SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One):
|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, 1996, 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 .
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Commission File Number: 0-25854
GFSB BANCORP, INC.
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(Name of Small Business Issuer in its Charter)
Delaware 04-2095007
- --------------------------------------------- -------------------
(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
221 West Aztec Avenue, Gallup, New Mexico 87301
- ----------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (505) 722-4361
--------------
Securities Registered Under Section 12(b) of the Exchange Act: None
----
Securities Registered Under Section 12(g) of the Exchange Act:
Common Stock, par value $0.10 per share
---------------------------------------
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 is not contained in this form, 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 issuer's revenues for its most recent fiscal year. $4,918,681.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the average bid and asked prices of such stock on
September 19, 1996, was $8.04 million (574,599 shares at $14.00 per share).
As of September 19, 1996, there were issued and outstanding 901,313 shares
of the registrant's Common Stock.
Transitional Small Business Disclosure format (check one):
Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for Fiscal Year ended June 30,
1996. (Part II)
2. Portions of Proxy Statement for the 1996 Annual Meeting of Stockholders.
(Part III)
<PAGE>
INDEX
PART I Page
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Item 1. Description of Business............................................ 2
Item 2. Description of Property............................................ 22
Item 3. Legal Proceedings.................................................. 22
Item 4. Submission of Matters to a Vote of Security-Holders................ 22
PART II
Item 5. Market for Common Equity and Related Stockholder Matters........... 23
Item 6. Management's Discussion and Analysis or Plan of Operation.......... 23
Item 7. Financial Statements............................................... 23
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................... 23
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act................ 23
Item 10. Executive Compensation............................................ 23
Item 11. Security Ownership of Certain Beneficial Owners and Management.... 23
Item 12. Certain Relationships and Related Transactions.................... 23
Item 13. Exhibits, List and Reports on Form 8-K............................ 24
<PAGE>
PART I
Item 1. Description of Business
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General
GFSB Bancorp, Inc. (the "Company") is a unitary savings and loan holding
company that was incorporated in March 1995 under the laws of the State of
Delaware for the purpose of acquiring all of the common stock of Gallup Federal
Savings Bank ("Gallup Federal" or the "Bank"). This acquisition occurred June
29, 1995 at which time Gallup Federal simultaneously converted from a mutual to
stock institution, sold all of its outstanding capital stock to the Company and
the Company made its initial public offering of common stock. Effective June 29,
1995, the Company completed its initial public offering and sold 948,750 shares
of common stock for $10 per share. The expenses associated with the Conversion
were charged to paid-in capital while $4.5 million of the net proceeds of $9.1
million from the public offering was used to purchase all of the issued and
outstanding stock of the Bank issued pursuant to the Conversion with the
remaining $4.5 million being retained by the Company. This transaction was
accounted for in a manner similar to a pooling of interests, consequently no
goodwill or other intangibles were recorded as a result of this transaction.
Since the primary activities of the Company are those of the Bank, much
of the discussion herein pertains to the Bank, however, comparisons to total
assets, liabilities, etc. are based on the Company's consolidated numbers. As of
June 30, 1996, the Company had total assets of $73.3 million, total deposits of
$46.0 million and stockholders' equity of $15.4 million or 21.0% of total assets
under generally accepted accounting principles ("GAAP"). The only subsidiary of
the Company is the Bank.
The Bank currently has no subsidiaries.
Gallup Federal is a federally chartered capital stock savings bank
located in Gallup, New Mexico. The Bank was founded in 1934 under the name
Gallup Federal Savings and Loan Association. In connection with the Bank's
conversion from a federally chartered mutual savings association to a federally
chartered stock savings bank, the Bank changed its name to Gallup Federal
Savings Bank. The Bank's deposits are federally insured by the Savings
Association Insurance Fund ("SAIF"), as administered by the Federal Deposit
Insurance Corporation ("FDIC").
The Company's business activities to date have been limited to its
investment in the Bank, loans made to the Bank for use in the normal course of
the Bank's business, and a loan made to the Gallup Federal Savings Bank Employee
Stock Ownership Plan ("ESOP") to enable the ESOP to purchase shares of the
Company's common stock in the initial public offering.
The Company offers a variety of financial services to meet the needs of
the communities it serves. The Company's principal business is attracting
deposits from the general public and investing those deposits, together with
funds generated from operations, to originate first mortgages on one- to
four-family residences in its market area. The Bank also originates a limited
number of multi-family, commercial real estate, construction, commercial
business and consumer loans. The Bank intends to materially increase its
origination of loans not secured by one- to four-family residences.
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The principal sources of funds for the Bank's lending activities are
deposits, the amortization, repayment and maturity of loans, mortgage-backed
securities, investment securities and borrowings from the FHLB. Principal
sources of income are interest and fees on loans, mortgage-backed securities,
investment securities, and deposits held in other financial institutions. The
Bank's principal expense is interest paid on deposits and FHLB borrowings.
The Company operates from its main office located at 221 West Aztec
Avenue, Gallup, New Mexico.
Market Area and Competition
The City of Gallup, New Mexico is considered to be the Bank's primary
market area. McKinley County, New Mexico is considered to be the Bank's
secondary market. McKinley County is located in northwestern New Mexico, and
occupies a part of the Colorado Plateau called the San Juan Plateau. More than
half of the people in the County are Native Americans; including Navajos and
Zunis. McKinley County includes the trading and service center of Gallup and the
southeastern edge of the Navajo Indian Reservation. In January 1994, McKinley
County had a population of 66,600. The Bank intends to expand its secondary
market area to adjacent counties, which will include a major portion of the
Navajo Indian Reservation and Apachi County, Arizona.
The general economy of Gallup is centered around the wholesale and
retail trade, public administration, manufacturing, transportation services,
tourism and mining. The production of Indian arts and crafts by smaller
businesses also constitutes a major part of the County's economic base. The
largest single employer in McKinley County is the Bureau of Indian Affairs.
During its sixty-one year existence, the Bank has focused on serving its
customers located in the New Mexico community of Gallup and surrounding
communities in McKinley County. Economic growth in the Bank's market area
remains dependent upon the local economy. In addition, the deposit and loan
activity of the Bank is significantly affected by economic conditions in its
market area. The Bank's principal competitors are financial institutions and
mortgage banking companies, many of which are significantly larger and have
greater financial resources than the Bank. The Bank's competition for loans on a
retail and wholesale basis comes principally from commercial banks, mortgage
brokers, banking and insurance companies. Its competition for deposits has
historically come from commercial banks. In addition, the Bank faces increasing
competition for deposits from non-bank institutions, such as brokerage firms and
insurance companies in such areas as short-term money market funds, corporate
and government securities funds, mutual funds and annuities. The Bank is one of
five savings associations and commercial banks having an office in McKinley
County. The Bank is the only savings association or commercial bank
headquartered in Gallup. The Bank also competes with three local credit unions
and several mortgage banking companies located outside of McKinley County.
Lending Activities
General. The Bank's loan portfolio consists of mortgage loans secured by
one- to four-family residences, and multi-family, commercial real estate,
construction, consumer and commercial business loans.
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<PAGE>
At June 30, 1996, the Bank's loan portfolio totaled $38.7 million. Loans
secured by first mortgages on one- to four-family residences totaled $28.3
million, or 73.01% of the Bank's loan portfolio at June 30, 1996. For its
mortgage loan portfolio, the Bank primarily originates fixed-rate loans with up
to 15-year terms. As part of its asset liability strategy, the Bank recently
began offering more adjustable-rate loan products. In addition, the Bank sells
conventional one- to four-family fixed rate mortgage loans over 15 years in
maturity into the secondary market.
Analysis of Loan Portfolio. The following table sets forth information
concerning the composition of the Bank's loan portfolio in dollar amounts and in
percentages of the total loan portfolio (before deductions for loans in process,
loan participations, deferred loan origination fees and costs and allowances for
losses) as of the dates indicated.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------
1996 1995
------------------------ ------------------------
$ % $ %
--------- ------ ------- ------
(Dollars in Thousands)
Type of Loans:
- --------------
<S> <C> <C> <C> <C>
Residential ............................... $ 29,178 75.34% $25,114 77.66%
Commercial real estate .................... 6,614 17.08 3,759 11.62
Construction:
Residential ............................. 443 1.14 750 2.32
Commercial .............................. 2,617 6.76 270 .83
Commercial business ....................... 1,632 4.21 2,105 6.51
Consumer:
Savings account ......................... 1,141 2.95 899 2.78
Automobile and other .................... 548 1.41 280 .87
Less:
Loans in process ........................ (2,106) (5.44) (272) (.84)
Loan participations sold ................ (710) (1.83) -- --
Deferred loan origination fees
and costs .............................. (320) (0.83) (250) (.77)
Allowance for loan losses ............... (309) (0.80) (316) (.98)
-------- ------ ------- ------
Total loans, net .......................... $ 38,728 100.00% $ 32,339 100.00%
======== ====== ======= ======
Type of Security:
- -----------------
Residential real estate
1-4 family ............................ $ 28,275 73.01% $ 24,914 77.04%
Multi-family dwelling units ........... 1,346 3.48 1,220 3.77
Commercial real estate .................. 9,231 23.84 3,759 11.62
Commercial business ..................... 1,632 4.21 2,105 6.51
Consumer:
Savings accounts ...................... 1,141 2.95 899 2.78
Automobile and other .................. 548 1.41 280 .87
Less:
Loan participations sold ................ (710) (1.83) -- --
Loans in process ........................ (2,106) (5.44) (272) (.84)
Deferred loan origination fees and costs (320) (0.83) (250) (.77)
Allowance for loan losses ............... (309) (0.80) (316) (.98)
------- ------- ------- ------
Total loans, net ........................ $ 38,728 100.00% $ 32,339 100.00%
======= ====== ======= ======
</TABLE>
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<PAGE>
Loan Maturity Tables
The following table sets forth the maturity of the Bank's loan portfolio
at June 30, 1996. The table does not include prepayments or scheduled principal
repayments. Prepayments and scheduled principal repayments on loans totaled
$12.1 million and $8.4 million, for the years ended June 30, 1996 and 1995,
respectively. Adjustable-rate mortgage loans are shown as maturing based on
contractual maturities.
<TABLE>
<CAPTION>
Multi-family and Consumer and
1-4 Family Commercial Commercial
Real Estate Real Estate Construction Business Total
----------- ----------- ------------ -------- -----
(In Thousands)
Amounts Due:
<S> <C> <C> <C> <C> <C>
Within 3 months........... $ 152 $ -- $ -- $ 181 $ 333
3 months to 1 Year........ 471 -- 743 960 2,174
After 1 year:
1 to 3 years............ 1,257 703 -- 956 2,916
3 to 5 years............ 1,720 3,675 -- 542 5,937
5 to 10 years........... 4,680 1,332 1,082 375 7,469
10 to 20 years.......... 18,037 2,183 1,235 274 21,729
Over 20 years........... 1,464 -- -- -- 1,464
--------- ------ --------- ------ --------
Total due after one year.. 27,158 7,893 2,317 2,147 39,515
--------- ------ --------- ------ --------
Non-performing............ 51 67 -- 33 151
--------- ------ --------- ------ --------
Total amount due.......... $ 27,832 $7,960 $ 3,060 $3,321 $ 42,173
========= ====== ========= ====== ========
Less:
Loan participations sold.. $ (710)
Allowance for loan loss... (309)
Loans in process.......... (2,106)
Deferred loan fees........ (320)
------
Loans receivable, net... $ 38,728
========
</TABLE>
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<PAGE>
The following table sets forth the dollar amount, before deductions for
loans in process, deferred loan origination fees and costs and allowance for
loan losses, at June 30, 1996 of all loans due after June 30, 1997, which have
pre-determined interest rates and which have floating or adjustable interest
rates.
<TABLE>
<CAPTION>
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
<S> <C> <C> <C>
One- to four-family(1)...... $27,194 $ -- $27,194
Multi-family and
commercial real estate(1). 6,128 3,171 9,299
Consumer and commercial
business.................. 2,306 1,016 3,322
------ ----- -----
Total................... $35,628 $4,187 $39,815
====== ===== ======
</TABLE>
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(1) Includes construction loans.
One- to Four-Family Residential Loans. Prior to 1994, the Bank's primary
lending activity consisted of the origination of one- to four-family residential
mortgage loans secured by owner-occupied property located in the Bank's primary
market area and loans secured by deposit accounts. The Bank now originates
multi-family, commercial business, commercial real estate and consumer loans.
The Bank generally originates one- to four-family residential mortgage loans
without private mortgage insurance in amounts up to 80% of the appraised value
of the mortgaged property, or up to 95% if private mortgage insurance is
obtained to reduce the Bank's exposure to 80% or below of the appraised value of
the properties. To a lesser extent, the Bank makes loans on non-owner occupied
one- to four-family properties acquired as an investment by the borrowers in
amounts up to 80% of the appraised value of the property. In addition, the Bank
originates FHA and VA loans.
The Bank primarily originates fixed-rate mortgage loans for its loan
portfolio with up to 15 year terms. In addition, the Bank originates loans with
terms over 15 years for sale in the secondary market. The Bank offers various
loan programs with varying interest rates and fees which are competitively
priced based on market conditions and the Bank's cost of funds. Generally, the
Bank's underwriting guidelines for fixed-rate mortgage loans conform to FHLMC
and FNMA guidelines. In March 1995, the Bank began offering one-year
adjustable-rate mortgage ("ARM") loans which adjust annually based upon the
one-year treasury rate. The program is structured so that such loans generally
may not adjust more than 2% in any one year. The Bank will not originate loans
below the fully indexed rate. Generally, during periods of rising interest
rates, the risk of default on an ARM loan is considered to be greater than the
risk of default on a fixed-rate loan due to the upward adjustment of interest
costs to the borrower. The Bank will not originate ARM loans with negative
amortization or with initial "teaser" rates. The Bank also offers a variety of
loan products for low and moderate income housing. The Bank offers second
mortgage loans on one- to four-family residences if the Bank holds the first
mortgage loan for such property and the combined loan to value ratio will be 80%
or lower.
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<PAGE>
Commercial Real Estate and Multi-Family Loans. Since 1994, the Bank has
actively increased its origination of commercial real estate and multi-family
loans and expects to continue to do so. The Bank became involved in these types
of loans due to a perceived need in the Bank's market area and in an attempt to
increase the Bank's net interest margin. Commercial real estate and multi-family
secured loans are originated in amounts generally up to 80% of the appraised
value of the property. Such appraised value is determined by an independent
appraiser previously approved by the Bank. The Bank's commercial real estate
loans are permanent loans secured by approved property such as churches, motels,
small office buildings, retail stores, small strip plazas, and other
non-residential buildings. The Bank generally originates fixed-rate commercial
real estate loans with balloon maturities of five years and with amortization
periods of up to 25 years, and to a lesser extent, adjustable-rate loans based
on a margin over the New York prime rate. At June 30, 1996, the Bank's largest
commercial real estate loan consisted of a $900,000 construction loan secured by
a commercial building in Gallup, New Mexico. At June 30, 1996, the Bank's
largest multi-family loan consisted of a $744,000 performing loan secured by two
multi-family apartment buildings in Gallup, New Mexico.
Loans secured by commercial real estate and multi-family properties
generally involve a greater degree of risk than residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties and the increased difficulty of evaluating and monitoring these types
of loans. Furthermore, the repayment of loans secured by commercial real estate
is typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced, the borrower's ability to
repay the loan may be impaired. The Bank intends to continue to emphasize
commercial real estate lending and accordingly, its credit risk may increase.
Consumer and Commercial Business Loans. In response to a perceived need
in the local community and to provide for diversification of its asset portfolio
and improved interest rate risk management, the Bank began making consumer and
commercial business loans at the beginning of 1994. At June 30, 1996, consumer
loans totaled $1.7 million or 4.3% of the loan portfolio. The Bank is attempting
to increase its level of consumer lending through new products, such as home
equity lines of credit, second mortgage loans and mobile home loans, a
competitive pricing structure, promotional activities, and cross-selling
consumer products through its office, without incurring unacceptable credit
risk. The home equity lines of credit are made with adjustable rates with loan
to value ratios of 80% if the Bank has the first mortgage and 75% if it does
not. The Bank also recently began offering mobile home and other consumer loans
offered primarily on a fixed-rate, short-term basis. 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 borrower's
ability to make payments on the proposed loan and other indebtedness. In
addition to the creditworthiness of the applicant, the underwriting process also
includes a comparison of the value of the security, if any, in relation to the
proposed loan amount. The Bank's consumer loans tend to have higher interest
rates and shorter maturities than one- to four-family first mortgage loans, but
are considered to entail a greater risk of default than mortgage loans.
The Bank intends to continue to actively increase its commercial
business loan originations so that they will equal approximately 10% of the
total loan portfolio. Revolving lines of credit, short-term working capital
loans, and term loans up to seven years are originated to meet the needs of
local small businesses. Some loans are unsecured, but the majority are secured
by inventory, equipment, accounts receivable, marketable securities, savings
deposits, real estate, personal guaranties, or a combination of these types of
collateral. Commercial business loans generally involve a greater degree of risk
than residential mortgage loans and frequently carry larger loan balances. The
Bank offers fixed-rate commercial business loans and adjustable-rate loans which
adjust daily based upon New York prime.
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<PAGE>
This increased credit risk is a result of several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on business cash flow, and the difficulty
of evaluating and monitoring these types of loans.
Construction Loans. The Bank primarily makes construction loans to
individuals to construct single-family owner-occupied homes for which the Bank
also provides permanent financing and to builders who have a proven track record
on either a pre-sold or speculative basis. Construction financing is generally
considered to involve a higher degree of risk of loss than long-term financing
on improved, occupied real estate. Risk of loss on a construction loan is
dependent largely upon the accuracy of the initial estimate of the property's
value at completion of construction or development and the estimated cost
(including interest) of construction. During the construction phase, a number of
factors could result in delays and cost overruns. If the estimate of
construction costs proves to be inaccurate, the Bank may be required to advance
funds beyond the amount originally committed to permit completion of the
development. If the estimate of value proves to be inaccurate, the Bank may be
confronted, at or prior to the maturity of the loan, with a project having a
value which is insufficient to assure full repayment.
Loan Commitments. The Bank issues written commitments to prospective
borrowers on all real estate approved loans. Generally, the commitment requires
acceptance within ten days of the date of issuance and must be closed within
thirty days of issuance. At June 30, 1996, the Bank had $4.8 million of
commitments to fund new loans at market interest rates and to fund the
undisbursed portion of construction loans and home equity lines of credit.
Loans to One Borrower. Savings institutions are subject to the same
limits as those applicable to national banks, which under current regulations
limit loans-to-one borrower in an amount equal to 15% of unimpaired capital and
retained income on an unsecured basis and an additional amount equal to 10% of
unimpaired capital and retained income if the loan is secured by readily
marketable collateral (generally, financial instruments, not real estate) or
$500,000, whichever is higher. The Bank's maximum loan-to-one borrower limit was
approximately $1.7 million as of June 30, 1996.
At June 30, 1996, the Bank's largest lending relationship consisted of a
$900,000 construction loan secured by a commercial building in Gallup of which
$416,512 has been funded. The next four largest lending relationships, all of
which consist of performing loans, at June 30, 1996 consisted of a $864,000 loan
secured by a commercial building located in Gallup; a $744,000 loan secured by
two multi-family apartment buildings located in Gallup; a $1.3 million loan
secured by a motel, of which $645,795 has been sold as a participation; and a
$626,000 loan secured by a strip shopping center.
Non-Performing and Problem Assets
Loan Delinquencies. Loans are reviewed on a monthly basis and are
generally placed on a non-accrual status when the loan becomes more than 90 days
delinquent and, in the opinion of management, the collection of additional
interest is doubtful. Interest accrued and unpaid at the time a loan is placed
on non-accrual status is charged against interest income. Subsequent interest
payments, if any, are either applied to the outstanding principal balance or
recorded as interest income, depending on the assessment of the ultimate
collectibility of the loan. At June 30, 1996, the Bank had total delinquent
loans of $260,700 and $15,405 that were delinquent more than 30 days and 60
days, respectively. On such date, the Bank had $151,423 of loans delinquent 90
days or more.
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The following table sets forth information regarding non-accrual loans,
real estate owned, and certain other repossessed assets and loans.
At June 30,
--------------------
1996 1995
---- ----
(In Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
Permanent loans secured by 1-4 dwelling units $ 49 $ 72
All other mortgage loans......................... -- --
Non-mortgage loans:
Commercial real estate........................... 96 --
Consumer......................................... 4 --
--- ---
Total........................................ $100 $ --
=== ===
Accruing loans which are contractually past
due 90 days or more:
Mortgage loans:
Permanent loans secured by 1-4 dwelling units $ 2 $ --
All other mortgage loans......................... -- 3
--- ---
Total........................................ $ 2 $ 3
=== ===
Total non-accrual and accrual loans................ $ -- $ 75
Real estate owned.................................. -- --
---- ---
Total non-performing assets........................ $151 $ 75
==== ===
Total non-accrual and accrual loans to net loans... .39% .23%
Total non-accrual and accrual loans to total asset. .21% .14%
Total non-performing assets to total assets........ .21% .14%
Interest income that would have been recorded on loans accounted for on
a non-accrual basis under the original terms of such loans was immaterial for
the year ended June 30, 1996. Amounts included in the Bank's interest income for
the year ended June 30, 1996 was, likewise, immaterial.
Classified Assets. OTS regulations provide for a classification system
for problem assets of insured institutions which covers all problem assets.
Under this classification system, problem assets of insured institutions are
classified 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 recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular
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<PAGE>
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 OTS, which may
order the establishment of additional general or specific loss allowances. A
portion of general loss allowances established to cover possible losses related
to assets classified as substandard or doubtful may be included in determining
an institution's regulatory capital, while specific valuation allowances for
loan losses generally do not qualify as regulatory capital. Although the Bank
had a low level of non-performing loans at June 30, 1996, the Bank has only been
originating commercial business loans and consumer loans since the beginning of
1994 and does not have a history on the performance of such loans.
At June 30, 1996, with the exception of three loans on one- to
four-family homes totaling $51,000 and three commercial business and consumer
loans totalling $100,000, there were no loans with respect to which known
information about the possible credit problems of the borrowers or the cash
flows of the security properties have caused management to have concerns as to
the ability of the borrowers to comply with present loan repayment terms.
The following table provides further information about the Bank's
problem assets as of June 30, 1996.
At
June 30,
1996
------------
(In Thousands)
Substandard.......................... $551
Doubtful ............................ 5
Loss ................................ 1
General loss allowance............... 308
Specific loss allowance - loans...... 1
Specific loss allowance - real estate owned --
Real Estate Owned. Real estate acquired by the Bank 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 the
cost or fair value. The Bank records loans as in substance foreclosures if the
borrower has little or no equity in the property based upon its documented
current fair value, the Bank can only expect repayment of the loan to come from
the sale of the property and if the borrower has effectively abandoned control
of the collateral or has continued to retain control of the collateral but
because of the current financial status of the borrower it is doubtful the
borrower will be able to repay the loan in the foreseeable future. In substance
foreclosures are accounted for as real estate acquired through foreclosure,
however, title to the collateral has not been acquired by the Bank. There may be
significant other expenses incurred such as attorney and other extraordinary
servicing costs involved with in substance foreclosures. There was no real
estate owned at June 30, 1996.
Allowance for Loan and Real Estate Losses. It is management's policy to
provide for losses on unidentified loans in its loan portfolio and foreclosed
real estate. A provision for loan losses is charged to operations based on
management's evaluation of the potential losses that may be incurred in the
Bank's loan portfolio. Such evaluation, which includes a review of all loans of
which full collectibility of interest and principal may not be reasonably
assured, considers the Bank's past loan loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrower's
ability to repay, estimated value of any underlying collateral and current
economic conditions. The allowance for loan losses, as a ratio of total loans,
net, was 0.8% at June 30, 1996.
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<PAGE>
Management will continue to review the entire loan portfolio to
determine the extent, if any, to which further additional loss provisions may be
deemed necessary. There can be no assurance that the allowance for losses will
be adequate to cover losses which may in fact be realized in the future and that
additional provisions for losses will not be required.
As a result of the declines in regional real estate market values and
the significant losses experienced by many financial institutions, there has
been a greater level of scrutiny by regulatory authorities of the loan
portfolios of financial institutions undertaken as part of the examination of
the institution by the FDIC, OTS or other federal or state regulators. Results
of recent examinations indicate that these regulators may be applying more
conservative criteria in evaluating real estate market values, requiring
significantly increased provisions for potential loan losses. While the Bank
believes it has established an adequate allowance for loan losses, there can be
no assurance that regulators, in reviewing the Bank's loan portfolio, will not
request the Bank to significantly increase its allowance for loan losses,
thereby negatively affecting the Bank's financial condition and earnings or that
the Bank may not have to increase its level of loan loss allowance in the
future.
Allocation of Allowance for Loan Losses
The following table sets forth the allocation of the Bank's allowance
for loan losses by loan category and the percent of loans in each category to
total loans receivable, net, at the dates indicated. The portion of the loan
loss allowance allocated to each loan category does not represent the total
available for future losses which may occur within the loan category since the
total loan loss allowance is a valuation reserve applicable to the entire loan
portfolio.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------
1996 1995
-------------------- --------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Residential real estate............ $152 34% $ 71 78%
Commercial real estate............. 82 65 106 12
Consumer and
commercial business.............. 75 1 139 10
--- ---- ----- ----
Total............................ $309 100% $ 316 100%
=== === ==== ===
</TABLE>
-11-
<PAGE>
Analysis of the Allowance for Loan Losses
The following table sets forth information with respect to the Bank's
allowance for loan losses at the dates indicated.
At June 30,
----------------------
1996 1995
--------- -------
(Dollars in Thousands)
Total loans outstanding, net............. $38,728 $32,339
====== ======
Average loans outstanding................ $34,934 $30,667
====== ======
Allowance balances (at beginning of
period)................................ $ 316 $ 196
Provision (credit):
Residential............................ -- 109
Consumer and commercial business....... 29 12
Charge-offs:
Residential............................ (36) --
Consumer and commercial business....... -- (1)
Recoveries:
Residential............................ -- --
Consumer and commercial business -- --
Net (charge-offs) recoveries............. -- --
Allowance balance (at end of period)..... $ 309 $ 316
==== =====
Allowance for loan losses as a percent
of total loans outstanding, net........ 0.80% 0.98%
-12-
<PAGE>
Analysis of the Allowance for Real Estate Owned
The following table sets forth information with respect to the Bank's
allowance for losses on real estate owned at the dates indicated.
At June 30,
-----------------------
1996 1995
--------- --------
(Dollars in Thousands)
Total real estate owned and other
repossessed assets, net.............. $ -- $ --
Allowance balances - beginning......... -- 20
Provision(1)........................... -- (20)
Net charges-offs....................... $ -- $ --
====== ===
Allowance balances - ending............ --% --%
====== ===
Allowance for losses on real estate
owned and other repossessed assets to
net real estate owned and other
repossessed assets..................... --% --%
- ----------------------
(1) Includes a transfer of $20,000 from the allowance for loan losses at June
30, 1995.
Mortgage-Backed Securities
The following table sets forth the composition of the Bank's
mortgage-backed securities portfolio in dollar amounts and in percentages of the
portfolio at the dates indicated.
At June 30,
-------------------------------------------
1996 1995
-------------------- -------------------
Percent Percent
Amount of Total Amount of Total
------ -------- ------ --------
(Dollars in Thousands)
Mortgage-backed securities(1):
FNMA........................... $12,148 48.12% $ 7,178 66.84%
GNMA........................... 9,193 36.41 -- --
FHLMC.......................... 3,189 12.63 3,268 30.43
------ ------- ------- ------
Total...................... 24,530 97.16 10,446 97.27
Net premiums................... 716 2.84 293 2.73
Net mortgage-backed securities... $25,246 100.00% $10,739 100.00%
====== ====== ====== ======
- --------------------------
(1) Effective July 1, 1993, the Bank adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." At June 30, 1996 and June 30, 1995,
substantially all investments in mortgage-backed securities are
classified as "available for sale" rather than "held for investment" and
accordingly are recorded at fair value versus carrying value. At June
30, 1995 investments in mortgage-backed securities included one FNMA
security held for investment and accounted for at carrying value.
-13-
<PAGE>
The following table sets forth the Bank's mortgage-backed securities
activities information for the periods indicated.
For the Year Ended June 30,
---------------------------
1996 1995
---------- ---------
(In Thousands)
Mortgage-backed securities(1):
Beginning balance: .............. $ 10,739 $ 7,382
Mortgage-backed securities
purchased ................... 18,040 4,369
Fair value adjustments ........ (252) 44
-------- --------
Less:
Mortgage-backed securities sold -- --
Principal repayments .......... (3,281) (1,056)
-------- --------
Ending balance .................... $ 25,246 $ 10,739
======== ========
- ------------------
(1) Includes premiums and discounts.
To supplement lending activities, the Bank invests in residential
mortgage-backed securities. Mortgage-backed securities serve as collateral for
borrowings and, through repayments, as a source of liquidity. The
mortgage-backed securities portfolio at June 30, 1996 consisted of
adjustable-rate certificates issued by the FHLMC, GNMA and FNMA. At June 30,
1996, the mortgage-backed securities portfolio classified as available for sale
had a fair value of $25.2 million and an amortized cost of $25.5 million and had
contractual maturities between 10 and 30 years.
Mortgage-backed securities represent a participation interest in a pool
of single-family or multi-family mortgages, the principal and interest payments
on which are passed from the mortgage originators, through intermediaries
(generally quasi-governmental agencies) that pool and repackage the
participation interests in the form of securities, to investors such as the
Bank. Such quasi-governmental agencies, which guarantee the payment of principal
and interest to investors, primarily include FHLMC, FNMA, and GNMA.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate mortgages or
adjustable-rate mortgage loans. Mortgage-backed securities are generally
referred to as mortgage participation certificates or pass-through certificates.
As a result, the interest rate risk characteristics of the underlying pool of
mortgages, i.e., fixed rate or adjustable rate, as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages.
Investment Activities
At June 30, 1996, the Bank had an investment portfolio of approximately
$4.6 million, consisting primarily of mutual funds and U.S. Treasury bills. To a
lesser extent, the portfolio also includes FHLMC stock and FHLB, FNMA and
Federal Farm Credit Bank debentures. The Bank classifies its investment
securities, as available for sale, in accordance with SFAS 115. The fair value
-14-
<PAGE>
of investment securities at June 30, 1996 was $4.6 million, resulting in a net
unrealized gain at that date of approximately $445,000.
Investment Portfolio
The following table sets forth the fair value of the Bank's investment
securities portfolio.
At June 30,
-----------------------
1996 1995
--------- ---------
Debt securities:(1) (In Thousands)
Mutual funds......................... $ 2,025 $ --
U.S. Treasury bills.................. 990 --
FHLB and FNMA debentures............. 889 2,872
FHLMC Stock.......................... 470 374
Municipal bonds...................... -- 235
Federal Farm Credit Bank............. 199 196
------ -----
Total investment securities........ $ 4,573 $3,677
====== =====
- ---------------------
(1) Effective July 1, 1993, the Bank adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." At June 30, 1995 and June 30, 1996,
investments are classified as "available for sale" rather than "held for
investment" and accordingly are recorded at fair value versus carrying
value.
Investment Portfolio Maturities
The following table sets forth certain information regarding the
carrying values, weighted average yields and maturities of the Bank's investment
securities portfolio at June 30, 1996.
-15-
<PAGE>
<TABLE>
<CAPTION>
At June 30, 1996
--------------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Securities
---------------- ----------------- ----------------- ------------------- ---------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Treasury bill..... $ -- --% $ 990 6.14% $ -- --% $ -- --% $ 990 6.14%
Mutual funds............ 2,025 5.92 -- -- -- -- -- -- 2,025 5.92
FHLB debentures......... 889 6.01 -- -- -- -- -- -- 889 6.01
FHLMC stock............. -- -- -- -- -- -- 470 1.52 470 1.52
Federal Farm Credit Bank 199 5.54 -- -- -- -- -- -- 199 5.54
------- ---- ---- ---- ---- --- -----
Total................. $ 3,113 5.92% $ 990 6.14% $ -- --% $ 470 1.52% $4,573 5.52%
======= ==== ==== ==== ==== ==== ==== ==== ====== ====
</TABLE>
-16-
<PAGE>
Sources of Funds
General. Deposits are the major source of the Bank's funds for lending
and other investment purposes. The Bank derives funds from amortization and
prepayment of loans and, to a much lesser extent, maturities of investment
securities, borrowings, mortgage-backed securities and operations. Scheduled
loan principal repayments are a relatively stable source of funds, while deposit
inflows and outflows and loan prepayments are significantly influenced by
general interest rates and market conditions. The Bank can obtain advances from
the FHLB as an alternative to retail deposit funds. FHLB advances may also be
used to acquire certain other assets as may be deemed appropriate for investment
purposes. These advances are collateralized by the capital stock of the FHLB
held by the Bank and by certain of the Bank's mortgage loans. The Bank had $10.9
million in FHLB advances at June 30, 1996.
Deposits. The Bank currently offers regular passbook savings, money
market deposit accounts (which are actually statement savings accounts with no
third party transfer or check writing provisions), and term certificate
accounts, primarily to consumers within its primary market area. The Bank has
plans to expand the deposit products it offers. A full range of demand and NOW
accounts are now offered, both for consumers and commercial customers. Deposit
account terms vary according to the minimum balance required, the time period
the funds must remain on deposit and the interest rate, among other factors. As
of June 30, 1996, the Bank had no brokered deposits.
-17-
<PAGE>
Jumbo Certificate Accounts
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of June 30,
1996.
Certificates
of Deposits
-----------
Maturity Period (In Thousands)
- ---------------
Within three months............................ $1,199
Three through six months....................... 1,110
Six through twelve months...................... 2,381
Over twelve months............................. 1,592
------
$6,282
======
Personnel
As of June 30, 1996, the Bank had 15 full-time employees. None of the
Bank's employees are represented by a collective bargaining group. The Bank
believes that its relationship with its employees is good.
REGULATION
Set forth below is a brief description of certain laws which relate to
the regulation of the Bank and the Company. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
General
As a federally chartered, SAIF-insured savings association, the Bank is
subject to extensive regulation by the OTS and the FDIC. Lending activities and
other investments must comply with various federal statutory and regulatory
requirements. The Bank is also subject to certain reserve requirements
promulgated by the Federal Reserve Board.
Insurance of Deposit Accounts
The Bank's deposit accounts are insured by the SAIF to a maximum of
$100,000 for each insured member (as defined by law and regulation). Insurance
of deposits may be terminated by the FDIC upon a finding that the institution
has engaged in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations or has violated any applicable law, regulation, rule,
order or condition imposed by the FDIC or the institution's primary regulator.
Savings associations, such as the Bank, pay an insurance premium to the
FDIC equal to at least 0.23% of its total deposits. BIF institutions pay only
the statutory minimum of $2,000 annually. As a result of this premium disparity,
BIF-insured institutions could have a significant competitive advantage over
SAIF-insured institutions in attracting and retaining deposits. This premium
disparity could have a material effect on the results of operations and
financial condition of the Bank in future periods.
A disparity in insurance premiums between those required for the Bank
and BIF members could allow BIF members to attract and retain deposits at a
lower effective cost than that possible for the Bank and put competitive
pressure on the Bank to raise its interest rates paid on deposits thus
increasing its cost
-18-
<PAGE>
of funds and possibly reducing net interest income. The resultant competitive
disadvantage could result in the Bank losing deposits to BIF members who have a
lower cost of funds and are therefore able to pay higher rates of interest on
deposits. Although the Bank has other sources of funds, these other sources may
have higher costs than those of deposits.
Several alternatives to mitigate the effect of the BIF/SAIF insurance
premium disparity have recently been proposed by the U.S. Congress, federal
regulators, industry lobbyists and the Administration. One plan that has gained
support of several sponsors would require all SAIF member institutions,
including the Bank, to pay a one-time assessment of up to approximately 68 basis
points on the amount of deposits held by the member institution to recapitalize
the SAIF. If this proposal is enacted by Congress, the effect would be to
immediately reduce the capital of the SAIF-member institutions by the amount of
the fee, and such amount would be immediately charged to earnings. Management of
the Bank is unable to predict whether this proposal or any similar proposal will
be enacted or whether ongoing SAIF premiums will be reduced to a level equal to
that of BIF premiums.
Regulatory Capital Requirements
OTS capital regulations require savings institutions to meet three
capital standards: (1) tangible capital equal to 1.5% of total adjusted assets,
(2) a leverage ratio (core capital) equal to at least 3% of total adjusted
assets and (3) a risk-based capital requirement equal to 8.0% of total
risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e, the difference between incoming and outgoing
discounted cash flows from assets, liabilities and off-balance sheet contracts)
that would result from a hypothetical 200 basis point increase or decrease in
market interest rates divided by the estimated economic value of the
association's assets, as calculated in accordance with guidelines set forth by
the OTS. A savings association whose measured interest rate risk exposure
exceeds 2% must deduct an interest rate risk component in calculating its total
capital under the risk-based capital rule. The interest rate risk component is
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
association's assets. That dollar amount is deducted from an association's total
capital in calculating compliance with its risk-based capital requirement. Under
the rule, there is a two quarter lag between the reporting date of an
institution's financial data and the effective date for the new capital
requirement based on that data. A savings association with assets of less than
$300 million and risk-based capital ratios in excess of 12% is not subject to
the interest rate risk component, unless the OTS determines otherwise. The rule
also provides that the Director of the OTS may waive or defer an association's
interest rate risk component on a case-by-case basis. Under certain
circumstances, a savings association may request an adjustment to its interest
rate risk component if it believes that the OTS-calculated interest rate risk
component overstates its interest rate risk exposure. In addition, certain
"well-capitalized" institutions may obtain authorization to use their own
interest rate risk model to calculate their interest rate risk component in lieu
of the OTS-calculated amount. The OTS has postponed the date that the component
will first be deducted from an institution's total capital until savings
associations become familiar with the process for requesting an adjustment to
its interest rate risk component.
-19-
<PAGE>
Prompt Corrective Action
Under the prompt corrective action system, the banking regulators are
required to take certain supervisory actions against undercapitalized
institutions, the severity of which depends upon the institution's degree of
capitalization. Under the OTS final rule implementing the prompt corrective
action provisions, an institution shall be deemed to be (i) "well capitalized"
if it has total risk-based capital of 10.0% or more, has a Tier I risk-based
capital ratio (core or leverage capital to risk-weighted assets) of 6.0% or
more, has a leverage capital of 5.0% or more and is not subject to any order or
final capital directive to meet and maintain a specific capital level for any
capital measure, (ii) "adequately capitalized" if it has a total risk-based
capital ratio of 8.0% or more, a Tier I risked-based ratio of 4.0% or more and a
leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and
does not meet the definition of "well capitalized," (iii) "undercapitalized" if
it has a total risk-based capital ratio that is less than 8.0%, a Tier I
risk-based capital ratio that is less than 4.0% or a leverage capital ratio that
is less than 4.0% (3.0% in certain circumstances), (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a leverage
capital ratio that is less than 3.0% and (v) "critically undercapitalized" if it
has a ratio of tangible equity to total assets that is equal to or less than
2.0%. In addition, under certain circumstances, a federal banking agency may
reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution or an undercapitalized institution
to comply with supervisory actions as if it were in the next lower category
(except that the FDIC may not reclassify a significantly undercapitalized
institution as critically undercapitalized). The Bank is currently a
"well-capitalized" institution as defined in the prompt corrective action
regulations and as such is not subject to any prompt corrective action measures.
Dividend and Other Capital Distribution Limitations
OTS regulations require the Bank to give the OTS 30 days' advance notice
of any proposed declaration of dividends to the Company, and the OTS has the
authority under its supervisory powers to prohibit the payment of dividends to
the Company. In addition, the Bank may not declare or pay a cash dividend on its
capital stock if the effect thereof would be to reduce the regulatory capital of
the Bank below the amount required for the liquidation account established
pursuant to the Bank's Plan of Conversion.
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory notice. As of June
30, 1996, the Bank was a Tier 1 institution. In the event the Bank's capital
fell below its fully phased-in requirement or the OTS notified it that it was in
need of more than normal supervision, the Bank's ability to make capital
distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
-20-
<PAGE>
A savings association is prohibited from making a capital distribution
if, after making the distribution, the savings association would be
undercapitalized (i.e., not meet any one of its minimum regulatory capital
requirements).
Qualified Thrift Lender Test
The Home Owners' Loan Act, as amended ("HOLA"), requires savings
institutions to meet a qualified thrift lender ("QTL") test. If the Bank
maintains an appropriate level of Qualified Thrift Investments ("QTIs")
(primarily residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualifies as a QTL, it will continue
to enjoy full borrowing privileges from the FHLB of Dallas. The required
percentage of QTIs is 65% of portfolio assets (defined as all assets minus
intangible assets, property used by the institution in conducting its business
and liquid assets equal to 10% of total assets). Certain assets are subject to a
percentage limitation of 20% of portfolio assets. In addition, savings
associations may include shares of stock of the FHLBs, FNMA and FHLMC as
qualifying QTIs. Compliance with the QTL test is determined on a monthly basis
in nine out of every 12 months. As of June 30, 1996, the Bank was in compliance
with its QTL requirement with 99% of its assets invested in QTIs.
Liquidity Requirements
All savings associations 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. The liquidity requirement may vary from time to time (between 4%
and 10%) depending upon economic conditions and savings flows of all savings
associations. At June 30, 1996, the Bank's required liquid asset ratio was 5%.
Federal Home Loan Bank System
The Bank is a member of the FHLB of Dallas, which is one of 12 regional
FHLBs that administer 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., advances) in accordance with policies and procedures established
by the Board of Directors of the FHLB.
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)
and non-personal time deposits. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy the
liquidity requirements that are imposed by the OTS. At June 30, 1996, the Bank's
total transaction accounts were below the minimum level for which the Federal
Reserve Board requires a reserve.
Savings associations have authority to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve policy generally requires savings
associations to exhaust all OTS sources before borrowing from the Federal
Reserve System. The Bank had no such borrowings at June 30, 1996.
-21-
<PAGE>
Company Regulation
General. The Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS will have enforcement authority
over the Company and its non-savings association subsidiaries, should such
subsidiaries be formed, which also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
association. This regulation and oversight is intended primarily for the
protection of the depositors of the Bank and not for the benefit of stockholders
of the Company.
QTL Test. As a unitary savings and loan holding company, the Company
generally will not be subject to activity restrictions, provided the Bank
satisfies the QTL test. See "- Qualified Thrift Lender Test." 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 restrictions
applicable to bank holding companies and those activities specified by the OTS
as permissible for a multiple savings and loan holding company unless such other
associations each also qualify as a QTL or were acquired in a supervised
acquisition.
Recent Legislation - Recapture of Post-1987 Bad-Debt Reserves
The Small Business Job Protection Act of 1996 will among other things,
equalize the taxation of thrifts and banks. The bill would no longer allow
thrifts a choice between the percentage of taxable income method and the
experience method in determining additions to their bad debt reserves. Smaller
thrifts with $500 million of assets or less would only be allowed to use the
experience method, which is generally available to small banks currently. Larger
thrifts would be forced into using the specific charge off method regarding its
bad debts. Any reserve amounts added after 1987 will be taxed over a six year
period beginning in 1996; however, bad debt reserves set aside through 1987 will
generally not be taxed. Institutions can delay these taxes for two years if they
meet a residential-lending test. At June 30, 1996, the Bank had $55,900 of post
1987 bad-debt reserves. Any recapture of the Bank's bad-debt reserves may have
an adverse effect on net income. The Bank is currently evaluating the
legislation to determine its effect.
Item 2. Description of Property.
- --------------------------------
The Bank owns its main office located at 221 West Aztec Avenue, Gallup,
New Mexico. The Bank's total investment in office property and equipment is
$931,000 with a net book value of $537,000 at June 30, 1996. The Bank may add on
additional office space to its current office in the future.
Item 3. Legal Proceedings
- --------------------------
Neither the Company nor the Bank are engaged in any legal proceedings of
a material nature at the present time. From time to time the Bank is a party to
legal proceedings in the ordinary course of business wherein it enforces its
security interest in mortgage loans made by it.
Item 4. Submission of Matters to a Vote of Security - Holders
- --------------------------------------------------------------
Not applicable.
-22-
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
The information contained under the section captioned "Stock Market
Information" in the Company's Annual Report to Stockholders for the fiscal year
ended June 30, 1996 (the "Annual Report") is incorporated herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
- ------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
Item 7. Financial Statements
- -----------------------------
The Company's consolidated financial statements listed under Item 13
herein are incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
- --------------------
Not applicable.
PART III
Item 9. Directors and Executive Officers, Promoters and Control Persons;
- --------------------------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act
- -------------------------------------------------
The information contained under the section captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's definitive proxy
statement for the Company's 1996 Annual Meeting of Stockholders (the "Proxy
Statement") is incorporated herein by reference.
Item 10. Executive Compensation
- --------------------------------
The information contained under the section captioned "Executive
Compensation" in the Proxy Statement is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information contained under the section captioned "Voting Securities
and Principal Holders Thereof" and "Proposal I - Election of Directors" in the
Proxy Statement is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information contained under the section captioned "Certain
Relationships and Related Transactions" in the Proxy Statement is incorporated
herein by reference.
-23-
<PAGE>
Item 13. Exhibits, List and Reports on Form 8-K
- ------------------------------------------------
(a) The Consolidated Financial Statements and Independent Auditors' Report
included in the Annual Report, listed below, are incorporated herein by
reference.
1. Independent Auditors' Report
2. GFSB Bancorp, Inc.
(a) Consolidated Statement of Financial Condition at June 30, 1996
(b) Consolidated Statements of Earnings for each of the years in
the two-year period ended June 30, 1996
(c) Consolidated Statements of Stockholders' Equity for each of
the years in the two-year period ended June 30, 1996
(d) Consolidated Statements of Cash Flows for each of the years in
the two-year period ended June 30, 1996
(e) Notes to Consolidated Financial Statements
The following exhibits are included in this Report or incorporated
herein by reference:
3. (a) List of Exhibits
3.1 Articles of Incorporation of GFSB Bancorp, Inc. 1
3.2 Bylaws of GFSB Bancorp, Inc. 1
4 Specimen Stock Certificate 1
11 Calculation Of Earnings per Share
13 1996 Annual Report to Stockholders
21 Subsidiaries of the Issuer
23 Consent of Atkinson & Co., Ltd.
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the last quarter of the period
covered by this Report.
- -----------------------
1 Incorporated herein by reference from the Exhibits to the Registration
Statement on Form S-1 of the Registrant (File No. 33-90400) initially filed
with the Commission on March 17, 1995.
-24-
<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.
GFSB BANCORP, INC.
Date: September 24, 1996 By: /s/ Jerry R. Spurlin
--------------------------------
Jerry R. Spurlin
President
(Duly Authorized Representative)
Pursuant to the requirement 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.
By: /s/ Wallace R. Phillips By: /s/ Jerry R. Spurlin
------------------------------ --------------------------------
Dr. Wallace R. Phillips Jerry R. Spurlin
Chairman of the Board President
(Principal Executive, Financial
and Accounting Officer)
Date: September 24, 1996 Date: September 24, 1996
By: /s/ Richard C. Kauzlaric By: /s/ James Nechero, Jr.
------------------------------ --------------------------------
Richard C. Kauzlaric James Nechero, Jr.
Director Director and Assistant Secretary
Date: September 24, 1996 Date: September 24, 1996
By: /s/ Vernon I. Hamilton By: /s/ Michael T. Mataya
------------------------------ --------------------------------
Vernon I. Hamilton Michael T. Mataya
Director Director
Date: September 24, 1996 Date: September 24, 1996
By: /s/ Charles L. Parker, Jr. By: /s/ George S. Perce
------------------------------ --------------------------------
Charles L. Parker, Jr. George S. Perce
Director and Treasurer Director and Secretary
Date: September 24, 1996 Date: September 24, 1996
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF
EARNINGS PER SHARE OF
GFSB BANCORP, INC.
Primary Earnings Per Common Share:
- ----------------------------------
Number of shares outstanding 893,684
Primary earnings per share $ 0.88
=======
The number of shares outstanding excludes 54,133 shares of unreleased ESOP
shares as required under Statement of Position 93-6.
GFSB BANCORP, INC.
ANNUAL REPORT - 1996
<PAGE>
- ---------------------------------------------------------------------------
C O N T E N T S
PAGE
LETTER TO STOCKHOLDERS...................................................1
CORPORATE PROFILE AND STOCK MARKET INFORMATION.........................2-3
SELECTED FINANCIAL AND OTHER DATA......................................4-5
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................6-15
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS......................16
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION.........................17
CONSOLIDATED STATEMENTS OF EARNINGS................................18-19
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY..............................................................20
CONSOLIDATED STATEMENTS OF CASH FLOWS..............................21-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.........................23-47
OFFICE LOCATION AND OTHER CORPORATE INFORMATION.........................48
- ------------------------------------------------------------------------------
<PAGE>
To Our Stockholders:
We are proud to present our second annual stockholders' report. This report
covers the first full year of operation since the successful completion on June
29, 1995 of the conversion of Gallup Federal Savings Bank (the "Bank") from a
federally chartered mutual savings association to a federally chartered stock
savings bank and the acquisition of all of the issued and outstanding capital
stock of the Bank by GFSB Bancorp, Inc. (the "Company").
Net earnings for the Company for the year ended June 30, 1996 were $788,036, an
increase of $281,990 or 55.7% over net earnings for the previous year. On a per
share basis the Company earned $0.88 per share this year compared with $0.57 per
share last year.
The Company's total assets increased to $73,251,000 at June 30, 1996,
representing growth of $20,346,000 or 38.5% from total assets of $52,905,000 at
June 30, 1995.
The Bank's total deposits increased $9,387,000 or 25.6% from $36,603,000 at
June 30, 1995 to $45,990,000 at June 30, 1996.
The earnings and growth achieved by the Company and the Bank provide evidence of
a very successful year. Since its founding in 1934, the Bank has sought to
provide the best possible financial services to the communities it serves. The
Bank is the only locally controlled and managed financial institution in the
community. This unique position has provided an opportunity for significant
growth.
The Bank began offering checking accounts in July, 1995. We have just installed
our first ATM, and two more are scheduled for installation soon. The Bank has a
loyal customer base, a dedicated Board of Directors, and an excellent staff who
recognize the importance of quality service and will continue to focus on what
it does best while looking for new ways to increase market share.
Your Board of Directors and management team are committed to protecting and
enhancing the value of your investment in the Company and are challenged to
continue delivering high quality services to our customers and communities and
build on our past accomplishments. We appreciate the confidence, support, and
loyalty of our customers, employees, and stockholders. Thank you for banking
with us.
Sincerely,
Jerry R. Spurlin W.R. Phillips, D.D.S. Richard C. Kauzlaric
President of the Company Chairman of the Board Chairman of the
and the Bank of the Company Board of the Bank
September 13, 1996
-1-
<PAGE>
GFSB Bancorp, Inc.
Corporate Profile
GFSB Bancorp, Inc. (the "Company") is a Delaware corporation organized in March
1995 at the direction of the Board of Directors of Gallup Federal Savings Bank
(the "Bank") to acquire all of the capital stock that the Bank issued upon its
conversion from the mutual to stock form of ownership. The Company is a unitary
savings and loan holding company which, under existing laws, generally is not
restricted in the types of business activities in which it may engage, provided
that the Bank retains a specified amount of its assets in housing-related
investments. At the present time, because the Company does not conduct any
active business, the Company does not intend to employ any persons other than
officers of the Bank, but utilizes the support staff of the Bank from time to
time.
The Bank is a federally chartered stock savings bank headquartered in Gallup,
New Mexico. The Bank was founded in 1934. Its deposits are federally insured by
the Savings Association Insurance Fund ("SAIF"), administered by the Federal
Deposit Insurance Corporation, and the Bank is a member of the Federal Home Loan
Bank ("FHLB") System. The Bank is a community oriented, full service retail
savings institution offering traditional mortgage loan products. It is the
Bank's intent to remain an independent community savings bank serving the local
banking needs of its community.
The Bank attracts deposits from the general public and uses such deposits
primarily to invest in residential lending on owner occupied properties. The
Bank also makes consumer, commercial real estate, commercial, construction, and
multi-family loans.
Stock Market Information
Since its issuance on June 29, 1995, the Bank's common stock has been traded in
the over-the-counter market. The following table reflects the stock price as
published by the Nasdaq Small-Cap Market. The quotations reflect inter-dealer
prices, without retail mark-up, mark-down, or commission, and may not represent
actual transactions.
High Low
---------- -----------
June 29, 1995 - June 30, 1995 $14.00 $12.50
Quarter ended September 30, 1995 14.00 12.75
Quarter ended December 31, 1995 14.25 13.25
Quarter ended March 31, 1996 14.50 13.50
Quarter ended June 30, 1996 15.00 13.50
The number of stockholders of record of common stock as of the record date
September 3, 1996 ("Record Date"), was approximately 226. This does not reflect
the number of persons or entities who held stock in nominee or "street" name
through various brokerage firms. As of the Record Date, there were 901,313
shares outstanding.
-2-
<PAGE>
GFSB Bancorp, Inc.
Corporate Profile - Continued
The Company's ability to pay dividends to stockholders is subject to the
requirements of Delaware law. No dividend may be paid by the Company unless its
board of directors determines that the Company will be able to pay its debts in
the ordinary course of business after payment of the dividend. In addition, the
Company's ability to pay dividends is dependent, in part, upon the dividends it
receives from the Bank. The Bank may not declare or pay a cash dividend on any
of its stock if the effect thereof would be to cause the Bank's regulatory
capital to be reduced below (1) the amount required for the liquidation account
established in connection with the Bank's conversion from mutual to stock form,
or (2) the regulatory capital requirements imposed by the Office of Thrift
Supervision ("OTS"). Total dividends declared by the Company during the year
ended June 30, 1996 were $626,233.
-3-
<PAGE>
GFSB BANCORP, INC.
SELECTED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
============================================================================================================
Financial Condition (Dollars in Thousands)
============================================================================================================
At June 30, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets $ 73,250 $52,905 $42,458
Loans receivable, net 38,728 32,339 29,381
Mortgage-backed securities 25,246 10,739 7,383
Stock of FHLB 551 442 417
Investment securities 4,573 3,677 2,406
Cash and cash equivalents 3,167 4,915 2,150
Deposits 45,990 36,603 35,487
Advances from the FHLB 10,854 - -
Retained earnings (substantially restricted) 7,199 7,038 6,532
Unrealized gain (loss) on available for sale securities, net 128 162 58
Summary of Operations (Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------
Year ended June 30,
- ------------------------------------------------------------------------------------------------------------
Interest income $ 4,876 $ 3,559 $ 3,224
Interest expense 2,403 1,664 1,435
--------- --------- ----------
Net interest income 2,473 1,895 1,789
Provision for loan losses 28 101 24
--------- --------- ----------
Net interest income after provision for loan losses 2,445 1,794 1,765
Non-interest income:
Income from real estate operations 3 8 26
Other 40 6 -
--------- --------- ----------
Total non-interest income 43 14 26
Non-interest expense:
Compensation and benefits 614 455 357
Professional fees 123 126 37
Occupancy 108 71 68
Advertising 34 11 9
Data processing 93 75 59
Insurance and SAIF premiums 105 97 98
Other 191 129 75
--------- --------- ----------
Total non-interest expense 1,268 964 703
--------- --------- ----------
Earnings before income taxes 1,220 845 1,087
Income tax expense 432 339 395
========= ========= ==========
Net earnings $ 788 $ 506 $ 692
========= ========= ==========
</TABLE>
-4-
<PAGE>
GFSB BANCORP, INC.
SELECTED FINANCIAL AND OTHER DATA - CONTINUED
<TABLE>
<CAPTION>
=============================================================================================================
Selected Operating Ratios
- -------------------------------------------------------------------------------------------------------------
Year ended June 30, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
Performance ratios:
Return on average assets (net income divided by average
<S> <C> <C> <C>
total assets) 1.23% 1.12% 1.66%
Return on average equity (net income divided by average
equity) 4.88 6.75 11.11
Average interest earning assets to average interest-bearing
liabilities 1.32X 1.19X 1.12X
Net interest income after provision for loan losses, to total
other expenses 192.85% 186.16% 251.07%
Net interest rate spread 2.75 3.58 4.08
Net yield on average interest-earnings assets 3.97 4.30 4.53
Equity ratios:
Average equity to average assets ratio (average equity
divided by average total assets) 25.11 16.63 14.91
Equity to assets to period end 20.97 29.78 15.52
Assets quality ratios:
Non-performing assets to total assets .21 0.14 0.22
Non-performing loans to total assets .21 0.14 -
Non-performing loans to net loans .39 0.23 -
Allowance for loan losses, REO and other repossessed
assets to non-performing assets 204.14 421.33 227.42
Allowance for loan losses to total loans, net .80 0.98 0.67
</TABLE>
-5-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Bank is primarily engaged in the business of accepting deposit accounts from
the general public and using such funds to originate mortgage loans for the
purchase and refinancing of one-to-four family homes located in its primary
market area. The Bank also originates multi-family, commercial real estate,
construction, consumer and commercial business loans. The Bank also purchases
mortgage-backed and investment securities. The largest components of the Bank's
net income are net interest income, which is the difference between interest
income and interest expense, and noninterest income derived primarily from fees.
Consequently, the Bank's earnings are dependent on its ability to originate
loans, net interest income, and the relative amounts of interest-earning assets
and interest-bearing liabilities. The Bank's net income is also affected by its
provision for loan losses as well as the amount of other expense, such as
compensation and benefit expense, occupancy and equipment expense and deposit
insurance premium expenses. Earnings of the Bank also are affected significantly
by general economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory authorities. The
disparity in premiums paid by Bank Insurance Fund ("BIF") and SAIF insured
institutions will also adversely impact the Bank.
Asset and Liability Management
In an effort to reduce interest rate risk and protect it from the negative
effect of rapid increases and decreases in interest rates, the Bank has
instituted certain asset and liability management measures including selling
fixed rate mortgage loans with terms over 15 years, and purchasing adjustable
rate mortgage-backed securities.
The Bank, like many other thrift institutions, is exposed to interest rate risk
as a result of the difference in the maturity of interest-bearing liabilities
and interest-earning assets and the volatility of interest rates. Most deposit
accounts react more quickly to market interest rate movements than do the
existing mortgage loans because of their shorter terms to maturity; sharp
decreases in interest rates would typically positively affect the Bank's
earnings. Conversely, this same mismatch will generally adversely affect the
Bank's earnings during periods of increasing interest rates. Generally, market
interest rates declined between 1991 and 1993. By the latter part of 1993,
interest rates on U.S. treasury bonds and home mortgage loans had declined to
lower levels than had been experienced in the prior ten years. However, since
the beginning of 1994, general market interest rates, including rates charged on
mortgage loans and rates paid on deposits, have increased.
During the low interest rate environment that existed from 1991 through 1993,
the Bank, like other financial institutions, experienced a significant increase
in homeowners seeking to refinance their existing mortgages. The trend resulted
in a decrease in the yield on the Bank's interest earning assets, namely the
loan portfolio and mortgage-backed and investment securities portfolios. The net
interest rate spread may decrease if deposits reprice upward more rapidly than
interest earning assets.
-6-
<PAGE>
Net Portfolio Value Tables
In order to encourage institutions to reduce their interest rate risk, the OTS
adopted a final rule in August 1993 incorporating an interest rate risk ("IRR")
component into the risk-based capital rules. The IRR component is a dollar
amount that will be deducted from total capital for the purpose of calculating
an institution's risk-based capital requirement and is measured in terms of the
sensitivity of its NPV to changes in interest rates. NPV is the difference
between incoming and outgoing discounted cash flows from assets, liabilities,
and off-balance sheet contracts. An institution's IRR is measured as the change
to its NPV as a result of a hypothetical 200 basis point change in market
interest rates divided by the estimated economic value (i.e., present value) of
its assets. A resulting change in NPV of more than 2% of the estimated market
value of its assets will require the institution to deduct from its capital 50%
of that excess change. The OTS calculates an institution's NPV based on
financial data submitted by the institution pursuant to its required reports and
using a complex computer model that the OTS has devised. The rules provide that
the OTS will calculate the IRR component quarterly for each institution. The
Bank, based on asset size and risk-based capital, is exempt from this rule. The
following table presents the Bank's NPV at June 30, 1996, as calculated by the
OTS, based on information provided to the OTS by the Bank. Actual experience may
differ from the components of this table.
* INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE (NPV)
==========================================================================
Change in NPV
Rates $ Amount $ Change % Change Ratio Change
----------- ----------- ---------- ----------- --------- ------------
(Dollars in Thousands)
+400 bp 8,226 -4,604 -36% 11.96% -517 bp
+300 bp 9,591 -3,239 -25% 13.61% -352 bp
+200 bp 10,881 -1,949 -15% 15.08% -205 bp
+100 bp 11,999 -831 -6 % 16.29% -84 bp
0 bp 12,830 -- -- 17.13%
-100 bp 13,373 543 +4% 17.62% +49 bp
-200 bp 13,520 690 +5% 17.67% +54 bp
-300 bp 13,533 703 +5% 17.57% +44 bp
-400 bp 13,688 858 +7% 17.63% +49 bp
* Denotes rate shock used to compute interest rate risk capital component.
-7-
<PAGE>
Average Balance Sheet
The following table sets forth certain information relating to the Bank's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from month-end balances. Management does
not believe that the use of month-end balances instead of daily average balances
has caused any material differences in the information presented.
<TABLE>
<CAPTION>
Year ended June 30, 1996 Year ended June 30, 1995
---------------------------------------------- -----------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------------- -------------- --------- ----------------- --------------- ----------
(Dollars in Thousands) (Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable (1) $ 34,934 $ 3,160 9.05% $ 30,668 $ 2,839 9.26%
Investment securities and
mortgage-backed securities 25,037 1,569 6.27% 12,046 648 5.38%
Other interest-earning
assets (2) 2,255 147 6.52% 1,524 78 5.12%
--------------- -------------- --------- ----------------- --------------- --------
Total interest-earning assets 62,226 4,876 7.84% 44,238 3,565 8.06%
-------------- --------- --------------- --------
Non-interest earning assets 2,060 - - 875 - -
--------------- -----------------
Total assets $ 64,286 - - $ 45,113 - -
=============== =================
Interest-bearing liabilities:
Transaction accounts $ 1,501 $ 10 .67% $ - - -
Passbook savings 2,544 77 3.03% 3,608 111 3.08%
Money market accounts 7,153 278 3.89% 8,439 295 3.50%
Certificates of deposit 29,711 1,708 5.75% 24,968 1,252 5.01%
Other liabilities 6,321 330 5.22% 100 6 6.00%
--------------- -------------- --------- ----------------- --------------- --------
Total interest-bearing
liabilities 47,230 2,403 5.09% 37,115 1,664 4.48%
-------------- --------- --------------- --------
Non-interest bearing
liabilities 910 497
--------------- -----------------
Total liabilities 48,140 37,612
Stockholders' equity 16,146 7,501
--------------- -----------------
Total liabilities and
stockholders' equity $ 64,286 $ 45,113
=============== =================
Net interest income $ 2,473 $ 1,901
============== ===============
Interest rate spread (3) 2.75% 3.58%
========= ========
Net yield on interest-
earning assets (4) 3.97% 4.30%
========= ========
Ratio of average interest-
earning assets to average
interest-bearing liabilities 1.32X 1.19X
========= ========
</TABLE>
(1) Average balances include non-accrual loans.
(2) Includes interest-bearing deposits in other financial institutions.
(3) Interest-rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
-8-
<PAGE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in interest
income and interest expense of the Bank for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the change in average volume). The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
Year ended June 30, Year ended June 30,
----------------------------------------- ----------------------------------------
1996 vs. 1995 1995 vs. 1994
----------------------------------------- ----------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------------------- ----------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
(Dollars in Thousands) (Dollars in Thousands)
Interest income:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable $ 395 $ (64) $ 9 $ 340 $ 214 $ 25 $ 15 $ 254
Mortgage-backed securities 700 79 123 902 (37) 48 (4) 7
Investment securities 38 5 1 44 547 (85) (382) 80
Other interest-earning assets 37 21 10 68 (6) 20 2 16
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets 1,170 41 143 1,354 718 8 (369) 357
Interest expense: (33) (2) (1) (36) (18) 8 1 (9)
Savings accounts (45) 33 (5) (17) 7 56 2 65
Money markets 238 185 35 458 108 55 5 168
------- ------- ------- ------- ------- ------- ------- -------
Certificates of deposit
Total interest-bearing
liabilities 160 216 29 405 97 119 8 224
------- ------- ------- ------- ------- ------- ------- -------
Net change in interest income $ 1,010 $ (175) $ 114 $ 949 $ 621 $ (111) $ (377) $ 133
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Financial Condition
General. The Company's total assets increased $20.3 million or 38.5% from $52.9
million at June 30, 1995 to $73.3 million at June 30, 1996. This increase was
primarily the result of a $896,000 increase in investment securities, a $14.5
million increase in mortgage-backed securities, and a $6.4 million increase in
the Bank's net loan portfolio, offset by a $1.7 million decrease in cash and
cash equivalents. The majority of the increases are primarily attributable to
the increased capital infusion made as a result of the conversion from a mutual
to stock form of ownership, the increased lending strategies of management, and
some leveraged transactions whereby the Bank borrowed funds from the Federal
Home Loan Bank of Dallas to purchase adjustable rate mortgage-backed securities.
During the same period, deposits increased $9.4 million from $36.6 million at
June 30, 1995 to $45.9 million at June 30, 1996. The Bank had $128,000 and
$162,000 in unrealized gains (net of deferred taxes) at June 30, 1996 and 1995,
respectively, from net market gains on the Bank's investment and mortgage-backed
securities portfolio. Unrealized gains and losses do not impact the Bank's
earnings until they are realized.
-9-
<PAGE>
Comparison of Operating Results for Years Ended June 30, 1996 and 1995
General. Net earnings increased $282,000 or 55.7% for the year ended June 30,
1996 from the year ended June 30, 1995. This increase was primarily the result
of an increase in interest income of $1.3 million and a decrease in the
provision for loan losses of $73,000 offset by an increase in interest expense
of $739,000 and an increase in non-interest expense of $304,000.
Total Interest Earnings. Total interest income increased $1.3 million or 37.0%
from $3.6 million for the year ended June 30, 1995 to $4.9 million for the year
ended June 30, 1996. The increase was primarily due to a $6.4 million increase
in the loan portfolio and a $14.5 million increase in mortgage-backed securities
activity.
Interest Expense. Total interest expense increased $739,000 or 44.4% from $1.7
million for the year ended June 30, 1995 to $2.4 million for the year ended June
30, 1996. This increase was primarily due to an increase of $324,000 of interest
incurred on increased Federal Home Loan Bank advances of $10.9 million and a
general increase in the deposit base.
Provision for Losses on Loans. The Company maintains an allowance for loan
losses based upon management's periodic evaluation of known and inherent risks
in the loan portfolio, past loss experience, adverse situations that may affect
the borrowers' ability to repay loans, estimated value of the underlying
collateral, and current and expected market conditions. The allowance for loan
losses was $309,000 and $316,000 at June 30, 1996 and 1995, respectively. The
provision for loan losses was $28,000 and $101,000 for the years ended June 30,
1996 and 1995, respectively. The $73,000 decrease was due primarily to the
addition of an additional reserve of $75,000 in the prior year to account for
the higher volume of commercial real estate and commercial business loans, as
these loans carry higher credit risk than traditional mortgage lending, and the
Company has limited prior experience with this type of lending. Based on a
historical trend of limited losses on residential loans and nonresidential
loans, the amount of the loan loss provision allocated to all loan types has
remained relatively stable for the two periods. While the Company maintains its
allowance for losses at a level which it considers to be adequate, there can be
no assurance that further additions will not be made to the loss allowances and
that such losses will not exceed the estimated amounts. The establishment of a
loan loss provision each period adversely impacts the Company's net earnings.
Non-Interest Earnings. Non-interest earnings increased $28,000 or 196% from
$14,500 for the year ended June 30, 1995 to $43,000 for the year ended June 30,
1996. This was primarily due to an increase in service charge income of $20,000,
recovery of some prior year legal fees for $10,000, and an increase in the gain
on sold loans of $2,500, offset by a decrease in income from real estate
operations consisting of rental income from the office space available on the
second floor of the Bank's building. During fiscal year 1995, the Bank
terminated a month-to-month lease of several of its available offices in
anticipation of growth within the Bank.
-10-
<PAGE>
Non-Interest Expense. Total non-interest expense increased $304,000 or 32% from
$964,000 for the year ended June 30, 1995 to $1.3 million for the year ended
June 30, 1996. This increase was primarily due to an increase in compensation
expense of $159,000 from the hiring of additional staff to handle growth and the
offering of new deposit products and including adding a chief administrative
officer. Other factors were increases in occupancy costs of $37,000, advertising
costs of $23,000, data processing costs of $18,000, and other operating costs of
$62,000, due to an overall increase in printing and office supplies to
accommodate the name change for the Bank as a result of the conversion,
introduction of checking accounts, and general regulatory and stock matters.
Income Tax Expense. Income tax expense increased $93,000 or 27.6% from $339,000
for the year ended June 30, 1995 to $432,000 for the year ended June 30, 1996.
This increase was attributable to the increase in pre-tax earnings of $375,000.
Comparison of Operating Results for Years Ended June 30, 1995 and 1994
General. Net earnings decreased $186,000 or 26.9% for the year ended June 30,
1995 from the year ended June 30, 1994. This decrease was primarily the result
of an increase in non-interest expense of $260,000 and an increase in the
provision for loan losses of $77,000 offset by an increase in interest earnings
of $335,000 and increase in interest expense of $229,000.
Total Interest Earnings. Total interest income increased $335,000 or 10.39% from
$3.2 million for the year ended June 30, 1994 to $3.5 million for the year ended
June 30, 1995. The increase was primarily due to a $3.0 million increase in the
average balance of the loan portfolio. Additionally, interest earned on
interest-bearing accounts increased $100,000 due to higher interest rates and
increased investment activity over the prior year.
Interest Expense. Total interest expense increased $229,000 or 15.92% from $1.4
million for the year ended June 30, 1994 to $1.6 million for the year ended June
30, 1995. This increase was primarily due to $5,000 of interest incurred on
Federal Home Loan Bank advances and a general increase in the deposit base.
Provision for Losses on Loans. The Company maintains an allowance for loan
losses based upon management's periodic evaluation of known and inherent risks
in the loan portfolio, past loss experience, adverse situations that may affect
the borrowers' ability to repay loans, estimated value of the underlying
collateral and current and expected market conditions. The allowance for loan
losses was $316,000 and $196,000 at June 30, 1995 and 1994, respectively. The
provision for loan losses was $101,000 and $24,000 for the year ended June 30,
1995 and 1994, respectively. This $77,000 increase was due primarily to the
addition of a higher volume of commercial real estate and commercial business
loans, as these loans carry higher credit risk than traditional mortgage
lending, and the Company has limited prior experience with this type of lending.
Based on a historical trend of limited losses on residential loans, the amount
of the loan loss provision allocated to residential loans remained relatively
stable for the two periods. While the Company maintains its allowance for losses
at a level which it considers to be adequate, there can be no assurance that
further additions will not be made to the loss allowances and that such losses
will not exceed the estimated amounts. The establishment of a loan loss
provision each period adversely impacts the Company's net earnings.
-11-
<PAGE>
Non-Interest Earnings. Non-interest earnings decreased $18,000 or 68% from
$26,000 for the year ended June 30, 1994 to $8,000 for the year ended June 30,
1995. This was primarily due to a decrease in income from real estate operations
consisting of rental income from the office space available on the second floor
of the Bank's building. During fiscal year 1995, the Bank terminated a
month-to-month lease of several of its available offices in anticipation of
growth within the Bank.
Non-Interest Expense. Total non-interest expense increased $261,000 or 37% from
$703,000 for the year ended June 30, 1994 to $964,000 for the year ended June
30, 1995. This increase was primarily due to an increase in compensation expense
of $98,000 from the addition of a senior lending officer and a commercial loan
processor to handle new commercial loan products. In addition, the Bank also
hired a financial officer during fiscal year 1995. Another primary factor was
the increase in professional fees of $87,000 due to increased accounting,
auditing fees and legal fees due to a prior attempt of conversion from mutual to
stock ownership. Other expenses have also increased $54,000 due to an overall
increase in printing and office supplies to accommodate the name change for the
Bank as a result of the conversion and the Bank also made a $20,000 contribution
to a scholarship fund of a university in New Mexico.
Income Tax Expense. Income tax expense decreased $56,000 or 14% from $395,000
for the year ended June 30, 1994 to $339,000 for the year ended June 30, 1995.
This decrease was attributable to the decrease in pre-tax earnings of $243,000.
Liquidity and Capital Resources
The Company is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of U.S. Government,
federal agency, and other investments having maturities of five years or less.
Current OTS regulations require that a savings institution maintain liquid
assets of not less than 5% of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less, of which short-term
liquid assets must consist of not less than 1%. At June 30, 1996, the Bank's
liquidity, as measured for regulatory purposes, was 13.6%. The Bank adjusts
liquidity as appropriate to meet its asset/liability objectives.
The Bank's primary sources of funds are deposits, borrowings, amortization and
prepayment of loans and mortgage-backed securities, maturities of investment
securities, and funds provided from operations. While scheduled loan repayments
are a relatively predictable source of funds, deposit flows and loan and
mortgage-backed security prepayments are significantly influenced by general
interest rates, economic conditions, and competition. In addition, the Bank
invests excess funds in overnight deposits which provide liquidity to meet
lending requirements and deposit fluctuations.
The Bank's most liquid assets are cash and cash equivalents, which include
investments in highly liquid short-term investments. The level of these assets
are dependent on the Bank's operating, financing, and investing activities
during any given period. At June 30, 1996, cash and cash equivalents totaled
$3.1 million. The Bank has another source of liquidity if a need for additional
funds should arise, that being FHLB of Dallas advances which can be easily
obtained using mortgage-backed and other securities as well as the Bank's
portfolio of loans secured by mortgages on 1-4 family dwellings. At June 30,
1996, the Bank had outstanding borrowings from the FHLB of Dallas of $10.9
million.
-12-
<PAGE>
The primary investment activity of the Bank is the origination of loans,
primarily mortgage loans. During the year ended June 30, 1996, the Bank
originated $20 million in total loans, of which $18 million were mortgage loans.
Another investment activity of the Bank is the investment of funds in U.S.
Treasury and agency securities, mortgage-backed securities, federal funds,
readily marketable equity securities, and FHLB of Dallas overnight funds. During
periods when the Bank's loan demand is limited, the Bank may purchase short term
investment securities to obtain a higher yield than otherwise available.
The Bank's cash flows are comprised of three primary classifications: cash flows
from operating activities, investing activities and financing activities. Cash
flows from operating activities, consisting principally of interest and
dividends received less interest paid on deposits, were $1.3 million and
$551,000 for the years ended June 30, 1996 and 1995, respectively. Net cash used
for investing activities consisting primarily of disbursement of loan
originations and investment and mortgage-backed security purchases, offset by
principal collections on loans and proceeds from the maturities of investment
securities, were $22 million and $7.5 million for the years ended June 30, 1996
and 1995, respectively. Net cash provided from financing activities consisting
primarily of net activity in deposit and escrow accounts and the proceeds
received from FHLB advances, were $19 million and $9.7 million for the years
ended June 30, 1996 and 1995, respectively.
Cash flows from operating activities increased $784,000 or 142% from the year
ended June 30, 1995 to the year ended June 30, 1996. This increase was primarily
due to an increase in net earnings of $282,000 and the declaration of $403,000
of dividends to stockholders. For the same periods, cash flows used by investing
activities increased $14.5 million primarily due to an increase in purchases of
investments and mortgage-backed securities as a result of new borrowings from
the FHLB. Purchases of investments and mortgage-backed securities increased
$14.9 million over the prior year. Cash flows from financing activities have
increased $9.3 million from the year ended June 30, 1995 to the year ended June
30, 1996 primarily due to the proceeds received on FHLB advances of $10.9
million and an overall increase in deposits of $9.4 million, partially offset by
the receipt during the year ended June 30, 1995 of $8.9 million from the
issuance of common stock.
The Bank anticipates that it will have sufficient funds available to meet its
current commitments. As of June 30, 1996, the Bank had commitments to fund loans
of $4.8 million. Certificates of deposit scheduled to mature in one year or less
totaled $19.3 million. Based on historical withdrawals, and on internal monthly
deposit reports monitored by management, management believes that a majority of
deposits will remain with the Bank. As a result, no adverse liquidity effects
are expected.
At June 30, 1996, the Bank exceeded each of the three OTS capital requirements
on a full-phased in basis.
Stock Repurchase Program
On July 31, 1996, the Company issued a press release announcing its intention to
repurchase up to 5% (47,347 shares) of the Company's common stock. The press
release indicated that the repurchased shares would become treasury shares and
would be utilized for general corporate and other purposes, including the
issuance of shares in connection with the exercise of stock options. The 47,347
shares were purchased in August, 1996, however, the Company has decided to
retire the shares at the advice of special counsel.
-13-
<PAGE>
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with Generally
Accepted Accounting Principles ("GAAP"), which require the measurement of
financial position and operating results primarily in terms of historical
dollars without considering the change in the relative purchasing power of money
over time and due to inflation. The impact of inflation is reflected in the
increased cost of the Company's operations. Unlike most industrial companies,
nearly all the assets and liabilities of the Company are financial. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the prices of goods and services.
Recent Legislation - Recapture of Post - 1987 Bad-Debt Reserves
The Small Business Job Protection Act of 1996 will, among other things, equalize
the taxation of thrifts and banks. The bill no longer allows thrifts a choice
between the percentage of taxable income method and the experience method in
determining additions to their bad debt reserves. Smaller thrifts with $500
million of assets or less are only allowed to use the experience method, which
is generally available to small banks currently. Larger thrifts must use the
specific charge off method regarding its bad debts. Any reserve amounts added
after 1987 will be taxed over a six year period beginning in 1996; however, bad
debt reserves set aside through 1987 will generally not be taxed. Institutions
can delay these taxes for two years if they meet a residential - lending test.
At June 30, 1996, the Bank had $55,936 of post 1987 bad-debt reserves. Any
recapture of the Bank's bad-debt reserves may have an adverse effect on net
earnings. The Bank is currently evaluating the legislation to determine its
effect.
New Accounting Standards
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-lived Assets to be Disposed of."
This Statement will be effective for the Company for the fiscal year ended June
30, 1997. This Statement establishes standards for the impairment whenever
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. The Statement also requires that long-lived assets to be
disposed of be reported at the lower of carrying value or fair value less cost
to sell. This Statement is not anticipated to have a material impact on the
Company's financial condition.
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights". This Statement amends FASB No. 65, "Accounting for Certain Mortgage
Banking Activities". This Statement requires that mortgage banking enterprises
recognize as separate assets the right to service mortgage loans for others,
however those servicing rights are acquired. Mortgage banking enterprises that
acquire mortgage servicing rights through either the purchase or origination of
mortgage loans and sells or securitizes those loans with servicing rights
retained should allocate the total cost of the mortgage loans to the mortgage
servicing rights and the loans (without the mortgage servicing rights) based on
their relative fair values if it is practicable to estimate those fair values.
This Statement applies to fiscal years beginning after December 31, 1995. The
Company currently does not retain servicing rights on sold loans, therefore,
this Statement is not anticipated to have a material impact on the Company's
financial condition.
-14-
<PAGE>
In October 1995, the FASB issued SFAS No. 123 "Statement on Accounting for
Stock-Based Compensation" which defines a "fair value based method" of
accounting for an employee stock option whereby compensation cost is measured at
the grant date based on the value of the award and is recognized over the
service period. The FASB encouraged all entities to adopt the fair value based
method, however, it will allow entities to continue the use of the "intrinsic
value based method" prescribed by Accounting Principles Board ("APB") Opinion
No. 25. Under the intrinsic value based method, compensation cost is the excess
of the market price of the stock at the grant date over the amount an employee
must pay to acquire the stock. However, most stock option plans have no
intrinsic value at the grant date and, as such, no compensation cost is
recognized under APB Opinion No. 25. Entities electing to continue use of the
accounting treatment of APB Opinion No. 25 must make certain pro forma
disclosures as if the fair value based method had been applied. The accounting
requirements of SFAS No. 123 are effective for transactions entered into in
fiscal years beginning after December 15, 1995. Pro forma disclosures must
include the effects of all awards granted in fiscal years beginning after
December 15, 1994. The Bank expects to continue to use the "intrinsic value
based method" as prescribed by APB Opinion No. 25. Accordingly, the impact of
adopting this Statement will not be material to the Bank's financial statements.
In June 1996, the FASB issued SFAS No. 125, "Statement on Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities",
which will be effective, on a prospective basis, for fiscal years beginning
after December 31, 1996. SFAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishment of
liabilities based on consistent application of a financial-components approach
that focuses on control. SFAS No. 125 extends the "available for sale" and
"trading" approach of SFAS No. 115 to non-security financial assets that can be
contractually prepaid or otherwise settled in such a way that the holder of the
asset would not recover substantially all of its recorded investment. In
addition, SFAS No. 125 amends SFAS No. 115 to prevent a security from being
classified as held to maturity if the security can be prepaid or settled in such
a manner that the holder of the security would not recover substantially all of
its recorded investment. The extension of the SFAS No. 115 approach to certain
non-security financial assets and the amendment to SFAS No. 115 are effective
for financial assets held on or acquired after January 1, 1997. Effective
January 1, 1997, SFAS No. 125 will supersede SFAS No. 122, which is discussed
above. Management has not yet determined the effect, if any, SFAS No. 125 will
have on the Company's financial statements.
-15-
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
GFSB Bancorp, Inc.
Gallup, New Mexico
We have audited the consolidated statement of financial condition of GFSB
Bancorp, Inc. and Subsidiary as of June 30, 1996, and the related consolidated
statements of earnings, changes in stockholders' equity, and cash flows for each
of the two years in the period ended June 30, 1996. 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 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 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 GFSB
Bancorp, Inc. and Subsidiary as of June 30, 1996, and the results of its
consolidated operations and its consolidated cash flows for each of the two
years in the period ended June 30, 1996 in conformity with generally accepted
accounting principles.
Atkinson & Co., Ltd.
Albuquerque, New Mexico
August 22, 1996
-16-
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
June 30, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash and due from banks (notes A3 and A14) $ 1,671,053
Interest-bearing deposits with banks (notes A3 and A14) 1,346,141
Federal funds sold (notes A3 and A14) 150,000
Available-for-sale investment securities (notes A4, A14, and C) 4,572,647
Available-for-sale mortgage-backed securities (notes A5, A14, B, and U) 25,245,896
Stock of Federal Home Loan Bank, at cost, restricted (note A17) 550,600
Loans receivable, net, substantially pledged (notes A6, A7, A14, D, S, and U) 38,727,535
Accrued interest and dividend receivable (notes A14, E, and U) 400,316
Premises and equipment (notes A9 and F) 537,042
Prepaid and other assets 49,405
------------
TOTAL ASSETS $ 73,250,635
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Transaction accounts (notes A14, G, and U) $ 3,239,079
Savings and now deposits (notes A14, G, and U) 10,758,974
Time deposits (notes A14, G, and U) 31,991,757
Accrued interest payable (notes A14 and U) 103,507
Advances from borrowers for taxes and insurance 174,532
Accounts payable and accrued liabilities 172,717
Deferred income taxes (notes A10 and L) 81,087
Dividends declared and payable 402,577
Advances from the Federal Home Loan Bank (notes A14, S, and U) 10,854,000
Income taxes payable 108,929
------------
TOTAL LIABILITIES 57,887,159
COMMITMENTS AND CONTINGENCIES (notes D and M) --
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 2,000,000
shares authorized; 948,750 issued and outstanding 91,080
Preferred stock, $.10 par value, 500,000
shares authorized; no shares issued or outstanding --
Additional paid-in-capital 8,486,822
Unearned ESOP stock (note N) (541,333)
Retained earnings, substantially restricted (note I) 7,199,360
Unrealized gain on available for sale
securities, net of taxes (note A4) 127,547
------------
TOTAL STOCKHOLDERS' EQUITY 15,363,476
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 73,250,635
============
</TABLE>
The accompanying notes are an integral part of these statements.
-17-
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
Years ended June 30,
1996 1995
---------- ----------
Interest income
Loans receivable (notes A6 and D)
Mortgage loans $2,838,874 $2,537,965
Commercial loans 202,259 208,819
Share and consumer loans 118,411 85,595
Available-for-sale investment securities and
mortgage-backed securities 1,569,434 648,045
Other interest-earning assets 146,847 78,313
---------- ----------
TOTAL INTEREST EARNINGS 4,875,825 3,558,737
Interest expense
Deposits (note G) 2,072,621 1,658,362
Advances from Federal Home Loan Bank 330,050 5,722
---------- ----------
2,402,671 1,664,084
---------- ----------
NET INTEREST EARNINGS 2,473,154 1,894,653
Provision for loan losses (note D) 28,099 101,000
---------- ----------
NET INTEREST EARNINGS AFTER
PROVISION FOR LOAN LOSSES 2,445,055 1,793,653
Non-interest earnings
Income from real estate operations 3,300 8,046
Miscellaneous income 10,454 137
Net gains from sales of loans 8,063 5,618
Service charge income 21,039 690
---------- ----------
TOTAL NON-INTEREST EARNINGS 42,856 14,491
Non-interest expense
Compensation and benefits 614,058 455,142
Professional fees 122,720 124,638
Occupancy 108,305 71,377
Advertising 34,358 10,949
Stock services 24,323 --
Data processing 92,522 74,842
Insurance 104,731 97,430
Other 166,852 129,142
---------- ----------
TOTAL NON-INTEREST EXPENSE 1,267,869 963,520
---------- ----------
The accompanying notes are an integral part of these statements.
-18-
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS - CONTINUED
Years ended June 30,
1996 1995
---------- ----------
EARNINGS BEFORE INCOME TAXES 1,220,042 844,624
Income tax expense (note L)
Currently payable 431,663 326,457
Deferred 343 12,121
---------- ----------
432,006 338,578
---------- ----------
NET EARNINGS $ 788,036 $ 506,046
========== ==========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING (note A12) 893,684 892,750
EARNINGS PER COMMON SHARE $ .88 $ .57
========== ==========
The accompanying notes are an integral part of these statements.
-19-
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Gain On
Additional Unearned Available
Common Stock Paid-in ESOP Retained For Sale
Shares Amount Capital Stock Earnings Securities, net Total
---------- ----------- ---------- ------------ ------------ ---------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1994 -- $ -- $ -- $ -- $ 6,531,511 $ 57,753 $ 6,589,264
Net earnings -- -- -- -- 506,046 -- 506,046
Unrealized gain on
available for sale
securities, net of taxes
(note A4) -- -- -- -- -- 103,945 103,945
Issuance of common
stock (note A1) 948,750 94,875 9,392,625 (560,000) -- -- 8,927,500
Conversion costs
(note A1) -- -- (372,002) -- -- -- (372,002)
-------- ------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30, 1995 948,750 94,875 9,020,623 (560,000) 7,037,557 161,698 15,754,753
Net earnings -- -- -- -- 788,036 -- 788,036
Unrealized gain (loss)
on available for sale
securities, net of
taxes -- -- -- -- -- (34,151) (34,151)
Acquisition of common
stock by the Bank for
the management stock
bonus plan (note P) -- (3,795) (541,736) -- -- -- (545,531)
Release of 1866.6667
shares of common stock
owned by the ESOP (note N) -- -- 7,935 18,667 -- -- 26,602
Dividends paid to
stockholders -- -- -- -- (626,233) -- (626,233)
-------- ------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30, 1996 948,750 $ 91,080 $ 8,486,822 $ (541,333) $ 7,199,360 $ 127,547 $ 15,363,476
======== ============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
-20-
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30,
Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>
1996 1995
------------ ------------
Cash flows from operating activities
<S> <C> <C>
Net earnings $ 788,036 $ 506,046
Adjustments to reconcile net earnings to
net cash provided by operations
Deferred loan origination fees (111,893) (83,263)
Gain on sale of sold loans (8,063) (5,618)
Provision for loan losses 28,099 101,000
Depreciation of premises and equipment 54,175 32,690
Amortization of investment and mortgage-
backed securities premiums (discounts) 111,875 39,185
Stock dividend on FHLB stock (29,900) (24,900)
Stock compensation 28,280 --
Release of ESOP stock 26,602 --
Provision for deferred income taxes 343 23,130
Net changes in operating assets and liabilities
Accrued interest receivable (180,352) (43,465)
Prepaid taxes 61,825 (61,825)
Prepaid and other assets (11,211) (600)
Accrued interest payable 45,364 24,930
Accounts payable and accrued liabilities 20,221 47,143
Income taxes payable 108,929 (3,726)
Dividends declared and payable 402,577 --
------------ ------------
Net cash provided by operating activities 1,334,907 550,727
Cash flows from investing activities
Purchase of premises and equipment (117,798) (81,995)
Loan originations and principal
repayment on loans, net (6,296,554) (2,894,883)
Principal payments on mortgage-backed securities 3,280,383 1,056,087
Purchases of mortgage-backed securities (18,060,661) (4,368,594)
Purchase of U.S. Agency Securities, FHLB
Debentures, bonds, and mutual funds (3,020,859) (1,796,328)
Maturities and proceeds from sale of FHLB
Debentures, U.S. Agency Securities,
certificates of deposit, and bonds 2,235,000 600,000
Purchase of FHLB stock (79,000) --
------------ ------------
Net cash used by investing activities (22,059,489) (7,485,713)
</TABLE>
The accompanying notes are an integral part of these statements.
-21-
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended June 30,
Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>
1996 1995
------------ -----------
Cash flows from financing activities
Net increase (decrease) in demand deposits,
passbook savings, money market accounts,
<S> <C> <C>
and certificates of deposit 9,387,305 1,115,369
Net increase (decrease) in mortgage escrow funds (92,282) 28,813
Proceeds from FHLB advances 10,854,000 1,500,000
Repayments on FHLB advances -- (1,500,000)
Proceeds from the issuance of common
stock received in cash -- 8,927,500
Conversion costs paid in cash -- (372,002)
Dividends paid or to be paid in cash (626,233) --
Purchase of GFSB Bancorp stock for
management stock bonus plan (545,531) --
------------ ------------
Net cash provided by
financing activities 18,977,259 9,699,680
------------ ------------
Increase (decrease) in cash and cash equivalents (1,747,323) 2,764,694
Cash and cash equivalents at beginning of year 4,914,517 2,149,823
------------ ------------
Cash and cash equivalents at end of year $ 3,167,194 $ 4,914,517
============ ============
Supplemental disclosures Cash paid during the year for:
Interest on deposits and advances $ 2,357,307 $ 1,639,154
Income taxes 235,198 381,000
Noncash investing activities
Transfers from/to loans to/from
real estate acquired through
foreclosure, net -- 75,377
Change in unrealized gain (loss), net of deferred taxes
for implementation of FASB #115 (34,151) 103,945
</TABLE>
The accompanying notes are an integral part of these statements.
-22-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies consistently applied in the
preparation of the accompanying statements follows:
1. Organization and Operations
---------------------------
On February 1, 1995, the Board of Directors of Gallup Federal Savings and
Loan Association (the Association), adopted a Plan of Conversion ("the
conversion"). The conversion allowed the Association to convert from a
federal mutual savings and loan association to a federal stock savings bank
with the concurrent formation of a holding company (GFSB Bancorp, Inc.). The
conversion was approved by the Office of Thrift Supervision, the Securities
and Exchange Commission, and the members of the Association, and on June 29,
1995 the conversion became effective. The conversion was accomplished through
amendment of the Association's federal charter and the sale of the holding
company's common stock. The Association also changed its name to Gallup
Federal Savings Bank (the Bank).
GFSB Bancorp, Inc. (the Company) is a unitary savings and loan holding
company that was incorporated in March 1995 under the laws of the State of
Delaware. The Company acquired all of the common stock of GFSB on June 29,
1995 and the Company also made its initial public offering of common stock.
The Company issued 948,750 shares of $.10 par value common stock at $10 per
share. Net proceeds, after deducting conversion expenses of $372,002 were
$9,115,498 and were reflected as common stock and additional paid in capital
in the accompanying consolidated statement of financial condition.
2. Basis of Presentation
---------------------
The accompanying consolidated financial statements include the accounts of
GFSB Bancorp and the Bank. All significant balances and transactions between
entities have been eliminated.
3. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include cash on hand, cash items, amounts due from
banks, amounts held with the Federal Reserve Bank, interest bearing deposits
with the Federal Home Loan Bank, and federal funds sold. Generally, federal
funds sold are purchased and sold for one-day periods. For purposes of the
statements of cash flows, the Company considers all highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents. The amounts in each of these above categories are as follows:
-23-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
3. Cash and Cash Equivalents - Continued
-------------------------------------
June 30,
1996
-------------
Cash on hand $ 302,371
Cash items 3,504
Amounts due from banks 1,189,373
Interest bearing deposits 1,346,141
Federal funds sold 150,000
Federal Reserve Bank deposits 175,805
--------------
$ 3,167,194
=============
4. Available-for-Sale Investment Securities
----------------------------------------
Investment securities consist of stock owned in the Federal Home Loan
Mortgage Corporation ("FHLMC"), Federal Home Loan Bank debentures, U.S.
Government Securities, Federal Farm Credit Bank debentures, FNMA debentures,
and mutual funds. During the fiscal year ended June 30, 1994, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." SFAS 115
expands the use of fair value accounting for debt and equity securities. It
requires that entities classify their debt and equity securities into one of
three categories: held-to-maturity, available for sale, or trading. The
Company has classified its investment portfolio and all mortgage-backed
securities as available for sale, and, accordingly, as required by SFAS 115,
accounted for its investments at fair value. (See also note A5). As a result
of the adoption of SFAS 115, the Company has recorded a net unrealized gain,
net of deferred income taxes, of $127,547 and $161,698 as an increase to
equity at June 30, 1996 and 1995, respectively.
Gains and losses on the sale of investment securities are determined using
the specific identification method.
5. Available-for-Sale Mortgage-Backed Securities
---------------------------------------------
All mortgaged-backed and related securities are stated at fair value as they
are classified as available-for-sale securities.
Gains and losses on the sale of mortgaged-backed securities are based on the
specific identification method. All sales are made without recourse.
At June 30, 1996, the Company had no outstanding commitments to sell any
securities.
-24-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
6. Loans Receivable
----------------
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at unpaid principal
balances, less the allowance for loan losses, and net deferred loan
origination fees and discounts. Two mortgage loans were held for sale at June
30, 1996 in the amount of $185,575, which approximates market value. These
two loans have not been separately disclosed on the statement of financial
condition given the minimal dollar amounts in relation to the total loan
portfolio.
The allowance for loan losses is increased by charges to income and decreased
by charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral,
and current economic conditions.
The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan" on July 1, 1995. SFAS No. 114 requires that the Company establish a
specific loan allowance on an impaired loan if the present value of the
future cash flows discounted using the loan's effective interest rate is less
than the carrying value of the loan. An impaired loan can be valued based
upon its fair value or the market value of the underlying collateral if the
loan is primarily collateral dependent. The Company assesses for impairment
all loans delinquent more than 90 days. The Statement does not allow for
previously issued financial statements to be restated and its adoption had no
effect on the Bank's 1996 financial statements. See note C for a further
explanation of the Statement.
Uncollectible interest on loans that are contractually past due is charged
off, or an allowance account 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 cash payments are received, until, in management's
judgment, the borrower's ability to make periodic principal and interest
payments is back to normal, in which case the loan is returned to accrual
status.
Mortgage loans sold to others are not included in the accompanying statements
of financial condition. For the years ended June 30, 1996 and 1995, $490,118
and $274,203, respectively, of loans have been sold. No servicing rights were
retained on these loans. Gains on the sale of these loans were $8,063 in 1996
and $5,618 in 1995.
-25-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
7. Loan Origination Fees and Related Costs
---------------------------------------
Loan fees are accounted for in accordance with FASB Statement of Financial
Accounting Standards No. 91, "Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases." Loan fees and certain direct loan origination costs are deferred,
and the net fee is recognized as an adjustment to interest income using the
interest method over the contractual life of the loans. Historical prepayment
experience for the Company is minimal for purposes of adjusting the
contractual life of the loans.
8. Foreclosed Real Estate
----------------------
Real estate properties acquired through, or in lieu of, loan foreclosure are
initially recorded at fair value at the date of foreclosure. The Company
generally holds foreclosed assets as held for sale, and accordingly, after
foreclosure, such assets are carried at the lower of fair value minus
estimated costs to sell, or cost. Valuations are periodically performed by
management, and an allowance for losses is established by a charge to
operations if the fair value of a property does not exceed its cost. The
Company had no foreclosed real estate at June 30, 1996.
9. Premises and Equipment
----------------------
Land is carried at cost. Building, furniture, fixtures, and equipment are
carried at cost, less accumulated depreciation. Building, furniture,
fixtures, and equipment are depreciated using a straight-line method over the
estimated useful lives of the assets. Maintenance and repairs are charged to
earnings in the period incurred.
10.Income Taxes
------------
Deferred income taxes are provided on temporary differences in the
recognition of income and expense for tax and financial reporting purposes.
These items consist principally of loan origination fees, income and expense
on foreclosed real estate, depreciation, delinquent interest, compensation
cost, and the bad debt reserve.
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities as
measured by the enacted tax rates that will be in effect when these
differences reverse as prescribed in FASB Statement No. 109, "Accounting for
Income Taxes". The principal differences between assets and liabilities for
financial statement and tax purposes are accumulated depreciation of premises
and equipment, the recognition of loan origination fees, and unrealized
holding gains and losses on available-for-sale securities. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes in the period of enactment.
-26-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
11.Reclassifications
-----------------
Certain reclassifications have been made to the 1995 financial statements to
conform to the 1996 presentation.
12.Earnings Per Share
------------------
For 1996, earnings per share have been computed on the basis of the weighted
average number of shares of common stock outstanding for the year. Earnings
per share for 1995 have been computed on the basis of the weighted average
number of shares of common stock which would have been outstanding if the
conversion from mutual to stock ownership had occurred on the first day of
the year rather than on June 29, 1995.
The Company accounts for the shares acquired by its ESOP in accordance with
Statement of Position 93-6; shares controlled by the ESOP are not considered
in the weighted average shares outstanding until the shares are committed for
allocation to an employee's individual account.
13.Advertising
-----------
The Company expenses advertising costs as incurred. Such expenses are shown
in the consolidated statements of earnings; no amounts of advertising are
carried as assets.
14.Fair Value of Financial Instruments
-----------------------------------
The following methods and assumptions were used by the Company in estimating
fair values of financial instruments as disclosed herein:
Cash and cash equivalents - The carrying amount of cash and cash equivalents
approximate their fair value.
Available-for-sale securities - Fair values for securities are based on
quoted market prices.
Loans receivable - For variable-rate loans that reprice frequently and have
no significant change in credit risk, fair values are based on carrying
values. Fair values for certain mortgage loans are based on quoted market
prices of similar loans sold in conjunction with securitization transactions.
Fair values for commercial real estate and commercial loans are estimated
using discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality.
Fair values for impaired loans are estimated using discounted cash flow
analyses or underlying collateral values, where applicable.
-27-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
14.Fair Value of Financial Instruments - Continued
-----------------------------------------------
Deposit liabilities - The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date (that
is, their carrying amounts). The carrying amounts of fixed-term money market
accounts approximate their fair values at the reporting date. Fair values for
fixed-rate certificates of deposits are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on time
deposits.
Short-term borrowings - The carrying amounts of short-term borrowings
maturing within 90 days approximate their fair values. Fair values of
borrowings maturing beyond 90 days are estimated using discounted cash flow
analyses based on the Bank's current incremental borrowing rates for similar
types of borrowing arrangements.
Off-balance-sheet instruments - Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counter parties' credit standings.
15.Financial Instruments
---------------------
In the ordinary course of business the Company has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit and commercial letters of credit. Such financial instruments are
recorded in the financial statements when they are funded or related fees are
incurred or received.
16.Estimates
---------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that effect certain reported amounts and disclosures. Accordingly, actual
results could differ from those estimates.
A substantial estimate for the Company is the allowance for loan losses. This
estimate could change substantially within a year if borrowers' ability to
repay or the estimated value of underlying collateral should decline
dramatically.
17.Investment in Federal Home Loan Bank Stock
------------------------------------------
The Bank, as a member of the Federal Home Loan Bank System, is required to
maintain an investment in it's capital stock of the Federal Home Loan Bank
(FHLB) in an amount equal to the greater of 1% of its outstanding home loans
or 5% of advances from the FHLB. No ready market exists for the Federal Home
Loan Bank Stock, and it has no quoted market value.
-28-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE B - AVAILABLE-FOR-SALE MORTGAGE-BACKED SECURITIES
The carrying values and estimated fair values of available-for-sale
mortgage-backed securities are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Principal Unamortized Amortized Holding Holding
June 30, 1996: Balance Premiums Cost Gains Losses Fair Value
- -------------- ----------- ----------- ----------- ----------- --------- ----------
FNMA ARM
<S> <C> <C> <C> <C> <C> <C>
Certificates $12,229,017 $ 345,281 $12,574,298 $ 22,566 $ (103,556) $ 12,493,308
FHLMC ARM
Certificates 3,206,335 90,910 3,297,245 5,448 (22,592) 3,280,101
GNMA ARM
Certificates 9,346,458 280,040 9,626,498 -- (154,011) 9,472,487
----------- ----------- ----------- ---------- ----------- -----------
$24,781,810 $ 716,231 $25,498,041 $ 28,014 $ (280,159) $ 25,245,896
=========== =========== =========== ========== =========== ===========
</TABLE>
During the year ended June 30, 1996 and 1995, the Company did not have any
proceeds from the sales of mortgage-backed securities. At June 30, 1996, the
Company had pledged $3,223,208 (par value) in mortgage-backed securities to
public entities who have on deposit amounts in excess of the federally
insured limit.
NOTE C - AVAILABLE-FOR-SALE INVESTMENTS
The amortized cost and fair values of available-for-sale investment equity
securities and investments in debt securities are summarized as follows:
June 30, 1996
--------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
---------- ---------- ----------- ----------
Mutual funds $2,027,265 $ -- $ (3,143) $2,024,122
FHLB Debentures 900,000 -- (10,594) 889,406
FFCB Debentures 198,436 752 -- 199,188
FHLMC Stock 7,786 462,123 -- 469,909
U.S. Treasury bill 993,761 -- (3,739) 990,022
---------- ---------- ----------- ----------
$4,127,248 $ 462,875 $ (17,476) $4,572,647
========== ========== =========== ==========
-29-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE C - AVAILABLE-FOR-SALE INVESTMENTS - CONTINUED
The amortized cost and fair value of all debt and equity securities by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
June 30, 1996
-----------------------------
Amortized Fair
Cost Value
------------ ------------
Available for sale:
Due within one year $ 2,725,701 $ 2,722,841
Due after one year through five years 1,393,761 1,379,897
FHLMC stock 7,786 469,909
Mortgage-backed securities 25,498,041 25,245,896
------------ ------------
$ 29,625,289 $ 29,818,543
============ ============
No investments were sold in 1996 or 1995. The change in the net unrealized
net holding gains and losses recorded through the equity section for June 30,
1996 is a net loss of $34,151.
NOTE D - LOANS RECEIVABLE
Loans receivable are summarized as follows:
June 30,
1996
------------
First mortgage loans (principally conventional)
Principal balances
Secured by one-to-four family residences $ 27,831,792
Secured by other properties 7,959,941
Construction loans 3,059,726
Share loans 1,141,057
Commercial loans 1,632,834
Consumer loans
Unsecured 103,505
Secured by vehicles 169,929
Home equity lines 274,164
------------
42,172,948
Less
Undisbursed portion of loans (2,106,108)
Loan participations sold (710,453)
Net deferred loan origination fees (319,735)
Allowance for loan losses (309,117)
-------------
$ 38,727,535
============
-30-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE D - LOANS RECEIVABLE - CONTINUED
Activity in the allowance for loan losses is summarized as follows:
June 30, June 30,
1996 1995
------------ ------------
Balance at beginning of year $ 316,520 $ 196,045
Provision charged to income 28,099 101,000
Charge-offs and other (35,502) 19,475
------------ -----------
Balance at end of year $ 309,117 $ 316,520
============ ============
The Company had commitments to fund new loans as follows:
June 30,
1996
------------
Fixed rate $ 2,381,272
Variable rate 2,393,998
------------
Total $ 4,775,270
============
Fixed rate commitments for the years ended June 30, 1996 had interest rates
that ranged from 8.125% to 10.0%.
Nonaccrual and renegotiated loans for which interest has been reduced totaled
$149,324 at June 30, 1996. Interest income that was foregone amounted to
$6,396. There were no nonaccrual and renegotiated loans for which interest
has been reduced at June 30, 1995.
The weighted average rate for the loan portfolio at June 30, 1996 is 9.22%.
On July 1, 1995, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan",
as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan
- Income Recognition and Disclosure", which requires that the Company
establish a specific allowance on impaired loans and disclosure of the
Company's method of accounting for interest income on impaired loans. The
Bank assesses all loans delinquent more than 90 days for impairment and such
loans amounted to $151,423 at June 30, 1996. Average balances for loans
delinquent more than 90 days totaled approximately $113,670 for the year
ended June 30, 1996. These loans are all primarily collateral dependent and
management has determined that the underlying collateral is in excess of the
carrying amount. As a result, the Company has determined that specific
allowances on these loans is not required.
-31-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE E - ACCRUED INTEREST AND DIVIDENDS RECEIVABLE
Accrued interest and dividends receivable is summarized as follows:
June 30,
1996
-----------
Loans receivable $ 206,526
Available-for-sale investment securities 27,241
Available-for-sale mortgage-backed securities 166,549
-----------
$ 400,316
===========
NOTE F - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
June 30,
1996
-----------
Buildings $ 522,400
Furniture, fixtures, and equipment 368,557
Land 35,050
Parking lot improvements 5,265
-----------
931,272
Less allowance for depreciation (394,230)
-----------
$ 537,042
===========
NOTE G - DEPOSITS
Deposits are summarized as follows:
Weighted
Average
Rate at June 30, 1996
June 30, --------------------------------
1996 Amount Percent
--------- ------------ ------------
Passbook savings
accounts 2.99% $ 2,541,296 5.53%
Money market
accounts 4.00% 8,217,678 17.87
Transaction accounts 1.66% 3,239,079 7.04
------------ ----------
13,998,053 30.44
-32-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE G - DEPOSITS - CONTINUED
Deposits are summarized as follows:
Weighted
Average
Rate at June 30, 1996
June 30, ---------------------------------
1996 Amount Percent
-------- ------------- ----------
Certificates of
deposit:
2.50%-6.00% 4.83% 22,625,940 49.19
6.00%-7.00% 6.31% 8,603,147 18.71
7.00%-8.00% 7.18% 762,670 1.66
------------- ---------
31,991,757 69.56
------------- --------
$45,989,810 100%
============= ========
The aggregate amount of jumbo certificates with a minimum denomination of
$100,000 was $6,282,377 at June 30, 1996.
Certificates of deposit by maturity dates are as follows:
June 30,
1996
-----------
3 months or less $ 6,414,589
3 months to 6 months 5,527,888
6 months to 1 year 7,382,017
1 year to 2 years 5,902,867
2 years to 3 years 2,747,470
Thereafter 4,016,926
-----------
$31,991,757
===========
Interest expense on deposits is summarized as follows:
June 30,
---------------------------
1996 1995
------------ ------------
Certificates of deposit $ 1,707,183 $ 1,251,577
Money market accounts 278,238 295,492
Passbook savings 76,743 111,293
Transaction deposits 10,457 -
------------ ------------
$ 2,072,621 $ 1,658,362
============ ============
-33-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE H - MONEY PURCHASE PENSION PLAN
Prior to the formation of GFSB Bancorp, the Bank had a money purchase pension
plan (wholly funded by the Bank) which covered all regular employees with one
or more years of service. The Bank made a contribution of 7.5% of an
employees compensation or earned income. Voluntary nondeductible employee
contributions were allowed up to 10%. It was the Bank's policy to fund
pension costs monthly. Pension expense of the plan for the year ended June
30, 1995 amounted to $9,377. This plan was terminated and has been replaced
with a stock option plan and a management bonus stock plan. See note P.
NOTE I - REGULATORY MATTERS AND RESTRICTIONS ON RETAINED
EARNINGS
The Bank is subject to certain restrictions on the amount of dividends that
it may declare without prior regulatory approval. The Bank is also subject to
various regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that,
if undertaken, could have a direct material effect on the 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. Management believes, as of June 30, 1996, that the Bank meets
all capital adequacy requirements to which it is subject.
Current regulations require institutions to have a minimum regulatory
tangible capital equal to 1.5 percent of total assets, a minimum 3 percent
leverage capital ratio and an 8 percent risk-based capital ratio.
The Bank at June 30, 1996, meets the regulatory tangible capital and core
capital requirements and the risk-based capital requirement of 8 percent of
total risk-adjusted assets. The following is a reconciliation of net worth to
regulatory capital as reported in the June 30, 1996 report to the Office of
Thrift Supervision ("OTS"):
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE I - REGULATORY MATTERS AND RESTRICTIONS ON RETAINED
EARNINGS - CONTINUED
June 30,
1996
-------------
Regulatory net worth per report to OTS $ 11,722,335
Audit adjustments
Decrease in income taxes 47,957
Increase in compensation cost (28,280)
-------------
Net worth as reported per the
accompanying financial statements (Bank only) $ 11,742,012
=============
The following is a reconciliation of the Bank's capital in accordance with
generally accepted accounting principles (GAAP) to the three components of
regulatory capital calculated under regulatory requirements at June 30, 1996:
<TABLE>
<CAPTION>
June 30, 1996
------------------------------------------------------------------
Tangible Capital Core Capital Risk-Based Capital
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
GAAP Capital $11,742,012 -- $11,742,012 -- $11,742,012 --
Qualifying general
loan loss allowance -- -- -- -- 309,117 --
----------- ----- ----------- ----- ----------- -----
Regulatory capital
computed 11,742,012 15.94% 11,742,012 15.94% 12,051,129 37.71%
Minimum capital
requirement 1,104,981 1.50 2,209,962 3.00 2,556,480 8.00
----------- ----- ----------- ----- ----------- -----
Regulatory capital
excess $10,637,031 14.44% $ 9,532,050 12.94% $ 9,494,649 29.71%
=========== ===== =========== ===== =========== =====
</TABLE>
-35-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE J - RELATED PARTY TRANSACTIONS
The Company has several loans receivable from related parties. The Company's
policy is that all such loan transactions be on the same terms, including
interest rates and collateral, as those prevailing at the same time for
comparable transactions with others.
A summary of the activity for outstanding loans receivable to related parties
is as follows:
June 30,
1996
------------
Balance, beginning of year $ 1,156,473
New loans 741,041
Repayments (470,835)
------------
Balance, end of year $ 1,426,679
============
The Company also has several deposits from related parties. Outstanding
deposits from related parties at June 30, 1996 amounted to $1,890,973.
NOTE K - CONCENTRATIONS OF CREDIT RISK
The Company is active in originating primarily first mortgage loans primarily
in McKinley County, New Mexico. At June 30, 1996, the Company had $40,066,840
of loans outstanding and unfunded commitments of $4,775,270. Significant
loans are approved by the Board of Directors through its loan committee.
Collateral is required on all real estate loans, commercial loans, and the
majority of consumer loans. Real estate exposure is primarily limited to the
county in which the Company operates. The Company generally maintains loan to
value ratios of no greater than 80%.
NOTE L - INCOME TAXES
Income tax expense consists of:
June 30,
------------------------------
1996 1995
------------ ------------
Current
Federal $ 377,633 $ 290,809
State 54,030 35,648
------------ ------------
431,663 326,457
-36-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE L - INCOME TAXES - CONTINUED
June 30,
------------------------------
1996 1995
------------ ------------
Deferred provision
Federal 291 10,303
State 52 1,818
------------ ------------
343 12,121
------------ ------------
$ 432,006 $ 338,578
============ ============
Deferred taxes consists of the following:
June 30,
1996
------------
Deferred tax receivable arising from reserve for
delinquent interest $ 2,558
Deferred tax liability arising from using accelerated
depreciation for income tax purposes (44,519)
Deferred tax receivable arising from recognition
of loan origination fees 47,217
Deferred tax liability arising from recognition of
real estate owned income and expense (7,558)
Deferred tax receivable arising from recognition of
compensation cost for financial reporting not
recognized for tax purposes 11,313
Deferred tax liability arising from
an excess bad debt tax reserve over
the base year bad debt tax reserve (24,392)
Deferred tax liability arising from
unrealized holding gains on available
for sale securities (65,706)
Deferred tax receivable arising from
the book bad debt reserve 123,646
-37-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE L - INCOME TAXES - CONTINUED
Valuation allowance for deferred tax
receivables (123,646)
Net deferred tax liability $ (81,087)
============
The Company has recorded a valuation allowance against the deferred tax
receivable in 1996 relating to the receivable arising from the book bad debt
reserve.
The Company has also recorded a deferred tax liability of $65,706 at June 30,
1996 in connection with the adoption of Statement of Financial Accounting
Standards No. 115 (See note A4). The deferred tax liability is the result of
the unrealized holding gains on available-for-sale securities. The deferred
tax liability has been recorded as a reduction to the unrealized holding gain
and reported as a separate component of equity as required by Statement No.
115.
If certain conditions are met in determining taxable income, the Internal
Revenue Code permits thrift institutions to deduct from taxable income an
allowance for bad debts limited to 8% of taxable income, subject to certain
limitations.
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory rates to income tax expense is:
June 30,
-----------------------------
1996 1995
----------- -------------
Tax at U.S. statutory rate of 34% $ 414,814 $ 287,172
State income taxes, net of federal
tax benefit 35,694 23,528
Other - net (18,502) 27,878
----------- -------------
$ 432,006 $ 338,578
=========== =============
Effective tax rate 35% 40%
NOTE M - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to five irrevocable letters of credit which total
$111,813. One of the letters of credit in the amount of $5,000 is for Vernon
Hamilton Construction Co., Inc., a company substantially owned by a director
of the Company. The letter of credit is secured by a $20,000 certificate of
deposit issued by the Bank. The Bank's exposure to credit loss in the event
of nonperformance by the other party to the letters of credit are represented
by the contractual notional amount of the letters of credit. The Company uses
the same credit policies in making commitments and conditional obligations as
it does for on-balance-sheet instruments.
-38-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE N - EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the conversion (see note A1), the Company adopted an
Employee Stock Ownership Plan (ESOP) for the benefit of all of its full time
employees. Contributions to the Plan are determined at the discretion of the
Company and are limited to the maximum amount deductible for income tax
purposes. Eligible employees include all full time employees with a minimum
of one year of service as of any anniversary date of the Plan. The ESOP
purchased 56,000 common shares of the Company's stock issued in the
conversion, which was funded by a $560,000 loan from the Company. In
accordance with Statement of Position 93-6, the unpaid balance of the ESOP
loan has been eliminated on the Company's consolidated statement of financial
condition. Stockholders' equity has been reduced by the aggregate purchase
price of the shares owned by the ESOP, net of the shares committed to be
released. Contributions to the ESOP by the Company are made to fund the
principal and interest payments on the debt of the ESOP. As of June 30, 1996,
1,866.667 ESOP shares were released, and for the year ended June 30, 1996,
$54,473 in contributions were made to the ESOP by the Company.
NOTE O - NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-lived Assets to be Disposed
of." This Statement will be effective for the Company for the fiscal year
ended June 30, 1997. This Statement establishes standards for the impairment
whenever events or changes in circumstances indicate that the carrying value
of an asset may not be recoverable. The Statement also requires that
long-lived assets to be disposed of be reported at the lower of carrying
value or fair value less cost to sell. This Statement is not anticipated to
have a material impact on the Company's financial condition.
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights". This Statement amends FASB No. 65, "Accounting for Certain Mortgage
Banking Activities". This Statement requires that mortgage banking
enterprises recognize as separate assets the right to service mortgage loans
for others, however those servicing rights are acquired. Mortgage banking
enterprises that acquire mortgage servicing rights through either the
purchase or origination of mortgage loans and sells or securitizes those
loans with servicing rights retained should allocate the total cost of the
mortgage loans to the mortgage servicing rights and the loans (without the
mortgage servicing rights) based on their relative fair values if it is
practicable to estimate those fair values. This Statement applies to fiscal
years beginning after December 31, 1995. The Company currently does not
retain servicing rights on sold loans, therefore, this Statement is not
anticipated to have a material impact on the Company's financial condition.
-39-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE O - NEW ACCOUNTING STANDARDS - CONTINUED
In October 1995, the FASB issued SFAS No. 123, "Statement on Accounting for
Stock-Based Compensation" which defines a "fair value based method" of
accounting for an employee stock option whereby compensation cost is measured
at the grant date based on the value of the award and is recognized over the
service period. The FASB encouraged all entities to adopt the fair value
based method, however, it will allow entities to continue the use of the
"intrinsic value based method" prescribed by Accounting Principles Board
("APB") Opinion No. 25. Under the intrinsic value based method, compensation
cost is the excess of the market price of the stock at the grant date over
the amount an employee must pay to acquire the stock. However, most stock
option plans have no intrinsic value at the grant date and, as such, no
compensation cost is recognized under APB Opinion No. 25. Entities electing
to continue use of the accounting treatment of APB Opinion No. 25 must make
certain pro forma disclosures as if the fair value based method had been
applied. The accounting requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years beginning after December 15, 1995.
Pro forma disclosures must include the effects of all awards granted in
fiscal years beginning after December 15, 1994. The disclosure requirements
of this Statement are effective for financial statements for fiscal years
beginning after December 15, 1995. The Bank expects to continue to use the
"intrinsic value based method" as prescribed by APB Opinion No. 25.
Accordingly, the impact of adopting this Statement will not be material to
the Bank's financial statements.
In June 1996, the FASB issued SFAS No. 125, "Statement on Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities", which will be effective, on a prospective basis, for fiscal
years beginning after December 31, 1996. SFAS No. 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities based on consistent application of a
financial-components approach that focuses on control. SFAS No. 125 extends
the "available for sale" and "trading" approach of SFAS No. 115 to
non-security financial assets that can be contractually prepaid or otherwise
settled in such a way that the holder of the asset would not recover
substantially all of its recorded investment. In addition, SFAS No. 125
amends SFAS No. 115 to prevent a security from being classified as held to
maturity if the security can be prepaid or settled in such a manner that the
holder of the security would not recover substantially all of its recorded
investment. The extension of the SFAS No. 115 approach to certain
non-security financial assets and the amendment to SFAS No. 115 are effective
for financial assets held on or acquired after January 1, 1997. Effective
January 1, 1997, SFAS No. 125 will supersede SFAS No. 122, which is discussed
above. Management has not yet determined the effect, if any, SFAS No. 125
will have on the Company's financial statements.
-40-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE P - STOCK PLANS
On January 5, 1996, the Board of Directors of the Company adopted a Stock
Option Plan. Pursuant to the Plan, an amount of stock equal to 10% of the
shares of common stock (94,875 shares) of the Corporation issued and
outstanding will be reserved for issuance by the Company upon exercise of
stock options which may be granted to directors, officers, and other key
employees from time to time. The Plan provides for both Incentive Stock
Options and Non-Incentive Stock Options. The options have an exercise date of
ten years from the date of grant. In connection with the adoption of the
Plan, the Company granted 25,000 incentive stock options and 28,462
non-incentive stock options to its directors, officers, and other key
employees. The option price established for the shares upon exercise was $13
7/8 per share. As of June 30, 1996, no shares have been exercised. Remaining
shares available to be granted in the future amount to 41,413.
The Company also adopted a Management Stock Bonus Plan on January 5, 1996.
Sufficient funds were contributed to the Plan representing up to 4% of the
aggregate number of shares issued in the conversion. Awards under the Plan
are determined based on the position and responsibilities of the employees,
the length and value of their services, and the compensation paid to
employees. On January 5, 1996, the Company made awards under the Plan in the
amount of 20,382 shares. The shares were awarded at a price of $13 7/8 per
share. At June 30, 1996, 17,568 shares remain to be awarded under the Plan in
the future. Awards under the Plan are earned at the rate of one-fifth of the
award per year as of the one-year anniversary of the effective date of the
Plan. As a result, at June 30, 1996, a liability and corresponding
compensation cost in the amount of $28,280 has been recorded under the
provisions of the Plan.
NOTE Q - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data are presented below by quarter for the
years ended June 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 Quarter Ended
--------------------------------------------------------
September 30 December 31 March 31 June 30
------------- ------------- ---------- ------------
Net interest income
after provision for
<S> <C> <C> <C> <C>
loan losses $ 631,313 $ 594,938 $ 622,271 $ 596,533
Other income 1,985 11,191 6,637 23,043
Other expenses 237,453 352,439 356,241 321,736
Earnings before
income taxes 395,845 253,690 272,667 297,840
Net earnings 266,480 136,248 159,683 225,625
Earnings per common
share .30 .15 .18 .25
</TABLE>
-41-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE Q - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
- CONTINUED
<TABLE>
<CAPTION>
1995 Quarter Ended
--------------------------------------------------------
September 30 December 31 March 31 June 30
------------- ------------- ---------- ------------
Net interest income
after provision for
<S> <C> <C> <C> <C>
loan losses $ 457,945 $ 385,435 $ 481,773 $ 474,808
Other income 1,913 2,492 1,999 1,779
Other expenses 346,455 150,931 226,036 240,098
Earnings before
income taxes 113,403 236,995 257,737 236,489
Net earnings 73,793 113,834 164,350 154,069
</TABLE>
NOTE R - SUBSEQUENT EVENTS
On July 31, 1996, the Company announced its intention to repurchase up to 5%
of its common stock and on August 22, 1996, the Company repurchased 12,000
shares at $13.9375 per share. In addition, on August 30, 1996, the Company
repurchased an additional 35,347 shares at $14.125 per share. The repurchased
shares will be retired. Subsequent to June 30, 1996, the Company also
purchased a $5,000,000 adjustable rate FNMA mortgage-backed security through
a leveraged transaction by borrowing an additional $5,000,000 from the FHLB.
On August 22, 1996, the Bank entered into two participation agreements to
purchase an interest in loans held by a Houston financial institution.
Funding for the participations is expected to approximate $1,019,169.
On July 23, 1996, the City of Gallup passed an ordinance to allow the Company
to purchase from the City a real estate property adjacent to the Company's
existing facility for $123,500. The purchase is expected to close on October
2, 1996.
NOTE S - FEDERAL HOME LOAN BANK ADVANCES
In October 1995, the Bank entered into an "Advances, Collateral Pledge and
Security Agreement" (the Agreement) with the Federal Home Loan Bank (FHLB).
The purpose of the Agreement is to allow the Bank to obtain extensions of
credit from the FHLB to use in its operations. At June 30, 1996, the Bank has
$10,854,000 in outstanding advances with the FHLB. The advances bear interest
and mature as follows:
-42-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE S - FEDERAL HOME LOAN BANK ADVANCES - CONTINUED
Unpaid principal balance Interest Rate Maturity
------------------------ ------------- -----------------
$ 5,000,000 5.7% November 18, 1996
5,000,000 5.62% December 16, 1996
854,000 5.5% July 1, 1996
-------------
$ 10,854,000
=============
The $854,000 advance was repaid in July, 1996. The advances are secured by
the Bank's investment in FHLB stock of $550,600 and a FNMA mortgage-backed
security in the amount of $849,679. In addition, the advances are secured
under a "blanket credit facility" whereby all of the Bank's 1-4 family real
estate loans are also collateral under the advance agreement.
NOTE T - DETAILS OF CONSOLIDATED FINANCIAL STATEMENTS
The following represents the details of consolidation with respect to GFSB
Bancorp, Inc. and the Bank:
Details Of Consolidated Statement Of Financial Condition
June 30, 1996
ASSETS
<TABLE>
<CAPTION>
Gallup GFSB
GFSB Federal Bancorp,
Bancorp, Savings Inc. and
Inc. Bank Eliminations Subsidiary
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Cash and due from banks $ -- $ 1,671,053 $ -- $ 1,671,053
Interest-bearing deposits with banks -- 1,346,141 -- 1,346,141
Federal funds sold -- 150,000 -- 150,000
Available-for-sale investment securities -- 4,572,647 -- 4,572,647
Mortgage-backed securities -- 25,245,896 -- 25,245,896
Stock of Federal Home Loan Bank, at cost, restricted -- 550,600 -- 550,600
Loans receivable, net 4,568,899 38,727,535 (4,568,899) 38,727,535
Accrued interest and dividends receivable 47,160 400,316 (47,160) 400,316
Premises and equipment, net -- 537,042 -- 537,042
Prepaid and other assets 3,234 46,171 -- 49,405
Investment in subsidiary 4,557,750 545,531 (5,103,281) --
----------- ----------- ----------- -----------
TOTAL ASSETS $ 9,177,043 $73,792,932 $(9,719,340) $73,250,635
=========== =========== =========== ===========
</TABLE>
-43-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE T - DETAILS OF CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Gallup GFSB
GFSB Federal Bancorp,
Bancorp, Savings Inc. and
Inc. Bank Eliminations Subsidiary
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Transaction accounts $ -- $ 3,239,079 $ -- $ 3,239,079
Savings and now deposits -- 10,938,597 (179,623) 10,758,974
Time deposits -- 31,991,757 -- 31,991,757
Accrued interest payable -- 150,667 (47,160) 103,507
Advances from borrowers for taxes and insurance -- 174,532 -- 174,532
Accounts payable and accrued liabilities 30,187 142,530 -- 172,717
Deferred income taxes -- 81,087 -- 81,087
Advances from parent company -- 4,215,000 (4,215,000) --
Dividends declared and payable 402,577 174,276 (174,276) 402,577
Advances from the Federal Home Loan Bank -- 10,854,000 -- 10,854,000
Income taxes payable 19,534 89,395 -- 108,929
------------ ------------ ------------ ------------
TOTAL LIABILITIES 452,298 62,050,920 (4,616,059) 57,887,159
COMMITMENTS AND CONTINGENCIES -- -- -- --
STOCKHOLDERS' EQUITY
Common stock 94,875 10,000 (13,795) 91,080
Paid-in-capital 9,028,558 4,547,750 (5,089,486) 8,486,822
Unearned ESOP stock (541,333) -- -- (541,333)
Retained earnings, substantially restricted 142,645 7,056,715 -- 7,199,360
Unrealized gain on available for sale
securities, net of taxes -- 127,547 -- 127,547
------------ ------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY 8,724,745 11,742,012 (5,103,281) 15,363,476
------------ ------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 9,177,043 $ 73,792,932 $ (9,719,340) $ 73,250,635
============ ============ ============ ============
</TABLE>
-44-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE T - DETAILS OF CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Details Of Consolidated Statement Of Earnings
Year ended June 30, 1996
<TABLE>
<CAPTION>
Gallup GFSB
GFSB Federal Bancorp,
Bancorp, Savings Inc. and
Inc. Bank Eliminations Subsidiary
----------- ----------- ------------ ------------
Interest income
Loans receivable
<S> <C> <C> <C> <C>
Mortgage loans $ -- $ 2,838,874 $ -- $ 2,838,874
Commercial loans -- 202,259 -- 202,259
Share and consumer loans -- 118,411 -- 118,411
Available-for-sale investment securities
and mortgage-backed securities -- 1,569,434 -- 1,569,434
Other interest-earning assets 187,934 146,847 (187,934) 146,847
----------- ----------- ----------- -----------
TOTAL INTEREST EARNINGS 187,934 4,875,825 (187,934) 4,875,825
Interest expense
Deposits -- 2,073,817 (1,196) 2,072,621
Advances from Federal Home Loan Bank -- 330,050 -- 330,050
Advances to parent company -- 186,738 (186,738) --
----------- ----------- ----------- -----------
-- 2,590,605 (187,934) 2,402,671
----------- ----------- ----------- -----------
NET INTEREST EARNINGS 187,934 2,285,220 -- 2,473,154
Provision for loan losses -- 28,099 -- 28,099
----------- ----------- ----------- -----------
NET INTEREST EARNINGS AFTER
PROVISION FOR LOAN LOSSES 187,934 2,257,121 -- 2,445,055
Non-interest earnings
Income from real estate operations -- 3,300 -- 3,300
Miscellaneous income -- 10,454 -- 10,454
Dividend income from subsidiary 759,462 -- (759,462) --
Net gains from sales of loans -- 8,063 -- 8,063
Service change income -- 21,039 -- 21,039
----------- ----------- ----------- -----------
TOTAL NON-INTEREST EARNINGS 759,462 42,856 (759,462) 42,856
</TABLE>
-45-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE T - DETAILS OF CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Details Of Consolidated Statement Of Earnings - Continued
Year ended June 30, 1996
<TABLE>
<CAPTION>
Gallup GFSB
GFSB Federal Bancorp,
Bancorp, Savings Inc. and
Inc. Bank Eliminations Subsidiary
------------ ------- ------------ ------------
Non-interest expense
<S> <C> <C> <C> <C>
Compensation and benefits 13,138 600,920 - 614,058
Professional fees 87,639 35,081 - 122,720
Occupancy - 108,305 - 108,305
Advertising - 34,358 - 34,358
Data processing - 92,522 - 92,522
Insurance - 104,731 - 104,731
Stock services 24,323 - - 24,323
Other 8,692 158,160 - 166,852
----------- ----------- ------------ ----------
TOTAL NON-INTEREST EXPENSE 133,792 1,134,077 - 1,267,869
----------- ----------- ------------ ----------
EARNINGS BEFORE INCOME TAXES 813,604 1,165,900 (759,462) 1,220,042
Income tax expense
Currently payable 45,245 386,418 - 431,663
Deferred (benefit) - 343 - 343
------------------------------------- -----------
45,245 386,761 - 432,006
------------------------------------- -----------
NET EARNINGS $ 768,359 $ 779,139 $ (759,462) $ 788,036
=========== =========== ============ ==========
</TABLE>
-46-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE U - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments were as
follows:
<TABLE>
<CAPTION>
June 30, 1996
---------------------------
Carrying Value Fair Value
-------------- ----------
Financial Assets:
<S> <C> <C>
Cash and due from banks $ 1,671,053 $ 1,671,053
Interest-bearing deposits with banks 1,346,141 1,346,141
Federal funds sold 150,000 150,000
Available-for-sale-investment securities 4,572,647 4,572,647
Available-for-sale mortgage-backed securities 25,245,896 25,245,896
Loans receivable, net 38,727,535 39,562,000
Accrued interest receivable 400,316 400,316
Financial Liabilities:
Transaction deposits 3,239,079 3,239,079
Savings and now deposits 10,758,974 10,939,000
Time deposits 31,991,757 32,036,000
Accrued interest payable 103,507 103,507
Advances from the FHLB 10,854,000 10,848,000
Off-Balance-Sheet Liabilities:
Commitments to extend credit -- 21,000
</TABLE>
-47-
<PAGE>
OFFICE LOCATION
CORPORATE OFFICE
GFSB Bancorp, Inc.
221 West Aztec Avenue
Gallup, New Mexico 87301
Board of Directors of GFSB Bancorp, Inc.
Wallace R. Phillips, D.D.S., Chairman Vernon I. Hamilton
George S. Perce, Secretary Richard C. Kauzlaric
Charles L. Parker, Jr., Treasurer Michael P. Mataya
James Nechero, Jr., Assistant Secretary
Executive Officers of GFSB Bancorp, Inc.
Jerry R. Spurlin, President Charles C. Brown, Sr.
William W. Head, Jr., Chief Lending Officer Vice-President
Marshall W. Coker, Chief Administrative Officer Sandra A. McKinney,
Sr. Vice-President
Special Counsel: Independent Auditors:
Malizia, Spidi, Sloane & Fisch, P.C. Atkinson & Co., Ltd.
One Franklin Square 707 Broadway, NE
1301 K. Street, NW, Suite 700 East Suite 400
Washington, D.C. 20005 Albuquerque, NM 87102
Transfer Agent and Registrar:
Registrar & Transfer Co.
10 Commerce Drive
Cranford, New Jersey 07016
The Company's Annual Report for the year ended June 30, 1996 filed with the
Securities and Exchange Commission on Form 10-KSB is available without charge
upon written request. For a copy of the Form 10-KSB or any other investor
information, please write or call the Secretary of the Company, at the Company's
corporate office in Gallup, New Mexico. The annual meeting of stockholders will
be held on October 28, 1996 at 2:00 p.m. at the Holiday Inn, 2915 West Highway
66, Gallup, New Mexico.
-48-
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Percentage of
Jurisdiction of Ownership held
Subsidiary Incorporation by Registrant
---------- ------------- -------------
Gallup Federal Savings Bank United States 100%
The financial statements of the subsidiary of the registrant are consolidated
with those of the registrant.
EXHIBIT 23
<PAGE>
[ATKINSON & CO. LTD. LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement
of GFSB Bancorp, Inc. on Form S-8 (filed with the Securities and Exchange
Commission on June 28, 1996) of our report dated August 22, 1996 on the
consolidated financial statements of GFSB Bancorp, Inc., included in this Annual
Report on Form 10-KSB of GFSB Bancorp, Inc. for the fiscal year ended June 30,
1996.
/s/Atkinson & Co. Ltd.
Atkinson & Co. Ltd.
Albuquerque, New Mexico
September 27, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,671
<INT-BEARING-DEPOSITS> 1,346
<FED-FUNDS-SOLD> 150
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 29,819
<INVESTMENTS-CARRYING> 30,177
<INVESTMENTS-MARKET> 30,370
<LOANS> 38,727
<ALLOWANCE> 309
<TOTAL-ASSETS> 73,251
<DEPOSITS> 45,990
<SHORT-TERM> 10,854
<LIABILITIES-OTHER> 1,043
<LONG-TERM> 0
0
0
<COMMON> 91
<OTHER-SE> 15,272
<TOTAL-LIABILITIES-AND-EQUITY> 73,251
<INTEREST-LOAN> 3,159
<INTEREST-INVEST> 1,569
<INTEREST-OTHER> 147
<INTEREST-TOTAL> 4,876
<INTEREST-DEPOSIT> 2,073
<INTEREST-EXPENSE> 330
<INTEREST-INCOME-NET> 2,473
<LOAN-LOSSES> 28
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,268
<INCOME-PRETAX> 1,220
<INCOME-PRE-EXTRAORDINARY> 1,220
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 788
<EPS-PRIMARY> 0.88
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.97
<LOANS-NON> 151
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,585
<ALLOWANCE-OPEN> 316
<CHARGE-OFFS> 36
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 309
<ALLOWANCE-DOMESTIC> 309
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 308
</TABLE>
