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, 1997, OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from
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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
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(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
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Securities Registered Under Section 12(g) of the Exchange Act:
Common Stock, par value $0.10 per share
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the 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
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NO .
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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. |_|
State issuer's revenues for its most recent fiscal year. $6,127,343.
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 15, 1997, was $8.9 million (468,116 shares at $18.875 per share).
As of September 15, 1997, there were issued and outstanding 800,708 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,
1997. (Part II)
2. Portions of Proxy Statement for the 1997 Annual Meeting of Stockholders.
(Part III)
<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 (the "Bank"). This acquisition occurred June 29, 1995 at which time
the Bank simultaneously converted from a mutual to stock institution (the
"Conversion"), sold all of its outstanding capital stock to the Company and the
Company made its initial public offering of its common stock. 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, 1997, the Company had total assets of $94 million, total deposits of
$58 million and stockholders' equity of $14 million or 15% of total assets under
generally accepted accounting principles ("GAAP"). The only subsidiary of the
Company is the Bank. The Bank currently has no subsidiaries.
The Bank is a federally chartered capital stock savings bank located in
Gallup, New Mexico. The Bank was founded in 1934 under the name the Bank 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 Bank offers a variety of financial services to meet the needs of the
communities it serves. The Bank'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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<PAGE>
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's dividend payout ratios for the fiscal years ended June 30,
1997 and June 30, 1996, are 51.9% and 79.5%, respectively.
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 1995, McKinley
County had a population of approximately 67,000. 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-three 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.
At June 30, 1997, the Bank's loan portfolio totaled $52 million. Loans
secured by first mortgages on one- to four-family residences totaled $38
million, or 73% of the Bank's loan portfolio at
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<PAGE>
June 30, 1997. 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,
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1997 1996
------------------------ ---------------------
$ % $ %
--------- -------- --------- --------
(Dollars in Thousands)
Type of Loans:
<S> <C> <C> <C> <C>
Residential................................ $ 36,716 70.58 % $ 29,178 75.34 %
Commercial real estate..................... 11,827 22.73 6,614 17.08
Construction:
Residential.............................. 232 .44 443 1.14
Commercial............................... 3,579 6.88 2,617 6.76
Commercial business ....................... 1,961 3.77 1,632 4.21
Consumer:
Savings account ......................... 1,113 2.14 1,141 2.95
Automobile and other..................... 1,618 3.11 548 1.42
Less:
Loans in process......................... (1,383) (2.66) (2,106) (5.44)
Loan participations sold................. (2,961) (5.69) (710) (1.83)
Deferred loan origination fees
and costs............................... (341) (.65) (320) (0.83)
Allowance for loan losses................ (339) (.65) (309) (0.80)
--------- ------ ------- ------
Total loans, net........................... $ 52,022 100 % $38,728 100.00%
========= ====== ======= ======
Type of Security:
Residential real estate
1-4 family............................. $36,948 71.02 $28,275 73.01%
Multi-family dwelling units............ 2,741 5.27 1,346 3.48
Commercial real estate................... 12,536 24.09 9,231 23.84
Commercial business ..................... 2,090 4.02 1,632 4.21
Consumer:
Savings accounts....................... 1,113 2.14 1,141 2.95
Automobile and other................... 1,618 3.11 548 1.41
Less:
Loan participations sold................. (2,961) (5.69) (710) (1.83)
Loans in process......................... (1,383) (2.66) (2,106) (5.44)
Deferred loan origination fees and costs. (341) (.65) (320) (0.83)
Allowance for loan losses................ (339) (.65) (309) (0.80)
--------- ------ ------- ------
Total loans, net......................... $ 52,022 100 % $38,728 100.00 %
========= ====== ======= ======
</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, 1997. The table does not include prepayments or scheduled principal
repayments. Prepayments and scheduled principal repayments on loans totaled $17
million and $12 million, for the years ended June 30, 1997 and 1996,
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........... $ 198 $ 9 $ 442 $ 303 $ 952
3 months to 1 Year........ 559 293 402 1,660 2,914
After 1 year:
1 to 3 years............ 1,054 1,442 116 1,043 3,655
3 to 5 years............ 2,296 4,968 59 547 7,870
5 to 10 years........... 10,004 684 129 159 10,976
10 to 20 years.......... 17,456 3,009 2,663 977 24,105
Over 20 years........... 6,437 - - - 6,437
------- ------- ------- ------ --------
Total due after one year.. 37,247 10,103 2,967 2,726 53,043
------- ------- ------- ------ --------
Non-performing............ 134 - - 3 137
------- ------- ------- ------ --------
Total amount due.......... $38,138 $10,405 $ 3,811 $4,692 $ 57,046
------- ------- ------- ------ --------
Less:
Loan participations sold.. $ (2,961)
Allowance for loan loss... (339)
Loans in process.......... (1,383)
Deferred loan fees........ (341)
--------
Loans receivable, net... $ 52,022
========
</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, 1997 of all loans due after June 30, 1998, 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)...... $33,103 $ 5,140 $38,243
Multi-family and
commercial real estate(1). 10,569 3,542 14,111
Consumer and commercial
business.................. 2,756 1,936 4,692
------- ------- -------
Total................... $46,428 $10,618 $57,046
======= ======= =======
</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 90%
or lower.
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
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<PAGE>
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, 1997, the Bank's largest commercial real estate loan consisted of a
$1,500,000 performing loan secured by a strip shopping center in Gallup, New
Mexico, of which $500,000 has been sold to another bank as a non-recourse
participation. At June 30, 1997, the Bank's largest multi-family loan consisted
of a $693,000 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, 1997, consumer
loans totaled $1.6 million or 2.8% 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 automobile 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 90% if the Bank has the first mortgage and 80% if it does
not. The Bank also offers automobile 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% to 20% 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. This increased credit risk is a result
of several factors, including the concentration of principal in a
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<PAGE>
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, 1997, the Bank had $10.5 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 $1.8 million as of June 30, 1997.
At June 30, 1997, the Bank's largest lending relationship consisted of
four performing loans, including two amortizing loans, a commercial revolving
line of credit loan and a construction loan, totaling $3,568,000, of which all
but $343,000 has been funded and of which $2,023,000 has been sold to other
banks as non-recourse participations, secured by three motel properties, two in
Gallup and one in Grants, New Mexico. The next four largest lending
relationships, all of which consist of performing loans, at June 30, 1997
consisted of a $200,000 commercial revolving line of credit secured by inventory
and $1,500,000 loan secured by a strip shopping center in Gallup, of which
$500,000 has been sold to another bank as a non-recourse participation, two
loans totaling $1,188,000 secured by two Gallup commercial office properties,
two loans totaling $1,407,000, secured by a motel property and adjacent land in
Gallup, of which $647,000 has been sold to another bank as a non-recourse
participation, and a $693,000 loan secured by two multi-family apartment
buildings located in Gallup.
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, 1997, the Bank had total delinquent
loans of $864,430, of which $543,187 were delinquent over 30 days, $321,243 were
delinquent over 60 days, and $136,921 were delinquent 90 days or more.
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<PAGE>
The following table sets forth information regarding non-accrual loans,
real estate owned, and certain other repossessed assets and loans.
<TABLE>
<CAPTION>
At June 30,
--------------
1997 1996
----- ----
(In Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
<S> <C> <C>
Permanent loans secured by 1-4 dwelling unit.............. $134 $ 49
All other mortgage loans ................................. 3 --
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 ................................. -- --
---- ----
Total ................................................ $ -- $ 2
==== ====
Total non-accrual and accrual loans ........................ $137 $151
Real estate owned .......................................... -- --
---- ----
otal non-performing assets ................................ $137 $151
==== ====
Total non-accrual and accrual loans to net loans ........... .26% .39%
Total non-accrual and accrual loans to total assets......... 15% .21%
Total non-performing assets to total assets ................ .15% .21%
</TABLE>
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, 1997. Amounts included in the Bank's interest income for the
year ended June 30, 1997 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, 1997, 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, 1997, with the exception of two loans on one- to four-family
homes totaling $51,000 and one commercial business and consumer loan totalling
$283,000, 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, 1997.
<TABLE>
<CAPTION>
At
June 30,
1997
--------------
(In Thousands)
<S> <C>
Substandard ...................................................... $630
Doubtful ......................................................... --
Loss ............................................................. --
General loss allowance ........................................... 339
Specific loss allowance - loans .................................. --
Specific loss allowance - real estate owned ...................... --
</TABLE>
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, 1997.
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 .65% at June 30, 1997.
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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,
---------------------------------------------
1997 1996
---------------------- ----------------------
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............ $ 139 65% $ 152 70%
Commercial real estate............. 116 27 82 22
Consumer and
commercial business.............. 84 8 75 8
------- --- ----- ---
Total............................ $ 339 100% $ 309 100%
======= === ===== ===
</TABLE>
-10-
<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.
<TABLE>
<CAPTION>
At June 30,
-------------------------
1997 1996
--------- ---------
(Dollars in Thousands)
<S> <C> <C>
Total loans outstanding, net ................... $ 52,022 $ 38,728
======== ========
Average loans outstanding ...................... $ 44,246 $ 34,934
======== ========
Allowance balances (at beginning of
period) ...................................... $ 309 $ 316
Provision (credit):
Residential .................................. -- --
Consumer and commercial business ............. 21 29
Charge-offs:
Residential .................................. -- (36)
Consumer and commercial business ............. (26) --
Recoveries:
Residential .................................. -- --
Consumer and commercial business ............. 35 --
Net (charge-offs) recoveries ................... 9 (36)
Allowance balance (at end of period$ ........... $ 339 $ 309
======== ========
Allowance for loan losses as a percent
of total loans outstanding, net .............. .65% 0.80%
</TABLE>
-11-
<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.
<TABLE>
<CAPTION>
At June 30,
--------------------------
1997 1996
----------- ----------
(Dollars in Thousands)
Total real estate owned and other
<S> <C> <C>
repossessed assets, net.............. $ -- $ --
Allowance balances - beginning......... -- --
Provision.............................. -- --
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..................... --% --%
</TABLE>
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.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------
1997 1996
--------------------- --------------------
Percent Percent
Amount of Total Amount of Total
-------- ---------- -------- ---------
(Dollars in Thousands)
Mortgage-backed securities(1):
<S> <C> <C> <C> <C>
FNMA........................... $21,069 65.70% $12,148 48.12%
GNMA........................... 7,274 22.68 9,193 36.41
FHLMC.......................... 2,765 8.62 3,189 12.63
------- ----- ------- ------
Total...................... 31,108 97.0 24,530 97.16
Net premiums................... 962 3.0 716 2.84
Net mortgage-backed securities... $32,070 100% $25,246 100.00%
======= ===== ======= ======
</TABLE>
- --------------------------
(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, 1997 and June 30, 1996, 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.
-12-
<PAGE>
The following table sets forth the Bank's mortgage-backed securities
activities information for the periods indicated.
<TABLE>
<CAPTION>
For the Year Ended June 30,
--------------------------
1997 1996
------------ -----------
(In Thousands)
Mortgage-backed securities(1):
<S> <C> <C>
Beginning balance: $25,246 $10,739
Mortgage-backed securities
purchased.................... 12,591 18,040
Fair value adjustments......... 312 (252)
------- -------
Less:
Mortgage-backed securities sold -- --
Principal repayments........... (6,079) (3,281)
------- -------
Ending balance..................... $32,070 $25,246
======= =======
</TABLE>
- ------------------
(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, 1997 consisted of
adjustable-rate certificates issued by the FHLMC, GNMA and FNMA. At June 30,
1997, the mortgage-backed securities portfolio classified as available for sale
had a fair value of $32 million and an amortized cost of $32 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.
-13-
<PAGE>
Investment Activities
At June 30, 1997, the Bank had an investment portfolio of approximately
$4.3 million, consisting primarily of mutual funds and U.S. Treasury bills. To a
lesser extent, the portfolio also includes FHLMC stock, and FHLB and FNMA
debentures. The Bank classifies its investment securities, as available for
sale, in accordance with SFAS 115. The fair value of investment securities at
June 30, 1997 was $4.3 million, resulting in a net unrealized gain at that date
of approximately $784,000.
Investment Portfolio
The following table sets forth the fair value of the Bank's investment
securities portfolio.
<TABLE>
<CAPTION>
At June 30,
---------------------
1997 1996
-------- -------
Debt securities:(1) (In Thousands)
<S> <C> <C>
Mutual funds......................... $ 2,163 $ 2,025
U.S. Treasury bills.................. 1,002 990
FHLB and FNMA debentures............. 397 889
FHLMC Stock.......................... 780 470
Federal Farm Credit Bank............. -- 199
------- -----
Total investment securities........ $ 4,342 $4,573
====== =====
</TABLE>
- ---------------------
(1) Effective July 1, 1993, the Bank adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." At June 30, 1996 and June 30, 1997, investments are
classified as "available for sale" rather than "held for investment" and
accordingly are recorded at fair value versus carrying value.
-14-
<PAGE>
Investment Portfolio Maturities
The following table sets forth certain information regarding the carrying
values, weighted average yields and maturities of the Bank's investment
securities portfolio at June 30, 1997.
<TABLE>
<CAPTION>
At June 30, 1997
---------------------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Securities
-------------------- ------------------- ------------------ ------------------- ---------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
--------- ------- -------- ------- -------- ------- --------- ------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
U. S. Treasury bills.$ 1,002 6,345% $ -- % $ -- --% $ -- --% $ 1,002 6.34%
Mutual funds......... 2,163 6.07 -- -- -- -- -- 2,163 6.07
FNMA debentures...... -- -- 397 5.27 -- -- -- -- 397 5.27
FHLMC stock.......... -- -- -- -- -- 780 1.13 780 1.13
Total..............$ 3,165 6.16% $ 397 5.27% $ -- --% $ 780 1.13% $ 4,342 5.17%
========= ==== ===== ===== ======= ==== ====== ==== ======== ====
</TABLE>
-15-
<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 $20.9
million in FHLB advances at June 30, 1997.
Deposits. The Bank currently offers regular passbook savings, money market
deposit accounts (which are actually statement savings accounts with limited
third party transfer or check writing provisions), and term certificate
accounts, primarily to consumers within its primary market area. 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, 1997, the Bank had no brokered deposits.
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,
1997.
<TABLE>
<CAPTION>
Certificates
of Deposits
--------------
Maturity Period (In Thousands)
- ---------------
<S> <C>
Within three months............................ $ 1,977
Three through six months....................... 1,834
Six through twelve months...................... 10,601
Over twelve months............................. 1,393
-------
$15,805
=======
</TABLE>
Personnel
As of June 30, 1997, the Bank had 18 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.
-16-
<PAGE>
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.
The FDIC may also prohibit an insured depository institution from engaging in
any activity the FDIC determines to pose a serious threat to the SAIF.
The FDIC charges an assessment for the insurance of deposits based on the
risk a particular institution poses to its deposit insurance fund, depending
upon the institution's risk classification. This risk classification is based on
an institution's capital group and supervisory subgroup assignment. In addition,
the FDIC is authorized to increase deposit insurance rates on a semi-annual
basis if it determines that such action is necessary to cause the balance in the
SAIF to reach the designated reserve ratio of 1.25% of SAIF-insured deposits
within a reasonable period of time. The FDIC may impose special assessments on
SAIF members to repay amounts borrowed from the U.S. Treasury or for any other
reason deemed necessary by the FDIC. Prior to September 30, 1996, savings
associations paid within a range of .23% to .31% of domestic deposits and the
SAIF was substantially underfunded. By comparison, prior to September 30, 1996,
members of the Bank Insurance Fund ("BIF"), predominantly commercial banks, were
required to pay substantially lower, or virtually no, federal deposit insurance
premiums.
Effective September 30, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the Bank of approximately
.657% of deposits held on March 31, 1995. The Bank recorded a $250,000 pre-tax
expense for this assessment at September 30, 1996. Beginning January 1, 1997,
deposit insurance assessments for SAIF members were reduced to approximately
.064% of deposits on an annual basis; this rate may continue through the end of
1999. During this same period, BIF members are expected to be annually assessed
approximately .013% of deposits. Thereafter, assessments for BIF and SAIF
members should be the same and the SAIF and BIF may be merged. It is expected
that these continuing assessments for both SAIF and BIF members will be used to
repay outstanding Financing Corporation bond obligations. As a result of these
changes, beginning January 1, 1997, the rate of deposit insurance assessed the
Bank substantially declined.
-17-
<PAGE>
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.
Savings associations with a greater than "normal" level of interest rate
risk exposure may, in the future, be subject to a deduction from capital for an
interest rate risk component for purposes of calculating their risk-based
capital requirements.
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.
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).
-18-
<PAGE>
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 20% 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.
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, 1997, 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, 1997, 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, 1997.
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
-19-
<PAGE>
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 and Proposed Legislation. Bills have been introduced to
congressional committees that would consolidate the OTS with the Office of the
Comptroller of the Currency ("OCC"). The resulting agency would regulate all
federally chartered commercial banks and thrift institutions. In the event that
the OTS is consolidated with the OCC, it is possible that the thrift charter
could be eliminated and thrifts could be forced to convert to commercial banks.
Legislation passed in 1996 required the recapture (for income tax purposes) of
the Bank's post 1987 additions to bad debt reserves; however, this recapture did
not have a material effect on the earnings of the Bank or the Company because
the Bank had previously provided deferred taxes on its bad debt reserves. Under
current law and regulations, a unitary savings and loan holding company, such as
the Company, which has only one thrift subsidiary such as the Bank, has
essentially unlimited investment authority. Legislation has also been proposed
which, if enacted, would limit the non-banking related activities of savings and
loan holding companies to those activities permitted for bank holding companies.
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
$1,141,000 with a net book value of $677,000 at June 30, 1997. 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.
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, 1997 (the "Annual Report") is incorporated herein by reference.
-20-
<PAGE>
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
- --------------------
On March 12, 1997, the board of directors of the registrant determined to
engage Neff & Company LLP as its independent auditors for the fiscal year ended
June 30, 1998. On March 12, 1997, the registrant orally notified Atkinson & Co.,
Ltd. ("Atkinson"), its independent auditors for the fiscal year ended June 30,
1997 and for the fiscal years ended June 30, 1996 and 1995, of this
determination and that Atkinson would not be engaged for the fiscal year ending
June 30, 1998 but that Atkinson remained engaged for the fiscal year ended June
30, 1997 and that the registrant expected that Atkinson would issue a report for
the fiscal year ended June 30, 1997. The determination to replace Atkinson was
recommended by the audit committee and approved by the full board of directors
of the registrant.
The report of Atkinson for the fiscal years ended June 30, 1995 and 1996
contained no adverse opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope or accounting principles. During the
fiscal years ended June 30, 1995 and 1996 and during the period from June 30,
1996 to March 12, 1997, there were no disagreements between the registrant and
Atkinson concerning accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.
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 1997 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.
-21-
<PAGE>
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.
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, 1997
(b) Consolidated Statements of Earnings for each of the years in
the two-year period ended June 30, 1997
(c) Consolidated Statements of Stockholders' Equity for each of
the years in the two-year period ended June 30, 1997
(d) Consolidated Statements of Cash Flows for each of the years in
the two-year period ended June 30, 1997
(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
10.1 1995 Stock Option Plan
- --------
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.
-22-
<PAGE>
10.2 Management Stock Bonus Plan
13 1997 Annual Report to Stockholders
21 Subsidiaries of the Issuer
23 Consent of Atkinson & Co., Ltd.
27 Financial Data Schedule (in electronic filing only)
(b) No reports on Form 8-K were filed during the last quarter of the period
covered by this Report.
-23-
<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 29, 1997 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/ Dr. Wallace R. Phillips By: /s/ Jerry R. Spurlin
------------------------------- --------------------------
Dr. Wallace R. Phillips Jerry R. Spurlin
Director President
(Principal Executive,
Financial and Accounting
Officer)
Date: September 29, 1997 Date: September 29, 1997
By: /s/ Richard C. Kauzlaric By: /s/ James Nechero, Jr.
------------------------------- --------------------------
Richard C. Kauzlaric James Nechero, Jr.
Chairman of the Board Director and Assistant
Secretary
Date: September 29, 1997 Date: September 29, 1997
By: By:
------------------------------- --------------------------
Vernon I. Hamilton Michael T. Mataya
Director Director
Date: September , 1997 Date: September , 1997
--- ---
By: /s/ Charles L. Parker, Jr. By:
------------------------------- --------------------------
Charles L. Parker, Jr. George S. Perce
Director and Treasurer Director and Secretary
Date: September 29, 1997 Date: September , 1997
---
EXHIBIT 10.1
<PAGE>
GFSB BANCORP, INC.
1995 STOCK OPTION PLAN
1. Purpose of the Plan. The Plan shall be known as the GFSB Bancorp,
Inc. ("Corporation") 1995 Stock Option Plan (the "Plan"). The purpose of the
Plan is to attract and retain the best available personnel for positions of
substantial responsibility and to provide additional incentive to officers,
directors and key employees of the Corporation, or any present or future parent
or subsidiary of the Corporation to promote the success of the business. The
Plan is intended to provide for the grant of "Incentive Stock Options," within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code") and Non-Incentive Stock Options, options that do not so qualify. Each
and every one of the provisions of the Plan relating to Incentive Stock Options
shall be interpreted to conform to the requirements of Section 422 of the Code.
2. Definitions. As used herein, the following definitions shall
apply.
(a) "Savings Bank" shall mean Gallop Federal Savings Bank, or
any successor corporation thereto.
(b) "Award" means the grant by the Committee of an Incentive
Stock Option or a Non-Incentive Stock Option, or any combination thereof, as
provided in the Plan.
(c) "Board" shall mean the Board of Directors of the
Corporation, or any successor or parent corporation thereto.
(d) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) "Committee" shall mean the Stock Option Committee
appointed by the Board in accordance with paragraph 5(a) of the Plan.
(f) "Common Stock" shall mean common stock, par value $.10 per
share, of the Corporation, or any successor or parent corporation thereto.
(g) "Continuous Employment" or "Continuous Status as an
Employee" shall mean the absence of any interruption or termination of
employment with the Corporation or any present or future Parent or Subsidiary of
the Corporation. Employment shall not be considered interrupted in the case of
sick leave, military leave or any other leave of absence approved by the
Corporation or in the case of transfers between payroll locations, of the
Corporation or between the Corporation, its Parent, its Subsidiaries or a
successor.
(h) "Corporation" shall mean the GFSB Bancorp, Inc., the
parent corporation for the Savings Bank, or any successor or Parent thereof.
(i) "Director" shall mean a member of the Board of the
Corporation, or any successor or parent corporation thereto.
(j) "Effective Date" shall mean the date specified in Section
15 hereof.
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(k) "Employee" shall mean any person employed by the
Corporation or any present or future Parent or Subsidiary of the Corporation.
(l) "Incentive Stock Option" or "ISO" shall mean an option to
purchase Shares granted by the Committee pursuant to Section 8 hereof which is
subject to the limitations and restrictions of Section 8 hereof and is intended
to qualify under Section 422 of the Code.
(m) "Non-Incentive Stock Option" or "Non-ISO" shall mean an
option to purchase Shares granted pursuant to Section 9 hereof, which option is
not intended to qualify under Section 422 of the Code.
(n) "Option" shall mean an Incentive or Non-Incentive Stock
Option granted pursuant to this Plan providing the holder of such Option with
the right to purchase Common Stock.
(o) "Optioned Stock" shall mean stock subject to an Option
granted pursuant to the Plan.
(p) "Optionee" shall mean any person who receives an Option or
Award pursuant to the Plan.
(q) "Parent" shall mean any present or future corporation
which would be a "parent corporation" as defined in Subsections 424(e) and (g)
of the Code.
(r) "Participant" means any director, officer or key employee
of the Corporation or any Parent or Subsidiary of the Corporation or any other
person providing a service to the Corporation who is selected by the Committee
to receive an Award, or who by the express terms of the Plan is granted an
Award.
(s) "Plan" shall mean the GFSB Bancorp, Inc. 1995 Stock Option
Plan.
(t) "Share" shall mean one share of the Common Stock.
(u) "Subsidiary" shall mean any present or future corporation
which would be a "subsidiary corporation" as defined in Subsections 424(f) and
(g) of the Code.
3. Shares Subject to the Plan. Except as otherwise required by the
provisions of Section 13 hereof, the aggregate number of Shares with respect to
which Awards may be made pursuant to the Plan shall not exceed 94,875.1 Such
Shares may either be authorized but unissued shares, treasury shares or shares
purchased in the market for Plan purposes.
An Award shall not be considered to be made under the Plan with respect
to any Option which terminates prior to its exercise, and new Awards may be
granted under the Plan with respect to the number of Shares as to which such
termination has occurred.
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1 Equal to 10% of shares issued in the initial stock offering.
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4. Six Month Holding Period.
Subject to vesting requirements, if applicable, except in the
event of death or disability, a minimum of six months must elapse between the
date of the grant of an Option and the date of the sale of Common Stock received
through the exercise of such Option.
5. Administration of the Plan.
(a) (i) Composition of the Committee. Except as indicated in
paragraph 5(a)(ii) below, the Plan shall be administered by the Committee
consisting of at least three non-employee Directors of the Corporation appointed
by the Board and serving at the pleasure of the Board. Officers, Directors, key
employees and other persons who are designated by the Committee shall be
eligible to receive Awards under the Plan, and all persons designated as members
of the Committee shall be "disinterested persons" within the meaning of Rule
16b-3 under the Securities Exchange Act of 1934.
(ii) For the purpose of granting Awards to directors,
the selection of any Director to whom Awards may be granted, as well as the
number of Shares subject to Awards, must be determined by a "disinterested
committee", as defined in Rule 16b-3 under the Securities Exchange Act of 1934.
(b) Powers of the Committee. The Committee is authorized (but
only to the extent not contrary to the express provisions of the Plan or to
resolutions adopted by the Board) to interpret the Plan, to prescribe, amend and
rescind rules and regulations relating to the Plan, to determine the form and
content of Awards to be issued under the Plan and to make other determinations
necessary or advisable for the administration of the Plan, and shall have and
may exercise such other power and authority as may be delegated to it by the
Board from time to time. A majority of the entire Committee shall constitute a
quorum and the action of a majority of the members present at any meeting at
which a quorum is present shall be deemed the action of the Committee. In no
event may the Committee revoke outstanding Awards without the consent of the
Participant.
The Chairman of the Corporation and such other officers as
shall be designated by the Committee are hereby authorized to execute
instruments evidencing Awards on behalf of the Corporation and to cause them to
be delivered to the Participants.
(c) Effect of Committee's Decision. All decisions,
determinations and interpretations of the Committee shall be final and
conclusive on all persons affected thereby.
6. Eligibility.
(i) Awards may be granted to officers, Directors,
key employees and other persons. The Committee shall from time to time determine
the officers, Directors, key employees and other persons who shall be granted
Awards under the Plan, the number of Awards to be granted to each such officer,
Director, key employee and other persons under the Plan, and whether Awards
granted to each such Participant under the Plan shall be Incentive and/or
Non-Incentive Stock Options. In selecting Participants and in determining the
number of Shares of Common Stock to be granted to each such Participant pursuant
to each Award granted under the Plan, the Committee may consider the nature of
the services rendered by each such Participant, each such Participant's current
and potential contribution to the Corporation and such other factors as the
Committee may, in its sole discretion, deem relevant.
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Officers, Directors, key employees or other persons who have been granted an
Award may, if otherwise eligible, be granted additional Awards.
(ii) The aggregate fair market value (determined
as of the date the Option is granted) of the Shares with respect to which
Incentive Stock Options are exercisable for the first time by each Employee
during any calendar year (under all Incentive Stock Option plans, as defined in
Section 422 of the Code, of the Corporation or any present or future Parent or
Subsidiary of the Corporation) shall not exceed $100,000. Notwithstanding the
prior provisions of this Section 6, the Committee may grant Options in excess of
the foregoing limitations, provided said Options shall be clearly and
specifically designated as not being Incentive Stock Options.
(iii) In no event shall Shares subject to Options
granted to non-employee Directors in the aggregate under this Plan exceed more
than 30% of the total number of Shares authorized for delivery under this Plan
pursuant to Section 3 herein or more than 5% to any individual non-employee
Director.
7. Term of the Plan. The Plan shall continue in effect for a term of
ten (10) years from the Effective Date, unless sooner terminated pursuant to
Section 18 hereof. No Option shall be granted under the Plan after ten (10)
years from the Effective Date.
8. Terms and Conditions of Incentive Stock Options. Incentive Stock
Options may be granted only to Participants who are Employees. Each Incentive
Stock Option granted pursuant to the Plan shall be evidenced by an instrument in
such form as the Committee shall from time to time approve. Each and every
Incentive Stock Option granted pursuant to the Plan shall comply with, and be
subject to, the following terms and conditions:
(a) Option Price.
(i) The price per Share at which each Incentive
Stock Option granted under the Plan may be exercised shall not, as to any
particular Incentive Stock Option, be less than the fair market value of the
Common Stock at the time such Incentive Stock Option is granted. For such
purposes, if the Common Stock is traded otherwise than on a national securities
exchange at the time of the granting of an Option, then the exercise price per
Share of the Optioned Stock shall be not less than the mean between the bid and
asked price on the date the Incentive Stock Option is granted or, if there is no
bid and asked price on said date, then on the next prior business day on which
there was a bid and asked price. If no such bid and asked price is available,
then the exercise price per Share shall be determined by the Committee. If the
Common Stock is listed on a national securities exchange at the time of the
granting of an Incentive Stock Option, then the exercise price per Share shall
be not less than the average of the highest and lowest selling price on such
exchange on the date such Incentive Stock Option is granted or, if there were no
sales on said date, then the exercise price shall be not less than the mean
between the bid and asked price on such date.
(ii) In the case of an Employee who owns Common
Stock representing more than ten percent (10%) of the outstanding Common Stock
at the time the Incentive Stock Option is granted, the Incentive Stock Option
exercise price shall not be less than one hundred and ten percent (110%) of the
fair market value of the Common Stock at the time the Incentive Stock Option is
granted.
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(b) Payment. Full payment for each Share of Common Stock
purchased upon the exercise of any Incentive Stock Option granted under the Plan
shall be made at the time of exercise of each such Incentive Stock Option and
shall be paid in cash (in United States Dollars), Common Stock or a combination
of cash and Common Stock. Common Stock utilized in full or partial payment of
the exercise price shall be valued at its fair market value at the date of
exercise. The Corporation shall accept full or partial payment in Common Stock
only to the extent permitted by applicable law. No Shares of Common Stock shall
be issued until full payment therefor has been received by the Corporation, and
no Optionee shall have any of the rights of a stockholder of the Corporation
until Shares of Common Stock are issued to him.
(c) Term of Incentive Stock Option. The term of exercisability
of each Incentive Stock Option granted pursuant to the Plan shall be not more
than ten (10) years from the date each such Incentive Stock Option is granted,
provided that in the case of an Employee who owns stock representing more than
ten percent (10%) of the Common Stock outstanding at the time the Incentive
Stock Option is granted, the term of the Incentive Stock Option shall not exceed
five (5) years.
(d) Exercise Generally. Except as otherwise provided in
Section 10 hereof, no Incentive Stock Option may be exercised unless the
Optionee shall have been in the employ of the Corporation at all times during
the period beginning with the date of grant of any such Incentive Stock Option
and ending on the date three (3) months prior to the date of exercise of any
such Incentive Stock Option. The Committee may impose additional conditions upon
the right of an Optionee to exercise any Incentive Stock Option granted
hereunder which are not inconsistent with the terms of the Plan or the
requirements for qualification as an Incentive Stock Option.
(e) Cashless Exercise. Subject to vesting requirements, if
applicable, an Optionee who has held an Incentive Stock Option for at least six
months may engage in the "cashless exercise" of the Option. Upon a cashless
exercise, an Optionee gives the Corporation written notice of the exercise of
the Option together with an order to a registered broker-dealer or equivalent
third party, to sell part or all of the Optioned Stock and to deliver enough of
the proceeds to the Corporation to pay the Option exercise price and any
applicable withholding taxes. If the Optionee does not sell the Optioned Stock
through a registered broker-dealer or equivalent third party, the Optionee can
give the Corporation written notice of the exercise of the Option and the third
party purchaser of the Optioned Stock shall pay the Option exercise price plus
any applicable withholding taxes to the Corporation.
(f) Transferability. Any Incentive Stock Option granted
pursuant to the Plan shall be exercised during an Optionee's lifetime only by
the Optionee to whom it was granted and shall not be assignable or transferable
otherwise than by will or by the laws of descent and distribution.
9. Terms and Conditions of Non-Incentive Stock Options. Each
Non-Incentive Stock Option granted pursuant to the Plan shall be evidenced by an
instrument in such form as the Committee shall from time to time approve. Each
and every Non-Incentive Stock Option granted pursuant to the Plan shall comply
with and be subject to the following terms and conditions.
(a) Options Granted to Directors. Subject to the limitations
of Section 6(iii), Non- Incentive Stock Options to purchase 4,066 shares of
Common Stock will be granted to each Director who is not an Employee as of the
Effective Date, at an exercise price equal to the fair market value of the
Common Stock on such date of grant. Options may be granted to newly appointed or
elected non-employee Directors within the sole discretion of the Committee. The
Options will be exercisable at the
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rate of 20% on the one year anniversary of the Effective Date of the Plan and
20% annually thereafter during such periods of service as director or director
emeritus. Upon the death or disability of the director or director emeritus, or
upon a change or control of the Savings Bank or the Corporation as provided at
Section 13(b) herein, such Option shall be deemed immediately 100% exercisable.
The price per Share at which such Options granted shall be exercisable shall be
equal to the fair market value of the Common Stock at the time such Options are
granted. For such purposes, if the Common Stock is traded otherwise than on a
national securities exchange at the time of the granting of the Options, then
the exercise price per Share of the Optioned Stock shall be not less than the
mean between the bid and asked price on the date the Options are granted or, if
there is no bid and asked price on said date, then on the next prior business
day on which there was a bid and asked price. If no such bid and asked price is
available, then the exercise price per Share shall be determined by the
Committee. If the Common Stock is listed on a national securities exchange at
the time of the granting of an Options, then the exercise price per Share shall
be not less than the average of the highest and lowest selling price on such
exchange on the date such Options are granted or, if there were no sales on said
date, then the exercise price shall be not less than the mean between the bid
and asked price on such date. Such Options shall continue to be exercisable for
a period of ten years following the date of grant without regard to the
continued services of such Directors as a Director or Director Emeritus. In the
event of the Optionee's death, such Options may be exercised by the personal
representative of his estate or person or persons to whom his rights under such
Option shall have passed by will or by laws of descent and distribution. Unless
otherwise inapplicable, or inconsistent with the provisions of this paragraph,
the Options to be granted to Directors hereunder shall be subject to all other
provisions of this Plan.
(b) Option Price. The exercise price per Share of Common Stock
for each Non-Incentive Stock Option granted pursuant to the Plan, other than
Options granted pursuant to Section 9(a) herein, shall be at such price as the
Committee may determine in its sole discretion, but in no event less than the
fair market value of such Common Stock on the date of grant.
(c) Payment. Full payment for each Share of Common Stock
purchased upon the exercise of any Non-Incentive Stock Option granted under the
Plan shall be made at the time of exercise of each such Non-Incentive Stock
Option and shall be paid in cash (in United States Dollars), Common Stock or a
combination of cash and Common Stock. Common Stock utilized in full or partial
payment of the exercise price shall be valued at its fair market value at the
date of exercise. The Corporation shall accept full or partial payment in Common
Stock only to the extent permitted by applicable law. No Shares of Common Stock
shall be issued until full payment therefor has been received by the Corporation
and no Optionee shall have any of the rights of a stockholder of the Corporation
until the Shares of Common Stock are issued to him.
(d) Term. The term of exercisability of each Non-Incentive
Stock Option granted pursuant to the Plan shall be not more than ten (10) years
from the date each such Non-Incentive Stock Option is granted.
(e) Exercise Generally. The Committee may impose additional
conditions upon the right of any Participant to exercise any Non-Incentive Stock
Option granted hereunder which is not inconsistent with the terms of the Plan.
(f) Cashless Exercise. Subject to vesting requirements, if
applicable, an Optionee who has held a Non-Incentive Stock Option for at least
six months may engage in the "cashless exercise" of the Option. Upon a cashless
exercise, an Optionee gives the Corporation written notice of the exercise
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of the Option together with an order to a registered broker-dealer or equivalent
third party, to sell part or all of the Optioned Stock and to deliver enough of
the proceeds to the Corporation to pay the Option exercise price and any
applicable withholding taxes. If the Optionee does not sell the Optioned Stock
through a registered broker-dealer or equivalent third party, the Optionee can
give the Corporation written notice of the exercise of the Option and the third
party purchaser of the Optioned Stock shall pay the Option exercise price plus
any applicable withholding taxes to the Corporation.
(g) Transferability. Any Non-Incentive Stock Option granted
pursuant to the Plan shall be exercised during an Optionee's lifetime only by
the Optionee to whom it was granted and shall not be assignable or transferable
otherwise than by will or by the laws of descent and distribution.
10. Effect of Termination of Employment, Disability or Death on
Incentive Stock Options.
(a) Termination of Employment. In the event that any
Optionee's employment with the Corporation shall terminate for any reason, other
than Permanent and Total Disability (as such term is defined in Section 22(e)(3)
of the Code) or death, all of any such Optionee's Incentive Stock Options, and
all of any such Optionee's rights to purchase or receive Shares of Common Stock
pursuant thereto, shall automatically terminate on the earlier of (i) the
respective expiration dates of any such Incentive Stock Options, or (ii) the
expiration of not more than three (3) months after the date of such termination
of employment, or (iii) at such later date as determined by the Committee at the
time of the grant of such Award, but only if, and to the extent that, the
Optionee was entitled to exercise any such Incentive Stock Options at the date
of such termination of employment. In the event that a subsidiary ceases to be a
subsidiary of the Corporation, the employment of all of its employees who are
not immediately thereafter employees of the Corporation shall be deemed to
terminate upon the date such subsidiary so ceases to be a Subsidiary of the
Corporation.
(b) Disability. In the event that any Optionee's employment
with the Corporation shall terminate as the result of the Permanent and Total
Disability of such Optionee, such Optionee may exercise any Incentive Stock
Options granted to him pursuant to the Plan at any time prior to the earlier of
(i) the respective expiration dates of any such Incentive Stock Options or (ii)
the date which is one (1) year after the date of such termination of employment,
but only if, and to the extent that, the Optionee was entitled to exercise any
such Incentive Stock Options at the date of such termination of employment.
(c) Death. In the event of the death of an Optionee, any
Incentive Stock Options granted to such Optionee may be exercised by the person
or persons to whom the Optionee's rights under any such Incentive Stock Options
pass by will or by the laws of descent and distribution (including the
Optionee's estate during the period of administration) at any time prior to the
earlier of (i) the respective expiration dates of any such Incentive Stock
Options or (ii) the date which is two (2) years after the date of death of such
Optionee but only if, and to the extent that, the Optionee was entitled to
exercise any such Incentive Stock Options at the date of death. For purposes of
this Section 10(c), any Incentive Stock Option held by an Optionee shall be
considered exercisable at the date of his death if the only unsatisfied
condition precedent to the exercisability of such Incentive Stock Option at the
date of death is the passage of a specified period of time. At the discretion of
the Committee, upon exercise of such Options the Optionee may receive Shares or
cash or combination thereof. If cash shall be paid in lieu of Shares, such cash
shall be equal to the difference between the fair market value of such Shares
and the exercise price of such Options on the exercise date.
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(d) Incentive Stock Options Deemed Exercisable. For purposes
of Sections 10(a), 10(b) and 10(c) above, any Incentive Stock Option held by any
Optionee shall be considered exercisable at the date of termination of his
employment if any such Incentive Stock Option would have been exercisable at
such date of termination of employment.
(e) Termination of Incentive Stock Options. To the extent that
any Incentive Stock Option granted under the Plan to any Optionee whose
employment with the Corporation terminates shall not have been exercised within
the applicable period set forth in this Section 10, any such Incentive Stock
Option, and all rights to purchase or receive Shares of Common Stock pursuant
thereto, as the case may be, shall terminate on the last day of the applicable
period.
11. Effect of Termination of Employment, Disability or Death on
Non-Incentive Stock Options. The terms and conditions of Non-Incentive Stock
Options relating to the effect of the termination of an Optionee's employment,
disability of an Optionee or his death shall be such terms and conditions as the
Committee shall, in its sole discretion, determine at the time of termination,
unless specifically provided for by the terms of the Agreement at the time of
grant of the Award.
12. Right of Repurchase and Restrictions on Disposition. The Committee,
in its sole discretion, may include, as a term of any Incentive Stock Option or
Non-Incentive Stock Option, the right (the "Repurchase Right"), but not the
obligation for the Corporation, to repurchase all or any amount of the Shares
acquired by an Optionee pursuant to the exercise of any such Options. The intent
of the Repurchase Right is to encourage the continued employment of the
Optionee. The Repurchase Right shall provide for, among other things, a
specified duration of the Repurchase Right, a specified price per Share to be
paid upon the exercise of the Repurchase Right and a restriction on the
disposition of the Shares by the Optionee during the period of the Repurchase
Right. The Repurchase Right may permit the Corporation to transfer or assign
such right to another party. The Corporation may exercise the Repurchase Right
only to the extent permitted by applicable law.
13. Recapitalization, Merger, Consolidation, Change in Control and
Similar Transactions.
(a) Adjustment. Subject to any required action by the
stockholders of the Corporation, within the sole discretion of the Committee,
the aggregate number of Shares of Common Stock for which Options may be granted
hereunder, the number of Shares of Common Stock covered by each outstanding
Option, and the exercise price per Share of Common Stock of each such Option,
shall all be proportionately adjusted for any increase or decrease in the number
of issued and outstanding Shares of Common Stock resulting from a subdivision or
consolidation of Shares (whether by reason of merger, consolidation,
recapitalization, reclassification, split-up, combination of shares, or
otherwise) or the payment of a stock dividend (but only on the Common Stock) or
any other increase or decrease in the number of such Shares of Common Stock
effected without the receipt of consideration by the Corporation (other than
Shares held by dissenting stockholders).
(b) Change in Control. All outstanding Awards shall become
immediately exercisable in the event of a change in control of the Corporation,
as determined by the Committee, provided that such accelerated vesting is not
inconsistent with applicable regulations of the Office of Thrift Supervision or
similar circumstances at the time of such change in control. In the event of
such a change in control, the Optionee shall, at the discretion of the
Committee, be entitled to receive cash in an amount equal to the fair market
value of the Common Stock subject to any Incentive or
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Non-Incentive Stock Option over the Option Price of such Shares, in exchange for
the surrender of such Options by the Optionee on that date in the event of a
change in control of the Corporation. For purposes of this Section 13, "change
in control" shall mean: (i) the execution of an agreement for the sale of all,
or a material portion, of the assets of the Corporation; (ii) the execution of
an agreement for a merger or recapitalization of the Corporation or any merger
or recapitalization whereby the Corporation is not the surviving entity; (iii) a
change of control of the Corporation, as otherwise defined or determined by the
Office of Thrift Supervision or regulations promulgated by it; or (iv) the
acquisition, directly or indirectly, of the beneficial ownership (within the
meaning of that term as it is used in Section 13(d) of the Securities Exchange
Act of 1934 and the rules and regulations promulgated thereunder) of twenty-five
percent (25%) or more of the outstanding voting securities of the Corporation by
any person, trust, entity or group. This limitation shall not apply to the
purchase of shares by underwriters in connection with a public offering of
Corporation stock, or the purchase of shares of up to 25% of any class of
securities of the Corporation by a tax-qualified employee stock benefit plan
which is exempt from the approval requirements, set forth under 12 C.F.R.
ss.574.3(c)(1)(vi) as now in effect or as may hereafter be amended. The term
"person" refers to an individual or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed herein. The
decision of the Committee as to whether a change in control has occurred shall
be conclusive and binding.
(c) Extraordinary Corporate Action. Subject to any required
action by the stockholders of the Corporation, in the event of any change in
control, recapitalization, merger, consolidation, exchange of Shares, spin-off,
reorganization, tender offer, partial or complete liquidation or other
extraordinary corporate action or event, the Committee, in its sole discretion,
shall have the power, prior or subsequent to such action or event to:
(i) appropriately adjust the number of Shares of
Common Stock subject to each Option, the exercise price per Share of Common
Stock, and the consideration to be given or received by the Corporation upon the
exercise of any outstanding Option;
(ii) cancel any or all previously granted Options,
provided that appropriate consideration is paid to the Optionee in connection
therewith; and/or
(iii) make such other adjustments in connection
with the Plan as the Committee, in its sole discretion, deems necessary,
desirable, appropriate or advisable; provided, however, that no action shall be
taken by the Committee which would cause Incentive Stock Options granted
pursuant to the Plan to fail to meet the requirements of Section 422 of the Code
without the consent of the Optionee.
Except as expressly provided in Sections 13(a) and 13(b)
hereof, no Optionee shall have any rights by reason of the occurrence of any of
the events described in this Section 13.
(d) Acceleration. The Committee shall at all times have the
power to accelerate the exercise date of Options previously granted under the
Plan; provided that such action is not contrary to regulations of the OTS then
in effect.
14. Time of Granting Options. The date of grant of an Option under the
Plan shall, for all purposes, be the date on which the Committee makes the
determination of granting such Option. Except, however, for purposes of
compliance with Section 16 of the Securities Exchange Act of 1934, the date
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of grant of an Option shall be deemed the later of the date of grant or the date
of stockholder approval of the Plan. Notice of the grant of an Option shall be
given to each individual to whom an Option is so granted within a reasonable
time after the date of such grant in a form determined by the Committee.
15. Effective Date. The Plan shall become effective upon the date of
approval of the Plan by the stockholders of the Corporation, subject to approval
or non-objection by the Office of Thrift Supervision, if applicable. The
Committee may make a determination related to the grant of options prior to the
Effective Date with such option grants to be effective upon the date of
stockholder approval of the Plan.
16. Approval by Stockholders. The Plan shall be approved by
stockholders of the Corporation within twelve (12) months before or after the
date the Plan is approved by the Board.
17. Modification of Options. At any time and from time to time, the
Board may authorize the Committee to direct the execution of an instrument
providing for the modification of any outstanding Option, provided no such
modification, extension or renewal shall confer on the holder of said Option any
right or benefit which could not be conferred on him by the grant of a new
Option at such time, or shall not materially decrease the Optionee's benefits
under the Option without the consent of the holder of the Option, except as
otherwise permitted under Section 18 hereof.
18. Amendment and Termination of the Plan.
(a) Action by the Board. The Board may alter, suspend or
discontinue the Plan, except that no action of the Board may increase (other
than as provided in Section 13 hereof) the maximum number of Shares permitted to
be optioned under the Plan, materially increase the benefits accruing to
Participants under the Plan or materially modify the requirements for
eligibility for participation in the Plan unless such action of the Board shall
be subject to approval or ratification by the stockholders of the Corporation.
(b) Change in Applicable Law. Notwithstanding any other
provision contained in the Plan, in the event of a change in any federal or
state law, rule or regulation which would make the exercise of all or part of
any previously granted Incentive and/or Non-Incentive Stock Option unlawful or
subject the Corporation to any penalty, the Committee may restrict any such
exercise without the consent of the Optionee or other holder thereof in order to
comply with any such law, rule or regulation or to avoid any such penalty.
19. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to any Option granted under the Plan unless the issuance and delivery of
such Shares shall comply with all relevant provisions of law, including, without
limitation, the Securities Act of 1933, as amended, the rules and regulations
promulgated thereunder, any applicable state securities law and the requirements
of any stock exchange upon which the Shares may then be listed.
The inability of the Corporation to obtain any necessary
authorizations, approvals or letters of non-objection from any regulatory body
or authority deemed by the Corporation's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder shall relieve the Corporation of any
liability in respect of the non-issuance or sale of such Shares.
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As a condition to the exercise of an Option, the Corporation may
require the person exercising the Option to make such representations and
warranties as may be necessary to assure the availability of an exemption from
the registration requirements of federal or state securities law.
Notwithstanding anything herein to the contrary, upon the termination
of service of an Optionee by the Corporation or its Subsidiaries for "cause" as
defined at 12 C.F.R. 563.39(b)(1) as determined by the Board of Directors, all
Options held by such Participant shall cease to be exercisable as of the date of
such termination of service.
20. Reservation of Shares. During the term of the Plan, the Corporation
will reserve and keep available a number of Shares sufficient to satisfy the
requirements of the Plan.
21. Unsecured Obligation. No Participant under the Plan shall have any
interest in any fund or special asset of the Corporation by reason of the Plan
or the grant of any Incentive or Non-Incentive Stock Option under the Plan. No
trust fund shall be created in connection with the Plan or any grant of any
Incentive or Non-Incentive Stock Option hereunder and there shall be no required
funding of amounts which may become payable to any Participant.
22. Withholding Tax. The Corporation shall have the right to deduct
from all amounts paid in cash with respect to the cashless exercise of Options
under the Plan any taxes required by law to be withheld with respect to such
cash payments. Where a Participant or other person is entitled to receive Shares
pursuant to the exercise of an Option pursuant to the Plan, the Corporation
shall have the right to require the Participant or such other person to pay the
Corporation the amount of any taxes which the Corporation is required to
withhold with respect to such Shares, or, in lieu thereof, to retain, or sell
without notice, a number of such Shares sufficient to cover the amount required
to be withheld.
23. Governing Law. The Plan shall be governed by and construed in
accordance with the laws of the State of New Mexico, except to the extent that
federal law shall be deemed to apply.
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EXHIBIT 10.2
<PAGE>
Gallup Federal Savings Bank
Management Stock Bonus Plan
and Trust Agreement
Article I
---------
ESTABLISHMENT OF THE PLAN AND TRUST
1.01 Gallup Federal Savings Bank ("Savings Bank") hereby establishes
the Management Stock Bonus Plan (the "Plan") and Trust (the "Trust") upon the
terms and conditions hereinafter stated in this Management Stock Bonus Plan and
Trust Agreement (the "Agreement").
1.02 The Trustee hereby accepts this Trust and agrees to hold the Trust
assets existing on the date of this Agreement and all additions and accretions
thereto upon the terms and conditions hereinafter stated.
Article II
----------
PURPOSE OF THE PLAN
2.01 The purpose of the Plan is to reward and retain personnel of
experience and ability in key positions of responsibility with the Savings Bank
and its subsidiaries, by providing such key employees of the Savings Bank and
its subsidiaries with an equity interest in the parent corporation of the
Savings Bank, GFSB Bancorp, Inc. ("Parent"), as compensation for their future
professional contributions and service to the Savings Bank and its subsidiaries.
Article III
-----------
DEFINITIONS
The following words and phrases when used in this Plan with an initial
capital letter, unless the context clearly indicates otherwise, shall have the
meaning as set forth below. Wherever appropriate, the masculine pronoun shall
include the feminine pronoun and the singular shall include the plural.
3.01 "Beneficiary" means the person or persons designated by the
Recipient to receive any benefits payable under the Plan in the event of such
Recipient's death. Such person or persons shall be designated in writing on
forms provided for this purpose by the Committee and may be changed from time to
time by similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Recipient's surviving spouse, if any,
or if none, Recipient's estate.
3.02 "Board" means the Board of Directors of the Savings Bank, or any
successor corporation or Parent thereto.
3.03 "Committee" means the Management Stock Bonus Plan Committee
appointed by the Board pursuant to Article IV hereof.
3.04 "Common Stock" means shares of the common stock, $.10 par value
per share, of the Savings Bank or any successor corporation or Parent thereto.
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3.05 "Employee" means any person who is employed by the Savings Bank
or a Subsidiary.
3.06 "Effective Date" shall mean the date of stockholder approval of
the Plan by the Parent's stockholders.
3.07 "Parent" shall mean GFSB Bancorp, Inc., the parent corporation of
the Savings Bank.
3.08 "Plan Shares" means shares of Common Stock held in the Trust which
are awarded or issuable to a Recipient pursuant to the Plan.
3.09 "Plan Share Award" means a right granted to an Employee under
this Plan to receive Plan Shares.
3.10 "Plan Share Reserve" means the shares of Common Stock held by the
Trustee pursuant to Sections 5.03 and 5.04.
3.11 "Recipient" means an Employee who receives a Plan Share Award
under the Plan.
3.12 "Savings Bank" means Gallup Federal Savings Bank, and any
successor corporation thereto.
3.13 "Subsidiary" means those subsidiaries of the Savings Bank which,
with the consent of the Board, agree to participate in this Plan.
3.14 "Trustee" or "Trustee Committee" means that person(s) or entity
nominated by the Committee and approved by the Board pursuant to Sections 4.01
and 4.02 to hold legal title to the Plan assets for the purposes set forth
herein.
Article IV
----------
ADMINISTRATION OF THE PLAN
4.01 Role of the Committee. The Plan shall be administered and
interpreted by the Committee, which shall consist of not less than three
non-employee members of the Board, which shall have all of the powers allocated
to it in this and other sections of the Plan. All persons designated as members
of the Committee shall be "disinterested persons" within the meaning of Rule
16b-3 under the Securities Exchange Act of 1934, as amended ("1934 Act"). The
interpretation and construction by the Committee of any provisions of the Plan
or of any Plan Share Award granted hereunder shall be final and binding. The
Committee shall act by vote or written consent of a majority of its members.
Subject to the express provisions and limitations of the Plan, the Committee may
adopt such rules, regulations and procedures as it deems appropriate for the
conduct of its affairs. The Committee shall report its actions and decisions
with respect to the Plan to the Board at appropriate times, but in no event less
than one time per calendar year. The Committee shall recommend to the Board one
or more persons or entity to act as Trustee(s) in accordance with the provision
of this Plan and Trust and the terms of Article VIII hereof.
4.02 Role of the Board. The members of the Committee and the Trustee or
Trustees shall be appointed or approved by, and will serve at the pleasure of
the Board. The Board may in its
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discretion from time to time remove members from, or add members to, the
Committee, and may remove, replace or add Trustees. The Board shall have all of
the powers allocated to it in this and other sections of the Plan, may take any
action under or with respect to the Plan which the Committee is authorized to
take, and may reverse or override any action taken or decision made by the
Committee under or with respect to the Plan, provided, however, that the Board
may not revoke any Plan Share Award already made except as provided in Section
7.01(b) herein. Members of the Board who are eligible for or who have been
granted Plan Share Awards may not vote on any matters affecting the
administration of the Plan or the grant of Plan Shares or Plan Share Awards
(although such members may be counted in determining the existence of a quorum
at any meeting of the Board during which actions taken). Further, with respect
to all actions taken by the Board in regard to the Plan, such action shall be
taken by a majority of the Board where such a majority of the directors acting
in the matter are "disinterested persons" within the meaning of Rule 16b-3
promulgated under the 1934 Act.
4.03 Limitation on Liability. No member of the Board or the Committee
or the Trustee(s) shall be liable for any determination made in good faith with
respect to the Plan or any Plan Share Awards granted under it. If a member of
the Board or Committee or any Trustee is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by any reason of
anything done or not done by him in such capacity under or with respect to the
Plan, the Parent shall indemnify such member against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or her in connection with such action, suit or
proceeding if he or she acted in good faith and in a manner he or she reasonably
believed to be in the best interests of the Parent and its Subsidiaries and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
Article V
---------
CONTRIBUTIONS; PLAN SHARE RESERVE
5.01 Amount and Timing of Contributions. The Board of Directors of the
Savings Bank shall determine the amounts (or the method of computing the
amounts) to be contributed by the Savings Bank to the Trust established under
this Plan. Such amounts shall be paid to the Trustee at the time of
contribution. No contributions to the Trust by Employees shall be permitted.
5.02 Initial Investment. Any funds held by the Trust prior to
investment in the Common Stock shall be invested by the Trustee in such
interest-bearing account or accounts at the Savings Bank as the Trustee shall
determine to be appropriate.
5.03 Investment of Trust Assets. Following approval of the Plan by
stockholders of the Parent and receipt of any other necessary regulatory
approvals, the Trust shall purchase Common Stock of the Parent in an amount
equal to up to 100% of the Trust's assets, after providing for any required
withholding as needed for tax purposes, provided, however, that the Trust shall
not purchase more than 37,950 shares of Common Stock representing 4% of the
aggregate shares of Common Stock issued by the Parent in the mutual-to-stock
conversion of the Savings Bank ("Conversion"). The Trustee shall purchase shares
of Common Stock in the open market or, in the alternative, shall purchase
authorized but unissued shares of the Common Stock from the Parent sufficient to
fund the Plan Share Reserve.
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<PAGE>
5.04 Effect of Allocations, Returns and Forfeitures Upon Plan Share
Reserves. Upon the allocation of Plan Share Awards under Section 6.02, or the
decision of the Committee to return Plan Shares to the Parent, the Plan Share
Reserve shall be reduced by the number of Shares subject to the Awards so
allocated or returned. Any Shares subject to an Award which may not be earned
because of forfeiture by the Recipient pursuant to Section 7.01 shall be added
to the Plan Share Reserve.
Article VI
----------
ELIGIBILITY; ALLOCATIONS
6.01 Eligibility. Employees of the Savings Bank and its Subsidiaries
are eligible to receive Plan Share Awards within the sole discretion of the
Committee.
6.02 Allocations. The Committee will determine which of the Employees
referenced in Section 6.01 above will be granted Plan Share Awards and the
number of Shares covered by each Award, provided, however, that in no event
shall any Awards be made which will violate the Charter or Bylaws of the Savings
Bank or its Parent or Subsidiaries or any applicable federal or state law or
regulation. In the event Shares are forfeited for any reason or additional
Shares are purchased by the Trustee, the Committee may, from time to time,
determine which of the Employees referenced in Section 6.01 above will be
granted additional Plan Share Awards to be awarded from forfeited Shares. In
selecting those Employees to whom Plan Share Awards will be granted and the
number of shares covered by such Awards, the Committee shall consider the
position duties and responsibilities of the eligible Employees, the value of
their services to the Savings Bank and its Subsidiaries, and any other factors
the Committee may deem relevant. All actions by the Committee shall be deemed
final, except to the extent that such actions are revoked by the Board.
6.03 Form of Allocation. As promptly as practicable after a
determination is made pursuant to Section 6.02 that a Plan Share Award is to be
made, the Committee shall notify the Recipient in writing of the grant of the
Award, the number of Plan Shares covered by the Award, and the terms upon which
the Plan Shares subject to the award may be earned. The date on which the
Committee so notifies the Recipient shall be considered the date of grant of the
Plan Share Awards. The Committee shall maintain records as to all grants of Plan
Share Awards under the Plan.
6.04 Allocations Not Required. Notwithstanding anything to the contrary
in Sections 6.01 and 6.02, no Employee shall have any right or entitlement to
receive a Plan Share Award hereunder, such Awards being at the total discretion
of the Committee and the Board, nor shall the Employees as a group have such a
right. The Committee may, with the approval of the Board (or, if so directed by
the Board) return all Common Stock in the Plan Share Reserve to the Savings Bank
at any time, and cease issuing Plan Share Awards.
6.05 Awards to Directors. Notwithstanding anything herein to the
contrary, upon the Effective Date, a Plan Share Award consisting of 1,626 Plan
Shares shall be awarded to each director of the Savings Bank that is not
otherwise an Employee. Such Plan Share Award shall be earned and non-
forfeitable at the rate of one-fifth as of the one-year anniversary of the
Effective Date and an additional one-fifth following each of the next four
successive years during such periods of service as a director or director
emeritus. Further, such Plan Share Award shall be immediately 100% earned and
non-forfeitable in the event of the death or disability of such director, or
upon a change in control of the Savings Bank or Parent as provided in Section
7.01(d) provided that such accelerated vesting is not inconsistent with
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<PAGE>
applicable regulations of the Office of Thrift Supervision ("OTS") or similar
circumstances at the time of such change in control. Subsequent to the Effective
Date, Plan Share Awards may be awarded to newly elected or appointed directors
of the Savings Bank by the Committee, provided that total Plan Share Awards to
non-employee directors of the Savings Bank shall not exceed 30% of total Plan
Shares in the aggregate under the Plan or 5% to any individual non-employee
director.
Article VII
-----------
EARNINGS AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
7.01 Earnings Plan Shares; Forfeitures.
(a) General Rules. Unless the Committee shall specifically state to the
contrary at the time a Plan Share Award is granted, Plan Shares subject to an
Award shall be earned and non-forfeitable by a Recipient at the rate of
one-fifth of such Award following one year after granting of such Award, and an
additional one-fifth following each of the next four successive years; provided
that such Recipient remains an Employee during such period. Notwithstanding
anything herein to the contrary, in no event shall a Plan Share Award granted
hereunder be earned and non-forfeitable by a Recipient more rapidly than at the
rate of one-fifth of such Award as of the one year anniversary of the date of
grant and an additional one-fifth following each of the next four successive
years.
(b) Revocation for Misconduct. Notwithstanding anything herein to the
contrary, the Board may, by resolution, immediately revoke, rescind and
terminate any Plan Share Award, or portion thereof, previously awarded under
this Plan, to the extent Plan Shares have not been delivered thereunder to the
Recipient, whether or not yet earned, in the case of an Employee who is
discharged from the employ of the Parent, Savings Bank or a Subsidiary for Cause
(as hereinafter defined), or who is discovered after termination of employment
to have engaged in conduct that would have justified termination for cause.
"Cause" is defined as personal dishonesty, incompetence, willful misconduct,
breach of fiduciary duty involving personal profits, intentional failure to
perform stated duties, willful violation of a material provision of any law,
rule or regulation (other than traffic violations and similar offense), or a
material violation of a final cease-and-desist order or any other action which
results in a substantial financial loss to the Parent, Savings Bank or its
Subsidiaries. A determination of "Cause" shall be made by the Board within its
sole discretion.
(c) Exception for Terminations Due to Death or Disability.
Notwithstanding the general rule contained in Section 7.01(a) above, all Plan
Shares subject to a Plan Share Award held by a Recipient whose employment with
the Parent, Savings Bank or a Subsidiary terminates due to death or disability
(as determined by the Committee), shall be deemed earned and nonforfeitable as
of the Recipient's last day of employment with the Parent, Savings Bank or
Subsidiary and shall be distributed as soon a practicable thereafter.
(d) Exception for Termination after a Change in Control.
Notwithstanding the general rule contained in Section 7.01 above, all Plan
Shares subject to a Plan Share Award held by a recipient shall be deemed to be
immediately 100% earned and non-forfeitable in the event of a "change in
control" of the Parent or Savings Bank and shall be distributed as soon as
practicable thereafter; provided that such accelerated vesting is not
inconsistent with applicable regulations of the OTS or similar circumstances at
the time of such change in control. For purposes of this Plan, "change in
control" shall mean: (i) the execution of an agreement for the sale of all, or a
material portion, of the assets of the Parent or Savings
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<PAGE>
Bank; (ii) the execution of an agreement for a merger or recapitalization of the
Parent or Savings Bank or any merger or recapitalization whereby the Parent or
Savings Bank is not the surviving entity; (iii) a change of control of the
Parent or Savings Bank, as otherwise defined or determined by the Office of
Thrift Supervision or regulations promulgated by it; or (iv) the acquisition,
directly or indirectly, of the beneficial ownership (within the meaning of that
term as it is used in Section 13(d) of the 1934 Act and the rules and
regulations promulgated thereunder) of twenty-five percent (25%) or more of the
outstanding voting securities of the Parent or Savings Bank by any person,
trust, entity or group. This limitation shall not apply to the purchase of
shares of up to 25% of any class of securities of the Parent or Savings Bank by
a tax-qualified employee stock benefit plan which is exempt from the approval
requirements, set forth under 12 C.F.R. ss.574.3(c)(1)(vi) as now in effect or
as may hereafter be amended. The term "person" refers to an individual or a
corporation, partnership, trust, association, joint venture, pool, syndicate,
sole proprietorship, unincorporated organization or any other form of entity not
specifically listed herein. The decision of the Committee as to whether a change
in control has occurred shall be conclusive and binding.
7.02 Payment of Dividends. A holder of a Plan Share Award, whether or
not non-forfeitable, shall also be entitled to receive an amount equal to any
cash dividends declared and paid with respect to shares of Common Stock
represented by such Plan Share Award between the date the relevant Plan Share
Award was initially granted to such Recipient and the date the Plan Shares are
distributed. Such dividend amounts shall be held in arrears under the Trust and
distributed upon vesting of the applicable Plan Share Award.
7.03 Distribution of Plan Shares.
(a) Timing of Distributions: General Rule. Except as provided in
Subsections (d) and (e) below, Plan Shares shall be distributed to the Recipient
or his Beneficiary, as the case may be, as soon as practicable after they have
been earned. No fractional shares shall be distributed. Notwithstanding anything
herein to the contrary, at the discretion of the Committee, Plan Shares may be
distributed prior to such shares being 100% earned, provided that such Plan
Shares shall contain a restrictive legend detailing the applicable limitations
of such shares with respect to transfer and forfeiture.
(b) Form of Distribution. All Plan Shares, together with any shares
representing stock dividends, shall be distributed in the form of Common Stock.
One share of Common Stock shall be given for each Plan Share earned. Payments
representing cash dividends (and earning thereon) shall be made in cash.
Notwithstanding anything within the Plan to the contrary, upon a Change in
Control whereby substantially all of the Common Stock of the Company shall be
acquired for cash, all Plan Shares associated with Plan Share Awards, together
with any shares representing stock dividends associated with Plan Share Awards,
shall be, at the sole discretion of the Committee, distributed as of the
effective date of such Change in Control, or as soon as administratively
feasible thereafter, in the form of cash equal to the consideration received in
exchange for such Common Stock represented by such Plan Shares.
(c) Withholding. The Trustee may withhold from any payment or
distribution made under this Plan sufficient amounts to cover any applicable
withholding and employment taxes, and if the amount of such payment is not
sufficient, the Trustee may require the Recipient or Beneficiary to have the
Trustee withhold from delivery a number of Plan Shares having a fair market
value, at the time withheld, sufficient to satisfy such withholding and
employment taxes, or to pay to the Trustee the amount required to be withheld as
a condition of delivering the Plan Shares. The Trustee shall pay over to the
Parent,
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<PAGE>
Savings Bank or Subsidiary which employs or employed such recipient any such
amount withheld from or paid by the Recipient or Beneficiary.
(d) Timing: Exception for 10% Shareholders. Notwithstanding Subsection
(a) above, no Plan Shares may be distributed prior to the date which is five (5)
years from the effective date of the Savings Bank's Conversion to the extent the
Recipient or Beneficiary, as the case may be, would after receipt of such Shares
own in excess of ten percent (10%) of the issued and outstanding shares of
Common Stock held by parties other than Parent, unless such action is approved
in advance by a majority vote of disinterested directors of the Board. Any Plan
Shares remaining undistributed solely by reason of the operation of this
Subsection (d) shall be distributed to the Recipient or his Beneficiary on the
date which is five years from the effective date of the Savings Bank's
Conversion.
(e) Regulatory Exceptions. No Plan Shares shall be distributed,
however, unless and until all of the requirements of all applicable law and
regulation shall have been fully complied with, including the receipt of
approval of the Plan by the stockholders of the Parent by such vote, if any, as
may be required by applicable law and regulations as determined by the Board.
7.04 Voting of Plan Shares. After a Plan Share Award has become earned
and non- forfeitable, the Recipient shall be entitled to direct the Trustee as
to the voting of the Plan Shares which are covered by the Plan Share Award and
which have not yet been distributed pursuant to Section 7.03, subject to rules
and procedures adopted by the Committee for this purpose. All shares of Common
Stock held by the Trust as to which Recipients are not entitled to direct, or
have not directed, the voting of, shall be voted by the Trustee as directed by
the Committee.
Article VIII
------------
TRUST
8.01 Trust. The Trustee shall receive, hold, administer, invest and
make distributions and disbursements from the Trust in accordance with the
provisions of the Plan and Trust and the applicable directions, rules,
regulations, procedures and policies established by the Committee pursuant to
the Plan.
8.02 Management of Trust. It is the intent of this Plan and Trust that
the Trustee shall have complete authority and discretion with respect to the
management, control and investment of the Trust, and that the Trustee shall
invest all assets of the Trust, except those attributable to cash dividends paid
with respect to Plan Shares not held in the Plan Share Reserve, in Common Stock
to the fullest extent practicable, and except to the extent that the Trustee
determines that the holding of monies in cash or cash equivalents is necessary
to meet the obligations of the Trust. In performing their duties, the Trustees
shall have the power to do all things and execute such instruments as may be
deemed necessary or proper, including the following powers:
(a) To invest up to one hundred percent (100%) of all Trust assets in
the Common Stock without regard to any law now or hereafter in force
limiting investments for Trustees or other fiduciaries. The investment
authorized herein may constitute the only investment of the Trust, and
in making such investment, the Trustees are authorized to purchase
Common Stock from Parent or from any other source, and such Common
Stock so purchased may be outstanding, newly issued, or Treasury
shares.
7
<PAGE>
(b) To invest in any Trust assets not otherwise invested in accordance
with (a) above in such deposit accounts, and certificates of deposit
(including those issued by the Savings Bank), obligations of the United
States government or its agencies or such other investments as shall be
considered the equivalent of cash.
(c) To sell, exchange or otherwise dispose of any property at any time
held or acquired by the Trust.
(d) To cause stocks, bonds or other securities to be registered in the
name of a nominee, without the addition of words indicating that such
security is an asset of the Trust (but accurate records shall be
maintained showing that such security is an asset of the Trust).
(e) To hold cash without interest in such amounts as may be in the
opinion of the Trustee reasonable for the proper operation of the Plan
and Trust.
(f) To employ brokers, agents, custodians, consultants and accountants.
(g) To hire counsel to render advice with respect to their rights,
duties and obligations hereunder, and such other legal services or
representation as they may deem desirable.
(h) To hold funds and securities representing the amounts to be
distributed to a Recipient or his Beneficiary as a consequence of a
dispute as to the disposition thereof, whether in a segregated account
or held in common with other assets.
Notwithstanding anything herein contained to the contrary, the Trustee
shall not be required to make any inventory, appraisal or settlement or report
to any court, or to secure any order of court for the exercise of any power
herein contained, or give bond.
8.03 Records and Accounts. The Trustee shall maintain accurate and
detailed records and accounts of all transactions of the Trust, which shall be
available at all reasonable times for inspection by any legally entitled person
or entity to the extent required by applicable law, or any other person
determined by the Committee.
8.04 Earnings. All earnings, gains and losses with respect to Trust
assets shall be allocated in accordance with a reasonable procedure adopted by
the Committee, to bookkeeping accounts for Recipients or to the general account
of the Trust, depending on the nature and allocation of the assets generating
such earnings, gains and losses. In particular, any earnings on cash dividends
received with respect to shares of Common Stock shall be allocated to accounts
for Recipients, except to the extent that such cash dividends are distributed to
Recipients, if such shares are the subject of outstanding Plan Share Awards, or,
otherwise to the Plan Share Reserve.
8.05 Expenses. All costs and expenses incurred in the operation and
administration of this Plan shall be paid by the Savings Bank.
8.06 Indemnification. The Parent shall indemnify, defend and hold the
Trustee harmless against all claims, expenses and liabilities arising out of or
related to the exercise of the Trustee's powers and the discharge of their
duties hereunder, unless the same shall be due to their gross negligence or
willful misconduct.
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Article IX
----------
MISCELLANEOUS
9.01 Adjustments for Capital Changes. The aggregate number of Plan
Shares available for issuance pursuant to the Plan Share Awards and the number
of Shares to which any Plan Share Award relates shall be proportionately
adjusted for any increase or decrease in the total number of outstanding shares
of Common Stock issued subsequent to the effective date of the Plan resulting
from any split, subdivision or consolidation of shares or other capital
adjustment, or other increase or decrease in such shares effected without
receipt or payment of consideration by the Parent.
9.02 Amendment and Termination of the Plan. The Board may, by
resolution, at any time, amend or terminate the Plan. The power to amend or
terminate the Plan shall include the power to direct the Trustee to return to
the Parent all or any part of the assets of the Trust, including shares of
Common Stock held in the Plan Share Reserve, as well as shares of Common Stock
and other assets subject to Plan Share Awards but not yet earned by the
Employees to whom they are allocated. However, the termination of the Trust
shall not affect a Recipients right to earn Plan Share Awards and to the
distribution of Common Stock relating thereto, including earnings thereon, in
accordance with the terms of this Plan and the grant by the Committee or the
Board.
9.03 Nontransferable. Plan Share Awards and rights to Plan Shares shall
not be transferable by a Recipient, and during the lifetime of the Recipient,
Plan Shares may only be earned by and paid to the Recipient who was notified in
writing of the Award by the Committee pursuant to Section 6.03. No Recipient or
Beneficiary shall have any right in or claim to any assets of the Plan or Trust,
nor shall the Parent, Savings Bank, or any Subsidiary be subject to any claim
for benefits hereunder.
9.04 Employment Rights. Neither the Plan nor any grant of a Plan Share
Award or Plan Shares hereunder nor any action taken by the Trustee, the
Committee or the Board in connection with the Plan shall create any right,
either express or implied, on the part of any Employee to continue in the employ
of the Parent, Savings Bank, or a Subsidiary thereof.
9.05 Voting and Dividend Rights. No Recipient shall have any voting or
dividend rights of a stockholder with respect to any Plan Shares covered by a
Plan Share Award, except as expressly provided in Sections 7.02 and 7.04 above,
prior to the time said Plan Shares are actually distributed to such Recipient.
9.06 Governing Law. The Plan and Trust shall be governed and construed
under the laws of the State of New Mexico, except to the extent that Federal Law
shall be deemed applicable.
9.07 Effective Date. The Plan shall be as effective as of the date
of approval of the Plan by stockholders of the Parent.
9.08 Term of Plan. This Plan shall remain in effect until the earlier
of (1) termination by the Board, (2) the distribution of all assets of the
Trust, or (3) 21 years from the Effective Date. Termination of the Plan shall
not effect any Plan Share Awards previously granted, and such Awards shall
remain valid and in effect until they have been earned and paid, or by their
terms expire or are forfeited.
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9.09 Tax Status of Trust. It is intended that the trust established
hereby be treated as grantor trust of the Savings Bank under the provisions of
Section 671 et seq. of the Internal Revenue Code, as the same may be amended
from time to time.
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EXHIBIT 13
<PAGE>
GFSB BANCORP, INC.
ANNUAL REPORT - 1997
<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..........................6-17
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS...............18
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION..................19
CONSOLIDATED STATEMENTS OF EARNINGS.........................20-21
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY.......................................................22
CONSOLIDATED STATEMENTS OF CASH FLOWS.......................23-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................25-52
OFFICE LOCATION AND OTHER CORPORATE INFORMATION..................53
<PAGE>
To Our Stockholders:
We are pleased to present to you our third annual stockholders' report. This
report covers the second full year of operations 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").
Unfortunately, net earnings for the Company for the year ended June 30, 1997
were $635,000, a decrease of $153,000 or 19.4% over net earnings for the
previous year. On a per share basis the Company earned $0.77 per share compared
with $0.88 per share last year.
On the positive side, the Company's total assets increased to $93,793,000 at
June 30, 1997, representing growth of $20,542,000 or 28% from total assets of
$73,250,000 at June 30, 1996. Deposits also increased $11,882,000 or 25.8% from
$45,990,000 at June 30, 1996 to $57,872,000 at June 30, 1997.
A significant negative impact on earnings resulted from the adoption by Congress
of a plan to mitigate the effect of the BIF/SAIF insurance premium disparity. As
a result, $250,000 was charged to earnings in the quarter ended September 30,
1996. The Bank will recover these earnings over several years due to a reduction
of approximately 70% in the assessment rate for deposit insurance following the
one-time assessment.
Earnings were also negatively impacted by a substantial increase in other
non-interest expense, particularly compensation and benefits and occupancy
expense. These increases were the result of the Bank's growth and equipment
purchases to support expanded retail banking delivery services. We are doing
this of course to provide the best possible service on a local basis that we
feel our community needs, and ultimately to also enhance our return on
stockholders' equity.
We have some exciting plans for 1997-1998, and we are optimistic that the steps
we have taken during this fiscal year to prepare for growth will have a positive
effect on our operating results for the coming year.
We do appreciate the confidence you share in our Company. We are going through a
tremendous growth period. Our Directors and employees are doing everything we
can to build customer loyalty, customer base and continue to make a substantial
positive impact on our community. Thank you very much for
your support, and we certainly appreciate your banking with us.
Sincerely,
/s/ Jerry R. Spurlin /s/ W.R. Phillips, D.D.S. /s/ Richard C.Kauzlaric
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 15, 1997
-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 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 primarily 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 Company's $0.10 par value common stock
has been traded in the over-the-counter market. The following table reflects the
stock prices as published by the Nasdaq Small-Cap Market for the most recent two
fiscal years. The quotations reflect inter-dealer prices, without retail
mark-up, mark-down, or commission, and may not represent actual transactions.
Bid Prices
- ------------------------------------ --------------------------------
Quarter Ended High Low
- ------------------------------------ --------------------------------
September 30, 1995 14.00 12.75
December 31,1995 14.25 13.25
March 31, 1996 14.50 13.50
June 30, 1996 15.00 13.50
September 30, 1996 14.25 13.25
December 31, 1996 16.00 13.75
March 31, 1997 17.50 15.50
June 30, 1997 19.00 16.75
The number of stockholders of record of common stock as of the record date
September 15, 1997 ("Record Date"), was approximately 221 . 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 800,708
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 years
ended June 30, 1997 and June 30, 1996 were $321,303 and $626,233, respectively.
-3-
<PAGE>
GFSB BANCORP, INC.
SELECTED FINANCIAL AND OTHER DATA
================================================================================
Financial Condition (Dollars in Thousands)
<TABLE>
<CAPTION>
================================================================================
At June 30, 1997 1996 1995
================================================================================
<S> <C> <C> <C>
Assets $93,793 $73,250 $52,905
Loans receivable, net 52,022 38,728 32,339
Mortgage-backed securities 32,070 25,246 10,739
Stock of FHLB 1,060 551 442
Investment securities 4,342 4,573 3,677
Cash and cash equivalents 2,994 3,167 4,915
Deposits 57,872 45,990 36,603
Advances from the FHLB 20,930 10,854 --
Retained earnings (substantially restricted) 7,514 7,199 7,038
Unrealized gain on available for sale 557 128 162
securities, net
</TABLE>
Summary of Operations
(Dollars in Thousands)
<TABLE>
<CAPTION>
================================================================================
Year ended June 30,
================================================================================
<S> <C> <C> <C>
Interest income $6,079 $4,876 $3,559
Interest expense 3,389 2,403 1,664
------ ------ ------
Net interest income 2,690 2,473 1,895
Provision for loan losses 21 28 101
------ ------ ------
Net interest income after provision for 2,669 2,445 1,794
loan losses
Non-interest income:
Income from real estate operations -- 3 8
Other 49 40 7
------ ------ ------
Total non-interest income 49 43 15
Non-interest expense:
Compensation and benefits 835 614 455
Professional fees 92 123 126
Occupancy 146 108 71
Advertising 46 34 11
Data processing 98 93 75
Insurance and SAIF premiums 330 105 97
Other and stock subscription services 252 191 129
------ ------ ------
Total non-interest expense 1,799 1,268 964
------ ------ ------
Earnings before income taxes 919 1,220 845
Income tax expense 283 432 339
------ ------ ------
Net earnings $ 636 $ 788 $ 506
====== ====== ======
</TABLE>
-4-
<PAGE>
- --------------------------------------------------------------------------------
GFSB BANCORP, INC.
SELECTED FINANCIAL AND OTHER DATA - CONTINUED
================================================================================
Selected Operating Ratios
<TABLE>
<CAPTION>
====================================================================================
Year ended June 30, 1997 1996 1995
====================================================================================
<S> <C> <C> <C>
Performance ratios:
Return on average assets (net income
divided by average total assets) 0.76% 1.23% 1.12%
Return on average equity (net income
divided by average equity) 4.34 4.88 6.75
Average interest earning assets to average
interest-bearing liabilities 1.19X 1.32X 1.19X
Net interest income after provision for
loan losses, to total other expenses 148.36% 192.85% 186.16%
Net interest rate spread 2.52 2.75 3.58
Net yield on average interest-earnings 3.34 3.97 4.30
assets
Equity ratios:
Average equity to average assets ratio
(average equity divided by average total 17.54 25.11 16.63
assets)
Equity to assets at period end 14.87 20.97 29.78
Assets quality ratios: .
Non-performing assets to total assets .15 .21 0.14
Non-performing loans to total assets .15 .21 0.14
Non-performing loans to net loans .26 .39 0.23
Allowance for loan losses, REO and other
repossessed assets to non-performing
assets 247.63 204.14 421.33
Allowance for loan losses to total loans,
net .65 .80 0.98
</TABLE>
-5-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
GFSB Bancorp, Inc. is the 100% owner of Gallup Federal Savings Bank ("the
Bank"), and the Bank is currently the only entity with which the holding company
has an ownership interest. 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,
and purchases participations in one-to-four family mortgage loans. The Bank also
purchases mortgage-backed and investment securities. The largest components of
the Bank's net earnings 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, and the relative amounts of interest-earning assets and
interest-bearing liabilities. The Bank's net earnings 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 have also adversely impacted the Bank.
In September 1996, Congress enacted a plan to mitigate the effect of the
BIF/SAIF insurance premium disparity. This plan required all SAIF member
institutions, including the Bank, to pay a one-time assessment to recapitalize
the SAIF. The effect of this reduced the capital of the Bank by the amount of
the fee, and such amount was charged to earnings in the quarter ended September
30, 1996. The assessment amount the Bank paid was $250,000 which is 65.7 basis
points on the amount of deposits held by the Bank at March 31, 1995.
Beginning January 1, 1997, deposit insurance assessments for SAIF members are to
be .064% of deposits on an annual basis. This rate is expected to be effective
through the end of 1999. During this same period, BIF members (predominantly
composed of commercial banks) are to be assessed .013% of most deposits.
Thereafter, assessments for BIF and SAIF members should be the same and BIF and
SAIF may be merged. As a result of these changes, beginning January 1, 1997, the
rate of deposit insurance assessed the Bank declined by approximately 70% from
the rate in effect prior to September 30, 1996.
Management Strategy
Management's strategy has been to monitor interest rate risk, by asset and
liability management, and maintain asset quality while enhancing earnings and
profitability. The Bank's strategy has been primarily to make loans,
secondarily, to invest in mortgage-backed securities and investment securities,
and thirdly, to purchase participations in adjustable rate, one-to-four family
mortgage loans primarily secured by one-to-four family residences. The Bank's
purchase of mortgage-backed securities and investment securities is designed
primarily for safety of principal and secondarily for rate of return. The Bank's
lending strategy has historically focused on the
-6-
<PAGE>
origination of traditional one-to-four-family mortgage loans primarily secured
by one-to-four-family residences in the Bank's primary market area. These loans
typically have fixed rates. The Bank also invests a portion of its assets in
construction, consumer, commercial business, multi-family and commercial real
estate loans as a method of enhancing earnings and profitability while also
reducing interest rate risk. Since 1994, the Bank has actively originated
commercial business loans and increased its origination of commercial real
estate loans and construction loans. These loans typically have adjustable
interest rates and are for shorter terms than residential first mortgage loans.
The Bank has limited experience with these types of loans, and this type of
lending generally has more risk than residential lending. The Bank's purchase of
participations in adjustable rate, one-to-four-family mortgage loans is designed
to increase earnings and reduce interest rate risk. These loans have more risk
than loans originated by the Bank, therefore, they have adjustable rates that
are higher than standard. Management is currently considering purchasing
automobile loans from dealers. These loans would have risk and terms comparable
to automobile loans originated in the Bank. Investment securities in the Bank's
portfolio typically have shorter terms to maturity than residential first
mortgage loans. As part of its asset/liability management strategy, the Bank
sells its fixed rate mortgage loans with terms over 15 years into the secondary
market. The Bank has sought to remain competitive in its market by offering a
variety of products. Automatic Teller Machine access and commercial and consumer
credit life insurance are additional products now offered by the Bank. The Bank
attempts to manage the interest rates it pays on deposits while maintaining a
stable deposit base and providing quality services to its customers.
During the past few years the competing financial institutions located in Gallup
have all been acquired by statewide and regional bank holding companies. As a
result, as of 1995, the Bank is the only local institution headquartered and
managed in Gallup, New Mexico. The Bank believes that its " hometown" advantage
will provide an opportunity to expand its operations as the only local
independent financial institution and that the reorganization to the holding
company format and the capital raised from the conversion will enable it to take
advantage of this opportunity. The new structure and capital has already enabled
the Bank to expand both the amount and scope of its current lending and
investment activities. The Bank also believes that it has a unique ability to
grow as a result of the relatively large number of local retail and wholesale
businesses specializing in Indian jewelry. In addition, the Bank is exploring
methods of increasing its business with the large Native American population
located in the nearby Navajo and Zuni Pueblo Indian reservations.
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. (See "Management
Strategy" discussed above).
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
-7-
<PAGE>
experienced in the prior ten years. Following a substantial increase in 1994 and
a slight drop in 1995, general market interest rates, including rates charged on
mortgage loans and rates paid on deposits, have remained relatively stable.
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.
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 March 31, 1997 (the most recent date
available) 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.
<TABLE>
<CAPTION>
* INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE (NPV)
======================================================================================
Change in NPV
Rates $ Amount $ Change % Change Ratio Change
================= ========== ========= ========= ======= ============
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+400 bp 7,290 -5,935 -45% 9.03% -595 bp
+300 bp 8,992 -4,232 -32% 10.86% -412 bp
+200 bp 10,662 -2,603 -20% 12.52% -246 bp
+100 bp 12,082 -1,143 -9 % 13.93% -105 bp
0 bp 13,225 -- -- 14.98%
- -100 bp 13,992 768 +6% 15.63% +65 bp
- -200 bp 14,215 990 +7% 15.76% +78 bp
- -300 bp 14,244 1,019 +8% 15.70% +72 bp
- -400 bp 14,425 1,201 +9% 15.78% +80 bp
</TABLE>
* Denotes rate shock used to compute interest rate risk capital component.
-8-
<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, 1997 Year ended June 30, 1996
============================================= ==============================================
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
=========== ========== ============== ============= =========== ==============
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $ 44,246 $ 3,893 8.79% $ 34,934 $ 3,160 9.05%
Investment securities and
mortgage-backed securities 33,918 2,054 6.06% 25,037 1,569 6.27%
Other interest-earning
assets (2) 2,647 132 5.00% 2,255 147 6.52%
--------- ---------- ----------- ------------- ----------- --------------
Total interest-earning assets 80,811 6,079 7.52% 62,226 4,876 7.84%
---------- ----------- ----------- --------------
Non-interest earning assets 2,560 2,060 - -
--------- -------------
Total assets $ 83,371 $ 64,286 - -
========= =============
Interest-bearing liabilities:
Transaction accounts $ 3,609 $ 34 .94% $ 1,501 $ 10 .67%
Passbook savings 2,896 87 3.00% 2,544 77 3.03%
Money market accounts 8,295 335 4.04% 7,153 278 3.89%
Certificates of deposit 37,534 2,140 5.70% 29,711 1,708 5.75%
Other liabilities 15,375 793 5.16% 6,321 330 5.22%
--------- ---------- ----------- ------------- ----------- --------------
Total interest-bearing
liabilities 67,709 3,389 5.00% 47,230 2,403 5.09%
---------- ----------- ----------- --------------
Non-interest bearing
liabilities 1,056 910
--------- -------------
Total liabilities 68,765 48,140
Stockholders' equity 14,606 16,146
--------- -------------
Total liabilities and
stockholders' equity $ 83,371 $ 64,286
========= =============
Net interest income $ 2,690 $ 2,473
========== ===========
Interest rate spread (3) 2.52% 2.75%
==============
Net yield on interest-
earning assets (4) 3.34% 3.97%
===========
Ratio of average interest-
earning assets to average
interest-bearing liabilities 1.19X 1.32X
=========== ==============
</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.
-9-
<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,
----------------------------------------- -------------------------------------------
1997 vs. 1996 1996 vs. 1995
----------------------------------------- -------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------------------- -------------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable $ 843 $ (91) $ (24) $ 728 $ 395 $ (64) $ 9 $ 340
Mortgage-backed securities 580 (71) (30) 479 700 79 123 902
Investment securities 3 8 0 11 38 5 1 44
Other interest-earning assets 26 (3) (1) 22 37 21 10 68
--------- ------- --------- -------- --------- ------- ------- ------
Total interest-earning assets 1,452 (157) (55) 1,240 1,170 41 143 1,354
Interest expense:
Savings accounts 53 (12) (7) 34 (33) (2) (1) (36)
Money markets 44 11 2 57 (45) 33 (5) (17)
Certificates of deposit 450 (15) (4) 431 238 185 35 458
Other liabilities 473 (4) (5) 464 373 (1) (49) 323
--------- ------- --------- -------- --------- ------- ------- ------
Total interest-bearing
liabilities 1020 (20) (14) 986 533 215 (20) 728
--------- ------- --------- -------- --------- ------- ------- ------
Net change in interest income $ 432 $ (137) $ (41) $ 254 $ 637 $ (174) $ 163 $ 626
========= ====== ========= ======= ========== ====== ====== =====
</TABLE>
Financial Condition
General. The Company's total assets increased $20.5 million or 28% from $73.3
million at June 30, 1996 to $93.8 million at June 30, 1997. This increase was
primarily the result of a $6.8 million increase in mortgage-backed securities,
and a $13.3 million increase in the Bank's net loan portfolio. The majority of
the increases are primarily attributable to the efforts of management to
effectively utilize 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
$11.9 million from $45.9 million at June 30, 1996 to $57.8 million at June 30,
1997. This increase is primarily due to an increase in the Bank's volume of NOW
accounts, business checking accounts, local (non-brokered) jumbo certificates of
deposit and public (state and city) certificates of deposits. Advances from the
Federal Home Loan Bank (FHLB) increased $9.9 million from $10.8 million at June
30, 1996 to $20.9 million at June 30, 1997. These additional borrowings funded
purchases of loans, securities and mortgage loan participations. The Bank had
$557,000 and $128 000 in unrealized gains (net of deferred taxes) at June 30,
1997 and 1996, respectively, from net market gains on the Bank's available-for-
sale investment and mortgage-backed securities portfolio. Unrealized gains and
losses do not impact the Bank's earnings until they are realized.
-10-
<PAGE>
Comparison of Operating Results for Years Ended June 30, 1997 and 1996
General. Net earnings decreased $153,000 or 19% for the year ended June 30, 1997
from the year ended June 30, 1996. This decrease was primarily the result of an
increase in interest expense of approximately $1 million and an increase in
non-interest expense of $531,000 offset by an increase in interest earnings of
$1.2 million.
Total Interest Earnings. Total interest earnings increased $1.2 million or 25%
from $4.9 million for the year ended June 30, 1996 to $6.1 million for the year
ended June 30, 1997. The increase was primarily due to a $13.3 million increase
in the loan portfolio and a $6.8 million increase in mortgage-backed securities
activity.
Interest Expense. Total interest expense increased $986,000 or 41% from $2.4
million for the year ended June 30, 1996 to $3.4 million for the year ended June
30, 1997. This increase was primarily due to an increase of $463,000 of interest
incurred on increased Federal Home Loan Bank advances and a general increase in
the deposit base of $11.8 million.
Provision for Losses on Loans. The Bank 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
$339,000 and $309,000 at June 30, 1997 and 1996, respectively. The provision for
loan losses was $21,000 and $28,000 for the years ended June 30, 1997 and 1996,
respectively. 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 Bank
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 $5,800 or 13% from
$43,000 for the year ended June 30, 1996 to $49,000 for the year ended June 30,
1997. This was primarily due to an increase in service charge income of $17,400,
offset by decreases in income from real estate operations and miscellaneous
income of $8,600 and a decrease in the gain on sold loans of $3,000.
Non-Interest Expense. Total non-interest expense increased $531,000 or 42% from
$1.3 million for the year ended June 30, 1996 to $1.8 million for the year ended
June 30, 1997. This increase was primarily due to an increase in compensation
expense of $221,000 from the hiring of additional staff to handle growth,
general salary increases and increases due to accruals for stock-based
compensation programs. Other factors were increases in insurance costs of
$225,000, occupancy costs of $38,000, advertising costs of $11,000, data
processing costs of $5,000, and other operating costs of $72,000, offset by a
decrease in professional fees of $31,000. The increase in insurance costs is due
to the BIF\SAIF assessment discussed earlier. The increase in occupancy costs is
the result of increased small building repairs. The increase in other operating
costs is due to placing into service automatic teller machines, and the decrease
in professional services is the result of a lesser need for services since the
completion of the conversion from mutual to stock ownership.
-11-
<PAGE>
Income Tax Expense. Income tax expense decreased $149,000 or 35% from $432,000
for the year ended June 30, 1996 to $283,000 for the year ended June 30, 1997.
This decrease was primarily attributable to the decrease in pre-tax earnings of
$153,000.
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 average balance of the loan portfolio and a $14.5 million increase in
mortgage-backed securities activities.
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 $324,000 of interest incurred on
Federal Home Loan Bank advances of $10.9 million and a general increase in the
deposit base.
Provision for Losses on Loans. The Bank 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 Bank 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 Bank 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.
-12-
<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 28% 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.
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, 1997, the Bank's
liquidity, as measured for regulatory purposes, was 10.15%. 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, 1997, cash and cash equivalents totaled
$2.9 million. The Bank has another source of liquidity if a need for additional
funds should arise, that being FHLB of Dallas advances. The Bank also has the
ability to borrow against mortgage-backed and other securities. At June 30,
1997, the Bank had outstanding borrowings from the FHLB of Dallas of $20.9
million. These outstanding borrowings were used to purchase additional
mortgage-backed securities and mortgage loan participations as a means of
enhancing earnings.
The primary investment activity of the Bank is the origination of loans,
primarily mortgage loans. During the year ended June 30, 1997, the Bank
originated $23 million in total loans (including loan participations purchased),
of which $14 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.
-13-
<PAGE>
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 $517,000 and $1.3
million for the years ended June 30, 1997 and 1996, 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 $20 million and $22 million for the years ended June 30, 1997
and 1996, 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 for both years ended June 30, 1997
and 1996, respectively.
Cash flows from operating activities decreased $818,000 or 61% from the year
ended June 30, 1996 to the year ended June 30, 1997. This decrease was primarily
due to a decrease in net earnings of $153,000 and the decrease in the
declaration of dividends to stockholders. For the same periods, cash flows used
by investing activities decreased $2 million primarily due to a decrease in
purchases of investments and mortgage-backed securities, and an increase in
principal repayments on mortgage-backed securities of $2.8 million, offset by an
increase in net loan originations of $6.8 million. Purchases of investments and
mortgage-backed securities decreased $8 million over the prior year. Cash flows
provided from financing activities have increased $325,000 from the year ended
June 30, 1996 to the year ended June 30, 1997 primarily due to an overall
increase in deposits of $2.5 million, and a net increase in FHLB borrowings of
$10 million, offset by the repurchase of company stock under the stock
repurchase program.
The Bank anticipates that it will have sufficient funds available to meet its
current commitments. As of June 30, 1997, the Bank had commitments to fund loans
of $10.5 million. Certificates of deposit scheduled to mature in one year or
less totaled $28 million. Based on historical withdrawals and outflows, on
internal monthly deposit reports monitored by management, and the fact that the
Bank does not accept any brokered deposits, management believes that a majority
of deposits will remain with the Bank. As a result, no adverse liquidity effects
are expected.
At June 30, 1997, the Bank exceeded each of the three OTS capital requirements
on a fully-phased in basis.
Stock Repurchase Program
During the fiscal year ended June 30, 1997, the Company repurchased 148,042
shares of its $0.10 common stock under a stock repurchase program approved by
the OTS. All of the shares purchased under the program have been retired as
authorized but unissued. The Company believes that even with the repurchase
program, the Company has sufficient capital and that the Bank will be able to
continue to meet its regulatory capital requirements.
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
-14-
<PAGE>
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, among other things, equalized 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 are 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, 1997, the Bank had $55,936 of post 1987 bad-debt reserves of which
1/6th or $9,323 was recaptured into taxable income for the year ended June 30,
1997. Future recapture of the Bank's bad-debt reserves will not have an adverse
effect on future net earnings.
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 was effective for the Company for the fiscal year ended June 30,
1997. This Statement establishes standards for the impairment of an asset
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 did not have a material impact on the
Company's June 30, 1997 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 was effective for the Company for the fiscal year ended June 30,
1997. The Company currently does not retain servicing rights on sold loans,
therefore, this Statement did not have a material impact on the Company's June
30, 1997 financial condition.
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 allows entities to continue the use of the "intrinsic value
based method" prescribed by Accounting Principles Board ("APB") Opinion No. 25.
Under the intrinsic
-15-
<PAGE>
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 Bank has continued to use the "intrinsic value based method"
as prescribed by APB Opinion No. 25.
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. In December 1996, the FASB issued SFAS No. 127 "Deferral of the Effective
Date of Certain Provisions of SFAS No. 125." It defers for one year the
effective date of certain provisions of SFAS 125. Management has not yet
determined the effect, if any, SFAS No. 125 will have on the Company's financial
statements.
Recently the FASB issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share". It simplifies the standards for computing earnings per
share, superseding the standards previously found in Opinion 15. It replaces the
presentation of primary earnings per share with a presentation of basic earnings
per share. It also requires dual presentation of basic and diluted earnings per
share on the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic earnings per share computation to the numerator and denominator of the
earnings per share computation. This Statement will affect the financial
statements issued by the Company after December 15, 1997.
The FASB recently issued Statement of Financial Accounting Standards No. 129,
"Disclosure of Information about an Entity's Capital Structure". This Statement
applies to all entities. Its requirements are a consolidation of those found in
ABP Opinions 10 and 15, and Statement of Financial Accounting Standards No. 47.
This statement will affect the financial statements issued by the Company after
December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
This Statement establishes standards for reporting and display of comprehensive
income on its components (revenues, expenses, gains and losses). Comprehensive
income is defined as the change in equity of a business enterprise, during a
period, from transactions and other events and
-16-
<PAGE>
circumstances from nonowner sources. The Statement requires that entities
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in-capital in the equity
section of a statement of financial position. This Statement is effective for
fiscal years beginning after December 31, 1997.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." This Statement establishes standards for
the way that public entities report information about operating segments in
annual financial statements and requires that selected information about
operating segments be reported in interim financial reports as well. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This Statement is effective for fiscal
years beginning after December 31, 1997.
-17-
<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, 1997, 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, 1997. 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, 1997, and the results of its
consolidated operations and its consolidated cash flows for each of the two
years in the period ended June 30, 1997 in conformity with generally accepted
accounting principles.
/s/ Atkinson & Co., Ltd.
Atkinson & Co., Ltd.
Albuquerque, New Mexico
August 11, 1997
-18-
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
June 30, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash and due from banks (notes A3, A14, and T) $ 1,772,937
Interest-bearing deposits with banks (notes A3, A14, and T) 1,121,191
Federal funds sold (notes A3, A14, and T) 100,000
Available-for-sale investment securities (notes A4, A14, C, and T) 4,342,042
Available-for-sale mortgage-backed securities (notes A5, A14, B, and T) 32,069,501
Stock of Federal Home Loan Bank, at cost, restricted (note A17) 1,060,300
Loans receivable, net, substantially pledged (notes A6, A7, A14, D, J, K, R, and T) 52,021,929
Accrued interest and dividends receivable (notes A14, E, and T) 551,783
Premises and equipment (notes A9 and F) 677,250
Prepaid and other assets 55,290
Deferred tax asset (notes A10 and L) 20,671
------------------
TOTAL ASSETS $ 93,792,894
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Transaction accounts (notes A14, G, J, and T) $ 4,488,475
Savings and now deposits (notes A14, G, J, and T) 10,606,993
Time deposits (notes A14, G, J, and T) 42,777,018
Accrued interest payable (notes A14 and T) 153,049
Advances from borrowers for taxes and insurance 175,748
Accounts payable and accrued liabilities 181,970
Deferred income taxes (notes A10 and L) 287,000
Dividends declared and payable 75,415
Advances from the Federal Home Loan Bank (notes A14, R, and T) 20,930,000
Income taxes payable 174,090
------------------
TOTAL LIABILITIES 79,849,758
COMMITMENTS AND CONTINGENCIES (notes D and M) -
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 1,500,000
shares authorized; 800,708 issued and outstanding 76,684
Preferred stock, $.10 par value, 500,000
shares authorized; no shares issued or outstanding -
Additional paid-in-capital 6,260,680
Unearned ESOP stock (note N) (464,881)
Retained earnings, substantially restricted (note I) 7,513,536
Unrealized gain on available for sale
securities, net of taxes (note A4) 557,117
------------------
TOTAL STOCKHOLDERS' EQUITY 13,943,136
------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 93,792,894
==================
</TABLE>
These accompanying notes are an integral part of these statements.
-19-
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
Years ended June 30,
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Interest income Loans receivable (notes A6 and D)
Mortgage loans $3,493,788 $2,838,874
Commercial loans 220,280 202,259
Share and consumer loans 178,877 118,411
Available-for-sale investment securities and
mortgage-backed securities 2,053,688 1,569,434
Other interest-earning assets 132,071 146,847
---------- ----------
TOTAL INTEREST EARNINGS 6,078,704 4,875,825
Interest expense
Deposits (note G) 2,595,886 2,072,621
Advances from Federal Home Loan Bank 793,124 330,050
---------- ----------
3,389,010 2,402,671
---------- ----------
NET INTEREST EARNINGS 2,689,694 2,473,154
Provision for loan losses (note D) 20,794 28,099
---------- ----------
NET INTEREST EARNINGS AFTER
PROVISION FOR LOAN LOSSES 2,668,900 2,445,055
Non-interest earnings
Service charge income 38,464 21,039
Income from real estate operations -- 3,300
Miscellaneous income 5,196 10,454
Net gains from sales of loans 4,979 8,063
---------- ----------
TOTAL NON-INTEREST EARNINGS 48,639 42,856
Non-interest expense
Compensation and benefits 835,312 614,058
Insurance (note H) 330,170 104,731
Other 239,240 166,852
Occupancy 146,252 108,305
Data processing 97,582 92,522
Professional fees 91,775 122,720
Advertising 45,942 34,358
Stock services 12,680 24,323
---------- ----------
TOTAL NON-INTEREST EXPENSE 1,798,953 1,267,869
---------- ----------
</TABLE>
These accompanying notes are an integral part of these statements.
-20-
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS - CONTINUED
Years ended June 30,
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
EARNINGS BEFORE INCOME TAXES 918,586 1,220,042
Income tax expense (note L)
Currently payable 319,159 431,663
Deferred provision (benefit) (36,052) 343
---------- ----------
283,107 432,006
---------- ----------
NET EARNINGS $ 635,479 $ 788,036
========== ==========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING (note A12) 822,154 893,684
EARNINGS PER COMMON SHARE AND
COMMON SHARE EQUIVALENT $ .77 $ .88
========== ==========
</TABLE>
These accompanying notes are an integral part of these statements.
-21-
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Gain On
Common Stock Additional Unearned Available For
---------------------- Paid-in ESOP Retained Sale Securities
Shares Amount Capital Stock Earnings Net Total
-------- ------------ ----------- ------------ ------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
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 (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 declared and
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
Net earnings - - - - 635,479 - 635,479
Unrealized gain on
available for sale
securities, net of taxes - - - - - 429,570 429,570
Distribution of stock
vested under the
management stock
bonus plan (note P) - 408 52,683 - - - 53,091
Acquisition of common
stock by the Company under
the stock repurchase plan
(note P ) (148,042) (14,804) (2,322,262) - - - (2,337,066)
Released and committed to be
released 7575.1762 of
shares of common stock
owned by the ESOP (note
N) - - 43,437 76,452 - - 119,889
Dividends declared and
paid to stockholders - - - - (321,303) - (321,303)
------- ------------ ----------- ------------ ------------- ----------- -----------
Balance, June 30, 1997 800,708 $ 76,684 $ 6,260,680 $ (464,881) $ 7,513,536 $ 557,117 $13,943,136
======= ============ =========== ============ ============= =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
-22-
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30,
Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net earnings $ 635,479 $ 788,036
Adjustments to reconcile net earnings to
net cash provided by operations
Deferred loan origination fees (128,265) (111,893)
Gain on sale of sold loans (4,979) (8,063)
Provision for loan losses 20,794 28,099
Depreciation of premises and equipment 69,933 54,175
Amortization of investment and mortgage-
backed securities premiums (discounts) 195,936 111,875
Stock dividend on FHLB stock (48,200) (29,900)
Release of ESOP stock 119,889 28,280
Stock compensation 53,091 26,602
Provision (benefit) for deferred income taxes (36,052) 343
Net changes in operating assets and liabilities
Accrued interest and dividends receivable (151,467) (180,352)
Prepaid taxes -- 61,825
Prepaid and other assets (5,885) (11,211)
Accrued interest payable 49,542 45,364
Accounts payable and accrued liabilities 9,253 20,221
Income taxes payable 65,161 108,929
Dividends declared and payable (327,162) 402,577
------------ ------------
Net cash provided by operating activities 517,068 1,334,907
Cash flows from investing activities
Purchases of premises and equipment (210,141) (117,798)
Loan originations and principal
repayment on loans, net (13,181,944) (6,296,554)
Principal payments on mortgage-backed securities 6,078,761 3,280,383
Purchases of mortgage-backed securities (12,790,892) (18,060,661)
Purchases of available-for-sale securities (125,941) (3,020,859)
Maturities and proceeds from sale of available-
for-sale securities 700,000 2,235,000
Purchase of FHLB stock (461,500) (79,000)
------------ ------------
Net cash used by investing activities (19,991,657) (22,059,489)
</TABLE>
These accompanying notes are an integral part of these statements.
-23-
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended June 30,
Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>
1997 1996
-------------- -------------
<S> <C> <C>
Cash flows from financing activities
Net increase in transaction accounts,
savings and NOW deposits and time deposits 11,882,676 9,387,305
Net increase (decrease) in advances from borrowers
for taxes and insurance 1,216 (92,282)
Proceeds from FHLB advances 106,463,375 10,854,000
Repayments on FHLB advances (96,387,375) --
Purchase of GFSB Bancorp stock under the
stock repurchase plan in cash (2,337,066) --
Dividends paid or to be paid in cash (321,303) (626,233)
Purchase of GFSB Bancorp stock under the
management stock bonus plan in cash -- (545,531)
-------------- -------------
Net cash provided by
financing activities 19,301,523 18,977,259
-------------- -------------
Decrease in cash and cash equivalents (173,066) (1,747,323)
Cash and cash equivalents at beginning of year 3,167,194 4,914,517
-------------- -------------
Cash and cash equivalents at end of year $ 2,994,128 $ 3,167,194
============= =============
Supplemental disclosures Cash paid during the year for:
Interest on deposits and advances $ 3,339,468 $ 2,357,307
Income taxes 253,998 235,198
Change in unrealized gain (loss), net of deferred taxes
on available-for-sale securities 429,570 (34,151)
</TABLE>
The accompanying notes are an integral part of these statements.
-24-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
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:
-25-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
3. Cash and Cash Equivalents - Continued
-------------------------------------
June 30,
1997
-------------------
Cash on hand $ 374,957
Cash items 1,341
Amounts due from banks 1,074,096
Interest bearing deposits 1,121,191
Federal funds sold 100,000
Federal Reserve Bank deposits 322,543
-------------------
$ 2,994,128
===================
The amounts due from banks includes $25,856 held in trust by the Company for
the employees awarded stock under the Management Stock Bonus Plan. The amount
represents dividends earned on non-vested shares. See Note P.
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, and mutual funds. The Company accounts for its
investments under 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). The Company
has recorded a net unrealized gain, net of deferred income taxes, of $
557,117 and $127,547 as an increase to equity at June 30, 1997 and 1996,
respectively. The net change in the net unrealized gain for the year ended
June 30, 1997 was $429,570.
Realized gains and losses on the sale of investment securities are determined
using the specific identification method when such sales occur.
-26-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
Realized gains and losses on the sale of mortgaged-backed securities (when
such sales occur) are based on the specific identification method. All sales
are made without recourse.
At June 30, 1997, the Company had no outstanding commitments to sell any
securities.
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. One mortgage loan was held for sale at June
30, 1997 in the amount of $83,436, which approximates market value. This loan
has not been separately disclosed on the statement of financial condition
given the minimal dollar amount 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.
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.
-27-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Mortgage loans sold to others are not included in the accompanying statements
of financial condition. For the years ended June 30, 1997 and 1996, $398,510
and $490,118, respectively, of loans have been sold. No servicing rights were
retained on these loans. Gains on the sale of these loans were $4,979 in 1997
and $8,063 in 1996.
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, 1997.
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.
-28-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 reserve for delinquent interest, bad debt reserves, stock
compensation plans, 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.
The Small Business Job Protection Act of 1996 equalized 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 bad debt reserves. Small thrifts (such as the Company) are only
allowed to use the experience method. Any reserve amounts added after 1987
are now taxed over a six year period. At June 30, 1997, the Company had
$55,936 of post 1987 bad debt reserves. Of this amount, $9,323 was recaptured
into taxable income for 1997.
11. Reclassifications
-----------------
Certain reclassifications have been made to the 1996 financial statements to
conform to the 1997 presentation.
12. Earnings Per Share
------------------
Earnings per share have been computed on the basis of the weighted average
number of shares of common stock and common stock equivalents outstanding for
the year. Stock options are included in primary earnings per share for 1997
because they are dilutive. Stock options are not included in earnings per
share in 1996 because they were antidilutive. 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.
-29-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
Deposit liabilities - The fair values disclosed for demand deposits are, by
definition, materially 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
approximate their fair values given that the borrowings are at the Bank's
current incremental borrowing rate.
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.
-30-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
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, 1997: Balance Premiums Cost Gains Losses Fair Value
- -------------- -------------- -------------- ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
FNMA ARM
Certificates $ 21,002,861 $ 667,808 $ 21,670,669 $ 146,497 $ (80,203) $ 21,736,963
FHLMC ARM
Certificates 2,747,717 77,744 2,825,461 24,649 (7,137) 2,842,973
GNMA ARM
Certificates 7,297,319 216,064 7,513,383 - (23,818) 7,489,565
------------ ------------- ------------ ---------- ----------- -------------
$ 31,047,897 $ 961,616 $ 32,009,513 $ 171,146 $ (111,158) $ 32,069,501
============ ============= ============ ========== =========== =============
</TABLE>
During the year ended June 30, 1997 and 1996, the Company did not have any
proceeds from the sales of mortgage-backed securities. At June 30, 1997, the
Company had pledged $5,093,764 (paid-down value) in mortgage-backed
securities to public entities who have on deposit amounts in excess of the
federally insured limit. The Company also had pledged $801,602 in
mortgage-backed securities to the Federal Reserve Bank for its Treasury Tax
and Loan Account.
-31-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
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:
<TABLE>
<CAPTION>
June 30, 1997
-----------------------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
---------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Mutual funds $ 2,153,206 $ 9,466 $ - $ 2,162,672
FHLB Debentures 400,000 - (2,625) 397,375
FHLMC Stock 7,786 772,646 - 780,432
U.S. Treasury bill 996,921 4,642 - 1,001,563
---------------- ------------- ---------- -------------
$ 3,557,913 $ 786,754 $ (2,625) $ 4,342,042
================ ============= ========== =============
</TABLE>
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.
<TABLE>
<CAPTION>
June 30, 1997
-----------------------------------------
Amortized Fair
Cost Value
----------------- ----------------
<S> <C> <C>
Available for sale:
Due within one year $ 996,921 $ 1,001,563
Due after one year through five years 400,000 397,375
FHLMC stock 7,786 780,432
Mortgage-backed securities 32,009,513 32,069,501
----------------- ---------------
$ 33,414,220 $ 34,248,871
================= ===============
</TABLE>
No investments were sold in 1997 or 1996. The change in the net unrealized
holding gains and losses recorded through the equity section for June 30,
1997 is a net gain of $429,570.
-32-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE D - LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
June 30,
1997
----------------
<S> <C>
First mortgage loans (principally conventional)
Principal balances
Secured by one-to-four family residences $ 31,984,280
----------------
Secured by other properties 10,405,439
Construction loans 3,811,079
Loan Participations Purchased 6,153,249
Share loans 1,113,175
Commercial loans 1,960,765
Consumer loans
Unsecured 117,518
Secured by vehicles 522,902
Home equity lines 977,141
57,045,548
Less
Undisbursed portion of loans (1,382,895)
Loan participations sold (2,961,052)
Net deferred loan origination fees (340,610)
Allowance for loan losses (339,062)
----------------
$ 52,021,929
================
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
------------ -------------
<S> <C> <C>
Balance at beginning of year $ 309,117 $ 316,520
Provision charged to income 20,794 28,099
Charge-offs, recoveries and other 9,151 (35,502)
------------ -------------
Balance at end of year $ 339,062 $ 309,117
============ =============
</TABLE>
-33-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE D - LOANS RECEIVABLE
The Company had commitments to fund new loans as follows:
June 30,
1997
----------------
Fixed rate $ 4,117,118
Variable rate 2,070,468
Commitments for new originations 4,327,155
----------------
Total $ 10,514,741
================
Fixed rate commitments for the years ended June 30, 1997 had interest rates
that ranged from 8% to 10.25%.
Nonaccrual and renegotiated loans for which interest has been reduced totaled
$136,921 and $149,324 at June 30, 1997 and 1996, respectively. Interest
income that was foregone amounted to $10,546 and $6,396 at June 30, 1997 and
1996, respectively.
The weighted average rate for the loan portfolio at June 30, 1997 is 8.98%.
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 $136,921 at June 30, 1997. Average balances for loans
delinquent more than 90 days totaled approximately $27,384 for the year ended
June 30, 1997. 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.
NOTE E - ACCRUED INTEREST AND DIVIDENDS RECEIVABLE
Accrued interest and dividends receivable is summarized as follows:
June 30, 1997
---------------
Loans receivable $ 333,503
Available-for-sale investment securities 14,041
Available-for-sale mortgage-backed securities 204,239
---------------
$ 551,783
===============
-34-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE F - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
June 30,
1997
---------------
<S> <C>
Buildings $ 522,400
Furniture, fixtures, and equipment 455,198
Land 158,550
Parking lot improvements 5,265
1,141,413
Less allowance for depreciation (464,163)
---------------
$ 677,250
===============
</TABLE>
NOTE G - DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Rate at
June 30, June 30, 1997
1997 ------------------------------------
--------- Amount Percent
----------------- ------------
<S> <C> <C> <C>
Passbook savings
accounts 3.00% $ 2,940,333 5.08%
Money market
accounts 4.00% 7,624,212 13.18
Transaction accounts 1.07% 4,488,474 7.77
----------------- ------
15,053,019 26.03
</TABLE>
-35-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE G - DEPOSITS - CONTINUED
Deposits are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Rate at
June 30, June 30, 1997
1997 ----------------------------------
--------- Amount Percent
--------------- -----------
<S> <C> <C> <C>
Certificates of deposit:
2.50%-6.00% 5.51% $ 33,970,769 58.74%
--------------- -----
6.00%-7.00% 6.55% 8,136,920 14.07
7.00%-8.00% 7.21% 669,329 1.16
42,777,018 73.97
--------------- -----
$ 57,830,037 100%
=============== =====
</TABLE>
The aggregate amount of jumbo certificates with a minimum denomination of
$100,000 was $15,805,114 at June 30, 1997.
Certificates of deposit by maturity dates are as follows:
<TABLE>
<CAPTION>
June 30, 1997
---------------
<S> <C>
3 months or less $ 7,242,578
3 months to 6 months 6,611,010
6 months to 1 year 14,951,461
1 year to 2 years 8,305,334
2 years to 3 years 1,906,082
Thereafter 3,760,553
---------------
$ 42,777,018
===============
</TABLE>
Interest expense on deposits is summarized as follows:
June 30,
---------------------------------------
1997 1996
----------------- ----------------
Certificates of deposit $ 2,140,115 $ 1,707,183
Money market accounts 334,958 278,238
Passbook savings 86,648 76,743
Transaction deposits 34,165 10,457
----------------- ----------------
$ 2,595,886 $ 2,072,621
================= ================
-36-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE H - SAVINGS ASSOCIATION INSURANCE FUND
The Economic Growth and Paperwork Reduction Act of 1996 was signed into law
on September 30, 1996. The Act provided for the resolution of the premium
disparity between the Bank Insurance Fund ("BIF") and the Savings Association
Insurance Fund ("SAIF"). In order to capitalize the SAIF, a one-time special
assessment of 65.7 basis points had to be paid by SAIF insured institutions.
As a result, the Company paid a one-time assessment of $250,257. As required
by Emerging Issues Task Force Topic No. D-47, the Company has recorded the
one-time assessment as a charge to current year operations. The amount has
been included under the caption "Insurance" on the consolidated statements of
earnings.
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, 1997 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, 1997, 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, 1997 report to the Office of
Thrift Supervision ("OTS"):
-37-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE I - REGULATORY MATTERS AND RESTRICTIONS ON RETAINED
EARNINGS - CONTINUED
<TABLE>
<CAPTION>
June 30,
1997
------------
<S> <C>
Regulatory net worth per report to OTS $ 12,171,582
Audit adjustments
Decrease in income taxes 70,749
Decrease in compensation costs and professional fees 5,384
Decrease in interest income (28,525)
------------
Net worth as reported per the
accompanying financial statements (Bank only) $ 12,219,190
============
</TABLE>
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, 1997:
<TABLE>
<CAPTION>
June 30, 1997
-----------------------------------------------------------------------------------------
Tangible Capital Core Capital Risk-Based Capital
------------------------------ ---------------------------- -------------------------
Amount Percent Amount Percent Amount Percent
-------------- ------------- -------------- ----------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
GAAP Capital $ 12,219,190 - $ 12,219,190 - $ 12,219,190 -
Unrealized gains
(losses) on available-
for-sale securities (557,117) - (557,117) - (557,117) -
Qualifying general
loan loss allowance - - - - (339,062) -
-------------- ----- ------------- ----- ------------- -----
Regulatory capital
computed 11,662,073 12.51% 11,662,073 12.51% 11,323,011 27.25%
Minimum capital
requirement 1,398,537 1.50 2,797,073 3.00 3,324,240 8.00
-------------- ----- ------------- ----- ------------- -----
Regulatory capital
excess $ 10,263,536 11.01% $ 8,865,000 9.51% $ 7,998,771 19.25%
============== ===== ============= ===== ============= =====
</TABLE>
-38-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
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,
1997
-----------------
Balance, beginning of year $ 1,426,679
New loans 422,881
Repayments (659,125)
-----------------
Balance, end of year $ 1,190,435
=================
The Company also has several deposits from related parties. Outstanding
deposits from related parties at June 30, 1997 amounted to $1,897,729. The
Company also expensed $156,623 and $105,099 for the years ended June 30, 1997
and 1996, respectively, for directors fees and compensation under the
management stock bonus plan.
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, 1997, the Company had $52,701,601
of loans outstanding and unfunded commitments of $10,514,741. Significant
loans are approved by the Board of Directors through its loan committee.
Collateral is required on all real estate loans, substantially all 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%.
The Company maintains its cash balances with other financial institutions.
The balances on deposit with other banks are insured by the Federal Deposit
Insurance Corporation up to $100,000.
-39-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE L - INCOME TAXES
Income tax expense consists of:
<TABLE>
<CAPTION>
June 30,
-------------------------------------------
1997 1996
----------------- ------------------
<S> <C> <C>
Current
Federal $ 280,336 $ 377,633
State 38,823 54,030
----------------- -----------------
319,159 431,663
Deferred provision (benefit)
Federal (30,645) 291
State (5,407) 52
----------------- -----------------
(36,052) 343
----------------- -----------------
$ 283,107 $ 432,006
================= ================
</TABLE>
Deferred taxes consists of the following:
<TABLE>
<CAPTION>
June 30, 1997
-----------------
<S> <C>
Deferred tax receivable arising from reserve for
delinquent interest $ 4,218
Deferred tax liability arising from using accelerated
depreciation for income tax purposes (46,030)
Deferred tax receivable arising from recognition
of loan origination fees 47,192
Deferred tax receivable arising from recognition of
compensation cost for financial reporting not
recognized for tax purposes 33,936
Deferred tax liability arising from
an excess bad debt tax reserve over
the base year bad debt tax reserve (18,645)
Deferred tax receivable arising from the
book bad debt reserve 135,625
Valuation allowance for deferred tax receivables (135,625)
---------------
Net deferred tax asset $ 20,671
===============
</TABLE>
-40-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE L - INCOME TAXES - CONTINUED
The Company has recorded a valuation allowance against the net deferred tax
receivable in 1997 relating to the receivable arising from the book bad debt
reserve. The change in the valuation allowance from 1996 was $11,979.
The Company has also recorded a deferred tax liability of $287,000 at June
30, 1997 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.
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory rates to income tax expense is:
<TABLE>
<CAPTION>
June 30,
-----------------------------------------
1997 1996
---------------- -----------------
<S> <C> <C>
Tax at U.S. statutory rate of 34% $ 312,319 $ 414,814
State income taxes, net of federal
tax benefit 25,623 35,694
Other - net (54,835) (18,502)
---------------- -----------------
$ 283,107 $ 432,006
================ =================
Effective tax rate 31% 35%
</TABLE>
NOTE M - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to six irrevocable letters of credit which total
$178,192. 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.
-41-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
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, 1997,
7,575.1762 ESOP shares were released, and for the year ended June 30, 1997,
$122,644 in contributions were made to the ESOP by the Company. As of June
30, 1996, 1866.667 ESOP shares were released and contributions of $54,473
were made to the Plan by the Company. The remaining unallocated ESOP shares
at June 30, 1997 amounted to 46,488. The fair value of the remaining
unallocated shares at June 30, 1997 is $883,272. Dividends on unallocated
ESOP shares are recorded as additional contributions to the ESOP by the
Company to prepay principal on the ESOP loan and release additional shares.
Dividends on allocated shares are charged to retained earnings.
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 was effective for the Company for the fiscal year ended
June 30, 1997. This Statement establishes standards for the impairment of an
asset 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 did not have a material
impact on the Company's June 30, 1997 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
-42-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE O - NEW ACCOUNTING STANDARDS - CONTINUED
mortgage servicing rights) based on their relative fair values if it is
practicable to estimate those fair values. This Statement was effective for
the Company for the fiscal year ended June 30, 1997. The Company currently
does not retain servicing rights on sold loans, therefore, this Statement did
not have a material impact on the Company's June 30, 1997 financial
condition.
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 allows 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 Bank has continued to use the "intrinsic value based method" as
prescribed by APB Opinion No. 25.
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. In December 1996, the FASB issued SFAS No. 127 "Deferral of the
Effective Date of Certain Provisions of SFAS No. 125." It defers for one year
the effective date of certain provisions of SFAS 125. Management has not yet
determined the effect, if any, SFAS No. 125 will have on the Company's
financial statements.
-43-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE O - NEW ACCOUNTING STANDARDS - CONTINUED
Recently the FASB issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share". It simplifies the standards for computing earnings per
share, superseding the standards previously found in Opinion 15. It replaces
the presentation of primary earnings per share with a presentation of basic
earnings per share. It also requires dual presentation of basic and diluted
earnings per share on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic earnings per share computation to the numerator and
denominator of the earnings per share computation. This Statement will affect
the financial statements issued by the Company after December 31, 1997.
The FASB recently issued Statement of Financial Accounting Standards No. 129,
"Disclosure of Information about an Entity's Capital Structure". This
Statement applies to all entities. Its requirements are a consolidation of
those found in ABP Opinions 10 and 15, and Statement of Financial Accounting
Standards No. 47. This statement will affect the financial statements issued
by the Company after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
This Statement establishes standards for reporting and display of
comprehensive income on its components (revenues, expenses, gains and
losses). Comprehensive income is defined as the change in equity of a
business enterprise, during a period, from transactions and other events and
circumstances from nonowner sources. The Statement requires that entities
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in-capital in the
equity section of a statement of financial position. This Statement is
effective for fiscal years beginning after December 31, 1997.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." This Statement establishes
standards for the way that public entities report information about operating
segments in annual financial statements and requires that selected
information about operating segments be reported in interim financial reports
as well. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. This Statement is
effective for fiscal years beginning after December 31, 1997.
-44-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE P - STOCK PLANS
At June 30, 1997, the Company has two stock-based compensation plans, which
are described below. The Company applies APB Opinion 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation
cost has been recognized for its Stock Option Plan. The compensation cost
that has been charged against income for the Management Stock Bonus Plan is
discussed below. Had compensation cost for the Company's two stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the method of FASB Statement
123, the Company's net income and earnings per share would have been reduced
to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
1997 1996
------------------ -----------------
<S> <C> <C> <C>
Net income As reported $ 635,479 $ 788,036
Pro forma 563,286 764,748
Earnings per share As reported $ .77 $ .88
Pro forma .68 .86
</TABLE>
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 is 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
priceestablished for the shares upon exercise was $13 7/8 per share. As of
June 30, 1997 and 1996, no shares have been exercised. Remaining shares
available to be granted in the future amount to 41,413. The fair value of
each option grant for the above proforma disclosures is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted - average assumptions: dividends of $0.10 per quarter; expected
volatility of 54%; risk-free interest rate of 5.10%; and expected lives of 8
and 7 years.
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, 1997 and 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
-45-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE P - STOCK PLANS - CONTINUED
effective date of the Plan. For the years ended June 30, 1997 and 1996,
compensation cost in the amount of $60,494 and $28,280, respectively, have
been recorded under the provisions of the Plan. The fair value of each option
grant for the above proforma disclosures is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted -
average assumptions: dividends of $0.10 per quarter; expected volatility of
54%; risk-free interest rate of 5.10%; and expected lives of 8 and 7 years.
During the current fiscal year, the Company implemented a stock repurchase
program. The program was approved by the Company's Board of Directors and the
OTS. The repurchase program authorized the Company to repurchase
approximately 15% of its currently outstanding shares. As of June 30, 1997,
the Company has repurchased 148,042 shares of its outstanding common stock
for $2,337,066. The shares purchased by the Company were retired at the
advice of special counsel.
NOTE Q - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data are presented below by quarter for the
years ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 Quarter Ended
---------------------------------------------------------------------------------
September 30 December 31 March 31 June 30
------------------ ------------------ -------------- ----------------
<S> <C> <C> <C> <C>
Net interest income after
provision for loan losses $ 669,227 $ 656,787 $ 637,499 $ 705,387
Other income 14,217 9,181 11,249 13,992
Other expenses 625,051 422,513 371,503 379,886
Earnings before
income taxes 58,393 243,455 277,246 339,492
Net earnings 34,640 146,062 171,471 283,306
Earnings per common
share .04 .17 .21 .34
</TABLE>
<TABLE>
<CAPTION>
1996 Quarter Ended
---------------------------------------------------------------------------------
September 30 December 31 March 31 June 30
------------------ ------------------ -------------- ----------------
<S> <C> <C> <C> <C>
Net interest income after
provision for 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>
-46-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE R - 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, 1997, the Bank has
$20,930,000 in outstanding advances with the FHLB. The advances bear interest
and mature as follows:
<TABLE>
<CAPTION>
Unpaid principal balance Interest Rate Maturity
------------------------ ------------- ------------------
<S> <C> <C> <C>
$ 3,000,000 5.53% July 01, 1997
4,000,000 5.53% July 08, 1997
1,000,000 5.51% July 14, 1997
2,880,000 5.54% July 16, 1997
3,000,000 5.53% July 22, 1997
4,000,000 5.53% July 29, 1997
650,000 5.48% December 15, 1997
2,400,000 5.89% December 17, 1997
-------------------
$ 20,930,000
===================
</TABLE>
Several of the advances due in July were subsequently refinanced after year
end. The advances are secured by the Bank's investment in FHLB stock of
$1,060,300 and FNMA mortgage-backed securities in the amount of $15,929,584.
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.
-47-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE S - 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, 1997
<TABLE>
<CAPTION>
ASSETS
Gallup GFSB
GFSB Federal Bancorp,
Bancorp, Savings Inc. and
Inc. Bank Eliminations Subsidiary
---------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Cash and due from banks $ - $ 1,772,937 $ - $ 1,772,937
Interest-bearing deposits with banks - 1,121,191 - 1,121,191
Federal funds sold - 100,000 - 100,000
Available-for-sale investment securities - 4,342,042 - 4,342,042
Mortgage-backed securities - 32,069,501 - 32,069,501
Stock of Federal Home Loan Bank, at cost, restricted - 1,060,300 - 1,060,300
Loans receivable, net 2,268,799 52,021,929 (2,268,799) 52,021,929
Accrued interest and dividends receivable - 551,783 - 551,783
Premises and equipment, net - 677,250 - 677,250
Prepaid and other assets 492 54,798 - 55,290
Deferred tax asset - 20,671 - 20,671
Investment in subsidiary 4,557,750 492,440 (5,050,190) -
---------------- ------------- -------------- --------------
TOTAL ASSETS $ 6,827,041 $ 94,284,842 $ (7,318,989) $ 93,792,894
================ ============= ============== ==============
</TABLE>
-48-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE S - DETAILS OF CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Details of Consolidated Statement of Financial Condition - Continued
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Gallup GFSB
GFSB Federal Bancorp,
Bancorp, Savings Inc. and
Inc. Bank Eliminations Subsidiary
----------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Transaction accounts $ - $ 4,488,475 $ - $ 4,488,475
Savings and now deposits - 10,608,969 (1,976) 10,606,993
Time deposits - 42,777,018 - 42,777,018
Accrued interest payable - 153,049 - 153,049
Advances from borrowers for taxes and insurance - 175,748 - 175,748
Accounts payable and accrued liabilities 21,770 160,200 - 181,970
Deferred income taxes - 287,000 - 287,000
Advances from parent company - 2,059,359 (2,059,359) -
Dividends declared and payable 75,415 207,464 (207,464) 75,415
Advances from the Federal Home Loan Bank - 20,930,000 - 20,930,000
Income taxes payable (44,280) 218,370 - 174,090
----------------- ------------- -------------- --------------
TOTAL LIABILITIES 52,905 82,065,652 (2,268,799) 79,849,758
COMMITMENTS AND CONTINGENCIES - - - -
STOCKHOLDERS' EQUITY
Common stock 80,071 10,000 (13,387) 76,684
Paid-in-capital 6,749,733 4,547,750 (5,036,803) 6,260,680
Unearned ESOP stock (464,881) - - (464,881)
Retained earnings, substantially restricted 409,213 7,104,323 - 7,513,536
Unrealized gain on available for sale
securities, net of taxes - 557,117 - 557,117
----------------- ------------- -------------- --------------
TOTAL STOCKHOLDERS' EQUITY 6,774,136 12,219,190 (5,050,190) 13,943,136
----------------- ------------- -------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 6,827,041 $ 94,284,842 $ (7,318,989) $ 93,792,894
================= ============= ============== ==============
</TABLE>
-49-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE S - DETAILS OF CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Details Of Consolidated Statement Of Earnings
<TABLE>
<CAPTION>
Year ended June 30, 1997
Gallup GFSB
GFSB Federal Bancorp,
Bancorp, Savings Inc. and
Inc. Bank Eliminations Subsidiary
----------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Interest income
Loans receivable
Mortgage loans $ -- $ 3,493,788 $ -- $ 3,493,788
Commercial loans -- 220,280 -- 220,280
Share and consumer loans -- 178,877 -- 178,877
Available-for-sale investment securities
and mortgage-backed securities -- 2,053,688 -- 2,053,688
Other interest-earning assets 185,595 132,071 (185,595) 132,071
----------- ----------- ----------- -----------
TOTAL INTEREST EARNINGS 185,595 6,078,704 (185,595) 6,078,704
Interest expense
Deposits -- 2,596,722 (836) 2,595,886
Advances from Federal Home Loan Bank -- 793,124 -- 793,124
Advances to parent company -- 137,561 (137,561) --
----------- ----------- ----------- -----------
-- 3,527,407 (138,397) 3,389,010
----------- ----------- ----------- -----------
NET INTEREST EARNINGS 185,595 2,551,297 (47,198) 2,689,694
Provision for loan losses -- 20,794 -- 20,794
----------- ----------- ----------- -----------
NET INTEREST EARNINGS AFTER
PROVISION FOR LOAN LOSSES 185,595 2,530,503 (47,198) 2,668,900
Non-interest earnings
Income from real estate operations -- -- -- --
Miscellaneous income -- 5,196 -- 5,196
Dividend income from subsidiary 587,863 -- (587,863) --
Net gains from sales of loans -- 4,979 -- 4,979
Service charge income -- 38,464 -- 38,464
----------- ----------- ----------- -----------
TOTAL NON-INTEREST EARNINGS 587,863 48,639 (587,863) 48,639
</TABLE>
-50-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE S - DETAILS OF CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Details Of Consolidated Statement Of Earnings - Continued
<TABLE>
<CAPTION>
Year ended June 30, 1997
Gallup GFSB
GFSB Federal Bancorp,
Bancorp, Savings Inc. and
Inc. Bank Eliminations Subsidiary
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Non-interest expense
Compensation and benefits 132,250 750,260 (47,198) 835,312
Insurance -- 330,170 -- 330,170
Other 18,769 220,471 -- 239,240
Occupancy -- 146,252 -- 146,252
Data processing -- 97,582 -- 97,582
Professional fees 53,022 38,753 -- 91,775
Advertising -- 45,942 -- 45,942
Stock services 12,680 -- -- 12,680
----------- ----------- ----------- -----------
TOTAL NON-INTEREST EXPENSE 216,721 1,629,430 (47,198) 1,798,953
----------- ----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES 556,737 949,712 (587,863) 918,586
Income tax expense
Currently payable (31,134) 350,293 -- 319,159
Deferred (benefit) -- (36,052) -- (36,052)
----------- ----------- ----------- -----------
(31,134) 314,241 -- 283,107
----------- ----------- ----------- -----------
NET EARNINGS $ 587,871 $ 635,471 $ (587,863) $ 635,479
=========== =========== =========== ===========
</TABLE>
-51-
<PAGE>
GFSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE T - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments were as
follows:
<TABLE>
<CAPTION>
June 30, 1997
--------------------------------------------
Carrying Value Fair Value
------------------ -------------------
<S> <C> <C>
Financial Assets:
Cash and due from banks $ 1,772,937 $ 1,772,937
Interest-bearing deposits with banks 1,121,191 1,121,191
Federal funds sold 100,000 100,000
Available-for-sale-investment securities 4,342,042 4,342,042
Available-for-sale mortgage-backed securities 32,069,501 32,069,501
Loans receivable, net 52,021,929 53,192,981
Accrued interest receivable
Financial Liabilities:
Transaction deposits 4,488,475 4,488,475
Savings and now deposits 10,606,993 10,035,204
Time deposits 42,777,018 42,962,722
Accrued interest payable 153,049 153,049
Advances from the FHLB 20,930,000 20,930,474
Off-Balance-Sheet Liabilities:
Commitments to extend credit - 2,000
</TABLE>
-52-
<PAGE>
OFFICE LOCATION AND OTHER CORPORATE INFORMATION
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 of the Board
(dentist, retired)
<TABLE>
<CAPTION>
<S> <C>
James Nechero, Jr. Richard C. Kauzlaric
(President, Eagle Energy, Inc., (President, Bubany Insurance Agency, Inc.)
a real estate investment company)
George S. Perce Vernon I. Hamilton
(owner of Perce Engineering, a (President, V.I.
professional engineering and surveying Hamilton Construction Co. Inc.)
company, and Perce Farms of
Deming, a producing pecan grove)
Michael P. Mataya Charles L. Parker, Jr.
(President and CEO of Indian (President of Sanders
Capital Distributing Co., a Trading Corp. and Twin Lakes Trading Corp.,
wholesale gasoline marketer) and an employee of Thriftway Marketing Corp.
</TABLE>
Executive Officers of GFSB Bancorp, Inc.
Jerry R. Spurlin, President
William W. Head, Jr., Chief Lending Officer
Marshall W. Coker, Chief Administrative Officer
===========================================
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
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, 1997 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 24, 1997.
-53-
EXHIBIT 21
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Percentage of
Jurisdiction of Ownership held
Subsidiary Incorporation by Registrant
---------- --------------- --------------
<S> <C> <C>
Gallup Federal Savings Bank United States 100%
</TABLE>
The financial statements of the subsidiary of the registrant are consolidated
with those of the registrant.
EXHIBIT 23
<PAGE>
[LOGO] ATKINSON & CO. LTD.
CERTIFIED PUBLIC ACCOUNTANTS - CONSULTANTS
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 11, 1997 on the
consolidated financials 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, 1997.
/s/Atkinson & Co., Ltd.
Atkinson & Co., Ltd.
Albuquerque, New Mexico
September 29, 1997
Telephone (505) 843-6492 - Fax (505) 843-6817
707 Broadway NE, Suite 400 Albuquerque, NM 87102 -
PO Box 25246, Albuquerque, NM 87125
[LOGO] Member [LOGO AAFI] ASSOCIATED
------------- ACCOUNTING
Division for CPA Firms AICPA FIRMS
INTERNATIONAL
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,773
<INT-BEARING-DEPOSITS> 1,121
<FED-FUNDS-SOLD> 100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,342
<INVESTMENTS-CARRYING> 3,558
<INVESTMENTS-MARKET> 4,342
<LOANS> 52,022
<ALLOWANCE> 339
<TOTAL-ASSETS> 93,793
<DEPOSITS> 51,872
<SHORT-TERM> 20,930
<LIABILITIES-OTHER> 1,047
<LONG-TERM> 0
0
0
<COMMON> 77
<OTHER-SE> 13,866
<TOTAL-LIABILITIES-AND-EQUITY> 93,793
<INTEREST-LOAN> 3,893
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<INTEREST-TOTAL> 6,079
<INTEREST-DEPOSIT> 2,596
<INTEREST-EXPENSE> 3,389
<INTEREST-INCOME-NET> 2,690
<LOAN-LOSSES> 21
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,799
<INCOME-PRETAX> 919
<INCOME-PRE-EXTRAORDINARY> 0
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</TABLE>
