UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE EXCHANGE ACT OF 1934
For the transition period from to
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 Number)
221 West Aztec Avenue, Gallup, New Mexico 87301
- ----------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (505) 722-4361
--------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
------ ------
As of February 12, 1997, there were issued and outstanding 843,708 shares of the
registrant's Common Stock.
<PAGE>
GFSB Bancorp, Inc.
Index
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION Page No.
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition September 30, 1996 and
June 30, 1996 3
Consolidated Statements of Earnings Three months ended September 30,
1996 and 1995 4
Consolidated Statements of Cash Flows Three months ended September 30,
1996 and 1995 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
2
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
------------ ---------
(Unaudited)
ASSETS
<S> <C> <C>
Cash and due from banks $ 1,623,393 $ 1,671,053
Interest-bearing deposits with banks 3,342,990 1,346,141
Federal funds sold 100,000 150,000
Available-for-sale investment securities 4,081,506 4,572,647
Available-for-sale mortgage-backed securities 27,990,074 25,245,896
Stock of Federal Home Loan Bank, at cost, restricted 808,100 550,600
Loans receivable, net, substantially pledged 42,670,152 38,727,535
Accrued interest and dividend receivable 459,598 400,316
Premises and equipment 664,791 537,042
Prepaid Income Taxes 19,833 -
Prepaid and other assets 14,225 49,405
---------------- ----------------
TOTAL ASSETS $ 81,774,662 73,250,635
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Transaction accounts $ 5,709,622 $ 3,239,079
Savings and now deposits 11,127,132 10,758,974
Time deposits 37,016,700 31,991,757
Accrued interest payable 94,386 103,507
Advances from borrowers for taxes and insurance 194,623 174,532
Accounts payable and accrued liabilities 194,318 172,717
Deferred income taxes 185,706 81,087
Dividends declared and payable 83,336 402,577
Advances from Federal Home Loan Bank 12,518,000 10,854,000
Income taxes payable 105,908 108,929
---------------- ----------------
TOTAL LIABILITIES 67,229,731 57,887,159
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 2,000,000
shares authorized; 901,313 issued and
outstanding at December 31, 1996 and 948,750 shares
issued and outstanding at June 30, 1996 83,336 91,080
Preferred stock, $.10 par value, 500,000
shares authorized; no shares issued or
outstanding - -
Additional paid-in-capital 7,377,595 8,486,822
Unearned ESOP stock (484,355) (541,333)
Retained earnings, substantially
restricted 7,237,724 7,199,360
Unrealized gain on available for sale
securities, net of taxes 330,631 127,547
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 14,544,931 15,363,476
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 81,774,662 $ 73,250,635
================ ================
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1996 1995 1996 1995
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Interest income
Loans receivable
<S> <C> <C> <C> <C>
Mortgage loans $ 863,653 $ 704,466 $ 1,674,396 $1,389,282
Commercial loans 46,845 48,866 93,961 101,423
Share and consumer loans 41,279 31,843 79,206 59,428
Available-for-sale investment securities and
mortgage-backed securities 509,967 343,535 1,027,314 656,646
Other interest-earning assets 14,929 48,941 62,145 93,997
---------- ----------- ----------- ----------
TOTAL INTEREST EARNINGS 1,476,673 1,177,651 2,937,022 2,300,776
Interest expense
Deposits 633,738 518,594 1,214,057 998,202
Advances from Federal Home Loan Bank 186,148 48,225 391,663 48,224
---------- ----------- ----------- ----------
TOTAL INTEREST EXPENSE 819,886 566,819 1,605,720 1,046,426
---------- ----------- ----------- ----------
NET INTEREST EARNINGS 656,787 610,832 1,331,302 1,254,350
Provision for loan losses 0 15,894 5,288 28,099
---------- ----------- ----------- ----------
NET INTEREST EARNINGS AFTER
PROVISION FOR LOAN LOSSES 656,787 594,938 1,326,014 1,226,251
Non-interest earnings
Income from real estate operations 0 1,650 0 3,300
Miscellaneous income 1,026 9,150 1,721 9,181
Net gains from sales of loans 0 0 4,942 0
Service charge income 8,155 391 16,735 695
---------- ----------- ----------- ----------
TOTAL NON-INTEREST EARNINGS 9,181 11,191 23,398 13,176
Non-interest expense
Compensation and benefits 237,264 170,044 424,587 266,779
Professional fees 25,951 48,743 54,793 69,652
Occupancy 35,363 31,874 67,472 55,550
Advertising 11,997 11,449 22,617 15,168
Data processing 22,327 17,658 45,825 43,839
Insurance 30,743 24,653 310,208 50,154
Other 58,869 48,018 122,062 76,355
---------- ----------- ----------- ----------
TOTAL NON-INTEREST EXPENSE 422,513 352,439 1,047,564 577,497
EARNINGS BEFORE INCOME TAXES 243,455 253,690 301,848 661,930
Income tax expense 97,393 117,442 121,146 246,810
---------- ----------- ----------- ----------
NET EARNINGS $ 146,062 $ 136,248 180,702 415,120
========== ========== ======= =======
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 856,942 892,760 856,942 892,760
EARNINGS PER COMMON SHARE $ 0.17 $ 0.15 0.21 0.46
========== ========== ==== ====
</TABLE>
4
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>
Six months ended
December 31,
1996 1995
(Unaudited) (Unaudited)
Cash flows from operating activities
<S> <C> <C>
Net earnings $ 180,702 $ 415,120
Adjustments to reconcile net earnings to
net cash provided (used) by operations
Deferred loan origination fees (69,391) (56,314)
Gain on sale of sold loans (4,942) (7,414)
Provision for loan losses 5,288 15,894
Depreciation of premises and equipment 32,935 24,599
Amortization of investment and mortgage-
backed securities premiums (discounts) 80,008 55,116
Stock dividends on FHLB stock (10,800) (14,500)
Stock compensation 28,280 --
ESOP stock committed to be released 86,180 34,285
Net changes in operating assets and liabilities
Accrued interest receivable (59,284) (167,280)
Prepaid income tax (22,854) --
Prepaid and other assets 35,180 (1,377)
Accrued interest payable (9,120) 54,027
Accounts payable and accrued liabilities (6,679) (45,923)
Income taxes payable -- 127,399
Dividends declared and payable (319,241) --
---------- -----------
Net cash provided (used) by
operating activities (53,738) 433,632
Cash flows from investing activities
Purchase of premises and equipment (160,684) (23,218)
Loan originations and principal
repayment on loans, net (3,873,572) (1,539,005)
Principal payments on mortgage-backed
securities 2,510,672 1,356,678
Purchases of mortgage-backed securities (5,174,111) (15,840,882)
Purchases of U.S. Agency Securities, FHLB
Debentures, bonds, and mutual funds (61,902) --
Maturities and proceeds from sale of FHLB
Debentures, U.S. Agency Securities,
certificates of deposit, and bonds 700,000 635,000
Purchase of FHLB stock (246,700) (51,200)
---------- -----------
Net cash used by investing activities (6,306,297) (15,462,627)
</TABLE>
5
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>
Six months ended
December 31,
1996 1995
(Unaudited) (Unaudited)
Cash flows from financing activities
Net increase in demand deposits, passbook
savings, money market accounts, and
<S> <C> <C>
certificates of deposit $ 7,863,644 $ 3,155,271
Net increase (decrease) in mortgage escrow funds 20,091 (15,759)
Proceeds from FHLB advances 54,048,910 10,000,000
Repayments on FHLB advances (52,384,910) --
Dividends paid or to be paid in cash (142,338) --
Purchase of retired treasury stock (1,146,173) --
------------ ------------
Net cash provided by
financing activities 8,259,224 13,139,512
------------ ------------
Increase (decrease) in cash and cash equivalent 1,899,189 (1,889,483)
Cash and cash equivalents at beginning of period 3,167,194 4,914,517
------------ ------------
Cash and cash equivalents at end of period $ 5,066,383 3,025,034
============ =========
Supplemental disclosures
Cash paid during the period for
Interest on deposits and advances $ 1,614,841 $ 992,399
Income taxes 142,200 135,000
Change in unrealized gain (loss), net of deferred
taxes for implementation of FASB #115 203,084 126,970
Dividends declared not yet paid -- 142,313
</TABLE>
6
<PAGE>
GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. The interim financial data is unaudited; however, in the opinion of
management, the interim data includes all adjustments, consisting only of normal
recurring adjustments necessary for a fair statement of the results for the
interim periods. The financial statements included herein have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures included herein
are adequate to make the information presented not misleading.
The organization and business of the Company, accounting policies followed by
the Company and other information are contained in the notes to the Company's
financial statements filed as part of the Company's June 30, 1996, Form 10-KSB.
This quarterly report should be read in conjunction with such annual report.
2. Dividends
---------
During the quarter ended September 30, 1996, the Board of Directors declared a
cash dividend of $0.10 per share on the Company's outstanding common stock,
payable to stockholders of record as of September 30, 1996. The dividends were
paid in October, 1996.
During the quarter ended December 31, 1996, the Board of Directors declared a
quarterly cash dividend of $0.10 per share on the Company's outstanding common
stock, payable to stockholders of record as of December 31, 1996. The dividends
were paid in January, 1997.
3. Employee Stock Ownership Plan
-----------------------------
On December 31, 1996, the Company was committed to release 3169.76 shares of its
common stock owned by the Company's ESOP. The commitment resulted in $50,000 of
additional compensation cost.
4. Management Stock Bonus Plan
---------------------------
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
December 31, 1996, 17,568 shares remained to be awarded under the Plan. Awards
under the Plan are earned at the rate of one-fifth of the award per year as of
the one-year anniversary of the effective date of the Plan. As a result of this
vesting and the dividends earned on the vested shares, a liability and
corresponding compensation cost in the amount of $15,000 has been recorded at
December 31, 1996, under the provisions of the Plan.
5. BIF/SAIF Insurance Premium
--------------------------
The one-time BIF/SAIF Insurance Premium assessed by Congress in September, 1996,
resulted in a $250,000 charge to the Bank. This assessment was charged to
earnings in September, 1996, and was paid in November, 1996.
7
<PAGE>
Item 2. 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.
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, net interest income, 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 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 BIF and SAIF insured institutions
has 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.
Beginning January 1, 1997, deposit insurance assessments for SAIF members are
expected to be reduced to approximately .064% of deposits on an annual basis
through the end of 1999. During this same period, BIF members (predominantly
composed of commercial banks) are expected to be assessed approximately .013% of
deposits. Thereafter, assessments for BIF and SAIF members should be the same
and SAIF and BIF may be merged. As a result of these changes, beginning January
1, 1997, the rate of deposit insurance assessed the Bank will decline by
approximately 70%.
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 and
secondarily to invest remaining funds in mortgage-backed securities and
investment securities. 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 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. 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. 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.
8
<PAGE>
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 including selling
fixed rate mortgage loans with terms over 15 years. See "Management Strategy."
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 inclining interest rates.
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. This trend resulted
in a decrease in the yield on the Bank's interest earning assets, namely the
loan portfolio and mortgage-backed securities portfolios. The net interest rate
spread may decrease if deposits reprice upward more rapidly than interest
earning assets.
FINANCIAL CONDITION
The Bank's total assets increased $8.5 million or 11.6% from $73.3 million at
June 30, 1996 to $81.8 million at December 31, 1996. This increase is the result
of a $2.7 million increase in mortgage-backed securities, a $3.9 million
increase in the Bank's net loan portfolio, and an increase in cash and cash
equivalents of $1.9 million. The majority of the increases are directly
attributable to efforts of Management to take advantage of the increased capital
infusion made as a result of the conversion from a mutual to stock form of
ownership through increased investment and lending activity and from FHLB
borrowings. During the same period, deposits increased $7.9 million or 17.2%
from $46.0 million at June 30, 1996, to $53.9 million at December 31, 1996. This
increase is primarily due to an increase in the Bank's volume of NOW accounts,
business checking accounts and local (non-brokered) Jumbo Certificates of
Deposit. The Bank had $331,000 and $128,000 in unrealized gains (net of deferred
taxes) at December 31, 1996 and June 30, 1996, respectively from market gains on
the Bank's investment and mortgage-backed portfolios. Unrealized gains and
losses do not impact the Bank's earnings until they are realized.
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR QUARTER ENDED DECEMBER 31, 1996 COMPARED
TO QUARTER ENDED DECEMBER 31, 1995
General
Net earnings increased $10,000 or 7.2% for the quarter ended December 31, 1996
from the quarter ended December 31, 1995. This increase is primarily the result
of an increase in net interest earnings of $46,000 offset by an increase in
non-interest expense of $70,000, a decrease in the provision for loan losses of
$16,000 and a decrease in income taxes of $20,000.
9
<PAGE>
Interest Earnings
Total interest income increased $299,000 or 24.9% from $1.2 million for the
quarter ended December 31, 1995 to $1.5 million for the quarter ended December
31, 1996. The increase in this twelve month period was primarily due to a $2.7
million increase in the Bank's mortgage-backed securities portfolio, a $900,000
increase in investment securities, and a $8.7 million increase in the Bank's net
loan portfolio.
Interest Expense
Total interest expense increased $253,000 or 44.6% from $567,000 for the quarter
ended December 31, 1995 to $820,000 for the quarter ended December 31, 1996.
This increase was due to a substantial increase in FHLB borrowings and a general
increase in the deposit base, including the increase in volume of NOW accounts
and Jumbo Certificates of Deposit.
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 borrower's ability to repay
loans, estimated value of the underlying collateral and current and expected
market conditions. The allowance for loan losses was $344,000 and $311,000 at
December 31, 1996 and 1995, respectively. The provision for loans was $0 and
$16,000 for the quarters ended December 31, 1996 and 1995, respectively. 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 Bank's net earnings.
Non-Interest Expense
Total non-interest expense increased $71,000 or 20.2% from $352,000 for the
quarter ended December 31, 1995 to $423,000 for the quarter ended December 31,
1996. This increase was primarily due to an increase in compensation and
benefits costs of $67,000, an increase in other costs of $11,000, an increase in
occupancy, insurance and data processing costs of $14,000, offset by a decrease
in professional fees of $23,000. The increase in compensation and benefits is
due to the addition of two senior officers, additional staff and current year
accruals for stock-based compensation plans. The increase in other expenses is
primarily due to increased supplies, franchise taxes, charitable contributions
and automatic teller machine expenses. The increase in occupancy, insurance and
data processing costs is due to adjustments made for increased and improved
customer service. 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.
Liquidity and Capital Resources
The Bank 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 December 31, 1996, the Bank's liquidity, as
measured for regulatory purposes, was 11.38%. The Bank adjusts liquidity as
appropriate to meet its asset/liability objectives.
The Bank's primary sources of funds are deposits, 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.
10
<PAGE>
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 December 31, 1996, cash and cash equivalents totaled
$5.1 million. The Bank has other sources of liquidity if a need for additional
funds arise. Additional sources of funds include FHLB of Dallas advances and the
ability to borrow against mortgage-backed and other securities. At December 31,
1996, the Bank had $12.5 million in outstanding borrowings from the FHLB of
Dallas. These outstanding borrowings were used to purchase additional
mortgage-backed securities as a means of enhancing earnings.
The primary investment activity of the Bank is the origination of loans,
primarily mortgage loans. During the quarter ended December 31, 1996, the Bank
originated $4.3 million in total loans, of which $2.0 million were mortgage
loans. Another investment activity of the Bank is the investment of funds in
U.S. Government Agency securities, mortgage-backed securities, federal funds and
FHLB-Dallas overnight funds. During periods when the Bank's loan demand is
limited, the Bank may purchase short-term investment securities to obtain a
higher yield than otherwise available.
The Bank's cash flows are comprised of three primary classifications: cash flows
from operating activities, investing activities and financing activities. Cash
flows provided in operating activities, consisting principally of stock based
compensation costs and income taxes less disbursements of interest and
dividends, were $434,000 for the six month period ended December 31, 1995 and
cash flows used by operating activities were $54,000 for the six month period
ended December 31, 1996. Net cash used for investing activities consisted
primarily of purchases of mortgage-backed securities and loan originations,
offset by principal collections on loans, and principal collections and proceeds
from the maturities of mortgage-backed securities and investment securities.
Such uses were $6.3 million and $15.5 million for the six month periods ended
December 31, 1996 and 1995, respectively. Net cash provided from financing
activities consisting primarily of net activity in deposit and escrow accounts,
and new FHLB borrowings less purchases of treasury stock, were $8.3 million and
$13.1 million for the six month periods ended December 31, 1996 and 1995
respectively.
The Bank anticipates that it will have sufficient funds available to meet its
current commitments. As of December 31, 1996, the Bank had commitments to fund
loans of $800,000. Certificates of deposit scheduled to mature in one year or
less totaled $19.9 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 December 31, 1996, the Bank exceeded each of the three OTS capital
requirements on a fully-phased-in basis.
Stock Repurchase Program
In August, 1996, the Company repurchased 47,347 shares, or 5%, of the Company's
common stock. The Company has decided to retire these shares at the advice of
special counsel.
On October 11, the Company issued a press release announcing its intention to
repurchase up to 15% (142,312 shares) of the Company's common stock. On November
8, 1996, the Company received regulatory approval to repurchase these shares of
common stock before June 28, 1997. As of December 31, 1996, 30,000 of these
shares had been repurchased. The Company has decided to retire these shares
also. Subsequent to December 31, an additional 27,300 shares have been
repurchased. The Company believes that it has sufficient capital to complete the
repurchase and that the repurchase will not cause the Bank to fail 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 Principals ("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
11
<PAGE>
of inflation is reflected in the increased cost of the Company's operations.
Unlike most industrial companies, nearly all the assets and liabilities of the
Company are financial. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.
Recent legislation - Recapture of Post 1987 Bad Debt Reserves
The Small Business Job Protection Act of 1996 will, among other things, equalize
the taxation of thrifts and banks. The bill no longer allows thrifts a choice
between the percentage of taxable income method and the experience method in
determining additions to their bad debt reserves. Smaller thrifts with $500
million of assets or less are only allowed to use the experience method, which
is generally available to small banks currently. Larger thrifts must use the
specific charge off method regarding its bad debts. Any reserve amounts added
after 1987 will be taxed over a six year period beginning in 1996; however, bad
debt reserves set aside through 1987 will generally not be taxed. Institutions
can delay these taxes for two years if they meet a residential - lending test.
At June 30, 1996, the Bank had $55,936 of post 1987 bad-debt reserves. Any
recapture of the Bank's bad-debt reserves may have an adverse effect on net
earnings. The Bank has evaluated the effects of this legislation and believes it
will not have a material impact on the Bank's financial condition.
Impact of Certain Accounting Standards
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of
In March, 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." This Statement
is currently effective for the Bank. This statement established standards for
the impairment of long-lived assets and requires that long-lived assets held by
an entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable. The
Statement also requires that long-lived assets to be disposed of be reported at
the lower of carrying value or fair value less cost to sell. Adoption of this
Statement has not had and is not anticipated to have a material impact on the
Bank's financial condition.
Accounting for Mortgage Servicing Rights
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 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
is effective in the current fiscal year. The Bank currently does not retain
servicing rights on sold loans, therefore, the adoption of this Statement has
not had and is not anticipated to have a material impact on the Bank's financial
condition.
PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K
A Form 8-K (Item 7) dated November 12, 1996, was filed regarding the
registrant's Board of Directors' adoption of a stock repurchase program that
authorized the repurchase of up to 15% of the outstanding shares of the common
stock of the registrant before June 28, 1997.
12
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GFSB BANCORP, INC.
Date: February 13, 1997 /s/ Jerry R. Spurlin
-----------------------------------
Jerry R. Spurlin
President
(Duly Authorized Representative and
Principal Financial Officer)
13
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<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 1,623
<INT-BEARING-DEPOSITS> 3,343
<FED-FUNDS-SOLD> 100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 32,072
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 42,670
<ALLOWANCE> 344
<TOTAL-ASSETS> 81,779
<DEPOSITS> 53,853
<SHORT-TERM> 12,518
<LIABILITIES-OTHER> 858
<LONG-TERM> 0
0
0
<COMMON> 83
<OTHER-SE> 14,462
<TOTAL-LIABILITIES-AND-EQUITY> 81,775
<INTEREST-LOAN> 1,848
<INTEREST-INVEST> 1,027
<INTEREST-OTHER> 62
<INTEREST-TOTAL> 2,937
<INTEREST-DEPOSIT> 1,214
<INTEREST-EXPENSE> 1,606
<INTEREST-INCOME-NET> 1,326
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,048
<INCOME-PRETAX> 302
<INCOME-PRE-EXTRAORDINARY> 302
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 181
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
<YIELD-ACTUAL> 4.28
<LOANS-NON> 126
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 399
<ALLOWANCE-OPEN> 312
<CHARGE-OFFS> 5
<RECOVERIES> 35
<ALLOWANCE-CLOSE> 344
<ALLOWANCE-DOMESTIC> 344
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
