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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 June 30, 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 August 16, 2004

Common Stock, par value $.01 per share

 

1,292,468 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

   

Selected Consolidated Financial Data

7

 

Item 2

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


8

 

Item 3

Quantitative and Qualitative Disclosures about Market Risk

18

 

Item 4

Controls and Procedures

18


PART II – OTHER INFORMATION

 

Item 1

Legal Proceedings

18

 

Item 2

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


18

 

Item 3

Defaults Upon Senior Securities

18

 

Item 4

Submission of Matters to a Vote of Security Holders

18

 

Item 5

Other Information

18

 

Item 6

Exhibits and Reports on Form 8-K

19


SIGNATURES

EXHIBIT INDEX




PART I – FINANCIAL INFORMATION


ITEM 1 – FINANCIAL STATEMENTS


GS FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

 

 

 

 

June 30, 2004

December 31, 2003

($ in thousands)

(Unaudited)

(Audited)

ASSETS

  

Cash and Cash Equivalents

  

Cash & Due from Depository Institutions

 $                      1,350

 $                       1,899

Interest-Bearing Deposits in Other Banks

                          2,548

                          4,507

Federal Funds Sold

                          1,486

                          4,965

Total Cash and Cash Equivalents

                          5,384

                        11,371

   

Securities Available-for-Sale, at Fair Value

                     110,194

                      119,271

Loans, Net

                       87,074

                        77,367

Accrued Interest Receivable

                             615

                             547

Premises & Equipment

                          2,536

                          2,591

Stock in Federal Home Loan Bank, at Cost

                          2,418

                          2,726

Foreclosed Assets

                             417

                               52

Real Estate Held-for-Investment

                             502

                             511

Other Assets

                             356

                             278

Total Assets

 $                  209,496

 $                   214,714

   

LIABILITIES

  

Deposits

  

Noninterest-bearing

 $                      1,044

 $                       1,155

Interest-bearing

                     140,730

                      140,953

Total Deposits

                     141,774

                      142,108

   

Advance Payments by Borrowers for Taxes and Insurance

                             279

 $                          312

FHLB Advances

                       38,464

                        42,135

Other Liabilities

                             585

                             851

Total Liabilities

                     181,102

                      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

                       34,361

                        34,231

Unearned ESOP Stock

                           (661)

                           (802)

Unearned RRP Trust Stock

                        (1,039)

                        (1,059)

Treasury Stock, at Cost

                      (31,925)

                      (31,804)

Retained Earnings

                       28,523

                        28,553

Accumulated Other Comprehensive (Loss) Income

                           (899)

                             155

Total Stockholders' Equity

                       28,394

                        29,308

Total Liabilities & Stockholders' Equity

 $                  209,496

 $                   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 June 30,

For the six months ended June 30,

($ in thousands, except per share data)

2004

2003

2004

2003

INTEREST AND DIVIDEND INCOME

    

Loans, Including Fees

 $    1,640

 $     1,503

 $   3,203

 $     2,983

Investment Securities

       1,067

           924

       2,176

        1,982

Other Interest Income

             10

             65

            21

           137

Total Interest Income

       2,717

        2,492

       5,400

        5,102

     

INTEREST EXPENSE

    

Deposits

          824

           844

       1,672

        1,622

FHLB Advances

          554

           769

       1,134

        1,599

Total Interest Expense

       1,378

        1,613

       2,806

        3,221

     

NET INTEREST INCOME

       1,339

           879

       2,594

        1,881

PROVISION FOR LOAN LOSSES

             19

             56

            33

             56

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

       1,320

           823

       2,561

        1,825

     

NON-INTEREST EXPENSE

    

Salaries and Employee Benefits

          643

           684

       1,324

        1,399

Occupancy Expense

          107

           113

          208

           226

Other Expenses

          370

           329

          731

           630

Total Non-Interest Expense

       1,120

        1,126

       2,263

        2,255

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

          200

          (303)

          298

         (430)

     

NON-INTEREST INCOME

    

(Loss) Gain on Sale of Investments

         (143)

           249

        (143)

           822

Other Income

             26

             32

            47

             52

Total Non-Interest Income (Loss)

         (117)

           281

           (96)

           874

     

INCOME BEFORE INCOME TAX EXPENSE

             83

            (22)

          202

           444

INCOME TAX  (BENEFIT) EXPENSE

           (11)

            (28)

             (3)

             63

NET INCOME

 $         94

 $            6

 $       205

 $        381

     

EARNINGS PER SHARE

    

Basic

 $      0.08

 $       0.01

 $      0.18

 $       0.31

Diluted

 $      0.08

 $       0.01

 $      0.17

 $       0.31

CASH DIVIDENDS PER SHARE

 $      0.10

 $       0.10

 $      0.20

 $       0.20

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

            -

              -

               -

                 -

              -

         381

                       -

              381

Other Comprehensive Income

        

Unrealized net holding gains on securities, net of taxes

            -

              -

               -

                 -

              -

              -

                 (702)

            (702)

Total Comprehensive Income

            -

              -

               -

                 -

              -

         381

                 (702)

            (321)

Distribution of RRP Stock

            -

              -

               -

                 -

              -

              -

 

                   -

ESOP Shares Released

            -

         175

               -

            140

              -

              -

 

              315

Purchase of Treasury Stock

            -

              -

      (3,354)

                 -

              -

              -

                       -

         (3,354)

Dividends Declared

            -

              -

               -

                 -

              -

       (290)

                       -

            (290)

Balances at June 30, 2003

 $      34

 $ 34,215

 $ (31,049)

 $        (943)

 $  (1,274)

 $ 28,425

 $            1,326

 $      30,734

         

Balances At December 31, 2003

 $      34

 $ 34,231

 $ (31,804)

 $        (802)

 $  (1,059)

 $ 28,553

 $               155

 $      29,308

Comprehensive Income:

        

Net Income

            -

              -

               -

                 -

              -

         205

                       -

              205

Other Comprehensive Income

        

Unrealized net holding gains on securities, net of taxes

            -

              -

               -

                 -

              -

              -

              (1,054)

         (1,054)

Total Comprehensive Income

            -

              -

               -

                 -

              -

         205

              (1,054)

            (849)

Distribution of RRP Stock

            -

           (5)

               -

                 -

           20

              -

                       -

                15

ESOP Shares Released

 

         135

               -

            141

              -

              -

                       -

              276

Purchase of Treasury Stock

            -

              -

         (121)

 

              -

              -

                       -

            (121)

Dividends Declared

            -

              -

               -

                 -

              -

       (235)

                       -

            (235)

Balances at June 30, 2004

 $      34

 $ 34,361

 $ (31,925)

 $        (661)

 $  (1,039)

 $ 28,523

 $              (899)

 $      28,394

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





#




GS FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Six Months Ended June 30,

($ in thousands)

2004

2003

CASH FLOWS FROM OPERATING ACTIVITIES

  

Net Income

 $                  205

 $                  381

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

  

Depreciation

                       71

                       71

Discount Accretion Net of Premium Amortized

                     (39)

                     (21)

Provision for Loan Losses

                       33

                       56

Non-Cash Dividend - FHLB

                     (19)

                     (68)

Net Loan Fees

                         -

                       (1)

Mutual Fund Dividends Reinvested

                   (716)

                   (625)

ESOP Shares Released

                     276

                     315

RRP Expense

                       48

                       74

(Loss) Gain on Sale of Investments

                     143

                   (822)

Deferred Income Tax Provision

                     (65)

                       (3)

Changes in Operating Assets and Liabilities

  

(Increase) Decrease in Accrued Interest Receivable

                     (68)

                     177

(Increase) Decrease in Prepaid Income Taxes

                     (11)

                         1

(Increase) in Other Assets

                     (67)

                   (147)

(Decrease) in Accrued Interest - FHLB Advances

                   (178)

                     (60)

Increase in Accrued Income Tax

                         -

                       57

Increase in Other Liabilities

                     487

                     237

Net Cash Provided by (Used in) Operating Activities

                     100

                   (378)

 

CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds from Maturities of Investment Securities

                  6,786

                47,584

Proceeds from Sales of Investment Securities

                         -

                  7,764

Purchases of Investment Securities

              (11,941)

              (14,566)

Redemption (Investment) in Mutual Funds, Net

                13,247

              (45,200)

Loan Originations and Principal Collections, Net

              (10,084)

                  1,483

Purchases of Premises and Equipment

                       (7)

                     (35)

Proceeds from Sales of Foreclosed Real Estate

                         -

                         -

Proceeds from Sale of FHLB Stock

                     327

                         -

Investment in Foreclosed Real Estate

                     (21)

                         -

Net Cash (Used in) Investing Activities

                (1,693)

                (2,970)

 

CASH FLOWS FROM FINANCING ACTIVITIES

Purchase of Treasury Stock

                   (121)

                (3,354)

Decrease in Advances from Federal Home Loan Bank

                (3,671)

              (12,790)

Payment of Cash Stock Dividends

                   (235)

                   (290)

Net (Decrease) Increase in Deposits

                   (334)

                22,234

Decrease in Deposits for Escrows

                     (33)

                   (183)

Net Cash (Used In) Provided by Financing Activities

                (4,394)

                  5,617

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

                (5,987)

                  2,269

CASH AND CASH EQUIVALENTS - Beginning of Period

                11,371

                13,352

CASH AND CASH EQUIVALENTS - End of Period

 $               5,384

 $             15,621

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash Paid During the Period For:

  

Interest Expense

                  2,984

                  3,281

Income Taxes

                       73

                       43

Loans Transferred to Foreclosed Real Estate During the Period

                     344

                         -

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

                (1,597)

                (1,064)

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 GS Financial Corp. (the “Company”) and its subsidiary, Guaranty Savings and Homestead Association.  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 June 30, 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:


 

For the three months ended June 30,

For the six months ended June 30,

($ in thousands, except per share data)

2004

2003

2004

2003

Numerator:

    

Net Income

 $             94

 $               6

 $           205

 $           381

Effect of Dilutive Securities

                  -

                  -

                   -

                   -

Numerator for Diluted Earnings Per Share

 $             94

 $               6

 $           205

 $           381

Denominator

    

Weighted-Average Shares Outstanding

    1,156,784

    1,187,429

    1,158,428

    1,242,659

Effect of Potentially Dilutive Securities and Contingently Issuable Shares

         30,825

         12,227

         31,180

           5,803

Denominator for Diluted Earnings Per Share

    1,187,609

    1,199,656

    1,189,608

    1,248,462

Earnings Per Share

    

Basic

 $          0.08

 $          0.01

 $          0.18

 $          0.31

Diluted

             0.08

             0.01

             0.17

             0.31

Cash Dividends Per Share

 $          0.10

 $          0.10

 $          0.20

 $          0.20


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 June 30, 2004, there were 80,187 unallocated shares and the balance of the loan was $867,000.  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 and $250,000 for the three and six month periods ended June 30, 2004, compared to $134,000 and $268,000 for the same time periods ended June 30, 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.  Under this Opinion, the Company recognizes no compensation expense with respect to fixed awards of stock options.  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.  As such, the options have no intrinsic value on the award date, which is also the measurement date for compensation expense.


SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, established a fair value-based method of accounting for stock-based compensation.  As provided for in SFAS No. 123, the Company has elected to continue to follow APB Opinion No. 25 and related interpretations to measure and recognize stock-based compensation expense.  Because all of the options that have been granted have vested prior to 2003, net income and earnings per share for the second quarters of 2004 and 2003 would not have been affected if the Company had applied the fair value recognition provisions of SFAS No. 123, 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 June 30, 2004, of the 125,028 shares awarded, 4,858 shares have been forfeited due to termination of employment or service as a director and 79,230 had been earned and issued.  Compensation expense related to the RRP was $10,000 and $48,000 for the three months and six months ended June 30, 2004 and $37,000 and $74,000 for the same time periods in 2004.



#



GS FINANCIAL CORP.

SELECTED CONSOLIDATED FINANCIAL DATA

(Unaudited)

 

 

 

 

 

 

 

Three Months Ended

Six Months Ended

($ in thousands, except per share data)

June 30, 2004

March 31, 2004

June 30, 2003

June 30, 2004

June 30, 2003

SUMMARY OF INCOME

     

Interest Income

 $       2,717

 $      2,683

 $      2,492

 $      5,400

 $      5,102

Interest Expense

          1,378

         1,428

         1,613

         2,806

         3,221

Net Interest Income

          1,339

         1,255

            879

         2,594

         1,881

Provision for Loan Losses

               19

              14

              56

              33

              56

Net Interest Income After Provision for Loan  Losses

          1,320

         1,241

            823

         2,561

         1,825

Non-Interest Income

           (117)

              21

            281

            (96)

            874

Non-Interest Expense

          1,120

         1,143

         1,126

         2,263

         2,255

Net Income Before Taxes

               83

            119

            (22)

            202

            444

Income Tax Expense

             (11)

                8

            (28)

              (3)

              63

Net Income

               94

            111

                6

            205

            381

SELECTED BALANCE SHEET DATA

 

 

 

 

 

Total Assets

 $   209,496

 $  218,054

 $  215,586

  

Loans Receivable, Net

        87,074

       85,522

       76,796

  

Investment Securities

      110,194

     119,976

     113,551

  

Deposit Accounts

      141,774

     145,575

     129,264

  

Borrowings

        38,464

       40,312

       53,602

  

Equity

        28,394

       30,412

       30,734

 

 

SELECTED AVERAGE BALANCES

     

Total Assets

 $   216,234

 $  217,343

 $  215,038

 $  216,789

 $  212,648

Loans Receivable, Net

        86,929

       81,636

       75,465

       84,283

       75,862

Investment Securities

      116,340

     120,102

     116,193

     118,222

     111,562

Deposit Accounts

      143,367

     142,866

     124,629

     143,116

     118,648

Borrowings

        39,122

       40,968

       54,584

       40,045

       59,218

Equity

        30,496

       29,396

       31,461

       29,932

       32,374

KEY RATIOS

 

 

 

 

 

Return on average assets

0.17%

0.20%

0.01%

0.19%

0.36%

Return on average shareholders' equity

1.23%

1.51%

0.08%

1.37%

2.35%

Net Interest Margin

2.55%

2.39%

1.70%

2.47%

1.84%

Average loans to average deposits

60.63%

57.14%

60.55%

58.89%

63.94%

Earning assets to interest-bearing liabilities

115.62%

114.59%

115.74%

115.10%

115.38%

Efficiency ratio

82.05%

89.58%

123.60%

85.69%

116.66%

Non-interest expense to average assets

2.07%

2.10%

2.09%

2.09%

2.12%

Allowance for loan losses to total loans

0.70%

0.69%

0.70%

  

Stockholders equity to total assets

13.55%

13.95%

14.26%

 

 

COMMON SHARE DATA

     

Earnings Per Share

     

Basic

 $         0.08

 $        0.10

 $        0.01

 $        0.18

 $        0.31

Diluted

            0.08

 $        0.09

           0.01

           0.17

           0.31

Dividends Paid Per Share

            0.10

 $        0.10

           0.10

           0.20

           0.20

Dividend Payout Ratio

123.06%

104.49%

1979.05%

113.02%

65.23%

Book Value Per Share

 $       21.87

 $      23.41

 $      22.86

  

Average Shares Outstanding

     

Basic

   1,156,784

  1,194,296

  1,187,429

  1,158,428

  1,242,659

Diluted

   1,187,609

  1,214,443

  1,199,656

  1,189,608

  1,248,462



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


The purpose of this discussion and analysis is to provide information necessary gain an understanding of the financial condition, changes in financial condition and results of operations of GS Financial Corp. (“GS Financial” or the “Company”), and its subsidiary during the second quarters of 2004 and 2003 and during the six-month periods through June 30 in each year.  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 quarterly 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 $9.7 million, or 12.5%, from year-end 2003 to the end the second quarter of 2004.  Average loans for the second quarter of 2004 were $86.9 million, up $11.5 million (15.2%) compared to the second quarter of 2003.  Year-to-date average loans at June 30, 2004 totaled $84.3 million, up $8.4 million (11.1%) from the same time period in 2003.  Table 1, which is based on regulatory reporting codes, shows loan balances at June 30, 2004 and at the end of the four prior quarters and average loans outstanding during each quarter.


TABLE 1. COMPOSITION OF LOAN PORTFOLIO

 

2004

2003

($ in thousands)

June 30

March 31

December 31

September 30

June 30

Real estate loans - residential

 $    44,896

 $      44,888

 $        44,021

 $         45,576

 $  49,791

Real estate loans - commercial and other

       34,293

         33,416

           26,460

            25,335

     23,103

Real estate loans - construction

         5,590

           5,641

             4,709

              3,822

       2,652

Consumer loans

             538

              496

                513

                 599

          512

Commercial business loans

         2,359

           1,666

             2,257

              1,161

       1,268

Total Loans

 $    87,676

 $      86,107

 $        77,960

 $         76,493

 $  77,326

Average Loans During Period

 $    86,929

 $      81,636

 $        76,956

 $         75,725

 $  75,465


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 30%, or $7.8 million, at June 30, 2004, compared to year-end 2003, and have grown 48%, or $11.2 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 June 30, 2004 were up only $875,000, or 2%, from December 31, 2003 and decreased $4.9 million, or 10%, from June 30, 2003.  Management expects moderate loan growth to continue through the end of 2004.


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 June 30, 2004, the allowance for loan losses was $610,000, or .70%, 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)

Second Quarter

First Quarter

Fourth Quarter

Third Quarter

Second Quarter

Beginning Balance

 $          594

 $           601

 $        580

 $        539

 $        483

Provision for Losses

               19

                14

             21

             41

             56

Loans Charged Off

                (3)

              (21)

                -

                -

                -

Recoveries of loans previously charged off

                   -

                   -

                -

                -

                -

Ending Balance

 $          610

 $           594

 $        601

 $        580

 $        539

Ratios

     

Charge-offs to average loans

0.00%

0.03%

0.00%

0.00%

0.00%

Provision for loan losses to charge-offs

633.33%

66.67%

n/a

n/a

n/a

Allowance for loan losses to charge-offs (annualized)

5083.33%

707.14%

n/a

n/a

n/a

Allowance for loan losses to ending loans

0.70%

0.69%

0.77%

0.76%

0.70%


Tables 3 and 4 set forth the Company’s delinquent loans and nonperforming assets at June 30, 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 quarter ends.  


TABLE 3. DELINQUENT LOANS

 

2004

2003

($ in thousands)

June 30

March 31

December 31

September 30

June 30

30-89 Days

 $        6,255

 $        5,714

 $        5,345

 $        3,708

 $  5,859

90+ Days

              759

              770

              930

           1,239

        521

Total

 $        7,014

 $        6,484

 $        6,275

 $        4,947

 $  6,380

Ratios

     

Loans delinquent 90 days to total loans

0.87%

0.89%

1.19%

1.62%

0.67%

Total delinquent loans to total loans

8.00%

7.53%

8.05%

6.47%

8.25%

Allowance for loan losses to 90 day delinquent loans

80.37%

77.14%

64.62%

46.81%

103.45%

Allowance for loan losses to total delinquent loans

8.70%

9.16%

9.58%

11.72%

8.45%






TABLE 4. NONPERFORMING ASSETS

 

2004

2003

($ in thousands)

June 30

March 31

December 31

September 30

June 30

Loans accounted for on a nonaccrual basis

 $           759

 $           770

 $           930

 $        1,239

 $     521

Foreclosed assets

              417

                52

                52

                  -

            -

Total nonperforming assets

 $        1,176

 $           822

 $           982

 $        1,239

 $     521

Ratios

     

Nonperforming assets to loans plus foreclosed assets

1.33%

0.95%

1.26%

1.62%

0.67%

Nonperforming assets to total assets

0.56%

0.38%

0.46%

0.66%

0.34%

Allowance for loan losses to nonperforming loans

51.87%

72.26%

61.20%

46.81%

103.45%


INVESTMENT IN SECURITIES

At June 30, 2004, total securities were $110.2 million, compared to $119.3 million at December 31, 2003 and $112.3 million at June 30, 2003.  The composition of the portfolio has shifted somewhat during the first six months of 2004, with mutual fund investments making up 48% of the portfolio at June 30, 2004 compared to 55% at year-end 2003 and 70% at June 30, 2003.  At June 30, 2004, collateralized mortgage obligations made up 34% of the portfolio, compared to 27% at December 31, 2003 and 11% at the end of the second quarter of 2003.  Table 5 shows the composition of the Company’s investment portfolio at June 30, 2004, December 31, 2003, and June 30, 2003.


Management expects the investment portfolio mix to remain essentially unchanged throughout the remainder of 2004.  Proceeds from interest, dividends and principal repayments that are not needed to fund new loan commitments and deposit runoff will be reinvested in similar securities.


At June 30, 2004, the net unrealized losses on the Company’s entire portfolio was $1.4 million, or 1.2% of amortized cost, compared to net unrealized gains of $234,000, or .2% of amortized cost at December 31, 2003.  These losses sustained during the year were primarily on the Company’s investment in FHLMC stock.  Management believes that these losses are temporary in nature and has no plans of divesting in the foreseeable future as these investments are paying dividends that have a tax-equivalent yield of approximately 7.95%.


TABLE 5. COMPOSITION OF INVESTMENT PORTFOLIO

 

June 30, 2004

December 31, 2003

June 30, 2003

($ in thousands)

Amortized Cost

Market Value

Amortized Cost

Market Value

Amortized Cost

Market Value

U.S. Treasury securities

 $         800

 $         853

 $           801

 $           881

 $           801

 $           909

Mortgage Backed Securities

             253

             277

              339

              362

              473

              496

Collateralized Mortgage Obligations

       37,500

       37,633

         32,220

         32,486

         12,234

         12,290

Mutual funds

       53,156

       52,444

         65,831

         65,371

         78,164

         78,175

FHLMC Stock

       19,846

       18,988

         19,846

         20,171

         19,857

         20,405

Total Investments

 $ 111,555

 $ 110,194

 $    119,037

 $    119,271

 $    111,529

 $    112,275


DEPOSITS

Deposit pricing strategies implemented during the second quarter of 2004 helped stem the growth rate of customer deposit accounts.  At June 30, 2004, deposits were less than 1%, or $334,000, below the level at December 31, 2003.  Average deposits totaled $143.4 million in the second quarter of 2004, a $501,000 (less than 1%) increase from the first quarter of 2004 and a $18.7 million (15%) increase from the second quarter of 2003.  Management expects that the current pricing strategy combined with an increase in market interest rates, may cause the level of deposits to decline throughout the remainder of 2004.


Table 6 presents the composition of average deposits for the quarters ended June 30, 2004, March 31, 2003 and June 30, 2003.





TABLE 6.  DEPOSIT COMPOSITION

 

Second Quarter 2004

First Quarter 2004

Second Quarter 2003

($ in thousands)

Average Balances

% of Deposits

Average Balances

% of Deposits

Average Balances

% of Deposits

Noninterest bearing demand deposits

 $         799

0.6%

 $         793

0.6%

 $         820

0.7%

NOW account deposits

         9,140

         6.4

         9,372

          6.6

         6,266

          5.0

Savings deposits

       34,475

       24.0

       34,853

        24.4

       32,672

        26.2

Time deposits

       98,953

       69.0

       97,848

        68.4

       84,871

        68.1

Total

 $ 143,367

100.0%

 $  142,866

100.0%

 $  124,629

100.0%


BORROWINGS

At June 30, 2004, the Company’s borrowings from the Federal Home Loan Bank decreased $3.7 million, or 9%, from December 31, 2003 and decreased $15.1 million, or 28%, from June 30, 2003.  Average advances for the first quarter of 2004 were $40.9 million, down $1.8 million, or 5%, from the first quarter of 2004 and down $15.5 million, or 28%, from the prior year’s second quarter.  The decreases were due to maturing FHLB advances that were not replaced because increased customer deposits produced sufficient cash on hand during the respective periods.


STOCKHOLDERS’ EQUITY AND CAPITAL ADEQUACY

At June 30, 2004, stockholders’ equity totaled $28.4 million, compared to $29.3 million at the end of 2003.  The primary cause this decrease was $1.1 million in unrealized losses on investment securities available-for-sale, net of related deferred income taxes.  Earnings of $205,000 and stock based compensation costs of $276,000 were partially offset by dividends of $235,000 and stock repurchases of $121,000.


Since 1998, the Company has been regularly 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

             6,221

                121

             19.45

Total Stock Repurchases

      2,139,941

 $        31,925

 $          14.92


The ratios in Table 8 indicate that the Association remained well capitalized at June 30, 2004.   The growth in the Association’s loan portfolio in the first quarter of 2004 was offset by the decrease in the investment portfolio during the second quarter of 2004.  Combined, the Association’s  risk-weighted assets increased only $797,000 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)

June 30

December 31

June 30

Tier 1 regulatory capital

 $      25,624

 $        26,800

 $   26,124

Tier 2 regulatory capital

               610

                601

           538

Total regulatory capital

 $      26,234

 $        27,401

 $   26,662

Adjusted total assets

 $    207,556

 $      213,199

 $ 211,449

Risk-weighted assets

 $      97,253

 $        96,456

 $   94,085

Ratios

   

Tier 1 capital to total assets

12.35%

12.57%

12.35%

Tier 1 capital to risk-weighted assets

26.35%

27.78%

27.77%

Total capital to risk-weighted assets

26.98%

28.41%

28.34%

Shareholders' equity to total assets

13.55%

13.65%

14.09%


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 second 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 six months of 2004 and 2003.  While the Company reported net income of $205,000 for the six months ended June 30, 2004, there was a net cash increase of only $100,000 from operations.  This was primarily due to $716,000 in dividends on mutual fund investments reinvested in principal that were not fully offset by other operating income amounts.


Table 9 illustrates some of the factors that the Company uses to measure liquidity.  After increasing significantly throughout 2003, the Company’s liquidity position has begun to drop during the first six months of 2004, primarily reflecting the  increase in lending activity discussed earlier.  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)

June 30

December 31

June 30

Cash and cash equivalents

 $         5,384

 $        11,371

 $              -

Total loans

          87,676

           77,960

       77,326

Total deposits

        141,774

         142,108

     129,264

Deposits $100,000 and over

          25,396

           27,235

       22,452

Ratios

   

Total loans to total deposits

61.84%

54.86%

59.82%

Deposits $100,000 and over to total deposits

17.91%

19.17%

17.37%





RESULTS OF OPERATIONS


NET INTEREST INCOME

Net interest income for the second quarter of 2004 increased $460,000, or 52.3%, from the second quarter of 2003, even though average earning assets increased only 1.7% between these periods.  Second quarter net interest income for 2004 was also up $84,000, or 6.7%, on earning assets that were up only .5% compared with the first quarter of 2004.


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; indicating that we would experience some improvement in its interest margin in a rising rate environment, holding other factors constant.  Rates on earning assets increased slightly during the second quarter of 2004.  As a result, Guaranty was able to add 16 basis points to the margin, raising it to 2.55% compared to the first quarter of 2004, and 85 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 first quarter of 2004 and second  quarter of 2003.


The increases in net interest income during the second quarter of 2004 over the first quarter of 2004 and the second quarter of 2003 were due in large part to the Company’s  increased volume of loans.  The Company’s average investment in loans, which traditionally carry a higher yield than other investment opportunities, was 41% of total interest-earning assets for the second quarter of 2004, compared to 39% for the first quarter of 2004 and 37% for the second quarter of 2003.  The increase in outstanding loans accounted for increases in interest income of $100,000 over the first quarter of 2004 and 216,000 over the second quarter of 2004, greatly exceeding the effects of reduced yields earned on these investments.


In addition to increased loan activity, the Company’ investments in collateralized mortgage obligations contributed to the increase in interest income for the second quarter of 2004 over the second quarter of 2003.  The Company’s average investment in this area increased $5.8 million over the same quarter of last year, contributing an additional $78,000 to income.  A 132 basis point increase in the yield on these investments added an additional $82,000 in income.


The average cost on interest bearing deposits dropped to 2.31% for the second quarter of 2004, from 2.39% in the first quarter of 2004 and 2.73% in the second quarter of 2003.  This decrease in rates accounted for $30,000 and $132,000 of the decreased in interest expense.  Management expects both the cost and volume of customer deposits to decrease through the end of 2003.

 

Average borrowings were down $1.8 million for the second quarter of 2004 compared to the first quarter of 2004, and $15.5 million compared to the second quarter of 2003.  These decreases in the average balances accounted for $26,000 and $219,000 in reduced interest expenses for each respective time frame.


Net interest income for the first six months of 2004 increased $713,000, or 38%, from the first six months of  2003 on earning assets that were $5.5 million (2.7%) higher.  Table 12 shows the components of the Company’s net interest margin for the first six months of  2004 and 2003.  The net interest margin was 2.47%for the 2004 period  and 1.84% for the prior year’s period.  The yield on average earning assets increased 16 basis points and the total interest cost of funding earning assets decreased 48 basis points compared to the first six months of 2003.  The same factors that affected the mix and rates for earning assets and funding sources in the second quarter of 2004 were also evident for the year-to-date period.






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

 

Second Quarter 2004

First Quarter 2004

Second 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

 $   86,929

 $  1,640

7.55%

 $        81,636

 $        1,563

7.66%

 $   75,465

 $  1,503

7.97%

U.S. Treasury securities

           876

          15

   6.85

                  881

                  14

       6.36

              910

            15

        6.59

Mortgage-backed securities

            281

            5

    7.12

                  331

                   6

       7.25

             485

              9

        7.42

Collateralized mortgage obligations

      30,595

        412

   5.39

            31,896

              434

       5.44

       24,797

         252

        4.07

Mutual funds

      63,354

        356

   2.25

            66,716

              377

       2.26

       67,773

         367

         2.17

FHLMC stock

       21,234

        279

   5.26

           20,278

              278

       5.48

       22,228

          281

        5.06

Total investment in securities

     116,340

     1,067

   3.67

           120,102

             1,109

       3.69

        116,193

         924

         3.18

FHLB stock

         2,518

          10

    1.59

              2,732

                  10

        1.46

          5,509

           34

        2.47

Federal funds sold and demand deposits

        4,275

            -

       -   

              5,272

                    1

       0.08

          9,304

            31

         1.33

Total interest-earning assets

     210,062

     2,717

5.17%

         209,742

           2,683

5.12%

      206,471

     2,492

4.83%

NONINTEREST-EARNING ASSETS

Other assets

        6,765

  

               8,201

  

          8,083

  

Allowance for loan losses

         (593)

 

 

               (600)

 

 

             484

 

 

Total assets

 $ 216,234

 

 

 $      217,343

 

 

 $  215,038

 

 

          

LIABILITIES AND SHAREHOLDERS' EQUITY

INTEREST-BEARING LIABILITIES

NOW account deposits

 $     9,140

 $      29

1.27%

 $          9,372

 $             35

1.49%

 $      6,266

 $       27

1.74%

Savings deposits

      34,475

         110

    1.28

           34,853

               130

        1.49

       32,672

          142

         1.74

Time deposits

      98,953

        685

   2.77

           97,848

              683

       2.79

        84,871

         675

         3.18

Total interest-bearing deposits

     142,568

        824

    2.31

          142,073

              848

       2.39

      123,809

         844

        2.73

Borrowings

       39,122

        554

   5.66

           40,968

              580

       5.66

       54,584

         769

        5.64

Total interest-bearing liabilities

     181,690

     1,378

3.03%

           183,041

            1,428

3.12%

      178,393

       1,613

3.62%

NONINTEREST-BEARING LIABILITIES AND SHAREHOLDERS' EQUITY

Demand deposits

           799

  

                 793

  

             820

  

Other liabilities

        3,249

  

                4,113

  

          4,364

  

Shareholders' equity

      30,496

 

 

           29,396

 

 

         31,461

 

 

Total liabilities and shareholders' equity

 $ 216,234

 

 

 $      217,343

 

 

 $  215,038

 

 

Net interest income and margin

 

 $  1,339

2.55%

 

 $        1,255

2.39%

 

 $     879

1.70%

Net interest-earning assets and spread

 $   28,372

 

2.14%

 $        26,701

 

2.00%

 $   28,078

 

1.21%

Cost of funding interest-earning assets

 

 

2.62%

 

 

2.72%

 

 

3.12%






TABLE 11. SUMMARY OF CHANGES IN NET INTEREST INCOME

 

Second Quarter 2004 Compared to:

 

First Quarter of 2004

Second 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

 $        100

 $         (23)

 $          77

 $        216

 $         (79)

 $        137

U.S. Treasury securities

                -

               1

               1

              (1)

               1

                -

Mortgage-backed securities

              (1)

                -

              (1)

              (4)

                -

              (4)

Collateralized mortgage obligations

            (18)

              (4)

            (22)

             78

             82

           160

Mutual funds

            (19)

              (2)

            (21)

            (25)

             14

            (11)

FHLMC stock

             13

            (12)

               1

            (13)

             11

              (2)

Total investment in securities

            (25)

            (17)

            (42)

             35

           108

           143

FHLB stock

              (1)

               1

                -

            (12)

            (12)

            (24)

Federal funds sold and demand deposits

                -

              (1)

              (1)

                -

            (31)

            (31)

Total interest income

             74

            (40)

             34

           239

            (14)

           225

       

INTEREST EXPENSE

NOW account deposits

              (1)

              (5)

              (6)

               9

              (7)

               2

Savings deposits

              (1)

            (19)

            (20)

               6

            (38)

            (32)

Time deposits

               8

              (6)

               2

             97

            (87)

             10

Total interest-bearing deposits

               6

            (30)

            (24)

           112

          (132)

            (20)

Borrowings

            (26)

                -

            (26)

          (219)

               4

          (215)

Total interest expense

            (20)

            (30)

            (50)

          (107)

          (128)

          (235)

Change in net interest income

 $          94

 $         (10)

 $          84

 $        346

 $        114

 $        460






TABLE 12. SUMMARY OF AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND INTEREST RATES

 

Six Months Ended June 30,2004

Six Month Ended June 30, 2003

($ in thousands)

Average Balance

Interest

Average Yield/ Cost

Average Balance

Interest

Average Yield/ Cost

ASSETS

INTEREST-EARNING ASSETS

Loans

 $ 84,283

 $ 3,203

7.60%

 $   75,862

 $ 2,983

7.86%

U.S. Treasury securities

          879

          29

   6.60

              914

           29

        6.35

Mortgage-backed securities

          306

           11

   7.19

             499

            19

        7.62

Collateralized mortgage obligations

     31,246

        846

   5.42

        31,939

         747

        4.68

Mutual funds

     65,035

        733

   2.25

        56,199

         623

        2.22

FHLMC stock

     20,756

        557

   5.37

        22,013

         564

         5.12

Total investment in securities

    118,222

     2,176

   3.68

        111,562

      1,982

        3.55

FHLB stock

       2,625

          20

   1.52

          5,485

           68

        2.48

Federal funds sold and demand deposits

       4,774

            1

   0.04

         11,483

           69

         1.20

Total interest-earning assets

   209,903

     5,400

5.15%

     204,392

      5,102

4.99%

NONINTEREST-EARNING ASSETS

Other assets

       7,484

  

          7,773

  

Allowance for loan losses

        (597)

 

 

             483

 

 

Total assets

 $216,789

 

 

 $  212,648

 

 

          

LIABILITIES AND SHAREHOLDERS' EQUITY

INTEREST-BEARING LIABILITIES

NOW account deposits

 $   9,256

 $      64

1.38%

 $       6,136

 $       54

1.77%

Savings deposits

     34,664

        240

   1.38

       32,422

          291

         1.80

Time deposits

     98,400

     1,368

   2.78

       79,365

      1,277

        3.22

Total interest-bearing deposits

   142,320

     1,672

   2.35

       117,923

      1,622

        2.75

Borrowings

     40,045

      1,134

   5.66

        59,218

      1,599

        5.40

Total interest-bearing liabilities

   182,365

     2,806

3.08%

        177,141

      3,221

3.64%

NONINTEREST-BEARING LIABILITIES AND SHAREHOLDERS' EQUITY

Demand deposits

          796

  

             725

  

Other liabilities

       3,696

  

          2,408

  

Shareholders' equity

     29,932

 

 

       32,374

 

 

Total liabilities and shareholders' equity

 $216,789

 

 

 $  212,648

 

 

Net interest income and margin

 

 $ 2,594

2.47%

 

 $   1,881

1.84%

Net interest-earning assets and spread

 $ 27,538

 

2.07%

 $    27,251

 

1.36%

Cost of funding interest-earning assets

 

 

2.67%

 

 

3.15%


PROVISION FOR LOAN LOSSES

The Company provided $19,000 for losses in the second quarter of 2004, up from 14,000 for the first quarter of 2004, and down from $56,000 in the second quarter of 2003.  Net charge-offs totaled $3,000 for the second quarter of 2004, compared to $21,000 in the first quarter of 2004.  There were no charge-offs in the second quarter 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.





NON-INTEREST INCOME

Non-interest income before securities transactions was down $6,000, or 19%, for the second quarter of 2004 and $5,000, or 10%, for the six months ended June 30, 2004 compared to the same time periods of 2003.  The major categories of non-interest income for the three and six months ended June 30, 2004 and 2003 are presented in Table 13.


TABLE 13. NON-INTEREST INCOME

 

Three Months Ended

Six Months Ended

($ in thousands)

June 30, 2004

June 30, 2003

Percentage Increase (Decrease)

June 30, 2004

June 30, 2003

Percentage Increase (Decrease)

Service charges on deposit accounts

 $         5

 $         4

25%

 $       10

 $         8

25%

ATM fees

            3

            1

          200

            5

            3

            67

Early closing penalties

            1

            1

               -

            2

            3

           (33)

Income from real estate held for investment

          12

          12

               -

          24

          24

               -

Miscellaneous

            5

          14

 (a)

            6

          14

 (a)

Total noninterest income before securities transactions

          26

          32

           (19)

          47

          52

           (10)

Securities transactions

      (143)

        249

         (157)

      (143)

        822

         (117)

Total noninterest income

 $   (117)

 $     281

-142%

 $     (96)

 $     874

-111%

(a) Not meaningful

      


NON-INTEREST EXPENSE

Non-interest expense for the second quarter of 2004 totaled $1.1 million, a $6,000 (1%) decrease from the second quarter of 2003.  For the six month period ended June 30, 2004, non-interest expense was $2.3 million, an $8,000 increase over the same time period of 2003.  Non-interest expense for the three and six months ended June 30, 2004 and 2003 are presented in Table 14 below.


Personnel costs, which represent the largest component of noninterest expense, decreased $41,000, or 6%, in the second quarter of 2004 compared to the second quarter of 2003, and $75,000, or 5% over the six month period ended June 30, 2003 compared to the prior year.  This reduced expense was primarily the result of a reduced bonus accrual.


TABLE 14. NON-INTEREST EXPENSE

 

Three Months Ended

Six Months Ended

($ in thousands)

June 30, 2004

June 30, 2003

Percentage Increase (Decrease)

June 30, 2004

June 30, 2003

Percentage Increase (Decrease)

Employee compensation

 $     450

 $     487

-8%

 $     937

 $     999

-6%

Employee benefits

        193

        197

             (2)

        387

        400

             (3)

Total personnel expense

        643

        684

             (6)

     1,324

     1,399

             (5)

Net occupancy expense

        102

        105

             (3)

        198

        210

             (6)

Ad Valorem taxes

        135

        127

              6

        268

        252

              6

Data processing costs

          50

          33

            52

        108

          62

            74

Advertising

          30

          19

            58

          62

          44

            41

ATM expenses

          12

          10

            20

          23

          22

              5

Professional fees

          35

          40

           (13)

          57

          54

              6

Deposit insurance and supervisory fees

          28

          26

              8

          56

          53

              6

Printing and office supplies

          27

          24

            13

          45

          43

              5

Telephone

          23

          26

           (12)

          42

          46

             (9)

Other operating expenses

          35

          32

              9

          80

          70

            14

Total noninterest expense

     1,120

 $  1,126

-1%

 $  2,263

 $  2,255

0%

Efficiency Ratio

82.05%

123.60%

 

85.69%

116.66%

 





Data processing costs increased $17,000, or 52%, to $50,000 for the first quarter of 2004 compared to the same period for 2003. For the six month period ended June 30, 2004, data  processing expenses were $108,000, up $46,000, or 74%, from the same period in 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 related to added services.


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 (April 1, 2004 - April 30, 2004)

                  10

             19.70

                    -

                 -

Month 2 (May 1, 2004 - May 31, 2004)

                500

             19.64

                    -

                 -

Month 3 (June 1, 2004 - June 30, 2004)

                     -

                   -   

                    -

                 -

Total

                510

 $          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


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


Item 5 - Other Information


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


Item 6 - Exhibits and Reports on Form 8-K


(a)

Exhibits


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 July 19, 2004, the registrant reported under item 12 the release of its financial results for the quarter ended June 30, 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:

August 16, 2004



By:



/s/ Donald C. Scott

  

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

Date:

August 16, 2004



By:



/s/ Jerry M. Sintes

  

Jerry M. Sintes
Chief Financial Officer