SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-22790
STATEFED FINANCIAL CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 42-1410788
(State of other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) or Number)
519 Sixth Avenue, Des Moines, Iowa 50309
(Address of principal executive offices)
(515) 282-0236
(Issuer's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
State the number of Shares outstanding of each of the issuer's classes of
common equity, as the latest date:
As of February 9, 1999, there were 1,545,392 shares of the Registrant's
common stock issued and outstanding.
STATEFED FINANCIAL CORPORATION
Form 10-QSB
Index
Financial Information Page No.
Item 1. Consolidated Financial Statements:
Consolidated Statements of Financial Condition
as of December 31, 1998 and June 30, 1998 3
Consolidated Statements of Operations for
the Three Months Ending December 31, 1998
and December 31, 1997 and for the Six Months Ending
December 31, 1998 and December 31, 1997 4
Consolidated Statements of Comprehensive Income for
the Three Months Ending December 31,1998 and
December 31,1997 and for the Six Months ending
December 31, 1998 and December 31, 1997 5
Consolidated Statement of Stockholders' Equity
for the Six Months Ending December 31,1998 6
Consolidated Statements of Cash Flows for the Six
Months Ending December 31,1998 and
December 31,1997 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. Other Information 18
Signatures 19
2
STATEFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1998 and June 30, 1998
PART I. Financial Information
Item 1. Financial Statements
ASSETS (Unaudited)
December 31, 1998 June 30, 1998
Cash and amounts due from depository institutions $ 10,489,817 $ 9,445,404
Investments in certificates of deposit $ 1,576,791 $ 1,478,514
Investment securities $ 2,025,208 $ 2,743,518
Loans receivable, net $ 70,349,522 $ 68,979,770
Real estate acquired for development $ 236,596 $ 231,870
Real estate held for investment, net $ 2,242,224 $ 2,262,060
Property acquired in settlement of loans $ 1,316,247 $ 1,286,452
Office property and equipment, net $ 1,552,348 $ 1,564,077
Federal Home Loan Bank stock, at cost $ 1,147,600 $ 949,000
Accrued interest receivable $ 516,737 $ 542,246
Other assets $ 344,206 $ 318,654
------------ ------------
TOTAL ASSETS $ 91,797,296 $ 89,801,565
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 55,793,707 $ 53,671,860
Advances from Federal Home Loan Bank $ 18,921,611 $ 18,964,890
Advances from borrowers for taxes and insurance $ 309,656 $ 340,686
Accrued interest payable $ 3,089 $ 134,251
Dividends payable $ 77,270 $ 78,295
Income taxes:current and deferred $ 267,499 $ 232,019
Other liabilities $ 205,436 $ 295,278
------------ ------------
TOTAL LIABILITIES $ 75,578,268 $ 73,717,279
------------ ------------
Stockholders' equity:
Common stock $ 8,905 $ 8,905
Additional paid-in capital $ 8,525,250 $ 8,483,110
Unearned compensation - restricted stock awards $ (305,305) $ (341,270)
Unrealized gain on investments $ 112,877 $ 119,928
Treasury stock $ (1,903,128) $ (1,643,697)
Retained earnings - substantially restricted $ 9,780,429 $ 9,457,310
------------ ------------
TOTAL STOCKHOLDERS' EQUITY $ 16,219,028 $ 16,084,286
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 91,797,296 $ 89,801,565
============ ============
3
STATEFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ending December 31, 1998 and 1997
and For the Six Months Ending December 31, 1998 and 1997
Three Months Ended Six Months Ended
December 31 December 31
(Unaudited) (Unaudited)
---------- ---------- ---------- ----------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Interest Income:
Loans $1,520,251 $1,557,121 $3,004,423 $2,988,005
Investments 76,216 130,116 169,076 281,004
Other 96,437 85,383 225,488 136,875
---------- ---------- ---------- ----------
Total interest income 1,692,904 1,772,620 3,398,987 3,405,884
Interest Expense:
Deposits 727,734 713,068 1,472,265 1,419,115
Borrowings 275,860 289,555 569,814 581,555
---------- ---------- ---------- ----------
Total interest expense 1,003,594 1,002,623 2,042,079 2,000,670
Net interest Income 689,310 769,997 1,356,908 1,405,214
Provision for loan losses 9,000 6,000 18,000 12,000
---------- ---------- ---------- ----------
Net interest income after 680,310 763,997 1,338,908 1,393,214
provision for loan losses
Non-interest Income:
Real estate operations 147,650 105,949 285,511 200,254
Gain on sale of real estate 1,224 1,772 1,272 1,836
Other 27,846 23,400 51,729 58,465
---------- ---------- ---------- ----------
Total non-interest income 176,720 131,121 338,512 260,555
Non-interest expense:
Salaries and benefits 228,600 247,118 457,890 464,342
Real estate operations 70,347 68,458 165,292 131,546
Occupancy and equipment 36,768 25,931 73,463 55,160
FDIC premiums and OTS assessments 7,026 9,938 22,291 19,876
Data processing 25,666 21,009 54,367 43,059
Other 105,510 113,059 193,779 188,575
---------- ---------- ---------- ----------
Total non-interest expense 473,917 485,513 967,082 902,558
---------- ---------- ---------- ----------
Income before income taxes 383,113 409,605 710,338 751,211
Income tax expense 130,240 136,565 232,480 253,730
---------- ---------- ---------- ----------
Net income $ 252,873 $ 273,040 $ 477,858 $ 497,481
========== ========== ========== ==========
Basic earnings per share $ 0.17 $ 0.18 $ 0.32 $ 0.33
Diluted earnings per share $ 0.17 $ 0.18 $ 0.31 $ 0.32
4
STATEFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months Ending December 31, 1998 and 1997
and For the Six Months Ending December 31, 1998 and 1997
(Unaudited)
Three Months Ended Six Months Ended
December 31 December 31
(Unaudited) (Unaudited)
--------- --------- --------- ---------
1998 1997 1998 1997
--------- --------- --------- ---------
Net income $ 252,873 $ 273,040 $ 477,858 $ 497,481
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on
securities arising during period $ (21,645) $ 49,005 $ (7,051) $ 81,057
--------- --------- --------- ---------
Comprehensive income $ 231,228 $ 322,045 $ 470,807 $ 578,538
========= ========= ========= =========
5
STATEFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Six Months Ending December 31, 1998
(Unaudited)
Balance - June 30, 1998 $ 16,084,286
Additional paid in capital 42,140
Other comprehensive income--unrealized gain on
investment securities, net of deferred income taxes (7,051)
Dividends declared (154,740)
Repurchase of 26,500 shares treasury stock (267,500)
Stock options exercised (1000 shares) 8,070
ESOP common stock released for allocation 35,965
Net income 477,858
------------
Balance - December 31, 1998 $ 16,219,028
============
6
STATEFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ending December 31, 1998 and December 31, 1997
(Unaudited)
Cash Flows From Operating Activities December 31, 1998 December 31, 1997
----------------- -----------------
Net Income $ 477,858 $ 497,481
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 79,261 40,263
Amortization of purchase loan discounts (60) (7,738)
Amortization of ESOP 78,105 100,484
Deferred loan fees (29,837) (6,388)
Provision for losses on loans 18,000 5,623
Change in:
Accrued interest receivable 25,509 22,854
Other assets (25,553) (42,471)
Accrued interest payable (131,162) (127,450)
Current income tax liability 35,480
Other liabilities (89,842) (1,879)
------------ ------------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 437,759 $ 480,779
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in certificates of deposit $ (99,054) $ --
Maturity of investments in certificates of deposit -- 2,361,600
Purchase of available-for-sale investment securities (292,254) (632,518)
Proceeds from sale or maturity of available-for-sale investment securities 1,004,288 950,000
(Purchase) redemption of FHLB Stock (198,600) --
Net (increase) decrease in loans outstanding (1,357,855) (191,277)
Investment in real estate held for development (4,725) 224,942
Investment in real estate held for investment (16,010) 87,862
Investment in real estate acquired in settlement of loans (29,794) (347,016)
Purchase of office property and equipment (31,686) (102,740)
------------ ------------
NET CASH FLOWS PROVIDED BY INVESTING ACTIVITIES $ (1,025,690) $ 2,350,853
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 2,121,847 $ 2,801,488
Advances from the Federal Home Loan Bank 11,000,000
Repayment of advances from the Federal Home Loan Bank (43,279) (11,000,000)
Net decrease in advances from borrowers (31,030) (153,834)
Proceees from stock options exercised 8,070 --
Dividends paid (155,764) (156,245)
Purchase of treasury stock (267,500) (111,875)
------------ ------------
NET CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES $ 1,632,344 $ 2,379,534
------------ ------------
CHANGE IN CASH AND CASH EQUIVALENTS $ 1,044,413 $ 5,211,166
------------ ------------
CASH AND CASH EQUIVALENTS, beginning of period $ 9,445,404 $ 3,634,086
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 10,489,817 $ 8,845,252
============ ============
7
STATEFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ending December 31,1998 and December 31,1997
And for the Six Months Ending December 31, 1998 and December 31, 1997
(Unaudited)
1. BASIS OF PRESENTATIONS
These consolidated financial statements are unaudited (with the exception
of the Consolidated Statement of Financial Condition for June 30, 1998). These
consolidated financial statements were prepared in accordance with institutions
for Form 10-QSB and therefore, do not include all disclosures necessary for a
complete presentation of the statements of financial condition, statements of
income and statements of cash flows in accordance with generally accepted
accounting principles. However, in the opinion of management, all adjustments
necessary for a fair presentation of the consolidated financial statements have
been included. Results for any interim period are not necessarily indicative of
results expected for the year. The interim consolidated financial statements
include the accounts of StateFed Financial Corporation (the "Corporation"), its
subsidiary, State Federal Savings and Loan Association (the "Association" or
"State Federal") and the Association's subsidiary, State Service Corporation.
These statements should be read in conjunction with the consolidated
financial statements and related notes, which are incorporated by reference in
the company's Annual Report on Form 10-KSB for the year, which ended June 30,
1998.
2. EARNINGS PER SHARE OF COMMON STOCK
Basic earnings per share are computed based upon the weighted-average
shares outstanding during the period, less shares in the ESOP that are
unallocated and are not committed to be released.
Diluted earnings per share are computed by considering common stocks
outstanding and dilutive potential common shares to be issued under the
Company's stock option plan.
For the three months For the six months
ended December 31, ended December 31,
1998 1998
-------------------- ------------------
Weighted Average Shares Outstanding:
Basic earnings per share 1,484,565 1,488,827
Fully diluted earnings per share 1,528,503 1,541,142
For the three months For the six months
ended December 31, ended December 31,
1997 1997
-------------------- ------------------
Weighted Average Shares Outstanding:
Basic earnings per share 1,481,791 1,484,241
Fully diluted earnings per share 1,542,155 1,540,557
8
3. REGULATORY CAPITAL REQUIREMENTS
Pursuant to Federal law, savings institutions must meet three separate
capital requirements. The Association's capital ratios and balances at December
31, 1998 are as follows:
Amount %
---------------------------
(Dollars in thousands)
Tangible Capital:
Association's $10,426 12.09%
Requirement 1,293 1.50
------- -----
Excess $ 9,133 10.59%
Core Capital:
Association's $10,426 12.09%
Requirement 2,586 3.00
------- -----
Excess $ 7,840 9.09%
Total Risk-Based Capital:
Association's $10,650 20.47%
Requirement 4,162 8.00
------- -----
Excess $ 6,488 12.47%
4. STOCK OPTION PLAN
At June 30, 1998 there were unexercised options for 82,014 shares of common
stock under the terms of the StateFed Financial Corporation 1993 Stock Option
Plan. The options have an exercise price of $5 per share. There were 1000 shares
exercised during the six months ended December 31,1998.
5. STOCK REPURCHASE PLAN
On February 18, 1998, the Company's Board of Directors authorized
management to repurchase up to 77,980 shares of the Company's common stock over
the next twelve months. During the three-month period ending December 31, 1998,
5,000 shares were repurchased. As of February 10, 1999, 31,500 shares had been
repurchased since February 18, 1998, at a cost of $392,500.
9
PART I ITEM 2
STATEFED FINANCIAL CORPORATION
Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
The accompanying Consolidated Financial Statements include StateFed
Financial Corporation (the "Company") and its wholly owned subsidiary, State
Federal Savings and Loan Association (the "Association"). All significant
inter-company transactions and balances are eliminated in consolidation. The
Company's results of operations are primarily dependent on the Association's net
interest margin, which is the difference between interest income earned on
interest-earning assets and interest expense paid on interest-bearing
liabilities. The Association's net income is also affected by the level of its
non-interest expenses, such as employee compensation and benefits, occupancy
expenses, and other expenses.
When used in this Form 10-QSB and in future filings with the SEC, in the
Company's press releases or other public or shareholder communications, as well
as in oral statements made by the executive officers of the Company or its
primary subsidiary, the words or phrases "will likely result," "are expected
to," "will continue," "is anticipated," "estimated," "project" or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are subject to certain risks and uncertainties, including, among other things,
changes in economic conditions in the Company's market area, changes in policies
by regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area and competition, that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect its
financial performance and could cause its actual results for future periods to
differ materially from any opinions or statements expressed with respect to
future periods in any current statements.
The Company does not undertake--and specifically declines any
obligation--to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.
Financial Condition
The Company's total assets increased $2 million from $89.8 million at June
30, 1998 to $91.8 million at December 31,1998. This increase was due primarily
to an increase in cash and amounts due from depository institutions of $1
million, an increase in loans receivable net, of $1.4 million, and an increase
in Federal Home Loan Bank Stock of $199,000, partially offset by a decrease in
investment securities of $718,000.
10
Cash and amounts due from depository institutions increased $1 million,
from $9.4 million at June 30, 1998 to $10.4 million at December 31,1998. The
increase in cash and amounts due from depository institutions occurred as a
result of an increase in deposits of $2.1 million.
Net loans receivable increased $1.4 million, from $69.0 million at June 30,
1998 to $70.4 million at December 31,1998. Loan originations of primarily
residential loans totaled $8.3 million for the three month period and purchased
loan participations totaled $l.3 million, while repayment of principal totaled
$8.2 million.
Total deposits increased by $2.1 million from $53.7 million at June 30,
1998 to $55.8 million at December 31,1998. Money market fund accounts increased
$2.1 million, NOW accounts increased $462,000, while certificate accounts
decreased $339,000 and passbook accounts decreased $82,000.
Total stockholders' equity increased $135,000 from $16,084,000at June 30,
1998 to $16,219,000 million at December 31,1998. The increase was primarily the
result of net earnings of $477,800, partially offset by the cost to repurchase
the Company's stock of $267,500 and dividends declared of $154,700.
Comparison of Operating Results for the Three Month Periods Ended December 31,
1998 and December 31, 1997
General. Net income decreased $20,100 to $252,900 for the three months
ended December 31, 1998 from $273,000 for the three months ended December 31,
1997. The decrease in net income was primarily due a decrease in net interest
income of $80,700, partially offset by an increase in non-interest income of
$45,600, a decrease non-interest expense of $11,600, and a decrease in income
tax expense of $6,300.
Net Interest Income. Net interest income decreased $80,700, from $770,000
for the three months ended December 31, 1997 to $689,300 for the three months
ended December 31, 1998. This decrease was primarily the result of a decrease in
interest income of $79,700 and an increase in interest expense of $1,000.
Interest Income. Interest income decreased $79,700, from $1,772,600 for the
three months ended December 31, 1997 to $1,692,900 for the three months ended
December 31, 1998. This decrease was primarily the result of a decrease in
interest earned on the loan portfolio of $36,900 and a decrease in interest on
investments of $53,900, partially offset by an increase in other interest income
of $11,100. Interest on the loan portfolio decreased primarily because of a
decrease interest rates. Interest on investments decreased as a result of the
investments being called.
Interest Expense. Interest expense increased $1,000 from $1,002,600 in the
three months ended December 31, 1997 to $1,003,600 in the three months ended
December 31, 1998. This increase resulted primarily from an increase in interest
paid on deposits of $14,700, offset by a decrease in interest paid on borrowings
of $13,700. The increase in interest paid on deposits was primarily the result
of an increase in the balance of deposits of $2.1 million. The decrease in
interest paid on borrowing occurred as a result of a decrease in the average
rate paid.
11
Provision for Loan Losses. The provision for loan losses increased $3,000
in the three months ended December 31,1998 as compared to the three months ended
December 31,1997. The provision during the three months ended December 31,1998
was based on management's analysis of the allowance for loan losses. The Company
will continue to monitor its allowance for loan losses and make future additions
to the allowance through the provision for loan losses as economic conditions
dictate. Although the Company maintains its allowance for loan losses at a level
which it considers to be adequate to provide for potential losses, there can be
no assurance that future losses will not exceed estimated amounts or that
additional provisions for loan losses will not be required for future periods.
Non-interest Income. Non-interest income increased $45,600 from $131,100 in
the three months ended December 31, 1997 to $176,700 in the three months ended
December 31, 1998. The increase was the result of an increase in income from
real estate operations of $41,700 and an increase of $4,400 in other income. The
increase in income from real estate operations was due to the completion and
occupancy of a 22-unit apartment building.
Non-interest Expense. Non-interest expense decreased from $485,500 in the
three months ended December 31, 1997 to $473,900 in the three months ended
December 31, 1998. This decrease of $11,600, was primarily the result of a
decrease of $18,500 in salaries and benefits and a decrease of $7,500 in other
non-interest expense, partially offset by an increase of $10,800 in occupancy
and equipment expense and an increase of $4,700 in data processing expense. The
decrease in salaries and benefits was primarily the result of the decrease in
the ESOP expense. The increase in real estate operations was due primarily to
the maintenance and deprecation resulting from the completion of a 22-unit
apartment building.
Income Tax Expense. Income tax expense was $130,200 for the three months
ended December 31, 1998 compared to $136,500 for the three months ended December
31, 1997, a decrease of $6,300, primarily due to the decrease in taxable income.
Comparison of the Six Months Ended December 31, 1998 and December 31, 1997
General. Net income decreased $19,600 from $497,500 for the six months
ended December 31, 1997 to $477,900 for the six months ended December 31, 1998.
The decrease was primarily the result of a decrease in net interest income of
$48,300, an increase in non-interest expense of $64,500, and an increase in
provision for loan losses of $6,000, partially offset by an increase in
non-interest income of $78,000 and a decrease in income tax expense of $21,200.
Net Interest Income. Net interest income decreased $48,300 from $1,405,200
for the six months ended December 31, 1997 to $1,356,900 for the six months
ended December 31, 1998. The decrease was primarily the result of a decrease in
investment interest income of $111,900 and an increase in interest paid on
deposits of $53,200, partially offset by an increase of $88,600 in other
interest income, an increase of $16,400 in interest on loans, and a decrease of
$11,700 in interest paid on borrowings.
Interest Income. Interest income decreased $6,900, from $3,405,900 for the
six months ended December 31, 1997 to $3,399,000 the six months ended December
31, 1998. The decrease was primarily the result of a decrease in interest on
investments of $111,900, offset by an increase in other interest income of
$88,600, and an increase in interest on loans of $16,400. The decrease in
interest on investments was primarily the result of the investments being
called.
12
Interest Expense. Interest expense increased $41,400 from $2,000,700 in the
six months ended December 31, 1997 to $2,042,100 in the six months ended
December 31, 1998. This increase resulted primarily from an increase in the
balance of deposits.
Provision for Loan Losses. The provision for loan losses increased $6,000
from $12,000 in the six months ended December 31, 1997 as compared to $18,000
for the six months ended December 31, 1998. The provision during the six months
ended December 31, 1998 was based on management's analysis of the allowance for
loan losses. The Company will continue to monitor its allowance for loan losses
and make future additions to the allowance through the provision for loan losses
as economic conditions dictate. Although the Company maintains its allowance for
loan losses at a level which it considers to be adequate to provide for
potential losses, there can be no assurance that future losses will not exceed
estimated amounts or that additional provisions for loan losses will not be
required for future periods.
Non-interest Income. Non-interest income increased $78,000 from $260,500 in
the six months ended December 31, 1997 to $338,500 in the six months ended
December 31, 1998. The increase was primarily the result of an increase of
$85,300 in real estate operations relating to the building of a 22 unit
apartment complex, partially offset by a decrease of $6,700 in other
non-interest income.
Non-interest Expense. Non-interest expense increased from $902,600 in the
six months ended December 31, 1997 to $967,100 in the six months ended December
31, 1998. This increase of $64,500 was primarily the result of an increase real
estate operations expense of $33,700 relating to the building of a 22 unit
apartment complex, an increase in occupancy and equipment expense of $18,300 and
an increase in data processing expense of $11,300.
Income Tax Expense. Income tax expense decreased from $253,700 for the six
months ended December 31, 1997 to $232,500 for the six months ended December 31,
1998, a decrease of $21,200. The increase was primarily due to the decrease in
net income before income taxes.
Liquidity and Capital Resources. The Company's primary sources of funds are
deposits, principal and interest payments on loans, FHLB Des Moines advances,
and funds provided by operations. While scheduled loan repayments and maturity
of short-term investments are a relatively predictable source of funds; deposit
flows are greatly influenced by general interest rates, economic conditions, and
competition. Current Office of Thrift Supervision regulations require the bank
to maintain cash and eligible investments in an amount equal to at least 4% of
customer accounts and short-term borrowings to assure its ability to meet
demands for withdrawals and repayment of short-term borrowings. As of December
31,1998, the Association's liquidity ratio was 20.68%, which exceeded the
minimum regulatory requirement on such date.
The Company uses its capital resources principally to meet its ongoing
commitments, to fund maturing certificates of deposits and loan commitments,
maintain its liquidity, and meet its foreseeable short- and long term needs. The
Company expects to be able to fund or refinance, on a timely basis, its material
commitments and long-term liabilities.
Regulatory standards impose the following capital requirements: a
risk-based capital standard expressed as a percent of risk adjusted assets, a
leverage ratio of core capital to total adjusted assets, and a tangible capital
ratio expressed as a percent of total adjusted assets. As of December 31,1998,
the Association exceeded all fully phased-in regulatory capital requirements.
13
At December 31, 1998, the Association's tangible equity capital was $10.4
million, or 12.09%, of tangible assets, which is in excess of the 1.5%
requirement by $9.1 million. In addition, at December 31,1998, the Association
had core capital of $10.4 million, or 12.09%, of adjusted total assets, which
exceeds the 3% requirement by $7.8 million. The Association had total risk-based
capital of $10.7 million at December 31,1998, or 20.47%, of risk-weighted
assets, which exceeds the 8.0% risk-based capital requirements by $6.5 million.
As required by Federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks. the OTS has proposed that only those savings associations rated
a composite one (the highest rating) under the MACRO rating system for savings
associations will be permitted to operate at or near the regulatory minimum
leverage ratio of 3%. all other savings associations will be required to
maintain a minimum leverage ratio of 3% plus at least an additional 100 to 200
basis points. The OTS will assess each individual savings association through
the supervisory process on a case-by-case basis to determine the applicable
requirement. No assurance can be given as to the final form of any such
regulation, the date of its effectiveness or the requirement applicable to the
Association. As a result of the prompt corrective action provisions of federal
law 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.
Year 2000 Compliance
General. The year 2000 ("Y2K") issue confronting the Bank and its
suppliers, customers, customers' suppliers and competitors centers on the
inability of computer systems to recognize the year 2000. Many existing computer
programs and systems originally were programmed with six digit dates that
provided only two digits to identify the calendar year in the date field. With
the impending new millennium, these programs and computers will recognize "00"
as the year 1900 rather than the year 2000.
Financial institution regulators recently have increased their focus upon
Y2K compliance issues and have issued guidance concerning the responsibilities
of senior management and directors. The Federal Financial Institutions
Examination Council ("FFIEC") has issued several interagency statements on Y2K
Project Management Awareness. These statements require financial institutions
to, among other things, examine the Y2K implications of their reliance on
vendors and with respect to data exchange and the potential impact of the Y2K
issue on their customers, supplies and borrowers. These statements also require
each federally regulated financial institution to survey its exposure, measure
risk and prepare a plan to address the Y2K issue. In addition, the federal
banking regulators have issued safety and soundness guidelines to be followed by
insured depository institutions, such as the Bank, to assure resolution of any
Y2K problems. The federal banking agencies have asserted that Y2K testing and
certification is a key safety and soundness issue in conjunction with regulatory
examinations and, thus, that an institution's failure to address appropriately
the Y2K issue could result in supervisory action, including the reduction of the
institution's supervisory ratings, the denial of applications for approval of
mergers or acquisitions, or the imposition of civil money penalties.
Risk. Like most financial institutions service providers, the Bank and its
operations may be significantly affected by the Y2K issue due to its dependence
on technology and date-sensitive data. Computer software and hardware and other
equipment, both within and outside the Bank's direct control and third parties
with whom the Bank electronically or operationally interfaces (including without
14
limitation its customers and third party vendors) are likely to be affected. If
computer systems are not modified in order to be able to identify the year
20000, many computer applications could fail or create erroneous results. As a
result, many calculations which rely on date field information, such as
interest, payment or due dates and other operating functions, could generate
results which are significantly misstated, and the Bank could experience an
inability to process transactions, prepare statements or engage in similar
normal business activities. Likewise, under certain circumstances, a failure to
adequately address the Y2K issue could adversely effect the viability of the
Bank's suppliers and creditors and the creditworthiness of its borrowers. Thus,
if not adequately address, the Y2K issue could result in a significant adverse
impact on the Bank's operations and, in turn, its financial condition and
results of operations.
State of Readiness. During November 1997, the Bank formulated its plan to
address the Y2K issue. Since that time, the Bank has taken the following steps:
o Established senior management advisory and review responsibilities;
o Completed a Bank-wide inventory of applications and system software;
o Built an internal tracking database for application and vendor
software;
o Developed compliance plans and schedules for all lines of business;
o Initiated vendor compliance verification;
o Begun awareness and education activities for employees through
existing internal communication channels; and
o Developed a process to respond to customer inquires as well as help
educate customers on the Y2K issue.
The following paragraphs summarize the phases of the Bank's Y2K plan:
Awareness Phase. The Bank formally established a Y2K plan headed by a
senior manager, and a project team was assembled for management of the Y2K
project. The project team created a plan of action that includes milestones,
budge estimates, strategies, and methodologies to track and report the status of
the project. Members of the project team also attended conferences and
information sharing sessions to gain more insight into the Y2K issue and
potential strategies for addressing it. This phase is substantially complete.
Assessment Phase. The Bank's strategies were further developed with respect
to how the objectives of the Y2K plan would be achieved, and aY2K business risk
assessment was made to quantify the extent of the Bank's Y2K exposure. A
corporate inventory (which is periodically updated as new technology is acquired
and as systems progress through subsequent phases) was developed to identify and
monitor Y2K readiness for information systems (hardware, software, utilities and
vendors) as well as environmental systems (security systems, facilities, etc.).
Systems were prioritized based on business impact and available alternatives.
Mission critical systems supplied by vendors were researched to determine Y2K
readiness. If Y2K-ready versions were not available, the Bank began identifying
15
functional replacements, which were either upgradable or currently Y2K-ready,
and a formal plan was developed to repair, upgrade or replace all mission
critical systems. This phase is substantially complete.
Beginning in October 1998, all unsecured credits greater than $100,000 were
sent a questionnaire developed by the Bank's credit administration staff to
evaluate Y2K exposure. Thank Bank also contacted its most significant borrowers
informing them of the y2K issue. Because the Bank's loan portfolio is primarily
real estate-based and is diversified with regard to individual borrowers and
types of businesses, and the Bank's primary market area is not significantly
dependent on one employer or industry, the Bank does not expect any significant
or prolonged Y2K-related difficulties that will affect net earnings or cash
flow. As part of the current credit approval process, all new and renewed loans
are evaluated for Y2K risk.
Renovation Phase. The Bank's corporate inventory revealed that Y2K upgrades
were available for all vendor supplied mission critical systems, and all these
Y2K-readay versions have been delivered and placed into production and have
entered the validation process.
Validation Phase. The validation phase is designed to test the ability of
hardware and software to accurately process date sensitive data. The Bank
currently is in the process of validation testing of each mission critical
system, with the degree of completion of such testing ranging from 25% to 100%.
The Bank's validation phase is expected to be completed by March 31, 1999 for
all mission critical systems. During the validation testing process to date, no
significant Y2K problems have been identified relating to any modified or
upgraded mission critical systems.
Implementation Phase. The Bank's plan calls for putting Y2K-ready code into
production before having actually completed Y2K validation testing. Y2K-ready
modified or upgraded versions have been installed and placed into production
with respect to all mission critical systems.
Bank Resources Invested. The Bank's Y2K project team has been assigned the
task of ensuring that all systems across the Bank are identified, analyzed for
Y2K compliance, corrected, if necessary, tested, and changes put into service by
the end of 1998. The Y2K project team members represent all functional areas of
the Bank, including branches, data processing, loan administration, accounting,
item processing and operations, compliance, internal audit, human resources, and
marketing. The team is headed by a vice president who reports directly to a
member of the Bank's senior management team. The Bank's board of Directors
oversees the Y2K plan and provides guidance and resources to, and received
quarterly updates from, the Y2K project team.
The Bank expenses all costs associated with the required system changes as
those costs are incurred, and such costs are being funded through operating cash
flows. The Bank does not anticipate incurring significant additional expense to
implement additional corrective actions.
Contingency Plans. During the assessment phase, the Bank began to develop
back-up contingency plans for each of its mission critical systems. Virtually
all of the Bank's mission critical systems are dependent upon third party
vendors or service providers, therefore, contingency plans include selecting a
new vendor or service provider and converting to their system. In the event a
current vendor's system fails during the validation phase and it is determined
that the vendor is unable or unwilling to correct the failure, the Bank will
convert to a new system from a pre-selected list of prospective vendors. In each
such case, realistic trigger dates have been established to allow for orderly
and successful conversions.
16
For some systems, contingency plans consist of using spreadsheet software or
reverting to manual systems until system problems can be corrected. Although the
Bank has been informed that each of its primary vendors anticipates that all
mission critical systems either are or will timely be Y2K-ready, no warranties
have been received from such vendors.
17
STATEFED FINANCIAL CORPORATION
Part II - Other Information
As of December 31,1998, management is not aware of any current
recommendations by regulatory authorities which, if they were to be implemented,
would have or are reasonably likely to have a material adverse effect on the
Company's liquidity, capital resources or operations.
Item 1 - Legal Proceedings
Not applicable.
Item 2 - Changes in Securities
Not applicable.
Item 3 - Defaults upon Senior Securities
Not applicable.
Item 4 - Submission of Matters to Vote of Security Holders
Not applicable
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
(1) Current report on Form 8-K for press release announcing the second
quarter earnings and an increase in the cash dividend to be paid to
stockholders as of March 31, 1999.
18
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly cause this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STATEFED FINANCIAL CORPORATION
Registrant
February 16, 1999
Date: /s/ John F. Golden
-------------------------------------
John F. Golden
President and Chief Executive Officer
February 16, 1999
Date: /s/ Andra K. Black
-------------------------------------
Andra K. Black
Executive Vice President and
Chief Financial Officer
19