<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1997
OR
[ ] 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 number 0-22790
STATEFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Name of small business issuer in its charter)
Delaware 42-1410788 (State or other
- ----------------------------- -----------------------------------
jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
519 Sixth Avenue, Des Moines, Iowa 50309 (Address
- ------------------------------------------------------------------------
of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (515) 282-0236
----------------------------
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 $0.01 per share
---------------------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. YES X . NO ___.
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer had $7.1 million of gross income for the year ended June 30, 1997.
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the average of the bid and asked
prices of such stock on the NASDAQ System as of September 5, 1997, was $14.1
million. (The exclusion from such amount of the market value of the shares owned
by any person shall not be deemed an admission by the registrant that such
person is an affiliate of the registrant.)
As of September 5, 1997, there were issued and outstanding 783,723
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Portions of the Annual Report to Stockholders
for the fiscal year ended June 30, 1997.
Part III of Form 10-KSB - Proxy Statement for 1997 Annual Meeting of
Stockholders.
<PAGE>
PART I
Item 1. Description of Business
General
The Company. StateFed Financial Corporation (the "Company"), a Delaware
corporation, was formed in September, 1993 to act as the holding company for
State Federal Savings and Loan Association of Des Moines ("State Federal" or the
"Association") upon the completion of the Association's conversion from the
mutual to the stock form (the "Conversion"). The Company received approval from
the Office of Thrift Supervision (the "OTS") to acquire all of the common stock
of the Association to be outstanding upon completion of the Conversion. The
Conversion was completed on January 4, 1994.
At June 30, 1997, the Company had $85.7 million of assets and
stockholders' equity of $15.2 million (or 17.78% of total assets).
State Federal is a federally chartered savings and loan association
headquartered in Des Moines, Iowa. Its deposits are insured up to applicable
limits by the Savings Association Insurance Fund of the Federal Deposit
Insurance Corporation (the "FDIC"), which is backed by the full faith and credit
of the United States.
The principal business of the Association consists of attracting retail
deposits from the general public and investing those funds primarily in
one-to-four family residential mortgage and commercial and multi-family real
estate loans, and, to a lesser extent, construction and consumer loans primarily
in the Association's market area. The Association also invests in U.S.
Government and agency obligations and other permissible investments. At June 30,
1997, substantially all of the Association's real estate mortgage loans were
secured by properties located in Iowa.
The Association's revenues are derived primarily from interest on
mortgage loans and investments, income from service charges and loan
originations, and income from real estate operations through its service
corporation subsidiary. The Association does not originate loans to fund
leveraged buyouts and has no loans to foreign corporations or governments.
The Association offers a variety of accounts having a wide range of
interest rates and terms. The Association's deposits include passbook accounts,
money market savings accounts, NOW, money market checking, and certificate
accounts with terms of three months to 60 months. Currently, the Association
only solicits deposits in its primary market area and does not accept brokered
deposits, although management may on occasion accept brokered deposits in the
future as market conditions may dictate.
The main office of the Association is located at 519 Sixth Avenue, Des
Moines, Iowa, which is located in Polk County. Its telephone number at that
address is (515) 282-0236. The Association maintains one other office in Des
Moines, Iowa. The Association considers its primary market area to comprise
parts of Polk, Dallas and Warren Counties.
Lending Activities
General. Historically, the Association has originated fixed-rate,
one-to-four family mortgage loans. In the early 1980's, the Association began to
focus on the origination of adjustable-rate mortgage ("ARM") loans, in order to
increase the percentage of loans in its portfolio with more frequent repricing
than fixed-rate mortgage loans. While the Association has continued to originate
fixed-rate mortgage loans in response to customer demand, it has increasingly
emphasized ARMs. The Association also, from time to time, purchases loans.
2
<PAGE>
While the Association primarily focuses its lending activities on the
origination of loans secured by first mortgages on owner-occupied one-to-four
family residences, it also originates multi-family and commercial real estate
and, to a lesser extent, construction and consumer loans in its primary market
area. At June 30, 1997, the Association's net loan portfolio totaled $68.2
million.
The Loan Committee of the Association, comprised of executive officers
Golden, Wood and Black and loan officers Komma, Bock and Stravers, has the
immediate responsibility for the supervision of the Association's loan
portfolio. The Association's loan policy requires full Board approval on all
loans. The Board relies heavily on the recommendation of CEO Golden in making
its decisions. The Board of Directors has responsibility for the overall
supervision of the Association's loan portfolio and in addition, reviews all
foreclosure actions or the taking of deeds-in-lieu of foreclosure.
The aggregate amount of loans that the Association is permitted to make
under applicable federal regulations to any one borrower, including related
entities, or the aggregate amount that the Association could have invested in
any one real estate project is generally the greater of 15% of unimpaired
capital and surplus or $500,000. See "Regulation - Federal Regulation of Savings
Associations." At June 30, 1997, the maximum amount which the Association could
have lent to any one borrower and the borrower's related entities was
approximately $1.6 million. The principal balance of the largest amount
outstanding to any one borrower, or group of related borrowers, was
approximately $1.4 million at June 30, 1997. Currently, it is the Association's
general policy to limit its loans to one borrower to the maximum regulatory
limit. The Association reserves the right to discontinue, adjust or create new
lending programs to respond to its needs and to competitive factors.
3
<PAGE>
Loan Portfolio Composition. The following table presents the
composition of the Association's loan portfolio in dollar amounts and in
percentages (before deductions for loans in process, deferred fees and discounts
and the allowances for loan losses) of total loans as of the dates indicated.
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------------------
1997 1996 1995
---------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
---------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans
One-to-four family.................. 44,582 63.93% $42,842 66.07% $ 38,137 64.60%
Multi-family and Commercial......... 20,469 29.35 17,997 27.76 16,794 28.45
Construction or development......... 3,549 5.09 3,126 4.82 3,639 6.16
------ ------ ------ ------ ------ ------
Total real estate loans......... 68,600 98.37 63,965 98.65 58,570 99.21
Other Loans:
Consumer Loans:
Deposit account.................... 242 .35 176 .27 308 .52
Home improvement................... --- --- 1 4 .01 1
Other.............................. 891 1.28 698 1.08 155 .26
------ ------ ------ ------ ------ ------
Total consumer loans............ 1,133 1.63 875 1.35 467 .79
------ ------ ------ ------ ------ ------
Total loans..................... 69,733 100.00% 64,840 100.00% 59,037 100.00%
====== ====== ====== ====== ====== ======
Less:
Loans in process.................... (999) (1,567) (2,066)
Deferred fees and discounts......... (335) (325) (335)
Allowance for losses................ (221) (240) (216)
------- ------- --------
Total loans receivable, net(1)...... $68,178 $62,708 $ 56,420
======= ======= ========
</TABLE>
- ------------
4
<PAGE>
The following table shows the composition of the Association's loan
portfolio by fixed and adjustable rate at the dates indicated.
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------------------------------
Amount Present Amount Percent Amount Percent
--------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed Rate Loans:
Real estate:
One-to-four family............................. $14,119 20.25% $12,340 19.03% $ 8,750 14.82%
Multi-family and Commercial.................... 9,456 13.56 6,449 9.95 5,804 9.83
Construction or development.................... 3,549 5.09 2,309 3.56 676 1.15
------ ------ ------ ------ ------ ------
Total real estate loans..................... 27,124 38.90 21,098 32.54 15,230 25.80
Consumer........................................ 1,133 1.62 875 1.35 467 .79
------ ------ ------ ------ ------ ------
Total fixed-rate loans...................... 28,257 40.52 21,973 33.89 15,697 26.59
Adjustable Rate Loans:
Real estate:
One-to-four family............................. 30,463 43.69 30,502 47.04 29,387 51.27
Multi-family and Commercial.................... 11,013 15.79 11,548 17.81 10,990 17.12
Construction or development.................... --- --- 817 1.26 2,963 5.02
------ ------ ------ ------ ------ ------
Total real estate loans..................... 41,476 59.48 42,867 66.11 43,340 73.41
Consumer........................................ --- --- --- --- --- ---
------ ------ ------ ------ ------ ------
Total adjustable rate loans................. 41,476 59.48 42,867 66.11 43,340 73.41
------ ------ ------ ------ ------ ------
Total loans................................. 69,733 100.00% 64,840 100.00% 59,037 100.00%
====== ====== ======
Less:
Loans in process................................ (999) (1,567) (2,066)
Deferred fees and discounts..................... (335) (325) (335)
Allowance for loan losses....................... (221) (240) (216)
------- ------- -------
Total loans receivable, net.................. $68,178 $62,708 $56,420
======= ======= =======
</TABLE>
5
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Association's loan portfolio at June 30, 1997. Mortgages which have fixed,
adjustable or renegotiable interest rates are shown as maturing at the
contractual maturity date. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
------------------------------------------------------------------------
Multi-family and Construction
One-to-four family Commercial or Development
------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Due During Years Ending June 30, (1)
1998.................................... $ 698 9.510% $1,358 8.927% $1,365 9.455%
1999.................................... 55 8.919 170 9.382 --- ---
2000.................................... 290 9.151 584 9.873 --- ---
2001-2005............................... 5,530 9.003 4,595 8.826 900 9.250
After 2005.............................. 38,009 8.341 13,762 9.074 1,284 9.535
Real Estate
----------------------------------------------
Consumer Total
----------------------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
----------------------------------------------
Due During Years Ending June 30, (1)
1998.................................... $290 8.606% $3,711 9.205%
1999.................................... 85 8.422 310 9.335
2000.................................... 110 9.383 984 9.605
2001-2005............................... 573 9.224 11,598 8.963
After 2005.............................. 75 9.383 53,130 8.561
</TABLE>
_________________
(1) Includes construction loans which the Association reclassifies
as permanent loans once the construction phase is completed.
The total amount of loans due after June 30, 1998 which have fixed
interest rates is $35.9 million, while the total amount of loans due after such
dates which have floating or adjustable interest rates is $30.2 million.
6
<PAGE>
One-to-four family Residential Mortgage Lending. Residential loan
originations of this type are generated by the Association's marketing efforts,
its present customers, walk-in customers and referrals from real estate agents
and builders. The Association focuses its lending efforts primarily on the
origination of loans secured by first mortgages on owner-occupied, one-to-four
family residences. At June 30, 1997, the Association's one-to-four family
residential mortgage loans totaled $44.6 million, or approximately 63.9% of the
Association's total gross loan portfolio.
The Association currently offers ARM payment and fixed-rate mortgage
loans. During the year ended June 30, 1997, the Association originated $5.0
million of adjustable-rate real estate loans, which were secured by one-to-four
family residential real estate. During the same period, the Association
originated $4.9 million of fixed-rate real estate loans, secured by one-to-four
family residential real estate. The Association's one-to-four family residential
mortgage originations are primarily in its market and surrounding areas, and no
such loans were sold during the three year period ended June 30, 1997.
The Association currently originates up to a maximum of 30-year,
fixed-rate, one-to-four family residential mortgage loans in amounts up to 90%
of the appraised value of the security property provided that private mortgage
insurance is obtained in an amount sufficient to reduce the Association's
exposure to at or below the 80% loan-to-value level. The Association may
consider raising the loan-to-value ratio in the future as regulations permit.
Due to consumer demand, the Association also has offered fixed-rate 10- through
15-year mortgage loans, most of which conform to secondary market standards
(i.e., Federal National Mortgage Association ("FNMA"), Government National
Mortgage Association ("GNMA"), and Federal Home Loan Mortgage Corporation
("FHLMC") standards).
Interest rates charged on these fixed-rate loans are priced according
to market conditions, although management does not currently anticipate offering
rates at the most competitive end of the market. Residential loans generally do
not include prepayment penalties. As with all loans the Association originates,
the Association retains its fixed-rate loans in its portfolio.
The Association also currently offers primarily thirty year
amortization ARM loans with interest rate adjustments occurring after one, and
to a lesser extent, three, five and seven year terms with an interest rate
margin generally 3.00 basis points over one year Treasury rates. These loans
have a fixed-rate for the stated period and, thereafter, such loans adjust
periodically, pursuant to the contractual term. These loans provide for up to a
100 basis point annual cap and a lifetime cap of 600 basis points over the
initial rate although the bulk of the Association's ARMs are estimated by
management to have 500 basis point lifetime caps. Under the current ARM program,
a 500 basis point lifetime cap is being utilized. Under the contractual terms,
the majority of such loans do not adjust below the initial rate. As a
consequence of using an initial fixed-rate and caps, the interest rates on these
loans may not be as rate sensitive as is the Association's cost of funds. The
Association's ARMs do not permit negative amortization of principal. The
Association generally qualifies borrowers above the fully indexed rate.
In underwriting one-to-four family residential real estate loans, State
Federal evaluates, among other things, both the borrower's ability to make
monthly payments and the value of the property securing the loan. Currently,
virtually all properties securing real estate loans made by State Federal are
appraised by independent fee appraisers approved by the Board of Directors or by
in-house appraisers. State Federal generally requires borrowers to obtain an
attorney's title opinion, and fire and property insurance (including flood
insurance, if necessary) in an amount not less than the amount of the loan.
State Federal does not generally require title insurance. Real estate loans
originated by the Association generally contain a "due on sale" clause allowing
the Association to declare the unpaid principal balance due and payable upon the
sale of the security property.
Multi-Family and Commercial Real Estate Lending. The Association has
also engaged in commercial and multi-family real estate lending in its market
area and surrounding areas and has purchased participation interests in such
loans from other financial institutions throughout Iowa. At June 30, 1997, the
Association had $20.5 million of commercial and multi-family real estate loans,
which represented 29.4% of the Association's gross loan portfolio. All of the
Association's commercial and multi-family real estate loans were performing in
accordance with their repayment terms. A substantial portion of the
Association's multi-family and commercial real estate loans were
7
<PAGE>
secured by properties located in Iowa. However, the Association had multi-family
and commercial real estate loans, with an aggregate balance of $2.1 million at
June 30, 1997, secured by real estate located in Texas, Colorado, Nebraska and
Wisconsin.
Loans secured by commercial and multi-family real estate properties are
generally larger and involve a greater degree of credit risk than one-to-four
family residential mortgage loans. Because payments on loans secured by
commercial real estate properties are often dependent on the successful
operation or management of the properties, repayment of such loans may be
subject to adverse conditions in the real estate market or the economy. If the
cash flow from the project is reduced (for example, if leases are not obtained
or renewed), the borrower's ability to repay the loan may be impaired.
The Association's commercial and multi-family real estate loan
portfolio is secured primarily by apartment buildings and, to a lesser extent,
office buildings, strip shopping centers, motels, nursing homes, and churches.
Multi-family and commercial real estate loans generally have terms that do not
exceed 30 years. The Association has a variety of rate adjustment features and
other terms in its commercial and multi-family real estate loan portfolio.
Generally, the loans are made in amounts up to 80% of the appraised value of the
security property. Multi-family and commercial real estate loans provide for a
margin over a designated index which is generally the one-year Treasury bill
rate. The Association currently analyzes the financial condition of the
borrower, the borrower's credit history, and the reliability and predictability
of the cash flow generated by the property securing the loan. The Association
generally requires personal guaranties of the borrowers. Appraisals on
properties securing commercial real estate loans originated by the Association
are performed by independent appraisers.
The following table breaks out the Association's commercial loan
portfolio by type of loan.
June 30,
--------------------------------------------
1997 1996 1995
--------------------------------------------
(In Thousands)
Multi-family................... $8,231 $ 7,060 $ 6,805
Nursing homes.................. 1,671 1,701 2,339
Churches....................... 1,164 321 351
Motels......................... 1,336 1,051 366
Shopping Centers............... 1,155 1,244 714
Commercial Buildings........... 6,912 6,620 6,219
------- ------- -------
Total..................... $20,469 $17,997 $16,794
This portfolio grew by $2.5 million from fiscal 1996 to fiscal 1997,
and the portfolio comprised a larger percentage in fiscal 1997, 29.4% of total
loans, than it did in fiscal 1996, when commercial loans comprised 27.8% of
total loans.
Construction Lending. The Association engages in limited amounts of
construction lending to individuals for the construction of their residences as
well as to builders for the construction of single family homes and commercial
properties in the Association's primary market area and surrounding areas. At
June 30, 1997, the Association had $3.5 million of gross construction loans.
Construction loans to individuals for their residences are structured
to be converted to permanent loans at the end of the construction phase, which
typically runs for twelve months. During the construction phase, the borrower
pays interest only. Residential construction loans are generally underwritten
pursuant to the same guidelines used for originating permanent residential
loans.
All construction loans to builders require payment of interest only for
up to 12 months. At June 30, 1997, all of the Association's construction loans
were performing in accordance with their repayment terms, except one loan on a
commercial building for $775,000.
8
<PAGE>
Because of the uncertainties inherent in estimating construction costs
and the market for the project upon completion, it is relatively difficult to
evaluate accurately the total loan funds required to complete a project, the
related loan-to-value ratios and the likelihood of ultimate success of the
project. Construction loans to borrowers other than owner-occupants also involve
many of the same risks discussed above regarding multi-family and commercial
real estate loans and tend to be more sensitive to general economic conditions
than many other types of loans. Also, the funding of loan fees and interest
during the construction phase makes the monitoring of the progress of the
project particularly important, as customary early warning signals of project
difficulties may not be present.
Consumer Lending. To a lesser extent, State Federal offers secured
consumer loans, including auto loans, home equity loans, and loans secured by
savings deposits. The Association currently originates all of its consumer loans
in its primary market area. The Association originates consumer loans on a
direct basis by extending credit directly to the borrower.
Consumer loans may entail greater credit risk than do residential
mortgage loans, particularly in the case of consumer loans which are unsecured.
In such cases, any repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss or depreciation. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be affected by adverse personal
circumstances. Furthermore, the application of various federal and state laws,
including bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans. At June 30, 1997, none of the loans in the consumer
loan portfolio was non-performing. There can be no assurance that delinquencies
will not occur in the future.
The largest component of State Federal's consumer loan portfolio
consists of auto loans. At June 30, 1997, such loans totaled $722,900 or
approximately 1% of the Association's gross loan portfolio. During the fiscal
year ended June 30, 1997, the Association originated $335,000 in auto loans as
compared to $532,000 originated in the same period ended June 30, 1996. At June
30, 1997, the Association's consumer loan portfolio totaled $1.1 million or 1.6%
of its total gross loan portfolio.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. Loans secured by
deposit accounts at the Association are currently originated for up to 90% of
the account balance with a hold placed on the account restricting the withdrawal
of the account balance. The interest rate on such loans is typically equal to
200 basis points above the deposit contract rate.
The underwriting standards employed by the Association for consumer
loans, other than loans secured by deposits, include an application, a
determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. Although creditworthiness of the applicant is a primary consideration, the
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount.
9
<PAGE>
Originations and Purchases of Loans
Real estate loans are generally originated by State Federal's staff of
salaried loan officers. Loan applications are taken and processed in the office
and the branch of the Association.
While the Association originates both adjustable-rate and fixed-rate
loans, its ability to originate loans is dependent upon the relative customer
demand for loans in its market. Demand is affected by the interest rate
environment. The Association is currently a portfolio lender.
In fiscal 1997, the Association originated $15.3 million of loans,
compared to $16.5 million and $14.0 million in fiscal 1996 and 1995,
respectively. The Association has experienced significant repayments of loans
during the last three fiscal years. Principal repayments in fiscal 1997
increased by $1.2 million to $12.7 million from $11.5 million in fiscal 1996.
The Association, in recent years, has not purchased mortgage-backed
securities.
In periods of economic uncertainty, the ability of financial
institutions, including State Federal, to originate large dollar volumes of real
estate loans may be substantially reduced or restricted, with a resultant
decrease in related loan origination fees, other fee income and operating
earnings.
10
<PAGE>
The following table shows the loan origination, purchase and repayment
activities of the Company for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------
1997 1996 1995
-----------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate - one-to-four family........................ $ 5,020 $ 6,532 $ 6,668
- commercial................................ 96 750 3,025
Non-real estate - consumer.............................. --- --- ---
------- --------- --------
Total adjustable-rate........................... 5,116 7,282 9,693
Fixed rate:
Real estate - one-to-four family........................ $4,910 $ 4,346 $ 2,374
- commercial................................ 4,625 3,966 1,473
Non-real estate - consumer.............................. 667 913 483
------- --------- --------
Total fixed-rate................................. 10,202 9,225 4,330
------- --------- --------
Total loans originated........................... 15,318 16,507 14,023
Purchases:
Real estate - one-to-four family........................ $ --- $ 139 $ ---
- commercial................................ 768 398 ---
Non-real estate - consumer.............................. --- --- ---
------- --------- --------
Total loans...................................... 768 537 ---
Mortgage-backed securities.............................. --- --- ---
------- --------- --------
Total purchases.................................. 768 537 ---
------- --------- --------
Sales and Repayments:
Real estate - one-to-four family........................ $ --- $ --- $ ---
- commercial................................ --- --- ---
Non-real estate - consumer.............................. --- --- ---
- commercial
business............................. --- --- ---
------- --------- --------
Total loans...................................... --- --- ---
Mortgage-backed securities.............................. --- --- ---
------- --------- --------
Total sales...................................... --- --- ---
Principal repayments.................................... 12,735 11,512 6,596
------- --------- --------
Total reductions................................. 12,735 11,512 6,596
------- --------- --------
Increase (decrease) in other items,
net...................................................... 2,118 756 (767)
------- --------- --------
Net increase (decrease).......................... $ 5,469 $ 6,288 $ 6,660
======= ========= ========
</TABLE>
Non-Performing Assets and Classified Assets
When a borrower fails to make a required payment on real estate secured
loans and consumer loans at fifteen days a late charge is automatically assessed
and a notice is sent. At 30 days after the payment is due, the Association
generally institutes collection procedures by mailing a delinquency notice. The
customer is contacted again, by notice and/or telephone, when the payment is 60
days past due. In most cases, delinquencies are cured promptly; however, if a
loan secured by real estate or other collateral has been delinquent for more
than 90 days, satisfactory payment arrangements must be adhered to or the
Association will initiate foreclosure or repossession.
11
<PAGE>
Generally, when a loan becomes delinquent 90 days or more or when the
collection of principal or interest becomes doubtful, the Association will place
the loan on a non-accrual status and, as a result, previously accrued interest
income on the loan is taken out of current income. The loan will remain on a
non-accrual status as long as the loan is 90 days delinquent.
The following table sets forth information concerning delinquent mortgage
and other loans at June 30, 1997. The amounts presented represent the total
remaining principal balances of the related loans, rather than the actual
payment amounts which are overdue.
<TABLE>
<CAPTION>
Real Estate
Commercial and
One-to-four family Multi-Family
-----------------------------------------------------------------------
Number Amount Percent Number Amount Percent
-----------------------------------------------------------------------
(Dollars in Thousands)
Loans delinquent for:
<S> <C> <C> <C> <C> <C> <C>
30-59 days......................... 11 $ 911 2.04% 1 $ 22 .11%
60-89 days......................... 8 454 1.02 --- --- ---
90 days and over................... 10 991 2.22 --- --- ---
----- ------ ---- - ---- ---
Total delinquent loans......... 29 $2,356 5.28% 1 $ 22 .11%
===== ====== ==== = ==== ===
</TABLE>
At June 30, 1997, there was one delinquent construction loan for
$775,000 and one consumer loan for $20,000. The ratio of delinquent loans to
total loans (net) was 4.43% at June 30, 1997.
The table below sets forth the amounts and categories of non-performing
assets in the Association's loan portfolio at the dates indicated. Loans are
generally placed on non-accrual status when the collection of principal and/or
interest become doubtful or when the loan is in excess of 90 days delinquent.
Foreclosed assets include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
June 30,
------------------------------------------
1997 1996 1995
------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accruing loans:
One-to-four family................................... $ 810 $ 330 $ 118
Total............................................. 810 330 118
Accruing loans delinquent more than 90 days:
One-to-four family................................... 181 148 25
Multi-family and commercial real estate.............. --- --- ---
Total............................................. 181 148 25
Foreclosed assets:
One-to-four family................................... 334 --- ---
Total non-performing assets............................ $1.325 $478 $143
====== ==== ====
Total as a percentage of total assets.................. 1.54% .62% .20%
====== ==== ====
</TABLE>
Non-Performing Assets. Included in total non-performing assets are ten
mortgage loans on one-to-four family dwellings totaling $991,900. One loan for
$35,400 has now been paid in full and one of the properties underlying another
loan for $156,000 has been sold and will be paid in full by the end of
September. The other eight loans totaling $799,000 are in the foreclosure
process and no loss is expected. One of the properties included in
12
<PAGE>
the foreclosed assets for $250,000 has been sold and will close in September.
Other Loans of Concern. In addition to the non-performing loans and
foreclosed assets set forth in the preceding table, as of June 30, 1997 there
was also an aggregate of $1.0 million in net book value of loans classified by
the Association with respect to the majority of which known information about
the possible credit problems of the borrowers or the cash flows of the security
properties have caused management to have some doubts as to the ability of the
borrowers to comply with present loan repayment terms and which may result in
the future inclusion of such items in the non-performing asset categories. The
principal components of loans of concern are four single-family loans totaling
$227,000, one construction commercial loan for $775,000, and one consumer loan
for $20,000. One loan for $53,800 included in the four single-family loans has
now been paid in full.
As of June 30, 1997, there were no other loans not included on the
table or discussed above where known information about the possible credit
problems of borrowers caused management to have doubts as to the ability of the
borrower to comply with present loan repayment terms and which may result in
disclosure of such loans in future.
Classified Assets. Federal regulations provide for the classification
of loans and other assets such as debt and equity securities considered by the
OTS to be of lesser quality as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the savings association 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.
When a savings association 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 a savings association 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 association's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the association's District Director at the regional OTS
office, who may order the establishment of additional general or specific loss
allowances.
In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Association
regularly reviews the loans in its portfolio to determine whether any loans
require classification in accordance with applicable regulations. On the basis
of management's review of its assets, at June 30, 1997, the Association had
classified a total of $830,000 of its assets as substandard, $0 were classified
as doubtful, and $0 were classified as loss.
At June 30, 1997, total classified assets comprised $1.9 million or
12.47% of the Association's capital, or 2.22% of the Association's total assets.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity. Such evaluation, which includes a review of loans for which full
collectibility may not be reasonably assured, considers among other matters the
estimated fair value of the underlying collateral, economic conditions,
historical loan loss experience and other factors that warrant recognition in
providing for an adequate loan allowance.
Real estate properties acquired through foreclosure are recorded at
fair value. If fair value at the date of foreclosure is lower than the balance
of the related loan, the difference will be charged-off to the allowance at the
time of transfer. Valuations are periodically updated by management and if the
value declines, a specific provision for losses on such property is established
by a charge to operations.
13
<PAGE>
Although management believes that it uses the best information
available to determine the allowances, unforeseen market conditions could result
in adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Association's allowances will be the
result of periodic loan, property and collateral reviews and thus cannot be
predicted in advance. At June 30, 1997, the Association had a total allowance
for loan losses of $221,000 or .32% of loans receivable, net. See Notes A and E
of the Notes to Consolidated Financial Statements and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Annual
Report to Stockholders attached hereto as Exhibit 13.
The following table sets forth an analysis of the Association's
allowance for loan losses.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------
1997 1996 1995
---------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period............................ $240 $ 216 $ 194
Charge-offs............................................... (55) --- (2)
Recoveries................................................ --- --- ---
----- ----- -----
Net charge-offs........................................... (55) (2)
Transfer to allowance for decline in
value of foreclosed real estate.......................... --- --- ---
Additions charged to operations........................... 36 24 24
----- ----- -----
Balance at end of period.................................. $ 221 $ 240 $ 216
===== ===== =====
Ratio of net charge-offs during the period to average
loans outstanding during the period....................... .08% ---% ---%
===== ===== =====
Ratio of net charge-offs during the period to average
non-performing assets..................................... 4.59% ---% ---%
===== ===== =====
</TABLE>
14
<PAGE>
The distribution of the Association's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------------------------------------------------------------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
---------------------------------------------------------------------------------------------
(Dollars In thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four
family.................. $ 67 63.93% $ 64 66.07% $ 58 64.60%
Multi-family and
Commercial real
estate.................. 51 29.35 42 27.76 45 28.45
Construction............. --- 5.09 --- 4.82 --- 6.16
Consumer................. 11 1.63 --- 1.35 --- .79
Unallocated.............. 92 --- 134 --- 113 ---
---- ------ ----- ------ ------ ------
Total............... $221 100.00% $ 240 100.00% $ 216 100.00%
==== ====== ===== ====== ====== ======
</TABLE>
Investment Activities
State Federal must maintain minimum levels of investments that qualify
as liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. Historically, the Association has generally
maintained its liquid assets above the minimum requirements imposed by the OTS
regulations and at a level believed adequate to meet requirements of normal
daily activities, repayment of maturing debt and potential deposit outflows. The
Association's investment policy objective in this regard sets the Association's
desired liquidity between 6% and 12%. As of June 30, 1997, the Association's
liquidity ratio (liquid assets as a percentage of net withdrawable savings
deposits and current borrowings) was 7.41%. See "Regulation - Liquidity."
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Association is to invest funds
among various categories of investments and maturities based upon the
Association's need for liquidity, to achieve the proper balance between its
desire to minimize risk and maximize yield, to provide collateral for
borrowings, and to fulfill the Association's asset/liability management
policies.
Cash and Investments in Certificates of Deposit and Other Investments.
At June 30, 1997, the Company's cash and interest-bearing deposits in other
financial institutions totaled $3.6 million, or 4.24% of its total assets.
Certificates of deposits invested in other institutions totaled $4.4 million or
5.18% of its total assets. The Association has a $950,000 investment in the
common stock of the FHLB of Des Moines in order to satisfy the requirement for
membership in such institution. The Company has $1.2 million or 1.40% of its
total assets invested in corporate securities, which includes preferred common
stocks and mutual funds. The Company has $2.3 million or 2.68% of its assets
invested in federal agency securities. See Note D of Notes to Consolidated
Financial Statements in the Annual Report to Stockholders attached hereto as
Exhibit 13.
15
<PAGE>
OTS regulations restrict investments in corporate debt and most equity
securities by the Association. These restrictions include prohibitions against
investments in the federal agency debt securities of any one issuer in excess of
15% of the Association's unimpaired capital and unimpaired surplus as defined by
federal regulations, plus an additional 10% if the investments are fully secured
by readily marketable collateral. See "Regulation - Federal Regulation of
Savings Associations" for a discussion of additional restrictions on the
Association's investment activities.
16
<PAGE>
The following table sets forth the composition of the Bank's investment
portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------
Book % of Book % of Book % of
Value Value Value Total Value Total
----------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
Corporate equity securities..................... $1,221 27.58 $ 723 23.34 $ 800 49.66
Federal agency debt securities.................. 2,256 50.96 1,624 52.44 311 19.30
FHLB stock........................................... 950 21.46 750 24.22 500 31.04
------ ------ ------ ------ ------ ------
Total investment
securities and FHLB
stock.......................................... $4,427 100.00% $3,097 100.00% $1,611 100.00%
====== ====== ====== ====== ====== ======
Other Interest-Earning Assets:
Interest-bearing deposits
with banks........................................ $3,453 43.80% $2,413 35.26% $3,788 40.27%
Certificates of deposit invested
in other institutions............................. 4,430 56.20% 4,430 64.74 5,618 59.73
------ ------ ------ ------ ------ ------
Total........................................... $7,883 100.00% $6,843 100.00% $9,406 100.00%
====== ====== ====== ====== ====== ======
Average remaining life or term
to repricing of certificates
of deposit.......................................... 1 year 2 years 2 years
</TABLE>
17
<PAGE>
Sources of Funds
General. The Company's primary sources of funds are deposits,
borrowings, repayment of loan principal, sales of loan participations, maturing
investments in certificates of deposit, and funds provided from operations.
Borrowings, consisting of FHLB advances, may be used at times to
compensate for seasonal reductions in deposits or deposit inflows at less than
projected levels, and may be used on a longer-term basis to support expanded
lending activities.
Deposits. State Federal offers a variety of deposit accounts having a
wide range of interest rates and terms. The Association's deposits consist of
passbook savings accounts, NOW, and money market accounts, and certificate
accounts ranging in terms from three months to 60 months. The Association only
solicits deposits from its market area and does not currently use brokers to
obtain deposits. The Association relies primarily on competitive pricing
policies, advertising and customer service to attract and retain these deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates, and
competition.
The variety of deposit accounts offered by the Association has allowed
it to be competitive in obtaining funds and to respond with flexibility to
changes in consumer demand. The Association has become more susceptible to
short-term fluctuations in deposit flows, as customers have become more interest
rate conscious. The ability of the Association to attract and maintain
certificates of deposit accounts and the rates paid on these deposits has been
and will continue to be significantly affected by market conditions.
The following table sets forth the savings flows at the Association
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------
1997 1996 1995
-------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance..................... $45,732 $45,596 $42,776
Deposits............................ 58,944 45,658 53,620
Withdrawals......................... (56,885) (47,952) (52,955)
Interest credited................... 2,555 2,430 2,155
------- ------- -------
Ending balance...................... $50,346 $45,732 $45,596
======= ======= =======
Net increase (decrease)............. $4,614 $136 $2,820
======= ======= =======
Percent increase (decrease)......... 10.09% .30% 6.59%
======= ======= =======
</TABLE>
18
<PAGE>
The following table indicates the amount of the Association's
certificates of deposit and other deposits by time remaining until maturity as
of June 30, 1997.
<TABLE>
<CAPTION>
Maturity
-------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
-------------------------------------------------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less
than $100,000........................ $5,956 $3,753 $7,916 $16,214 $33,839
Certificates of deposit of
$100,000 or more..................... 1,701 1,115 1,577 2,880 7,273
------ ------ ------ ------- -------
Total certificates of
deposit.............................. $7,657 $4,868 $9,493 $19,094 $41,112
====== ====== ====== ======= =======
</TABLE>
Borrowings. Although deposits are the Association's primary source of
funds, the Association's policy has been to utilize borrowings when they are a
less costly source of funds, can be invested at a positive interest rate spread
or when the Association desires additional capacity to fund loan demand.
State Federal's borrowings historically have consisted of advances from
the FHLB of Des Moines upon the security of a blanket collateral agreement of a
percentage of unencumbered loans. Such advances can be made pursuant to several
different credit programs, each of which has its own interest rate and range of
maturities. At June 30, 1997, the Association had $19 million in FHLB advances.
At June 30, 1997, the Association had no repurchase agreements or other
borrowings not mentioned above outstanding.
The following table sets forth certain information including the
maximum month-end balance and average balance of FHLB advances at the dates
indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------
1997 1996 1995
-------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances.............................. $19,000 $15,000 $10,000
======= ======= =======
Average Balance:
FHLB advances.............................. $18,500 $11,846 $ 7,083
======= ======= =======
Weighted average interest
rate of FHLB advances...................... 6.34% 5.73% 5.97%
======= ======= =======
</TABLE>
19
<PAGE>
Service Corporation Activities
Federal associations generally may invest up to 2% of their assets in
service corporations plus an additional 1% of assets if used for community
purposes. In addition, federal associations may invest up to 50% of their
regulatory capital in conforming loans to their service corporations. In
addition to investments in service corporations, federal associations are
permitted to invest an unlimited amount in operating subsidiaries engaged solely
in activities in which a federal association may engage directly.
State Federal has one service corporation, State Service Corporation,
located in Des Moines, Iowa. State Service Corporation was organized by State
Federal in 1976. State Service Corporation owns and operates a 60-unit apartment
complex, in Pleasant Hill, Iowa.
During the fiscal year ended June 30, 1997, State Service Corporation's
gross revenues from property management activities (consisting of rental income)
totaled approximately $353,000 and expenses (consisting of depreciation,
property taxes, maintenance fees, and maintenance) were $292,000. Income tax
expense totaled $62,800 for 1997. During fiscal year 1997, State Service
Corporation sold an 8-unit apartment complex and realized a gain of $131,000
from the sale. State Service Corporation has not had significant capital
expenditures with regard to its real estate operation over the past three fiscal
years. Revenues from State Service Corporation's insurance sales totaled
approximately $3,600 and interest income on real estate contracts totaled
$8,200. See Note G to the Notes to Consolidated Financial Statements in the 1997
Annual Report to Stockholders attached hereto as Exhibit 13.
REGULATION
General
State Federal is a federally chartered savings and loan association,
the deposits of which are federally insured and backed by the full faith and
credit of the United States Government. Accordingly, State Federal is subject to
broad federal regulation and oversight extending to all its operations. The
Association is a member of the FHLB of Des Moines and is subject to certain
limited regulation by the Board of Governors of the Federal Reserve System
("Federal Reserve Board"). As the savings and loan holding company of State
Federal, the Holding Company also is subject to federal regulation and
oversight. The purpose of the regulation of the Holding Company and other
holding companies is to protect subsidiary savings associations. The Association
is a member of the Savings Association Insurance Fund ("SAIF"), which together
with the Bank Insurance Fund (the "BIF") are the two deposit insurance funds
administered by the FDIC, and the deposits of the Association are insured by the
FDIC. As a result, the FDIC has certain regulatory and examination authority
over State Federal.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations
The OTS has extensive authority over the operations of savings
associations. As part of this authority, State Federal is required to file
periodic reports with the OTS and is subject to periodic examinations by the OTS
and the FDIC. The last regular OTS and FDIC examinations of State Federal were
as of March 31, 1996 and June 30, 1994, respectively. When these examinations
are conducted by the OTS and the FDIC, the examiners may require the Association
to provide for higher general or specific loan loss reserves. All savings
associations are subject to a semi-annual assessment, based upon the savings
association's total assets, to fund the operations of the OTS. The Association's
OTS assessment for the fiscal year ended June 30, 1997 was approximately
$26,500.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including State Federal and the
Holding Company. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders and to initiate injunctive actions. In general, these enforcement actions
may be initiated for violations of laws and regulations and unsafe or unsound
20
<PAGE>
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the
Association is prescribed by federal law and it is prohibited from engaging in
any activities not permitted by such laws. For instance, no savings institution
may invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to branch nationwide. State Federal is in compliance with the noted
restrictions.
The Association's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At June 30, 1997, the Association's lending
limit under this restriction was $1,578,000. State Federal is in compliance with
the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a compliance plan. A
failure to submit a plan or to comply with an approved plan will subject the
institution to further enforcement action.
Insurance of Accounts and Regulation by the FDIC
State Federal is a member of the SAIF, which is administered by the
FDIC. Deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the United States
Government. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious risk
to the SAIF or the BIF. The FDIC also has the authority to initiate enforcement
actions against savings associations, after giving the OTS an opportunity to
take such action, and may terminate the deposit insurance if it determines that
the institution has engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
For the first six months of 1995, the assessment schedule for BIF
members and SAIF members ranged from .23% to .31% of deposits. As is the case
with the SAIF, the FDIC is authorized to adjust the insurance premium rates for
banks that are insured by the BIF of the FDIC in order to maintain the reserve
ratio of the BIF at 1.25% of BIF insured deposits. As a result of the BIF
reaching its statutory reserve ratio, the FDIC revised the premium schedule for
BIF insured institutions to provide a range of .04% to .31% of deposits. The
21
<PAGE>
revisions became effective in the third quarter of 1995. In addition, the BIF
rates were further revised, effective January 1997, to provide a range of 0% to
.27%. The SAIF rates, however, were not adjusted.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted on September 30,
1996. The legislation provided for a one-time assessment to be imposed on all
deposits assessed at the SAIF rates, as of March 31, 1995, in order to
recapitalize the SAIF. It also provides for the merger of the BIF and the SAIF
on January 1, 1999 if no savings associations then exist. The special assessment
rate was established at .657% of deposits by the FDIC and the resulting
assessment of $291,331 was paid in November 1996. This special assessment
significantly increased noninterest expense and adversely affected the
Association's results of operations for the year ended June 30, 1997. As a
result of the special assessment, the Association's deposit insurance premiums
was reduced to zero for calendar 1997 based upon its current risk classification
and the new assessment schedule for SAIF insured institutions. These premiums
are subject to change in future periods.
Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on savings associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for resolving
the thrift crisis in the 1980s. Although the FDIC equalized the SAIF and BIF
assessment schedule, effective October 1, 1996, SAIF-insured institutions will
continue to be subject to a FICO assessment as a result of this continuing
obligation. Although the legislation also now requires assessments to be made on
BIF-assessable deposits for this purpose, effective January 1, 1997, that
assessment will be limited to 20% of the rate imposed on SAIF assessable
deposits until the earlier of December 31, 1999 or when no savings association
continues to exist, thereby imposing a greater burden on SAIF member
institutions such as the Association. Thereafter, however, assessments on
BIF-member institutions will be made on the same basis as SAIF-member
institutions. The calendar 1997 rates established by the FDIC to implement this
requirement for all FDIC-insured institutions are 6.48 basis points on SAIF
deposits and 1.3 basis points on BIF deposits.
Regulatory Capital Requirements
Federally insured savings associations, such as the Association, are
required to maintain a minimum level of regulatory capital. The OTS has
established capital standards, including a tangible capital requirement, a
leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations. These capital requirements
must be generally as stringent as the comparable capital requirements for
national banks. The OTS is also authorized to impose capital requirements in
excess of these standards on individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries, the debt and equity investments in such subsidiaries are deducted
from assets and capital.
At June 30, 1997 the Association had tangible capital of $9.3 million,
or 11.60% of adjusted total assets, which is approximately $8.1 million above
the minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
22
<PAGE>
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio.
At June 30, 1997, the Association had core capital equal to $9.3
million, or 11.60% of adjusted total assets, which is $6.9 million above the
minimum leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At June 30, 1997, State Federal had
no capital instruments that qualify as supplementary capital and $221,400 of
general loss reserves, which was less than 1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. State Federal had no such
exclusions from capital and assets at June 30, 1997.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.
OTS regulations also require that every savings association with more
than normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings association, greater than 2% of the present value of its
assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule will not become effective until the OTS
evaluates the process by which savings associations may appeal an interest rate
risk deduction determination. It is uncertain when this evaluation may be
completed. Any savings association with less than $300 million in assets and a
total capital ratio in excess of 12% is exempt from this requirement unless the
OTS determines otherwise.
On June 30, 1997, the Association had total capital of $10.5 million
(including $9.3 million in core capital and $221,400 in qualifying supplementary
capital) and risk-weighted assets of $49.5 million or total capital of 19.29% of
risk-weighted assets. This amount was $5.6 million above the 8% requirement in
effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1 risk-based
capital ratio or an 8% risk-based capital ratio). Any such association must
submit a capital restoration plan and until such plan is approved by the OTS may
not increase its assets, acquire another institution, establish a branch or
engage in any new activities, and generally may not make capital distributions.
The OTS is authorized to impose the additional restrictions that are applicable
to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
23
<PAGE>
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authorities of the OTS or FDIC, including the
appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Association may have a substantial adverse effect on the Association's
operations and profitability. Holding Company shareholders do not have
preemptive rights, and therefore, if the Holding Company is directed by the OTS
or the FDIC to issue additional shares of Common Stock, such issuance may result
in the dilution in the percentage of ownership of the Holding Company.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions on savings associations
with respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
savings association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result, the regulatory capital of the association
would be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion.
Generally, savings associations, such as State Federal, that before and
after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk- based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However, an association deemed to be in need of more than normal supervision by
the OTS may have its dividend authority restricted by the OTS. State Federal may
pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period based on safety and soundness concerns.
See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
24
<PAGE>
Liquidity
All savings associations, including State Federal, 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. For a discussion of what the Association
includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources". This liquid asset ratio requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
savings associations. At the present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. At June 30, 1997, the Association was in compliance with both
requirements, with an overall liquid asset ratio of 7.41% and a short-term
liquid assets ratio of 7.41%.
Accounting
An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of and
accounting for loans and securities (i.e., whether held for investment, sale or
trading) with appropriate documentation. The Association is in compliance with
these amended rules.
The OTS has adopted an amendment to its accounting regulations, which
may be made more stringent than GAAP by the OTS, to require that transactions be
reported in a manner that best reflects their underlying economic substance and
inherent risk and that financial reports must incorporate any other accounting
regulations or orders prescribed by the OTS.
Qualified Thrift Lender Test
All savings associations, including the Association, are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. This test requires a savings association to have at least 65%
of its portfolio assets (as defined by regulation) in qualified thrift
investments on a monthly average for nine out of every 12 months on a rolling
basis. As an alternative, the Savings Association may maintain 60% of its assets
specified in Section 770(a)(19) of the Internal Revenue Code. Under either test,
such assets primarily consist of residential housing related loans and
investments. At June 30, 1997, the Association met the test and has always met
the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
25
<PAGE>
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of State
Federal to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by State
Federal. An unsatisfactory rating may be used as the basis for the denial of an
application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Association may be required to devote additional
funds for investment and lending in its local community. The Association
examined for CRA compliance in 1990 and received a rating of satisfactory.
Transactions with Affiliates
Generally, transactions between a savings association or its
subsidiaries and its affiliates are required to be on terms as favorable to the
association as transactions with non-affiliates. In addition, certain of these
transactions such as loans to an affiliate, are restricted to a percentage of
the association's capital. Affiliates of State Federal include the Holding
Company and any company which is under common control with the Association. In
addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates. The Association's subsidiaries are not deemed affiliates,
however; the OTS has the discretion to treat subsidiaries of savings
associations as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation
The Holding Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Holding 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 Holding Company and its non-savings association subsidiaries which also
permits the OTS to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Holding Company
generally is not subject to activity restrictions. If the Holding 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 Holding Company and any of its subsidiaries (other than the Association or
any other SAIF-insured savings association) would become subject to such
restrictions unless such other associations each qualify as a QTL and were
acquired in a supervisory acquisition.
If the Association fails the QTL test, the Holding Company must obtain
the approval of the OTS prior to continuing after such failure, directly or
through its other subsidiaries, any business activity other than those approved
for multiple savings and loan holding companies or their subsidiaries. In
addition, within one year of such failure the Holding Company must register as,
and will become subject to, the restrictions applicable to bank holding
companies. The activities authorized for a bank holding company are more limited
than are the activities authorized for a unitary or multiple savings and loan
holding company. See "--Qualified Thrift Lender Test."
26
<PAGE>
The Holding 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.
Federal Securities Law
The stock of the Holding Company is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Holding
Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
Holding Company stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Holding Company may not
be resold without registration or unless sold in accordance with certain resale
restrictions. If the Holding Company meets specified current public information
requirements, each affiliate of the Holding Company is able to sell in the
public market, without registration, a limited number of shares in any
three-month period.
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).
At June 30, 1997, the Association was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements that
may be imposed by the OTS. See "-- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
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, which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
As a member, State Federal is required to purchase and maintain stock
in the FHLB of Des Moines. At June 30, 1997, State Federal had $950,000 in FHLB
stock, which was in compliance with this requirement. In past years, the
Association has received substantial dividends on its FHLB stock. Over the past
five fiscal years such dividends have averaged 7.73% and were 7.06% for fiscal
year 1997.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Association's FHLB stock may result in a corresponding
reduction in State Federal's capital.
For the fiscal year ended June 30, 1997, dividends paid by the FHLB of
Des Moines to State Federal totaled $64,300, which constitutes a $20,100
increase from the amount of dividends received in the fiscal year ended June
27
<PAGE>
30, 1996. The $16,600 dividend received for the quarter ended June 30, 1997
reflects an annualized rate of 7.0%, for the same quarter ended June 30, 1996.
Federal and State Taxation
Prior to the year ended June 30, 1997 savings associations such as the
Association that meet certain definitional tests relating to the composition of
assets and other conditions prescribed by the Internal Revenue Code of 1986, as
amended (the "Code") were permitted to establish reserves for bad debts and to
make annual additions thereto which may, within specified formula limits, be
taken as a deduction in computing taxable income for federal income tax purposes
the amount of the bad debt reserve deduction for "non-qualifying loans" was
computed under the experience method. The amount of the bad debt reserve
deduction for "qualifying real property loans" (generally loans secured by
improved real estate) was also computed under the experience method of the
percentage of taxable income method (based on an annual election). Under the
experience method, the bad debt reserve deduction is an amount determined under
a formula based generally upon the bad debts actually sustained by the savings
association over a period of years.
The percentage of specially computed taxable income that was used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") was 8% for the
years 1987-1995. The percentage bad debt deduction thus computed was reduced by
the amount permitted as a deduction for non-qualifying loans under the
experience method. The availability of this percentage-of-taxable-income method
permitted qualifying savings associations to be taxed at a lower effective
federal income tax rate than that applicable to corporations generally
(approximately 31.3% assuming the maximum percentage bad debt deduction).
Pursuant to changes in Federal tax law enacted in August 1996, the percentage
bad debt deduction has been eliminated for tax years beginning after December
31, 1995.
The federal tax legislation enacted in August 1996 imposes a
requirement to recapture into taxable income the portion of the qualifying and
non-qualifying loan reserves in excess of the "base-year" balances of such
reserves. For the Association, the base-year reserves are the balances as of
December 31, 1987. Recapture of the excess reserves will occur over a six-year
period which will begin for the bank either in fiscal 1997, fiscal 1998 or
fiscal 1999, depending on whether it meets certain residential lending
requirements. The Bank previously established, and will continue to maintain, a
deferred tax liability with respect to its Federal tax bad debt reserves in
excess of the base-year balances; accordingly, the legislative changes will have
no effect on total income tax expense for financial reporting purposes.
Also, under the August 1996 legislation, the Association's base-year
Federal tax bad debt reserves are "frozen" and subject to current recapture only
in very limited circumstances. Generally, recapture of all or a portion of the
base-year reserves will be required if the Association pays a dividend in excess
of its current or accumulated earnings or profits, redeems any of its stock or
is liquidated. The Association has not established a deferred federal tax
liability under Statement of Financial Accounting Standards ("SFAS") No. 109 for
its base-year Federal tax bad debt reserves, as it does not anticipate engaging
in any of the transactions that would cause such reserves to be recaptured. The
unrecognized deferred tax liability was $1.7 million at June 30, 1997.
In addition to the regular income tax, corporations, including savings
associations such as the Association, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Association, are also subject to an environmental tax equal to 0.12% of the
excess of alternative minimum taxable income for the taxable year (determined
without regard to net operating losses and the deduction for the environmental
tax) over $2 million.
28
<PAGE>
The Association and its subsidiary have not been audited by the IRS
with respect to consolidated federal income tax returns within the past three
years. With respect to years examined by the IRS, either all deficiencies have
been satisfied or sufficient reserves have been established to satisfy asserted
deficiencies. In the opinion of management, any examination of still open
returns (including returns of subsidiaries and predecessors of, or entities
merged into, the Association) would not result in a deficiency which could have
a material adverse effect on the financial condition of the Association and its
consolidated subsidiaries.
Iowa Taxation. The Holding Company and the Association's subsidiaries
file Iowa corporation tax returns while the Association files an Iowa franchise
tax return.
Iowa imposes a franchise tax on the taxable income for both mutual and
stock savings and loan associations. The tax rate is 5%, which may effectively
be increased, in individual cases, by application of a minimum tax provision.
Taxable income under the franchise tax is generally similar to taxable income
under the federal corporate income tax, except that, under the Iowa franchise
tax, no deduction is allowed for Iowa franchise tax payments and taxable income
includes interest on state and municipal obligations. Interest on U.S.
obligations is taxable under the Iowa franchise tax and under the federal
corporate income tax.
Taxable income under the Iowa corporate income tax is generally similar
to taxable income under the federal corporate income tax, except that, under the
Iowa tax, no deduction is allowed for Iowa income tax payments; interest from
state and municipal obligations is included in income; interest from U.S.
obligations is excluded from income; and 50% of federal corporate income tax
payments are excluded from income. The Iowa corporate income tax rates range
from 6% to 12% and may be effectively increased, in individual cases, by
application of a minimum tax provision.
Delaware Taxation. As a Delaware holding company, the Holding Company
is exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Holding Company
is also subject to an annual franchise tax imposed by the State of Delaware.
Competition
State Federal faces strong competition, both in originating real estate
and other loans and in attracting deposits. Competition in originating real
estate loans comes primarily from other commercial banks, savings associations,
credit unions and mortgage bankers making loans secured by real estate located
in the Association's market area. The Association competes for real estate and
other loans principally on the basis of the quality of services it provides to
borrowers, and loan fees it charges, and the types of loans it originates.
The Association attracts all of its deposits through its retail banking
offices, primarily from the communities in which those retail banking offices
are located; therefore, competition for those deposits is principally from other
commercial banks, savings associations and credit unions located in the same
communities. The Association competes for these deposits by offering a variety
of deposit accounts at competitive rates, convenient business hours, and
convenient branch locations with interbranch deposit and withdrawal privileges
at each.
The Association's primary concentration is Des Moines, Iowa. There are
four savings institutions, over 13 commercial banks and approximately 35 credit
unions in the Association's market area. The Association estimates its share of
the savings market in its primary market area to be approximately 1.0%.
Employees
At June 30, 1997, the Company and its subsidiary had a total of 16
employees. The Association's employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.
29
<PAGE>
Item 2. Properties
The Association conducts its business at its main office and one other
location in its primary market area. The following table sets forth information
relating to each of the Association's offices as of June 30, 1997.
The Association owns its branch office and its main office. The total
net book value of the Association's premises and equipment (including land,
building, furniture, fixtures and equipment) at June 30, 1997 was $1.4 million.
See Note I of Notes to Consolidated Financial Statements in the Annual Report to
Stockholders attached hereto as Exhibit 13.
<TABLE>
<CAPTION>
Total
Approximate
Date Square Net Book Value at
Location Acquired Footage June 30, 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Main Office:
519 Sixth Avenue January 3, 1995 3,300 $751,700
Des Moines, Iowa
Branch Office:
4018 University 1985 4,000 $308,500
Des Moines, Iowa
</TABLE>
The Association also owns a parcel of land located in Clive, Iowa with
a net book value of $287,400 at June 30, 1997. The Association conducts its data
processing through a service bureau, NCR Corporation. The net book value of the
data processing and computer equipment utilized by the Association at June 30,
1997 was $14,900. The net book value of other furniture and equipment at June
30, 1997 was $58,000.
Item 3. Legal Proceedings
State Federal is involved from time to time as plaintiff or defendant
in various legal actions arising in the normal course of its business. State
Service Corporation, the Association's wholly-owned subsidiary is not a party to
any legal action. While the ultimate outcome of these proceedings cannot be
predicted with certainty, it is the opinion of management, after consultation
with counsel representing State Federal in the proceedings, that the resolution
of these proceedings should not have a material effect on State Federal's
consolidated financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended June 30, 1997.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Page 8 of the attached 1997 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operation
30
<PAGE>
Pages 8 through 17 of the attached 1997 Annual Report to Stockholders
are herein incorporated by reference.
Item 7. Financial Statements
The following information appearing in the Company's Annual Report to
Stockholders for the year ended June 30, 1997 is incorporated by reference in
this Annual Report on Form 10-KSB as Exhibit 13.
Annual Report Section Pages in Annual Report
- --------------------- ----------------------
Independent Auditors' Report 17
Consolidated Balance Sheets as of
June 30, 1997 and 1996 18
Consolidated Statements of Income
for the Years Ended June 30, 1997,
1996 and 1995 19
Consolidated Statements of
Stockholders' Equity for Years
Ended June 30, 1997, 1996 and 1995 20
Consolidated Statements of Cash Flows
for Years Ended June 30, 1997, 1996
and 1995 21
Notes to Consolidated Financial
Statements 22
With the exception of the aforementioned information, the Company's
Annual Report to Stockholders for the year ended June 30, 1997 is not deemed
filed as part of this Annual Report on Form 10-KSB.
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Directors
Information concerning directors and executive officers of the Company
is incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1997, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
31
<PAGE>
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1997, a copy of which will be filed not later than
120 days after the close of the fiscal year.
32
<PAGE>
Item 11. Security Ownership of Certain Beneficial
Owners and Management
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in 1997, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
Item 12. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions
is incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1997, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
33
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
Reference to
Prior Filing
or Exhibit
Number
S-B Exhibit Attached
Number Document Hereto
----------- ------------------------------------ ------------
3(i) Articles of Incorporation, including *
amendments thereto
3(ii) By-Laws *
4 Instruments defining the rights of *
security holders, including
debentures
9 Voting Trust Agreement None
10 Executive Compensation Plans and *
Arrangements
(a) Employment Contract between: *
(i) John F. Golden and the Association
(ii) Andra K. Black and the Association
(iii) Craig Wood and the Association
(b) 1993 Stock Option and Incentive *
Plan
(c) 1993 Management Recognition and *
Retention Plan
(d) Deferred Compensation Agreement *
11 Statement re: computation of per None
share earnings
13 Annual Report to Security Holders 13
16 Letter re: change in certifying None
accountants
18 Letter re: change in accounting None
principles
34
<PAGE>
Reference to
Prior Filing
or Exhibit
Regulation Number
S-B Exhibit Attached
Number Document Hereto
----------- ------------------------------- ------------
21 Subsidiaries of Registrant 21
22 Published report regarding None
matters submitted to vote
of security holders
23 Consents of Experts and Counsel 23
24 Power of Attorney Not required
27 Financial Data Schedule None
28 Information from reports None
furnished to state insurance
regulatory authorities
99 Additional Exhibits None
- ----------------
* Filed as exhibits to the Company's Form S-1 registration statement filed on
September 23, 1993 (File No. 33-69314) pursuant to Section 5 of the
Securities Act of 1933. All of such previously filed documents are hereby
incorporated herein by reference in accordance with Item 601 of Regulation
S-K.
(b) Reports on Form 8-K
1) Filed on September 21, 1997
2) Filed on May 15, 1997
35
<PAGE>
EXHIBIT 13
ANNUAL REPORT TO SHAREHOLDERS
36
<PAGE>
- --------------------------------------------------------------------------------
1997 ANNUAL REPORT
- --------------------------------------------------------------------------------
STATEFED FINANCIAL CORPORATION
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
President's Message.................................................... 3
Selected Consolidated Financial Information............................ 6
Management's Discussion and Analysis of Financial
Condition and Results of Operation................................... 8
Consolidated Financial Statements...................................... 18
Stockholder Information................................................ 43
Corporate Information.................................................. 44
<PAGE>
September 23, 1997
Dear Fellow Shareholders:
We are once again pleased to have the opportunity to report to you on
the financial condition of your company for the fiscal year ended June 30, 1997.
In all important aspects it was a very good year. Net income increased
from $882,854.00 in fiscal 1996 to a new record high of $921,325.00 for 1997.
The higher income was primarily the result of an increase in net interest income
of $190,100.00 and a gain in non-interest income of $199,600.00, partially
offset by an increase in non-interest expense of $311,800.00, of which
$291,300.00 was a one-time expense to recapitalize the FDIC Savings Association
Insurance Fund (SAIF). While that is a considerable amount of money, of course,
the payment enabled our cost of deposit insurance to drop from .23% to .063% of
insured savings accounts, which will continue to benefit our income stream in
the future.
Because the SAIF is now fully capitalized, and also due to our strong
capital position, the amount State Federal Savings will pay to the FDIC is
specifically earmarked to cover the cost of interest payments on "FICO" bonds,
which were bonds issued during the problem years of the 1980's to cover losses
generated by the many failed financial institutions of that time. State Federal
was not a part of that problem, of course, because, as today, we remained safe
and strong in spite of the difficulties that beset all financials of that
period.
Also during the past year, in the May issue of Worth Financial
Intelligence magazine, it was most gratifying to see StateFed Financial
Corporation stock listed by Mr. Peter Lynch as one of the top ten thrift stocks
in the nation that should be given consideration as a "buy" in the coming
year; and in the August 21st issue of the Des Moines Register was an article
from our regulatory agency, the Office of Thrift Supervision, that listed State
Federal Savings & Loan as one of the three most profitable thrifts in Iowa and
one of the top 102 in the nation. We, of course, are most pleased with the
positive reactions from these favorable articles regarding your companies.
The Board and management of StateFed Financial Corporation are also
very aware of the attention stockholders give to the value and price of their
stock holdings. We are therefore pleased to note that the book value of your
shares has risen to $19.44 per share as of June 30, 1997 and the price of
StateFed Financial Corporation stock is currently listed on the NASDAQ Stock
Market at $24.00. Dividends have remained at $.40 per share during fiscal 1997.
Total stock-holders' equity increased to $15,233,007.00 from $14,928,305.00
during the past year.
As in the past, the per share value does not include the appreciated
value of our real estate holdings, which, as in the case of the Pleasant Hill
sixty-unit apartment complex, is considerable.
3
<PAGE>
The new twenty-two unit apartment building adjacent to the branch
office on University is nearing completion. This project, which was announced in
last year's letter, will be ready for occupancy in mid-September.
The second building project also mentioned in last year's report was a
planned branch site with additional rental space to be built in Clive, Iowa.
Clive is a western suburb of Des Moines that has had and continues to experience
phenomenal growth. To date our parcel of land has been brought to final grade,
the concrete entrance roadway has been poured, the utilities brought in and the
perimeter interlocking concrete block retaining wall has been completed. In
short, we could be ready to begin construction as early as next year, if
conditions and circumstances favor such a move at that time.
Again, many shareholders have indicated their favorable opinion
regarding the repurchase of our stock by the holding company. The board of
directors approved the purchase of 5% of our outstanding shares and during 1996
we purchased a total of 41,000 shares of StateFed Financial Corporation stock.
The price per share varied from a low of $15.50 to a high of $16.75 per share.
This was obviously a wise decision given price per share today.
The Board also has approved management's recommendation to do a
complete revamping of the company's computer system. This is an expensive but
necessary expenditure and we are fortunate to have the in-house expertise to
plan and complete the renovation at a minimal cost. This should satisfy our
computer requirements for the foreseeable future.
One of the fastest growing mediums of communication in the country
today is the internet. State Federal is not behind-the-times, in recognizing
this fact. In June of 1996, State Federal made its presence known to the world
by presenting itself with a site on the world wide web. By accessing
http.//wwwstate-federal-savings.com, the user can not only discover what State
Federal Savings has to offer, but can also access directly to our stock
information by linking with the NASDAQ website. We have also included links to
other websites that may be of interest to those seeking financial information.
State Federal Savings and StateFed Financial Corporation can be contacted via
e-mail using the addresses [email protected] or [email protected] and
[email protected]. We recognize the beauty of e-mail communication in that not
only is it inexpensive, but also instantaneous. This makes State Federal Savings
and StateFed Financial Corporation more accessible to greater numbers in our
market and provides quicker responses to not only our present customer base, but
to an up-and-coming market of customers who prefer a fast, paper-reduced system.
We see the future of banking incorporating a new market of fast paced
computer-literate customers, who will not only want to conduct business from any
location where they happen to be, but also to do so at the touch of a keyboard
or click of a mouse. At State Federal we are positioning ourselves to
accommodate this type of consumer. Electronic banking is inevitable and we plan
to be there, ready to deliver to customers the products they desire in a manner
that is not only efficient, but also cost effective to the company.
4
<PAGE>
While many problems have been answered during the past year, the
industry is faced with yet another situation that congress is attempting to
resolve at the present time. This is the question as to the type of charter and
the powers that the thrift industry will be empowered to retain and conduct as a
financial entity in the future. We, of course, do not wish to see a diminution
of the permitted activities under our existing savings and loan charter. There
are others, however, who do not agree with this position, and want congress to
seriously restrict our profitable activities and operate under one charter with
the commercial banking industry.
The current action now being considered in Congress is under the
sponsorship of Iowa Congressman Jim Leach, and is entitled House Banking
Committee's HR-10 (Financial Modernization). Mr. Leach is chairman of this
committee. We urge you to make your views known to him and other members of the
committee; keep Savings & Loan powers intact!
In any event, we feel confident that given the correct framework in a
new charter, we will continue to serve you and the community well as we have for
over 70 years.
Thank you for your consideration and support during this past year. We
hope many of you will be able to attend the annual meeting in person on October
22, 1997.
Sincerely,
/s/ John F. Golden
--------------------------------------
John F. Golden
President and Chairman of the Board
5
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------ -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
- ----------------------------------
Total assets....................................... $85,679 $76,705 $71,271 62,773 $58,657
Cash & cash equivalents............................ 3,634 2,564 3,938 1,636 2,855
Certificates of deposits in
other institutions................................ 4,435 4,440 5,634 7,430 7,730
Investment securities.............................. 3,477 2,347 1,114 793 ---
Loans receivable, net.............................. 68,178 62,708 56,420 49,760 45,255
Deposits........................................... 50,346 45,732 45,596 42,776 47,408
FHLB advances...................................... 19,000 15,000 10,000 5,000 4,000
Stockholders' equity............................... 15,233 14,928 14,533 14,010 6,329
Year Ended June 30,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------- -------
(In Thousands)
Selected Operations Data:
- -------------------------
Total interest income.............................. $6,407 $5,785 $5,107 $ 4,620 $ 4,715
Total interest expense............................. 3,626 3,194 2,601 2,179 2,650
------ ------ ------ ------- -------
Net interest income............................. 2,781 2,591 2,506 2,441 2,065
Provision for loan losses.......................... 36 24 24 24 99
Net interest income after ------ ------ ------ ------- -------
provision for loan losses...................... 2,745 2,567 2,482 2,417 1,966
Non-interest income:
Real estate operations.......................... 404 395 386 347 340
Gain on sale of real estate and investments..... 158 41 2 28 13
Net realized loss on sale of available-for-sale
securities..................................... --- (24) --- --- ---
Other non-interest income....................... 108 58 57 55 50
------ ------ ------ ------ -------
Total non-interest income.......................... 670 470 445 430 403
Total non-interest expense......................... 1,991 1,679 1,637 1,445 1,277
------ ------ ------ ------ -------
Income before income taxes...................... 1,424 1,358 1,290 1,402 1,092
Income tax expense................................. 503 475 486 528 416
Net income before cumulative ------ ------ ------ ------ -------
effect of change in accounting
method........................................... $ 921 883 804 874 $ 676
Cumulative effect of change in
accounting for income taxes...................... --- --- --- (59) ---
------ ------ ------ ------- -------
Net Income......................................... $ 921 $ 883 $ 804 $ 815 $ 676
====== ====== ====== ======= =======
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
- -----------------------------------------
Performance Ratios:
Return on assets (ratio of net income to
average total assets)............................. 1.12 1.20 1.20 1.33 1.15
Interest rate spread information:
Average during year............................... 2.77 2.72 2.98 3.54 3.18
End of year....................................... 2.65 2.80 2.52 3.28 3.31
Net interest margin(1)............................. 3.58 3.72 3.95 4.18 3.65
Ratio of operating expense to average
total assets...................................... 2.42 2.29 2.44 2.37 2.17
Return on retained earnings (ratio of net
income to average equity)......................... 6.19 6.00 5.62 7.84 11.28
Quality Ratios:
Non-performing assets to total assets at
end of year....................................... 1.55 .62 .20 .54 .32
Allowance for loan losses to
non-performing loans.............................. 22.30 50.21 151.05 56.27 (2)
Capital Ratios:
Stockholders' Equity to total assets at end
of year........................................... 17.78 19.46 20.39 22.32 10.79
Average Stockholders' Equity to average
assets............................................. 18.10 20.05 21.33 16.93 10.16
Ratio of average interest-earning assets to
average interest-bearing liabilities............... 1.173x 1.218x 1.235x 1.170x 1.099x
Number of full-service offices...................... 2 2 2 2 2
</TABLE>
- ----------------
(1) Net interest income divided by average interest-earning assets. (2) No
non-performing loans at year-end.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
StateFed Financial Corporation (the "Company") is a savings and loan
holding company the primary asset of which is State Federal Savings and Loan
Association of Des Moines (the "Association"). The Company was incorporated in
September, 1993 and sold 859,625 shares of Common Stock on January 4, 1994 for
the purpose of acquiring all of the capital stock of the Association in
connection with the Association's conversion from mutual to stock form of
ownership. All references to the Company prior to January 4, 1994, except where
otherwise indicated, are to the Association and its subsidiary on a consolidated
basis.
The principal business of the Company has historically consisted of
attracting deposits from the general public, and making loans secured by
residential real estate. The Company's profitability is primarily dependent upon
its net interest income, which is the difference between interest income on its
loan and investment portfolio and interest paid on deposits and other borrowed
funds. Net interest income is directly affected by the relative amounts of
interest-earning assets and interest-bearing liabilities and the interest rates
earned or paid on such amounts. The Company's profitability is also affected by
the provision for loan losses and the level of non-interest income and expenses.
Non-interest income consists primarily of service charges and other fees, gains
(losses) on sales of assets and income from real estate operations. Non-interest
expense includes salaries and employee benefits, real estate operations,
occupancy of premises, federal deposit insurance premiums, data processing
expenses and other operating expenses.
StateFed Financial generally has sought to enhance its net earnings by,
among other things, maintaining asset quality and levels of capital above
federally required minimum standards and by controlling general and
administrative expenses. Although no assurances can be made about future
periods, the Company's results in these areas have enabled it to be consistently
profitable and well capitalized.
The operating results of the Company are also affected by general
economic conditions, the monetary and fiscal policies of federal agencies and
the policies of agencies that regulate financial institutions. StateFed
Financial's cost of funds is influenced by interest rates on competing
investments and general market rates of interest. Lending activities are
influenced by the demand for real estate loans and other types of loans, which
is in turn affected by the interest rates at which such loans are made, general
economic conditions affecting loan demand and the availability of funds for
lending activities.
StateFed Financial's basic mission is to maintain a strong capital
position and continue to record core earnings while serving its local community.
Specifically, it offers a range of customer services and products, including
deposit accounts and loans with a special emphasis on one-to-four family
mortgage lending and, to a lesser extent, multi-family and commercial real
estate lending. Yet smaller portions of the Company's loans receivable consists
of construction and consumer loans. Management has focused on ARM loans in
recent years, achieving a loan portfolio consisting of 40.52% fixed rate loans
and 59.48% adjustable rate loans at June 30, 1997.
Financial Condition
Comparison of Fiscal Years Ended June 30, 1997 and June 30, 1996.
The Company's total assets increased from $76.7 million at June 30,
1996 to $85.7 million at June 30, 1997, an increase of $9.0 million, or 11.73%.
The increase was primarily due to the increase in loans receivable of $5.5
million, the increase in investments available-for-sale of $1.1 million, and the
increase in cash and cash equivalents of $1.1 million, funded primarily from a
$4.6 million increase in deposits and a $4.0 million increase in FHLB advances.
Net loans increased $5.5 million, or 8.7%, from $62.7 million at June
30, 1996 to $68.2 million at June 30, 1997. The increase in the loan portfolio
was comprised primarily of mortgage loans originated.
Total deposits increased $4.6 million from $45.7 million at June 30,
1996 to $50.3 million at June 30, 1997. During fiscal 1997, certificates of
deposit increased $4.8 million, money market accounts increased by $163,000
while passbook accounts decreased $180,000, and NOW accounts decreased $159,000.
8
<PAGE>
Total borrowed funds increased to $19.0 million at June 30, 1997 from
$15.0 million at June 30, 1996. The increase consisted of advances from the
Federal Home Loan Bank of Des Moines. The funds were used primarily to to fund
increases in loan demand.
Total stockholders' equity increased $305,000 from $14.9 million at
June 30, 1996 to $15.2 million at June 30, 1997. The increase was primarily the
result of net income of $921,000, exercised stock options of $76,400,
amortization of recognition and retention plan ("RRP") awards and allocations to
the Employee Stock Ownership Plan ("ESOP") totaling $163,000, and the increase
in unrealized gains on available for sale securities of $80,000, offset by
$621,000 expended for the repurchase of 37,400 shares of Company common stock
and dividends declared totaling $315,000.
Results of Operations
Comparison of Fiscal Years Ended June 30, 1997 and June 30, 1996
General. Net Income for the year ended June 30, 1997 was $921,000, an
increase of $38,000 compared to net income for the year ended June 30, 1996 of
$883,000. The increase was primarily the result of an increase in net interest
income of $190,000, an increase in non-interest income of $200,000, partially
offset by an increase in non-interest expense of $312,000, an increase in income
taxes of $27,000 and an increase in the provision for loan losses of $12,000.
Net Interest Income. Net interest income increased $190,000, or 7.34%
from $2.6 million for the year ended June 30, 1996 to $2.8 million for the year
ended June 30, 1997.
Interest Income. Interest income increased $622,000 to $6.4 million for
fiscal 1997 compared to $5.8 million for the fiscal 1996 due primarily to an
increase in average loans receivable of $7.1 million.
Interest Expense. Interest expense increased $431,000 from $3.2 million
in fiscal 1996 to $3.6 million in fiscal 1997. The increase was due to the
increase in the balance of advances from the FHLB and to an increase in the
balance of certificates of deposit.
Provision for Loan Losses. The provision for loan losses for fiscal
1997 was $36,000, an increase of $12,000 compared to the year ended June 30,
1996 of $24,000. The amounts provided during the fiscal year were based on
management's quarterly analysis of the allowance for loan losses, based on,
among other things, the condition of the loan portfolio, the local economy, and
regulatory comments. Although the Company maintains its allowance for loan
losses at a level which it considers to be adequate to provide for potential
losses, there can be no assurance that future losses will not exceed estimated
amounts of that additional provisions for loan losses will not be required in
future periods. In addition, the Company's determination as to the amount of the
allowance for loan losses is subject to review by the regulatory agencies which
can order the establishment of additional general or specific allowances.
Non-Interest Income. Non-interest income increased from $470,000 in
fiscal 1996 to $670,000 in fiscal 1997. The increase of $200,000 is primarily
the result of a $117,000 increase in gains on sales of real estate, an increase
of $9,000 in real estate operation income, an increase in net realized gains on
sales of available-for-sale securities of $24,000, and an increase in other
non-interest income of $49,000.
Non-Interest Expense. Non-interest expense increased from $1.7 million
in fiscal 1996 to $2.0 million in fiscal 1997. The increase of $312,000, or
18.5%, is primarily the result of an increase in the Savings Association
Insurance Fund special assessment of $291,000, an increase in advertising of
$35,000, an increase in occupancy expense of $22,000 and an increase in other
non-interest expense of $27,000, partially offset by a decrease of $39,000 in
Federal Deposit Insurance premiums and a decrease of $22,000 in investment real
estate operations.
Income Tax Expense. Income tax expense was $503,000 in fiscal 1997
compared to $475,000 in fiscal 1996, an increase of $28,000 or 5.9%. Income
taxes increased primarily due to the increase in net income.
Comparison of Fiscal Years Ended June 30, 1996 and June 30, 1995
General. Net Income for the year ended June 30, 1996 was $883,000, an
increase of $79,000 compared to net income for the year ended June 30, 1995 of
$804,000. The increase was primarily the result of an increase in net interest
income of $85,000, an increase in non-interest income of $25,000, and a decrease
in income taxes of $11,000, partially offset by an increase in non-interest
expense of $42,000.
9
<PAGE>
Net Interest Income. Net interest income increased $85,000, or 3.4%
from $2.5 million for the year ended June 30, 1995 to $2.6 million for the year
ended June 30, 1996.
Interest Income. Interest income increased $677,900 to $5.8 million for
fiscal 1996 compared to $5.1 million for the fiscal 1995 due primarily to an
increase in average loans receivable of $6.2 million.
Interest Expense. Interest expense increased $592,700 from $2.6 million
in fiscal 1995 to $3.2 million in fiscal 1996. The increase was due to the
increase in the balance of advances from the FHLB and to an increase in interest
rates paid on certificates of deposit.
Provision for Loan Losses. The provision for loan losses for fiscal
1996 was $24,000, and did not change from the provision in fiscal 1995. The
amounts provided during the fiscal year were based on management's quarterly
analysis of the allowance for loan losses, based on, among other things, the
condition of the loan portfolio, the local economy, and regulatory comments.
Although the Company maintains its allowance for loan losses at a level which it
considers to be adequate to provide for potential losses, there can be no
assurance that future losses will not exceed estimated amounts or that
additional provisions for loan losses will not be required in future periods. In
addition, the Company's determination as to the amount of the allowance for loan
losses is subject to review by the regulatory agencies which can order the
establishment of additional general or specific allowances.
Non-Interest Income. Non-interest income increased from $445,000 in
fiscal 1995 to $470,000 in fiscal 1996. The increase of $25,000 is primarily the
result of a $39,000 increase in gains on sales of real estate, and an increase
of $9,000 in real estate operation income, partially offset by net realized
losses on sales of available-for-sale securities of $24,000.
Non-Interest Expense. Non-interest expense increased from $1.6 million
in fiscal 1995 to $1.7 million in fiscal 1996. The increase of $42,000, or 2.6%,
is primarily the result of an increase in compensation and benefits of $33,000,
and an increase of $16,000 in real estate operation expense, partially offset by
a decrease of $14,000 in other non-interest expense.
Income Tax Expense. Income tax expense was $475,000 in fiscal 1996
compared to $486,000 in fiscal 1995, a decrease of $11,000, or 2.3%. Income
taxes decreased primarily due to the utilization of tax credits as a result of
the Company's participation in a low-income housing project.
Asset/Liability Management
The measurement and analysis of the exposure of the Association to
changes in the interest rate environment is referred to as asset/liability
management. A primary objective of asset/liability management is to manage
interest rate risk. The Association monitors its asset/liability mix on an
ongoing basis and, from time to time, may institute certain changes in its
product mix and asset and liability maturities.
The Association focuses lending efforts toward offering adjustable-rate
loan products as an alternative to more traditional fixed-rate mortgage loans.
At June 30, 1997, the Company had $41.5 million of adjustable-rate loans which
comprised over 59% of the Association's loan portfolio. StateFed Financial has
not historically sold its loans.
The primary objective of the Association's investment strategy is to
provide liquidity necessary to meet funding needs as well as to address daily,
cyclical and long-term changes in the asset/liability mix, while contributing to
profitability by providing a stable flow of dependable earnings. Investments
generally include interest-bearing deposits in other federally insured financial
institutions, FHLB stock, U.S. Government securities, and certain issues of
corporate equity securities.
Generally, the investment policy of the Association is to invest funds
among various categories of investments and maturities based upon the Company's
need for liquidity, to achieve the proper balance between its desire to minimize
risk and maximize yield, to provide collateral for borrowings, and to fulfill
the Association's asset/liability management policies.
StateFed Financial's cost of funds responds to changes in interest
rates due to the relatively short-term nature of its deposit portfolio.
Consequently, the results of operations are influenced by the levels of
short-term interest rates. The Association offers a range of maturities on its
deposit products at competitive rates and monitors the maturities on an ongoing
basis.
10
<PAGE>
An approach used by management to quantify interest rate risk is the
net portfolio value ("NPV") analysis. In essence, this approach calculates the
difference between the present value of liabilities, expected cash flows from
assets and cash flows from off balance sheet contracts. Under OTS regulations,
an institution's "normal" level of interest rate risk in the event of an
immediate and sustained 200 basis point change in interest rates is a decrease
in the institution's NPV in an amount not exceeding 2% of the present value of
its assets. Pursuant to this regulation, thrift institutions with greater than
"normal" interest rate exposure must take a deduction from their total capital
available to meet their risk-based capital requirement. The amount of that
deduction is one-half of the difference between (a) the institution's actual
calculated exposure to the 200 basis point interest rate increase or decrease
(whichever results in the greater pro forma decrease in NPV) and (b) its
"normal" level of exposure which is 2% of the present value of its assets.
Savings institutions, however, with less than $300 million in assets and a total
capital ratio in excess of 12%, will be exempt from this requirement unless the
OTS determines otherwise. The OTS has postponed the implementation of the rule
until further notice. Based upon its asset size and capital level at June 30,
1997, the Company would qualify for an exemption from this rule.
The following table sets forth, at June 30, 1997, an analysis of the
Bank's interest rate risk as measured by the estimated changes in NPV resulting
from instantaneous and sustained parallel shifts in the yield curve (+/-400
basis points, measured in 100 basis point increments).
Estimated Increase (Decrease) in NPV
Change in Interest Rates Estimated NPV ------------------------------------
(Basis Points) Amount Amount Percent
-------------- ------ ------ -------
(Dollars in Thousands)
+400 $8,496 (4,253) (33)%
+300 9,719 (3,030) (24)%
+200 10,896 (1,853) (15)%
+100 11,940 (810) (6)%
--- 12,749 --- ---
-100 13,282 532 4%
-200 13,719 970 8%
-300 14,321 1,571 12%
-400 15,068 2,318 18%
Certain assumptions utilized in assessing the interest rate risk of
thrift institutions were employed in preparing the preceding table. These
assumptions relate to interest rates, loan prepayment rates, deposit decay
rates, and the market values of certain assets under the various interest rate
scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. Even if interest rates change in the designated amounts, there
can be no assurance that the Company's assets and liabilities would perform as
set forth above. In addition, a change in U.S. Treasury rates in the designated
amounts accompanied by a change in the shape of the Treasury yield curve would
cause significantly different changes to the NPV than indicated above.
11
<PAGE>
Average Balances, Interest Rates and Yields
The following table presents for the periods indicated the total dollar
amount of interest income from average interest earning assets and the resultant
yields, as well as the interest expense on average interest bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are monthly average balances. Non-accruing loans have been
included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------- ------------------------------ ---------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
----------- -------- ------ ----------- -------- ------ ----------- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Interest-earning bank accounts. $3,255 $ 145 4.45% $ 2,791 $ 125 4.48% $ 2,310 $ 104 4.50%
Certificates of deposit in-
vested in other institutions. 4,445 262 5.89 4,918 285 5.80 6,486 353 5.44
Investment and other 1,790 121 6.76 930 68 7.31
securities................... 2,483 184 7.41
Loans receivable(1)............ 66,558 5,752 8.64 59,480 5,210 8.76 53,274 4,545 8.53
FHLB stock..................... 912 64 7.02 615 44 7.15 494 38 7.69
------- ----- ---- ------- ------ ---- ------- ----- ----
Total interest-earning
assets(1)...................$77,653 6,407 8.25% $69,594 $5,785 8.31% $63,494 5,108 8.04%
======= ===== ==== ======= ====== ==== ======= ===== ====
Interest-Bearing Liabilities:
Passbook accounts............. $4,094 $ 113 2.76% $ 4,499 $ 123 2.73% $ 5,329 $ 146 2.74%
NOW accounts.................. 1,867 23 1.23 1,848 42 2.27 1,859 45 2.42
Money market accounts......... 3,283 117 3.56 3,174 113 3.56 3,828 129 3.37
Certificates of deposit....... 38,745 2,302 5.94 35,763 2,176 6.08 33,327 1,846 5.54
FHLB advances................. 18,231 1,071 5.87 11,846 740 6.25 7,077 436 6.16
Total interest-bearing
liabilities..................$66,220 3,626 5.48 $57,130 3,194 5.59 $51,420 2,602 5.06
======= ----- ---- ======= ------ ---- ======= ----- ----
Net interest income............. $2,781 $2,591 $2,506
====== ====== ======
Net interest rate spread........ 2.77% 2.72% 2.98%
Net earning assets..............$11,433 $12,464 $12,074
======= ======= =======
Net yield on average
interest-earning assets........ 3.58% 3.72% 3.95%
==== ==== ====
Average interest-earning
assets to average interest-
bearing liabilities........... 1.173x 1.218x 1.235x
===== ===== =====
</TABLE>
- ------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process
and loss reserves.
12
<PAGE>
Rate/Volume Analysis
The following schedule presents the dollar amount of changes in interest
income and interest or decrease expense for major components of interest-earning
assets and interest-bearing liabilities. It distinguishes between the increase
or decrease related to changes in average outstanding balances and that due to
the volatility of interest rates. For each category of interest-earning assets
and interest-bearing liabilities, information is provided on changes
attributable to (i) changes in volume (i.e., changes in volume multiplied by old
rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume).
For purposes of this table, changes attributable to both rate and volume, which
cannot be segregated have been allocated proportionately to the change due to
volume and the change due to rate. <TABLE> <CAPTION>
Year Ended June 30,
-----------------------------------------------------------------------------
1997 v. 1996 1996 v. 1995
-----------------------------------------------------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Due to
-----------------------------------------------------------------------------
Total Total
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
-----------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning bank accounts....... $21 $ (1) $ 20 $ 22 $ (1) $ 21
Certificates of deposit invested in
other institutions.................. (28) 5 (23) (90) 22 (68)
Investments and other securities..... 50 13 63 58 (5) 53
Loans receivable..................... 613 (71) 542 541 124 665
FHLB stock........................... 21 (1) 20 9 (3) 6
---- ----- ---- ----- ---- ----
Total interest-earning assets...... $677 $ (55) $622 $540 $137 $677
==== ===== ==== ===== ==== ====
Interest-bearing liabilities:
Passbook accounts.................... (11) 1 (10) (23) (1) (24)
NOW accounts......................... (19) --- (19) --- (3) (3)
Money market accounts................ 4 --- 4 (23) 7 (16)
Certificates of deposit.............. 178 (52) 126 141 190 331
FHLB advances........................ 377 (46) 331 298 6 304
Total interest-bearing ---- ----- ---- ---- ---- ----
liabilities....................... $529 $ (97) $432 $393 $199 $592
==== ===== ==== ==== ==== ====
Net interest income................... $190 $ 85
==== ====
</TABLE>
13
<PAGE>
Interest Rate Spread
The Company's results of operations are determined primarily by net
interest income and, to a lesser extent, fee income, miscellaneous income and
operating expenses. Net interest income is determined by the interest rate
spread between the yields earned on its interest-earning assets and the rates
paid on interest-bearing liabilities and by the relative amounts of
interest-earning assets and interest-bearing liabilities.
The following table sets forth the weighted average effective interest rate
earned by the Company on its loan and investment portfolios, the weighted
average effective cost of the Company's deposits and borrowings, the interest
rate spread of the Company and the net yield on weighted average
interest-earning assets at year end. <TABLE> <CAPTION>
At June 30,
----------------------------------------------
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
Weighted average yield on:
Loans receivable...................................... 8.517% 8.548% 8.568%
Interest-earning bank
accounts............................................ 5.50 5.15 5.672
Certificates of deposit
invested in other
institutions......................................... 6.01 6.02 5.860
Investments and other
securities........................................... 7.33 6.30 8.261
FHLB stock............................................ 7.00 7.00 7.000
Combined weighted average
yield on interest-earning
assets............................................. 8.181 8.227 8.163
Weighted average rate paid on
Passbook accounts..................................... 2.827 2.827 2.827
NOW accounts.......................................... 1.070 2.504 2.529
Money market accounts................................. 3.290 3.300 3.291
Certificates of deposit............................... 5.830 5.938 6.152
FHLB advances........................................ 6.338 5.729 6.364
Combined weighted average
rate paid on interest-
bearing liabilities................................ 5.534 5.429 5.646
Spread................................................. 2.647 2.798 2.517
</TABLE>
Liquidity and Capital Resources
The OTS requires minimum levels of liquid assets. OTS regulations
presently require the Company to maintain an average daily balance of liquid
assets (United State Treasury, federal agency, and other investments having
maturities of five years or less) equal to at least 5.0% of the sum of its
average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. Such requirements may be changed from time to time
by the OTS to reflect changing economic conditions. Such investments are
intended to provide a source of relatively liquid funds upon which the Company
may rely, if necessary, to fund deposit withdrawals and other short-term funding
needs. The Company's regulatory liquidity at June 30, 1997 was 7.41%. In
addition to the regulatory liquidity requirement, the Company is required to
maintain short-term liquid assets, as defined, equal to 1.0% of the average sum
of net withdrawal deposits and other liabilities, as defined. StateFed
Financial's short-term liquidity ratio at June 30, 1997 was 7.41%.
The Company's primary sources of funds consist of deposits, FHLB
advances, repayments of loans and interest earned on certificates of deposits in
other institutions. The Company maintains a higher ratio of loans to deposits in
comparison with other similarly sized savings institutions. Historically, this
has not had a material affect on the Company's liquidity as it has utilized
other potential sources of funds including borrowings from the FHLB of Des
Moines to maintain liquidity and to meet operating expenses. Management believes
that loan repayments and other sources of funds will be adequate to meet the
Company's foreseeable liquidity needs.
14
<PAGE>
The primary financing activity of the Company during the fiscal year
ended June 30, 1997 has been advances from the Federal Home Loan Bank. The
amount of FHLB advances net increase was $4 million, consisting of $12 million
in new borrowed funds, less $8 million of advances paid off.
Liquidity management is both a daily and long-term responsibility of
management. The Company adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) expected deposit
flows, (iii) yields available on interest-bearing deposits and (iv) the
objectives of its asset/liability management program. Excess liquidity is
invested generally in interest-bearing overnight deposits and other short-term
government and agency obligations. If the Company requires additional funds
beyond its internal ability to generate, it has additional borrowing capacity
with the FHLB of Des Moines.
The Company anticipates that it will have sufficient funds available to
meet current loan commitments. At June 30, 1997, the Company had outstanding
commitments to extend credit which amounted to $731,500. The Company is not
aware of any trends, events or uncertainties which will have or that are
reasonably likely to have a material effect on the Company's liquidity, capital
resources or operations.
Certificates of deposit scheduled to mature in one year or less at June
30, 1997, totaled approximately $22.2 million. Based on historical experience,
management believes that a significant portion of such deposits will remain with
the Association. There can be no assurance, however, that the Association can
retain all such deposits. At June 30, 1997, the Association had $19 million in
advances from the FHLB of Des Moines outstanding.
As a savings and loan holding company of a federal stock savings and
loan association, the Company's capital currently consists of stockholders'
equity including retained earnings. At June 30, 1997, the Company's
stockholders' equity totaled $15.2 million, or 17.78% of assets.
At June 30, 1997, the Association had tangible and core capital of $9.3
million, or 11.6% of adjusted total assets, respectively, which was
approximately $8.1 million and $6.9 million above the minimum requirements of
$1.5 and 3.0% respectively, of the adjusted total assets in effect on that date.
On June 30, 1997, the Association had risk-based capital of $9.6 million
(including $9.3 million in core capital), or 19.29% of risk-weighted assets of
$49.5 million. This amount was $5.6 million above the 8% requirement in effect
on that date. The Association is presently in compliance with the fully
phased-in capital requirements.
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 results of
operations in terms of historical dollars without considering changes in the
relative purchasing power of money over time because of inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
most industrial companies, virtually all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services.
Impact of New Accounting Standards
During October 1995, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123). SFAS 123 establishes financial accounting
and reporting standards for stock-based employee compensation plans and also
applies to transactions in which an entity issues its equity instruments to
acquire goods or services for nonemployees. SFAS 123 defines a fair value based
method of accounting for an employee stock option or similar equity instruments
and encourages all entities to adopt that method of accounting. However, it also
allows an entity to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25). Pro forma disclosures required for entities that elect to continue to
measure compensation cost using APB 25 must include the effect of all awards
granted in fiscal years beginning with fiscal year 1996. The Company has elected
15
<PAGE>
to continue to measure compensation cost using APB 25, therefore the adoption of
SFAS No. 123 did not impact the Company's financial condition or results of
operations. The Company did not grant any awards during fiscal 1997 or 1996.
During June 1996, the FASB issued SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
which provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers of financial assets that are secured
borrowings. SFAS 125 also requires that a liability can be derecognized if
either (a) the debtor pays the creditor and is relieved of its obligation for
the liability or (b) the debtor is legally released from the liability either
judicially or by the creditor. SFAS 125 is effective for transactions occurring
after December 31, 1996 and is to be applied prospectively. SFAS No. 127, issued
by the FASB in January 1997, amends FASB Statement No. 125 and postpones the
effective date of certain provisions of SFAS No. 125 until December 31, 1997.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share."
This Statement establishes standards of computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock or potential
common stock. This Statement simplifies the standards for computing earnings per
share and makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. This Statement is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods; earlier application is not permitted. This Statement
requires restatement of all prior-period EPS data presented.
The FASB issued SFAS No. 129, "Disclosure of Information about Capital
Structure" in February 1997. This Statement establishes standards for disclosing
information about an entity's capital structure and applies to all entities.
SFAS 129 codifies certain existing disclosures about an entity's capital
structure. This Statement is effective for financial statement periods ending
after December 15, 1997.
The FASB issued SFAS No. 130, "Reporting Comprehensive Income," in June
1997. This Statement establishes standards for the reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. The Statement requires
that an enterprise (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. The
Statement is effective for fiscal years beginning after December 15, 1997 and
requires reclassification of financial statements for earlier periods provided
for comparative purposes.
During June 1997, the FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This Statement establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that these
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. This Statement supercedes SFAS No. 14, "Financial Reporting for
Segments of a Business." The Statement is effective for fiscal years beginning
after December 15, 1997. In the initial year of adoption, comparative
information for earlier years is to be restated.
The Company expects to adopt these statements when required. Management
believes adoption will not have a material effect on financial position and
results of operations, nor will adoption require additional capital resources.
16
<PAGE>
[LETTERHEAD OF VROMAN, MCGOWEN, HURST, CLARK & SMITH, P.C.]
INDEPENDENT AUDITOR'S REPORT
Board of Directors
StateFed Financial Corporation
Des Moines, Iowa
We have audited the accompanying consolidated balance sheets of StateFed
Financial Corporation and subsidiary as of June 30, 1997 and 1996, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ended June 30, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
StateFed Financial Corporation and its subsidiary as of June 30, 1997 and 1996
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended June 30, 1997, in conformity with
generally accepted accounting principles.
/s/ Vroman, McGowen, Hurst, Clark & Smith, P.C.
- -----------------------------------------------
Des Moines, Iowa
July 31, 1997
17
<PAGE>
STATEFED FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
--------------------------------------
1997 1996
-------------- ------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents
Non-interest bearing $ 180,607 $ 151,599
Interest bearing 3,453,479 2,412,668
------------- -------------
3,634,086 2,564,267
Investments in certificates of deposit 4,435,425 4,439,567
Investment securities available-for-sale 3,477,168 2,347,048
Loans receivable, net 68,177,746 62,708,487
Real estate acquired for development 435,484 359,594
Real estate held for investment, net 1,933,532 1,175,872
Property acquired in settlement of loans 333,939 --
Office property and equipment, net 1,418,982 1,464,796
Federal Home Loan Bank stock, at cost 950,000 750,000
Accrued interest receivable 567,478 533,706
Other assets 314,754 361,287
------------- -------------
Total Assets $ 85,678,594 $ 76,704,624
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 50,345,972 $ 45,731,828
Advances from Federal Home Loan Bank 19,000,000 15,000,000
Advances from borrowers for taxes and insurance 490,053 505,749
Accrued interest payable 128,881 129,833
Income taxes
Current 29,327 5,255
Deferred 171,000 133,000
Accounts payable and other liabilities 201,982 189,305
Dividends payable 78,372 81,349
------------- -------------
Total Liabilities 70,445,587 61,776,319
Stockholders' equity
Preferred stock, $.01 par value, 500,000 shares authorized,
none issued --
Common stock, $.01 par value, 2,000,000 shares authorized
890,486 shares issued with 783,723 (1997) and 813,485
(1996) shares outstanding 8,905 8,905
Additional paid-in capital 8,398,857 8,376,924
Retained earnings - substantially restricted 8,752,218 8,146,074
Less treasury stock (106,763 and 77,001 shares, at cost) (1,560,859) (1,049,358)
Less common stock acquired by:
Employee stock ownership plan (413,940) (490,211)
Retention and recognition plan (9,636) (41,778)
Net unrealized gains (losses) on available-for-sale securities 57,462 (22,251)
------------- -------------
Total Stockholders' Equity 15,233,007 14,928,305
------------- -------------
Total Liabilities and Stockholders' Equity $ 85,678,594 $ 76,704,624
============= =============
</TABLE>
18
<PAGE>
STATEFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Loans receivable interest $ 5,752,351 $ 5,210,354 $ 4,544,928
Investment securities and other interest 654,681 575,072 562,560
------------ ------------ ------------
6,407,032 5,785,426 5,107,488
INTEREST EXPENSE
Deposits 2,555,022 2,454,135 2,165,564
Advances from Federal Home Loan Bank 1,070,715 740,109 435,960
------------ ------------ ------------
3,625,737 3,194,244 2,601,524
------------ ------------ ------------
NET INTEREST INCOME 2,781,295 2,591,182 2,505,964
PROVISION FOR LOAN LOSSES 36,000 24,000 24,000
------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,745,295 2,567,182 2,481,964
NON-INTEREST INCOME
Investment real estate operations 404,035 394,519 385,529
Gain on sale of real estate 158,154 41,269 1,555
Net realized loss on sales of available-for-sale securities -- (23,787) --
Other 107,717 58,297 58,441
------------ ------------ ------------
669,906 470,298 445,525
NON-INTEREST EXPENSE
Salaries and employee benefits 835,207 846,725 813,615
Investment real estate operations 214,055 235,710 219,632
Occupancy expenses 148,616 126,463 125,312
Federal deposit insurance premiums 88,059 127,257 124,531
SAIF special assessment 291,331 -- --
Data processing services 83,739 74,635 71,517
Advertising 52,715 17,977 27,193
Other 277,336 250,459 255,351
------------ ------------ ------------
1,991,058 1,679,226 1,637,151
------------ ------------ ------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 1,424,143 1,358,254 1,290,338
PROVISION FOR INCOME TAXES 502,818 475,400 486,498
------------ ------------ ------------
NET INCOME $ 921,325 $ 882,854 $ 803,840
============ ============ ============
Earnings per common share $ 1.20 $ 1.11 $ 1.00
============ ============ ============
Weighted average common shares outstanding 766,012 800,786 795,949
============ ============ ============
</TABLE>
19
<PAGE>
STATEFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years ended June 30, 1997, 1996, and 1995
-----------------------------------------------------------------------
Additional Stock
Common Paid-in Retained Treasury Acquired
Stock Capital Earnings Stock By ESOP
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1994 $ 8,905 $ 8,332,763 $ 7,079,042 $ (514,275) $ (653,315)
Net income for the year 803,840
Dividends declared (291,816)
ESOP common stock released
for allocation 22,777 83,164
Amortization of RRP contributions
Treasury stock acquired - 21,000 shares,
at cost (286,000)
Treasury stock reissued to fund stock
options exercised - 7,500 shares (16,800) 91,800
Change in unrealized gains (losses)
on available-for-sale securities
---------------------------------------------------------------------
Balance at June 30, 1995 8,905 8,338,740 7,591,066 (708,475) (570,151)
Net income for the year 882,854
Dividends declared (327,846)
ESOP common stock released for
allocation 57,061 79,940
Amortization of RRP contributions
Treasury stock acquired - 25,000
shares, at cost (418,750)
Treasury stock reissued to fund stock
options exercised--5,899 shares (18,877) 77,867
Change in unrealized gains (losses)
on available-for-sale securities
---------------------------------------------------------------------
Balance at June 30, 1996 8,905 8,376,924 8,146,074 (1,049,358) (490,211)
Net income for the year 921,325
Dividends declared (315,181)
ESOP common stock released for
allocation 54,877 76,271
Amortization of RRP contributions
Treasury stock acquired - 37,400
shares, at cost (620,825)
Treasury stock reissued to fund stock
options exercised--7,638 shares (32,944) 109,324
Change in unrealized gains (losses)
on available-for-sale securities
---------------------------------------------------------------------
Balance at June 30, 1997 $ 8,905 $ 8,398,857 $ 8,752,218 $ (1,560,859) $ (413,940)
=====================================================================
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Years ended June 30, 1997, 1996, and 1995
----------------------------------------------------
Common Unrealized
Stock Gains (Losses) Total
Acquired on AFS Stockholders'
By RRP Securities Equity
----------------------------------------------------
<S> <C> <C> <C>
Balance at June 30, 1994 $ (228,246) $ (15,240) $ 14,009,634
Net income for the year 803,840
Dividends declared (291,816)
ESOP common stock released
for allocation 105,941
Amortization of RRP contributions 122,166 122,166
Treasury stock acquired - 21,000 shares,
at cost (286,000)
Treasury stock reissued to fund stock
options exercised - 7,500 shares 75,000
Change in unrealized gains (losses)
on available-for-sale securities (6,010) (6,010)
----------------------------------------------------
Balance at June 30, 1995 (106,080) (21,250) 14,532,755
Net income for the year 882,854
Dividends declared (327,846)
ESOP common stock released for
allocation 137,001
Amortization of RRP contributions 64,302 64,302
Treasury stock acquired - 25,000
shares, at cost (418,750)
Treasury stock reissued to fund stock
options exercised--5,899 shares 58,990
Change in unrealized gains (losses)
on available-for-sale securities (1,001) (1,001)
----------------------------------------------------
Balance at June 30, 1996 (41,778) (22,251) 14,928,305
Net income for the year 921,325
Dividends declared (315,181)
ESOP common stock released for --
allocation 131,148
Amortization of RRP contributions 32,142 32,142
Treasury stock acquired - 37,400
shares, at cost (620,825)
Treasury stock reissued to fund stock
options exercised--7,638 shares 76,380
Change in unrealized gains (losses)
on available-for-sale securities 79,713 79,713
----------------------------------------------------
Balance at June 30, 1997 $ (9,636) $ 57,462 $ 15,233,007
====================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------------------
1997 1996 1995
---------------- ----------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 921,325 $ 882,854 $ 803,840
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 111,940 117,439 107,382
Gain on sale of real estate (158,154) 41,269 1,555
Amortization of ESOP and RRP contributions 163,291 201,303 228,106
Realized loss on sale of available-for-sale securities - 23,787 -
Deferred loan fees 13,305 10,814 33,060
Provision for losses on loans 36,000 24,000 24,000
Deferred income taxes 38,000 (35,400) (44,600)
Change in:
Accrued interest receivable (33,772) (94,222) (70,335)
Other assets 47,740 1,022 93,500
Accrued interest payable (952) 12,471 28,895
Current income tax liability 24,072 (26,559) 21,729
Accounts payable and other liabilities 12,677 (59,720) 50,421
---------- ------------ ----------
Net cash provided by operating activities 1,751,472 1,099,058 1,277,553
Cash flows from investing activities
Investment in certificates of deposits (99,000) - (380,286)
Maturity of investments in certificates of deposit 99,000 1,188,000 2,177,000
Proceeds from sale or maturity of available-for-sale
investment securities 200,000 453,420 531,699
Purchase of held-to-maturity investment securities - - (811,484)
Purchase of available-for-sale investment securities (1,250,407) (1,711,059) (56,008)
Purchase of FHLB stock (200,000) (250,000) -
Net increase in loans outstanding (5,669,007) (6,000,121) (6,222,098)
Investment in real estate held for investment (859,781) (3,450) (4,328)
Investment in real estate held for development (75,890) (432,540) (327,536)
Proceeds from sale of real estate 29,264 - -
Purchases of property and equipment (15,676) (35,638) (1,046,178)
Increase in other assets - (100,000) (250,000)
---------- ------------ ----------
Net cash flows used by investing activities (7,841,497) (6,891,388) (6,389,219)
Cash flows from financing activities
Net increase in deposits 4,614,144 135,523 2,820,122
Advances from Federal Home Loan Bank 12,000,000 11,000,000 10,000,000
Repayment of Federal Home Loan Bank advances (8,000,000) (6,000,000) (5,000,000)
Net increase (decrease) in advances from borrowers (15,696) (27,459) 78,077
Proceeds from stock options exercised 76,380 58,990 75,000
Dividends paid (318,159) (329,756) (273,677)
Treasury stock purchased (620,825) (418,750) (286,000)
---------- ------------ ----------
Net cash flows provided by financing activities 7,735,844 4,418,548 7,413,522
---------- ------------ ----------
CHANGE IN CASH AND CASH EQUIVALENTS 1,069,819 (1,373,782) 2,301,856
---------- ------------ ----------
CASH AND CASH EQUIVALENTS, beginning of year 2,564,267 3,938,049 1,636,193
---------- ------------ ----------
CASH AND CASH EQUIVALENTS, end of year $ 3,634,086 $ 2,564,267 $ 3,938,049
============ ============ ============
</TABLE>
21
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - StateFed Financial Corporation (the Company) was formed in 1993,
under the laws of the State of Delaware, for the purpose of becoming a
thrift holding company. The Company owns 100% of the outstanding capital
stock of State Federal Savings and Loan Association (the Association). The
only significant assets of the Company are cash, investment securities,
real estate held for investment, and the stock of the Association. Its
business consists primarily of the operation of the Association.
The Association provides a full range of banking services to individual and
corporate customers from its two offices located in Des Moines, Iowa. The
Association's wholly-owned subsidiary, State Service Corporation, owns and
operates residential apartment units.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of StateFed Financial Corporation, State Federal Savings and
Loan Association and its wholly-owned subsidiary, State Service
Corporation. All significant intercompany accounts and transactions have
been eliminated in consolidation.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the allowance for loan
losses and the valuation of assets acquired in connection with foreclosures
or in satisfaction of loans. In connection with the determination of the
allowances for loan losses and the valuation of assets acquired by
foreclosure, management obtains independent appraisals for significant
properties.
Management believes that the allowances for losses on loans and valuations
of assets acquired by foreclosure are adequate and appropriate. While
management uses available information to recognize losses on loans and
assets acquired by foreclosure, future loss may be accruable based on
changes in economic conditions, particularly the economic conditions of
central Iowa. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review the Company's allowances
for losses on loans and valuations of assets acquired by foreclosure. Such
agencies may require the Company to recognize additional losses based on
their judgment of information available to them at the time of their
examination.
INVESTMENTS IN CERTIFICATES OF DEPOSIT - The Company invests in
certificates of deposit issued by other federally insured financial
institutions located throughout the United States. The Company limits its
investments in certificates to $100,000 per financial institution. The
investments in certificates of deposit are carried at cost. Brokerage or
other fees paid to acquire the certificates are capitalized and amortized
against interest income, using the interest method, over the term of the
certificate.
22
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
INVESTMENT AND OTHER SECURITIES - Investments in debt securities which
management has the intent and the Company has the ability to hold to
maturity are carried at cost, adjusted for purchase premiums or discounts.
Purchase premiums or discounts are recognized in interest income using the
interest method over the period to maturity.
Debt securities to be held for indefinite periods of time, including debt
securities that management intends to use as part of its asset/liability
strategy, or that may be sold in response to changes in interest rates,
changes in prepayment risk, the need to increase regulatory capital or
other similar factors, are classified as available-for-sale and are carried
at the lower of cost or market value. A valuation allowance is established
if the aggregate cost of debt securities held for sale exceeds their
aggregate market value. Changes in the valuation allowance are reflected as
a separate component of the Company's stockholders' equity.
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 (FHLB). The stock is recorded at cost, which
represents anticipated redemption value.
All other equity securities are carried at the lower of cost or estimated
market value in the aggregate. Net unrealized losses are recognized through
a valuation allowance that is shown as a reduction in the carrying value of
the related securities and as a corresponding reduction in stockholders'
equity if the decline in market value is deemed to be temporary.
Gains and losses on the sale of investment securities are determined using
the specific identification method.
LOANS RECEIVABLE - Loans receivable are stated at unpaid principal
balances, less an allowance for loan losses, deferred loan origination
fees, and discounts. The Company has both the intent and the ability to
hold loans receivable to maturity.
A valuation allowance is provided for estimated losses on loans when a
probable and reasonably estimable loss or decline in value occurs. Loans
are reviewed periodically to determine potential problems at an early date.
The Company's experience has shown that foreclosures on loans can result in
some loss. Therefore, in addition to an allowance for specific loans, the
Company makes a provision for losses based in part on experience and part
on prevailing market conditions. Additions to allowances are charged to
earnings.
Uncollectible interest on loans that are contractually past due 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 that 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. The Company had non-accrual loans with balances aggregating
$810,000 and $311,000 at June 30, 1997 and 1996, respectively.
The Company defers loan fees (net of direct loan origination costs)
received in the origination process, and recognizes those fees over the
contractual life of the related loan as a yield adjustment.
23
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
PROPERTY ACQUIRED IN SETTLEMENT OF LOANS - Property acquired in the
settlement of loans, or where the loan is in-substance foreclosed, is
initially recorded at the lower of fair value (less estimated costs to sell
the real estate) at the date of foreclosure, or the loan balance. Costs
relating to improvement of the property are capitalized, whereas costs
relating to the holding of the property are expensed. Valuation allowances
are established and adjusted periodically by management if the carrying
value of the property exceeds its fair value, less estimated costs to sell
the property.
OFFICE PROPERTY AND EQUIPMENT - Property and equipment acquired by the
Company is recorded at cost. Depreciation is provided using straight-line
or accelerated methods over the estimated useful lives of the related
assets.
FINANCIAL INSTRUMENTS - The Company does not participate in interest-rate
exchange agreements, hedging or other similar financial instruments.
ADVERTISING COSTS - Advertising costs are expensed as incurred.
INCOME TAXES - The Company provides for deferred income taxes using an
asset-and-liability method of accounting for income taxes. Under the
asset-and-liability method, deferred income taxes are recognized for the
tax consequences of "temporary differences" by applying enacted statutory
tax rates to differences between financial statement carrying amounts and
the tax bases of existing assets and liabilities.
The Company and its subsidiary file a consolidated federal income tax
return and separate state income tax returns.
EFFECT OF NEW FINANCIAL ACCOUNTING STANDARDS - During October 1995, the
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
(SFAS 123). SFAS 123 establishes financial accounting and reporting
standards for stock-based employee compensation plans and also applies to
transactions in which an entity issues its equity instruments to acquire
goods or services for nonemployees. SFAS 123 defines a fair value based
method of accounting for an employee stock option or similar equity
instruments and encourages all entities to adopt that method of accounting.
However, it also allows an entity to continue to measure compensation cost
for those plans using the intrinsic value based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25). Pro forma disclosures required for
entities that elect to continue to measure compensation cost using APB 25
must include the effect of all awards granted in fiscal years beginning
with fiscal year 1996. The Company has elected to continue to measure
compensation cost using APB 25, therefore the adoption of SFAS No. 123 did
not impact the Company's financial condition or results of operations. The
Company did not grant any awards during fiscal 1997 or 1996.
24
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
During June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities,"
which provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers of financial assets that are
secured borrowings. SFAS 125 also requires that a liability can be
derecognized only if either (a) the debtor pays the creditor and is
relieved of its obligation for the liability or (b) the debtor is legally
released from the liability either judicially or by the creditor. SFAS 125
is effective for transactions occurring after December 31, 1996 and is to
be applied prospectively. SFAS No. 127, issued by the FASB in January 1997,
amends FASB Statement No. 125 and postpones the effective date of certain
provisions of SFAS No. 125 until December 31, 1997.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." This
Statement establishes standards of computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock or
potential common stock. This Statement simplifies the standards for
computing earnings per share and makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with a presentation
of basic EPS. It also requires dual presentation of basic and diluted EPS
on the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator
of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. This Statement is effective for financial
statements issued for periods ending after December 15, 1997, including
interim periods; earlier application is not permitted. This Statement
requires restatement of all prior-period EPS data presented.
The FASB issued SFAS No. 129, "Disclosure of Information about Capital
Structure," in February 1997. This Statement establishes standards for
disclosing information about an entity's capital structure and applies to
all entities. SFAS 129 codifies certain existing disclosures about an
entity's capital structure. This Statement is effective for financial
statement periods ending after December 15, 1997.
The FASB issued SFAS No. 130, "Reporting Comprehensive Income", in June
1997. This Statement establishes standards for the reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. The
Statement requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section
of a statement of financial position. The Statement is effective for fiscal
years beginning after December 15, 1997 and requires reclassification of
financial statements for earlier periods provided for comparative purposes.
25
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
During June 1997, the FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". This Statement
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This Statement supercedes SFAS No.
14, "Financial Reporting for Segments of a Business". The Statement is
effective for fiscal years beginning after December 15, 1997. In the
initial year of adoption, comparative information for earlier years is to
be restated.
The Company expects to adopt these statements when required. Management
believes adoption will not have a material effect on financial position and
results of operations, nor will adoption require additional capital
resources.
EARNINGS PER SHARE - Earnings per share have been computed on the basis of
the weighted average number of shares outstanding during the period, plus
the shares that would be issued assuming the exercise of dilutive stock
options. The weighted average number of common and common stock equivalents
include shares of restricted stock issued in accordance with the
recognition and retention plan established by the Company. In addition,
shares of common stock issued to the Employee Stock Ownership Plan (ESOP)
trust for the benefit of the employees of the Company and its subsidiaries.
Shares that have been committed to be released are considered outstanding
and ESOP shares that have not been committed to be released are not
considered outstanding.
FINANCIAL STATEMENT PRESENTATION - Certain items in prior year financial
statements have been reclassified to conform to the 1997 presentation.
NOTE B - STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments with maturities of three months or less,
when purchased, to be cash equivalents.
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------------------
1997 1996 1995
--------------- ---------------- ---------------
<S> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information
Income taxes paid $ 441,000 $ 533,000 $ 510,000
=============== ================ ===============
Interest paid on deposits and FHLB advances
(includes interest credited to deposit accounts) $ 3,627,000 $ 3,182,000 $ 2,573,000
=============== ================ ===============
</TABLE>
Noncash Investing and Financing Activities
During fiscal year 1997, property acquired through foreclosure totaled
$449,000. The Company also financed $299,000 of loans for borrowers to
purchase real estate owned by the Company.
The Company had no significant noncash investing or financing activities
during the years ended June 30, 1996 and 1995.
26
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - INVESTMENTS IN CERTIFICATES OF DEPOSIT
The Company invests in certificates of deposit issued by other financial
institutions, up to a maximum of $100,000 per institution. Following is a
summary of the future maturities of the certificates at June 30, 1997:
<TABLE>
<CAPTION>
Interest
Rate Amount
-------------------- -----------------
<S> <C> <C>
Mature during fiscal year:
1998 5.40% - 9.00% $ 3,250,000
1999 5.25% - 5.90% 693,000
2000 6.70% - 7.00% 289,000
2001 6.85% - 7.00% 198,000
-----------------
4,430,000
Unamortized broker fees 5,425
-----------------
$ 4,435,425
=================
</TABLE>
Following is a summary of certificates by interest rate range:
June 30,
----------------------------------
1997 1996
----------------- ----------------
Interest rates:
5.00% - 5.99% $ 1,971,000 $ 1,971,000
6.00% - 6.99% 2,071,000
2,170,000
7.00% - 7.99% 289,000 190,000
Over 8% 99,000 99,000
----------------- ----------------
4,430,000 4,430,000
Unamortized broker fees 5,425 9,567
----------------- ----------------
$ 4,435,425 $ 4,439,567
================= ================
NOTE D - INVESTMENT SECURITIES
Following is a summary of investment securities (all securities are
classified as available-for-sale):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
June 30, 1997:
U.S. government and agency
debt securities $2,250,000 $ 20,055 $ 13,428 $2,256,627
Equity securities 1,169,706 51,462 627 1,220,541
--------------- --------------- --------------- ---------------
$3,419,706 $ 71,517 $ 14,055 $3,477,168
=============== =============== =============== ===============
June 30, 1996:
U.S. government and agency
debt securities $1,650,649 $ 11,087 $ 37,806 $1,623,930
Equity securities 718,650 5,968 1,500 723,118
--------------- --------------- --------------- ---------------
$2,369,299 $ 17,055 $ 39,306 $2,347,048
=============== =============== =============== ===============
</TABLE>
27
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - INVESTMENT SECURITIES - Continued
During fiscal year 1996, as allowed by the Financial Accounting Standards
Board, management re-evaluated the classification of its security portfolio
as trading, available-for-sale, or held-to-maturity. As a result of this
re-evaluation, management elected to change the classification of debt
securities previously classified as held-to-maturity to the
available-for-sale category. Securities with a carrying value and fair
value of approximately $1,500,000 were reclassified as available-for-sale.
No transfers of securities between classifications were made during 1997 or
1995.
The contractual maturities of debt securities are shown below. Actual
maturities are expected to differ from contractual maturities as borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
--------------- ----------------
<S> <C> <C>
Due in one year or less $ $
- -
Due after one year through five years 399,750 410,572
Due after five years through ten years 952,250 951,219
Due after ten years 898,000 894,836
--------------- ----------------
$ 2,250,000 $ 2,256,627
=============== ================
</TABLE>
The Company had no realized gains or losses on sale of investment
securities available-for-sale during fiscal year 1997 and 1995. During
fiscal year 1996, the Company had gross realized losses of $23,787 and no
realized gains. Proceeds from the sale of available-for-sale equity
securities during 1996 totaled $253,420.
Following is a summary of investment income:
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------------
1997 1996 1995
------------ -------------- ---------------
<S> <C> <C> <C>
U.S. government and agency securities $ 109,834 $ 106,087 $ 11,098
Investments in certificates of deposit 262,253 285,115 352,610
FHLB stock dividends 64,262 44,196 38,299
Interest-bearing cash accounts 144,655 124,866 102,890
Equity securities dividends 73,677 14,808 57,663
------------ -------------- ---------------
$ 654,681 $ 575,072 $ 562,560
============ ============== ===============
</TABLE>
28
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - LOANS RECEIVABLE, NET
Following is a summary of loans receivable:
<TABLE>
<CAPTION>
June 30,
----------------------------------
1997 1996
----------------- ----------------
<S> <C> <C>
Real estate mortgage loans:
Secured by one-to-four family residences $44,581,692 $ 42,842,841
Secured by commercial and multi-family real estate 20,469,228 17,996,720
Construction loans 3,543,880 3,126,300
----------------- ----------------
Total real estate mortgage loans 68,594,800 63,965,861
Consumer and other loans 1,133,198 875,212
----------------- ----------------
69,727,998 64,841,073
Less:
Allowance for loan losses (221,355) (240,278)
Undisbursed portion of mortgage loans (993,492) (1,567,451)
Unamortized balance on purchased loan discounts (8,169) (10,926)
Deferred loan fees (327,236) (313,931)
----------------- ----------------
Loans receivable, net $ 68,177,746 $62,708,487
================= ================
</TABLE>
A significant portion of loans receivable consist of first mortgage loans
issued to finance purchases of real estate, principally one-to-four family
residences. The real estate is located primarily in the greater Des Moines
area. There is no significant concentration of credit risk to specific
industries.
The economic condition of the Company's market area can affect its
borrowers' ability to repay their loans. The Company has no significant
restructured troubled debt.
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financial needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments primarily include commitments to extend credit.
These instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the Statement of
Financial Condition.
The Company's exposure to credit loss in the event of non-performance by
the other party to the financial instrument for loan commitments is
represented by the contractual amount of those instruments. The Company
uses the same credit policies in making commitments as it does for
on-balance sheet instruments.
At June 30, 1997, the Company had outstanding commitments to fund real
estate loans of $731,500, including $231,500 for fixed rate loans.
29
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - LOANS RECEIVABLE, NET - Continued
Loan commitments are agreements to lend to customers as long as there are
no violations of any conditions established in the contracts. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the borrower.
Collateral held is primarily residential and commercial real estate, but
may include autos, consumer goods and other assets.
Loan customers of the Company include certain executive officers,
employees, members of the board of directors, and their related interests.
All loans to this group were made in the ordinary course of business at
prevailing terms and conditions. Such loans at June 30, 1997 and 1996
amounted to $1,062,000 and $1,046,000, respectively. During the year ended
June 30, 1997, there were new loans to this group totaling $205,600 and
repayments totaling $189,600.
The Company serviced participation loans with outstanding balances totaling
$7,374,000 and $7,753,000 at June 30, 1997 and 1996 respectively. The
Company's portion of these loans totaled $3,414,000 and $3,654,000 at June
30, 1997 and 1996, respectively.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------
1997 1996 1995
------------- -------------- ---------------
<S> <C> <C> <C>
Balance at beginning of year $ 240,278 $ 216,278 $ 193,773
Provision charged to income 36,000 24,000 24,000
Charge-offs (54,923) (1,495)
-
------------- -------------- ---------------
Balance at end of year $ 221,355 $ 240,278 $ 216,278
============= ============== ===============
</TABLE>
Impaired loans as of June 30, 1997 and 1996 totaled approximately $192,000
and $387,000, respectively. The total allowance for loan losses
specifically related to these loans was $5,100 and $3,500 on June 30, 1997
and 1996, respectively. Interest income on impaired loans of $3,800 and
none was recognized for cash payments received for the years ended June 30,
1997 and 1996, respectively.
30
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F - REAL ESTATE ACQUIRED FOR DEVELOPMENT
Following is a summary of real estate acquired for development, which the
Company records at the lower of cost or fair value:
<TABLE>
<CAPTION>
June 30,
------------------------------
1997 1996
------------- ----------------
<S> <C> <C>
Undeveloped residential building lot $ 43,109 $ 43,109
Townhouse construction project 392,375 316,485
------------- ----------------
$ 435,484 $ 359,594
============= ================
</TABLE>
The Company has agreed to advance up to $450,000 for the development of a
townhouse project located in Des Moines, Iowa. The Company is accounting
for this venture as a real estate development project.
NOTE G - REAL ESTATE HELD FOR INVESTMENT
The Company owns and operates a sixty unit apartment complex in the Des
Moines area. The units rent for $425 to $450 per month under rental
agreements which do not exceed one year.
The Company is also constructing a 22 unit apartment complex located in Des
Moines, Iowa. Total construction costs are expected to be approximately
$1,200,000. Following is a summary of the investment in these real estate
projects:
<TABLE>
<CAPTION>
June 30,
--------------------------------
1997 1996
--------------- ----------------
<S> <C> <C>
Construction in process - rental real estate $ 935,873 $ 25,882
Rental real estate, at cost 1,402,155 1,714,913
Less accumulated depreciation (404,496) (564,923)
--------------- ----------------
Net real estate held for investment $1,933,532 $ 1,175,872
=============== ================
</TABLE>
During 1997, the Company sold an eight-unit apartment building and realized
a gain of $131,048 from the sale.
NOTE H - PROPERTY ACQUIRED IN SETTLEMENT OF LOANS
At June 30, 1997 the Company held two one-to-four family homes, with a
carrying value of $333,939, which were acquired during 1997 in the
settlement of loans. Management is actively marketing the properties and
anticipates selling them in the near future. Management believes the
carrying value of the properties does not exceed the fair value of the
properties, less anticipated selling costs.
No gains or losses were recognized from adjusting the carrying value of
property acquired in settlements of loans to fair value during 1997, 1996
or 1995.
31
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I - OFFICE PROPERTY AND EQUIPMENT
Following is a summary of office property and equipment:
<TABLE>
<CAPTION>
June 30,
--------------------------------
1997 1996
--------------- ----------------
<S> <C> <C>
Land $1,012,609 $ 996,934
Office building 464,986 491,356
Furniture, fixtures and equipment 373,958 373,958
--------------- ----------------
1,851,553 1,862,248
Less accumulated depreciation (432,571) (397,452)
--------------- ----------------
Office property and equipment, net $ 1,418,982 $ 1,464,796
=============== ================
</TABLE>
The office building has six tenants, primarily with month-to-month lease
agreements, at June 30, 1997. Aggregate monthly rental receipts total
approximately $4,500.
NOTE J - ACCRUED INTEREST RECEIVABLE
Following is a summary of accrued interest receivable:
<TABLE>
<CAPTION>
June 30,
-----------------------------
1997 1996
------------ ----------------
<S> <C> <C>
Investments in certificates of deposit interest $ 15,495 $ 18,592
U.S. Government and agency securities interest receivable 34,211 23,089
Loans receivable interest 517,772 492,025
------------ ----------------
$ 567,478 $ 533,706
============ ================
</TABLE>
NOTE K - DEPOSITS
Savings deposit customers are primarily greater Des Moines area individuals
and businesses. Deposits with balances in excess of $100,000 totaled
$3,417,010 and $2,230,000 at June 30, 1997 and 1996, respectively.
Non-interest bearing deposit accounts totaled approximately $1,091,000 and
$22,000 at June 30, 1997 and 1996, respectively.
Deposit accounts held by members of the board of director and executive
officers totaled $524,000 and $932,000 at June 30, 1997 and 1996,
respectively.
32
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - DEPOSITS - Continued
Following is a summary of savings deposits as of June 30, 1997 and 1996 and
interest expense relating to those deposits for the years then ended:
<TABLE>
<CAPTION>
1997 1996
------------------------------ -------------------------------
Outstanding Interest Outstanding Interest
Balance Expense Balance Expense
-------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Demand deposits $ 1,708,260 $ 22,689 $ 1,867,295 $ 42,879
Savings and money market deposits 7,525,309 230,329 7,541,974 237,215
Certificates of deposits 41,112,403 2,315,215 36,322,559 2,177,332
----------- ------------- ------------ -------------
$50,345,972 2,568,233 $45,731,828 2,457,426
=========== ============
Less penalties for early withdrawals (13,211) (3,291)
-------------- --------------
$ 2,555,022 $ 2,454,135
============== ==============
</TABLE>
At June 30, 1997, the scheduled maturities of certificates of deposits are
as follows:
Fiscal year ending June 30:
1998 $ 22,018,520
1999 12,730,346
2000 3,444,705
2001 1,495,440
2002 1,098,513
Thereafter 324,879
----------------
$ 41,112,403
================
NOTE L - ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank of Des Moines, which are secured
by a blanket pledge agreement, including all stock in the FHLB and
qualifying first mortgage loans, consisted of the following at June 30,
1997:
- A variable rate open line of credit of $7,000,000 which expires
December 11, 1997. The line of credit may be prepaid without
penalty. Outstanding advances may not exceed 15% of assets. The
interest rate on outstanding advances was 6.90% at June 30, 1997.
The outstanding balance under the line was $7,000,000 at June 30,
1997.
- The following fixed rate advances, which are subject to prepayment
penalties:
Maturity Date Interest Rate Amount
--------------------- -------------------- --------------
September 12, 1997 5.87% $ 2,000,000
September 24, 1997 5.76% 2,000,000
June 25, 1998 5.86% 3,000,000
September 14, 1998 5.94% 2,000,000
November 2, 2001 6.46% 3,000,000
==============
$ 12,000,000
==============
33
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - ADVANCES FROM FEDERAL HOME LOAN BANK - Continued
Scheduled maturities of the advances are as follows:
Weighted
Year ending June 30, Amount Average Rate
----------------- ----------------
1998 $ 14,000,000 6.35%
1999 2,000,000 5.94%
2000 - -%
2001 - -%
2002 3,000,000 6.46%
-----------------
$ 19,000,000
=================
NOTE M - INCOME TAXES
Prior to the year ended June 30, 1997, the savings and loan subsidiary was
allowed a special bad debt deduction based on a percentage of taxable
income (8%), or on specified experience formulas, subject to certain
limitations based on aggregate loan balances at the end of the year. Under
new legislation, the special bad debt deduction was repealed for thrift
institutions. The legislation also requires thrifts to recapture, over a
six-year period, bad debt reserves added since January 1, 1988
(approximately $340,000). Recapture of pre-1988 reserves (approximately
$1,353,000) is required only under limited circumstances, such as if a
thrift pays dividends in excess of its earnings and profits or liquidates.
The legislation is not expected to have a material effect on results of
operations as the Association has provided a deferred tax liability for
special bad debt deductions since January 1, 1988. The Company, in
accordance with SFAS No. 109, has not recorded a deferred tax liability of
approximately $520,000 relating to pre-1988 bad debt reserves.
Taxes on income are comprised of:
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------------- --------------------------------- ---------------------------------
Federal State Total Federal State Total Federal State Total
----------- ---------- ----------- ----------- --------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current $393,818 $ 71,000 $464,818 $435,000 $ 75,800 $510,800 $475,698 $ 74,000 $549,698
Deferred 32,100 5,900 38,000
(30,100) (5,300) (35,400) (53,100) (10,100) (63,200)
----------- ---------- ----------- ---------- --------- ----------- ---------- ----------- ----------
Total $425,918 $ 76,900 $502,818 $404,900 $ 70,500 $475,400 $422,598 $ 63,900 $486,498
=========== ========== ========== ========== ========= =========== ========== =========== ==========
</TABLE>
Taxes on income differ from the "expected" amounts computed by applying the
federal income tax rate of 34 percent to income before taxes for the
following reasons:
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------
1997 1996 1995
------------- -------------- ---------------
<S> <C> <C> <C>
Computed "expected" taxes on income $484,200 $ 461,800 $ 448,800
State taxes, net of federal benefit 55,000 46,800 42,100
Low income housing tax credits (57,500) (30,500) -
Other adjustments 21,118 (2,700) (4,402)
------------- -------------- ---------------
Provision for income taxes $502,818 $ 475,400 $ 486,498
============= ============== ===============
</TABLE>
34
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - INCOME TAXES - Continued
Temporary differences between the financial statement carrying amounts and
tax bases of assets and liabilities that give rise to the deferred tax
liability at June 30, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------
1997 1996
----------------- ----------------
<S> <C> <C>
Federal Home Loan Bank stock (income tax payable when
shares received as stock dividends are sold) $ 63,900 $ 63,900
Real estate and equipment (depreciation method differences) 90,100 103,100
Compensation agreements (deductible when paid for income
tax reporting purposes) (22,800) (12,700)
Loan fees deferred for financial reporting purposes (41,600) (60,500)
Allowance for loan losses 44,400 47,700
Deferred installment sale gains 36,400 -
Other 600 (8,500)
----------------- ----------------
Net deferred income tax liability $ 171,000 $ 133,000
================= ================
</TABLE>
No valuation allowance was recorded against deferred tax assets at June 30,
1997 or 1996.
NOTE N - EMPLOYEE BENEFITS
EMPLOYEE PENSION PLAN - The Company has a defined contribution pension plan
available to qualifying employees. Contributions are at the discretion of
the Company. No contributions were made by the Company for the years ended
June 30, 1997, 1996 and 1995.
RECOGNITION AND RETENTION PLAN (RRP) - The Company has a Recognition and
Retention Plan that provides directors, officers and other key employees of
the Company with a proprietary interest in the Company in a manner designed
to encourage such persons to remain with the Company. Eligible directors,
officers and other key employees of the Company earn (i.e., become vested
in) shares of common stock covered by the award at a rate of 25% per year
starting one year from the date of the grant. Of the 34,385 shares reserved
for issuance under the RRP, 30,861 shares had been awarded to directors,
officers and other key employees as of June 30, 1997. Expense of
approximately $32,100, $64,300 and $122,000 was recorded for the RRP for
the years ended June 30, 1997, 1996 and 1995, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) - The Company has also established an
ESOP for eligible employees. Employees with at least 1,000 hours of annual
service with the Company and who have attained an age of 21 are eligible to
participate. The ESOP borrowed $687,700 from the Company to purchase up to
8% of the common stock or 68,770 shares. Collateral for the loan is the
common stock purchased by the ESOP. The loan is repaid principally from the
Association's discretionary contributions to the ESOP over a period of
seven years (through June 30, 2000). The interest rate for the loan is 7%.
Shares purchased by the ESOP are held in a suspense account for allocation
among participants as the loan is repaid. Expense of $131,100, $137,000 and
$105,940 was recorded relative to the ESOP for the years ended June 30,
1997, 1996 and 1995, respectively.
35
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - EMPLOYEE BENEFITS - Continued
Contributions to the ESOP and shares released from the suspense account in
an amount proportional to the repayment of the ESOP loan are allocated
among ESOP participants on the basis of compensation in the year of
allocation. Benefits generally become 100% vested after five years of
credited service. Credit for vesting purposes is given for years of service
prior to the effective date of the ESOP (July 1, 1993). Prior to the
completion of five years of credited service, a participant who terminates
employment for reasons other than death, normal retirement, or disability
will not receive any benefit under the ESOP. Forfeitures are reallocated
among remaining participating employees, in the same proportion as
contributions. Benefits may be payable in the form of stock or cash upon
termination of employment. The Company's contributions to the ESOP are not
fixed, so benefits payable under the ESOP cannot be estimated.
As shares are released from collateral, the Company reports compensation
expense equal to the current market price of the shares, and the shares
become outstanding for earnings per share computations. Dividends on
allocated ESOP shares are recorded as a reduction of retained earnings;
dividends on unallocated ESOP shares are recorded as a reduction of debt
and accrued interest. ESOP shares were as follows:
June 30,
---------------------------
1997 1996
------------ --------------
Allocated shares 19,767 12,348
Shares released for allocation 7,598 7,963
Shares sold for distributions - (544)
Distributions of shares - -
Unreleased shares 40,659 48,257
------------ --------------
Total ESOP shares 68,024 68,024
============ ==============
Fair value of unreleased shares $ 772,521 $ 800,679
============ ==============
STOCK OPTION PLAN - The Company authorized options for 85,962 shares of
common stock under the 1993 Stock Option and Incentive Plan (the "Plan").
Officers, directors and employees of the Company and its subsidiaries are
eligible to participate in the Plan. The option exercise price must be at
least 100% of the market value (as defined in the Plan) of the common stock
on the date of the grant, and the option term cannot exceed 10 years.
During 1994, the Company's Compensation Committee granted options for
68,770 shares to certain officers, directors and employees, at an exercise
price of $10 per share. No additional options have been granted since 1994.
Stock options vest at a rate of 20% per year.
Year ended June 30,
--------------------------
1997 1996
----------- --------------
Unexercised options, beginning of year 55,371 61,270
Stock options exercised (7,638) (5,899)
----------- --------------
Unexercised options, end of year 47,733 55,371
=========== ==============
36
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - EMPLOYEE BENEFITS - Continued
STOCK-BASED COMPENSATION COSTS - Compensation costs related to stock-based
compensation plans (RRP plan and stock option plan) totaled $32,142,
$64,302 and $122,166 for the years ended June 30, 1997, 1996 and 1995,
respectively.
SIMPLIFIED EMPLOYEE PENSION PLAN - During fiscal year 1997, the Company
adopted a simplified employee pension plan (SEP). The plan allows
employees, over the age of eighteen, to make tax-deferred contributions to
the SEP. The Company is also allowed to make discretionary contributions to
the SEP. No Company discretionary contributions were made to the SEP during
fiscal year 1997.
EMPLOYMENT AGREEMENTS - The Company has entered into certain employment
agreements with key officers. Under the terms of the agreements, the
employees are entitled to additional compensation in the event of a change
in control of the Company and the employees are involuntarily terminated
within twelve months of the change in control. A change in control is
generally triggered by the acquisition or control of 10% or more of the
common stock.
NOTE O - REGULATORY AND CAPITAL MATTERS
The Association is required to maintain prescribed levels of regulatory
capital. The regulations require institutions to have minimum regulatory
tangible capital equal to 1.5% of adjusted total assets, a minimum of 3%
core capital ratio, and 8% risk-based capital. At June 30, 1997 and 1996,
the Association's capital exceeded regulatory capital requirements. At June
30, 1997, the Association's regulatory tangible capital and core capital
ratios were 11.6%. The risk-adjusted capital ratio was 19.29%.
Following is a reconciliation of capital under generally accepted
accounting principles (GAAP) to regulatory capital:
<TABLE>
<CAPTION>
June 30, 1997
--------------------------------------------------
Tangible Core Risk-Based
Capital Capital Capital
---------------- ---------------- ----------------
<S> <C> <C> <C>
GAAP capital of Association $10,521,000 $10,521,000 $10,521,000
Add - Allowance for loan losses - - 221,000
Less:
Unrealized gains on available-for-sale securities (28,000) (28,000) (28,000)
Non-includable investment in subsidiary (1,156,000) (1,156,000) (1,156,000)
---------------- ---------------- ----------------
Regulatory capital - computed 9,337,000 9,337,000 9,558,000
Minimum capital requirement 1,207,000 2,414,000 3,892,000
---------------- ---------------- ----------------
Regulatory capital - excess $ 8,130,000 $ 6,923,000 $ 5,666,000
================ ================ ================
</TABLE>
37
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O - REGULATORY AND CAPITAL MATTERS - Continued
The Association may not declare or pay a cash dividend to the Company if
the effect would cause the net worth of the Association to be reduced below
either the amount required for the liquidation account or the net worth
requirement imposed by the Office of Thrift Supervision (OTS), and if all
capital requirements continue to be met, may not declare or pay a cash
dividend in excess of the Association's net earnings for the fiscal year in
which the dividend is declared plus one-half of the surplus over the
capital requirements, without prior approval of the OTS. OTS approval is
required for the Association to pay dividends in excess of these
limitations.
The Association established a liquidation account when it converted from a
federally chartered mutual savings bank to a federally chartered stock
savings bank. The liquidation account is equal to the Association's net
worth as of the date of the consolidated financial statements contained in
the final prospectus used to sell the common stock at June 30, 1993. The
liquidation account will be maintained for the benefit of depositors with
deposits as of the March 31, 1993 eligibility record date, who continue to
maintain their deposits in the Association after conversion. In the event
of a complete liquidation (and only in such an event), each eligible
depositor will be entitled to receive a liquidation distribution from the
liquidation account in the proportionate amount of the then current
adjusted balance for deposits then held, before any liquidation
distribution may be made with respect to the stockholders. Except for the
repurchase of stock and payment of dividends by the Association, the
existence of the liquidation account will not restrict the use or
application of retained earnings.
Under Federal regulations, the Association may not declare or pay a cash
dividend on or repurchase any of its stock if the effect thereof would
cause the Association's regulatory capital to be reduced below the amount
required for the liquidation accounts or the regulatory capital
requirements of the OTS. In addition, banks that before and after proposed
dividend distributions meet or exceed their fully phased-in capital
requirements, may make capital distributions, with prior notice to the OTS,
during any calendar year up to 100% of net income for the year plus 50% of
the amounts in excess of their fully phased-in capital requirements as of
the beginning of the calendar year. However, the OTS may impose greater
restrictions if an institution is deemed to be in need of more than normal
supervision. The Association currently exceeds its fully-phased in capital
requirements and has not been notified of a need for more than normal
supervision.
NOTE P - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments:
Cash and Amounts Due From Depository Institutions - The carrying amounts of
cash and amounts due from depository institutions approximate their fair
value.
Investments in Certificates of Deposits - The fair values disclosed for
investments in certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently available on
certificates to a schedule of aggregated remaining maturities of the
certificates.
38
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE P - FAIR VALUES OF FINANCIAL INSTRUMENTS - Continued
Available-for-Sale and Held-to-Maturity Investment Securities - Fair values
for securities, excluding restricted equity securities, are based on quoted
market prices. The carrying values of restricted equity securities (Federal
Home Loan Bank stock) approximate fair values.
Loans Receivable - For variable-rate loans that reprice frequently and have
no significant change in credit risk, fair values are based on carrying
values. Fair values for fixed-rate loans are estimated using discounted
cash flow analyses, using interest rates currently being offered for loans
with similar terms to borrowers of similar credit quality. Fair values for
impaired loans are estimated using discounted cash flow analyses or
underlying collateral values, where applicable.
Deposit Liabilities - The fair values disclosed for NOW, money market and
passbook savings accounts equal their carrying amounts. Fair values for
certificates of deposits are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities of the
certificates.
Advances from the Federal Home Loan Bank - The fair value of the Company's
debt is estimated using discounted cash flow analyses based on the
Company's current incremental borrowing rates for similar types of
borrowing arrangements.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
------------------------------- -------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $3,634,086 $3,634,086 $2,564,267 $2,564,267
Investments in certificates of deposit 4,435,425 4,430,000 4,439,567 4,424,600
Investment securities available-for-sale 3,477,168 3,477,168 2,347,048 2,347,048
Loans receivable 68,177,746 68,380,000 62,708,487 62,875,000
Federal Home Loan Bank stock 950,000 950,000 750,000 750,000
Financial liabilities
Deposits 50,345,972 50,640,000 45,731,828 46,169,000
Advances from Federal Home Loan Bank 19,000,000 18,957,000 15,000,000 14,961,000
</TABLE>
NOTE Q - SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
The Company had cash deposits of approximately $3,000,000 at the Federal
Home Loan Bank of Des Moines at June 30, 1997.
The Company grants mortgage, consumer and business loans primarily to
customers within the state. The Company's net investment in loans is
subject to a significant concentration of credit risk given that the
investment is primarily within a specific geographic area.
39
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q - SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
As of June 30, 1997, the Company had a net investment of $68,177,746 in
loans receivable. These loans possess an inherent credit risk given the
uncertainty regarding the borrower's compliance with the terms of the loan
agreement. To reduce credit risk, the loans are secured by varying forms of
collateral, including first mortgages on real estate, liens on personal
property, savings accounts, etc. It is generally Company policy to file
liens on titled property taken as collateral on loans, such as real estate
and autos. In the event of default, the Company's policy is to foreclose or
repossess collateral on which it has filed liens.
In the event that any borrower completely failed to comply with the terms
of the loan agreement and the related collateral proved worthless, the
Company would incur a loss equal to the loan balance.
NOTE R - RECENT DEVELOPMENTS
Deposits of the Association are insured by the Savings Association
Insurance Fund (SAIF) as administered by the FDIC. The FDIC also maintains
another insurance fund, the Bank Insurance Fund (BIF), which primarily
insures commercial bank deposits. Effective September 30, 1996, federal law
was revised to mandate a one-time special assessment of SAIF members, such
as the Association, of deposits held on March 31, 1995. The Association has
reflected a $291,331 pre-tax expense for this assessment for the year ended
June 30, 1997. Beginning January 1, 1997, deposit insurance assessments for
SAIF members were reduced to approximately .064% of deposits and are
expected to remain at that rate through the end of 1999. During this same
period, BIF members are expected to be assessed approximately .013% of
deposits. Thereafter, assessments for BIF and SAIF members should be the
same and SAIF and BIF may be merged. It is expected that these continuing
assessments for both SAIF and BIF members will be used to repay outstanding
Financing Corporation bond obligations.
40
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE S - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
Following are condensed financial statements of the parent company, StateFed
Financial Corporation:
Condensed Balance Sheet
<TABLE>
<CAPTION>
June 30,
--------------------------------
Assets 1997 1996
------------- --------------
<S> <C> <C>
Cash and cash equivalents $ 706,956 $ 803,770
Investments in certificates of deposits 690,127 690,796
Investment in subsidiary 10,464,204 10,580,885
Advances to subsidiary 285,291 804,702
Investment securities 199,680 123,618
Contract notes receivable 827,457 809,954
ESOP note receivable - subsidiary 447,005 515,775
Real estate acquired for development 435,484 359,595
Real estate held for investment 935,873 25,881
Other assets 317,044 352,259
------------- --------------
$ 15,309,121 $ 15,067,235
============= ==============
Liabilities
Dividends payable $ 78,372 $ 81,349
Other liabilities 26,118 30,862
------------- --------------
104,490 112,211
Stockholders' equity
Common stock 8,905 8,905
Additional paid-in capital 8,398,857 8,376,924
Retained earnings 8,752,218 8,146,074
Treasury stock (1,560,859) (1,049,358)
Less common stock acquired by:
Employee stock ownership plan (413,940) (490,211)
Retention and recognition plan (9,636) (41,778)
Net realized gains on available-for-sale securities 29,086 4,468
------------- --------------
15,204,631 14,955,024
------------- --------------
$ 15,309,121 $ 15,067,235
============= ==============
</TABLE>
Condensed Statement of Income
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------------
1997 1996 1995
------------- ------------- --------------
<S> <C> <C> <C>
Operating income - interest and dividend income $ 194,709 $ 167,429 $ 159,676
Operating expenses 49,932 77,194 79,792
------------- ------------- --------------
Income before undistributed income of subsidiary 144,777 90,235 79,884
Equity in undistributed income of subsidiary 770,240 827,699 730,556
------------- ------------- --------------
Income before income tax 915,017 917,934 810,440
Provision for income tax (6,302) 35,080 6,600
------------- ------------- --------------
Net income $ 921,319 $ 882,854 $ 803,840
============= ============= ==============
</TABLE>
41
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE S - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS - Continued
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------------
1997 1996 1995
------------- ------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 921,325 $ 882,854 $ 803,840
Dividends received from subsidiary 1,000,000 1,000,000 975,000
Deferred income taxes 5,692 (8,990) -
Adjustments to reconcile net income to net cash from operating activities:
Equity in undistributed income of subsidiary (770,240) (827,701) (730,556)
Other 28,450 33,481 (1,515)
------------- ------------- --------------
Net cash from operating activities 1,185,227 1,079,644 1,046,769
Cash flows from investing activities:
Purchase of investment securities (51,444) (64,587) (56,008)
Proceeds from sale of investment securities - 253,420 532,930
Investments in certificates of deposits - - (93,571)
Proceeds from maturing certificates of deposits - - 198,000
Investment in real estate for development (938,671) (442,550) (352,536)
Investment in and advances to subsidiary 519,411 (224,304) (425,900)
(Increase) decrease in contract notes
receivable (17,503) 6,206 -
Payment received on ESOP debt 68,770 68,770 68,770
Increase in other assets - (88,557) (111,166)
------------- ------------- --------------
(419,437) (491,602) (239,481)
Cash flows from financing activities:
Treasury stock purchased (620,825) (418,750) (286,000)
Proceeds from options exercised 76,380 58,990 91,800
Dividends paid (318,159) (329,756) (273,677)
------------- ------------- --------------
(862,604) (689,516) (467,877)
------------- ------------- --------------
Net increase in cash and cash equivalents (96,814) (101,474) 339,411
Cash and cash equivalents, beginning of year 803,770 905,244 565,833
------------- ------------- --------------
Cash and cash equivalents, end of year 706,956 $ 803,770 $ 905,244
============= ============= ==============
</TABLE>
42
<PAGE>
STATEFED FINANCIAL CORPORATION
STOCKHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 2:00 p.m., Des
Moines, Iowa time on October 22, 1997 at 519 Sixth Avenue, Des Moines, Iowa.
STOCK LISTING
StateFed Financial Corporation common stock is traded on the National
Association of Securities Dealers, Inc. Small-Cap System under the symbol
"SFFC."
PRICE RANGE OF COMMON STOCK
The following table sets forth, for the periods shown, the high and low
prices of the common stock and cash dividends per share declared. The prices
reflect inter-dealer quotations without retail markup, markdown or commissions,
and do not necessarily represent actual transactions.
Dividend restrictions are described in the notes to consolidated
financial statements included in this report.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW DIVIDENDS
- --------------------------------------------- ----- ----- ---------
<S> <C> <C> <C>
March 31, 1995............................... 14.25 11.25 .100
June 30, 1995................................ 16.00 13.50 .100
September 30, 1995........................... 19.00 15.50 .100
December 31, 1995............................ 19.75 17.75 .100
March 31, 1996............................... 17.75 16.25 .100
June 30, 1996................................ 17.25 16.00 .100
September 30, 1996........................... 16.75 15.00 .100
December 31, 1996............................ 17.25 16.25 .100
March 31, 1997............................... 18.75 16.50 .100
June 30, 1997................................ 19.12(5) 18.00 .100
</TABLE>
The stock price information set forth in the table above was provided by the
National Association of Securities Dealers, Inc. Automated Quotation System. The
average of the bid and asked prices of StateFed Financial Corporation's common
stock on September 5, 1997 was $21.975.
At September 8, 1997, there were 783,723 shares of StateFed Financial
Corporation common stock issued and outstanding and there were approximately 700
holders of record.
SHAREHOLDERS AND GENERAL INQUIRIES TRANSFER AGENT
John F. Golden, President and Chief First Bankers Trust Company, N.A.
Executive Officer 1201 Broadway
StateFed Financial Corporation Quincy, IL 62301
519 Sixth Avenue (217) 228-8000
Des Moines, Iowa 50309
ANNUAL AND OTHER REPORTS
A copy of StateFed Financial Corporation's Annual Report on Form 10-KSB
for the year ended June 30, 1997 as filed with the Securities and Exchange
Commission, may be obtained without charge by contacting John F. Golden,
President and Chief Executive Officer, StateFed Financial Corporation, 519 Sixth
Avenue, Des Moines, Iowa, 50309.
43
<PAGE>
STATEFED FINANCIAL CORPORATION
CORPORATE INFORMATION
COMPANY AND ASSOCIATION ADDRESS
519 Sixth Avenue Telephone: (515) 282-0236
Des Moines, IA 50309 Fax: (515) 282-1160
DIRECTORS OF THE BOARD
John F. Golden
Chairman of the Board, President and Chief
Executive Officer of StateFed Financial
Corporation and State Federal Savings and
Loan Association of Des Moines
Harry A. Winegar
Retired Consultant and Appraiser for Real
Estate Appraisal firm located in Des Moines,
Iowa
Sidney M. Ramey
President of Peoples Abstract Company
Eugene M. McCormick
Retired Dentist
Andra K. Black
Executive Vice President and Secretary of
StateFed Financial Corporation and State
Federal Savings and Loan Association of Des
Moines
Kevin J. Kruse
Corporate Counsel for the Iowa League of
Savings Institutions
Craig Wood
Senior Vice President and Assistant Secretary
of State Federal Savings and Loan
Association of Des Moines and StateFed
Financial Corporation
STATEFED FINANCIAL CORPORATION EXECUTIVE OFFICERS
John F. Golden
President and Chief Executive Officer
Chairman of the Board
Craig Wood
Senior Vice President and Assistant Secretary
Andra K. Black
Executive Vice President and Secretary
INDEPENDENT AUDITORS SPECIAL COUNSEL
Vroman, McGowen, Hurst, Silver, Freedman & Taff, L.L.P.
Clark & Smith, P.C. 1100 New York Avenue, N.W.
317 Sixth Avenue Seventh Floor
Suite 400 Washington, D.C. 20005
Des Moines, Iowa 50309
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
STATEFED FINANCIAL CORPORATION
Date: September 29, 1997 By: /s/ John F. Golden
---------------------------- -----------------------------------
John F. Golden
(Duly Authorized Representative)
Pursuant to the requirements 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.
/s/ John F. Golden /s/ Craig Wood
- ---------------------------------- ---------------------------------------
JOHN F. GOLDEN CRAIG WOOD
Chairman of the Board Director and Senior Vice
President and Chief Executive President
Officer
Date: September 29, 1997 Date: September 29, 1997
---------------------------- ---------------------------------
/s/ Harry A. Winegar /s/ Eugene M. McCormick
- ---------------------------------- ---------------------------------------
HARRY A. WINEGAR EUGENE M. MCCORMICK
Director Director
Date: September 29, 1997 Date: September 29, 1997
---------------------------- ---------------------------------
/s/ Sidney M. Ramey /s/ Kevin J. Kruse
- ---------------------------------- ---------------------------------------
SIDNEY M. RAMEY KEVIN J. KRUSE
Director Director
Date: September 29, 1997 Date: September 29, 1997
---------------------------- ---------------------------------
/s/ Andra K. Black
---------------------------------------
ANDRA K. BLACK
Director, Executive Vice President,
Secretary and Chief Financial and
Accounting Officer
Date: September 29, 1997
---------------------------------------
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Subsidiary or Percent of State of
Parent Organization Ownership Incorporation
------ ------------ --------- -------------
<S> <C> <C> <C>
StateFed Financial State Federal Savings 100% Federal
Corporation and Loan Association
State Federal Savings State Service Corporation 100% Iowa
and Loan Association
</TABLE>
<PAGE>
Vroman, McGowen, Hurst, Clark & Smith, P.C.
- --------------------------------------------------------------------------------
Certified Public Accountants and Business Advisors
Larry J. Clark, CPA Michael W. McNichols, CPA
David L. Hansen, SPHR, CCP Thomas J. Pflanz, CPA
David W. Hurst, CPA John A. Schmidt, CPA
Kathleen A. Koenig, CPA S. James Smith, CPA
Robert R. McGowen, CPA James A. Vroman, CPA
INDEPENDENT AUDITOR'S CONSENT
We consent to the use of our independent auditor's report, dated July 31, 1997,
appearing in the Annual Report on Form 10-KSB of StateFed Financial Corporation
for the year ended June 30, 1997.
/s/ Vroman, McGowen, Hurst, Clark & Smith, P.C.
- -----------------------------------------------
Des Moines, Iowa
September 26, 1997
Member of Accounting Firms Associated, Inc. and Alliott Peirson International:
SEC Practice Section of American Institute of Certified Public Accountants
317 Sixth Avenue, Suite 400 106 E. Jefferson Street, P.O. Box 312
Des Moines, Iowa 50309-4136 Winterset, Iowa 50273
515-288-3279 * Fax: 515-280-1490 515-463-1882 * Fax: 515-462-1577
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from Form 10-KSB
for the fiscal year ended June 30, 1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
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0
0
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</TABLE>
