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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, 1998
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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.
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(Name of Small Business Issuer in its Charter)
Delaware 04-2095007
- --------------------------------------------------- --------------------
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer
Organization) Identification No.)
221 West Aztec Avenue, Gallup, New Mexico 87301
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (505) 722-4361
---------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
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As of May 8, 1998, there were issued and outstanding 1,201,037 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, 1998 and June 30, 1997 3
Consolidated Statements of Earnings
Three months and nine months ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows
Nine months ended March 31, 1998 and 1997 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 17
Signatures 18
2
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, June 30,
1998 1997
---------------- ---------------
(Unaudited)
ASSETS
Cash and due from banks $ 2,066,280 $ 1,772,937
Interest-bearing deposits with banks 974,838 1,121,191
Federal funds sold 0 100,000
Available-for-sale investment securities 6,639,305 4,342,042
Available-for-sale mortgage-backed securities 35,488,275 32,069,501
Stock of Federal Home Loan Bank, at cost, restricted 1,936,300 1,060,300
Loans receivable, net, substantially pledged 69,384,087 52,021,929
Accrued interest and dividends receivable 680,499 551,783
Premises and equipment 904,674 677,250
Other real estate and repossessed property 7,560 --
Prepaid and other assets 72,921 55,290
Deferred tax asset 20,671 20,671
--------------- ---------------
TOTAL ASSETS $ 118,175,409 93,792,894
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Transaction accounts $ 8,772,199 $ 4,488,475
Savings and now deposits 11,738,905 10,606,993
Time deposits 46,661,111 42,777,018
Accrued interest payable 308,601 153,049
Advances from borrowers for taxes and insurance 333,553 175,748
Accounts payable and accrued liabilities 255,010 181,970
Deferred income taxes 423,622 287,000
Dividends declared and payable 76,217 75,415
Advances from Federal Home Loan Bank 34,960,876 20,930,000
Income taxes payable 70,661 174,090
--------------- ---------------
TOTAL LIABILITIES 103,600,755 79,849,758
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 1,500,000,000 shares authorized;
800,700 issued and outstanding at June 30, 1997 and 800,700 shares
issued and outstanding at March 31, 1998 77,041 76,684
Preferred stock, $.10 par value, 500,000
shares authorized; no shares issued or
outstanding -- --
Additional paid-in-capital 6,296,462 6,260,680
Unearned ESOP stock (431,286) (464,881)
Retained earnings, substantially
restricted 7,946,516 7,513,536
Unrealized gain on available for sale
securities, net of taxes 685,921 557,117
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 14,574,654 13,943,136
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 118,175,409 $ 93,792,894
=============== ===============
See notes to consolidated financial statements.
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
Three months ended Nine months ended
March 31, March 31,
-------------------------- -------------------------
1998 1997 1998 1997
-------------------------- -------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Interest income
Loans receivable
Mortgage loans $ 1,297,923 $ 859,176 $ 3,636,241 $ 2,533,572
Commercial loans 82,480 71,407 199,318 165,368
Share and consumer loans 80,561 44,477 220,984 123,682
Available-for-sale investment securities and
mortgage-backed securities 623,415 478,173 1,938,938 1,505,487
Other interest-earning assets 39,652 37,304 130,108 99,449
----------- ------------ ----------- -----------
TOTAL INTEREST EARNINGS 2,124,030 1,490,537 6,125,589 4,427,558
Interest expense
Deposits 775,293 676,545 2,316,258 1,890,603
Advances from Federal Home Loan Bank 502,467 160,986 1,435,393 552,649
----------- ------------ ----------- -----------
TOTAL INTEREST EXPENSE 1,277,760 837,531 3,751,650 2,443,252
----------- ------------ ----------- -----------
NET INTEREST EARNINGS 846,270 653,005 2,373,938 1,984,306
Provision for loan losses 15,758 15,506 53,217 20,794
----------- ------------ ----------- -----------
NET INTEREST EARNINGS AFTER
PROVISION FOR LOAN LOSSES 830,512 637,499 2,320,721 1,963,512
Non-interest earnings
Income from real estate operations
Miscellaneous income 1,210 1,127 7,992 2,848
Net gains from sales of loans (2,503) 272 1,710 5,214
Service charge income 24,362 9,850 54,609 26,586
----------- ------------ ----------- -----------
TOTAL NON-INTEREST EARNINGS 23,070 11,249 64,311 34,648
Non-interest expense
Compensation and benefits 243,150 211,088 692,259 635,676
Insurance 13,742 7,097 40,069 317,304
Other 93,001 53,888 244,641 170,195
Occupancy 41,450 38,208 120,963 105,680
Data processing 30,624 19,432 93,367 65,257
Professional fees 12,892 23,657 81,867 78,450
Advertising 7,067 12,481 34,576 35,098
Stock services 5,147 5,652 12,817 11,407
----------- ------------ ----------- -----------
TOTAL NON-INTEREST EXPENSE 447,072 371,503 1,320,558 1,419,067
4
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS - CONTINUED
Three months ended Nine months ended
March 31, March 31,
------------------------ -----------------------
1998 1997 1998 1997
------------------------ -----------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
EARNINGS BEFORE INCOME TAXES 406,509 277,246 1,064,474 579,094
Income tax expense
Currently payable 155,337 105,775 404,838 226,921
Deferred provision - - - -
--------- --------- ------- -------
155,337 105,775 404,838 226,921
--------- --------- ------- -------
NET EARNINGS $ 251,171 $ 171,471 659,636 352,173
========= ========= ======= =======
Earnings per common share
Basic $ 0.33 0.21 0.87 0.42
========= ========= ======= =======
Weighted average number of common shares outstanding
Basic 756,957 822,257 755,900 843,590
========= ========= ======= =======
Earnings per common share
Diluted 0.32 0.21 0.85 0.41
========= ========= ======= =======
Weighted average number of common shares outstanding
Diluted 774,301 829,717 771,692 850,690
========= ========= ======= =======
5
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
Nine months ended
March 31,
----------------------------
1998 1997
------------- ------------
(Unaudited) (Unaudited)
Cash flows from operating activities
Net earnings $ 659,636 $ 352,173
Adjustments to reconcile net earnings to
net cash provided by operations
Deferred loan origination fees (125,956) (99,299)
Gain on sale of sold loans (1,709) (5,214)
Provision for loan losses 53,217 20,794
Depreciation of premises and equipme 58,730 51,152
Amortization of investment and mortgage-
backed securities premiums (discou 206,436 134,162
Stock dividends on FHLB stock (77,400) (23,600)
Release of ESOP stock 69,734 101,696
Stock compensation 37,217 (13,732)
Provision (benefit) for deferred inc
Net changes in operating assets and liabilities
Accrued interest and dividends recei (128,716) (99,013)
Prepaid taxes
Prepaid and other assets (17,631) (17,657)
Accrued interest payable 155,551 3,408
Accounts payable and accrued liabili 35,823 (21,655)
Income taxes payable (103,429) 57,921
Dividends declared and payable 802 (322,044)
------------ ------------
Net cash provided by
operating activities 822,305 119,092
Cash flows from investing activities
Purchase of premises and equipment (286,154) (205,863)
Loan originations and principal
repayment on loans, net (17,295,270) (6,214,554)
Principal payments on mortgage-backed
securities 7,101,219 4,232,576
Purchases of mortgage-backed securities (10,770,665) (11,793,195)
Purchases of available-for-sale securities (1,847,601) (93,593)
Maturities and proceeds from sale of
available-for-sale securities 500,000 700,000
Purchases of municipal securities (640,000)
Purchase of FHLB stock (798,600) (295,000)
------------ ------------
Net cash used by
investing activities (24,037,071) (13,669,629)
6
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Increase (decrease) in cash and cash equivalents
Nine months ended
March 31,
-------------------------------
1998 1997
-------------- --------------
(Unaudited) (Unaudited)
Cash flows from financing activities
Net increase in transaction accounts, passbook
savings, money market accounts, and
certificates of deposit $ 9,299,731 $ 9,295,226
Net increase (decrease) in mortgage escrow fu 157,805 127,874
Proceeds from FHLB advances 378,820,950 75,948,910
Repayments on FHLB advances (364,790,074) (70,352,910)
Purchase of GFSB Bancorp stock under the
stock repurchase plan in cash - (1,664,847)
Dividends paid or to be paid in cash (226,656) (218,028)
Price paid for vested MSBP Stock - 56,152
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Net cash provided by
financing activities 23,261,756 13,192,377
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Increase (decrease) in cash and cash equivale 46,990 (358,160)
Cash and cash equivalents at beginning of per 2,994,128 3,167,194
------------- -------------
Cash and cash equivalents at end of $ 3,041,118 2,809,034
============= =========
Supplemental disclosures
Cash paid during the period for
Interest on deposits and ad $ 3,596,099 $ 2,439,844
Income taxes 508,267 160,000
Change in unrealized gain (loss), net of deferred
taxes on available-for-sale securities 128,804 175,315
Dividends declared not yet paid 76,217 -
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, 1997, Form 10-KSB.
This quarterly report should be read in conjunction with such annual report.
2. Dividends
---------
During the quarter ended December 31, 1997, 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, 1997. The dividends were
paid in January 1998.
During the quarter ended March 31, 1998, 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, 1998. The dividends
were paid in April 1998. Also, the Board of Directors declared a stock dividend
of fifty (50%) percent on the Company's outstanding common stock, payable on or
about April 20, 1998, to stockholders of record as of March 31, 1998 and that
cash be paid in lieu of fractional shares resulting from the stock dividend
based on the market value of a share of common stock at the close of business on
the record date as determined with respect to stock prices or the determination
of the Board of Directors in the event the market value is not determinable
based on the lack of recent trading in common stock of the Company in the period
preceding the record date.
As required by SOP 93-6, the dividends on unallocated ESOP shares have been
recorded as an additional $4,000 compensation cost rather than a reduction of
retained earnings.
3. Employee Stock Ownership Plan
-----------------------------
On December 31, 1997 the Company released 4341.26 shares of its common stock
owned by the Company's ESOP. On March 31, 1998, the Company was committed to
release 1039.41 shares of this common stock. The commitment resulted in $23,000
of additional compensation cost.
4. Management Stock Bonus Plan
---------------------------
On January 5, 1996, the Company made awards under the Plan in the amount of
20,382 shares. The shares were awarded at a price of $13 7/8 per share. 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 2,000 shares in
the total number of shares awarded. At March 31, 1998, 19,568 shares remained to
be awarded under the Plan. Awards under the Plan are earned at the rate of
one-fifth of the award per year as of the one-year anniversary of the grant of
the award. As a result of this vesting and the dividends earned on the vested
shares, a liability and corresponding compensation cost in the amount of $12,000
has been recorded at March 31, 1998, under the provisions of the Plan. On
January 5, 1998, 3575 shares under the Plan were earned, and the corresponding
liability was paid.
5. BIF/SAIF Insurance Premium
--------------------------
The one-time BIF/SAIF Insurance Premium assessed by Congress in September 1996,
resulted in a $250,000 charge to the Bank. This assessment was charged to
earnings in September 1996, and was paid in November 1996.
8
6. Earnings Per Share
------------------
The Financial Accounting Standards Board (FASB) issued Statement No. 128, "
Earnings Per Share", which supersedes APB Opinion No. 15. Statement No. 128
requiring the presentation of earnings per share by all entities that have
common stock or potential common stock, such as options, warrants and
convertible securities, outstanding that trade in a public market. Those
entities that have only common stock outstanding are required to present basic
earnings per share amounts. All other entities are required to present basic and
diluted per share amounts. 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 from continuing
operations. All entities required to present per share amounts must initially
apply Statement No. 128 for annual and interim periods ending after December 15,
1997.
Because the Company has potential common stock outstanding (stock options to
employees and directors), the Company is required to present basic and diluted
earnings per share. The Bank has applied Statement No. 128 in the accompanying
financial statements.
The weighted average number of shares of common stock used to compute the basic
earnings per share was increased by 17344 for the three month period ended March
31, 1998, and by 7,460 for the three month period ended March 31, 1997,
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
15,792 for the nine month period ended March 31, 1998, and by 7,100 for the nine
month period ended March 31, 1997, in computing the diluted per share data.
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 mortgage 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 noninterest income derived primarily
from fees. Consequently, the Bank's earnings are dependent on its ability to
originate loans, and the relative amounts of interest-earning assets and
interest-bearing liabilities. The Bank's net earnings is also affected by its
provision for loan losses as well as the amount of other expense, such as
compensation and benefit expense, occupancy and equipment expense and deposit
insurance premium expenses. Earnings of the Bank also are affected significantly
by general economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory authorities.
In September 1996, Congress enacted a plan to mitigate the effect of the
BIF/SAIF insurance premium disparity. This plan required all SAIF member
institutions, including the Bank, to pay a one-time assessment to recapitalize
the SAIF. The effect of this reduced the capital of the Bank by the amount of
the fee, and such amount was charged to earnings in the quarter ended September
30, 1996. The assessment amount the Bank paid was $250,000 which is 65.7 basis
points on the amount of deposits held by the Bank at March 31, 1995.
Beginning January 1, 1997, deposit insurance assessments for most SAIF members
became .064% of deposits on an annual basis. This rate is expected to be
effective through the end of 1999. During this same period, BIF members
(predominantly composed of commercial banks) are to be assessed .013% of most
deposits. Thereafter, assessments for BIF and SAIF members should be the same
and BIF and SAIF may be merged. As a result of these changes, beginning January
1, 1997, the rate of deposit insurance assessed the Bank declined by
approximately 70% from the rate in effect prior to September 30, 1996.
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- 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 and
increased its origination of commercial real estate loans and construction
loans. These loans typically have adjustable interest rates and are for shorter
terms than residential first mortgage loans. The Bank has limited experience
with these types of loans, and 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 has recently begun purchasing 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 commercial and consumer credit life insurance are additional
products now offered by the Bank. The Bank attempts to manage the interest rates
10
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 $24.4 million or 26% from $93.8 million at
June 30, 1997 to $118.2 million at March 31, 1998. This increase is primarily
the result of a $3.4 million increase in mortgage-backed securities, a $17.4
million increase in the Bank's net loan portfolio, a $2.3 million increase in
investment securities and a $876,000 increase in stock of the Federal Home Loan
Bank. The majority of the increases are directly attributable to efforts of
Management to take advantage of the increased capital infusion made as a result
of the conversion from a mutual to stock form of ownership through increased
investment and lending activity. During the same period, deposits increased $9.3
million or 16.1% from $57.9 million at June 30, 1997, to $67.2 million at March
31, 1998. This increase is primarily due to an increase in the Bank's volume of
NOW accounts, business checking accounts, local (non-brokered) Jumbo
Certificates of Deposit and Public (state and city) Certificates of Deposits.
Advances from the FHLB increased $14 million from $20.9 million at June 30, 1997
to $34.9 million at March 31, 1998. These additional borrowings funded purchases
of loans, securities and mortgage loan participations. The Bank had $686,000 and
$557,000 in unrealized gains (net of deferred taxes) at March 31, 1998 and June
30, 1997, respectively from market gains on the Bank's investment and
mortgage-backed portfolios. Unrealized gains and losses do not impact the Bank's
earnings until they are realized.
11
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR QUARTER ENDED MARCH 31, 1998 COMPARED TO
QUARTER ENDED MARCH 31, 1997
General
Net earnings increased $80,000 or 46.5% for the quarter ended March 31, 1998
from the quarter ended March 31, 1997. This increase is primarily the result of
an increase in net interest earnings of $193,000, an increase in non-interest
earnings of $12,000, offset by an increase in non-interest expense of $76,000
and an increase in income taxes of $50,000.
Interest Earnings
Total interest income increased $633,000 or 42.2% from $1.5 million for the
quarter ended March 31, 1997 to $2.1 million for the quarter ended March 31,
1998. This increase was primarily due to substantial increases in the Bank's
mortgage-backed securities portfolio, investment securities and net loan
portfolio.
Interest Expense
Total interest expense increased $440,000 or 52.5% from $838,000 for the quarter
ended March 31, 1997 to $1,278,000 for the quarter ended March 31, 1998. This
increase was due to a substantial increase in FHLB borrowings and an increase in
the deposit base, including the increase in volume of NOW accounts, business
checking accounts, local (non-brokered) Jumbo Certificates of Deposit and Public
(state and city) Certificates of Deposits.
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 $377,000 and $339,000 at
March 31, 1998 and 1997, respectively. The provision for loan loss was $16,000
for the quarter ended March 31, 1998 and 1997 respectively. Based on a
historical trend of limited losses on residential loans, the amount of the loan
loss provision allocated to residential loans remained relatively stable for the
two periods. While the Bank maintains its allowance for losses at a level which
it considers to be adequate, there can be no assurance that further additions
will not be made to the loss allowances and that such losses will not exceed the
estimated amounts. Recent substantial increases in the loan portfolio of the
Bank may result in an increase of provision for losses on loans. The
establishment of a loan loss provision each period adversely impacts the Bank's
net earnings.
Non-Interest Income
Total Non-Interest income increased by $12,000 or 109.1% from $11,000 for the
quarter ended March 31, 1997 to $23,000 for the quarter ended March 31, 1998.
This increase was primarily due to increased service and NSF charges on NOW and
checking accounts and increased Automated Teller Machine use fees.
Non-Interest Expense
Total non-interest expense increased $76,000 or 20.5% from $371,000 for the
quarter ended March 31, 1997 to $447,000 for the quarter ended March 31, 1998.
This increase was primarily due to an increase of other costs of $39,000, an
increase of occupancy expense of $3,000, an increase in data processing of
$11,000 and an increase in compenstation and benefits of $32,000 and an increase
in insurance expense of $7,000, offset by a decrease in professional fees of
$11,000 and a decrease in advertising of $5,000. The increase in other expenses
is primarily due to increased supplies, automated teller machine expense,
charitable contributions and postage expense. The increase in occupancy costs is
mainly due to the depreciation of Furniture, Fixtures and Equipment. The
increase in data processing is due to increased transaction volume from growth
in deposits. The increase in compensation and benefits is due to an increase in
staff, some salary increases and curent year accrual for stock-based
compensation plans. The increase in insurance expense is due to the quarterly
SAIF insurance premium being higher resulting from the growth in deposits. The
decrease in professional services is the result of some additional expense in
audit, accounting and legal
12
fees incurred in the quarter ended March 31, 1997. The decrease in advertising
is due to additonal advertising supplies and advertising expense used for
promoting bank growth in the quarter ended March 31, 1997.
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR NINE MONTH PERIOD ENDED MARCH 31, 1998
COMPARED TO NINE MONTH PERIOD ENDED MARCH 31, 1997
General
Net earnings increased $307,000 or 87.3% for the nine month period ended March
31, 1998 from the nine month period ended March 31, 1997. This increase is
primarily the result of an increase in net interest earnings of $390,000, an
increase in non-interest earnings of $30,000 and a decrease in non-interest
expense of $98,000, offset by an increase in income taxes of $178,000 and an
increase in the provision for loan loss of $32,000.
Interest Earnings
Total interest income increased $1.7 million or 38.6% from $4.4 million for the
nine month period ended March 31, 1997 to $6.1 million for the nine month period
ended March 31, 1998. This increase was primarily due to substantial increases
in the Bank's mortgage-backed securities portfolio, investment securities and
net loan portfolio.
Interest Expense
Total interest expense increased $1.3 million or 54.2% from $2.4 million for the
nine month period ended March 31, 1997 to $3.7 million for the nine month period
ended March 31, 1998. This increase was due to a substantial increase in FHLB
borrowings and an increase in the deposit base, including the increase in volume
of NOW accounts, business checking accounts, local (non-brokered) Jumbo
Certificates of Deposit and Public (state and city) Certificates of Deposits.
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 $377,000 and $339,000 at
March 31, 1998 and 1997, respectively. The provision for loans was $53,000 and
$21,000 for the nine month period ended March 31, 1998 and 1997. Based on a
historical trend of limited losses on residential loans, the amount of the loan
loss provision allocated to residential loans remained relatively stable for the
two periods. While the Bank maintains its allowance for losses at a level which
it considers to be adequate, there can be no assurance that further additions
will not be made to the loss allowances and that such losses will not exceed the
estimated amounts. The establishment of a loan loss provision each period
adversely impacts the Bank's net earnings.
Non-Interest Income
Total non-interest income increased $30,000 or 88.2% from $34,000 for the nine
month period ended March 31, 1997 to $64,000 for the nine month period ended
March 31, 1998. This increase was primarily due to increased service and NSF
charges on NOW and checking accounts and increased ATM use fees.
Non-Interest Expense
Total non-interest expense decreased $98,000 or 7% from $1.4 million for the
nine month period ended March 31, 1997 to $1.3 million for the nine months
period ended March 31, 1998. This decrease was primarily due to a decrease in
insurance expense of $277,000, offset by an increase in compensation and
benefits costs of $57,000, an increase in other costs of $74,000, an increase in
occupancy costs of $15,000, an increase in data processing of $28,000, an
increase in professional fees of $3,000.The decrease in insurance expense was
primarily due to the one-time $250,000 assessment paid during the quarter ended
September 30, 1996. The increase in compensation and benefits costs is due to an
increase in staff, some salary increases and
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current year accruals for stock-based compensation plans. The increase in other
expenses is primarily due to increased supplies, automated teller machine
expense, charitable contributions and postage expense. The increase in occupancy
costs is mainly due to the depreciation of Furniture, Fixtures and Equipment,
building repairs and small building improvements. The increase in data
processing is due to increased transaction volume from growth in deposits. The
increase in professional services is the result of using more services of the
Bank's auditing firm. .
Liquidity and Capital Resources
The Bank is required under applicable federal regulations to maintain specified
levels of "liquid" investments in qualifying types of U.S. Government, federal
agency and other investments. Prior OTS regulations required that a savings
institution maintain liquid assets of not less than 5% of its average daily
balance of net withdrawable deposit accounts and borrowings payable in one year
or less, of which short-term liquid assets consist of not less than 1%, with the
qualifying investments limited to those having maturities of five years of less.
Revised OTS regulations effective November 13, 1997 lowered the required level
of liquid assets to 4%, removed the short-term liquid asset requirement and
deleted the five year or less maturity requirement. At March 31, 1998, the
Bank's liquidity, as measured for regulatory purposes, was 6.30%. 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.
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, 1998, cash and cash equivalents totaled $3
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,
1998, the Bank had $35 million in outstanding borrowings from the FHLB of
Dallas. These outstanding borrowings were used to purchase additional
mortgage-backed 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, 1998, the Bank
originated $11.1 million in total loans, of which $7.2 million were mortgage
loans. The Bank also purchased $717,000 in mortgage loan participations. Another
investment activity of the Bank is the investment of funds in U.S. Government
Agency securities, mortgage-backed securities, federal funds and FHLB-Dallas
overnight funds. During periods when the Bank's loan demand is limited, the Bank
may purchase short-term investment securities to obtain a higher yield than
otherwise available.
The Bank's cash flows are comprised of three primary classifications: cash flows
from operating activities, investing activities and financing activities. Cash
flows provided in 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 $475,000 and $119,000 for the nine month period ended March 31, 1998 and
1997 respectively. Net cash used for investing activities consisted primarily of
loan originations and purchases of mortgage-backed securities, municipal
securities and FHLB Stock, offset by principal collections on loans, and
principal collections and proceeds from the maturities of mortgage-backed
securities and investment securities. Such uses were $24 million and $13.7
million for the nine month periods ended March 31, 1998 and 1997, respectively.
Net cash provided from financing activities consisting primarily of net activity
in deposit and escrow accounts and new FHLB borrowings, were $23.3 million and
$13.2 million for the nine month periods ended March 31, 1998 and 1997,
respectively.
The Bank anticipates that it will have sufficient funds available to meet its
current commitments. As of March 31, 1998, the Bank had commitments to fund
loans of $1.2 million. Certificates of deposit scheduled to mature in one year
or less totaled $30.4 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,
14
management believes that a majority of deposits will remain with the Bank. As a
result, no adverse liquidity effects are expected.
At March 31, 1998, the Bank exceeded each of the three OTS capital requirements
on a fully-phased-in basis.
The Year 2000 issue
- -------------------
By now almost everyone has heard about the year-2000 computer problem. Every
major company has a potential problem caused by computer hardware and software
developed to use two digits to identify the year instead of four, i.e. 1995 is,
in many cases, input, stored, sorted, and calculated as "95". Similarly, the
year 2000, being read as "00", may be treated as the year 1900, thereby causing
a variety of problems such as the inability to compute payment due dates or
interest correctly. Rapid and accurate data processing is essential to the
operation of the Bank.
The Bank's Board of Directors has adopted an action plan for addressing the Year
2000 issue. An internal committee has been appointed by the Board to manage this
effort. Management has been charged with the responsibility of assuring Year
2000 compliance within time frames dictated by sound business practice and the
Federal Financial Institutions Examination Council.
Work has been underway for some time to identify all equipment and systems that
may potentially be impacted. Contact has been made with all outside servicers
and major vendors to ascertain their individual levels of Year 2000 compliance.
This effort will continue and will include substantial testing procedures.
The Bank is dependent on a service bureau for its major data processing
functions. Management is monitoring the service bureau's Year 2000 compliance
efforts closely. This monitoring includes membership and active participation in
a user group made up of client institutions of the service bureau and will
include testing beginning in the third quarter of 1998.
Major borrowers have been contacted in order to help them be aware of the Year
2000 issue and to determine their state of readiness for the Year 2000.
The Bank has experienced considerable growth in recent years, which independent
of the Year 2000 issue, has created the need to upgrade some hardware and
software. These upgrades, primarily to the Bank's local area network, personal
computers, and off-the-shelf software, are considered a normal result of the
growth and rapid changes in technology. They are not expected to have a material
effect on the financial performance of the Bank.
Although the Bank is expecting some charges from various vendors for equipment
and systems upgrades specifically related to the Year 2000 issue, it is
currently estimated that the impact on financial performance will not be
material. However, it is possible that future Year 2000 compliance efforts could
result in currently unforseen material impact on financial performance.
Subsequent Events
- -----------------
During the quarter ending June 30, 1998, the Bank will open a newly constructed
drive-up teller and automated teller machine facility on a lot previously
purchased for this purpose adjacent to the present bank building. The Bank will
incur some additional non-interest expense associated with depreciation for this
new facility. It is also hoped that the addition will provide the Bank growth
potential by improving its ability to deliver retail banking services to the
community. The addition is not expected to have a material impact on financial
performance for the Bank during the final quarter of the fiscal year ending June
30, 1998, and future impact cannot be accurately determined at the present time.
Stock Repurchase Program
On September 23, 1997, the Company issued a press release announcing its
intention to repurchase up to 5% (40,035 shares) of the Company's common stock.
On October 2, 1997, the Company received regulatory approval to repurchase these
shares of common stock before June 28, 1998. As of March 31, 1998, none of these
shares have been repurchased. If any shares are repurchased, the Company has
decided to retire these shares as authorized but unissued. The Company believes
that it has sufficient capital to complete the
15
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
Thrift institutions are no longer allowed 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. 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, 1997, the Bank had $55,936 of post 1987 bad-debt reserves of which
1/6th or $9,323 was recaptured into taxable income for the year ended June 30,
1997. Future recapture of the Bank's bad-debt reserves may have an adverse
effect on net earnings. Management does not believe such future recapture of the
Bank's bad debt reserves will have a material impact on the Bank's financial
condition.
Impact of Certain Accounting Standards
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." This Statement
is currently effective for the Company. This statement established standards for
the impairment of long-lived assets and requires that long-lived assets held by
an entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable. The
Statement also requires that long-lived assets to be disposed of be reported at
the lower of carrying value or fair value less cost to sell. Adoption of this
Statement has not had and is not anticipated to have a material impact on the
Company's financial condition.
Accounting for Mortgage Servicing Rights
In May, 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights." This Statement amends FASB No. 65, "Accounting for Certain Mortgage
Banking Activities." This Statement requires that mortgage banking enterprises
recognize as separate assets right to service mortgage loans for others, however
those servicing rights are acquired. Mortgage banking enterprises that acquire
mortgage servicing rights through either the purchase or origination of mortgage
loans and sells or securitizes those loans with servicing rights retained should
allocate the total cost of the mortgage loans to the mortgage servicing rights
and the loans (without the mortgage servicing rights) based on their relative
fair values if it is practicable to estimate those fair values. This Statement
is effective in the current fiscal year. The Bank currently does not retain
servicing rights on purchased or sold loans, therefore, the adoption of this
Statement has not had and is not anticipated to have a material impact on the
Bank's financial condition.
Accounting for Stock-Based Compensation
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.
16
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.
Transfer and Servicing of Financial Assets and Extinguishment of Liabilities
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 125, "Transfer and Servicing of Financial Assets and
Extinguishment of Liabilities." This Statement requires that transferred assets
could be derecognized only when control is surrendered, rather than when risks
and rewards related to the asset are passed to another party. A liability would
be extinguished when the creditor no longer has ultimate responsibility for the
liability. Adoption of this Statement has not had and is not anticipated to have
a material impact on the Company's financial condition.
Earnings per Share
Recently the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share." It simplifies the standards
for computing earnings per share, superseding the standards previously found in
Opinion 15. It replaces the presentation of primary earnings per share with a
presentation of basic earnings per share. It also requires dual presentation of
basic and diluted earnings per share on the face of the income statement for all
entities with complex capital structures and requires a reconciliation of the
numerator and denominator of the basic earnings per share computation to the
numerator and denominator of the earnings per share computation. This Statement
will affect the financial statements issued by the Company after December 15,
1997.
Disclosure of Information about an Entity's Capital Structure
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards No. 129, "Disclosure of Information about an Entity's
Capital Structure." This Statement applies to all entities. Its requirements are
a consolidation of those found in APB Opinions 10 and 15, and Statement of
Financial Accounting Standards No. 47, and it eliminates the exemption of
nonpublic entities from certain disclosure requirements. This Statement will
affect the financial statements issued by the Company after December 15, 1997.
Reporting Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
This Statement establishes standards for reporting and display of comprehensive
income on its components (revenues, expenses, gains and losses). Comprehensive
income is defined as the change in equity of a business enterprise, during a
period, from transactions and other events and circumstances from nonowner
sources. The Statement requires that entities classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in-capital in the equity section of a statement of
financial position. This Statement is effective for fiscal years beginning after
December 31, 1997.
Disclosure About Segments of an Enterprise and Related Information
Also 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.
PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K
None
17
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GFSB BANCORP, INC.
Date: May 12, 1998 /s/ Jerry R. Spurlin
------------------------------------
Jerry R. Spurlin
President
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