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 March 31, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-25854
GFSB BANCORP, INC.
------------------------------------------------
(Name of Small Business Issuer in its Charter)
Delaware
- -------------------------------
(State or Other Jurisdiction of
Incorporation or Organization) 04-2095007
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(I.R.S. Employer
Identification No.)
221 West Aztec Avenue, Gallup, New Mexico
- -----------------------------------------
(Address of Principal Executive Offices)
87301
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(Zip Code)
Issuer's Telephone Number, Including Area Code: (505) 722-4361
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes |X| No
------------- ---------------
As of April 27, 2000, there were issued and outstanding 940,963 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
March 31, 2000 and June 30, 1999 3
Consolidated Statements of Earnings and Comprehensive Earnings
Three months and nine months ended March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows
Nine months ended March 31, 2000 and 1999 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis or Plan of Operation 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, June 30,
2000 1999
------------------ -----------------
(Unaudited)
ASSETS
Cash and due from banks $ 3,319,541 $ 2,839,479
Interest-bearing deposits with banks 1,248,595 2,307,736
Federal funds sold 0 0
Available-for-sale investment securities 22,906,387 10,295,919
Available-for-sale mortgage-backed securities 25,713,893 31,711,838
Held-to-Maturity investment securities 1,680,250 1,677,144
Stock of Federal Home Loan Bank, at cost, restricted 3,735,400 2,815,100
Loans receivable, net, substantially pledged 106,028,334 96,564,840
Accrued interest and dividends receivable 1,048,232 863,975
Premises and equipment 1,312,952 1,404,616
Other real estate and repossessed property 188,459 150,459
Prepaid and other assets 108,542 54,365
Deferred tax asset 92,269 68,377
------------------ -----------------
TOTAL ASSETS $ 167,382,855 150,753,849
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Transaction and NOW accounts $ 12,707,756 $ 12,874,979
Savings and MMDA deposits 15,705,127 16,962,513
Time deposits 54,245,196 51,391,829
Accrued interest payable 335,159 276,328
Advances from borrowers for taxes and insurance 527,089 329,298
Accounts payable and accrued liabilities 443,135 426,634
Deferred income taxes 64,673 265,317
Dividends declared and payable 90,350 74,748
Advances from Federal Home Loan Bank 70,680,792 55,540,826
Securities sold under agreements to repurchase 271,139 0
Income taxes payable (57,975) 180,069
------------------ -----------------
TOTAL LIABILITIES 155,012,441 138,322,541
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 955,713
shares issued and outstanding at March 31, 2000, adjusted for 40,035 shares at
June 30, 1999 and 34,039 shares
at March 31, 2000 for unallocated Management Stock Bonus Plan shares
held by the Company's wholly owned subsidiary, respectively. 92,167 95,354
Preferred stock, $.10 par value, 500,000
shares authorized; no shares issued or
outstanding - -
Additional paid-in-capital 3,007,774 3,432,687
Unearned ESOP stock (335,710) (371,183)
Retained earnings, substantially
restricted 9,480,641 8,759,425
Accumulated other comprehensive
earnings 125,542 515,025
------------------ -----------------
TOTAL STOCKHOLDERS' EQUITY 12,370,414 12,431,308
------------------ -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 167,382,855 $ 150,753,849
================== =================
See notes to consolidated financial statements.
3
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE EARNINGS
Three months ended Nine months ended
March 31, March 31,
------------------------------ -------------------------------
2000 1999 2000 1999
------------------------------ -------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Interest income
Loans receivable
Mortgage loans $ 1,965,405 $ 1,684,895 $ 5,688,913 4,807,011
Commercial loans 134,946 126,488 354,540 363,185
Share and consumer loans 121,765 102,616 350,339 298,412
Investment and mortgage-backed securities 787,128 455,300 2,121,319 1,450,586
Other interest-earning assets 70,254 49,280 193,156 152,894
------------ ------------ ------------- ------------
TOTAL INTEREST EARNINGS 3,079,498 2,418,579 8,708,267 7,072,088
Interest expense
Deposits 808,376 787,428 2,385,421 2,438,034
Advances from Federal Home Loan Bank 1,034,046 593,183 2,736,404 1,745,165
Other interest expense 2,189 - 3,101 -
------------ ------------ ------------- ------------
TOTAL INTEREST EXPENSE 1,844,611 1,380,612 5,124,926 4,183,199
------------ ------------ ------------- ------------
NET INTEREST EARNINGS 1,234,887 1,037,967 3,583,341 2,888,889
Provision for loan losses 70,000 25,000 130,000 65,000
------------ ------------ ------------- ------------
NET INTEREST EARNINGS AFTER
PROVISION FOR LOAN LOSSES 1,164,887 1,012,967 3,453,341 2,823,889
Non-interest earnings
Income from real estate operations 2,500 - 5,000 -
Miscellaneous income 5,026 2,805 13,311 14,095
Net gains (losses) from sales of loans and AFS Securitie(60,412) 31,828 (39,891) 41,053
Service charge income 57,247 42,052 187,707 115,246
------------- ------------
------------ ------------
TOTAL NON-INTEREST EARNINGS 4,361 76,686 166,127 170,394
Non-interest expense
Compensation and benefits 431,280 365,635 1,230,279 1,062,061
Insurance 12,233 16,183 50,572 46,005
Stock services 4,169 3,962 10,071 20,606
Occupancy 85,621 79,448 244,736 206,006
Data processing 50,863 50,329 147,720 149,426
Professional fees 20,303 10,170 67,579 37,862
Advertising 13,811 20,224 48,722 55,626
Stationary, printing and office supplies 19,440 17,476 59,154 51,835
ATM Expense 12,045 10,016 37,715 32,374
Supervisosry Exam Fees 10,384 8,992 29,367 27,482
Postage 9,392 11,188 25,363 24,865
Other 57,829 53,812 156,718 163,916
------------ ------------ ------------- ------------
TOTAL NON-INTEREST EXPENSE 727,369 647,435 2,107,997 1,878,063
4
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE EARNINGS - CONTINUED
Three months ended Nine months ended
March 31, March 31,
------------------------------ -------------------------------
2000 1999 2000 1999
------------------------------ -------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
EARNINGS BEFORE INCOME TAXES 441,879 442,218 1,511,471 1,116,220
Income tax expense
Currently payable 148,912 166,159 534,430 418,448
Deferred provision - - - -
------------ ------------ ------------- ------------
148,912 166,159 534,430 418,448
------------ ------------ ------------- ------------
NET EARNINGS $ 292,967 $ 276,058 977,041 697,772
============ ============ ============= ============
Other Comprehensive Earnings
Unrealized gain (loss), net of tax (16,594) (206,486) (389,483) (5,701)
------------ ------------ ------------- ------------
COMPREHENSIVE EARNINGS 276,373 69,572 587,558 692,071
============ ============ ============= ============
Earnings per common share
Basic $ 0.32 0.28 1.06 0.67
============ ============ ============= ============
Weighted average number of common shares outstanding
Basic 914,728 979,857 921,629 1,035,898
============ ============ ============= ============
Earnings per common share
Diluted 0.31 0.27 1.04 0.66
============ ============ ============= ============
Weighted average number of common shares outstanding
Diluted 933,052 1,006,191 939,953 1,064,377
============ ============ ============= ============
Comprehensive earnings per common share
Basic 0.30 0.07 0.64 0.67
============ ============ ============= ============
Diluted 0.30 0.07 0.63 0.65
============ ============ ============= ============
5
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
Nine months ended
March 31,
-----------------------------------------
2000 1999
--------------- --------------------
(Unaudited) (Unaudited)
Cash flows from operating activities
Net earnings $ 977,041 $ 697,772
Adjustments to reconcile net earnings to
net cash provided by operations
Deferred loan origination fees (231,360) (223,663)
Gain on sale of sold loans (26,122) (41,053)
Provision for loan losses 130,000 65,000
Depreciation of premises and equipment 133,468 113,570
Amortization of investment and mortgage-
backed securities premiums (discounts) 126,429 294,702
Stock dividends on FHLB stock (144,400) (95,400)
Release of ESOP stock 72,124 76,724
Stock compensation 48,664 79,883
Provision (benefit) for deferred income taxes (23,892) -
Net changes in operating assets and liabilities
Accrued interest and dividends receivable (184,257) (154,143)
Prepaid taxes - -
Prepaid and other assets (54,177) (26,355)
Accrued interest payable 58,831 20,074
Accounts payable and accrued liabilities (32,163) 112,526
Income taxes payable (238,044) (62,836)
Dividends declared and payable 15,602 (9,992)
--------------- --------------------
Net cash provided by
operating activities 627,744 846,809
Cash flows from investing activities
Purchase of premises and equipment (41,804) (523,208)
Loan originations and principal
repayment on loans, net (9,374,012) (15,413,958)
Principal payments on mortgage-backed
securities 4,341,753 8,207,158
Purchases of mortgage-backed securities - (2,928,670)
Purchases of available-for-sale securities (15,929,426) (6,002,335)
Maturities and proceeds from sale of
available-for-sale securities 4,178,588 2,010,000
Principal payments on available-for-sale securities 76,900 70,000
Purchases of held-to-maturity securities - (1,530,000)
Maturities and proceeds from sale of
held-to-maturity securities - -
Purchase of FHLB stock (775,900) (373,300)
--------------- --------------------
Net cash used by
investing activities (17,523,901) (16,484,313)
6
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Increase (decrease) in cash and cash equivalents
Nine months ended
March 31,
-----------------------------------------
2000 1999
--------------- --------------------
(Unaudited) (Unaudited)
Cash flows from financing activities
Net increase in transaction accounts, passbook
savings, money market accounts, and
certificates of deposit $ 1,428,758 $ 8,131,524
Net increase (decrease) in mortgage escrow funds 197,791 258,819
Proceeds from FHLB advances 487,058,922 217,685,527
Repayments on FHLB advances (471,918,956) (209,364,245)
Net increase (decrease) in securities sold under
agreements to repurchase 271,139 -
Purchase of GFSB Bancorp stock under the
stock repurchase plan in cash (539,640) (2,058,528)
Dividends paid or to be paid in cash (255,824) (222,984)
Price paid for vested management bonus
stock plan stock 55,463 50,065
Proceeds from exercise of stock options 19,425 -
--------------- --------------------
Net cash provided by
financing activities 16,317,078 14,480,178
--------------- --------------------
Increase (decrease) in cash and cash equivalents (579,079) (1,157,326)
Cash and cash equivalents at beginning of period 5,147,215 4,537,980
--------------- --------------------
Cash and cash equivalents at end of period $ 4,568,136 3,380,654
=============== ====================
Supplemental disclosures
Cash paid during the period for
Interest on deposits and advances $ 5,062,994 $ 4,163,126
Income taxes 772,475 481,284
Change in unrealized gain (loss), net of deferred
taxes on available-for-sale securities (389,483) (5,701)
Dividends declared not yet paid 90,350 72,454
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 December 31, 1999, the Board of Directors declared a
cash dividend of $0.10 per share on the Company's outstanding common stock,
payable to stockholders of record as of December 31, 1999. The dividends were
paid in January 2000.
During the quarter ended March 31, 2000, 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 March 31, 2000. The dividends
were paid in April 2000.
As required by SOP 93-6, the dividends on unallocated ESOP shares have been
recorded as an additional $5,200 compensation cost rather than a reduction of
retained earnings.
3. Employee Stock Ownership Plan
-----------------------------
On December 31, 1999, the Company released 7,021.01 shares of its common stock
owned by the Company's ESOP. On March 31, 2000, the Company was committed to
release 1,852.89 shares of this common stock. The commitment resulted in $25,000
of additional compensation cost for the three months ended March 31, 2000.
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. On January 5, 2000,
5,816 shares under the Plan were earned, and the corresponding liability was
paid.
At March 31, 2000, 22,523 shares remain to be awarded under the Plan, including
1,421 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 $16,200 has been recorded for the three months ended March 31, 2000, 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 18,324 for the three month period ended
March 31, 2000, and by 26,334 for the three month period ended March 31, 1999,
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 18,324 for the nine month period ended March
31, 2000, and by 28,479 for the nine month period ended March 31, 1999, 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 are 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 quarterly
report on Form 10-QSB and the exhibits thereto), in its reports to stockholders
and in other communication by the Company, which are made in good faith by the
Company pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System, inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes; acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing these risks.
The Company cautions that this list of important factors is not exclusive. The
Company does not undertake to update forward-looking statements, whether written
or oral, that may be made from time to time by or on behalf of the Company.
Management Strategy
Management's strategy has been to monitor interest rate risk, by asset and
liability management, and maintain asset quality while enhancing earnings and
profitability. The Bank's strategy has been primarily to make loans,
secondarily, to invest in mortgage-backed securities and investment securities,
and thirdly, to purchase participations in adjustable rate, one-to-four family
mortgage loans primarily secured by one-to-four family residences. The Bank's
purchase of mortgage-backed securities and investment securities is designed
primarily for safety of principal and secondarily for rate of return. The Bank's
lending strategy has historically focused on the origination of traditional
one-to-four-family mortgage loans primarily secured by one-to-four-
10
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 $16.6 million or 11% from $150.8 million at
June 30, 1999 to $167.4 million at March 31, 2000. This increase is primarily
the result of a $9.5 million increase in the Bank's net loan portfolio and a
$6.6 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 increased $1.4
million or 1.8% from $81.2 million at June 30, 1999 to $82.7 million at March
31, 2000. This increase is primarily due to an increase in the Bank's volume of
time deposits, offset by a decrease in the Bank's volume of savings and MMDA
accounts. Advances from the FHLB increased $15.1 million from $55.5 million at
June 30, 1999 to $70.7 million at March 31, 2000. These additional borrowings
funded purchases of loans, securities, and mortgage loan participations. The
Bank had $126,000 and $515,000 in unrealized gains (net of deferred taxes) at
March 31, 2000 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 MARCH 31, 2000 COMPARED TO
QUARTER ENDED MARCH 31, 1999
General
Net earnings increased $17,000 or 6.1% for the quarter ended March 31, 2000 from
the quarter ended March 31, 1999. This increase is primarily the result of an
increase in net interest earnings of $197,000 and a decrease in income tax
expense of $17,000, offset by an decrease in non-interest earnings of $72,000,
an increase in non-interest expense of $80,000 and an increase in provision for
loan losses of $45,000.
Interest Earnings
Total interest income increased $661,000 or 27.3% from $2.4 million for the
quarter ended March 31, 1999 to $3.1 million for the quarter ended March
31,2000. 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 $464,000 or 33.6% from $1.4 million for the
quarter ended March 31, 1999 to $1.8 million for the quarter ended March 31,
2000. This increase was primarily due to an increase in FHLB borrowings.
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 $535,000 and $422,000 at
March 31, 2000 and 1999, respectively. The provision for loan loss was $70,000
and $25,000 for the quarters ended March 31, 2000 and 1999, respectively. 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 decrease of $72,000 or 94.3% from $77,000 for the
quarter ended March 31, 1999 to $4,000 for the quarter ended March 31, 2000 was
primarily due to net losses of $66,000 from the sale of available-for-sale
securities and a decrease in net gains from sales of loans of $25,000, offset by
increased service and NSF charges on NOW and checking accounts of $15,000 and an
increase in income from real estate operations of $5,000. Funds received by the
Bank 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 $80,000 or 12.3% from $647,000 for the
quarter ended March 31, 1999 to $727,000 for the quarter ended March 31, 2000.
This increase was primarily due to an increase in compensation and benefits of
$66,000 from general salary increases, increases in accruals for stock-based
compensation programs, increases in employee health insurance and retirement
benefits and a gross receipts tax paid to the State of New Mexico for directors
fees. Other factors contributing to this increase were increases in professional
fees of $10,000 and occupancy costs of $6,000.
12
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR NINE MONTH PERIOD ENDED MARCH 31, 2000
COMPARED TO NINE MONTH PERIOD ENDED MARCH 31, 1999
General
Net earnings increased $279,000 or 40% for the nine-month period ended March 31,
2000 from the nine-month period ended March 31, 1999. This increase is primarily
the result of an increase in net-interest earnings of $694,000, offset by a
decrease in non-interest earnings of $4,000, an increase in non-interest expense
of $230,000, an increase in provision for loan loss of $65,000 and an increase
in provision for income taxes of $116,000.
Interest Earnings
Total interest income increased $1.6 million or 23.1% from $7.1 million for the
nine-month period ended March 31, 1999, to $8.7 million for the nine-month
period ended March 31, 2000. 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 $942,000 or 22.5% from $4.2 million for the
nine-month period ended March 31, 1999 to $5.1 million for the nine-month period
ended March 31, 2000. This increase was primarily due to an increase in FHLB
borrowings.
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 $535,000 and $422,000 at
March 31, 2000 and 1999, respectively. The provision for loan loss was $130,000
and $65,000 for the nine-month period ended March 31, 2000 and 1999,
respectively. 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 decreased by $4,000 or 2.5% from $170,000 for the
nine-month period ended March 31, 1999 to $166,000 for the nine-month period
ended March 31, 2000. This decrease was primarily due to net losses from the
sale of available- for-sale securities of $66,000 and a decrease in net gains
from sales of loans of $16,000, offset by increased service and NSF charges on
NOW and checking accounts of $72,000 and an increase in income from real estate
operations of $5,000. Funds received by the Bank 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 $230,000 or 12.2% from $1,878,000 for the
nine-month period ended March 31, 1999 to $2,108,000 for the nine-month period
ended March 31, 2000. This increase was primarily due to an increase in
compensation and benefits of $168,000 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 accruals for stock-based compensation programs, increases in
13
employee health insurance and retirement benefits and a gross receipts tax paid
to the State of New Mexico for directors fees. Other factors were increases in
occupancy costs of $39,000, professional fees of $30,000, stationary, printing
and office supplies of $7,000, Automated Teller Machine expense of $5,000,
insurance expense of $5,000, offset by a decrease in stock services of $11,000.
The increase in occupancy costs is primarily due 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.
Liquidity and Capital Resources
The Bank 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 borrowing payable in one year or less. At March 31, 2000,
the Bank's liquidity, as measured for regulatory purposes, was 5.23%. 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 March 31, 2000, cash and cash equivalents totaled
$4.6 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 March 31,
2000, the Bank had $70.7 million in outstanding borrowings from the FHLB of
Dallas. 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 quarter ended March 31 2000, the Bank
originated $11 million in total loans (including loan participations purchased),
of which $5.7 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 $628,000 and $847,000 for the nine month period ended March 31, 2000 and
1999 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 $17.5 million and $16.5 million for the nine month period ended
March 31, 2000 and 1999, 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 $16.3
million and $14.5 million for the nine month period ended March 31, 2000 and
1999, respectively.
The Bank anticipates that it will have sufficient funds available to meet its
current commitments. As of March 31, 2000, the Bank had commitments to fund
loans of $10 million. Certificates of deposit scheduled to mature
14
in one year or less totaled $38.6 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 $17,000, due to increases in interest rates during
the three months ended March 31, 2000. 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
$293,000 yielded a net increase in the Bank's capital of $276,000, net of
applicable taxes, during the three months ended March 31, 2000. During the nine
months ended March 31, 2000, the unrealized losses in the investment portfolio
totaled $389,000.
At March 31, 2000, the Bank exceeded each of the three OTS capital requirements
on a fully-phased-in basis.
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. The
repurchase was completed on March 24, 2000. On March 24, 2000 the Company issued
a press release announcing its intention to repurchase up to 5% (47,785 shares)
of the Company's common stock. As of April 24, 2000, 16,175 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.
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.
15
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.
PART II. OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.3 Directors Deferred Compensation Agreements
10.4 Directors Stock Compensation Plan
16
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: May 8, 2000 /s/Jerry R. Spurlin
-----------------------------------------------
Jerry R. Spurlin
Assistant Secretary and Chief Financial Officer
(Duly Authorized Representative and
Principal Financial Officer)