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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 December 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 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 December 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 1. Consolidated Financial Statements:
Consolidated Statements of Financial Condition
December 31, 1997 and June 30, 1997 3
Consolidated Statements of Earnings
Three months and six months ended December 31, 1997
and 1996 4
Consolidated Statements of Cash Flows
Six months ended December 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis or Plan of Operation 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
-------------- --------------
(Unaudited)
ASSETS
<S> <C> <C>
Cash and due from banks $ 1,645,527 $ 1,772,937
Interest-bearing deposits with banks 1,286,839 1,121,191
Federal funds sold 100,000
Available-for-sale investment securities 6,969,910 4,342,042
Available-for-sale mortgage-backed securities 38,317,353 32,069,501
Stock of Federal Home Loan Bank, at cost, restricted 1,888,700 1,060,300
Loans receivable, net, substantially pledged 63,118,788 52,021,929
Accrued interest and dividends receivable 672,162 551,783
Premises and equipment 774,400 677,250
Other real estate and repossessed property - -
Prepaid and other assets 50,617 55,290
Deferred tax asset 20,671 20,671
-------------- --------------
TOTAL ASSETS $ 114,744,967 93,792,894
============== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Transaction accounts $ 5,763,434 $ 4,488,475
Savings and now deposits 11,428,153 10,606,993
Time deposits 46,056,426 42,777,018
Accrued interest payable 213,010 153,049
Advances from borrowers for taxes and insurance 188,583 175,748
Accounts payable and accrued liabilities 235,464 181,970
Deferred income taxes 334,612 287,000
Dividends declared and payable 75,220 75,415
Advances from Federal Home Loan Bank 36,065,250 20,930,000
Income taxes payable 45,591 174,090
-------------- --------------
TOTAL LIABILITIES 100,405,743 79,849,758
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 1,500,000,000
shares authorized; 800,700 issued and
outstanding at June 30, 1997 and 800,700 shares
issued and outstanding at December 31, 1997 76,683 76,684
Preferred stock, $.10 par value, 500,000
shares authorized; no shares issued or
outstanding - -
Additional paid-in-capital 6,282,372 6,260,680
Unearned ESOP stock (443,747) (464,881)
Retained earnings, substantially
restricted 7,774,375 7,513,536
Unrealized gain on available for sale
securities, net of taxes 649,541 557,117
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY 14,339,224 13,943,136
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 114,744,967 $ 93,792,894
============== ==============
</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,
----------------------------- ------------------------------
1997 1996 1997 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Interest income
Loans receivable
Mortgage loans $ 1,230,456 $ 863,653 $ 2,338,318 $ 1,674,396
Commercial loans 60,062 46,845 116,839 93,961
Share and consumer loans 75,129 41,279 140,423 79,206
Available-for-sale investment securities
and mortgage-backed securities 672,493 509,967 1,315,522 1,027,314
Other interest-earning assets 50,672 14,929 90,455 62,145
------------ ------------ ------------- ------------
TOTAL INTEREST EARNINGS 2,088,812 1,476,673 4,001,559 2,937,022
Interest expense
Deposits 784,041 633,738 1,540,965 1,214,057
Advances from Federal Home Loan Bank 520,900 186,148 932,925 391,663
------------ ------------ ------------- ------------
TOTAL INTEREST EXPENSE 1,304,941 819,886 2,473,890 1,605,720
------------ ------------ ------------- ------------
NET INTEREST EARNINGS 783,871 656,787 1,527,669 1,331,302
Provision for loan losses 0 0 37,459 5,288
------------ ------------ ------------- ------------
NET INTEREST EARNINGS AFTER
PROVISION FOR LOAN LOSSES 783,871 656,787 1,490,210 1,326,014
Non-interest earnings
Income from real estate operations - - - 0
Miscellaneous income 1,305 1,026 6,782 1,721
Net gains from sales of loans 955 0 4,212 4,942
Service charge income 19,805 8,155 30,247 16,735
------------ ------------ ------------- ------------
TOTAL NON-INTEREST EARNINGS 22,065 9,181 41,241 23,398
Non-interest expense
Compensation and benefits 214,931 237,264 446,295 424,587
Insurance 13,168 30,743 26,328 310,208
Other 83,746 55,281 151,640 116,307
Occupancy 39,513 35,363 79,513 67,472
Data processing 31,725 22,327 62,743 45,825
Professional fees 30,012 25,951 68,975 54,793
Advertising 9,782 11,997 27,509 22,617
Stock services 4,921 3,588 7,670 5,755
------------ ------------ ------------- ------------
TOTAL NON-INTEREST EXPENSE 427,798 422,513 870,672 1,047,564
</TABLE>
4
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS - CONTINUED
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1997 1996 1997 1996
---------------------------- ---------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
-------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
EARNINGS BEFORE INCOME TAXES 378,138 243,455 660,780 301,848
Income tax expense
Currently payable 146,137 97,396 249,501 121,146
Deferred provision - - - -
------------ ------------ ------- -------
146,137 97,393 249,501 121,146
------------ ------------ ------- -------
NET EARNINGS $ 232,001 $ 146,062 411,279 180,702
============ ============ ======= =======
Earnings per common share
Primary $ 0.31 0.17 0.54 0.21
============ ============ ======= =======
Weighted average number of common shares
outstanding
Primary 755,817 874,536 755,277 874,137
============ ============ ======= =======
Earnings per common share
Fully diluted 0.30 0.17 0.53 0.21
============ ============ ======= =======
Weighted average number of common shares
outstanding
Fully diluted 772,743 876,840 770,402 876,879
============ ============ ======= =======
</TABLE>
5
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>
Six months ended
December 31,
-----------------------------
1997 1996
------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net earnings $ 411,279 $ 180,702
Adjustments to reconcile net earnings to
net cash provided by operations
Deferred loan origination fees (79,085) (69,391)
Gain on sale of sold loans (4,212) (4,942)
Provision for loan losses 37,459 5,288
Depreciation of premises and equipment 38,936 32,935
Amortization of investment and mortgage-
backed securities premiums (discounts) 131,256 80,008
Stock dividends on FHLB stock (49,400) (10,800)
Release of ESOP stock 52,527 28,280
Stock compensation 24,470 86,180
Provision (benefit) for deferred
income taxes - -
Net changes in operating assets and liabilities
Accrued interest and dividends receivable (120,379) (59,284)
Prepaid taxes - (22,854)
Prepaid and other assets 4,672 35,180
Accrued interest payable 59,960 (9,120)
Accounts payable and accrued liabilities 53,494 (6,679)
Income taxes payable (128,499)
Dividends declared and payable (196) (319,241)
------------ ------------
Net cash provided by
operating activities 432,282 (53,738)
Cash flows from investing activities
Purchase of premises and equipment (136,087) (160,684)
Loan originations and principal
repayment on loans, net (11,111,598) (3,873,572)
Principal payments on mortgage-backed
securities 4,385,694 2,510,672
Purchases of mortgage-backed securities (10,770,665) (5,174,111)
Purchases of available-for-sale securities (1,815,562) (61,902)
Maturities and proceeds from sale of
available-for-sale securities - 700,000
Purchases of municipal securities (640,000) -
Purchase of FHLB stock (779,000) (246,700)
------------ ------------
Net cash used by
investing activities (20,867,218) (6,306,297)
</TABLE>
6
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>
Six months ended
December 31,
-----------------------------
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 $ 5,375,528 $ 7,863,644
Net increase (decrease) in mortgage escrow funds 12,835 20,091
Proceeds from FHLB advances 234,345,950 54,048,910
Repayments on FHLB advances (219,210,700) (52,384,910)
Purchase of GFSB Bancorp stock under the
stock repurchase plan in cash - (1,146,173)
Dividends paid or to be paid in cash (150,439) (142,338)
------------- -------------
Net cash provided by
financing activities 20,373,174 8,259,224
------------- -------------
Increase (decrease) in cash and cash equivalents (61,762) 1,899,189
Cash and cash equivalents at beginning of period 2,994,128 3,167,194
------------- -------------
Cash and cash equivalents at end of period $ 2,932,366 5,066,383
============= =============
Supplemental disclosures
Cash paid during the period for
Interest on deposits and ad $ 2,413,930 $ 1,614,841
Income taxes 377,640 142,200
Change in unrealized gain (loss), net of deferred
taxes on available-for-sale securities 92,424 203,084
Dividends declared not yet paid 75,219 0
</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 September 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 September 30, 1997. The dividends were
paid in October 1997.
During the quarter ended December 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 December 31, 1997. The dividends
were paid in January 1998.
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 December 31, 1997, the Company was committed to
release 4134.62 shares of this common stock. The commitment resulted in $78,000
of additional compensation cost for the twelve months ended December 31, 1997,
with $21,000 of that amount booked as additional compensation cost for the three
months ended December 31, 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 December 31, 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 grant of
the award. 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 December 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.
8
<PAGE>
6. Earnings Per Share
------------------
The Financial Accounting Standards Board (FASB) issued Statement No. 128, "
Earnings Per Share", which supersedes APB Opinion No. 15. Statement No. 128
requiring 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 amounts. Diluted per share amounts assume the conversion,
exercise or issuance of all potential common stock 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.
Because the Company has potential common stock outstanding (stock options to
employees and directors), the Company is required to present basic and diluted
earnings per share. The Bank has applied Statement No. 128 in the accompanying
financial statements.
The weighted average number of shares of common stock used to compute the basic
earnings per share was increased by 16,926 for the three month period ended
December 31, 1997, and by 2,304 for the three month period ended December 31,
1996 in computing the diluted per share data. The weighted average number of
shares of common stock used to compute the basic earnings per share was
increased by 15,125 for the six month period ended December 31, 1997, and by
2,742 for the six month period ended December 31, 1996, 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.
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 most SAIF members
became .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. Automated Teller
Machine access and commercial and consumer credit life insurance are additional
products now offered by the Bank. The Bank attempts to manage the interest rates
it pays on deposits while maintaining a stable deposit base and providing
quality services to its customers.
10
<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
provides an opportunity to expand its operations as the only local independent
financial institution. 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.
FINANCIAL CONDITION
The Bank's total assets increased $20.9 million or 22.2% from $93.8 million at
June 30, 1997 to $114.7 million at December 31, 1997. This increase is primarily
the result of a $6.2 million increase in mortgage-backed securities, a $11
million increase in the Bank's net loan portfolio, a $2.6 million increase in
investment securities and a $828,000 increase in stock of the Federal Home Loan
Bank. 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. During the same period, deposits increased $5
million or 8.6% from $57.9 million at June 30, 1997, to $63.2 million at
December 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 $15.1 million from $20.9 million at June 30,
1997 to $36.0 million at December 31, 1997. These additional borrowings funded
purchases of loans, securities and mortgage loan participations. The Bank had
$650,000 and $557,000 in unrealized gains (net of deferred taxes) at December
31, 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 DECEMBER 31, 1997 COMPARED TO
QUARTER ENDED DECEMBER 31, 1996
General
Net earnings increased $86,000 or 58.8% for the quarter ended December 31, 1997
from the quarter ended December 31, 1996. This increase is primarily the result
of an increase in net interest earnings of $127,000, an increase in non-interest
earnings of $13,000, offset by an increase in non-interest expense of $5,000 and
an increase in income taxes of $48,000.
Interest Earnings
Total interest income increased $612,000 or 41.4% from $1.5 million for the
quarter ended December 31, 1996 to $2.1 million for the quarter ended December
31, 1997. This increase was primarily due to substantial increases in the Bank's
mortgage-backed securities portfolio, investment securities and net loan
portfolio.
Interest Expense
Total interest expense increased $485,000 or 59.1% from $820,000 for the quarter
ended December 31, 1996 to $1,305,000 for the quarter ended December 31, 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 $369,000 and $344,000 at
December 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. Recent
substantial increases in the loan portfolio of the Bank may result in an
increase of provision for losses on loans. The establishment of a loan loss
provision each period adversely impacts the Bank's net earnings.
Non-Interest Income
Total Non-Interest income increased by $13,000 or 142.9% from $8,000 for the
quarter ended December 31, 1996 to $20,000 for the quarter ended December 31,
1997. This increase was primarily due to increased service and NSF charges on
NOW and checking accounts and increased Automated Teller Machine use fees.
Non-Interest Expense
Total non-interest expense increased $5,000 or 1.2% from $423,000 for the
quarter ended December 31, 1996 to $428,000 for the quarter ended December 31,
1997. This increase was primarily due to an increase of other costs of $28,000,
an increase of occupancy expense of $4,000, an increase in data processing of
$9,000 and an increase in professional fees of $4,000, offset by a decrease in
compensation and benefits of $22,000 and a decrease in insurance expense of
$17,000. The increase in other expenses is primarily due to increased supplies,
automated teller machine expense, charitable contributions and postage expense.
The increase in occupancy costs is mainly due to the depreciation of Furniture,
Fixtures and Equipment. 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
decrease in compensation and benefits is due to a reclassification of costs of
stock-based compensation in December 1997. The decrease in insurance expense is
primarily due to a reduction in the SAIF insurance assessment (See "General"
under Item 2 discussed above).
12
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR SIX MONTH PERIOD ENDED DECEMBER 31, 1997
COMPARED TO SIX MONTH PERIOD ENDED DECEMBER 31, 1996
General
Net earnings increased $231,000 or 127.6% for the six month period ended
December 31, 1997 from the six month period ended December 31, 1996. This
increase is primarily the result of an increase in net interest earnings of
$164,000, an increase in non-interest earnings of $18,000 and a decrease in
non-interest expense of $177,000 offset by an increase in income taxes of
$128,000.
Interest Earnings
Total interest income increased $1.1 million or 36.2% from $2.9 million for the
six month period ended December 31, 1996 to $4 million for the quarter ended
December 31, 1997. This increase was primarily due to substantial increases in
the Bank's mortgage-backed securities portfolio, investment securities and net
loan portfolio.
Interest Expense
Total interest expense increased $868,000 or 54.1% from $1,606,000 for the six
month period ended December 31, 1996 to $2,474,000 for the six month period
ended December 31, 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 $369,000 and $344,000 at
December 31, 1997 and 1996, respectively. The provision for loans was $37,000
and $5,000 for the six month period ended December 31, 1997 and 1996. 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 Income
Total non-interest income increased $18,000 or 76.3% from $23,000 for the six
month period ended December 31, 1996 to $41,000 for the six month period ended
December 31, 1997. This increase was primarily due to increased service and NSF
charges on NOW and checking accounts and increased ATM use fees.
Non-Interest Expense
Total non-interest expense decreased $177,000 or 20.3% from $1,047,000 for the
six month period ended December 31, 1996 to $870,000 for the six month period
ended December 31, 1997. This decrease was primarily due to a decrease in
insurance expense of $283,000, offset by an increase in compensation and
benefits costs of $22,000, an increase in other costs of $35,000, an increase in
occupancy costs of $12,000, an increase in data processing of $17,000, an
increase in professional fees of $14,000 and an increase in advertising of
$5,000. 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 December 31, 1997 (See "General"
under Item 2 discussed above). The increase in compensation and benefits costs
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, automated teller machine expense,
13
<PAGE>
charitable contributions and postage expense. The increase in occupancy costs is
mainly due to the depreciation of Furniture, Fixtures and Equipment, building
repairs and small building improvements. The increase in data processing is due
to increased transaction volume from growth in deposits. The increased 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.
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. Prior OTS regulations required 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 consist of not less than 1%, with the
qualifying investments limited to those having maturities of five years of less.
Revised OTS regulations effective November 13, 1997 lowered the required level
of liquid assets to 4%, removed the short-term liquid asset requirement and
deleted the five year or less maturity requirement. At December 31, 1997, the
Bank's liquidity, as measured for regulatory purposes, was 6.38%. 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.
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, 1997, cash and cash equivalents totaled
$2.9 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 December
31, 1997, the Bank had $36.1 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 December 31, 1997, the Bank
originated $12 million in total loans, of which $10.2 million were mortgage
loans. The Bank also purchased $1.1 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 $432,000 and ($53,000)for the six month period ended December 31, 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 $20.9 million and $6.3
million for the six month periods ended December 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, were
$20.4 million and $8.3 million for the six month periods ended December 31, 1997
and 1996, respectively.
The Bank anticipates that it will have sufficient funds available to meet its
current commitments. As of December 31, 1997, the Bank had commitments to fund
loans of $1.7 million. Certificates of deposit scheduled to mature in one year
or less totaled $30.5 million. Based on historical withdrawals and outflows, on
internal daily 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,
14
<PAGE>
no adverse liquidity effects are expected.
At December 31, 1997, the Bank exceeded each of the three OTS capital
requirements on a fully-phased-in basis.
Stock Repurchase Program
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 December 31, 1997, none of
these shares have been repurchased. If any shares are repurchased, the Company
has decided to retire these shares 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.
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
15
<PAGE>
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.
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.
16
<PAGE>
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.
17
<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, 1998 /s/ Jerry R. Spurlin
------------------------------------
Jerry R. Spurlin
President
(Duly Authorized Representative and
Principal Financial Officer)
18
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