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 March 31, 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 (I.R.S. Employer
Incorporation or Organization) Identification No.)
221 West Aztec Avenue, Gallup, New Mexico 87301
- ----------------------------------------------- ---------------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (505) 722-4361
-----------------
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
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As of April 30, 1997, there were issued and outstanding 804,208 shares of the
registrant's Common Stock.
<PAGE>
GFSB Bancorp, Inc.
Index
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Statements of Financial Condition
March 31, 1997 and June 30, 1996 3
Consolidated Statements of Earnings
Three and nine months ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows
Nine months ended March 31, 1997 and 1996 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 14
Signatures 15
2
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
----------- -----------
(Unaudited)
ASSETS
<S> <C> <C>
Cash and due from banks $ 2,077,012 $ 1,671,053
Interest-bearing deposits with banks 632,022 1,346,141
Federal funds sold 100,000 150,000
Available-for-sale investment securities 4,115,151 4,572,647
Available-for-sale mortgage-backed securities 32,789,071 25,245,896
Stock of Federal Home Loan Bank, at cost, restricted 869,200 550,600
Loans receivable, net, substantially pledged 45,025,808 38,727,535
Accrued interest and dividend receivable 499,329 400,316
Premises and equipment 691,753 537,042
Prepaid income taxes 44,687 -
Prepaid and other assets 67,062 49,405
------------ ------------
TOTAL ASSETS $ 86,911,095 $ 73,250,635
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Transaction accounts $ 3,194,168 $ 3,239,079
Savings and now deposits 11,492,648 10,758,974
Time deposits 40,598,220 31,991,757
Accrued interest payable 106,915 103,507
Advances from borrowers for taxes and insurance 302,406 174,532
Accounts payable and accrued liabilities 137,328 172,717
Deferred income taxes 171,401 81,087
Dividends declared and payable 80,533 402,577
Advances from Federal Home Loan Bank 16,450,000 10,854,000
Income taxes payable 211,537 108,929
------------ ------------
TOTAL LIABILITIES 72,745,156 57,887,159
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 2,000,000
shares authorized; 839,208 issued and
outstanding at March 31, 1997 and 948,750 shares
issued and outstanding at June 30, 1996 80,533 91,080
Preferred stock, $.10 par value, 500,000
shares authorized; no shares issued or
outstanding - -
Additional paid-in-capital 6,924,025 8,486,822
Unearned ESOP stock (474,987) (541,333)
Retained earnings, substantially
restricted 7,333,505 7,199,360
Unrealized gain on available for sale
securities, net of taxes 302,863 127,547
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 14,165,939 15,363,476
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 86,911,095 $ 73,250,635
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
------------------------ ------------------------
1997 1996 1997 1996
------------------------ ------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest income
Loans receivable
Mortgage loans $ 859,176 $ 716,700 $ 2,533,572 $ 2,106,253
Commercial loans 71,407 56,441 165,368 157,864
Share and consumer loans 44,477 28,441 123,682 82,503
Available-for-sale investment securities and
mortgage-backed securities 478,173 440,909 1,505,487 1,097,555
Other interest-earning assets 37,304 38,714 99,449 132,710
---------- ---------- ----------- -----------
TOTAL INTEREST EARNINGS 1,490,537 1,281,205 4,427,558 3,576,885
Interest expense
Deposits 676,545 518,207 1,890,603 1,516,409
Advances from Federal Home Loan Bank 160,986 140,727 552,649 188,951
---------- ---------- ----------- -----------
TOTAL INTEREST EXPENSE 837,531 658,934 2,443,252 1,705,360
---------- ---------- ----------- -----------
NET INTEREST EARNINGS 653,005 622,271 1,984,306 1,871,525
Provision for loan losses 15,506 - 20,794 28,099
---------- ---------- ----------- -----------
NET INTEREST EARNINGS AFTER
PROVISION FOR LOAN LOSSES 637,499 622,271 1,963,512 1,843,426
Non-interest earnings
Income from real estate operations - - - 3,300
Miscellaneous income 1,127 446 2,848 9,627
Net gains from sales of loans 272 - 5,214 -
Service charge income 9,850 6,191 26,586 11,982
---------- ---------- ----------- -----------
TOTAL NON-INTEREST EARNINGS 11,249 6,637 34,648 24,909
Non-interest expense
Compensation and benefits 211,088 177,445 635,676 418,623
Professional fees 23,657 53,307 78,450 122,959
Occupancy 38,208 25,126 105,680 80,677
Advertising 12,481 10,481 35,098 25,649
Data processing 19,432 20,824 65,257 64,664
Insurance 7,097 26,387 317,304 76,541
Other 59,540 42,671 181,602 119,027
---------- ---------- ----------- -----------
TOTAL NON-INTEREST EXPENSE 371,503 356,241 1,419,067 908,140
EARNINGS BEFORE INCOME TAXES 277,246 272,667 579,094 960,195
Income tax expense 105,775 112,984 226,921 359,795
---------- ---------- ----------- -----------
NET EARNINGS $ 171,471 $ 159,683 352,173 600,400
========== ========== ======= =======
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 800,366 894,636 838,106 893,381
EARNINGS PER COMMON SHARE $ 0.21 0.18 0.42 0.67
========== ==== ==== ====
</TABLE>
4
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>
Nine months ended
March 31,
1997 1996
(Unaudited) (Unaudited)
Cash flows from operating activities
<S> <C> <C>
Net earnings $ 352,173 $ 600,400
Adjustments to reconcile net earnings to
net cash provided by operations
Deferred loan origination fees (99,299) (86,330)
Gain on sale of sold loans (5,214) (7,414)
Provision for loan losses 20,794 28,099
Depreciation of premises and equipment 51,152 39,256
Amortization of investment and mortgage-
backed securities premiums (discounts) 134,162 85,753
Stock dividends on FHLB stock (23,600) (49,800)
Stock compensation (13,732) -
ESOP stock committed to be released 101,696 26,168
Net changes in operating assets and liabilities
Accrued interest receivable (99,013) (184,419)
Prepaid and other assets (17,657) (20,606)
Accrued interest payable 3,408 52,529
Accounts payable and accrued liabilities (21,655) (36,347)
Income taxes payable 57,921 178,429
Dividends declared and payable (322,044) -
------------ ------------
Net cash provided by
operating activities 119,092 625,718
Cash flows from investing activities
Purchase of premises and equipment (205,863) (62,803)
Loan originations and principal
repayment on loans, net (6,214,554) (2,765,391)
Principal payments on mortgage-backed
securities 4,232,576 2,342,106
Purchases of mortgage-backed securities (11,793,195) (15,840,882)
Purchases of U.S. Agency Securities, FHLB
Debentures, bonds, and mutual funds (93,593) -
Maturities and proceeds from sale of FHLB
Debentures, U.S. Agency Securities,
certificates of deposit, and bonds 700,000 1,035,000
Purchase of FHLB stock (295,000) (51,200)
------------ ------------
Net cash used by
investing activities (13,669,629) (15,343,170)
</TABLE>
5
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>
Nine months ended
March 31,
----------------------------
1997 1996
(Unaudited) (Unaudited)
Cash flows from financing activities
Net increase in transaction accounts, passbook
savings, money market accounts, and
<S> <C> <C>
certificates of deposit $ 9,295,226 $ 6,653,929
Net increase in mortgage escrow funds 127,874 75,091
Proceeds from FHLB advances 75,948,910 10,000,000
Repayments on FHLB advances (70,352,910) -
Dividends paid or to be paid in cash (218,028) (142,313)
Purchase of retired treasury stock (1,664,847) -
Price paid for vested MSBP Stock 56,152
------------ ------------
Net cash provided by
financing activities 13,192,377 16,586,707
------------ ------------
Increase (decrease) in cash and cash equiv (358,160) 1,869,255
Cash and cash equivalents at beginning of 3,167,194 4,914,517
------------ ------------
Cash and cash equivalents at end of period $ 2,809,034 6,783,772
============ =========
Supplemental disclosures
Cash paid during the period for
Interest on deposits and advances $ 2,439,844 $ 1,652,831
Income taxes 160,000 161,954
Change in unrealized gain, net of deferred
taxes for implementation of FASB #115 175,315 72,633
Dividends declared not yet paid - 94,875
</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 is 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 December 31, 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 December 31, 1996. The dividends were
paid in January 1997.
During the quarter ended March 31, 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 March 31, 1997. The dividends
were paid in April 1997.
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 March 31, 1997, the Company was committed to
release 1010.61 shares of this common stock. The commitment resulted in $17,000
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 March
31, 1997, 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 $14,000 has been recorded at
March 31, 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.
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,
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 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 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-fami ly 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
8
<PAGE>
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 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."
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 $13.6 million or 18.6% from $73.3 million at
June 30, 1996 to $86.9 million at March 31, 1997. This increase is the result of
a $7.5 million increase in mortgage-backed securities, and a $6.3 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 $9.3 million or
20.2% from $46.0 million at June 30, 1996, to $55.3 million at March 31, 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 $5.6 million from $10.8 million at June 30, 1996 to $16.5 million
at March 31, 1997. These additional borrowings funded purchases of loans,
securities and mortgage loan participations. The Bank had $303,000 and $128,000
in unrealized gains (net of deferred taxes) at March 31, 1997 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.
9
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR QUARTER ENDED MARCH 31, 1997 COMPARED TO
QUARTER ENDED MARCH 31, 1996
General
Net earnings increased $12,000 or 7.4% for the quarter ended March 31, 1997 from
the quarter ended March 31, 1996. This increase is primarily the result of an
increase in net interest earnings of $31,000, an increase in non-interest
earnings of $5,000, a decrease in income taxes of $7,000, offset by an increase
in the provision for loan losses of $16,000, and an increase in non-interest
expense of $15,000.
Interest Earnings
Total interest income increased $209,000 or 16.3% from $1.3 million for the
quarter ended March 31, 1996 to $1.5 million for the quarter ended March 31,
1997. This increase was primarily due to a $8.6 million increase in the Bank's
mortgage-backed securities portfolio, a $1.4 million increase in investment
securities, and a $9.8 million increase in the Bank's net loan portfolio.
Interest Expense
Total interest expense increased $179,000 or 27.1% from $659,000 for the quarter
ended March 31, 1996 to $838,000 for the quarter ended March 31, 1997. This
increase was due to a substantial increase in FHLB borrowings and 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 $339,000 and $311,000 at
March 31, 1997 and 1996, respectively. The provision for loans was $16,000 and
$0 for the quarters ended March 31, 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 increased $15,000 or 4.3% from $356,000 for the
quarter ended March 31, 1996 to $372,000 for the quarter ended March 31, 1997.
This increase was primarily due to an increase in compensation and benefits
costs of $34,000, an increase in other costs of $17,000, an increase in
occupancy costs of $13,000 , offset by a decrease in insurance costs of $19,000,
and a decrease in professional fees of $30,000. 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 decrease in insurance
is due to the BIF/SAIF assessment adjustment. 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.
10
<PAGE>
COMPARISON OF OPERATING RESULTS FOR NINE MONTH PERIOD ENDED MARCH 31, 1997
COMPARED TO NINE MONTH PERIOD ENDED MARCH 31, 1996
General
Net earnings decreased $248,000 or 41.3% for the nine month period ended March
31, 1997 from the the nine month period ended March 31, 1996. This decrease is
primarily the result of an increase in non-interest expense of $511,000, offset
by an increase in net interest earnings of $120,000 and a decrease in income tax
expense of $133,000.
Total Interest Earnings
Total interest earnings increased $851,000 or 23.7% from $3.6 million for the
nine month period ended March 31, 1996, to $4.4 million for the nine month
period ended March 31, 1997. The increase was primarily due to a $8.6 million
increase in the Bank's mortgage-backed securities portfolio, a $9.9 million
increase in the loan portfolio and some general increases in interest rates.
Interest Expense
Total interest expense increased $738,000 or 43.2% from $1.7 million for the
nine month period ended March 31, 1996 to $2.4 million for the nine month period
ended March 31, 1997. This increase was due to an increase in the Bank's deposit
base of $12.0 million and an increase in FHLB borrowings of $6.5 million, and
higher rates on deposit products.
Non-interest expense
Total non-interest expense increased $511,000 or 56.2% from $908,000 for the
nine month period ended March 31, 1996 to $1.4 million for the nine month period
ended March 31, 1997. This increase was primarily due to an increase in
compensation and benefits costs of $217,000, an increase in insurance costs of
$241,000, an increase in occupancy costs of $25,000 and an increase in other
expense of $63,000, offset by a decrease in professional fees of $45,000. The
increase in compensation costs is due to current year accruals for stock-based
compensation plans and staff salary increases. The increase in insurance costs
is due to the BIF/SAIF assessment. The increase in occupancy costs is the result
of increased small building improvements and repairs. The increase in other
expense 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.
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 March 31, 1997, the Bank's liquidity, as
measured for regulatory purposes, was 11.41%. 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 March 31, 1997, cash and cash equivalents totaled
$2.8 million. The
11
<PAGE>
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 March 31, 1997, the Bank
had $16.5 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 March 31, 1997, the Bank
originated $5.4 million in total loans, of which $4.2 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,
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 $119,000 and $626,000 for
the nine month periods ended March 31, 1997 and 1996 respectively. 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 $13.7 million and $15.3
million for the nine month periods ended March 31, 1997 and 1996, 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 $13.2 million and $16.6 million for the nine month periods
ended March 31, 1997 and 1996, respectively.
The Bank anticipates that it will have sufficient funds available to meet its
current commitments. As of March 31, 1997, the Bank had commitments to fund
loans of $1.8 million. Certificates of deposit scheduled to mature in one year
or less totaled $23.1 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 March 31, 1997, 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 47,437 shares, or 5%, of the Company's
common stock. The Company has decided to retire 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 March 31, 1997, 62,105 of
these shares had been repurchased. The Company has decided to retire these
shares also, as authorized but unissued. Subsequent to March 31, an additional
35,000 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 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
12
<PAGE>
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 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
Recently the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation." This
Statement sets forth an alternative approach to the present method of using APB
Opinion 25, "Accounting for Stock Issued to Employees," to account for stock
options. However, companies are not required to follow the new guidelines, but
may continue in their present accounting practice with only slight modification.
The Company has chosen to continue accounting for its stock option plan under
the APB Opinion 25. Under this Opinion, using the intrinsic value method, the
excercise price is the same as the market price of the stock at the grant date,
therefore, no compensation cost is recognized.
13
<PAGE>
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 Bank'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.
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
regarding the registrant's change in accountants.
14
<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: May 14, 1997 /s/ Jerry R. Spurlin
-----------------------------------
Jerry R. Spurlin
President
(Duly Authorized Representative and
Principal Financial Officer)
15
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<PERIOD-END> MAR-31-1997
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