UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[|X|] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-25854
GFSB BANCORP, INC.
---------------------------------------------
(Name of Small Business Issuer in its Charter)
Delaware 04-2095007
- -------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
221 West Aztec Avenue, Gallup, New Mexico 87301
- ----------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (505) 722-4361
--------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes |X| No
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As of February 8, 2000, there were issued and outstanding 970,358 shares of the
registrant's Common Stock.
GFSB Bancorp, Inc.
Index
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Statements of Financial Condition
December 31, 1999 and June 30, 1999 3
Consolidated Statements of Earnings and Comprehensive Earnings
Three months and six months ended December 31, 1999 and 1998 4
Consolidated Statements of Cash Flows
Six months ended December 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis or Plan of Operation 10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, June 30,
1999 1999
------------------ -----------------
(Unaudited)
ASSETS
Cash and due from banks $ 3,081,126 $ 2,839,479
Interest-bearing deposits with banks 1,033,240 2,307,736
Federal funds sold 0 0
Available-for-sale investment securities 19,202,739 10,295,919
Available-for-sale mortgage-backed securities 28,226,236 31,711,838
Held-to-Maturity investment securities 1,679,207 1,677,144
Stock of Federal Home Loan Bank, at cost, restricted 3,574,400 2,815,100
Loans receivable, net, substantially pledged 104,140,875 96,564,840
Accrued interest and dividends receivable 856,351 863,975
Premises and equipment 1,337,500 1,404,616
Other real estate and repossessed property 147,959 150,459
Prepaid and other assets 45,032 54,365
Deferred tax asset 92,269 68,377
------------------ -----------------
TOTAL ASSETS $ 163,416,935 150,753,849
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Transaction and NOW accounts $ 11,619,807 $ 12,874,979
Savings and MMDA deposits 14,695,598 16,962,513
Time deposits 52,815,619 51,391,829
Accrued interest payable 415,306 276,328
Advances from borrowers for taxes and insurance 328,244 329,298
Accounts payable and accrued liabilities 461,550 426,634
Deferred income taxes 73,221 265,317
Dividends declared and payable 91,708 74,748
Advances from Federal Home Loan Bank 70,275,888 55,540,826
Securities sold under agreements to repurchase 216,595 0
Income taxes payable 39,539 180,069
------------------ -----------------
TOTAL LIABILITIES 151,033,076 138,322,541
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 1,500,000
shares authorized; 993,578 issued and outstanding
at June 30, 1999 and 976,308 shares issued and
outstanding at December 31, 1999, adjusted for
40,035 shares at June 30, 1999 and December 31, 1999
for unallocated Management Stock Bonus Plan shares
held by the Company's wholly owned subsidiary, respectively. 93,627 95,354
Preferred stock, $.10 par value, 500,000
shares authorized; no shares issued or
outstanding - -
Additional paid-in-capital 3,218,135 3,432,687
Unearned ESOP stock (348,063) (371,183)
Retained earnings, substantially
restricted 9,278,024 8,759,425
Accumulated other comprehensive
earnings 142,136 515,025
------------------ -----------------
TOTAL STOCKHOLDERS' EQUITY 12,383,859 12,431,308
------------------ -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 163,416,935 $ 150,753,849
================== =================
See notes to consolidated financial statements.
3
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE EARNINGS
Three months ended Six months ended
December 31, December 31,
------------------------------ -------------------------------
1999 1998 1999 1998
------------------------------ -------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Interest income
Loans receivable
Mortgage loans $ 1,903,691 $ 1,605,430 $ 3,723,509 3,122,116
Commercial loans 108,791 122,734 219,594 236,696
Share and consumer loans 117,839 101,303 228,575 195,796
Investment and mortgage-backed securities 703,174 484,423 1,334,191 995,286
Other interest-earning assets 65,335 52,543 122,902 103,614
------------ ------------ ------------- ------------
TOTAL INTEREST EARNINGS 2,898,830 2,366,433 5,628,771 4,653,509
Interest expense
Deposits 789,052 820,827 1,577,045 1,650,605
Advances from Federal Home Loan Bank 919,749 583,917 1,702,359 1,151,981
Other interest expense 912 - 912 -
------------ ------------ ------------- ------------
TOTAL INTEREST EXPENSE 1,709,713 1,404,744 3,280,316 2,802,587
------------ ------------ ------------- ------------
NET INTEREST EARNINGS 1,189,117 961,689 2,348,455 1,850,922
Provision for loan losses 40,000 25,000 60,000 40,000
------------ ------------ ------------- ------------
NET INTEREST EARNINGS AFTER
PROVISION FOR LOAN LOSSES 1,149,117 936,689 2,288,455 1,810,922
Non-interest earnings
Income from real estate operations - - 2,500 -
Miscellaneous income 4,699 2,564 8,284 11,288
Net gains from sales of loans 13,380 7,090 20,521 9,225
Service charge income 70,820 38,109 130,460 73,194
------------ ------------ ------------- ------------
TOTAL NON-INTEREST EARNINGS 88,899 47,763 161,765 93,707
Non-interest expense
Compensation and benefits 404,165 356,189 799,000 696,426
Insurance 19,555 14,923 38,339 29,821
Stock services 3,403 3,287 5,903 16,644
Occupancy 83,471 70,015 159,115 126,558
Data processing 47,596 59,552 96,857 99,097
Professional fees 23,779 14,737 47,276 27,692
Advertising 20,745 19,028 34,910 35,402
Stationary, printing and office supplies 26,479 19,408 39,714 34,359
ATM Expense 11,610 9,272 25,670 22,358
Supervisosry Exam Fees 9,491 9,245 18,983 18,490
Postage 8,713 5,443 15,972 13,677
Other 47,454 50,187 98,888 110,104
------------ ------------ ------------- ------------
TOTAL NON-INTEREST EXPENSE 706,460 631,286 1,380,627 1,230,627
4
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE EARNINGS - CONTINUED
Three months ended Six months ended
December 31, December 31,
------------------------------ -------------------------------
1999 1998 1999 1998
------------------------------ -------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
EARNINGS BEFORE INCOME TAXES 531,556 353,166 1,069,593 674,002
Income tax expense
Currently payable 192,713 135,723 385,518 252,289
Deferred provision - - - -
------------ ------------ ------------- ------------
192,713 135,723 385,518 252,289
------------ ------------ ------------- ------------
NET EARNINGS $ 338,842 $ 217,443 684,075 421,714
============ ============ ============= ============
Other Comprehensive Earnings
Unrealized gain (loss), net of tax (239,626) 207,231 (372,889) 200,785
------------ ------------ ------------- ------------
COMPREHENSIVE EARNINGS 99,216 424,674 311,186 622,499
============ ============ ============= ============
Earnings per common share
Basic $ 0.37 0.22 0.73 0.40
============ ============ ============= ============
Weighted average number of common shares outstanding
Basic 925,753 1,008,985 931,000 1,047,923
============ ============ ============= ============
Earnings per common share
Diluted 0.36 0.21 0.72 0.39
============ ============ ============= ============
Weighted average number of common shares outstanding
Diluted 943,564 1,035,688 950,350 1,076,970
============ ============ ============= ============
Comprehensive earnings per common share
Basic 0.11 0.42 0.33 0.59
============ ============ ============= ============
Diluted 0.11 0.41 0.33 0.58
============ ============ ============= ============
5
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
Six months ended
December 31,
-----------------------------------------
1999 1998
--------------- --------------------
(Unaudited) (Unaudited)
Cash flows from operating activities
Net earnings $ 684,075 $ 421,714
Adjustments to reconcile net earnings to
net cash provided by operations
Deferred loan origination fees (156,437) (157,153)
Gain on sale of sold loans (18,816) (9,225)
Provision for loan losses 60,000 40,000
Depreciation of premises and equipment 87,535 69,863
Amortization of investment and mortgage-
backed securities premiums (discounts) 101,279 197,708
Stock dividends on FHLB stock (88,800) (63,100)
Release of ESOP stock 47,002 45,376
Stock compensation 32,443 26,893
Provision (benefit) for deferred income taxes (23,892) -
Net changes in operating assets and liabilities
Accrued interest and dividends receivable 7,625 (53,608)
Prepaid taxes - -
Prepaid and other assets 9,333 2,736
Accrued interest payable 138,978 10,970
Accounts payable and accrued liabilities 2,473 136,574
Income taxes payable (140,530) (87,996)
Dividends declared and payable 16,960 (8,523)
--------------- --------------------
Net cash provided by
operating activities 759,228 572,229
Cash flows from investing activities
Purchase of premises and equipment (20,419) (512,823)
Loan originations and principal
repayment on loans, net (7,458,282) (12,719,262)
Principal payments on mortgage-backed
securities 3,296,815 5,469,927
Purchases of mortgage-backed securities - (880,255)
Purchases of available-for-sale securities (12,208,015) (3,980,260)
Maturities and proceeds from sale of
available-for-sale securities 2,746,655 2,010,000
Principal payments on available-for-sale securities 75,000 70,000
Purchases of held-to-maturity securities - (980,000)
Maturities and proceeds from sale of
held-to-maturity securities - -
Purchase of FHLB stock (670,500) (293,300)
--------------- --------------------
Net cash used by
investing activities (14,238,746) (11,815,973)
6
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Increase (decrease) in cash and cash equivalents
Six months ended
December 31,
-----------------------------------------
1999 1998
--------------- --------------------
(Unaudited) (Unaudited)
Cash flows from financing activities
Net increase in transaction accounts, passbook
savings, money market accounts, and
certificates of deposit $ (2,098,297) $ 4,528,652
Net increase (decrease) in mortgage escrow funds (1,054) 75,541
Proceeds from FHLB advances 258,008,922 148,835,528
Repayments on FHLB advances (243,273,860) (141,898,304)
Net increase (decrease) in securities sold under
agreements to repurchase 216,595 -
Purchase of GFSB Bancorp stock under the
stock repurchase plan in cash (248,487) (1,609,036)
Dividends paid or to be paid in cash (165,474) (150,530)
Price paid for vested management bonus
stock plan stock - -
Proceeds from exercise of stock options 8,325 -
--------------- --------------------
Net cash provided by
financing activities 12,446,670 9,781,851
--------------- --------------------
Increase (decrease) in cash and cash equivalents (1,032,848) (1,461,893)
Cash and cash equivalents at beginning of period 5,147,215 4,537,980
--------------- --------------------
Cash and cash equivalents at end of period $ 4,114,366 3,076,087
=============== ====================
Supplemental disclosures
Cash paid during the period for
Interest on deposits and advances $ 3,136,426 $ 1,754,827
Income taxes 526,049 340,284
Change in unrealized gain (loss), net of deferred
taxes on available-for-sale securities (372,889) 200,785
Dividends declared not yet paid 91,708 73,923
7
GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. The interim financial data is unaudited; however, in the opinion of
management, the interim data includes all adjustments, consisting only of normal
recurring adjustments necessary for a fair statement of the results for the
interim periods. The financial statements included herein have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures included herein
are adequate to make the information presented not misleading.
The organization and business of the Company, accounting policies followed by
the Company and other information is contained in the notes to the Company's
financial statements filed as part of the Company's June 30, 1999, Form 10-KSB.
This quarterly report should be read in conjunction with such annual report.
2. Dividends
---------
During the quarter ended September 30, 1999, the Board of Directors declared a
cash dividend of $0.08 per share on the Company's outstanding common stock,
payable to stockholders of record as of September 30, 1999. The dividends were
paid in October 1999.
During the quarter ended December 31, 1999, the Board of Directors declared a
quarterly cash dividend of $0.10 per share on the Company's outstanding common
stock, payable to stockholders of record as of December 31, 1999. The dividends
were paid in January 2000.
As required by SOP 93-6, the dividends on unallocated ESOP shares have been
recorded as an additional $5,900 compensation cost rather than a reduction of
retained earnings.
3. Employee Stock Ownership Plan
-----------------------------
On December 31, 1998 the Company released 7,022.36 shares of its common stock
owned by the Company's ESOP. On December 31, 1999, the Company was committed to
release 7,021.01 shares of this common stock. The commitment resulted in $98,000
of additional compensation cost for the twelve months ended December 31, 1999,
with $23,000 of that amount booked as additional compensation cost for the three
months ended December 31, 1999.
4. Management Stock Bonus Plan
On January 5, 1996, the Company made awards under the Plan in the amount of
30,573 shares. The shares were awarded at a price of $9.250 per share. On
January 5, 1998, the Company made awards under the Plan in the amount of 2,250
shares. On November 16, 1998, the Company made awards under the Plan in the
amount of 6,000 shares. The retirement during the quarter ended September 30,
1997 of an officer, to whom an award had been made under the Plan, resulted in a
reduction of 3,000 shares in the total number of shares awarded. Awards under
the Plan are earned at the rate of one-fifth of the award per year. From January
5, 1997 to January 5, 1999, 17,291 shares under the Plan were earned, and the
corresponding liability was paid. On November 16, 1999 1,200 shares under the
Plan were earned, and the corresponding liability was paid.
At December 31, 1999, 21,503 shares remain to be awarded under the Plan,
including 401 shares earned under the Plan but withheld from vesting to satisfy
tax obligations of recipients. As a result of vesting and the dividends earned
on the vested shares, a liability and corresponding compensation cost in the
amount of $67,700 has been recorded for the twelve months ended December 31,
1999, with $16,200 of that amount booked as additional compensation for the
three months ended December 31, 1999, under the provisions of the Plan.
8
5. Earnings Per Share
------------------
The Company has potential dilutive common stock (stock options to employees and
directors) and accordingly presents basic and diluted earnings per share.
Diluted per share amounts assume the conversion, exercise or issuance of all
potential common stock instruments unless the effect is to reduce a loss or
increase the income per common share
The weighted average number of shares of common stock used to compute the basic
earnings per share was increased by 17,811 for the three month period ended
December 31, 1999, and by 26,703 for the three month period ended December 31,
1998, in computing the diluted per share data.
The weighted average number of shares of common stock used to compute the basic
earnings per share was increased by 19,350 for the six month period ended
December 31, 1999, and by 29,047 for the six month period ended December 31,
1998, in computing the diluted per share data.
6. Comprehensive Earnings
----------------------
Comprehensive earnings, defined as the change in equity of a business enterprise
from transactions and other events and circumstances from non-owner sources. The
only item of other comprehensive earnings for the Company is the unrealized gain
(loss) on available-for-sale securities.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
General
GFSB Bancorp, Inc., is the 100% owner of Gallup Federal Savings Bank ("the
Bank"), and the Bank is currently the only entity with which the holding company
has an ownership interest. The Bank is primarily engaged in the business of
accepting deposit accounts from the general public and using such funds to
originate mortgage loans for the purchase and refinancing of one-to-four-family
homes located in its primary market area. The Bank also originates multi-family,
commercial real estate, construction, consumer and commercial business loans and
purchases participations in one-to-four family and commercial real estate loans.
The Bank also purchases mortgage-backed and investment securities. The largest
components of the Bank's net earnings are net interest income, which is the
difference between interest income and interest expense, and non-interest income
derived primarily from fees. Consequently, the Bank's earnings are dependent on
its ability to originate loans, and the relative amounts of interest-earning
assets and interest-bearing liabilities. The Bank's net earnings is also
affected by its provision for loan losses as well as the amount of other
expense, such as compensation and benefit expense, occupancy and equipment
expense and deposit insurance premium expenses. Earnings of the Bank also are
affected significantly by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.
GFSB Bancorp, Inc. (the "Company") may from time to time make written or oral
"forward-looking statements", including statements contained in the Company's
filing with the Securities and Exchange Commission (including this quarter
report on Form 10-QSB and the exhibits thereto), in its reports to stockholders
and in other communication by the Company, which are made in good faith by the
Company pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System, inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes; 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 is not exclusive. The
Company does not undertake to update and forward-looking statement, whether
written or oral, that may be made from time to time by or on behalf of the
Company.
Management Strategy
Management's strategy has been to monitor interest rate risk, by asset and
liability management, and maintain asset quality while enhancing earnings and
profitability. The Bank's strategy has been primarily to make loans,
secondarily, to invest in mortgage-backed securities and investment securities,
and thirdly, to purchase participations in adjustable rate, one-to-four family
mortgage loans primarily secured by one-to-four family residences. The Bank's
purchase of mortgage-backed securities and investment securities is designed
10
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, increased its origination of commercial
real estate loans, construction loans, and purchased participations in
commercial real estate loans. These loans typically have adjustable interest
rates and are for shorter terms than residential first mortgage loans. 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 credit life insurance are additional products offered
by the Bank. The Bank attempts to manage the interest rates it pays on deposits
while maintaining a stable deposit base and providing quality services to its
customers.
During the past few years the competing financial institutions located in Gallup
have all been acquired by statewide and regional bank holding companies. As a
result, as of 1995, the Bank is the only local institution headquartered and
managed in Gallup, New Mexico. The Bank believes that its "hometown" advantage
provides an opportunity to expand its operations as the only local independent
financial institution. The Bank also believes that it has a unique ability to
grow as a result of the relatively large number of local retail and wholesale
businesses specializing in Indian jewelry. In addition, the Bank is exploring
methods of increasing its business with the large Native American population
located in the nearby Navajo and Zuni Pueblo Indian reservations.
Asset and Liability Management
In an effort to reduce interest rate risk and protect it from the negative
effect of rapid increases and decreases in interest rates, the Bank has
instituted certain asset and liability management measures. (See "Management
Strategy" discussed above).
The Bank, like many other thrift institutions, is exposed to interest rate risk
as a result of the difference in the maturity of interest-bearing liabilities
and interest-earning assets and the volatility of interest rates. Most deposit
accounts react more quickly to market interest rate movements than do the
existing mortgage loans because of their shorter terms to maturity; sharp
decreases in interest rates would typically positively affect the Bank's
earnings. Conversely, this same mismatch will generally adversely affect the
Bank's earnings during periods of increasing interest rates.
FINANCIAL CONDITION
The Bank's total assets increased $12.7 million or 8.4% from $150.8 million at
June 30, 1999 to $163.4 million at December 31, 1999. This increase is primarily
the result of a $7.6 million increase in the Bank's net loan portfolio and a
$5.4 million increase in the Bank's investment portfolio. The majority of the
increases are directly attributable to efforts of Management to increase
investment and lending activity. During the same period, deposits decreased $2.1
million or 2.7% from $81.2 million at June 30, 1999 to $79.1 million at December
31, 1999. This decrease is primarily due to a decrease in the Bank's volume of
savings and MMDA accounts; management believes this to be primarily a seasonal
fluctuation. Advances from the FHLB increased $14.7 million from $55.5 million
at June 30, 1999 to $70.3 million at December 31, 1999. These additional
borrowings funded purchases of loans, securities, and mortgage loan
participations. The Bank had $142,000 and $515,000 in unrealized gains (net of
deferred taxes) at December 31, 1999 and June 30, 1999, respectively from market
gains on the Bank's equity securities offset by market losses on the Bank's
available-for-sale investment and mortgage-backed portfolios.
11
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR QUARTER ENDED DECEMBER 31, 1999 COMPARED TO
QUARTER ENDED DECEMBER 31, 1998
General
Net earnings increased $121,000 or 55.8% for the quarter ended December 31, 1999
from the quarter ended December 31, 1998. This increase is primarily the result
of an increase in net interest earnings of $227,000 and an increase in
non-interest earnings of $41,000, offset by an increase in non-interest expense
of $75,000, an increase in income tax expense of $57,000 and an increase in
provision for loan losses of $15,000
Interest Earnings
Total interest income increased $532,000 or 22.5% from $2.4 million for the
quarter ended December 31, 1998 to $2.9 million for the quarter ended December
31,1999. This increase was primarily due to substantial increases in the net
loan portfolio and securities portfolio of the bank.
Interest Expense
Total interest expense increased $305,000 or 21.7% from $1.4 million for the
quarter ended December 31, 1999 to $1.7 million for the quarter ended December
31, 1999. This increase was primarily due to an increase in FHLB borrowings
offset by a decrease in the deposit base of the bank.
Provision for Losses on Loans
The Bank maintains an allowance for loan losses based upon management's periodic
evaluation of known and inherent risks in the loan portfolio, past loss
experience, adverse situations that may affect the borrower's ability to repay
loans, estimated value of the underlying collateral and current and expected
market conditions. The allowance for loan losses was $498,000 and $421,000 at
December 31,1999 and 1998, respectively. The provision for loan loss was $40,000
and $25,000 for the quarter ended December 31, 1999 and 1998, respectively.
Based on a historical trend of limited losses on residential loans, the amount
of the loan loss provision allocated to residential loans remained relatively
stable for the two periods. While the Bank maintains its allowance for losses at
a level which it considers to be adequate, there can be no assurance that
further additions will not be made to the loss allowances and that such losses
will not exceed the estimated amounts. Recent substantial increases in the loan
portfolio of the Bank may result in an increase of provision for losses on
loans. The establishment of a loan loss provision each period adversely impacts
the Bank's net earnings.
Non-Interest Income
Total non-Interest income increased by $41,000 or 83.1% from $48,000 for the
quarter ended December 31, 1998 to $89,000 for the quarter ended December 31,
1999. This increase was primarily due to increased service and NSF charges on
NOW and checking accounts.
Non-Interest Expense
Total non-interest expense increased $75,000 or 11.9% from $631,000 for the
quarter ended December 31, 1998 to $706,000 for the quarter ended December 31,
1999. This increase was primarily due to an increase in compensation and
benefits of $48,000 from general salary increases, increases due to accrual for
stock-based compensation programs and increases in employee health insurance
benefits. Other factors were increases in occupancy costs of $13,000,
professional fees of $9,000, stationary, printing and office supplies of $7,000,
insurance expense of $5,000, offset by a decrease in data processing of $12,000.
The increase in occupancy cost is primarily due to furniture, fixtures, and
equipment expense. The decrease in data processing expense is primarily due to
service bureau expense for upgrading computer software in the quarter ending
December 31, 1998.
12
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR SIX MONTH PERIOD ENDED DECEMBER 31, 1999
COMPARED TO SIX MONTH PERIOD ENDED DECEMBER 31, 1998
General
Net earnings increased $262,000 or 62.2% for the six-month period ended December
31, 1999 from the six-month period ended December 31, 1998. This increase is
primarily the result of an increase in net-interest earnings of $498,000 and a
increase in non-interest earnings of $68,000, offset by an increase in
non-interest expense of $150,000, an increase in provision for loan loss of
$20,000 and an increase in provision for income taxes of $133,000.
Interest Earnings
Total interest income increased $975,000 or 20.9% from $4.7 million for the
six-month period ended December 31, 1998, to $5.6 million for the six-month
period ended December 31, 1999. This increase was primarily due to substantial
increases in the net loan portfolio and securities portfolio of the bank.
Interest Expense
Total interest expense increased $478,000 or 17% from $2.8 million for the
six-month period ended December 31, 1998 to $3.3 million for the six-month
period ended December 31, 1999. This increase was primarily due to an increase
in FHLB borrowings offset by a decrease in the deposit base of the bank.
Provision for Losses on Loans
The Bank maintains an allowance for loan losses based upon management's periodic
evaluation of known and inherent risks in the loan portfolio, past loss
experience, adverse situations that may affect the borrower's ability to repay
loans, estimated value of the underlying collateral and current and expected
market conditions. The allowance for loan losses was $498,000 and $421,000 at
December 31, 1999 and 1998, respectively. The provision for loan loss was
$60,000 and $40,000 for the six-month period ended December 31, 1999 and 1998,
respectively. Based on a historical trend of limited losses on residential
loans, the amount of the loan loss provision allocated to residential loans
remained relatively stable for the two periods. While the Bank maintains its
allowance for losses at a level which it considers to be adequate, there can be
no assurance that further additions will not be made to the loss allowances and
that such losses will not exceed the estimated amounts. Recent substantial
increases in the loan portfolio of the Bank may result in an increase of
provision for losses on loans. The establishment of a loan loss provision each
period adversely impacts the Bank's net earnings.
Non-Interest Income
Total non-Interest income increased by $68,000 or 72.6% from $94,000 for the
six-month period ended December 31, 1998 to $162,000 for the six-month period
ended December 31, 1999. This increase was primarily due to increased service
and NSF charges on NOW and checking accounts and an increase in net gains from
sales of loans.
Non-Interest Expense
Total non-interest expense increased $150,000 or 12.2% from $1,231,000 for the
six-month period ended December 31, 1998 to $1,381,000 for the six month period
ended December 31, 1999. This increase was primarily due to an increase in
compensation and benefits of $103,000 from the hiring of additional staff to
handle growth, salary expense for a full time data processing systems
administrator for Year 2000 administration, general salary increases, increases
due to accrual for stock-based compensation programs and increases in employee
health insurance benefits. Other factors were increases in occupancy costs of
13
$33,000, professional fees of $20,000, insurance expense of $9,000, offset by a
decrease in stock services of $11,000. The increase in occupancy cost is
primarily due leasehold improvement expense and janitorial expense for the Loan
Center and furniture, fixtures, and equipment expense. The decrease in stock
services in primarily due to a fee paid to the OTS for filing a change of
control application for the quarter ended September 30, 1998.
Liquidity and Capital Resources
The Bank is required under applicable federal regulations to maintain specified
levels of "liquid" investments in qualifying types of U.S. Government, federal
agency and other investments. Prior OTS regulations required that a savings
institution maintain liquid assets of not less than 5% of its average daily
balance of net withdrawable deposit accounts and borrowings payable in one year
or less, of which short-term liquid assets consist of not less than 1%, with the
qualifying investments limited to those having maturities of five years of less.
Revised OTS regulations effective November 13, 1997 lowered the required level
of liquid assets to 4%, removed the short-term liquid asset requirement and
deleted the five year or less maturity requirement. At December 31, 1999, the
Bank's liquidity, as measured for regulatory purposes, was 5.28%. The Bank
adjusts liquidity as appropriate to meet its asset/liability objectives.
The Bank's primary sources of funds are deposits, amortization and prepayment of
loans and mortgage-backed securities, maturities of investment securities, and
funds provided from operations. While scheduled loan repayments are a relatively
predictable source of funds, deposit flows and loan and mortgage-backed security
prepayments are significantly influenced by general interest rates, economic
conditions and competition. In addition, the Bank invests excess funds in
overnight deposits, which provide liquidity to meet lending requirements 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 December 31, 1999, cash and cash equivalents totaled
$4 million. The Bank has other sources of liquidity if a need for additional
funds arises. Additional sources of funds include FHLB of Dallas advances and
the ability to borrow against mortgage-backed and other securities. At December
31, 1999, the Bank had $70.3 million in outstanding borrowings from the FHLB of
Dallas. 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 quarter ended December 31 1999, the Bank
originated $13.4 million in total loans (including loan participations
purchased), of which $9.6 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 and FHLB-Dallas overnight funds and readily marketable equity
securities. During periods when the loan demand of the Bank 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 $759,000 and $572,000 for the six month period ended December 31, 1999 and
1998 respectively. Net cash used for investing activities consisted primarily of
disbursement of loan originations and investment and mortgage-backed security
purchases, offset by principal collections on loans and principal collections
and proceeds from the maturities of investment securities and mortgage-backed
securities, were $14.2 million and $11.8 million for the six month period ended
December 31, 1999 and 1998, respectively. Net cash provided from financing
activities consisting primarily of net activity in deposit and escrow accounts
and new FHLB borrowings, offset by repayments on FHLB borrowings, were $12.4
million and $9.8 million for the six month period ended December 31, 1999 and
1998, respectively.
14
The Bank anticipates that it will have sufficient funds available to meet its
current commitments. As of December 31, 1999, the Bank had commitments to fund
loans of $10 million. Certificates of deposit scheduled to mature in one year or
less totaled $37 million. Based on historical withdrawals and outflows, on
internal daily deposit reports monitored by management, and the fact that the
Bank does not accept any brokered deposits, management believes that a majority
of deposits will remain with the Bank. As a result, no adverse liquidity effects
are expected.
Pursuant to Financial Accounting Standards Bulletin No. 130, the Bank is
required to record unrealized gains and losses in its investment portfolio that
may result from movements in interest rates. The Bank showed unrealized losses,
net of tax effect, totaling $240,000, due to increases in interest rates during
the three months ended December 31, 1999. Management does not anticipate the
realization of this loss. The unrealized loss negatively impacts the Bank's
capital. However, the unrealized losses combined with net operating income of
$339,000 yielded a net increase in the Bank's capital of $99,000, net of
applicable taxes, during the three months ended December 31, 1999. During the
six months ended December 31, 1999, the unrealized losses in the investment
portfolio totaled $373,000.
At December 31, 1999, the Bank exceeded each of the three OTS capital
requirements on a fully-phased-in basis.
The Year 2000 issue
Year 2000 expense for the quarter ended December 31, 1999 was $14,000. The Bank
does not anticipate any material expenses for the quarter ending March 31, 2000.
As Of September 30, 1999, the Bank had completed its Year 2000 project
compliance efforts. During the quarter ended December 31, 1999, the Bank
continued to refine its Year 2000 emergency preparedness/business recovery
plans.
During the month of January 2000 the Bank has operated normally and has
experienced no significant Year 2000 problems.
Subsequent Events
None
Stock Repurchase Program
On May 20, 1999 the Company issued a press release announcing its intention to
repurchase up to 5% (49,965 shares) of the Company's common stock. As of
February 4, 2000, 34,120 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
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.
15
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 will be taxed over a six year period beginning in 1996; however, bad
debt reserves set aside through 1987 will generally not be taxed. Institutions
can delay these taxes for two years if they meet a residential - lending test.
At June 30, 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 may have an adverse
effect on net earnings. Management does not believe such future recapture of the
Bank's bad debt reserves will have a material impact on the Bank's financial
condition.
Impact of Certain Accounting Standards
In October, 1995, the FASB issued SFAS No. 123 "Statement of Accounting for
Stock-Based Compensation" which defines a "fair value based method" of
accounting for an employee stock option whereby compensation cost is measured at
the grant date based on the value of the award and is recognized over the
service period. The FASB encouraged all entities to adopt the fair value based
method, however, it allows entities to continue the use of the "intrinsic value
based method" prescribed by Accounting Principles Board ("APB") Opinion No. 25.
Under the intrinsic value based method, compensation cost is the excess of the
market price of the stock at the grant date over the amount an employee must pay
to acquire the stock. However, most stock option plans have no intrinsic value
at the grant date and, as such, no compensation cost is recognized under APB
Opinion No. 25. Entities electing to continue use of the accounting treatment of
APB Opinion No. 25 must make certain pro forma disclosures as if the fair value
based method had been applied. The Bank has continued to use the "intrinsic
value based method" as prescribed by APB Opinion No. 25.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." This Statement establishes standards for
the way that public entities report information about operating segments in
annual financial statements and requires that selected information about
operating segments be reported in interim financial reports as well. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This Statement is effective for fiscal
years beginning after December 31, 1997, except for interim financial statements
in the initial year of its application.
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.
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.
16
PART II. OTHER INFORMATION
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Item 4. Submission of Matters to a Vote of Security Holder.
The annual meeting of the stockholders of the Company was held on October 27,
1999. At the meeting two directors were elected for terms to expire in 2002, the
appointment of an independent accountant was ratified , the GFSB Bancorp, Inc.
1995 Stock Option Plan was ratified and the Gallup Federal Savings Bank
Management Stock Bonus Plan and Trust Agreement was ratified.
The results of voting are shown for each matter considered.
Director election:
Nominee Votes For Votes Withheld Broker non-votes
James Nechero, Jr. 714,612 1,853 0
Vernon I. Hamilton 691,497 24,968 0
Auditor ratification:
Votes for 716,465
Votes against 0
Abstentions 0
GFSB Bancorp, Inc 1995 Stock Option Plan ratification:
Votes for 529,355
Votes against 26,903
Abstentions 750
Gallup Federal Savings Bank Management Stock Bonus Plan and Trust Agreement
ratification:
Votes for 688,775
Votes against 27,690
Abstentions 0
Item 6. Exhibits and Reports on Form 8-K
None
17
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GFSB BANCORP, INC.
Date: February 11, 2000 /s/Jerry R. Spurlin
------------------------------------------------
Jerry R. Spurlin
Assistant Secretary and Chief Financial Officer
(Duly Authorized Representative and
Principal Financial Officer)