-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OTJNxdNRZm7LN8tSSz8T8HHNQcXI9eDdD9KD3njzMrJoQ3hi0leg17AwlpBxiHrc tg5S/3aBLK7QZGhNNCcchw== 0000946275-96-000428.txt : 19961227 0000946275-96-000428.hdr.sgml : 19961227 ACCESSION NUMBER: 0000946275-96-000428 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961226 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MISSISSIPPI VIEW HOLDING CO CENTRAL INDEX KEY: 0000933404 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 411795363 STATE OF INCORPORATION: MN FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: 1934 Act SEC FILE NUMBER: 000-25546 FILM NUMBER: 96686317 BUSINESS ADDRESS: STREET 1: 35 E BROADWAY CITY: LITTLE FALLS STATE: MN ZIP: 56345 BUSINESS PHONE: 6126325461 MAIL ADDRESS: STREET 1: 35 EAST BROADWAY CITY: LITTLE FALLS STATE: MN ZIP: 56345-3093 10KSB40 1 FORM 10KSB40 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark One): [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended September 30, 1996, ------------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to . -------------------- ---------------- Commission File No. 0-25546 MISSISSIPPI VIEW HOLDING COMPANY - -------------------------------------------------------------------------------- (Name of Small Business Issuer in Its Charter) Minnesota 41-1795363 - --------------------------------------------- ------------------ (State or Other Jurisdiction of Incorporation I.R.S. Employer or Organization) Identification No. 35 East Broadway, Little Falls, Minnesota 56345 - --------------------------------------------- ------------------ (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, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] State issuer's revenues for its most recent fiscal year. $558,768 As of December 19, 1996, there were issued and outstanding 859,714 shares of the registrant's Common Stock. The Registrant's voting stock trades on the Nasdaq SmallCap Market under the symbol "MIVI." The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the last price the registrant's Common Stock was sold on December 19, 1996, was $7,380,468 ($12.00 per share based on 615,039 shares of Common Stock outstanding). Transition Small Business Disclosure Format (check one) YES [ ] NO [X] --- --- DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Annual Report to Stockholders for the Fiscal Year ended September 30, 1996. (Parts I, II, and IV) 2. Portions of the Proxy Statement for the Annual Meeting of Stockholders. (Part III) PART I Item 1. Business - ----------------- General Mississippi View Holding Company (the "Company") is a Minnesota corporation organized in November 1994 at the direction of Community Federal Savings and Loan Association of Little Falls (the "Association") in connection with the Association's conversion from the mutual to stock form (the "Conversion"). On March 23, 1995, the Association completed the Conversion and became a wholly owned subsidiary of the Company. The Company is a unitary savings and loan holding company which, under existing laws, generally is not restricted in the types of business activities in which it may engage provided the Association retains a specified amount of its assets in housing-related investments. The Association is a federally chartered stock savings and loan association. The Association's only office is located in Little Falls, Morrison County, Minnesota. The Association was founded in 1934 under the name Little Falls Federal Savings and Loan Association of Little Falls. The name of the Association was changed to Community Federal Savings and Loan Association of Little Falls in July 1977. The Association is subject to examination and comprehensive regulation by the Office of Thrift Supervision ("OTS") and its deposits are federally insured by the Savings Association Insurance Fund ("SAIF"). The Association is a member of and owns capital stock in the Federal Home Loan Bank ("FHLB") of Des Moines, which is one of the 12 regional banks in the FHLB System. The Association attracts deposits from the general public and uses such deposits, without outside borrowings, primarily to invest in investment securities and to originate loans secured by first mortgages on owner-occupied, one- to four-family residences in its market area. To a much lesser extent, the Association also originates residential real estate construction loans and consumer loans. The principal sources of funds for the Association's lending activities are deposits and the amortization, repayment, and maturity of loans and investment securities. The Association does not rely on brokered deposits. Principal sources of income are interest on loans and investment securities. The Association's principal expense is interest paid on deposits. Market Area and Competition The Association's primary market area consists of Morrison County, Minnesota. Morrison County has traditionally been one of the lower income areas of the state and has carried a comparatively higher unemployment rate than other areas of the state. The county has been successful in recent years in attracting new and in retaining existing businesses through the progressive activities of its County Board, Little Falls City Council, Little Falls Economic Development Authority, Morrison County Rural Finance Development Authority, and Community Development of Morrison County Corporation. Little Falls financial institutions, including the Association, have demonstrated cooperation in providing needed expertise and gap financing to facilitate the community development process. Morrison County is the home of three major recreational boat manufacturers; Larson, Crestliner, and Glastron. The financial performance and employment size of the recreational boat industry have historically been highly cyclical. Also located in Morrison County are a paper mill, a national mailing distributor, and Camp Ripley, a prominent National Guard training facility. According to the Minnesota Department of Agriculture, Morrison County is the third largest dairy producing county in the State. 1 The Association encounters strong competition both in the attraction of deposits and origination of real estate and other loans. Competition comes primarily from eight commercial banks and two credit unions with offices in its market area. In addition, the Association competes with investment and mortgage banking companies that operate in the area. Due to their size, some of the Association's competitors possess greater financial and marketing resources. Based on published figures, the Association is the only thrift institution headquartered in Morrison County, Minnesota, and third largest financial institution headquartered in Morrison County, Minnesota on the basis of assets as of June 30, 1996. The Association competes for savings accounts by offering depositors competitive interest rates and a high level of personal service. Over the past four years, the Association has added low cost noninterest bearing checking accounts, safety deposit boxes, a drive-up ATM, plastic cash and check cards, and checking account overdraft protection and home equity line of credit in order to remain competitive in its market. Lending Activities General. The Association's loan portfolio predominantly consists of both adjustable-rate and fixed-rate mortgage loans secured by single family residences and, to a much lesser extent, commercial mortgage and construction loans. The Association also makes consumer loans, consisting of savings account loans, second mortgages, low document 10-year first mortgages, home improvement, new and used automobiles, recreational vehicles, and unsecured loans. As of September 30, 1996, the Association's total net portfolio of loans (the "loan portfolio") was $43.2 million, of which $33.7 million, or 78%, was secured by residential real estate. The Association's available funds have historically exceeded the loan demand in the Association's market area. To supplement its loan originations, the Association has made purchases of loans, loan participations, and investment securities. However, since 1984, the Association has essentially discontinued the purchase of whole loans and loan participations. If loan demand remains at its present level, the Association's purchases of investment securities are likely to remain constant or increase. Because investment securities generally provide for lower returns than loans originated by the Association, the increased use of investment securities may negatively impact net income. In addition, no assurances can be given that the Association will not resume purchasing whole loans or loan participations in the future. 2 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:
At September 30, ---------------------------------------------------- 1996 1995 ------------------------ ----------------------- $ % $ % ------- ------ ------- ------ (Dollars in Thousands) Type of Loans: -------------- Construction loans ................. $ 627 1.40% $ 1,136 2.53% Residential (includes held for sale)(1) ...... 33,682 75.54 35,919 79.86 Commercial ......................... 1,417 3.18 1,269 2.82 Other (includes land) .............. - - 33 0.07 Commercial business loans .......... 351 0.79 4 0.01 Consumer loans (includes held for sale): Low document mortgage (2) ........ 1,619 3.63 2,397 5.33 Other consumer and land .......... 6,894 15.46 4,219 9.38 ------- ------ ------- ------ Total loans ................... 44,590 100.00% 44,977 100.00% ======= ====== Less: Loans in process ................. 228 746 Deferred loan origination fees and costs .......................... 236 222 Allowance for loan losses ........ 877 962 ------- ------- Total loans, net ................... $43,249 $43,047 ======= =======
- -------------- (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. 3 Loan Maturity Tables. The following table sets forth the maturity of the Association's loan portfolio at September 30, 1996. The table does not include prepayments of scheduled principal repayments which totalled $6.0 million and $4.6 million for the years ended September 30, 1996 and 1995, respectively. All mortgage loans are shown as maturing based on contractual maturities.
Multi-Family & 1-4 Family Commercial Commercial Real Estate Real Business & Mortgage Estate Construction Consumer Total -------- ------ ------------ -------- ----- (In Thousands) Non-performing............ $ 31 $ - $ - $ 17 $ 48 Amounts Due: Within 3 months........... 32 1 551 221 805 3 months to 1 Year........ 89 29 76 413 607 After 1 year: 1 to 3 years............ 625 597 - 1,529 2,751 3 to 5 years............ 1,015 205 - 2,298 3,518 5 to 10 years........... 5,776 851 - 4,386 11,013 10 to 20 years.......... 15,077 418 - - 15,495 Over 20 years........... 10,308 45 - - 10,353 ------ ------- ------ ------ ------ Total due after one year.. 32,801 2,116 - 8,213 43,130 ------ ----- ------ ----- ------ Total amount due.......... $32,953 $2,146 $ 627 $8,864 44,590 ====== ===== ======= ===== Less: Allowance for loan losses.......................................................................... 877 Undisbursed portion of mortgage loans.............................................................. 228 Deferred loan fees................................................................................. 236 ------- Loan receivable, net............................................................................. $43,249 ======
The following table sets forth the dollar amount of all loans due after September 30, 1997, which have pre-determined interest rates and which have floating or adjustable interest rates.
Floating or Fixed Rate Adjustable Rates Total ---------- ---------------- ----- (In Thousands) One-to-four family.............. $ 8,428 $24,373 $32,801 Commercial real estate.......... 1,526 590 2,116 Consumer........................ 7,397 816 8,213 ------ ------- ------ Total......................... $17,351 $25,779 $43,130 ====== ====== ======
4 One- to Four-Family Residential Loans. The Association's primary lending activity consists of the origination of single family residential mortgage loans secured by property located in the Association's primary market area. The Association generally originates one- to four-family residential mortgage loans in amounts up to 80% of the lesser of the appraised value or selling price of the mortgaged property. The Association requires private mortgage insurance on loans originated at 80 to 95% of the lesser of the appraised value or selling price. Loans equal to 100% of the lesser of appraised value or selling price are offered if insured by Farmers Home Administration ("FmHA") or the Veterans Administration ("VA"). Loans with a 95 to 98% loan to value ratio are offered if insured by the U.S. Department of Housing and Urban Development ("HUD"). Loans insured by other agencies are sold on the secondary market. Loan originations are generally obtained from existing or past customers, members of the local community, and referrals from realtors within the Association's lending area. Mortgage loans originated and held by the Association in its portfolio generally include due-on sale clauses which provide the Association with the contractual right to deem the loan immediately due and payable in the event that the borrower transfers ownership of the property without the Association's consent. As of September 30, 1996, $33.4 million or 77.2% of mortgage loans consisted of one- to four-family residential loans, of which 27.4% were fixed rate loans. The Association primarily originates for its portfolio adjustable-rate mortgage loans with up to 30 year terms that adjust annually based upon the one-year Treasury Bill rate and fixed-rate mortgage loans with a 15 year term. The Association also originates 20 and 30 year fixed-rate mortgage loans for sale in the secondary market. The Association had limited success in originating ARMs during periods of prevailing low market interest rates. ARMs generally have a 2% cap on any change in the interest rate per year, with an overall limit of 6% on any increase or decrease over the life of the loan. Although the Association occasionally offers discounts on the interest rate on its ARMs during the first year of the mortgage loan for competitive reasons, generally it determines a borrowers ability to pay at the fully- indexed rate. The Association also offers a mortgage product that is fixed for a specified time period after which the loan converts to an adjustable rate mortgage. The rate adjusts annually and is tied to the one-year Treasury Bill. The Association offers a 3-year fixed/1-year adjustable rate mortgage. Adjustable-rate mortgage loans decrease the risks associated with changes in interest rates, but involve other risks because, as interest rates increase, the underlying payments by the borrower increase, thus increasing the potential for default. At the same time, the marketability of the underlying collateral, may be adversely affected by higher interest rates. These risks have not had an adverse effect on the Association to date. Interest rates charged on fixed rate mortgage loans are competitively priced based on market conditions and the Association's cost of funds. The origination fees for fixed rate loans were generally 1% at September 30, 1996. Generally, the Association's standard underwriting guidelines for fixed rate mortgage loans conform to Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA") guidelines. The Association currently sells essentially all 30-year fixed rate mortgage loans in the secondary market, servicing released. As of September 30, 1996, the Association's portfolio of loans previously originated, sold, and serviced for others totalled approximately $2.8 million. Multi-Family and Commercial Real Estate Loans. In order to participate in local projects that will benefit the community, the Association originates a limited number of commercial real estate and multi-family real estate loans. Commercial real estate and multi-family real estate secured loans are reviewed on a loan by loan basis and must be approved by the Association's Board of Directors. The 5 Association's commercial real estate loan portfolio consists of seasoned permanent loans secured by improved property such as retail stores, manufacturing facilities, and other non-residential buildings. As of September 30, 1996, the Association had multi-family and commercial real estate loans totalling $2.3 million, or 5.4% of the Association's loan portfolio of which $827,447 were secured by multi-family real estate. Loans secured by multi-family and commercial real estate generally involve a greater degree of risk than residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family and commercial real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced, the borrower's ability to repay the loan may be impaired. As of September 30, 1996, the largest permanent multi-family and commercial real estate loan was secured by a commercial property in Little Falls, Minnesota and had a balance of $581,000 and was current. Construction Loans. The Association primarily makes loans to construct single-family owner occupied homes which upon completion of construction convert to permanent financing. For at least the past 10 years, the Association has not made construction loans to builders for the purpose of spec homes. Construction loans are made to owners for construction of their primary residence on a construction/permanent basis. Construction/permanent loans to owner/borrowers have either fixed or adjustable rates and are underwritten in accordance with the same terms and requirements as the Association's permanent mortgages on existing properties except that the building contractor must meet the Association's Board approved construction lending policy. The loans generally provide for disbursement of loan proceeds in stages during a construction period of up to six months. Borrowers are required to pay accrued interest on the outstanding balance monthly during the construction phase. At September 30, 1996, there was $227,762 outstanding in construction loans to owner/borrowers with $626,900 in outstanding loans in process allocated to these projects. The Association originated $1.1 million in construction loans on one- to four-family properties during fiscal 1996. Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, the Association may be required to advance funds beyond the amount originally committed to permit completion of the development. If the estimate of value proves to be inaccurate, the Association may be confronted, at or prior to the maturity of the loan, with a project having a value which is insufficient to assure full repayment. The Association is not engaged in any other significant loans for commercial development, land acquisition, and development of condominiums or apartment building. Consumer and Other Loans. The Association also offers consumer and other loans in the form of second mortgages and low document 10-year first mortgages which totalled $3.2 million and $3.9 6 million at September 30, 1996 and 1995, respectively, and automobile, recreational vehicle and mobile home loans, home improvement loans, home equity lines of credit, savings account loans, and commercial business loans which totalled $5.6 million and $4.2 million at September 30, 1996 and 1995, respectively. At September 30, 1996, 3.74% of total loans consisted of second mortgage loans. Federal regulations permit federally chartered thrift institutions to make secured and unsecured consumer loans up to 35% of an institution's assets. In addition, a federal thrift has lending authority above the 35% category for certain consumer loans, property improvement loans, and loans secured by savings accounts. The Association originates consumer loans in order to provide a wider range of financial services to its customers. Consumer loans generally have shorter terms and higher interest rates than mortgage loans but generally involve more credit risk than mortgage loans because of type and nature of the collateral and, in certain cases, the absence of collateral. In addition, consumer lending collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely effected by job loss, divorce, illness, and personal bankruptcy. In most cases, any repossessed collateral for a defaulted consumer loan will not provide an adequate source of repayment of the outstanding loan balance because of improper repair and maintenance of the underlying security. The remaining deficiency often does not warrant further substantial collection efforts against the borrower. The Association believes that the generally higher yields earned on consumer loans compensate for the increased credit risk associated with such loans and that consumer loans are important to its efforts to increase the interest rate sensitivity and shorten the average maturity of its loan portfolio. In connection with consumer loan applications, the Association verifies the borrower's income and reviews a credit bureau report. In addition, the relationship of the loan to the value of the collateral is considered and the borrower debt to income ratio must meet the Association's underwriting guidelines. Federal thrift institutions are permitted to make secured or unsecured loans for commercial, corporate, business, or agricultural purposes, including the issuance of letters of credit secured by real estate, business equipment, inventories, accounts receivable, and cash equivalents. The aggregate amount of such loans outstanding may not exceed 10% of such institution's assets. The Association offers, as consumer loans, low document fixed rate first mortgage and second mortgage loans on one- to four-family residences for a term not to exceed 10 years. Such loans are subject to an 80% combined loan to value ratio. The underwriting standards for these loans are the same as the Association's standards applicable to one- to four-family residential mortgages. In order to participate in local community development projects, the Association makes commercial business loans on a secured basis and generally requires collateral consisting of real estate, accounts receivable, inventory, and equipment. The Association's commercial business loans primarily consist of short term loans for equipment, working capital, business expansion, and inventory financing. The Association customarily reviews the financial statements and income tax returns of the guarantors and the origination of commercial business loans are approved on a loan by loan basis by the Loan Committee. As of September 30, 1996, the Association had approximately $1.5 million in outstanding commercial business loans, which represented approximately 3.45% of its loan portfolio. Loan Purchases. It is the current policy of the Association not to purchase loans. Although some loans that were purchased in the past still remain, the Association has not purchased any material amounts of whole loans or loan participations since 1984. In 1984, the Association purchased approximately $3.5 million in loans from a third party originator. These loans were secured by residential, multi-family, and commercial properties in various states. The originator eventually filed for bankruptcy and the Association wrote off approximately $700,000 of such loans in 1986. Approximately $72,908 of these loans remained in the Association's loan portfolio at September 30, 1996. The 7 Association has made reserves for these loans and does not expect any further reserves; however, no assurance can be given that additional reserves will not be required. Furthermore, the Association also purchased whole loans or participations therein throughout the country, such loans being secured by one- to four-family residential, multi-family, commercial, and land-tract development real estate. At September 30, 1996, $915,802 or 2.12% of the Association's total loan portfolio consisted of purchased loans. Although it is the current policy of the Association not to purchase whole loans or participations in loans, no assurances can be given that the Association will not purchase loans or participations therein in the future. Loan Approval Authority and Underwriting. Certain loan officers may approve loans on one- to four-family residences up to $50,000. The Loan Committee has the authority to approve loans on one- to four-family residences above $50,000 up to $150,000. Loans on one- to four-family residences exceeding $150,000 requires the Board of Director's approval. Certain loan officers may approve consumer loans up to $25,000 or $50,000 if secured by real estate mortgages on owner occupied residences with a loan to value of 80% or less and up to 100% of loan to value on home equity lines of credit. For all loans originated by the Association, upon receipt of a completed loan application from a prospective borrower, a credit report is ordered, income and certain other information is verified, and if necessary, additional financial information is requested. An appraisal of the real estate intended to secure the proposed loan is required which currently is performed by a state certified independent appraiser designated and approved by the Board of Directors of the Association. The Association makes construction/permanent loans on individual properties. Funds advanced during the construction phase are held in a loan-in-process account and disbursed based upon various stages of completion. The independent appraiser or loan officer determines the stage of completion based upon a physical inspection of the construction. The Association requires title insurance on all loans originated for sale on the secondary market. Title insurance is also required where a purchase of real estate is involved and on all fixed rate loans. Borrowers must also obtain hazard or flood insurance (for loans on property located in a flood zone) prior to closing the loan. For loans in excess of 80% of the loan to value ratio, borrowers are generally required to advance funds on a monthly basis together with each payment of principal and interest to an escrow account from which the Association makes disbursements for items such as real estate taxes and hazard insurance premiums. Loan Commitments. The Association issues written, formal commitments to prospective borrowers on all real estate approved loans. The commitment usually requires acceptance within 60 days of the date of issuance, however, on loans originated for sale in the secondary market, the term depends on the time remaining on the rate lock. As of September 30, 1996, the Association had $634,000 of commitments to originate mortgage loans. Loan Processing Fees. In addition to interest earned on loans, the Association recognizes service charges which consist primarily of loan application fees, processing fees, and late charges. The Association recognized loan processing fees of $71,000 and $76,000 for the fiscal years ended September 30, 1996 and 1995, respectively. Loans to One Borrower. Savings associations are subject to the same limits as those applicable to national banks, which under current regulations limit loans-to-one borrower in an amount equal to 15% of unimpaired capital and unimpaired surplus, calculated as the sum of the Association's core and supplementary capital included in total capital, plus the balance of the general valuation allowances for loan and lease losses not included in supplementary capital, plus investments in subsidiaries that are not included in calculating core capital, or $500,000, whichever is higher. The Association's maximum loan- 8 to-one borrower limit was approximately $1.7 million as of September 30, 1996. At September 30, 1996, the Association's largest aggregate loans to one borrower relationship consisted of several loans secured by commercial property, business inventory, and residential real estate with a balance of $772,650 and was current. Loan Delinquencies. The Association's collection procedures provide that when a mortgage loan is 15 days past due, a notice of nonpayment is sent. If payment is still delinquent after 30 days, the customer will receive a letter and/or telephone call. If the delinquency continues, similar subsequent efforts are made to eliminate the delinquency. If the loan continues in a delinquent status for 90 days or more and no repayment plan is in effect, a notice of right to cure default is mailed to the customer giving 30 days to bring the account current before foreclosure is commenced. Loans are reviewed on a monthly basis and are generally placed on a non-accrual status when the loan becomes more than 90 days delinquent and, in the opinion of management, the collection of additional interest is doubtful. Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income. Subsequent interest payments, if any, are either applied to the outstanding principal balance or recorded as interest income, depending on the assessment of the ultimate collectibility of the loan. Real estate acquired by the Association as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until such time as it is sold. When foreclosed real estate is acquired, it is recorded at the fair value at the date of foreclosure. Valuations are periodically performed by management and subsequent charges to operations are taken when it is determined that the carrying value of the property exceeds the estimated net realizable value. The Association was the owner of property classified as real estate owned and other repossessed assets, with original loan balances of $15,700 that had been written down to $0.00 at September 30, 1996. See "- Classified Assets." 9 The following table sets forth information regarding non-accrual loans, real estate owned, and other repossessed assets and loans, that are 90 days or more delinquent but on which the Association was accruing interest at the dates indicated. As of the dates indicated, the Association had no loans categorized as trouble debt restructuring within the meaning of Statement of Financial Accounting Standards ("SFAS") No. 15. At September 30, ------------------------ 1996 1995 ------- ------- (In Thousands) Loans accounted for on a non-accrual basis: Mortgage loans: Permanent loans secured by 1-4 dwelling units.......................... $ -- $ 29 All other mortgage loans.................. -- -- Non-mortgage loans.......................... 17 -- ------ ------ Total....................................... 17 29 Accruing loans which are contractually past due 90 days or more: Mortgage loans: Construction loans -- -- Permanent loans secured by 1-4 dwelling units.......................... 31 3 All other mortgage loans.................. -- -- Non-mortgage loans: Consumer.................................. -- 12 ----- ----- Total....................................... 31 15 ----- ----- Total non-accrual and accrual loans......... 48 44 Real estate owned, net...................... -- 30 Other non-performing assets................. -- -- ----- ------ Total non-performing assets................. $ 48 $ 74 ===== ===== Total non-accrual and accrual loans to net loans.............................. 0.11% 0.10% Total non-accrual and accrual loans to total assets........................... 0.07% 0.06% Total non-performing assets to total assets.............................. 0.07% 0.11% Interest income that would have been recorded on loans accounted for on a non-accrual basis under the original terms of such loans was $1,148 and $1,319 for the fiscal years ended September 30, 1996 and 1995, respectively. No interest income on non-accrual loans was included in income for the fiscal years ended September 30, 1996 or 1995. Classified Assets. OTS regulations provide for a classification system for problem assets of insured institutions which covers all problem assets. Under this classification system, problem assets of insured institutions are classified as "substandard," "doubtful," or "loss." An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or 10 of the collateral pledged, if any. Substandard assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard, with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as loss are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets may be designated "special mention" because of potential weaknesses that do not currently warrant classification in one of the aforementioned categories. When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as loss, it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. An institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS, which may order the establishment of additional general or specific loss allowances. A portion of general loss allowances established to cover possible losses related to assets classified as substandard or doubtful may be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital. At September 30, 1996, the Association's classified assets consisted of special mention loans of $813,837, substandard loans of $1,070,717 and doubtful loans of $0. A $668,825 general reserve allowance was established for both classified and unclassified assets. Assets classified as "loss" totalled $223,969 with a $223,969 specific reserve established. The Association had delinquent loans of 60 days or more of $188,862. Doubtful loans may be classified due to particular aspects of the loan; such as, delinquency, high loan-to-value ratio, poor market conditions, future employment of owner, or environmental issues. As of September 30, 1996, no loans were classified doubtful, therefore, no doubtful loans are reflected as non-performing loans in the prior table. Foreclosed Real Estate. Real estate acquired by the Association as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until it is sold. When property is acquired it is recorded at the fair value at the date of foreclosure less estimated costs of disposition. The Association records loans as in substance foreclosures if the borrower has little or no equity in the property based upon its documented current fair value, the Association can only expect repayment of the loan to come from the sale of the property and if the borrower has effectively abandoned control of the collateral or has continued to retain control of the collateral but because of the current financial status of the borrower, it is doubtful the borrower will be able to repay the loan in the foreseeable future. In-substance foreclosures are accounted for as real estate acquired through foreclosure, when title to the collateral has been acquired by the Association. There may be significant other expenses incurred such as attorney and other extraordinary servicing costs involved with in substance foreclosures. The Association had no in substance foreclosures at September 30, 1996. The Association holds real estate owned with a balance of $0 (net of a $15,700 loss provision) at September 30, 1996. 11 Allowances for Loan Losses. It is management's policy to provide for inherent losses on loans in its loan portfolio. A provision for loan losses is charged to operations based on management's evaluation of the potential losses that may be incurred in the Association's loan portfolio. Such evaluation, which includes a review of all loans of which full collectibility of interest and principal may not be reasonably assured, considers the Association's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and current economic conditions. Management will continue to review the entire loan portfolio to determine the extent, if any, to which further additional loss provisions may be deemed necessary. There can be no assurance that the allowance for losses will be adequate to cover losses which may in fact be realized in the future and that additional provisions for losses will not be required. Allocation of Allowance for Loan Losses. The following table sets forth the allocation of the Association's allowance for loan losses by loan category and the percent of loans in each category to total loans receivable at the dates indicated. The portion of the loan loss allowance allocated to each loan category does not represent the total available for future losses that may occur within the loan category because the total loan loss allowance is a valuation reserve applicable to the entire loan portfolio.
At September 30, ------------------------------------------------------------- 1996 1995 ---------------------------- --------------------------- Percent of Percent of Loans to Loans to Amount Total Loans Amount Total Loans ------ ----------- ------ ----------- (Dollars in Thousands) At end of period allocated to: One-to-four family residential (includes held for sale)........ $746 88.41% $762 83.52% Multi-family and commercial real estate..................... 102 5.07 101 9.98 Construction...................... 3 1.40 4 2.53 Consumer and other loans.......... 26 5.12 95 3.97 ---- -------- ---- -------- Total allowance.............. $877 100.00% $962 100.00% === ====== === ======
12 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, ------------------------- 1996 1995 ------- ------- (Dollars in Thousands) Gross loans outstanding(1).................................. $44,362 $44,231 ====== ====== Average loans outstanding................................... $43,435 $44,371 ====== ====== Allowance balances (at beginning of period)................. $ 962 $ 1,006 ------ ------ Provision (credit): Residential(2)............................................ (54) 23 Commercial real estate.................................... 26 25 Construction.............................................. (2) (3) Non-mortgage and other (including land)................... 34 (25) ------- ------- Total provision............................................. 4 20 ------- ------- Charge-offs: Residential(2)............................................ 5 2 Commercial real estate.................................... 2 - Non-mortgage and other (including land)................... 85 67 ------- ------- Total Charge-offs........................................... 92 69 ------- ------- Recoveries: Residential(2)............................................ 2 3 Commercial real estate.................................... - 1 Non-mortgage and other (including land)................... 1 1 ------- ------- Total Recoveries............................................ 3 5 ------- ------- Allowance balance (at end of period)........................ $ 877 $ 962 ====== ====== Allowance for loan losses as a percent of gross loans....... 1.98% 2.17% Net loans charged off as a part of average loans outstanding 0.21% 0.16%
- ------------------------ (1) Includes total loans (including loans held for sale), net of loans in process. (2) Includes one- to four-family and multi-family residential real estate loans. Interest Bearing Accounts Held at Other Financial Institutions. As of September 30, 1996, the Association held $3.6 million in insured interest bearing deposits in other financial institutions and $2.8 million at the FHLB of Des Moines. The Association maintains these accounts in order to maintain liquidity and improve the interest-rate sensitivity of its assets. 13 Investment Portfolio Mortgage-backed and Related Securities. To supplement lending activities, the Association invests in residential mortgage-backed securities. Although such securities are held for investment, they can serve as collateral for borrowings and, through repayments, as a source of liquidity. The mortgage-backed securities portfolio as of September 30, 1996 consisted primarily of certificates issued by the FHLMC. To a lesser extent, the mortgage-backed securities portfolio also contains certificates issued by FNMA and the Government National Mortgage Association ("GNMA"). As of September 30, 1996, the carrying value of mortgage-backed securities totalled $4.9 million, or 6.94% of total assets. The market value of such securities totalled approximately $4.9 million at September 30, 1996. Mortgage-backed securities represent a participation interest in a pool of single-family or multi-family mortgages, the principal and interest payments on which are passed from the mortgage originators, through intermediaries (generally quasi-governmental agencies) that pool and repackage the participation interests in the form of securities, to investors such as the Association. Such quasi-governmental agencies, which guarantee the payment of principal and interest to investors, primarily include FHLMC, Fannie Mae, and GNMA. Mortgage-backed securities typically are issued with stated principal amounts, and the securities are backed by pools of mortgages that have loans with interest rates that are within a range and have varying maturities. The underlying pool of mortgages can be composed of either fixed-rate mortgages or adjustable-rate mortgage loans. Mortgage-backed securities are generally referred to as mortgage participation certificates or pass-through certificates. As a result, the interest rate risk characteristics of the underlying pool of mortgages (i.e., fixed rate or adjustable rate) as well as prepayment risk, are passed on to the certificate holder. The life of a mortgage-backed pass-through security is equal to the life of the underlying mortgages. Mortgage-backed securities issued by FHLMC, Fannie Mae, and GNMA make up a majority of the pass-through certificates market. Investment Activities. The Association is required under federal regulations to maintain a minimum amount of liquid assets that may be invested in specified short-term securities and certain other investments. See "- Regulation - Federal Home Loan Bank System." The Association has generally maintained a liquidity portfolio well in excess of regulatory requirements. Liquidity levels may be increased or decreased depending upon the yields on investment alternatives and upon management's judgment as to the attractiveness of the yields then available in relation to other opportunities and its expectation of future yield levels, as well as management's projections as to the short-term demand for funds to be used in the Association's loan origination and other activities. As of September 30, 1996, the Association had an investment portfolio of approximately $17.3 million, consisting primarily of U.S. government agency obligations, certificates of deposit at other institutions, and FHLB stock, as permitted by OTS regulations. The Association has found its level of investment securities has increased in recent years as a result of repayments and prepayments on loans and mortgage-backed securities exceeding loan demand. The market value of investments at September 30, 1996 was $17.3 million which is substantially equivalent to its carrying value. The Association anticipates having the ability to fund all of its investing activities from funds held on deposit at the FHLB of Des Moines. The Association will continue to seek high quality investments with short to intermediate maturities and duration from one to three years. 14 Investment Portfolio. The following table sets forth the carrying value of the Association's investment securities portfolio, short-term investments, and FHLB stock at the dates indicated.
September 30, ------------------------------ 1996 1995 ---------- ---------- (In Thousands) Investment Securities: U.S. Government Securities Held to Maturity........ $ - $ 499 U.S. Government Securities Available for Sale...... 2,499 1,011 U.S. Agency Securities Held to Maturity............ 1,750 5,674 U.S. Agency Securities Available for Sale.......... 7,836 2,478 Certificates of Deposit............................ 4,065 6,064 Mutual Fund........................................ 87 82 FHLMC Stock........................................ 436 299 FHLB Stock......................................... 651 638 ------ ------ Total Investment Securities...................... 17,324 16,745 Mortgage-backed Securities Held to Maturity.......... 3,479 4,125 Mortgage-backed Securities Available for Sale........ 1,377 625 Interest Bearing Deposits(1)......................... 2,266 2,600 ------ ------ Total Investments.................................. $24,446 $24,095 ====== ======
- --------------- (1) Consisted of FHLB demand deposits and daily time deposits, considered cash equivalents. 15 Investment Portfolio Maturities. The following table sets forth certain information regarding the carrying values, weighted average yields, and maturities of the Association's investment securities portfolio at September 30, 1996.
As of September 30, 1996 ----------------------------------------------------------------------------------------------------- One Year or Less One to Five Years Five to Ten Years More than Ten Years Carrying Average Carrying Average Carrying Average Carrying Average Value Yield Value Yield Value Yield Value Yield ----------- ---------- ----------- ----------- ----------- ----------- ----------- --------- (Dollars in Thousands) U.S. government obligations held to maturity........... $ - -% $ - -% $ - -% $ - -% U. S. government obligations available for sale......... 1,506 6.40 992 5.45 - - - - U.S. agency obligations held to maturity........... 1,250 5.58 500 7.01 - - - - U.S. agency obligations available for sale......... 2,989 4.86 4,424 6.06 - - 423 6.91 Other Securities(1).......... 6,418 5.56 - - - - - - FHLB stock(2)................ N/A N/A N/A N/A N/A N/A N/A N/A FHLMC stock, available for sale(3)...... N/A N/A N/A N/A N/A N/A N/A N/A Mortgage-backed securities held to maturity........... - - 1,326 6.76 673 8.05 1,480 8,83 Mortgage-backed securities available for sale......... - - 932 6.48 - - 446 7.91 ------ --- ----- ---- ------- --- ------ ---- Total...................... $12,163 5.50% $8,174 6.21% $ 673 8.05% $2,349 8.31% ====== ==== ===== ==== ====== ==== ===== ====
As of September 30, 1996 ---------------------------------- Total Investment Securities Carrying Average Market Value Yield Value ---------- ---------- -------- (Dollars in Thousands) U.S. government obligations held to maturity........... $ - -% $ - U. S. government obligations available for sale......... 2,498 6.02 2,498 U.S. agency obligations held to maturity........... 1,750 5.99 1,748 U.S. agency obligations available for sale......... 7,836 5.65 7,836 Other Securities(1).......... 6,418 5.56 6,418 FHLB stock(2)................ 651 7.25 651 FHLMC stock, available for sale(3)...... 436 - 436 Mortgage-backed securities held to maturity........... 3,479 7.89 3,508 Mortgage-backed securities available for sale......... 1,378 6.95 1,378 ------- ---- ------ Total...................... $24,446 6.02% $24,473 ====== ==== ======
(1) Consists of Certificates of Deposit and other interest bearing deposits. (2) As of September 30, 1996, FHLB stock paid a return of 7.25%. (3) FHLMC stock noninterest earning - market value only. 16 Sources of Funds General. Deposits are the major external source of the Association's funds for lending and other investment purposes. The Association derives funds from the amortization and prepayment of loans and mortgage-backed securities, maturities of investment securities, and operations. Scheduled loan principal repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and market conditions. The Association also has the ability to obtain advances from the FHLB of Des Moines as a source of funds. Deposits. Consumer and commercial deposits are attracted principally from within the Association's primary market area through the offering of a broad selection of deposit instruments including regular savings, demand and NOW accounts, and term certificate accounts. Deposit account terms vary according to the minimum balance required, the time period the funds must remain on deposit, and the interest rate, among other factors. Regular savings accounts, money market accounts, and NOW accounts constituted $18.6 million, or 32.8% of the Association's deposit portfolio at September 30, 1996. Certificates of deposit constituted $38.0 million or 67.2% of the deposit portfolio. As of September 30, 1996, the Association had no brokered deposits. Jumbo Certificate Accounts. The following table indicates the amount of the Association's certificates of deposit of $100,000 or more by time remaining until maturity as of September 30, 1996. Certificates of Deposits ----------- (In Thousands) Maturity Period - --------------- Within three months....................................... $ 738 Three through six months.................................. 303 Six through twelve months................................. 892 Over twelve months........................................ 501 ------- Total................................................... $ 2,434 ====== Borrowings Deposits are the primary source of funds of the Association's lending and investment activities and for its general business purposes. The Association may obtain advances from the FHLB of Des Moines to supplement its supply of lendable funds. Advances from the FHLB of Des Moines are typically secured by a pledge of the Association's stock in the FHLB of Des Moines and a portion of the Association's first mortgage loans and certain other assets. The Association, if the need arises, may also access the Federal Reserve Bank discount window to supplement its supply of lendable funds and to meet deposit withdrawal requirements. As of September 30, 1996, the Association had no advances outstanding from the FHLB of Des Moines. As of September 30, 1996, the Association had no other borrowings. 17 Subsidiary Activity The Company has one wholly-owned subsidiary, the Association. The Association is permitted to invest up to 2% of its assets in the capital stock of, or secured or unsecured loans to, subsidiary corporations, with an additional investment of 1% of assets when such additional investment is utilized primarily for community development purposes. Under such limitations, as of September 30, 1996, the Association was authorized to invest up to approximately $1.4 million in the stock of, or loans to, service corporations (based upon the 2% limitation). At September 30, 1996, the Association had no subsidiaries. Personnel As of September 30, 1996, the Association had 19 full-time and 3 part-time employees. None of the Association's employees are represented by a collective bargaining group. Regulation Set forth below is a brief description of certain laws that relate to the regulation of the Company and the Association. The description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations. Company Regulation General. The Company is a unitary savings and loan holding company subject to regulatory oversight by the OTS. As such, the Company is required to register and file reports with the OTS and is subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over the Company and its non-savings association subsidiaries, should such subsidiaries be formed, which also permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association. This regulation and oversight is intended primarily for the protection of the depositors of the Association and not for the benefit of stockholders of the Company. Qualified Thrift Lender Test. As a unitary savings and loan holding company, the Company generally is not subject to activity restrictions, provided the Association satisfies the Qualified Thrift Lender ("QTL") test or meets the definition of domestic building and loan association pursuant to section 7701 of the Internal Revenue Code of 1986, as amended (the "Code"). If the Company acquires control of another savings association as a separate subsidiary, it would become a multiple savings and loan holding company, and the activities of the Company and any of its subsidiaries (other than the Association or any other SAIF-insured savings association) would become subject to restrictions applicable to bank holding companies unless such other associations each also qualify as a QTL or domestic building and loan association and were acquired in a supervisory acquisition. See "- Regulation of the Association Qualified Thrift Lender Test." Restrictions on Acquisitions. The Company must obtain approval from the OTS before acquiring control of any other SAIF-insured association. Such acquisitions are generally prohibited if they result in a multiple savings and loan holding company controlling savings associations in more than one state. However, such interstate acquisitions are permitted based on specific state authorization or in a supervisory acquisition of a failing savings association. 18 Federal law generally provides that no "person," acting directly or indirectly or through or in concert with one or more other persons, may acquire "control," as that term is defined in OTS regulations, of a federally insured savings institution without giving at least 60 days written notice to the OTS and providing the OTS an opportunity to disapprove the proposed acquisition. In addition, no company may acquire control of such an institution without prior OTS approval. Federal Securities Law. The Company is subject to filing and reporting requirements by virtue of having its common stock registered under the Securities Exchange Act of 1934. Furthermore, company stock held by persons who are affiliates (generally officers, directors and principal stockholders) of the Company may not be resold without registration or unless sold in accordance with certain resale restrictions. If the Company meets specified current public information requirements, each affiliate of the Company is able to sell in the public market, without registration, a limited number of shares in any three-month period. Regulation of the Association General. As a federally chartered, SAIF-insured savings association, the Association is subject to extensive regulation by the OTS and the Federal Deposit Insurance Corporation ("FDIC"). Lending activities and other investments must comply with various federal statutory and regulatory requirements. The Association is also subject to certain reserve requirements promulgated by the Federal Reserve Board. The OTS, in conjunction with the FDIC, regularly examines the Association and prepares reports for the consideration of the Association's Board of Directors on any deficiencies that are found in the Association's operations. The Association's relationship with its depositors and borrowers is also regulated to a great extent by federal and state law, especially in such matters as the ownership of savings accounts and the form and content of the Association's mortgage documents. The Association must file reports with the OTS and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other savings institutions. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the SAIF and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulations, whether by the OTS, the FDIC, or the Congress could have a material adverse impact on the Company, the Association, and their operations. Insurance of Deposit Accounts. The Association's deposit accounts are insured by the SAIF to the maximum of $100,000 permitted by law. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the institution's primary regulator. The FDIC charges an annual assessment for the insurance of deposits based on the risk a particular institution poses to its deposit insurance fund. Under this system as of September 30, 1996, SAIF members paid within a range of 23 cents to 31 cents per $100 of domestic deposits, depending upon the institution's risk classification. This risk classification is based on an institution's capital group and supervisory subgroup assignment. Pursuant to the Economic Growth and Paperwork Reduction Act of 19 1996 (the "Act"), the FDIC imposed a special assessment on SAIF members to capitalize the SAIF at the designated reserve level of 1.25% as of October 1, 1996. Based on the Association's deposits as of March 31, 1995, the date for measuring the amount of the special assessment pursuant to the Act, the Association paid a special assessment of $362,557 on November 27, 1996 to recapitalize the SAIF. This expense was recognized during the fourth quarter of fiscal 1996. The FDIC is expected to lower the premium for deposit insurance to a level necessary to maintain the SAIF at its required reserve level; however, the range of premiums has not been determined at this time. Pursuant to the Act, the Association will pay, in addition to its normal deposit insurance premium as a member of the SAIF, an amount equal to approximately 6.4 basis points toward the retirement of the Financing Corporation bonds ("Fico Bonds") issued in the 1980's to assist in the recovery of the savings and loan industry. Member of the Bank Insurance Fund ("BIF"), by contrast, will pay, in addition to their normal deposit insurance premium, approximately 1.3 basis points. Based on total deposits as of September 30, 1996, had the Act been in effect, the Association's Fico Bond premium would have been approximately $36,200 in addition to its normal deposit insurance premium. Beginning no later than January 1, 2000, the rate paid to retire the Fico Bonds will be equal for members of the BIF and the SAIF. The Act also provides for the merging of the BIF and the SAIF by January 1, 1999 provided there are no financial institutions still chartered as savings associations at that time. Should the insurance funds be merged before January 1, 2000, the rate paid by all members of this new fund to retire the Fico Bonds would be equal. Regulatory Capital Requirements. OTS capital regulations require savings institutions to meet three capital standards: (1) tangible capital equal to 1.5% of total adjusted assets, (2) a leverage ratio (core capital) equal to at least 3% of total adjusted assets, and (3) a risk-based capital requirement equal to 8.0% of total risk-weighted assets. Savings associations with a greater than "normal" level of interest rate exposure will, in the future, be subject to a deduction for an interest rate risk ("IRR") component from capital for purposes of calculating their risk-based capital requirement. 20 As shown below, the Association's regulatory capital exceeded all minimum regulatory capital requirements applicable to it as of September 30, 1996: Percent of Adjusted Amount Assets ------ ------ (Dollars in Thousands) GAAP Capital: $10,642,889 15.21% ========== ===== Tangible Capital:(1) Regulatory requirement...................... $ 1,046,236 1.50% Actual capital.............................. 10,404,144 14.92 ---------- ------ Excess.................................... $ 9,357,908 13.42% ========== ====== Core Capital:(1) Regulatory requirement...................... $ 2,092,472 3.00% Actual capital.............................. 10,404,144 14.92 ---------- ------ Excess.................................... $ 8,311,672 11.92% ========== ====== Risk-Based Capital:(2) Regulatory requirement...................... $ 2,732,548 8.00% Actual capital.............................. 10,834,091 30.72 ---------- ------ Excess.................................... $ 8,101,543 23.72% ========== ====== (1) Regulatory capital reflects modifications from GAAP capital due to valuation adjustments for available for sale securities and unallowable mortgage servicing rights. (2) Based on risk weighted assets of $34,156,849. Net Portfolio Value. The OTS requires the computation of amounts by which the net present value of an institution's cash flows from assets, liabilities, and off balance sheet items (the institution's net portfolio value, or "NPV") would change in the event of assumed changes in market interest rates. An institution's IRR is measured as the change to its NPV as a result of a hypothetical 200 basis point change in market interest rates. A resulting change in NPV of more than 2% of the estimated market value of its assets will require the institution to deduct from its capital 50% of that excess change. However, the Association is exempt from this rule. The rule provides that the OTS will calculate the IRR component quarterly for each institution. 21 The following table presents the Association's NPV at September 30, 1996, as calculated by the OTS and based on OTS assumptions utilizing data provided to the OTS by the Association.
Percent of Change in Change Interest Estimated Amount of Estimated NPV NPV Ratio (4) Rates (basis points) NPV Change(1) NPV(2) Ratio(3) (basis points) -------------------- --- --------- ------ -------- -------------- +400 $ 9,779 $-2,585 -21% 14.34% -290 +300 10,597 -1,767 -14 15.30 -193 +200 11,339 -1,025 -8 16.15 -109 +100 11,942 -422 -3 16.80 -43 - 12,364 17.24 -100 12,602 238 +2 17.45 +21 -200 12,710 345 +3 17.51 +27 -300 13,052 687 +6 17.83 +59 -400 13,515 1,151 +9 18.27 +104
- ----------------- (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.
At September 30, At September 30, 1996 1995 ---------------- ---------------- *** Risk Measures: 200 bp rate shock *** Pre-Shock NPV Ratio: NPV as % of PV of Assets........ 17.24% 16.93% Exposure Measure: Post-Shock NPV Ratio............... 16.15 16.51 Sensitivity Measure: Change in NPV Ratio............. -109 bp -42 bp *** Calculation of Capital Component *** Change in NPV as % of PV of Assets................... -1.43% -.67% Interest Rate Risk Capital Component ($000).......... -- --
Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit run-offs, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the Association may undertake in response to changes in interest rates. Although the Association is not subject to the IRR component reduction discussed above, the Association is still subject to interest rate risk and, as can be seen above, rising interest rates will reduce the Association's NPV. The OTS has the authority to require otherwise exempt institutions to comply with the rule concerning interest rate risk. 22 Dividend and Other Capital Distribution Limitations. OTS regulations require the Association to give the OTS 30 days advance notice of any proposed declaration of dividends to the Company, and the OTS has the authority under its supervisory powers to prohibit the payment of dividends to the Company. In addition, the Association may not declare or pay a cash dividend on its capital stock if the effect thereof would be to reduce the regulatory capital of the Association below the amount required for the liquidation account to be established pursuant to the Association's plan of conversion. OTS regulations impose limitations upon all capital distributions by savings institutions, such as cash dividends, payments to repurchase or otherwise acquire its shares, payments to shareholders of another institution in a cash-out merger and other distributions charged against capital. The rule establishes three tiers of institutions, based primarily on an institution's capital level. An institution that exceeds all fully phased-in capital requirements before and after a proposed capital distribution ("Tier 1 institution") and has not been advised by the OTS that it is in need of more than the normal supervision can, after prior notice but without the approval of the OTS, make capital distributions during a calendar year equal to the greater of (i) 100% of its net income to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the excess capital over its fully phased-in capital requirements) at the beginning of the calendar year, or (ii) 75% of its net income over the most recent four quarter period. Any additional capital distributions require prior regulatory approval. At September 30, 1996, the Association was a Tier 1 institution. In the event the Association's capital fell below its fully phased-in requirement or the OTS notified it that it was in need of more than normal supervision, the Association's ability to make capital distributions could be restricted. In addition, the OTS could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OTS determines that such distribution would constitute an unsafe or unsound practice. Finally, a savings association is prohibited from making a capital distribution if, after making the distribution, the savings association would be undercapitalized (not meet any one of its minimum regulatory capital requirements). Qualified Thrift Lender Test. Savings institutions must meet either the QTL test pursuant to OTS regulations or the definition of a domestic building and loan association in section 7701 of the Internal Revenue Code of 1986, as amended (the "Code"). If the Association maintains an appropriate level of certain specified investments (primarily residential mortgages and related investments, including certain mortgage-related securities) and otherwise qualifies as a QTL or a domestic building and loan association, it will continue to enjoy full borrowing privileges from the FHLB of Des Moines. The required percentage of investments under the QTL test is 65% of assets while the Code requires investments of 60% of assets. An association must be in compliance with the QTL test or definition of domestic building and loan association on a monthly basis in nine out of every 12 months. As of September 30, 1996, the Association was in compliance with its QTL requirement and met the definition of a domestic building and loan association. There can be no assurance that the Association will continue to meet the QTL requirements or the definition of a domestic building and loan association in future periods. Loans-to-One Borrower. See "Business - Loans-to-One Borrower." Transactions With Affiliates. Generally, restrictions on transactions with affiliates require that transactions between a savings association or its subsidiaries and its affiliates be on terms as favorable to the Association as comparable transactions with non-affiliates. In addition, certain of these transactions are restricted to an aggregate percentage of the Association's capital; collateral in specified amounts must usually be provided by affiliates to receive loans from the Association. Affiliates of the Association include the Company and any company which would be under common control with the Association. 23 In addition, a savings association may not lend to any affiliate engaged in activities not permissible for a bank holding company or acquire the securities of any affiliate that is not a subsidiary. The OTS has the discretion to treat subsidiaries of savings associations as affiliates on a case-by-case basis. Liquidity Requirements. All savings associations are required to maintain an average daily balance of liquid assets equal to a certain percentage of the sum of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less. The liquidity requirement may vary from time to time (between 4% and 10%) depending upon economic conditions and savings flows of all savings associations. At September 30, 1996, the Association's required liquid asset ratio was 5%. Monetary penalties may be imposed upon associations for violations of liquidity requirements. Federal Home Loan Bank System. The Association is a member of the FHLB of Des Moines, which is one of 12 regional FHLBs that administers the home financing credit function of savings associations. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB. As a member, the Association is required to purchase and maintain stock in the FHLB of Des Moines in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year. At September 30, 1996, the Association had $650,700 in FHLB stock, which was in compliance with this requirement. Federal Reserve System. The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily checking, NOW, and Super NOW checking accounts) and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy the liquidity requirements that are imposed by the OTS. At September 30, 1996, the Association was in compliance with these requirements. Item 2. Description of Property - --------------------------------- (a) Properties. The Company owns no real property but utilizes the office owned by the Association. The Association owns and operates from its office located at 35 East Broadway, Little Falls, Minnesota 56345. The Association has a total investment in office property and equipment of $1.35 million with a net book value of $788,846 at September 30, 1996. (b) Investment Policies. See "Item 1. Business" above for a general description of the Association's investment policies and any regulatory or Board of Directors' percentage of assets limitations regarding certain investments. All of the Association's investment policies are reviewed and approved by the Board of Directors of the Association, and such policies, subject to regulatory restrictions (if any), can be changed without a vote of stockholders. The Association's investments are primarily acquired to produce income, and to a lesser extent, possible capital gain. 24 (1) Investments in Real Estate or Interests in Real Estate. See "Item 1. Business - Lending Activities," "Item 1. Business - Regulation of the Association," and "Item 2. Description of Property. (a) Properties" above. (2) Investments in Real Estate Mortgages. See "Item 1. Business - Lending Activities" and "Item 1. Business - Regulation of the Association." (3) Investments in Securities of or Interests in Persons Primarily Engaged in Real Estate Activities. See "Item 1. Business - Lending Activities," "Item 1. Business - Regulation of the Association," and "Item 1. Business - Subsidiary Activity." (c) Description of Real Estate and Operating Data. Not Applicable. Item 3. Legal Proceedings - --------------------------- The Company, from time to time, is a party to ordinary routine litigation, which arises in the normal course of business, such as claims to enforce liens, condemnation proceedings on properties in which the Association holds security interests, claims involving the making and servicing of real property loans, and other issues incident to the business of the Company. In the opinion of management, no material loss is expected from any of such pending claims or lawsuits. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------- No matters were submitted to stockholders for a vote during the quarter ended September 30, 1996. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder - -------------------------------------------------------------------------------- Matters ------- The information contained under the section captioned "Stock Market Information" in the Company's Annual Report to Stockholders for the fiscal year ended September 30, 1996 (the "Annual Report"), is incorporated herein by reference. Item 6. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations ------------- Except as set forth below, the required information is contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report and is incorporated herein by reference. 25 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).
Year Ended September 30, ---------------------------------------------------------------------------------- 1996 vs. 1995 1995 vs. 1994 -------------------------------------- -------------------------------------- Increase (Decrease) Increase (Decrease) Due to Due to -------------------------------------- -------------------------------------- Rate/ Rate/ Volume Rate Volume Net Volume Rate Volume Net ------ ---- ------ --- ------ ---- ------ --- (Dollars in Thousands) Interest income: Loans receivable(1)....... $ (76) $173 $ (4) $ 93 $ (78) $382 $ (9) $295 Mortgage-backed securities 123 (41) (18) 64 (3) (14) -- (17) Investment securities..... 92 50 6 148 182 86 30 298 Other interest-earning assets 64 (19) (4) 41 (16) 84 (14) 54 --- --- --- --- --- --- --- --- Total interest-earning assets 203 163 (20) 346 85 538 7 630 --- --- --- --- --- --- --- --- Interest expense: Savings accounts.......... (3) 301 -- 298 (100) 282 (14) 168 Other liabilities......... -- -- -- -- -- -- -- -- ---- ----- ---- --- ---- ----- ---- --- Total interest-bearing liabilities............ (3) 301 -- 298 (100) 282 (14) 168 ----- ---- ---- --- ---- ---- --- --- Net change in interest income $ 206 $(138) $ (20) $ 48 $ 185 $ 256 $ 21 $462 ==== ==== ==== === ==== ==== ==== ===
- --------------------- (1) Loans are net of undisbursed commitments. Item 7. Financial Statements - ------------------------------ The Company's consolidated financial statements required herein are contained in the Annual Report and are incorporated herein by reference. Quarter results of operations on page 14 of the 1996 annual report to stockholders is hereby incorporated by reference. Item 8. Changes in and Disagreements With Accountants on Accounting and - -------------------------------------------------------------------------------- Financial Disclosure -------------------- Not Applicable. 26 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance - -------------------------------------------------------------------------------- with Section 16(b) of the Exchange Act -------------------------------------- The information contained under the sections captioned "Filing of Beneficial Ownership Reports" and "I - Information with Respect to Nominees for Director, Directors Continuing in Office, and Executive Officers" in the Company's definitive proxy statement for the Company's Annual Meeting of Stockholders (the "Proxy Statement") is incorporated herein by reference. Item 10. Executive Compensation - -------------------------------- The information contained under the section captioned "Director and Executive Officer Compensation" in the Proxy Statement is incorporated herein by reference. Item 11. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ (a) Security Ownership of Certain Beneficial Owners Information required by this item is incorporated herein by reference to the section captioned "Voting Securities and Principal Holders Thereof" in the Proxy Statement. (b) Security Ownership of Management Information required by this item is incorporated herein by reference to the section captioned "I - Information with Respect to Nominees for Director, Directors Continuing in Office, and Executive Officers" in the Proxy Statement. (c) Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the Registrant. Item 12. Certain Relationships and Related Transactions - -------------------------------------------------------- The information required by this item is incorporated herein by reference to the section captioned "Certain Relationships and Related Transactions" and "Voting Securities and Principal Holders Thereof" in the Proxy Statement. Item 13. Exhibits, List and Reports on Form 8-K - ------------------------------------------------ (a) Exhibits are either attached as part of this Report or incorporated herein by reference. 3.1 Articles of Incorporation of Mississippi View Holding Company* 3.2 Bylaws of Mississippi View Holding Company* 10.1 Employment contract with Thomas J. Leiferman* 10.2 Management Stock Bonus Plans** 27 10.3 1995 Stock Option Plan** 11 Statement regarding computation of earnings per share (see Note 1 to the Notes to Consolidated Financial Statements in the Annual Report) 13 Annual Report to Stockholders for the fiscal year ended September 30, 1996. 21 Subsidiaries of the Registrant (see information contained herein under "Business - Subsidiary Activity"). 23 Consent of Bertram Cooper & Co., LLP 99 Financial Data Schedule*** (b) Reports on Form 8-K. None. - ------------------- * Incorporated by reference to the Registrant's Registration Statement on Form S-1 (File No. 33-86820) declared effective by the SEC on February 9, 1995. ** Incorporated by reference to the Registrant's proxy statement for the special meeting of stockholders held on September 27, 1995 and filed with the SEC on August 17, 1995 (File No. 0-25546) *** Only in electronic filing. 28 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MISSISSIPPI VIEW HOLDING COMPANY Dated: December 19, 1996 By: /s/Thomas J. Leiferman ---------------------- Thomas J. Leiferman President, Chief Executive Officer, and Director (Duly Authorized Representative) Pursuant to the requirement of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By: /s/Thomas J. Leiferman By: ---------------------- ----------------------- Thomas J. Leiferman Andrew P. Revering President, Chief Executive Officer, and Director Chairman of the Board (Principal Executive Officer) Date: December 19, 1996 Date: December 19, 1996 By: /s/Neil Adamek By: /s/Wallace R. Mattock ---------------------- ----------------------- Neil Adamek Wallace R. Mattock Director Director Date: December 19, 1996 Date: December 19, 1996 By: /s/Gerald Peterson By: /s/Peter Vogel ---------------------- ----------------------- Gerald Peterson Peter Vogel Director Director Date: December 19, 1996 Date: December 19, 1996 By: /s/Larry D. Hartwig ---------------------- Larry D. Hartwig Treasurer/Comptroller (Principal Financial and Accounting Officer) Date: December 19, 1996 EX-13 2 EXHIBIT 13 EXHIBIT 13 Annual Report to Stockholders for the fiscal year ended September 30, 1996 [MISSISSIPPI VIEW HOLDING COMPANY LOGO] 1996 ANNUAL REPORT MISSISSIPPI VIEW HOLDING COMPANY 1996 ANNUAL REPORT - ------------------------------------------------------------------------------- TABLE OF CONTENTS - ------------------------------------------------------------------------------- Selected Financial and Other Data............................. 2 Letter to Shareholders........................................ 3 Corporate Profile and Stock Market Information................ 4 Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 6 Selected Quarterly Financial Data............................. 14 Report of Independent Auditors................................ 15 Consolidated Financial Statements............................. 16 Notes to Consolidated Financial Statements.................... 21 Office Locations.............................................. 36 Other Corporate Information................................... 36 1
SELECTED FINANCIAL AND OTHER DATA Financial Condition (Dollars in Thousands) September 30, 1996 1995 1994 1993 1992 - --------------- ---- ---- ---- ---- ---- Total assets (1) ................................................ $70,011 $69,443 $62,865 $64,995 $65,857 Loans receivable, net ........................................... 43,070 42,989 44,226 44,712 45,065 Loans held for sale ............................................. 179 58 93 241 354 Mortgage-backed securities ...................................... 4,857 4,750 3,123 4,248 6,041 Investment securities (1) ....................................... 17,323 16,745 11,549 10,383 11,888 Cash and cash equivalents (1) ................................... 2,584 2,837 1,732 3,950 772 Deposits ........................................................ 56,531 54,920 56,402 58,873 60,680 Other borrowings ................................................ -- -- -- -- 37 Net retained earnings (substantially restricted) (2) ............ 7,320 6,832 5,869 5,495 4,690 Total stockholders equity (1) ................................... 12,440 13,783 n/a n/a n/a Summary of Operations (Dollars in Thousands) Year Ended September 30, 1996 1995 1994 1993 1992 - ------------------------ ---- ---- ---- ---- ---- Interest income ................................................. $ 5,173 $ 4,860 $ 4,233 $ 4,803 $ 5,530 Interest expense ................................................ 2,531 2,234 2,065 2,577 3,456 Net interest income ............................................. 2,642 2,626 2,168 2,226 2,074 Provision for credit losses ..................................... 4 26 144 90 99 Non-interest income ............................................. 351 215 155 303 164 Non-interest expense (3) ........................................ 2,056 1,468 1,502 1,325 1,349 Income before income taxes and cumulative effect of change in accounting principle .......................................... 933 1,347 677 1,114 790 Income tax expense .............................................. 374 519 302 309 297 Income before cumulative effect of change in accounting principle 559 828 375 805 493 Cumulative effect of change in accounting principle ............. -- -- -- -- 98 Net income ...................................................... 559 828 375 805 591 Other Selected Data Year Ended September 30, 1996 1995 1994 1993 1992 - ------------------------ ---- ---- ---- ---- ---- Return on average assets ........................................ 0.80% 1.24% 0.59% 1.22% 0.88% Return on average equity ........................................ 4.18 7.94 6.47 15.81 13.45 Average interest earning assets to average interest bearing liabilities (1) ............................................... 124.74 119.33 109.87 108.23 106.46 Average equity to average assets (1) ............................ 19.21 15.66 9.05 7.73 6.52 Net interest rate spread ........................................ 2.95 3.35 3.10 3.09 2.78 Net interest income after provision for loan losses to total other expenses (1) ............................................ 128.32 177.04 134.74 161.16 146.34 Earnings per share (4) .......................................... $ 0.66 0.89 n/a n/a n/a Book value per share (4) ........................................ $ 14.17 $ 13.67 n/a n/a n/a Stockholders equity to assets at period end (1) ................. 17.77% 19.85% 9.34 8.45 7.11 Non-performing assets to total assets ........................... 0.07 0.11 0.18 0.35 1.15 Non-performing loans to total loans ............................. 0.11 0.11 0.21 0.16 0.66 Allowance for loan losses to total loans ........................ 2.03 2.23 2.27 1.88 1.78
- ------------------------------------- (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 Mississippi View Holding Company To Our Shareholders: I am pleased to present the annual report of Mississippi View Holding Company for the year ended September 30, 1996, our first full year of operations as a stock company. Fiscal 1996 earnings were significantly impacted by a one time Savings Association Insurance Fund (SAIF) special assessment charged to Community Federal Savings and Loan Association. The purpose of the assessment was to recapitalize SAIF and was charged to all SAIF insured institutions nationwide. The Association's 1996 fiscal earnings were reduced by 27.3% as a result of the assessment. The Company's year end return on assets was .80% compared to a 1.11% return on assets that would have been achieved without the special assessment. As a result of this recapitalization of the insurance fund, future deposit premiums will decline significantly effective January 1, 1997. As of September 30, 1996, Mississippi View Holding Company had repurchased approximately 13% of the stock it sold in the initial offering. This was done to move toward a capital level which provides a more adequate return to our shareholders. In addition, the Company has paid two semi-annual dividends of $0.08 per share. Future dividends, if any, will be based on continued successful operations of the company. Community Federal continues to significantly exceed all minimum federal regulatory capital requirements. The attainment of the Association's financial safety and soundness is a result of many years of conservative management. Mississippi View Holding Company is well positioned to meet tomorrow's challenges and demands, and looks forward to the future with optimism. Its focus will continue to be on meeting the financial needs of its customers and in promoting the economic growth of its market area. The Company's board of directors and staff are dedicated to doing what they do best, providing progressive, quality services to our customers. Thank you for your continued support and for sharing in our future success. Sincerely, /s/ Thomas J. Leiferman Thomas J. Leiferman President and Chief Executive Officer 3 Business of the Corporation and the Association Mississippi View Holding Company Mississippi View Holding Company (the "Company) is the parent company for Community Federal Savings and Loan Association of Little Falls ("Community Federal" or the "Association"). The Company was formed as a Minnesota corporation in November 1994 at the direction of the Association to acquire all of the capital stock that Community Federal issued upon its conversion from the mutual to stock form of ownership (the "Conversion"). On March 23, 1995, the Company became a unitary savings and loan holding company when it purchased 100% of the Association's newly-issued common stock in connection with the "Conversion". Under existing laws, the Company generally is not restricted from engaging in any type of business activity provided that the Association retains a specified amount of its assets in housing-related loans and investments. Management believes the holding company structure will facilitate expansion into existing and new market areas, should it ever decide to do so, through the acquisition or formation of new banking and non-banking operations. However, there are no present plans, arrangements, agreements or understandings regarding any such activities. The Company's business activities to date have been limited to its investments in and loans to the Association and a loan made to the Community Federal Savings and Loan Association Employee Stock Ownership Plan (the "ESOP") to enable the ESOP to purchase shares of the Company's common stock. The loan bears an interest rate and has a term and conditions which prevailed in the marketplace at the time it was originated. Community Federal Savings and Loan Association The Association is a federally chartered stock savings and loan association. The Association's only office is located in Little Falls, Morrison County, Minnesota. The Association was founded in 1934 under the name Little Falls Federal Savings and Loan Association of Little Falls. The name of the Association was changed to Community Federal Savings and Loan Association of Little Falls in July 1977. The Association is subject to examination and comprehensive regulation by the Office of Thrift Supervision ("OTS") and its deposits have been federally insured by the Savings Association Insurance Fund ("SAIF"). The Association is a member of and owns capital stock in the Federal Home Loan Bank ("FHLB") of Des Moines, which is one of the 12 regional banks in the FHLB System. The Association's primary market area consists of Morrison County, Minnesota, which encounters strong competition both in the attraction of deposits and origination of real estate and other loans. Competition comes primarily from the eight commercial banks and two credit unions with offices in its market area. In addition, the Association competes with investment and mortgage banking companies that operate in the area. Due to their size and holding company or branch network structure, some of the Association's competitors possess greater financial and marketing resources. Based on published figures, the Association is the only thrift institution headquartered in Morrison County, Minnesota. 4 The Association competes for saving accounts by offering competitive interest rates and a high level of personal service. The Association attracts deposits from the general public and uses such deposits primarily to invest in investment securities and to originate loans secured by first mortgages on owner-occupied, one to four-family residences in its market area. The Association's loan portfolio predominantly consists of both adjustable-rate and fixed-rate mortgage loans secured by single family residences and, to a much lesser extent, commercial mortgage and construction loans. The Association also makes consumer loans, consisting of savings account loans, home improvement loans, new and used auto loans, recreational vehicle loans, and unsecured loans. As of September 30, 1996, the Association's total net portfolio of loans was $43.2 million, of which $33.7 million, or 78%, was secured by residential real estate. The principal sources of funds for the Association's lending activities are deposits and the amortization, repayment, and maturity of loans and investment securities. The Association does not rely on brokered deposits. Principal sources of income are interest on loans and investment securities. The Association's principal expense is interest paid on deposits. Stock Market Information Since its issuance in March 1995, the Company's common stock has been traded on the Nasdaq "Small Cap" Market under the trading symbol of "MIVI". The daily stock quotation for Mississippi View Holding Company is published in The Wall Street Journal under the trading symbols of "MIVI" or "MissVw". The following table reflects the stock price trading range as published by the Nasdaq "Small Cap" Market statistical report. The stock price in the initial offering was $8.00 per share. HIGH LOW ---- --- Third Quarter - 6/30/95 10 1/4 8 1/2 Fourth Quarter - 9/30/95 11 5/8 9 1/2 First Quarter - 12/31/95 12 11 Second Quarter - 3/31/96 12 1/4 11 1/4 Third Quarter - 6/30/96 12 11 Fourth Quarter - 9/30/96 12 3/4 10 3/4 The number of shareholders of record of common stock as of the record date of December 2, 1996, was approximately 208. This does not reflect the number of persons or entities who held stock in nominee or "street" name through various brokerage firms. At September 30, 1996, there were 877,714 shares outstanding. Semi-annual cash dividends of $0.08/share were paid on February 15, 1996, and August 15, 1996, to the shareholders of common stock on the record dates of February 3, 1996, and August 1, 1996, respectively. The Company's ability to pay dividends to shareholders is dependent upon earnings from investments and dividends it receives from the Association. The Association may not declare or pay a cash dividend on any of its stock if the effect thereof would cause Community Federal's regulatory capital to be reduced below (1) the amount required for the liquidation account established in connection with the Association's conversion from mutual to stock form, or (2) the regulatory capital requirements imposed by the OTS. 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Company's consolidated results of operations are primarily dependent on the Association's net interest income, or the difference between the interest income earned on its loan, mortgage-backed securities and investment securities portfolios, and the interest expense paid on its savings deposits and other borrowings. Net interest income is affected not only by the difference between the yields earned on interest-earning assets and the costs incurred on interest-bearing liabilities, but also by the relative amounts of such interest-earning assets and interest-bearing liabilities. Other components of net income include: provisions for losses on loans and other assets; noninterest income (primarily, miscellaneous loan fees; service fees; gain on the sale of loans; and gain on sale of real estate owned property); noninterest expense (primarily, compensation and employee benefits; federal insurance premiums; data processing costs; office occupancy expense; and gains, losses and expenses associated with foreclosed real estate); and income taxes. Earnings of the Company also are affected significantly by general economic and competitive conditions, particularly changes in market interest rates, government policies, and actions of regulatory authorities. Management Strategy Management's strategy has been to enhance earnings and profitability and increase capital while maintaining asset quality. The Association's current lending strategy focuses on the origination of traditional one to four-family residential mortgages with the primary emphasis on single family residences in the Association's primary market area. Because deposits exceed loan demand, the Association also invests a significant portion of its assets in investment securities. This focus, along with the adherence to strict underwriting standards, is designed to reduce the risk of loss on the Association's loan portfolio. However, the lack of diversification in its loan portfolio structure does increase the Association's portfolio concentration risk by making the value of the portfolio more susceptible to declines in real estate values in its market area. This risk has been mitigated in recent years through the acquisition of investment securities, as well as the Association's efforts to maintain quality loans, consistent collection procedures, and adequate reserves for loss on loans. The Association's policy of pricing its deposits in accordance with management's determination of its lending and investment needs has caused assets to increase this past fiscal year. However, disintermediation has been a constant challenge offsetting deposit growth. Disintermediation is the flow of funds away from savings institutions into direct investments, such as U.S. Government and corporate securities and other investment vehicles which, because of the absence of federal insurance premiums and reserve requirements, generally pay higher rates of return than savings institutions. The Association recognizes that it will take time to originate the necessary amount of loans to fully and prudently leverage its capital from conversion. Therefore, management continues to invest in U.S. Government and federal agency securities. When needed, proceeds from maturing securities or sold securities will be used to fund loan originations. 6 Management has increased the interest rate sensitivity of the Association's assets and decreased the interest rate sensitivity of it liabilities, while maintaining high asset quality. This has been accomplished by: (1) originating mostly adjustable-rate mortgage loans, 15 and 20 year fixed mortgage loans, and shorter term consumer loans for its portfolio, (2) emphasizing the solicitation and retention of core deposits from within the primary market, (3) investing in short and intermediate term investments, (4) adhering to sound underwriting and investment standards, and (5) managing interest rates paid for deposits. In addition, the Association's conventional mortgage loans are underwritten to standards which would enable it to sell such loans in the secondary market, if management decided to do so. The Association attempts to manage the interest rates it pays on deposits while maintaining a stable deposit base and provide quality services to its customers. The Association has limited its borrowings and relied primarily upon deposits as its source of funds. To the extent the Association is unable to invest these funds in loans originated in the Association's market area, it will continue to purchase shorter, high quality investment securities. Changes in Financial Condition from September 30, 1995 to September 30, 1996 General. The Company increased total assets by $568,017 from September 30, 1995, to September 30, 1996. The asset increase was the net result of increased investments of $685,533 and increased loans receivable of $201,498 offset by decrease in cash and cash equivalents of $253,416 and a decrease in other assets of $65,598. Cash and Cash Equivalents. Cash and cash equivalents, which consist of interest-bearing and noninterest-bearing deposits, decreased $253,416, or 8.93%. This decrease was the result of increased deposits offset by increased loan originations and the purchase of investments and common stock of the Company. Securities available for sale. Securities available for sale increased $7,740,122, or 172.19%, from $4,495,023 on September 30, 1995, to $12,235,145 on September 30, 1996. This increase was due to the purchase of $5.45 million debt securities and a $2.5 million transfer between categories as described below. Furthermore, mortgage-backed securities available for sale increased $752,713 due to the purchase of mortgage-backed securities less principal amortization during this period and reduced mark to market values. From September 30, 1995 to September 30, 1996, mark to market valuations increased the value of such securities by $134,261. Any increase or decrease in the market value of such securities will have a corresponding positive or negative effect on stockholders' equity. These increases were offset by a $1.1 million maturity of available for sale securities. Securities held to maturity. Debt and mortgage-backed securities held to maturity decreased $7,067,389, or 43.20%, from $16,361,481 on September 30, 1995, to $9,294,092 on September 30, 1996. The Financial Accounting Standards Board issued a special portfolio classification standard on investments dated November 15, 1995, creating a window from November 15, 1995, to December 31, 1995, allowing financial institutions to reassess their existing held to maturity securities and transfer them to either the available for sale or trading category. During this window, the Company transferred $2.5 million from the held to maturity category to available for sale. 7 Furthermore, maturities of $3.9 million of debt securities held to maturity were reinvested in available for sale securities or were held in cash. Mortgage-backed securities decreased $645,332 due to principal amortization. FHLB Stock. Federal Home Loan Bank Stock increased $12,800 from $637,900 on September 30, 1995, to $650,700 on September 30, 1996, due to a stock dividend paid by the Federal Home Loan Bank of Des Moines at the end of December 1995. Loans Held for Sale. Loans held for sale increased $120,689 from $57,974 at September 30, 1995, to $178,663 at September 30, 1996. This increase is the result of management's decision to sell in the secondary market lower-yielding fixed rate mortgage loans rather than maintaining them for portfolio. Held for sale loans are presold in the secondary market prior to origination. The balance is the amount sold, yet unfunded as of the period end. Loans Receivable, Net. Loans receivable increased $80,809, from $42,989,472 on September 30, 1995, to $43,070,281 on September 30, 1996. The increase was due from new originations exceeding principal amortization and $2,135,339 held to maturity loans transferred to loans available for sale, the majority of which were subsequently sold, during this period. Accrued Interest Receivable. Accrued interest receivable decreased $78,598 from September 30, 1995, to September 30, 1996, as accrued interest on Conversion proceed investments were offset by reduced interest rates on adjustable rate and new fixed rate mortgages. Premises and Equipment. Premises and equipment, net of depreciation, decreased $72,835 due to normal depreciation amortized on fixed assets in excess of new asset purchases. Foreclosed Real Estate. Foreclosed real estate decreased $29,711, or 100%, from $29,711 at September 30, 1995 to $0.0 at September 30, 1996, due to the sale of REO during the period. Deferred Tax Asset. Deferred tax asset, net of valuation allowance, increased $73,403 during this twelve month period. The primary reason for the change was the deferred tax effect of the one time SAIF assessment. Other Assets. Other assets including a tax refund receivable increased $42,143, or 7.62%, from $553,065 as of September 30, 1995, to $595,208 as of September 30, 1996, due to a $23,892 tax refund receivable and a $22,000 reduction in various prepaid expenses. Deposits. Deposits, after interest credited, increased by $1,610,863, or 2.93% to $56,531,194 at September 30, 1996, from $54,920,331 at September 30, 1995. The increase was due to the marketing of a new deposit product and management's deposit pricing strategy. Advances from Borrowers for Taxes and Insurance. Advances from borrowers for taxes and insurance decreased $49,168 from $187,698 on September 30, 1995 , to $138,530 on September 30, 1996, due to a change in calculating the maximum allowed advances from borrowers for taxes and insurance. 8 Accrued Income Tax. The income tax accrual decreased $115,222 between the two periods due to an accrued income tax receivable amount calculated through September 30, 1996. The September 30, 1996, balance was classified as a tax refund receivable because the estimated tax payments exceeded the accrued expense. Other Liabilities. Other liabilities increased by $464,298, or 106.35%, from $436,552 on September 30, 1995, to $900,850 on September 30, 1996. The primary reason for the increase was the SAIF deposit insurance assessment of $362,557 along with increases in accounts payable of $34,928, accrued expenses of 65,900, and deferred compensation of $17,625. Shareholders' Equity. Shareholders' equity decreased by $1,342,754, or 9.74%, from $13,782,999 on September 30, 1995, to $12,440,245 on September 30, 1996. This decrease is the net effect of the following changes in equity: a paid in capital increase of $15,426 resulting from the fair market value adjustment to earned and committed to be released Employee Stock Ownership Plan ("ESOP") shares, net of taxes; an increase of $77,705 as a result of accounting for earned ESOP shares; an increase of $69,477 resulting from market valuation adjustments on available for sale securities; an increase of $558,768 from net operational income for the twelve month period just ended; a decrease of $387,412 for unearned Management Stock Bonus Plan ("MSBP") shares resulting from open market purchase of MSBP shares; a decrease of $1,536,689 resulting from open market purchases of the Company's common stock pursuant to three stock repurchase programs, and a decrease to retained earnings due to dividends declared and paid of $140,029. Average Balance Sheet The following table sets forth certain information relating to average balance sheets and reflects the average yield on assets and average cost of liabilities for the periods indicated and the average yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. Average balances are derived from month-end balances. Management does not believe that the use of month-end instead of daily average balances has caused any material difference in the information presented. 9
Average Balance Sheet For the Year Ended September 30, -------------------------------------------------------------------------- 1996 1995 --------------------------------- ------------------------------------ Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost ------- -------- ---------- ------- -------- ------------ (Dollars in Thousands) Interest-earning assets: Loans receivable (1) ............... $43,435 $3,704 8.53% $44,371 $3,610 8.14% Mortgage-backed securities ......... 5,047 344 6.82% 3,502 280 8.00% Investment securities (2) .......... 16,286 964 5.92% 14,636 817 5.58% Other interest-earning assets ...... 3,497 162 4.63% 2,887 153 5.30% ------ ----- ------ ----- Total interest-earning assets .... 68,265 5,174 7.58% 65,396 4,860 7.43% Non interest-earning assets ......... 1,315 1,177 ------ ------ Total assets...................... $69,580 $66,573 ======= ======= Interest-bearing liabilities: Passbook / Passcard savings......... $11,105 268 2.41% $10,621 232 2.18% NOW / MMDA ......................... 6,068 100 1.65% 6,798 113 1.66% Certificates of Deposit ............ 37,551 2,164 5.76% 37,385 1,889 5.05% ------ ----- ------ ----- Total interest-bearing liabilities 54,724 2,532 4.63% 54,804 2,234 4.08% ----- ----- Non interest-bearing liabilities: Demand Deposits .................... 827 625 Other non interest-bearing liabilities ....................... 665 716 ------ ------ Total liabilities ................ 56,216 56,145 Retained earnings ................... 13,364 10,428 ------ ------ Total liabilities and retained earnings ......................... $69,580 $66,573 ====== ====== Net interest income ................. $2,642 $2,626 ===== ===== Interest rate spread (3) ............ 2.95% 3.35% Net yield on interest-earning assets (4)................................. 3.87% 4.02% Ratio of average interest-earning assets to average interest-bearing liabilities ......................... 124.74% 119.33%
- --------------------------------- (1) Average balances include non-accrual loans and are net of undisbursed commitments. (2) Includes interest-bearing deposits in other financial institutions. (3) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (4) Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets. 10 Comparison of Operating Results for the Years Ended September 30, 1995, and 1996 Net Income. Net Income decreased $268,786, or 32.48% from $827,554 on September 30, 1995 to $558,768 on September 30, 1996. The decrease was primarily due to a $362,557 charge connected with a one time special assessment from the SAIF. This one time assessment was the result of legislation that was signed into law on September 30, 1996, for the purpose of recapitalizing the SAIF. Increased net interest income of $16,279, increased noninterest income of $135,226, along with decreased provisions for loan losses of $22,705 and decreased tax expense of $144,809, were offset by increased noninterest expenses of $225,248. Interest Income. Interest income increased $313,562, or 6.45%, in the twelve month period ended September 30, 1996, as compared to the same period ended September 30, 1995. Interest income from loans receivable increased $93,447, the result of decreased mortgage loan interest of $40,742 due to a reduction in the mortgage loan portfolio average balance offset by increased consumer and other loan interest income of $134,189 due to increased loan balances. Income from securities available for sale increased $326,005 and income from securities held to maturity decreased $105,890. The decrease was a result of the transfer of held to maturity securities to available for sale securities discussed in changes in financial condition. The remaining available for sale security investment income of $220,115 was due primarily to an increase in average balance of investments as the Company invested the proceeds from the Conversion for only six months in fiscal 1995 compared to twelve months in fiscal 1996. Interest Expense: Interest expense, which is comprised of interest paid on deposits, increased $297,283, or 13.31%, for the twelve month comparative period for September 30, 1995 and 1996. This increase was due to the increase in the average balance of deposits, particularly certificates of deposit, with higher rates paid on specific deposit products. Net Interest Income. Net interest income increased $16,279, or 0.62%, from $2,625,607 for the twelve month period ended September 30, 1995, to $2,641,886 for the same period ended September 30, 1996. This was due to the increased revenue from interest earned on the interest earning assets ($313,562), offset by increased deposit interest expense ($297,283), due to increased average balances. The Company's spread decreased from 3.35% to 2.95% as the cost of interest-bearing deposits increased at a faster rate than yields on interest-earning assets. Provisions for Loan Losses. The Association currently maintains an allowance for loan losses based upon management's periodic evaluation of known and inherent risks in the loan portfolio, the Association's past loss experience, adverse situations that may affect the borrowers' ability to repay loans, estimated value of the underlying collateral, and current and expected market conditions. Provisions for loan losses decreased by $22,705, or 85.91%, from $26,430 for the period ended September 30, 1995, to $3,725 for the period ended September 30, 1996. This decrease was due to an assessment of the loan portfolio and market conditions. While management maintains its allowance for losses at a level which it considers to be adequate to provide for potential losses, there can be no assurances that further additions will not be made to the loss allowances and that such losses will not exceed the estimated amounts. Noninterest Income. Noninterest income increased $135,226, or 62.76%, from $215,452 at September 30, 1995, to $350,678 at September 30, 1996. This increase was primarily the result of a $81,023 contingency recovery in the first quarter of fiscal 1996 and an increase of $61,348 in gains on the sale of loans due to the Association's sale of $2,135,339 of mortgage loans in December 1995. The contingency 11 recovery was due to a $65,000 settlement paid by the Association to settle litigation for which it had established a $146,023 loss reserve. In this litigation the bankruptcy trustee was seeking the return of loan payments made to the Association by the servicer on account of mortgage loans on which payments had not been made from mortgagors, and on account of mortgage loans not in the possession of the Association based on theories of fraudulent conveyance and preference. On October 30, 1995, the Court issued an order approving a settlement in the amount of $65,000 between the trustee and the Association. Furthermore, other noninterest income increased $24,950. These noninterest income increases were offset by decreased fees and service charges of $5,529 and a $24,730 decrease in gain on the sale of real estate owned. The reduction in the gain on real estate owned was due to the Association recognizing a gain of $32,878 on the sale of a property in December 1994. Noninterest Expense. Noninterest expense increased by $587,805, or 40.04%, from $1,468,166 to $2,055,971 during the twelve month periods ended September 30, 1995 and 1996, respectively. Compensation and employee benefits increased $155,669 due to director and employee compensation increases of $47,263, ESOP expense increase of $42,058, and MSBP expense increase of $66,541. In fiscal 1995 no MSBP expenses were incurred. Pursuant to the Economic Growth and Paperwork Reduction Act of 1996 (the "Act"), the FDIC imposed a special assessment on SAIF members to capitalize the SAIF at the designated reserve level of 1.25% as of October 1, 1996. Based on the Association's deposits as of March 31, 1995, the date for measuring the amount of the special assessment pursuant to the Act, the Association will pay a special assessment of $362,557 to recapitalize the SAIF. The FDIC is expected to lower the premium for deposit insurance to a level necessary to maintain the SAIF at its required reserve level; however, the range of premiums has not been determined at this time. Pursuant to the Act, the Association will pay, in addition to its normal deposit insurance premium as a member of the SAIF, an amount equal to approximately 6.4 basis points toward the retirement of the Financing Corporation bonds ("Fico Bonds") issued in the 1980's to assist in the recovery of the savings and loan industry. Members of the Bank Insurance Fund ("BIF"), by contrast, will pay, in addition to their normal deposit insurance premium, approximately 1.3 basis points. Based on total deposits as of September 30, 1996, had the Act been in effect, the Association's Fico Bond premium would have been approximately $36,000 in addition to its normal deposit insurance premium. Beginning no later than January 1, 2000, the rate paid to retire the Fico Bonds will be equal for members of the BIF and the SAIF. The Act also provides for the merging of the BIF and the SAIF by January 1, 1999, provided there are no financial institutions still chartered as savings associations at that time. Should the insurance funds be merged before January 1, 2000, the rate paid by all members of this new fund to retire the Fico Bonds would be equal. Other increases in noninterest expenses were occupancy of $4,227, data processing of $4,673, advertising of $3,255, real estate owned expense of $3,574, offset by a decrease in provisions for losses on foreclosed real estate of $7,295. "Other" noninterest expenses, including legal, consulting, registrar fees, filing fees, auditing, and shareholder meeting expenses, increased $62,027 due to the added costs of being a public company. Income Tax Expense. Income tax expense decreased $144,809, or 27.91%, from $518,909 for the twelve months ended September 30, 1995, to $374,100 for the twelve month period ended September 30, 1996, due to reduced earnings primarily from the SAIF assessment. 12 Liquidity and Capital Resources. The Association is required to maintain minimum levels of "liquid assets," as defined by OTS regulations. This requirement, which may be varied from time to time depending upon economic conditions and deposit flows, is based upon a percentage of deposits and short-term borrowings. The required OTS minimum ratio is currently 5%. The Association's average liquidity ratio was 26.65% during September 1996. The OTS required short term liquidity is 1%; at September 30, 1996, the Association's short term liquidity was 16.42%. The Association manages its liquidity ratio to meet its funding needs, including: deposit outflows; disbursements of payments collected from borrowers for taxes and insurance; repayment of borrowings, when applicable and loan principal disbursements. The Association also monitors its liquidity position in accordance with its asset/liability objectives. In addition to funds provided from operations, the Association's primary sources of funds are: savings deposits; principal repayments on loans and mortgage-backed securities; and matured or called investment securities. As an alternative to supplement liquidity needs, the Association has the ability to borrow from the FHLB of Des Moines. Scheduled loan repayments and maturing investment securities are a relatively predictable source of funds. However, savings deposit flows and prepayments on loans and mortgage-backed securities are significantly influenced by changes in market interest rates, economic conditions, and competition. The Association strives to manage the pricing of its deposits to maintain a balanced stream of cash flow commensurate with its loan commitments and other predictable funding needs. The Association's most liquid assets are cash and cash equivalents, which include highly liquid short-term investments. The level of these assets is dependent on the Association's operating, financing, and investing activities during any given period. At September 30, 1996, cash and cash equivalents totaled $2.584 million. The Association anticipates that it will have sufficient funds available to meet its current commitments. As of September 30, 1996, the Association had commitments to fund loans of $634,000, unused lines of credit of $798,000, and loans in process of $227,762. Certificates of deposit scheduled to mature within one year totaled $27.0 million at September 30, 1996. Based on historical deposit withdrawals and outflows, and on internal monthly deposit reports monitored by management, management believes that a majority of such deposits will remain in the Association. As a result, no adverse liquidity effects are expected. The Association is required by OTS to maintain various regulatory capital requirements. At September 30, 1996, the Association exceeded these regulatory capital requirements. See Note 14 to the Notes to Consolidated Financial Statements included herein. Impact of Inflation and Changing Prices The Consolidated Financial Statements and Notes thereto presented herein have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars, without consideration for changes in the relative purchasing power of money over time caused by inflation. 13 Unlike industrial companies, nearly all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services, since such goods and services are affected by inflation. In the current interest rate environment, liquidity and the maturity structure of the Association's assets and liabilities are critical to the maintenance of acceptable performance levels. Impact of New Accounting Standards The Financial Accounting Standards Board ("FASB") has issued several new accounting standards which may affect the accounting for transactions of the Association. The new standards are discussed in detail at Note 15 to the Notes to Consolidated Financial Statements included herein. Selected Quarterly Financial Data (unaudited) (Dollars in thousands except earnings per share) First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Fiscal 1996 - ------------------------- Total interest income ... $1,307 $1,300 $1,281 $1,286 Total interest expense .. 622 637 634 639 Net interest income ..... 685 663 647 647 Provision for loan losses 2 -- 2 -- Net Income .............. 258 174 196 (69) Earnings per share ...... $ 0.29 $ 0.19 $ 0.24 $(0.09) Fiscal 1995 - ------------------------- Total interest income ... $1,120 $1,151 $1,276 $1,313 Total interest expense .. 518 535 575 606 Net interest income ..... 602 616 701 707 Provision for loan losses 10 10 8 (2) Net Income .............. $ 190 $ 158 $ 202 $ 277 Earnings per share ...... N/A N/A $ 0.22 $ 0.30 14 [BERTRAM COOPER & CO., LLP LETTERHEAD] INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders Mississippi View Holding Company and Subsidiary Little Falls, Minnesota 56345 We have audited the accompanying consolidated statements of financial condition of Mississippi View Holding Company and Subsidiary (the Company) as of September 30, 1996 and 1995, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for the two years then ended. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Mississippi View Holding Company and Subsidiary as of September 30, 1996 and 1995, and the consolidated results of their operations and their cash flows for the two years then ended, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for certain investments in debt and equity securities. /s/ Bertram Cooper & Co., LLP Bertram Cooper & Co., LLP Waseca, Minnesota October 29, 1996 15 MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, ---------------------------- ASSETS 1996 1995 ----------- ----------- Cash and cash equivalents: Cash and due from banks $ 317,777 $ 236,632 Interest bearing deposits with banks 2,265,877 2,600,438 Securities available for sale, at fair value 12,235,145 4,495,023 Securities held to maturity, at amortized cost 9,294,092 16,361,481 FHLB stock, at cost 650,700 637,900 Loans held for sale 178,663 57,974 Loans receivable, net of allowance for loan losses of $877,094 in 1996 and $962,086 in 1995 43,070,281 42,989,472 Accrued interest receivable 450,327 528,925 Premises and equipment 788,846 861,681 Foreclosed real estate (net of allowance for losses of $15,700 for 1996 and $25,187 for 1995) - 29,711 Deferred tax asset (net of valuation allowance) 163,903 90,500 Other assets 595,208 553,065 ---------- ---------- Total Assets $ 70,010,819 $ 69,442,802 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Demand deposits $ 4,471,137 $ 4,242,241 Savings deposits 14,087,832 13,918,703 Time deposits 37,972,225 36,759,387 ---------- ---------- Total deposits 56,531,194 54,920,331 Advances from borrowers for taxes and insurance 138,530 187,698 Income taxes payable - 115,222 Other liabilities 900,850 436,552 ---------- ---------- Total Liabilities 57,570,574 55,659,803 ========== ========== Shareholders' equity: Serial preferred stock, no par value, 5,000,000 shares authorized, no shares issued - - Common stock, $.10 par value, 10,000,000 shares authorized; 1,007,992 shares issued 100,799 100,799 Paid in capital 7,510,397 7,494,971 Treasury stock (130,278 shares), at cost (1,536,689) - Retained earnings, substantially restricted 7,116,646 6,697,907 Unearned ESOP shares (66,527 and 75,263 shares) at cost (566,736) (644,441) Unearned MSBP shares (34,474 shares) at cost (387,412) - Net unrealized appreciation on available-for-sale securities, net of tax of $135,494 in 1996 and $89,175 in 1995 203,240 133,763 ---------- ---------- Total shareholders' equity 12,440,245 13,782,999 ---------- ---------- Total liabilities and shareholders' equity $ 70,010,819 $ 69,442,802 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements 16 MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
For the Year ended September 30, ------------------------- 1996 1995 --------- --------- Interest income: Loans receivable $ 3,703,652 $ 3,610,205 Securities available for sale 528,912 202,907 Securities held to maturity 940,865 1,046,755 --------- --------- Total interest income 5,173,429 4,859,867 Interest expense: Demand deposits 37,345 39,941 Savings deposits 330,357 304,947 Time deposits 2,163,841 1,889,372 --------- --------- Total interest expense 2,531,543 2,234,260 Net interest income 2,641,886 2,625,607 Provision for loan losses 3,725 26,430 --------- --------- Net interest income after provision for loan losses 2,638,161 2,599,177 --------- --------- Noninterest income: Other fees and service charges 70,603 76,132 Gain on sale of loans 74,142 19,170 Net gain on sale of real estate owned 17,394 42,124 Contingency recovery 81,023 - Other 107,516 78,026 --------- --------- Total noninterest income 350,678 215,452 --------- --------- Noninterest expenses: Compensation and employee benefits 919,565 763,896 Occupancy 87,856 83,629 Deposit insurance assessment 362,557 - Deposit insurance premium 150,091 150,973 Data processing 75,996 71,323 Advertising 30,787 27,532 Real estate owned expense, net 5,053 5,204 Provision for losses on foreclosed real estate - 3,570 Other 424,066 362,039 --------- --------- Total noninterest expense 2,055,971 1,468,166 --------- --------- Income before income taxes 932,868 1,346,463 Income tax expense 374,100 518,909 --------- --------- Net income $ 558,768 $ 827,554 ========= ========= Earnings per share of common stock $ 0.66 $ 0.89 ========= =========
The accompanying notes are an integral part of these consolidated financial statements 17 MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Unrealized Retained Unallocated Unallocated Gain (Loss) Additional Earnings Common Common on Securities Common Paid-in Treasury Substantially Stock Held Stock Held Available Stock Capital Stock Restricted By ESOP For MSBP For Sale Total ------ ---------- -------- ------------- ---------- ----------- ------------ ----- Balance, September 30, 1994 $ - $ - $ - $5,870,353 $ - $ - $ (1,067) $ 5,869,286 Cumulative effect of accounting change - - - - - - 94,553 94,553 Net earnings for the year ended September 30, 1995 - - - 827,554 - - - 827,554 Issuance of common stock net of stock acquired by the ESOP 100,799 7,491,423 - - (690,472) - - 6,901,750 Fair value adjustment of ESOP shares net of taxes of $2,365 - 3,548 - - - - - 3,548 Allocated ESOP shares - - - - 46,031 - - 46,031 Net change in unrealized appreciation on available- for-sale securities, net of taxes of $27,563 - - - - - - 40,277 40,277 ------- --------- ---------- --------- -------- ------- ------- ---------- Balance, September 30, 1995 100,799 7,494,971 - 6,697,907 (644,441) - 133,763 13,782,999 Treasury Stock acquired - - (1,536,689) - - - - (1,536,689) Net earnings for the year ended September 30, 1995 - - - 558,768 - - - 558,768 Dividend paid - - - (140,029) - - - (140,029) Fair value adjustment of ESOP shares net of taxes of $10,284 - 15,426 - - - - - 15,426 Allocated ESOP shares - - - - 77,705 - - 77,705 MSBP shares acquired, net of earned shares in the amount of $71,217 - - - - - (387,412) - (387,412) Net change in unrealized appreciation on available- for-sale securities, net of taxes of $46,318 - - - - - - 69,477 69,477 -------- ---------- ----------- ---------- --------- --------- -------- ----------- Balance, September 30, 1996 $100,799 $7,510,397 $(1,536,689) $7,116,646 $(566,736) $(387,412) $203,240 $12,440,245 ======== ========== =========== ========== ========= ========= ======== ===========
The accompanying notes are an integral part of these consolidated financial statements 18 MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended September 30, -------------------------- 1996 1995 ----------- ------------ Cash flows from operating activities: Interest received on loans and investments $ 5,212,957 $ 4,683,486 Interest paid (2,532,101) (2,236,930) Other fees, commissions, and income received 299,433 238,890 Cash paid to suppliers, employees and others (1,350,252) (1,389,795) Contributions to charities (7,869) (2,304) Income taxes paid (643,219) (324,750) Loans originated for sale (2,455,977) (1,214,782) Proceeds from sale of loans 4,487,415 1,269,148 ---------- ---------- Net cash provided by operating activities 3,010,387 1,022,963 ---------- ---------- Cash flows from investing activities: Purchases of available-for-sale securities (6,547,147) (1,627,350) Proceeds from maturities of available-for-sale securities 1,356,285 1,000,000 Purchases of held-to-maturity securities (4,694,532) (13,570,461) Proceeds from maturities of held-to-maturity securities 9,295,315 7,555,005 Loan originations and principal payments on loans, net (2,123,430) 1,193,291 Proceeds from sale of property and equipment - 464 Purchases of property and equipment (10,936) (47,620) Proceeds from sale of foreclosed real estate 17,394 38,446 ---------- ---------- Net cash provided by (used in) investing activities (2,707,051) (5,458,225) ---------- ---------- Cash flows from financing activities: Net increase (decrease) in non-interest bearing demand and savings deposit accounts 398,025 (791,572) Net increase (decrease) in time deposits 1,213,396 (690,979) Net (decrease) increase in mortgage escrow funds (49,168) 117,580 Dividend on unallocated ESOP shares 11,612 - Net proceeds from sale of common stock - 7,595,770 Acquisition of unearned ESOP shares - (690,472) Acquisition of treasury stock (1,536,689) - Acquistion of unearned MSBP shares (453,899) - Dividends paid (140,029) - ---------- ---------- Net cash used by financing activities (556,752) 5,540,327 ---------- ---------- Net (decrease) increase in cash and cash equivalents (253,416) 1,105,065 Cash and cash equivalents at beginning of year 2,837,070 1,732,005 ---------- ---------- Cash and cash equivalents at end of year $ 2,583,654 $ 2,837,070 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements 19 MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the Year Ended September 30, ------------------- 1996 1995 ---- ---- RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Net income $ 558,768 $ 827,554 Adjustments: Provision for losses on loans and real estate 3,725 30,000 Depreciation 83,771 79,882 Federal Home Loan Bank stock dividends (12,800) - Noncash dividends (5,071) (5,058) ESOP fair value adjustment 15,426 3,548 Amortization of ESOP compensation 66,092 46,031 Amortization of MSBP compensation 66,487 - Net amortization and accretion of premiums and discounts on securities 38,211 49,490 Net loss on sale of fixed assets - 4,540 Net (gains) on sales of real estate owned (17,393) (42,124) Net loan fees deferred and amortized 14,291 5,579 Net mortgage loan servicing fees deferred (11,611) - Contingency recovery (81,023) - (Increase) decrease in: Loans held for sale 2,014,650 35,196 Accrued interest receivable 78,598 (166,962) Prepaid income tax (23,892) 51,823 Deferred tax asset (119,721) 29,479 Other assets (6,639) 45,605 Increase (decrease) in: Accrued interest payable (558) (2,670) Accrued income tax (115,222) 115,222 Other liabilities 464,298 (84,172) --------- --------- Net cash provided by operating activities $ 3,010,387 $ 1,022,963 ========= ========= SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Federal Home Loan Bank stock dividends $ 12,800 $ - Refinancings of sales of real estate owned 37,200 9,000 Transfers from loans to real estate acquired through foreclosure 4,989 64,046 Noncash dividends 5,071 5,058 Transfer of debt securities to available for sale from securities held to maturity 2,449,446 3,568,247 Transfers of loans held for investment to loans held for sale 2,135,339 -
The accompanying notes are an integral part of these consolidated financial statements 20 MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1996 and 1995 Note 1. Summary of Significant Accounting Policies The following summarizes the significant accounting policies Mississippi View Holding Company (the Company) follows in presenting its financial statements. Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary Community Federal Savings and Loan Association (the Association). All significant intercompany transactions and balances are eliminated in consolidation. Certain amounts in the financial statements for the prior year have been reclassified to conform to current financial statement presentation. Organization - On March 23, 1995, the Association converted from a mutual association to a stock association pursuant to a Plan of Conversion, (the Conversion) via the issuance of common stock. In conjunction with the Conversion, the Company sold 1,007,992 shares of common stock which, after giving effect to offering expenses of $471,714, resulted in net proceeds of $7.6 million which included an order for 20,159 shares of stock in the amount of $161,272 from the Employee Stock Ownership Plan (ESOP). Pursuant to the Conversion, the Association transferred all of its outstanding shares to its newly organized holding company. On March 24, 1995 the Association's ESOP purchased an additional 60,480 shares in the open market, in the amount of $529,200. The ESOP's purchases were funded through a loan from the Company. Upon the Conversion, the preexisting liquidation rights of the mutual stock association members were unchanged. Such rights will be accounted for by the Company for the benefit of such depositors in proportion to their liquidation interests as of either the Eligibility Record Date or the Supplemental Eligibility Record Date as defined. Subsequent to the Conversion, neither the Company nor the Association may declare or pay cash dividends on any of their shares of common stock if the effect would be to reduce shareholders' equity below applicable regulatory capital requirements or if such declaration of payment would otherwise violate regulatory requirements. Nature of Business - Mississippi View Holding Company is a unitary thrift holding company whose subsidiary provides financial services. The Association's business is that of a financial intermediary and consists primarily of attracting deposits from the general public and using such deposits, together with borrowings and other funds, to make mortgage loans secured by residential real estate and other consumer loans. At September 30, 1996, the Association operated one retail banking office in Minnesota. The Association is subject to significant competition from other financial institutions, and is also subject to regulation by certain federal agencies and undergoes periodic examinations by those regulatory authorities. Use of Estimates - In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheets, and income and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties. A substantial portion of the Association's loans are collateralized by real estate in local markets (see Note 13). In addition, foreclosed real estate is located in the same market area. Accordingly, the ultimate collectibility of a substantial portion of the Association's loan portfolio and the recovery of a substantial portion of the carrying amount of foreclosed real estate are susceptible to changes in local market conditions. 21 MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Note 1. Summary of Significant Accounting Policies - (continued) While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Association's allowance for losses on loans and foreclosed real estate. Such agencies may require the Association to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Cash Equivalents - Cash equivalents of $1,000,000 and $2,200,000 at September 30, 1996 and 1995, respectively, consist of certificates of deposit, and funds due from banks. For purposes of the statements of cash flows, the Association considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Investment Securities - The Company was required to adopt Statement of Financial Accounting Standard (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," for the fiscal year beginning October 1, 1994. SFAS No. 115 requires the Company to classify its investments, including debt securities, marketable equity securities, mortgage-backed securities, and mortgage related securities in one of three categories: held to maturity, trading or available for sale. Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost. The Company does not engage in security trading and, therefore, the balance of its debt securities and any equity securities are classified as available for sale. The Company classifies debt securities as available for sale when it determines that such securities may be sold at a future date or if there are foreseeable circumstances under which the Company would sell such securities. Securities designated as available-for-sale are recorded at fair value. Changes in the fair value of securities available-for-sale are included in shareholders' equity as unrealized holding gains or losses net of the related tax effect. Unrealized losses on available for sale securities or held to maturity securities reflecting a decline in value judged to be other than temporary are charged to income. Realized gains or losses on available for sale securities are computed on a specific identification basis. In November 1995, the Financial Accounting Standards Board (FASB) issued "Special Report - A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities," which provided transition guidance permitting an enterprise to reassess the appropriateness of the classification of all its securities before December 31, 1995. The Company reassessed its classifications, and on December 31,1995, transferred $2.5 million in amortized cost of investment and mortgage-backed securities from held-to-maturity to available-for-sale classification. The related unrealized gain after tax effect as of the date of transfer was $25,000. Premiums and discounts on debt and mortgage-backed securities are amortized to expense and accreted to income over the estimated life of the respective security using a method that approximates the level yield method. Prior to adoption of SFAS No. 115, marketable equity securities were carried at lower of cost or estimated fair value with net unrealized losses being recognized through a valuation allowance shown as a reduction in the carrying value of the related securities and as a corresponding reduction in retained earnings. The Association, as a member of the Federal Home Loan Bank System, is required to maintain an investment in capital stock of the Federal Home Loan Bank of Des Moines. Because no ready market exists for this stock, and it has no quoted market value, the Association's investment in this stock is carried at cost. 22 MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Note 1. Summary of Significant Accounting Policies - (continued) Loans Held for Sale - Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. Loans Receivable - Loans receivable are stated at unpaid principal balances, less the allowance for loan losses, net of deferred loan origination fees. The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Management's periodic evaluation of the adequacy of the allowance is based on the Association's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and current economic conditions. SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," were adopted prospectively by the Company on October 1, 1995. These statements address the accounting for impaired loans and specify how allowances for loan losses related to these impaired loans should be determined. The adoption of these statements did not affect the level of the overall allowance or operating results. Income recognition and charge-off policies were not changed as a result of SFAS 114 and SFAS 118. The Association defines the population of impaired loans to be all non-accrual commercial real estate, multi-family and land loans. Impaired loans are individually assessed to determine that the loan's carrying value is not in excess of the fair value of the collateral or the present value of the loan's expected future cash flows. Smaller balance homogeneous loans that are collectively evaluated for impairment, such as residential mortgage loans and installment loans, are specifically excluded from the impaired loan portfolio. There were no impaired loans at September 30, 1996 as defined by SFAS 114 and SFAS 118. Uncollectible interest on loans contractually past due for three months is charged off or an allowance is established based on management's periodic evaluation. The allowance is established by a charge to interest income equal to all interest previously accrued and income is subsequently recognized only to the extent cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments returns to normal, in which case the loan is returned to accrual status. Loan origination fees, net of certain specifically defined direct loan origination costs, are deferred. The net amount deferred is recognized as interest income using the interest method over the contractual term of each loan as an adjustment of yield. If the related loan is sold, the remaining net amount deferred, which is part of the basis of the loan, is used in determining gain or loss on sale. Mortgage Servicing Rights - The Company adopted SFAS No. 122 "Accounting for Mortgage Servicing Rights-An Amendment of SFAS No. 65, " prospectively as of October 1, 1995. SFAS No. 122 amends certain provisions of SFAS No. 65 to eliminate the accounting distinction between rights to service mortgage loans for others that are acquired through loan origination activities and rights acquired through purchase transactions. The statement requires a mortgage banking enterprise, which sells or securitizes loans and retains the servicing rights, to allocate the total cost of the mortgage loans to the mortgage servicing rights and the loan (without the servicing rights) based on their relative fair values. Costs allocated to mortgage servicing rights are recognized as a separate asset and amortized in proportion to and over the period of estimated net servicing income and are evaluated for impairment based on their fair value. The effect of adopting SFAS No. 122 did not have a material impact on the Company's financial condition or the results of its operations. 23 MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Note 1. Summary of Significant Accounting Policies - (continued) Foreclosed Real Estate - Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at the lower of the related unpaid loan balance or fair value of the property, less estimated costs to sell at the date of foreclosure. Costs relating to development and improvement of property are capitalized, whereas costs relating to the holding of property are expensed. Valuations are periodically performed by management and an allowance for losses is established by a charge to operations if the carrying value of a property exceeds its estimated fair value less estimated costs to sell. Premises and Equipment - Land is carried at cost. Building, furniture and equipment are carried at cost less accumulated depreciation. Depreciation is computed by the straight-line method over the estimated useful lives of the assets, which range from five to forty years. Long-Lived Assets - The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," in fiscal year 1996. This statement requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present. Impairment would be considered when the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Implementation of this statement had no effect on the consolidated financial statements. Income Taxes - Deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. The effect of a change in the beginning-of-the-year balance of a valuation allowance that results from a change in judgment about the realizability of deferred tax assets, is included in income. Earnings Per Share - Earnings per share of common stock for the year ended September 30, 1996, has been determined by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding during the year of 852,612. Earnings per share of common stock for the fiscal year ended September 30, 1995, has been computed by dividing the net income for the twelve month period by the calculated weighted average number of shares of common stock and common stock equivalents which would have been outstanding if the Conversion had occurred on the first day of the fiscal year rather than on March 23, 1996, which was 928,720 shares. Shares acquired by the employee stock ownership plan are not considered in the weighted average shares outstanding until shares are committed for allocation to an employees individual account or have been earned. Stock options are regarded as common stock equivalents computed using the treasury stock method, however, they did not have a material effect on primary and fully diluted earnings per share. Fiscal 1995 pro-forma earnings per share of $1.01 is computed as if the net proceeds of the stock conversion were recorded on October 1, 1994, and was invested by the Company at 6.2%, which was equal to the one year U.S. Treasury bill rate as of October 31, 1994, net of an effective federal and state income tax rate of 40.5% resulting in an after tax yield of 3.69% on $6,901,750. The stock proceeds were generally available to the Company on March 1, 1995, resulting in a five month pro forma earning period. Treasury Stock - Treasury stock is recorded at cost. In the event of a subsequent reissue, the treasury stock account will be reduced by the cost of such stock on the average cost basis with any excess proceeds credited to addional paid-in capital. Treasury stock is available for general corporate purposes. 24 MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Note 1. Summary of Significant Accounting Policies - (continued) Fair Values of Financial Instruments - SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," initially adopted during fiscal 1996, requires disclosure of fair value information about financial instruments, whether or not recognized in the statement of financial condition. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimated cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used by the Company in estimating its fair value disclosures, as presented in Note 12, for financial instruments: Cash and cash equivalents: The carrying amounts reported in the statements of financial condition for cash and cash equivalents approximate those assets' fair values. Debt and equity securities: Fair values for debt and equity securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. FHLB stock: The carrying amount of FHLB stock approximates fair value. Loans: For variable-rate loans that reprice frequently with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans (for example, fixed rate commercial real estate, rental property mortgage loans, and commercial and industrial loans) are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality giving consideration to estmated perpayment and credit loss factors. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values, where applicable. Accrued interest receivable: The carrying amount of accrued interest receivable approximates fair value. Deposits: The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). Fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. The carrying amount of accrued interest payable approximates fair value. Advance payments by borrowers for taxes and insurance (escrow accounts): The carrying amount of escrow accounts approximate fair value. Loan commitments: Commitments to extend credit were evaluated and fair value was estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The carrying value and fair value of commitments to extend credit are not considered material for disclosure. 25 MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Note 2. Debt and Equity Securities The amortized costs and approximate fair values of debt and equity securities are summarized as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ------- September 30, 1996: ------------------- Debt and equity 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 ========== ======= ======= ========== Debt securities held to maturity: U.S. Government and agency obligations $ 1,749,672 $ 172 $ (2,031) $ 1,747,813 Certificates of deposit 4,065,000 -- -- 4,065,000 Mortgage-backed securities 3,479,420 75,648 (47,140) 3,507,928 ---------- ------- ------- ---------- Total $ 9,294,092 $ 75,820 $ (49,171) $ 9,320,741 ========== ======= ======= ========== September 30, 1995: ------------------ Debt and equity securities available for sale: Debt securities: U.S. Government and agency obligations $ 3,513,087 $ 13,081 $ (37,184) $ 3,488,984 Mortgage-backed securities 625,512 -- (642) 624,870 ---------- ------- ------- ---------- Subtotal 4,138,599 13,081 (37,826) 4,113,854 ---------- ------- ------- ---------- Equity securities: Mutual fund 81,833 56 -- 81,889 Stock in FHLMC 51,653 247,627 -- 299,280 ---------- ------- ------- ---------- Subtotal 133,486 247,683 -- 381,169 ---------- ------- ------- ---------- Total $ 4,272,085 $ 260,764 $ (37,826) $ 4,495,023 ========== ======= ======= ========== Debt securities held to maturity: U.S. Government and agency obligations $ 6,172,729 $ 38,094 $ (14,417) $ 6,196,406 Certificates of deposit 6,064,000 -- -- 6,064,000 Mortgage-backed securities 4,124,752 84,459 (81,760) 4,127,451 ---------- ------- ------- ---------- Total $16,361,481 $ 122,553 $ (96,177) $ 16,387,857 ========== ======= ======= ==========
There were no sales of securities during the two years ended September 30, 1996. 26 MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Note 2. Debt and Equity Securities - (continued) The amortized cost and estimated market value of debt securities at September 30, 1996, by contractual maturity, are shown below. Mortgage-backed securities have been aggregated and disclosed separately, rather than allocate over several maturity groupings, since they lack a single maturity date and because borrowers retain the right to prepay the obligation.
Held to Maturity Available for Sale -------------------------- ---------------------- Estimated Estimated Amortized Fair Amortized Fair Cost Value Cost Value ---------- ---------- --------- ---------- Due in one year or less $ 5,315,000 $ 5,312,969 $ 4,502,556 $ 4,495,130 Due one year through five years 499,672 499,844 5,430,968 5,416,250 Due after ten years - - 427,641 423,405 --------- --------- ---------- ---------- Subtotal 5,814,672 5,812,813 10,361,165 10,334,785 Mortgage-backed securities 3,479,420 3,507,928 1,396,690 1,377,583 --------- --------- ---------- ---------- Total $ 9,294,092 $ 9,320,741 $ 11,757,855 $11,712,368 ========= ========= ========== ==========
Note 3. Loans Receivable Loans receivable at September 30, 1996 and 1995 consist of the following:
1996 1995 ---------- ---------- Secured by 1-4 family residences $ 37,623,209 $ 37,514,624 Secured by other real estate 3,964,195 4,516,721 Construction 626,900 1,136,300 Consumer and other 1,916,165 1,551,198 Loans secured by deposits 281,115 200,939 ---------- ---------- Total loans receivable 44,411,584 44,919,782 ---------- ---------- Less: Undisbursed portion of mortgage loans (227,762) (746,068) Allowance for loan losses (877,094) (962,086) Deferred loan fees (236,447) (222,156) ---------- ---------- Loans receivable, net $ 43,070,281 $ 42,989,472 ========== ==========
A summary of the activity in the allowance for loan losses is as follows:
Years ended September 30, ------------------------- 1996 1995 -------- --------- Balance, beginning of period $ 962,086 $ 1,006,252 Provision for losses 3,725 26,430 Charge offs (92,213) (75,333) Recoveries 3,496 4,737 ------- --------- Balance, end of period $ 877,094 $ 962,086 ======= =========
In the ordinary course of business, the Association has granted loans to certain executive officers, directors and their related interests. Related party loans are made on substantially the same terms as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectibility. The aggregate dollar amount of these loans was approximately $140,000 and $212,000 at September 30, 1996 and 1995, respectively. 27 MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Note 4. Foreclosed Real Estate Foreclosed real estate acquired in settlement of loans consists of the following: September 30, ------------------- 1996 1995 ------- ------- Real estate acquired by foreclosure $ 15,700 $ 54,898 Less allowance for losses 15,700 25,187 ------ ------ Foreclosed real estate, net $ - $ 29,711 ====== ====== Activity in the allowance for losses on foreclosed real estate is as follows: Years ended September 30, ------------------------- 1996 1995 ------- ------- Beginning balance $ 25,187 $ 78,461 Provision charged to income - 3,570 Charge-offs (9,487) (56,844) Recoveries - - ------ ------- Ending balance $ 15,700 $ 25,187 ====== ======= Note 5. Loan Servicing Mortgage loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of loans serviced for others was $2,823,000 and $1,159,000 at September 30, 1996 and 1995, respectively. Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in demand deposits, were approximately $13,300 and $13,500 at September 30, 1996 and 1995, respectively. Mortgage servicing rights of $12,700 were capitalized in fiscal 1996 with a carrying amount of $11,600 at September 30, 1996. The valuation allowance on September 30, 1996 and changes in the valuation allowance during the period were not significant. Note 6. Accrued Interest Receivable Accrued interest receivable at September 30, 1996 and 1995 is summarized as follows: 1996 1995 ------- ------- Investment securities $ 164,382 $ 246,865 Mortgage-backed securities 41,500 48,562 Loans receivable 244,445 233,498 ------- ------- Total $ 450,327 $ 528,925 ======= ======= Note 7. Premises and Equipment Premises and equipment at September 30, 1996 and 1995 consists of the following: 1996 1995 ------- -------- Land $ 98,840 $ 98,840 Office building 790,702 786,739 Furniture and equipment 463,914 456,943 --------- --------- Total 1,353,456 1,342,522 Less accumulated depreciation (564,610) (480,841) --------- --------- Premises and equipment, net $ 788,846 $ 861,681 ========= ========= 28 MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Note 8. Deposits The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $2,434,000 and $2,109,000 at September 30, 1996 and 1995, respectively. Deposited amounts in excess of $100,000 per account are not insured by the Savings Association Insurance Fund. At September 30, 1996, the scheduled maturities of time deposits are as follows: 1997 $26,959,056 1998 10,495,000 1999 487,908 2000 30,261 ---------- Total $37,972,225 ========== Deposits by related parties were approximately $803,000 and $623,000 at September 30, 1996 and 1995, respectively. The Association provides collateral to various local governmental units as required by state statute on savings and certificate account balances greater than $100,000. The collateral pledged against such deposits consisted of mortgage-backed securities totaling $1,101,623 and $2,188,784 as of September 30, 1996 and 1995, respectively. Note 9. Income Taxes Income tax expense (benefit) applicable to operations include current and deferred taxes as follows: Years ended September 30, ------------------------- 1996 1995 ------- ------- CURRENT Federal $ 367,539 $ 369,700 State 126,283 119,730 -------- ------- Subtotal 493,822 489,430 -------- ------- DEFERRED Federal (89,790) 22,109 State (29,932) 7,370 -------- ------- Subtotal (119,722) 29,479 -------- ------- Total income tax provision $ 374,100 $ 518,909 ======== ======= The State of Minnesota follows the Internal Revenue Code for the determination of taxable income in connection with temporary differences. The State portion of deferred tax assets and liabilities is approximately 25 percent. Temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities that create deferred tax assets and liabilities are as follows: September 30, ------------------- 1996 1995 ------- ------- Deferred tax assets: General loan loss allowance $ 350,838 $ 272,699 Deferred loan fees 94,579 88,864 Deferred compensation 129,278 100,304 SAIF assessment 145,023 - -------- -------- 719,718 461,867 Less valuation allowance (162,000) (159,037) -------- -------- Subtotal 557,718 302,830 -------- -------- 29 MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Note 9. Income Taxes - (continued) September 30, ---------------------- 1996 1995 ---------- ---------- Deferred tax liabilities: Excess tax reserves 115,768 - Securities unrealized gains 135,494 89,175 FHLB stock dividend 99,680 88,198 Mortgage servicing rights 4,644 - Depreciation and basis adjustment 38,229 34,957 ------- ------- Subtotal 393,815 212,330 ------- ------- Net deferred tax assets $ 163,903 $ 90,500 ======= ======= The Association has paid sufficient income taxes in prior carryback years which would enable it to recover the balance of the net deferred tax assets, and therefore, no additional valuation allowance was required at September 30, 1996 and 1995. Actual income tax expense varied from "expected" tax expense (computed by applying the United States federal corporate income tax rate of 34 percent to earnings before taxes) as follows:
Years ended September 30, ------------------------- 1996 1995 ---------- ---------- Computed "expected" tax expense: $ 317,200 $ 457,760 Increase (reduction) in income tax resulting from: State income taxes, net of federal tax benefit 63,600 82,600 Other (net) (6,700) (21,451) ------- ------- Total income tax expense $ 374,100 $ 518,909 ======= =======
If certain conditions are met, savings and loan associations are allowed a bad debt deduction in determining income for tax purposes, based on specified experience formulas or a percentage of taxable income before such deduction. On August 21, 1996 legislation was signed into law which repealed the percentage of taxable income method for the tax bad debt deduction. The repeal is effective for the Association's taxable year beginning October 1, 1996. In addition, the legislation requires the Company to include in taxable income its tax bad debt reserves in excess of its base year reserves (pre-1988 reserves) over a six, seven, or eight year period depending upon the attainment of certain loan origination levels. Since the percentage of taxable income method for the tax bad debt deduction and the corresponding increase in the tax bad debt reserve in excess of base year have been recorded as temporary differences, this change in the tax law is not expected to have a material effect on the Company's statement of operations. Retained earnings at September 30, 1996, includes approximately $1,459,000 of pre-1988 reserves, for which no deferred income tax liability, approximately $584,000, has been recognized. This amount represents an allocation of income to bad debt deductions for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses or adjustments from carryback of net operating losses would create income for tax purposes only, which would be subject to the then current corporate income tax rate. Note 10. Employee Benefit Plans Salary Continuation Plan The Association is obligated to its former executive officers under a deferred compensation plan. The unpaid liability of $101,768 is recorded in the accompanying financial statements. The plan is fully funded with annuity contracts recorded as assets in the accompanying financial statements. The Association has also adopted a directors' consultations and retirement plan. Benefits related to services are expensed under the plan vesting schedule. The Association adopted an insured executive supplemental retirement plan and the estimated benefits will be accrued over the expected remaining years of employment. The compensation expense related to these plans amounted to $29,892 and $27,182 for the years ended September 30, 1996 and 1995, respectively. 30 MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Note 10. Employee Benefit Plans - (continued) Salary Reduction Plan The Association has adopted a salary reduction plan (401(k) Plan) which covers substantially all full time employees. Company contributions are determined anually by the Board of Directors. The Company's expense was $1,042 and $14,516 for the years ended September 30, 1996 and 1995, respectively. Employee Stock Ownership Plan At the time of the stock conversion, the Association established an Employee Stock Ownership Plan (ESOP) covering all employees over the age of 21, with at least one year of service who work at least 1,000 hours during the plan year. The ESOP borrowed funds from the Company to purchase a total of 80,639 shares of the Company's Common Stock. The loan is collateralized by the Common Stock. Contributions by the Association are used to repay the loan with shares being released from the Company's lien proportional to the loan repayment. Annually, on December 31, the released shares are allocated to the participants in the same proportion as their wages bear to the total compensation of all of the participants. The Company presents these financial statements in accordance with the AICPA Statement of Position (SOP) No. 93-6, "Employers' Accounting for Employee Stock Ownership Plans." The price of the shares issued and unreleased are charged to unearned compensation, a contra-equity account, and shares released are reported as compensation expense equal to the current market value price of the released shares. Dividends paid on allocated shares are charged to retained earnings and those on unallocated shares are charged to expense. The following table presents the components of the ESOP shares: September 30, ----------------------- 1996 1995 ---------- ----------- Allocated shares 8,064 - Commited to be released shares 6,048 5,376 Unreleased shares 66,527 75,263 ------- ------- Total ESOP shares 80,639 80,639 ======= ======= Fair value of unreleased shares $ 756,745 $ 865,525 ======= ======= Compensation expense recorded $ 94,003 $ 51,945 ======= ======= Management Stock Bonus Plan (MSBP) The Company has adopted a MSBP for directors and Management to enable the Association to attract and retain experienced and capable personnel in key positions of responsibility. A total of 29,224 shares were awarded in the form of restricted stock payable over a five year vesting period and 11,095 shares were reserved for future awards. The Company acquired the MSBP shares in fiscal 1996 in an open market purchase at a cost of $458,629, which was initially recorded as unearned compensation in a contra shareholders' equity account. The Company recognizes compensation expense pro rata over the vesting period which amounted to $66,487 for fiscal 1996. Stock Option Plan The Company established two stock option plans for directors, officers, and employees. One is a non-qualified plan and the other is an incentive stock option plan. The option plans were approved by the Company's shareholders on September 27, 1995, and 100,799 shares were available for grant. Awarded were 73,072 shares exercisable at the market price of $11.38 per share. All options were outstanding at September 30, 1996 and expire ten years from date of grant. Note 11. Commitments and Contingencies Loans serviced for FNMA, in the amount of $740,000 at September 30, 1996, were sold subject to recourse provisions which require the Association to buy back any loan which is delinquent more than ninety days. The Association also sold loans and related servicing subject to recourse provisions which expire in March 1997 in the amount of $1,082,400 at September 30, 1996.. The Association has not incurred any losses on loans sold with recourse provisions. 31 MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Note 12. Financial Instruments The Association is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are commitments to extend credit and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The Association's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Association uses the same credit policies in making commitments as it does for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Commitments to extend credit which represent credit risk totaled $634,000 for loans ($296,000 at fixed rates and $338,000 at adjustable rates) and $798,000 unused lines of credit at September 30, 1996. Commitments to sell loans amounted to $179,000 at September 30, 1996. The estimated fair values of the Company's financial instruments are as follows:
September 30, 1996 --------------------------- Carrying Fair Financial assets: Amount Value ----------- ----------- Cash and cash equivalents $ 2,583,654 $ 2,583,654 Investment securities 21,529,237 21,555,886 FHLB Stock 650,700 650,700 Loans Receivable 44,590,248 45,544,520 Accrued interest receivable 450,327 450,327 Financial liabilities: Deposits 56,531,194 56,538,374 Advance payments by borrowers (escrows) 138,530 138,530
Note 13. Significant Geographic Concentration of Credit Risk A significant portion of the Association's loans receivable are to borrowers located in Little Falls, Minnesota, and the surrounding counties. This geographic concentration amounted to approximately 95% of the total loans receivable balance for the years ended September 30, 1996 and 1995. Note 14. Regulatory Matters The Association is subject to various regulatory capital requirements administered by the Office of Thrift Supervision (OTS). Failure to meet minimum capital requirements can initiate certain mandatory - and possible additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Association's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Association must meet specific capital guidelines that involve quantitative measures of the Association's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Association's capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings and other factors. The OTS includes an interest-rate risk component in its risk-based capital requirements. Institutions with a greater than normal interest-rate risk exposure (as defined) must take a deduction from the total capital available to meet their risk-based capital requirement equal to half the difference between the institution's actual measured exposure and a defined normal level of exposure. Quantitative measures established by regulation to ensure capital adequacy require the Association to maintain minimum amounts and ratios (set forth in the following table below) of total and Tier 1 capital (as defined in the regulation), to risk-weighted assests (as defined), and of tangible and Tier 1 capital (as defined) to adjusted total assets (as defined). Management believes, as of September 30, 1996, that the Association meets all of capital adequacy requirements to which it is subject. 32 MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Note 14.Regulatory Matters - (continued) As of September 30, 1996 and 1995, the most recent notification from the OTS categorized the Association as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Association must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Association's category. The Association's actual regulatory capital amounts, with reconcilation to the Company's capital investment in the Association determined in accordance with generally accepted accounting principles (GAAP), and ratios as of September 30, 1996, are also presented in the table (in thousands).
For Capital Prompt Corrective Actual Adequacy Purposes Action Provision ---------------------- ------------------ ---------------- Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- GAAP capital $ 10,643 Less: Unrealized gains on debt securities held for sale (238) Excess mortgage servicing rights (1) ------- Tangible capital and ratio to adjusted total assest $ 10,404 14.9% $ 1,046 1.50% ------- ---- ------ ---- Tier 1 (Core) capital and ratio to adjust total assets $ 10,404 14.9% $ 2,092 3.0% $ 3,487 5.0% ------- ---- ------ ---- ----- --- Tier 1 capital and ratio to risk-weighted assets $ 10,404 30.5% $ 1,366 4.0% $ 2,049 6.0% ------- ---- ------ ---- ----- --- Tier 2 capital, allowance for loan losses 430 ------- Total risk-based capital and ratio to risk-weighted assets $ 10,834 31.7% $ 2,733 8.0% $ 3,416 10.0% ======= ==== ====== === ===== ====
The Association may not declare or pay cash dividends to the Company if the effect would be to reduce GAAP capital below applicable regulatory capital requirements or if such declaration and payment would otherwise violate regulatory requirements. Note 15.Effects of New Financial Accounting Standards In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation". This statement establishes financial accounting and reporting standards for stock-based employees compensation plans. SFAS 123 encourages all entities to adopt the "fair value based method" of accounting for employee stock compensation plans. However, SFAS 123 also allows an entity to continue to measure compensation cost under such plans using the "intrinsic value based method." Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, usually the vesting period. Fair value is determined using an option pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock and the expected dividends on it, and the risk-free interest rate over the expected life of the option. Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. Most stock plans have no intrinsic value at date of grant, and under previous accounting guidance, no compensation cost was to be recognized. The accounting requirements of this statement are effective for transactions entered into in fiscal years that begin after December 15, 1995. The Company intends to continue accounting for compensation cost under the intrinsic value based method and will provide pro forma disclosures for all awards granted after September 30, 1996. Such disclosures include net income and earnings per share as if the fair value based method of accounting has been applied. 33 MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Note 15.Effects of New Financial Accounting Standards - (continued) In June 1996, the Financial Accounting Standards Board issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 125 amends portions of SFAS 115, amends and extends to all servicing assets and liabilities the accounting standards for mortgage servicing rights now in SFAS 65, and supercedes SFAS 122. The statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. Those standards are based upon consistent application of a financial components approach that focuses on control. The statement also defines accounting treatment for servicing assets and other retained interest in the assets that are transferred. SFAS 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively. The adoption of the statement is not expected to have a material effect on the Company's financial condition or results of operations. Note 16.Parent Only Condensed Financial Information This information should be read in conjunction with the other Notes to Consolidated Financial Statements. On March 23, 1996 the Company issued $7.6 million of common stock and contributed one-half of the net proceeds to the Association as equity capital. Shareholders' equity differs from the consolidated statements by the amount of consolidating ESOP adjustments. STATEMENT OF FINANCIAL CONDITION
September 30, September 30, ASSETS 1996 1995 ----------- ----------- Cash and cash equivalents $ 61,525 $ 48,790 Investment in Association subsidiary 10,642,889 10,588,338 Loan to Association subsidiary 1,725,000 3,100,000 Loan to Association ESOP 609,813 690,472 Tax refund receivable 33,235 - ---------- ---------- Total $13,072,462 $ 14,427,600 ========== ========== LIABILITIES AND SHAREHOLDERS EQUITY Other liabilities $ 70,210 $ 160 Shareholders' equity 13,002,252 14,427,440 ---------- ---------- Total $13,072,462 $14,427,600 ========== ==========
STATEMENT OF INCOME
For the Year Ended From inception to September 30, September 30, Interest from: 1996 1995 ----------- ----------- Association's subsidiary loan $ 151,949 $ 103,063 Association's ESOP loan 54,101 32,008 Dividends from Association subsidiary 200,000 - ------- ------- Total income 406,050 135,071 Expenses: Non-interest expenses 234,402 68,732 Income tax (refund) expense (11,679) 26,895 ------- ------- Total expenses 222,723 95,627 ------- ------- Income before equity in undistributed net income of Association subsidiary 183,327 39,444 Equity in undistributed net income of Association subsidiary 577,217 788,110 ------- ------- Net income $ 760,544 $ 827,554 ======= =======
34 MISSISSIPPI VIEW HOLDING COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Note 16.Parent Only Condensed Financial Information - (continued) STATEMENT OF CASH FLOWS
For the Year Ended From inception to September 30, September 30, 1996 1995 ---------- ---------- Net income $ 760,544 $ 827,554 Adjustments: Equity distribution net of Association subsidiary (577,217) (788,110) ESOP fair value adjustment, net of taxes 15,426 - Dividend from Association subsidiary (200,000) - Increase in income tax refund receivable (33,235) - (Decrease) increase in accrued income taxes (160) 160 Increase in other liabilities 70,210 - -------- -------- Net cash provided by operations 35,568 39,604 -------- -------- Cash flows from investing activities: Loan to subsidiary 1,375,000 (3,100,000) Dividend from Association subsidiary 200,000 - Purchase of treasury stock (1,536,689) - Purchase of subsidiary stock - (3,796,112) -------- -------- Net cash used in investing activities 38,311 (6,896,112) -------- -------- Cash flows from financing activities: Proceeds from sale of stock - 7,595,770 Payment of cash dividend (141,804) - Purchase of ESOP shares 80,660 (690,472) -------- -------- Net cash (used in) provided by financing activities (61,144) 6,905,298 -------- -------- Increase in cash and cash equivalents 12,735 48,790 Cash and cash equivalents Beginning of year 48,790 - -------- -------- End of year $ 61,525 $ 48,790 ======== ========
35 OFFICE LOCATIONS MISSISSIPPI VIEW HOLDING COMPANY 35 East Broadway Little Falls, Minnesota 56345 (320) 632-5461 COMMUNITY FEDERAL SAVINGS AND LOAN ASSOCIATION OF LITTLE FALLS 35 East Broadway Little Falls, Minnesota 56345 (320) 632-5461 Board of Directors of Mississippi View Holding Company and Community Federal Savings and Loan Association of Little Falls Andrew P. Revering Chairman of the Board (rotated annually) Neil Adamek Thomas J. Leiferman Wallace R. Mattock Gerald Peterson Peter Vogel Executive Officers of Mississippi View Holding Company and Community Federal Savings & Loan Association of Little Falls Thomas J. Leiferman President and Chief Executive Officer Larry D. Hartwig Mary Ann Karnowski Treasurer/Controller Secretary ----------------------------- Corporate Counsel Independent Auditors Rosenmeier Anderson & Vogel Bertram Cooper & Co., LLP 210 Second Street, N.E. 110 Second Avenue, S.E. Little Falls, Minnesota 56345 Waseca, Minnesota 56093 Special Counsel Transfer Agent and Registrar Malizia, Spidi, Sloane & Fisch, P.C. Registrar and Transfer Company One Franklin Square 10 Commerce Drive 1301 K Street, N.W., Suite 700 East Cranford, New Jersey 07016 Washington D.C. 20005 (908) 272-8511 ----------------------------- The Company's Annual Report for the year ended September 30, 1996, filed with the Securities and Exchange Commission on Form 10-KSB is available without charge upon written request. For a copy of the Form 10-KSB or any other investor information, please write or call Larry D. Hartwig, Treasurer/Controller at the Company's Office in Little Falls, Minnesota. The Annual Meeting of Shareholders will be held on January 22, 1997, at 10:00 a.m. at the office of the Company. 36 EX-23 3 EXHIBIT 23 EXHIBIT 23 Consent of Bertram Cooper & Co., LLP INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-3280 of Mississippi View Holding Company on Form S-8 (filed with the Securities and Exchange Commission on April 5, 1996) of our report dated October 29, 1996 included in this Annual Report on Form 10-KSB of Mississippi View Holding Company for the fiscal year ended September 30, 1996. Bertram Cooper & Co., LLP Waseca, Minnesota December 23, 1996 EX-27 4 FDS FOR 10KSB40
9 1,000 12-MOS SEP-30-1996 SEP-30-1996 318 2,266 0 0 12,235 9,294 9,321 44,362 877 70,011 56,531 0 1,039 0 0 0 101 12,339 70,011 3,704 1,470 0 5,174 2,532 2,532 2,642 4 0 2,056 933 559 0 0 559 0.66 0.65 7.64 17 31 0 2,060 962 92 3 877 877 0 669
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