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, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-22790
STATEFED FINANCIAL CORPORATION
--------------------------------
(Name of small business issuer in its charter)
Delaware 42-1410788
--------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
519 Sixth Avenue, Des Moines, Iowa 50309
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (515) 282-0236
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
---------------------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. YES |X| NO |_|.
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |X|
State the issuer's revenue for the most recent fiscal year: $7.7 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 20, 2000, was $9.50 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 20, 2000, there were issued and outstanding 1,510,600
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of Form 10-KSB - Proxy Statement for 2000 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, 2000, the Company had $100.7 million of assets and
stockholders' equity of $16.6 million (or 16.48% 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,
2000, 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
2
<PAGE>
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.
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, 2000, the Association's net loan portfolio totaled $86.6
million.
The Loan Committee of the Association, comprised of executive officers
Wood and Black, Chairman Golden, 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 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, 2000, the maximum amount which the Association could
have lent to any one borrower and the borrower's related entities was
approximately $1.4 million. At that date the largest loan to one borrower or
group of related borrowers consisted of 51 loans to one borrower totaling $1.37
million. All of such loans were performing in accordance with their terms.
Currently, it is the Association's 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, and on occasion the Association's holding company has participated in
loans with the Association, which loans would have exceeded the limit on loans
to one borrower had such loans been made by the Association.
3
<PAGE>
Loan Portfolio Composition. The following table presents the composition
of the Company's loan portfolio in dollar amounts and in percentages (before
deductions for loans in process, deferred fees and discounts and the allowances
for loan losses) of total loans as of the dates indicated.
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------
2000 1999 1998
------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans
One-to-four family .................................. $ 54,078 61.95% $ 46,178 62.55% $ 44,441 63.41%
Multi-family and Commercial ......................... 31,071 35.59 24,340 32.91 23,115 32.98
Construction or development ......................... 719 0.83 2,025 2.74 1,535 2.19
-------- ------ -------- ------ -------- ------
Total real estate loans ......................... 85,868 98.37 72,543 98.26 69,091 98.58
Other Loans:
Consumer Loans:
Deposit account .................................... 186 0.21 141 0.19 159 0.23
Other .............................................. 1,240 1.42 1,140 1.55 838 1.19
-------- ------ -------- ------ -------- ------
Total consumer loans ............................ 1,426 1.63 1,281 1.74 997 1.42
-------- ------ -------- ------ -------- ------
Total loans ..................................... 87,294 100.00% 73,824 100.00% 70,088 100.00%
====== ====== ======
Less:
Loans in process .................................... (141) (963) (605)
Deferred fees and discounts ......................... (321) (288) (297)
Allowance for losses ................................ 259 (242) (206)
-------- -------- --------
Total loans receivable, net(1) ...................... $ 86,573 $ 72,331 $ 68,980
======== ======== ========
</TABLE>
4
<PAGE>
The following table shows the composition of the Company's loan portfolio
by fixed and adjustable rate at the dates indicated.
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------
Amount Present Amount Present Amount Present
--------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed Rate Loans:
Real estate:
One-to-four family ....................................... $ 37,398 42.84% $ 28,310 38.35% $ 21,041 30.02%
Multi-family and Commercial .............................. 15,286 17.51 14,330 19.41 12,582 17.95
Construction or development .............................. 719 .83 2,025 2.74 1,535 2.19
-------- ------ -------- ------ -------- ------
Total real estate loans ............................... 53,403 61.18 44,665 60.50 35,158 50.16
Consumer .................................................. 1,426 1.63 1,281 1.74 997 1.42
-------- ------ -------- ------ -------- ------
Total fixed-rate loans ................................ 54,829 62.81 45,946 62.24 36,155 51.58
Adjustable Rate Loans:
Real estate:
One-to-four family ....................................... 16,680 19.11 17,868 24.20 23,400 33.39
Multi-family and Commercial .............................. 15,785 18.08 10,010 13.56 10,533 15.03
-------- ------ -------- ------ -------- ------
Total real estate loans ............................... 32,465 37.19 27,878 37.76 33,933 48.42
Consumer .................................................. -- -- -- -- -- --
-------- ------ -------- ------ -------- ------
Total adjustable rate loans ........................... 32,465 37.19 27,878 -- 33,933 48.42
-------- ------ -------- ------ -------- ------
Total loans ........................................... 87,294 100.00% 73,824 100.00% 70,088 100.00%
====== ====== ======
Less:
Loans in process .......................................... (141) (963) (605)
Deferred fees and discounts ............................... (321) (288) (297)
Allowance for loan losses ................................. (259) (242) (206)
-------- -------- --------
Total loans receivable, net ............................ $ 86,573 $ 72,331 $ 68,980
======== ======== ========
</TABLE>
5
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Company's loan portfolio at June 30, 2000. Mortgages which have fixed,
adjustable or renegotiable interest rates are shown as maturing at the
contractual maturity date. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
----------------------------------------------------------------------------------------------
Multi-family and Construction
One-to-four family Commercial or Development Consumer 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)
2001 ............................... $ 1,173 9.16% $ 1,037 8.99% $ 100 10.00% $ 293 8.89% $ 2,603 9.07%
2002 ............................... 756 8.54 715 9.46 -- -- 164 9.49 1,635 9.04
2003 ............................... 6,142 8.63 5,104 8.97 67 7.50 228 9.19 11,541 8.79
2004-2008 .......................... 11,691 8.22 7,982 8.57 -- -- 741 9.06 20,414 8.39
After 2008 ......................... 34,316 8.10 16,233 8.45 $ 552 7.89 -- -- 51,101 8.21
</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, 2001 which have fixed
interest rates is $52.3 million, while the total amount of loans due after such
dates which have floating or adjustable interest rates is $32.4 million.
6
<PAGE>
One-to-four family Residential Mortgage Lending. Loans 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,
2000, the Company's one-to-four family residential mortgage loans totaled $54.1
million, or approximately 62.0% 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, 2000, the Association originated $1.6 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 $12.9
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, 2000
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, 2000, the Company
had $31.1 million of commercial and multi-family real estate loans, which
represented 35.6% 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 totaling
$42,000 secured by commercial real estate. A substantial portion of the
Company's multi-family and commercial real estate loans were secured by
properties located in Iowa. However, the Company had multi-family and commercial
real estate loans, with an aggregate balance of $9.0 million at June 30, 2000,
7
<PAGE>
secured by real estate located in Texas, Colorado, Nebraska, Minnesota, Nevada,
California, Illinois, Wisconsin, and Arizona.
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. Multi-
family 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,
-------------------------------------
2000 1999 1998
-------------------------------------
(In Thousands)
Multi-family ...................... $ 9,388 $ 9,222 $10,141
Nursing homes ..................... 1,653 1,697 1,638
Churches .......................... 598 1,129 1,208
Motels ............................ 5,097 3,321 1,688
Shopping Centers .................. 2,056 1,136 1,568
Commercial Buildings .............. 12,279 7,835 6,872
------- ------- -------
Total ........................ $31,071 $24,340 $23,115
======= ======= =======
This portfolio grew by $6.7 million from fiscal 1999 to fiscal 2000, and
the portfolio comprised 36 percent of total loans compared to 33 percent of
total loans in fiscal 1999.
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, 2000, the Company had $719,000 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, 2000, 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
8
<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, 2000, two auto loans totaling $14,300 in the consumer
loan portfolio were non-performing. There can be no assurance as to the
delinquencies in the future.
The largest component of State Federal's consumer loan portfolio consists
of auto loans. At June 30, 2000, such loans totaled $1.1 million or
approximately 1.3% of the Association's gross loan portfolio. During the fiscal
year ended June 30, 2000, the Association originated $814,000 in auto loans as
compared to $829,000 originated in the same period ended June 30, 1999. At June
30, 2000, the Association's consumer loan portfolio totaled $1.4 million or
1.63% 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 2000, the Company originated $18.0 million of loans, compared to
$16.6 million and $16.5 million in fiscal 1999 and 1998, respectively. The
Company experienced significant repayments of loans during fiscal 1999 and 1998.
Principal repayments in fiscal 2000 decreased by $9.5 million to $8.2 million
from $17.7 million in fiscal 1999.
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.
9
<PAGE>
The following table shows the loan origination, purchase and repayment
activities of the Company for the periods indicated.
Year Ended June 30,
---------------------------------
2000 1999 1998
-------- -------- --------
(In Thousands)
Originations by type:
Adjustable rate:
Real estate - one-to-four family ........ $ 1,585 $ 2,093 $ 2,361
- commercial ................ -- -- 60
Non-real estate - consumer .............. -- -- --
-------- -------- --------
Total adjustable-rate ............ 1,585 2,093 2,421
Fixed rate:
Real estate - one-to-four family ........ 12,873 9,077 8,160
- commercial ................ 2,236 4,396 5,399
Non-real estate - consumer .............. 1,317 1,034 540
-------- -------- --------
Total fixed-rate ................. 16,426 14,507 14,099
-------- -------- --------
Total loans originated ........... 18,011 16,600 16,520
Purchases:
Real estate - one-to-four family ........ $ -- $ -- $ --
- commercial ................ 5,238 2,416 2,213
Non-real estate - consumer .............. -- -- --
-------- -------- --------
Total loans ...................... 5,238 2,416 2,213
Mortgage-backed securities .............. -- -- --
-------- -------- --------
Total purchases .................. 5,238 2,416 2,213
-------- -------- --------
Repayments:
Principal repayments .................... $ 8,232 $ 17,650 $ 18,241
-------- -------- --------
Total reductions ................. 8,232 17,650 18,241
-------- -------- --------
Increase (decrease) in other items,
net ...................................... (775) 1,985 310
-------- -------- --------
Net increase (decrease) .......... $ 14,242 $ 3,351 $ 802
======== ======== ========
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.
10
<PAGE>
The following table sets forth information concerning delinquent mortgage
and other loans at June 30, 2000. 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 .......................................... 15 $1,319 2.44% 1 $ 42 0.14%
60-89 days .......................................... 12 1,067 1.97 -- -- --
90 days and over .................................... 12 961 1.78 -- -- --
------ ------ ---- ------ ------ ----
Total delinquent loans .......................... 39 $3,347 6.19% 1 $ 42 0.14%
====== ====== ==== ====== ====== ====
</TABLE>
At June 30, 2000, there were six delinquent consumer loans totaling
$34,300. The ratio of delinquent loans to total loans (net) was 3.95% at June
30, 2000.
The table below sets forth the amounts and categories of non-performing
assets in the Association's loan portfolio at the dates indicated. Loans are
generally placed on non-accrual status when the collection of principal and/or
interest become doubtful or when the loan is in excess of 90 days delinquent.
Foreclosed assets include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
June 30,
--------------------------
2000 1999 1998
------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accruing loans:
One-to-four family .......................................................... $ 717 $ -- $ 96
Consumer .................................................................... 14 -- --
------ ------ ------
Total .................................................................... 731 -- 96
Accruing loans delinquent more than 90 days:
One-to-four family .......................................................... 244 353 4
Multi-family and commercial real estate ..................................... -- 525 --
------ ------ ------
Total .................................................................... 244 878 4
Foreclosed assets:
One-to-four family .......................................................... -- 345 484
Multi-family and commercial real estate ..................................... 1,338 788 805
------ ------ ------
Total .................................................................... 1,338 1,133 1,289
Total non-performing assets ................................................... $2,313 $2,011 $1,389
====== ====== ======
Total as a percentage of total assets ......................................... 2.30% 2.21% 1.55%
====== ====== ======
</TABLE>
Non-Performing Assets. Included in total non-performing assets are twelve
mortgage loans secured by one-to- four family dwellings totaling $961,000 and
two consumer auto loans for $14,000. One loan totaling $1,338,000 on a
commercial building acquired in settlement of loans, and is presently leased
with capital improvements being made to the building.
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
11
<PAGE>
of the collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the savings association will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
"doubtful" have all of the weaknesses inherent in those classified
"substandard," with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions, and values, "highly questionable and improbable." Assets classified
as "loss" are those considered "uncollectible" and of such little value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted.
When a savings association classifies problem assets as either substandard
or doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When a savings association classifies problem assets
as "loss," it is required either to establish a specific allowance for losses
equal to 100% of that portion of the asset so classified or to charge-off such
amount. An association's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review by the
association's District Director at the regional OTS office, who may order the
establishment of additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS and in
accordance with its classification of assets policy, the Association regularly
reviews the loans in its portfolio to determine whether any loans require
classification in accordance with applicable regulations. On the basis of
management's review of its assets, at June 30, 2000, the Association had
classified a total of $1.5 million of its assets as substandard, none were
classified as doubtful, and none were classified as loss.
At June 30, 2000, total classified assets comprised $1.5 million or 16.1%
of the Association's capital, or 1.6% of the Association's total assets.
At June 30, 2000 the Association had a total of $1.3 million in property
acquired in settlement of loans, which consisted of commercial real estate. The
property is presently leased and capital improvements are being made.
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 Company's allowances will be the result
of periodic loan, property and collateral reviews and thus cannot be predicted
in advance. At June 30, 2000, the Company had a total allowance for loan losses
of $259,000 or .30% of loans receivable, net. See Notes A and E of the Notes to
Consolidated Financial Statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Financial Statements at
Item 7.
12
<PAGE>
The following table sets forth an analysis of the Association's allowance
for loan losses.
Year Ended June 30,
-----------------------
2000 1999 1998
----- ----- -----
(Dollars in Thousands)
Balance at beginning of period ...................... $ 242 $ 206 $ 221
Charge-offs ......................................... (19) -- (67)
Recoveries .......................................... -- -- --
----- ----- -----
Net charge-offs ..................................... (19) -- (67)
Transfer to allowance for decline in
value of foreclosed real estate .................. -- -- --
Additions charged to operations ..................... 36 36 52
----- ----- -----
Balance at end of period ............................ $ 259 $ 242 $ 206
===== ===== =====
Ratio of net charge-offs during the period to average
loans outstanding during the period .............. .02% --% .10%
===== ===== =====
Ratio of net charge-offs during the period to average
non-performing assets ............................ 1.04% --% 4.69%
===== ===== =====
The distribution of the Association's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
June 30
---------------------------------------------------------------------
2000 1999 1997
------------------- ------------------- -------------------
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 ................................... $ 99 61.95% $ 69 62.55% $ 67 63.41%
Multi-family and commercial real
estate .............................................. 144 35.59 61 32.97 58 32.98
Construction ........................................... -- 0.83 -- 2.74 -- 2.19
Consumer and unsecured ................................. 16 1.63 12 1.74 10 1.42
Unallocated ............................................ -- -- 100 -- 71 --
---- ------ ---- ------ ---- ------
Total ............................................. $259 100.00% $242 100.00% $206 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
13
<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, 2000, the Association's
liquidity ratio (liquid assets as a percentage of net withdrawable savings
deposits and current borrowings) was 6.94%. 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, 2000, the Company's cash and interest-bearing deposits in other
financial institutions totaled $2.5 million, or 2.48% of its total assets.
Certificates of deposits invested in other institutions totaled $496,000 or .49%
of its total assets. The Association has a $1.5 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 $1.7 million or 1.69% of its
total assets invested in corporate securities, which includes preferred common
stocks. The Company has $546,000 or .54% of its assets invested in federal
agency securities and municipal bonds. See Note D of Notes to Consolidated
Financial Statements at Item 7.
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.
14
<PAGE>
The following table sets forth the composition of the Bank's investment
portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------
2000 1999 1998
---------------- ---------------- ----------------
Book % of Book % of Book % of
Value Value Value Value Value Value
------- ------ ------- ------ ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
Corporate equity securities ....................................... $ 1,685 45.59% $ 1,438 46.51% $ 1,301 35.23%
Federal agency debt securities .................................... 446 12.07 406 13.13 1,443 39.07
Municipal bonds ................................................... 100 2.70 100 3.23 -- --
FHLB stock ............................................................. 1,465 39.64 1,148 37.13 949 25.70
------- ------ ------- ------ ------- ------
Total investment securities and FHLB
stock ............................................................ $ 3,696 100.00% $ 3,092 100.00% $ 3,693 100.00%
======= ====== ======= ====== ======= ======
Other Interest-Earning Assets:
Interest-bearing deposits with banks ................................. $ 2,196 81.58% $ 8,212 90.28% $ 9,107 86.03%
Certificates of deposit invested
in other institutions ............................................... 496 18.42 884 9.72 1,479 13.97
------- ------ ------- ------ ------- ------
Total ............................................................. $ 2,692 100.00% $ 9,096 100.00% $10,586 100.00%
======= ====== ======= ====== ======= ======
Average remaining life or term to repricing of
certificates of deposit ............................................ 2 years 1 year 1 year
</TABLE>
Contractual maturities of federal agency debt securities and municipal bonds are
shown below:
June 30, 2000
---------------------
Weighted
Book Average
Value Yield
-------- ---------
(Dollars in Thousands)
Due in one year or less $ -- --%
Due after one year through five years -- --
Due after five years through ten years 446 7.76
Due after ten years 100 5.00
----
$546
15
<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,
--------------------------------------
2000 1999 1998
-------- -------- --------
(Dollars in Thousands)
Opening balance ................... $ 54,713 $ 53,672 $ 50,346
Deposits .......................... 66,932 66,888 57,637
Withdrawals ....................... (70,762) (68,735) (57,179)
Interest credited ................. 2,765 2,888 2,868
-------- -------- --------
Ending balance .................... $ 53,648 $ 54,713 $ 53,672
======== ======== ========
Net increase (decrease) .......... $ (1,065) $ 1,041 $ 3,326
======== ======== ========
Percent increase (decrease) ....... (1.95%) 1.94% 6.61%
======== ======== ========
16
<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,
2000.
<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 ............................. $ 7,213 $ 5,015 $ 8,782 $15,399 $36,409
Certificates of deposit of $100,000 or more 929 1,879 1,563 2,215 6,586
------- ------- ------- ------- -------
Total certificates of deposit .............. $ 8,142 $ 6,894 $10,345 $17,614 $42,995
======= ======= ======= ======= =======
</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, 2000, the Association had $29.3 million in FHLB
advances.
At June 30, 2000, 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,
-----------------------------
2000 1999 1998
------- ------- -------
(Dollars In Thousands)
Maximum Balance:
FHLB advances ................................ $29,284 $19,000 $19,000
======= ======= =======
Average Balance:
FHLB advances ................................ $21,716 $18,918 $18,992
======= ======= =======
Weighted average interest rate of FHLB advances 6.31% 5.70% 5.98%
======= ======= =======
17
<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, 2000, State Service Corporation's
gross revenues from property management activities (consisting of rental income)
totaled approximately $327,700 and expenses (consisting of depreciation,
interest, property taxes, insurance, management fees, and maintenance) were
$248,200. Income tax expense totaled $36,100 for 2000. 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 $18,200.
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. hen 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, 2000 was approximately $27,150.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including State Federal and the
Holding Company. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders and to initiate injunctive actions. In general, these enforcement actions
may be initiated for violations of laws and regulations and unsafe or unsound
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.
18
<PAGE>
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, 2000, the Association's lending
limit under this restriction was approximately $1.4 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. This amount is currently equal to approximately 2.98 basis points for
each $100 in domestic deposits in both BIF and SAIF institutions, while
BIF-insured institutions pay an assessment equal to approximately 1.52 basis
points for each $100 in domestic deposits. These assessments, which may be
revised based upon the level of BIF and SAIF deposits, will continue until the
bonds mature in 2017 to 2019.
19
<PAGE>
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, 2000 the Association had tangible capital of $8.2 million, or
8.79 % of adjusted total assets, which is approximately $6.8 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% to 4%
of adjusted total assets depending on an institution's rating. 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, 2000, the Association had core capital equal to $8.2 million,
or 8.79% of adjusted total assets, which is $4.5 million above the minimum
leverage ratio requirement of 4% 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, 2000, State Federal had
no capital instruments that qualify as supplementary capital but had $259,000 of
general loss reserves, which was less than 0.41% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for the
purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. State Federal had no such
exclusions from capital and assets at June 30, 2000.
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.
20
<PAGE>
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, 2000, the Association had total risk-based capital of $8.4
million (including $8.2 million in core capital and $200,000 in qualifying
supplementary capital) and risk-weighted assets of $62.6 million or total
risk-based capital of 13.49% of risk-weighted assets. This amount was $3.4
million above the 8% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1 risk-based
capital ratio or an 8% risk-based capital ratio). Any such association must
submit a capital restoration plan and until such plan is approved by the OTS may
not increase its assets, acquire another institution, establish a branch or
engage in any new activities, and generally may not make capital distributions.
The OTS is authorized to impose the additional restrictions that are applicable
to significantly undercapitalized associations.
Any savings association that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital ratio of less than 6%) must be made
subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authorities of the OTS or FDIC, including the
appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into a
lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Association may have a substantial adverse effect on the Association's
operations and profitability. Holding Company shareholders do not have
preemptive rights, and therefore, if the Holding Company is directed by the OTS
or the FDIC to issue additional shares of Common Stock, such issuance may result
in the dilution in the percentage of ownership of the Holding Company.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions on savings associations with
respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
savings association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result, the regulatory capital of the association
would be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion.
Generally, savings associations, such as State Federal, that before and
after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net
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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."
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, 2000, the Association was in compliance with both
requirements, with an overall liquid asset ratio of 6.94% and a short-term
liquid assets ratio of 6.18%.
Accounting
An OTS policy statement applicable to all savings associations clarifies
and re-emphasizes that the investment activities of a savings association must
be in compliance with approved and documented investment policies and
strategies, and must be accounted for in accordance with GAAP. Under the policy
statement, management must support its classification of and accounting for
loans and securities (i.e., whether held for investment, sale or trading) with
appropriate documentation. The Association is in compliance with these amended
rules.
The OTS has adopted an amendment to its accounting regulations, which may
be made more stringent than GAAP by the OTS, to require that transactions be
reported in a manner that best reflects their underlying economic substance and
inherent risk and that financial reports must incorporate any other accounting
regulations or orders prescribed by the OTS.
Qualified Thrift Lender Test
All savings associations, including the Association, are required to meet
a qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings association to have at least 65% of its
portfolio assets (as defined by regulation) in qualified thrift investments on a
monthly average for nine out of every 12 months on a rolling basis. As an
alternative, the Savings Association may maintain 60% of its assets specified in
Section 770(a)(19) of the Internal Revenue Code. Under either test, such assets
primarily consist of residential housing related loans and investments. At June
30, 2000, 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
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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 December 1999 and received a rating of satisfactory.
Transactions with Affiliates
Generally, transactions between a savings association or its subsidiaries
and its affiliates are required to be on terms as favorable to the association
as transactions with non-affiliates. In addition, certain of these transactions
such as loans to an affiliate, are restricted to a percentage of the
association's capital. Affiliates of State Federal include the Holding Company
and any company which is under common control with the Association. In addition,
a savings association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of most
affiliates. The Association's subsidiaries are not deemed affiliates, however;
the OTS has the discretion to treat subsidiaries of savings associations as
affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation
The Holding Company is a unitary savings and loan holding company subject
to regulatory oversight by the OTS. As such, the Holding Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Holding Company and its non-savings association subsidiaries which also permits
the OTS to restrict or prohibit activities that are determined to be a serious
risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Holding Company
generally is not subject to activity restrictions. If the Holding Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Holding Company and any of its
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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,
2000, the Association was in compliance with these reserve requirements. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements that may be imposed
by the OTS. See "-- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
The Association is a member of the FHLB of Des Moines, which is one of 12
regional FHLBs, that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures, established
by the board of directors of the FHLB, which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
As a member, State Federal is required to purchase and maintain stock in
the FHLB of Des Moines. At June 30, 2000, State Federal had $1.5 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 6.81% and were 6.55% for fiscal
year 2000.
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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, 2000, dividends paid by the FHLB of Des
Moines to State Federal totaled $78,200 which constitutes a $7,000 increase from
the amount of dividends received in the fiscal year ended June 30, 1999. The
$22,500 dividend received for the quarter ended June 30, 2000 reflects an
annualized rate of 6.86%, which increased 0.61% from the same quarter ended June
30, 1999, which was a rate of 6.25.
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 began for the bank in fiscal year 1999. The Bank previously
established, and will continue to maintain, a deferred tax liability with
respect to its Federal tax bad debt reserves in excess of the base-year
balances; accordingly, the legislative changes will have no effect on total
income tax expense for financial reporting purposes.
Also, under the August 1996 legislation, the Association's base-year
Federal tax bad debt reserves are "frozen" and subject to current recapture only
in very limited circumstances. Generally, recapture of all or a portion of the
base- year reserves will be required if the Association pays a dividend in
excess of its current or accumulated earnings or profits, redeems any of its
stock or is liquidated. The Association has not established a deferred federal
tax liability under Statement of Financial Accounting Standards ("SFAS") No. 109
for its base-year Federal tax bad debt reserves, as it does not anticipate
engaging in any of the transactions that would cause such reserves to be
recaptured. The unrecognized deferred tax liability was approximately $510,000
at June 30, 2000.
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
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extent it exceeds the corporation's regular income tax and net operating losses
can offset no more than 90% of alternative minimum taxable income.
The Association and its subsidiary have not been audited by the IRS with
respect to consolidated federal income tax returns within the past three years.
With respect to years examined by the IRS, either all deficiencies have been
satisfied or sufficient reserves have been established to satisfy asserted
deficiencies. In the opinion of management, any examination of still open
returns (including returns of subsidiaries and predecessors of, or entities
merged into, the Association) would not result in a deficiency which could have
a material adverse effect on the financial condition of the Association and its
consolidated subsidiaries.
Iowa Taxation. The Holding Company and the Association's subsidiaries file
Iowa corporation tax returns while the Association files an Iowa franchise tax
return.
Iowa imposes a franchise tax on the taxable income for both mutual and
stock savings and loan associations. The tax rate is 5%, which may effectively
be increased, in individual cases, by application of a minimum tax provision.
Taxable income under the franchise tax is generally similar to taxable income
under the federal corporate income tax, except that, under the Iowa franchise
tax, no deduction is allowed for Iowa franchise tax payments and taxable income
includes interest on state and municipal obligations. Interest on U.S.
obligations is taxable under the Iowa franchise tax and under the federal
corporate income tax.
Taxable income under the Iowa corporate income tax is generally similar to
taxable income under the federal corporate income tax, except that, under the
Iowa tax, no deduction is allowed for Iowa income tax payments; interest from
state and municipal obligations is included in income; interest from U.S.
obligations is excluded from income; and 50% of federal corporate income tax
payments are excluded from income. The Iowa corporate income tax rates range
from 6% to 12% and may be effectively increased, in individual cases, by
application of a minimum tax provision.
Delaware Taxation. As a Delaware holding company, the Holding Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Holding Company
is also subject to an annual franchise tax imposed by the State of Delaware.
Competition
State Federal faces strong competition, both in originating real estate
and other loans and in attracting deposits. Competition in originating real
estate loans comes primarily from other commercial banks, savings associations,
credit unions and mortgage bankers making loans secured by real estate located
in the Association's market area. The Association competes for real estate and
other loans principally on the basis of the quality of services it provides to
borrowers, and loan fees it charges, and the types of loans it originates.
The Association attracts all of its deposits through its retail banking
offices, primarily from the communities in which those retail banking offices
are located; therefore, competition for those deposits is principally from other
commercial banks, savings associations and credit unions located in the same
communities. The Association competes for these deposits by offering a variety
of deposit accounts at competitive rates, convenient business hours, and
convenient branch locations with interbranch deposit and withdrawal privileges
at each.
The Association's primary concentration is Des Moines, Iowa. There are
four savings institutions, over 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, 2000, the Company and its subsidiary had a total of 20
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, 2000.
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, 2000 was $3.0 million.
See Note H of Notes to Consolidated Financial Statements at Item 7.
Total
Approximate
Date Square Net Book Value at
Location Acquired Footage June 30, 2000
-------------------------- ------------------ ----------- -------------------
Main Office:
519 Sixth Avenue January 3, 1995 3,300 $721,000
Des Moines, Iowa
Branch Office:
4018 University Avenue 1985 4,000 $280,000
Des Moines, Iowa
Future Branch Office:
13523 University Avenue Under Construction 12,000 $1,832,000
Clive, Iowa
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, 2000 was $85,000. The net book value of
other furniture and equipment at June 30, 2000 was $20,300.
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, 2000.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The dividend payout ratio for June 30, 2000 was 41.3%.
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.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW DIVIDENDS
------------- ---- --- ---------
<S> <C> <C> <C>
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
September 30, 1999 ................ 12.125 10.875 .075
December 31, 2000 ................. 11.000 7.500 .075
March 31, 2000 .................... 9.000 7.750 .075
June 30, 2000 ..................... 9.3125 7.875 .075
</TABLE>
----------
The stock price information set forth in the table above was provided by the
National Association of Securities Dealers, Inc. Automated Quotation System. The
average of the bid and asked prices of StateFed Financial Corporation's common
stock on September 18, 2000 was $9.50.
At September 18, 2000, there were 1,510,600 shares of StateFed Financial
Corporation common stock issued and outstanding and there were approximately 900
holders of record.
SHAREHOLDERS AND GENERAL INQUIRIES TRANSFER AGENT
John F. Golden, Chairman of the Board First Bankers Trust Company, N.A.
StateFed Financial Corporation 1201 Broadway
519 Sixth Avenue Quincy, IL 92301
Des Moines, Iowa 50309 (217) 228-8000
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Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operation and Selected Financial Data
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.
Non-interest income consists primarily of service charges and other fees, gains
(losses) on sales of assets and income from real estate operations. Non-interest
expense includes salaries and employee benefits, real estate operations,
occupancy of premises, federal deposit insurance premiums, data processing
expenses and other operating expenses.
StateFed Financial generally has sought to enhance its net earnings by,
among other things, maintaining asset quality and levels of capital above
federally required minimum standards and by controlling general and
administrative expenses. Although no assurances can be made about future
periods, the Company's results in these areas have enabled it to be consistently
profitable and well capitalized.
The operating results of the Company are also affected by general economic
conditions, the monetary and fiscal policies of federal agencies and the
policies of agencies that regulate financial institutions. StateFed Financial's
cost of funds is influenced by interest rates on competing investments and
general market rates of interest. Lending activities are influenced by the
demand for real estate loans and other types of loans, which is in turn affected
by the interest rates at which such loans are made, general economic conditions
affecting loan demand and the availability of funds for lending activities.
StateFed Financial's basic mission is to maintain a strong capital
position and continue to record core earnings while serving its local community.
Specifically, it offers a range of customer services and products, including
deposit accounts and loans with a special emphasis on one-to-four family
mortgage lending and, to a lesser extent, multi-family
28
<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 37.19%
adjustable rate loans, 35.27% fixed rate loans, and 27.54% balloon loans.
Financial Condition
Comparison of Fiscal Years Ended June 30, 2000 and June 30, 1999.
The Company's total assets increased from $90.8 million at June 30, 1999
to $100.7 million at June 30, 2000, an increase of $9.9 million, or 10.9%. The
increase was primarily due to an increase in loans receivable of $14.3 million
and an increase in office property and equipment of $1.3 million, partially
offset by a decrease in cash and cash equivalents of $6.0 million. The increase
in loans receivable was funded primarily from an increase in advances from the
FHLB of $10.4 million and a decrease in cash and cash equivalents of $6.0
million.
Net loans increased $14.3 million from $72.3 million at June 30, 1999 to
$86.6 million at June 30, 2000. The increase in the loan portfolio was comprised
primarily of $18.0 million in mortgage loans originated and $5.2 million in
purchased loans, partially offset by $8.2 million in principal repayments.
Total deposits decreased $1.1 million from $54.7 million at June 30, 1999
to $53.6 million at June 30, 2000. During fiscal 2000, NOW accounts decreased
$60,000, money market accounts increased $420,000, and passbook accounts
decreased $190,000, while certificates of deposit decreased $1.2 million. The
Company did not offer any special marketing programs during the 2000 fiscal
year.
Total stockholders' equity increased $526,500 from $16.12 million at June
30, 1999 to $16.50 million at June 30, 2000. The increase was primarily the
result of net income of $1.1 million, exercised stock options of $43,000,
allocations to the Employee Stock Ownership Plan ("ESOP") totaling $126,000,
partially offset by $202,000 expended for the repurchase of 18,000 shares of
Company common stock, dividends declared totaling $452,000, and the decrease in
unrealized gains on available-for-sale securities of $128,000.
Results of Operations
Comparison of Fiscal Years ended June 30, 2000 and June 30, 1999.
General. Net income for the year ended June 30, 2000 increased $122,000
from $1.02 million at June 30, 1999 to $1.14 million at June 30, 2000. Net
interest income increased $340,000. This increase was partially offset by a
decrease in non-interest income of $89,000, an increase in non-interest expense
of $80,000 and an increase in income taxes of $48,000.
Interest Income. Interest income increased $326,000 to $7.0 million for
fiscal 2000 compared to $6.70 million for fiscal 1999 due primarily to an
increase in total loans receivable.
Interest Expense. Interest expense decreased $14,000 from $4.00 million
for fiscal 1999 to $3.99 million in fiscal 2000. The decrease was due to a
decrease in the balance in deposits, offset by the effect of the increase in
total advances from the Federal Home Loan Bank.
Provision for Loan Losses. The provision for loan losses for fiscal 2000
remained unchanged at $36,000 for the years ended June 30, 1999 and June 30,
2000. 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
29
<PAGE>
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 $773,100 in fiscal
1999 to $684,100 in fiscal 2000. The decrease of $89,000 is primarily the
results of a $41,000 decrease in investment real estate operations, and a
$48,000 decrease in other non-interest income.
Non-Interest Expense. Non-interest expense increased from $1.9 million in
fiscal 1999 to $2.0 million in fiscal 2000. The increase of $80,500 is primarily
the result of an increase in salaries and employee benefits of $116,100, an
increase in occupancy expense of $2,600 and an increase in advertising of
$4,700, partially offset by a decrease in investment real estate operations
expense of $16,800, a decrease in Federal deposit insurance premiums of $10,100,
a decrease in other non-interest expense of $11,800, and a decrease in data
processing services of $4,100.
Income Tax Expense. Income tax expense was $536,900 in fiscal 2000
compared to $488,900 in fiscal 1999, an increase of $48,000. Income taxes
increased due to the increase in taxable income.
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,
30
<PAGE>
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.
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, 2000, the Company had $32.5 million of
adjustable-rate loans which comprised over 37.2% of the Association's loan
portfolio. The Association has not historically sold its loans.
The primary objective of the Association's investment strategy is to
provide liquidity necessary to meet funding needs as well as to address daily,
cyclical and long-term changes in the asset/liability mix, while contributing to
profitability by providing a stable flow of dependable earnings. Investments
generally include interest-bearing deposits in other federally insured financial
institutions, FHLB stock, U.S. Government securities, and certain issues of
corporate equity securities.
Generally, the investment policy of the Association is to invest funds
among various categories of investments and maturities based upon the Company's
need for liquidity, to achieve the proper balance between its desire to minimize
risk and maximize yield, to provide collateral for borrowings, and to fulfill
the Association's asset/liability management policies.
The Association'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,
2000, the Company would qualify for an exemption from this rule.
The following table sets forth, at June 30, 2000, 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 (+/-300
basis points, measured in 100 basis point increments).
31
<PAGE>
Estimated Increase (Decrease) in NPV
Change in Interest Rates Estimated NPV ------------------------------------
(Basis Points) Amount Amount Percent
-------------- ------ ------ -------
(Dollars in Thousands)
+300 11,115 -1,536 -12%
+200 11,746 -905 -7%
+100 12,288 -363 -3%
-- 12,651 -- --
-100 12,700 50 0%
-200 12,462 -188 -1%
-300 12,252 -398 -3%
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.
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,
------------------------------------------------------------------
2000 1999
-------------------------------- -------------------------------
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 ..... $ 3,135 $ 143 4.56% $ 9,678 $ 459 4.74%
Certificates of deposit invested in
other institutions ............... 732 46 6.28 1,332 78 5.86
Investment and other securities .... 2,338 146 6.24 2,246 137 6.10
Loans receivable(1) ................ 79,105 6,608 8.35 69,904 5,951 8.51
FHLB stock ......................... 1,194 78 6.53 1,102 71 6.44
--------- --------- ------- --------- --------- -------
Total interest-earning assets(1) .. $ 86,504 $ 7,021 8.12 $ 84,262 $ 6,696 7.95
========= ========= -------
Interest-Bearing Liabilities:
Passbook accounts ................. 3,539 97 2.74 3,561 97 2.72
NOW accounts ...................... 2,605 42 1.61 2,333 34 1.46
Money market accounts ............. 4,819 174 3.61 4,418 160 3.62
Certificates of deposit ........... 43,277 2,452 5.66 44,199 2,597 5.88
FHLB advances ..................... 21,716 1,269 5.84 18,921 1,112 5.88
Effect of capitalized interest .... -- (49) -- -- -- --
--------- --------- ------- --------- --------- -------
Total interest-bearing liabilities $ 75,956 $ 3,985 5.25% $ 73,432 4,000 5.45
========= --------- ------- ========= --------- -------
Net interest income ................. $ 3,036 $ 2,696
========= =========
Net interest rate spread............. 2.87% 2.50%
======= =======
Net earning assets................... $ 10,548 $ 10,830
========= =========
Net yield on average
interest-earning assets............. 3.51% 3.20%
======= =======
Average interest-earning assets to
average interest-bearing liabilities 1.39x 1.147x
========= =========
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------
1998
-------------------------------
Average Interest
utstanding Earned/ Yield/
Balance Paid Rate
---------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-Earning Assets:
Interest-earning bank accounts ..... $ 7,881 $ 380 4.82%
Certificates of deposit invested in
other institutions ............... 2,553 148 5.80
Investment and other securities .... 3,321 241 7.26
Loans receivable(1) ................ 68,195 5,989 8.78
FHLB stock ......................... 950 65 6.84
--------- --------- -------
Total interest-earning assets(1) .. $ 82,900 $ 6,823 8.23
========= --------- -------
Interest-Bearing Liabilities:
Passbook accounts ................. 3,889 107 2.75
NOW accounts ...................... 1,901 25 1.32
Money market accounts ............. 3,654 132 3.61
Certificates of deposit ........... 43,436 2,624 6.04
FHLB advances ..................... 18,992 1,155 6.08
Effect of capitalized interest .... -- -- --
--------- --------- -------
Total interest-bearing liabilities $ 71,872 4,043 5.63
========= --------- -------
Net interest income ................. $ 2,780
=========
Net interest rate spread............. 2.60%
=======
Net earning assets................... $ 11,028
=========
Net yield on average
interest-earning assets............. 3.35%
=======
Average interest-earning assets to
average interest-bearing liabilities 1.153x
=========
</TABLE>
----------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
33
<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, Year Ended June 30,
----------------------------------------------------------------
2000 v. 1999 1999 v. 1998
------------------------------ ------------------------------
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 ................. $(299) $ (17) $(316) $ 85 $ (6) $ 79
Certificates of deposit invested in other
institutions .................................. (37) 5 (32) (71) 1 (70)
Investments and other securities ................ 6 3 9 (70) (34) (104)
Loans receivable ................................ 770 (113) 657 148 (186) (38)
FHLB stock ...................................... 6 1 7 10 (4) 6
----- ----- ----- ----- ----- -----
Total interest-earning assets ................... $ 446 $(121) $ 325 $ 102 $(229) $(127)
===== ===== ===== ===== =====
Interest-bearing liabilities:
Passbook accounts ............................... (1) 1 -- (9) (1) (10)
NOW accounts .................................... 4 4 8 6 3 9
Money market accounts ........................... 14 -- 14 28 -- 28
Certificates of deposit ......................... (53) (92) (145) 46 (73) (27)
FHLB advances ................................... 163 (6) 157 (4) (39) (43)
----- ----- ----- ----- ----- -----
Total interest-bearing liabilities .............. $ 127 $ (93) $ 34 $ 67 $(110) $ (43)
===== ===== ===== ===== ===== =====
Net interest income, before effect of capitalized
interest ...................................... $ 291 $ (84)
=====
Effect of capitalized interest .................. 49
-----
Net interest income ............................. $ 340 $ (84)
===== =====
</TABLE>
34
<PAGE>
Interest Rate Spread
The Company's results of operations are determined primarily by net
interest income and, to a lesser extent, fee income, miscellaneous income and
operating expenses. Net interest income is determined by the interest rate
spread between the yields earned on its interest-earning assets and the rates
paid on interest-bearing liabilities and by the relative amounts of
interest-earning assets and interest-bearing liabilities.
The following table sets forth the weighted average effective interest
rate earned by the Company on its loan and investment portfolios, the weighted
average effective cost of the Company's deposits and borrowings, the interest
rate spread of the Company and the net yield on weighted average
interest-earning assets at year end.
<TABLE>
<CAPTION>
At June 30,
---------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Weighted average yield on:
Loans receivable ........................................... 8.35% 8.25% 8.477%
Interest-earning bank accounts ............................. 5.90 5.49 5.49
Certificates of deposit invested in other institutions ..... 6.35 6.54 6.07
Investments and other securities ........................... 4.89 5.33 6.71
FHLB stock ................................................. 6.86 6.25 6.75
Combined weighted average yield on interest-earning assets 8.17 7.84 8.028
Weighted average rate paid on:
Passbook accounts .......................................... 2.83 2.83 2.827
NOW accounts ............................................... 1.52 1.60 1.422
Money market accounts ...................................... 3.30 3.29 3.291
Certificates of deposit .................................... 6.12 5.62 6.100
FHLB advances .............................................. 6.31 5.70 5.983
Combined weighted average rate paid on interest-bearing
liabilities ........................................... 5.75 5.23 5.621
Spread ...................................................... 2.42 2.62 2.407
</TABLE>
Liquidity and Capital Resources
The OTS requires minimum levels of liquid assets. OTS regulations
presently require the Association 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
Association may rely, if necessary, to fund deposit withdrawals and other
short-term funding needs. The Association's regulatory liquidity at June 30,
2000 was 6.7%. In addition to the regulatory liquidity requirement, the
Association 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. The Association's short-term liquidity ratio at June 30, 2000 was 6.7%.
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, 2000 has been advances from the Federal Home Loan Bank. The net
increase in advances from FHLB was $10.4 million during fiscal year 2000.
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.
35
<PAGE>
Excess liquidity is invested generally in interest-bearing overnight deposits
and other short-term government and agency obligations. If the Company requires
additional funds beyond its internal ability to generate, it has additional
borrowing capacity with the FHLB of Des Moines.
The Company anticipates that it will have sufficient funds available to
meet current loan commitments. At June 30, 2000, the Company had outstanding
commitments to extend credit which amounted to $5.3 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, 2000, totaled approximately $25.4 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, 2000, the Association had $29.3 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, 2000, the Company's stockholders'
equity totaled $16.6 million, or 16.5% of assets.
At June 30, 2000, the Association had tangible and core capital of $8.2
million, or 8.79% of adjusted total assets, respectively, which was
approximately $6.8 million and $4.5 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, 2000, the Association had risk-based capital of $8.5 million
(including $8.2 million in core capital), or 13.49% of risk-weighted assets of
$62.6 million. This amount was $3.4 million above the 8% requirement in effect
on that date.
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
In June 1998, the Financial Accounting Standards Board ("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.
36
<PAGE>
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.
37
<PAGE>
Item 7. Financial Statements
STATEFED FINANCIAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS AND
INDEPENDENT AUDITOR'S REPORT
JUNE 30, 2000
38
<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, 2000 and 1999, and the
related consolidated statements of income, comprehensive income, stockholders'
equity, and cash flows for each of the three years in the period ended June 30,
2000. 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, 2000 and 1999
and the consolidated results of their operations and their cash flows for each
of the three years ended June 30, 2000, 1999 and 1998, in conformity with
generally accepted accounting principles.
McGowen, Hurst, Clark & Smith, P.C.
Des Moines, Iowa
August 11, 2000
39
<PAGE>
STATEFED FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
-----------------------------
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents
Non-interest bearing $ 281,585 $ 268,876
Interest bearing 2,195,909 8,212,340
------------- ------------
2,477,494 8,481,216
Investments in certificates of deposit 495,692 884,300
Investment securities available-for-sale 2,231,274 1,944,374
Loans receivable, net 86,572,585 72,330,884
Real estate held for investment, net 2,175,785 2,210,027
Property acquired in settlement of loans 1,337,847 1,133,517
Office property and equipment, net 2,965,659 1,623,465
Federal Home Loan Bank stock, at cost 1,464,600 1,147,600
Accrued interest receivable 573,293 536,028
Other assets 390,550 532,297
------------- ------------
Total Assets $ 100,684,779 $ 90,823,708
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 53,648,118 $ 54,713,072
Advances from the Federal Home Loan Bank 29,283,906 18,877,047
Advances from borrowers for taxes and insurance 353,743 337,371
Accrued interest payable 140,243 133,773
Income taxes
Current 197,992 127,643
Deferred 99,000 197,000
Accounts payable and other liabilities 198,689 200,123
Dividends payable 113,220 114,300
------------- ------------
Total Liabilities 84,034,911 74,700,329
Stockholders' equity
Preferred stock, $.01 par value, 500,000 shares authorized,
none issued -- --
Common stock, $.01 par value, 2,000,000 shares authorized
1,780,972 shares issued with 1,509,600 (2000) and 1,519,004
(1999) shares outstanding 17,810 17,810
Additional paid-in capital 8,546,501 8,517,658
Retained earnings - substantially restricted 10,778,818 10,090,384
Less treasury stock (271,372 and 261,968 shares, at cost) (2,362,921) (2,234,986)
Less common stock acquired by employee stock
ownership plan (205,761) (271,290)
Accumulated other comprehensive income (loss) --
net unrealized gains (losses) on available-for-sale
securities net of related tax effects (124,579) 3,803
------------- ------------
Total Stockholders' Equity 16,649,868 16,123,379
------------- ------------
Total Liabilities and Stockholders' Equity $ 100,684,779 $ 90,823,708
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
STATEFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME
Loans receivable interest $6,608,263 $5,950,625 $5,987,884
Investment securities and other interest 413,313 744,777 834,682
---------- ---------- ----------
7,021,576 6,695,402 6,822,566
INTEREST EXPENSE
Deposits 2,731,412 2,888,006 2,887,066
Advances from the Federal Home Loan Bank 1,254,358 1,111,563 1,155,461
---------- ---------- ----------
3,985,770 3,999,569 4,042,527
---------- ---------- ----------
NET INTEREST INCOME 3,035,806 2,695,833 2,780,039
PROVISION FOR LOAN LOSSES 36,000 36,000 52,000
---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,999,806 2,659,833 2,728,039
NON-INTEREST INCOME
Investment real estate operations 524,514 565,503 440,718
Other 159,573 207,648 160,119
---------- ---------- ----------
684,087 773,151 600,837
NON-INTEREST EXPENSE
Salaries and employee benefits 1,032,790 916,692 930,892
Investment real estate operations 312,090 328,904 267,824
Occupancy expenses 162,779 160,202 132,669
Federal deposit insurance premiums 49,887 60,023 57,800
Data processing services 107,328 111,459 99,239
Advertising 38,379 33,639 33,327
Other 303,029 314,875 299,386
---------- ---------- ----------
2,006,282 1,925,794 1,821,137
---------- ---------- ----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 1,677,611 1,507,190 1,507,739
PROVISION FOR INCOME TAXES 536,860 488,900 490,460
---------- ---------- ----------
NET INCOME $1,140,751 $1,018,290 $1,017,279
========== ========== ==========
Basic earnings per share $ 0.78 $ 0.68 $ 0.68
========== ========== ==========
Diluted earnings per share $ 0.76 $ 0.67 $ 0.66
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
STATEFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net income $ 1,140,751 $ 1,018,290 $ 1,017,279
Other comprehensive income, net of tax effects:
Unrealized holding gains (losses) on securities
arising during period (129,682) (147,153) 64,341
Reclassification adjustment - realized gains
(losses) on securities during the period 1,300 31,028 (1,875)
----------- ----------- -----------
Net change in other comprehensive income (128,382) (116,125) 62,466
----------- ----------- -----------
Comprehensive income $ 1,012,369 $ 902,165 $ 1,079,745
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
STATEFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years ended June 30, 2000, 1999, and 1998
--------------------------------------------------------------------------------
Common Common
Additional Stock Stock
Common Paid-in Retained Treasury Acquired Acquired
Stock Capital Earnings Stock By ESOP By RRP
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 $ 17,810 $ 8,389,952 $ 8,752,218 $ (1,560,859) $ (413,940) $ (9,636)
Net income for the year 1,017,279
Dividends declared (312,187)
ESOP common stock released for
allocation 118,559 72,670
Amortization of RRP contributions 9,636
Treasury stock acquired - 10,000 shares (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 17,810 8,474,205 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 17,810 8,517,658 10,090,384 (2,234,986) (271,290) --
Net income for the year 1,140,751
Dividends declared (452,317)
ESOP common stock released for
allocation 60,240 65,529
Treasury stock acquired - 18,000 shares (202,313)
Treasury stock reissued to fund stock options
exercised - 8,596 shares (31,397) 74,378
Change in unrealized gains (losses)
on available-for-sale securities, net of
related tax effects
--------------------------------------------------------------------------------
Balance at June 30, 2000 $ 17,810 $ 8,546,501 $ 10,778,818 $ (2,362,921) $ (205,761) $ --
================================================================================
<CAPTION>
Years ended June 30, 2000, 1999, and 1998
-----------------------------------------
Accumulated Other Total
Comprehensive Stockholders'
Income (Loss) Equity
-----------------------------------------
<S> <C> <C>
Balance at June 30, 1997 $ 57,462 $ 15,233,007
Net income for the year 1,017,279
Dividends declared (312,187)
ESOP common stock released for
allocation 191,229
Amortization of RRP contributions 9,636
Treasury stock acquired - 10,000 shares (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
Net income for the year 1,140,751
Dividends declared (452,317)
ESOP common stock released for
allocation 125,769
Treasury stock acquired - 18,000 shares (202,313)
Treasury stock reissued to fund stock options
exercised - 8,596 shares 42,981
Change in unrealized gains (losses)
on available-for-sale securities, net of
related tax effects (128,382) (128,382)
-----------------------------------------
Balance at June 30, 2000 $ (124,579) $ 16,649,868
=========================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
STATEFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------
2000 1999 1998
------------ ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,140,751 $ 1,018,290 $ 1,017,279
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 167,385 160,449 102,612
Gain on sale of real estate (50,094) (53,835) (44,017)
Amortization of ESOP and RRP contributions 125,770 151,271 200,865
Realized (gains) losses on sale of available-for-sale securities (1,940) (52,602) 1,875
Deferred loan fees 35,970 (9,635) (32,165)
Provision for losses on loans 36,000 36,000 52,000
Deferred income taxes (21,293) 13,000 11,000
Other 13,134 18,607 (45,143)
Change in:
Accrued interest receivable (37,265) 6,218 25,232
Other assets 61,759 22,959 (3,900)
Accrued interest payable 6,470 (478) 5,370
Current income tax liability 70,349 108,624 (10,308)
Accounts payable and other liabilities 1,634 (95,177) 89,575
------------ ----------- ------------
Net cash provided by operating activities 1,548,630 1,323,691 1,370,275
Cash flows from investing activities
Investment in certificates of deposits (99,000) (198,000) (99,000)
Maturity of investments in certificates of deposit 487,000 792,046 3,052,000
Proceeds from sale or maturity of available-for-sale
investment securities 703,660 1,124,853 1,650,000
Purchase of available-for-sale investment securities (1,194,123) (420,259) (771,984)
(Purchase) redemption of FHLB stock (317,000) (198,600) 1,000
Net increase in loans outstanding (13,953,559) (3,199,516) (1,435,034)
Investment in real estate held for investment (36,555) (55,472) (359,497)
Investment in real estate held for development 79,987 (4,731) (36,386)
Proceeds from sales of real estate 65,500 13,000 --
Investment in property acquired in settlement of loans (595,028) (840) (55,321)
Purchases of equipment and construction of office property (1,438,782) (112,134) (216,738)
------------ ----------- ------------
Net cash flows provided (used) by investing activities (16,297,900) (2,259,653) 1,729,040
Cash flows from financing activities
Net increase (decrease) in deposits (1,064,954) 1,041,271 3,325,888
Advances from Federal Home Loan Bank 10,500,000 6,000,000 14,000,000
Repayment of Federal Home Loan Bank advances (93,141) (6,087,843) (14,035,110)
Net increase (decrease) in advances from borrowers 16,372 (3,315) (149,367)
Proceeds from stock options exercised 42,981 60,560 67,231
Dividends paid (453,397) (349,211) (312,264)
Treasury stock purchased (202,313) (689,688) (184,375)
------------ ----------- ------------
Net cash flows provided (used) by financing activities 8,745,548 (28,226) 2,712,003
------------ ----------- ------------
CHANGE IN CASH AND CASH EQUIVALENTS (6,003,722) (964,188) 5,811,318
CASH AND CASH EQUIVALENTS, beginning of year 8,481,216 9,445,404 3,634,086
------------ ----------- ------------
CASH AND CASH EQUIVALENTS, end of year $ 2,477,494 $ 8,481,216 $ 9,445,404
============ =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
44
<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.
45
<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 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.
46
<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 had no investment in impaired loans
at June 30, 2000 and 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 - 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.
47
<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 1,462,969, 1,488,072
and 1,487,881 for the years ended June 30, 2000, 1999, and 1998,
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 1,493,237, 1,531,094 and 1,545,208 for the years ended June 30,
2000, 1999, and 1998, respectively.
FINANCIAL STATEMENT PRESENTATION - Certain items in prior year financial
statements have been reclassified to conform to the 2000 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
$2,250,000 at the Federal Home Loan Bank of Des Moines at June 30, 2000.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information
Income taxes paid $ 487,804 $ 380,276 $ 489,300
========== ========== ==========
Interest paid on deposits and FHLB advances
(includes interest credited to deposit accounts) $4,028,474 $4,000,047 $4,046,000
========== ========== ==========
</TABLE>
Noncash Investing and Financing Activities
Property acquired through foreclosure totaled $74,087, $41,937 and
$1,150,000 during fiscal years 2000, 1999, and 1998, respectively. The
Company also financed $424,000, $219,900 and $730,000 of loans for
borrowers to purchase real estate owned by the Company during fiscal years
2000, 1999, and 1998, respectively.
48
<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, 2000:
Interest
Rate Amount
-------------------------------
Mature during fiscal year:
2001 5.40% - 5.74% $ 198,000
2002 6.85% - 7.00% 198,000
2005 6.75% 99,000
---------
495,000
Unamortized broker fees 692
---------
$ 495,692
=========
Following is a summary of certificates by interest rate range:
June 30,
-------------------
2000 1999
-------------------
Interest rates:
5.00% - 5.99% $198,000 $297,000
6.00% - 6.99% 198,000 297,000
7.00% - 7.99% 99,000 289,000
-------------------
495,000 883,000
Unamortized broker fees 692 1,300
-------------------
$495,692 $884,300
===================
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, 2000:
U.S. government and agency
debt securities $ 450,000 $ -- $ (4,202) $ 445,798
Municipal bonds 101,440 -- (1,447) 99,992
Equity securities 1,879,160 -- (193,677) 1,685,484
----------- ----------- ----------- -----------
$ 2,430,600 $ -- $ (199,326) $ 2,231,274
=========== =========== =========== ===========
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
=========== =========== =========== ===========
</TABLE>
49
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - INVESTMENT SECURITIES - Continued
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.
Weighted
Average Amortized Fair
Yield Cost Value
------------------------------
Due in one year or less -- % $ -- $ --
Due after one year through five years -- % -- --
Due after five years through ten years 7.76% 450,000 445,798
Due after ten years 4.81% 101,440 99,992
-------------------
-- $551,440 $545,790
===================
The Company had realized gains (losses) on the sale of investment
securities totaling $1,940, $52,602, and ($1,875) during fiscal years
2000, 1999, and 1998, respectively. Proceeds from the sale of
available-for-sale equity securities totaled $3,660 for 2000 and $113,643
during 1999.
Following is a summary of investment income:
Year Ended June 30,
------------------------------
2000 1999 1998
------------------------------
U.S. government and agency securities $ 46,452 $ 69,179 $162,065
Municipal bonds 4,865 4,596 --
Certificates of deposit 46,302 78,061 147,984
FHLB stock dividends 78,156 71,213 64,725
Interest-bearing cash accounts 143,492 459,334 380,462
Equity securities dividends 94,046 62,394 79,446
------------------------------
$413,313 $744,777 $834,682
==============================
50
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - LOANS RECEIVABLE, NET
Following is a summary of loans receivable:
<TABLE>
<CAPTION>
June 30,
----------------------------
2000 1999
----------------------------
<S> <C> <C>
Real estate mortgage loans:
Secured by one-to-four family residences $ 54,078,222 $ 46,177,819
Secured by commercial and multi-family real estate 31,070,668 24,340,169
Construction loans 719,000 2,025,300
----------------------------
Total real estate mortgage loans 85,867,890 72,543,288
Consumer and other loans 1,426,043 1,280,244
----------------------------
87,293,933 73,823,532
Less:
Allowance for loan losses (258,801) (242,129)
Undisbursed portion of mortgage loans (141,582) (963,043)
Unamortized balance on purchased loan premiums
(discounts) 439 (2,041)
Deferred loan fees (321,404) (285,435)
----------------------------
Loans receivable, net $ 86,572,585 $ 72,330,884
============================
</TABLE>
A significant portion of loans receivable consist of first mortgage loans
issued to finance purchases of real estate, principally one-to-four family
residences. The real estate is located primarily in the greater Des Moines
area. There is no significant concentration of credit risk to specific
industries.
Commercial and multi-family real estate loans include participating
interests in loans purchased by the Company. Participation loans purchased
totaled approximately $12,000,000 and $5,700,000 at June 30, 2000 and
1999, 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.
51
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - LOANS RECEIVABLE, NET - Continued
At June 30, 2000, the Company had outstanding commitments to fund real
estate loans of $5,258,219. 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, 2000 and 1999
amounted to $2,070,000 and $1,935,000, respectively. During the year ended
June 30, 2000, there were new loans to this group totaling $445,000 and
repayments totaling $310,000.
The Company serviced participation loans with outstanding balances
totaling $2,385,312 and $2,448,260 at June 30, 2000 and 1999 respectively.
The Company's portion of these loans totaled $1,415,921 and $1,456,250 at
June 30, 2000 and 1999, respectively.
The Company did not sell any portion of its loan portfolio, or loans
originated, during the years ended June 30, 2000 and 1999.
Activity in the allowance for loan losses is summarized as follows:
Year Ended June 30,
---------------------------------
2000 1999 1998
---------------------------------
Balance at beginning of year $ 242,129 $206,129 $ 221,355
Provision charged to income 36,000 36,000 52,000
Charge-offs (19,328) -- (67,226)
---------------------------------
Balance at end of year $ 258,801 $242,129 $ 206,129
=================================
Non-accrual loans totaled $717,000 at June 30, 2000. Loan interest income
for the year ended June 30, 2000 would have increased by $34,300 if
interest income had been accrued on these past-due loans. There were no
significant non-accrual loans as of June 30, 1999 and 1998.
52
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - LOANS RECEIVABLE, NET - Continued
As of June 30, 2000, the Company had a net investment of $86,572,585 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 HELD FOR INVESTMENT
The Company owns and operates a sixty-unit apartment complex and a
twenty-two unit apartment complex located in the Des Moines area. The
units rent for $425 to $610 per month under rental agreements which do not
exceed one year.
Following is a summary of the Company's investment in these real estate
projects:
June 30,
--------------------------
2000 1999
--------------------------
Rental real estate, at cost $ 2,750,089 $ 2,713,535
Less accumulated depreciation (574,304) (503,508)
--------------------------
$ 2,175,785 $ 2,210,027
==========================
NOTE G - PROPERTY ACQUIRED IN SETTLEMENT OF LOANS
The Company held one property acquired in the settlement of loans at June
30, 2000. The commercial building property has a carrying value of
$1,337,847. Management believes the carrying value of the property does
not exceed the fair value of the property, net of anticipated selling
costs.
No gains or losses were recognized from adjusting the carrying value of
property acquired in settlement of loans to fair value during 2000, 1999,
or 1998.
53
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - OFFICE PROPERTY AND EQUIPMENT
Following is a summary of office property and equipment:
June 30,
--------------------------
2000 1999
--------------------------
Land $ 725,210 $ 725,210
Office building 471,615 471,615
Furniture, fixtures and equipment 484,486 443,178
Commercial office space under development 1,832,901 435,218
--------------------------
3,514,212 2,075,221
Less accumulated depreciation (548,553) (451,756)
--------------------------
Office property and equipment, net $ 2,965,659 $ 1,623,465
==========================
The Company leases a portion of one of its office buildings on a
month-to-month basis. Aggregate monthly rental receipts total
approximately $4,200.
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 50% 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 fall of 2000 at a total cost of
approximately $2,400,000, including land costs. Costs incurred through
June 30, 2000 include capitalized interest of $49,174.
NOTE I - ACCRUED INTEREST RECEIVABLE
Following is a summary of accrued interest receivable:
June 30,
-------------------
2000 1999
-------------------
Investments in certificates of deposit $ 1,661 $ 4,317
Investment securities 11,663 3,972
Loans receivable 559,969 527,739
-------------------
$573,293 $536,028
===================
NOTE J - DEPOSITS
Savings deposit customers are primarily greater Des Moines area
individuals and businesses. Deposits with balances in excess of $100,000
totaled $3,478,328 and $3,914,413 at June 30, 2000 and 1999, respectively.
Non-interest bearing deposit accounts totaled approximately $1,163,500 and
$1,120,400 at June 30, 2000 and 1999, respectively.
Deposit accounts held by members of the board of directors and executive
officers totaled $814,739 and $760,524 at June 30, 2000 and 1999,
respectively.
54
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - DEPOSITS - Continued
Following is a summary of savings deposits as of June 30, 2000 and 1999
and interest expense relating to those deposits for the years then ended:
<TABLE>
<CAPTION>
2000 1999
-------------------------------------------------------
Outstanding Interest Outstanding Interest
Balance Expense Balance Expense
-------------------------------------------------------
<S> <C> <C> <C> <C>
Demand deposits $ 2,627,441 $ 42,442 $ 2,691,500 $ 34,312
Savings and money market deposits 8,025,588 271,419 7,795,011 257,215
Certificates of deposits 42,995,089 2,458,111 44,226,561 2,598,898
-------------------------------------------------------
$53,648,118 2,771,972 $54,713,072 2,890,425
=========== ===========
Less penalties for early withdrawals (6,586) (2,419)
Less allocation of capitalized
interest (33,974) --
------------ -----------
$ 2,731,412 $ 2,888,006
============ ===========
</TABLE>
The scheduled maturities of certificates of deposits are as follows:
Fiscal year ending June 30:
2001 $ 25,380,456
2002 9,061,853
2003 4,220,660
2004 1,892,839
2005 2,439,281
--------------
$ 42,995,089
==============
NOTE K - 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,
2000:
- 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
$1,783,906 at June 30, 2000.
55
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - ADVANCES FROM FEDERAL HOME LOAN BANK - Continued
- 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
- Fed Funds Advances totaling $10,500,000 at June 30, 2000. The
advances mature daily, but renew automatically. Interest
adjusts daily, (7.41% at June 30, 2000) based on the FHLB's
short-term investment returns.
Scheduled maturities of the advances are as follows:
Interest
Year ending June 30, Amount Rates
------------------------------
2001 $ 13,598,757 5.87% - 7.41%
2002 5,104,713 5.87% - 6.14%
2003 111,028 5.87%
2004 117,723 5.87%
2005 124,833 5.87%
Thereafter 10,226,852 4.99% - 5.87%
-------------
$ 29,283,906
=============
The weighted average interest rate for all advances was 6.31% and 5.70% at
June 30, 2000 and 1999, respectively.
NOTE L - 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 $510,000 relating to
pre-1988 bad debt reserves.
56
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - INCOME TAXES - Continued
Taxes on income consist of:
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------------------------------------------
2000 1999 1998
---------------------------------------------------------------------------------------------------
Federal State Total Federal State Total Federal State Total
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current $ 471,639 $ 86,514 $ 558,153 $402,135 $73,765 $475,900 $405,460 $74,000 $479,460
Deferred (17,993) (3,300) (21,293) 10,985 2,015 13,000 9,000 2,000 11,000
---------------------------------------------------------------------------------------------------
Total $ 453,646 $ 83,214 $ 536,860 $413,120 $75,780 $488,900 $414,460 $76,000 $490,460
===================================================================================================
</TABLE>
Taxes on income differ from the "expected" amounts computed by applying
the federal income tax rate of 34 percent to income before taxes for the
following reasons:
Year Ended June 30,
-----------------------------------
2000 1999 1998
-----------------------------------
Computed "expected" taxes on income $ 570,400 $ 512,400 $ 512,600
State taxes, net of federal benefit 64,700 58,200 58,200
Low income housing tax credits (59,000) (59,000) (59,000)
Other adjustments (39,240) (22,700) (21,340)
-----------------------------------
Provision for income taxes $ 536,860 $ 488,900 $ 490,460
===================================
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, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
June 30,
----------------------
2000 1999
----------------------
<S> <C> <C>
Federal Home Loan Bank stock (income tax payable when
Shares received as stock dividends are sold) $ 63,900 $ 63,900
Real estate and equipment (depreciation method differences) 123,000 119,200
Compensation agreements (deductible when paid for income
tax reporting purposes) (15,700) (15,700)
Loan fees deferred for financial reporting purposes (22,300) (23,400)
Allowance for loan losses (5,200) 15,800
Deferred installment sale gains 34,000 35,000
Unrealized gains (losses) on investment securities (74,800) 2,100
Other (3,900) 100
----------------------
Net deferred income tax liability $ 99,000 $ 197,000
======================
</TABLE>
No valuation allowance was recorded against deferred tax assets at June
30, 2000 or 1999.
57
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - EMPLOYEE BENEFITS
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
$125,770, $151,300, and $191,200 was recorded relative to the ESOP for the
years ended June 30, 2000, 1999, and 1998, 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,
----------------------
2000 1999
----------------------
Allocated shares 76,378 69,209
Distributions of shares (581) (6,593)
Shares released for allocation 13,054 13,762
Unreleased shares 40,023 53,077
----------------------
Total ESOP shares 128,874 129,455
======================
Fair value of unreleased shares $ 370,213 $ 583,847
======================
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. Stock options vest at a rate of 20% per
year. No additional options have been granted since 1994. There are
unexercised outstanding stock options for 61,306 shares at June 30, 2000.
At June 30, 2000, the weighted average remaining contractual life is 3.5
years for the outstanding unexercised options.
58
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - EMPLOYEE BENEFITS - Continued
As allowed by SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company accounts for stock options and similar equity instruments under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees." Entities that elect to 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. No pro-forma
disclosures are presented as no options were granted by the Company during
the fiscal years ended June 30, 2000, 1999 and 1998.
A summary of the status of the Company's stock option plan as of June 30,
2000 and 1999, and the changes during the years ended on those dates is
presented below:
Year ended June 30,
------------------
2000 1999
------------------
Unexercised options, beginning of year 69,902 82,014
Stock options exercised (8,596) (12,112)
------------------
Unexercised options, end of year 61,306 69,902
==================
STOCK-BASED COMPENSATION COSTS - Compensation costs related to stock-based
compensation plans totaled approximately $9,600 for the year ended June
30, 1998. There were no costs related to stock-based compensation plans
during the years ended June 30, 2000 and 1999.
SIMPLIFIED EMPLOYEE PENSION PLAN - The Company provides a simplified
employee pension plan (SEP) to its employees. 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 2000, 1999 and 1998.
EMPLOYMENT AGREEMENTS - The Company has entered into certain employment
agreements with key officers. Under the terms of the agreements, the
employees are entitled to additional compensation in the event of a change
in control of the Company and the employees are involuntarily terminated
within twelve months of the change in control. A change in control is
generally triggered by the acquisition or control of 10% or more of the
common stock.
NOTE N - 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.
59
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - REGULATORY AND CAPITAL MATTERS - Continued
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%.
Management believes that the Association has met all capital adequacy
requirements to which it is subject.
Following is a summary of the Association's regulatory capital as of June
30, 2000:
<TABLE>
<CAPTION>
To be "well-capitalized"
For capital under prompt corrective
adequacy purposes action provisions
-------------------------------------------------------
Actual Greater than or equal to: Greater than or equal to:
-----------------------------------------------------------------------------------
Capital Ratio Capital Ratio Capital Ratio
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tangible equity (1) $ 8,187,000 8.79% $ 1,397,000 1.50% NA NA
Core capital (1) $ 8,187,000 8.79% $ 3,726,000 4.00% $ 4,658,000 5.00%
Risk-based capital (2) $ 8,446,000 13.49% $ 5,007,000 8.00% $ 6,259,000 10.00%
Tier I risk-based capital (2) $ 8,187,000 13.08% $ 2,504,000 4.00% $ 3,755,000 6.00%
</TABLE>
(1) - To adjusted total assets
(2) - To risk-weighted assets
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 was 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 is 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.
60
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - REGULATORY AND CAPITAL MATTERS - Continued
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 O - FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of the fair value of financial instruments, both
assets and liabilities whether or not recognized in the consolidated
statements of financial condition, for which it is practicable to estimate
that value. For financial instruments where quoted market prices are not
available, fair values are based on estimates using present value and
other valuation methods.
The methods used are greatly affected by the assumptions applied,
including the discount rate and estimates of future cash flows. Therefore,
the fair values presented may not represent amounts that could be realized
in exchange for certain financial instruments.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments at June
30, 2000 and 1999:
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.
61
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O - FAIR VALUES OF FINANCIAL INSTRUMENTS - Continued
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, 2000 June 30, 1999
--------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 2,477,494 $ 2,477,494 $ 8,481,216 $ 8,481,216
Investments in certificates of deposit 495,692 502,912 884,300 918,969
Investment securities available-for-sale 2,231,274 2,231,274 1,944,374 1,944,374
Loans receivable 86,572,585 86,202,000 72,330,884 71,719,000
Federal Home Loan Bank stock 1,464,600 1,464,600 1,147,600 1,147,600
Financial liabilities
Deposits 53,648,118 54,081,396 54,713,072 55,423,236
Advances from Federal Home Loan Bank 29,283,906 28,933,711 18,877,047 18,266,615
</TABLE>
62
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE P - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
Following are condensed financial statements of the parent company,
StateFed Financial Corporation:
Condensed Balance Sheet
June 30
----------------------------
Assets 2000 1999
------------ ------------
Cash and cash equivalents $ 326,644 $ 3,431,491
Investments in certificates of deposit -- 95,000
Investment in subsidiary 9,348,785 7,932,532
Advances to subsidiary 578,034 645,359
Investment securities 381,413 407,776
Loans receivable 4,276,028 1,254,544
ESOP note receivable subsidiary 240,695 309,465
Real estate held for investment 1,221,032 1,690,146
Other assets 427,329 520,417
------------ ------------
$ 16,799,960 $ 16,286,730
============ ============
Liabilities
Dividends payable $ 113,220 $ 114,300
Other liabilities 36,872 49,051
------------ ------------
150,092 163,351
Stockholders' equity
Common stock 17,810 17,810
Additional paid in capital 8,546,501 8,517,658
Retained earnings 10,778,818 10,090,384
Treasury stock (2,362,921) (2,234,986)
Less common stock acquired by employee stock
ownership plan (205,761) (271,290)
Accumulated other comprehensive income (loss) (124,579) 3,803
------------ ------------
16,649,868 16,123,379
------------ ------------
$ 16,799,960 $ 16,286,730
============ ============
Condensed Statement of Income
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------
2000 1999 1998
---------- ---------- -----------
<S> <C> <C> <C>
Operating income interest and dividend income $ 411,161 $ 353,213 $ 255,172
Operating expenses 139,426 147,525 93,391
---------- ---------- -----------
Income before undistributed income of subsidiary 271,735 205,688 161,781
Equity in undistributed income of subsidiary 914,200 834,113 854,374
---------- ---------- -----------
Income before income tax 1,185,935 1,039,801 1,016,155
Provision (credit) for income tax 45,184 21,511 (1,124)
---------- ---------- -----------
Net income $1,140,751 $1,018,290 $ 1,017,279
========== ========== ===========
</TABLE>
63
<PAGE>
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Statement of Cash Flows
NOTE P - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,140,751 $ 1,018,290 $ 1,017,279
Cash dividends received from subsidiary -- 3,200,000 1,000,000
Deferred income taxes 7,184 (11,000) 11,876
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 38,757 39,261 --
Gain on sale of investments (1,940) (46,311) --
Equity in undistributed income of subsidiary (914,200) (834,113) (854,374)
Change in other assets 53,488 14,969 19,131
Change in other liabilities (16,433) 10,133 8,567
----------- ----------- -----------
307,607 3,391,229 1,202,479
Cash flows from investing activities:
Purchase of investment securities (88,123) (318,559) (63,559)
Proceeds from sale of investment securities 3,660 113,644 50,000
Proceeds from maturing certificates of deposit 94,392 593,158 --
Proceeds from sale of real estate
for development -- -- 240,000
Investment in real estate for development 75,735 (47,016) (390,479)
Changes in investment in and advances
to subsidiary 67,325 -- (349,068)
Increase in loans receivable (3,021,484) (86,232) (340,855)
Payment received on ESOP debt 68,770 68,770 68,770
----------- ----------- -----------
(2,799,725) 323,765 (785,191)
Cash flows from financing activities:
Treasury stock purchased (202,313) (689,688) (184,375)
Proceeds from options exercised 42,981 60,560 67,231
Dividends paid (453,397) (349,211) (312,264)
----------- ----------- -----------
(612,729) (978,339) (429,408)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents (3,104,847) 2,736,655 (12,120)
Cash and cash equivalents, beginning of year 3,431,491 694,836 706,956
----------- ----------- -----------
Cash and cash equivalents, end of year $ 326,644 $ 3,431,491 $ 694,836
=========== =========== ===========
</TABLE>
64
<PAGE>
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.
65
<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 2000, 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 2000, 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 2000, 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 2000, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
66
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Reference to Prior Filing
S-B Exhibit or Exhibit Number
Number Document Attached Hereto
------------ ---------------------------------------- ----------------------------
<S> <C> <C>
3(i) Articles of Incorporation, including *
amendments thereto
3(ii) By-Laws **
4 Instruments defining the rights of *
security holders, including
debentures
9 Voting Trust Agreement None
10 Executive Compensation Plans and *
Arrangements
(a) Employment Contract between: *
(I) John F. Golden and the Association
(ii) Andra K. Black and the Association
(iii) Craig Wood and the Association
(b) 1993 Stock Option and Incentive *
Plan
(c) 1993 Management Recognition and *
Retention Plan
(d) Deferred Compensation Agreement *
11 Statement re: computation of per None
share earnings
13 Annual Report to Security Holders None
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
</TABLE>
(b) Reports on Form 8-K
Current Report filed on May 12, 2000, reflecting quarterly financial
information.
----------
* 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.
** Filed as an Exhibit to the Company's 10-KSB filed on September 28, 1999,
and incorporated by reference herein.
67
<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, 2000 By: /s/ John F. Golden
-------------------------- -------------------------------------
John F. Golden
(Duly Authorized Representative)
68
<PAGE>
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 dated indicated.
/s/ John F. Golden /s/ Craig Wood
JOHN F. GOLDEN CRAIG WOOD
Chairman of the Board Director and Co-President
Date: September 28, 2000 Date: September 28, 2000
-------------------------- -------------------------------------
/s/ Harry A. Winegar /s/ Eugene M. McCormick
HARRY A. WINEGAR EUGENE M. MCCORMICK
Director Director
Date: September 28, 2000 Date: September 28, 2000
-------------------------- -------------------------------------
/s/ Sidney M. Ramey /s/ Kevin J. Kruse
SIDNEY M. RAMEY KEVIN J. KRUSE
Director Director
Date: September 28, 2000 Date: September 28, 2000
-------------------------- -------------------------------------
/s/ William T. Nassif /s/ Andra K. Black
WILLIAM T. NASSIF ANDRA K. BLACK
Director Director, Co-President, Secretarty and
Chief Financial and Accounting Officer
Date: September 28, 2000 Date: September 28, 2000
-------------------------- -------------------------------------
69
