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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 September 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 November 10, 2004

Common Stock, par value $.01 per share

 

1,290,738 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

 

 

 

 

September 30, 2004

December 31, 2003

($ in thousands)

(Unaudited)

(Audited)

ASSETS

  

Cash and Cash Equivalents

  

Cash & Due from Depository Institutions

 $                      1,286

 $                       1,899

Interest-Bearing Deposits in Other Banks

                       13,736

                          4,507

Federal Funds Sold

                          1,476

                          4,965

Total Cash and Cash Equivalents

                       16,498

                        11,371

   

Securities Available-for-Sale, at Fair Value

                       95,269

                      119,271

Loans, Net

                       89,002

                        77,367

Accrued Interest Receivable

                             578

                             547

Premises & Equipment

                          2,507

                          2,591

Stock in Federal Home Loan Bank, at Cost

                          2,430

                          2,726

Foreclosed Assets

                                   -

                               52

Real Estate Held-for-Investment

                             498

                             511

Other Assets

                             409

                             278

Total Assets

 $                  207,191

 $                   214,714

   

LIABILITIES

  

Deposits

  

Noninterest-bearing

 $                      1,000

 $                       1,155

Interest-bearing

                     134,481

                      140,953

Total Deposits

                     135,481

                      142,108

   

Advance Payments by Borrowers for Taxes and Insurance

                             309

 $                          312

FHLB Advances

                       41,589

                        42,135

Other Liabilities

                             887

                             851

Total Liabilities

                     178,266

                      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

  

Outstanding - 1,291,238 shares

                               34

                               34

Additional Paid in Capital

                       34,422

                        34,231

Unearned ESOP Stock

                           (591)

                           (802)

Unearned RRP Trust Stock

                        (1,039)

                        (1,059)

Treasury Stock, at Cost

                      (32,047)

                      (31,804)

Retained Earnings

                       28,644

                        28,553

Accumulated Other Comprehensive (Loss) Income

                           (498)

                             155

Total Stockholders' Equity

                       28,925

                        29,308

Total Liabilities & Stockholders' Equity

 $                  207,191

 $                   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 September 30,

For the nine months ended September 30,

($ in thousands, except per share data)

2004

2003

2004

2003

INTEREST AND DIVIDEND INCOME

    

Loans, Including Fees

 $    1,671

 $     1,427

 $   4,874

 $     4,410

Investment Securities

       1,111

           852

       3,287

        2,902

Other Interest Income

             11

             36

            32

           105

Total Interest Income

       2,793

        2,315

       8,193

        7,417

     

INTEREST EXPENSE

    

Deposits

          794

           862

       2,466

        2,484

FHLB Advances

          539

           640

       1,673

        2,239

Total Interest Expense

       1,333

        1,502

       4,139

        4,723

     

NET INTEREST INCOME

       1,460

           813

       4,054

        2,694

PROVISION FOR LOAN LOSSES

                -

             41

            33

             97

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

       1,460

           772

       4,021

        2,597

     

NON-INTEREST EXPENSE

    

Salaries and Employee Benefits

          664

           614

       1,988

        2,013

Occupancy Expense

          111

             86

          319

           312

Other Expenses

          355

           479

       1,086

        1,109

Total Non-Interest Expense

       1,129

        1,179

       3,392

        3,434

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

          331

          (407)

          629

         (837)

     

NON-INTEREST INCOME

    

(Loss) Gain on Sale of Investments

           (73)

           553

        (216)

        1,375

Other Income

           (12)

             53

            35

           105

Total Non-Interest Income (Loss)

           (85)

           606

        (181)

        1,480

     

INCOME BEFORE INCOME TAX EXPENSE

          246

           199

          448

           643

INCOME TAX  EXPENSE

               6

             49

               3

           112

NET INCOME

 $       240

 $        150

 $       445

 $        531

     

EARNINGS PER SHARE

    

Basic

 $      0.21

 $       0.13

 $      0.38

 $       0.44

Diluted

 $      0.20

 $       0.13

 $      0.38

 $       0.43

CASH DIVIDENDS PER SHARE

 $      0.10

 $       0.10

 $      0.30

 $       0.30

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

            -

              -

               -

                 -

              -

         531

                       -

              531

Other Comprehensive Income

        

Unrealized net holding gains on securities, net of taxes

            -

              -

               -

                 -

              -

              -

              (1,474)

         (1,474)

Total Comprehensive Income

            -

              -

               -

                 -

              -

         531

              (1,474)

            (943)

Distribution of RRP Stock

            -

              -

               -

                 -

              -

              -

                       -

                   -

ESOP Compensation Earned

            -

         263

               -

            211

              -

              -

                       -

              474

Purchase of Treasury Stock

            -

              -

      (3,739)

                 -

              -

              -

                       -

         (3,739)

Cash Dividends Paid

            -

              -

               -

                 -

              -

       (425)

                       -

            (425)

Balances at September 30, 2003

 $      34

 $ 34,303

 $ (31,434)

 $        (872)

 $  (1,274)

 $ 28,440

 $               554

 $      29,751

         

Balances At December 31, 2003

 $      34

 $ 34,231

 $ (31,804)

 $        (802)

 $  (1,059)

 $ 28,553

 $               155

 $      29,308

Comprehensive Income:

        

Net Income

            -

              -

               -

                 -

              -

         445

                       -

              445

Other Comprehensive Income

        

Unrealized net holding gains on securities, net of taxes

            -

              -

               -

                 -

              -

              -

                 (653)

            (653)

Total Comprehensive Income

            -

              -

               -

                 -

              -

         445

                 (653)

            (208)

Distribution of RRP Stock

            -

           (5)

               -

                 -

           20

              -

                       -

                15

ESOP Compensation Earned

 

         196

               -

            211

              -

              -

                       -

              407

Purchase of Treasury Stock

            -

              -

         (243)

 

              -

              -

                       -

            (243)

Cash Dividends Paid

            -

              -

               -

                 -

              -

       (354)

                       -

            (354)

Balances at September 30, 2004

 $      34

 $ 34,422

 $ (32,047)

 $        (591)

 $  (1,039)

 $ 28,644

 $              (498)

 $      28,925

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





#




GS FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Nine Months Ended September 30,

($ in thousands)

2004

2003

CASH FLOWS FROM OPERATING ACTIVITIES

  

Net Income

 $                  445

 $                  531

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

  

Depreciation

                     106

                     107

Discount Accretion Net of Premium Amortized

                     (42)

                       (7)

Provision for Loan Losses

                       33

                       97

Non-Cash Dividend - FHLB

                     (31)

                     (96)

Net Loan Fees

                         -

                         2

Mutual Fund Dividends Reinvested

                (1,019)

                (1,006)

ESOP Shares Released

                     407

                     474

RRP Expense

                       83

                         -

Loss (Gain) on Sale of Investments

                     216

                (1,375)

Loss (Gain) on Sale of Foreclosed Real Estate

                       34

                         -

Deferred Income Tax Provision

                   (145)

                         4

Changes in Operating Assets and Liabilities

  

(Increase) Decrease in Accrued Interest Receivable

                     (31)

                     190

(Increase) Decrease in Prepaid Income Taxes

                       28

                       44

(Increase) in Other Assets

                   (159)

                     (70)

(Decrease) in Accrued Interest - FHLB Advances

                   (167)

                     525

Increase in Accrued Income Tax

                         -

                       (4)

Increase in Other Liabilities

                     612

                   (104)

Net Cash Provided by (Used in) Operating Activities

                     370

                   (688)

 

CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds from Maturities of Investment Securities

                  7,975

                60,167

Proceeds from Sales of Investment Securities

                10,921

                  8,299

Purchases of Investment Securities

              (11,941)

              (36,582)

Redemption (Investment) in Mutual Funds, Net

                16,907

              (31,861)

Loan Originations and Principal Collections, Net

              (12,012)

                  2,314

Purchases of Premises and Equipment

                       (9)

                     (37)

Proceeds from Sales of Foreclosed Real Estate

                     385

                         -

Proceeds from Sale of FHLB Stock

                     327

                         -

Investment in Foreclosed Real Estate

                     (23)

                         -

Net Cash Provided by Investing Activities

                12,530

                  2,300

 

CASH FLOWS FROM FINANCING ACTIVITIES

Purchase of Treasury Stock

                   (243)

                (3,739)

Decrease in Advances from Federal Home Loan Bank

                   (546)

              (22,459)

Payment of Cash Stock Dividends

                   (354)

                   (425)

Net (Decrease) Increase in Deposits

                (6,627)

                29,705

Decrease in Deposits for Escrows

                       (3)

                     (97)

Net Cash (Used In) Provided by Financing Activities

                (7,773)

                  2,985

NET INCREASE IN CASH AND CASH EQUIVALENTS

                  5,127

                  4,597

CASH AND CASH EQUIVALENTS - Beginning of Period

                11,371

                13,352

CASH AND CASH EQUIVALENTS - End of Period

 $             16,498

 $             17,949

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash Paid During the Period For:

  

Interest Expense

                  4,306

                  4,827

Income Taxes

                     120

                       68

Loans Transferred to Foreclosed Real Estate During the Period

                     344

                         -

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 and nine months ended September 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 September 30,

For the nine months ended September 30,

($ in thousands, except per share data)

2004

2003

2004

2003

Numerator:

    

Net Income

 $         240

 $           150

 $          445

 $           531

Effect of Dilutive Securities

                  -

                  -

                   -

                   -

Numerator for Diluted Earnings Per Share

 $         240

 $           150

 $          445

 $           531

Denominator

    

Weighted-Average Shares Outstanding

 1,152,393

    1,155,595

  1,156,409

    1,212,703

Effect of Potentially Dilutive Securities and Contingently Issuable Shares

       25,302

         17,920

        29,097

         18,509

Denominator for Diluted Earnings Per Share

 1,177,695

    1,173,515

  1,185,506

    1,231,212

Earnings Per Share

    

Basic

 $        0.21

 $          0.13

 $         0.38

 $          0.44

Diluted

            0.20

             0.13

            0.38

             0.43

Cash Dividends Per Share

 $        0.10

 $          0.10

 $         0.30

 $          0.30


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 September 30, 2004, there were 80,187 unallocated shares and the balance of the loan was $783,000.  The Association bears the cost of the ESOP as compensation expense, which is based on the principal and interest payments on the corresponding debt as well as the market value of the stock.  Compensation expense related to the ESOP was $118,000 and $368,000 for the three and nine month periods ended September 30, 2004, compared to $134,000 and $402,000 for the same time periods ended September 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 three and nine month periods ended September 30, 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 September 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 $34,000 and $82,000 for the three months and nine months ended September 30, 2004 and $37,000 and $111,000 for the same time periods in 2003.



#



GS FINANCIAL CORP.

SELECTED CONSOLIDATED FINANCIAL DATA

(Unaudited)

 

 

Three Months Ended

Nine Months Ended

($ in thousands, except per share data)

September 30, 2004

June 30, 2004

September 30, 2003

September 30, 2004

September 30, 2003

SUMMARY OF INCOME

     

Interest Income

 $             2,793

 $       2,717

 $      2,315

 $      8,193

 $      7,417

Interest Expense

                1,333

          1,378

         1,502

         4,139

         4,723

Net Interest Income

                1,460

          1,339

            813

         4,054

         2,694

Provision for Loan Losses

                       -

               19

              41

              33

              97

Net Interest Income After Provision for Loan  Losses

                1,460

          1,320

            772

         4,021

         2,597

Non-Interest Income

                   (85)

           (117)

            606

          (181)

         1,480

Non-Interest Expense

                1,129

          1,120

         1,179

         3,392

         3,434

Net Income Before Taxes

                   246

               83

            199

            448

            643

Income Tax Expense

                       6

             (11)

              49

                3

            112

Net Income

                   240

               94

            150

            445

            531

SELECTED BALANCE SHEET DATA

 

 

 

 

 

Total Assets

 $         207,191

 $   209,496

 $  212,193

  

Loans Receivable, Net

              89,002

        87,074

       75,921

  

Investment Securities

              95,269

      110,194

       86,468

  

Deposit Accounts

            135,481

      141,774

     136,822

  

Borrowings

              41,589

        38,464

       43,933

  

Equity

              28,925

        28,394

       29,751

 

 

SELECTED AVERAGE BALANCES

     

Total Assets

 $         207,193

 $   216,234

 $  213,274

 $  213,590

 $  212,961

Loans Receivable, Net

              87,975

        86,929

       75,725

       85,513

       75,793

Investment Securities

            107,502

      116,340

     113,192

     107,570

     107,878

Deposit Accounts

            137,922

      143,367

     132,579

     141,385

     125,687

Borrowings

              38,521

        39,122

       45,306

       39,537

       51,104

Equity

              27,805

        30,496

       28,263

       29,223

       31,145

KEY RATIOS

 

 

 

 

 

Return on average assets

0.46%

0.17%

0.28%

0.28%

0.33%

Return on average shareholders' equity

3.45%

1.23%

2.12%

2.03%

2.27%

Net Interest Margin

2.91%

2.55%

1.59%

2.72%

1.75%

Average loans to average deposits

63.79%

60.63%

57.12%

60.48%

60.30%

Interest-earning assets to interest-bearing liabilities

114.41%

115.62%

115.69%

110.16%

116.30%

Efficiency ratio

77.97%

82.05%

136.14%

82.95%

122.69%

Non-interest expense to average assets

2.18%

2.07%

2.21%

2.12%

2.15%

Allowance for loan losses to total loans

0.68%

0.70%

0.70%

  

Stockholders equity to total assets

13.96%

13.55%

14.02%

 

 

COMMON SHARE DATA

     

Earnings Per Share

     

Basic

 $               0.21

 $         0.08

 $        0.13

 $        0.38

 $        0.44

Diluted

                  0.20

 $         0.08

           0.13

           0.38

           0.43

Dividends Paid Per Share

                  0.10

 $         0.10

           0.10

           0.30

           0.30

Dividend Payout Ratio

48.02%

123.06%

77.04%

77.96%

68.51%

Book Value Per Share

 $             22.40

 $       21.87

 $      22.47

  

Average Shares Outstanding

     

Basic

         1,152,393

   1,156,784

  1,155,595

  1,156,409

  1,212,703

Diluted

         1,177,695

   1,187,609

  1,173,515

  1,185,506

  1,231,212



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 third quarters of 2004 and 2003 and during the nine-month periods through September 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 $11.6 million, or 14.9%, from year-end 2003 to the end the third quarter of 2004.  Average loans for the third quarter of 2004 were $88 million, up $12.3 million (16.2%) compared to the third quarter of 2003.  Year-to-date average loans at September 30, 2004 totaled $85.5 million, up $9.7 million (12.8%) from the same time period in 2003.  Table 1, which is based on regulatory reporting codes, shows loan balances at September 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)

September 30

June 30

March 31

December 31

September 30

Real estate loans - residential

 $        45,963

 $      44,896

 $      44,888

 $        44,021

 $         45,576

Real estate loans - commercial and other

            33,769

         34,293

         33,416

           26,460

            25,335

Real estate loans - construction

              6,292

           5,590

           5,641

             4,709

              3,822

Consumer loans

                 598

              538

              496

                513

                 599

Commercial business loans

              2,983

           2,359

           1,666

             2,257

              1,161

Total Loans

 $        89,605

 $      87,676

 $      86,107

 $        77,960

 $         76,493

Average Loans During Period

 $        87,975

 $      86,929

 $      81,636

 $        76,956

 $         75,725


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 27.6%, or $7.3 million, at September 30, 2004, compared to year-end 2003, and have grown 33.3%, or $8.4 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 September 30, 2004 were up only $1.9 million, or 4.4%, from December 31, 2003 and $387,000, or .8%, from September 30, 2003.  Management expects this trend of increased commercial loan activity to continue through the end of 2004.  Moderate growth is expected to continue for the residential mortgage loan portfolio for the fourth quarter.


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 September 30, 2004, the allowance for loan losses was $610,000, or .68%, 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)

Third Quarter

Second Quarter

First Quarter

Fourth Quarter

Third Quarter

Beginning Balance

 $          610

 $           594

 $           601

 $        580

 $        539

Provision for Losses

                   -

                19

                14

             21

             41

Loans Charged Off

                   -

                (3)

              (21)

                -

                -

Recoveries of loans previously charged off

                   -

                   -

                   -

                -

                -

Ending Balance

 $          610

 $           610

 $           594

 $        601

 $        580

Ratios

     

Charge-offs to average loans

0.00%

0.00%

0.03%

0.00%

0.00%

Provision for loan losses to charge-offs

n/a

n/a

66.67%

n/a

n/a

Allowance for loan losses to charge-offs (annualized)

n/a

n/a

707.14%

n/a

n/a

Allowance for loan losses to ending loans

0.68%

0.70%

0.69%

0.77%

0.76%


Tables 3 and 4 set forth the Company’s delinquent loans and nonperforming assets at September 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)

September 30

June 30

March 31

December 31

September 30

30-89 Days

 $          5,588

 $        6,255

 $        5,714

 $        5,345

 $        3,708

90+ Days

             2,207

              759

              770

              930

           1,239

Total

 $          7,795

 $        7,014

 $        6,484

 $        6,275

 $        4,947

Ratios

     

Loans delinquent 90 days to total loans

2.46%

0.87%

0.89%

1.19%

1.62%

Total delinquent loans to total loans

8.70%

8.00%

7.53%

8.05%

6.47%

Allowance for loan losses to 90 day delinquent loans

27.64%

80.37%

77.14%

64.62%

46.81%

Allowance for loan losses to total delinquent loans

7.83%

8.70%

9.16%

9.58%

11.72%






TABLE 4. NONPERFORMING ASSETS

 

2004

2003

($ in thousands)

September 30

June 30

March 31

December 31

September 30

Loans accounted for on a nonaccrual basis

 $          2,207

 $           759

 $           770

 $           930

 $        1,239

Foreclosed assets

                     -

              417

                52

                52

                  -

Total nonperforming assets

 $          2,207

 $        1,176

 $           822

 $           982

 $        1,239

Ratios

     

Nonperforming assets to loans plus foreclosed assets

2.46%

1.33%

0.95%

1.26%

1.62%

Nonperforming assets to total assets

1.07%

0.56%

0.38%

0.46%

0.66%

Allowance for loan losses to nonperforming assets

27.64%

51.87%

72.26%

61.20%

46.81%



INVESTMENT IN SECURITIES

At September 30, 2004, total securities were $95.3 million, compared to $119.3 million at December 31, 2003 and $108.8 million at September 30, 2003.  The composition of the portfolio has shifted somewhat during the first nine months of 2004, with mutual fund investments making up 51.5% of the portfolio at September 30, 2004 compared to 54.8% at year-end 2003 and 59.5% at September 30, 2003.  At September 30, 2004, collateralized mortgage obligations made up 27.1% of the portfolio, compared to 27.2% at December 31, 2003 and 20.1% at the end of the third quarter of 2003.  Table 5 shows the composition of the Company’s investment portfolio at September 30, 2004, December 31, 2003, and September 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 September 30, 2004, the net unrealized losses on the Company’s entire portfolio was $750,000, or .78% 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

 

September 30, 2004

December 31, 2003

September 30, 2003

($ in thousands)

Amortized Cost

Market Value

Amortized Cost

Market Value

Amortized Cost

Market Value

U.S. Treasury securities

 $         800

 $         844

 $           801

 $           881

 $           801

 $           896

Mortgage Backed Securities

             224

             240

              339

              362

              429

              456

Collateralized Mortgage Obligations

       25,433

       25,814

         32,220

         32,486

         21,727

         21,920

Mutual funds

       49,717

       49,094

         65,831

         65,371

         65,202

         64,744

FHLMC Stock

       19,846

       19,277

         19,846

         20,171

         19,846

         20,828

Total Investments

 $    96,020

 $    95,269

 $    119,037

 $    119,271

 $    108,005

 $    108,844


DEPOSITS

Deposit pricing strategies implemented during the second quarter of 2004 helped stem the growth rate of customer deposit accounts.  At September 30, 2004, deposits were 4.7%, or $6.6 million, below the level at December 31, 2003.  Average deposits totaled $137.9 million in the third quarter of 2004, a $5.4 million (3.8%) decrease from the second quarter of 2004 and a $5.3 million (4%) increase from the third 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 September 30, 2004, June 30, 2004 and September 30, 2003.





TABLE 6.  DEPOSIT COMPOSITION

 

Third Quarter 2004

Second Quarter 2004

Third Quarter 2003

($ in thousands)

Average Balances

% of Deposits

Average Balances

% of Deposits

Average Balances

% of Deposits

Noninterest bearing demand deposits

 $         861

0.6%

 $         799

0.6%

 $         664

0.5%

NOW account deposits

         8,793

         6.4

         9,140

          6.4

         7,602

          5.7

Savings deposits

       34,442

       25.0

       34,475

        24.0

       33,868

        25.5

Time deposits

       93,826

       68.0

       98,953

        69.0

       90,445

        68.3

Total

 $ 137,922

100.0%

 $  143,367

100.0%

 $  132,579

100.0%


BORROWINGS

At September 30, 2004, the Company’s borrowings from the Federal Home Loan Bank decreased $546,000, or 1.3%, from December 31, 2003 and decreased $2.3 million, or 5.3%, from September 30, 2003.  Average advances for the third quarter of 2004 were $38.5 million, down $601,000, or 1.5%, from the second quarter of 2004 and down $6.8 million, or 15%, from the prior year’s third quarter.  The decreases were due to regularly scheduled principal payments that were not fully offset by new borrowings because of the Company’s current liquidity position.


STOCKHOLDERS’ EQUITY AND CAPITAL ADEQUACY

At September 30, 2004, stockholders’ equity totaled $28.9 million, compared to $29.3 million at the end of 2003.  The primary cause for this decrease was $653,000 in unrealized losses on investment securities available-for-sale, net of related deferred income taxes.  Earnings of $445,000 and stock based compensation costs of $407,000 were partially offset by dividends of $354,000 and stock repurchases of $243,000.


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

           13,542

                243

             17.94

Total Stock Repurchases

      2,147,262

 $        32,047

 $          14.92


The ratios in Table 8 indicate that the Association remained well capitalized at September 30, 2004.   The growth in the Association’s loan portfolio was offset by the decreases in the investment portfolio.  Combined, the Association’s  risk-weighted assets increased $2.6 million 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)

September 30

December 31

September 30

Tier 1 regulatory capital

 $        26,250

 $        26,800

 $         25,657

Tier 2 regulatory capital

                 610

                601

                 580

Total regulatory capital

 $        26,860

 $        27,401

 $         26,237

Adjusted total assets

 $      205,169

 $      213,199

 $       209,679

Risk-weighted assets

 $        99,067

 $        96,456

 $         94,015

Ratios

   

Tier 1 capital to total assets

12.79%

12.57%

12.24%

Tier 1 capital to risk-weighted assets

26.50%

27.78%

27.29%

Total capital to risk-weighted assets

27.11%

28.41%

27.91%

Shareholders' equity to total assets

13.96%

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 third 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 nine months of 2004 and 2003.  While the Company reported net income of $445,000 for the nine months ended September 30, 2004, there was a net cash increase of only $370,000 from operations.  This was primarily due to $1.0 million 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 declined during the first nine months of 2004, primarily reflecting the  increase in lending activity  and the effects of a discipline pricing strategy on customer deposits as 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)

September 30

December 31

September 30

Cash and cash equivalents

 $        16,498

 $        11,371

 $         17,949

Total loans

            89,605

           77,960

            76,493

Total deposits

         135,481

         142,108

          136,822

Deposits $100,000 and over

            23,480

           27,235

            25,109

Ratios

   

Total loans to total deposits

66.14%

54.86%

55.91%

Deposits $100,000 and over to total deposits

17.33%

19.17%

18.35%





RESULTS OF OPERATIONS


NET INTEREST INCOME

Net interest income for the third quarter of 2004 increased $647,000, or 79.6%, from the third quarter of 2003, even though average earning assets decreased 2.2% between these periods.  Third quarter net interest income for 2004 was also up $121,000, or 9%, on earning assets that were down 4.37% compared with the second 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 it 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 third quarter of 2004.  As a result, Guaranty was able to add 36 basis points to the margin, raising it to 2.91% compared to the second quarter of 2004, and 132 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 second quarter of 2004 and third  quarter of 2003.


The increases in net interest income during the third quarter of 2004 over the second quarter of 2004 and the third 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 44% of total interest-earning assets for the third quarter of 2004, compared to 41% for the second quarter of 2004 and 37% for the third quarter of 2003.  The increase in outstanding loans accounted for increases in interest income of $20,000 over the second quarter of 2004 and 233,000 over the third quarter of 2003.  In addition, an increase in yields earned on these investments added an additional $11,000 over the previous quarter and year earlier quarter.


In addition to increased loan activity, the Company’ investments in collateralized mortgage obligations contributed to the increase in interest income for the third quarter of 2004 over the second quarter of 2004 and the third quarter of 2003.  The Company’s average investment in this area increased $6.7 million over the second quarter of 2004 and $25.8 million over the same quarter of last year, contributing an additional $89,000 and $346,000 to income in each respective period.


The average cost on interest bearing deposits increased slightly to 2.32% for the third quarter of 2004, from 2.31% in the second quarter of 2004.  This was a decrease from 2.61% in the third quarter of 2003.  These changes in rates accounted for a $7,000 increase in interest expense from the second quarter of 2004 and a $98,000 decrease from the third quarter of 2003.  Management expects both the cost and volume of customer deposits to decrease through the end of 2003.

 

Average borrowings were down $601,000 for the third quarter of 2004 compared to the second quarter of 2004, and $6.8 million compared to the third quarter of 2003.  These decreases in the average balances accounted for $8,000 and $95,000 in reduced interest expenses for each respective time frame.


Net interest income for the first nine months of 2004 increased $1.4 million, or 50.4%, from the first nine months of  2003 on earning assets that were $6.3 million (3.09%) lower.  Table 12 shows the components of the Company’s net interest margin for the first nine months of  2004 and 2003.  The net interest margin was 2.72% for the 2004 period  and 1.75% for the prior year’s period.  The yield on average earning assets increased 68 basis points and the total interest cost of funding earning assets decreased 52 basis points compared to the first nine months of 2003.  The same factors that affected the mix and rates for earning assets and funding sources in the third 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

 

Third Quarter 2004

Second Quarter 2004

Third 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

 $   87,975

 $   1,671

7.60%

 $         86,929

 $        1,640

7.55%

 $   75,725

 $  1,427

7.54%

U.S. Treasury securities

           853

          14

   6.57

                   876

                  15

       6.85

             904

            14

         6.19

Mortgage-backed securities

           234

            4

   6.84

                    281

                   5

        7.12

             456

              9

        7.89

Collateralized mortgage obligations

      37,259

        499

   5.36

             30,595

               412

       5.39

         11,455

           141

        4.92

Mutual funds

       50,120

        316

   2.52

             63,354

              356

       2.25

        81,497

          410

         2.01

FHLMC stock

       19,036

        278

   5.84

              21,234

              279

       5.26

        18,880

         278

        5.89

Total investment in securities

     107,502

       1,111

    4.13

             116,340

            1,067

       3.67

        113,192

         852

         3.01

FHLB stock

        2,420

           11

    1.82

                 2,518

                  10

        1.59

          5,572

           28

         2.01

Federal funds sold and demand deposits

        2,989

            -

       -   

                4,275

                    -

            -   

        10,539

              8

        0.30

Total interest-earning assets

    200,886

     2,793

5.56%

            210,062

            2,717

5.17%

     205,028

      2,315

4.52%

NONINTEREST-EARNING ASSETS

Other assets

         6,917

  

                6,765

  

          8,898

  

Allowance for loan losses

          (610)

 

 

                 (593)

 

 

           (652)

 

 

Total assets

 $ 207,193

 

 

 $        216,234

 

 

 $  213,274

 

 

          

LIABILITIES AND SHAREHOLDERS' EQUITY

INTEREST-BEARING LIABILITIES

NOW account deposits

 $     8,793

 $      28

1.27%

 $             9,140

 $             29

1.27%

 $      7,602

 $       33

1.73%

Savings deposits

      34,442

        108

    1.25

             34,475

                110

        1.28

       33,868

          147

         1.73

Time deposits

      93,826

        658

    2.81

             98,953

              685

       2.77

       90,445

         682

        3.02

Total interest-bearing deposits

     137,061

        794

   2.32

            142,568

              824

        2.31

        131,915

         862

         2.61

Borrowings

       38,521

        539

   5.60

              39,122

              554

       5.66

       45,306

         640

        5.65

Total interest-bearing liabilities

     175,582

     1,333

3.04%

             181,690

            1,378

3.03%

       177,221

      1,502

3.39%

NONINTEREST-BEARING LIABILITIES AND SHAREHOLDERS' EQUITY

Demand deposits

            861

  

                   799

  

             664

  

Other liabilities

        2,945

  

                3,249

  

           7,126

  

Shareholders' equity

      27,805

 

 

             30,496

 

 

       28,263

 

 

Total liabilities and shareholders' equity

 $ 207,193

 

 

 $        216,234

 

 

 $  213,274

 

 

Net interest income and margin

 

 $  1,460

2.91%

 

 $        1,339

2.55%

 

 $      813

1.59%

Net interest-earning assets and spread

 $   25,304

 

2.52%

 $         28,372

 

2.14%

 $   27,807

 

1.13%

Cost of funding interest-earning assets

 

 

2.65%

 

 

2.62%

 

 

2.93%







TABLE 11. SUMMARY OF CHANGES IN NET INTEREST INCOME

 

Third Quarter 2004 Compared to:

 

Second Quarter of 2004

Third 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

 $          20

 $          11

 $          31

 $        233

 $          11

 $        244

U.S. Treasury securities

                -

              (1)

              (1)

              (1)

               1

                -

Mortgage-backed securities

              (1)

                -

              (1)

              (4)

              (1)

              (5)

Collateralized mortgage obligations

             89

              (2)

             87

           346

             12

           358

Mutual funds

            (83)

             43

            (40)

          (198)

           104

            (94)

FHLMC stock

            (32)

             31

              (1)

               2

              (2)

                -

Total investment in securities

            (27)

             71

             44

           145

           114

           259

FHLB stock

                -

               1

               1

            (14)

              (3)

            (17)

Federal funds sold and demand deposits

                -

                -

                -

                -

              (8)

              (8)

Total interest income

              (7)

             83

             76

           364

           114

           478

       

INTEREST EXPENSE

NOW account deposits

              (1)

                -

              (1)

               4

              (9)

              (5)

Savings deposits

                -

              (2)

              (2)

               2

            (41)

            (39)

Time deposits

            (36)

               9

            (27)

             24

            (48)

            (24)

Total interest-bearing deposits

            (37)

               7

            (30)

             30

            (98)

            (68)

Borrowings

              (8)

              (7)

            (15)

            (95)

              (6)

          (101)

Total interest expense

            (45)

                -

            (45)

            (65)

          (104)

          (169)

Change in net interest income

 $          38

 $          83

 $        121

 $        429

 $        218

 $        647






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

 

Nine Months Ended September 30,2004

Nine Months Ended September 30, 2003

($ in thousands)

Average Balance

Interest

Average Yield/ Cost

Average Balance

Interest

Average Yield/ Cost

ASSETS

INTEREST-EARNING ASSETS

Loans

 $   85,513

 $ 4,874

7.60%

 $   75,793

 $  4,410

7.76%

U.S. Treasury securities

           870

          43

   6.59

             908

           43

         6.31

Mortgage-backed securities

           282

          15

   7.09

             478

           28

         7.81

Collateralized mortgage obligations

      33,250

     1,345

   5.39

        21,697

         888

        5.46

Mutual funds

      60,063

     1,049

   2.33

       63,683

        1,101

         2.31

FHLMC stock

       13,105

        835

   8.50

          21,112

         842

        5.32

Total investment in securities

     107,570

     3,287

   4.07

      107,878

     2,902

        3.59

FHLB stock

        2,557

          31

   1.62

          5,530

           96

         2.31

Federal funds sold and demand deposits

        2,754

            1

   0.05

        15,509

              9

        0.08

Total interest-earning assets

     198,394

     8,193

5.51%

      204,710

      7,417

4.83%

NONINTEREST-EARNING ASSETS

Other assets

       15,798

  

           8,791

  

Allowance for loan losses

          (601)

 

 

           (540)

 

 

Total assets

 $ 213,590

 

 

 $   212,961

 

 

          

LIABILITIES AND SHAREHOLDERS' EQUITY

INTEREST-BEARING LIABILITIES

NOW account deposits

 $     9,102

 $      92

1.35%

 $      6,869

 $       87

1.69%

Savings deposits

      34,590

        348

   1.34

        33,127

         438

    1.76

Time deposits

      96,875

     2,026

   2.79

       84,923

      1,959

   3.08

Total interest-bearing deposits

     140,567

     2,466

   2.34

       124,919

     2,484

   2.65

Borrowings

      39,537

     1,673

   5.64

         51,104

     2,239

   5.84

Total interest-bearing liabilities

     180,104

     4,139

3.06%

      176,023

     4,723

3.58%

NONINTEREST-BEARING LIABILITIES AND SHAREHOLDERS' EQUITY

Demand deposits

            818

  

             768

  

Other liabilities

        3,446

  

          5,025

  

Shareholders' equity

      29,223

 

 

         31,145

 

 

Total liabilities and shareholders' equity

 $ 213,590

 

 

 $   212,961

 

 

Net interest income and margin

 

 $ 4,054

2.72%

 

 $ 2,694

1.75%

Net interest-earning assets and spread

 $   18,290

 

2.45%

 $   28,687

 

1.25%

Cost of funding interest-earning assets

 

 

2.78%

 

 

3.08%


PROVISION FOR LOAN LOSSES

The Company made no provision for losses in the third quarter of 2004, compared to $19,000 provided for in the second quarter of 2004, and $41,000 in the third quarter of 2003.  There were no charge-offs in the third quarter of 2004 compared to  $3,000 for the second quarter of 2004.  There were no charge-offs in the third 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 $65,000, or 123%, for the third quarter of 2004 and $70,000, or 67%, for the nine months ended September 30, 2004 compared to the same time periods of 2003.  The major categories of non-interest income for the three and six months ended September 30, 2004 and 2003 are presented in Table 13.


TABLE 13. NON-INTEREST INCOME

 

Three Months Ended

Nine Months Ended

($ in thousands)

September 30, 2004

September 30, 2003

Percentage Increase (Decrease)

September 30, 2004

September 30, 2003

Percentage Increase (Decrease)

Service charges on deposit accounts

 $             5

 $         5

0%

 $           15

 $       13

15%

ATM fees

                3

            2

            50

                8

            5

            60

Early closing penalties

                2

            2

               -

                4

            5

           (20)

Income from real estate held for investment

              12

          12

               -

              36

          36

               -

Gain (Loss on sales of foreclosed assets)

            (34)

             -

 (a)

            (34)

             -

 (a)

Miscellaneous

                -

          32

         (100)

                6

          46

           (87)

Total noninterest income before securities transactions

            (12)

          53

         (123)

              35

        105

           (67)

Securities transactions

            (73)

        553

         (113)

          (216)

     1,375

         (116)

Total noninterest income

 $         (85)

 $     606

-114%

 $       (181)

 $  1,480

-112%

(a) Not meaningful

      


NON-INTEREST EXPENSE

Non-interest expense for the third quarter of 2004 totaled $1.1 million, a $50,000 (4%) decrease from the third quarter of 2003.  For the nine month period ended September 30, 2004, non-interest expense was $3.4 million, a $42,000 decrease over the same time period of 2003.  Non-interest expense for the three and nine months ended September 30, 2004 and 2003 are presented in Table 14 below.


Personnel costs, which represent the largest component of noninterest expense, decreased $39,000, or 6%, in the third quarter of 2004 compared to the third quarter of 2003, and $114,000, or 5% over the nine month period ended September 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

Nine Months Ended

($ in thousands)

September 30, 2004

September 30, 2003

Percentage Increase (Decrease)

September 30, 2004

September 30, 2003

Percentage Increase (Decrease)

Employee compensation

 $         479

 $     504

-5%

 $      1,416

 $  1,503

-6%

Employee benefits

            185

        199

             (7)

            572

        599

             (5)

Total personnel expense

            664

        703

             (6)

         1,988

     2,102

             (5)

Net occupancy expense

            106

          97

              9

            304

        307

             (1)

Ad Valorem taxes

            135

        127

              6

            403

        379

              6

Data processing costs

              50

          41

            22

            158

        103

            53

Advertising

              44

          19

          132

            106

          63

            68

ATM expenses

              12

          11

              9

              35

          33

              6

Professional fees

              18

          24

           (25)

              75

          78

             (4)

Deposit insurance and supervisory fees

              31

          25

            24

              87

          78

            12

Printing and office supplies

              17

          18

             (6)

              62

          61

              2

Telephone

              20

          16

            25

              62

          62

               -

Other operating expenses

              32

          98

           (67)

            112

        168

           (33)

Total noninterest expense

         1,129

 $  1,179

-4%

 $      3,392

 $  3,434

-1%

Efficiency Ratio

77.97%

136.14%

 

82.95%

122.69%

 

(a) Not meaningful

      





Data processing costs increased $9,000, or 22%, to $50,000 for the third quarter of 2004 compared to the same period for 2003. For the nine month period ended September 30, 2004, data  processing expenses were $158,000, up $55,000, or 53%, 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 additional 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 (July 1, 2004 - July 31, 2004)

                     -

                   -   

                    -

                 -

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

             6,732

             18.07

                    -

                 -

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

                     -

                   -   

                    -

                 -

Total

             6,732

 $          18.07

                    -

                 -

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 October 20, 2004, the registrant reported under item 12 the release of its financial results for the quarter ended September 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:

November 15, 2004



By:



/s/ Donald C. Scott

  

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

Date:

November 15, 2004



By:



/s/ Jerry M. Sintes

  

Jerry M. Sintes
Chief Financial Officer