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, 1999
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
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(Name of small business issuer in its charter)
Delaware 42-1410788
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
519 Sixth Avenue, Des Moines, Iowa 50309
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (515) 282-0236
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Securities Registered Pursuant to Section 12(b) of the Act:
None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
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(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: $7.5 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 22, 1999, was $13.8 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 22, 1999, there were issued and outstanding 1,509,100
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, 1999.
Part III of Form 10-KSB - Proxy Statement for 1999 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, 1999, the Company had $90.8 million of assets and
stockholders' equity of $16.1 million (or 17.73% 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,
1999, 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. 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 advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's
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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
General. The year 2000 ("Y2K") issue confronting the Company and its
suppliers, customers, customers' suppliers and competitors centers on the
inability of computer systems to recognize the year 2000. Many existing computer
programs 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, suppliers 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 Association, 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.
Risk. Like most financial institution service providers, the Company 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 Company's direct control and
third parties with whom the Company 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
Company 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 affect the viability of the Company'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 Company's operations
and, in turn, its financial condition and results of operations.
State of Readiness. During November 1997, the Company 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 Company-wide inventory of applications and system
software;
o Completed renovation and testing of the Company's mission-critical
systems;
o Built an internal tracking database for application and vendor
software;
o Developed compliance plans and schedules for all lines of business;
o Monitored vendor compliance verification;
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o Provided awareness and education activities for employees through
existing internal communication channels;
o Continued a process to respond to customer inquiries as well as help
educate customers on the Y2K issue; and
o Completed a detailed contingency plan in the event of interruptions
of service from our outside vendors and service providers.
The following paragraphs summarize the phases of the Company's Y2K plan:
Awareness Phase. The Company 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, budget 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 getting more
insight into the Y2K issue and potential strategies for addressing it.
This phase is substantially complete.
Assessment Phase. The Company's strategies were further developed
with respect to how the objectives of the Y2K plan would be achieved, and
a Y2K business risk assessment was made to quantify the extent of the
Company's Y2K exposure. A corporate inventory (which is periodically
updated as new technology is acquired and as systems progress through
subsequent phases) was developed to identify and monitor Y2K readiness for
information 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 Company 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.
The Company also contacted its most significant borrowers informing
them of the Y2K issue. Because the Company's loan portfolio is primarily
real estate-based and is diversified with regard to individual borrowers
and types of businesses, and the Company's primary market area is not
significantly dependent on one employer or industry, the Company 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 Company'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 Company currently is near completion of testing of each
mission-critical system, with the degree of completion of such testing at
97%. The Company's validation phase is expected to be completed by
October, 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 system.
Implementation Phase. The Company'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.
Company Resources Invested. The Company's Y2K project team has been
assigned the task of ensuring that all systems across the Company are
identified, analyzed for Y2K compliance,
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corrected, if necessary, tested, and changes put into service by October
31, 1999. The Y2K project team members represent all functional areas of
the Company, 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 Company's senior management team. The
Company's Board of Directors oversees the Y2K plan and provides guidance
and resources to, and receives quarterly updates from, the Y2K project
team.
The Company 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 Company does not anticipate incurring
significant additional expense to implement additional corrective actions.
Contingency Plans. During the assessment phase, the Company developed
backup contingency plans for each of its mission-critical systems. Virtually all
the Company's mission-critical systems are dependent upon third party vendors or
service providers. These vendors have been monitored throughout the 1998-1999
year and all have provided evidence of their efforts to comply with the Y2K
problem. All that we consider as our primary providers have appeared to have
resolved any Y2K problems that they may have had, with the exception of some of
the public utilities, which have issued statements periodically through the
local press. As a backup plan to the possibility of electrical service being
interrupted, the Company has made arrangements to have an electrical generator
on site large enough to totally power one of the branch offices. All other
vendors and suppliers that we consider part of our mission-critical systems have
provided statements of assurance and have shown due diligence as to their own
readiness. The Company has also put into place provisions to have additional
currency available and will have limitations on withdrawals in the event of
aggressive pressures on the Company's cash on hand.
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, 1999, the Association's net loan portfolio totaled $72.3
million.
The Loan Committee of the Association, comprised of executive officers
Golden, Wood and Black, loan officers Komma and Stravers and Director of
Development Joe Sinnwell, has the immediate responsibility for the supervision
of the Association's loan portfolio. The Association's loan policy requires full
Board approval on all loans. The Board relies heavily on the recommendation of
CEO Golden in making its decisions. The Board of Directors has responsibility
for the overall supervision of the Association's loan portfolio and in addition,
reviews all foreclosure actions or the taking of deeds-in-lieu of foreclosure.
The aggregate amount of loans that the Association is permitted to make
under applicable federal regulations to any one borrower, including related
entities, or the aggregate amount that the Association could have invested in
any one real estate project is generally the greater of 15% of unimpaired
capital and surplus or $500,000. See "Regulation Federal Regulation of Savings
Associations." At June 30, 1999, the maximum amount which the Association could
have lent to any one borrower and the borrower's related entities was
approximately $1.2 million. At that date the largest loan to one borrower or
group of related borrowers consisted of 44 loans to one borrower totaling $2.4
million. All of such loans were performing in accordance with their terms.
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.
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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,
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1999 1998 1997
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Amount Percent Amount Percent Amount Percent
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(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans
One-to-four family ............... $ 46,178 62.55% $ 44,441 63.41% $ 44,582 63.93%
Multi-family and Commercial ...... 24,340 32.91 23,115 32.98 20,469 29.35
Construction or development ...... 2,025 2.74 1,535 2.19 3,549 5.09
-------- ------ -------- ------ -------- ------
Total real estate loans ...... 72,543 98.26 69,091 98.58 68,600 98.37
Other Loans:
Consumer Loans:
Deposit account .................. 141 0.19 159 0.23 242 .35
Other ............................ 1,140 1.55 838 1.19 891 1.28
-------- ------ -------- ------ -------- ------
Total consumer loans ......... 1,281 1.74 997 1.42 1,133 1.63
-------- ------ -------- ------ -------- ------
Total loans .................. 73,824 100.00% 70,088 100.00% 69,733 100.00%
====== ====== ======
Less:
Loans in process ................. (963) (605) (999)
Deferred fees and discounts ...... (288) (297) (335)
Allowance for losses ............. (242) (206) (221)
-------- -------- --------
Total loans receivable, net ...... $ 72,331 $ 68,980 $ 68,178
======== ======== ========
</TABLE>
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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,
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1999 1998 1997
-----------------------------------------------------------------------------
Amount Present Amount Present Amount Percent
-----------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed Rate Loans:
Real estate:
One-to-four family .............. $ 28,310 38.35% $ 21,041 30.02% $ 14,119 20.25%
Multi-family and Commercial ..... 14,330 19.41 12,582 17.95 9,456 13.56
Construction or development ..... 2,025 2.74 1,535 2.19 3,549 5.09
-------- ------ -------- ------ -------- ------
Total real estate loans ...... 44,665 60.50 35,158 50.16 27,124 38.90
Consumer ......................... 1,281 1.74 997 1.42 1,133 1.62
-------- ------ -------- ------ -------- ------
Total fixed-rate loans ....... 45,946 62.24 36,155 51.58 28,257 40.52
Adjustable Rate Loans:
Real estate:
One-to-four family .............. 17,868 24.20 23,400 33.39 30,463 43.69
Multi-family and Commercial ..... 10,010 13.56 10,533 15.03 11,013 15.79
-------- ------ -------- ------ -------- ------
Total real estate loans ...... 27,878 37.76 33,933 48.42 41,476 59.48
Consumer ......................... -- -- -- -- -- --
-------- ------ -------- ------ -------- ------
Total adjustable rate loans .. 27,878 -- 33,933 48.42 41,476 59.48
-------- ------ -------- ------ -------- ------
Total loans .................. 73,824 100.00% 70,088 100.00% 69,733 100.00%
====== ====== ======
Less:
Loans in process ................. (963) (605) (999)
Deferred fees and discounts ...... (288) (297) (335)
Allowance for loan losses ........ (242) (206) (221)
-------- -------- --------
Total loans receivable, net .. $ 72,331 $ 68,980 $ 68,178
======== ======== ========
</TABLE>
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The following schedule illustrates the interest rate sensitivity of the
Company's loan portfolio at June 30, 1999. 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
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Multi-family and Construction
One-to-four family Commercial or Development Consumer Total
------------------ ---------------- ---------------- ----------------- ----------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ --------- ------ -------- ------ -------- ------ -------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Due During Years Ending June 30, (1)
2000 ............................... $ 503 9.23% $ 2,112 8.77% $ 984 9.20% $ 147 8.89% $ 3,746 8.95%
2001 ............................... 333 9.31 472 8.76 -- -- 247 9.08 1,052 9.01
2002 ............................... 977 8.74 1,190 8.90 -- -- 224 9.24 2,391 8.87
2003-2007 .......................... 8,927 8.41 9,123 8.63 -- -- 626 8.95 18,676 8.53
After 2007 ......................... 35,438 7.85 11,443 8.60 $ 1,041 8.41 37 10.50 47,959 8.04
</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, 2000 which have fixed
interest rates is $43.2 million, while the total amount of loans due after such
dates which have floating or adjustable interest rates is $26.8 million.
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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, 1999, the Company's one-to-four family residential
mortgage loans totaled $46.2 million, or approximately 62.6% 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, 1999, the Association originated $2.1 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 $9.1
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, 1999.
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 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, 1999, the Company
had $24.3 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 with the exception of one loan aggregating
$525,000 secured by a multi-family dwelling. Such loan was 30 days past due at
September 1, 1999. 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
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an aggregate balance of $5.3 million at June 30, 1999, secured by real estate
located in Texas, Colorado, Nebraska, Minnesota, Nevada, California, Illinois
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 at the dates indicated.
June 30,
--------------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Multi-family ............ $ 9,222 $10,141 $ 8,231
Nursing homes ........... 1,697 1,638 1,671
Churches ................ 1,129 1,208 1,164
Motels .................. 3,321 1,688 1,336
Shopping Centers ........ 1,136 1,568 1,155
Commercial Buildings .... 7,835 6,872 6,912
------- ------- -------
Total .............. $24,340 $23,115 $20,469
======= ======= =======
This portfolio grew by $1.2 million from fiscal 1998 to fiscal 1999, and
the portfolio comprised the same percentage of total loans, 33.0%, in fiscal
1999 as it did in fiscal 1998, when commercial loans also comprised 33.0% 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, 1999, the Company had $2.0 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, 1999, 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 than
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<PAGE>
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, 1999, 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, 1999, such loans totaled $1.0 million or
approximately 1.4% of the Association's gross loan portfolio. During the fiscal
year ended June 30, 1999, the Association originated $829,000 in auto loans as
compared to $418,000 originated in the same period ended June 30, 1998. At June
30, 1999, the Association's consumer loan portfolio totaled $1.3 million or
1.74% 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 1999, the Company originated $16.6 million of loans, compared to
$16.5 million and $15.3 million in fiscal 1998 and 1997, respectively. The
Company has experienced significant repayments of loans during the last three
fiscal years. Principal repayments in fiscal 1999 decreased by $500,000 to $17.7
million from $18.2 million in fiscal 1998.
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.
11
<PAGE>
The following table shows the loan origination, purchase and repayment
activities of the Company for the periods indicated.
Year Ended June 30,
-------------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Originations by type:
Adjustable rate:
Real estate - one-to-four family ...... $ 2,093 $ 2,361 $ 5,020
- commercial .................... -- 60 96
Non-real estate - consumer ............ -- -- --
------- ------- -------
Total adjustable-rate ............. 2,093 2,421 5,116
Fixed rate:
Real estate - one-to-four family ...... 9,077 8,160 4,910
- commercial .................... 4,396 5,399 4,625
Non-real estate - consumer ............ 1,034 540 667
------- ------- -------
Total fixed-rate .................. 14,507 14,099 10,202
------- ------- -------
Total loans originated ............ 16,600 16,520 15,318
Purchases:
Real estate - one-to-four family ...... $ -- $ -- $ --
- commercial .................... 2,416 2,213 768
Non-real estate - consumer ............ -- -- --
------- ------- -------
Total loans ....................... 2,416 2,213 768
Mortgage-backed securities ............ -- -- --
------- ------- -------
Total purchases ................... 2,416 2,213 768
------- ------- -------
Repayments:
Principal repayments .................. $17,650 $18,241 $12,735
------- ------- -------
Total reductions .................. 17,650 18,241 12,735
------- ------- -------
Increase (decrease) in other items,
net .................................... 1,985 310 2,118
------- ------- -------
Net increase (decrease) ........... $ 3,351 $ 802 $ 5,469
======= ======= =======
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.
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.
12
<PAGE>
The following table sets forth information concerning delinquent mortgage
and other loans at June 30, 1999. 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 ............... 17 $ 893 1.93% 5 $1,039 4.27%
60-89 days ............... 9 636 1.38 -- -- --
90 days and over ......... 7 353 0.77 1 525 2.16
------ ------ ---- ------ ------ ----
Total delinquent loans 33 $1,882 4.08% 6 $1,564 6.43%
====== ====== ==== ====== ====== ====
</TABLE>
At June 30, 1999, there were two delinquent construction loans totaling
$219,000 and 8 consumer loans totaling $42,000. The ratio of delinquent loans to
total loans (net) was 5.13% at June 30, 1999.
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.
June 30,
------------------------------
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
Non-accruing loans:
One-to-four family ........................ $ -- $ 96 $ 810
------ ------ ------
Total .................................... -- 96 810
Accruing loans delinquent more
than 90 days:
One-to-four family ........................ 353 4 181
Multi-family and commercial real estate ... 525 -- --
------ ------ ------
Total .................................... 878 4 181
Foreclosed assets:
One-to-four family ........................ 345 484 334
Multi-family and commercial real estate ... 788 805 --
------ ------ ------
Total .................................... 1,133 1,289 334
Total non-performing assets ................ $2,011 $1,389 $1,325
====== ====== ======
Total as a percentage of total assets ...... 2.21% 1.55% 1.54%
====== ====== ======
Non-Performing Assets. Included in total non-performing assets are eight
mortgage loans secured by a one-to-four family dwellings totaling $353,000 and
one mortgage loan for $525,000 secured by a multi-family dwelling. The
multifamily loan is currently 30 days past due. One loan totaling $72,000 has
now been paid current. One loan totaling $70,000 is in the foreclosure process
and no loss is expected.
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
13
<PAGE>
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, 1999, 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, 1999, total classified assets comprised $1.1 million or 13.3%
of the Association's capital, or 1.26% of the Association's total assets.
At June 30, 1999 the Association had a total of $1.1 million in property
acquired in settlement of loans. Included in this total is $345,000 in a one- to
four-family dwelling and $788,000 in commercial real estate. Both of the
properties are presently leased with offers pending.
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, 1999, the Association had a total allowance
for loan losses of $242,000 or 0.33% 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.
14
<PAGE>
The following table sets forth an analysis of the Association's allowance
for loan losses.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period ...................... $ 206 $ 221 $ 240
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 ..................... 36 52 36
----- ----- -----
Balance at end of period ............................ $ 242 $ 206 $ 221
===== ===== =====
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
-----------------------------------------------------------
1999 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 ........... $ 69 62.55% $ 67 63.41% $ 67 63.93%
Multi-family and commercial real
estate ......................... 61 32.97 58 32.98 51 29.35
Construction ................... -- 2.74 -- 2.19 -- 5.09
Consumer ....................... 12 1.74 10 1.42 11 1.63
Unallocated .................... 100 -- 71 -- 92 --
---- ------ ---- ------ ---- ------
Total ........................ $242 100.00% $206 100.00% $221 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
15
<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, 1999, the Association's
liquidity ratio (liquid assets as a percentage of net withdrawable savings
deposits and current borrowings) was 15.19%. 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, 1999, the Company's cash and interest-bearing deposits in other
financial institutions totaled $8.5 million, or 9.36% of its total assets.
Certificates of deposits invested in other institutions totaled $884,000 or
0.97% of its total assets. The Association has a $1.1 million 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 $1.4 million or 1.54% of its
total assets invested in corporate securities, which includes preferred common
stocks and mutual funds. The Company has $406,000 or 0.45% 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.
16
<PAGE>
The following table sets forth the composition of the Bank's investment
portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------
1999 1998 1997
-------------- ---------------- -----------------
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 ................ $ 1,438 46.51% $ 1,301 35.23% $ 1,221 27.58%
Federal agency debt securities ............. 406 13.13 1,443 39.07 2,256 50.96
Municipal bonds ............................ 100 3.23 -- -- -- --
FHLB stock ................................... 1,148 37.13 949 25.70 950 21.46
------- ------- ------- ------- ------- -------
Total investment securities and FHLB
stock ...................................... $ 3,092 100.00% $ 3,693 100.00% $ 4,427 100.00%
======= ======= ======= ======= ======= =======
Other Interest-Earning Assets:
Interest-bearing deposits with banks ........ $ 8,212 90.28% $ 9,107 86.03% $ 3,453 43.80%
Certificates of deposit invested
in other institutions ....................... 884 9.72 1,479 13.97 4,430 56.20
------- ------- ------- ------- ------- -------
Total ...................................... $ 9,096 100.00% $10,586 100.00% $ 7,883 100.00%
======= ======= ======= ======= ======= =======
Average remaining life or term to repricing of
certificates of deposit .................... 1 year 1 year 1 year
</TABLE>
Contractual maturities of federal agency debt securities and municipal bonds are
shown below:
June 30, 1999
----------------------
Weighted
Book Average
Value Yield
------ --------
(Dollars in Thousands)
Due in one year or less .............. $202 8.35%
Due after one year through five years -- --
Due after five years through ten years 204 7.45
Due after ten years .................. 100 5.00
----
$506
====
17
<PAGE>
Sources of Funds
General. The Company's primary sources of funds are deposits, borrowings,
repayment of loan principal, sales of loan participations, maturing investments
in certificates of deposit, and funds provided from operations.
Borrowings, consisting of FHLB advances, may be used at times to
compensate for seasonal reductions in deposits or deposit inflows at less than
projected levels, and may be used on a longer-term basis to support expanded
lending activities.
Deposits. State Federal offers a variety of deposit accounts having a wide
range of interest rates and terms. The Association's deposits consist of
passbook savings accounts, NOW, and money market accounts, and certificate
accounts ranging in terms from three months to 60 months. The Association only
solicits deposits from its market area and does not currently use brokers to
obtain deposits. The Association relies primarily on competitive pricing
policies, advertising and customer service to attract and retain these deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates, and
competition.
The variety of deposit accounts offered by the Association has allowed it
to be competitive in obtaining funds and to respond with flexibility to changes
in consumer demand. The Association has become more susceptible to short-term
fluctuations in deposit flows, as customers have become more interest rate
conscious. The ability of the Association to attract and maintain certificates
of deposit accounts and the rates paid on these deposits has been and will
continue to be significantly affected by market conditions.
The following table sets forth the savings flows at the Association during
the periods indicated.
Year Ended June 30,
--------------------------------
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
Opening balance ........... $ 53,672 $ 50,346 $ 45,732
Deposits .................. 66,888 57,637 58,944
Withdrawals ............... (68,735) (57,179) (56,885)
Interest credited ......... 2,888 2,868 2,555
-------- -------- --------
Ending balance ............ $ 54,713 $ 53,672 $ 50,346
======== ======== ========
Net increase (decrease) ... $ 1,041 $ 3,326 $ 4,614
======== ======== ========
Percent increase (decrease) 1.94% 6.61% 10.09%
======== ======== ========
18
<PAGE>
The following table indicates the amount of the Association's certificates
of deposit and other deposits by time remaining until maturity as of June 30,
1999.
<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 ............. $ 6,803 $ 6,383 $10,289 $13,571 $37,046
Certificates of deposit of
$100,000 or more .......... 1,164 1,996 2,172 1,849 7,181
------- ------- ------- ------- -------
Total certificates of
deposit ................... $ 7,967 $ 8,379 $12,461 $15,420 $44,227
======= ======= ======= ======= =======
</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, 1999, the Association had $18.9 million in FHLB
advances.
At June 30, 1999, 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.
Year Ended June 30,
------------------------
1999 1997 1996
---- ---- ----
(Dollars In Thousands)
Maximum Balance:
FHLB advances ................................. $19,000 $19,000 $19,000
======= ======= =======
Average Balance:
FHLB advances ................................. $18,918 $18,992 $18,500
======= ======= =======
Weighted average interest rate of FHLB advances 5.70% 5.98% 6.34%
======= ======= =======
19
<PAGE>
Service Corporation Activities
Federal associations generally may invest up to 2% of their assets in
service corporations plus an additional 1% of assets if used for community
purposes. In addition, federal associations may invest up to 50% of their
regulatory capital in conforming loans to their service corporations. In
addition to investments in service corporations, federal associations are
permitted to invest an unlimited amount in operating subsidiaries engaged solely
in activities in which a federal association may engage directly.
State Federal has one service corporation, State Service Corporation,
located in Des Moines, Iowa. State Service Corporation was organized by State
Federal in 1976. State Service Corporation owns and operates a 60-unit apartment
complex, in Pleasant Hill, Iowa.
During the fiscal year ended June 30, 1999, State Service Corporation's
gross revenues from property management activities (consisting of rental income)
totaled approximately $328,400 and expenses (consisting of depreciation,
interest, property taxes, management fees, and maintenance) were $251,200.
Income tax expense totaled $36,300 for 1999. 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 $18,700. See Note G to the
Notes to Consolidated Financial Statements in the 1999 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, 1999 was approximately $27,500.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including State Federal and the
Holding Company. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders and to initiate injunctive actions. In general,
20
<PAGE>
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, 1999, the Association's lending
limit under this restriction was approximately $1.2 million.
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 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
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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, 1999 the Association had tangible capital of $7.7 million, or
9.01 % of adjusted total assets, which is approximately $6.5 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, 1999, the Association had core capital equal to $7.7 million,
or 9.01% of adjusted total assets, which is $5.2 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, 1999, State Federal had
no capital instruments that qualify as supplementary capital and $242,000 of
general loss reserves, which was less than 0.46% 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, 1999.
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.
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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, 1999, the Association had total risk-based capital of $8.0
million (including $7.7 million in core capital and $242,000 in qualifying
supplementary capital) and risk-weighted assets of $52.8 million or total
risk-based capital of 15.13% of risk-weighted assets. This amount was $3.8
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.
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
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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, 1999, the Association was in compliance with both
requirements, with an overall liquid asset ratio of 15.19% and a short-term
liquid assets ratio of 15.19%.
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.
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The OTS has adopted an amendment to its accounting regulations, which may
be made more stringent than GAAP by the OTS, to require that transactions be
reported in a manner that best reflects their underlying economic substance and
inherent risk and that financial reports must incorporate any other accounting
regulations or orders prescribed by the OTS.
Qualified Thrift Lender Test
All savings associations, including the Association, are required to meet
a qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings association to have at least 65% of its
portfolio assets (as defined by regulation) in qualified thrift investments on a
monthly average for nine out of every 12 months on a rolling basis. As an
alternative, the Savings Association may maintain 60% of its assets specified in
Section 770(a)(19) of the Internal Revenue Code. Under either test, such assets
primarily consist of residential housing related loans and investments. At June
30, 1999, 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 1998 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.
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Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation
The Holding Company is a unitary savings and loan holding company subject
to regulatory oversight by the OTS. As such, the Holding Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Holding Company and its non-savings association subsidiaries which also permits
the OTS to restrict or prohibit activities that are determined to be a serious
risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Holding Company
generally is not subject to activity restrictions. If the Holding Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Holding Company and any of its subsidiaries (other than the Association or
any other SAIF-insured savings association) would become subject to such
restrictions unless such other associations each qualify as a QTL and were
acquired in a supervisory acquisition.
If the Association fails the QTL test, the Holding Company must obtain the
approval of the OTS prior to continuing after such failure, directly or through
its other subsidiaries, any business activity other than those approved for
multiple savings and loan holding companies or their subsidiaries. In addition,
within one year of such failure the Holding Company must register as, and will
become subject to, the restrictions applicable to bank holding companies. The
activities authorized for a bank holding company are more limited than are the
activities authorized for a unitary or multiple savings and loan holding
company. See "--Qualified Thrift Lender Test."
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,
1999, 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.
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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, 1999, State Federal had $1.1 million 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 7.05% and were 6.44% for fiscal
year 1999.
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, 1999, dividends paid by the FHLB of Des
Moines to State Federal totaled $71,200 which constitutes a $6,500 increase from
the amount of dividends received in the fiscal year ended June 30, 1998. The
$17,900 dividend received for the quarter ended June 30, 1999 reflects an
annualized rate of 6.25%, which decreased 0.75% from the same quarter ended June
30, 1998, which was a rate of 7.0%.
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 1998, 1999, or 2000,
depending on whether it meets certain residential lending requirements. The Bank
previously established, and will continue to
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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, 1999.
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.
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
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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 21 commercial banks and approximately 30 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, 1999, the Company and its subsidiary had a total of 18
employees. The Association's employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.
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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, 1999.
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, 1999 was $1.2 million.
See Note I of Notes to Consolidated Financial Statements in the Annual Report to
Stockholders attached hereto as Exhibit 13.
Total
Approximate
Date Square Net Book Value at
Location Acquired Footage June 30, 1999
-------- -------- ------- -------------
Main Office:
519 Sixth Avenue January 3, 1995 3,300 $732,300
Des Moines, Iowa
Branch Office:
4018 University
Des Moines, Iowa 1985 4,000 $290,143
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, 1999 was $106,600. The net book value of
other furniture and equipment at June 30, 1999 was $36,700.
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, 1999.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Page 47 of the attached 1999 Annual Report to Stockholders is herein
incorporated by reference. The dividend payout ratio for June 30, 1999 was
37.3%.
30
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operation and Selected Financial Data
Pages 6 through 17 of the attached 1999 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, 1999 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 19
Consolidated Balance Sheets as of
June 30, 1999 and 1998 20
Consolidated Statements of Income
for the Years Ended June 30, 1999,
1998 and 1997 21
Consolidated Statements of
Stockholders' Equity for Years
Ended June 30, 1999, 1998 and 1997 23
Consolidated Statements of Cash Flows
for Years Ended June 30, 1999, 1998
and 1997 24
Notes to Consolidated Financial
Statements 25
With the exception of the aforementioned information, the Company's Annual
Report to Stockholders for the year ended June 30, 1999 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 1999, 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 1999, 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 1999, 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 1999, 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
Reference to Prior Filing
S-B Exhibit or Exhibit Number
Number Document Attached Hereto
------ -------- ---------------
3(i) Articles of Incorporation, including *
amendments thereto
3(ii) By-Laws 3(ii)
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
None.
- ----------------
* Filed as exhibits to the Company's Form S-1 registration statement filed
on September 23, 1993 (File No. 33-69314) pursuant to Section 5 of the
Securities Act of 1933. All of such previously filed documents are hereby
incorporated herein by reference in accordance with Item 601 of Regulation
S-K.
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 28, 1999 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 28, 1999 Date: September 28, 1999
------------------------------- -------------------------------------
/s/ Harry A. Winegar /s/ Eugene M. McCormick
HARRY A. WINEGAR EUGENE M. MCCORMICK
Director Director
Date: September 28, 1999 Date: September 28, 1999
------------------------------- -------------------------------------
/s/ Sidney M. Ramey /s/ Kevin J. Kruse
SIDNEY M. RAMEY KEVIN J. KRUSE
Director Director
Date: September 28, 1999 Date: September 28, 1999
------------------------------- -------------------------------------
/s/ Andra K. Black
ANDRA K. BLACK
Director, Executive Vice
President, Secretary and Chief
Financial and Accounting
Officer
Date: September 28, 1999
EXHIBIT 3(ii)
AMENDED AND RESTATED BYLAWS
<PAGE>
STATEFED FINANCIAL CORPORATION
AMENDED AND RESTATED BY-LAWS
ARTICLE I
STOCKHOLDERS
Section 1. Annual Meeting.
An annual meeting of the stockholders, for the election of directors to
succeed those whose terms expire and for the transaction of such other business
as may properly come before the meeting, shall be held at such place, on such
date, and at such time as the Board of Directors shall each year fix, which date
shall be within thirteen (13) months subsequent to the later of the date of
incorporation or the last annual meeting of stockholders.
Section 2. Special Meetings.
Subject to the rights of the holders of any class or series of preferred
stock of the Corporation, special meetings of stockholders of the Corporation
may be called only by the Board of Directors pursuant to a resolution adopted by
a majority of the total number of directors which the Corporation would have if
there were no vacancies on the Board of Directors (hereinafter the "Whole
Board").
Section 3. Notice of Meetings.
Written notice of the place, date, and time of all meetings of the
stockholders shall be given, not less than ten (10) nor more than sixty (60)
days before the date on which the meeting is to be held, to each stockholder
entitled to vote at such meeting, except as otherwise provided herein or
required by law (meaning, here and hereinafter, as required from time to time,
by the Delaware General Corporation Law or the Certificate of Incorporation of
the Corporation).
When a meeting is adjourned to another place, date or time, written notice
need not be given of the adjourned meeting if the place, date and time thereof
are announced at the meeting at which the adjournment is taken; provided,
however, that if the date of any adjourned meeting is more than thirty (30) days
after the date for which the meeting was originally noticed, or if a new record
date is fixed for the adjourned meeting, written notice of the place, date and
time of the adjourned meeting shall be given in conformity herewith. At any
adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
Section 4. Quorum.
At any meeting of the stockholders, the holders of at least one-third of
all of the shares of the stock entitled to vote at the meeting, present in
person or by proxy, shall constitute a quorum for all purposes, unless or except
to the extent that the presence of a larger number may be required by law.
If a quorum shall fail to attend any meeting, the chairman of the meeting
or the holders of a majority of the shares of stock entitled to vote who are
present, in person or by proxy, may adjourn the meeting to another place, date
or time.
If a notice of any adjourned special meeting of stockholders is sent to
all stockholders entitled to vote thereat, stating that it will be held with
those present constituting a quorum, then except as otherwise required by law,
those present at such adjourned meeting shall constitute a quorum, and all
matters shall be determined by a majority of the votes cast at such meeting.
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Section 5. Organization.
Such person as the Board of Directors may have designated or, in the
absence of such a person, the Chairman of the Board of the Corporation or, in
his or her absence, such person as may be chosen by the holders of a majority of
the shares entitled to vote who are present, in person or by proxy, shall call
to order any meeting of the stockholders and act as chairman of the meeting. In
the absence of the Secretary of the Corporation, the secretary of the meeting
shall be such person as the chairman appoints.
Section 6. Conduct of Business.
(a) The chairman of any meeting of stockholders shall determine the
order of business and the procedure at the meeting, including such regulation of
the manner of voting and the conduct of discussion as seem to him or her in
order. The polls for each matter upon which the stockholders will vote at the
meeting will be opened and closed in accordance with law.
(b) At any annual meeting of the stockholders, only such business
shall be conducted as shall have been brought before the meeting (i) by or at
the direction of the Board of Directors, or (ii) by any stockholder of the
Corporation who is entitled to vote with respect thereto and who complies with
the notice procedures set forth in this Section 6(b). For business to be
properly brought before an annual meeting by a stockholder, the business must
relate to a proper subject matter for stockholder action and the stockholder
must have given timely notice thereof in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice must be delivered or mailed to
and received at the principal executive offices of the Corporation not less than
sixty (60) days prior to the date of the annual meeting; provided, however, that
in the event that less than forty (40) days' notice or prior public disclosure
of the date of the meeting is given or made to stockholders, notice by the
stockholder must be received not later than the close of business on the 10th
day following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure was made. A stockholder's notice to the
Secretary shall set forth as to each matter such stockholder proposes to bring
before the annual meeting (i) a brief description of the business desired to be
brought before the annual meeting and the reasons for conducting such business
at the annual meeting, (ii) the name and address, as they appear on the
Corporation's books, of the stockholder who proposed such business, (iii) the
class and number of shares of the Corporation's capital stock that are
beneficially owned by such stockholder, and (iv) any material interest of such
stockholder in such business. Notwithstanding anything in these By-laws to the
contrary, no business shall be brought before or conducted at an annual meeting
except in accordance with the provisions of this Section 6(b). The officer of
the Corporation or other person presiding over the annual meeting shall, if the
facts so warrant, determine and declare to the meeting that business was not
properly brought before the meeting in accordance with the provisions of this
Section 6(b) and, if he should so determine, he shall so declare to the meeting
and any such business so determined to be not properly brought before the
meeting shall not be transacted.
At any special meeting of the stockholders, only such business shall
be conducted as shall have been brought before the meeting by or at the
direction of the Board of Directors or by or at the direction of the holders of
not less than one-tenth of all the outstanding capital stock of the Corporation
entitled to vote at whose instance the special meeting is called.
(c) Only persons who are nominated in accordance with the procedures
set forth in these By-laws shall be eligible for election as directors.
Nominations of persons for election to the Board of Directors of the Corporation
may be made at a meeting of stockholders at which directors are to be elected
only (i) by or at the direction of the Board of Directors or (ii) by any
stockholder of the Corporation entitled to vote for the election of directors at
the meeting who complies with the notice procedures set forth in this Section
6(c). Such nominations, other than those made by or at the direction of the
Board of Directors, shall be made by timely notice in writing to the Secretary
of the Corporation. To be timely, a stockholder's notice shall be delivered or
mailed to and received at the principal executive offices of the Corporation not
less than sixty (60) days prior to the date of the meeting; provided, however,
that in the event that less than forty (40) days' notice or prior disclosure of
the date of the meeting is given or made to stockholders, to be timely, notice
by the stockholder must be so received not later than the close of business on
the 10th day following the day on which such notice of the date of the meeting
was mailed or such public disclosure was made. Such stockholder's notice shall
set forth (i) as to each person whom such stockholder proposes to nominate for
election or re-election as a director, all information relating to such person
that is required to be disclosed in solicitations of proxies
2
<PAGE>
for election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (including
such person's written consent to being named in the proxy statement as a nominee
and to serving as a director if elected); and (ii) as to the stockholder giving
the notice, (x) the name and address, as they appear on the Corporation's books,
of such stockholder, and (y) the class and number of shares of the Corporation's
capital stock that are beneficially owned by such stockholder. At the request of
the Board of Directors, any person nominated by the Board of Directors for
election as a director shall furnish to the Secretary of the Corporation that
information required to be set forth in a stockholder's notice of nomination
which pertains to the nominee. No person shall be eligible for election as a
director of the Corporation unless nominated in accordance with the provisions
of this Section 6(c). The officer of the Corporation or other person presiding
at the meeting shall, if the facts so warrant, determine that a nomination was
not made in accordance with such provisions and, if he or she should so
determine, he or she shall so declare to the meeting and the defective
nomination shall be disregarded.
Section 7. Proxies and Voting.
At all meetings of stockholders, every stockholder entitled to vote may
vote in person or by proxy executed in writing (or as otherwise permitted under
applicable law) by the stockholder or his duly authorized attorney-in-fact in
accordance with the procedures established for the meeting. Proxies solicited on
behalf of the management shall be voted as directed by the stockholder or, in
the absence of such direction, as determined by a majority of the Board of
Directors. No proxy shall be valid after eleven months from the date of its
execution except for a proxy coupled with an interest.
Each stockholder shall have one (1) vote for every share of stock entitled
to vote which is registered in his or her name on the record date for the
meeting, except as otherwise provided herein or in the Certificate of
Incorporation of the Corporation or as required by law.
All voting, including the election of directors but excepting where
otherwise required by law, may be by a voice vote; provided, however, that the
Board of Directors, in its discretion, or the officer of the Corporation
presiding at the meeting of stockholders, in his discretion, may require that
any votes cast at such meeting shall be cast pursuant to a roll call. Every vote
taken by ballot shall be counted by an inspector or inspectors appointed by the
Board of Directors in advance of the meeting of stockholders and such inspector
or inspectors shall act at the meeting or any adjournment thereof and make a
written report thereof, in accordance with law.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law or as provided in the Certificate of
Incorporation, all other matters shall be determined by a majority of the votes
cast.
Section 8. Stock List.
The officer who has charge of the stock transfer books of the Corporation
shall prepare and make, in the time and manner required by applicable law, a
list of stockholders entitled to vote and shall make such list available for
such purposes, at such places, at such times and to such persons as required by
law. The stock transfer books shall be the only evidence as to the identity of
the stockholders entitled to examine the stock transfer books or to vote in
person or by proxy at any meeting of stockholders.
Section 9. Consent of Stockholders in Lieu of Meeting.
Subject to the rights of the holders of any class or series of preferred
stock of the Corporation, any action required or permitted to be taken by the
stockholders of the Corporation must be effected at a duly called annual or
special meeting of stockholders of the Corporation and may not be effected by
any consent in writing by such stockholders.
Section 10. Inspectors of Election.
The Board of Directors shall, in advance of any meeting of stockholders,
appoint one or more persons as inspectors of election to act at the meeting or
any adjournment thereof and make a written report thereof in accordance with
law.
3
<PAGE>
ARTICLE II
BOARD OF DIRECTORS
Section 1. General Powers, Number and Term of Office.
The business and affairs of the Corporation shall be managed by or under
the direction of the Board of Directors. The number of directors shall be set as
provided for in the Certificate of Incorporation. The number of directors who
shall constitute the Whole Board shall be such number as the Board of Directors
shall from time to time have designated except that in the absence of any such
designation, such number shall be seven (7). The Board of Directors shall
annually elect a Chairman of the Board and a President from among its members
and shall designate, when present, either the Chairman of the Board or the
President to preside at its meetings.
The directors, other than those who may be elected by the holders of any
class or series of preferred stock, shall be divided into three classes, as
nearly equal in number as reasonably possible, with the term of office of the
first class to expire at the conclusion of the first annual meeting of
stockholders, the term of office of the second class to expire at the conclusion
of the annual meeting of stockholders one year thereafter and the term of office
of the third class to expire at the conclusion of the annual meeting of
stockholders two years thereafter, with each director to hold office until his
or her successor shall have been duly elected and qualified. At each annual
meeting of stockholders, commencing with the first annual meeting, directors
elected to succeed those directors whose terms expire shall be elected for a
term of office to expire at the conclusion of the third succeeding annual
meeting of stockholders after their election, with each director to hold office
until his or her successor shall have been duly elected and qualified.
Section 2. Vacancies and Newly Created Directorships.
Subject to the rights of the holders of any class or series of preferred
stock then outstanding, and unless the Board of Directors otherwise determines,
newly created directorships resulting from any increase in the authorized number
of directors or any vacancies in the Board of Directors resulting from death,
resignation, retirement, disqualification, removal from office or other cause
may be filled only by a majority vote of the directors then in office, though
less than a quorum, and each director so chosen shall hold office for a term
expiring at the annual meeting of stockholders at which the term of office of
the class to which he or she has been elected expires, and until such director's
successor shall have been duly elected and qualified. No decrease in the number
of authorized directors constituting the Board shall shorten the term of any
incumbent director.
Section 3. Regular Meetings.
Regular meetings of the Board of Directors shall be held at such place or
places, on such date or dates, and at such time or times as shall have been
established by the Board of Directors and publicized among all directors. A
notice of each regular meeting shall not be required.
Section 4. Special Meetings.
Special meetings of the Board of Directors may be called by one-third
(1/3) of the directors then in office (rounded up to the nearest whole number)
or by the Chairman of the Board and shall be held at such place, on such date,
and at such time as they or he or she shall fix. Notice of the place, date, and
time of each such special meeting shall be given to each director by whom it is
not waived by mailing written notice not less than five (5) days before the
meeting or by telegraphing or telexing or by facsimile transmission of the same
not less than twenty-four (24) hours before the meeting. Unless otherwise
indicated in the notice thereof, any and all business may be transacted at a
special meeting.
Section 5. Quorum.
At any meeting of the Board of Directors, a majority of the authorized
number of directors then constituting the Board shall constitute a quorum for
all purposes. If a quorum shall fail to attend any meeting, a majority of those
present may adjourn the meeting to another place, date, or time, without further
notice or waiver thereof.
4
<PAGE>
Notwithstanding the above, at any adjourned meeting of the Board of Directors,
at least one-third of the authorized number of directors then constituting the
Board shall constitute a quorum for all purposes.
Section 6. Participation in Meetings By Conference Telephone.
Members of the Board of Directors, or of any committee thereof, may
participate in a meeting of such Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other and such participation shall
constitute presence in person at such meeting.
Section 7. Conduct of Business.
At any meeting of the Board of Directors, business shall be transacted in
such order and manner as the Board may from time to time determine, and all
matters shall be determined by the vote of a majority of the directors present,
except as otherwise provided herein or required by law. Action may be taken by
the Board of Directors without a meeting if all members thereof consent thereto
in writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors.
Section 8. Powers.
The Board of Directors may, except as otherwise required by law, exercise
all such powers and do all such acts and things as may be exercised or done by
the Corporation, including, without limiting the generality of the foregoing,
the unqualified power:
(1) To declare dividends from time to time in accordance with law;
(2) To purchase or otherwise acquire any property, rights or
privileges on such terms as it shall determine;
(3) To authorize the creation, making and issuance, in such form as
it may determine, of written obligations of every kind, negotiable or
non-negotiable, secured or unsecured, and to do all things necessary in
connection therewith;
(4) To remove any officer of the Corporation with or without cause,
and from time to time to devolve the powers and duties of any officer upon any
other person for the time being;
(5) To confer upon any officer of the Corporation the power to
appoint, remove and suspend subordinate officers, employees and agents;
(6) To adopt from time to time such stock, option, stock purchase,
bonus or other compensation plans for directors, officers, employees and agents
of the Corporation and its subsidiaries as it may determine;
(7) To adopt from time to time such insurance, retirement, and other
benefit plans for directors, officers, employees and agents of the Corporation
and its subsidiaries as it may determine; and,
(8) To adopt from time to time regulations, not inconsistent with
these By-laws, for the management of the Corporation's business and affairs.
Section 9. Compensation of Directors.
Directors, as such, may receive, pursuant to resolution of the Board of
Directors, fixed fees and other compensation for their services as directors,
including, without limitation, their services as members of committees of the
Board of Directors.
5
<PAGE>
ARTICLE III
COMMITTEES
Section 1. Committees of the Board of Directors.
The Board of Directors, by a vote of a majority of the Whole Board of
Directors, may from time to time designate committees of the Board, with such
lawfully delegable powers and duties as it thereby confers, to serve at the
pleasure of the Board and shall, for those committees and any others provided
for herein, elect a director or directors to serve as the member or members,
designating, if it desires, other directors as alternate members who may replace
any absent or disqualified member at any meeting of the committee. Any committee
so designated may exercise the power and authority of the Board of Directors to
declare a dividend, to authorize the issuance of stock or to adopt a certificate
of ownership and merger pursuant to Section 253 of the Delaware General
Corporation Law if the resolution which designated the committee or a
supplemental resolution of the Board of Directors shall so provide. In the
absence or disqualification of any member of any committee and any alternate
member in his or her place, the member or members of the committee present at
the meeting and not disqualified from voting, whether or not he or she or they
constitute a quorum, may by unanimous vote appoint another member of the Board
of Directors to act at the meeting in the place of the absent or disqualified
member.
Section 2. Conduct of Business.
Each committee may determine the procedural rules for meeting and
conducting its business and shall act in accordance therewith, except as
otherwise provided herein or required by law. Adequate provision shall be made
for notice to members of all meetings; one-third (1/3) of the members shall
constitute a quorum unless the committee shall consist of one (1) or two (2)
members, in which event one (1) member shall constitute a quorum; and all
matters shall be determined by a majority vote of the members present. Action
may be taken by any committee without a meeting if all members thereof consent
thereto in writing and the writing or writings are filed with the minutes of the
proceedings of such committee.
Section 3. Nominating Committee.
The Board of Directors shall appoint a Nominating Committee of the Board,
consisting of not less than three (3) members, one of which shall be the
Chairman of the Board. The Nominating Committee shall have authority (a) to
review any nominations for election to the Board of Directors made by a
stockholder of the Corporation pursuant to Section 6(c)(ii) of Article I of
these By-laws in order to determine compliance with such By-law, and (b) to
recommend to the Whole Board nominees for election to the Board of Directors to
replace those directors whose terms expire at the annual meeting of stockholders
next ensuing.
ARTICLE IV
OFFICERS
Section 1. Generally.
(a) As soon as may be practicable after the annual meeting of
stockholders, the Board of Directors shall choose a Chairman of the Board, a
President, one or more Vice Presidents, a Secretary and a Chief Financial
Officer and from time to time may choose such other officers as it may deem
proper. The Chairman of the Board and the President shall be chosen from among
the directors. Any number of offices may be held by the same person.
(b) The term of office of all officers shall be until the next
annual election of officers and until their respective successors are chosen,
but any officer may be removed from office at any time by the affirmative vote
of a majority of the authorized number of directors then constituting the Board
of Directors.
6
<PAGE>
(c) All officers chosen by the Board of Directors shall each have
such powers and duties as generally pertain to their respective offices, subject
to the specific provisions of this Article IV. Such officers shall also have
such powers and duties as from time to time may be conferred by the Board of
Directors or by any committee thereof.
Section 2. Chairman of the Board of Directors.
The Chairman of the Board of Directors of the Corporation shall have
general responsibility for the conduct of meetings of the Board of Directors,
subject to the direction of the Board of Directors, Section 3 herein and to
Article I, Section 6.
Section 3. President.
The President shall be the chief executive officer and, subject to the
control of the Board of Directors, shall have general power over the management
and oversight of the administration and operation of the Corporation's business
and general supervisory power and authority over its policies and affairs. He
shall see that all orders and resolutions of the Board of Directors and of any
committee thereof are carried into effect.
Each meeting of the stockholders and of the Board of Directors shall be
presided over by the Chairman of the Board, or, in his absence, the President,
or, in his absence, by such officer as has been designated by the Board of
Directors or, in his absence, by such officer or other person as is chosen at
the meeting. The Secretary or, in his absence, the General Counsel of the
Corporation or such officer as has been designated by the Board of Directors or,
in his absence, such officer or other person as is chosen by the person
presiding, shall act as secretary of each such meeting.
Section 4. Vice President.
The Vice President or Vice Presidents, if any, shall perform the duties of
the President in his absence or during his disability to act. In addition, the
Vice Presidents shall perform the duties and exercise the powers usually
incident to their respective offices and/or such other duties and powers as may
be properly assigned to them from time to time by the Board of Directors, the
Chairman of the Board or the President.
Section 5. Secretary.
The Secretary or an Assistant Secretary shall issue notices of meetings,
shall keep their minutes, shall have charge of the seal and the corporate books,
shall perform such other duties and exercise such other powers as are usually
incident to such offices and/or such other duties and powers as are properly
assigned thereto by the Board of Directors, the Chairman of the Board or the
President.
Section 6. Chief Financial Officer.
The Chief Financial Officer shall have charge of all monies and securities
of the Corporation, other than monies and securities of any division of the
Corporation which has a treasurer or financial officer appointed by the Board of
Directors, and shall keep regular books of account. The funds of the Corporation
shall be deposited in the name of the Corporation by the Chief Financial Officer
with such banks or trust companies as the Board of Directors from time to time
shall designate. He or she shall sign or countersign such instruments as require
his or her signature, shall perform all such duties and have all such powers as
are usually incident to such office and/or such other duties and powers as are
properly assigned to him or her by the Board of Directors, the Chairman of the
Board or the President, and may be required to give bond for the faithful
performance of his or her duties in such sum and with such surety as may be
required by the Board of Directors.
Section 7. Assistant Secretaries and Other Officers.
The Board of Directors may appoint one or more assistant secretaries and
one or more assistants to the Chief Financial Officer, or one appointee to both
such positions, which officers shall have such powers and shall perform such
7
<PAGE>
duties as are provided in these By-laws or as may be assigned to them by the
Board of Directors, the Chairman of the Board or the President.
Section 8. Action with Respect to Securities of Other Corporations.
Unless otherwise directed by the Board of Directors, the President or any
officer of the Corporation authorized by the President shall have power to vote
and otherwise act on behalf of the Corporation, in person or by proxy, at any
meeting of stockholders of or with respect to any action of stockholders of any
other corporation in which this Corporation may hold securities and otherwise to
exercise any and all rights and powers which this Corporation may possess by
reason of its ownership of securities in such other corporation.
ARTICLE V
STOCK
Section 1. Certificates of Stock.
Each stockholder shall be entitled to a certificate signed by, or in the
name of the Corporation by, the President or a Vice President, and by the
Secretary or an Assistant Secretary, or the Chief Financial Officer or an
assistant to the Chief Financial Officer, certifying the number of shares owned
by him or her. Any or all of the signatures on the certificate may be by
facsimile.
Section 2. Transfers of Stock.
Transfers of stock shall be made only upon the transfer books of the
Corporation kept at an office of the Corporation or by transfer agents
designated to transfer shares of the stock of the Corporation. Except where a
certificate is issued in accordance with Section 4 of Article V of these
By-laws, an outstanding certificate for the number of shares involved shall be
surrendered for cancellation before a new certificate is issued therefor.
Section 3. Record Date.
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders, or to receive payment of
any dividend or other distribution or allotment of any rights or to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix a record
date, which record date shall not precede the date on which the resolution
fixing the record date is adopted and which record date shall not be more than
sixty (60) nor less than ten (10) days before the date of any meeting of
stockholders, nor more than sixty (60) days prior to the time for such other
action as hereinbefore described; provided, however, that if no record date is
fixed by the Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the day next preceding the day
on which the meeting is held, and, for determining stockholders entitled to
receive payment of any dividend or other distribution or allotment of rights or
to exercise any rights of change, conversion or exchange of stock or for any
other purpose, the record date shall be at the close of business on the day on
which the Board of Directors adopts a resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
Section 4. Lost, Stolen or Destroyed Certificates.
In the event of the loss, theft or destruction of any certificate of
stock, another may be issued in its place pursuant to such regulations as the
Board of Directors may establish concerning proof of such loss, theft or
destruction and concerning the giving of a satisfactory bond or bonds of
indemnity.
8
<PAGE>
Section 5. Regulations.
The issue, transfer, conversion and registration of certificates of stock
shall be governed by such other regulations as the Board of Directors may
establish.
ARTICLE VI
NOTICES
Section 1. Notices.
Except as otherwise specifically provided herein or required by law, all
notices required to be given to any stockholder, director, officer, employee or
agent shall be in writing and may in every instance be given effectively by hand
delivery to the recipient thereof, by depositing such notice in the mail,
postage paid, by sending such notice by prepaid telegram or mailgram or by
sending such notice by facsimile machine or other electronic transmission. Any
such notice shall be addressed to such stockholder, director, officer, employee
or agent at his or her last known address as the same appears on the books of
the Corporation. The time when such notice is received, if hand delivered, or
dispatched, if delivered through the mail, by telegram or mailgram or by
facsimile machine or other electronic transmission, shall be the time of the
giving of the notice.
Section 2. Waivers.
A written waiver of any notice, signed by a stockholder, director,
officer, employee or agent, whether before or after the time of the event for
which notice is to be given, shall be deemed equivalent to the notice required
to be given to such stockholder, director, officer, employee or agent. Neither
the business nor the purpose of any meeting need be specified in such a waiver.
ARTICLE VII
MISCELLANEOUS
Section 1. Facsimile Signatures.
In addition to the provisions for use of facsimile signatures elsewhere
specifically authorized in these By-laws, facsimile signatures of any officer or
officers of the Corporation may be used whenever and as authorized by the Board
of Directors or a committee thereof.
Section 2. Corporate Seal.
The Board of Directors may provide a suitable seal, containing the name of
the Corporation, which seal shall be in the charge of the Secretary. If and when
so directed by the Board of Directors or a committee thereof, duplicates of the
seal may be kept and used by the Chief Financial Officer or by an Assistant
Secretary or an assistant to the Chief Financial Officer.
Section 3. Reliance upon Books, Reports and Records.
Each director, each member of any committee designated by the Board of
Directors, and each officer of the Corporation shall, in the performance of his
or her duties, be fully protected in relying in good faith upon the books of
account or other records of the Corporation and upon such information, opinions,
reports or statements presented to the Corporation by any of its officers or
employees, or committees of the Board of Directors so designated, or by any
other person as to matters which such director or committee member reasonably
believes are within such other person's professional or expert competence and
who has been selected with reasonable care by or on behalf of the Corporation.
9
<PAGE>
Section 4. Fiscal Year.
The fiscal year of the Corporation shall begin on July 1 of each year.
Section 5. Time Periods.
In applying any provision of these By-laws which requires that an act be
done or not be done a specified number of days prior to an event or that an act
be done during a period of a specified number of days prior to an event,
calendar days shall be used, the day of the doing of the act shall be excluded
and the day of the event shall be included.
ARTICLE VIII
AMENDMENTS
The By-laws of the Corporation may be adopted, amended or repealed as
provided in Article SEVENTH of the Certificate of Incorporation of the
Corporation.
10
EXHIBIT 13
REGISTRANT'S ANNUAL REPORT
TO SECURITY HOLDERS
<PAGE>
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT
- --------------------------------------------------------------------------------
[LOGO]
STATEFED FINANCIAL CORPORATION
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
President's Message ....................................................... 1
Selected Consolidated Financial Information ............................... 4
Management's Discussion and Analysis of Financial
Condition and Results of Operation ...................................... 6
Consolidated Financial Statements ......................................... 18
Stockholder Information ................................................... 47
Corporate Information ..................................................... 48
i
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October 20, 1999
Dear Shareholder,
Again we are pleased to report to you on the financial condition of your
company as of June 30, 1999.
It was an exceedingly challenging year as evidenced by media reports, for
all financial institutions, but for StateFed Financial Corporation it was also a
very rewarding year. For the second consecutive time in our seventy-three years
of operation we achieved the one million dollar mark in profitability which,
importantly, came primarily from ordinary income. As a result of the company's
excellent profitability again during fiscal 1999 the Board felt that all
stockholders should be personally rewarded for their investment in and
commitment to the company and consequently, on March 31, 1999, the dividend was
increased by 50% to $.30 per share per annum. Total assets also increased to
$90,823,708, and net diluted earnings per share rose from $.66 per share to $.67
per share.
A peer group analysis compiled by America's Community Bankers showed State
Federal Savings and Loan's ROA (return on assets) at 1.12% for the first
calendar quarter of 1999 compared to a national average ratio of 0.73% for
similarly sized thrifts.
These numbers tell us that we are doing something right, which oftentimes
translates into not necessarily doing what everyone else is doing.
Resultantly this motivated us into the development of the 22 unit
apartment building at 4010 University, as was true ten years ago when we began
the construction of the sixty unit apartment complex in the suburb of Pleasant
Hill, Iowa. Today, that investment, based on opinions by many local real estate
brokers, is valued at an approximate figure of over three million dollars. As
pointed out in past reports, the cost of construction of that project was
$1,400,000 and today is being carried on the company's books at $955,100. The
company also enjoys a current occupancy ratio of 100% in both complexes. The
total gross income for fiscal year 1999 totaled $473,482 from these two
investments. It would be difficult to conceive of another similar investment
that could generate that amount of cash flow per year. In this connection,
income from real estate operations totaled $565,503 in fiscal 1999, a $125,000
improvement from the prior fiscal year. Overall, non-interest income was
$773,151, a $172,000 improvement from the prior fiscal year.
The past year has also brought about other very significant changes in the
financial industry, the stock market having reached heights many thought
heretofore were unreachable. Also we witnessed the tremendous effect the
secondary market brought to the mortgage business, especially in the traditional
home mortgage lending area.
Today articles published in trade journals geared to this segment of the
market boast of having achieved a 70% market share of home mortgage
originations. As evidenced by the media, many advertisements unwisely urge
homeowners to borrow amounts far in excess of prudent standards based on the
values of the borrowers' homes, as well as testing their ability to adequately
manage their financial affairs.
1
<PAGE>
This, of course, flies in the face of the original motto of the Savings
and Loan industry - "Thrift and Home Ownership". These were the stated goals for
all American citizens and they served America well for over 150 years.
This was the primary reason for our maintaining the company title of State
Federal Savings and Loan Association in the conversion to a stock company. We
are proud of the heritage that this name represents as a member of the singular
group of financial institutions that carried the torch in the building of
America into a nation of homeowners. This will forever remain as the great
legacy bestowed on America by the Savings and Loan industry, and we wanted to
continue this connotation by retaining the well-known and respected name of
State Federal Savings and Loan Association of Des Moines into our new corporate
structure.
Hopefully the holders of these 70% of our nation's mortgages, if this is
true, will be as generous and benevolent as the thrift industry proved to be to
the homeowner in times of financial stress, which oftentimes follows levels of
prosperity now extant in America. It is a well-known fact that the Savings and
Loan Associations in America carried the burden of providing financing for the
vast majority of purchases and renovations of homes for Americans many decades
prior to the passage of the Community Reinvestment Act.
In retrospect, with interest rates having declined steadily during the
year, and, contrastingly in light of the increases the Federal Reserve Board has
recently put into effect, we are pleased that we held the line in booking below
par investments during the past year. Today we are able to purchase investments
and book mortgages that provide a much better return than those offered during
the past twelve to fifteen months.
The repurchase of company shares, as approved by the Board of Directors on
May 24, 1999, has progressed very well. The number of shares to be purchased was
set at five percent of the total outstanding, which would amount to a buy-back
of 77,450 shares. To date, September 2, 1999, we have purchased a total of
45,500 shares ranging in price from $11.25 to $11.50 per share for a total cash
outlay of $518,250. With a current book value of $10.61 and the Wall Street
Journal currently quoting a NASDAQ price of $11.00 to $12.00 per share, it would
appear that our repurchase program has been and will continue to be an excellent
investment for the company.
Looking ahead, we are very pleased to have begun the construction of our
new branch facility and leasehold investment in the western suburb of Clive,
Iowa, a fast-rising star in the local business market. Almost five years ago,
when this parcel became available for sale, we determined that this was an
exceptional opportunity and submitted an offer that was accepted. Fortunately we
took this step at that time, as prices of land in Clive have increased
considerably. The location is on University Avenue, the major East-West
thoroughfare in the area, and the size of the lot, 1.25 acres, fits our plans
perfectly. The building will be of contemporary design, masonry exterior, with a
total of 14,000 square feet. Our branch facility will occupy approximately 3,000
square feet and, excluding the basement area, the remaining space will be
available for lease.
Also included in our strategic plan for the future was a total revamping
of our computer system. With the Y2K situation having become a major concern for
the fast-approaching date of January 1, 2000, it was most fortuitous that we
will be meeting that date with a totally updated computer system. Our primary
supplier, NCR, assures that our equipment is now "state-of-the-art" and should
hold us in good stead for the Y2K conundrum and many more years to come.
2
<PAGE>
Among other disturbing events that were spawned during fiscal 1999 with
the precipitous reduction in interest rates, were resultantly, the huge numbers
of mortgage refinancings and the calling of many financial instruments that were
issued with built-in call provisions. This, of course, heralded a substantial
upturn in the national economy, but largely at the expense of the saver,
however, which continues to some extent to the present. All Americans must be
aware that there are two areas of the economy that are not faring well in the
nation's new-found largesse. These are the important sectors of agriculture and
livestock production which are experiencing very difficult straits. Typical
prices of most farm products are currently well below the cost of production,
which eventually, could have a negative effect on the entire national economy.
At present there is a great deal of discussion among elected political figures
regarding possible congressional support programs, but as of now, very little of
substance has come to pass. The ripple effect could have significant
consequences on the nation, with emphasis on all agricultural states, Iowa being
only one of many. Congress has taken note of the problem and, hopefully, appears
to be positioning itself to take some form of remedial action in the near
future.
Thank you again for your many kind and supportive letters and calls during
the past year. They are appreciated. The Board, management and staff wish you
the best for the coming year.
Please remember: Enhance the value of your investment - do business with
the bank in which you own an interest! - State Federal Savings and Loan
Association. During the coming year your management team will be very busy with
the construction of the Clive facility but will always welcome a call or letter
from you at any time.
I hope you will find it possible to join us at the annual meeting on
October 20th.
Sincerely,
John F. Golden
President and Chairman of the Board
3
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets ..................... $90,824 $ 89,802 $85,679 $ 76,705 $71,271
Cash & cash equivalents .......... 8,481 9,445 3,634 2,564 3,938
Certificates of deposits in other
institutions ................... 884 1,4794 4,4354 4,4404 5,6344
Investment securities ............ 1,944 2,744 3,477 2,347 1,114
Loans receivable, net ............ 72,331 68,980 68,178 62,708 56,420
Deposits ......................... 54,713 53,672 50,346 45,732 45,596
FHLB advances .................... 18,877 18,965 19,000 15,000 10,000
Stockholders' equity ............. 16,123 16,084 15,233 14,928 14,533
<CAPTION>
Years Ended June 30,
---------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Total interest income ............ $ 6,695 $ 6,823 $ 6,407 $ 5,785 $ 5,107
Total interest expense ........... 3,999 4,043 3,626 3,194 2,601
------- -------- ------- -------- -------
Net interest income .............. 2,696 2,780 2,781 2,591 2,506
Provision for loan losses ........ 36 52 36 24 24
------- -------- ------- -------- -------
Net interest income after ........ 0 5 7
provision for loan losses ........ 2,660 2,728 2,745 2,567 2,482
Non-interest income:
Real estate operations ........... 566 441 404 395 386
Gain on sale of real estate and
investments .................... 106 44 1584 41 2
Net realized loss on sale of
available-for-sale securities .. -- (2) -- (24) --
Other non-interest income ........ 101 118 108 58 57
------- -------- ------- -------- -------
Total non-interest income ........ 773 601 670 470 445
Total non-interest expense ....... 1,926 1,821 1,991 1,679 1,637
------- -------- ------- -------- -------
Income before income taxes ....... 1,507 1,508 1,424 1,358 1,290
Income tax expense ............... 489 491 503 475 486
------- -------- ------- -------- -------
Net income ....................... $ 1,018 $ 1,017 $ 921 $ 883 $ 804
======= ======== ======= ======== =======
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<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) ................. 1.13 1.15 1.12 1.20 1.20
Interest rate spread information:
Average during year ................... 2.50 2.60 2.77 2.72 2.98
End of year ........................... 2.62 2.41 2.65 2.80 2.52
Net interest margin(1) ................. 3.20 3.35 3.58 3.72 3.95
Ratio of operating expense to average
total assets .......................... 2.13 2.06 2.42 2.29 2.44
Return on equity (ratio of net
income to average equity) ............. 6.3 6.51 6.19 6.00 5.62
Quality Ratios:
Non-performing assets to total assets at
end of year ........................... 1.84 1.50 1.55 .62 .20
Allowance for loan losses to
non-performing loans .................. 27.36 127.44 22.30 50.21 151.05
Capital Ratios:
Stockholders' Equity to total assets at
end of year ........................... 17.75 17.91 17.78 19.46 20.39
Average Stockholders' Equity to average
assets ................................. 17.81 17.71 18.10 20.05 21.33
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.147x 1.153x 1.173x 1.218x 1.235x
Number of full-service offices .......... 2 2 2 2 2
</TABLE>
- ----------
(1) Net interest income divided by average interest-earning assets.
(2) No non-performing loans at year-end.
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
6
<PAGE>
and commercial real estate lending. Yet smaller portions of the Company's loans
receivable consists of construction and consumer loans. Management has focused
on adjustable rate mortgage loans and loans with three to seven year balloons
and/or calls in recent years, achieving a loan portfolio consisting of 39.98%
adjustable rate loans, 36.14% fixed rate loans, and 23.88% balloon loans.
Financial Condition
Comparison of Fiscal Years Ended June 30, 1999 and June 30, 1998.
The Company's total assets increased from $89.8 million at June 30, 1998
to $90.8 million at June 30, 1999, an increase of $1.0 million, or 1.1%. The
increase was primarily due to the increase in loans receivable of $3.3 million,
partially offset by a decrease in cash and cash equivalents of $964,200, and a
decrease in investment securities of $799,100, and a decrease in investments in
certificates of deposit of $594,200. The increase in loans receivable was funded
primarily from an increase in deposits of $1.0 million, a decrease in cash and
cash equivalents of $964,200, a decrease in investment securities
available-for-sale of $799,100, and a decrease in investments in certificates of
deposit of $594,200.
Net loans increased $3.3 million from $69.0 million at June 30, 1998 to
$72.3 million at June 30, 1999. The increase in the loan portfolio was comprised
primarily of $16.6 million in mortgage loans originated and $1.4 million in
purchased loans, partially offset by $14.4 million in principal repayments.
Total deposits increased $1.0 million from $53.7 million at June 30, 1998
to $54.7 million at June 30, 1999. During fiscal 1999, NOW accounts increased
$640,000, money market accounts increased $345,000, and passbook accounts
increased $150,000, while certificates of deposit decreased $94,000. The Company
did not offer any special marketing programs during the 1999 fiscal year.
Total stockholders' equity increased $39,100 from $16.08 million at June
30, 1998 to $16.12 million at June 30, 1999. The increase was primarily the
result of net income of $1.0 million, exercised stock options of $60,600,
allocations to the Employee Stock Ownership Plan ("ESOP") totaling $151,300,
partially offset by $689,700 expended for the repurchase of 59,000 shares of
Company common stock, dividends declared totaling $385,200, and the decrease in
unrealized gains on available-for-sale securities of $116,100.
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,
7
<PAGE>
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.
Results of Operations
Comparison of Fiscal Years ended June 30, 1999 and June 30, 1998.
General. Net income for the year ended June 30, 1999 remained virtually
unchanged at $1.0 million, however, due to stock repurchases, diluted earnings
per shared increased $.01. Non-interest income increased $172,300 and the
provision for loan losses decreased $16,000. These gains were partially offset
by a decrease in net interest income of $84,200, and an increase in non-interest
expense of $104,700.
Interest Income. Interest income decreased $127,100 to $6.67 million for
fiscal 1999 compared to $6.82 million for fiscal 1998 due primarily to a
decrease in the rates earned on loans receivable, investment securities, and
other assets.
Interest Expense. Interest expense decreased $43,000 from $4.04 million
for fiscal 1998 to $4.00 million in fiscal 1999. The decrease was due to the
decrease in the rates paid on deposits and advances from the Federal Home Loan
Bank.
Provision for Loan Losses. The provision for loan losses for fiscal 1999
was $36,000, a decrease of $16,000 compared to $52,000 for the year ended June
30, 1998. The amounts provided during the fiscal year were based on management's
quarterly analysis of the allowance for loan losses, based on, among other
things, the condition of the loan portfolio, the local economy, and regulatory
comments. Although the Company maintains its allowance for loan losses at a
level which it considers to be adequate to provide for potential losses, there
can be no assurance that future losses will not exceed estimated amounts or that
additional provisions for loan losses will not be required in future periods. In
addition, the Company's determination as to the amount of the allowance for loan
losses is subject to review by the regulatory agencies, which can order the
establishment of additional general or specific allowances.
Non-Interest Income. Non-interest income increased from $600,800 in fiscal
1998 to $773,100 in fiscal 1999. The increase of $172,300 is primarily the
result of a $124,800 increase in investment in real estate operations, a $54,500
increase in gains on sale of investments, and a $9,800 increase in gains on
sales of real estate, offset by a $16,800 decrease in other non-interest income.
Non-Interest Expense. Non-interest expense increased from $1.8 million in
fiscal 1998 to $1.9 million in fiscal 1999. The increase of $104,700 is
primarily the result of an increase in investment real estate operations expense
of $61,000 as a result of depreciation expenses of a full year of operations in
the new 22 unit apartment building, an increase in occupancy expense of $27,500
as a result of the increase in depreciation of the new computer equipment, an
increase in data processing services of $12,200, and an increase in other
non-interest expense of $15,500, partially offset by a decrease in salaries and
employee benefits of $14,200.
Income Tax Expense. Income tax expense was $488,900 in fiscal 1999
compared to $490,500 in fiscal 1998, a decrease of $1,600. Income taxes
decreased primarily due to tax benefits of tax credits on investments.
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-
8
<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.
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 and balloon loans as an alternative to more traditional fixed-rate
30 year mortgage loans. At June 30, 1999, the Company had $27.9 million of
adjustable-rate loans which comprised over 39.98% 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.
9
<PAGE>
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,
1999, the Company would qualify for an exemption from this rule.
The following table sets forth, at June 30, 1999, an analysis of the
Bank's interest rate risk as measured by the estimated changes in NPV resulting
from instantaneous and sustained parallel shifts in the yield curve (+/-400
basis points, measured in 100 basis point increments).
Estimated Increase (Decrease) in NPV
Change in Interest Rates Estimated NPV ------------------------------------
(Basis Points) Amount Amount Percent
-------------- ------ ------ -------
(Dollars in Thousands)
+300 $ 8,829 $(2,179) (20)%
+200 9,748 (1,260) (11)
+100 10,520 (487) (4)
--- 11,008
-100 11,222 214 2
-200 11,377 369 3
-300 11,579 571 5
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,
--------------------------------------------------------------------
1999 1998
--------------------------------- -------------------------------
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 ..... $ 9,678 $ 459 4.74% $ 7,881 $ 380 4.82%
Certificates of deposit invested in
other institutions ............... 1,332 78 5.86 2,553 148 5.80
Investment and other securities .... 2,246 137 6.10 3,321 241 7.26
Loans receivable(1) ................ 69,904 5,951 8.51 68,195 5,989 8.78
FHLB stock ......................... 1,102 71 6.44 950 65 6.84
------- ------ ---- ------- ------ ----
Total interest-earning assets(1) .. $84,262 $6,696 7.95 $82,900 $6,823 8.23
======= ====== ==== ======= ====== ====
Interest-Bearing Liabilities:
Passbook accounts ................. 3,561 97 2.72 3,889 107 2.75
NOW accounts ...................... 2,333 34 1.46 1,901 25 1.32
Money market accounts ............. 4,418 160 3.62 3,654 132 3.61
Certificates of deposit ........... 44,199 2,597 5.88 43,436 2,624 6.04
FHLB advances ..................... 18,921 1,112 5.88 18,992 1,155 6.08
------- ------ ---- ------- ------ ----
Total interest-bearing liabilities $73,432 4,000 5.45 $71,872 4,043 5.63
======= ====== ==== ======= ====== ====
Net interest income ................. $2,696 $2,780
====== ======
Net interest rate spread ............ 2.50% 2.60%
==== ====
Net earning assets .................. $10,830 $11,028
======= =======
Net yield on average
interest-earning assets ............ 3.20% 3.35%
==== ====
Average interest-earning assets to
average interest-bearing liabilities 1.147x 1.153x
====== ======
<CAPTION>
Year Ended June 30,
----------------------------------
1997
----------------------------------
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
------- ---- ----
<S> <C> <C> <C>
Interest-Earning Assets:
Interest-earning bank accounts ..... $ 3,255 $ 145 4.45%
Certificates of deposit invested in
other institutions ............... 4,445 262 5.89
Investment and other securities .... 2,483 184 7.41
Loans receivable(1) ................ 66,558 5,752 8.64
FHLB stock ......................... 912 64 7.02
------- ------ ----
Total interest-earning assets(1) .. $77,653 6,407 8.25%
======= ====== ====
Interest-Bearing Liabilities:
Passbook accounts ................. $ 4,094 $ 113 2.76%
NOW accounts ...................... 1,867 23 1.23
Money market accounts ............. 3,283 117 3.56
Certificates of deposit ........... 38,745 2,302 5.94
FHLB advances ..................... 18,231 1,071 5.87
------- ------ ----
Total interest-bearing liabilities $66,220 3,626 5.48
======= ====== ====
Net interest income ................. $2,781
======
Net interest rate spread ............ 2.77%
====
Net earning assets .................. $11,433
=======
Net yield on average
interest-earning assets ............ 3.58%
====
Average interest-earning assets to
average interest-bearing liabilities 1.173x
======
</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,
----------------------------------------------------------------------
1999 v. 1998 1998 v. 1997
--------------------------------- -----------------------------------
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 .......... $ 85 $ (6) $ 79 $ 222 $ 13 $ 235
Certificates of deposit invested in other (71) 1 (70)
institutions ............................ (110) (4) (114)
Investments and other securities ........ (70) (34) (104) 61 (4) 57
Loans receivable ........................ 148 (186) (38) 143 94 237
FHLB stock .............................. 10 (4) 6 3 (2) 1
----- ----- ----- ----- ---- -----
Total interest-earning assets ........... $ 102 $(229) $(127) $ 319 $ 97 $ 416
===== ===== ===== ===== ==== =====
Interest-bearing liabilities:
Passbook accounts ....................... (9) (1) (10) (6) -- (6)
NOW accounts ............................ 6 3 9 -- 2 2
Money market accounts ................... 28 -- 28 13 2 15
Certificates of deposit ................. 46 (73) (27) 283 39 322
FHLB advances ........................... (4) (39) (43) 46 38 84
----- ----- ----- ----- ---- -----
Total interest-bearing liabilities ...... $ 67 $(110) $ (43) $ 336 $ 81 $ 417
===== ===== ===== ===== ==== =====
Net interest income ..................... $ (84) $ (1)
===== =====
</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.
At June 30,
-----------------------------
1999 1998 1997
---- ---- ----
Weighted average yield on:
Loans receivable ............................. 8.25% 8.477% 8.517%
Interest-earning bank accounts ............... 5.49 5.49 5.50
Certificates of deposit invested in other
institutions................................ 6.54 6.07 6.01
Investments and other securities ............. 5.33 6.71 7.33
FHLB stock ................................... 6.25 6.75 7.00
Combined weighted average yield on
interest-earning assets .................. 7.84 8.028 8.181
Weighted average rate paid on:
Passbook accounts ............................ 2.83 2.827 2.827
NOW accounts ................................. 1.60 1.422 1.070
Money market accounts ........................ 3.29 3.291 3.290
Certificates of deposit ...................... 5.62 6.100 5.830
FHLB advances ................................ 5.70 5.983 6.338
Combined weighted average rate paid on
interest-bearing liabilities ............ 5.23 5.621 5.534
Spread ........................................ 2.62 2.407 2.647
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, 1999 was 15.19%. 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, 1999 was 15.19%.
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, 1999 has been the increasing deposit base. The net increase in deposits
was $1.0 million during fiscal year 1999.
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
13
<PAGE>
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, 1999, the Company had outstanding
commitments to extend credit which amounted to $7.4 million. The Company is not
aware of any trends, events or uncertainties which will have or that are
reasonably likely to have a material effect on the Company's liquidity, capital
resources or operations.
Certificates of deposit scheduled to mature in one year or less at June
30, 1999, totaled approximately $28.8 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, 1999, the Association had $18.9 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, 1999, the Company's stockholders'
equity totaled $16.1 million, or 17.75% of assets.
At June 30, 1999, the Association had tangible and core capital of $7.7
million, or 9.0% of adjusted total assets, respectively, which was approximately
$6.5 million and $4.3 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,
1999, the Association had risk-based capital of $8.0 million (including $7.7
million in core capital), or 15.13% of risk-weighted assets of $52.8 million.
This amount was $3.8 million above the 8% requirement in effect on that date.
Impact of Year 2000
General. The year 2000 ("Y2K") issue confronting the Company and its
suppliers, customers, customers' suppliers and competitors centers on the
inability of computer systems to recognize the year 2000. Many existing computer
programs 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, suppliers 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 Association, 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.
Risk. Like most financial institution service providers, the Company 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 Company's direct control and
third parties with whom the Company 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
14
<PAGE>
significantly misstated, and the Company 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 affect the viability of the Company'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 Company's operations and, in turn, its financial condition and results of
operations.
State of Readiness. During November 1997, the Company 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 Company-wide inventory of applications and system
software;
o Completed renovation and testing of the Company's mission-critical
systems;
o Built an internal tracking database for application and vendor
software;
o Developed compliance plans and schedules for all lines of business;
o Monitored vendor compliance verification;
o Provided awareness and education activities for employees through
existing internal communication channels;
o Continued a process to respond to customer inquiries as well as help
educate customers on the Y2K issue; and
o Completed a detailed contingency plan in the event of interruptions
of service from our outside vendors and service providers.
The following paragraphs summarize the phases of the Company's Y2K plan:
Awareness Phase. The Company 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, budget 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 getting more
insight into the Y2K issue and potential strategies for addressing it.
This phase is substantially complete.
Assessment Phase. The Company's strategies were further developed
with respect to how the objectives of the Y2K plan would be achieved, and
a Y2K business risk assessment was made to quantify the extent of the
Company's Y2K exposure. A corporate inventory (which is periodically
updated as new technology is acquired and as systems progress through
subsequent phases) was developed to identify and monitor Y2K readiness for
information 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 Company 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.
15
<PAGE>
The Company also contacted its most significant borrowers informing
them of the Y2K issue. Because the Company's loan portfolio is primarily
real estate-based and is diversified with regard to individual borrowers
and types of businesses, and the Company's primary market area is not
significantly dependent on one employer or industry, the Company 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 Company'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 Company currently is near completion of testing of each
mission-critical system, with the degree of completion of such testing at
97%. The Company's validation phase is expected to be completed by
October, 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 system.
Implementation Phase. The Company'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.
Company Resources Invested. The Company's Y2K project team has been
assigned the task of ensuring that all systems across the Company are
identified, analyzed for Y2K compliance, corrected, if necessary, tested,
and changes put into service by October 31, 1999. The Y2K project team
members represent all functional areas of the Company, 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 Company's senior management team. The Company's Board of Directors
oversees the Y2K plan and provides guidance and resources to, and receives
quarterly updates from, the Y2K project team.
The Company 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 Company does not anticipate incurring
significant additional expense to implement additional corrective actions.
Contingency Plans. During the assessment phase, the Company developed
backup contingency plans for each of its mission-critical systems. Virtually all
the Company's mission-critical systems are dependent upon third party vendors or
service providers. These vendors have been monitored throughout the 1998-1999
year and all have provided evidence of their efforts to comply with the Y2K
problem. All that we consider as our primary providers have appeared to have
resolved any Y2K problems that they may have had, with the exception of some of
the public utilities, which have issued statements periodically through the
local press. As a backup plan to the possibility of electrical service being
interrupted, the Company has made arrangements to have an electrical generator
on site large enough to totally power one of the branch offices. All other
vendors and suppliers that we consider part of our mission-critical systems have
provided statements of assurance and have shown due diligence as to their own
readiness. The Company has also put into place provisions to have additional
currency available and will have limitations on withdrawals in the event of
aggressive pressures on the Company's cash on hand.
16
<PAGE>
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with generally accepted accounting principles
which require the measurement of financial position and results of operations in
terms of historical dollars without considering changes in the relative
purchasing power of money over time because of inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
most industrial companies, virtually all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services.
Impact of New Accounting Standards
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard ("SFAS") No. 131, "Disclosures about Segments of
an Enterprise and Related Information" in June 1997. This Statement establishes
standards for the way the 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. Management adopted SFAS No. 131
effective July 1, 1998, as required, without material impact on the Company's
financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires entities to recognize all
derivatives in their financial statements as either assets or liabilities
measured at fair value. SFAS No. 133 also specifies new methods of accounting
for hedging transactions, prescribes the items and transactions that may be
hedged, and specifies detailed criteria to be net to qualify for hedge
accounting.
The definition of a derivative financial instrument is complex, but in
general, it is an instrument with one or more underlyings, such as an interest
rate or foreign exchange rate, that is applied to a notional amount, such as an
amount of currency, to determine the settlement amount(s). It generally requires
no significant initial investment and can be settled net or by delivery of an
asset that is readily convertible to cash. SFAS No. 133 applies to derivatives
embedded in other contracts, unless the underlying of the embedded derivative is
clearly and closely related to the host contract.
SFAS No. 133 is effective for fiscal years beginning after June 15, 2000.
On adoption, entities are permitted to transfer held-to-maturity debt securities
to the available-for-sale or trading category without calling into question
their intent to hold other debt securities to maturity in the future. SFAS No.
133 is not expected to have a material impact on the Company's financial
statements.
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," as of
July 1, 1998. The Statement establishes standards for reporting and presentation
of comprehensive income and its components in a full set of general- purpose
financial statements. It requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is presented with the same prominence as
other financial statements. SFAS No. 130 requires that companies (i) classify
items of other comprehensive income by their nature in a financial statement and
(ii) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital. Financial statements for
earlier periods have been restated for comparative purposes. Accumulated
comprehensive income consists solely of the change in unrealized gains or losses
on securities designated as available-for-sale in accordance with SFAS No. 115.
17
<PAGE>
STATEFED FINANCIAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS AND
INDEPENDENT AUDITOR'S REPORT
JUNE 30, 1999
<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, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity, comprehensive
income and cash flows for each of the three years in the period ended June 30,
1999. 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, 1999 and 1998
and the consolidated results of their operations and their cash flows for each
of the three years ended June 30, 1999, 1998 and 1997, in conformity with
generally accepted accounting principles.
McGowen, Hurst, Clark & Smith, P.C.
Des Moines, Iowa
August 6, 1999
<PAGE>
STATEFED FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents
Non-interest bearing $ 268,876 $ 338,612
Interest bearing 8,212,340 9,106,792
------------ ------------
8,481,216 9,445,404
Investments in certificates of deposit 884,300 1,478,514
Investment securities available-for-sale 1,944,374 2,743,518
Loans receivable, net 72,330,884 68,979,770
Real estate acquired for development 236,602 231,870
Real estate held for investment, net 2,645,245 2,262,060
Property acquired in settlement of loans 1,133,517 1,286,452
Office property and equipment, net 1,188,247 1,564,077
Federal Home Loan Bank stock, at cost 1,147,600 949,000
Accrued interest receivable 536,028 542,246
Other assets 295,695 318,654
------------ ------------
Total Assets $ 90,823,708 $ 89,801,565
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 54,713,072 $ 53,671,860
Advances from the Federal Home Loan Bank 18,877,047 18,964,890
Advances from borrowers for taxes and insurance 337,371 340,686
Accrued interest payable 133,773 134,251
Income taxes
Current 127,643 19,019
Deferred 197,000 213,000
Accounts payable and other liabilities 200,123 295,278
Dividends payable 114,300 78,295
------------ ------------
Total Liabilities 74,700,329 73,717,279
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 1,519,004 (1999) and 1,565,892
(1998) shares outstanding 8,905 8,905
Additional paid-in capital 8,526,563 8,483,110
Retained earnings - substantially restricted 10,090,384 9,457,310
Less treasury stock (261,968 and 215,080 shares, at cost) (2,234,986) (1,643,697)
Less common stock acquired by employee stock
ownership plan (271,290) (341,270)
Accumulated other comprehensive income--
net unrealized gains on available-for-sale securities,
net of related tax effects 3,803 119,928
------------ ------------
Total Stockholders' Equity 16,123,379 16,084,286
------------ ------------
Total Liabilities and Stockholders' Equity $ 90,823,708 $ 89,801,565
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
STATEFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------
1999 1998 1997
---------- ----------- ----------
<S> <C> <C> <C>
INTEREST INCOME
Loans receivable interest $5,950,625 $ 5,987,884 $5,752,351
Investment securities and other interest 744,777 834,682 654,681
---------- ----------- ----------
6,695,402 6,822,566 6,407,032
INTEREST EXPENSE
Deposits 2,888,006 2,887,066 2,555,022
Advances from the Federal Home Loan Bank 1,111,563 1,155,461 1,070,715
---------- ----------- ----------
3,999,569 4,042,527 3,625,737
---------- ----------- ----------
NET INTEREST INCOME 2,695,833 2,780,039 2,781,295
PROVISION FOR LOAN LOSSES 36,000 52,000 36,000
---------- ----------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,659,833 2,728,039 2,745,295
NON-INTEREST INCOME
Investment real estate operations 565,503 440,718 404,035
Gain on sales of real estate 53,835 44,017 158,154
Net realized gains (losses) on sales of
available-for-sale investment securities 52,602 (1,875) --
Other 101,211 117,977 107,717
---------- ----------- ----------
773,151 600,837 669,906
NON-INTEREST EXPENSE
Salaries and employee benefits 916,692 930,892 835,207
Investment real estate operations 328,904 267,824 244,224
Occupancy expenses 160,202 132,669 118,447
Federal deposit insurance premiums 60,023 57,800 88,059
SAIF special assessment -- -- 291,331
Data processing services 111,459 99,239 83,739
Advertising 33,639 33,327 52,715
Other 314,875 299,386 277,336
---------- ----------- ----------
1,925,794 1,821,137 1,991,058
---------- ----------- ----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 1,507,190 1,507,739 1,424,143
PROVISION FOR INCOME TAXES 488,900 490,460 502,818
---------- ----------- ----------
NET INCOME $1,018,290 $ 1,017,279 $ 921,325
========== =========== ==========
Basic earnings per share $ 0.68 $ 0.68 $ 0.62
========== =========== ==========
Diluted earnings per share $ 0.67 $ 0.66 $ 0.60
========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
STATEFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------------
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Net income $ 1,018,290 $ 1,017,279 $ 921,325
Other comprehensive income, net of tax effects:
Unrealized holding gains (losses) on securities
arising during period (147,153) 64,341 79,713
Reclassification adjustment - realized gains
(losses) on securities during the period 31,028 (1,875) --
----------- ----------- ----------
Net change in unrealized gains (losses) (116,125) 62,466 79,713
----------- ----------- ----------
Comprehensive income $ 902,165 $ 1,079,745 $1,001,038
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
STATEFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years ended June 30, 1999, 1998, and 1997
----------------------------------------------------------------------------------
Common
Additional Stock
Common Paid-in Retained Treasury Acquired
Stock Capital Earnings Stock By ESOP
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996 $ 8,905 $ 8,376,924 $ 8,146,074 $ (1,049,358) $ (490,211)
Net income for the year 921,325
Dividends declared (315,181)
ESOP common stock released for
allocation 54,877 76,271
Amortization of RRP contributions
Treasury stock acquired - 37,400 shares (620,825)
Treasury stock reissued to fund stock options
eexercised--77,638 shares (32,944) 109,324
Change in unrealized gains (losses)
on available-for-sale securities, net of
related tax effects
----------------------------------------------------------------------------------
Balance at June 30, 1997 8,905 8,398,857 8,752,218 (1,560,859) (413,940)
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
Treasury stock acquired - 10,000 shares (184,375)
Treasury stock reissued to fund stock options
exercised - 13,446 shares (34,306) 101,537
Change in unrealized gains (losses)
on available-for-sale securities, net of
related tax effects
----------------------------------------------------------------------------------
Balance at June 30, 1998 8,905 8,483,110 9,457,310 (1,643,697) (341,270)
Net income for the year 1,018,290
Dividends declared (385,216)
ESOP common stock released for
allocation 81,292 69,980
Treasury stock acquired - 59,000 shares (689,688)
Treasury stock reissued to fund stock options
exercised - 12,112 shares (37,839) 98,399
Change in unrealized gains (losses)
on available-for-sale securities, net of
related tax effects
----------------------------------------------------------------------------------
Balance at June 30, 1999 $ 8,905 $ 8,526,563 $ 10,090,384 $ (2,234,986) $ (271,290)
==================================================================================
<CAPTION>
Years ended June 30, 1999, 1998, and 1997
---------------------------------------------------
Accumulated Other
Comprehensive
Common Income--Unrealized
Stock Gains (Losses) Total
Acquired on AFS Stockholders'
By RRP Securities Equity
---------------------------------------------------
<S> <C> <C> <C>
Balance at June 30, 1996 $ (41,778) $ (22,251) $ 14,928,305
Net income for the year 921,325
Dividends declared (315,181)
ESOP common stock released for
allocation 131,148
Amortization of RRP contributions 32,142 32,142
Treasury stock acquired - 37,400 shares (620,825)
Treasury stock reissued to fund stock options
eexercised--77,638 shares 76,380
Change in unrealized gains (losses)
on available-for-sale securities, net of
related tax effects 79,713 79,713
---------------------------------------------------
Balance at June 30, 1997 (9,636) 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 9,636
Treasury stock acquired - 10,000 shares (184,375)
Treasury stock reissued to fund stock options
exercised - 13,446 shares 67,231
Change in unrealized gains (losses)
on available-for-sale securities, net of
related tax effects 62,466 62,466
---------------------------------------------------
Balance at June 30, 1998 -- 119,928 16,084,286
Net income for the year 1,018,290
Dividends declared (385,216)
ESOP common stock released for
allocation 151,272
Treasury stock acquired - 59,000 shares (689,688)
Treasury stock reissued to fund stock options
exercised - 12,112 shares 60,560
Change in unrealized gains (losses)
on available-for-sale securities, net of
related tax effects (116,125) (116,125)
---------------------------------------------------
Balance at June 30, 1999 $ -- $ 3,803 $ 16,123,379
===================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
STATEFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------------------
1999 1998 1997
----------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,018,290 $ 1,017,279 $ 921,325
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 160,449 102,612 111,940
Gain on sale of real estate (53,835) (44,017) (158,154)
Amortization of ESOP and RRP contributions 151,271 200,865 163,291
Realized (gains) losses on sale of available-for-sale securities (52,602) 1,875 -
Deferred loan fees (9,635) (32,165) 13,305
Provision for losses on loans 36,000 52,000 36,000
Deferred income taxes 13,000 11,000 38,000
Other 18,607 (45,143) -
Change in:
Accrued interest receivable 6,218 25,232 (33,772)
Other assets 22,959 (3,900) 47,740
Accrued interest payable (478) 5,370 (952)
Current income tax liability 108,624 (10,308) 24,072
Accounts payable and other liabilities (95,177) 89,575 12,677
----------------- ---------------- ----------------
Net cash provided by operating activities 1,323,691 1,370,275 1,175,472
Cash flows from investing activities
Investment in certificates of deposits (198,000) (99,000) (99,000)
Maturity of investments in certificates of deposit 792,046 3,052,000 99,000
Proceeds from sale or maturity of available-for-sale
investment securities 1,124,853 1,650,000 200,000
Purchase of available-for-sale investment securities (420,259) (771,984) (1,250,407)
(Purchase) redemption of FHLB stock (198,600) 1,000 (200,000)
Net increase in loans outstanding (3,199,516) (1,435,034) (5,669,007)
Investment in real estate held for investment (55,472) (359,497) (859,781)
Investment in real estate held for development (4,731) (36,386) (75,890)
Proceeds from sale of real estate 13,000 - 29,264
Investment in property acquired in settlement of loans (840) (55,321) -
Purchases of property and equipment (112,134) (216,738) (15,676)
----------------- ---------------- ----------------
Net cash flows provided (used) by investing activities (2,259,653) 1,729,040 (7,841,497)
Cash flows from financing activities
Net increase in deposits 1,041,271 3,325,888 4,614,144
Advances from Federal Home Loan Bank 6,000,000 14,000,000 12,000,000
Repayment of Federal Home Loan Bank advances (6,087,843) (14,035,110) (8,000,000)
Net decrease in advances from borrowers (3,315) (149,367) (15,696)
Proceeds from stock options exercised 60,560 67,231 76,380
Dividends paid (349,211) (312,264) (318,159)
Treasury stock purchased (689,688) (184,375) (620,825)
----------------- ---------------- ----------------
Net cash flows provided (used) by financing activities (28,226) 2,712,003 7,735,844
----------------- ---------------- ----------------
CHANGE IN CASH AND CASH EQUIVALENTS (964,188) 5,811,318 1,069,819
----------------- ---------------- ----------------
CASH AND CASH EQUIVALENTS, beginning of year 9,445,404 3,634,086 2,564,267
----------------- ---------------- ----------------
CASH AND CASH EQUIVALENTS, end of year $ 8,481,216 $ 9,445,404 $ 3,634,086
================= ================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - StateFed Financial Corporation (the Company), organized 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.
25
<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 amortized through 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 as 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 at June 30, 1998. The Company had no
non-accrual loans at June 30, 1999.
The Company accounts for impaired loans in accordance with Statement of
Financial Accounting Standard (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan." This statement requires that impaired loans be
measured based upon the present value of expected future cash flows
discounted at the loan's effective interest rate or, as an alternative, at
the loan's observable market price or fair value of the collateral.
26
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In applying the provisions of SFAS No. 114, the Company
considers investment in one-to-four family residential loans and consumer
installment loans to be homogeneous and therefore excluded from separate
identification for evaluation of impairment. With respect to the Company's
investment in multi-family and nonresidential loans, and their evaluation
of impairment thereof, such loans are collateral dependent and, as a
result, are carried as a practical expedient at the lower of cost or fair
value.
It is the Company's policy to charge off unsecured credits that are more
than ninety days delinquent. Similarly, collateral dependent loans which
are more than ninety days delinquent are considered to constitute more
than a minimum delay in repayment and are evaluated for impairment under
SFAS No. 114 at that time.
The Company's investment in impaired loans, as defined, totaled
approximately $83,000 at June 30, 1998. No loans were considered impaired
as of June 30, 1999.
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.
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.
27
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
EFFECT OF NEW FINANCIAL ACCOUNTING STANDARDS - The Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standard
(SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related
Information" in June 1997. 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. Management adopted SFAS No. 131 effective July 1, 1998, as
required, without material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires entities to recognize
all derivatives in their financial statements as either assets or
liabilities measured at fair value. SFAS No. 133 also specifies new
methods of accounting for hedging transactions, prescribes the items and
transactions that may be hedged, and specifies detailed criteria to be met
to qualify for hedge accounting.
The definition of a derivative financial instrument is complex, but in
general, it is an instrument with one or more underlyings, such as an
interest rate or foreign exchange rate, that is applied to a notional
amount, such as an amount of currency, to determine the settlement
amount(s). It generally requires no significant initial investment and can
be settled net or by delivery of an asset that is readily convertible to
cash. SFAS No. 133 applies to derivatives embedded in other contracts,
unless the underlying of the embedded derivative is clearly and closely
related to the host contract.
SFAS No. 133 is effective for fiscal years beginning after June 15, 2000.
On adoption, entities are permitted to transfer held-to-maturity debt
securities to the available-for-sale or trading category without calling
into question their intent to hold other debt securities to maturity in
the future. SFAS No. 133 is not expected to have a material impact on the
Company's financial statements.
COMPREHENSIVE INCOME - The Company adopted SFAS No. 130, "Reporting
Comprehensive Income," as of July 1, 1998. The Statement establishes
standards for reporting and presentation of comprehensive income and its
components in a full set of general-purpose financial statements. It
requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in
a financial statement that is presented with the same prominence as other
financial statements. SFAS No. 130 requires that companies (i) classify
items of other comprehensive income by their nature in a financial
statement and (ii) display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital.
Financial statements for earlier periods have been restated for
comparative purposes. Accumulated comprehensive income consists solely of
the change in unrealized gains or losses on securities designated as
available for sale in accordance with SFAS No. 115.
28
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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.
Weighted-average common shares outstanding totaled 1,488,072, 1,487,881
and 1,489,648 for the years ended June 30, 1999, 1998 and 1997,
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. Weighted-average common shares deemed
outstanding for the purpose of computing diluted earnings per share
totaled 1,531,094, 1,545,208 and 1,532,881 for the years ended June 30,
1999, 1998 and 1997, respectively.
FINANCIAL STATEMENT PRESENTATION - Certain items in prior year financial
statements have been reclassified to conform to the 1999 presentation.
NOTE B - STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments with maturities of three months or less, when purchased,
to be cash equivalents. The Company had cash deposits of approximately
$8,190,000 at the Federal Home Loan Bank of Des Moines at June 30, 1999.
Year Ended June 30,
------------------------------------
1999 1998 1997
------------------------------------
Supplemental Disclosures of Cash
Flow Information
Income taxes paid $ 380,276 $ 489,300 $ 441,000
====================================
Interest paid on deposits and
FHLB advances (includes interest
credited to deposit accounts) $4,000,047 $4,046,000 $3,627,000
====================================
Noncash Investing and Financing Activities
Property acquired through foreclosure totaled $41,937, $1,150,000 and $449,000
during fiscal years 1999, 1998, and 1997, respectively. The Company also
financed $219,900, $730,000 and $299,000 of loans for borrowers to purchase real
estate owned by the Company during fiscal years 1999, 1998, and 1997,
respectively.
29
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - INVESTMENTS IN CERTIFICATES OF DEPOSIT
The Company invests in certificates of deposit issued by other financial
institutions, up to a maximum of $100,000 per institution. Following is a
summary of the future maturities of the certificates at June 30, 1999:
Interest
Rate Amount
----------------------------------------
Mature during fiscal year:
2000 5.25% - 7.00% $ 487,000
2001 5.40% - 5.75% 198,000
2003 6.85% - 7.00% 198,000
-----------------
883,000
Unamortized broker fees 1,300
-----------------
$ 884,300
=================
Following is a summary of certificates by interest rate range:
June 30,
---------------------------------------
1999 1998
---------------------------------------
Interest rates:
5.00% - 5.99% $ 297,000 $ 792,000
6.00% - 6.99% 297,000 396,000
7.00% - 7.99% 289,000 289,000
---------------------------------------
883,000 1,477,000
Unamortized broker fees 1,300 1,514
---------------------------------------
$ 884,300 $ 1,478,514
=======================================
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, 1999:
U.S. government and agency
debt securities $ 400,280 $ 5,576 $ -- $ 405,856
Municipal bonds 101,574 -- (1,582) 99,992
Equity securities 1,436,757 31,250 (29,481) 1,438,526
------------------------------------------------------
$1,938,611 $ 36,826 (31,063) $1,944,374
======================================================
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
======================================================
</TABLE>
NOTE D - INVESTMENT SECURITIES - Continued
30
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The contractual maturities of debt securities are shown below. Actual maturities
are expected to differ from contractual maturities as borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Weighted Estimated
Average Amortized Fair
Yield Cost Value
-----------------------------------------------
<S> <C> <C> <C>
Due in one year or less 8.35% $ 200,280 $ 201,999
Due after one year through five years - - -
Due after five years through ten years 7.45% 200,000 203,856
Due after ten years 5.00% 101,574 99,993
-------------------------------
$ 501,854 $ 505,848
===============================
</TABLE>
The Company had realized gains (losses) on the sale of investment securities
totaling $52,602 and ($1,875) during fiscal years 1999 and 1998, respectively.
The Company had no realized gains or losses on the sale of investment securities
available-for-sale during fiscal year 1997. Proceeds from the sale of
available-for-sale equity securities totaled $113,643 for 1999 and $50,000
during 1998.
Following is a summary of investment income:
Year Ended June 30,
--------------------------------
1999 1998 1997
--------------------------------
U.S. government and agency securities $ 69,179 $162,065 $109,834
Municipal bonds 4,596 -- --
Investments in certificates of deposit 78,061 147,984 262,253
FHLB stock dividends 71,213 64,725 64,262
Interest-bearing cash accounts 459,334 380,462 144,655
Equity securities dividends 62,394 79,446 73,677
--------------------------------
$744,777 $834,682 $654,681
================================
31
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - LOANS RECEIVABLE, NET
Following is a summary of loans receivable:
June 30,
-----------------------------
1999 1998
-----------------------------
Real estate mortgage loans:
Secured by one-to-four family residences $ 46,177,819 $ 44,440,849
Secured by commercial and multi-family
real estate 24,340,169 23,114,638
Construction loans 2,025,300 1,535,363
-----------------------------
Total real estate mortgage loans 72,543,288 69,090,850
Consumer and other loans 1,280,244 996,850
-----------------------------
73,823,532 70,087,700
Less:
Allowance for loan losses (242,129) (206,129)
Undisbursed portion of mortgage loans (963,043) (605,197)
Unamortized balance on purchased loan
discounts (2,041) (1,534)
Deferred loan fees (285,435) (295,070)
-----------------------------
Loans receivable, net $ 72,330,884 $ 68,979,770
=============================
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.
Commercial and multi-family real estate loans include participating
interests in loans purchased by the Company. Participation loans purchased
totaled approximately $5,700,000 and $3,800,000 at June 30, 1999 and 1998,
respectively. A significant portion of these participation loans are
secured by real estate located outside of Iowa.
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 amounts recognized in the
financial statements.
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.
32
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - LOANS RECEIVABLE, NET - Continued
At June 30, 1999, the Company had outstanding commitments to fund real
estate loans of $7,390,779. The commitments were primarily for adjustable
interest rate commercial real estate loans on real estate located across
the Midwest.
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, 1999 and 1998
amounted to $1,935,000 and $1,579,000, respectively. During the year ended
June 30, 1999, there were new loans to this group totaling $629,000 and
repayments totaling $273,000.
The Company serviced participation loans with outstanding balances
totaling $2,448,260 and $3,974,000 at June 30, 1999 and 1998 respectively.
The Company's portion of these loans totaled $1,456,250 and $2,110,000 at
June 30, 1999 and 1998, respectively.
The Company did not sell any portion of its loan portfolio, or loans
originated, during the years ended June 30, 1999 and 1998.
Activity in the allowance for loan losses is summarized as follows:
Year Ended June 30,
-------------------------------------
1999 1998 1997
-------------------------------------
Balance at beginning of year $206,129 $ 221,355 $ 240,278
Provision charged to income 36,000 52,000 36,000
Charge-offs -- (67,226) (54,923)
-------------------------------------
Balance at end of year $242,129 $ 206,129 $ 221,355
=====================================
There were no significant nonaccrual loans as of June 30, 1999, 1998 and
1997.
33
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - LOANS RECEIVABLE, NET - Continued
As of June 30, 1999, the Company had a net investment of $72,330,884 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,
------------------------
1999 1998
------------------------
Undeveloped residential building lot $ 43,109 $ 43,109
Townhouse construction project 193,493 188,761
------------------------
$236,602 $231,870
========================
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 $595 per month under rental agreements which do not exceed one
year.
During 1999, the Company started construction of an office complex on land
owned by the Company in Clive, Iowa (a suburb of Des Moines).
Approximately 40% of the building will be used for a branch office, with
the remaining space to be leased to commercial tenants. Construction is
expected to be completed during the summer of 2000 at a total cost of
approximately $2,400,000, including land.
34
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G - REAL ESTATE HELD FOR INVESTMENT - Continued
Following is a summary of the investment in these real estate projects:
June 30,
----------------------------
1999 1998
----------------------------
Rental real estate, at cost $ 2,713,535 $ 2,697,525
Less accumulated depreciation (503,508) (435,465)
----------------------------
Net rental real estate held for investment 2,210,027 2,262,060
Commercial office space under development 435,218 --
----------------------------
$ 2,645,245 $ 2,262,060
===========================
NOTE H - PROPERTY ACQUIRED IN SETTLEMENT OF LOANS
The Company held two properties acquired in the settlement of loans at
June 30, 1999. The properties, which consist of a single family home and a
commercial building, have a carrying value of $1,133,517. Management
believes the carrying value of the properties does not exceed the fair
value of the properties, net of anticipated selling costs.
The commercial property is a firing range. During 1999, the County adopted
a noise ordinance that may prevent the firing range from operating. The
Company and the commercial property tenant operating the firing range have
filed suit against the County to change the noise ordinance. The fair
value of the commercial property ($788,000 at June 30, 1999) may decrease
if the property cannot be used as a firing range.
No gains or losses were recognized from adjusting the carrying value of
property acquired in settlement of loans to fair value during 1999, 1998
or 1997.
NOTE I - OFFICE PROPERTY AND EQUIPMENT
Following is a summary of office property and equipment:
June 30,
------------------------------
1999 1998
------------------------------
Land $ 725,210 $ 1,067,217
Office building 471,615 471,178
Furniture, fixtures and equipment 443,178 529,897
------------------------------
1,640,003 2,068,292
Less accumulated depreciation (451,756) (504,215)
------------------------------
Office property and equipment, net $ 1,188,247 $ 1,564,077
=============================
The Company leases a portion of one of its office buildings on a
month-to-month basis. Aggregate monthly rental receipts total
approximately $4,700. Land with a cost of $342,007, and acquired for a
possible future office site, was reclassified to real estate held for
investment during 1999.
35
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - ACCRUED INTEREST RECEIVABLE
Following is a summary of accrued interest receivable:
June 30,
------------------------
1999 1998
------------------------
Investments in certificates of deposit $ 4,317 $ 6,299
U.S. Government and agency securities 2,500 14,631
Municipal bonds 1,472 --
Loans receivable 527,739 521,316
------------------------
$536,028 $542,246
========================
NOTE K - DEPOSITS
Savings deposit customers are primarily greater Des Moines area
individuals and businesses. Deposits with balances in excess of $100,000
totaled $3,914,413 and $3,871,947 at June 30, 1999 and 1998, respectively.
Non-interest bearing deposit accounts totaled approximately $1,120,400 and
$881,500 at June 30, 1999 and 1998, respectively.
Deposit accounts held by members of the board of directors and executive
officers totaled $760,524 and $563,000 at June 30, 1999 and 1998,
respectively.
Following is a summary of savings deposits as of June 30, 1999 and 1998
and interest expense relating to those deposits for the years then ended:
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------------
Outstanding Interest Outstanding Interest
Balance Expense Balance Expense
----------------------------------------------------------
<S> <C> <C> <C> <C>
Demand deposits $ 2,691,500 $ 34,312 $ 2,051,363 $ 24,874
Savings and money market deposits 7,795,011 257,215 7,299,665 238,476
Certificates of deposits 44,226,561 2,598,898 44,320,832 2,632,121
----------------------------------------------------------
$54,713,072 2,890,425 $53,671,860 2,895,471
=========== ===========
Less penalties for early withdrawals (2,419) (8,405)
--------- -----------
$ 2,888,006 $ 2,887,066
=========== ===========
</TABLE>
36
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - DEPOSITS - Continued
The scheduled maturities of certificates of deposits are as follows:
Fiscal year ending June 30:
2000 $28,796,031
2001 8,403,282
2002 2,858,809
2003 1,862,509
2004 1,966,362
Thereafter 339,568
------------
$ 44,226,561
============
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,
1999:
- 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
$1,877,047 at June 30, 1999.
- The following fixed rate advances, which are subject to
prepayment penalties:
Maturity Date Interest Rate Amount
- -----------------------------------------------------------------------------
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
September 11, 2008 (2) 4.99% 6,000,000
------------
$ 17,000,000
============
(1) Callable in 2003
(2) Callable in 2001
37
<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
--------------------------------------
2000 $ 93,141 5.87%
2001 3,098,757 5.87% - 6.46%
2002 104,713 5.87%
2003 5,111,028 5.87% - 6.14%
2004 117,723 5.87%
Thereafter 10,351,685 4.99% - 5.87%
------------
$ 18,877,047
============
The weighted average interest rate for all advances was 5.70% and 5.98% at
June 30, 1999 and 1998, respectively.
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 consist of:
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------------------------------------------------------
Federal State Total Federal State Total Federal State Total
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current $402,135 $73,765 $475,900 $405,460 $74,000 $479,460 $393,818 $71,000 $464,818
Deferred 10,985 2,015 13,000 9,000 2,000 11,000 32,100 5,900 38,000
--------------------------------------------------------------------------------------------------------------
Total $413,120 $75,780 $488,900 $414,460 $76,000 $490,460 $425,918 $76,900 $502,818
==============================================================================================================
</TABLE>
38
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - INCOME TAXES - Continued
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,
----------------------------------------
1999 1998 1997
----------------------------------------
Computed "expected" taxes on income $ 512,400 $ 512,600 $ 484,200
State taxes, net of federal benefit 58,200 58,200 55,000
Low income housing tax credits (59,000) (59,000) (57,500)
Other adjustments (22,700) (21,340) 21,118
----------------------------------------
Provision for income taxes $ 488,900 $ 490,460 $ 502,818
========================================
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, 1999 and 1998 were as follows:
Year Ended June 30,
------------------------
1999 1998
-------------------------
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) 119,200 105,300
Compensation agreements (deductible when paid
for income tax reporting purposes) (15,700) (24,400)
Loan fees deferred for financial reporting purposes (23,400) (29,800)
Allowance for loan losses 15,800 31,100
Deferred installment sale gains 35,000 36,000
Unrealized gains on investment securities 2,100 60,000
Other 100 (29,100)
-------------------------
Net deferred income tax liability $ 197,000 $ 213,000
=========================
No valuation allowance was recorded against deferred tax assets at June
30, 1999 or 1998.
NOTE N - EMPLOYEE BENEFITS
RECOGNITION AND RETENTION PLAN (RRP) - The Company had a Recognition and
Retention Plan that provided 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 earned (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 and $32,100 was recorded for the RRP for the years
ended June 30, 1998 and 1997, respectively. There was no expense related
to the RRP during the year ended June 30, 1999.
NOTE N - EMPLOYEE BENEFITS - Continued
39
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) - The Company has 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
$151,300, $191,200 and $131,100 was recorded relative to the ESOP for the
years ended June 30, 1999, 1998 and 1997, respectively.
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,
-------------------------
1999 1998
-------------------------
Allocated shares 69,209 54,730
Shares released for allocation 13,762 14,479
Unreleased shares 53,077 66,839
-------------------------
Total ESOP shares 136,048 136,048
=========================
Fair value of unreleased shares $583,847 $935,746
=========================
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.
40
<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,
1999, 1998 and 1997.
A summary of the status of the Company's stock option plan as of June 30,
1999 and 1998, and the changes during the years ended on those dates is
presented below:
Year ended June 30,
-------------------------
1999 1998
-------------------------
Unexercised options, beginning of year 82,020 95,466
Stock options exercised (12,112) (13,446)
-------------------------
Unexercised options, end of year 69,908 82,020
=========================
STOCK-BASED COMPENSATION COSTS - Compensation costs related to stock-based
compensation plans (RRP plan and stock option plan) totaled approximately
$9,600 and $32,100 for the years ended June 30, 1998 and 1997,
respectively. There were no costs related to the RRP and stock option
plans during the year ended June 30, 1999.
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 1999, 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.
41
<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, 1999 and 1998, management believes that the Association met
all capital adequacy requirements to which it is subject.
As of June 30, 1999:
<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> <C>
Tangible equity (1) $ 7,743,000 9.01% $ 1,289,000 1.50% NA NA
Core capital (1) $ 7,743,000 9.01% $ 3,437,000 4.00% $ 4,297,000 5.00%
Risk-based capital (2) $ 7,985,000 15.13% $ 4,221,000 8.00% $ 5,276,000 10.00%
Tier I risk-based capital(2) $ 7,743,000 14.68% $ 2,110,000 4.00% $ 3,166,000 6.00%
</TABLE>
(1) - To adjusted total assets
(2) - To risk-weighted assets
42
<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.
The Company's management believes that, under the current regulatory
capital regulations, the Association will continue to meet its minimum
capital requirements in the foreseeable future. However, events beyond the
control of the Association, such as increased interest rates or a downturn
in the economy in the Associations' market area, could adversely affect
future earnings and, consequently, the ability to meet future minimum
regulatory capital requirements.
Under current OTS regulations, a savings institution may make a capital
distribution without notice to the OTS, unless it is a subsidiary of a
holding company, provided that it has a regulatory rating in the two top
categories, is not of supervisory concern, and would remain adequately
capitalized, as defined in the OTS prompt corrective action regulations,
following the proposed distribution. Savings institutions 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 earnings to date
during the calendar year. A savings institution 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. The OTS
may object to a capital distribution if it would constitute an unsafe or
unsound practice.
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.
43
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE P - FAIR VALUES OF FINANCIAL INSTRUMENTS - Continued
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments at June
30, 1999 and 1998:
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.
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, 1999 June 30, 1998
--------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $8,481,216 $8,481,216 $9,445,404 $9,445,404
Investments in certificates of deposit 884,300 918,969 1,478,514 1,487,868
Investment securities available-for-sale 1,944,374 1,944,374 2,743,518 2,743,518
Loans receivable 72,330,884 71,719,000 68,979,770 69,542,000
Federal Home Loan Bank stock 1,147,600 1,147,600 949,000 949,000
Financial liabilities
Deposits 54,713,072 55,423,236 53,671,860 53,893,547
Advances from Federal Home Loan Bank 18,877,047 18,266,615 18,964,890 18,857,039
</TABLE>
44
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
45
<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 1999 1998
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 3,431,491 $ 694,836
Investments in certificates of deposit 95,000 689,458
Investment in subsidiary 7,932,532 10,569,296
Advances to subsidiary 645,359 634,359
Investment securities 407,776 256,104
Loans receivable 1,254,544 1,168,312
ESOP note receivable - subsidiary 309,465 378,235
Real estate acquired for development 236,602 231,870
Real estate held for investment 1,690,146 1,290,265
Other assets 283,815 298,785
------------ ------------
$ 16,286,730 $ 16,211,520
============ ============
Liabilities
Dividends payable $ 114,300 $ 78,295
Other liabilities 49,051 48,939
------------ ------------
163,351 127,234
Stockholders' equity
Common stock 8,905 8,905
Additional paid-in capital 8,526,563 8,483,110
Retained earnings 10,090,384 9,457,310
Treasury stock (2,234,986) (1,643,697)
Less common stock acquired by employee stock
ownership plan (271,290) (341,270)
Net realized gains on available-for-sale securities 3,803 119,928
------------ ------------
16,123,379 16,084,286
------------ ------------
$ 16,286,730 $ 16,211,520
============ ============
</TABLE>
Condensed Statement of Income
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------
1999 1998 1997
-----------------------------------------
<S> <C> <C> <C>
Operating income - interest and dividend
income $ 353,213 $ 255,172 $ 194,709
Operating expenses 147,525 93,391 49,932
---------- ----------- ---------
Income before undistributed income of
subsidiary 205,688 161,781 144,777
Equity in undistributed income of
subsidiary 834,113 854,374 770,240
---------- ----------- ---------
Income before income tax 1,039,801 1,016,155 915,017
Provision (credit) for income tax 21,511 (1,124) (6,308)
---------- ----------- ---------
Net income $1,018,290 $ 1,017,279 $ 921,325
========== =========== =========
</TABLE>
NOTE R - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS - Continued
46
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------
1999 1998 1997
-------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,018,290 $ 1,017,279 $ 921,325
Dividends received from subsidiary 3,200,000 1,000,000 1,000,000
Deferred income taxes (11,000) 11,876 5,692
Adjustments to reconcile net income
to net cash from operating
activities:
Depreciation and amortization 39,261 -- --
Gain on sale of investments (46,311) -- --
Equity in undistributed income of
subsidiary (834,113) (854,374) (770,240)
Other 10,133 8,567 28,450
----------- ----------- -----------
3,376,260 1,183,348 1,185,227
Cash flows from investing activities:
Purchase of investment securities (318,559) (63,559) (51,444)
Proceeds from sale of investment
securities 113,644 50,000 --
Proceeds from maturing certificates
of deposit 593,158 -- --
Proceeds from sale of real estate
for development -- 240,000 --
Investment in real estate for development (47,016) (390,479) (938,671)
Investment in and advances to subsidiary -- (349,068) 519,411
(Increase) decrease in loans receivable (86,232) (340,855) (17,503)
Payment received on ESOP debt 68,770 68,770 68,770
Decrease in other assets 14,969 19,131 --
----------- ----------- -----------
338,734 (766,060) (419,437)
Cash flows from financing activities:
Treasury stock purchased (689,688) (184,375) (620,825)
Proceeds from options exercised 60,560 67,231 76,380
Dividends paid (349,211) (312,264) (318,159)
----------- ----------- -----------
(978,339) (429,408) (862,604)
----------- ----------- -----------
Net increase in cash and cash
equivalents 2,736,655 (12,120) (96,814)
Cash and cash equivalents, beginning
of year 694,836 706,956 803,770
----------- ----------- -----------
Cash and cash equivalents, end
of year $ 3,431,491 $ 694,836 $ 706,956
=========== =========== ===========
</TABLE>
47
<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 20, 1999 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, 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
September 30, 1998 ................ 14.000 9.000 .050
December 31, 1998 ................. 11.6875 9.500 .050
March 31, 1999 .................... 10.3750 9.6875 .075
June 30, 1999 ..................... 12.500 9.000 .075
- ----------
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 22, 1999 was $11.50.
At September 22, 1999, there were 1,509,100 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 92301
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, 1999 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.
48
<PAGE>
STATEFED FINANCIAL CORPORATION
CORPORATE INFORMATION
COMPANY AND ASSOCIATION ADDRESS
519 Sixth Avenue Telephone: (515) 282-0239
Des Moines, IA 50309 Fax: (515) 282-1190
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
McGowen, Hurst, Clark & Smith, P.C. Silver, Freedman & Taff, L.L.P.
317 Sixth Avenue 1100 New York Avenue, N.W.
Suite 400 Seventh Floor
Des Moines, Iowa 50309 Washington, D.C. 20005
49
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
Association of Des Moines State Service Corporation 100% Iowa
</TABLE>
EXHIBIT 23
CONSENT OF EXPERTS AND COUNSEL
<PAGE>
[LETTERHEAD OF MCGOWEN HURST CLARK & SMITH, P.C.]
INDEPENDENT AUDITOR'S CONSENT
We consent to the use of our independent auditor's report, dated August 6, 1999,
appearing in the Annual Report on Form 10-KSB of StateFed Financial Corporation
for the year ended June 30, 1999.
/s/ McGowen, Hurst, Clark & Smith, P.C.
Des Moines, Iowa
September 27, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from Form
10-KSB for the fiscal year ended June 30, 1999 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 8,481
<INT-BEARING-DEPOSITS> 884
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,944
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 72,573
<ALLOWANCE> 242
<TOTAL-ASSETS> 90,824
<DEPOSITS> 54,713
<SHORT-TERM> 93
<LIABILITIES-OTHER> 1,110
<LONG-TERM> 18,784
0
0
<COMMON> 9
<OTHER-SE> 16,114
<TOTAL-LIABILITIES-AND-EQUITY> 90,824
<INTEREST-LOAN> 5,951
<INTEREST-INVEST> 745
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 6,696
<INTEREST-DEPOSIT> 2,888
<INTEREST-EXPENSE> 1,112
<INTEREST-INCOME-NET> 2,696
<LOAN-LOSSES> 36
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,926
<INCOME-PRETAX> 1,507
<INCOME-PRE-EXTRAORDINARY> 1,507
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,018
<EPS-BASIC> 0.68
<EPS-DILUTED> 0.67
<YIELD-ACTUAL> 7.95
<LOANS-NON> 0
<LOANS-PAST> 878
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 206
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 242
<ALLOWANCE-DOMESTIC> 242
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 242
</TABLE>
