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 June 30, 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 June 30, 1999, there were 2,648,446 shares of the Registrant's
Common stock outstanding. The financial statements contained within
this Form 10-Q for the three months ended June 30, 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 June 30, 1999
Table of Contents
Part I - Financial Information
Item 1 Financial Statements
Consolidated Balance Sheets
(as of June 30, 1999 Unaudited and December 31, 1998 Audited) 3
Consolidated Statements of Operations
(For the three and six months ended June 30, 1999 and 1998 Unaudited) 4
Consolidated Statements of Changes in Stockholders' Equity
(For the six months ended June 30, 1999 and 1998 Unaudited) 5
Consolidated Statements of Cash Flows
(For the six months ended June 30, 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 18
Item 5 Other Information 18
Item 6 Exhibits and Reports on Form 8-K 19
GS Financial Corp.
Consolidated Balance Sheets
(Dollars in Thousands)
(Unaudited)
June 30, 1999 December 31, 1998
-------------- -----------------
ASSETS
Cash and Due from Banks $ 247 $ 171
Interest Bearing Deposits
in Other Banks 798 839
Federal Funds Sold 950 800
Investment Securities 19,116 20,877
Loans (Net) 65,764 63,895
Mortgage-Backed Securities 18,915 23,209
Collateralized Mortgage
Obligations 44,500 41,726
Accrued Interest Receivable 707 689
Premises & Equipment 2,572 2,620
Other Assets 2,917 2,708
----------- ----------
TOTAL ASSETS $ 156,486 $ 157,534
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Interest Bearing Deposits $ 60,243 $ 61,099
Non-Interest Bearing Dep. 746 695
Borrowings 49,826 45,381
Other Liabilities 1,332 1,850
----------- ----------
TOTAL LIABILITIES 112,147 109,025
STOCKHOLDERS' EQUITY
Common Stock & Additional
Paid in Capital 33,918 33,844
Treasury Stock (11,978) (8,324)
Accumulated Other
Comprehensive Income 826 1,768
Unearned ESOP Shares (2,068) (2,208)
Unearned RRP Trust Stock (2,193) (2,193)
Other Stockholders' Equity 25,834 25,622
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 44,339 48,509
----------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 156,486 $ 157,534
=========== ==========
GS Financial Corp.
Consolidated Statements of Operations
(Dollars in Thousands, except per share data)
(Unaudited)
For the three Months For the six Months
ended June 30, ended June 30,
1999 1998 1999 1998
----------------------------------------
INTEREST INCOME (from)
Loans $ 1,316 $ 1,191 $ 2,607 $ 2,374
Mortgage-Backed Securities 318 428 661 1,014
Investment Securities 263 426 592 861
Collateralized Mortgage
Obligations 549 179 1,126 232
Other Interest Income 62 60 111 106
----- ----- ----- -----
TOTAL INTEREST INCOME 2,508 2,284 5,097 4,587
----- ----- ----- -----
INTEREST EXPENSE (on)
Deposits 636 609 1,275 1,218
FHLB Advances 576 330 1,174 556
----- ----- ----- -----
TOTAL INTEREST EXPENSE 1,212 939 2,449 1,774
----- ----- ----- -----
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES 1,296 1,345 2,648 2,813
PROVISION FOR LOAN LOSSES 0 35 0 53
----- ----- ----- -----
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,296 1,310 2,648 2,760
----- ----- ----- -----
NON-INTEREST INCOME
Gain/(Loss) on Investments (10) (10) (17) 248
Other Income 2 6 6 11
----- ----- ----- -----
TOTAL NON-INTEREST INCOME ( 8) ( 4) (11) 259
OTHER EXPENSES
Compensation and Benefits 505 632 1,019 1,292
Net Occupancy Expense 72 72 140 143
Other Expenses 241 326 461 523
----- ----- ----- -----
TOTAL OTHER EXPENSES 818 1,030 1,620 1,958
----- ----- ----- -----
INCOME BEFORE TAX EXPENSE 470 276 1,017 1,061
INCOME TAX EXPENSE 161 99 362 385
----- ----- ----- -----
NET INCOME $ 309 $ 177 $ 655 $ 676
===== ===== ===== =====
EARNINGS PER SHARE - PRIMARY $ .13 $ .06 $ .27 $ .23
EARNINGS PER SHARE - DILUTED $ .13 $ .06 $ .27 $ .23
GS Financial Corp.
Consolidated Statements of Changes in Stockholders' Equity
For The Six Months Ended June 30, 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-6 months
Ended June 30, 1998 - - - - - 676 - 676
Other Comprehensive
Income Net of
Applicable Deferred
Income Taxes - - - - - - (507) (507)
Purchase of Treasury Stock - - (3,469) - - - - (3,469)
Purchase of RRP Trust
Stock - - - - (334) - - (334)
Retirement of ESOP Debt - 182 - 182 - - - 364
Cash Dividends Paid - - - - - (469) - (469)
BALANCE AT
June 30, 1998 $ 34 $ 33,840 $(3,469) $(2,334) $(2,410) $ 25,296 $ 1,351 $ 52,308
BALANCE AT
DECEMBER 31, 1998 $ 34 $ 33,810 $(8,324) $(2,208) $(2,193) $ 25,622 $ 1,768 $ 48,509
Net Income-6 months
Ended June 30, 1999 - - - - - 655 - 655
Other Comprehensive
Income Net of
Applicable Deferred
Income Taxes - - - - - - (942) (942)
Purchase of Treasury Stock - - (3,654) - - - - (3,654)
Retirement of ESOP Debt - 74 - 140 - - - 214
Cash Dividends Paid - - - - - (443) - (443)
BALANCE AT
JUNE 30, 1999 $ 34 $ 33,884 $(11,978) $(2,068) $(2,193) $ 25,834 $ 826 $ 44,339
GS Financial Corp.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
For the Six Months Ended
June 30,
-----------------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 655 $ 676
Adjustments to Reconcile Net Income
to Net Cash Provided
by Operating Activities:
Depreciation 53 62
Premiums Amortized 131 99
Provision for Loan Losses - 53
(Gain)/Loss on Sale of Loans 5 (3)
Loss on Sale of Foreclosed Real Estate 3 -
ESOP Expense 179 327
(Gain)/Loss on Sale of Investments 12 (249)
(Increase)/Decrease in Prepaid Income Tax 69 (31)
Changes in Deferred Income Tax 12 (72)
Changes in Operating Assets and Liabilities:
(Increase) in Accrued Interest Receivable (18) (87)
(Increase) in Deferred Charges (57) (94)
Increase/(Decrease) in Accrued Income Tax 9 (76)
Increase/(Decrease) in Other Liabilities (66) 515
(Increase)/Decrease in Other Assets ( 3) 11
------ -------
Net Cash Provided by Operating Activities 984 1,131
CASH FLOWS FROM INVESTING ACTIVITIES
Redemption of ARM Mutual Fund 103 4,261
Purchase of CMOs (15,422) (29,182)
Proceeds from Maturities of CMOs 11,940 6,312
Proceeds from Maturities of Available-
For-Sale Securities 3,015 1,300
Proceeds from Maturities of
Mortgage-Backed Securities 4,042 5,966
Purchases of Mortgage-Backed Securities - (5,764)
Purchase of IMF Mutual Fund (Net) (1,703) -
Proceeds from Sales of Mortgage-
Backed Securities - 12,697
Net Loan Originations (1,868) (8,309)
Purchases of Premises and Equipment ( 7) (15)
GS Financial Corp.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
For the Six Months Ended
June 30,
-----------------------
Cash Flows from Investing Activities (Continued)
1999 1998
---- ----
Dividend on ARM Fund (40) (431)
Dividend on IMF Fund (205) -
Investment in Foreclosed Real Estate - (11)
Purchase of FHLB Stock (133) (786)
Non-Cash Dividend - FHLB Stock (63) (31)
---------- -------
Net Cash Used in Investing Activities ( 341) (13,993)
---------- -------
CASH FLOW FROM FINANCING ACTIVITIES
Net Increase/(Decrease) in Deposits (813) 423
Purchases of Treasury Stock (3,653) (3,469)
Net Increase in
Unapplied Loan Payments 3 4
Payment of Cash Stock Dividends (443) (469)
Net Increase/(Decrease) in Advance
Payments by Borrowers for Taxes
and Insurance 3 (120)
Purchase of Stock for Recognition &
Retention Plan Trust - (334)
Net Increase in FHLB Advances 4,445 17,009
---------- ---------
Net Cash (Used in)/Provided by
Financing Activities ( 458) 13,044
---------- ---------
NET CASH EQUIVALENTS 185 182
CASH AND CASH EQUIVALENTS - January 1, 1,810 2,612
---------- ---------
CASH AND CASH EQUIVALENTS - June 30 $ 1,995 $ 2,794
========== =========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
General
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"). Pursuant to
the Plan of Conversion (the "Conversion"), which, in part, provided
for the Association's conversion from the mutual to stock form, the
Company opened its subscription 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 initial public offering was completed on April 1, 1997.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 June 30,
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 $2.2 million at
June 30, 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 2.3 million
for the three months ended June 30, 1999 and 2.9 million shares for
the three months ended June 30, 1998. During the three months ended
June 30, 1999 and 1998, the Company declared and paid cash dividends
in the amount of $.09 and $.07 per common share, respectively.
(4) INVESTMENTS
June 30, 1999 December 31, 1998
-------------- -----------------
(Dollars in thousands)
Amortized Market Amortized Market
AVAILABLE FOR SALE Cost Value Cost Value
US Government and
Agency Obligations $ 7,152 $ 7,240 $ 10,171 $ 10,450
ARM Mutual Fund 2,802 2,802 2,865 2,848
IMF Mutual Fund 7,175 6,986 5,267 5,259
FHLMC Stock 35 2,088 35 2,320
------ ------ ------ ------
Total $ 17,164 $ 19,116 $ 18,338 $ 20,877
====== ====== ====== ======
(5) LOANS
June 30, December 31,
(Dollars in Thousands) 1999 1998
-------- -----------
Total Loans $ 66,221 $ 64,353
Allowance for Loan Losses (463) (463)
Net Unearned Fees 6 5
-------- --------
TOTAL NET LOANS $ 65,764 $ 63,895
======== ========
Permanent Mortgages (1-4 family) $ 64,062 $ 61,918
Construction (1-4 family) 231 740
Commercial Mortgages 1,324 1,157
Other Mortgages 261 201
Consumer (secured by deposits) 343 337
---------- ----------
TOTAL LOANS $ 66,221 $ 64,353
======== ========
Allowance for Loan Losses
(Dollars in Thousands) 1999 1998
----- -----
Beginning Balance, March 31, $ 463 $ 429
Provision for Losses 0 34
Loans Charged Off 0 0
----- -----
Ending Balance, June 30, $ 463 $ 463
===== =====
(6) MORTGAGE-BACKED SECURITIES
June 30, December 31,
1999 1998
--------- ------------
(Dollars in thousands)
Amortized Market Amortized Market
AVAILABLE FOR SALE Cost Value Cost Value
------ ----- ------ -----
GNMA Fixed Rate (1-4 family) $ 11,318 $ 11,289 $ 13,159 $ 13,265
FHLMC Fixed Rate (1-4 family) 1,637 1,655 2,310 2,328
FNMA Fixed Rate (1-4 family) 6,002 5,971 7,589 7,616
------ ------ ------ ------
TOTAL MORTGAGE-BACKED SECURITIES $ 18,957 $ 18,915 $ 23,058 $ 23,209
====== ====== ====== ======
(7) COLLATERALIZED MORTGAGE OBLIGATIONS
June 30, December 31,
1999 1998
--------- ------------
(Dollars in thousands)
Amortized Market Amortized Market
AVAILABLE FOR SALE Cost Value Cost Value
------ ----- ------ -----
FNMA $ 16,951 $ 16,682 $ 18,987 $ 18,954
FHLMC 8,469 8,358 17,928 17,955
Private Issue 19,738 19,460 4,823 4,817
------ ------ ------ ------
TOTAL COLLATERALIZED MORTGAGE
OBLIGATIONS $ 45,158 $ 44,500 $ 41,738 $ 41,726
====== ====== ====== ======
(8) INTEREST BEARING DEPOSITS
June 30, December 31,
1999 1998
--------- -----------
(Dollars in thousands)
Passbook Savings $ 20,611 $ 21,506
Certificates of Deposits 39,632 39,593
------- ------
TOTAL INTEREST BEARING DEPOSITS $ 60,243 $ 61,099
======= ======
(9) FEDERAL HOME LOAN BANK ADVANCES
June 30, December 31,
1999 1998
--------- -----------
(Dollars in thousands)
Amounts maturing within 1 year $ 12,743 $ 10,730
Amounts maturing over 1 year 37,083 34,651
------- ------
TOTAL FEDERAL HOME LOAN BANK ADVANCES $ 49,826 $ 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. As of June 30, 1999, 12,499 shares have
distributed to participants of the plan.
(12) TREASURY STOCK
On April 8, 1999, the Company completed it latest buyback by
acquiring approximately 10% of shares outstanding for $3.7 million.
This brings the total number of shares repurchased to 790,054 at an
average price of $15.16 per common share, or an investment of $12.0
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
June 30,
-----------------------
1999 1998
---- ----
Office Supplies & Telephone $ 32,186 $ 37,432
Bank Shares and Franchise Tax 87,138 95,572
Data Processing 18,366 19,999
Advertising 9,739 32,070
Supervisory Fees 19,544 9,693
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 June 30, 1999 to December 31, 1998 and the
results of operations for the three months and six months ended June
30, 1999 and 1998.
CHANGES IN FINANCIAL CONDITION
At June 30, 1999, the assets of the Company totaled $156.5
million, a decrease of $1.0 million, or less than 1%, from $157.5
million at December 31, 1998. The three months ended June 30, 1999
were characterized by continued steady growth of the Company's
portfolio of mortgage loans and collateralized mortgage obligations
which was funded by paydowns of various agency investments and
mortgage-backed securities as well as additional advances from the
Federal Home Loan Bank of Dallas (FHLB).
Loans receivable increased by $1.9 million, or 3.0%, to $65.8
million at June 30, 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 increased $2.8 million, or
6.7%, to $44.5 million at June 30, 1999 compared to $41.7 million at
December 31, 1998. The Company has continued its program of
wholesale growth through leveraged investing. For that purpose,
these first-tranche obligations offer yields ranging from 6.3% to
8.0% with durations ranging from three to five years.
Mortgage-backed securities decreased $4.3 million, or 18.5%, to
$18.9 million at June 30, 1999 compared to $23.2 million at December
31, 1998. This is due to the continued paydowns of these instruments
and the Company's alternative strategy to invest in first-tranche
collateralized mortgage obligations
Investment securities decreased $1.8 million, or 8.6%, to $19.1
million at June 30, 1999 compared to $20.9 million at December
31, 1998. The Company has experienced several early calls on some of
its Agency holdings so far this year.
Interest bearing deposits decreased $.9 million, or 1.5% to
$60.2 million at June 30, 1999 compared to $61.1 million at December
31, 1998.
The Company's borrowings increased $4.4 million, or 9.7%, to
$49.8 million at June 30, 1999 compared to $45.4 million at
December 31, 1998. This was due to the continuation of the Company's
leveraged investing program. The Company's borrowings consist of
$39.8 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 $4.2 million, to $44.3
million at June 30, 1999 compared to $48.5 million at December
31, 1998. The decrease was mainly due to the acquisition of $3.7
million of Treasury Stock in April, 1999. Net income of $.7 million,
a decrease in comprehensive income of $.9 million, dividends paid of
$.5 million and the net effects of the reduction of the ESOP debt
totaling $.2 million accounted for other changes in stockholders'
equity.
RESULTS OF OPERATIONS
GENERAL
The Company reported net income for the three months ended
June 30, 1999 of $.3 million which was an increase of $.1
million compared to $.2 million for the three months ended June
30, 1998. This represents earnings of $.13 per common share for the
three months ended June 30, 1999 compared to $.06 per common share
for the three months ended June 30, 1998. The increase was due
primarily to a reduction of the Company's other expenses by $.2
million from $1.0 million for the three months ended June 30, 1998 to
$.8 million for the three months ended June 30, 1999.
For the six months ended June 30 1999, and 1998 net income
was $.7 million for both six-month periods. This represents earnings
per common share of $.27 for the six months ended June 30, 1999
compared to $.23 for the six months ended June 30, 1998. It should
be noted that net income for the six months ended June 30, 1998
included gains on sales of investments of $.25 million while net
income for the six months ended June 30, 1999 included no material
gain or loss on sales of investments.
INTEREST INCOME
Total interest income increased $.2 million, or 8.7%, to $2.5
million for the three months ended June 30, 1999 compared to
$2.3 million for the three months ended June 30, 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 8.3%, to $1.3
million for the three months ended June 30, 1999 compared to
$1.2 million for the three months ended June 30, 1998. This was
due primarily to growth in the loan portfolio. The average balance
of the loan portfolio for the three months ended June 30, 1999
was $65.3 million (net) compared to $58.8 million (net) for the three
months ended June 30, 1998. The average annualized yield on
loans for the three months ended June 30, 1999 and 1998 was 8.1%.
Interest on loans for the six months ended June 30, 1999 was $2.6
million compared to $2.4 million for the six months ended June 30,
1998.
Interest on mortgage-backed securities decreased $.1 million, or
25.0%, to $.3 million for the three months ended June 30, 1999
compared to $.4 million for the three months ended June 30,
1998. For the three months ended June 30, 1999 the average
balance of mortgage-backed securities was $19.7 million; for the same
period in 1998 the average balance was $26.7 million. The average
annualized yield of mortgage-backed securities was 6.5% for the three
months ended June 30, 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-duration investments
than mortgage loans or securities. To date in 1999 the Company has
earned $.5 million in such interest on an average balance of $36.2
million yielding 6.1%. For the three months ended June 30, 1998
interest income on CMOs was $.2 million on an average balance of
$12.5 million representing a yield of 5.7%. Most of these
investments are part of the Company's wholesale growth strategy of
leveraged investing. The second quarter 1999 saw a general slowing
of the prepayments of the Company's mortgage derivative instruments
which was tied to the general trend of rising interest rates.
Interest income from investment securities decreased $.1 million
or 25.0% to $.3 million for the three months ended June 30, 1999
compared to $.4 million for the three months ended June 30, 1998.
The results for the second quarter of 1998 reflected an annualized
yield of 6.3% on an average balance of $27.1 million in investment
securities while the second quarter 1999's annualized yield has been
6.2% on an average balance of $16.9 million.
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 June 30, 1998 to the same period ended June 30,
1999 at $.06 million.
PROVISION FOR LOAN LOSSES
The Company had no provision for loan loss for the quarter ended
June 30, 1999 compared to $34,000 for the three months ended June
30, 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.
INTEREST EXPENSE
The Company's total interest expense increased $.3 million, or
33.3%, to $1.2 million for the three months ended June 30, 1999
compared to $.9 million for the three months ended June 30,
1998. The increase was due to an increase in interest expense of $.3
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 4.7%
(annualized) for the three months ended June 30, 1998 to 4.8%
(annualized) for the same period in 1999. The increased cost of
funds was due to the increase of Federal Home Loan Bank
Advances as a percentage of total interest bearing funds. 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 June 30, 1998, compared
to 5.5% (annualized) for the three months ended June 30, 1999.
OTHER EXPENSES
Other expenses for the three months ended June 30, 1999
were $.8 million compared to $1.0 million for the three months ended
June 30, 1998. This represents a decrease of $.2 million, or
20.0%. The decrease was largely due to a reduction in compensation
and employee benefits of $.1 million, or 16.7%, from $.6 million for
the three months ended June 30, 1998 compared to $.5 million for the
three months ended June 30, 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. Further reductions in other
expenses were attributable to bank acquisition costs charged off in
the second quarter of 1998 of approximately $.05 million which is a
non-recurring expense.
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 June 30, 1999, the Company's liquidity stood at
61.5%, or $63.0 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 June 30, 1999, the Company's
tangible and core capital amounted to $40.2 million, or 26.4% of
adjusted total assets, while the Company's risk-based capital was
$40.5 million, or 66.5% 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,
spreadsheet, database, accounting and other software; (3) other
hardware such as the Company's telephone, alarm and HVAC equipment,
and (4) other software such as Fedline.
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 has developed a
business resumption 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. Several tests of the
procedures described in this plan have been held in 1999, and more
will be held as the year progresses. The Company has also developed
a Year 2000 Cash Plan to prepare for possible end-of-year customer
withdrawals that are greater than historical year-end withdrawals.
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
There are no matters required to be reported under this item.
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: August 12, 1999 BY:/s/ Donald C. Scott
-------------------
DONALD C. SCOTT, CHAIRMAN OF THE
BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
DATE: August 12, 1999 BY:/s/ Glenn R. Bartels
--------------------
GLENN R. BARTELS
CONTROLLER
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