SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 2003
Commission File Number 0-22790
STATEFED FINANCIAL CORPORATION
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(Exact name of small business issuer as specified in its charter)
Delaware 42-1410788
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(State of other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) or Number)
13523 University Avenue, Clive, Iowa 50325
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(Address of principal executive offices)
(515) 223-8484
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(Issuer's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
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 February 3, 2004, there were 1,309,432 shares of the Registrant's
common stock issued and outstanding.
Transitional Small Business Disclosure Format:
Yes [ ] No [X]
1
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 14
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
Exhibit 31.1 17
Exhibit 31.2 18
Exhibit 32 19
2
PART I. - CONSOLIDATED FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATEFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2003 AND JUNE 30, 2003
(UNAUDITED)
ASSETS
DECEMBER 31, 2003 JUNE 30, 2003
Cash and amounts due from depository institutions $ 8,506,407 $ 4,407,338
Investments in certificates of deposit 99,000 99,000
Investment securities available for sale 1,208,701 1,264,495
Loans held for sale - 1,870,683
Loans receivable, net 78,353,537 82,193,569
Real estate held for sale, net - 540,500
Property acquired in settlement of loans 140,688 87,546
Office property and equipment, net 3,210,670 3,323,484
Federal Home Loan Bank stock, at cost 762,200 1,762,200
Accrued interest receivable 398,956 470,357
Income tax refund receivable - 90,707
Deferred income taxes 314,183 314,926
Other assets 328,837 328,610
--------------- ---------------
TOTAL ASSETS $ 93,323,179 $ 96,753,415
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 69,730,302 $ 72,973,470
Advances from Federal Home Loan Bank 9,000,000 9,000,000
Advances from borrowers for taxes and insurance 335,534 380,606
Accrued interest payable 3,210 1,702
Dividends payable - 129,161
Income taxes payable 17,758 -
Other liabilities 299,844 361,694
--------------- ---------------
TOTAL LIABILITIES 79,386,648 82,846,633
--------------- ---------------
Stockholders' equity:
Common stock 17,810 17,810
Additional paid-in capital 8,591,988 8,566,238
Unearned compensation - Employee Stock Ownership Plan (4,870) (30,875)
Accumulated other comprehensive income - unrealized gains
on investment securities available for sale, net of deferred taxes 56,167 67,298
Treasury stock (5,017,038) (5,041,185)
Retained earnings - substantially restricted 10,292,474 10,327,496
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TOTAL STOCKHOLDERS' EQUITY 13,936,531 13,906,782
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 93,323,179 $ 96,753,415
=============== ===============
3
STATEFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATION
FOR THE THREE AND SIX MONTH PERIODS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2002
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
------------------------- ------------------------
2003 2002 2003 2002
========================= ========================
Interest Income:
Loans $1,376,361 $1,614,546 $2,822,172 $3,263,017
Investments & other 28,813 32,836 46,772 67,986
------------------------- ------------------------
Total interest income 1,405,174 1,647,382 2,868,944 3,331,003
Interest Expense:
Deposits 526,455 694,805 1,085,179 1,370,174
Borrowings 118,833 164,434 237,666 361,723
------------------------- ------------------------
Total interest expense 645,288 859,239 1,322,845 1,731,897
Net interest income 759,886 788,143 1,546,099 1,599,106
Provision for loan losses - - 110,000 103,076
------------------------- ------------------------
Net interest income after
provision for loan losses 759,886 788,143 1,436,099 1,496,030
Non-interest Income:
Real estate operations 8,708 13,314 21,606 26,069
Gains on loans held for sale 15,486 43,706 62,730 43,706
Gain on sales of real estate, net 78,430 11,043 98,337 9,679
Gain (loss) on sales of investments held for sale 28,904 (2,787) 28,101 (4,517)
Commission income 28,489 12,078 63,775 21,904
Other 52,631 46,183 105,173 97,526
------------------------- ------------------------
Total non-interest income 212,648 123,537 379,722 194,367
Non-interest Expense:
Salaries and benefits 433,229 435,818 808,558 809,740
Occupancy and equipment 131,373 127,277 262,404 297,244
FDIC premiums and OTS assessments 10,911 10,770 22,151 21,700
Data processing 42,077 42,164 80,168 84,794
Other 325,019 313,476 537,066 514,440
------------------------- ------------------------
Total non-interest expense 942,609 929,505 1,710,347 1,727,918
------------------------- ------------------------
Income (loss) before income taxes 29,925 (17,825) 105,474 (37,521)
Income tax expense (benefit) (9,500) (15,760) 11,100 (39,520)
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Net income (loss) $ 39,425 $ (2,065) $ 94,374 $ 1,999
========================= ========================
Basic earnings per share $ 0.03 $ - $ 0.07 $ -
Diluted earnings per share 0.03 - 0.07 -
Dividends declared per common share $ - $ 0.10 $ 0.10 $ 0.10
Comprehensive income (loss) $ 54,691 $ 23,275 $ 83,243 $ (2,209)
========================= ========================
4
STATEFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2002
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES DECEMBER 31, DECEMBER 31,
2003 2002
------------ ------------
Net income $ 94,374 $ 1,999
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation 126,313 116,189
Gain on sale of real estate held for investment (69,461) -
Amortization of ESOP 64,182 59,830
Deferred loan fees 29,815 10,956
Loans originated for sale (4,587,182) (4,545,630)
Loans sold 6,105,325 2,663,730
Provision for losses on loans 110,000 103,076
Change in:
Accrued interest receivable 71,401 36,424
Other assets (227) (16,899)
Accrued interest payable 1,508 (172,458)
Current and deferred income tax liability - (296,723)
Other liabilities (61,850) (58,026)
----------- -----------
NET CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITES 1,884,198 (2,097,532)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale or maturity of available-for-sale investment securities 149,907 -
Purchase of available-for-sale investment securities (86,630) -
Redemption of FHLB stock 1,000,000 -
Net (increase) decrease in loans 4,049,331 (780,433)
Proceeds from sale of real estate held for investment 574,585 -
Investment in real estate acquired in settlement of loans (53,142) (54,713)
Purchase of office property and equipment (13,499) (153,984)
----------- -----------
NET CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES 5,620,552 (989,130)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (3,243,168) 8,213,129
Repayment of advances from the Federal Home Loan Bank - (5,000,000)
Net decrease in advances from borrowers (45,072) (3,723)
Proceeds from stock options exercised 11,720 -
Dividends paid (129,161) (255,774)
----------- -----------
NET CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITES (3,405,681) 2,953,632
----------- -----------
CHANGE IN CASH AND CASH EQUIVALENTS 4,099,069 (133,030)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,407,338 3,114,682
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,506,407 $ 2,981,652
=========== ===========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash payments for:
Interest $ 1,215,927 $91,045,855
Income taxes (50,834) 213,364
5
STATEFED FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIOD ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2002
FOR THE SIX MONTH PERIOD ENDED DECEMBER 31, 2003 AND DECEMBER 31, 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. PENDING SALE OF COMPANY
On November 18, 2003, the Company entered into a definitive agreement to
sell the Company to Liberty Bank at a per share price of $13.47. All regulatory
approvals have been received. Only StateFed Financial shareholder approval is
still needed. There is a special meeting scheduled for February 26, 2004 for the
purpose of obtaining shareholder approval. The transaction is expected to close
during the quarter ended March 31, 2004.
3. 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 1,292,888 at December 31, 2003 and 1,267,349
at December 31, 2002. For the six month periods ending December 31, 2003 and
December 31, 2002, weighted-average common shares outstanding totaled 1,290,958
and 1,265,959, respectively.
Diluted earnings per share is computed by considering common shares
outstanding and dilutive potential common shares to be issued under the
Company's stock option plan. Weighted-average common shares deemed outstanding
for the purpose of computing diluted earnings per share, for the three month
periods ending December 31, 2003 and December 31, 2002, totaled 1,306,728 and
1,287,383, respectively. For the six month periods ending December 31, 2003 and
December 31, 2002, weighted-average common shares deemed outstanding for the
purpose of computing diluted earnings per share were 1,304,384 and 1,287,955,
respectively.
6
At December 31, 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. 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.
4. 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 $ 7,906 8.86 %
Requirement 1,339 1.50
--------- -----------
Excess $ 6,567 7.36 %
Core Capital:
Bank's $ 7,906 8.86 %
Requirement 3,571 4.00
--------- -----------
Excess $ 4,335 4.86 %
Risk-Based Capital:
Bank's $ 8,618 15.12 %
Requirement 4,559 8.00
--------- -----------
Excess $ 4,059 7.12 %
The Bank is considered "well-capitalized" under federal regulations.
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 did not have a material impact on the consolidated financial
statements.
The Accounting Standards Executive Committee has issued Statement of
Position (SOP) 03-3 "Accounting for Certain Loans or Debt Securities Acquired in
a Transfer". This Statement applies to all loans acquired in a transfer,
including those acquired in the acquisition of a bank or a branch, and provides
that such loans be accounted for at fair value with no allowance for loan
losses, or other valuation allowance, permitted at the time of acquisition. The
difference between cash flows expected at the acquisition date and the
investment in the loan should be recognized as interest income over the life of
the loan. If contractually required payments for principal and interest are less
than expected cash flows, this amount should not be recognized as a yield
adjustment, a loss accrual, or a valuation allowance. For the Company, this
Statement is effective for fiscal 2006 and, early adoption, although permitted,
is not planned. No significant impact is expected on the consolidated financial
statements at the time of adoption.
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.
PENDING SALE OF COMPANY
On November 18, 2003, the Company entered into a definitive agreement to
sell the Company to Liberty Bank at a per share price of $13.47. All regulatory
approvals have been received. Only StateFed Financial shareholder approval is
still needed. There is a special meeting scheduled for February 26, 2004 for the
purpose of obtaining shareholder approval. The transaction is expected to close
during the quarter ended March 31, 2004.
9
FINANCIAL CONDITION
The Company's total assets decreased $3.4 million from $96.7 million at
June 30, 2003 to $93.3 million at December 31, 2003. Cash and amounts due from
depository institutions increased by $4.1 million. This increase was offset by
decreases in net loans receivable of $3.8 million, loans held for sale of $1.9
million and Federal Home Loan Bank stock of $1.0 million.
No loans were held for sale at December 31, 2003, resulting in a decrease
of $1.9 million from the period ended June 30, 2003.
Net loans receivable decreased $3.8 million, from $82.2 million at June 30,
2003 to $78.4 million at December 31, 2003. Loan originations totaled $19.1
million for the six-month period, including $6.1 million in originations
subsequently sold on the secondary market. Due to continued high refinancing
activity, repayment of principal on loans totaled $16.8 million for the same
period.
Total deposits decreased by $3.3 million from $73.0 million at June 30,
2003 to $69.7 million at December 31, 2003. The decreases in certificates of
deposit and savings deposits were $4.8 million and $1.1 million, 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 $1.8 million and
$752,000, respectively.
Total stockholders' equity increased $29,800 at December 31, 2003 from
$13.9 million at June 30, 2003. The increase was primarily the result of net
earnings of $94,400 and accounting for employee stock ownership plan awards and
options of $75,900, which was partially offset by dividends declared of $129,400
and unrealized loss on investment securities of $11,100.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTH PERIODS ENDED DECEMBER 31,
2003 AND DECEMBER 31, 2002
GENERAL. Net income increased $41,500 from a net loss of $2,100 for the
three months ended December 31, 2002, to net income of $39,400 for the three
months ended December 31, 2003. The increase in net income primarily resulted
from an increase in non-interest income of $89,100, partially offset by an
increase in non-interest expense of $13,100. Net interest income decreased
$28,200. There was no provision for loan losses recorded during the periods
ended December 31, 2003 or 2002. There was a decrease in the income tax benefit
of $6,300 from the prior comparable period.
NET INTEREST INCOME. Net interest income decreased $28,200, from $788,100
for the three months ended December 31, 2002 to $759,900 for the three months
ended December 31, 2003. This decrease was the result of a decrease of $242,200
in interest income, partially offset by a decrease of $214,000 in interest
expense.
INTEREST INCOME. Interest income decreased $242,200 from $1.6 million for
the three months ended December 31, 2002 to $1.4 million for the three months
ended December 31, 2003. This decrease was primarily the result of decreases in
interest earned on the loan portfolio of $238,200 and investments and other of
$4,000.
10
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.
INTEREST EXPENSE. Interest expense decreased $214,000 from $859,200 for the
three months ended December 31, 2002 to $645,200 for the three months ended
December 31, 2003. This decrease resulted primarily from decreases in interest
expense on deposits of $168,400, and decreases of interest paid on borrowings of
$45,600. The decrease in interest expense resulted primarily from reductions in
the average rate paid and the average outstanding balance of deposit accounts,
and the reduction in the average outstanding balance of Federal Home Loan Bank
advances from the period ended December 31, 2002.
PROVISION FOR LOAN LOSSES. Management's analysis of the allowance for loan
losses during the three months ended December 31, 2003 and the three months
ended December 31, 2002, resulted in no additions to the provision 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 $89,100 from $123,500 in
the three months ended December 31, 2002 to $212,600 in the three months ended
December 31, 2003. The increase was primarily due a $67,400 increase in gain on
sales of real estate, which mainly consisted of a one time gain of $69,500,
received from the sale of the Company's former downtown Des Moines branch office
during the quarter ended December 31, 2003. There were also increases in gain on
sales of investments held for sale of $31,700, commission income from the sale
of non-insured deposit products of $16,400 and other non-interest income of
$6,400, which mainly consists of fee income. The increases were offset by
decreases in gains on loans held for sale of $28,200 and real estate operations
of $4,600. Gains on loans held for sale decreased as a result of a reduction in
real estate mortgage originations sold in the secondary market, as compared to
the quarter ended December 31, 2002. Income from real estate operations had been
partially generated by the former downtown Des Moines branch office, which was
sold during the December 2003 quarter, resulting in the decrease in income.
NON-INTEREST EXPENSE. Non-interest expense increased from $929,500 in the
three months ended December 31, 2002 to $942,600 in the three months ended
December 31, 2003. This increase of $13,100 was primarily the result of
increases in other non-interest expense of $11,500 and occupancy and equipment
expense of $4,100. The increase was partially offset by a decrease in salaries
and benefits of $2,600. Other non-interest expense increased primarily as a
result of costs associated with the analysis and negotiation of the proposed
merger of the Company and increases in the outside audit expense. Office and
occupancy expense increased primarily due to increases in the costs of facility
maintenance. Salaries and benefits expense decreased due to a reduction in
commissions paid to loan originators.
INCOME TAX EXPENSE. There was an income tax (benefit) of ($9,500) for the
three months ended December 31, 2003, compared to an income tax (benefit) of
($15,800) for the
11
three months ended December 31, 2002. The change was the result of an increase
in taxable income.
COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2002
GENERAL. Net income was $94,400 for the six months ended December 31, 2003
as compared to $2,000 for the six months ended December 31, 2002.
NET INTEREST INCOME. Net interest income decreased $53,000 from $1.6
million for the six months ended December 31, 2002 to $1.5 million for the six
months ended December 31, 2003. There were reductions in total interest income
and total interest expense. The $462,100 reduction in total interest income was
comprised of decreases in interest on loans of $440,900 and investment and other
interest income of $21,200. There was also a decrease in interest paid on
deposits of $285,000, in addition to a reduction in interest paid on borrowings
of $124,100, resulting in a $409,100 decrease in total interest expense.
INTEREST INCOME. Interest income decreased $462,100 from $3.3 million for
the six months ended December 31, 2002 to $2.9 million for the six months ended
December 31, 2003. The change was primarily due to decreases in interest earned
on the loan portfolio of $440,900 and interest earned on investments and other
of $21,200. The decrease in interest earned on loans receivable resulted from
decreases in both the average rate and the average loans receivable balance. The
decrease in income on investments and other was primarily due to the decrease in
the average rate paid on those balances.
INTEREST EXPENSE. Interest expense decreased $409,100 from $1.7 million in
the six months ended December 31, 2002 to $1.3 million in the six months ended
December 31, 2003. This decrease was primarily due to decreases in interest paid
on deposits of $285,000 and interest paid on Federal Home Loan Bank advances of
$124,100. The decrease in interest paid on deposits was the result of reductions
in the average rate paid and in the average outstanding balance of deposit
accounts. The decrease in interest paid on borrowings was due to a decrease in
the average outstanding balance of Federal Home Loan Bank advances, as compared
to the period ended December 31, 2002.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the six months
ended December 31, 2003 as compared to the six months ended December 31, 2002,
were $110,000 and $103,100, respectively. The increase of $6,900 was based on
management's analysis of the allowance for loan losses during the six months
ended December 31, 2003. 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 $185,300 from $194,400
for the six months ended December 31, 2002 to $379,700 for the six months ended
December 31, 2003. There were increases in net gains on sales of real estate of
$88,700, commission income of $41,900, gain on sales of investments held for
sale of $32,600, gains on loans held for sale
12
of $19,000 and other non-interest income of $7,600. The increases were offset by
a decrease in real estate operations income of $4,500. The increase in net gains
on sales of real estate held for sale was primarily due to the one time gain of
$69,500 from the sale of the Company's former downtown Des Moines branch office
location, recorded during the period ended December 31, 2003. Commission income
increased due to increases in sales of non-insured deposit products, as a result
of increased marketing and the current low interest rate environment. The
reduction in income from real estate operations is primarily due to the sale of
the Company's former downtown Des Moines branch office, which had generated a
significant portion of the income. The increase in gains on loans held for sale
was the result of an increase in loans originated and sold in the secondary
market, during the six month period ended December 31, 2003, as compared to the
six month period ended December 31, 2002. Increases in fee income generated by
deposit accounts, resulted in an increase in other non-interest income.
NON-INTEREST EXPENSE. Non-interest expense decreased $17,600 to $1.7
million for the six months ended December 31, 2003. This decrease was primarily
the result of decreases in occupancy and equipment expense of $34,800, data
processing of $4,600 and salaries and benefits of $1,200, which were offset by
an increase other non-interest expense of $22,600. The decrease in occupancy and
equipment expense was mainly due to a one-time property tax accrual adjustment
that occurred during the December 2002 period. Data processing expense decreased
due to one-time charges that occurred during the period ended December 31, 2002,
as new products and services were added. Decreases in commissions paid to loan
originators resulted in a reduction in salaries and benefits expense. The
increase in other non-interest expense is primarily due to analysis and
negotiation costs associated with the proposed merger of the Company and
increases in the outside audit expense.
INCOME TAX EXPENSE. Income tax expense was $11,100 for the six months ended
December 31, 2003, compared to an income tax (benefit) of ($39,500) that had
resulted from the reduction in taxable income and the application of tax credits
for the six months ended December 31, 2002.
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 December 31, 2003 was 4.7%. 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
13
adjusted assets, and a tangible capital ratio expressed as a percent of total
adjusted assets. As of December 31, 2003, the Bank exceeded regulatory capital
requirements.
At December 31, 2003, the Bank's tangible equity capital was $7.9 million,
or 8.86%, of tangible assets, which exceeded the 1.5% requirement by $6.6
million. In addition, at December 31, 2003, the Bank had core capital of $7.9
million, or 8.86%, of adjusted total assets, which exceeded the 4% requirement
by $4.3 million. The Bank had total risk-based capital of $8.6 million at
December 31, 2003, or 15.12%, of risk-weighted assets which exceeded the 8.0%
risk-based capital requirements by $4.1 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.
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.
14
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 December 31, 2003:
1. October 3, 2003, a current report on Form 8-K was filed
reflecting annual financial information.
2. November 24, 2003, a current report on Form 8-K was filed
reflecting execution of a definitive agreement.
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: February 13, 2004 /s/ Randall C. Bray
------------------------ ----------------------------------
Randall C. Bray
Chairman and President
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Date: February 13, 2004 /s/ Andra K. Black
------------------------ ----------------------------------
Andra K. Black
Executive Vice President and CFO
16