SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|X| Preliminary Proxy Statement
|_| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
|_| Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
Statefed Financial Corporation
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|_| No fee required.
|X| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies: Common
Stock, par value $.01 per share
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
Fee paid previously with preliminary materials.
Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
STATEFED FINANCIAL CORPORATION
13523 University Avenue
Clive, Iowa 50325
[Mail Date]
Dear Fellow Stockholders:
On behalf of the Board of Directors of StateFed Financial Corporation (the
"Company"), you are cordially invited to attend a Special Meeting of
Stockholders of the Company, to be held at the West Des Moines Marriott, 1250
74th Street, West Des Moines, Iowa 50266, on [Day of Week], [Date], 2004 at
[Time], local time. At the Special Meeting, the stockholders of the Company will
be asked to consider and vote on approval of an Agreement and Plan of Merger
dated November 18, 2003 (the "Agreement"), providing for the acquisition of the
Company by Liberty Bank, F.S.B., West Des Moines, Iowa ("Liberty"), in a merger
transaction. If the merger is completed, you will receive a cash payment of
$13.47 per share for the shares of the Company's common stock that you own
("Merger Consideration"), subject to your appraisal rights under Delaware law,
as more fully explained in the enclosed Proxy Statement. The Merger
Consideration will be decreased if the Company's consolidated stockholders'
equity falls below a prescribed level as of the month-end prior to the closing
of the merger, as explained in more detail in the enclosed Proxy Statement. Upon
completion of the merger, you will no longer own any stock or have any interest
in the Company, and you will not receive any stock of Liberty in the merger. The
merger is expected to be completed in the first quarter of 2004.
THE COMPANY'S BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER IS FAIR AND
IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS AND UNANIMOUSLY
RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF THE AGREEMENT. YOUR BOARD OF
DIRECTORS HAS RECEIVED THE OPINION OF KEEFE, BRUYETTE & Woods, Inc. that the
Merger Consideration is fair to the stockholders of the Company from a financial
point of view.
YOUR VOTE, REGARDLESS OF THE NUMBER OF SHARES YOU HOLD, IS EXTREMELY
IMPORTANT. UNLESS A SUFFICIENT NUMBER OF STOCKHOLDER VOTES IS RECEIVED, THE
AGREEMENT CANNOT BE APPROVED. THE BOARD OF DIRECTORS THEREFORE URGES YOU TO VOTE
FOR THE AGREEMENT ON THE ENCLOSED PROXY CARD AND RETURN THE PROXY CARD AS
PROMPTLY AS POSSIBLE, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING.
The enclosed Proxy Statement provides you with detailed information about
the Agreement and the merger. I urge you to read the enclosed materials
carefully before voting. Even if you plan to attend the Special Meeting, please
complete, sign and return the enclosed proxy card. Please do not send your
common stock certificates at this time. If the merger is consummated, you will
be sent instructions regarding the surrender of your stock certificates. We look
forward to seeing you at the Special Meeting. On behalf of the Board of
Directors of the Company, I wish to thank you for your continued support.
Very truly yours,
Randall C. Bray
President and Chairman
- --------------------------------------------------------------------------------
WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE
AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY.
- --------------------------------------------------------------------------------
STATEFED FINANCIAL CORPORATION
13523 University Avenue
Clive, Iowa 50325
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON [DATE], 2004
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of StateFed
Financial Corporation (the "Company") will be held on [Day of Week], [Date],
2004, at the West Des Moines Marriott, 1250 74th Street, West Des Moines, Iowa,
at [Time], local time.
At the special meeting, you will be asked to consider and vote on the following:
1. The approval of the Agreement and Plan of Merger, dated as of November
18, 2003 (the "Agreement"), by and between the Company and Liberty
Bank, F.S.B. ("Liberty"), pursuant to which a to-be-formed interim
subsidiary of Liberty will be merged with and into the Company, the
stock of the Company will be cancelled and the stockholders of the
Company will receive cash in the amount of $13.47 per share for the
shares of the Company held by them immediately prior to the merger
(the "Merger Consideration").
2. Any other matters that are properly brought before the special
meeting.
Action may be taken on this proposal at the special meeting or on any date or
dates to which the special meeting may be adjourned or postponed. The board of
directors of the Company has selected [Record Date] as the record date for the
special meeting. Only stockholders of record at the close of business on the
record date are entitled to notice of and to vote at the special meeting and at
any postponement or adjournment thereof.
As a stockholder of the Company, you have an appraisal right under applicable
provisions of Delaware law to receive payment of the fair value of your shares
of Company common stock in a state court proceeding. In order to exercise this
appraisal right, you must deliver to the Company a written demand for payment
for your shares before the approval of the Agreement is voted on at the special
meeting, and you must not vote in favor of the approval of the Agreement. Merely
voting against the approval of the Agreement or abstaining from voting is not
sufficient to perfect your appraisal right. A copy of the Delaware statutory
provisions regarding this appraisal right is included as Appendix D to the
accompanying Proxy Statement and a summary of these provisions can be found in
the Proxy Statement under "STOCKHOLDER APPRAISAL RIGHT."
Please complete, date and sign the enclosed proxy card promptly and return it in
the accompanying postage prepaid envelope, whether or not you expect to attend
the special meeting, in order to assure that your shares of common stock will be
represented. No matter how many or how few shares of common stock you own, your
vote is important. Since mail delays occur, IT IS IMPORTANT THAT THE PROXY CARD
BE MAILED WELL IN ADVANCE OF THE DATE OF THE SPECIAL MEETING. Any stockholder
giving a proxy has the right to revoke it at any time before it is voted. If you
receive more than one proxy card because your shares of common stock are
registered in different names or addresses, each proxy card should be signed and
returned to ensure that all your shares of common stock will be voted promptly.
Your attention is directed to the Proxy Statement accompanying this Notice for a
more complete description of the Agreement and the merger.
By Order of the Board of Directors,
Randall C. Bray
President and Chairman
Clive, Iowa
[Mail Date]
STATEFED FINANCIAL CORPORATION
13523 UNIVERSITY AVENUE
CLIVE, IOWA 50325
----------------
PROXY STATEMENT FOR
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD [DATE], 2004
----------------
This proxy statement is being furnished to stockholders of StateFed Financial
Corporation (the "Company") in connection with the solicitation of proxies by
the board of directors of the Company for use at the special meeting to be held
on [Date], 2004. At the special meeting, the Company's stockholders will be
asked to consider and vote on the approval of the Agreement and Plan of Merger,
dated November 18, 2003 (the "Agreement"), providing for the acquisition of the
Company by Liberty Bank, F.S.B., West Des Moines, Iowa ("Liberty") in a merger
transaction. If the merger is completed, Company stockholders will receive a
cash payment of $13.47 per share for their shares of the Company's common stock
("Merger Consideration"). A stockholder's receipt of the Merger Consideration is
subject to the exercise of appraisal rights under Delaware law and a possible
reduction based on the Company's capital level at the month-end prior to the
date of the merger, both of which are explained in more detail in this proxy
statement. A copy of the Agreement is attached to this proxy statement as
Appendix A.
SUMMARY OF PROXY STATEMENT
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION IN THIS PROXY STATEMENT AND MAY NOT
CONTAIN INFORMATION IMPORTANT TO YOU. TO UNDERSTAND THE AGREEMENT MORE FULLY AND
FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL TERMS OF THE PROPOSED MERGER, YOU
SHOULD READ THIS ENTIRE DOCUMENT CAREFULLY, INCLUDING THE APPENDICES.
A TABLE OF CONTENTS FOR THIS PROXY STATEMENT, INCLUDING A LIST OF THE
APPENDICES, APPEARS ON PAGE [__].
================================================================================
THE SPECIAL MEETING AND STOCKHOLDER VOTE
Location and Time of Special Meeting
- ------------------------------------
A special meeting of the stockholders of the Company will be held at [Time],
local time, on [Day of Week], [Date], 2004, at the West Des Moines Marriott,
1250 74th Street, West Des Moines, Iowa 50266.
Matters for Stockholder Action at the Special Meeting
- -----------------------------------------------------
At the special meeting, stockholders of the Company will be asked to vote on the
approval and adoption of the Agreement by and between the Company and Liberty
providing for the acquisition of the Company by Liberty in a merger transaction.
See "SPECIAL MEETING OF STOCKHOLDERS - Purpose of Special Meeting."
================================================================================
THE DATE OF THIS PROXY STATEMENT AND THE DATE ON WHICH IT AND THE ACCOMPANYING
DOCUMENTS ARE FIRST BEING SENT OR GIVEN TO STOCKHOLDERS IS [MAIL DATE].
================================================================================
Stockholders Eligible to Vote
- -----------------------------
Holders of shares of the Company's common stock can vote at the special meeting
if the holder owned common stock of the Company at the close of business on the
designated record date of [Record Date]. There were [1,293,958] shares of the
Company's common stock outstanding on that date. See "SPECIAL MEETING OF
STOCKHOLDERS - Record Date; Voting Rights."
Vote Required to Adopt the Agreement
- ------------------------------------
The affirmative vote of the holders of a majority of the outstanding shares of
the Company's common stock as of the [Record Date], or [646,980] shares, is
required to approve the Agreement. See "SPECIAL MEETING OF STOCKHOLDERS - Vote
Required." Abstentions will have the same effect as a vote against the
Agreement. Company stockholders, who are some of the directors of the Company,
owning 107,079, or approximately [8.18]%, of the common stock (assuming the
exercise of 15,474 options for Company shares by one of the directors) have
already agreed that their shares will be voted in favor of the approval of the
Agreement. See the discussion under the caption "THE MERGER AND THE AGREEMENT -
Voting Agreements" for more information.
Procedures for Voting
- ---------------------
Stockholders should read this Proxy Statement and the appendices carefully to
consider the proposal. A stockholder can vote by mailing a signed proxy card in
the enclosed pre-addressed, postage prepaid envelope as soon as possible so that
the holder's shares may be represented and voted at the special meeting. In
order to ensure that all shares are represented and voted at the special
meeting, stockholders are encouraged to mail a completed proxy card even if they
currently plan to attend the special meeting in person. Any signed proxy card
returned to the Company that does not indicate how the holder wants to vote will
be treated as voting "FOR" approval of the Agreement at the special meeting.
Stockholders may also vote in person by attending the special meeting and
notifying the inspector of election. A stockholder may revoke a proxy at any
time before the special meeting as set forth under the caption "SPECIAL MEETING
OF STOCKHOLDERS - Voting and Revocation of Proxies."
STOCKHOLDERS OF THE COMPANY SHOULD NOT RETURN THEIR STOCK CERTIFICATES WITH
THEIR PROXIES OR PRIOR TO RECEIVING A LETTER OF TRANSMITTAL FROM A PAYING AGENT
DESIGNATED BY LIBERTY.
Recommendation of the Company's Board
- -------------------------------------
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF
THE AGREEMENT.
PARTIES TO THE MERGER
The Company
- -----------
The Company is the holding company for its wholly owned subsidiary, State
Federal Savings and Loan Association of Des Moines, a federally chartered
savings association headquartered in Clive, Iowa ("State Federal"). State
Federal is a community-oriented financial institution operating from its main
office and two additional retail banking facilities in Des Moines, Iowa. The
Company's business consists entirely of the operations of State Federal and its
subsidiary and providing general support services to these entities. The
Company's principal executive offices are located at 13523 University Avenue,
Clive, Iowa 50325, and its phone number there is (513) 223-8484.
================================================================================
-2-
================================================================================
At September 30, 2003, the Company had consolidated assets of $94.7 million,
consolidated deposits of $71.4 million and consolidated stockholders' equity of
$13.8 million. For additional information regarding the Company, see "BUSINESS
AND FINANCIAL STATEMENTS OF THE COMPANY."
Liberty
- -------
Liberty is a federally chartered savings bank headquartered in West Des Moines,
Iowa. Liberty is a community-oriented financial institution operating from 13
retail banking facilities. Liberty is wholly owned by Liberty Banshares, Inc.,
which engages in no independent activities other than providing general support
services to Liberty. Liberty's main office is located at 6139 Ashworth Road,
West Des Moines, Iowa 50266, and its telephone number there is (515) 222-0731.
At September 30, 2003, Liberty had consolidated assets of $481.5 million,
consolidated deposits of $394.6 million and consolidated stockholders' equity of
$51.3 million. For additional information about Liberty, see "BUSINESS AND
FINANCIAL STATEMENTS OF LIBERTY."
THE MERGER AND THE AGREEMENT
Structure of the Merger
- -----------------------
If the Agreement is approved by Company stockholders at the special meeting, the
required regulatory approvals are obtained, and the parties satisfy or waive the
other conditions of the Agreement, an interim subsidiary of Liberty will merge
with and into the Company. The Company will continue as the surviving
corporation and as a wholly owned subsidiary of Liberty. Following the merger,
the directors and officers of the interim subsidiary of Liberty immediately
prior to the effective time of the merger will become the directors and officers
of the surviving corporation. After the merger, the Company will be liquidated,
and State Federal will be merged with and into Liberty with Liberty as the
surviving institution. If the Agreement is not approved at the special meeting,
the required regulatory approvals are not obtained or the other conditions to
the merger are not satisfied, the Company and Liberty will continue as separate
entities and all holders of the Company's common stock at that time will remain
stockholders of the Company. See "THE MERGER AND THE AGREEMENT - Overview of the
Transaction."
Regulatory Approvals and Completion of the Merger
- -------------------------------------------------
We hope to complete the merger in the first quarter of 2004. The merger cannot
occur unless Company stockholders owning at least a majority of the outstanding
shares of common stock approve the Agreement and required regulatory filings are
made and approvals received, in addition to certain other customary conditions.
See "THE MERGER AND THE AGREEMENT - Regulatory Approvals."
Conditions to Completing the Merger
- -----------------------------------
The completion of the merger depends on a number of conditions being met,
including the Company having stockholders' equity of at least $13,275,000 as of
the month-end prior to the closing date of the merger. Conditions to
consummation of the merger include, among other things, approval of the
Agreement by holders of at least a majority of the outstanding shares of the
Company's common stock, receipt of all required regulatory approvals, continued
accuracy of representations and warranties made by the Company and Liberty in
the Agreement and the satisfaction of closing conditions set forth in the
Agreement. The Company cannot be certain if these conditions will be met or
waived. See "THE MERGER AND THE AGREEMENT - Other Terms of the Merger --
CONDITIONS OF COMPLETING THE MERGER."
================================================================================
-3-
================================================================================
Dividend Limit
- --------------
The Company has agreed not to pay any dividends or make any other capital
distribution to its stockholders prior to completing the merger, except the
Company may declare and pay a dividend of up to $0.10 per share, if the merger
is not effected by April 1, 2004, and the Company has performed its obligations
under the Agreement timely and has sufficient capital in excess of the
$13,275,000 closing requirement. See "THE MERGER AND THE AGREEMENT - Other Terms
of the Merger -- BUSINESS PENDING EFFECTIVE TIME."
Agreement Not to Solicit Other Proposals
- ----------------------------------------
The Company has agreed not to solicit or encourage any acquisition proposal with
a third party, negotiate or discuss an acquisition proposal with a third party
or enter into any agreement that would require it to abandon or terminate the
merger with Liberty. Despite these agreements, the board of directors of the
Company, prior to the special meeting, may generally negotiate or have
discussions with, or provide information to, a third party who makes an
unsolicited, written bona fide acquisition proposal. This authority to discuss
or negotiate another acquisition proposal may be exercised only if the Company's
board of directors, in good faith and after receipt of advice from outside legal
counsel and its financial advisor, determines that failure to take this action
is reasonably likely to result in a violation of its fiduciary duties to the
Company's stockholders and the unsolicited acquisition proposal is a more
favorable transaction than the transaction contemplated by the Agreement with
Liberty.
Amendments or Waivers
- ---------------------
The Company and Liberty can agree to amend the Agreement, and each of them can
waive its right to require the other party to adhere to the terms and conditions
of the Agreement, where the law allows. However, if the Company's stockholder
approve the Agreement, Liberty and the Company cannot approve any amendment or
waiver that reduces or changes the Merger Consideration without the approval of
the Company's stockholders. "THE MERGER AND THE AGREEMENT - Waiver; Amendment."
Termination
- -----------
Liberty and the Company can mutually agree to terminate the Agreement at any
time prior to the closing of the merger. In addition, either Liberty or the
Company may terminate the Agreement if:
o the other party breaches any representation or warranty made in the
Agreement, and the breach has had or is likely to have a material
adverse effect on the party seeking to terminate and the breaching
party does not cure the breach within 30 days after receiving notice
of the breach or the breach cannot be cured, unless the party seeking
to terminate is in breach of the Agreement;
o the other party materially breaches any covenant or agreement in the
Agreement and cannot or does not cure the breach within 30 days after
receiving notice of the breach;
o governmental approval necessary to consummate the merger and the
subsequent combination of Liberty and State Federal is denied, unless
the denial is due to the failure of the party seeking to terminate to
perform under the Agreement;
o the stockholders of the Company do not approve the merger, or
o the merger is not consummated on or before July 18, 2004, unless the
party seeking termination is in breach of the Agreement.
================================================================================
-4-
================================================================================
Liberty also may terminate the Agreement if:
o the Company's board fails to call and hold the special meeting within
the time frame provided in the Agreement, fails to publicly recommend
adoption of the Agreement by the stockholders or withdraws, modifies
or changes its recommendation or recommends a competing acquisition
proposal, or
o any of the individuals executing a voting agreement does not vote all
his or her shares in favor of the Agreement or otherwise materially
breaches the Agreement.
The Company also may terminate the Agreement prior to the special meeting if:
o the Company enters into an acquisition agreement for a superior
competing acquisition proposal as described in more detail at "THE
MERGER AND THE AGREEMENT - Other Terms of the Merger - - NO
SOLICITATION."
See "THE MERGER AND THE AGREEMENT - Other Terms of the Merger -- PAYMENTS
ASSOCIATED WITH CERTAIN TERMINATIONS OF THE AGREEMENT."
Payments Associated With Terminations
- -------------------------------------
The Company is required to pay to Liberty up to $150,000 of Liberty's reasonable
expenses and a fee of $500,000 for certain terminations provided for in the
Agreement. See "THE MERGER AND THE AGREEMENT - Other Terms of the Merger --
PAYMENTS ASSOCIATED WITH CERTAIN TERMINATIONS OF THE AGREEMENT."
THE MERGER CONSIDERATION AND STOCKHOLDER RIGHTS
The Merger Consideration
- ------------------------
The Merger Consideration payable by Liberty to the Company's stockholders shall
be $13.47 per share in cash. Liberty will be required to pay [$17,429,614.26]
for the [1,293,958] shares issued and outstanding as of September 30, 2003. In
addition, Liberty will be required to pay up to an additional $208,434.78 for
additional shares that may be issued if one of the Company's directors exercises
outstanding stock options prior to the closing of the merger and up to
$69,961.36 as payment for other outstanding stock options, which will not be
exercised prior to the closing of the merger. See "THE MERGER AND THE AGREEMENT
- - Interests of the Company's Insiders in the Merger -- Payment for Company
Options." As a result, the maximum aggregate cash consideration to be paid by
Liberty would be [$17,708,010.40]. Liberty has represented to the Company in the
Agreement that it will have sufficient funds available immediately prior to the
closing of the merger to pay the Merger Consideration. The amount of the Merger
Consideration is subject to reduction as described in this proxy statement under
"THE MERGER AND THE AGREEMENT - Merger Consideration," if the consolidated
stockholders' equity of the Company falls below $13,575,000 as of the month-end
prior to the date of the merger. Pursuant to the Agreement, the shares of common
stock of the Company outstanding immediately prior to the time at which the
merger becomes effective will be converted into the right to receive the Merger
Consideration from Liberty, and the stockholders of the Company will no longer
have an ownership interest in the Company.
Fairness of Merger Consideration
- --------------------------------
Keefe, Bruyette & Woods, Inc. ("KBW"), the Company's financial advisor, has
delivered to the Company's board of directors its opinion that, as of the date
of this document, the Merger Consideration is fair to the holders of the
Company's common stock, from a financial point of view. A copy of this
================================================================================
-5-
================================================================================
opinion is provided as Appendix B to this document. You should read this opinion
and the description of it in this proxy statement completely to understand the
procedures followed, assumptions made, matters considered, and qualifications
and limitations on the review made by KBW in providing this opinion. The Company
has agreed to pay KBW approximately $176,000 as of the date of closing, plus
expenses for its services in connection with the merger. See "OPINION OF THE
COMPANY'S FINANCIAL ADVISOR."
Tax Consequences to Company Stockholders
- ----------------------------------------
For federal income tax purposes, the exchange of shares of the Company's common
stock for the cash Merger Consideration generally will cause a stockholder to
recognize a gain or loss measured by the difference between the amount of Merger
Consideration and the holder's tax basis in the shares of the Company's common
stock. If these shares are held as a capital asset, this gain or loss will be a
capital gain or loss. Stockholders also may be subject to state and local taxes
as a result of the exchange of common stock for cash. See the discussion under
the caption "MATERIAL TAX CONSEQUENCES TO STOCKHOLDERS" for more information.
YOUR TAX BASIS IN THE SHARES OF COMPANY COMMON STOCK YOU OWN IS NOT INFORMATION
THAT CAN BE PROVIDED BY THE COMPANY. ACCORDINGLY, THE TAX CONSEQUENCES OF THE
MERGER TO YOU WILL DEPEND ON YOUR OWN SITUATION. YOU SHOULD CONSULT WITH YOUR
OWN TAX ADVISORS FOR A FULL UNDERSTANDING OF THE TAX CONSEQUENCES OF THE MERGER
TO YOU.
Appraisal Right
- ---------------
Delaware law provides each stockholder with an appraisal right in the merger.
This means that if a stockholder is not satisfied with the amount of Merger
Consideration, that person is entitled to dissent from the Agreement and receive
payment based on an independently determined valuation. To exercise your
appraisal rights, you must deliver a written demand for payment for your shares
to the Company before the special meeting and must not vote in favor of the
Agreement. Written demands for payment should be addressed to StateFed Financial
Corporation at 13523 University Avenue, Clive, Iowa 50325, Attention: Randall C.
Bray, President and Chairman. A vote against the Agreement or abstaining from
voting will not constitute a demand for payment. Your failure to follow exactly
the procedures specified under Delaware law will result in the loss of your
appraisal rights. A copy of the appraisal rights provisions of Delaware law is
provided as Appendix C to this Proxy Statement. See "STOCKHOLDER APPRAISAL
RIGHT."
Procedure for Receiving Merger Consideration
- --------------------------------------------
After the completion of the merger, Liberty will send the former stockholders of
the Company a letter of transmittal to be used for surrendering stock
certificates. In order to receive the Merger Consideration in a timely fashion
after the consummation of the merger, a stockholder should complete that letter
of transmittal and mail it in the pre-addressed, postage prepaid envelope
promptly. You will not receive payment for your shares unless and until the
letter of transmittal is received by Liberty's paying agent in the proper form.
See "THE MERGER AND THE AGREEMENT - Surrender of Stock Certificates."
INTERESTS OF DIRECTORS AND EXECUTIVE OFFICERS
Some of the Company's directors and executive officers may have an interest in
the merger that is different from, or in addition to, their interest as
stockholders of the Company. These interests exist because of the rights that
these directors and executive officers have under the terms of their benefit and
compensation plans and also, in the case of the executive officers, under the
terms of various agreements with the Company. These agreements provide some
executive officers with severance benefits if their
================================================================================
-6-
================================================================================
employment is terminated under specified circumstances in connection with or
following the merger. These interests also arise from provisions of the
Agreement relating to director and officer indemnification and insurance,
retention bonuses and other employee benefits after the merger and appointments
to management positions with Liberty. In addition, stock options held by certain
directors and executive officers of the Company will vest early as a result of
the merger. See "THE MERGER AND THE AGREEMENT - Interests of the Company's
Insiders in the Merger."
Mr. Bray, the President and Chairman of the Company, has been retained,
effective as of the closing of the merger, as a consultant to Liberty under a
three-year contract, providing for total payments to Mr. Bray of $150,000. He
also will be paid $192,500 under his current employment agreement with the
Company, as a result of the change in control. See "THE MERGER AND THE
AGREEMENT- Interests of the Company's Insiders in the Merger -- TERMINATION OF
CURRENT EMPLOYMENT AGREEMENT OF RANDALL C. BRAY AND -- NEW CONSULTING AGREEMENT
FOR RANDALL C. BRAY."
Ms. Black, the Executive Vice President and Chief Financial Officer of the
Company, has been offered a terminable at will position as a financial analyst
and officer of Liberty at an annualized salary of $60,000 in 2004 and $52,500 in
2005. See "THE MERGER AND THE AGREEMENT - Interests of the Company's Insiders in
the Merger -- EMPLOYMENT AGREEMENT WITH ANDRA K. BLACK."
Mr. Blazek, the Senior Vice President of the Company has a severance agreement
with the Company providing for a change in control severance payment for
involuntary terminations up to one year after the change in control. Liberty is
assuming this contract and continuing to employ Mr. Blazek as Senior Vice
President. Liberty will pay Mr. Blazek a $10,000 signing bonus. See "THE MERGER
AND THE AGREEMENT - Interests of the Company's Insiders in the Merger --
Severance Agreement with Steven J. Blazek."
QUESTIONS ABOUT THE MERGER
If you have questions about the merger you should contact:
Randall C. Bray
President and Chairman
StateFed Financial Corporation
Telephone: (515) 223-8484
================================================================================
THE FOREGOING INFORMATION CONCERNING THE AGREEMENT PROVIDES ONLY A SUMMARY OF
SIGNIFICANT FEATURES OF THE MERGER AND THE AGREEMENT. MORE DETAILED INFORMATION
ABOUT THE MERGER AND AGREEMENT IS CONTAINED IN THE REMAINDER OF THIS PROXY
STATEMENT AND THE APPENDICES. AS YOU DELIBERATE ON HOW TO VOTE ON THE AGREEMENT,
YOU SHOULD NOT RELY EXCLUSIVELY ON THIS INTRODUCTORY INFORMATION OR THE SUMMARY
AND, INSTEAD, ARE URGED TO REVIEW THE ENTIRE PROXY STATEMENT.
-7-
SPECIAL MEETING OF STOCKHOLDERS
PLACE, DATE AND TIME
This proxy statement is being furnished to you in connection with the
solicitation of proxies by the board of directors of the Company for use at a
special meeting of stockholders to be held at [Time], local time, on [Day of
Week], [Date], 2004, and at any adjournments or postponements thereof.
PURPOSE OF SPECIAL MEETING
At the special meeting, you will be requested to vote upon a proposal to
approve the Agreement by and between the Company and Liberty. The Agreement
provides for the acquisition of the Company by Liberty through the merger of a
to-be-formed interim, wholly owned subsidiary of Liberty with and into the
Company. In that merger, the Company's existing common stock will be cancelled,
and the Company will become a wholly owned subsidiary of Liberty. Upon
consummation of the merger, each outstanding share of the Company's common stock
will be converted into the right to receive the Merger Consideration of $13.47
per share in cash (subject to a stockholder's exercise of the appraisal right
explained in this proxy statement under "STOCKHOLDER APPRAISAL RIGHT"). The
Merger Consideration will be decreased if the Company's consolidated
stockholders' equity falls below a prescribed level as of the month-end prior to
the closing of the merger, as explained in this proxy statement under "THE
MERGER AND THE AGREEMENT - Merger Consideration."
After the merger, the Company, as the surviving corporation and a wholly
owned subsidiary of Liberty, will be liquidated and cease to exist. Liberty will
acquire the Company's assets, including its shares of stock in State Federal,
and assume its liabilities. After that transaction, State Federal will be merged
with and into Liberty, with Liberty as the surviving corporation, and the
separate existence of State Federal shall cease.
RECORD DATE; VOTING RIGHTS
The board of directors has fixed the close of business on [Record Date] as
the record date for the determination of stockholders of the Company entitled to
receive notice of and to vote at the special meeting. On [Record Date], there
were [1,293,958] shares of the Company's common stock outstanding. Each holder
of the Company's common stock is entitled to one vote per share held of record
on [Record Date].
QUORUM
The presence at the special meeting, in person or by proxy, of at least
one-third of the outstanding shares of the Company's common stock will
constitute a quorum. If a stockholder abstains from voting but returns a valid
proxy or attends the special meeting, that stockholder's shares will be counted
for purposes of determining the existence of a quorum. Broker non-votes also
will be counted for purposes of determining the existence of a quorum. A broker
non-vote occurs when a broker, bank or other nominee holding shares for a
beneficial owner does not vote on a particular proposal, because the nominee
does not have discretionary voting power with respect to that item and has not
received voting instructions from the beneficial owner. Under applicable rules,
brokers, banks and other nominees may not exercise their voting discretion on
the proposal to approve and adopt the Agreement, and, for this reason, may not
vote shares held for beneficial owners without specific instructions from the
beneficial owners.
-8-
VOTE REQUIRED
The Company's certificate of incorporation requires the affirmative vote of
the holders of a majority of its outstanding shares of common stock to approve
the Agreement. Abstentions and broker non-votes will have the same effect as
votes against the Agreement. As of [Record Date], 2003, directors and executive
officers of the Company owned [126,901] shares of the Company's common stock,
not including shares that may be acquired upon the exercise of stock options.
This equals approximately 9.8% of the shares outstanding on [Record Date]. All
but two of the Company's directors owning 107,079 or approximately [8.18]% of
the common stock of the Company (assuming the exercise of 15,474 options for
Company shares by one of the directors) entered into agreements with Liberty to
vote their shares in favor of approval of the Agreement. In addition, Krause
Gentle Corporation, the owner of approximately 11.52% of the Company's common
stock, is controlled by the chairman of Liberty and will be voting its shares in
favor of adoption of the Agreement.
SHARES HELD BY A NOMINEE
If a stockholder is a beneficial owner of shares of the Company's common
stock held by a broker, bank or other nominee (i.e., in "street name"), the
stockholder will need proof of ownership to be admitted to the special meeting.
A recent brokerage statement or letter from a bank or broker indicating that the
stockholder was the beneficial owner of the Company's common stock on [Record
Date], is valid proof of ownership. If the stockholder wants to vote shares of
the Company's common stock held in street name in person at the special meeting,
the stockholder will have to get a written proxy in the stockholder's name from
the broker, bank or other nominee who holds the stockholder's shares.
PARTICIPANTS IN THE COMPANY'S EMPLOYEE STOCK OWNERSHIP PLAN
Persons who participate in the Company's employee stock ownership plan will
receive a voting instruction form that reflects all shares he or she may vote
under the plan. Under the terms of the employee stock ownership plan, all shares
held in the employee stock ownership plan are voted by the plan trustee, but
each participant in the employee stock ownership plan may direct the trustee how
to vote the shares of the Company's common stock allocated to his or her
employee stock ownership plan account. Where properly executed voting
instructions are returned to the plan trustee with no specific instruction on
how to vote at the meeting, the plan trustee will vote the shares FOR approval
of the Agreement. As for allocated shares for which the trustee does not receive
timely voting instructions, the trustee will not vote the shares. Unallocated
shares of the Company's common stock held by the employee stock ownership plan
trust will be voted by the plan trustee in the same proportion as shares for
which the trustee has received voting instructions, subject to the exercise of
its fiduciary duties. The deadline for returning your voting instructions to the
plan trustee is [Date], 2004.
VOTING AND REVOCATION OF PROXIES
Shares of the Company's common stock represented by a properly signed proxy
and received at or prior to the special meeting, unless subsequently revoked,
will be voted at the special meeting in accordance with the instructions on the
proxy. If a proxy is signed and returned without indicating any voting
instructions, shares of the Company's common stock represented by the proxy will
be voted "FOR" approval of the Agreement.
If shares of the Company's common stock are held in street name, a
stockholder will receive instructions from the broker, bank or their nominee
holding the shares, which the stockholder must follow in order to have his, hers
or its shares voted. A broker or bank may allow a stockholder to deliver
-9-
voting instructions via telephone or the Internet. Please see the instruction
form that accompanies this document.
Any proxy given in connection with this solicitation may be revoked by the
person giving it at any time before the special meeting by filing either an
instrument revoking it or a duly executed proxy bearing a later date with the
Secretary of the Company prior to or at the special meeting or by voting the
shares subject to the proxy in person at the special meeting. Attendance at the
special meeting in person will not in and of itself constitute a revocation of a
proxy.
If any other matter is properly presented for consideration at the special
meeting, including, among other things, consideration of a motion to adjourn or
postpone the special meeting to another time and/or place, the persons named in
the proxy card will have the discretion to vote on such matter in accordance
with their best judgment. The Company is not aware of any matters to be
presented at the special meeting, other than the approval of the Agreement.
SOLICITATION OF PROXIES
The Company will pay the cost of this proxy solicitation. In addition to
solicitation by mail, the directors, officers, employees and agents of the
Company may solicit proxies from the Company's stockholders, either personally
or by telephone or other form of communication. None of these persons who
solicit proxies will be specifically compensated for such services. Nominees,
fiduciaries and other custodians will be requested to forward soliciting
materials to beneficial owners. The Company will reimburse such nominees,
fiduciaries and other custodians for the reasonable out-of-pocket expenses
incurred by them in connection with this process. The Company also has retained
Regan & Associates, Inc., as its proxy solicitor to assist in the process of
obtaining a favorable vote on the agreement. The proxy solicitor will be paid
$4,500, however if a favorable stockholder vote is not obtained, it will receive
no fee. In addition, the Company will bear its own expenses in connection with
the solicitation of proxies for the special meeting.
-10-
PRINCIPAL HOLDERS OF THE COMPANY'S COMMON STOCK
Stockholders of record as of the close of business on [Record Date], will
be entitled to vote at the special meeting. As of that date, there were
[1,293,958] shares of the Company's common stock issued and outstanding. The
following table sets forth as of [Record Date], information regarding ownership
of the Company's common stock by: (i) those persons or entities known by
management to be beneficial owners of more than 5% of the outstanding shares of
the Company's common stock, (ii) each director and the executive officers of the
Company who own shares of the Company's common stock, and (iii) all directors
and executive officers of the Company as a group:
SHARES BENEFICIALLY OWNED
--------------------------------------
BENEFICIAL OWNER NUMBER(1) PERCENTAGE
- --------------------------------------------------- ------------------ ------------------
Krause Gentle Corporation(2). . . . . . . . . . . . 127,000 9.81%
c/o James B. Langeness
Duncan, Green, Brown, Langeness & Eckley
380 Capital Square, 400 Locust Street
Des Monies, Iowa 50309
StateFed Financial Corporation
Employee Stock Ownership Plan(3)(4) . . . . . . . 103,112 7.97%
Douglas M. Kratz(5) . . . . . . . . . . . . . . . . 126,600 9.74%
Middle Road, Suite 101
Bettendorf, Iowa 52722
Andra K. Black(3)(6)(7) . . . . . . . . . . . . . . 34,855 2.66%
Executive Vice President
Randall C. Bray(3)(7)(8). . . . . . . . . . . . . . 7,707 0.59%
President, Chairman and Director
Kevin J. Kruse(3)(7)(9) . . . . . . . . . . . . . . 15,504 1.20%
Eugene M. McCormick(3)(7)(10) . . . . . . . . . . . 40,266 3.11%
Sidney M. Ramey(3)(7)(11) . . . . . . . . . . . . . 13,044 1.01%
William T. Nassif(3)(12). . . . . . . . . . . . . . 10,477 0.81%
Harry A. Winegar(3) . . . . . . . . . . . . . . . . 28,266 2.18%
All directors and executive officers as a group
(7 persons) . . . . . . . . . . . . . . . . . . . . 150,119 11.40%
- ----------------------
(1) Amounts include shares held directly, as well as shares which are held in
retirement accounts, or held by certain members of the named individuals'
families, or held by trusts of which the named individual is a trustee or
substantial beneficiary, with respect to which shares the respective
directors may be deemed to have sole or shared voting and/or investment
power. Amounts also include 15,474, 3,447 and 4,297 shares subject to
options granted to Directors Black, Nassif and Bray under the Company's
stock option plan, which options are exercisable within 60 days of [Record
Date]. This table also includes 15,089 and 910 shares allocated to the
accounts of Ms. Black and Mr. Bray, respectively, pursuant to the Company's
employee stock ownership plan.
-11-
(2) Information provided by Krause Gentle Corporation to the Company in
December 2003. William Krause, the president of Krause Gentle Corporation,
is also the chairman of the board of Liberty.
(3) Address for named person or entity is c/o StateFed Financial Corporation,
13523 University Avenue, Clive, Iowa 50325.
(4) The amount reported represents shares held by the employee stock ownership
plan, of which 97,931 shares of common stock were allocated to accounts of
participants. First Bankers Trust Company, N.A., the trustee of the
employee stock ownership plan, may be deemed to beneficially own all the
shares held by the employee stock ownership plan. Pursuant to the terms of
the employee stock ownership plan, participants in the employee stock
ownership plan have the right to direct the voting of shares allocated to
participant accounts. Unallocated shares held by the employee stock
ownership plan are voted by the plan trustee in the manner that the plan
trustee is directed to vote by the majority of the employee stock ownership
plan participants who directed the plan trustee as to the manner of voting
the shares allocated to their plan accounts. If an employee stock ownership
plan participant fails to give timely voting instructions to the plan
trustee with respect to the voting of the shares allocated to the
participant's account, the plan trustee is entitled to vote such shares in
its discretion.
(5) Information as reported by Douglas M. Kratz in a Schedule 13-D dated
November 19, 2002 and filed with the Securities and Exchange Commission.
(6) Includes 4,292 shares held directly, 15,089 shares allocated to Ms. Black's
account pursuant to the employee stock ownership plan and 15,474 shares
subject to options granted to Ms. Black under the Company's stock option
plan.
(7) Executed a voting agreement with the Company to vote in favor of adoption
of the Agreement.
(8) Includes 2,500 shares held directly, 910 shares allocated pursuant to the
Company's stock option plan, and 4,297 shares subject to options granted to
Mr. Bray under that stock option plan.
(9) Includes 13,816 shares held jointly with his spouse and 1,688 shares held
by Mr. Kruse's spouse.
(10) Includes 39,266 shares held directly and 1,000 shares held by Mr.
McCormick's spouse.
(11) Includes 9,004 shares held directly, 1,260 shares held by Mr. Ramey's
spouse, and 2,780 shares held jointly with his spouse
(12) Includes 7,000 shares held directly and 3,447 shares subject to options
granted to Mr. Nassif under the Company's stock option plan.
BACKGROUND OF THE MERGER
Since its inception as a public company in January 1994, the Company has
been operating with a substantial amount of excess capital. The Company was
organized by State Federal for the purpose of acquiring all of the outstanding
capital stock of State Federal in connection with State Federal's conversion
from the mutual to stock form of organization. In connection with that
conversion, the Company issued its common stock to the public. Upon completion
of these transactions, the Company reported a tangible equity to assets ratio of
approximately 23%. This substantial amount of excess capital was not unlike the
level of capital reported by most other thrifts that completed mutual to stock
conversions. The Company has been unable to effectively deploy all of this
excess capital, which has resulted in a lower return on equity over the years
for the Company as compared to that reported by its higher leveraged
competitors.
One of the primary objectives of the board of directors and management of
the Company is, and has been, to enhance stockholder value. Over the years they
have considered various strategies to accomplish this goal. These strategies
have included internal retail growth through its primary lending and deposit
products, regular quarterly cash dividends, a two-for-one stock split in 1997
and regular stock repurchase programs. In addition, in May 2001, the Company
announced a dutch auction tender to repurchase 230,770 shares for between $11.50
and $13.00 per share, and it repurchased these shares for $11.50 per share on
June 11, 2001. The board of directors and management of the Company have
considered other strategies to deploy its excess capital and enhance stockholder
value, including expanding its franchise into other cities or acquiring another
financial institution. These expansion strategies were not pursued due to
concerns over increasing non-interest operating expenses and the lack of viable
acquisition candidates with a similar philosophy or geographic fit. As a result
of the efforts taken by the Company since 1994, its tangible equity to assets
ratio was reduced to 14.6% as of September 30, 2003.
In October 2002, a businessman from Bettendorf, Iowa, submitted an
unsolicited, non-binding indication of interest to acquire 51% of the Company's
shares for $12.50 in cash per share. After receiving the proposal, the Company
informed the bidder that the Company was not interested in
-12-
pursuing this proposal, because the proposed price was inadequate and the
transaction would not best serve the interests of the stockholders.
In November 2002, the Company engaged KBW to evaluate alternative
strategies under a stockholder enhancement program. Over several months, KBW
reviewed the Company's current operations, business plan, alternative
opportunities to enhance stockholder value, the related risks and rewards of
these options, and the current merger and acquisition market. This review
included consideration of conducting another dutch auction tender and
deregistration of the Company's common stock. After consultation with KBW, the
Company's board and management identified various factors that could potentially
limit their ability to continue to further enhance stockholder value without an
outside strategic alliance. These factors included: (a) the strategic challenge
of leveraging the Company's excess capital combined with the relatively low
growth profile for its operations; (b) the execution risk that accompanies a
strategy of remaining an independent community banking institution in an
increasingly competitive banking environment; (c) the future valuation assigned
by the capital markets to a traditional thrift franchise; (d) the low average
trading volume and liquidity of the Company's common stock; (e) anticipated
expenditures required to implement new technology to remain competitive; (f) the
increased competition for deposits, and (g) the expenditures required to
re-position the Company in higher growth markets through a de novo branching
strategy or a relocation of existing branches and the time required to recover
the expenditures. After considering these various alternatives, the board
decided to consider potential outside strategic alliances with another
institution.
During March and April 2003, the Company met with several potential
acquirers to determine the level of interest in the Company and the possible
terms of an acquisition. The Company engaged KBW in May 2003 to provide an
analysis and review with respect to the specific acquisition opportunities that
had presented themselves and to solicit additional indications of interest.
During May and June 2003, KBW contacted several additional financial
institutions regarding a strategic partnership with the Company. In all,
thirteen companies or individuals were contacted or approached regarding a
possible strategic alliance with the Company. Eight of these persons signed
confidentiality agreements. Two companies submitted a written indication of
interest, and one company provided a verbal indication of interest which
subsequently was withdrawn. These three indications of interest were for the
acquisition of the Company's common stock for cash in a price range of $13.00 to
$14.15 per share.
The Company's board of directors began to review and evaluate the two
remaining indications of interest with the assistance of KBW. During this
review, the Company began to recognize some problems in the performance of its
loan portfolio, which would require it to establish additional loan loss
reserves in the financial statements for its June 30, 2003 fiscal year-end. The
Company had to report this development to the two potential acquirers, who
reduced the proposed per share purchase price in their indications of interest
to a price range of $13.77 to $13.85. In August 2003, the Company selected to
enter into negotiations on the more beneficial proposal, which had been
submitted by a bank holding company. That bank holding company performed an
additional review of the Company, and terms of a formal agreement submitted by
that bidder were discussed with the Company. During this review and the
negotiation of the formal agreement, the bidder decided to withdraw its
proposal. In September 2003, the Company contacted Liberty, who was the only
remaining bidder, to affirm its previous price indication and determine if it
wanted to pursue a definitive agreement.
The Company immediately entered into negotiations with Liberty, and Liberty
completed its review of the Company. While the terms of the definitive agreement
were negotiated, KBW conducted its analysis and review of the Merger
Consideration At a special meeting on October 30, 2003, KBW presented its
preliminary fairness opinion and provided an analysis of the transaction to the
board of directors of the Company. Counsel for the Company presented the
proposed merger agreement for the
-13-
board's consideration. Soon thereafter, upon completion of its review of the
financial condition and operations of the Company, Liberty lowered their
proposed purchase price by approximately 2% to $13.47 per share. On November 17,
2003, the Company's counsel reviewed the changes with the Company's board, and
KBW reaffirmed that the transaction was fair from a financial point of view. The
definitive agreement was signed on November 18, 2003, and KBW issued its
fairness opinion on that same date.
REASONS FOR THE MERGER
The Company's board has determined that the terms of the Agreement are
advisable and in the best interests of the Company and its stockholders. In
approving the Agreement, the board consulted with legal counsel as to its legal
duties and the terms of the Agreement, and with KBW with respect to the
financial aspects and fairness of the merger from a financial point of view. In
arriving at its decision, the board also considered a number of factors,
including:
o the factors for affiliating with a strategic partner discussed with
KBW over the last several quarters and summarized above;
o the financial condition, results of operations, capital levels, asset
quality and prospects for the Company;
o the shared community banking philosophy of both organizations and the
familiarity of the Company's markets by Liberty;
o the board's consideration of the written fairness opinion of KBW that
the consideration to be received by the Company's stockholders
pursuant to the Agreement was fair to them from a financial point of
view;
o the enhanced ability to offer more competitive services and maintain a
stronger competitive presence in its market area as a result of the
partnership;
o the impact of the strategic partnership on the depositors, employees,
customers and communities served by the Company, and
o the likelihood of receiving the required regulatory approvals in a
timely manner.
The foregoing discussion of the information and factors considered by the
Company's board is not intended to be exhaustive, but constitutes the material
factors considered by the board. In reaching its determination to approve and
recommend the Agreement, the board did not assign any relative or specific
weights to the foregoing factors, and individual directors may have weighed
factors differently. The terms of the Agreement were the product of arm's length
negotiations between representatives of the Company and Liberty.
-14-
RECOMMENDATION OF BOARD OF DIRECTORS
After careful and thorough consideration of the Agreement, the board of
directors of the Company unanimously approved the Agreement as being in the best
interests of the Company and its stockholders. ACCORDINGLY, THE BOARD OF
DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE APPROVAL
OF THE AGREEMENT.
THE MERGER AND THE AGREEMENT
THE FOLLOWING DISCUSSION OF THE MERGER AND THE AGREEMENT IS QUALIFIED BY
REFERENCE TO THE COPY OF THE AGREEMENT ATTACHED HERETO AS APPENDIX A. THIS
SUMMARY DISCUSSES MATERIAL PROVISIONS OF THE AGREEMENT. STOCKHOLDERS ARE URGED
TO READ THE AGREEMENT CAREFULLY. THE AGREEMENT IS THE LEGAL DOCUMENT GOVERNING
THE MERGER.
OVERVIEW OF THE TRANSACTION
The boards of directors of the Company and Liberty have each unanimously
approved the Agreement, which provides for the acquisition of the Company and
State Federal by Liberty. Liberty will be the survivor in the acquisition, and
all the assets and liabilities of the Company and its subsidiaries will become
the assets and liabilities of Liberty. Subject to the satisfaction or waiver of
the conditions to the closing of the merger or the selection of an alternative
structure provided for in the Agreement, this acquisition will be effected as
follows:
o In the merger, a to-be-formed, wholly owned subsidiary of Liberty will
merge with and into the Company, with the Company as the surviving
entity and a wholly owned subsidiary of Liberty;
o All existing shares of the Company's common stock and any options for
those shares outstanding just prior to the closing will be cancelled
and converted into the right to receive the Merger Consideration,
subject to the exercise of stockholder appraisal rights (see "- Merger
Consideration" below and "STOCKHOLDER APPRAISAL RIGHT");
o Promptly after the merger, the Company will be liquidated, and all its
assets and liabilities will be transferred to or assumed by Liberty,
and
o Promptly after the liquidation of the Company, State Federal will be
merged with and into Liberty, with Liberty as the surviving entity.
MERGER CONSIDERATION
Upon consummation of the merger, each share of common stock of the Company
will be converted into the right to receive the Merger Consideration of $13.47
in cash, subject to each stockholder's appraisal right, as more fully explained
in this proxy statement under "STOCKHOLDER APPRAISAL RIGHT." The Merger
Consideration will be decreased if the Company's stockholders' equity falls
below $13,575,000 as of the month-end prior to the closing date of the merger.
If the Company's stockholders' equity is below $13,575,000 at that time, the
total cash consideration to be paid by Liberty will be reduced by the difference
between that benchmark level and the actual stockholders' equity and that
reduction will be allocated pro rata to the outstanding shares of the Company's
common stock. If, however, the Company's stockholders' equity is less than
$13,275,000 at that time, both Liberty and the Company will have the right to
terminate the Agreement. See "- Other Terms of the Merger --
-15-
CONDITIONS TO COMPLETING THE MERGER." As a result, the Merger Consideration
could be less than $13.47. At September 30, 2003, the stockholders' equity of
the Company was $13,848,730, which is $273,730 above the benchmark. The
Company's stockholders' equity is subject to adjustment, however, to take into
account the third party costs related to the merger. The Company currently
believes that it will meet this equity benchmark requirement at the closing of
the merger. Upon completion of the merger, the current holders of the Company's
stock will no longer own any Company stock or have any interest in the Company,
and will not receive, as a result of the merger, any stock of Liberty or any of
its affiliates.
Assuming the Merger Consideration is $13.47 per share, Liberty will be
required to pay [$17,429,614.26] for the [1,293,958] shares issued and
outstanding as of September 30, 2003. In addition, Liberty will be required to
pay up to an additional $208,434.78 for additional shares that may be issued if
one of the Company's directors exercises outstanding stock options prior to the
closing of the merger and up to $69,961.36 as payment for other outstanding
stock options, which will not be exercised prior to the closing of the merger.
As a result, the maximum aggregate cash consideration to be paid by Liberty
would be [$17,708,010.40]. See "- Interests of the Company's Insiders in the
Merger -- PAYMENT FOR COMPANY OPTIONS." Liberty has represented to the Company
in the Agreement that it will have sufficient funds available to pay the Merger
Consideration immediately prior to the closing of the merger.
SURRENDER OF STOCK CERTIFICATES
Upon consummation of the merger, all of the then issued and outstanding
shares of the Company's common stock automatically will be cancelled and
converted into the Merger Consideration, and the stock certificates for those
shares will only serve as evidence of that right (subject to a stockholder's
exercise of the appraisal right afforded under Delaware law). At that time, the
stock transfer books of the Company will be closed, and no more transfers of the
Company's shares will be made.
In order to receive the Merger Consideration, a stockholder must surrender
the stock certificates for all Company shares owned by the stockholder to
Liberty as instructed in materials to be provided by Liberty after the merger.
Liberty will designate a paying agent to mail a letter of transmittal for use in
surrendering these stock certificates within five business days of the merger.
STOCKHOLDERS SHOULD NOT RETURN THEIR STOCK CERTIFICATES WITH THEIR PROXIES OR
PRIOR TO RECEIVING THE LETTER OF TRANSMITTAL AND, INSTEAD, SHOULD WAIT TO
RECEIVE THE MATERIALS FROM THE PAYING AGENT.
Holders of the Company's common stock who surrender their stock
certificates to the paying agent, together with a properly completed letter of
transmittal, promptly will receive the Merger Consideration for those shares,
without interest, after giving effect to any tax withholding required by law. If
the payment is to be made for the benefit of a person other than the registered
holder of the surrendered certificate, it will be a condition of payment that
the certificate so surrendered be properly endorsed or otherwise in proper form
for transfer and that the persons requesting such payment pay any transfer or
other taxes required by reason of the payment to a person other than the
registered holder or provide evidence reasonably satisfactory to the paying
agent that such taxes have been paid or are not applicable. The letter of
transmittal will provide instructions for providing evidence of ownership of
Company shares, if the certificate evidencing those shares has been lost, stolen
or destroyed. The receipt of the Merger Consideration for Company shares will be
a taxable event for the stockholder. See "M ATERIAL TAX CONSEQUENCES TO
STOCKHOLDERS."
A COMPANY STOCKHOLDER WILL NOT BE PAID ANY PORTION OF THE MERGER
CONSIDERATION TO WHICH THE STOCKHOLDER IS ENTITLED UNLESS THE STOCKHOLDER HAS
SUBMITTED ALL STOCK CERTIFICATES EVIDENCING THE
-16-
STOCKHOLDER'S SHARES (OR THE REQUIRED DOCUMENTATION FOR LOST, STOLEN OR
MISPLACED CERTIFICATES). NO INTEREST WILL BE PAID AT ANY TIME ON ANY PORTION OF
THE MERGER CONSIDERATION.
Stockholders may exercise an appraisal right afforded by Delaware law,
which would include a demand for the fair value of the Company shares held by
the stockholder. See "STOCKHOLDER APPRAISAL RIGHT" for more information. A
stockholder exercising this appraisal right will not receive the Merger
Consideration.
OTHER TERMS OF THE MERGER
CONDITIONS TO COMPLETING THE MERGER. The obligations of the Company and
Liberty to effect the merger are subject to the satisfaction or waiver of
certain conditions. Following is a list of the material conditions (which does
not include those already satisfied):
o The receipt of all regulatory approvals required to consummate the
merger between the Company and Liberty's interim subsidiary and the
subsequent consolidation of Liberty and State Federal. See "-
Regulatory Approvals."
o The adoption of the Agreement by a majority vote of the holders of the
outstanding shares of the Company's common stock.
o The consummation of the merger not violating any law or injunction,
order or decree of any court or governmental body.
The obligations of Liberty and its interim subsidiary to effect the merger
are subject to the satisfaction or waiver of the following additional conditions
(which does not include those already satisfied):
o The representations and warranties of the Company contained in the
Agreement being true and correct in all respects at the closing of the
merger or, if not true and correct, the underlying circumstances would
not have a material adverse effect on the Company as defined in the
Agreement.
o The Company performing or complying, in all material respects, with
its agreements and covenants in the Agreement.
o No event or circumstances shall have occurred which has a material
adverse effect (as defined in the Agreement) on the Company or its
subsidiaries.
o Liberty receiving all necessary written releases and resignations from
the directors of the Company and State Federal.
o The continued effectiveness of the non-solicitation agreements between
Liberty and the directors of the Company. See "-- No Solicitation,"
below.
o The timely delivery by the Company of a report of its stockholders'
equity as of the month-end prior to the closing of the merger, which
equity is not less than $13,275,000.
o The receipt of certificates from officers of the Company as provided
for in the Agreement.
-17-
o The receipt of an environmental report for the real property of State
Federal evidencing less than $100,000 in environmental clean-up costs.
(If these expenses exceed $100,000, Liberty has 10 business days from
the receipt of the report to terminate the Agreement or this condition
is deemed waived.)
o The satisfaction by the Company of all requirements respecting
obligations owed to the participants in its employee stock ownership
plan and the termination of that plan. See "Interests of the Company's
Insiders in the Merger -- PAYMENT FOR COMPANY OPTIONS."
o The continued effectiveness of the consulting agreement and agreement
not to compete between Liberty, Greyhawk Partners and Randall C. Bray.
See "- Interests of the Company's Insiders in the Merger -- NEW
CONSULTING AGREEMENT FOR RANDALL C. BRAY."
The obligations of the Company to effect the merger are subject to the
satisfaction or waiver of the following additional conditions prior to the
consummation of the merger (which does not include those already satisfied):
o The representations and warranties of Liberty contained in the
Agreement being true and correct in all respects or, if not true and
correct, the underlying circumstances would not have a material
adverse effect on Liberty as defined in the Agreement.
o Liberty and its interim subsidiary performing or complying with, in
all material respects, their agreements and covenants in the
Agreement.
o The receipt of certificates from officers of Liberty as provided for
in the Agreement.
o The stockholders' equity of the Company being at least $13,275,000 as
of the month-end prior to the closing of the merger, subject to the
Company paying a designated reimbursement fee to Liberty. See "--
PAYMENTS ASSOCIATED WITH CERTAIN TERMINATIONS OF THE AGREEMENT,"
BELOW.
REPRESENTATIONS AND WARRANTIES. Liberty and the Company have made customary
representations and warranties to each other in the Agreement. For the contents
of these representations and warranties, please refer to the copy of the
Agreement attached hereto as Appendix A. These representations and warranties as
to each party must be true throughout the completion of the merger, unless the
change would not have a material adverse effect on the other party. See "--
CONDITIONS TO COMPLETING THE MERGER," above. Changes in these representation and
warranties could result in a termination of the Agreement. See "-- PAYMENTS
ASSOCIATED WITH CERTAIN TERMINATIONS OF THE AGREEMENT," below.
BUSINESS PENDING EFFECTIVE TIME. The Agreement imposes limitations on the
conduct of the Company's business pending completion of the merger. Generally,
the Company must conduct its businesses only in the ordinary and usual course,
consistent with past practice. The Company is also restricted from paying
dividends to its stockholders. From November 18, 2003 through the closing of the
merger, the Company may not declare, pay, or set aside for payment any dividend
or other stockholder distribution. If the merger is not effected prior to April
1, 2004 and the Company is not in breach of the Agreement and has used its best
efforts to timely meet its obligations under the Agreement, it may declare and
pay a one-time cash dividend of ten cents ($0.10) per share.
-18-
The Company is required to use its best efforts to operate and preserve the
business, assets, liabilities and organization of State Federal pending the
merger. In particular, the Company and State Federal may not change its capital
stock or structure and, except with the prior consent of Liberty, they may not
o incur additional borrowings, other than short-term Federal Home Loan
Bank borrowings;
o hire additional personnel;
o acquire or dispose of material assets other than in the ordinary
course of business;
o extend or renew a loan or advance additional sums to a borrower for a
loan included in the classified, special mention or watch list assets
of State Federal;
o make any loan contrary to State Federal's loan policies as in effect
on November 18, 2003;
o make or commit to make any first residential mortgage loan that does
not meet the qualifications for resale on the secondary market or any
new loans or advances in excess of $10,000 for an unsecured loan,
$50,000 for a secured commercial loan and $200,000 for a first
mortgage loan qualifying for resale in the secondary market, and
o subject to limited exception, sell or purchase investment securities.
NO SOLICITATION. The Company has agreed not to solicit, initiate, or
encourage inquiries or proposals with respect to, furnish any information
relating to, or otherwise facilitate any "Competing Proposal." As used in the
Agreement, "Competing Proposal" is defined as any proposal to engage in any
merger or consolidation involving the Company or State Federal, any purchase of
at least 15% of the assets of, or securities representing at least 15% of the
voting power of the Company, or any similar transaction involving the Company or
State Federal (but specifically excluding the proposed merger involving
Liberty). However, prior to the special meeting, the board of directors of the
Company may furnish information or participate in negotiations or discussions if
it determines, after having consulted with and considered the advice of outside
counsel and its financial advisor, that an alternative acquisition proposal is a
"Superior Competing Proposal" and that the failure to do the same could
reasonably be expected to constitute a breach of the fiduciary duties of the
directors under applicable law. A "Superior Competing Proposal" is defined in
the Agreement as any proposal to engage in or publicly announce any merger or
consolidation involving the Company or State Federal, any purchase of
substantially all the assets of, or securities representing more than 50% of the
voting power of the Company or any similar transactions involving the Company or
State Federal (but specifically excluding the proposed merger involving
Liberty), for which adequate funding or financing is readily available and which
the board of directors of the Company, in good faith and relying on the opinion
of its financial advisor, considers more favorable to the Company's stockholders
than the merger proposal in the Agreement. The existence of a Competing Proposal
or Superior Competing Proposal could result in a termination of the Agreement,
cancellation of the plans for the merger and the Company's payment of fees and
expenses to Liberty. See "-- TERMINATION OF THE AGREEMENT" and "-- PAYMENTS
ASSOCIATED WITH CERTAIN TERMINATIONS OF THE AGREEMENT." The Company is required
to promptly inform Liberty orally and in writing of any request for information
or of any related negotiations or discussions. The Company must also instruct
its affiliates and representatives to refrain from engaging in these prohibited
solicitation or negotiating activities. In no event may the Company provide any
information to a third party that it has not been provided to Liberty, except
for information not requested by Liberty or information that was not available
at the time Liberty requested information.
-19-
OTHER COVENANTS AND AGREEMENTS. In addition to the covenants, undertakings
and agreements referred to in other parts of this proxy statement, Liberty and
the Company have agreed as follows:
o Unless prohibited by law, the Company shall provide Liberty and its
representatives access to its records and property, and Liberty agrees
to maintain the confidentiality of all non-public information
concerning the Company and State Federal to which it is provided
access.
o Prior to closing the merger, the Company shall terminate its employee
stock ownership plan and its 401(k) profit sharing plan and retirement
trust.
o Liberty, at the effectiveness of the merger, will substitute itself
for the Company or State Federal in all of their employee benefit
plans and programs not otherwise terminated in accordance with the
Agreement. See "- Employee Benefit Matters."
o Liberty shall provide each continuing full-time employee of the
Company and State Federal the opportunity to participate in Liberty's
severance plan and other employer benefit and welfare plans with
credit given for past service with the Company or State Federal.
o The Company shall amend its employee stock ownership plan to allow for
certain distributions or payments to participants. See "- Interests of
the Company's Insiders in the Merger."
TERMINATION OF THE AGREEMENT. The Agreement may be terminated at any time
prior to consummation of the merger, either before or after approval of the
Agreement by the Company's stockholders:
o by mutual consent of Liberty and the Company as determined by a vote
of their boards.
o by Liberty, if the Company has breached in any respect any
representation or warranty contained in the Agreement, unless the
breach has been cured within 30 days of written notice of the breach,
or it would not have a material adverse effect on Liberty.
o by the Company, if Liberty has breached in any respect any
representation or warranty contained in the Agreement, unless the
breach has been cured within 30 days of written notice of the breach,
or it would not have a material adverse effect on the Company.
o by Liberty or the Company, if the other party has breached in any
material respect any of the covenants or undertakings contained in the
Agreement, unless the breach has been cured within 30 days of written
notice of the breach.
o by either Liberty or the Company, if any application for prior
regulatory approval necessary to consummate the merger or the
subsequent combination of Liberty and State Federal is denied.
o by either Liberty or the Company, if the stockholders of the Company
do not approve the Agreement.
o by Liberty, if the board of directors of the Company fails to hold the
special meeting, fails to recommend adoption of the Agreement,
withdraws, modifies or amends its favorable
-20-
recommendation for adoption of the Agreement or authorizes, recommends
or publicly announces its intention to authorize, recommend or to
engage in any Competing Proposal.
o by the Company, prior to the special meeting, for the purpose of
permitting the Company to enter into an agreement with a third party
with respect to a Superior Competing Proposal, subject to a right
granted to Liberty to make a competing offer to the Superior Competing
Proposal.
o by either Liberty or the Company, if the effective time of the merger
has not occurred by the close of business on July 18, 2004.
o by Liberty, if any individual violates his or her agreement with the
Company, including not voting his or her shares in favor of the
Agreement.
PAYMENTS ASSOCIATED WITH CERTAIN TERMINATIONS OF THE AGREEMENT. The
obligation of Liberty and the Company to effect the merger is conditioned on the
Company having stockholders' equity of at least $13,275,000 at the month-end
prior to the date of the merger. If Liberty waives this condition, then this
condition is in effect with respect to the Company only if:
o within two business days of receipt of Liberty's waiver, the Company
pays $100,000 to Liberty as partial reimbursement of expenses incurred
in connection with the Agreement and merger, and
o within one business day of receipt of a statement from Liberty of its
actual expenses the Company pays up to an additional $50,000 as
reimbursement of expenses.
A fee of $500,000, plus the reimbursement of up to $150,000 of reasonable
expenses, must be paid to Liberty by the Company, in the event the Agreement is
terminated by:
o Liberty or the Company, as a result of the failure to obtain
stockholder approval of the Agreement at the special meeting, if a
Competing Proposal was publicly announced or known to the Company at
the time of the special meeting and results in a definitive agreement
within one year of the termination;
o Liberty, as a result of (i) the failure of the Company to hold the
special meeting; (ii) the board of directors of the Company not
recommending adoption of the Agreement, (iii) the board of directors
of the Company withdrawing, modifying or amending its favorable
recommendation that stockholders vote to adopt the Agreement; (iv) the
board of directors of the Company authorizing, recommending or
publically announcing its intention to authorize, recommend or to
engage in any Competing Proposal; (v) any individual breaches his or
her voting agreement, including not voting in favor of the Agreement,
or (vi) a breach of the Agreement by the Company accompanied by the
announcement of a Competing Proposal prior to that termination for
which a definitive agreement is entered into within one year, or
o the Company, at any time prior to the special meeting, in order to
enter into a Superior Competing Proposal (i) that is received and
considered by the board of directors of the Company in accordance with
the Agreement, and (ii) against which Liberty has not submitted a more
favorable offer.
-21-
VOTING AGREEMENTS
The members of the Company's board of directors and their immediate family
members own 126,901 or [9.81]% of the shares of the Company's common stock as of
[Record Date] (excluding options for 15,474 shares, which may be exercised by
Ms. Black and other options held by Messrs. Bray and Nassif, which they have
agreed not to exercise prior to the merger). As provided for in the Agreement,
all the directors except for Messrs. Nassif and Winegar, have entered into
separate voting agreements with the Company, each dated as of November 18, 2003.
Pursuant to the voting agreements, they have agreed that 107,079 shares or
[8.18]% of the Company's common stock will be voted in favor of the Agreement,
provided, however, that nothing in the voting agreements will prevent those
stockholders (or any representative of any such stockholder) from discharging
his or her fiduciary duties as a member of the Company's board of directors.
They have provided proxies to the Company to facilitate that vote and have
agreed not to exercise their appraisal right under Delaware law. Liberty
requested that these voting agreements be executed for no more than 10% of the
shares of the Company's outstanding common stock in order to avoid a change in
control issue under Office of Thrift Supervision regulations. As a result,
Messrs. Nassif and Winegar were not asked to execute voting agreements; however,
each of them supports the merger and expects to vote for adoption of the
Agreement.
In addition to their agreement to vote in favor of adoption of the
Agreement, the individuals have agreed to vote against any proposal regarding
the Company or its subsidiaries, which is submitted to the stockholders that, if
approved, would: (a) result in a breach of the Agreement; (b) authorize an
extraordinary corporate transaction other than the merger; (c) approve a sale or
lease of a material amount of assets; (d) allow a reorganization,
recapitalization, dissolution or liquidation; (e) change a majority of the
board; (f) amend the certificate of incorporation or bylaws; (g) materially
change the corporate structure, or (h) have any other adverse impact on the
merger.
MANAGEMENT OF THE COMPANY. The directors of the Company and State Federal
will not become directors of Liberty or its holding company and are required to
submit resignations as directors prior to the closing of the merger. One of the
executive officers of the Company, Steven J. Blazek (Senior Vice President),
will become an executive officer of Liberty with a $10,000 signing bonus and a
continuation of his current severance agreement with the Company. See "Interests
of the Company's Insiders in the Merger -- SEVERANCE AGREEMENT WITH STEVEN J.
BLAZEK." The other two executive officers of the Company, Randall C. Bray
(President and Chairman) and Andra K. Black (Chief Financial Officer) will not
become executive officers of Liberty or its holding company. Mr. Bray will serve
as a consultant to Liberty. See "Interests of the Company's Insiders in the
Merger -- NEW CONSULTING AGREEMENT FOR RANDALL C. BRAY." Ms. Black will serve as
a financial analyst and officer at Liberty. See "Interests of the Company's
Insiders in the Merger -- EMPLOYMENT AGREEMENT WITH ANDRA K. BLACK." The
directors and executive officer have some special additional interests in the
merger. See "Interests of the Company's Insiders in the Merger."
WAIVER; AMENDMENT
Liberty and the Company can agree to amend the Agreement and each of them
can waive their right to require the other party to adhere to the terms and
conditions of the Agreement, including, where law allows, conditions to the
closing of the merger. After the Company's stockholders have approved the
Agreement, however, the amount or form of the Merger Consideration may not be
changed (except for adjustment to the Merger Consideration if the Company's
stockholder's equity is below $13,575,000 as of the month-end prior to the
merger), and no waiver or amendment which would otherwise materially adversely
affect the Company's stockholders may be effected without the approval of the
Company's stockholders to the extent required by applicable Delaware law.
-22-
EXPENSES
The Agreement provides that each party will bear and pay all costs and
expenses incurred by it in connection with the transactions contemplated by the
Agreement, including fees and expenses of its accountants and counsel.
EMPLOYEE BENEFIT MATTERS
The Agreement calls for Liberty to assume most of the Company's employee
benefit plans after the merger, except for the employee stock ownership plan and
401(k) profit sharing plan, which are to be terminated. Liberty will have the
right after the merger to subsequently amend or terminate plans it assumes, but
it may not negatively impact the vested benefits of participants. The Agreement
requires Liberty or one of its subsidiaries to provide to each continuing
full-time employee of the Company and its subsidiaries the opportunity to
participate in each Liberty employee and welfare benefit plan (other than those
which are similar to plans of the Company which remain in effect for continuing
employees) which is generally available to full-time employees of Liberty on a
uniform and non-discriminatory basis. Employees of the Company and its
subsidiaries will be given credit for past service in determining eligibility
for participation and vesting of benefits and, only with respect to severance
and vacation plans, accrual of benefits.
INTERESTS OF THE COMPANY'S INSIDERS IN THE MERGER
Some members of the Company's management and board of directors may have
interests in the merger that are in addition to or different from the interests
of the Company's stockholders. The Company's board of directors was aware of
these interests and considered them when it approved the Agreement and
recommended it for stockholder approval. The following summary describes these
varying or additional agreements or benefits being afforded the Company's
directors and officers in the Agreement. To the extent the Company's officers
and directors are stockholders of the Company, they will receive the same Merger
Consideration and related rights in that capacity as do all the stockholders.
These additional or different benefits are being provided to them in their
capacity as management officials and not as stockholders.
TERMINATION OF CURRENT EMPLOYMENT AGREEMENT OF RANDALL C. BRAY. Randall C.
Bray, President and Chairman of the Company and State Federal currently has an
employment agreement with the Company dated November 21, 2002, pursuant to which
Mr. Bray is to receive a payment and certain continued employee benefits after a
termination of Mr. Bray, including in connection with a change in control of
State Federal or the Company. This payment is generally to be equal to three
year's salary, plus his most recent bonus. Pursuant to the Agreement, the
employment of Mr. Bray will be involuntarily terminated by the Company, which
shall pay him a severance payment at the closing of the merger of $192,500, as
provided for in his employment agreement.
NEW CONSULTING AGREEMENT FOR RANDALL C. BRAY. A condition precedent to
Liberty completing the merger is the continuation of a Consulting Agreement and
Agreement Not to Compete executed by Liberty and Mr. Bray, through his company,
Greyhawk Partners on the same day as the Agreement. Liberty requested this
Agreement to obtain Mr. Bray's services in connection with facilitating the
acquisition of the Company and continued relationships with the customers of
State Federal. Liberty wished to assure itself of the continued services of Mr.
Bray in an advisory capacity for three years after the merger. Pursuant to the
consulting agreement, Mr. Bray will provide customer relation services related
to the retention of former customers of State Federal and assist Liberty in
handling assets acquired and liabilities assumed in the acquisition. Mr. Bray
will receive $50,000 a year in addition to
-23-
certain expense reimbursements. In addition, Mr. Bray agrees not to compete with
Liberty in the former market of State Federal during the term of the consulting
agreement.
EMPLOYMENT AGREEMENT WITH ANDRA K. BLACK. The current employment agreement
between State Federal and Andra K. Black will expire prior to the merger. She
will not receive any payment under that employment agreement as a result of the
merger. Ms. Black has been offered and has accepted terminable at will
employment at Liberty. She will receive an annualized salary of $60,000 in 2004,
beginning the date after the closing of the merger, and $52,500 in 2005. She
also will receive customary employee benefits.
SEVERANCE AGREEMENT WITH STEVEN J. BLAZEK. In March 2002, State Federal
entered into a severance agreement with Steven J. Blazek, the Senior Vice
President of State Federal. That agreement provides for a special severance
payment to be paid to Mr. Blazek if he is terminated without cause, including in
connection with a change in control. That severance payment would be equal to
Mr. Blazek's annual base salary through the date of his termination plus three
years of his base salary and health benefits for 18 months following his
termination. Liberty has agreed to assume and honor this employment agreement by
becoming the substituted party for State Federal. In connection with Liberty's
employment of Mr. Blazek as Senior Vice President, Mr. Blazek will be paid a
signing bonus of $10,000 at the closing of the merger. However, if he is
involuntarily terminated (which might include a geographic transfer or reduction
in his salary or benefits) within one year of the merger, he may be entitled to
the payment provided for under the severance agreement.
PAYMENT FOR COMPANY OPTIONS. The Company has issued stock options to
directors, officers and employees of the Company and State Federal. Not all of
these options were vested and exercisable as of [Record Date]. As of that date,
there were 18,488 of these stock options outstanding (excluding the options held
by Ms. Black), all of which were held by directors and executive officers of
State Federal. The weighted average exercise price of the options held by those
directors and executive officers on [Record Date] was $[9.69]. The closing price
of the Company's common stock on [Record Date] was $____________. Therefore, if
the directors and executive officers had exercised all their options on [Record
Date], they would have been able to purchase 18,488 shares of the Company's
common stock at an aggregate price of $[________] below the current market
value.
At the closing of the merger, all outstanding options to purchase shares of
the Company's common stock, whether or not exercisable and vested at that date,
shall be cancelled, and each option holder will receive an amount equal to the
excess of the Merger Consideration paid at the closing of the merger over the
exercise price per share of each option (less required withholding taxes). The
gross amount paid for these options may not exceed $69,961.36 in the aggregate,
which is [compare to amount using Record Date Price], and the amounts paid to
the option holders will be reduced pro rata, if necessary, to meet this limit.
In order to receive this payment, each option holder has executed a stock option
cancellation agreement, which prohibits the exercise of any options for the
Company's shares prior to the closing.
[THIS PROVISION FOR THE OUTSTANDING OPTIONS OF THE COMPANY DOES NOT APPLY
TO THE OPTIONS FOR 15,474 SHARES HELD BY ANDRA BLACK, A DIRECTOR AND THE
EXECUTIVE VICE PRESIDENT OF STATE FEDERAL AND THE COMPANY. MS. BLACK INTENDS TO
EXERCISE THESE OPTIONS, WHICH ARE FULLY VESTED AND EXERCISABLE AND HAVE AN
EXERCISE PRICE OF $5.00 PER SHARE, PRIOR TO THE CLOSING OF THE MERGER. AS A
RESULT, SHE WILL BE ENTITLED TO RECEIVE THE FULL MERGER CONSIDERATION FOR THESE
SHARES. THE AGGREGATE PURCHASE PRICE FOR 15,474 SHARES BASED ON THE MARKET PRICE
FOR THE COMPANY'S COMMON STOCK ON [RECORD DATE], 2003, WOULD HAVE BEEN
$[____________]. THE AGGREGATE PURCHASE PRICE FOR 15,474 SHARES AT THE EXERCISE
PRICE OF $5.00 IS $77,370, OR $[________] BELOW THE AGGREGATE PURCHASE PRICE ON
[RECORD DATE], 2003. ASSUMING THE
-24-
MERGER CONSIDERATION IS $13.47 PER SHARE, THE AGGREGATE PAYMENT TO MS. BLACK AT
CLOSING FOR 15,474 SHARES WOULD BE $208,434.78, OR $[131,064.78] ABOVE THE
AGGREGATE PURCHASE PRICE AT THE EXERCISE PRICE OF $77,370.] NOTE: THIS PARAGRAPH
WILL BE ELIMINATED IF THESE OPTIONS ARE EXERCISED BEFORE THE RECORD DATE.
The following table reflects for each director and executive officer who
owns options for the Company's common stock, the number of vested options held
on [Record Date], how many of those options will vest as a result of the merger
and the payment each will receive for those options at Closing (assuming Merger
Consideration of $13.47 per share).
Number of Number of
Vested Options
Options as Vesting as a Option
of the Result Total Number Option Exercise Payment
Name Record Date of the Merger of Options Price at Closing
- ------------------------- ------------- --------------- ------------ ----------------- -------------
Randall C. Bray 4,298 6,446 10,744 $10.00 37,281.68
William T. Nassif 3,447 4,297 7,744 $9.25 32,679.68
TERMINATION OF COMPANY EMPLOYEE STOCK OWNERSHIP PLAN. Pursuant to the
Agreement, the Company and State Federal shall satisfy and discharge all their
obligations to their employee stock ownership plan, including any existing loans
from the employee stock ownership plan and all required employer contributions
accruing prior to the closing. They also have agreed to terminate the employee
stock ownership plan prior to the closing of the merger. Subject to the closing
of the merger and receipt of an Internal Revenue Service tax qualification
determination, the employee stock ownership plan shall distribute all of its
assets to entitled participants, including Mr. Bray and Ms. Black, in the form
of a cash benefit payment in proportion to the employee stock ownership plan
account balances, in accordance with applicable law and the governing documents
of the employee stock ownership plan.
OFFICERS' AND DIRECTORS' INSURANCE; INDEMNIFICATION. Liberty has agreed for
a period of six years after the merger to indemnify and hold harmless to the
fullest extent permitted by law any person who was at any time an officer,
director or employee of the Company, State Federal or their subsidiaries against
losses, expenses and other liabilities with respect to claims and proceedings
arising out of any matters occurring at or prior to the effective time of the
merger. This indemnification extends to liability arising out of the
transactions contemplated by the Agreement. Liberty has agreed to advance costs
to these persons as they are incurred in defense of any such claim or
proceeding. Liberty also has agreed, for a period of three years after the
merger, to maintain officers' and directors' liability insurance covering the
persons currently covered by the Company's officers' and directors' liability
insurance policy with respect to matters occurring prior to the merger. The
terms of the insurance are to be at least as favorable as the Company's current
policy; however, Liberty is not required to expend in the aggregate during the
coverage period more than an amount equal to 150% of the annual premium most
recently paid by the Company. If Liberty is unable to maintain or obtain the
insurance required, Liberty must use its reasonable best efforts to obtain as
much comparable insurance as is available for the amount specified, which may be
in the form of tail coverage, or may request the Company to obtain tail coverage
at its expense prior to the merger.
REGULATORY APPROVALS
Consummation of the merger is subject to the prior approval of the Office
of Thrift Supervision, including an approval of: (i) the creation of an interim
subsidiary by Liberty; (ii) the merger of the
-25-
Company and Liberty's interim subsidiary; and (iii) the subsequent merger of
Liberty and State Federal. The Federal Deposit Insurance Corporation must
receive notice of and may object to the creation of the interim subsidiary to
facilitate the merger. Liberty or its holding company has filed all the required
applications and notices with the Office of Thrift Supervision and the Federal
Deposit Insurance Corporation. [AWAITING RESPONSE ON REGULATORY FILINGS.]
In reviewing these applications, the Office of Thrift Supervision must
consider a number of factors, including the financial and managerial resources
and future prospects of the Company and Liberty, separately and on a combined
basis. It also must consider the impact of the merger on the convenience and
needs of the communities served by the Company. The Office of Thrift Supervision
may not approve the merger if it will result in a monopoly or have a prohibited
anti-competitive effect. The Federal Deposit Insurance Corporation has 30 days
from receipt of the notice filed by Liberty to object to the creation of the
interim subsidiary to facilitate the merger. For a period of 15 to 30 days after
receipt of Office of Thrift Supervision approval, the United States Department
of Justice may object to the merger under the federal antitrust laws. While the
Company believes that the likelihood of a Department of Justice objection is
remote in this case, there can be no assurances that the Department of Justice
will not seek to block the merger nor any assurances as to the outcome of such a
challenge.
The merger cannot proceed without the requisite regulatory approvals. See
"- Other Terms of the Merger -- CONDITIONS TO COMPLETING THE MERGER." There can
be no assurance that the requisite regulatory approvals will be obtained, and if
obtained, there can be no assurance as to the date of any such approval. There
also can be no assurance that any regulatory approvals will not contain a
condition or requirement that causes the approval to not satisfy the condition
in the Agreement for no non-customary, unduly burdensome condition on the Office
of Thrift Supervision approval. The Company is not aware of any other regulatory
approvals that would be required for consummation of the merger.
Any approval of the applications by the Office of Thrift Supervision merely
implies the satisfaction of regulatory criteria for approval. It does not
include a review of the merger from the standpoint of the adequacy of the Merger
Consideration. Furthermore, regulatory approvals do not constitute an
endorsement of or a recommendation in favor of the merger.
OPINION OF THE COMPANY'S FINANCIAL ADVISOR
ENGAGEMENT OF KBW
KBW has acted as financial advisor to the Company in connection with the
merger. KBW, as part of its investment banking business, is regularly engaged in
the evaluation of businesses and securities in connection with mergers and
acquisitions, negotiated underwriting and distributions of listed and unlisted
securities. KBW is familiar with the market for common stocks of publicly traded
banks, thrifts and their holding companies. The Company selected KBW based on
its experience, expertise and familiarity with the Company and its business,
including KBW's expertise in transactions similar to the merger and its prior
consultative working relationship with the Company. KBW has provided investment
banking services to the Company in the past and received compensation for such
services. During the last two years, and specifically in the six months ending
in May 2003, KBW received $10,000 from the Company under an engagement to create
a stockholder enhancement program.
In May 2003, the Company executed an update of its November 2002 engagement
letter with KBW. Under that new engagement letter, KBW will receive a fee of
approximately 1.0% of the aggregate Merger Consideration to be paid to Company
stockholders, or $176,000, for services rendered
-26-
in connection with advising the Company regarding the merger and providing a
fairness option respecting the Merger Consideration. As of the date of this
proxy statement, the Company has paid KBW $50,000 of that fee, with the
remainder of the fee to be paid at the closing of the merger. The Company also
has agreed to reimburse KBW for certain reasonable out-of-pocket expenses
incurred in connection with its engagement and to indemnify KBW and KBW's
affiliates and their respective directors, officers, employees, agents and
controlling persons against certain expenses and liabilities, including
liability under the federal securities laws.
As the Company's financial advisor, KBW assisted the Company in finding and
evaluating potential acquirers, in analyzing Liberty's proposal and negotiating
certain terms of the merger included in the Agreement. In connection with KBW's
engagement, the Company asked KBW to evaluate the fairness of the Merger
Consideration to the Company's stockholders from a financial point of view. On
November 18, 2003, KBW delivered its written fairness opinion to the Company's
board of directors that, as of November 18, 2003, and based upon and subject to
various matters set forth in that opinion, the Merger Consideration was fair to
the Company's stockholders from a financial point of view. With KBW's consent, a
copy of the complete KBW fairness opinion is attached as Appendix B to this
proxy statement and is incorporated into this proxy statement by reference. You
should read KBW's opinion completely, along with the summary of the opinion
below, to understand the assumptions made, procedures followed, matters
considered and limitations on the review undertaken by KBW in providing its
opinion.
THE FULL TEXT OF THE KBW OPINION, WHICH IS ATTACHED AS APPENDIX B TO THIS
PROXY STATEMENT, SETS FORTH CERTAIN ASSUMPTIONS MADE, MATTERS CONSIDERED AND
LIMITATIONS ON THE REVIEW UNDERTAKEN BY KBW AND SHOULD BE READ IN ITS ENTIRETY.
THE FOLLOWING SUMMARY OF THE KBW OPINION IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE TEXT OF THE OPINION.
In arriving at its opinion, KBW:
o Reviewed the Agreement;
o Reviewed the Company's annual reports to stockholders, proxy
statements and Form 10-KSB annual reports for the prior three fiscal
years ending June 30, 2003, 2002 and 2001, the Form 10-QSB quarterly
report for the quarter ended September 30, 2003, and other internal
financial analyses considered relevant;
o Discussed with the Company's senior management and board of directors
the current and prospective outlook for the Company;
o Reviewed financial and stock market data of other savings
institutions, particularly those in the Midwestern region of the
United States with a comparable asset range to that of the Company;
o Reviewed the financial and structural terms of several other recent
transactions involving mergers and acquisitions of savings
institutions or proposed changes of control of comparably situated
companies, and
o Performed other analyses and reviews KBW deemed appropriate.
-27-
SUMMARY OF MARKETING EFFORTS
In rendering its opinion, KBW considered the results from contacting
several interested financial institutions about a potential strategic alliance
with the Company. During this process, the following steps were taken by KBW to
solicit potential interest in a strategic alliance with the Company:
o Thirteen financial institutions were contacted regarding a potential
strategic partnership with the Company;
o Eight financial institutions executed confidentiality agreements and
received a confidential investor memorandum, and
o Three financial institutions conveyed a non-binding indication of
interest in the Company, though only two submitted written proposals.
Though no assurance can be given that all potential strategic partners were
identified and contacted during this process, KBW believes the marketing efforts
support the Merger Consideration being fair from a financial point of view, as
of the date of its fairness opinion.
The following is a summary of the material financial analyses KBW employed
and summarized for the Company's board of directors in connection with its
evaluation of the merger and KBW fairness opinion.
ANALYSIS OF RECENT COMPARABLE ACQUISITION TRANSACTIONS
In connection with rendering its fairness opinion, KBW considered and
analyzed certain comparable merger and acquisition transactions of both pending
and completed thrift deals, comparing the acquisition price relative to book
value, tangible book value, last twelve-months earnings and premium to core
deposits. This analysis included the median and average of the aforementioned
ratios for representative pending and completed acquisitions since January 1,
2001, in which the seller was a thrift institution.
To compare this potential sale of the Company to sales of thrift
institutions or their holding companies with a similar asset size and
transaction value, KBW focused on representative pending and completed thrift
acquisitions since January 1, 2001, in which the seller had: (a) an asset size
of less than $250 million; (b) a last twelve-months return on average equity of
less than 7.0% for profitability purposes, and (c) tangible equity to assets of
between 10% and 20%. As a result, the sales of the following thrift institutions
were used to analyze comparable transactions:
Big Foot Financial NS&L Bancorp, Inc.
CBES Bancorp, Inc. Perry County Financial Corp.
CGB&L Financial Group PFSB Bancorp, Inc.
Delphos Citizens Bancorp, Inc. PS Financial, Inc.
First Federal Financial Bancorp, Inc. Security Financial Bancorp, Inc.
Montgomery Financial Corp.
All of the above transactions were closed prior to November 2003. There
were no comparable pending transactions announced that had not closed. The
transaction analysis resulted in a range of values for the Company based upon
comparable thrift merger and acquisition transactions. KBW derived
-28-
the average and median pricing metrics of the aforementioned comparable group
and summarized the results of comparative thrift merger and acquisition
transactions and compared the range of values to the consideration to be
received by the Company's stockholders. The comparable thrift merger and
acquisition statistics are as follows:
PRICE TO PRICE TO LAST
PRICE TO TANGIBLE 12 MONTHS CORE DEPOSIT
BOOK RATIO BOOK RATIO EARNINGS PREMIUM
------------- -------------- --------------- -------------
Low Value. . . . . . . . . . . 82.9% 82.9% 16.0x (6.5)%
Median Value . . . . . . . . . 120.2 122.2 27.8 7.0
High Value . . . . . . . . . . 239.9 239.9 54.7 20.8
$13.47 Liberty Offer . . . . . 127.3 127.3 * 6.4
- --------------
* Not meaningful; earnings for the last twelve months were negligible.
KBW viewed the aforementioned comparable group as the most appropriate in
deriving a comparable transaction value based on the Company's size, capital
base and earnings. KBW considered the information derived from this comparable
group to be statistically significant for the purposes of comparison, based on
the above criteria producing 11 transactions with reported pricing metrics in
the comparable group. KBW viewed the four resulting metrics (price to book
value, price to tangible book value, price to last twelve months earnings and
core deposit premium) from the three comparable groups on a median basis, as the
key metrics used to evaluate the fairness, from a financial point of view, of
the transaction.
The value of the consideration on an aggregate basis to be paid in the
merger, as of the date of KBW's opinion, is within the range of comparable
thrift transactions in all cases and, on that date, is above the high value on a
price to last twelve-months earnings basis. KBW believes that this analysis
supports the fairness, from a financial point of view, to the Company and its
stockholders of the consideration to be paid in the merger.
DISCOUNTED DIVIDEND STREAM AND TERMINAL VALUE ANALYSIS. KBW performed
analyses that estimated the future stream of after-tax dividend flows of the
Company through June 30, 2008 under various circumstances, assuming the
Company's projected dividend stream and that the Company performed in accordance
with the earnings projections reviewed with management. A range of terminal
values was determined by adding (1) the present value, which is a representation
of the current value of a sum that is to be received some time in the future, of
the estimated future dividends per share (i.e., cash flows per share) that the
Company would generate through Year 5 of their current business plan (as
provided to KBW) and (2) the present value of the terminal value on a per share
basis, which is a representation of the ongoing value of an entity at a
specified time in the future of the Company's common stock.
In calculating a terminal value of the Company's common stock, KBW applied
multiples of 16.0x, 18.0x and 20.0x to year five forecasted earnings per share.
The terminal multiple range is based on the terminal earnings multiple of
pending and completed transactions similar to this transaction based on deal
value, asset size and return on average assets. In performing this analysis, KBW
used the budget provided by the Company. The combined cash flows and terminal
value were then discounted back to present values using different discount rates
ranging from 10.3% to 12.3%, chosen to reflect different assumptions regarding
required rates of return of holders or prospective buyers of the Company's
common stock taking into consideration such factors as current long term
interest rates, market
-29-
capitalization size, earnings and liquidity of the shares. The results of KBW's
analysis are set forth in the following table:
Discount Rate Terminal Multiple
--------------- -------------------------------
16.0x 18.0x 20.0x
-------- --------- ---------
12.3% $11.26 $12.27 $13.28
11.3% $11.25 $12.82 $13.88
10.3% $13.37 $13.40 $14.52
Based on the foregoing criteria and assumptions, KBW determined that the
stand-alone present value of the Company's common stock ranged from $11.26 to
$14.52 per share. Given that the value of the Merger Consideration as of the
date of the opinion, is above the $12.82 midpoint of that present value range
derived from the discounted cash flow analysis, KBW believes that this analysis
supports the fairness, from a financial point of view, to the Company and its
stockholders of the Merger Consideration.
The discounted cash flow analyses of the Company do not necessarily
indicate actual values or actual future results and do not purport to reflect
the prices at which any securities may trade at the present or at any time in
the future. Discounted cash flow analysis is a widely used valuation
methodology, but the results of this methodology are highly dependent upon
numerous assumptions that must be made, including earnings growth rates,
dividend payout rates, terminal values, projected capital structure, and
discount rates.
FAIRNESS OPINION
Based on the above analyses, KBW concluded that the Merger Consideration is
fair, from a financial point of view, to the stockholders of the Company and
issued the fairness opinion included in Appendix B. This summary does not
purport to be a complete description of the analysis performed by KBW and should
not be construed independent of the other information considered by KBW in
rendering its opinion. Selecting portions of KBW's analysis or isolating certain
aspects of the comparable transactions without considering all analyses and
factors, could create an incomplete or potentially misleading view of the
evaluation process.
In rendering its opinion, KBW assumed and relied upon the accuracy and
completeness of the financial information provided to it by the Company and
Liberty. In its review, with the consent of the Company's board of directors,
KBW did not undertake any independent verification of the information provided
to it, nor did it make any independent appraisal or evaluation of the assets or
liabilities and potential or contingent liabilities of the Company or Liberty.
The KBW fairness opinion is limited to the fairness as of its date, from a
financial point of view, of the Merger Consideration to be paid to the Company's
stockholders in the merger. The fairness opinion does not address the underlying
business decision to effect the merger or any alternatives to the merger and
does not constitute a recommendation to any Company stockholder on how to vote
on the Agreement or at the special meeting.
In preparing its analysis, KBW made numerous assumptions with respect to
industry performance, business and economic conditions and other matters, many
of which are beyond the control of KBW and the Company. The analyses performed
by KBW are not necessarily indicative of actual
-30-
value or future results, which may be significantly more or less favorable than
suggested by such analyses and do not purport to be appraisals or reflect the
prices at which a business may be sold.
MATERIAL TAX CONSEQUENCES TO STOCKHOLDERS OF THE COMPANY
The following is a discussion of the material federal income tax
consequences of the merger to stockholders of the Company. The discussion is
based upon the Internal Revenue Code of 1986 (the "Code"), Treasury Regulations,
Internal Revenue Service rulings and judicial and administrative decisions in
effect as of the date of this proxy statement. This discussion assumes that a
stockholder's shares of the Company's common stock are generally held for
investment. In addition, this discussion does not address all of the tax
consequences that may be relevant to you in light of your particular
circumstances or to the Company stockholders subject to special rules.
The receipt of the Merger Consideration for shares of the Company's common
stock in connection with the merger will be a taxable transaction for federal
income tax purposes to stockholders receiving such consideration. It may be a
taxable transaction for state, local and foreign tax purposes as well. Each
stockholder receiving the Merger Consideration will recognize a gain or loss
measured by the difference between the tax basis for the shares of the Company's
common stock owned by each stockholder at the time of the merger and the amount
of cash received as the Merger Consideration for those shares. Payments should
be included in the calculation of income in the year received. The resulting
gain or loss will be a capital gain or loss, if the Company's common stock is a
capital asset.
The cash paid as Merger Consideration to the Company's stockholders in
exchange for the Company's common stock pursuant to the merger generally will be
subject to "backup withholding" for federal income tax purposes, unless certain
requirements are met. Under federal law, the third-party paying agent must
withhold 30% of the cash payments to holders of Company common stock to whom
backup withholding applies (assuming the payments are made in 2003 or 2004), and
the federal income tax liability of these persons will be reduced by the amount
that is withheld. To avoid backup withholding, a holder of Company common stock
must provide the third-party paying agent with the holder's taxpayer
identification number and complete a Form W-9 Request for Taxpayer
Identification Number and Certification in which the holder certifies that he,
she or it has not been notified by the Internal Revenue Service that he, she or
it is subject to backup withholding as a result of a failure to report interest
and dividends. The taxpayer identification number of an individual is his or her
social security number. The Form W-9 will be provided with the letter of
transmittal to be forwarded by Liberty, which will request that the Company's
stockholders surrender their shares. To avoid backup withholding, a stockholder
must complete that Form W-9 and mail it, along with the letter of transmittal,
as instructed therein.
Neither Liberty nor the Company has requested or will request a ruling from
the Internal Revenue Service as to any of the tax effects to the Company's
stockholders of the transactions discussed in this proxy statement, and no
opinion of counsel has been or will be rendered to the Company's stockholders
with respect to any of the tax effects of the merger to stockholders.
THE ABOVE SUMMARY OF THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING ON AN INDIVIDUAL BASIS.
IN ADDITION TO THE FEDERAL INCOME TAX CONSEQUENCES DISCUSSED ABOVE, CONSUMMATION
OF THE MERGER MAY HAVE SIGNIFICANT STATE AND LOCAL INCOME TAX CONSEQUENCES THAT
ARE NOT DISCUSSED IN THIS PROXY STATEMENT. ACCORDINGLY, YOU ARE URGED TO CONSULT
YOUR OWN TAX ADVISORS
-31-
WITH SPECIFIC REFERENCE TO THE EFFECT OF YOUR PARTICULAR FACTS AND CIRCUMSTANCES
ON THE MATTERS DISCUSSED IN THIS PROXY STATEMENT.
STOCKHOLDER APPRAISAL RIGHT
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW ENTITLES ANY
STOCKHOLDER OF THE COMPANY WHO OBJECTS TO THE MERGER AND WHO FOLLOWS THE
PRESCRIBED PROCEDURES TO RECEIVE CASH EQUAL TO THE "FAIR VALUE" OF SUCH
STOCKHOLDER'S SHARES OF THE COMPANY'S COMMON STOCK IN LIEU OF RECEIVING THE
MERGER CONSIDERATION. SET FORTH BELOW IS A SUMMARY OF THE PROCEDURES RELATING TO
THE EXERCISE OF SUCH APPRAISAL RIGHTS. THIS SUMMARY DOES NOT PURPORT TO BE A
COMPLETE STATEMENT OF THE APPRAISAL RIGHTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW, WHICH IS
REPRODUCED IN FULL AND ATTACHED AS APPENDIX C TO THIS PROXY STATEMENT. THE
DELIVERY OF THIS PROXY STATEMENT WITH APPENDIX C CONSTITUTES THE COMPANY'S
NOTICE OF THESE APPRAISAL RIGHTS REQUIRED TO BE PROVIDED IN SECTION 262.
Any stockholder of the Company is entitled to dissent from the merger and
exercise an appraisal right under Section 262 of the Delaware General
Corporation Law, pursuant to which a stockholder may demand that the fair value
of that stockholder's shares be judicially determined and paid for in cash by
Liberty. A copy of Section 262 of the Delaware General Corporation Law is
attached as Appendix C hereto. Any stockholder contemplating the exercise of
appraisal rights is urged to carefully review the provisions of Section 262,
particularly with respect to the procedural steps required to exercise such
rights. Appraisal rights may be lost if the procedural requirements of Section
262 are not followed exactly. If appraisal rights are lost, a Company
stockholder will receive the Merger Consideration to be received pursuant to the
Agreement.
The following is a brief summary of the statutory procedures to be followed
by any Company stockholder in order to perfect these appraisal rights under
Delaware law. THIS SUMMARY IS NOT INTENDED TO BE COMPLETE AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SECTION 262 OF THE DELAWARE GENERAL CORPORATION
LAW.
To dissent from the merger and demand an appraisal, a Company stockholder
must satisfy the following conditions:
o deliver a written demand for appraisal to the Company before the vote
on the adoption of the Agreement;
o not vote in favor of the Agreement (the return of a signed proxy that
does not specify a vote against the Agreement or a direction to
abstain, will constitute a waiver of the stockholder's right of
appraisal), and
o continuously hold the shares of the Company's common stock from the
date of the making of the demand through the time the merger is
completed.
If a Company stockholder fails to comply with any of these conditions, and
the merger becomes effective, that stockholder will be entitled to receive only
the Merger Consideration provided for in the Agreement. Failure by a Company
stockholder to vote on the Agreement will not constitute a waiver of this
appraisal right. Voting against the Agreement will not satisfy the requirement
of a written demand for an appraisal.
-32-
All written demands for appraisal should be addressed to: StateFed
Financial Corporation, 13523 University Avenue, Clive, Iowa 50325, Attention:
Randall C. Bray, President and Chairman, before the vote concerning the
Agreement at the special meeting. These written demands should be executed by,
or on behalf of, the holder of record. The written demand should reasonably
inform the Company of the identity of the dissenting stockholder and of that
stockholder's intent to demand an appraisal of his, her or its shares of the
Company's common stock. If any shares of the Company's common stock are owned of
record in a fiduciary capacity, as by a trustee, guardian or custodian,
execution of a demand for appraisal should be made in such capacity. If any
shares of the Company's common stock are owned of record by more than one
person, as in a joint tenancy or tenancy in common, such demand must be executed
by or for all joint owners. An authorized agent, including one for two or more
joint owners, may execute the demand for appraisal for a stockholder of record;
however, the agent must identify the record owner or owners and expressly
disclose the fact that, in executing the demand, he, she or it is acting as
agent for the record owner. A record owner, such as a broker, who holds shares
of the Company's common stock as a nominee for others may exercise rights of
appraisal with respect to the shares held for one or more beneficial owners,
while not exercising such rights for other beneficial owners. In such case, the
written demand should set forth the number of shares as to which the record
owner dissents. Where no number of shares is expressly mentioned, the demand
will be presumed to cover all shares of the Company's common stock in the name
of such record owner.
Within 10 days after the merger, Liberty (or the Company if it is not yet
liquidated) must give written notice that the merger has become effective to
each former holder of the Company's common stock who filed a written demand for
appraisal and did not vote in favor of the Agreement. Any stockholder entitled
to appraisal rights may, within 20 days after the date of mailing of that
notice, demand in writing from the Liberty (or the Company if it is not yet
liquidated) the appraisal of the stockholder's shares of the Company's common
stock. Within 120 days after the completion of the merger, either Liberty (or
the Company if it is not yet liquidated) or any Company stockholder who has
complied with Section 262, may file a petition in the Delaware Court of Chancery
demanding a determination of the value of the shares of the Company's common
stock held by all stockholders entitled to appraisal of their shares. It is
currently expected that Liberty (or the Company if it is not yet liquidated)
will not file such a petition. Because Liberty (or the Company if it is not yet
liquidated) has no obligation to file such a petition, the failure of a
stockholder to do so within the period specified could nullify the stockholder's
previous written demand for appraisal.
If a petition for appraisal is duly filed by a Company stockholder and a
copy is delivered to Liberty (or the Company if it is not yet liquidated),
Liberty (or the Company if it is not yet liquidated) will then be obligated
within 20 days of receipt of such copy to provide the Court of Chancery with a
duly verified list containing the names and addresses of all stockholders who
have demanded an appraisal of their shares and with whom agreement as to the
value of such shares has not been reached. After notice to such stockholders,
the Court of Chancery is empowered to conduct a hearing to determine those
stockholders who have complied with Section 262 and who have become entitled to
appraisal rights.
The Court of Chancery will then appraise the shares of the Company's common
stock, determining their fair value exclusive of any element of value arising
from the accomplishment or expectation of the merger. When the value is
determined, the Court will direct the payment by Liberty (or the Company if it
is not yet liquidated) of such value, with interest thereon, simple or compound,
if the Court so determines, to the stockholders entitled to receive the amount.
-33-
Stockholders of Company who are considering seeking an appraisal should
bear in mind that the fair value of their shares of the Company's common stock
determined under Section 262 could be more than, the same as or less than the
consideration they are to receive pursuant to the Agreement if they do not seek
appraisal of their shares.
Costs of the appraisal proceeding may be assessed against the stockholder
by the court as the court deems equitable in the circumstances.
Any Company stockholder who has duly demanded an appraisal of his, her or
its shares in compliance with Section 262 will not be entitled to vote those
shares of Company common stock after the effective time of the merger, subject
to the demand for any purpose or be entitled to the payment of dividends or
other distributions on those shares of the Company's common stock (except
dividends or other distributions payable to holders of record or shares of our
common stock as of a record date, which is prior to the effective time of the
merger). If any stockholder who demands appraisal of shares under Section 262
fails to perfect, or effectively withdraws or loses, the right to appraisal, the
shares of our common stock of the holder will be deemed to have been converted,
at the effective time of the merger, into the right to receive the Merger
Consideration. A stockholder may withdraw a demand for appraisal by delivering
to us a written withdrawal of the demand for appraisal and an acceptance of the
merger except that any attempt to withdraw made more than 60 days after the
effective time of the merger will require our written approval. Once a petition
for appraisal has been filed, the appraisal proceeding may not be dismissed as
to any stockholder without the approval of the Delaware Court of Chancery.
FAILURE TO COMPLY STRICTLY WITH THESE PROCEDURES WILL CAUSE THE STOCKHOLDER TO
LOSE HIS, HER OR ITS APPRAISAL RIGHT. CONSEQUENTLY, ANY COMPANY STOCKHOLDER WHO
DESIRES TO EXERCISE THESE APPRAISAL RIGHTS IS URGED TO CONSULT A LEGAL ADVISOR
BEFORE ATTEMPTING TO EXERCISE THIS RIGHT.
Pursuant to the Agreement, the Company is required to notify Liberty
promptly of any demands submitted under Section 262. Liberty has a right to
participate in all negotiations and proceedings respecting any such demands. The
Company may not make or offer any payments to settle any demands under Section
262 outside of court without Liberty's written consent.
-34-
BUSINESS AND FINANCIAL STATEMENTS OF THE COMPANY
The Company was organized as a Delaware corporation in 1993 to be the
holding company for State Federal in connection with its 1994 conversion from
the mutual to stock form of ownership. The Company owns all of the outstanding
shares of stock of State Federal. The Company is subject to regulation by the
Office of Thrift Supervision. Since its formation, the Company's principal
activity has been to direct and continue the business of State Federal. At
September 30, 2003, the Company had $94.7 million in assets and $13.8 million in
stockholders' equity (or 14.6% of total assets on that date).
State Federal is a federally chartered savings association headquartered in
Clive, Iowa. It is regulated by the Office of Thrift Supervision, and its
deposits are insured by the FDIC. The principal business of State Federal is to
attract retail deposits from the general public and invest these funds in
residential and commercial mortgages and certain other types of loans to persons
in communities it serves. State Federal operates from three offices in Clive and
Des Moines, Iowa. State Federal's wholly owned subsidiary, State Service
Corporation, sells noninsured investment products, such as mutual fund shares,
to customers of State Federal and others.
A copy of the Company's Form 10-KSB for the year ended June 30, 2003 is
attached as Appendix D and is incorporated herein by reference. The Form 10-KSB
includes the Company's consolidated statements of financial condition at June
30, 2003 and 2002, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years ended June 30,
2003, 2002 and 2001. The independent auditor's report on the Company's June 30,
2003 consolidated financial statements is included in the Form 10-KSB.
A copy of the Company's Form 10-QSB for the quarter ended September 30,
2003 is attached as Appendix E and is incorporated herein by reference. The Form
10-QSB includes the Company's unaudited consolidated statements of financial
condition at September 30, 2003 and 2002, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the quarters then ended.
You may obtain a copy of the Form 10-KSB and 10-QSB attached hereto and the
other annual, quarterly and current reports, proxy statements and other
information filed by the Company with the Securities and Exchange Commission
from the Securities and Exchange Commission's public reference room located at
450 Fifth Street, N.W., Washington DC (call 1-(800) SEC-0330 for more
information) or on the Securities and Exchange Commission's website at
www.sec.gov under "Filings and Forms (EDGAR)."
BUSINESS AND FINANCIAL STATEMENTS OF LIBERTY
Liberty is a federally chartered savings bank. Liberty's primary regulator
is the Office of Thrift Supervision. It is a community bank with deposits that
are insured by the FDIC. It operates from 14 banking facilities in Arnolds Park,
Cedar Rapids, Council Bluffs, Des Moines, Dubuque, Granger, Grundy Center, Iowa
City, Iowa Falls, Klemme, Urbandale and West Des Moines, Iowa, and one in East
Dubuque, Illinois. Liberty is owned by Liberty Banshares, Inc., which is not a
publicly traded company and is not registered with the Securities and Exchange
Commission.
In its Thrift Financial Report for September 30, 2003, which was filed with
the Office of Thrift Supervision, Liberty reported total assets of $481.5
million and exceeded its minimum regulatory requirements. Liberty has
represented to the Company in the Agreement that it will have sufficient funds
to pay the Merger Consideration when the merger is closed. Liberty's entire
Thrift Financial Report is
-35-
available on the FDIC's website at www2.fdic.gov/Call_TFR_Rpts. All information
contained in this proxy statement with respect to Liberty has been supplied by
Liberty for inclusion in this proxy statement and has not been independently
verified by the Company.
STOCKHOLDER PROPOSALS
The Company will hold an annual meeting next year, only if the merger is
not completed. In order to be eligible for inclusion in the Company's proxy
materials for that annual meeting, a stockholder proposal to take action at such
meeting must be received by the Company at 13523 University Avenue, Clive, Iowa
50325, no later than May 29, 2004. Any proposal shall be subject to the
requirements of the proxy rules adopted under the Securities Exchange Act of
1934, as amended. Otherwise, any stockholder proposal to take action at such
meeting must be received by the Company at 13523 University Avenue, Clive, Iowa
50325 by August 22, 2004; provided, however, that in the event that the date of
the annual meeting is held before September 23, 2004, or after November 23,
2004, the stockholder proposal must be received not later than the close of
business on the later of the 40th day prior to such annual meeting or the tenth
day following the day on which notice of the date of the annual meeting was
mailed or public announcement of the date of such meeting was first made. All
stockholder proposals must also comply with the Company's by-laws and Delaware
law.
OTHER MATTERS
Other than as described in this proxy statement, no business is scheduled
to be transacted at the special meeting.
-36-
TABLE OF CONTENTS
SECTION PAGE
- ------- ----
SUMMARY OF PROXY STATEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Special Meeting and Stockholder Vote . . . . . . . . . . . . . . . . . . . . . . 1
Parties to the Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Merger and the Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Merger Consideration and Stockholder Rights. . . . . . . . . . . . . . . . . . . 5
Interests of Directors and Executive Officers. . . . . . . . . . . . . . . . . . . . 6
Questions About the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
SPECIAL MEETING OF STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Place, Date and Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Purpose of Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Record Date; Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Vote Required. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Shares Held By a Nominee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Participants in the Company's Employee Stock Ownership Plan. . . . . . . . . . . . . 9
Voting and Revocation of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Solicitation of Proxies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
PRINCIPAL HOLDERS OF THE COMPANY'S COMMON STOCK . . . . . . . . . . . . . . . . . . . . . 11
BACKGROUND OF THE MERGER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
REASONS FOR THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
RECOMMENDATION OF THE BOARD OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . 15
THE MERGER AND THE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Overview of the Transaction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Merger Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Surrender of Stock Certificates. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Other Terms of the Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Voting Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Waiver; Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Employee Benefit Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Interests of The Company's Insiders in the Merger. . . . . . . . . . . . . . . . . . 23
Regulatory Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
OPINION OF THE COMPANY'S FINANCIAL ADVISOR. . . . . . . . . . . . . . . . . . . . . . . . 26
Engagement of KBW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Summary of Marketing Efforts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Analysis of Recent Comparable Acquisition Transactions . . . . . . . . . . . . . . . 28
Fairness Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
MATERIAL TAX CONSEQUENCES TO STOCKHOLDERS OF THE COMPANY. . . . . . . . . . . . . . . . . 31
STOCKHOLDER APPRAISAL RIGHT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
BUSINESS AND FINANCIAL STATEMENTS OF THE COMPANY. . . . . . . . . . . . . . . . . . . . . 34
BUSINESS AND FINANCIAL STATEMENTS OF LIBERTY. . . . . . . . . . . . . . . . . . . . . . . 34
STOCKHOLDER PROPOSALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
APPENDIX A-- Agreement and Plan of Merger . . . . . . . . . . . . . . . . . . . . . . . . A-1
APPENDIX B-- Fairness Opinion of Keefe, Bruyette & Woods, Inc . . . . . . . . . . . . . . B-1
APPENDIX C-- Section 262 of the Delaware General Corporation Law -- Appraisal Rights. . . C-1
APPENDIX D-- Form 10-KSB of the Company for the Year Ended June 30, 2003. . . . . . . . . D-1
APPENDIX E-- Form 10-QSB of the Company for the Quarter Ended September 30, 2003. . . . . E-1
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
by and between:
LIBERTY BANK, F.S.B.,
a Federal Stock Savings Bank
and
STATEFED FINANCIAL CORPORATION,
a Delaware corporation
-------------------
Dated as of November 18, 2003
-------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (the "AGREEMENT") dated as of November 18,
2003, by and between Liberty Bank, F.S.B., a federal stock savings bank (the
"BUYER"), and StateFed Financial Corporation, a Delaware corporation (the
"COMPANY").
WHEREAS, the Buyer desires to affiliate with the Company and its wholly
owned subsidiary, State Federal Savings and Loan Association of Des Moines, a
federal stock savings bank (the "BANK"), and the Company and the Bank desire to
affiliate with the Buyer in the manner provided in this Agreement;
WHEREAS, the Buyer and the Company believe that the Merger (as defined
herein) of the Company with a to-be-formed subsidiary (the "TRANSITORY
SUBSIDIARY") of the Buyer to be incorporated under the laws of the State of
Delaware to be added as a party to this Agreement after the date hereof in the
manner provided by, and subject to the terms and conditions set forth in this
Agreement, and all exhibits, schedules and supplements hereto, is desirable and
in the best interests of their respective institutions and shareholders;
WHEREAS, the Company's Board of Directors, at one or more meetings duly
called and held, has unanimously (i) determined, among other things, that the
Merger is in the best interests of the Company's shareholders, (ii) approved
this Agreement and declared its advisability, and (iii) resolved, subject to its
fiduciary duties, to recommend to its shareholders to vote in favor of the
adoption of this Agreement at a meeting of its shareholders to be held as soon
as reasonably practicable; and
WHEREAS, the board of directors of the Buyer has approved this Agreement
and, upon its formation, the Buyer shall cause the board of directors of
Transitory Subsidiary to approve this Agreement, declare its advisability, and
cause Transitory Subsidiary to become a party to this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth, and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties, intending to be
legally bound, hereby agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 THE MERGER. Upon the terms and subject to the conditions
hereof, and in accordance with the General Corporation Law of the State of
Delaware (the "DELAWARE ACT"), Transitory Subsidiary shall be merged with and
into the Company (the "MERGER") as soon as practicable following the
satisfaction or waiver, if permissible, of the conditions set forth in Article
VII hereof. Following the Merger, the Company shall continue as the surviving
corporation (the "SURVIVING CORPORATION") and the separate corporate existence
of Transitory Subsidiary shall cease. The Buyer shall not be deemed a party to
the Merger or a constituent corporation for the purposes of the Delaware Act.
Immediately after the Merger, Buyer shall cause the Company to be liquidated
with all of its assets being transferred to, and all of its liabilities and
obligations being assumed by, the Buyer and immediately after that, the Buyer
shall cause the Bank to be merged with and into the Buyer (the "BANK MERGER").
SECTION 1.2 EFFECTIVE TIME. The Merger shall become effective on the date
the Certificate of Merger, in the form required by and executed in accordance
with the relevant provisions of the Delaware Act, is duly filed with the
Delaware Secretary of State (or at such later time as may be specified in the
Certificate of Merger) (the "EFFECTIVE TIME"). The parties shall use their best
efforts to cause the Effective Time to occur on the same date as the closing of
the transactions contemplated by Section 2.3 of this Agreement (the "CLOSING").
The Certificate of Merger shall provide that the Certificate of Incorporation of
the Company as the Surviving Corporation shall be amended by fully restating its
Certificate of Incorporation in the form of the Certificate of Incorporation of
Transitory Subsidiary as in effect immediately prior to the Effective Time.
SECTION 1.3 CONVERSION OF SHARESError! Bookmark not defined.. At the
Effective Time:
(a) All shares of the Company's common stock, $0.01 par value per share
("COMPANY COMMON STOCK" or "SHARES"), issued and outstanding immediately prior
to the Effective Time (the "COMMON SHARES OUTSTANDING"), other than Dissenting
Shares (as defined in Section 1.9) and Shares described in Section 1.3(b),
shall, by virtue of the Merger and without any action on the part of the holders
thereof, be converted into and represent the right to receive cash in an amount
equal to Thirteen Dollars and Forty Seven Cents ($13.47) per Share, subject to
adjustment pursuant to Section 2.4 (the "MERGER CONSIDERATION"). The Merger
Consideration shall be paid to the holders of record thereof, without interest
thereon, upon surrender of the certificates representing such Shares as provided
in Section 1.7.
(b) Each of the Shares held by the Company as treasury stock or held of
record by Buyer immediately prior to the Effective Time shall be cancelled, and
no payment shall be made with respect thereto.
2
(c) Each share of capital stock of Transitory Subsidiary issued and
outstanding immediately before the Effective Time shall be converted into one
share of common stock of the Surviving Corporation.
SECTION 1.4 CERTAIN EFFECTS OF THE MERGER. From and after the Effective
Time, the Surviving Corporation shall possess all the rights, powers, privileges
and franchises and be subject to all of the obligations, liabilities and
restrictions of the Company and Buyer, all as provided under the Delaware Act.
SECTION 1.5 CERTIFICATE OF INCORPORATION AND BYLAWS. The Certificate of
Incorporation and the Bylaws of Transitory Subsidiary, in each case as in effect
immediately prior to the Effective Time, shall be the Certificate of
Incorporation and Bylaws of the Surviving Corporation.
SECTION 1.6 DIRECTORS AND OFFICERS. The directors and officers of
Transitory Subsidiary immediately prior to the Effective Time shall be the
directors and officers of the Surviving Corporation and shall hold office from
the Effective Time until their respective successors are duly elected or
appointed and qualified in the manner provided in the Certificate of
Incorporation and Bylaws of the Surviving Corporation, or as otherwise provided
by law.
SECTION 1.7 CLOSING OF THE COMPANY'S TRANSFER BOOKS. At the Effective
Time: (a) all Shares outstanding immediately prior to the Effective Time shall
cease to exist as provided in Section 1.3 and all holders of certificates
representing Shares that were outstanding immediately prior to the Effective
Time shall cease to have any rights as shareholders of the Company; and (b) the
stock transfer books of the Company shall be closed with respect to all Shares
outstanding immediately prior to the Effective Time. No further transfer of any
such Shares shall be made on such stock transfer books after the Effective Time.
If, after the Effective Time, a valid certificate previously representing any of
such Shares (a "CERTIFICATE") is presented to the Paying Agent (as defined in
Section 1.8) or to the Surviving Corporation or the Buyer, such Certificate
shall be canceled and shall be exchanged as provided in Section 1.8.
SECTION 1.8 PAYMENT FOR SHARES.
(a) As soon as practicable following receipt of the Required Vote (as
defined in Section 3.4 below), (i) the Buyer shall select a reputable bank or
trust company to act as paying agent under this Agreement (the "Paying Agent"),
and (ii) the Buyer shall deposit with the Paying Agent cash amounts sufficient
to enable the Paying Agent to make payments pursuant to Section 1.3 to all
holders of Shares outstanding immediately prior to the Effective Time (other
than Dissenting Shares).
(b) Within five (5) business days after the Effective Time, the Buyer
shall cause the Paying Agent to mail to each person who was, immediately prior
to the Effective Time, a holder of record of Shares (other than Dissenting
Shares) a form of letter of transmittal in customary form and containing such
provisions as are mutually agreed to by the Buyer and the Company (including a
provision confirming that, subject
3
to Section 1.8(d), delivery of Certificates shall be effected, and risk of loss
and title shall pass, only upon delivery of the Certificates to the Paying
Agent) and instructions for use in effecting the surrender of Certificates in
exchange for payment therefor (a "TRANSMITTAL LETTER"). The Buyer shall deliver
irrevocable written instructions to the Paying Agent in form and substance
reasonably satisfactory to the Company to make the payments referred to in
Section 1.3 and shall otherwise ensure that, upon surrender to the Paying Agent
of a Certificate, together with a properly executed Transmittal Letter, the
holder of such Certificate (or, under the circumstances described in Section
1.8(e), the transferee of the Shares represented by such Certificate) shall
promptly receive in exchange therefor the amount of cash to which such person is
entitled pursuant to this Agreement.
(c) On or after the date which is one hundred eighty (180) days after the
Effective Time, the Buyer shall be entitled to cause the Paying Agent to deliver
to the Buyer any funds made available to the Paying Agent which have not been
disbursed to holders of Certificates, and thereafter the Buyer shall be liable
with respect to the cash amounts payable upon surrender of their Certificates.
Neither the Buyer nor the Paying Agent shall be liable to any holder of a
Certificate for any amount properly paid to a public official pursuant to any
applicable abandoned property, escheat or similar law.
(d) If any Certificate shall have been lost, stolen or destroyed, then,
upon the making of an affidavit of that fact by the person claiming such
Certificate to be lost, stolen or destroyed (and, if required by the Buyer,
either the signing of an agreement to indemnify the Buyer against any claim that
may be made against it with respect to such Certificate or the posting by such
person of a bond, in such reasonable amount as the Buyer may direct), the Buyer
shall cause the Paying Agent to pay in exchange for such lost, stolen or
destroyed Certificate the cash amount payable in respect thereof pursuant to
this Agreement.
(e) In the event of a transfer of ownership of Shares which is not
registered in the transfer records of the Company, payment may be made with
respect to such Shares to a transferee of such Shares if the Certificate
representing such Shares is presented to the Paying Agent, accompanied by all
documents reasonably required by the Paying Agent to evidence and effect such
transfer and to evidence that any applicable stock transfer taxes relating to
such transfer have been paid.
(f) The Buyer shall pay all charges and expenses, including those of the
Paying Agent, in connection with the exchange of the Merger Consideration for
Shares.
SECTION 1.9 DISSENTING SHARES. Notwithstanding anything in this Agreement
to the contrary, Shares which are issued and outstanding immediately prior to
the Effective Time and which are held by shareholders who have not voted such
Shares in favor of the adoption of this Agreement and who shall have delivered a
written demand for appraisal of such Shares within the time and in the manner
provided in Section 262 of the Delaware Act and who, as of the Effective Time,
shall not have withdrawn such demand or lost such right to appraisal and payment
therefor under the Delaware Act (the "DISSENTING SHARES") shall not be converted
into or be exchangeable for the right
4
to receive the Merger Consideration provided in Section 1.3(a) of this
Agreement. The holders thereof shall be entitled only to such rights as are
granted by Section 262 of the Delaware Act. Each holder of Dissenting Shares who
becomes entitled to payment for such Shares pursuant to Section 262 of the
Delaware Act shall receive payment therefor from the Surviving Corporation in
accordance with the Delaware Act; provided, however, that (i) if any such holder
of Dissenting Shares shall have failed to establish such holder's entitlement to
appraisal rights as provided in Section 262 of the Delaware Act or (ii) if any
such holder of Dissenting Shares shall have effectively withdrawn such holder's
demand for appraisal of such Shares or lost such holder's right to appraisal and
payment for such holder's Shares under Section 262 of the Delaware Act, such
holder shall forfeit the right of appraisal of such Shares and each such Share
shall be treated as if it had been, as of the Effective Time, converted into a
right to receive the Merger Consideration, without interest thereon, from the
Surviving Corporation as provided in Section 1.3(a). The Company shall give
Buyer notice as promptly as practicable of any demands received by the Company
for appraisal of Shares, and Buyer shall have the right to participate in all
negotiations and proceedings with respect to such demands. The Company shall
not, except with the prior written consent of Buyer, which consent shall not be
unreasonably withheld or delayed, make any payment with respect to, or settle or
offer to settle, any such demands.
ARTICLE II
MEETING OF COMPANY SHAREHOLDERS; CLOSING
SECTION 2.1 SHAREHOLDERS' MEETING. The Company covenants and agrees with
the Buyer that, acting through its Board of Directors, the Company shall, in
accordance with applicable law:
(a) As soon as reasonably practicable after the date of this Agreement
and in any event within 45 days after the Proxy Statement has been cleared by
the SEC, duly call, give notice of, convene and hold a special meeting of its
shareholders (the "SHAREHOLDERS' MEETING") for the sole purpose of adopting this
Agreement.
(b) Require no greater than the Required Vote (as defined in Section 3.4)
in order to approve and adopt this Agreement.
(c) Subject to compliance with the Board's fiduciary duties and the
receipt from Keefe, Bruyette & Woods, Inc. of a letter prior to the mailing of
the Proxy Statement (as defined in Section 2.2 below) to the effect that the
Merger Consideration to be received by the holders of Company Common Stock is
fair from a financial point of view, include in the Proxy Statement the
unanimous recommendation of its Board of Directors that the shareholders of the
Company vote in favor of the adoption of this Agreement.
(d) Subject to compliance with the Board's fiduciary duties, use its best
efforts to obtain the adoption of this Agreement by the Required Vote.
5
SECTION 2.2 PROXY STATEMENT.
(a) The Company shall prepare at its expense a proxy statement and other
proxy solicitation materials of the Company (the "PROXY STATEMENT") in
compliance with Section 14A of the Securities Exchange Act of 1934, as amended
(the "1934 ACT") and regulations thereunder, soliciting the vote of the
Company's shareholders in favor of the adoption of this Agreement.
(b) As promptly as practicable and in any event within 30 days after the
date of this Agreement, each of the Buyer and the Company shall use its best
efforts to prepare and cause to be filed with the SEC the Proxy Statement. The
Company will not file the Proxy Statement with the SEC, and will not amend or
supplement the Proxy Statement, without consulting the Buyer and its counsel.
The Company shall cause the Proxy Statement to comply with the requirements of
the 1934 Act and the rules and regulations thereunder, and to respond promptly
to any comments of the SEC or its staff. The Buyer shall use its best efforts to
assist the Company in causing the Proxy Statement to comply with the
requirements of the 1934 Act and the rules and regulations thereunder, and in
responding promptly to any comments of the SEC or its staff. The Company will
use its reasonable best efforts to cause the Proxy Statement to be mailed to the
Company's shareholders as promptly as practicable following the date the Proxy
Statement is cleared by the SEC. Each of the Company and the Buyer shall
promptly furnish to the other all information that may be required or reasonably
requested in connection with any action contemplated by this Section 2.2. If any
event occurs, or if either the Buyer or the Company becomes aware of any
information, that should be disclosed in an amendment or supplement to the Proxy
Statement, then such party shall promptly inform the other thereof and shall
cooperate in filing such amendment or supplement with the SEC and, if
appropriate, in mailing such amendment or supplement to the shareholders of the
Company. Each of the Company and the Buyer hereby represent and covenant that
none of the information supplied or to be supplied by it specifically for
inclusion or incorporation by reference in the Proxy Statement will, at the date
it is first mailed to the shareholders or at the time of the Shareholders'
Meeting, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading, except that no representation or warranty is made by either such
party with respect to statements made or incorporated by reference therein based
on information supplied by the other such party specifically for inclusion or
incorporation by reference in the Proxy Statement.
SECTION 2.3 CLOSING. Subject to the terms and conditions of this
Agreement, the Closing of the transactions contemplated hereby (the "Closing")
will take place at the office of the Buyer at 10:00 a.m. at the office of
Liberty Banshares, Inc. at 6400 Westown Parkway, West Des Moines, Iowa on a date
selected by the Buyer which is not greater than the tenth business day after the
later to occur of (i) receipt by Buyer of all required regulatory approvals and
expiration of all waiting periods imposed by law or regulation to consummate the
Merger and (ii) adoption of this Agreement by the shareholders of the Company,
unless another place or time is agreed upon in
6
writing by the parties (the "CLOSING DATE" or "DATE OF CLOSING"). At the
Closing, the parties will deliver to each other the various certificates,
instruments and documents referred to in Article VII below and elsewhere in this
Agreement.
SECTION 2.4 ADJUSTMENT OF MERGER CONSIDERATION. The Merger Consideration
shall be subject to adjustment as specified in this Section 2.4:
(a) CALCULATION OF CONSOLIDATED STOCKHOLDERS' EQUITY. As promptly as
practicable following the last day of the calendar month preceding the month in
which the Closing is expected to occur (the "PRECEDING MONTH") and in any event
within five (5) business days after the last day of the Preceding Month, the
Company shall deliver to Buyer (i) a balance sheet that fairly presents the
financial position of the Company as of the last day of the Preceding Month in
conformity with GAAP and (ii) the Company's calculation of its Consolidated
Stockholders' Equity (as defined in Section 9.13) as of the last day of the
Preceding Month. Such balance sheet and accompanying calculation shall be
referred to herein as the "Calculation of Stockholders' Equity."
(b) MERGER CONSIDERATION ADJUSTMENT. In the event that the Consolidated
Stockholders' Equity reflected on the Calculation of Stockholders' Equity is
less than Thirteen Million Five Hundred Seventy Five Thousand Dollars
($13,575,000) the Merger Consideration shall be adjusted downward in an amount
(rounded to the nearest cent) equal to (i) the difference between Thirteen
Million Five Hundred Seventy Five Thousand Dollars ($13,575,000) and the
Consolidated Stockholders' Equity divided by (ii) the number of Common Shares
Outstanding.
SECTION 2.5 ALTERNATIVE STRUCTURE. Notwithstanding any provision of this
Agreement to the contrary, the Buyer may elect with the prior written consent of
the Company (such consent not to be unreasonably withheld), subject to the
filing of all necessary applications and the receipt of all required regulatory
approvals, to modify the structure of the transactions contemplated hereby so
long as (a) there are no adverse federal income tax consequences to the
shareholders of the Company as a result of such modification, (b) the
consideration to be paid to holders of Company Common Stock under this Agreement
is not thereby changed in kind or reduced in amount solely because of such
modification, and (c) such modification will not be likely to materially delay
or jeopardize receipt of any required regulatory approvals.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
As an inducement to Buyer to enter into this Agreement, the Company
represents and warrants to Buyer that, except as expressly disclosed in the
disclosure statement prepared by the Company and delivered by the Company to
Buyer prior to the execution and delivery of this Agreement by the Company (the
"DISCLOSURE STATEMENT"):
SECTION 3.1 ORGANIZATION AND QUALIFICATION. The Company is a Delaware
corporation, duly organized, validly existing and in good standing under the
laws of the
7
State of Delaware and is registered with the Office of Thrift Supervision (the
"OTS") as a unitary thrift holding company. The Bank is a federal stock savings
bank, duly organized, validly existing and in good standing under the laws of
the United States of America. State Service Corporation (the "SERVICE
CORPORATION") is an Iowa corporation duly organized, validly existing and in
good standing under the laws of the State of Iowa. The Bank and the Service
Corporation are sometimes referred to collectively in this Agreement as the
"SUBSIDIARIES" and separately as a "SUBSIDIARY". Each of the Company and the
Subsidiaries has all requisite corporate power and authority to carry on its
respective business as now being conducted and to own, lease and operate its
respective properties and assets as now owned, leased or operated. The nature of
the business of the Company and the Service Corporation and their respective
activities, as currently conducted, do not require them to be qualified to do
business in any jurisdiction other than the State of Iowa and they are so
qualified. True and correct copies of the Certificate of Incorporation and
Bylaws of the Company, the Articles of Incorporation and Bylaws of the Service
Corporation and the Federal Stock Charter and Bylaws of the Bank, with all
amendments thereto through the date of this Agreement, are attached as Schedule
3.1. (References in this Agreement to any "SCHEDULE" are to the Schedules to the
Disclosure Statement.)
SECTION 3.2 COMPANY CAPITALIZATION. The authorized capital stock of the
Company consists solely of (a) 2,000,000 shares of Company Common Stock, $0.01
par value per share of which 1,293,958 shares are issued and outstanding and
487,014 shares are held as treasury shares, and (b) 500,000 shares of Preferred
Stock, $0.01 par value per share, none of which are outstanding. Except as set
forth on Schedule 3.2, there are no outstanding subscriptions, options,
convertible securities, rights, warrants, calls, or other agreements, plans or
commitments of any kind issued or granted by, or binding upon, the Company or
its Subsidiaries to purchase or otherwise acquire any security of or equity
interest in the Company or its Subsidiaries. Except for the Voting Agreements
(as defined herein) or as set forth on Schedule 3.2, there are no outstanding
subscriptions, options, rights, warrants, calls, convertible securities or other
agreements, plans or commitments obligating the Company or its Subsidiaries to
issue any shares of the Company or its Subsidiaries, or to the knowledge of the
Company, irrevocable proxies or any agreements restricting the transfer of or
otherwise relating to any shares of their capital stock of any class. All of the
Shares that have been issued have been duly authorized, validly issued and are
fully paid and non-assessable, and are free of preemptive rights. There are no
restrictions applicable to the payment of dividends on the Shares except
pursuant to the Delaware Act and applicable banking laws and regulations and all
dividends declared prior to the date hereof have been paid.
SECTION 3.3 SUBSIDIARIES' CAPITALIZATION; OTHER SECURITIES. The authorized
capital stock of the Bank consists solely of 859,625 shares of common stock,
$0.01 par value per share of which 859,625 shares are issued and outstanding,
all of which are owned by the Company, free and clear of all liens, claims,
security interests, charges, encumbrances and rights of third parties. The
authorized capital stock of the Service Corporation consists solely of one share
of common stock, $0.01 par value per share of which one share is issued and
outstanding and owned by the Bank, free and clear of all liens, claims, security
interests, charges, encumbrances and rights of third parties. All
8
of the issued and outstanding shares of the capital stock of the Subsidiaries
are duly authorized, validly issued, fully paid and nonassessable, and are free
of preemptive rights. Neither the Bank nor the Service Corporation has any
treasury shares. Except for the shares of the Bank owned by the Company and the
shares of the Service Corporation owned by the Bank, neither the Company nor its
Subsidiaries own of record or beneficially, directly or indirectly, any equity
securities or similar interests in any corporation, bank, business trust,
association, partnership, joint venture, limited liability company or other
entity, other than those identified as to issuer, number and class of shares as
set forth on Schedule 3.3.
SECTION 3.4 AUTHORITY RELATIVE TO THE AGREEMENT. The Company has all
requisite corporate power and authority, and, except for the adoption of this
Agreement by the Company's shareholders, no further proceedings on the part of
the Company are necessary, to execute and deliver this Agreement and to
consummate the transactions contemplated hereby, which have been duly and
validly authorized by its Board of Directors. The approval by the vote of the
holders of a majority of the Company Common Stock entitled to vote at the
Shareholders' Meeting (the "REQUIRED VOTE") is the only approval by the
Company's shareholders of the adoption of this Agreement required under
applicable law or the Company's Certificate of Incorporation or Bylaws. This
Agreement has been duly executed and delivered by the Company and (assuming due
authorization, execution and delivery by the Buyer) constitutes a valid, legally
binding and enforceable obligation of the Company, subject to the effect of
bankruptcy, insolvency, reorganization, moratorium, or other similar laws
relating to creditors' rights generally and general equitable principles, and
subject to such shareholder and regulatory approvals as specified herein.
SECTION 3.5 NO VIOLATION. The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby will not
conflict with, or result in any violation or breach of or default under the
Certificate of Incorporation or Bylaws of the Company or the Federal Stock
Charter or Bylaws of the Bank. Neither the execution, delivery nor performance
of this Agreement in its entirety, nor the consummation of all of the
transactions contemplated hereby, will (i) subject to the receipt of the
shareholder and regulatory approvals as specified herein, violate (with or
without the giving of notice or the passage of time), any law, order, writ,
judgment, injunction, award, decree, rule, statute, ordinance or regulation
applicable to the Company or its Subsidiaries or (ii) be in conflict with,
result in a breach or termination of any provision of, cause the acceleration of
the maturity of any debt or obligation pursuant to, constitute a default (or
give rise to any right of termination, cancellation or acceleration) under, or
result in the creation of any security interest, lien, charge or other
encumbrance upon any property or assets of the Company or its Subsidiaries
pursuant to, any terms, conditions or provisions of any note, license,
instrument, indenture, mortgage, deed of trust or other agreement or
understanding or any other restriction of any kind or character, to which the
Company or its Subsidiaries is a party or by which any of their assets or
properties are subject or bound, except for such breaches, termination rights,
defaults, acceleration or cancellation right, security interest, lien, charge or
encumbrance that would not, individually or in the aggregate, result in a
Material Adverse Effect (as defined in Section 9.13). Except as set forth on
9
Schedule 3.5, there are no proceedings pending or, to the knowledge of the
Company or its Subsidiaries, threatened, against the Company or its Subsidiaries
at law or in equity or before or by any foreign, federal, state, municipal or
other governmental court, department, commission, board, bureau, agency,
instrumentality or other person which may result in a material liability to
Buyer or Transitory Subsidiary or which would prevent or materially delay such
consummation. Except as set forth in Schedule 3.5 or as contemplated hereby, the
Contracts (as defined herein) will not be terminated or impaired by reason of
the execution, delivery or performance by the Company of this Agreement or
consummation by the Company or the Bank of the transactions contemplated hereby,
assuming the receipt of required shareholder and regulatory approvals.
SECTION 3.6 CONSENTS AND APPROVALS. The Company's Board of Directors, at
one or more meetings duly called and held, has unanimously (i) determined, among
other things, that the Merger is in the best interest of the Company's
shareholders, (ii) approved this Agreement and declared its advisability, and
(iii) resolved, subject to its fiduciary duties, to recommend to its
shareholders to vote in favor of the adoption of this Agreement. The Company has
been advised that all of its directors intend to vote all of their Shares in
favor of approval and adoption of this Agreement and the Merger. Except as
described in Schedule 3.6, no prior consent, approval or authorization of, or
declaration, filing or registration with any person, domestic or foreign, is
required of the Company in connection with the execution, delivery and
performance by the Company of this Agreement and the transactions contemplated
hereby or the resulting change of control of its Subsidiaries, except (a) the
filing of the Certificate of Merger under the Delaware Act, (b) the approval
immediately after the Effective Time by the Board of Directors of the Surviving
Corporation and the Buyer, its sole shareholder, of the liquidation and
dissolution of the Surviving Corporation, (c) the filing of a certificate of
dissolution in connection with the liquidation of the Surviving Corporation, (d)
the approval by the Board of Directors of the Bank and the Company, its sole
shareholder, of the Bank Merger, (e) the filing of tax clearance certificates in
connection with each of the Merger and the liquidation of the Company, and (f)
such shareholder and regulatory approvals as are specified herein.
SECTION 3.7 REGULATORY REPORTS. Except as set forth on Schedule 3.7, the
Company and its Subsidiaries have filed all reports, registrations and
statements, together with any amendments required to be made thereto, that are
required to be filed with the OTS or any other regulatory authority having
jurisdiction over any such persons.
SECTION 3.8 SECURITIES ISSUANCES. All issuances of securities by the
Company have been registered under the Securities Act of 1933, as amended, the
Securities Act of the State of Iowa, and all other applicable laws or were
exempt from any such registration requirements. The Company and its Subsidiaries
have made all filings required to be made in compliance with the 1934 Act and
such filings were prepared in accordance and complied in all material respects
with the requirements of the 1934 Act and the rule and regulations of the
Securities and Exchange Commission (the "SEC") thereunder applicable to such
filings. None of the information contained in any filing by
10
the Company or any Subsidiary was, as of the date of such filing (or, with
respect to amended filings, the date of filing of such amendment) false or
misleading with respect to any material fact, or omitted to state any material
fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
SECTION 3.9 FINANCIAL STATEMENTS. Schedule 3.9 contains true, correct and
complete copies of the audited consolidated balance sheets of the Company and
its Subsidiaries as of June 30, 2003, 2002, and 2001, and the related
consolidated statements of income, comprehensive income, stockholders' equity
and cash flows for the years ended June 30, 2003, 2002, and 2001, in each case
accompanied by the audit report thereon of the independent public accountants,
plus the unaudited consolidated balance sheets of the Company and its
Subsidiaries as of September 30, 2003 and 2002 and the related unaudited
consolidated statements of income, shareholders' equity and changes in cash
flows for the three-month periods ended September 30, 2003 and 2002. Promptly
following their availability, but in no event more than 45 days after the end of
each fiscal quarter, the Company will provide the Buyer with true, accurate and
complete copies of the Company's unaudited financial statements as of the end of
each such period. The financial statements (including the related notes, where
applicable) referred to in this Section which have been provided as Schedule 3.9
fairly present, and the financial statements to be provided pursuant to this
Section will fairly present the financial position of the Company and its
Subsidiaries as of the dates thereof and the results of operations and changes
in consolidated financial position of the Company and its Subsidiaries for the
periods then ended, in conformity with generally accepted accounting principles
applied on a basis consistent with prior periods ("GAAP") (subject, in the case
of the unaudited interim financial statements, to normal year-end adjustments
and, in the case of unaudited interim financial statements, to the fact that
they do not contain all of the footnote disclosures required by GAAP), except as
otherwise noted therein, and the accounting records underlying the consolidated
financial statements do and will accurately and fairly reflect in all material
respects the transactions of the Company and its Subsidiaries. Neither the
Company nor its Subsidiaries have any liabilities or obligations of a type which
are required to be included in or reflected on the financial statements if
prepared in accordance with GAAP, whether related to tax or non-tax matters,
accrued or contingent, due or not yet due, liquidated or unliquidated, or
otherwise, except (a) as and to the extent disclosed or reflected in the 2003
audited financial statements or in the notes thereto, (b) incurred in the
ordinary course of business after the date of the 2003 audited financial
statements or (c) expenses incurred relating to marketing of the Company and the
transactions contemplated by this Agreement. The Company will provide the Buyer
with the Thrift Financial Reports of the Bank for all periods ending after June
30, 2003. Other than those reflected in the footnotes to the Company's 2003
audited financial statements in accordance with GAAP, the Company and its
Subsidiaries (i) have no off balance sheet liabilities other than those arising
in the ordinary course of business since the date thereof which are of the type
that if material would be noted in the footnotes to consolidated financial
statements prepared in accordance with GAAP and (ii) have no potential
liabilities associated with financial derivative products. The Company's
11
financial statements contain or will contain, in the opinion of management of
the Company, an adequate allowance for loan and lease losses.
SECTION 3.10 ABSENCE OF CERTAIN CHANGES. Except as and to the extent set
forth on Schedule 3.10 or as specifically contemplated by this Agreement, since
June 30, 2003 neither the Company nor any of its Subsidiaries has:
(a) made any amendment to its Certificate or Articles of Incorporation,
Charter or Bylaws or changed the character of its business in any material
manner;
(b) suffered any Material Adverse Effect (as defined in Section 9.13);
(c) except for this Agreement, entered into any agreement, commitment or
transaction except in the ordinary course of business;
(d) except in the ordinary course of business, incurred, assumed or
become subject to, whether directly or by way of any guarantee or otherwise, any
obligations or liabilities (absolute, accrued, contingent or otherwise) other
than in connection with the transactions contemplated by this Agreement;
(e) permitted or allowed any of its property or assets to be subject to
any mortgage, pledge, lien, security interest, encumbrance, restriction or
charge of any kind (other than statutory liens not yet delinquent) except in the
ordinary course of business;
(f) except in the ordinary course of business, canceled any debts, waived
any claims or rights, or sold, transferred, or otherwise disposed of any of its
properties or assets;
(g) disposed of or permitted to lapse any rights to the use of any
trademark, service mark, trade name or copyright, or disposed of or disclosed to
any person other than its employees or agents, any trade secret not theretofore
a matter of public knowledge;
(h) except as set forth on Schedule 3.10(h) and except for regular salary
increases granted in the ordinary course of business within the Company's or its
Subsidiaries' 2004 budgets and consistent with prior practices, granted any
increase in compensation or paid or agreed to pay or accrue any bonus,
percentage compensation, service award, severance payment or like benefit to or
for the credit of any director, officer, employee or agent, or entered into any
employment or consulting contract or other agreement with any director, officer
or employee or adopted, amended or terminated any pension, employee welfare,
retirement, stock purchase, stock option, stock appreciation rights,
termination, severance, income protection, golden parachute, savings or
profit-sharing plan (including trust agreements and insurance contracts
embodying such plans), any deferred compensation, or collective bargaining
agreement, any group insurance contract or any other incentive, welfare or
employee benefit plan, program or agreement maintained by the Company or its
Subsidiaries, for the directors, employees or former employees of the Company or
its Subsidiaries;
12
(i) except as specifically contemplated by this Agreement, directly or
indirectly declared, set aside or paid any dividend or made any distribution in
respect to its capital stock or redeemed, purchased or otherwise acquired, or
arranged for the redemption, purchase or acquisition of, any shares of its
capital stock or other of its securities, except for dividends paid to the
Company by its Subsidiaries and the dividend of Ten Cents ($0.10) per Share paid
on October 3, 2003 to shareholders of record of the Company on September 30,
2003;
(j) organized or acquired any capital stock or other equity securities or
acquired any equity or ownership interest in any person (except through
settlement of indebtedness, foreclosure, the exercise of creditors' remedies or
in a fiduciary capacity, the ownership of which does not expose the Company or
its Subsidiaries to any liability from the business, operations or liabilities
of such person) other than Federal Home Loan Bank stock and readily marketable
securities set forth on Schedule 3.3;
(k) issued, reserved for issuance, granted, sold or authorized the
issuance of any shares of its capital stock or subscriptions, options, warrants,
calls, rights or commitments of any kind relating to the issuance or sale of or
conversion into shares of its capital stock;
(l) made any or acquiesced with any change in any accounting methods,
principles or practices except to comply with GAAP;
(m) experienced any change in relations with customers or clients of the
Company or its Subsidiaries which could have a Material Adverse Effect on the
Company or its Subsidiaries;
(n) except for the transactions contemplated by this Agreement or as
otherwise permitted hereunder, entered into any transaction, or entered into,
modified or amended any contract or commitment, other than in the ordinary
course of business and consistent with safe and sound banking practices;
(o) sold or agreed to sell any of its banking facilities other than its
former headquarters located in downtown Des Moines, Iowa; or
(p) except for this Agreement and the transactions contemplated hereby,
agreed, whether in writing or otherwise, to take any action the performance of
which would change the representations contained in this Section 3.10 in the
future so that any such representation would not be true in all material
respects as of the Closing.
SECTION 3.11 COMPANY INDEBTEDNESS. The Company has delivered to the Buyer
as set forth on Schedule 3.11, true and complete copies of all loan documents
("COMPANY LOAN DOCUMENTS") related to indebtedness of the Company and its
Subsidiaries for borrowed funds and capital leases, other than deposits, Federal
Home Loan Bank advances and federal funds purchased ("COMPANY INDEBTEDNESS"),
and
13
made available to the Buyer all material correspondence concerning the status of
Company Indebtedness.
SECTION 3.12 LITIGATION. Except as set forth on Schedule 3.12, there is no
action, suit, claim, investigation, review or other proceeding pending by or
against the Company or its Subsidiaries or, to the knowledge of the Company or
its Subsidiaries, threatened against the Company or any of its Subsidiaries or
involving any of their respective properties or assets, at law or in equity or
before or by any foreign, federal, state, municipal, or other governmental
court, department, commission, board, bureau, agency, or other instrumentality
or person or any board of arbitration or similar entity involving a monetary
claim in excess of $25,000 individually or in the aggregate in excess of
$100,000 or involving a claim for equitable relief (i.e., specific performance
or injunctive relief) other than mechanics liens arising in the ordinary course
of business in respect of the loan assets of the Company or any of its
Subsidiaries or foreclosure actions initiated by the Bank ("PROCEEDING"). The
Company will notify the Buyer immediately in writing of any Proceeding against
the Company or its Subsidiaries.
SECTION 3.13 TAX MATTERS. Except as described in Schedule 3.13, the Company
and its Subsidiaries have duly filed all tax returns that they were required to
file (the "FILED RETURNS"), prior to the date of this Agreement. All such Filed
Returns were correct and complete in all material respects. The Company and its
Subsidiaries have paid, or have established adequate reserves for the payment
of, all federal income taxes and all state and local income taxes and all
franchise, property, sales, employment, foreign or other taxes required to be
paid by the Filed Returns. Except as described in Schedule 3.13, none of the
Company or its Subsidiaries currently is the beneficiary of any extension of
time within which to file any tax return. With respect to the periods for which
returns have not yet been filed, the Company and its Subsidiaries have
established adequate reserves determined in accordance with GAAP for the payment
of all federal income taxes and all state and local income taxes and all
franchise, property, sales, employment, foreign or other taxes. Except as
described in Schedule 3.13, the Company and its Subsidiaries have no direct or
indirect liability for the payment of federal income taxes, state and local
income taxes, and franchise, property, sales, employment or other taxes in
excess of amounts paid or reserves established. There are no liens for any taxes
on any assets of the Company or its Subsidiaries except for liens for taxes not
yet due or for taxes being contested in good faith and for which adequate
reserves have been established in accordance with GAAP. Except as set forth on
Schedule 3.13, the Company has not entered into any tax sharing agreement or
other agreement regarding the allocation of the tax liability of the Company or
the Bank or similar arrangement with its other Subsidiaries. Except as set forth
on Schedule 3.13, neither the Company nor its Subsidiaries have filed any
Internal Revenue Service ("IRS") Forms 1139 (Application for Tentative Refund)
or anticipate receipt of any tax refund. Except as set forth on Schedule 3.13,
there are no pending questions raised in writing by the IRS or other taxing
authority for taxes or assessments of the Company or its Subsidiaries, nor are
there any outstanding agreements or waivers extending the statutory period of
limitation applicable to any tax assessment or deficiency against the Company or
its Subsidiaries for any period. The Company and its Subsidiaries have withheld
and paid over all taxes to the proper governmental
14
authorities required to be so withheld and paid over in connection with amounts
paid or owing to any employee, independent contractor, creditor, stockholder or
other third party. The Company and its Subsidiaries are neither obligated to
make any payments nor are they parties to any agreement that under certain
circumstances could obligate them to make any payments that will not be
deductible under Section 280G of the Internal Revenue Code, as amended (the
"CODE"). None of the Company and its Subsidiaries (i) has been a member of an
affiliated group filing a consolidated federal income tax return (other than a
group the common parent of which was the Company) or (ii) has any liability for
the taxes of any person (other than any of the Company and its Subsidiaries)
under Reg. Section 1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise. For the
purposes of this Agreement, the term "tax" shall include all federal, state,
local and foreign taxes and related governmental charges and any interest or
penalties payable in connection with the payment of taxes.
SECTION 3.14 EMPLOYEE BENEFIT PLANS. With respect to all employee benefit
plans and programs in which employees of the Company or its Subsidiaries
participate the following are true and correct:
(a) Schedule 3.14(a) lists each "employee welfare benefit plan" (as
defined in Section 3(1) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA")) maintained by the Company or its Subsidiaries or any
entity which is a member of a controlled group or affiliated service group with
the Company or any of its Subsidiaries under ERISA Section 4001 or Section 414
of the Code (such Subsidiaries and entities collectively, "ERISA AFFILIATES") or
to which the Company or ERISA Affiliates contribute or are required to
contribute, including any multiemployer welfare plan (such employee welfare
benefit plans being hereinafter collectively referred to as the "WELFARE BENEFIT
PLANS") and sets forth (i) the amount of any liability of the Company or ERISA
Affiliates for contributions more than thirty days past due with respect to each
Welfare Benefit Plan as of the date hereof and (ii) the annual cost attributable
to each of the Welfare Benefit Plans; no Welfare Benefit Plan provides for
continuing benefits or coverage for any participant, beneficiary or former
employee after such participant's or former employee's termination of employment
except as may be required by Section 4980B of the Code and Sections 601-608 of
ERISA;
(b) Schedule 3.14(b) lists each "employee pension benefit plan" (as
defined in Section 3(2) of ERISA and not exempted under Section 4(b) or 201 of
ERISA) maintained by the Company or an ERISA Affiliate or to which the Company
or ERISA Affiliates contribute or are required to contribute, including any
multiemployer plan (as defined in Section 3(37) of ERISA) (such employee pension
benefit plans being hereinafter collectively referred to as the "PENSION BENEFIT
PLANS");
(c) Schedule 3.14(c) lists each deferred compensation plan, bonus plan,
stock option plan, employee stock purchase plan, restricted stock, excess
benefit plan, incentive compensation, stock bonus, cash bonus, severance pay,
golden parachute, life insurance, all nonqualified deferred compensation
arrangements, rabbi trust, cafeteria plans, dependent care plans, all unfunded
plans and any other employee
15
benefit plans or programs, agreements, arrangements or commitments not required
under a previous subsection to be listed (other than normal policies concerning
holidays, vacations and salary continuation during short absences for illness or
other reasons) maintained by the Company or ERISA Affiliates (referred to as
("OTHER PROGRAMS");
(d) All of the Pension Benefit Plans and Welfare Benefit Plans and any
related trust agreements or annuity contracts (or any other funding instruments)
and all Other Programs comply currently, and have complied in the past, in all
material respects, both as to form and operation, with the provisions of ERISA,
the Code and with all other applicable laws, rules and regulations governing the
establishment and operation of the Pension Benefit Plans, Welfare Benefit Plans
and all Other Programs; all necessary governmental approvals relating to the
establishment of the Pension Benefit Plans have been obtained; and with respect
to each Pension Benefit Plan that is intended to be tax-qualified under Section
401(a) or 403(a) of the Code, a favorable determination letter as to the
qualification under the Code of each such Pension Benefit Plan and each material
amendment thereto has been issued by the Internal Revenue Service (and nothing
has occurred since the date of the last such determination letter which resulted
in, or is likely to result in the revocation of such determination);
(e) Each Welfare Benefit Plan, each Pension Benefit Plan and each Other
Program has been administered in all material respects in compliance with the
requirements of the Code, ERISA and all other applicable laws, and all reports
and disclosures required by ERISA, the Code and any other applicable laws with
respect to each Welfare Benefit Plan, each Pension Benefit Plan and each Other
Program have been timely filed;
(f) Neither the Company, any Subsidiary nor any plan fiduciary of any
Welfare Benefit Plan or Pension Benefit Plan has ever engaged in any transaction
in violation of Section 406 of ERISA (for which transaction no exemption exists
under Section 408 of ERISA) or in any "prohibited transaction" as defined in
Section 4975(c)(1) of the Code (for which no exemption exists under Section
4975(c)(2) or 4975(d) of the Code);
(g) Neither the Company nor any ERISA Affiliate is, or has been within
the past ten years, a contributing sponsor (as defined in Section 4001(a)(13) of
ERISA) of a Pension Benefit Plan subject to the provisions of Title IV of ERISA,
nor has the Company or any ERISA Affiliate during the past ten years maintained
or participated in any employee pension benefit plan (defined in Section 3(2) of
ERISA) subject to the provision of Title IV of ERISA. In addition, neither the
Company nor any ERISA Affiliate (i) is a party to a collective bargaining
agreement, (ii) has maintained or contributed to, or has participated in or
agreed to participate in, a multiemployer plan (as defined in Section 3(37) of
ERISA), or (iii) has made a complete or partial withdrawal from a multiemployer
plan (as defined in Section 3(37) of ERISA) so as to incur withdrawal liability
as defined in Section 4201 of ERISA (without regard to subsequent reduction or
waiver of such liability under Section 4207 or 4208 of ERISA);
16
(h) True and complete copies of each Welfare Benefit Plan, each Pension
Benefit Plan and each Other Program, related trust agreements or annuity
contracts (or any other funding instruments), summary plan descriptions, the
most recent determination letter issued by the Internal Revenue Service with
respect to each Pension Benefit Plan, the most recent application for a
determination letter from the IRS with respect to each Pension Benefit Plan and
Annual Reports on Form 5500 Series filed with any governmental agency for each
Welfare Benefit Plan, Pension Benefit Plan and Other Program for the three most
recent plan years, are attached hereto as Schedule 3.14(h);
(i) All Welfare Benefit Plans, Pension Benefit Plans, and Other Programs
related trust agreements or annuity contracts (or any other funding
instruments), are legally valid and binding and in full force and effect and
there are no promised increases in benefits (whether expressed, implied, oral or
written) under any of these plans nor any obligations, commitments or
understandings to continue any of these plans except as expressly stated
therein, (whether expressed, implied, oral or written) except as required by
Section 4980B of the Code and Sections 601-608 of ERISA;
(j) There are no claims pending with respect to, or under, any Pension
Benefit Plan, Welfare Benefit Plan or any Other Program, other than routine
claims for plan benefits, and there are no disputes or litigation pending or, to
the knowledge of Company and its Subsidiaries threatened, with respect to any
such plans;
(k) No action has been taken, nor has there been a failure to take any
action that would subject any person or entity to any liability for any income,
excise or other tax or penalty in connection with any Pension Benefit Plan,
Welfare Benefit Plan or any Other Program, other than for income taxes due with
respect to benefits paid;
(l) Except as otherwise set forth in Schedule 3.14(l), neither the
execution and delivery of this Agreement nor the consummation of the transaction
contemplated hereby will (i) result in any payment to be made by the Company or
any ERISA Affiliate (including, without limitation, severance, unemployment
compensation, golden parachute (defined in Section 280G of the Code), or
otherwise) becoming due to any employee, director or consultant, or (ii)
increase any benefits otherwise payable under any Welfare Benefit Plan, Pension
Benefit Plan, or any Other Program; and
(m) The ESOP (as defined below) has, or will have prior to the Closing,
repaid all amounts due to the Company.
SECTION 3.15 EMPLOYMENT MATTERS. Except as disclosed on Schedule 3.15,
neither the Company nor any Subsidiary is a party to any oral or written
employment or similar contracts or agreements with any of its employees or any
collective bargaining agreement or to any conciliation agreement with the
Department of Labor, the Equal Employment Opportunity Commission or any federal,
state or local agency which requires equal employment opportunities or
affirmative action in employment. There
17
are no unfair labor practice complaints pending against the Company or any
Subsidiary before the National Labor Relations Board and no similar claims
pending before any similar state, local or foreign agency. To the knowledge of
the Company, there is no activity or proceeding of any labor organization (or
representative thereof) or employee group to organize any employees of the
Company or any Subsidiary, nor of any strikes, slowdowns, work stoppages,
lockouts, or threats thereof, by or with respect to any such employees. The
Company and its Subsidiaries are in compliance in all material respects with all
applicable laws respecting employment and employment practices, terms and
conditions of employment and wages and hours, and, to the knowledge of the
Company, neither the Company nor its Subsidiaries are engaged in any unfair
labor practice.
SECTION 3.16 LEASES, CONTRACTS AND AGREEMENTS. Schedule 3.16 sets forth an
accurate and complete description of all leases, subleases, licenses, contracts
and agreements to which the Company or any Subsidiary is a party or by which the
Company or any Subsidiary is bound which the Company or any Subsidiary cannot
terminate without penalty upon 60 days' notice and which obligate or may
obligate the Company or any Subsidiary for an annual amount in excess of $25,000
per lease, sublease, license, contract or agreement (the "CONTRACTS"). Schedule
3.16 includes a true and correct copy of the purchase agreement for the sale of
the Company's former headquarters located in downtown Des Moines. The Company
has made available to the Buyer true and correct copies of all Contracts. For
the purposes of this Agreement, the Contracts shall be deemed not to include
loans made by or deposits by or with the Company or its Subsidiaries. Except as
set forth in Schedule 3.16, no participations or loans have been sold which have
buy back, recourse or guaranty provisions which create contingent or direct
liabilities of the Company or its Subsidiaries. To the knowledge of the Company,
all of the Contracts are legal, valid and binding obligations of the parties to
the Contracts enforceable in accordance with their terms, subject to the effect
of bankruptcy, insolvency, reorganization, moratorium, or other similar laws
relating to creditors' rights generally and to general equitable principles, and
are in full force and effect. Except as described in Schedule 3.16, all rent and
other payments by the Company and its Subsidiaries under the Contracts are
current, there are no existing defaults by the Company or its Subsidiaries under
the Contracts and no termination, condition or other event has occurred on the
part of or with respect to the Company which (whether with or without notice,
lapse of time or the happening or occurrence of any other event) would
constitute a default. The Company and each of its Subsidiaries has a good and
valid leasehold interest in each parcel of real property leased by it free and
clear of all mortgages, pledges, liens, encumbrances and security interests.
SECTION 3.17 TRANSACTIONS WITH INSIDERS. Except as described in Schedule
3.17, there are no transactions in which any of the executive officers,
directors or employees of the Bank or the Company or member of the "immediate
family" or "related interests" (as such terms are defined in Regulation O) of
any such executive officers or directors (collectively, "INSIDERS"), directly or
indirectly, either individually or through any corporation, limited liability
company, partnership, association or other entity, has borrowed from, loans to,
supplied or provided goods to, purchased assets from, sold assets to, or done
business in any manner with, the Company or the Bank. All
18
transactions with Insiders are in compliance with applicable laws, rules and
regulations. Except as described in Schedule 3.17, no Insider has any direct or
indirect interest in any property, assets, business or right which is owned,
leased, held or used by the Company or the Bank or in any liability, obligation
or indebtedness of the Company or the Bank, except for deposits of the Bank.
Neither the Company nor the Bank owns and is the beneficiary of insurance on the
life of any Insider.
SECTION 3.18 COMPLIANCE WITH LAWS. Except as set forth on Schedule 3.18,
neither the Company nor any of its Subsidiaries is in default in respect to or
is in violation of (i) any judgment, order, writ, injunction or decree of any
court, or (ii) in any material respect, any applicable statute, law, ordinance,
rule, order or regulation of any governmental department, commission, board,
bureau, agency or instrumentality, federal, state or local, including (for
purposes of illustration and not limitation) capital ratios and loan limitations
of the OTS or the FDIC, except for any such violation or default which is not
likely to have, individually or in the aggregate, a Material Adverse Effect and
the consummation of the transactions contemplated by this Agreement will not
constitute such a default or violation as to the Company or any of its
Subsidiaries assuming all required regulatory approvals are obtained. The
Company and its Subsidiaries have all permits, licenses, and franchises from
governmental agencies ("PERMITS") required to conduct their businesses as they
are now being conducted, except for those Permits the absence of which are not
likely to have, individually or in the aggregate, a Material Adverse Effect. As
of the date hereof, the Company is not aware of any reason relating to it or the
Subsidiaries why all required regulatory approvals or consents shall not be
obtained relating to the transactions contemplated by this Agreement.
SECTION 3.19 INSURANCE. The Company and its Subsidiaries have in effect the
insurance coverage (including fidelity bonds) described in Schedule 3.19 and
have had similar insurance in force for the last 5 years. There have been no
claims in excess of $25,000 in the aggregate under such bonds within the last 5
years and neither the Company nor its Subsidiaries is aware of any facts which
would form the basis of a claim under such bonds. Neither the Company nor its
Subsidiaries has any reason to believe that the existing fidelity coverage would
not be renewed by its carrier on substantially the same terms. The Company has
made available to the Buyer true and accurate copies of the policies and
declaration pages evidencing such insurance coverage.
SECTION 3.20 LOANS.
(a) Except as set forth on Schedule 3.20:
(i) all loans, loan agreements, loan participations, letters of credit,
leases and loan commitments made or entered into by the Company or the Bank
are in compliance in all material respects with applicable laws and
regulations, and all guarantees of any government or governmental entity of
such extensions of credit are valid and enforceable;
19
(ii) the Company's or the Bank's loan files contain all notes, leases and
other evidences of indebtedness, lease agreements, certificates, security
agreements, mortgages, deeds of trust, guarantees, UCC financing statements
and similar documents evidencing collateral or other financial
accommodations relating to the loans;
(iii) all loan documents of the Company and the Bank are correct in amount,
genuine as to signature of every party thereto, including but not limited
to lessees, makers and endorsers and were given for valid consideration and
are enforceable in accordance with their respective terms, except as
enforcement thereof may be limited by bankruptcy, insolvency, moratorium,
reorganization or similar laws affecting the enforcement of creditors'
rights generally or by limitations on the availability of equitable
remedies;
(iv) none of the obligations represented by the loan documents have been
modified, altered, forgiven, discharged or otherwise disposed of except as
indicated in the loan documents or as a result of bankruptcy or other
debtor relief laws of general application;
(v) none of the loans are subject to any offset, claims of offset or
claims of other material liability on the part of the Company or the Bank;
(vi) all security interests granted in favor of the lender of the loan as
reflected in the loan documents have been properly perfected; and
(vii) the collateral securing each loan was in existence at the time funds
were advanced or an interest was taken in such collateral as reflected in
the loan documents.
(b) Except as reflected on the books and records of the Company or the
Bank, neither the Company nor the Bank has notice or knowledge of, and have not
consented to, the sale, loss, destruction or other disposition of any such
collateral, except where the proceeds thereof have been applied to the
indebtedness to the Company or the Bank.
SECTION 3.21 FIDUCIARY RESPONSIBILITIES. The Company and its Subsidiaries
have performed in all material respects all of their respective duties as a
trustee, custodian, guardian or as an escrow agent in a manner which complies in
all material respects with all applicable laws, regulations, orders, agreements,
instruments and common law standards.
SECTION 3.22 PATENTS, TRADEMARKS AND COPYRIGHTS. Except as set forth in
Schedule 3.22, neither the Company nor its Subsidiaries require the use of any
material patent, patent application, invention, process, trademark (whether
registered or unregistered), trademark application, trade name, service mark,
copyright, or any material trade secret for the business or operations of the
Company or its Subsidiaries.
20
The Company and its Subsidiaries own or are licensed or otherwise have the right
to use the items listed in Schedule 3.22.
SECTION 3.23 ENVIRONMENTAL COMPLIANCE. To the knowledge of the Company or
the Bank, there have been no acts or omissions occurring on or with respect to
real estate currently or previously owned, leased or otherwise used by the
Company or the Bank, including without limitation, other real estate owned,
properties under foreclosure or properties held by the Bank in any fiduciary
capacity (collectively, the "BANK PROPERTY") which constitute or result, or
which are reasonably likely to have constituted or resulted, in the creation of
any federal, state or common law nuisance (whether or not the nuisance condition
is, or was, foreseen or unforeseen) or which do not, or have not, complied with
federal, state or local environmental laws including, without limitation, the
Clean Water Act, the Clean Air Act, the Resource Conservation and Recovery Act,
the Toxic Substances Control Act and the Comprehensive Environmental, Response,
Compensation and Liability Act, as amended, and their state and local law
counterparts, all rules and regulations promulgated thereunder and all other
legal requirements associated with the ownership and use of the Bank Property
(collectively, "ENVIRONMENTAL LAWS") and as a result of which acts or omissions
the Company or the Bank is subject to or reasonably likely to incur a material
liability. To the knowledge of the Company or the Bank, neither the Company nor
the Bank is subject to or reasonably likely to incur a material liability as a
result of its ownership, lease, operation or use of any Bank Property (i) that
is contaminated by or contains any hazardous waste, toxic substance or related
materials, including without limitation, asbestos, PCBs, pesticides, herbicides,
petroleum products, substances defined as "hazardous substances" or "toxic
substances" in the Environmental Laws, and any other substance or waste that is
hazardous to human health or the environment (collectively, "TOXIC SUBSTANCES"),
or (ii) on which any Toxic Substance has been stored, disposed of, placed or
used in the construction thereof. No claim, action, suit or proceeding is
pending or threatened against the Company or the Bank relating to the Bank
Property before any court or other governmental authority or arbitration
tribunal relating to Toxic Substances, pollution or the environment, and there
is no outstanding judgment, order, writ, injunction, decree or award against or
affecting the Company or the Bank with respect thereto, nor have Sellers, the
Company or the Bank been notified of any investigation or claim relating
thereto. Schedule 3.23 includes a copy of all environmental property assessments
previously conducted or possessed by the Company or the Bank with respect to the
Bank Property currently owned or leased by the Bank.
SECTION 3.24 NO INDEMNITY CLAIMS. Neither the Company nor its Subsidiaries
is subject to, or to the knowledge of the Company threatened with, any
indemnification claim for the benefit of any present or former director, officer
or employee or any other person, or the heirs, personal representatives,
successors or assigns thereof.
SECTION 3.25 TITLE TO PROPERTIES; ENCUMBRANCES. Except as set forth on
Schedule 3.25, in notes to the balance sheet included as part of the 2003
audited financial statements, or for such encumbrances arising by operation of
law, the Company and each of its Subsidiaries has unencumbered, good, legal, and
marketable title to all its owned properties and assets, real and personal,
including, without limitation, all the properties and assets reflected in the
balance sheet included as part of
21
the 2003 audited financial statements except for those properties and assets
disposed of for fair market value in the ordinary course of business since June
30, 2003. Except as set forth on Schedule 3.25, the Company has a title policy
in full force and effect from a title insurance company which, to the best of
Company's knowledge, is solvent, insuring good and marketable title to all real
property owned by the Company and its Subsidiaries in favor of the Company or
its Subsidiaries, whichever is applicable. The Company has made available to the
Buyer all of the files and information in the possession of the Company or its
Subsidiaries concerning such properties, including any title exceptions which
might affect marketable title or value of such property. The Company and its
Subsidiaries each hold good and legal title or good and valid leasehold rights
to all assets that are necessary for them to conduct their respective businesses
as they are currently being conducted. Except as set forth on Schedule 3.25, the
Company and the Bank each own all furniture, equipment, art and other property
(excluding leased real estate) which is material to the operation of their
respective businesses and presently located on their respective premises.
SECTION 3.26 SHAREHOLDER LIST. The Company has provided to the Buyer prior
to the date of this Agreement a list of the record holders of Shares and the
holders of any outstanding warrant, option, convertible debenture or other
security entitling the holder thereof to acquire Shares as of October 31, 2003
containing the names, addresses and number of Shares or such other securities
held of record, which, to the knowledge of the Company, is accurate in all
respects as of such date.
SECTION 3.27 DISSENTING SHAREHOLDERS. As of the date hereof, the Company
and the Bank, and their respective directors, have no knowledge of any plan or
intention on the part of any Company shareholders to make written demand for
payment of the fair value of such Shares in the manner provided in Section 262
of the Delaware Act.
SECTION 3.28 TAKEOVER LAWS. This Agreement and the Merger contemplated
hereby are not subject to the requirements of any "moratorium," "control share,"
"fair price," "affiliate transactions," "business combination" or other
anti-takeover laws and regulations of any state applicable to the Company or any
of its Subsidiaries. Neither the Company nor its Subsidiaries has a "poison
pill" or shareholder rights plan.
SECTION 3.29 EMPLOYEE STOCK OPTIONS. Except as set forth on Schedule 3.29,
there are no Company employee stock option plans or provisions in any other
plan, program, or arrangement providing for the issuance or grant of any other
interest in respect of the capital stock of the Company or any Subsidiary.
Schedule 3.29 identifies each grantee of an option to purchase Shares, the
number of outstanding options held by each, their vesting status, expiration
dates and exercise price.
SECTION 3.30 NO ADMINISTRATIVE ACTION. Neither the Company nor the Bank is
subject to any cease and desist order, written agreement, memorandum of
understanding or any other administrative action by or with any regulatory
authority, or any board resolution in lieu of the foregoing, nor is any such
action threatened or pending, nor has the Company or the Bank made any
commitment to any regulatory body.
22
SECTION 3.31 REGULATORY EXAMINATIONS. The Bank was last examined by the OTS
as of June 30, 2002. In addition to loans classified by the Bank's regulatory
examiners as "other loans specially mentioned," "substandard," "doubtful", or
"loss," the Bank has no other loans which are included on its watch list, except
those which have been disclosed to Buyer in a confidential letter.
SECTION 3.32 COMMUNITY REINVESTMENT ACT COMPLIANCE. The Bank is rated
"satisfactory" or better by OTS in its most recent Community Reinvestment Act
examination.
SECTION 3.33 MINUTE BOOKS. The minute book and stock record book of each of
the Company and its Subsidiaries is complete and correct and records all
material transactions required to be recorded under any federal, state or
governmental agency law or regulation.
SECTION 3.34 FDIC DEPOSIT INSURANCE. The deposit accounts of the Bank are
insured by the Savings Association Insurance Fund of the Federal Deposit
Insurance Corporation to the maximum extent provided by law, and there has not
occurred any act or default on the part of the Bank which could materially and
adversely affect its status as an insured bank.
SECTION 3.35 NO BROKERED DEPOSITS OR DERIVATIVE SECURITIES. Except as set
forth on Schedule 3.35, the Bank has no current deposits for which it has paid a
fee. The Bank owns no derivative securities.
SECTION 3.36 DISCLOSURE CONTROLS AND PROCEDURES. Since September 30, 2002,
the Company and its Subsidiaries have had in place "disclosure controls and
procedures" as defined in Rules 13a-15(c) and 15d-15(c) of the 1934 Act)
designed and maintained to ensure that (i) transactions are executed in
accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with GAAP and to maintain accountability for assets,
(iii) access to assets is permitted only in accordance with management's general
or specific authorizations, (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences, (v) all information (both financial
and non-financial) required to be disclosed by the Company in the reports that
it files or submits under the 1934 Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the SEC,
and (vi) all such information is accumulated and communicated to the Company's
management as appropriate to allow timely decisions regarding required
disclosures and to make the certifications of the Chief Executive Officer and
Chief Financial Officer of the Company required under the 1934 Act with respect
to such reports. None of the Company's or its Subsidiaries' records, systems,
controls, data or information is recorded, stored, maintained, operated or
otherwise wholly or partly dependent on or held by any means (including any
electronic, mechanical or photographic process, whether computerized or not)
which (including all means of access thereto and therefrom)
23
are not under the exclusive ownership and direct control of the Company or its
Subsidiaries or accountants.
SECTION 3.37 PROXY STATEMENT INFORMATION. The information relating to the
Company and its Subsidiaries to be contained in the Proxy Statement will not
contain any untrue statement or a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances in
which they are made, not misleading. The Proxy Statement will comply in all
material respects with provisions of the 1934 Act and the rules and regulations
thereunder.
SECTION 3.38 BROKERS, FINDERS AND MERGER FEES. Except for Keefe, Bruyette &
Woods, Inc., neither the Company nor its Subsidiaries nor any of their
respective officers, directors or employees has employed any broker or finder or
incurred any liability for any financial advisory fees, brokerage fees,
commissions or finder's fees, and no broker or finder has acted directly or
indirectly for the Company or its Subsidiaries in connection this Agreement or
the transactions contemplated hereby. Schedule 3.38 discloses a bona fide
estimate of the aggregate amount of all fees and expenses expected to be paid by
the Company and its Subsidiaries to all attorneys, accountants, advisors and
investment bankers in connection with the Merger or this Agreement ("MERGER
FEES").
SECTION 3.39 REPRESENTATIONS NOT MISLEADING. No representation or warranty
by the Company in this Agreement, or in any Exhibit or Schedule furnished to the
Buyer or to Transitory Subsidiary by the Company or its Subsidiaries under and
pursuant to this Agreement, contains or will contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
contained herein or therein, in light of the circumstances in which they were
made, not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF THE BUYER
As an inducement to the Company to enter into this Agreement, Buyer
represents and warrants to the Company that, except as expressly disclosed in
the disclosure statement prepared by the Buyer and delivered by the Buyer to the
Company prior to the execution and delivery of this Agreement by the Buyer (the
"BUYER DISCLOSURE STATEMENT") :
SECTION 4.1 ORGANIZATION AND AUTHORITY.
(a) Buyer is a federal stock saving bank, duly organized, validly existing
and in good standing under the laws of the United States. Buyer has all
requisite corporate power and authority to carry on its business as now being
conducted and to own, lease and operate its properties and assets as now owned,
leased or operated.
(b) Buyer is duly qualified or licensed and in good standing in each
jurisdiction which requires such qualification.
24
SECTION 4.2 AUTHORITY RELATIVE TO AGREEMENT. The Buyer has all requisite
corporate power and authority and no further corporate or shareholder
proceedings on the part of the Buyer are necessary to execute and deliver this
Agreement and to consummate the transactions contemplated hereby, all of which
have been duly and validly authorized by the Board of Directors of Buyer. This
Agreement has been duly executed and delivered by the Buyer and (assuming due
authorization, execution and delivery by the Company) constitutes a valid,
legally binding and enforceable obligation of the Buyer, subject to the effect
of bankruptcy, insolvency, reorganization, moratorium, or other similar laws
relating to creditors' rights generally and general equitable principles, and
subject to such shareholder and regulatory approvals as specified herein.
SECTION 4.3 NO VIOLATION. The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby, will not
conflict with, or result in any violation or breach of or default under the
Federal Stock Charter or Bylaws of Buyer.
SECTION 4.4 CONSENTS AND APPROVALS.
(a) Neither the execution, delivery nor performance of this Agreement in
its entirety, nor the consummation of all of the transactions contemplated
hereby, will (i) subject to the receipt of the regulatory approvals specified
herein, violate (with or without the giving of notice or the passage of time),
any law, order, writ, judgment, injunction, award, decree, rule, statute,
ordinance or regulation applicable to the Buyer or (ii) be in conflict with,
result in a breach or termination of any provision of, cause the acceleration of
the maturity of any debt or obligation pursuant to, constitute a default (or
give rise to any right of termination, cancellation or acceleration) under, or
result in the creation of any security interest, lien, charge or other
encumbrance upon any property or assets of the Buyer pursuant to, any terms,
conditions or provisions of any note, license, instrument, indenture, mortgage,
deed of trust or other agreement or understanding or any other restriction of
any kind or character, to which the Buyer is a party or by which any of its
assets or properties are subject or bound, except for such breaches, termination
rights, defaults, acceleration or cancellation right, security interest, lien,
charge or encumbrance that would not, individually or in the aggregate, result
in a Material Adverse Effect (as defined in Section 9.13). Except as set forth
on Schedule 4.4, there are no proceedings pending or, to the knowledge of the
Buyer, threatened, against the Buyer at law or in equity or before or by any
foreign, federal, state, municipal or other governmental court, department,
commission, board, bureau, agency, instrumentality or other person or which
would prevent or materially delay such consummation.
(b) Except as described in Schedule 4.4, no prior consent, approval or
authorization of, or declaration, filing or registration with any person,
domestic or foreign, is required of the Buyer in connection with the execution,
delivery and performance by the Buyer of this Agreement and the transactions
contemplated hereby, except (a) the filing of the Certificate of Merger under
the Delaware Act, (b) the approval immediately after the Effective Time by the
Board of Directors of the Surviving
25
Corporation and the Buyer, its sole shareholder, of the liquidation and
dissolution of the Surviving Corporation, (c) the filing of a certificate of
dissolution in connection with the liquidation of the Surviving Corporation, (d)
the approval by the Board of Directors of the Buyer and Liberty Banshares, Inc.,
its sole shareholder, of the Bank Merger, (e) the filing of tax clearance
certificates in connection with each of the Merger and the liquidation of the
Company, (f) such regulatory approvals as are specified herein and (g) the
filing of Articles of Combination with the OTS relating to the Bank Merger.
SECTION 4.5 FINANCIAL STATEMENTS. Schedule 4.5 contains a true, correct
and complete copy of the unaudited consolidated financial statements of Liberty
Banshares, Inc. and its subsidiaries as of September 30, 2003. The financial
statements (including the related notes, where applicable) referred to in this
Section which have been provided as Schedule 4.5 fairly present the financial
position of Liberty Banshares, Inc. and its subsidiaries as of the dates thereof
and the results of operations of Liberty Banshares, Inc. for the period then
ended, in conformity with GAAP (subject to normal year-end adjustments and to
the fact that they do not contain all of the footnote disclosures required by
GAAP), except as otherwise noted therein, and the accounting records underlying
such consolidated financial statements accurately and fairly reflect in all
material respects the transactions of Liberty Banshares, Inc. and its
subsidiaries. The Buyer does not have any liabilities or obligations of a type
which are required to be included in or reflected on the financial statements if
prepared in accordance with GAAP, whether related to tax or non-tax matters,
accrued or contingent, due or not yet due, liquidated or unliquidated, or
otherwise, except (a) as and to the extent disclosed or reflected in the
September 30, 2003 unaudited financial statements or in the notes thereto, (b)
incurred in the ordinary course of business after the date of the September 30,
2003 unaudited financial statements or (c) expenses incurred relating to the
transactions contemplated by this Agreement.
SECTION 4.6 ABSENCE OF CERTAIN CHANGES. Since September 30, 2003, the
Buyer has not suffered any Material Adverse Effect (as defined in Section 9.13).
SECTION 4.7 LITIGATION. There is no action, suit, claim, investigation,
review or other proceeding pending by or against the Buyer or, to the knowledge
of the Buyer, threatened against the Buyer or involving any of its properties or
assets, at law or in equity or before or by any foreign, federal, state,
municipal, or other governmental court, department, commission, board, bureau,
agency, or other instrumentality or person or any board of arbitration or
similar entity the outcome of which would reasonably be likely to have a
Material Adverse Effect (as defined in Section 9.13) on the Buyer ("BUYER
PROCEEDING"). The Buyer will notify the Company immediately in writing of any
Buyer Proceeding.
SECTION 4.8 COMPLIANCE WITH LAWS. Except as set forth on Schedule 4.8, the
Buyer is not in default in respect to or in violation of (i) any judgment,
order, writ, injunction or decree of any court, or (ii) in any material respect,
any applicable statute, law, ordinance, rule, order or regulation of any
governmental department, commission, board, bureau, agency or instrumentality,
federal, state or local, including (for purposes of illustration and not
limitation) capital ratios and loan limitations of the OTS or the
26
FDIC, except for any such violation or default which is not likely to have,
individually or in the aggregate, a Material Adverse Effect and the consummation
of the transactions contemplated by this Agreement will not constitute such a
default or violation as to the Buyer assuming all required regulatory approvals
are obtained. The Buyer has all Permits required to conduct its business as it
is now being conducted, except for those Permits the absence of which are not
likely to have, individually or in the aggregate, a Material Adverse Effect. As
of the date hereof, the Buyer is not aware of any reason relating to it why all
required regulatory approvals or consents shall not be obtained relating to the
transactions contemplated by this Agreement.
SECTION 4.9 NO ADMINISTRATIVE ACTION. The Buyer is not subject to any
cease and desist order, written agreement, memorandum of understanding or any
other administrative action by or with any regulatory authority, or any board
resolution in lieu of the foregoing, nor is any such action threatened or
pending, nor has the Buyer made any commitment to any regulatory body.
SECTION 4.10 COMMUNITY REINVESTMENT ACT COMPLIANCE. The Buyer is rated
"satisfactory" or better by OTS in its most recent Community Reinvestment Act
examination.
SECTION 4.11 FINANCING. The Buyer has, or will have immediately prior to
the Closing, sufficient funds to pay the Merger Consideration.
SECTION 4.12 REPRESENTATIONS NOT MISLEADING. No representation or warranty
by the Buyer in this Agreement nor exhibit or schedule furnished to the Company
by it under and pursuant to this Agreement, contains or will contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements contained herein or therein, in light of the circumstances in
which they were made, not misleading.
ARTICLE V
COVENANTS OF THE COMPANY
SECTION 5.1 AFFIRMATIVE COVENANTS OF THE COMPANY. For so long as this
Agreement is in effect, the Company shall, and shall cause its Subsidiaries (the
Company and it Subsidiaries being sometimes collectively referred to herein as
the "ACQUIRED COMPANIES"), from the date of this Agreement to the Closing,
except as specifically contemplated by this Agreement, to:
(a) operate and conduct the businesses of the Acquired Companies in the
ordinary course of business and consistent with safe and sound banking
practices;
(b) preserve intact the Acquired Companies' corporate existence and use
reasonable best efforts to preserve intact the Acquired Companies' business
organization, assets, licenses, permits, authorizations, and business
opportunities;
27
(c) comply with all material contractual obligations applicable to the
Acquired Companies' operations;
(d) maintain all the Acquired Companies' properties in good repair, order
and condition, reasonable wear and tear excepted, and maintain the insurance
coverages described in Schedule 3.19 (which shall list all types of property
insured by such coverages) or obtain comparable insurance coverages from
reputable insurers which, in respect to amounts, types and risks insured, are
consistent with the existing insurance coverages;
(e) in good faith and in a timely manner (i) cooperate with the Buyer and
Transitory Subsidiary in satisfying the conditions in this Agreement, (ii)
assist the Buyer and Transitory Subsidiary in obtaining as promptly as possible
all consents, approvals, authorizations and rulings, whether regulatory,
corporate or otherwise, as are necessary for the Buyer, Transitory Subsidiary or
the Company to carry out and consummate the transactions contemplated by this
Agreement, including all consents, approvals and authorizations required by any
agreement or understanding existing at the Closing between the Company and any
governmental agency or other third party, (iii) furnish information concerning
the Acquired Companies not previously provided to the Buyer required for
inclusion in any filings or applications that may be necessary in that regard
and (iv) perform all acts and execute and deliver all documents necessary to
cause the transactions contemplated by this Agreement to be consummated at the
earliest possible date;
(f) timely file with the SEC and the OTS all financial statements and
other reports required to be so filed by any of the Acquired Companies and to
the extent permitted by applicable law, promptly thereafter deliver to the Buyer
copies of all financial statements and other reports required to be so filed;
(g) use reasonable best efforts to comply in all material respects with
all applicable laws and regulations;
(h) promptly notify the Buyer upon obtaining knowledge of any default,
event of default or condition with which the passage of time or giving of notice
would constitute a default or an event of default under the Company Loan
Documents and promptly notify and provide copies to the Buyer of any material
written communications concerning the Company Loan Documents;
(i) between the date of this Agreement and Closing, promptly give written
notice to the Buyer upon obtaining knowledge of any event or fact that would
cause any of the representations or warranties of the Company contained in or
referred to in this Agreement to be untrue or misleading in any material
respect;
(j) deliver to the Buyer a list (Schedule 5.1(j)), dated as of the
Closing, showing (i) the name of each bank or institution where the Acquired
Companies have accounts or safe deposit boxes, (ii) the name(s) in which such
accounts or boxes are
28
held and (iii) the name of each person authorized to draw thereon or have access
thereto;
(k) deliver to the Buyer a list (Schedule 5.1(k)), dated as of the
Effective Time, showing all liabilities and obligations of the Acquired
Companies, except those arising in the ordinary course of their respective
businesses, incurred since the latest financial statement delivered to Buyer,
certified by an officer of Company;
(l) shall continue to have contingency plans for cash availability and
liquidity sources;
(m) promptly notify the Buyer of any material change or material
inaccuracies in any data previously given or made available to the Buyer or
Transitory Subsidiary pursuant to this Agreement;
(n) to the extent permitted by GAAP, the Company and its Subsidiaries
shall expense in financial statement presentation prior to the Effective Time
all fees, costs and expenses of the Company and its Subsidiaries that have been
and are to be incurred by them as a result of the transactions contemplated
under this Agreement, so that no such fees, costs and expenses of the Company
and its Subsidiaries will become a financial statement expense of the Buyer
after the Effective Time;
(o) provide reasonable access, to the extent that the Company or its
Subsidiaries have the right to provide access, during normal business hours to
any or all Bank Property (as defined in Section 3.23) so as to enable the Buyer
to physically inspect any structure or components of any structure on such Bank
Property, including without limitation, surface and subsurface testing and
analyses and environmental audits or assessments that may include soil,
groundwater or Toxic Substances sampling ("ENVIRONMENTAL INVESTIGATIONS"); and
(p) make adjustments to the Bank's allowance for loan and lease losses in
accordance with GAAP and regulatory requirements.
SECTION 5.2 NEGATIVE COVENANTS OF THE COMPANY. Except with the prior
written consent of the Buyer (which consent with respect to subsections (l) and
(m) shall not be unreasonably withheld or delayed) or as otherwise specifically
permitted by this Agreement, the Company will not and will not permit the Bank,
or any other Subsidiary of the Company, from the date of this Agreement to the
Effective Time, to:
(a) make any amendment to its Certificate or Articles of Incorporation,
Federal Thrift Charter or Bylaws;
(b) make any change in the methods used in allocating and charging costs,
except as may be required by applicable law, regulation or GAAP and after notice
to the Buyer;
29
(c) make any change in the number of shares of the capital stock issued
and outstanding, or issue, reserve for issuance, grant, sell or authorize the
issuance of any shares of its capital stock or subscriptions, options, warrants,
calls, rights or commitments of any kind relating to the issuance or sale of or
conversion into shares of its capital stock except for the exercise of stock
options outstanding on the date hereof to purchase Shares and the acceptance of
Shares for the payment of the exercise of such stock options;
(d) contract to create any obligation or liability (absolute, accrued,
contingent or otherwise) except in the ordinary course of business and
consistent with safe and sound banking practices;
(e) contract to create any mortgage, pledge, lien, security interest or
encumbrances, restrictions, or charge of any kind (other than statutory liens
for which the obligations secured thereby shall not become delinquent) on any
property of the Company or its Subsidiaries, except in the ordinary course of
business and consistent with safe and sound banking practices;
(f) cancel any debts, waive any claims or rights of value or sell,
transfer, or otherwise dispose of any of its material properties or assets,
except in the ordinary course of business and consistent with safe and sound
banking practices;
(g) sell any real estate owned as of the date of this Agreement or
acquired thereafter, except for (i) real estate which qualifies as "other real
estate owned" under banking principles applicable to it, and then only in the
ordinary course of business and consistent with safe and sound banking practices
and applicable banking laws and regulations and (ii) the sale of the former
headquarters facility pursuant to that certain purchase agreement included in
Schedule 3.16;
(h) dispose of or permit to lapse any rights to the use of any material
trademark, service mark, trade name or copyright, or dispose of or disclose to
any person other than its employees any material trade secret not theretofore a
matter of public knowledge;
(i) except as set forth on Schedule 3.10 and except for regular salary
increases granted in the ordinary course of business and consistent with prior
practices, grant any increase in compensation or directors' fees, or pay or
agree to pay or accrue any bonus or like benefit to or for the credit of any
director, officer, employee or other person or enter into any employment,
consulting or severance agreement or other agreement with any director, officer
or employee, or adopt, amend or terminate any employee benefit plan or change or
modify the period of vesting or retirement age for any participant of such a
plan;
(j) declare, pay or set aside for payment any dividend or other
distribution or payment in respect of shares of its capital stock; provided (i)
if the Closing has not occurred by April 1, 2004 and (ii) the Company is not
then in default or breach of any of
30
its covenants, obligations or representations and warranties under this
Agreement and the Company has continually used its best efforts to timely
satisfy its obligations hereunder, then the Company shall be permitted to
declare and pay a one-time cash dividend in the amount of ten cents ($0.10) per
Share;
(k) except through settlement of indebtedness, foreclosure or the
exercise of creditors' remedies, in each case in connection with a debt
previously contracted in good faith, acquire the capital stock or other equity
securities or interest of any person;
(l) make any capital expenditure or a series of expenditures of a similar
nature in excess of $10,000 in the aggregate;
(m) make any income tax or franchise tax election or settle or compromise
any federal, state, local or foreign income tax or franchise tax liability, or,
except in the ordinary course of business and consistent with safe and sound
banking practices, make any other tax election or settle or compromise any other
federal, state, local or foreign tax liability;
(n) except for the transactions contemplated by this Agreement or as
otherwise permitted hereunder, enter into any transaction, or enter into, modify
or amend any contract or commitment other than in the ordinary course of
business and consistent with safe and sound banking practices;
(o) except as contemplated by this Agreement, adopt a plan of complete or
partial liquidation, dissolution, merger, consolidation, restructuring,
recapitalization, or other reorganization or business combination of the Company
or any of its Subsidiaries;
(p) issue any certificates of deposit except in the ordinary course of
business and consistent with safe and sound banking practices;
(q) make any investments except in the ordinary course of business and
consistent with safe and sound banking practices;
(r) modify, amend, waive or extend either the Company Loan Documents or
any rights under such agreements;
(s) except as described in Section 3.10(o), sell, lease, sublease or
contract to sell, lease or sublease any part of the Company's or its
Subsidiaries' premises;
(t) change any fiscal year or the length thereof;
(u) incur any additional Company Indebtedness;
(v) except as otherwise permitted by this Agreement, voluntarily take any
action that is intended to or expected to result in any of its representations
or warranties set forth in this Agreement being or becoming untrue in any
material respect at any time
31
prior to the Effective Time or in any of the conditions set forth in this
Agreement not being satisfied or in violation of any provisions of this
Agreement; or
(w) except to the extent permitted by this Agreement, enter into any
agreement, understanding or commitment, written or oral, with any other person
which is in any manner inconsistent with the obligations of the Company and its
directors and its Subsidiaries under this Agreement or any related written
agreement.
Nothing contained in this Section 5.2 or in Section 5.1 is intended to influence
the general management or overall operations of the Company or its Subsidiaries
in a manner not permitted by applicable law and the provisions thereof shall
automatically be reduced in compliance therewith.
SECTION 5.3 COVENANTS OF THE BUYER. Except as specifically provided in
this Agreement, during the period from the date of this Agreement to the
Effective Time, the Buyer shall:
(a) conduct its business in the regular, ordinary and usual course,
consistent with past practices;
(b) take no action that is reasonably likely to have an adverse affect or
delay the ability of the Buyer to perform its covenants or obligations in a
timely basis under this Agreement;
(c) take no action that is reasonably likely to have an adverse affect
upon or delay the ability of the Buyer to obtain any necessary approvals,
consents, or waivers of any regulatory authority or third party;
(d) form Transitory Subsidiary as soon as practicable after receiving
regulatory approval to do so and cause Transitory Subsidiary to become a party
to this Agreement;
(e) between the date of this Agreement and Closing, promptly give written
notice to the Company upon obtaining knowledge of any event or fact that would
cause any of the representation or warranties of the Buyer contained in or
referred to in this Agreement to be untrue or misleading in any material
respect;
(f) promptly notify the Company of any material change or material
inaccuracies in any data previously given or made available to the Company
pursuant to this Agreement;
(g) take no voluntary action that is intended or expected to result in
any of its representations and warranties set forth in this Agreement being or
becoming untrue in any material respect prior to the Effective Time or in any of
the conditions set forth in this Agreement not being satisfied or in violation
of any provisions of this Agreement; and
32
(h) enter into any agreement, understanding or commitment, written or
oral, with any other person which is in any manner inconsistent with the
obligations of the Buyer under this Agreement or any related agreement.
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.1 ACCESS TO, AND INFORMATION CONCERNING, PROPERTIES AND RECORDS.
During the pendency of the transactions contemplated hereby, the Company shall,
to the extent permitted by law, give the Buyer, its legal counsel, accountants
and other representatives full access, during normal business hours and upon
reasonable advance notice, throughout the period prior to the Closing, to all of
the Company's and its Subsidiaries' properties, books, contracts, commitments
and records, permit the Buyer to make such inspections (including without
limitation physical inspection of the surface and subsurface of any property
thereof and any structure thereon) as they may reasonably require and furnish to
the Buyer during such period all such information concerning the Company and its
Subsidiaries and their affairs as the Buyer may reasonably request. All
information disclosed by the Company and its Subsidiaries to the Buyer which is
nonpublic shall be held confidential by the Buyer and its representatives. In
the event that the Buyer is required by applicable law or valid court process to
disclose such information, the Buyer shall provide the Company with prompt
written notice of any such requirement so that the Company may seek a protective
order or other appropriate remedy and/or waive compliance with this Section 6.1.
If in the absence of a protective order or other remedy or the receipt of a
waiver, the Buyer is nonetheless, in the written opinion of counsel, legally
compelled to disclose any such information to any tribunal or else stand liable
for contempt or suffer other censure or penalty, the Buyer may, without
liability hereunder, disclose to such tribunal only that portion of the
nonpublic information which such counsel advises the Buyer it is legally
required to disclose. In the event this Agreement is terminated pursuant to the
provisions of Article VIII, the Buyer agrees to destroy or return to the Company
all copies of such nonpublic information and shall not thereafter use any such
information to any purpose whatsoever.
SECTION 6.2 FILING OF REGULATORY APPROVALS. The Buyer shall promptly
prepare and file and the Company shall cooperate in the preparation and filing
of all notices and applications to the OTS, the FDIC and any other regulatory or
governmental authorities which are necessary or which the Buyer deems
appropriate to complete the transactions contemplated herein, including
establishing the Transitory Subsidiary, the Merger, the liquidation of the
Company into the Buyer and the merger of the Bank into the Buyer. The Buyer
shall furnish copies of such notices and applications as so filed to the
Company. The Buyer shall use its reasonable best efforts to make all filings
with the OTS, the FDIC and any other banking regulatory authority within 20 days
after the date hereof.
SECTION 6.3 MISCELLANEOUS AGREEMENTS AND CONSENTS. Subject to the terms
and conditions of this Agreement, the parties agree to use all reasonable
efforts to take,
33
or cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper, or advisable under applicable laws and regulations to
consummate and make effective, as soon as practicable after the date hereof, the
transactions contemplated by this Agreement. The parties shall use their
respective best efforts to obtain or cause to be obtained consents of all third
parties and governmental and regulatory authorities necessary or desirable for
the consummation of the transactions contemplated herein.
SECTION 6.4 OPERATION OF THE BANK IN THE ORDINARY COURSE OF BUSINESS.
Between the date hereof and the time of Closing, the business of the Company and
the Bank shall be operated and conducted only in the ordinary course, including
but not limited to compliance with the Bank's internal lending policy and
procedures, including standards of credit worthiness, security requirements and
lending limits; the Bank shall continue to accrue interest on loans and charge
off loans in accordance with its past practice and in accordance with GAAP and
regulatory requirements; the Bank shall continue to operate and price deposit
offerings in a reasonable manner as it has done over time in the ordinary course
of business; and the Company shall use its best efforts to operate and preserve
the business, assets, liabilities and organization of the Bank. Without limiting
the generality of the foregoing, except as specifically authorized or required
in this Agreement, the Company and the Bank shall not request or accept any
change in capital stock or structure and shall not, without the written consent
of Buyer (which consent shall not be unreasonably withheld or delayed): incur
additional borrowings from the Federal Home Loan Bank other than short term
borrowings with a term not to exceed one year; hire additional personnel;
acquire or dispose of material assets other than in the ordinary course of
business; extend or renew loans or advance additional sums to a borrower whose
loans, in whole or in part, have been classified or listed as special mention by
any regulatory authority or are on the Bank's watch list; make loans other than
in accordance with the Bank's current loan policies; make or commit to make any
new loan or new letter of credit or any new or additional advance under any
existing line of credit (other than any advance which it is obligated to make
pursuant to contracts to lend money in effect on the date of this Agreement),
(i) in principal amounts in excess of Ten Thousand Dollars ($10,000) for an
unsecured loan, Fifty Thousand Dollars ($50,000) for a secured commercial loan
and Two Hundred Thousand Dollars ($200,000) for a first-mortgage, secondary
market qualified loan secured by owner-occupied residential real estate or (ii)
with respect to any residential mortgage loan which does not meet the
qualifications for resale on the secondary market; sell investment securities
prior to maturity; or purchase investment securities, except that Buyer's
consent shall not be required for the purchase of U.S. Government or U.S. Agency
securities having a maturity at the time of purchase of one year or less. The
Company's requests for Buyer's consent pursuant to the preceding sentence shall
be made in writing or via facsimile to Russell G. Olson or James Davids as
Buyer's authorized representatives (or to such other authorized representatives
as Buyer may designate in writing to the Bank from time to time). If Buyer's
authorized representatives shall fail to respond to any such request by the end
of the third business day following receipt thereof, such request shall be
deemed approved by Buyer. From and after the date of this Agreement to the date
of Closing or termination of this Agreement, the Company shall cause the Bank to
allow representatives of Buyer to attend all board meetings and all loan
committee meetings of the Bank, but without voting rights and as observers only,
and provide the Buyer reasonable prior notice thereof; provided
34
such representatives shall be excluded from portions of any meeting which
discuss the transactions contemplated by this Agreement, a Competing Proposal or
Superior Proposal, or regulatory issues, or if, in the reasonable opinion of
counsel to the Company, attendance at such portion of the meeting would
adversely affect the attorney-client privilege between the Company and its
counsel.
SECTION 6.5 NO SOLICITATION BY THE COMPANY.
(a) From the date of this Agreement through the Effective Time, the
Company shall not, nor shall it permit any Company Subsidiary to, nor shall it
authorize or permit any of its or any Company Subsidiary directors, officers or
employees or any investment banker, financial advisor, attorney, accountant or
other representative retained by it or any Company Subsidiary to, directly or
indirectly through another person, (i) solicit, initiate or encourage (including
by way of furnishing information or assistance), or take any other action
designed to facilitate or that is likely to result in, any inquiries or the
making of any proposal that constitutes, or is reasonably likely to lead to, any
Competing Proposal (as defined in Section 9.13), (ii) enter into any agreement
with respect to a Competing Proposal, (iii) participate in any discussions or
negotiations regarding any Competing Proposal, or (iv) make or authorize any
statement, recommendation or solicitation in support of any Competing Proposal;
provided, however, that if, and only to the extent that (A) the approval of this
Agreement by the Company's shareholders has not occurred and (B) the Board of
Directors of the Company determines in good faith, after consultation with its
outside legal and financial advisors, that the failure to do so would or could
reasonably be expected to breach the fiduciary duties of the Board of Directors
of the Company under applicable law, the Company may, in response to a bona
fide, written Competing Proposal not solicited in violation of this Section
6.5(a) that the Board of Directors of the Company believes in good faith
constitutes a Superior Competing Proposal (as defined in Section 9.13), subject
to compliance with Section 6.5(b), (1) furnish information with respect to the
Company to any person making such a Superior Competing Proposal pursuant to a
customary confidentiality agreement (as determined by the Company after
consultation with its outside counsel) on terms no more favorable to such person
than the terms contained in any such agreement between the Company and the
Buyer, (2) participate in discussions or negotiations regarding such a Superior
Competing Proposal and (3) subject to the terms of Section 8.1(h), enter into an
acquisition agreement or similar agreement (each, an "ACQUISITION AGREEMENT")
with respect to a Superior Competing Proposal.
(b) In addition to the obligations of the Company set forth in Section
6.5(a), the Company shall promptly advise the Buyer orally and in writing of any
Competing Proposal or any inquiry which could lead to a Competing Proposal
(including the identity of the person making or submitting such Competing
Proposal or inquiry and the terms thereof) and keep the Buyer informed, on a
current basis, of the continuing status thereof.
(c) The Company shall immediately cease and cause to be terminated any
existing discussions with any person that relate to a Competing Proposal.
35
SECTION 6.6 PUBLIC ANNOUNCEMENT. Subject to written advice of counsel with
respect to legal requirements relating to public disclosure of matters related
to the subject matter of this Agreement, the timing and content of any
announcements, press releases or other public statements concerning the proposal
contained herein will occur upon, and be determined by, the mutual consent of
the Company and the Buyer.
SECTION 6.7 EMPLOYEE BENEFIT PLANS.
(a) The employment of Randall C. Bray shall be involuntarily terminated
without cause at the Effective Time and he shall thereafter perform services
pursuant to the Consulting Agreement referred to in Section 7.2(l) hereof.
Accordingly, it is agreed by the parties that at the Closing the Bank shall pay
to Mr. Bray a change in control payment in the amount of $192,500 as provided in
Section 8(a) of that certain Amended and Restated Employment Agreement by and
between the Bank and Mr. Bray dated November 21, 2002 (the "BRAY EMPLOYMENT
AGREEMENT"), subject to possible reduction thereof as set forth in Section 9 of
the Bray Employment Agreement. At the Effective Time, the Buyer shall assume and
honor, and become the substituted party for the Bank under, that certain Change
in Control Severance Agreement by and between the Bank and Steven J. Blazek
dated March 21, 2002.
(b) Except as otherwise provided in this Agreement, at the Effective
Time, the Buyer shall be substituted for the Company and its Subsidiaries under
all of the employee benefit and welfare plans and programs of the Company and
its Subsidiaries as in effect immediately prior to the Effective Time; and the
Buyer shall assume and be vested with all of the powers, rights, duties,
obligations and liabilities previously vested in the Company and/or its
Subsidiaries with respect to each such plan or program. Except as otherwise
provided herein, each such plan or program shall be continued in effect by the
Buyer after the Effective Time without a termination or discontinuance thereof
as a result of the transactions contemplated by this Agreement, subject to the
power reserved to the Buyer to subsequently amend or terminate any such plan or
program, which amendment or termination shall comply with applicable law. Except
as otherwise provided herein, under no circumstances will the vested benefits of
participants in any such plan or program immediately prior to the Effective time
be adversely affected by consummation of the transactions contemplated by this
Agreement or actions taken by the Buyer to amend or terminate such plan or
program.
(c) At or as promptly as practicable after the Effective Time as the
Buyer shall reasonably determine, the Buyer shall provide, or cause to be
provided, to each continuing full time employee of the Company and its
Subsidiaries (the "CONTINUING EMPLOYEES") the opportunity to participate in the
Severance Plan (as defined herein) and each other employee benefit and welfare
plan maintained by the Buyer that is generally available to its full time
employees on a uniform and non-discriminatory basis; provided that with respect
to such plans maintained by the Buyer, Continuing Employees shall be given
credit for their past service with the Company and any of its Subsidiaries,
without duplication for dual service, in determining eligibility for
participation and vesting in benefits thereunder, and only with respect to the
Severance
36
Plan and vacation plans, accrual of benefits. Continuing Employees shall not be
subject to any waiting periods under the health plan of the Buyer to the extent
that such periods are longer than the periods imposed under the applicable
health plan of the Company or any of its Subsidiaries and the Buyer shall, or
cause its health insurance carrier to, cover pre-existing conditions that were
previously covered for a Continuing Employee under the health plan of the
Company or any of its Subsidiaries. To the extent that the initial period of
coverage for Continuing Employees under any plan of the Buyer, that is an
"employee welfare benefit plan" as defined in Section 3(1) of ERISA is not a
full 12-month period of coverage, Continuing Employees shall be given credit
under the applicable welfare plan for any deductibles and co-insurance payments
made by such Continuing Employees under the corresponding welfare plan of the
Company or any of its Subsidiaries during the balance of such 12-month period of
coverage. Nothing contained herein shall obligate the Buyer to provide or cause
to be provided any benefits duplicative to those provided under any benefit or
welfare plan or program continued pursuant to Section 6.7(b), including
extending participation in any plan which is a qualified plan relative to any
period of time with respect to which allocations are made to Continuing
Employees under any qualified plan maintained or sponsored by the Company or any
of its Subsidiaries. Nothing herein shall alter the power of the Buyer to amend
or terminate any benefit or welfare plans of the Buyer, the Company or its
Subsidiaries, and subject to the foregoing provisions relating to
non-duplication of benefits, any such amendment or termination shall be
undertaken on a uniform and nondiscriminatory basis. Moreover, this subsection
6.7(c) shall not constitute a contract of employment or create any rights, to be
retained or otherwise, in employment at the Buyer.
(d) As promptly as practicable following the satisfaction or waiver of
all conditions contained in Article VII hereof, the Company and its Subsidiaries
shall have taken all necessary action to terminate and cease all contributions
to their 401(k) profit sharing plans and retirement trusts (the "401(K) PLAN")
other than contributions accrued and owing to the 401(k) Plan and to make
application to the Internal Revenue Service for determination of the tax
qualification of the 401(k) Plan upon termination. The Company shall have
furnished Buyer with copies of such application and copies of all resolutions
and correspondence in connection with such application. The form and substance
of such resolutions shall be subject to review and approval of the Buyer. The
distribution of the benefits of the 401(k) plan shall be made to each 401(k)
Plan participant consistent with applicable law as soon as administratively
practicable after the issuance by the IRS of its determination of tax
qualification of the 401(k) Plan upon termination. To the extent such
distributions have not been accomplished by the Company and its Subsidiaries
prior to the Closing, Buyer shall use its best efforts to permit the complete
distribution of all benefits to each 401(k) Plan participant as soon as
administratively practicable after the issuance by the IRS of its determination
of the tax qualification of each 401(k) Plan upon termination. Prior to the
Closing, the Company and its Subsidiaries shall have satisfied and discharged
all of the Banks' outstanding or accrued obligations, of every kind or
description, with respect to such 401(k) Plan, so that the Company and its
Subsidiaries shall have no liability or obligation with respect thereto. Nothing
herein shall prevent 401(k) Plan
37
participants from rolling over distributions contemplated by this Section 6.7(d)
into qualifying IRA accounts.
(e) As of the Effective Time, the Continuing Employees shall be subject
to the Buyer's general severance plan a copy of which is attached hereto as
Exhibit 6.7(e) (the "SEVERANCE PLAN"). The Buyer shall not amend the Severance
Plan in any manner that disparately and adversely effects the rights of the
Continuing Employees vis a vis the Buyer's other employees.
SECTION 6.8 LIQUIDATION OF THE COMPANY AND MERGER OF THE BANK. The Buyer
shall cause the Company to be liquidated into the Buyer immediately after the
Effective Time, and cause the Bank to be merged into the Buyer immediately
thereafter. The Company agrees to cause the Bank and its other Subsidiaries to
execute documents and take actions (conditioned on the Merger being effective)
and otherwise cooperate with the Buyer during the time the Merger transaction is
pending in order to facilitate the foregoing transactions immediately after the
Effective Time and on the date thereof. Prior to the Effective Time, the Buyer
shall execute and deliver and the Company shall cause the Bank to execute and
deliver the Bank Merger Agreement in substantially the form attached hereto as
Exhibit 6.8 (the "BANK MERGER AGREEMENT").
SECTION 6.9 STOCK OPTIONS.
(a) At the Closing, the Company shall cause each stock option to purchase
Shares which is then outstanding, whether vested or unvested, under any stock
option or compensation plan or arrangement of the Company to be cancelled, and
in consideration of such cancellation the Company shall pay each holder of any
such option at the Closing for each such option an amount in cash (less all
applicable withholding taxes) equal to the product of (i) the number of Shares
such holder could have purchased (assuming full vesting of all options) had such
holder exercised such option in full immediately prior to the Closing multiplied
by (ii) the excess, if any, of the Merger Consideration (subject to any
adjustment pursuant to Section 2.4) per Share over the applicable exercise price
of such option. In no event shall the amounts payable under this Section 6.9
exceed an aggregate amount of Sixty Nine Thousand Nine Hundred Sixty One Dollars
and Thirty Six Cents ($69,961.36) for all such stock options.
(b) Concurrently with the execution of this Agreement, the Company has
(i) obtained any consents from holders of options to purchase Shares granted
under the Company's stock option or compensation plans or arrangements (which
consents include a covenant from such optionee not to exercise any of such
optionee's options between the date hereof and the Closing) (each, an "OPTIONEE
CONSENT") and (ii) made any amendments to the terms of such stock option or
compensation plans or arrangements that, in the case of either clause (i) or
(ii), are necessary to give effect to the transactions contemplated by Section
6.9(a). Notwithstanding any other provision of this Section 6.9, payment may be
withheld in respect of any stock option until and unless such optionee has
executed an Optionee Consent.
38
(c) Notwithstanding anything to the contrary contained herein, this
Section 6.9 shall not apply to that certain option to purchase 15,474 Shares
held by Andra Black as of the date hereof.
SECTION 6.10 NOTIFICATION OF RELATED PARTY TRANSACTIONS. The Company shall
notify the Buyer in writing of, and provide the Buyer a reasonable opportunity
to object to, the Company or any of its Subsidiaries entering into any new
transactions with Insiders or their affiliates.
SECTION 6.11 WITHHOLDING. The Buyer or the Company, as applicable, shall be
entitled to deduct and withhold from the Merger Consideration otherwise payable
to any person under Article I or Section 6.9 of this Agreement such amounts as
it is required to deduct and withhold with respect to the making of such payment
under any provision of federal, state, local or foreign tax law. If the Buyer or
the Company, as applicable, so withholds amounts, such amounts shall be treated
for all purposes of this Agreement as having been paid to the holder of the
Shares or options to acquire the Shares in respect of which the Buyer or the
Company, as applicable, made such deduction and withholding.
SECTION 6.12 OFFICERS' AND DIRECTORS' INSURANCE; INDEMNIFICATION.
(a) For three years from and after the Effective Time, the Buyer shall
maintain officers' and directors' liability insurance (the "D&O Insurance")
covering the individuals who are presently covered by the current officers' and
directors' liability insurance polices of the Company and its Subsidiaries with
respect to actions, omissions, events, matters or circumstances occurring at or
prior to the Effective Time, on terms which are at least as favorable as the
terms of said current policies; provided however, in lieu thereof, Buyer may
obtain, or request the Company to obtain at the expense of (and which will be
paid for by) the Buyer, in either case prior to the Closing, three year tail
coverage under the existing policies of the Company and its Subsidiaries; and
provided, further, that officers and directors of the Company and its
Subsidiaries may be required to make application and provide customary
representations and warranties to the Buyer's insurance carrier for the purpose
of obtaining such insurance. Notwithstanding anything to the contrary contained
herein, in no event shall the Buyer be required to pay an annual premium for the
D&O Insurance in excess of 150% of the last annual premium paid by the Company
prior to the date hereof, but in such case shall purchase as much coverage as
possible for that amount.
(b) For a period of six years from and after the Effective Time, the
Buyer shall indemnify the past and present officers, directors and employees of
the Company and its Subsidiaries to the extent currently provided in the charter
or incorporation documents and bylaws of the Company and its Subsidiaries for
liabilities and claims arising out of acts, omissions, events, matters or
circumstances occurring or existing at or prior to the Effective Time, including
the transactions contemplated by this Agreement.
39
(c) In connection with the indemnification provided pursuant to Section
6.12(b), the Buyer (i) will advance expenses, promptly after statements therefor
are received, to each such indemnified individual to the fullest extent
permitted by law, including the payment of the fees and expenses of one counsel
with respect to a matter, and one local counsel in each applicable jurisdiction,
if necessary or appropriate, selected by such indemnified individual or multiple
indemnified persons, it being understood that they collectively shall only be
entitled to one counsel and one local counsel in each applicable jurisdiction
where necessary or appropriate (unless a conflict shall exist between them in
which case they may retain separate counsel), all such counsel shall be
reasonably satisfactory to the Buyer and (ii) will cooperate in the defense of
any such matter.
(d) Any determination required to be made with respect to whether an
indemnified individual's conduct complies with the standards for or
prerequisites to indemnification under Section 6.12(b) shall be made by
independent counsel selected by the Buyer (which shall not be counsel that
provides any services to the Buyer or any of its subsidiaries) and reasonably
acceptable to the indemnified individual, and the Buyer shall pay such counsel's
fees and expenses.
(e) This Section 6.12 shall survive the Effective Time, is intended to
benefit each indemnified individual (each of whom shall be entitled to enforce
this Section against the Buyer), and shall be binding on all successors and
assigns of the Buyer.
(f) In the event the Buyer or any of its successors or assigns (i)
consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger,
or (ii) transfers all or substantially all of its properties and assets to one
or more other persons, then, and in each such case, proper provision shall be
made so that the successors and assigns of the Buyer assume the obligations set
forth in this Section 6.12.
(g) The Buyer shall pay all expenses (including attorneys' fees) that may
be reasonably incurred by any indemnified individual in enforcing the indemnity
and other obligations provided for in this Section 6.12 if the indemnified
individual is successful in whole or any material part or if any dispute
relating thereto is settled or compromised.
SECTION 6.13 TERMINATION OF EMPLOYEE STOCK OWNERSHIP PLAN. The Company
shall satisfy and discharge prior to the Closing all obligations and liabilities
of the Company and sponsoring employers, of every kind and description, with
respect to the Company's Employee Stock Ownership Plan (the "ESOP"), including
but not limited to making all contributions to the ESOP for the matching,
elective deferrals and other employer contributions that had accrued during all
periods before the Closing. No additional contributions shall be made by the
Company or its Subsidiaries after December 31, 2003. The Company shall also take
all necessary action to amend and terminate the ESOP in accordance with the
following requirements:
40
(a) The ESOP shall be amended within 30 days after the date of this
Agreement to provide: (i) upon termination of the ESOP, there will be a complete
distribution of the assets of the ESOP in the form of a single lump-sum cash
benefit payments to the ESOP participants entitled to distribution of benefits
upon such termination, with such distributions to be made within an
administratively practicable time after the determination by the Internal
Revenue Service of the ESOP's tax-qualification upon termination; and (ii) the
ESOP's investment in additional Shares shall cease effective immediately after
the approval of the Merger by the shareholders of the Company.
(b) The ESOP shall be formally terminated before the Closing, but
coincident with or after the adoption of the above-referenced amendments to the
ESOP, with such termination resulting in the distribution of the benefits of the
terminated ESOP in the form of lump sum cash payments as soon as
administratively practicable after the issuance by the Internal Revenue Service
of its determination of the tax-qualification of the ESOP upon termination.
(c) The Company shall adopt before the Closing and in connection with its
termination of the ESOP all additional amendments as may be necessary to
maintain the tax-qualification of the ESOP upon termination.
(d) The Company shall before the Closing submit its application to the
Internal Revenue Service pursuant to IRS Form 5310, Application for
Determination for Terminating Plan, requesting the determination of the
tax-qualification of the ESOP, as amended, upon termination. Such application
shall disclose all amendments to the ESOP adopted by the Company pursuant to
this Section 6.13 and that a complete distribution of the assets of the ESOP,
including the accounts attributable to the participant's elective contributions,
if any, will be made in the form of lump sum cash distributions after the
determination of the ESOP's tax-qualification upon termination.
SECTION 6.14 UPDATE DISCLOSURE. From and after the date of this Agreement
until the Closing, the Company shall promptly, but not less frequently than
monthly and again as of the Closing, update the Schedules to this Agreement by
notice to Buyer to reflect any matters which have occurred from and after the
date of this Agreement which, if existing on the date of this Agreement, would
have been required to be described therein; provided, however, that no such
update shall affect the conditions to the obligation of the Buyer or Transitory
Subsidiary to consummate the transactions contemplated hereby, and any and all
changes reflected in any such update shall be considered in determining whether
such conditions have been satisfied.
SECTION 6.15 S CORPORATION MATTERS. Notwithstanding any provision of this
Agreement to the contrary, immediately after the Effective Time of the Merger,
the Buyer will cause the Company, the Bank and the Service Corporation each to
elect to be treated as a qualified S corporation subsidiary of the Buyer for
income tax purposes.
SECTION 6.16 VOTING AGREEMENTS. The Company shall not amend or make any
modification to the Voting Agreements (as defined below).
41
ARTICLE VII
CONDITIONS TO CONSUMMATION OF THE MERGER
SECTION 7.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER.
The respective obligations of each party to effect the Merger are subject to the
satisfaction or waiver of the following conditions prior to the Effective Time:
(a) The receipt of all required regulatory approvals in order to
consummate the Merger, the liquidation of the Company into the Buyer and the
merger of the Bank into the Buyer shall have been obtained and shall remain in
full force and effect and all statutory waiting periods in respect thereof shall
have expired. No such regulatory approval shall contain a non-customary
condition that the Buyer reasonably determines to be unduly burdensome.
(b) The Closing will not violate any injunction, order or decree of any
court or governmental body having competent jurisdiction.
(c) The adoption of this Agreement by the Company's shareholders entitled
to vote at the Shareholders' Meeting by the Required Vote.
SECTION 7.2 CONDITIONS TO THE OBLIGATIONS OF THE BUYER AND TRANSITORY
SUBSIDIARY TO EFFECT THE MERGER. The obligations of the Buyer and Transitory
Subsidiary to effect the Merger are subject to the satisfaction or waiver of the
following conditions prior to the Effective Time:
(a) All representations and warranties of the Company shall have been
true and correct in all respects as of the date this Agreement.
(b) All representations and warranties of the Company shall be true and
correct in all respects as of the Closing as if made on and as of the Closing
(provided that representations and warranties which are confined to a specified
date shall speak only as of such date), except that any inaccuracies in such
representations and warranties will be disregarded if the circumstances giving
rise to such inaccuracies (considered collectively) do not constitute, and could
not reasonably be expected to have, a Material Adverse Effect on the Company;
provided, however, that, for purposes of determining the accuracy of such
representations and warranties, all "Material Adverse Effect" qualifications and
other materiality qualifications contained in such representations and
warranties shall be disregarded.
(c) The Company shall have performed in all material respects all
obligations and agreements and in all material respects complied with all
covenants and conditions, contained in this Agreement to be performed or
complied with by it prior to the Closing.
(d) There shall not have occurred a Material Adverse Effect with respect
to the Company or its Subsidiaries.
42
(e) The directors of the Company other than Harry A. Winegar shall have
executed and delivered to the Company written voting agreements in the form of
Exhibit 7.2(e) attached hereto (the "Voting Agreements") prior to the mailing of
the Proxy Statement.
(f) The directors of the Company and its Subsidiaries shall have
delivered to the Buyer an instrument in the form of Exhibit 7.2(f) attached
hereto dated the Effective Time releasing the Company and its Subsidiaries from
any and all claims of such directors (except as to their deposit accounts and
subject to Section 6.12) and shall have delivered to the Buyer their
resignations as directors of the Company and its Subsidiaries.
(g) The Nonsolicitation Agreements between Buyer and the directors of the
Company dated the date of this Agreement, copies of which are attached to this
Agreement as Exhibit 7.2(g), shall remain in effect as of the Effective Time of
the Merger.
(h) The Company shall have timely delivered to Buyer the Calculation of
Stockholders' Equity and the Consolidated Stockholders' Equity (as defined in
Section 9.13) reflected on the Calculation of Stockholders' Equity shall be no
less than Thirteen Million Two Hundred Seventy Five Thousand Dollars
($13,275,000).
(i) The Buyer shall have received a certificate in form and substance
reasonably acceptable to the Buyer dated the date of the Closing executed by the
Chairman of the Board of the Company and by the Chairman of the Board of its
Subsidiaries, and the Chief Financial Officer of the Company and its
Subsidiaries, respectively, certifying, based upon their best knowledge, in such
reasonable detail as the Buyer may reasonably request, to the effect described
in Sections 7.2(a), (b), (c) and (h).
(j) The findings of the Environmental Investigations conducted at the \
Bank Property (as indicated in the final written report on such findings as
delivered to the Buyer (the "FINAL REPORT")) shall not have identified any fact,
condition or occurrence that, in the written good faith estimate of the third
party consultant performing the Environmental Investigations, will or could
reasonably be expected to result in related environmental costs or expenses in
excess of $100,000 in the aggregate assuming that the transactions contemplated
hereby are consummated. The amount of such environmental costs and expenses as
estimated in the Final Report shall hereinafter be referred to as the
"IDENTIFIED ENVIRONMENTAL LIABILITIES." In the event that the Identified
Environmental Liabilities exceed $100,000, the Buyer shall have 10 business days
following the Buyer's receipt of the Final Report to terminate this Agreement by
providing written notice of such termination to the Company. If such notice of
termination is not provided to the Company within such 10 business day period,
this closing condition shall be deemed to have been waived by the Buyer and
Transitory Subsidiary.
43
(k) The Company shall have satisfied all accrued obligations and
liabilities to the ESOP as required by Section 6.13; the ESOP shall have been
amended and terminated in accordance with the requirements set forth in Section
6.13; the Company shall have submitted Form 5310, Application for Determination
for Terminating Plan, requesting the determination of the ESOP's
tax-qualification upon termination; and the Company shall have furnished to the
Buyer satisfactory evidence of the foregoing.
(l) The Consulting Agreement and Agreement Not to Compete between Buyer,
Greyhawk Partners and Randall C. Bray dated the date of this Agreement, a copy
of which is attached to this Agreement as Exhibit 7.2(l), shall remain in effect
as of the Effective Time of the Merger unless Randall C. Bray shall die or
become disabled prior thereto.
SECTION 7.3 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY TO EFFECT THE
MERGER. The obligations of the Company to effect the Merger are subject to the
satisfaction or waiver of the following conditions prior to the Effective Time:
(a) All representations and warranties of the Buyer shall have been true
and correct in all respects as of the date this Agreement.
(b) All representations and warranties of the Buyer shall be true and
correct in all respects as of the Closing as if made on and as of the Closing
(provided that representations and warranties which are confined to a specified
date shall speak only as of such date), except that any inaccuracies in such
representations and warranties will be disregarded if the circumstances giving
rise to such inaccuracies (considered collectively) do not constitute, and could
not reasonably be expected to have, a Material Adverse Effect on the Buyer;
provided, however, that, for purposes of determining the accuracy of such
representations and warranties, all "Material Adverse Effect" qualifications and
other materiality qualifications contained in such representations and
warranties shall be disregarded.
(c) The Buyer and Transitory Subsidiary shall have performed in all
material respects all obligations and agreements and in all material respects
complied with all covenants and conditions contained in this Agreement to be
performed or complied with by either of them prior to the Closing.
(d) The Company shall have received a certificate in form and substance
reasonably acceptable to the Company dated the date of the Closing executed by
the Chairman of the Board of the Buyer and Transitory Subsidiary, and the Chief
Financial Officer of the Buyer, respectively, certifying, based upon their best
knowledge, in such detail as the Company may reasonably request, to the effect
described in Sections 7.3(a), (b) and (c).
(e) The Calculation of Stockholders' Equity and the Consolidated
Stockholders' Equity (as defined in Section 9.13) reflected on the Calculation
of Stockholders' Equity shall be no less than Thirteen Million Two Hundred
Seventy Five Thousand Dollars ($13,275,000). This condition shall be deemed to
have been waived
44
by the Company unless, within two (2) business days of receipt from the Buyer of
its written waiver of the condition contained in Section 7.2(h) hereof, the
Company has (i) reimbursed Buyer by wire transfer of $100,000 in immediately
available funds to an account designated by the Buyer for its reasonable
expenses incurred in connection with this Agreement and the transactions
contemplated herein and (ii) within one (1) business day of receipt from Buyer
of a statement of Buyer's reasonable expenses incurred in connection with this
Agreement and the transactions contemplated herein, reimbursed Buyer by wire
transfer in immediately available funds to an account designated by the Buyer
for such reasonable expenses in an amount up to $150,000 (less all amounts paid
pursuant to clause (i) above).
ARTICLE VIII
TERMINATION; AMENDMENT; WAIVER
SECTION 8.1 TERMINATION. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval of the matters
presented in connection with the Merger by the shareholders of the Company:
(a) by mutual consent of the Buyer and the Company in a written
instrument, if the Board of Directors of each so determines by a vote of a
majority of the members of its entire Board;
(b) by either the Buyer or the Company (provided that the terminating
party is not then in breach of any representation, warranty, covenant or other
agreement contained herein that, individually or in the aggregate, would give
the other party the right to terminate this Agreement) if there shall have been
a breach of any of the representations or warranties set forth in this Agreement
on the part of the other party, if such breach, individually or in the
aggregate, has had or is reasonably likely to have a Material Adverse Effect on
the non-breaching party, and such breach shall not have been cured within 30
days following receipt by the breaching party of written notice of such breach
from the other party hereto or such breach, by its nature, cannot be cured prior
to the Closing;
(c) by either the Buyer or the Company (provided that the terminating
party is not then in breach of any representation, warranty, covenant or other
agreement contained herein that, individually or in the aggregate, would give
the other party the right to terminate this Agreement) if there shall have been
a material breach of any of the covenants or agreements set forth in this
Agreement on the part of the other party, and such breach shall not have been
cured within 30 days following receipt by the breaching party of written notice
of such breach from the other party hereto or such breach, by its nature, cannot
be cured prior to the Closing;
(d) by either the Buyer or the Company if the Merger shall not have been
consummated on or before eight months after the date of this Agreement, unless
the failure of the Closing to occur by such date shall be due either (i) the
breach of any of the representations and warranties of the party seeking to
terminate this Agreement or
45
(ii) the failure of the party seeking to terminate this Agreement to perform or
observe the covenants and agreements of such party set forth herein;
(e) by either the Buyer or the Company upon written notice to the other
party 30 days after the date on which any request or application for any
required regulatory approval shall have been denied, unless within the 30-day
period following such denial the parties agree to file, and have filed with the
applicable governmental entity, a petition for rehearing or an amended
application; provided, however, that no party shall have the right to terminate
this Agreement pursuant to this Section 8.1(e) if such denial shall be due to
the failure of the party seeking to terminate this Agreement to perform or
observe the covenants and agreements of such party set forth herein;
(f) by either the Buyer or the Company (provided that, in the case of the
Company, it is not in material breach of its obligations under Section 2.1
hereof) if the approval of the shareholders of the Company hereto required for
the consummation of the Merger shall not have been obtained by reason of the
failure to obtain the Required Vote at a duly held meeting of shareholders or at
any adjournment or postponement thereof;
(g) by the Buyer if (i) the Board of Directors of the Company, for any
reason, fails to call and hold the Shareholders' Meeting to consider the
adoption of this Agreement within 45 days after the Proxy Statement is cleared
by the SEC; (ii) the Board of Directors of the Company does not publicly
recommend in the Proxy Statement that the Company's shareholders adopt this
Agreement; (iii) the Board of Directors of the Company fails to reaffirm its
recommendation in favor of the adoption of this Agreement within 5 days after
the Buyer requests in writing that such recommendation be reaffirmed; (iv) after
recommending in the Proxy Statement that such shareholders adopt this Agreement,
the Board of Directors of the Company shall have withdrawn, modified or amended
such recommendation in any manner adverse to the Buyer; or (v) the Board of
Directors of the Company shall have authorized, recommended, or publicly
announced its intention to authorize, recommend or to engage in any Competing
Proposal;
(h) by the Company, at any time prior to the meeting of the shareholders
of the Company contemplated by Section 2.1 hereof, in order to concurrently
enter into an Acquisition Agreement with respect to a Superior Competing
Proposal which has been received and considered by the Company and the Board of
Directors of the Company in compliance with Section 6.6 hereof; provided,
however, that this Agreement may be terminated by the Company pursuant to this
Section 8.1(h) only after the fifth business day following the Buyer's receipt
of written notice from the Company advising the Buyer that the Company is
prepared to enter into an Acquisition Agreement with respect to a Superior
Competing Proposal, and only if, during such five business day period the Buyer
does not, in its sole discretion, make an offer to the Company that the Board of
Directors of the Company determines in good faith, after consultation with its
financial and legal advisors, is at least as favorable as the Superior Competing
Proposal; or
46
(i) by the Buyer, if (i), at the Shareholders' Meeting (or any
adjournment or postponement thereof), any of the parties to the Voting
Agreements have not voted all shares of Company Common Stock covered by such
agreements in favor of the adoption of this Agreement or (ii) any of the parties
to the Voting Agreements materially breach any of the terms thereof.
SECTION 8.2 EFFECT OF TERMINATION; BREAKUP FEE
(a) In the event of termination of this Agreement by either the Buyer or
the Company as provided in Section 8.1 hereof, this Agreement shall forthwith
become void and have no effect except (i) as set forth in this Section 8.2 and
Section 9.1, which shall survive any termination of this Agreement, and (ii)
notwithstanding anything to the contrary contained in this Agreement, no party
shall be relieved or released from any liabilities or damages arising out of its
willful or intentional breach of any provision of this Agreement. Termination of
this Agreement by any party for any reason shall not have any effect on the
confidentiality agreement between the Company and the Buyer dated April 3, 2003
(the "CONFIDENTIALITY AGREEMENT") and the confidentiality obligations of the
Buyer under Section 6.1 shall survive such termination.
(b) In recognition of the efforts, expenses and other opportunities
foregone by the Buyer while structuring and pursuing the Merger, the parties
hereto agree that the Company shall pay to the Buyer a termination fee of
$500,000 in the manner set forth below, and shall reimburse the Buyer for
reasonable expenses incurred in connection with this Agreement and the
transactions contemplated herein in an amount up to $150,000, if:
(i) this Agreement is terminated (1) by the Buyer pursuant to Section
8.1(g) or Section 8.1(i) or (2) by the Company under Section 8.1(h);
(ii) (1) this Agreement is terminated by the Buyer pursuant to Section
8.1(c) and a Competing Proposal shall have been publicly announced or
otherwise communicated or made known to the senior management of the
Company or the Company's Board of Directors (or any person shall have
publicly announced, communicated or made known an intention, whether or not
conditional, to make a Competing Proposal) at any time after the date of
this Agreement and prior to the date of termination of this Agreement, and
(2) within 12 months after such termination of this Agreement, the Company
or a Subsidiary of the Company enters into any agreement with respect to,
or consummates, a transaction which is the subject of a Competing Proposal;
or
(iii) (1) this Agreement is terminated by either the Buyer or the Company
pursuant to Section 8.1(f) and a Competing Proposal providing for aggregate
merger consideration equal to or in excess of the Merger Consideration
shall have been publicly announced at any time after the date of this
Agreement and prior to the taking of the vote of the shareholders of the
Company contemplated by this Agreement at the Special Meeting, and (2)
within 12 months after such
47
termination of this Agreement, the Company or a Subsidiary of the Company
enters into any agreement with respect to, or consummates, a transaction
which is the subject of a Competing Proposal.
Any amount that becomes payable pursuant to this Section 8.2(b) shall be
paid within two (2) business days thereafter by wire transfer of immediately
available funds to an account designated by the Buyer.
(c) The Company and the Buyer agree that the agreement contained in
paragraph (b) of this Section 8.2 is an integral part of the transactions
contemplated by this Agreement, that without such agreement the Buyer would not
have entered into this Agreement, and that such amounts do not constitute a
penalty or liquidated damages in the event of a breach of this Agreement by the
Company. If the Company fails to pay the Buyer the amounts due under paragraph
(b) above within the time periods specified therein, the Company shall pay the
costs and expenses (including reasonable legal fees and expenses) incurred by
the Buyer in connection with any action in which the Buyer prevails, including
the filing of any lawsuit, taken to collect payment of such amounts, together
with interest on the amount of any such unpaid amounts at the prime lending rate
prevailing during such period as published in The Wall Street Journal,
calculated on a daily basis from the date such amounts were required to be paid
until the date of actual payment.
8.3 AMENDMENT. The parties hereto hereby agree to enter into an
amendment of this Agreement for the purpose of adding Transitory Subsidiary as a
party hereto as soon as practicable after the Buyer receives all required
regulatory approval to do so, which amendment shall be made prior to any
submission of this Agreement to shareholders of the Company for their approval.
Subject to compliance with applicable law, this Agreement may be amended by the
parties hereto, by action taken or authorized by their respective Boards of
Directors, at any time before or after adoption of this Agreement by the
shareholders of the Company; provided, however, that after any approval of the
transactions contemplated by this Agreement by the Company's shareholders, there
may not be, without further approval of such shareholders, any amendment of this
Agreement which by law requires further approval of the shareholders of the
Company without obtaining such approval. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto.
8.4 EXTENSION; WAIVER. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Boards of
Directors may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other party hereto,
(ii) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto, and (iii) waive compliance
with any of the agreements or conditions contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of such party, but such
extension or waiver or failure to insist on strict compliance with an
obligation, covenant,
48
agreement or condition shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure.
ARTICLE IX
MISCELLANEOUS
SECTION 9.1 EXPENSES. Except with respect to tail insurance coverage as
provided in Section 6.12(a), all costs and expenses incurred in connection with
the transactions contemplated by this Agreement, including without limitation,
attorneys' fees, accountants' fees, other professional fees and costs related to
expenses of officers and directors of the Company and its Subsidiaries, shall be
paid by the party incurring such costs and expenses. Each party hereto hereby
agrees to and shall indemnify the other parties hereto against any liability
arising from any such fee or payment incurred by such party.
SECTION 9.2 BROKERS AND FINDERS. Other than Keefe, Bruyette & Woods,
Inc., which has been engaged by the Company and at its sole expense as described
on Schedule 3.38 attached to this Agreement, all negotiations on behalf of the
Buyer and the Company relating to this Agreement and the transactions
contemplated by this Agreement have been carried on by the parties hereto and
their respective agents directly without the intervention of any other person in
such manner as to give rise to any claim against the Buyer, Transitory
Subsidiary, the Company or its Subsidiaries for financial advisory fees,
brokerage or commission fees, finder's fees or other like payment in connection
with the consummation of the transactions contemplated hereby.
SECTION 9.3 ENTIRE AGREEMENT; ASSIGNMENT. This Agreement together with
the Confidentiality Agreement (a) constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all other prior
agreements and understandings, both written and oral, among the parties or any
of them with respect to the subject matter hereof, and (b) shall not be assigned
by operation of law or otherwise, provided that the Buyer may assign its rights
and obligations or those of Transitory Subsidiary to any direct or indirect,
wholly-owned, subsidiary of the Buyer or its holding company, Liberty Banshares,
Inc., but no such assignment shall relieve the Buyer of its obligations
hereunder.
SECTION 9.4 FURTHER ASSURANCES. From time to time as and when requested
by the Buyer or its successors or assigns, the Company, the officers and
directors of the Company, or its Subsidiaries, shall execute and deliver such
further agreements, documents, deeds, certificates and other instruments and
shall take or cause to be taken such other actions, including those as shall be
necessary to vest or perfect in or to confirm of record or otherwise the
Company's or its Subsidiaries' title to and possession of, all of their
respective property, interests, assets, rights, privileges, immunities, powers,
franchises and authority, as shall be reasonably necessary or advisable to carry
out the purposes of and effect the transactions contemplated by this Agreement.
49
SECTION 9.5 ENFORCEMENT OF THE AGREEMENT. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof, this being in addition to
any other remedy to which they are entitled at law or in equity.
SECTION 9.6 SEVERABILITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which shall remain in full force and
effect.
SECTION 9.7 NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given when delivered if in person, by cable, telegram or telex or by
telecopy, or five business days after mailing if delivered by registered or
certified mail (postage prepaid, return receipt requested) to the respective
parties as follows:
if to the Buyer or Transitory Subsidiary:
Russell G. Olson, President
Liberty Bank, F.S.B.
6400 Westown Parkway
West Des Moines IA 50266
Facsimile: 515/457-6363
with a copy (which shall not constitute notice) to:
John S. Zeilinger, Esq.
Baird, Holm, McEachen, Pedersen, Hamann & Strasheim LLP
1500 Woodmen Tower
Omaha NE 68102
Facsimile: 402/231-8556
if to the Company:
Randall C. Bray, Chairman of the Board and President
StateFed Financial Corporation
13525 University Ave.
Clive IA 50325
Facsimile: 515/223-7227
with a copy (which shall not constitute notice) to:
Martin L. Meyrowitz, Esq.
Silver, Freedman, & Taff, L.L.P.
1700 Wisconsin Ave. N.W.
Washington, D.C. 20007
Facsimile: 202/337-5502
50
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above
(provided that notice of any change of address shall be effective only upon
receipt thereof).
SECTION 9.8 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
SECTION 9.9 DESCRIPTIVE HEADINGS. The descriptive headings are inserted
for convenience of reference only and are not intended to be part of or to
affect the meaning or interpretation of this Agreement. When a reference is made
in this Agreement to Sections, Schedules or Exhibits, such reference to be to a
Section of or a Schedule or Exhibit to this Agreement unless otherwise
indicated.
SECTION 9.10 PARTIES IN INTEREST. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and, except as provided in
this Agreement, nothing in this Agreement is intended to confer upon any other
person any rights or remedies of any nature whatsoever under or by reason of
this Agreement.
SECTION 9.11 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
SECTION 9.12 INCORPORATION BY REFERENCES. Any and all Schedules, Exhibits,
annexes, statements, reports, certificates or other documents or instruments
referred to herein or attached hereto are incorporated herein by reference
hereto as though fully set forth at the point referred to in the Agreement.
SECTION 9.13 CERTAIN DEFINITIONS.
"MATERIAL ADVERSE EFFECT" shall mean (A) with respect to the Company, a
material adverse effect on (i) the business, results of operations or financial
condition of the Company and the Company's Subsidiaries taken as a whole, or
(ii) the ability of the Company or the Bank to timely consummate the
transactions contemplated hereby; and (B) with respect to the Buyer, a material
adverse effect on the ability of the Buyer to timely consummate the transactions
contemplated hereby; provided however, that Material Adverse Effect with respect
to the Company shall not be deemed to include for purposes of clause (A)(i) the
impact of (1) changes in banking and similar laws of general applicability or
interpretations thereof by governmental or regulatory authorities, or other
changes affecting depository institutions generally, including changes in
general economic conditions and changes in prevailing interest and deposit
rates, (2) changes in GAAP or regulatory accounting requirements applicable to
thrifts and their holding companies generally, (3) changes resulting from
transaction expenses, including legal, accounting and investment banking or
brokers' fees incurred in
51
connection with this Agreement and the transactions contemplated hereby, (4)
actions or omissions of the Company or any of its Subsidiaries taken with the
prior written consent of the Buyer or as permitted by this Agreement, (5) the
payment of any amounts due to, or the provision of any other benefits to, any
officers or employees of the Company and its Subsidiaries under employment
contracts, employee benefit plans, severance agreements or other arrangements in
existence as of the date hereof, (6) the cash-out of stock options as
contemplated by Section 6.9, (7) any adjustments pursuant to FAS 115 and (8) any
conforming entries pursuant to Section 9.15 hereof.
"CONSOLIDATED STOCKHOLDERS' EQUITY" when used with respect to the Company
shall mean the Company's (and its Subsidiaries') consolidated stockholders'
equity as of the last day of the calendar month next preceding the Closing
determined in accordance with GAAP, except that (i) the Company shall have
expensed (or established appropriate accruals) for all third party transaction
costs relating to this Agreement and the Merger without taking into account any
deduction therefor for federal and state income tax purposes, including but not
limited to, the Merger Fees for attorneys, accountants and investment bankers or
brokers of the Company, (ii) no adjustment will be taken for unrealized losses
or gains under FAS 115; (iii) no deduction or accrual will be taken for
severance or change in control payments or benefits contemplated by this
Agreement; and (iv) no adjustment will be taken for the cash-out of stock
options under Section 6.9 or the exercise of options.
"COMPETING PROPOSAL" shall mean any of the following involving the Company
or the Bank: any proposal or offer from any person relating to any direct or
indirect acquisition or purchase by such person of the Company, the Bank or any
assets of the Company or its Subsidiaries that constitute 15% or more of assets
of the Company and its Subsidiaries, taken as a whole; 15% or more of any class
of equity securities of the Company or the Bank; any tender offer or exchange
offer that, if consummated, would result in any person beneficially owning 15%
or more of any class of equity securities of the Company or the Bank; or any
merger, consolidation, business combination, recapitalization, liquidation,
dissolution or similar transaction involving the Company or the Bank, other than
the transactions contemplated by this Agreement.
"SUPERIOR COMPETING PROPOSAL" shall mean any of the following involving the
Company or its Subsidiaries: any proposal made by a third party to acquire,
directly or indirectly, including pursuant to a tender offer, exchange offer,
merger, consolidation, business combination, recapitalization, liquidation,
dissolution or similar transaction, for consideration consisting of cash and/or
securities, more than 50% of the combined voting power of the shares of the
Company's common stock then outstanding or all or substantially all the assets
of the Company, and otherwise on terms which the Board of Directors of the
Company determines in its good faith judgment (based on the opinion of Keefe,
Bruyette & Woods, Inc. or another financial advisor of nationally recognized
reputation) to be more favorable to its shareholders than the Merger and for
which financing, to the extent required, is then committed or which if not
committed is, in the good faith judgment of its Board of Directors, reasonably
capable of being obtained by such third party.
52
SECTION 9.14 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
None of the representations, warranties, covenants and agreements in this
Agreement or in any instrument delivered pursuant to this Agreement shall
survive the Effective Time, except for those covenants and agreements contained
herein and therein which by their terms apply in whole or in part after the
Effective Time.
SECTION 9.15 CONFORMING ENTRIES AND LOAN LOSS RESERVE. Following the
satisfaction or waiver of all conditions contained in Article VII hereof,
subsequent to the last day of the Preceding Month and prior to the Closing Date,
the Company and/or the Bank shall have established and taken such reserves and
accruals as Buyer shall request to conform the Company's and the Bank's loan,
accrual and reserve policies to Buyer's policies and to establish and take such
accruals, reserves and charges in order to implement such policies with respect
to excess facilities and equipment capacity, severance costs, litigation
matters, write-off or write-down of various assets and other appropriate
accounting adjustments, and to recognize for financial accounting purposes such
expenses and restructuring charges related to or to be incurred in connection
with the transactions contemplated by this Agreement, in each case at such times
as are requested by Buyer; provided, however, that any such conforming entries
shall not (i) affect the amount of the Merger Consideration or the determination
of any adjustments thereto pursuant to Section 2.4 of this Agreement or (ii) be
used to determine the calculation of Consolidated Stockholders' Equity or
whether there has been a Material Adverse Effect with respect to the Company;
and provided further that all such conforming entries shall be made in
accordance with GAAP.
[SIGNATURE PAGE FOLLOWS]
53
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
day and year first above written.
LIBERTY BANK, F.S.B.
By: /s/ Russell G. Olson
--------------------------------------
Russell G. Olson, President
STATEFED FINANCIAL CORPORATION
By: /s/ Randall C. Bray
--------------------------------------
Randall C. Bray, Chairman of the Board
and President
54
TABLE OF CONTENTS
PAGE
ARTICLE I THE MERGER..........................................................2
Section 1.1 The Merger...............................................2
Section 1.2 Effective Time...........................................2
Section 1.3 Conversion of Shares.....................................2
Section 1.4 Certain Effects of the Merger............................3
Section 1.5 Certificate of Incorporation and Bylaws..................3
Section 1.6 Directors and Officers...................................3
Section 1.7 Closing of the Company's Transfer Books..................3
Section 1.8 Payment for Shares.......................................3
Section 1.9 Dissenting Shares........................................4
ARTICLE II MEETING OF COMPANY SHAREHOLDERS; CLOSING...........................5
Section 2.1 Shareholders' Meeting....................................5
Section 2.2 Proxy Statement..........................................6
Section 2.3 Closing..................................................6
Section 2.4 Adjustment of Merger Consideration.......................7
Section 2.5 Alternative Structure....................................7
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY.....................7
Section 3.1 Organization and Qualification...........................7
Section 3.2 Company Capitalization...................................8
Section 3.3 Subsidiaries' Capitalization; Other Securities...........8
Section 3.4 Authority Relative to the Agreement......................9
Section 3.5 No Violation.............................................9
Section 3.6 Consents and Approvals...................................10
Section 3.7 Regulatory Reports.......................................10
Section 3.8 Securities Issuances.....................................10
Section 3.9 Financial Statements.....................................11
Section 3.10 Absence of Certain Changes...............................12
Section 3.11 Company Indebtedness.....................................13
Section 3.12 Litigation...............................................14
Section 3.13 Tax Matters..............................................14
i
TABLE OF CONTENTS
(CONTINUED)
PAGE
Section 3.14 Employee Benefit Plans...................................15
Section 3.15 Employment Matters.......................................17
Section 3.16 Leases, Contracts and Agreements.........................18
Section 3.17 Transactions with Insiders...............................18
Section 3.18 Compliance with Laws.....................................19
Section 3.19 Insurance................................................19
Section 3.20 Loans ................................................19
Section 3.21 Fiduciary Responsibilities...............................20
Section 3.22 Patents, Trademarks and Copyrights.......................20
Section 3.23 Environmental Compliance.................................21
Section 3.24 No Indemnity Claims......................................21
Section 3.25 Title to Properties; Encumbrances........................21
Section 3.26 Shareholder List.........................................22
Section 3.27 Dissenting Shareholders..................................22
Section 3.28 Takeover Laws............................................22
Section 3.29 Employee Stock Options...................................22
Section 3.30 No Administrative Action.................................22
Section 3.31 Regulatory Examinations..................................23
Section 3.32 Community Reinvestment Act Compliance....................23
Section 3.33 Minute Books.............................................23
Section 3.34 FDIC Deposit Insurance...................................23
Section 3.35 No Brokered Deposits or Derivative Securities............23
Section 3.36 Disclosure Controls and Procedures.......................23
Section 3.37 Proxy Statement Information..............................24
Section 3.38 Brokers, Finders and Merger Fees.........................24
Section 3.39 Representations Not Misleading...........................24
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE BUYER........................24
Section 4.1 Organization and Authority...............................24
Section 4.2 Authority Relative to Agreement..........................25
Section 4.3 No Violation.............................................25
ii
TABLE OF CONTENTS
(CONTINUED)
PAGE
Section 4.4 Consents and Approvals...................................25
Section 4.5 Financial Statements.....................................26
Section 4.6 Absence of Certain Changes...............................26
Section 4.7 Litigation...............................................26
Section 4.8 Compliance with Laws.....................................26
Section 4.9 No Administrative Action.................................27
Section 4.10 Community Reinvestment Act Compliance....................27
Section 4.11 Financing................................................27
Section 4.12 Representations Not Misleading...........................27
ARTICLE V COVENANTS OF THE COMPANY............................................27
Section 5.1 Affirmative Covenants of the Company.....................27
Section 5.2 Negative Covenants of the Company........................29
Section 5.3 Covenants of the Buyer...................................32
ARTICLE VI ADDITIONAL AGREEMENTS..............................................33
Section 6.1 Access To, and Information Concerning, Properties and
Records..................................................33
Section 6.2 Filing of Regulatory Approvals...........................33
Section 6.3 Miscellaneous Agreements and Consents....................34
Section 6.4 Operation of the Bank in the Ordinary Course of
Business.................................................34
Section 6.5 No Solicitation by the Company...........................35
Section 6.6 Public Announcement......................................36
Section 6.7 Employee Benefit Plans...................................36
Section 6.8 Liquidation of the Company and Merger of the Bank........38
Section 6.9 Stock Options............................................38
Section 6.10 Notification of Related Party Transactions...............39
Section 6.11 Withholding..............................................39
Section 6.12 Officers' and Directors' Insurance; Indemnification......39
Section 6.13 Termination of Employee Stock Ownership Plan.............40
Section 6.14 Update Disclosure........................................41
Section 6.15 S Corporation Matters....................................41
iii
TABLE OF CONTENTS
(CONTINUED)
PAGE
Section 6.16 Voting Agreements........................................42
ARTICLE VII CONDITIONS TO CONSUMMATION OF THE MERGER..........................42
Section 7.1 Conditions to Each Party's Obligation to Effect the
Merger...................................................42
Section 7.2 Conditions to the Obligations of the Buyer and
Transitory Subsidiary to Effect the Merger...............42
Section 7.3 Conditions to the Obligations of the Company to Effect
the Merger...............................................44
ARTICLE VIII TERMINATION; AMENDMENT; WAIVER...................................45
Section 8.1 Termination..............................................45
Section 8.2 Effect of Termination; Breakup Fee.......................47
Section 8.3 Amendment................................................48
Section 8.4 Extension; Waiver........................................48
ARTICLE IX MISCELLANEOUS......................................................49
Section 9.1 Expenses.................................................49
Section 9.2 Brokers and Finders......................................49
Section 9.3 Entire Agreement; Assignment.............................49
Section 9.4 Further Assurances.......................................49
Section 9.5 Enforcement of the Agreement.............................50
Section 9.6 Severability.............................................50
Section 9.7 Notices..................................................50
Section 9.8 Governing Law............................................51
Section 9.9 Descriptive Headings.....................................51
Section 9.10 Parties in Interest......................................51
Section 9.11 Counterparts.............................................51
Section 9.12 Incorporation by References..............................51
Section 9.13 Certain Definitions......................................51
Section 9.14 Nonsurvival of Representations, Warranties and
Agreements...............................................53
Section 9.15 Conforming Entries and Loan Loss Reserve.................53
iv
KEEFE, BRUYETTE & WOODS, INC.
SPECIALISTS IN FINANCIAL SERVICES
211 BRADENTON AVE. DUBLIN, OH 43017
PHONE 614-766-8400
FAX 614-766-8406
November 18, 2003
Board of Directors
StateFed Financial Corporation
13523 University Avenue
Clive, IA 50325
Dear Board Members:
You have requested our opinion as an independent investment banking firm
regarding the fairness, from a financial point of view, to the stockholders of
StateFed Financial Corporation ("SFFC"), of the consideration to be paid to SFFC
shareholders in the merger (the "Merger") between SFFC and Liberty Bank, F.S.B.,
a federal savings bank ("Liberty"). We have not been requested to opine as to,
and our opinion does not in any manner address, SFFC's underlying business
decision to proceed with or effect the Merger.
Pursuant to the Agreement and Plan of Merger, dated November 18, 2003, by and
among SFFC and Liberty (the "Agreement"), at the effective time of the Merger,
Liberty will acquire all of SFFC's issued and outstanding shares of common
stock. SFFC shareholders will receive $13.47 in cash per share.
Keefe, Bruyette & Woods, Inc., as part of its investment banking business, is
regularly engaged in the evaluation of businesses and securities in connection
with mergers and acquisitions, negotiated underwritings, and distributions of
listed and unlisted securities. We are familiar with the market for common
stocks of publicly traded banks, savings institutions and bank and savings
institution holding companies.
In connection with this opinion we reviewed certain financial and other business
data supplied to us by SFFC, including (i) the Agreement (ii) Annual Report,
Proxy Statement and Form 10-K for the years ended June 30, 2003, 2002 and 2001
(iii) Form 1OQSB for the quarter ended September 30, 2003 (iv) and other
information we deemed relevant. We also discussed with senior management of
SFFC, the current position and prospective outlook for SFFC. We reviewed
financial and stock market data of other savings institutions, particularly in
the Midwestern region of the United States, and the financial and structural
terms of several other
B-1
recent transactions involving mergers and acquisitions of savings institutions
or proposed changes of control of comparably situated companies.
B-2
Board of Directors
StateFed Financial Corporation
November 18, 2003
Page 2
For purposes of this opinion we have relied, without independent verification,
on the accuracy and completeness of the material furnished to us by SFFC and the
material otherwise made available to us, including information from published
sources, and we have not made any independent effort to verify such data. With
respect to the financial information, including forecasts and asset valuations
we received from SFFC, we assumed (with your consent) that they had been
reasonably prepared reflecting the best currently available estimates and
judgment of SFFC's management. In addition, we have not made or obtained any
independent appraisals or evaluations of the assets or liabilities, and
potential andlor contingent liabilities of SFFC. We have further relied on the
assurances of management of SFFC that they are not aware of any facts that would
make such information inaccurate or misleading. We express no opinion on matters
of a legal, regulatory, tax or accounting nature or the ability of the Merger,
as set forth in the Agreement, to be consummated.
In rendering our opinion, we have assumed that in the course of obtaining the
necessary approvals for the Merger, no restrictions or conditions will be
imposed that would have a material adverse effect on the contemplated benefits
of the Merger to Liberty or the ability to consummate the Merger. Our opinion is
based on the market, economic and other relevant considerations as they exist
and can be evaluated on the date hereof.
Consistent with the engagement letter with you, we have acted as financial
advisor to SFFC in connection with the Merger and will receive a fee for such
services. In addition, SFFC has agreed to indemnify us for certain liabilities
arising out of our engagement by SFFC in connection with the Merger.
Based upon and subject to the foregoing, as outlined in the foregoing paragraphs
and based on such other matters as we considered relevant, it is our opinion
that as of the date hereof, the consideration to be paid by Liberty in the
Merger is fair, from a financial point of view, to the stockholders of SFFC.
This opinion may not, however, be summarized, excerpted from or otherwise
publicly referred to without our prior written consent, although this opinion
may be included in its entirety in the proxy statement of SFFC used to solicit
stockholder approval of the Merger. It is understood that this letter is
directed to the Board of Directors of SFFC in its consideration of the
Agreement, and is not intended to be and does not constitute a recommendation to
any stockholder as to how such stockholder should vote with respect to the
Merger.
Very truly yours,
/s/ Keefe, Bruyette & Woods, Inc.
Keefe, Bruyette, & Woods, Inc.
B-3
APPENDIX C
DELAWARE GENERAL CORPORATION LAW
SS. 262. APPRAISAL RIGHTS.
I. Any stockholder of a corporation of this State who holds shares of stock on
the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has
otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in
writing pursuant toss.228 of this title shall be entitled to an appraisal
by the Court of Chancery of the fair value of the stockholder's shares of
stock under the circumstances described in subsections (b) and (c) of this
section. As used in this section, the word "stockholder" means a holder of
record of stock in a stock corporation and also a member of record of a
nonstock corporation; the words "stock" and "share" mean and include what
is ordinarily meant by those words and also membership or membership
interest of a member of a nonstock corporation; and the words "depository
receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the
depository.
II. Appraisal rights shall be available for the shares of any class or series
of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to ss. 251 (other than a merger effected pursuant to ss.
251(g) of this title), ss. 252, ss. 254, ss. 257, ss. 258, ss. 263 or ss.
264 of this title:
A. Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date
fixed to determine the stockholders entitled to receive notice of and
to vote at the meeting of stockholders to act upon the agreement of
merger or consolidation, were either (i) listed on a national
securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of
Securities Dealers, Inc. or (ii) held of record by more than 2,000
holders; and further provided that no appraisal rights shall be
available for any shares of stock of the constituent corporation
surviving a merger if the merger did not require for its approval the
vote of the stockholders of the surviving corporation as provided in
subsection (f) ofss.251 of this title.
B. Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or
series of stock of a constituent corporation if the holders thereof
are required by the terms of an agreement of merger or consolidation
pursuant to ss.ss. 251, 252, 254, 257, 258, 263 and 264 of this title
to accept for such stock anything except:
1. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
2. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts
in respect thereof) or depository receipts at the effective date
of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market
system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. or held of
record by more than 2,000 holders;
3. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of
this paragraph; or
4. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a., b. and c.
of this paragraph.
C. In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under ss. 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal
rights shall be available for the shares of the subsidiary Delaware
corporation.
III. Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its
certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or
substantially all of the assets of the corporation. If the certificate of
incorporation contains such a provision, the procedures of this section,
including those set forth in subsections (d) and (e) of this section, shall
apply as nearly as is practicable.
IV. Appraisal rights shall be perfected as follows:
A. If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior
to the meeting, shall notify each of its stockholders who was such on
the record date for such meeting with respect to shares for which
appraisal rights are available pursuant to subsection (b) or (c)
hereof that appraisal rights are available for any or all of the
shares of the constituent corporations, and shall include in such
notice a copy of this section. Each stockholder electing to demand the
appraisal of such stockholder's shares shall deliver to the
corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of such stockholder's
shares.
Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such
stockholder's shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder
electing to take such action must do so by a separate written demand
as herein provided. Within 10 days after the effective date of such
merger or consolidation, the surviving or resulting corporation shall
notify each stockholder of each constituent corporation who has
complied with this subsection and has not voted in favor of or
consented to the merger or consolidation of the date that the merger
or consolidation has become effective; or
B. If the merger or consolidation was approved pursuant toss.228 orss.253
of this title, then either a constituent corporation before the
effective date of the merger or consolidation or the surviving or
resulting corporation within 10 days thereafter shall notify each of
the holders of any class or series of stock of such constituent
corporation who are entitled to appraisal rights of the approval of
the merger or consolidation and that appraisal rights are available
for any or all shares of such class or series of stock of such
constituent corporation, and shall include in such notice a copy of
this section. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days after the
date of mailing of such notice, demand in writing from the surviving
or resulting corporation the appraisal of such holder's shares. Such
demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of such holder's shares. If such
notice did not notify stockholders of the effective date of the merger
or consolidation, either (i) each such constitutent corporation shall
send a second notice before the effective date of the merger or
consolidation notifying each of the holders of any class or series of
stock of such constitutent corporation that are entitled to appraisal
rights of the effective date of the merger or consolidation or (ii)
the surviving or resulting corporation shall send such a second notice
to all such holders on or within 10 days after such effective date;
provided, however, that if such second notice is sent more than 20
days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal
rights and who has demanded appraisal of such holder's shares in
accordance with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the corporation that
is required to give either notice that such notice has been given
shall, in the absence of fraud, be prima facie evidence of the facts
stated therein. For purposes of determining the stockholders entitled
to receive either notice, each constitutent corporation may fix, in
advance, a record date that shall be not more than 10 days prior to
the date the notice is given, provided, that if the notice is given on
or after the effective date of the merger or consolidation, the record
date shall be such effective date. If no record date is fixed and the
notice is given prior to the effective date, the record date shall be
the close of business on the day next preceding the day on which the
notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied
with subsections (a) and (d)
hereof and who is otherwise entitled to appraisal rights, may file a
petition in the Court of Chancery demanding a determination of the value of
the stock of all such stockholders. Notwithstanding the foregoing, at any
time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw such
stockholder's demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the
merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall
be entitled to receive from the corporation surviving the merger or
resulting from the consolidation a statement setting forth the aggregate
number of shares not voted in favor of the merger or consolidation and with
respect to which demands for appraisal have been received and the aggregate
number of holders of such shares. Such written statement shall be mailed to
the stockholder within 10 days after such stockholder's written request for
such a statement is received by the surviving or resulting corporation or
within 10 days after expiration of the period for delivery of demands for
appraisal under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register
in Chancery in which the petition was filed a duly verified list containing
the names and addresses of all stockholders who have demanded payment for
their shares and with whom agreements as to the value of their shares have
not been reached by the surviving or resulting corporation. If the petition
shall be filed by the surviving or resulting corporation, the petition
shall be accompanied by such a duly verified list. The Register in
Chancery, if so ordered by the Court, shall give notice of the time and
place fixed for the hearing of such petition by registered or certified
mail to the surviving or resulting corporation and to the stockholders
shown on the list at the addresses therein stated. Such notice shall also
be given by 1 or more publications at least 1 week before the day of the
hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The
forms of the notices by mail and by publication shall be approved by the
Court, and the costs thereof shall be borne by the surviving or resulting
corporation.
(g) At the hearing on such petition, the Court shall determine the stockholders
who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by
certificates to submit their certificates of stock to the Register in
Chancery for notation thereon of the pendency of the appraisal proceedings;
and if any stockholder fails to comply with such direction, the Court may
dismiss the proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value. In determining
such fair value, the Court shall take into account all relevant factors. In
determining the fair rate of interest, the Court may consider all relevant
factors, including the rate of interest which the surviving or resulting
corporation would have had to pay to borrow money during the pendency of
the proceeding. Upon application by the surviving or resulting corporation
or by any stockholder entitled to participate in the appraisal proceeding,
the Court may, in its discretion, permit discovery or other pretrial
proceedings and may proceed to trial upon the appraisal prior to the final
determination of the stockholder entitled to an appraisal. Any stockholder
whose name appears on the list
filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted such stockholder's certificates of
stock to the Register in Chancery, if such is required, may participate
fully in all proceedings until it is finally determined that such
stockholder is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation
to the stockholders entitled thereto. Interest may be simple or compound,
as the Court may direct. Payment shall be so made to each such stockholder,
in the case of holders of uncertificated stock forthwith, and the case of
holders of shares represented by certificates upon the surrender to the
corporation of the certificates representing such stock. The Court's decree
may be enforced as other decrees in the Court of Chancery may be enforced,
whether such surviving or resulting corporation be a corporation of this
State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and
the fees and expenses of experts, to be charged pro rata against the value
of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a
date which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed
within the time provided in subsection (e) of this section, or if such
stockholder shall deliver to the surviving or resulting corporation a
written withdrawal of such stockholder's demand for an appraisal and an
acceptance of the merger or consolidation, either within 60 days after the
effective date of the merger or consolidation as provided in subsection (e)
of this section or thereafter with the written approval of the corporation,
then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of
Chancery shall be dismissed as to any stockholder without the approval of
the Court, and such approval may be conditioned upon such terms as the
Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares of
such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
(8 Del. C. 1953,ss.262; 56 Del. Laws, c. 50; 56 Del. Laws, c. 186,ss.24; 57 Del.
Laws, c. 148,ss.ss.27-29; 59 Del. Laws, c. 106,ss.12; 60 Del. Laws, c.
371,ss.ss.3-12; 63 Del. Laws, c. 25,ss.14; 63 Del. Laws, c. 152,ss.ss.1, 2; 64
Del. Laws, c. 112,ss.ss.46-54; 66 Del. Laws, c. 136,ss.ss.30-32; 66 Del. Laws,
c. 352,ss.9; 67 Del. Laws, c. 376,ss.ss. 19, 20; 68 Del. Laws, c. 337,ss.ss.3,
4; 69 Del. Laws, c. 61,ss.10; 69 Del. Laws, c. 262,ss.ss.1-9; 70 Del. Laws, c.
79,ss.16; 70 Del. Laws, c. 186,ss.1; 70 Del. Laws, c. 299,ss.ss.2, 3; 70 Del.
Laws, c. 349,ss.22; 71 Del. Laws, c. 120,ss.15; 71 Del. Laws, c.
339,ss.ss.49-52; 73 Del. Laws, c. 82,ss.21.)
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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-22790
STATEFED FINANCIAL CORPORATION
----------------------------------------------
(Name of small business issuer in its charter)
Delaware 42-1410788
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13523 University Avenue, Clive, Iowa 50325
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (515) 223-8484
Securities Registered Pursuant to Section 12(b) of the Act:
None
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: $7.1
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 23, 2003, was $13.8 million.
(The exclusion from such amount of the market value of the shares owned by any
person shall not be deemed an admission by the registrant that such person is an
affiliate of the registrant.)
As of September 23, 2003, there were issued and outstanding 1,293,958
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (check one): Yes [ ]; No [X]
PART I
Item 1. Description of Business
General
The Company. StateFed Financial Corporation (the "Company" or the
"Holding 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 "Bank") upon the completion of the Bank'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 Bank 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
Bank on a consolidated basis.
At June 30, 2003, the Company had $96.8 million of assets and
stockholders' equity of $13.9 million (or 14.37% of total assets).
State Federal is a federally chartered savings association headquartered
in Clive, 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 Bank 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
Bank's market area. The Bank also invests in U.S. Government and agency
obligations and other permissible investments. At June 30, 2003, most of the
Bank's real estate mortgage loans were secured by properties located in Iowa.
The Bank's revenues are derived primarily from interest on mortgage
loans and investments, income from service charges and loan originations. The
Bank does not originate loans to fund leveraged buyouts and has no loans to
foreign corporations or governments.
The Bank offers a variety of accounts having a wide range of interest
rates and terms. The Bank's deposits include savings accounts, money market
savings accounts, checking accounts and certificate accounts with terms of three
months to 60 months. Currently, the Bank 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 Bank is located at 13523 University Avenue,
Clive, Iowa 50325, which is located in Polk County. Its telephone number at that
address is (515) 223-8484. The Bank maintains two other offices in Des Moines,
Iowa. The Bank 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 actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
1
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 Bank has originated fixed-rate, one- to
four-family residential mortgage loans. In the early 1980's, the Bank 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 Bank has continued to originate
fixed-rate mortgage loans in response to customer demand, it also continues to
offer ARMs. The Bank also, from time to time, purchases loans.
While the Bank 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, 2003, the Bank's net loan portfolio totaled $82.2
million.
The Loan Committee of the Bank, comprised of executive officers of the
Bank, has the immediate responsibility for the supervision of the Bank's loan
portfolio. Loans are originated and underwritten according to policies approved
by the Board. Any loan in excess of the approved level of the Loan Committee of
the Bank, must be reviewed and approved by the Loan Committee of the Board,
comprised of two non-employee members of the Board. The Board of Directors has
responsibility for the overall supervision of the Bank'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 Bank is permitted to make under
applicable federal regulations to any one borrower, including related entities,
or the aggregate amount that the Bank 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 Banks." At June 30,
2003, the maximum amount which the Bank could have lent to any one borrower and
the borrower's related entities was approximately $1.2 million. At that date the
largest loan to one borrower or group of related borrowers consisted of three
loans to one borrower totaling $1.2 million. All of those loans were performing
in accordance with their terms. Currently, it is the Bank's policy to limit its
loans to one borrower to the maximum regulatory limit. The Bank reserves the
right to discontinue, adjust or create new lending programs to respond to its
needs and to competitive factors, and on occasion the Bank's holding company has
participated in loans with the Bank, which loans would have exceeded the limit
on loans to one borrower had such loans been made by the Bank.
2
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.
June 30,
-----------------------------------------------------------------
2003 2002 2001
-----------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
-----------------------------------------------------------------
(Dollars in Thousands)
Real Estate Loans:
One-to-four family $ 55,886 65.77% $ 55,482 63.24% $ 55,179 61.77%
Multi-family and Commercial 22,235 26.17 25,847 29.46 31,243 34.97
Construction and development 3,019 3.55 4,331 4.94 1,309 1.46
-------------------- ------------------- -------------------
Total real estate loans $ 81,140 95.49 $ 85,660 97.64 $ 87,731 98.20
Other Loans:
Consumer loans:
Deposit account................ 41 0.05 56 0.06 117 0.13
Other.......................... 3,794 4.46 2,012 2.29 1,489 1.67
-------------------- ------------------- -------------------
Total consumer loans......... 3,835 4.51 2,068 2.36 1,606 1.80
-------------------- ------------------- -------------------
Total loans.................. 84,975 100.00% 87,728 100.00% 89,337 100.00%
======== ======= =======
Less:
Loans in process................. (1,176) (1,726) (717)
Deferred fees and discounts...... (286) (303) (339)
Allowance for losses............. (1,319) (927) (382)
-------- --------- ---------
Total loans receivable, net...... $ 82,194 $ 84,772 $ 87,899
======== ========= =========
3
The following table shows the composition of the Company's loan
portfolio by fixed and adjustable rate at the dates indicated.
June 30,
-----------------------------------------------------------------
2003 2002 2001
-----------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
-----------------------------------------------------------------
(Dollars in Thousands)
Fixed Rate Loans:
Real estate:
One-to-four family............... $ 50,503 59.43% $ 47,701 54.37% $ 42,100 47.13%
Multi-family and Commercial...... 12,767 15.02 14,216 16.20 15,402 17.24
Construction or development...... 3,019 3.55 4,331 4.94 1,309 1.46
-------------------- ------------------- -------------------
Total real estate loans...... 66,289 78.00 66,248 75.51 58,811 65.83
Consumer......................... 2,759 3.24 1,859 2.12 1,606 1.80
-------------------- ------------------- -------------------
Total fixed-rate loans 69,048 81.24 68,107 77.63 60,417 67.63
Adjustable Rate Loans:
Real estate:
One-to-four family............... 5,383 6.34 7,781 8.87 13,079 14.64
Multi-family and Commercial...... 9,468 11.15 11,631 13.26 15,841 17.73
-------------------- ------------------- -------------------
Total real estate loans...... 14,851 17.49 19,412 22.13 28,920 32.37
Consumer......................... 1,076 1.27 209 0.24 -
-------------------- ------------------- -------------------
Total adjustable-rate loans.. 15,927 18.76 19,621 22.37 28,920 32.37
-------------------- ------------------- -------------------
Total loans.................. 84,975 100.00% 87,728 100.00% 89,337 100.00%
======== ======= =======
Less:
Loans in process................. (1,176) (1,726) (717)
Deferred fees and discounts...... (286) (303) (339)
Allowance for losses............. (1,319) (927) (382)
-------- --------- ---------
Total loans receivable, net...... $ 82,194 $ 84,772 $ 87,899
======== ========= =========
4
The following schedule illustrates the interest rate sensitivity of the
Company's loan portfolio at June 30, 2003. 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.
Real Estate
-------------------------------------------------------------
Multi-family and Construction
One-to-four family Commercial or Development
-------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------- -------- ------- -------- ------- --------
Due During Years Ending June 30, /(1)/
2004................................... $ 5,365 7.64% $ 7,027 7.16% $ 3,019 6.52%
2005................................... 7,473 7.60 1,768 7.70 - -
2006................................... 3,742 7.58 1,874 9.18 - -
2007-2011.............................. 4,211 7.43 5,775 6.65 - -
After 2011............................. 35,095 7.01 5,791 6.96 - -
Real Estate
---------------------------------------
Consumer Total
---------------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ -------- -------- --------
Due During Years Ending June 30, /(1)/
2004................................... $ 897 7.55% $ 16,308 7.22%
2005................................... 207 9.57 9,448 7.66
2006................................... 192 9.62 5,808 8.16
2007-2011.............................. 2,539 6.68 12,525 6.92
After 2011............................. - - 40,886 7.00
- ----------
(1) Includes construction loans which the Bank reclassifies as permanent
loans once the construction phase is completed.
The total amount of loans due after June 30, 2004 which have fixed
interest rates is $57.5 million, while the total amount of loans due after such
dates which have floating or adjustable interest rates is $11.2 million.
5
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,
2003, the Company's one- to four-family residential mortgage loans totaled $55.9
million, or approximately 65.8% 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, 2003, the Bank did not originate any
adjustable-rate real estate loans, which were secured by one- to four-family
residential real estate, due to the historically low interest rate environment.
During the same period, the Company originated $31.9 million of fixed-rate real
estate loans, secured by one- to four-family residential real estate. This
included loans originated with the intent to sell in the secondary market. The
Company's one- to four-family residential mortgage originations are primarily in
its market and surrounding areas. The Company began originating and selling
servicing released fixed rate single family loans in the secondary market, which
totaled $11.0 million during the period ended June 30, 2003. No such loans were
sold during the two year period ended June 30, 2002.
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
Bank ("FNMA"), Government National Mortgage Bank ("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 on loans that it holds in
portfolio. In order to be more competitive in the market, maintain asset quality
and profitability, the Company began originating and selling fixed rate single
family servicing released mortgages. Residential loans generally do not include
prepayment penalties.
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 300
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 Bank'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
Bank's cost of funds. The Company's ARMs do not permit negative amortization of
principal. The Bank generally qualifies borrowers at 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. All properties
securing real estate loans made by State Federal are appraised by independent
fee appraisers approved by the Board of Directors. 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 now requires title insurance. Real estate
loans originated by the Bank generally contain a "due on sale" clause allowing
the Bank 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, 2003, the Company
had $22.2 million of commercial and multi-family real estate loans, which
represented 26.2% of the Company's gross loan portfolio. There were two loans
totaling $1.1 million 30-89 days delinquent and two non-performing loans
totaling $1.6 million (two of the loans were on properties located in the Des
Moines area, one in the Chicago area and one commercial property located in
Minnesota). The Company had multi-family and commercial real estate loans, with
an aggregate balance of $4.6 million at June 30, 2003, secured by real estate
located in Colorado, Nebraska, Minnesota, Nevada, California, Illinois and
Florida.
6
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 office buildings and, to a lesser
extent, 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 Bank 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,
-------------------------------------
2003 2002 2001
----------- ----------- -----------
Multi-family $ 6,916 $ 7,472 $ 10,956
Nursing homes 1,906 1,983 2,030
Churches 223 465 525
Motels 3,213 4,835 6,037
Shopping Centers - - 1,305
Commercial buildings 9,977 11,092 10,390
----------- ----------- -----------
Total $ 22,235 $ 25,847 $ 31,243
=========== =========== ===========
This portfolio decreased by $3.6 million from fiscal 2002 to fiscal
2003, and the portfolio comprised 26.2% of total loans in fiscal 2003 compared
to 29.5% of total loans in fiscal 2002.
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, 2003, the Company had $3.0 million of gross construction loans.
Construction loans to individuals for their residences are structured to
be converted to permanent loans at the end of the construction phase, which
typically runs for twelve months. During the construction phase, the borrower
pays interest only. Residential construction loans are generally underwritten
pursuant to the same guidelines used for originating permanent residential
loans.
7
All construction loans to builders require payment of interest only for
up to 12 months. At June 30, 2003, there were two delinquent constructions loans
totaling $168,000 secured by single family residences. One of these construction
loans with a carrying value of $85,000 was paid current in July 2003 and is
performing in accordance with its 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 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 and
unsecured consumer loans, including auto loans, home equity loans, loans secured
by savings deposits and lines of credit. The Bank currently originates all of
its consumer loans in its primary market area. The Bank 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, 2003, two home equity lines of credit
totaling $59,000, four auto loans totaling $6,000 and six unsecured loans
totaling $1,000 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 home equity lines of credit. At June 30, 2003, these loans totaled
$1.9 million or approximately 2.2% of the Bank's gross loan portfolio. During
the fiscal year ended June 30, 2003, the Bank originated $3.0 million in home
equity lines of credit as compared to $447,000 originated in the same period
ended June 30, 2002. At June 30, 2003, the Bank's consumer loan portfolio
totaled $3.8 million or 4.5% 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 Bank 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 Bank 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 and commissioned loan officers. Loan applications are taken and
processed in the office and the branch of the Bank.
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 had primarily been a portfolio lender, but began originating and
selling servicing released single family fixed rate loans in the secondary
market in order to maintain asset quality and profitability.
8
In fiscal 2003, the Company originated $37.2 million of loans, compared
to $22.1 million and $18.2 million in fiscal 2002 and 2001, respectively. The
Company sold $11.0 million of its fiscal 2003 fixed rate single family servicing
released loan originations in the secondary market. Principal repayments in
fiscal 2003 increased by $3.1 million from $25.1 million in fiscal 2002.
In periods of economic uncertainty, the ability of financial
institutions, including State Federal, to originate large dollar volumes of real
estate loans may be substantially reduced or restricted, with a resultant
decrease in related loan origination fees, other fee income and operating
earnings.
The following table shows the loan origination, purchase, sales and
repayment activities of the Company for the periods indicated.
Year ended June 30,
---------------------------------------------
2003 2002 2001
------------ ----------- ------------
(In Thousands)
Originations by type:
Adjustable rate:
Real estate - one-to four-family $ - $ - $ 896
- multi-family and commercial - - 1,416
Non-real estate - consumer 1,876 447 -
------------ ----------- ------------
Total adjustable-rate 1,876 447 2,312
Fixed rate:
Real estate - one-to four-family 31,852 13,209 12,069
- multi-family and commercial 1,708 6,097 2,486
Non-real estate - consumer 1,764 2,337 1,314
Total fixed-rate 35,324 21,643 15,869
------------ ----------- ------------
Total loans originated 37,200 22,090 18,181
Purchases:
Real estate - one-to four-family - - -
- multi-family and commercial 500 1,000 2,472
Non-real estate - consumer - - -
------------ ----------- ------------
Total loans 500 1,000 2,472
Mortgage-backed securities - - -
------------ ----------- ------------
Total purchases 500 1,000 2,472
Sales:
Real estate - one-to four-family 10,986 - -
- multi-family and commercial - - -
Non-real estate - consumer - - -
------------ ----------- ------------
Total loan sales 10,986 - -
Repayments:
Principal repayments 28,182 25,086 18,713
------------ ----------- ------------
Total reductions 39,168 25,086 18,713
------------ ----------- ------------
Increase (decrease) in other items, net 761 (1,131) (614)
------------ ----------- ------------
Net increase (decrease) $ (707) $ (3,127) $ 1,326
============ =========== ============
Non-Performing Assets and Classified Assets
When a borrower fails to make a required payment on real estate secured
loans and consumer loans, a late charge is automatically assessed and a notice
is sent in accordance with the terms outline in the loan note. At 30 days after
the payment is due, the Company generally institutes collection procedures by
mailing a delinquency notice and/or by telephone. In most cases, delinquencies
are cured promptly; however, if a loan secured by real estate or other
collateral has been delinquent for more than 60 days, satisfactory payment
arrangements must be adhered to or the Company will initiate foreclosure or
repossession.
9
Generally, when a loan becomes delinquent 90 days or more or when the
collection of principal or interest becomes doubtful, the Company will place the
loan on a non-accrual status and, as a result, previously accrued interest
income on the loan is taken out of current income. The loan will remain on a
non-accrual status as long as the loan is 90 days delinquent.
The following table sets forth information concerning delinquent
mortgage and other loans at June 30, 2003. The amounts presented represent the
total remaining principal balances of the related loans, rather than the actual
payment amounts which are overdue.
Real Estate
---------------------------------------------------------
Commercial and
One-to four-family Multi-family
-------------------------- --------------------------
Number Amount Percent Number Amount Percent
------ ------- ------- ------ ------- -------
(Dollars in Thousands)
Loans delinquent for:
30-59 days ......................... 20 $ 1,158 2.07% 2 $ 1,070 4.81%
60-89 days ......................... 2 58 0.10 - - -
90 days and over ................... 16 811 1.45 2 1,576 7.09
------ ------- ------- ------ ------- -------
Total delinquent loans 38 $ 2,027 3.62% 4 $ 2,646 11.90%
====== ======= ======= ====== ======= =======
At June 30, 2003 there were 12 delinquent consumer loans totaling
$66,000. The ratio of delinquent consumer loans to total loans (net) was .08% at
June 30, 2003. There were two delinquent single family construction loans
totaling $168,000 as of June 30, 2003.
The table below sets forth the amounts and categories of non-performing
assets in the Company's loan portfolio at the dates indicated. Loans are
generally placed on non-accrual status when the collection of principal and/or
interest become doubtful or when the loan is in excess of 90 days delinquent.
Foreclosed assets include assets acquired in settlement of loans.
June 30,
--------------------------
2003 2002 2001
------- ------- -------
(Dollars in Thousands)
Non-accruing loans:
One-to four-family $ 811 $ 1,077 $ 1,218
Multi-family and commercial real estate 1,576 906 48
Consumer 17 27 53
------- ------- -------
Total 2,404 2,010 1,319
Accruing loans delinquent more than 90 days:
One-to four-family - 180 362
Multi-family and commercial real estate - - 469
------- ------- -------
Total - 180 831
Foreclosed assets:
One-to four-family 88 365 -
Multi-family and commercial real estate - - 1,320
------- ------- -------
Total 88 365 1,320
Total non-performing assets $ 2,492 $ 2,555 $ 3,470
======= ======= =======
Total as a percentage of total assets 2.58% 2.65% 3.23%
======= ======= =======
10
Non-Performing Assets. Included in total non-performing assets are 16
mortgage loans secured by one- to four-family dwellings totaling $811,000, two
multi-family and commercial loans totaling $1.6 million and three consumer loans
for $17,000.
Classified Assets. Federal regulations provide for the classification of
loans and other assets such as debt and equity securities considered by the OTS
to be of lesser quality as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the savings institution 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 institution 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 bank 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. A bank's determination as to the classification of its assets and
the amount of its valuation allowances is subject to review by the bank'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 Bank 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, 2003, the Bank had classified a
total of $1.1 million of its assets as substandard, $3.0 million were classified
as doubtful, and none were classified as loss.
At June 30, 2003, total classified assets comprised $4.1 million or
52.6% of the Bank's capital, or 4.5% of the Bank's total assets. In addition,
the Bank has $2.8 million of its assets classified as special mention that
contain deficiency characteristics, which if not corrected, could become
classified as substandard, according to OTS guidelines.
At June 30, 2003 the Bank had a total of $88,000 in property acquired in
settlement of loans, which consisted of a single one- to four-family real estate
property.
Allowance for Loan Losses. The allowance for loan losses is established
by management and the Board of Directors through a provision for loan losses on
a systematic evaluation process focusing on the risk of loss in the loan
portfolio and changes in the nature and volume of its loan activity. Such
evaluation, which includes a review of delinquent residential and consumer, and
all multi-family and commercial loans, considers among other matters the
estimated fair value of the underlying collateral, economic conditions, specific
industries, 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, 2003, the Company had a total allowance for loan losses
of $1.3 million or 1.6% of loans receivable, net. See Notes A and E of the Notes
to Consolidated Financial Statements in Part III Item 7 and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Part II Item 6.
11
The following table sets forth an analysis of the Company's allowance
for loan losses.
Year Ended June 30,
---------------------------
2003 2002 2001
------- ------ ------
(Dollars in Thousands)
Balance at beginning of period $ 927 $ 382 $ 259
Charge-offs (428) (77) (28)
Recoveries 57 56 -
------- ------ ------
Net charge-offs (371) (21) (28)
Additions charged to operations 763 566 151
------- ------ ------
Balance at end of period $ 1,319 $ 927 $ 382
======= ====== ======
Ratio of net charge-offs during the period
to average loans outstanding during the period 0.44% 0.02% 0.03%
======= ====== ======
Ratio of net charge-offs during the period
to average non-performing assets 17.20% 0.79% 0.96%
======= ====== ======
The distribution of the Company's allowance for losses on loans at the
dates indicated is summarized as follows:
June 30,
-------------------------------------------------------------
2003 2002 2001
-------------------- ----------------- ------------------
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)
One-to four-family............. $ 522 65.77% $ 292 63.24% $ 165 61.77%
Multi-family and commercial
real estate................... 753 26.17 594 29.46 198 34.97
Construction................... 17 3.55 - 4.94 - 1.46
Consumer and unsecured......... 27 4.51 41 2.36 19 1.80
Unallocated.................... - - - - - -
--------- -------- ------ -------- ------ --------
Total $ 1,319 100.00% $ 927 100.00% $ 382 100.00%
========= ======== ====== ======== ====== ========
12
Investment Activities
State Federal maintains minimum levels of investments for liquidity
purposes. Liquidity may increase or decrease depending upon the availability of
funds and comparative yields on investments in relation to the return on loans.
The Bank's investment policy objective in this regard sets the Bank's desired
liquidity between 6% and 12%. As of June 30, 2003, the Bank's liquidity ratio
(liquid assets as a percentage of net withdrawable savings deposits and current
borrowings) was 6.92%. 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 Bank is to invest funds among
various categories of investments and maturities based upon the Bank'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 Bank's
asset/liability management policies.
Cash and Investments in Certificates of Deposit and Other Investments.
At June 30, 2003, the Company's cash and interest-bearing deposits in other
financial institutions totaled $4.4 million, or 4.5% of its total assets.
Certificates of deposits invested in other institutions totaled $99,000 or 0.1%
of its total assets. The Bank has a $1.8 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 $1.1 million or 1.1% of its total assets
invested in corporate securities, which includes preferred common stocks. The
Company has $141,000 or 0.2% of its assets invested in federal agency
securities. See Note D of Notes to Consolidated Financial Statements in Part II
Item 7.
OTS regulations restrict investments in corporate debt and most equity
securities by the Bank. These restrictions include prohibitions against
investments in the federal agency debt securities of any one issuer in excess of
15% of the Bank'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 Banks" for a discussion of additional restrictions on the Bank's
investment activities.
13
The following table sets forth the composition of the Company's
investment portfolio at the dates indicated.
2003 2002 2001
--------------- ---------------- ---------------
Book % of Book % of Book % of
Value Value Value Value Value Value
--------------- ---------------- ---------------
(Dollars in Thousands)
Investment Securities:
Corporate equity securities.......................... $ 1,124 37.13% $ 1,082 35.06% $ 1,619 43.92%
Federal agency debt securities....................... 141 4.66 141 4.57 204 5.54
Municipal bonds...................................... - - 101 3.27 101 2.74
FHLB Stock................................................. 1,762 58.21 1,762 57.10 1,762 47.80
--------------- ---------------- ---------------
Total investment securities and FHLB stock........... $ 3,027 100.00% $ 3,086 100.00% $ 3,686 100.00%
=============== ================ ===============
Other Interest-Earning Assets:
Interest-bearing deposits with banks................. $ 3,808 97.47% $ 2,846 96.64% $ 6,691 95.75%
Certificates of deposit invested in other
institutions......................................... 99 2.53 99 3.36 297 4.25
--------------- ---------------- ---------------
Total................................................ $ 3,907 100.00% $ 2,945 100.00% $ 6,988 100.00%
=============== ================ ===============
Average remaining life or term to repricing of
certificates of deposit................................... 1 year 2 years 1-1/2
years
Contractual maturities of federal agency debt securities and municipal bonds are
shown below:
June 30, 2003
----------------------
Weighted
Book Average
Value Yield
----------------------
(Dollars in Thousands)
Due in one year or less 55 3.58%
Due after one year through five years - -
Due after five years through ten years 4 7.25
Due after ten years 82 6.46
-------
$ 141
=======
14
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, proceeds from investment securities 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 Bank's deposits consist of savings
accounts, checking and money market accounts, and certificate accounts ranging
in terms from three months to 60 months. The Bank only solicits deposits from
its market area and does not currently use brokers to obtain deposits. The Bank
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 prevailing interest rates, and competition.
The variety of deposit accounts offered by the Bank has allowed it to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. The Bank has become more susceptible to short-term fluctuations
in deposit flows, as customers have become more interest rate conscious. The
ability of the Bank to attract and maintain certificate 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 Bank during the
periods indicated.
Year Ended June 30,
----------------------------------
2003 2002 2001
----------------------------------
(Dollars in Thousands)
Opening balance.......................... $ 66,901 $ 62,987 $ 53,648
Deposits................................. 121,855 100,655 80,230
Withdrawals.............................. (118,409) (99,801) (73,984)
Interest credited........................ 2,626 3,060 3,093
---------- --------- ----------
Ending balance........................... $ 72,973 $ 66,901 $ 62,987
========== ========= ==========
Net increase (decrease).................. $ 6,072 $ 3,914 $ 9,339
========== ========= ==========
Percent increase (decrease).............. 9.1% 6.2% 17.40%
========== ========= ==========
15
The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of June 30, 2003.
Maturity
---------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or less Months Months 12 Months Total
--------- --------- --------- ---------- --------
(Dollars in Thousands)
Certificates of deposits less than $100,000... $ 7,226 $ 4,210 $ 6,706 $ 20,450 $ 38,592
Certificates of deposit $100,000 or more...... 1,050 1,312 1,176 8,261 11,799
--------- --------- --------- ---------- --------
Total certificates of deposit $ 8,276 $ 5,522 $ 7,882 $ 28,711 $ 50,391
========= ========= ========= ========== ========
Borrowings. Although deposits are the Bank's primary source of funds,
the Bank'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
Bank 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, 2003, the Bank had $9.0 million in FHLB advances.
At June 30, 2003, the Bank 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,
-------------------------------
2003 2002 2001
-------------------------------
(Dollars in Thousands)
Maximum Balance:
FHLB advances $ 14,000 $ 29,185 $ 35,235
======== ======== ========
Average Balance:
FHLB advances $ 10,923 $ 18,541 $ 32,543
======== ======== ========
Weighted average interest rate of FHLB advances 5.17% 5.51% 5.21%
======== ======== ========
Service Corporation Activities
Federal institutions 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 institutions may invest up to 50% of their
regulatory capital in conforming loans to their service corporations. In
addition to investments in service corporations, federal institutions are
permitted to invest an unlimited amount in operating subsidiaries engaged solely
in activities in which a federal institution may engage directly.
State Federal has one subsidiary which is a service corporation, State
Service Corporation, located in Des Moines, Iowa. State Service Corporation was
organized by State Federal in 1976. State Service Corporation currently sells
noninsured investment products.
16
During the fiscal year ended June 30, 2003, State Service Corporation
generated $81,000 in gross revenue from the sale of noninsured investment
products and $16,000 of interest income on real estate contracts. Income tax
(benefit) totaled ($12,000) for fiscal 2003.
REGULATION
General
State Federal is a federally chartered savings bank, the deposits of
which are federally insured and backed by the full faith and credit of the
United States Government up to applicable limits set by the FDIC. State Federal
is subject to broad federal regulation and oversight extending to all its
operations principally by its primary regulator, the OTS. The Bank 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 principally by the OTS. The
purpose of the regulation of the Holding Company and other holding companies is
to protect subsidiary savings associations. The Bank 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. 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.
The USA PATRIOT Act
In response to the events of September 11, 2001, President George W. Bush signed
into law the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT
Act, on October 26, 2001. The USA PATRIOT Act gives the federal government new
powers to address terrorist threats through enhanced domestic security measures,
expanded surveillance powers, increased information sharing, and broadened
anti-money laundering requirements. By way of amendments to the Bank Secrecy
Act, Title III of the USA PATRIOT Act takes measures intended to encourage
information sharing among bank regulatory agencies and law enforcement bodies.
Further, certain provisions of Title III impose affirmative obligations on a
broad range of financial institutions, including banks, thrifts, brokers,
dealers, credit unions, money transfer agents and parties registered under the
Commodity Exchange Act.
Among other requirements, Title III of the USA PATRIOT Act imposes the following
requirements with respect to financial institutions:
. Pursuant to Section 352, all financial institutions must establish
anti-money laundering programs that include, at minimum: (i) internal
policies, procedures, and controls, (ii) specific designation of an
anti-money laundering compliance officer, (iii) ongoing employee
training programs, and (iv) an independent audit function to test the
anti-money laundering program.
. Pursuant to Section 326 on July 23, 2003, the Secretary of the
Department of Treasury, in conjunction with other bank regulators issued
a proposed rule that provides for minimum standards with respect to
customer identification and verification. At this time, a final rule is
pending.
. Section 312 requires financial institutions that establish, maintain,
administer, or manage private banking accounts or correspondent accounts
in the United States for non-United States persons or their
representatives (including foreign individuals visiting the United
States) to establish appropriate, specific, and, where necessary,
enhanced due diligence policies, procedures, and controls designed to
detect and report money laundering.
. Effective December 25, 2001, financial institutions are prohibited from
establishing, maintaining, administering or managing correspondent
accounts for foreign shell banks (foreign banks that do not have a
physical presence in any country), and will be subject to certain record
keeping obligations with respect to correspondent accounts of foreign
banks.
. Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on Federal
Reserve Act and Bank Merger Act applications.
17
The Sarbanes-Oxley Act
On July 30, 2002, President George W. Bush signed into law the Sarbanes-Oxley
Act of 2002. The Sarbanes-Oxley Act implements a broad range of corporate
governance and accounting measures for public companies designed to promote
honesty and transparency in corporate America and better protect investors from
the type of corporate wrongdoing that occurred in Enron, WorldCom and similar
companies. The Sarbanes-Oxley Act's principal legislation includes:
. the creation of an independent accounting oversight board;
. auditor independence provisions which restrict non-audit services that
accountants may provide to their audit clients;
. additional corporate governance and responsibility measures, including
the requirement that the chief executive officer and chief financial
officer certify financial statements;
. the forfeiture of bonuses or other incentive-based compensation and
profits from the sale of an issuer's securities by directors and senior
officers in the twelve month period following initial publication of any
financial statements that later require restatement;
. an increase the oversight of, and enhancement of certain requirements
relating to audit committees of public companies and how they interact
with the company's independent auditors;
. requirement that audit committee members must be independent and are
absolutely barred from accepting consulting, advisory or other
compensatory fees from the issuer;
. requirement that companies disclose whether at least one member of the
committee is a "financial expert" (as such term will be defined by the
Securities and Exchange Commission) and if not, why not;
. expanded disclosure requirements for corporate insiders, including
accelerated reporting of stock transactions by insiders and a
prohibition on insider trading during pension blackout periods;
. a prohibition on personal loans to directors and officers, except
certain loans made by insured financial institutions;
. disclosure of a code of ethics and filing a Form 8-K for a change or
waiver of such code;
. mandatory disclosure by analysts of potential conflicts of interest; and
. a range of enhanced penalties for fraud and other violations.
Although we anticipate that we will incur additional expense in complying with
the provisions of the Sarbanes-Oxley Act and the resulting regulations,
management does not expect that this compliance will have a material impact on
our results of operations or financial condition.
Federal Regulation of Savings Banks
The OTS has extensive authority over the operations of savings banks,
such as State Federal. 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
June 30, 2002. When these examinations are conducted by the OTS and the FDIC,
the examiners may require the Bank to provide for higher general or specific
loan loss reserves. All savings institutions are subject to a semi-annual
assessment, based upon the savings institution's total assets, to fund the
operations of the OTS. The Bank's OTS assessment for the fiscal year ended June
30, 2003 was approximately $32,000.
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.
In addition, the investment, lending and branching authority of the Bank
is prescribed by federal law and it is prohibited from engaging in any
activities not permitted by such laws. For example, the permissible level of
investment by federal associations, subject to safety and soundness
restrictions, (1) in loans secured by non-residential real property may not
exceed 400% of total capital, (2) in commercial loans may not exceed 20% of
assets, provided that amounts in excess of 10% of assets may only be small
business loans, (3) related to leasing of tangible personal property may not
exceed 10% of assets, and (4) in loans for personal, family and household
purposes, when combined with commercial paper and corporate debt securities, may
not exceed 35% of assets. Federal savings institutions are also generally
authorized to branch nationwide. State Federal is in compliance with the noted
restrictions.
18
The Bank'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, 2003, the Bank's lending limit under this restriction was approximately
$1.2 million.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a compliance plan. A
failure to submit a plan or to comply with an approved plan will subject the
institution to further enforcement action.
Insurance of Accounts and Regulation by the FDIC
State Federal is a member of the SAIF, which is administered by the
FDIC. Deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the United States
Government. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious risk
to the SAIF or the BIF. The FDIC also has the authority to initiate enforcement
actions against savings institutions, 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 will be made by the FDIC for each semi-annual assessment period. As
of June 30, 2003, the Bank met the requirements of a well-capitalized
institution
The premium schedule for BIF and SAIF insured institutions ranged from 0
to 27 basis points. However, SAIF insured institutions and BIF insured
institutions are required to pay a Financing Corporation assessment in order to
fund the interest on bonds issued to resolve thrift failures in the 1980s. This
amount is currently equal to about 1.88 points for each $100 in domestic
deposits for BIF and SAIF insured institutions. These assessments, which may be
revised based upon the level of BIF and SAIF deposits, will continue until the
bonds mature in 2017 through 2019.
Regulatory Capital Requirements
Federally insured savings institutions, such as the Bank, 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 banks. 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 banks on a case-by-case basis.
19
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 banks 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 bank's level of ownership. For excludable
subsidiaries, the debt and equity investments in such subsidiaries are deducted
from assets and capital.
At June 30, 2003, the Bank had tangible capital of $7.2 million, or
7.87% of adjusted total assets, which is approximately $5.8 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
institution 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, 2003, the Bank had core capital equal to $7.2 million, or
7.87% of adjusted total assets, which is $3.5 million above the minimum leverage
ratio requirement of 4% as in effect on that date.
The OTS risk-based requirement requires savings institutions 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 institution 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, 2003, State Federal had
no capital instruments that qualify as supplementary capital but had $650,000 of
general loss reserves, which was less than 1.12% 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, 2003.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For example,
the OTS has assigned a risk weight of 50% for prudently underwritten permanent
one- to four-family first lien mortgage loans not more than 90 days delinquent
and having a loan to value ratio of not more than 80% at origination unless
insured to such ratio by an insurer approved by the FNMA or FHLMC.
OTS regulations also require that every savings institution 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 bank, 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 institutions may appeal an interest rate risk deduction
determination. It is uncertain when this evaluation may be completed. Any
savings institution 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.
20
On June 30, 2003, the Bank had total risk-based capital of $7.8 million
(including $7.2 million in core capital and $650,000 in qualifying supplementary
capital) and risk-weighted assets of $58.8 million or total risk-based capital
of 13.3% of risk-weighted assets. This amount was $3.1 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 institutions that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized institution" (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 institution 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 institutions.
Any savings institution 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 institution. An institution 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 institutions. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings institution, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized institution 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 institution 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
Bank may have a substantial adverse effect on the Bank'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 or requirements on savings
institutions 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 permit a
federal savings institution to pay dividends in any calendar year equal to net
income for that year plus retained earnings for the preceding two years.
Accounting
An OTS policy statement applicable to all savings institutions clarifies
and re-emphasizes that the investment activities of a savings institution 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 Bank 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.
21
Qualified Thrift Lender Test
All savings institutions, including the Bank, are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings institution 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 Institution 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, 2003, the Bank met the test and has always met the test since its
effectiveness.
Any savings institution 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 institution 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 institution has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings institution and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
bank is immediately ineligible to receive any new FHLB borrowings and is subject
to national bank limits for payment of dividends. If such institution 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
bank 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 Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in March 2002 and received a rating of satisfactory.
Transactions with Affiliates
Generally, transactions between a savings institution or its
subsidiaries and its affiliates are required to be on terms as favorable to the
Bank as transactions with non-affiliates. In addition, certain of these
transactions such as loans to an affiliate, are restricted to a percentage of
the bank's capital. Affiliates of State Federal include the Holding Company and
any company which is under common control with the Bank. In addition, a savings
institution may not lend to any affiliate engaged in activities not permissible
for a bank holding company or acquire the securities of most affiliates. The
Bank's subsidiaries are not deemed affiliates, however; the OTS has the
discretion to treat subsidiaries of savings banks 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.
22
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 institution subsidiaries which also
permits the OTS to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings bank.
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 institution as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Holding Company and any of its subsidiaries (other than the Bank or any
other SAIF-insured savings institutions) would become subject to such
restrictions unless such other institutions each qualify as a QTL and were
acquired in a supervisory acquisition.
If the Bank 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 institution. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings institutions 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 bank.
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 accounts). At June 30, 2003, the Bank
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 institutions are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
institutions to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
The Bank 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
banks. 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.
23
As a member, State Federal is required to purchase and maintain stock in
the FHLB of Des Moines. At June 30, 2003, State Federal had $1.8 million in FHLB
stock, which was in compliance with this requirement. In past years, the Bank
has received substantial dividends on its FHLB stock. Over the past five fiscal
years these dividends have averaged 5.12% and were 3.0% for fiscal year 2003.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings institutions 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 Bank's FHLB stock may result in a corresponding
reduction in State Federal's capital.
For the fiscal year ended June 30, 2003, dividends paid by the FHLB of
Des Moines to State Federal totaled $53,000 which constituted a $9,000 decrease
from the amount of dividends received in the fiscal year ended June 30, 2002.
The $13,000 dividend received for the period ended May 31, 2003 and paid June
13, 2003 reflected an annualized rate of 3.0%, which was unchanged from the
quarter ended June 30, 2002.
Federal and State Taxation
In addition to the regular income tax, corporations, including savings
institutions such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income.
A portion of the Bank's reserves for losses on loans may not, without
adverse tax consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of June 30, 2003, the portion of the Bank's reserves subject to this
treatment for tax purposes totaled approximately $1.4 million.
State Federal and its subsidiaries file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting. State
Federal and its subsidiaries have not been audited by the IRS within the last
ten years.
Iowa Taxation. The Holding Company and the Bank's subsidiaries file Iowa
corporation tax returns while the Bank files an Iowa franchise tax return.
Iowa imposes a franchise tax on the taxable income for both mutual and
stock savings and loan banks. 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 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 is
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.
24
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 banks, credit
unions and mortgage bankers making loans secured by real estate located in the
Bank's market area. The Bank 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 Bank 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 Banks and credit unions located in the same
communities. The Bank 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 Bank's primary concentration is Des Moines, Iowa. There are over 30
commercial banks and approximately 30 credit unions in the Bank's market area.
The Bank estimates its share of the savings market in its primary market area to
be approximately 1.0%.
Employees
At June 30, 2003, the Company and its subsidiary had a total of 32
full-time employees. The Bank's employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.
Item 2. Properties
The Bank conducts its business at its main office and two other
locations in its primary market area. The following table sets forth information
relating to each of the Bank's offices as of June 30, 2003.
The Bank owns one branch office and its main office. The total net book
value of the Bank's premises and equipment (including land, building, furniture,
fixtures and equipment) at June 30, 2003 was $3.3 million. See Note G of Notes
to Consolidated Financial Statements in Part II Item 7.
25
Total
Approximate Net Book
Year Square Value at
Location Acquired Footage June 30, 2003
---------------------------------------------------------------------------
Main Office:
13523 University Avenue 2001 12,000 $ 2,613,100
Clive, Iowa
Branch Offices:
4018 University Avenue 1985 4,000 $ 291,100
Des Moines, Iowa
700 Walnut Street, Suite 203 2002/(1)/ 2,077 $ 39,700
Des Moines, Iowa
/(1)/ Lease expires in May 2007 with an option to renew for an additional 5
year term.
The minimum lease amount for fiscal years 2004, 2005, 2006 and 2007 are
$41,500, $41,500, $41,500 and $38,100, respectively.
The Bank subleases approximately 250 square feet of its location on
Walnut Street, under a five year operating lease. The sublease began on April
29, 2002 and expires in May 2007.
The Bank believes that its current facilities are adequate to meet the
present and foreseeable needs of the Bank.
The Bank conducts its data processing through a service bureau, Fiserv.
The net book value of the data processing and computer equipment utilized by the
Bank at June 30, 2003 was $93,000. The net book value of other furniture and
equipment at June 30, 2003 was $286,000.
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. Neither the
Company nor State Service Corporation, the Bank's wholly-owned subsidiary, is 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, 2003.
26
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
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. The prices
reflect inter-dealer quotations without retail markup, markdown or commissions,
and do not necessarily represent actual transactions.
QUARTER ENDED HIGH LOW DIVIDENDS
------------------ ------ ------ ---------
September 30, 2000 10.500 8.750 0.075
December 31, 2000 11.000 9.500 0.125
March 31, 2001 11.063 8.875 0.100
June 30, 2001 11.260 8.500 0.100
September 30, 2001 11.600 9.500 0.100
December 31, 2001 10.500 7.850 0.100
March 31, 2002 10.390 9.800 0.100
June 30, 2002 11.500 9.900 0.100
September 30, 2002 10.300 8.710 0.100
December 31, 2002 12.400 10.200 0.100
March 31, 2003 12.650 11.000 0.100
June 30, 2003 12.450 11.210 0.100
Dividend restrictions are described in the notes to consolidated
financial statements included in this report.
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 23, 2003 was $12.06.
At September 24, 2003, there were 1,293,958 shares of StateFed Financial
Corporation common stock issued and outstanding and there were approximately 149
holders of record.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operation and Selected Financial Data
General
The Company owns all of the outstanding capital stock of State Federal
Savings and Loan Association (the "Bank"). 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.
27
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
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 record earnings while serving
its local community. The Company wants to earn the complete trust and respect of
its clients by providing compassionate personal service and sound financial
advice. Specifically, it offers a range of customer services and products,
including deposit accounts and loans with a special emphasis on one-to-four
family mortgage lending and, to a lesser extent, multi-family and commercial
real estate lending. Yet smaller portions of the Company's loans receivable
consists of construction and consumer loans. Management has focused on fixed
rate mortgage loans in recent years, achieving a loan portfolio consisting of
23.6% adjustable rate loans, 42.7% fixed rate loans, and 33.7% balloon and/or
call loans.
Critical Accounting Policies
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and disclosures included within this report, are based on
the Company's audited consolidated financial statements. These statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The financial information contained in these
statements is, for the most part, based on approximate measures of the financial
effects of transactions and events that have already occurred. However, the
preparation of these statements requires management to make certain estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses.
The Company's significant account policies are described in the "Notes
to Consolidated Financial Statements". Based on its consideration of accounting
policies that involve the most complex and subjective estimates and judgments,
management has identified its most critical accounting policy to be that related
to the allowance for loan losses.
The allowance for loan losses is established through a provision for
loan losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that collectibility of the principal is
unlikely. The Company has policies and procedures for evaluating the overall
credit quality of its loan portfolio including timely identification of
potential problem credits. On a quarterly basis, management reviews the
appropriate level for the allowance for loan losses incorporating a variety of
risk considerations, both quantitative and qualitative. Quantitative factors
include the Company's historical loss experience, delinquency and charge-off
trends, collateral values, known information about individual loans and other
factors. Qualitative factors include the general economic environment in the
Company's market area and the expected trend of those economic conditions. To
the extent actual results differ from forecasts and management's judgment, the
allowance for loan losses may be greater or less than future charge-offs.
28
June 30,
---------------------------------------------------------
2003 2002 2001 2000 1999
---------------------------------------------------------
(In Thousands)
Selected Financial Condition Data:
Total assets ............................... $ 96,753 $ 96,405 $ 107,549 $ 100,685 $ 90,824
Cash & cash equivalents .................... 4,407 3,115 7,729 2,477 8,481
Certificates of deposits in other
institutions .............................. 99 99 297 496 884
Investment securities ...................... 1,264 1,324 1,925 2,231 1,944
Loans held for sale ........................ 1,871 - - - -
Loans receivable, net ...................... 82,194 84,772 87,899 86,573 72,331
Deposits ................................... 72,973 66,901 62,987 53,648 54,713
FHLB advances .............................. 9,000 14,000 29,185 29,284 18,877
Stockholders' equity ....................... 13,907 14,196 14,088 16,650 16,123
June 30,
---------------------------------------------------------
2003 2002 2001 2000 1999
---------------------------------------------------------
(In Thousands)
Selected Operations Data:
Total interest income ...................... $ 6,533 $ 7,175 $ 8,231 $ 7,022 $ 6,695
Total interest expense ..................... 3,222 4,036 4,961 3,986 3,999
---------------------------------------------------------
Net interest income ........................ 3,311 3,139 3,270 3,036 2,696
Provision for loan losses .................. 763 566 151 36 36
---------------------------------------------------------
Net interest income after provision for
loan losses ............................... 2,548 2,573 3,119 3,000 2,660
Non-interest income:
Real estate operations ................... 49 247 519 525 566
Gain on sales of loans ................... 177 - - - -
Gain (Loss) on sale of real estate and
investments ............................. 7 748 (77) 52 106
Other non-interest income ................ 285 196 121 107 101
---------------------------------------------------------
Total non-interest income .................. 518 1,191 563 684 773
Total non-interest expense ................. 3,446 3,044 2,662 2,006 1,926
---------------------------------------------------------
Income (loss) before income taxes .......... (380) 720 1,020 1,678 1,507
Income tax expense (benefit) ............... (341) 189 357 537 489
---------------------------------------------------------
Net income (loss) .......................... $ (39) $ 531 $ 663 $ 1,141 $ 1,018
=========================================================
29
June 30,
-----------------------------------------------
2003 2002 2001 2000 1999
-----------------------------------------------
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to
average total assets) ..................... (0.04)% 0.53% 0.63% 1.22% 1.13%
Interest rate spread information:
Average during the year .................. 3.23 2.94 2.84 2.87 2.50
End of year .............................. 3.22 3.11 2.58 2.42 2.62
Net interest margin (1) .................... 3.57 3.37 3.35 3.51 3.20
Ratio of operating expense to average
total assets .............................. 3.48 3.04 2.52 2.15 2.13
Return on equity (ratio of net income to
average equity) ........................... (0.28) 3.72 4.07 7.02 6.30
Quality Ratios:
Non-performing assets to total assets at
end of year ............................... 2.48 2.06 3.21 2.30 1.84
Allowance for loan losses to
non-performing loans ...................... 54.87 46.76 17.92 26.54 27.36
Capital Ratios:
Stockholders' Equity to total assets at
end of year ............................... 14.37 14.72 13.10 16.54 17.75
Average Stockholders' Equity to average
assets .................................... 14.23 14.28 15.44 17.39 17.81
Ratio of average interest-earning assets
to average interest-bearing liabilities ... 1.100x 1.098x 1.101x 1.139x 1.147x
Number of full-service offices ............. 3 3 3 2 2
(1) Net interest income divided by average interest-earning assets.
Dividends declared per share $ 0.40 $ 0.40 $ 0.40 $ 0.30 $ 0.25
Dividend payout ratio -% 92.8% 87.5% 41.3% 37.3%
Financial Condition
Comparison of Fiscal Years Ended June 30, 2003 and June 30, 2002.
The Company's total assets increased from $96.4 million at June 30, 2002
to $96.8 million at June 30, 2003, an increase of $348,000, or .36%. The
increase was primarily due to increases in loans held for sale of $1.9 million,
cash and cash equivalents of $1.3 million, current and deferred income tax asset
of $264,000, funded by an increase in deposits and offset by decreases in net
loans receivable of $2.6 million, property acquired in the settlement of loans
of $277,000, accrued interest receivable of $102,000, net office property and
equipment of $82,000 and investment securities available for sale of $59,000.
Cash and cash equivalents increased $1.3 million from $3.1 million at
June 30, 2002 to $4.4 million at June 30, 2003. The increase was the result of
increases in deposits and the repayment of loans receivable, partially offset by
an increase in loans held for sale and the repayment of Federal Home Loan Bank
advances.
Loans held for sale were $1.9 million at June 30, 2003, as the Bank
began originating and selling servicing released single family fixed rate loans
in the secondary market.
Net loans receivable decreased $2.6 million from $84.8 million at June
30, 2002 to $82.2 million at June 30, 2003. Loans decreased primarily as a
result of the high level of loan refinancing activity, during 2003, in a lower
interest rate environment. Repayments of loan principal totaled $28.2 million
during 2003, while new loan originations and participation loans purchased for
portfolio totaled only $25.0 million during the same period.
At June 30, 2003, the allowance for loan losses totaled $1,319,000 or
1.55% of loans, compared to $927,000 or 1.06% of loans at June 30, 2002. In
determining the amount of the loan loss allowance at any point in time,
management and the Board apply a systematic process focusing on the risk of loss
in the portfolio. First, delinquent residential and consumer, and all
multi-family and commercial loans are evaluated individually for potential
impairments in their carrying value. At June 30, 2003, the analysis and review
of $6.9 million of classified loans resulted in $475,000 of the allocation of
the allowance. In the previous year ending June 30, 2002, the analysis and
review of $3.3 million of classified loans resulted in $465,000 of the
allocation of the allowance.
30
The second step in determining the allowance for loan losses entails the
application of historic loss experience to the individual loan types in the
portfolio. In addition to the historic loss percentage, management employs an
additional risk percentage tailored to the perception of the overall risk in the
economy. This segment of the loss analysis resulted in assigning $185,000 of the
allowance for loan losses at June 30, 2003, compared to $217,000 of the
allowance for loan losses for the year ended June 30, 2002.
The third step in determining the allowance for loan losses involves the
review and analysis of specific loans or industries that may be affected by or
at risk due to changes in the economy. As a result of this analysis, management
reviewed and analyzed its portfolio, and identified $3.3 million of commercial
loans that may contain some weakness and pose a possible loss to the Company.
The Company allocated $659,000 of the allowance to these specific loans at June
30, 2003. In the previous period ended June 30, 2002, the Company had allocated
$245,000 of the allowance, which were attributed to $1.6 million of commercial
participation loans.
Although management believes that its allowance for loan losses is
adequate based upon the available facts and circumstances, there can be no
assurance that additions to the allowance will not be necessary in future
periods, which could adversely affect the Company's results of operations. To
the best of management's knowledge, all known losses as of June 30, 2003, have
been recorded.
Total deposits increased $6.1 million from $66.9 million at June 30,
2002 to $73.0 million at June 30, 2003. During fiscal 2003, there were increases
in money market accounts, certificates of deposit of $3.4 million and $3.2
million, respectively, offset in part by decreases in savings accounts of
$545,000 and checking accounts of $32,000. The changes in deposits were
primarily due to the Company's new pricing strategy and increased marketing of
its deposit products.
Advances from the Federal Home Loan Bank (FHLB) decreased from $14.0
million at June 30, 2002 to $9.0 million at June 30, 2003. The decrease resulted
from the maturity of a $5.0 million long-term advance and the Company's decision
to reduce its outstanding daily FHLB advances.
Total stockholders' equity decreased $289,000 from $14.2 million at June
30, 2002 to $13.9 million at June 30, 2003. The decrease was primarily the
result of allocations to the Employee Stock Ownership Plan ("ESOP") totaling
$123,000, exercised stock options of $101,000 and unrealized gain net of tax
effect on investment securities of $39,000, which was partially offset by
dividends declared of $514,000 and a net loss of $39,000.
Results of Operations
Comparison of Fiscal Years ended June 30, 2003 and June 30, 2002.
General. Net income for the year ended June 30, 2003 decreased $570,000
from $531,000 at June 30, 2002 to a loss of $39,000 at June 30, 2003. The
decrease was primarily due to a decrease in non-interest income of $673,000, an
increase in non-interest expense of $402,000, and an increase in the provision
for loan losses of $197,000. Partially offsetting the decrease was an increase
in net-interest income of $172,000 and a decrease in income tax expense of
$530,000.
Net Interest Income. Net interest income increased $172,000 or 5.5%,
from $3.14 million for the year ended June 30, 2002 to $3.31 million for the
year ended June 30, 2003. This increase was due to a reduction of $814,000 in
interest expense, offset by a decrease in interest income of $642,000.
31
Interest Income. Interest income decreased $642,000 or 9.0%, from $7.18
million for the year ended June 30, 2002 to $6.53 million for the year ended
June 30, 2003. This decrease was primarily due to a decrease of 0.62% in the
average interest rate on loans compared to the prior year. Investment and other
interest income decreased due to a lower interest rate environment for interest
bearing cash accounts and investments and other securities and to a lesser
extent, a reduction in the average balance of investments and other securities.
Interest Expense. Interest expense decreased $814,000 from $4.04 million
for the year ended June 30, 2002 to $3.22 million for the year ended June 30,
2003. This decrease resulted from decreases in interest expense on deposits of
$433,000, and decreases in interest on borrowings of $381,000. The reduction in
interest expense resulted primarily from a decrease in the average rate paid on
deposit accounts and the repayment of Federal Home Loan Bank ("FHLB") advances,
partially offset by an increase in the average deposit balances.
Provision for Loan Losses. The Company's provision for loan losses was
$763,000 and $566,000 for the fiscal years ended June 30, 2003 and 2002,
respectively. To the best of management's knowledge, all known losses as of June
30, 2003 and 2002 have been recorded.
Non-interest Income. Non-interest income decreased $673,000 from
$1,191,000 at June 30, 2002 to $518,000 for the year ended June 30, 2003. The
decrease was primarily due to a $620,000 reduction in the net gain on sale of
real estate. During the period ended June 30, 2002, the Company sold its two
apartment complexes resulting in a net gain on sale of real estate held for
investment of $635,000. There was also a decrease in real estate operations
income of $198,000, which had been generated by the two apartment complexes in
previous periods. There was a $7,000 loss on the sale of investments available
for sale for the year ended June 30, 2003, compared to a gain on the sale of
investments available for sale of $113,000 for the year ended June 30, 2002.
Gain on the sale of loans was $177,000, as the Bank began originating and
selling loans in the secondary market during the twelve month period ended June
30, 2003. Other non-interest income increased $88,000, and was primarily due to
increases in fee income for the year ended June 30, 2003, as compared to the
year ended June 30, 2002.
Non-interest Expense. Non-interest expense increased from $3.04 million
for the year ended June 30, 2002 to $3.44 million for the year ended June 30,
2003. The increase of $402,000 was primarily the result of increases in salaries
and benefits of $279,000, other non-interest expense of $261,000, occupancy and
equipment expense of $122,000, advertising expense of $35,000 and data
processing expense of $29,000, which were partially offset by decreases in real
estate operations expense of $184,000 and provision for decline in value of real
estate held for sale of $158,000. The increase in salaries and benefits was
primarily related to commissions paid to loan originators, as the Bank began
originating and selling mortgages in the secondary market. Other non-interest
expense increases were primarily due to increases in outside audit and
consulting expense and costs associated with expansion of the residential
mortgage program, related to improving efficiency and expansion of residential
mortgage originations. The increase in occupancy and equipment expense was due
to the increased costs associated with the Clive office and the expansion of the
mortgage lending department. Increases in marketing and advertising expense
resulted from increased market awareness and expansion of products and services.
Data processing expense increased primarily due to the addition of telephone
banking services for our customers, provided by our data processor. The
reduction in real estate operations expense was related to the two apartment
complexes that the Company sold during the year ended June 30, 2002. There were
no additional reductions in the value of real estate held for sale.
Income Tax Expense. Income tax expense (benefit) was ($341,000) for the
fiscal year ended June 30, 2003, compared to a tax expense of $189,000 for the
fiscal year ended June 30, 2002. The expense reduction was due to a decrease in
taxable income, tax refunds receivable from prior periods' amended tax returns,
settlement of tax contingencies and the application of tax credits.
32
Asset/Liability Management
The measurement and analysis of the exposure of the Bank 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 Bank 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 Bank focuses lending efforts toward offering fixed-rate,
adjustable-rate, and balloon loan products. The Bank has not historically sold
its loans, but began originating and selling residential fixed rate servicing
released loans in the secondary market during the fiscal year ended June 30,
2003 in order to maintain asset quality and profitability.
The primary objective of the Bank'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 Bank 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
Bank's asset/liability management policies.
The Bank'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 levels of short-term interest rates. The
Bank 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,
2003, the Company would qualify for an exemption from this rule.
The following table sets forth, at June 30, 2003, 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). Due to the abnormally low
prevailing interest rate environment, down 200 and 300 basis points NPV
estimates are not presented.
Change in Estimated Estimated Increase
Interest Rates NPV (Decrease) in NPV
(Basis Points) Amount Amount Percent
-------------- --------- ---------- --------
(Dollars in Thousands)
+300bp 8,985 (893) -9%
+200bp 9,672 (206) -2%
+100bp 10,121 243 2%
+0bp 9,878 - -
-100bp 9,189 (689) -7%
33
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.
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.
Year Ended June 30,
-----------------------------------------------------------------
2003 2002
-----------------------------------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
-----------------------------------------------------------------
(Dollars in Thousands)
Interest-Earning Assets:
Interest-earning bank accounts $ 4,469 $ - -% $ 4,416 $ 65 1.47%
Certificates of deposit
invested in other institutions 99 7 7.07 274 15 5.47
Investments and other securities 1,279 56 4.38 1,763 98 5.56
Loans receivable/(1)/ 85,015 6,417 7.55 84,915 6,937 8.17
FHLB stock 1,762 53 3.01 1,762 60 3.40
------------------------------ -------------------------------
Total interest-earning
assets/(1)/ 92,624 6,533 7.05 93,130 7,175 7.70
===================== ======================
Interest-Bearing Liabilities:
Savings accounts 2,713 16 0.59 3,392 63 1.86
Checking accounts 3,460 9 0.26 3,262 21 0.64
Money market accounts 14,296 296 2.07 8,649 238 2.75
Certificates of deposit 52,849 2,305 4.36 50,968 2,738 5.37
FHLB advances 10,923 596 5.46 18,541 977 5.27
Effect of capitalized interest - - - - - -
--------------------- ------ ---------------------- ------
Total interest-bearing
liabilities 84,241 3,222 3.82 84,812 4,037 4.76
--------------------- ------ ---------------------- ------
Net interest income $ 3,311 $ 3,138
======== =========
Net interest rate spread 3.23% 2.94%
====== ======
Net earning assets $ 8,383 $ 8,318
=========== ===========
Net yield on average
interest-earning assets 3.57% 3.37%
====== ======
Average interest-earning assets
to average interest-bearing
liabilities 1.100x 1.098x
======== =========
Year Ended June 30,
------------------------------
2001
------------------------------
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
------------------------------
(Dollars in Thousands)
Interest-Earning Assets:
Interest-earning bank accounts $ 3,646 $ 162 4.44%
Certificates of deposit
invested in other institutions 411 26 6.33
Investments and other securities 2,047 102 4.98
Loans receivable/(1)/ 89,869 7,842 8.73
FHLB stock 1,663 99 5.95
------------------------------
Total interest-earning
assets/(1)/ 97,636 8,231 8.43
=====================
Interest-Bearing Liabilities:
Savings accounts 3,420 93 2.72
Checking accounts 3,277 40 1.22
Money market accounts 4,750 173 3.64
Certificates of deposit 44,706 2,787 6.23
FHLB advances 32,543 1,928 5.92
Effect of capitalized interest - (60) -
--------------------- ------
Total interest-bearing
liabilities 88,696 4,961 5.59
--------------------- ------
Net interest income $ 3,270
========
Net interest rate spread 2.84%
======
Net earning assets $ 8,940
===========
Net yield on average
interest-earning assets 3.35%
======
Average interest-earning assets
to average interest-bearing
liabilities 1.101x
========
- ----------
(1) Calculated net of deferred loan fees, loan discounts, loans in process
and loss reserves.
34
Rate/Volume Analysis
The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the increase or decrease
due 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.
Year Ended June 30, Year Ended June 30,
---------------------------------------------------------------------
2003 v. 2002 2002 v. 2001
---------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
-------------------- -------------------
Total Total
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
--------- -------- ---------- -------- ------- -----------
(Dollars in Thousands)
Interest-earning assets:
Interest-earning bank accounts $ 1 $ (71) $ (70) $ 29 $ (126) $ (97)
Certificates of deposit invested in
other instituions (11) 3 (8) (8) (3) (11)
Investments and other securities (24) (13) (37) (15) 11 (4)
Loans receivable 8 (528) (520) (485) (420) (905)
FHLB stock - (7) (7) 6 (45) (39)
--------- -------- ---------- -------- ------- -----------
Total interest-earning assets $ (26) $ (616) $ (642) $ (473) $ (583) $ (1,056)
========= ======== ========== ======== ======= ===========
Interest-bearing liabilities:
Savings accounts (11) (37) (48) (1) (29) (30)
Checking accounts 1 (13) (12) - (19) (19)
Money market accounts 127 (68) 59 115 (50) 65
Certificates of deposit 98 (531) (433) 363 (412) (49)
FHLB advances (416) 35 (381) (757) (194) (951)
--------- -------- ---------- -------- ------- -----------
Total interest-bearing liabilities $ (201) $ (614) $ (815) $ (280) $ (704) $ (984)
========= ======== ========== ======== ======= ===========
Net interest income, before effect
of capitalized interest $ 173 $ (72)
Effect of capitalized interest - (60)
---------- -----------
Net interest income $ 173 $ (132)
========== ===========
Interest Rate Spread
The Company's results of operations are determined primarily by net
interest income and, to a lesser extent, fee income, miscellaneous income and
operating expenses. Net interest income is determined by the interest rate
spread between the yields earned on its interest-earning assets and the rates
paid on interest-bearing liabilities and by the relative amounts of
interest-earning assets and interest- bearing liabilities.
The following table sets forth the weighted average effective interest
rate earned by the Company on its loan and investment portfolios, the weighted
average effective cost of the Company's deposits and borrowings, the interest
rate spread of the Company and the net yield on weighted average interest-
earning assets at year end.
At June 30,
--------------------
2003 2002 2001
--------------------
Weighted average yield on:
Loans receivable ................................................ 7.01% 7.65% 8.47%
Interest-earning bank accounts .................................. 0.78 1.29 3.57
Certificates of deposit invested in other insitutions ........... 6.75 6.75 6.87
Investments and other securities ................................ 4.50 2.63 5.07
FHLB stock ...................................................... 3.00 3.00 4.56
Combined weighted average yield on interest-earning assets .... 6.64 7.27 7.99
Weighted average rate paid:
Savings accounts ................................................ 0.32 1.21 2.83
Checking accounts ............................................... 0.24 0.27 1.44
Money market accounts ........................................... 1.80 2.47 3.29
Certificates of deposit ......................................... 4.02 4.74 6.12
FHLB advances ................................................... 5.17 5.51 5.21
Combines weighted average rate paid on interest-bearing
liabilities .................................................. 3.42 4.16 5.41
Spread ............................................................ 3.22 3.11 2.58
35
Liquidity and Capital Resources
The OTS requires the Bank to maintain a safe and sound level of liquid
assets. Such assets may include United States Treasury, federal agency, and
other investments having maturities of five years or less and are intended to
provide a source of relatively liquid funds upon which the Bank may rely, if
necessary, to fund deposit withdrawals and other short-term funding needs. The
Bank's regulatory liquidity at June 30, 2003 was 6.92%.
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, 2003 has been the increasing deposit base. The net increase in
deposit accounts was $6.1 million during fiscal year 2003.
Liquidity management is both a daily and long-term responsibility of
management. The Company adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) expected deposit
flows, (iii) yields available on interest-bearing deposits and (iv) the
objectives of its asset/liability management program. Excess liquidity is
invested generally in interest-bearing overnight deposits and other short-term
government and agency obligations. If the Company requires additional funds
beyond its internal ability to generate, it has additional borrowing capacity
with the FHLB of Des Moines.
The Company anticipates that it will have sufficient funds available to
meet current loan commitments. At June 30, 2003, the Company had outstanding
commitments to extend credit which amounted to approximately $3.5 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, 2003, totaled approximately $21.7 million. Based on historical experience,
management believes that a significant portion of such deposits will remain with
the Bank. There can be no assurance, however, that the Bank can retain all such
deposits. At June 30, 2003, the Bank had $9.0 million in advances from the FHLB
of Des Moines outstanding.
As a savings and loan holding company of a federal stock savings and
loan association, the Company's capital currently consists of stockholders'
equity including retained earnings. At June 30, 2003, the Company's
stockholders' equity totaled $13.9 million, or 14.37% of assets.
At June 30, 2003, the Bank had tangible and core capital of $7.2
million, or 7.87% of adjusted total assets, respectively, which was
approximately $5.8 million and $3.5 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, 2003, the Bank had risk-based capital of $7.8 million (including
$7.2 million in core capital), or 13.34% of risk-weighted assets of $58.8
million. This amount was $3.1 million above the 8% requirement in effect on that
date. The Bank is considered "well-capitalized."
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with accounting principles generally accepted
in the United States of America 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.
36
Impact of New Accounting Standards
Accounting Standards Statement of Financial Accounting Standards.
The Financial Accounting Standards Board (FASB) has issued Statement
148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB No. 123." This Statement amends Statement No. 123 to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation and amends the
disclosure requirements of Statement No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation are
effective for transitions after July 1, 2003. The Company will not make a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. The amended disclosure requirements are currently
effective and have been adopted in the consolidated financial statements for the
year ended June 30, 2003.
The FASB has issued Statement 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging". This Statement amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instrument embedded in other contracts, and for hedging activities
under Statement 133. The Statement is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after June
30, 2003. Implementation of the Statement is not expected to have a material
impact on the consolidated financial statements.
The FASB has issued Statement 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity and
requires that certain freestanding financial instruments be reported as
liabilities in the balance sheet. For the Company, the Statement is effective
July 1, 2003 and the Company is not expected to have a material impact on the
consolidated financial statements.
37
Item 7. Financial Statements
INDEPENDENT AUDITOR'S REPORT
To The Board of Directors
StateFed Financial Corporation
Clive, Iowa
We have audited the accompanying consolidated balance sheet of StateFed
Financial Corporation and subsidiary as of June 30, 2003, and the related
consolidated statements of income, comprehensive income, stockholders' equity,
and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the 2003 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, 2003 and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America.
McGladrey & Pullen, LLP
Des Moines, Iowa
August 14, 2003
38
StateFed Financial Corporation
Consolidated Balance Sheets
June 30,
----------------------------
2003 2002
------------ ------------
ASSETS
Cash and cash equivalents
Non-interest bearing $ 598,966 $ 268,524
Interest bearing 3,808,372 2,846,158
------------ ------------
4,407,338 3,114,682
Investments in certificates of deposit 99,000 99,000
Investment securities available-for-sale 1,264,495 1,323,918
Loans held for sale 1,870,683 -
Loans receivable, net 82,193,569 84,771,507
Real estate held for sale, net 540,500 540,500
Property acquired in settlement of loans 87,546 364,622
Office property and equipment, net 3,323,484 3,405,720
Federal Home Loan Bank stock, at cost 1,762,200 1,762,200
Accrued interest receivable 470,357 572,414
Income tax refund receivable 90,707 -
Deferred income taxes 314,926 142,046
Other assets 328,610 308,632
------------ ------------
Total Assets $ 96,753,415 $ 96,405,241
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 72,973,470 $ 66,901,147
Advances from the Federal Home Loan Bank 9,000,000 14,000,000
Advances from borrowers for taxes and insurance 380,606 351,422
Accrued interest payable 1,702 174,921
Income taxes payable - 305,231
Accounts payable and other liabilities 361,694 349,063
Dividends payable 129,161 127,887
------------ ------------
Total Liabilities 82,846,633 82,209,671
Commitments and Contingencies
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 1,291,614 (2003) and 1,278,870
(2002) shares outstanding 17,810 17,810
Additional paid-in capital 8,566,238 8,527,873
Retained earnings - substantially restricted 10,327,496 10,880,409
Less treasury stock (489,358 and 502,102 shares, at cost) (5,041,185) (5,172,468)
Less unearned employee stock ownership plan shares (30,875) (85,575)
Accumulated other comprehensive income --
net unrealized gains on available-for-sale
securities, net of related tax effect 67,298 27,521
------------ ------------
Total Stockholders' Equity 13,906,782 14,195,570
------------ ------------
Total Liabilities and Stockholders' Equity $ 96,753,415 $ 96,405,241
============ ============
39
StateFed Financial Corporation
Consolidated Statements of Income
Year ended June 30,
2003 2002 2001
----------- ----------- -----------
INTEREST INCOME
Loans receivable $ 6,416,719 $ 6,937,015 $ 7,842,292
Investment securities and other 116,112 238,175 388,767
----------- ----------- -----------
6,532,831 7,175,190 8,231,059
INTEREST EXPENSE
Deposits 2,626,349 3,059,883 3,055,787
Advances from the Federal Home Loan
Bank 595,514 976,759 1,905,468
----------- ----------- -----------
3,221,863 4,036,642 4,961,255
----------- ----------- -----------
NET INTEREST INCOME 3,310,968 3,138,548 3,269,804
PROVISION FOR LOAN LOSSES 762,847 565,656 151,000
----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,548,121 2,572,892 3,118,804
NON-INTEREST INCOME
Investment real estate operations 48,932 247,003 518,719
Gain on sales of loans held for sale 176,732 - -
Gain (loss) on sale of
available-for-sale investments (7,087) 112,886 (95,880)
Gain on sale of real estate, net 14,398 634,026 18,873
Other 285,309 196,975 121,151
----------- ----------- -----------
518,284 1,190,890 562,863
NON-INTEREST EXPENSE
Salaries and employee benefits 1,648,057 1,369,299 1,287,057
Investment real estate operations - 183,736 321,672
Occupancy expenses 551,825 429,379 245,830
Federal deposit insurance premiums 44,147 44,385 38,563
Data processing services 173,460 144,747 128,429
Advertising 155,078 119,897 62,644
Legal fees 110,163 91,525 156,477
Provision for decline in value of real
estate held for sale - 157,890 -
Other 763,398 502,802 421,213
----------- ----------- -----------
3,446,128 3,043,660 2,661,885
----------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES (379,723) 720,122 1,019,782
PROVISION FOR INCOME TAXES (340,906) 189,307 356,460
----------- ----------- -----------
NET INCOME (LOSS) $ (38,817) $ 530,815 $ 663,322
=========== =========== ===========
Basic earnings (loss) per share $ (0.03) $ 0.42 $ 0.45
=========== =========== ===========
Diluted earnings (loss) per share $ (0.03) $ 0.41 $ 0.44
=========== =========== ===========
Dividends declared per common share $ 0.40 $ 0.40 $ 0.40
40
StateFed Financial Corporation
Consolidated Statements of Comprehensive Income
Year ended June 30,
----------------------------------------
2003 2002 2001
----------- ----------- -----------
Net income (loss) $ (38,817) $ 530,815 $ 663,322
Other comprehensive income, net of tax
effects:
Unrealized holding gains (losses) on
securities arising during the year 34,958 78,934 90,003
Reclassification adjustment - realized
(gains) losses on securities during
the year 4,819 (76,762) 59,925
----------- ----------- -----------
Net change in accumulated other
comprehensive income 39,777 2,172 149,928
----------- ----------- -----------
Comprehensive income $ 960 $ 532,987 $ 813,250
=========== =========== ===========
41
StateFed Financial Corporation
Consolidated Statement of Changes in Stockholders' Equity
Years ended June 30, 2003, 2002 and 2001
-----------------------------------------------------------
Additional
Common Paid-in Retained Treasury
Stock Capital Earnings Stock
-----------------------------------------------------------
Balance at June 30, 2000 $ 17,810 $ 8,546,501 $ 10,778,818 $ (2,362,921)
Net income for the year - - 663,322 -
Dividends declared - - (580,287) -
ESOP common stock released for allocation - 62,575 - -
Treasury stock acquired - 256,474 shares - - - (3,035,632)
Treasury stock reissued to fund stock options
exercised - 23,200 shares - (86,720) - 202,719
Change in unrealized gains (losses)
on available-for-sale securities, net of
related tax effects - - - -
-----------------------------------------------------------
Balance at June 30, 2001 17,810 8,522,356 10,861,853 (5,195,834)
Net income for the year - - 530,815 -
Dividends declared - - (512,259) -
ESOP common stock released for allocation - 61,363 - -
Treasury stock acquired - 8,000 shares - - - (85,200)
Treasury stock reissued to fund stock options
exercised - 10,544 shares - (55,846) - 108,566
Change in unrealized gains (losses)
on available-for-sale securities, net of
related tax effects - - - -
-----------------------------------------------------------
Balance at June 30, 2002 17,810 8,527,873 10,880,409 (5,172,468)
Net income (loss) for the year - - (38,817) -
Dividends declared - - (514,096) -
ESOP common stock released for allocation - 68,429 - -
Treasury stock reissued to fund stock options
exercised - 12,744 shares - (30,064) - 131,283
Change in unrealized gains (losses)
on available-for-sale securities, net of
related tax effects - - - -
-----------------------------------------------------------
Balance at June 30, 2003 $ 17,810 $ 8,566,238 $ 10,327,496 $ (5,041,185)
===========================================================
Years ended June 30, 2003, 2002 and 2001
---------------------------------------------------
Common
Stock Accumulated Other Total
Acquired Comprehensive Stockholders'
By ESOP Income (Loss) Equity
---------------------------------------------------
Balance at June 30, 2000 $ (205,761) $ (124,579) $ 16,649,868
Net income for the year - - 663,322
Dividends declared - - (580,287)
ESOP common stock released for allocation 61,895 - 124,470
Treasury stock acquired - 256,474 shares - - (3,035,632)
Treasury stock reissued to fund stock options
exercised - 23,200 shares - - 115,999
Change in unrealized gains (losses)
on available-for-sale securities, net of
related tax effects - 149,928 149,928
---------------------------------------------------
Balance at June 30, 2001 (143,866) 25,349 14,087,668
Net income for the year - - 530,815
Dividends declared - - (512,259)
ESOP common stock released for allocation 58,291 - 119,654
Treasury stock acquired - 8,000 shares - - (85,200)
Treasury stock reissued to fund stock options
exercised - 10,544 shares - - 52,720
Change in unrealized gains (losses)
on available-for-sale securities, net of
related tax effects - 2,172 2,172
---------------------------------------------------
Balance at June 30, 2002 (85,575) 27,521 14,195,570
Net income (loss) for the year - - (38,817)
Dividends declared - - (514,096)
ESOP common stock released for allocation 54,700 - 123,129
Treasury stock reissued to fund stock options
exercised - 12,744 shares - - 101,219
Change in unrealized gains (losses)
on available-for-sale securities, net of
related tax effects - 39,777 39,777
---------------------------------------------------
Balance at June 30, 2003 $ (30,875) $ 67,298 $ 13,906,782
===================================================
42
StateFed Financial Corporation
Consolidated Statement of Cash Flows
Year ended June 30,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
Cash flows from operating activities
Net income (loss) $ (38,817) $ 530,815 $ 663,322
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities:
Depreciation 248,653 220,277 223,048
Gain on sales of real estate, net (14,398) (634,026) (18,873)
Amortization of ESOP contributions 123,129 119,654 124,470
Realized (gains) losses on sale of available-for-sale securities 7,087 (112,886) 95,880
Deferred loan fees (16,573) (35,522) 17,530
(Gain) on sale of loans held for sale (176,732) - -
Loans originated for sale (12,679,980) - -
Loans sold 10,986,029 - -
Provision for losses on loans 762,847 565,656 151,000
Provision for decrease in value of real estate held for sale - 157,890 -
Deferred income taxes (176,812) (317,846) (43,962)
Change in:
Accrued interest receivable 102,057 57,752 (63,573)
Other assets (19,978) 31,206 14,326
Accrued interest payable (173,219) 4,057 30,621
Current income tax (395,938) 246,687 (139,448)
Accounts payable and other liabilities 12,631 (42,990) 193,364
------------ ------------ ------------
Net cash provided (used) by operating activities (1,450,014) 790,724 1,247,705
Cash flows from investing activities
Maturity of investments in certificates of deposit - 198,272 198,420
Proceeds from sale or maturity of available-for-sale investment
securities 298,685 1,122,108 450,426
Purchase of available-for-sale investment securities (202,640) (375,310) -
Purchase of FHLB stock - - (297,600)
Net (increase) decrease in loans outstanding 1,568,178 3,617,240 (1,482,619)
Investment in real estate held for investment - - (1,922)
Investment in real estate held for development - 43,174 (12)
Proceeds from sales of real estate 554,960 2,658,077 24,000
Purchases of equipment and construction of office property (166,417) (358,561) (1,133,744)
------------ ------------ ------------
Net cash flows provided (used) by investing activities 2,052,766 6,905,000 (2,243,051)
Cash flows from financing activities
Net increase (decrease) in deposits 6,072,323 3,913,651 9,339,378
Advances from Federal Home Loan Bank - - 6,000,000
Repayment of Federal Home Loan Bank advances (5,000,000) (15,185,149) (6,098,757)
Net increase (decrease) in advances from borrowers 29,184 (43,610) 41,289
Proceeds from stock options exercised 101,219 52,720 116,000
Dividends paid (512,822) (512,005) (565,875)
Treasury stock purchased - (85,200) (3,035,632)
------------ ------------ ------------
Net cash flows provided (used) by financing activities 689,904 (11,859,593) 5,796,403
------------ ------------ ------------
CHANGE IN CASH AND CASH EQUIVALENTS 1,292,656 (4,163,869) 4,801,057
CASH AND CASH EQUIVALENTS, beginning of year 3,114,682 7,278,551 2,477,494
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 4,407,338 $ 3,114,682 $ 7,278,551
============ ============ ============
43
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 Bank). Its primary business activity
is the operation of the Bank.
The Bank provides a full range of banking services to individual and
corporate customers from its three offices located in Des Moines and
Clive, Iowa. The Bank's wholly-owned subsidiary, State Service
Corporation, sells uninsured investment products and services.
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 accounting principles generally accepted in the United States of
America 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.
CASH, CASH EQUIVALENTS AND CASH FLOWS - For purposes of reporting cash
flows, cash and cash equivalents include cash on hand and demand
deposits at other financial institutions, including cash items in
process of clearing. Cash flows from loans and deposits are reported
net.
INVESTMENT AND OTHER SECURITIES - 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
separate component of other comprehensive income. The amortization of
premiums and accretion of discounts, computed by the interest method
over their contractual lives, are recognized in interest income.
The Bank, 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). No ready market exists for the FHLB stock, and it
has no quoted market value. The stock is recorded at cost, which
represents anticipated redemption value.
Gains and losses on the sale of investment securities, determined using
the specific identification method, are included in earnings on the
trade date.
LOANS HELD FOR SALE - Loans held for sale are those loans the Company
has the intent to sell in the foreseeable future. They are carried at
the lower of aggregate cost or market value. Net unrealized losses, if
any, are recognized through a valuation allowance by charges to income.
Gains and losses on sales of loans are recognized at settlement dates
and are determined by the difference between the sales proceeds and the
carrying value of the loans.
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.
44
The allowance for loan losses is increased by provisions charged to
income and by charge-offs, net of recoveries. Management's periodic
evaluation of the adequacy of the allowance is based on the Bank's past
loan experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral, and current economic conditions.
While management uses the best information available to make its
evaluation, future adjustments to the allowance may be necessary if
there are no significant changes in economic conditions.
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 by measuring impaired loans
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. The amount of
impairment, if any, and any subsequent changes are included in the
allowance for loan losses.
A loan is defined 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.
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.
REAL ESTATE HELD FOR SALE - Real estate held for sale is comprised of
commercial property previously occupied and operated as a branch. It is
stated at the lower of net carrying value or fair value, less estimated
costs to sell.
PROPERTY ACQUIRED IN SETTLEMENT OF LOANS - Property acquired in the
settlement of loans 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. Any write-down to fair value at the
time of transfer is charged to the allowance for loan losses. Costs
relating to improvement of the property are capitalized, whereas costs
relating to the holding of the property are expensed. Valuation
allowances are established 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 less accumulated depreciation. Depreciation
is provided using straight-line or accelerated methods over the
estimated useful lives of the related assets, ranging from 3 to 39
years.
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 - Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the difference between the reported amounts of assets
and liabilities and their income tax bases. Income taxes are allocated
to the Company and its subsidiaries based on each entity's income tax
liability as if it filed a separate return.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion, or
all of the deferred tax assets, will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax
laws and rates on the date of enactment.
45
COMPREHENSIVE INCOME - Accounting principles generally require that
recognized revenue, expenses, gains and losses be included in net
income. Although certain changes in assets and liabilities, such as
realized gains and losses on available-for-sale securities, are reported
as a separate component of the equity section of the balance sheet, such
items, along with net income, are components of comprehensive income.
Gains and losses on available-for-sale securities are reclassified to
net income as the gains or losses are realized upon sale of the
securities. Other-than-temporary impairment charges are reclassified to
net income at the time of the charge.
OPERATING SEGMENTS - The Company uses the "management approach" for
reporting information about segments in annual and interim financial
statements. The management approach is based on the way the chief
operating decision-maker organizes segments within a company for making
operating decisions and assessing performance. Reportable segments are
based on products and services, geography, legal structure, management
structure and any other manner in which management disaggregates a
company. Based on the "management approach" model, the Company has
determined that its business is comprised of a single operating segment.
EARNINGS PER SHARE - Basic earnings per common share is computed based
upon the weighted-average number of common shares outstanding during the
period. Diluted earnings per common share include the dilutive effect of
additional potential common shares issuable under the Company's stock
option plan. In accordance with Statement of Position 93-6, shares owned
by the ESOP that have not been committed to be released are not
considered to be outstanding for the purpose of computing earnings per
share. The computation of earnings per share are as follows:
Year Ended June 30,
---------------------------------
2003 2002 2001
---------------------------------
Weighted-average common
shares outstanding (basic) 1,271,165 1,258,083 1,468,121
Dilutive effect of assumed
exercise of stock options - 27,426 29,491
---------------------------------
Weighted-average common
shares outstanding (diluted) 1,271,165 1,285,509 1,497,612
=================================
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 continue to measure
compensation using the intrinsic value based method. Accordingly,
compensation cost for stock options is measured as the excess, if any,
of the quoted market price of the Company's stock at the date of the
grant over the amount an employee must pay to acquire the stock.
Entities are also 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. Had the Company determined
compensation cost based on the fair value at the grant date for stock
options under SFAS 123, the Company's net income and net income per
share would have been as indicated below:
Year Ended June 30,
-------------------------------------
2003 2002 2001
-------------------------------------
Net income (loss) - as reported $ (38,817) $ 530,815 $ 663,322
Deduct: Total stock based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects
Net income (loss) - pro forma (8,260) (2,002) (7,135)
-------------------------------------
$ (47,077) $ 528,813 $ 656,187
=====================================
Basic earnings (loss) per share - as reported $ (0.03) $ 0.42 $ 0.45
Basic earnings (loss) per share - pro forma $ (0.04) $ 0.42 $ 0.45
Diluted earnings (loss) per share - as reported $ (0.03) $ 0.41 $ 0.44
Diluted earnings (loss) per share - pro forma $ (0.04) $ 0.41 $ 0.44
46
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option valuation model with the following
weighted average assumption used for grants during fiscal 2001:
risk-free interest rate of 6.50%, dividend yield of 4.00%, expected
volatility of 34.53%, and expected lives of 5 years. The weighted
average fair value of the options granted in fiscal 2001 was $0.86 per
share. The effects of applying SFAS 123 may not be representative of the
effects on reported net earnings for future years. No options were
granted by the Company during the fiscal years ended June 30, 2003 and
2002.
NOTE B - STATEMENT OF CASH FLOWS
Supplemental Disclosures of Cash Flow Information
Year Ended June 30,
---------------------------------------
2003 2002 2001
---------------------------------------
Income taxes paid $ 231,845 $ 236,400 $ 539,869
=======================================
Interest paid on deposits
and FHLB advances $ 3,395,082 $ 4,032,585 $ 4,990,324
=======================================
Noncash Investing and Financing Activities
Property acquired through foreclosure totaled $617,746, $605,516 and
$197,343 during fiscal years 2003, 2002 and 2001, respectively. The
Company also financed $354,260, $1,625,461 and $209,400 of loans for
borrowers to purchase real estate owned by the Company during fiscal
years 2003, 2002 and 2001, respectively.
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. At June 30,
2003, the Company had $99,000 invested in a 6.75% certificate of deposit
that matures during fiscal 2004.
NOTE D - INVESTMENT SECURITIES
Following is a summary of investment securities available for sale:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------
June 30, 2003:
U.S. government and agency
debt securities $ 135,945 $ 4,971 $ (217) $ 140,699
Equity securities 1,032,410 111,406 (20,020) 1,123,796
-------------------------------------------------------
$ 1,168,355 $ 116,377 $ (20,237) $ 1,264,495
=======================================================
June 30, 2002:
U.S. government and agency
debt securities $ 140,585 $ 992 $ - $ 141,577
Municipal bonds 101,170 - (408) 100,762
Equity securities 1,029,732 51,847 - 1,081,579
-------------------------------------------------------
$ 1,271,487 $ 52,839 $ (408) $ 1,323,918
=======================================================
The contractual maturities of debt securities at June 30, 2003, are
shown below. Actual maturities may differ from contractual maturities as
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
47
Weighted
Average Amortized Fair
Yield Cost Value
-------------------------------
Due in one year or less 3.58% $ 55,464 $ 55,425
Due after one year through five years -% - -
Due after five years through ten years 7.25% 3,704 3,721
Due after ten years 6.46% 76,777 81,553
---------------------
$ 135,945 $ 140,699
=====================
The Company had realized gains (losses) on the sale of investment
securities totaling ($7,087), $112,886, and ($95,880) during fiscal
years 2003, 2002 and 2001, respectively. Proceeds from the sale of
available-for-sale securities totaled $145,493 for 2003, $900,871 for
2002, and $99,790 for 2001.
Included in the interest income on investment securities and other was
dividend income of $52,273, $81,252, and $76,817 for the years ended
June 30, 2003, 2002 and 2001, respectively.
NOTE E - LOANS RECEIVABLE, NET
Following is a summary of loans receivable:
June 30,
----------------------------
2003 2002
----------------------------
Real estate mortgage loans:
Secured by one-to-four family residences $ 55,885,939 $ 55,481,964
Secured by commercial and multi-family real
estate 22,235,356 25,846,350
Construction loans 3,019,017 4,331,204
----------------------------
Total real estate mortgage loans 81,140,312 85,659,518
Consumer and other loans 3,835,034 2,068,374
----------------------------
84,975,346 87,727,892
Less:
Allowance for loan losses (1,318,868) (927,311)
Undisbursed portion of mortgage loans (1,176,069) (1,725,745)
Unamortized balance on purchased loan
premiums - 83
Deferred loan fees, net (286,840) (303,412)
----------------------------
Loans receivable, net $ 82,193,569 $ 84,771,507
============================
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. The economic condition of the
Company's market area can affect its borrowers' ability to repay their
loans.
Commercial and multi-family real estate loans include participating
interests in loans purchased by the Company. Participation loans
purchased totaled approximately $6,374,000 and $7,670,000 at June 30,
2003 and 2002, respectively. A significant portion of these
participation loans are secured by real estate located outside of Iowa.
48
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.
At June 30, 2003, the Company had outstanding commitments to fund loans
of approximately $3,500,000. The commitments were primarily for fixed
interest rate commercial and residential real estate loans on real
estate located across the Midwest. The Company also had outstanding
commitments on unused portions of available lines of credit totaling
$1.7 million at June 30, 2003.
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.
In the normal course of business, the Company has made loans to their
directors, officers and their related business interests. Regulations
allow executive officers and directors to receive the same loan terms
that are widely available to other employees, as long as the director or
executive officer is not given preferential treatment compared to other
participating employees. The table below details the activity for loans
outstanding to directors, officers and their related business interests:
2003 2002
-----------------------
Balance, beginning of year $ 948,019 $ 949,151
Loans disbursed 175,836 140,524
Principal repayments (185,294) (141,656)
-----------------------
Balance, end of year $ 938,561 $ 948,019
=======================
The Company began originating and selling on a servicing released basis,
single family fixed rate loans in the secondary market during the year
ended June 30, 2003. During the year ended June 30, 2002, the Company
did not sell any portion of its loan portfolio, or loans originated.
Activity in the allowance for loan losses is summarized as follows:
Year Ended June 30,
-----------------------------------------
2003 2002 2001
-----------------------------------------
Balance at beginning of year $ 927,311 $ 382,325 $ 258,801
Provision for losses on loans 762,847 565,656 151,000
Charge-offs on loans (427,948) (76,751) (27,476)
Recoveries on charged-off loans 56,658 56,081 -
-----------------------------------------
Balance at end of year $ 1,318,868 $ 927,311 $ 382,325
=========================================
49
Following is a summary of impaired loans:
2003 2002
-------------------------
Impaired loans without a valuation
allowance $ - $ 534,404
Impaired loans with a valuation
allowance 4,132,522 1,890,915
-------------------------
Total investment in impaired loans $ 4,132,522 $ 2,425,319
=========================
Valuation allowance allocated to
impaired loans $ 808,857 $ 426,889
As of June 30, 2003, the Company had a net investment of $82,193,569 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 SALE
During fiscal 2002, the Company relocated its downtown branch and listed
the office building it had previously occupied for sale or lease. The
carrying value of the land and building was written-down to its
estimated fair value, less estimated selling costs. A loss of $157,890
was recognized as a result of this valuation adjustment during fiscal
2002. There were no additional valuation adjustments made during fiscal
2003. The Company has accepted an offer to sell the real estate held for
sale. The transaction is expected to close during the second quarter of
fiscal 2004. No material loss is expected.
NOTE G - OFFICE PROPERTY AND EQUIPMENT
Following is a summary of office property and equipment:
June 30,
---------------------------
2003 2002
---------------------------
Land $ 305,000 $ 305,000
Office building 3,019,852 2,941,316
Furniture, fixtures and equipment 978,160 900,032
Leasehold improvements 52,425 52,425
---------------------------
4,355,437 4,198,773
Less accumulated depreciation (1,031,953) (793,053)
---------------------------
Office property and equipment, net $ 3,323,484 $ 3,405,720
===========================
NOTE H - ACCRUED INTEREST RECEIVABLE
Following is a summary of accrued interest receivable:
June 30,
---------------------------
2003 2002
---------------------------
Investments in certificates of
deposit $ 220 $ 220
Investment securities 1,775 2,334
Loans receivable 468,362 569,860
---------------------------
$ 470,357 $ 572,414
===========================
50
NOTE I - DEPOSITS
Deposit customers are primarily greater Des Moines area individuals and
businesses. Deposits with balances in excess of $100,000 totaled
$14,247,763 and $9,519,988 at June 30, 2003 and 2002, respectively.
Non-interest bearing deposit accounts totaled approximately $2,169,000
and $1,920,000 at June 30, 2003 and 2002, respectively.
Deposit accounts held by members of the board of directors and executive
officers totaled $355,000 and $534,000 at June 30, 2003 and 2002,
respectively.
Following is a summary of savings deposits as of June 30, 2003 and 2002
and interest expense relating to those deposits for the years then
ended:
2003 2002
-----------------------------------------------------------
Outstanding Interest Outstanding Interest
Balance Expense Balance Expense
-----------------------------------------------------------
Demand deposits $ 3,574,219 $ 9,393 $ 3,606,185 $ 21,039
Savings and money market deposits 19,008,269 312,326 16,115,810 301,320
Certificates of deposits 50,390,982 2,311,858 47,179,152 2,743,029
-----------------------------------------------------------
$ 72,973,470 2,633,577 $ 66,901,147 3,065,388
============ ============
Less penalties for early withdrawals (7,228) (5,505)
------------ ------------
$ 2,626,349 $ 3,059,883
============ ============
The scheduled maturities of certificates of deposit as of June 30, 2003
are as follows:
Fiscal-year ending June 30:
2004 $ 21,679,930
2005 8,025,360
2006 8,713,443
2007 6,053,155
2008 5,919,094
------------
$ 50,390,982
============
NOTE J - 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 fixed
rate advances, which are subject to prepayment penalties, at June 30,
2003:
Maturity Date Interest Rate Amount
-------------------------------------------------------
June 30, 2008 /(1)/ 5.52% $ 3,000,000
September 11, 2008 /(1)/ 4.99% 6,000,000
-----------
$ 9,000,000
===========
(1) Callable in fiscal year 2004
The weighted average interest rate for all advances was 5.17% and 5.51%
at June 30, 2003 and 2002, respectively.
NOTE K - 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 $61,000 remains to be recaptured). Recapture of pre-1988
reserves (approximately $1,278,000) 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 $477,000 relating to
pre-1988 bad debt reserves.
51
Taxes on income consist of:
Year Ended June 30,
-------------------------------------------------------------------------------------------------------------
2003 2002 2001
-------------------------------------------------------------------------------------------------------------
Federal State Total Federal State Total Federal State Total
-------------------------------------------------------------------------------------------------------------
Current $ (169,644) $ 5,550 $ (164,094) $ 409,828 $ 75,175 $ 485,003 $ 338,357 $ 62,065 $ 400,422
Deferred (161,067) (15,745) (176,812) (249,813) (45,883) (295,696) (37,148) (6,814) (43,962)
-------------------------------------------------------------------------------------------------------------
Total $ (330,711) $ (10,195) $ (340,906) $ 160,015 $ 29,292 $ 189,307 $ 301,209 $ 55,251 $ 356,460
=============================================================================================================
Taxes on income differ from the "expected" amounts computed by applying
the federal income tax rate of 34% to income before taxes for the
following reasons:
Year Ended June 30,
----------------------------------
2003 2002 2001
----------------------------------
Computed "expected" taxes on income $ (129,000) $ 245,000 $ 348,000
State taxes, net of federal benefit 4,000 34,000 37,500
Settlement of tax contingencies (157,000) - -
Low income housing tax credits (59,000) (59,000) (59,000)
Other adjustments 94 (30,693) 29,960
----------------------------------
Provision for income taxes $ (340,906) $ 189,307 $ 356,460
==================================
Temporary differences between the financial statement carrying amounts
and tax bases of assets and liabilities that give rise to the deferred
tax (asset) liability at June 30, 2003 and 2002 were as follows:
June 30,
-----------------------
2003 2002
-----------------------
Federal Home Loan Bank stock (income tax payable
when shares received as stock dividends are sold) $ 64,000 $ 64,000
Real estate and equipment (depreciation method
carrying value differences) 63,000 62,000
Loan fees deferred for financial reporting purposes (9,000) (18,000)
Allowance for loan losses (469,000) (302,000)
Deferred intallment sale gains 26,000 32,000
Unrealized gains on investment securities 29,000 22,000
Other (18,926) (2,046)
-----------------------
Net deferred income tax (asset) liability $ (314,926) $ (142,046)
=======================
No valuation allowance was recorded against deferred tax assets at June
30, 2003 or 2002.
52
NOTE L - 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 Bank'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 $123,129, $119,654, and $124,470 was recorded relative to the ESOP
for the years ended June 30, 2003, 2002, and 2001, 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. If the Company's
stock is not traded on an established market at the time of an ESOP
participant's termination, the terminated ESOP participant has the right
to require the Bank to purchase the stock at its current fair market
value. Bank management believes there is an established market for the
Company's stock and therefore the Bank believes there is no potential
repurchase obligation at June 30, 2003 and 2002.
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,
----------------------
2003 2002
----------------------
Allocated shares, beginning of year 112,082 100,468
Distribution of shares (25,049) -
Shares released for allocation 10,898 11,614
----------------------
Total allocated shares, end of year 97,931 112,082
Unreleased shares 5,181 16,079
----------------------
Total ESOP shares 103,112 128,161
======================
Fair value of unreleased shares $ 59,581 $ 160,790
======================
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. Stock options vest at a rate of 20% per
year. There are unexercised outstanding stock options for 36,306 shares
at June 30, 2003, which have exercise prices between $5.00 and $10.00.
At June 30, 2003, the weighted average remaining contractual life is 4.0
years and the weighted average option price is $7.44 for the outstanding
unexercised options.
53
A summary of the status of the Company's stock option plan as of June
30, 2003, 2002 and 2001, and the changes during the years ended on those
dates is presented below:
Weighted -
Average
Number of Exercise Price
shares Per Share
--------------------------
Outstanding, June 30, 2000 61,306 $ 5.00
Granted 21,488 9.75
Exercised (23,200) 5.00
--------------------------
Outstanding, June 30, 2001 59,594 6.71
Granted - -
Exercised (10,544) 5.00
--------------------------
Outstanding, June 30, 2002 49,050 7.08
Granted - -
Exercised (12,744) 6.06
--------------------------
Outstanding, June 30, 2003 36,306 7.44
==========================
Options exercisable 23,414 $ 6.17
==========================
Remaining shares available for grant 12,902
=========
401(k) Plan - The Company implemented a 401(k) plan that covers
substantially all employees meeting age and length of service
requirements during fiscal 2003. Employees participating in this plan
are eligible to contribute up to 15% of their annual compensation. The
plan provides for discretionary contributions by the employer, which are
allocated to the participants' accounts in proportion to employee
contributions. No Company discretionary contributions were made to the
plan during fiscal year 2003.
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 Company's common stock.
NOTE M - REGULATORY AND CAPITAL MATTERS
The Bank 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 the consolidated financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors. The
minimum capital standards of the OTS generally require the maintenance
of regulatory capital sufficient to meet each of three tests,
hereinafter described as the tangible equity requirement, the core
capital requirement and the 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. In computing risk-weighted assets, the Bank multiplies the value
of each asset on its statement of financial condition by a defined
risk-weighting factor, e.g., one-to-four family residential loans carry
a risk-weighted factor of 50%.
As of June 30, 2003 and 2002, management believes that the Bank met all
capital adequacy requirements to which they are subject.
54
The Bank's management believes that, under current regulatory capital
regulations, the Bank will continue to meet its minimum capital
requirements in the foreseeable future. However, events beyond the
control of the Bank, such as increased interest rates or a downturn in
the economy in the Bank's market area, could adversely affect future
earnings and, consequently, the ability to meet future minimum
regulatory capital requirements.
Following is a summary of the Bank's regulatory capital as of June 30, 2003 and
2002:
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
---------------------------------------------------------------------------
June 30, 2003:
Tangible capital /(1)/ $ 7,199,000 7.87% $ 1,372,000 1.50% N/A N/A
Core capital /(1)/ $ 7,199,000 7.87% $ 3,658,000 4.00% $ 4,573,000 5.00%
Tier 1 (Core) Capital /(2)/ $ 7,199,000 12.24% $ 2,354,000 4.00% $ 3,530,000 6.00%
Risk-based capital /(2)/ $ 7,849,000 13.34% $ 4,707,000 8.00% $ 5,884,000 10.00%
June 30, 2002:
Tangible capital /(1)/ $ 7,163,000 7.89% $ 1,362,000 1.50% N/A N/A
Core capital /(1)/ $ 7,163,000 7.89% $ 3,632,000 4.00% $ 4,540,000 5.00%
Tier 1 (Core) Capital /(2)/ $ 7,163,000 11.85% $ 2,417,000 4.00% $ 3,626,000 6.00%
Risk-based capital /(2)/ $ 7,894,000 13.06% $ 4,835,000 8.00% $ 6,043,000 10.00%
(1) - To adjusted total assets
(2) - To risk-weighted assets
The Bank 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 Bank'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 Bank 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 Bank, the
existence of the liquidation account will not restrict the use or
application of retained earnings.
The Company's management believes that, under the current regulatory
capital regulations, the Bank will continue to meet its minimum capital
requirements in the foreseeable future. However, events beyond the
control of the Bank, such as increased interest rates or a downturn in
the economy in the Banks' market area, could adversely affect future
earnings and, consequently, the ability to meet future minimum
regulatory capital requirements.
The Bank is subject to regulations imposed by the OTS regarding the
amount of capital distributions payable to the Company. Generally, the
Bank's payment of dividends is limited, without prior OTS approval, to
net earnings for the current calendar year, plus the two preceding
years, less capital distributions paid over the same time period.
Insured institutions are required to file an application with the OTS
for capital distributions in excess of the limitation.
NOTE N - LEASES
The Company leases office space for a branch location. The lease term
expires May 31, 2007. Future minimum lease payments under the lease
terms are as follows:
2004 $ 41,540
2005 $ 41,540
2006 $ 41,540
2007 $ 38,078
55
The Company subleases a portion of this leased space. The sublease began
on April 29, 2002 and expires in May 2007. The annual sublease rent is
approximately $5,000.
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. FASB
Statement No. 107 excludes certain financial instruments and all
non-financial instruments from its disclosure requirements. Accordingly,
the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments at June
30, 2003 and 2002:
Cash and Amounts Due From Depository Institutions - The carrying amounts
of cash and amounts due from depository institutions approximate their
fair value.
Investments in Certificates of Deposits - The fair values disclosed for
investments in certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently available on
certificates to a schedule of aggregated remaining maturities of the
certificates.
Investment Securities - Fair values for securities, excluding restricted
equity securities, are based on quoted market prices. The carrying
values of restricted equity securities (Federal Home Loan Bank stock)
approximate fair values.
Loans Held for Sale - Fair values are based on quoted market prices of
similar loans sold on the secondary market.
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 checking, money
market and 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.
Accrued Interest - The carrying amounts of accrued interest approximates
their fair value.
56
Commitments to extend credit - The fair values of commitments to extend
credit are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements
and credit worthiness of the counterparties. At June 30, 2003 and 2002,
the carrying amount and fair value of the commitments were not
significant.
NOTE O - FAIR VALUES OF FINANCIAL INSTRUMENTS - continued
The estimated fair values of the Company's financial instruments are as
follows:
June 30, 2003 June 30, 2002
---------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------------------------
Financial assets
Cash and cash equivalents $ 4,407,338 $ 4,407,338 $ 3,114,682 $ 3,114,682
Investments in certificates of deposit 99,000 99,000 99,000 107,000
Investment securities available-for-sale 1,264,495 1,264,495 1,323,918 1,323,918
Loans held for sale 1,870,683 1,870,683 - -
Loans receivable 82,193,569 85,682,000 84,771,507 85,808,000
Federal Home Loan Bank stock 1,762,200 1,762,200 1,762,200 1,762,200
Accrued interest receivable 470,357 470,357 572,414 572,414
Financial liabilities
Deposits 72,973,470 74,728,000 66,901,147 68,316,000
Advances from Federal Home Loan Bank 9,000,000 9,481,000 14,000,000 14,086,000
Accrued interest payable 1,702 1,702 174,921 174,921
NOTE P - RECENT ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board (FASB) has issued Statement
148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of FASB No. 123." This Statement amends
Statement No. 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation and amends the disclosure requirements
of Statement No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on
reported results. The alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based
employee compensation are effective for transitions after July 1, 2003.
The Company will not make a voluntary change to the fair value based
method of accounting for stock-based employee compensation. The amended
disclosure requirements are currently effective and have been adopted in
the consolidated financial statements for the year ended June 30, 2003.
The FASB has issued Statement 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging". This Statement amends and clarifies
financial accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for
hedging activities under Statement 133. The Statement is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. Implementation of the
Statement is not expected to have a material impact on the consolidated
financial statements.
The FASB has issued Statement 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This
Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity and requires that certain freestanding financial
instruments be reported as liabilities in the balance sheet. For the
Company, the Statement is effective July 1, 2003 and the Company is not
expected to have a material impact on the consolidated financial
statements.
57
NOTE Q - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
Following are condensed financial statements of the parent company,
StateFed Financial Corporation:
Condensed Balance Sheet
June 30,
----------------------------
2003 2002
------------ ------------
Assets
Cash and cash equivalents $ 1,499,160 $ 1,753,813
Investment in subsidiary 7,769,628 7,725,032
Investment securities 465,235 444,515
Loans receivable 3,797,435 4,110,075
ESOP note receivable - subsidiary 34,385 103,155
Deferred income taxes 24,436 -
Other assets 476,021 317,570
------------ ------------
$ 14,066,300 $ 14,454,160
============ ============
Liabilities
Dividends payable $ 129,161 $ 127,887
Deferred income taxes - 20,000
Other liabilities 30,357 110,703
------------ ------------
159,518 258,590
Stockholders' equity
Common stock 17,810 17,810
Additional paid-in capital 8,566,238 8,527,873
Retained earnings 10,327,496 10,880,409
Treasury stock (5,041,185) (5,172,468)
Less common stock acquired by employee stock
ownership plan (30,875) (85,575)
Accumulated other comprehensive income 67,298 27,521
------------ ------------
13,906,782 14,195,570
------------ ------------
$ 14,066,300 $ 14,454,160
============ ============
Condensed Statement of Income
Year ended June 30,
----------------------------------
2003 2002 2001
---------- --------- ---------
Operating income - interest and dividend
income $ 335,956 $ 583,151 $ 464,855
Less:
Loss on sale of real estate - 171,887 -
Operating expenses 397,451 301,180 536,268
---------- --------- ---------
Income (loss) before undistributed income
of subsidiary (61,495) 110,084 (71,413)
Equity in undistributed income of subsidiary (87,828) 387,034 688,428
---------- --------- ---------
Income (loss) before income tax (149,323) 497,118 617,015
Provision (credit) for income tax (110,506) (33,697) (46,307)
---------- --------- ---------
Net income (loss) $ (38,817) $ 530,815 $ 663,322
========== ========= =========
58
NOTE Q - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS - continued
Condensed Statement of Cash Flows
Year ended June 30,
-------------------------------------------
2003 2002 2001
----------- ------------ ------------
Cash flows from operating activities:
Net income $ (38,817) $ 530,815 $ 663,322
Cash dividends received from subsidiary - - 3,000,000
Deferred income taxes (36,635) 27,412 9,001
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization - 9,689 38,756
Provision for loan losses 82,700 - -
Loss (gain) on sale of investments 7,087 (106,740) 95,880
Loss on sale of real estate held for investment - 171,811 -
Equity in undistributed income of subsidiary 87,828 (387,034) (688,428)
Change in other assets (158,451) 6,039 (15,685)
Change in other liabilities (80,346) (12,038) 48,835
----------- ------------ ------------
(136,634) 239,954 3,151,681
Cash flows from investing activities:
Purchase of investment securities (202,640) (375,310) -
Proceeds from sale or maturity of investment
securities 197,514 416,962 99,789
Proceeds from sales of real estate - 1,042,563 -
Changes in investment in and advances to subsidiary - 952,371 (374,340)
Decrease (increase) in loans receivable 229,940 120,986 44,965
Payment received on ESOP debt 68,770 68,770 68,770
----------- ------------ ------------
293,584 2,226,342 (160,816)
Cash flows from financing activities:
Treasury stock purchased - (85,200) (3,035,632)
Proceeds from options exercised 101,219 52,720 116,000
Proceeds from note payable - (1,200,000) 1,200,000
Dividends paid (512,822) (512,005) (565,875)
----------- ------------ ------------
(411,603) (1,744,485) (2,285,507)
----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents (254,653) 721,811 705,358
Cash and cash equivalents, beginning of year 1,753,813 1,032,002 326,644
----------- ------------ ------------
Cash and cash equivalents, end of year $ 1,499,160 $ 1,753,813 $ 1,032,002
=========== ============ ============
59
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
disagreements on any matter of accounting principle or financial statement
disclosure.
On August 28, 2002, September 3, 2002 and September 12, 2002, the
Company disclosed on Forms 8-K a change of independent accounts to McGladrey &
Pullen, LLP for the fiscal year 2003.
60
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Directors
The table below sets forth certain information, as of June 30, 2003
regarding the composition of the Company's Board of Directors, including each
director's term of office. The Board of Directors acting as the nominating
committee has recommended and approved the nominees identified in the following
table. It is intended that the proxies solicited on behalf of the Board of
Directors (other than proxies in which the vote is withheld as to a nominee)
will be voted at the Meeting "FOR" the election of the nominees identified
below. If a nominee is unable to serve, the shares represented by all valid
proxies will be voted for the election of such substitute nominee as the Board
of Directors may recommend. At this time, the Board of Directors knows of no
reason why any nominee may be unable to serve, if elected. Except as disclosed
herein, there are no arrangements or understandings between the nominee and any
other person pursuant to which the nominee was selected.
Shares of Common Percent
Position(s) Held Director Term to Stock Beneficially of
Name Age/(1)/ in the Company Since/(2)/ Expire Owned/(3)/ Class/(4)/
NOMINEES
Eugene M. McCormick 76 Director 1979 2006 40,266/(5)/ 3.1%
Sidney M. Ramey 63 Director 1987 2006 13,044/(6)/ 1.0
Andra K. Black 56 Executive Vice President 1995 2006 34,855/(7)/ 2.7
and Director
DIRECTORS CONTINUING
IN OFFICE
Harry A. Winegar 75 Director 1977 2004 28,266/(8)/ 2.2
William T. Nassif 53 Director 2000 2004 10,477/(9)/ *
Randall C. Bray 59 Chairman of the Board and 2001 2005 7,707/(10)/ *
President
Kevin J. Kruse 43 Director 1993 2005 15,504/(11)/ 1.2
* less than 1%
1. At June 30, 2003.
2. Includes service as a director of the Bank.
3. Amounts include shares held directly, as well as shares which are held
in retirement accounts, or held by certain members of the named
individuals' families, or held by trusts of which the named individual
is a trustee or substantial beneficiary, with respect to which shares
the respective directors may be deemed to have sole or shared voting
and/or investment power. Amounts also include 15,474, 2,344, 3,447 and
4,297 shares subject to options granted to Directors Black, Winegar,
Nassif and Bray under the Stock Option Plan which options are
exercisable within 60 days of June 30, 2003.
4. Percentage is calculated based on 1,293,958 shares of Common Stock
outstanding as of September 25, 2003.
5. Includes 39,266 shares held directly and 1,000 shares held by Mr.
McCormick's spouse.
6. Includes 9,004 shares held directly, 1,260 shares held by Mr. Ramey's
spouse, and 2,780 shares held jointly with his spouse
61
7. Includes 4,292 shares held directly, 15,089 shares allocated to Ms.
Black's account pursuant to the ESOP and 15,474 shares subject to
options granted to Ms. Black under the Stock Option Plan.
8. Includes 25,922 shares held directly and 2,344 shares subject to options
granted to Mr. Winegar under the Stock Option Plan.
9. Includes 7,000 shares held directly and 3,447 shares subject to options
granted to Mr. Nassif under the Stock Option Plan.
10. Includes 2,500 shares held directly, 910 shares allocated to Mr. Bray's
account pursuant to the ESOP, and 4,297 shares subject to option granted
to Mr. Bray under the Stock Option Plan.
11. Includes 13,816 shares held jointly with his spouse, 1,688 shares held
by Mr. Kruse's spouse.
Set forth below is the principal occupation of each director of StateFed
Financial Corporation and of each of the nominees for director. All directors
and nominees have held their present positions for at least five years unless
otherwise indicated.
Eugene M. McCormick. Mr. McCormick has served on the Board since 1980.
Mr. McCormick is currently retired. Until 1993, he practiced dentistry in Des
Moines, Iowa.
Sidney M. Ramey. Mr. Ramey has served on the Board since 1987. Since
1982, Mr. Ramey has been the Manager of Peoples Abstract Company, LLC, a title
search company located in Des Moines, Iowa.
Andra K. Black. In January 2002, Ms. Black resumed her duties as
Executive Vice President of the Company. Prior to this appointment, Ms. Black
served as Co-President from July, 2000 and prior to that as Executive Vice
President. In addition to her duties as Executive Vice President, Ms. Black is
responsible for the operations and savings departments, which include compliance
with savings regulations and disclosures, general office administration and
reporting to the Office of Thrift Supervision ("OTS") and the Internal Revenue
Service ("IRS"). Ms. Black also oversees the maintenance of the general ledger
and monthly reporting.
Harry A. Winegar. Mr. Winegar has served on the Board since 1977. Mr.
Winegar is currently retired. Until his retirement in 1992, Mr. Winegar was a
consultant and appraiser for Carlson, McClure & McWilliams, Inc. a real estate
appraisal firm located in Des Moines, Iowa.
William T. Nassif. On July 1, 2000, Mr. William T. Nassif was appointed
to the board of directors. Mr. Nassif is the staff attorney for Legal Services
Corporation of Iowa. Legal Services Corporation provides legal services for
elderly Iowans.
Randall C. Bray. Mr. Bray was elected Chairman of the Board in April,
2001 and became President of the Company in January 2002. Mr. Bray is also
President of Greyhawk Partners and has been involved in the financial services
business for more than 30 years. He has been President and CEO of Midland
Savings Bank in Des Moines and was also Chairman and Founder of The Evergreen
Group, a distributor of insurance products to the banking industry.
Kevin J. Kruse. Mr. Kruse has served on the Board since 1993. Mr. Kruse
is the Senior Vice President and Corporate Counsel for Diversified Management
Services, Inc. a trade association headquartered in Des Moines.
Section 16(a) Beneficial Ownership Reporting Compliance.
Section 16(a) of the Securities Exchange Act of 1934 requires StateFed's
directors and executive officers, and persons who own more than 10% of the
Company's common stock to report their initial ownership of the Company's common
stock and any subsequent changes in that ownership to the SEC. Specific due
dates for these reports have been established by the SEC and the Company is
required to disclose in this proxy statement any late filings or failures to
file.
62
The Company believes, based solely on a review of the copies
of such reports furnished to us and written representations that no other
reports were required during the fiscal year ended June 30, 2003, of Section
16(a) filing requirements applicable to our executive officers, directors and
greater than 10% beneficial owners were complied with.
Item 10. Executive Compensation
The following table sets forth information regarding compensation paid
by the Company and the Bank to their President and executive officers who made
in excess of $100,000 for services rendered during the fiscal year ended June
30, 2003.
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation
-------------------------------- ------------
Securities
Underlying All Other
Fiscal Salary Bonus Options/SARs Compensation
Name and Principal Position Year ($) ($) ($) ($)
- --------------------------- ------ --------- -------- ------------ ------------
Randall C. Bray, President 2003 $ 64,184 $ 100 -- $ 9,198/(1)/
2002 62,400 500 -- 7,800
2001 25,200/(2)/ -- 10,744 1,800
Steven J. Blazek, 2003 107,826 100 -- 2,273/(1)/
Sr. Vice President
2002 55,385 10,000 -- --
2001 -- -- -- --
John Kallemyn, 2003 100,902 40 -- 2,143/(1)/
Sr. Vice President
2002 2,308 -- -- --
2001 -- -- -- --
1. Includes director fees of $9,100 for Mr. Bray and company matched 401(k)
contributions of $98, $2,273 and $2,143 for Messrs. Bray, Blazek and
Kallemyn, respectively.
2. Includes consulting fees of $15,600 received in the fiscal year 2001
prior to executive's appointment as President.
63
The following table sets forth information regarding the number and
value of stock options at June 30, 2003 held by the Company's President and
executive officers who made in excess of $100,000 during the fiscal year ended
June 30, 2003.
AGGREGATED OPTION/SAR GRANTS IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
Number of Unexercised In-the Money
Options/SARs at Options/SARs at
Fiscal Year End (#)/(1)/ Fiscal Year End (#)(2)
Shares Acquired Value -------------------------- --------------------------
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- -------------------- --------------- ------------ ----------- ------------- ----------- -------------
Randall C. Bray 0 0% 4,297 6,447 $ 7,520 $ 11,282
President
Steven J. Blazek 0 0% 0 0 0 0
Sr. Vice President
John Kallemyn 0 0% 0 0 0 0
Sr. Vice President
- ----------
1. Represents an option to purchase Common Stock awarded to the Company's
Chief Executive Officers pursuant to the terms of the incentive stock
option award.
2. Represents the aggregate market value (market price of the common stock
less the exercise price) of the option granted based upon the average of
the bid and asked price of $11.75 per share of the common stock as
reported on the NASDAQ Bulletin Board on June 30, 2003.
Employment Agreements and Salary Continuation Plan
Employment Agreements. The continued success of the Bank depends to a
significant degree on the skills and competence of its officers. In April 2001,
the Bank entered into an employment agreement with President Bray. The
employment agreement provides for an initial annual base salary of $62,400,
subject to annual review and adjustment by the Company's Board of Directors, and
an initial term of three years. The agreement provides for extensions of one
year, in addition to the then-remaining term under the agreement, on each
anniversary of the effective date of the agreement, subject to a formal
performance evaluation performed by disinterested members of the Board of
Directors of the Bank. The agreement provides for termination upon the
employee's death, for cause or in certain events specified by OTS regulations.
The employment agreement is also terminable by the employee upon 60-days' notice
to the Bank.
The employment agreement provides for payment to the employee of his
salary for the remainder of the term of the agreement, plus up to 299% of the
employee's base compensation, in the event there is a "change in control" of the
Bank where employment terminates involuntarily in connection with such change in
control or within 12 months thereafter. This termination payment is subject to
reduction by the amount of all other compensation to the employee deemed for
purposes of the Code to be contingent on a "change in control," and may not
exceed three times the employee's average annual compensation over the most
recent five-year period or be non-deductible by the Bank for federal income tax
purposes. For the purposes of the employment agreement, a "change in control" is
defined as any event which would require the filing of an application for
acquisition of control or notice of change in control pursuant to 12 C.F.R.
Sections 574.3 or 4. Such events are generally triggered prior to the
acquisition or control of 10% of the Common Stock. The agreement guarantees
participation in an equitable manner in employee benefits applicable to
executive personnel.
Based on current salaries, if Mr. Bray's employment had been terminated
as of June 30, 2003, under circumstances entitling him to severance pay as
described above, he would have been entitled to receive a lump sum cash payment
of approximately $154,448.
64
Director Compensation
The Company's directors do not receive a fee for serving on the
Company's Board of Directors. No fee is paid for membership on the Board's
committees. All Bank directors receive a fee of $700 per board meeting. A fee of
$200 is paid to non-employee directors of the Bank for committee membership.
$200 was paid to certain directors for four audit committee meetings, four
compensation committee meetings and one extra meeting.
Executive Compensation
The Company has not paid any compensation to its executive officers
since its formation. The Company does not presently anticipate paying any
compensation to such persons until it becomes actively involved in the operation
or acquisition of business other than the Bank.
65
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Equity Compensation Plan Information
The following table summarizes our equity compensation plan as of June
30, 2003.
Number of securities Weighted-average Number of Securities
to be issued upon exercise exercise price of remaining available for
of outstanding options outstanding options future issuance under
Plan Category warrants and rights warrants and rights equity compensation plans
- ---------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved by
security holders 36,306 $ 7.44 19,950(1)
Equity compensation plans not approved by
security holders -- -- --
- -----------
1. Includes 12,902 shares available for future grants under the Company's
stock option plans and 7,048 shares available for future grants under the
Company's recognition and retention plan.
Stock Ownership of Significant Stockholders, Directors and Executive Officers
Stockholders of record as of the close of business on September 25,
2003, will be entitled to one vote for each share then held. As of September 25,
2003, the Company had 1,293,958 shares of Common Stock issued and outstanding.
The following table sets forth as of June 30, 2003 information regarding share
ownership of: (i) those persons or entities known by management to beneficially
own more than five percent of the Company's Common Stock, (ii) the Company's
Chief Executive Officer, and (iii) all directors and executive officers as a
group.
Shares Percent
Beneficially of
Beneficial Owner Owned Class
Krause Gentle Corporation/(1)/ 149,000 11.5%
c/o James B. Langeness
Duncan, Green, Brown, Langeness & Eckley
380 Capital Square, 400 Locust Street
Des Moines, Iowa 50309
StateFed Financial Corporation Employee Stock Ownership Plan/(2)/ 103,112 8.0
13523 University Avenue
Clive, Iowa 50325
Douglas M. Kratz/(3)/ 126,600 9.8
Middle Road, Suite 101
Bettendorf, Iowa 52722
Randall C. Bray/(4)/ 7,707 *
StateFed Financial Corporation
13523 University Avenue
Clive, Iowa 50325
Directors and executive officers of the Company and the Bank
as a group (7 persons)/(5)/ 150,089 11.4
66
* less than 1%.
1. The above information is as reported by Krause Gentle Corporation in an
amended statement dated October 5, 2000 on Schedule 13-D/A filed
pursuant to the Securities Exchange Act of 1934.
2. The amount reported represents shares held by the Employee Stock
Ownership Plan ("ESOP"), of which 97,931 shares of Common Stock were
allocated to accounts of participants. First Bankers Trust Company,
N.A., the trustee of the ESOP, may be deemed to beneficially own all the
shares held by the ESOP. Pursuant to the terms of the ESOP, participants
in the ESOP have the right to direct the voting of shares allocated to
participant accounts. Unallocated shares held by the ESOP are voted by
the plan trustee in the manner that the plan trustee is directed to vote
by the majority of the plan participants who directed the plan trustee
as to the manner of voting the shares allocated to their plan accounts.
If an ESOP participant fails to give timely voting instructions to the
plan trustee with respect to the voting of the shares allocated to the
participant's account, the plan trustee is entitled to vote such shares
in its discretion.
3. The above information is as reported by Douglas M. Kratz in a statement
dated November 19, 2002 on Schedule 13-D filed pursuant to the
Securities Exchange Act of 1934.
4. Includes 2,500 shares held directly, 910 shares allocated pursuant to
the Company's ESOP, and 4,297 shares subject to options granted to Mr.
Bray under the Stock Option Plan.
5. Includes shares held directly, as well as jointly with family members,
and shares held in retirement accounts in a fiduciary capacity or by
certain family members, with respect to which shares the listed
individuals or group members may be deemed to have sole voting and
investment power. This table also includes 15,089 and 910 shares
allocated to the accounts of Ms. Black and Mr. Bray, respectively
pursuant to the Company's ESOP and 25,562 shares subject to options
granted to directors and the executive officers under the Company's
Stock Option Plan.
Item 12. Certain Relationships and Related Transactions
The Bank has followed a policy of granting consumer loans and loans
secured by the borrower's personal residence to officers, directors and
employees. The loans to employees, executive officers and directors are made in
the ordinary course of business and on the same terms and conditions as those of
comparable transactions prevailing at the time, in accordance with the Bank's
underwriting guidelines, and do not involve more than the normal risk of
collectibility or present other unfavorable features. Loans to executive
officers and directors must be approved by a majority of the disinterested
directors and loans to other officers and employees must be approved by the
Bank's Loan Committee.
All loans by the Bank to its directors and executive officers are
subject to OTS regulations restricting loan and other transactions with
affiliated persons of the Bank. Loans to all directors, executive officers,
employees and their associates totaled $1.9 million at June 30, 2003, which was
13.8% of the Company's stockholders' equity at that date. All of such loans were
made on the same terms, including interest rates, as those of comparable
transactions prevailing at the time.
67
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits and Exhibit Index
Reference to
Prior Filing or
Exhibit Number
Exhibit Number Document Attached Hereto
- -------------- ---------------------------------------------------------- ---------------
3(i) Articles of Incorporation, including amendments thereto *
3(ii) By-Laws **
4 Instruments defining the rights of security holders,
including indentures *
9 Voting Trust Agreement None
10 Executive Compensation Plans and Arrangements
(a) Employment contract between:
(i) Andra K. Black and the Bank *
(ii) Randall C. Bray and the Bank 10
(b) 1993 Stock Option and Incentive Plan *
(c) 1993 Management Recognition and Retention Plan *
11 Statement Regarding Computation of Per Share Earnings None
13 Annual Report to Security Holders Not Applicable
16 Letter Regarding Change in Certifying Accountant None
18 Letter Regarding Change in Accounting Principles None
21 Subsidiaries of Registrant 21
22 Published Report Regarding Matters Submitted to Vote of
Security Holders None
23 Consents of Experts and Counsel 23
24 Power of Attorney Not Required
31 Rule 13a-14(a)/15d-14(a) Certifications 31
32 Section 1350 Certifications 32
- ----------
* 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 exhibits to the Company's Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1999.
68
(b) Reports on Form 8-K
The following Reports on Form 8-K were filed with the Securities and
Exchange Commission during the quarter ending June 30, 2003:
Regarding Event
Date Filed Occurring on: Nature of Event
---------- --------------- ---------------------------------
04/30/2003 04/28/2003 Announcement of Registrant's
Third Quarter Earnings
06/09/2003 06/06/2003 Registrant Declares Cash Dividend
Item 14. Principal Accountant Fees and Services
McGladrey & Pullen LLP, Certified Public Accountants, provided
accounting services to the Company during the year ended June 30, 2003 in
conjunction with the audit of the Company's annual financial statements for
2003, and fees billed for other services rendered by McGladrey & Pullen, LLP and
its associated entity RSM McGladrey, Inc. during 2003. Financial statements for
the fiscal year ended June 30, 2002 had been audited by the Company's former
accounting firm, McGowen, Hurst, Clark & Smith, P.C.
Audit Fees. The aggregate fees billed to StateFed Financial Corporation by
McGladrey & Pullen, LLP for the professional services rendered for the audit of
StateFed's consolidated financial statements for fiscal 2003 and the reviews of
the consolidated financial statements included in StateFed's Forms 10-QSB for
that year were $43,400. StateFed's consolidated financial statements for fiscal
2002 and the reviews of the consolidated financial statements included in
StateFed's Forms 10-QSB, billed to StateFed by McGowen, Hurst, Clark & Smith,
P.C. for that year were $32,000.
Financial Information Systems Design and Implementation Fees. There were no fees
for financial information systems design and implementation billed to StateFed
by McGladrey & Pullen, LLP or McGowen, Hurst, Clark & Smith P.C. for fiscal
years 2003 and 2002, respectively.
All Other Fees. Other than audit fees, the aggregate fees billed to StateFed by
McGladrey & Pullen, LLP for fiscal 2003 were $17,100. The aggregate fees billed
for fiscal 2002 to StateFed by McGowen, Hurst, Clark & Smith, P.C. were $25,105.
The Audit Committee has considered whether the services provided by McGladrey &
Pullen, LLP and its associated entity RSM McGladrey, Inc., apart from the audit
services described under the heading "Audit Fees" above, are compatible with
maintaining the independence of McGladrey & Pullen, LLP.
Item 15. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
An evaluation of the StateFed's disclosure controls and procedures (as defined
in Rule13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")
as of June 30, 2003, was carried out under the supervision and with the
participation of StateFed's Chief Executive Officer, Chief Financial Officer and
several other members of StateFed's senior management. StateFed's Chief
Executive Officer and Chief Financial Officer concluded that StateFed's
disclosure controls and procedures as currently in effect are effective in
ensuring that the information required to be disclosed by StateFed in the
reports it files or submits under the Exchange Act is (i) accumulated and
communicated to StateFed's management (including the Chief Executive Officer and
Chief Financial Officer) in a timely manner, and (ii) recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms. There have been no changes in our internal controls over financial
reporting (as defined in Rule 13a-15(f) under the Act) that occurred during the
year ended June 30, 2003, that has materially effected, or is reasonably likely
to materially affect, StateFed's internal control over financial reporting.
69
StateFed intends to continually review and evaluate the design and effectiveness
of its disclosure controls and procedures and to improve its controls and
procedures over time and to correct any deficiencies that it may discover in the
future. The goal is to ensure that senior management has timely access to all
material financial and non-financial information concerning StateFed's business.
While StateFed believes the present design of its disclosure controls and
procedures is effective to achieve its goal, future events affecting its
business may cause StateFed to modify its disclosure controls and procedures.
70
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 29, 2003 By: /s/ Randall C. Bray
----------------------------
Randall C. Bray, President
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Randall C. Bray /s/ Harry A. Winegar
- ---------------------------------------- ---------------------------------
RANDALL C. BRAY HARRY A. WINEGAR
Chairman of the Board Director
Officer
Date: September 29, 2002 Date: September 29, 2003
/s/ Eugene M. McCormick /s/ Sidney M. Ramey
- ---------------------------------------- ---------------------------------
EUGENE M. MCCORMICK SIDNEY M. RAMEY
Director Director
Date: September 29, 2003 Date: September 29, 2003
/s/ Kevin J. Kruse /s/ William T. Nassif
- ---------------------------------------- ---------------------------------
KEVIN J. KRUSE WILLIAM T. NASSIF
Director Director
Date: September 29, 2003 Date: September 29, 2003
/s/ Andra K. Black
- ----------------------------------------
ANDRA K. BLACK
Director, Executive Vice President, Secretary
and Chief Financial and Accounting Officer
Date: September 29, 2003
71
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
- --------------------------------------------------------------------------------
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2003
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)
13523 University Avenue, Clive, Iowa 50325
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(515) 223-8484
- --------------------------------------------------------------------------------
(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 126-2 of the Exchange Act) Yes [ ] No [X]
State the number of Shares outstanding of each of the issuer's classes
of common equity, as the latest date:
As of November 3, 2003, there were 1,293,958 shares of the Registrant's
common stock issued and outstanding.
Transitional Small Business Disclosure Format:
Yes [ ] No [X]
STATEFED FINANCIAL CORPORATION
Form 10-QSB
Index
Page
PART I. - CONSOLIDATED FINANCIAL INFORMATION Number
Item 1. Financial Statements (Unaudited) 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Controls and Procedures 12
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
Exhibit 31.1 15
Exhibit 31.2 16
Exhibit 32 17
2
PART I. - CONSOLIDATED FINANCIAL INFORMATION
Item 1. Financial Statements
STATEFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 2003 and June 30, 2003
(Unaudited)
ASSETS
September 30, 2003 June 30, 2003
------------------ ------------------
Cash and amounts due from depository institutions $ 7,346,164 $ 4,407,338
Investments in certificates of deposit 99,000 99,000
Investment securities available for sale 1,189,338 1,264,495
Loans held for sale 1,437,158 1,870,683
Loans receivable, net 78,916,815 82,193,569
Real estate held for sale, net 540,500 540,500
Property acquired in settlement of loans -- 87,546
Office property and equipment, net 3,265,158 3,323,484
Federal Home Loan Bank stock, at cost 762,200 1,762,200
Accrued interest receivable 424,212 470,357
Income tax refund receivable 72,529 90,707
Deferred income taxes 314,183 314,926
Other assets 324,911 328,610
------------------ ------------------
TOTAL ASSETS $ 94,692,168 $ 96,753,415
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 71,408,843 $ 72,973,470
Advances from Federal Home Loan Bank 9,000,000 9,000,000
Advances from borrowers for taxes and insurance 2,476 380,606
Accrued interest payable 2,371 1,702
Dividends payable 129,396 129,161
Other liabilities 300,352 361,694
------------------ ------------------
TOTAL LIABILITIES 80,843,438 82,846,633
------------------ ------------------
Stockholders' equity:
Common stock 17,810 17,810
Additional paid-in capital 8,571,768 8,566,238
Unearned compensation - Employee Stock Ownership Plan (17,760) (30,875)
Accumulated other comprehensive income - unrealized gains (losses)
on investment securities available for sale, net of deferred taxes 40,901 67,298
Treasury stock (5,017,038) (5,041,185)
Retained earnings - substantially restricted 10,253,049 10,327,496
------------------ ------------------
TOTAL STOCKHOLDERS' EQUITY 13,848,730 13,906,782
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 94,692,168 $ 96,753,415
================== ==================
3
STATEFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATION
For the Three Month Periods Ended September 30, 2003 and September 30, 2002
(Unaudited)
----------- -----------
2003 2002
----------- -----------
Interest Income:
Loans $ 1,445,811 $ 1,648,471
Investments & other 17,959 35,150
----------- -----------
Total interest income 1,463,770 1,683,621
Interest Expense:
Deposits 558,724 675,369
Borrowings 118,833 197,289
----------- -----------
Total interest expense 677,557 872,658
Net interest income 786,213 810,963
Provision for loan losses 110,000 103,076
----------- -----------
Net interest income after
provision for loan losses 676,213 707,887
Non-interest Income:
Real estate operations 12,898 12,755
Gains on loans held for sale 47,244 --
Commission income 35,286 9,849
Other 71,646 48,225
----------- -----------
Total non-interest income 167,074 70,829
Non-interest Expense:
Salaries and benefits 375,329 373,922
Occupancy and equipment 131,031 169,966
FDIC premiums and OTS assessments 11,240 10,930
Data processing 38,091 42,630
Other 212,047 200,963
----------- -----------
Total non-interest expense 767,738 798,411
----------- -----------
Income (loss) before income taxes 75,549 (19,695)
Income tax expense (benefit) 20,600 (23,760)
----------- -----------
Net income $ 54,949 $ 4,065
=========== ===========
Basic earnings per share $ 0.04 $ --
Diluted earnings per share 0.04 --
Dividends declared per common share $ 0.10 $ 0.10
Comprehensive income (loss) $ 28,533 $ (25,483)
=========== ===========
4
STATEFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Month Periods Ended September 30, 2003 and September 30, 2002
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES September 30, September 30,
2003 2002
------------- -------------
Net income $ 54,949 $ 4,065
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation 62,887 53,776
Amortization of ESOP 31,072 26,808
Deferred loan fees 6,776 6,487
(Gain) on sales of loans (47,244) --
Loans originated for sale (3,762,072) --
Loans sold 4,242,860 --
Provision for losses on loans 110,000 103,076
Change in:
Accrued interest receivable 46,145 8,911
Other assets 3,699 (16,097)
Accrued interest payable 669 (173,197)
Current and deferred income tax liability 30,234 (237,124)
Other liabilities (61,342) (132,337)
------------- -------------
NET CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES 718,633 (355,632)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale or maturity of available-for-sale investment securities 100,071 --
Purchase of available-for-sale investment securities (62,624) --
Redemption of FHLB stock 1,000,000 --
Net (increase) decrease in loans outstanding 3,159,959 (1,296,766)
Investment in real estate acquired in settlement of loans 87,546 (207,960)
Purchase of office property and equipment (4,561) (96,878)
------------- -------------
NET CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES 4,280,391 (1,601,604)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (1,564,627) 6,610,168
Net decrease in advances from borrowers for taxes and insurance (378,130) (351,422)
Proceeds from stock options exercised 11,720 --
Dividends paid (129,161) (127,887)
------------- -------------
NET CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES (2,060,198) 6,130,859
------------- -------------
CHANGE IN CASH AND CASH EQUIVALENTS 2,938,826 4,173,623
CASH AND CASH EQUIVALENTS, beginning of period 4,407,338 3,114,682
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 7,346,164 $ 7,288,305
============= =============
Supplemental Schedule of Cash Flow Information:
Cash payments for:
Interest $ 676,888 $ 1,045,855
Income taxes (50,834) 213,364
5
STATEFED FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Month Period Ended September 30, 2003 and September 30, 2002
1. BASIS OF PRESENTATIONS
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information, instructions for Form 10-QSB and Regulation SB 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 (consisting only of normal
recurring 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 "Company"), its subsidiary, State Federal Savings and Loan
Association (the "Bank" or "State Federal") and the Bank's subsidiary, State
Service Corporation.
These statements should be read in conjunction with the consolidated
financial statements and related notes, which are incorporated by reference in
the Company's Annual Report on Form 10-KSB for the year ended June 30, 2003.
2. EARNINGS PER SHARE OF COMMON STOCK
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. For the three month period,
weighted-average common shares outstanding totaled 1,289,027 at September 30,
2003 and 1,264,333 at September 30, 2002.
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, for the three month
periods ending September 30, 2003 and September 30, 2002, totaled 1,302,039 and
1,277,057, respectively.
At September 30, 2003 there were unexercised options for 33,962 shares
of common stock under the terms of the Company's 1993 Stock Option Plan. There
were 15,474, 7,744 and 10,744 options with exercise prices of $5.00, $9.50 and
$10.00 per share, respectively. There were 2,344 shares exercised during the
three months ended September 30, 2003. Had the Company accounted for the 1993
Stock Option Plan in accordance with SFAS No. 123, the effect on net income and
net income per share would not be material.
6
3. REGULATORY CAPITAL REQUIREMENTS
Pursuant to Federal law, the Bank must meet three separate minimum
capital requirements. The Bank's capital ratios and balances at September 30,
2003 were as follows:
Amount %
-------- --------
(Dollars in thousands)
Tangible Capital:
Bank's $ 7,279 8.11%
Requirement 1,347 1.50
-------- --------
Excess $ 5,932 6.61%
Core Capital:
Bank's $ 7,279 8.11%
Requirement 3,591 4.00
-------- --------
Excess $ 3,688 4.11%
Risk-Based Capital:
Bank's $ 7,929 13.85%
Requirement 4,579 8.00
-------- --------
Excess $ 3,350 5.85%
The Bank is considered "well-capitalized" under federal regulations.
4. SUBSEQUENT EVENTS
The Company sold its former downtown Des Moines branch office on
October 31, 2003. Net proceeds from the sale were $574,585, resulting in a gain
of $69,461.
5. NEW ACCOUNTING STANDARDS
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging". This statement amends and clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under Statement 133. The Statement
is effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. Implementation of the
Statement did not have a material impact on the consolidated financial
statements.
SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity". This Statement establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity and requires
that certain freestanding financial instruments be reported as liabilities in
the balance sheet. For the Company, the Statement was effective July 1, 2003 and
did not have a material impact on the consolidated financial statements.
7
FIN No. 46 "Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin No. 51." FIN 46 establishes
accounting guidance for consolidation of variable interest rate entities (VIE)
that function to support the activities of the primary beneficiary. The primary
beneficiary of a VIE entity is the entity that absorbs a majority of the VIE's
expected losses, receives a majority of the VIE's expected residual returns, or
both, as a result of ownership, controlling interest, contractual relationship
or other business relationship with a VIE. Prior to the implementation of FIN
46, VIEs were generally consolidated by an enterprise when the enterprise had a
controlling financial interest through ownership of a majority of voting
interest in the entity. The provisions of FIN 46 were effective immediately for
all arrangements entered into after January 31, 2003. If a VIE existed prior to
February 1, 2003, FIN 46 was effective at the beginning of the first interim
period beginning after June 15, 2003. However, on October 8, 2003, the Financial
Accounting Standards Board (FASB) deferred the implementation date of FIN 46
until the first period ending after December 15, 2003. Implementation of this
interpretation is not expected to have a material impact on the consolidated
financial statements.
8
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 "Bank"). All significant inter-company
transactions and balances are eliminated in consolidation. The Company's results
of operations are primarily dependent on the Bank'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 Bank's net income is
also affected by the level of non-interest income, gains or losses on the sale
of investments, gains or losses from the sale of real estate, provision for loan
loss expense, and by its non-interest expenses, such as employee compensation
and benefits, occupancy expenses, and other expenses.
Forward-Looking Statements
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 decreased $2.1 million from $96.8 million at
June 30, 2003 to $94.7 million at September 30, 2003. Cash and amounts due from
depository institutions increased by $2.9 million. This increase was offset by
decreases in net loans receivable of $3.3 million, Federal Home Loan Bank stock
of $1.0 million and loans held for sale of $433,500.
9
Loans held for sale were $1.4 million for the period ended September
30, 2003, a decrease of $433,500 from $1.9 million for the period ended June 30,
2003.
Net loans receivable decreased $3.3 million, from $82.2 million at June
30, 2003 to $78.9 million at September 30, 2003. Loan originations totaled $10.2
million for the three-month period, including $4.2 million in originations
subsequently sold on the secondary market. Due to continued high refinancing
activity, repayment of principal on loans totaled $9.3 million for the same
period.
Total deposits decreased by $1.6 million from $73.0 million at June 30,
2003 to $71.4 million at September 30, 2003. The decreases in certificates of
deposit and savings deposits were $2.9 million and $930,000, respectively, as a
result of the Company's new pricing strategy. These decreases were offset in
part by increases in money market and demand deposits of $1.6 million and
$593,000, respectively.
Total stockholders' equity decreased $58,000 from $13.9 million at June
30, 2003 to $13.8 million at September 30, 2003. The decrease was primarily the
result of net earnings of $55,000 and accounting for employee stock ownership
plan awards and options of $42,800, which was offset by dividends declared of
$129,400 and unrealized loss on investment securities of $26,400.
Comparison of Operating Results for the Three Month Periods Ended September 30,
2003 and September 30, 2002
General. Net income increased $50,900 from $4,100 for the three months
ended September 30, 2002, to $55,000 for the three months ended September 30,
2003. The increase in net income primarily resulted from an increase in
non-interest income of $96,200 and a decrease in non-interest expense of
$30,700. Net interest income decreased $24,800, and the provision for loan
losses increased $6,900. Income tax expense was $20,600 compared to an income
tax benefit of $23,800 for the prior comparable period.
Net Interest Income. Net interest income decreased $24,800, from
$811,000 for the three months ended September 30, 2002 to $786,200 for the three
months ended September 30, 2003. This decrease was the result of a decrease of
$219,900 in interest income, partially offset by a decrease of $195,100 in
interest expense.
Interest Income. Interest income decreased $219,900 from $1.7 million
for the three months ended September 30, 2002 to $1.5 million for the three
months ended September 30, 2003. This decrease was primarily the result of
decreases in interest earned on the loan portfolio of $202,700 and investments
and other of $17,200.
The decrease in interest earned on loans receivable resulted from
decreases in both the average rate and the average loans receivable balance.
Investment and other interest income decreased primarily from decreases in the
average rate paid on such balances.
10
Interest Expense. Interest expense decreased $195,100 from $872,700 for
the three months ended September 30, 2002 to $677,600 for the three months ended
September 30, 2003. This decrease resulted primarily from decreases in interest
expense on deposits of $116,600, and decreases of interest paid on borrowings of
$78,500. The decrease in interest expense resulted primarily from reductions in
the average rate paid and the average outstanding balance of deposit accounts,
and the repayment of $5 million of Federal Home Loan Bank advances from the
period ended September 30, 2002.
Provision for Loan Losses. The provision for loan losses increased
$6,900 from $103,100 for the three months ended September 30, 2002 to $110,000
for the three months ended September 30, 2003. The provision during the three
months ended September 30, 2003 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 based on the condition of the loan portfolio, analysis of
specific loans, regulatory comments, and if economic conditions dictate.
Although the Company maintains its allowance for loan losses at a level, which
it considers to be adequate to provide for probable 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 $96,200 from $70,800
in the three months ended September 30, 2002 to $167,000 in the three months
ended September 30, 2003. The increase was due to gains on loans held for sale
of $47,200, as the Company began originating and selling loans in the secondary
market during the quarter ended December 31, 2002. There was an increase in
commission income from the sale of non-insured deposit products of $25,400, due
to increased marketing and the current low interest rate environment. Other
non-interest income increased $23,400, which mainly consists of fee income.
Non-interest Expense. Non-interest expense decreased from $798,400 in
the three months ended September 30, 2002 to $767,800 in the three months ended
September 30, 2003. This decrease of $30,700 was primarily the result of
decreases in occupancy and equipment expense of $38,900 and data processing
expense of $4,500. The decrease was partially offset by increases in other
non-interest expense of $11,100 and salaries and benefits expense of $1,400. The
decrease in occupancy and equipment expense was mainly due to a one-time
property tax accrual adjustment that occurred during the September 2002 quarter.
Data processing expense decreased due to one-time charges that occurred during
the quarter ended September 30, 2002, as new products and services were added.
Other non-interest expense increases were primarily related to increases in loan
origination systems expense and employee education. Salaries and benefits
expense increased due to the increased costs of providing employee benefits.
Income Tax Expense. Income tax expense was $20,600 for the three months
ended September 30, 2003, compared to an income tax (benefit) of ($23,800) that
had resulted from the reduction in taxable income and the application of tax
credits for the three months ended September 30, 2002.
11
Liquidity and Capital Resources. The Office of Thrift Supervision
regulations require the Bank to maintain a safe and sound level of liquid
assets. Such assets may include United States Treasury, federal agency, and
other investments having maturities of five years or less and are intended to
provide a source of relatively liquid funds upon which the Bank may rely, if
necessary, to fund deposit withdrawals and other short-term funding needs. The
Bank's regulatory liquidity at September 30, 2003 was 6.1%. The Company's
primary sources of funds consist of deposits, FHLB advances, repayments of
loans, interest earned on investments and funds provided by operations.
Management believes that loan repayments and other sources of funds will be
adequate to meet the Company's foreseeable liquidity needs.
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 September 30, 2003,
the Bank exceeded regulatory capital requirements.
At September 30, 2003, the Bank's tangible equity capital was $7.3
million, or 8.11%, of tangible assets, which exceeded the 1.5% requirement by
$5.9 million. In addition, at September 30, 2003, the Bank had core capital of
$7.3 million, or 8.11%, of adjusted total assets, which exceeded the 4%
requirement by $3.7 million. The Bank had total risk-based capital of $7.9
million at September 30, 2003, or 13.85%, of risk-weighted assets which exceeded
the 8.0% risk-based capital requirements by $3.4 million. The Bank is considered
"well-capitalized" under federal regulations.
PART I. - ITEM 3
CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures:
With the participation and under the supervision of the Company's
management, including the Company's Chief Executive Officer and Chief
Financial Officer, and within 90 days of the filing date of this quarterly
report, the Company's Chief Executive Officer and Chief Financial Officer
have evaluated the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14(c) and 15(d)-14(c)) and, based on their evaluation, have
concluded that the disclosure controls and procedures are effective.
(b) Changes in Internal Controls:
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective action with regard
to significant deficiencies and material weaknesses.
12
STATEFED FINANCIAL CORPORATION
Part II - Other Information
---------------------------
Item 1 - Legal Proceedings
Not applicable.
Item 2 - Changes in Securities
Not applicable.
Item 3 - Defaults upon Senior Securities
Not applicable.
Item 4 - Submission of Matters to Vote of Security Holders
Not applicable.
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 - ss. 13a-14(a) Certifications
31.2 - ss. 13a-14(a) Certifications
32 - Certification pursuant to 18 U.S.C. Section 1350, as
adapted to Section 906 of the Sarbanes-Oxley Act of 2002 from
the Company's Chief Executive Officer and Chief Financial
Officer (attached as an exhibit and incorporated herein by
reference).
(b) The following is a description of the Form 8-K's filed during the
three months ended September 30, 2003:
1. September 9, 2003, a current report on Form 8-K was filed
announcing a dividend declaration.
2. October 3, 2003, a current report on Form 8-K was filed
reflecting quarterly and annual financial information.
13
SIGNATURES
Pursuant to the requirement 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
Registrant
Date: November 14, 2003 /s/ RANDALL C. BRAY
------------------------ --------------------------------------
Randall C. Bray
Chairman and President
Date: November 14, 2003 /s/ ANDRA K. BLACK
------------------------ --------------------------------------
Andra K. Black
Executive Vice President and CFO
14
REVOCABLE PROXY
REVOCABLE PROXY
STATEFED FINANCIAL CORPORATION
SPECIAL MEETING OF STOCKHOLDERS
[DATE], 2004
The undersigned hereby appoints the Board of Directors of StateFed
Financial Corporation (the "Company "), with full powers of substitution, to act
as proxy for the undersigned to vote all shares of capital stock of the Company
which the undersigned is entitled to vote at the Special Meeting of Stockholders
(the "Meeting") to be held at the Company's main offices located at West Des
Moines Marriott, 1250 74th Street, West Des Moines, Iowa on [Date], 2004, at
__:__ _.m., local time, and at any and all adjournments and postponements
thereof, as follows:
1. Approval of the Agreement and Plan of Merger, dated
November 18, 2003, by and between the Company and Liberty
Bank, F.S.B., and the transactions contemplated by that
agreement.
- ----
FOR
- ----
- ----
AGAINST
- ----
- ----
ABSTAIN
- ----
In its discretion, the Board of Directors, as proxy for the
undersigned, is authorized to vote on any other business that may
properly come before the Meeting or any adjournment or postponement
thereof.
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE
SPECIFIED, THIS PROXY WILL BE VOTED FOR THE PROPOSAL LISTED ABOVE. IF ANY
OTHER BUSINESS IS PRESENTED AT THE MEETING, THIS PROXY WILL BE VOTED AS
DIRECTED BY A MAJORITY OF THE BOARD OF DIRECTORS IN THEIR BEST JUDGMENT.
AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER BUSINESS TO
BE PRESENTED AT THE MEETING.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSALS.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
(Continued and to be SIGNED on Reverse Side)
This proxy may be revoked at any time before it is voted by: (i) filing
with the Secretary of the Company at or before the Meeting a written notice of
revocation bearing a later date than this proxy; (ii) duly executing a
subsequent proxy relating to the same shares and delivering it to the Secretary
of the Company at or before the Meeting; or (iii) attending the Meeting and
voting in person (although attendance at the Meeting will not in and of itself
constitute revocation of this proxy). If this proxy is properly revoked as
described above, then the power of the Board of Directors to act as proxy for
the undersigned shall be deemed terminated and of no further force and effect.
The undersigned acknowledges receipt from the Company, prior to the
execution of this proxy, of notice of the Meeting and the proxy statement for
the Meeting.
Dated: , 2004
--------------------------------------------
Signature of Stockholder
--------------------------------------------
Please sign exactly as your name(s)
appear(s) to the left. When signing as
attorney, executor, administrator, trustee
or guardian, please give your full title.
If shares are held jointly, each holder
should sign.
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY
PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE