Exhibit 13.0
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GS Financial Corp.
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2005 ANNUAL REPORT
PRESIDENT'S LETTER TO SHAREHOLDERS
2005 - A YEAR OF LEADERSHIP TRANSITION
I am very excited to be a part of a local community based financial institution
like Guaranty Savings and Homestead Association that is conscious of its past,
understands its local market and is poised to play a key role in the recovery
and rebuilding of our metropolitan area. Since joining the Company in December
2005, I have been very impressed by the dedication and loyalty of both our
clients and employees.
The year 2005 was one of transition that began with the retirement of our
company's longtime Chairman, President and CEO, Mr. Donald Scott, in January.
His service and leadership since 1985 contributed to the building of a strong
balance sheet and solid foundation upon which we can build success for future
generations of Guaranty.
Also in January, our Board wisely determined that Mr. Ralph Weber should serve
as interim President and CEO during the search for a permanent replacement. His
loyalty and knowledge of the Association's operations and its personnel were
severely tested when Hurricane Katrina made land fall. We were fortunate and
grateful to have Mr. Weber and those dedicated and loyal employees who worked
under some very trying conditions to re-establish our operations.
2005 - A YEAR OF UNPRECEDENTED NATURAL DISASTER
None of us anticipated the severity of the devastation caused by Hurricane
Katrina. Because of electrical outages and concern for the safety of our
employees, our main office and branches were closed for a short period of time.
One inner city branch location was severely damaged by the flood waters
associated with the storm and has yet to be re-opened. Although our business and
the lives of our employees were temporarily disrupted, we were able to offer
immediate assistance to our customers and neighbors within several days after
the storm had passed. Our employees demonstrated their dedication and commitment
to our Association and the community we serve.
Unfortunately, our operations and earnings were negatively impacted by Hurricane
Katrina resulting in a significant net loss for the year for GS Financial Corp.
Prior to the hurricane, we expected to earn net income of approximately
$700,000. However, with the addition of $4.8 million to our loan loss reserve
due to Katrina, a $159,000 loss on fixed assets for the damages sustained to our
inner city branch, as well as the recognition of a $1.3 million loss in a
mortgage backed mutual fund, we posted an after tax loss of $3.7 million.
Despite this loss, our company remains very well capitalized with Tier 1
regulatory capital of $23.8 million and a Tier 1 capital to total assets ratio
of 13.47% at year-end.
The impact of this hurricane will continue to be a major factor in 2006 and
beyond. As insurance claims continue to settle, we anticipate growth in deposits
followed by new construction lending to both new and existing consumers and
small businesses throughout our market area. We also expect to increase our
mortgage loan volume as repairs are made to homes in the most severely impacted
neighborhoods.
2005 ANNUAL REPORT PAGE 1
2006 AND BEYOND - OUR INITIATIVES FOR THE FUTURE
As we move into 2006, our management team has developed some key strategic
initiatives to leverage technology across all of our lines of business to
enhance customer service, product offerings and to make it easier for our
employees to service the needs of our customers. This project was initiated in
2005 with the purchase and implementation of a windows based teller and loan
applications system that has improved our capabilities.
With continued investment in technology, development of new products and the
addition of key lending professionals to our team in both mortgage banking and
commercial banking, we believe that we are poised to capitalize on some key
opportunities for growth.
We will focus our efforts on growth in mortgage banking production and revenue
as well as increasing commercial lending by targeting commercial real estate and
development loans. We also plan to develop additional consumer products and
services to enhance our retail banking efforts. In order to better serve our
community, we intend to rebuild and remodel our damaged branches and consider
expansion within our geographic market when the right opportunities present
themselves.
I can assure you that we are dedicated to improving long-term shareholder value.
It is our mission to build strong, profitable relationships with our clients
over time by delivering exceptional customer service and integrating additional
financial products and services from all of our business segments.
Our familiarity with local real estate markets and local industries, our ability
to make decisions locally, as well as our experienced and dedicated team of
banking professionals form the foundations from which we will build our success
in 2006 and beyond.
This has been a year of transition and recovery for all of us at GS Financial
Corp. I am honored to assume the role of President and Chief Executive Officer,
confident in our team and excited about the possibilities lying ahead of us.
Thank you for your continued support and interest in GS Financial Corp., your
company.
/s/ Stephen E. Wessel
President and Chief Executive Officer
2005 ANNUAL REPORT PAGE 2
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INDEX TO ANNUAL REPORT
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Business Description 4
Shareholder Information 4
Selected Consolidated Financial Data 5
Management's Discussion and Analysis of Financial Condition and Results of Operations 6
Report of Independent Registered Public Accounting Firm 28
Consolidated Balance Sheets 29
Consolidated Statements of Income 31
Consolidated Statements of Comprehensive Income 32
Consolidated Statements of Changes in Stockholders' Equity 33
Consolidated Statements of Cash Flows 34
Notes to the Consolidated Financial Statements 36
Board of Directors 66
Executive Officers 66
Banking Locations 67
2005 ANNUAL REPORT PAGE 3
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BUSINESS DESCRIPTION
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GS Financial Corp. ("GS Financial" or the "Company") provides community banking services through its wholly-owned subsidiary,
Guaranty Savings and Homestead Association, a Louisiana chartered savings association, at its five locations in the metropolitan New
Orleans area.
The Company, a thrift holding company organized and incorporated under the laws of the State of Louisiana, is subject to the
supervision and regulation of the Office of Thrift Supervision as well as other federal and state agencies governing the banking
industry and public companies.
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SHAREHOLDER INFORMATION
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TRANSFER AGENT, REGISTRAR, AND DIVIDEND PAYING AGENT FOR COMMON STOCK
COMMON STOCK GS Financial's common stock is traded on The NASDAQ Stock
Registered shareholder inquiries related to stock transfers, Market under the ticker symbol GSLA. At December 31, 2005, the
address changes, lost stock certificates, dividend payments or closing price was $15.00 per share and there were 104
account consolidations should be directed to: shareholders of record.
Registrar and Transfer Company
10 Commerce Drive MARKET PRICES AND DIVIDENDS
Cranford, New Jersey 07016 Set forth below are the high and low bid quotations for GS
(800) 368-5948 Financial's common stock on the Nasdaq National Market and
www.rtco.com dividends paid for the periods presented.
FORM 10-K AND OTHER FINANCIAL INFORMATION -------------------------------------------------------------
Shareholders are advised to review financial information and YEAR 2005 STOCK PRICE DIVIDENDS
other disclosures about GS Financial contained in its Annual -------------------------------------------------------------
Report on Form 10-K. A copy of Form 10-K for the year ended QUARTER ENDED HIGH LOW
December 31, 2005 and other financial reports filed by GS March 31 $ 19.66 $ 17.87 $ 0.10
Financial with the SEC is available on the Company's web site June 30 18.99 17.70 0.10
at www.gsfinancialcorp.com or the SEC's web site at September 30 18.45 12.86 0.10
www.sec.gov, or may be obtained without charge by calling December 31 15.80 14.67 0.10
Lettie Moll, Corporate Secretary, or Andrew Bower, Chief -------------------------------------------------------------
Financial Officer, at (504) 457-6220 or by writing to: YEAR 2004 STOCK PRICE DIVIDENDS
GS Financial Corp. -------------------------------------------------------------
Investor Relations QUARTER ENDED HIGH LOW
3798 Veterans Boulevard March 31 $ 19.90 $ 18.70 $ 0.10
Metairie, Louisiana 70002 June 30 19.90 18.46 0.10
September 30 19.79 18.00 0.10
INDEPENDENT AUDITORS December 31 19.26 17.90 0.10
LaPorte, Sehrt, Romig and Hand -------------------------------------------------------------
A Professional Accounting Corporation
110 Veterans Boulevard, Suite 200
Metairie, Louisiana 70005 NOTICE OF ANNUAL MEETING
The Annual Meeting of Shareholders of GS Financial Corp. will
be held Tuesday, April 25, 2006, at 10:00 a.m. CST at its
corporate office. The address is:
Guaranty Savings and Homestead Association
3798 Veterans Boulevard
Metairie, Louisiana 70002
2005 ANNUAL REPORT PAGE 4
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GS FINANCIAL CORP. AND SUBSIDIARY
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SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
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($ IN THOUSANDS, EXCEPT PER SHARE DATA) 2005 2004 2003 2002 2001
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YEAR-END BALANCE SHEET DATA
Total assets $ 177,614 $ 200,066 $ 214,714 $ 210,029 $ 188,494
Cash and cash equivalents 22,555 7,024 11,371 13,352 8,638
Loans receivable, net 69,657 92,158 77,367 78,334 81,611
Investment securities 77,344 94,557 119,271 108,726 88,792
Deposit accounts 118,866 130,723 142,108 106,781 71,169
Borrowings 32,106 39,689 42,135 66,392 79,265
Stockholders' equity 25,407 28,944 29,308 34,384 35,408
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INCOME STATEMENT DATA
Interest income $ 10,466 $ 10,989 $ 9,993 $ 12,433 $ 13,100
Interest expense 4,856 5,436 6,178 6,804 7,825
Net interest income 5,610 5,553 3,815 5,629 5,275
Provision for loan losses 4,793 343 118 48 25
Non-interest income (loss) (1,294) (691) 1,476 102 634
Non-interest expense 4,707 4,483 4,419 4,188 3,678
Net (loss) income before taxes (5,184) 36 754 1,495 2,206
Net (loss) income (3,676) 199 691 1,177 1,617
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KEY RATIOS
Return on average assets (1.96)% 0.10% 0.32% 0.60% 0.86%
Return on average shareholders' equity (13.76) 0.70 2.17 3.35 4.43
Net interest margin 3.12 2.73 1.84 2.94 2.87
Average loans to average deposits 71.74 62.69 60.15 93.77 120.83
Earning assets to interest-bearing liabilities 115.04 114.37 115.53 120.68 122.80
Efficiency ratio 109.06 92.20 83.52 73.08 62.24
Non-interest expense to average assets 2.51 2.12 2.06 2.13 1.97
Allowance for loan losses to loans 7.58 0.99 0.77 0.62 0.53
Stockholders' equity to total assets 14.30 14.47 13.65 16.37 18.78
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COMMON SHARE DATA
Earnings (loss) per share:
Basic $ (3.11) $ 0.17 $ 0.58 $ 0.86 $ 1.04
Diluted (3.11) 0.17 0.57 0.86 1.04
Dividends paid per share 0.40 0.40 0.40 0.36 0.36
Dividend payout ratio n/a 235.29% 68.97% 41.86% 34.62%
Book value per share $ 20.99 $ 22.47 $ 22.46 $ 22.61 $ 21.29
Trading data:
High closing price $ 19.66 $ 19.90 $ 19.50 $ 18.60 $ 15.50
Low closing price 12.86 17.90 18.00 14.70 14.19
End of period closing price 15.00 18.00 19.44 18.15 14.94
Average shares outstanding:
Basic 1,181,313 1,156,441 1,194,296 1,371,800 1,555,260
Diluted 1,181,313 1,178,013 1,214,443 1,371,800 1,555,260
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2005 ANNUAL REPORT PAGE 5
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GS FINANCIAL CORP. AND SUBSIDIARY
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The purpose of this discussion and analysis is to focus on significant changes
in the financial condition of GS Financial Corp. ("GS Financial" or the
"Company"), and its subsidiary and on their results of operations during 2005,
2004 and 2003. Virtually all of the Company's operations are dependent on the
operations of its subsidiary, Guaranty Savings and Homestead Association
("Guaranty" or the "Association"). This discussion is presented to highlight and
supplement information presented elsewhere in this annual report, particularly
the consolidated financial statements and related notes. This discussion should
be read in conjunction with accompanying tables and the aforementioned
consolidated financial statements. Certain financial information in prior years
has been reclassified to conform to the current year's presentation.
FORWARD-LOOKING STATEMENTS
In addition to the historical information, this annual report includes certain
forward-looking statements as that term is defined by the Private Securities
Litigation Reform Act of 1995. Such statements include, but may not be limited
to comments regarding (a) the potential for earnings volatility from changes in
the estimated allowance for loan losses over time, (b) the expected growth rate
of the loan portfolio, (c) future changes in the mix of deposits, (d) the
results of net interest income simulations run by the Company to measure
interest rate sensitivity, (d) the performance of Guaranty's net interest income
and net interest margin assuming certain future conditions, and (f) changes or
trends in certain expense levels.
Forward-looking statements are based on numerous assumptions, certain of which
may be referred to specifically in connection with a particular statement. Some
of the more important assumptions include:
o expectations about overall economic recovery in Guaranty's market
area,
o expectations about the ability of the Association's borrowers to make
payments on outstanding loans and the sufficiency of the allowance for
loan losses,
o expectations about the current values of collateral securing the
Association's outstanding loans,
o expectations about the movement of interest rates, including actions
that may be taken by the Federal Reserve Board in response to changing
economic conditions,
o reliance on existing or anticipated changes in laws or regulations
affecting the activities of the banking industry and other financial
service providers, and
o expectations regarding the nature and level of competition, changes in
customer behavior and preferences, and Guaranty's ability to execute
its plans to respond effectively.
Because it is uncertain whether future conditions and events will confirm these
assumptions, there is a risk that the Company's future results will differ
materially from what is stated or implied by such forward-looking statements.
The Company cautions the reader to consider this risk.
The Company undertakes no obligation to update any forward-looking statement
included in this annual report, whether as a result of new information, future
events or developments, or for any other reason.
OVERVIEW
The Company reported a net loss of $3.7 million, or $3.11 per share, for the
year ended December 31, 2005. The Company's results of operations for 2005 were
significantly impacted by the effects of Hurricane Katrina which struck in
August 2005. Hurricane Katrina resulted in substantial property damage in the
greater New Orleans market area that the Company operates in and has displaced a
significant number of people and businesses. Based upon its assessment of the
property damage caused by Hurricane Katrina, and taking into consideration its
estimates of the potential economic impact on its borrowers, the Company made
provisions for loan losses of $4.8 million for the year ended December 31, 2005
compared to $343,000 for the year ended December 31, 2004. In addition, the
Company recognized $159,000 in losses resulting from damages to its offices and
other assets. The Association's mid-city New Orleans office was damaged
extensively and remains closed, but is expected to reopen in the second half of
2006. Our other four offices suffered minor damage and reopened shortly after
the Hurricane. During the
2005 ANNUAL REPORT PAGE 6
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GS FINANCIAL CORP. AND SUBSIDIARY
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
third quarter of 2005, the Company unilaterally agreed to defer payments on all
outstanding loans for three months in recognition of the difficulties faced by
borrowers after Hurricane Katrina. As a result, accrued interest receivable on
loans increased by $970,000 to $1.4 million at December 31, 2005 compared to
$454,000 at December 31, 2004. The amounts deferred will become due and payable
at the time of loan maturity or payoff.
During the year ended December 31, 2005, the Company's results also were
adversely affected by its recognition of a charge of $1.3 million as the result
of an other-than-temporary impairment of securities available for sale.
The Company's net loan portfolio amounted to $69.7 million at December 31, 2005
compared to $92.2 million at December 31, 2004. The decrease in net loans
receivable was due to increased loan payoffs, as borrowers used insurance
proceeds to repay loans, decreased loan originations during the year and the
increase in the allowance for loan losses. In December 2005, Stephen Wessel was
hired as the Association's new President and Chief Executive Officer. In
addition, in January, 2006, two new commercial loan officers were hired. As a
result, the Company has increased its efforts to originate new loans and expects
loan originations to increase in 2006 compared to 2005.
As a result of the impact of Hurricane Katrina, management has been confronted
with significant uncertainties regarding future operations and prospects. As
discussed below under "Loans and Allowance for Loan Losses," management
undertook an extensive review of the Association's loan portfolio after
Hurricane Katrina and, based on this review, made a $4.8 million provision to
the allowance for loan losses. However, management's review is subject to
significant uncertainties, such as the ultimate resolution of insurance claims
and the ability of the greater New Orleans area to recover. In addition, in
light of the three-month loan deferment provided to borrowers, we have not yet
had an opportunity to fully assess borrowers' capabilities to resume loan
payments. While the amount of the allowance for loan losses at December 31, 2005
incorporated management's best estimate, based on available information, of
inherent losses in the loan portfolio, additional provisions may be required in
the event new information reveals additional losses in the future.
CRITICAL ACCOUNTING POLICIES
The Company prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America. Note A to the
consolidated financial statements discusses certain accounting principles and
methods of applying those principles that are particularly important to this
process. In applying these principles to determine the amounts and other
disclosures that are presented in the financial statements and discussed in this
section, the Company is required to make estimates and assumptions.
The Company believes that the determination of its estimate of the allowance for
loan losses involves a higher degree of judgment and complexity than its
application of other significant accounting policies. Factors considered in this
determination and the processes used by management are discussed in Note A to
the consolidated financial statements and in the discussion below under the
heading "Loans and Allowance for Loan Losses." Although management believes it
has identified appropriate factors for review and designed and implemented
adequate procedures to support the estimation process that are consistently
followed, the allowance remains an estimate about the effect of matters that are
inherently uncertain. Over time, changes in economic conditions or the actual or
perceived financial condition of Guaranty's credit customers or other factors
can materially impact the allowance estimate, potentially subjecting the Company
to significant earnings volatility.
One other estimate requiring a high degree of judgment is the valuation
allowance on the deferred tax asset. As operating losses can be carried forward
fifteen years and the Company expects positive taxable income for each year
going forward, no valuation allowance is deemed necessary on the portion of the
deferred tax
2005 ANNUAL REPORT PAGE 7
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GS FINANCIAL CORP. AND SUBSIDIARY
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
asset created by net operating losses. However, a portion of the deferred tax
asset relates to capital losses. Tax rules only allow these losses to be offset
against future capital gains for five years. As it is uncertain whether the
Association will be able to realize capital gains of the magnitude to fully
offset these losses in the next five years, management elected to establish an
appropriate valuation allowance for the portion of the capital loss carryforward
which it estimates may not be utilized. See Note J of the consolidated financial
statements for further discussion of the Company's income tax accounting.
FINANCIAL CONDITION
At December 31, 2005, GS Financial reported total assets of $177.6 million
compared to $200.1 million at the end of 2004. Average total assets were $187.2
million in 2005, down $24.1 million compared to 2004, primarily reflecting a
decrease in loan balances due to payoffs of loans secured by properties damaged
by Hurricane Katrina, repayments of investment securities and decreased loan
originations.
LOANS AND ALLOWANCE FOR LOAN LOSSES
As with most savings associations, a significant portion of Guaranty's assets
are comprised of loans made to its customers. Guaranty engages primarily in real
estate lending, both residential and commercial.
In general, credit is extended based on the current market conditions,
prevailing economic trends, value of the underlying collateral and the character
of the borrower. The lending activities of the Company are subject to written
underwriting standards and loan origination procedures established by the
Company's Board of Directors (the "Board") and senior officers and are
incorporated into the Company's Lending Policy which is reviewed as needed by
the Board and senior officers. The underwriting standards establish the manner
in which loan applications are accepted and processed. Such standards are
written to comply with all applicable laws and regulations including but not
limited to Truth-In-Lending (Regulation Z) and the Real Estate Settlement and
Procedures Act ("RESPA"). These standards pertain to such issues as maximum loan
amounts, acceptable rates and terms, appraisal guidelines, disclosure
requirements, credit criteria, debt-to-income ratios, complete applications, and
title requirements. The Lending Policy establishes the overall direction of the
Company's lending activities within the community and forms the basis for
setting underwriting standards which limit the Company's exposure to credit
risk.
The outstanding balance in total loans at December 31, 2005 was $75.4 million, a
decrease of $17.7 million, or 19.0%, from the year-end 2004 balance of $93.1
million. The 2004 balance was up 19.4%, or $15.1 million, from the end of 2003.
Average loans for 2005 were $87.4 million, an increase of $252,000, or 0.3%,
from the prior year's average level. Table 1, which is based on regulatory
reporting codes, shows loan balances at year end of the previous five years.
TABLE 1. COMPOSITION OF LOAN PORTFOLIO
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AT DECEMBER 31,
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($ IN THOUSANDS) 2005 2004 2003 2002 2001
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Real estate loans - residential $ 36,800 $ 45,007 $ 44,021 $ 57,502 $ 69,852
Real estate loans - commercial and other 24,794 36,143 26,460 18,124 10,181
Real estate loans - construction 11,282 8,233 4,709 1,263 1,056
Consumer loans 669 629 513 403 265
Commercial business loans 1,819 3,058 2,257 1,515 683
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Total Loans at Year-End $ 75,364 $ 93,070 $ 77,960 $ 78,807 $ 82,037
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Allowance for loan losses (5,713) (920) (601) (483) (435)
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Deferred Loan Origination Costs 6 8 8 8 9
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Net loans at year end 69,657 92,158 77,367 78,332 81,611
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Average total loans during year $ 87,437 $ 87,185 $ 76,623 $ 81,463 $ 76,300
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2005 ANNUAL REPORT PAGE 8
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GS FINANCIAL CORP. AND SUBSIDIARY
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Guaranty's investment in residential mortgage loans, which includes those loans
secured by 1-4 family properties, decreased 18.2%, or $8.2 million, between
December 31, 2004 and 2005, after an increase of 2.2%, or $986,000 million,
between 2003 and 2004. The decrease experienced in 2005 was primarily due to
payoffs on loans on properties damaged by Hurricane Katrina. Subsequent to
Hurricane Katrina, borrowers received insurance proceeds checks that were then
used to repay the loans. In addition, the Association's originations of new
single-family residential real estate loans decreased by 38.0% in 2005 compared
to 2004. Decreased loan originations reflect the slowdown in business activity
in the fourth quarter of 2005 after Hurricane Katrina as well as reduced new
originations in general during 2005 as the Association completed its search for
a new President.
In 2000, the Company began shifting its lending emphasis towards the commercial
market to diversify and enhance the products and services offered to its
customers and add higher yielding loans to its overall portfolio. Commercial
loans typically carry higher yields and associated risk than loans on 1-4 family
dwellings. The Company offers mortgage loans on multifamily residential
dwellings, commercial real estate and vacant land. The Company also offers
commercial asset-based loans secured by non-real estate collateral such as
inventory and accounts receivable. The Company has a special commercial loan
committee to evaluate such applications.
During 2004 and 2003, Guaranty was able to develop significant new business in
the growing commercial market. Commercial real estate loans, including
multi-family and retail property, increased 36.6%, or $9.7 million, between
December 31, 2003 and 2004. Construction loan draws declined $1.7 million, or
25.3%, from December 31, 2004 to 2005, and were up 107.8%, or $3.4 million,
between year-end 2003 and 2004. At December 31, 2005, commercial real estate and
construction loans made up 47.9% of the entire loan portfolio compared to 47.7%
and 40.0% at December 31, 2004 and 2003, respectively.
For the year ended December 31, 2005, the Association's total loan origination's
amounted to $14.7 million compared to $41.0 million and $34.2 million for the
years ended December 31, 2004 and 2003, respectively. The decrease in new loan
originations in 2005, reflects the slowdown in business activity in the fourth
quarter of 2005 as well as reduced new originations in general during 2005 as
the Association completed its search for a new President. The Association
recently hired two new commercial loan officers and a new mortgage lender and
expects that loan originations will increase in 2006 compared to 2005.
Table 2 reflects the Company's total loan origination and repayment experience
during the periods indicated. Historically, the Company has not purchased or
sold any loans.
TABLE 2. LOAN ORIGINATIONS BY TYPE
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YEAR ENDED DECEMBER 31,
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($ IN THOUSANDS) 2005 2004 2003 2002 2001
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Real estate loans - residential $ 8,339 $ 13,452 $ 12,469 $ 8,021 $ 12,062
Real estate loans - commercial and other 1,143 18,733 15,103 8,839 7,460
Real estate loans - construction 4,896 6,550 3,152 2,143 1,670
Consumer loans 366 269 338 364 252
Commercial loans - 2,003 3,153 2,049 610
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Total originations 14,744 41,007 34,215 21,416 22,054
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Loan principal repayments (32,204) (25,897) (35,062) (24,646) (14,535)
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Net portfolio activity (17,460) $ 15,110 $ (847) $ (3,230) $ 7,519
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Table 3 reflects contractual loan maturities, unadjusted for scheduled principal
reductions, prepayments or repricing opportunities. Demand loans and loans
having no stated maturity are reported as due in one year or less. All of the
Association's outstanding loans carry a fixed rate of interest.
2005 ANNUAL REPORT PAGE 9
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GS FINANCIAL CORP. AND SUBSIDIARY
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
TABLE 3. LOAN MATURITIES BY TYPE
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AT DECEMBER 31, 2005, LOANS MATURING IN
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One year One through More than
($ IN THOUSANDS) or less five years five years Total
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Real estate loans - residential 347 1,699 31,248 33,294
Other real estate loans 7,283 9,257 18,516 35,056
Consumer loans 295 - 357 652
Commercial loans 6,606 - 2 6,608
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Total 14,531 10,956 50,213 75,610
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Percentage 19.2% 14.5% 66.3% 100.0%
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All loans carry a degree of credit risk. Management's evaluation of this risk
ultimately is reflected in the estimate of probable loan losses that is reported
in the Company's financial statements as the allowance for loan losses. Changes
in this ongoing evaluation are reflected in the provision for loan losses
charged to operating expense.
The Company has adopted an asset classification policy which is designed to draw
attention to assets before collection becomes a problem, thus maintaining the
quality of the Company's investment as an interest-earning asset. The policy
also ensures the accurate reporting of the Company's assets from a valuation
standpoint. As part of this policy, all of the Company's loans are reviewed on a
regular basis. Payment histories as well as the value of the underlying
collateral are reviewed and assessed in light of several risk factors. The state
of the local economy factors into the evaluation process as do current interest
rates and expectations of the movement thereof. Other risk factors include the
level of credit concentration the customer has with the Company, environmental
factors which could impair the value of the underlying collateral of an asset,
or other factors which might reduce the ability of the Company to collect all of
the principal and interest owed to the Company.
The Company maintains a "Watch List" of loans, which is part of management's
internal asset classification system. The Watch List identifies assets
classified as "substandard," "doubtful" or "loss," pursuant to OTS regulations.
Assets displaying tendencies which might hinder full collection of principal are
classified as substandard. Such tendencies include but are not limited to late
payments on loans or deterioration of the underlying collateral.
Loan collection efforts in the form of past due notices commence when loan
payments are more than 15 days past due. Once a loan reaches 30 days past due
status, the Company's collection manager initiates personal contact with the
borrower. When a loan becomes 90 days past due, the Company initiates
foreclosure proceedings. At this point, loans are placed on non-accrual status.
All interest and late charges due on such loans are reversed in the form of
reserves for uncollectible interest and late charges.
In making its risk evaluation and establishing an allowance for loan loss level
that it believes is adequate to absorb probable losses in the portfolio,
management considers various sources of information. Some of the more
significant sources include analyses prepared on specific loans reviewed for
impairment, statistics on balances of loans assigned to internal risk rating
categories, reports on the composition and repayment portion of loan portfolios
not subject to individual risk ratings, and factors derived from historical loss
experience. In addition to this more objective and quantitative information,
management's evaluation must take into consideration its assessment of general
economic conditions and how current conditions affect segments of borrowers.
Management must also make judgments regarding the level of accuracy inherent in
the loss allowance estimation process. An allowance analysis is prepared at
least quarterly that summarizes the results of the evaluation process and helps
ensure a consistent process over time.
2005 ANNUAL REPORT PAGE 10
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GS FINANCIAL CORP. AND SUBSIDIARY
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
At December 31, 2005, the allowance for loan losses was $5.7 million, or 7.56%
of total loans, compared to $920,000, or 0.99% of total loans at the end of
2004. The increase was due to a provision for loan losses of $4.8 million taken
in the fourth quarter of 2005 for potential losses caused by the impact of
Hurricane Katrina. No loans were charged off during the year ended December 31,
2005. As previously indicated, the Company unilaterally deferred all loan
payments after Hurricane Katrina. Table 4 presents an analysis of the activity
in the allowance for loan losses for the past five years.
TABLE 4. SUMMARY OF ACTIVITY IN THE ALLOWANCE FOR LOSSES
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------
($ IN THOUSANDS) 2005 2004 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Balance at the beginning of year 921 $ 601 $ 483 $ 435 $ 420
Provision for loan losses charged to operations 4,792 343 118 48 25
Loans charged to the allowance - (24) - - (10)
Recoveries of loans previously charged off - - - - -
- --------------------------------------------------------------------------------------------------------------------
Balance at the end of year 5,713 $ 921 $ 601 $ 483 $ 435
- --------------------------------------------------------------------------------------------------------------------
Ratios
Charge-offs to average loans 0.00% 0.03% 0.00% 0.00% 0.01%
Provision for loan losses to charge-offs n/a 1,429.17% n/a n/a 250.00%
Allowance for loan losses to loans at end of
year 7.56% 0.99% 0.77% 0.61% 0.53%
- --------------------------------------------------------------------------------------------------------------------
The allowance for loan losses is comprised of specific reserves for each loan
that is reviewed for impairment or for which a probable loss has been identified
and general reserves for groups of homogenous loans. Reserves for impaired loans
are based on discounted cash flows using the loan's initial effective interest
rate, the observable market value of the loan or the fair value of the
underlying collateral. General reserves are established based on historic
charge-offs, and based upon consideration of various other factors including
risk rating, industry concentration and loan type.
The $4.8 million provision for loan losses made in 2005 reflects management's
assessment, based on the information available at the time, of the inherent
level of losses in the Association's portfolio after Hurricane Katrina. In its
assessment for year-end 2005, management attempted to contact all borrowers with
loans over $200,000 and evaluated the collateral on any borrowers on a loan who
did not make a payment for December or for which the Association did not receive
any insurance proceeds. Of the $4.8 million provision, $3.3 million was recorded
specifically on an aggregate of $8.2 million of loans deemed impaired and on
which no loan payments had been received and the Company knew the collateral had
suffered property damage as a result of the hurricane. The remaining $1.5
million of the provision was applied to the general allowance for loan losses.
Because significant uncertainties remain regarding the performance of the
Company's loan portfolio after Hurricane Katrina, such as the ultimate
disposition of property insurance claims and the ultimate economic recovery of
greater New Orleans, it is unclear whether additional losses may become apparent
in the future. The recovery process is expected to be lengthy and management
will continue to review the allowance for loan losses and make additional
provisions as required.
2005 ANNUAL REPORT PAGE 11
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GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
TABLE 5. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
- ------------------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
ALLOWANCE % OF ALLOWANCE % OF ALLOWANCE % OF ALLOWANCE % OF ALLOWANCE % OF
FOR LOAN TOTAL FOR LOAN TOTAL FOR LOAN TOTAL FOR LOAN TOTAL FOR LOAN TOTAL
($ IN THOUSANDS) LOSSES RESERVE LOSSES RESERVE LOSSES RESERVE LOSSES RESERVE LOSSES RESERVE
- ------------------------------------------------------------------------------------------------------------------------------------
Real estate loans -
residential $ 3,332 58.3% $ 239 26.0% $ 147 24.5% $ 217 45.0% $ 337 77.5%
Real estate loans -
commercial and other 1,805 31.6% 591 64.2 410 68.2 241 49.9 90 20.7
Real estate loans -
construction 292 5.1% 4 0.4 10 1.7 5 1.0 5 1.1
Commercial loans 284 5.0% 87 9.4 34 5.6 20 4.1 3 0.7
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 5,713 100.0% $ 920 100.0% $ 601 100.0% $ 483 100.0% $ 435 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
Tables 6 and 7 set forth the Company's delinquent loans and nonperforming assets
for each of the prior three years. The balances presented in Table 6 are total
principal balances outstanding on the loans rather than the actual principal
past due. Nonperforming assets consist of loans on nonaccrual status and
foreclosed assets. There were no loans 90 days delinquent and still accruing
interest at any of the five previous year ends.
TABLE 6. DELINQUENT LOANS
- --------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------
($ IN THOUSANDS) 2005 2004 2003
- --------------------------------------------------------------------------------------------------------------------
30-89 Days 9,296 $ 8,106 $ 5,345
90+ Days 931 894 929
- --------------------------------------------------------------------------------------------------------------------
Total 10,227 $ 9,000 $ 6,274
- --------------------------------------------------------------------------------------------------------------------
Ratios
Loans delinquent 90 days to total loans 1.24% 0.96% 1.19%
Total delinquent loans to total loans 13.57% 9.67% 8.05%
Allowance for loan losses to 90 day delinquent loans 613.75% 102.91% 64.69%
Allowance for loan losses to total delinquent loans 55.87% 10.22% 9.58%
- --------------------------------------------------------------------------------------------------------------------
TABLE 7. NONPERFORMING ASSETS
- --------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------
($ IN THOUSANDS) 2005 2004 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Loans accounted for on a nonaccrual basis 3,582 $ 894 $ 929 $ 651 $ 249
Foreclosed assets - - 52 - -
- --------------------------------------------------------------------------------------------------------------------
Total nonperforming assets 3,582 $ 894 $ 981 $ 651 $ 249
- --------------------------------------------------------------------------------------------------------------------
Ratios
Nonperforming assets to loans plus foreclosed assets 4.75% 0.96% 1.26% 0.83% 0.30%
Nonperforming assets to total assets 2.01% 0.45% 0.46% 0.31% 0.13%
Allowance for loan losses to nonperforming loans 159.52% 102.91% 64.69% 74.19% 174.70%
- --------------------------------------------------------------------------------------------------------------------
2005 ANNUAL REPORT PAGE 12
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GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
During the fourth quarter of 2005, the Association unilaterally agreed to defer
all loan payments. As a result, no loans other than those that were delinquent
prior to the deferral period were deemed to be delinquent, non-performing or
non-accrual during the three-month deferral period.
The deferment program offered after Hurricane Katrina has rendered traditional
indicators of loan portfolio risk, such as delinquent and non-performing loans,
to be less useful as a tool to measure risk elements.
INVESTMENT IN SECURITIES
Interest rates dictate many of the investment decisions and policies of the
Company. It is the policy of the Company not to engage in speculative
purchasing, selling or trading of investments; however, certain profits may be
taken from time to time on the sale of investments. When interest rate spreads
reach acceptable levels, the Company may utilize leveraged purchasing of
investment securities, as has been done in the past. Also, when anticipated
earnings permit, certain portfolio adjustments may be made to enhance overall
portfolio yield even though losses may be recognized in doing so.
Strong demand for deposit products during 2003 led to significant increases in
liquidity. During 2004, short term interest rates increased, causing liquidity
to begin a return to a more moderate level. Liquidity was reduced in 2005 as the
result of a decline in deposits, caused in part by Hurricane Katrina, and by
contractual paydowns on FHLB borrowings. Information on changes in deposits and
liquidity sources are presented in later sections of this discussion and
analysis. Management routinely places much of its liquid assets into its
investment portfolio, particularly in collateralized mortgage obligations with a
relatively short estimated duration and mutual funds, based on its expectations
regarding the stability of the funding sources and the near-term prospects for
loan demand.
At December 31, 2005, total securities were $77.3 million, down 18.3%, or $17.3
million, from December 31, 2004. During 2005, the Company's average investment
in securities was down 25.1%, or $27.6 million, from 2004. Mutual fund
investments were 63.7% of the total portfolio in 2005 compared with 52.5% in the
prior year. Regular principal repayments and a lack of acceptable replacement
investments caused the Company's investment in collateralized mortgage
obligations ("CMOs") to decrease 8.1%, or $2.0 million, at December 31, 2005
compared to December 31, 2004. At December 31, 2005, CMOs made up 29.1% of the
investment portfolio, compared to 25.9% at December 31, 2004.
During the years ended December 31, 2005 and 2004, the Company recognized
charges of $1.3 million and $497,000, respectively, for other-than-temporary
impairments of available-for-sale securities. The 2004 impairment charge related
to the Company's investment in FHLMC preferred stock, all of which was sold in
2005. The $1.3 million charge recognized in 2005 relates to the Company's
investment in an ARM mutual fund which, based on current rates and market
conditions, is deemed to be other-than-temporarily impaired. Table 8 shows the
makeup of the Company's investment portfolio at December 31, 2005, 2004 and
2003.
TABLE 8. COMPOSITION OF INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------
2005 2004 2003
- --------------------------------------------------------------------------------------------------------------------
($ IN THOUSANDS) BALANCE PERCENT Balance Percent Balance Percent
- --------------------------------------------------------------------------------------------------------------------
U.S. Treasury and Agency securities $ 5,449 7.1% $ 832 0.9% $ 881 0.8%
Mortgage-backed securities 100 0.1 238 0.2 362 0.3
Collateralized mortgage obligations 22,496 29.1 24,481 25.9 32,486 27.2
Mutual funds 49,299 63.7 49,657 52.5 65,371 54.8
FHLMC stock - 0.0 19,349 20.5 20,171 16.9
- --------------------------------------------------------------------------------------------------------------------
Total Investments at Year End 77,344 100.0% $ 94,557 100.0% $ 119,271 100.0%
- --------------------------------------------------------------------------------------------------------------------
Average Investments During Year $ 78,516 $ 110,004 $ 111,669
- --------------------------------------------------------------------------------------------------------------------
2005 ANNUAL REPORT PAGE 13
- --------------------------------------------------------------------------------
GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Information about the contractual maturity of Company's investment securities at
December 31, 2005 is shown in Table 9 below. At December 31, 2005, 64% of the
investment portfolio consists of mutual fund or equity investments carrying no
stated maturity. These investments are redeemable immediately at their current
market value. Scheduled principal reductions and principal repayments on
mortgage-backed securities and collateralized mortgage obligations are not
reflected in Table 9. If these expected principal reductions were taken into
consideration, the weighted-average maturity of the Company's overall securities
portfolio would be approximately 22 months at December 31, 2005.
TABLE 9. DISTRIBUTION OF INVESTMENT MATURITIES
- -----------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 2005
- -----------------------------------------------------------------------------------------------------------------------------
One year Over one through Over five through
($ IN THOUSANDS) or less five years ten years Over ten years Total
- -----------------------------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Treasury
securities $ 506 6.92% - - $4,943 - $ - - $ 5,449 5.31%
Mortgage-backed
securities - - - - - - 100 7.78% 100 7.78%
CMOs - - - - - - 22,496 5.31% 22,496 5.31%
Mutual funds 49,299 3.60% - - - - - - 49,299 3.60%
- -----------------------------------------------------------------------------------------------------------------------------
Total $ 49,805 3.63% - - $4,943 - $22,596 5.32% 77,344 4.22%
- -----------------------------------------------------------------------------------------------------------------------------
Percentage of Total 64.4% 0.0% 6.4% 29.2% 100.0%
- -----------------------------------------------------------------------------------------------------------------------------
All of the Company's investments in marketable securities are classified as
available for sale. The net unrealized losses on these investments totaled
$300,000, or 0.39%, of amortized cost at December 31, 2005. At year-end 2004,
there was a net unrealized loss of $448,000, or 0.47% of amortized cost. This
net unrealized gain or loss will vary based on the overall changes in market
rates, shifts in the slope of the yield curve, and movement in spreads to the
yield curve for different types of securities.
At December 31, 2005, the Company had certain investment concentrations
exceeding 10% of stockholders' equity. While these are significant in amount,
they are limited to "AAA" rated securities and management feels that they
present a limited risk of default. Investments of the Company that exceed 10% of
stockholders' equity at December 31, 2005 are shown in Table 10 below.
TABLE 10. INVESTMENTS GREATER THAN 10% OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 2005
- --------------------------------------------------------------------------------------------------------------------
% of
Stockholders'
($ IN THOUSANDS) Type Total Investment % of Total Assets Equity
- --------------------------------------------------------------------------------------------------------------------
Shay Mutual Funds Mutual Fund $ 49,299 27.76% 194.04%
Federal National Mortgage Association Agency Bond 4,944 2.78% 19.46%
First Horizon Mortgage CMO 2,746 1.54% 10.81%
FHLMC REMIC CMO 2,593 1.46% 10.20%
- --------------------------------------------------------------------------------------------------------------------
Total $ 59,582 33.54% 234.51%
- --------------------------------------------------------------------------------------------------------------------
2005 ANNUAL REPORT PAGE 14
- --------------------------------------------------------------------------------
GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company has made no investments in financial instruments or participated in
agreements with values that are linked to or derived from changes in some
underlying asset or index. These financial instruments or agreements are
commonly referred to as derivatives and include such instruments as futures,
forward contracts, option contracts, interest rate swap agreements and other
financial arrangements with similar characteristics. Management has no plans to
use derivatives as part of its asset/liability and liquidity management
processes.
DEPOSITS
Deposits are the Company's primary source of funding for earning assets. The
Company offers a variety of products designed to attract and retain customers.
The principal methods used by the Company to attract deposits include its
emphasis on personal service, competitive interest rates and convenient office
locations. The Company does not pay "jumbo" rates for deposits over $100,000 and
does not advertise for deposits outside of its primary market area. The Company
had no deposits that were obtained through outside deposit brokers at December
31, 2005 or 2004.
At December 31, 2005, deposits were 9.1%, or $11.8 million, below the level at
December 31, 2004. Average deposits for fiscal 2005 decreased 12.5%, or $17.5
million over 2004 and increased 9.2%, or $11.7 million, in 2004 from 2003.
During 2004, in response to the Company's liquidity management objectives,
management decreased the rate of interest paid on customer deposits in an effort
to reduce overall interest costs. The decline in 2005 can be largely attributed
to the impact of Hurricane Katrina and many customers leaving the Association's
market area. Further declines in 2006 may be experienced as insurance proceeds
are used and in the event more of our depositors relocate outside of our market
area. A summary of deposit composition is presented in Table 11.
TABLE 11. DEPOSIT COMPOSITION
- ---------------------------------------------------------------------------------------------------------------
AT DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------
2005 2004 2003
- ---------------------------------------------------------------------------------------------------------------
AVERAGE % OF Average % of Average % of
($ IN THOUSANDS) BALANCES DEPOSITS Balances Deposits Balances Deposits
- ---------------------------------------------------------------------------------------------------------------
Noninterest bearing demand deposits $ 895 0.7% $ 816 0.6% $ 711 0.6%
NOW account deposits 7,778 6.4 9,065 6.5 7,127 5.6
Savings deposits 30,551 25.1 34,348 24.7 33,422 26.2
Certificates of deposit 82,409 67.8 94,855 68.2 86,131 67.6
- ---------------------------------------------------------------------------------------------------------------
Total $ 121,633 100.0% $ 139,084 100.0% $ 127,391 100.0%
- ---------------------------------------------------------------------------------------------------------------
Average certificates of deposit (or "time deposits") totaled $82.4 million, or
67.8% of total average deposits during 2005, down $12.5 million, or 13.2%,
compared to 2004. Average savings deposits made up 25.1% of total average
deposits during 2005, up slightly from 24.7% in the previous year. During 2005,
transaction accounts continued to make up less than 10% of total deposits.
Table 12 shows the maturity structure of time deposits over and under $100,000
at December 31, 2005.
TABLE 12. MATURITIES OF TIME DEPOSITS
- ----------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 2005
- ----------------------------------------------------------------------------------------------------------------
Total
Less than ---------------------------
($ in thousands) $100,000 $100,000 or more Amount Percentage
- ----------------------------------------------------------------------------------------------------------------
Three months or less $ 12,587 $ 1,681 $ 14,268 18.66%
Over three months through twelve months 26,842 4,982 31,824 41.61%
Over twelve months 25,937 4,444 30,382 39.73%
- ----------------------------------------------------------------------------------------------------------------
Total $ 65,366 $ 11,107 $ 76,474 100.00%
- ----------------------------------------------------------------------------------------------------------------
2005 ANNUAL REPORT PAGE 15
- --------------------------------------------------------------------------------
GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BORROWINGS
The Association is a member of the Federal Home Loan Bank System. This
membership provides access to a variety of Federal Home Loan Bank advance
products as an alternative source of funds. At December 31, 2005, the Company
had outstanding advances totaling $32.1 million, compared to $39.7 million at
year-end 2004. Average advances outstanding during 2005 were $35.6 million,
compared with $39.7 million for 2004. The average rate paid on FHLB advances
during 2005 was 5.25%, compared to 5.56% in 2004. FHLB advances decreased $7.6
million, or 19.1%, at December 31, 2005 when compared to December 31, 2004. This
reduction was due to the contractually scheduled repayment of the advances and
no new borrowings. The Company's reliance on borrowings continues to be within
the parameters determined by management to be prudent in terms of liquidity and
interest rate sensitivity. Table 13 shows the scheduled maturities of FHLB
advances at December 31, 2005.
TABLE 13. MATURITIES OF ADVANCES
- --------------------------------------------------------------------------------
AT DECEMBER 31, 2005
- --------------------------------------------------------------------------------
($ IN THOUSANDS) Amount % of Total Advances Weighted Average Rate
- --------------------------------------------------------------------------------
2006 $ 15,056 46.89% 4.39%
2007 5,513 17.17% 5.63%
2008 11,537 35.94% 5.44%
-----------------------------------------------------------
Total Advances $ 32,106 100.00% 4.98%
- --------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY AND CAPITAL ADEQUACY
At December 31, 2005, stockholders' equity totaled $25.4 million, compared to
$28.9 million at the end of 2004. The major factors in the $3.5 million decrease
in 2005 were the net loss of $3.7 million and dividends declared totaling
$474,000 offset by the release of stock from the ESOP and RRP totaling $589,000
and a $98,000 decrease in the accumulated comprehensive loss. As the Company
incurred a net loss in 2005 and had minimal earnings in 2004, the dividend
payout ratio has not been a meaningful measure.
Since 1998, the Company has been consistently repurchasing shares of its common
stock when shares have been available at prices and amounts deemed prudent by
management. Table 14 summarizes the repurchase of the shares of its common stock
by year. All of the purchases were open market transactions and most were at a
discount to book value.
TABLE 14. SUMMARY OF STOCK REPURCHASES
- --------------------------------------------------------------------------------
Average Price
YEAR ENDED DECEMBER 31, Shares Cost ($000) Per Share
- --------------------------------------------------------------------------------
1998 491,054 $ 8,324 $ 16.95
1999 299,000 3,653 12.22
2000 679,600 8,590 12.64
2001 305,684 4,612 15.09
2002 142,201 2,516 17.69
2003 216,181 4,109 19.01
2004 16,842 315 18.70
2005 3,907 74 19.06
- --------------------------------------------------------------------------------
Total Stock Repurchases 2,154,469 $ 32,193 $ 14.94
- --------------------------------------------------------------------------------
2005 ANNUAL REPORT PAGE 16
- --------------------------------------------------------------------------------
GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The ratios in Table 15 indicate that the Association is well capitalized at
December 31, 2005. During 2005, net losses were offset by proportional decreases
in asset size such that capital, both Tier 1 and total stockholders' equity, as
a percentage of total assets was relatively unchanged. Risk-based capital ratios
improved in 2005 as there was a $26.0 million reduction in risk-weighted assets
which can be attributed primarily to reductions in the loan portfolio. The
regulatory capital ratios of Guaranty Savings and Homestead Association exceed
the minimum required ratios, and the Association has been categorized as
"well-capitalized" in the most recent notice received from its primary
regulatory agency.
TABLE 15. CAPITAL AND RISK BASED CAPITAL RATIOS
- --------------------------------------------------------------------------------
DECEMBER 31,
- --------------------------------------------------------------------------------
($ IN THOUSANDS) 2005 2004 2003
- --------------------------------------------------------------------------------
Tier 1 regulatory capital $ 23,772 $ 26,631 $ 26,800
Tier 2 regulatory capital 905 920 601
- --------------------------------------------------------------------------------
Total regulatory capital $ 24,677 $ 27,551 $ 27,401
- --------------------------------------------------------------------------------
Adjusted total assets $ 176,444 $ 198,443 $ 213,199
Risk-weighted assets $ 72,399 $ 98,415 $ 96,456
- --------------------------------------------------------------------------------
Ratios
Tier 1 capital to total assets 13.47% 13.42% 12.57%
Tier 1 capital to risk-weighted assets 32.83% 27.06% 27.78%
Total capital to risk-weighted assets 34.08% 27.99% 28.41%
Stockholders' equity to total assets 14.26% 14.47% 13.65%
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The objective of liquidity management is to ensure that funds are available to
meet cash flow requirements of depositors and borrowers, while at the same time
meeting the operating, capital and strategic cash flow needs of the Company and
the Association, all in the most cost-effective manner. The Company develops its
liquidity management strategies and measures and monitors liquidity risk as part
of its overall asset/liability management process, making use of the
quantitative modeling tools to project cash flows under a variety of possible
scenarios.
On the liability side, liquidity management focuses on growing the base of more
stable core deposits at competitive rates, while at the same time ensuring
access to economical wholesale funding sources. The sections above on Deposits
and Borrowings discuss changes in these liability-funding sources in 2005.
Liquidity management on the asset side primarily addresses the composition and
maturity structure of the loan and investment securities portfolios and their
impact on the Company's ability to generate cash flows from scheduled payments,
contractual maturities and prepayments, their use as collateral for borrowings
and possible outright sales on the secondary market. Tables 3 and 9 above
present the contractual maturities of the loan portfolio and the Company's
investment in securities.
Cash generated from operations is another important source of funds to meet
liquidity needs. The consolidated statements of cash flows present operating
cash flows and summarize all significant sources and uses of funds for each year
in the three-year period ended December 31, 2005. While the Company reported a
net loss of $3.7 million for the year ended December 31, 2005, net cash from
operations contributed $1.2 million in cash to the Company. The difference is
primarily due to the $4.8 million provision for loan losses and the $1.3 million
recognition of an unrealized loss on an investment as other-than-temporary,
which were partially offset by $1.7 million in a deferred tax benefit and a $1.0
million increase in accrued interest receivable.
2005 ANNUAL REPORT PAGE 17
- --------------------------------------------------------------------------------
GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Table 16 illustrates some the factors that the Company uses to measure
liquidity. Cash and cash equivalents increased substantially during 2005
compared to 2004, primarily resulting from significant loan paydowns occurring
subsequent to Hurricane Katrina. Deposits decreased primarily as a result of
customers leaving the Association's market area following Hurricane Katrina. As
discussed in the above section on deposits, during 2004 management decreased the
rate of interest paid on customer deposits and liquidity began to return to more
normal levels.
The Company has made investment allocation decisions and developed loan and
deposit pricing strategies consistent with its assessment of current and future
economic conditions. Management feels that these higher liquidity levels of the
past three years will continue to move toward more normal levels with liquidity
being used to pay down maturing FHLB debt and to take advantage of anticipated
significant new lending opportunities resulting from both Post-Hurricane-Katrina
rebuilding and the hiring of experienced commercial lenders.
TABLE 16. KEY LIQUIDITY INDICATORS
- -----------------------------------------------------------------------------------------------
DECEMBER 31,
- -----------------------------------------------------------------------------------------------
($ IN THOUSANDS) 2005 2004 2003
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents $ 22,555 $ 7,024 $ 11,371
Total loans 75,364 93,070 77,960
Total deposits 118,866 130,723 142,108
Deposits $100,000 and over 16,301 22,067 27,235
- -----------------------------------------------------------------------------------------------
Ratios
Total loans to total deposits 63.40% 71.20% 54.86%
Deposits $100,000 and over to total deposits 13.71% 16.88% 19.17%
- -----------------------------------------------------------------------------------------------
ASSET/LIABILITY MANAGEMENT
The objective the Company's asset/liability management is to implement
strategies for the funding and deployment of its financial resources that are
expected to maximize profitability over time at acceptable levels of risk.
Interest rate sensitivity is the potential impact of changing rate environments
on both net interest income and cash flows. The Association monitors its
interest rate sensitivity on a quarterly basis by reviewing net interest income
simulations, monitoring the economic value of equity and preparing interest rate
gap analyses.
The simplest method of measuring interest rate sensitivity is gap analysis,
which identifies the difference between the dollar volume of assets and
liabilities that reprice within specific time periods. A gap is considered
positive when the amount of interest-rate sensitive assets exceeds the amount of
interest-rate sensitive liabilities, and is considered negative when the amount
of interest-rate sensitive liabilities exceeds the amount of interest-rate
sensitive assets. In general, during a period of rising interest rates, a
negative gap within shorter maturities would adversely affect net interest
income, while a positive gap within shorter maturities would result in an
increase in net interest income. A cycle of falling interest rates would have
the opposite effect.
Since thrift organizations are generally invested primarily in home mortgage
loans varying in contractual terms to maturity usually from 15 to 30 years while
their longest term interest-bearing liabilities are typically five-year
certificates of deposit, they tend to create negative gaps over the short term.
Guaranty is no different; therefore, it is vital that the Association utilize
its other investments to offset in the short-term (12-months or less) horizon,
the substantial negative re-pricing gap which arises from one to five years,
while at the same time maximizing net interest income. The Company has placed
much of its ready cash in short-term investments such as mortgage-based mutual
funds that provide the benefit of overnight
2005 ANNUAL REPORT PAGE 18
- --------------------------------------------------------------------------------
GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
availability. The Association also places a high emphasis on cash flows in its
portfolio of CMOs. The duration of the Association's CMOs varies from two to 15
years. Table 17 shows the Company's static gap position as of December 31, 2005.
This table indicates that the Company is significantly asset sensitive in the
very near term and liability sensitive over a three-year time frame.
Gap analysis has several limitations, including the fact that it is a
point-in-time measurement that ignores the dynamic nature of the Company's
assets and liabilities, and it does not take into consideration actions that
management can and will take to maximize net interest income over time.
Another tool used by management is a net portfolio value ("NPV") model. The NPV
is the difference between the market value of the Association's assets and the
market value of the Association's liabilities and off balance sheet commitments.
At least quarterly, the Board reviews the internal model and a standard thrift
industry model prepared by the OTS from the Association's quarterly Consolidated
Maturity and Rate Report.
TABLE 17. INTEREST RATE SENSITIVITY
- ---------------------------------------------------------------------------------------------------------------------------
BY MATURITY OR REPRICING AT DECEMBER 31, 2005
- ---------------------------------------------------------------------------------------------------------------------------
After 1 through After 3 Non-interest
($ IN THOUSANDS) 0-90 Days 91-365 Days 3 Years Years earning/bearing Total
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
Loans $ 2,325 $7,046 $7,963 $52,323 $ - $ 69,657
Securities available for sale 49,299 9,460 - 18,585 - 77,344
Cash and cash equivalents 22,555 - - - - 22,555
Other assets - - - - 8,058 8,058
- ---------------------------------------------------------------------------------------------------------------------------
Total assets 74,179 16,506 7,963 70,908 8,058 177,614
- ---------------------------------------------------------------------------------------------------------------------------
SOURCES OF FUNDS
Noninterest bearing deposits - - - - 2,195 2,195
NOW account deposits 8,200 - - - - 8,200
Savings deposits 31,997 - - - - 31,997
Time deposits 14,269 31,824 26,443 3,938 - 76,474
Advances 5,244 4,594 22,268 - - 32,106
Other liabilities - - - - 1,235 1,235
Stockholders' equity - - - - 25,407 25,407
- ---------------------------------------------------------------------------------------------------------------------------
Total sources of funds 59,710 36,418 48,711 3,938 28,837 177,614
- ---------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap
Period $ 14,469 $(19,912) $(40,748) $66,970 $ (20,779)
Cumulative $ 14,469 $ (5,443) $(46,191) $20,779 $ -
- ---------------------------------------------------------------------------------------------------------------------------
Gap/total earning assets
Period 8.5% (11.7)% (24.0)% 39.5% (12.3)%
Cumulative 8.5% (3.2)% (27.2)% 12.3% -
- ---------------------------------------------------------------------------------------------------------------------------
Table 18 presented below is an analysis of the Association's interest rate risk
as measured by changes in NPV for instantaneous and sustained parallel shifts in
the yield curve, in 100 basis point increments, up and down 300 basis points in
accordance with OTS regulations. Currently, due to the low level of interest
rates, the only downward shocks capable of being applied are 100 and 200 basis
points. As illustrated in the tables below, NPV is currently more sensitive to
and may be more negatively impacted by rising rates than falling rates.
2005 ANNUAL REPORT PAGE 19
- --------------------------------------------------------------------------------
GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
TABLE 18. NET PORTFOLIO VALUE
- ----------------------------------------------------------------------------------------------------------
AT DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------
($ IN THOUSANDS) 2005 2004
- ----------------------------------------------------------------------------------------------------------
Change (Basis Point)
in Interest Rates $ VALUE $ CHANGE % CHANGE $ Value $ Change % Change
- ----------------------------------------------------------------------------------------------------------
+300 $ 23,988 $ (8,467) (26)% $ 28,613 $ (7,228) (20)%
+200 27,266 (5,189) (16)% 30,949 (4,892) (14)%
+100 30,203 (2,253) (7)% 33,346 (2,495) (7)%
0 32,455 - - 35,841 - -
-100 33,258 804 2% 38,405 2,564 7%
-200 33,276 821 3% 40,719 4,878 14%
-300 n/a n/a n/a n/a n/a n/a
- ----------------------------------------------------------------------------------------------------------
IMPACT OF INFLATION AND CHANGING PRICES
The great majority of assets and liabilities of a financial institution are
monetary in nature. Management believes the most significant potential impact of
inflationary or deflationary economic cycles on the Company's financial results
is its ability to react to changes in interest rates. Interest rates do not
necessarily move in the same direction, or at the same magnitude, as the prices
of goods and services. As discussed above, the Company employs asset/liability
management strategies in its attempt to minimize the effects of economic cycles
on its net interest income.
Inflation and changing prices also have an impact on the growth of total assets
in the banking industry and the resulting need to increase capital at higher
than normal rates in order to maintain an appropriate equity to assets ratio.
Changing prices will also affect trends in noninterest operating expenses and
noninterest income.
RESULTS OF OPERATIONS
The Company reported net loss of $3.7 million, or $3.11 per share, during 2005,
compared to net income of $199,000, or $0.17 per share in 2004, and $691,000, or
$0.58 per share, in 2003. The losses in 2005 resulted primarily from a
substantial loan loss provision of $4.8 million to cover potential loan losses
resulting from the impact of Hurricane Katrina and a $1.3 million recognition of
losses on available-for-sale investment securities as other-than-temporary. The
reductions in earnings during 2004 were primarily due to investment losses and
one-time write-downs.
NET INTEREST INCOME
The Company's net interest income increased 1.0%, or $57,000, in 2005, on an
11.7% decline in average interest-earning assets. This followed a 45.6%, or $1.7
million, increase in net interest income for 2004 over 2003 when
interest-earning assets decreased 1.7%. Net interest margin is net interest
income expressed as a percent of average interest-earning assets. In 2005, the
Company was able to add 39 basis points to increase its net interest margin to
3.12% with a 42 basis point increase in the average yield on earning assets
which more than offset a 6 basis point increase in the cost of interest-bearing
liabilities. This followed an 89 basis point increase in net interest margin in
2004.
During 2005 average loans were 49% of average interest-earning assets, up from
43% in 2004 and 37% in 2003. Collateralized mortgage obligation investments made
up 13% of average interest-earning assets during 2005, down from 15% in 2004 and
up from 11% in 2003. With rates remaining well below historical average levels,
management has directed excess liquidity into short-term investments. Mutual
fund investments, consisting primarily of investments in funds secured by
short-term mortgage instruments, were 28% of average interest-earning assets in
both 2005 and 2004, down from 32% in 2003.
2005 ANNUAL REPORT PAGE 20
- --------------------------------------------------------------------------------
GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
As discussed above, market rates fell to record lows in 2003 and remained well
below historical averages throughout 2004 and 2005. Discipline in loan pricing
in the face of restrained demand helped the Company to keep the loan yield flat
in 2005 and limit the decrease in loan portfolio yield to 14 basis points in
2004. Low market rates stimulated home mortgage refinancing activity and
accelerated prepayments on mortgage-backed securities and collateralized
mortgage obligations. These repayments have had significant impact on the
Company's yield on its loans and investment portfolios.
The Company's funding mix continued to have a negative impact on interest
margins in 2005. The percentage of average interest-earning assets funded by
higher-cost sources of funds, including time deposits and FHLB borrowings
remained unchanged at 66% in 2005, 2004 and 2003. This is expected to improve in
2006 due to significant contractual paydowns on FHLB advances and an increased
emphasis on attracting lower-cost transaction accounts. Lower-cost core deposits
totaled 21% of average interest-earning assets in 2005 and 2004, up from 20% in
2003.
Table 19 below sets forth, for the periods indicated, information regarding (i)
the total dollar amount of interest income from interest-earning assets and the
resulting average yields; (ii) the total dollar amount of interest expense on
interest-bearing liabilities and the resulting average rate; (iii) net interest
income; (iv) interest rate spread; and (v) net interest margin. Information is
based on average daily balances during the indicated periods.
2005 ANNUAL REPORT PAGE 21
- --------------------------------------------------------------------------------
GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
TABLE 19. SUMMARY OF AVERAGE BALANCES, NET INTEREST INCOME AND INTEREST RATES
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2005 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
($ IN THOUSANDS) BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
INTEREST-EARNING ASSETS
Loans 87,437 6,658 7.61% $ 87,185 $ 6,638 7.61% $ 76,623 $ 5,938 7.75%
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury and Agency securities 4,376 231 5.28 864 58 6.71 908 57 6.28
Mortgage-backed securities 136 9 6.62 266 19 7.14 419 33 7.88
Collateralized mortgage obligations 22,788 1,471 6.46 31,315 1,693 5.41 23,184 1,234 5.32
Mutual funds 49,495 1,720 3.48 57,578 1,349 2.34 65,627 1,357 2.07
FHLMC stock 1,721 - - 19,982 1,116 5.59 21,531 1,120 5.20
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment in securities 78,516 3,431 4.37% 110,005 4,235 3.85 111,669 3,801 3.40
- ------------------------------------------------------------------------------------------------------------------------------------
FHLB stock 2,294 82 3.57% 2,526 46 1.82 5,027 114 2.27
- ------------------------------------------------------------------------------------------------------------------------------------
Federal funds sold and demand deposits 11,584 295 2.55% 3,881 70 1.80 13,772 140 1.02
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 179,831 10,466 5.82% 203,597 10,989 5.40% 207,091 9,993 4.83%
- ------------------------------------------------------------------------------------------------------------------------------------
NONINTEREST-EARNING ASSETS
Other assets 8,313 8,290 8,203
Allowance for loan losses 933 604 521
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets 187,213 $211,283 $214,773
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
NOW account deposits $ 7,778 $ 97 1.25% $ 9,065 $ 120 1.32% $ 7,127 $ 119 1.67%
Savings deposits 30,551 382 1.25% 34,348 454 1.32 33,422 569 1.70
Time deposits 82,409 2,508 3.04% 94,855 2,653 2.80 86,131 2,644 3.07
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 120,738 2,987 2.47% 138,268 3,227 2.33 126,680 3,332 2.63
- ------------------------------------------------------------------------------------------------------------------------------------
Borrowings 35,589 1,869 5.25% 39,743 2,209 5.56 50,428 2,846 5.64
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 156,327 4,856 3.11% 178,011 5,436 3.05% 177,108 6,178 3.49%
- ------------------------------------------------------------------------------------------------------------------------------------
NONINTEREST-BEARING LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits 1,138 816 711
Other liabilities 3,021 3,895 5,161
Shareholders' equity 26,727 28,561 31,793
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $187,213 $211,283 $214,773
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income and margin $ 5,610 3.12% $ 5,553 2.73% $ 3,815 1.84%
Net interest-earning assets and spread $ 23,504 2.69% $ 25,586 2.35% $ 29,983 1.34%
Cost of funding interest-earning assets 2.70% 2.67% 2.98%
- ------------------------------------------------------------------------------------------------------------------------------------
Table 20 below sets forth the effects of changing rates and volumes on net
interest income of the Company. Information is provided with respect to (i)
effects on interest income attributable to changes in volume (changes in volume
multiplied by prior rate) and (ii) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume). The change in
interest due to both volume and rate has been allocated proportionately between
volume and rate based on the absolute dollar amount of the change in each.
2005 ANNUAL REPORT PAGE 22
- --------------------------------------------------------------------------------
GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
TABLE 20. SUMMARY OF CHANGES IN NET INTEREST INCOME
- --------------------------------------------------------------------------------------------------------------------
2005 COMPARED TO 2004 2004 Compared to 2003
- --------------------------------------------------------------------------------------------------------------------
DUE TO CHANGE IN TOTAL Due to Change in Total
--------------------- INCREASE --------------------- Increase
($ IN THOUSANDS) VOLUME RATE (DECREASE) Volume Rate (Decrease)
- --------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $ 19 $ 1 $ 20 $ 804 $ (104) $ 700
- --------------------------------------------------------------------------------------------------------------------
U.S. Treasury and Agency securities 236 (63) 173 (3) 4 1
Mortgage-backed securities (9) (1) (10) (11) (3) (14)
Collateralized mortgage obligations (461) 241 (220) 440 19 459
Mutual funds (189) 560 371 (189) 181 (8)
FHLMC stock (1,020) (96) (1,116) (87) 83 (4)
- --------------------------------------------------------------------------------------------------------------------
Total investment in securities (1,443) 641 (802) 150 284 434
- --------------------------------------------------------------------------------------------------------------------
FHLB stock (4) 40 36 (46) (22) (68)
- --------------------------------------------------------------------------------------------------------------------
Federal funds sold and demand deposits 139 84 223 (178) 108 (70)
- --------------------------------------------------------------------------------------------------------------------
Total interest income (1,289) 766 (523) 730 266 996
- --------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
NOW account deposits (17) (6) (23) 26 (25) 1
Savings deposits (50) (22) (72) 12 (127) (115)
Time deposits (348) 203 (145) 244 (235) 9
- --------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits (415) 175 (240) 282 (387) (105)
- --------------------------------------------------------------------------------------------------------------------
Borrowings (231) (109) (340) (594) (43) (637)
- --------------------------------------------------------------------------------------------------------------------
Total interest expense (646) 66 (580) (312) (430) (742)
- --------------------------------------------------------------------------------------------------------------------
Change in net interest income $ (643) $ 700 $ 57 $1,043 $ 695 $ 1,738
- --------------------------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
The Company took a provision for loan losses of $4.8 million in 2005, all
subsequent to Hurricane Katrina, as the hurricane severely impacted the entire
area in which the Company does business. The impact was on both the collateral
securing certain loans and on the income or cash flow of many borrowers. At
year-end, the Company evaluated the entire loan portfolio to make its assessment
of potential losses, including contacting borrowers, inspecting properties and
determining the status of insurance claims against damaged properties.
Management believes the provision and resultant reserve to be adequate but not
excessive. As previously discussed under "Loans and Allowance for Loan Losses,"
the provision for loan losses for the year ended December 31, 2005 was based on
the information available to management at the time. Considerable uncertainties
remain regarding, among other things, the extent of any economic recovery in the
greater New Orleans area and the ultimate disposition of property insurance
claims. The recovery process is expected to be lengthy and management will
continue to review the allowance for loan losses and make additional provisions
as required. The Company provided $343,000 for loan losses in 2004, up from
$118,000 in 2003, primarily due to the changing composition of the loan
portfolio with an increased emphasis on commercial loans. The Company had
charge-offs of $24,000 in 2004. There were no charge-offs in 2005 or 2003.
For a more detailed discussion of the changes in the allowance for loan losses,
non-performing assets and general credit quality, see the earlier section on
Loans and Allowance for Loan Losses. The future level of the allowance and
provisions for loan losses will reflect management's ongoing evaluation of
credit risk, based on established internal policies and practices.
2005 ANNUAL REPORT PAGE 23
- --------------------------------------------------------------------------------
GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
NON-INTEREST INCOME
Total non-interest income decreased $604,000 from a loss of $691,000 in 2004 to
a loss of $1.3 million in 2005. Both losses were primarily due to writedowns due
to other-than-temporary impairment of securities available for sale. Table 21
shows the components of non-interest income for each year in the three-year
period ended December 31, 2005, along with the percent changes between years for
each component. Non-interest income before securities transactions was adversely
impacted by a $159,000 loss taken on fixed assets destroyed by Hurricane
Katrina. Guaranty recognized a gain of $40,000 on the sale of foreclosed real
estate in 2005. Excluding gains and losses from the sale of foreclosed real
estate and the disposal of fixed assets, non-interest income was $101,000, up
from $93,000 in both 2004 and 2003.
Service charges on deposit accounts were unchanged at $19,000 in 2005, 2004 and
2003. The Company continues to develop new deposit products and pricing
strategies to increase transaction accounts and related fee income.
Income from real estate held for investment, the largest component of recurring
non-interest income, increased 8%, or $4,000, in 2005, compared to 2004. This
income is for rent received by the Company on property not used in its banking
operations. The Company took a loss of $159,000 in 2005 on property at one
branch location that was substantially damaged by Hurricane Katrina. The
non-recoverable assets have been written off and the Company intends to repair
and reopen the branch location in the latter half of 2006.
TABLE 21. NON-INTEREST INCOME
- -----------------------------------------------------------------------------------------------------------------
($ IN THOUSANDS) 2005 % CHANGE 2004 % change 2003
- -----------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts $ 19 0.00% $ 19 0.00% $ 19
ATM fees 6 45.45% 11 57.14% 7
Early closing penalties 9 50.00% 6 (33.33)% 9
Income from real estate held for investment 53 8.16% 49 2.08% 48
Gain on sales and income from foreclosed assets 40 n/a (31) (487.50)% 8
Loss on impairment of fixed assets (159) 100% - - -
Miscellaneous 33 312.50% 8 (20.00)% 10
- -----------------------------------------------------------------------------------------------------------------
Total noninterest income before securities transactions 1 (98.39)% 62 (38.61)% 101
Net (loss)/gain on securities transactions (1,295) (71.98)% (753) (154.76)% 1,375
- -----------------------------------------------------------------------------------------------------------------
Total noninterest income (1,294) (87.42)% $ (691) (146.82)% $1,476
- -----------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Table 22 shows the components of non-interest expense for each year of the
three-year period ended December 31, 2005 along with percent changes between
years for each component. Non-interest expense increased 5.0%, or $224,000, in
2005 after a 1.5%, or $64,000, increase in 2004.
2005 ANNUAL REPORT PAGE 24
- --------------------------------------------------------------------------------
GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
TABLE 22. NON-INTEREST EXPENSE
- --------------------------------------------------------------------------------------------------------
($ IN THOUSANDS) 2005 % CHANGE 2004 % change 2003
- --------------------------------------------------------------------------------------------------------
Employee compensation $ 2,083 7.31% $ 1,941 1.04% $ 1,921
Employee benefits 893 20.04% 744 (0.80)% 750
- --------------------------------------------------------------------------------------------------------
Total personnel expense 2,976 10.84% 2,685 0.52% 2,671
Net occupancy expense 458 8.78% 421 (2.32)% 431
Ad Valorem taxes 435 9.85% 396 (19.51)% 492
Data processing costs 178 (26.14%) 241 66.21% 145
Advertising 67 (57.86%) 159 84.88% 86
ATM expenses 23 (54.90%) 51 15.91% 44
Professional fees 200 90.47% 105 12.90% 93
Deposit insurance and supervisory fees 124 5.98% 117 7.34% 109
Printing and office supplies 58 34.83% 89 7.23% 83
Telephone 66 14.29% 77 (8.33)% 84
Prepayment penalty on FHLB advances - - - (a) 83
Other operating expenses 122 (14.08%) 142 44.90% 98
- --------------------------------------------------------------------------------------------------------
Total non-interest expense 4,707 5.00% $ 4,483 1.45% $ 4,419
- --------------------------------------------------------------------------------------------------------
Efficiency Ratio 109.06% 92.20% 83.52%
- --------------------------------------------------------------------------------------------------------
(a) NOT MEANINGFUL
Total personnel costs increased 10.8%, or $291,000, in 2005, primarily due to
the Early Retirement and Consulting Agreement with the Company's former
President and Chief Executive Officer addressed below. This followed a 0.5%, or
$14,000, increase in 2004. The Company provides full health insurance benefits
to its employees and partial benefits to dependents of employees. Employee
health insurance costs were $247,000 in 2005, an increase of $2,000, or less
than 1% from 2004, and in 2004 the Company incurred an increase of $1,000, or
less than 1%, compared to 2003.
The Company provides retirement benefits under an Employee Stock Ownership Plan
("ESOP"). The cost of providing this benefit fluctuates with the price of the
Company's stock. The cost associated with this plan was $412,000 in 2005, down
from $475,000 in 2004 and $488,000 in 2003.
On January 7, 2005, the Company entered into an Early Retirement and Consulting
Agreement with its former President and Chief Executive Officer. During 2005,
the Company recognized $449,000 in expense with respect to this agreement, which
represents the discounted present value of the 36 monthly payments due to the
former President and Chief Executive Officer and interest accrued during 2005.
The only remaining expense relating to this agreement is the interest expense on
the discounted amount.
Advertising costs in 2005 declined by $92,000, or 58%, compared with 2004. This
was the result of a significant radio advertising campaign in 2004 which was not
continued in 2005.
Occupancy expenses increased nearly 9%, or $37,000, primarily due to increases
in repairs and in utility costs. There was a decrease of 2%, or $10,000 in 2004.
Ad Valorem taxes increased 10%, or $39,000, in 2005, following a decrease of
20%, or $96,000, in 2004. Included in this category is a tax that banks in
Louisiana pay in lieu of a state income tax. This tax, known as the bank shares
tax, is based on the value of their capital stock. This expense will fluctuate
based in part on the growth in Guaranty's equity and earnings and in part on
market valuation trends for the banking industry.
2005 ANNUAL REPORT PAGE 25
- --------------------------------------------------------------------------------
GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Professional fees increased 90%, or $95,000 in 2005, following a $12,000, or 13%
increase in 2004. This was primarily due to consulting costs associated with a
conversion of the Association's accounting and operating systems.
INCOME TAXES
Income tax benefit was $1.5 million in 2005, compared with $163,000 in 2004 and
an expense of $63,000 in 2003. The Company's effective tax rate in 2005 was
lower than the 34% federal statutory rate because of a valuation allowance
created due to the uncertainty of whether the Company can realize all of the
capital losses generated from the writedown of impairment losses on securities.
The Company's effective tax rates in 2004 and 2003 were lower than the 34%
federal statutory rate primarily because of credits received for dividend income
generated from equity investments. The decrease in tax expense throughout 2004
and 2005 was primarily due to lower earnings. See Note J to the financial
statements for additional information on the Company's effective tax rates and
the composition of changes in income tax expense for all periods.
CONTRACTUAL OBLIGATIONS
The following table summarized payments due from the Company under specified
long-term and certain other contractual obligations as of December 31, 2005.
Guaranty's only non-Company-owned banking facility is rented month-to-month
without a lease obligation. Obligations under deposit contracts are not
included. The maturities of time deposits are scheduled in Table 12 above in the
section on "Deposits".
TABLE 23. CONTRACTUAL OBLIGATIONS
- --------------------------------------------------------------------------------------------------------------------
($ IN THOUSANDS) PAYMENTS DUE BY PERIOD FROM DECEMBER 31, 2005
- --------------------------------------------------------------------------------------------------------------------
Total Less Than 1 Year 1-3 Years 3-5 Years More Than 5 Years
- --------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank Advances $ 32,106 $ 9,838 $ 22,268 $ - $ -
Total Obligations $ 32,106 $ 9,838 $ 22,268 $ - $ -
- --------------------------------------------------------------------------------------------------------------------
OFF-BALANCE SHEET OBLIGATIONS
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include mortgage and construction loan commitments
and commercial lines of credit. Those instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the balance sheet.
The Company's exposure to credit loss in the event of non-performance by the
other party to the financial instrument is represented by the contractual
notional amount of those instruments. The Company uses the same credit policies
in making commitments and conditional obligations as it does for on-balance
sheet instruments (see Note P of the "Notes to Consolidated Financial
Statements").
The Company's contingent liabilities and commitments as of December 31, 2005 are
as follows:
TABLE 24. OFF-BALANCE SHEET OBLIGATIONS
- --------------------------------------------------------------------------------------------------------------------
($ IN THOUSANDS) COMMITMENTS DUE BY PERIOD FROM DECEMBER 31, 2005
- --------------------------------------------------------------------------------------------------------------------
Total Less Than 1 Year 1-3 Years 3-5 Years More Than 5 Years
- --------------------------------------------------------------------------------------------------------------------
Mortgage Loan Commitments $ 588 $ 588 $ - $ - $ -
Construction Loan Commitments 8,092 8,092 - - -
Total Obligations $ 8,680 $ 8,680 $ - $ - $ -
- --------------------------------------------------------------------------------------------------------------------
2005 ANNUAL REPORT PAGE 26
- --------------------------------------------------------------------------------
GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information required for this item is included in the section entitled
"Asset/Liability Management" above. The assumptions used by management to
evaluate the vulnerability of the Association's operations to changes in
interest rates in Tables 17 and 18 are based on assumptions for timing of
prepayment. Although management finds these assumptions reasonable, the interest
rate sensitivity of the Association's assets and liabilities and the estimated
effects of changes in interest rates on the Association's net interest income
and net portfolio value indicated could vary substantially if different
assumptions were used or actual experience differs from such assumptions.
2005 ANNUAL REPORT PAGE 27
[LOGO LSRH]
LAPORTE SEHRT
ROMIG HAND
CERTIFIED PUBLIC ACCOUNTANTS
To The Board of Directors
GS FINANCIAL CORP. AND SUBSIDIARY
Metairie, Louisiana
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
We have audited the accompanying consolidated balance sheets of GS
FINANCIAL CORP. and its wholly-owned subsidiary, Guaranty Savings and Homestead
Association, as of December 31, 2005 and 2004, and the related consolidated
statements of (loss) income, comprehensive loss, changes in stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2005. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
GS FINANCIAL CORP. and its wholly-owned subsidiary, Guaranty Savings and
Homestead Association, as of December 31, 2005 and 2004, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2005, in conformity with accounting principles
generally accepted in the United States of America.
/s/ LAPORTE, SEHRT, ROMIG & HAND
A Professional Accounting Corporation
Metairie, Louisiana
January 26, 2006
110 VETERANS MEMORIAL BOULEVARD, SUITE 200, METAIRIE, LA 70005-4958
504.835.5522 o FAX 985.892.5956
5100 VILLAGE WALK, SUITE 202, COVINGTON, LA 70433-4012
985.892.5850 o FAX 985.892.5956
WWW.LAPORTE.COM
RSM MCGLADREY NETWORK
An Independent Owned Member
2005 ANNUAL REPORT PAGE 28
- ---------------------------------------------------------------------------------------------------
GS FINANCIAL CORP. AND SUBSIDIARY
- ---------------------------------------------------------------------------------------------------
Consolidated Balance Sheets
ASSETS
December 31,
---------------------------
2005 2004
------------ ------------
(IN THOUSANDS)
Cash and Amounts Due from Depository Institutions $ 3,040 $ 1,613
Interest-Bearing Deposits in Other Banks 4,515 3,761
Federal Funds Sold 15,000 1,650
------------ ------------
Total Cash and Cash Equivalents 22,555 7,024
Securities Available-for-Sale 77,344 94,557
Loans, Net of Allowance for Loan Losses of $5,713 and $920 69,657 92,158
Accrued Interest Receivable 1,627 596
Premises and Equipment, Net 2,257 2,508
Stock in Federal Home Loan Bank, at Cost 1,833 2,445
Real Estate Held-for-Investment, Net 478 493
Other Assets 1,863 285
------------ ------------
Total Assets $ 177,614 $ 200,066
============ ============
Liabilities and Stockholders' Equity
December 31,
---------------------------
2005 2004
------------ ------------
(IN THOUSANDS)
LIABILITIES
Deposits
Noninterest-bearing $ 2,195 $ 965
Interest-bearing 116,671 129,758
------------ ------------
Total Deposits 118,866 130,723
Advance Payments by Borrowers for Taxes and Insurance 127 296
FHLB Advances 32,106 39,689
Other Liabilities 1,108 414
------------ ------------
Total Liabilities 152,207 171,122
------------ ------------
STOCKHOLDERS' EQUITY
Preferred Stock - $.01 Par Value; 5,000,000 Shares Authorized,
None Issued - -
Common Stock - $.01 Par Value; 20,000,000 Shares Authorized
3,438,500 Shares Issued 34 34
Additional Paid-In Capital 34,565 34,425
Unearned ESOP Stock (239) (521)
Unearned RRP Trust Stock (698) (865)
Treasury Stock (2,154,469 Shares in 2005 and
2,150,562 Shares in 2004) at Cost (32,193) (32,119)
Retained Earnings 24,136 28,286
Accumulated Other Comprehensive Loss (198) (296)
------------ ------------
Total Stockholders' Equity 25,407 28,944
------------ ------------
Total Liabilities and Stockholders' Equity $ 177,614 $ 200,066
============ ============
The accompanying notes are an integral part of these financial statements.
2005 ANNUAL REPORT PAGE 29
- ----------------------------------------------------------------------------------------------------
GS FINANCIAL CORP. AND SUBSIDIARY
- ----------------------------------------------------------------------------------------------------
Consolidated Statements of (Loss) Income
For the Years Ended
December 31,
------------------------------------------
2005 2004 2003
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INTEREST AND DIVIDEND INCOME
Loans, Including Fees $ 6,658 $ 6,638 $ 5,938
Investment Securities 3,431 4,281 3,915
Other Interest Income 377 70 140
------------ ------------ ------------
Total Interest Income 10,466 10,989 9,993
------------ ------------ ------------
INTEREST EXPENSE
Deposits 2,987 3,227 3,332
Advances from Federal Home Loan Bank 1,869 2,209 2,846
------------ ------------ ------------
Total Interest Expense 4,856 5,436 6,178
------------ ------------ ------------
NET INTEREST INCOME 5,610 5,553 3,815
PROVISION FOR LOAN LOSSES 4,793 343 118
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 817 5,210 3,697
------------ ------------ ------------
NON-INTEREST (LOSS) INCOME
Net (Loss) Gain on Available-for-Sale Securities (1,295) (753) 1,375
Other Income 1 62 101
------------ ------------ ------------
Total Non-Interest (Loss) Income (1,294) (691) 1,476
------------ ------------ ------------
NON-INTEREST EXPENSES
Salaries and Employee Benefits 2,976 2,685 2,671
Occupancy Expense 458 429 431
Ad Valorem Taxes 435 403 492
Other Expenses 838 966 825
------------ ------------ ------------
Total Non-Interest Expenses 4,707 4,483 4,419
------------ ------------ ------------
(LOSS) INCOME BEFORE INCOME TAX (BENEFIT) EXPENSE (5,184) 36 754
INCOME TAX (BENEFIT) EXPENSE (1,508) (163) 63
------------ ------------ ------------
NET (LOSS) INCOME $ (3,676) $ 199 $ 691
============ ============ ============
(LOSS) EARNINGS PER SHARE - BASIC $ (3.11) $ 0.17 $ 0.58
============ ============ ============
(LOSS) EARNINGS PER SHARE - DILUTED $ (3.11) $ 0.17 $ 0.57
============ ============ ============
The accompanying notes are an integral part of these financial statements.
2005 ANNUAL REPORT PAGE 30
- ----------------------------------------------------------------------------------------------------
GS FINANCIAL CORP. AND SUBSIDIARY
- ----------------------------------------------------------------------------------------------------
Consolidated Statements of Comprehensive Loss
For the Years Ended
December 31,
------------------------------------------
2005 2004 2003
------------ ------------ ------------
(IN THOUSANDS)
NET (LOSS) INCOME $ (3,676) $ 199 $ 691
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX:
Unrealized Holding Losses Arising During the
Period (704) (910) (834)
Reclassification Adjustment for Losses (Gains)
Included in Net Income 802 459 (1,039)
------------ ------------ ------------
Total Other Comprehensive Income (Loss) 98 (451) (1,873)
------------ ------------ ------------
COMPREHENSIVE LOSS $ (3,578) $ (252) $ (1,182)
============ ============ ============
The accompanying notes are an integral part of these financial statements.
2005 ANNUAL REPORT PAGE 31
- ------------------------------------------------------------------------------------------------------------------------------------
GS FINANCIAL CORP. AND SUBSIDIARY
- ------------------------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 2005, 2004, and 2003
Accumulated
Additional Unearned Unearned Other Total
Common Paid-In Treasury ESOP RRP Trust Retained Comprehensive Stockholders'
Stock Capital Stock Stock Stock Earnings Income (Loss) Equity
-------- --------- --------- --------- --------- ---------- -------------- -------------
(IN THOUSANDS)
BALANCES AT JANUARY 1, 2003 $ 34 $ 34,040 $ (27,695) $ (1,083) $ (1,274) $ 28,334 $ 2,028 $ 34,384
Distribution of RRP Trust
Stock - (57) - - 215 - - 158
ESOP Compensation Earned - 248 - 281 - - - 529
Purchase of Treasury Stock - - (4,109) - - - - (4,109)
Dividends Declared - - - - - (472) - (472)
Net Income - Year Ended
December 31, 2003 - - - - - 691 - 691
Other Comprehensive Loss,
Net of Applicable
Deferred Income Taxes - - - - - - (1,873) (1,873)
-------- --------- --------- --------- --------- ---------- -------------- -------------
BALANCES AT DECEMBER 31, 2003 34 34,231 (31,804) (802) (1,059) 28,553 155 29,308
Distribution of RRP Trust
Stock - (51) - - 194 - - 143
ESOP Compensation Earned - 245 - 281 - - - 526
Purchase of Treasury Stock - - (315) - - - - (315)
Dividends Declared - - - - - (466) - (466)
Net Income - Year Ended
December 31, 2004 - - - - - 199 - 199
Other Comprehensive Loss,
Net of Applicable
Deferred Income Taxes - - - - - - (451) (451)
-------- --------- --------- --------- --------- ---------- -------------- -------------
BALANCES AT DECEMBER 31, 2004 34 34,425 (32,119) (521) (865) 28,286 (296) 28,944
Distribution of RRP Trust
Stock - (43) - - 167 - - 124
ESOP Compensation Earned - 183 - 282 - - - 465
Purchase of Treasury Stock - - (74) - - - - (74)
Dividends Declared - - - - - (474) - (474)
Net Loss - Year Ended
December 31, 2005 - - - - - (3,676) - (3,676)
Other Comprehensive Income,
Net of Applicable
Deferred Income Taxes - - - - - - 98 98
-------- --------- --------- --------- --------- ---------- -------------- -------------
BALANCES AT DECEMBER 31, 2005 $ 34 $ 34,565 $ (32,193) $ (239) $ (698) $ 24,136 $ (198) $ 25,407
======== ========= ========= ========= ========= ========== ============== =============
The accompanying notes are an integral part of these financial statements.
2005 ANNUAL REPORT PAGE 32
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GS FINANCIAL CORP. AND SUBSIDIARY
- -------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
For the Years Ended
December 31,
------------------------------------------
2005 2004 2003
------------ ------------ ------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net (Loss) Income $ (3,676) $ 199 $ 691
Adjustments to Reconcile Net (Loss) Income to Net Cash
Provided by (Used in) Operating Activities:
Depreciation 154 142 142
Discount Accretion Net of Premium Amortization (80) (46) (19)
Provision for Loan Losses 4,793 343 118
Non-Cash Dividend - FHLB Stock (81) (46) (114)
Net Loan Fees 2 - 2
Mutual Fund Dividends Reinvested - (1,347) (1,357)
ESOP Expense 465 526 529
RRP Expense 119 128 168
(Gain) Loss on Sale of Foreclosed Real Estate (40) 31 (8)
Loss (Gain) on Sale of Investments 18 256 (1,375)
Loss on Write-Down of Investments 1,277 497 -
Deferred Income Tax Benefit (1,722) (387) (96)
Changes in Operating Assets and Liabilities:
(Increase) Decrease in Accrued Interest Receivable (1,025) (49) 91
(Increase) Decrease in Prepaid Income Taxes (16) 41 75
Decrease (Increase) in Other Assets 54 (17) (37)
Increase (Decrease) in Accrued Interest - FHLB Advances 27 (157) (112)
Increase in Accrued Income Tax 83 65 -
Increase (Decrease) in Other Liabilities 894 258 (9)
------------ ------------ ------------
Net Cash Provided by (Used in) Operating Activities 1,246 437 (1,311)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Maturities of Investment Securities 8,872 8,594 62,276
Proceeds from Sales of Investment Securities 19,631 11,395 8,299
Purchases of Investment Securities (12,077) (11,941) (49,083)
(Investment in) Redemption of Mutual Funds, Net (133) 16,623 (32,138)
Loan Originations and Principal Collections, Net 17,312 (15,492) 736
Purchases of Premises and Equipment (49) (41) (47)
Proceeds from Sales of Foreclosed Real Estate 199 403 73
Investment in Foreclosed Real Estate (5) (24) (6)
Redemption of Federal Home Loan Bank Stock 692 327 2,849
------------ ------------ ------------
Net Cash Provided by (Used in) Investing Activities 34,442 9,844 (7,041)
------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
2005 ANNUAL REPORT PAGE 33
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GS FINANCIAL CORP. AND SUBSIDIARY
- -------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Cash Flows (Continued)
For the Years Ended
December 31,
------------------------------------------
2005 2004 2003
------------ ------------ ------------
(IN THOUSANDS)
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of Treasury Stock (74) (315) (4,109)
Decrease in Advances from Federal Home Loan Bank (7,583) (2,446) (24,257)
Payment of Cash Stock Dividends (474) (466) (472)
(Decrease) Increase in Deposits (11,857) (11,385) 35,327
Decrease in Deposits for Escrows (169) (16) (118)
------------ ------------ ------------
Net Cash (Used in) Provided by Financing Activities (20,157) (14,628) 6,371
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 15,531 (4,347) (1,981)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 7,024 11,371 13,352
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 22,555 $ 7,024 $ 11,371
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash Paid During the Year for:
Interest $ 4,883 $ 5,593 $ 6,489
Income Taxes 109 118 69
Loans Transferred to Foreclosed Real Estate
During the Year 154 358 111
Market Value Adjustment for Gain (Loss)
on Securites Available-for-Sale 148 (682) (2,852)
The accompanying notes are an integral part of these financial statements.
2005 ANNUAL REPORT PAGE 34
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GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
GS FINANCIAL CORP. (Company) was organized as a Louisiana
corporation on December 24, 1996, for the purpose of becoming the
holding company of Guaranty Savings and Homestead Association
(Association) in anticipation of converting the Association from a
Louisiana chartered mutual savings and loan association to a Louisiana
chartered stock savings and loan association. The Association operates
in the savings and loan industry and as such provides financial services
to individuals, corporate entities and other organizations through the
origination of loans and the acceptance of deposits in the form of
passbook savings, certificates of deposit, and demand deposit accounts.
The Association is subject to competition from other financial
institutions, and is also subject to the regulations of certain Federal
and State agencies and undergoes periodic examinations by those
regulatory authorities.
BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary, Guaranty Savings and
Homestead Association. All significant inter-company balances and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
In preparing consolidated financial statements in conformity
with accounting principles generally accepted in the United States of
America, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of
the balance sheets and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for losses on loans
and valuation of foreclosed real estate.
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Company's activities are with customers located
within the Greater New Orleans area in Louisiana. Note B discusses the
types of securities in which the Company invests. Note C discusses the
types of lending in which the Company engages. The Company does not have
any significant concentrations in any one industry or to any one
customer.
CASH AND CASH EQUIVALENTS
For the purposes of the Consolidated Statements of Cash Flows,
cash and cash equivalents include cash and balances due from banks,
federal funds sold and securities purchased under agreements to resell,
all of which mature within ninety days.
SECURITIES AVAILABLE-FOR-SALE
Marketable securities are classified as "available-for-sale" and
recorded at fair value, with unrealized gains and losses excluded from
earnings and reported in other comprehensive income.
2005 ANNUAL REPORT PAGE 35
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GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SECURITIES AVAILABLE-FOR-SALE (CONTINUED)
Purchase premiums and discounts are recognized in interest
income over the terms of the securities. Gains and losses on sales of
securities are recorded on the trade date and are determined using the
specific identification method.
LOANS
The Company, through the Association, grants mortgage,
commercial and construction loans, and lines of credit to customers. A
substantial portion of the loan portfolio is represented by mortgage
loans throughout the Greater New Orleans area. The ability of the
Company's debtors to honor their contracts is dependent upon the real
estate and general economic conditions in this area.
Loans are reported at their outstanding unpaid principal balance
adjusted for charge-offs, the allowance for loan losses, and any
deferred fees or costs on originated loans. Interest income is accrued
on the unpaid principal balance. Loan origination and commitment fees,
as well as certain direct origination costs, are deferred and amortized
as a yield adjustment over the lives of the related loans using the
interest method. Amortization of net deferred loan fees or costs is
discontinued when a loan is placed on non-accrual status.
The accrual of interest on loans is discontinued at the time the
loan is 90 days past due. At that time, uncollected interest previously
recorded is reversed. If the delinquent interest is subsequently
collected, it is credited to income in the period collected. Interest on
impaired loans is discontinued when in management's opinion the borrower
may be unable to meet payments as they become due.
Subsequent to Hurricane Katrina, the Association deferred loan
payments for certain loans for the months of September, October and
November 2005. Interest continued to accrue at the contract rate, and
unpaid interest for these months will be due at maturity. For loans
which were performing prior to Katrina, the deferral period was not
considered in measuring delinquency and performing status.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established as losses are
estimated to have occurred through a provision for loan losses charged
to earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
Association's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to
pay, the estimated value of underlying collateral, and prevailing
economic conditions. This evaluation is inherently subjective, as it
requires estimates that are susceptible to significant revision as more
information becomes available.
2005 ANNUAL REPORT PAGE 36
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GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR LOAN LOSSES (CONTINUED)
A loan is considered impaired when, based on current information
and events, it is probable the Association will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status, collateral
value, and the probability of collecting scheduled principal and
interest payments when due. Impairment is measured on a loan by loan
basis by either the present value of expected future cash flows
discounted at the loan's effective interest rate, the loan's obtainable
market price, or the fair value of the collateral if the loan is
collateral dependent.
FORECLOSED ASSETS
Assets acquired through, or in lieu of, loan foreclosure are
held for sale and are initially recorded at the lower of the related
loan balance or fair value less estimated cost to sell at the date of
foreclosure. Management periodically performs valuations, and an
allowance for losses will be established to reduce the net carrying
value to net realizable value if necessary. Costs related to improvement
of the property are capitalized, whereas costs related to holding the
property are charged to operations.
PREMISES AND EQUIPMENT
Land is carried at cost. Buildings and equipment are carried at
cost, less accumulated depreciation computed on the straight-line method
over the estimated useful lives of the assets. Estimated useful lives of
premises and equipment range as follows:
Building and Improvements 10 - 39 Years
Furniture and Equipment 3 - 7 Years
REAL ESTATE HELD-FOR-INVESTMENT
Real estate held-for-investment consists of a multi-suite office
building at a former branch location of the Association. The Company
leases two of the four suites to the Association which serves as a
branch office location. The remaining two suites are leased by unrelated
third parties.
INCOME TAXES
The Company and its wholly-owned subsidiary file a consolidated
Federal income tax return on a calendar year basis. Each entity pays its
pro rata share of income taxes in accordance with a written tax-sharing
agreement.
Deferred income tax assets and liabilities are determined using
the liability (or balance sheet) method. Under this method, the net
deferred tax asset or liability is determined based on the tax effects
of the temporary differences between the book and tax bases of the
various balance sheet assets and liabilities and gives current
recognition to change in tax rates and laws.
While the Association is exempt from Louisiana income tax, it is
subject to the Louisiana Ad Valorem tax that is based on stockholders'
equity and net income.
2005 ANNUAL REPORT PAGE 37
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GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK COMPENSATION PLANS
Statement of Financial Accounting Standards (SFAS) No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, encourages all entities to
adopt a fair value based method of accounting for employee stock
compensation plans, whereby compensation cost is measured at the grant
date based on the value of the award and is recognized over the service
period, which is usually the vesting period. However, it also allows an
entity to continue to measure compensation costs for those plans using
the intrinsic value based method of accounting prescribed in Accounting
Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, whereby compensation cost is the excess, if any, of the
quoted market price of the stock at the grant date over the amount an
employee must pay to acquire the stock. Stock options issued under the
Corporation's stock option plan have no intrinsic value at the grant
date, and under Opinion No. 25, no compensation cost is recognized for
them.
During 2005, the FASB revised SFAS No. 123. SFAS No. 123(R)
replaced SFAS No. 123 and superceded APB Opinion No. 25. This Statement
required a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the
grant-date fair value of the award. That cost is to be recognized over
the period during which an employee is required to provide service in
exchange for the award. The adoption had no impact on the Company's
interim or annual financial statements for 2005, since the options
issued had fully vested in 2002.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising
costs were $67,000, $159,000, and $85,000 for the years ended December
31, 2005, 2004 and 2003, respectively.
COMPREHENSIVE INCOME
Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses
on available-for-sale securities, are reported as a separate component
of the equity section of the balance sheets; such items, along with net
income, are components of comprehensive income.
RECENT ACCOUNTING PRONOUNCEMENTS
During 2005, the Company adopted SFAS No. 123(R), which revised
SFAS No. 123, SHARE-BASED PAYMENT. SFAS No. 123(R) replaces SFAS No. 123
and superceded APB Opinion No. 25. This Statement required a public
entity to measure the cost of employee services received in exchange for
an award of equity instruments based on the grant date fair value of the
award. That cost is to be recognized over the period during which an
employee is required to provide service in exchange for the award. The
adoption had no impact on the Company's interim or annual financial
statements for 2005, since options issued by the Company under its stock
option plan had fully vested in 2002.
2005 ANNUAL REPORT PAGE 38
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GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In May 2005, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 154, ACCOUNTING CHANGES AND ERROR CORRECTIONS. This
Statement replaces APB Opinion No. 20, ACCOUNTING Changes, and SFAS No.
3, REPORTING ACCOUNTING CHANGES IN INTERIM FINANCIAL STATEMENTS, and
changes the requirements for the accounting for and reporting of a
change in accounting principle. This Statement requires retrospective
application of changes in accounting principle to prior periods'
financial statements, unless impracticable, and enhances the consistency
of financial information between periods. This Statement is effective
for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005.
In 2005, the FASB issued Interpretation No. 47, ACCOUNTING FOR
CONDITIONAL ASSET RETIREMENT OBLIGATIONS. This Interpretation clarifies
that the term "conditional asset retirement obligation", as used in SFAS
No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS, refers to a legal
obligation to perform an asset retirement activity in which the timing
and/or method of settlement are conditional on a future event that may
or may not be within the control of the entity. In addition, this
Interpretation clarifies that an entity is required to recognize a
liability for the fair value of a conditional asset retirement
obligation when incurred if the liability's fair value can be reasonably
estimated. The Interpretation had no effect on the Company's financial
statements.
In February 2006, the FASB issued SFAS No. 155, ACCOUNTING FOR
CERTAIN HYBRID FINANCIAL INSTRUMENTS. This Statement amends SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, to
narrow the scope of exception for interest-only and principal-only
strips on debt instruments to include only such strips representing
rights to receive a specified portion of the contractual interest or
principal cash flows. SFAS No. 155 also amends SFAS No. 140, ACCOUNTING
FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF
LIABILITIES, to allow qualifying special-purpose entities to hold a
passive derivative financial instrument pertaining to beneficial
interests that itself is a derivative instrument. SFAS No. 155 is
effective for all financial instruments acquired or issued following the
start of an entity's first fiscal year beginning after September 15,
2006.
2005 ANNUAL REPORT PAGE 39
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GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B
SECURITIES AVAILABLE-FOR-SALE
The amortized costs and fair value of securities
available-for-sale, with gross unrealized gains and losses, follows:
December 31, 2005
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ------------ ----------- ------------
(IN THOUSANDS)
Debt Securities
U.S. Government and Federal Agencies $ 5,488 $ 6 $ 45 $ 5,449
Mortgage-Backed Securities 94 6 - 100
Collateralized Mortgage Obligations 22,741 23 268 22,496
----------- ------------ ----------- ------------
Total Debt Securities 28,323 35 313 28,045
----------- ------------ ----------- ------------
Marketable Equity Securities
Mutual Funds 49,320 - 21 49,299
----------- ------------ ----------- ------------
Total Marketable Equity Securities 49,320 - 21 49,299
----------- ------------ ----------- ------------
Total Securities Available-for-Sale $ 77,643 $ 35 $ 334 $ 77,344
=========== ============ =========== ============
December 31, 2004
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ------------ ----------- ------------
(IN THOUSANDS)
Debt Securities
U.S. Government and Federal Agencies $ 801 $ 31 $ - $ 832
Mortgage-Backed Securities 223 15 - 238
Collateralized Mortgage Obligations 24,340 215 74 24,481
----------- ------------ ----------- ------------
Total Debt Securities 25,364 261 74 25,551
----------- ------------ ----------- ------------
Marketable Equity Securities
Mutual Funds 50,292 - 635 49,657
FHLMC Preferred Stock 19,349 - - 19,349
----------- ------------ ----------- ------------
Total Marketable Equity Securities 69,641 - 635 69,006
----------- ------------ ----------- ------------
Total Securities Available-for-Sale $ 95,005 $ 261 $ 709 $ 94,557
=========== ============ =========== ============
2005 ANNUAL REPORT PAGE 40
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GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B
SECURITIES - AVAILABLE-FOR-SALE (CONTINUED)
The Company's investment in FHLMC common and preferred stock at
December 31, 2004 represents an investment in securities, which pay a
stated rate of interest quarterly of which 70% is exempt from Federal
income tax. This FHLMC preferred stock contains call options from 2004
to 2009.
The amortized cost and fair value of debt securities by
contractual maturity at December 31, 2005, follows. Debt securities with
scheduled repayments, such as mortgage-backed-securities and
collateralized mortgage obligations are presented in separate totals.
Amortized
Cost Fair Value
----------- ----------
(IN THOUSANDS)
Amounts Maturing in:
Within One Year $ 500 $ 506
One to Five Years - -
Five to Ten Years 4,988 4,943
---------- ----------
5,488 5,449
Mortgage-Backed Securities 94 100
Collateralized Mortgage Obligations 22,741 22,496
---------- ----------
$ 28,323 $ 28,045
========== ==========
For the years ended December 31, 2005, 2004 and 2003, proceeds
from the sale of securities available-for-sale amounted to $19,631,000,
$11,395,000, and $8,299,000, respectively. Gross realized gains amounted
to $92,000, $9,000, and $1,375,000, respectively. Gross realized losses
in 2005 and 2004 were $110,000 and $265,000, respectively. There were no
realized losses in 2003.
In addition to the sales of securities available-for-sale during
the year ended December 31, 2004, the Company also redeemed shares of
its investment in mutual funds. Proceeds from the redemption of these
shares amounted to $20,828,000, and the Company realized losses of
$262,000 on these redemptions. There were no redemptions in 2005 and
2003.
In accordance with the Company's policy to review the investment
portfolio for declines that may be other than temporary, non-cash losses
of approximately $1,277,000 and $497,000 were recorded on certain
available-for-sale securities in 2005 and 2004.
No securities were pledged at December 31, 2005 and 2004.
2005 ANNUAL REPORT PAGE 41
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GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B
SECURITIES AVAILABLE-FOR-SALE (CONTINUED)
Information pertaining to securities with gross unrealized
losses at December 31, 2005, aggregated by investment category and
length of time that individual securities have been in a continuous loss
position follows:
Less Than Twelve Months Over Twelve Months
-------------------------- --------------------------
Gross Gross
Unrealized Fair Unrealized Fair
Losses Value Losses Value
------------ ----------- ------------ -----------
(IN THOUSANDS)
U.S. Government and Federal Agencies $ - $ - $ 45 $ 4,944
Mortgage-Backed Securities - - - -
Collateralized Mortgage Obligations 139 5,951 129 10,354
Marketable Equity Securities - - 21 427
------------ ----------- ------------ -----------
Total Securities $ 139 $ 5,951 $ 195 $ 15,725
============ =========== ============ ===========
The Company's investment in equity securities consists primarily
of shares of an adjustable rate mortgage loan mutual fund. The
unrealized losses associated with this fund were caused by interest rate
increases, and the timing between when these rate increases took place
compared to the resulting adjustment in rates in the underlying mortgage
loans. These losses have increased throughout the Company's holding
period, and it is uncertain whether the Company will hold the securities
long enough for a recovery to fair value to occur. Based on this
assessment the Company elected to deem the securities as
"other-than-temporarily" impaired as of December 31, 2005 and recognized
a $1,277,000 impairment loss.
2005 ANNUAL REPORT PAGE 42
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GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C
LOANS
A summary of the balances of loans follows:
December 31,
---------------------------
2005 2004
------------ ------------
(IN THOUSANDS)
Loans Secured by First Mortgages on Real Estate:
1-4 Family Residential $ 36,800 $ 45,007
Construction 11,282 8,233
Commercial Real Estate 13,989 20,390
Other 10,805 15,753
------------ ------------
Total Real Estate Loans 72,876 89,383
Consumer Loans 669 629
Commercial Loans 1,819 3,058
------------ ------------
Total Loans 75,364 93,070
Allowance for Loan Losses (5,713) (920)
Net Deferred Loan Origination Costs 6 8
------------ ------------
Loans, Net $ 69,657 $ 92,158
============ ============
An analysis of the allowance for loan losses is as follows:
Years Ended December 31,
------------------------------------------
2005 2004 2003
------------ ------------ ------------
(IN THOUSANDS)
Balance, Beginning of Year $ 920 $ 601 $ 483
Provision for Losses 4,793 343 118
Loans Charged-off - (24) -
------------ ------------ ------------
Balance, End of Year $ 5,713 $ 920 $ 601
============ ============ ============
2005 ANNUAL REPORT PAGE 43
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GS FINANCIAL CORP. AND SUBSIDIARY
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C
LOANS (CONTINUED)
Loans receivable as of December 31, 2005, are scheduled to
mature and adjustable rate loans are scheduled to reprice as follows:
Under One One to Five Six to Ten Over Ten
Year Years Years Years Total
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
1-4 Family - Fixed Rate $ 347 $ 1,699 $ 3,653 $ 27,595 $ 33,294
Other Real Estate - Fixed Rate 7,283 9,257 6,914 11,602 35,056
Commercial - Fixed Rate 6,606 - 2 - 6,608
All Other Loans 295 - - 357 652
----------- ----------- ----------- ----------- -----------
$ 14,531 $ 10,956 $ 10,569 $ 39,554 $ 75,610
=========== =========== =========== =========== ===========
Loans for which impairment had been recognized totaled
approximately $11,841,000 and $4,752,000 at December 31, 2005 and 2004,
respectively. The increase in 2005 can be attributed to uncertainties
following Hurricane Katrina. The valuation allowance related to impaired
loans amounted to $3,764,000 and $509,000 at December 31, 2005 and 2004,
respectively. The amount of interest income that would have been
recorded on impaired loans at December 31, 2005 and 2004, was $230,000
and $71,000, respectively.
In the ordinary course of business, the Company has granted
loans to principal officers and directors and their affiliates. In the
opinion of management, such transactions were on substantially the same
terms, including interest rates and collateral, as those prevailing at
the time of comparable transactions with other persons and did not
involve more than a normal risk of collectibility or present any other
unfavorable features to the Association. An analysis of the changes in
loans to such borrowers follows:
December 31,
----------------------------
2005 2004
------------ ------------
(IN THOUSANDS)
Balance, Beginning of Year $ 763 $ 888
Additions - 242
Payments and Renewals (541) (367)
------------ ------------
Balance, End of Year $ 222 $ 763
============ ============
2005 ANNUAL REPORT PAGE 44
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GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C
LOANS (CONTINUED)
The Company's lending activity is concentrated within the
metropolitan New Orleans area and surrounding parishes, with its major
emphasis in the origination of permanent single-family dwelling loans
and real-estate secured commercial loans. Such loans comprise the
majority of the Company's loan portfolio.
NOTE D
ACCRUED INTEREST RECEIVABLE
Accrued interest receivable increased substantially in 2005 as
the result of deferring three months of payments on most loans
immediately following Hurricane Katrina. The deferred interest will be
collected at the time of maturity or payoff. Accrued interest receivable
at December 31, 2005 and 2004, consists of the following:
December 31,
---------------------------
2005 2004
------------ ------------
(IN THOUSANDS)
Loans $ 1,424 $ 454
Securities 203 142
------------ ------------
Total Accrued Interest $ 1,627 $ 596
============ ============
NOTE E
FORECLOSED ASSETS
A summary of the activity of the Foreclosed Assets account
follows:
December 31,
---------------------------
2005 2004
------------ ------------
(IN THOUSANDS)
Balance, Beginning of Year $ - $ 52
Acquired in Settlement of Loans 154 358
Costs Capitalized 5 24
Sales of Foreclosed Assets (159) (434)
------------ ------------
$ - $ -
============ ============
Expenses applicable to foreclosed assets consist of operating
expenses, net of rental income. The Company incurred net expenses
associated with foreclosed real estate of approximately $2,000, $1,000,
and $-0- for the years ended December 31, 2005, 2004, and 2003,
respectively.
2005 ANNUAL REPORT PAGE 45
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GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F
PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation of premises
and equipment follows:
December 31,
---------------------------
2005 2004
------------ ------------
(IN THOUSANDS)
Land $ 952 $ 952
Buildings and Improvements 1,702 2,074
Furniture, Fixtures and Equipment 829 774
------------ ------------
3,483 3,800
Accumulated Depreciation and Amortization (1,226) (1,292)
------------ ------------
$ 2,257 $ 2,508
============ ============
Depreciation expense for the years ended December 31, 2005, 2004
and 2003 was approximately $139,000, $124,000, and $124,000,
respectively. During 2005, the Association recognized an impairment
charge of $159,000 relating to fixed assets damaged as a result of
Hurricane Katrina.
NOTE G
REAL ESTATE HELD-FOR-INVESTMENT
Real estate held-for-investment, which consists of a multi-suite
office building located on the property of a former branch location of
the Association, is summarized below:
December 31,
---------------------------
2005 2004
------------ ------------
(IN THOUSANDS)
Land $ 226 $ 226
Buildings and Improvements 320 320
------------ ------------
546 546
Accumulated Depreciation and Amortization (68) (53)
------------ ------------
$ 478 $ 493
============ ============
Depreciation expense for each of the years ended December 31,
2005, 2004 and 2003 was $15,000, $18,000 and $18,000, respectively.
In 2005, the Company realized $53,000 in rental income from this
property. During 2004 and 2003, the Company had $48,000 in such rental
income.
2005 ANNUAL REPORT PAGE 46
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GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H
DEPOSITS
Deposit account balances at December 31, 2005 and 2004, are
summarized as follows:
Weighted Average Account Balances at December 31,
Rate at --------------------------------------------
December 31, 2005 2004
------------------ -------------------- --------------------
2005 2004 Amount Percent Amount Percent
-------- -------- -------- --------- -------- ---------
(IN THOUSANDS)
Balance by Interest Rate
Demand Deposit Accounts 1.03% 1.13% $ 10,395 8.75% $ 9,956 7.62%
Savings Accounts 1.25% 1.25% 31,997 26.92% 33,425 25.57%
Certificates of Deposit 3.35% 2.80% 76,474 64.34% 87,342 66.81%
-------- --------- -------- ---------
$118,866 100.00% $130,723 100.00%
======== ========= ======== =========
Certificate Accounts Maturing
One Year or Less $ 46,093 60.27% $ 63,777 73.02%
One to Two Years 14,278 18.67% 19,205 21.99%
Two to Three Years 11,175 14.61% 3,062 3.51%
Three to Five Years 4,928 6.44% 1,298 1.48%
-------- --------- -------- ---------
$ 76,474 100.00% $ 87,342 100.00%
======== ========= ======== =========
The aggregate amount of time deposits in denominations of
$100,000 or more at December 31, 2005 and 2004, was approximately
$8,107,000 and $22,067,000, respectively.
Interest expense for each of the following periods is as
follows:
Years Ended December 31,
------------------------------------------
2005 2004 2003
------------ ------------ ------------
(IN THOUSANDS)
Certificates of Deposit $ 2,508 $ 2,653 $ 2,644
NOW Accounts 97 120 119
Passbook Savings 382 454 569
------------ ------------ ------------
$ 2,987 $ 3,227 $ 3,332
============ ============ ============
The Company held deposits of approximately $1,552,000 and
$1,487,000 for related parties at December 31, 2005 and 2004,
respectively.
2005 ANNUAL REPORT PAGE 47
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GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I
BORROWINGS
Pursuant to collateral agreements with the Federal Home Loan
Bank (FHLB), advances issued by the Federal Home Loan Bank are secured
by a blanket floating lien on first mortgage loans and certain pledged
CMO's. Total interest expense recognized on FHLB Advances in 2005, 2004,
and 2003 was $1,869,000, $2,209,000, and $2,846,000, respectively.
Advances consisted of the following at December 31, 2005 and
2004, respectively.
FHLB Advance Total
----------------------------
Contract Rate 2005 2004
----------------- ------------ ------------
(IN THOUSANDS)
2% - 2.99% $ 5,000 $ 5,000
5% - 5.99% 27,106 30,571
6% - 6.99% - 4,118
------------ ------------
$ 32,106 $ 39,689
============ ============
Maturities of FHLB Advances at December 31, 2005, for each of
the next three years are as follows:
Year Ending Amount
December 31, Maturing
----------------- ------------
(IN THOUSANDS)
2006 $ 15,056
2007 5,513
2008 11,537
------------
$ 32,106
============
NOTE J
INCOME TAX EXPENSE
The provision for income taxes for 2005, 2004 and 2003 consists
of the following:
Years Ended December 31,
------------------------------------------
2005 2004 2003
------------ ------------ ------------
(IN THOUSANDS)
Current Tax Expense $ - $ 187 $ 140
Deferred Tax Benefit (1,508) (350) (77)
------------ ------------ ------------
$ (1,508) $ (163) $ 63
============ ============ ============
2005 ANNUAL REPORT PAGE 48
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GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J
INCOME TAX EXPENSE (CONTINUED)
The provision for Federal income taxes differs from that
computed by applying Federal statutory rates to income (loss) before
Federal income tax expense, as indicated in the following analysis:
Years Ended December 31,
------------------------------------------
2005 2004 2003
------------ ------------ ------------
(IN THOUSANDS)
Expected Tax Provision at a 34% Rate $ (1,762) $ 12 $ 256
Expected State Corporate Tax (4) - 1
Effect of Tax Exempt Income - (263) (212)
Employee Stock Ownership Plan 37 109 36
Valuation Allowance on Capital Loss 241 - -
Other (20) (21) (18)
------------ ------------ ------------
$ (1,508) $ (163) $ 63
============ ============ ============
Deferred tax liabilities have been provided for the temporary
differences related to unrealized gains on available-for-sale
securities, deferred loan costs, depreciation, the allowance for loan
losses, and non-cash Federal Home Loan Bank dividends. Deferred tax
assets have been provided for the temporary differences related to the
Company's Recognition and Retention Plan and Employee Stock Ownership
Plan, reserves for uncollected interest and late charges, deferred loan
fees, and the allowance for losses on foreclosed real estate. The net
deferred tax assets or liabilities in the accompanying consolidated
balance sheets include the following components:
2005 2004
------------ ------------
(IN THOUSANDS)
Deferred Tax Assets
Recognition and Retention Plan $ 9 $ 12
Employee Stock Ownership Plan 32 60
Recognition of Other-than-Temporary Decline in
Market Value of Available-for-Sale Securities 434 169
Market Value Adjustment to Available-for-Sale Securities 102 152
Net Operating Loss Carryforward 585 -
Capital Loss Carryforward 172 -
Allowance for Loan Losses 510 -
Other 54 109
------------ ------------
Total Deferred Tax Assets $ 1,898 $ 502
------------ ------------
2005 ANNUAL REPORT PAGE 49
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GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J
INCOME TAX EXPENSE (CONTINUED)
2005 2004
------------ ------------
(IN THOUSANDS)
Deferred Tax Liabilities
FHLB Stock Dividends $ (438) $ (410)
Other (63) (68)
------------ ------------
Total Deferred Tax Liabilities (501) (478)
------------ ------------
Valuation Allowance (241) -
------------ ------------
Net Deferred Tax Asset $ 1,156 $ 24
============ ============
SFAS No. 109 requires a valuation allowance to be recorded when
it is more likely than not that some or all of the deferred tax assets
will not be realized. At December 31, 2005, a valuation allowance of
$241,000 for approximately 50% of the recognition in
other-than-temporary decline of market value of available-for-sale
securities was recorded because of uncertainties as to the amount of
capital gains that would be generated in future years.
Included in retained earnings at December 31, 2005 and 2004, is
approximately $3,800,000 in bad debt reserves for which no deferred
Federal income tax liability has been recorded. These amounts represent
allocations of income to bad debt deductions for tax purposes only.
Reduction of these reserves for purposes other than tax bad-debt losses
or adjustments arising from carryback of net operating losses would
create income for tax purposes, which would be subject to the
then-current corporate income tax rate. The unrecorded deferred
liability on these amounts was approximately $1,292,000 for December 31,
2005 and 2004, respectively.
NOTE K
EMPLOYEE STOCK OWNERSHIP PLAN
During 1997, GS Financial Corp. instituted an employee stock
ownership plan. The GS Financial Corp. Employee Stock Ownership Plan
(ESOP) enables all eligible employees of the Bank to share in the growth
of the Company through the acquisition of stock. Employees are generally
eligible to participate in the ESOP after completion of one year of
service and attaining age 21.
The ESOP purchased eight percent of the shares offered in the
initial public offering of the Company (275,080 shares). This purchase
was facilitated by a loan from the Company to the ESOP in the amount of
$2,750,800. The loan is secured by a pledge of the ESOP shares. The
shares pledged as collateral are reported as unearned ESOP shares in the
balance sheets. The corresponding note is to be paid back in 40 equal
quarterly payments of $103,000 on the last business day of each quarter,
beginning June 30, 1997, at the rate of 8.5%. The note payable and the
corresponding note receivable have been eliminated for consolidation
purposes.
2005 ANNUAL REPORT PAGE 50
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GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K
EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)
The Company may contribute to the plan, in the form of debt
service, at the discretion of its Board of Directors. Dividends received
on the ESOP shares are utilized to service the debt. Shares are released
for allocation to plan participants based on principal and interest
payments of the note. Compensation expense is recognized based on the
number of shares allocated to plan participants each year and the
average market price of the stock for the current year. Released ESOP
shares become outstanding for earnings per share computations.
As compensation expense is incurred, the Unearned ESOP Shares
account is reduced based on the original cost of the stock. The
difference between the cost and average market price of shares released
for allocation is applied to Additional Paid-In Capital. ESOP
compensation expense was approximately $412,000, $475,000, and $488,000
for the years ended December 31, 2005, 2004 and 2003, respectively.
The ESOP shares as of December 31, 2005 and 2004 were as
follows:
2005 2004
------------ ------------
Allocated Shares 156,602 156,756
Shares Released for Allocation 28,132 28,132
Unreleased Shares 23,922 52,054
------------ ------------
Total ESOP Shares 208,656 236,942
============ ============
Fair Value of Unreleased Shares (IN THOUSANDS) $ 359 $ 937
============ ============
Stock Price at December 31 $ 15.00 $ 18.00
============ ============
Total ESOP shares decreased in 2005 and 2004, due to the release
of shares for employees who terminated their employment in 2005 and
2004.
NOTE L
RECOGNITION AND RETENTION PLAN
On October 15, 1997, the Company established a Recognition and
Retention Plan (the Plan) as an incentive to retain personnel of
experience and ability in key positions. The Company approved a total of
137,540 shares of stock to be acquired for the Plan, of which 125,028
shares were allocated for distribution to key employees and directors.
In 2005, 1,769 shares were forfeited due to the expiration of a
director's term. During 2004, 2,358 awarded shares were forfeited due to
the resignation of a director, and during 2003, 2,500 awarded shares
were forfeited due to the resignation of a member of management. The
Company granted 2,355 shares to a new director during 2004.
2005 ANNUAL REPORT PAGE 51
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GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L
RECOGNITION AND RETENTION PLAN (CONTINUED)
As shares are acquired for the Plan, the purchase price of these
shares is recorded as unearned compensation, a contra equity account. As
the shares are distributed, the contra equity account is reduced.
During 1998, with unanimous approval of the Plan participants,
the Plan was amended by the Board as a direct effort to reduce the
Company's expenses resulting from the Plan. Prior to the amendment to
the Plan, Plan share awards were earned by recipients at a rate of 20%
of the aggregate number of shares covered by the Plan over five years.
The amended Plan stipulates that Plan share awards are earned by
recipients at a rate of 10% of the aggregate number of shares covered by
the plan over ten years. If the employment of an employee or service as
a non-employee director is terminated prior to the tenth anniversary of
the date of grant of Plan share award for any reason (except for death,
disability or retirement), the recipient shall forfeit the right to any
shares subject to the awards which have not been earned.
Compensation expense pertaining to the Recognition and Retention
Plan was $119,000, $128,000, and $169,000 for the years ended December
31, 2005, 2004 and 2003, respectively. The higher expense in 2003 was
attributable to a lump sum distribution of the remaining awarded shares
under the terms of the Plan to a member of the Board of Directors who
retired for health reasons.
A summary of the changes in restricted stock follows:
Unawarded Shares Awarded Shares
--------------------------- ---------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Balance, Beginning of Year 14,975 14,972 33,063 44,477
Purchased by Plan - - - -
Granted - (2,355) - 2,355
Forfeited 1,769 2,358 (1,769) (2,358)
Earned and Issued - - (9,883) (11,411)
------------ ------------ ------------ ------------
Balance, End of Year 16,744 14,975 21,411 33,063
============ ============ ============ ============
NOTE M
STOCK OPTION PLAN
In 1997, the Company adopted a stock option plan for the benefit
of directors, officers, and other key employees. The number of shares of
common stock reserved for issuance under the stock option plan was
343,850 shares, or ten percent of the total number of shares of common
stock sold in the Company's initial public offering of its common stock.
The plan also permits the granting of Stock Appreciation Rights
(SARs). SARs entitle the holder to receive, in the form of cash or
stock, the increase in the fair value of the Company stock from the date
of grant to the date of exercise. No SARs have been issued under the
plan.
2005 ANNUAL REPORT PAGE 52
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GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M
STOCK OPTION PLAN (CONTINUED)
On October 15, 1997, the Company granted a total of 275,076
options to directors. Under the plan, the exercise price of each option
cannot be less than the fair value of the underlying common stock as of
the date of the option grant, and the maximum term is 10 years. Options
vest over five years. During 2002, the options had fully vested.
The Company accounted for the plan under the recognition and
measurement principles of APB Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, and related Interpretations. No stock-based
employee compensation cost was reflected in net income, as all options
granted under the plan have an exercise price equal to the market value
of the underlying common stock on the date of the grant.
The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, to stock-based employee compensation (dollar amounts in
thousands, except per share data):
2005 2004 2003
------------ ------------ ------------
Net (Loss) Income as Reported $ (3,676) $ 199 $ 691
Deduct: Total Stock-Based Employee
Compensation Expense Determined Under
Fair Based Method, Net of Related Tax
Effects - - -
------------ ------------ ------------
Pro Forma Net (Loss) Income $ (3,676) $ 199 $ 691
============ ============ ============
(Loss) Earnings per Share
Basic, as Reported $ (3.11) $ 0.17 $ 0.58
Basic, Pro Forma $ (3.11) $ 0.17 $ 0.58
Diluted, as Reported $ (3.11) $ 0.17 $ 0.57
Diluted, Pro Forma $ (3.11) $ 0.17 $ 0.57
The fair value of options granted on October 15, 1997, was
estimated as of the date of the grant using the Black-Scholes
option-pricing model with the following assumptions: dividend yield of
1.59%; expected volatility of 16.2%; risk-free interest rate of 6.14%;
and life of 9.88 years.
During 2005, the Company adopted SFAS No. 123(R), which amended
SFAS No. 123 and superceded APB No. 25. The adoption of this
pronouncement had no impact on the Company's interim or annual financial
position or results of operations.
2005 ANNUAL REPORT PAGE 53
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GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M
STOCK OPTION PLAN (CONTINUED)
A summary of the status of the Company's stock option plan as of
December 31, 2005, 2004, and 2003, and changes during the years ending
on those dates is presented below:
2005 2004 2003
------------------------ ------------------------ ------------------------
Exercise Exercise Exercise
Fixed Options Shares Price Shares Price Shares Price
------------- ------------------------ ------------------------ ------------------------
Outstanding, Beginning of Year 245,604 $17.18 260,340 $17.18 275,076 $17.18
Granted - - -
Exercised - - -
Forfeited 29,472 14,736 14,736
-------- -------- --------
Outstanding, End of Year 216,132 $17.18 245,604 $17.18 260,340 $17.18
======== ======== ========
Options Exercisable at Year-End 216,132 $17.18 245,604 $17.18 260,340 $17.18
======== ======== ========
The following table summarizes information about fixed stock
options outstanding at December 31, 2005:
Options Outstanding Options Exercisable
---------------------------------------- -------------------------
Weighted Weighted
Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Price at 12/31/05 Life Price at 12/31/05 Price
----------- ------------- ------------- ---------- ------------- ----------
$ 17.18 216,132 1.8 years $ 17.18 245,604 $ 17.18
2005 ANNUAL REPORT PAGE 54
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GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N
COMPREHENSIVE INCOME
Comprehensive income was comprised of changes in the Company's
unrealized holding gains or losses on securities available-for-sale
during 2005, 2004 and 2003. The components of comprehensive income and
related tax effects are as follows:
Years Ended December 31,
----------------------------- ------------
2005 2004 2003
------------ ------------ ------------
(IN THOUSANDS)
Gross Unrealized Holding Losses
Arising During the Period $ (1,066) $ (1,378) $ (1,277)
Tax Benefit 362 468 443
------------ ------------ ------------
(704) (910) (834)
------------ ------------ ------------
Reclassification Adjustment for Losses
(Gains) Included in Net Income 1,215 696 (1,575)
Tax (Benefit) Expense (413) (237) 536
------------ ------------ ------------
802 459 (1,039)
------------ ------------ ------------
Net Unrealized Holding Gains (Losses)
Arising During the Period $ 98 $ (451) $ (1,873)
============ ============ ============
NOTE O
REGULATORY MATTERS
The Association is subject to various regulatory capital
requirements administered by its primary federal regulator, the Office
of Thrift Supervision (OTS). Failure to meet the minimum regulatory
capital requirements can initiate certain mandatory, and possible
additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Association and the financial
statements. Under the regulatory capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Association must
meet specific capital guidelines involving quantitative measures of the
Association's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Association's
capital amounts and classification under the prompt corrective action
guidelines are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Association to maintain minimum amounts and
ratios of: total risk-based capital and Tier I capital to risk-weighted
assets (as defined in the regulations), Tier I capital to adjusted total
assets (as defined), tangible capital to adjusted total assets (as
defined), and tangible equity to adjusted total assets (as defined). As
of December 31, 2005, the Association meets all of the capital
requirements to which it is subject and is deemed to be well
capitalized.
2005 ANNUAL REPORT PAGE 55
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GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O
REGULATORY MATTERS (CONTINUED)
The actual and required capital amounts and ratios applicable to
the Association for the years ended December 31, 2005 and 2004, are
presented in the following tables, including a reconciliation of capital
under generally accepted accounting principles (GAAP) to such amounts
reported for regulatory purposes.
Minimum to be Well
Capitalized Under
Minimum for Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------- ----------------------- -----------------------
December 31, 2005 Amount Ratio Amount Ratio Amount Ratio
----------------- ---------- --------- ---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
Tangible Capital $ 23,772 13.47% 2,647 1.50% N/A N/A
Tangible Equity Ratio 23,772 13.47% 3,529 2.00% N/A N/A
Tier 1 Capital 23,772 13.47% 5,293 3.00% $ 9,919 5.00%
Tier 1 Risk-Based Capital 23,772 32.83% 2,896 4.00% 5,905 6.00%
Total Risk-Based Capital 24,677 34.08% 5,792 8.00% 9,842 10.00%
DECEMBER 31, 2004
-----------------
Tangible Capital $ 26,631 13.42% $ 2,976 1.50% N/A N/A
Tangible Equity Ratio 26,631 13.42% 3,968 2.00% N/A N/A
Tier 1 Capital 26,631 13.42% 5,952 3.00% $ 9,919 5.00%
Tier 1 Risk-Based Capital 26,631 27.06% 3,937 4.00% 5,905 6.00%
Total Risk-Based Capital 27,551 27.99% 7,873 8.00% 9,842 10.00%
NOTE P
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Association is a party to credit related commitments with
off-balance sheet risk in the normal course of business to meet the
financing needs of its customers. These consist of outstanding mortgage
and construction loan commitments and commercial lines of credit. Such
commitments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the consolidated
financial statements.
The Association's exposure to credit loss is represented by the
contractual amount of these commitments. The Company follows the same
credit policies in making commitments as it does for on-balance sheet
instruments.
As of December 31, 2005 and 2004, outstanding mortgage,
construction and commercial lines of credit commitments were
approximately $9,968,000 and $9,517,000, respectively.
2005 ANNUAL REPORT PAGE 56
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GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE P
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established
in the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. The
commitments for lines of credit may expire without being drawn upon.
Therefore, the total commitment amounts do not necessarily represent
future cash requirements. The amount of collateral obtained, if it is
deemed necessary by the Association, is based on management's credit
evaluation of the customer.
NOTE Q
COMMITMENTS AND CONTINGENCIES
EMPLOYMENT CONTRACTS
On January 7, 2005, the former Chief Executive Officer retired
from the Company. The Company entered into an early retirement and
consulting agreement with the former Chief Executive Officer. The
agreement provides that the former Chief Executive Officer will provide
up to 60 hours of consulting services per month for 36 months. In
addition, the agreement provided provisions for a non-compete period
which expires on January 6, 2006. The agreement stipulates that the
Company will pay the former Chief Executive Officer $13,000 per month
for 36 months.
OPERATING LEASES
During 2003, the Association entered into a lease with the
Company for a Branch Office Location. The rental expense associated with
this lease is eliminated in the consolidated statement of operations.
The lease had a term of 24 months with a rental rate of $4,025 per
month. The Association has continued to lease this property subsequent
to the lease expiration on a month-to-month basis. In addition, the
Association leases on a month-to-month basis a facility for a loan
production office.
Total rent expense incurred by the Association under these
leases amounted to $60,300 for each of the years ended December 31,
2005, 2004, and 2003.
NOTE R
CONCENTRATION OF CREDIT RISK
In accordance with industry practices, the Company has deposits
in other financial institutions for more than the insured limit. These
deposits in other institutions do not represent more than the normal
industry credit risk.
2005 ANNUAL REPORT PAGE 57
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GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE S
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure is made in accordance with the
requirements of SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL
INSTRUMENTS. Financial instruments are defined as cash and contractual
rights and obligations that require settlement, directly or indirectly,
in cash. In cases where quoted market prices are not available, fair
values have been estimated using the present value of future cash flows
or other valuation techniques. The results of these techniques are
highly sensitive to the assumptions used, such as those concerning
appropriate discount rates and estimates of future cash flows, which
require considerable judgment. Accordingly, estimates presented herein
are not necessarily indicative of the amounts the Company could realize
in a current settlement of the underlying financial instruments. SFAS
No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. These disclosures should
not be interpreted as representing an aggregate measure of the
underlying value of the Company.
The estimated fair values of the Company's financial instruments
are as follows:
December 31, 2005 December 31, 2004
------------------------- -------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
---------- ------------ ---------- ------------
(IN THOUSANDS)
Financial Assets
Cash and Cash Equivalents $ 22,055 $ 22,055 $ 7,024 $ 7,024
Securities Available-for-Sale 77,344 77,344 94,557 94,557
Loans, Net 69,897 70,987 92,158 99,520
Federal Home Loan Bank Stock 1,833 1,833 2,445 2,445
Accrued Interest Receivable 1,621 1,621 596 596
Financial Liabilities
Deposits $ 118,866 $ 118,065 $ 130,723 $ 129,576
Borrowings 32,106 29,651 39,689 45,090
Accrued Interest Payable 194 194 177 177
The following methods and assumptions were used by the Company
in estimating fair value disclosures for financial instruments.
CASH AND CASH EQUIVALENTS
The carrying amount of cash and due from financial institutions,
federal funds sold and short-term investments approximate fair values.
SECURITIES
Fair values for securities, excluding Federal Home Loan Bank
Stock, are based on quoted market prices. If quoted market prices are
not available, fair values are based on quoted market prices of
comparable instruments.
2005 ANNUAL REPORT PAGE 58
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GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE S
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
LOANS RECEIVABLE, NET
The fair values of loans are estimated through discounted cash
flow analysis, using current rates at which loans with similar terms
would be made to borrowers with similar credit quality. Appropriate
adjustments are made to reflect probable credit losses. The carrying
amount of accrued interest on loans approximated its fair value.
FEDERAL HOME LOAN BANK STOCK
The carrying value of Federal Home Loan Bank Stock approximates
fair value based on the redemption provisions of the Federal Home Loan
Bank.
DEPOSIT LIABILITIES
SFAS No. 107 specifies that the fair value of deposit
liabilities with no defined maturity is the amount payable on demand at
the reporting date, i.e., their carrying or book value. These deposits
include interest and non-interest bearing checking, passbook, and money
market accounts. The fair value of fixed rate certificates of deposit is
estimated using a discounted cash flow calculation that applies interest
rates currently offered on certificates of similar remaining maturities
to a schedule of aggregate expected cash flows on time deposits.
ADVANCES FROM THE FEDERAL HOME LOAN BANK
The fair value of fixed rate borrowings is estimated using
discounted cash flows, based on current incremental borrowing rates for
similar types of borrowing arrangements.
ACCRUED INTEREST
The carrying amount of accrued interest approximates its fair
value.
OFF-BALANCE SHEET INSTRUMENTS
Off-balance sheet financial instruments include commitments to
extend credit and undisbursed lines of credit. The fair value of such
instruments is estimated using fees currently charged for similar
arrangements in the marketplace, adjusted for changes in terms and
credit risk as appropriate. The estimated fair value for these
instruments was not significant at December 31, 2005 and 2004. The
contract or notional amounts of the Company's financial instruments with
off-balance sheet risk are disclosed in Note P.
2005 ANNUAL REPORT PAGE 59
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GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE T
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following sets forth condensed quarterly results of
operations for 2005 and 2004 (dollar amounts in thousands, except per
share data):
First Second Third Fourth
2005 Quarter Quarter Quarter Quarter
------------------------------------------------------
Interest Income $ 2,663 $ 2,647 $ 2,670 $ 2,486
Interest Expense 1,223 1,220 1,231 1,182
------- ------- ------- -------
Net Interest Income 1,440 1,427 1,439 1,304
Provision for Loan Losses - - - 4,793
Other Income (Loss) 8 24 39 (1,211)
Other Expense 1,517 1,071 1,136 1,138
Income Tax Expense (Benefit) 30 109 111 (1,758)
------- ------- ------- -------
Net (Loss) Income $ (99) $ 271 $ 231 $(4,080)
======= ======= ======= =======
Net (Loss) Income per Common Share(1)
Basic $ (0.09) $ 0.23 $ 0.20 $ (3.45)
======= ======= ======= =======
Diluted $ (0.08) $ 0.23 $ 0.20 $ (3.45)
======= ======= ======= =======
Dividends Per Share $ 0.10 $ 0.10 $ 0.10 $ 0.10
======= ======= ======= =======
(1) QUARTERLY PER SHARE AMOUNTS DO NOT ADD TO TOTAL FOR THE YEAR ENDED DUE TO ROUNDING.
First Second Third Fourth
2004 Quarter Quarter Quarter Quarter
------------------------------------------------------
Interest Income $ 2,683 $ 2,717 $ 2,793 $ 2,796
Interest Expense 1,428 1,378 1,333 1,297
------- ------- ------- -------
Net Interest Income 1,255 1,339 1,460 1,499
Provision for Loan Losses 14.00 19 - 310
Other Income (Loss) 21 (117) (85) (510)
Other Expense 1,143 1,120 1,129 1,091
Income Tax Expense (Benefit) 8 (11) 6 (166)
------- ------- ------- -------
Net Income (Loss) $ 111 $ 94 $ 240 $ (246)
======= ======= ======= =======
Net Income (Loss) per Common Share(1)
Basic $ 0.10 $ 0.08 $ 0.21 $ (0.21)
======= ======= ======= =======
Diluted $ 0.09 $ 0.08 $ 0.20 $ (0.21)
======= ======= ======= =======
Dividends Per Share $ 0.10 $ 0.10 $ 0.10 $ 0.10
======= ======= ======= =======
(1) QUARTERLY PER SHARE AMOUNTS DO NOT ADD TO TOTAL FOR THE YEAR ENDED DUE TO ROUNDING.
2005 ANNUAL REPORT PAGE 60
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GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE U
(LOSS) EARNINGS PER COMMON SHARE
(Loss) Earnings per share are computed using the weighted
average number of shares outstanding as prescribed in SFAS No. 128.
Options to purchase 216,132 shares at $17.18 per share were outstanding
during 2005, but were not included in the computation of diluted (loss)
earnings per share because the options' exercise price was greater than
the average market value price of the common shares. The options were
included in the computation of diluted (loss) earnings per share for the
years ended December 31, 2004 and 2003. The Company had no other
securities outstanding during the years ended December 31, 2005, 2004 or
2003 that would have a dilutive effect on (loss) earnings per share.
Years Ended December 31,
------------------------------------------
2005 2004 2003
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator:
Net (Loss) Income $ (3,676) $ 199 $ 691
Effect of Dilutive Securities - - -
------------ ------------ ------------
Numerator for Diluted (Loss) Earnings Per Share $ (3,676) $ 199 $ 691
============ ============ ============
Denominator:
Weighted-Average Shares Outstanding 1,181,313 1,156,441 1,194,296
Effect of Potentially Dilutive Securities - 21,572 20,147
------------ ------------ ------------
Denominator for Diluted Earnings Per Share 1,181,313 1,178,013 1,214,443
============ ============ ============
(Loss) Earnings Per Share
Basic $ (3.11) $ 0.17 $ 0.58
============ ============ ============
Diluted $ (3.11) $ 0.17 $ 0.57
============ ============ ============
Cash Dividends Per Share $ 0.40 $ 0.40 $ 0.40
============ ============ ============
2005 ANNUAL REPORT PAGE 61
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GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE U
(LOSS) EARNINGS PER COMMON SHARE (CONTINUED)
The following table presents the components of average
outstanding shares for each of the three years:
Years Ended December 31,
------------------------------------------
2005 2004 2003
------------ ------------ ------------
Average Common Shares Issued 3,438,500 3,438,500 3,438,500
Average Treasury Shares (2,153,780) (2,142,322) (2,063,289)
Average Unearned ESOP Shares (51,977) (80,109) (108,241)
Average Unearned RRP Trust Shares (51,430) (59,628) (72,674)
------------ ------------ ------------
1,181,313 1,156,441 1,194,296
============ ============ ============
2005 ANNUAL REPORT PAGE 62
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GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE V
CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
Financial information pertaining only to GS Financial Corp. is
as follows:
CONDENSED BALANCE SHEETS
ASSETS
December 31,
---------------------------
2005 2004
------------ ------------
(IN THOUSANDS)
Cash and Cash Equivalents $ 472 $ 356
Investments - Available-for-Sale, at Fair Value 554 545
Investment in Subsidiary 23,574 26,744
Loan Receivable 334 697
Other Assets 747 791
------------ ------------
Total Assets $ 25,681 $ 29,133
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deferred Tax Liability $ - $ 6
Other Liabilities 97 5
Stockholders' Equity 25,584 29,122
------------ ------------
Total Liabilities and Stockholders' Equity $ 25,681 $ 29,133
============ ============
2005 ANNUAL REPORT PAGE 63
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GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE V
CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (CONTINUED)
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
------------------------------------------
2005 2004 2003
------------ ------------ ------------
(IN THOUSANDS)
Income:
Dividends from Guaranty Savings and
Homestead Association $ 262 $ 687 $ 2,716
Interest Income 82 108 160
Other Income 97 94 97
------------ ------------ ------------
Total Income 441 889 2,973
Operating Expenses 274 272 249
------------ ------------ ------------
Income Before Income Taxes and Equity in
Undistributed (Loss) Net Income of Guaranty
Savings and Homestead Association 167 617 2,724
Applicable Income Tax (Benefit) Provision (23) (7) 4
Equity in Undistributed (Loss) Net Income of
Guaranty Savings and Homestead Association (3,866) (425) (2,029)
------------ ------------ ------------
Net (Loss) Income $ (3,676) $ 199 $ 691
============ ============ ============
2005 ANNUAL REPORT PAGE 64
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GS FINANCIAL CORP. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE V
CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------------------------
2005 2004 2003
------------ ------------ ------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net (Loss) Income $ (3,676) $ 199 $ 691
Adjustments to Reconcile Net (Loss) Income to Net Cash
Provided by (Used in) Operating Activities
Depreciation Expense 18 20 20
Loss on Sale of Investments - 3 -
Equity in Undistributed Loss (Earnings) of Subsidiary 3,866 425 2,029
Amortization of Investment Premium 3 2 4
Mutual Fund Dividends Reinvested - (6) (23)
Decrease in Accrued Interest Receivable - 1 2
Decrease (Increase) in Other Assets 25 12 (55)
Change in Deferred Income Tax Assets/Liabilities (5) (9) (3)
Increase in Other Liabilities 95 2 -
------------ ------------ ------------
Net Cash Provided by (Used in) Operating Activities 326 649 2,665
------------ ------------ ------------
INVESTING ACTIVITIES
(Investment) Redemption in Mutual Funds (150) (108) 1,315
Principal Paydowns Note Receivable GS Financial ESOP 363 334 307
Proceeds from Maturities of Investment Securities 125 114 197
------------ ------------ ------------
Net Cash Provided by Investing Activities 338 340 1,819
------------ ------------ ------------
FINANCING ACTIVITIES
Purchase of Treasury Stock (74) (315) (4,109)
Payment of Dividends (474) (466) (472)
------------ ------------ ------------
Net Cash Used in Financing Activities (548) (781) (4,581)
------------ ------------ ------------
INCREASE (DECREASE ) IN CASH AND CASH EQUIVALENTS 116 208 (97)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 356 148 245
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 472 $ 356 $ 148
============ ============ ============
2005 ANNUAL REPORT PAGE 65
GS Financial Corp and Subsidiary
- ------------------------------------------------------------------------------------------------------------------------------------
BOARD OF DIRECTORS
- ------------------------------------------------------------------------------------------------------------------------------------
ALBERT J. ZAHN, JR. HAYDEN W. WREN III
Mr. Zahn (age 54) is a certified public accountant and Mr. Wren (age 57) is the Director of Commercial/Investment
president of the firm Al Zahn, CPA, A Professional Accounting Brokerage of Corporate Realty, Inc., New Orleans Louisiana.
Corporation. He has served as Chairman of the Board of GS Mr. Wren is a Certified Commercial Investment Member (CCIM), a
Financial and Guaranty Savings since April 2005 and has been a member of the Society of Industrial and Office Realtors
director since 1992. (SIOR), and a licensed Certified Public Accountant having
membership affiliations with the American Society of Certified
EDWARD J. BOURGEOIS Public Accountants and the Louisiana Society of Certified
Mr. Bourgeois (age 49) is a certified public accountant in the Public Accountants. He was appointed in May 2004 to fill the
State of Louisiana and currently serves as President of position of a retiring director.
Centergy consulting, LLC, New Orleans, Louisiana, a consulting
firm specializing in the banking and financial industry. Mr.
Bourgeois was formerly the Executive Vice President/Chief --------------------------------------------------------------
Operating Officer of Crescent Bank and Trust, New Orleans, EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS\
Louisiana from 2001 to 2004. Prior thereto, Mr. Bourgeois was --------------------------------------------------------------
President of Bourgeois Consulting, a bank consulting agency in
New Orleans, Louisiana from 2000 to 2001, and during 2001, was STEPHEN E. WESSEL
a Senior Vice President of Ebank.com, Atlanta, Georgia. He is Mr. Wessel (age 43) has served as President and Chief
a member of the American Institute of Certified Public Executive Officer of GS Financial and Guaranty Savings since
Accountants and Louisiana Society of Certified Public December, 2005. Previously he served as Senior Vice
Accountants and Board member of the National Automotive President/South Louisiana Business Banking Manager for AmSouth
Finance Association. He has been a director since 2004. Bank, a regional commercial bank, New Orleans, Louisiana since
August, 2001. Prior thereto, Mr. Wessel served as Vice
STEPHEN L. CORY President/Regional Business Banking Manager for Whitney
Mr. Cory (age 56) is an insurance agent and President of Cory, National Bank, New Orleans, Louisiana from December 1991 to
Tucker & Larrowe Agency in Metairie, Louisiana. He has been a August 2001.
director since 1995.
LETTIE R. MOLL
BRADFORD A. GLAZER Ms. Moll (age 52) has served as Vice President and Corporate
Mr. Glazer (age 50) is President of Glazer Enterprises, Inc., Secretary of the Company since 1997 and Vice President and
a freight agency primarily representing the Landstar Carrier Corporate Secretary of the Association since March 1987 and
Group, a full truckload carrier serving 48 states, Mexico, and March 1982, respectively.
Canada. Glazer Enterprises, Inc., located in Cincinnati,
Ohio, is also a real estate management and development RALPH E. WEBER
company. He has been a director since 1991. Mr. Weber (age 61) has served as Senior Vice President of GS
Financial and Guaranty Savings since December 2005; prior
BRUCE A. SCOTT thereto, Mr. Weber served as interim President and Chief
Mr. Scott (age 53) is an attorney and has served as Executive Executive Officer of GS Financial and Guaranty Savings from
Vice President of GS Financial since February 1997 and January 2005 until December 2005. Mr. Weber previously served
Executive Vice President of Guaranty Savings since 1985. Mr. as Vice President of the Company and the Association from
Scott also serves as legal counsel and Personnel Manager of February 1997 and 1987, respectively until January 2005. He
Guaranty Savings, and performs certain legal services for also serves as a member of both loan committees of Guaranty
Guaranty Savings and its borrowers in connection with real Savings and as the company security officer.
estate loan closings and receives fees from the borrowers in
connection therewith. He has been a director since 1982. J. ANDREW BOWER
Mr. Bower (age 41) has served as Chief Financial Officer and
DONALD C. SCOTT Senior Vice President of GS Financial and Guaranty Savings
Mr. Scott (age 54) served as President and Chief Executive since January 2006. Prior thereto, Mr. Bower was a
Officer of the Company from February 1997 to January 2005, and self-employed consultant providing internal audit, accounting
the Association from March 1985 to January 2005. He has been a and loan review services primarily to banks in the greater New
director since 1982. Orleans area, including GS Financial and Guaranty Savings
since January 2002. Previously, Mr. Bower was employed as an
accounting manager at Stewart Enterprises, Inc., Metairie,
Louisiana, from September 2000 through January 2002, and as an
audit manager at Arthur Andersen LLP from December 1992 to
September 2000.
PAGE 66
GS Financial Corp and Subsidiary
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BANKING LOCATIONS
- --------------------------------------------------------------------------------
MAIN OFFICE 2111 N. Causeway Blvd
3798 Veterans Memorial Blvd. Mandeville, LA 70471
Metairie, LA 70002
LOAN PRODUCTION OFFICE
1700 Veterans Memorial Blvd. 1515 Hwy 51 South
Metairie, LA 70005 Ponchatoula, LA 70454
3915 Canal Street
New Orleans, LA 70119
PAGE 67