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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the Quarterly period ended March 31, 2004

Commission File Number: 0-22269


GS Financial Corp.

(Exact Name of Registrant as Specified in its Charter)


Louisiana

 

72-1341014

(State of Incorporation)

 

(IRS Employer Identification No.)


3798 Veterans Blvd.

Metairie, LA 70002

(Address of Principal Executive Offices)


(504) 457-6220

(Registrant's Telephone Number, including area code)



Indicate by check mark 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.  Yes  X    No___


Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ___    No X    


Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class

 

Outstanding at May 11, 2004

Common Stock, par value $.01 per share

 

1,298,559 shares







GS FINANCIAL CORP.




TABLE OF CONTENTS

Page


PART I – FINANCIAL INFORMATION

 

Item 1

Financial Statements

   

Consolidated Balance Sheets

1

   

Consolidated Statements of Income

2

   

Consolidated Statements of Changes in Stockholders’ Equity

3

   

Consolidated Statements of Cash Flows

4

   

Notes to Consolidated Financial Statements

5

 

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations


6

 

Item 3

Quantitative and Qualitative Disclosures about Market Risk

14

 

Item 4

Controls and Procedures

14


PART II – OTHER INFORMATION

 

Item 1

Legal Proceedings

14

 

Item 2

Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities


14

 

Item 3

Defaults Upon Senior Securities

14

 

Item 4

Submission of Matters to a Vote of Security Holders

14

 

Item 5

Other Information

15

 

Item 6

Exhibits and Reports on Form 8-K

15


SIGNATURES

EXHIBIT INDEX






PART I – FINANCIAL INFORMATION


ITEM 1 – FINANCIAL STATEMENTS


GS FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

 

 

 

 

March 31, 2004

December 31, 2003

($ in thousands)

(Unaudited)

(Audited)

ASSETS

  

Cash and Cash Equivalents

  

Cash & Due from Depository Institutions

 $                      2,163

 $                       1,899

Interest-Bearing Deposits in Other Banks

                          1,689

                          4,507

Federal Funds Sold

                          1,940

                          4,965

Total Cash and Cash Equivalents

                          5,792

                        11,371

   

Securities Available-for-Sale, at Fair Value

                     119,976

                      119,271

Loans, Net

                       85,522

                        77,367

Accrued Interest Receivable

                             585

                             547

Premises & Equipment

                          2,560

                          2,591

Stock in Federal Home Loan Bank, at Cost

                          2,736

                          2,726

Foreclosed Assets

                               52

                               52

Real Estate Held-for-Investment

                             507

                             511

Other Assets

                             324

                             278

Total Assets

 $                  218,054

 $                   214,714

   

LIABILITIES

  

Deposits

  

Noninterest-bearing

 $                      1,341

 $                       1,155

Interest-bearing

                     144,234

                      140,953

Total Deposits

                     145,575

                      142,108

   

Advance Payments by Borrowers for Taxes and Insurance

                             273

 $                          312

FHLB Advances

                       40,312

                        42,135

Deferred Income Tax

                          1,054

                             512

Other Liabilities

                             428

                             339

Total Liabilities

                     187,642

                      185,406

   

STOCKHOLDERS' EQUITY

  

Preferred Stock - $.01 Par Value

  

Authorized - 5,000,000 shares

  

Issued - 0 Shares

                                   -

                                  -

Common Stock - $.01Par Value

  

Authorized - 20,000,000 shares

  

Issued - 3,438,500 Shares

                               34

                               34

Additional Paid in Capital

                       34,294

                        34,231

Unearned ESOP Stock

                           (732)

                           (802)

Unearned RRP Trust Stock

                        (1,039)

                        (1,059)

Treasury Stock, at Cost

                      (31,915)

                      (31,804)

Retained Earnings

                       28,546

                        28,553

Accumulated Other Comprehensive Income

                          1,224

                             155

Total Stockholders' Equity

                       30,412

                        29,308

Total Liabilities & Stockholders' Equity

 $                  218,054

 $                   214,714

The accompanying notes are an integral part of these financial statements.




GS FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

   

 

For the three months ended March 31,

($ in thousands, except per share data)

2004

2003

INTEREST AND DIVIDEND INCOME

  

Loans, Including Fees

 $    1,563

 $     1,480

Investment Securities

       1,109

        1,058

Other Interest Income

             11

             72

Total Interest Income

       2,683

        2,610

   

INTEREST EXPENSE

  

Deposits

          848

           778

FHLB Advances

          580

           830

Total Interest Expense

       1,428

        1,608

   

NET INTEREST INCOME

       1,255

        1,002

PROVISION FOR LOAN LOSSES

             14

                -

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

       1,241

        1,002

   

NON-INTEREST EXPENSE

  

Salaries and Employee Benefits

          681

           715

Occupancy Expense

          101

           113

Other Expenses

          361

           301

Total Non-Interest Expense

       1,143

        1,129

NET INCOME (LOSS) BEFORE NON-INTEREST INCOME AND INCOME TAXES

             98

          (127)

   

NONINTEREST INCOME

  

Gain on Sale of Investments

                -

           573

Other Income

             21

             20

Total Non-Interest Income

             21

           593

   

INCOME BEFORE INCOME TAX EXPENSE

          119

           466

INCOME TAX  EXPENSE

               8

             91

NET INCOME

 $       111

 $        375

   

EARNINGS PER SHARE

  

Basic

 $      0.10

 $       0.29

Diluted

 $      0.09

 $       0.28

CASH DIVIDENDS PER SHARE

 $      0.10

 $       0.10

The accompanying notes are an integral part of these financial statements.




#




GS FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

($ in thousands)

Common Stock

Additional Paid in Capital

Treasury Stock

Unearned ESOP Stock

Unearned RRP Trust Stock

Retained Earnings

Accumulated Other Comprehensive Income (Loss)

Total Stockholders' Equity

Balances At December 31, 2002

 $      34

 $ 34,040

 $ (27,695)

 $     (1,083)

 $  (1,274)

 $ 28,334

 $            2,028

 $      34,384

Comprehensive Income:

        

Net Income

            -

              -

               -

                 -

              -

         375

                       -

              375

Other Comprehensive Income

        

Unrealized net holding gains on securities, net of taxes

            -

              -

               -

                 -

              -

              -

                 (221)

            (221)

Total Comprehensive Income

            -

              -

               -

                 -

              -

         375

                 (221)

              154

Distribution of RRP Stock

            -

              -

               -

                 -

              -

              -

 

                   -

ESOP Shares Released

            -

           86

               -

              70

              -

              -

 

              156

Purchase of Treasury Stock

            -

              -

      (2,355)

                 -

              -

              -

                       -

         (2,355)

Dividends Declared

            -

              -

               -

                 -

              -

       (152)

                       -

            (152)

Balances at March 31, 2003

 $      34

 $ 34,126

 $ (30,050)

 $     (1,013)

 $  (1,274)

 $ 28,557

 $            1,807

 $      32,187

         

Balances At December 31, 2003

 $      34

 $ 34,231

 $ (31,804)

 $        (802)

 $  (1,059)

 $ 28,553

 $               155

 $      29,308

Comprehensive Income:

        

Net Income

            -

              -

               -

                 -

              -

         111

                       -

              111

Other Comprehensive Income

        

Unrealized net holding gains on securities, net of taxes

            -

              -

               -

                 -

              -

              -

               1,069

           1,069

Total Comprehensive Income

            -

              -

               -

                 -

              -

         111

               1,069

           1,180

Distribution of RRP Stock

            -

           (5)

               -

                 -

           20

              -

                       -

                15

ESOP Shares Released

 

           68

               -

              70

              -

              -

                       -

              138

Purchase of Treasury Stock

            -

              -

         (111)

 

              -

              -

                       -

            (111)

Dividends Declared

            -

              -

               -

                 -

              -

       (118)

                       -

            (118)

Balances at March 31, 2004

 $      34

 $ 34,294

 $ (31,915)

 $        (732)

 $  (1,039)

 $ 28,546

 $            1,224

 $      30,412

The accompanying notes are an integral part of these financial statements.








GS FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Three Months Ended March 31,

($ in thousands)

2004

2003

CASH FLOWS FROM OPERATING ACTIVITIES

  

Net Income

 $                  111

 $                  375

Adjustments to Reconcile Net Income to Net Cash Provided by (Used In) Operating Activities

  

Depreciation

                       35

                       35

Discount Accretion Net of Premium Amortized

                     (12)

                       13

Provision for Loan Losses

                       14

                         -

Non-Cash Dividend - FHLB

                     (10)

                     (34)

Net Loan Fees

                         -

                         1

Mutual Fund Dividends Reinvested

                   (365)

                   (256)

ESOP Shares Released

                     138

                     134

RRP Expense

                       38

                       37

Gain on Sale of Foreclosed Real Estate

                         -

                         -

Gain on Sale of Investments

                         -

                   (573)

Deferred Income Tax Provision

                     (91)

                       23

Changes in Operating Assets and Liabilities

  

(Increase) Decrease in Accrued Interest Receivable

                     (38)

                     121

Decrease in Prepaid Income Taxes

                       22

                         1

(Increase) in Other Assets

                     (68)

                     (81)

(Decrease) in Accrued Interest - FHLB Advances

                   (189)

                   (111)

Increase in Accrued Income Tax

                         -

                       91

Increase in Other Liabilities

                     338

                     139

Net Cash (Used in) Operating Activities

                     (77)

                     (85)

 

CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds from Maturities of Investment Securities

                  2,102

                22,130

Proceeds from Sales of Investment Securities

                         -

                  7,481

Purchases of Investment Securities

                         -

              (11,562)

Investment in Mutual Funds, Net

                   (811)

              (25,939)

Loan Originations and Principal Collections, Net

                (8,169)

                  2,885

Purchases of Premises and Equipment

                         -

                     (11)

Proceeds from Sales of Foreclosed Real Estate

                         -

                         -

Investment in Foreclosed Real Estate

                         -

                         -

Net Cash (Used in) Investing Activities

                (6,878)

                (5,016)

 

CASH FLOWS FROM FINANCING ACTIVITIES

Purchase of Treasury Stock

                   (111)

                (2,355)

Decrease in Advances from Federal Home Loan Bank

                (1,823)

                (9,976)

Payment of Cash Stock Dividends

                   (118)

                   (152)

Net Increase in Deposits

                  3,467

                11,985

Decrease in Deposits for Escrows

                     (39)

                     (46)

Net Cash Provided by (Used In) Financing Activities

                  1,376

                   (544)

NET (DECREASE) IN CASH AND CASH EQUIVALENTS

                (5,579)

                (5,645)

CASH AND CASH EQUIVALENTS - Beginning of Period

                11,371

                13,352

CASH AND CASH EQUIVALENTS - End of Period

 $               5,792

 $               7,707

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash Paid During the Period For:

  

Interest Expense

                  1,617

                  6,874

Income Taxes

                       77

                     326

Loans Transferred to Foreclosed Real Estate During the Period

                         -

                       42

Market Value Adjustments for Gain on Securities Available-for-Sale

                  1,619

                     277

The accompanying notes are an integral part of these financial statements.







GS FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 – BASIS OF PRESENTATION


The consolidated financial statements include the accounts of the Company and its subsidiary.  All significant intercompany balances and transactions have been eliminated.  Certain financial information for prior periods has been reclassified to conform to the current presentation.

In preparing the consolidated financial statements, the Company is required to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.  Actual results could differ from those estimates.  The consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the financial condition, results of operations, changes in stockholders’ equity and cash flows for the interim periods presented.  These adjustments are of a normal recurring nature and include appropriate estimated provisions.


Pursuant to rules and regulations of the Securities and Exchange Commission, certain financial information and disclosures have been condensed or omitted in preparing the consolidated financial statements presented in this quarterly report on Form 10-Q.  The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results to be expected for the year ending December 31, 2004.  These unaudited financial statements should be read in conjunction with the Company’s 2003 annual report of Form 10-K.

NOTE 2 – EARNINGS PER SHARE


Earnings per share are computed using the weighted average number of shares outstanding as prescribed in Statement of Financial Accounting Standard (“SFAS”) 128.  The components used in this computation were as follows:


 

Three Months Ended March 31

($ in thousands, except per share data)

2004

2003

Numerator:

  

Net Income

 $           111

 $           375

Effect of Dilutive Securities

                  -

                  -

Numerator for Diluted Earnings Per Share

 $           111

 $           375

Denominator

  

Weighted-Average Shares Outstanding

    1,160,093

    1,298,503

Effect of Potentially Dilutive Securities and Contingently Issuable Shares

         31,534

         18,378

Denominator for Diluted Earnings Per Share

    1,191,627

    1,316,881

Earnings Per Share

  

Basic

 $          0.10

 $          0.29

Diluted

             0.09

             0.28


NOTE 3 – EMPLOYEE STOCK OWNERSHIP PLAN


The GS Financial Employee Stock Ownership Plan (ESOP) purchased 275,080 shares of the Company’s common stock on April 1, 1997 financed by a loan from the Company.  The loan is secured by those shares not yet allocated to plan participants.  At March 31, 2004, there were 80,187 unallocated shares and the balance of the loan was $950,000.  The Association bears the cost of the ESOP as compensation expense which is based on principal and interest payments on the corresponding debt as well as the market value of the stock.  Compensation expense related to the ESOP was $125,000 for the three months ended March 31, 2004, compared to $134,000 for the three months ended March 31, 2003.


NOTE 4 – STOCK OPTION PLAN


On October 15, 1997, the stockholders approved the adoption of the GS Financial Corp. 1997 Stock Option Plan for the benefit of directors, officers and other key employees.  Under this plan, 343,850 shares of common stock have been reserved for issuance pursuant to the exercise of stock options, of which 275,076 shares have become fully vested and exerciseable.  To date no options have been exercised.


The Company accounts for the plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations.  No stock-based employee compensation cost is reflected in net income, as all options granted under the plan have an exercise price equal to the market value of the underlying common stock on the date of the grant.  Net income and earnings per share for the first quarters of 2004 and 2003 would have been the same as reported if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation to measure and recognize stock based compensation expense.


NOTE 5 – RECOGNITION AND RETENTION PLAN


On October 15, 1997 the Company established the Recognition and Retention Plan and Trust (RRP) as an incentive to retain personnel of experience and ability in key positions.  Stockholders approved a total of 137,540 shares of stock to be granted pursuant to the RRP.  The Company acquired a total of 137,500 shares of common stock for issuance under the RRP.  The Company is accruing this expense over the ten-year vesting period based on the price of the stock ($12.50/share) when the plan was modified in September, 1998.  As of March 31, 2003, of the 125,028 shares awarded, 2,500 shares have been forfeited due to termination of employment and 79,230 had been earned and issued.  Compensation expense related to the RRP was $38,000 for the three months ended March 31, 2004 and $37,000 for the same time period in 2003.


ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


The purpose of this discussion and analysis is to focus on significant changes in the financial condition of GS Financial Corp. (“GS Financial” or the “Company”), and its subsidiary during the first quarter of 2004 as compared to the end of the prior fiscal year and on their results of operations during the first quarters of 2004 and 2003.  Virtually all of the Company’s operations are dependent on the operations of its subsidiary, Guaranty Savings and Homestead Association (“Guaranty” or the “Association”).  This discussion is presented to highlight and supplement information presented elsewhere in this quarterly report on Form 10-Q, particularly the consolidated financial statements and related notes in Item 1.  This discussion and analysis should be read in conjunction with accompanying tables and the Company’s 2003 annual report on Form 10-K.


FORWARD-LOOKING STATEMENTS

In addition to the historical information, this discussion includes certain forward-looking statements as that term is defined by the Private Securities Litigation Reform Act of 1995.  Such statements include, but may not be limited to comments regarding (a) the potential for earnings volatility from changes in the estimated allowance for loan losses over time, (b) the expected growth rate of the loan portfolio, (c) future changes in the mix of deposits, (d) the results of net interest income simulations run by the Company to measure interest rate sensitivity, (d) the performance of Guaranty’s net interest income and net interest margin assuming certain future conditions, and (f) changes or trends in certain expense levels.


Forward-looking statements are based on numerous assumptions, certain of which may be referred to specifically in connection with a particular statement.  Some of the more important assumptions include:


•

expectations about overall economic strength and the performance of the economies in Guaranty’s market area,

•

expectations about the movement of interest rates, including actions that may be taken by the Federal Reserve Board in response to changing economic conditions,

•

reliance on existing or anticipated changes in laws or regulations affecting the activities of the banking industry and other financial service providers, and

•

expectations regarding the nature and level of competition, changes in customer behavior and preferences, and Guaranty’s ability to execute its plans to respond effectively.


Because it is uncertain whether future conditions and events will confirm these assumptions, there is a risk that the Company’s future results will differ materially from what is stated or implied by such forward-looking statements.  The Company cautions the reader to consider this risk.


The Company undertakes no obligation to update any forward-looking statement included in this annual report, whether as a result of new information, future events or developments, or for any other reason.







FINANCIAL CONDITION


LOANS AND ALLOWANCE FOR LOAN LOSSES

Total loans increased $8.1 million, or 10.5%, from year-end 2003 to the end the first quarter of 2004.  Average loans for the first quarter of 2004 were $81.6 million, up $4.7 million (6%) and $5.4 million (7%) compared to the fourth quarter of 2003 and first quarter of 2003, respectively.  Table 1, which is based on regulatory reporting codes, shows loan balances at March 31, 2004 and at the end of the four prior quarters.


TABLE 1. COMPOSITION OF LOAN PORTFOLIO

 

2004

2003

($ in thousands)

March 31

December 31

September 30

June 30

March 31

Real estate loans - residential

 $    44,888

 $        44,021

 $         45,576

 $ 49,791

 $  56,336

Real estate loans - commercial and other

       33,416

           26,460

            25,335

    23,103

     14,406

Real estate loans - construction

         5,641

             4,709

              3,822

      2,652

       1,610

Consumer loans

             496

                513

                 599

         512

          437

Commercial business loans

         1,666

             2,257

              1,161

      1,268

       3,133

Total Loans

 $    86,107

 $        77,960

 $         76,493

 $ 77,326

 $  75,922

Average Loans During Period

 $    81,636

 $        76,956

 $         75,725

 $ 75,465

 $  76,258


Throughout 2003 and continuing into 2004, the commercial real estate loan portfolio, including multi-family and retail property, has shown significant growth.  The Company continues to develop significant new business in the growing commercial market, while not, in management’s view, incurring an excessive amount of risk to the overall portfolio.  Commercial real estate loans, were up 26%, or $7.0 million, at March 31, 2004, compared to year-end 2003, and has grown 132%, or 19.0 million, from the end of the year earlier quarter.  


The above increases in lending on commercial real estate reflects a shift in the Company’s emphasis over the past few years from its more traditional residential mortgage lending activities.  As such, loans secured by residential real estate at March 31, 2004 were up $867,000, or 2%, from December 31, 2003 and decreased $11.4 million, or 20%, from March 31, 2003.


All loans carry a degree of credit risk. Management’s evaluation of this risk ultimately is reflected in the estimate of probable loan losses that is reported in the Company’s financial statements as the allowance for loan losses.  Changes in this ongoing evaluation over time are reflected in the provision for loan losses charged to operating expense.  At March 31, 2004, the allowance for loan losses was $594,000, or .69%, of total loans.  Table 2 presents an analysis of the activity in the allowance for loan losses for the past five quarters.


TABLE 2. SUMMARY OF ACTIVITY IN THE ALLOWANCE FOR LOAN LOSSES

 

2004

2003

($ in thousands)

First Quarter

Fourth Quarter

Third Quarter

Second Quarter

First Quarter

Beginning Balance - January 1

 $          601

 $        580

 $        539

 $        483

 $        483

Provision for Losses

               14

             21

             41

             56

                -

Loans Charged Off

              (21)

                -

                -

                -

                -

Recoveries of loans previously charged off

                   -

                -

                -

                -

                -

Ending Balance - December 31

 $          594

 $        601

 $        580

 $        539

 $        483

Ratios

     

Charge-offs to average loans

0.03%

0.00%

0.00%

0.00%

0.00%

Provision for loan losses to charge-offs

66.67%

n/a

n/a

n/a

n/a

Allowance for loan losses to charge-offs (annualized)

707.14%

n/a

n/a

n/a

n/a

Allowance for loan losses to ending loans

0.69%

0.77%

0.76%

0.70%

0.64%







Tables 3 and 4 set forth the Company’s delinquent loans and nonperforming assets at March 31, 2004 and at the end of the preceding four quarters.   The balances presented in Table 3 are total principal balances outstanding on the loans rather than the actual principal past due.  Nonperforming assets consist of loans on nonaccrual status and foreclosed assets.  There were no loans 90 days delinquent and still accruing interest at any of the five previous quarter ends.  


TABLE 3. DELINQUENT LOANS

  

 

2004

2003

($ in thousands)

March 31

December 31

September 30

June 30

March 31

30-89 Days

 $        5,714

 $        5,345

 $        3,708

 $        5,859

 $        2,841

90+ Days

              770

              930

           1,239

              521

              682

Total

 $        6,484

 $        6,275

 $        4,947

 $        6,380

 $        3,523

Ratios

     

Loans delinquent 90 days to total loans

0.89%

1.19%

1.62%

0.67%

0.90%

Total delinquent loans to total loans

7.53%

8.05%

6.47%

8.25%

4.64%

Allowance for loan losses to 90 day delinquent loans

77.14%

64.62%

46.81%

103.45%

70.82%

Allowance for loan losses to total delinquent loans

9.16%

9.58%

11.72%

8.45%

13.71%


TABLE 4. NONPERFORMING ASSETS

 

2004

2003

($ in thousands)

March 31

December 31

September 30

June 30

March 31

Loans accounted for on a nonaccrual basis

 $           770

 $           930

 $        1,239

 $           521

 $           682

Foreclosed assets

                52

                52

                  -

                  -

                  -

Total nonperforming assets

 $           822

 $           982

 $        1,239

 $           521

 $           682

Ratios

     

Nonperforming assets to loans plus foreclosed assets

0.95%

1.26%

1.62%

0.67%

0.90%

Nonperforming assets to total assets

0.38%

0.46%

0.66%

0.34%

0.43%

Allowance for loan losses to nonperforming loans

72.26%

61.20%

46.81%

103.45%

70.82%


INVESTMENT IN SECURITIES

At March 31, 2004, total securities were $120.0 million, compared to $119.3 million at December 31, 2003 and $117.1 million at March 31, 2003.  The composition of the portfolio has not changed significantly over this time frame, with mutual fund investments making up 56% of the portfolio at March 31, 2004 compared to 55% at year-end 2003 and 50% at March 31, 2003.  At March 31, 2004, collateralized mortgage obligations made up 26% of the portfolio, compared to 27% at December 31, 2003 and 30% at the end of the first quarter of 2003.


The quarter-end net unrealized gains on the entire portfolio was $1.9 million, or 1.6% of amortized cost, up from $234,000, or .2% of amortized cost at December 31, 2003.


Table 5 shows the composition of the Company’s investment portfolio at March 31, 2004, December 31, 2003, and March 31, 2003.


TABLE 5. COMPOSITION OF INVESTMENT PORTFOLIO

 

March 31, 2004

December 31, 2003

March 31, 2003

($ in thousands)

Amortized Cost

Market Value

Amortized Cost

Market Value

Amortized Cost

Market Value

U.S. Treasury securities

 $         801

 $         876

 $           801

 $           881

 $           801

 $           910

Mortgage Backed Securities

             316

             312

              339

              362

              524

              534

Collateralized Mortgage Obligations

       30,152

       31,064

         32,220

         32,486

         34,653

         34,874

Mutual funds

       67,007

       66,566

         65,831

         65,371

         58,532

         58,545

FHLMC Preferred Stock

       19,846

       21,157

         19,846

         20,171

         19,862

         22,235

Total Investments

 $ 118,122

 $ 119,976

 $    119,037

 $    119,271

 $    114,372

 $    117,098







DEPOSITS

At March 31, 2004, deposits were 2%, or $3.5 million, above the level at December 31, 2003.  Average deposits totaled $142.9 million in the first quarter of 2004, a $3.6 million (3%) increase from the fourth quarter of 2003 and a $30.2 million (27%) increase from the first quarter of 2003.  Table 6 presents the composition of average deposits for the quarter ended March 31, 2004, December 31, 2003 and March 31, 2003.


TABLE 6.  DEPOSIT COMPOSITION

 

First Quarter 2004

Fourth Quarter 2003

First Quarter 2003

($ in thousands)

Average Balances

% of Deposits

Average Balances

% of Deposits

Average Balances

% of Deposits

Noninterest bearing demand deposits

 $         793

0.6%

 $         663

0.5%

 $         654

0.6%

NOW account deposits

         9,372

   6.6

         8,600

    6.2

         6,006

   5.3

Savings deposits

       34,853

24.4

       34,953

  25.1

       32,172

 28.5

Time deposits

       97,848

68.4

       95,049

  68.2

       73,859

 65.6

Total

 $ 142,866

100.0%

 $  139,265

100.0%

 $  112,691

100.0%


BORROWINGS

At March 31, 2004, the Company’s borrowings from the Federal Home Loan Bank decreased $1.8 million, or 4%, from December 31, 2003 and decreased $16.1 million, or 29%, from March 31, 2003.  Average advances for the first quarter of 2004 were $40.9, down $1.8 million, or 4%, from the fourth quarter of 2003 and down $18.3 million, or 31%, from the prior year’s first quarter.  The decreases were due to maturing FHLB advances that were not replaced because increased deposits had produced increased cash on hand during the respective periods.


STOCKHOLDERS’ EQUITY AND CAPITAL ADEQUACY

At March 31, 2004, stockholders’ equity totaled $30.4 million, compared to $29.3 million at the end of 2003.  The main factor for this increase was unrealized gains on investment securities available-for-sale, net of related deferred income taxes.  Earnings of $111,000 and stock based compensation costs of $153,000 were partially offset by dividends of $118,000.


Since 1998, the Company has been consistently repurchasing shares of its common stock when shares have been available at prices and amounts deemed prudent by management.  Due to the highly capitalized condition of the Company, management felt that these purchases, most of which were at a discount to book value, were an effective way to reduce capital while still enhancing shareholder value.  Management believes that reducing capital through stock repurchases is a more conservative use of capital than alternatives such as expanding the banking activities of the Company’s subsidiary through acquisitions.  These shares have not been retired and could potentially serve as a source of capital funding should the need arise in the future.  Table 7 summarizes the repurchase of the shares of its common stock by year.


TABLE 7. SUMMARY OF STOCK REPURCHASES

Year Ended December 31,

Shares

Cost ($000)

 Average Price Per Share

1998

         491,054

 $          8,324

 $          16.95

1999

         299,000

             3,653

             12.22

2000

         679,600

             8,590

             12.64

2001

         305,684

             4,612

             15.09

2002

         142,201

             2,516

             17.69

2003

         216,181

             4,109

             19.01

2004

             5,711

                111

             19.44

Total Stock Repurchases

      2,139,431

 $        31,915

 $          14.92


The ratios in Table 8 indicate that the Company remained well capitalized at March 31, 2004.   The growth in the Company’s loan portfolio in the first quarter of 2004 is reflected in the increase in risk-weighted assets since year-end 2003.  The regulatory capital ratios of Guaranty Savings and Homestead Association exceed the minimum required ratios, and the Association has been categorized as “well-capitalized” in the most recent notice received from its primary regulatory agency.







TABLE 8. CAPITAL AND RISK BASED CAPITAL RATIOS

 

2004

2003

($ in thousands)

March 31

December 31

March 31

Tier 1 regulatory capital

 $      26,395

 $        26,800

 $   25,949

Tier 2 regulatory capital

               990

                601

           483

Total regulatory capital

 $      27,385

 $        27,401

 $   26,432

Adjusted total assets

 $    214,355

 $      213,199

 $ 203,736

Risk-weighted assets

 $    105,295

 $        96,456

 $ 134,969

Ratios

   

Tier 1 capital to total assets

12.31%

12.57%

12.74%

Tier 1 capital to risk-weighted assets

25.07%

27.78%

19.23%

Total capital to risk-weighted assets

26.01%

28.41%

19.58%

Stockholders’ equity to total assets

13.95%

13.65%

15.34%


LIQUIDITY AND CAPITAL RESOURCES

The objective of liquidity management is to ensure that funds are available to meet cash flow requirements of depositors and borrowers, while at the same time meeting the operating, capital and strategic cash flow needs of the Company and the Association, all in the most cost-effective manner.  The Company develops its liquidity management strategies and measures and monitors liquidity risk as part of its overall asset/liability management process, making use of the quantitative modeling tools to project cash flows under a variety of possible scenarios.


On the liability side, liquidity management focuses on growing the base of more stable core deposits at competitive rates, while at the same time ensuring access to economical wholesale funding sources.  The sections above on Deposits and Borrowings discuss changes in these liability-funding sources in the first quarter of 2004.  


Liquidity management on the asset side primarily addresses the composition and maturity structure of the loan and investment securities portfolios and their impact on the Company’s ability to generate cash flows from scheduled payments, contractual maturities and prepayments, their use as collateral for borrowings and possible outright sales on the secondary market.  


Cash generated from operations is another important source of funds to meet liquidity needs.  The consolidated statements of cash flows present operating cash flows and summarize all significant sources and uses of funds for the first three months of 2004 and 2003.  While the Company reported net income of $111,000 for the quarter ended March 31, 2004, there was a net cash decrease of $77,000 from operations.  This was primarily due to $365,000 in dividends on mutual fund investments reinvested in principal that were not fully offset by operating income amounts.


Table 9 illustrates some the factors that the Company uses to measure liquidity.  After growing significantly throughout 2003, the Company’s liquidity position has begun to drop during the first three months of 2004, primarily reflecting the  increase in lending activity.  Management feels that this developing trend will continue and liquidity will return to more normal levels with increased economic activity, higher interest rates, and the strengthening of the capital markets.  


TABLE 9. KEY LIQUIDITY INDICATORS

 

2004

2003

($ in thousands)

March 31

December 31

March 31

Cash and cash equivalents

 $        5,792

 $      11,371

 $     7,707

Total loans

         86,107

         77,960

      76,493

Total deposits

       145,575

       142,108

   119,153

Deposits $100,000 and over

         27,540

           27,235

       19,265

Ratios

   

Total loans to total deposits

59.15%

54.86%

64.20%

Deposits $100,000 and over to total deposits

18.92%

19.17%

16.17%







RESULTS OF OPERATIONS


NET INTEREST INCOME

Net interest income for the first quarter of 2004 increased $253,000, or 25%, from the first quarter of 2003, even though average earning assets increased only 3% between these periods.  First quarter net interest income for 2004 on earning assets that were less than 1% higher was also up 17%, or $184,000 compared with the fourth quarter of 2003.


Based on internal interest rate risk models and balance sheet gap analysis, the Company is significantly asset sensitive in the short term (3 month) horizon; implying that it would experience some compression in its interest margin in a declining rate environment, holding other factors constant.  However, rates on earning assets held fairly constant during the first three months of 2004.  As a result, Guaranty was able to add 33 basis points to the margin, raising it to 2.39% compared to the fourth quarter of 2003, and 41 basis points higher than that of the year-earlier quarter.  Tables 10 and 11 show the components of the Company’s net interest margin and the changes in those components from the fourth quarter and first quarter of 2003.


TABLE 10. SUMMARY OF AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND INTEREST RATES

 

First Quarter 2004

Fourth Quarter 2003

First Quarter 2003

($ in thousands)

Average Balance

Interest

Average Yield/ Cost

Average Balance

Interest

Average Yield/ Cost

Average Balance

Interest

Average Yield/ Cost

ASSETS

INTEREST-EARNING ASSETS

Loans

 $   81,636

 $ 1,563

7.66%

 $   76,956

 $  1,479

7.69%

 $    76,741

 $  1,480

7.71%

U.S. Treasury securities

            881

          14

   6.36

             895

            14

        6.26

              917

            14

          6.11

Mortgage-backed securities

            331

           6

   7.25

              361

              5

        5.54

              513

            10

        7.80

Collateralized mortgage obligations

       31,896

       434

   5.44

       24,672

         346

         5.61

       39,080

         495

        5.07

Mutual funds

       66,716

       377

   2.26

       64,988

          351

         2.16

       44,624

         256

        2.29

FHLMC stock

      20,278

       278

   5.48

        20,916

         278

        5.32

        21,797

         283

         5.19

Total investment in securities

     120,102

     1,109

   3.69

        111,832

         994

        3.56

       106,931

      1,058

        3.96

FHLB stock

        2,732

          10

    1.46

           3,631

            19

        2.09

           5,461

           34

        2.49

Federal funds sold and demand deposits

        5,272

            1

   0.08

        15,754

           34

        0.86

         13,661

           38

           1.11

Total interest-earning assets

    209,742

    2,683

5.12%

      208,173

     2,526

4.85%

     202,794

      2,610

5.15%

NONINTEREST-EARNING ASSETS

Other assets

         8,201

  

          8,993

  

          7,946

  

Allowance for loan losses

         (600)

 

 

           (580)

 

 

           (483)

 

 

Total assets

 $ 217,343

 

 

 $  216,586

 

 

 $  210,257

 

 

          

LIABILITIES AND SHAREHOLDERS' EQUITY

INTEREST-BEARING LIABILITIES

NOW account deposits

 $     9,372

 $      35

1.49%

 $      8,600

 $       33

1.53%

 $      6,006

 $       27

1.80%

Savings deposits

      34,853

        130

    1.49

       34,953

          132

          1.51

        32,172

          149

         1.85

Time deposits

      97,848

       683

   2.79

       95,049

         684

        2.88

       73,859

         602

        3.26

Total interest-bearing deposits

     142,073

       848

   2.39

      138,602

         849

        2.45

       112,037

         778

        2.78

Borrowings

      40,968

       580

   5.66

       42,769

         606

        5.67

        59,218

         830

         5.61

Total interest-bearing liabilities

     183,041

     1,428

3.12%

        181,371

      1,455

3.21%

       171,255

      1,608

3.76%

NONINTEREST-BEARING LIABILITIES AND SHAREHOLDERS' EQUITY

Demand deposits

           793

  

             663

  

             654

  

Other liabilities

         4,140

  

          5,075

  

          9,232

  

Shareholders' equity

      29,369

 

 

       29,477

 

 

         29,116

 

 

Total liabilities and shareholders' equity

 $ 217,343

 

 

 $  216,586

 

 

 $  210,257

 

 

Net interest income and margin

 

 $ 1,255

2.39%

 

 $   1,071

2.06%

 

 $  1,002

1.98%

Net interest-earning assets and spread

 $   26,701

 

2.00%

 $   26,802

 

1.64%

 $    31,539

 

1.39%

Cost of funding interest-earning assets

 

 

2.72%

 

 

2.80%

 

 

3.17%







The increases in net interest income during the first quarter of 2004 over the fourth quarter of 2003 were due in large part to the increased volume of loans recorded by the Company and higher levels of investments in collateralized mortgage obligations.  The Company’s average investment in loans and CMOs was 54% of total interest-earning assets for the first quarter of 2004, compared to 49% for the fourth quarter of 2003.  These assets generally carry a higher yield than other investment opportunities.


The increase in net interest income between the first quarter of 2004 and the first quarter of 2003 was primarily due to changes on the funding side.  Sustained higher demand for deposit products combined with a reduced loan demand in 2002 and 2003 provided the Company with an influx of liquidity.  Because of the increased amount of cash on hand, management did not replace FHLB advances that matured during 2003.  Average advances were down $18.3 million, or 31%, for the first quarter of 2004 compared to the first quarter of 2003.  This accounted for $258,000 in reduced interest expenses for that time frame.


TABLE 11. SUMMARY OF CHANGES IN NET INTEREST INCOME

 

First Quarter 2004 Compared to:

 

Fourth Quarter of 2003

First Quarter of 2003

 

Due to Change in

Total Increase (Decrease)

Due to Change in

Total Increase (Decrease)

($ in thousands)

Volume

Rate

Volume

Rate

INTEREST INCOME

Loans

 $          90

 $           (6)

 $          84

 $          94

 $         (11)

 $          83

U.S. Treasury securities

                -

                -

                -

              (1)

               1

                -

Mortgage-backed securities

              (1)

               2

               1

              (3)

              (1)

              (4)

Collateralized mortgage obligations

             98

            (10)

             88

            (98)

             37

            (61)

Mutual funds

             10

             16

             26

           125

              (4)

           121

FHLMC stock

              (9)

               9

                -

            (21)

             16

              (5)

Total investment in securities

             98

             17

           115

               2

             49

             51

FHLB stock

              (3)

              (6)

              (9)

            (10)

            (14)

            (24)

Federal funds sold and demand deposits

              (2)

            (31)

            (33)

              (2)

            (35)

            (37)

Total interest income

           183

            (26)

           157

             84

            (11)

             73

       

INTEREST EXPENSE

NOW account deposits

               3

              (1)

               2

             13

              (5)

               8

Savings deposits

                -

              (2)

              (2)

             10

            (29)

            (19)

Time deposits

             20

            (21)

              (1)

           167

            (86)

             81

Total interest-bearing deposits

             23

            (24)

              (1)

           190

          (120)

             70

Borrowings

            (25)

              (1)

            (26)

          (258)

               8

          (250)

Total interest expense

              (2)

            (25)

            (27)

            (68)

          (112)

          (180)

Change in net interest income

 $        185

 $           (1)

 $        184

 $        152

 $        101

 $        253


PROVISION FOR LOAN LOSSES

The Company provided $14,000 for losses in the first quarter of 2004, down from $21,000 in the fourth quarter of 2003.  The Company had no allocation to the provision for loan losses for the three months ended March 31, 2003.  Net charge-offs totaled $21,000 in the first quarter of 2004.  There were no charge-offs in either the fourth or first quarters of 2003.


For a more detailed discussion of changes in the allowance for loan losses, nonperforming assets and general credit quality, see the earlier section on Loans and Allowance for Loan Losses.  The future level of the allowance for loan losses will reflect management’s ongoing evaluation of credit risk, based on established internal policies and practices.







NONINTEREST INCOME

Noninterest income before securities transactions for the first quarter of 2004 was up $1,000, or 5%,  compared to the same period of 2003.  The major categories of noninterest income for the three months ended March 31, 2004 and 2003 are presented in Table 12.


TABLE 12. NON-INTEREST INCOME

 

($ in thousands)

First Quarter 2004

First Quarter 2003

Percentage Increase (Decrease)

Service charges on deposit accounts

 $            5

 $            4

25%

ATM fees

               2

               2

                 -

Early closing penalties

               1

               2

             (50)

Income from real estate held for investment

             12

             12

                 -

Miscellaneous

               1

                -

 (a)

Total noninterest income before securities transactions

             21

             20

                5

Securities transactions

                -

           573

           (100)

Total noninterest income

 $         21

 $        593

(96)%

(a) Not meaningful

   


NONINTEREST EXPENSE

Noninterest expense for the first quarter of 2004 totaled $1.1 million, $14,000 (1%) increase from the first quarter of 2003.  Non interest expense for the three months ended March 31, 2004 and 2003 are presented in Table 13 below.


Personnel costs, which represent the largest component of noninterest expense, decreased $34,000, or 5%, in the first quarter of 2004 compared to the first quarter of 2003 as result of a reduced bonus accrual.


Data processing costs increased $29,000, or 100%, to $58,000 for the first quarter of 2004 compared to the same period for 2003.  During the first quarter of 2004, Guaranty introduced an internet banking product.  In connection with the set up of this new service, the Company incurred a one-time charge of $18,000.  The remainder of the increase was due to higher outside data processing expenses.


TABLE 13. NON-INTEREST EXPENSE

 

($ in thousands)

First Quarter 2004

First Quarter 2003

Percentage Increase (Decrease)

Employee compensation

 $       487

 $        512

(5)%

Employee benefits

          194

           203

               (4)

Total personnel expense

          681

           715

               (5)

Net occupancy expense

             96

           105

               (9)

Ad Valorem taxes

          133

           125

                6

Data processing costs

             58

             29

            100

Advertising

             32

             25

              28

ATM expenses

             11

             12

               (8)

Professional fees

             22

             14

              57

Deposit insurance and supervisory fees

             28

             27

                4

Printing and office supplies

             18

             19

               (5)

Telephone

             19

             20

               (5)

Other operating expenses

             45

             38

              18

Total noninterest expense

 $    1,143

 $     1,129

1%








Item 3 – Quantitative and Qualitative Disclosures about Market Risk


Quantitative and qualitative disclosures about market risk are presented at December 31, 2003 in the Company’s Annual Report on Form 10-K, filed with the SEC on March 29, 2004.  Management believes there have been no material changes in the Company’s market risk since December 31, 2003.


Item 4 - Controls and Procedures


Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report.  Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and are operating in an effective manner.

No change in our internal control over financial reporting (as defined in Rules 13a–15(f) or 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to affect, our internal control over financial reporting.

Part II - Other Information


Item 1 - Legal Proceedings


There are no matters required to be reported under this item.


Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities


ISSUER PURCHASES OF EQUITY SECURITIES

Period

(a) Total Number of Shares Purchased) 1

(b) Average Price Paid Per Share

(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs

Month 1 (January 1, 2004 - January 31, 2004)

                     -

 $                -   

                    -

                 -

Month 2 (February 1, 2004 - February 29, 2004)

             5,711

             19.44

                    -

                 -

Month 3 (March 1, 2004 - March 31, 2004)

                     -

                   -   

                    -

                 -

Total

             5,711

 $          19.44

                    -

                 -

1 All purchases were made in open-market transactions.

    


Item 3 - Defaults Upon Senior Securities


There are no matters required to be reported under this item.


Item 4 - Submission of Matters to a Vote of Security Holders

On March 29, 2004, the Company commenced a proxy solicitation of its stockholders with respect to the Annual Meeting of Stockholders held on April 27, 2004 (“Annual Meeting”).  There were two proposals considered at the Annual Meeting, the election of two directors and the ratification of the appointment of the Company’s independent auditors.  Both proposals passed by the vote reflected below.  In addition to the directors elected to three-year terms at the Annual Meeting, the following persons had terms of office as a director which continued after the Annual Meeting:  Kenneth B. Caldcleugh, Stephen L. Cory, Bradford A. Glazer, Bruce A. Scott, and Albert J. Zahn, Jr.


Approval of the election of Donald C. Scott to a three-year term as director.


For

 

Withheld

1,051,835

 

2,691







Approval of the election of Hayden W. Wren III to a three-year term as director.


For

 

Withheld

1,053,926

 

600


Approval to ratify the appointment of LaPorte, Sehrt, Romig and Hand as the Company’s independent auditors for the year ending December 31, 2004.


For

 

Against

 

Abstained

1,046,224

 

8,300

 

2


The matters considered at the Annual Meeting were discretionary items and there were no broker non-votes.


Item 5 - Other Information


There are no matters required to be reported under this item.


Item 6 - Exhibits and Reports on Form 8-K


(a)

Exhibits


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 13, 1997

10.4*

Employment Agreement among GS Financial Corp. Guaranty Savings and Homestead Association and Bruce A. Scott Dated February 13, 1997

31.1        

Rule 13a-14(a) Certification of Chief Executive Officer

31.2        

Rule 13a-14(a) Certification of Chief Financial Officer

32.0

Certification pursuant to 18 U.S.C. Section 1350


*

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)


(b) Reports on Form 8-K.

On a Form 8-K dated April 20, 2004, the registrant reported under item 12 the release of its financial results for the quarter ended March 31, 2004.  The news release covering the financial results was filed as an exhibit under item 7(c).








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.


Date:

May 14, 2004



By:



/s/ Donald C. Scott

  

Donald C. Scott
Chairman of the Board, President
and Chief Executive Officer

Date:

May 14, 2004



By:



/s/ Jerry M. Sintes

  

Jerry M. Sintes
Chief Financial Officer