<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------------------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-22742
GFS BANCORP, INC.
- - ------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 42-1410536
- - --------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification or
organization) Number)
1025 MAIN STREET, GRINNELL, IOWA 50112-0030
- - ------------------------------------------------------------------------------
(Address of principal executive offices)
(515) 236-3121
- - ------------------------------------------------------------------------------
(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 [_]
Transitional Small Business Disclosure Format (check one):
Yes [_] No [X]
State the number of Shares outstanding of each of the issuer's classes of
common equity, as of the latest date:
As of March 31, 1996, there were 514,600 shares of the Registrant's common
stock issued and outstanding, including 10,444 shares of restricted stock.
<PAGE>
GFS BANCORP, INC.
INDEX
-----
PART I. FINANCIAL STATEMENTS (UNAUDITED) PAGE NO.
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets, March 31, 1996
and June 30, 1995 (Unaudited)............................. 1
Consolidated Statement of Income for the Three Months
and Nine Months Ended March 31, 1996 and 1995
(Unaudited)............................................... 2
Consolidated Statement of Shareholders' Equity,
for the Nine Months Ended March 31, 1996
(Unaudited)............................................... 3
Consolidated Statement of Cash Flows, for the Nine
Months Ended March 31, 1996 and 1995 (Unaudited).......... 4
Notes to Consolidated Financial Statements (Unaudited).... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 7
PART II. OTHER INFORMATION
Signature Page............................................ 21
i
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<TABLE>
<CAPTION>
GFS BANCORP, INC
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, June 30,
ASSETS 1996 1995
<S> <C> <C>
Cash & amounts due from depository institutions $3,671,797 $4,107,346
Investment securities held to maturity 1,435,000 1,551,800
Investment securities available for sale 2,564,439 4,526,000
Stock in Federal Home Loan Bank 1,159,000 832,200
Mortgage-backed securities held to maturity 3,535,097 3,950,389
Loans receivable, net 67,430,574 54,999,105
Real estate acquired in settlement of loans, net 60,771 0
Premises and equipment, net 234,430 196,270
Accrued interest receivable 347,923 318,250
Other assets 474,111 468,623
-----------------------------
Total Assets $80,913,142 $70,949,983
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $51,050,214 $46,081,945
Advances from Federal Home Loan Bank 19,331,528 14,577,952
Advances from borrowers for taxes and insurance 139,590 192,132
Accrued dividends payable 39,271 40,592
Other accrued expenses and liabilities 614,157 517,775
-----------------------------
Total Liabilities $71,174,760 $61,410,396
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,
550,160 and 549,732 shares issued, respectively
(514,600 and 541,232 shares outstanding, respectively) $5,501 $5,497
Additional paid-in capital 5,121,394 5,075,728
Retained earnings - substantially restricted 5,630,289 5,117,067
Less common stock acquired by:
Employee stock ownership plan (275,781) (325,011)
Retention and recognition plan (42,517) (71,802)
Treasury stock at cost, 35,560 and 8,500 shares, respectively (626,300) (131,313)
Net unrealized loss on available for sale securities (74,204) (130,579)
-----------------------------
Total Stockholders' Equity $9,738,382 $9,539,587
-----------------------------
Total Liabilities & Stockholders' Equity $80,913,142 $70,949,983
=============================
</TABLE>
1
<PAGE>
GFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable $1,418,640 $1,026,100 $3,953,793 $2,866,031
Mortgage-backed securities 67,088 74,817 207,403 229,667
Investment and other securities and
interest-bearing cash accounts 118,042 121,703 413,287 379,191
-----------------------------------------------------
Total Interest Income 1,603,770 1,222,620 4,574,483 3,474,889
INTEREST EXPENSE
Interest on deposits 631,134 524,485 1,878,748 1,497,984
Interest on FHLB Advances 303,756 166,857 882,901 369,215
-----------------------------------------------------
Total Interest Expense 934,890 691,342 2,761,649 1,867,199
-----------------------------------------------------
Net Interest Income 668,880 531,278 1,812,834 1,607,690
Provision for Loan losses 8,000 0 20,000 0
-----------------------------------------------------
Net Interest Income after provision for loan losses 660,880 531,278 1,792,834 1,607,690
NON-INTEREST INCOME
Gain on sale of investment securities available for sale 10,928 0 28,054 36,250
Other 22,778 17,677 68,776 67,715
-----------------------------------------------------
Total Non-interest Income 33,706 17,677 96,830 103,965
NON-INTEREST EXPENSES
Salaries and employee benefits 203,692 175,991 569,770 562,387
Occupancy expenses 19,956 13,834 53,638 41,528
Federal deposit insurance premiums 26,807 24,450 78,286 72,387
Data processing 18,043 16,307 47,408 50,724
Other 68,228 83,816 216,793 269,446
-----------------------------------------------------
Total Non-interest Expenses 336,726 314,398 965,895 996,472
-----------------------------------------------------
Income before provision for income taxes 357,860 234,557 923,769 715,183
Provision for Income Taxes 117,100 89,250 302,969 274,685
-----------------------------------------------------
Net Income $240,760 $145,307 $620,800 $440,498
=====================================================
Earnings per common share $0.47 $0.27 $1.19 $0.84
=====================================================
</TABLE>
2
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GFS BANCORP, INC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Net Unrealized
Loss on
Additional ESOP RRP Available Total
Common Paid-in Retained Stock Stock Treasury for Sale Stockholders'
Stock Capital Earnings Awards Awards Stock Securities Equity
----- ------- -------- ------ ------ ----- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 $5,497 $5,075,728 $5,117,067 ($325,011) ($71,802) ($131,313) ($130,579) $9,539,587
Net income 620,800 $620,800
Dividends declared (107,578) ($107,578)
ESOP common stock released
for allocation 42,770 49,230 $92,000
Amortization of RRP contributions 37,631 $37,631
Treasury stock acquired - 28,012
shares at cost (509,953) ($509,953)
Treasury stock reissued to fund
stock options exercised
(952 shares) (5,446) 14,966 $9,520
Issuance of common stock
(428 RRP shares) 4 8,342 (8,346) $0
Decrease in unrealized loss on
investments available
for sale 56,375 $56,375
-------------------------------------------------------------------------------------------
Balance at March 31, 1996 $5,501 $5,121,394 $5,630,289 ($275,781) ($42,517) ($626,300) ($ 74,204) $9,738,382
===========================================================================================
</TABLE>
3
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GFS BANCORP, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
March 31
1996 1995
--------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $620,800 $440,498
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 20,017 11,499
Gain on sale of real estate 0 (6,610)
Gain on sale of available for sale investments (28,054) (36,250)
FHLB Stock Dividend (20,800) 0
Amortization of ESOP and RRP contributions 129,631 123,181
Deferred Loan fees 38,947 64,623
Provisions for losses on loans and real estate 20,000 0
Change in:
Accrued interest receivable (29,673) (46,061)
Other assets (5,488) (32,209)
Other accrued expenses and liabilities 96,382 218,211
--------------------------------
Net Cash Flows provided by Operating Activities 841,762 736,882
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of available for sale investment securities 2,077,956 112,497
Proceeds from maturity of available for sale investment securities 150,000 225,000
Proceeds from held to maturity investment securities 1,200,000 640,000
Purchase of available for sale investment securities (181,500) (104,648)
Purchase of held to maturity investment securities (1,085,000) (440,000)
Purchase of FHLB Stock (306,000) 0
Principal payments received on mortgage-backed securities 415,065 252,963
Net increase in loans outstanding (12,549,431) (7,869,429)
Proceeds from sale of real estate 0 20,000
Purchase of office equipment and building improvements (58,373) (82,925)
--------------------------------
Net Cash Flows provided (used) by Investing Activities (10,337,283) (7,246,542)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 4,968,269 2,077,240
Advances from Federal Home Loan Bank 8,500,000 9,300,000
Repayment of advances from the Federal Home Loan Bank (3,746,424) (5,553,543)
Net decrease in advances from borrowers for
taxes and insurance (52,542) (82,957)
Proceeds from stock options exercised 9,520 0
Dividends paid (108,898) 0
Treasury stock purchased (509,953) 0
-------------------------------
Net Cash Flows provided by Financing Activities 9,059,972 5,740,740
Net (increase) increase in cash and cash equivalents (435,549) (768,920)
Cash and Cash equivalents, beginning of period 4,107,346 198,956
-------------------------------
Cash and Cash equivalents, end of period $3,671,797 ($569,964)
===============================
</TABLE>
4
<PAGE>
GFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
---------------------
The accompanying unaudited Consolidated Financial Statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Regulation
S-X. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
In the opinion of management, the Consolidated Financial Statements
contain all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial condition of GFS Bancorp, Inc. as of
March 31, 1996 and June 30, 1995, the results of its operations for the three
months and nine months ended March 31, 1996 and 1995, changes in stockholders'
equity for the nine months ended March 31, 1996 and for the statement of cash
flows for the nine months ended March 31, 1996 and 1995.
Operating results for the three months and nine months ended March 31,
1996 are not necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 1996.
(2) Earnings Per Share of Common Stock
----------------------------------
Earnings per share is based on the weighted average number of shares
outstanding during the period, plus the shares that would be issued assuming the
conversion of dilutive stock options. The weighted average number of common and
common stock equivalents for the three and nine month period ended March 31,
1996 was 516,453 shares and 517,881 shares, respectively. The amount set forth
above includes 10,444 shares of restricted stock issued in accordance with the
recognition and retention plan established by the Company. These restricted
stock awards are reflected in the income per share computations in the
accompanying financial statements. In addition, 42,320 shares of common stock
were issued to the Employee Stock Ownership Plan (ESOP) trust for the benefit of
the employees of the Company and its subsidiaries. In
5
<PAGE>
accordance with American Institute of Certified Public Accountants Accounting
Standards Division statement of position 93-6 on "Employers Accounting for
Employee Stock Ownership Plans," ESOP shares that have been committed to be
released are considered outstanding and ESOP shares that have not been committed
to be released are not considered outstanding. At March 31, 1996, 15,193 ESOP
shares were committed to be released and were considered in the earnings per
share computations.
(3) Regulatory Capital Requirements
-------------------------------
Pursuant to Office of Thrift Supervision Regulations, savings institutions
must meet three separate minimum capital-to-asset requirements. The following
table summarizes, as of March 31, 1996, the capital requirements for Grinnell
Federal Savings Bank (the "Bank") under these regulations. As of March 31,
1996, the Bank substantially exceeded all current regulatory capital standards.
<TABLE>
<CAPTION>
Regulatory Actual
Capital Capital
Requirement (Bank Only) Excess Capital
--------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Risk-Based.............. $3,636 8.0% $8,404 18.49% $4,768 10.49%
Core Capital............ 2,385 3.0 7,992 10.06 5,607 7.06
Tangible Capital........ 1,193 1.5 7,992 10.06 6,801 8.56
</TABLE>
6
<PAGE>
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Business
- - --------
GFS Bancorp, Inc. (the "Company") was formed to be the holding company for
Grinnell Federal Savings Bank ("Grinnell Federal" or the "Bank") in connection
with the Bank's conversion to stock form. The Company completed its initial
public offering on January 5, 1994 with the sale of 529,000 shares at $10.00 per
share. The primary activity of the Company is to act as a holding company for
the Bank. As a result, unless otherwise noted, the following discussion relates
primarily to the Bank. The primary business of savings banks, including Grinnell
Federal, has historically consisted of attracting deposits from the general
public and providing financing for the purchase of residential properties. The
operations of the Bank are significantly affected by prevailing economic
conditions as well as by government policies and regulations relating to
monetary and fiscal affairs, housing and financial institutions.
Net income is primarily dependent upon the difference (or "spread") between
the average yield earned on loans, mortgage-backed and related securities and
investments, and the average rate paid on deposits and borrowings, as well as
the relative amounts of such assets and liabilities. The interest rate spread
is affected by regulatory, economic and competitive factors that influence
interest rates, loan demand and deposit flows. The Bank, like other thrift
institutions, is subject to interest rate risk to the degree that its interest-
bearing liabilities mature or reprice at different times, or on a different
basis, than its interest-earning assets.
Net income is also affected by, among other things, gains and losses on
sales of real estate and investments, mortgage-backed and related securities,
investment securities and foreclosed assets, provisions for loan losses, service
charges and other fees, operating expenses and income taxes.
7
<PAGE>
Financial Condition
- - -------------------
The Company's total assets increased $10.0 million, or 14.1%, from $70.9
million at June 30, 1995 to $80.9 million at March 31, 1996. This increase was
due primarily to an increase of $12.4 million in net loans receivable, and
$327,000 in Federal Home Loan Bank stock. The increases were partially offset
by a $2.1 million decrease in investment securities and a $415,000 decrease in
mortgage-backed securities. The increase in loans was funded primarily by a
$5.0 million increase in savings deposits and a $4.7 million net increase in
borrowings from the Federal Home Loan Bank of Des Moines.
Total investment securities decreased by $2.1 million, or 34.4%, from $6.1
million at June 30, 1995 to $4.0 million at March 31, 1996 due to the sale of
municipal bonds, mutual funds and common stock and maturing investment
securities. At March 31, 1996 the investment portfolio consisted primarily of
$1.4 million in U.S. agency obligations, $1.6 million in mutual funds, and $1.0
million in preferred and common stocks.
Stock in the Federal Home Loan Bank of Des Moines increased by $327,000
from $832,000 at June 30, 1995 to $1.2 million at March 31, 1996. The increase
was required by the Federal Home Loan Bank according to its standard formula
based on the Bank's level of outstanding advances.
Total mortgage-backed securities decreased $415,000, or 10.6%, from $3.9
million at June 30, 1995 to $3.5 million at March 31, 1996. The decrease in
mortgage-backed securities was due to amortization of principal and prepayments.
Net loans receivable increased $12.4 million, or 22.5%, from $55.0 million
at June 30, 1995 to $67.4 million at March 31, 1996. Mortgage loans originated
during the nine months ended March 31, 1996, totalled $8.9 million, including
$8.1 million secured by one-to-four family dwellings in the Bank's market area
and $711,000 secured by commercial real estate, of which $548,000 was located in
the Des Moines, Iowa metropolitan area. During this period, the Bank also
purchased (i) $2.8 million in loans secured by real estate located in the Des
Moines, Iowa metropolitan area, including $2.3 million secured by single family
dwellings and a $509,000 loan secured by commercial real estate, and (ii) $12.5
million in loans secured by real estate located in the Madison,
8
<PAGE>
Wisconsin area, including $2.9 million of loans secured by single family
dwellings, $8.3 million secured by multi-family dwellings, $446,000 secured by
commercial real estate and $800,000 secured by residential land development. Of
the $15.3 million in loans purchased during the nine (9) months ended March 31,
1996, $5.4 million were sold to other financial institutions with the Bank
retaining the servicing.
On October 5, 1995, the Bank entered into an exclusive agreement effective
November 1, 1995 ("Agreement") with Bache Funding Corp. of Wisconsin ("Bache"),
a mortgage banking firm headquartered in Madison, Wisconsin. Under the
Agreement, the Bank has a right of first refusal on any real estate loans
generated by Bache, including one-to-four family, multi-family, commercial real
estate, and land development loans secured by properties located primarily in
the Madison, Wisconsin metropolitan area. The Bank anticipates that it will
sell majority participation interests in these loans to financial institutions
located in Iowa and contiguous states. The Bank has had experience with Bache
originated loans prior to November 1995. During fiscal 1994 and 1995, the Bank
purchased participation interests totalling approximately $8.8 million in Bache
originated loans from another financial institution. Although these purchased
loans are subject to the same underwriting guidelines as loans originated, they
entail a certain amount of risk. In addition to the risks associated with the
specific type of loan purchased, loans purchased outside the Bank's market carry
a greater degree of risk that those loans originated and serviced by the Bank
since the Bank has less control over the subsequent administration of the loans
purchased.
Since entering into the Agreement with Bache, the Bank purchased $2.8
million one-to-four family, $5.6 million multi-family, $446,000 commercial, and
$800,000 residential land development loans from Bache. The dollar volume of
loans for the purpose of land development is not expected to be a material
percentage of Bache originations in future periods. Of the $9.6 million in one-
to-four family, commercial, multi-family, and land development loans purchased
from Bache during the period November 1, 1995 through March 31, 1996, $5.4
million were sold to other financial institutions with the Bank retaining the
servicing.
Total deposits increased by $5.0 million, or 10.8%, from
9
<PAGE>
$46.1 million at June 30, 1995 to $51.1 million at March 31, 1996. This increase
was primarily due to growth of $5.2 million in checking and savings accounts and
partially offset by a $250,000 decrease in certificate of deposit accounts.
Management believes that the increases in checking and savings were primarily
attributable to successful marketing efforts. Management believes the decrease
in certificates of deposit was due to attractive yields on money market savings
accounts as compared to short term certificate of deposit rates and to other
investment alternatives.
Total borrowed funds had a net increase of $4.7 million, or 32.2%, from
$14.6 million at June 30, 1995 to $19.3 million at March 31, 1996. The net
increase consisted of borrowings from the Federal Home Loan Bank of Des Moines.
The funds were used to fund the increase in mortgage lending.
Total stockholders' equity increased $200,000 from $9.54 million at June
30, 1995 to $9.74 million at March 31, 1996. The increase was primarily due to
$621,000 in net income, amortization of Recognition and Retention Plan ("RRP"),
allocations to the Employee Stock Ownership Plan ("ESOP"), and a decrease in
unrealized loss on available for sale securities. The increase was partially
offset by the cost to repurchase 28,012 shares of the Company's stock and by
declarations of $.075 per share quarterly dividends in September 1995, December
1995, and March 1996. (See Consolidated Statement of Shareholders' Equity.)
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
- - ------------------------------------------------------------
General. The Company's net income increased $96,000, or 66.2%, to $241,000
for the quarter ended March 31, 1996 from $145,000 for the quarter ended March
31, 1995. This increase resulted primarily from an increase in net interest
income after provision for loan losses of $130,000. Partially offsetting the
beneficial effects of the net interest income increases were increases in total
non-operating expenses and provision for income taxes of $22,000 and $28,000,
respectively.
Net Interest Income. Net interest income, before provision for loan
losses, increased $138,000, or 26.0%, from $531,000 at March 31, 1995 to
$669,000 at March 31, 1996 due to increases in average balances of interest-
earning assets. The Company's average spread increased from 2.54% for the three
months ended March 31, 1995 to 2.68% for the three months ended March 31, 1996
due to
10
<PAGE>
the fact that yields on interest-earning assets increased more than rates paid
on interest-bearing liabilities.
Interest Income. Interest income increased by $381,000, or 31.8%, from
$1.2 million at March 31, 1995 to $1.6 million at March 31, 1996. This increase
was primarily due to an increase of 0.31% in the average rate earned on
interest-earning assets and an increase of $16.4 million in the average balance
of such assets. The average balance of such assets increased due to an increase
in the average balance of loans as a result of increased originations and
purchases.
Interest Expense. Interest expense increased by $244,000, or 35.3%, from
$691,000 for the quarter ended March 31, 1995 to $935,000 for the quarter ended
March 31, 1996. This increase was primarily due to an increase of 0.18% in the
average rates paid on interest-bearing liabilities, and a $16.3 million increase
in the average balance of such liabilities due to an increase in total deposits
and borrowed funds.
Provision for Loan Losses. An $8,000 provision for loan losses was
established for the quarter ended March 31, 1996, based upon management's
evaluation of the loan portfolio. No provisions were taken during the quarter
ended March 31, 1995 based upon management's evaluation of the loan portfolio.
Management will continue to monitor its allowance for loan losses and may make
future additions to the allowance through the provision for loan losses as
economic conditions and other factors dictate. Although the Company maintains
its allowance for loan losses at a level which it considers to be adequate to
provide for potential losses, there can be no assurance that future losses will
not exceed estimated amounts or that additional provisions for loan losses will
not be required for future periods. (For further details, see "Non-Performing
Assets and Allowance for Loan Losses".)
Non-Interest Income. Non-interest income increased by $16,000 from $18,000
at March 31, 1995 to $34,000 at March 31, 1996. The increase was primarily due
to gains on the sale of investment securities during the period.
Non-Interest Expense. Non-interest expense increased by $23,000 from
$314,000 in the quarter ended March 31, 1995 to $337,000 in the quarter ended
March 31, 1996. This increase was
11
<PAGE>
primarily due to a $28,000 increase in compensation expense due to staff
additions. This increase was partially offset by a $16,000 decrease in other
expenses including legal, accounting, and annual meeting expenses. See
"Regulatory Developments", for information regarding pending legislation which
may result in a one-time assessment on the Bank's deposits.
Provision for Income Taxes. Income tax expense was $89,000 for the
quarter ended March 31, 1995 compared to $117,000 for the quarter ended March
31, 1996. This $28,000 increase was primarily due to an increase in income
subject to taxes. In addition, income tax expense was favorably impacted by a
$10,000 income tax credit on an investment in a low and moderate income multi-
family housing development.
COMPARISON OF THE NINE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1995
- - ---------------------------------------------------------------------
General. Net income for the nine months ended March 31, 1996 was $621,000
as compared to $440,000 for the same period ended March 31, 1995, resulting in
an increase of $181,000. This increase resulted primarily from an increase in
net interest income after provision for loan losses of $185,000 and reductions
in non-interest expenses of $31,000. Partially offsetting the beneficial
effects of the net interest income increases and expense reductions was a $7,000
decrease in non-interest income.
Net Interest Income. Net interest income, before provision for loan losses,
increased $205,000 from $1.6 million at March 31, 1995 to $1.8 million at March
31, 1996. The Company's average spread decreased from 2.77% for the nine months
ended March 31, 1995 to 2.44% for the nine months ended March 31, 1996 due to
the fact that rates paid on interest-bearing liabilities increased more than
yields on interest-earning assets.
Interest Income. Interest income increased $1.1 million, or 31.4%, from
$3.5 million for the nine months ended March 31, 1995 to $4.6 million for the
same period in 1996. This increase was primarily due to an increase of .35% in
the average rate earned on interest-earning assets and an increase of $15.6
million in average balance of such assets. Interest income on loans increased
$1.1 million, which was due to an increase in the average balance of and yield
on the Bank's loan portfolio. Interest income on mortgage-backed securities
decreased by $22,000
12
<PAGE>
due to principal payments and prepayments. Interest income on cash and
investment securities increased by $34,000 due to an increase in average
balances.
Interest Expense. Interest expense increased by $894,000 or 47.1%, from
$1.9 million for the nine months ended March 31, 1995 to $2.8 million for the
nine months ended March 31, 1996. This increase was primarily due to a $15.1
million increase in the average balance of interest-bearing liabilities and a
.68% increase in the average rates paid on such liabilities.
Provision for Loan Losses. A $20,000 provision for loan losses was
established for the nine month period ended March 31, 1996, based upon
management evaluation of the loan portfolio. No provisions were taken for the
nine months ended March 31, 1995. Management will continue to monitor its
allowance for loan losses and may make future additions to the allowance through
the provision for loan losses as economic conditions dictate. (For further
details, see "Non-Performing Assets and Allowance for Loan Losses".)
Non-Interest Income. Non-interest income decreased from $104,000 for the
nine months ended March 31, 1995 to $97,000 for the nine months ended March 31,
1996. This $7,000 decrease was primarily due to the gains on the sale of
investment securities during the year earlier period.
Non-Interest Expense. Non-interest expense decreased from $996,000 in the
nine months ended March 31, 1995 to $966,000 for the nine months ended March 31,
1996. This $30,000 decrease, or 3.0%, was primarily due to reductions in a
number of expense areas, including legal, accounting, annual meeting, office
supplies, and real estate operational expenses. See "Regulatory Developments",
for information regarding pending legislation which may result in a one-time
assessment on the Bank's deposits.
Income Tax Expense. Income tax expense was $275,000 for the nine months
ended March 31, 1995, as compared to $303,000 for the nine months ended March
31, 1996. This $28,000 increase was due to an increase in income subject to
taxes. In addition, the income tax expense was favorably impacted by a $20,000
income tax credit on an investment in a low and moderate income multi-family
housing development.
13
<PAGE>
Non-Performing Assets and Allowance for Loan Losses. The allowance for loan
losses is calculated based upon an evaluation of pertinent factors underlying
the types and qualities of the Company's loans. Management considers such
factors as the repayment status of a loan, the estimated fair value of the
underlying collateral, the borrower's ability to repay the loan, current and
anticipated economic conditions which might affect the borrower's ability to
repay the loan and the Company's past statistical history concerning charge-
offs. The Company's allowance for loan losses as of March 31, 1996 was $412,000,
or 0.61% of the total loans. The June 30, 1995 allowance for loan losses was
$400,000, or 0.7% of total loans. Total assets classified as substandard,
doubtful or loss, increased from $78,000 as of June 30, 1995 to $730,000, or
0.90% of total assets, as of March 31, 1996. This increase reflects the addition
of a $227,000 commercial real estate participation loan in the Madison,
Wisconsin metropolitan area and a $437,000 package of equipment leases owned by
the Bank. The commercial real estate loan is secured by a combination retail and
four (4) unit apartment located in Madison, Wisconsin. A lake lot provides
additional collateral. The borrower has made no payments since December 1995.
Foreclosure proceedings have been initiated and the collateral property was
placed in judgement in April 1996. Management believes that the loan is
adequately collateralized and expects no loss on disposition of the property.
The referenced equipment leases were sold and serviced by Bennett Funding
Group and its affiliates (the "Bennett Group"), certain of which have been
charged by the Securities and Exchange Commission with, among other things, the
illegal sale of fictitious equipment leases. On April 1, 1996, the Bennett
Group filed for Chapter 11 Bankruptcy, resulting in the suspension of payments
on the Bank's leases. Management has reviewed the Bank's lease files and
supporting documentation and has discovered no evidence of fraud related to this
lease portfolio. While, on the basis of this review and other information
available at this time, management does not currently expect these events to
have a material adverse effect on the Company's earnings or financial condition,
this conclusion may be altered by future developments in this matter. Write-
downs of this asset may be necessary, though the size of any such write-downs
cannot be predicted with accuracy at this time.
14
<PAGE>
Other loans of concern increased $364,000 to $704,000 at March 31, 1996.
This increase primarily reflects the addition of a $270,000 commercial real
estate loan secured by a manufacturing facility located in Grinnell, Iowa.
Although the loan is current, the sole tenant vacated the building in December
1995 and a new tenant has not yet been found. Management has considered non-
performing assets and total classified assets in establishing the allowance for
loan losses.
The ratio of non-performing assets to total assets is one indicator of the
exposure to credit risk. Non-performing assets of the Company consist of non-
accruing loans, accruing loans delinquent 90 days or more, and foreclosed assets
which have been
acquired as a result of foreclosure or deed-in-lieu of foreclosure. For all
periods presented the Company had no significant troubled debt restructuring.
The following table sets forth the amount of non-performing assets at the
periods indicated.
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
--------- --------
(Dollars in Thousands)
<S> <C> <C>
Non-Accruing Loans and Leases....... $ 726 $ 14
Foreclosed Assets................... 61 --
----- -----
Total Non-Performing Assets......... $ 787 $ 14
Total Non-Performing Assets as a
Percentage of Total Assets....... .97% .02%
</TABLE>
Total non-performing assets increased $773,000 to $787,000, or .97% of
total assets, at March 31, 1996 from $14,000 or .02% of total assets at June 30,
1995.
Liquidity and Capital Resources.
The Company's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-backed securities, FHLB-Des Moines advances and
funds provided by operations. While scheduled loan and mortgage-backed security
repayments and maturity of short-term investments are a relatively predictable
source of funds, deposit flows are greatly influenced by general interest rates,
economic conditions and competition. Current Office of Thrift Supervision
regulations require the Bank to maintain cash and eligible investments in an
amount equal to at
15
<PAGE>
least 5% of customer accounts and short-term borrowings to assure its ability to
meet demands for withdrawals and repayments of short-term borrowings. At March
31, 1996 the Bank's liquidity ratio was 8.9% which exceeded the minimum
regulatory requirements on such date.
The Company uses its capital resources principally to meet its ongoing
commitments to fund maturing certificates of deposits and loan commitments,
maintain its liquidity and meet operating expenses. At March 31, 1996, the
Company had commitments to purchase or originate loans totalling $411,000. The
Company considers its liquidity and capital resources to be adequate to 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 March 31, 1996,
the Bank exceeded all fully phased-in regulatory capital standards.
At March 31, 1996, the Bank's tangible capital was $8.0 million, or 10.1%,
of adjusted total assets, which is in excess of the 1.5% requirement by $6.8
million. In addition, at March 31, 1996, the Bank had core capital of $8.0
million , or 10.1%, of adjusted total assets, which exceeds the 3% requirement
by $5.6 million. The Bank had risk-based capital of $8.4 million at March 31,
1996 or 18.5% of risk-adjusted assets which exceeds the 8.0% risk-based capital
requirement by $4.8 million.
The OTS's risk-based capital requirements require savings institutions with
more than a "normal" level of interest rate risk to maintain additional total
capital. A savings institution's interest rate risk is measured in terms of the
sensitivity of its "net portfolio value" to changes in interest rates. Net
portfolio value is defined, generally, as the present value of expected cash
inflows from existing assets and off-balance sheet contracts less the present
value of expected cash outflows from existing liabilities. A savings
institution is considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
16
<PAGE>
greater decline) is less than two percent of the current estimated economic
value of its assets. A savings institution with a greater than normal interest
rate risk is required to deduct from total capital, for purposes of calculating
its risk-based capital requirement, an amount (the "interest rate risk
component") equal to one-half the difference between the institution's measured
interest rate risk and the normal level of interest rate risk, multiplied by the
economic value of its total assets.
The OTS calculates the sensitivity of a savings institution's net portfolio
value based on data submitted by the institution in a schedule to its quarterly
Thrift Financial Report and using the interest rate risk measurement model
adopted by the OTS. The amount of the interest rate risk component, if any, to
be deducted from a savings institution's total capital is based on the
institution's Thrift Financial Report filed two quarters earlier. Management
believes the Bank will continue to meet its regulatory capital requirements
under these risk-based capital rule.
Regulatory Developments.
The Bank is a member of the SAIF, which is administered by the FDIC. The
FDIC is authorized to increase assessment rates, on a semi-annual basis, if it
determined that the reserve ratio of the SAIF will be less than the designated
reserve ratio of 1.25% of SAIF insured deposits.
As in the case with SAIF, the FDIC is authorized to adjust the insurance
premium rates for banks that are insured by the Bank Insurance Fund (the "BIF")
of the FDIC in order to maintain the reserve ratio of the BIF at 1.25% of BIF
insured deposits. The FDIC revised the premium schedule for BIF insured
institutions to provide a range of .04% to .31% of deposits in anticipation of
the BIF reaching the required reserve ratio. The revisions became effective in
the third quarter of 1995. Subsequently, the FDIC reduced the premium rate to
0.0% for the most highly rated BIF insured institutions.
The FDIC also noted that the SAIF is not expected to attain the designated
reserve ratio until the year 2002 due to the shrinking deposit base for SAIF
assessments and the requirement that SAIF premiums be used to make the interest
payments on bonds
17
<PAGE>
issued by the Financing Corporation ("FICO") in order to finance the costs of
resolving thrift failures in the 1980's. As a result, SAIF insured members will
generally be subject to higher
deposit insurance premiums than banks until, all things being equal, the SAIF
attains the required reserve ratio.
The effect of this disparity on the Bank and other SAIF members is
uncertain at this time. It may have the effect of permitting BIF-insured banks
to offer loan and deposit products on more attractive terms than SAIF members
due to the cost savings achieved through lower deposit premiums, thereby placing
SAIF members at a competitive disadvantage. In April 1996, there was an attempt
to attach legislation that would have provided for a special one-time assessment
to recapitalize the SAIF and would have spread the interest payments on
obligations issued by the FICO on all FDIC-insured institutions. Such attempt
was unsuccessful. The Company cannot predict whether this proposed legislation
will be enacted in the future or, if enacted, what its final form will be. The
following summarizes the major provisions of the legislation as most recently
considered by Congress. As part of the continuing resolution, Congress proposed
to authorize the FDIC to assess a one-time fee on institutions, like the Bank,
with deposits insured by the SAIF in order to increase the SAIF's reserves to
the 1.25% of insured deposits required by the Federal Deposit Insurance Act
("FDIA"). The amount of such assessment would be determined by the FDIC based
on the amount of reserves in the SAIF, the amount of insured deposits and such
other factors as the FDIC deemed appropriate. The amount of such assessment for
an individual institution would have been based on its SAIF-assessable deposits
as of March 31, 1995 and was expected to range between 0.85% and 0.90% of such
deposits. The special assessment would have been due on such date as the FDIC
prescribed within 60 days of enactment of the legislation. The proposed
legislation provided for the merger of the SAIF and the BIF into a single
Deposit Insurance Fund effective January 1, 1998 if no insured depository
institution was a savings association on that date. Based on its deposits as of
March 31, 1995, the Bank would have been required to pay a special assessment of
approximately $375,000 on a pre-tax basis if it is assessed at the rate of 0.90%
of SAIF-assessable deposits.
18
<PAGE>
Also under consideration by Congress are proposals relating
to merger of the BIF and SAIF funds, the elimination of the thrift
charter and the federal tax implications of conversion to a
national bank. Grinnell Federal is unable to accurately predict at this time
whether any of these proposals will be adopted in their current form or the
impact of these proposals on the Bank.
19
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None.
Item 2. Changes in Securities
---------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
None.
(b) Reports on Form 8-K
Filed 8-K on January 22, 1996 to report the
Commencement of Stock Repurchase Program.
20
<PAGE>
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.
GFS BANCORP, INC.
Registrant
Date: May 10, 1996 /s/ Steven L. Opsal
-----------------------------
Steven L. Opsal, President
and Chief Executive Officer
Date: May 10, 1996 /s/ Katherine A. Rose
-----------------------------
Katherine A. Rose, Vice President
and Chief Financial Officer
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-1-1995
<PERIOD-END> MAR-31-1996
<CASH> 1,193,520
<INT-BEARING-DEPOSITS> 2,478,277
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,564,439
<INVESTMENTS-CARRYING> 4,970,097
<INVESTMENTS-MARKET> 0
<LOANS> 67,430,574
<ALLOWANCE> 412,000
<TOTAL-ASSETS> 80,913,142
<DEPOSITS> 51,050,214
<SHORT-TERM> 3,355,560
<LIABILITIES-OTHER> 793,018
<LONG-TERM> 15,975,968
0
0
<COMMON> 5,501
<OTHER-SE> 9,732,881
<TOTAL-LIABILITIES-AND-EQUITY> 80,913,142
<INTEREST-LOAN> 3,953,793
<INTEREST-INVEST> 620,690
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 4,574,483
<INTEREST-DEPOSIT> 1,878,748
<INTEREST-EXPENSE> 2,761,649
<INTEREST-INCOME-NET> 1,812,834
<LOAN-LOSSES> 20,000
<SECURITIES-GAINS> 28,054
<EXPENSE-OTHER> 965,895
<INCOME-PRETAX> 923,769
<INCOME-PRE-EXTRAORDINARY> 620,800
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 620,800
<EPS-PRIMARY> 1.19
<EPS-DILUTED> 1.19
<YIELD-ACTUAL> 0
<LOANS-NON> 726,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 704,000
<ALLOWANCE-OPEN> 400,000
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 412,000
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
