UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[|X|] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-25854
GFSB BANCORP, INC.
----------------------------------------------
(Name of Small Business Issuer in its Charter)
Delaware
- --------------------------------------------------------------
(State or Other Jurisdiction of Incorporation or Organization)
04-2095007
----------
(I.R.S. Employer
Identification No.)
221 West Aztec Avenue, Gallup, New Mexico
- -----------------------------------------
(Address of Principal Executive Offices)
87301
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(Zip Code)
Issuer's Telephone Number, Including Area Code: (505) 722-4361
--------------
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 February 4, 1999, there were issued and outstanding 1,047,223 shares of
the registrant's Common Stock.
GFSB Bancorp, Inc.
Index
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition
December 31, 1998 and June 30, 1998 3
Consolidated Statements of Earnings and Comprehensive Earnings
Three months and six months ended December 31, 1998 and 1997 4
Consolidated Statements of Cash Flows
Six months ended December 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. 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, June 30,
1998 1998
------------------ -----------------
(Unaudited)
ASSETS
Cash and due from banks $ 2,247,589 $ 2,047,860
Interest-bearing deposits with banks 828,498 2,490,120
Federal funds sold 0 0
Available-for-sale investment securities 7,475,412 5,188,095
Available-for-sale mortgage-backed securities 28,610,552 33,551,219
Hold-to-Maturity investment securities 1,125,175 144,993
Stock of Federal Home Loan Bank, at cost, restricted 2,321,600 1,965,200
Loans receivable, net, substantially pledged 88,592,716 75,836,642
Accrued interest and dividends receivable 729,093 675,485
Premises and equipment 1,478,628 1,035,668
Other real estate and repossessed property 248,671 159,106
Prepaid and other assets 43,579 46,316
Deferred tax asset 68,377 68,377
------------- -------------
TOTAL ASSETS $ 133,769,890 123,209,081
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Transaction and NOW accounts $ 10,733,232 $ 6,979,785
Savings and MMDA deposits 13,557,079 13,901,860
Time deposits 49,617,482 48,497,496
Accrued interest payable 234,672 223,702
Advances from borrowers for taxes and insurance 301,138 225,597
Accounts payable and accrued liabilities 423,800 260,332
Deferred income taxes 459,719 426,553
Dividends declared and payable 73,923 82,446
Advances from Federal Home Loan Bank 45,184,855 38,247,631
Income taxes payable 66,761 154,757
------------- -------------
TOTAL LIABILITIES 120,652,660 109,000,159
=========== ===========
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 1,500,000
shares authorized; 1,165,537 issued and outstanding
at June 30, 1998 and 1,051,898 shares issued and
outstanding at December 31, 1998, adjusted for
30,389 and 45,584 shares at June 30, 1998 and December 31, 1998,
for unallocated Manangement Stock Bonus Plan shares
held by the Company's wholly owned subsidiary, respectively. 100,631 113,515
Preferred stock, $.10 par value, 500,000
shares authorized; no shares issued or
outstanding -- --
Additional paid-in-capital 4,211,497 5,777,881
Unearned ESOP stock (400,088) (415,695)
Retained earnings, substantially
restricted 8,312,794 8,041,610
Accumulated other comprehensive
earnings 892,396 691,611
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 13,117,230 14,208,922
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 133,769,890 $ 123,209,081
============= =============
See notes to consolidated financial statements.
3
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE EARNINGS
Three months ended Six months ended
December 31, December 31,
------------------------------ -------------------------------
1998 1997 1998 1997
------------------------------ -------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Interest income
Loans receivable
Mortgage loans $ 1,605,430 $ 1,230,456 $ 3,122,116 2,338,318
Commercial loans 122,734 60,062 236,696 116,839
Share and consumer loans 101,303 75,129 195,796 140,423
Investment and mortgage-backed securities 484,423 672,493 995,286 1,315,522
Other interest-earning assets 52,543 50,672 103,614 90,455
------------ ------------ ------------- ------------
TOTAL INTEREST EARNINGS 2,366,433 2,088,812 4,653,509 4,001,559
Interest expense
Deposits 820,827 784,041 1,650,605 1,540,965
Advances from Federal Home Loan Bank 583,917 520,900 1,151,981 932,925
------------ ------------ ------------- ------------
TOTAL INTEREST EXPENSE 1,404,744 1,304,941 2,802,587 2,473,890
------------ ------------ ------------- ------------
NET INTEREST EARNINGS 961,689 783,871 1,850,922 1,527,669
Provision for loan losses 25,000 0 40,000 37,459
------------ ------------ ------------- ------------
NET INTEREST EARNINGS AFTER
PROVISION FOR LOAN LOSSES 936,689 783,871 1,810,922 1,490,210
Non-interest earnings
Income from real estate operations - - - -
Miscellaneous income 2,564 1,305 11,288 6,782
Net gains from sales of loans 7,090 955 9,225 4,212
Service charge income 38,109 19,805 73,194 30,247
------------ ------------ ------------- ------------
TOTAL NON-INTEREST EARNINGS 47,763 22,065 93,707 41,241
Non-interest expense
Compensation and benefits 356,189 214,931 696,426 446,295
Insurance 14,923 13,168 29,821 26,328
Stock services 3,287 4,921 16,644 7,670
Occupancy 70,015 39,513 126,558 79,513
Data processing 59,552 31,725 99,097 62,743
Professional fees 14,737 30,012 27,692 68,975
Advertising 19,028 9,782 35,402 27,509
Other 93,555 83,746 198,988 151,640
------------ ------------ ------------- ------------
TOTAL NON-INTEREST EXPENSE 631,286 427,798 1,230,627 870,672
4
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE EARNINGS - CONTINUED
Three months ended Six months ended
December 31, December 31,
------------------------------ -------------------------------
1998 1997 1998 1997
------------------------------ -------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
EARNINGS BEFORE INCOME TAXES 353,166 378,138 674,002 660,780
Income tax expense
Currently payable 135,723 146,137 252,289 249,501
Deferred provision - - - -
------------ ------------ ------------- ------------
135,723 146,137 252,289 249,501
------------ ------------ ------------- ------------
NET EARNINGS $ 217,443 $ 232,001 421,714 411,279
============ ============ ============= ============
Other Comprehensive Earnings
Unrealized gain (loss), net of tax
of $79,543 in 1998 and $47,612 in 1997
on available-for-sale securities 207,231 66,668 200,785 92,424
============ ============ ============= ============
COMPREHENSIVE EARNINGS 424,674 298,669 622,499 503,703
============ ============ ============= ============
Earnings per common share
Basic $ 0.22 0.20 0.40 0.36
============ ============ ============= ============
Weighted average number of common shares outstanding
Basic 1,008,985 1,133,725 1,047,923 1,132,915
============ ============ ============= ============
Earnings per common share
Diluted 0.21 0.20 0.39 0.36
============ ============ ============= ============
Weighted average number of common shares outstanding
Diluted 1,035,688 1,150,651 1,076,970 1,148,040
============ ============ ============= ============
Comprehensive earnings per common share
Basic 0.42 0.26 0.59 0.44
============ ============ ============= ============
Diluted 0.41 0.26 0.58 0.44
============ ============ ============= ============
5
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
Six months ended
December 31,
--------------------------------
1998 1997
------------- ----------------
(Unaudited) (Unaudited)
Cash flows from operating activities
Net earnings $ 421,714 $ 411,279
Adjustments to reconcile net earnings to
net cash provided by operations
Deferred loan origination fees (157,153) (79,085)
Gain on sale of sold loans (9,225) (4,212)
Provision for loan losses 40,000 37,459
Depreciation of premises and equipment 69,863 38,936
Amortization of investment and mortgage-
backed securities premiums (discounts) 197,708 131,256
Stock dividends on FHLB stock (63,100) (49,400)
Release of ESOP stock 45,376 52,527
Stock compensation 26,893 24,470
Provision (benefit) for deferred income taxes -- --
Net changes in operating assets and liabilities
Accrued interest and dividends receivable (53,608) (120,379)
Prepaid taxes -- --
Prepaid and other assets 2,736 4,672
Accrued interest payable 10,970 59,960
Accounts payable and accrued liabilities 136,574 53,494
Income taxes payable (87,996) (128,499)
Dividends declared and payable (8,523) (196)
------------ ------------
Net cash provided by
operating activities 572,229 432,282
Cash flows from investing activities
Purchase of premises and equipment (512,823) (136,087)
Loan originations and principal
repayment on loans, net (12,719,262) (11,111,598)
Principal payments on mortgage-backed
securities 5,469,927 4,385,694
Purchases of mortgage-backed securities (880,255) (10,770,665)
Purchases of available-for-sale securities (3,980,260) (2,455,562)
Maturities and proceeds from sale of
available-for-sale securities 2,010,000 --
Principal payments on available-for-sale securities 70,000 --
Purchases of held-to-maturity securities (980,000) --
Maturities and proceeds from sale of
held-to-maturity securities -- --
Purchase of FHLB stock (293,300) (779,000)
------------ ------------
Net cash used by
investing activities (11,815,973) (20,867,218)
6
GFSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Increase (decrease) in cash and cash equivalents
Six months ended
December 31,
-----------------------------------------
1998 1997
---------------- ----------------
(Unaudited) (Unaudited)
Cash flows from financing activities
Net increase in transaction accounts, passbook
savings, money market accounts, and
certificates of deposit $ 4,528,652 $ 5,375,528
Net increase (decrease) in mortgage escrow funds 75,541 12,835
Proceeds from FHLB advances 148,835,528 234,345,950
Repayments on FHLB advances (141,898,304) (219,210,700)
Purchase of GFSB Bancorp stock under the
stock repurchase plan in cash (1,609,036) -
Dividends paid or to be paid in cash (150,530) (150,439)
---------------- ----------------
Net cash provided by
financing activities 9,781,851 20,373,174
---------------- ----------------
Increase (decrease) in cash and cash equivalents (1,461,893) (61,762)
Cash and cash equivalents at beginning of period 4,537,980 2,994,128
---------------- ----------------
Cash and cash equivalents at end of period $ 3,076,087 2,932,366
================ ================
Supplemental disclosures
Cash paid during the period for
Interest on deposits and advances $ 1,754,827 $ 2,413,930
Income taxes 340,284 377,640
Change in unrealized gain (loss), net of deferred
taxes on available-for-sale securities 200,785 92,424
Dividends declared not yet paid 73,923 75,219
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, 1998, Form 10-KSB.
This quarterly report should be read in conjunction with such annual report.
2. Dividends
---------
During the quarter ended September 30, 1998, the Board of Directors declared a
cash dividend of $0.075 per share on the Company's outstanding common stock,
payable to stockholders of record as of September 30, 1998. The dividends were
paid in October 1998.
During the quarter ended December 31, 1998, the Board of Directors declared a
quarterly cash dividend of $0.075 per share on the Company's outstanding common
stock, payable to stockholders of record as of December 31, 1998. The dividends
were paid in January 1999.
As required by SOP 93-6, the dividends on unallocated ESOP shares have been
recorded as an additional $5,000 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 December 31, 1998, the Company was committed to
release 7022.35 shares of this common stock. The commitment resulted in $93,000
of additional compensation cost for the twelve months ended December 31, 1998,
with $22,000 of that amount booked as additional compensation cost for the three
months ended December 31, 1998.
4. Management Stock Bonus Plan
---------------------------
On January 5, 1996, the Company made awards under the Plan in the amount of
30,573 shares. The shares were awarded at a price of $9.25 per share. On January
5, 1998, the Company made awards under the Plan in the amount of 2,250 shares.
The retirement during the quarter ended September 30, 1997 of an officer to whom
an award had been made under the Plan, resulted in a reduction of 3,000 shares
in the total number of shares awarded. Awards under the Plan are earned at the
rate of one-fifth of the award per year as of the one-year anniversary of the
grant of the award. On January 5, 1997, 6,112 shares under the Plan were earned,
and the corresponding liability was paid. On January 5, 1998, 5,363 shares under
the Plan were earned, and the corresponding liability was paid.
At December 31, 1998, 27,102 shares remained to be awarded under the Plan. As a
result of this vesting and the dividends earned on the vested shares, a
liability and corresponding compensation cost in the amount of $52,000 has been
recorded for the twelve months ended December 31, 1998, with $13,000 of that
amount booked as additional compensation for the three months ended December 31,
1998, under the provisions of the Plan.
8
5. Earnings Per Share
------------------
The Company has potential dilutive common stock (stock options to employees and
directors) and accordingly presents basic and diluted earnings per share.
Diluted per share amounts assume the conversion, exercise or issuance of all
potential common stock instruments unless the effect is to reduce a loss or
increase the income per common share
The weighted average number of shares of common stock used to compute the basic
earnings per share was increased by 26,703 for the three month period ended
December 31, 1998, and by 16,926 for the three month period ended December 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 29,047 for the six month period ended
December 31, 1998, and by 15,125 for the six month period ended December 31,
1997, in computing the diluted per share data.
6. Comprehensive Earnings
----------------------
Comprehensive earnings, defined as the change in equity of a business enterprise
from transactions and other events and circumstances from non-owner sources, was
presented for the first time in the quarter ended September 30, 1998. The only
item of other comprehensive earnings for the Company is the unrealized gain
(loss) on available-for-sale securities.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
General
GFSB Bancorp, Inc., is the 100% owner of Gallup Federal Savings Bank ("the
Bank"), and the Bank is currently the only entity with which the holding company
has an ownership interest. The Bank is primarily engaged in the business of
accepting deposit accounts from the general public and using such funds to
originate mortgage loans for the purchase and refinancing of one-to-four-family
homes located in its primary market area. The Bank also originates multi-family,
commercial real estate, construction, consumer and commercial business loans and
purchases participations in one-to-four family 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 non-interest income derived primarily
from fees. Consequently, the Bank's earnings are dependent on its ability to
originate loans, and the relative amounts of interest-earning assets and
interest-bearing liabilities. The Bank's net earnings is also affected by its
provision for loan losses as well as the amount of other expense, such as
compensation and benefit expense, occupancy and equipment expense and deposit
insurance premium expenses. Earnings of the Bank also are affected significantly
by general economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory authorities.
GFSB Bancorp, Inc. (the "Company") may from time to time make written or oral
"forward-looking statements", including statements contained in the Company's
filing with the Securities and Exchange Commission (including this quarter
report on Form 10-QSB and the exhibits thereto), in its reports to stockholders
and in other communication by the Company, which are made in good faith by the
Company pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System, inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes, acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing these risks.
The Company cautions that this list of important factors in not exclusive. The
Company does not undertake to update and forward-looking statement, whether
written or oral, that may be made from time to time by or on behalf of the
Company.
Management Strategy
Management's strategy has been to monitor interest rate risk, by asset and
liability management, and maintain asset quality while enhancing earnings and
profitability. The Bank's strategy has been primarily to make loans,
secondarily, to invest in mortgage-backed securities and investment securities,
and thirdly, to purchase participations in adjustable rate, one-to-four family
mortgage loans primarily secured by one-to-four family residences. The Bank's
purchase of mortgage-backed securities and investment securities is designed
primarily for safety of principal and secondarily for rate of return. The Bank's
lending strategy has historically
10
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 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 $10.6 million or 8.6% from $123.2 million at
June 30, 1998 to $133.8 million at December 31, 1998. This increase is primarily
the result of a $12.8 million increase in the Bank's net loan portfolio. The
majority of the increases are directly attributable to efforts of Management to
increase investment and lending activity. During the same period, deposits
increased $4.5 million or 6.5% from $69.4 million at June 30, 1998 to $73.9
million at December 31, 1998. This increase is primarily due to an increase in
the Bank's volume of NOW accounts, business checking accounts and Time Deposits.
Advances from the FHLB increased $7 million from $38.2 million at June 30, 1998
to $45.2 million at December 31, 1998. These additional borrowings funded
purchases of loans and mortgage loan participations. The Bank had $892,000 and
$692,000 in unrealized gains (net of deferred taxes) at December 31, 1998 and
June 30, 1998, respectively from market gains on the Bank's available-for-sale
investment and mortgage-backed portfolios.
11
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR QUARTER ENDED DECEMBER 31, 1998 COMPARED TO
QUARTER ENDED DECEMBER 31, 1997
General
Net earnings decreased $15,000 or 6.3% for the quarter ended December 31, 1998
from the quarter ended December 31, 1997. This decrease is primarily the result
of an increase in non-interest expense of $203,000, an increase in the provision
for loan losses of $25,000 and a decrease in income tax expense of $10,000,
offset by an increase in net interest earnings of $178,000 and an increase in
non-interest earnings of $26,000
Interest Earnings
Total interest income increased $278,000 or 13.3% from $2.1 million for the
quarter ended December 31, 1997, to $2.4 million for the quarter ended December
31, 1998. This increase was primarily due to substantial increases in the banks
net loan portfolio.
Interest Expense
Total interest expense increased $100,000 or 7.6% from $1.3 million for the
quarter ended December 31, 1997 to $1.4 million for the quarter ended December
31, 1998. This increase was primarily due to an increase in FHLB borrowings and
an increase in the deposit base.
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 $421,000 and $369,000 at
December 31, 1998 and 1997, respectively. The provision for loan loss was
$25,000 for the quarter ended December 31, 1998. No provision for loan loss was
made for the quarter ended December 31, 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. 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 $26,000 or 116.5% from $22,000 for the
quarter ended December 31, 1997 to $48,000 for the quarter ended December 31,
1998. This increase was primarily due to increased service and NSF charges on
NOW and checking accounts.
Non-Interest Expense
Total non-interest expense increased $203,000 or 47.5% from $428,000 for the
quarter ended December 31, 1997 to $631,000 for the quarter ended December 31,
1998. This increase was primarily due to an increase in compensation and
benefits of $141,000 from the hiring of additional staff to handle growth,
general salary increases and increases due to accrual for stock-based
compensation programs. Other expenses in compensation and benefits this quarter
ended December 31, 1998 include a $44,600 performance bonus plan accrual. This
performance bonus plan accrual was budgeted for the fiscal year ending June 30,
1999 therefore will continue to increase non-interest expense in future periods.
Other factors were increases in occupancy costs of $31,000, data processing
costs of $28,000, advertising costs of $10,000 and other operating costs
$10,000, offset by a decrease in professional fees of $15,000. The increase in
occupancy cost is primarily due
12
to lease expense and leasehold improvement expense on the new Loan Center and
Furniture, Fixtures and Equipment depreciation for the new Drive-up facility and
New Automated Teller Machine. The increase in data processing expense is
primarily due to service bureau expense for upgrading computer software. The
increase in other operating costs is primarily due to other real estate owned
expenses and Year 2000 expense. The increase in advertising costs is a result of
efforts of the Bank to achieve growth in deposits through attracting new
customers. The decrease in professional fees is primarily due to a decrease in
legal fees and audit and accounting accruals.
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR SIX MONTH PERIOD ENDED DECEMBER 31, 1998
COMPARED TO SIX MONTH PERIOD ENDED DECEMBER 31, 1997
General
Net earnings increased $11,000 or 2.5% for the six-month period ended December
31, 1998 from the six-month period ended December 31, 1997. This increase is
primarily the result of an increase in net-interest earnings of $323,000 and a
increase in non-interest earnings of $53,000, offset by an increase in
non-interest expense of $360,000, an increase in provision for loan loss of
$3,000 and an increase in provision for income taxes of $2,000.
Interest Earnings
Total interest income increased $652,000 or 16.3% from $4.0 million for the
six-month period ended December 31, 1997, to $4.7 million for the six-month
period ended December 31, 1998. This increase was primarily due to substantial
increases in the banks net loan portfolio.
Interest Expense
Total interest expense increased $329,000 or 13.3% from $2.5 million for the
six-month period ended December 31, 1997 to $2.8 million for the six-month
period ended December 31, 1998. This increase was primarily due to an increase
in FHLB borrowings and an increase in the deposit base.
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 $421,000 and $369,000 at
December 31, 1998 and 1997, respectively. The provision for loan loss was
$40,000 and $37,000 for the six-month period ended December 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 $53,000 or 127.2% from $41,000 for the
six-month period ended December 31, 1997 to $94,000 for the quarter ended
December 31, 1998. This increase was primarily due to increased service and NSF
charges on NOW and checking accounts.
13
Non-Interest Expense
Total non-interest expense increased $360,000 or 41.3% from $871,000 for the
six-month period ended December 31, 1997 to $1,231,000 for the six month period
ended December 31, 1998. This increase was primarily due to an increase in
compensation and benefits of $250,000 from the hiring of additional staff to
handle growth, general salary increases and increases due to accrual for
stock-based compensation programs. Other expenses in compensation and benefits
the six-month period ended December 31, 1998 includes a $87,500 performance
bonus plan accrual and a $12,000 increase in education and training due to
employee training for the new operating system and application software. This
performance bonus plan accrual was budgeted for the fiscal year ending June 30,
1999 therefore will continue to increase non-interest expense in future periods.
Other factors were increases in occupancy costs of $47,000, data processing
costs of $36,000, advertising costs of $7,000 and other operating costs $48,000,
an increase in stock services of $9,000 offset by a decrease in professional
fees of $41,000. The increase in occupancy cost is primarily due to lease
expense and leasehold improvement expense on the new Loan Center and Furniture,
Fixtures and Equipment depreciation for the new Drive-up facility and New
Automated Teller Machine. The increase in data processing expense is primarily
due to service bureau expense for upgrading computer software. The increase in
other operating costs is primarily due to other real estate owned expenses,
increased stationary and supplies, automated teller machine expense, postage
expense and Year 2000 expense. The increase in advertising costs is a result of
efforts of the Bank to achieve growth in deposits through attracting new
customers. The increase in stock services is primarily due to a fee paid to the
OTS for filing a change of control application. The decrease in professional
fees is primarily due to a decrease in legal fees and audit and accounting
accruals.
Liquidity and Capital Resources
The Bank is required under applicable federal regulations to maintain specified
levels of "liquid" investments in qualifying types of U.S. Government, federal
agency and other investments. Prior OTS regulations required that a savings
institution maintain liquid assets of not less than 5% of its average daily
balance of net withdrawable deposit accounts and borrowings payable in one year
or less, of which short-term liquid assets consist of not less than 1%, with the
qualifying investments limited to those having maturities of five years of less.
Revised OTS regulations effective November 13, 1997 lowered the required level
of liquid assets to 4%, removed the short-term liquid asset requirement and
deleted the five year or less maturity requirement. At December 31, 1998, the
Bank's liquidity, as measured for regulatory purposes, was 5.82%. 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 December 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 December
31, 1998, the Bank had $45 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 December 31, 1998 the Bank
originated $14.6 million in total loans, of which $11.4 million were mortgage
loans. The Bank also purchased $1 million in mortgage loan participations.
Another investment activity of the Bank is the investment of funds in U.S.
Government Agency securities, mortgage-backed
14
securities, federal funds and FHLB-Dallas overnight funds and readily marketable
equity securities. 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 $572,000 and $432,000 for the six month period ended December 31, 1998 and
1997 respectively. Net cash used for investing activities consisted primarily of
disbursement of loan originations and investment and mortgage-backed security
purchases, offset by principal collections on loans and principal collections
and proceeds from maturities of investment securities and mortgage-backed
securities. Such uses were $11.8 million and $20.9 million for the six month
period ended December 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, offset by repayments on FHLB borrowings, were
$9.8 million and $20.4 million for the six month period ended December 31, 1998
and 1997, respectively.
The Bank anticipates that it will have sufficient funds available to meet its
current commitments. As of December 31, 1998, the Bank had commitments to fund
loans of $9 million. Certificates of deposit scheduled to mature in one year or
less totaled $37.1 million. Based on historical withdrawals and outflows, on
internal daily deposit reports monitored by management, and the fact that the
Bank does not accept any brokered deposits, management believes that a majority
of deposits will remain with the Bank. As a result, no adverse liquidity effects
are expected.
At December 31, 1998, the Bank exceeded each of the three OTS capital
requirements on a fully-phased-in basis.
The Year 2000 issue
Funds spent for Year 2000 expense in the quarter ended December 31, 1998 was
$23,000. Funds spent for Year 2000 expense for the six month period ended
December 31, 1998 was $25,000. The Bank's operating budget for the fiscal year
ending June 30, 1999 includes $75,000 for Year 2000 expense. In September 1998
the bank hired a full time data processing systems administrator. Although he
will have other duties, his primary duties initially will be Year 2000
administration, testing, remediation, and contingency planning, and his salary
will be allocated to Year 2000 expense. We have identified some personal
computers and software to be upgraded. Management believes the $75,000 budget
allocation for Year 2000 expense will cover these costs as well as those for the
systems administrator. Because management expects to be Year 2000 compliant in
almost all risk areas by June 30, 1999, Year 2000 costs for the fiscal year
ending June 30, 2000 are not expected to be material. Should the Bank have to
resort to alternative operating procedures due to major systems or communication
failures at the beginning of the Year 2000, the extra costs could be material.
In its initial Year 2000 Action Plan, the Bank identified seven phases as
necessary to implement a Year 2000 compliant system. The Bank is a federally
chartered financial institution regulated by the Office of Thrift Supervision
("OTS"). The OTS identified five phases for Year 2000 compliance. The following
list describes the five phases as identified by the OTS with comparable phases
from the Bank's Year 2000 Action Plan identified in parentheses, if different:
1. Awareness -- Inform senior management of Year 2000 issues and possible
impact to the overall organization.
2. Assessment (Inventory, Assessment) -- Estimate the scope of the Year
2000 project and develop the budget for project execution. Develop a
complete inventory of hardware, software and systems, and categorize by
importance.
15
3. Renovation (Analysis, Renovation) -- Perform a detailed analysis and
develop detailed plans for correction, testing and reimplementing
critical applications. Correct and replace all critical applications.
4. Validation (Testing) -- Test all critical applications unit and system
level.
5. Implementation -- Implement all critical applications and databases
in a production environment. Integration test.
As of December 31, 1998 the following chart shows the current and projected
status of the Bank's Year 2000 compliance efforts:
Phase 12/31/98 3/31/99 6/30/99
- ----- -------- ------- -------
Awareness 100% - -
Assessment 100% - -
Renovation 100% - -
Validation 93% 100% -
Implementation 93% 95% 100%
Subsequent Events
In June 1998, the Bank opened 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. On September 14, 1998, the Bank moved its loan
operations into a new Loan Center across the street from its office. The 7000
sq. ft. building was leased for ten years with an option to purchase at a set
price. Management believes the additions will provide the Bank growth potential
by improving its ability to deliver retail-banking services in the community.
These additions had a minimal impact on financial performance for the Bank for
the quarter ended September 30, 1998, but they will materially increase
non-interest expense for the Company during the fiscal year ending June 30, 1999
and subsequent years.
Stock Repurchase Program
On September 9, 1998, the Company issued a press release announcing its
intention to repurchase up to 5% (55,363 shares) of the Company's common stock.
The repurchase was complete on October 6, 1998. On November 24, 1998 the Company
issued a press release announcing its intention to repurchase up to 5% (52,595
shares) of the Company's common stock. As of December 31, 1998 none of these
shares have been repurchased. The Company believes that it has sufficient
capital to complete the repurchase and that the repurchase will not cause the
Bank to fail to meet its regulatory capital requirements.
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with Generally
Accepted Accounting Principles ("GAAP"), which require the measurement of
financial position and operating results primarily in terms of historical
dollars without considering the change in the relative purchasing power of money
over time and due to inflation. The impact of inflation is reflected in the
increased cost of the Company's operations. Unlike most industrial companies,
nearly all the assets and liabilities of the Company are financial. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the prices of goods and services.
16
Recapture of Post 1987 Bad Debt Reserves
The Small Business Job Protection Act of 1996, among other things, equalized the
taxation of thrifts and banks. The bill no longer allows thrifts a choice
between the percentage of taxable income method and the experience method in
determining additions to their bad debt reserves. Smaller thrifts with $500
million of assets or less are only allowed to use the experience method, which
is generally available to small banks currently. Larger thrifts must use the
specific charge off method regarding its bad debts. Any reserve amounts added
after 1987 will be taxed over a six year period beginning in 1996; however, bad
debt reserves set aside through 1987 will generally not be taxed. Institutions
can delay these taxes for two years if they meet a residential - lending test.
At June 30, 1998, the Bank had $46,613 of post 1987 bad-debt reserves of which
1/6th or $9,323 was recaptured into taxable income for the year ended June 30,
1998. 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 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. 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.
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, except for interim financial statements
in the initial year of its application.
PART II. OTHER INFORMATION
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of the stockholders of the Company was held on November 9,
1998. At the meeting, two directors were elected for terms to expire in 2001 and
the selection of independent accountant was ratified.
17
The results of voting are shown for each matter considered.
Director election:
Nominee Votes For Votes Withheld Broker non-votes
Wallace R. Phillips 785,567 1,668 0
Richard C. Kauzlaric 785,567 1,668 0
Auditor ratification:
Votes for 669,650
Votes against 115,073
Abstentions 2,512
Item 6. Exhibits and Reports on Form 8-K
None
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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 12, 1999 /s/Jerry R. Spurlin
-----------------------------------
Jerry R. Spurlin
President
(Duly Authorized Representative and
Principal Financial Officer)
19