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, 2004
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE EXCHANGE ACT OF 1934
For the transition period from to
------- -------
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) 726-6500
--------------
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 May 14, 2004, there were issued and outstanding 1,146,270 shares of the
issuer's Common Stock.
Transitional Small Business Disclosure format:
Yes No X
------------- ------------
GFSB Bancorp, Inc.
Index
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Financial Condition
March 31, 2004 and June 30, 2003 3
Condensed Consolidated Statements of Earnings and Comprehensive Earnings
Three months and nine months ended March 31, 2004 and March 31, 2003. 4
Condensed Consolidated Statements of Cash Flows
Nine months ended March 31, 2004 and March 31, 2003. 6
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis or Plan of Operation 9
Item 3. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Small Business Issuer Purchases of 16
Equity Securities
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 18
2
GFSB Bancorp, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, June 30,
2004 2003
------------------ -----------------
ASSETS
Cash and due from banks $ 7,329,919 $ 6,785,410
Interest-bearing deposits with banks 378,212 466,948
Available-for-sale investment securities 32,059,790 29,279,417
Available-for-sale mortgage-backed securities 34,848,544 38,517,103
Held-to-maturity investment securities 398,998 675,997
Stock of Federal Home Loan Bank, at cost, restricted 4,392,800 4,332,800
Loans receivable, net, substantially pledged 155,460,388 146,264,291
Loans held-for-sale 158,105 132,000
Accrued interest and dividends receivable 963,432 844,722
Premises and equipment 2,566,461 2,313,815
Other real estate and repossessed property 88,929 213,953
Prepaid and other assets 266,224 128,197
------------------ -----------------
TOTAL ASSETS $ 238,911,802 229,954,653
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Transaction and NOW accounts $ 27,968,784 $ 24,937,782
Savings and MMDA deposits 20,842,723 17,264,978
Time deposits 89,654,792 87,556,558
Advances from Federal Home Loan Bank 74,535,306 76,641,834
Other secured borrowings 4,983,533 3,657,911
Repurchase agreements 638,427 584,902
Accrued interest payable 479,972 515,872
Advances from borrowers for taxes and insurance 582,301 365,193
Notes payable 136,875 -
Accounts payable and accrued liabilities 397,907 250,015
Deferred income taxes 13,275 312,796
Dividends declared and payable 140,848 122,467
Income taxes payable - -
------------------ -----------------
TOTAL LIABILITIES 220,374,743 212,210,308
------------------ -----------------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value, 500,000
shares authorized; no shares issued or
outstanding - -
Common stock, $.10 par value, 1,500,000
shares authorized; 1,146,270 issued and outstanding
at March 31, 2004 and June 30, 2003 114,627 114,627
Additional paid-in-capital 3,010,219 2,853,446
Unearned ESOP stock (85,981) (139,882)
Retained earnings, substantially
restricted 14,382,443 13,633,421
Accumulated other comprehensive
earnings 1,115,751 1,282,733
------------------ -----------------
TOTAL STOCKHOLDERS' EQUITY 18,537,059 17,744,345
------------------ -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 238,911,802 $ 229,954,653
================== =================
See notes to condensed consolidated financial statements.
3
GFSB Bancorp, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE EARNINGS
Three months ended Nine months ended
March 31, March 31,
------------------------------- --------------------------------
2004 2003 2004 2003
------------------------------- --------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Interest income
Loans receivable
Mortgage loans $ 2,008,343 $ 2,006,844 $ 6,075,465 $ 6,254,520
Commercial loans 381,429 354,295 1,117,957 1,018,707
Share and consumer loans 104,884 100,988 320,214 320,619
Investment and mortgage-backed securities 553,797 526,965 1,579,976 1,728,783
Other interest-earning assets 17,389 32,366 65,967 102,349
------------- ------------ ------------- -------------
TOTAL INTEREST EARNINGS 3,065,842 3,021,458 9,159,579 9,424,978
Interest expense
Deposits 666,258 710,295 2,166,025 2,262,892
Advances from Federal Home Loan Bank 659,373 790,859 2,036,789 2,375,061
Repurchase agreements 6 160 146 3,710
------------- ------------ ------------- -------------
TOTAL INTEREST EXPENSE 1,325,637 1,501,314 4,202,960 4,641,663
------------- ------------ ------------- -------------
NET INTEREST EARNINGS 1,740,205 1,520,144 4,956,619 4,783,315
Provision for loan losses 339,016 140,015 469,030 215,015
------------- ------------ ------------- -------------
NET INTEREST EARNINGS AFTER
PROVISION FOR LOAN LOSSES 1,401,189 1,380,129 4,487,589 4,568,300
------------- ------------ ------------- -------------
Non-interest earnings
Income from real estate operations 1,350 1,350 4,900 5,100
Miscellaneous income 12,184 15,663 78,060 39,544
Net gain (loss) from sales of available
for sale securities - - (1,417) -
Net gains from sales of loans 2,879 52,129 33,154 108,188
Service charge income 170,488 119,096 518,577 310,595
------------- ------------ ------------- -------------
TOTAL NON-INTEREST EARNINGS 186,901 188,238 633,274 463,427
------------- ------------ ------------- -------------
Non-interest expense
Compensation and benefits 561,408 595,937 1,782,997 1,710,413
FDIC insurance 5,163 4,697 14,715 13,624
Insurance 14,410 13,963 39,321 38,445
Stock services 4,504 6,680 24,469 15,732
Occupancy 142,071 136,430 415,158 402,050
Data processing 95,339 92,276 279,199 251,211
Professional fees 81,229 39,205 187,152 105,358
Advertising 58,656 52,313 165,212 124,088
Stationary, printing and office supplies 29,715 35,530 90,786 123,258
ATM expense 21,773 9,312 55,812 40,257
Supervisory exam fees 16,042 14,077 45,213 41,877
Postage 18,136 18,458 56,977 43,997
Other 119,285 101,778 316,692 275,178
------------- ------------ ------------- -------------
TOTAL NON-INTEREST EXPENSE 1,167,731 1,120,656 3,473,703 3,185,488
------------- ------------ ------------- -------------
4
GFSB Bancorp, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE EARNINGS - CONTINUED
Three months ended Nine months ended
March 31, March 31,
------------------------------- --------------------------------
2004 2003 2004 2003
------------------------------- --------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
EARNINGS BEFORE INCOME TAXES 420,359 447,711 1,647,160 1,846,239
Income tax expense
Currently payable 204,406 168,135 709,155 629,478
Deferred (benefit) (108,500) - (213,500) -
------------- ------------ ------------- -------------
NET INCOME TAX EXPENSE 95,906 168,135 495,655 629,478
------------- ------------ ------------- -------------
NET EARNINGS $ 324,453 $ 279,576 $ 1,151,505 $ 1,216,761
============= ============ ============= =============
Other Comprehensive Earnings
Unrealized (loss) gain, net of tax 105,094 (85,190) (166,981) (29,084)
------------- ------------ ------------- -------------
COMPREHENSIVE EARNINGS $ 429,547 $ 194,386 $ 984,524 $ 1,187,677
============= ============ ============= =============
Earnings per common share
Basic $ 0.29 $ 0.25 $ 1.02 $ 1.09
============= ============ ============= =============
Weighted average number of common shares outstanding
Basic 1,126,787 1,116,925 1,125,096 1,113,390
============= ============ ============= =============
Earnings per common share
Diluted $ 0.27 $ 0.24 $ 0.97 $ 1.05
============= ============ ============= =============
Weighted average number of common shares outstanding
Diluted 1,183,235 1,164,785 1,181,231 1,158,911
============= ============ ============= =============
Comprehensive earnings per common share
Basic $ 0.38 $ 0.17 $ 0.88 $ 1.07
============= ============ ============= =============
Diluted $ 0.36 $ 0.17 $ 0.83 $ 1.02
============= ============ ============= =============
Dividends per share $ 0.125 $ 0.11 $ 0.36 $ 0.32
============= ============ ============= =============
See notes to condensed consolidated financial statements.
5
GFSB Bancorp, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
Nine Months Ended
March 31,
-----------------------------------------
2004 2003
----------------- -----------------
(Unaudited) (Unaudited)
Cash flows from operating activities
Net earnings $ 1,151,505 $ 1,216,761
Adjustments to reconcile net earnings to
net cash provided by operations
Deferred loan origination fees (413,928) (220,607)
Gain on sale of loans and securities (31,737) (108,188)
Provision for loan losses 469,030 215,015
Depreciation of premises and equipment 218,274 218,734
Amortization of investment and mortgage-
backed securities premiums 308,306 116,885
Stock dividend on FHLB stock (60,000) (87,500)
Release of ESOP stock 203,052 148,525
Stock compensation under management stock bonus plan 29,117 23,060
Stock compensation resulting from stock purchased by
the Company within six months of exercise of
related options - 16,920
(Benefit) for deferred income taxes (213,500) -
Net changes in operating assets and liabilities
Accrued interest and dividends receivable (118,709) 101,087
Prepaid and other assets (39,882) (28,990)
Accrued interest payable (35,900) 58,988
Accounts payable and accrued liabilities 118,775 133,531
Income taxes (receivable) payable (98,146) (15,341)
Dividends declared and payable 18,381 11,961
----------------- -----------------
Net cash provided by
operating activities 1,504,638 1,800,841
----------------- -----------------
Cash flows from investing activities
Purchase of premises and equipment (470,920) (95,114)
Loan originations and principal
repayment on loans, net (11,256,682) (2,211,905)
Change in other secured borrowings 1,325,621 -
Proceeds from the sale of loans 2,137,557 -
Principal payments on mortgage-backed
securities 10,943,433 7,905,784
Principal payments on available-for-sale securities 1,663,455 4,719,479
Principal payments on held-to-maturity securities 7,000 4,000
Purchases of mortgage-backed securities (7,649,914) (14,408,091)
Purchases of available-for-sale securities (5,331,514) (7,088,496)
Purchases of held-to-maturity securities - (270,000)
Maturities and proceeds from sale of
available-for-sale securities 700,000 1,668,000
Maturities and proceeds from sale of held-to-maturity securites 270,000 -
----------------- -----------------
Net cash used by
investing activities (7,661,964) (9,776,343)
----------------- -----------------
6
GFSB Bancorp, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Increase (decrease) in cash and cash equivalents
Nine Months Ended
March 31,
-----------------------------------------
2004 2003
----------------- -----------------
(Unaudited) (Unaudited)
Cash flows from financing activities
Net increase in transaction accounts, passbook
savings, money market accounts, and
certificates of deposit $ 8,706,979 $ 10,110,496
Net increase (decrease) in Repurchase agreements 53,525 (462,464)
Net increase (decrease) in mortgage escrow funds 217,108 198,950
Proceeds from FHLB advances 1,144,089,296 726,298,387
Repayments on FHLB advances (1,146,195,823) (727,616,577)
Purchase of GFSB Bancorp stock under the
stock repurchase plan in cash - (112,624)
Net increase (decrease) in note payable 136,875 -
Dividends paid or to be paid in cash (402,483) (354,530)
Proceeds from exercise of stock options - 31,125
Price paid for vested management bonus
stock plan stock 7,622 11,100
----------------- -----------------
Net cash provided by
financing activities 6,613,099 8,103,863
----------------- -----------------
Increase in cash and cash equivalents 455,773 128,361
Cash and cash equivalents at beginning of period 7,252,358 5,651,491
----------------- -----------------
Cash and cash equivalents at end of period $ 7,708,131 $ 5,779,852
================= =================
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest on deposits and advances $ 4,238,715 $ 4,582,675
Income taxes 593,800 644,100
Change in market value, net of deferred taxes on
available-for-sale securities (other comprehensive earnings) (166,981) (29,084)
Dividends declared not yet paid 140,848 122,467
See notes to condensed consolidated financial statements.
7
GFSB BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. The accompanying unaudited condensed consolidated financial
statements were prepared in accordance with instructions for Form 10-QSB and
therefore do not include all disclosure necessary for a complete presentation of
the consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America. However, all adjustments,
which are, in the opinion of management, necessary for the fair presentation of
the interim financial statements have been included. All such adjustments are of
a normal recurring nature. The condensed consolidated statements of earnings and
comprehensive earnings are not necessarily indicative of results, which may be
expected for the entire year, or for any other interim period.
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. It is suggested
that these condensed unaudited consolidated financial statements be read in
conjunction with the Form 10-KSB for the year ended June 30, 2003.
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes", "anticipates", "contemplates", "expects", and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, risks associated with the ability to control costs
and expenses and general economic conditions. We undertake no obligation to
publicly release the results of any revisions to those forward-looking
statements, which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Overview
GFSB Bancorp, Inc. is a savings and loan holding company headquartered in
Gallup, New Mexico, which provides a full range of deposits and traditional
mortgage loan products through its wholly-owned banking subsidiary, Gallup
Federal Savings Bank. All references refer collectively to the Company and the
Bank, unless the context indicates otherwise.
9
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR QUARTER ENDED MARCH 31, 2004 COMPARED TO
QUARTER ENDED MARCH 31, 2003.
General
Net earnings for the quarter ended March 31, 2004 increased $44,000 to $324,000
($0.27 per diluted share) from $280,000 ($0.24 per diluted share) for the
quarter ended March 31, 2003. The increase in net earnings is primarily
attributable to a $220,000 increase in net interest earnings and a $72,000
decrease in income tax expense, partially offset by a $199,000 increase in the
provision for loan losses, an increase in non-interest expense of $47,000 and a
$1,000 decrease in non-interest earnings. The increase in net interest earnings
is primarily due to improvement in the Company's net interest margin, which was
driven by a higher volume of earning assets. The decrease in income tax expense
is primarily due to the recognition of certain permanent tax differences. Please
refer to "Average Balance Sheets" for an analysis of the changes in net interest
earnings for the quarter ended March 31, 2004 compared to the same period in
2003.
Average Balance Sheets
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average annual yields earned
and rates paid. Average balances are derived from month-end balances. Management
does not believe that the use of month-end balances instead of daily average
balances has caused any material differences in the information presented.
Quarter ended March 31, 2004 Quarter ended March 31, 2003
---------------------------- ----------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands) (Dollars in Thousands)
Interest-earning assets:
Loans receivable (1) $156,489 $2,494 6.37% $142,246 $2,462 6.92%
Investment securities and
mortgage-backed securities 67,459 554 3.28% 55,686 527 3.78%
Other interest-earning
assets (2) 4,013 17 1.69% 5,110 32 2.50%
-------- ------ ---- -------- ------ ----
Total interest-earning assets 227,961 3,065 5.38% 203,042 3,021 5.95%
Non-interest-earning assets 11,492 9,158
-------- --------
Total assets $239,453 $212,200
======== ========
Interest-bearing liabilities:
Transaction accounts $11,020 $ 6 .22% $ 8,673 $ 16 .74%
Passbook savings 7,702 16 .83% 4,721 15 1.27%
Money market accounts 12,305 24 .78% 10,309 27 1.05%
Certificates of deposit 91,899 620 2.70% 76,666 652 3.40%
Other liabilities (3) 80,750 659 3.26% 80,417 791 3.93%
-------- ------ ------- ------
Total interest-bearing
liabilities 203,676 1,325 3.07% 180,786 1,501 3.32%
Non-interest bearing
liabilities 17,342 14,096
-------- -------
Total liabilities 221,018 194,882
Stockholders' equity 18,435 17,318
-------- --------
Total liabilities and
stockholders' equity $239,453 $212,200
======== ========
10
Net interest earnings $1,740 $1,520
====== ======
Interest rate spread (4) 2.31% 2.63%
==== ====
Net yield on interest-
earning assets (5) 3.05% 2.99%
==== ====
Ratio of average interest-
Earning assets to average
interest-bearing liabilities 1.12X 1.12X
==== ====
(1) Average balances include non-accrual loans.
(2) Includes interest-bearing deposits in other financial institutions.
(3) Other liabilities include FHLB advances, repurchase agreements and other
secured borrowings.
(4) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net yield on interest-earning assets represents net interest earnings as a
percentage of average interest-earning assets.
Rate/Volume Analysis
The table below sets forth certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume; and
(ii) changes in rates. The changes attributable to the combined impact of volume
and rate have been allocated proportionately to the changes due to volume and
the changes due to rate.
Quarter ended March 31, 2004 vs. 2003
Increase (Decrease)
Due to
-----------------------------------------
Volume Rate Net
------ ---- ---
(Dollars in Thousands)
Interest income:
Loans receivable $ 237 $(205) $ 32
Mortgage-backed securities and
investment securities 104 (77) 27
Other interest-earning assets (6) (9) (15)
----- ----- ----
Total interest-earning assets 335 (291) 44
Interest expense:
Transaction accounts 3 (13) (10)
Savings accounts 7 (6) 1
Money markets 5 (8) (3)
Certificates of deposit 115 (147) (32)
Other liabilities 3 (135) (132)
----- ----- ------
Total interest-bearing liabilities $ 133 $(309) $ (176)
----- ----- -----
Net change in interest income $ 202 $ 18 $ 220
===== ===== ======
Provision for Losses on Loans
The Company maintains an allowance for loan losses based upon management's
periodic evaluation of known and inherent risks in the loan portfolio, past loss
experience, adverse situations that may affect the borrower's ability to repay
loans, estimated value of the underlying collateral and current and expected
market conditions. The provision for loan losses was $339,000 and $140,000 for
the quarters ended March 31, 2004 and March 31, 2003, respectively. The increase
in the provision for loan losses for the current three-month period was
primarily the result of a $1,799,000 increase in substandard and doubtful loans
to $6,478,000 for the quarter ended March 31, 2004 from $4,679,000 for the
quarter ended March 31, 2003 and loan growth in commercial and commercial real
estate loans, which tend to have greater credit risk than residential real
estate loans. The increase in classified loans is primarily attributable to two
loans, each with unique credit quality concerns. While the Company maintains
its allowance for losses at a level which it considers to be
11
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.
Non-Interest Earnings
Total non-interest earnings decreased by $1,000 or 0.5% to $187,000 for the
quarter ended March 31, 2004 from $188,000 for the quarter ended March 31, 2003.
This increase was primarily due to a decrease in net gains from sales of loans
of $49,000 and a decrease in miscellaneous income of $3,000, partially offset by
an increase in service charge income of $51,000. The increase in service charge
income is primarily due to increased insufficient funds charges collected on NOW
and checking accounts because of increased volume of insufficient funds checks.
Non-Interest Expense
Total non-interest expense increased $47,000 or 4.2% to $1,168,000 for the
quarter ended March 31, 2004 from $1,121,000 for the quarter ended March 31,
2003. The increase in non-interest expense was primarily attributable to
increases in professional fees, ATM expense, advertising, occupancy, data
processing, and other operating expenses, partially offset by decreases in
compensation and benefits and stationary, printing and office supplies. The
$42,000 increase in professional fees is primarily attributable to $32,000 in
fees paid to consultants for strategic planning services and a $10,000 increase
in legal fees, audit expense and accounting fees largely due to the Company's
efforts to comply with requirements of the Sarbanes-Oxley Act. ATM expense
increased $12,000, primarily due to the installation and operation of one
additional ATM and transaction volume increases. Advertising expense increased
$6,000, primarily due to efforts to achieve growth in the Gallup and Farmington,
New Mexico markets. Occupancy expense increased $6,000, primarily due to an
increase in lease expense on the Bank's loan center and an increase in
depreciation of furniture, fixtures and equipment. Data processing expense
increased $3,000, primarily due to transaction volume increases. Other
non-interest expenses increased $18,000, primarily due to losses on sale or
repossessed assets and increases in charitable contributions, correspondent bank
expense and franchise taxes. The $35,000 decrease in compensation and benefits
is primarily attributable to a reduction in accruals for performance bonuses due
to operating results below expectations for the Company during the six months
ended December 31, 2004. Stationary, printing and office supplies decreased
$6,000, since a substantial portion of such expenses the previous year were
attributable to the start-up costs during the first year of operation of the
Farmington branch.
12
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE NINE-MONTH PERIOD ENDED MARCH 31, 2004
COMPARED TO THE NINE-MONTH PERIOD ENDED MARCH 31, 2003.
General
Net earnings for the nine months ended March 31, 2004 decreased $65,000 to
$1,152,000 ($0.97 per diluted share) compared to net earnings of $1,217,000
($1.05 per diluted share) for the comparable nine-month period in 2003. The
decrease in net earnings was primarily the result of a $288,000 increase in
non-interest expense and a $254,000 increase in the provision for loan losses,
partially offset by an increase in net interest earnings of $173,000, an
increase in non-interest earnings of $170,000 and a $134,000 decrease in income
tax expense. The Company attributes the increase in non-interest expense
primarily to bank growth. The increase in net interest earnings is primarily due
to improvement in the Company's net interest margin, which was driven by a
higher volume of earning assets. The decrease in income tax expense is primarily
due to the recognition of certain permanent tax differences. Please refer to
"Average Balance Sheets" for an analysis of the change in net interest earnings
for the nine months ended March 31, 2004 compared to the same period in 2003.
Average Balance Sheets
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Average balances are derived from month-end balances. Management does not
believe that the use of month-end balances instead of daily average balances has
caused any material differences in the information presented.
Nine-month period ended Nine-month period ended
March 31, 2004 March 31, 2003
-------------- --------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands) (Dollars in Thousands)
Interest-earning assets:
Loans receivable (1) $155,794 $7,514 6.43% $141,191 $7,594 7.17%
Investment securities and
Mortgage-backed securities 67,055 1,580 3.14% 53,547 1,729 4.31%
Other interest-earning
assets (2) 3,899 66 2.26% 5,192 102 2.62%
-------- ------ -------- ------
Total interest-earning assets 226,748 9,160 5.39% 199,930 9,425 6.28%
Non-interest-earning assets 11,783 8,997
-------- --------
Total assets $238,531 $208,927
======== ========
Interest-bearing liabilities:
Transaction accounts $10,586 $ 24 .30% $ 8,678 $ 52 .80%
Passbook savings 7,064 50 .94% 5,781 48 1.11%
Money market accounts 12,604 82 .87% 11,648 105 1.20%
Certificates of deposit 90,948 2,010 2.95% 74,838 2,058 3.67%
Other liabilities (3) 81,924 2,037 3.32% 76,216 2,379 4.16%
-------- ------ ------- ------
Total interest-bearing
liabilities 203,126 4,203 2.76% 177,161 4,642 3.49%
Non-interest bearing
liabilities 17,415 14,746
-------- --------
Total liabilities 220,541 191,907
Stockholders' equity 17,990 17,020
-------- --------
Total liabilities and
Stockholders' equity $238,531 $208,927
======== ========
13
Net interest earnings $4,957 $4,783
====== ======
Interest rate spread (4) 2.63% 2.79%
==== ====
Net yield on interest-
earning assets (5) 2.91% 3.19%
==== ====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 1.12X 1.13X
==== ====
(1) Average balances include non-accrual loans.
(2) Includes interest-bearing deposits in other financial institutions
(3) Other liabilities include FHLB advances, repurchase agreements and other
secured borrowings. The FHLB borrowings are adversely affecting the
Company's net interest earnings because some of them bear fixed interest
rates that are above current market rates. These borrowings will continue
to adversely affect net interest earnings unless paid off early, at a
significant penalty, or unless market rates increase.
(4) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net yield on interest - earning assets represents net interest earnings as
a percentage of average interest-earning assets.
Rate/Volume Analysis
The table below sets forth certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume; and
(ii) changes in rates. The changes attributable to the combined impact of volume
and rate have been allocated proportionately to the changes due to volume and
the changes due to rate.
Nine-month period ended
March 31, 2004 vs. 2003
Increase (Decrease)
Due to
-----------------------------------------
Volume Rate Net
------ ---- ---
(Dollars in Thousands)
Interest income:
Loans receivable $ 745 $ (825) $ 80
Mortgage-backed securities and
investment securities 379 (528) (149)
Other interest-earning assets (24) (12) (36)
------ ------- -----
Total interest-earning assets 1,100 (1,365) (265)
====== ======= =====
Interest expense:
Transaction accounts 8 (36) (28)
Savings accounts 10 (8) 2
Money markets 8 (31) (23)
Certificates of deposit 400 (448) (48)
Other liabilities 158 (500) (342)
------ ------- -----
Total interest-bearing liabilities $ 584 $(1,023) $(439)
------ ------- -----
Net change in interest income $ 516 $ (342) $(174)
====== ======= =====
Provision for Losses on Loans
The Company maintains an allowance for loan losses based upon management's
periodic evaluation of known and inherent risks in the loan portfolio, past loss
experience, adverse situations that may affect the borrower's ability to repay
loans, estimated value of the underlying collateral and current and expected
market conditions. The provision for loan losses was $469,000 and $215,000 for
the nine months ended March 31, 2004 and March 31, 2003, respectively. See
"Comparison of Operating Results for the quarter ended March 31, 2004 compared
to quarter ended March 31, 2003 - Provision for Losses on Loans."
14
Non-Interest Earnings
Total non-interest earnings increased by $170,000 or 36.7% to $633,000 for the
nine months ended March 31, 2004 from $463,000 for the nine months ended March
31, 2003. This increase was primarily due to an increase in service charge
income of $208,000 and an increase in miscellaneous income of $39,000, partially
offset by a decrease in net gains from sales of loans of $75,000. The increase
in miscellaneous income is primarily due to a gain on the sale of other real
estate owned. The increase in service charge income is primarily due to
increased insufficient funds charges collected on NOW and checking accounts
because of increased volume of insufficient funds checks.
Non-Interest Expense
Total non-interest expense increased $288,000 or 9.0% to $3,474,000 for the nine
months ended March 31, 2004 from $3,186,000 for the nine months ended March 31,
2003. The increase in non-interest expense was primarily attributable to
increases in professional fees, compensation and benefits, advertising, data
processing, ATM expense, occupancy expense, postage, stock services and other
operating expenses, partially offset by a decrease in stationary, printing and
office supplies. The $82,000 increase in professional fees is primarily
attributable to $52,000 in fees paid to consultants for strategic planning
services and a $30,000 increase in legal fees, audit expense and accounting fees
largely due to the Company's efforts to comply with requirements of the
Sarbanes-Oxley Act. The $73,000 increase in compensation and benefits is
primarily attributable to a $57,000 increase in general salaries and benefits
due to the hiring of two additional employees, general salary increases and an
increase in retirement benefits expenses, a $44,000 increase in expense
associated with employee stock compensation plans, and an increase of $16,000 in
director's fees, partially offset by a $44,000 reduction in performance bonus
accruals due to operating results below expectations for the Company during the
six months ended December 31, 2004. Advertising expense increased $41,000,
primarily due to efforts to achieve growth in the Gallup and Farmington, New
Mexico market. Data processing expense increased $28,000, primarily due to
increases in expenses resulting from the processing cost associated with the
growth in the volume of deposit accounts, statement processing, servicing for
the online home banking system and an increase in the number of transactions
processed. ATM expense increased $16,000, primarily due to the installation and
operation of one additional ATM and transaction volume increases. Occupancy
expense increased $13,000, primarily due to an increase in lease expense on the
Bank's loan center and an increase in depreciation of furniture, fixtures and
equipment. Postage Expense increased $13,000 due to the mailing costs associated
with the growth in the volume of deposit accounts and statement processing.
Stock services increased $9,000, primarily due to increases in annual fees for
NASDAQ stock services and an increase in printing costs associated with the
Bank's annual reports. Other operating expenses increased $42,000, primarily due
to losses on sale or repossessed assets and increases in charitable
contributions, correspondent bank expense, organization dues and subscriptions,
franchise taxes, meals and armored transportation, partially offset by decreases
in loan expense, OREO expense and telephone expense. Stationary, printing and
office supplies decreased $32,000, since a substantial portion of such expenses
the previous year were attributable to the start-up costs during the first year
of operation of the Farmington branch.
Item 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation of the Company's disclosure controls and procedures
(as defined in Rules 13a-15(e) under the Securities Exchange Act
of 1934 (the "Exchange Act"), the Company's principal executive
officer and the principal financial officer have concluded that
as of the end of the period covered by this Quarterly Report on
Form 10-QSB such disclosure controls and procedures are effective
to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the
time periods specified in Securities and Exchange Commission
rules and forms.
(b) Changes in internal control over financial reporting. During the
quarter under report, there was no change in the Company's
internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
15
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings
-----------------
Not applicable.
Item 2. Changes in Securities and Small Business Issuer Purchases of Equity
------------------------------------------------------------------------
Securities
----------
Not applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) List of Exhibits
3.1 Certificate of Incorporation of GFSB Bancorp, Inc.*
3.2 Bylaws of GFSB Bancorp, Inc.*
10.1 1995 Stock Option Plan**
10.2 Management Stock Bonus Plan**
10.3 Form of Directors Deferred Compensation Agreement between the Bank and
Directors***
10.4 Form of Directors Stock Compensation Plan between the Company and Directors of
the Company***
10.5 2000 Stock Option Plan****
31 Certifications Pursuant to Section 302 of the Sarbanes
Oxley Act of 2002
32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
--------------
* Incorporated herein by reference to exhibits 3(i)(Certificate
of Incorporation) and 3(ii)(Bylaws) to the Registration
Statement on Form S-1 of the Registrant (File No. 33-90400)
initially filed with the Commission on March 17, 1995.
** Incorporated by reference to the identically numbered exhibits
of the Annual Report on Form 10-KSB for the fiscal year ended
June 30, 1997 (File No. 0-25854) filed with the SEC.
*** Incorporated by reference to the identically numbered exhibits
of the Quarterly Report on Form 10-QSB for the quarter ended
March 31, 2000 filed with the SEC.
**** Incorporated by reference to Exhibit 4.1 to the Registration
Statement on Form S-8 (File No. 333-51478) filed with the SEC
on December 8, 2000.
(b) On February 18, 2004 the Company filed a report on Form 8-K pursuant to
items 7 and 12 to report earnings for the quarter ended December 31, 2003
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 14, 2004 /s/Jerry R. Spurlin
-----------------------------------------------
Jerry R. Spurlin
Assistant Secretary and Chief Financial Officer
(Duly Authorized Representative and
Principal Financial Officer)
17