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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _________ to __________
Commission File Number 0-22742
GFS BANCORP, INC.
- -----------------------------------------------------------------
(Name of small business issuer in its charter)
Delaware 42-1410536
- -------------------------------- -----------------------------
(State or other jurisdiction (IRS Employer Identification
of incorporation or organization) No.)
1025 Main Street, Grinnell, Iowa 50112-0030
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(515) 236-3121
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Securities Registered Pursuant to Section 12(b) of the Act:
None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
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(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 revenues for its most recent fiscal year:
$7.3 million.
The aggregate market value of the voting stock held by non-
affiliates of the registrant, computed by reference to the
closing prices of such stock on the Nasdaq System as of September
22, 1997, was 12.3 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 3, 1997, there were issued and outstanding
988,242 shares of the Registrant's Common Stock.
Transitional Small Business disclosure format (check one):
yes [ ] no [x]
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Annual Report to Stockholders for
the fiscal year ended June 30, 1997.
Part III of Form 10-KSB - Proxy Statement for 1997 Annual
Meeting of Stockholders.<PAGE>
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
-----------------------
GENERAL
THE COMPANY. GFS Bancorp, Inc. (the "Company"), a Delaware
corporation, was formed in September 1993 to act as the holding
company for Grinnell Federal Savings Bank ("Grinnell 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 5, 1994. The primary business activity
of the Company is to act as the holding company of the Bank. The
Company also invests in U.S. government obligations, common and
preferred stocks and mutual funds.
The executive offices of the Company and its subsidiary are
located at 1025 Main Street, Grinnell, Iowa 50112 and the
telephone number at that address is (515) 236-3121.
GRINNELL FEDERAL. Grinnell Federal, originally chartered
in 1935, is a federally chartered savings bank headquartered in
Grinnell, Iowa. Its deposits are insured up to the maximum
allowable amount by the Federal Deposit Insurance Corporation
(the "FDIC"). As a federally chartered savings bank, the Bank is
regulated by the Office of Thrift Supervision, Department of the
Treasury ("OTS").
Grinnell Federal primarily serves Poweshiek County, as well
as, parts of Marshall, Iowa, and Jasper Counties, Iowa through
its office located at 1025 Main Street, Grinnell, Iowa 50112.
The Bank competes in loan originations and in attracting deposits
with approximately six financial institutions serving its primary
market area.
Grinnell Federal is a community-oriented financial
institution offering a variety of financial services to meet the
needs of the communities it serves. The Bank attracts deposits
from the general public and uses the deposits, together with
borrowings and other funds, to originate loans secured by first
mortgages on owner-occupied one- to four-family residences. To a
lesser extent, the Bank also originates loans secured by
commercial and multi-
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family real estate, and construction, consumer and commercial
business loans.
In addition, in order to supplement loan demand in its
market area, Grinnell Federal has purchased whole loans and
participation interests in loans secured by one- to four-family
owner-occupied real estate in the Des Moines, Iowa metropolitan
area, and multi-family and commercial real estate in the Madison
and Milwaukee, Wisconsin metropolitan areas, originated by a
mortgage broker located in Wisconsin and other savings
institutions headquartered in Iowa. All of such purchased loans
meet the Bank's underwriting standards.
The Bank also invests in U.S. Government and agency
securities and other investment securities. See "- Investment
Activities."
The Bank offers a variety of accounts having a wide range of
interest rates and terms. The Bank only solicits deposits in its
primary market area and does not accept brokered deposits.
MARKET AREA. The office of the Bank is located at 1025 Main
Street, Grinnell, Iowa 50112. Through this office, Grinnell
Federal currently serves primarily Poweshiek County and, to a
lesser extent, portions of Marshall, Iowa, and Jasper Counties,
Iowa.
Grinnell, Iowa is located in Poweshiek County, and is
approximately 55 miles east of Des Moines, Iowa. Poweshiek
County has a population of approximately 19,000 persons, and
Grinnell's population is estimated at 8,900 people. Grinnell has
a mixed industrial and agricultural economy consisting of some
200 retail and service enterprises serving the Grinnell area.
Major employers include Grinnell College, Grinnell Mutual
Reinsurance Company, DeLong Sportswear, GTE, Grinnell Regional
Medical Center, Donaldson Company, CertainTeed Company, Wenco of
Iowa, Mayflower Homes and
Van Wyk Freight Lines.
LENDING ACTIVITIES
GENERAL. Historically, the Bank originated fixed-rate
mortgage loans. Since the early 1980s, however, the Bank has
emphasized, subject to market conditions, the origination and
holding of adjustable-rate mortgage ("ARM") loans and loans with
shorter terms to maturity than traditional 30-year, fixed-rate
loans. Management's strategy has been to increase the percentage
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of assets in its portfolio with more frequent repricing or
shorter maturities. In response to customer demand, however, the
Bank continues to originate for its loan portfolio fixed-rate
mortgages with terms not greater than 30 years.
The Bank's primary focus in lending activities is on the
origination of loans secured by first mortgages on owner-
occupied, one- to four-family residences. The Bank also
originates and purchases loans secured by commercial and multi-
family real estate and a limited number of construction, consumer
and commercial business loans. During fiscal 1997, the Bank
originated $13.7 million and purchased $35.4 million in loans
which contributed to the increase in the Bank's loan portfolio.
Of the $35.4 million in loans purchased during the 1997 fiscal
year, $26.9 million in participation interests were sold to other
financial institutions with the Bank retaining the servicing.
See "- Originations, Purchases and Sales of Loans and
Mortgage-Backed Securities" herein and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in
the Company's 1997 Annual Report to Stockholders attached hereto
as Exhibit 13 (the "Annual Report"). At June 30, 1997, the
Bank's net loan portfolio totaled $78.5 million.
All members of the Board of Directors serve as Loan
Committee members. At any given time, the approval of at least
two outside directors and one inside director is required to
approve loans for which approval of the Loan Committee is
required. Loan Committee approval is required for unsecured
consumer loans greater than $25,000, secured consumer loans over
$50,000, and commercial (non-real estate) loans of more than
$50,000. The Loan Committee must also approve all loans secured
by real estate over $300,000.
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
can invest in any one real estate project is, with certain
exceptions, generally the greater of 15% of unimpaired capital
and surplus or $500,000. See "Regulation - Federal Regulation of
Savings Associations." At June 30, 1997, the maximum amount
which the Bank could have lent to any one borrower and the
borrower's related entities was approximately $1.3 million. At
June 30, 1997, the Bank had no loans with aggregate outstanding
balances in excess of this amount. Since the Bank's current
lending policy generally limits loans secured by real estate to
$500,000 and consumer loans
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to $50,000, the Bank has not been materially restricted by this
lending limit.
At June 30, 1997, the Bank had five (5) lending
relationships exceeding $750,000 secured primarily by multi-
family and commercial real estate properties. At June 30, 1997,
the foregoing loans were performing in accordance with their loan
repayment terms.
LOAN PORTFOLIO COMPOSITION. The following table presents
the composition of the Bank's loan portfolios in dollar amounts
and in percentages (before deductions for loans in process,
deferred fees and discounts and allowances for losses) as of the
dates indicated.
<TABLE>
<CAPTION>
June 30,
--------------------------------
1997 1996
--------------- ---------------
Amount % Amount %
------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real Estate Loans:
- -----------------
One-to four-family . . . . . . . . . . . $53,391 66.3 $49,015 65.3
Multi-family . . . . . . . . . . . . . . 11,346 14.1 11,589 15.4
Commercial . . . . . . . . . . . . . . . 8,786 10.9 8,184 10.9
Construction and land. . . . . . . . . . 4,311 5.4 3,721 5.0
------- ----- ------- -----
Total real estate loan. . . . . . . 77,834 96.7 72,509 96.6
------- ----- ------- -----
Other Loans:
- -----------
Consumer Loans:
Deposit account . . . . . . . . . . 56 .1 42 .1
Automobile. . . . . . . . . . . . . 752 .9 669 .9
Home equity line of credit. . . . . 419 .5 274 .3
Home improvement. . . . . . . . . . 13 --- 7 ---
Other . . . . . . . . . . . . . . . 260 .3 296 .4
------- ----- ------- -----
Total consumer loans . . . . . . 1,500 1.8 1,288 1.7
Commercial business loans(1) . . . . 1,169 1.5 1,297 1.7
------- ----- ------- -----
Total other loans. . . . . . . . 2,669 3.3 2,585 3.4
------- ----- ------- -----
Total loans. . . . . . . . . . . 80,503 100.0% 75,094 100.0%
===== =====
Less:
Loans in process . . . . . . . . . . 1,147 2,473
Deferred fees and discounts. . . . . 235 207
Allowance for losse. . . . . . . . . 646 641
------- -------
Total loans receivable,net . . . . . $78,475 $71,773
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<FN>
__________
(1) Includes commercial leases totaling $165,000 as of June 30, 1997.
</FN>
</TABLE>
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The following table shows the composition of the Bank's loan
portfolios by fixed- and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
June 30,
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1997 1996
--------------- ---------------
Amount % Amount %
------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Fixed-Rate Loans:
- ----------------
Real estate:
One- to four-family. . . . . . . . . . . $24,114 29.9% $22,568 30.1%
Multi-family . . . . . . . . . . . . . . 1,224 1.5 1,236 1.6
Commercial . . . . . . . . . . . . . . . 938 1.2 1,174 1.6
Construction and land. . . . . . . . . . 4,256 5.3 3,469 4.7
------- ----- ------- -----
Total fixed-rate real
estate loans. . . . . . . . . . . . 30,532 37.9 28,447 38.0
Non-real estate:
Consumer . . . . . . . . . . . . . . . 1,081 1.3 1,014 1.3
Commercial business(2) . . . . . . . . 376 .5 695 .9
------- ----- ------- -----
Total fixed-rate loans . . . . . . . 31,989 39.7 30,156 40.2
------- ----- ------- -----
Adjustable-Rate Loans:
- ---------------------
Real estate:
One- to four-family. . . . . . . . . . 29,277 36.4 26,447 35.2
Multi-family . . . . . . . . . . . . . 10,122 12.6 10,353 13.8
Commercial . . . . . . . . . . . . . . 7,848 9.7 7,010 9.3
Construction and land. . . . . . . . . 55 .1 252 .3
------- ----- ------- -----
Total adjustable-rate
real estate loans . . . . . . . . . 47,302 58.8 44,062 58.6
Non-real estate:
Home equity line of credit . . . . . . 419 .5 274 .4
Commercial business. . . . . . . . . . 793 1.0 602 .8
------- ----- ------- -----
Total adjustable-rate loans. . . . . 48,514 60.3 44,938 59.8
------- ----- ------- -----
Total loans. . . . . . . . . . . . . 80,503 100.0% 75,094 100.0%
===== =====
Less:
- ----
Loans in process. . . . . . . . . . . . 1,147 2,473
Deferred fees and discounts . . . . . . 235 207
Allowance for loan losses . . . . . . . 646 641
------- -------
Total loans receivable, net . . . . . $78,475 $71,773
======= =======
____________
(2) Includes commercial leases totaling $165,000 at June 30, 1997.
6<PAGE>
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The following table illustrates the interest rate
sensitivity of the Bank's loan portfolio at June 30, 1997.
Mortgages which have adjustable or renegotiable interest rates
are shown as maturing in the period during which the contract is
due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
</TABLE>
<TABLE>
<CAPTION>
Real Estate
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One- to Multi-family Construction(1) Commercial
four-family and Commercial and Land Consumer Business Total
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Amount Amount Amount Amount Amount Amount
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(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Due During Years
Ending June 30,
1998 . . . . . . . $ 492 $ 399 $3,115 $237 $ 54 $ 4,297
1999 . . . . . . . 488 94 1,141 202 56 1,981
2000 and 2001 . . . 1,834 765 46 512 529 3,686
2002 and 2006 . . . 6,001 10,116 -- 425 188 16,730
2007 to 2011. . . . 10,197 3,877 9 124 24 14,231
2012 and
thereafter. . . . 34,379 4,881 -- -- 318 39,578
<FN>
__________
(1)Assumes the term during the construction phase.
</FN>
</TABLE>
At June 30, 1997 the total amount of loans due after June
30, 1998 which had fixed interest rates was $27.9 million, while
the total amount of loans due after such dates which had
floating or adjustable interest rates was $48.3 million.
ONE- TO FOUR-FAMILY RESIDENTIAL MORTGAGE LENDING.
Residential loan originations are generated by the Bank's
marketing efforts, its present customers, walk-in customers and
referrals from real estate brokers and builders. The Bank has
focused its lending efforts primarily on the origination of
loans secured by first mortgages on owner-occupied,
single-family residences in its market area. At June 30, 1997,
the Bank's one- to four-family residential mortgage loans
totaled $53.4 million, or 66.3%, of the Bank's loan portfolio.
The Bank currently makes adjustable-rate one- to
four-family residential mortgage loans in amounts of up to 90%
of the lesser of the appraised value or selling price of the
security property. For loans with loan-to-value ratios of
greater than 80%, the Bank typically requires private mortgage
insurance to reduce the Bank's exposure to 70% of the appraised
value or selling price of the security property.
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The Bank currently offers one-year, three-year and five-
year ARM loans at rates determined in accordance with market and
competitive factors for a term of up to 30 years. The interest
rate charged on adjustable-rate mortgage loans currently
originated by the Bank is based upon the one year, three year
and five year Treasury Constant Maturity rate. The
adjustable-rate loans currently originated by the Bank provide
for a 1% to 3% annual cap and floor, and a 5% to 6% lifetime cap
on the interest rate over the rate in effect on the date of
origination. The annual and lifetime caps on increases in
interest rates reduce the extent to which these loans can help
protect the Bank against interest rate risk. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Asset/Liability Management" in the Annual Report.
Approximately 46.0% of the loans secured by one- to four-family
real estate originated by the Bank during fiscal 1997 were
originated with adjustable-rates of interest. See
"- Originations, Purchases and Sales of Loans and
Mortgage-Backed Securities."
Adjustable-rate loans decrease the risks associated with
changes in interest rates but involve other risks, primarily
because as interest rates rise, the payment by the borrower
rises to the extent permitted by the terms of the loan, thereby
increasing the potential for default. At the same time, the
marketability of the underlying property may be adversely
affected by higher interest rates. The Bank believes that these
risks have not had a material adverse effect on the Bank to
date.
The Bank also originates fixed-rate mortgage loans. These
fixed-rate loans currently originated by the Bank have terms of
up to 30 years. Interest rates charged on these fixed-rate
loans are competitively priced according to local market
conditions.
In underwriting residential real estate loans, the Bank
evaluates both the borrower's ability to make monthly payments,
employment history, credit history and the value of the property
securing the loan. Potential borrowers are qualified for
fixed-rate loans based upon the initial or stated rate of the
loan. Borrowers on adjustable-rate loans are currently
qualified at the fully indexed rate. However, in the past, the
Bank qualified borrowers at the initial rate.
An appraisal or evaluation report of the security property
from Board-approved appraisers is obtained on all mortgage loan
applications. In connection with origination of residential
real
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estate loans, the Bank generally requires that the borrower
obtain an opinion from an attorney regarding the title to the
property and fire and casualty insurance to protect the Bank's
interest.
In addition, in order to supplement loan demand in the
Bank's primary market area, the Bank has purchased whole loans
secured by one- to four-family real estate located in Iowa,
Texas, Colorado, Utah, and Wisconsin originated by financial
institutions and mortgage companies. With minor exceptions, the
loans purchased by the Bank over the last 2 years are being
serviced by the Bank. The potential risks associated with out
of area lending include the lack of control over loan servicing
when loans are serviced by others and the inability to closely
monitor and inspect the property. In order to mitigate these
risks, the Bank only purchases loans that meet its underwriting
standards used in originating loans in its market area.
During fiscal 1997, the Bank purchased 47 loans secured by
one- to four-family real estate totalling $7.3 million;
substantially all of which were located in the State of
Wisconsin. Of this $7.3 million in purchased one- to four-
family loans, $4.4 million were sold to other financial
institutions. At June 30, 1997, approximately $16.9 million, or
31.6% of the Bank's one- to four-family residential mortgage
loan portfolio was purchased by the Bank. See "- Originations,
Purchases and Sales of Loans and Mortgage-Backed Securities."
The Bank's residential mortgage loans customarily include
due-on-sale clauses giving the Bank the right to declare the
loan immediately due and payable in the event, among other
things, the borrower sells or otherwise disposes of the property
subject to the mortgage and the loan is not repaid. The Bank on
occasion has enforced due-on-sale clauses in its mortgage
contracts for the purpose of increasing its loan portfolio
yield. The yield increase is obtained through the authorization
of assumptions of existing loans at higher rates of interest and
the imposition of assumption fees. One- to four-family real
estate loans may be assumed provided home buyers meet the Bank's
underwriting standards and the loan terms are modified, to the
extent necessary, to conform with the Bank's present yield and
maturity requirements.
CONSTRUCTION AND LAND LENDING. The Bank also originates
and purchases construction loans for the construction of one- to
four-family, multi-family and commercial real estate, and loans
secured
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by land. At June 30, 1997, the Bank's construction and land
loan portfolio totaled $4.3 million.
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 up to 12 months. These
construction loans have rates and terms which match any one- to
four-family loans then offered by the Bank, except that 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.
Construction loans are obtained principally through
continued business from individuals who have previously borrowed
from the Bank, as well as referrals from existing customers and
walk-in customers. The application process includes a
submission to the Bank of accurate plans, specifications and
costs of the project to be constructed/developed. These items
are used as a basis to determine the appraised value of the
subject property. Loans are limited to a percentage of the
lesser of current appraised value and/or the cost of
construction (land plus building).
In addition, the Bank has originated and purchased
construction loans for the construction of multi-family and
commercial properties located in its market area and the Madison
and Milwaukee, Wisconsin area. Construction loans on commercial
real estate projects may be secured by strip shopping centers,
apartments, small office building, churches or other property
and are structured to be converted to permanent loans at the end
of the construction phase, which generally runs up to 12 months.
These construction loans have rates and terms which match the
permanent non-residential real estate loans then offered by the
Bank, except that during the construction phase, the borrower
pays interest only. These loans generally provide for the
payment of interest and loan fees from loan proceeds. At
June 30, 1997, the Bank had $2.2 million of outstanding loans
for the construction of commercial and multi-family buildings.
See "Multi-Family Commercial Real Estate Lending" and
"Originations, Purchases and Sales of Loans and Mortgage-Backed
Securities."
No construction loan is approved unless there is evidence
of a commitment for permanent financing upon completion of the
property, whether through the Bank or another financial
institution.
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Construction lending involves greater risk than permanent
mortgage lending. Because of the uncertainties inherent in
estimating construction costs, it is relatively difficult to
evaluate accurately the total loan funds required to complete a
project. 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.
To a very limited extent, the Bank originates or purchases
loans secured by raw land in its market area and in the Madison,
Wisconsin area. Such loans carry fixed and adjustable rates and
terms of one to ten years. At June 30, 1997, there was $469,000
in outstanding loans secured by raw land.
MULTI-FAMILY/COMMERCIAL REAL ESTATE LENDING. The Bank has
purchased whole loans and participation interests in loans
originated by other lenders and, to a limited extent, has
originated loans secured by multi-family and commercial real
estate. At June 30, 1997, the Bank had $20.1 million in multi-
family and commercial real estate loans, representing 25% of the
bank's loan portfolio.
In the past, the Bank purchased whole loans and interests
in loans secured by multi-family and commercial real estate from
financial institutions and mortgage companies located throughout
the United States. Approximately 66% of the property securing
the Bank's multi-family and commercial real estate loan
portfolio is located outside the State of Iowa. Many of the
properties securing these purchased loans and participations are
located in Wisconsin, Colorado and Utah. Some of these areas
have experienced adverse economic conditions, including a
general softening in the real estate markets and local
economies, which resulted in increased delinquencies and loan
losses during prior years. However, many of the Bank's
multi-family and commercial real estate loans are now seasoned.
During the 1996 and 1997 fiscal years, the Bank has experienced
several delinquencies in its Wisconsin multifamily and
commercial real estate portfolio. See discussion under "Asset
Quality" herein.
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
11<PAGE>
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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 normally sells majority participation interests in
these loans to financial institutions located in Iowa and
contiguous states. Although these purchased loans are subject
to the same underwriting guidelines as loans originated, they
entail a certain amount of added 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 than those loans originated by the Bank since the
origination function is performed by third parties and the
property is located outside the Bank's normal lending territory.
The Company's net investment as of June 30, 1997 in loans
generated under this Agreement totaled $13.2 million. Such net
investment reflects an outstanding principal balance of $46.4
million in loans purchased and serviced by the Company, less
interests sold to other financial institutions of $33.2 million.
The table below sets forth by type of security property of
the Bank's multi-family and commercial real estate loans
(including construction loans) at June 30, 1997.
<TABLE>
<CAPTION>
Outstanding Amount
Number of Principal Non-Performing
Loans Balance or of Concern
--------- ----------- --------------
(Dollars in Thousands)
<S> <C> <C> <C>
Multi-family . . . . . . . . . . . . . 61 $13,392 $ 750
Office Building and
business facilities . . . . . . . . 37 7,472 537
Hotel/Motel. . . . . . . . . . . . . . 2 695 ---
Restaurant . . . . . . . . . . . . . . 4 752 ---
--- ------- ------
Total commercial and multi-family
real estate loans(1). . . . . . . 104 $22,311 $1,287
=== ======= ======
<FN>
___________
(1) Includes $2,179,000 of multi-family and commercial real estate
construction loans.
</FN>
</TABLE>
Multi-family and commercial real estate loans originated by
the Bank generally have terms ranging from 10 to 30 years and up
to 30-year amortization schedules. Rates on such loans
generally either (i) adjust (subject, in some cases, to
specified interest rate caps) at one, three and five year
intervals to specified spreads over an index, (ii) float
(subject, in some cases, to specified interest rate caps) with
changes in a specified prime rate or (iii) carry fixed rates.
Under the Bank's current loan policy, multi-family and
commercial real estate loans (other than
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loans to facilitate) are written in amounts of up to 75% of the
appraised value of the properties.
Appraisals on properties securing multi-family and
commercial real estate property loans originated by the Bank are
performed by an independent appraiser approved by the Bank at
the time the loan is made. All appraisals on multi-family and
commercial real estate loans are reviewed by the Bank's
management. In addition, the Bank's underwriting procedures
generally require verification of the borrower's credit history,
income and financial statements, banking relationships and
income projections for the property. Personal guarantees are
generally obtained for all or a portion of most of the Bank's
multi-family and commercial real estate loans. While the Bank
continues to monitor multi-family and commercial real estate
loans on a regular basis after origination, updated appraisals
are not normally obtained after closing unless the Bank believes
that there are questions regarding the progress of the loan or
the value of the collateral.
Multi-family and commercial real estate lending affords the
Bank an opportunity to receive interest at rates higher than
those generally available from one- to four-family residential
lending. Nevertheless, loans secured by such properties are
generally larger and involve a greater degree of risk than one-
to four-family residential mortgage loans. Because payments on
loans secured by multi-family and 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 Bank has
attempted to minimize these risks through its underwriting
standards and by lending primarily on existing income-producing
properties.
CONSUMER LENDING. Consumer loans generally have shorter
terms to maturity (thus reducing Grinnell Federal's exposure to
changes in interest rates) and carry higher rates of interest
than do one- to four-family residential mortgage loans. In
addition, management believes that the offering of consumer loan
products helps to expand and create stronger ties to its
existing customer base, by increasing the number of customer
relationships and providing cross-marketing opportunities. At
June 30, 1997, the Bank's consumer loan portfolio totaled $1.5
million, or 1.8%, of its loan
13<PAGE>
<PAGE>
portfolio. Under applicable federal law, the Bank is authorized
to invest up to 35% of its assets in consumer loans.
Grinnell Federal offers a variety of secured consumer
loans, including home improvement loans, home equity line of
credit loans, auto loans, mobile home loans and loans secured by
savings deposits and other consumer collateral. The Bank also
offers a limited amount of unsecured loans. The Bank currently
originates substantially all of its consumer loans in its market
area. Consumer loan terms vary according to the type of
collateral, length of contract and creditworthiness of the
borrower. The Bank's consumer loans generally have a fixed-rate
of interest.
The Bank does not originate any consumer loans on an
indirect basis (i.e., where loan contracts are purchased from
retailers of goods or services which have extended credit to
their customers).
The underwriting standards employed by the Bank for
consumer loans include a determination of the applicant's
payment history on other debts and an assessment of the 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.
Consumer loans may entail greater risk than do residential
mortgage loans, particularly in the case of consumer loans which
are unsecured, such as checking account overdraft privilege
loans, or are secured by rapidly depreciable assets, such as
automobiles. 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. Although the level of
delinquencies in the Bank's consumer loan portfolio has
generally been low (at June 30, 1997, four consumer loans
totaling $36,000 were 90 days or more delinquent), there can be
no assurance that delinquencies will not increase in the future.
COMMERCIAL BUSINESS LENDING. Federally chartered savings
institutions, such as Grinnell Federal, are authorized to make
14<PAGE>
<PAGE>
secured or unsecured loans and issue letters of credit for
commercial, corporate, business and agricultural purposes and to
engage in commercial leasing activities, up to a maximum of 10%
of total assets.
At June 30, 1997, Grinnell Federal had $1.2 million in
commercial business loans outstanding, representing 1.5% of the
Bank's total loan portfolio, with no additional commercial
business loan commitments. Included in the $1.2 million in
commercial business loans, were $165,000 in commercial equipment
leases. In addition, at June 30, 1997, Grinnell Federal had no
letters of credit outstanding.
Most of the Bank's commercial business loans have terms to
maturity of 10 years or less and fixed or adjustable interest
rates. The Bank's loan policy provides that commercial loans
may not exceed $100,000, without prior Board approval.
Unlike residential mortgage loans, which generally are made
on the basis of the borrower's ability to make repayment from
his or her employment and other income, and which are secured by
real property whose value tends to be more easily ascertainable,
commercial business loans are of higher risk and typically are
made on the basis of the borrower's ability to make repayment
from the cash flow of the borrower's business. As a result, the
availability of funds for the repayment of commercial business
loans may be dependent upon the success of the business itself
(which, in turn, is likely to be dependent upon the general
economic environment). The Bank's commercial business loans
almost always include personal guarantees and are usually, but
not always, secured by business assets, such as accounts
receivable, equipment
and inventory as well as real estate. However, the collateral
securing the loans may depreciate over time, may be difficult to
appraise and may fluctuate in value based on the success of the
business.
The Bank recognizes the generally increased risks
associated with commercial business lending. Grinnell Federal's
commercial business lending policy emphasizes credit file
documentation and analysis of the borrower's character,
management capabilities, capacity to repay the loan, the
adequacy of the borrower's capital and collateral as well as an
evaluation of the industry conditions affecting the borrower.
Analysis of the borrower's past, present and future cash flows
is also an important aspect of Grinnell Federal's credit
analysis.
15<PAGE>
<PAGE>
ORIGINATIONS, PURCHASES AND SALES OF LOANS AND MORTGAGE-BACKED
SECURITIES
The Bank originates real estate loans through marketing
efforts, the Bank's customer base, walk-in customers and
referrals from real estate brokers. The Bank originates both
adjustable-rate and fixed-rate loans. Its ability to originate
loans is dependent upon the relative demand for fixed-rate or
ARM loans in the origination market, which is affected by the
term structure (short term compared to long term) of interest
rates, as well as, the current and expected future level of
interest rates and competition.
Historically, the Bank has purchased loans and loan
participations for one- to four-family, multi-family and
commercial real estate loans. Such purchases have enabled
Grinnell Federal to offset the relatively low level of loan
demand in the Bank's principal market area, to take advantage of
favorable lending opportunities in other markets, to diversify
its portfolio and to limit origination expenses while generally
providing the Bank with a higher yield than was available on
mortgage-backed securities. During fiscal 1996, the Bank
purchased loans from two Iowa-based financial institutions
secured by one- to four-family, multi-family and commercial real
estate located in the Des Moines, Iowa metropolitan area and the
Madison and Milwaukee, Wisconsin areas, respectively. During
fiscal 1996, the Bank purchased $5.8 million of loans pursuant
to these agreements. During fiscal 1997 the Bank's purchased
loans were from the Bache loan agreement.
Under the Agreement with Bache, the Bank has sold and plans
to continue to sell majority participation interests in loans to
financial institutions located in Iowa and contiguous states.
During fiscal 1996 and 1997, the Bank purchased $13.3 million
one-to-four family, $32.4 million multi-family, $5.4 million
commercial, and $1.4 million residential land development loans.
Of the $52.5 million in one-to-four family, multi-family,
commercial real estate, and land development loans purchased
from Bache during this period, $36.2 million in participation
interests were sold to other financial institutions with the
Bank retaining the servicing. See "Multi-Family/Commercial Real
Estate Lending".
The Bank has underwritten its loan purchases utilizing the
same criteria it uses in originating loans. Prior to November
1995, servicing of purchased multi-family and commercial real
estate loans was generally done by the seller. At June 30,
1997,
16<PAGE>
<PAGE>
approximately $13.6 million of Grinnell Federal's loan portfolio
was serviced by others. During the past two years, all one- to
four-family purchased real estate loans and all loans purchased
directly from Bache are serviced by the Bank.
In addition, the Bank has purchased mortgage-backed
securities in the past to supplement loan demand. During fiscal
1996 and 1997, however, the Bank did not purchase any mortgage-
backed securities. The mortgage-backed securities purchased in
the past generally had fixed rates and maturities of seven to 30
years. See "Investment Activities."
17<PAGE>
<PAGE>
The following table shows the loan origination, purchase
and sale activities of the Bank for the periods indicated.
<TABLE>
<CAPTION>
Year Ended
June 30,
-----------------
1997 1996
----- ------
(In thousands)
<S> <C> <C>
Originations by type
- --------------------
Adjustable-rate:
Real estate - one- to four-family. . . .$ 5,238 $ 5,441
- multi-family . . . . . . . --- ---
- commercial . . . . . . . . --- 163
Non-real estate - consumer . . . . . . . --- ---
- commercial business. . 135 202
------- -------
Total adjustable-rate. . . . . . 5,373 5,806
------- -------
Fixed-rate:
Real estate - one- to four-family. . . . 6,157 6,336
- multi-family . . . . . . . --- ---
- commercial . . . . . . . . --- 548
Non-real estate - consumer . . . . . . . 1,937 1,422
- commercial business. . 280 518
------- -------
Total fixed-rate . . . . . . . . 8,374 8,824
------- -------
Total loans originated . . . . . 13,747 14,630
------- -------
Purchases
- ---------
Real Estate - one- to four-family(1). . 7,335 8,472
- multi-family(2) . . . . . 24,332 10,829
- commercial and land(3). . 3,767 3,589
------- -------
Total loans purchased. . . . . . 35,434 22,890
Mortgage-backed securities. . . . . . . --- ---
------- -------
Total loans and mortgage-backed
securities purchased. . . . . 35,434 22,890
------- -------
Sales
- -----
Real Estate - one- to four-family . . . 4,358 1,211
- multi-family. . . . . . . 20,619 6,245
- commercial and land . . . 1,898 1,843
------- -------
Total Sales . . . . . . . . . . . . 26,875 9,299
<FN>
___________
(1) Includes $1.7 million of loans for the construction of
one- to four-family residences.
(2) Includes $2.0 million of loans for the construction of
multi-family real estate.
(3) Includes $133,000 of loans for the construction of
commercial buildings.
</FN>
</TABLE>
18<PAGE>
<PAGE>
ASSET QUALITY
GENERAL. When a borrower fails to make a required payment
on a loan, the Bank attempts to cause the delinquency to be
cured by contacting the borrower. In the case of loans secured
by real estate, a late notice is sent by the 10th of the month
if payment for the prior month is not received. If the
delinquency is not cured by the 15th of the month, contact with
the borrower is made by phone. Additional written and verbal
contacts are made with the borrower to the extent necessary. If
the delinquency is not cured or a payment plan arranged by the
60th day, the Bank will send a second late notice followed by
additional phone contacts and meetings with the borrower. If
the delinquency is not cured by the 90th day, a 35-day default
letter is sent and, once that period lapses, appropriate action
to foreclose on the property is initiated. Interest income on
loans at this point is reduced by the full amount of accrued and
uncollected interest. If foreclosed, the property is sold at a
sheriff's sale and may be purchased by the Bank. Delinquent
consumer loans are handled in a similar manner. If these
efforts fail to bring the loan current, appropriate action may
be taken to collect any loan payment that remains delinquent.
The Bank's procedures for repossession and sale of consumer
collateral are subject to various requirements under Iowa
consumer protection laws.
Real estate acquired by Grinnell Federal as a result of
foreclosure or by deed in lieu of foreclosure is classified as
real estate owned until it is sold. When property is acquired,
it is recorded at the lower of cost or estimated fair value at
the date of acquisition, and any write down resulting therefrom
is charged to the allowance for losses on loans. Upon
acquisition, all costs incurred in maintaining the property are
expensed. However, costs relating to the development and
improvement of the property are capitalized to the extent of net
realizable value.
NON-PERFORMING ASSETS. The table below sets forth the
amounts and categories of non-performing assets in the Bank's
loan portfolio. Loans are placed on non-accrual status when the
collection of principal and/or interest become doubtful. All
loans for which payments have been due and uncollected for a
period in excess of 90 days are placed on non-accrual status.
For all years presented, the Bank has had no troubled debt
restructurings (which involve forgiving a portion of interest or
principal on any loans
19<PAGE>
<PAGE>
or making loans at a rate materially less than that of market
rates). Foreclosed assets include assets acquired in settlement
of loans and reflect the lower of cost or fair value less
selling expense.
<TABLE>
<CAPTION>
Year Ended
June 30,
-----------------
1997 1996
----- ------
(In thousands)
<S> <C> <C>
Non-accruing loans:
One- to four-family. . . . . . . . . . $136 $298
Multi-family . . . . . . . . . . . . . 750 ---
Non-mortgage commercial loans. . . . . --- 437
Consumer . . . . . . . . . . . . . . . 36 ---
Foreclosed assets:
Commercial real estate . . . . . . . . --- 227
---- ----
Total non-performing assets. . . . . . . $922 $962
==== ====
Total as a percentage of total assets. . 1.00% 1.15%
==== ====
</TABLE>
Total non-performing assets (defined as non-accruing
loans for which payments have been due and uncollected for a
period in excess of 90 days plus foreclosed assets) decreased
$40,000 to $922,000, or 1.00% of total assets at June 30, 1997,
from $962,000, or 1.15% of total assets at June 30, 1996. This
$922,000 consisted primarily of seven loans totaling $136,000
secured by single-family homes, three loans totaling $750,000
secured by multi-family real estate located in Madison,
Wisconsin, and four consumer loans totaling $36,000.
The decrease in non-performing assets primarily reflects the
net effect of the addition of the three loans totaling $750,000
secured by multi-family real estate located in Madison,
Wisconsin, the redemption of a $227,000 parcel of real estate
in judgment, which had been non-performing at June 30, 1996, the
settlement of a claim against a bankruptcy trustee concerning a
$437,000 package of equipment leases and the return of a
$286,000 single family home loan in Houston, Texas to performing
status.
In connection with the settlement of the referenced
bankruptcy claim involving equipment leases, management entered
into an agreement on February 5, 1997, whereby the Company is
receiving a
20<PAGE>
<PAGE>
pre-determined percentage of all amounts collected up to 80% of
the then outstanding balance. The balance of the equipment
packages at June 30, 1997 was $165,000, reflecting payments of
$157,000 and a $115,000 charge-off against the allowance for
loan losses. (See Allowance for Loan Losses Below).
For the fiscal year ended June 30, 1997, gross interest
income which would have been recorded had the non-accruing loans
been current in accordance with their original terms amounted to
$40,600. Interest income of `$33,600 was recognized for cash
payments received on such loans for the fiscal year ended
June 30, 1997.
OTHER ASSETS OF CONCERN. In addition, at June 30, 1997,
other assets of concern totaled $1.1 million and included nine
loans totaling $240,000 secured by single-family residences in
the Bank's local lending area, one $275,000 loan secured by a
single family residence located in Houston, Texas, one $537,000
loan secured by commercial real estate located in Grinnell,
Iowa, and one $56,000 commercial business loan. While these
loans raise concerns as to timely collectibility, based upon
information currently available, management does not anticipate
any material loss on these assets.
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 insured
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 an insured 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
21<PAGE>
<PAGE>
recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated
to particular problem assets. When an insured institution
classifies problem assets as "loss," it is required either to
establish a specific allowance for losses equal to 100% of that
portion of the asset so classified or to charge-off such amount.
An institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to
review by the regulatory authorities, 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 problem loans and real estate
acquired through foreclosure in its portfolio to determine
whether such assets require classification in accordance with
applicable regulations. The Bank's Classified assets and assets
designated special mention at June 30, 1997, all of which are
included in the table of non-performing assets above or are
described under the caption "- Other Loans of Concern" above,
were as follows:
<TABLE>
<CAPTION>
June 30,
-----------------
1997 1996
----- ------
(In thousands)
<S> <C> <C>
Special mention. . . . . . . . . . . . . $ 544 $ 714
Substandard. . . . . . . . . . . . . . . 1,478 1,789
Doubtful . . . . . . . . . . . . . . . . --- ---
Loss . . . . . . . . . . . . . . . . . . --- ---
------ ------
Total classified assets and
assets requiring special
mention . . . . . . . . . . . . . . .$ 2,022 $2,503
======= ======
</TABLE>
Classified assets appearing in the table above are included
in the non-performing assets table or discussed under the
caption "Other Loans of Concern." The specific reserves
established with respect to assets classified as "loss" are
included in the allowance for real estate acquired through
foreclosure or as a reduction in the book value of the real
estate.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses
is calculated based upon an evaluation of the risk inherent in
its loan portfolio, changes in the nature and volume of its loan
activity, and other pertinent factors underlying the types and
22<PAGE>
<PAGE>
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.
Future adjustments to the allowance may be necessary, and net
income could be significantly affected if circumstances differ
substantially from the assumptions used in making the initial
determinations.
At June 30, 1997, the Bank had an allowance for loan losses
of $646,000 or 0.8% of total loans. The June 30, 1996 allowance
for loan losses was $641,000, or 0.9% of total loans. This
$5,000 increase reflects the addition of $121,000 to the
allowance for loan losses, which was largely offset by a
$115,000 charge off on equipment leases (see Non-Performing
Assets above). The ratio of the allowance for loan losses to
non-performing assets increased from 67% of non-performing
assets at June 30, 1996 to 70% of non-performing assets at June
30, 1997, due to the combination of a $40,000 decrease in non-
performing assets with the $5,000 increase in allowance for loan
losses referenced above. Management believes, upon
consideration of the pertinent factors described above, that the
current allowance for loan losses is adequate.
The Bank had $121,000 in additions to its allowance for
loan losses in fiscal 1997 as compared to a $249,000 addition in
fiscal 1996 due to settlement of a bankruptcy claim involving
certain equipment leases (See Non-performing Assets above) and
to the reduction in the Bank's level of classified assets from
$2.5 million at June 30, 1996 to $2.0 million at June 30, 1997
(See Classified Assets above).
23<PAGE>
<PAGE>
The following table sets forth an analysis of the Bank's
allowance for loan losses.
<TABLE>
<CAPTION>
At June 30,
-----------------
1997 1996
----- ------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period. . . . . . $641 $400
Total Chargeoffs. . . . . . . . . . . . . 116 8
Recoveries. . . . . . . . . . . . . . . . -- --
---- ----
Net charge-offs . . . . . . . . . . . . . 116 8
Additions charged to operations . . . . . 121 249
---- ----
Balance at end of period. . . . . . . . . $646 $641
==== ====
Ratio of net charge-offs during the
period to average loans outstanding
during the period . . . . . . . . . . . 15% .01%
==== ====
Ratio of net charge-offs during the
period to average non-performing
assets. . . . . . . . . . . . . . . . . 8.22% 2.81%
==== ====
</TABLE>
The distribution of the Bank's allowance for loan losses at
the dates indicated is summarized as follows:
<TABLE>
<CAPTION>
June 30,
--------------------------------------------
1997 1996
-------------------- ---------------------
Percent Percent
of Loans of Loans
in Each in Each
Category Category
to Total to Total
Amount Loans Amount Loans
------ -------- ------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real Estate:
One- to four-family. . . . . . .$ 74 66.3% $ 72 65.3%
Multi-family and
commercial. . . . . . . . . . . 247 25.0 241 26.3
Construction . . . . . . . . . . 34 5.4 31 5.0
Consumer . . . . . . . . . . . . 17 1.8 18 1.7
Commercial business. . . . . . . 13 1.5 119 1.7
Unallocated. . . . . . . . . . . 261 --- 160 ---
---- ----- ---- -----
Total. . . . . . . . . . . .$646 100.0% $641 100.0%
==== ===== ==== =====
</TABLE>
24<PAGE>
<PAGE>
INVESTMENT ACTIVITIES
GENERAL. Grinnell Federal must maintain minimum levels of
investments that qualify as liquid assets under OTS regulations.
Liquidity may increase or decrease depending upon the
availability of funds and comparative yields on investments in
relation to the return on loans. Historically, the Bank has
maintained liquid assets at levels above the minimum
requirements imposed by the OTS regulations and at levels
believed adequate to meet the requirements of normal operations,
including repayments of maturing debt and potential deposit
outflows. Cash flow projections are regularly reviewed and
updated to assure that adequate liquidity is maintained. At
June 30, 1997, the Bank's liquidity ratio (liquid assets as a
percentage of net withdrawable savings deposits and current
borrowings) was 7.3%. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and
Capital Resources" in the Annual Report and "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 Company and the
Bank is to invest funds among various categories of investments
and maturities based upon their liquidity needs, asset/liability
management policies, investment quality and marketability and
performance objectives.
SECURITIES. At June 30, 1997, the Company's interest-
bearing deposits with banks totaled $4.3 million, or 4.7% of
total assets, and its investment securities totaled $3.4
million, or 3.7% of total assets. As of such date, the Bank
also had a $1.2 million investment in FHLB stock, satisfying its
requirement for membership in the FHLB of Des Moines. It is the
general policy of the Bank to purchase investment securities
which are U.S. Government securities or federal agency
obligations or other issues, such as municipal
25<PAGE>
<PAGE>
bonds, that are rated investment grade. At June 30, 1997, the
average term to maturity or repricing of the securities
portfolio was 3.9 years.
In June 1993, the Financial Accounting Standards Board
("FASB") adopted the Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"). SFAS 115 addresses the accounting and
reporting for investments in equity securities that have readily
determinable fair values and for all investments in debt
securities. Such investments should be classified in three
categories and accounted for as follows: (i) debt securities
that the entity has the positive intent and ability to hold to
maturity are to be classified as held to maturity and reported
at amortized cost; (ii) debt and equity securities that are held
for current resale are to be classified as trading securities
and reported at fair value, with unrealized gains and losses
included in earnings; and (iii) debt and equity securities not
classified as either securities held to maturity or trading
securities are to be classified as securities available for sale
and reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of
shareholders' equity. Management adopted SFAS 115 effective
July 1, 1994.
At June 30, 1997, the Company held no securities for
trading purposes, but did have $772,000 in mutual funds and $1.1
million in corporate stock, all of which are held as available
for sale and are carried at market value. The following table
sets forth the composition of the Company's securities portfolio
at the dates indicated.
26<PAGE>
<PAGE>
<TABLE>
<CAPTION>
June 30,
---------------------------------
1997 1996
---------------------------------
Carrying % of Carrying % of
Value Total Value Total
---------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Investment Securities:
U.S. Agency Securities. . . $1,498 32.8 $1,497 33.9
Certificates of Deposit . . --- --- 85 1.9
Corporate stock(1). . . . . 1,137 24.9 916 20.8
Mutual Funds(1) . . . . . . 772 16.9 757 17.1
------ ----- ------ -----
Subtotal . . . . . . . . $3,407 74.6 $3,255 73.7
FHLB Stock. . . . . . . . . 1,159 25.4 1,159 26.3
------ ----- ------ -----
Total Investment Securities
and FHLB Stock. . . . . . . $4,566 100.0% $4,414 100.0%
====== ===== ====== =====
Average remaining life or
term to repricing of
securities and other
interest-earning assets,
excluding FHLB stock and
other marketable equity
securities . . . . . . . . . 3.9 yrs 4.6 yrs
Other Interest-Earning Assets:
Interest-earning deposits
with banks . . . . . . . $4,309 $2,049
====== ======
<FN>
_________________
(1) Classified as securities available for sale. All other
securities are classified as held to maturity.
</FN>
</TABLE>
The composition and maturities of the Company's securities
portfolio, excluding FHLB stock and equity securities, are
indicated in the following table.
<TABLE>
<CAPTION>
June 30, 1997
---------------------------------------
Less Than 1 to 5 Over 5 to Over Total Investment
1 Year Years 10 Years 10 Years Securities
--------------------------------------------------------
Carrying Carrying Carrying Carrying Carrying Market
Value Value Value Value Value Value
--------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. agency securities. . .$ --- $1,498 $ --- $ --- $ 1,498 $1,493
------ ------ ------ ------ ------- ------
Total Securities. . . . .$ --- $1,498 $ --- $ --- $ 1,498 $1,493
Weighted average yield. . . ---% 6 .53% ---% ---% 6.53% 6.53%
====== ====== ====== ====== ======= ======
</TABLE>
27<PAGE>
<PAGE>
At June 30, 1997 the Company's securities portfolio did not
contain securities of any issuer with an aggregate book value in
excess of 10% of the Company's stockholders' equity, excluding
securities issued by the United States Government or its
agencies.
The Company's securities portfolio is managed in accordance
with a written investment policy adopted by the Board of
Directors. Investments may be made by the Company's officers
within specified limits and must be approved in advance by the
Board of Directors for transactions over certain limits.
MORTGAGE-BACKED SECURITIES. Grinnell Federal has in the
past purchased mortgage-backed securities in order to supplement
loan demand in its market area. Although such securities are
held for investment, they can serve as collateral for borrowings
and deposits, and through repayments, as a source for liquidity.
The Bank did not purchase any mortgage-backed securities during
fiscal 1997. At June 30, 1997, the Company's mortgage-backed
securities totaled $3.1 million.
The following table sets forth the contractual maturities
of the Company's mortgage-backed securities at June 30, 1997.
<TABLE>
<CAPTION>
June 30, 1997
Less than 1 to 5 5 to 10 Over 10 Balance
1 Year Years Years Years Outstanding
--------- ------- ------- -------- -------------
<S> <C> <C> <C> <C> <C>
Federal Home Loan Mortgage
Corporation. . . . . . . . $ --- $ 633 $ 43 $ 94 $ 770
Government National Mortgage
Association. . . . . . . . --- --- --- 2,376 2,376
----- ----- ----- ------ ------
Total. . . . . . . . . . $ --- $ 633 $ 43 $2,470 $3,146
===== ===== ===== ====== ======
</TABLE>
For information regarding the carrying and market values of
the Company's mortgage-backed securities portfolio, see Note 2
of the Notes to Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Financial Condition" in the Annual
Report.
Under the OTS's risk-based capital requirements, Government
National Mortgage Association ("GNMA") mortgage-backed
securities have a zero percent risk weighting and Federal
National Mortgage Association ("FNMA"), Federal Home Loan
Mortgage Corporation ("FHLMC") and AA-rated mortgage-backed
securities have a 20% risk weighting, in contrast to the 50%
risk weighting carried by one- to four-family performing
residential mortgage loans.
28<PAGE>
<PAGE>
SOURCES OF FUNDS
GENERAL. The Company's primary sources of funds are:
deposits, amortization and repayment of loan principal
(including mortgage-backed securities); sales or maturities of
investment securities, mortgage-backed securities and short-term
investments; FHLB advances; and funds provided from operations.
Borrowings are used to compensate for seasonal reductions
in deposits or deposit inflows at less than projected levels,
and to support lending activities. At June 30, 1997, the only
borrowings outstanding were FHLB advances totalling $21.0
million. See "- Borrowings" and Note 7 of the Notes to
Consolidated Financial Statements in the Annual Report.
DEPOSITS. Grinnell Federal offers a variety of deposit
accounts having a wide range of interest rates and terms. The
Bank's deposits include savings accounts, money market savings
accounts, NOW, money market checking and regular checking
accounts, and certificate accounts with terms of 3 to 60 months.
The Bank relies primarily on advertising, competitive pricing
policies and customer service to attract and retain these
deposits. Grinnell Federal solicits deposits from its market
area only and does not use brokers to obtain deposits.
The flow of deposits is influenced significantly by general
economic conditions, changes in money market and prevailing
interest rates and competition. The variety of deposit accounts
offered by the 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 Bank manages the
pricing of its deposits in keeping with its asset/liability
management and profitability objectives. Based on its
experience, the Bank believes that its savings, NOW and
non-interest-bearing checking accounts are relatively stable
sources of deposits. However, the ability of the Bank to
attract and maintain certificates of deposit, and the rates paid
on these deposits, has been and will continue to be
significantly affected by market conditions.
29<PAGE>
<PAGE>
The following table sets forth the dollar amount of savings
deposits in the various types of deposit programs offered by the
Bank for the dates indicated and the rates offered.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------
1997 1996
--------------- ---------------
Percent Percent
Amount of Total Amount of Total
------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Transactions and Savings Deposits:
- ---------------------------------
Savings Accounts (2.50-2.50%). . . . . $ 3,567 5.99 $ 4,192 7.89%
NOW Accounts (2.00-5.03%). . . . . . . 4,924 8.27 3,626 6.83
Money Market Savings (3.25-5.00%). . . 8,051 13.52 5,948 11.20
Non-interest bearing accounts. . . . . 1,349 2.26 1,026 1.93
------- ------ ------- ------
Total Non-Certificates . . . . . . . . 7,891 30.04 14,792 27.85
------- ------ ------- ------
Certificates:
- ------------
3.00 - 3.99% . . . . . . . . . . . . 148 .25 164 .31
4.00 - 5.99% . . . . . . . . . . . . 35,312 59.30 27,392 51.56
6.00 - 7.99% . . . . . . . . . . . . 6,200 10.41 10,774 20.28
8.00 - 9.99% . . . . . . . . . . . . --- --- --- ---
10.00 - 11.99% . . . . . . . . . . . . --- --- --- ---
12.00% and over. . . . . . . . . . . . --- --- --- ---
------- ------ ------- ------
Total Certificates . . . . . . . . . . 41,660 69.96 38,330 72.15
------- ------ ------- ------
Total Deposits . . . . . . . . . . . . $59,551 100.00% $53,122 100.00%
======= ====== ======= ======
</TABLE>
The following table sets forth the savings flows at the
Bank during the periods indicated. Net increase refers to the
amount of deposits during a period less the amount of
withdrawals during the period.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------
1997 1996
-------- --------
(Dollars in thousands)
<S> <C> <C>
Opening balance. . . . . . . . . . . . $ 53,122 $ 46,082
Deposits . . . . . . . . . . . . . . . 174,583 108,377
Withdrawals. . . . . . . . . . . . . . (170,464) (103,249)
Interest credited. . . . . . . . . . . 2,310 1,912
--------- ---------
Ending balance . . . . . . . . . . . . $ 59,551 $ 53,122
========= =========
Net increase . . . . . . . . . . . . . $ 6,429 $ 7,040
========= =========
Percent increase . . . . . . . . . . . 12.1% 15.3%
========= =========
</TABLE>
30<PAGE>
<PAGE>
The following table indicates the amount of the Bank's
certificates of deposit by time remaining until maturity as of
June 30, 1997.
<TABLE>
<CAPTION>
Maturity
--------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
-------- ------ ------- --------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less
than $100,000. . . . . . . . . . $10,240 $ 6,119 $ 6,852 $11,948 $35,159
Certificates of deposit of
$100,000 or more . . . . . . . . 100 2,527 1,319 1,753 5,699
Public funds(1). . . . . . . . . . 401 201 --- 200 802
------- ------- ------- ------- -------
Total certificates of deposit . . . $10,741 $ 8,847 $ 8,171 $13,901 $41,660
======= ======= ======= ======= =======
<FN>
___________________
(1) Deposits from governmental and other public entities.
</FN>
</TABLE>
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 or can be
invested at a positive rate of return. In addition, the Bank
has relied upon borrowings for short-term liquidity needs.
Grinnell Federal may obtain advances from the FHLB of Des
Moines upon the security of its capital stock in the FHLB of Des
Moines and certain of its mortgage loans and mortgage-backed
securities. Such advances may be made pursuant to several
different credit programs, each of which has its own interest
rate and range of maturities.
The following table sets forth the maximum month-end
balance and average balance of FHLB advances for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
Maximum Balance:
- ---------------
FHLB advances. . . . . . . . . . . .$20,961 $22,749
Average Balance:
- ---------------
FHLB advances. . . . . . . . . . . .$19,236 $18,711
</TABLE>
The following table sets forth certain information as to
the Bank's FHLB advances at the dates indicated.
<TABLE>
<CAPTION>
June 30,
----------------------
1997 1996
-------- --------
(Dollars in thousands)
<S> <C> <C>
FHLB advances. . . . . . . . . . . . $20,961 $19,318
Weighted average interest
rate of FHLB advances . . . . . . . 6.12% 5.98%
</TABLE>
31<PAGE>
<PAGE>
SERVICE CORPORATION ACTIVITIES
Federal associations generally may invest up to 2% of their
assets in service corporations, plus an additional 1% of assets
if for community purposes. In addition, federal associations
may invest up to 50% of their regulatory capital in conforming
loans to their service corporations. In addition to investments
in service corporations, federal associations are permitted to
invest an unlimited amount in operating subsidiaries engaged
solely in activities which a federal association may engage in
directly.
Grinnell Federal has one service corporation, Grinnell
Service Corporation, Inc. ("GSCI"), located in Grinnell, Iowa.
GSCI was organized by the Bank in 1970 in order to purchase land
located in Grinnell, Iowa for development of single-family
building sites. Due to low demand for such land, GSCI
experienced losses of $30,000 and $83,000 for fiscal years ended
June 30, 1993 and 1992, respectively. As a result, the Bank
determined to discontinue the development activities engaged in
by its service corporation. During fiscal 1994, GSCI completed
the sale of its remaining lots for a gain of $34,000. GSCI has
not engaged in any real estate development or other substantive
activities since June 30, 1994.
REGULATION
GENERAL. Grinnell 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.
Accordingly, the Bank is subject to broad federal regulation and
oversight extending to all its operations. 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 (the
"Federal Reserve Board"). As the savings and loan holding
company of the Bank, the Company also is subject to federal
regulation and oversight. The Bank is a member of the Savings
Association Insurance Fund (the "SAIF") and the deposits of the
Bank are insured by the FDIC. As a result, the FDIC has certain
regulatory and examination authority over the Bank.
Certain of these regulatory requirements and restrictions
are discussed below or elsewhere in this Form 10-KSB.
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS. The OTS has
extensive authority over the operations of savings associations.
As part of this authority, the Bank is required to file periodic
32<PAGE>
<PAGE>
reports with the OTS and is subject to periodic examinations by
the OTS and the FDIC. The last regular OTS and FDIC
examinations of Grinnell Federal were as of May 1996 and May
1991, respectively. 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 associations are subject to a semi-annual assessment,
based upon the savings association's total assets, to fund the
operations of the OTS. The Bank's OTS assessment for the fiscal
year ended June 30, 1997, was $27,079.
The OTS also has extensive enforcement authority over all
savings institutions and their holding companies, including the
Bank and the 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 laws and it is
prohibited from engaging in any activities not permitted by such
laws. For instance, no savings institution may invest in non-
investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans
secured by non-residential real property may not exceed 400% of
total capital, except with approval of the OTS. Federal savings
associations are also generally authorized to branch nationwide.
The Bank is in compliance with the noted restrictions.
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, 1997, the Bank's lending limit under this
restriction was $1.3 million. At June 30, 1997, the Bank had no
loans in excess of this limit. The Bank is in compliance with
the loans-to-one-borrower limitation.
33<PAGE>
<PAGE>
The OTS, as well as the other federal banking agencies, has
adopted guidelines establishing safety and soundness standards
on matters such 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. The Bank
is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC. 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
FDIC. The FDIC also has the authority to initiate enforcement
actions against savings associations, after giving the OTS an
opportunity to take such action, and may terminate the deposit
insurance if it determines that the institution has engaged in
unsafe or unsound practices, or is in an unsafe or unsound
condition.
The FDIC's deposit insurance premiums are assessed
through a risk-based system under which all insured depository
institutions are placed into one of nine categories and assessed
insurance premiums, ranging from .06% to .31% of deposits, 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.
34<PAGE>
<PAGE>
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings
associations, 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 associations.
These capital requirements must be generally as stringent as the
comparable capital requirements for national banks. The OTS is
also authorized to impose capital requirements in excess of
these standards on individual associations on a case-by-case
basis.
The capital regulations require tangible capital of at
least 1.5% of adjusted total assets (as defined by regulation).
Tangible capital generally includes common stockholders' equity
and retained income, and certain noncumulative perpetual
preferred stock and related income. In addition, all intangible
assets, other than a limited amount of purchased mortgage
servicing rights, must be deducted from tangible capital for
calculating compliance with the requirement. At June 30, 1997,
the Bank did not have any intangible assets.
The OTS regulations establish special capitalization
requirements for savings associations that own subsidiaries. In
determining compliance with the capital requirements, all
subsidiaries engaged solely in activities permissible for
national banks or engaged in certain other activities solely as
agent for its customers are "includable" subsidiaries that are
consolidated for capital purposes in proportion to the
association's level of ownership. For excludable subsidiaries,
the debt and equity investments in such subsidiaries are
deducted from assets and capital. All subsidiaries of the Bank
are includable subsidiaries.
At June 30, 1997, the Bank had tangible capital of $8.9
million, or 9.8% of adjusted total assets, which is
approximately $7.5 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% of adjusted total assets. Core capital generally
consists of tangible capital plus certain intangible assets,
including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action
provisions discussed below, however, a savings association must
maintain a core capital ratio of at least 4% to be considered
adequately capitalized unless its supervisory condition is such
to allow it to maintain a 3% ratio.
35<PAGE>
<PAGE>
At June 30, 1997, the Bank had no intangibles which were subject
to these tests.
At June 30, 1997, the Bank had core capital equal to $8.9
million, or 9.8% of adjusted total assets, which is $6.2 million
above the minimum leverage ratio requirement of 3% as in effect
on that date.
The OTS risk-based requirement requires savings
associations to have total capital of at least 8% of risk-
weighted assets. Total capital consists of core capital, as
defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments
that do not qualify as core capital and general valuation loan
and lease loss allowances up to a maximum of 1.25% of risk-
weighted assets. Supplementary capital may be used to satisfy
the risk-based requirement only to the extent of core capital.
The OTS is also authorized to require a savings association to
maintain an additional amount of total capital to account for
concentration of credit risk and the risk of non-traditional
activities. At June 30, 1997, the Bank had no capital
instruments that qualify as supplementary capital but had
$646,000 of allowance for loan and lease losses, which was not
in excess of the 1.25% 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. The Bank
had no exclusions from capital and assets at June 30, 1997.
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.
The OTS has adopted a final rule that requires every
savings association with more than normal interest rate risk
exposure to deduct from its total capital, for purposes of
determining
36<PAGE>
<PAGE>
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 (the "NPV") of a savings association,
greater than 2% of the present value of its assets, based upon a
hypothetical 200 basis point increase or decrease in interest
rates (whichever results in a greater decline). NPV is the
present value of expected cash flows from assets, liabilities
and off-balance sheet contracts. The rule provides for a two
quarter lag between calculating interest rate risk and
recognizing any deduction from capital. The rule will not
become effective until the OTS evaluates the process by which
savings associations may appeal an interest rate risk deduction
determination. It is uncertain as to when this evaluation may
be completed. Any savings association with less than $300
million in assets and a total capital ratio in excess of 12% is
exempt from this requirement unless the OTS determines
otherwise. The Bank meets the criteria for an exemption from
this requirement and has not been advised by the OTS that it is
otherwise subject to this rule.
On June 30, 1997, the Bank had total capital of $9.5
million (including $8.9 million in core capital and $646,000 in
qualifying supplementary capital) and risk-weighted assets of
$52.0 million (the Bank had no converted off-balance sheet
assets), or total capital of 18.3% of risk-weighted assets.
This amount was $5.4 million above the 8% requirement in effect
on that date.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS.
OTS regulations impose various restrictions or requirements on
associations with respect to their ability to pay dividends or
make other distributions of capital. OTS regulations prohibit
an association from declaring or paying any dividends or from
repurchasing any of its stock if, as a result, the regulatory
capital of the association would be reduced below the amount
required to be maintained for the liquidation account
established in connection with its mutual to stock conversion.
The OTS utilizes a three-tiered approach to permit
associations, based on their capital level and supervisory
condition, to make capital distributions which include
dividends, stock redemptions or repurchases, cash-out mergers
and other transactions charged to the capital account. See "-
Regulatory Capital Requirements."
37<PAGE>
<PAGE>
Generally, Tier 1 associations, which are associations that
before and after the proposed distribution meet their fully
phased-in capital requirements, may make capital distributions
during any calendar year equal to the greater of 100% of net
income for the year-to-date plus 50% of the amount by which the
lesser of the association's tangible, core or risk-based capital
exceeds its fully phased-in capital requirement for such capital
component, as measured at the beginning of the calendar year, or
the amount authorized for a Tier 2 association. However, a Tier
1 association deemed to be in need of more than normal
supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association as a result of such a determination. The Bank meets
the requirements for a Tier 1 association and has not been
notified of a need for more than normal supervision. Tier 2
associations, which are associations that before and after the
proposed distribution meet their current minimum capital
requirements, may make capital distributions of up to 75% of net
income over the most recent four-quarter period.
Tier 3 associations (which are associations that do not
meet current minimum capital requirements) that propose to make
any capital distribution and Tier 2 associations that propose to
make a capital distribution in excess of the noted safe harbor
level must obtain OTS approval prior to making such
distribution. Tier 2 associations proposing to make a capital
distribution within the safe harbor provisions and Tier 1
associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such
distribution. As a subsidiary of the Company, the Bank is
required to give the OTS 30 days' notice prior to declaring any
dividend on its stock. The OTS may object to the distribution
during that 30-day period based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
LIQUIDITY. All savings associations, including the Bank,
are required to maintain an average daily balance of liquid
assets equal to a certain percentage of the sum of its average
daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. This liquid asset ratio
requirement may vary from time to time (between 4% and 10%)
depending upon economic conditions and savings flows of all
savings associations. At the present time, the minimum liquid
asset ratio is 5%.
38<PAGE>
<PAGE>
In addition, short-term liquid assets (e.g., cash, certain
time deposits, certain bankers acceptances and short-term United
States Treasury obligations) currently must constitute at least
1% of the association's average daily balance of net
withdrawable deposit accounts and current borrowings. Penalties
may be imposed upon associations for violations of either liquid
asset ratio requirement. At June 30, 1997, the Bank was in
compliance with both requirements, with an overall liquid asset
ratio of 7.3% and a short-term liquid assets ratio of 6.5%.
ACCOUNTING. An OTS policy statement applicable to all
savings associations clarifies and re-emphasizes that the
investment activities of a savings association must be in
compliance with approved and documented investment policies and
strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its
classification of and accounting for loans and securities
(i.e.,whether held for investment, sale or trading) with appropriate
documentation. The 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.
QUALIFIED THRIFT LENDER TEST. All savings associations,
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 association to have at
least 65% of its portfolio assets (as defined by regulation) in
qualified thrift investments on a monthly average for nine out
of every 12 months on a rolling basis. Such assets primarily
consist of residential housing related loans and investments.
At June 30, 1997, the Bank met the test and has always met the
test since its effectiveness.
Any savings association that fails to meet the QTL test
must convert to a national bank charter, unless it requalifies
as a QTL and thereafter remains a QTL. If an association does
not requalify and converts to a national bank charter, it must
remain SAIF-insured until the FDIC permits it to transfer to the
BIF. If such an association has not yet requalified or
converted to a national bank, its new investments and activities
are limited to those permissible for both a savings association
and a national bank, and
39<PAGE>
<PAGE>
it is limited to national bank branching rights in its home
state. In addition, the association is immediately ineligible
to receive any new FHLB borrowings and is subject to national
bank limits for payment of dividends. If such association has
not requalified or converted to a national bank within three
years after the failure, it must divest of all investments and
cease all activities not permissible for a national bank. In
addition, it must repay promptly any outstanding FHLB
borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding
company, then within one year after the failure, the holding
company must register as a bank holding company and become
subject to all restrictions on bank holding companies. See "-
Holding Company Regulation."
COMMUNITY REINVESTMENT ACT. Under the Community
Reinvestment Act ("CRA"), every FDIC insured institution has a
continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its
entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of
products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires
the OTS, in connection with the examination of the Bank, 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 the Bank. 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 September 1996 and received a
rating of satisfactory.
TRANSACTIONS WITH AFFILIATES. Generally, transactions
between a savings association or its subsidiaries and its
affiliates are required to be on terms as favorable to the
association as transactions with non-affiliates. In addition,
certain of these transactions, such as loans to an affiliate,
are restricted to a percentage of the association's capital.
Affiliates of the Bank
40<PAGE>
<PAGE>
include the Company and any company which is under common
control with the Bank. In addition, a savings association may
not lend to affiliates 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 associations as affiliates on a case-by-case basis.
Certain transactions with directors, officers or
controlling persons are also subject to conflict of interest
regulations enforced by the OTS. These conflict of interest
regulations and other statutes also impose restrictions on loans
to such persons and their related interests.
HOLDING COMPANY REGULATION. The Company is a unitary
savings and loan holding company subject to regulatory oversight
by the OTS. As such, the Company is registered and files
reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings association
subsidiaries which also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the
subsidiary savings association.
As a unitary savings and loan holding company, the Company
generally is not subject to activity restrictions. If the
Company acquires control of another savings association as a
separate subsidiary, it would become a multiple savings and loan
holding company, and the activities of the Company and any of
its subsidiaries (other than the Bank or any other SAIF-insured
savings association) would become subject to such restrictions
unless such other associations each qualify as a QTL and were
acquired in a supervisory acquisition.
If the Bank fails the QTL test, the 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 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."
41<PAGE>
<PAGE>
The Company must obtain approval from the OTS before
acquiring control of any other SAIF-insured association. Such
acquisitions are generally prohibited if they result in a
multiple savings and loan holding company controlling savings
associations in more than one state. However, such interstate
acquisitions are permitted based on specific state authorization
or in a supervisory acquisition of a failing savings
association.
FEDERAL SECURITIES LAW. The stock of the Company is
registered with the SEC under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The Company is subject
to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the
Exchange Act.
Company stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Company
may not be resold without registration or unless sold in
accordance with certain resale restrictions. If the Company
meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market,
without registration, a limited number of shares in any three-
month period.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires
all depository institutions to maintain non-interest bearing
reserves at specified levels against their transaction accounts
(primarily checking, NOW and Super NOW checking accounts). At
June 30, 1997, 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 associations are authorized to borrow from the
Federal Reserve Bank "discount window," but Federal Reserve
Board regulations require associations to exhaust other
reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the
FHLB of Des Moines, which is one of 12 regional FHLBs ("FHLB
System"), that administers the home financing credit function of
savings associations. Each FHLB serves as a reserve or central
bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated
obligations of the FHLB System. It makes loans to members
(i.e.,
42<PAGE>
<PAGE>
advances) in accordance with policies and procedures established
by the board of directors of the FHLB, which are subject to the
oversight of the Federal Housing Finance Board. All advances
from the FHLB are required to be fully secured by sufficient
collateral as determined by the FHLB. In addition, all long-
term advances are required to provide funds for residential home
financing.
As a member, the Bank is required to purchase and maintain
stock in the FHLB of Des Moines. At June 30, 1997, the Bank had
$1.2 million in FHLB stock, which was in compliance with this
requirement. In past years, the Bank has received substantial
dividends on its FHLB stock. For the fiscal year ended June 30,
1997, dividends paid by the FHLB of Des Moines to the Bank
totaled $81,000, which constitutes a $5,000 increase over the
amount of dividends received in the fiscal year ended June 30,
1996.
Under federal law the FHLBs are required to provide funds
for the resolution of troubled savings associations and to
contribute to low- and moderately-priced housing programs
through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level
of FHLB dividends paid and could continue to do so in the
future. These contributions could also have an adverse effect
on the value of FHLB stock in the future. A reduction in value
of the Bank's FHLB stock may result in a corresponding reduction
in the Bank's capital.
CHANGE IN CONTROL REGULATIONS. Federal law provides that no
company "directly or indirectly or acting in concert with one or
more persons, or through one or more subsidiaries, or through
one or more transactions," may acquire "control" of a savings
association at any time without the prior approval of the OTS.
In addition, federal regulations require that, prior to
obtaining control of a savings association, a person, other than
a company, must give 60 days' prior notice to the OTS and have
received no OTS objection to such acquisition of control. Any
company that acquires such control becomes a "savings and loan
holding company" subject to registration, examination and
regulation as a savings and loan holding company. Under federal
law (as well as the regulations referred to below) the term
"savings association" includes state and federally chartered
SAIF-insured institutions and federally chartered Banks whose
accounts are insured by the FDIC's BIF and holding companies
thereof.
43<PAGE>
<PAGE>
Control, as defined under federal law, means ownership,
control of or holding irrevocable proxies representing more than
25% of any class of voting stock, control in any manner of the
election of a majority of the savings association's directors,
or a determination by the OTS that the acquiror has the power to
direct, or directly or indirectly to exercise a controlling
influence over, the management or policies of the institution.
Acquisition of more than 10% of any class of a savings
association's voting stock, if the acquiror also is subject to
any one of eight "control factors," constitutes a rebuttable
determination of control under the regulations. Such control
factors include the acquiror being one of the two largest
stockholders. The determination of control may be rebutted by
submission to the OTS, prior to the acquisition of stock or the
occurrence of any other circumstances giving rise to such
determination, of a statement setting forth facts and
circumstances which would support a finding that no control
relationship will exist and containing certain undertakings.
The regulations provide that persons or companies which acquire
beneficial ownership exceeding 10% or more of any class of a
savings association's stock must file with the OTS a
certification that the holder is not in control of such
institution, is not subject to a rebuttable determination of
control and will take no action which would result in a
determination or rebuttable determination of control without
prior notice to or approval of the OTS, as applicable.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION. Prior to the enactment, on August 20,
1996, of the Small Business Job Protection Act of 1996 (the
"Small Business Act"), for federal income tax purposes, thrift
institutions such as the Bank, which met certain definitional
tests primarily relating to their assets and the nature of their
business, were permitted to establish tax reserves for bad debts
and to make annual additions thereto, which additions could,
within specified limitations, be deducted in arriving at their
taxable income. The Company's deduction with respect to
"qualifying loans," which are generally loans secured by certain
interests in real property, could be computed using an amount
based on a six-year moving average of the Company's actual loss
experience (the "Experience Method"), or a percentage equal to
8.0% of the Company's taxable income (the "PTI Method"),
computed without regard to this deduction and with additional
modifications and reduced by the amount of any permitted
addition to the non-qualifying reserve.
44<PAGE>
<PAGE>
Under the Small Business Act, the PTI Method was repealed
and the Bank, as a "small bank" (one with assets having an
adjusted basis of $500 million or less) has elected to use the
Experience Method of computing additions to its bad debt reserve
for taxable years beginning with the Company's taxable year
beginning July 1, 1996. In addition, the Company will be
required to recapture (i.e., take into taxable income) over a
six-year period, beginning with the Company's taxable year
beginning July 1, 1996, the excess of the balance of its bad
debt reserves (other than the supplemental reserve) as of June
30, 1996 over the greater of (a) the balance of its "base year
reserve," i.e., its reserves as of June 30, 1998 or (b) an
amount that would have been the balance of
such reserves as of June 30, 1996 had the Company always
computed the additions to its reserves using the Experience
Method. Under the Small Business Act such recapture
requirements could have been suspended for each of the two
successive taxable years beginning July 1, 1996 in which the
Company originated a minimum amount of certain residential loans
during such years that is not less than the average of the
principal amounts of such loans made by the Company during its
six taxable years preceding July 1, 1996. The Company elected
not to defer the recapture causing approximately $15,000 of
income recapture for the year ended June 30, 1997. A deferred
tax liability has been previously recorded by the bank for this
item.
In addition to the regular income tax, corporations,
including savings associations 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.
Net operating losses can offset no more than 90% of alternative
minimum taxable income. For taxable years beginning after 1986
and before 1996, corporations, including savings associations
such as the Bank, were also subject to an environmental tax
equal to 0.12% of the excess of alternative minimum taxable
income for the taxable year (determined without regard to net
operating losses and the deduction for the environmental tax)
over $2.0 million.
To the extent earnings appropriated to a savings
association's bad debt reserves for "qualifying real property
loans" and deducted for federal income tax purposes exceed the
allowable amount of such reserves computed under the experience
method and to the extent of
45<PAGE>
<PAGE>
the association's supplemental reserves for losses on loans
("Excess"), such Excess 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).
The Company and its subsidiaries file consolidated federal
income tax returns on a fiscal year basis using the accrual
method of accounting. For years prior to June 30, 1997, savings
associations, such as the Bank, that file federal income tax
returns as part of a consolidated group were required by
applicable Treasury regulations to reduce their taxable income
for purposes of computing the percentage bad debt deduction for
losses attributable to activities of the non-savings association
members of the consolidated group that are functionally related
to the activities of the savings association member.
The Company and its consolidated subsidiaries have not been
audited by the IRS with respect to consolidated federal income
tax returns during the past seven years. In the opinion of
management, any examination of still open returns (including
returns of subsidiaries and predecessors of, or entities merged
into, the Company) would not result in a deficiency which could
have a material adverse effect on the financial condition,
results of operations or liquidity of the Company and its
consolidated subsidiaries.
IOWA TAXATION. The Bank currently files an Iowa franchise
tax return, and the Company and the Bank's service corporation
file an Iowa corporation tax return.
Iowa imposes a franchise tax on the taxable income of both
mutual and stock savings 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 payments and
taxable income includes interest on state and municipal
obligations. Interest on U.S. obligations is taxable under the
Iowa franchise tax and under the federal corporate income tax.
46<PAGE>
<PAGE>
Taxable income under the Iowa corporate income tax is
generally similar to taxable income under the federal corporate
income tax, except that, under the Iowa tax, no deduction is
allowed for Iowa income tax payments; interest from state and
municipal obligations is included in income; interest from U.S.
obligations is excluded from income; and 50% of federal
corporate income tax payments are excluded from income. The
Iowa corporate income tax rates range from 6% to 12% and may be
effectively increased, in individual cases, by application of a
minimum tax provision.
DELAWARE TAXATION. As a Delaware holding company, the
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 Company is also subject to an annual
franchise tax imposed by the State of Delaware.
COMPETITION
Grinnell 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 commercial banks. The Bank competes for loans
principally on the basis of the interest rates and loan fees it
charges, the types of loans it originates and the quality of
services it provides to borrowers.
The Bank attracts most of its deposits from Poweshiek
County where the Bank's office is located and parts of Marshall,
Jasper, and Iowa, Counties, Iowa. Competition for those
deposits is principally from commercial banks and credit unions
located in the same community. The ability of the Bank to
attract and retain deposits depends on its ability to provide an
investment opportunity that satisfies the requirements of
investors as to rate of return, liquidity, risk and other
factors. The Bank competes for these deposits by offering a
variety of deposit accounts at competitive rates and convenient
business hours.
EMPLOYEES
At June 30, 1997, the Bank had a total of 16 full-time and
four part-time employees. The Company's employees are not
represented by any collective bargaining group. Management
considers its employee relations to be good.
47<PAGE>
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
-----------------------
The Bank owns its main office located at 1025 Main Street,
Grinnell, Iowa 50112. The total net book value of the Bank's
premises and equipment at June 30, 1997, was $223,000.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company and Grinnell Federal are involved from time to
time as plaintiff or defendant in various legal actions arising
in the normal course of its business. While the ultimate
outcome of these proceedings cannot be predicted with certainty,
it is the opinion of management, after consultation with counsel
representing the Company and Grinnell Federal in the proceed-
ings, that the resolution of these proceedings should not have a
material effect on the Company'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, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
-------------------------------------------------
Page 45 of the attached 1997 Annual Report to Stockholders
is herein incorporated by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
-------------------------------------------------
Pages 4 through 17 of the attached 1997 Annual Report to
Stockholders are herein incorporated by reference.
48<PAGE>
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
--------------------
The following information appearing in the Company's Annual
Report to Stockholders for the year ended June 30, 1997, is
incorporated by reference in this Annual Report on Form 10-KSB
as Exhibit 13.
PAGES IN
ANNUAL REPORT SECTION ANNUAL REPORT
- --------------------- -------------
Independent Auditors' Report. . . . . . . . . . . . . 18
Consolidated Balance Sheets as of June 30,
1997 and 1996 . . . . . . . . . . . . . . . . . . . . 19
Consolidated Statements of Income for the
Years Ended June 30, 1997, 1996 and 1995. . . . . . . 20
Consolidated Statements of Changes in
Stockholders' Equity for Years Ended
June 30, 1997, 1996 and 1995. . . . . . . . . . . . . 21
Consolidated Statements of Cash Flows for
Years Ended June 30, 1997, 1996 and 1995. . . . . . . 22-23
Notes to Consolidated Financial Statements. . . . . .24-44
With the exception of the aforementioned information, the
Company's Annual Report to Stockholders for the year ended
June 30, 1997, is not deemed filed as part of this Annual Report
on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
------------------------------------------------
On August 18, 1995, the Company dismissed Vroman, McGowen,
Hurst, Clark & Smith, P.C. ("Vroman McGowen") as their
independent auditors. The change of independent auditors was
recommended by the Audit Committee and subsequently approved by
the Board of Directors. There have been no disagreements
between the Company and Vroman McGowen on any matter of
accounting principles or practices, financial statement
disclosure or auditing scope of procedure in connection with the
audit of the consolidated financial statements of the Company
for two years ended June 30, 1995 and subsequent interim periods
through August 18, 1995, which, if not resolved to the
satisfaction of Vroman McGowen, would have
49<PAGE>
<PAGE>
caused them to make reference to the subject matter of such
disagreements in connection with their report. The reports of
Vroman McGowen on the consolidated financial statements of the
Company for the two years ended June 30, 1995 did not contain an
adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or
accounting principles.
Effective September 15, 1995, the Board of Directors
engaged McGladrey & Pullen, LLP to be its auditors for the 1996
fiscal year, subject to the ratification of the appointment by
the Company's stockholders. The appointment was ratified at the
Annual Meeting of Stockholders held on October 25, 1995.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT
------------------------------------------------------
For information concerning the Board of Directors and
executive officers of the Company, the information contained
under the section captioned "Proposal I -- Election of
Directors" in the Company's definitive proxy statement for the
Company's 1997 Annual Meeting of Stockholders (the "Proxy
Statement") is incorporated herein by reference.
COMPLIANCE WITH SECTION 16(a)
- -----------------------------
Section 16(a) of the Securities Exchange Act of 1934
requires the Company's directors and executive officers, and
persons who own more than 10% of a registered class of the
Company's equity securities, to file with the SEC initial
reports of ownership and reports of changes in ownership of
Common Stock and other equity securities of the Company.
Officers, directors and greater than 10% stockholders are
required by SEC regulation to furnish the Company with copies of
all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the
copies of such reports furnished to the Company and written
representations that no other reports were required, during the
fiscal years ended June 30, 1997, all Section 16(a) filing
requirements applicable to its officers, directors and greater
than 10 percent beneficial owners were complied with.
50<PAGE>
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
----------------------
The information contained under the sections captioned
"Proposal I -- Election of Directors -- Executive Compensation,"
"-- Director Compensation," and "-- Employment Agreements and
Salary Continuation Plan" in the Proxy Statement is incorporated
herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
---------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and
Principal Holders thereof" in the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the sections captioned "Proposal I -- Election of
Directors" in the Proxy Statement.
(c) Changes in Control
Management of the Company knows of no arrangements,
including any pledge by any person of securities of the Company,
the operation of which may at a subsequent date result in a
change in control of the registrant.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The Information required by this item is incorporated
herein by reference to the section captioned "Proposal I --
Election of Directors -- Certain Transactions" in the Proxy
Statement.
51<PAGE>
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
The following is a list of exhibits filed as part of this
Annual Report on Form 10-KSB:
Regulation S-B
Exhibit Number Document
- -------------- --------
3 *(a) Articles of Incorporation, including
amendments thereto
*(b) By-Laws
10 Material Contracts
*(a) Employment Contracts between the Bank
and Messrs. Meredith, Opsal, Nassif and
Ms. Rose
*(b) 1993 Stock Option and Incentive Plan
*(c) Recognition and Retention Plan
*(d) Salary Continuation Plan
**(e) 1997 Stock Option Plan
13 Annual Report to Security Holders
21 Subsidiaries of Registrant
23 (a) Consent of McGladrey & Pullen, LLP
(b) Consent of Vroman, McGowen, Hurst, Clark
and Smith, P.C.
27 Financial Data Schedule
*Incorporated by reference to the Company's Form 10KSB for the
fiscal year ended June 30, 1996.
**Incorporated by reference to the Company's Form S-8 filed on
March 28, 1997.
(b) Reports on Form 8-K
-------------------
On June 24, 1997, the Company filed a Current Report on
Form 8-K reporting the increase in its quarterly cash dividend
from $.05 per share to $.065 per share. No other reports on
Form 8-K were filed during the three-month period ended June 30,
1997.
52<PAGE>
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GFS BANCORP, INC.
Date: September 25, 1997 /s/ Steven L. Opsal
---------------------------
Steven L. Opsal (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/ Steven L. Opsal /s/ LeRoy E. Meredith
- ------------------------------- ----------------------------
Steven L. Opsal, President, LeRoy E. Meredith, Chairman
Chief Executive Officer and of the Board and Director
Director (Principal Executive
Officer)
Date: September 25, 1997 Date: September 25, 1997
/s/ Theodore Mokricky /s/ David Clay
- ------------------------------- ----------------------------
Theodore Mokricky, Vice David Clay, Director
Chairman of the Board
Date: September 25, 1997 Date: September 25, 1997
/s/ Thomas M. Groth /s/ Scott A. Jensen
- ------------------------------- ----------------------------
Thomas M. Groth, Director Scott A. Jensen, Director
Date: September 25, 1997 Date: September 25, 1997
/s/ Albert C. Eisenman /s/ Donald H. Howig
- ------------------------------- ----------------------------
Albert C. Eisenman, Director Donald H. Howig, Director
Date: September 25, 1997 Date: September 25, 1997
/s/ Katherine A. Rose
- ------------------------------
Katherine A. Rose, Senior Vice
President and Chief Financial Officer
and Director (Principal Financial and
Accounting Officer)
Date: September 25, 1997
<PAGE>
================================================================
GFS BANCORP, INC.
[LOGO]
1997 ANNUAL REPORT
================================================================
<PAGE>
<PAGE>
A MESSAGE FROM THE PRESIDENT
Dear Fellow Stockholder:
Our balance sheet once again reflects solid growth with respect
to total assets (up 10.6%), loans receivable (up 9.3%) and
deposits (up 12.1%). More importantly, this was not simply
"growth for growth's sake", but was profitable growth.
Excluding the one-time BIF/SAIF assessment paid by all thrift
institutions in the September 1996 quarter, GFS Bancorp's
earnings would have been another record high at $1,052,000, a
17.5% increase over last year. Even including the
aforementioned assessment, the Bancorp still produced very
respectable earnings of $871,000, or about the same as last
year's $895,000. We were particularly pleased about the fact
that $588,000 of net income was generated in the last half of
the fiscal year.
Net interest income, the main driver of our earnings, increased
to more than $3 million, up 20.7%. This substantial increase
was fueled by a combination of record local lending volume and
the continuation of our relationship with Bache Funding Corp. of
Wisconsin, a mortgage banking firm headquartered in Madison.
These two sources provided over $20 million for our loan
portfolio and nearly $27 million in related servicing.
Other highlights for the year included another increase in our
cash dividend, a 100% stock dividend, the unveiling of our
Hometown Checking program, on-site banking service for residents
of the Mayflower Home (a senior care facility), and securing a
long term lease on property adjacent to our office which will
allow for a planned expansion of our facility.
We pledge to continue our focus on earnings per share. To this
end, we will strive to increase market share by providing
attractive and reasonably priced banking products and services.
You, our investors, can help us by using our services and
recommending us to your family and friends.
As always, we are indebted to our valued customers, dedicated
staff and loyal stockholders. Thank you!
Sincerely,
Steven L. Opsal
President<PAGE>
<PAGE>
________________________________________________________________
TABLE OF CONTENTS
________________________________________________________________
President's Letter to Shareholders . . . . . . . . . . . . . . 1
Selected Consolidated Financial Information. . . . . . . . . . 2
Management's Discussion and Analysis of Financial
Condition and Results of Operation. . . . . . . . . . . . . 4
Consolidated Financial Statements . . . . . . . . . . . . . . 18
Stockholder Information . . . . . . . . . . . . . . . . . . . 45
Corporate Information . . . . . . . . . . . . . . . . . . . . 46
<PAGE>
<PAGE>
GFS BANCORP, INC.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
June 30,
------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
- ---------------------------------
Total assets. . . . . . . . . . . . . . $92,063 $83,305 $70,950 $57,179 $51,213
Cash and cash equivalents . . . . . . . 4,643 2,271 4,107 968 4,923
Mortgage-backed securities, net . . . . 3,146 3,435 3,950 4,237 5,716
Investment securities . . . . . . . . . 3,407 3,255 6,078 6,690 5,001
FHLB stock. . . . . . . . . . . . . . . 1,159 1,159 832 832 832
Loans receivable, net . . . . . . . . . 78,475 71,773 54,999 43,682 33,898
Deposits. . . . . . . . . . . . . . . . 59,551 53,122 46,082 42,016 43,249
FHLB advances . . . . . . . . . . . . . 20,961 19,318 14,578 5,870 3,500
Stockholders' equity. . . . . . . . . . 10,537 9,945 9,540 8,811 4,042
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------
(Dollars in Thousands Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
- ------------------------
Total interest income . . . . . . . . . $7,139 $ 6,245 $ 4,778 $ 4,013 $ 4,098
Total interest expense. . . . . . . . . 4,092 3,720 2,638 2,228 2,547
------ ------- ------- ------- -------
Net interest income . . . . . . . . . 3,047 2,525 2,140 1,785 1,551
Provision (credit) for loan losses. . . 121 249 --- 20 (4)
------ ------- ------- ------- -------
Net interest income after provision
for losses on loans. . . . . . . . . 2,926 2,276 2,140 1,765 1,555
Non-interest income:
Gain (loss) on sale of investments. . (3) (48) 36 --- ---
Gains on sale of real estate. . . . . 4 --- 11 34 5
Other non-interest income . . . . . . 149 186 81 79 47
------ ------- ------- ------- -------
Total non-interest income . . . . . . . 150 138 128 113 52
Total non-interest expense. . . . . . . 1,828 1,335 1,321 1,061 856
------ ------- ------- ------- -------
Income before income taxes. . . . . . 1,248 1,079 947 817 751
Income tax expense. . . . . . . . . . . 377 184 316 281 237
------ ------- ------- ------- -------
Net income before accounting change . 871 895 631 536 514
Accounting change for income taxes. . . --- --- --- --- (64)
------ ------- ------- ------- -------
Income before extraordinary item. . . 871 895 631 536 450
Extraordinary item - penalty for early
extinguishment of debt, net of income
tax benefit . . . . . . . . . . . . . --- --- --- 51 ---
------ ------- ------- ------- -------
Net income . . . . . . . . . . . . . $ 871 $ 895 $ 631 $ 485 $ 450
====== ======= ======= ======= =======
Per common share data after giving
retroactive effect for the 2 for 1
stock split(1):
Net income per common share. . . . . $ .85 $ .86 $ .60 $ .26 N/A
Cash dividends declared per share. . $.2150 $ .1625 $ .0375 --- N/A
Dividend payout ratio . . . . . . . .25 .19 .06
<FN>
____________
(1) Subsequent to the conversion of Grinnell Federal Savings Bank to the stock form,
effective January 5, 1994. See Notes to Consolidated Financial Statements for
additional information regarding earnings per common share data.
</FN>
</TABLE>
2<PAGE>
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
- ----------------------------------------
Performance Ratios:
Return on assets (ratio of net income
to average total assets). . . . . . . . 0.99% 1.15% 1.01% .89% .90%
Interest rate spread information:
Average during year. . . . . . . . . . 2.85 2.56 2.70 2.81 2.76
End of year. . . . . . . . . . . . . . 2.64 2.51 2.14 2.84 2.60
Net interest margin(1). . . . . . . . . 3.52 3.30 3.48 3.34 3.15
Ratio of operating expense to average
total assets . . . . . . . . . . . . . 2.07 1.72 2.10 1.91 1.66
Return on equity (ratio of net income
to average equity) . . . . . . . . . . 8.63 9.25 6.89 7.76 11.79
Quality Ratios:
Non-performing assets to total assets
at end of year(2) . . . . . . . . . . 1.00 1.15 .02 .44 .56
Allowance for loan losses to non-
performing loans(3) . . . . . . . . . 70.03 87.24 2857.43 1290.32 6198.40
Capital Ratios:
Equity to total assets at end of
year . . . . . . . . . . . . . . . . 11.45 11.94 13.45 15.41 7.89
Average equity to average assets . . . 11.47 12.43 14.70 11.50 7.65
Average interest-earning assets to
average interest-bearing
liabilities. . . . . . . . . . . . . 114.36 115.34 118.24 112.66 107.50
Number of full-service offices . . . . . 1 1 1 1 1
<FN>
____________________
(1) Net interest income divided by average interest earning assets.
(2) Non-performing assets consist of non-accruing loans, accruing loans past due 90
or more days and real estate owned.
(3) Excludes real estate owned.
</FN>
</TABLE>
3
<PAGE>
<PAGE>
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 1,058,000 shares at
$5.00 per share after giving retroactive effect for the 2
for 1 stock split. 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.
FINANCIAL CONDITION
June 30, 1997 compared to June 30, 1996. Total assets
increased $8.8 million, or 10.6%, from $83.3 million at
June 30, 1996 to $92.1 million at June 30, 1997. This increase
was due primarily to increases in loans receivable, cash and
cash equivalents and investment securities, which increases were
partially offset by decreases in mortgage backed securities and
the disposition of real estate acquired in settlement of loans.
Cash and amounts due from depository institutions increased
$2.3 million from $2.3 million at June 30, 1996 to $4.6 million
at June 30, 1997. Investment securities increased $100,000, or
3.0%, from $3.3 million at June 30, 1996 to $3.4 million at
June 30, 1997. At June 30, 1997, the investment portfolio
consisted primarily of $1.5 million in U.S. agency obligations,
$770,000 in mutual funds, and $1.1 million in equity securities
consisting of common stocks of one bank holding company and one
thrift holding company, and preferred stocks of a life insurance
company, a bank holding company, two power companies and an
automobile manufacturer.
Total mortgage-backed securities decreased $290,000, or
8.5%, from $3.4 million at June 30, 1996 to $3.1 million at
June 30, 1997. The decrease in mortgage-backed securities was
due to repayments and prepayments.
Net loans receivable increased $6.7 million, or 9.3%, from
$71.8 million at June 30, 1996 to $78.5 million at June 30,
1997. Mortgage loans originated during fiscal 1997 totaled
$11.4 million and were secured primarily by one-to-four family
dwellings in the Bank's market area. During this period, the
Bank
4
<PAGE>
<PAGE>
also purchased $35.4 million in loans secured by real estate
located primarily in the Madison, Wisconsin area, including
$7.3 million of loans secured by one-to-four family dwellings,
$24.3 million secured by multi-family dwellings, $3.5 million
secured by commercial real estate and $316,000 secured by
residential land development. Of the $35.4 million in loans
purchased during the 1997 fiscal year, $26.9 million in
participation interests 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 normally sells majority
participation interests in these loans to financial institutions
located in Iowa and contiguous states. Although these
purchased loans are subject to the same underwriting guidelines
as loans originated, they entail a certain amount of added 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 than those loans originated by the Bank
since the origination function is performed by third parties and
the property is located outside the Bank's normal lending
territory. The Company's net investment as of June 30, 1997 in
loans generated under this Agreement totaled $13.2 million.
Such net investment reflects an outstanding principal balance of
$46.4 million in loans purchased and serviced by the Company,
less interests sold to other financial institutions of $33.2
million.
Total deposits of the Bank increased by $6.4 million, or
12.1%, from $53.1 million at June 30, 1996 to $59.5 million at
June 30, 1997. This increase was primarily due to growth of
$1.6 million in demand and negotiable order of withdrawal
accounts, $1.5 million in money market savings accounts and $3.3
million in certificates of deposit. Management believes that
this increase was primarily attributable to successful marketing
initiatives and competitive pricing.
Total borrowed funds consisted of advances from the Federal
Home Loan Bank ("FHLB") of Des Moines. FHLB advances increased
by $1.7 million, or 8.8%, from $19.3 million at June 30, 1996
to $21.0 million at June 30, 1997. This increase in borrowing
was due to the utilization of FHLB advances to partially fund
the origination and purchase of loans. Management attempts to
use borrowing to maintain the Bank's current spread and provide
a stable source of funding for loans. During fiscal 1997,
management utilized a combination of fixed-rate FHLB advances
with maturities of 30 days to 3 years. At June 30, 1997,
approximately 71% of borrowing carried maturities greater than
one year. Although this strategy could reduce the short-term
impact of an increase in interest rates, the Bank may be exposed
to an increase in interest rate risk in future periods to the
extent the actual repricing of assets differs from management's
assumptions.
Stockholders' equity increased $592,000 from $9.9 million
at June 30, 1996 to $10.5 million at June 30, 1997. This
increase was due to net income of $871,000, amortization of
Recognition and Retention Plan ("RRP") awards, allocations to
the Employee Stock Ownership Plan ("ESOP"), and a decrease in
unrealized loss on decline in value of investments available for
sale. The increase in stockholders' equity was partially
offset by the Company's repurchase of 33,262 shares of its stock
and the declaration of $0.215 dividends per share for the 1997
fiscal year.
RESULTS OF OPERATIONS
The Company's results of operations depend primarily on the
level of its net interest income and non-interest income and the
level of its operating expenses. Net interest income depends
upon the volume of interest-earning assets and interest-bearing
liabilities and interest rates earned or paid.
5
<PAGE>
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1997 AND JUNE 30, 1996
General. The Company's net income decreased by $24,000, or
2.7%, from $895,000 for fiscal 1996 to $871,000 for fiscal 1997.
As discussed in more detail below, the primary reasons for this
decrease were the one time after-tax special assessment of
$181,000 ($287,568 before the effect of federal and state income
taxes) levied by the Federal Deposit Insurance Corporation (the
"FDIC") in order to capitalize the Savings Association Insurance
Fund, and increases in non-interest expense and provision for
income taxes. The increase in expenses was largely offset by
increases in net interest income and non-interest income and a
reduction in provision for loan losses.
Interest Income. Interest income increased by $900,000 to
$7.1 million in fiscal 1997 from $6.2 million in fiscal 1996
primarily as a result of an increase in the volume of interest-
earning assets and, to a lesser extent, the average rates earned
on interest earning assets. The average balance of interest-
earning assets increased $9.9 million, or 12.9%, to $86.5
million in fiscal 1997 from $76.6 million in fiscal 1996
primarily due to an increase in the average balances of loans
resulting from increased loan originations and purchases. The
average yield on interest earning assets increased from 8.16%
for 1996 to 8.26% in 1997.
Interest Expense. Interest expense increased $400,000 to
$4.1 million in fiscal 1997 from $3.7 million in fiscal 1996 due
primarily to an increase in the volume of interest-bearing
liabilities which was partially offset by a decrease in the
average rates paid on interest-bearing liabilities. The average
balance of interest-bearing liabilities increased $9.2 million
from $66.4 million in fiscal 1996 to $75.6 million in fiscal
1997 primarily as a result of an increase in certificates of
deposit and, to a lesser extent, savings and NOW accounts, money
market accounts, and FHLB advances. The average rates paid on
interest-bearing liabilities decreased from 5.60% during fiscal
1996 to 5.41% during fiscal 1997.
Net Interest Income. Net interest income increased
$500,000 to $3.0 million in fiscal 1997 as compared to $2.5
million in fiscal 1996. The Company's average spread increased
from 2.56% for the fiscal year ended June 30, 1996 to 2.85% for
the fiscal year ended June 30, 1997 due to the increased yields
on interest earning assets and a decline in rates paid on
interest costing liabilities. Net interest margin increased
from 3.30% for the fiscal year ended June 30, 1996 to 3.52% for
the fiscal year ended June 30, 1997. The ratio of average
interest-earning assets to average interest-bearing liabilities
decreased from 115.3% during fiscal 1996 to 114.4% during
fiscal 1997.
Provision for Loan Losses. The provision for loan losses
is determined by management as the amount to be added to the
allowance for loan losses after net charge-offs have been
deducted to bring the allowance to a level which is considered
adequate to absorb losses inherent in the loan portfolio in
accordance with generally accepted accounting principles. A
$121,000 provision for loan losses was made for fiscal 1997, as
compared to $249,000 in fiscal 1996. The allowance for loan
losses at June 30, 1997 increased $5,000 to $646,000 from
$641,000 at June 30, 1996. This $5,000 increase reflects the
net effect of the $121,000 provision for loan losses referenced
above as offset by a $115,000 charge-off on equipment leases
during the 1997 fiscal year.
Management believes that the current allowance for loan
losses is adequate. Non-performing assets (defined as non-
accruing loans for which payments have been due and uncollected
for a period in excess of 90 days plus foreclosed assets)
totaled $922,000, or 1.00% of total assets at June 30, 1997 as
compared to $962,000, or 1.15%at June 30, 1996. The ratio of
the allowance for loan losses to non-performing assets increased
from 67% of non-performing assets at June 30, 1996 to 70% of
non-performing assets at June 30, 1997, due to a
6
<PAGE>
<PAGE>
$40,000 decrease in nonperforming assets coupled with the $5,000
increase in allowance for loan losses referenced above. The
ratio of the allowance for loan losses to total loans was 0.8%
at June 30, 1997 as compared to 0.9% at June 30, 1996. (See
discussion of Asset Quality below.) Future additions to the
allowance for loan losses are dependent upon the performance and
composition of the loan portfolio, the economy, changes in real
estate values and interest rates, the view of the regulatory
authorities toward adequate reserve levels and inflation.
Non-interest Income. Non-interest income increased by
$12,000 to $150,000 in fiscal 1997 from $138,000 in fiscal 1996.
Non-interest Expense. Non-interest expense increased by
$500,000 to $1.8 million in fiscal 1997 from $1.3 million in
fiscal 1996. This increase was primarily due to: (i) a one time
special assessment of $287,568 ($181,000 after the effect of
federal and state income taxes) levied by the FDIC in order to
capitalize the Savings Association Insurance Fund, (ii) a
$126,000 increase in salaries and employee benefits resulting
from staff additions, fiscal year-end salary increases and
increased expenses associated with higher market values of
allocated ESOP shares, and (iii) an $84,000 increase in other
non-interest expense.
Income Tax Expense. Income tax expense increased by
$193,000, to $377,000 in fiscal 1997 as compared to $184,000 in
fiscal 1996. This increase was primarily attributable to
resolution of a $137,000 tax contingency during fiscal 1996
and, to a lessor extent, the amount of income subject to income
taxes.
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1996 AND JUNE 30, 1995
General. The Company's net income increased by $264,000,
or 41.8%, to $895,000 in fiscal 1996 from net income of $631,000
in fiscal 1995. As discussed in more detail below, the primary
reason for this increase was the $385,000 increase in net
interest income, a $10,000 increase in non-interest income and a
$132,000 decrease in provision for income taxes, which together
more than offset the $249,000 and $14,000 increases in provision
for loan losses and non-interest expense, respectively, over
the year earlier period.
Interest Income. Interest income increased $1.4 million to
$6.2 million in fiscal 1996 from $4.8 million in fiscal 1995
primarily as a result of an increase in the volume of interest-
earning assets and, to a lesser extent, the average rates earned
on interest earning assets. The average balance of interest-
earning assets increased $15.1 million, or 24.6%, to $76.6
million in fiscal 1996 from $61.5 million in fiscal 1995
primarily due to an increase in the average balances of loans
resulting from increased loan originations and purchases. The
average yield on interest earning assets increased from 7.77%
for 1995 to 8.16% in 1996.
Interest Expense. Interest expense increased $1.1 million
to $3.7 million in fiscal 1996 from $2.6 million in fiscal 1995
due primarily to an increase in the volume of interest-bearing
liabilities and, to a lesser extent, the average rates paid on
interest-bearing liabilities. The average balance of interest-
bearing liabilities increased $14.4 million from $52.0 million
in fiscal 1995 to $66.4 million in fiscal 1996 primarily as a
result of an increase in FHLB advances and to a lesser extent
NOW accounts, money market accounts, and certificate of deposit
accounts. The average rates paid on interest-bearing
liabilities increased from 5.07% during fiscal 1995 to 5.60%
during fiscal 1996 due to an overall increase in rates paid to
attract deposits.
<PAGE>
Net Interest Income. Net interest income increased
$385,000 to $2.5 million in fiscal 1996 as compared to $2.1
million in fiscal 1995. The Company's average spread decreased
from 2.70% for the fiscal year ended June 30, 1995 to 2.56% for
the fiscal year ended June 30, 1996 due to the fact that rates
paid on interest costing liabilities increased more than yields
on interest earning assets. Net interest margin decreased from
3.48% for the fiscal year ended June 30, 1995 to 3.30% for the
fiscal year ended June 30, 1996. The
7
<PAGE>
<PAGE>
ratio of average interest-earning assets to average interest-
bearing liabilities decreased to 115.3% during fiscal 1996 from
118.2% during fiscal 1995.
Provision for Loan Losses. A $249,000 provision for loan
losses was made for fiscal 1996, as compared to no provision in
fiscal 1995. The allowance for loan losses at June 30, 1996
increased $241,000 to $641,000 from $400,000 at June 30, 1995.
This increase resulted from the $241,000 net addition to
provision for loan losses during the 1996 fiscal year.
Management believes these increases were prudent due to the
level of non-performing assets at June 30, 1996 and the increase
in the loan portfolio.
Non-performing assets (defined as non-accruing loans for
which payments have been due and uncollected for a period in
excess of 90 days plus foreclosed assets) totaled $962,000 or
1.15% of total assets at June 30, 1996 as compared to $14,000 at
June 30, 1995 or .02% of total assets. The ratio of the
allowance for loan losses to total loans was 0.9% at June 30,
1996 as compared to 0.7% at June 30, 1995.
Non-interest Income. Non-interest income increased by
$10,000 to $138,000 in fiscal 1996 from $128,000 in fiscal 1995.
This increase was primarily due to $87,000 in interest on
refunds of prior years income taxes recognized in fiscal 1996,
which was partially offset by a $48,000 loss on investment
securities in 1996, as compared to a $36,000 gain in fiscal
1995.
Non-interest Expense. Non-interest expense for fiscal 1996
at $1.3 million was unchanged from fiscal 1995 levels.
Income Tax Expense. Income tax expense was $184,000 in
fiscal 1996 compared to $316,000 in fiscal 1995, a decrease of
$132,000, or 41.8%. This decrease was primarily due to a
$137,000 resolution of a tax contingency and $30,000 in income
tax credits on an investment in a low and moderate income multi-
family housing development.
ASSET QUALITY
Total non-performing assets (defined as non-accruing loans
for which payments have been due and uncollected for a period in
excess of 90 days plus foreclosed assets) decreased $40,000 to
$922,000, or 1.00% of total assets at June 30, 1997, from
$962,000, or 1.15% of total assets at June 30, 1996. This
$922,000 consisted primarily of seven loans totaling $136,000
secured by single-family homes, three loans totaling $750,000
secured by multi-family real estate located in Madison,
Wisconsin, and four consumer loans totaling $36,000. All loans
for which payments have been due and uncollected for a period in
excess of 90 days are placed on non-accrual status.
The decrease in non-performing assets primarily reflects
the net effect of the addition of the three loans totaling
$750,000 secured by multi-family real estate located in Madison,
Wisconsin, the redemption of a $227,000 parcel of real estate
in judgment, which had been non-performing at June 30, 1996, the
settlement of a claim against a bankruptcy trustee concerning a
$437,000 package of equipment leases and the return of a
$286,000 single family home loan in Houston, Texas to performing
status.
In connection with the settlement of the referenced
bankruptcy claim involving equipment leases, management entered
into an agreement on February 5, 1997, whereby the Company is
receiving a pre-determined percentage of all amounts collected
up to 80% of the then outstanding balance. The balance of the
equipment packages at June 30, 1997 was $165,000, reflecting
payments of $157,000 and a $115,000 charge-off against the
allowance for loan losses.
8
<PAGE>
<PAGE>
In addition, at June 30, 1997, other assets of concern
totaled $1.1 million and included nine loans totaling $240,000
secured by single-family residences in the Bank's local lending
area, one $275,000 loan secured by a single family residence
located in Houston, Texas, one $537,000 loan secured by
commercial real estate located in Grinnell, Iowa, and one
$56,000 commercial business loan. While these loans raise
concerns as to timely collectibility, based upon information
currently available, management does not anticipate any material
loss on these assets.
Assets classified pursuant to the Office of Thrift
Supervision ("OTS") regulations and assets designated special
mention totaled $2.0 million at June 30,1997 as compared to $2.5
million at June 30, 1996. The decrease in classified assets
reflects the changes in composition of the non-performing and
other assets of concern described above. At June 30, 1997, all
classified assets were included in non-performing assets or
other assets of concern.
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, and the
resultant costs, expressed both in dollars and rates. No tax
equivalent adjustments were made. All average balances are
monthly average balances. Interest on non-accruing loans has
been included in the table to the extent received.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------------------------
1997 1996 1995
---------------------------------------------------------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
---------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Interest-earning bank accounts $ 2,955 $ 90 3.05% $ 2,641 $ 122 4.61% $ 1,320 $ 58 4.39%
Investments and other securities 3,244 211 6.50 5,078 325 6.40 6,461 384 5.94
Mortgage-backed securities 3,256 241 7.40 3,660 272 7.44 4,074 303 7.44
Loans receivable(1) 75,848 6,516 8.59 64,140 5,450 8.50 48,789 3,968 8.13
FHLB stock 1,159 81 6.99 1,046 76 7.26 832 65 7.81
------- ------ ------- ------ ------- ------
Total interest-earning assets $86,462 $7,139 8.26 $76,565 $6,245 8.16 $61,476 $4,778 7.77
------- ------ ------- ------ ------- ------
Interest-Bearing Liabilities:
Passbook accounts $ 3,731 $ 98 2.63 $ 3,504 $ 88 2.51 $ 3,756 $ 95 2.53
NOW accounts 4,455 183 4.11 2,005 64 3.18 1,598 34 2.12
Money market accounts 6,952 328 4.72 4,399 214 4.86 1,776 67 3.77
Certificates of deposit 41,228 2,319 5.62 37,764 2,179 5.77 36,011 1,883 5.23
FHLB advances 19,236 1,165 6.06 18,711 1,175 6.28 8,851 559 6.32
------- ------ ------- ------ ------- ------
Total interest-bearing
liabilities $75,602 $4,093 5.41 $66,383 $3,720 5.60 $51,992 $2,638 5.07
------- ------ ------- ------ ------- ------
Net interest income $3,046 $2,525 $2,140
====== ====== ======
Net interest rate spread 2.85% 2.56% 2.70%
Net earning assets $10,860 $10,182 $ 9,484
======= ======= =======
Net interest margin 3.52% 3.30% 3.48%
Average interest-earning assets
to average interest-bearing
liabilities 114.36% 115.34% 118.24%
====== ====== ======
<FN>
__________
(1) Calculated net of deferred loan fees, loan discounts, loans in process and loss reserves.
</FN>
</TABLE>
9<PAGE>
<PAGE>
RATE/VOLUME ANALYSIS OF THE NET INTEREST INCOME
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 related to
higher outstanding balances and that due to the levels and
volatility of interest rates. For each category of interest-
earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume
(i.e.,changes in volume multiplied by old rate) and (ii) changes in
rate (i.e., changes in rate multiplied by old volume). For
purposes of this table, changes attributable to both rate and
volume, which cannot be segregated have been allocated
proportionately to the change due to volume and the change due
to rate.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------
1997 vs. 1996 1996 vs.1995
------------------------- ------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
------------- Increase ------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning bank accounts $ 13 $(45) $ (32) $ 61 $ 3 $ 64
Investments and other securities (119) 5 (114) (87) 28 (59)
Mortgage-backed securities (30) (1) (31) (31) 0 (31)
Loans receivable 1,009 57 1,066 1,295 187 1,482
FHLB stock 6 (1) 5 16 (5) 11
------ ---- ------ ------ ---- ------
Total interest-earning assets $ 879 $ 15 $ 894 $1,254 $213 $1,467
====== ==== ====== ====== ==== ======
Interest-bearing liabilities:
Passbook accounts 6 4 10 (6) (1) (7)
NOW accounts 96 23 119 10 20 30
Money market accounts 121 (7) 114 123 24 147
Certificates of deposit 196 (56) 140 95 201 296
FHLB advances 32 (42) (10) 619 (3) 616
------ ---- ------ ------ ---- ------
Total interest-bearing
liabilities $ 451 $(78) $ 373 $ 841 $241 $1,082
====== ==== ====== ====== ==== ======
Net interest income $ 521 $ 385
====== ======
</TABLE>
10<PAGE>
<PAGE>
The following table sets forth the weighted average yields
on the Company's interest-earning assets, the weighted average
interest rates on interest-bearing liabilities and the interest
rate spread between weighted average yields and rates for the
Company at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-----------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Weighted average yield on:
- -------------------------
Interest-earning bank accounts 5.21% 4.89% 5.74%
Investment and other securities 6.53 6.51 6.01
Mortgage-backed securities 7.38 7.37 7.42
Loans receivable 8.41 8.23 8.15
FHLB stock 7.00 7.00 7.00
Combined weighted average yield on interest-
earning assets 8.14 8.03 7.78
Weighted average rate paid on:
- -----------------------------
Passbook accounts 2.57 2.57 2.57
NOW Accounts 4.29 3.93 2.10
Money market accounts 4.76 4.79 4.88
Certificates of deposit 5.73 5.87 5.84
FHLB advances liabilities 6.12 5.98 6.34
Combined weighted average rate paid on
interest-bearing liabilities 5.50 5.52 5.64
Spread 2.64 2.51 2.14
</TABLE>
ASSET/LIABILITY MANAGEMENT
The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are
"interest rate sensitive" and by monitoring an institution's
interest rate sensitivity "gap." An asset or liability is said
to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest
rate sensitivity gap is defined as the difference between the
amount of interest-earning assets anticipated, based upon
certain assumptions, to mature or reprice within a specific time
period and the amount of interest-bearing liabilities
anticipated, based upon certain assumptions, to mature or
reprice within that time period. A gap is considered positive
when the amount of interest rate sensitive assets exceed the
amount of interest rate sensitive liabilities. A gap is
considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive
assets. During a period of rising interest rates, a negative
gap would tend to adversely affect operations while a positive
gap would tend to benefit operations. During a period of
falling interest rates, a negative gap would tend to benefit
operations while a positive gap would tend to adversely affect
operations.
Since the early 1980's, the Bank's asset/liability
management strategy has been directed toward reducing and
controlling the Bank's exposure to fluctuations in interest
rates. In order to properly monitor interest rate risk, the
Board of Directors in 1990 created an Asset/Liability Committee.
The committee is currently composed of the Chairman of the
Board, the President, two Senior Vice Presidents, and
Commercial Loan Officer, which meet quarterly to review the
Bank's interest rate risk position. The principal
responsibilities of this Committee are to assess the Bank's
asset/liability mix and recommend strategies to the Board that
will enhance income while managing the Bank's vulnerability to
changes in interest rates.
11<PAGE>
<PAGE>
The Bank's asset/liability management strategy emphasizes
the origination or purchase of mortgages with adjustable rates.
The Bank's ARM's adjust based upon various indices. The Bank
monitors the mix of indices on its adjustable-rate assets and
seeks, consistent with market conditions and a degree of risk
deemed acceptable to management, to achieve a relative balance
in repricing characteristics of its assets and liabilities. In
the future, the Bank intends, subject to market conditions, to
continue to stress the origination or purchase of adjustable-
rate mortgage loans, including commercial and multi-family real
estate loans. In response to customer demand, however, the Bank
continues to originate and purchase for its loan portfolio
fixed-rate mortgages with terms not greater than 30 years.
As part of its asset/liability management strategy, the
Bank has also emphasized core deposits. Consumer savings
accounts, demand accounts, money market deposit accounts and NOW
accounts amounted to $17.9 million, or 30% of the Bank's total
deposits, as of June 30, 1997. Although at June 30, 1997
approximately 66.6% of the Bank's certificates of deposit were
scheduled to mature during the next year, management believes
that this reflects current consumer preference for short-term
investments as a result of the current interest rate
environment. Over 65.4% and 10.9% of the Bank's total
certificates of deposit at June 30, 1997 had an original term of
more than one and three years, respectively. Based on its
experience, the Bank's certificates of deposit have been a
relatively stable source of long-term funds as such certificates
are generally renewed upon maturity since the Bank has
established long-term banking relationships with its customers.
In addition, in recent years, the Bank has increased its use of
borrowings in an effort to maintain current spreads in a rising
rate environment and to reduce the short-term impact of
increases in interest rates.
In managing its asset/liability mix, Grinnell Federal may,
at times, depending on the relationship between long- and short-
term interest rates, market conditions and consumer preference,
place greater emphasis on maximizing its net interest margin
than on better matching the interest rate sensitivity of its
assets and liabilities in an effort to improve its spread.
Management believes that the increased net income resulting from
a mismatch in the maturity of its asset and liability portfolios
can provide high enough returns to justify the increased
vulnerability to sudden and unexpected increases in interest
rates.
12<PAGE>
<PAGE>
The following table sets forth the repricing dates of the
Bank's interest-earning assets and interest-bearing liabilities
at June 30, 1997 and the Bank's interest rate sensitivity "gap",
which is defined as the amount by which assets repricing within
the respective periods exceed liabilities repricing within such
periods. All prepayment and liability repricing assumptions are
those used by the FHLB of Des Moines at such date for the
purpose of assessing the interest rate sensitivity of member
thrift institutions and are set forth in detail following the
table.
<TABLE>
<CAPTION>
Maturing or Repricing
---------------------------------------------------
Less than 6-12 Over 1-3 Over 3-5 Over
6-Months Months Years Years 5 Years Total
--------- ------ -------- --------- ------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-rate one- to four-family loans
(including mortgage-backed
securities) $ 3,017 $ 2,739 $ 8,656 $ 5,911 $ 9,768 $30,091
Adjustable-rate one- to four-family
loans 10,999 9,458 3,030 747 --- 24,234
Fixed- and adjustable-rate construction
loans, multi-family, commercial real
estate and second mortgages 12,614 9,314 998 839 2,204 25,969
Commercial business loans 630 95 342 103 --- 1,170
Consumer loans 238 230 575 --- --- 1,043
Investment securities and other 5,393 --- --- 1,498 --- 6,891
------- ------- ------- ------- ------ -------
Total interest-earning assets 32,891 21,836 13,601 9,098 11,972 89,398
------- ------- ------- ------- ------ -------
Money market 8,056 --- --- --- --- 8,056
Passbook accounts 308 281 894 616 1,364 3,463
Demand and NOW accounts 1,057 839 1,946 773 508 5,123
Certificates 16,408 11,334 12,756 1,162 --- 41,660
FHLB advances & Other Borrowings 1,500 4,500 5,500 8,662 1,011 21,173
------- ------- ------- ------- ------ -------
Total interest-bearing liabilities 27,329 16,954 21,096 11,213 2,883 79,475
------- ------- ------- ------- ------ -------
Interest-earning assets less interest-
bearing liabilities $ 5,562 $ 4,882 $(7,495) $(2,115) $9,089 $ 9,923
======= ======= ======= ======= ====== =======
Cumulative interest rate sensitivity
gap $ 5,562 $10,444 $ 2,949 $ 834 $9,923 $ 9,923
======= ======= ======= ======= ====== =======
Cumulative interest rate gap as a
percentage of assets 6.14% 11.53% 3.26% 0.92% 10.96% 10.96%
======= ======= ======= ======= ====== =======
</TABLE>
In preparing the table above, it has been assumed, with the assumptions
used by the FHLB of Des Moines at June 30, 1997, that (i) adjustable-rate
mortgage loans on one- to four-family residential properties prepay at the
rate of 8% per year; (ii) first mortgage loans on residential properties of
five or more units and non-residential properties will prepay at the rate of
8% per year; (iii) fixed-rate construction loans, commercial loans and
consumer loans are assumed to prepay at annual rate of 5%, 8% and 8%,
respectively; (iv) one- to four-family fixed-rate mortgage loans and mortgage-
backed securities will prepay annually as follows:
<TABLE>
<CAPTION>
Annual
Prepayment Rate
---------------------
15-year 30-year
------- -------
<S> <C> <C>
Less than 8.00% 7.00% 6.00%
8.00% to 8.99% 13.00 14.00
9.00% to 9.99% 16.00 18.00
10.00% to 10.99% 12.00 14.00
11.00% or more 11.00 12.00
</TABLE>
13<PAGE>
<PAGE>
In addition, it is assumed that fixed maturity deposits are not withdrawn
prior to maturity, and that passbook accounts and NOW accounts reprice at
annual rates of 17% and 37%, respectively. The effect of these assumptions is
to quantify the dollar amount of items that are interest-sensitive and can be
repriced within each of the periods specified. Such repricing can occur in
one of three ways: (1) the rate of interest to be paid on an asset or
liability may adjust periodically on the basis of an index; (2) an asset or
liability such as a mortgage loan may amortize, permitting reinvestment of
cash flows at the then-prevailing interest rates; or (3) an asset or
liability may mature, at which time the proceeds can be reinvested at current
market rates.
Certain shortcomings are inherent in the method of analysis presented in
the foregoing tables. For example, although certain assets and liabilities
may have similar maturities or periods to repricing, they may react in
different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Additionally, certain assets, such as ARM
loans, have features which restrict changes in interest rates on a short-term
basis and over the life of the asset. Further, in the event of change in
interest rates, prepayments and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. Finally, the
ability of many borrowers to service their debt may decrease in the event of
an interest rate increase.
In addition, the previous table does not necessarily indicate the impact
of general interest rate movement on the Bank's net interest income because
the repricing of certain categories of assets and liabilities is subject to
competitive and other pressures beyond the Bank's control. As a result,
certain assets and liabilities indicated as maturing or otherwise repricing
within a stated period may, in fact, mature or reprice at different times and
at different volumes.
The following table, as of June 30, 1997, is an analysis of the Bank's
interest rate risk as measured by changes in the Bank's market value of
portfolio equity ("MVPE"), the market value of total assets less the market
value of total liabilities, for instantaneous and sustained parallel shifts in
the yield curve, in 100 basis point increments, up and down 300 basis points
and compared to Board policy limits. Assumptions used in calculating the
amounts in this table are FHLB assumptions.
<TABLE>
<CAPTION>
Change in At June 30, 1997
Interest Rate Board Limit ----------------------
(Basis Points) % Change $Change % Change
-------------- ----------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C>
+300 (35)% $(1,713) (17.7)%
+200 (25) (1,013) (10.5)
+100 (15) (358) (3.7)
0 0 --- ---
-100 10 115 1.2
-200 15 (68) (0.7)
-300 20 (121) (1.2)
</TABLE>
As indicated in the table above, management has structured its assets and
liabilities to minimize its exposure to interest rate risk. In the event of a
200 basis point change in interest rates, the Bank would experience a 0.7%
decrease in MVPE in a declining rate environment and a 10.5% decrease in a
rising rate environment.
In evaluating the Bank's exposure to interest rate risk, certain
shortcomings inherent in the method of analysis presented in the foregoing
table must be considered. For example, although certain assets and
14<PAGE>
<PAGE>
liabilities may have similar maturities or periods to repricing, they may
react in different degrees to changes in market interest rates. Also, the
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other
types may lag behind changes in market rates. Further, in the event of a
change in interest rates, prepayments and early withdrawal levels would likely
deviate significantly from those assumed in calculating the table. Finally,
the ability of many borrowers to service their debt may decrease in the event
of an interest rate increase. As a result, the actual effect of changing
interest rates may differ from that presented in the foregoing table.
LIQUIDITY AND CAPITAL RESOURCES
The OTS requires minimum levels of liquid assets. OTS regulations
presently require Grinnell Federal to maintain an average daily balance of
liquid assets (United State Treasury, federal agency and other investments
having maturities of five years or less) equal to at least 5.0% of the sum of
its average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. Such requirements may be changed from time to
time by the OTS to reflect changing economic conditions. Such investments are
intended to provide a source of relatively liquid funds upon which Grinnell
Federal may rely, if necessary, to fund deposit withdrawals and other
short-term funding needs. The Bank has historically maintained its liquidity
ratio in excess of that required. At June 30, 1997, the amount of the Bank's
liquidity was $4.6 million, resulting in a liquidity ratio of 7.3%.
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
generally is invested in interest-bearing overnight deposits and other short-
term government and agency obligations. If the Bank requires additional
funds, beyond its internal ability to generate, it has additional borrowing
capacity with the FHLB of Des Moines and collateral eligible for repurchase
agreements.
The Company's liquidity, represented by cash and cash equivalents, is a
combination of its operating, investing and financing activities. These
activities are summarized below for the years ended June 30, 1996 and 1997.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
1997 1996
------ ------
(In Thousands)
<S> <C> <C>
Net income $ 871 $ 895
Adjustments to reconcile net income to net
cash provided by operating activities 39 343
------- --------
Net cash provided by operating activities 910 1,238
Net cash provided by (used in) investing activities (6,367) (14,348)
Net cash provided by financing activities 7,829 11,274
------- --------
Net increase (decrease) in cash and cash equivalents 2,372 (1,836)
Cash and cash equivalents at beginning of year 2,271 4,107
------- --------
Cash and cash equivalents at end of year $ 4,643 $ 2,271
======= ========
</TABLE>
The Company principally uses its liquidity resources to meet ongoing
commitments, to fund maturing certificates of deposit and deposit withdrawals,
to invest, to fund existing and future loan commitments, to maintain
liquidity, and to meet operating expenses. At June 30, 1997, there were loans
in process totaling $1.1
15<PAGE>
<PAGE>
million, loan commitments totaling $893,000 and commitments for unused line of
credit loans totaling $529,000. The Company anticipates that it will have
sufficient funds available to meet current commitments.
Certificates of deposit scheduled to mature in a year or less at June 30,
1997 totaled $27.8 million. Based on historical experience, management
believes that a significant portion of such deposits will remain with the
Bank; however, there can be no assurance that the Bank can retain all such
deposits.
Management believes that loan repayments and other sources of funds will
be adequate to meet and exceed the Bank's foreseeable short- and long-term
liquidity needs.
The primary investing activities of the Company include investing in
loans, mortgage-backed securities, agency bonds, Treasury Securities,
corporate stocks and mutual funds. At June 30, 1997, these assets accounted
for over 92% of the Company's total assets. The purchases are funded
primarily from loan repayments, maturities of securities, FHLB advances and
increases in deposits and net income.
The Bank has utilized borrowing to offset reductions in other sources of
funds and to assist in asset/liability management objectives. At June 30,
1997, the Bank had outstanding borrowing of $21.0 million from the FHLB of Des
Moines.
CAPITAL REQUIREMENTS
OTS regulations establish three capital requirements for savings banks.
The following table sets forth Grinnell Federal's compliance with its capital
requirements at June 30, 1997.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------
Amount Percent
------ -------
(Dollars in Thousands)
<S> <C> <C>
Tangible Capital:
Capital level $8,880 9.80%
Requirement 1,360 1.50
------ ----
Excess $7,520 8.30%
====== ====
Core Capital:
Capital level(2) $8,880 9.80%
Requirement 2,719 3.00
------ ----
Excess $6,161 6.80%
====== ====
Fully Phased-In Risk-Based Capital:
Capital level(3) $9,526 18.31%
Requirement 4,162 8.00
------ -----
Excess $5,364 10.31%
====== =====
<FN>
_____________
(1) Tangible and core capital levels are shown as a percentage of adjusted
total assets; risk-based capital levels are shown as a percentage of
risk-weighted assets.
(2) Under current regulatory capital regulations, the Bank must have: (a)
core capital equal to 3% of adjusted total assets,(b) tangible capital
equal to 1.5% of adjusted assets, and (c) total capital equal to 8.0% of
risk-weighted assets. Risk-weighted assets are comprised of both on- and
off-balance sheet items and are assigned a risk weight ranging from 0-100%
based on their relative risk.
(3) Includes $646,000 of general valuation allowances.
</FN>
</TABLE>
16<PAGE>
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein
have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial
position and results of operations in terms of historical
dollars without considering changes in the relative purchasing
power of money over time because of inflation.
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. In the present interest rate environment, the
liquidity, maturity structure and quality of the Company's
assets and liabilities are important factors in the maintenance
of acceptable performance levels.
EFFECT OF NEW ACCOUNTING STANDARDS
The Financial Accounting Standard Board issued in February,
1997, Statement No.128, Earnings Per Share. The Financial
Accounting Standard Board has approved, effective for years
beginning after December 15, 1997, Statement No. 129, Disclosure
of Information About Capital Structure, Statement No. 130,
Reporting Comprehensive Income and Statement No. 131, Disclosure
About Segments of an Enterprise and Related Information. FASB
Statements No.128, 129, 130, and 131 are expected to have no
impact on the Company's financial statements when adopted. For
additional information, see Note 14 of the Notes to Consolidated
Financial Statements.
RECENT DEVELOPMENTS - PENDING FINANCIAL SERVICES MODERNIZATION
LEGISLATION
Legislation currently under consideration by Congress would
repeal the federal thrift charter and require federal
associations like the Bank to convert to national banks two
years after the enactment of the bill. The bill, in its current
form, would permit federal thrifts that converted to national
banks to exercise any authority which they were legally entitled
to exercise immediately prior to such conversion and would not
be required to divest any branches. Further, these institutions
could continue to branch in any state in which they were located
to the same extent as national banks. Unitary savings and loan
holding companies, like the Company, could continue to exercise
any powers they had prior to their subsidiary becoming a bank by
operation of law as long as they did not acquire another bank.
Powers of those unitary savings and loan holding companies that
were grandfathered, however, could not be transferred to another
company which acquires control of the unitary holding company
after the effective date of the law. There can be no assurance
that this legislation will be passed in its current form. At
this time, the Company is unable to predict whether such
legislation would significantly impact its operation.
DIVIDENDS
The Company declared $0.215 in dividends during fiscal
1997, including an increase to a $0.065 quarterly cash dividend
on June 20, 1997, payable on July 25, 1997 to stockholders of
record on July 11, 1997. The Company intends to continue to pay
quarterly cash dividends in the future, dependent on the results
of operations and financial condition of the Bank, tax
considerations, industry standards, economic conditions, general
business practices and other factors. The Company's ability to
pay dividends is dependent on the dividend payments it receives
from its subsidiary, the Bank, which are subject to regulations
and the Bank's continued compliance with all regulatory capital
requirements.
17<PAGE>
<PAGE>
McGLADREY & PULLEN, LLP
-----------------------
Certified Public Accountants and Consultants
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
GFS Bancorp, Inc.
Grinnell, Iowa
We have audited the accompanying consolidated balance sheets of
GFS Bancorp, Inc. and subsidiaries as of June 30, 1997 and
1996, and the related consolidated statements of income,
stockholders' equity and cash flows for the years 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 audits. The
consolidated balance sheet of GFS Bancorp, Inc. and
subsidiaries as of June 30, 1995 and the related consolidated
statements of income, stockholders' equity and cash flows for
the year ended June 30, 1995 were audited by other auditors
whose report, dated July 19, 1995, expressed an unqualified
opinion on those statements.
We conducted our audits in accordance with generally accepted
auditing standards. 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 audits provide a reasonable basisfor our opinion.
In our opinion, the 1997 and 1996 consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of GFS Bancorp, Inc. and
subsidiaries as of June 30, 1997 and 1996, and the results of
their operations and their cash flows for the years then ended
in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Des Moines, Iowa
July 30, 1997
18<PAGE>
<PAGE>
Vroman, McGowen, Hurst, Clark & Smith, P.C.
-------------------------------------------
Certified Public Accountants and Business Advisors
INDEPENDENT AUDITOR'S REPORT
----------------------------
Board of Directors
GFS Bancorp, Inc.
Grinnell, Iowa
We have audited the accompanying consolidated balance sheets of
GFS Bancorp, Inc. and subsidiary as of June 30, 1995 and 1994,
and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the years ended June 30,
1995, 1994 and 1993. These financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of GFS Bancorp, Inc. and its
subsidiary as of June 30, 1995 and 1994 and the consolidated
results of their operations and their cash flows for the years
ended June 30, 1995, 1994 and 1993, in conformity with generally
accepted accounting principles.
/s/ Vroman, McGowen, Hurst, Clark & Smith, P.C.
Des Moines, Iowa
July 19, 1995
18.1
<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C>
Cash and amounts due from depository institutions:
Noninterest bearing $ 334,287 $ 222,461
Interest bearing 4,308,632 2,048,671
Securities available for sale (Note 2) 1,909,490 1,672,763
Securities held to maturity (Note 2) 1,497,785 1,582,188
Mortgage-backed securities held to maturity (Note 2) 3,145,696 3,435,254
Stock in Federal Home Loan Bank (Note 7) 1,159,000 1,159,000
Loans receivable, net (Notes 3 and 7) 78,474,914 71,772,896
Real estate acquired in settlement of loans, net -- 226,616
Premises and equipment, net (Note 4) 223,236 234,415
Accrued interest receivable (Note 5) 520,661 439,392
Other assets 489,552 510,960
----------- -----------
TOTAL ASSETS $92,063,253 $83,304,616
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Note 6):
Demand $ 6,273,344 $ 4,651,689
Savings and money market 11,617,756 10,140,487
Certificates of deposit 41,659,676 38,330,207
----------- -----------
TOTAL DEPOSITS 59,550,776 53,122,383
=========== ===========
Advances from Federal Home Loan Bank (Note 7) 20,961,466 19,317,997
Advances from borrowers for taxes and insurance 713,593 432,970
Income taxes (Note 8):
Current -- 90,994
Deferred 73,500 8,000
Dividends payable 64,235 51,460
Other liabilities 162,505 335,921
----------- -----------
TOTAL LIABILITIES 81,526,075 73,359,725
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 14)
STOCKHOLDERS' EQUITY (Note 10)
Preferred stock, $.01 par value, authorized 500,000
shares, issued none - -
Common stock, $.01 par value, authorized
2,000,000 shares; issued 1997 1,100,720 shares;
1996 1,100,320 shares 11,007 5,501
Additional paid-in capital 5,202,310 5,138,066
Retained earnings, substantially restricted (Note 8) 6,523,527 5,856,546
Less: (Note 9)
Unearned employee stock ownership plan (197,631) (259,781)
Unearned recognition and retention plan (7,225) (32,659)
Treasury stock, at cost 1997 112,478 shares;
1996 81,120 shares (1,055,302) (728,800)
Unrealized gain (loss) on securities available
for sale, net (Note 2) 60,492 (33,982)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 10,537,178 9,944,891
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $92,063,253 $83,304,616
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
19<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans receivable $6,515,512 $5,449,941 $3,968,174
Mortgage-backed securities 241,445 272,367 303,401
Other securities and interest-bearing
cash accounts 382,413 522,332 506,547
---------- ---------- ----------
7,139,370 6,244,640 4,778,122
Interest expense:
Deposits (Note 6) 2,927,257 2,545,116 2,078,795
Advances from Federal Home Loan Bank 1,165,397 1,174,763 559,007
---------- ---------- ----------
4,092,654 3,719,879 2,637,802
---------- ---------- ----------
NET INTEREST INCOME 3,046,716 2,524,761 2,140,320
Provision for loan losses (Note 3) 121,000 249,000 --
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,925,716 2,275,761 2,140,320
---------- ---------- ----------
Noninterest income:
Gain (loss) on sale of securities
available for sale (Note 2) (2,525) (47,750) 36,250
Real estate operations -- -- 10,036
Gain on sale of real estate (3,623) -- 11,388
Other 149,100 186,175 69,876
---------- ---------- ----------
150,198 138,425 127,550
---------- ---------- ----------
Noninterest expenses:
Salaries and employee benefits (Note 9) 917,752 791,912 756,480
Real estate operations 4,043 214 11,068
Occupancy expenses 86,157 73,457 59,124
Federal deposit insurance premiums 71,553 105,530 97,078
Federal deposit insurance special assessment 287,568 -- --
Data processing services 75,094 63,213 64,368
Other 385,409 301,503 333,216
---------- ---------- ----------
1,827,576 1,335,829 1,321,334
---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,248,338 1,078,357 946,536
Provision for income taxes (Note 8) 377,180 183,517 315,650
---------- ---------- ----------
NET INCOME $ 871,158 $ 894,840 $ 630,886
========== ========== ==========
Earnings per common share $ 0.85 $ 0.86 $ 0.60
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
20<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Common
Additional Stock
Common Paid-in Retained Acquired by
Stock Capital Earnings ESOP
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, June 30, 1994 $ 5,497 $5,045,663 $4,526,773 $(392,971)
Net income -- -- 630,886 --
Dividends on common stock, $.15
per share -- -- (40,592) --
ESOP common stock released for
allocation -- 30,065 -- 67,960
Amortization of RRP contributions -- -- -- --
Purchase of 17,000 shares of
treasury stock -- -- -- --
Net change in unrealized (loss) on
securities available for sale, net
(Note 2) -- -- -- --
-----------------------------------------------
Balance, June 30, 1995 5,497 5,075,728 5,117,067 (325,011)
Net income -- -- 894,840 --
Dividends on common stock, $.65 per
share -- -- (155,361) --
ESOP common stock released for
allocation -- 59,442 -- 65,230
Amortization of RRP contributions -- -- -- --
Purchase of 66,024 shares of treasury
stock -- -- -- --
Treasury stock reissued to fund stock
options exercised (1,904 shares)
(Note 9) -- (5,446) -- --
Issuance of common stock (856 RRP
shares) 4 8,342 -- --
Net change in unrealized (loss) on
securities available for sale,
net (Note 2) -- -- -- --
-----------------------------------------------
Balance, June 30, 1996 5,501 5,138,066 5,856,546 (259,781)
Net income
Dividends on common stock, $.215
per share -- -- 871,158 --
ESOP common stock released for
allocation -- -- (204,177) --
Amortization of RRP contributions -- 75,813 -- 62,150
Purchase of 33,262 shares of
treasury stock -- -- -- --
Treasury stock reissued to fund
stock options exercised (1,904
shares) (Note 9) -- (8,063) -- --
Additional shares issued in two-for-
one stock split effected in the
form of a stock dividend 5,502 (5,502) -- --
Common stock issued to fund stock
options exercised (400 shares)
(Note 9) 4 1,996 -- --
Net change in unrealized gain (loss)
on securities available for
sale, net (Note 2) -- -- -- --
-----------------------------------------------
BALANCE, JUNE 30, 1997 $11,007 $5,202,310 $6,523,527 $(197,631)
===============================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Unrealized
Common Gain (Loss) on
Stock Securities
Acquired by Treasury Available for
RRP Stock Sale, Net Total
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, June 30, 1994 $(158,712) $ -- $(214,822) $ 8,811,428
Net income -- -- -- 630,886
Dividends on common stock, $.15
per share -- -- -- (40,592)
ESOP common stock released for
allocation -- -- -- 98,025
Amortization of RRP contributions 86,910 -- -- 86,910
Purchase of 17,000 shares of
treasury stock -- (131,313) -- (131,313)
Net change in unrealized (loss) on
securities available for sale, net
(Note 2) -- -- 84,243 84,243
-------------------------------------------------
Balance, June 30, 1995 (71,802) (131,313) (130,579) 9,539,587
Net income -- -- -- 894,840
Dividends on common stock, $.65 per
share -- -- -- (155,361)
ESOP common stock released for
allocation -- -- -- 124,672
Amortization of RRP contributions 47,489 -- -- 47,489
Purchase of 66,024 shares of treasury
stock -- (612,453) -- (612,453)
Treasury stock reissued to fund stock
options exercised (1,904 shares) -- 14,966 -- 9,520
(Note 9)
Issuance of common stock (856 RRP (8,346) -- -- --
shares)
Net change in unrealized (loss) on
securities available for sale,
net (Note 2) -- -- 96,597 96,597
------------------------------------------------
Balance, June 30, 1996 (32,659) (728,800) (33,982) 9,944,891
Net income -- -- -- 871,158
Dividends on common stock, $.215
per share -- -- -- (204,177)
ESOP common stock released for
allocation -- -- -- 137,963
Amortization of RRP contributions 25,434 -- -- 25,434
Purchase of 33,262 shares of
treasury stock -- (344,085) -- (344,085)
Treasury stock reissued to fund
stock options exercised (1,904
shares) (Note 9) -- 17,583 -- 9,520
Additional shares issued in two-for-
one stock split effected in the
form of a stock dividend -- -- -- --
Common stock issued to fund stock
options exercised (400 shares)
(Note 9) -- -- -- 2,000
Net change in unrealized gain (loss)
on securities available for
sale, net (Note 2) -- -- 94,474 94,474
------------------------------------------------
Balance, June 30, 1997 $(7,225) $(1,055,302) $60,492 10,537,178
================================================
</TABLE>
See Notes to Consolidated Financial Statements.
21 <PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 871,158 $ 894,840 $ 630,886
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 37,235 30,396 19,291
(Gain) loss on sale of securities available
for sale 2,525 47,750 (36,250)
(Gain) on sale of real estate (3,624) -- (11,388)
Stock dividend on FHLB stock -- (20,800) --
ESOP and RRP expense 163,397 172,161 184,935
Deferred loan fees, net 28,762 40,201 67,087
Provision for loan losses 121,000 249,000 --
Purchases of loans for resale (26,875,167) (9,299,768) --
Proceeds from the sale of loans 26,875,167 9,299,768 --
Deferred taxes 14,000 (61,000) (12,935)
Change in:
Accrued interest receivable (81,269) (121,142) (98,714)
Other assets 21,408 7,663 (21,336)
Income taxes payable (90,994) 73,993 17,001
Other liabilities (173,416) (74,853) 185,521
------------ ----------- ----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 910,182 1,238,209 924,098
------------ ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturity of securities held to maturity 84,403 1,551,800 1,490,000
Maturity of securities available for sale -- 150,000 225,000
Proceeds from sales of securities
available for sale 147,425 2,912,584 113,750
Purchase of securities held to maturity -- (1,582,188) (994,769)
Purchase of securities available for sale (240,703) (181,500) (101,610)
Purchase of FHLB stock -- (306,000) --
Principal payments received on mortgage-
backed securities 289,558 515,135 286,986
Net (increase) decrease in loans
outstanding 1,705,318 (3,699,752) 367,469
Purchase of loans to be held in portfolio (8,557,098) (13,589,856) (11,751,736)
Proceeds from sale of real estate 230,240 -- 234,778
Purchase of premises and equipment (26,056) (68,541) (85,369)
Investment in other assets -- (50,000) (250,000)
------------ ----------- ----------
NET CASH (USED BY) INVESTING
ACTIVITIES (6,366,913) (14,348,318) (10,465,501)
------------ ----------- ----------
</TABLE>
(Continued)
22<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits $ 6,428,393 $ 7,040,438 $ 4,066,421
Advances from the Federal Home Loan
Bank 13,500,000 9,500,000 15,600,000
Repayment of advances from the
Federal Home Loan Bank (11,856,531) (4,759,955) (6,892,025)
Net increase in advances from
borrowers for taxes and insurance 280,623 240,838 37,790
Proceeds from the issuance of common
stock for stock options exercised 2,000 -- --
Net proceeds from reissuance of treasury
stock 9,520 9,520 --
Purchase of treasury stock (344,085) (612,453) (131,313)
Dividends paid (191,402) (144,493) --
------------ ----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 7,828,518 11,273,895 12,680,873
------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 2,371,787 (1,836,214) 3,139,470
CASH AND CASH EQUIVALENTS
Beginning 2,271,132 4,107,346 967,876
------------ ----------- -----------
End $ 4,642,919 $ 2,271,132 $ 4,107,346
============ =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash payments for:
Income taxes $ 454,174 $ 170,523 $ 323,000
Interest on deposits and advances
from Federal Home Loan Bank 4,093,029 3,718,737 2,637,802
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Real estate acquired in settlement
of loans $ -- $ 226,616 $ --
</TABLE>
See Notes to Consolidated Financial Statements.
23<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business: GFS Bancorp, Inc. (the Company) located in Grinnell,
Iowa, owns 100% of the outstanding capital stock issued by
Grinnell Federal Savings Bank (the Bank). The only significant
assets of the Company are investment securities and stock of the
Bank. Its business consists primarily of the operation of the
Bank.
The Bank provides a full range of banking services to individual
and corporate customers from its office located in Grinnell,
Iowa. The Bank's wholly-owned subsidiary, Grinnell Service
Corporation, had no significant operations during 1997, 1996 or
1995.
Principles of consolidation: The consolidated financial
statements include the accounts of GFS Bancorp, Inc., Grinnell
Federal Savings Bank and its wholly-owned subsidiary, Grinnell
Service Corporation. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Accounting estimates and assumptions: The consolidated
financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the
financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the disclosures of contingent assets and
liabilities as of the date of the financial statements and
revenues and expenses for the period. Actual results could
differ from those estimates.
Securities: Securities which management has the intent and the
Company has the ability to hold to maturity are carried at cost,
adjusted for purchase premiums or discounts. Purchase premiums
or discounts are recognized in interest income using the
interest method over the period to maturity.
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. Securities available for sale
are carried at fair value. Unrealized gains or losses, net of
the related deferred tax effect, are reported as increases or
decreases in stockholders' equity. Realized gains and losses are
determined using the specific identification method of specific
securities sold and are included in earnings.
Loans receivable: Loans are stated at unpaid principal
balances, less the allowance for loan losses, deferred loan
origination fees and discounts.
24<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
A valuation allowance is provided for estimated losses on loans
when a probable and reasonably estimable loss or decline in
value occurs. Major loans are reviewed periodically to determine
potential problems at an early date. The Company's experience
has shown that foreclosures on loans can result in some loss.
Therefore, in addition to an allowance for specific loans, the
Company makes a provision for losses based in part on experience
and part on prevailing market conditions. Additions to the
allowance are charged to earnings. Although management uses the
best information available to make its evaluation, future
adjustments to the allowance may be necessary if there are
significant changes in economic conditions. Impaired loans are
measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's desirable market price or the
fair value of the collateral if the loan is collateral
dependent. A loan is impaired when it is probable the creditor
will be unable to collect all principal and interest payments
due in accordance with the terms of the loan agreement.
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.
Real estate acquired in settlement of loans: Real estate
acquired in the settlement of loans, or where the loan is
in-substance foreclosed, is initially recorded at the lower of
fair value (less estimated costs to sell the real estate) or the
loan balance. Costs relating to improvement of the property are
capitalized, whereas costs relating to the holding of the
property are expensed. Valuation allowances are established and
adjusted periodically by management if the carrying value of the
property exceeds its fair value, less estimated costs to sell
the property.
Premises and equipment: Premises and equipment are carried at
cost, less accumulated depreciation. Buildings and furniture,
fixtures and equipment are depreciated using the straight-line
method over the estimated useful lives of the assets, which
range from 5 to 50 years.
Income taxes: Deferred taxes are provided on an asset and
liability method whereby deferred tax assets are recognized for
deductible temporary differences, and operating loss or tax
credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the
differences between the amount of assets and liabilities
recorded for income tax and financial reporting purposes.
Deferred tax assets are reduced by a valuation allowance when
management determines that 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.
The Company and its wholly-owned subsidiary file a consolidated
federal income tax return and separate state returns.
25<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
Earnings per share: Earnings per share for the years ended June
30, 1997, 1996 and 1995 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 years ended June 30, 1997, 1996 and 1995 was
1,030,266, 1,037,930 and 1,048,722 shares, respectively. The
amount set forth above includes restricted stock issued in
accordance with the recognition and retention plan established
by the Company. In addition, in 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 not been
committed to be released are not considered outstanding for the
purpose of computing earnings per share.
Common stock split: On April 11, 1997, the Board of Directors
declared a two-for-one stock split on the Company's common stock
effected in the form of a stock dividend to holders of record on
April 25, 1997. Common stock issued and additional paid-in
capital as of June 30, 1996 have been restated to reflect this
split.
All share and per share data, including stock option
information, is stated to reflect the split.
Stock option plan: In October 1995, the FASB issued SFAS No.
123, "Accounting for Stock-Based Compensation," which establishes
a fair value based method for financial accounting and reporting
for stock-based employee compensation plans and for transactions
in which an entity issues its equity instruments to acquire
goods and services from nonemployees. However, the new standard
allows compensation to continue to be measured by using the
intrinsic value based method of accounting prescribed by
Accounting Principle Board opinion (APB) No. 25, "Accounting for
Stock Issued to Employees," but requires expanded disclosures.
The Company has elected to apply the intrinsic value based
method of accounting for stock options issued to employees.
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 grant over the amount an employee must pay
to acquire the stock.
Fair value of financial instruments: Financial Accounting
Standards Board (FASB) Statement No. 107, "Disclosures About Fair
Value of Financial Instruments," requires disclosure of fair
value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present
value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could
not be realized in immediate settlement of the instruments.
Statement No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
26<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
The following methods and assumptions were used by the Company
in estimating the fair value of its financial instruments:
Cash and amounts due from depositing institutions: The carrying
amount reported in the consolidated balance sheets for cash
approximates fair value.
Securities: Fair values for all securities are based on quoted
market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of
comparable instruments.
Stock in Federal Home Loan Bank: The fair value of Federal Home
Loan Bank stock approximates its carrying amount.
Loans receivable, net: For variable-rate loans that reprice
frequently and that have experienced no significant change in
credit risk, fair values are based on carrying values. Fair
values for all other loans are estimated based on discounted
cash flows, using interest rates currently being offered for
loans with similar terms to borrowers with similar credit
quality.
Accrued interest receivable: The fair value of accrued interest
receivable approximates its carrying amount.
Off-balance sheet instruments: Fair values for off-balance
sheet instruments (guarantees, letters of credit, and lending
commitments) are based on quoted fees currently charged to enter
into similar agreements, taking into account the remaining terms
of the agreements and the counterparties' credit standing.
Deposits: Fair values disclosed for demand savings and money
market deposits equal their carrying amounts, which represent
the amount payable on demand. Fair values for certificates of
deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on
certificates to a schedule of aggregate expected monthly
maturities on time deposits.
Federal Home Loan Bank advances: The fair values of all Federal
Home Loan Bank advances approximate their carrying amounts.
27<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
NOTE 2. SECURITIES
Securities are summarized below:
<TABLE>
<CAPTION>
June 30, 1997
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
cost Gains (Losses) Market Value
----------------------------------------------------
<S> <C> <C> <C> <C>
Securities held to maturity:
U.S. agency securities $1,497,785 $ 3,950 $ (8,510) $1,493,225
====================================================
Mortgage-backed securities $3,145,696 $67,161 $(11,387) $3,201,470
====================================================
<CAPTION>
June 30, 1997
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
cost Gains (Losses) Market Value
----------------------------------------------------
<S> <C> <C> <C> <C>
Securities available for sale:
Mutual funds $ 832,245 $ -- $(60,045) $ 772,200
Corporate stocks 986,252 152,038 1,000 1,137,290
----------------------------------------------------
$1,818,497 $152,038 $(61,045) $1,909,490
====================================================
<CAPTION>
June 30, 1996
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
cost Gains (Losses) Market Value
----------------------------------------------------
<S> <C> <C> <C> <C>
Securities held to maturity:
U.S. agency securities $1,497,188 $ -- $(25,313) $1,471,875
Certificate of deposit 85,000 -- -- 85,000
----------------------------------------------------
$1,582,188 $ -- $(25,313) $1,556,875
Mortgage-backed securities $3,435,254 $44,597 $(74,927) $3,404,924
====================================================
<CAPTION>
June 30, 1996
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
cost Gains (Losses) Market Value
----------------------------------------------------
<S> <C> <C> <C> <C>
Securities available for sale:
Mutual funds $ 832,245 $ -- $ (75,645) $ 756,600
Corporate stocks 895,500 49,500 (28,837) 916,163
----------------------------------------------------
$1,727,745 $ 49,500 $(104,482) $1,672,763
====================================================
</TABLE>
28<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
The contractual maturities as of June 30, 1997 of debt securities are shown
below. Maturities will differ from contractual maturities in mortgage backed
securities because mortgages underlying the securities may be called or
prepaid without call or prepayment penalties. Therefore, these securities are
not included in the maturity categories in the following maturity summary.
<TABLE>
<CAPTION>
Securities Held to Maturity
----------------------------------------
Weighted
Amortized Estimated Average
Cost Market Value Interest Rate
----------------------------------------
<S> <C> <C> <C>
Due in one year or less $ -- $ -- --
Due after one year through five years 1,497,785 1,493,225 6.326%
-----------------------
$1,497,785 $1,493,225
=======================
</TABLE>
Gross realized gains and gross realized losses on sales of
available for sale securities were none and $2,525,
respectively, in 1997; $43,999 and $91,749, respectively, in
1996 and $36,250 and none, respectively, in 1995.
Mortgage-backed securities with a market value of approximately
$2,874,000 and U.S. agency securities with a market value of
approximately $992,000 as of June 30, 1997 were pledged as
collateral to secure certain deposits.
29<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
NOTE 3. LOANS RECEIVABLE
Loans receivable consisted of the following:
<TABLE>
<CAPTION>
June 30,
-------------------------
1997 1996
-------------------------
<S> <C> <C>
Real estate mortgage loans:
Secured by one to four family residences $53,390,705 $49,015,217
Secured by multi-family real estate 11,345,547 11,589,593
Secured by commercial real estate 8,786,447 8,183,912
Construction loans and land loans 4,311,310 3,720,627
----------- -----------
TOTAL REAL ESTATE MORTGAGE LOANS 77,834,009 72,509,349
----------- -----------
Consumer and other loans:
Secured by deposit accounts 56,212 41,899
Automobile loans 751,828 669,000
Home improvement loans 12,411 7,337
Home equity line-of-credit loans 419,396 274,145
Commercial loans 1,169,353 1,297,422
Other loans 259,714 295,125
----------- -----------
TOTAL CONSUMER AND OTHER LOANS 2,668,914 2,584,928
----------- -----------
TOTAL LOANS 80,502,923 75,094,277
Less:
Allowance for loan losses (645,757) (641,205)
Undisbursed portion of mortgage loans (1,146,601) (2,473,287)
Deferred loan fees (235,651) (206,889)
----------- -----------
$78,474,914 $71,772,896
=========== ===========
</TABLE>
The Company's lending activity consists primarily of first
mortgage real estate loans made to individuals and businesses in
the Grinnell, Iowa area. Approximately 47% of the Company's real
estate mortgage loans consists of loans purchased outside of the
Company's primary lending area. These loans are secured by the
underlying properties and are subject to the same underwriting
guidelines as loans originated internally. The concentration of
these out of lending area real estate mortgage loans are as
follows:
<TABLE>
<CAPTION>
One-to-four Multi- Construction
Family Family Commercial and Land Total
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Wisconsin $ 5,132,734 $6,977,162 $4,922,628 $2,672,053 $19,704,577
Texas 959,183 -- -- -- 959,183
Colorado 68,729 -- 372,283 -- 441,012
Central Iowa 10,073,846 2,510,012 1,160,962 46,250 13,791,070
Other areas 655,616 437,879 538,180 189,000 1,820,675
----------- ---------- ---------- ---------- -----------
$16,890,108 $9,925,053 $6,994,053 $2,907,303 $36,716,517
=========== ========== ========== ========== ===========
</TABLE>
30<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
The above table includes loans purchased from a mortgage banking
firm headquartered in Madison, Wisconsin. The Company has an
exclusive agreement with this firm in which the Company has
first refusal on any real estate loans generated, 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 Company has
sold, and anticipates that it will continue to sell, a majority
participation interest in these loans to financial institutions
located in Iowa and contiguous states. The Company's net
investment in loans generated under this agreement as of June
30, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997
---------------------------------
UNDER THE
ABOVE
AGREEMENT OTHERS TOTAL
---------------------------------
<S> <C> <C> <C>
Outstanding principal balance of loans
purchased and serviced by the Company $46,407,544 $853,564 $47,261,108
Partial interest sold to other financial
institutions 33,222,126 443,032 33,665,158
-----------------------------------
NET INVESTMENT $13,185,418 $410,532 $13,595,950
===================================
<CAPTION>
1996
---------------------------------
UNDER THE
ABOVE
AGREEMENT OTHERS TOTAL
---------------------------------
<S> <C> <C> <C>
Outstanding principal balance of loans
purchased and serviced by the Company $17,528,669 $825,289 $18,353,958
Partial interest sold to other financial
institutions 7,779,891 412,644 8,192,535
-----------------------------------
NET INVESTMENT $ 9,748,778 $412,645 $10,161,423
===================================
</TABLE>
Loan customers of the Company include certain executive
officers, directors, and their related interests. All loans to
this group were made in the ordinary course of business at
prevailing terms and conditions. Such loans at June 30, 1997 and
1996 totaled approximately $710,000 and $736,000, respectively.
During the years ended June 30, 1997 and 1996, new loans to this
group totaled approximately $74,000 while repayments totaled
approximately $100,000.
31<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
Activity in the allowance for loan losses is summarized as
follows:
<TABLE>
<CAPTION>
Years ended June 30,
------------------------------------
1997 1996 1995
------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 641,205 $399,705 $399,705
Provision charged to income 121,000 249,000 --
Charge-offs (116,448) (7,500) --
Recoveries -- -- --
--------- -------- --------
Balance, end of year $ 645,757 $641,205 $399,705
========= ======== ========
</TABLE>
Impaired loans as of June 30, 1997 and 1996 totaled
approximately $922,000 and $735,000, respectively. The total
allowance for loan losses specifically related to these loans
was none and $109,000 on June 30, 1997 and 1996, respectively.
Interest income on impaired loans of $33,567 and none was
recognized for cash payments received for the years ended June
30, 1997 and 1996, respectively.
NOTE 4. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
June 30,
-------------------------
1997 1996
-------------------------
<S> <C> <C>
Land $ 17,483 $ 17,483
Bank building 240,256 240,256
Furniture, fixtures and equipment 193,106 167,050
------------------------
450,845 424,789
Less accumulated depreciation (227,609) (190,374)
------------------------
$ 223,236 $ 234,415
========================
</TABLE>
NOTE 5. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consisted of the following:
<TABLE>
<CAPTION>
June 30,
-----------------------
1997 1996
-----------------------
<S> <C> <C>
Securities $ 21,207 $ 25,526
Loans receivable 475,814 387,643
Mortgage-backed securities 23,640 26,223
----------------------
$520,661 $439,392
======================
32<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
NOTE 6. DEPOSITS
The scheduled maturities of certificate accounts are as follows
as of June 30, 1997:
1998 $27,758,883
1999 10,808,313
2000 1,930,865
2001 292,592
2002 626,216
Thereafter 242,807
-----------
$41,659,676
===========
Certificate of deposit accounts with balances of $100,000 and
above totaled $6,501,687 and $3,812,515 at June 30, 1997 and
1996, respectively. These certificates, at June 30, 1997, have
scheduled maturities of $501,063 in 3 months or less, $2,728,373
from 3 to 6 months, $1,318,771 from 6 to 12 months and
$1,953,480 beyond 12 months.
Interest expense on deposits is summarized as follows:
</TABLE>
<TABLE>
<CAPTION>
Years ended June 30,
------------------------------------
1997 1996 1995
------------------------------------
<S> <C> <C> <C>
NOW accounts $ 183,150 $ 63,698 $ 34,290
Money market deposit accounts 327,749 213,988 67,300
Passbook savings accounts 97,510 87,891 95,112
Certificates of deposit 2,324,016 2,181,293 1,887,548
---------- ---------- ----------
2,932,425 2,546,870 2,084,250
Less penalties for early withdrawals (5,168) (1,754) (5,455)
---------- ---------- ----------
INTEREST ON DEPOSITS $2,927,257 $2,545,116 $2,078,795
========== ========== ==========
</TABLE>
Noninterest bearing deposit accounts were approximately
$1,349,000 and $1,026,000 as of June 30, 1997 and 1996,
respectively.
NOTE 7. ADVANCES FROM FEDERAL HOME LOAN BANK
At June 30, 1997, advances from the Federal Home Loan Bank of
Des Moines consisted of various fixed rate advances with
interest rates ranging from 5.33% to 6.74%. These advances are
due at various dates from August 1997 through November 2008. The
advances are secured by the FHLB stock and real estate loans at
least equal to 150% of the total advances outstanding. Certain
advances are subject to repayment penalties. During the year
ended June 30, 1997, the maximum advances outstanding at a month
end were $20,961,466.
33<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
Following is a summary of future maturities of advances from the
Federal Home Loan Bank of Des Moines:
<TABLE>
<CAPTION>
June 30, 1997
---------------------
Weighted
Amount Rate
---------------------
<S> <C> <C>
Year ending June 30:
1998 $ 6,060,588 6.04%
1999 1,064,943 5.98
2000 4,569,619 6.35
2001 8,524,639 6.12
2002 80,031 5.98
Thereafter 661,646 5.98
-----------
$20,961,466
===========
</TABLE>
NOTE 8. INCOME TAXES AND RETAINED EARNINGS
Under the Internal Revenue Code and similar sections of Iowa
law, the Bank was allowed a special bad debt deduction related
to additions to tax bad debt reserves established for the
purpose of absorbing losses. Through June 30, 1996, the
provisions of the Code permitted the Bank to deduct from taxable
income an allowance for bad debts based on 8% of taxable income
before such deduction or actual loss experience. The Bank used
the percentage of taxable income method to compute its
deductions for the years ended June 30, 1996 and 1995.
Legislation passed in 1996 eliminated the percentage of taxable
income method as an option for computing bad debt deductions for
the year ended June 30, 1997 and in all future years. The Bank
will still be permitted to take deductions for bad debts, but
will be required to compute such deductions using an experience
method.
The Bank will also have to recapture its tax bad debt reserves
which have accumulated since June 30, 1988 amounting to
approximately $89,000. The tax associated with the recaptured
reserves is approximately $33,000 and will be paid over a six
year period beginning June 30, 1997. Deferred income taxes have
been previously established for the taxes associated with the
recaptured reserves.
Retained earnings at June 30, 1997 and 1996 include
approximately $1,350,000 for which no deferred federal income
tax liability has been recognized. These amounts represent an
allocation of income to bad debt deductions for tax purposes
only. Reduction of amounts so allocated for purposes other than
tax bad debt losses or adjustments arising from carryback of net
operating losses would create income for tax purposes only,
which would be subject to the then current corporate income tax
rate. The unrecorded deferred tax liability on the above amount
for financial statement purposes was approximately $500,000 at
June 30, 1997 and 1996.
34<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
Taxes on income are comprised as follows:
<TABLE>
<CAPTION>
Years ended June 30,
--------------------------------
1997 1996 1995
--------------------------------
<S> <C> <C> <C>
Current $363,180 $244,517 $328,585
Deferred 14,000 (61,000) (12,935)
--------------------------------
$377,180 $183,517 $315,650
================================
</TABLE>
Taxes on income differ from the "expected" amounts computed by
applying the federal income tax rate of 34 percent to income
before taxes for the following reasons:
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------
1997 1996 1995
-----------------------------------------------------------
PERCENT PERCENT PERCENT
OF PRETAX OF PRETAX OF PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected"
taxes on income $424,400 34.0% $366,600 34.0% $321,800 34.0%
State taxes, net of federal
benefit 32,500 2.6 31,700 2.9 28,600 3.0
Tax-exempt interest and
dividends (15,200) (1.2) (27,000) (2.5) (261,00) (2.8)
Resolution of tax
contingency -- -- (137,000) (12.7) -- --
ESOP 25,800 2.1 20,200 1.9 10,200 1.1
Low income housing credit (42,100) (3.4) (30,500) (2.8) -- --
Other (48,220) (3.9) (40,483) (3.8) (18,850) (2.0)
-----------------------------------------------------------
PROVISION FOR
INCOME TAXES $377,180 30.2 $183,517 17.0 $315,650 33.3
===========================================================
</TABLE>
Temporary differences between the financial statements carrying
amounts and the tax basis of assets and liabilities that give
rise to the deferred tax liability at June 30, 1997 and 1996 are
as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------
1997 1996
-----------------------
<S> <C> <C>
Federal Home Loan Bank stock $ 181,700 $ 181,700
Premises and equipment 21,600 16,900
Deferred compensation agreements (45,700) (54,000)
Loan fees deferred for financial reporting
purposes (6,700) (9,000)
Allowance for loan losses (211,600) (204,400)
ESOP and RRP plan (15,000) (19,800)
Other 149,200 96,600
-----------------------
DEFERRED INCOME TAX LIABILITY $ 73,500 $ 8,000
=======================
</TABLE>
35<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
NOTE 9. EMPLOYEE BENEFITS
Employee pension plan: The Bank participates in a multi-
employer defined benefit pension plan covering substantially all
employees. There was no pension expense for the years ended June
30, 1997, 1996 and 1995.
Recognition and retention plan (RRP): The Company has
established a Recognition and Retention Plan as a method of
providing directors, officers and other key employees of the
Company with a proprietary interest in the Company in a manner
designed to encourage such persons to remain with the Company.
Eligible officers and other key employees of the Company earn
(i.e., become vested in) shares of common stock covered by the
award at a rate of 25% per year starting one year from the date
of the grant. Nonemployee directors vest at a rate of 33% per
year. Under the RRP, 42,320 shares had been awarded to
directors, officers and other key employees as of June 30, 1997.
Expense of approximately $25,000, $47,000 and $87,000 was
recorded for the RRP for the years ended June 30, 1997, 1996 and
1995, respectively.
Employee stock ownership plan (ESOP): In conjunction with the
stock conversion, the Company established an ESOP for eligible
employees. Employees with at least 1,000 hours of annual service
with the Company and who have attained age 21 are eligible to
participate. The ESOP borrowed $423,200 from the Company to
purchase up to 8% of the common stock issued in the conversion
or 84,640 shares. Collateral for the loan is the common stock
purchased by the ESOP. The loan will be repaid principally from
the Bank's discretionary contributions to the ESOP over a period
of seven years. The interest rate for the loan is 6%. Shares
purchased by the ESOP will be held in a suspense account for
allocation among participants as the loan is repaid. Expense of
$137,963, $124,672 and $98,025 was recorded relative to the ESOP
for the years ended June 30, 1997, 1996 and 1995, respectively.
Contributions to the ESOP and shares released from the suspense
account in an amount proportional to the repayment of the ESOP
loan will be 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 will be 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. The Company's contributions
to the ESOP are not fixed, as benefits payable under the ESOP
cannot be estimated.
36<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
As shares are released from collateral, the Company reports
compensation expense equal to the current market price of the
shares, and the shares become outstanding for earnings per share
calculations. Dividends on the 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 as of June 30 were as follows:
<TABLE>
<CAPTION>
1997 1996
-----------------------
<S> <C> <C>
Allocated shares 34,164 21,118
Shares released for allocation 12,430 13,046
Unreleased shares` 38,046 50,476
-----------------------
TOTAL ESOP SHARES 84,640 84,640
=======================
Fair value of unreleased shares at June 30 $516,000 $511,000
</TABLE>
1993 stock option plan: The Board of Directors of the Company
has adopted the GFS Bancorp, Inc. 1993 Stock Option and
Incentive Plan (the "Plan"). The number of options authorized
under the Plan is 10% of the common stock issued in the
conversion (105,800 shares). 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. The Company's Compensation Committee has granted options
for 105,800 shares to certain officers, directors and employees,
primarily at an exercise price of $5 per share. The stock
options are exercisable through January 5, 2004. Options for
2,304 and 1,904 shares were exercised during the years ended
June 30, 1997 and 1996 and no options were exercised during
1995, leaving 101,592 options outstanding.
1997 stock option plan: The Board of Directors of the Company
has adopted the GFS Bancorp, Inc. 1997 Stock Option and
Incentive Plan (the "Plan"). The number of options authorized
under the Plan is 10% of the common stock issued and outstanding
on the plan date (98,870 shares). 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 50% 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. The Company's Compensation Committee has
granted options for 61,920 shares to certain officers and
directors, at an exercise price of $10.4375 pershare, the market
value at the date of the grant. The stock options are
exercisable through February 19, 2007.
37<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
The table below reflects option activity for the period
indicated:
Year Ended
June 30, 1997
-------------
Balance at beginning of period --
Granted 61,920
Exercised --
-------
Balance at end of period 62,920
=======
Weighted average fair value per option of
options granted during the year $ 3.60
=======
Options exercisable 61,920
=======
Remaining shares available for grant 36,950
=======
Had compensation cost for the Plan been determined based on the
grant date fair values of awards (the method described in FASB
Statement No. 123), the approximate June 30, 1997 reported net
income and earnings per common share would have been decreased
to the pro forma amounts shown below. The June 30, 1996 and June
30, 1995 amounts for net income and earnings per common share
would not have been affected since the Plan was adopted during
the year ending June 30, 1997.
June 30, 1997
-------------
Net income:
As reported $871,158
Pro forma 730,905
Earnings per common share:
As reported $ .85
Proforma .71
The fair value of the options is estimated at the grant date
using the Black-Scholes option-pricing model with the following
weighted-average assumptions: dividend rate of 2.05%, price
volatility of 25%, risk-free interest rate of 6.36% and expected
lives of 8 years.
Salary continuation plan: The Company has a nonqualified
deferred compensation plan for the benefit of its Chairman of
the Board of Directors. The nonqualified plan provides for
annual retirement benefits equal to $30,000 per year for a
period of seven years, provided he meets certain employment and
length of service requirements. The Company recognized plan
expenses of $33,945, $22,256 and $30,240 for the years ending
June 30, 1997, 1996 and 1995, respectively.
38<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
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% of more
of the common stock.
NOTE 10. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory -
and possible additional discretionary - actions by regulators
that, if undertaken, could have a direct material effect on the
Bank's 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.
Quantitative measures established by regulation to ensure
capital adequacy require the Bank to maintain minimum amounts
and ratios (set forth in the table below) of total, Tier I
capital (as defined in the regulations) to risk-weighted assets
(as defined), of Tier I capital (as defined) to average assets
(as defined) and tangible capital to adjusted assets. Management
believes, as of June 30, 1997, the Bank meets all capital
adequacy requirements to which it is subject.
The Bank's actual capital amounts and ratios are also presented
in the table.
<TABLE>
<CAPTION>
To Be Well Capitalized
Under Prompt
Minimum for Capital Corrective Action
Actual Adequacy Purposes Provisions
-------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------------
(000's) (000's) (000's)
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1997:
Total capital (to risk
weighted assets) $9,526 18.3% $4,162 8.0% $5,203 10.0%
Tier 1 Capital (to risk
weighted assets) 8,880 17.1 2,081 4.0 3,122 6.0
Tier 1 (Core) Capital
(to average assets) 8,880 9.8 2,719 3.0 4,532 5.0
Tangible capital (to
adjusted assets) 8,880 9.8 1,360 1.5 -- --
As of June 30, 1996:
Total capital (to risk
weighted assets) $8,962 19.1 $3,744 8.0 $4,680 10.0
Tier 1 Capital (to risk
weighted assets) 8,376 17.9 1,872 4.0 2,808 6.0
Tier 1 (Core) Capital
(to average assets) 8,376 10.2 2,458 3.0 4,096 5.0
Tangible capital (to
adjusted assets) 8,376 10.2 1,229 1.5 -- --
</TABLE>
39<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
The Bank is subject to certain restrictions on the amount of
dividends that may be paid without prior regulatory approval.
At the time of the conversion, the Bank established a
liquidation account in an amount equal to its net worth as of
the date of the latest consolidated financial statements
contained in the final prospectus used to sell the common stock
at June 30, 1993. The liquidation account will be 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.
NOTE 11. PARENT COMPANY FINANCIAL STATEMENTS
Presented below are condensed financial statements for the
parent company, GFS, Bancorp, Inc.:
CONDENSED BALANCE SHEET
JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
-----------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 142,924 $ 277,808
Investment in subsidiary 8,842,775 8,328,948
Securities available for sale, net 1,137,290 916,163
ESOP note receivable 211,600 272,057
Other assets 255,969 280,050
--------------------------
TOTAL ASSETS $10,590,558 $10,075,026
==========================
LIABILITIES, accrued expenses $ 53,380 $ 130,135
--------------------------
STOCKHOLDERS' EQUITY
Common stock 11,007 5,501
Additional paid-in capital 5,202,310 5,138,066
Retained earnings 6,523,527 5,856,546
Less common stock acquired by:
Employee stock ownership plan (197,631) (259,781)
Recognition and retention plan (7,225) (32,659)
Treasury stock, at cost (1,055,302) (728,800)
Net unrealized losses on investments -
subsidiary (37,545) (47,645)
Net unrealized gains on investments -
parent company 98,037 13,663
--------------------------
TOTAL STOCKHOLDERS' EQUITY 10,537,178 9,944,891
--------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $10,590,558 $10,075,026
==========================
</TABLE>
40<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
Condensed Statements of Income
Years Ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------
<S> <C> <C> <C>
Interest and other income $ 80,059 $105,770 $187,345
Operating expenses 121,551 97,391 101,739
---------------------------------
INCOME (LOSS) BEFORE EQUITY IN
NET INCOME OF SUBSIDIARY (41,492) 8,379 85,606
Equity in net income of subsidiary 840,330 846,330 573,230
---------------------------------
INCOME BEFORE INCOME TAXES 798,838 854,709 658,836
Provision for income taxes (credits) (72,320) (40,131) 27,950
---------------------------------
NET INCOME $871,158 $894,840 $630,886
=================================
</TABLE>
41<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 871,158 $894,840 $630,886
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed net income of
subsidiary (340,330) (846,330) (573,230)
(Gain) loss on sale of securities
available for sale 2,525 11,956 (36,250)
Decrease in other assets 24,081 21,950 10,000
Increase (decrease) in other liabilities (135,530) 59,930 7,782
Other -- -- (5,897)
------------------------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 421,904 142,346 33,291
------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale (240,703) (181,500) (541,299)
Proceeds from maturity and sales of
securities available for sale 147,425 652,684 1,103,750
Increase in other assets -- (50,000) (250,000)
Payments received on ESOP debt 60,457 60,457 60,457
------------------------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (32,821) 481,641 372,908
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance on common stock for
stock options exercised 2,000 -- --
Net proceeds from reissuance of treasury
stock 9,520 9,520 --
Purchase of treasury stock (344,085) (612,453) (131,313)
Dividends paid (191,402) (144,493) --
------------------------------
NET CASH (USED IN) FINANCING
ACTIVITIES (523,967) (747,426) (131,313)
------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (134,884) (123,439) 274,886
CASH AND CASH EQUIVALENTS
Beginning 277,808 401,247 126,361
------------------------------
Ending $ 142,924 277,808 401,247
==============================
</TABLE>
42<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
NOTE 12. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial
instruments as of June 30, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1996
--------------------------------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------------------------------------------------------
(Nearest 000) (Nearest 000) (Nearest 000) (Nearest 000)
<S> <C> <C> <C> <C>
Financial assets:
Cash and amounts due from
depository institutions $ 4,643 $ 4,643 $ 2,271 $ 2,271
Securities 6,553 6,604 6,690 6,635
Stock in FHLB 1,159 1,159 1,159 1,159
Loans receivable, net 78,475 78,648 71,773 71,824
Accrued interest receivable 521 521 439 439
Financial liabilities:
Deposits 59,551 59,657 53,122 53,330
Advances from FHLB 20,961 20,961 19,318 19,318
Off balance sheet financial
instruments, commitments
to extend credit -- -- -- --
</TABLE>
NOTE 13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments
consist primarily of commitments to extend credit. Those
instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the
statement of financial condition. The contract ornotional
amounts of those instruments reflect the extent of involvement
the Company has in particular classes of financial instruments.
The Company uses the same credit policies in making commitments
and conditional obligations as they do for on-statement of
financial condition instruments. The Company requires collateral
or other security to support financial instruments with credit
risk.
At June 30, 1997 the Company had outstanding loan commitments
totaling $893,000. The outstanding loan commitments consisted of
$206,000 of fixed rate loan commitments and $687,000 of
adjustable rate loan commitments. The Company had $529,000
commitments for unused lines of credit.
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. 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
above do not necessarily represent future cash requirements. The
Company evaluates each customer's credit worthiness 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 counterparty. Collateral
held varies but normally includes real estate and personal
property.
43<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
NOTE 14. PENDING ACCOUNTING PRONOUNCEMENTS AND REGULATIONS
In February 1997, the FASB issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS No.
128"). SFAS No. 128 applies to all entities that have issued
publicly-held common stock or potential common stock. SFAS No.
128 requires the entities to present basic earnings per share
and diluted earnings per share on the face of the statements of
income. Basic earnings per share replaces "primary" earnings per
share and diluted earnings per share replaces "fully diluted"
earnings per share. The Company does not expect SFAS No. 128 to
materially affect its computation of earnings per share and
since the requirements of SFAS No. 128 are disclosure related,
its implementation will have no impact on the Company's
financial condition or results of operations.
In February 1997, the FASB issued Statement of Financial
Accounting Standards No. 129, "Disclosure of Information About
Capital Structure" ("SFAS No. 129"). SFAS No. 129 requires
separate disclosure about the capital structure of the entity.
While this statement codifies and contains a few more specifics,
it does not expand, in any significant manner, previously
existing disclosure requirements. SFAS No. 129 is effective for
periods ending after December 15, 1997. As the requirements of
SFAS No. 129 are disclosure related, its implementation will
have no impact on the Company's financial condition or results
of operations.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No.
130"). SFAS No. 130 requires that all items that are components
of comprehensive income defined as "the change in equity [net
assets] of a business enterprise during a period from
transactions and other events and circumstances from nonowner
sources, including all changes in equity during a period except
those resulting from investments by owners and distributions to
owners," be reported in a financial statement that is displayed
with the same prominence as other financial statements.
Companies will be required to (a) classify items of other
comprehensive income by their nature in a financial statement
and (b) display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial
position. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997, and requires reclassification of prior
periods presented. As the requirements of SFAS No. 130 are
disclosure related, its implementation will have no impact on
the Company's financial condition or results of operations.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosure about Segments of an Enterprise
and Related Information ("SFAS No. 131"). SFAS No. 131 requires
that enterprises report certain financial and descriptive
information about operating segments in complete sets of
financial statements of the Company and in condensed financial
statements of interim periods issued to shareholders. It also
requires that a Company report certain information about their
products and services, geographic areas in which they operate
and their major customers. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. As the requirements of
SFAS No. 131 are disclosure related, its implementation will
have no impact on the Company's financial condition or results
of operations.
44
<PAGE>
<PAGE>
STOCKHOLDER INFORMATION
EXECUTIVE OFFICES
1025 Main Street
Grinnell, IA 50112
ANNUAL MEETING
The Annual Meeting of Stockholders will be held on
October 23, 1997 at 9:30 a.m., local time, at the office of
Grinnell Federal Savings Bank located at 1025 Main Street,
Grinnell, Iowa.
ANNUAL REPORT ON FORM 10-KSB
A copy of GFS Bancorp, Inc.'s Annual Report on Form 10-KSB
as filed with the Securities and Exchange Commission may be
obtained without charge upon written request to Steven L. Opsal,
President and Chief Executive Officer, or by calling (515) 236-
3121.
<TABLE>
<CAPTION>
REGISTRAR/TRANSFER AGENT MARKET MAKERS SPECIAL COUNSEL
<S> <C> <C>
First Bankers Trust Co., N.A. Everen Securities, Inc. Housley, Kantarian &
2321 Koch's Lane Robert W. Baird & Co. Bronstein,P.C.
Quincy, IL 62301 Herzog, Heine, Geduld, Inc. Suite 700
Howe, Barnes Investments 1220 19th Street, NW
Washington, DC 20036
</TABLE>
STOCK LISTING
GFS Bancorp, Inc. common stock is traded over the counter
and is listed on the NASDAQ "Small Cap" Market under the symbol
"GFSB." At September 3, 1997 there were 988,242 shares of GFS
Bancorp, Inc. common stock issued and outstanding and there were
approximately 247 holders of record and approximately 505
beneficial holders. The price range of the common stock after
giving retroactive effect for the 2 for 1 stock split for each
quarter of fiscal 1996 and 1997 was as follows:
<TABLE>
<CAPTION>
DIVIDENDS
FISCAL 1996 HIGH LOW DECLARED
- ----------- ---- ----- ----------
<S> <C> <C> <C>
First Quarter $ 9.625 $ 7.625 $0.375
Second Quarter $10.00 $ 9.25 $0.375
Third Quarter $10.375 $ 9.625 $0.375
Fourth Quarter $10.375 $10.00 $0.05
<CAPTION>
DIVIDENDS
FISCAL 1997 HIGH LOW DECLARED
- ----------- ---- ----- ----------
<S> <C> <C> <C>
First Quarter $10.50 $10.125 $0.05
Second Quarter $10.625 $10.125 $0.05
Third Quarter $11.50 $10.125 $0.05
Fourth Quarter $14.25 $11.50 $0.065
</TABLE>
The stock price information set forth in the table above was
provided by the NARD, Inc. High, low and closing prices and
daily trading volume are reported in most major newspapers.
The above quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual
transactions.
45<PAGE>
<PAGE>
GFS BANCORP, INC.
Directors
LeRoy E. Meredith
Chairman of the Board
GFS Bancorp, Inc. and Grinnell Federal Savings Bank
Theodore Mokricky
Vice Chairman of the Board
Executive Director of Continuing Care Facility
David S. Clay
Vice President and Treasurer of Grinnell College
Albert C. Eisenman
Retired Former President of Grinnell Federal Savings Bank
Donald H. Howig
Retired Businessman
Scott A. Jensen
Optometrist and part-owner of Jensen Optometrists
Thomas M. Groth
District Sales Representative
Steven L. Opsal
President and Chief Executive Officer of GFS Bancorp, Inc. and
Grinnell Federal Savings Bank
Katherine A. Rose
Senior Vice President and Chief Financial Officer of
GFS Bancorp, Inc. and Grinnell Federal Savings Bank
Executive Officers
LeRoy E. Meredith
Chairman of the Board
Steven L. Opsal
President and Chief Executive Officer
Katherine A. Rose
Senior Vice President and Chief Financial Officer
William T. Nassif
Senior Vice President and Chief Operating Officer
GRINNELL FEDERAL SAVINGS BANK
Executive Officers
LeRoy E. Meredith
Chairman of the Board
Steven L. Opsal
President and Chief Executive Officer
Katherine A. Rose
Senior Vice President, Treasurer and
Chief Financial Officer
William T. Nassif
Senior Vice President and Chief Operating Officer
46
SUBSIDIARIES OF THE REGISTRANT
--------------------------------------
<TABLE>
<CAPTION>
Percent State of
of Incorporation
Parent Subsidiary Ownership or Organization
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
GFS Bancorp, Inc. Grinnell Federal Savings 100% Federal
Bank
Grinnell Federal Grinnell Service Corporation, 100% Iowa
Savings Bank Inc.
</TABLE>
McGladrey & Pullen, LLP
-----------------------
Certified Public Accountant and Consultants
To the Board of Directors
GFS Bancorp, Inc.
Grinnell, Iowa
We consent to the incorporation by reference in the GFS Bancorp,
Inc. Registration Statement on Form S-8 of GFS Bancorp, Inc.,
pertaining to the GFS Bancorp, Inc. 1997 Stock Option and
Incentive Plan, of our report dated July 30, 1997, which appears
in the annual report on Form 10-KSB of GFS Bancorp, Inc. and
subsidiaries for the year ended June 30, 1997.
McGladrey & Pullen, LLP
Des Moines, Iowa
September 26, 1997
[VROMAN, MCGOWEN, HURST, CLARK & SMITH, P.C. LETTERHEAD]
INDEPENDENT AUDITOR'S CONSENT
-----------------------------
We consent to the incorporation by reference in the Annual
Report on Form 19-KSB under the Securities Exchange Act of 1934
of GFS Bancorp, Inc. for the year ended June 30, 1997 of our
report, dated July 19, 1995, as such report relates to the
financial statements of GFS Bancorp, Inc. for the year ended
June 30, 1995.
/s/ Vroman, McGowan, Hurst, Clark & Smith, P.C.
Des Moines, Iowa
September 17, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-1-1996
<PERIOD-END> JUN-30-1997
<CASH> 334,287
<INT-BEARING-DEPOSITS> 4,308,632
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,909,490
<INVESTMENTS-CARRYING> 4,643,481
<INVESTMENTS-MARKET> 4,694,695
<LOANS> 78,474,914
<ALLOWANCE> 645,757
<TOTAL-ASSETS> 92,063,253
<DEPOSITS> 59,550,776
<SHORT-TERM> 6,060,588
<LIABILITIES-OTHER> 1,013,833
<LONG-TERM> 14,900,878
0
0
<COMMON> 11,007
<OTHER-SE> 10,526,171
<TOTAL-LIABILITIES-AND-EQUITY> 92,063,253
<INTEREST-LOAN> 6,515,512
<INTEREST-INVEST> 623,858
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,138,370
<INTEREST-DEPOSIT> 2,927,257
<INTEREST-EXPENSE> 4,092,654
<INTEREST-INCOME-NET> 3,046,716
<LOAN-LOSSES> 121,000
<SECURITIES-GAINS> (2,525)
<EXPENSE-OTHER> 1,827,576
<INCOME-PRETAX> 1,248,338
<INCOME-PRE-EXTRAORDINARY> 871,158
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 871,158
<EPS-PRIMARY> .85
<EPS-DILUTED> .85
<YIELD-ACTUAL> 8.26
<LOANS-NON> 922,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,100,000
<ALLOWANCE-OPEN> 641,205
<CHARGE-OFFS> 116,448
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 645,757
<ALLOWANCE-DOMESTIC> 384,757
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 261,000
</TABLE>
