United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
x Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the three months ended March 31, 1999
Commission File Number: 0-22269
GS Financial Corp.
(Exact Name of Registrant as Specified in its Charter)
Louisiana 72-1341014
(State or Other Jurisdiction (IRS Employer ID Number)
of Incorporation or Organization)
3798 Veterans Blvd.
Metairie, LA 70002
(Address of Principal Executive Offices)
Registrant's Telephone Number: (504) 457-6220
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 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.
x Yes No
As of March 31, 1999, there were 3,438,500 shares of the
Registrant's Common stock outstanding. The financial statements
contained within this Form 10-Q for the three months ended March 31,
1999 and 1998 represent the consolidated financial position and
results of operations of GS Financial Corp.
GS Financial Corp.
Form 10-Q
Three Months ended March 31, 1999
Table of Contents
Part I - Financial Information
Item 1 Financial Statements
Consolidated Balance Sheets
(as of March 31, 1999 and December 31, 1998 Unaudited) 3
Consolidated Statements of Operations
(For the three months ended March 31, 1999 and 1998 Unaudited) 4
Consolidated Statements of Changes in Stockholders' Equity
(For the three months ended March 31, 1999 and 1998 Unaudited) 5
Consolidated Statements of Cash Flows
(For the three months ended March 31, 1999 and 1998 Unaudited) 6-7
Notes to Consolidated Financial Statements 7-12
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-18
Item 3 Quantitative and Qualitative Disclosures about
Market Risk 18
Part II Other Information 18
Item 1 Legal Proceedings 18
Item 2 Changes in Securities 18
Item 3 Defaults Upon Senior Securities 18
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 5 Other Information 19
Item 6 Exhibits and Reports on Form 8-K 20
GS Financial Corp.
Consolidated Balance Sheets
(Dollars in Thousands)
(Unaudited)
March 31, 1999 December 31, 1998
-------------- -----------------
ASSETS
Cash and Due from Banks $ 362 $ 171
Interest Bearing Deposits
in Other Banks 1,687 839
Federal Funds Sold 675 800
Investment Securities 24,705 20,877
Loans (Net) 64,899 63,895
Mortgage-Backed Securities 20,565 23,209
Collateralized Mortgage
Obligations 34,831 41,726
Accrued Interest Receivable 687 689
Premises & Equipment 2,597 2,620
Other Assets 2,805 2,708
----------- ----------
TOTAL ASSETS $ 153,813 $ 157,534
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Interest Bearing Deposits $ 60,588 $ 61,099
Non-Interest Bearing Dep. 578 695
Borrowings 42,623 45,381
Other Liabilities 1,639 1,850
----------- ----------
TOTAL LIABILITIES 105,428 109,025
STOCKHOLDERS' EQUITY
Common Stock & Additional
Paid in Capital 33,879 33,844
Treasury Stock (8,324) (8,324)
Accumulated Other
Comprehensive Income 1,397 1,768
Unearned ESOP Shares (2,136) (2,208)
Unearned RRP Trust Stock (2,193) (2,193)
Other Stockholders' Equity 25,762 25,622
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 48,385 48,509
----------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 153,813 $ 157,534
=========== ==========
GS Financial Corp.
Conolidated Statements of Operations
(Dollars in Thousands, except per share data)
(Unaudited)
For the three months ended March 31,
1999 1998
---------------------
INTEREST INCOME (from)
Loans $ 1,291 $ 1,183
Mortgage-Backed Securities 343 586
Investment Securities 329 435
Collateralized Mortgage
Obligations 577 53
Other Interest Income 49 46
----- -----
TOTAL INTEREST INCOME 2,589 2,303
----- -----
INTEREST EXPENSE (on)
Deposits 639 609
FHLB Advances 598 226
----- -----
TOTAL INTEREST EXPENSE 1,237 835
----- -----
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES 1,352 1,468
PROVISION FOR LOAN LOSSES - 19
----- -----
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,352 1,449
----- -----
NON-INTEREST INCOME
Gain/(Loss) on Investments (7) 259
Other Income 4 5
----- -----
TOTAL NON-INTEREST INCOME (3) 264
OTHER EXPENSES
Compensation and Benefits 514 660
Net Occupancy Expense 68 71
Other Expenses 220 197
----- -----
TOTAL OTHER EXPENSES 802 928
----- -----
INCOME BEFORE TAX EXPENSE 547 785
INCOME TAX EXPENSE 201 286
----- -----
NET INCOME $ 346 $ 499
===== =====
BASIC EARNINGS PER SHARE $ .13 $ .16
DILUTED EARNINGS PER SHARE $ .13 $ .16
GS Financial Corp.
Consolidated Statements of Changes in Stockholders' Equity
For The Three Months Ended March 31, 1999, and 1998
(Dollars in Thousands)
(Unaudited)
Accumulated
Additional Unearned Unearned Other Total
Common Paid-In Treasury ESOP RRP Trust Retained Comprehensive Stockholders'
Stock Capital Stock Stock Stock Earnings Income Equity
BALANCE AT
DECEMBER 31, 1997 $ 34 $33,658 $ - $ (2,516) $ (2,076) $ 25,089 $ 1,858 $ 56,047
Net Income-3 months
Ended March 31, 1998 - - - - - 499 - 499
Other Comprehensive
Income Net of
Applicable Deferred
Income Taxes - - - - - - (458) (458)
Purchase of Treasury Stock - - (1,836) - - - - (1,836)
Purchase of RRP Trust
Stock - - - - (334) - - (334)
Retirement of ESOP Debt - 91 - 92 - - - 183
Cash Dividends Paid - - - - - (242) - (242)
BALANCE AT
MARCH 31, 1998 $ 34 $ 33,749 $(1,836) $(2,424) $(2,410) $ 25,346 $ 1,400 $ 53,859
BALANCE AT
DECEMBER 31, 1998 $ 34 $ 33,810 $(8,324) $(2,208) $(2,193) $ 25,622 $ 1,768 $ 48,509
Net Income-3 months
Ended March 31, 1999 - - - - - 346 - 346
Other Comprehensive
Income Net of
Applicable Deferred
Income Taxes - - - - - - (371) (371)
Retirement of ESOP Debt - 35 - 72 - - - 107
Cash Dividends Paid - - - - - (206) - (206)
BALANCE AT
MARCH 31, 1999 $ 34 $ 33,845 $ (8,324) $(2,136) $(2,193) $ 25,762 $ 1,397 $ 48,385
GS Financial Corp.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
For the Three Months Ended
March 31,
-----------------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 346 $ 499
Adjustments to Reconcile Net Income
to Net Cash Provided
by Operating Activities:
Depreciation 26 30
Premiums Amortized 69 42
Provision for Loan Losses - 19
Loss on Sale of Loans 5 -
Loss on Sale of Foreclosed Real Estate 3 -
ESOP Expense 91 163
(Gain)/Loss on Sale of Investments 2 (259)
Decrease in Prepaid Income Tax 5 -
Changes in Deferred Income Tax 116 12
Changes in Operating Assets and Liabilities:
(Increase)/Decrease in
Accrued Interest Receivable 2 (32)
(Increase) in Deferred Charges (70) (31)
Increase in Accrued Income Tax 201 195
Increase/(Decrease) in Other Liabilities (221) 199
(Increase) in Other Assets - (23)
------ -------
Net Cash Provided by Operating Activities 575 814
CASH FLOWS FROM INVESTING ACTIVITIES
(Purchases of)/Redemption of
ARM Mutual Fund 206 (5,351)
Purchase of CMOs - (9,429)
Proceeds from Maturities of CMOs 6,843 1,073
Proceeds from Maturities of Available-
For-Sale Securities 500 1,000
Proceeds from Maturities of
Mortgage-Backed Securities 2,517 3,287
Purchase of IMF Mutual Fund (Net) (4,952) -
Proceeds from Sales of Mortgage-
Backed Securities - 12,646
Net Loan Originations (1,004) (1,649)
Purchases of Premises and Equipment (6) (13)
Dividend on ARM Fund (36) (212)
Dividend on IMF Fund (105) -
GS Financial Corp.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
For the Three Months Ended
March 31,
-----------------------
1999 1998
---- ----
Cash Flows from Investing Activities (Continued)
Non-Cash Dividend - FHLB Stock (32) (13)
---------- -------
Net Cash Provided by Investing Activities 3,931 1,339
---------- -------
CASH FLOW FROM FINANCING ACTIVITIES
Net Increase/(Decrease) in Deposits (493) 1,483
Purchases of Treasury Stock - (1,836)
Net Increase in
Unapplied Loan Payments 2 2
Payment of Cash Stock Dividends (206) (242)
Net Increase/(Decrease) in Advance
Payments by Borrowers for Taxes
and Insurance (138) 32
Purchase of Stock for Recognition &
Retention Plan Trust - (334)
Net Decrease in FHLB Advances (2,757) (1,484)
---------- ---------
Net Cash Used in Financing Activities (3,592) (2,379)
---------- ---------
NET CASH EQUIVALENTS 914 (226)
CASH AND CASH EQUIVALENTS - January 1, 1,810 2,612
---------- ---------
CASH AND CASH EQUIVALENTS - March 31, $ 2,724 $ 2,386
========== =========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GS Financial Corp. (the "Company") was organized and
incorporated under the laws of the State of Louisiana on December 24,
1996, for the purpose of becoming the holding company of Guaranty
Savings and Homestead Association, (the "Association"). The Company
registered its initial public offering ("IPO") of its common stock on
Form SB-2 with the Securities and Exchange Commission ("SEC") on
December 26, 1996, which as amended on February 6, 1997, was declared
effective by the SEC on February 11, 1997. The Association filed an
Application for Conversion ("Application") with the Office of Thrift
Supervision ("OTS") and the Louisiana Office of Financial
Institutions ("OFI"), the two primary regulators of the Association.
The Association received approval for its Application along with
related proxy materials from both the OTS and OFI by letters dated
February 7, 1997 and April 11, 1997, respectively.
Pursuant to the Plan of Conversion, which, in part, provided for
the Association's conversion from the mutual to stock form (the
"Conversion"), the Company opened its subscription offering on
February 24, 1997 and closed the offering on March 17, 1997. The
Conversion was approved by the members of the Association at a
special meeting held March 25, 1997. The IPO was completed on
April 1,1997.
The accompanying financial statements represent the consolidated
financial position, results of operations and cash flows of the
Company. The accompanying financial statements were prepared in
accordance with instructions to Form 10-Q, and therefore, do not
include information or footnotes necessary for a complete
presentation of financial position, results of operations and cash
flows in conformity with generally accepted accounting principles.
However, all adjustments, consisting only of normally recurring
accruals, which, in the opinion of management are necessary for a
fair presentation of the financial statements, have been included.
The results of operations for the three months ended March 31,
1999 are not necessarily indicative of the results to be expected for
the year ending December 31, 1999. The unaudited consolidated
financial statements and the notes included herein should be read in
conjunction with the audited financial statements and notes thereto
for the year ended December 31, 1998.
(2) EMPLOYEE STOCK OWNERSHIP PLAN
Effective January 1, 1997 the Association terminated its
Simplified Employee Pension Plan ("SEP") and formally adopted an
Employee Stock Ownership Plan ("ESOP") for the benefit of its
employees. The ESOP purchased 8%, or 275,080 shares, of the
Company's common stock in the Conversion. The purchase of this stock
was financed through a loan from the Company which is secured by the
above-mentioned shares. The balance of that loan was $2.3 million at
March 31, 1999. The Company accounts for the ESOP in accordance
with Statement of Position ("SOP") 93-6 and, as such, approximately
53,367 shares had been earned by plan participants at December 31,
1998. The Association bears the cost of the ESOP as compensation
expense which is based on principal and interest payments on the
corresponding debt as well as the market value of the stock.
(3) EARNINGS PER SHARE AND PAYMENTS OF DIVIDENDS
Earnings per share are computed using the weighted average
number of shares outstanding as prescribed in Statement of Financial
Accounting Standard ("SFAS") 128. In accordance with SFAS 128, the
average weighted shares outstanding were approximately 2.6 million
for the three months ended March 31, 1999 and 3.0 million shares for
the three months ended March 31, 1998. During the three months ended
March 31, 1999 and 1998, the Company declared and paid cash dividends
in the amount of $.07 per common share.
(4) INVESTMENTS
March 31, 1999 December 31, 1998
-------------- -----------------
(Dollars in thousands)
Amortized Market Amortized Market
AVAILABLE FOR SALE Cost Value Cost Value
US Government and
Agency Obligations $ 9,672 $ 9,840 $ 10,171 $ 10,450
ARM Mutual Fund 2,692 2,678 2,865 2,848
IMF Mutual Fund 10,219 10,124 5,267 5,259
FHLMC Stock 35 2,063 35 2,320
------ ------ ------ ------
Total $ 22,618 $ 24,705 $ 18,338 $ 20,877
====== ====== ====== ======
(5) LOANS
March 31, December 31,
(Dollars in Thousands) 1999 1998
-------- -----------
Total Loans $ 65,356 $ 64,353
Allowance for Loan Losses (463) (463)
Net Unearned Fees 6 5
-------- --------
TOTAL NET LOANS $ 64,899 $ 63,895
======== ========
Permanent Mortgages (1-4 family) $ 63,556 $ 61,918
Construction (1-4 family) 250 740
Commercial Mortgages 951 1,157
Other Mortgages 274 201
Consumer (secured by deposits) 325 337
---------- ----------
TOTAL LOANS $ 65,356 $ 64,353
======== ========
Allowance for Loan Losses
1999 1998
(Dollars in Thousands) ----- -----
Beginning Balance, December 31, $ 463 $ 410
Provision for Losses 0 19
Loans Charged Off 0 0
----- -----
Ending Balance, March 31, $ 463 $ 429
===== =====
(6) MORTGAGE-BACKED SECURITIES
March 31, December 31,
1999 1998
--------- ------------
(Dollars in thousands)
Amortized Market Amortized Market
AVAILABLE FOR SALE Cost Value Cost Value
------ ----- ------ -----
GNMA Fixed Rate (1-4 family) $ 12,016 $ 12,066 $ 13,159 $ 13,265
FHLMC Fixed Rate (1-4 family) 1,870 1,881 2,310 2,328
FNMA Fixed Rate (1-4 family) 6,621 6,618 7,589 7,616
------ ------ ------ ------
TOTAL MORTGAGE-BACKED SECURITIES $ 20,507 $ 20,565 $ 23,058 $ 23,209
====== ====== ====== ======
(7) COLLATERALIZED MORTGAGE OBLIGATIONS
March 31, December 31,
1999 1998
--------- ------------
(Dollars in thousands)
Amortized Market Amortized Market
AVAILABLE FOR SALE Cost Value Cost Value
------ ----- ------ -----
FNMA $ 17,906 $ 17,877 $ 18,987 $ 18,954
FHLMC 12,358 12,374 17,928 17,955
Private Issue 4,595 4,580 4,823 4,817
------ ------ ------ ------
TOTAL COLLATERALIZED MORTGAGE
OBLIGATIONS $ 34,859 $ 34,831 $ 41,738 $ 41,726
====== ====== ====== ======
(8) INTEREST BEARING DEPOSITS
March 31, December 31,
1999 1998
--------- -----------
(Dollars in thousands)
Passbook Savings $ 20,990 $ 21,506
Certificates of Deposits 39,598 39,593
------- ------
TOTAL INTEREST BEARING DEPOSITS $ 60,588 $ 61,099
======= ======
(9) FEDERAL HOME LOAN BANK ADVANCES
March 31, December 31,
1999 1998
--------- -----------
(Dollars in thousands)
Amounts maturing within 1 year $ 10,346 $ 10,730
Amounts maturing over 1 year 32,277 34,651
------- ------
TOTAL FEDERAL HOME LOAN BANK ADVANCES $ 42,623 $ 45,381
======= ======
(10) STOCK OPTION PLAN
On October 15, 1997, the stockholders approved the adoption of
the GS Financial Corp. 1997 Stock Option Plan for the benefit of
directors, officers and other key employees. Under this plan,
343,850 shares of common stock have been reserved for issuance
pursuant to the exercise of stock options with 275,076 shares granted
to vest over five years. The Company has followed all disclosure
requirements set forth in SFAS 123, "Accounting for Stock-Based
Compensation." To date no options have been exercised.
(11) RECOGNITION AND RETENTION PLAN
On October 15, 1997 the Company established the Recognition
and Retention Plan and Trust ("RRP") as an incentive to retain
personnel of experience and ability in key positions. Stockholders
approved a total of 137,540 shares of stock to be granted pursuant to
the RRP, or 4% of the common stock issued in the Conversion. By
January 16, 1998, the Company had acquired in open market
transactions a total of 137,500 shares of common stock for issuance
under the RRP. During the quarter ended September 30, 1998, RRP
participants agreed to extend the vesting period of shares of
restricted stock issued under the RRP from five years to 10 years.
The effect of this extension reduces the annual compensation expense
to the Company associated with the RRP. The Company is accruing this
expense commensurate with the expiration of the vesting period based
on the price of the stock ($12.50/share) when the plan was modified
in September, 1998.
(12) TREASURY STOCK
As of March 31, 1999, the Company had repurchased 491,054 shares
of its common stock. On April 8, 1999, the Company additionally purchased
approximately 10% of shares outstanding bringing the total number of shares
repurchased to 790,054 at an average price of $15.16 per common share, or
an investment of $11.9 million. This represents approximately 23% of the
original shares issued.
(13) OTHER EXPENSES
Listed below are major recurring components comprising Other
Expenses.
For the Three Months Ended
March 31,
-----------------------
1999 1998
---- ----
Office Supplies & Telephone $ 28,699 $ 20,556
Bank Shares and Franchise Tax 87,157 54,614
Data Processing 19,741 19,425
Advertising 14,151 20,891
Supervisory Fees 21,086 27,745
Item 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
In addition to the historical information contained herein, the
following discussion contains forward-looking statements that involve
risk and uncertainties. Economic circumstances, the Company's
operations, and actual results could differ significantly from those
discussed in the forward-looking statements. The major factors that
could cause or contribute to such differences include, but are not
limited to, changes in the local economy as well as fluctuations in
prevailing interest rates. Other forward-looking statements are made
concerning the amount and adequacy of the allowance for loan losses
and the cost and potential impact of the effect of the year 2000 on
the Company's management information system.
GENERAL
The Company's principal business is conducted through its wholly
owned subsidiary, Guaranty Savings and Homestead Association. The
Association, founded in New Orleans, Louisiana in 1937, provides
financial services primarily to individuals. It's principal products
include mortgage loans, passbook savings accounts, and certificates
of deposit. The Association also invests in short-term and long-term
liquid investments such as overnight Federal Funds, United States
Treasury and Agency issued securities, and mortgage-backed
securities.
The following discussion compares the financial condition of GS
Financial Corp. at March 31, 1999 to December 31, 1998 and the
results of operations for the three months ended March 31, 1999 and
1998.
CHANGES IN FINANCIAL CONDITION
At March 31, 1999, the assets of the Company totaled $153.8
million, a decrease of $3.7 million, or 2%, from December 31,
1998. This change was the result of repayments of mortgage-backed
securities and collateralized mortgage obligations ("CMOs") and the
Company's utilization of a substantial portion of such funds to repay
Federal Home Loan Bank advances. The three months ended March 31,
1999 were characterized by continued accelerated pay-downs of the
Company's mortgage derivative securities fueled by continued low
market interest rates. Those funds generated from paydowns which
were not used to repay advances were funneled into the Company's
qualified thrift investment grade mutual fund.
Growth in the mortgage loan portfolio continued although at a
reduced pace from 1998. Loans receivable increased by $1.0 million,
or 2.0%, to $64.9 million at March 31, 1999 compared to $63.9 million
at December 31, 1998. The increase came primarily in loans on 1-4
family residential dwellings.
Collateralized mortgage obligations decreased $6.9 million, or
17%, to $34.8 million at March 31, 1999 compared to $41.7 million at
December 31, 1998. Although low market interest rates continue to
drive the rapid prepayment of these instruments, yields are still
significantly higher than current money market rates.
Mortgage-backed securities decreased $2.6 million, or 11%, to
$20.6 million at March 31, 1999 compared to $23.2 million at December
31, 1998.
Investment securities increased $3.8 million, or 18%, to $24.7
million at March 31, 1999 compared to $20.9 million at December
31, 1998. The Company invested excess cash from mortgage-derivative
paydowns in short term qualified thrift mutual funds.
Interest bearing deposits remained relatively unchanged from
December 31, 1998 to March 31, 1999 at approximately $61.0
million.
The Company's borrowings decreased $2.8 million, or 6%, to
$42.6 million at March 31, 1999 compared to $45.4 million at
December 31, 1998. This was due to scheduled paydowns of the
Company's Federal Home Loan Bank advances which is part of its
leveraged investing program. The Company's borrowings consist of
$32.6 million of fully amortizing advances from the Federal Home Loan
Bank (FHLB) as well as $10.0 million in balloon obligations from the
FHLB.
Stockholders' equity decreased $.1 million, to $48.4
million at March 31, 1999 compared to $48.5 million at December
31, 1998. The decrease was due to the net effects of $.3 million in
net income for the three months ended March 31, 1999; $.1 million due
to the retirement of ESOP debt; $.2 million in cash dividends paid
and a $.4 million reduction in other comprehensive income.
RESULTS OF OPERATIONS
GENERAL
The Company reported net income for the three months ended
March 31, 1999 of $.3 million which was a decrease of $.2
million compared to $.5 million for the three months ended March
31, 1998. The decrease was due primarily to the realization of gains
of $.25 million on the sales of $12 million of mortgage-backed
securities during the three months ended March 31, 1998. Income
before income taxes exclusive of securities gains and losses
increased $.1 million for the three months ended March 31, 1999
compared to the three months ended March 31, 1998.
INTEREST INCOME
Total interest income increased $.3 million, or 13%, to $2.6
million for the three months ended March 31, 1999 compared to
$2.3 million for the three months ended March 31, 1998. This was
due primarily to increases in interest on collateralized mortgage
obligations and mortgage loans, which was partially offset by
decreases in interest income from investment securities and mortgage-
backed securities.
Interest on loans increased $.1 million, or 8%, to $1.3
million for the three months ended March 31, 1999 compared to
$1.2 million for the three months ended March 31, 1998. This was
due primarily to growth in the loan portfolio. The average balance
of the loan portfolio for the three months ended March 31, 1999
was $64.2 million (net) compared to $54.3 million (net) for the three
months ended March 31, 1998. The average annualized yield on
loans for the three months ended March 31, 1999 was 8.0% compared
to 8.7% for the three months ended March 31, 1998.
Interest on mortgage-backed securities decreased $.3 million, or
50%, to $.3 million for the three months ended March 31, 1999
compared to $.6 million for the three months ended March 31,
1998. For the three months ended March 31, 1999 the average
balance of mortgage-backed securities was $21.7 million; for the same
period in 1998 the average balance was $36.8 million. The average
annualized yield of mortgage-backed securities was 6.3% for the three
months ended March 31, 1999 compared to 6.4% for the same period in
1998.
Beginning in 1998 the Company utilized first-tranche
Collateralized Mortgage Obligations or REMICs (Real Estate Mortgage
Investment Conduits) as alternative, shorter-term investments than
mortgage loans or securities. To date in 1999 the Company has earned
$.6 million in such interest on an average balance of $38.3 million
yielding 6.0%. For the three months ended March 31, 1998 interest
income on CMOs was $.1 million on an average balance of $3.3 million
representing a yield of 6.5%. Most of these investments are part of
the Company's wholesale growth strategy of leveraged investing.
During the latter part of 1998 and early 1999, the yield on the
Company's investment in CMOs has been reduced by the rapid prepayment
of these bonds due to sustained low national market interest rates.
Interest income from investment securities decreased $.1 million
or 25% to $.3 million for the three months ended March 31, 1999
compared to $.4 million for the three months ended March 31, 1998.
The results for the first quarter of 1998 reflected an annualized
yield of 6.2% on an average balance of $28.2 million in investment
securities while the first quarter 1999's annualized yield has been
6.0% on an average balance of $21.9 million. The reduction in yield
has been due to the reduction in yield of the Company's two qualified
thrift mutual funds with the downturn in market interest rates.
Other interest income consists mainly of interest income on
overnight Federal Funds sold and interest bearing deposits in other
financial institutions and remained substantially unchanged from the
three months ended March 31, 1998 to the same period ended March 31,
1999 at $.05 million.
PROVISION FOR LOAN LOSSES
The Company had no provision for loan loss for the quarter ended
March 31, 1999 compared to $19,000 for the three months ending March
31, 1998. The general valuation allowance is reviewed quarterly and
is based on each individual loan's performance as well as the
estimated value of the underlying collateral. The Company employs the
reserve method of accounting for its general and specific valuation
allowances for loan losses.
During the three months ended March 31, 1999, the Company
amended its Asset Classification Policy to omit consideration of any
loan with a balance of $5,000 or less. As a result of this change,
approximately $38,000 was transferred from the specific valuation allowance
to the general valuation allowance.
INTEREST EXPENSE
The Company's total interest expense increased $.4 million, or
50%, to $1.2 million for the three months ended March 31, 1999
compared to $.8 million for the three months ended March 31,
1998. The increase was due to the effect of increased interest
expense of $.4 million on advances from the Federal Home Loan Bank in
conjunction with the Company's wholesale growth strategy of leveraged
investing. The Company's overall cost of funds increased from 4.6%
(annualized) for the three months ended March 31, 1998 to 4.7%
(annualized) for the same period in 1999. The increased cost of
funds was due to the increased percentage of Federal Home Loan Bank
Advances compared to total interest bearing deposits since the
advances carry a higher cost than the Company's passbook savings and
certificate of deposit accounts. Both the amount and cost of
interest on interest-bearing deposits remained substantially constant
for the three month periods at $.6 million, or 4.2%. The cost of the
Company's advances from the Federal Home Loan Bank decreased from
5.9% (annualized) for the three months ended March 31, 1998, compared
to 5.4% (annualized) for the three months ended March 31, 1999.
OTHER EXPENSES
Other expenses for the three months ended March 31, 1999
were $.8 million compared to $.9 million for the three months ended
March 31, 1998. This represents a decrease of $.1 million, or
11%. The decrease was largely due to a reduction in compensation and
employee benefits of $.2 million, or 29%, from $.7 million for the
three months ended March 31, 1998 compared to $.5 million for the
three months ended March 31, 1999. The reduction was due to the
attrition of the Company's staff, the extension of the vesting period
for shares of restricted stock issued under the RRP, and the
reduction of the cost associated with the ESOP due to a reduction in
the market value of the Company's stock.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity measures the Company's ability to meet its short-term
obligations with ready cash. These commitments and obligations
include loan disbursements, savings withdrawals by customers, the
payment of dividends and the daily operating expenses of the Company.
The Company's primary sources of funds are interest bearing
customer deposits, advances from the Federal Home Loan Bank and
maturities of existing investments including mortgage loans,
mortgage-backed securities, investment securities and collateralized
mortgage obligations. The Company does not utilize brokered deposits
nor does it offer special rates for "jumbo" deposits of $100,000 or
more.
The Company is required under Federal regulations to maintain
certain levels of "liquid" investments, specifically not less than 4%
of its average daily balance of net withdrawable deposit accounts.
For its liquid investments, the Company utilizes a combination of
cash on hand, certain money market investments, and deposits in other
financial institutions, as well as U.S. Government and Agency issued
securities. As of March 31, 1999, the Company's liquidity stood at
56.4%, or $53.6 million in excess of the minimum requirement.
The Company is required to maintain regulatory capital
sufficient to meet all three of the regulatory capital requirements,
those being tangible capital (1.5%), core capital (3.0%), and risk
- -based capital (8.0%). As of March 31, 1999, the Company's
tangible and core capital amounted to $40.1 million, or 27.71% of
adjusted total assets, while the Company's risk-based capital was
$40.5 million, or 69.1% of total adjusted risk-weighted assets.
Year 2000
The Year 2000 problem refers to the possibility that computers
will not recognize the correct year beginning on January 1, 2000, and
will either completely fail or will generate erroneous data, such as
an incorrect maturity date for a certificate of deposit account.
Since computers pervade our operations, the impact of misreading the
date has potentially serious consequences.
Recognizing the importance of this issue, the Company
established a Year 2000 Project (the "Project") in 1997. Oversight
of the Project was elevated to the Board of Directors in March, 1998,
with the establishment of a three member committee.
The Company has focused its efforts on (1) its data processor,
NCR Corp. of Dayton, Ohio, which provides on-line banking services
through its data center in Irving, Texas; (2) the Company's personal
computers ("PC's"), which serve both as terminals for processing
customer transactions and accessing customer account information, and
as computers for general business functions using word processing,
spreadsheets, and database software; (3) other hardware such as the
Company's telephone, alarm or HVAC equipment, and (4) other software,
such as Fedline and various accounting applications.
NCR held two testing sessions for customers in 1998 and has
stated that it is Year 2000 ready. All PC's have been tested and are
either Year 2000 compliant or can be manually reset on the first
business day of 2000 to the correct date. Some older PC's will be
replaced in 1999 as part of a normal process of upgrading outdated
equipment.
The Company has either tested other applications or received
written assurances from vendors that their products are Year 2000
compliant. The Company expects to continue its testing in 1999 to
ensure that all of its processes will function properly after 1999.
The estimated costs of Year 2000 compliance are not expected to be
material.
As part of its Year 2000 planning, the Company is developing a
business continuity plan to be used in the event that a process fails
after December 31, 1999, even though the process has been certified
as Year 2000 compliant. This plan will be completed and tested
during 1999.
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
Quantitative and qualitative disclosures about market risk are
presented at December 31, 1998 in the Company's Annual Report on Form
10-K, filed with the SEC on March 30, 1999. Management believes
there have been no material changes in the Company's market risk
since December 31, 1998.
Part II - Other Information
Item 1 - Legal Proceedings
There are no matters required to be reported under this item.
Item 2 - Changes in Securities
There are no matters required to be reported under this item.
Item 3 - Defaults Upon Senior Securities
There are no matters required to be reported under this item.
Item 4 - Submission of Matters to a Vote of Security Holders
On March 24, 1999, the Company commenced a proxy solicitation of
its stockholders with respect to the Annual Meeting of Stockholders
held on April 27, 1999 ("Annual Meeting"). There were two issues
considered at the Annual Meeting, the election of three directors and
the ratification of the appointment of the Company's independent
auditors. Both issues passed by the vote reflected below. In
addition to the directors elected to three-year terms at the Annual
Meeting, the following persons had term of office as a director which
continued after the Annual Meeting: Donald C. Scott, Stephen L.
Cory, J. Scott Key, Victor Kirschman, Mannie D. Paine, Jr., and
Albert J. Zahn, Jr.
Approval of the election of Bruce A. Scott to a three year term as
director.
For Withheld
--- --------
2,483,364 31,710
Approval of the election of Kenneth B. Caldcleugh to a three year
term as director.
For Withheld
--- --------
2,489,939 25,135
Approval of the election of Bradford A. Glazer to a three year term
as director.
For Withheld
--- --------
2,199,905 315,169
Approval to ratify the appointment of LaPorte, Sehrt, Romig and Hand
as the Company's independent auditors for the year ending December
31, 1999.
For Against Abstained
--- ------- ---------
2,483,964 22,030 9,080
Item 5 - Other Information
There are no matters required to be reported under this item.
Item 6 - Exhibits and Reports on Form 8-K:
(a) Exhibits
27.0 Financial Data Schedule
(b) No Form 8-K reports were filed during the quarter.
SIGNATURES
In accordance with the requirements of the Securities Exchange
Act of 1934, the registrant has caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GS FINANCIAL CORP.
DATE: May 12, 1999 BY:/s/ Donald C. Scott
-------------------
DONALD C. SCOTT, CHAIRMAN OF THE
BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
DATE: May 12, 1999 BY:/s/ Glenn R. Bartels
--------------------
GLENN R. BARTELS
CONTROLLER
12