitted to operate at or near the regulatory
minimum leverage ratio of 3%. All other savings associations will be required
to maintain a minimum leverage ratio of 4% to 5%. The OTS will assess each
individual savings association through the supervisory process on a
case-by-case basis to determine the applicable requirement. No assurance can
be given as to the final form of any such regulation, the date of its
effectiveness or the requirement applicable to the Association.
Savings associations also must maintain "tangible capital" not less than
1.5% of the Association's adjusted total assets. "Tangible capital" is
defined, generally, as core capital minus any "intangible assets" other than
purchased mortgage servicing rights.
Each savings institution must maintain total risk-based capital equal to
at least 8% of risk-weighted assets. Total risk-based capital consists of the
sum of core and supplementary capital, provided that supplementary capital
cannot exceed core capital, as previously defined. Supplementary capital
includes (i) permanent capital instruments such as cumulative perpetual
preferred stock, perpetual subordinated debt and mandatory convertible
subordinated debt, (ii) maturing capital instruments such as subordinated
debt, intermediate-term preferred stock and mandatory convertible subordinated
debt, subject to an amortization schedule, and (iii) general valuation loan
and lease loss allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held
by a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities
that are backed by the full faith and credit of the U.S. Government to 100%
for repossessed assets or assets more than 90 days past due. Qualifying
residential mortgage loans (including multi-family mortgage loans) are
assigned a 50% risk weight. Consumer, commercial, home equity and residential
construction loans are assigned a 100% risk weight, as are nonqualifying
residential mortgage loans and that portion of land loans and nonresidential
construction loans that do not exceed an 80% loan-to-value ratio. The book
value of assets in each category is multiplied by the weighing factor (from 0%
to 100%) assigned to that category. These products are then totaled 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 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
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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.
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).
A Tier 1 savings association may make (without application but upon prior
notice to, and no objection made by, the OTS) capital distributions during a
calendar year up to 100% of its net income to date during the calendar year
plus one-half its surplus capital ratio (i.e., the amount of capital in excess
of its fully phased-in requirement) at the beginning of the calendar year or
the amount authorized for a Tier 2 association. Capital distributions in
excess of such amount require advance notice to the OTS. A Tier 2 savings
association has capital equal to or in excess of its minimum capital
requirement but below its fully phased-in capital requirement (both before and
after the proposed capital distribution). Such an association may make
(without application) capital distributions up to an amount equal to 75% of
its net income during the previous four quarters depending on how close the
association is to meeting its fully phased-in capital requirement. Capital
distributions exceeding this amount require prior OTS approval. A Tier 3
savings association has capital below the minimum capital requirement (either
before or after the proposed capital distribution). A Tier 3 savings
association 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 Savings 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
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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 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.
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.
Community Reinvestment Act. Under the federal Community Reinvestment Act
("CRA"), all federally-insured financial institutions have a continuing and
affirmative obligation consistent with safe and sound operations to help meet
all the credit needs of its delineated community. The CRA does not establish
specific lending requirements or programs nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to meet all the credit needs of its delineated community. The CRA
requires the federal banking agencies, in connection with regulatory
examinations, to assess an institution's record of meeting the credit needs of
its delineated community and to take such record into account in evaluating
regulatory applications to establish a new branch office that will accept
deposits, relocate an existing office, or merge or consolidate with, or
acquire the assets or assume the liabilities of, a federally regulated
financial institution, among others. The CRA requires public disclosure of an
institution's CRA rating. The Association received a "satisfactory" rating as
a result of its latest evaluation.
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FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Association report their income on a fiscal
year basis using the accrual method of accounting and are 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.
The thrift bad debt rules were revised by Congress in 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 required 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). For taxable years beginning after
December 31, 1995, the Association's bad debt deduction must 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 allowed 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. If an institution is permitted to postpone the reserve
recapture, it must begin its six year recapture no later than the 1998 tax
year. 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 provisions 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 lesser 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, 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
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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 0.12% 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 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.
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
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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 totaled $1.3 million at March 31, 1998.
Item 3. Legal Proceedings
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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
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No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended March 31, 1998.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
The common stock of the Company is not regularly and actively traded in
any established market, although quoted bid and asked prices to the Company's
common stock may be available on the OTC-Bulletin Board under the symbol BBKY.
During the quarter ended March 31, 1998, the common stock was traded at prices
ranging between $24.50 and $27.50. The last known trade occurred on May 12,
1998 at $31.00. At March 31, 1998, the Company had 308,721 shares of Common
Stock issued and outstanding and 294 stockholders of record.
The Company's ability to pay dividends is dependent on dividends received
from the Association. OTS regulations require the Association to give the OTS
30 days' advance notice of any proposed declaration of dividends to the
Company, and the OTS has the authority under its supervisory powers to
prohibit the payment of dividends to the Company. The OTS imposes certain
limitations on the payment of dividends from the Association to the Company
which utilize a three-tiered approach that permits various levels of
distributions based primarily upon a savings association's capital level. See
"REGULATION -- Regulation of the Association -- Limitations on Capital
Distributions." In addition, the Company may not declare or pay a cash
dividend on its capital stock if the effect thereof would be to reduce the
regulatory capital of the Company below the amount required for the
liquidation account or the regulatory capital requirements imposed by the OTS.
See Note 13 of Notes to the Consolidated Financial Statements included
elsewhere herein.
Item 6. Management's Discussion and Analysis or Plan of Operation
- ------------------------------------------------------------------
Asset and Liability Management
The Company 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 Company's Asset/Liability
Management Policies generally seek to increase the interest rate sensitivity
of the Company'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 Company'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 Company's balance sheet, new
product development and product promotion through marketing. Because interest
rate risk management involves all areas of operation of the Company, 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 Company.
Treasury yield information, other relevant money market rate data, prior
period deposit activity and a survey of local deposit rates are reviewed
before the Company'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)
The Company, 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").
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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 regulatory examination, a deduction may be required as a result of
future examinations.
The following table presents the Association's NPV at March 31, 1998 , 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 6,707 (3,708) (36)% 11.32% (485) bp
300 bp 7,753 (2,662 ) (26)% 12.78% (338) bp
200 bp 8,860 (1,555) (15)% 14.26% (190) bp
100 bp 9,748 (667) (6)% 15.38% (79) bp
0 bp 10,415 16.17%
(100) bp 10,732 317 3% 16.48% 31 bp
(200) bp 10,795 381 4% 16.46% 29 bp
(300) bp 11,019 604 6% 16.64% 47 bp
(400) bp 11,409 994 10% 17.02% 85 bp
Yields Earned and Rates Paid
The earnings of the Company 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 Company's interest-earning
asset and interest-bearing liability portfolios.
During the year ended March 31, 1998, average total assets increased
$2.84 million, or 4.68%, to $63.51 million in 1998 from $60.67 million in
1997.
The average weighted balance of loans decreased by $248,000, to $37.07
million in 1998 from $37.32 million in 1997.
The average weighted balance of mortgage-backed securities increased by
$4.5 million, to $7.99 million in 1998 from $3.54 million in 1997. The
increase was due to the purchase of $5 million of CMOs which were funded by
advances from the FHLB-Seattle.
The average investment securities portfolio decreased $1.36 million or
9.89%, to $12.39 million in 1998 from $13.75 million in 1997.
-27-
<PAGE>
<PAGE>
Total interest-earning assets increased by $2.74 million, or 4.72%, to
$60.81 million in 1998 from $58.07 million in 1997.
Total deposits and other interest-bearing liabilities increased by $1.84
million, to $53.38 million in 1998 from $51.54 million in 1997.
The yield on average interest-earning assets decreased 9 basis points, to
7.87% for the year ending March 31, 1998, from 7.96% for the year ending March
31, 1997. The average cost of funds increased 15 basis points, to 4.88% for
1998, from 4.73% for 1997.
Net interest income decreased $6,000, or .27%, to $2.18 million in 1998
from $2.19 million in 1997.
The Company's interest rate spread (difference between yield on
interest-earning assets and average cost of interest-bearing liabilities)
decreased 24 basis points, to 2.99% in 1998 from 3.23% in 1997.
The net interest margin (net interest income as a percentage of average
interest-earning assets) decreased 18 basis points, to 3.58% in 1998 from
3.76% in 1997.
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.
-28-
<PAGE>
<PAGE>
<TABLE>
Average consolidated statements of financial position and analysis of net interest spreads were as
follows:
Year Ended March 31, At
--------------------------------------------------------------------------------- March
31,
1996 1997 1998 1998
--------------------------- -------------------------- -------------------------- ----
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and Yield/
Yield/
Balance Dividend Cost Balance Dividend Cost Balance Dividend Cost Cost
------- -------- ---- ------- -------- ---- ------- -------- ----
Interest-earning
assets(1): (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans. . . . . . $39,795 $ 3,535 8.88% $37,315 $ 3,335 8.94% $37,067 $ 3,250 8.77%
8.26%
Mortgage-backed
securities. . . 3,492 250 7.16 3,538 259 7.32 7,985 556 6.96
6.67
Investment
securities. . . 11,043 608 5.51 13,752 798 5.80 12,392 746 6.02
5.89
Daily interest-
bearing deposits
and other earning
assets. . . . . 4,506 280 6.21 3,463 230 6.64 3,365 234 6.95
6.36
------- ------- ---- -------- ------- ---- -------- ------- ---- ---
- -
Total interest-
earning assets. 58,836 4,673 7.94 58,068 4,622 7.96 60,809 4,786 7.87
7.48
Non interest-
earning assets. 2,582 2,602 2,698
------- ------- -------
Total assets . . $61,418 $60,670 $63,507
======= ======= =======
Interest-bearing
liabilities:
Total deposits
and other
interest-bearing
liabilities . . $52,680 2,540 4.82% $51,538 $ 2,437 4.73% $53,378 $ 2,607 4.88%
4.98%
------- ------- ---- -------- ------- ---- -------- ------- ---- ----
Non interest-
bearing
liabilities . . 2,479 2,129 2,550
------- ------- -------
Total
liabilities . . 55,159 53,667 55,928
------- ------- -------
Stockholders'
equity. . . . . 6,259 7,003 7,579
------- ------- -------
-29-
</TABLE>
<PAGE>
<PAGE>
<TABLE>
Year Ended March 31, At
--------------------------------------------------------------------------------- March
31,
1996 1997 1998 1998
--------------------------- -------------------------- -------------------------- ----
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>
Total liabili-
ties and
stockholders'
equity. . . . . $61,418 $60,670 $63,507
======= ======= =======
Net interest
income. . . . . $ 2,133 $ 2,185 $ 2,179
======= ======= =======
Interest rate
spread. . . . . 3.12% 3.23% 2.99%
2.50%
Net interest
margin. . . . . 3.63% 3.76% 3.58%
3.10%
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities . . 111.69% 112.67% 113.92%
- --------------------
(1) Does not include interest on loans 90 days or more past due.
-30-
</TABLE>
<PAGE>
<PAGE>
<TABLE>
Rate/Volume Analysis
1997 Compared to 1996 1998 Compared to 1997
Increase (Decrease) Increase (Decrease)
---------------------------------- -----------------------------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
---- ------ ------ --- ---- ------ ------ ---
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans(1) . . . . . . . . . . . $ 23 $ (221) $ (2) $ (200) $ (64) $ (22) $ 1 $ (85)
Mortgage-backed securities . . 5 3 1 9 (13) 326 (16) 297
Investment securities. . . . . 32 150 8 190 30 (79) (3) (52)
Daily interest-bearing
deposits and other earning
assets. . . . . . . . . . . . 19 (65) (4) (50) 11 (6) (1) 4
---- ------ ----- ------ ----- ----- ---- -----
Total net change in income
on interest-earning assets . . $ 79 $ (133) $ 3 (51) $ (36) $ 219 $(19) 164
==== ====== ===== ------ ===== ===== ==== -----
Interest-bearing liabilities:
Total net change in
expense on interest-
bearing liabilities . . . . . $(48) $ (56) $ 1 (103) $ 78 $ 88 $ 4 170
==== ====== ===== ------ ===== ===== ==== -----
Net change in net interest
income . . . . . . . . . . $ 52 $ (6)
====== =====
- -----------------
(1) Does not include interest on loans 90 days or more past due.
-31-
</TABLE>
<PAGE>
<PAGE>
Liquidity
The Company'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 Company 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 Company is
eligible to borrow funds from the FHLB-Seattle. The Company is required to
maintain cash and certain investment securities in an amount equal to 4% of
its deposit accounts and short-term borrowings. The Company's liquidity
position at March 31, 1998 was 17.98%, as compared to 19.56% at March 31,
1997.
Capital Resources
At March 31, 1998, First Federal Savings and Loan 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 $6.45 million, $5.52 million and $5.60 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, 1998 To The Year Ended March 31, 1997
Net Income. Net income increased by $187,000, or 48.57%, to $572,000 in
1998 from $385,000 in 1997.
Income for 1997, however, was substantially reduced by an industry wide
assessment to help recapitalize the Savings Association Insurance Fund
("SAIF") of the Federal Deposit Insurance Corporation ("FDIC"). There was no
corresponding one-time SAIF assessment in 1998.
Excluding the one-time SAIF charge in 1997, net income for 1998 decreased
by $24,000, or 4.03%, to $572,000, as compared to $596,000 for 1997.
Interest Income. Total interest income increased by $164,000, or 3.55%,
to $4.79 million in 1998 from $4.62 million in 1997.
Interest and fees on loans receivable decreased by $85,000, or 2.55%, to
$3.25 million in 1998 from $3.34 million in 1997, partially as a result of a
reduction of $200,000, or .54%, in average balances of loans receivable, to
$37.1 million in 1998, from $37.3 million in 1997.
Interest on investment securities decreased by $52,000, or 6.52%, to
$746,000 in 1998 from $798,000 in 1997, primarily as a result of a decrease in
the average balances of the portfolio, together with a decrease in the yields
available for such securities. The average balances of the investment
portfolio decreased by $1.4 million, or 10.1%, to $12.4 million in 1998 from
$13.8 million in 1997.
Interest on mortgage-backed securities increased by $297,000, or 114.67%,
to $556,000 in 1998 from $259,000 in 1997, primarily as a result of a $4.45
million, or 125.7%, increase in average balances of the mortgage-backed
securities portfolio, to $7.99 million in 1998 from $3.54 million in 1997.
The increase was due to the purchase of $5 million of CMOs which were funded
by FHLB advances.
FHLB stock dividends and other income increased by $4,000, or 1.7%, to
$234,000 in 1998, as compared to $230,000 in 1997.
-32-
<PAGE>
<PAGE>
Interest expense increased by $170,000, or 6.98%, to $2.61 million in
1998 from $2.44 million in 1997, primarily as a result of a $1.9 million, or
3.6%, increase in the average balances of total deposits and other interest-
bearing liabilities, to $53.4 million in 1998 from $51.5 million in 1997.
Loan Loss Reserves. The provision for loan losses decreased by $11,000,
or 26.83%, to $30,000 in 1998, as compared to $41,000 in 1997.
The allowance for loan losses was increased by $26,000, or 5.12%, to
$534,000 at March 31, 1998 from $508,000 at March 31, 1997. The allowance for
loan losses as a percentage of total loans increased to 1.52% at March 31,
1998 from 1.44% at March 31, 1997.
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 $38,000, or 18%,
to $ 179,000 in 1998 from $217,000 in 1997, primarily as a result of a $46,000
gain on the sale of investment securities in 1997. There was no corresponding
gain on sale of investment securities in 1998.
Income from loan fees and service charges remained the same at $74,000
for 1998 and 1997.
Rental income decreased $4,000, or 4.44%, to $86,000 in 1998 from $90,000
in 1997.
Other income increased by $12,000, to $19,000 in 1998 from $7,000 in
1997.
Other Expense. Total other expense decreased by $385,000, or 22.24%, to
$1.35 million in 1998, as compared to $1.73 million in 1997, primarily as a
result of a one-time assessment of $345,000 to recapitalize the SAIF in 1997.
No similar assessments were incurred in 1998.
Excluding the SAIF assessment in 1997, total other expense decreased by
$40,000 in 1998, as compared to 1997.
FDIC/SAIF insurance expense decreased by $61,000, or 53.51%, to $53,000
in 1998 from $114,000 in 1997.
Advertising expense decreased by $5,000, or 10.64%, to $42,000 in 1998
from $47,000 in 1997.
Outside services decreased by $4,000, or 3.70%, to $104,000 in 1998 from
108,000 in 1997.
Salaries and benefits increased by $8,000, or 1.17%, to $691,000 in 1998
from $683,000 in 1997.
Occupancy expense increased by $9,000, or 4.89%, to $193,000 in 1998, as
compared to $184,000 in 1997.
Other expense increased by $13,000, or 5.20%, to $263,000 in 1998, as
compared to $250,000 in 1997, primarily as a result of an increase of $20,000
for professional consulting and securities counsel fees. The increase in
other expense was partially offset by a $3,000 decrease in officer travel
expense.
Income Taxes. Income tax expense increased $165,000, or 67.35%, to
$410,000 in 1998 from $245,000 in 1997.
-33-
<PAGE>
<PAGE>
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.
Income for 1997 was substantially reduced by an industry wide assessment
to help recapitalize the SAIF of the 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.
Interest and fees on loans receivable decreased by $200,000, or 5.66%, to
$3.34 million 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
$1.0 million, 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 $1.14 million, 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
industry wide assessment of $345,000 to recapitalize the SAIF in 1997, and a
$616,000 gain on the sale of office premises and equipment in 1996.
-34-
<PAGE>
<PAGE>
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
$1.73 million in 1997, as compared to $1.46 million 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.
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.
Item 7. Financial Statements
- -----------------------------
The financial statements beginning on page F-1 are incorporated by
reference into this Item 7 of Part II of this Form 10-KSB.
Item 8. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
Not applicable.
-35-
<PAGE>
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
- ----------------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act
- -------------------------------------------------
Directors of the Company and the Association
Age at Current
March 31, Director Term
Name 1998 Since(1) Expires
---- ---- -------- -------
Michael E. McKee 53 1983 1998
Thomas H. Boone 57 1984 1998
Collette E. Maxwell 49 1991 2000
Robert K. Ford 69 1985 2000
Douglas N. Klein 59 1984 1999
Kurt F. Ingold 54 1984 1999
- ---------------
(1) Includes prior service on the Board of Directors of the Association.
Executive Officers of the Company and the Association
Age at Position
March 31, -----------------------------------------
Name 1998 Company Association
---- ---- ------- -----------
Michael E. McKee 53 President and Chief President and Chief
Executive Officer Executive Officer
Collette E. Maxwell 49 Executive Vice Executive Vice
President President
Ernest M. Kwiatkowski 47 Vice President, Vice President,
Treasurer and Treasurer and
Secretary Secretary
Biographical Information
Set forth below is certain information regarding the Directors and
executive officers of the Company and the Association. Unless otherwise
stated, each Director and executive officer has held his or her current
occupation for the last five years. There are no family relationships among
or between the Directors or executive officers.
Michael E. McKee has been President and Chief Executive Officer of the
Association since 1982 and of the Company since 1994.
Thomas H. Boone is a partner in the law firm of Boone, Karlberg & Haddon,
Missoula, Montana.
-36-
<PAGE>
<PAGE>
Collette E. Maxwell has served as Executive Vice President of the
Association since 1986 and of the Company since 1994.
Robert K. Ford is a retired executive of Champion International
Corporation, a forest products company.
Douglas N. Klein is an owner of Collection Bureau Services, a collection
and consumer credit reporting agency in Missoula.
Kurt F. Ingold has served as Chairman of the Board of Directors since
1986. Mr. Ingold is the President of Ingold & Company, P.C., a certified
public accounting and financial consulting firm in Missoula.
Ernest M. Kwiatkowski has served as Vice President, Secretary and
Treasurer of the Association since 1987.
Compliance With Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires the Company's executive
officers and directors, and persons who own more than 10% of any registered
class of the Company's equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission. Executive
officers, directors and greater than 10% shareholders are required by
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on its review of the copies of such forms it has received,
the Company believes all filing requirements applicable to its reporting
officers, directors and greater than 10% beneficial owners were properly and
timely complied with during the fiscal year.
Item 10. Executive Compensation
- --------------------------------
Summary Compensation Table. The following information is furnished for
the named executive officers.
<PAGE>
<TABLE>
Long-Term Compensation
----------------------
Annual Compensation Awards
------------------------------------- ----------------------
Other All
Annual Restricted Securities Other
Name and Compen- Stock Underlying
Compen-
Position Year Salary($) Bonus($) sation($)(1) Award($) Options(#)
sation(1)
- -------- ---- --------- -------- ------------ -------- ---------- ------
- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Michael E. McKee 1998 $100,750 $11,400 $10,350 $103,950 140 --
President and Chief 1997 97,335 11,400 10,200 -- 1,676 --
Executive Officer 1996 94,800 15,250 9,800 -- -- --
Collette E. Maxwell 1998 86,500 11,400 10,350 $103,950 140 --
Executive Vice 1997 83,430 11,400 10,200 -- 1,676 --
President 1996 81,300 13,250 9,800 -- -- --
- ------------------
(1) Consists of directors fees. Does not include perquisites which did not exceed the lesser of $50,000
or
10% of salary and bonus.
(2) Represents the total value of the award of shares of restricted stock on December 1, 1997 in the
following amounts: Mr. McKee, 4,950 shares; Mrs. Maxwell, 4,950 shares. For both Mr. McKee and Mrs.
Maxwell, 750 shares will vest ratably over a five-year period and 4,200 shares will vest ratably over
a
ten-year period subject to accelerated vesting of an additional 10% per year for each year that
financial goals established by the Board of Directors are achieved. At March 31, 1998, the value of
the
unvested restricted stock awards were: Mr. McKee, $136,125; Mrs. Maxwell, $136,125. Dividends, if
any,
will be paid on the restricted stock.
</TABLE>
<PAGE>
Employment Agreements. In connection with the Association's conversion
from a federal mutual savings and loan association to a federal capital stock
savings and loan association, the Association entered into employment
agreements with Michael E. McKee and Collette E. Maxwell. Such employment
agreements have a term of three years.
-37-
<PAGE>
<PAGE>
Additionally, on the anniversary of the commencement date of such agreement,
the term of such agreement may be extended by the Board of Directors for an
additional year, unless the individual notifies the Association of his or her
intention to terminate the agreement. The agreements are terminable by the
Association for "cause" (as defined in the agreements) at any time or in
certain events specified by applicable regulations. The agreements also
provide for a severance payment if employment is terminated following a
"change in control." This payment, which will be made promptly after any
"change in control," will be equal to 2.99 times the average annual
compensation paid to each individual during the five years immediately
preceding the "change in control." The term "change in control" is defined in
the agreements as, among other things, any time during the period of
employment when a "change in control" is deemed to have occurred under OTS
regulations or a change in the composition of more than a majority of the
Board of Directors of the Association. Under current provisions of the
Internal Revenue Code of 1986, as amended, the Association would not be
subject to any penalty tax on the payment under the agreements. Based upon
the 1998 compensation levels for Mr. McKee and Mrs. Maxwell, the aggregate
payment which would have been payable under the terms of the agreements had a
change in control occurred in 1997 were $342,953 and $298,402, respectively.
The Association entered into a salary continuation agreement with Mr.
McKee, effective March 16, 1994, which provides for the payment of $4,500 per
month for a period of 180 months following Mr. McKee's termination of
employment on or after the date he attains age 65. In the event of Mr.
McKee's earlier termination of employment, the vested portion of the salary
continuation benefit would be payable to Mr. McKee over 180 months. Vesting
under the agreement is determined as follows: 25% on the effective date of
the agreement plus 2.5% for each six months of employment with the Association
thereafter. In the event of Mr. McKee's termination of employment by reason
of his death or disability, the agreement provides for the payment of his
vested benefit, but not less than $2,500 per month, over 180 months. In 1997
the agreement was amended to provide for accelerated vesting upon a change in
control of the Association.
The Association has also entered into a salary continuation agreement
with Mrs. Maxwell, effective March 16, 1994, which provides for the payment of
$3,375 per month for a period of 180 months following Mrs. Maxwell's
termination of employment on or after the date she attains age 65. In the
event of Mrs. Maxwell's earlier termination of employment, the vested portion
of the salary continuation benefit would be payable to Mrs. Maxwell over 180
months. Vesting under the agreement is determined as follows: 25% on the
effective date of the agreement plus 2.0% for each six months of employment
with the Association thereafter. In the event of Mrs. Maxwell's termination
of employment by reason of her death or disability, the agreement provides for
the payment of her vested benefit, but not less than $1,667 per month, over
180 months. In 1997, the agreement was amended to provide for accelerated
vesting upon a change in control of the Association.
The salary continuation agreements are unfunded and unsecured obligations
of the Association. The discounted present value of vested benefits is
accrued as a liability by the Association.
Options Grants in Last Fiscal Year. The following table sets forth
information regarding stock option grants to the named executive officers
during the year ended March 31, 1998.
Percent of
Number of Total Options
Securities Granted to
Underlying Employees in Exercise Expiration
Name Options Granted(#) Fiscal Year Price ($) Date
- ---- ------------------ ----------- --------- ----
Michael E. McKee 140 33% $19.625 5/21/07
Collette E. Maxwell 140 33% $19.625 5/21/07
-38-
<PAGE>
<PAGE>
Aggregated Option Exercises and Fiscal Year-End Option Value Table. The
following information with respect to options exercised during the fiscal year
ended March 31, 1998 and remaining unexercised at the end of the fiscal year,
is presented for the named executive officers.
<PAGE>
<TABLE>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at Fiscal Year End($)(1)
Acquired on Value --------------------------- -----------------------
- -----
Name Exercise (#) Realized($) Exercisable Unexercisable Exercisable
Unexercisable
- ---- ------------ ----------- ----------- ------------- ----------- -----------
- --
<S> <C> <C> <C> <C> <C> <C>
Michael E. McKee -- -- 10,809 -- $224,396 --
Collette E. Maxwell -- -- 8,854 -- 180,688 --
- ---------------
(1) The value of unexercised in-the-money options is calculated based on the market price for the
Company's
Common Stock as of March 31, 1998.
</TABLE>
<PAGE>
Compensation of Directors. Effective August 1, 1997, members of the
Association's Board of Directors receive a retainer of $500 per month and $250
per meeting attended. Non-employee directors also receive $125 for each
special Board meeting and each committee meeting attended. Directors of the
Company receive no additional compensation for service on the Company's Board
of Directors. Mr. Ingold receives an additional annual fee of $2,400 for
serving as Chairman of the Board of Directors of the Association. During the
year ended March 31, 1998 each director was awarded 750 shares of restricted
stock, which vests ratably over a five year period.
During the year ended March 31, 1998, Directors Boone and Ingold were
granted options to acquire 140 shares of the Company's common stock and
Directors Klein and Ford were granted options to acquire 139 shares of the
Company's common stock. All options were granted at an exercise price of
$19.625 per share.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
Persons and groups who beneficially own in excess of 5% of the Company's
Common Stock are required to file certain reports disclosing such ownership
pursuant to the Securities Exchange Act of 1934, as amended ("Exchange Act").
Based on such reports, the following table sets forth, as of May 1, 1998,
certain information as to those persons who were beneficial owners of more
than 5% of the outstanding shares of Common Stock. To the Company's
knowledge, no other person or entity beneficially owned more than 5% of the
Company's outstanding Common Stock as of May 1, 1998.
-39-
<PAGE>
<PAGE>
The following table also sets forth, as of May 1, 1998, information as to
the shares of Common Stock beneficially owned by (a) each director, (b) each
of the executive officers named in the Summary Compensation Table found below
(the "named executive officers") and (c) all executive officers and directors
of the Company as a group.
Percent of
Amount and Nature of Common Stock
Name Beneficial Ownership(a) Outstanding
- ---- ----------------------- -----------
Beneficial Owner of More Than 5%
Collette E. Maxwell 32,237 9.7%
358 Skyline Drive
Hamilton, Montana 59840
Arthur W. Capko 20,050(b) 6.2
5743 Rosebrook Drive
Riverbank, California 95367
Leah C. Capko 19,550(b) 6.0
5743 Rosebrook Drive
Riverbank, California 95367
Michael E. McKee 38,816(c) 7.8
133 Creekside Drive
Hamilton, Montana 59840
Directors and Executive Officers
Collette E. Maxwell* 32,237 9.7
Michael E. McKee** 38,816(c) 7.8
Thomas H. Boone 15,738 4.8
Douglas N. Klein 15,509 4.8
Kurt F. Ingold 14,342 4.4
Robert K. Ford 9,369 2.9
All executive officers
and directors as a
group (7 persons) 139,577 35.2
- -----------------
* Mrs. Maxwell is also the Executive Vice President of the Company.
** Mr. McKee is also the President and Chief Executive Officer of the
Company.
(a) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed
to be the beneficial owner, for purposes of this table, of any shares of
Common Stock if he or she has voting and/or investment power with respect
to such security. The table includes shares owned by spouses, other
immediate family members in trust, shares held in retirement accounts or
funds for the benefit of the named individuals, and other forms of
ownership, over which shares the persons named in the table may possess
voting and/or investment power. Shares of restricted stock granted under
the Company's 1997 Management Recognition and Development Plan, as to
which the holders have voting power but not investment power, are included
as follows: Mrs. Maxwell, 4,950 shares; Mr. McKee, 4,950 shares; Mr.
Boone, 750 shares; Mr. Klein, 750 shares; Mr. Ingold, 750 shares; Mr.
Ford, 750 shares; all executive officers and directors as a group, 15,000
shares. The amounts shown also include the following amounts of Common
Stock which the indicated individuals have the right to acquire within
-40-
<PAGE>
<PAGE>
60 days of May 1, 1998 through the exercise of stock options granted
pursuant to the Company's Stock Option Plan: Collette E. Maxwell, 8,854;
Michael E. McKee, 10,809; Thomas H. Boone, 2,988; Douglas N. Klein, 1,815;
Kurt F. Ingold, 2,988; Robert K. Ford, 2,988; all executive officers and
directors as a group, 35,777.
(b) Arthur W. Capko and Leah C. Capko have joint ownership of 19,550 shares of
the Company's Common Stock.
(c) Includes 12,900 shares held by Mr. McKee's wife as to which he disclaims
beneficial ownership. Includes 2,850 shares of Common Stock jointly held
by Mr. McKee and his wife.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
Federal regulations require that all loans or extensions of credit to
executive officers and directors must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons and must not involve more than the
normal risk of repayment or present other unfavorable features. The Company
is therefore prohibited from making any new loans or extensions of credit to
the Company's executive officers and directors at different rates or terms
than those offered to the general public and has adopted a policy to this
effect. In addition, loans made to a director or executive officer in an
amount that, when aggregated with the amount of all other loans to such person
and his or her related interests, are in excess of the greater of $25,000 or
5% of the company's capital and surplus (up to a maximum of $500,000) must be
approved in advance by a majority of the disinterested members of the Board of
Directors.
Item 13. Exhibits List, and Reports on Form 8-K
- ------------------------------------------------
(a) Exhibits
3.1 Certificate of Incorporation of Big Sky Bancorp, Inc.
(incorporated by reference to Exhibit 3.1 to the Corporation's
Registration Statement on Form S-4 File No. 33-79018)
3.2 Bylaws of Big Sky Bancorp, Inc. (incorporated by reference to
Exhibit 3.2 to the Corporation's Registration Statement on
Form S-4 File No. 33-79018)
10.1 First Federal Savings and Loan Association of Montana 1992
Stock Option Plan (incorporated by reference from the
Registration Statement on Form 10 filed by the Association
with the OTS on May 15, 1992)
10.2 Employment Agreement between Michael E. McKee and First
Federal Savings and Loan Association of Montana (incorporated
by reference from the Registration Statement on Form 10 filed
by the Association with the OTS on May 15, 1992)
10.3 Employment Agreement between Collette E. Maxwell and First
Federal Savings and Loan Association of Montana (incorporated
by reference from the Registration Statement on Form 10 filed
by the Association with the OTS on May 15, 1992)
10.4 Employment Agreement between Ernest M. Kwiatkowski and First
Federal Savings and Loan Association of Montana (incorporated
by reference from the Registration Statement on Form 10 filed
by the Association with the OTS on May 15, 1992)
10.5 Big Sky Bancorp, Inc. 1997 Management Recognition and
Development Plan (incorporated by reference to Exhibit A to
the Company's Proxy Statement dated June 23, 1997)
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, 1998.
-41-
<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 12, 1998 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 12, 1998 Date: June 12, 1998
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 12, 1998 Date: June 12, 1998
By: /s/ Thomas H. Boone By: /s/ Robert K. Ford
------------------------- --------------------------------
Thomas H. Boone Robert K. Ford
Director Director
Date: June 12, 1998 Date: June 12, 1998
By: /s/ Douglas N. Klein
-------------------------
Douglas N. Klein
Director
Date: June 12, 1998
<PAGE>
<PAGE>
Exhibit 21
Subsidiaries of Registrant
Parent
- ------
Big Sky Bancorp, Inc.
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 subsidiary is included in the Company's
consolidated financial statements.
<PAGE>
<PAGE>
EXHIBIT 23
Consent of Deloitte & Touche LLP
<PAGE>
<PAGE>
Deloitte &
Touche LLP
- -------------- ------------------------------------------------------
Suite 3900 Telephone: (503) 222-1341
111 S.W. Fifth Avenue Facsimile: (503) 224-2172
Portland, Oregon 97204-3642
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement No.
33-91248 of Big Sky Bancorp, Inc. on Form S-8 of our report dated May 8, 1998,
appearing in the Annual Report on Form 10-KSB of Big Sky Bancorp, Inc. for the
year ended March 31, 1998.
/s/ Deloitte & Touche LLP
Portland, Oregon
June 12, 1998
<PAGE>
<PAGE>
Deloitte &
Touche LLP
- --------------- -----------------------------------------------------
Suite 3900 Telephone: (503) 222-1341
111 S.W. Fifth Avenue Facsimile: (503) 224-2172
Portland, Oregon 97204-3642
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, 1998 and 1997,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended March 31,1998.
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, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1998, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Portland, Oregon
May 8, 1998
- ----------------
Deloitte Touche
Tohmatsu
International
- ----------------
F-1
<PAGE>
<PAGE>
BIG SKY BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
- ------------------------------------------------------------------------------
ASSETS 1998 1997
Cash, including interest-bearing accounts of
$5,820,000 and $1,813,000 $ 7,029,000 $ 3,017,000
Investment securities available for sale, at
fair value, cost $141,000 and $134,000 547,000 359,000
Mortgage-backed securities available for sale,
at fair value, cost $7,527,000 and $7,402,000 7,651,000 7,420,000
Investment securities held to maturity, at
amortized cost, fair value $7,810,000 and
$12,911,000 7,825,000 13,273,000
Mortgage-backed securities held to maturity,
at amortized cost, fair value $484,000 and
$606,000 458,000 575,000
Loans receivable, net 35,042,000 35,315,000
Accrued interest receivable 320,000 315,000
Federal Home Loan Bank stock, at cost 2,012,000 1,862,000
Premises and equipment 1,255,000 1,335,000
Prepaid expenses and other assets 129,000 101,000
----------- -----------
TOTAL $62,268,000 $63,572,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $47,770,000 $50,072,000
Advances from borrowers for taxes and insurance 497,000 527,000
Advances from the Federal Home Loan Bank of Seattle 5,000,000 5,000,000
Accrued expenses and other liabilities 314,000 161,000
Deferred taxes 740,000 638,000
----------- -----------
Total liabilities 54,321,000 56,398,000
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value - authorized
1,500,000 shares; issued, 323,721 and 308,721
shares; outstanding, 308,721 shares 3,000 3,000
Additional paid-in capital 922,000 610,000
Unrealized appreciation on securities available
for sale, net of tax 325,000 149,000
Retained earnings 6,984,000 6,412,000
Unearned compensation - MRDP (287,000) -
----------- -----------
Total stockholders' equity 7,947,000 7,174,000
----------- -----------
TOTAL $62,268,000 $63,572,000
=========== ===========
See notes to consolidated financial statements.
F-2
<PAGE>
<PAGE>
BIG SKY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 1998, 1997, AND 1996
- ------------------------------------------------------------------------------
1998 1997 1996
INTEREST INCOME:
Loans receivable $3,250,000 $3,335,000 $3,535,000
Investment securities 746,000 798,000 608,000
Mortgage-backed securities 556,000 259,000 250,000
FHLB stock dividends and other 234,000 230,000 280,000
---------- ---------- ----------
Total interest income 4,786,000 4,622,000 4,673,000
INTEREST EXPENSE 2,607,000 2,437,000 2,540,000
---------- ---------- ----------
Net interest income 2,179,000 2,185,000 2,133,000
PROVISION FOR LOAN LOSSES (30,000) (41,000) (43,000)
---------- ---------- ----------
Net interest income after
provision for loan losses 2,149,000 2,144,000 2,090,000
---------- ---------- ----------
OTHER INCOME:
Rental income 86,000 90,000 115,000
Loan fees and service charges 74,000 74,000 86,000
Gain on sale of investments and
mortgage-backed securities
available for sale - 46,000 -
Gain on sale of premises and equipment - - 616,000
Other 19,000 7,000 50,000
---------- ---------- ----------
Total other income 179,000 217,000 867,000
---------- ---------- ----------
OTHER EXPENSE:
Salaries and employee benefits 691,000 683,000 698,000
Occupancy 193,000 184,000 212,000
FDIC insurance 53,000 114,000 144,000
SAIF assessment - 345,000 -
Outside services 104,000 108,000 103,000
Advertising 42,000 47,000 52,000
Other 263,000 250,000 252,000
---------- ---------- ----------
Total other expense 1,346,000 1,731,000 1,461,000
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 982,000 630,000 1,496,000
INCOME TAX EXPENSE 410,000 245,000 581,000
---------- ---------- ----------
NET INCOME $ 572,000 $ 385,000 $ 915,000
========== ========== ==========
NET INCOME PER SHARE:
Basic $ 1.85 $ 1.25 $ 2.99
========== ========== ==========
Diluted $ 1.72 $ 1.18 $ 2.84
========== ========== ==========
See notes to consolidated financial statements.
F-3
<PAGE>
<PAGE>
<TABLE>
BIG SKY BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1998, 1997, AND 1996
Unrea-
lized
Gain
(Loss)
Addi- on Secu- Compen-
Common Stock tional rities sation
---------------- Paid-in Available Under Retained
Shares Amount Capital for Sale MRDP Earnings Total
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, APRIL 1, 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
Net income - - - - - 572,000
572,000
Shares allocated for MRDP - - 312,000 - - -
312,000
Unearned compensation - MRDP - - - - (287,000) -
(287,000)
Unrealized gain on
securities available
for sale, net of tax - - - 176,000 - -
176,000
------- ------ -------- -------- --------- ---------- --------
- --
BALANCE, MARCH 31, 1998 308,721 $3,000 $922,000 $325,000 $(287,000) $6,984,000
$7,947,000
======= ====== ======== ======== ========= ==========
==========
See notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
<PAGE>
BIG SKY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1998, 1997, AND 1996
- ------------------------------------------------------------------------------
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 572,000 $ 385,000 $ 915,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 78,000 66,000 72,000
Deferred taxes (10,000) 67,000 123,000
MRDP compensation expense 25,000 - -
Provision for loan losses 30,000 41,000 43,000
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) -
Federal Home Loan Bank stock dividend (150,000) (137,000) (115,000)
Cash provided (used) by changes in
operating assets and liabilities:
Accrued interest receivable (5,000) 7,000 -
Prepaid expenses and other assets (28,000) 10,000 106,000
Accrued expenses and other
liabilities 152,000 6,000 (67,000)
Deferred loan fees, net 94,000 91,000 14,000
Net cash provided by operating ----------- ----------- -----------
activities 758,000 490,000 448,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal repayments on loans 6,103,000 7,547,000 6,409,000
Loan originations (5,953,000) (5,584,000) (4,075,000)
Principal repayments on mortgage-
backed securities available for sale 374,000 315,000 282,000
Purchase of mortgage-backed securities
available for sale (500,000) (5,111,000) -
Principal repayments on mortgage-
backed securities held to maturity 120,000 113,000 115,000
Proceeds from maturity of investment
securities 8,990,000 2,500,000 4,350,000
Purchase of investment securities
held to maturity (3,540,000) (2,540,000) (6,749,000)
Purchase of investment securities
available for sale (7,000) (7,000) -
Proceeds from sale of investment
securities available for sale - 101,000 -
Purchase of premises and equipment (1,000) (76,000) (694,000)
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 5,586,000 (2,742,000) 1,245,000
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposit accounts
due on demand (1,320,000) (195,000) (1,977,000)
Net increase (decrease) in
certificates accounts (982,000) (2,576,000) 2,497,000
Net decrease in advances from
borrowers for taxes and insurance (30,000) (23,000) (7,000)
Proceeds from exercise of stock options 5,000 20,000
Stockholder redemption - - (820,000)
Proceeds from Federal home Loan Bank
borrowings - 5,000,000 -
Net cash provided (used) by ----------- ----------- -----------
financing activities (2,332,000) 2,211,000 (287,000)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH $ 4,012,000 $ (41,000) $ 1,406,000
(Continued)
F-5
<PAGE>
<PAGE>
BIG SKY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1998, 1997, AND 1996
- ------------------------------------------------------------------------------
1998 1997 1996
NET INCREASE (DECREASE) IN CASH $ 4,012,000 $ (41,000) $ 1,406,000
CASH, BEGINNING OF YEAR 3,017,000 3,058,000 1,652,000
----------- ----------- -----------
CASH, END OF YEAR $ 7,029,000 $ 3,017,000 $ 3,058,000
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Fair value adjustment to
investment and mortgage-backed
securities available for sale $ 288,000 $ (20,000) $ 183,000
Income tax effect related to fair
value adjustment (112,000) (8,000) (71,000)
Loans arising from sale of real
estate owned - - 235,000
Adjustment of stockholder
redemption accrual - - (45,000)
Cash paid during the year for:
Interest 2,605,000 2,428,000 2,541,000
Income taxes 378,000 178,000 520,000
See notes to consolidated financial statements.
(Concluded)
F-6
<PAGE>
<PAGE>
BIG SKY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998, 1997, AND 1996
- ------------------------------------------------------------------------------
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.
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 which 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 with original maturities of 90 days or less.
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, 1998 and 1997, 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, 1998 and 1997.
F-7
<PAGE>
<PAGE>
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, and SFAS No. 118, an
amendment of SFAS No. 114. 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
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.
F-8
<PAGE>
<PAGE>
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 cost 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 cost 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 15
for the pro forma effect on net income and earnings per share ("EPS"), as if
the fair value method encouraged by SFAS No. 123 were used.
Net Income Per Share - The Company adopted SFAS No. 128, Earnings per Share,
effective December 31, 1997. SFAS No. 128 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
requires restatement of all prior period EPS data presented. See Note 14 for
required disclosures under this statement.
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, 1998, the Company had interest-earning assets of $60,035,000
having a weighted effective yield of 7.48%. Interest-bearing liabilities
totaled $52,771,000 with a weighted effective cost of 4.98%. At March 31,
1998, interest-sensitive assets of $13,213,000 and interest-sensitive
liabilities of $33,015,000 mature or reprice within one year.
F-9
<PAGE>
<PAGE>
3. SECURITIES AVAILABLE FOR SALE
Securities available for sale classified by type and contractual maturity
date, consist of the following:
March 31, 1998
-------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Yield*
Investment securities:
Equity securities:
Mutual Fund $ 132,000 $ - $5,000 $ 127,000 5.50%
FHLMC stock 9,000 411,000 - 420,000 42.90
---------- -------- ------ ---------- -----
141,000 411,000 5,000 547,000 7.88
---------- -------- ------ ---------- -----
Mortgage-backed securities:
U.S. Government and agency
obligations:
Due after one but within
five years 268,000 11,000 - 279,000 8.66
Due after five but within
ten years 954,000 32,000 - 986,000 7.00
After ten years 701,000 20,000 - 721,000 7.03
---------- -------- ------ ---------- -----
1,923,000 63,000 - 1,986,000 7.24
---------- -------- ------ ---------- -----
Collateralized mortgage
obligations:
U.S. Government and agency
obligations:
Due after five but within
ten years 496,000 - - 496,000 5.75
Due after ten years 5,108,000 61,000 - 5,169,000 6.60
---------- -------- ------ ---------- -----
5,604,000 61,000 - 5,665,000 6.52
---------- -------- ------ ---------- -----
$7,668,000 $535,000 $5,000 $8,198,000 6.73%
========== ======== ====== ========== ====
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 five but within
ten 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%
========== ======== ====== ========== ====
*Weighted average yield at March 31.
F-10
<PAGE>
<PAGE>
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, 1998 and 1997, accrued interest on investment securities
available for sale was $62,000 and $60,000, respectively. Accrued interest on
mortgage-backed securities available for sale was $30,000 and $31,000 at March
31, 1998 and 1997, respectively.
Proceeds from sale of investment securities available for sale were zero,
$101,000, and zero during the years ended March 31, 1998, 1997, and 1996,
respectively. Realized gains and losses on those sales were zero, $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:
March 31, 1998
-------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Yield*
Investment securities:
U.S. Government and agency
obligations:
Due within one year $ 750,000 $ - $ 2,000 $ 748,000 5.02%
Due after one but within
five years 1,000,000 2,000 - 1,002,000 6.31
Due after five but within
ten years 5,250,000 - 13,000 5,237,000 5.81
Due after ten years 250,000 - 4,000 246,000 7.04
---------- ------- ------- ---------- ----
7,250,000 2,000 19,000 7,233,000 5.84
---------- ------- ------- ---------- ----
Certificates of deposit:
Due within one year 100,000 - - 100,000 5.85
Due after five but within
ten years 95,000 - - 95,000 6.13
Due after ten years 95,000 - - 95,000 7.00
---------- ------- ------- ---------- ----
290,000 - - 290,000 6.32
---------- ------- ------- ---------- ----
Municipal obligations**:
Due after one but within
five years 185,000 - 1,000 184,000 6.37
Due after five but within
ten year 100,000 3,000 - 103,000 7.68
---------- ------- ------- ---------- ----
285,000 3,000 1,000 287,000 6.83
---------- ------- ------- ---------- ----
Mortgage-backed securities:
U.S. Government and agency
obligations:
Due after ten years 458,000 26,000 - 484,000 7.92
---------- ------- ------- ---------- ----
$8,283,000 $31,000 $20,000 $8,294,000 6.02%
========== ======= ======= ========== ====
F-11
<PAGE>
<PAGE>
March 31, 1997
-------------------------------------------------
Amortized Unrealized Unrealized Fair
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%
=========== ======= ======== =========== ====
*Weighted average yield at March 31.
**The yield was adjusted to reflect tax equivalent yields on nontaxable
investment income.
There were no sales of securities held to maturity during the years ended
March 31, 1998, 1997, or 1996. 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:
1998 1997
Conventional $34,116,000 $34,520,000
FHA and VA 492,000 540,000
Consumer and other 1,400,000 1,145,000
----------- -----------
36,008,000 36,205,000
----------- -----------
Less:
Deferred loan fees, net 284,000 295,000
Allowance for loan losses 534,000 508,000
Undisbursed loans in process 140,000 79,000
Unearned discounts 8,000 8,000
----------- -----------
966,000 890,000
----------- -----------
Loans receivable, net $35,042,000 $35,315,000
=========== ===========
F-12
<PAGE>
<PAGE>
Loans by maturity or repricing date were as follows at March 31:
1998 1997
Adjustable rate loans:
Due within one year $ 3,131,000 $ 7,953,000
After one but within five years 365,000 557,000
----------- -----------
3,496,000 8,510,000
----------- -----------
Fixed rate loans:
Due within one year 3,412,000 626,000
After one but within five years 1,879,000 1,845,000
After five but within ten years 5,027,000 3,925,000
After ten years 22,194,000 21,299,000
----------- -----------
32,512,000 27,695,000
----------- -----------
$36,008,000 $36,205,000
=========== ===========
The Company serviced loans for others totaling $1,944,000 and $2,443,000 at
March 31, 1998 and 1997, respectively. These loan balances are not included in
the balance sheets as they are not assets of the Company.
As of March 31, 1998, the Company was in compliance with regulatory
limitations on loans to one borrower.
At March 31, 1998 and 1997, accrued interest on loans were $209,000 and
$215,000, respectively.
Over 99% of the mortgage loans in the portfolio at March 31, 1998 and 1997,
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:
1998 1997 1996
Beginning balance $665,000 $745,000 $912,000
Originations 75,000 124,000 50,000
Principal repayments (61,000) (204,000) (217,000)
-------- -------- --------
$679,000 $665,000 $745,000
======== ======== ========
F-13
<PAGE>
<PAGE>
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:
1998 1997 1996
Balance, beginning of period $508,000 $468,000 $425,000
Loans charged off (5,000) (2,000) -
Recoveries 1,000 1,000 -
-------- -------- --------
Net charge-offs (4,000) (1,000) -
Provision for loan losses 30,000 41,000 43,000
-------- -------- --------
Balance, end of period $534,000 $508,000 $468,000
======== ======== ========
7. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at March 31:
1998 1997
Buildings and improvements $1,463,000 $1,463,000
Furniture and equipment 826,000 825,000
---------- ----------
2,289,000 2,288,000
Less accumulated depreciation 1,224,000 1,143,000
---------- ----------
1,065,000 1,145,000
Land 190,000 190,000
---------- ----------
$1,255,000 $1,335,000
========== ==========
During the year ended March 31, 1996, the Company completed its agreement to
sell its Southside 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.
F-14
<PAGE>
<PAGE>
8. DEPOSITS
Deposit accounts consisted of the following:
Average Average
Interest March 31, Interest March 31,
Account Type Rate 1998 Rate 1997
Checking accounts 2.00% $ 4,260,000 2.10% $ 4,491,000
Money market 4.04 776,000 2.07 880,000
Savings and passbook accounts 3.05 8,556,000 2.99 9,540,000
Certificate accounts 5.65 34,178,000 5.49 35,161,000
----------- -----------
$47,770,000 $50,072,000
=========== ===========
Weighted average interest rate 4.83% 4.65%
==== ====
Deposit accounts as of March 31, 1998, mature as follows:
Less than one year $33,015,000
One year to two years 3,266,000
Two years to three years 2,267,000
Three years to four years -
Four years to five years 9,222,000
-----------
$47,770,000
===========
Interest expense by deposit type for the years ended March 31 consisted of the
following:
1998 1997 1996
Checking and money market accounts $ 121,000 $ 120,000 $ 125,000
Savings and passbook accounts 276,000 292,000 337,000
Certificate accounts 1,957,000 2,002,000 2,059,000
---------- ---------- ----------
$2,354,000 $2,414,000 $2,521,000
========== ========== ==========
Certificates of deposit in amounts of $100,000 or more totaled $4,983,000 and
$3,867,000 at March 31, 1998 and 1997, respectively.
9. BORROWINGS WITH THE FEDERAL HOME LOAN BANK OF SEATTLE
Current borrowings with the Federal Home Loan Bank of Seattle ("FHLB") consist
of FHLB credit line advances.
As a member of the FHLB, the Company may receive advances on its credit line
up to 20% of total Company assets. At March 31, 1998 and 1997, credit line
advances of $5,000,000 were outstanding at interest rates of 5.39% and 5.04%,
respectively. Advances are due on June 3, 2002.
F-15
<PAGE>
<PAGE>
Under the Cash Management Advance Program (the "Program") which was approved
on April 26, 1996, the Company has a credit line available to meet immediate
liquidity needs. The Program credit line represents 5% of total Company assets
and is a subset of the Company's total credit line with FHLB. There was no
outstanding balance at March 31, 1998 or 1997.
FHLB credit lines 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.
10. INCOME TAXES
The provision for income taxes consisted of the following for the years ended
March 31:
1998 1997 1996
Current provision $ 308,000 $ 185,000 $ 426,000
Deferred provision 102,000 60,000 155,000
--------- --------- ---------
$ 410,000 $ 245,000 $ 581,000
========= ========= =========
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:
1998 1997 1996
Federal income taxes computed
at statutory rates $ 311,000 $ 198,000 $ 508,000
State taxes, net of federal
income tax benefit 44,000 30,000 70,000
Other, net 55,000 17,000 3,000
--------- --------- ---------
Income tax expense included in
the statements of income $ 410,000 $ 245,000 $ 581,000
========= ========= =========
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:
1998 1997
Deferred tax assets:
Loan loss reserve $ 208,000 $ 197,000
Deferred loan fees 106,000 115,000
Other 13,000 3,000
---------- ---------
327,000 315,000
Deferred tax liabilities:
Accumulated depreciation (172,000) (159,000)
Unrealized appreciation on securities
available for sale (206,000) (94,000)
FHLB stock dividends (546,000) (488,000)
Tax qualified loan loss reserve (130,000) (163,000)
Other (13,000) (49,000)
---------- ---------
(1,067,000) (953,000)
---------- ---------
Net deferred tax liabilities $ (740,000) $(638,000)
========== =========
F-16
<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 provision from 1987 to 1996 included an amount for
the tax effect on such excess reserves. In each of the periods ended March 31,
1998 and 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, 1998
or 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, 1998 and 1997.
The Company also has entered into salary continuation agreements with certain
executives, which provide each executive with 180 consecutive monthly benefit
payments to commence upon retirement. As of March 31, 1998, the vested and
accrued portion of these benefits was $85,000. Using a discount rate of 6%,
the estimated present value of total future benefit payments as of March 31,
1998 was approximately $486,000. In the event of a change in control,
executives shall become fully vested and are entitled to 180 monthly benefit
payments to commence upon attaining age 65.
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, 1998.
F-17
<PAGE>
<PAGE>
As of March 31, 1998 and 1997, 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.
FFSL of Montana's actual and required minimum capital amounts and ratios are
presented in the following table:
Categorized
as Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provision
----------------- ---------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
As of March 31, 1998
Total Capital:
(To Risk Weighted
Assets) $7,709,000 29.3% $2,108,000 8.0% $2,635,000 10.0%
Core or Tier I Capital:
(To Risk Weighted
Assets) 7,377,000 28.0% N/A N/A 1,581,000 6.0%
Core Capital:
(To Total Assets) 7,377,000 11.9% 1,853,000 3.0% 3,088,000 5.0%
Tangible Capital
(To Tangible Assets) 7,377,000 11.9% 926,000 1.5% N/A N/A
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 10.6% 950,000 1.5% N/A N/A
The following table is a reconciliation of FFSL of Montana's capital,
calculated according to generally accepted accounting principles (GAAP), to
regulatory tangible and risk-based capital at March 31, 1998:
Equity $ 7,702,000
Unrealized securities gain 325,000
-----------
Tangible capital 7,377,000
General valuation allowance 332,000
-----------
Total capital $ 7,709,000
===========
At periodic intervals, the OTS and the Federal Deposit Insurance Corporation
("FDIC") 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 1998 financial statements. In view of the
uncertain regulatory environment in which the Company operates, the extent,
F-18
<PAGE>
<PAGE>
if any, to which a forthcoming regulatory examination may ultimately result in
adjustments to the 1998 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 for the year ended March 31, 1997, 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.
14. EARNINGS PER SHARE
Effective March 31, 1997, the Company adopted SFAS No. 128 which requires all
companies whose capital structure include convertible securities and options
to make a dual presentation of basic and diluted earnings per share.
Basic EPS is computed by dividing net income applicable to common stock by the
weighted average number of common shares outstanding during the period,
without considering any dilutive items. Diluted EPS is computed by dividing
net income applicable to common stock by the weighted average
F-19
<PAGE>
<PAGE>
number of common shares and common stock equivalents for items that are
dilutive, net of shares assumed to be repurchased using the treasury stock
method at the average share price for the Company's common stock during the
period. Common stock equivalents arise from assumed conversion of outstanding
stock options. MRDP shares are not considered outstanding in the calculation
of basic earnings per share until they are vested. Unvested MRDP shares are
treated as options for the purpose of computing diluted earnings per share.
Years Ended March 31,
------------------------------------
1998 1997 1996
Basic EPS computation:
Numerator-net income divided by $ 572,000 $ 385,000 $ 915,000
Denominator-weighted average
common outstanding 308,721 308,461 305,882
Basic EPS $ 1.85 $ 1.25 $ 2.99
========= ========= =========
Diluted EPS computation:
Numerator-net income divided by $ 572,000 $ 385,000 $ 915,000
Denominator-weighted average
common shares outstanding, net 308,721 308,461 305,882
Dilutive effect of stock options,
plus 22,387 17,910 16,347
Dilutive effect of MRDP shares 603 - -
--------- --------- ---------
Weighted average common shares
and common stock equivalents 331,711 326,371 322,229
Diluted EPS $ 1.72 $ 1.18 $ 2.84
========= ========= =========
Authorized nonvested MRDP shares amounted to 15,000 at March 31, 1998. Shares
outstanding for 1998 do not include shares that were nonvested.
15. STOCK-BASED AWARDS
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.
F-20
<PAGE>
<PAGE>
Option activity under the plans was as follows:
Weighted
Average
Number of Exercise
Shares Price
Outstanding, April 1, 1995 27,370 $ 5.00
Granted - -
Exercised 2,346 5.00
------ ------
Outstanding, April 1, 1996 25,024 5.00
Granted 11,730 15.00
Exercised 977 5.00
------ ------
Outstanding, March 31, 1997 35,777 8.28
Granted 977 19.63
Expired 977 5.00
------ ------
Outstanding, March 31, 1998 35,777 $ 8.62
====== ======
Additional information regarding options outstanding as of March 31, 1998 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 23,070 4 $ 5.00 23,070 $ 5.00
15.00 11,730 9 15.00 11,730 15.00
19.63 977 9 19.63 977 19.63
At March 31, 1998, 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 No. 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 years 1998 and 1997,
respectively: expected life, 9 years and 4 years; stock volatility, 17.24% and
21.68% (1996 assumptions are not applicable as there were no stock options
granted in that year); risk free interest rate, 6.72% and 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 been adopted
as of the beginning of
F-21
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<PAGE>
1996, 1997, and 1998, net income would have been decreased by zero, $45,000,
and $9,000, respectively. Over the same periods, basic earnings per share
would have decreased by zero, $.14, and $.02, respectively.
Management Recognition and Development Plan - Under the 1997 Management
Recognition and Development Plan (MRDP), 15,000 shares of Company stock were
granted to the Board of Directors and management as compensation. Shares
issued to the Board of Directors vest annually over a five year period from
the grant date. Shares issued to management vest annually over a five to ten
year period from the date of grant depending upon the achievement of certain
financial goals as stipulated under the accelerated vesting provision.
On August 1, 1997 the Company granted a total of 3,000 shares to the four
outside members of the Board of Directors at $20.00 per share. On December 1,
1997 the Company granted 12,000 shares to the Company's management at $21.00
share. The value of the award, based on the estimated fair value of the stock
at the date of grant, was recorded as an increase to additional paid-in
capital and reduction to unearned compensation, which is amortized to expense
as shares vest. In 1998 the Company recognized $25,000 of compensation expense
related to the MRDP. In the event of a change of control, all forfeiture
restrictions on granted stock shall lapse and the granted stock shall become
fully vested.
16. 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,
1998 and 1997:
1998 1998
----------------------- -----------------------
Carrying Fair Carrying Fair
Value Value Value Value
Assets
Cash $ 7,029,000 $ 7,029,000 $ 3,017,000 $ 3,017,000
Investment securities
available for sale 547,000 547,000 359,000 359,000
Mortgagee-backed securities
available for sale 7,651,000 7,651,000 7,420,000 7,420,000
Investment securities held
to maturity 458,000 484,000 575,000 606,000
Mortgage-backed securities
held to maturity 7,825,000 7,810,000 13,273,000 12,911,000
Loans receivable, net 35,042,000 36,909,000 35,315,000 36,472,000
Liabilities
Checking, money market,
and passbook accounts 13,592,000 13,592,000 14,912,000 14,912,000
Certificate accounts 34,178,000 34,392,000 35,160,000 35,274,000
FHLB advances 5,000,000 4,880,000 5,000,000 4,867,000
Fair value estimates, methods, and assumptions are set forth below.
F-22
<PAGE>
<PAGE>
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.
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, 1998 and 1997.
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.
17. 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.
F-23
<PAGE>
<PAGE>
The balance sheets at March 31, 1998 and 1997 are as follows:
1998 1997
Assets:
Cash $ 240,000 $ 283,000
Investment in subsidiary 7,702,000 6,885,000
Other assets 8,000 8,000
---------- ----------
Total $7,950,000 $7,176,000
========== ==========
Liabilities and Stockholders' Equity:
Liabilities:
Other liabilities $ 3,000 $ 2,000
Stockholders' equity 7,947,000 7,174,000
---------- ----------
$7,950,000 $7,176,000
========== ==========
The statements of income for the years ended March 31, 1998, 1997, and 1996
are as follows:
1998 1997 1996
Other income:
Equity in undistributed
income of subsidiary $616,000 $407,000 $921,000
Interest income from
investments 8,000 9,000 20,000
Other nonoperating income - - 8,000
Other expense:
Interest and other 52,000 31,000 34,000
-------- -------- --------
Net income $572,000 $385,000 $915,000
======== ======== ========
F-24
<PAGE>
<PAGE>
The statements of cash flows for the years ended March 31, 1998, 1997, and
1996 are as follows:
1998 1997 1996
Operating activities:
Net income $ 572,000 $ 385,000 $ 915,000
Adjustment to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed income by
subsidiary (616,000) (407,000) (921,000)
Dividends received - - 1,135,000
Cash provided (used) by changes in
operating assets and liabilities:
Other assets - - (8,000)
Other liabilities 1,000 (18,000) 15,000
Franchise tax accrual - (1,000) 3,000
--------- --------- ----------
Net cash provided by (used in)
operating activities (43,000) (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 (43,000) (37,000) 320,000
Cash:
Beginning of period 283,000 320,000 -
--------- --------- ----------
End of period $ 240,000 $ 283,000 $ 320,000
========= ========= ==========
Supplemental disclosures related to the
statement of cash flows:
Noncash activities:
Adjustment of stockholder redemption
accrual $ - $ - $ 45,000
18. SUBSEQUENT EVENT
On April 23, 1998, the Company entered into a definitive merger agreement
("Agreement") with Sterling Financial Corporation ("Sterling") pursuant to
which the Company will be merged into Sterling and FFSL of Montana will be
merged into Sterling's wholly-owned subsidiary, Sterling Savings Association.
The Agreement provides that each share of the Company's common stock will be
exchanged for 1.384 shares of Sterling common stock.
Pursuant to the Agreement, the Company has agreed to pay Sterling a
termination fee of $500,000 in the event the Agreement is terminated under
certain conditions, including the failure of the Company's shareholders to
approve the Agreement or if the Agreement is terminated as a result of a
breach by the Company.
F-25
<PAGE>
<PAGE>
Consummation of the merger is subject to several conditions, including receipt
of applicable regulatory approval and approval of the Company's shareholders.
Pending these approvals, completion of the merger transaction is anticipated
by mid-Fall 1998.
* * * * * *
F-26
<PAGE>
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