EXHIBIT 13
<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 common stock has been
traded on the Nasdaq Smallcap 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.
Dividends
Quarter Ended High Low Declared
------------- ---- --- --------
September 30,1998 16.750 13.000 .075
December 31, 1998 15.500 13.625 .075
March 31, 1999 15.250 14.250 .075
June 30, 1999 14.750 13.125 .08
September 30, 1999 13.375 13.000 .08
December 31, 1999 14.750 13.500 .10
March 31, 2000 13.500 13.250 .10
June 30, 2000 14.125 13.625 .10
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GFSB Bancorp, Inc.
Corporate Profile (continued)
The number of stockholders of record of common stock as of the record date
September 15, 2000 ("Record Date"), was approximately 212. 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 936,000
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.
The balance of this page intentionally left blank
3
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GFSB BANCORP, INC.
SELECTED FINANCIAL AND OTHER DATA
Financial Condition (Dollars in Thousands)
At June 30, 2000 1999 1998
Total assets $176,786 $150,754 $123,209
Loans receivable, net 109,777 96,565 75,837
Mortgage-backed securities 28,931 31,712 33,551
Stock of FHLB 4,207 2,815 1,965
Investment securities 27,120 11,973 5,188
Cash and cash equivalents 4,091 5,147 4,538
Deposits 79,948 81,229 69,379
Advances from the FHLB 82,935 55,541 38,248
Retained earnings (substantially restricted) 9,975 8,759 8,042
Summary of Operations
(Dollars in Thousands)
Year ended June 30,
Interest income $ 11,989 $ 9,651 $ 8,259
Interest expense 7,117 5,599 5,009
Net interest income 4,872 4,052 3,340
Provision for loan losses 205 138 63
Net interest income after provision for
loan losses 4,667 3,913 3,187
Non-interest income:
Income from real estate operations 5 - -
Other 245 243 104
Total non-interest income 250 243 104
Non-interest expense:
Compensation and benefits 1,507 1,363 973
Professional fees 86 66 104
Occupancy 336 283 166
Advertising 70 71 50
Data processing 200 202 137
Insurance and SAIF premiums 64 65 55
Other and stock subscription services 436 451 389
Total non-interest expense 2,699 2,501 1,874
Earnings before income taxes 2,218 1,655 1,416
Income tax expense 657 639 539
Net earnings $ 1,561 $ 1,016 $ 877
Basic net earnings per share 1.70 .99 .78
Dilutive net earnings per share 1.67 .97 .76
4
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GFSB BANCORP, INC.
SELECTED FINANCIAL AND OTHER DATA (CONTINUED)
<TABLE>
<CAPTION>
Selected Operating Ratios
Year ended June 30, 2000 1999 1998
<S> <C> <C> <C>
Performance ratios:
Return on average assets (net income
divided by average total assets) 0.96% 0.75% 0.81%
Return on average equity (net income
divided by average equity) 12.58 7.76 6.09
Average interest earning assets to average
interest-bearing liabilities 1.10X 1.13X 1.16X
Net interest income after provision for
loan losses, to total other expenses 172.89% 156.46% 170.06%
Net interest rate spread 2.62% 2.53% 2.46%
Net yield on average interest-earnings
assets 3.10% 3.11% 3.25%
Equity ratios:
Average equity to average assets ratio
(average equity divided by average total
assets) 7.62 9.70 13.95
Equity to assets at period end 7.18 8.25 11.54
Assets quality ratios:
Non-performing loans to total assets .41 .15 .57
Non-performing loans to net loans .66 .23 .93
Allowance for loan losses, REO and other
Repossessed assets to non-performing
assets 76.53 271.43 129.47
Allowance for loan losses to total loans,
net .47 .46 .51
Dividend payout ratio 23.6 31.9 37.4
</TABLE>
5
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes", "anticipates", "contemplates", "expects", and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, risks associated with the ability to control costs
and expenses, year 2000 issues and general economic conditions. We undertake no
obligation to publicly release the results of any revisions to those forward
looking statements which may be made to reflect events or circumstances after
the date hereof or to reflect the occurrence of unanticipated events.
Overview
GFSB Bancorp, Inc. ("GFSB Bancorp") is a bank holding company headquartered in
Gallup. New Mexico, which provides a full range of deposits and traditional
mortgage loan products through its wholly owned banking subsidiary, Gallup
Federal Savings Bank (collectively, the "Company").
Management of Interest Rate Risk and Market Risk
Because the majority of the Company's assets and liabilities are sensitive to
changes in interest rates, its most significant form of market risk is interest
rate risk, or changes in interest rates. The Company is vulnerable to an
increase in interest rates to the extent that its interest-bearing liabilities
mature or reprice more rapidly than its interest-earning assets. The Company's
lending activities have emphasized the purchase of long-term adjustable rate and
the origination of fixed rate loans secured by one-to four family residences.
The primary source of funds has been deposits with substantially shorter
maturities. While having interest-bearing liabilities that reprice more
frequently than interest-earning assets is generally beneficial to net interest
income during a period of declining interest rates, this type of an
asset/liability mismatch is generally detrimental during periods of rising
interest rates.
Senior management of the Company reviews loan and deposit pricing and production
volumes, interest rate risk analysis, liquidity and borrowing needs, and a
variety of other asset and liability management topics on a weekly basis. The
Company's Investment Committee meets on a monthly basis to review these same
items. On behalf of the Investment Committee, the Chairman reports to the Board
of Directors."
To reduce the effect of interest rate changes on net interest income, the
Company has adopted various strategies to enable it to improve the matching of
interest-earning asset maturities to interest-bearing liability maturities. The
principal elements of these strategies include seeking to:
o when market conditions permit, purchase one-to four family residential
mortgage loans with adjustable rate features;
o sell fixed rate mortgage loans that conform to Federal National Mortgage
Association guidelines when sales can be achieved on terms favorable to the
Company;
o lengthen the maturities of our liabilities when it would be cost effective
through the pricing and promotion of higher rate certificates of deposit
and utilization of FHLB advances;
6
<PAGE>
o attract low cost checking and transaction accounts which tend to be less
interest rate sensitive when interest rates rise;
o maintain interest- bearing deposits, federal funds and U.S. government
securities with short to intermediate terms to maturities; and
o maintain an investment portfolio that provides a stable cash flow, thereby
providing investable funds in varying interest rate cycles.
The Company has made a significant effort to maintain its level of lower cost
deposits as a method of enhancing profitability. At June 30, 2000, the Company
had approximately $ 27 million, or 34%, of its deposits in low-cost savings,
checking and money market accounts. These deposits have traditionally remained
relatively stable and are expected to be only moderately affected in a period of
rising interest rates. This stability has enabled the Company to offset the
impact of rising rates in other deposit accounts.
Net Portfolio Value
Exposure to interest rate risk is actively monitored by management. The
Company's objective is to maintain a consistent level of profitability within
acceptable risk tolerances across a broad range of potential interest rate
environments. The Company uses the OTS Net Portfolio Value ("NPV") Model to
monitor its exposure to interest rate risk, which calculates changes in net
portfolio value. "OTS NPV reports along with management's suggestions are
reviewed by the Investment Committee and reported to the Board of Directors
quarterly."
The Interest Rate Sensitivity of Net Portfolio Value Report shows the degree to
which balance sheet line items and net portfolio value are potentially affected
by a 100 to 300 basis point (1/100th of a percentage point) upward and downward
parallel shift (shock) in the Treasury yield curve.
The following table represents our NPV at June 30, 2000. The NPV was calculated
by the OTS, based upon information that the Company provided.
* INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE (NPV)
Change NPV
In rates Ratio (1) Change (2)
-------- --------- ----------
+300 bp 3.56% -479 bp
+200 bp 5.32% -304 bp
+100 bp 6.94% -141 bp
0 bp 8.35%
-100 bp 9.42% 107 bp
-200 bp 10.02% 166 bp
-300 bp 10.51% 215 bp
(1) Calculated as the estimated NPV divided by present value of assets.
(2) Calculated as the excess (deficiency) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio
assuming no change in interest rates.
These calculations indicate that the Company's NPV could be adversely affected
by increases in interest rates but could be favorably affected by decreases in
interest rates. In addition, the Company may be deemed to have more than a
normal level of interest rate risk under applicable regulatory capital
requirements.
7
<PAGE>
Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, prepayments and deposit run-offs and should not be relied upon as
indicative of actual results. Certain shortcomings are inherent in such
computations. Although certain assets and liabilities may have similar maturity
or periods of repricing they may react at different times and in different
degrees to changes in the market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while rates on other types of assets and liabilities may lag
behind changes in market interest rates. Certain assets, such as adjustable rate
mortgages, generally have features which restrict changes in interest rates on a
short term basis and over the life of the asset. In the event of a change in
interest rates, prepayments and early withdrawal levels could deviate
significantly from those assumed in making calculations set forth above.
Additionally, an increased credit risk may result as the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase.
8
<PAGE>
Average Balance Sheet
The following table sets forth certain information relating to the Company'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, 2000 Year ended June 30, 1999
------------------------------------------ ---------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $103,252 $8,660 8.39% $ 88,355 $7,465 8.45%
Investment securities and
mortgage-backed securities 49,270 3,001 6.09% 38,333 1,977 5.16%
Other interest-earning
assets (2) 4,739 328 6.92% 3,542 209 5.84%
Total interest-earning assets 157,261 11,989 7.62% 130,230 9,651 7.41%
Non-interest-earning assets 5,337 4,759
----------- -----------
Total assets $162,598 $134,989
Interest-bearing liabilities:
Transaction accounts $ 5,975 $ 90 1.51% $ 4,853 $ 99 2.04%
Passbook savings 5,018 102 2.03% 4,450 107 2.40%
Money market accounts 10,304 310 3.01% 9,964 333 3.34%
Certificates of deposit 52,660 2,703 5.13% 49,678 2,689 5.41%
Other liabilities 68,442 3,912 5.72% 45,802 2,371 5.18%
----------- ---------- ----------- ----------
Total interest-bearing
liabilities 142,399 7,117 5.0 % 114,747 5,599 4.88%
Non-interest bearing
liabilities 7,801 7,151
----------- -----------
Total liabilities 150,200 121,898
Stockholders' equity 12,398 13,091
----------- -----------
Total liabilities and
stockholders' equity $162,598 $134,989
Net interest income $4,872 $4,052
Interest rate spread (3) 2.62% 2.53%
Net yield on interest-
earning assets (4) 3.10% 3.11%
Ratio of average interest-
earning assets to average
interest-bearing liabilities 1.10X 1.13X
</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 Company 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.
Year ended June 30,
2000 vs. 1999
Increase (Decrease)
Due to
----------------------------------------
Rate/
Volume Rate Volume Net
------- ------- ------- -------
(Dollars in Thousands)
Interest income:
Loans receivable $ 1,259 $ (53) $ (9) $ 1,197
Mortgage-backed securities and
Investment securities 563 360 103 1,026
Other interest-earning assets 70 38 13 121
------- ------- ------- -------
Total interest-earning assets 1,892 345 107 2,344
Interest expense:
Savings accounts 14 (16) (2) (4)
Money markets 11 (33) (1) (23)
Certificates of deposit 161 (139) (8) 14
Other liabilities 1,169 247 122 1,538
------- ------- ------- -------
Total interest-bearing liabilities 1,355 59 111 1,525
------- ------- ------- -------
Net change in interest income $ 537 $ 286 $ (4) $ 819
======= ======= ======= =======
Financial Condition
General. The Company's total assets increased $26 million or 17.2% from $150.8
million at June 30, 1999 to $176.8 million at June 30, 2000. This increase was
primarily the result of a $14.1 million increase in cash and investment
securities, offset by a decrease in mortgage-backed securities of $2.8 million,
and a $13.2 million increase in the Company'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
decreased $1.3 million from $81.2 million at June 30, 1999 to $79.9 million at
June 30, 2000. This decrease is primarily due to a decrease in the Company's
volume of MMDA, NOW and business checking accounts offset by an increase in the
Company's volume of jumbo certificates of deposit and public (state and city)
certificates of deposit. Advances from the Federal Home Loan Bank (FHLB)
increased $27.4 million from $55.6 million at June 30, 1999 to $82.9 million at
June 30, 2000. These additional borrowings funded purchases of loans, securities
and mortgage loan participations. The Company had $130,000 and $515,000 in
unrealized gains (net of deferred taxes) at June 30, 2000 and 1999,
respectively, from net market gains on the Company's available-for-sale
investment and mortgage-backed securities portfolio. Unrealized gains and losses
do not impact the Company's earnings until they are realized.
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<PAGE>
Comparison of Operating Results for Years Ended June 30, 2000 and 1999
General. Net earnings increased $544,000 or 53.6 % for the year ended June 30,
2000 from the year ended June 30, 1999. This increase was primarily the result
of an increase in net interest earnings of approximately $819,000, and an
increase in non-interest earnings of $7,000 offset by an increase in
non-interest expense of $198,000, an increase in provision for loan losses of
$67,000 an increase in provision for income tax expense of $18,000.
Interest Earnings. Total interest earnings increased $2.3 million or 24.2% from
$9.7 million for the year ended June 30, 1999 to $12 million for the year ended
June 30, 2000. The increase is primarily due to an increase in the Company's
lending and investment activities and to a general increase in market interest
rates. Details are contained in the Average Balance Sheet on page 9.
Interest Expense. Total interest expense increased $1.5 million or 27.1% from
$5.6 million for the year ended June 30, 1999 to $7.1 million for the year ended
June 30, 2000. This increase was primarily due to an increase of $1.5 million of
interest incurred on increased Federal Home Loan Bank advances and to a general
increase in market interest rates. Details are contained in the Average Balance
Sheet on page 9.
Provision for Losses on Loans. The Company 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 $513,000 and $443,000 at June 30, 2000 and 1999, respectively. The
provision for loan losses was $205,000 and $138,000 for the years ended June 30,
2000 and 1999, respectively. While the Company maintains its allowance for
losses at a level which it considers to be adequate, there can be no assurance
that further additions will not be made to the loss allowances and that such
losses will not exceed the estimated amounts. Recent substantial increases in
the loan portfolio of the Company may result in an increase of provisions for
losses on loans.
Non-Interest Earnings. Non-interest earnings increased $7,000 or 3% from
$243,000 for the year ended June 30, 1999 to $250,000 for the year ended June
30, 2000. This was primarily due to an increase in service charge income of
$85,000, an increase in real estate operations of $5,000 and an increase in
other operating income or $7,000 offset by net losses from sales of loans and
available for sale securities of $90,000. Funds received by the Company from the
sale of available for sale securities were used to purchase higher yielding
available for sale securities to enhance future earnings.
Non-Interest Expense. Total non-interest expense increased $198,000 or 7.9% from
$2.5 million for the year ended June 30, 1999 to $2.7 million for the year ended
June 30, 2000. This increase was primarily due to an increase in compensation
and benefits of $144,000 from the hiring of additional staff to handle growth,
salary expenses for a full time data processing systems administrator for Year
2000 administration, general salary increases, increases due to accruals for
stock-based compensation programs, increases in employee health insurance and
retirement benefits, a gross receipts tax paid to the State of New Mexico for
directors fees, offset by a $131,000 change related to a stock-based
compensation program. Other factors were increases in occupancy costs of $53,000
and professional fees of $20,000, offset by a decrease in stock services of
$12,000. The increase in occupancy costs is primarily due to leasehold
improvement expense and janitorial expense for the Loan Center and furniture,
fixtures, and equipment expense. The decrease in stock services is primarily due
to a fee paid to the OTS for filing a change of control application for the
quarter ended September 30, 1998.
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<PAGE>
Income Tax Expense. Income tax expense increased $18,000 or 3% from $639,000 for
the year ended June 30, 1999 to $657,000 for the year ended June 30, 2000. This
increase was primarily attributable to the increase in pre-tax earnings of
$662,000, much of which was nontaxable interest and dividends. Deferred tax
liabilities decreased by $198,160 due to the impact of other comprehensive
earnings.
Liquidity and Capital Resources
The Company is required under applicable federal regulations to maintain
"liquid" investments in qualifying types of U.S. Government, federal agency, and
other investments of not less than 4% of its average daily balance of net
withdrawable deposit account and borrowings payable in one year or less. At June
30, 2000 the Bank's liquidity, as measured for regulatory purposes, was 5.3%.
The Company'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 Company
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
is dependent on the Company's operating, financing, and investing activities
during any given period. At June 30, 2000, cash and cash equivalents totaled
$4.1 million. The Bank has another source of liquidity if a need for additional
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,
2000, the Bank had outstanding borrowings from the FHLB of Dallas of $82.9
million. Some of these outstanding borrowings were used to purchase additional
investment 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, 2000, the Bank
originated $45.7 million in total loans (including loan participations
purchased), of which $28.9 million were mortgage loans. Another investment
activity of the Bank is the investment of funds in U.S. Government agency
securities, mortgage-backed securities, collateralized mortgage obligations,
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, 2000 and 1999. 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
and mortgage-backed securities, were $27 million and $27 million for the years
ended June 30, 2000 and 1999, 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 $25 million and $27 million
for the years ended June 30, 2000 and 1999, respectively.
The Bank anticipates that it will have sufficient funds available to meet its
current commitments. As of June 30, 2000, the Bank had commitments to fund loans
of $10 million. Certificates of deposit scheduled to mature in one year or less
totaled $40 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
12
<PAGE>
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, 2000, the Bank exceeded each of the three OTS capital requirements
on a fully phased in basis. See Note 8 to the Consolidated Financial Statements.
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with Generally
Accepted Accounting Principles ("GAAP"), which require the measurement of
financial position and operating results primarily in terms of historical
dollars without considering the change in the relative purchasing power of money
over time and due to inflation. The impact of inflation is reflected in the
increased cost of the Company's operations. Unlike most industrial companies,
nearly all the assets and liabilities of the Company are financial. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the prices of goods and services.
13
<PAGE>
[Logo]
NEFF & RICCI
-----------------------
LLP
Independent Auditors' Report
Board of Directors
GFSB Bancorp, Inc.
Gallup, New Mexico
We have audited the accompanying consolidated statements of financial condition
of GFSB Bancorp, Inc. (a Delaware corporation) and Subsidiary as of June 30,
2000 and 1999, and the related consolidated statements of earnings and
comprehensive earnings, changes in stockholders' equity, and cash flows for the
years ended June 30, 2000 and 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 audits.
We conducted our audits 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 audits provide 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, 2000 and 1999, and the results of their operations
and their cash flows for the years then ended, in conformity with generally
accepted accounting principles.
/s/Neff & Ricci LLP
Albuquerque, New Mexico
August 3, 2000
14
CONSULTANTS & CERTIFIED PUBLIC ACCOUNTANTS
7001 PROSPECT PLACE NE - ALBUQUERQUE, NM 87110
(505) 883-6612 - FAX (505) 830-6282 - e-Mail: [email protected]
<PAGE>
GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 2000
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,875,537 2,839,479
Interest-bearing deposits with banks 1,215,428 2,307,736
Available-for-sale investment securities 25,438,540 10,295,919
Available-for-sale mortgage-backed securities 28,930,510 31,711,838
Hold-to-maturity investment securities 1,681,310 1,677,144
Stock of Federal Home Loan Bank, at cost, restricted 4,206,900 2,815,100
Loans receivable, net, substantially pledged 109,777,269 96,564,840
Accrued interest and dividends receivable 1,033,974 863,975
Premises and equipment 1,296,048 1,404,616
Prepaid and other assets 235,883 204,825
Deferred tax asset 94,517 68,377
--------------------------------------
Total assets $ 176,785,916 150,753,849
======================================
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Transaction and NOW accounts $ 12,409,069 12,874,979
Savings deposits 14,801,893 16,962,513
Time deposits 52,736,983 51,391,829
Accrued interest payable 288,350 276,328
Advances from borrowers for taxes and insurance 305,909 329,298
Accounts payable and accrued liabilities 236,070 426,634
Repurchase agreements 230,839 -
Deferred income taxes 67,157 265,317
Dividends declared and payable 88,875 74,748
Income taxes payable - 180,069
Advances from the Federal Home Loan Bank 82,935,066 55,540,826
----------------------------------------
Total liabilities 164,100,211 138,322,541
----------------------------------------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 1,500,000 shares authorized;
940,958 shares in 2000 and 993,578 shares in 1999
issued and outstanding 94,096 99,358
Preferred stock, $.10 par value, 500,000 shares authorized;
no shares issued or outstanding - -
Additional paid-in capital 2,810,626 3,428,683
Unearned ESOP stock (323,911) (371,183)
Retained earnings, substantially restricted 9,974,531 8,759,425
Accumulated other comprehensive earnings 130,363 515,025
----------------------------------------
Total stockholders' equity 12,685,705 12,431,308
----------------------------------------
Total liabilities and stockholders' equity $ 176,785,916 150,753,849
========================================
</TABLE>
16
<PAGE>
GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE EARNINGS
Years Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Interest Earnings
Loans receivable
Mortgage loans $ 7,414,091 6,312,252
Commercial loans 480,810 444,158
Share and consumer loans 465,581 393,918
Service fee income 299,942 314,833
Investment and mortgage-backed securities 3,000,669 1,978,827
Other interest-earning assets 327,597 206,549
-----------------------------------------
Total interest earnings 11,988,690 9,650,537
-----------------------------------------
Interest Expense
Deposits 3,205,280 3,227,770
Advances from Federal Home Loan Bank 3,905,867 2,370,969
Repurchase Agreements 6,345 -
-----------------------------------------
Total interest expense 7,117,492 5,598,739
-----------------------------------------
Net interest earnings 4,871,198 4,051,798
Provision for Loan Losses 205,000 138,417
-----------------------------------------
Net interest earnings after provision
for loan losses 4,666,198 3,913,381
-----------------------------------------
Non-Interest Earnings
Service charge income 251,243 166,668
Miscellaneous income 36,540 23,692
Gain from sales of loans 28,070 52,193
Gain on sale of available-for-sale securities 4,539 -
Loss on sale of available-for-sale securities (70,552) -
-----------------------------------------
Total non-interest earnings 249,840 242,553
-----------------------------------------
Non-Interest Expense
Compensation and benefits 1,506,693 1,362,562
Insurance 64,278 65,130
Stationery, printing, and office supplies 78,483 69,532
ATM expense 48,200 41,789
Supervisory exam fees 39,751 36,474
Postage 37,618 32,836
</TABLE>
See Notes to Financial Statements.
17
<PAGE>
GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE EARNINGS - CONTINUED
Years Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Non-Interest Expense - Continued
Other $ 219,185 246,348
Occupancy 335,564 282,943
Data processing 200,165 201,694
Professional fees 86,158 66,332
Advertising 70,287 71,461
Stock services 12,623 24,141
-----------------------------------------
Total non-interest expense 2,699,005 2,501,242
-----------------------------------------
Earnings before Income Taxes 2,217,033 1,654,692
-----------------------------------------
Income Tax Expense
Currently payable 659,475 663,037
Deferred benefit (2,248) (23,892)
-----------------------------------------
Total income tax expense 657,227 639,145
-----------------------------------------
Net earnings 1,559,806 1,015,547
Other Comprehensive Earnings
Unrealized investment losses, net of tax of
$(198,160) in 2000 and $(99,360) in 1999 (384,662) (176,586)
-----------------------------------------
Net comprehensive earnings $ 1,175,144 838,961
=========================================
Basic Net Earnings per Share 1.70 0.99
Dilutive Net Earnings per Share 1.67 0.97
Weighted average number of common shares outstanding-basic 915,139 1,020,932
Weighted average number of common shares outstanding-dilutive 934,599 1,046,558
</TABLE>
See Notes to Financial Statements.
18
<PAGE>
GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
Years Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
Common Stock
--------------------------
Accumulated
Additional Unearned Other
Paid-in ESOP Retained Comprehensive
Shares Amount Capital Stock Earnings Earnings Total
----------- ----------- ----------- -------- --------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1998 1,165,537 $ 113,515 $ 5,777,881 (415,695) 8,041,610 691,611 14,208,922
Comprehensive earnings
Net earnings - - - - 1,015,547 - 1,015,547
Unrealized loss on
available for sale
securities,
net of taxes - - - - - (176,586) (176,586)
----------
Total
comprehensive
earnings 838,961
----------
Distribution of stock
vested under the
management stock
bonus plan - 555 49,510 - - - 50,065
Adjustment of management
stock bonus plan - 4,004 (4,004) - - - -
Adjustment of prior
stock dividend on
management stock
bonus plan - (1,521) 1,521 - - - -
Acquisition of common
stock by the
Company under the
stock repurchase plan (176,234) (17,623) (2,492,289) - - - (2,509,912)
Released and committed to
be released 10,574.5950
shares of common stock
owned by the ESOP - - 56,949 44,512 - - 101,461
Stock issued upon exercise
of stock options 4,275 428 39,115 - - - 39,543
Dividends declared and paid
to stockholders - - - - (297,732) - (297,732)
----------- ----------- ----------- -------- --------- ------- ----------
Balances, June 30, 1999 993,578 99,358 3,428,683 (371,183) 8,759,425 515,025 12,431,308
Comprehensive earnings
Net earnings - - - - 1,559,806 - 1,559,806
Unrealized loss on
available for sale
securities,
net of taxes - - - - - (384,662) (384,662)
----------
Total
comprehensive
earnings 1,175,144
----------
Distribution of stock
vested under the
management stock
bonus plan - - 55,463 - - - 55,463
Acquisition of common
stock by the Company
under the stock
repurchase plan (56,140) (5,614) (754,917) - - - (760,531)
Released and committed
to be released
10,643.6894 shares
of common stock
owned by the ESOP - - 49,143 47,272 - - 96,415
Stock issued upon exercise
of stock options 3,520 352 32,254 32,606
Dividends declared and
paid to stockholders - - - - (344,700) - (344,700)
----------- ----------- ----------- -------- --------- ------- ----------
Balances, June 30, 2000 940,958 $ 94,096 $ 2,810,626 (323,911) 9,974,531 130,363 12,685,705
=========== =========== =========== ======== ========= ======= ==========
See Notes to Financial Statements.
19 20
</TABLE>
<PAGE>
GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Cash Flows from Operating Activities
Net earnings $ 1,559,806 1,015,547
Adjustments to reconcile net earnings to net cash
provided by operations:
Deferred loan origination fees (299,942) (314,834)
Loss (gain) on sale of loans and securities 37,943 (52,193)
Provision for loan losses 205,000 138,417
Depreciation of premises and equipment 179,938 134,408
Amortization of investment and mortgage-backed
securities premiums 159,259 367,012
Stock dividend on FHLB stock (265,467) (128,098)
Release of ESOP stock 96,414 101,462
Stock compensation 66,803 61,185
Provision (benefit) for deferred income taxes (2,248) (23,892)
Net changes in operating assets and liabilities:
(Increase) decrease in assets:
Accrued interest and dividends receivable (169,999) (188,490)
Prepaid and other assets 90,862 599
Income taxes receivable (121,921) -
Increase (decrease) in liabilities:
Accrued interest payable 12,022 52,626
Accounts payable and other accrued liabilities (455,528) (50,928)
Repurchase agreements 230,839 -
Dividends declared and payable 14,127 25,312
Income taxes payable (203,961) 11,004
------------------------------------------
Net cash provided by operating activities 1,133,947 1,149,137
------------------------------------------
Cash Flows from Investing Activities
Purchase of premises and equipment (71,370) (503,356)
Loan origination and principal repayment on loans, net (13,089,417) (20,499,588)
Principal payments on mortgage-backed securities 5,598,842 10,304,171
Principal payments on available-for-sale securities 13,182 70,000
Purchases of mortgage-backed securities (6,754,229) (8,999,907)
Purchases of available-for-sale securities (16,011,777) (7,826,305)
Purchases of hold-to-maturity securities - (1,532,151)
Maturities and proceeds from sale of available-for-sale securities 801,194 2,010,000
Maturities and proceeds from sale of available-for-sale mortgage-
backed securities 3,377,395 -
Purchase of FHLB stock (1,126,333) (91,802)
------------------------------------------
Net cash used by investing activities (27,262,513) (27,068,938)
------------------------------------------
</TABLE>
See Notes to Financial Statements.
21
<PAGE>
GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Cash Flows from Financing Activities
Net increase (decrease) in transaction accounts, passbook savings
money market accounts, and certificates of deposit $ (1,281,376) 11,850,180
Net increase (decrease) in mortgage escrow finds (23,386) 103,698
Proceeds from FHLB advance 894,458,922 299,595,527
Repayments on FHLB advances (867,064,682) (282,302,332)
Purchase of GFSB Bancorp stock under the stock
repurchase plan in cash (760,531) (2,509,912)
Dividends paid or to be paid in cash (344,700) (297,733)
Proceeds from exercise of stock options 32,606 39,543
Price paid for vested management bonus stock plan stock 55,463 50,065
------------------------------------------
Net cash provided by financing activities 25,072,316 26,529,036
------------------------------------------
Increase (decrease) in cash and cash equivalents (1,056,250) 609,235
Cash and cash equivalents at beginning of year 5,147,215 4,537,980
------------------------------------------
Cash and cash equivalents at end of year $ 4,090,965 5,147,215
==========================================
Supplemental Disclosures Cash paid during the year for:
Interest on deposits and advances $ 7,099,126 5,546,291
Income taxes 962,233 564,957
Change in unrealized gain, net of deferred taxes on
available-for-sale securities (other comprehensive
earnings) (384,662) (176,586)
</TABLE>
See Notes to Financial Statements.
22
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATMENTS
June 30, 2000
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:
2000 1999
Cash on hand $ 562,397 552,103
Cash items 3,077 1,900
Amounts due from banks 1,738,926 2,094,031
Interest bearing deposits 621,428 1,713,736
Time deposits 594,000 594,000
Federal Reserve Bank deposits 571,137 191,445
---------- ---------
Total cash and cash equivalents $4,090,965 5,147,215
========== =========
The amounts due from banks includes $51,305 and $44,694 for the years ended June
30, 2000 and 1999, respectively, 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.
23
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATMENTS
June 30, 2000
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Available-for-Sale Investment Securities. All available-for-sale investment
securities are stated at fair value. 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, Collateralized
Mortgage Obligations (CMO) 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, 2000, 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.
24
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATMENTS
June 30, 2000
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, 2000 and 1999, $2,000,000 and
$3,000,000, respectively, of loans have been sold. No servicing rights were
retained on these loans. Gains on the sale of these loans were $28,070 in 2000
and $52,193 in 1999.
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.
25
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATMENTS
June 30, 2000
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, 2000, the Company had $33,273 of post 1987 bad debt
reserves. Of this amount, $11,091 was recaptured into taxable income for 2000.
Reclassifications. Certain reclassifications have been made to the 1999
financial statements to conform to the 2000 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.
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.
26
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
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.
27
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
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 2000 Balance (Discounts) Cost Gains Losses Value
<S> <C> <C> <C> <C> <C> <C>
FNMA ARM
Certificates $ 19,004,640 471,682 19,476,322 19,751 (310,194) 19,185,879
FHLMC ARM
Certificates 1,781,661 38,596 1,820,257 7,908 (12,018) 1,816,147
GNMA ARM
Certificates 2,607,042 62,902 2,669,944 368 (61,392) 2,608,920
SBA 1,108,286 - 1,108,286 - - 1,108,286
Mortgage Pass-
through
Certificates 4,450,679 (93,301) 4,357,378 - (146,100) 4,211,278
--------------------------------------------------------------------------------------------------------
$ 28,952,308 479,879 29,432,187 28,027 (529,704) 28,930,510
========================================================================================================
</TABLE>
28
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
NOTE 2. AVAILABLE-FOR-SALE MORTGAGE-BACKED SECURITIES
(CONTINUED)
<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, 2000 and 1999, the Company did not have any
proceeds from the sales of mortgage-backed securities. The Company had pledged
$10,241,541 and $10,199,586 (current face) at June 30, 2000 and 1999,
respectively, in mortgage-backed and investment securities to public entities
who have on deposit amounts in excess of the federally insured limit. The
Company also had pledged $480,841 and $568,249 at June 30, 2000 and 1999,
respectively, in mortgage-backed securities to the Federal Reserve Bank for its
Treasury Tax and Loan Account.
29
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
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:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
June 30, 2000
Mutual funds $ 2,551,629 - (28,811) 2,522,818
US Agency securities 4,581,956 1,334 (86,196) 4,497,094
FHLMC stock 7,786 882,566 - 890,352
Tax-exempt securities 4,695,055 702 (19,526) 4,676,231
Taxable securities 330,000 36 (668) 329,368
FNMA preferred 1,513,308 1,692 - 1,515,000
CMO 9,067,848 41,870 (97,041) 9,012,677
SLMA asset-backed note 1,991,760 3,240 - 1,995,000
------------------------------------------------------------
$24,739,342 931,440 (232,242) 25,438,540
============================================================
June 30, 1999
Mutual funds $ 2,409,362 - (11,529) 2,397,833
US Agency securities 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:
June 30, 2000
Tax-exempt securities $ 694,995 - (22,306) 672,689
Corporate debt securities 986,315 12,435 - 998,750
------------------------------------------------------------
$ 1,681,310 12,435 (22,306) 1,671,439
============================================================
</TABLE>
30
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
NOTE 3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
June 30, 1999
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
====================================================================
</TABLE>
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.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
<S> <C> <C>
Hold-to-maturity:
Due after one year through five years $ 986,315 998,750
Due after five years through ten years 144,995 141,543
Due after ten years 550,000 531,146
---------------------------------
$ 1,681,310 1,671,439
=================================
Available-for-sale:
Due within one year $ 285,488 284,205
Due after one year through five years 4,097,605 4,055,652
Due after five years through ten years 1,412,120 1,365,629
Due after ten years 3,811,798 3,797,207
Mutual funds 2,551,629 2,522,818
FHLMC stock 7,786 890,352
FNMA 1,513,308 1,515,000
SLMA asset-backed note 1,991,760 1,995,000
CMO 9,067,848 9,012,677
Mortgage-backed securities 29,432,187 28,930,510
---------------------------------
$ 54,171,529 54,369,050
=================================
</TABLE>
During the year ended June 30, 2000, $4,112,575 in investments were sold. No
investments were sold during 1999.
31
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
NOTE 4. LOANS RECEIVABLE
<TABLE>
<CAPTION>
Loans receivable are summarized as follows:
2000 1999
<S> <C> <C>
First mortgage loans (principally conventional)
Principal balances
Secured by one-to-four family residences $ 69,078,064 61,172,548
Secured by other properties 15,854,366 15,751,265
Construction loans 4,195,389 3,560,949
Loan participations purchased 14,641,330 12,564,791
Share loans 1,083,057 1,067,428
Commercial loans 6,993,272 4,460,488
Consumer loans:
Unsecured 215,434 166,675
Secured by vehicles 2,280,122 1,611,060
Home equity lines 1,818,151 1,439,305
Other consumer 328,068 241,763
---------------------------------
116,487,253 102,036,273
Less
Undisbursed portion of loans (2,245,582) (1,443,236)
Loan participations sold (3,307,063) (2,938,085)
Net deferred loan origination fees (644,769) (646,633)
Allowance for loan losses (512,570) (443,479)
---------------------------------
Total loans receivable $ 109,777,269 96,564,840
=================================
Activity in the allowance for loan losses is summarized as follows:
Balance at beginning of year $ 443,479 386,970
Provision charged to income 205,000 138,417
Charge-offs, recoveries and other (135,909) (81,908)
---------------------------------
Balance at end of year $ 512,570 443,479
=================================
The Company has commitments to fund new loans as follows:
Fixed rate $ 1,228,000 2,625,000
Variable rate 3,999,000 2,544,000
Commitments for new originations 4,778,000 1,443,000
---------------------------------
Total $ 10,005,000 6,612,000
=================================
</TABLE>
32
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
NOTE 4. LOANS RECEIVABLE (CONTINUED)
Fixed rate commitments at June 30, 2000 and 1999 had interest rates that ranged
from 6.625 percent to 10 percent. Total loans with fixed rates were $90,478,307
and $81,526,094 at June 30, 2000 and 1999, respectively. Total loans with
variable rates were $19,811,532 and $15,038,746 at June 30, 2000 and 1999,
respectively.
Non-accrual and renegotiated loans for which interest has been reduced totaled
$719,443 and $218,822 at June 30, 2000 and 1999, respectively. Interest income
that was foregone amounted to $49,667 and $19,614 at June 30, 2000 and 1999,
respectively.
The weighted average rate for the loan portfolio was 8.23 percent and 8.59
percent at June 30, 2000 and 1999, respectively.
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 $719,443 at June 30, 2000. Average balances for loans
delinquent more than 90 days totaled approximately $469,133 for the year ended
June 30, 2000. 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:
2000 1999
Loans receivable $ 595,651 583,865
Available-for-sale investment securities 195,874 98,821
Available-for-sale mortgage-backed securities 235,962 178,803
Dividends 4,001 -
Time deposits 2,486 2,486
--------------------------
Total accrued interest and dividends $ 1,033,974 863,975
==========================
33
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
NOTE 6. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Buildings $ 866,746 866,746
Furniture, fixtures, and equipment 819,261 747,891
Land 158,550 158,550
Parking lot improvements 5,265 5,265
Leasehold improvements 328,163 328,163
---------------------------------
2,177,985 2,106,615
Less allowance for depreciation 881,937 701,999
---------------------------------
Total premises and equipment $ 1,296,048 1,404,616
=================================
</TABLE>
NOTE 7. DEPOSITS
Deposits are summarized as follows:
Weighted
Average
Rate at
June 30, June 30, 2000
2000 -----------------------------
Amount Percent
Passbook savings accounts 2.02% $ 5,266,817 6.59%
Money market accounts 3.62 9,535,076 11.93
Transaction and NOW accounts 1.44 12,409,069 15.52
-----------------------------
27,210,962 34.04
-----------------------------
34
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
NOTE 7. DEPOSITS (CONTINUED)
Weighted
Average
Rate at
June 30, June 30, 2000
2000 --------------------------
Amount Percent
Certificates of deposit:
4.00%-6.00% 5.25% $ 45,745,027 57.22%
6.01%-7.00% 6.37 6,477,094 8.10
7.01%-8.00% 7.25 514,862 .64
-----------------------
Total certificates of deposit 52,736,983 65.96
-----------------------
Total deposits $ 79,947,945 100.00%
=======================
The aggregate amount of jumbo certificates with a minimum denomination of
$100,000 was $26,937,632 and $24,073,858 at June 30, 2000 and 1999,
respectively.
Certificates of deposit by remaining maturity are as follows:
2000 1999
Less than one 1 year $40,196,681 33,785,319
1 year to 2 years 6,684,750 12,114,701
2 years to 3 years 2,513,204 2,111,722
3 years to 4 years 1,629,692 1,051,522
4 years to 5 years 834,528 1,239,062
Thereafter 878,128 1,089,503
------------------------
$52,736,983 51,391,829
========================
Interest expense on deposits is summarized as follows:
Certificates of deposit $ 2,703,535 2,689,004
Money market accounts 310,119 332,892
Passbook savings 101,551 107,072
Transaction and NOW deposits 90,075 98,802
------------------------
$ 3,205,280 3,227,770
========================
35
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
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, 2000 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 4 percent leverage
capital ratio and an 8 percent risk-based capital ratio.
36
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
NOTE 8. REGULATORY MATTERS AND RESTRICTIONS ON RETAINED EARNINGS
(CONTINUED)
The Bank at June 30, 2000, 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, 2000:
<TABLE>
<CAPTION>
June 30, 2000
-----------------------------------------------------------------
Tangible Capital Core Capital Risk-Based Capital
------------------------------- ------------------------------ --------------------------------
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
GAAP Capital $ 11,789,622 -% $ 11,789,622 -% $ 11,789,622 -%
Disallowed servicing
assets, disallowed
deferred tax assets,
and other disallowed
assets (94,517) - (94,517) - (94,517) -
Accumulated losses
(gains) on certain
available-for-sale
securities (149,378) - (149,378) - (149,378) -
Unrealized (gains)
losses on available-
for-sale securities - - - - 384,951 -
Qualifying general
loan loss allowance - - - - 512,570 -
----------------------------------------------------------------------------------------------
Regulatory capital
computed 11,545,727 6.53% 11,545,727 6.53% 12,443,248 12.99%
Minimum capital
requirement 2,653,157 1.50% 7,075,084 4.00% 7,661,200 8.00%
----------------------------------------------------------------------------------------------
Regulatory capital
excess $ 8,892,570 5.03% $ 4,470,643 2.53% $ 4,782,048 4.99%
============================================================== ===============================
</TABLE>
37
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
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:
2000 1999
Balance, beginning of year $ 929,966 796,524
New loans 573,626 306,358
Repayments (436,560) (172,916)
-----------------------------
Balance, end of year $ 1,067,032 929,966
=============================
The Company also has several deposits from related parties. Outstanding deposits
from related parties at amounted to $2,538,000 and $2,528,284 at June 30, 2000
and 1999, respectively. The Company also expensed $150,303 and $149,785 for the
years ended June 30, 2000 and 1999, respectively, for director's fees and
compensation under the management stock bonus plan.
As described in Note 20, the Company 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. The Company's uninsured cash balances
totaled $1,587,621 and $1,949,737 at June 30, 2000 and 1999, respectively.
38
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
NOTE 11. INCOME TAXES
Income tax expense consists of:
2000 1999
Current
Federal $ 557,533 558,211
State 101,942 104,826
---------------------------------
659,475 663,037
---------------------------------
Deferred provision (benefit)
Federal (2,113) (22,798)
State (135) (1,094)
---------------------------------
(2,248) (23,892)
---------------------------------
Total income tax expense $ 657,227 639,145
=================================
Deferred taxes consist of temporary differences arising from book tax
differences in depreciation, recognition of loan origination fees, compensation
costs, unrealized holding gains on available-for-sale securities, and allowance
for loan losses.
The Company has recorded a valuation allowance against the net deferred tax
receivable primarily relating to the receivable arising from the allowance for
loan loss. The change in the valuation allowance in 2000 was an increase of
$56,707. The change in the valuation allowance in 1999 was a decrease of
$12,261.
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:
Tax at statutory rate of 34 percent $ 753,792 528,829
State income taxes, net of federal
tax benefit 101,807 99,311
Non-taxable interest, dividends and
other-net (198,372) 11,005
--------------------------
$ 657,227 639,145
==========================
Effective tax rate 30% 39%
39
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
NOTE 12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to twelve irrevocable letters of credit which total
$286,650. 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
In connection with the conversion, the Company 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 a 50 percent stock dividend on March 12, 1998) common shares of the
Company's stock issued in the conversion, which was funded by a $560,000 loan
from the Company. Per Statement of Position 93-6, Employer's Accounting for
Employee Stock Ownership Plans, the unpaid balance of the ESOP loan between the
Company and the Bank has not been reported in the Consolidated Statement of
Financial Position. 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, 2000,
28,541.3496 ESOP shares were released, and for the year ended June 30, 2000,
$96,414 in contributions were made to the ESOP by the Company. As of June 30,
1999, 21,520.3394 ESOP shares were released and contributions of $101,461 were
made to the Plan by the Company. The remaining unallocated ESOP shares at June
30, 2000 was 52,208.6504. The fair value of the remaining unallocated shares at
June 30, 2000 is $725,700. 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.
40
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
NOTE 14. STOCK PLANS
At June 30, 2000, the Company has three 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 and Director's Stock Compensation
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 option 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:
2000 1999
Net income (as reported) $ 1,559,806 1,015,547
Pro forma 1,548,512 934,867
Basic earnings per share (as reported) $ 1.70 .99
Pro forma 1.69 .92
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 vest at a rate of one-fifth
of the award per year and have an exercise date of ten years from the date of
grant. In connection with the adoption of the Plan, the Company has granted
58,925 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 5.6 years.
During the year, 7,000 incentive stock options were granted and 3,525 incentive
stock options were exercised. Remaining shares available to be granted in the
future amount to 40,695. 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 $0.10 per quarter; expected volatility of 11 percent; risk-free
interest rate of 6 percent; and expected lives of 6 and 5 years.
41
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
NOTE 14. STOCK PLANS (CONTINUED)
A summary of common stock options under the Stock Option Plan for the years
ended June 30, 1999 and 2000 follows:
Weighted
Average Options
Options Price Exercisable
Balance, June 30, 1998 84,618 $10,138
Granted 10,000 13,625
Exercised (4,275) 9,250
-----------------------------
Balance, June 30, 1999 90,343 11,234 50,145
======
Granted 7,000 13,500
Exercised (3,525) 9,250
-----------------------------
Balance, June 30, 2000 93,818 11,477 66,244
============================= ======
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. From
January 5, 1996 to June 30, 1999, the Company made awards under the Plan (less
forfeited shares) in the amount of 35,823 shares. During the year ended June 30,
2000, 3,000 additional shares were granted under this plan. The award price
established for the shares upon exercise was $9 1/4 per share. At June 30, 2000
and 1999, 19,523 and 21,102 shares, including 1,421 shares earned under the plan
but withheld from vesting to satisfy tax obligations of the recipients,
respectively, remain to be awarded under the Plan in the future.
During the year, 3,000 shares were granted. 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, 2000 and 1999,
compensation cost in the amount of $65,810 and $61,185, respectively, have been
recorded under the provisions of the Plan.
On March 22, 2000, the Board of Directors of the Company adopted a Director's
Stock Compensation Plan. Pursuant to the Plan an amount of stock equal to 1
percent of the shares of common stock of the Corporation issued and outstanding
is reserved for issuance by the Company upon exercise of stock options which are
to be issued to Directors of the Company. The options vest upon date of grant
and have an exercise date of ten years from date of grant. In connection with
the adoption of the Plan, the Company has granted all 9,557 shares available
under the Plan to its Directors. The option price established for the shares
upon exercise is $13.50 per share.
During the 1997 fiscal year, the Company began a stock repurchase program. As of
June 30, 2000 and 1999, the Company has repurchased 56,140 and 176,234 shares of
its outstanding common stock for $760,531 and $2,509,912, respectively.
42
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
NOTE 15. 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, 2000, the Bank has
$82,935,066 in outstanding advances with the FHLB. The advances bear interest at
a fixed rate and mature as follows:
Unpaid Principal Interest
Balance Rate Maturity
------- ---- --------
$ 564,739 5.64% February 3, 2000
3,000,000 6.61% July 3, 2000
10,000,000 6.68% July 3, 2000
7,700,000 6.67% July 5, 2000
2,000,000 6.68% July 5, 2000
4,000,000 6.68% July 6, 2000
4,850,000 6.68% July 6, 2000
99,000 4.78% July 10, 2000
12,450,000 6.69% July 10, 2000
10,000,000 6.69% July 11, 2000
99,000 4.78% September 4, 2000
526,741 5.86% September 11, 2000
562,181 5.86% September 11, 2000
2,150,000 6.42% December 22, 2000
1,000,000 5.88% June 18, 2001
4,250,000 4.77% October 2, 2001
99,000 4.55% October 2, 2001
99,000 4.65% October 2, 2001
1,000,000 6.04% June 18, 2002
5,000,000 6.29% October 2, 2002
650,000 5.78% December 15, 2002
500,000 6.20% June 18, 2003
5,000,000 5.73% July 1, 2003
99,000 4.91% September 3, 2003
99,000 4.72% October 2, 2003
1,000,000 6.29% June 18, 2004
875,000 6.60% October 1, 2004
212,585 5.54% February 1, 2005
547,944 5.52% May 2, 2005
500,000 6.42% June 18, 2006
2,000,000 6.97% December 2, 2009
825,000 5.86% December 7, 2009
570,000 6.84% December 10, 2009
606,876 5.79% February 1, 2018
--------------------
$ 82,935,066
====================
43
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
NOTE 15. 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 $4,321,100
and investment and mortgage-backed securities in the amount of $19,078,236. In
addition, the advances are secured under a "blanket credit facility" whereby all
of the Bank's 1-4 family and commercial real estate loans are also collateral
under the advance agreement.
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments were as
follows:
<TABLE>
<CAPTION>
June 30, 2000
----------------------------------
Carrying Fair
Value Value
<S> <C> <C>
Financial Assets:
Cash and due from banks $ 2,875,537 2,875,537
Interest-bearing deposits with banks 1,215,428 1,215,428
Available-for-sale-investment securities 25,438,540 25,438,540
Hold-to-maturity investment securities 1,681,310 1,671,439
Available-for-sale mortgage-backed securities 28,930,510 28,930,510
Loans receivable, net 109,777,269 110,495,103
Accrued interest receivable 1,033,974 1,033,974
Financial Liabilities:
Transaction deposits 12,409,069 12,409,069
Savings and now deposits 14,801,893 14,801,893
Time deposits 52,736,983 52,736,983
Accrued interest payable 288,350 288,350
Advances from the FHLB 82,935,066 82,935,066
Repurchase agreements 230,839 230,839
Off-Balance-Sheet Liabilities:
Commitments to extend credit 10,005,000 10,005,000
</TABLE>
44
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
NOTE 17. EARNINGS PER SHARE
Basic earnings per share are computed by dividing earnings available to common
stockholders by the weighted average number of common shares 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, 2000
---------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Income available to common stockholders -
basic earnings per share $ 1,559,806 915,139 $ 1.70
=======
Effect of dilutive securities:
Options - 19,460
--------------------------------
Income available to common stockholders -
diluted earnings per share $ 1,559,806 934,599 $ 1.67
==========================================
</TABLE>
<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>
45
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
NOTE 18. LEASES
The Company 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 both years ended June 30, 2000 and 1999, rental expense was
$30,000.
The following is a schedule of non-cancelable future minimum lease payments
required under the operating lease:
Years Ending June 30, Amount
2001 $ 30,000
2002 30,000
2003 30,000
2004 30,000
Thereafter 75,000
The lease expires December 31, 2007. The Company 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.
NOTE 19. NEW ACCOUNTING STANDARD
During the year ended June 30, 2000, the following Statement of Financial
Accounting Standard "SFAS" became effective but is not currently applicable to
the Company:
SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB No. 133 - an amendment of FASB
Statement 133. This statement delays the effective application date of SFAS
No.133 from fiscal years beginning after June 15, 1999 to fiscal years
beginning after June 15, 2000.
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