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, 1998
------------------
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
- ---------------------------------------------
(State or Other Jurisdiction of Incorporation
or Organization) 04-2095007
-------------------
(I.R.S. Employer
Identification No.)
221 West Aztec Avenue, Gallup, New Mexico
- -----------------------------------------
(Address of Principal Executive Offices) 87301
------------
(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, 1998, there were issued and outstanding 1,051,898 shares of
the registrant's Common Stock.
<PAGE>
GFSB Bancorp, Inc.
Index
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Statements of Financial Condition
September 30, 1998 and June 30, 1998 3
Consolidated Statements of Earnings
and Comprehensive Earnings
Three months ended September 30, 1998
and September 30, 1997 4
Consolidated Statements of Cash Flows
Three months ended September 30, 1998
and September 30, 1997 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 16
Signatures 17
2
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
--------------- ----------------
(Unaudited)
ASSETS
<S> <C> <C>
Cash and due from banks $ 1,749,589 $ 2,047,860
Interest-bearing deposits with banks 1,440,171 2,490,120
Federal funds sold 0 0
Available-for-sale investment securities 6,729,533 5,188,095
Available-for-sale mortgage-backed securities 31,371,453 33,551,219
Hold-to-Maturity investment securities 144,993 144,993
Stock of Federal Home Loan Bank, at cost, restricted 2,216,100 1,965,200
Loans receivable, net, substantially pledged 82,660,924 75,836,642
Accrued interest and dividends receivable 740,953 675,485
Premises and equipment 1,485,557 1,035,668
Other real estate and repossessed property 98,212 159,106
Prepaid and other assets 63,636 46,316
Deferred tax asset 68,377 68,377
------------- -------------
TOTAL ASSETS $ 128,769,499 123,209,081
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Transaction and NOW accounts $ 8,518,181 $ 6,979,785
Savings and MMDA deposits 12,900,252 13,901,860
Time deposits 49,326,178 48,497,496
Accrued interest payable 249,988 223,702
Advances from borrowers for taxes and insurance 397,238 225,597
Accounts payable and accrued liabilities 296,613 260,332
Deferred income taxes 423,233 426,553
Dividends declared and payable 76,606 82,446
Advances from Federal Home Loan Bank 43,201,476 38,247,631
Income taxes payable 117,039 154,757
------------- -------------
TOTAL LIABILITIES 115,506,803 109,000,159
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 1,500,000
shares authorized; 1,165,537 issued and
outstanding at June 30, 1998 and 1,087,661 shares
issued and outstanding at September 30, 1998 104,208 113,515
Preferred stock, $.10 par value, 500,000
shares authorized; no shares issued or
outstanding 0 0
Additional paid-in-capital 4,704,153 5,777,881
Unearned ESOP stock (400,104) (415,695)
Retained earnings, substantially
restricted 8,169,275 8,041,610
Accumulated other comprehensive
earnings 685,165 691,611
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 13,262,696 14,208,922
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 128,769,499 $ 123,209,081
============= =============
See notes to consolidated financial statements.
</TABLE>
3
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE EARNINGS
Three months ended
September 30
---------------------------
1998 1997
---------------------------
(Unaudited) (Unaudited)
Interest income
Loans receivable
Mortgage loans $ 1,516,686 $ 1,107,862
Commercial loans 113,963 56,777
Share and consumer loans 94,493 65,294
Investment and mortgage-backed securities 510,863 643,030
Other interest-earning assets 51,071 39,784
TOTAL INTEREST EARNINGS 2,287,076 1,912,747
----------- ----------
Interest expense
Deposits 829,779 756,924
Advances from Federal Home Loan Bank 568,064 412,025
----------- ----------
TOTAL INTEREST EXPENSE 1,397,843 1,168,949
----------- ----------
NET INTEREST EARNINGS 889,233 743,798
Provision for loan losses 15,000 37,459
NET INTEREST EARNINGS AFTER
PROVISION FOR LOAN LOSSES 874,233 706,339
Non-interest earnings
Income from real estate operations
Miscellaneous income 8,726 5,478
Net gains from sales of loans 2,135 3,257
Service charge income 35,085 10,442
----------- ----------
TOTAL NON-INTEREST EARNINGS 45,946 19,177
Non-interest expense
Compensation and benefits 340,237 231,363
Insurance 14,898 13,159
Stock services 13,357 2,749
Occupancy 56,542 40,001
Data processing 39,545 31,018
Professional fees 12,954 38,963
Advertising 16,374 17,726
Other 105,433 67,894
----------- ----------
TOTAL NON-INTEREST EXPENSE 599,341 442,873
4
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE EARNINGS - CONTINUED
Three months ended
September 30
--------------------------
1998 1997
---------- ----------
(Unaudited) (Unaudited)
EARNINGS BEFORE INCOME TAXES 320,838 282,643
Income tax expense
Currently payable 116,567 103,364
Deferred provision - -
---------- ----------
116,567 103,364
---------- ----------
NET EARNINGS $ 204,271 179,279
Other comprehensive earnings:
Unrealized gain (loss), net of tax
of (2,192) in 1998 and $8,757 in 1997
on available-for-sale securities (6,446) 25,756
---------- ----------
COMPREHENSIVE EARNINGS 197,825 205,035
========== ==========
Earnings per common share
Basic $ 0.19 0.16
========== ==========
Weighted average number of common
shares outstanding
Basic 1,065,025 1,132,140
========== ==========
Earnings per common share
Diluted 0.19 0.16
========== ==========
Weighted average number of common
shares outstanding
Diluted 1,093,847 1,147,843
========== ==========
5
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
(Unaudited) (Unaudited)
Cash flows from operating activities
Net earnings $ 204,271 $ 179,279
Adjustments to reconcile net earnings to
net cash provided by operations
Deferred loan origination fees (49,078) (37,180)
Gain on sale of sold loans (2,135) (3,257)
Provision for loan losses 15,000 37,459
Depreciation of premises and equipment 30,682 19,025
Amortization of investment and mortgage-
backed securities premiums (discounts) 104,215 69,562
Stock dividends on FHLB stock (30,800) (21,500)
Release of ESOP stock 23,028 26,508
Stock compensation 13,446 12,406
Provision (benefit) for deferred income taxes 0 0
Net changes in operating assets and liabilities
Accrued interest and dividends receivable (65,468) (91,111)
Prepaid taxes 0 0
Prepaid and other assets (17,320) (1,483)
Accrued interest payable 26,286 75,437
Accounts payable and accrued liabilities 22,835 (13,910)
Income taxes payable (37,718) (77,636)
Dividends declared and payable (5,840) (196)
--------- ---------
Net cash provided by
operating activities 231,404 173,403
Cash flows from investing activities
Purchase of premises and equipment (480,571) (93,380)
Loan originations and principal
repayment on loans, net (6,727,178) (6,693,371)
Principal payments on mortgage-backed
securities 2,872,988 1,977,923
Purchases of mortgage-backed securities (880,255) (9,739,727)
Purchases of available-for-sale securities (2,336,396) (33,085)
Maturities and proceeds from sale of
available-for-sale securities 1,010,000 0
Purchases of municipal securities (211,990) (640,000)
Principal payments on municipal securities 70,000 0
Purchase of FHLB stock (220,100) (657,600)
--------- ---------
Net cash used by
investing activities (6,903,502) (15,879,240)
</TABLE>
6
<PAGE>
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Increase (decrease) in cash and cash equivalents
Three months ended
September 30,
1998 1997
(Unaudited) (Unaudited)
Cash flows from financing activities
Net increase in transaction accounts,
savings and NOW deposits and
time deposits $ 1,365,470 $ 2,476,195
Net increase (decrease) in mortgage
escrow funds 171,641 124,695
Proceeds from FHLB advances 74,832,527 73,282,950
Repayments on FHLB advances (69,878,682) (59,861,400)
Purchase of GFSB Bancorp stock
under the stock repurchase plan in cash (1,090,472) 0
Dividends paid or to be paid in cash (76,606) (75,219)
----------- ----------
Net cash provided by
financing activities 5,323,878 15,947,221
----------- ----------
Increase (decrease) in cash and
cash equivalents (1,348,220) 241,384
Cash and cash equivalents at
beginning of period 4,537,980 2,994,128
----------- ----------
Cash and cash equivalents at end of period $ 3,189,760 3,235,512
=========== ==========
Supplemental disclosures
Cash paid during the period for
Interest on deposits and advances $ 1,371,557 $ 1,093,512
Income taxes 106,578 181,000
Change in unrealized gain (loss),
net of deferred taxes on
available-for-sale securities (6,446) 25,756
Dividends declared not yet paid 76,606 75,219
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, 1998, Form 10-KSB.
This quarterly report should be read in conjunction with such annual report.
2. Dividends
---------
During the quarter ended June 30, 1998, the Board of Directors declared a cash
dividend of $0.075 per share on the Company's outstanding common stock, payable
to stockholders of record as of June 30, 1998. The dividends were paid in July
1998.
During the quarter ended September 30, 1998, the Board of Directors declared a
quarterly cash dividend of $0.075 per share on the Company's outstanding common
stock, payable to stockholders of record as of September 30, 1998. The dividends
were paid in October 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, 1997 the Company released 4341.26 shares of its common stock
owned by the Company's ESOP. On September 30, 1998, the Company was committed to
release 4157.61 shares of this common stock. The commitment resulted in $71,000
of additional compensation cost for the nine months ended September 30, 1998,
with $23,000 of that amount booked as additional compensation cost for the three
months ended September 30, 1998.
4. Management Stock Bonus Plan
---------------------------
On January 5, 1996, the Company made awards under the Plan in the amount of
30,573 shares. The shares were awarded at a price of $9.25 per share. On January
5, 1998, the Company made awards under the Plan in the amount of 2,250 shares.
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 3,000 shares
in the total number of shares awarded. 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. On January 5, 1997, 6,112 shares under the Plan were earned,
and the corresponding liability was paid. On January 5, 1998, 5,363 shares under
the Plan were earned, and the corresponding liability was paid.
At September 30, 1998, 27,102 shares remained to be awarded under 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 $39,000 has been
recorded for the nine months ended September 30, 1998, with $13,000 of that
amount booked as additional compensation for the three months ended September
30, 1998, under the provisions of the Plan.
8
<PAGE>
5. Earnings Per Share
------------------
The Company has potential dilutive common stock (stock options to employees and
directors) and, accordingly, presents basic and diluted earnings per share.
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.
The weighted average number of shares of common stock used to compute the basic
earnings per share was increased by 28,822 for the three month period ended
September 30, 1998, and by 15,703 for the three month period ended September 30,
1997, in computing the diluted per share data.
6. Comprehensive Earnings
----------------------
Comprehensive earnings, defined as the change in equity of a business enterprise
from transactions and other events and circumstances from nonowner sources, is
presented for the first time this quarter. The only item of other comprehensive
earnings for the Company is the unrealized gain (loss) on available-for-sale
securities.
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 non-interest 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.
GFSB Bancorp, Inc. (the Company) may from time to time make written or oral
forward-looking statements, including statements contained in the Company's
filing with the Securities and Exchange Commission (including this quarter
report on Form 10-QSB and the exhibits thereto), in its reports to stockholders
and in other communication by the Company, which are made in good faith by the
Company pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System, inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes, acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing these risks.
The Company cautions that this list of important factors in not exclusive. The
Company does not undertake to update and forward-looking statement, whether
written or oral, that may be made from time to time by or on behalf of the
Company.
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
10
<PAGE>
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.
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 $5.6 million or 4.5% from $123.2 million at
June 30, 1998 to $128.8 million at September 30, 1998. This increase is
primarily the result of a $6.8 million increase in the Bank's net loan
portfolio. The majority of the increases are directly attributable to efforts of
Management to increase investment and lending activity. During the same period,
deposits increased $1.4 million or 2% from $69.4 million at June 30, 1998 to
$70.7 million at September 30, 1998. This increase is primarily due to an
increase in the Bank's volume of NOW accounts, business checking accounts and
Time Deposits. Advances from the FHLB increased $5 million from $38.2 million at
June 30, 1998 to $43.2 million at September 30, 1998. These additional
borrowings funded purchases of loans and mortgage loan participations. The Bank
had $685,000 and $692,000 in unrealized gains (net of deferred taxes) at
September 30, 1998 and June 30, 1998, respectively from market gains on the
Bank's available-for-sale investment and mortgage-backed portfolios.
11
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR QUARTER ENDED SEPTEMBER 30, 1998 COMPARED TO
QUARTER ENDED SEPTEMBER 30, 1997
General
Net earnings increased $25,000 or 13.9% for the quarter ended September 30, 1998
from the quarter ended September 30, 1997. This increase is primarily the result
of an increase in net interest earnings of $145,000, an increase in non-interest
earnings of $21,000, a $6,000 gain on the sale of other real estate owned and a
decrease in provision for loan losses of $22,000, offset by an increase in
non-interest expense of $156,000 and an increase in provision for income taxes
of $13,000.
Interest Earnings
Total interest income increased $374,000 or 19.6% from $1.9 million for the
quarter ended September 30, 1997, to $2.3 million for the quarter ended
September 30, 1998. This increase was primarily due to $6.8 million increase in
the banks net loan portfolio.
Interest Expense
Total interest expense increased $229,000 or 19.6% from $1.2 million for the
quarter ended September 30, 1997 to $1.4 million for the quarter ended September
30, 1998. This increase was primarily due to a increase in FHLB borrowings and
an increase in the deposit base.
Provision for Losses on Loans
The Bank maintains an allowance for loan losses based upon management's periodic
evaluation of known and inherent risks in the loan portfolio, past loss
experience, adverse situations that may affect the borrower's ability to repay
loans, estimated value of the underlying collateral and current and expected
market conditions. The allowance for loan losses was $401,000 and $374,000 at
September 30, 1998 and 1997, respectively. The provision for loan loss was
$15,000 and $37,459 for the quarters ended September 30, 1998 and 1997
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 $27,000 or 142.1% from $19,000 for the
quarter ended September 30, 1997 to $46,000 for the quarter ended September 30,
1998. This increase was primarily due to increased service and NSF charges on
NOW and checking accounts.
Non-Interest Expense
Total non-interest expense increased $156,000 or 35.3% from $443,000 for the
quarter ended September 30, 1997 to $599,000 for the quarter ended September 30,
1998. This increase was primarily due to an increase in compensation and
benefits of $53,300 from the hiring of additional staff to handle growth,
general salary increases and increases due to accrual for stock-based
compensation programs. Other expenses in compensation and benefits this quarter
ended September 30, 1998 were a $12,000 increase in education and training due
to employee training for the new operating system and application software and
$43,700 in performance bonus plan accrual. This performance bonus plan accrual
was budgeted for the fiscal year ending June 30, 1999 therefore will continue to
increase non-interest expense in future periods. Other factors
12
<PAGE>
were increases in occupancy costs of $16,000, data processing costs of $9,000,
stock services of $10,000 and other operating costs $37,000, offset by a
decrease in professional fees of $26,000. The increase in occupancy cost is
primarily due to lease expense and leasehold improvement expense on the new Loan
Center and Furniture, Fixtures and Equipment depreciation for the new Drive-up
facility and New Automated Teller Machine. The increase in data processing
expense is primarily due to service bureau expense for upgrading computer
software. The increase in stock services is primarily due to a fee paid to the
OTS for filing a change of control application. The increase in other operating
costs is primarily due to other real estate owned expenses, increased stationary
and supplies, automated teller machine expense and postage expense. The decrease
in professional fees is primarily due to a $27,000 invoice paid for auditing
services in September 1997 for annual report preparation.
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 September 30, 1998, the
Bank's liquidity, as measured for regulatory purposes, was 5.52%. 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, 1998, cash and cash equivalents
totaled $3 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, 1998, the Bank had $43 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, 1998, the Bank
originated $13.7 million in total loans, of which $9.9 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 and readily marketable equity securities. 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 $231,000 and $173,000 for the three month period ended September 30, 1998
and 1997 respectively. Net cash used for investing activities consisted
primarily of disbursement of loan originations and investment and
mortgage-backed security purchases, offset by principal collections on loans and
principal collections and proceeds from maturities of investment securities and
mortgage-backed securities. Such uses were $7 million and $16 million for the
three month period ended
13
<PAGE>
September 30, 1998 and 1997, respectively. Net cash provided from financing
activities consisting primarily of net activity in deposit and escrow accounts
and new FHLB borrowings, offset by repayments on FHLB borrowings, were $5
million and $16 million for the three month period ended September 30, 1998 and
1997, respectively.
The Bank anticipates that it will have sufficient funds available to meet its
current commitments. As of September 30, 1998, the Bank had commitments to fund
loans of $5 million. Certificates of deposit scheduled to mature in one year or
less totaled $33.1 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, no adverse liquidity effects
are expected.
At September 30, 1998, the Bank exceeded each of the three OTS capital
requirements on a fully-phased-in basis.
The Year 2000 issue
Funds spent for Year 2000 expense in the quarter ended September 30, 1998 was
$2,000. The Bank's operating budget for the fiscal year ending June 30, 1999
includes $75,000 for Year 2000 expense. In September 1998 the bank hired a full
time data processing systems administrator. Although he will have other duties,
his primary duties initially will be Year 2000 administration, testing,
remediation, and contingency planning, and his salary will be allocated to Year
2000 expense. We have identified some personal computers and software to be
upgraded. Management believes the $75,000 budget allocation for Year 2000
expense will cover these costs as well as those for the systems administrator.
Because management expects to be Year 2000 compliant in almost all risk areas by
June 30, 1999, Year 2000 costs for the fiscal year ending June 30, 2000 are not
expected to be material. Should the Bank have to resort to alternative operating
procedures due to major systems or communication failures at the beginning of
the Year 2000, the extra costs could be material.
In its initial Year 2000 Action Plan, the Bank identified seven phases as
necessary to implement a Year 2000 compliant system. The Bank is a federally
chartered financial institution regulated by the Office of Thrift Supervision
(OTS). The OTS identified five phases for Year 2000 compliance. The following
list describes the five phases as identified by the OTS with comparable phases
from the Bank's Year 2000 Action Plan identified in parentheses, if different:
1. Awareness -- Inform senior management of Year 2000 issues and possible
impact to the overall organization.
2. Assessment (Inventory, Assessment) -- Estimate the scope of the Year 2000
project and develop the budget for project execution. Develop a complete
inventory of hardware, software and systems, and categorize by importance.
3. Renovation (Analysis, Renovation) -- Perform a detailed analysis and
develop detailed plans for correction, testing and reimplementing critical
applications. Correct and replace all critical applications.
4. Validation (Testing) -- Test all critical applications unit and system
level.
5. Implementation -- Implement all critical applications and databases in a
production environment. Integration test.
14
<PAGE>
As of September 30, 1998 the following chart shows the current and projected
status of the Bank's Year 2000 compliance efforts:
Phase 9/28/98 10/15/98 12/31/98 3/31/99 6/30/99
- ----- ------- -------- -------- ------- -------
Awareness 100% - - - -
Assessment 100% - - - -
Renovation 85% 100% - - -
Validation 10% 60% 85% 100% -
Implementation 10% 60% 85% 95% 100%
Subsequent Events
In June 1998, the Bank opened a newly constructed drive-up teller and automated
teller machine facility on a lot previously purchased for this purpose adjacent
to the present bank building. On September 14, 1998, the Bank moved its loan
operations into a new Loan Center across the street from its office. The 7000
sq. ft. building was leased for ten years with an option to purchase at a set
price. Management believes the additions will provide the Bank growth potential
by improving its ability to deliver retail-banking services in the community.
These additions had a minimal impact on financial performance for the Bank for
the quarter ended September 30, 1998, but they will materially increase
non-interest expense for the Company during the fiscal year ending June 30, 1999
and subsequent years.
Stock Repurchase Program
On August 18, 1998, the Company issued a press release announcing its intention
to repurchase up to 5% (58,276 shares) of the Company's common stock. The
repurchase was complete on September 9, 1998. On September 9, 1998, the Company
issued a press release announcing its intention to repurchase up to 5% (55,363
shares) of the Company's common stock. The repurchase was complete on October 6,
1998. All shares repurchased have been retired 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
The Small Business Job Protection Act of 1996, among other things, equalized the
taxation of thrifts and banks. The bill no longer allows thrifts a choice
between the percentage of taxable income method and the experience method in
determining additions to their bad debt reserves. Smaller thrifts with $500
million of assets or less are only allowed to use the experience method, which
is generally available to small banks
15
<PAGE>
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, 1998, the Bank had $46,613 of
post 1987 bad-debt reserves of which 1/6th or $9,323 was recaptured into taxable
income for the year ended June 30, 1998. 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 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.
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, except for interim financial statements
in the initial year of its application.
PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K
None
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 6, 1998 /s/ Jerry R. Spurlin
-----------------------------------
Jerry R. Spurlin
President
(Duly Authorized Representative and
Principal Financial Officer)
17
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE
QUARTERLY REPORT ON FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1998
<CASH> 1,750
<INT-BEARING-DEPOSITS> 1,440
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 38,100
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 82,661
<ALLOWANCE> 401
<TOTAL-ASSETS> 128,769
<DEPOSITS> 70,745
<SHORT-TERM> 43,201
<LIABILITIES-OTHER> 1,561
<LONG-TERM> 0
0
0
<COMMON> 104
<OTHER-SE> 13,159
<TOTAL-LIABILITIES-AND-EQUITY> 128,769
<INTEREST-LOAN> 1,725
<INTEREST-INVEST> 511
<INTEREST-OTHER> 51
<INTEREST-TOTAL> 2,287
<INTEREST-DEPOSIT> 830
<INTEREST-EXPENSE> 1,398
<INTEREST-INCOME-NET> 889
<LOAN-LOSSES> 15
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 599
<INCOME-PRETAX> 321
<INCOME-PRE-EXTRAORDINARY> 321
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 204
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.19
<YIELD-ACTUAL> 2.18
<LOANS-NON> 575
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 622
<ALLOWANCE-OPEN> 387
<CHARGE-OFFS> 1
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 401
<ALLOWANCE-DOMESTIC> 401
<ALLOWANCE-FOREIGN> 0
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</TABLE>
