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United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
x Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
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 December 31, 1997, there were 3,438,500 shares of the
Registrant's common stock, par value $.01 per share, issued and
outstanding. The aggregate market value of this stock was $71.8
million at December 31, 1997 based on the per common share price
at closing of $20.875 on that date. The information presented in
this Form 10-K at December 31, 1997 and for the twelve months
ended December 31, 1997 represent the financial condition and
results of operations of GS Financial Corp. and its wholly owned
subsidiary, Guaranty Savings & Homestead Association. The
information presented as of December 31, 1996 and for the twelve
months ended December 31, 1996 and 1995, represent the financial
condition and results of operations of Guaranty Savings and
Homestead Association alone.
DOCUMENTS INCORPORATED BY REFERENCE
Listed hereunder are the following documents which have been
incorporated by reference and the Part of the Form 10-K into which
the document is incorporated.
(1) Portions of the Annual Report to Shareholders for the fiscal
year ended December 31, 1997 are incorporated into Part II, Items
(2) Portions of the definitive proxy statement for the 1998
Annual Meeting of Shareholders to be filed within 120 days of the
Registrant's fiscal year end are incorporated into Part III, Items
10 through 13.
PART I.
Item 1 BUSINESS
General
GS Financial Corp. (the "Company") was incorporated under
Louisiana law on December 24, 1996 as a thrift holding company.
The Company commenced operations on April 1, 1997 upon the
completion of its initial public offering of common stock on the
National Association of Securities Dealers Automated Quotation
(NASDAQ) system. On that date the Company's wholly owned
subsidiary, Guaranty Savings and Homestead Association (the
"Association") was converted from a Louisiana chartered mutual
savings and loan association to a Louisiana chartered stock
savings and loan association. This was accomplished through the
offer and sale of common stock by the Company to certain
depositors, employees, officers and directors of the Association
as well as the GS Financial Employee Stock Ownership Plan (the
"ESOP"). The Company simultaneously used a portion of the
proceeds of its sale of common stock to acquire 100% of the stock
of the Association.
The Company's principal business is conducted through the
Association. Guaranty Savings and Homestead Association was
founded in New Orleans, Louisiana in 1937 as a mutual savings and
loan association. The Association's unconsolidated assets at
December 31, 1997 totaled $115.5 million and comprise 87.9% or
$115.2 million of the total consolidated assets of the Company.
The Association provides financial services primarily to
individuals, mainly through the origination of mortgage loans on
1-4 family residences. The Association also takes in deposits in
the form of passbook savings and certificates of deposit. The
Association also invests in short and long term liquid investments
such as US Treasury and Agency securities, mortgage backed
securities, overnight Federal Funds, money market investments and
qualified thrift grade mutual funds. The balance of the
consolidated assets held by the Company includes $15.9 million in
similar short and long term liquid investments.
Regulation
The Company's primary regulator is the United States Office
of Thrift Supervision ("OTS"). The OTS regulates all thrifts and
thrift holding companies whose deposits are insured by the Savings
Association Insurance Fund ("SAIF") which is administered by the
Federal Deposit Insurance Corporation ("FDIC"). The Company, by
virtue of its state charter is also subject to the rules and
regulations of the Louisiana Office of Financial Institutions
("OFI"). These 2 agencies currently examine the Company approximately
every 18 months on an individual basis, relying on the examination
report of the other agency on cycles, alternating when it is not there
year to exam the Association.
As a public registrant the Company is also subject to the
rules and regulations of the Securities and Exchange Commission
("SEC"). The SEC monitors not only financial information on a
quarterly basis but tracks insider holdings and transactions and
generally insures that all necessary information is disseminated
to the Company's shareholders and the general public. The Company
must also follow the rules of the previously mentioned NASDAQ
stock market.
The Association is a member of the Federal Home Loan Bank of
Dallas. The Federal Home Loan Bank System is comprised of 12
regional banks which serve thrifts and banks by offering
investment opportunities and sources of funds.
Lending Activities
Loan Portfolio Composition. The following table sets forth the
composition of the Company's loan portfolio by type of loan at the
dates indicated (in thousands):
LOAN PORTFOLIO COMPOSITION
December 31,
----------------------------------------
1997 1996 1995 1994 1993
----------------------------------------
First Mortgage Loans:
One to Four
Family Residential $ 52,528 $ 42,660 $ 38,449 $ 38,236 $ 38,205
FHA and VA 358 511 675 854 1,018
Construction 99 298 - - -
Commercial
Real Estate 471 430 484 601 654
Other 123 145 146 182 418
-------- -------- --------- ------- -------
Total First
Mortgage Loans 53,579 44,044 39,754 39,873 40,295
Consumer Loans
Second Mortgage 172 273 267 350 440
Loans on Deposits 244 183 186 161 313
-------- -------- -------- -------- -------
53,995 44,500 40,207 40,384 41,048
Allowance for
Loan Losses (410) (382) (323) (345) (370)
Net Deferred Loan
Origination Costs 3 7 (4) (3) (1)
--------- --------- -------- -------- ------
Net Loans $ 53,588 $ 44,125 $ 39,888 $ 40,042 $ 40,679
====== ====== ====== ====== ======
Contractual Term to Final Maturities. The following table sets
forth certain information as of December 31, 1997 regarding the
dollar amount of loans maturing in the Company's portfolio, based
on the contractual date of the loan's final maturity, before
giving effect to net items. Demand loans and loans having no
stated maturity are reported as due in one year or less. The
amounts shown below do not reflect normal principal amortization;
rather, the balance of each loan outstanding at December 31, 1997
is shown in the appropriate year of the loan's final maturity.
The actual maturity of loans varies primarily on prepayments which
to a large extent depends on market interest rates. In general if
prevailing market rates fall below those of the portfolio,
prepayments accelerate. Conversely if market interest rates
increase above portfolio rates early pay-offs tend to decrease.
Fixed rate loans receivable as of December 31, 1997 are
scheduled to mature and adjustable rate loans are scheduled to re-
price as follows (in thousands):
Over
Under One Five Over
One to Five to Ten 10
Year Years Years Years
------ -------- ------- ------
Loans Secured by 1-4 Family
Residential:
Fixed Rate $ 76 $ 3,921 $ 7,754 $ 41,406
Other Loans Secured by
Real Estate
Fixed Rate 1 172 169 252
All Other Loans 244 - - -
------ -------- -------- ---------
$ 321 $ 4,093 $ 7,923 $ 41,658
====== ======== ======== =========
Loan Origination Activity. The table below sets forth the
Company's total loan origination and reduction experience during
the periods indicated. Historically, the Company has not
purchased or sold any loans.
December 31,
--------------------------------------
1997 1996 1995 1994 1993
--------------------------------------
Loan Originations:
1-4 family residential 14,806 8,876 6,400 6,467 3,161
Construction 577 823 - - -
Commercial real estate 75 69 - - -
Consumer 149 66 150 105 228
Other Real Estate 165 235 - - -
------- ------ ------ ------ ------
Total Loan Originations 15,756 10,000 6,550 6,572 3,389
Loan principal
repayments (6,272) (5,776) (6,727) (7,236) (9,887)
Increase (decrease)
due to other items (4) 3 23 27 49
------- ------ ------ ------- -------
Net increase
(decrease) in 9,463 4,237 (154) (637) (6,449)
Loan portfolio ===== ===== ===== ===== =======
Real Estate Lending Standards and Underwriting Policies. As of
March 19, 1993, the Company was required to adopt and maintain
written real estate lending policies that are consistent with safe
and sound banking practices. The Company is in compliance with
all such standards.
The lending activities of the Company are subject to written
underwriting standards and loan origination procedures established
by the Company's Board of Directors and management. These
standards and procedures are incorporated into the Company's
Underwriting Standards and Lending Policy which are reviewed
annually by the Board of Directors. The Underwriting Standards
dictate the manner in which loan applications are accepted and
processed. Such standards include, but are not limited to,
appraisal guidelines, disclosure requirements of Truth-In-Lending
and RESPA Laws and Regulations, credit criteria, completeness of
applications, title requirements and compliance with local codes
and ordinances. The Company requires appraisals from Board-
approved state licensed and certified appraisers. 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. Such factors include minimum and maximum loan
amounts, debt to income ratios, collateral, and acceptable rates
and terms.
Briefly stated, the loan process consists of applicants
meeting with loan personnel and providing pertinent documentation,
including but not limited to, requested loan amount, property
description, security offered as collateral, intended down
payments and acceptable rate and term consistent with the
Company's then current lending policy. Upon receipt of a
favorable credit report, an appraisal is obtained with requisite
documentation to support the property's stated market value. Upon
completion the loan package is presented to the Loan Committee for
consideration. Applicants are advised of the decisions of the
Loan Committee by mail. Approved loans are assigned to one of the
Company's approved attorneys for closing. Actions of the Loan
committee are submitted to the Board of Directors for
consideration and ratification on a monthly basis.
Loan applications are accepted at all three of the Company's
offices and forwarded to the Loan Committee which meets weekly.
In general, loan applications for $300,000 or less are considered
in the ordinary course of business. Applications for loans in
excess of this amount are given consideration on a case by case
basis. On November 25, 1997, the Company began accepting a title
insurance policy in lieu of the title opinion of an approved
attorney as required for all prior loan closings.
The Company's loan portfolio consists of conventional fixed
rate mortgage loans on 1-4 family residential dwellings. The
terms of these loans vary from 5 to 30 years. In general, down
payments of 20% of the purchase price or appraised value are
required. However, the Company does make loans where the loan to
value ratio (LTV) is as high as 90%. The Company also makes loans
on residential investment property, commercial real estate and
vacant ground. Terms vary and rates tend to be slightly higher on
these types of mortgage loans than those rates for residential 1-4
properties.
The Company originates and funds construction loans which
subsequently convert to permanent, fixed rate mortgage loans.
During the construction period, the company requires payment of
interest only on the amount of principal drawn.
Loans are available to depositors of the Company secured by
passbook savings or certificate of deposit at a rate 2 percentage
points above the savings rate up to 90% of the deposited balance.
These loans are payable on demand subject to 30 days notice.
Asset Quality
General. 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 insures
the accurate reporting of the Company's assets from a valuation
standpoint.
All of the Company's assets are reviewed on a quarterly
basis. Factors taken into consideration include the asset's
payment history, the value of the underlying collateral as well as
current economic conditions, particularly in the local real estate
market. 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. Assets classified
as special mention are those not yet serious enough to merit the
substandard classification but do require additional attention
from management.
The Company's Watch List, comprising substandard and special
mention assets is presented to the Board quarterly and ratified.
Specific valuation allowances are allocated to those substandard
assets deemed appropriate by management. Additional general
valuation allowances are assigned to the Company's substandard and
special mention assets over and above the general valuation
allowance assigned to the loan portfolio as a whole.
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.
Real estate acquired by the Company through foreclosure is
classified as real estate owned until such time as the property is
sold. Appraisals are obtained on all such real estate acquired
and the asset is booked at the lower of appraised value or cost
which includes all principal, escrow overdrafts and attorney fees.
All Real Estate Owned is considered substandard.
Delinquent Loans and Non-Performing Assets. The following
tables set forth the Company's delinquent loans and non-earning
assets as of the dates indicated. Balances are indicative of the
total principal balances of such loans rather than the actual
principal past due based on the number of payments past due. At
December 31 of the five years presented all of the Association's
delinquent loans and non performing assets were either 1-4 family
residential dwellings or loans secured by 1-4 family residential
loans.
DELINQUENT LOANS
(in thousands)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
30-89 Days $ 271 $ 175 $ 313 $ 710 $ 773
90+ Days 166 253 206 197 501
--- --- --- --- -----
Total Delinquent Loans $ 437 $ 428 $ 519 $ 907 $ 1,274
=== === === === =====
Non Performing Assets
(in thousands)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
90+ Day Delinquent Loans $ 166 $ 253 $ 206 $ 197 $ 501
Real Estate Owned - - 24 37 38
--- --- --- --- ---
Total Non Performing Assets $ 166 $ 253 $ 230 $ 234 $ 544
=== === === === ===
Non Performing Loans as
a % of Total Loans .31% .57% .51% .49% 1.23%
Non Performing Assets as
a % of Total Assets .13% .29% .27% .27% .60%
Classified Assets. The following table presents information
pertaining to the Company's Watch list of classified assets and
associated specific valuation allowances as of the dates
indicated. All substandard and special mention loans receivable
and related specific valuation allowances were on 1-4 family
residential mortgage loans.
POTENTIAL PROBLEM LOANS
(in thousands)
-----------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------
Substandard $ 1,564 $ 1,781 $ 1,900 $ 1,928 $ 1,978
Special Mention 298 346 501 606 666
------ ------ ------ ------ ------
Gross 1,862 2,127 2,401 2,534 2,644
Less Specific
Valuation Allowance (141) (160) (123) (143) (166)
----- ----- ----- ----- -----
Net $ 1,721 $ 1,967 $ 2,278 $ 2,391 $ 2,478
===== ===== ===== ===== =====
Provisions for loan losses are charged to earnings to bring
the total allowance for loan losses to a level considered
appropriate by management based on a quarterly review which is
reflective of each individual loan's performance and condition of
the underlying collateral. Management targets a certain
percentage of the entire portfolio given the current economic
conditions at which the general valuation allowance is deemed
adequate. The Company employs the reserve method of accounting
for its general and specific valuation allowances for loan losses.
The following table sets forth the Company's loan loss experience
for the years presented.
LOAN LOSS EXPERIENCE
An analysis of the allowance for loan losses as follows (dollars in
thousands):
Years Ended December 31,
------------------------------------
1997 1996 1995 1994 1993
Balance, Beginning
of Year $ 382 $ 323 $ 345 $ 370 $ 321
Provision for Losses 28 59 12 21 98
Loans Charged Off - - (34) (48) (50)
Recoveries - - 2 1
---- ---- ---- ---- ----
Balance, End of Year $ 410 $ 382 $ 323 $ 345 $ 370
=== === === === ===
Allowance for Loan
Losses as a % of
Total Loans Receivable .76% .86% .80% .85% .90%
Allowance for Loan
Losses as a % of
Non Performing Loans 246.99% 150.99% 156.80% 175.13% 73.12%
Mortgage-Backed Securities
GS Financial has invested in a portfolio of mostly fixed-
rate, mortgage-backed securities that are issued or guaranteed by
the Federal Home Loan Mortgage Corporation (FHLMC), Federal Natioal
Mortgage Association (FNMA) or Government National Mortgage Association
(GNMA). The FHLMC and FNMA are enterprises sponsored by the Federal
government while GNMA securities represent direct obligations of the
Federal government. Because of this, these securities are considered
high quality investments with minimal credit risks. The guaranteed
aspect of these investments results in yields slightly less than the
actual yields on the underlying mortgage loans.
Mortgage-backed securities represent participating interests
in pools of first mortgage loans originated and serviced by their
prospective issuers. Principal and interest payments of the
underlying mortgage loans are passed through intermediaries
including but not limited to the issuing agencies, on to investors
such as GS Financial Corp. These securities in general offer
slightly higher yields than United States Treasury obligations.
The Company invests in mortgage-backed securities with terms
varying from 5 to 30 years. These securities are subject to
variations in cash flow and yield due to the prepayment rates of
the underlying mortgage loans. While this does add interest rate
risk to the Company it is an attractive investment for the Company
from the prospective that mortgage-backed securities are highly
liquid qualified thrift investments.
On September 30, 1997 the Company reclassified all of its
mortgage-backed securities as available-for-sale pursuant to
SFAS 115. Management felt that this classification was more
appropriate considering the magnitude of the Company's investment
in these instruments and the liquidity necessary should other
investment opportunities arrive.
The following table sets forth the composition of Guaranty
Savings' mortgage-backed securities portfolio at each of the dates
indicated in thousands:
MORTGAGE-BACKED SECURITIES
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
--------------------------------------------
Available for Sale:
FNMA $ 17,054 $ 320 $ 269 $ 17,105
FHLMC 10,659 582 39 11,202
GNMA 13,935 797 318 14,414
------ ---- --- ------
$ 41,648 $ 1,699 $ 626 $ 42,721
====== ===== === ======
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
--------------------------------------------
Held to Maturity:
FNMA $ 2,980 $ 1 $ 78 $ 2,903
FHLMC 4,540 4 151 4,393
----- --- --- -----
$ 7,520 $ 5 $ 229 $ 7,296
===== === === =====
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1995 Cost Gains Losses Value
--------------------------------------------
Held to Maturity:
FNMA $ 1,772 $ 3 $ 17 $ 1,759
FHLMC 4,595 13 61 4,546
----- --- --- -----
$ 6,367 $ 16 $ 78 $ 6,305
===== === === =====
The following table sets forth the maturities of the mortgage-
backed security portfolio as of December 31, 1997 in thousands:
MORTGAGE-BACKED SECURITIES
Wtd.
Amortized Fair Avg.
December 31, 1997 Cost Value Rate
Mortgage-Backed Securities
Maturing:
In One Year or Less $ 918 $ 1,009 5.26%
After One Year Through Five Years 6,861 6,874 6.11%
After Five Years Through Ten Years 6,333 6,591 6.51%
After Ten Years 27,536 28,247 7.20%
------ ------
$ 41,648 $ 42,721
====== ======
The following table sets forth the purchases, sales and principal
repayments of the Company's mortgage-backed securities during the
periods indicated in thousands:
MORTGAGE-BACKED SECURITIES
1997 1996 1995
--------------------------------
Mortgage-Backed Securities
Balance at January 1, $ 7,520 $ 6,367 $ 6,063
Purchases 38,440 3,065 855
Repayments (4,310) (1,908) (522)
Amortizations of Premiums
/Discounts (Net) (2) (4) 1
------ ------ -----
Balance at December 31, $ 41,648 7,520 6,397
====== ===== =====
Weighted Average Yield 6.38% 5.92% 5.98%
Investment Securities
GS Financial invests in United States Treasury and Agency
issued obligations ranging in term from 3 months to 10 years. The
investment policy of the Company is reviewed periodically by
Management and ratified annually by the Board of Directors. At
present the investment policy of the Company strives to maintain a
liquid, conservative portfolio of investments keeping in mind the
cash flow and investment needs of the Company.
The Company also invests its surplus funds in a adjustable
rate mortgage-backed mutual fund (ARM Fund). Surplus funds are
those funds the Company wishes to maintain as available on demand
for investment purposes. The ARM Fund is offered by the First
Financial Trust, which is a co-operative institutional investment
group comprised of members of America's Community Bankers. At
December 31, 1997, 93.7% of the ARM Fund's assets were held in
qualified thrift investments. This strategy for the most part
supplements the Company's prior investment in money market funds
or overnight Federal Funds. The ARM Fund typically yields a rate
of return 75 to 80 basis points higher than overnight Federal
Funds.
Interest rates dictate many of the investment decisions and
policies of the Company. It shall be 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. Also, when anticipated earnings permit,
certain portfolio adjustments may be made to enhance the overall
portfolio yield even though losses may be recognized in doing so.
The Company's investment portfolio is classified as
available-for-sale is accordance with SFAS 115. In prior years
the Company's investment portfolio was largely classified as held-
to-maturity with only approximately 5% to 10% being classified
available for sale. That amount was determined by management as
necessary should any emergency liquidity demands arise. On
September 30, 1996, the Company sold investments classified held-
to-maturity, thus "tainting" the portfolio and forcing 100% of
the portfolio to be classified as available-for-sale. Management
felt this was in the best interest of the Company in considering
the then current interest rate environment, high loan demand,
capital strength of the company and future investment avenues
which might be pursued in light of the impending stock conversion
INVESTMENT SECURITIES
Securities available-for-sale consist of the following (in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
--------------------------------------------
U. S. Government
and Federal Agencies $ 12,380 $ 283 $ - $ 12,663
Adjustable Rate
Mortgage Mutual Fund 13,817 - 16 13,801
FHLMC Common Stock 35 1,475 - 1,510
------ ----- --- ------
$ 26,232 $ 1,758 $ 16 $ 27,974
====== ===== === ======
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
--------------------------------------------
U. S. Government
and Federal Agencies $ 21,085 $ 437 $ 4 $ 21,518
Adjustable Rate
Mortgage Mutual Fund 1,056 - 1 1,055
FHLMC Common Stock 35 958 - 993
------ ----- --- ------
$ 22,176 $ 1,395 $ 5 $ 23,566
====== ===== === ======
Securities held-to-maturity consist of the following in thousands:
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1995 Cost Gains Losses Value
--------------------------------------------
U. S. Government
and Federal Agencies $ 30,100 $ 367 $ 27 $ 30,440
------ ----- --- ------
$ 30,100 $ 367 $ 27 $ 30,440
====== ===== === ======
Securities available-for-sale consist of the following in thousands:
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1995 Cost Gains Losses Value
--------------------------------------------
U. S. Government
and Federal Agencies $ 2,182 $ 24 $ - $ 2,206
Adjustable Rate
Mortgage Mutual Fund 302 - 302
FHLMC Common Stock 35 716 - 752
------ ----- --- ------
$ 2,519 $ 740 $ - $ 3,259
===== === === =====
The following table sets forth the amount of investment
securities which mature during each of the periods indicated at
December 31, 1997 in thousands:
INVESTMENT SECURITIES
December 31, 1997
Securities
Available-for-Sale
Amortized Fair Wtg.
Cost Value Avg. Rates
Amounts Maturing in:
One Year or Less $ 14,852 $ 16,314 6.05%
After One Year
Thru Five Years 3,805 3,909 7.19%
After Five Years
Thru Ten Years 7,575 7,751 7.29%
------ ------
$ 26,232 $ 27,974
====== ======
Sources of Funds
General. Deposits have always been the primary source of the
Company's funds for lending and other investment purposes. In
1997 two significant other sources were utilized when the Company
completed its initial public offering which raised $30.8 million.
Advances from the Federal Home Loan Bank also provided the Company
with an additional source of funds as part of the Company's
leveraged investing whereby the Company was able to take advantage
of favorable interest rate spreads to borrow money and reinvest it
immediately at a rate 150 to 200 basis points higher than its
cost.
Deposits. Guaranty Savings & Homestead's deposits are attracted
principally from within its market area. Many of there depositors
are also mortgage loan customers. The Association offers both
passbook savings and certificates of deposit. Terms for
certificates vary from 3 months to 5 years while rates tend to
increase with term.
The following table shows the distribution of, and certain
other information relating to the Association's deposits:
DEPOSITS
Deposit account balances at December 31, 1997,1996, and 1995
are summarized as follows (in thousands):
Years Ending
December 31,
-------------------------------------------
1997 1996 1995
-------------------------------------------
Wtd. Wtd. Wtd.
Avg. Avg. Avg.
Balance Rate Balance Rate Balance Rate
Regular Savings
Accounts $ 22,314 3.5% $ 25,088 4.0% $ 24,120 3.2%
Certificates of
Deposit 34,508 5.2% 36,333 5.2% 36,825 4.8%
------ ------ ------
$ 56,822 $ 61,421 $ 60,945
====== ====== ======
The following table sets forth the savings cash flow of
Guaranty Savings & Homestead during the periods indicated (in
thousands):
Year Ended December 31,
------------------------
1997 1996 1995
------------------------
Increase (decrease) before
Interest Credited $ (7,482) $ (1,590) $ (5,743)
Interest Credited 2,043 2,066 2,046
----- ----- -----
Net increase (decrease) in deposits $ (5,439) $ 476 $ (3,697)
The Company attempts to control the flow of deposits by
pricing its accounts to remain generally competitive with other
financial institutions in its market area, but does not
necessarily seek to match the highest rates in the local market.
Traditionally the Association has priced its passbook savings at
or near the top of such local rates as the holders of these
accounts form the majority of its core depositors. The
Association has taken a more conservative approach in rates paid
for certificate of deposits as the Association feels these
accounts to be more rate conscious and sensitive to market
fluctuations.
The principal methods used by the Association to attract
deposits include its emphasis on personal services, competitive
interest rates and convenient office locations. Guaranty Savings
& Homestead does not advertise for deposits outside of its primary
market area. At December 31, 1997, the Association has no
deposits that were obtained through deposit brokers.
The following table presents the amount of certificates of
deposit at December 31, 1997 and the amounts at December 31, 1997
which mature during the periods indicated (in thousands).
Amount Percent
------ -------
Certificate Accounts Maturing
Under 12 months $ 26,531 76.90%
12 months to 24 months 5,586 16.20
24 months to 36 months 2,303 6.67
36 months to 48 months 6 .02
48 months to 60 months 82 .21
------ -----
Total Certificates $ 34,508 100.00%
====== ======
The following table sets forth the maturities of Guaranty
Savings & Homestead's certificates of deposits $100,000 or more at
December 31, 1997 by time remaining to maturity (in thousands).
DEPOSITS 100,000 AND OVER
(in thousands)
Maturing in 3 months or less $ 100
Maturing in 3 to 6 months 307
Maturing in 6 months to 1 year 701
-----
Total Certificates of Deposit $ 1,108
=====
Borrowings. During 1997 the Company obtained advances from the
Federal Home Loan Bank of Dallas (FHLB) as part of a limited
leveraged investment program. The Company borrows the funds which
are subsequently reinvested in mortgage-backed securities and
other investments which yield the Company anywhere from 150 to 200
over the interest charged on the advances. The advances consist
of fully amortizing advances which mature between November, 1998
and September, 2002. A summary of the advances by maturity and
interest rate are detailed as follows (in thousands):
Weighted
Maturing in the Year Average
Ending December 31, Amount Rate
------------------- ------ ---------
1998 $ 919 5.68%
1999 3,523 5.88%
2000 5,842 6.08%
2001 907 5.97%
2002 4,966 6.14%
-------
$16,157
The maximum amount of advances outstanding at any month-end
during 1997 was $17.2 million. The average balance outstanding
during 1997 was $7.4 million. Prior to 1997 the Company had no
material borrowings.
Subsidiaries
Guaranty Savings & Homestead Association is a wholly owned
subsidiary of the Company. The Company has no other subsidiaries.
Competition
Guaranty Savings & Homestead Association faces significant
competition both in attracting deposits and in originating loans.
Its most direct competition for deposits has come from commercial
banks, credit unions, other savings and loans and mortgage brokers
located in the metropolitan New Orleans market. The Association
also competes for investors' funds with short-term money market
mutual funds and issuers of corporate and government securities.
Guaranty Savings & Homestead Association does not rely on any
individual group or entity for a material portion of its deposits
or mortgage loan portfolio. The Association's primary factors in
competing in the home mortgage loan market is its efficient
personal service and attractive interest rates and terms.
Employees
The Association had 33 full-time employees at December 31,
1997. None of these employees is represented by a collective
bargaining agreement. Guaranty Savings & Homestead
Association believes that it enjoys excellent relations with its
personnel.
Regulation
Set forth below is a brief description of certain laws and
regulations which are applicable to the Company and Guaranty
Savings & Homestead Association. The description of the laws and
regulations contained elsewhere herein, does not purport to be
complete and is qualified in its entirety by reference to
applicable laws and regulations.
The Company
General. The Company, as a savings and loan holding company
within the meaning of the Home Owners' Loan Act, as amended
("HOLA"), is registered with and subject to OTS regulations,
examinations, supervision and reporting. As a subsidiary of a
savings and loan holding company, Guaranty Savings & Homestead
Association is subject to certain restrictions in its dealings
with the Company and any affiliates thereof.
Activities Restrictions. There are generally no restrictions on
the activities of a savings and loan holding company which holds
only one subsidiary savings institution. However, if the Director
of the OTS determines that there is reasonable cause to believe
that the continuation by a savings and loan holding company of an
activity constitutes a serious risk to the financial safety,
soundness or stability of its subsidiary savings institution, the
Director may impose such restrictions as deemed necessary to
address such risk, including limiting (i) payment of dividends by
the savings institution; (ii) transactions between the savings
institution and its affiliates; and (iii) any activities of the
savings institution that might create a serious risk that the
liabilities of the holding company and its affiliates may be
imposed on the savings institution. Notwithstanding the above
rules as to permissible business activities of unitary savings and
loan holding companies, if the savings institution subsidiary of
such a holding company fails to meet the qualified thrift lender
("QTL") test, as discussed under "- The Association - Qualified
Thrift Lender Test," then such unitary holding company also shall
become subject to the activities restrictions applicable to
multiple savings and loan holding companies and, unless the
savings institution re-qualifies as a QTL within one year
thereafter, shall register as, and become subject to the
restrictions applicable to, a bank holding company. See "- The
Association - Qualified Thrift Lender Test."
If the Company were to acquire control of another savings
institution, other than through merger or other business
combination with Guaranty Savings, the Company would thereupon
become a multiple savings and loan holding company. Except where
such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings institution
meets the QTL test, as set forth below, the activities of the
Company and any of its subsidiaries (other than Guaranty Savings
or other subsidiary savings institutions) would thereafter be
subject to further restrictions. Among other things, no multiple
savings and loan holding company or subsidiary thereof which is
not a savings institution shall commence or continue for a limited
period of time after becoming a multiple savings and loan holding
company or subsidiary thereof any business activity, other than:
(i)furnishing or performing management services for a subsidiary
(ii) savings institution; (ii) conducting an insurance agency or
(iii) escrow business; (iii) holding, managing, or liquidating
assets owned by or acquired from a subsidiary savings institution;
(iv) holding or managing properties used or occupied by a
subsidiary savings institution; (v) acting as trustee under deeds
of trust; (vi) those activities authorized by regulation as of
March 5, 1987 to be engaged in by multiple savings and loan
holding companies; or (vii) unless the Director of the OTS by
regulation prohibits or limits such activities for savings and
loan holding companies. Those activities described in clause
(vii) above also must be approved by the Director of the OTS prior
to being engaged in by a multiple savings and loan holding
company.
Limitations on Transactions with Affiliates. Transactions between
savings institutions and any affiliate are governed by Sections
23A and 23B of the Federal Reserve Act. An affiliate of a savings
institution is any company or entity which controls, is controlled
by or is under common control with the savings institution. In a
holding company context, the parent holding company of a savings
institution (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the
savings institution. Generally, Sections 23A and 23B (i) limit
the extent to which the savings institution or its subsidiaries
may engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such institution's capital stock and
surplus, and contain an aggregate limit on all such transactions
with all affiliates to an amount equal to 20% of such capital
stock and surplus and (ii) require that all such transactions be
on terms substantially the same, or at least as favorable, to the
institution or subsidiary as those provided to a non-affiliate.
The term "covered transaction" includes the making of loans,
purchase of assets, issuance of guarantee and other similar
transactions. In addition to the restrictions imposed by Sections
23A and 23B, no savings institution may (i) loan or otherwise
extend credit to an affiliate, except for any affiliate which
engages only in activities which are permissible for bank holding
companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except
for affiliates which are subsidiaries of the savings institution.
In addition, Sections 22(h) and (g) of the Federal Reserve
Act place restrictions on loans to executive officers, directors
and principal stockholders. Under Section 22(h), loans to a
director, an executive officer and to a greater than 10%
stockholder of a savings institution, and certain affiliated
interest of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the
savings institution's loans to one borrower limit (generally equal
to 15% of the institution's unimpaired capital and surplus).
Section 22(h) also requires that loans to directors, executive
officers and principal stockholders be made on terms substantially
the same as offered in comparable transactions to other persons
unless the loans are made pursuant to a benefit or compensation
program that (i) is widely available to employees of the
institution and (ii) does not give preference to any director,
executive officer or principal stockholder, or certain affiliated
interests of either, over other employees of the savings
institution. Section 22(h) also requires prior board approval for
certain loans. In addition, the aggregate amount of extensions of
credit by a savings institution to all insiders cannot exceed the
institution's unimpaired capital and surplus. Furthermore,
Section 22(g) places additional restrictions on loans to executive
officers. At December 31, 1997 Guaranty Savings was in compliance
with the above restrictions.
Restrictions on Acquisitions. Except under limited circumstances,
savings and loan holding companies are prohibited from acquiring,
without prior approval of the Director of the OTS, (i) control of
any other savings institution or savings and loan holding company
or substantially all the assets thereof or (ii) more than 5% of
the voting shares of a savings institution or holding company
thereof which is not a subsidiary. Except with the prior approval
of the Director of the OTS, no director or officer of a savings
and loan holding company or person owning or controlling by proxy
or otherwise more than 25% of such company's stock, may acquire
control of any savings institution, other than a subsidiary
savings institution, or of any other savings and loan holding
company.
The Director of the OTS may only approve acquisitions
resulting in the formation of a multiple savings and loan holding
company which controls savings institutions in more than one state
if (i) the multiple savings and loan holding company involved
controls a savings institution which operated a home or branch
office located in the state of the institution to be acquired as
of March 5, 1987; (ii) the acquirer is authorized to acquire
control of the savings institution pursuant to the emergency
acquisition provisions of the Federal Deposit Insurance Act
("FDIA"); or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit
institutions to be acquired by the state-chartered institutions or
savings and loan holding companies located in the state where the
acquiring entity is located (or by a holding company that controls
such state-chartered savings institutions).
Under the Bank Holding Company Act of 1956, the FRB is
authorized to approve an application by a bank holding company to
acquire control of a savings institution. In addition, a bank
holding company that controls a savings institution to merge or
consolidate the assets and liabilities of the savings institution
with, or transfer assets and liabilities to, any subsidiary bank
which is a member of the BIF with the approval of the appropriate
federal banking agency and the FRB. As a result of these
provisions, there have been a number of acquisitions of savings
institutions by bank holding companies in recent years.
Federal Securities Laws. The Company's common stock is registered
with the SEC under the Securities and Exchange Act of 1934
("Exchange Act"). The Company is subject to the information,
proxy solicitation, insider trading restrictions and other
requirements under the Exchange Act.
The Association
General. As a Louisiana chartered stock savings and loan
association, the OFI is the Association's chartering authority,
and the OTS serves as the Association's primary regulator. As
such, the OFI and the OTS have extensive authority over the
operations of Louisiana-chartered savings institutions. The
Association is subject to periodic examinations and is required to
file monthly, quarterly and annual reports with either or both
parties. The investment and lending authority of savings
institutions are prohibited from engaging in any activities not
permitted by such laws and regulations. Such regulation and
supervision is primarily intended for the protection of
depositors.
Insurance of Accounts. The deposits of Guaranty Savings and
Homestead Association are insured to the maximum permitted by the
SAIF, which is administered by the FDIC, and are backed by the
full faith and credit of the U.S. Government. As insurer, the
FDIC is authorized to conduct examinations of, and to require
reporting by, FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious threat to the
FDIC. The FDIC also has the authority to initiate enforcement
actions against savings institutions, after giving the OTS an
opportunity to take such action.
The FDIC may terminate the deposit insurance of any insured
depository institution, including Guaranty Savings and Homestead
Association, if it determines after a hearing that the institution
has engaged or is engaging in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations, or has
violated any applicable law, regulation, order or any condition
imposed by an agreement with the FDIC. It also may suspend
deposit insurance temporarily during the hearing process for the
permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the
accounts at the institution at the time of the termination, less
subsequent withdrawals, shall continue to be insured for a period
of six months to two years, as determined by the FDIC. Management
is aware of no existing circumstances which would result in
termination of the Association's deposit insurance.
Regulatory Capital Requirements. Federally insured savings
institutions are required to maintain minimum levels of regulatory
capital. Pursuant to FIRREA, the OTS has established capital
standards applicable to all savings institutions. These standards
generally must be as stringent as the comparable capital
requirements imposed on national banks. The OTS also is
authorized to impose capital requirements in excess of these
standards on individual institutions on a case-by-case basis.
Current OTS capital standards require savings institutions to
satisfy three different capital requirements. Under these
standards, savings institutions must maintain "tangible" capital
(1.5%), core capital (3.0%), and risk based capital (8.0%). Core
capital includes generally recognized capital such as common
stockholders' equity and retained earnings plus other items such
as qualifying goodwill. Tangible capital is essentially the same
but does not include qualifying supervisory goodwill. At December
31, 1997 the Association had no goodwill or other intangible
assets which are deducted in computing its tangible capital.
In determining risk-based capital, a savings institution is
allowed to include both core capital and supplementary capital.
Assets are assigned to particular risk-weighted categories and
subsequently multiplied by that particular percentage (cash equal
0%, 20% for securities, 50% for single family mortgage loans and
100% for all other loans and investments). The sum of these
calculations becomes the total of risk-weighted assets which are
then used to calculate the Association's risk-based capital ratio.
At December 31, 1997, Guaranty Savings exceeded all of its
regulatory capital requirements, with tangible, core and risk-
based capital ratios of 31.82%, 31.82% and 78.93% respectively.
Liquidity Requirements. All savings institutions are required to
maintain an average daily balance of liquid assets equal to a
certain percentage of the sum of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year
or less. As of December 31, 1997 Guaranty Savings and Homestead
Association's liquidity was 70.8% or $48.7 million in excess of
the minimum required 5%.
Capital Distributions. OTS regulations govern capital
distributions by savings institutions, which include cash
dividends, stock redemptions or repurchases, cash-out mergers,
interest payments on certain convertible debt and other
transactions charged to the capital account of a savings
institution to make capital distributions. Under these
regulations, safe harbors are created for specified levels of
capital distributions as long as the savings institution meets
their minimum required capital levels. In order to make
distributions under these safe harbors, Tier 1 and Tier 2
institutions must submit 30 day written notice to the OTS prior to
making the distribution. The Association does not anticipate
making any such distributions at the current time nor does it
expect this regulation to have any adverse impact on the
Association at any time in the future.
Community Reinvestment. Under the Community Reinvestment Act 0f
1977, as amended ("CRA"), as implemented by OTS regulations, a
savings institution has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the
credit needs of its entire community, including low and moderate
income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OTS, in
connection with its examination of a savings institution, to
assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation
of certain applications by such institution. The CRA requires
public disclosure of an institution's CRA rating and requires the
OTS to provide a written evaluation of an institution's CRA
performance utilizing a rating system which identifies four levels
of performance that may describe an institution's record of
meeting community needs: outstanding, satisfactory, needs to
improve and substantial noncompliance. The CRA also requires all
institutions to make public disclosure of their CRA ratings.
Qualified Thrift Lender Test. The Qualified Thrift Lender (QTL)
Test measures the Association's level of qualified thrift
investments compared to its total portfolio assets (total assets
less intangibles, property used by a savings association in its
business and liquidity investments in an amount not to exceed 20%
of assets). Generally, qualified thrift investments are
residential housing related assets. The Internal Revenue Service
(IRS) requires a savings institution to have at least 65% of its
assets in qualified thrift investments to qualify for tax
treatment as a building and loan association. At December 31,
1997, 99.20% of the Association's assets were invested in QTI's
which was in excess of the percentage required to qualify the
Association under the QTL test.
Year 2000. Guaranty Savings and Homestead Association employs a
service bureau, NCR Corporation of Dayton, Ohio as its data
processor. NCR has been addressing the Year 2000 issue in its
last several software releases, and it has scheduled national
testing in May, 1998 and regional testing during the summer of
1998. NCR expects to be fully Year 2000 compliant by the end of
1998. Guaranty has contacted other computer hardware and
software vendors and equipment vendors to ensure that their
products are either Year 2000 compliant now or will be by the end
of this year. The Association does not anticipate that Year 2000
expenditures will be material.
Federal Home Loan Bank System. Guaranty Savings and Homestead
Association is a member of the FHLB of Dallas. Each FHLB serves
as a reserve or central bank for its members within its assigned
region. It is funded primarily from proceeds derived from the
sale of FHLB agency issued obligations. As a member, the
Association is required to maintain stock in the FHLB of Dallas in
an amount equal to at least 1% of its aggregate unpaid residential
mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of its advances from the FHLB of
Dallas, whichever is greater. At December 31, 1997, Guaranty
Savings and Homestead Association had $857,000 in FHLB stock,
which was in compliance with this requirement.
Federal Taxation
General. The Company and Guaranty Savings are subject to the
generally applicable corporate tax provisions of the Code, and
Guaranty Savings is subject to certain additional provisions of
the Code which apply to thrift and other types of financial
institutions. The following discussion of federal taxation is
intended only to summarize certain pertinent federal income tax
matters relevant to the taxation of the Company and Guaranty
Savings and is not a comprehensive discussion of the tax rules
applicable to the Company and Guaranty Savings.
Year. The Company files a consolidated federal income tax return
on the basis of a calendar year ending on December 31.
Bad Debt Reserves. Savings institutions, such as Guaranty
Savings, which meet certain definitional tests primarily relating
to their assets and the nature of their businesses, are permitted
to establish a reserve for bad debts and to make annual additions
to the reserve. These additions may, within specified formula
limits, be deducted in arriving at the institution's taxable
income. For purposes of computing the deductible addition to its
bad debt reserve, the institution's loans are separated into
"qualifying real property loans"(ie., qualifying loans"). The
deduction with respect to non-qualifying loans must be completed
under the experience method as described below. The following
formulas may be used to compute the bad debt deduction with
respect to qualifying real property loans: (i) actual loss
experience, or (ii) a percentage of taxable income. Reasonable
additions to the reserve for losses on non-qualifying loans must
be based upon actual loss experience and would reduce the current
year's additions to the reserve for losses on qualifying real
property loans, unless that addition is also determined under the
experience method. The sum of the additions to each reserve for
each year is the institution's annual bad debt deduction.
Under the experience method, the deductible annual addition
to the institution's bad debt reserves is the amount necessary to
increase the balance of the reserve at the close of the taxable
year to the greater of (a) the amount which bears the same ratio
to loans outstanding at the close of the taxable year as the total
net bad debts sustained during the current and five preceding
taxable years bear to the sum of the loans outstanding at the
close of the six years, or (b) the lower of (i) the balance of the
reserve account at the close of the Association's "base year,"
which was its tax year ended December 31, 1987, or (ii) if the
amount of loans outstanding at the close of the taxable year is
less than the amount of loans outstanding at the close of the base
year, the amount which bears the same ratio to loans outstanding
at the close of the taxable year as the balance of the reserve at
the close of the base year bears to the amount of loans
outstanding at the close of the base year.
Under the percentage of taxable income method, the bad debt
deduction equals 8% of taxable income determined without regard to
that deduction and with certain adjustments. The availability of
the percentage of taxable income method permits a qualifying
savings institution to be taxed at a lower effective federal
income tax rate than that applicable to corporations in general.
This resulted generally in an effective federal income tax rate
payable by a qualifying savings institution fully able to use the
maximum deduction permitted under the percentage of taxable income
method, in the absence of other factors affecting taxable income,
of 31.3% exclusive of any minimum tax or environmental tax (as
compared to 34% for corporations generally). For tax years
beginning on or after January 1, 1993, the maximum corporate tax
rate was increased to 35%, which increased the maximum effective
federal income tax rate payable by a qualifying savings
institution fully able to use the maximum deduction to 32.2%. Any
savings institution at least 60% of whose assets are of 8% of
taxable income. As of December 31, 1995, over 71% of the assets
of Guaranty Savings were "qualifying assets" as defined in the
Code, and Guaranty Savings anticipates that at least 60% of its
assets will continue to be qualifying assets in the immediate
future. If this ceases to be the case, the institution may be
required to restore some portion of its bad debt reserve to
taxable income in the future.
Under the percentage of taxable income method, the bad debt
deduction for an addition to the reserve for qualifying real
property loans cannot exceed the amount necessary to increase the
balance in this reserve to an amount equal to 6% of such loans
outstanding at the end of the taxable year. The bad debt
deduction is also limited to the amount which, when added to the
addition to the reserve for losses on non-qualifying loans, equals
the amount by which 12% of deposits at the close of the year
exceeds the sum of surplus, undivided profits and reserves at the
beginning of the year. Based on experience, it is not expected
that these restrictions will be a limiting factor for Guaranty
Savings in the foreseeable future. In addition, the deduction for
qualifying real property loans is reduced by an amount equal to
all or part of the deduction for non-qualifying loans.
Pursuant to certain legislation which was recently enacted
and which will be effective for tax years beginning after 1995, a
small thrift institution (one with an adjusted basis of assets of
less than $500 million), such as Guaranty Savings, would no longer
be permitted to make additions to its tax bad debt reserve under
the percentage of taxable income method. Such institutions would
be permitted to use the experience method in lieu of deducting bad
debts only as they occur. Such legislation will require Guaranty
Savings to realize increased tax liability over a period of at
least six years, beginning in 1996. Specifically, the legislation
will require a small thrift institution to recapture (ie., take
into income) over a multi-year period the balance of its bad debt
reserves in excess of the lesser of (i) the balance of such
reserves as of the end of its last taxable year ending before 1988
or (ii) an amount that would have been the balance of such
reserves had the institution always computed its additions to its
reserves using the experience method. The recapture requirement
would be suspended for each of two successive taxable years
beginning January 1, 1996 in which Guaranty Savings originates an
amount of certain kinds of residential loans which in the
aggregate are equal to or greater than the average of the
principal amounts of such loans made by Guaranty Savings during
its six taxable years preceding 1996. It is anticipated that any
recapture of Guaranty Savings' bad debt reserves accumulated after
1987 would not have a material adverse effect on Guaranty Savings'
financial condition and results of operations.
At December 31, 1995, the federal income tax reserves of
Guaranty Savings included $5.5 million for which no federal income
tax has been provided. Because of these federal income tax
reserves and the liquidation account to be established for the
benefit of certain depositors of Guaranty Savings in connection
with the conversion of the Association to stock form, the retained
earnings of Guaranty Savings are substantially restricted.
Distributions. If Guaranty Savings were to distribute cash or
property to its sole stockholder, and the distribution was treated
as being from its accumulated bad debt reserves, the distribution
would cause Guaranty Savings to have additional taxable income. A
distribution is deemed to have been made from accumulated bad debt
reserves to the extent that (a) the reserves exceed the amount
that would have been accumulated on the basis of actual loss
experience, and (b) the distribution is a "non-qualified
distribution." A distribution with respect to stock is a non-
qualified distribution to extent that, for federal income tax
purposes, (i) it is in redemption of share, (ii) it is pursuant to
a liquidation of the institution, or (iii) in the case of a
current distribution, together with all other such distributions
during the taxable year, it exceeds the institution's current and
post-1951 accumulated earnings and profits. The amount of
additional taxable income created by a non-qualified distribution
is an amount that when reduced by the tax attributable to it is
equal to the amount of the distribution.
Minimum Tax The Code imposes an alternative minimum tax at a rate
of 20%. The alternative minimum tax generally applies to a base
of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI") and is payable
to the extent such AMTI is in excess of an exemption amount. The
Code provides that an item of tax preference is the excess of the
bad debt deduction allowable for a taxable year pursuant to the
percentage of taxable income method over the amount allowable
under the experience method. Other items of tax preference that
constitute AMTI include (a) tax-exempt interest on newly issued
(generally, issued on or after August 8, 1986) private activity
bonds other than certain qualified bonds and (b) 75% of the excess
(if any) of (i) adjusted current earnings as defined in the Code,
over (ii) AMTI (determined without regard to this preference and
prior to reduction by net operating losses).
Net Operating Loss Carryovers. A financial institution may carry
back net operating losses ("NOLs") to the preceding three taxable
years and forward to the succeeding 15 taxable years. This
provision applies to losses incurred in taxable years beginning
after 1986. At December 31, 1995, Guaranty Savings had no NOL
carryforwards for federal income tax purposes.
Capital Gains and Corporate Dividends-Received Deduction.
Corporate net capital gains are taxed at a maximum rate of 35%.
The corporate dividends-received deduction is 80% in the case of
dividends received from corporations with which a corporate
recipient does not file a consolidated tax return, and
corporations which own less than 20% of the stock of a corporation
distributing a dividend may deduct only 70% of dividends received
or accrued on their behalf. However, a corporation may deduct
100% of dividends from a member of the same affiliated group of
corporations.
Other Matters Federal legislation is introduced from time to
time that would limit the ability of individuals to deduct
interest paid on mortgage loans. Individuals are currently not
permitted to deduct interest on consumer loans. Significant
increases in tax rates or further restrictions on the
deductibility of mortgage interest could adversely affect Guaranty
Savings.
Guaranty Savings' federal income tax returns for the tax
years ended December 31, 1993 forward are open under the statute
of limitations and are subject to review by the IRS.
State Taxation
Any non-banking subsidiaries of the Association ( as well as
the Company) are subject to the Louisiana Corporation Income Tax
based on their Louisiana taxable income, as well as franchise
taxes. The Corporation Income Tax applies at graduated rates from
4% upon the first $25,000 of Louisiana taxable income to 8% on all
Louisiana taxable income in excess of $200,000. For these
purposes, "Louisiana taxable income" means net income which is
earned within or derived from sources within the State of
Louisiana, after adjustments permitted under Louisiana law
including a federal income tax deduction and an allowance for net
operating losses, if any. In addition, following the Conversion
the Association will be subject to the Louisiana Shares Tax, which
will be imposed on the assessed value of its stock. The formula
for deriving the assessed value is to calculate 15% of the sum of
20% of the company's capitalized earnings, plus (b) 80% of
the company's taxable stockholders' equity, and to subtract from
that figure 50% of the company's real and personal property
assessment. Various items may also be subtracted in calculating a
company's capitalized earnings.
Item 2. PROPERTIES
The following table sets forth certain information relating
to the Company's offices at December 31, 1997. All properties are
owned by the Company. All amounts are in thousands.
Net
Book Total
Location Value Deposits
- -------- ------- --------
3798 Veterans Blvd., Metairie $1,948 $ 50,716
2111 N. Causeway Blvd., Mandeville 360 506
3915 Canal St., New Orleans 267 5,601
----- ------
$2,575 $ 56,823
===== ======
Item 3. LEGAL PROCEEDINGS
The Company and the Association are not involved in any
pending legal proceedings other than nonmaterial legal proceedings
occurring in the ordinary course of business.
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 16, 1997, the Company commenced a proxy
solicitation of its stockholders with respect to a Special Meeting
of Stockholders held on October 15, 1997 ("Special Meeting").
There were two matters considered at the Special Meeting,
consideration of the Company's Stock Option Plan and the Company's
Recognition and Retention Plan and Trust. Both of such plans were
approved by the Company's stockholders by the vote reflected
below.
Approval of the Company's Stock Option Plan:
For Against Abstain Not Voted
--- ------- ------- ---------
2,004,167 156,935 28,180 56,316
Approval of the Company's Recognition and Retention Plan and
Trust:
For Against Abstain Not Voted
--- ------- ------- ---------
1,924,830 242,322 28,680 49,766
Part II.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information required herein, to the extent applicable, is
incorporated by reference from the front cover of the Registrant's
1997 Annual Report to Stockholders ("Annual Report").
Item 6. SELECTED FINANCIAL DATA
The information required herein is incorporated by reference
from page 7 of the Registrant's Annual Report.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required herein is incorporated by reference
from pages 8 to 11 of the Registrant's Annual Report.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required herein is incorporated by reference
from pages 12 to 35 of the Registrant's Annual Report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
Part III.
Item 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required herein is incorporated by reference
from the Registrant's definitive proxy statement for the 1997
Annual Meeting of Stockholders ("Proxy Statement").
Item 11 EXECUTIVE COMPENSATION
The information required herein is incorporated by reference
from the Registrant's Proxy Statement.
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required herein is incorporated by reference
from the Registrant's Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated by reference
from the Registrant's Proxy Statement.
Part IV.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) Documents filed as part of this Report.
(1) The following financial statements are incorporated by
reference from Item 8 hereof (see Exhibit 13):
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1997 and
1996
Consolidated Statements of Income for the Fiscal Periods
Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Changes in Shareholders'
Equity for the Fiscal Periods Ended December 31, 1997,
1996 and 1995
Consolidated Statements of Cash Flows for the Fiscal
Periods Ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(2) All schedules for which provision is made in the
applicable accounting regulation of the SEC are omitted
because of the absence of conditions under which they
are required or because the required information is
included in the consolidated financial statements and
related notes thereto.
(3) The following exhibits are filed as part of this form
10-K, and this list includes the Exhibit Index.
Exhibit Index
3.1* Articles of Incorporation of GS Financial Corp.
3.2* Bylaws of GS Financial Corp.
4.1* Stock Certificate of GS Financial Corp.
10.1** GS Financial Corp. Stock Option Plan
10.2** GS Financial Corp. Recognition and Retention Plan and Trust
Agreement for Employees and Non-Employee Directors.
10.3* Employment Agreement among GS Financial Corp. Guaranty
Savings and Homestead Association and Donald C. Scott
Dated February 25, 1997
10.4* Employment Agreement among GS Financial Corp. Guaranty
Savings and Homestead Association and Bruce A. Scott
Dated February 25, 1997
13.0 1997 Annual Report to Stockholders
21.0 Subsidiaries of the Registrant - Reference is made to
"Item 2" Business for the required information
27.0 Financial Data Schedule
Incorporated herein by reference from the Registration
Statement on Form SB-2 (Registration number 333-18841) filed by
the Registrant with the SEC on December 26, 1996, as
subsequently amended.
** Incorporated herein by reference from the definitive proxy
statement, dated September 16, 1997, filed by the Registrant with
the SEC (Commission File No. 000-22269)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities and Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GS FINANCIAL CORP.
March 28, 1998 By: /s/ Donald C. Scott
-------------------
Donald C. Scott
Chairman of the Board, President
And Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Name Title
- ---- -----
/s/ Donald C. Scott Chairman of the Board, March 28, 1998
- ------------------- President and Chief
Donald C. Scott Executive Officer
(principal executive officer)
/s/ Bruce A. Scott Executive Vice March 28, 1998
- ------------------- President and Director
Bruce A. Scott
/s/ Glenn R. Bartels Controller March 28, 1998
- ------------------- (principal financial
Glenn R. Bartels and accounting officer)
/s/ J. Scott Key Director March 28, 1998
- ----------------
J. Scott Key
/s/ M.D. Paine, Jr. Director March 28, 1998
- ------------------
M.D. Paine, Jr.
/s/ Victor Kirschman Director March 28, 1998
- --------------------
Victor Kirschman
/s/ Bradford A. Glazer Director March 28, 1998
- ----------------------
Bradford A. Glazer
/s/ Stephen L. Cory Director March 28, 1998
- -------------------
Stephen L. Cory
/s/ Albert J. Zahn, Jr. Director March 28, 1998
- -----------------------
Albert J. Zahn, Jr.
/s/ Kenneth B. Caldcleugh Director March 28, 1998
- -------------------------
Kenneth B. Caldcleugh
ANNUAL REPORT TO SHAREHOLDERS
GS FINANCIAL CORP.
1997
The Company
GS Financial Corp. (the "Company") is a thrift holding
company which was organized and incorporated under the laws of the
State of Louisiana on December 24, 1996. The Company completed its
initial public offering on April 1, 1997. The Company's primary
business is conducted through its wholly owned subsidiary,
Guaranty Savings & Homestead Association at its three locations in
the metropolitan New Orleans area. The Association provides
financial services mainly to individuals through the origination
of mortgage loans primarily on 1-4 family dwellings. The
Association also takes in savings deposits.
Market Information
The Company's stock price is reported under the symbol GSLA
on the National Association of Securities Dealers Automated
Quotation (NASDAQ) system. The Company's stock traded in the
range shown below. At December 31, 1997 the closing price was
$20.875 per share and there were approximately 1,900 shareholders.
QUARTER ENDING HIGH LOW
- ------------------ ------ ------
June 30, 1997 15.630 13.000
September 30, 1997 16.380 14.875
December 31, 1997 20.875 16.000
Notice of Annual Meeting
The Annual Meeting of Shareholders of GS Financial Corp. will
be held at the offices of Guaranty Savings & Homestead
Association, 3798 Veterans Blvd., Metairie, Louisiana on Tuesday,
April 28, 1997 at 10:00 a.m. CST.
Shareholder Services
Shareholders desiring to change the name, address or
ownership of stock, to report lost certificates, or to consolidate
accounts should contact our transfer agent:
Registrar and Transfer
P.O. Box 1010
Cranford, NJ 07016
(908) 497-2300
Investor Relations
Shareholders and others seeking financial information or
copies of the Company's financial information should contact:
Amy Forrester, Compliance Officer or, Glenn R. Bartels, Controller
GS Financial Corp.
3798 Veterans Blvd.
Metairie, LA 70002
(504) 457-6220
TO OUR SHAREHOLDERS
When the opening bell sounded on the National Association of
Securities Dealers Automated Quotation System (NASDAQ) and GS
Financial Stock was offered for sale on April 1, 1997, it marked
the beginning of the next generation of the Guaranty Savings &
Homestead Family. In years past tradition dictated that savings
and loans made home mortgage loans, commercial banks concentrated
on business lending while stock brokers counseled and offered
long-term investment products. This scenario could not be farther
from the truth in our present day. Deregulation along with a vast
secondary market has opened the home mortgage origination to
everyone from in-house mortgage brokers to the largest commercial
banks while investment products can be purchased from the internet
to the corner bank
The initial public offering of GS Financial has unveiled a
new corporate structure which offers less regulated and more
diverse investment opportunities for our company while allowing us
to protect 60 years of solid earnings. Thrifts such as Guaranty
Savings & Homestead Association are limited by Federal and State
regulations in permissible activities. GS Financial Corp. allows
us to take advantage of new investment opportunities while keeping
Guaranty Savings & Homestead as the rock solid anchor it has
always been.
Guaranty Savings & Homestead has carried us through the last
60 years by offering great personal service and no frills products
that our customers trust and understand. This has built a
tradition of steady earnings, high asset quality and strength
through abundant capital and liquid resources. Our Company makes
a long term investment in our customers. We like to refer to it
as "building a better mortgage". When you call our company on
the phone you are greeted with a live voice. Walk into our lobby
and you'll be met with a warm smile free of charge. Questions are
answered live, in person, while you wait.
The transition of our Company involved not only moving our
Main Office and opening two new branches, but also saw the
evolution of many of our internal policies and goals. New
investment strategies have enabled the Company to take advantage
of favorable fluctuations in market interest rates while at the
same time funding the rapid growth of our mortgage portfolio. Our
liquidity and strength also enabled our Company to supplement its
growth through leveraged investing. The end result of the
completion of our initial public offering and transition is
reflected in strong growth and earnings in 1997.
GS Financial Corp. is entering the 21st Century in a growth
mode supported by steady and stable earnings and high levels of
capital and liquid resources. Our new structure affords us
additional tools to be more competitive in a world of
increasingly open and competitive markets. At the same time we
haven't forgot what got us here. We will continue to be a
community oriented company whose customers are secure in their
knowledge that their investments are secure and no question
unresolved.
Sincerely,
/s/ Donald C. Scott
Donald C. Scott
Chairman of the Board and Chief Executive Officer
The following selected consolidated financial and other data of
the Company does not purport to be complete and should be read in
conjunction with, and is qualified in its entirety by, the more
detailed financial information, including the Consolidated
Financial Statements of the Company and Notes thereto, contained
elsewhere herein.
At December 31,
1997 1996 1995 1994 1993
Selected Financial
Condition:
Total Assets 131,396 87,550 86,040 88,250 90,100
Cash and Cash
Equivalents 2,612 7,591 2,355 2,620 2,883
Loans Receivable, Net 53,588 44,125 39,888 40,042 40,679
Investment Securities 27,974 23,566 33,360 35,496 37,798
Mortgage-Backed
Securities 42,721 7,520 6,367 6,063 6,112
Deposit accounts 56,822 61,421 60,945 64,642 67,432
Borrowings 16,157 - - - -
Equity 56,047 24,779 23,457 22,385 21,591
Selected Operating Data:
Interest Income 8,347 6,155 6,260 6,035 6,327
Interest Expense 3,014 2,669 2,664 2,408 2,385
Net Interest Income 5,333 3,486 3,596 3,627 3,942
Provision for Loan Losses 28 59 12 21 98
Net Interest Income after 5,305 3,427 3,584 3,606 3,844
Non-Interest Income 73 (74) 63 109 147
Non-Interest Expense (2,708) (2,747) (2,295) (2,191)(1,994)
Net Income before taxes 2,670 606 1,352 1,524 1,997
Income Tax expense 1,000 201 480 529 722
Net Income 1,670 405 872 994 1,275
Net Income per share $ 0.53 n/a n/a n/a n/a
Dividends declared per
Share $ 0.14 n/a n/a n/a n/a
Other Data:
Profitability
Average Yield on
Interest Earning Assets 7.21% 7.57% 7.52% 6.97% 7.26%
Average Cost of Interest
Bearing Liabilities 4.60 4.43 4.27 3.62 3.52
Average Interest
Rate Spread 2.61 4.29 3.25 3.35 3.74
Net Interest Margin 4.50 4.21 4.32 4.19 4.52
Interest-Earning Assets
as a % of Interest
Bearing Liabilities 176.67 134.92 133.39 130.39 128.78
Net Interest Income
after Provision for
Loan Loss as a % of
Non Interest Expense 195.90 124.75 156.17 164.58 192.77
Non Interest Expense as
a % of Average Assets 2.23 3.19 2.63 2.43 2.21
Return on Average Assets 1.38 0.47 1.00 1.10 1.42
Return on Average Equity 3.19 1.66 3.70 4.41 6.02
Capital Ratio's:
Average Equity as a %
of Total Assets 40.76% 28.30% 26.99% 25.02% 23.54%
Tangible Capital Ratio 32.61 27.72 27.35 25.90 24.30
Core Capital Ratio 32.61 27.72 27.35 25.90 24.30
Risk-Based Capital Ratio 79.41 79.19 93.60 90.00 89.40
Asset Quality Ratios:
Non Performing Loans as
a % of Total Loans 0.31% 0.57% 0.51% 0.49% 1.23%
Non Performing Assets as
a % of Total Assets 0.13 0.29 0.27 0.27 0.60
Allowance for Loan Losses
as a % of Total Loans
Receivable 0.76 0.86 0.80 0.85 0.90
Allowance for Loan Losses
as a % of Non-
Performing Loans 246.99 150.99 156.80 175.13 73.12
Net charge-offs as a %
Of Average Loans 0.00 0.00 .06 - .08
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial
condition and results of operations of GS Financial Corp. (the
"Company") and its subsidiary for the years ended December 31,
1993 through 1997 is designed to assist readers in their
understanding of the Company. This review should be read in
conjunction with the audited consolidated financial statements,
accompanying footnotes and supplemental financial data included
herein.
FINANCIAL CONDITION
ASSETS
General - Total assets of the Company increased by $43.8 million,
or 50%, from $87.6 million at December 31, 1996, to $131.4 million
at December 31, 1997. The increase was primarily due to a $35.2
million increase in mortgage-backed securities and a $9.5 million
increase in loans receivable. These increases were funded by the
$30.8 million of net proceeds from the Company's offering of
common stock in April, 1997 and an increase of $16.2 million in
advances from the Federal Home Loan Bank of Dallas.
Cash and Cash Equivalents - Cash and cash equivalents, consisting
of interest and non-interest bearing deposits decreased $5.0
million, or 65.8%, from $7.6 million at December 31, 1996, to $2.6
million at December 31, 1997. The decrease was due to the
Company's new relationship with First Financial Trust whereby
surplus funds are now maintained in an adjustable rate mortgage-
backed mutual fund. Surplus funds were previously maintained in
overnight Federal Funds. This new policy has resulted in an
increased yield of 70 to 80 basis points on the Company's surplus
cash.
Loans Receivable, Net - Loans receivable, net, increased by $9.5
million or 21.5%, from $44.1 million at December 31, 1996, to
$53.6 million at December 31, 1997. This increase was almost
exclusively in first mortgage loans on 1-4 family dwellings which
increased $9.8 million or 22.9%, from $42.7 million at December
31, 1996, to $52.5 million at December 31, 1997. This increase
was partially offset by slight decreases in FHA, VA, construction
and other loans from December 31, 1996 to December 31, 1997. The
increase in loans was funded substantially by a portion of the net
proceeds from the Company's sale of common stock in April, 1997.
Investment Securities - Investment securities increased $4.4
million or 18.6%, from $23.6 million at December 31, 1996, to
$28.0 million at December 31, 1997. This was primarily due to the
Company's change in policy of investing surplus cash in an
adjustable rate mortgaged-backed mutual fund. At December 31,
1997 93.7% of the fund's assets were invested in qualified thrift
investments.
Mortgage-Backed Securities - Mortgage-backed securities increased
$35.2 million or 469.3%, from $7.5 million at December 31, 1996,
to $42.7 million at December 31, 1997. This increase was funded
by an increase in advances from the Federal Home Loan Bank of
Dallas of $16.1 million and investment of a portion of the net
proceeds from the Company's sale of common stock in April, 1997.
The increase was also due to the adoption of a limited wholesale
growth strategy of leveraged investing.
On September 30, 1997, the Company reclassified all of its
mortgage-backed securities as available for sale. The Company was
able to take advantage of favorable market interest rate
conditions to lock in favorable yields resulting in $1.1 million
in unrealized gains on mortgage-backed securities at December 31,
1997. At December 31, 1997 and 1996, all of the Company's
mortgage-backed securities were FHLMC, FNMA, or GNMA issued
instruments. FHLMC and FNMA are enterprises sponsored by
the Federal government while GNMA securities represent
direct obligations of the Federal Government.
LIABILITIES AND STOCKHOLDERS' EQUITY
General - The Company's deposits, borrowings and equity represent
sources of funds. Of these accounts borrowings and equity
experienced significant changes from December 31, 1996 to December
31, 1997. The following discussion explains these changes.
Deposits - The Company's deposits decreased $4.6 million or 7.5%,
from $61.4 million at December 31, 1996, to $56.8 million at
December 31, 1997. Most of the reduction was due to the
withdrawal of $3.5 million in passbook savings and certificate of
deposit accounts to purchase the Company's common stock on April
1, 1997.
Borrowings - The Company's borrowings consisted entirely of fully
amortizing advances from the Federal Home Loan Bank of Dallas
which mature between November, 1998 and September, 2002. These
borrowings represent the implementation of a limited wholesale
growth strategy of leveraged investing. The Company borrows the
funds and reinvests the funds in investment and mortgage-backed
securities yielding 150 to 200 basis points higher than the cost
of the funds. The securities are generally purchased with 80%
borrowed funds and 20% of the Company's own cash.
Stockholders' Equity - Stockholders' equity increased $31.2
million or 125.8%, from $24.8 million at December 31, 1996, to
$56.0 million at December 31, 1997. The net increase was mainly
the result of the influx of $30.8 million in net proceeds from the
Company's sale of common stock on April 1, 1997. The increase in
stockholders' equity was also due to $1.7 million in net income
for the year ending December 31, 1997, and $.4 million from the
release and allocation of ESOP shares. Stockholders' equity was
also affected by the change in unrealized gain in available for
sale securities which increased $.9 million or 100%, from $.9
million at December 31, 1996, to $1.8 million at December 31,
1997. Stockholders' equity was decreased in 1997 by common stock
purchased by the Recognition and Retention Plan Trust in
the amount of $2.1 million and by dividends paid by the
Company for 1997 totaling $.5 million.
Average Balances, Net Interest Income
Average Balances, Net Interest Income, and Yields Earned and Rates Paid
For the Years Ending December 31,
-----------------------------------------------
1997 1996 1995
Avg. Avg. Avg. Avg. Avg. Avg.
Bal. Int. Rate Bal. Int. Rate Bal. Int. Rate
------ ----- ----- ------ ----- ----- ------ ----- -----
Loans 46,773 4,085 8.73% 41,443 3,760 9.07% 40,196 3,740 9.29%
Mortgage-Backed
Securities 28,854 1,841 6.38% 7,368 436 5.92% 6,267 380 6.06%
Investment Securities 25,972 1,724 6.64% 27,430 1,689 6.16% 34,227 2,028 5.93%
Other Interest
Earning Assets 14,251 697 4.89% 5,049 270 5.35% 2,561 150 5.82%
------ ----- ------ ----- ------ -----
Total Interest
Earning Assets 115,850 8,347 7.21% 81,290 6,155 7.57% 83,251 6,298 7.52%
Non Interest Earning
Assets 5,592 4864 4,096
------- ------ ------
TOTAL ASSETS 121,442 86,154 87,347
Interest Bearing
Liabilities
Passbooks 23,735 854 3.60% 23,672 833 3.52% 25,013 880 3.52%
Certificates of Deposits 34,397 1,721 5.00% 36,577 1,836 5.02% 37,397 1,784 4.74%
Borrowings 7,445 439 5.90%
------ ----- ------ ----- ------ -----
Total Interest Bearing
Liabilities 65,577 3,014 4.60% 60,249 2,669 4.43% 62,410 2,664 4.29%
Non Interest Bearing
Liabilities 3,457 1,393 1,363
------ ------ ------
TOTAL LIABILITIES 69,034 61,642 63,773
RETAINED EARNINGS 52,408 24,512 23,574
------- ------ ------
TOTAL LIABILITIES AND
RETAINED EARNINGS 121,442 86,154 87,347
Net Interest
Earning Assets 50,273 21,041 20,841
Net Interest Income 5,333 3,486 3,596
Net Interest Spread 2.61% 3.14% 3.25%
Net Interest Margin 4.60% 4.29% 4.32%
RESULTS OF OPERATIONS
General - The Company reported net income of $1.7 million, $.4
million and $.9 million for the years ended December 31, 1997,
1996 and 1995. The $1.3 million increase was primarily due to an
increase in interest income of $2.2 million from December 31, 1996
to December 31, 1997. A one-time savings deposit insurance
premium of $.4 million was the main factor in the $.5 million
decline in net income from 1995 to 1996.
Interest Income - Interest income increased $2.2 million or 36.1%,
from $6.1 million for 1996 compared to $8.3 million in 1997. The
most significant contributing factor in this increase was interest
on mortgage-backed securities which increased $1.4 million or 350%
from 1996 to 1997. This change was due to an increase in the
average balance in mortgage-backed securities $21.5 million from
1996 compared to 1997 and an increase in the yield of mortgage-
backed securities from 5.92% in 1996 to 6.38% in 1997. This
increased yield was due to a lengthening in the maturity of the
Company's portfolio of mortgage-backed securities. Longer term
instruments tend to yield higher interest rates. The Company
invested in securities in 1997 with maturities ranging from 5
years to 30 years. In past years the Company limited its
investments in mortgage-backed securities to instruments with
maturities of 10 years. While this new strategy does add interest
rate risk, the Company feels that its strong liquid and capital
position make these type investments safe.
The yield on loans receivable decreased form 9.07% in 1996 to
8.73% in 1997. This, however, was offset by an increase in the
average balance of net loans receivable of $5.4 million from 1996
to 1997 resulting in an increase in interest income from net loans
receivable of $.3 million or 7.89%, from $3.8 million in 1996,
compared to $4.1 million in 1997.
Interest income from other interest earning assets increased
$.4 million or 133%, from $.3 million for the 12 months ending
December 31, 1996, compared to $.7 million for the 12 months
ending December 31, 1997. Most of this increase was due to the
Company's temporary investment of funds from its April 1, 1997
sale of common stock in overnight Federal Funds and money market
accounts. While the yield on other interest earning assets was
down from 5.35% in 1996 to 4.89% in 1997, the decrease was
significantly offset by the increase in the average investment in
other interest earning assets.
Interest Expense - Interest expense increased $.3 million or
11.1%, from $2.7 million in 1996, compared to $3.0 million in
1997. The primary reason for the increase was the Company's
adoption of a limited wholesale growth strategy involving
leverage investing. The resulting advances from the
Federal Home Loan Bank of Dallas cost the Company $.4
million in interest expense which was non-existent in prior
years. The cost of passbook savings and certificate of
deposit funds remained essentially unchanged from 1996 to
1997.
Interest expense on passbook savings increased $.02 million
in 1997 compared to 1996. This was largely due to a slight
increase in the average balance. In the first quarter of 1997
passbook savings increased to $27.6 million as some of the funds
designated to purchase the Company's common stock was deposited in
existing customer accounts. Upon the sale of common stock
approximately $3.1 million in passbook savings funds were used to
purchase common stock.
Provision for Loan Losses -The Company had a provisions for loan
loss of $.03 million in 1997 compared to $.06 million and $.01
million for the years ending December 31, 1996 and 1995.
Provisions for loan losses are charged to earnings to bring the
total allowance for loan losses to a level considered appropriate
by management based on a quarterly review which is reflective of
each individual loan's performance and condition of the underlying
collateral. Management targets a certain percentage of the entire
mortgage portfolio given the current economic conditions at which
the general valuation allowance is deemed adequate. The
Association employs the reserve method of accounting for its
general and specific valuation allowances for loan losses. For
the twelve months ended December 31, 1997 and 1996 the above-
mentioned provisions were necessary to bring the general valuation
allowance in line with management's targets due to growth in the
mortgage portfolio.
Non-Interest Income - Non-interest income increased $.14 million
in 1997 to $.07 million, compared to $(.07) million in the twelve
months ended December 31, 1996. The one major contributing factor
to this difference was the gain on sale of investments in 1997 of
$.05 million in 1997 compared to the loss on sale of investments
in 1996 of $.1 million.
Other Expenses - Other expenses decreased $.04 million or 1.5%,
from $2.75 million for the twelve months ended December 31, 1996,
compared to $2.71 million for the twelve months ended December 31,
1997. The absence of the one time $.4 million Savings
Associations Insurance Fund (SAIF) recapitalization premium
assessed in 1996 was largely offset by an increase in
compensation and employee benefits which was due to the
implementation of the Employee Stock Ownership Plan (ESOP)
and the Management Recognition and Retention Plan. The
ESOP replaced the Company's Simplified Employee Pension
(SEP) which served as the Company's pension plan for the
last 4 years. The Company is accounting for the ESOP
expense in accordance with Statement of Position 93-6 as
published by the American Institute of Certified Public
Accountants (AICPA).
Federal Insurance premiums decreased $.1 million or 71.41%,
from $.14 million in 1996, compared to $.04 million in 1997 due to
the lowering of deposit insurance rates instituted by the Federal
Deposit Insurance Corporation for those financial institutions
belonging to the SAIF. The overall expenses increased due to the
Company's conversion from the mutual form of organization to a
stock organization. Such increases occurred in areas such as
legal fees, printing and paper costs.
INTEREST RATE/VOLUME ANALYSIS
-------------------------------------
12/31/97 to 12/31/96 12/31/96 to 12/31/95
Rate Volume Total Rate Volume Total
Interest Income
Loans (141) 466 325 (56) 76 20
MBS 34 1,371 1,405 (9) 65 56
Invest 132 (97) 35 79 (418) (339)
Other (23) 450 427 (12) 132 120
---- ----- ----- ---- ---- -----
Total 1 2,190 2,192 2 (145) (143)
Interest Expense
Passbook 19 2 21 - (47) (47)
Certificates ( 6) (109) (115) 93 (30) 63
Borrowings 439 439 - - -
---- --- --- --- ---- ---
Total 13 332 345 93 ( 77) 16
Increase/(Decrease)
in Net Interest (11) 1,858 1,847 ( 91) (68) (159)
Income
LIQUIDITY AND CAPITAL RESOURCES
Liquidity measures the Company's ability to meet its short term
obligations with ready cash. The Company is required under
Federal regulations to maintain certain levels of "liquid"
investments, specifically not less than 5% 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 securities. As
of December 31, 1997, the Company's liquidity stood at 70.8% or
$48.7 million in excess of the minimum requirement.
Guaranty Savings & Loan Association, the Company's wholly owned
subsidiary, 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 December 31, 1997, the Association's
tangible and core capital amounted to $35.9 million or 31.8% of
adjusted total assets, while the Association's risk based capital
was $35.9 million or 79.0% of total adjusted risk weighted assets.
Laporte, Sehrt, Romig & Hand
To The Board of Directors
GS Financial Corp. and Subsidiaries
Independent Auditor's Report
We have audited the accompanying consolidated balance sheet
of GS FINANCIAL CORP. and its wholly-owned subsidiary, GUARANTY
SAVINGS AND HOMESTEAD ASSOCIATION as of December 31, 1997 and
1996, and the related consolidated statement of income, changes in
stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1997. 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 generally accepted
auditing standards. Those standards require that we plan and
perform the audit 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 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, 1997 and 1996, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally
accepted accounting principles.
A Professional Accounting Corporation
February 17, 1998
Metairie, LA.
A Professional Accounting Corporation
800 Two Lakeway Center, 3850 N. Causeway Blvd. Metairie, LA 70002
PH (504) 835-5522
FAX (504) 835-5535
GS FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
ASSETS
December 31,
-----------------
1997 1996
-----------------
CASH AND CASH EQUIVALENTS
Cash and Amounts Due from
Depository Institutions $ 376 $ 329
Interest-Bearing Deposits in Other Banks 1,186 1,212
Federal Funds Sold 1,050 6,050
Total Cash and Cash Equivalents 2,612 7,591
Securities Available-for-Sale,
at Fair Value 27,974 23,566
Mortgage-Backed Securities
Available-for-Sale, at Fair Value 42,721 -
Mortgage-Backed Securities Held-to-
Maturity - Fair Value of
$7,296 at December 31, 1996 - 7,520
Loans, Net 53,588 44,125
Accrued Interest Receivable 587 536
Premises and Equipment, Net 2,715 2,752
Real Estate Held-for-Investment 218 93
Stock in Federal Home Loan Bank, at Cost 884 728
Prepaid Income Tax - 398
Deferred Charges 46 24
Other Assets 51 217
------- ------
Total Assets $131,396 $87,550
======= ======
The accompanying notes are an integral part of these financial statements.
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
------------------
1997 1996
------------------
LIABILITIES
Deposits $ 56,822 $61,421
Advance Payments by Borrowers
for Taxes and Insurance 899 529
FHLB Advances 16,157 -
Accrued Interest - FHLB Advances 83 -
Accrued Income Tax 92 -
Deferred Income Tax 1,178 715
Other Liabilities 118 106
------ ------
Total Liabilities 75,349 62,771
STOCKHOLDERS' EQUITY
Preferred Stock - $.01 Par Value;
5,000,000 Shares Authorized - 0 -
Shares Issued and Outstanding - -
Common Stock - $.01 Par Value;
20,000,000 Shares Authorized
3,438,500 Shares Issued and Outstanding 34 -
Additional Paid-in Capital 33,658 -
Unearned ESOP Shares (2,516) -
Unearned RRP Trust Stock (2,076) -
Retained Earnings 25,089 23,862
Unrealized Gain on Securities
Available-for-Sale, Net of
Applicable Deferred Income Tax 1,858 917
------ ------
Total Stockholders' Equity 56,047 24,779
------- ------
Total Liabilities and
Stockholders' Equity $ 131,396 $87,550
======= ======
The accompanying notes are an integral part of these financial statements.
GS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
For The Years Ended
December 31,
-----------------------------------
1997 1996 1995
-----------------------------------
INTEREST INCOME
Loans Receivable $ 4,085 $ 3,760 $ 3,740
Investment Securities 1,724 1,689 2,028
Mortgage Backed Securities 1,841 436 380
Dividends on Federal Home
Loan Bank Stock 47 41 43
Other Interest Income 650 229 107
----- ----- -----
Total Interest Income 8,347 6,155 6,298
----- ----- -----
INTEREST EXPENSE
Deposits 2,575 2,669 2,653
Advances from Federal Home
Loan Bank 439 - -
----- ----- -----
Total Interest Expense 3,014 2,669 2,653
----- ----- -----
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES 5,333 3,486 3,645
PROVISION FOR LOAN LOSSES 28 59 12
----- ----- -----
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,305 3,427 3,633
----- ----- -----
NON INTEREST INCOME
Gain (Loss) on Sale of
Investments 53 (100) -
Other Income 20 26 8
----- ----- -----
Total Other Income 73 (74) 8
NON INTEREST EXPENSE
Compensation and Employee
Benefits 1,923 1,579 1,577
Advertising 33 38 37
Office Supplies, Telephone
and Postage 91 83 79
Net Occupancy Expense 308 293 258
SAIF Recapitalization Premium - 413 -
Legal Fees 35 7 10
Audit and Consulting Fees 53 56 38
Supervisory Fees 56 47 47
Federal Insurance Premiums 38 140 147
Data Processing Expense 65 67 69
Real Estate Owned Expense - Net 8 (3) (11)
Other 98 27 58
----- ----- -----
Total Other Expenses 2,708 2,747 2,289
----- ----- -----
INCOME BEFORE FEDERAL INCOME
TAX EXPENSE 2,670 606 1,352
INCOME TAX EXPENSE 1,000 201 480
----- ----- -----
NET INCOME $ 1,670 $ 405 $ 872
===== === ===
EARNINGS PER SHARE - BASIC $ .53 $ - $ -
EARNINGS PER SHARE - DILUTED $ 0.53
The accompanying notes are an integral part of these financial statements.
GS FINANCIAL CORP.CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For The Years Ended December 31, 1997, 1996, and 1995
(Dollars in Thousands)
Unrealized
Gain on Securities
Available for Sale,
Additional Unearned Unearned Net of Applicable Total
Common Paid-in ESOP RRP Trust Retained Deferred Stockholders'
Stock Capital Shares Stock Earnings Income Tax