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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 September 30, 1997
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-25854
GFSB BANCORP, INC.
----------------------------------------------
(Name of Small Business Issuer in its Charter)
Delaware 04-2095007
- ------------------------------------------------ ----------
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer
Organization) Identification No.)
221 West Aztec Avenue, Gallup, New Mexico 87301
- ----------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (505) 722-4361
--------------
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 October 31, 1997, there were issued and outstanding 800,708 shares of the
registrant's Common Stock.
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<PAGE>
GFSB Bancorp, Inc.
Index
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1Consolidated Financial Statements:
Consolidated Statements of Financial Condition
September 31, 1997 and June 30, 1997 3
Consolidated Statements of Earnings
Three months ended September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows
Three months ended September 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 8
Item 2Management's Discussion and Analysis or Plan of Operation 10
PART II. OTHER INFORMATION
Item 6Exhibits and Reports on Form 8-K 16
Signatures 17
2
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,656,286 $ 1,772,937
Interest-bearing deposits with banks 1,579,226 1,121,191
Federal funds sold -- 100,000
Available-for-sale investment securities 5,013,634 4,342,042
Available-for-sale mortgage-backed securities 39,802,986 32,069,501
Stock of Federal Home Loan Bank, at cost, restricted 1,739,400 1,060,300
Loans receivable, net, substantially pledged 58,700,292 52,021,929
Accrued interest and dividend receivable 642,894 551,783
Premises and equipment 751,606 677,250
Other real estate and repossessed property -- --
Prepaid and other assets 56,773 55,290
Deferred tax asset 20,671 20,671
------------ -----------
TOTAL ASSETS $109,963,768 $93,792,894
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Transaction accounts $ 4,687,603 $ 4,488,475
Savings and now deposits 10,987,939 10,606,993
Time deposits 44,673,139 42,777,018
Accrued interest payable 228,486 153,049
Advances from borrowers for taxes and insurance 300,443 175,748
Accounts payable and accrued liabilities 168,060 181,970
Deferred income taxes 300,268 287,000
Dividends declared and payable 75,219 75,415
Advances from Federal Home Loan Bank 34,351,550 20,930,000
Income taxes payable 96,454 174,090
------------ -----------
TOTAL LIABILITIES 95,869,161 79,849,758
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 2,000,000
shares authorized; 800,700 issued and
outstanding at June 30, 1997 and 800,700 shares
issued and outstanding at September 30, 1997 76,683 76,684
Preferred stock, $.10 par value, 500,000
shares authorized; no shares issued or
outstanding -- --
Additional paid-in-capital 6,271,540 6,260,680
Unearned ESOP stock (454,083) (464,881)
Retained earnings, substantially
restricted 7,617,595 7,513,536
Unrealized gain on available for sale
securities, net of taxes 582,873 557,117
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 14,094,608 13,943,136
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $109,963,768 $93,792,894
============ ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Three months ended
September 30
1997 1996
--------- ---------
(Unaudited) (Unaudited)
<S> <C> <C>
Interest income
Loans receivable
Mortgage loans $1,107,862 $ 810,743
Commercial loans 56,777 47,116
Share and consumer loans 65,294 37,926
Available-for-sale investment securities and
mortgage-backed securities 643,030 517,348
Other interest-earning assets 39,784 47,216
--------- ---------
TOTAL INTEREST EARNINGS 1,912,747 1,460,349
Interest expense
Deposits 756,924 580,320
Advances from Federal Home Loan Bank 412,025 205,514
--------- ---------
TOTAL INTEREST EXPENSE 1,168,949 785,834
--------- ---------
NET INTEREST EARNINGS 743,798 674,515
Provision for loan losses 37,459 5,288
--------- ---------
NET INTEREST EARNINGS AFTER
PROVISION FOR LOAN LOSSES 706,339 669,227
Non-interest earnings
Income from real estate operations -- --
Miscellaneous income 5,478 695
Net gains from sales of loans 3,257 4,942
Service charge income 10,442 8,580
--------- ---------
TOTAL NON-INTEREST EARNINGS 19,177 14,217
Non-interest expense
Compensation and benefits 231,363 187,324
Insurance 13,159 279,465
Other 67,894 61,027
Occupancy 40,001 32,109
Data processing 31,018 23,498
Professional fees 38,963 28,842
Advertising 17,726 10,620
Stock services 2,749 2,166
--------- ---------
TOTAL NON-INTEREST EXPENSE 442,873 625,051
</TABLE>
4
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS - CONTINUED
<TABLE>
<CAPTION>
Three months ended
September 30
1997 1996
--------- ---------
(Unaudited) (Unaudited)
<S> <C> <C>
EARNINGS BEFORE INCOME TAXES 282,643 58,393
Income tax expense
Currently payable 103,364 23,753
Deferred provision -- --
---------- ----------
103,364 23,753
---------- ----------
NET EARNINGS $ 179,279 $ 34,640
========== ==========
Earnings per common share
Primary and fully diluted $ 0.23 $ 0.04
========== ==========
Weighted average number of common
shares outstanding
Primary and fully diluted 770,463 897,729
========== ==========
</TABLE>
5
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------------------------------
1997 1996
-------------- --------------
(Unaudited) (Unaudited
<S> <C> <C>
Cash flows from operating activities
Net earnings $ 179,279 $ 34,640
Adjustments to reconcile net earnings to
net cash provided by operations
Deferred loan origination fees (37,180) (34,951)
Gain on sale of sold loans (3,257) (4,942)
Provision for loan losses 37,459 5,288
Depreciation of premises and equipment 19,025 16,330
Amortization of investment and mortgage-
backed securities premiums (discounts) 69,562 36,525
Stock dividends on FHLB stock (21,500) (10,800)
Release of ESOP stock 26,508 13,533
Stock compensation 12,406 14,140
Provision (benefit) for deferred
income taxes -- --
Net changes in operating assets and liabilities
Accrued interest and dividends receivable (91,111) (33,429)
Prepaid taxes -- --
Prepaid and other assets (1,483) (2,713)
Accrued interest payable 75,437 35,712
Accounts payable and accrued liabilities (13,910) 180,743
Income taxes payable (77,636) (96,247)
Dividends declared and payable (196) (312,444)
----------- ----------
Net cash provided by
operating activities 173,403 (158,615)
Cash flows from investing activities
Purchase of premises and equipment (93,380) (18,820)
Loan originations and principal
repayment on loans, net (6,693,371) (2,385,694)
Principal payments on mortgage-backed
securities 1,977,923 1,148,390
Purchases of mortgage-backed securities (9,739,727) (5,174,111)
Purchases of available-for-sale securities (33,085) (30,666)
Maturities and proceeds from sale of
available-for-sale securities -- 500,000
Purchases of municipal securities (640,000) --
Purchase of FHLB stock (657,600) (246,700)
----------- ----------
Net cash used by
investing activities (15,879,240) (6,207,601)
</TABLE>
6
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>
Three months ended
September 30,
1997 1996
----------- -----------
(Unaudited) (Unaudited
<S> <C> <C>
Cash flows from financing activities
Net increase in transaction accounts, passbook
savings, money market accounts, and
certificates of deposit $ 2,476,195 $ 2,010,490
Net increase (decrease) in mortgage escrow funds 124,695 106,889
Proceeds from FHLB advances 73,282,950 17,834,910
Repayments on FHLB advances (59,861,400) (12,742,910)
Purchase of GFSB Bancorp stock under the
stock repurchase plan in cash -- (667,798)
Dividends paid or to be paid in cash (75,219) (84,718)
----------- ---------
Net cash provided by
financing activities 15,947,221 6,456,863
----------- ---------
Increase (decrease) in cash and cash equivalents 241,384 90,647
Cash and cash equivalents at beginning of period 2,994,128 3,167,194
----------- ---------
Cash and cash equivalents at end of period $ 3,235,512 3,257,841
=========== =========
Supplemental disclosures
Cash paid during the period for
Interest on deposits and advances $ 1,093,512 $ 750,124
Income taxes 181,000 120,000
Change in unrealized gain (loss), net of deferred
taxes on available-for-sale securities 25,756 86,170
Dividends declared not yet paid 75,219 90,131
</TABLE>
7
<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 is contained in the notes to the Company's
financial statements filed as part of the Company's June 30, 1997, Form 10-KSB.
This quarterly report should be read in conjunction with such annual report.
2. Dividends
---------
During the quarter ended June 30, 1997, 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 June 30, 1997. The dividends were paid in July
1997.
During the quarter ended September 30, 1997, 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 September 30, 1997. The dividends
were paid in October 1997.
As required by SOP 93-6, the dividends on unallocated ESOP shares have been
recorded as an additional $5,000 compensation cost rather than a reduction of
retained earnings.
3. Employee Stock Ownership Plan
-----------------------------
On December 31, 1996, the Company released 5568.06 shares of its common stock
owned by the Company's ESOP. On September 30, 1997, the Company was committed to
release 3100.97 shares of this common stock. The commitment resulted in $57,000
of additional compensation cost for the nine months ended September 30, 1997,
with $22,000 of that amount booked as additional compensation cost for the three
months ended September 30, 1997.
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. The
retirement during the quarter ended September 30, 1997 of an officer to whom an
award had been made under the Plan, resulted in a reduction of 2,000 shares in
the total number of shares awarded. At September 30, 1997, 19,568 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 $12,000 has been recorded at September 30, 1997, under the provisions
of the Plan. On January 5, 1997, 4075 shares under the Plan were earned, and the
corresponding liability was paid.
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.
8
<PAGE>
6. Earnings Per Share
------------------
Earnings per share for the three month period ended September 30, 1997 and 1996
were computed by dividing net income for the period by the weighted average
common sharesor common share equivalents outstanding during the period.
The Financial Accounting Standards Board (FASB) has issued Statement No. 128.
Earnings Per Share, which supersedes APB Opinion No. 15. Statement No. 128
requires the presentation of earnings per share by all entities that have common
stock or potential common stock, such as options, warrants and convertible
securities, outstanding that trade in a public market. Those entities that have
only common stock outstanding are required to present basic earnings per share
amounts. All other entities are required to present basic and diluted per share
instruments unless the effect is to reduce a loss or increase the income per
common share from continuing operations. All entities required to present per
share amounts must initially apply Statement No. 128 for annual and interim
periods ending after December 15, 1997. Early application is not permitted.
Because the Company has potential common stock outstanding (stock options to
employees and directors), the Company will be required to present basic and
diluted earnings per share. If the Company had applied Statement No. 128 in the
accompanying financial statements, the following per share amounts would have
been reported.
<TABLE>
<CAPTION>
Diluted
Basic Earnings Earnings Per
Per Share Share
----------------------------------------
For the three months ended:
<S> <C> <C>
September 30, 1997 $0.24 $0.23
September 30, 1996 $0.04 $0.04
</TABLE>
The weighted average number of shares of common stock used to compute the basic
earnings per share was increased by 15,703 for the three month period ended
September 30, 1997, and by 1,860 for the three month period ended September 30,
1996, for the assumed exercise of the stock options in computing the diluted per
share data.
9
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 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 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. The
Bank has recently begun purchasing automobile loans from dealers. These loans
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
10
<PAGE>
insurance are additional products now offered by the 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 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 in 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. 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 $16.1 million or 17.1% from $93.8 million at
June 30, 1997 to $109.9 million at September 30, 1997. This increase is
primarily the result of a $7.7 million increase in mortgage-backed securities,
and a $6.6 million increase in the Bank's net loan portfolio. 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 $2.4 million or 4.1% from $57.9 million at June 30, 1997, to $60.3
million at September 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 FHLB increased $13.4 million from
$20.9 million at June 30, 1997 to $34.3 million at September 30, 1997. These
additional borrowings funded purchases of loans, securities and mortgage loan
participations. The Bank had $583,000 and $557,000 in unrealized gains (net of
deferred taxes) at September 30, 1997 and June 30, 1997, 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.
11
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR QUARTER ENDED SEPTEMBER 30, 1997 COMPARED TO
QUARTER ENDED SEPTEMBER 30, 1996
General
Net earnings increased $144,000 or 417.5% for the quarter ended September 30,
1997 from the quarter ended September 30, 1996. This increase is primarily the
result of an increase in net interest earnings of $69,000, an increase in
non-interest earnings of $5,000, and a decrease in non-interest expense of
$182,000, offset by an increase in the provision for loan losses of $32,000 and
an increase in income taxes of $80,000.
Interest Earnings
Total interest income increased $452,000 or 30.9% from $1.5 million for the
quarter ended September 30, 1996 to $1.9 million for the quarter ended September
30, 1997. This increase was primarily due to a $7.7 million increase in the
Bank's mortgage-backed securities portfolio, a $672,000 increase in investment
securities, and a $6.6 million increase in the Bank's net loan portfolio.
Interest Expense
Total interest expense increased $383,000 or 48.8% from $786,000 for the quarter
ended September 30, 1996 to $1,169,000 for the quarter ended September 30, 1997.
This increase was due to a substantial increase in FHLB borrowings and an
increase in the deposit base, including the increase in volume of NOW accounts,
business checking accounts, local (non-brokered) Jumbo Certificates of Deposit
and Public (state and city) Certificates of Deposits.
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 $374,000 and $312,000 at
September 30, 1997 and 1996, respectively. The provision for loans was $37,000
and $5,000 for the quarters ended September 30, 1997 and 1996, 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 decreased $182,000 or 29.1% from $625,000 for the
quarter ended September 30, 1996 to $443,000 for the quarter ended September 30,
1997. This decrease was primarily due to a decrease in insurance expense of
$266,000, offset by an increase in compensation and benefits costs of $44,000,
an increase in other costs of $7,000, an increase in occupancy costs of $8,000 ,
an increase in data processing of $7,000, an increase in professional fees of
$10,000 and an increase in advertising of $7,000. The decrease in insurance
expense was primarily due to the one-time $250,000 assessment paid during the
quarter ended September 30, 1996 for resolution of the BIF/SAIF insurance
premium disparity and reduced SAIF insurance premiums during the quarter ended
September 30, 1997 (See "General" under Item 2 discussed above). The increase in
compensation and benefits is due to an increase in staff, some salary increases
and current year accruals for stock-based compensation plans. The increase in
other expenses is primarily due to increased supplies, charitable contributions
and automatic teller machine expenses. The increase in occupancy costs is due to
an increase in building repairs and small building improvements. The increase in
data processing is due to increased transaction volume from growth in deposits.
The increase in professional services is the result of using more services of
the Bank's auditing firm. The increase in advertising is a result of efforts of
the Bank to achieve growth in deposits through attracting new customers.
12
<PAGE>
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 September 30, 1997, the Bank's liquidity,
as measured for regulatory purposes, was 5.03%. 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.
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 September 30, 1997, cash and cash equivalents
totaled $3.2 million. The Bank has other sources of liquidity if a need for
additional funds arises. Additional sources of funds include FHLB of Dallas
advances and the ability to borrow against mortgage-backed and other securities.
At September 30, 1997, the Bank had $34.4 million in outstanding borrowings from
the FHLB of Dallas. 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 quarter ended September 30, 1997, the Bank
originated $9.8 million in total loans, of which $7.9 million were mortgage
loans. The Bank also purchased $1.3 million in mortgage loan participations.
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 net earnings,
provision for loan losses, amortization of investment and mortgage backed
securities premiums and discounts, stock based compensation costs and income
taxes less disbursements of interest and dividends, and loan origination fees
were $173,000 and ($159,000)for the three month periods ended September 30, 1997
and 1996 respectively. Net cash used for investing activities consisted
primarily of loan originations and purchases of mortgage-backed securities,
municipal securities and FHLB Stock, offset by principal collections on loans,
and principal collections and proceeds from the maturities of mortgage-backed
securities and investment securities. Such uses were $15.9 million and $6.2
million for the three month periods ended September 30, 1997 and 1996,
respectively. Net cash provided from financing activities consisting primarily
of net activity in deposit and escrow accounts, and new FHLB borrowings, were
$15.9 million and $6.5 million for the three month periods ended September 30,
1997 and 1996, respectively.
The Bank anticipates that it will have sufficient funds available to meet its
current commitments. As of September 30, 1997, the Bank had commitments to fund
loans of $1.3 million. Certificates of deposit scheduled to mature in one year
or less totaled $30.9 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 September 30, 1997, the Bank exceeded each of the three OTS capital
requirements on a fully-phased-in basis.
13
<PAGE>
Stock Repurchase Program
In August, 1996, the Company repurchased 47,437 shares, or 5%, of the Company's
common stock. The Company retired these shares as authorized but unissued at the
advice of special counsel.
On October 11, 1996, 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 September 30, 1996, 62,105 of
these shares had been repurchased. The Company retired these shares also, as
authorized but unissued. By June 28, 1997 an additional 38,500 shares had been
repurchased.
On September 23, 1997, the Company issued a press release announcing its
intention to repurchase up to 5% (40,035 shares) of the Company's common stock.
On October 2, 1997, the Company received regulatory approval to repurchase these
shares of common stock before June 28, 1998. As of September 30, 1997, none of
these shares have been repurchased. If any shares are repurchased, the Company
has decided to retire these shares also, as authorized but unissued. 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 Principles ("GAAP"), which require the measurement of
financial position and operating results primarily in terms of historical
dollars without considering the change in the relative purchasing power of money
over time and due to inflation. The impact of inflation is reflected in the
increased cost of the Company's operations. Unlike most industrial companies,
nearly all the assets and liabilities of the Company are financial. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the prices of goods and services.
Recapture of Post 1987 Bad Debt Reserves
Thrift institutions are no longer allowed 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. 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, 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 may have an adverse
effect on net earnings. Management does not believe such future recapture of the
Bank's bad-debt reserves will 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 Company. 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
Company's financial condition.
14
<PAGE>
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 purchased or 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.
Accounting for Stock-Based Compensation
In October, 1995, the FASB issued SFAS No. 123 "Statement of 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.
Transfer and Servicing of Financial Assets and Extinguishment of Liabilities
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 125, "Transfer and Servicing of Financial Assets and
Extinguishment of Liabilities." This Statement requires that transferred assets
could be derecognized only when control is surrendered, rather than when risks
and rewards related to the asset are passed to another party. A liability would
be extinguished when the creditor no longer has ultimate responsibility for the
liability. Adoption of this Statement has not had and is not anticipated to have
a material impact on the Company's financial condition.
Earnings per Share
Recently the Financial Accounting Standards Board 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.
Disclosure of Information about an Entity's Capital Structure
The Financial Accounting Standards Board 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 APB Opinions 10 and 15, and Statement of
Financial Accounting Standards No. 47, and it eliminates the exemption of
nonpublic entities from certain disclosure requirements. This Statement will
affect the financial statements issued by the Company after December 15, 1997.
15
<PAGE>
Reporting Comprehensive Income
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.
Disclosure About Segments of an Enterprise and Related Information
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.
PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K
A Form 8-K (Items 4 and 7) dated March 12, 1997, was filed during the quarter
ended March 31, 1997 regarding the registrant's change in accountants, effective
for the fiscal year ending June 30, 1998.
An amended Form 8-K (Items 4 and 7) dated March 12, 1997, was filed October 6,
1997.
16
<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: November 14, 1997 /s/Jerry R. Spurlin
--------------------------------------
Jerry R. Spurlin
President
(Duly Authorized Representative and
Principal Financial Officer)
17
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