SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One):
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] For the fiscal year ended September 30, 1996,
-------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period
from to .
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Commission File No. 0-25546
MISSISSIPPI VIEW HOLDING COMPANY
- --------------------------------------------------------------------------------
(Name of Small Business Issuer in Its Charter)
Minnesota 41-1795363
- --------------------------------------------- ------------------
(State or Other Jurisdiction of Incorporation I.R.S. Employer
or Organization) Identification No.
35 East Broadway, Little Falls, Minnesota 56345
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(Address of Principal Executive Offices (Zip Code)
Issuer's Telephone Number, Including Area Code: (320) 632-5461
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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 $0.10 per share
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(Title of Class)
Check whether the issuer: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES [X] NO [ ].
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
[X]
State issuer's revenues for its most recent fiscal year. $558,768
As of December 19, 1996, there were issued and outstanding 859,714
shares of the registrant's Common Stock.
The Registrant's voting stock trades on the Nasdaq SmallCap Market under
the symbol "MIVI." The aggregate market value of the voting stock held by
non-affiliates of the registrant, based on the last price the registrant's
Common Stock was sold on December 19, 1996, was $7,380,468 ($12.00 per share
based on 615,039 shares of Common Stock outstanding).
Transition Small Business Disclosure Format (check one)
YES [ ] NO [X]
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DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year ended
September 30, 1996. (Parts I, II, and IV)
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders.
(Part III)
<PAGE>
PART I
Item 1. Business
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General
Mississippi View Holding Company (the "Company") is a Minnesota
corporation organized in November 1994 at the direction of Community Federal
Savings and Loan Association of Little Falls (the "Association") in connection
with the Association's conversion from the mutual to stock form (the
"Conversion"). On March 23, 1995, the Association completed the Conversion and
became a wholly owned subsidiary of the Company. The Company is a unitary
savings and loan holding company which, under existing laws, generally is not
restricted in the types of business activities in which it may engage provided
the Association retains a specified amount of its assets in housing-related
investments.
The Association is a federally chartered stock savings and loan
association. The Association's only office is located in Little Falls, Morrison
County, Minnesota. The Association was founded in 1934 under the name Little
Falls Federal Savings and Loan Association of Little Falls. The name of the
Association was changed to Community Federal Savings and Loan Association of
Little Falls in July 1977. The Association is subject to examination and
comprehensive regulation by the Office of Thrift Supervision ("OTS") and its
deposits are federally insured by the Savings Association Insurance Fund
("SAIF"). The Association is a member of and owns capital stock in the Federal
Home Loan Bank ("FHLB") of Des Moines, which is one of the 12 regional banks in
the FHLB System.
The Association attracts deposits from the general public and uses such
deposits, without outside borrowings, primarily to invest in investment
securities and to originate loans secured by first mortgages on owner-occupied,
one- to four-family residences in its market area. To a much lesser extent, the
Association also originates residential real estate construction loans and
consumer loans.
The principal sources of funds for the Association's lending activities
are deposits and the amortization, repayment, and maturity of loans and
investment securities. The Association does not rely on brokered deposits.
Principal sources of income are interest on loans and investment securities. The
Association's principal expense is interest paid on deposits.
Market Area and Competition
The Association's primary market area consists of Morrison County,
Minnesota. Morrison County has traditionally been one of the lower income areas
of the state and has carried a comparatively higher unemployment rate than other
areas of the state. The county has been successful in recent years in attracting
new and in retaining existing businesses through the progressive activities of
its County Board, Little Falls City Council, Little Falls Economic Development
Authority, Morrison County Rural Finance Development Authority, and Community
Development of Morrison County Corporation. Little Falls financial institutions,
including the Association, have demonstrated cooperation in providing needed
expertise and gap financing to facilitate the community development process.
Morrison County is the home of three major recreational boat manufacturers;
Larson, Crestliner, and Glastron. The financial performance and employment size
of the recreational boat industry have historically been highly cyclical. Also
located in Morrison County are a paper mill, a national mailing distributor, and
Camp Ripley, a prominent National Guard training facility. According to the
Minnesota Department of Agriculture, Morrison County is the third largest dairy
producing county in the State.
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The Association encounters strong competition both in the attraction of
deposits and origination of real estate and other loans. Competition comes
primarily from eight commercial banks and two credit unions with offices in its
market area. In addition, the Association competes with investment and mortgage
banking companies that operate in the area. Due to their size, some of the
Association's competitors possess greater financial and marketing resources.
Based on published figures, the Association is the only thrift institution
headquartered in Morrison County, Minnesota, and third largest financial
institution headquartered in Morrison County, Minnesota on the basis of assets
as of June 30, 1996. The Association competes for savings accounts by offering
depositors competitive interest rates and a high level of personal service. Over
the past four years, the Association has added low cost noninterest bearing
checking accounts, safety deposit boxes, a drive-up ATM, plastic cash and check
cards, and checking account overdraft protection and home equity line of credit
in order to remain competitive in its market.
Lending Activities
General. The Association's loan portfolio predominantly consists of both
adjustable-rate and fixed-rate mortgage loans secured by single family
residences and, to a much lesser extent, commercial mortgage and construction
loans. The Association also makes consumer loans, consisting of savings account
loans, second mortgages, low document 10-year first mortgages, home improvement,
new and used automobiles, recreational vehicles, and unsecured loans. As of
September 30, 1996, the Association's total net portfolio of loans (the "loan
portfolio") was $43.2 million, of which $33.7 million, or 78%, was secured by
residential real estate.
The Association's available funds have historically exceeded the loan
demand in the Association's market area. To supplement its loan originations,
the Association has made purchases of loans, loan participations, and investment
securities. However, since 1984, the Association has essentially discontinued
the purchase of whole loans and loan participations. If loan demand remains at
its present level, the Association's purchases of investment securities are
likely to remain constant or increase. Because investment securities generally
provide for lower returns than loans originated by the Association, the
increased use of investment securities may negatively impact net income. In
addition, no assurances can be given that the Association will not resume
purchasing whole loans or loan participations in the future.
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Analysis of Loan Portfolio. Set forth below is selected data relating to
the composition of the Association's loan portfolio by type of loan on the dates
indicated:
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------
1996 1995
------------------------ -----------------------
$ % $ %
------- ------ ------- ------
(Dollars in Thousands)
Type of Loans:
--------------
<S> <C> <C> <C> <C>
Construction loans ................. $ 627 1.40% $ 1,136 2.53%
Residential
(includes held for sale)(1) ...... 33,682 75.54 35,919 79.86
Commercial ......................... 1,417 3.18 1,269 2.82
Other (includes land) .............. - - 33 0.07
Commercial business loans .......... 351 0.79 4 0.01
Consumer loans
(includes held for sale):
Low document mortgage (2) ........ 1,619 3.63 2,397 5.33
Other consumer and land .......... 6,894 15.46 4,219 9.38
------- ------ ------- ------
Total loans ................... 44,590 100.00% 44,977 100.00%
======= ======
Less:
Loans in process ................. 228 746
Deferred loan origination fees and
costs .......................... 236 222
Allowance for loan losses ........ 877 962
------- -------
Total loans, net ................... $43,249 $43,047
======= =======
</TABLE>
- --------------
(1) Includes one- to four-family and multi-family residential real estate.
(2) Consists primarily of second mortgage and low documentation mortgage loans
with terms of ten years or less.
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<PAGE>
Loan Maturity Tables. The following table sets forth the maturity of the
Association's loan portfolio at September 30, 1996. The table does not include
prepayments of scheduled principal repayments which totalled $6.0 million and
$4.6 million for the years ended September 30, 1996 and 1995, respectively. All
mortgage loans are shown as maturing based on contractual maturities.
<TABLE>
<CAPTION>
Multi-Family &
1-4 Family Commercial Commercial
Real Estate Real Business &
Mortgage Estate Construction Consumer Total
-------- ------ ------------ -------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Non-performing............ $ 31 $ - $ - $ 17 $ 48
Amounts Due:
Within 3 months........... 32 1 551 221 805
3 months to 1 Year........ 89 29 76 413 607
After 1 year:
1 to 3 years............ 625 597 - 1,529 2,751
3 to 5 years............ 1,015 205 - 2,298 3,518
5 to 10 years........... 5,776 851 - 4,386 11,013
10 to 20 years.......... 15,077 418 - - 15,495
Over 20 years........... 10,308 45 - - 10,353
------ ------- ------ ------ ------
Total due after one year.. 32,801 2,116 - 8,213 43,130
------ ----- ------ ----- ------
Total amount due.......... $32,953 $2,146 $ 627 $8,864 44,590
====== ===== ======= =====
Less:
Allowance for loan losses.......................................................................... 877
Undisbursed portion of mortgage loans.............................................................. 228
Deferred loan fees................................................................................. 236
-------
Loan receivable, net............................................................................. $43,249
======
</TABLE>
The following table sets forth the dollar amount of all loans due after
September 30, 1997, which have pre-determined interest rates and which have
floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed Rate Adjustable Rates Total
---------- ---------------- -----
(In Thousands)
<S> <C> <C> <C>
One-to-four family.............. $ 8,428 $24,373 $32,801
Commercial real estate.......... 1,526 590 2,116
Consumer........................ 7,397 816 8,213
------ ------- ------
Total......................... $17,351 $25,779 $43,130
====== ====== ======
</TABLE>
4
<PAGE>
One- to Four-Family Residential Loans. The Association's primary lending
activity consists of the origination of single family residential mortgage loans
secured by property located in the Association's primary market area. The
Association generally originates one- to four-family residential mortgage loans
in amounts up to 80% of the lesser of the appraised value or selling price of
the mortgaged property. The Association requires private mortgage insurance on
loans originated at 80 to 95% of the lesser of the appraised value or selling
price. Loans equal to 100% of the lesser of appraised value or selling price are
offered if insured by Farmers Home Administration ("FmHA") or the Veterans
Administration ("VA"). Loans with a 95 to 98% loan to value ratio are offered if
insured by the U.S. Department of Housing and Urban Development ("HUD"). Loans
insured by other agencies are sold on the secondary market.
Loan originations are generally obtained from existing or past
customers, members of the local community, and referrals from realtors within
the Association's lending area. Mortgage loans originated and held by the
Association in its portfolio generally include due-on sale clauses which provide
the Association with the contractual right to deem the loan immediately due and
payable in the event that the borrower transfers ownership of the property
without the Association's consent. As of September 30, 1996, $33.4 million or
77.2% of mortgage loans consisted of one- to four-family residential loans, of
which 27.4% were fixed rate loans.
The Association primarily originates for its portfolio adjustable-rate
mortgage loans with up to 30 year terms that adjust annually based upon the
one-year Treasury Bill rate and fixed-rate mortgage loans with a 15 year term.
The Association also originates 20 and 30 year fixed-rate mortgage loans for
sale in the secondary market. The Association had limited success in originating
ARMs during periods of prevailing low market interest rates. ARMs generally have
a 2% cap on any change in the interest rate per year, with an overall limit of
6% on any increase or decrease over the life of the loan. Although the
Association occasionally offers discounts on the interest rate on its ARMs
during the first year of the mortgage loan for competitive reasons, generally it
determines a borrowers ability to pay at the fully- indexed rate. The
Association also offers a mortgage product that is fixed for a specified time
period after which the loan converts to an adjustable rate mortgage. The rate
adjusts annually and is tied to the one-year Treasury Bill. The Association
offers a 3-year fixed/1-year adjustable rate mortgage.
Adjustable-rate mortgage loans decrease the risks associated with
changes in interest rates, but involve other risks because, as interest rates
increase, the underlying payments by the borrower increase, thus increasing the
potential for default. At the same time, the marketability of the underlying
collateral, may be adversely affected by higher interest rates. These risks have
not had an adverse effect on the Association to date.
Interest rates charged on fixed rate mortgage loans are competitively
priced based on market conditions and the Association's cost of funds. The
origination fees for fixed rate loans were generally 1% at September 30, 1996.
Generally, the Association's standard underwriting guidelines for fixed rate
mortgage loans conform to Federal Home Loan Mortgage Corporation ("FHLMC") and
Federal National Mortgage Association ("FNMA") guidelines. The Association
currently sells essentially all 30-year fixed rate mortgage loans in the
secondary market, servicing released. As of September 30, 1996, the
Association's portfolio of loans previously originated, sold, and serviced for
others totalled approximately $2.8 million.
Multi-Family and Commercial Real Estate Loans. In order to participate
in local projects that will benefit the community, the Association originates a
limited number of commercial real estate and multi-family real estate loans.
Commercial real estate and multi-family real estate secured loans are reviewed
on a loan by loan basis and must be approved by the Association's Board of
Directors. The
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<PAGE>
Association's commercial real estate loan portfolio consists of seasoned
permanent loans secured by improved property such as retail stores,
manufacturing facilities, and other non-residential buildings. As of September
30, 1996, the Association had multi-family and commercial real estate loans
totalling $2.3 million, or 5.4% of the Association's loan portfolio of which
$827,447 were secured by multi-family real estate.
Loans secured by multi-family and commercial real estate generally
involve a greater degree of risk than residential mortgage loans and carry
larger loan balances. This increased credit risk is a result of several factors,
including the concentration of principal in a limited number of loans and
borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by multi-family and
commercial real estate is typically dependent upon the successful operation of
the related real estate project. If the cash flow from the project is reduced,
the borrower's ability to repay the loan may be impaired. As of September 30,
1996, the largest permanent multi-family and commercial real estate loan was
secured by a commercial property in Little Falls, Minnesota and had a balance of
$581,000 and was current.
Construction Loans. The Association primarily makes loans to construct
single-family owner occupied homes which upon completion of construction convert
to permanent financing. For at least the past 10 years, the Association has not
made construction loans to builders for the purpose of spec homes.
Construction loans are made to owners for construction of their primary
residence on a construction/permanent basis. Construction/permanent loans to
owner/borrowers have either fixed or adjustable rates and are underwritten in
accordance with the same terms and requirements as the Association's permanent
mortgages on existing properties except that the building contractor must meet
the Association's Board approved construction lending policy. The loans
generally provide for disbursement of loan proceeds in stages during a
construction period of up to six months. Borrowers are required to pay accrued
interest on the outstanding balance monthly during the construction phase. At
September 30, 1996, there was $227,762 outstanding in construction loans to
owner/borrowers with $626,900 in outstanding loans in process allocated to these
projects. The Association originated $1.1 million in construction loans on one-
to four-family properties during fiscal 1996.
Construction financing is generally considered to involve a higher
degree of risk of loss than long-term financing on improved, occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could result in
delays and cost overruns. If the estimate of construction costs proves to be
inaccurate, the Association may be required to advance funds beyond the amount
originally committed to permit completion of the development. If the estimate of
value proves to be inaccurate, the Association may be confronted, at or prior to
the maturity of the loan, with a project having a value which is insufficient to
assure full repayment.
The Association is not engaged in any other significant loans for
commercial development, land acquisition, and development of condominiums or
apartment building.
Consumer and Other Loans. The Association also offers consumer and other
loans in the form of second mortgages and low document 10-year first mortgages
which totalled $3.2 million and $3.9
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million at September 30, 1996 and 1995, respectively, and automobile,
recreational vehicle and mobile home loans, home improvement loans, home equity
lines of credit, savings account loans, and commercial business loans which
totalled $5.6 million and $4.2 million at September 30, 1996 and 1995,
respectively. At September 30, 1996, 3.74% of total loans consisted of second
mortgage loans. Federal regulations permit federally chartered thrift
institutions to make secured and unsecured consumer loans up to 35% of an
institution's assets. In addition, a federal thrift has lending authority above
the 35% category for certain consumer loans, property improvement loans, and
loans secured by savings accounts. The Association originates consumer loans in
order to provide a wider range of financial services to its customers. Consumer
loans generally have shorter terms and higher interest rates than mortgage loans
but generally involve more credit risk than mortgage loans because of type and
nature of the collateral and, in certain cases, the absence of collateral. In
addition, consumer lending collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be adversely
effected by job loss, divorce, illness, and personal bankruptcy. In most cases,
any repossessed collateral for a defaulted consumer loan will not provide an
adequate source of repayment of the outstanding loan balance because of improper
repair and maintenance of the underlying security. The remaining deficiency
often does not warrant further substantial collection efforts against the
borrower. The Association believes that the generally higher yields earned on
consumer loans compensate for the increased credit risk associated with such
loans and that consumer loans are important to its efforts to increase the
interest rate sensitivity and shorten the average maturity of its loan
portfolio.
In connection with consumer loan applications, the Association verifies
the borrower's income and reviews a credit bureau report. In addition, the
relationship of the loan to the value of the collateral is considered and the
borrower debt to income ratio must meet the Association's underwriting
guidelines.
Federal thrift institutions are permitted to make secured or unsecured
loans for commercial, corporate, business, or agricultural purposes, including
the issuance of letters of credit secured by real estate, business equipment,
inventories, accounts receivable, and cash equivalents. The aggregate amount of
such loans outstanding may not exceed 10% of such institution's assets.
The Association offers, as consumer loans, low document fixed rate first
mortgage and second mortgage loans on one- to four-family residences for a term
not to exceed 10 years. Such loans are subject to an 80% combined loan to value
ratio. The underwriting standards for these loans are the same as the
Association's standards applicable to one- to four-family residential mortgages.
In order to participate in local community development projects, the
Association makes commercial business loans on a secured basis and generally
requires collateral consisting of real estate, accounts receivable, inventory,
and equipment. The Association's commercial business loans primarily consist of
short term loans for equipment, working capital, business expansion, and
inventory financing. The Association customarily reviews the financial
statements and income tax returns of the guarantors and the origination of
commercial business loans are approved on a loan by loan basis by the Loan
Committee. As of September 30, 1996, the Association had approximately $1.5
million in outstanding commercial business loans, which represented
approximately 3.45% of its loan portfolio.
Loan Purchases. It is the current policy of the Association not to
purchase loans. Although some loans that were purchased in the past still
remain, the Association has not purchased any material amounts of whole loans or
loan participations since 1984. In 1984, the Association purchased approximately
$3.5 million in loans from a third party originator. These loans were secured by
residential, multi-family, and commercial properties in various states. The
originator eventually filed for bankruptcy and the Association wrote off
approximately $700,000 of such loans in 1986. Approximately $72,908 of these
loans remained in the Association's loan portfolio at September 30, 1996. The
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<PAGE>
Association has made reserves for these loans and does not expect any further
reserves; however, no assurance can be given that additional reserves will not
be required. Furthermore, the Association also purchased whole loans or
participations therein throughout the country, such loans being secured by one-
to four-family residential, multi-family, commercial, and land-tract development
real estate. At September 30, 1996, $915,802 or 2.12% of the Association's total
loan portfolio consisted of purchased loans. Although it is the current policy
of the Association not to purchase whole loans or participations in loans, no
assurances can be given that the Association will not purchase loans or
participations therein in the future.
Loan Approval Authority and Underwriting. Certain loan officers may
approve loans on one- to four-family residences up to $50,000. The Loan
Committee has the authority to approve loans on one- to four-family residences
above $50,000 up to $150,000. Loans on one- to four-family residences exceeding
$150,000 requires the Board of Director's approval. Certain loan officers may
approve consumer loans up to $25,000 or $50,000 if secured by real estate
mortgages on owner occupied residences with a loan to value of 80% or less and
up to 100% of loan to value on home equity lines of credit.
For all loans originated by the Association, upon receipt of a completed
loan application from a prospective borrower, a credit report is ordered, income
and certain other information is verified, and if necessary, additional
financial information is requested. An appraisal of the real estate intended to
secure the proposed loan is required which currently is performed by a state
certified independent appraiser designated and approved by the Board of
Directors of the Association. The Association makes construction/permanent loans
on individual properties. Funds advanced during the construction phase are held
in a loan-in-process account and disbursed based upon various stages of
completion. The independent appraiser or loan officer determines the stage of
completion based upon a physical inspection of the construction. The Association
requires title insurance on all loans originated for sale on the secondary
market. Title insurance is also required where a purchase of real estate is
involved and on all fixed rate loans. Borrowers must also obtain hazard or flood
insurance (for loans on property located in a flood zone) prior to closing the
loan. For loans in excess of 80% of the loan to value ratio, borrowers are
generally required to advance funds on a monthly basis together with each
payment of principal and interest to an escrow account from which the
Association makes disbursements for items such as real estate taxes and hazard
insurance premiums.
Loan Commitments. The Association issues written, formal commitments to
prospective borrowers on all real estate approved loans. The commitment usually
requires acceptance within 60 days of the date of issuance, however, on loans
originated for sale in the secondary market, the term depends on the time
remaining on the rate lock. As of September 30, 1996, the Association had
$634,000 of commitments to originate mortgage loans.
Loan Processing Fees. In addition to interest earned on loans, the
Association recognizes service charges which consist primarily of loan
application fees, processing fees, and late charges. The Association recognized
loan processing fees of $71,000 and $76,000 for the fiscal years ended September
30, 1996 and 1995, respectively.
Loans to One Borrower. Savings associations are subject to the same
limits as those applicable to national banks, which under current regulations
limit loans-to-one borrower in an amount equal to 15% of unimpaired capital and
unimpaired surplus, calculated as the sum of the Association's core and
supplementary capital included in total capital, plus the balance of the general
valuation allowances for loan and lease losses not included in supplementary
capital, plus investments in subsidiaries that are not included in calculating
core capital, or $500,000, whichever is higher. The Association's maximum loan-
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to-one borrower limit was approximately $1.7 million as of September 30, 1996.
At September 30, 1996, the Association's largest aggregate loans to one borrower
relationship consisted of several loans secured by commercial property, business
inventory, and residential real estate with a balance of $772,650 and was
current.
Loan Delinquencies. The Association's collection procedures provide that
when a mortgage loan is 15 days past due, a notice of nonpayment is sent. If
payment is still delinquent after 30 days, the customer will receive a letter
and/or telephone call. If the delinquency continues, similar subsequent efforts
are made to eliminate the delinquency. If the loan continues in a delinquent
status for 90 days or more and no repayment plan is in effect, a notice of right
to cure default is mailed to the customer giving 30 days to bring the account
current before foreclosure is commenced.
Loans are reviewed on a monthly basis and are generally placed on a
non-accrual status when the loan becomes more than 90 days delinquent and, in
the opinion of management, the collection of additional interest is doubtful.
Interest accrued and unpaid at the time a loan is placed on non-accrual status
is charged against interest income. Subsequent interest payments, if any, are
either applied to the outstanding principal balance or recorded as interest
income, depending on the assessment of the ultimate collectibility of the loan.
Real estate acquired by the Association as a result of foreclosure or by
deed in lieu of foreclosure is classified as real estate owned until such time
as it is sold. When foreclosed real estate is acquired, it is recorded at the
fair value at the date of foreclosure. Valuations are periodically performed by
management and subsequent charges to operations are taken when it is determined
that the carrying value of the property exceeds the estimated net realizable
value. The Association was the owner of property classified as real estate owned
and other repossessed assets, with original loan balances of $15,700 that had
been written down to $0.00 at September 30, 1996. See "- Classified Assets."
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The following table sets forth information regarding non-accrual loans,
real estate owned, and other repossessed assets and loans, that are 90 days or
more delinquent but on which the Association was accruing interest at the dates
indicated. As of the dates indicated, the Association had no loans categorized
as trouble debt restructuring within the meaning of Statement of Financial
Accounting Standards ("SFAS") No. 15.
At September 30,
------------------------
1996 1995
------- -------
(In Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
Permanent loans secured by 1-4
dwelling units.......................... $ -- $ 29
All other mortgage loans.................. -- --
Non-mortgage loans.......................... 17 --
------ ------
Total....................................... 17 29
Accruing loans which are
contractually past due 90 days or more:
Mortgage loans:
Construction loans -- --
Permanent loans secured by 1-4
dwelling units.......................... 31 3
All other mortgage loans.................. -- --
Non-mortgage loans:
Consumer.................................. -- 12
----- -----
Total....................................... 31 15
----- -----
Total non-accrual and accrual loans......... 48 44
Real estate owned, net...................... -- 30
Other non-performing assets................. -- --
----- ------
Total non-performing assets................. $ 48 $ 74
===== =====
Total non-accrual and accrual loans
to net loans.............................. 0.11% 0.10%
Total non-accrual and accrual loans
to total assets........................... 0.07% 0.06%
Total non-performing assets to
total assets.............................. 0.07% 0.11%
Interest income that would have been recorded on loans accounted for on
a non-accrual basis under the original terms of such loans was $1,148 and $1,319
for the fiscal years ended September 30, 1996 and 1995, respectively. No
interest income on non-accrual loans was included in income for the fiscal years
ended September 30, 1996 or 1995.
Classified Assets. OTS regulations provide for a classification system
for problem assets of insured institutions which covers all problem assets.
Under this classification system, problem assets of insured institutions are
classified as "substandard," "doubtful," or "loss." An asset is considered
substandard if it is inadequately protected by the current net worth and paying
capacity of the obligor or
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of the collateral pledged, if any. Substandard assets include those
characterized by the "distinct possibility" that the insured institution will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
doubtful have all of the weaknesses inherent in those classified substandard,
with the added characteristic that the weaknesses present make "collection or
liquidation in full," on the basis of currently existing facts, conditions, and
values, "highly questionable and improbable." Assets classified as loss are
those considered "uncollectible" and of such little value that their continuance
as assets without the establishment of a specific loss reserve is not warranted.
Assets may be designated "special mention" because of potential weaknesses that
do not currently warrant classification in one of the aforementioned categories.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. An institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which may order the establishment of additional general or specific loss
allowances. A portion of general loss allowances established to cover possible
losses related to assets classified as substandard or doubtful may be included
in determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
At September 30, 1996, the Association's classified assets consisted of
special mention loans of $813,837, substandard loans of $1,070,717 and doubtful
loans of $0. A $668,825 general reserve allowance was established for both
classified and unclassified assets. Assets classified as "loss" totalled
$223,969 with a $223,969 specific reserve established. The Association had
delinquent loans of 60 days or more of $188,862.
Doubtful loans may be classified due to particular aspects of the loan;
such as, delinquency, high loan-to-value ratio, poor market conditions, future
employment of owner, or environmental issues. As of September 30, 1996, no loans
were classified doubtful, therefore, no doubtful loans are reflected as
non-performing loans in the prior table.
Foreclosed Real Estate. Real estate acquired by the Association as a
result of foreclosure or by deed in lieu of foreclosure is classified as real
estate owned until it is sold. When property is acquired it is recorded at the
fair value at the date of foreclosure less estimated costs of disposition.
The Association records loans as in substance foreclosures if the
borrower has little or no equity in the property based upon its documented
current fair value, the Association can only expect repayment of the loan to
come from the sale of the property and if the borrower has effectively abandoned
control of the collateral or has continued to retain control of the collateral
but because of the current financial status of the borrower, it is doubtful the
borrower will be able to repay the loan in the foreseeable future. In-substance
foreclosures are accounted for as real estate acquired through foreclosure, when
title to the collateral has been acquired by the Association. There may be
significant other expenses incurred such as attorney and other extraordinary
servicing costs involved with in substance foreclosures. The Association had no
in substance foreclosures at September 30, 1996. The Association holds real
estate owned with a balance of $0 (net of a $15,700 loss provision) at September
30, 1996.
11
<PAGE>
Allowances for Loan Losses. It is management's policy to provide for
inherent losses on loans in its loan portfolio. A provision for loan losses is
charged to operations based on management's evaluation of the potential losses
that may be incurred in the Association's loan portfolio. Such evaluation, which
includes a review of all loans of which full collectibility of interest and
principal may not be reasonably assured, considers the Association's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay, estimated value of any
underlying collateral, and current economic conditions.
Management will continue to review the entire loan portfolio to
determine the extent, if any, to which further additional loss provisions may be
deemed necessary. There can be no assurance that the allowance for losses will
be adequate to cover losses which may in fact be realized in the future and that
additional provisions for losses will not be required.
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of the Association's allowance for loan losses by loan category
and the percent of loans in each category to total loans receivable at the dates
indicated. The portion of the loan loss allowance allocated to each loan
category does not represent the total available for future losses that may occur
within the loan category because the total loan loss allowance is a valuation
reserve applicable to the entire loan portfolio.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------
1996 1995
---------------------------- ---------------------------
Percent of Percent of
Loans to Loans to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in Thousands)
At end of period allocated to:
One-to-four family residential
<S> <C> <C> <C> <C>
(includes held for sale)........ $746 88.41% $762 83.52%
Multi-family and commercial
real estate..................... 102 5.07 101 9.98
Construction...................... 3 1.40 4 2.53
Consumer and other loans.......... 26 5.12 95 3.97
---- -------- ---- --------
Total allowance.............. $877 100.00% $962 100.00%
=== ====== === ======
</TABLE>
12
<PAGE>
Analysis of the Allowance for Loan Losses. The following table sets
forth information with respect to the Association's allowance for loan losses at
the dates and for the periods indicated:
<TABLE>
<CAPTION>
At September 30,
-------------------------
1996 1995
------- -------
(Dollars in Thousands)
<S> <C> <C>
Gross loans outstanding(1).................................. $44,362 $44,231
====== ======
Average loans outstanding................................... $43,435 $44,371
====== ======
Allowance balances (at beginning of period)................. $ 962 $ 1,006
------ ------
Provision (credit):
Residential(2)............................................ (54) 23
Commercial real estate.................................... 26 25
Construction.............................................. (2) (3)
Non-mortgage and other (including land)................... 34 (25)
------- -------
Total provision............................................. 4 20
------- -------
Charge-offs:
Residential(2)............................................ 5 2
Commercial real estate.................................... 2 -
Non-mortgage and other (including land)................... 85 67
------- -------
Total Charge-offs........................................... 92 69
------- -------
Recoveries:
Residential(2)............................................ 2 3
Commercial real estate.................................... - 1
Non-mortgage and other (including land)................... 1 1
------- -------
Total Recoveries............................................ 3 5
------- -------
Allowance balance (at end of period)........................ $ 877 $ 962
====== ======
Allowance for loan losses as a percent of gross loans....... 1.98% 2.17%
Net loans charged off as a part of average loans outstanding 0.21% 0.16%
</TABLE>
- ------------------------
(1) Includes total loans (including loans held for sale), net of loans in
process.
(2) Includes one- to four-family and multi-family residential real estate
loans.
Interest Bearing Accounts Held at Other Financial Institutions. As of
September 30, 1996, the Association held $3.6 million in insured interest
bearing deposits in other financial institutions and $2.8 million at the FHLB of
Des Moines. The Association maintains these accounts in order to maintain
liquidity and improve the interest-rate sensitivity of its assets.
13
<PAGE>
Investment Portfolio
Mortgage-backed and Related Securities. To supplement lending
activities, the Association invests in residential mortgage-backed securities.
Although such securities are held for investment, they can serve as collateral
for borrowings and, through repayments, as a source of liquidity.
The mortgage-backed securities portfolio as of September 30, 1996
consisted primarily of certificates issued by the FHLMC. To a lesser extent, the
mortgage-backed securities portfolio also contains certificates issued by FNMA
and the Government National Mortgage Association ("GNMA"). As of September 30,
1996, the carrying value of mortgage-backed securities totalled $4.9 million, or
6.94% of total assets. The market value of such securities totalled
approximately $4.9 million at September 30, 1996.
Mortgage-backed securities represent a participation interest in a pool
of single-family or multi-family mortgages, the principal and interest payments
on which are passed from the mortgage originators, through intermediaries
(generally quasi-governmental agencies) that pool and repackage the
participation interests in the form of securities, to investors such as the
Association. Such quasi-governmental agencies, which guarantee the payment of
principal and interest to investors, primarily include FHLMC, Fannie Mae, and
GNMA.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate mortgages or
adjustable-rate mortgage loans. Mortgage-backed securities are generally
referred to as mortgage participation certificates or pass-through certificates.
As a result, the interest rate risk characteristics of the underlying pool of
mortgages (i.e., fixed rate or adjustable rate) as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages. Mortgage-backed
securities issued by FHLMC, Fannie Mae, and GNMA make up a majority of the
pass-through certificates market.
Investment Activities. The Association is required under federal
regulations to maintain a minimum amount of liquid assets that may be invested
in specified short-term securities and certain other investments. See "-
Regulation - Federal Home Loan Bank System." The Association has generally
maintained a liquidity portfolio well in excess of regulatory requirements.
Liquidity levels may be increased or decreased depending upon the yields on
investment alternatives and upon management's judgment as to the attractiveness
of the yields then available in relation to other opportunities and its
expectation of future yield levels, as well as management's projections as to
the short-term demand for funds to be used in the Association's loan origination
and other activities. As of September 30, 1996, the Association had an
investment portfolio of approximately $17.3 million, consisting primarily of
U.S. government agency obligations, certificates of deposit at other
institutions, and FHLB stock, as permitted by OTS regulations. The Association
has found its level of investment securities has increased in recent years as a
result of repayments and prepayments on loans and mortgage-backed securities
exceeding loan demand. The market value of investments at September 30, 1996 was
$17.3 million which is substantially equivalent to its carrying value. The
Association anticipates having the ability to fund all of its investing
activities from funds held on deposit at the FHLB of Des Moines. The Association
will continue to seek high quality investments with short to intermediate
maturities and duration from one to three years.
14
<PAGE>
Investment Portfolio. The following table sets forth the carrying value
of the Association's investment securities portfolio, short-term investments,
and FHLB stock at the dates indicated.
<TABLE>
<CAPTION>
September 30,
------------------------------
1996 1995
---------- ----------
(In Thousands)
Investment Securities:
<S> <C> <C>
U.S. Government Securities Held to Maturity........ $ - $ 499
U.S. Government Securities Available for Sale...... 2,499 1,011
U.S. Agency Securities Held to Maturity............ 1,750 5,674
U.S. Agency Securities Available for Sale.......... 7,836 2,478
Certificates of Deposit............................ 4,065 6,064
Mutual Fund........................................ 87 82
FHLMC Stock........................................ 436 299
FHLB Stock......................................... 651 638
------ ------
Total Investment Securities...................... 17,324 16,745
Mortgage-backed Securities Held to Maturity.......... 3,479 4,125
Mortgage-backed Securities Available for Sale........ 1,377 625
Interest Bearing Deposits(1)......................... 2,266 2,600
------ ------
Total Investments.................................. $24,446 $24,095
====== ======
</TABLE>
- ---------------
(1) Consisted of FHLB demand deposits and daily time deposits, considered cash
equivalents.
15
<PAGE>
Investment Portfolio Maturities. The following table sets forth certain
information regarding the carrying values, weighted average yields, and
maturities of the Association's investment securities portfolio at September 30,
1996.
<TABLE>
<CAPTION>
As of September 30, 1996
-----------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
----------- ---------- ----------- ----------- ----------- ----------- ----------- ---------
(Dollars in Thousands)
U.S. government obligations
<S> <C> <C> <C> <C> <C> <C> <C> <C>
held to maturity........... $ - -% $ - -% $ - -% $ - -%
U. S. government obligations
available for sale......... 1,506 6.40 992 5.45 - - - -
U.S. agency obligations
held to maturity........... 1,250 5.58 500 7.01 - - - -
U.S. agency obligations
available for sale......... 2,989 4.86 4,424 6.06 - - 423 6.91
Other Securities(1).......... 6,418 5.56 - - - - - -
FHLB stock(2)................ N/A N/A N/A N/A N/A N/A N/A N/A
FHLMC stock,
available for sale(3)...... N/A N/A N/A N/A N/A N/A N/A N/A
Mortgage-backed securities
held to maturity........... - - 1,326 6.76 673 8.05 1,480 8,83
Mortgage-backed securities
available for sale......... - - 932 6.48 - - 446 7.91
------ --- ----- ---- ------- --- ------ ----
Total...................... $12,163 5.50% $8,174 6.21% $ 673 8.05% $2,349 8.31%
====== ==== ===== ==== ====== ==== ===== ====
</TABLE>
<TABLE>
<CAPTION>
As of September 30, 1996
----------------------------------
Total Investment Securities
Carrying Average Market
Value Yield Value
---------- ---------- --------
(Dollars in Thousands)
U.S. government obligations
<S> <C> <C> <C>
held to maturity........... $ - -% $ -
U. S. government obligations
available for sale......... 2,498 6.02 2,498
U.S. agency obligations
held to maturity........... 1,750 5.99 1,748
U.S. agency obligations
available for sale......... 7,836 5.65 7,836
Other Securities(1).......... 6,418 5.56 6,418
FHLB stock(2)................ 651 7.25 651
FHLMC stock,
available for sale(3)...... 436 - 436
Mortgage-backed securities
held to maturity........... 3,479 7.89 3,508
Mortgage-backed securities
available for sale......... 1,378 6.95 1,378
------- ---- ------
Total...................... $24,446 6.02% $24,473
====== ==== ======
</TABLE>
(1) Consists of Certificates of Deposit and other interest bearing deposits.
(2) As of September 30, 1996, FHLB stock paid a return of 7.25%.
(3) FHLMC stock noninterest earning - market value only.
16
<PAGE>
Sources of Funds
General. Deposits are the major external source of the Association's
funds for lending and other investment purposes. The Association derives funds
from the amortization and prepayment of loans and mortgage-backed securities,
maturities of investment securities, and operations. Scheduled loan principal
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are significantly influenced by general interest
rates and market conditions. The Association also has the ability to obtain
advances from the FHLB of Des Moines as a source of funds.
Deposits. Consumer and commercial deposits are attracted principally
from within the Association's primary market area through the offering of a
broad selection of deposit instruments including regular savings, demand and NOW
accounts, and term certificate accounts. Deposit account terms vary according to
the minimum balance required, the time period the funds must remain on deposit,
and the interest rate, among other factors.
Regular savings accounts, money market accounts, and NOW accounts
constituted $18.6 million, or 32.8% of the Association's deposit portfolio at
September 30, 1996. Certificates of deposit constituted $38.0 million or 67.2%
of the deposit portfolio. As of September 30, 1996, the Association had no
brokered deposits.
Jumbo Certificate Accounts. The following table indicates the amount of
the Association's certificates of deposit of $100,000 or more by time remaining
until maturity as of September 30, 1996.
Certificates
of Deposits
-----------
(In Thousands)
Maturity Period
- ---------------
Within three months....................................... $ 738
Three through six months.................................. 303
Six through twelve months................................. 892
Over twelve months........................................ 501
-------
Total................................................... $ 2,434
======
Borrowings
Deposits are the primary source of funds of the Association's lending
and investment activities and for its general business purposes. The Association
may obtain advances from the FHLB of Des Moines to supplement its supply of
lendable funds. Advances from the FHLB of Des Moines are typically secured by a
pledge of the Association's stock in the FHLB of Des Moines and a portion of the
Association's first mortgage loans and certain other assets. The Association, if
the need arises, may also access the Federal Reserve Bank discount window to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. As of September 30, 1996, the Association had no advances
outstanding from the FHLB of Des Moines. As of September 30, 1996, the
Association had no other borrowings.
17
<PAGE>
Subsidiary Activity
The Company has one wholly-owned subsidiary, the Association. The
Association is permitted to invest up to 2% of its assets in the capital stock
of, or secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. Under such limitations,
as of September 30, 1996, the Association was authorized to invest up to
approximately $1.4 million in the stock of, or loans to, service corporations
(based upon the 2% limitation). At September 30, 1996, the Association had no
subsidiaries.
Personnel
As of September 30, 1996, the Association had 19 full-time and 3
part-time employees. None of the Association's employees are represented by a
collective bargaining group.
Regulation
Set forth below is a brief description of certain laws that relate to
the regulation of the Company and the Association. The description does not
purport to be complete and is qualified in its entirety by reference to
applicable laws and regulations.
Company Regulation
General. The Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Company and its non-savings association subsidiaries, should such subsidiaries
be formed, which also permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings association. This
regulation and oversight is intended primarily for the protection of the
depositors of the Association and not for the benefit of stockholders of the
Company.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Association satisfies the Qualified Thrift Lender ("QTL") test or meets the
definition of domestic building and loan association pursuant to section 7701 of
the Internal Revenue Code of 1986, as amended (the "Code"). If the Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Company and any of its subsidiaries (other than the Association or any other
SAIF-insured savings association) would become subject to restrictions
applicable to bank holding companies unless such other associations each also
qualify as a QTL or domestic building and loan association and were acquired in
a supervisory acquisition. See "- Regulation of the Association Qualified Thrift
Lender Test."
Restrictions on Acquisitions. The Company must obtain approval from the
OTS before acquiring control of any other SAIF-insured association. Such
acquisitions are generally prohibited if they result in a multiple savings and
loan holding company controlling savings associations in more than one state.
However, such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings association.
18
<PAGE>
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally insured
savings institution without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition. In
addition, no company may acquire control of such an institution without prior
OTS approval.
Federal Securities Law. The Company is subject to filing and reporting
requirements by virtue of having its common stock registered under the
Securities Exchange Act of 1934. Furthermore, company stock held by persons who
are affiliates (generally officers, directors and principal stockholders) of the
Company may not be resold without registration or unless sold in accordance with
certain resale restrictions. If the Company meets specified current public
information requirements, each affiliate of the Company is able to sell in the
public market, without registration, a limited number of shares in any
three-month period.
Regulation of the Association
General. As a federally chartered, SAIF-insured savings association, the
Association is subject to extensive regulation by the OTS and the Federal
Deposit Insurance Corporation ("FDIC"). Lending activities and other investments
must comply with various federal statutory and regulatory requirements. The
Association is also subject to certain reserve requirements promulgated by the
Federal Reserve Board.
The OTS, in conjunction with the FDIC, regularly examines the
Association and prepares reports for the consideration of the Association's
Board of Directors on any deficiencies that are found in the Association's
operations. The Association's relationship with its depositors and borrowers is
also regulated to a great extent by federal and state law, especially in such
matters as the ownership of savings 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 savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulations, whether by the OTS, the FDIC, or the
Congress could have a material adverse impact on the Company, the Association,
and their operations.
Insurance of Deposit Accounts. The Association's deposit accounts are
insured by the SAIF to the maximum of $100,000 permitted by law. Insurance of
deposits may be terminated by the FDIC upon a finding that the institution has
engaged in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, rule, order
or condition imposed by the FDIC or the institution's primary regulator.
The FDIC charges an annual assessment for the insurance of deposits
based on the risk a particular institution poses to its deposit insurance fund.
Under this system as of September 30, 1996, SAIF members paid within a range of
23 cents to 31 cents per $100 of domestic deposits, depending upon the
institution's risk classification. This risk classification is based on an
institution's capital group and supervisory subgroup assignment. Pursuant to the
Economic Growth and Paperwork Reduction Act of
19
<PAGE>
1996 (the "Act"), the FDIC imposed a special assessment on SAIF members to
capitalize the SAIF at the designated reserve level of 1.25% as of October 1,
1996. Based on the Association's deposits as of March 31, 1995, the date for
measuring the amount of the special assessment pursuant to the Act, the
Association paid a special assessment of $362,557 on November 27, 1996 to
recapitalize the SAIF. This expense was recognized during the fourth quarter of
fiscal 1996. The FDIC is expected to lower the premium for deposit insurance to
a level necessary to maintain the SAIF at its required reserve level; however,
the range of premiums has not been determined at this time.
Pursuant to the Act, the Association will pay, in addition to its normal
deposit insurance premium as a member of the SAIF, an amount equal to
approximately 6.4 basis points toward the retirement of the Financing
Corporation bonds ("Fico Bonds") issued in the 1980's to assist in the recovery
of the savings and loan industry. Member of the Bank Insurance Fund ("BIF"), by
contrast, will pay, in addition to their normal deposit insurance premium,
approximately 1.3 basis points. Based on total deposits as of September 30,
1996, had the Act been in effect, the Association's Fico Bond premium would have
been approximately $36,200 in addition to its normal deposit insurance premium.
Beginning no later than January 1, 2000, the rate paid to retire the Fico Bonds
will be equal for members of the BIF and the SAIF. The Act also provides for the
merging of the BIF and the SAIF by January 1, 1999 provided there are no
financial institutions still chartered as savings associations at that time.
Should the insurance funds be merged before January 1, 2000, the rate paid by
all members of this new fund to retire the Fico Bonds would be equal.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets, (2) a leverage ratio (core capital) equal to at least
3% of total adjusted assets, and (3) a risk-based capital requirement equal to
8.0% of total risk-weighted assets.
Savings associations with a greater than "normal" level of interest rate
exposure will, in the future, be subject to a deduction for an interest rate
risk ("IRR") component from capital for purposes of calculating their risk-based
capital requirement.
20
<PAGE>
As shown below, the Association's regulatory capital exceeded all
minimum regulatory capital requirements applicable to it as of September 30,
1996:
Percent of
Adjusted
Amount Assets
------ ------
(Dollars in Thousands)
GAAP Capital: $10,642,889 15.21%
========== =====
Tangible Capital:(1)
Regulatory requirement...................... $ 1,046,236 1.50%
Actual capital.............................. 10,404,144 14.92
---------- ------
Excess.................................... $ 9,357,908 13.42%
========== ======
Core Capital:(1)
Regulatory requirement...................... $ 2,092,472 3.00%
Actual capital.............................. 10,404,144 14.92
---------- ------
Excess.................................... $ 8,311,672 11.92%
========== ======
Risk-Based Capital:(2)
Regulatory requirement...................... $ 2,732,548 8.00%
Actual capital.............................. 10,834,091 30.72
---------- ------
Excess.................................... $ 8,101,543 23.72%
========== ======
(1) Regulatory capital reflects modifications from GAAP capital due to
valuation adjustments for available for sale securities and unallowable
mortgage servicing rights.
(2) Based on risk weighted assets of $34,156,849.
Net Portfolio Value. The OTS requires the computation of amounts by
which the net present value of an institution's cash flows from assets,
liabilities, and off balance sheet items (the institution's net portfolio value,
or "NPV") would change in the event of assumed changes in market interest rates.
An institution's IRR is measured as the change to its NPV as a result of
a hypothetical 200 basis point change in market interest rates. A resulting
change in NPV of more than 2% of the estimated market value of its assets will
require the institution to deduct from its capital 50% of that excess change.
However, the Association is exempt from this rule. The rule provides that the
OTS will calculate the IRR component quarterly for each institution.
21
<PAGE>
The following table presents the Association's NPV at September 30,
1996, as calculated by the OTS and based on OTS assumptions utilizing data
provided to the OTS by the Association.
<TABLE>
<CAPTION>
Percent of Change in
Change Interest Estimated Amount of Estimated NPV NPV Ratio (4)
Rates (basis points) NPV Change(1) NPV(2) Ratio(3) (basis points)
-------------------- --- --------- ------ -------- --------------
<S> <C> <C> <C> <C> <C> <C>
+400 $ 9,779 $-2,585 -21% 14.34% -290
+300 10,597 -1,767 -14 15.30 -193
+200 11,339 -1,025 -8 16.15 -109
+100 11,942 -422 -3 16.80 -43
- 12,364 17.24
-100 12,602 238 +2 17.45 +21
-200 12,710 345 +3 17.51 +27
-300 13,052 687 +6 17.83 +59
-400 13,515 1,151 +9 18.27 +104
</TABLE>
- -----------------
(1) Represents the excess (deficiency) of the estimated NPV assuming the
indicated change in interest rates minus the estimated NPV assuming no
change in interest rates.
(2) Calculated as the amount of change in the estimated NPV divided by the
estimated NPV assuming no change in interest rates.
(3) Calculated as the estimated NPV divided by average total assets.
(4) Calculated as the excess (deficiency) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming
no change in interest rates.
<TABLE>
<CAPTION>
At September 30, At September 30,
1996 1995
---------------- ----------------
*** Risk Measures: 200 bp rate shock ***
<S> <C> <C>
Pre-Shock NPV Ratio: NPV as % of PV of Assets........ 17.24% 16.93%
Exposure Measure: Post-Shock NPV Ratio............... 16.15 16.51
Sensitivity Measure: Change in NPV Ratio............. -109 bp -42 bp
*** Calculation of Capital Component ***
Change in NPV as % of PV of Assets................... -1.43% -.67%
Interest Rate Risk Capital Component ($000).......... -- --
</TABLE>
Computations of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of market
interest rates, loan prepayments and deposit run-offs, and should not be relied
upon as indicative of actual results. Further, the computations do not
contemplate any actions the Association may undertake in response to changes in
interest rates.
Although the Association is not subject to the IRR component reduction
discussed above, the Association is still subject to interest rate risk and, as
can be seen above, rising interest rates will reduce the Association's NPV. The
OTS has the authority to require otherwise exempt institutions to comply with
the rule concerning interest rate risk.
22
<PAGE>
Dividend and Other Capital Distribution Limitations. 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. In
addition, the Association 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
Association below the amount required for the liquidation account to be
established pursuant to the Association's plan of conversion.
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory approval. At
September 30, 1996, the Association was a Tier 1 institution. In the event the
Association's capital fell below its fully phased-in requirement or the OTS
notified it that it was in need of more than normal supervision, the
Association's ability to make capital distributions could be restricted. In
addition, the OTS could prohibit a proposed capital distribution by any
institution, which would otherwise be permitted by the regulation, if the OTS
determines that such distribution would constitute an unsafe or unsound
practice.
Finally, a savings association is prohibited from making a capital
distribution if, after making the distribution, the savings association would be
undercapitalized (not meet any one of its minimum regulatory capital
requirements).
Qualified Thrift Lender Test. Savings institutions must meet either the
QTL test pursuant to OTS regulations or the definition of a domestic building
and loan association in section 7701 of the Internal Revenue Code of 1986, as
amended (the "Code"). If the Association maintains an appropriate level of
certain specified investments (primarily residential mortgages and related
investments, including certain mortgage-related securities) and otherwise
qualifies as a QTL or a domestic building and loan association, it will continue
to enjoy full borrowing privileges from the FHLB of Des Moines. The required
percentage of investments under the QTL test is 65% of assets while the Code
requires investments of 60% of assets. An association must be in compliance with
the QTL test or definition of domestic building and loan association on a
monthly basis in nine out of every 12 months. As of September 30, 1996, the
Association was in compliance with its QTL requirement and met the definition of
a domestic building and loan association. There can be no assurance that the
Association will continue to meet the QTL requirements or the definition of a
domestic building and loan association in future periods.
Loans-to-One Borrower. See "Business - Loans-to-One Borrower."
Transactions With Affiliates. Generally, restrictions on transactions
with affiliates require that transactions between a savings association or its
subsidiaries and its affiliates be on terms as favorable to the Association as
comparable transactions with non-affiliates. In addition, certain of these
transactions are restricted to an aggregate percentage of the Association's
capital; collateral in specified amounts must usually be provided by affiliates
to receive loans from the Association. Affiliates of the Association include the
Company and any company which would be under common control with the
Association.
23
<PAGE>
In addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of any affiliate that is not a subsidiary. The OTS has the discretion to treat
subsidiaries of savings associations as affiliates on a case-by-case basis.
Liquidity Requirements. All savings associations are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At September 30, 1996, the Association's
required liquid asset ratio was 5%. Monetary penalties may be imposed upon
associations for violations of liquidity requirements.
Federal Home Loan Bank System. The Association is a member of the FHLB
of Des Moines, which is one of 12 regional FHLBs that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB.
As a member, the Association is required to purchase and maintain stock
in the FHLB of Des Moines in an amount equal to at least 1% of its aggregate
unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year. At September 30, 1996, the
Association had $650,700 in FHLB stock, which was in compliance with this
requirement.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW, and Super
NOW checking accounts) and non-personal time deposits. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve Board may be
used to satisfy the liquidity requirements that are imposed by the OTS. At
September 30, 1996, the Association was in compliance with these requirements.
Item 2. Description of Property
- ---------------------------------
(a) Properties.
The Company owns no real property but utilizes the office owned by the
Association. The Association owns and operates from its office located at 35
East Broadway, Little Falls, Minnesota 56345. The Association has a total
investment in office property and equipment of $1.35 million with a net book
value of $788,846 at September 30, 1996.
(b) Investment Policies.
See "Item 1. Business" above for a general description of the
Association's investment policies and any regulatory or Board of Directors'
percentage of assets limitations regarding certain investments. All of the
Association's investment policies are reviewed and approved by the Board of
Directors of the Association, and such policies, subject to regulatory
restrictions (if any), can be changed without a vote of stockholders. The
Association's investments are primarily acquired to produce income, and to a
lesser extent, possible capital gain.
24
<PAGE>
(1) Investments in Real Estate or Interests in Real Estate. See "Item 1.
Business - Lending Activities," "Item 1. Business - Regulation of the
Association," and "Item 2. Description of Property.
(a) Properties" above.
(2) Investments in Real Estate Mortgages. See "Item 1. Business -
Lending Activities" and "Item 1. Business - Regulation of the Association."
(3) Investments in Securities of or Interests in Persons Primarily
Engaged in Real Estate Activities. See "Item 1. Business - Lending Activities,"
"Item 1. Business - Regulation of the Association," and "Item 1. Business -
Subsidiary Activity."
(c) Description of Real Estate and Operating Data.
Not Applicable.
Item 3. Legal Proceedings
- ---------------------------
The Company, from time to time, is a party to ordinary routine
litigation, which arises in the normal course of business, such as claims to
enforce liens, condemnation proceedings on properties in which the Association
holds security interests, claims involving the making and servicing of real
property loans, and other issues incident to the business of the Company. In the
opinion of management, no material loss is expected from any of such pending
claims or lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
No matters were submitted to stockholders for a vote during the quarter
ended September 30, 1996.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- --------------------------------------------------------------------------------
Matters
-------
The information contained under the section captioned "Stock Market
Information" in the Company's Annual Report to Stockholders for the fiscal year
ended September 30, 1996 (the "Annual Report"), is incorporated herein by
reference.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
-------------
Except as set forth below, the required information is contained in the
section captioned "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the Annual Report and is incorporated herein by
reference.
25
<PAGE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Association for the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the change in average volume).
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
-------------------------------------- --------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
-------------------------------------- --------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
(Dollars in Thousands)
Interest income:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable(1)....... $ (76) $173 $ (4) $ 93 $ (78) $382 $ (9) $295
Mortgage-backed securities 123 (41) (18) 64 (3) (14) -- (17)
Investment securities..... 92 50 6 148 182 86 30 298
Other interest-earning assets 64 (19) (4) 41 (16) 84 (14) 54
--- --- --- --- --- --- --- ---
Total interest-earning assets 203 163 (20) 346 85 538 7 630
--- --- --- --- --- --- --- ---
Interest expense:
Savings accounts.......... (3) 301 -- 298 (100) 282 (14) 168
Other liabilities......... -- -- -- -- -- -- -- --
---- ----- ---- --- ---- ----- ---- ---
Total interest-bearing
liabilities............ (3) 301 -- 298 (100) 282 (14) 168
----- ---- ---- --- ---- ---- --- ---
Net change in interest income $ 206 $(138) $ (20) $ 48 $ 185 $ 256 $ 21 $462
==== ==== ==== === ==== ==== ==== ===
</TABLE>
- ---------------------
(1) Loans are net of undisbursed commitments.
Item 7. Financial Statements
- ------------------------------
The Company's consolidated financial statements required herein are
contained in the Annual Report and are incorporated herein by reference.
Quarter results of operations on page 14 of the 1996 annual report to
stockholders is hereby incorporated by reference.
Item 8. Changes in and Disagreements With Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
--------------------
Not Applicable.
26
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
- --------------------------------------------------------------------------------
with Section 16(b) of the Exchange Act
--------------------------------------
The information contained under the sections captioned "Filing of
Beneficial Ownership Reports" and "I - Information with Respect to Nominees for
Director, Directors Continuing in Office, and Executive Officers" in the
Company's definitive proxy statement for the Company's Annual Meeting of
Stockholders (the "Proxy Statement") is incorporated herein by reference.
Item 10. Executive Compensation
- --------------------------------
The information contained under the section captioned "Director and
Executive Officer Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and
Principal Holders Thereof" in the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the section captioned "I - Information with Respect
to Nominees for Director, Directors Continuing in Office, and
Executive Officers" in the Proxy Statement.
(c) Management of the Company knows of no arrangements, including any
pledge by any person of securities of the Company, the operation
of which may at a subsequent date result in a change in control
of the Registrant.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Certain Relationships and Related
Transactions" and "Voting Securities and Principal Holders Thereof" in the Proxy
Statement.
Item 13. Exhibits, List and Reports on Form 8-K
- ------------------------------------------------
(a) Exhibits are either attached as part of this Report or incorporated herein
by reference.
3.1 Articles of Incorporation of Mississippi View Holding Company*
3.2 Bylaws of Mississippi View Holding Company*
10.1 Employment contract with Thomas J. Leiferman*
10.2 Management Stock Bonus Plans**
27
<PAGE>
10.3 1995 Stock Option Plan**
11 Statement regarding computation of earnings per share (see Note 1
to the Notes to Consolidated Financial Statements in the Annual
Report)
13 Annual Report to Stockholders for the fiscal year ended September
30, 1996.
21 Subsidiaries of the Registrant (see information contained herein
under "Business - Subsidiary Activity").
23 Consent of Bertram Cooper & Co., LLP
99 Financial Data Schedule***
(b) Reports on Form 8-K.
None.
- -------------------
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 33-86820) declared effective by the SEC on February
9, 1995.
** Incorporated by reference to the Registrant's proxy statement for the
special meeting of stockholders held on September 27, 1995 and filed
with the SEC on August 17, 1995 (File No. 0-25546)
*** Only in electronic filing.
28
<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.
MISSISSIPPI VIEW HOLDING COMPANY
Dated: December 19, 1996 By: /s/Thomas J. Leiferman
----------------------
Thomas J. Leiferman
President, Chief Executive Officer, and Director
(Duly Authorized Representative)
Pursuant to the requirement 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/Thomas J. Leiferman By:
---------------------- -----------------------
Thomas J. Leiferman Andrew P. Revering
President, Chief Executive Officer, and Director Chairman of the Board
(Principal Executive Officer)
Date: December 19, 1996 Date: December 19, 1996
By: /s/Neil Adamek By: /s/Wallace R. Mattock
---------------------- -----------------------
Neil Adamek Wallace R. Mattock
Director Director
Date: December 19, 1996 Date: December 19, 1996
By: /s/Gerald Peterson By: /s/Peter Vogel
---------------------- -----------------------
Gerald Peterson Peter Vogel
Director Director
Date: December 19, 1996 Date: December 19, 1996
By: /s/Larry D. Hartwig
----------------------
Larry D. Hartwig
Treasurer/Comptroller (Principal
Financial and Accounting Officer)
Date: December 19, 1996
EXHIBIT 13
Annual Report to Stockholders for the fiscal year ended September 30, 1996
<PAGE>
[MISSISSIPPI VIEW HOLDING COMPANY LOGO]
1996
ANNUAL REPORT
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY
1996 ANNUAL REPORT
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
Selected Financial and Other Data............................. 2
Letter to Shareholders........................................ 3
Corporate Profile and Stock Market Information................ 4
Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 6
Selected Quarterly Financial Data............................. 14
Report of Independent Auditors................................ 15
Consolidated Financial Statements............................. 16
Notes to Consolidated Financial Statements.................... 21
Office Locations.............................................. 36
Other Corporate Information................................... 36
1
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL AND OTHER DATA
Financial Condition (Dollars in Thousands)
September 30, 1996 1995 1994 1993 1992
- --------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total assets (1) ................................................ $70,011 $69,443 $62,865 $64,995 $65,857
Loans receivable, net ........................................... 43,070 42,989 44,226 44,712 45,065
Loans held for sale ............................................. 179 58 93 241 354
Mortgage-backed securities ...................................... 4,857 4,750 3,123 4,248 6,041
Investment securities (1) ....................................... 17,323 16,745 11,549 10,383 11,888
Cash and cash equivalents (1) ................................... 2,584 2,837 1,732 3,950 772
Deposits ........................................................ 56,531 54,920 56,402 58,873 60,680
Other borrowings ................................................ -- -- -- -- 37
Net retained earnings (substantially restricted) (2) ............ 7,320 6,832 5,869 5,495 4,690
Total stockholders equity (1) ................................... 12,440 13,783 n/a n/a n/a
Summary of Operations (Dollars in Thousands)
Year Ended September 30, 1996 1995 1994 1993 1992
- ------------------------ ---- ---- ---- ---- ----
Interest income ................................................. $ 5,173 $ 4,860 $ 4,233 $ 4,803 $ 5,530
Interest expense ................................................ 2,531 2,234 2,065 2,577 3,456
Net interest income ............................................. 2,642 2,626 2,168 2,226 2,074
Provision for credit losses ..................................... 4 26 144 90 99
Non-interest income ............................................. 351 215 155 303 164
Non-interest expense (3) ........................................ 2,056 1,468 1,502 1,325 1,349
Income before income taxes and cumulative effect of change in
accounting principle .......................................... 933 1,347 677 1,114 790
Income tax expense .............................................. 374 519 302 309 297
Income before cumulative effect of change in accounting principle 559 828 375 805 493
Cumulative effect of change in accounting principle ............. -- -- -- -- 98
Net income ...................................................... 559 828 375 805 591
Other Selected Data
Year Ended September 30, 1996 1995 1994 1993 1992
- ------------------------ ---- ---- ---- ---- ----
Return on average assets ........................................ 0.80% 1.24% 0.59% 1.22% 0.88%
Return on average equity ........................................ 4.18 7.94 6.47 15.81 13.45
Average interest earning assets to average interest bearing
liabilities (1) ............................................... 124.74 119.33 109.87 108.23 106.46
Average equity to average assets (1) ............................ 19.21 15.66 9.05 7.73 6.52
Net interest rate spread ........................................ 2.95 3.35 3.10 3.09 2.78
Net interest income after provision for loan losses to total
other expenses (1) ............................................ 128.32 177.04 134.74 161.16 146.34
Earnings per share (4) .......................................... $ 0.66 0.89 n/a n/a n/a
Book value per share (4) ........................................ $ 14.17 $ 13.67 n/a n/a n/a
Stockholders equity to assets at period end (1) ................. 17.77% 19.85% 9.34 8.45 7.11
Non-performing assets to total assets ........................... 0.07 0.11 0.18 0.35 1.15
Non-performing loans to total loans ............................. 0.11 0.11 0.21 0.16 0.66
Allowance for loan losses to total loans ........................ 2.03 2.23 2.27 1.88 1.78
</TABLE>
- -------------------------------------
(1) The change is primarily due to the conversion from a mutual to a stock
company in fiscal year 1995.
(2) Composed of appropriated and unappropriated retained earnings and net
unrealized gains/losses on marketable equity securities.
(3) Includes a one time assessment in fiscal year 1996 of $362 to recapitalize
the SAIF.
(4) There were no shares outstanding prior to the consummation of the Company's
initial public offering on March 23, 1995.
2
<PAGE>
Mississippi View Holding Company
To Our Shareholders:
I am pleased to present the annual report of Mississippi View Holding Company
for the year ended September 30, 1996, our first full year of operations as a
stock company.
Fiscal 1996 earnings were significantly impacted by a one time Savings
Association Insurance Fund (SAIF) special assessment charged to Community
Federal Savings and Loan Association. The purpose of the assessment was to
recapitalize SAIF and was charged to all SAIF insured institutions nationwide.
The Association's 1996 fiscal earnings were reduced by 27.3% as a result of the
assessment. The Company's year end return on assets was .80% compared to a 1.11%
return on assets that would have been achieved without the special assessment.
As a result of this recapitalization of the insurance fund, future deposit
premiums will decline significantly effective January 1, 1997.
As of September 30, 1996, Mississippi View Holding Company had repurchased
approximately 13% of the stock it sold in the initial offering. This was done to
move toward a capital level which provides a more adequate return to our
shareholders. In addition, the Company has paid two semi-annual dividends of
$0.08 per share. Future dividends, if any, will be based on continued successful
operations of the company. Community Federal continues to significantly exceed
all minimum federal regulatory capital requirements. The attainment of the
Association's financial safety and soundness is a result of many years of
conservative management.
Mississippi View Holding Company is well positioned to meet tomorrow's
challenges and demands, and looks forward to the future with optimism. Its focus
will continue to be on meeting the financial needs of its customers and in
promoting the economic growth of its market area. The Company's board of
directors and staff are dedicated to doing what they do best, providing
progressive, quality services to our customers.
Thank you for your continued support and for sharing in our future success.
Sincerely,
/s/ Thomas J. Leiferman
Thomas J. Leiferman
President and
Chief Executive Officer
3
<PAGE>
Business of the Corporation and the Association
Mississippi View Holding Company
Mississippi View Holding Company (the "Company) is the parent company for
Community Federal Savings and Loan Association of Little Falls ("Community
Federal" or the "Association"). The Company was formed as a Minnesota
corporation in November 1994 at the direction of the Association to acquire all
of the capital stock that Community Federal issued upon its conversion from the
mutual to stock form of ownership (the "Conversion"). On March 23, 1995, the
Company became a unitary savings and loan holding company when it purchased 100%
of the Association's newly-issued common stock in connection with the
"Conversion".
Under existing laws, the Company generally is not restricted from engaging in
any type of business activity provided that the Association retains a specified
amount of its assets in housing-related loans and investments. Management
believes the holding company structure will facilitate expansion into existing
and new market areas, should it ever decide to do so, through the acquisition or
formation of new banking and non-banking operations. However, there are no
present plans, arrangements, agreements or understandings regarding any such
activities.
The Company's business activities to date have been limited to its investments
in and loans to the Association and a loan made to the Community Federal Savings
and Loan Association Employee Stock Ownership Plan (the "ESOP") to enable the
ESOP to purchase shares of the Company's common stock. The loan bears an
interest rate and has a term and conditions which prevailed in the marketplace
at the time it was originated.
Community Federal Savings and Loan Association
The Association is a federally chartered stock savings and loan association. The
Association's only office is located in Little Falls, Morrison County,
Minnesota. The Association was founded in 1934 under the name Little Falls
Federal Savings and Loan Association of Little Falls. The name of the
Association was changed to Community Federal Savings and Loan Association of
Little Falls in July 1977. The Association is subject to examination and
comprehensive regulation by the Office of Thrift Supervision ("OTS") and its
deposits have been federally insured by the Savings Association Insurance Fund
("SAIF"). The Association is a member of and owns capital stock in the Federal
Home Loan Bank ("FHLB") of Des Moines, which is one of the 12 regional banks in
the FHLB System.
The Association's primary market area consists of Morrison County, Minnesota,
which encounters strong competition both in the attraction of deposits and
origination of real estate and other loans. Competition comes primarily from the
eight commercial banks and two credit unions with offices in its market area. In
addition, the Association competes with investment and mortgage banking
companies that operate in the area. Due to their size and holding company or
branch network structure, some of the Association's competitors possess greater
financial and marketing resources. Based on published figures, the Association
is the only thrift institution headquartered in Morrison County, Minnesota.
4
<PAGE>
The Association competes for saving accounts by offering competitive interest
rates and a high level of personal service. The Association attracts deposits
from the general public and uses such deposits primarily to invest in investment
securities and to originate loans secured by first mortgages on owner-occupied,
one to four-family residences in its market area. The Association's loan
portfolio predominantly consists of both adjustable-rate and fixed-rate mortgage
loans secured by single family residences and, to a much lesser extent,
commercial mortgage and construction loans. The Association also makes consumer
loans, consisting of savings account loans, home improvement loans, new and used
auto loans, recreational vehicle loans, and unsecured loans. As of September 30,
1996, the Association's total net portfolio of loans was $43.2 million, of which
$33.7 million, or 78%, was secured by residential real estate.
The principal sources of funds for the Association's lending activities are
deposits and the amortization, repayment, and maturity of loans and investment
securities. The Association does not rely on brokered deposits. Principal
sources of income are interest on loans and investment securities. The
Association's principal expense is interest paid on deposits.
Stock Market Information
Since its issuance in March 1995, the Company's common stock has been traded on
the Nasdaq "Small Cap" Market under the trading symbol of "MIVI". The daily
stock quotation for Mississippi View Holding Company is published in The Wall
Street Journal under the trading symbols of "MIVI" or "MissVw". The following
table reflects the stock price trading range as published by the Nasdaq "Small
Cap" Market statistical report. The stock price in the initial offering was
$8.00 per share.
HIGH LOW
---- ---
Third Quarter - 6/30/95 10 1/4 8 1/2
Fourth Quarter - 9/30/95 11 5/8 9 1/2
First Quarter - 12/31/95 12 11
Second Quarter - 3/31/96 12 1/4 11 1/4
Third Quarter - 6/30/96 12 11
Fourth Quarter - 9/30/96 12 3/4 10 3/4
The number of shareholders of record of common stock as of the record date of
December 2, 1996, was approximately 208. This does not reflect the number of
persons or entities who held stock in nominee or "street" name through various
brokerage firms. At September 30, 1996, there were 877,714 shares outstanding.
Semi-annual cash dividends of $0.08/share were paid on February 15, 1996, and
August 15, 1996, to the shareholders of common stock on the record dates of
February 3, 1996, and August 1, 1996, respectively.
The Company's ability to pay dividends to shareholders is dependent upon
earnings from investments and dividends it receives from the Association. The
Association may not declare or pay a cash dividend on any of its stock if the
effect thereof would cause Community Federal's regulatory capital to be reduced
below (1) the amount required for the liquidation account established in
connection with the Association's conversion from mutual to stock form, or (2)
the regulatory capital requirements imposed by the OTS.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Company's consolidated results of operations are primarily dependent on the
Association's net interest income, or the difference between the interest income
earned on its loan, mortgage-backed securities and investment securities
portfolios, and the interest expense paid on its savings deposits and other
borrowings. Net interest income is affected not only by the difference between
the yields earned on interest-earning assets and the costs incurred on
interest-bearing liabilities, but also by the relative amounts of such
interest-earning assets and interest-bearing liabilities.
Other components of net income include: provisions for losses on loans and other
assets; noninterest income (primarily, miscellaneous loan fees; service fees;
gain on the sale of loans; and gain on sale of real estate owned property);
noninterest expense (primarily, compensation and employee benefits; federal
insurance premiums; data processing costs; office occupancy expense; and gains,
losses and expenses associated with foreclosed real estate); and income taxes.
Earnings of the Company also are affected significantly by general economic and
competitive conditions, particularly changes in market interest rates,
government policies, and actions of regulatory authorities.
Management Strategy
Management's strategy has been to enhance earnings and profitability and
increase capital while maintaining asset quality. The Association's current
lending strategy focuses on the origination of traditional one to four-family
residential mortgages with the primary emphasis on single family residences in
the Association's primary market area. Because deposits exceed loan demand, the
Association also invests a significant portion of its assets in investment
securities. This focus, along with the adherence to strict underwriting
standards, is designed to reduce the risk of loss on the Association's loan
portfolio. However, the lack of diversification in its loan portfolio structure
does increase the Association's portfolio concentration risk by making the value
of the portfolio more susceptible to declines in real estate values in its
market area. This risk has been mitigated in recent years through the
acquisition of investment securities, as well as the Association's efforts to
maintain quality loans, consistent collection procedures, and adequate reserves
for loss on loans. The Association's policy of pricing its deposits in
accordance with management's determination of its lending and investment needs
has caused assets to increase this past fiscal year. However, disintermediation
has been a constant challenge offsetting deposit growth. Disintermediation is
the flow of funds away from savings institutions into direct investments, such
as U.S. Government and corporate securities and other investment vehicles which,
because of the absence of federal insurance premiums and reserve requirements,
generally pay higher rates of return than savings institutions. The Association
recognizes that it will take time to originate the necessary amount of loans to
fully and prudently leverage its capital from conversion. Therefore, management
continues to invest in U.S. Government and federal agency securities. When
needed, proceeds from maturing securities or sold securities will be used to
fund loan originations.
6
<PAGE>
Management has increased the interest rate sensitivity of the Association's
assets and decreased the interest rate sensitivity of it liabilities, while
maintaining high asset quality. This has been accomplished by: (1) originating
mostly adjustable-rate mortgage loans, 15 and 20 year fixed mortgage loans, and
shorter term consumer loans for its portfolio, (2) emphasizing the solicitation
and retention of core deposits from within the primary market, (3) investing in
short and intermediate term investments, (4) adhering to sound underwriting and
investment standards, and (5) managing interest rates paid for deposits. In
addition, the Association's conventional mortgage loans are underwritten to
standards which would enable it to sell such loans in the secondary market, if
management decided to do so.
The Association attempts to manage the interest rates it pays on deposits while
maintaining a stable deposit base and provide quality services to its customers.
The Association has limited its borrowings and relied primarily upon deposits as
its source of funds. To the extent the Association is unable to invest these
funds in loans originated in the Association's market area, it will continue to
purchase shorter, high quality investment securities.
Changes in Financial Condition from September 30, 1995 to September 30, 1996
General. The Company increased total assets by $568,017 from September 30, 1995,
to September 30, 1996. The asset increase was the net result of increased
investments of $685,533 and increased loans receivable of $201,498 offset by
decrease in cash and cash equivalents of $253,416 and a decrease in other assets
of $65,598.
Cash and Cash Equivalents. Cash and cash equivalents, which consist of
interest-bearing and noninterest-bearing deposits, decreased $253,416, or 8.93%.
This decrease was the result of increased deposits offset by increased loan
originations and the purchase of investments and common stock of the Company.
Securities available for sale. Securities available for sale increased
$7,740,122, or 172.19%, from $4,495,023 on September 30, 1995, to $12,235,145 on
September 30, 1996. This increase was due to the purchase of $5.45 million debt
securities and a $2.5 million transfer between categories as described below.
Furthermore, mortgage-backed securities available for sale increased $752,713
due to the purchase of mortgage-backed securities less principal amortization
during this period and reduced mark to market values. From September 30, 1995 to
September 30, 1996, mark to market valuations increased the value of such
securities by $134,261. Any increase or decrease in the market value of such
securities will have a corresponding positive or negative effect on
stockholders' equity. These increases were offset by a $1.1 million maturity of
available for sale securities.
Securities held to maturity. Debt and mortgage-backed securities held to
maturity decreased $7,067,389, or 43.20%, from $16,361,481 on September 30,
1995, to $9,294,092 on September 30, 1996. The Financial Accounting Standards
Board issued a special portfolio classification standard on investments dated
November 15, 1995, creating a window from November 15, 1995, to December 31,
1995, allowing financial institutions to reassess their existing held to
maturity securities and transfer them to either the available for sale or
trading category. During this window, the Company transferred $2.5 million from
the held to maturity category to available for sale.
7
<PAGE>
Furthermore, maturities of $3.9 million of debt securities held to maturity were
reinvested in available for sale securities or were held in cash.
Mortgage-backed securities decreased $645,332 due to principal amortization.
FHLB Stock. Federal Home Loan Bank Stock increased $12,800 from $637,900 on
September 30, 1995, to $650,700 on September 30, 1996, due to a stock dividend
paid by the Federal Home Loan Bank of Des Moines at the end of December 1995.
Loans Held for Sale. Loans held for sale increased $120,689 from $57,974 at
September 30, 1995, to $178,663 at September 30, 1996. This increase is the
result of management's decision to sell in the secondary market lower-yielding
fixed rate mortgage loans rather than maintaining them for portfolio. Held for
sale loans are presold in the secondary market prior to origination. The balance
is the amount sold, yet unfunded as of the period end.
Loans Receivable, Net. Loans receivable increased $80,809, from $42,989,472 on
September 30, 1995, to $43,070,281 on September 30, 1996. The increase was due
from new originations exceeding principal amortization and $2,135,339 held to
maturity loans transferred to loans available for sale, the majority of which
were subsequently sold, during this period.
Accrued Interest Receivable. Accrued interest receivable decreased $78,598 from
September 30, 1995, to September 30, 1996, as accrued interest on Conversion
proceed investments were offset by reduced interest rates on adjustable rate and
new fixed rate mortgages.
Premises and Equipment. Premises and equipment, net of depreciation, decreased
$72,835 due to normal depreciation amortized on fixed assets in excess of new
asset purchases.
Foreclosed Real Estate. Foreclosed real estate decreased $29,711, or 100%, from
$29,711 at September 30, 1995 to $0.0 at September 30, 1996, due to the sale of
REO during the period.
Deferred Tax Asset. Deferred tax asset, net of valuation allowance, increased
$73,403 during this twelve month period. The primary reason for the change was
the deferred tax effect of the one time SAIF assessment.
Other Assets. Other assets including a tax refund receivable increased $42,143,
or 7.62%, from $553,065 as of September 30, 1995, to $595,208 as of September
30, 1996, due to a $23,892 tax refund receivable and a $22,000 reduction in
various prepaid expenses.
Deposits. Deposits, after interest credited, increased by $1,610,863, or 2.93%
to $56,531,194 at September 30, 1996, from $54,920,331 at September 30, 1995.
The increase was due to the marketing of a new deposit product and management's
deposit pricing strategy.
Advances from Borrowers for Taxes and Insurance. Advances from borrowers for
taxes and insurance decreased $49,168 from $187,698 on September 30, 1995 , to
$138,530 on September 30, 1996, due to a change in calculating the maximum
allowed advances from borrowers for taxes and insurance.
8
<PAGE>
Accrued Income Tax. The income tax accrual decreased $115,222 between the two
periods due to an accrued income tax receivable amount calculated through
September 30, 1996. The September 30, 1996, balance was classified as a tax
refund receivable because the estimated tax payments exceeded the accrued
expense.
Other Liabilities. Other liabilities increased by $464,298, or 106.35%, from
$436,552 on September 30, 1995, to $900,850 on September 30, 1996. The primary
reason for the increase was the SAIF deposit insurance assessment of $362,557
along with increases in accounts payable of $34,928, accrued expenses of 65,900,
and deferred compensation of $17,625.
Shareholders' Equity. Shareholders' equity decreased by $1,342,754, or 9.74%,
from $13,782,999 on September 30, 1995, to $12,440,245 on September 30, 1996.
This decrease is the net effect of the following changes in equity: a paid in
capital increase of $15,426 resulting from the fair market value adjustment to
earned and committed to be released Employee Stock Ownership Plan ("ESOP")
shares, net of taxes; an increase of $77,705 as a result of accounting for
earned ESOP shares; an increase of $69,477 resulting from market valuation
adjustments on available for sale securities; an increase of $558,768 from net
operational income for the twelve month period just ended; a decrease of
$387,412 for unearned Management Stock Bonus Plan ("MSBP") shares resulting from
open market purchase of MSBP shares; a decrease of $1,536,689 resulting from
open market purchases of the Company's common stock pursuant to three stock
repurchase programs, and a decrease to retained earnings due to dividends
declared and paid of $140,029.
Average Balance Sheet
The following table sets forth certain information relating to average balance
sheets and reflects the average yield on assets and average cost of liabilities
for the periods indicated and the average yields earned and rates paid. Such
yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the periods presented.
Average balances are derived from month-end balances. Management does not
believe that the use of month-end instead of daily average balances has caused
any material difference in the information presented.
9
<PAGE>
<TABLE>
<CAPTION>
Average Balance Sheet
For the Year Ended September 30,
--------------------------------------------------------------------------
1996 1995
--------------------------------- ------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ------------
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable (1) ............... $43,435 $3,704 8.53% $44,371 $3,610 8.14%
Mortgage-backed securities ......... 5,047 344 6.82% 3,502 280 8.00%
Investment securities (2) .......... 16,286 964 5.92% 14,636 817 5.58%
Other interest-earning assets ...... 3,497 162 4.63% 2,887 153 5.30%
------ ----- ------ -----
Total interest-earning assets .... 68,265 5,174 7.58% 65,396 4,860 7.43%
Non interest-earning assets ......... 1,315 1,177
------ ------
Total assets...................... $69,580 $66,573
======= =======
Interest-bearing liabilities:
Passbook / Passcard savings......... $11,105 268 2.41% $10,621 232 2.18%
NOW / MMDA ......................... 6,068 100 1.65% 6,798 113 1.66%
Certificates of Deposit ............ 37,551 2,164 5.76% 37,385 1,889 5.05%
------ ----- ------ -----
Total interest-bearing liabilities 54,724 2,532 4.63% 54,804 2,234 4.08%
----- -----
Non interest-bearing liabilities:
Demand Deposits .................... 827 625
Other non interest-bearing
liabilities ....................... 665 716
------ ------
Total liabilities ................ 56,216 56,145
Retained earnings ................... 13,364 10,428
------ ------
Total liabilities and retained
earnings ......................... $69,580 $66,573
====== ======
Net interest income ................. $2,642 $2,626
===== =====
Interest rate spread (3) ............ 2.95% 3.35%
Net yield on interest-earning assets
(4)................................. 3.87% 4.02%
Ratio of average interest-earning
assets to average interest-bearing
liabilities ......................... 124.74% 119.33%
</TABLE>
- ---------------------------------
(1) Average balances include non-accrual loans and are net of undisbursed
commitments.
(2) Includes interest-bearing deposits in other financial institutions.
(3) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
10
<PAGE>
Comparison of Operating Results for the Years Ended September 30, 1995, and 1996
Net Income. Net Income decreased $268,786, or 32.48% from $827,554 on September
30, 1995 to $558,768 on September 30, 1996. The decrease was primarily due to a
$362,557 charge connected with a one time special assessment from the SAIF. This
one time assessment was the result of legislation that was signed into law on
September 30, 1996, for the purpose of recapitalizing the SAIF. Increased net
interest income of $16,279, increased noninterest income of $135,226, along with
decreased provisions for loan losses of $22,705 and decreased tax expense of
$144,809, were offset by increased noninterest expenses of $225,248.
Interest Income. Interest income increased $313,562, or 6.45%, in the twelve
month period ended September 30, 1996, as compared to the same period ended
September 30, 1995. Interest income from loans receivable increased $93,447, the
result of decreased mortgage loan interest of $40,742 due to a reduction in the
mortgage loan portfolio average balance offset by increased consumer and other
loan interest income of $134,189 due to increased loan balances. Income from
securities available for sale increased $326,005 and income from securities held
to maturity decreased $105,890. The decrease was a result of the transfer of
held to maturity securities to available for sale securities discussed in
changes in financial condition. The remaining available for sale security
investment income of $220,115 was due primarily to an increase in average
balance of investments as the Company invested the proceeds from the Conversion
for only six months in fiscal 1995 compared to twelve months in fiscal 1996.
Interest Expense: Interest expense, which is comprised of interest paid on
deposits, increased $297,283, or 13.31%, for the twelve month comparative period
for September 30, 1995 and 1996. This increase was due to the increase in the
average balance of deposits, particularly certificates of deposit, with higher
rates paid on specific deposit products.
Net Interest Income. Net interest income increased $16,279, or 0.62%, from
$2,625,607 for the twelve month period ended September 30, 1995, to $2,641,886
for the same period ended September 30, 1996. This was due to the increased
revenue from interest earned on the interest earning assets ($313,562), offset
by increased deposit interest expense ($297,283), due to increased average
balances. The Company's spread decreased from 3.35% to 2.95% as the cost of
interest-bearing deposits increased at a faster rate than yields on
interest-earning assets.
Provisions for Loan Losses. The Association currently maintains an allowance for
loan losses based upon management's periodic evaluation of known and inherent
risks in the loan portfolio, the Association's past loss experience, adverse
situations that may affect the borrowers' ability to repay loans, estimated
value of the underlying collateral, and current and expected market conditions.
Provisions for loan losses decreased by $22,705, or 85.91%, from $26,430 for the
period ended September 30, 1995, to $3,725 for the period ended September 30,
1996. This decrease was due to an assessment of the loan portfolio and market
conditions. While management maintains its allowance for losses at a level which
it considers to be adequate to provide for potential losses, there can be no
assurances that further additions will not be made to the loss allowances and
that such losses will not exceed the estimated amounts.
Noninterest Income. Noninterest income increased $135,226, or 62.76%, from
$215,452 at September 30, 1995, to $350,678 at September 30, 1996. This increase
was primarily the result of a $81,023 contingency recovery in the first quarter
of fiscal 1996 and an increase of $61,348 in gains on the sale of loans due to
the Association's sale of $2,135,339 of mortgage loans in December 1995. The
contingency
11
<PAGE>
recovery was due to a $65,000 settlement paid by the Association to settle
litigation for which it had established a $146,023 loss reserve. In this
litigation the bankruptcy trustee was seeking the return of loan payments made
to the Association by the servicer on account of mortgage loans on which
payments had not been made from mortgagors, and on account of mortgage loans not
in the possession of the Association based on theories of fraudulent conveyance
and preference. On October 30, 1995, the Court issued an order approving a
settlement in the amount of $65,000 between the trustee and the Association.
Furthermore, other noninterest income increased $24,950. These noninterest
income increases were offset by decreased fees and service charges of $5,529 and
a $24,730 decrease in gain on the sale of real estate owned. The reduction in
the gain on real estate owned was due to the Association recognizing a gain of
$32,878 on the sale of a property in December 1994.
Noninterest Expense. Noninterest expense increased by $587,805, or 40.04%, from
$1,468,166 to $2,055,971 during the twelve month periods ended September 30,
1995 and 1996, respectively. Compensation and employee benefits increased
$155,669 due to director and employee compensation increases of $47,263, ESOP
expense increase of $42,058, and MSBP expense increase of $66,541. In fiscal
1995 no MSBP expenses were incurred.
Pursuant to the Economic Growth and Paperwork Reduction Act of 1996 (the "Act"),
the FDIC imposed a special assessment on SAIF members to capitalize the SAIF at
the designated reserve level of 1.25% as of October 1, 1996. Based on the
Association's deposits as of March 31, 1995, the date for measuring the amount
of the special assessment pursuant to the Act, the Association will pay a
special assessment of $362,557 to recapitalize the SAIF. The FDIC is expected to
lower the premium for deposit insurance to a level necessary to maintain the
SAIF at its required reserve level; however, the range of premiums has not been
determined at this time.
Pursuant to the Act, the Association will pay, in addition to its normal deposit
insurance premium as a member of the SAIF, an amount equal to approximately 6.4
basis points toward the retirement of the Financing Corporation bonds ("Fico
Bonds") issued in the 1980's to assist in the recovery of the savings and loan
industry. Members of the Bank Insurance Fund ("BIF"), by contrast, will pay, in
addition to their normal deposit insurance premium, approximately 1.3 basis
points. Based on total deposits as of September 30, 1996, had the Act been in
effect, the Association's Fico Bond premium would have been approximately
$36,000 in addition to its normal deposit insurance premium. Beginning no later
than January 1, 2000, the rate paid to retire the Fico Bonds will be equal for
members of the BIF and the SAIF. The Act also provides for the merging of the
BIF and the SAIF by January 1, 1999, provided there are no financial
institutions still chartered as savings associations at that time. Should the
insurance funds be merged before January 1, 2000, the rate paid by all members
of this new fund to retire the Fico Bonds would be equal.
Other increases in noninterest expenses were occupancy of $4,227, data
processing of $4,673, advertising of $3,255, real estate owned expense of
$3,574, offset by a decrease in provisions for losses on foreclosed real estate
of $7,295. "Other" noninterest expenses, including legal, consulting, registrar
fees, filing fees, auditing, and shareholder meeting expenses, increased $62,027
due to the added costs of being a public company.
Income Tax Expense. Income tax expense decreased $144,809, or 27.91%, from
$518,909 for the twelve months ended September 30, 1995, to $374,100 for the
twelve month period ended September 30, 1996, due to reduced earnings primarily
from the SAIF assessment.
12
<PAGE>
Liquidity and Capital Resources.
The Association is required to maintain minimum levels of "liquid assets," as
defined by OTS regulations. This requirement, which may be varied from time to
time depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The required OTS minimum ratio
is currently 5%. The Association's average liquidity ratio was 26.65% during
September 1996. The OTS required short term liquidity is 1%; at September 30,
1996, the Association's short term liquidity was 16.42%. The Association manages
its liquidity ratio to meet its funding needs, including: deposit outflows;
disbursements of payments collected from borrowers for taxes and insurance;
repayment of borrowings, when applicable and loan principal disbursements. The
Association also monitors its liquidity position in accordance with its
asset/liability objectives.
In addition to funds provided from operations, the Association's primary sources
of funds are: savings deposits; principal repayments on loans and
mortgage-backed securities; and matured or called investment securities. As an
alternative to supplement liquidity needs, the Association has the ability to
borrow from the FHLB of Des Moines.
Scheduled loan repayments and maturing investment securities are a relatively
predictable source of funds. However, savings deposit flows and prepayments on
loans and mortgage-backed securities are significantly influenced by changes in
market interest rates, economic conditions, and competition. The Association
strives to manage the pricing of its deposits to maintain a balanced stream of
cash flow commensurate with its loan commitments and other predictable funding
needs.
The Association's most liquid assets are cash and cash equivalents, which
include highly liquid short-term investments. The level of these assets is
dependent on the Association's operating, financing, and investing activities
during any given period. At September 30, 1996, cash and cash equivalents
totaled $2.584 million.
The Association anticipates that it will have sufficient funds available to meet
its current commitments. As of September 30, 1996, the Association had
commitments to fund loans of $634,000, unused lines of credit of $798,000, and
loans in process of $227,762. Certificates of deposit scheduled to mature within
one year totaled $27.0 million at September 30, 1996. Based on historical
deposit withdrawals and outflows, and on internal monthly deposit reports
monitored by management, management believes that a majority of such deposits
will remain in the Association. As a result, no adverse liquidity effects are
expected.
The Association is required by OTS to maintain various regulatory capital
requirements. At September 30, 1996, the Association exceeded these regulatory
capital requirements. See Note 14 to the Notes to Consolidated Financial
Statements included herein.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented herein have
been prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars, without consideration for changes in the relative purchasing
power of money over time caused by inflation.
13
<PAGE>
Unlike industrial companies, nearly all of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates have a
more significant impact on a financial institution's performance than general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the price of goods and services, since
such goods and services are affected by inflation. In the current interest rate
environment, liquidity and the maturity structure of the Association's assets
and liabilities are critical to the maintenance of acceptable performance
levels.
Impact of New Accounting Standards
The Financial Accounting Standards Board ("FASB") has issued several new
accounting standards which may affect the accounting for transactions of the
Association. The new standards are discussed in detail at Note 15 to the Notes
to Consolidated Financial Statements included herein.
Selected Quarterly Financial Data
(unaudited)
(Dollars in thousands except earnings
per share)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Fiscal 1996
- -------------------------
Total interest income ... $1,307 $1,300 $1,281 $1,286
Total interest expense .. 622 637 634 639
Net interest income ..... 685 663 647 647
Provision for loan losses 2 -- 2 --
Net Income .............. 258 174 196 (69)
Earnings per share ...... $ 0.29 $ 0.19 $ 0.24 $(0.09)
Fiscal 1995
- -------------------------
Total interest income ... $1,120 $1,151 $1,276 $1,313
Total interest expense .. 518 535 575 606
Net interest income ..... 602 616 701 707
Provision for loan losses 10 10 8 (2)
Net Income .............. $ 190 $ 158 $ 202 $ 277
Earnings per share ...... N/A N/A $ 0.22 $ 0.30
14
<PAGE>
[BERTRAM COOPER & CO., LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Mississippi View Holding Company and Subsidiary
Little Falls, Minnesota 56345
We have audited the accompanying consolidated statements of financial
condition of Mississippi View Holding Company and Subsidiary (the Company)
as of September 30, 1996 and 1995, and the related consolidated statements
of income, changes in shareholders' equity, and cash flows for the two
years then ended. These financial statements are the responsibility of
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
Mississippi View Holding Company and Subsidiary as of September 30, 1996
and 1995, and the consolidated results of their operations and their cash
flows for the two years then ended, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for certain investments in debt
and equity securities.
/s/ Bertram Cooper & Co., LLP
Bertram Cooper & Co., LLP
Waseca, Minnesota
October 29, 1996
15
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30,
----------------------------
ASSETS 1996 1995
----------- -----------
Cash and cash equivalents:
<S> <C> <C>
Cash and due from banks $ 317,777 $ 236,632
Interest bearing deposits with banks 2,265,877 2,600,438
Securities available for sale, at fair value 12,235,145 4,495,023
Securities held to maturity, at amortized cost 9,294,092 16,361,481
FHLB stock, at cost 650,700 637,900
Loans held for sale 178,663 57,974
Loans receivable, net of allowance for loan losses of
$877,094 in 1996 and $962,086 in 1995 43,070,281 42,989,472
Accrued interest receivable 450,327 528,925
Premises and equipment 788,846 861,681
Foreclosed real estate (net of allowance for losses
of $15,700 for 1996 and $25,187 for 1995) - 29,711
Deferred tax asset (net of valuation allowance) 163,903 90,500
Other assets 595,208 553,065
---------- ----------
Total Assets $ 70,010,819 $ 69,442,802
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits $ 4,471,137 $ 4,242,241
Savings deposits 14,087,832 13,918,703
Time deposits 37,972,225 36,759,387
---------- ----------
Total deposits 56,531,194 54,920,331
Advances from borrowers for taxes and insurance 138,530 187,698
Income taxes payable - 115,222
Other liabilities 900,850 436,552
---------- ----------
Total Liabilities 57,570,574 55,659,803
========== ==========
Shareholders' equity:
Serial preferred stock, no par value, 5,000,000 shares
authorized, no shares issued - -
Common stock, $.10 par value, 10,000,000 shares authorized;
1,007,992 shares issued 100,799 100,799
Paid in capital 7,510,397 7,494,971
Treasury stock (130,278 shares), at cost (1,536,689) -
Retained earnings, substantially restricted 7,116,646 6,697,907
Unearned ESOP shares (66,527 and 75,263 shares) at cost (566,736) (644,441)
Unearned MSBP shares (34,474 shares) at cost (387,412) -
Net unrealized appreciation on available-for-sale securities,
net of tax of $135,494 in 1996 and $89,175 in 1995 203,240 133,763
---------- ----------
Total shareholders' equity 12,440,245 13,782,999
---------- ----------
Total liabilities and shareholders' equity $ 70,010,819 $ 69,442,802
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
16
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Year ended
September 30,
-------------------------
1996 1995
--------- ---------
Interest income:
<S> <C> <C>
Loans receivable $ 3,703,652 $ 3,610,205
Securities available for sale 528,912 202,907
Securities held to maturity 940,865 1,046,755
--------- ---------
Total interest income 5,173,429 4,859,867
Interest expense:
Demand deposits 37,345 39,941
Savings deposits 330,357 304,947
Time deposits 2,163,841 1,889,372
--------- ---------
Total interest expense 2,531,543 2,234,260
Net interest income 2,641,886 2,625,607
Provision for loan losses 3,725 26,430
--------- ---------
Net interest income after provision for loan losses 2,638,161 2,599,177
--------- ---------
Noninterest income:
Other fees and service charges 70,603 76,132
Gain on sale of loans 74,142 19,170
Net gain on sale of real estate owned 17,394 42,124
Contingency recovery 81,023 -
Other 107,516 78,026
--------- ---------
Total noninterest income 350,678 215,452
--------- ---------
Noninterest expenses:
Compensation and employee benefits 919,565 763,896
Occupancy 87,856 83,629
Deposit insurance assessment 362,557 -
Deposit insurance premium 150,091 150,973
Data processing 75,996 71,323
Advertising 30,787 27,532
Real estate owned expense, net 5,053 5,204
Provision for losses on foreclosed real estate - 3,570
Other 424,066 362,039
--------- ---------
Total noninterest expense 2,055,971 1,468,166
--------- ---------
Income before income taxes 932,868 1,346,463
Income tax expense 374,100 518,909
--------- ---------
Net income $ 558,768 $ 827,554
========= =========
Earnings per share of common stock $ 0.66 $ 0.89
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
17
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Retained Unallocated Unallocated Gain (Loss)
Additional Earnings Common Common on Securities
Common Paid-in Treasury Substantially Stock Held Stock Held Available
Stock Capital Stock Restricted By ESOP For MSBP For Sale Total
------ ---------- -------- ------------- ---------- ----------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1994 $ - $ - $ - $5,870,353 $ - $ - $ (1,067) $ 5,869,286
Cumulative effect of
accounting change - - - - - - 94,553 94,553
Net earnings for the year
ended September 30, 1995 - - - 827,554 - - - 827,554
Issuance of common stock net
of stock acquired by the ESOP 100,799 7,491,423 - - (690,472) - - 6,901,750
Fair value adjustment of ESOP
shares net of taxes of $2,365 - 3,548 - - - - - 3,548
Allocated ESOP shares - - - - 46,031 - - 46,031
Net change in unrealized
appreciation on available-
for-sale securities, net
of taxes of $27,563 - - - - - - 40,277 40,277
------- --------- ---------- --------- -------- ------- ------- ----------
Balance, September 30, 1995 100,799 7,494,971 - 6,697,907 (644,441) - 133,763 13,782,999
Treasury Stock acquired - - (1,536,689) - - - - (1,536,689)
Net earnings for the year
ended September 30, 1995 - - - 558,768 - - - 558,768
Dividend paid - - - (140,029) - - - (140,029)
Fair value adjustment of ESOP
shares net of taxes of $10,284 - 15,426 - - - - - 15,426
Allocated ESOP shares - - - - 77,705 - - 77,705
MSBP shares acquired, net of
earned shares in the amount
of $71,217 - - - - - (387,412) - (387,412)
Net change in unrealized
appreciation on available-
for-sale securities, net
of taxes of $46,318 - - - - - - 69,477 69,477
-------- ---------- ----------- ---------- --------- --------- -------- -----------
Balance, September 30, 1996 $100,799 $7,510,397 $(1,536,689) $7,116,646 $(566,736) $(387,412) $203,240 $12,440,245
======== ========== =========== ========== ========= ========= ======== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
18
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended
September 30,
--------------------------
1996 1995
----------- ------------
Cash flows from operating activities:
<S> <C> <C>
Interest received on loans and investments $ 5,212,957 $ 4,683,486
Interest paid (2,532,101) (2,236,930)
Other fees, commissions, and income received 299,433 238,890
Cash paid to suppliers, employees and others (1,350,252) (1,389,795)
Contributions to charities (7,869) (2,304)
Income taxes paid (643,219) (324,750)
Loans originated for sale (2,455,977) (1,214,782)
Proceeds from sale of loans 4,487,415 1,269,148
---------- ----------
Net cash provided by operating activities 3,010,387 1,022,963
---------- ----------
Cash flows from investing activities:
Purchases of available-for-sale securities (6,547,147) (1,627,350)
Proceeds from maturities of available-for-sale securities 1,356,285 1,000,000
Purchases of held-to-maturity securities (4,694,532) (13,570,461)
Proceeds from maturities of held-to-maturity securities 9,295,315 7,555,005
Loan originations and principal payments on loans, net (2,123,430) 1,193,291
Proceeds from sale of property and equipment - 464
Purchases of property and equipment (10,936) (47,620)
Proceeds from sale of foreclosed real estate 17,394 38,446
---------- ----------
Net cash provided by (used in) investing activities (2,707,051) (5,458,225)
---------- ----------
Cash flows from financing activities:
Net increase (decrease) in non-interest bearing demand
and savings deposit accounts 398,025 (791,572)
Net increase (decrease) in time deposits 1,213,396 (690,979)
Net (decrease) increase in mortgage escrow funds (49,168) 117,580
Dividend on unallocated ESOP shares 11,612 -
Net proceeds from sale of common stock - 7,595,770
Acquisition of unearned ESOP shares - (690,472)
Acquisition of treasury stock (1,536,689) -
Acquistion of unearned MSBP shares (453,899) -
Dividends paid (140,029) -
---------- ----------
Net cash used by financing activities (556,752) 5,540,327
---------- ----------
Net (decrease) increase in cash and cash equivalents (253,416) 1,105,065
Cash and cash equivalents at beginning of year 2,837,070 1,732,005
---------- ----------
Cash and cash equivalents at end of year $ 2,583,654 $ 2,837,070
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
19
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
For the Year Ended
September 30,
-------------------
1996 1995
---- ----
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 558,768 $ 827,554
Adjustments:
Provision for losses on loans and real estate 3,725 30,000
Depreciation 83,771 79,882
Federal Home Loan Bank stock dividends (12,800) -
Noncash dividends (5,071) (5,058)
ESOP fair value adjustment 15,426 3,548
Amortization of ESOP compensation 66,092 46,031
Amortization of MSBP compensation 66,487 -
Net amortization and accretion of premiums
and discounts on securities 38,211 49,490
Net loss on sale of fixed assets - 4,540
Net (gains) on sales of real estate owned (17,393) (42,124)
Net loan fees deferred and amortized 14,291 5,579
Net mortgage loan servicing fees deferred (11,611) -
Contingency recovery (81,023) -
(Increase) decrease in:
Loans held for sale 2,014,650 35,196
Accrued interest receivable 78,598 (166,962)
Prepaid income tax (23,892) 51,823
Deferred tax asset (119,721) 29,479
Other assets (6,639) 45,605
Increase (decrease) in:
Accrued interest payable (558) (2,670)
Accrued income tax (115,222) 115,222
Other liabilities 464,298 (84,172)
--------- ---------
Net cash provided by operating activities $ 3,010,387 $ 1,022,963
========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Federal Home Loan Bank stock dividends $ 12,800 $ -
Refinancings of sales of real estate owned 37,200 9,000
Transfers from loans to real estate acquired
through foreclosure 4,989 64,046
Noncash dividends 5,071 5,058
Transfer of debt securities to available for sale
from securities held to maturity 2,449,446 3,568,247
Transfers of loans held for investment to loans
held for sale 2,135,339 -
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
20
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996 and 1995
Note 1. Summary of Significant Accounting Policies
The following summarizes the significant accounting policies Mississippi
View Holding Company (the Company) follows in presenting its financial
statements.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiary
Community Federal Savings and Loan Association (the Association). All
significant intercompany transactions and balances are eliminated in
consolidation. Certain amounts in the financial statements for the prior
year have been reclassified to conform to current financial statement
presentation.
Organization - On March 23, 1995, the Association converted from a
mutual association to a stock association pursuant to a Plan of
Conversion, (the Conversion) via the issuance of common stock. In
conjunction with the Conversion, the Company sold 1,007,992 shares of
common stock which, after giving effect to offering expenses of
$471,714, resulted in net proceeds of $7.6 million which included an
order for 20,159 shares of stock in the amount of $161,272 from the
Employee Stock Ownership Plan (ESOP). Pursuant to the Conversion, the
Association transferred all of its outstanding shares to its newly
organized holding company. On March 24, 1995 the Association's ESOP
purchased an additional 60,480 shares in the open market, in the amount
of $529,200. The ESOP's purchases were funded through a loan from the
Company.
Upon the Conversion, the preexisting liquidation rights of the mutual
stock association members were unchanged. Such rights will be accounted
for by the Company for the benefit of such depositors in proportion to
their liquidation interests as of either the Eligibility Record Date or
the Supplemental Eligibility Record Date as defined.
Subsequent to the Conversion, neither the Company nor the Association
may declare or pay cash dividends on any of their shares of common stock
if the effect would be to reduce shareholders' equity below applicable
regulatory capital requirements or if such declaration of payment would
otherwise violate regulatory requirements.
Nature of Business - Mississippi View Holding Company is a unitary
thrift holding company whose subsidiary provides financial services. The
Association's business is that of a financial intermediary and consists
primarily of attracting deposits from the general public and using such
deposits, together with borrowings and other funds, to make mortgage
loans secured by residential real estate and other consumer loans. At
September 30, 1996, the Association operated one retail banking office
in Minnesota. The Association is subject to significant competition from
other financial institutions, and is also subject to regulation by
certain federal agencies and undergoes periodic examinations by those
regulatory authorities.
Use of Estimates - In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance
sheets, and income and expenses for the period. Actual results could
differ from those estimates. Material estimates that are particularly
susceptible to significant change relate to the determination of the
allowance for losses on loans and the valuation of real estate acquired
in connection with foreclosures or in satisfaction of loans. In
connection with the determination of the allowance for losses on loans
and foreclosed real estate, management obtains independent appraisals
for significant properties.
A substantial portion of the Association's loans are collateralized by
real estate in local markets (see Note 13). In addition, foreclosed real
estate is located in the same market area. Accordingly, the ultimate
collectibility of a substantial portion of the Association's loan
portfolio and the recovery of a substantial portion of the carrying
amount of foreclosed real estate are susceptible to changes in local
market conditions.
21
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 1. Summary of Significant Accounting Policies - (continued)
While management uses available information to recognize losses on loans
and foreclosed real estate, future additions to the allowances may be
necessary based on changes in local economic conditions. In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the Association's allowance for losses on loans and
foreclosed real estate. Such agencies may require the Association to
recognize additions to the allowance based on their judgments about
information available to them at the time of their examination.
Cash Equivalents - Cash equivalents of $1,000,000 and $2,200,000 at
September 30, 1996 and 1995, respectively, consist of certificates of
deposit, and funds due from banks. For purposes of the statements of
cash flows, the Association considers all highly liquid debt instruments
with original maturities of three months or less to be cash equivalents.
Investment Securities - The Company was required to adopt Statement of
Financial Accounting Standard (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," for the fiscal year
beginning October 1, 1994. SFAS No. 115 requires the Company to classify
its investments, including debt securities, marketable equity
securities, mortgage-backed securities, and mortgage related securities
in one of three categories: held to maturity, trading or available for
sale. Debt securities that the Company has the positive intent and
ability to hold to maturity are classified as held to maturity and
reported at amortized cost. The Company does not engage in security
trading and, therefore, the balance of its debt securities and any
equity securities are classified as available for sale. The Company
classifies debt securities as available for sale when it determines that
such securities may be sold at a future date or if there are foreseeable
circumstances under which the Company would sell such securities.
Securities designated as available-for-sale are recorded at fair value.
Changes in the fair value of securities available-for-sale are included
in shareholders' equity as unrealized holding gains or losses net of the
related tax effect. Unrealized losses on available for sale securities
or held to maturity securities reflecting a decline in value judged to
be other than temporary are charged to income. Realized gains or losses
on available for sale securities are computed on a specific
identification basis.
In November 1995, the Financial Accounting Standards Board (FASB) issued
"Special Report - A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities," which
provided transition guidance permitting an enterprise to reassess the
appropriateness of the classification of all its securities before
December 31, 1995. The Company reassessed its classifications, and on
December 31,1995, transferred $2.5 million in amortized cost of
investment and mortgage-backed securities from held-to-maturity to
available-for-sale classification. The related unrealized gain after tax
effect as of the date of transfer was $25,000.
Premiums and discounts on debt and mortgage-backed securities are
amortized to expense and accreted to income over the estimated life of
the respective security using a method that approximates the level yield
method.
Prior to adoption of SFAS No. 115, marketable equity securities were
carried at lower of cost or estimated fair value with net unrealized
losses being recognized through a valuation allowance shown as a
reduction in the carrying value of the related securities and as a
corresponding reduction in retained earnings.
The Association, as a member of the Federal Home Loan Bank System, is
required to maintain an investment in capital stock of the Federal Home
Loan Bank of Des Moines. Because no ready market exists for this stock,
and it has no quoted market value, the Association's investment in this
stock is carried at cost.
22
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 1. Summary of Significant Accounting Policies - (continued)
Loans Held for Sale - Mortgage loans originated and intended for sale in
the secondary market are carried at the lower of cost or estimated
market value in the aggregate. Net unrealized losses are recognized
through a valuation allowance by charges to income.
Loans Receivable - Loans receivable are stated at unpaid principal
balances, less the allowance for loan losses, net of deferred loan
origination fees.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the
Association's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to
repay, estimated value of any underlying collateral, and current
economic conditions.
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," and
SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures," were adopted prospectively by the Company
on October 1, 1995. These statements address the accounting for impaired
loans and specify how allowances for loan losses related to these
impaired loans should be determined. The adoption of these statements
did not affect the level of the overall allowance or operating results.
Income recognition and charge-off policies were not changed as a result
of SFAS 114 and SFAS 118. The Association defines the population of
impaired loans to be all non-accrual commercial real estate,
multi-family and land loans. Impaired loans are individually assessed to
determine that the loan's carrying value is not in excess of the fair
value of the collateral or the present value of the loan's expected
future cash flows. Smaller balance homogeneous loans that are
collectively evaluated for impairment, such as residential mortgage
loans and installment loans, are specifically excluded from the impaired
loan portfolio. There were no impaired loans at September 30, 1996 as
defined by SFAS 114 and SFAS 118.
Uncollectible interest on loans contractually past due for three months
is charged off or an allowance is established based on management's
periodic evaluation. The allowance is established by a charge to
interest income equal to all interest previously accrued and income is
subsequently recognized only to the extent cash payments are received
until, in management's judgment, the borrower's ability to make periodic
interest and principal payments returns to normal, in which case the
loan is returned to accrual status.
Loan origination fees, net of certain specifically defined direct loan
origination costs, are deferred. The net amount deferred is recognized
as interest income using the interest method over the contractual term
of each loan as an adjustment of yield. If the related loan is sold, the
remaining net amount deferred, which is part of the basis of the loan,
is used in determining gain or loss on sale.
Mortgage Servicing Rights - The Company adopted SFAS No. 122
"Accounting for Mortgage Servicing Rights-An Amendment of SFAS No. 65, "
prospectively as of October 1, 1995. SFAS No. 122 amends certain
provisions of SFAS No. 65 to eliminate the accounting distinction
between rights to service mortgage loans for others that are acquired
through loan origination activities and rights acquired through purchase
transactions. The statement requires a mortgage banking enterprise,
which sells or securitizes loans and retains the servicing rights, to
allocate the total cost of the mortgage loans to the mortgage servicing
rights and the loan (without the servicing rights) based on their
relative fair values. Costs allocated to mortgage servicing rights are
recognized as a separate asset and amortized in proportion to and over
the period of estimated net servicing income and are evaluated for
impairment based on their fair value. The effect of adopting SFAS No.
122 did not have a material impact on the Company's financial condition
or the results of its operations.
23
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 1. Summary of Significant Accounting Policies - (continued)
Foreclosed Real Estate - Real estate properties acquired through, or in
lieu of, loan foreclosure are initially recorded at the lower of the
related unpaid loan balance or fair value of the property, less
estimated costs to sell at the date of foreclosure. Costs relating to
development and improvement of property are capitalized, whereas costs
relating to the holding of property are expensed. Valuations are
periodically performed by management and an allowance for losses is
established by a charge to operations if the carrying value of a
property exceeds its estimated fair value less estimated costs to sell.
Premises and Equipment - Land is carried at cost. Building, furniture
and equipment are carried at cost less accumulated depreciation.
Depreciation is computed by the straight-line method over the estimated
useful lives of the assets, which range from five to forty years.
Long-Lived Assets - The Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of," in fiscal year 1996. This statement requires impairment
losses to be recorded on long-lived assets used in operations when
indicators of impairment are present. Impairment would be considered
when the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Implementation of this
statement had no effect on the consolidated financial statements.
Income Taxes - Deferred income taxes are recognized for the tax
consequences of temporary differences by applying enacted statutory tax
rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. The
measurement of deferred tax assets is reduced, if necessary, by the
amount of any tax benefits that, based on available evidence, are not
expected to be realized. The effect of a change in the
beginning-of-the-year balance of a valuation allowance that results from
a change in judgment about the realizability of deferred tax assets, is
included in income.
Earnings Per Share - Earnings per share of common stock for the year
ended September 30, 1996, has been determined by dividing net income by
the weighted average number of shares of common stock and common stock
equivalents outstanding during the year of 852,612. Earnings per share
of common stock for the fiscal year ended September 30, 1995, has been
computed by dividing the net income for the twelve month period by the
calculated weighted average number of shares of common stock and common
stock equivalents which would have been outstanding if the Conversion
had occurred on the first day of the fiscal year rather than on March
23, 1996, which was 928,720 shares.
Shares acquired by the employee stock ownership plan are not considered
in the weighted average shares outstanding until shares are committed
for allocation to an employees individual account or have been earned.
Stock options are regarded as common stock equivalents computed using
the treasury stock method, however, they did not have a material effect
on primary and fully diluted earnings per share.
Fiscal 1995 pro-forma earnings per share of $1.01 is computed as if the
net proceeds of the stock conversion were recorded on October 1, 1994,
and was invested by the Company at 6.2%, which was equal to the one year
U.S. Treasury bill rate as of October 31, 1994, net of an effective
federal and state income tax rate of 40.5% resulting in an after tax
yield of 3.69% on $6,901,750. The stock proceeds were generally
available to the Company on March 1, 1995, resulting in a five month pro
forma earning period.
Treasury Stock - Treasury stock is recorded at cost. In the event of a
subsequent reissue, the treasury stock account will be reduced by the
cost of such stock on the average cost basis with any excess proceeds
credited to addional paid-in capital. Treasury stock is available for
general corporate purposes.
24
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 1. Summary of Significant Accounting Policies - (continued)
Fair Values of Financial Instruments - SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments," initially adopted during fiscal
1996, requires disclosure of fair value information about financial
instruments, whether or not recognized in the statement of financial
condition. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future
cash flows. In that regard, the derived fair value estimated cannot be
substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instruments. SFAS
No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate
fair value amounts presented do not represent the underlying value of
the Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures, as presented in Note 12, for
financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
statements of financial condition for cash and cash equivalents
approximate those assets' fair values.
Debt and equity securities: Fair values for debt and equity securities
are based on quoted market prices, where available. If quoted market
prices are not available, fair values are based on quoted market prices
of comparable instruments.
FHLB stock: The carrying amount of FHLB stock approximates fair value.
Loans: For variable-rate loans that reprice frequently with no
significant change in credit risk, fair values are based on carrying
amounts. The fair values for other loans (for example, fixed rate
commercial real estate, rental property mortgage loans, and commercial
and industrial loans) are estimated using discounted cash flow analysis,
based on interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality giving consideration to
estmated perpayment and credit loss factors. Loan fair value estimates
include judgments regarding future expected loss experience and risk
characteristics. Fair values for impaired loans are estimated using
discounted cash flow analysis or underlying collateral values, where
applicable.
Accrued interest receivable: The carrying amount of accrued interest
receivable approximates fair value.
Deposits: The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date
(that is, their carrying amounts). Fair values for time deposits are
estimated using a discounted cash flow calculation that applies interest
rates currently offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits. The carrying amount of
accrued interest payable approximates fair value.
Advance payments by borrowers for taxes and insurance (escrow accounts):
The carrying amount of escrow accounts approximate fair value.
Loan commitments: Commitments to extend credit were evaluated and fair
value was estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The
carrying value and fair value of commitments to extend credit are not
considered material for disclosure.
25
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 2. Debt and Equity Securities
The amortized costs and approximate fair values of debt and equity
securities are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
September 30, 1996:
-------------------
Debt and equity securities available for sale:
Debt securities:
<S> <C> <C> <C> <C>
U.S. Government and agency obligations $ 10,361,165 $ 21,133 $ (47,513) $ 10,334,785
Mortgage-backed Securities 1,396,690 -- (19,107) 1,377,583
---------- ------- ------- ----------
Subtotal 11,757,855 21,133 (66,620) 11,712,368
---------- ------- ------- ----------
Equity securities:
Mutual fund 86,903 -- (33) 86,870
Stock in FHLMC 51,653 384,254 -- 435,907
---------- ------- ------- ----------
Subtotal 138,556 384,254 (33) 522,777
---------- ------- ------- ----------
Total $ 11,896,411 $ 405,387 $ (66,653) $ 12,235,145
========== ======= ======= ==========
Debt securities held to maturity:
U.S. Government and agency obligations $ 1,749,672 $ 172 $ (2,031) $ 1,747,813
Certificates of deposit 4,065,000 -- -- 4,065,000
Mortgage-backed securities 3,479,420 75,648 (47,140) 3,507,928
---------- ------- ------- ----------
Total $ 9,294,092 $ 75,820 $ (49,171) $ 9,320,741
========== ======= ======= ==========
September 30, 1995:
------------------
Debt and equity securities available for sale:
Debt securities:
U.S. Government and agency obligations $ 3,513,087 $ 13,081 $ (37,184) $ 3,488,984
Mortgage-backed securities 625,512 -- (642) 624,870
---------- ------- ------- ----------
Subtotal 4,138,599 13,081 (37,826) 4,113,854
---------- ------- ------- ----------
Equity securities:
Mutual fund 81,833 56 -- 81,889
Stock in FHLMC 51,653 247,627 -- 299,280
---------- ------- ------- ----------
Subtotal 133,486 247,683 -- 381,169
---------- ------- ------- ----------
Total $ 4,272,085 $ 260,764 $ (37,826) $ 4,495,023
========== ======= ======= ==========
Debt securities held to maturity:
U.S. Government and agency obligations $ 6,172,729 $ 38,094 $ (14,417) $ 6,196,406
Certificates of deposit 6,064,000 -- -- 6,064,000
Mortgage-backed securities 4,124,752 84,459 (81,760) 4,127,451
---------- ------- ------- ----------
Total $16,361,481 $ 122,553 $ (96,177) $ 16,387,857
========== ======= ======= ==========
</TABLE>
There were no sales of securities during the two years ended September
30, 1996.
26
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 2. Debt and Equity Securities - (continued)
The amortized cost and estimated market value of debt securities at
September 30, 1996, by contractual maturity, are shown below.
Mortgage-backed securities have been aggregated and disclosed
separately, rather than allocate over several maturity groupings,
since they lack a single maturity date and because borrowers retain
the right to prepay the obligation.
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
-------------------------- ----------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Due in one year or less $ 5,315,000 $ 5,312,969 $ 4,502,556 $ 4,495,130
Due one year through five years 499,672 499,844 5,430,968 5,416,250
Due after ten years - - 427,641 423,405
--------- --------- ---------- ----------
Subtotal 5,814,672 5,812,813 10,361,165 10,334,785
Mortgage-backed securities 3,479,420 3,507,928 1,396,690 1,377,583
--------- --------- ---------- ----------
Total $ 9,294,092 $ 9,320,741 $ 11,757,855 $11,712,368
========= ========= ========== ==========
</TABLE>
Note 3. Loans Receivable
Loans receivable at September 30, 1996 and 1995 consist of the
following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Secured by 1-4 family residences $ 37,623,209 $ 37,514,624
Secured by other real estate 3,964,195 4,516,721
Construction 626,900 1,136,300
Consumer and other 1,916,165 1,551,198
Loans secured by deposits 281,115 200,939
---------- ----------
Total loans receivable 44,411,584 44,919,782
---------- ----------
Less:
Undisbursed portion of mortgage loans (227,762) (746,068)
Allowance for loan losses (877,094) (962,086)
Deferred loan fees (236,447) (222,156)
---------- ----------
Loans receivable, net $ 43,070,281 $ 42,989,472
========== ==========
</TABLE>
A summary of the activity in the allowance for loan losses is as
follows:
<TABLE>
<CAPTION>
Years ended September 30,
-------------------------
1996 1995
-------- ---------
<S> <C> <C>
Balance, beginning of period $ 962,086 $ 1,006,252
Provision for losses 3,725 26,430
Charge offs (92,213) (75,333)
Recoveries 3,496 4,737
------- ---------
Balance, end of period $ 877,094 $ 962,086
======= =========
</TABLE>
In the ordinary course of business, the Association has granted loans
to certain executive officers, directors and their related interests.
Related party loans are made on substantially the same terms as those
prevailing at the time for comparable transactions with unrelated
persons and do not involve more than the normal risk of
collectibility. The aggregate dollar amount of these loans was
approximately $140,000 and $212,000 at September 30, 1996 and 1995,
respectively.
27
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 4. Foreclosed Real Estate
Foreclosed real estate acquired in settlement of loans consists of the
following:
September 30,
-------------------
1996 1995
------- -------
Real estate acquired by foreclosure $ 15,700 $ 54,898
Less allowance for losses 15,700 25,187
------ ------
Foreclosed real estate, net $ - $ 29,711
====== ======
Activity in the allowance for losses on foreclosed real estate is as
follows:
Years ended September 30,
-------------------------
1996 1995
------- -------
Beginning balance $ 25,187 $ 78,461
Provision charged to income - 3,570
Charge-offs (9,487) (56,844)
Recoveries - -
------ -------
Ending balance $ 15,700 $ 25,187
====== =======
Note 5. Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal
balances of loans serviced for others was $2,823,000 and $1,159,000 at
September 30, 1996 and 1995, respectively.
Custodial escrow balances maintained in connection with the foregoing
loan servicing, and included in demand deposits, were approximately
$13,300 and $13,500 at September 30, 1996 and 1995, respectively.
Mortgage servicing rights of $12,700 were capitalized in fiscal 1996
with a carrying amount of $11,600 at September 30, 1996. The valuation
allowance on September 30, 1996 and changes in the valuation allowance
during the period were not significant.
Note 6. Accrued Interest Receivable
Accrued interest receivable at September 30, 1996 and 1995 is
summarized as follows:
1996 1995
------- -------
Investment securities $ 164,382 $ 246,865
Mortgage-backed securities 41,500 48,562
Loans receivable 244,445 233,498
------- -------
Total $ 450,327 $ 528,925
======= =======
Note 7. Premises and Equipment
Premises and equipment at September 30, 1996 and 1995 consists of the
following:
1996 1995
------- --------
Land $ 98,840 $ 98,840
Office building 790,702 786,739
Furniture and equipment 463,914 456,943
--------- ---------
Total 1,353,456 1,342,522
Less accumulated depreciation (564,610) (480,841)
--------- ---------
Premises and equipment, net $ 788,846 $ 861,681
========= =========
28
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 8. Deposits
The aggregate amount of certificates of deposit with a minimum
denomination of $100,000 was approximately $2,434,000 and $2,109,000 at
September 30, 1996 and 1995, respectively. Deposited amounts in excess
of $100,000 per account are not insured by the Savings Association
Insurance Fund.
At September 30, 1996, the scheduled maturities of time deposits are as
follows:
1997 $26,959,056
1998 10,495,000
1999 487,908
2000 30,261
----------
Total $37,972,225
==========
Deposits by related parties were approximately $803,000 and $623,000 at
September 30, 1996 and 1995, respectively.
The Association provides collateral to various local governmental units
as required by state statute on savings and certificate account balances
greater than $100,000. The collateral pledged against such deposits
consisted of mortgage-backed securities totaling $1,101,623 and
$2,188,784 as of September 30, 1996 and 1995, respectively.
Note 9. Income Taxes
Income tax expense (benefit) applicable to operations include current
and deferred taxes as follows:
Years ended September 30,
-------------------------
1996 1995
------- -------
CURRENT
Federal $ 367,539 $ 369,700
State 126,283 119,730
-------- -------
Subtotal 493,822 489,430
-------- -------
DEFERRED
Federal (89,790) 22,109
State (29,932) 7,370
-------- -------
Subtotal (119,722) 29,479
-------- -------
Total income tax provision $ 374,100 $ 518,909
======== =======
The State of Minnesota follows the Internal Revenue Code for the
determination of taxable income in connection with temporary
differences. The State portion of deferred tax assets and liabilities is
approximately 25 percent.
Temporary differences between financial statement carrying amounts and
the tax basis of assets and liabilities that create deferred tax assets
and liabilities are as follows:
September 30,
-------------------
1996 1995
------- -------
Deferred tax assets:
General loan loss allowance $ 350,838 $ 272,699
Deferred loan fees 94,579 88,864
Deferred compensation 129,278 100,304
SAIF assessment 145,023 -
-------- --------
719,718 461,867
Less valuation allowance (162,000) (159,037)
-------- --------
Subtotal 557,718 302,830
-------- --------
29
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 9. Income Taxes - (continued)
September 30,
----------------------
1996 1995
---------- ----------
Deferred tax liabilities:
Excess tax reserves 115,768 -
Securities unrealized gains 135,494 89,175
FHLB stock dividend 99,680 88,198
Mortgage servicing rights 4,644 -
Depreciation and basis adjustment 38,229 34,957
------- -------
Subtotal 393,815 212,330
------- -------
Net deferred tax assets $ 163,903 $ 90,500
======= =======
The Association has paid sufficient income taxes in prior carryback
years which would enable it to recover the balance of the net deferred
tax assets, and therefore, no additional valuation allowance was
required at September 30, 1996 and 1995.
Actual income tax expense varied from "expected" tax expense (computed
by applying the United States federal corporate income tax rate of 34
percent to earnings before taxes) as follows:
<TABLE>
<CAPTION>
Years ended September 30,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Computed "expected" tax expense: $ 317,200 $ 457,760
Increase (reduction) in income tax resulting from:
State income taxes, net of federal tax benefit 63,600 82,600
Other (net) (6,700) (21,451)
------- -------
Total income tax expense $ 374,100 $ 518,909
======= =======
</TABLE>
If certain conditions are met, savings and loan associations are allowed
a bad debt deduction in determining income for tax purposes, based on
specified experience formulas or a percentage of taxable income before
such deduction. On August 21, 1996 legislation was signed into law which
repealed the percentage of taxable income method for the tax bad debt
deduction. The repeal is effective for the Association's taxable year
beginning October 1, 1996. In addition, the legislation requires the
Company to include in taxable income its tax bad debt reserves in excess
of its base year reserves (pre-1988 reserves) over a six, seven, or
eight year period depending upon the attainment of certain loan
origination levels. Since the percentage of taxable income method for
the tax bad debt deduction and the corresponding increase in the tax bad
debt reserve in excess of base year have been recorded as temporary
differences, this change in the tax law is not expected to have a
material effect on the Company's statement of operations.
Retained earnings at September 30, 1996, includes approximately
$1,459,000 of pre-1988 reserves, for which no deferred income tax
liability, approximately $584,000, has been recognized. This amount
represents an allocation of income to bad debt deductions for tax
purposes only. Reduction of amounts so allocated for purposes other than
tax bad debt losses or adjustments from carryback of net operating
losses would create income for tax purposes only, which would be subject
to the then current corporate income tax rate.
Note 10. Employee Benefit Plans
Salary Continuation Plan
The Association is obligated to its former executive officers under a
deferred compensation plan. The unpaid liability of $101,768 is recorded
in the accompanying financial statements. The plan is fully funded with
annuity contracts recorded as assets in the accompanying financial
statements. The Association has also adopted a directors' consultations
and retirement plan. Benefits related to services are expensed under the
plan vesting schedule. The Association adopted an insured executive
supplemental retirement plan and the estimated benefits will be accrued
over the expected remaining years of employment. The compensation
expense related to these plans amounted to $29,892 and $27,182 for the
years ended September 30, 1996 and 1995, respectively.
30
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 10. Employee Benefit Plans - (continued)
Salary Reduction Plan
The Association has adopted a salary reduction plan (401(k) Plan) which
covers substantially all full time employees. Company contributions are
determined anually by the Board of Directors. The Company's expense was
$1,042 and $14,516 for the years ended September 30, 1996 and 1995,
respectively.
Employee Stock Ownership Plan
At the time of the stock conversion, the Association established an
Employee Stock Ownership Plan (ESOP) covering all employees over the age
of 21, with at least one year of service who work at least 1,000 hours
during the plan year. The ESOP borrowed funds from the Company to
purchase a total of 80,639 shares of the Company's Common Stock. The
loan is collateralized by the Common Stock. Contributions by the
Association are used to repay the loan with shares being released from
the Company's lien proportional to the loan repayment. Annually, on
December 31, the released shares are allocated to the participants in
the same proportion as their wages bear to the total compensation of all
of the participants.
The Company presents these financial statements in accordance with the
AICPA Statement of Position (SOP) No. 93-6, "Employers' Accounting for
Employee Stock Ownership Plans." The price of the shares issued and
unreleased are charged to unearned compensation, a contra-equity
account, and shares released are reported as compensation expense equal
to the current market value price of the released shares. Dividends paid
on allocated shares are charged to retained earnings and those on
unallocated shares are charged to expense.
The following table presents the components of the ESOP shares:
September 30,
-----------------------
1996 1995
---------- -----------
Allocated shares 8,064 -
Commited to be released shares 6,048 5,376
Unreleased shares 66,527 75,263
------- -------
Total ESOP shares 80,639 80,639
======= =======
Fair value of unreleased shares $ 756,745 $ 865,525
======= =======
Compensation expense recorded $ 94,003 $ 51,945
======= =======
Management Stock Bonus Plan (MSBP)
The Company has adopted a MSBP for directors and Management to enable
the Association to attract and retain experienced and capable personnel
in key positions of responsibility. A total of 29,224 shares were
awarded in the form of restricted stock payable over a five year vesting
period and 11,095 shares were reserved for future awards. The Company
acquired the MSBP shares in fiscal 1996 in an open market purchase at a
cost of $458,629, which was initially recorded as unearned compensation
in a contra shareholders' equity account. The Company recognizes
compensation expense pro rata over the vesting period which amounted to
$66,487 for fiscal 1996.
Stock Option Plan
The Company established two stock option plans for directors, officers,
and employees. One is a non-qualified plan and the other is an incentive
stock option plan. The option plans were approved by the Company's
shareholders on September 27, 1995, and 100,799 shares were available
for grant. Awarded were 73,072 shares exercisable at the market price of
$11.38 per share. All options were outstanding at September 30, 1996 and
expire ten years from date of grant.
Note 11. Commitments and Contingencies
Loans serviced for FNMA, in the amount of $740,000 at September 30,
1996, were sold subject to recourse provisions which require the
Association to buy back any loan which is delinquent more than ninety
days. The Association also sold loans and related servicing subject to
recourse provisions which expire in March 1997 in the amount of
$1,082,400 at September 30, 1996.. The Association has not incurred any
losses on loans sold with recourse provisions.
31
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 12. Financial Instruments
The Association is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs
of its customers. These financial instruments are commitments to extend
credit and involve, to varying degrees, elements of credit risk in
excess of the amount recognized in the balance sheet.
The Association's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend
credit is represented by the contractual amount of those instruments.
The Association uses the same credit policies in making commitments as
it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Commitments to
extend credit which represent credit risk totaled $634,000 for loans
($296,000 at fixed rates and $338,000 at adjustable rates) and $798,000
unused lines of credit at September 30, 1996.
Commitments to sell loans amounted to $179,000 at September 30, 1996.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
September 30, 1996
---------------------------
Carrying Fair
Financial assets: Amount Value
----------- -----------
<S> <C> <C>
Cash and cash equivalents $ 2,583,654 $ 2,583,654
Investment securities 21,529,237 21,555,886
FHLB Stock 650,700 650,700
Loans Receivable 44,590,248 45,544,520
Accrued interest receivable 450,327 450,327
Financial liabilities:
Deposits 56,531,194 56,538,374
Advance payments by borrowers (escrows) 138,530 138,530
</TABLE>
Note 13. Significant Geographic Concentration of Credit Risk
A significant portion of the Association's loans receivable are to
borrowers located in Little Falls, Minnesota, and the surrounding
counties. This geographic concentration amounted to approximately 95% of
the total loans receivable balance for the years ended September 30,
1996 and 1995.
Note 14. Regulatory Matters
The Association 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
possible additional discretionary - actions by regulators that, if
undertaken, could have a direct material effect on the Association's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Association must
meet specific capital guidelines that involve quantitative measures of
the Association's assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The
Association's capital amounts and classification are also subject to
qualitative judgements by the regulators about components, risk
weightings and other factors.
The OTS includes an interest-rate risk component in its risk-based
capital requirements. Institutions with a greater than normal
interest-rate risk exposure (as defined) must take a deduction from the
total capital available to meet their risk-based capital requirement
equal to half the difference between the institution's actual measured
exposure and a defined normal level of exposure.
Quantitative measures established by regulation to ensure capital
adequacy require the Association to maintain minimum amounts and ratios
(set forth in the following table below) of total and Tier 1 capital (as
defined in the regulation), to risk-weighted assests (as defined), and
of tangible and Tier 1 capital (as defined) to adjusted total assets (as
defined). Management believes, as of September 30, 1996, that the
Association meets all of capital adequacy requirements to which it is
subject.
32
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 14.Regulatory Matters - (continued)
As of September 30, 1996 and 1995, the most recent notification from the
OTS categorized the Association as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized the Association must maintain minimum total risk-based, Tier
1 risk-based, Tier 1 leverage ratios as set forth in the table. There
are no conditions or events since that notification that management
believes have changed the Association's category.
The Association's actual regulatory capital amounts, with reconcilation
to the Company's capital investment in the Association determined in
accordance with generally accepted accounting principles (GAAP), and
ratios as of September 30, 1996, are also presented in the table (in
thousands).
<TABLE>
<CAPTION>
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
---------------------- ------------------ ----------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
GAAP capital $ 10,643
Less: Unrealized gains on debt
securities held for sale (238)
Excess mortgage servicing rights (1)
-------
Tangible capital and ratio
to adjusted total assest $ 10,404 14.9% $ 1,046 1.50%
------- ---- ------ ----
Tier 1 (Core) capital and ratio
to adjust total assets $ 10,404 14.9% $ 2,092 3.0% $ 3,487 5.0%
------- ---- ------ ---- ----- ---
Tier 1 capital and ratio
to risk-weighted assets $ 10,404 30.5% $ 1,366 4.0% $ 2,049 6.0%
------- ---- ------ ---- ----- ---
Tier 2 capital, allowance
for loan losses 430
-------
Total risk-based capital and
ratio to risk-weighted assets $ 10,834 31.7% $ 2,733 8.0% $ 3,416 10.0%
======= ==== ====== === ===== ====
</TABLE>
The Association may not declare or pay cash dividends to the Company if
the effect would be to reduce GAAP capital below applicable regulatory
capital requirements or if such declaration and payment would otherwise
violate regulatory requirements.
Note 15.Effects of New Financial Accounting Standards
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation". This statement
establishes financial accounting and reporting standards for stock-based
employees compensation plans. SFAS 123 encourages all entities to adopt
the "fair value based method" of accounting for employee stock
compensation plans. However, SFAS 123 also allows an entity to continue
to measure compensation cost under such plans using the "intrinsic value
based method." Under the fair value based method, compensation cost is
measured at the grant date based on the value of the award and is
recognized over the service period, usually the vesting period. Fair
value is determined using an option pricing model that takes into
account the stock price at the grant date, the exercise price, the
expected life of the option, the volatility of the underlying stock and
the expected dividends on it, and the risk-free interest rate over the
expected life of the option. Under the intrinsic value based method,
compensation cost is the excess, if any, of the quoted market price of
the stock at the grant date or other measurement date over the amount an
employee must pay to acquire the stock. Most stock plans have no
intrinsic value at date of grant, and under previous accounting
guidance, no compensation cost was to be recognized.
The accounting requirements of this statement are effective for
transactions entered into in fiscal years that begin after December 15,
1995. The Company intends to continue accounting for compensation cost
under the intrinsic value based method and will provide pro forma
disclosures for all awards granted after September 30, 1996. Such
disclosures include net income and earnings per share as if the fair
value based method of accounting has been applied.
33
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 15.Effects of New Financial Accounting Standards - (continued)
In June 1996, the Financial Accounting Standards Board issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS 125 amends portions of SFAS 115,
amends and extends to all servicing assets and liabilities the
accounting standards for mortgage servicing rights now in SFAS 65, and
supercedes SFAS 122. The statement provides consistent standards for
distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. Those standards are based upon
consistent application of a financial components approach that focuses
on control. The statement also defines accounting treatment for
servicing assets and other retained interest in the assets that are
transferred. SFAS 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after
December 31, 1996, and is to be applied prospectively. The adoption of
the statement is not expected to have a material effect on the Company's
financial condition or results of operations.
Note 16.Parent Only Condensed Financial Information
This information should be read in conjunction with the other Notes to
Consolidated Financial Statements. On March 23, 1996 the Company issued
$7.6 million of common stock and contributed one-half of the net
proceeds to the Association as equity capital. Shareholders' equity
differs from the consolidated statements by the amount of consolidating
ESOP adjustments.
STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30, September 30,
ASSETS 1996 1995
----------- -----------
<S> <C> <C>
Cash and cash equivalents $ 61,525 $ 48,790
Investment in Association subsidiary 10,642,889 10,588,338
Loan to Association subsidiary 1,725,000 3,100,000
Loan to Association ESOP 609,813 690,472
Tax refund receivable 33,235 -
---------- ----------
Total $13,072,462 $ 14,427,600
========== ==========
LIABILITIES AND SHAREHOLDERS EQUITY
Other liabilities $ 70,210 $ 160
Shareholders' equity 13,002,252 14,427,440
---------- ----------
Total $13,072,462 $14,427,600
========== ==========
</TABLE>
STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the
Year Ended From inception to
September 30, September 30,
Interest from: 1996 1995
----------- -----------
<S> <C> <C>
Association's subsidiary loan $ 151,949 $ 103,063
Association's ESOP loan 54,101 32,008
Dividends from Association subsidiary 200,000 -
------- -------
Total income 406,050 135,071
Expenses:
Non-interest expenses 234,402 68,732
Income tax (refund) expense (11,679) 26,895
------- -------
Total expenses 222,723 95,627
------- -------
Income before equity in undistributed
net income of
Association subsidiary 183,327 39,444
Equity in undistributed net income of
Association subsidiary 577,217 788,110
------- -------
Net income $ 760,544 $ 827,554
======= =======
</TABLE>
34
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 16.Parent Only Condensed Financial Information - (continued)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the
Year Ended From inception to
September 30, September 30,
1996 1995
---------- ----------
<S> <C> <C>
Net income $ 760,544 $ 827,554
Adjustments:
Equity distribution net of Association subsidiary (577,217) (788,110)
ESOP fair value adjustment, net of taxes 15,426 -
Dividend from Association subsidiary (200,000) -
Increase in income tax refund receivable (33,235) -
(Decrease) increase in accrued income taxes (160) 160
Increase in other liabilities 70,210 -
-------- --------
Net cash provided by operations 35,568 39,604
-------- --------
Cash flows from investing activities:
Loan to subsidiary 1,375,000 (3,100,000)
Dividend from Association subsidiary 200,000 -
Purchase of treasury stock (1,536,689) -
Purchase of subsidiary stock - (3,796,112)
-------- --------
Net cash used in investing activities 38,311 (6,896,112)
-------- --------
Cash flows from financing activities:
Proceeds from sale of stock - 7,595,770
Payment of cash dividend (141,804) -
Purchase of ESOP shares 80,660 (690,472)
-------- --------
Net cash (used in) provided by financing activities (61,144) 6,905,298
-------- --------
Increase in cash and cash equivalents 12,735 48,790
Cash and cash equivalents
Beginning of year 48,790 -
-------- --------
End of year $ 61,525 $ 48,790
======== ========
</TABLE>
35
<PAGE>
OFFICE LOCATIONS
MISSISSIPPI VIEW HOLDING COMPANY
35 East Broadway
Little Falls, Minnesota 56345
(320) 632-5461
COMMUNITY FEDERAL SAVINGS AND LOAN ASSOCIATION
OF LITTLE FALLS
35 East Broadway
Little Falls, Minnesota 56345
(320) 632-5461
Board of Directors of Mississippi View Holding Company
and
Community Federal Savings and Loan Association of Little Falls
Andrew P. Revering
Chairman of the Board
(rotated annually)
Neil Adamek Thomas J. Leiferman
Wallace R. Mattock Gerald Peterson
Peter Vogel
Executive Officers of Mississippi View Holding Company
and
Community Federal Savings & Loan Association of Little Falls
Thomas J. Leiferman
President and Chief Executive Officer
Larry D. Hartwig Mary Ann Karnowski
Treasurer/Controller Secretary
-----------------------------
Corporate Counsel Independent Auditors
Rosenmeier Anderson & Vogel Bertram Cooper & Co., LLP
210 Second Street, N.E. 110 Second Avenue, S.E.
Little Falls, Minnesota 56345 Waseca, Minnesota 56093
Special Counsel Transfer Agent and Registrar
Malizia, Spidi, Sloane & Fisch, P.C. Registrar and Transfer Company
One Franklin Square 10 Commerce Drive
1301 K Street, N.W., Suite 700 East Cranford, New Jersey 07016
Washington D.C. 20005 (908) 272-8511
-----------------------------
The Company's Annual Report for the year ended September 30, 1996, filed with
the Securities and Exchange Commission on Form 10-KSB is available without
charge upon written request. For a copy of the Form 10-KSB or any other investor
information, please write or call Larry D. Hartwig, Treasurer/Controller at the
Company's Office in Little Falls, Minnesota. The Annual Meeting of Shareholders
will be held on January 22, 1997, at 10:00 a.m. at the office of the Company.
36
EXHIBIT 23
Consent of Bertram Cooper & Co., LLP
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-3280 of Mississippi View Holding Company on Form S-8 (filed with the
Securities and Exchange Commission on April 5, 1996) of our report dated October
29, 1996 included in this Annual Report on Form 10-KSB of Mississippi View
Holding Company for the fiscal year ended September 30, 1996.
Bertram Cooper & Co., LLP
Waseca, Minnesota
December 23, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 318
<INT-BEARING-DEPOSITS> 2,266
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,235
<INVESTMENTS-CARRYING> 9,294
<INVESTMENTS-MARKET> 9,321
<LOANS> 44,362
<ALLOWANCE> 877
<TOTAL-ASSETS> 70,011
<DEPOSITS> 56,531
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,039
<LONG-TERM> 0
0
0
<COMMON> 101
<OTHER-SE> 12,339
<TOTAL-LIABILITIES-AND-EQUITY> 70,011
<INTEREST-LOAN> 3,704
<INTEREST-INVEST> 1,470
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,174
<INTEREST-DEPOSIT> 2,532
<INTEREST-EXPENSE> 2,532
<INTEREST-INCOME-NET> 2,642
<LOAN-LOSSES> 4
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,056
<INCOME-PRETAX> 933
<INCOME-PRE-EXTRAORDINARY> 559
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 559
<EPS-PRIMARY> 0.66
<EPS-DILUTED> 0.65
<YIELD-ACTUAL> 7.64
<LOANS-NON> 17
<LOANS-PAST> 31
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,060
<ALLOWANCE-OPEN> 962
<CHARGE-OFFS> 92
<RECOVERIES> 3
<ALLOWANCE-CLOSE> 877
<ALLOWANCE-DOMESTIC> 877
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 669
</TABLE>
