SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One):
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1999, OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to .
Commission File Number: 0-25854
GFSB BANCORP, INC.
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(Name of Small Business Issuer in its Charter)
Delaware 04-2095007
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(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
221 West Aztec Avenue, Gallup, New Mexico 87301
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (505) 722-4361
--------------
Securities Registered Under Section 12(b) of the Exchange Act: None
Securities Registered Under Section 12(g) of the Exchange Act:
Common Stock, par value $0.10 per share
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(Title of Class)
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 .
--- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |_|
State issuer's revenues for its most recent fiscal year. $9,893,090.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based upon the average bid and asked prices of such stock on
September 15, 1999, was $6.8 million.
As of September 15, 1999, there were issued and outstanding 981,308
shares of the registrant's Common Stock.
Transitional Small Business Disclosure format (check one):
Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for Fiscal Year ended June 30,
1999. (Part II)
2. Portions of Proxy Statement for the 1999 Annual Meeting of Stockholders.
(Part III)
<PAGE>
PART I
GFSB Bancorp, Inc. (the "Company") may from time to time make written
or oral "forward- looking statements", including statements contained in the
Company's filings with the Securities and Exchange Commission (including this
annual report on Form 10-KSB and the exhibits thereto), in its reports to
stockholders and in other communications 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; disruptions caused by computer malfunctions
resulting from the year 2000 issue; 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 is not
exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
Item 1. Description of Business
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General
GFSB Bancorp, Inc. (the "Company") is a unitary savings and loan
holding company that was incorporated in March 1995 under the laws of the State
of Delaware for the purpose of acquiring all of the common stock of Gallup
Federal Savings Bank (the "Bank"). This acquisition occurred June 29, 1995 at
which time the Bank simultaneously converted from a mutual to stock institution
(the "Conversion"), sold all of its outstanding capital stock to the Company and
the Company made its initial public offering of its common stock. The expenses
associated with the Conversion were charged to paid-in capital while $4.5
million of the net proceeds of $9.1 million from the public offering was used to
purchase all of the issued and outstanding stock of the Bank issued pursuant to
the Conversion with the remaining $4.5 million being retained by the Company.
This transaction was accounted for in a manner similar to a pooling of
interests, consequently no goodwill or other intangibles were recorded as a
result of this transaction.
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Since the primary activities of the Company are those of the Bank, much
of the discussion herein pertains to the Bank, however, comparisons to total
assets, liabilities, etc. are based on the Company's consolidated numbers. As of
June 30, 1999, the Company had total assets of $151 million, total deposits of
$81 million and stockholders' equity of $12 million or 8% of total assets under
generally accepted accounting principles ("GAAP"). The only subsidiary of the
Company is the Bank. The Bank currently has no subsidiaries.
The Bank is a federally chartered capital stock savings bank located in
Gallup, New Mexico. The Bank was founded in 1934 under the name the Gallup
Federal Savings and Loan Association. In connection with the Bank's conversion
from a federally chartered mutual savings association to a federally chartered
stock savings bank, the Bank changed its name to Gallup Federal Savings Bank.
The Bank's deposits are federally insured by the Savings Association Insurance
Fund ("SAIF"), as administered by the Federal Deposit Insurance Corporation
("FDIC").
The Company's business activities to date have been limited to its
investment in the Bank, loans made to the Bank for use in the normal course of
the Bank's business, and a loan made to the Gallup Federal Savings Bank Employee
Stock Ownership Plan ("ESOP") to enable the ESOP to purchase shares of the
Company's common stock in the initial public offering.
The Bank offers a variety of financial services to meet the needs of
the communities it serves. The Bank's principal business is attracting deposits
from the general public and investing those deposits, together with funds
generated from operations, to originate first mortgages on one- to four-family
residences in its market area. The Bank also originates a limited number of
multi-family, commercial real estate, construction, commercial business and
consumer loans.
The principal sources of funds for the Bank's lending activities are
deposits, the amortization, repayment and maturity of loans, mortgage-backed
securities, investment securities and borrowings from the FHLB. Principal
sources of income are interest and fees on loans, mortgage-backed securities,
investment securities, and deposits held in other financial institutions. The
Bank's principal expense is interest paid on deposits and FHLB borrowings.
Market Area and Competition
The City of Gallup, New Mexico is considered to be the Bank's primary
market area. The county where Gallup is located is McKinley County and is
considered to be the Bank's secondary market. McKinley County is located in
northwestern New Mexico, and occupies a part of the Colorado Plateau called the
San Juan Plateau. More than half of the people in the County are Native
Americans; including Navajos and Zunis. McKinley County includes the trading and
service center of Gallup and the southeastern edge of the Navajo Indian
Reservation. In January 1995, McKinley County had a population of approximately
67,000. The Bank intends to expand its secondary market area to adjacent
counties, which will include a major portion of Apachie County, Arizona and the
Navajo Indian Reservation. However, recent attempts to originate loans on the
reservation have been stymied due to regulatory barriers.
The general economy of Gallup is centered around the wholesale and
retail trade, public administration, transportation services, tourism and
mining. The production of Indian arts and crafts by
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smaller businesses also constitutes a significant part of the County's economic
base. The largest single employer in McKinley County is the Bureau of Indian
Affairs.
During its sixty-five year existence, the Bank has focused on serving
its customers located in the New Mexico community of Gallup and surrounding
communities in McKinley County. Economic growth in the Bank's market area
remains dependent upon the local economy. In addition, the deposit and loan
activity of the Bank is significantly affected by economic conditions in its
market area. The Bank's principal competitors are financial institutions and
mortgage banking companies, many of which are significantly larger and have
greater financial resources than the Bank. The Bank's competition for loans on a
retail and wholesale basis comes principally from commercial banks, mortgage
brokers, banking and insurance companies. Its competition for deposits has
historically come from commercial banks. Moreover, the Bank faces increasing
competition for deposits from non-bank institutions, such as brokerage firms and
insurance companies in such areas as short-term money market funds, corporate
and government securities funds, mutual funds and annuities. The Bank is one of
five savings associations and commercial banks having an office in McKinley
County. The Bank is the only savings association or commercial bank
headquartered in Gallup. The Bank also competes with several mortgage banking
companies located outside of McKinley County and three credit unions.
Lending Activities
General. The Bank's loan portfolio consists of mortgage loans secured
by one- to four-family residences, and multi-family, commercial real estate,
construction, consumer and commercial business loans.
At June 30, 1999, the Bank's loan portfolio totaled $97 million. Loans
secured by first mortgages on one- to four-family residences totaled $72
million, or 75% of the Bank's loan portfolio at June 30, 1999. For its mortgage
loan portfolio, the Bank primarily originates fixed-rate loans with up to
15-year terms. As part of its asset liability strategy, the Bank recently began
offering more adjustable-rate loan products. In addition, the Bank sells
conventional one- to four-family fixed rate mortgage loans over 15 years in
maturity into the secondary market.
Analysis of Loan Portfolio. The following table sets forth information
concerning the composition of the Bank's loan portfolio in dollar amounts and in
percentages of the total loan portfolio (before deductions for loans in process,
loan participations, deferred loan origination fees and costs and allowances for
losses) as of the dates indicated.
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<PAGE>
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------
1999 1998
---------------------- ---------------------
$ % $ %
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Type of Loans:
Residential................................ $72,290 74.86% $55,297 72.92%
Commercial real estate..................... 17,199 17.81 14,750 19.45
Construction:
Residential.............................. 828 .86 1,125 1.48
Commercial............................... 2,733 2.83 1,848 2.44
Commercial business ....................... 4,460 4.62 4,748 6.26
Consumer:
Savings account ......................... 1,067 1.10 955 1.26
Automobile and other..................... 3,459 3.58 2,839 3.74
Less:
Loans in process......................... (1,443) (1.49) (1,755) (2.31)
Loan participations sold................. (2,938) (3.04) (3,065) (4.04)
Deferred loan origination fees and costs.. (647) (.67) (520) (.69)
Allowance for loan losses................ (443) (.46) (387) (.51)
--------- ------- ------ -----
Total loans, net........................... $ 96,565 100% $75,837 100%
======= ======= ====== =====
Type of Security:
- ----------------
Residential real estate
1-4 family............................. $ 72,174 74.74% $56,422 74.39%
Multi-family dwelling units............ 944 .98 908 1.20
Commercial real estate................... 19,844 20.55 15,717 20.72
Commercial business ..................... 4,548 4.71 4,722 6.23
Consumer:
Savings accounts....................... 1,067 1.10 955 1.26
Automobile and other................... 3,459 3.58 2,839 3.74
Less:
Loan participations sold................. (2,938) (3.04) (3,065) (4.04)
Loans in process......................... (1,443) (1.49) (1,755) (2.31)
Deferred loan origination fees and costs. (647) (.67) (519) (.68)
Allowance for loan losses................ (443) (.46) (387) (.51)
------- ------- ------ -----
Total loans, net......................... $ 96,565 100% $75,837 100%
======= ======= ====== =====
</TABLE>
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Loan Maturity Tables
The following table sets forth the maturity of the Bank's loan
portfolio at June 30, 1999. The table does not include prepayments or scheduled
principal repayments. Prepayments and scheduled principal repayments on loans
totaled $27.3 million and $16.1 million, for the years ended June 30, 1999 and
1998, respectively. Adjustable-rate mortgage loans are shown as maturing based
on contractual maturities.
<TABLE>
<CAPTION>
Multi-family Consumer and
1-4 Family and Commercial Commercial
Real Estate Real Estate Construction Business Total
----------- ----------- ------------ -------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Amounts Due:
Within 3 months........... $ 20 $ 823 $ 178 $ 1,103 $ 2,124
3 months to 1 Year........ 665 462 296 2,157 3,580
After 1 year:
1 to 3 years............ 1,181 5,323 -- 1,755 8,259
3 to 5 years............ 837 2,361 233 1,598 5,029
5 to 10 years........... 36,930 2,361 160 1,052 40,503
10 to 20 years.......... 22,363 6,683 2,617 1,343 33,006
Over 20 years........... 9,314 -- -- -- 9,314
---------- ---------- ---------- ----------- ----------
Total due after one year.. 70,625 16,728 3,010 5,748 96,111
--------- ---------- ---------- --------- ---------
Non-performing............ 36 42 77 66 221
---------- ---------- ---------- ----------- ----------
Total amount due.......... $ 71,346 $ 18,055 $ 3,561 $ 9,074 $ 102,036
========= ========= ========= ========== ========
Less:
Loan participations sold.. (2,938)
Allowance for loan loss... (443)
Loans in process.......... (1,443)
Deferred loan fees........ (647)
---------
Loans receivable, net... $ 96,565
=========
</TABLE>
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The following table sets forth the dollar amount, before deductions for
loans in process, deferred loan origination fees and costs and allowance for
loan losses, at June 30, 1999 of all loans due after June 30, 2000, which have
pre-determined interest rates and which have floating or adjustable interest
rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
One- to four-family(1)...... $ 62,405 $ 8,610 $ 71,015
Multi-family and
commercial real estate(1). 14,680 4,823 19,503
Consumer and commercial
business.................. 3,708 2,106 5,814
---------- ---------- ----------
Total................... $ 80,793 $ 15,539 $ 96,332
========= ========= ==========
- ---------------
(1) Includes construction loans.
One- to Four-Family Residential Loans. The Bank originates
multi-family, commercial business, commercial real estate and consumer loans.
The Bank generally originates one- to four-family residential mortgage loans
without private mortgage insurance in amounts up to 80% of the appraised value
of the mortgaged property, or up to 95% if private mortgage insurance is
obtained to reduce the Bank's exposure to 80% or below of the appraised value of
the properties. To a lesser extent, the Bank makes loans on nonowner occupied
one- to four-family properties acquired as an investment by the borrowers in
amounts up to 80% of the appraised value of the property. In addition, the Bank
originates FHA and VA loans.
The Bank primarily originates fixed-rate mortgage loans for its loan
portfolio with up to 15 year terms. In addition, the Bank originates loans with
terms over 15 years for sale in the secondary market. The Bank offers various
loan programs with varying interest rates and fees which are competitively
priced based on market conditions and the Bank's cost of funds. Generally, the
Bank's underwriting guidelines for fixed-rate mortgage loans conform to FHLMC
and FNMA guidelines. In March 1995, the Bank began offering one-year
adjustable-rate mortgage ("ARM") loans which adjust annually based upon the
one-year treasury rate. The program is structured so that such loans generally
may not adjust more than 2% in any one year. The Bank will not originate loans
below the fully indexed rate. Generally, during periods of rising interest
rates, the risk of default on an ARM loan is considered to be greater than the
risk of default on a fixed-rate loan due to the upward adjustment of interest
costs to the borrower. The Bank will not originate ARM loans with negative
amortization or with initial "teaser" rates. The Bank also offers a variety of
loan products for low and moderate income housing. The Bank offers second
mortgage loans on one- to four-family residences if the Bank holds the first
mortgage loan for such property and the combined loan to value ratio will be 90%
or lower.
Commercial Real Estate and Multi-Family Loans. The Bank actively seeks
to increase its origination of commercial real estate and multi-family loans and
expects to continue to do so. The Bank became involved in these types of loans
due to a perceived need in the Bank's market area and in an attempt to increase
the Bank's net interest margin. Commercial real estate and multi-family secured
loans are originated in amounts generally up to 80% of the appraised value of
the property. Such appraised value is determined by an independent appraiser
previously approved by the Bank. The Bank's commercial real estate loans are
permanent loans secured by approved property such as churches, motels, small
office
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buildings, retail stores, small strip plazas, and other non-residential
buildings. The Bank generally originates fixed-rate commercial real estate loans
with balloon maturities of five years and with amortization periods of up to 25
years, and to a lesser extent, adjustable-rate loans based on a margin over the
New York prime rate. At June 30, 1999, the Bank's largest commercial real estate
loan consisted of a $1,400,000 performing loan secured by a retail commercial
property, of which $470,000, has been sold to another bank as a non-recourse
participation. At June 30, 1999, the Bank's largest multi-family loan consisted
of a $580,000 performing loan secured by two multi-family apartment buildings in
Gallup, New Mexico.
Loans secured by commercial real estate and multi-family properties
generally involve a greater degree of risk than residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties and the increased difficulty of evaluating and monitoring these types
of loans. Furthermore, the repayment of loans secured by commercial real estate
is typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced, the borrower's ability to
repay the loan may be impaired. The Bank intends to continue to emphasize
commercial real estate lending and accordingly, its credit risk may increase.
Consumer and Commercial Business Loans. In response to a perceived need
in the local community and to provide for diversification of its asset portfolio
and improved interest rate risk management, the Bank continues increasing the
amount of consumer and commercial business loans it originates. The Bank is
attempting to increase its level of consumer lending through new products, such
as home equity lines of credit, second mortgage loans and automobile loans, a
competitive pricing structure, promotional activities, and cross-selling
consumer products through its office, without incurring unacceptable credit
risk. The home equity lines of credit are made with adjustable rates with loan
to value ratios of 90% if the Bank has the first mortgage and 80% if it does
not. The Bank also offers automobile and other consumer loans offered primarily
on a fixed-rate, short-term basis. The underwriting standards employed by the
Bank for consumer loans include a determination of the applicant's payment
history on other debts and an assessment of the borrower's ability to make
payments on the proposed loan and other indebtedness. In addition to the
creditworthiness of the applicant, the underwriting process also includes a
comparison of the value of the security, if any, in relation to the proposed
loan amount. The Bank's consumer loans tend to have higher interest rates and
shorter maturities than one- to four-family first mortgage loans, but are
considered to entail a greater risk of default than mortgage loans.
The Bank intends to continue to actively increase its commercial
business loan originations. Revolving lines of credit, short-term working
capital loans, and term loans up to seven years are originated to meet the needs
of local small businesses. Some loans are unsecured, but the majority are
secured by inventory, equipment, accounts receivable, marketable securities,
savings deposits, real estate, personal guaranties, or a combination of these
types of collateral. Commercial business loans generally involve a greater
degree of risk than residential mortgage loans and frequently carry larger loan
balances. The Bank offers fixed-rate commercial business loans and
adjustable-rate loans which adjust daily based upon New York prime. This
increased credit risk is a result of several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on business cash flow, and the difficulty
of evaluating and monitoring these types of loans.
Construction Loans. The Bank primarily makes construction loans to
individuals to construct single-family, owner-occupied homes for which the Bank
also provides permanent financing and to builders who have a proven track record
on either a pre-sold or speculative basis. Construction financing is
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generally considered to involve a higher degree of risk of loss than long-term
financing on improved, occupied real estate. Risk of loss on a construction loan
is dependent largely upon the accuracy of the initial estimate of the property's
value at completion of construction or development and the estimated cost
(including interest) of construction. During the construction phase, a number of
factors could result in delays and cost overruns. If the estimate of
construction costs proves to be inaccurate, the Bank may be required to advance
funds beyond the amount originally committed to permit completion of the
development. If the estimate of value proves to be inaccurate, the Bank may be
confronted, at or prior to the maturity of the loan, with a project having a
value which is insufficient to assure full repayment.
Loan Commitments. The Bank issues written commitments to prospective
borrowers on all real estate approved loans. Generally, the commitment requires
acceptance within ten days of the date of issuance and must be closed within
thirty days of issuance. At June 30, 1999, the Bank had $6.6 million of
commitments to fund new loans at market interest rates and to fund the
undisbursed portion of construction loans and home equity lines of credit.
Loans to One Borrower. Savings institutions are subject to the same
limits as those applicable to national banks, which under current regulations
limit loans-to-one borrower in an amount equal to 15% of unimpaired capital and
retained income on an unsecured basis and an additional amount equal to 10% of
unimpaired capital and retained income if the loan is secured by readily
marketable collateral (generally, financial instruments, not real estate) or
$500,000, whichever is higher. The Bank's maximum loan-to-one borrower limit was
approximately $1.8 million as of June 30, 1999.
At June 30, 1999, the Bank's largest lending relationship consisted of
three performing loans, including two amortizing loans, and a fixed rate loan,
totaling $3,210,000 of which $1,870,000 has been sold to other banks as
non-recourse participations, secured by three motel properties, two in Gallup
and one in Grants, New Mexico. The next five largest lending relationships, all
of which consist of performing loans, at June 30, 1999 consisted of a $1,400,000
commercial property loan of which $470,000 has been sold to other banks as
non-recourse participations, two loans totaling $1,320,000 secured by motel
property in Gallup, of which $610,000 has been sold to another bank as
non-recourse participation, sixteen loans totaling $1,030,000 secured by 1-4
dwelling units, a commercial revolving line of credit totaling $150,000 and two
construction loans totaling $2,100,000, and two loans totaling $550,000 secured
by non-residential property.
Non-Performing and Problem Assets
Loan Delinquencies. Loans are reviewed on a monthly basis and are
generally placed on a non-accrual status when the loan becomes more than 90 days
delinquent and, in the opinion of management, the collection of additional
interest is doubtful. Interest accrued and unpaid at the time a loan is placed
on non-accrual status is charged against interest income. Subsequent interest
payments, if any, are either applied to the outstanding principal balance or
recorded as interest income, depending on the assessment of the ultimate
collectibility of the loan. At June 30, 1999, the Bank had total delinquent
loans of $1,710,000, of which $1,270,000 were delinquent over 30 days, $220,000
were delinquent over 60 days, and $220,000 were delinquent 90 days or more.
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The following table sets forth information regarding non-accrual loans,
real estate owned, and certain other repossessed assets and loans.
At June 30,
--------------------------
1999 1998
------------ ----------
(In Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
Permanent loans secured by 1-4 dwelling units......$ 78 $ 705
All other mortgage loans........................... 75 --
Non-mortgage loans:
Commercial real estate............................. -- --
Consumer........................................... 66 2
------- ----
Total.......................................... $ 219 $ 707
======= ====
Accruing loans which are contractually past
due 90 days or more:
Mortgage loans:
Permanent loans secured by 1-4 dwelling units......$ -- $ --
All other mortgage loans................... -- --
--------- ----
Total..........................................$ -- $ --
========= ====
Total non-accrual and accrual loans.................. $ 219 $ 707
Real estate owned.................................... 150 159
-------- ----
Total non-performing assets.......................... $ 369 $ 866
======== ====
Total non-accrual and accrual loans to net loans..... 0.23% 1.14%
Total non-accrual and accrual loans to total assets.. 0.15% 0.70%
Total non-performing assets to total assets.......... 0.24% 0.70%
Interest income that would have been recorded on loans accounted for on
a non-accrual basis under the original terms of such loans was immaterial for
the year ended June 30, 1999. Amounts included in the Bank's interest income for
the year ended June 30, 1999 was, likewise, immaterial.
Classified Assets. OTS regulations provide for a classification system
for problem assets of insured institutions which covers all problem assets.
Under this classification system, problem assets of insured institutions are
classified as "substandard," "doubtful," or "loss." An asset is considered
substandard if it is inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Substandard assets
include those characterized by the "distinct possibility" that the insured
institution will sustain "some loss" if the deficiencies are not corrected.
Assets classified as doubtful have all of the weaknesses inherent in those
classified substandard, with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions and values, "highly questionable and improbable."
Assets classified as loss are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem
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assets. When an insured institution classifies problem assets as loss, it is
required either to establish a specific allowance for losses equal to 100% of
that portion of the asset so classified or to charge off such amount. An
institution's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the OTS, which may
order the establishment of additional general or specific loss allowances. A
portion of general loss allowances established to cover possible losses related
to assets classified as substandard or doubtful may be included in determining
an institution's regulatory capital, while specific valuation allowances for
loan losses generally do not qualify as regulatory capital.
At June 30, 1999, there were no loans with respect to which known
information about the possible credit problems of the borrowers or the cash
flows of the security properties have caused management to have concerns as to
the ability of the borrowers to comply with present loan repayment terms.
The following table provides further information about the Bank's
problem assets as of June 30, 1999.
At
June 30,
1999
-------------
Substandard........................................... $924,718
Doubtful ............................................. --
Loss ................................................. --
General loss allowance................................ 443,479
Specific loss allowance - loans....................... --
Specific loss allowance - real estate owned........... --
Real Estate Owned. Real estate acquired by the Bank as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until it is sold. When property is acquired it is recorded at the lower of the
cost or fair value. The Bank records loans as in substance foreclosures if the
borrower has little or no equity in the property based upon its documented
current fair value, the Bank can only expect repayment of the loan to come from
the sale of the property and if the borrower has effectively abandoned control
of the collateral or has continued to retain control of the collateral but
because of the current financial status of the borrower it is doubtful the
borrower will be able to repay the loan in the foreseeable future. In substance
foreclosures are accounted for as real estate acquired through foreclosure,
however, title to the collateral has not been acquired by the Bank. There may be
significant other expenses incurred such as attorney and other extraordinary
servicing costs involved with in substance foreclosures.
The Bank's real estate owned at June 30, 1999 was $150,000.
Allowance for Loan and Real Estate Losses. It is management's policy to
provide for losses on unidentified loans in its loan portfolio and foreclosed
real estate. A provision for loan losses is charged to operations based on
management's evaluation of the potential losses that may be incurred in the
Bank's loan portfolio. Such evaluation, which includes a review of all loans of
which full collectibility of interest and principal may not be reasonably
assured, considers the Bank's past loan loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrower's
ability to repay, estimated value of any underlying collateral and current
economic conditions. The allowance for loan losses, as a ratio of total loans,
net, was 0.46% at June 30, 1999.
Management will continue to review the entire loan portfolio to
determine the extent, if any, to which further additional loss provisions may be
deemed necessary. There can be no assurance that the
-10-
<PAGE>
allowance for losses will be adequate to cover losses which may in fact be
realized in the future and that additional provisions for losses will not be
required.
While the Bank believes it has established an adequate allowance for
loan losses, there can be no assurance that regulators, in reviewing the Bank's
loan portfolio, will not request the Bank to significantly increase its
allowance for loan losses, thereby negatively affecting the Bank's financial
condition and earnings or that the Bank may not have to increase its level of
loan loss allowance in the future.
Allocation of Allowance for Loan Losses
The following table sets forth the allocation of the Bank's allowance
for loan losses by loan category and the percent of loans in each category to
total loans receivable, net, at the dates indicated. The portion of the loan
loss allowance allocated to each loan category does not represent the total
available for future losses which may occur within the loan category since the
total loan loss allowance is a valuation reserve applicable to the entire loan
portfolio.
At June 30,
------------------------------------------------------
1999 1998
------------------------- --------------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in Thousands)
Residential real estate. $ 273 72% $214 55%
Commercial real estate.. 71 20 109 28
Consumer and
commercial business... 100 8 64 17
-------- ------ ---- ----
Total................. $ 443 100% $ 387 100%
======== ====== ==== ====
-11-
<PAGE>
Analysis of the Allowance for Loan Losses
The following table sets forth information with respect to the Bank's
allowance for loan losses at the dates indicated.
At June 30,
-------------------------
1999 1998
---------- ------------
(Dollars in Thousands)
Total loans outstanding, net........... $ 96,565 $75,837
======= ======
Average loans outstanding.............. $ 88,355 $63,930
======= ======
Allowance balances (at beginning of
period).............................. $ 387 $ 339
Provision (credit):
Residential.......................... 14 68
Consumer and commercial business..... 124 (5)
Charge-offs:
Residential.......................... (64) --
Consumer and commercial business..... (18) (19)
Recoveries:
Residential.......................... -- --
Consumer and commercial business..... -- 4
Net (charge-offs) recoveries........... (82) (15)
Allowance balance (at end of period)... $ 443 $ 387
======= =====
Allowance for loan losses as a percent
of total loans outstanding, net...... .46% .51%
-12-
<PAGE>
Analysis of the Allowance for Real Estate Owned
The following table sets forth information with respect to the Bank's
allowance for losses on real estate owned at the dates indicated.
At June 30,
----------------------------
1999 1998
---------------- ------------
(Dollars in Thousands)
Total real estate owned and other
repossessed assets, net............... $ 150 $ 159
Allowance balances - beginning.......... -- --
Provision............................... -- --
Net charges-offs........................ $ -- $ --
====== ===
Allowance balances - ending............. --% --%
====== ===
Allowance for losses on real estate
owned and other repossessed assets
to net real estate owned and other
repossessed assets...................... --% --%
Mortgage-Backed Securities
The following table sets forth the composition of the Bank's
mortgage-backed securities portfolio in dollar amounts and in percentages of the
portfolio at the dates indicated.
At June 30,
------------------------------------------
1999 1998
-------------------- -------------------
Percent Percent
Amount of Total Amount of Total
------ -------- ------ --------
(Dollars in Thousands)
Mortgage-backed securities:
FNMA.............................. $ 21,746 68.57% $25,581 76.25%
GNMA.............................. 2,781 8.77 4,695 13.99
FHLMC............................. 1,524 4.81 2,201 6.56
Mortgage Pass-through certificates.. 4,933 5.55 -- --
-------- ------- ---------- -------
Total......................... 30,984 97.70 32,477 96.80
Net premiums...................... 728 2.30 1,074 3.20
Net mortgage-backed securities...... $ 31,712 100.00% $33,551 100.00%
======== ====== ====== ======
-13-
<PAGE>
The following table sets forth the Bank's mortgage-backed securities
activities information for the periods indicated.
For the Year Ended June 30,
1999 1998
(In Thousands)
Mortgage-backed securities(1):
Beginning balance: $ 33,551 $ 32,070
Mortgage-backed securities
purchased....................... 8,969 11,678
Fair value adjustments............ (504) (168)
------- ---------
Less:
Mortgage-backed securities sold... -- --
Principal repayments.............. (10,304) (10,029)
------- --------
Ending balance........................$ 31,712 $ 33,551
========= =========
- ------------------
(1) Includes premiums and discounts.
To supplement lending activities, the Bank invests in residential
mortgage-backed securities. Mortgage- backed securities serve as collateral for
borrowings and, through repayments, as a source of liquidity. The
mortgage-backed securities portfolio at June 30, 1999 consisted of
adjustable-rate certificates issued by the FHLMC, GNMA, FNMA, and Norwest Asset
Securities Corporation. At June 30, 1999, the mortgage-backed securities
portfolio classified as available for sale had a fair value of $31.7 million and
an amortized cost of $32.1 million and had contractual maturities between 10 and
30 years.
Mortgage-backed securities represent a participation interest in a pool
of single-family or multi-family mortgages, the principal and interest payments
on which are passed from the mortgage originators, through intermediaries
(generally quasi-governmental agencies) that pool and repackage the
participation interests in the form of securities, to investors such as the
Bank. Such quasi-governmental agencies, which guarantee the payment of principal
and interest to investors, primarily include FHLMC, FNMA, and GNMA.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate mortgages or
adjustable-rate mortgage loans. Mortgage-backed securities are generally
referred to as mortgage participation certificates or pass-through certificates.
As a result, the interest rate risk characteristics of the underlying pool of
mortgages (i.e., fixed rate or adjustable rate), as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages.
Investment Activities
At June 30, 1999, the Bank had an investment portfolio of approximately
$10.8 million, consisting of mutual funds, tax-exempt securities, FHLMC stock,
FHLB and FNMA debentures, Student Loan Marketing Association ("SLMA") asset
backed notes and corporate debt securities. The Bank classifies its investment
securities, as available for sale, and held to maturity. The fair value of
available for sale securities and held-to-maturity securities at June 30, 1999
was $12 million, resulting in a net unrealized gain at that date of
approximately $1.2 million.
-14-
<PAGE>
Investment Portfolio
The following table sets forth the fair value of the investment
securities portfolio of the Bank.
At June 30,
-----------------------
1999 1998
------------ ---------
Debt securities: (In Thousands)
Mutual funds.................... $ 2,398 $2,283
U.S. Treasury bills............. -- --
FHLB and FNMA debentures........ 3,643 1,010
FHLMC Stock..................... 1,275 1,035
Tax-Exempt Securities........... 1,668 1,005
SLMA asset backed note.......... 1,992 --
Corporate debt securities....... 990 --
-------- --------
Total investment securities... $ 11,966 $ 5,333
========== ======
-15-
<PAGE>
Investment Portfolio Maturities
The following table sets forth certain information regarding the
carrying values, weighted average yields and maturities of the Bank's investment
securities portfolio at June 30, 1999.
<TABLE>
<CAPTION>
At June 30, 1999
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment
---------------- ----------------- ----------------- ------------------- ----------------
Securities
----------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tax-exempt Securities(1)..... $ -- --% $ 736 4.86% $ 395 4.63% $ 537 8.00% $ 1,668 5.82%
Mutual funds................. 2,398 5.41 -- -- -- -- -- -- 2,398 5.41
FHLB and FNMA debentures..... 301 5.62 2,374 5.38 968 6.89 -- -- 3,643 5.80
FHLMC stock.................. -- -- -- -- -- -- 1,275 1.00 1,275 1.00
SLMA asset backed note...... -- -- -- -- -- -- 1,992 5.49 1,992 5.49
Corporate debt securities... -- -- 990 5.83 - -- - -- 990 5.83
------ ------- ------- ------ ------- ------ ------- ------ ------- -------
Total...................... $ 2,699 5.43% $ 4,100 5.40% $ 1,363 6.24% $ 3,804 4.34% $ 11,966 5.17%
====== ====== ======= ===== ======== ===== ======= ====== ======= ======
</TABLE>
- ----------------------------------
(1) Average yield is computed on book value basis and not on a tax equivalent
basis.
-16-
<PAGE>
Sources of Funds
General. Deposits are the major source of the Bank's funds for lending
and other investment purposes. The Bank derives funds from amortization and
prepayment of loans and, to a much lesser extent, maturities of investment
securities, borrowings, mortgage-backed securities and operations. Scheduled
loan principal repayments are a relatively stable source of funds, while deposit
inflows and outflows and loan prepayments are significantly influenced by
general interest rates and market conditions. The Bank can obtain advances from
the FHLB as an alternative to retail deposit funds. FHLB advances may also be
used to acquire certain other assets as may be deemed appropriate for investment
purposes. These advances are collateralized by the capital stock of the FHLB
held by the Bank and by certain of the Bank's mortgage loans. The Bank had $55.5
million in FHLB advances at June 30, 1999.
Deposits. The Bank currently offers regular passbook savings, money
market deposit accounts (which are actually statement savings accounts with
limited third party transfer or check writing provisions), and term certificate
accounts, primarily to consumers within its primary market area. A full range of
demand and NOW accounts are now offered, both for consumers and commercial
customers. Deposit account terms vary according to the minimum balance required,
the time period the funds must remain on deposit and the interest rate, among
other factors. As of June 30, 1999, the Bank had no brokered deposits.
Jumbo Certificate Accounts
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of June 30,
1999.
Certificates
of Deposits
-----------
Maturity Period (In Thousands)
- ---------------
Within three months............... $ 6,914
Three through six months.......... 5,525
Six through twelve months......... 4,195
Over twelve months................ 7,440
---------
$ 24,074
=========
Personnel
As of June 30, 1999, the Bank employed 36 employees with 33 working
full-time. None of the Bank's employees are represented by a collective
bargaining group. The Bank believes that its relationship with its employees is
good.
-17-
<PAGE>
REGULATION
Set forth below is a brief description of certain laws which relate to
the regulation of the Bank and the Company. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
Regulation of the Company
General. The Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Company and its non-savings association subsidiaries, should such subsidiaries
be formed, which also permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings association. This
regulation and oversight is intended primarily for the protection of the
depositors of the Bank and not for the benefit of stockholders of the Company.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank satisfies the Qualified Thrift Lender ("QTL") test. If the Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Company and any of its subsidiaries (other than the Bank or any other
SAIF-insured savings association) would become subject to restrictions
applicable to bank holding companies unless such other associations each also
qualify as a QTL and were acquired in a supervisory acquisition. See "-
Regulation of the Bank - Qualified Thrift Lender Test."
Regulation of the Bank
General. As a federally chartered, SAIF-insured savings association,
the Bank is subject to extensive regulation by the OTS and the Federal Deposit
Insurance Corporation ("FDIC"). Lending activities and other investments must
comply with various federal statutory and regulatory requirements. The Bank is
also subject to certain reserve requirements promulgated by the Federal Reserve
Board.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured
by the SAIF to a maximum of $100,000 for each insured member (as defined by law
and regulation). Insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
institution's primary regulator.
The FDIC charges an annual assessment for the insurance of deposits
based on the risk a particular institution poses to its deposit insurance fund,
depending upon the institution's risk classification. This risk classification
is based on an institution's capital group and supervisory sub-group assignment.
In addition, the FDIC is authorized to increase deposit insurance rates on a
semi-annual basis if it determines that such action is necessary to cause the
balance in the SAIF to reach the designated reserve ratio of 1.25% of
SAIF-insured deposits within a reasonable period of time. The FDIC may impose
special assessments of SAIF members to repay amounts borrowed from the U.S.
Treasury or for any other reason deemed necessary by the FDIC. Prior to
September 30, 1996, savings associations paid within a range of .23% to .31% of
domestic deposits and the SAIF was substantially underfunded. By comparison,
prior to
-18-
<PAGE>
September 30, 1996, members of the Bank Insurance Fund ("BIF"), predominantly
commercial banks, were required to pay substantially lower, or virtually no,
federal deposit insurance premiums.
Effective September 30, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the Bank of approximately
.657% of deposits held on March 31, 1995. The Bank recorded a $250,000 pre-tax
expense for this assessment for the year ended June 30, 1997, recognized in the
first fiscal quarter. Beginning January 1, 1997, deposit insurance assessments
for SAIF members were reduced to approximately .064% of deposits on an annual
basis; this rate may continue through the end of 1999. During this same period,
BIF members are expected to be assessed approximately .013% of deposits.
Thereafter, assessments for BIF and SAIF members should be the same and the SAIF
and BIF may be merged. It is expected that those continuing assessments for both
SAIF and BIF members will be used to repay outstanding Financial Corporation
bond obligations. As a result of these changes, beginning January 1, 1997, the
rate of deposit insurance assessed the Bank declined by approximately 70% from
rates in effect prior to September 30, 1996.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) a leverage ratio (core capital) equal to
at least 4% of total adjusted assets, and (3) a risk-based capital requirement
equal to 8.0% of total risk-weighted assets. The Bank's regulatory capital
exceeded all minimum regulatory capital requirements applicable to it as of June
30, 1999. Regulations that enable the OTS to take prompt corrective action
against savings associations effectively impose higher capital requirements on
savings associations.
Interest-Rate Risk (IRR). As a financial institution regulated by the
OTS, the Bank is required to measure and monitor its sensitivity to interest
rate movements. OTS-regulated institutions meeting certain conditions have the
option of utilizing the OTS-established IRR measurement model, or developing an
in-house model. The Bank has chosen to meet its IRR sensitivity modeling
requirements through use of the OTS's Net Present Value (NPV) model. This model
measures how the net present value of an institution's assets, liabilities and
off-balance-sheet items would change in the event of a range of assumed changes
in market interest rates. These computations estimate the effect on NPV of a
permanent and instantaneous change in market interest rates of plus or minus
100, 200, 300, and 400 basis points (bps). The Board has established acceptable
ranges for the NPV changes across these various scenarios.
The following table sets forth the interest-rate risk measures, as
calculated by the OTS's NPV model, for the Bank at June 30, 1999, given an
instantaneous and permanent increase in market interest rates.
Risk Measures: At June 30,
-------------- 1999
-----------
200 Basis point rate shock
Pre-shock NPV ratio: NPV as % of present value of 10.71%
assets
Exposure measure: Post-shock NPV ratio: 9.03%
Sensitivity measure: Change in NPV ratio: 168 bps
Calculations of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of market
interest rates, loan prepayments and deposit run-off, and should not be relied
upon as indicative of actual results. Further, the calculations do not
contemplate any actions the Bank may undertake in response to changes in
interest rates.
-19-
<PAGE>
Savings associations with a greater than "normal" level of interest
rate exposure may, in the future, be subject to a deduction from capital for an
interest rate risk ("IRR") component for purposes of calculating their
risk-based capital requirement.
Dividend and Other Capital Distribution Limitations. The Bank must give
the OTS 30 days advance notice of any proposed declaration of dividends to the
Company, and the OTS has the authority under its supervisory powers to prohibit
the payment of dividends to the Company. In addition, the Bank may not declare
or pay a cash dividend on its capital stock if the dividend would (1) reduce the
regulatory capital of the Bank below the amount required for the liquidation
account established in connection with the conversion from mutual to stock form
or (2) reduce the amount of capital of the Bank below the amounts required in
accordance with other OTS regulations. In contrast, the Company has fewer
restrictions on the payment of dividends.
Loans to One Borrower. Savings institutions are subject to the same
limits as those applicable to national banks, which under current regulations
limit loans to one borrower in an amount equal to 15% of unimpaired capital and
unimpaired surplus, or $500,000, whichever is greater. The Bank's maximum loan
to one borrower limit was approximately $1.8 million as of June 30, 1999.
Qualified Thrift Lender Test. Savings institutions must meet a QTL
test. If the Bank maintains an appropriate level of Qualified Thrift Investments
(primarily residential mortgages and related investments, including certain
mortgage-related securities) ("QTIs") and otherwise qualifies as a QTL, it will
continue to enjoy full borrowing privileges from the FHLB of Dallas. The
required percentage of QTIs is 65% of portfolio assets (defined as all assets
minus intangible assets, property used by the institution in conducting its
business and liquid assets equal to 20% of total assets). Certain assets are
subject to a percentage limitation of 20% of portfolio assets. In addition,
savings associations may include shares of stock of the FHLBs, FNMA and FHLMC as
qualifying QTIs. As of June 30, 1999, the Bank was in compliance with its QTL
requirement.
Liquidity Requirements. All savings associations are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Dallas, which is one of 12 regional FHLBs that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW, and Super
NOW checking accounts) and non-personal time deposits. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve Board may be
used to satisfy the liquidity requirements that are imposed by the OTS. At June
30, 1999, the Bank was in compliance with these requirements.
Item 2. Description of Property.
- ---------------------------------
-20-
<PAGE>
The Bank owns its main office located at 221 West Aztec Avenue, Gallup,
New Mexico. The Bank leases additional office space across the street from its
main office.
Item 3. Legal Proceedings
- --------------------------
Neither the Company nor the Bank are engaged in any legal proceedings
of a material nature at the present time. From time to time the Bank is a party
to legal proceedings in the ordinary course of business wherein it enforces its
security interest in mortgage loans made by it.
Item 4. Submission of Matters to a Vote of Security - Holders
- --------------------------------------------------------------
Not applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
The information contained under the section captioned "Stock Market
Information" in the Company's Annual Report to Stockholders for the fiscal year
ended June 30, 1999 (the "Annual Report") is incorporated herein by reference.
The registrant has declared the following cash dividends during the
past 2 fiscal years.
Quarter ended Cash dividend per share
------------- -----------------------
June 30, 1999 $ 0.08
March 31, 1999 0.075
December 31, 1999 0.075
September 30, 1998 0.075
June 30, 1998 0.075
March 31, 1998 0.10
December 31, 1997 0.10
September 30, 1997 0.10
Item 6. Management's Discussion and Analysis or Plan of Operation
- ------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
Item 7. Financial Statements
- -----------------------------
The Company's consolidated financial statements listed under Item 13
herein are incorporated herein by reference.
-21-
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
- --------------------
There were no changes in or disagreements with accountants on
accounting and financial disclosure during the two most recent fiscal years.
PART III
Item 9. Directors and Executive Officers, Promoters and Control Persons;
- --------------------------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act
- -------------------------------------------------
The information contained under the section captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Proxy Statement is
incorporated herein by reference.
Item 10. Executive Compensation
- --------------------------------
The information contained under the section captioned "Executive
Compensation" in the Proxy Statement is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information contained under the section captioned "Voting
Securities and Principal Holders Thereof" and "Proposal I - Election of
Directors" in the Proxy Statement is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information contained under the section captioned "Certain
Relationships and Related Transactions" in the Proxy Statement is incorporated
herein by reference.
Item 13. Exhibits, List and Reports on Form 8-K
- ------------------------------------------------
(a) The Consolidated Financial Statements and Independent Auditor's Report
included in the Annual Report, listed below, are incorporated herein by
reference.
1. Independent Auditor's Report
2. GFSB Bancorp, Inc.
(a) Consolidated Statement of Financial Condition at June
30, 1999 and 1998.
(b) Consolidated Statements of Earnings for each of the
years in the two-year period ended June 30, 1999
(c) Consolidated Statements of Stockholders' Equity for
each of the years in the two-year period ended June 30,
1999
(d) Consolidated Statements of Cash Flows for each of the
years in the two-year period ended June 30, 1999
-22-
<PAGE>
(e) Notes to Consolidated Financial Statements
The following exhibits are included in this Report or
incorporated herein by reference:
3. (a) List of Exhibits
3.1 Certificate of Incorporation of GFSB Bancorp, Inc.*
3.2 Bylaws of GFSB Bancorp, Inc.*
10.1 1995 Stock Option Plan**
10.2 Management Stock Bonus Plan**
13 1999 Annual Report to Stockholders
21 Subsidiaries of the Issuer
23 Consent of Neff & Ricci LLP
27 Financial Data Schedule (in electronic filing only)
(b) No reports on Form 8-K were filed during the last
quarter of the period covered by this Report.
* Incorporated herein by reference to exhibits 3(i)(Certificate of
Incorporation) and 3(ii)(Bylaws) to the Registration Statement on Form
S-1 of the Registrant (File No. 33-90400) initially filed with the
Commission on March 17, 1995.
** Incorporated by reference to the identically numbered exhibits of the
Annual Report on Form 10- KSB for the fiscal year ended June 30, 1997
(File No. 0-25854) filed with the SEC.
-23-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GFSB BANCORP, INC.
Date: September 28, 1999 By: /s/Jerry R. Spurlin
----------------------------------
Jerry R. Spurlin
President
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/Dr. Wallace R. Phillips By: /s/Jerry R. Spurlin
------------------------------ ---------------------------------
Dr. Wallace R. Phillips Jerry R. Spurlin
Chairman of the Board President
(Principal Executive, Financial
and Accounting Officer)
Date: September 28, 1999 Date: September 28, 1999
By: /s/Richard C. Kauzlaric By: /s/James Nechero, Jr.
----------------------- ---------------------------------
Richard C. Kauzlaric James Nechero, Jr.
Director Director and Assistant Secretary
Date: September 28, 1999 Date: September 28, 1999
By: /s/ Vernon I. Hamilton By:
---------------------- ---------------------------------
Vernon I. Hamilton Michael P. Mataya
Director Director
Date: September 28, 1999 Date: September ____, 1999
By: /s/ Charles L. Parker, Jr. By: /s/George S. Perce
-------------------------- ---------------------------------
Charles L. Parker, Jr. George S. Perce
Director and Treasurer Director and Secretary
Date: September 28, 1999 Date: September 28, 1999
GFSB BANCORP, INC.
ANNUAL REPORT - 1999
<PAGE>
C O N T E N T S
PAGE
LETTER TO STOCKHOLDERS.......................................................1
CORPORATE PROFILE AND STOCK MARKET INFORMATION.............................2-3
SELECTED FINANCIAL AND OTHER DATA..........................................4-5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.....................................6-17
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS..........................18
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION...........................19-20
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS..........21-22
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY..............23-24
CONSOLIDATED STATEMENTS OF CASH FLOWS...................................25-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..............................27-55
OFFICE LOCATION AND OTHER CORPORATE INFORMATION.............................56
<PAGE>
To Our Stockholders:
We are pleased to present to you our fourth annual stockholders' report. This
report covers the fourth full year of operations since the successful completion
on June 29, 1995 of the conversion of Gallup Federal Savings Bank (the "Bank")
from a federally chartered mutual savings association to a federally chartered
stock savings bank and the acquisition of all of the issued and outstanding
capital stock of the Bank by GFSB Bancorp, Inc. (the "Company").
Net earnings for the Company for the year ended June 30, 1999 were $1,015,547,
an increase of $138,338 or 16% over net earnings for the previous year. On a per
share basis the Company earned $.99 per share compared with $.78 per share last
year.
The Company's total assets increased to $150,753,849 at June 30, 1999,
representing growth of $27,544,768 or 22% from total assets of $123,209,801 at
June 30, 1998. Deposits also increased $11,850,180 or 17% from $69,379,141 at
June 30, 1998 to $81,229,321 at June 30, 1999.
We do appreciate the confidence you share in our Company. We are going through a
tremendous growth period. Our directors and employees are doing everything we
can to build customer loyalty, customer base and continue to make a substantial
positive impact on our community. Thank you very much for your support, and we
certainly appreciate your banking with us.
Sincerely,
/s/ W.R. Phillips, D.D.S. /s/ Richard C. Kauzlaric
- -------------------------------------- -----------------------------------
W.R. Phillips, D.D.S. Richard C. Kauzlaric
Chairman of the Board Chairman of the
of the Company Board of the Bank
/s/ Jerry R. Spurlin /s/ Richard P. Gallegos
- -------------------------------------- -----------------------------------
Jerry R. Spurlin Richard P. Gallegos
President of the Company President of the Bank
September 15, 1999
<PAGE>
GFSB Bancorp, Inc.
Corporate Profile
GFSB Bancorp, Inc. (the "Company") is a Delaware corporation organized in March
1995 at the direction of the Board of Directors of Gallup Federal Savings Bank
(the "Bank") to acquire all of the capital stock that the Bank issued upon its
conversion from the mutual to stock form of ownership. The Company is a unitary
savings and loan holding company which, under existing laws, generally is not
restricted in the types of business activities in which it may engage, provided
that the Bank retains a specified amount of its assets in housing-related
investments. At the present time, because the Company does not conduct any
active business, the Company does not employ any persons other than officers of
the Bank, but utilizes the support staff of the Bank from time to time.
The Bank is a federally chartered stock savings bank headquartered in Gallup,
New Mexico. The Bank was founded in 1934. Its deposits are federally insured by
the Savings Association Insurance Fund ("SAIF"), administered by the Federal
Deposit Insurance Corporation, and the Bank is a member of the Federal Home Loan
Bank ("FHLB") System. The Bank is a community oriented, full service retail
savings institution offering primarily traditional mortgage loan products. It is
the Bank's intent to remain an independent community savings bank serving the
local banking needs of its community.
The Bank attracts deposits from the general public and uses such deposits
primarily to invest in residential lending on owner occupied properties. The
Bank also makes consumer, commercial real estate, commercial, construction, and
multi-family loans.
Stock Market Information
Since its issuance on June 29, 1995, the Company's $0.10 par value common stock
has been traded in the over-the-counter market. The following table reflects the
stock prices as published by the Nasdaq Small-Cap Market for the most recent two
fiscal years. The quotations reflect inter-dealer prices, without retail
mark-up, markdown, or commission, and may not represent actual transactions.
Bid Prices
Quarter Ended High Low
------------------- ------ ------
September 30, 1997* 14.670 14.000
December 31, 1997* 14.080 13.500
March 31, 1998* 15.670 15.000
June 30, 1998* 16.750 15.250
September 30, 1998 16.750 13.000
December 31, 1998 15.500 13.625
March 31, 1999 15.250 14.250
June 30, 1999 14.750 13.125
* Table reflects a 50% stock dividend effective March 31, 1998
2
<PAGE>
GFSB Bancorp, Inc.
Corporate Profile (continued)
The number of stockholders of record of common stock as of the record date
September 15, 1999 ("Record Date"), was approximately 214. This does not reflect
the number of persons or entities who held stock in nominee or "street" name
through various brokerage firms. As of the Record Date, there were 981,308
shares outstanding.
The Company's ability to pay dividends to stockholders is subject to the
requirements of Delaware law. No dividend may be paid by the Company unless its
board of directors determines that the Company will be able to pay its debts in
the ordinary course of business after payment of the dividend. In addition, the
Company's ability to pay dividends is dependent, in part, upon the dividends it
receives from the Bank. The Bank may not declare or pay a cash dividend on any
of its stock if the effect thereof would be to cause the Bank's regulatory
capital to be reduced below (1) the amount required for the liquidation account
established in connection with the Bank's conversion from mutual to stock form,
or (2) the regulatory capital requirements imposed by the Office of Thrift
Supervision ("OTS"). Total dividends declared by the Company during the year
ended June 30, 1999 were $297,732. Total dividends declared by the Company
during the year ended June 30, 1998 were $309,102.
The balance of this page intentionally left blank
<PAGE>
GFSB BANCORP, INC.
SELECTED FINANCIAL AND OTHER DATA
Financial Condition (Dollars in Thousands)
At June 30, 1999 1998 1997
Assets $150,754 $123,209 $ 93,793
Loans receivable, net 96,565 75,837 52,022
Mortgage-backed securities 31,712 33,551 32,070
Stock of FHLB 2,815 1,965 1,060
Investment securities 11,973 5,188 4,342
Cash and cash equivalents 5,147 4,538 2,994
Deposits 81,229 69,379 57,872
Advances from the FHLB 55,541 38,248 20,930
Retained earnings (substantially restricted) 8,759 8,042 7,514
Unrealized gain on available for sale
securities, net (other comprehensive income) 515 692 557
Summary of Operations
(Dollars in Thousands)
Year ended June 30,
Interest income $ 9,651 $ 8,259 $ 6,079
Interest expense 5,599 5,009 3,389
Net interest income 4,052 3,340 2,690
Provision for loan losses 138 63 21
Net interest income after provision for
loan losses 3,913 3,187 2,669
Non-interest income:
Income from real estate operations -- -- --
Other 243 104 49
Total non-interest income 243 104 49
Non-interest expense:
Compensation and benefits 1,363 973 835
Professional fees 66 104 92
Occupancy 283 166 146
Advertising 71 50 46
Data processing 202 137 98
Insurance and SAIF premiums 65 55 330
Other and stock subscription services 451 389 252
Total non-interest expense 2,501 1,874 1,799
Earnings before income taxes 1,655 1,416 919
Income tax expense 639 539 283
Net earnings $ 1,016 $ 877 $ 636
4
<PAGE>
GFSB BANCORP, INC.
SELECTED FINANCIAL AND OTHER DATA - CONTINUED
Selected Operating Ratios
Year ended June 30, 1999 1998 1997
Performance ratios:
Return on average assets (net income
divided by average total assets) .75% 0.81% 0.76%
Return on average equity (net income
divided by average equity) 7.76 6.09 4.34
Average interest earning assets to average
interest-bearing liabilities 1.13X 1.16X 1.19X
Net interest income after provision for
loan losses, to total other expenses 156.46% 170.06% 148.36%
Net interest rate spread 2.53% 2.46% 2.52%
Net yield on average interest-earnings
assets 3.11% 3.25% 3.34%
Equity ratios:
Average equity to average assets ratio
(average equity divided by average total
assets) 9.70 13.95 17.54
Equity to assets at period end 8.25 11.54 14.87
Assets quality ratios:
Non-performing loans to total assets .15 .57 .15
Non-performing loans to net loans .23 .93 .26
Allowance for loan losses, REO and other
Repossessed assets to non-performing
assets 271.43 129.47 247.63
Allowance for loan losses to total loans,
net .46 .51 .65
Dividend payout ratio: 31.9% 37.4% 53.7%
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
GFSB Bancorp, Inc., is the 100% owner of Gallup Federal Savings Bank ("the
Bank"), and the Bank is currently the only entity with which the holding company
has an ownership interest. The Bank is primarily engaged in the business of
accepting deposit accounts from the general public and using such funds to
originate mortgage loans for the purchase and refinancing of one-to-four-family
homes located in its primary market area. The Bank also originates multi-family,
commercial real estate, construction, consumer and commercial business loans and
purchases participations in one-to-four family mortgage loans. The Bank also
purchases mortgage-backed and investment securities. The largest components of
the Bank's net earnings are net interest income, which is the difference between
interest income and interest expense, and 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 annual report
on Form 10-KSB 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; disruption in data processing caused by
computer malfunctions associated with the year 2000 problem that are greater
than anticipated; 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 any forward-looking statement, whether
written or oral, that may be made from time to time by or on behalf of the
Company.
6
<PAGE>
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 also purchases 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
7
<PAGE>
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.
Net Portfolio Value Tables
In order to encourage institutions to reduce their interest rate risk, the OTS
adopted a final rule in August 1993 incorporating an interest rate risk ("IRR")
component into the risk-based capital rules. The IRR component is a dollar
amount that will be deducted from total capital for the purpose of calculating
an institution's risk-based capital requirement and is measured in terms of the
sensitivity of its NPV to changes in interest rates. NPV is the difference
between incoming and outgoing discounted cash flows from assets, liabilities,
and off-balance sheet contracts. An institution's IRR is measured as the change
to its NPV as a result of a hypothetical 200 basis point change in market
interest rates divided by the estimated economic value (i.e., present value) of
its assets. A resulting change in NPV of more than 2% of the estimated market
value of its assets will require the institution to deduct from its capital 50%
of that excess change. The OTS calculates an institution's NPV based on
financial data submitted by the institution pursuant to its required reports and
using a complex computer model that the OTS has devised. The rules provide that
the OTS will calculate the IRR component quarterly for each institution. The
Bank, based on asset size and risk-based capital, is exempt from this rule. The
following table presents the Bank's NPV at June 30, 1999 as calculated by the
OTS, based on information provided to the OTS by the Bank. Actual experience may
differ from the components of this table.
* INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE (NPV)
Change NPV
in Rates $ Amount $ Change % Change Ratio Change
(Dollars in Thousands)
+400 bp $ - - -% -% - bp
+300 bp 11,372 (5,110) -31% 7.86% -285 bp
+200 bp 13,367 (3,115) -19% 9.03% -168 bp
+100 bp 15,137 (1,345) -8% 10.02% -69 bp
0 bp 16,482 10.71%
-100 bp 17,272 790 +5% 11.06% +35 bp
-200 bp 17,570 1,089 +7% 11.11% +40 bp
-300 bp 17,823 1,341 +8% 11.14% +43 bp
-400 bp - - -% -% - bp
* Denotes rate shock used to compute interest rate risk capital component.
8
<PAGE>
Average Balance Sheet
The following table sets forth certain information relating to the Bank's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from month-end balances. Management does
not believe that the use of month-end balances instead of daily average balances
has caused any material differences in the information presented.
<TABLE>
<CAPTION>
Year ended June 30, 1999 Year ended June 30, 1998
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
(Dollars in Thousands) (Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable (1) $ 88,355 $7,465 8.45% $ 60,042 $5,590 9.31%
Investment securities and
Mortgage-backed securities 38,333 1,977 5.16% 36,401 2,493 8.08%
Other interest-earning
assets (2) 3,542 207 5.84% 3,551 176 4.96%
Total interest-earning assets 130,230 9,651 7.41% 99,994 8,259 8.26%
Non-interest-earning assets 4,759 3,272
Total assets $134,989 $103,266
Interest-bearing liabilities:
Transaction accounts 4,853 99 2.04% $ 3,609 62 1.72%
Passbook savings 4,450 107 2.40% 3,563 107 3.00%
Money market accounts 9,964 333 3.34% 7,633 324 4.24%
Certificates of deposit 49,678 2,689 5.41% 43,017 2,598 6.04%
Other liabilities 45,802 2,371 5.18% 26,811 1,917 7.15%
Total interest-bearing
liabilities 114,747 5,599 4.88% 86,318 5,009 5.80%
Non-interest bearing
liabilities 7,151 2,540
Total liabilities $121,898 $88,858
Stockholders' equity 13,091 14,606
Total liabilities and
stockholders' equity $134,989 $103,266
Net interest income $4,052 $3,250
Interest rate spread (3) 2.53% 2.46%
Net yield on interest-
earning assets (4) 3.11% 3.25%
Ratio of average interest-
earning assets to average
interest-bearing liabilities 1.13X 1.16X
</TABLE>
(1) Average balances include non-accrual loans.
(2) Includes interest-bearing deposits in other financial institutions.
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
9
<PAGE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in interest
income and interest expense of the Bank for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the change in average volume). The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
Year ended June 30, Year ended June 30,
1999 vs. 1998 1998 vs. 1997
Increase (Decrease) Increase (Decrease)
Due to Due to
--------------------------------------------------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
(Dollars in Thousands) (Dollars in Thousands)
Interest income:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable $2,636 $ (516) $ (243) $1,877 $ 1,388 $ 230 $ 82 $1,700
Mortgage-backed securities and
investment securities 156 (1,063) (56) (963) 150 685 50 885
Other interest-earning assets - 31 - 31 45 (1) - 44
------ ------- ------ ----- ------- ------ --- -----
total interest-earning assets 2,792 (1,548) (299) 945 1,583 914 132 2,629
Interest expense:
Savings accounts 27 (21) (5) 1 20 -- 667 687
Money markets 99 (69) (21) 9 (27) 17 (1) (11)
Certificates of deposit 402 (271) (41) 90 313 128 19 460
Other liabilities 1,358 (528) (374) 456 590 306 228 1,124
------ ------- ------ ----- ------- ------ --- -----
Total interest-bearing liabilities 1,886 (889) (441) 556 896 451 913 2,260
------ ------- ------ ----- ------- ------ --- -----
Net change in interest income $ 906 $ (659) $ 142 $ 389 $ 687 $ 463 $(781) $ 369
====== ===== ====== ====== ======= ====== ==== =====
</TABLE>
Financial Condition
General. The Company's total assets increased $27.5 million or 22.4% from $123.2
million at June 30, 1998 to $150.8 million at June 30, 1999. This increase was
primarily the result of a $7.2 million increase in cash and investment
securities, offset by a decrease in mortgage-backed securities of $1.8 million,
and a $20.7 million increase in the Bank's net loan portfolio. The majority of
the increases are directly attributable to the efforts of management to increase
investment and lending activity. During the same period, deposits increased
$11.9 million from $69.3 million at June 30, 1998 to $81.2 million at June 30,
1999. 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
Federal Home Loan Bank (FHLB) increased $17.3 million from $38.2 million at June
30, 1998 to $55.6 million at June 30, 1999. These additional borrowings funded
purchases of loans, securities and mortgage loan participations. The Bank had
$515,000 and $692,000 in unrealized gains (net of deferred taxes) at June 30,
1999 and 1998, respectively, from net market gains on the Bank's
available-for-sale investment and mortgage-backed securities portfolio.
Unrealized gains and losses do not impact the Bank's earnings until they are
realized. Unrealized gains and losses are presented as accumulated other
comprehensive earnings for financial statement purposes.
10
<PAGE>
Comparison of Operating Results for Years Ended June 30, 1999 and 1998
General. Net earnings increased $138,000 or 15.8 % for the year ended June 30,
1999 from the year ended June 30, 1998. This increase was primarily the result
of an increase in net interest earnings of approximately $802,000, and an
increase in non-interest earnings of $139,000 offset by an increase in
non-interest expense of $627,000, an increase in provision for loan losses of
$75,000 an increase in provision for income tax expense of $100,000.
Other comprehensive earnings decreased by $176,586.
Total Interest Earnings. Total interest earnings increased $1.4 million or 16.9%
from $8.3 million for the year ended June 30, 1998 to $9.7 million for the year
ended June 30, 1999. The increase was primarily due to the $1.9 million increase
in the loan portfolio.
Interest Expense. Total interest expense increased $590,000 or 11.8% from $5.0
million for the year ended June 30, 1998 to $5.6 million for the year ended June
30, 1999. This increase was primarily due to an increase of $454,000 of interest
incurred on increased Federal Home Loan Bank advances and a general increase in
the deposit base of $11.9 million.
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
borrowers' ability to repay loans, estimated value of the underlying collateral,
and current and expected market conditions. The allowance for loan losses was
$443,000 and $387,000 at June 30, 1999 and 1998, respectively. The provision for
loan losses was $138,000 and $63,000 for the years ended June 30, 1999 and 1998,
respectively. Based on a historical trend of limited losses on residential loans
and nonresidential loans, the amount of the loan loss provision allocated to all
loan types has 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
Company's net earnings.
Non-Interest Earnings. Non-interest earnings increased $139,000 or 133.4% from
$104,000 for the year ended June 30, 1998 to $243,000 for the year ended June
30, 1999. This was primarily due to an increase in service charge income of
$81,000 and an increase in net gains from sales of loans of $45,000.
Non-Interest Expense. Total non-interest expense increased $627,000 or 33.5%
from $1.9 million for the year ended June 30, 1998 to $2.5 million for the year
ended June 30, 1999. This increase was primarily due to an increase in
compensation and benefits of $390,000 from the hiring of additional staff to
handle growth, general salary increases, and increases due to accrual for
stock-based programs. Other expenses in compensation and benefits include
expenses for performance bonuses and an increase in education and training due
to employee training for the new operating system and application software.
Other factors were increases in occupancy costs of $117,000, data processing
costs of $64,000, advertising costs of $22,000, an increase in stationery,
printing and office supplies of $17,000, an increase in postage of $13,000, an
increase in supervisory exam fees of $4,000, an increase in operating costs of
$18,000, an increase in stock services of $8,000, and an increase in insurance
expense of $10,000, offset by a decrease in professional fees of $38,000. 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 and computer equipment purchases. The increase in data processing
expense is primarily due to year 2000 expense and an increase in organizational
dues and subscriptions. The increase in advertising costs is a result of efforts
of the Bank to achieve growth in deposits through attracting new customers. The
increase in stock services is primarily
11
<PAGE>
due to a fee paid to the OTS for filing a change of control application. The
decrease in professional fees is primarily due to a decrease in legal fees and
audit and accounting accruals.
Non-interest expense is expected to materially increase in future periods
primarily due to growth of the Bank and the resulting expansion by the Bank in
staffing and marketing. The increase in non-interest expense may result in a
decrease in net income in future periods due to this growth and expansion and
related costs. The Company believes that this expansion should enhance long term
shareholder value and does not expect the decrease in earnings to be as great in
the future, assuming the expansion begins to result in increased interest income
and non-interest income. The lag in time between the expansion and the hoped for
increases in interest income and non-interest income could be approximately two
years. This statement of beliefs concerning this expansion and the impact of
this expansion on the Company is a forward-looking statement. The Private
Securities Litigation Reform Act of 1995 (the "Act") provides protection to the
Company in making certain forward looking statements that are accompanied by
meaningful cautionary statements that identify important factors that could
cause actual results to differ materially from the forward looking statement. It
is expected that the expansion will result in both increased net interest income
after provision for loan losses and increased other income. However, the
increase in other expenses may more offset these other increases during the next
two years. If the expansion is successful, net interest income after provision
for loan losses and other income will increase in greater dollar amounts than
the expected increase in other expense. However, as with any expansion, if the
additional personnel and related costs do not ultimately result in sufficient
increased loan and deposit activity and increased net interest and other income,
these expenses would continue to have an adverse effect on net income in future
periods.
Income Tax Expense. Income tax expense increased $100,000 or 18.5% from $539,000
for the year ended June 30, 1998 to $639,000 for the year ended June 30, 1999.
This increase was primarily attributable to the increase in pre-tax earnings of
$238,000. Deferred tax liabilities decreased by $161,237 as unrealized
investment gains (other comprehensive earnings) decreased.
Liquidity and Capital Resources
The Company 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
savings institutions maintain liquid assets of not less than 5% of its average
daily balance of net withdrawable deposit accounts and borrowings payable in one
year or less, of which short-term liquid assets must consist of not less than 1%
with the qualifying investments limited to those having maturities of five years
or 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 June 30, 1999 the
Bank's liquidity, as measured for regulatory purposes, was 5.69%. The Bank
adjusts liquidity as appropriate to meet its asset/liability objectives.
The Bank's primary sources of funds are deposits, borrowings, 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 and deposit fluctuations.
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 June 30, 1999, cash and cash equivalents totaled
$5.1 million. The Bank has another source of liquidity if a need for additional
12
<PAGE>
funds should arise, that being FHLB of Dallas advances. The Bank also has the
ability to borrow against mortgage-backed and other securities. At June 30,
1999, the Bank had outstanding borrowings from the FHLB of Dallas of $55.4
million. 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 year ended June 30, 1999, the Bank
originated $56.3 million in total loans (including loan participations
purchased), of which $36 million were mortgage loans. Another investment
activity of the Bank is the investment of funds in U.S. Treasury and agency
securities, mortgage-backed securities, federal funds, readily marketable equity
securities, and FHLB of 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 from 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 $1 million for the years ended June 30, 1999 and 1998. Net cash used for
investing activities consisting primarily of disbursement of loan originations
and investment and mortgage-backed security purchases, offset by principal
collections on loans and proceeds from the maturities of investment securities,
were $27 million and $28 million for the years ended June 30, 1999 and 1998,
respectively. Net cash provided from financing activities consisting primarily
of net activity in deposit and escrow accounts and the proceeds received from
FHLB advances, were $27 million and $28 million for the years ended June 30,
1999 and 1998, respectively.
Cash flows from operating activities increased $70,000 or 6.5% from the year
ended June 30, 1998 to the year ended June 30, 1999. This increase was primarily
due to an increase in net earnings, an increase in the amortization of
investment and mortgage backed securities premiums (discounts), an increase in
the provision for loan losses and the decrease of loan origination fees. For the
same periods, cash flows used by investing activities decreased $499,000
primarily due to an decrease in net loan originations and the decrease in the
purchase of FHLB stock, offset by an increase in purchases of mortgage backed
and investment securities. Cash flows provided from financing activities
decreased $1.5 million from the year ended June 30, 1998 to the year ended June
30, 1999 primarily due to an the repurchase of company stock under the stock
repurchase program.
The Bank anticipates that it will have sufficient funds available to meet its
current commitments. As of June 30, 1999, the Bank had commitments to fund loans
of $7 million. Certificates of deposit scheduled to mature in one year or less
totaled $34 million. Based on historical withdrawals and outflows, on internal
monthly deposit reports monitored by management, and the fact that the Bank does
not accept any brokered deposits, management believes that a majority of
deposits will remain with the Bank. As a result, no adverse liquidity effects
are expected.
At June 30, 1999, the Bank exceeded each of the three OTS capital requirements
on a fully phased in basis.
The Year 2000 Issue
By now almost everyone has heard about the Year 2000 computer problem. Every
major company has a potential problem caused by computer hardware and software
developed to use two digits to identify the year instead of four, i.e. 1995 is,
in many cases, input, stored, sorted, and calculated as "95". Similarly, the
year 2000, being read as "00", may be treated as the year 1900, thereby causing
13
<PAGE>
a variety of problems such as the inability to compute payment due dates or
interest correctly. Rapid and accurate data processing is essential to the
operation of the Bank.
The Bank's Board of Directors has adopted an action plan and a testing plan for
addressing the Year 2000 issue. An internal committee has been appointed by the
Board to manage these efforts. Management has been charged with the
responsibility of assuring Year 2000 compliance within time frames dictated by
sound business practice and the Federal Financial Institutions Examination
Council. Management reports to the Board of Directors monthly on Year 2000
progress.
The Bank has identified and evaluated equipment and systems that may potentially
be impacted. The identification process included information technology and
communication systems such as personal computers, local area networks and
servers, ATM's, modems, printers, copy machines, facsimile machines, telephones
and the operating systems and software for these systems. It also included
non-information technology systems, such as heating, air conditioning and vault
controls, alarm systems, surveillance systems, time clocks, coin and currency
counters, and postage meters.
The Bank is dependent on a service bureau for its major data processing
functions. Management is monitoring the service bureau's Year 2000 compliance
efforts closely. This monitoring includes membership and active participation in
a user group made up of client institutions of the service bureau. The service
bureau is already running Year 2000 compliant software. The Bank and
substantially all of the service bureau's clients have completed intensive
two-week testing periods with the service bureau with excellent results.
Contact has been made with the Bank's other outside servicers and major vendors
to ascertain their individual levels of Year 2000 compliance. The Bank and/or
its major service bureau have conducted extensive Year 2000 testing of hardware,
software and communications these vendors. From test results, vendor responses
and/or certifications of Year 2000 compliance the Bank has reasonable
expectations that it should not be severely impacted by the Year 2000 from these
systems. This effort will continue and will include additional testing
procedures.
The Bank has contacted major borrowers in order to help them be aware of the
Year 2000 issue and to determine their state of readiness for the Year 2000.
Based on responses received the Bank has no reason to doubt the ability of any
of these customers to continue to operate effectively in the Year 2000.
Management believes that most of the Bank's residential borrowers are not
dependent on their computers for income. The Bank also believes that none of its
commercial borrowers are so large or complex that a Year 2000 problem would
render them unable to collect revenue or rent and in turn continue to make loan
payments to the Bank.
The Bank has experienced substantial growth in recent years, which, independent
of the Year 2000 issue, created the need to upgrade some hardware and software.
The major upgrade, including new servers and operating system for the Bank's
local area network, personal computers, and off-the-shelf software, is
considered a normal result of the growth and rapid changes in technology. The
upgrade was completed during the fiscal year ended June 30, 1999. A side benefit
of this upgrade was a major improvement in Year 2000 compliance of the systems
being upgraded. The upgrade is not expected to have a material effect on the
financial performance of the Bank.
Senior management has developed an emergency preparedness/business recovery plan
for continuation of services to the Bank's customers in the event of systems or
communication failures at the beginning of the Year 2000. The plan is being
continually refined, and management believes that the Bank will be able to
continue to operate in the Year 2000 even if some systems fail. Near the end of
December 1999, the bank will generate paper and spreadsheet backup of all
customer and general ledger accounts. Due to the size of the Bank, management
believes that the Bank will be able to operate with transactions processed
manually until normal operations can be restored. This
14
<PAGE>
procedure could require changing of schedules and hiring of temporary staff,
which would increase cost of operations. If this procedure were to continue for
any extended period of time, or if the bank ultimately had to change data
service providers, the cost could be material.
Year 2000 expense for the year ended June 30, 1999 was $48,000. The Bank's
operating budget for the fiscal year ending June 30, 2000, includes $78,000 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 are Year 2000 administration, testing, remediation, and contingency
planning, and his salary is allocated to Year 2000 expense. The budget
allocation for Year 2000 expense is expected to cover personnel and other costs,
including some contingency costs for operation under the contingency plan.
Should the Bank have to resort to alternative operating procedures due to major
systems or communication failures at the beginning of the Year 2000, additional
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.
As of June 30, 1999, the Bank has completed more than 97% of its Year 2000
project compliance efforts.
Stock Repurchase Program
During the fiscal year ended June 30, 1999, the Company repurchased 176,234
shares of its $0.10 common stock under a stock repurchase program. All of the
shares purchased under the program have been retired as authorized but unissued.
The Company believes that even with the repurchase program, the Company has
sufficient capital and that the Bank will be able to continue to meet its
regulatory capital requirements.
On May 20, 1999, the Company issued a press release announcing its intention to
repurchase up to 5 percent (49,965 shares) of the Company's common stock. As of
July 21, 1999, 22,270 shares have been repurchased and 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
15
<PAGE>
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.
Recent Legislation - 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 currently. Larger thrifts must use the
specific charge-off method regarding its bad debts. Any reserve amounts added
after 1987 are 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, 1999, 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,
1999. Future recapture of the Bank's bad-debt reserves will not have an adverse
effect on future net earnings.
Impact of Certain Accounting Standards
In October 1995, the FASB issued SFAS No. 123 Statement on 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.
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 application.
In February 1998, the FASB issued SFAS No. 132, Employer's Disclosures about
Pensions and Other Postretirement Benefits. This statements revises disclosures
about pension and other postretirement benefit plans. It does not change the
measurement or recognition of those plans. This statement eliminates certain
disclosures from SFAS No.'s 87, 88, and 106. This statement is effective for
fiscal years beginning after December 15, 1997. This statement is currently not
applicable to the Bank.
16
<PAGE>
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. This statement is effective for fiscal
years beginning after June 15, 1999. Earlier application of this statement is
encouraged. This statement is currently not applicable to the Bank.
In October 1998, the FASB issued SFAS No. 134, Accounting for Mortgage-Backed
Securities Retained After the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise. This statement amends SFAS No. 65 to require that
after the securitization of a mortgage loan an entity engaged in mortgage
banking activities classify the resulting mortgage backed security as a trading
or held-for-sale based on the intent to sell or hold the investments. This
statement is effective for the first fiscal quarter beginning after December 15,
1998. This statement is currently not applicable to the Bank.
17
<PAGE>
Independent Auditors' Report
Board of Directors
GFSB Bancorp, Inc.
Gallup, New Mexico
We have audited the accompanying consolidated statement of financial condition
of GFSB Bancorp, Inc. (a Delaware corporation) and Subsidiary as of June 30,
1999, and the related consolidated statements of earnings and comprehensive
earnings, changes in stockholders' equity, and cash flows for the year ended
June 30, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated financial statements
of GFSB Bancorp, Inc. as of June 30, 1998, were audited by Neff & Company LLP,
who merged with Ricci and Ricci, LLC, as of January 1, 1999, and whose report
dated August 14, 1998, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of GFSB Bancorp, Inc.
and Subsidiary as of June 30, 1999, and the results of their operations and
their cash flows for the year ended June 30, 1999 in conformity with generally
accepted accounting principles.
/s/ Neff & Ricci, LLP
- --------------------------------------
Albuquerque, New Mexico
July 30, 1999
<PAGE>
GFSB BANCORP, INC.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
June 30, 1999
ASSETS
Cash and due from banks (Note 19) $ 2,839,479
Interest-bearing deposits with banks (Note 19) 2,307,736
Available-for-sale investment securities (Notes 3 and 19) 10,295,919
Available-for-sale mortgage-backed
securities (Notes 2 and 19) 31,711,838
Hold-to-maturity investment securities (Notes 3 and 19) 1,677,144
Stock of Federal Home Loan Bank,
at cost, restricted 2,815,100
Loans receivable, net, substantially
pledged (Notes 4 and 19) 96,564,840
Accrued interest and dividends
receivable (Notes 5 and 19) 863,975
Premises and equipment (Note 6) 1,404,616
Prepaid and other assets 204,825
Deferred tax asset (Note 11) 68,377
------------
Total assets $ 150,753,849
============
19
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
Transaction and NOW accounts (Notes 7 and 19) $ 12,874,979
Savings deposits (Notes 7 and 19) 16,962,513
Time deposits (Notes 7 and 19) 51,391,829
Accrued interest payable (Note 19) 276,328
Advances from borrowers for taxes and insurance 329,298
Accounts payable and accrued liabilities 426,634
Deferred income taxes (Note 11) 265,317
Dividends declared and payable 74,748
Advances from the Federal Home
Loan Bank (Notes 17 and 19) 55,540,826
Income taxes payable 180,069
------------------
Total liabilities 138,322,541
COMMITMENTS AND CONTINGENCIES
(Notes 4, 10, and 22) -
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 1,500,000 shares authorized; issued and
outstanding 993,578 shares, adjusted for 40,035 shares of unallocated
Management Stock Bonus Plan shares held by the
Company's wholly owned subsidiary 95,354
Preferred stock, $.10 par value, 500,000
shares authorized; no shares issued or outstanding -
Additional paid-in-capital 3,432,687
Unearned ESOP stock (Note 13) (371,183)
Retained earnings, substantially restricted (Note 8) 8,759,425
Accumulated other comprehensive earnings (Note 14) 515,025
------------------
Total stockholders' equity 12,431,308
------------------
Total liabilities and stockholders' equity $ 150,753,849
==================
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
20
<PAGE>
GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF
EARNINGS AND COMPREHENSIVE EARNINGS
Years Ended June 30, 1999 and 1998
1999 1998
INTEREST EARNINGS Loans receivable (Note 4)
Mortgage loans $ 6,312,252 4,846,416
Commercial loans 444,158 262,132
Share and consumer loans 393,918 302,561
Service fee income 314,833 178,993
Investment and mortgage-backed securities 1,978,827 2,492,849
Other interest-earning assets 206,549 175,959
---------------------------
Total interest earnings 9,650,537 8,258,910
INTEREST EXPENSE
Deposits (Note 7) 3,227,770 3,092,086
Advances from Federal Home Loan Bank 2,370,969 1,916,851
---------------------------
5,598,739 5,008,937
Net interest earnings 4,051,798 3,249,973
Provision for loan losses (Note 4) 138,417 63,217
---------------------------
Net interest earnings after
provision for loan losses 3,913,381 3,186,756
NON-INTEREST EARNINGS
Service charge income 166,668 85,796
Miscellaneous income 23,692 10,422
Net gains from sales of loans 52,193 7,685
---------------------------
Total non-interest earnings 242,553 103,903
NON-INTEREST EXPENSE
Compensation and benefits 1,362,562 972,663
Insurance 65,130 54,860
Stationery, printing, and office supplies 69,532 52,281
ATM expense 41,789 41,432
Supervisory exam fees 36,474 31,698
Postage 32,836 20,302
Other 246,348 227,966
Occupancy 282,943 166,125
Data processing 201,694 137,317
The Notes to Financial Statements are an integral part of these statements.
21
<PAGE>
GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF
EARNINGS AND COMPREHENSIVE EARNINGS (CONTINUED)
Years Ended June 30, 1999 and 1998
1999 1998
Professional fees $ 66,332 103,894
Advertising 71,461 49,845
Stock services 24,141 15,785
----------------------
Total non-interest expense 2,501,242 1,874,168
----------------------
Earnings before income taxes 1,654,692 1,416,491
INCOME TAX EXPENSE (Note 11)
Currently payable 663,037 586,988
Deferred provision (benefit) (23,892) (47,706)
----------------------
639,145 539,282
----------------------
Net earnings 1,015,547 877,209
OTHER COMPREHENSIVE EARNINGS
Unrealized investment gain (loss), net of tax
of ($161,237) in 1999 and $139,553 in 1998 (176,586) 134,494
----------------------
Net comprehensive earnings $ 838,961 1,011,703
======================
Basic net earnings per share .99 .78
Dilutive net earnings per share .97 .76
Weighted average number of common
shares outstanding - basic 1,020,932 1,117,647
Weighted average number of common
shares outstanding - dilutive 1,046,558 1,153,244
The Notes to Financial Statements are an integral part of these statements.
22
<PAGE>
GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
Years Ended June 30, 1999 and 1998
Common Stock
--------------------
Shares Amount
Balances, June 30, 1997 800,708 $ 76,684
Comprehensive Earnings
Net earnings - -
Unrealized gain on available for sale
securities, net of taxes - -
Total comprehensive earnings
Distribution of stock vested under the
management stock bonus plan (Note 15) - 348
Acquisition of common stock by the Company
under the stock repurchase plan (Note 15) (35,500) (3,550)
Issuance of stock dividend (Note 20) 400,329 40,033
Released and committed to be released 11,130.0965
of shares of common stock owned by the
ESOP (Note 13) - -
Dividends declared and paid to stockholders - -
----------------------
Balances, June 30, 1998 1,165,537 113,515
Comprehensive earnings
Net earnings - -
Unrealized gain on available for sale securities,
net of taxes - -
Total comprehensive earnings
Distribution of stock vested under the management
stock bonus plan (Note 15) - 555
Adjustment of prior stock dividend on management
stock bonus plan - (1,521)
Acquisition of common stock by the Company
under the stock repurchase plan (Note 15) (176,234) (17,623)
Released and committed to be released 10,574.5950
of shares of common stock owned by the
ESOP (Note 13) - -
Stock issued upon exercise of stock options 4,275 428
Dividends declared and paid to stockholders - -
----------------------
Balances, June 30, 1999 993,578 $ 95,354
======================
23
<PAGE>
<TABLE>
<CAPTION>
Accumulated
Additional Unearned Other
Paid-in ESOP Retained Comprehensive
Capital Stock Earnings Earnings Total
------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C>
$ 6,260,680 (464,881) 7,513,536 557,117 13,943,136
- - 877,209 - 877,209
- - - 134,494 134,494
----------------
1,011,703
49,265 - - - 49,613
(577,763) - - - (581,313)
- - (40,033) - -
45,699 49,186 - - 94,885
- - (309,102) - (309,102)
-----------------------------------------------------------------------------------------------
5,777,881 (415,695) 8,041,610 691,611 14,208,922
- - 1,015,547 - 1,015,547
- - - (176,586) (176,586)
----------------
838,961
49,510 - - - 50,065
1,521 - - - -
(2,492,289) - - - (2,509,912)
56,949 44,512 - - 101,461
39,115 - - - 39,543
- - (297,732) - (297,732)
- --------------------------------------------------------------------------------------------------------
$ 3,432,687 (371,183) 8,759,425 515,025 12,431,308
========================================================================================================
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
24
<PAGE>
GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net earnings $ 1,015,547 877,209
Adjustments to reconcile net earnings to
net cash provided by operations:
Deferred loan origination fees (314,834) (178,892)
Gain on sale of loans (52,193) (7,685)
Provision for loan losses 138,417 63,217
Depreciation of premises and equipment 134,408 79,240
Amortization of investment and mortgage
backed securities premiums 367,012 302,500
Stock dividend on FHLB stock (128,098) (106,527)
Release of ESOP stock 101,462 94,885
Stock compensation 61,185 51,704
Provision (benefit) for deferred income taxes (5,190) (47,706)
Net changes in operating assets and liabilities:
Accrued interest and dividends receivable (188,490) (123,702)
Prepaid and other assets 599 (150,132)
Accrued interest payable 52,626 70,653
Accounts payable and accrued and other liabilities (50,928) 166,211
Income taxes payable 25,312 (19,333)
Dividends declared and payable (7,698) 7,031
------------------------------
Net cash provided by operating activities 1,149,137 1,078,673
------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of premises and equipment (503,356) (437,658)
Loan origination and principal repayment
on loans, net (20,499,588) (23,691,353)
Principal payments on mortgage-backed securities 10,304,171 10,028,831
Principal payments on available-for-sale-securities 70,000 -
Purchases of mortgage-backed securities (8,999,907) (11,678,555)
Purchases of available-for-sale securities (7,826,305) (3,181,046)
Purchases of hold-to-maturity securities (1,532,151) -
Maturities and proceeds from sale of available-
for-sale securities 2,010,000 2,190,000
Purchase of FHLB stock (91,802) (798,373)
------------------------------
Net cash applied to investing activities (27,068,938) (27,568,154)
------------------------------
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
25
<PAGE>
GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
CASH FLOWS FROM FINANCING ACTIVITIES
<S> <C> <C>
Net increase in transaction accounts, passbook savings
money market accounts, and certificates of deposit $ 11,850,180 11,506,655
Net increase in mortgage escrow funds 103,698 49,849
Proceeds from FHLB advances 299,595,527 469,270,950
Repayments on FHLB advances (282,302,332) (451,953,319)
Purchase of GFSB Bancorp stock under the
stock repurchase plan in cash (2,509,912) (581,313)
Dividends paid or to be paid in cash (297,733) (309,102)
Proceeds from exercise of stock options 39,543 -
Price paid for vested management bonus stock
plan stock 50,065 49,613
---------------------------------
Net cash provided by financing activities 26,529,036 28,033,333
---------------------------------
Increase in cash and cash equivalents 609,235 1,543,852
Cash and cash equivalents at beginning of year 4,537,980 2,994,128
---------------------------------
Cash and cash equivalents at end of year $ 5,147,215 4,537,980
=================================
Supplemental disclosures Cash paid during the year for:
Interest on deposits and advances $ 5,546,291 4,939,577
Income taxes 564,957 651,769
Change in unrealized gain, net of deferred taxes
on available-for-sale securities (other comprehensive
earnings) (176,586) 134,494
Issuance of stock dividend - 40,033
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
26
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies consistently applied in the
preparation of the accompanying statements follows:
Organization and Operations. Effective June 29, 1995, Gallup Federal Savings and
Loan Association (the "Association") converted from a federal mutual savings and
loan association to a federal stock savings bank with the formation of a holding
company (GFSB Bancorp, Inc.). The conversion was accomplished through amendment
of the Association's federal charter and the sale of the holding company's
common stock. The Association also changed its name to Gallup Federal Savings
Bank (the "Bank").
GFSB Bancorp, Inc. (the "Company") is a unitary savings and loan holding company
incorporated under the laws of the State of Delaware. The Company acquired all
of the common stock of the Bank on June 29, 1995 and the Company also made its
initial public offering of common stock.
Basis of Presentation. The accompanying consolidated financial statements
include the accounts of the Company and the Bank. All significant balances and
transactions between entities have been eliminated.
Cash and Cash Equivalents. Cash and cash equivalents include cash on hand, cash
items, amounts due from banks, amounts held with the Federal Reserve Bank,
interest bearing deposits with the Federal Home Loan Bank, time deposits and
federal funds sold. Generally, federal funds sold are purchased and sold for
one-day periods. For purposes of the statements of cash flows, the Company
considers all highly liquid debt instruments with original maturities of three
months or less to be cash equivalents. The amounts in each of these above
categories are as follows:
1999 1998
Cash on hand $ 552,103 458,407
Cash items 1,900 1,369
Amounts due from banks 2,094,031 1,344,454
Interest bearing deposits 1,713,736 2,490,120
Time deposits 594,000 -
Federal Reserve Bank deposits 191,445 243,630
---------------------------------
$ 5,147,215 4,537,980
=================================
The amounts due from banks includes $44,694 held in trust by the Company for the
employees awarded stock under the Management Stock Bonus Plan. The amount
represents dividends earned on non-vested shares.
27
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Available-for-Sale Investment Securities. Investment securities consist of stock
owned in the Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Home Loan
Bank debentures, U.S. Government Securities, mutual funds, and Student Loan
Marketing Association ("SLMA") asset-backed notes. The Company has recorded a
net unrealized gain (loss), net of deferred income taxes, as accumulated
comprehensive income. Realized gains and losses on the sale of investment
securities are determined using the specific identification method when such
sales occur. The amortization of premiums and accretion of discounts are
recognized in interest income using methods approximating the interest method
over the period of maturity.
Available-for-Sale Mortgage-Backed Securities. All mortgaged-backed and related
securities are stated at fair value. The Company has recorded a net unrealized
gain (loss), net of deferred income taxes, as accumulated comprehensive income.
Realized gains and losses on the sale of mortgage backed securities are
determined using the specific identification method when such sales occur. All
sales are made without recourse. The amortization of premiums and accretion of
discounts are recognized in interest income using methods approximating the
interest method over the remaining period of maturity.
Hold-to-Maturity Securities. Government, Federal agency, and corporate debt
securities that management has the positive intent and ability to hold to
maturity are reported at cost, adjusted for amortization of premiums and
accretion of discounts that are recognized in interest income using methods
approximating the interest method over the period to maturity. All
hold-to-maturity securities are recorded at amortized cost.
At June 30, 1999, the Company had no outstanding commitments to sell any
securities.
Loans Receivable. Loans receivable that management has the intent and ability to
hold for the foreseeable future or until maturity or payoff are stated at unpaid
principal balances, less the allowance for loan losses, and net deferred loan
origination fees and discounts.
The allowance for loan losses is increased by charges to income and decreased by
charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral, and
current economic conditions.
The Company establishes a specific loan allowance on an impaired loan if the
present value of the future cash flows discounted using the loan's effective
interest rate is less than the carrying value of the loan.
28
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
An impaired loan can be valued based upon its fair value or the market value of
the underlying collateral if the loan is primarily collateral dependent. The
Company assesses for impairment all loans delinquent more than 90 days.
Uncollectible interest on loans that are contractually past due is charged off,
or an allowance account is established based on management's periodic
evaluation. The allowance is established by a charge to interest income equal to
all interest previously accrued, and income is subsequently recognized only to
the extent cash payments are received, until, in management's judgment, the
borrower's ability to make periodic principal and interest payments is back to
normal, in which case the loan is returned to accrual status.
Mortgage loans sold to others are not included in the accompanying statements of
financial condition. For the years ended June 30, 1999 and 1998, $3,000,000 and
$1,158,000, respectively, of loans have been sold. No servicing rights were
retained on these loans. Gains on the sale of these loans were $52,193 in 1999
and $7,685 in 1998.
Loan Origination Fees and Related Costs. Loan fees and certain direct loan
origination costs are deferred, and the net fee is recognized as an adjustment
to interest income using the interest method over the contractual life of the
loans. Historical prepayment experience for the Company is minimal for purposes
of adjusting the contractual life of the loans.
Foreclosed Real Estate. Real estate properties acquired through, or in lieu of,
loan foreclosure are initially recorded at fair value at the date of
foreclosure. The Company generally holds foreclosed assets as held for sale, and
accordingly, after foreclosure, such assets are carried at the lower of fair
value minus estimated costs to sell, or cost. Valuations are periodically
performed by management, and an allowance for losses is established by a charge
to operations if the fair value of a property does not exceed its cost.
Premises and Equipment. Land is carried at cost. Building, furniture, fixtures,
and equipment are carried at cost, less accumulated depreciation. Building,
furniture, fixtures, and equipment are depreciated using a straight-line method
over the estimated useful lives of the assets. Maintenance and repairs are
charged to earnings in the period incurred.
Income Taxes. Deferred income taxes are provided on temporary differences in the
recognition of income and expense for tax and financial reporting purposes.
These items consist principally of loan origination fees, depreciation,
compensation cost, and the allowance for loan losses.
29
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities as
measured by the enacted tax rates that will be in effect when these differences
reverse. The principal differences between assets and liabilities for financial
statement and tax purposes are accumulated depreciation of premises and
equipment, the reserve for delinquent interest, allowance for loan losses, stock
compensation plans, the recognition of loan origination fees, and unrealized
holding gains and losses on available-for-sale securities. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes in the period of enactment.
The Small Business Job Protection Act of 1996 equalized the taxation of thrifts
and banks. The Act no longer allows thrifts a choice between the percentage of
taxable income method and the experience method in determining additions to bad
debt reserves. Small thrifts (such as the Company) are only allowed to use the
experience method. Any reserve amounts added after 1987 are now taxed over a
six-year period. At June 30, 1999, the Company had $46,613 of post 1987 bad debt
reserves. Of this amount, $9,323 was recaptured into taxable income for 1999.
Reclassifications. Certain reclassifications have been made to the 1998
financial statements to conform to the 1999 presentation.
Earnings Per Share. Earnings per share have been computed on the basis of the
weighted average number of shares of common stock and common stock equivalents
outstanding for the year. The Company accounts for the shares acquired by its
ESOP in accordance with Statement of Position 93-6; shares controlled by the
ESOP are not considered in the weighted average number of shares outstanding
until the shares are committed for allocation to an employee's individual
account.
Advertising. The Company expenses advertising costs as incurred as shown in the
consolidated statements of earnings. For the years ended June 30, 1999 and 1998,
advertising expense was $71,461 and $49,845, respectively.
Fair Value of Financial Instruments. The following methods and assumptions were
used by the Company in estimating fair values of financial instruments as
disclosed herein:
Cash and Cash Equivalents. - The carrying amount of cash and cash
equivalents approximate their fair value.
Available-for-Sale and Hold-to-Maturity Securities. - Fair values for
securities are based on quoted market prices.
30
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Loans Receivable. - For variable-rate loans that reprice frequently
and have no significant change in credit risk, fair values are based
on carrying values. Fair values for certain mortgage loans are based
on quoted market prices of similar loans sold in conjunction with
securitization transactions. Fair values for commercial real estate
and commercial loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Fair values for
impaired loans are estimated using discounted cash flow analyses or
underlying collateral values, where applicable.
Deposit Liabilities. - The fair values disclosed for demand deposits
are, by definition, materially equal to the amount payable on demand
at the reporting date (that is, their carrying amounts). The carrying
amounts of fixed-term money market accounts approximate their fair
values at the reporting date. Fair values for fixed-rate certificates
of deposits are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates to
a schedule of aggregated expected monthly maturities on time deposits.
Short-Term Borrowings. - The carrying amounts of short-term borrowings
approximate their fair values given that the borrowings are at the
Bank's current incremental borrowing rate.
Off-Balance-Sheet Instruments. - Fair values for off-balance-sheet
lending commitments are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the counter parties' credit standings.
Financial Instruments. In the ordinary course of business the Company has
entered into off-balance-sheet financial instruments consisting of commitments
to extend credit and commercial letters of credit. Such financial instruments
are recorded in the financial statements when they are funded or related fees
are incurred or received.
Estimates. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
A substantial estimate for the Company is the allowance for loan losses. This
estimate could change substantially within a year if borrowers' ability to repay
or the estimated value of underlying collateral should decline dramatically.
31
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Investment in Federal Home Loan Bank Stock. The Bank, as a member of the Federal
Home Loan Bank System, is required to maintain an investment in its capital
stock of the Federal Home Loan Bank (FHLB) in an amount equal to the greater of
1 percent of its outstanding home loans or 5 percent of advances from the FHLB.
No ready market exists for the Federal Home Loan Bank Stock, and it has no
quoted market value.
Segment Reporting. The Company is required to report information about operating
segments in and related disclosures about products and services, geographic
areas and major customers. The Company only has one operating segment.
NOTE 2. AVAILABLE-FOR-SALE MORTGAGE-BACKED SECURITIES
The carrying values and estimated fair values of available-for-sale
mortgage-backed securities are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Unamortized Unrealized Unrealized
Principal Premiums Amortized Holding Holding Fair
June, 30 1999 Balance (Discounts) Cost Gains Losses Value
<S> <C> <C> <C> <C> <C> <C>
FNMA ARM
Certificates $ 22,091,800 711,709 22,803,509 20,470 (366,387) 22,457,592
FHLMC ARM
Certificates 1,542,849 42,700 1,585,549 - (19,301) 1,566,248
GNMA ARM
Certificates 2,821,782 81,574 2,903,356 - (40,590) 2,862,766
Mortgage pass-
through
Certificates 4,949,119 (108,179) 4,840,940 - (15,708) 4,825,232
--------------------------------------------------------------------------------------------------------
$ 31,405,550 727,804 32,133,354 20,470 (441,986) 31,711,838
========================================================================================================
</TABLE>
During the year ended June 30, 1999 and 1998, the Company did not have any
proceeds from the sales of mortgage-backed securities. At June 30, 1999, the
Company had pledged $10,199,586 (paid-down value) in mortgage-backed securities
to public entities who have on deposit amounts in excess of the federally
insured limit. The Company also had pledged $568,249 in mortgage-backed
securities to the Federal Reserve Bank for its Treasury Tax and Loan Account.
32
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 3. INVESTMENTS
The amortized cost and fair values of available-for-sale investment equity
securities and investments in debt securities are summarized as follows:
Available-for-sale investment securities:
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
Mutual funds $ 2,409,362 - (11,529) 2,397,833
FHLB debentures 3,698,973 - (56,348) 3,642,625
FHLMC stock 7,786 1,267,286 - 1,275,072
Tax-exempt securities 986,582 3,064 (1,757) 987,889
SLMA asset-backed note 1,991,357 1,143 - 1,992,500
-------------------------------------------------
$ 9,094,060 1,271,493 (69,634) 10,295,919
=================================================
Hold-to-maturity securities:
Tax-exempt securities $ 694,993 - (15,305) 679,688
Corporate debt securities 982,151 7,849 - 990,000
-------------------------------------------------
1,677,144 7,849 (15,305) 1,669,688
=================================================
33
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 3. INVESTMENTS (CONTINUED)
The amortized cost and fair value of all debt securities by contractual
maturity, are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
Amortized Fair
Cost Value
Hold-to-maturity:
Due after one year through five years $ 982,151 990,000
Due after five years through ten years 144,993 143,014
Thereafter 550,000 536,674
---------------------------
$ 1,677,144 1,669,688
===========================
Available-for-sale:
Due within one year $ 301,061 301,031
Due after one year through five years 3,137,602 3,109,633
Due after five years through ten years 1,246,892 1,219,850
Mutual funds 2,409,362 2,397,833
FHLMC stock 7,786 1,275,072
SLMA asset-backed note 1,991,357 1,992,500
Mortgage-backed securities 32,133,354 31,711,838
---------------------------
$ 41,227,414 42,007,757
===========================
No investments were sold in 1999 or 1998.
34
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 4. LOANS RECEIVABLE
<TABLE>
<CAPTION>
Loans receivable are summarized as follows:
<S> <C> <C>
1999 1998
First mortgage loans (principally conventional)
Principal balances
Secured by one-to-four family residences $ 61,172,549 46,746,639
Secured by other properties 15,751,265 14,750,022
Construction loans 3,560,949 2,973,700
Loan participations purchased 12,564,791 8,550,204
Share loans 1,067,428 955,367
Commercial loans 4,460,488 4,748,814
Consumer loans:
Unsecured 166,675 366,846
Secured by vehicles 1,611,060 1,226,109
Home equity lines 1,439,305 1,254,965
Other consumer 241,763 -
-----------------------------
102,036,273 81,572,666
Less
Undisbursed portion of loans (1,443,236) (1,755,115)
Loan participations sold (2,938,085) (3,065,389)
Net deferred loan origination fees (646,633) (528,550)
Allowance for loan losses (443,479) (386,970)
-----------------------------
$ 96,564,840 75,836,642
=============================
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Balance at beginning of year $ 386,970 339,062
Provision charged to income 138,417 63,217
Charge-offs, recoveries and other (81,908) (15,309)
---------------------------------
Balance at end of year $ 443,479 386,970
=================================
The Company has commitments to fund new loans as follows:
1999 1998
Fixed rate $ 2,625,000 1,762,000
Variable rate 2,544,000 836,000
Commitments for new originations 1,443,000 1,741,000
---------------------------------
Total $ 6,612,000 4,339,000
=================================
</TABLE>
35
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 4. LOANS RECEIVABLE (CONTINUED)
Fixed rate commitments at June 30, 1999 had interest rates that ranged from 6.63
percent to 10 percent. Total loans with fixed rates were $81,526,094 and total
loans with variable rates were $15,038,746.
Non-accrual and renegotiated loans for which interest has been reduced totaled
$218,822 and $707,632 at June 30, 1999 and 1998, respectively. Interest income
that was foregone amounted to $19,614 and $33,755 at June 30, 1999 and 1998,
respectively.
The weighted average rate for the loan portfolio at June 30, 1999, is 8.59
percent.
The Company establishes a specific allowance on impaired loans and disclosure of
the Company's method of accounting for interest income on impaired loans. The
Bank assesses all loans delinquent more than 90 days for impairment and such
loans amounted to $218,822 at June 30, 1999. Average balances for loans
delinquent more than 90 days totaled approximately $31,260 for the year ended
June 30, 1999. These loans are all primarily collateral dependent and management
has determined that the underlying collateral is in excess of the carrying
amount. As a result, the Company has determined that specific allowances on
these loans are not required.
NOTE 5. ACCRUED INTEREST AND DIVIDENDS RECEIVABLE
Accrued interest and dividends receivable is summarized as follows:
1999 1998
Loans receivable $ 583,865 444,334
Available-for-sale investment securities 98,821 23,823
Available-for-sale mortgage-backed securities 178,803 207,328
Time deposits 2,486 -
----------------------
$ 863,975 675,485
======================
36
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 6. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
1999 1998
Buildings $ 866,746 522,400
Furniture, fixtures, and equipment 747,891 480,019
Construction-in-progress - 412,837
Land 158,550 158,550
Parking lot improvements 5,265 5,265
Leasehold improvements 328,163 -
----------------------------
2,106,615 1,579,071
Less allowance for depreciation (701,999) (543,403)
----------------------------
$ 1,404,616 1,035,668
============================
NOTE 7. DEPOSITS
Deposits are summarized as follows:
Weighted
Average
Rate at
June 30, June 30, 1999
1999 Amount Percent
Passbook savings accounts 2.00% $ 4,764,788 5.87%
Money market accounts 2.95 12,197,725 15.02
Transaction and NOW accounts 1.50 12,874,979 15.85
--------------------------
$ 29,837,492 36.74%
==========================
37
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 7. DEPOSITS (CONTINUED)
Deposits are summarized as follows:
Weighted
Average
Rate at
June 30, June 30, 1999
1999 Amount Percent
Certificates of deposit:
2.50%-6.00% 5.01% $ 48,074,004 59.18%
6.01%-7.00% 6.40 2,557,591 3.15
7.01%-8.00% 7.24 760,234 .93
--------------------------
51,391,829 63.26
--------------------------
$ 81,229,321 100.00%
==========================
The aggregate amount of jumbo certificates with a minimum denomination of
$100,000 was $24,073,858 at June 30, 1999.
Certificates of deposit by remaining maturity are as follows:
1999 1998
Less than one 1 year $ 33,785,319 29,971,554
1 year to 2 years 12,114,701 15,433,404
2 years to 3 years 2,111,722 1,707,965
3 years to 4 years 1,051,522 430,741
4 years to 5 years 1,239,062 507,584
Thereafter 1,089,503 446,248
-----------------------------
$ 51,391,829 48,497,496
=============================
Interest expense on deposits is summarized as follows:
1999 1998
Certificates of deposit $ 2,689,004 2,598,370
Money market accounts 332,892 324,341
Passbook savings 107,072 107,399
Transaction and NOW deposits 98,802 61,976
---------------------------------
$ 3,227,770 3,092,086
=================================
38
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 8. REGULATORY MATTERS AND RESTRICTIONS ON RETAINED
EARNINGS
The Bank is subject to certain restrictions on the amount of dividends that it
may declare without prior regulatory approval. The Bank is also subject to
various regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios set forth in the table
below. Management believes, as of June 30, 1999, that the Bank meets all capital
adequacy requirements to which it is subject.
Current regulations require institutions to have a minimum regulatory tangible
capital equal to 1.5 percent of total assets, a minimum 3 percent leverage
capital ratio and an 8 percent risk-based capital ratio.
39
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 8. REGULATORY MATTERS AND RESTRICTIONS ON RETAINED
EARNINGS (CONTINUED)
The Bank at June 30, 1999, meets the regulatory tangible capital and core
capital requirements and the risk-based capital requirement of 8 percent of
total risk-adjusted assets.
The following is a reconciliation of the Bank's capital in accordance with
generally accepted accounting principles (GAAP) to the three components of
regulatory capital calculated under regulatory requirements at June 30, 1999:
<TABLE>
<CAPTION>
June 30, 1999
---------------------------------------------------------------
Tangible Capital Core Capital Risk-Based Capital
------------------------------ ------------------------------ ----------------------------
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
GAAP Capital $ 12,174,283 - $ - -% $12,174,283 -%
Unrealized (gains)
losses on available-
for-sale securities
(net of taxes) (515,025) - (515,025) - (515,025) -
Qualifying general
loan loss allowance - - - - (443,479) -
----------------------------------------------------------------------------------------------
Regulatory capital
computed 11,659,258 7.74% 11,659,258 7.74% 11,215,779 13.86%
Minimum capital
requirement 2,258,422 1.50% 4,516,844 3.00% 6,689,520 8.00%
----------------------------------------------------------------------------------------------
Regulatory capital
excess $ 9,400,836 6.24% $ 7,142,414 4.74% $ 4,526,259 5.86%
==============================================================================================
</TABLE>
40
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 9. RELATED PARTY TRANSACTIONS
The Company has several loans receivable from related parties. The Company's
policy is that all such loan transactions be on the same terms, including
interest rates and collateral, as those prevailing at the same time for
comparable transactions with others.
A summary of the activity for outstanding loans receivable to related parties is
as follows:
1999 1998
Balance, beginning of year $ 796,524 1,190,435
New loans 306,358 181,956
Repayments (172,916) (575,867)
--------------------------------
Balance, end of year $ 929,966 796,524
================================
The Company also has several deposits from related parties. Outstanding deposits
from related parties at June 30, 1999 amounted to $2,528,284. The Company also
expensed $197,746 and $172,154 for the years ended June 30, 1999 and 1998,
respectively, for directors fees and compensation under the management stock
bonus plan.
As described in Note 22, the Bank leases a building located across the street
from its office from a related party.
NOTE 10. CONCENTRATIONS OF CREDIT RISK
The Company is active in originating primarily first mortgage loans primarily in
McKinley County, New Mexico. Significant loans are approved by the Board of
Directors through its loan committee. Collateral is required on all real estate
loans, substantially all commercial loans, and the majority of consumer loans.
Real estate exposure is primarily limited to the county in which the Company
operates. The Company generally maintains loan to value ratios of no greater
than 80 percent.
The Company maintains its cash balances with other financial institutions. The
balances on deposit with other banks are insured by the Federal Deposit
Insurance Corporation up to $100,000. At June 30, 1999, the Company's uninsured
cash balances totaled $1,949,337.
41
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 11. INCOME TAXES
Income tax expense consists of:
1999 1998
Current
Federal $ 558,211 505,046
State 104,826 81,942
---------------------------
663,037 586,988
Deferred provision (benefit)
Federal (22,798) (41,982)
State (1,094) (5,724)
---------------------------
(23,892) (47,706)
---------------------------
$ 639,145 539,282
============================
Deferred taxes consist of temporary differences arising from book tax
differences in depreciation expense and allowance for loan losses.
The Company has recorded a valuation allowance against the net deferred tax
receivable in 1999 relating to the receivable arising from the allowance for
loan loss. The change in the valuation allowance from 1998 is a decrease of
$14,752.
The deferred tax liability is the result of the unrealized holding gains on
available-for-sale securities. The deferred tax liability has been recorded as a
reduction to the unrealized holding gain and reported as a separate component of
equity.
The reconciliation of income tax attributable to continuing operations computed
at the U.S. federal statutory rate to income tax expense is:
1999 1998
Tax at statutory rate of 34 percent $ 528,829 481,607
State income taxes, net of federal
tax benefit 99,311 64,877
Other - net 11,005 (7,202)
------------------------
$ 639,145 539,282
========================
Effective tax rate 39% 38%
42
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to seven irrevocable letters of credit which total
$179,650. The Bank's exposure to credit loss in the event of nonperformance by
the other party to the letters of credit are represented by the contractual
notional amount of the letters of credit. The Company uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
NOTE 13. EMPLOYEE STOCK OWNERSHIP PLAN
The Company has adopted an Employee Stock Ownership Plan (ESOP) for the benefit
of all of its full time employees. Contributions to the Plan are determined at
the discretion of the Company and are limited to the maximum amount deductible
for income tax purposes. Eligible employees include all full time employees with
a minimum of one year of service as of any anniversary date of the Plan. The
ESOP purchased 84,000 (as adjusted for the stock dividend) common shares of the
Company's stock issued in the conversion (Note 1), which was funded by a
$560,000 loan from the Company. The unpaid balance of the ESOP loan has been
eliminated on the Company's consolidated statement of financial condition.
Stockholders' equity has been reduced by the aggregate purchase price of the
shares owned by the ESOP, net of the shares committed to be released.
Contributions to the ESOP by the Company are made to fund the principal and
interest payments on the debt of the ESOP. As of June 30, 1999, 21,520.3394 ESOP
shares were released, and for the year ended June 30, 1999, $101,461 in
contributions were made to the ESOP by the Company. As of June 30, 1998,
17,747.9844 ESOP shares were released and contributions of $94,875 were made to
the Plan by the Company. The remaining unallocated ESOP shares at June 30, 1999
was 59,229.6606. The fair value of the remaining unallocated shares at June 30,
1999 is $799,600. Dividends on unallocated ESOP shares are recorded as
additional contributions to the ESOP by the Company to prepay principal on the
ESOP loan and release additional shares. Dividends on allocated shares are
charged to retained earnings.
43
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 14. NEW ACCOUNTING STANDARDS
During the year ended June 30, 1999, the Company applied the following
Statements of Financial Accounting Standards "SFAS's":
SFAS No. 125, Statement on Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities. This statement
provides reporting standards for transfers and servicing of financial
assets, and certain non-security financial assets, and extinguishment
of liabilities based on a consistent application of a financial
components approach focused on control. SFAS No. 129, Disclosure of
Information about an Entity's Capital Structure. This statement
requires a consolidation of requirements contained in APB opinions
No.'s 10 and 15 and SFAS 47.
SFAS No. 130, Reporting Comprehensive Income. Comprehensive income is
defined as the change in equity during a period from transactions and
other events and circumstances from non-owner sources. The accumulated
balance of other comprehensive income is to be presented separately
from retained earnings and additional paid-in-capital. For the Company,
this accumulated balance is entirely composed of unrealized gain on
available-for-sale securities.
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 and
related disclosures about products and services, geographic areas and
major customers. The Company only has one operating segment.
During the year ended June 30, 1999, the following Statement of Financial
Accounting Standards "SFAS's" became effective but are not currently applicable
to the Company:
SFAS No. 132, Employer's Disclosures about Pensions and Other
Postretirement Benefits. This statement revises disclosures about
pension and other postretirement benefit plans. It does not change the
measurement or recognition of those plans. This statement eliminates
certain disclosures from SFAS No.'s 87, 88, and 106.
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities.
SFAS No. 134, Accounting for Mortgage-Backed Securities Retained after
the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise. This statement amends SFAS No. 65 to require that
after the securitization of a mortgage loan an entity engaged in
mortgage banking activities classify the resulting mortgage backed
security as a trading or held-for-sale based on the intent to sell or
hold the investments.
44
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 15. STOCK PLANS
At June 30, 1999, the Company has two stock-based compensation plans, which are
described below. The Company applies APB Opinion 25 and related Interpretations
in accounting for its plans. Accordingly, no compensation cost has been
recognized for its Stock Option Plan. The compensation cost that has been
charged against income for the Management Stock Bonus Plan is discussed below.
Had compensation cost for the Company's two stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of FASB Statement 123, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below.
1999 1998
Net income As reported $ 1,015,547 877,209
Pro forma 934,867 803,304
Basic earnings per share As reported $ .99 .78
Pro forma .92 .72
On January 5, 1996, the Board of Directors of the Company adopted a Stock Option
Plan. Pursuant to the Plan, an amount of stock equal to 10 percent of the shares
of common stock (142,313 shares as adjusted for the stock dividend) of the
Corporation issued and outstanding is reserved for issuance by the Company upon
exercise of stock options which may be granted to directors, officers, and other
key employees from time to time. The Plan provides for both Incentive Stock
Options and Non-Incentive Stock Options. The options have an exercise date of
ten years from the date of grant. In connection with the adoption of the Plan,
the Company has granted 51,925 incentive stock options and 42,693 non-incentive
stock options to its directors, officers, and other key employees. The option
price established for the shares upon exercise range from $9 1/4 per share to
$16 per share depending on the grant date of the option. The weighted average
remaining life of common stock options is 6.6 years.
During the year, 10,000 incentive stock options were granted and 4,275 incentive
stock options were exercised. Remaining shares available to be granted in the
future amount to 47,695. The fair value of each option grant for the above
proforma disclosures is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted - average assumptions:
dividends of $0.075 per quarter; expected volatility of 50 percent; risk-free
interest rate of 5.0 percent; and expected lives of 7 and 6 years.
45
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 15. STOCK PLANS (CONTINUED)
A summary of common stock options under the Stock Option Plan for the year ended
June 30, 1998 and June 30, 1999 follows:
Weighted
Average Options
Options Price Exercisable
Balance, June 30, 1997 80,193 $ 9.250
Granted 13,125 14.980
Forfeited (8,700) 9.250
-----------------------------
Balance, June 30, 1998 84,618 10.138 36,497
=======
Granted 10,000 13.625
Exercised (4,275) 9.250
-----------------------------
Balance, June 30, 1999 90,343 $ 11.234 50,145
=========================================
The Company also adopted a Management Stock Bonus Plan on January 5, 1996.
Sufficient funds were contributed to the Plan representing up to 4 percent of
the aggregate number of shares issued in the conversion. Awards under the Plan
are determined based on the position and responsibilities of the employees, the
length and value of their services, and the compensation paid to employees. On
January 5, 1996, the Company made awards under the Plan in the amount of 30,573
shares. The award price established for the shares upon exercise was $9 1/4 per
share. At June 30, 1999 and 1998, 21,102 and 27,852 shares, respectively, remain
to be awarded under the Plan in the future.
During the year, 6,000 shares were granted and 750 shares were forfeited. Awards
under the Plan are earned at the rate of one-fifth of the award per year as of
the one-year anniversary of the effective date of the Plan. For the years ended
June 30, 1999 and 1998, compensation cost in the amount of $61,185 and $51,704,
respectively, have been recorded under the provisions of the Plan.
During the 1997 fiscal year, the Company implemented a stock repurchase program.
The program was approved by the Company's Board of Directors and the OTS. The
repurchase program authorized the Company to repurchase approximately 15 percent
of its currently outstanding shares. As of June 30, 1999 and 1998, the Company
has repurchased 176,234 and 35,500 shares of its outstanding common stock for
$2,509,912 and $581,313, respectively.
46
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data are presented below by quarter for the years
ended June 30, 1999 and 1998:
1999 Quarter Ended
-------------------------------------------------
September 30 December 31 March 31 June 30
Net interest income after
provision for loan losses $ 874,233 936,689 1,012,967 1,089,492
Other income 45,946 47,763 76,686 72,158
Other expenses 599,341 631,286 647,435 623,180
Earnings before
income taxes 320,838 353,166 442,218 538,470
Net earnings 204,271 217,443 276,058 317,775
Earnings per common
share 0.19 0.21 0.27 0.32
1998 Quarter Ended
-----------------------------------------------
September 30 December 31 March 31 June 30
Net interest income after
provision for loan losse $ 706,339 783,871 846,270 850,276
Other income 19,177 22,065 23,070 39,591
Other expenses 442,873 427,798 447,072 556,425
Earnings before
income taxes 282,643 378,138 406,509 349,201
Net earnings 179,279 232,001 251,171 214,758
Earnings per common
share 0.16 0.21 0.22 0.19
47
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 17. FEDERAL HOME LOAN BANK ADVANCES
In October 1995, the Bank entered into an "Advances, Collateral Pledge and
Security Agreement" (the Agreement) with the Federal Home Loan Bank (FHLB). The
purpose of the Agreement is to allow the Bank to obtain extensions of credit
from the FHLB to use in its operations. At June 30, 1999, the Bank has
$55,540,826 in outstanding advances with the FHLB. The advances bear interest at
a fixed rate and mature as follows:
Unpaid Principal Balance Interest Rate Maturity
$ 4,750,000 4.900% July 01, 1999
4,700,000 4.880% July 07, 1999
3,500,000 5.050% July 14, 1999
1,650,000 5.000% July 21, 1999
1,350,000 5.050% July 21, 1999
1,350,000 4.969% September 1, 1999
548,355 5.036% September 10, 1999
587,172 5.036% September 10, 1999
1,000,000 4.946% September 27, 1999
8,500,000 5.390% March 16, 2000
99,000 4.780% July 10, 2000
99,000 5.813% September 04, 2000
1,000,000 5.878% June 18, 2001
4,250,000 4.770% October 1, 2001
99,000 4.550% October 2, 2001
99,000 4.650% October 2, 2001
1,000,000 6.038% June 18, 2002
5,000,000 5.663% October 2, 2002
650,000 5.780% December 16, 2002
500,000 6.198% June 18, 2003
5,000,000 5.730% July 1, 2003
99,000 4.910% September 3, 2003
99,000 4.720% October 2, 2003
1,000,000 6.285% June 18, 2004
251,433 5.540% February 1, 2005
642,364 5.518% May 2, 2005
500,000 6.420% June 19, 2006
6,000,000 4.960% December 12, 2007
591,430 5.640% February 3, 2014
626,072 5.790% February 1, 2018
----------------
$ 55,540,826
================
48
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 17. FEDERAL HOME LOAN BANK ADVANCES (CONTINUED)
Several of the advances due in July were subsequently refinanced after year-end.
The advances are secured by the Bank's investment in FHLB stock of $2,185,100
and FNMA mortgage-backed securities in the amount of $8,715,407. In addition,
the advances are secured under a "blanket credit facility" whereby all of the
Bank's 1-4 family real estate loans are also collateral under the advance
agreement.
NOTE 18. DETAILS OF CONSOLIDATED FINANCIAL STATEMENTS
The following represents the details of consolidation with respect to GFSB
Bancorp, Inc. and the Bank:
Details of Consolidated Statement of Financial Condition
June 30, 1999
ASSETS
<TABLE>
<CAPTION>
Gallup GFSB
GFSB Federal Bancorp,
Bancorp, Savings Inc. and
Inc. Bank Eliminations Subsidiary
<S> <C> <C> <C> <C>
Cash and due from banks $ - 2,839,479 - 2,839,479
Interest bearing deposits
with banks - 2,307,736 - 2,307,736
Available-for-sale investment
securities - 10,295,919 - 10,295,919
Hold-to-maturity investment
Securities 1,677,144 - 1,677,144
Mortgage-backed securities - 31,711,838 - 31,711,838
Stock of Federal Home Loan
Bank, at cost, - 2,815,100 - 2,815,100
Loans receivable, net 852,389 96,564,840 (852,389) 96,564,840
Accrued interest and dividends
receivable - 863,975 - 863,975
Premises and equipment, net - 1,404,616 - 1,404,616
Prepaid and other assets 1,725 203,100 - 204,825
Deferred tax asset - 68,377 - 68,377
Investment in subsidiary 4,557,750 392,753 (4,950,503) -
-----------------------------------------------------------
Total assets $ 5,411,864 151,144,877 (5,802,892) 150,753,849
===========================================================
</TABLE>
49
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 18. DETAILS OF CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Details of Consolidated Statement of Financial Condition (Continued)
June 30, 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Gallup GFSB
GFSB Federal Bancorp,
Bancorp, Savings Inc. and
Inc. Bank Eliminations Subsidiary
<S> <C> <C> <C> <C>
Transaction accounts $ - 12,874,979 - 12,874,979
Savings and now deposits - 16,992,107 (29,594) 16,962,513
Time deposits - 51,391,829 - 51,391,829
Accrued interest payable - 276,328 - 276,328
Advances from borrowers - 329,298 - 329,298
Accounts payable and accrued
liabilities 128,420 298,214 - 426,634
Deferred income taxes - 265,317 - 265,317
Advances from parent company - 468,359 (468,359) -
Dividends declared and payable 74,748 354,436 (354,436) 74,748
Advances from the Federal Home
Loan Bank - 55,540,826 - 55,540,826
Income taxes payable 1,168 178,901 - 180,069
-----------------------------------------------------------------------
Total liabilities 204,336 138,970,594 (852,389) 138,322,541
COMMITMENTS AND
CONTINGENCIES - - - -
STOCKHOLDERS' EQUITY
Common stock 99,358 10,000 (14,004) 95,354
Paid-in-capital 3,821,437 4,547,750 (4,936,499) 3,432,688
Unearned ESOP stock (371,183) - - (371,183)
Retained earnings, substantially
restricted 1,657,916 7,101,508 - 8,759,424
Unrealized gain on available
for sale securities, net of taxes - 515,025 - 515,025
-----------------------------------------------------------------------
Total stockholders'
equity 5,207,528 12,174,283 (4,950,503) 12,431,308
-----------------------------------------------------------------------
Total liabilities and
stockholders' equity $5,411,864 151,144,877 (5,802,892) 150,753,849
=======================================================================
</TABLE>
50
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 18. DETAILS OF CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Details of Consolidated Statement of Earnings
Year ended June 30, 1999
<TABLE>
<CAPTION>
Gallup GFSB
GFSB Federal Bancorp,
Bancorp, Savings Inc. and
Inc. Bank Eliminations Subsidiary
INTEREST INCOME
<S> <C> <C> <C> <C>
Loans receivable
Mortgage loans $ - 6,312,252 - 6,312,252
Commercial loans - 444,158 - 444,158
Share and consumer loans - 393,918 - 393,918
Service fee income - 314,833 - 314,833
Available-for-sale investment
securities and mortgage-
backed securities - 1,978,827 - 1,978,827
Other interest-earning assets 73,100 206,549 (73,100) 206,549
-----------------------------------------------------------------------
Total interest earnings 73,100 9,650,537 (73,100) 9,650,537
-----------------------------------------------------------------------
INTEREST EXPENSE
Deposits - 3,228,247 (477) 3,227,770
Advances from Federal
Home Loan Bank - 2,370,969 - 2,370,969
Advances to parent company - 36,466 (36,466) -
-----------------------------------------------------------------------
- 5,635,682 (36,943) 5,598,739
-----------------------------------------------------------------------
Net interest earnings 73,100 4,014,855 (36,157) 4,051,798
Provision for loan losses - 138,417 - 138,417
-----------------------------------------------------------------------
Net interest earnings
after provision for
loan losses 73,100 3,876,438 (36,157) 3,913,381
-----------------------------------------------------------------------
NON-INTEREST EARNINGS
Miscellaneous income 68 23,624 - 23,692
Dividend income from subsidiary 1,166,579 - (1,166,579) -
Net gains from sales of loans - 52,193 - 52,193
Service charge income - 166,668 - 166,668
-----------------------------------------------------------------------
Total non-interest
earnings 1,166,647 242,485 (1,166,579) 242,553
-----------------------------------------------------------------------
</TABLE>
51
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 18. DETAILS OF CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Details of Consolidated Statement of Earnings (Continued)
Year ended June 30, 1999
<TABLE>
<CAPTION>
Gallup GFSB
GFSB Federal Bancorp,
Bancorp, Savings Inc. and
Inc. Bank Eliminations Subsidiary
NON-INTEREST EXPENSE
<S> <C> <C> <C> <C>
Compensation and benefits $ 136,333 1,262,386 (36,157) 1,362,562
Stationery, printing, and office
supplies - 69,532 - 69,532
ATM expense - 41,789 - 41,789
Supervisory exam fees - 36,474 - 36,474
Postage - 32,836 - 32,836
Insurance - 65,130 - 65,130
Other 14,390 231,958 - 246,348
Occupancy - 282,943 - 282,943
Data processing - 201,694 - 201,694
Professional fees 22,718 43,614 - 66,332
Advertising - 71,461 - 71,461
Stock services 24,141 - - 24,141
-----------------------------------------------------------------------
Total non-interest
expense 197,582 2,339,817 (36,157) 2,501,242
-----------------------------------------------------------------------
Earnings before income taxes 1,042,165 1,779,106 (1,166,579) 1,654,692
Income tax expense
Currently payable - 644,335 - 644,335
Deferred (benefit) - (5,190) - (5,190)
-----------------------------------------------------------------------
- 639,145 - 639,145
-----------------------------------------------------------------------
Net earnings $ 1,042,165 1,139,961 (1,166,579) 1,015,547
=======================================================================
</TABLE>
52
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments were as
follows:
<TABLE>
<CAPTION>
June 30, 1999
---------------------------
Carrying Fair
Value Value
Financial Assets:
<S> <C> <C>
Cash and due from banks $ 2,839,479 2,839,479
Interest-bearing deposits with banks 2,307,736 2,307,736
Available-for-sale-investment securities 10,295,919 10,295,919
Hold-to-maturity investment securities 1,677,144 1,669,688
Available-for-sale mortgage-backed securities 31,711,838 31,711,838
Loans receivable, net 96,564,840 67,292,587
Accrued interest receivable 863,975 863,975
Financial Liabilities:
Transaction deposits 12,874,979 12,874,979
Savings and now deposits 16,962,513 16,962,513
Time deposits 51,391,829 49,937,869
Accrued interest payable 276,328 276,328
Advances from the FHLB 55,540,826 55,540,826
Off-Balance-Sheet Liabilities:
Commitments to extend credit 6,612,000 6,612,000
</TABLE>
NOTE 20. COMMON STOCK DIVIDENDS DECLARED
On March 12, 1998, a fifty-percent stock dividend was declared to shareholders
of record as of March 31, 1998. As a result of the stock dividend, 400,329
shares were issued.
53
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 21. EARNINGS PER SHARE
Basic earnings per share are computed by dividing earnings available to common
stockholders by the weighted average number of common share outstanding during
the period. Diluted earnings per share reflect per share amounts that would have
resulted if dilutive potential common stock had been converted to common stock.
The following reconciles amounts reported in the financial statements:
<TABLE>
<CAPTION>
For the Year Ended June 30, 1999
Income Shares Per-share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Income available to common stockholders -
basic earnings per share $ 1,015,547 1,020,932 $ 0.99
==================
Effect of dilutive securities:
Options - 25,626
--------------------------------
Income available to common stockholders -
diluted earnings per share $ 1,015,547 1,046,558 $ 0.97
=====================================================
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended June 30, 1998
-----------------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
Income available to common stockholders -
<S> <C> <C> <C> <C>
basic earnings per share $ 877,209 1,117,647 $ 0.78
==================
Effect of dilutive securities:
Options - 35,597
-------------------------------
Income available to common stockholders -
diluted earnings per share $ 877,209 1,153,244 $ 0.76
=====================================================
</TABLE>
54
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 22. LEASES
The Bank is obligated under a lease agreement entered into on December 30, 1997,
with a related party (see Note 9) for the building across the street from its
offices. For the years ended June 30, 1999 and 1998, rental expense was $30,000
and $15,000, respectively.
The following is a schedule of non-cancelable future minimum lease payments
required under the operating lease:
Years Ending June 30 Amount
2000 $ 30,000
2001 30,000
2002 30,000
2003 30,000
2004 30,000
Thereafter 105,000
The lease expires December 31, 2007. The Bank has an option, upon notification
of the lessor by August 1, 2007, to purchase the building for $275,000 or to
extend the lease for an additional 10 years.
Effective January 1, 2003, and each year thereafter during the term of the lease
or any renewals, there is a cost of living adjustment. In no event will the rent
be less than 30,000 a year. The above schedule does not contain any cost of
living increases.
55
<PAGE>
GFSB BANCORP, INC.
OFFICE LOCATION AND
OTHER CORPORATE INFORMATION
CORPORATE OFFICE
GFSB Bancorp, Inc.
221 West Aztec Avenue
Gallup, New Mexico 87301
Board of Directors of GFSB Bancorp, Inc.
Wallace R. Phillips, D.D.S., Chairman
George S. Perce, Secretary Vernon I. Hamilton
Charles L. Parker, Jr., Treasurer Richard C. Kauzlaric
James Nechero, Jr., Assistant Secretary Michael P. Mataya
Executive Officers of GFSB Bancorp, Inc. and Gallup Federal Savings Bank
Jerry R.Spurlin, President of the Company and Chief Financial Officer of
the Bank
Richard P. Gallegos, President of the Bank
William W. Head, Jr., Chief Lending Officer
Marshall W. Coker, Chief Administrative Officer
Jennifer Hembd, Vice-President/Real Estate Loan Officer
Special Counsel: Independent Auditors:
Malizia Spidi & Fisch, PC Neff & Ricci LLP
One Franklin Square 7001 Prospect Pl., NE
1301 K. Street, NW, Suite 700 East Albuquerque, NM 87110
Washington, D.C. 20005
Transfer Agent and Registrar:
Registrar & Transfer Co.
10 Commerce Drive
Cranford, New Jersey 07016
The Company's Annual Report for the year ended June 30, 1999 filed with the
Securities and Exchange Commission on Form 10-KSB is available without charge
upon written request. For a copy of the Form 10-KSB or any other investor
information, please write or call the Secretary of the Company, at the Company's
corporate office in Gallup, New Mexico. The annual meeting of stockholders will
be held on October 27, 1999.
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Percentage of
Jurisdiction of Ownership held
Subsidiary Incorporation by Registrant
---------- ------------- -------------
Gallup Federal Savings Bank United States 100%
The financial statements of the subsidiary of the registrant are consolidated
with those of the registrant.
EXHIBIT 23
NEFF & RICCI
- ----------------------
LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
Board of Directors
GFSB Bancorp, Inc.
We consent to incorporation by reference in the registration statement (No.
333-07131) on Form S-8 of GFSB Bancorp, Inc. of our report dated July 30, 1999,
relating to the consolidated statement of financial condition of GFSB Bancorp,
Inc. as of June 30, 1999, and the related consolidated statements of earnings
and comprehensive earnings, changes in stockholders' equity and cash flows for
the years ending June 30, 1999 and 1998, which report appears in the June 30,
1999 annual report on Form 10-KSB of GFSB Bancorp, Inc.
/s/ NEFF & RICCI LLP
- -------------------------------------------------
September 24, 1999
Albuquerque, New Mexico
CONSULTANTS & CERTIFIED PUBLIC ACCOUNTANTS
7001 Prospect Lace, NE * Albuquerque, NM 87110
(505) 883-6612 * Fax (505) 830-6282 * e-mail: [email protected]
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ANNUAL REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,839
<INT-BEARING-DEPOSITS> 2,308
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 42,008
<INVESTMENTS-CARRYING> 1,677
<INVESTMENTS-MARKET> 0
<LOANS> 96,565
<ALLOWANCE> 443
<TOTAL-ASSETS> 150,754
<DEPOSITS> 81,229
<SHORT-TERM> 55,541
<LIABILITIES-OTHER> 1,552
<LONG-TERM> 0
0
0
<COMMON> 95
<OTHER-SE> 12,336
<TOTAL-LIABILITIES-AND-EQUITY> 150,754
<INTEREST-LOAN> 7,465
<INTEREST-INVEST> 1,979
<INTEREST-OTHER> 207
<INTEREST-TOTAL> 9,651
<INTEREST-DEPOSIT> 3,228
<INTEREST-EXPENSE> 5,599
<INTEREST-INCOME-NET> 4,052
<LOAN-LOSSES> 138
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,501
<INCOME-PRETAX> 1,655
<INCOME-PRE-EXTRAORDINARY> 1,655
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,016
<EPS-BASIC> .99
<EPS-DILUTED> .97
<YIELD-ACTUAL> 3.11
<LOANS-NON> 219
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 510
<ALLOWANCE-OPEN> 387
<CHARGE-OFFS> 82
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 443
<ALLOWANCE-DOMESTIC> 443
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
