SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-22790
STATEFED FINANCIAL CORPORATION
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(Exact name of small business issuer as specified in its charter)
Delaware 42-1410788
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(State of other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) or Number)
519 Sixth Avenue, Des Moines, Iowa 50309
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(Address of principal executive offices)
(515) 282-0236
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(Issuer's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [ ]
State the number of Shares outstanding of each of the issuer's classes
of common equity, as the latest date:
As of May 11, 1999, there were 1,549,004 shares of the Registrant's
common stock issued and outstanding.
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STATEFED FINANCIAL CORPORATION
Form 10-QSB
Index
Financial Information Page No.
Item 1. Consolidated Financial Statements:
Consolidated Statements of Financial Condition
as of March 31, 1999 and June 30, 1998 3
Consolidated Statements of Operations for
the Three Month Periods Ending March 31, 1999
and March 31, 1998 and for the Nine Month Periods
ending March 31, 1999 and March 31, 1998 4
Consolidated Statements of Comprehensive Income for
The Three Months Ending March 31, 1999 and
March 31, 1998 and for the Nine Months ending
March 31, 1999 and March 31, 1998 5
Consolidated Statement of Stockholders'
Equity for the Nine Months ended March 31, 1999 6
Consolidated Statements of Cash Flows
for the Nine Months ended March 31, 1999 and
March 31, 1998 7
Notes to Consolidated Financial Statements 8
Items 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. Other Information 18
Signatures 19
2
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STATEFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, 1999 and June 30, 1998
ASSETS (Unaudited)
March 31, 1999 June 30, 1998
-------------- -------------
<S> <C> <C>
Cash and amounts due from depository institutions $10,827,280 $ 9,445,404
Investments in certificates of deposit $ 982,474 $ 1,478,514
Investment securities $ 1,945,404 $ 2,743,518
Loans receivable, net $69,768,819 $68,979,770
Real estate acquired for development $ 236,602 $ 231,870
Real estate held for investment, net $ 2,223,501 $ 2,262,060
Property acquired in settlement of loans $ 1,175,784 $ 1,286,452
Office property and equipment, net $ 1,532,726 $ 1,564,077
Federal Home Loan Bank stock, at cost $ 1,147,600 $ 949,000
Accrued interest receivable $ 543,249 $ 542,246
Other assets $ 331,177 $ 318,654
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TOTAL ASSETS $90,714,616 $89,801,565
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $54,752,957 $53,671,860
Advances from Federal Home Loan Bank $18,899,492 $18,964,890
Advances from borrowers for taxes and insurance $ 5,224 $ 340,686
Accrued interest payable $ 71,360 $ 134,251
Dividends payable $ 116,175 $ 78,295
Income taxes:current and deferred $ 366,239 $ 232,019
Other liabilities $ 156,977 $ 295,278
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TOTAL LIABILITIES $74,368,424 $73,717,279
Stockholders' equity:
Common stock $ 8,905 $ 8,905
Additional paid-in capital $ 8,515,705 $ 8,483,110
Unearned compensation - restricted stock awards $ (288,211) $ (341,270)
Unrealized gain on investments $ 55,090 $ 119,928
Treasury stock $(1,885,621) $(1,643,697)
Retained earnings - substantially restricted $ 9,940,324 $ 9,457,310
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TOTAL STOCKHOLDERS' EQUITY $16,346,192 $16,084,286
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $90,714,616 $89,801,565
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<CAPTION>
STATEFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Month Periods Ending March 31, 1999 and 1998
and For the Nine Month Periods Ending March 31, 1999 and 1998
Three Months Ended Nine Months Ended
March 31 March 31
(Unaudited) (Unaudited)
---------------------------- --------------------------
1999 1998 1999 1998
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
Interest Income:
Loans $1,489,460 $1,500,673 $4,493,883 $4,488,678
Investments 59,736 105,214 211,399 386,218
Other 114,889 109,110 357,789 245,985
---------- ---------- ---------- ----------
Total interest income 1,664,085 1,714,997 5,063,071 5,120,881
Interest Expense:
Deposits 715,662 725,490 2,187,927 2,144,605
Borrowings 269,542 286,723 839,356 868,277
---------- ---------- ---------- ----------
Total interest expense 985,204 1,012,213 3,027,283 3,012,882
Net interest Income 678,881 702,784 2,035,788 2,107,999
Provision for loan losses 9,000 6,000 27,000 18,000
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 669,881 696,784 2,008,788 2,089,999
Non-interest Income:
Real estate operations 140,837 111,246 426,348 311,500
Gain on sale of investments 33,911 --- 40,202 ---
Gain on sale of real estate 33,075 29,137 34,347 30,974
Other 23,180 23,190 68,618 63,654
---------- ---------- ---------- ----------
Total non-interest income 231,003 163,573 569,515 406,128
Non-interest expense:
Salaries and benefits 216,604 231,626 674,493 695,969
Real estate operations 91,496 61,466 256,787 193,012
Occupancy and equipment 43,740 28,972 117,204 84,132
FDIC premiums and OTS assessments 22,827 22,692 45,118 42,568
Data processing 26,886 27,943 81,053 71,003
Other 86,221 92,318 280,000 262,892
---------- ---------- ---------- ----------
Total non-interest expense 487,774 465,017 1,454,655 1,349,576
---------- ---------- ---------- ----------
Income before income taxes 413,310 395,340 1,123,648 1,146,551
Income tax expense 137,240 127,365 369,720 381,095
---------- ---------- ---------- ----------
Net income $ 276,070 $ 267,975 $ 753,928 $ 765,456
========== ========== ========== ==========
Basic earnings per share $0.19 $0.18 $0.51 $0.52
Diluted earnings per share $0.18 $0.17 $0.49 $0.50
</TABLE>
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<CAPTION>
STATEFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Month Periods Ending March 31, 1999 and 1998
and For the Nine Month Periods Ending March 31, 1999 and 1998
Three Months Ended Nine Months Ended
March 31 March 31
(Unaudited) (Unaudited)
-------------------------- --------------------------
1999 1998 1999 1998
----------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Net income $276,070 $267,975 $753,928 $765,456
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on
securities arising during period $(35,066) $ 23,550 $(37,903) $104,607
-------- -------- -------- --------
Reclassification adjustment $(22,721) $ --- $(26,935) $ ---
-------- -------- -------- --------
$(57,787) $ 23,550 $(64,838) $104,607
-------- -------- -------- --------
Comprehensive income $218,283 $291,525 $689,090 $870,063
======== ======== ======== ========
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STATEFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Nine Months Ended March 31, 1999 and 1998
(Unaudited)
Balance - June 30, 1998 $16,084,286
Additional paid in capital 32,595
Other comprehensive income--unrealized gain on
investment securities, net of deferred income taxes (64,838)
Dividends declared (270,915)
Repurchase of 31,500 shares treasury stock (320,000)
Stock options exercised (9,612 shares) 78,077
ESOP common stock released for allocation 53,059
Net income 753,928
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Balance - March 31, 1999 $16,346,192
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<CAPTION>
STATEFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Nine Month Periods Ending March 31, 1999 and March 31, 1998
(Unaudited)
<S> <C> <C>
Cash Flows From Operating Activities March 31, 1999 March 31, 1998
-------------- --------------
Net Income $ 753,928 $ 765,456
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 122,256 59,032
Amortization of purchase loan discounts (60) (7,738)
Amortization of ESOP 85,655 123,439
Deferred loan fees (10,151) (14,608)
Provision for losses on loans 27,000 11,623
Change in:
Accrued interest receivable (1,002) 22,488
Other assets (12,524) (23,746)
Accrued interest payable (62,892) (59,304)
Other liabilities (4,080) 134,554
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NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 898,130 $ 1,011,196
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in certificates of deposit $ (99,054) $ ---
Maturity of investments in certificates of deposit 596,225 2,954,004
Purchase of available-for-sale investment securities (323,199) (697,058)
Proceeds from sale or maturity of available-for-sale
investment securities 1,055,342 1,050,000
(Purchase) redemption of FHLB Stock (198,600) ---
Net (increase) decrease in loans outstanding (805,837) (1,346,532)
Investment in real estate held for development (4,731) 209,549
Investment in real estate held for investment (16,855) 136,542
Investment in real estate acquired in settlement of loans 110,668 (353,246)
Purchase of office property and equipment (35,492) (222,466)
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NET CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES $ 278,467 $ 1,730,793
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 1,081,097 $ 3,696,753
Advances from the Federal Home Loan Bank --- 11,000,000
Repayment of advances from the Federal Home Loan Bank (65,398) (11,013,941)
Net decrease in advances from borrowers (335,463) (465,126)
Proceeds from stock options exercised 78,077 78,616
Dividends paid (233,034) (234,115)
Purchase of treasury stock (320,000) (184,375)
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NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES $ 205,279 $ 2,877,812
----------- -----------
CHANGE IN CASH AND CASH EQUIVALENTS $ 1,381,876 $ 5,619,801
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CASH AND CASH EQUIVALENTS, beginning of period $ 9,445,404 $ 3,634,086
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CASH AND CASH EQUIVALENTS, end of period $10,827,280 $ 9,253,887
=========== ===========
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STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ending March 31, 1999 and March 31, 1998
And for the Nine Months Ending March 31, 1999 and March 31, 1998
(Unaudited)
1. BASIS OF PRESENTATIONS
These consolidated financial statements are unaudited (with the
exception of the Consolidated Statement of Financial Condition for June 30,
1998). These consolidated financial statements were prepared in accordance with
instructions for Form 10-QSB and therefore, do not include all disclosures
necessary for a complete presentation of the statements of financial condition,
statements of income and statements of cash flows in accordance with generally
accepted accounting principles. However, in the opinion of management, all
adjustments necessary for a fair presentation of the consolidated financial
statements have been included. Results for any interim period are not
necessarily indicative of results expected for the year. The interim
consolidated financial statements include the accounts of StateFed Financial
Corporation (the "Corporation"), its subsidiary, State Federal Savings and Loan
Association (the "Association" or "State Federal") and the Association's
subsidiary, State Service Corporation.
These statements should be read in conjunction with the consolidated
financial statements and related notes, which are incorporated by reference in
the Company's Annual Report on Form 10-KSB for the year, ended June 30, 1998.
2. EARNINGS PER SHARE OF COMMON STOCK
Basic earnings per share are computed based upon the weighted-average
shares outstanding during the period, less shares in the ESOP that are
unallocated and are not committed to be released.
Diluted earnings per share are computed by considering common stocks
outstanding and dilutive potential common shares to be issued under the
Company's stock option plan.
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<S> <C> <C>
For the three months For the nine months
ended March 31, 1999 ended March 31, 1999
Weighted Average Shares Outstanding:
--------------------------- -------------------------
Basic earnings per share 1,485,950 1,487,868
Fully diluted earnings per share 1,525,166 1,535,540
For the three months For the six months ended
ended March 31, 1998 March 31, 1998
Weighted Average Shares Outstanding:
--------------------------- -------------------------
Basic earnings per share 1,488,133 1,485,538
Fully diluted earnings per share 1,545,924 1,542,346
</TABLE>
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3. REGULATORY CAPITAL REQUIREMENTS
Pursuant to Federal law, savings institutions must meet three separate
capital requirements. The Association's capital ratios and balances at March 31,
1999 are as follows:
Amount %
------- ------
Tangible Capital: (Dollars in thousands)
Association's $ 7,544 8.79%
Requirement 1,288 1.50%
------- -----
Excess $ 6,256 7.29%
Core Capital:
Association's $ 7,544 8.79%
Requirement 3,434 4.00%
------- -----
Excess $ 4,110 4.79%
Risk-Based Capital:
Association's $ 7,777 15.25%
Requirement 4,080 8.00%
------- -----
Excess $ 3,697 7.25%
4. STOCK OPTION PLAN
At June 30, 1998 there were unexercised options for 82,014 shares of
common stock under the terms of the StateFed Financial Corporation 1993 Stock
Option Plan. The options have an exercise price of $5 per share. There were
9,612 shares exercised during the nine months ended March 31, 1999.
5. STOCK REPURCHASE PLAN
On February 18, 1998, the Company's Board of Directors authorized
management to repurchase up to 77,980 shares of the Company's common stock over
the next twelve months. During the three month period ending March 31, 1999,
5,000 shares were repurchased. As of March 31, 1999 a total of 31,500 shares
have been repurchased since February 18, 1998, at a cost of $392,500.
9
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PART I ITEM 2
STATEFED FINANCIAL CORPORATION
Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
The accompanying Consolidated Financial Statements include StateFed
Financial Corporation (the "Company") and its wholly owned subsidiary, State
Federal Savings and Loan Association (the "Association"). All significant
inter-company transactions and balances are eliminated in consolidation. The
Company's results of operations are primarily dependent on the Association's net
interest margin, which is the difference between interest income earned on
interest-earning assets and interest expense paid on interest-bearing
liabilities. The Association's net income is also affected by the level of its
non-interest expenses, such as employee compensation and benefits, occupancy
expenses, and other expenses.
When used in this Form 10-Q and in future filings with the SEC, in the
Company's press releases or other public or shareholder communications, as well
as in oral statements made by the executive officers of the Company or its
primary subsidiary, the words or phrases "will likely result," "are expected
to," "will continue," "is anticipated," "estimated," "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 advise readers that the factors listed above could affect its
financial performance and could cause its 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.
Financial Condition
The Company's total assets increased $900,000, or 1.0%, from $89.8
million at June 30, 1998 to $90.7 million at March 31, 1999. This increase was
due primarily to an increase in cash and amounts due from depository
institutions of $1.4 million, and an increase in net loans receivable of
$800,000, partially offset by a decrease in investment securities of $800,000
and a decrease in investments in certificates of deposit of $500,000.
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Net loans receivable increased $800,000, or 1.1%, from $69.0 million at
June 30, 1998 to $69.8 million at March 31, 1999. The increase in the loan
portfolio occurred as a result of an increase in loan originations comprised
primarily of fixed-rate mortgage loans on residential properties and adjustable
rate mortgage loans on commercial real estate.
Total deposits increased by $1.1 million, or 2.0%, from $53.7 million
at June 30, 1998 to $54.8 million at March 31, 1999. Money market fund accounts
increased $1.2 million and NOW accounts increased $342,000, while certificate
accounts decreased $461,000 and passbook accounts decreased $44,000. The
increase was the result of the company competitively pricing its products.
Total stockholders' equity increased $261,900 from $16.1 million at
June 30, 1998 to $16.3 million at March 31, 1999. The increase was due
primarily, to net income of $753,900 and accounting for employee stock awards
and options of $163,700, partially offset by the result of the treasury stock
repurchases of $320,000, dividends declared of $270,900, and a change in net
unrealized gains on investment securities of $64,800.
Comparison of Operating Results for the Three Month Periods Ending March 31,
1999 and March 31, 1998
General. Net income increased $8,100 to $276,100 for the three months
ended March 31, 1999 from $268,000 for the three months ended March 31, 1998.
The increase was primarily the result of an increase in non-interest income of
$67,400, partially offset by a decrease in net interest income of $23,900, an
increase in non-interest expense of $22,800, and an increase in income tax
expense of $9,900.
Net Interest Income. Net interest income decreased $23,900, from
$702,800 for the three months ended March 31, 1998 to $678,900 for the three
months ended March 31, 1999. This decrease was the result of a decrease in
interest income of $50,900, offset by a decrease in interest expense $27,000.
Interest Income. Interest income decreased $50,900, from $1.71 million
for the three months ended March 31, 1998 to $1.66 million for the three months
ended March 31, 1999 primarily as a result of a decrease in the rates earned on
interest earning assets.
Interest Expense. Interest expense decreased $27,000 from $1.0 million
in the three months ended March 31, 1998 to $985,200 for the three months ended
March 31, 1999. This decrease resulted primarily from a decrease in the balance
of deposit accounts and borrowings, and also slightly lower interest rates paid
on these accounts.
Provision for Loan Losses. The provision for loan losses increased
$3,000 in the three months ended March 31, 1999 as compared to the three months
ended March 31, 1998. The provision during the three months ended March 31, 1999
was based on management's analysis of the allowance for loan losses. The Company
will continue to monitor its allowance for loan losses and make future additions
to the allowance through the provision for loan losses as economic conditions
dictate. Although the Company maintains its allowance for loan losses at a
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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 for future periods.
Non-interest Income. Non-interest income increased $67,400 from
$163,600 in the three months ended March 31, 1998 to $231,000 in the three
months ended March 31, 1999. This increase reflects increased income from the
Company's real estate operations as well as an increase in gain on sale of
investments.
Non-interest Expense. Non-interest expense increased from $465,000 in
the three months ended March 31, 1998 to $487,800 in the three months ended
March 31, 1999. This increase of $22,800, was primarily the result of an
increase in real estate operations expense of $30,000 and an increase in
occupancy and equipment expense of $14,800, partially offset by a decrease in
salaries and benefits expense of $15,000.
Income Tax Expense. Income tax expense was $137,200 for the three
months ended March 31, 1999 compared to $127,400 for the three months ended
March 31, 1998, an increase of $9,800, primarily due to the increase in taxable
income.
Comparison of the Nine Month Periods Ending March 31, 1999 and March 31, 1998
General. Net income decreased $11,500 from $765,400 for the nine months
ended March 31, 1998 to $753,900 for the nine months ended March 31, 1999. The
decrease was primarily the result of a decrease in net interest income of
$72,200, an increase in non-interest expense of $105,100, and an increase in the
provision for loan losses of $9,000, partially offset by an increase in
non-interest income of $163,400 and a decrease in income tax expense of $11,400.
Net Interest Income. Net interest income decreased $72,200, from $2.1
million for the nine months ended March 31, 1998 to $2.0 million for the nine
months ended March 31, 1999. This decrease was primarily the result of a
decrease in the rates earned on interest earning assets, partially offset by a
decrease on rates paid on deposits and borrowings.
Interest Income. Interest income decreased $57,800, from $5.12 million
for the nine months ended March 31, 1998 to $5.06 million the nine months ended
March 31, 1999. The slight decrease is a result of a decrease in the rates
earned on interest earning assets.
Interest Expense. Interest expense increased $14,400 from $3.01 million
in the nine months ended March 31, 1998 to $3.03 million in the nine months
ended March 31, 1999. This increase resulted from a slight increase in the
balance of deposits, partially offset by a decrease in the rates paid on
deposits and borrowings.
Provision for Loan Losses. The provision for loan losses increased
$9,000 in the nine months ended March 31, 1999 as compared to the nine months
ended March 31, 1998. The provision during the nine months ended March 31, 1999
was based on management's analysis of
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the allowance for loan losses. The Company will continue to monitor its
allowance for loan losses and make future additions to the allowance through the
provision for loan losses as economic conditions dictate. 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 for future periods.
Non-interest Income. Non-interest income increased $163,400 from
$406,100 in the nine months ended March 31, 1998 to $596,500 in the nine months
ended March 31, 1999. The increase was primarily the result of an increase in
real estate operations of $114,800 and an increase in gain on sale of
investments of $40,200.
Non-interest Expense. Non-interest expense increased from $1.35 million
in the nine months ended March 31, 1998 to $1.45 million in the nine months
ended March 31, 1999. This increase of $105,100 was primarily the result of an
increase of $63,800 in real estate operations expense, an increase in occupancy
and equipment expense of $33,100, an increase in other non-interest expense of
$17,100, and an increase in data processing expense of $10,000, partially offset
by a decrease in salaries and benefit expense of $21,500.
Income Tax Expense. Income tax expense decreased from $381,100 for the
nine months ended March 31, 1998 to $369,700 for the nine months ended March 31,
1999, a decrease of $11,400. The decrease was primarily due to the decrease in
taxes on taxable income.
Liquidity and Capital Resources. The Company's primary sources of funds
are deposits, principal and interest payments on loans, FHLB Des Moines
advances, and funds provided by operations. While scheduled loan repayments and
maturity of short-term investments are a relatively predictable source of funds,
deposit flows are greatly influenced by general interest rates, economic
conditions, and competition. Current Office of Thrift Supervision regulations
require the bank to maintain cash and eligible investments in an amount equal to
at least 5% of customer accounts and short-term borrowings to assure its ability
to meet demands for withdrawals and repayment of short-term borrowings. As of
March 31, 1999, the Association's liquidity ratio was 19.96%, which exceeded the
minimum regulatory requirement on such date.
The Company uses its capital resources principally to meet its ongoing
commitments, to fund maturing certificates of deposits and loan commitments,
maintain its liquidity, and meet its foreseeable short- and long term needs. The
Company expects to be able to fund or refinance, on a timely basis, its material
commitments and long-term liabilities.
Regulatory standards impose the following capital requirements: a
risk-based capital standard expressed as a percent of risk adjusted assets, a
leverage ratio of core capital to total adjusted assets, and a tangible capital
ratio expressed as a percent of total adjusted assets. As of March 31, 1999, the
Association exceeded all fully phased-in regulatory capital requirements.
At March 31, 1999, the Association's tangible capital was $7.5 million,
or 8.79%, of adjusted total assets, which is in excess of the 1.5% requirement
by $6.3 million. In addition, at March 31, 1999, the Association had core
capital of $7.5 million, or 8.79%, of adjusted total assets, which exceeds the
3% requirement by $5.0 million. The Association had risk-based
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capital of $7.8 million at March 31, 1999 or 15.25% of risk-adjusted assets
which exceeds the 8.0% risk-based capital requirements by $3.7 million.
Regulatory Developments
As of March 31, l999, management is not aware of any current
recommendations by regulatory authorities which, if they were to be implemented,
would have or are reasonable likely to have a material adverse effect on the
Company's liquidity, capital resources of operations.
Year 2000 Compliance
General. The year 2000 ("Y2K") issue confronting the Bank and its
suppliers, customers, customers' suppliers and competitors centers on the
inability of computer systems to recognize the year 2000. Many existing computer
programs and systems originally were programmed with six digit dates that
provided only two digits to identify the calendar year in the date field. With
the impending new millennium, these programs and computers will recognize "00"
as the year 1900 rather than the year 2000.
Financial institution regulators recently have increased their focus
upon Y2K compliance issues and have issued guidance concerning the
responsibilities of senior management and directors. The Federal Financial
Institutions Examination Council ("FFIEC") has issued several interagency
statements on Y2K Project Management Awareness. These statements require
financial institutions to, among other things, examine the Y2K implications of
their reliance on vendors and with respect to data exchange and the potential
impact of the Y2K issue on their customers, supplies and borrowers. These
statements also require each federally regulated financial institution to survey
its exposure, measure risk and prepare a plan to address the Y2K issue. In
addition, the federal banking regulators have issued safety and soundness
guidelines to be followed by insured depository institutions, such as the Bank,
to assure resolution of any Y2K problems. The federal banking agencies have
asserted that Y2K testing and certification is a key safety and soundness issue
in conjunction with regulatory examinations and, thus, that an institution's
failure to address appropriately the Y2K issue could result in supervisory
action, including the reduction of the institution's supervisory ratings, the
denial of applications for approval of mergers or acquisitions, or the
imposition of civil money penalties.
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Risk. Like most financial institutions service providers, the Bank and
its operations may be significantly affected by the Y2K issue due to its
dependence on technology and date-sensitive data. Computer software and hardware
and other equipment, both within and outside the Bank's direct control and third
parties with whom the Bank electronically or operationally interfaces (including
without limitation its customers and third party vendors) are likely to be
affected. If computer systems are not modified in order to be able to identify
the year 2000, many computer applications could fail or create erroneous
results. As a result, many calculations which rely on date field information,
such as interest, payment or due dates and other operating functions, could
generate results which are significantly misstated, and the Bank could
experience an inability to process transactions, prepare statements or engage in
similar normal business activities. Likewise, under certain circumstances, a
failure to adequately address the Y2K issue could adversely effect the viability
of the Bank's suppliers and creditors and the creditworthiness of its borrowers.
Thus, if not adequately addressed, the Y2K issue could result in a significant
adverse impact on the Bank's operations and, in turn, its financial condition
and results of operations.
State of Readiness. During November 1997, the Bank formulated its plan to
address the Y2K issue. Since that time, the Bank has taken the following steps:
o Established senior management advisory and review responsibilities;
o Completed a Bank-wide inventory of applications and system software;
o Built an internal tracking database for application and vendor
software;
o Developed compliance plans and schedules for all lines of business;
o Initiated vendor compliance verification;
o Begun awareness and education activities for employees through
existing internal communication channels; and
o Developed a process to respond to customer inquires as well as help
educate customers on the Y2K issue.
The following paragraphs summarize the phases of the Bank's Y2K plan:
Awareness Phase. The Bank formally established a Y2K plan headed by a
senior manager, and a project team was assembled for management of the Y2K
project. The project team created a plan of action that includes milestones,
budge estimates, strategies, and methodologies to track and report the status of
the project. Members of the project team also attended conferences and
information sharing sessions to gain more insight into the Y2K issue and
potential strategies for addressing it. This phase is substantially complete.
Assessment Phase. The Bank's strategies were further developed with
respect to how the objectives of the Y2K plan would be achieved, and aY2K
business risk assessment was made to quantify the extent of the Bank's Y2K
exposure. A corporate inventory (which is periodically updated as new technology
is acquired and as systems progress through subsequent phases) was
15
<PAGE>
developed to identify and monitor Y2K readiness for information systems
(hardware, software, utilities and vendors) as well as environmental systems
(security systems, facilities, etc.). Systems were prioritized based on business
impact and available alternatives. Mission critical systems supplied by vendors
were researched to determine Y2K readiness. If Y2K-ready versions were not
available, the Bank began identifying functional replacements, which were either
upgradable or currently Y2K-ready, and a formal plan was developed to repair,
upgrade or replace all mission critical systems. This phase is substantially
complete.
Beginning in October 1998, all unsecured credits greater than $100,000
were sent a questionnaire developed by the Bank's credit administration staff to
evaluate Y2K exposure. The Bank also contacted its most significant borrowers
informing them of the Y2K issue. Because the Bank's loan portfolio is primarily
real estate-based and is diversified with regard to individual borrowers and
types of businesses, and the Bank's primary market area is not significantly
dependent on one employer or industry, the Bank does not expect any significant
or prolonged Y2K-related difficulties that will affect net earnings or cash
flow. As part of the current credit approval process, all new and renewed loans
are evaluated for Y2K risk.
Renovation Phase. The Bank's corporate inventory revealed that Y2K
upgrades were available for all vendor supplied mission critical systems, and
all these Y2K-ready versions have been delivered and placed into production and
have entered the validation process.
Validation Phase. The validation phase is designed to test the ability
of hardware and software to accurately process date sensitive data. The Bank
currently is in the process of validation testing of each mission critical
system, with the degree of completion of such testing ranging from 25% to 100%.
The Bank's validation phase is expected to be completed by March 31, 1999 for
all mission critical systems. During the validation testing process to date, no
significant Y2K problems have been identified relating to any modified or
upgraded mission critical systems.
Implementation Phase. The Bank's plan calls for putting Y2K-ready code
into production before having actually completed Y2K validation testing.
Y2K-ready modified or upgraded versions have been installed and placed into
production with respect to all mission critical systems.
Bank Resources Invested. The Bank's Y2K project team has been assigned
the task of ensuring that all systems across the Bank are identified, analyzed
for Y2K compliance, corrected, if necessary, tested, and changes put into
service by the end of 1998. The Y2K project team members represent all
functional areas of the Bank, including branches, data processing, loan
administration, accounting, item processing and operations, compliance, internal
audit, human resources, and marketing. The team is headed by a vice president
who reports directly to a member of the Bank's senior management team. The
Bank's board of Directors oversees the Y2K plan and provides guidance and
resources to, and received quarterly updates from, the Y2K project team.
The Bank expenses all costs associated with the required system changes
as those costs are incurred, and such costs are being funded through operating
cash flows. The Bank does not anticipate incurring significant additional
expense to implement additional corrective actions.
16
<PAGE>
Contingency Plans. During the assessment phase, the Bank began to
develop back-up contingency plans for each of its mission critical systems.
Virtually all of the Bank's mission critical systems are dependent upon third
party vendors or service providers, therefore, contingency plans include
selecting a new vendor or service provider and converting to their system. In
the event a current vendor's system fails during the validation phase and it is
determined that the vendor is unable or unwilling to correct the failure, the
Bank will convert to a new system from a pre-selected list of prospective
vendors. In each such case, realistic trigger dates have been established to
allow for orderly and successful conversions. For some systems, contingency
plans consist of using spreadsheet software or reverting to manual systems until
system problems can be corrected. Although the Bank has been informed that each
of its primary vendors anticipates that all mission critical systems either are
or will timely be Y2K-ready, no warranties have been received from such vendors.
17
<PAGE>
STATEFED FINANCIAL CORPORATION
Part II - Other Information
Item 1 - Legal Proceedings
Not applicable.
Item 2 - Changes in Securities Not applicable.
Item 3 - Defaults upon Senior Securities
Not applicable.
Item 4 - Submission of Matters to Vote of Security Holders
Not applicable.
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial data Schedule
(b) The following is a description of the Form 8-K's filed during
the three months ended March 31, 1999:
None
18
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly cause this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STATEFED FINANCIAL CORPORATION
Registrant
Date: May 18, 1999 /s/ John F. Golden
--------------------- ---------------------------------------
John F. Golden
President and Chief Executive Officer
Date: May 18, 1999 /s/ Andra K. Black
--------------------- ---------------------------------------
Andra K. Black
Executive Vice President and
Chief Financial Officer
19
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The schedule contains summary financial information extracted from the quarterly
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