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, 1997,
-------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from
to .
---------------- -------------------
Commission File No. 0-25546
MISSISSIPPI VIEW HOLDING COMPANY
- --------------------------------------------------------------------------------
(Name of Small Business Issuer in Its Charter)
Minnesota 41-1795363
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(State or Other Jurisdiction of Incorporation I.R.S. Employer
or Organization) Identification No.
35 East Broadway, Little Falls, Minnesota 56345
- ----------------------------------------- --------------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: 320-632-5461
------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
---------------------------------------
(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,
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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. $739,715
As of December 9, 1997, there were issued and outstanding 740,243 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 average bid and asked price of
the registrant's Common Stock on December 9, 1997, was $8,018,784 ($18.00 per
share based on 445,488 shares of Common Stock outstanding).
Transition Small Business Disclosure Format (check one)
YES [ ] NO [X]
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year
ended September 30, 1997. (Parts I, II, and IV)
2. Portions of the Proxy Statement for the Annual Meeting of
Stockholders. (Part III)
<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. 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, home equity line of credit loans, and
unsecured 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 hospital, a paper mill, a national mailing
distributor, and Camp Ripley, a prominent National Guard training facility.
Little Falls is the county seat of Morrison County. According to the Minnesota
Department of Agriculture, Morrison County is the third largest dairy producing
county in the State.
The Association encounters strong competition both in the attraction of
deposits and origination of real estate and other loans. Competition comes
primarily from eight 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, 1997. The Association competes for savings accounts by offering depositors
competitive interest rates and a high level of personal service. Over the past
five years, the Association has added low cost noninterest bearing checking
accounts, safety deposit boxes, a drive-up
1
<PAGE>
ATM, plastic cash and check cards, checking account overdraft protection and
home equity line of credit loans in order to remain competitive in its market.
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,
-------------------------------------------------------
1997 1996
----------------------- ------------------------
$ % $ %
------- -------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Type of Loans:
Construction ........................... 953 2.07% 627 1.40%
Residential (includes held for sale)(1) 34,152 74.16% 33,682 75.54%
Commercial real estate ................. 1,227 2.67% 1,417 3.18%
Commercial business .................... 393 0.85% 351 0.79%
Consumer loans (includes held for sale):
Low document mortgage (2) .............. 1,036 2.25% 1,619 3.63%
Other consumer and land ................ 8,289 18.00% 6,894 15.46%
------ ------ ------ ------
Total loans ............................ 46,050 100.00% 44,590 100.00%
====== ======
Less:
Loans in process ....................... 310 228
Deferred loan origination fees and costs 269 236
Allowance for loan losses .............. 861 877
------ ------
Total loans, net ......................... 44,610 43,249
====== ======
</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.
2
<PAGE>
Loan Maturity Tables. The following table sets forth the maturity of
Association's loan portfolio at September 30, 1997. The table does not include
prepayments of scheduled principal repayments which totaled $5.5 million and
$6.0 million for the years ended September 30, 1997 and 1996, respectively. All
mortgage loans are shown as maturing based on contractual maturities.
<TABLE>
<CAPTION>
Land, Multi
1-4 Family Family & Commercial
Real Estate Commercial Business &
Mortgage Real Estate Construction Consumer Total
----------- ----------- ------------- ---------- -----
(Dollars in Thousands)
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-performing ........................ $ 223 $ -- $ -- $ 11 $ 234
Amounts Due:
Within 3 Months ..................... 17 182 692 319 1,210
3 Months to 1 Year .................. 143 3 261 416 823
After 1 Year:
1 to 3 Years ........................ 452 301 -- 3,492 4,245
3 to 5 Years ........................ 930 73 -- 3,019 4,022
5 to 10 Years ....................... 2,301 125 -- 998 3,424
10 to 20 Years ...................... 14,590 937 -- 1,463 16,990
Over 20 Years ....................... 15,028 74 -- -- 15,102
-------- -------- ------ -------- --------
Total due after one year ......... 33,301 1,510 -- 8,972 43,783
-------- -------- ------ -------- --------
Total amount due ................. $ 33,684 $ 1,695 $ 953 $ 9,718 $ 46,050
======== ======== ====== ========
Less:
Allowance for loan loss ............. 861
Undisbursed portion of mortgage loans 310
Deferred loan fees .................. 269
--------
Loans receivable, net ............ $ 44,610
========
</TABLE>
The following table sets forth the dollar amount of all loans due after
September 30, 1998, which have pre-determined interest rates and which have
floating or adjustable interest rates.
Fixed Floating or
Rates Adjustable Rates Total
----- ---------------- -----
(Dollars in Thousands)
-------------------------------------
One-to four-family ................ $ 9,349 $23,952 $33,301
Commercial real estate ............ 965 545 1,510
Consumer .......................... 7,687 1,285 8,972
------- ------- -------
Total .......................... $18,001 $25,782 $43,783
======= ======= =======
3
<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.
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 15 year terms.
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 maximum second year rate. Three
year balloon mortgages are offered on greater than forty acre parcels, seasonal
dwellings, multi-collateral parcels, and one- to four-unit rental properties.
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, 1997.
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 ("Fannie Mae") guidelines. The Association
currently sells essentially all 30-year fixed-rate mortgage loans in the
secondary market, servicing released. As of September 30, 1997, the
Association's portfolio of loans previously originated, sold, and serviced for
others totaled approximately $2.4 million.
Multi-Family and Commercial Real Estate Loans. The Association
originates a limited number of commercial real estate and multi-family real
estate loans. Commercial loans must be approved by the President, who has
authority to lend up to $500,000 on secured commercial real estate loans. Any
loan in excess of this limit must be approved in advance by the Board of
Directors. The President, informs the Board of Directors at their monthly
meeting of all commercial real estate loans originated during the previous
month. The 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, 1997, the Association had multi-family and commercial real estate loans
totaling $2.2 million, or 4.87% of the Association's loan portfolio of which
$840,550 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 or business. If the cash flow from the project
or business is reduced, the borrower's ability to repay the loan may be
impaired. As of September 30, 1997, 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 $532,357 and payments were current.
4
<PAGE>
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 disbursements 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, 1997, there was $953,265 outstanding in construction loans to
owner/borrowers with $271,924 in outstanding loans in process allocated to these
projects. The Association originated $1.4 million in construction loans on one-
to four-family properties during fiscal 1997.
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 buildings.
Consumer and Other Loans. The Association also offers consumer and other
loans in the form of first and second low document three year balloon mortgages
with 10 to 20-year amortizations which totaled $3.1 million and $3.2 million at
September 30, 1997 and 1996, 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 totaled $6.5 million
and $5.6 million at September 30, 1997 and 1996, respectively. At September 30,
1997, 4.65% 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 have shorter terms and
higher interest rates than mortgage loans, however, they are more costly to
originate and administer and 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 and administration
costs 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 20% of such institution's assets. Amounts
in excess of 10% of the institution's assets must be used for qualifying small
business loans.
5
<PAGE>
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. The origination of
commercial loans must be approved by the President of the Association who has
authority to lend up to $500,000 on secured nonmortgage loans and $100,000 on
unsecured commercial lending. Any loan in excess of these limits must be
approved by the Board of Directors. Each month the President reports all
commercial loans originated the previous month to the Board of Directors. As of
September 30, 1997, the Association had approximately $1.3 million in
outstanding commercial business loans, which represented approximately 2.8% 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 $55,074 of these
loans remained in the Association's loan portfolio at September 30, 1997. The
Association has made reserves for these loans and does not expect any further
loss provisions; 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, 1997, $699,080 or 1.57% 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 in a range from $20,000 to $50,000 as defined in the
lending policy 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. If an appraisal of the real estate intended
to secure the proposed loan is required, the appraisal is performed by a state
certified independent appraiser designated and approved by the Board of
Directors. 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. With the exception of some low document installment
loans, the Association issues written, formal commitments to prospective
borrowers on 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, 1997, the Association had $660,750 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 $79,000 and $71,000 for the fiscal years ended September
30, 1997 and 1996, respectively.
6
<PAGE>
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-to-one borrower limit was approximately $1.8 million as of September 30,
1997. At September 30, 1997, the Association's largest aggregate loans to one
borrower relationship consisted of several loans secured by a commercial
property, business inventory, and residential real estate with a balance of
$818,854 and all payments were 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, 1997. See " -
Classified Assets."
7
<PAGE>
Non-performing and Problem Assets. The following table sets forth
information regarding non-accrual loans, real estate owned, and other
repossessed assets, and loans 90 days or more delinquent but on which the
Association was accruing interest at the date indicated.
At September 30,
----------------
1997 1996
-------- -------
(In Thousands)
----------------
Loans accounted for on a non-accrual basis:
Mortgage loans:
Permanent loans secured by 1-4 dwelling units ................ $ 190 $ --
All other mortgage loans ..................................... -- --
Non-mortgage loans ............................................. 11 17
------ ------
Total .......................................................... 201 17
Accruing loans which are contractually past due 90 days or more:
Mortgage loans:
Construction loans ........................................... -- --
Permanent loans secured by 1-4 dwelling units ................ 33 31
All other mortgage loans ..................................... -- --
Non-mortgage loans ............................................. -- --
------ ------
Total .......................................................... 33 31
------ ------
Total non-accrual and accrual loans ............................ 234 48
------ ------
Real estate owned (net) ........................................ -- --
Other non-performing assets .................................... -- --
------ ------
Total non-performing assets .................................... $ 234 $ 48
====== ======
Total non-accrual and accrual loans to net loans ............... 0.52% 0.11%
Total non-accrual and accrual loans to total assets ............ 0.34% 0.07%
Total non-performing assets to total assets .................... 0.34% 0.07%
Interest income that would have been recorded on loans accounted for on
a nonaccrual basis under the original terms of such loans was $8,506 and $1,148
for the fiscal years ended September 30, 1997 and 1996, respectively. No
interest income on non-accrual loans was included in income for the fiscal years
ended September 30, 1997 and 1996.
Classified Assets. OTS regulations provide for a classification system for
problems assets of insured institutions which covers all problem assets. Under
this classification system, problem assets of insured institutions are
classified as "substandard," "doubtful," or "loss." An asset is considered
substandard if it is inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Substandard assets
include those characterized by the "distinct possibility" that the insured
institution will sustain "some loss" if the deficiencies are not corrected.
Assets classified as doubtful have all of the weaknesses inherent in those
classified substandard, with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions, and values, "highly questionable and improbable."
Assets classified as loss are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted. Assets may be designated "special
mention" because of potential weaknesses that do not currently warrant
classification in one of the aforementioned categories.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
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
8
<PAGE>
allowances. A portion of general loss allowances established to cover possible
losses related to assets classified as substandard or doubtful may be included
in determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
At September 30, 1997, The Association's classified assets consisted of
special mention loans of $621,197, substandard loans of $1,051,991, and doubtful
loans of $0.00. A $861,170 general reserve allowance was established for both
classified and unclassified assets. Assets classified as "loss" totaled $15,700
with a $15,700 specific reserve established. The Association had delinquent
loans of 60 days or more of $246,455.
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, 1997, 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.
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.
Impaired loans, including all loans that are restructured in a troubled
debt restructuring involving a modification of terms, are measured at the
present value of expected future cash flows discounted at the loan's initial
effective interest rate. The fair value of the collateral of an impaired
collateral-dependent loan or an observable market price, if one exists, may be
used as an alternative to discounting. If the measure of the impaired loan is
less than the recorded investment in the loan, impairment is recognized through
the allowance for loan losses. A loan is considered impaired when, based on
current information and events, it is probable that the Association will be
unable to collect all amounts due according to the contractual terms of the loan
agreement.
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.
9
<PAGE>
Allocation of Allowance for Loan. 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,
-----------------------------------------------------
1997 1996
------------------------ ------------------------
Percent of Percent of
Loans to Total Loans to Total
Amount Loans Amount Loans
------ --------------- ------ ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
At end of period allocated to:
One-to four-family residential
(includes held for sale) .... $726 89.11% $746 88.41%
Multi-family and commercial
real estate ................. 93 3.73% 102 5.07%
Construction ................. 3 2.07% 3 1.40%
Consumer and other loans ..... 39 5.09% 26 5.12%
---- ------ ---- ------
Total allowance .......... $861 100.00% $877 100.00%
==== ====== ==== ======
</TABLE>
Due to the size of the institution and the minimal amount of
non-performing loans (see - "Non-performing and Problem Assets") the percentage
of non-performing loans to allowance for loan losses will seem high. Movement of
even one loan into or out of non-performing status may result in a large
percentage change due to the size of the portfolio.
10
<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.
At September 30,
-----------------------
1997 1996
--------- ----------
(Dollars in Thousands)
-----------------------
Gross loans outstanding (1) .......................... $ 45,741 $ 44,362
======== ========
Average loans outstanding ............................ 45,267 43,435
======== ========
Allowance balance (at beginning of period) ........... $ 877 $ 962
-------- --------
Provision (credit):
Residential (2) .................................... (12) (54)
Commercial real estate ............................. (7) 26
Construction ....................................... 1 (2)
Non-mortgage and other (including land) ............ 18 34
-------- --------
Total Provision ...................................... -- 4
-------- --------
Charge-offs:
Residential (2) .................................... 12 5
Commercial real estate ............................. -- 2
Non-mortgage and other (including land) ............ 5 85
-------- --------
Total Charge-offs .................................... 17 92
-------- --------
Recoveries:
Residential (2) .................................... -- 2
Commercial real estate ............................. -- --
Non-mortgage and other (including land) ............ 1 1
-------- --------
Total Recoveries ..................................... 1 3
-------- --------
Allowance balance (at end of period) ................. $ 861 $ 877
======== ========
Allowance for loan losses as a percent of gross loans 1.88% 1.98%
Net loans charged off as a percentage of average loans
outstanding ....................................... 0.04% 0.21%
- ----------------
(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.
<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, 1997,
consisted primarily of certificates issued by FHLMC. To a lesser extent, the
mortgage-backed securities portfolio also contains certificates issued by Fannie
Mae and the Government National Mortgage Association ("GNMA"). As of September
30, 1997, the carrying value of mortgage-backed securities totaled $5.0 million,
or 7.39% of total assets. The market value of such securities totaled
approximately $5.1 million at September 30, 1997.
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, 1997, the Association had an
investment portfolio of approximately $16.0 million, consisting primarily of
U.S. government agency obligation, 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, 1997,
was $16.0 million which is 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.
12
<PAGE>
Investment Portfolio. The following table sets forth the carrying value of
the Association's investment securities portfolio, short-term investments, FHLB
stock, and mortgage-backed securities at the dates indicated.
At September 30,
----------------------
1997 1996
---------- ----------
(Dollars in Thousands)
Investment Securities:
U.S. Government Securities Held-to-Maturity . $ -- $ --
U.S. Government Securities Available-for-Sale 999 2,499
U.S. Agency Securities Held-to-Maturity ..... -- 1,750
U.S. Agency Securities Available-for-Sale ... 7,592 7,836
Certificates of Deposit ..................... 4,755 4,065
Mutual Funds ................................ 93 87
FHLMC Stock ................................. 1,866 436
FHLB Stock .................................. 651 651
------- -------
Total Investment Securities ............... 15,956 17,324
Mortgage-backed Securities Held-to-Maturity ... 2,650 3,479
Mortgage-backed Securities Available-for-Sale . 2,413 1,377
Interest Bearing Deposits (1) ................. 890 2,266
------- -------
Total Investments ......................... $21,909 $24,446
======= =======
- ----------------------
(1) Consisted of FHLB demand deposits and daily time deposits, considered cash
equivalents.
13
<PAGE>
Investment Portfolio Maturities. The following table sets forth certain
information regarding the carrying value, weighted average yields and maturities
of the Association's investment securities portfolio at September 30, 1997.
<TABLE>
<CAPTION>
As of September 30, 1997
-----------------------------------------------------------------------------------------------
One Year One to Five to More than Total
or Less Five Years Ten Years Ten Years Investment Securities
----------------- ----------------- ---------------- ----------------- -----------------------
Carrying Average Carrying Average Carryig Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
-------- ------- -------- ------- ------- ------- -------- ------- -------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government obligations
held-to-maturity................... $ -- --% $ -- --% $ -- --% $ -- --% $ -- --% $ --
U.S. Government obligations
available-for-sale ................ 999 5.45 -- -- -- -- -- -- 999 5.45 999
U.S. Agency obligations held-to-
maturity .......................... -- -- -- -- -- -- -- -- -- -- --
U.S. Agency obligations
available-for-sale ................ 4,216 5.97 2,529 6.75 502 8.78 346 7.20 7,593 6.47 7,592
Other Securities (1) .............. 5,640 5.94 97 6.25 -- -- -- -- 5,737 5.95 5,738
FHLB stock (2) .................... n/a n/a n/a n/a n/a n/a n/a n/a 651 7.00 651
FHLMC stock, available-for-sale (3) n/a n/a n/a n/a n/a n/a n/a n/a 1,866 -- 1,866
Mortgage-backed securities
held-to-maturity .................. 630 6.05 611 8.42 222 7.58 1,187 8.92 2,650 8.01 2,715
Mortgage-backed securities
available-for-sale ................ 717 6.50 497 5.05 555 6.95 644 6.38 2,413 6.27 2,413
------- ---- ------- ---- ------- ---- ------ ---- ------- ---- -------
Total ........................... $12,202 5.95% $ 3,734 6.78% $ 1,279 7.78% $2,177 7.90% $21,909 6.47% $21,974
======= ==== ======= ==== ======= ==== ====== ==== ======= ==== =======
</TABLE>
- ---------------------
(1) Consists of Certificates of Deposit and other interest-bearing deposits.
(2) As of September 30, 1997, FHLB stock paid a return of 7.00%.
(3) FHLMC stock noninterest earning market value only.
14
<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 $18.9 million, or 34.3% of the Association's deposit portfolio at
September 30, 1997. Certificates of deposit constituted $36.3 million or 65.7%
of the deposit portfolio. As of September 30, 1997, 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, 1997.
Maturity Period Certificates of Deposit
- -------------------------- -----------------------
(In Thousands)
-----------------------
Within three months ..... $ 1,029
Three through six months 100
Six through twelve months 926
Over twelve months ...... 434
-------------
Total ................ $ 2,489
=============
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, 1997, the Association had no advances
outstanding from the FHLB of Des Moines. As of September 30, 1997, the
Association had no other borrowings.
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, 1997, the Association was authorized to invest up to
approximately $1.4 million in the stock of, or loan to, service corporations
(based upon the 2% limitation). At September 30, 1997, the Association had no
subsidiaries.
15
<PAGE>
Personnel
As of September 30, 1997, the Association had 19 full-time and 2
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
appropriate federal regulatory agency before acquiring control of any other
insured institution. Such acquisitions are generally prohibited if they result
in a multiple savings and loan holding company controlling savings associations
in more than one state. However, such interstate acquisitions are permitted
based on specific state authorization or in a supervisory acquisition of a
failing savings association.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally insured
savings institution without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition. In
addition, no company may acquire control of such an institution without prior
OTS approval.
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.
16
<PAGE>
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, 1997, SAIF members paid within a range of
0 cents to 27 cents per $100 of domestic deposits, depending upon the
institution's risk classification. This risk classification is based on an
institution's capital group and supervisory subgroup assignment. Pursuant to the
Economic Growth and Paperwork Reduction Act of 1996 (the "Act"), the 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 has
reduced the premium for deposit insurance to a level necessary to maintain the
SAIF at its required reserve level.
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,
1997, the Association's Fico Bond premium will be approximately $35,000 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
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.
17
<PAGE>
As shown below, the Association's regulatory capital exceeded all
minimum regulatory capital requirements applicable to it as of September 30,
1997:
At September 30, 1997
----------------------------------
Percentage of
Amount Adjusted Assets
------------- ---------------
GAAP Capital $11,998,136 17.50%
=========== =====
Tangible Capital: (1)
Regulatory requirement $ 1,000,434 1.50%
Actual capital 10,886,680 16.32%
----------- -----
Excess $ 9,886,246 14.82%
=========== =====
Core Capital: (1)
Regulatory requirement $ 2,000,868 3.00%
Actual capital 10,886,680 16.32%
----------- -----
Excess $ 8,885,812 13.32%
=========== =====
Risk-Based Capital: (2)
Regulatory requirement $ 2,729,569 8.00%
Actual capital 11,318,542 33.17%
----------- -----
Excess $ 8,588,973 25.17%
=========== =====
(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 $34,119,617.
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 distributions ("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, 1997, the Association was a Tier 1 institution. In the event the
18
<PAGE>
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, 1997, 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. In addition, a savings association may not lend to any affiliate
engaged in activities not permissible for a bank holding company or acquire the
securities of any affiliate that is not a subsidiary. The OTS has the discretion
to treat subsidiaries of savings associations as affiliates on a case-by-case
basis.
Liquidity Requirements. All savings associations are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At September 30, 1997, the 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, 1997, 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, 1997, the Association was in compliance with these requirements.
19
<PAGE>
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 $1.44 million with a net book
value of $806,900 at September 30, 1997.
(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 asset 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.
(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 - Regulations 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, 1997.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- --------------------------------------------------------------------------------
Matters
- -------
The information contained under the section captioned "Stock Market
Information" in the Company's Annual Report to Stockholders for the fiscal year
ended September 30, 1997 (the "Annual Report"), is incorporated herein by
reference.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
The required information is contained in the section captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Annual Report and is incorporated herein by reference.
20
<PAGE>
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 17 of the 1997 Annual Report is
hereby incorporated by reference.
Item 8. Changes in and Disagreements With Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
- --------------------
Not Applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
- --------------------------------------------------------------------------------
with Section 16(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.
21
<PAGE>
Item 13. Exhibits, List and Reports on Form 8-K
- ------------------------------------------------
(a) Exhibits are either attached as part of this Report or incorporated herein
by reference.
3.1 Articles of Incorporation of Mississippi View Holding Company*
3.2 Amended Bylaws of Mississippi View Holding Company
10.1 Employment contract with Thomas J. Leiferman*
10.2 Management Stock Bonus Plan**
10.3 1995 Stock Option Plan**
10.4 1997 Stock Option Plan***
11 Statement regarding computation of earnings per share
13 Annual Report to Stockholders for the fiscal year ended
September 30, 1997.
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).
*** Incorporated by reference to the Registrant's proxy statement for the annual
meeting of stockholders held January 22, 1997 and filed with the SEC on
December 16, 1997 (File No. 0-25546).
****Only in electronic filing.
<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 10, 1997 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: /s/ Wallace R. Mattock
----------------------------------- ----------------------------------
Thomas J. Leiferman Wallace R. Mattock
President, Chief Executive Officer, Chairman of the Board
and Director
Date: December 10, 1997 Date: December 10, 1997
By: /s/ Neil Adamek By: /s/ Peter Vogel
----------------------------------- ----------------------------------
Neil Adamek Peter Vogel
Director Director
Date: December 10, 1997 Date: December 10, 1997
By: /s/ Gerald Peterson
-----------------------------------
Gerald Peterson
Director
Date: December 10, 1997
By: /s/ Larry D. Hartwig
-----------------------------------
Larry D. Hartwig
Vice President (Principal Financial and
Accounting Officer)
Date: December 10, 1997
MISSISSIPPI VIEW HOLDING COMPANY
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the Twelve Months
Ended September 30,
---------------------
1997 1996
---------- ---------
<S> <C> <C>
Net Income ..................................................... $739,715 $558,768
======== ========
Weighted Average Shares Outstanding ............................ 746,484 851,025
Common stock equivalents due to dilutive effect of stock options 26,970 1,587
-------- --------
Total weighted average common shares and equivalents outstanding 773,454 852,612
======== ========
Primary Earnings Per Share ..................................... $ 0.96 $ 0.66
======== ========
Weighted Average Shares Outstanding ............................ 746,484 851,025
Additional dilutive shares using end of period
market value versus average market value for
period when utilizing the treasury stock method
regarding stock options ...................................... 54,005 10,870
-------- --------
Total weighted average common shares and equivalents outstanding
for fully diluted computation ................................ 800,489 861,895
======== ========
Fully diluted earnings per share ............................... $ 0.92 $ 0.65
======== ========
</TABLE>
Earnings per share of common stock for the twelve month periods ended September
30, 1996 and 1997, have been determined by dividing net income for the period by
the weighted average number of shares of common stock outstanding, net of
unearned ESOP shares.
24
Exhibit 3.2
<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
MISSISSIPPI VIEW HOLDING COMPANY
ARTICLE I
Home Office
The home office of Mississippi View Holding Company (the "Corporation")
shall be at 35 East Broadway, City of Little Falls, County of Morrison, in the
State of Minnesota. The Corporation may also have offices at such other places
within or without the State of Minnesota as the board of directors shall from
time to time determine.
ARTICLE II
Stockholders
SECTION 1. Place of Meetings. All annual and special meetings of
stockholders shall be held at the home office of the Corporation or at such
other place within or without the State of Minnesota as the board of directors
may determine and as designated in the notice of such meeting.
SECTION 2. Annual Meeting. A meeting of the stockholders of the
Corporation for the election of directors and for the transaction of any other
business of the Corporation shall be held annually at such date and time as the
board of directors may determine.
SECTION 3. Special Meetings. Special meetings of the stockholders for any
purpose or purposes may be called at any time by the majority of the board of
directors, the chief executive officer or the president, and only such persons
as are specifically permitted to call meetings by the Minnesota Business
Corporation Act in accordance with the provisions of the Corporation's Articles
of Incorporation.
SECTION 4. Conduct of Meetings. Annual and special meetings shall be
conducted in accordance with the rules and procedures established by the board
of directors. The board of directors shall designate, when present, either the
chairman of the board or president to preside at such meetings.
SECTION 5. Voting. At each election for directors every stockholder
entitled to vote at such election shall be entitled to one vote for each share
of stock held by him. Unless otherwise provided in the Articles of
Incorporation, by Statute, or by these Bylaws, a majority of those votes cast by
stockholders at a lawful meeting shall be sufficient to pass on a transaction or
matter.
SECTION 6. Notice of Meetings. Written notice stating the place, day and
hour of the meeting and the purpose or purposes for which the meeting is called
shall be mailed by the secretary or the officer performing his duties, not less
than ten days nor more than sixty days before the meeting to each stockholder of
record entitled to vote at such meeting. If mailed, such notice shall be deemed
to be delivered when deposited in the United States mail, addressed to the
stockholder at his address as it appears on the stock transfer books or records
of the Corporation as of the record date prescribed in Section 7 of this Article
II, with postage thereon prepaid. If a stockholder is present at a meeting, or
in writing waives notice thereof before or after the meeting, notice of the
meeting to such stockholder shall
<PAGE>
be unnecessary. When any stockholders' meeting, either annual or special, is
adjourned for 120 days, notice of the adjourned meeting shall be given as in the
case of an original meeting. It shall not be necessary to give any notice of the
time and place of any meeting adjourned for less than 120 days or of the
business to be transacted at such adjourned meeting, other than an announcement
at the meeting at which such adjournment is taken.
SECTION 7. Fixing of Record Date. For the purpose of determining
stockholders entitled to notice of or to vote at any meeting of stockholders, or
any adjournment thereof, or stockholders entitled to receive payment of any
dividend, or in order to make a determination of stockholders for any other
proper purpose, the board of directors shall fix in advance a date as the record
date for any such determination of stockholders. Such date in any case shall be
not more than sixty days, and in case of a meeting of stockholders, not less
than ten days prior to the date on which the particular action, requiring such
determination of stockholders, is to be taken. When a determination of
stockholders entitled to vote at any meeting of stockholders has been made as
provided in this section, such determination shall apply to any adjournment
thereof.
SECTION 8. Quorum. A majority of the outstanding shares of the Corporation
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of stockholders. If less than a majority of the outstanding shares
are represented at a meeting, a majority of the shares so represented may
adjourn the meeting from time to time without further notice. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. The stockholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
SECTION 9. Proxies. A shareholder may cast or authorize the casting of a
vote by filing a written appointment of a proxy with an officer of the
Corporation at or before the meeting at which the appointment is to be
effective. A written appointment of a proxy may be signed by the shareholder or
authorized by the shareholder by transmission of a telegram, cablegram, or other
means of electronic transmission, provided that the corporation has no reason to
believe that the telegram, cablegram, or other electronic transmission was not
authorized by the shareholder. Any reproduction of the writing or transmission
may be substituted or used in lieu of the original writing or transmission for
any purpose for which the original transmission could be used, provided that the
copy, facsimile telecommunication, or other reproduction is a complete and
legible reproduction of the entire original writing or transmission. Proxies
solicited on behalf of the management shall be voted as directed by the
stockholder or, in the absence of such direction, as determined by a majority of
the board of directors. No proxy shall be valid after eleven months from the
date of its execution unless otherwise provided in the proxy.
SECTION 10. Voting of Shares in the Name of Two or More Persons. When
ownership of stock stands in the name of two or more persons, in the absence of
written directions to the Corporation to the contrary, at any meeting of the
stockholders of the Corporation any one or more of such stockholders may cast,
in person or by proxy, all votes to which such ownership is entitled. In the
event an attempt is made to cast conflicting votes, in person or by proxy, by
the several persons in whose name shares of stock stand, the vote or votes to
which these persons are entitled shall be cast as directed by a majority of
those holding such stock and present in person or by proxy at such meeting, but
no votes shall be cast for such stock if a majority cannot agree.
- 2 -
<PAGE>
SECTION 11. Voting of Shares by Certain Holders. Shares standing in the
name of another corporation may be voted by any officer, agent or proxy as the
bylaws of such corporation may prescribe, or, in the absence of such provision,
as the board of directors of such corporation may determine. Shares held by an
administrator, executor, guardian trustee or conservator may be voted by him,
either in person or by proxy, without a transfer of such shares into his name.
Shares standing in the name of a receiver may be voted by such receiver, and
shares held by or under the control of a receiver may be voted by such receiver
without the transfer thereof into his name if authority to do so is contained in
an appropriate order of the court or other public authority by which such
receiver was appointed.
A stockholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the Corporation, nor
shares held by another corporation, if a majority of the shares entitled to vote
for the election of directors of such other corporation are held by the
Corporation, shall be voted at any meeting or counted in determining the total
number of outstanding shares at any given time for purposes of any meeting.
SECTION 12. Inspectors of Election. In advance of any meeting of
stockholders, the board of directors may appoint any persons, other than
nominees for office, as inspectors of election to act at such meeting or any
adjournment thereof. The number of inspectors shall be either one or three. If
the board of directors so appoints either one or three inspectors, that
appointment shall not be altered at the meeting. If inspectors of election are
not so appointed, the chairman of the board or the president may make such
appointment at the meeting. In case any person appointed as inspector fails to
appear or fails or refuses to act, the vacancy may be filled by appointment by
the board of directors in advance of the meeting or at the meeting by the
chairman of the board or the president.
Unless otherwise prescribed by applicable law, the duties of such
inspectors shall include: determining the number of shares of stock and the
voting power of each share, the shares of stock represented at the meeting, the
existence of a quorum, the authenticity, validity and effect of proxies;
receiving votes, ballots or consents; hearing and determining all challenges and
questions in any way arising in connection with the right to vote; counting and
tabulating all votes or consents; determining the result; and such acts as may
be proper to conduct the election or vote with fairness to all stockholders.
SECTION 13. Nominating Committee. The board of directors shall act as a
nominating committee for selecting the management nominees for election as
directors. Except in the case of a nominee substituted as a result of the death
or other incapacity of a management nominee, the nominating committee shall
deliver written nominations to the secretary at least twenty days prior to the
date of the annual meeting. Provided such committee makes such nominations, no
nominations for directors except those made by the nominating committee shall be
voted upon at the annual meeting unless other nominations by stockholders are
made in writing and delivered to the secretary of the Corporation in accordance
with the provisions of the Corporation's Articles of Incorporation.
- 3 -
<PAGE>
ARTICLE III
Board of Directors
SECTION 1. General Powers. The business and affairs of the Corporation
shall be under the direction of its board of directors. The board of directors
shall annually elect a president and a chief executive officer from among its
members and may also elect a chairman of the board from among its members. The
board of directors shall designate, when present, either of the chairman of the
board or president to preside at its meetings.
SECTION 2. Number, Term and Election. The board of directors shall consist
of five members and shall be divided into three classes as nearly equal in
number as possible. The members of each class shall be elected for a term of
three years and until their successors are elected or qualified. The board of
directors shall be classified in accordance with the provisions of the
Corporation's Articles of Incorporation. Directors are to be elected by a
plurality of votes cast by the shares entitled to vote in the election at a
meeting of stockholders at which a quorum is present. The board of directors may
increase the number of members of the board of directors but in no event shall
the number of directors be increased in excess of fifteen.
SECTION 3. Qualifications. Each Director of the Corporation must at all
times be a resident of the State of Minnesota and the beneficial owner of not
less than 100 shares of capital stock of the Corporation. For the purpose of
this section, "resident" means any natural person who occupies a dwelling within
Minnesota, has an intention to remain within Minnesota for a period of time
(manifested by establishing a physical, on-going, non-transitory presence within
Minnesota) and continues to reside in Minnesota for the term of his or her
directorship.
SECTION 4. Place of Meetings. All annual and special meetings of the board
of directors shall be held at the home office of the Corporation or at such
other place within or without the State in which the home office of the
Corporation is located as the board of directors may determine and as designated
in the notice of such meeting.
SECTION 5. Regular Meetings. A regular meeting of the board of directors
shall be held without other notice than this Bylaw at such time and date as the
board of directors may determine.
SECTION 6. Special Meetings. Special meetings of the board of directors
may be called by or at the request of the chairman of the board or president, or
by two-thirds of the directors. The persons authorized to call special meetings
of the board of directors may fix any place within or without the State of
Minnesota as the place for holding any special meeting of the board of directors
called by such persons.
Members of the board of directors may participate in special meetings by
means of conference telephone or similar communications equipment by which all
persons participating in the meeting can hear each other.
SECTION 7. Nominating Committee. The board of directors shall act as a
nominating committee for selecting the nominees for election as directors.
Except in the case of a nominee substituted as a result of the death or other
incapacity of a management nominee, the nominating committee shall deliver
written nominations to the secretary at least twenty days prior to the date of
the
- 4 -
<PAGE>
annual meeting. Provided such committee makes such nominations, no nominations
for directors except those made by the nominating committee shall be voted upon
at the annual meeting unless other nominations by stockholders are made in
writing and delivered to the secretary of the Corporation in accordance with the
provisions of the Corporation's Articles of Incorporation.
SECTION 8. Notice. Written notice of any special meeting shall be given to
each director at least two days previous thereto delivered personally or by
telegram or at least five days previous thereto delivered by mail at the address
at which the director is most likely to be reached. Such notice shall be deemed
to be delivered when deposited in the United States mail so addressed, with
postage thereon prepaid if mailed or when delivered to the telegraph company if
sent be telegram. Any director may waive notice of any meeting by a writing
filed with the secretary. The attendance of a director at a meeting shall
constitute a waiver of notice of such meeting, except where a director attends a
meeting for the express purpose of objecting to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any meeting of the board of directors need
be specified in the notice or waiver of notice of such meeting.
SECTION 9. Quorum. A majority of the number of directors fixed by Section
2 of Article III shall constitute a quorum for the transaction of business at
any meeting of the board of directors, but if less than such majority is present
at a meeting, a majority of the directors present may adjourn the meeting from
time to time. Notice of any adjourned meeting shall be given in the same manner
as prescribed by Section 8 of Article III.
SECTION 10. Manner of Acting. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the board
of directors, unless a greater number is prescribed by these Bylaws, the
Articles of Incorporation, or the laws of Minnesota.
SECTION 11. Action Without a Meeting. Any action required or permitted to
be taken by the board of directors at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the directors.
SECTION 12. Resignation. Any director may resign at any time by sending a
written notice of such resignation to the home office of the Corporation
addressed to the chairman of the board or president. Unless otherwise specified
herein such resignation shall take effect upon receipt thereof by the chairman
of the board or president.
SECTION 13. Vacancies. Any vacancy occurring in the board of directors
shall be filled in accordance with the provisions of the Corporation's Articles
of Incorporation. Any directorship to be filled by reason of an increase in the
number of directors may be filled by the affirmative vote of two-thirds of the
directors then in office. The term of such director shall be in accordance with
the provisions of the Corporation's Articles of Incorporation.
SECTION 14. Removal of Directors. Any director or the entire board of
directors may be removed for cause and then only in accordance with the
provisions of the Corporation's Articles of Incorporation.
SECTION 15. Compensation. Directors, as such, may receive a stated fee for
their services. By resolution of the board of directors, a reasonable fixed sum,
and reasonable expenses of attendance, if any, may be allowed for actual
attendance at each regular or special meeting of the board of directors.
- 5 -
<PAGE>
Members of either standing or special committees may be allowed such
compensation for actual attendance at committee meetings as the board of
directors may determine. Nothing herein shall be construed to preclude any
director from serving the Corporation in any other capacity and receiving
remuneration therefor.
SECTION 16. Presumption of Assent. A director of the Corporation who is
present at a meeting of the board of directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless
his dissent or abstention shall be entered in the minutes of the meeting or
unless he shall file his written dissent to such action with the person acting
as the secretary of the meeting before the adjournment thereof or shall forward
such dissent by registered mail to the secretary of the Corporation immediately
after the adjournment of the meeting. Such right to dissent shall not apply to a
director who votes in favor of such action.
ARTICLE IV
Committees of the Board of Directors
The board of directors may, by resolution passed by a majority of the
whole board, designate one or more committees, as they may determine to be
necessary or appropriate for the conduct of the business of the Corporation, and
may prescribe the duties, constitution and procedures thereof. Each committee
shall consist of one or more directors of the Corporation. The board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee.
The board of directors shall have power, by the affirmative vote of a
majority of the authorized number of directors, at any time to change the
members of, to fill vacancies in, and to discharge any committee of the board.
Any member of any such committee may resign at any time by giving notice to the
Corporation provided, however, that notice to the board, the chairman of the
board, the chairman of such committee, or the secretary shall be deemed to
constitute notice to the Corporation. Such resignation shall take effect upon
receipt of such notice or at any later time specified therein; and, unless
otherwise specified therein, acceptance of such resignation shall not be
necessary to make it effective. Any member of any such committee may be removed
at any time, either with or without cause, by the affirmative vote of a majority
of the authorized number of directors at any meeting of the board called for
that purpose.
ARTICLE V
Officers
SECTION 1. Positions. The officers of the Corporation shall be a
president, a chief executive officer, one or more vice presidents, a secretary
and a treasurer, each of whom shall be elected by the board of directors. The
offices of the secretary and treasurer may be held by the same person and a vice
president may also be either the secretary or the treasurer. The board of
directors may designate one or more vice presidents as executive vice president
or senior vice president. The board of directors may designate the treasurer as
chief financial officer. The board may designate the president as chief
executive officer. The board of directors may also elect or authorize the
appointment of such other officers as the business of the Corporation may
require. The officers shall have such authority and perform such duties as the
board of directors may from time to time authorize or determine. In the
- 6 -
<PAGE>
absence of action by the board of directors, the officers shall have such powers
and duties as generally pertain to their respective offices.
SECTION 2. Election and Term of Office. The officers of the Corporation
shall be elected annually by the board of directors at the first meeting of the
board of directors held after each annual meeting of the stockholders. If the
election of officers is not held at such meeting, such election shall be held as
soon thereafter as possible. Each officer shall hold office until his successor
shall have been duly elected and qualified or until his death or until he shall
resign or shall have been removed in the manner hereinafter provided. Election
or appointment of an officer, employee or agent shall not of itself create
contract rights. The board of directors may authorize the Corporation to enter
into an employment contract with any officer in accordance with state law; but
no such contract shall impair the right of the board of directors to remove any
officer at any time in accordance with Section 3 of this Article V.
SECTION 3. Removal. Any officer may be removed by vote the vote of the
majority of the board of directors whenever, in its judgment, the best interests
of the Corporation will be served thereby, but such removal, other than for
cause, shall be without prejudice to the contract rights, if any, of the person
so removed.
SECTION 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be filled by the board
of directors for the unexpired portion of the term.
SECTION 5. Remuneration. The remuneration of the officers shall be fixed
from time to time by the board of directors and no officer shall be prevented
from receiving such salary by reason of the fact that he is also a director of
the Corporation.
ARTICLE VI
Contracts, Loans, Checks and Deposits
SECTION 1. Contracts. To the extent permitted by applicable law, and
except as otherwise prescribed by the Articles of Incorporation or these Bylaws
with respect to certificates for shares, the board of directors may authorize
any officer, employee, or agent of the Corporation to enter into any contract or
execute and deliver any instrument in the name of and on behalf of the
Corporation. Such authority may be general or confined to specific instances.
SECTION 2. Loans. No loans shall be contracted on behalf of the
Corporation and no evidence of indebtedness shall be issued in its name unless
authorized by the board of directors. Such authority may be general or confined
to specific instances.
SECTION 3. Checks, Drafts, Etc. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the Corporation shall be signed by one or more officers, employees or agents of
the Corporation in such manner as shall from time to time be determined by
resolution of the board of directors.
SECTION 4. Deposits. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in any of
its duly authorized depositories as the board of directors may select.
- 7 -
<PAGE>
ARTICLE VII
Certificates for Shares and Their Transfer
SECTION 1. Certificates for Shares. The shares of the Corporation shall be
represented by certificates signed by the chairman of the board of directors, by
the president or vice president, by the treasurer/chief financial officer or by
the secretary of the Corporation, and may be sealed with the seal of the
Corporation or a facsimile thereof. Any or all of the signatures upon a
certificate may be facsimiles if the certificate is countersigned by a transfer
agent, or registered by a registrar, other than the Corporation itself or an
employee of the Corporation. If any officer who has signed or whose facsimile
signature has been placed upon such certificate shall have ceased to be such
officer before the certificate is issued, it may be issued by the Corporation
with the same effect as if he were such officer at the date of its issue.
SECTION 2. Form of Share Certificates. All certificates representing
shares issued by the Corporation shall set forth upon the face or back that the
Corporation will furnish to any shareholder upon request and without charge a
full statement of the designations, preferences, limitations, and relative
rights of the shares of each class authorized to be issued, the variations in
the relative rights and preferences between the shares of each such series so
far as the same have been fixed and determined, and the authority of the board
of directors to fix and determine the relative rights and preferences of
subsequent series.
Each certificate representing shares shall state upon the face thereof:
that the Corporation is organized under the laws of the State of Minnesota; the
name of the person to whom issued; the number and class of shares; the date of
issue; the designation of the series, if any, which such certificate represents;
the par value of each share represented by such certificate, or a statement that
the shares are without par value. Other matters in regard to the form of the
certificates shall be determined by the board of directors.
SECTION 3. Payment for Shares. No certificate shall be issued for any
shares until such share is fully paid.
SECTION 4. Form of Payment for Shares. The consideration for the issuance
of shares shall be paid in accordance with the provisions of Minnesota law.
SECTION 5. Transfer of Shares. Transfer of shares of capital stock of the
Corporation shall be made only on its stock transfer books. Authority for such
transfer shall be given only by the holder of record thereof or by his legal
representative, who shall furnish proper evidence of such authority, or by his
attorney thereunto authorized by power of attorney duly executed and filed with
the Corporation. Such transfer shall be made only on surrender for cancellation
of the certificate for such shares. The person in whose name shares of capital
stock stand on the books of the Corporation shall be deemed by the Corporation
to be the owner thereof for all purposes.
SECTION 6. Stock Ledger. The stock ledger of the Corporation shall be the
only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Minnesota law or the books of the Corporation, or
to vote in person or by proxy at any meeting of stockholders.
- 8 -
<PAGE>
SECTION 7. Lost Certificates. The board of directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. When authorizing such issue of a new certificate,
the board of directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen, or destroyed
certificate, or his legal representative, to give the Corporation a bond in such
sum as it may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost, stolen,
or destroyed.
SECTION 8. Beneficial Owners. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and shall not be
bound to recognize any equitable or other claim to or interest in such shares on
the part of any other person, whether or not the Corporation shall have express
or other notice thereof, except as otherwise provided by law.
ARTICLE VIII
Fiscal Year; Annual Audit
The fiscal year of the Corporation shall end on the last day of September
of each year. The Corporation shall be subject to an annual audit as of the end
of its fiscal year by independent public accountants appointed by and
responsible to the board of directors.
ARTICLE IX
Dividends
Subject to the provisions of the Articles of Incorporation and applicable
law, the board of directors may, at any regular or special meeting, declare
dividends on the Corporation's outstanding capital stock. Dividends may be paid
in cash, in property or in the Corporation's own stock.
ARTICLE X
Corporate Seal
The corporate seal of the Corporation shall be in such form as the board
of directors shall prescribe.
ARTICLE XI
Amendments
The Bylaws may be altered, amended or repealed or new Bylaws may be
adopted in the manner set forth in the Articles of Incorporation.
As amended and restated on August 19, 1997
- 9 -
MISSISSIPPI VIEW HOLDING COMPANY
1997 ANNUAL REPORT
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------------------
<S> <C>
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........................................... 17
Report of Independent Auditors.............................................. 18
Consolidated Financial Statements........................................... 19
Notes to Consolidated Financial Statements.................................. 24
Office Locations............................................................ 40
Other Corporate Information................................................. 40
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================================
SELECTED FINANCIAL AND OTHER DATA
Financial Condition (Dollars in Thousands)
==============================================================================================================
September 30, 1997 1996 1995 1994 1993
==============================================================================================================
<S> <C> <C> <C> <C> <C>
Total assets (1) $68,546 $70,011 $69,443 $62,865 $64,995
Loans receivable, net 44,475 43,070 42,989 44,226 44,712
Loans held for sale 136 179 58 93 241
Mortgage-backed securities 5,064 4,857 4,750 3,123 4,248
Investment securities (1) 15,956 17,323 16,745 11,549 10,383
Cash and cash equivalents (1) 1,105 2,584 2,837 1,732 3,950
Deposits 55,184 56,531 54,920 56,402 58,873
Other borrowings -- -- -- -- --
Net retained earnings (substantially restricted) (2) 8,848 7,320 6,832 5,869 5,495
Total stockholders equity (1) 12,068 12,440 13,783 n/a n/a
Summary of Operations (Dollars in Thousands)
==============================================================================================================
Year Ended September 30, 1997 1996 1995 1994 1993
==============================================================================================================
Interest income $ 5,165 $ 5,173 4,860 4,233 4,803
Interest expense 2,502 2,531 2,234 2,065 2,577
Net interest income 2,663 2,642 2,626 2,168 2,226
Provision for credit losses -- 4 26 144 90
Non-interest income 202 351 215 155 303
Non-interest expense (3) 1,667 2,056 1,468 1,502 1,325
Income before income taxes and cumulative effect of
change in accounting principle 1,198 933 1,347 677 1,114
Income tax expense 458 374 519 302 309
Income before cumulative effect of change in
accounting principle 740 559 828 375 805
Cumulative effect of change in accounting principle -- -- -- -- --
Net income 740 559 828 375 805
Other Selected Data
==============================================================================================================
Year Ended September 30, 1997 1996 1995 1994 1993
==============================================================================================================
Return on average assets 1.08% 0.80% 1.25% 0.59% 1.22%
Return on average equity 6.18 4.23 8.02 6.47 15.81
Average interest earning assets to average interest
bearing liabilities (1) 123.24 124.24 118.99 109.87 108.23
Average equity to average assets (1) 17.53 19.01 15.52 9.05 7.73
Net interest rate spread 3.10 2.98 3.38 3.10 3.09
Net interest income after provision for loan losses to
total other expenses (1) 159.70 128.32 177.04 134.74 161.16
Earnings per share (4) $ 0.96 $ 0.66 $ 0.89 n/a n/a
Book value per share (4) $ 16.30 $ 14.17 413.67 n/a n/a
Stockholders equity to assets at period end (1) 17.61% 17.77% 19.85% 9.34 8.45
Non-performing assets to total assets 0.34 0.07 0.11 0.18 0.35
Non-performing loans to total loans 0.52 0.11 0.11 0.21 0.16
Allowance for loan losses to total loans 1.93 2.03 2.23 2.27 1.88
</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 year ended September 30, 1997 Annual Report of
Mississippi View Holding Company reflecting our second full year of operation as
a stock company.
Fiscal 1997 earnings were significantly greater than fiscal 1996 earnings
resulting mainly from the payment of a one time Savings Association Insurance
Fund ("SAIF") special assessment charged to Community Federal Savings and Loan
Association in fiscal 1996. In addition, the interest rate spread, the
difference between the average yield on interest-earning assets and the average
cost of interest-bearing liabilities, increased in fiscal 1997 to 3.10% from
2.98% in fiscal 1996.
As of September 30, 1997, Mississippi View Holding Company had repurchased
approximately 27% of the stock it sold in its initial offering and over the past
year the company's asset size was reduced resulting from these expenditures.
Stock repurchases have been made to move toward a capital level which provides a
more adequate return to shareholders. Future repurchases, if any, will be
subject to the availability of stock, market conditions, trading price,
financial performance and other considerations. In addition, the company paid
two semi-annual dividends of $0.08 per share in fiscal 1997. Future dividends,
if any, will be based on the continued successful operation of the company.
Community Federal continues to significantly exceed all minimum federal
regulatory capital requirements.
Mississippi View Holding Company's board of directors and staff are dedicated to
providing quality service to our customers. Our focus will continue to be
filling the financial needs of our customers by marketing and selling
competitively priced products and services. We are well positioned to meet
tomorrow's challenges and look forward to an optimistic future.
Sincerely,
/s/ Thomas J. Leiferman
Thomas J. Leiferman
President & 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.
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.
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 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.
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
4
<PAGE>
loans. The Association also makes consumer loans, consisting of savings account
loans, home improvement loans, home equity line of credit loans, new and used
auto loans, recreational vehicle loans, and unsecured loans. As of September 30,
1997, the Association's total net portfolio of loans was $44.6 million, of which
$36.1 million, or 81%, 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. 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
First Quarter - 12/31/96 12 3/4 11 3/4
Second Quarter - 3/31/97 15 1/2 12 1/4
Third Quarter - 6/30/97 15 5/8 14
Fourth Quarter - 9/30/97 17 1/2 14 1/2
The number of shareholders of record of common stock as of the record date of
December 1, 1997, was approximately 199. 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, 1997, there were 740,243 shares outstanding.
Semi-annual cash dividends of $0.08/share were paid on February 17, 1997, and
August 15, 1997, to the shareholders of common stock on the record dates of
February 3, 1997, and August 1, 1997, 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.
Asset/Liability 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 consumer lending and on
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 decrease this past fiscal year. Disintermediation of
deposits continues to be a constant challenge. 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. 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 mortgage and
consumer 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
adjustable-rate mortgage loans, 15 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.
Market Risk Management
Market risk is the risk of loss arising from adverse changes in market prices
and rates. The Association's market risk is comprised primarily of interest rate
risk resulting from its core banking activities of lending and deposit taking.
Interest rate risk is the risk that changes in market interest rates might
adversely affect the Association's net interest income or the economic value of
its portfolio of assets, liabilities and off-balance sheet contracts. Management
continually develops and applies strategies to mitigate this risk. Management
does not believe that the Association's primary market risk exposures and how
those exposures are managed in fiscal 1997 have changed when compared to fiscal
1996. Market risk limits have been established by the Board of Directors based
on the Association's tolerance for risk.
The Association primarily relies on the OTS Net Portfolio Value Model (the
Model) to measure its susceptibility to interest rate changes. Net portfolio
value (NPV) is defined as the present value of expected cash flows from existing
assets minus the present value of expected net cash flows from existing
liabilities plus or minus the present value of net expected cash flows from
existing off-balance sheet contracts. The Association does not currently own any
derivative financial instruments whose values are determined from underlying
instruments or market indices and whose notional or contractual amounts would
not be recognized in the financial statements. The Model estimates the current
economic value of each type of asset, liability, and off-balance sheet contract
after various assumed instantaneous, parallel shifts in the Treasury yield curve
both upward and downward.
The NPV Model uses an option-based pricing approach to value one-to four-family
mortgages, mortgages serviced by others, and firm commitments to buy, sell, or
originate mortgages. This approach makes use of an interest rate simulation
program to generate numerous random interest rate paths that, in conjunction
with a prepayment model, are used to estimate mortgage cash flows. Prepayment
options and interest rate caps and floors contained in mortgages and
mortgage-related securities introduce significant uncertainty in estimating the
timing of cash flows for these instruments that warrants the use of this
sophisticated methodology. All other financial instruments are valued using a
static discounted cash flow method. Under this approach, the present value is
determined by discounting the cash flows the instrument is expected to generate
by the yields currently available to investors from an instrument of comparable
risk and duration.
The following table sets forth the present value estimates of the Association at
September 30, 1997, as calculated by its NPV Model. The table shows the NPV of
the Association under rate shock
7
<PAGE>
scenarios of -400 basis points to +400 basis points in increments of 100 basis
points. As market rates increase, the market value of the Association's large
portfolio of mortgage loans and securities declines significantly and
prepayments are slow. As rates decrease, the market value of mortgage loans and
securities increase only modestly due to prepayment risk, periodic rate caps,
and other embedded options. Actual changes in market value will differ from
estimated changes set forth in this table due to various risks and
uncertainties.
<TABLE>
<CAPTION>
Change Percent of Change in
Interest Rates Estimated Amount of Estimated NPV NPV Ratio (4)
(basis points) NPV Change (1) NPV (2) Ratio (3) (basis points)
- -------------- --------- ----------- --------- --------- --------------
<S> <C> <C> <C> <C> <C>
+ 400 $11,684 $(2,722) - 19% 17.46% -299
+ 300 12,563 (1,843) - 13% 18.48% -197
+ 200 13,347 (1,059) - 7% 19.35% -110
+ 100 13,983 (423) - 3% 20.03% - 42
- 14,406 -- -- 20.45% --
- 100 14,608 203 + 1% 20.61% + 16
- 200 14,896 491 + 3% 20.86% + 41
- 300 15,304 898 + 6% 21.24% + 79
- 400 15,859 1,453 + 10% 21.76% +131
</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.
Savings associations are subject to an interest rate risk ("IRR") component in
calculating their required regulatory capital. 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. The following table as computed by the
OTS determined that the Association had no IRR modification required to its
regulatory capital requirement.
<TABLE>
<CAPTION>
At September 30, 1997 At September 30, 1996
--------------------- ---------------------
<S> <C> <C>
Risk Measures: 200 bp rate shock
Pre-Shock NPV Ratio: NPV as % of PV of Assets 20.45% 17.24%
Exposure Measure: Post-Shock NPV Ratio 19.35% 16.15%
Sensitivity Measure: Change in NPV Ratio - 110 bp -109 bp
Calculation of Capital Component
Change in NPV as % of PV of Assets - 1.50% - 1.43%
Interest Rate Risk Capital Component ($000) - -- - --
</TABLE>
8
<PAGE>
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.
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, 1996 to September 30, 1997
General. The Company decreased assets by $1,464,369 from September 30, 1996, to
September 30, 1997. The asset decrease was primarily the net result of using
liquidity from maturing, held to maturity securities of $1,888,626 and cash and
cash equivalents of $1,479,060 to fund the increase in loans receivable of
$1,404,528 and to purchase treasury stock of $2,068,422.
Cash and Cash Equivalents. Cash and cash equivalents, which consist of
interest-bearing and noninterest-bearing deposits, decreased $1,479,060 or
57.25%. This decrease was primarily due to the purchase of treasury stock during
the fiscal year ended September 30, 1997.
Securities available-for-sale. Securities available-for-sale increased $728,199,
or 5.95%, from $12,235,145 on September 30, 1996, to $12,963,344 on September
30, 1997. Maturities and principal receipts of $6,074,554 exceeded purchases of
$5,311,916 reducing the portfolio by $762,638. This decrease in the portfolio
was offset by an increase in the net unrealizable gain on these securities of
$1,512,110 of which $995,958 was due to an error in the recorded number of
shares of stock of the Federal Home Loan Mortgage Corporation (FHLMC) owned by
the Association. The additional shares issued in a 3-for-1 stock split in fiscal
1992 were not recorded which resulted in the amount of stock owned being
understated by 8,792 shares. The market value adjustment had no effect on net
income or earnings per share but did have an effect on certain balance sheet
items and their corresponding ratios. Any increase or decrease in the market
value of such securities will have a corresponding positive or negative effect
on stockholders' equity.
Securities held-to-maturity. Debt and mortgage-backed securities
held-to-maturity decreased $1,888,626, or 20.32%, from $9,294,092 on September
30, 1996, to $7,405,466 on September 30, 1997. The decrease was primarily due to
maturities and principal receipts of $6,641,854 exceeding purchases of
$4,755,000.
9
<PAGE>
Loans Held for Sale. Loans held for sale decreased $43,113 from $178,663 (3
loans) at September 30, 1996, to $135,550 (2 loans) at September 30, 1997. This
decrease was 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 $1,404,528, or 3.26%, from
$43,070,281 on September 30, 1996, to $44,474,809 on September 30, 1997. The
increase was due from new originations exceeding principal amortization and loan
payoffs.
Premises and Equipment. Premises and equipment, net of depreciation, increased
$18,054 due to purchases of new assets exceeding normal depreciation amortized
on fixed assets.
Deferred Tax Asset. Deferred tax asset, net of valuation allowance, decreased
$163,903 during this twelve month period as a result of a tax deferred liability
being incurred due to the increase in the mark to market value of available for
sale securities.
Other Assets. Other assets decreased $27,669, or 4.65%, from $595,208 as of
September 30, 1996, to $567,539 as of September 30, 1997, due to the reduced
Federal Deposit Insurance Corporation (FDIC) prepaid assessment of $23,467.
Deposits. Deposits, after interest credited, decreased by $1,347,607, or 2.38%
to $55,183,587 at September 30, 1997, from $56,531,194 at September 30, 1996.
The decrease was due, in part, to management's deposit pricing strategy.
Advances from Borrowers for Taxes and Insurance. Advances from borrowers for
taxes and insurance decreased $31,492 from $138,530 on September 30, 1996 , to
$107,038 on September 30, 1997, due to a change in calculating the maximum
allowed advances from borrowers for taxes and insurance.
Accrued Income Tax. The income tax accrual increased by $66,352 between the two
periods due to an accrued income tax amount calculated for September 30, 1997.
The September 30, 1996, balance was classified as a prepaid asset because the
estimated tax payments exceeded the accrual
Deferred Tax Liability. Deferred tax liability increased from $0.00 at September
30, 1996, to $525,353 on September 30, 1997, due primarily to the increase in
net unrealized gains on available for sale securities. See also "Securities
Available-for-Sale."
Other Liabilities. Other liabilities decreased by $304,634, or 33.82%, from
$900,850 on September 30, 1996, to $596,216 on September 30, 1997. The primary
reason for the decrease was the payment of the Savings Association Insurance
Fund (SAIF) assessment of $362,557 during the first quarter offset by increases
in accounts payable of $33,110, and a five year pledge/commitment of $26,250, of
which $20,250 is outstanding at September 30, 1997, to Unity Family
Healthcare/St. Gabriel's Hospital, a local healthcare/hospital facility, for
renovation and expansion.
10
<PAGE>
Shareholders' Equity. Shareholders' equity decreased by $372,341, or 2.99%, from
$12,440,245 on September 30, 1996, to $12,067,904 on September 30, 1997. This
decrease is the net effect of the following changes in equity: a paid in capital
increase of $29,821 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 $68,724 as a result of accounting for earned ESOP
shares; an increase of $907,266 resulting from market valuation adjustments on
available for sale securities; an increase of $739,715 from net operational
income for the twelve month period just ended; an increase of $69,458 as a
result of accounting for earned Management Stock Bonus Plan ("MSBP") shares; a
decrease of $2,068,422 resulting from open market purchases of the Company's
common stock pursuant to two stock repurchase programs, and a decrease to
retained earnings due to dividends declared and paid of $118,903.
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.
11
<PAGE>
<TABLE>
<CAPTION>
Average Balance Sheet
For the Year Ended September 30,
------------------------------------------------------------------------
1997 1996
-------------------------------------- --------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $45,267 $ 3,817 8.43% $43,435 $3,704 8.53%
Investment securities
available-for-sale 12,082 741 6.13% 10,050 576 5.73%
Investment securities
held-to-maturity (2) 7,779 521 6.70% 11,005 731 6.64%
Other interest-earning assets 1,922 86 4.47% 3,497 162 4.63%
------- ------- ------- -----
Total interest-earning assets 67,050 5,165 7.70% 67,987 5,173 7.61%
Non interest-earning assets 1,205 1,426
------- -------
Total assets $68,255 $69,413
======= =======
Interest-bearing liabilities:
Savings deposits $14,382 395 2.75% $13,922 330 2.37%
Transaction accounts 3,040 37 1.22% 3,251 37 1.14%
Time Deposit 36,985 2,070 5.60% 37,551 2,164 5.76%
------- ------- ------- -----
Total interest-bearing
liabilities 54,407 2,502 4.60% 54,724 2,531 4.63%
------- -----
Non interest-bearing liabilities:
Demand Deposits 1,173 827
Other non interest-bearing
liabilities 708 665
------- -------
Total liabilities 56,288 56,216
Shareholders equity 11,967 13,197
------- -------
Total liabilities and
shareholders equity $68,255 $ 69,413
======= ==========
Net interest income $ 2,663 $2,642
======= =====
Interest rate spread (3) 3.10% 2.98%
Net yield on interest-earning
assets (4) 3.97% 3.89%
Ratio of average
interest-earning assets to
average interest-bearing
liabilities 123.24% 124.24%
</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.
12
<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,
---------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
--------------------------------- --------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
--------------------------------- --------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
-------- ------ --------- ---- -------- ------ -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable (1) $ 156 $ (45) $ (2) $ 109 $ (76) $ 173 $ (4) $ 93
Securities available-
for- sale 116 40 8 164 235 64 74 373
Securities held-to-
maturity (214) 5 (2) (211) (154) (11) 2 (163)
Other interest-earning
assets (73) (6) 3 (76) 32 (19) (4) 9
----- ----- ----- ----- ----- ----- ----- -----
Total interest-earning assets (15) (6) 7 (14) 37 207 68 312
Interest Expense:
Savings accounts (15) (22) 0 (37) (3) 301 (0) 298
Other liabilities -- -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Total interest-
bearing liabilities (15) (22) 0 (37) (3) 301 (0) 298
----- ----- ----- ----- ----- ----- ----- -----
Net change in interest income $ 0 $ 16 $ 7 $ 23 $ 40 $ (94) $ 68 $ 14
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
(1) Loans are net of undisbursed commitments.
Comparison of Operating Results for the Years Ended September 30, 1996, and 1997
Net Income. Net income increased $180,947, or 32.38% from $558,768 on September
30, 1996 to $739,715 on September 30, 1997. Noninterest expense decreased
$388,428 and was offset by decreased noninterest income of $148,618 and
increased income tax expense of $83,762. The decrease in noninterest expense was
primarily due to a $362,557 charge connected with a one time special assessment
from the SAIF resulting from legislation that was signed into law on September
30, 1996, for the purpose of recapitalizing the SAIF.
Interest Income. Interest income decreased $8,503, or .16%, in the twelve month
period ended September 30, 1997, as compared to the same period ended September
30, 1996. Interest income from
13
<PAGE>
loans receivable increased $113,560 due to the increase in the average loan
balances offset somewhat by lower rates paid on such balances over the period
due to decreased market rates of interest. Available- for-sale security
investment income increased $211,869 due to the increase in the average
investment balance along with increased rate of return on these investments.
Held-to-maturity investment security income decreased $333,932 due to a decrease
in the average balance of such securities as maturities were not reinvested in
such investments.
Interest Expense: Interest expense, which is comprised of interest paid on
deposits, decreased $29,677, or 1.17%, for the twelve month comparative period
for September 30, 1996 and 1997. This decrease was primarily due to lower rates
paid on a lower average balance of certificate deposits during this period.
Net Interest Income. Net interest income increased $21,174, or 0.80%, from
$2,641,886 for the twelve month period ended September 30, 1996, to $2,663,060
for the same period ended September 30, 1997. This was due to the decreased
deposit interest expense ($29,677) offset by decreased revenue from interest
earned on the interest earning assets ($8,503). The Company's interest rate
spread improved from 2.98% to 3.10% as the yield earned on interest earning
assets increased while the cost of interest bearing deposits decreased.
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 from $3,725 at September 30, 1996, to no
provisions made for the twelve month period ending September 30, 1997. 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 decreased $148,618, or 42.38%, from
$350,678 at September 30, 1996, to $202,060 at September 30, 1997. This decrease
was primarily the result of a $81,023 contingency recovery in the first quarter
of fiscal 1996, a decrease of $56,770 in gains on the sale of loans, and a
payment for $11,900 received from the Association's previous data processor
recorded during the twelve months ended September 30, 1996. The contingency
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 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.
Noninterest Expense. Noninterest expense decreased by $388,428, or 18.89%, from
$2,055,971 to $1,667,543 during the twelve month periods ended September 30,
1996 and 1997, respectively. Compensation and employee benefits increased
$44,125 due primarily to director and employee compensation increases of $32,667
and ESOP expense increase of $11,124.
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
14
<PAGE>
the amount of the special assessment pursuant to the Act, the Association paid a
special assessment of $362,557 to recapitalize the SAIF in September 1996. The
Act, also, reduced the ongoing FDIC premium for deposit insurance by $74,018 for
the twelve month period.
Other increases in noninterest expenses were occupancy of $6,973, data
processing of $7,258, offset by a decrease in advertising for $3,586, real
estate owned expense for $3,638, and other noninterest expenses for $2,985.
Historically, date fields in computer software programs were programmed using
two digit characters to represent the year. Due to this practice, these software
applications, if not corrected prior to the year 2000, will interpret the year
as 1900 and not 2000. As a result, many calculations which rely on the date
field information, such as interest, payment or due dates and other operating
functions, will generate results which will be significantly misstated.
To prepare for this event and to minimize its potential adverse impact,
management has begun a process to identify areas that will be affected by this
issue, assess their potential impact on the operations of the Association,
monitor the progress of third party software vendors in addressing this matter,
testing changes provided by these vendors, and developing contingency plans for
any critical systems which are not effectively reprogrammed.
The Association's material data processing functions are performed using
software provided by a third party vendor. This company has advised its users
that it expects to resolve any potential problems prior to the year 2000. In
addition, this company will provide ongoing communication to its users to assist
them in implementing tests of the vendor's software. If this company is unable
to correct potential problems in time, or if tests should prove the proposed
corrections to be insufficient, it is likely that the Association would
experience significant data processing delays, errors or failures. Such delays,
errors or failures could have a significant adverse impact on the financial
condition and results of operations of the Association. In addition, monitoring
and managing the year 2000 project will result in additional direct and indirect
costs to the Association. Direct costs include potential charges by third party
software vendors for product enhancements, costs involved in testing software
products for year 2000 compliance, and any resulting costs for developing and
implementing contingency plans for critical software products which are not
enhanced. Indirect costs will principally consist of the time devoted by
existing employees in managing software vendor progress, testing enhanced
software products and implementing any necessary contingency plans. While such
direct costs cannot yet be reasonably estimated, these expenditures will be
charged to expense as incurred.
Income Tax Expense. Income tax expense increased $83,762, or 22.39%, from
$374,100 for the twelve months ended September 30, 1996, to $457,862 for the
twelve month period ended September 30, 1997, due to increased earnings.
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 20.93% during
September 1997. The OTS required short term liquidity is 1%; at September 30,
1997, the Association's short term liquidity was 16.17%. The Association manages
its liquidity ratio to meet its
15
<PAGE>
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, 1997, cash and cash equivalents
totaled $1.105 million.
The Association anticipates that it will have sufficient funds available to meet
its current commitments. As of September 30, 1997, the Association had
commitments to fund loans of $660,750, unused lines of credit of $1,292,196, and
loans in process of $309,781. Certificates of deposit scheduled to mature within
one year totaled $27.6 million at September 30, 1997. 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.
The Association is required by OTS to maintain various regulatory capital
requirements. At September 30, 1997, 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.
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.
16
<PAGE>
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 1997
- -------------------------
Total interest income $ 1,293 $ 1,285 $ 1,292 $ 1,295
Total interest expense 635 621 621 625
Net interest income 658 664 671 670
Provision for loan losses -- -- -- --
Net Income 173 174 208 185
Earnings per share $ 0.22 $ 0.22 $ 0.26 $ 0.24
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)
-17-
<PAGE>
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, 1997 and 1996, 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 conduced 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for the two years
then ended, in conformity with generally accepted accounting principles.
Bertram Cooper & Co., LLP
Waseca, Minnesota
October 29, 1997
18
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30,
----------------------------------------------
ASSETS 1997 1996
------ --------------------- ---------------------
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks $ 214,934 $ 317,777
Interest bearing deposits with banks 889,660 2,265,877
Securities available-for-sale, at fair value 12,963,344 12,235,145
Securities held-to-maturity, at amortized cost (fair value of
$7,470,314 for 1997 and $9,320,741 for 1996) 7,405,466 9,294,092
FHLB stock, at cost 650,700 650,700
Loans held for sale 135,550 178,663
Loans receivable, net of allowance for loan losses of
$861,170 in 1997 and $877,094 in 1996 44,474,809 43,070,281
Accrued interest receivable 437,548 450,327
Premises and equipment 806,900 788,846
Deferred tax asset (net of valuation allowance) - 163,903
Other assets 567,539 595,208
--------------------- ---------------------
Total Assets $ 68,546,450 $ 70,010,819
===================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Demand deposits $ 4,408,558 $ 4,471,137
Savings deposits 14,525,018 14,087,832
Time deposits 36,250,011 37,972,225
--------------------- ---------------------
Total deposits 55,183,587 56,531,194
Advances from borrowers for taxes and insurance 107,038 138,530
Accrued income taxes 66,352 -
Deferred tax liability 525,353 -
Other liabilities 596,216 900,850
--------------------- ---------------------
Total Liabilities 56,478,546 57,570,574
--------------------- ---------------------
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, 653,151 and 776,713 outstanding 100,799 100,799
Paid in capital 7,540,218 7,510,397
Treasury stock (267,749 and 130,278 shares), at cost (3,605,111) (1,536,689)
Retained earnings, substantially restricted 7,737,458 7,116,646
Unearned ESOP shares (58,463 and 66,527 shares) at cost (498,012) (566,736)
Unearned MSBP shares (28,629 and 34,474 shares) at cost (317,954) (387,412)
Net unrealized gain on available-for-sale securities, net
of tax of $740,337 in 1997 and $135,494 in 1996 1,110,506 203,240
--------------------- ---------------------
Total shareholders' equity 12,067,904 12,440,245
--------------------- ---------------------
Total liabilities and shareholders' equity $ 68,546,450 $ 70,010,819
===================== =====================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
19
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Year ended
September 30,
----------------------------------------
1997 1996
------------------- -------------------
Interest income:
<S> <C> <C>
Loans receivable $ 3,817,212 $ 3,703,652
Securities available-for-sale 740,781 528,912
Securities held-to-maturity 606,933 940,865
------------------- -------------------
Total interest income 5,164,926 5,173,429
------------------- -------------------
Interest expense:
Demand deposits 36,963 37,345
Savings deposits 394,811 330,357
Time deposits 2,070,092 2,163,841
------------------- -------------------
Total interest expense 2,501,866 2,531,543
------------------- -------------------
Net interest income 2,663,060 2,641,886
Provision for loan losses - 3,725
------------------- -------------------
Net interest income after provision for loan losses 2,663,060 2,638,161
------------------- -------------------
Noninterest income:
Other fees and service charges 79,022 70,603
Gain on sale of loans 17,372 74,142
Net gain on sale of foreclosed real estate 12,848 17,394
Contingency recovery - 81,023
Other 92,818 107,516
------------------- -------------------
Total noninterest income 202,060 350,678
------------------- -------------------
Noninterest expenses:
Compensation and employee benefits 963,690 919,565
Occupancy 94,829 87,856
Deposit insurance assessment - 362,557
Deposit insurance premiums 76,073 150,091
Data processing 83,254 75,996
Advertising 27,201 30,787
Foreclosed real estate expense, net 1,415 5,053
Other 421,081 424,066
------------------- -------------------
Total noninterest expense 1,667,543 2,055,971
------------------- -------------------
Income before income taxes 1,197,577 932,868
Income tax expense 457,862 374,100
------------------- -------------------
Net income $ 739,715 $ 558,768
=================== ===================
Earnings per share of common stock $ 0.96 $ 0.66
=================== ===================
Weighted averages common shares outstanding 746,484 851,025
=================== ===================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
20
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Retained Unallocated Unallocated Gain on
Additional Earnings Common Common 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, 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, 1996 -- -- -- 558,768 -- -- -- 558,768
Dividend paid $0.16/share -- -- -- (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 gain 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
------- --------- ----------- ---------- --------- -------- --------- ---------
Treasury stock acquired -- -- (2,068,422) -- -- -- -- (2,068,422)
Net earnings for the year
ended September 30, 1997 -- -- -- 739,715 -- -- -- 739,715
Dividend paid $0.16/share -- -- -- (118,903) -- -- -- (118,903)
Fair value adjustment of ESOP
shares net of taxes of $17,846 -- 26,769 -- -- -- -- -- 26,769
Allocated ESOP shares -- -- -- -- 68,724 -- -- 68,724
MSBP shares earned -- -- -- -- -- 69,458 -- 69,458
Effect of tax adjustment for vested
MSBP shares -- 3,052 -- -- -- -- -- 3,052
Net change in unrealized gain on
available-for-sale securities, net
of taxes of $740,337 -- -- -- -- -- -- 907,266 907,266
-------- ---------- ----------- ---------- ---------- --------- ---------- ----------
Balance, September 30, 1997 $100,799 $7,540,218 $(3,605,111) $7,737,458 $(498,012) $(317,954) $1,110,506 $12,067,904
======== ========== ============ ========== ========== ========= ========= ==========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
21
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended
September 30,
----------- ------------
1997 1996
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Interest received on loans and investments $ 5,146,533 $ 5,212,957
Interest paid (2,499,878) (2,532,101)
Other fees, commissions, and income received 285,085 299,433
Cash paid to suppliers, employees and others (1,704,523) (1,350,252)
Contributions to charities (29,482) (7,869)
Income taxes paid (298,000) (643,219)
Loans originated for sale (1,744,089) (2,455,977)
Proceeds from sale of loans 1,742,622 4,487,415
----------- -----------
Net cash provided by operating activities 898,268 3,010,387
----------- -----------
Cash flows from investing activities:
Purchases of available-for-sale securities (5,311,916) (6,547,147)
Proceeds from maturities of available-for-sale securities 6,074,554 1,356,285
Purchases of held-to-maturity securities (4,755,000) (4,694,532)
Proceeds from maturities of held-to-maturity securities 6,641,854 9,295,315
Loan originations and principal payments on loans, net (1,375,500) (2,123,430)
Purchases of property and equipment (109,049) (10,936)
Proceeds from sale of foreclosed real estate 12,848 17,394
----------- -----------
Net cash provided by (used in) investing activities 1,177,791 (2,707,051)
----------- -----------
Cash flows from financing activities:
Net increase in non-interest bearing demand
and savings deposit accounts 375,500 398,025
Net (decrease) increase in time deposits (1,722,125) 1,213,396
Net (decrease) in mortgage escrow funds (31,492) (49,168)
Dividend on unallocated ESOP shares 10,322 11,612
Acquisition of treasury stock (2,068,422) (1,536,689)
Acquistion of unearned MSBP shares -- (453,899)
Dividends paid (118,902) (140,029)
----------- -----------
Net cash used by financing activities (3,555,119) (556,752)
----------- -----------
Net (decrease) in cash and cash equivalents (1,479,060) (253,416)
Cash and cash equivalents at beginning of year 2,583,654 2,837,070
----------- -----------
Cash and cash equivalents at end of year $ 1,104,594 $ 2,583,654
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
22
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
For the Year Ended
September 30,
----------- ------------
1997 1996
----------- ------------
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income $ 739,715 $ 558,768
Adjustments:
Provision for losses on loans and real estate -- 3,725
Depreciation 90,995 83,771
Federal Home Loan Bank stock dividends -- (12,800)
Reinvested dividends (5,421) (5,071)
ESOP fair value adjustment 26,768 15,426
Amortization of ESOP compensation 58,403 66,092
Amortization of MSBP compensation 66,487 66,487
Tax benefit of MSBP vesting activities 3,052 --
Net amortization and accretion of premiums and
discounts on securities 28,466 38,211
Net (gains) on sales of foreclosed real estate (12,848) (17,393)
Net loan fees deferred and amortized 32,924 14,291
Net mortgage loan servicing fees deferred 2,112 (11,611)
Net increase in unearned MSBP shares 2,971 --
Contingency recovery -- (81,023)
(Increase) decrease in:
Loans held for sale (18,839) 2,014,650
Accrued interest receivable 12,780 78,598
Prepaid income tax 23,892 (23,892)
Deferred tax asset 163,903 (119,721)
Other assets 1,664 (6,639)
Increase (decrease) in:
Accrued interest payable (983) (558)
Accrued income tax (13,139) (115,222)
Other liabilities (304,634) 464,298
----------- -----------
Net cash provided by operating activities $ 898,268 $ 3,010,387
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
<S> <C> <C>
Federal Home Loan Bank stock dividends $ -- $ 12,800
Refinancings of sales of foreclosed real estate -- 37,200
Transfers from loans to real estate acquired
through foreclosure -- 4,989
Reinvested dividends 5,421 5,071
Transfer of debt securities to available-for-sale from
securities held-to-maturity -- 2,449,446
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
23
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997 and 1996
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.
Nature of Business - The 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, 1997, 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 regulatory agencies and undergoes periodic
examinations by those regulatory agencies.
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.
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. These 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 $300,000 and $1,000,000
at September 30, 1997 and 1996, 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 classifies its investments,
including debt securities, marketable equity securities,
mortgage-backed securities, and mortgage related securities in
one of three catagories: held-to-maturity, trading and
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 securities trading, therefore, the balance
of its debt securities and all 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.
24
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 1. Summary of Significant Accounting Policies - (continued)
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.
Premiums and discounts on debt and mortgage-backed securities
are amortized to expense or accreted to income over the
estimated life of the respective security using a method that
approximates the level yield method.
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.
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 that management has the
intent and ability to hold for the forseeable future or until
maturity or pay-off are reported at their outstanding principal
balance adjusted for any charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans and
unamortized premiums or discounts on purchased loans. Discounts
and premiums on purchased residential real estate loans are
amortized to income using the interest method over the
remaining period to contractual maturity, adjusted for
anticipated prepayments. Discounts and premiums on purchased
consumer loans are recognized over the expected lives of the
loans using the level yield method.
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. Loans
are considered impaired if full principal and interest payments
are not anticipated to be made in accordance with the
contractual terms. Impaired loans are carried at the present
value of expected future cash flows discounted at the loan's
effective interest rate or at the fair value of the collateral
if the loan is collateral dependent. A portion of the allowance
for loan losses is allocated to impaired loans if the value of
such loans is deemed to be less than the unpaid balance. If
these allocations cause the allowance for loan losses to
require an increase, such an increase is reported as a
component of the provision for loan losses.
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 and certain direct origination costs are
capitalized with the net fee or cost recognized as an
adjustment to interest income using the interest method.
Mortgage Servicing Rights - The Association adopted Statement
of Financial Accounting Standards (SFAS) No. 125, "Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" for transactions entered into
after December 31, 1996. SFAS No. 125 established accounting
and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on
the consistent application of the financial-components
approach. This approach requires
25
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 1. Summary of Significant Accounting Policies - (continued)
the recognition of financial assets and servicing assets that
are controlled by the reporting entity, and the derecognition
of financial assets and liabilities when control is
extinguished. Liabilities and derivatives incurred or obtained
by transferors in conjunction with the transfer of financial
assets are measured at fair value, if practicable. Servicing
assets and other retained interests in transferred assets are
measured by allocating the carrying amount between the assets
sold and the interest retained, based on their relative fair
value. The adoption of SFAS No. 125 did not have a material
effect on the Association's operations for the year ended
September 30, 1997.
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.
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
basis 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.
The Company files consolidated income tax returns with the
Association and they have entered into a tax sharing agreement
which provides that the Association will pay to the Company, or
receive a refund from the Company, as if the Association's
portion of income tax liability or benefit was separately
determined based on the Association's taxable income or loss.
Earnings Per Share - Earnings per share of common stock 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. Stock options are regarded as
common stock equivalents computed using the treasury stock
method. Shares acquired by the employee stock ownership plan
are not considered in the weighted average shares outstanding
until shares are committed to be released to an employee's
individual account or have been earned. The difference between
primary and fully diluted earnings per share is not material.
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.
Stock-Based Compensation - SFAS No. 123, "Accounting for
Stock-Based Compensation," establishes a new fair value-based
accounting method for stock-based compensation plans. As
permitted by SFAS No. 123, management has elected to continue
measuring compensation costs based on the intrinsic value
method as prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees." See Footnote No. 10 for proforma
disclosure of net income and earnings per share as if the fair
value method had been adopted.
26
<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,"
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 assets and liabilities 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:
Cash and cash equivalents: The carrying amounts of cash and
cash equivalents approximates fair value.
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 analyses, based on interest rates
currently being offered for loans with similar terms to
borrowers of similar credit quality giving consideration to
estimated prepayment 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.
27
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 2. Debt and Equity Securities
The amortized costs and 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, 1997:
- ------------------
<S> <C> <C> <C> <C>
Securities available-for-sale:
Debt securities:
U.S. Government and agency obligations $ 8,566,851 $ 36,481 $ (12,322) $ 8,591,010
Mortgage-backed securities 2,401,673 11,657 (19) 2,413,311
----------- ----------- ----------- -----------
Subtotal 10,968,524 48,138 (12,341) 11,004,321
----------- ----------- ----------- -----------
Equity securities:
Mutual fund 92,325 596 -- 92,921
Stock in FHLMC 51,653 1,814,449 -- 1,866,102
----------- ----------- ----------- -----------
Subtotal 143,978 1,815,045 -- 1,959,023
----------- ----------- ----------- -----------
Total $11,112,502 $ 1,863,183 $ (12,341) $12,963,344
=========== =========== =========== ===========
Securities held-to-maturity:
Certificates of deposit $ 4,755,000 $ -- $ -- $ 4,755,000
Mortgage-backed securities 2,650,466 87,715 (22,867) 2,715,314
----------- ----------- ----------- -----------
Total $ 7,405,466 $ 87,715 $ (22,867) $ 7,470,314
=========== =========== =========== ===========
September 30, 1996:
- -------------------
Securities available-for-sale:
Debt securities:
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
=========== =========== =========== ===========
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
=========== =========== =========== ===========
</TABLE>
There were no sales of securities during the two years ended September 30,
1997 and 1996.
28
<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, 1997, by contractual maturity, are
shown below. Mortgage-backed securities have been aggregated
and disclosed separately, rather than allocated 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 $ -- $ -- $ 5,200,006 $ 5,214,434
Due from one to five years -- -- 2,510,207 2,528,845
Due from five to ten years -- -- 501,291 501,961
Due after ten years -- -- 355,347 345,770
----------- ----------- ----------- -----------
Subtotal -- -- 8,566,851 8,591,010
Mortgage-backed securities 2,650,466 2,715,314 2,401,673 2,413,311
----------- ----------- ----------- -----------
Total $ 2,650,466 $ 2,715,314 $10,968,524 $11,004,321
=========== =========== =========== ===========
</TABLE>
Note 3. Loans Receivable
Loans receivable at September 30, 1997 and 1996 consist of the
following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Secured by 1-4 family residences $ 39,863,763 $ 37,623,209
Secured by other real estate 2,831,392 3,964,195
Construction 953,265 626,900
Consumer and other 2,053,921 1,916,165
Loans secured by deposits 212,790 281,115
------------ ------------
Total loans receivable 45,915,131 44,411,584
Less:
Undisbursed portion of mortgage loans (309,781) (227,762)
Allowance for loan losses (861,170) (877,094)
Deferred loan fees (269,371) (236,447)
------------ ------------
Loans receivable, net $ 44,474,809 $ 43,070,281
============ ============
</TABLE>
A summary of the activity in the allowance for loan losses is
as follows:
Years ended September 30,
---------------------------
1997 1996
------------ -------------
Balance, beginning of period $ 877,094 $ 962,086
Provision for losses -- 3,725
Charge offs (17,017) (92,213)
Recoveries 1,093 3,496
------------- -------------
Balance, end of period $ 861,170 $ 877,094
============= =============
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
$124,000 and $140,000 at September 30, 1997 and 1996,
respectively.
29
<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,
------------------
1997 1996
------- --------
Real estate acquired by foreclosure $15,700 $15,700
Less allowance for losses 15,700 15,700
------- -------
Foreclosed real estate, net $ -- $ --
======= =======
Activity in the allowance for losses on foreclosed real
estate is as follows:
Years ended September 30,
-------------------------
1997 1996
-------- -----------
Beginning balance $ 15,700 $ 25,187
Provision charged to income -- --
Charge-offs -- (9,487)
Recoveries -- --
-------- --------
Ending balance $ 15,700 $ 15,700
======== ========
Note 5. Loan Servicing
Mortgage loans serviced for others are not included in the
accompanying consolidated statements of financial condition.
The unpaid principal balance of loans serviced for others was
$2,351,000 and $2,823,000 at September 30, 1997 and 1996,
respectively.
Custodial escrow balances maintained in connection with the
foregoing loan servicing, and included in demand deposits were
approximately $4,700 and $13,300 at September 30, 1997 and
1996, respectively.
Capitalized mortgage servicing rights included in other assets
are summarized as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
1997 1996
---------- -----------
<S> <C> <C>
Beginning balance, net of accumulated amortization $11,600 $ --
Amounts capitalized -- 12,700
Amortization 2,100 1,100
Valuation adjustments -- --
------- -------
Balance, end of period $ 9,500 $11,600
======= =======
</TABLE>
Note 6. Accrued Interest Receivable
Accrued interest receivable at September 30, 1997 and 1996 is
summarized as follows:
1997 1996
-------- --------
Investment securities $152,279 $164,382
Mortgage-backed securities 38,569 41,500
Loans receivable 246,700 244,445
-------- --------
Total $437,548 $450,327
======== ========
30
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 7. Premises and Equipment
Premises and equipment at September 30, 1997 and 1996 consists
of the following:
1997 1996
----------- ------------
Land $ 98,840 $ 98,840
Office building 797,008 790,702
Furniture and equipment 541,618 463,914
----------- -----------
Total 1,437,466 1,353,456
Less accumulated depreciation (630,566) (564,610)
----------- -----------
Premises and equipment, net $ 806,900 $ 788,846
=========== ===========
Note 8. Deposits
The aggregate amount of certificates of deposit with a minimum
denomination of $100,000 was approximately $2,489,000 and
$2,434,000 at September 30, 1997 and 1996, respectively.
Deposited amounts in excess of $100,000 per account are not
insured by the Savings Association Insurance Fund.
At September 30, 1997, the scheduled maturities of time
deposits, for the fiscal years ended, are as follows:
1998 $27,624,960
1999 8,424,248
2000 99,744
2001 101,059
Thereafter --
-----------
Total $36,250,011
===========
Deposits by related parties were approximately $1,014,000 and
$803,000 at September 30, 1997 and 1996, respectively.
The Association provides collateral to various local
governmental units as required by State statute on savings and
certificate accounts with balances greater than $100,000. The
collateral pledged against these deposits consisted of
mortgage-backed securities totaling $961,363 and $1,101,623 as
of September 30, 1997 and 1996, respectively.
Note 9. Income Taxes
Income tax expense (benefit) applicable to operations include
current and deferred taxes as follows:
Years ended September 30,
-------------------------
1997 1996
---------- ------------
CURRENT
Federal $ 279,700 $ 367,539
State 93,750 126,283
--------- ---------
Subtotal 373,450 493,822
--------- ---------
DEFERRED
Federal 63,310 (89,790)
State 21,102 (29,932)
--------- ---------
Subtotal 84,412 (119,722)
--------- ---------
Total income tax provision $ 457,862 $ 374,100
========= =========
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%.
31
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 9. Income Taxes - (continued)
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:
<TABLE>
<CAPTION>
September 30,
---------------------------
1997 1996
----------- ------------
<S> <C> <C>
Deferred tax assets:
General loan loss allowance $ 278,044 $ 350,838
Deferred loan fees 107,748 94,579
Deferred compensation 140,875 129,278
Accrual adjustments 16,847 --
SAIF assessment -- 145,023
----------- -----------
543,514 719,718
Less valuation allowance (68,679) (162,000)
----------- -----------
Subtotal 474,835 557,718
----------- -----------
Deferred tax liabilities:
Excess tax reserves 115,768 115,768
Unrealized gains on available-for-sale securities 740,337 135,494
FHLB stock dividends 99,680 99,680
Mortgage servicing assets 3,800 4,644
Depreciation and basis adjustment 40,604 38,229
----------- -----------
Subtotal 1,000,189 393,815
----------- -----------
Net deferred tax (liability) asset $ (525,354) $ 163,903
=========== ===========
</TABLE>
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, therefore, no additional valuation
allowance was required at September 30, 1997 and 1996.
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,
-------------------------
1997 1996
--------- ---------
<S> <C> <C>
Computed "expected" tax expense: $ 407,000 $ 317,200
Increase (reduction) in income tax resulting from:
State income taxes, net of federal tax benefit 76,000 63,600
Other (net) (25,138) (6,700)
--------- ---------
Total income tax expense $ 457,862 $ 374,100
========= =========
</TABLE>
Savings and loan associations were allowed a bad debt
deduction, in determining income tax 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 Association 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 will not effect 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.
32
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 10. Employee Benefit Plans
Salary Continuation Plan
The Association has adopted a directors' consultation 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 $31,663 and $29,892 for the years ended
September 30, 1997 and 1996, respectively.
Salary Reduction Plan
The Association maintains a salary reduction plan (401(k) Plan)
which covers qualifying all full time employees. Company
contributions are determined anually by the Board of Directors.
The Company's expense related to this plan was $-0- and $1,042
for the years ended September 30, 1997 and 1996, respectively.
Employee Stock Ownership Plan
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,
-------------------
1997 1996
-------- --------
Allocated shares 16,128 8,064
Commited to be released shares 6,048 6,048
Unreleased shares 58,463 66,527
-------- --------
Total ESOP shares 80,639 80,639
======== ========
Fair value of unreleased shares $993,871 $848,219
======== ========
Compensation expense recorded $105,127 $ 94,003
======== ========
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 $66,663 and $66,487 for fiscal 1997
and 1996, respectively.
33
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 10. Employee Benefit Plans - (continued)
Stock Option Plan
In September, 1995 the Company adopted a stock option plan, the
1995 Stock Option Plan (the SOP). During 1995, options
exercisable for 73,072 shares of the Company's common stock
were granted to certain officers and directors at an exercise
price of $11.375 per share. The options vest over a five year
period and may be exercised within 10 years of the grant date.
In January 1997, a second option plan, the 1997 Stock Option
and Incentive Plan was adopted. In 1997, options exercisable
for 63,636 shares of the Company's common stock were granted to
certain officers and directors at an exercise price of $13.00
per share. The options vest over a two year period and may be
exercised within 10 years of the grant date. All options
granted in the 1997 Stock Option Plan have dividend equivalent
rights associated with such options.
The Company uses the intrinsic value method as described in APB
Opinion No. 25 and related interpretations to account for its
stock incentive plans. Accordingly, no compensation cost has
been recognized for the fixed option plan. There are no charges
or credits to expense with respect to the granting or exercise
of options since the options were issued at fair value on the
respective grant dates. Had compensation cost for the Company's
stock-based plans been determined in accordance with the fair
value method recommended by SFAS No. 123, the Company's net
income and earnings per share would have been reduced to the
proforma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Net income:
As reported $739,715 $558,768
Pro forma 614,602 519,471
Earnings per common share and common share equivalent:
As reported $ 0.96 $ 0.66
Pro forma 0.82 0.61
</TABLE>
The above disclosed pro forma effects of applying SFAS No. 123,
to compensation costs, may not be representative of the effects
on reported pro forma net income for future years.
The fair value for each option grant is estimated on the date
of the grant using the Black Scholes Model. The model
incorporates the following assumptions:
1997 1996
------ ------
Risk-free interest rate 5.60% 6.08%
Expected life 10 Yrs. 10 Yrs.
Expected volatility 19.00% 20.00%
Expected dividends 2.00% None
The fair value of the granted 1995 options granted in 1995 was
$4.48 per option. The fair value of the options granted in 1997
was $3.51 per options. A summary of stock option activity under
the SOP's are detailed below:
Weighted
Options Average
Available Options Exercise
For Grant Outstanding Price
--------- ----------- -----------
September 30, 1994 None None --
Plan adopted 100,799 -- $ 11.375
Granted September 27, 1995 (73,072) 73,072 11.375
------- ------- -----------
September 30, 1995 27,727 73,072 11.375
Exercised -- -- --
Forfeited -- -- --
------- ------- -----------
September 30, 1996 27,727 73,072 11.375
Plan adopted 87,771 -- 13.000
Granted January 22, 1997 (63,636) 63,636 13.000
Exercised -- -- --
Forfeited -- -- --
------- ------- -----------
September 30, 1997 51,862 136,708 $ 12.131
====== ======= ===========
34
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 10. Employee Benefit Plans - (continued)
The following table summarizes information about stock options
outstanding at September 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------- ---------------------------------------
Weighted Avg.
Remaining
Number Exercise Contractual
Outstanding Price Life In Years Number Price
---------------------------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C>
73,072 $11.375 8.0 Yrs. 29,224 $11.375
63,636 $13.000 9.1 Yrs. 31,813 $13.000
------- ------
136,708 61,037
======= ======
</TABLE>
Note 11. Commitments
Loans serviced for FNMA, in the amount of $480,474 at September
30, 1997, 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 1998 in the amount of $910,350 at
September 30, 1997. The Association has not incurred any losses
on loans sold with recourse provisions.
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 on 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 $660,750 for loans ($481,650 at fixed rates
and $179,100 at adjustable rates) and $1,292,196 unused lines
of credit at September 30, 1997.
Commitments to sell loans amounted to $237,300 at September 30,
1997.
The estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
September 30, 1997 September 30, 1996
-------------------------- --------------------------
Carrying Fair Carrying Fair
Financial assets: Amount Value Amount Value
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 1,104,594 $ 1,104,594 $ 2,583,654 $42,583,654
Investment securities 20,368,810 20,433,657 21,529,237 21,555,886
FHLB stock 650,700 650,700 650,700 650,700
Loans receivable 44,610,359 46,246,918 43,248,944 44,201,216
Accrued interest receivable 437,548 437,548 450,327 450,327
Financial liabilities:
Deposits 55,183,587 55,209,196 56,531,194 56,538,374
Advance payments
by borrowers (escrows) 107,038 107,038 138,530 138,530
</TABLE>
35
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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, 1997 and 1996.
Note 14. Stockholders Equity and Regulatory Matters
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 in the Conversion.
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.
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.
Quantitative measures established by regulation to ensure
capital adequacy require the Association to maintain minimum
amounts and ratios (set forth in the following table) 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, 1997, that the
Association meets all of capital adequacy requirements to which
it is subject.
As of September 30, 1997 and 1996, 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.
36
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 14. Stockholders Equity and Regulatory Matters - (continued)
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,
1997 and 1996, are also presented in the following tables (in
thousands):
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
------------------------- ---------------------- -----------------------
Amount Percent Amount Percent Amount Percent
------------ ----------- ---------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
GAAP capital,
September 30, 1997 $ 11,998
Less: Unrealized gains on
securities available-for-sale (1,111)
Excess mortgage servicing rights (1)
------------
Tangible capital and ratio
to adjusted total assets $ 10,886 16.3% $ 1,000 1.50%
------------ ----------- ---------- ----------
Tier 1 (Core) capital and ratio
to adjusted total assets $ 10,886 16.3% $ 2,000 3.0% $ 3,335 5.0%
------------ ----------- ---------- ---------- ------------ ---------
Tier 1 capital and ratio
to risk-weighted assets $ 10,886 31.9% $ 1,365 4.0% $ 2,047 6.0%
------------ ----------- ---------- ---------- ------------ ---------
Tier 2 capital, allowance
for loan losses 432
------------
Total risk-based capital and
ratio to risk-weighted
assets, September 30, 1997 $ 11,318 33.2% $ 2,730 8.0% $ 3,412 10.0%
============ =========== ========== ========== ============ =========
</TABLE>
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
------------------------- ---------------------- -----------------------
Amount Percent Amount Percent Amount Percent
------------ ----------- ---------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
GAAP capital,
September 30, 1996 $ 10,643
Less: Unrealized gains on
securities available-for-sale (238)
Excess mortgage servicing rights (1)
------------
Tangible capital and ratio
to adjusted total assets $ 10,404 14.9% $ 1,046 1.50%
------------ ----------- ---------- ----------
Tier 1 (Core) capital and ratio
to adjusted 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, September 30, 1996 $ 10,834 31.7% $ 2,733 8.0% $ 3,416 10.0%
============ =========== ========== ========== ============ =========
</TABLE>
37
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 15. Effects of New Financial Accounting Standards
SFAS No. 128, "Earnings Per Share" - issued February 1997,
establishes standards for computing and presenting earnings per
share (EPS). It simplifies prior standards by replacing primary
earnings per share with basic earnings per share and by altering
the calculation of diluted EPS, which replaces fully diluted
EPS. SFAS No. 128 is effective for financial statements issued
after December 15, 1997, including interim periods.
SFAS No. 130, "Reporting Comprehensive Income" - issued June
1997, establishes standards for reporting and displaying
comprehensive income and its components in general-purpose
financial statements. Comprehensive income includes net income
and several other items that current accounting standards
require to be recognized outside of net income. This statement
requires entities to display comprehensive income and its
components in the financial statements with presentation of the
accumulated balances of other comprehensive income reported in
stockholders' equity separately from retained earnings and
additional paid-in capital. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. Reclassification of
financial statements for earlier periods that are presented for
comparative purposes is required.
SFAS No. 131, "Disclosures about Segments of Enterprise and
Related Information" - issued June 1997, requires public
business enterprises to report information about their operating
segments in a complete set of financial statements to
shareholders. This statement also requires entities to report
enterprise-wide information about their products and services,
their activities in different geographic areas, and their
reliance on major customers. Certain segment information is also
to be reported in interim financial statements. The basis for
determining an enterprise's operating segments is the manner in
which management operates the business. Specifically, financial
information is required to be reported on the basis that it is
used internally by the enterprise's chief operating decision
maker in making decisions related to resource allocation and
segment performance. SFAS No. 131 is effective for financial
statements for years beginning after December 31, 1997.
Management believes adoption of the above-described Statements
will not have a material effect on financial position and the
results of operations, nor will adoption require additional
capital resources.
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, 1995
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 primarily by the amount of consolidating ESOP
adjustments.
STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30,
-------------------------------
1997 1996
------------ -----------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 24,203 $ 61,525
Investment in Association subsidiary 11,998,136 10,642,889
Loan to Association subsidiary 65,000 1,725,000
Loan to Association ESOP 542,056 609,813
Tax benefit due from subsidiary 40,781 33,235
----------- -----------
Total $12,670,176 $13,072,462
=========== ===========
LIABILITIES AND SHAREHOLDERS EQUITY
Other liabilities $ 111,961 $ 70,210
Shareholders' equity 12,558,215 13,002,252
----------- -----------
Total $12,670,176 $13,072,462
=========== ===========
</TABLE>
38
<PAGE>
MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 16. Parent Only Condensed Financial Information - (continued)
STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the Year Ended September 30,
-----------------------------
Interest from: 1997 1996
------------- -------------
<S> <C> <C>
Association's subsidiary loan $ 80,148 $ 151,949
Association's ESOP loan 47,137 54,101
Dividends from Association subsidiary 450,000 200,000
----------- -----------
Total income 577,285 406,050
Expenses:
Non-interest expenses 272,672 234,402
Income tax (benefit) (58,435) (11,679)
----------- -----------
Total expenses 214,237 222,723
----------- -----------
Income before equity in undistributed net income of
Association subsidiary 363,048 183,327
Equity in undistributed net income of
Association subsidiary 828,442 577,217
----------- -----------
Net income $ 1,191,490 $ 760,544
=========== ===========
</TABLE>
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended September 30,
--------------------------------
1997 1996
----------- ------------
<S> <C> <C>
Net income $ 1,191,490 $ 760,544
Adjustments:
Equity in undistributed net income of subsidiary (828,442) (577,217)
ESOP fair value adjustment, net of taxes 26,768 15,426
Increase in income tax benefit due from subsidiary (3,499) (33,235)
Increase in deferred income taxes (4,047) --
(Decrease) in accrued income taxes -- (160)
Increase in other liabilities 41,750 70,210
----------- -----------
Net cash provided by operations 424,020 235,568
----------- -----------
Cash flows from investing activities:
Subsidiary loan proceeds 1,660,000 1,375,000
Purchase of treasury stock (2,068,422) (1,536,689)
----------- -----------
Net cash used in investing activities (408,422) (161,689)
----------- -----------
Cash flows from financing activities:
Payment of cash dividend (120,677) (141,804)
Principal received on ESOP loan 67,757 80,660
----------- -----------
Net cash used in financing activities (52,920) (61,144)
----------- -----------
(Decrease) increase in cash and cash equivalents (37,322) (12,735)
Cash and cash equivalents
Beginning of year 61,525 48,790
----------- -----------
End of year $ 24,203 $ 61,525
=========== ===========
</TABLE>
39
<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
Wallace R. Mattock
Chairman of the Board
(rotated annually)
Neil Adamek Thomas J. Leiferman
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
Vice President Vice President
-----------------------
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 Company
Malizia, Spidi, Sloane & Fisch,P.C. Registrar and Transfer
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, 1997, 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, Vice President at the
Company's Office in Little Falls, Minnesota. The Annual Meeting of Shareholders
will be held on January 21, 1998, at 10:00 a.m. at the office of the Company.
40
<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, 1997 included in this Annual Report on Form 10-KSB of Mississippi View
Holding Company for the fiscal year ended September 30, 1997.
/s/Bertram Cooper & Co., LLP
Bertram Cooper & Co., LLP
Waseca, Minnesota
December 22, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 215
<INT-BEARING-DEPOSITS> 890
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,963
<INVESTMENTS-CARRYING> 7,405
<INVESTMENTS-MARKET> 7,470
<LOANS> 45,741
<ALLOWANCE> 861
<TOTAL-ASSETS> 68,546
<DEPOSITS> 55,184
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,295
<LONG-TERM> 0
0
0
<COMMON> 101
<OTHER-SE> 11,967
<TOTAL-LIABILITIES-AND-EQUITY> 68,546
<INTEREST-LOAN> 3,817
<INTEREST-INVEST> 1,348
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,165
<INTEREST-DEPOSIT> 2,502
<INTEREST-EXPENSE> 2,502
<INTEREST-INCOME-NET> 2,663
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,668
<INCOME-PRETAX> 1,198
<INCOME-PRE-EXTRAORDINARY> 740
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 740
<EPS-PRIMARY> 0.96
<EPS-DILUTED> 0.92
<YIELD-ACTUAL> 7.76
<LOANS-NON> 201
<LOANS-PAST> 33
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,456
<ALLOWANCE-OPEN> 877
<CHARGE-OFFS> 17
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 861
<ALLOWANCE-DOMESTIC> 861
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 695
</TABLE>
