United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
x Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the three months ended September 30, 1999
Commission File Number: 0-22269
GS Financial Corp.
(Exact Name of Registrant as Specified in its Charter)
Louisiana 72-1341014
(State or Other Jurisdiction (IRS Employer ID Number)
of Incorporation or Organization)
3798 Veterans Blvd.
Metairie, LA 70002
(Address of Principal Executive Offices)
Registrant's Telephone Number: (504) 457-6220
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
x Yes No
As of November 15, 1999, there were 2,648,446 shares of the
Registrant's Common stock outstanding.
GS Financial Corp.
Form 10-Q
Three Months Ended September 30, 1999
Table of Contents
Part I - Financial Information
Item 1 Financial Statements
Consolidated Balance Sheets (as of September 30, 1999
Unaudited and December 31, 1998 Audited) 3
Consolidated Statements of Operations (For the three
and nine months ended September 30, 1999 and 1998 Unaudited) 4
Consolidated Statements of Changes in Stockholders' Equity
(For the nine months ended September 30, 1999 and 1998 Unaudited) 5
Consolidated Statements of Cash Flows (For the nine months
ended September 30, 1999 and 1998 Unaudited) 6-7
Notes to Consolidated Financial Statements 7-12
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-18
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 18
Part II Other Information 18
Item 1 Legal Proceedings 18
Item 2 Changes in Securities 19
Item 3 Defaults Upon Senior Securities 19
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 5 Other Information 19
Item 6 Exhibits and Reports on Form 8-K 19
GS Financial Corp.
Consolidated Balance Sheets
(Dollars in Thousands)
(Unaudited)
September 30, 1999 December 31, 1998
-------------- -----------------
ASSETS
Cash and Due from Banks $ 348 $ 171
Interest Bearing Deposits
in Other Banks 2,078 839
Federal Funds Sold 1,085 800
Investment Securities 11,854 20,877
Loans (Net) 68,205 63,895
Mortgage-Backed Securities 17,452 23,209
Collateralized Mortgage
Obligations 50,045 41,726
Accrued Interest Receivable 733 689
Premises & Equipment 2,550 2,620
Other Assets 3,110 2,708
----------- ----------
TOTAL ASSETS $ 157,460 $ 157,534
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Interest Bearing Deposits $ 59,525 $ 61,099
Non-Interest Bearing Dep. 813 695
FHLB Advances 52,173 45,381
Other Liabilities 1,108 1,850
----------- ----------
TOTAL LIABILITIES 113,619 109,025
STOCKHOLDERS' EQUITY
Common Stock & Additional
Paid in Capital 33,958 33,844
Treasury Stock (11,978) (8,324)
Accumulated Other
Comprehensive Income 34 1,768
Unearned ESOP Shares (1,997) (2,208)
Unearned RRP Trust Stock (2,193) (2,193)
Other Stockholders' Equity 26,017 25,622
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 43,841 48,509
----------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 157,460 $ 157,534
=========== ==========
GS Financial Corp.
Consolidated Statements of Operations
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
----------------------------------------
INTEREST INCOME (from)
Loans $ 1,335 $ 1,295 $ 3,942 $ 3,669
Mortgage-Backed Securities 301 438 962 1,452
Investment Securities 216 314 808 1,175
Collateralized Mortgage
Obligations 802 370 1,928 602
Other Interest Income 56 48 168 154
----- ----- ----- -----
TOTAL INTEREST INCOME 2,710 2,465 7,808 7,052
----- ----- ----- -----
INTEREST EXPENSE (on)
Deposits 634 610 1,909 1,828
FHLB Advances 729 472 1,903 1,028
----- ----- ----- -----
TOTAL INTEREST EXPENSE 1,363 1,082 3,812 2,856
----- ----- ----- -----
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES 1,347 1,383 3,996 4,196
PROVISION FOR LOAN LOSSES - - - 53
----- ----- ----- -----
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,347 1,383 3,996 4,143
----- ----- ----- -----
NON-INTEREST INCOME
Gain/(Loss) on Investments - (33) (17) 215
Other Income 5 5 11 17
----- ----- ----- -----
TOTAL NON-INTEREST INCOME 5 (28) (6) 232
OTHER EXPENSES
Compensation and Benefits 505 397 1,524 1,690
Net Occupancy Expense 77 70 217 213
Other Expenses 220 253 681 775
----- ----- ----- -----
TOTAL OTHER EXPENSES 802 720 2,422 2,678
----- ----- ----- -----
INCOME BEFORE TAX EXPENSE 550 635 1,568 1,697
INCOME TAX EXPENSE 130 219 492 605
----- ----- ----- -----
NET INCOME $ 420 $ 416 $1,076 $1,092
===== ===== ===== =====
EARNINGS PER SHARE - PRIMARY $ .18 $ .16 $ .45 $ .38
EARNINGS PER SHARE - DILUTED $ .18 $ .16 $ .45 $ .38
<TABLE>
GS Financial Corp.
Consolidated Statements of Changes in Stockholders' Equity
For The Nine Months Ended September 30, 1999, and 1998
(Dollars in Thousands)
(Unaudited)
<CAPTION>
Accumulated
Additional Unearned Unearned Other Total
Common Paid-In Treasury ESOP RRP Trust Retained Comprehensive Stockholders'
Stock Capital Stock Stock Stock Earnings Income Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1997 $ 34 $33,658 $ - $ (2,516) $ (2,076) $ 25,089 $ 1,858 $ 56,047
Net Income-9 months
Ended 9/30/98 - - - - - 1,092 - 1,092
Other Comprehensive
Income Net of
Applicable Deferred
Income Taxes - - - - - - (217) (217)
Purchase of Treasury Stock - - (8,324) - - - - (8,324)
Purchase of RRP Trust
Stock - - - - (334) - - (334)
Retirement of ESOP Debt - 206 - 281 - - - 487
Cash Dividends Paid - - - - - (686) - (686)
BALANCE AT
SEPTEMBER 30, 1998 $ 34 $ 33,864 $(8,324) $(2,235) $(2,410) $ 25,495 $ 1,641 $ 48,065
BALANCE AT
DECEMBER 31, 1998 $ 34 $ 33,810 $(8,324) $(2,208) $(2,193) $ 25,622 $ 1,768 $ 48,509
Net Income-9 months
Ended 9/30/99 - - - - - 1,076 - 1,076
Other Comprehensive
Income Net of
Applicable Deferred
Income Taxes - - - - - - (1,734) (1,734)
Purchase of Treasury Stock - - (3,654) - - - - (3,654)
Retirement of ESOP Debt - 114 - 211 - - - 325
Cash Dividends Paid - - - - - (681) - (681)
BALANCE AT
SEPTEMBER 30, 1999 $ 34 $ 33,924 $ (11,978) $(1,997) $(2,193) $ 26,017 $ 34 $ 43,841
</TABLE>
GS Financial Corp.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
For the Nine Months Ended
September 30,
-----------------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,076 $ 1,092
Adjustments to Reconcile Net Income
to Net Cash Provided
by Operating Activities:
Depreciation 83 94
Premiums Amortized 150 160
Provision for Loan Losses - 53
Loss on Sale of Loans 5 -
Loss on Disposal of Fixed Assets 3 -
Net Loan Fees (1) (2)
ESOP Expense 269 430
(Gain)/Loss on Sale of Investments 12 (216)
Decrease in Prepaid Income Tax 47 -
Changes in Deferred Income Tax (31) 193
Changes in Operating Assets and Liabilities:
(Increase) in Accrued Interest Receivable (44) (141)
(Increase) in Deferred Charges (21) (69)
Decrease in Accrued Income Tax - (64)
Increase in Other Liabilities 151 563
(Increase)/Decrease in Other Assets (27) 9
------ -------
Net Cash Provided by Operating Activities 1,672 2,102
CASH FLOWS FROM INVESTING ACTIVITIES
Redemption of ARM Mutual Fund 1,590 8,901
Purchase of CMO's (25,884) (34,248)
Proceeds from Maturities of CMO's 16,133 7,461
Proceeds from Maturities of Available-
For-Sale Securities 4,215 2,210
Proceeds from Maturities of
Mortgage-Backed Securities 5,354 8,722
Purchases of Mortgage-Backed Securities - (5,764)
Purchase of IMF Mutual Fund (Net) 2,617 (3,683)
Proceeds from Sales of Mortgage-
Backed Securities - 12,646
Net Loan Originations (4,264) (8,622)
Purchases of Premises and Equipment (10) (23)
GS Financial Corp.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
For the Nine Months Ended
September 30,
-----------------------
CASH FLOWS FROM INVESTING ACTIVITIES -Continued
1999 1998
---- ----
Dividend on ARM Fund (69) (529)
Dividend on IMF Fund (281) ( 19)
Purchase of FHLB Stock (275) (539)
Non-Cash Dividend - FHLB Stock (99) (57)
---------- -------
Net Cash Used in Investing Activities ( 973) (13,544)
---------- -------
CASH FLOW FROM FINANCING ACTIVITIES
Net Increase/(Decrease) in Deposits (1,534) 354
Purchases of Treasury Stock (3,654) (8,324)
Net Increase in
Unapplied Loan Payments 2 6
Payment of Cash Stock Dividends (681) (687)
Net Increase/(Decrease) in Advance
Payments by Borrowers for Taxes
and Insurance 76 (185)
Purchase of Stock for Recognition &
Retention Plan Trust - (334)
Net Increase in FHLB Advances 6,793 20,328
---------- ---------
Net Cash Provided by Financing Activities 1,002 11,158
---------- ---------
NET CASH EQUIVALENTS 1,701 (284)
CASH AND CASH EQUIVALENTS - January 1, 1,810 2,612
---------- ---------
CASH AND CASH EQUIVALENTS - September 30,$ 3,511 $ 2,328
========== =========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
General
GS Financial Corp. (the "Company") was organized and
incorporated under the laws of the State of Louisiana on December 24,
1996, for the purpose of becoming the holding company of Guaranty
Savings and Homestead Association (the "Association"). The Company
completed its initial public offering on April 1, 1997. The Company
offers financial products and services including originating mortgage
loans as well as deposit products such as certificates of deposit,
passbook savings and checking accounts. The Company also invests in
various investments such as U.S. Treasury and Agency bonds,
institutional mutual funds and mortgage-backed securities. The
Association has three branches in the Metropolitan New Orleans area.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements represent the consolidated
financial position, results of operations and cash flows of the
Company. The accompanying financial statements were prepared in
accordance with instructions to Form 10-Q, and therefore, do not
include information or footnotes necessary for a complete
presentation of financial position, results of operations and cash
flows in conformity with generally accepted accounting principles.
However, all adjustments, consisting only of normally recurring
accruals, which, in the opinion of management are necessary for a
fair presentation of the financial statements, have been included.
The results of operations for the three and nine month periods
ended September 30, 1999 are not necessarily indicative of the
results to be expected for the year ending December 31, 1999. The
unaudited consolidated financial statements and the notes included
herein should be read in conjunction with the audited financial
statements and notes thereto for the year ended December 31, 1998.
(2) EMPLOYEE STOCK OWNERSHIP PLAN
In 1997 the Company established an Employee Stock Ownership Plan
("ESOP") in which all full-time salaried employees of the Association
participate. At September 30, 1999, the ESOP owned approximately
221,713 shares of the Company's common stock with an outstanding debt
obligation of $2.2 million which is secured by pledge of the
unallocated shares held by the ESOP in favor of the Company. As the
debt is repaid, shares are released from the pledge and allocated to
plan participants. On a quarterly basis the Association makes
contributions to the ESOP in amounts equal to the debt service less
dividends received by the ESOP. Dividends received by the ESOP in
1998 and 1999 were used for debt service. The Company accounts for
the ESOP in accordance with Statement of Position ("SOP") 93-6. As a
compensatory pension plan, the Association bears the cost of the ESOP
as compensation expense based on principal and interest payments on
the corresponding debt as well as the market value of the stock.
(3) EARNINGS PER SHARE AND PAYMENTS OF DIVIDENDS
Earnings per share are computed using the weighted average
number of shares outstanding as prescribed in Statement of Financial
Accounting Standard ("SFAS") 128. In accordance with SFAS 128, the
average weighted shares outstanding were approximately 2.3 million
for the three months ended September 30, 1999 and 2.7 million shares
for the three months ended September 30, 1998. During the three
months ended September 30, 1999 and 1998, the Company declared and
paid cash dividends in the amount of $.09 and $.07 per common share,
respectively.
(4) INVESTMENTS
September 30, 1999 December 31, 1998
-------------- -----------------
(Dollars in thousands) Amortized Market Amortized Market
AVAILABLE FOR SALE Cost Value Cost Value
US Government and
Agency Obligations $ 5,937 $ 5,998 $ 10,171 $ 10,450
IMF Mutual Fund 2,931 2,716 2,865 2,848
ARM Mutual Fund 1,343 1,268 5,267 5,259
FHLMC Stock 35 1,872 35 2,320
------ ------ ------ ------
Total $ 10,246 $ 11,854 $ 18,338 $ 20,877
====== ====== ====== ======
(5) LOANS
September 30, December 31,
(Dollars in Thousands) 1999 1998
-------- -----------
Total Loans $ 68,617 $ 64,353
Allowance for Loan Losses (418) (463)
Net Unearned Fees 6 5
-------- --------
TOTAL NET LOANS $ 68,205 $ 63,895
======== ========
Permanent Mortgages (1-4 family) $ 66,230 $ 61,918
Construction (1-4 family) 377 740
Commercial Mortgages 1,436 1,157
Other Mortgages 255 201
Consumer (secured by deposits) 319 337
---------- ----------
TOTAL LOANS $ 68,617 $ 64,353
======== ========
Allowance for Loan Losses
(Dollars in Thousands) 1999 1998
----- -----
Beginning Balance, June 30, $ 463 $ 463
Provision for Losses 0 0
Loans Charged Off (45) 0
----- -----
Ending Balance, September 30, $ 418 $ 463
===== =====
(6) MORTGAGE-BACKED SECURITIES
September 30, December 31,
1999 1998
--------- ------------
(Dollars in thousands) Amortized Market Amortized Market
AVAILABLE FOR SALE Cost Value Cost Value
------ ----- ------ -----
GNMA Fixed Rate (1-4 family) $ 10,648 $ 10,537 $ 13,159 $ 13,265
FHLMC Fixed Rate (1-4 family) 1,415 1,410 2,310 2,328
FNMA Fixed Rate (1-4 family) 5,565 5,505 7,589 7,616
------ ------ ------ ------
TOTAL MORTGAGE-BACKED SECURITIES $ 17,628 $ 17,452 $ 23,058 $ 23,209
====== ====== ====== ======
(7) COLLATERALIZED MORTGAGE OBLIGATIONS
September 30, December 31,
1999 1998
--------- ------------
(Dollars in thousands) Amortized Market Amortized Market
AVAILABLE FOR SALE Cost Value Cost Value
------ ----- ------ -----
FNMA $ 8,943 $ 8,573 $ 18,987 $ 18,954
FHLMC 13,011 12,549 17,928 17,955
Private Issue 29,470 28,923 4,823 4,817
------ ------ ------ ------
TOTAL COLLATERALIZED MORTGAGE
OBLIGATIONS $ 51,424 $ 50,045 $ 41,738 $ 41,726
====== ====== ====== ======
(8) INTEREST BEARING DEPOSITS
September 30, December 31,
1999 1998
--------- -----------
(Dollars in thousands)
Passbook Savings $ 20,324 $ 21,506
Certificates of Deposits 39,201 39,593
------- ------
TOTAL INTEREST BEARING DEPOSITS $ 59,525 $ 61,099
======= ======
(9) FEDERAL HOME LOAN BANK ADVANCES
September 30, December 31,
1999 1998
--------- -----------
(Dollars in thousands)
Amounts maturing within 1 year $ 14,994 $ 10,730
Amounts maturing over 1 year 37,179 34,651
------- ------
TOTAL FEDERAL HOME LOAN BANK ADVANCES $ 52,173 $ 45,381
======= ======
(10) STOCK OPTION PLAN
Under the 1997 Stock Option Plan, 343,850 shares of common stock
have been reserved for issuance pursuant to the exercise of stock
options. To date, a total of 275,076 options have been awarded to
directors with a five-year vesting period. The Company has followed
all disclosure requirements set forth in SFAS 123, "Accounting for
Stock-Based Compensation." As of September 30, 1999, no stock
options have been exercised.
(11) RECOGNITION AND RETENTION PLAN
On October 15, 1997 the Company established the Recognition
and Retention Plan and Trust ("RRP") as an incentive to attract and
retain personnel of experience and ability in key positions. Of the
initial 137,540 shares of stock approved by stockholders for grant
pursuant to the RRP, 125,028 shares have been awarded under the plan.
During the quarter ended September 30, 1998, the Board of Directors
requested and RRP participants agreed to extend the vesting period of
shares of restricted stock issued under the RRP from five years to 10
years, the effect of which reduces the annual compensation expense of
the RRP to the Company. The Company is accruing this expense
commensurate with the 10 year vesting period based on the market
value of the stock on the modification date ($12.50/share).
As of September 30, 1999, a total of 12,499 shares have been
distributed to participants of the Plan.
(12) TREASURY STOCK
Under its stock buyback program, the Company has repurchased
790,054 shares of its common stock at an aggregate cost of $12.0
million. The Company did not repurchase any of its common stock
during the three months ended September 30, 1999.
(13) OTHER EXPENSES
Listed below are major recurring components comprising Other
Expenses.
For the Three Months Ended
September 30,
-----------------------
1999 1998
---- ----
Office Supplies & Telephone $ 32,077 $ 38,782
Bank Shares and Franchise Tax 88,772 95,723
Data Processing 12,378 17,922
Advertising 25,994 16,387
Supervisory Fees 16,374 18,630
Item 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
In addition to the historical information contained herein, the
following discussion contains forward-looking statements that involve
risk and uncertainties. Economic circumstances, the Company's
operations, and actual results could differ significantly from those
discussed in the forward-looking statements. The major factors that
could cause or contribute to such differences include, but are not
limited to, changes in the local economy as well as fluctuations in
prevailing interest rates. Other forward-looking statements are made
concerning the amount and adequacy of the allowance for loan losses
and the cost and potential impact of the effect of the Year 2000 on
the Company's Management Information System.
The following discussion compares the financial condition of GS
Financial Corp. at September 30, 1999 to December 31, 1998 and the
results of operations for the three months and nine months ended
September 30, 1999 and 1998.
CHANGES IN FINANCIAL CONDITION
At September 30, 1999, the assets of the Company totaled $157.5
million which was unchanged from December 31, 1998. The nine months
ended September 30, 1999 saw increases in mortgage loans and
collateralized mortgage obligations and decreases in mortgage-backed
securities and United States Treasury and Agency issued investments.
The Company's liability mix saw a slight reduction in customer
deposits with increases in advances from the Federal Home Loan Bank.
The Company's equity was reduced mainly through the continuation of
the Company's stock buyback program.
Loans receivable increased by $4.3 million, or 6.7%, to $68.2
million at September 30, 1999 compared to $63.9 million at December
31, 1998. The increase came primarily in loans on 1-4 family
residential dwellings.
Collateralized mortgage obligations increased $8.3 million, or
19.9%, to $50.0 million at September 30, 1999 compared to $41.7
million at December 31, 1998. The Company has continued its program
of wholesale growth through leveraged investing. For that purpose,
these first-tranche obligations offer yields ranging from 6.3% to
8.0% with durations ranging from three to five years.
Mortgage-backed securities decreased $5.7 million, or 24.6%, to
$17.5 million at September 30, 1999 compared to $23.2 million at
December 31, 1998. This is due to the continued paydowns of these
instruments and the Company's alternative strategy to invest in
first-tranche collateralized mortgage obligations
Investment securities decreased $9.0 million, or 43.1%, to $11.9
million at September 30, 1999 compared to $20.9 million at December
31, 1998. The Company has experienced several early calls on some of
its Agency holdings so far this year.
Interest bearing deposits decreased $1.6 million, or 2.6% to
$59.5 million at September 30, 1999 compared to $61.1 million at
December 31, 1998.
The Company's borrowings increased $6.8 million, or 15.0%, to
$52.2 million at September 30, 1999 compared to $45.4 million at
December 31, 1998. This was due to the continuation of the Company's
leveraged investing program. At September 30, 1999, the Company's
borrowings consisted of $42.2 million of fully amortizing advances
from the Federal Home Loan Bank (FHLB) as well as $10.0 million in
balloon obligations from the FHLB.
Stockholders' equity decreased $4.7 million, to $43.8
million at September 30, 1999 compared to $48.5 million at December
31, 1998. The decrease was mainly due to the acquisition of $3.7
million of Treasury Stock in April, 1999. Net income of $1.1
million, a decrease in comprehensive income of $1.7 million,
dividends paid of $.7 million, and the net effects of the reduction
of the ESOP debt totaling $.3 million accounted for other changes in
stockholders' equity.
RESULTS OF OPERATIONS
GENERAL
The Company reported net income for the three months ended
September 30, 1999 of $.4 million which was unchanged compared to the
three months ended September 30, 1998. This represents earnings of
$.18 per common share for the three months ended September 30, 1999
compared to $.16 per common share for the three months ended
September 30, 1998. The $.02 per common share increase in earnings
was due to a reduction in the average number of shares outstanding to
2.3 million shares for the three months ended September 30, 1999
compared to 2.7 million shares for the three months ended September
30, 1998.
For the nine months ended September 30 1999, and 1998 net income
was $1.1 million for both nine-month periods. This represents
earnings per common share of $.45 for the nine months ended September
30, 1999 compared to $.38 for the nine months ended September 30,
1998. Average shares outstanding for the nine months ended September
30, 1999 were 2.4 million compared to 2.9 million for the nine months
ended September 30, 1998.
INTEREST INCOME
Total interest income increased $.2 million, or 8.0%, to $2.7
million for the three months ended September 30, 1999 compared to
$2.5 million for the three months ended September 30, 1998. This was
due primarily to increases in interest on collateralized mortgage
obligations and mortgage loans, which was partially offset by
decreases in interest income from investment securities and mortgage-
backed securities.
Interest on loans was unchanged at $1.3 million for the three
months ended September 30, 1999 and 1998. The average balance of the
loan portfolio for the three months ended September 30, 1999
was $66.3 million (net) compared to $62.2 million (net) for the three
months ended September 30, 1998. The average annualized yield on
loans for the three months ended September 30, 1999 was 8.1% compared
to 8.3% for the three months ended September 30, 1998.
Interest on loans for the nine months ended September 30, 1999 was
$3.9 million compared to $3.7 million for the nine months ended
September 30, 1998.
Interest on mortgage-backed securities decreased $.1 million, or
25.0%, to $.3 million for the three months ended September 30, 1999
compared to $.4 million for the three months ended September 30,
1998. For the nine months ended September 30, 1999, the average
balance of mortgage-backed securities was $19.6 million; while the
average balance for the same period in 1998 was $30.3 million. The
average annualized yield of mortgage-backed securities was 6.5% for
the three months ended September 30, 1999 compared to 6.4% for the
same period in 1998.
Beginning in 1998, the Company utilized first-tranche
Collateralized Mortgage Obligations or REMICs (Real Estate Mortgage
Investment Conduits) as alternative, shorter-duration investments
than mortgage loans or securities. For the three months ended
September 30, 1999, the Company has earned $.8 million in such
interest on an average balance of $49.1 million yielding 6.2%. For
the three months ended September 30, 1998, interest income on CMOs
was $.4 million on an average balance of $22.4 million representing a
yield of 6.6%. Most of these investments are part of the Company's
wholesale growth strategy of leveraged investing. The third quarter
of 1999 saw a general slowing of the prepayments of the Company's
mortgage derivative instruments which was tied to the general trend
of rising interest rates.
Interest income from investment securities decreased $.1 million
or 33.3% to $.2 million for the three months ended September 30, 1999
compared to $.3 million for the three months ended September 30,
1998. The results for the third quarter of 1998 reflected an
annualized yield of 6.0% on an average balance of $20.8 million in
investment securities while the annualized yield for the third
quarter of 1999 was 5.3% on an average balance of $16.5 million. The
reduced yield of the investment securities was the result of the
maturity of some of the higher yielding agency bonds and subsequent
higher proportionate investment in institutional qualified thrift
investment based mutual funds which are lower yielding.
Other interest income consists mainly of interest income on
overnight Federal Funds sold and interest bearing deposits in other
financial institutions and remained substantially unchanged from the
three months ended September 30, 1998 to the same period ended
September 30, 1999 at $.05 million.
PROVISION FOR LOAN LOSSES
The Company had no provision for loan loss for the quarter ended
September 30, 1999 and 1998. During the three months ended September
30, 1999, the Company went from a system of specific and general
valuation allowances to one allowance for loan loss ("ALL")
classification. The ALL is reviewed quarterly and is based on
each individual loan's performance as well as the estimated value of
the underlying collateral. The Company employs the reserve method of
accounting for its ALL.
INTEREST EXPENSE
The Company's total interest expense increased $.3 million, or
27.3%, to $1.4 million for the three months ended September 30, 1999
compared to $1.1 million for the three months ended September 30,
1998. The increase was due almost entirely to an increase in
interest expense on advances from the Federal Home Loan Bank in
conjunction with the Company's wholesale growth strategy of leveraged
investing. The Company's overall cost of funds was 4.9% (annualized)
for the three months ended September 30, 1999 and 1998. Both the
amount and cost of interest on interest-bearing deposits remained
substantially constant for the three-month periods at $.6 million, or
4.2% for 1999 and 4.3 % for 1998. The cost of the Company's advances
from the Federal Home Loan Bank decreased from 5.9% (annualized) for
the three months ended September 30, 1998, to 5.7% (annualized) for
the three months ended September 30, 1999.
NON-INTEREST INCOME
The net income for the nine months ended September 30, 1998
included gains on sales of investments of $.25 million while net
income for the nine months ended September 30, 1999 included no
material gain or loss on sales of investments.
OTHER EXPENSES
Other expenses for the three months ended September 30, 1999
were $.8 million compared to $.7 million for the three months ended
September 30, 1998. This represents an increase of $.1 million, or
14.3%. The increase was largely due to an increase in compensation
and employee benefits of $.1 million, or 25.0%, from $.4 million for
the three months ended September 30, 1998 to $.5 million for the
three months ended September 30, 1999. The third quarter of 1998
reflected credits due to the restructuring of the Recognition and
Retention Plan.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity measures the Company's ability to meet its short-term
obligations with ready cash. These commitments and obligations
include loan disbursements, savings withdrawals by customers, the
payment of dividends and the daily operating expenses of the Company.
The Company's primary sources of funds are interest bearing
customer deposits, advances from the Federal Home Loan Bank and
maturities of existing investments including mortgage loans,
mortgage-backed securities, investment securities and collateralized
mortgage obligations. The Company does not utilize brokered deposits
nor does it offer special rates for "jumbo" deposits of $100,000 or
more.
The Company is required under Federal regulations to maintain
certain levels of "liquid" investments, specifically not less than 4%
of its average daily balance of net withdrawable deposit accounts.
For its liquid investments, the Company utilizes a combination of
cash on hand, certain money market investments, and deposits in other
financial institutions, as well as U.S. Government and Agency issued
securities. As of September 30, 1999, the Company's liquidity stood
at 64.7%, or $67.5 million in excess of the minimum requirement.
The Company is required to maintain regulatory capital
sufficient to meet all three of the regulatory capital requirements,
those being tangible capital (1.5%), core capital (3.0%), and risk
- -based capital (8.0%). As of September 30, 1999, the Company's
tangible and core capital amounted to $40.7 million, or 26.4% of
adjusted total assets, while the Company's risk-based capital was
$41.1 million, or 73.1% of total adjusted risk-weighted assets.
YEAR 2000
The Year 2000 problem refers to the possibility that computers
will not recognize the correct year beginning on January 1, 2000, and
will either completely fail or will generate erroneous data, such as
an incorrect maturity date for a certificate of deposit account.
Since computers pervade our operations, the impact of misreading the
date has potentially serious consequences.
Recognizing the importance of this issue, the Company
established a Year 2000 Project (the "Project") in 1997. Oversight
of the Project was elevated to the Board of Directors in March, 1998,
with the establishment of a three member committee.
The Company has focused its efforts on (1) its data processor,
NCR Corp. of Dayton, Ohio, which provides on-line banking services
through its data center in Irving, Texas; (2) the Company's personal
computers ("PC's"), which serve both as terminals for processing
customer transactions and accessing customer account information, and
as computers for general business functions using word processing,
spreadsheet, database, accounting and other software; (3) other
hardware such as the Company's telephone, alarm and HVAC equipment,
and (4) other software such as Fedline.
NCR held two testing sessions for customers in 1998 and has
stated that it is Year 2000 ready. All PC's have been tested and are
either Year 2000 compliant or can be manually reset on the first
business day of 2000 to the correct date. Some older PC's will be
replaced in 1999 as part of a normal process of upgrading outdated
equipment.
The Company has either tested other applications or received
written assurances from vendors that their products are Year 2000
compliant. The Company expects to continue its testing in 1999 to
ensure that all of its processes will function properly after 1999.
The estimated costs of Year 2000 compliance are not expected to be
material.
As part of its Year 2000 planning, the Company has developed a
business resumption continuity plan to be used in the event that a
process fails after December 31, 1999, even though all processes have
been qualified as Year 2000 compliant. Several tests of the
procedures described in this plan have been held in 1999, and more
will be held as the year progresses. The Company has also developed
a Year 2000 Cash Plan to prepare for possible end-of-year customer
withdrawals that are greater than historical year-end withdrawals.
The Company has tested extensively for potential Y2K problems
and does not expect a "worst-case scenario" that would cause it to
interrupt its normal banking services. However, the Company does
recognize the possibility that a critical external supplier, such as
telecommunications and/or utility service providers, could experience
failures that would result in the loss of on-line access to customer
information. In such an event, the Company would implement
established manual posting procedures for loan payments and savings
deposits and withdrawals, which is a more personnel-intensive and
slower method. The diminution of certain banking activities may
result while personnel are assigned to other duties to ensure the
accuracy of manual entries. The loss of electricity may require the
closure of one or more branches and/or restricted customer access
thereto. A telecommunications and/or utility failure may also reduce
the Company's ability to access funds through the Fedwire network and
therefore limit the ability to fund both customer requests for
withdrawals and outstanding loan commitments.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosures about market risk are
presented at December 31, 1998 in the Company's Annual Report on Form
10-K, filed with the SEC on March 30, 1999. Management believes
there have been no material changes in the Company's market risk
since December 31, 1998.
Part II - Other Information
Item 1 - Legal Proceedings
There are no matters required to be reported under this item.
Item 2 - Changes in Securities
There are no matters required to be reported under this item.
Item 3 - Defaults Upon Senior Securities
There are no matters required to be reported under this item.
Item 4 - Submission of Matters to a Vote of Security Holders
There are no matters required to be reported under this item.
Item 5 - Other Information
There are no matters required to be reported under this item.
Item 6 - Exhibits and Reports on Form 8-K:
(a) Exhibits
27.0 Financial Data Schedule
(b) No Form 8-K reports were filed during the quarter.
SIGNATURES
In accordance with the requirements of the Securities Exchange
Act of 1934, the registrant has caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GS FINANCIAL CORP.
DATE: November 15, 1999 BY:/s/Donald C. Scott
------------------
DONALD C. SCOTT, CHAIRMAN OF THE
BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
DATE: November 15, 1999 BY:/s/Glenn R. Bartels
-------------------
GLENN R. BARTELS
CONTROLLER
20
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