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
For the fiscal year ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-22790
STATEFED FINANCIAL CORPORATION
(Name of small business issuer in its charter)
Delaware 42-1410788
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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]
State the issuer's revenue for the most recent fiscal year: $7.4 million.
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 4, 1998, was $12.5 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 23, 1998, there were issued and outstanding 1,554,392
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Annual Report to Stockholders for the fiscal year ended
June 30, 1998.
Part III of Form 10-KSB - Proxy Statement for 1998 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. Unless the context otherwise
requires, all references to the Company include the Company and the Association
on a consolidated basis.
At June 30, 1998, the Company had $89.8 million of assets and stockholders'
equity of $16.1 million (or 17.91% 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,
1998, 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 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.
Forward-Looking Statements
When used in this Form 10-KSB and in future filings by the Company with the
Securities and Exchange Commission (the "SEC"), in the Company's press releases
or other public or shareholder communications, and in oral statements made with
the approval of an authorized executive officer, the words or phrases "will
likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties, including, among other things, changes in economic conditions in
the Company's market area, changes in policies by regulatory agencies,
fluctuations in interest rates, demand for loans in the Company's market area
and competition, that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The Company
wishes to
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advise readers that the factors listed above could affect the Company's
financial performance and could cause the Company's actual results for future
periods to differ materially from any opinions or statements expressed with
respect to future periods in any current statements.
The Company does not undertake--and specifically declines any
obligation--to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.
Impact of Year 2000
Much has been written about the potential Year 2000 problems that may arise
with information technology systems. Many computer programs and other
technological devices that can only distinguish the final two digits of the year
entered (a common programming practice in earlier years) are expected to read
entries for the year 2000 as the year 1900 and compute payments, interest and
other information incorrectly or may be unable to function. Rapid and accurate
data processing is essential to the operation of the Company. Data processing is
also essential to most other financial institutions and the customers and
suppliers of the Company.
A third-party hardware and software company provides the material data
processing of the Company. This hardware and software provider has advised the
Company that it expects to be Year 2000 compliant before the end of calendar
year 1998. However, if the hardware and software provider is unable to become
compliant with Year 2000 issues, the Company may experience significant data
processing delays, mistakes, or failures. These delay, mistakes or failures
could have a significant adverse impact on the financial condition and results
of operations of the Company.
During 1998, the Company, in the normal course of operations, installed new
hardware and software supplied by the third-party data processor. The Company is
conducting tests of the hardware and software for Year 2000 compliance. Based on
the results of these tests and its evaluation of other hardware and software
used by the Company, including other technological equipment used by the
Company, management does not anticipate incurring significant additional expense
to implement additional corrective actions.
Management believes that appropriate actions have been taken to evaluate
Year 2000 risks and to implement procedures necessary to address those risks.
Management has also developed a contingency plan that outlines courses of
actions that would be followed should the Company encounter computer processing
or general operational problems arising from the Year 2000 issue.
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 also continues to
offer ARMs. The Association also, from time to time, purchases loans.
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, 1998, the Association's net loan portfolio totaled $69.0
million.
The Loan Committee of the Association, comprised of executive officers
Golden, Wood and Black and loan officers Komma 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.
3
<PAGE>
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, 1998, 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 $1.5 million at June 30, 1998. 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.
4
<PAGE>
Loan Portfolio Composition. The following table presents the composition of
the Company'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,
---------------------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
---------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans
One-to-four family .................... $ 44,441 63.41% $ 44,582 63.93% $42,842 66.07%
Multi-family and Commercial ........... 23,115 32.98 20,469 29.35 17,997 27.76
Construction or development ........... 1,535 2.19 3,549 5.09 3,126 4.82
-------- ---------- -------- ---------- -------- ----------
Total real estate loans ........... 69,091 98.58 68,600 98.37 63,965 98.65
Other Loans:
Consumer Loans:
Deposit account ...................... 159 0.23 242 .35 176 .27
Home improvement ..................... -- -- -- -- 1 --
Other ................................ 838 1.19 891 1.28 698 1.08
-------- ---------- -------- ---------- -------- ----------
Total consumer loans .............. 997 1.42 1,133 1.63 875 1.35
-------- ---------- -------- ---------- -------- ----------
Total loans ....................... 70,088 100.00% 69,733 100.00% 64,840 100.00%
========== ========== ==========
Less:
Loans in process ...................... (605) (999) (1,567)
Deferred fees and discounts ........... (297) (335) (325)
Allowance for losses .................. (206) (221) (240)
-------- -------- --------
Total loans receivable, net(1) ........ $ 68,980 $ 68,178 $ 62,708
======== ======== ========
</TABLE>
5
<PAGE>
The following table shows the composition of the Company's loan portfolio
by fixed and adjustable rate at the dates indicated.
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
---------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed Rate Loans:
Real estate:
One-to-four family .................... $ 21,041 30.02% $ 14,119 20.25% $ 12,340 19.03%
Multi-family and Commercial ........... 12,582 17.95 9,456 13.56 6,449 9.95
Construction or development ........... 1,535 2.19 3,549 5.09 2,309 3.56
-------- ---------- -------- ---------- -------- ----------
Total real estate loans ............ 35,158 50.16 27,124 38.90 21,098 32.54
Consumer ............................... 997 1.42 1,133 1.62 875 1.35
-------- ---------- -------- ---------- -------- ----------
Total fixed-rate loans ............. 36,155 51.58 28,257 40.52 21,973 33.89
Adjustable Rate Loans:
Real estate:
One-to-four family .................... 23,400 33.39 30,463 43.69 30,502 47.04
Multi-family and Commercial ........... 10,533 15.03 11,013 15.79 11,548 17.81
Construction or development ........... -- -- -- -- 817 1.26
-------- ---------- -------- ---------- -------- ----------
Total real estate loans ............ 33,933 48.42 41,476 59.48 42,867 66.11
Consumer ............................... -- -- -- -- -- --
-------- ---------- -------- ---------- -------- ----------
Total adjustable rate loans ........ 33,933 48.42 41,476 59.48 42,867 66.11
-------- ---------- -------- ---------- -------- ----------
Total loans ........................ 70,088 100.00% 69,733 100.00% 64,840 100.00%
========== ========== ==========
Less:
Loans in process ....................... (605) (999) (1,567)
Deferred fees and discounts ............ (297) (335) (325)
Allowance for loan losses .............. (206) (221) (240)
-------- -------- --------
Total loans receivable, net ......... $ 68,980 $ 68,178 $ 62,708
======== ======== ========
</TABLE>
6
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Company's loan portfolio at June 30, 1998. 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 Consumer
------------------- ------------------ ------------------- -----------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------ --------- ------ --------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Due During Years Ending June 30, (1)
1999 ................................ $ 498 9.24% $ 607 9.46% $ 1,249 9.47% $ 132 8.50%
2000 ................................ 343 8.72 38 11.57 -- -- 112 9.48
2001 ................................ 591 9.12 1,287 8.89 -- -- 283 8.95
2002-2006 ........................... 7,022 8.81 9,044 8.36 -- -- 423 8.74
After 2006 .......................... 35,987 7.88 12,139 10.29 286 7.21 47 10.00
<CAPTION>
Real Estate
---------------------
Total
---------------------
Weighted
Average
Amount Rate
------ --------
(Dollars in Thousands)
<S> <C> <C>
Due During Years Ending June 30, (1)
1999 ................................ $ 2,486 9.37%
2000 ................................ 493 9.11
2001 ................................ 2,161 8.96
2002-2006 ........................... 16,775 8.54
After 2006 .......................... 48,173 8.49
</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, 1999 which have fixed interest
rates is $33.7 million, while the total amount of loans due after such dates
which have floating or adjustable interest rates is $33.9 million.
7
<PAGE>
One-to-four family Residential Mortgage Lending. Residential loan
originations of this type are generated by the Company's marketing efforts, its
present customers, walk-in customers and referrals from real estate agents and
builders. The Company 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, 1998, the Company's one-to-four family residential
mortgage loans totaled $44.4 million, or approximately 63.4% of the Company's
total gross loan portfolio.
The Company currently offers ARM payment and fixed-rate mortgage loans.
During the year ended June 30, 1998, the Association originated $2.4 million of
adjustable-rate real estate loans, which were secured by one-to-four family
residential real estate. During the same period, the Company originated $8.2
million of fixed-rate real estate loans, secured by one-to-four family
residential real estate. The Company'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, 1998.
The Company 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 Company's exposure
to at or below the 80% loan-to-value level. The Company may consider raising the
loan-to-value ratio in the future as regulations permit. Due to consumer demand,
the Company 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 Company originates, the
Company retains its fixed-rate loans in its portfolio.
The Company 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 Company'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 Company 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, 1998, the Company
had $23.1 million of commercial and multi-family real estate loans, which
represented 33.0% of the Company'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 Company's
multi-family and commercial real estate loans were secured by properties located
in Iowa. However, the Company had multi-family and commercial real estate loans,
with an
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aggregate balance of $3.2 million at June 30, 1998, 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 Company'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.
Multifamily and commercial real estate loans generally have terms that do not
exceed 30 years. The Company 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
Company 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 Company 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 Company's commercial loan portfolio by
type of loan.
June 30,
---------------------------------------
1998 1997 1996
------- ------- -------
(In Thousands)
Multi-family ................... $10,141 $ 8,231 $ 7,060
Nursing homes .................. 1,638 1,671 1,701
Churches ....................... 1,208 1,164 321
Motels ......................... 1,688 1,336 1,051
Shopping Centers ............... 1,568 1,155 1,244
Commercial Buildings ........... 6,872 6,912 6,620
------- ------- -------
Total ..................... $23,115 $20,469 $17,997
This portfolio grew by $2.6 million from fiscal 1997 to fiscal 1998, and
the portfolio comprised a larger percentage in fiscal 1998, 33.0% of total
loans, than it did in fiscal 1997, when commercial loans comprised 29.4% of
total loans.
Construction Lending. The Company 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 Company's primary market area and surrounding areas. At June
30, 1998, the Company had $1.5 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, 1998, all of the Company's construction loans were
performing in accordance with their repayment terms.
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
9
<PAGE>
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, 1998, 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, 1998, such loans totaled $765,000 or approximately
1.09% of the Association's gross loan portfolio. During the fiscal year ended
June 30, 1998, the Association originated $418,000 in auto loans as compared to
$335,000 originated in the same period ended June 30, 1997. At June 30, 1998,
the Association's consumer loan portfolio totaled $1.0 million or 1.42% 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.
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 Company 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
Company is currently a portfolio lender.
In fiscal 1998, the Company originated $16.5 million of loans, compared to
$15.3 million and $16.5 million in fiscal 1997 and 1996, respectively. The
Company has experienced significant repayments of loans during the last three
fiscal years. Principal repayments in fiscal 1998 increased by $5.2 million to
$17.9 million from $12.7 million in fiscal 1997.
The Company, in recent years, has not purchased mortgage-backed securities.
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<PAGE>
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.
The following table shows the loan origination, purchase and repayment
activities of the Company for the periods indicated.
Year Ended June 30,
---------------------------------
1998 1997 1996
------- ------- -------
(In Thousands)
Originations by type:
Adjustable rate:
Real estate - one-to-four family ...... $ 2,361 $ 5,020 $ 6,532
- commercial .............. 60 96 750
Non-real estate - consumer ............ -- -- --
------- ------- -------
Total adjustable-rate .......... 2,421 5,116 7,282
Fixed rate:
Real estate - one-to-four family ...... 8,160 $ 4,910 $ 4,346
- commercial .............. 5,399 4,625 3,966
Non-real estate - consumer ............ 540 667 913
------- ------- -------
Total fixed-rate ............... 14,099 10,202 9,225
------- ------- -------
Total loans originated ......... 16,520 15,318 16,507
Purchases:
Real estate - one-to-four family ...... $ -- $ -- $ 139
- commercial .............. 2,213 768 398
Non-real estate - consumer ............ -- -- --
------- ------- -------
Total loans .................... 2,213 768 537
Mortgage-backed securities ............ -- -- --
------- ------- -------
Total purchases ................ 2,213 768 537
------- ------- -------
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 .................. 18,241 12,735 11,512
------- ------- -------
Total reductions ............... 18,241 12,735 11,512
------- ------- -------
Increase (decrease) in other items,
net .................................... 310 2,118 756
------- ------- -------
Net increase (decrease) ........ $ 802 $ 5,469 $ 6,288
======= ======= =======
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 Company 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 Company 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 Company 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, 1998. 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)
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30-59 days .......................... 28 $1,459 3.28% 1 $ 260 1.12%
60-89 days .......................... 7 556 1.25 0 0 0
90 days and over .................... 7 204 0.46 0 0 0
------ ------ ---- ------ ------ ----
Total delinquent loans .......... 42 $2,219 4.99% 1 $ 260 1.12%
====== ====== ==== ====== ====== ====
</TABLE>
At June 30, 1998, there were no delinquent construction loans and 6
consumer loans for $41,000. The ratio of delinquent loans to total loans (net)
was 3.65% at June 30, 1998.
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,
--------------------------------
1998 1997 1996
------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accruing loans:
One-to-four family ....................... $ 96 $ 810 $ 330
------ ------ ------
Total ................................. 96 810 330
Accruing loans delinquent more than 90 days:
One-to-four family ....................... 4 181 148
Multi-family and commercial real estate .. -- -- --
------ ------ ------
Total ................................. 4 181 148
Foreclosed assets:
One-to-four family ....................... 484 334 --
Multi-family and commercial real estate .. 805 -- --
------ ------ ------
Total ................................. 1,289 334 --
Total non-performing assets ................ $1,389 $1,325 $ 478
====== ====== ======
Total as a percentage of total assets ...... 1.55% 1.54% .62%
====== ====== ======
</TABLE>
Non-Performing Assets. Included in total non-performing assets are three
mortgage loans on one-to-four family dwellings totaling $100,000. One loan
totaling $72,000 has now been paid current. One loan totaling $24,000 is in the
foreclosure process and no loss is expected.
12
<PAGE>
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, 1998, the Association had
classified a total of $1.1 million of its assets as substandard, none were
classified as doubtful, and none were classified as loss.
At June 30, 1998, total classified assets comprised $1.3 million or 12.3%
of the Association's capital, or 1.50% of the Association's total assets.
At June 30, 1998 the Association had a total of $1.3 million in property
acquired in settlement of loans. Included in this total is $345,000 in a
one-family dwelling, $139,000 in two duplexes, and $805,000 in commercial real
estate. All of the properties are now earning income as they are all rented.
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.
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, 1998, the Association had a total allowance
for loan losses of $206,000 or 0.30% 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.
13
<PAGE>
The following table sets forth an analysis of the Association's
allowance for loan losses.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------
1998 1997 1996
----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period ...................... $ 221 $ 240 $ 216
Charge-offs ......................................... (67) (55) --
Recoveries .......................................... -- -- --
----- ----- -----
Net charge-offs ..................................... (67) (55) --
Transfer to allowance for decline in
value of foreclosed real estate .................. -- -- --
Additions charged to operations ..................... 52 36 24
----- ----- -----
Balance at end of period ............................ $ 206 $ 221 $ 240
----- ----- =====
Ratio of net charge-offs during the period to average
loans outstanding during the period .............. .10% .08% ---%
===== ===== =====
Ratio of net charge-offs during the period to average
non-performing assets ............................ 4.69% 4.59% ---%
===== ===== =====
</TABLE>
The distribution of the Association's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
June 30
------------------------------------------------------------------------
1998 1997 1996
-------------------- --------------------- ------------------
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 63.41% $ 67 63.93% $ 64 66.07%
Multi-family and commercial real estate ........... 58 32.98 51 29.35 42 27.76
Construction ...................................... -- 2.19 -- 5.09 -- 4.82
Consumer .......................................... 10 1.42 11 1.63 -- 1.35
Unallocated ....................................... 71 -- 92 -- 134 --
---- ------ ---- ------ ---- ------
Total ........................................ $206 100.00% $221 100.00% $240 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
14
<PAGE>
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, 1998, the Association's
liquidity ratio (liquid assets as a percentage of net withdrawable savings
deposits and current borrowings) was 10.54%. 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, 1998, the Company's cash and interest-bearing deposits in other
financial institutions totaled $9.4 million, or 10.47% of its total assets.
Certificates of deposits invested in other institutions totaled $1.5 million or
1.67% of its total assets. The Association has a $949,000 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 $1.3 million or 1.45% of its
total assets invested in corporate securities, which includes preferred common
stocks and mutual funds. The Company has $1.4 million or 1.56% 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.
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.
15
<PAGE>
The following table sets forth the composition of the Bank's investment
portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
Book % of Book % of Book % of
Value Value Value Value Value Total
------- ------ ------- ------ ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
Corporate equity securities ..................... $ 1,301 35.23% $ 1,221 27.58% $ 723 23.34%
Federal agency debt securities .................. 1,443 39.07 2,256 50.96 1,624 52.44
FHLB stock ........................................... 949 25.70 950 21.46 750 24.22
------- ------ ------- ------ ------- ------
Total investment securities and FHLB
stock .......................................... $ 3,693 100.00% $ 4,427 100.00% $ 3,097 100.00%
======= ====== ======= ====== ======= ======
Other Interest-Earning Assets:
Interest-bearing deposits with banks ............... $ 9,107 86.03% $ 3,453 43.80% $ 2,413 35.26%
Certificates of deposit invested
in other institutions ............................. 1,479 13.97 4,430 56.20 4,430 64.74
------- ------ ------- ------ ------- ------
Total ........................................... $10,586 100.00% $ 7,883 100.00% $ 6,843 100.00%
======= ====== ======= ====== ======= ======
Average remaining life or term to repricing of
certificates of deposit .......................... 1 year 1 year 2 years
</TABLE>
Contractual maturities of federal agency debt securities are shown below:
June 30, 1998
-----------------------
Weighted
Book Average
Value Yield
-------- -----
(Dollars in Thousands)
Due in one year or less $ --- ---%
Due after one year through five years 307 7.81
Due after five years through ten years 310 7.32
Due after ten years 826 7.85
--------
$1,443
========
16
<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.
Year Ended June 30,
----------------------------------------
1998 1997 1996
-------- -------- --------
(Dollars in Thousands)
Opening balance ................ $ 50,346 $ 45,732 $ 45,596
Deposits ....................... 57,637 58,944 45,658
Withdrawals .................... (57,179) (56,885) (47,952)
Interest credited .............. 2,868 2,555 2,430
-------- -------- --------
Ending balance ................. $ 53,672 $ 50,346 $ 45,732
======== ======== ========
Net increase (decrease) ........ $ 3,326 $ 4,614 $ 136
======== ======== ========
Percent increase (decrease) .... 6.61% 10.09% 0.30%
======== ======== ========
17
<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, 1998.
<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 ............. $ 6,894 $ 6,213 $ 9,832 $13,098 $36,037
Certificates of deposit of
$100,000 or more .......... 1,616 1,716 3,164 1,788 8,284
------- ------- ------- ------- -------
Total certificates of
deposit ................... $ 8,510 $ 7,929 $12,996 $14,886 $44,321
======= ======= ======= ======= =======
</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, 1998, the Association had $19.0 million in FHLB
advances.
At June 30, 1998, 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,
-----------------------------------
1998 1997 1996
------- ------- -------
(Dollars In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances ................................ $19,000 $19,000 $15,000
======= ======= =======
Average Balance:
FHLB advances ................................ $18,992 $18,500 $11,846
======= ======= =======
Weighted average interest rate of FHLB advances 5.98% 6.34% 5.73%
======= ======= =======
</TABLE>
18
<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, 1998, State Service Corporation's
gross revenues from property management activities (consisting of rental income)
totaled approximately $303,000 and expenses (consisting of depreciation,
interest, property taxes, management fees, and maintenance) were $258,000.
Income tax expense totaled $26,000 for 1998. 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
interest income on real estate contracts totaled $19,000. See Note K to the
Notes to Consolidated Financial Statements in the 1998 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 examination of State Federal was as of December
31, 1997. 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, 1998 was approximately $27,300.
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.
19
<PAGE>
In general, these enforcement actions may be initiated for violations of laws
and regulations and unsafe or unsound 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, 1998, the Association's lending
limit under this restriction was $1.6 million. 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.
Effective January 1, 1997, the premium schedule for BIF and SAIF insured
institutions ranged from 0 to 27 basis points. However, SAIF-insured
institutions are required to pay a Financing Corporation (FICO) assessment, in
order to fund the interest on bonds issued to resolve thrift failures in the
1980s, equal to approximately 6.48 basis points for each $100 in domestic
deposits, while BIF-insured institutions pay an assessment equal to
approximately
20
<PAGE>
1.52 basis points for each $100 in domestic deposits. The assessment is expected
to be reduced to 2.43 basis points no later than January 1, 2000, when BIF
insured institutions fully participate in the assessment. These assessments,
which may be revised based upon the level of BIF and SAIF deposits will continue
until the bonds mature in the year 2017.
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, 1998 the Association had tangible capital of $9.4 million, or
11.18% 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
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, 1998, the Association had core capital equal to $9.4 million,
or 11.18% of adjusted total assets, which is $6.0 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, 1998, State Federal had
no capital instruments that qualify as supplementary capital and $206,000 of
general loss reserves, which was less than 0.41% 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, 1998.
21
<PAGE>
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, 1998, the Association had total capital of $10.6 million
(including $9.4 million in core capital and $206,000 in qualifying supplementary
capital) and risk-weighted assets of $49.8 million or total capital of 19.31% of
risk-weighted assets. This amount was $5.4 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.
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.
22
<PAGE>
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.
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 4%.
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, 1998, the Association was in compliance with both
requirements, with an overall liquid asset ratio of 10.54% and a short-term
liquid assets ratio of 10.54%.
23
<PAGE>
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.
24
<PAGE>
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, 1998, 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."
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
25
<PAGE>
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."
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,
1998, 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.
26
<PAGE>
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, 1998, State Federal had $949,000 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 7.39% and were 6.81% for fiscal
year 1998.
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, 1998, dividends paid by the FHLB of Des
Moines to State Federal totaled $64,700, which constitutes a $400 increase from
the amount of dividends received in the fiscal year ended June 30, 1997. The
$16,000 dividend received for the quarter ended June 30, 1998 reflects an
annualized rate of 7.0%, the same rate for the same quarter ended June 30, 1997.
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 bad debt reserve deduction for "non-qualifying loans"
are 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 to be computed under either the experience method or
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 year 1997, 1998, or 1999,
27
<PAGE>
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 $520,000 at June 30, 1998.
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.
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.
28
<PAGE>
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, 1998, the Company and its subsidiary had a total of 17
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, 1998.
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, 1998 was $1.6 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, 1998
-------- -------- ------- -------------
<S> <C> <C> <C>
Main Office:
519 Sixth Avenue January 3, 1995 3,300 $743,100
Des Moines, Iowa
Branch Office:
4018 University 1985 4,000 $323,200
Des Moines, Iowa
</TABLE>
The Association also owns a parcel of land located in Clive, Iowa with a
net book value of $321,000 at June 30, 1998. 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,
1998 was $131,900. The net book value of other furniture and equipment at June
30, 1998 was $44,500.
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, 1998.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Page 42 of the attached 1998 Annual Report to Stockholders is herein
incorporated by reference. The dividend payout ratio for June 30, 1998 was
30.7%.
30
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operation and Selected Financial Data
Pages 4 through 15 of the attached 1998 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, 1998 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 16
Consolidated Balance Sheets as of
June 30, 1998 and 1997 17
Consolidated Statements of Income
for the Years Ended June 30, 1998,
1997 and 1996 18
Consolidated Statements of
Stockholders' Equity for Years
Ended June 30, 1998, 1997 and 1996 19
Consolidated Statements of Cash Flows
for Years Ended June 30, 1998, 1997
and 1996 20
Notes to Consolidated Financial
Statements 21
With the exception of the aforementioned information, the Company's Annual
Report to Stockholders for the year ended June 30, 1998 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.
31
<PAGE>
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 1998, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
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 1998, a copy of which will be filed not later than
120 days after the close of the fiscal year.
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 1998, 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 1998, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
32
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Reference to Prior Filing
S-B Exhibit or Exhibit Number
Number Document Attached Hereto
------ -------- ---------------
<S> <C>
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
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
(b) Reports on Form 8-K
A report on Form 8-K was filed on May 14, 1998, to report financial
results for the quarter ended March 31, 1998.
</TABLE>
- ----------------
* 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.
33
<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 25, 1998 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 25, 1998 Date: September 25, 1998
/s/ Harry A. Winegar /s/ Eugene M. McCormick
- ------------------------ --------------------------
HARRY A. WINEGAR EUGENE M. MCCORMICK
Director Director
Date: September 25, 1998 Date: September 25, 1998
/s/ Sidney M. Ramey /s/ Kevin J. Kruse
- ------------------------ --------------------------
SIDNEY M. RAMEY KEVIN J. KRUSE
Director Director
Date: September 25, 1998 Date: September 25, 1998
/s/ Andra K. Black
-------------------------
ANDRA K. BLACK
Director, Executive Vice
President, Secretary and Chief
Financial and Accounting
Officer
Date: September 25, 1998
EXHIBIT 13
ANNUAL REPORT
<PAGE>
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
- ----------------------------------
Total assets ............................................... $89,802 $85,679 $76,705 $71,271 $62,773
Cash & cash equivalents .................................... 9,445 3,634 2,564 3,938 1,636
Certificates of deposits in other institutions ............. 1,479 4,435 4,440 5,634 7,430
Investment securities ...................................... 2,744 3,477 2,347 1,114 793
Loans receivable, net ...................................... 68,980 68,178 62,708 56,420 49,760
Deposits ................................................... 53,672 50,346 45,732 45,596 42,776
FHLB advances .............................................. 18,965 19,000 15,000 10,000 5,000
Stockholders' equity ....................................... 16,084 15,233 14,928 14,533 14,010
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
- ------------------------
Total interest income ...................................... $ 6,823 $ 6,407 $ 5,785 $ 5,107 $ 4,620
Total interest expense ..................................... 4,043 3,626 3,194 2,601 2,179
------- ------- ------- ------- -------
Net interest income ..................................... 2,780 2,781 2,591 2,506 2,441
Provision for loan losses .................................. 52 36 24 24 24
------- ------- ------- ------- -------
Net interest income after
provision for loan losses .............................. 2,728 2,745 2,567 2,482 2,417
Non-interest income:
Real estate operations .................................. 441 404 395 386 347
Gain on sale of real estate and investments ............. 44 158 41 2 28
Net realized loss on sale of available-for-sale
securities ............................................. -- -- (24) -- --
Other non-interest income ............................... 116 108 58 57 55
------- ------- ------- ------- -------
Total non-interest income .................................. 601 670 470 445 430
Total non-interest expense ................................. 1,821 1,991 1,679 1,637 1,445
------- ------- ------- ------- -------
Income before income taxes .............................. 1,508 1,424 1,358 1,290 1,402
Income tax expense ......................................... 491 503 475 486 528
------- ------- ------- ------- -------
Net income before cumulative
effect of change in accounting
method ................................................... $ 1,017 $ 921 883 804 874
Cumulative effect of change in
accounting for income taxes .............................. -- -- -- -- (59)
------- ------- ------- ------- -------
Net Income ................................................. $ 1,017 $ 921 $ 883 $ 804 $ 815
======= ======= ======= ======= =======
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<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) ................................... 1.15 1.12 1.20 1.20 1.33
Interest rate spread information:
Average during year ..................................... 2.60 2.77 2.72 2.98 3.54
End of year ............................................. 2.41 2.65 2.80 2.52 3.28
Net interest margin(1) ................................... 3.35 3.58 3.72 3.95 4.18
Ratio of operating expense to average
total assets ............................................ 2.06 2.42 2.29 2.44 2.37
Return on equity (ratio of net
income to average equity) ............................... 6.51 6.19 6.00 5.62 7.84
Quality Ratios:
Non-performing assets to total assets at
end of year ............................................. 1.50 1.55 .62 .20 .54
Allowance for loan losses to
non-performing loans .................................... 127.44 22.30 50.21 151.05 56.27
Capital Ratios:
Stockholders' Equity to total assets at end
of year ................................................. 17.91 17.78 19.46 20.39 22.32
Average Stockholders' Equity to average
assets ................................................... 17.71 18.10 20.05 21.33 16.93
Ratio of average interest-earning assets to
average interest-bearing liabilities ..................... 1.153x 1.173x 1.218x 1.235x 1.170x
Number of full-service offices ............................ 2 2 2 2 2
(1) Net interest income divided by average interest-earning assets.
(2) No non-performing loans at year-end.
</TABLE>
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
When used in this filing and in future filings by StateFed Financial
Corporation (the "Company") with the Securities and Exchange Commission, in the
Company's press releases or other public or shareholder communications, or in
oral statements made with the approval of an authorized executive officer, the
words or phrases "would be," "will allow," "intends to," "will likely result,"
"are expected to," "will continue," "is anticipated," "estimate," "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to risks and uncertainties, including but not limited to
changes in economic conditions in the Company's market area, changes in policies
by regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area and competition, all or some of which could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected.
The Company wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made, and
advises readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation,
to update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
General
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.
Noninterest 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 50.89% fixed rate loans
and 49.11% adjustable rate loans at June 30, 1998.
6
<PAGE>
Financial Condition
Comparison of Fiscal Years Ended June 30,1998 and June 30, 1997.
The Company's total assets increased from $85.7 million at June 30, 1997 to
$89.8 million at June 30, 1998, an increase of $4.1 million, or 4.81%. The
increase was primarily due to the increase in cash and cash equivalents of $5.8
million, the increase in property acquired in settlement of loans of $952,500,
and the increase in loans receivable of $802,000. The increase in loans
receivable was funded primarily from a decrease in investment in certificates of
deposit held for investment of $3.0 million and an increase in deposits of $3.3
million.
Net loans increased $802,000 from $68.2 million at June 30, 1997 to $69.0
million at June 30, 1998. The increase in the loan portfolio was comprised
primarily of $16.5 million in mortgage loans originated and $2.2 million in
purchased loans, partially offset by $18.2 million in principal repayments.
Total deposits increased $3.3 million from $50.3 million at June 30, 1997
to $53.7 million at June 30, 1998. During fiscal 1998, certificates of deposit
increased $3.2 million, money market accounts increased by $313,000, and NOW
accounts increased $343,000, while passbook accounts decreased $538,000. The
Company did not offer any special marketing programs during the 1998 fiscal
year.
Total stockholders' equity increased $ 851,300 from $15.2 million at June
30, 1997 to $16.1 million at June 30, 1998. The increase was primarily the
result of net income of $1.0 million, exercised stock options of $67,200,
amortization of recognition and retention plan ("RRP") awards and allocations to
the Employee Stock Ownership Plan ("ESOP") totaling $200,900, and the increase
in unrealized gains on available for sale securities of $62,500, offset by
$184,000 expended for the repurchase of 10,000 shares of Company common stock
and dividends declared totaling $312,200.
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.
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, 1998 and June 30, 1997.
General. Net income for the year ended June 30, 1997 was $1,017,000, an
increase of $96,000 compared to net income for the year ended June 30, 1997 of
$921,000. The increase was primarily the result of a decrease in non-
7
<PAGE>
interest expense of $169,900 and a decrease in income taxes of $12,400,
partially offset by a decrease in non-interest income of $69,100 and an increase
in the provision for loan losses of $16,000.
Interest Income. Interest income increased $415,500 to $6.8 million for
fiscal 1998 compared to $6.4 million for fiscal 1997 due primarily to an
increase in the volume of loans receivable, and investment securities and other
assets.
Interest Expense. Interest expense increased $416,800 from $3.6 million for
fiscal 1997 to $4.0 million in fiscal 1998. The increase was due to the increase
in the balance of certificates of deposit.
Provision for Loan Losses. The provision for loan losses for fiscal 1998
was $52,000, an increase of $16,000 compared to the year ended June 30, 1997 of
$36,000. 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 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 decreased from $670,000 in fiscal
1997 to $601,000 in fiscal 1998. The decrease of $69,000 is primarily the result
of a $114,100 decrease in gains on sales of real estate, offset by a $36,700
increase in investment in real estate operations and a $8,400 increase in other
non-interest income.
Non-Interest Expense. Non-interest expense decreased from $2.0 million in
fiscal 1997 to $1.8 million in fiscal 1998. The decrease of $170,000, or 8.53%,
is primarily the result of a decrease in the Savings Association Insurance Fund
special assessment of $291,000, a decrease in advertising of $19,000, and a
decrease in Federal Deposit Insurance premiums of $30,000, partially offset by
an increase in investment real estate operations of $23,000, an increase in
other non-interest expense of $22,000, an increase in salaries and employee
benefits of $96,000, an increase in occupancy expense of $14,000, and an
increase in data processing services of $15,000.
Income Tax Expense. Income tax expense was $490,000 in fiscal 1998 compared
to $503,000 in fiscal 1997, a decrease of $13,000. Income taxes decreased
primarily due to tax benefits of tax credits on investments.
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.
8
<PAGE>
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 $8,000 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 $7,000 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.
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, 1998, the Company had $34.9 million of adjustable-rate loans which
comprised over 49.11% 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.
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,
1998, the Company would qualify for an exemption from this rule.
9
<PAGE>
The following table sets forth, at June 30, 1998, 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).
<TABLE>
<CAPTION>
Estimated Increase (Decrease) in NPV
Change in Interest Rates Estimated NPV ------------------------------------
(Basis Points) Amount Amount Percent
-------------- ------ ------ -------
(Dollars in Thousands)
<S> <C> <C> <C>
+400 $10,769 $(2,421) (18)%
+300 11,645 (1,545) (12)
+200 12,395 (795) (6)
+100 12,924 (266) (2)
-- 13,190
-100 13,361 171 1
-200 13,561 371 3
-300 13,955 765 6
-400 14,495 1,305 10
</TABLE>
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.
10
<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,
------------------------------------------------------------------------------------------
1998 1997
------------------------------------------------------------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Interest-earning bank accounts ..... $ 7,881 $ 380 4.82% $ 3,255 $ 145 4.45%
Certificates of deposit invested in
other institutions ............... 2,553 148 5.80 4,445 262 5.89
Investment and other securities .... 3,321 241 7.26 2,483 184 7.41
Loans receivable(1) ................ 68,195 5,989 8.78 66,558 5,752 8.64
FHLB stock ......................... 950 65 6.84 912 64 7.02
------- ------- ------- ------- ------- -------
Total interest-earning assets(1) .. $82,900 $ 6,823 8.23 $77,653 6,407 8.25%
======= ------- ------- ======= ------- -------
Interest-Bearing Liabilities:
Passbook accounts ................. 3,889 107 2.75 $ 4,094 $ 113 2.76
NOW accounts ...................... 1,901 25 1.32 1,867 23 1.23
Money market accounts ............. 3,654 132 3.61 3,283 117 3.56
Certificates of deposit ........... 43,436 2,624 6.04 38,745 2,302 5.94
FHLB advances ..................... 18,992 1,155 6.08 18,231 1,071 5.87
------- ------- ------- ------- -------
Total interest-bearing liabilities $71,872 4,043 5.63 $66,220 3,626 5.48
======= ------- ------- ======= ------- -------
Net interest income ................. $ 2,780 $ 2,781
======= =======
Net interest rate spread ............ 2.60% 2.77%
======= =======
Net earning assets .................. $11,028 $11,433
======= =======
Net yield on average
interest-earning assets ............ 3.35% 3.58%
======= =======
Average interest-earning assets to
average interest-bearing liabilities 1.53x 1.173x
======= =======
<CAPTION>
Year Ended June 30,
------------------------------------
1996
------------------------------------
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
------- ---- ----
<S> <C> <C> <C>
Interest-Earning Assets:
Interest-earning bank accounts ..... $ 2,791 $ 125 4.48%
Certificates of deposit invested in
other institutions ............... 4,918 285 5.80
Investment and other securities .... 1,790 121 6.76
Loans receivable(1) ................ 59,480 5,210 8.76
FHLB stock ......................... 615 44 7.15
------- ------- -------
Total interest-earning assets(1) .. $69,594 $ 5,785 8.31%
======= ------- -------
Interest-Bearing Liabilities:
Passbook accounts ................. $ 4,499 $ 123 2.73%
NOW accounts ...................... 1,848 42 2.27
Money market accounts ............. 3,174 113 3.56
Certificates of deposit ........... 35,763 2,176 6.08
FHLB advances ..................... 11,846 740 6.25
------- ------- -------
Total interest-bearing liabilities $57,130 3,194 5.59
======= ------- -------
Net interest income ................. $ 2,591
=======
Net interest rate spread ............ 2.72%
=======
Net earning assets .................. $12,464
=======
Net yield on average
interest-earning assets............. 3.72%
=======
Average interest-earning assets to
average interest-bearing liabilities 1.218x
=======
</TABLE>
- ---------------------------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
11
<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,
----------------------------------------------------------------------
1998 v. 1997 1997 v. 1996
--------------------------------- --------------------------------
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 ...................... $ 222 $ 13 $ 235 $ 21 $ (1) $ 20
Certificates of deposit invested in other
institutions ....................................... (110) (4) (114) (28) 5 (23)
Investments and other securities .................... 61 (4) 57 50 13 63
Loans receivable .................................... 143 94 237 613 (71) 542
FHLB stock .......................................... 3 (2) 1 21 (1) 20
----- ----- ----- ----- ----- -----
Total interest-earning assets ..................... $ 319 $ 97 $ 416 $ 677 $ (55) $ 622
===== ===== ===== ===== ===== =====
Interest-bearing liabilities:
Passbook accounts ................................... (6) -- (6) (11) 1 (10)
NOW accounts ........................................ -- 2 2 (19) -- (19)
Money market accounts ............................... 13 2 15 4 -- 4
Certificates of deposit ............................. 283 39 322 178 (52) 126
FHLB advances ....................................... 46 38 84 377 (46) 331
----- ----- ----- ----- ----- -----
Total interest-bearing
liabilities ...................................... $ 336 $ 81 $ 417 $ 529 $ (97) $ 432
===== ===== ===== ===== ===== =====
Net interest income .................................. $ (1) $ 190
===== =====
</TABLE>
12
<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,
-----------------------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Weighted average yield on:
Loans receivable ......................................................... 8.477% 8.517% 8.548%
Interest-earning bank accounts ........................................... 5.49 5.50 5.15
Certificates of deposit invested in other institutions ................... 6.07 6.01 6.02
Investments and other securities ......................................... 6.71 7.33 6.30
FHLB stock ............................................................... 6.75 7.00 7.00
Combined weighted average yield on interest-earning assets ............. 8.028 8.181 8.227
Weighted average rate paid on:
Passbook accounts ........................................................ 2.827 2.827 2.827
NOW accounts ............................................................. 1.422 1.070 2.504
Money market accounts .................................................... 3.291 3.290 3.300
Certificates of deposit .................................................. 6.100 5.830 5.938
FHLB advances ............................................................ 5.983 6.338 5.729
Combined weighted average rate paid on interest- bearing
liabilities ......................................................... 5.621 5.534 5.429
Spread .................................................................... 2.407 2.647 2.798
</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, 1998 was 10.0%. 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, 1998 was 10.0%.
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. Management believes that loan repayments and other sources of
funds will be adequate to meet the Company's foreseeable liquidity needs.
The primary financing activity of the Company during the fiscal year ended
June 30, 1998 has been the increasing deposit base. The net increase in deposits
was $3.3 million during fiscal year 1998.
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, 1998, the Company had outstanding
commitments to extend credit which amounted to $1,644,000. 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.
13
<PAGE>
Certificates of deposit scheduled to mature in one year or less at June 30,
1998, totaled approximately $29.6 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, 1998, the Association had $19.0 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, 1998, the Company's stockholders'
equity totaled $16.1 million, or 17.91% of assets.
At June 30, 1998, the Association had tangible and core capital of $9.4
million, or 11.18% of adjusted total assets, respectively, which was
approximately $8.1 million and $6.6 million above the minimum requirements of
1.5% and 4.0% respectively, of the adjusted total assets in effect on that date.
On June 30, 1998, the Association had risk-based capital of $9.6 million
(including $9.4 million in core capital), or 19.31% of risk-weighted assets of
$49.8 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 Year 2000
Much has been written about the potential Year 2000 problems that may arise
with information technology systems. Many computer programs and other
technological devices that can only distinguish the final two digits of the year
entered (a common programming practice in earlier years) are expected to read
entries for the year 2000 as the year 1900 and compute payments, interest and
other information incorrectly or may be unable to function. Rapid and accurate
data processing is essential to the operation of the Company. Data processing is
also essential to most other financial institutions and the customers and
suppliers of the Company.
A third-party hardware and software company provides the material data
processing of the Company. This hardware and software provider has advised the
Company that it expects to be Year 2000 compliant before the end of calendar
year 1998. However, if the hardware and software provider is unable to become
compliant with Year 2000 issues, the Company may experience significant data
processing delays, mistakes or failures. These delays, mistakes or failures
could have a significant adverse impact on the financial condition and results
of operations of the Company.
During 1998, the Company, in the normal course of operations, installed new
hardware and software supplied by the third-party data processor. The Company is
conducting tests of the hardware and software for Year 2000 compliance. Based on
the results of these tests and its evaluation of other hardware and software
used by the Company, including other technological equipment used by the
Company, management does not anticipate incurring significant additional expense
to implement additional corrective actions.
Management believes that appropriate actions have been taken to evaluate
Year 2000 risks and to implement procedures necessary to address those risks.
Management has also developed a contingency plan that outlines courses of
actions that would be followed should the Company encounter computer processing
or general operational problems arising from the Year 2000 issue.
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.
14
<PAGE>
Impact of New Accounting Standards
The Financial Accounting standards Board ("FASB") issued Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"), 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.
The FASB also issued SFAS No. 131 in June 1997, "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.
15
<PAGE>
STATEFED FINANCIAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS AND
INDEPENDENT AUDITOR'S REPORT
JUNE 30, 1998
<PAGE>
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, 1998 and 1997, 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, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, 1998 and 1997
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended June 30, 1998, in conformity with
generally accepted accounting principles.
Vroman, McGowen, Hurst, Clark & Smith, P.C.
Des Moines, Iowa
August 7, 1998
<PAGE>
STATEFED FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
-----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents
Non-interest bearing $ 338,612 $ 180,607
Interest bearing 9,106,792 3,453,479
------------ ------------
9,445,404 3,634,086
Investments in certificates of deposit 1,478,514 4,435,425
Investment securities available-for-sale 2,743,518 3,477,168
Loans receivable, net 68,979,770 68,177,746
Real estate acquired for development 231,870 435,484
Real estate held for investment, net 2,262,060 1,933,532
Property acquired in settlement of loans 1,286,452 333,939
Office property and equipment, net 1,564,077 1,418,982
Federal Home Loan Bank stock, at cost 949,000 950,000
Accrued interest receivable 542,246 567,478
Other assets 318,654 314,754
------------ ------------
Total Assets $ 89,801,565 $ 85,678,594
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 53,671,860 $ 50,345,972
Advances from Federal Home Loan Bank 18,964,890 19,000,000
Advances from borrowers for taxes and insurance 340,686 490,053
Accrued interest payable 134,251 128,881
Income taxes
Current 19,019 29,327
Deferred 213,000 171,000
Accounts payable and other liabilities 295,278 201,982
Dividends payable 78,295 78,372
------------ ------------
Total Liabilities 73,717,279 70,445,587
Stockholders' equity
Preferred stock, $.01 par value, 500,000 shares authorized,
none issued
Common stock, $.005 par value, 2,000,000 shares authorized
1,780,972 shares issued with 1,565,892 (1998) and 1,567,446
(1997) shares outstanding 8,905 8,905
Additional paid-in capital 8,483,110 8,398,857
Retained earnings - substantially restricted 9,457,310 8,752,218
Less treasury stock (215,080 and 213,526 shares, at cost) (1,643,697) (1,560,859)
Less common stock acquired by:
Employee stock ownership plan (341,270) (413,940)
Retention and recognition plan -- (9,636)
Net unrealized gains on available-for-sale securities,
net of income taxes 119,928 57,462
------------ ------------
Total Stockholders' Equity 16,084,286 15,233,007
------------ ------------
Total Liabilities and Stockholders' Equity $ 89,801,565 $ 85,678,594
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Loans receivable interest $ 5,987,884 $ 5,752,351 $ 5,210,354
Investment securities and other interest 834,682 654,681 575,072
----------- ----------- -----------
6,822,566 6,407,032 5,785,426
INTEREST EXPENSE
Deposits 2,887,066 2,555,022 2,454,135
Advances from Federal Home Loan Bank 1,155,461 1,070,715 740,109
----------- ----------- -----------
4,042,527 3,625,737 3,194,244
----------- ----------- -----------
NET INTEREST INCOME 2,780,039 2,781,295 2,591,182
PROVISION FOR LOAN LOSSES 52,000 36,000 24,000
----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,728,039 2,745,295 2,567,182
NON-INTEREST INCOME
Investment real estate operations 440,718 404,035 394,519
Gain on sales of real estate 44,017 158,154 41,269
Net realized loss on sales of available-for-sale securities (1,875) -- (23,787)
Other 117,977 107,717 58,297
----------- ----------- -----------
600,837 669,906 470,298
NON-INTEREST EXPENSE
Salaries and employee benefits 930,892 835,207 846,725
Investment real estate operations 267,824 244,224 251,650
Occupancy expenses 132,669 118,447 110,523
Federal deposit insurance premiums 57,800 88,059 127,257
SAIF special assessment -- 291,331 --
Data processing services 99,239 83,739 74,635
Advertising 33,327 52,715 17,977
Other 299,386 277,336 250,459
----------- ----------- -----------
1,821,137 1,991,058 1,679,226
----------- ----------- -----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 1,507,739 1,424,143 1,358,254
PROVISION FOR INCOME TAXES 490,460 502,818 475,400
----------- ----------- -----------
NET INCOME $ 1,017,279 $ 921,325 $ 882,854
=========== =========== ===========
Basic earnings per share $ 0.68 $ 0.62 $ 0.57
=========== =========== ===========
Diluted earnings per share $ 0.66 $ 0.60 $ 0.55
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years ended June 30, 1998, 1997, and 1996
--------------------------------------------------------------------------------------
Common
Additional Stock Stock
Common Paid-in Retained Treasury Acquired Acquired
Stock Capital Earnings Stock By ESOP By RRP
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 $ 8,905 $ 8,338,740 $ 7,591,066 $ (708,475) $ (570,151) $ (106,080)
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 64,302
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) (41,778)
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 32,142
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) (9,636)
Net income for the year 1,017,279
Dividends declared (312,187)
ESOP common stock released for
allocation 118,559 72,670
Amortization of RRP contributions 9,636
Treasury stock acquired - 10,000
shares, at cost (184,375)
Treasury stock reissued to fund stock options
exercised - 14,534 shares (34,306) 101,537
Change in unrealized gains (losses)
on available-for-sale securities
--------------------------------------------------------------------------------------
Balance at June 30, 1995 $ 8,905 $ 8,483,110 $ 9,457,310 $(1,643,697) $ (341,270) $ --
======================================================================================
<CAPTION>
Years ended June 30, 1998, 1997, and 1996
-----------------------------------------
Unrealized
Gains (Losses) Total
on AFS Stockholders'
Securities Equity
----------------------------
<S> <C> <C>
Balance at June 30, 1995 $ (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
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 (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
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 57,462 15,233,007
Net income for the year 1,017,279
Dividends declared (312,187)
ESOP common stock released for --
allocation 191,229
Amortization of RRP contributions 9,636
Treasury stock acquired - 10,000
shares, at cost (184,375)
Treasury stock reissued to fund stock options
exercised - 14,534 shares 67,231
Change in unrealized gains (losses)
on available-for-sale securities 62,466 62,466
----------------------------
Balance at June 30, 1995 $ 119,928 $16,084,286
============================
</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,
----------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,017,279 $ 921,325 $ 882,854
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 102,612 111,940 117,439
Gain on sale of real estate (44,017) (158,154) 41,269
Amortization of ESOP and RRP contributions 200,865 163,291 201,303
Realized loss on sale of available-for-sale securities (1,875) -- 23,787
Amortization of unearned interest (45,143) -- --
Deferred loan fees (32,165) 13,305 10,814
Provision for losses on loans 52,000 36,000 24,000
Deferred income taxes 11,029 38,000 (35,400)
Change in:
Accrued interest receivable 25,232 (33,772) (94,222)
Other assets (3,900) 47,740 1,022
Accrued interest payable 5,370 (952) 12,471
Current income tax liability (10,308) 24,072 (26,559)
Accounts payable and other liabilities 93,296 12,677 (59,720)
------------ ------------ ------------
Net cash provided by operating activities 1,370,275 1,175,472 1,099,058
Cash flows from investing activities
Investment in certificates of deposits (99,000) (99,000) --
Maturity of investments in certificates of deposit 3,052,000 99,000 1,188,000
Proceeds from sale or maturity of available-for-sale
investment securities 1,650,000 200,000 453,420
Purchase of available-for-sale investment securities (771,984) (1,250,407) (1,711,059)
(Purchase) redemption of FHLB stock 1,000 (200,000) (250,000)
Net increase in loans outstanding (1,435,034) (5,669,007) (6,000,121)
Investment in real estate held for investment (359,497) (859,781) (3,450)
Investment in real estate held for development (36,386) (75,890) (432,540)
Proceeds from sale of real estate -- 29,264 --
Investment in property acquired in settlement of loans (55,321) -- --
Purchases of property and equipment (216,738) (15,676) (35,638)
Increase in other assets -- -- (100,000)
------------ ------------ ------------
Net cash flows provided (used) by investing activities 1,729,040 (7,841,497) (6,891,388)
Cash flows from financing activities
Net increase in deposits 3,325,888 4,614,144 135,523
Advances from Federal Home Loan Bank 14,000,000 12,000,000 11,000,000
Repayment of Federal Home Loan Bank advances (14,035,110) (8,000,000) (6,000,000)
Net decrease in advances from borrowers (149,367) (15,696) (27,459)
Proceeds from stock options exercised 67,231 76,380 58,990
Dividends paid (312,264) (318,159) (329,756)
Treasury stock purchased (184,375) (620,825) (418,750)
------------ ------------ ------------
Net cash flows provided by financing activities 2,712,003 7,735,844 4,418,548
------------ ------------ ------------
CHANGE IN CASH AND CASH EQUIVALENTS 5,811,318 1,069,819 (1,373,782)
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, beginning of year 3,634,086 2,564,267 3,938,049
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 9,445,404 $ 3,634,086 $ 2,564,267
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - StateFed Financial Corporation (the Company), under the laws of
the State of Delaware, is a thrift holding company. The Company owns 100%
of the outstanding capital stock of State Federal Savings and Loan
Association (the Association). Its primary business activity is 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.
<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 recorded at
fair value. Equity securities are also carried at fair value. Unrealized
holding gains and losses, net of tax, on securities available for sale are
reported as a net amount in a separate component of 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.
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
$96,000 and $810,000 at June 30, 1998 and 1997, 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.
<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 AND REAL ESTATE HELD FOR INVESTMENT -
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 - The Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standard
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.
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The FASB also issued SFAS No. 131, in June 1997, "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 - Basic earnings per share is computed based upon the
weighted-average shares outstanding during the period, less shares in the
ESOP that are unallocated and not committed to be released. Weighed-average
common shares outstanding totaled 1,487,881, 1,489,648 and 1,545,622 for
the years ended June 30, 1998, 1997 and 1996, respectively.
Diluted earnings per share is computed by considering common shares
outstanding and dilutive potential common shares to be issued under the
Company's stock option plan. Weighed-average common shares deemed
outstanding for the purpose of computing diluted earnings per share totaled
1,545,208, 1,532,881 and 1,593,337 for the years ended June 30, 1998, 1997
and 1996, respectively.
During fiscal 1998, the Company began presenting earning per share pursuant
to the provisions of SFAS No. 128 "Earnings Per Share." Accordingly, the
fiscal 1997 and 1996 earnings per share presentations have been revised to
conform to SFAS No. 128.
STOCK SPLIT - On October 22, 1997, the Board of Directors authorized a
one-for-one common stock split effective October 31, 1997, thereby doubling
the number of issued and outstanding common shares and decreasing the par
value of each share from $.01 to $.005. All references in the accompanying
financial statements to the number of common shares and per share amounts
have been restated to reflect the stock split.
FINANCIAL STATEMENT PRESENTATION - Certain items in prior year financial
statements have been reclassified to conform to the 1998 presentation.
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The Company had cash deposits of approximately
$8,400,000 at the Federal Home Loan Bank of Des Moines at June 30, 1998.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information
Income taxes paid $ 489,300 $ 441,000 $ 533,000
========== ========== ==========
Interest paid on deposits and FHLB advances
(includes interest credited to deposit accounts) $4,046,000 $3,627,000 $3,182,000
========== ========== ==========
</TABLE>
Noncash Investing and Financing Activities
Property acquired through foreclosure totaled $1,150,000 and $449,000
during fiscal years 1998 and 1997, respectively. The Company also financed
$730,000 and $299,000 of loans for borrowers to purchase real estate owned
by the Company during fiscal years 1998 and 1997, respectively.
The Company had no significant noncash investing or financing activities
during the years ended June 30, 1996.
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, 1998:
Interest
Rate Amount
------------ -------------
Mature during fiscal year:
1999 5.40% - 6.10% $ 891,000
2000 5.25% - 5.90% 388,000
2001 6.70% - 7.00% --
2002 6.85% - 7.00% 198,000
-------------
1,477,000
Unamortized broker fees 1,514
-------------
$ 1,478,514
=============
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - INVESTMENTS IN CERTIFICATES OF DEPOSIT - Continued
Following is a summary of certificates by interest rate range:
June 30,
-------------------------------------
1998 1997
-------------- ---------------
Interest rates:
5.00% - 5.99% $ 792,000 $ 1,971,000
6.00% - 6.99% 396,000 2,071,000
7.00% - 7.99% 289,000 289,000
Over 8% -- 99,000
-------------- ---------------
1,477,000 4,430,000
Unamortized broker fees 1,514 5,425
-------------- ---------------
$ 1,478,514 $ 4,435,425
============== ===============
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, 1998:
U.S. government and agency
debt securities $1,361,292 $ 81,622 $ -- $1,442,914
Equity securities 1,185,529 115,075 -- 1,300,604
---------- ---------- ------------ ----------
$2,546,821 $ 196,697 $ -- $2,743,518
========== ========== ============ ==========
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
========== ========== ============ ==========
</TABLE>
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.
Estimated
Amortized Market
Cost Value
---------- ----------
Due in one year or less $ -- $ --
Due after one year through five years 298,759 306,898
Due after five years through ten years 300,000 309,744
Due after ten years 762,533 826,272
---------- ----------
$1,361,292 $1,442,914
========== ==========
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - INVESTMENT SECURITIES - Continued
The Company had realized gains on the sale of investment securities
totaling $1,875 during fiscal year 1998. The Company had no realized gains
or losses on the sale of investment securities available-for-sale during
fiscal year 1997. 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 totaled $50,000 for 1998 and $253,420
during 1996.
Following is a summary of investment income:
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
U.S. government and agency securities $162,065 $109,834 $106,087
Investments in certificates of deposit 147,984 262,253 285,115
FHLB stock dividends 64,725 64,262 44,196
Interest-bearing cash accounts 380,462 144,655 124,866
Equity securities dividends 79,446 73,677 14,808
-------- -------- --------
$834,682 $654,681 $575,072
======== ======== ========
</TABLE>
NOTE E - LOANS RECEIVABLE, NET
Following is a summary of loans receivable:
<TABLE>
<CAPTION>
June 30,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Real estate mortgage loans:
Secured by one-to-four family residences $ 44,440,849 $ 44,581,692
Secured by commercial and multi-family real estate 23,114,638 20,469,228
Construction loans 1,535,363 3,543,880
------------ ------------
Total real estate mortgage loans 69,090,850 68,594,800
Consumer and other loans 996,850 1,133,198
------------ ------------
70,087,700 69,727,998
Less:
Allowance for loan losses (206,129) (221,355)
Undisbursed portion of mortgage loans (605,197) (993,492)
Unamortized balance on purchased loan discounts (1,534) (8,169)
Deferred loan fees (295,070) (327,236)
------------ ------------
Loans receivable, net $ 68,979,770 $ 68,177,746
============ ============
</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.
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - LOANS RECEIVABLE, NET - Continued
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, 1998, the Company had outstanding commitments to fund real
estate loans of $1,644,011. The commitments were primarily for adjustable
interest rate commercial real estate loans.
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, 1998 and 1997
amounted to $1,579,000 and $1,062,000, respectively. During the year ended
June 30, 1998, there were new loans to this group totaling $774,000 and
repayments totaling $257,000.
The Company serviced participation loans with outstanding balances totaling
$3,974,000 and $7,374,000 at June 30, 1998 and 1997 respectively. The
Company's portion of these loans totaled $2,110,020 and $3,414,000 at June
30, 1998 and 1997, respectively.
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - LOANS RECEIVABLE, NET - Continued
Activity in the allowance for loan losses is summarized as follows:
Year Ended June 30,
-------------------------------------
1998 1997 1996
--------- --------- ---------
Balance at beginning of year $ 221,355 $ 240,278 $ 216,278
Provision charged to income 52,000 36,000 24,000
Charge-offs (67,226) (54,923) --
--------- --------- ---------
Balance at end of year $ 206,129 $ 221,355 $ 240,278
========= ========= =========
Impaired loans as of June 30, 1998 and 1997 totaled approximately $83,000
and $192,000, respectively. The total allowance for loan losses
specifically related to these loans was $800 and $5,100 on June 30, 1998
and 1997, respectively. Interest income on impaired loans of $1,900 and
$3,800 was recognized for cash payments received for the years ended June
30, 1998 and 1997, respectively.
As of June 30, 1998, the Company had a net investment of $68,979,770 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 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:
June 30,
---------------------
1998 1997
-------- --------
Undeveloped residential building lot $ 43,109 $ 43,109
Townhouse construction project 188,761 392,375
-------- --------
$231,870 $435,484
======== ========
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 also owns and operates a twenty-two unit apartment complex
located in Des Moines, Iowa. The Company completed construction and began
renting units during the fiscal year ended June 30, 1998. The units rent
for $525 to $550 per month under rental agreements which do not exceed one
year. Following is a summary of the investment in these real estate
projects:
June 30,
--------------------------
1998 1997
----------- -----------
Construction in process - rental real estate $ -- $ 935,873
Rental real estate, at cost 2,697,525 1,402,155
Less accumulated depreciation (435,465) (404,496)
----------- -----------
Net real estate held for investment $ 2,262,060 $ 1,933,532
=========== ===========
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, 1998 the Company held three properties acquired in the
settlement of loans. The properties, which include two one-to-four family
homes and a commercial building, have a carrying value of $1,286,452.
Management believes the carrying value of the properties does not exceed
the fair value of the properties, net of anticipated selling costs.
No gains or losses were recognized from adjusting the carrying value of
property acquired in settlement of loans to fair value during 1998, 1997 or
1996.
NOTE I - OFFICE PROPERTY AND EQUIPMENT
Following is a summary of office property and equipment:
June 30,
--------------------------
1998 1997
----------- -----------
Land $ 1,067,217 $ 1,012,609
Office building 471,178 464,986
Furniture, fixtures and equipment 529,897 373,958
----------- -----------
2,068,292 1,851,553
Less accumulated depreciation (504,215) (432,571)
----------- -----------
Office property and equipment, net $ 1,564,077 $ 1,418,982
=========== ===========
The Company leases a portion of one of its office buildings on a
month-to-month basis. Aggregate monthly rental receipts total approximately
$4,600.
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - ACCRUED INTEREST RECEIVABLE
Following is a summary of accrued interest receivable:
June 30,
-------------------
1998 1997
-------- --------
Investments in certificates of deposit interest $ 6,299 $ 15,495
U.S. Government and agency securities interest 14,631 34,211
Loans receivable interest 521,316 517,772
-------- --------
$542,246 $567,478
======== ========
NOTE K - DEPOSITS
Savings deposit customers are primarily greater Des Moines area individuals
and businesses. Deposits with balances in excess of $100,000 totaled
$3,871,947 and $3,192,557 at June 30, 1998 and 1997, respectively.
Non-interest bearing deposit accounts totaled approximately $881,500 and
$1,091,000 at June 30, 1998 and 1997, respectively.
Deposit accounts held by members of the board of director and executive
officers totaled $563,000 and $524,000 at June 30, 1998 and 1997,
respectively.
Following is a summary of savings deposits as of June 30, 1998 and 1997 and
interest expense relating to those deposits for the years then ended:
<TABLE>
<CAPTION>
1998 1997
---------------------------- ---------------------------
Outstanding Interest Outstanding Interest
Balance Expense Balance Expense
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Demand deposits $ 2,051,363 $ 24,874 $ 1,708,260 $ 22,689
Savings and money market deposits 7,299,665 238,476 7,525,309 230,329
Certificates of deposits 44,320,832 2,632,121 41,112,403 2,315,215
------------ ------------ ------------ ------------
$ 53,671,860 2,895,471 $ 50,345,972 2,568,233
============ ============
Less penalties for early withdrawals (8,405) (8,405)
------------ ------------
$ 2,887,066 $ 2,555,022
============ ============
</TABLE>
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - DEPOSITS - Continued
At June 30, 1998, the scheduled maturities of certificates of deposits are
as follows:
Fiscal year ending June 30:
1999 $ 29,435,187
2000 8,337,315
2001 3,377,575
2002 1,244,357
2003 1,550,450
Thereafter 375,948
-------------
$ 44,320,832
=============
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,
1998:
- Fixed rate advance due in monthly principal and interest payments of
$16,737 through January 31, 2013. The advance, which bears interest at
5.87%, cannot be prepaid before January 12, 2001. The outstanding
balance of the advance was $1,964,890 at June 30, 1998.
- The following fixed rate advances, which are subject to prepayment
penalties:
Maturity Date Interest Rate Amount
------------- ------------- ------
September 11, 1998 5.80% $ 2,000,000
September 14, 1998 5.94% 2,000,000
September 29, 1998 5.91% 2,000,000
November 2, 2001 6.46% 3,000,000
November 21, 2002 6.14% 5,000,000
June 30, 2008 (1) 5.52% 3,000,000
------------
$ 17,000,000
============
(1) Callable in 2003
<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:
Interest
Year ending June 30, Amount Rates
--------------- -------------
1999 $ 6,087,843 5.80% - 5.94%
2000 93,141 5.87%
2001 98,758 5.87% - 6.46%
2002 3,104,713 5.87%
2003 5,111,028 5.87% - 6.14%
Thereafter 4,469,407 5.52% - 5.87%
---------------
$ 18,964,890
===============
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. The
special bad debt deduction has been repealed for thrift institutions.
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 recapture is not expected to
have a material effect on results of operations as the Company 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>
Year Ended June 30,
-----------------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------- --------------------------------- -----------------------------------
Federal State Total Federal State Total Federal State Total
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current $ 405,460 $ 74,000 $ 479,460 $ 393,818 $ 71,000 $ 464,818 $ 435,000 $ 75,800 $ 510,800
Deferred 9,000 2,000 11,000 32,100 5,900 38,000 (30,100) (5,300) (35,400)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total $ 414,460 $ 76,000 $ 490,460 $ 425,918 $ 76,900 $ 502,818 $ 404,900 $ 70,500 $ 475,400
========= ========= ========= ========= ========= ========= ========= ========= =========
</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:
Year Ended June 30,
-----------------------------------
1998 1997 1996
--------- --------- ---------
Computed "expected" taxes on income $ 512,600 $ 484,200 $ 461,800
State taxes, net of federal benefit 58,200 55,000 46,800
Low income housing tax credits (59,000) (57,500) (30,500)
Other adjustments (21,340) 21,118 (2,700)
--------- --------- ---------
Provision for income taxes $ 490,460 $ 502,818 $ 475,400
========= ========= =========
<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, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------
1998 1997
--------- ---------
<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) 105,300 90,100
Compensation agreements (deductible when paid for income
tax reporting purposes) (24,400) (22,800)
Loan fees deferred for financial reporting purposes (29,800) (41,600)
Allowance for loan losses 31,100 44,400
Deferred installment sale gains 36,000 36,400
Unrealized gains on investment securities 60,000 18,000
Other (29,100) (17,400)
--------- ---------
Net deferred income tax liability $ 213,000 $ 171,000
========= =========
</TABLE>
No valuation allowance was recorded against deferred tax assets at June 30,
1998 or 1997.
NOTE N - EMPLOYEE BENEFITS
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. As of June 30, 1998, all of
the 68,770 shares reserved for issuance under the RRP had been awarded to
directors, officers and other key employees. Expense of approximately
$9,600, $32,100 and $64,300 was recorded for the RRP for the years ended
June 30, 1998, 1997 and 1996, 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 137,540 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 ten
years (through December 31, 2003). 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 $191,200, $131,100 and
$137,000 was recorded relative to the ESOP for the years ended June 30,
1998, 1997 and 1996, respectively.
<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.
As shares are released from collateral, the Company reports compensation
expense equal to the current market price of the shares. 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,
----------------------
1998 1997
-------- --------
Allocated shares 54,730 39,534
Shares released for allocation 14,479 15,196
Shares sold for distributions -- --
Distributions of shares -- --
Unreleased shares 66,839 81,318
-------- --------
Total ESOP shares 136,048 136,048
======== ========
Fair value of unreleased shares $935,746 $772,521
======== ========
STOCK OPTION PLAN - The Company authorized options for 171,924 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
137,540 shares to certain officers, directors and employees, at an exercise
price of $5 per share. No additional options have been granted since 1994.
Stock options vest at a rate of 20% per year.
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - EMPLOYEE BENEFITS - Continued
During fiscal year 1998, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," SFAS No. 123 contains a fair-value based method
for valuing stock-based compensation that entities may use. The fair-value
based method measures compensation cost at the grant dated based on the
fair value of the award. Compensation is then recognized over the service
period, which is usually the vesting period. Alternatively, SFAS No. 123
permits entities to continue to account for stock options and similar
equity instruments under Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees." Entities that continue to
account for stock options using APB Opinion No. 25 are required to make
pro-forma disclosure of net earnings and earnings per share, as if the fair
value-based method of accounting defined in SFAS No. 123 had been applied.
Management has determined that the Company will continue to account for
stock based compensation using APB Opinion No. 25. The pro-forma
disclosures required by SFAS No. 123 are not required as no options were
granted by the Company during the fiscal years ended June 30, 1998, 1997
and 1996.
A summary of the status of the Company's stock option plan as of June 30,
1998 and 1997, and the changes during the years ended on those dates is
presented below:
Year ended June 30,
---------------------
1998 1997
-------- --------
Unexercised options, beginning of year 95,466 110,742
Stock options exercised (13,446) (15,276)
-------- --------
Unexercised options, end of year 82,020 95,466
======== ========
STOCK-BASED COMPENSATION COSTS - Compensation costs related to stock-based
compensation plans (RRP plan and stock option plan) totaled $9,636, $32,142
and $64,302 for the years ended June 30, 1998, 1997 and 1996, 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 years 1998 and 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.
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O - REGULATORY AND CAPITAL MATTERS
The Association is subject to minimum regulatory capital standards
promulgated by the Office of Thrift Supervision (the "OTS"). Failure to
meet minimum capital requirements can initiate certain mandatory -- and
possibly additional discretionary -- actions by regulators that, if
undertaken, could have a direct material effect on its financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Association must meet specific capital
guidelines that involve quantitative measures of the Association's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Association's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
The minimum capital standards of the OTS generally require the maintenance
of regulatory capital sufficient to meet each of four tests, hereinafter
described as the tangible equity requirement, the core capital requirement,
the risk-based capital requirement and the Tier I risk-based capital
requirement. The tangible equity requirement provides for minimum tangible
capital (defined as stockholders' equity less all intangible assets) equal
to 1.5% of adjusted total assets. The core capital requirement provides for
minimum core capital (tangible capital plus certain forms of supervisory
goodwill and other qualifying intangible assets) equal to 4.0% of adjusted
total assets. The risk-based capital requirement provides for the
maintenance of core capital plus general loss allowances equal to 8.0% of
risk-weighted assets, while the Tier I risk-based capital requirement is
core capital equal to at least 4.0% of risk-weighed assets. In computing
risk-weighted assets, the Association multiplies the value of each asset on
its statement of financial condition by a defined risk-weighting factor,
e.g., one-to-four family residential loans carry a risk-weighted factor of
50%.
As of June 30, 1998 and 1997, management believes that the Association met
all capital adequacy requirements to which it is subject.
As of June 30, 1998:
<TABLE>
<CAPTION>
To be "well-capitalized"
For capital under prompt corrective
adequacy purposes action provisions
--------------------------- ------------------------
Actual Greater than or equal to: Greater than or equal to:
------------------------ --------------------------- ------------------------
Capital Ratio Capital Ratio Capital Ratio
----------- ----- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Tangible equity (1) $ 9,408,000 11.18% $ 1,262,070 1.50% NA NA
Core capital (1) $ 9,408,000 11.18% $ 3,365,520 4.00% $ 4,206,900 5.00%
Risk-based capital (2) $ 9,614,000 19.31% $ 3,982,720 8.00% $ 4,978,400 10.00%
Tier I risk-based capital (2) $ 9,408,000 18.90% $ 1,991,360 4.00% $ 2,987,040 6.00%
</TABLE>
(1) - To adjusted total assets
(2) - To risk-weighted assets
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O - REGULATORY AND CAPITAL MATTERS - Continued
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 in an amount of (i) up to 100% of its net earnings
to date during the year plus an amount equal to one-half of the amount by
which its total capital to assets ratio exceeded its fully phased-in
capital to assets ratio at the beginning of the year (ii) or 75% of its net
earnings for the most recent four quarters.
NOTE P - FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of the fair value of financial instruments, both assets
and liabilities whether or not recognized in the consolidated statements of
financial condition, for which it is practicable to estimate that value.
For financial instruments where quoted market prices are not available,
fair values are based on estimates using present value and other valuation
methods.
The methods used are greatly affected by the assumptions applied, including
the discount rate and estimates of future cash flows. Therefore, the fair
values presented may not represent amounts that could be realized in
exchange for certain financial instruments.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments at June 30,
1998 and 1997:
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.
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE P - FAIR VALUES OF FINANCIAL INSTRUMENTS - Continued
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, 1998 June 30, 1997
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 9,445,404 $ 9,445,404 $ 3,634,086 $ 3,634,086
Investments in certificates of deposit 1,478,514 1,487,868 4,435,425 4,430,000
Investment securities available-for-sale 2,743,518 2,743,518 3,477,168 3,477,168
Loans receivable 68,979,770 69,542,000 68,177,746 68,380,000
Federal Home Loan Bank stock 949,000 949,000 950,000 950,000
Financial liabilities
Deposits 53,671,860 53,893,547 50,345,972 50,640,000
Advances from Federal Home Loan Bank 18,964,890 18,857,039 19,000,000 18,957,000
</TABLE>
NOTE Q - LEGISLATIVE MATTERS
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.
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE R - 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 1998 1997
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 694,836 $ 706,956
Investments in certificates of deposits 689,458 690,127
Investment in subsidiary 10,569,296 10,492,580
Advances to subsidiary 634,359 285,291
Investment securities 256,104 199,680
Contract notes receivable 1,168,312 827,457
ESOP note receivable - subsidiary 378,235 447,005
Real estate acquired for development 231,870 435,484
Real estate held for investment 1,290,265 935,873
Other assets 298,785 317,044
------------ ------------
$ 16,211,520 $ 15,337,497
============ ============
Liabilities
Dividends payable $ 78,295 $ 78,372
Other liabilities 48,939 26,118
------------ ------------
127,234 104,490
Stockholders' equity
Common stock 8,905 8,905
Additional paid-in capital 8,483,110 8,398,857
Retained earnings 9,457,310 8,752,218
Treasury stock (1,643,697) (1,560,859)
Less common stock acquired by:
Employee stock ownership plan (341,270) (413,940)
Retention and recognition plan -- (9,636)
Net realized gains on available-for-sale securities 119,928 57,462
------------ ------------
16,084,286 15,233,007
------------ ------------
$ 16,211,520 $ 15,337,497
============ ============
</TABLE>
Condensed Statement of Income
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Operating income - interest and dividend income $ 255,172 $ 194,709 $ 167,429
Operating expenses 93,391 49,932 77,194
----------- ----------- -----------
Income before undistributed income of subsidiary 161,781 144,777 90,235
Equity in undistributed income of subsidiary 854,374 770,240 827,699
----------- ----------- -----------
Income before income tax 1,016,155 915,017 917,934
Provision (credit) for income tax (1,124) (6,308) 35,080
----------- ----------- -----------
Net income $ 1,017,279 $ 921,325 $ 882,854
=========== =========== ===========
</TABLE>
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE R - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS - Continued
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,017,279 $ 921,325 $ 882,854
Dividends received from subsidiary 1,000,000 1,000,000 1,000,000
Deferred income taxes 11,876 5,692 (8,990)
Adjustments to reconcile net income to net cash
from operating activities:
Equity in undistributed income of subsidiary (854,374) (770,240) (827,701)
Other 8,567 28,450 33,481
----------- ----------- -----------
Net cash from operating activities 1,183,348 1,185,227 1,079,644
Cash flows from investing activities:
Purchase of investment securities (63,559) (51,444) (64,587)
Proceeds from sale of investment securities 50,000 -- 253,420
Proceeds from sale of real estate
for development 240,000 -- --
Investment in real estate for development (390,479) (938,671) (442,550)
Investment in and advances to subsidiary (349,068) 519,411 (224,304)
(Increase) decrease in contract notes
receivable (340,855) (17,503) 6,206
Payment received on ESOP debt 68,770 68,770 68,770
(Increase) decrease in other assets 19,131 -- (88,557)
----------- ----------- -----------
(766,060) (419,437) (491,602)
Cash flows from financing activities:
Treasury stock purchased (184,375) (620,825) (418,750)
Proceeds from options exercised 67,231 76,380 58,990
Dividends paid (312,264) (318,159) (329,756)
----------- ----------- -----------
(429,408) (862,604) (689,516)
----------- ----------- -----------
Net increase in cash and cash equivalents (12,120) (96,814) (101,474)
Cash and cash equivalents, beginning of year 706,956 803,770 905,244
----------- ----------- -----------
Cash and cash equivalents, end of year $ 694,836 $ 706,956 $ 803,770
=========== =========== ===========
</TABLE>
<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 21, 1998 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 and adjusted
for the Company's stock split during fiscal 1998. 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.
QUARTER ENDED HIGH LOW DIVIDENDS
------------- ---- --- ---------
March 31, 1996............................ 8.875 8.125 .050
June 30, 1996............................. 8.625 8.000 .050
September 30, 1996........................ 8.375 7.500 .050
December 31, 1996......................... 8.625 8.125 .050
March 31, 1997............................ 9.375 8.250 .050
June 30, 1997............................. 9.563 9.000 .050
September 30, 1997........................ 11.438 9.500 .050
December 31, 1997......................... 14.750 10.875 .050
March 31, 1998............................ 15.250 12.500 .050
June 30, 1998............................. 15.000 13.375 .050
- ----------
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 15, 1998 was $10.75.
At September 15, 1998, there were 1,549,392 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, 1998 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.
<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
Senior Vice President and Corporate Counsel
for the Iowa's Community Bankers/Diversified
Management Services, Inc.
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
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Subsidiary or Percent of State of
Parent Organization Ownership Incorporation
- ------ ------------ --------- -------------
<S> <C> <C> <C>
StateFed Financial Corporation State Federal Savings and Loan 100% Federal
Association of Des Moines
State Federal Savings and Loan State Service Corporation 100% Iowa
Association of Des Moines
</TABLE>
EXHIBIT 23
[VMHC&S LETTERHEAD]
INDEPENDENT AUDITOR'S CONSENT
We consent to the use of our independent auditor's report, dated August 7, 1998,
appearing in the Annual Report on Form 10-KSB of StateFed Financial Corporation
for the year ended June 30, 1998.
/s/ Vroman, McGowen, Hurst, Clark & Smith, P.C.
Des Moines, Iowa
September 28, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 9,445
<INT-BEARING-DEPOSITS> 1,479
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,744
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 69,186
<ALLOWANCE> 206
<TOTAL-ASSETS> 89,802
<DEPOSITS> 53,672
<SHORT-TERM> 6,088
<LIABILITIES-OTHER> 1,081
<LONG-TERM> 12,877
0
0
<COMMON> 9
<OTHER-SE> 16,075
<TOTAL-LIABILITIES-AND-EQUITY> 89,802
<INTEREST-LOAN> 5,988
<INTEREST-INVEST> 835
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 6,823
<INTEREST-DEPOSIT> 2,887
<INTEREST-EXPENSE> 1,156
<INTEREST-INCOME-NET> 2,780
<LOAN-LOSSES> 52
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,821
<INCOME-PRETAX> 1,508
<INCOME-PRE-EXTRAORDINARY> 1,508
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,017
<EPS-PRIMARY> 0.68
<EPS-DILUTED> 0.66
<YIELD-ACTUAL> 8.23
<LOANS-NON> 96
<LOANS-PAST> 4
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 221
<CHARGE-OFFS> 67
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 206
<ALLOWANCE-DOMESTIC> 206
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 206
</TABLE>
