UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2004
-----------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE EXCHANGE ACT
For the transition period from ________ to ________
Commission file number: 0-25854
GFSB BANCORP, INC.
----------------------------------------------
(Name of Small Business Issuer in its Charter)
Delaware 85-0430841
- --------------------------------------------- ----------------
(State or Other Jurisdiction of Incorporation (I.R.S. Employer
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 January 31, 2005, there were issued and outstanding 1,146,645 shares of
the registrant's Common Stock.
Transitional Small Business Disclosure format:
Yes No X
--- ---
GFSB Bancorp, Inc.
Index
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Financial Condition
December 31, 2004 and June 30, 2004 3
Condensed Consolidated Statements of Earnings and Comprehensive Earnings
Three and six months ended December 31, 2004 and December 31, 2003 4
Condensed Consolidated Statements of Cash Flows
Three and six months ended December 31, 2004 and December 30, 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 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits 18
Signatures 20
2
GFSB Bancorp, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, June 30,
2004 2004
------------- -------------
(Unaudited)
ASSETS
Cash and due from banks $ 6,277,306 $ 7,840,712
Interest-bearing deposits with banks 362,790 866,281
Available-for-sale investment securities 27,909,821 30,518,828
Available-for-sale mortgage-backed securities 26,453,935 30,680,195
Held-to-maturity investment securities 389,999 398,999
Stock of Federal Home Loan Bank, at cost, restricted 3,625,900 4,409,200
Loans receivable, net, substantially pledged 148,419,879 152,430,322
Loans held-for-sale - 411,400
Accrued interest and dividends receivable 807,214 859,298
Premises and equipment 2,410,835 2,513,992
Other real estate and repossessed property 283,405 437,211
Prepaid and other assets 184,230 445,847
Deferred tax asset 131,886 275,125
------------- -------------
TOTAL ASSETS $ 217,257,200 $ 232,087,410
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Transaction and NOW accounts $ 28,571,724 $ 28,987,811
Savings and MMDA deposits 21,128,121 21,501,954
Time deposits 81,889,595 83,369,991
Advances from Federal Home Loan Bank 60,467,614 73,652,218
Other secured borrowings 4,539,209 4,814,763
Repurchase agreements 269,699 157,119
Accrued interest payable 455,225 460,520
Advances from borrowers for taxes and insurance 370,784 499,998
Accounts payable and accrued liabilities 310,734 369,595
Dividends declared and payable 138,459 140,895
------------- -------------
TOTAL LIABILITIES 198,141,164 213,954,864
------------- -------------
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; 1,146,645 issued and outstanding
at December 31, 2004 and June 30, 2004 114,665 114,665
Additional paid-in-capital 3,237,565 3,095,718
Unearned ESOP stock (23,729) (68,048)
Retained earnings, substantially restricted 14,959,391 14,440,118
Accumulated other comprehensive earnings 828,144 550,093
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 19,116,036 18,132,546
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 217,257,200 $ 232,087,410
============= =============
See notes to condensed consolidated financial statements.
3
GFSB Bancorp, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE EARNINGS
Three months ended Six months ended
December 31, December 31,
-------------------------- -------------------------
2004 2003 2004 2003
-------------------------- -------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Interest income
Loans receivable
Mortgage loans $ 1,972,742 $ 2,022,098 $ 3,961,861 $ 4,067,122
Commercial loans 411,366 407,690 801,667 736,528
Share and consumer loans 99,522 106,761 203,975 215,330
Investment and mortgage-backed securities 462,274 526,977 933,614 1,026,179
Other interest-earning assets 23,009 23,106 44,063 48,578
----------- ----------- ----------- -----------
TOTAL INTEREST EARNINGS 2,968,913 3,086,632 5,945,180 6,093,737
Interest expense
Deposits 598,099 746,607 1,206,365 1,499,767
Advances from Federal Home Loan Bank 591,493 671,778 1,208,878 1,377,416
Repurchase agreements 1,019 37 1,258 141
----------- ----------- ----------- -----------
TOTAL INTEREST EXPENSE 1,190,611 1,418,422 2,416,501 2,877,324
----------- ----------- ----------- -----------
NET INTEREST EARNINGS 1,778,302 1,668,210 3,528,679 3,216,413
Provision for loan losses 60,000 70,014 60,000 130,014
----------- ----------- ----------- -----------
NET INTEREST EARNINGS AFTER
PROVISION FOR LOAN LOSSES 1,718,302 1,598,196 3,468,679 3,086,399
----------- ----------- ----------- -----------
Non-interest earnings
Income from real estate operations 5,050 1,350 8,499 3,550
Miscellaneous income 16,304 52,195 36,670 65,876
Net loss from sales of available for sale securities - (1,417) -- (1,417)
Net gains from sales of loans 15,262 19,490 30,337 30,274
Service charge income 219,512 177,542 435,281 348,090
----------- ----------- ----------- -----------
TOTAL NON-INTEREST EARNINGS 256,128 249,160 510,787 446,373
----------- ----------- ----------- -----------
Non-interest expense
Compensation and benefits 683,502 635,466 1,269,394 1,221,589
FDIC insurance 14,535 4,822 29,718 9,552
Insurance 15,107 11,703 32,336 24,911
Stock services 5,379 13,380 9,716 19,965
Occupancy 126,413 138,260 245,796 273,087
Data processing 90,841 94,376 191,673 183,860
Professional fees 127,386 60,353 337,716 105,924
Advertising 41,643 49,506 91,526 106,556
Stationary, printing and office supplies 25,625 30,166 50,546 61,071
ATM expense 23,618 19,462 49,060 34,040
Supervisory exam fees 23,916 14,585 47,832 29,170
Postage 11,328 19,555 24,831 38,841
Other 154,795 96,932 257,731 197,405
----------- ----------- ----------- -----------
TOTAL NON-INTEREST EXPENSE 1,344,088 1,188,566 2,637,875 2,305,971
----------- ----------- ----------- -----------
4
GFSB Bancorp, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE EARNINGS - CONTINUED
Three months ended Six months ended
December 31, December 31,
------------------------- -------------------------
2004 2003 2004 2003
------------------------- -------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
EARNINGS BEFORE INCOME TAXES $ 630,342 $ 658,790 $ 1,341,591 $ 1,226,801
Income tax expense
Currently payable 303,446 263,582 540,527 504,749
Deferred provision - (105,000) - (105,000)
----------- ----------- ----------- -----------
303,446 158,582 540,527 399,749
----------- ----------- ----------- -----------
NET EARNINGS $ 326,896 $ 500,208 $ 801,064 $ 827,052
=========== =========== =========== ===========
Other Comprehensive Earnings
Unrealized (loss) gain, net of tax (56,038) (75,211) 278,051 (272,075)
----------- ----------- ----------- -----------
COMPREHENSIVE EARNINGS $ 270,858 $ 424,997 $ 1,079,115 $ 554,977
=========== =========== =========== ===========
Earnings per common share
Basic $ 0.29 $ 0.44 $ 0.70 $ 0.74
=========== =========== =========== ===========
Weighted average number of common shares outstanding
Basic 1,136,166 1,125,105 1,138,046 1,123,414
=========== =========== =========== ===========
Earnings per common share
Diluted $ 0.27 $ 0.42 $ 0.67 $ 0.70
=========== =========== =========== ===========
Weighted average number of common shares outstanding
Diluted 1,196,326 1,179,896 1,200,122 1,177,867
=========== =========== =========== ===========
Comprehensive earnings per common share
Basic $ 0.24 $ 0.38 $ 0.95 $ 0.49
=========== =========== =========== ===========
Diluted $ 0.23 $ 0.36 $ 0.90 $ 0.47
=========== =========== =========== ===========
Dividends per share $ 0.125 $ 0.125 $ 0.250 $ 0.235
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
4
GFSB Bancorp, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
Six Months Ended
December 31,
----------------------------
2004 2003
------------ ------------
(Unaudited) (Unaudited)
Cash flows from operating activities
Net earnings $ 801,064 $ 827,052
Adjustments to reconcile net earnings to
net cash provided by operations
Deferred loan origination fees (284,187) (281,515)
Gain on sale of loans and securities (30,337) (28,857)
Provision for loan losses 60,000 130,014
Depreciation of premises and equipment 119,076 148,019
Amortization of investment and mortgage-
backed securities premiums 156,002 238,377
Stock dividend on FHLB stock (42,500) (43,700)
Release of ESOP stock 186,167 125,088
Stock compensation under management stock bonus plan 122,539 19,411
(Benefit) for deferred income taxes - (105,000)
Net changes in operating assets and liabilities
Accrued interest and dividends receivable 52,086 (35,791)
Prepaid and other assets 334,688 (6,978)
Accrued interest payable (5,295) (7,085)
Accounts payable and accrued liabilities (181,400) 124,890
Income taxes (receivable) payable (73,072) (38,120)
Dividends declared and payable (2,436) 16,700
------------ ------------
Net cash provided by
operating activities 1,212,395 1,082,505
------------ ------------
Cash flows from investing activities
Purchase of premises and equipment (15,919) (456,714)
Loan originations and principal
repayment on loans, net 4,086,674 (13,044,462)
Change in other secured borrowings (412,428) 2,896,808
Proceeds from the sale of loans 743,500 1,980,073
Principal payments on mortgage-backed
securities 4,158,022 9,006,531
Principal payments on available-for-sale securities 1,938,446 943,672
Principal payments on held-to-maturity securities 9,000 7,000
Purchases of mortgage-backed securities - (3,420,353)
Purchases of available-for-sale securities (2,995,915) (5,277,976)
Maturities and proceeds from sale of
available-for-sale securities 4,000,000 700,000
Maturities and proceeds from sale of held-to-maturity securites - 270,000
Redemption (purchase) of FHLB stock 825,800 -
------------ ------------
Net cash provided (used) by
investing activities 12,337,180 (6,395,421)
------------ ------------
6
GFSB Bancorp, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Increase (decrease) in cash and cash equivalents
Six Months Ended
December 31,
-----------------------------
2004 2003
------------- -------------
(Unaudited) (Unaudited)
Cash flows from financing activities
Net increase (decrease) in transaction accounts, passbook
savings, money market accounts, and
certificates of deposit $ (2,270,317) $ 9,943,018
Net increase in Repurchase agreements 112,580 345,107
Net increase in mortgage escrow funds 7,661 16,050
Proceeds from FHLB advances 397,275,000 773,689,296
Repayments on FHLB advances (410,459,604) (777,932,171)
Net increase (decrease) in note payable - 273,750
Dividends paid or to be paid in cash (281,792) (261,634)
Price paid for vested management bonus
stock plan stock - 7,622
------------- -------------
Net cash (used) provided by
financing activities (15,616,472) 6,081,038
------------- -------------
Increase (decrease) in cash and cash equivalents (2,066,897) 768,122
Cash and cash equivalents at beginning of period 8,706,993 7,252,358
------------- -------------
Cash and cash equivalents at end of period $ 6,640,096 8,020,480
============= =============
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest on deposits and advances $ 2,420,537 $ 2,884,268
Income taxes 281,100 437,869
Change in market value, net of deferred taxes on
available-for-sale securities (other comprehensive earnings) 278,051 (272,075)
Dividends declared not yet paid 138,459 139,167
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 the 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 financial statements be read in conjunction with
the Form 10-KSB for the year ended June 30, 2004.
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 that 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 that 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.
Proposed Merger
On August 25, 2004, the Company announced that it had signed a definitive merger
agreement with First Federal Banc of the Southwest, Inc. ("FFBSW"), the holding
company for First Federal Bank, Roswell, New Mexico, pursuant to which the
Company will merge with and into FFBSW.
Under the terms of the agreement, upon consummation of the merger of the Company
into FFBSW, each outstanding share of the Company's common stock will be
converted into the right to receive either $20.00 in cash or FFBSW common stock,
at the election of the holder, subject to an overall requirement that 51% of the
Company's total outstanding common stock be exchanged for stock. The transaction
is subject to various conditions, including stockholder approval of both the
Company and FFBSW, and approval by the applicable banking regulatory agencies.
Pursuant to the terms of the merger agreement, FFBSW has agreed to register
FFBSW's common stock under the Securities Exchange Act of 1934 and it will file
reports with the Securities and Exchange Commission. In addition, upon the
completion of the merger, its shares are expected to be listed on the NASDAQ.
Comparison of Financial Condition at December 31, 2004 and June 30, 2004
Total assets decreased by $14.8 million, or 6.4%, to $217.3 million at December
31, 2004 from $232.1 million at June 30, 2004 primarily due to decreases in
available-for-sale investment and mortgage-backed securities, net loans
receivable, cash and cash equivalents, stock of the Federal Home Loan Bank
("FHLB"), and loans held for sale. The $6.8 million, or 11.2%, decrease in
available-for-sale investment and mortgage-backed securities to $54.4 million at
December 31, 2004 from $61.2 million at June 30, 2004, was the result of normal
monthly principal payments received on the securities owned. Net loans
receivable decreased $4.0 million, or 2.6%, to $148.4 million, at December 31,
2004, from $152.4 million at June 30, 2004, primarily due to normal monthly
principal payments received on the loans. Cash and cash equivalents of $6.6
million held at December 31, 2004 was $2.1 million or 23.7% less than the June
30, 2004 balance of $8.7 million, primarily due to normal daily fluctuations and
a decision by management to reduce the level of cash for the purpose of
increasing profitability through an increase in the level of interest earning
assets and also for the purpose of reducing cash exposure risk. This decrease in
total cash and cash equivalents included a $0.5 million decrease in
interest-bearing deposits with banks, which primarily consists of the Company's
FHLB demand account. The stock of FHLB decreased $0.8 million, or 18.0%, to $3.6
million at December 31, 2004 from $4.4 million at June 30, 2004, primarily due
to quarterly stock
9
redemptions by the FHLB. There were no loans held for sale at December 31, 2004,
while there were $0.4 million in loans held for sale at June 30, 2004, resulting
in a decrease of $0.4 million, or 100.0%. This change was primarily a matter of
timing, as there has been no change in the Company's plan to sell some
longer-term, fixed-rate one- to four-family loans in the secondary market. The
remaining $0.7 million decrease in assets during the six-month period ended
December 31, 2004 was the result of small changes in various asset accounts
including accrued interest and dividends receivable, premises and equipment,
other real estate and repossessed property, deferred tax asset, and prepaid and
other assets.
Total liabilities decreased $15.8 million, or 7.4% mostly due to a decrease in
FHLB advances of $13.2 million or 17.9% to $60.5 million at December 31, 2004,
from $73.7 million at June 30, 2004. Time deposits decreased $2.3 million, or
1.7% to $131.6 million at December 31, 2004 from $133.9 million at June 30,
2004. There were small decreases in transaction and NOW accounts, savings and
MMDA deposits, and time deposits. The remaining $0.3 million decrease in
liabilities was the result of changes in various liability accounts including
other secured borrowings, repurchase agreements, accrued interest payable,
advances from borrowers for taxes and insurance, dividends payable, and accounts
payable and accrued liabilities.
Stockholders' equity increased $1.0 million, or 5.4% to $19.1 million at
December 31, 2004 from $18.1 million at June 30, 2004, primarily due to income
of $801,000 for the six-month period ended December 31, 2004 and to unrealized
gains, net of taxes, in investment and mortgage-backed securities. The Company
paid a cash dividend of $0.125 per share, or $141,000, in the quarter ended
September 30, 2004, and a cash dividend of $0.125 per share, or $141,000, in the
quarter ended December 31, 2004.
10
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR QUARTER ENDED DECEMBER 31, 2004 COMPARED TO
QUARTER ENDED DECEMBER 31, 2003.
General
Net earnings for the quarter ended December 31, 2004 decreased $173,000 to
$327,000 ($0.27 per diluted share) from $500,000 ($0.42 per diluted share) for
the quarter ended December 31, 2003. The decrease in net earnings is primarily
attributable to a $156,000 increase in non-interest expense and a $145,000
increase in income tax expense partially offset by a $110,000 increase in net
interest earnings, a $7,000 increase in non-interest earnings, and a $10,000
decrease in provision for loan losses. Please refer to "Average Balance Sheets"
for an analysis of the changes in net interest earnings for the quarter ended
December 31, 2004 compared to the quarter ended December 31, 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 December 31, 2004 Quarter ended December 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) $151,344 $2,484 6.57% $158,656 $2,537 6.39%
Investment securities and
mortgage-backed securities 57,035 462 3.24% 65,866 527 3.20%
Other interest-earning
assets (2) 4,069 23 2.26% 5,772 23 1.59%
-------- ------ -------- ------
Total interest-earning assets 212,448 2,969 5.59% 230,294 3,087 5.36%
Non-interest-earning assets 11,500 ------ 10,307 -------
-------- --------
Total assets $223,948 $240,601
======== ========
Interest-bearing liabilities:
Transaction accounts $ 13,144 $ 12 .37% $ 10,858 $ 8 .29%
Passbook savings 9,353 18 .77% 7,094 18 1.01%
Money market accounts 12,695 30 .95% 13,863 32 .92%
Certificates of deposit 82,679 539 2.61% 92,571 689 2.98%
Other liabilities (3) 68,600 592 3.45% 80,884 672 3.32%
-------- ------ -------- ------
Total interest-bearing
liabilities 186,471 1,191 2.55% 205,270 1,419 2.77%
Non-interest bearing ------ ------
liabilities 18,387 17,392
-------- --------
Total liabilities 204,858 222,662
Stockholders' equity 19,090 17,939
-------- --------
Total liabilities and
stockholders' equity $223,948 $240,601
======== ========
11
Net interest earnings $1,778 $1,668
====== ======
Interest rate spread (4) 3.04% 2.59%
==== ====
Net yield on interest-
earning assets (5) 3.35% 2.90%
==== ====
Ratio of average interest-
Earning assets to average
interest-bearing liabilities 1.14X 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 income 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; (ii)
changes in rates; (iii) changes in rate/volume.
Quarter ended December 31, 2004 vs. 2003
Increase (Decrease)
Due to
----------------------------------
Rate/
Volume Rate Volume Net
------ ---- ------ ---
(Dollars in Thousands)
Interest income:
Loans receivable $(117) $ 71 $ (7) $ (53)
Mortgage-backed securities and
investment securities (71) 7 (1) (65)
Other interest-earning assets (7) 10 (3) -
------ ----- ------ -----
Total interest-earning assets (195) 88 (11) (118)
Interest expense:
Transaction accounts 2 2 - 4
Savings accounts 6 (4) (2) -
Money markets (3) 1 - (2)
3)
Certificates of deposit (73) (86) 9 (150)
Other liabilities (102) 26 (4) 80)
------ ----- ------ -----
Total interest-bearing liabilities (170) (61) 3 (228)
------ ----- ------ -----
Net change in interest income $ (25) $ 149 $ (14) $ 110
====== ===== ====== =====
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 loss was $60,000 and $70,000 for the
quarter ended December 31, 2004 and 2003, respectively. The decrease in the
provision for loan losses for the current quarter compared to the same quarter a
year earlier is primarily due to improvement in loan quality and the fact that
the Company's loan portfolio decreased during the period. While the Company
maintains its allowance for losses at a level that 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.
12
Non-Interest Earnings
Total non-interest earnings increased by $7,000 or 2.8% to $256,000 for the
quarter ended December 31, 2004 from $249,000 for the quarter ended December 31,
2003. This increase was primarily due to a $42,000 increase in service charge
income and a $4,000 increase in income from real estate operations partially
offset by a $36,000 decrease in miscellaneous income and a $3,000 decrease in
net gains from sales of loans and securities.
Non-Interest Expense
Total non-interest expense increased $156,000 or 13.1% to $1,344,000 for the
quarter ended December 31, 2004 from $1,188,000 for the quarter ended December
31, 2003. The increase in non-interest expense was primarily attributable to
increases in professional fees, other expense, compensation and benefits, FDIC
insurance expense, supervisory exam fees, ATM expense, and insurance expense,
partially offset by decreases in occupancy, stock services, advertising,
postage, stationery, printing and office supplies, and data processing. The
$67,000 increase in professional fees for the quarter ended December 31, 2004 is
primarily attributable to a $47,000 increase in legal fees and a $20,000
increase in other professional services in connection with the Agreement and
Plan of Merger between the Company and First Federal Banc of the Southwest, Inc.
announced on August 25, 2004. The $58,000 increase in other expense is primarily
attributable to a $29,000 increase in loan expense and a $20,000 loss on sale of
other real estate owned. Compensation and benefits increased $48,000, primarily
attributable to early vesting of restricted stock as a result of the filing of
the Agreement and Plan of Merger between the Company and First Federal Banc of
the Southwest, Inc. announced on August 25, 2004. The $10,000 increase in FDIC
insurance was primarily due to an increase in the FDIC assessment. The $9,000
increase in supervisory exam fees was primarily due to an increase in the Office
of Thrift Supervision supervisory exam fees assessment. The $4,000 increase in
ATM expense is primarily attributable to an increase in the volume of ATM
transactions. Insurance expense increased $3,000 due to a general increase in
premium rates for property and casualty insurance. Occupancy expense decreased
$12,000 primarily due to a decrease in depreciation expense for furniture,
fixtures and equipment.
Borrowings
The Company may obtain advances from the FHLB of Dallas to supplement its supply
of funds available for loans and investments. Advances from the FHLB are
typically secured by a pledge of the Company's stock in the FHLB, a portion of
the Company's first mortgage loans and certain other assets. Each FHLB credit
program has its own interest rate, which may be fixed or variable, and range of
maturities. The Company, if the need arises, may also access the Federal Reserve
Bank discount window to supplement its supply of funds available for loans and
investments and to meet deposit withdrawal requirements. For the quarters ended
December 31, 2004 and December 31, 2003, borrowings with the FHLB averaged
$61,510,895 and $72,307,668, respectively. The approximate weighted average rate
paid on borrowings was 3.45% and 3.32% for the quarter ended December 31, 2004
and December 31, 2003, respectively.
13
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE SIX-MONTH PERIOD ENDED DECEMBER 31, 2004
COMPARED TO THE SIX-MONTH PERIOD ENDED DECEMBER 31, 2003.
General
Net earnings for the six-month period ended December 31, 2004 decreased $26,000
to $801,000 compared to net earnings of $827,000 for the six-month period ended
December 31, 2003. The decrease in net earnings was primarily the result of a
$332,000 increase in non-interest expense and a $141,000 increase in income tax
expense partially offset by increases in net interest earnings of $312,000 and
non-interest earnings of $64,000 and a $70,000 decrease in provision for loan
losses. Please refer to "Average Balance Sheets" for an analysis of the change
in net interest earnings for the six-month period ended December 31, 2004
compared to the six-month period ended December 31, 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.
Six-month period ended Six-month period ended
---------------------- ----------------------
December 31, 2004 December 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) $151,770 $4,966 6.54% $155,676 $5,019 6.45%
Investment securities and
Mortgage-backed securities 58,602 934 3.19% 66,611 1,026 3.08%
Other interest-earning
assets (2) 4,496 44 1.96% 5,275 49 1.86%
-------- ------ -------- ------
Total interest-earning assets 214,868 5,944 5.53% 227,562 6,094 5.36%
Non-interest-earning assets 11,649 ------ 10,577 ------
-------- --------
Total assets $226,517 $238,139
======== ========
Interest-bearing liabilities:
Transaction accounts $12,966 $ 23 .35% $10,370 $ 18 .35%
Passbook savings 9,140 35 .77% 6,768 34 1.00%
Money market accounts 12,906 61 .95% 12,767 58 .91%
Certificates of deposit 67,318 1,087 3.23% 90,844 1,389 3.06%
Other liabilities (3) 70,879 1,210 3.41% 82,303 1,378 3.35%
-------- ------ -------- ------
Total interest-bearing
liabilities 173,209 2,416 2.79% 203,052 2,877 2.83%
Non-interest bearing ------ ------
liabilities 34,463 17,326
-------- --------
Total liabilities 207,672 220,378
Stockholders' equity 18,845 17,761
-------- --------
Total liabilities and
Stockholders' equity $226,517 $238,139
======== ========
14
Net interest income $3,528 $3,217
====== ======
Interest rate spread (4) 2.74% 2.53%
==== ====
Net yield on interest-
earning assets (5) 3.28% 2.83%
==== ====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 1.24X 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. 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 income 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; (ii)
changes in rates; and (iii) changes in rate/volume.
Six-month period ended
December 31, 2004 vs. 2003
Increase (Decrease)
Due to
-----------------------------------
Rate/
Volume Rate Volume Net
------ ---- ------ ---
(Dollars in Thousands)
Interest income:
Loans receivable $(126) $ 70 $ 3 $ (53)
Mortgage-backed securities and
investment securities (123) 37 (6) (92)
Other interest-earning assets (7) 3 (1) (5)
----- ----- ----- -----
Total interest-earning assets (256) 110 (4) (150)
----- ----- ----- -----
Interest expense:
Transaction accounts 4 - 1 5
Savings accounts 12 (8) (3) 1
Money markets 1 3 (1) 3
Certificates of deposit (360) 77 (19) (302)
Other liabilities (191) 25 (2) (168)
----- ----- ----- -----
Total interest-bearing liabilities (534) 97 (24) (461)
----- ----- ----- -----
Net change in interest income $ 278 $ 13 $ 20 $ 311
===== ===== ===== =====
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.
15
The provision for loan losses was $60,000 and $130,000 for the six-month period
ended December 31, 2004 and 2003, respectively. See "Comparison of Operating
Results for the quarter ended December 31, 2004 compared to quarter ended
December 31, 2003 - Provision for Losses on Loans."
Non-Interest Earnings
Total non-interest earnings increased by $64,000 or 14.4% to $511,000 for the
six-month period ended December 31, 2004 from $446,000 for the six-month period
ended December 31, 2003. This increase was primarily due to an increase in
service charge income of $87,000 and an increase of $5,000 in income from real
estate operations partially offset by a decrease in miscellaneous income of
$29,000. The decrease in miscellaneous income is primarily due to gains on the
sale of other real estate owned in the six-month period ended December 31, 2003.
The increase in service charge income is primarily due to increased account
analysis service charges and increased insufficient funds charges collected on
NOW and checking accounts.
Non-Interest Expense
Total non-interest expense increased $332,000, or 14.4%, to $2,638,000 for the
six-month period ended December 31, 2004 from $2,306,000 for the six-month
period ended December 31, 2003. The increase in non-interest expense was
primarily attributable to increases in professional fees, other expenses,
compensation and benefits, FDIC insurance, supervisory exam fees, ATM expense,
data processing and insurance, partially offset by decreases in occupancy,
advertising, postage, stationery, printing and office supplies, and stock
services. The $232,000 increase in professional fees for the six-month period
ended December 31, 2004 is primarily attributable to a $156,000 increase in
legal fees and a $71,000 increase in other professional services in connection
with the Agreement and Plan of Merger between the Company and First Federal Banc
of the Southwest, Inc. announced on August 25, 2004 The $60,000 increase in
other expense is primarily attributable to a $45,000 increase in loan expense
and $22,000 in losses on sale of other real estate owned, partially offset by
small decreases in several other expense items. Compensation and benefits
increased $48,000, primarily attributable to early vesting of restricted stock
as a result of the filing of the Agreement and Plan of Merger between the
Company and First Federal Banc of the Southwest, Inc. announced on August 25,
2004. The $20,000 increase in FDIC insurance was primarily due to an increase in
the FDIC assessment. The $19,000 increase in supervisory exam fees was primarily
due to an increase in the Office of Thrift Supervision supervisory exam fees
assessment. The $15,000 increase in ATM expense is primarily attributable to an
increase in the volume of ATM transactions. Data processing costs increased by
$8,000, primarily due to growth in the number of deposit accounts and
transaction volume increases. Insurance expense increased $7,000 due to a
general increase in premium rates for property and casualty insurance. Occupancy
expense decreased $27,000 primarily due to a decrease in depreciation expense
for furniture, fixtures and equipment.
Borrowings
The Company may obtain advances from the FHLB of Dallas to supplement its supply
of funds available for loans and investments. Advances from the FHLB are
typically secured by a pledge of the Company's stock in the FHLB, a portion of
the Company's first mortgage loans and certain other assets. Each FHLB credit
program has its own interest rate, which may be fixed or variable, and range of
maturities. The Company, if the need arises, may also access the Federal Reserve
Bank discount window to supplement its supply of funds available for loans and
investments and to meet deposit withdrawal requirements. For the six-month
period ended December 31, 2004 and December 31, 2003, borrowings with the FHLB
averaged $63,900,571 and $72,573,899, respectively. The approximate weighted
average rate paid on borrowings was 3.41% and 3.35% for the six-month period
ended December 31, 2004 and December 31, 2003, respectively.
16
Item 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The Company's
management evaluated, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, the effectiveness of
the Company's disclosure controls and procedures as of the end of the
period covered by this report. Based on such evaluation, the Company's
principal executive officer and the principal financial officer have
concluded that 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.
17
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings
-----------------
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
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
--------
(a) List of Exhibits
2.1 Agreement and Plan of Merger, dated as of August 25, 2004, between
GFSB Bancorp, Inc. and First Federal Banc of the Southwest, Inc.*
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*****
10.6+ Change-in-Control Severance Agreement with Richard P. Gallegos******
10.7+ Change-in-Control Severance Agreement with Jerry R. Spurlin******
10.8+ Change-in-Control Severance Agreement with William W. Head, Jr.******
10.9+ Change-in-Control Severance Agreement with Leonard C. Scalzi******
31.1 Rule 13a-14(a)/15d-14(a) Certification
31.2 Rule 13a-14(a)/15d-14(a) Certification
32 Section 1350 Certification
_________
+ Management contract or compensatory plan or arrangement.
* Incorporated herein by reference to the identically numbered exhibit to
the current report on Form 8-K filed with the SEC on August 26, 2004.
** Incorporated herein by reference to the Registration Statement on Form
S-1 of the Company (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.
18
**** Incorporated by reference to the identically numbered exhibits of
the Quarterly Report on Form 10-QSB for the quarter ended March 31, 2001
filed with the SEC.
***** Incorporated by reference to Exhibit 4.1 to the Registration Statement
on Form S-8 (File No. 333-51498) filed with the SEC on December 8, 2000.
****** Incorporated by reference to Annual Report on Form 10-KSB for the fiscal
year ended June 30, 2004 as filed September 27, 2004.
19
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 14, 2005 /s/Jerry R. Spurlin
-----------------------------------------------
Jerry R. Spurlin
Assistant Secretary and Chief Financial Officer
(Duly Authorized Representative and
Principal Financial Officer)
20