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United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
x Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
Commission File Number: 0-22269
GS Financial Corp.
(Exact Name of Registrant as Specified in its Charter)
Louisiana 72-1341014
(State or Other Jurisdiction (IRS Employer ID Number)
of Incorporation or Organization)
3798 Veterans Blvd.
Metairie, LA 70002
(Address of Principal Executive Offices)
Registrant's Telephone Number: (504) 457-6220
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90 days.
x Yes No
As of December 31, 1997, there were 3,438,500 shares of the
Registrant's common stock, par value $.01 per share, issued and
outstanding. The aggregate market value of this stock was $71.8
million at December 31, 1997 based on the per common share price
at closing of $20.875 on that date. The information presented in
this Form 10-K at December 31, 1997 and for the twelve months
ended December 31, 1997 represent the financial condition and
results of operations of GS Financial Corp. and its wholly owned
subsidiary, Guaranty Savings & Homestead Association. The
information presented as of December 31, 1996 and for the twelve
months ended December 31, 1996 and 1995, represent the financial
condition and results of operations of Guaranty Savings and
Homestead Association alone.
DOCUMENTS INCORPORATED BY REFERENCE
Listed hereunder are the following documents which have been
incorporated by reference and the Part of the Form 10-K into which
the document is incorporated.
(1) Portions of the Annual Report to Shareholders for the fiscal
year ended December 31, 1997 are incorporated into Part II, Items
(2) Portions of the definitive proxy statement for the 1998
Annual Meeting of Shareholders to be filed within 120 days of the
Registrant's fiscal year end are incorporated into Part III, Items
10 through 13.
PART I.
Item 1 BUSINESS
General
GS Financial Corp. (the "Company") was incorporated under
Louisiana law on December 24, 1996 as a thrift holding company.
The Company commenced operations on April 1, 1997 upon the
completion of its initial public offering of common stock on the
National Association of Securities Dealers Automated Quotation
(NASDAQ) system. On that date the Company's wholly owned
subsidiary, Guaranty Savings and Homestead Association (the
"Association") was converted from a Louisiana chartered mutual
savings and loan association to a Louisiana chartered stock
savings and loan association. This was accomplished through the
offer and sale of common stock by the Company to certain
depositors, employees, officers and directors of the Association
as well as the GS Financial Employee Stock Ownership Plan (the
"ESOP"). The Company simultaneously used a portion of the
proceeds of its sale of common stock to acquire 100% of the stock
of the Association.
The Company's principal business is conducted through the
Association. Guaranty Savings and Homestead Association was
founded in New Orleans, Louisiana in 1937 as a mutual savings and
loan association. The Association's unconsolidated assets at
December 31, 1997 totaled $115.5 million and comprise 87.9% or
$115.2 million of the total consolidated assets of the Company.
The Association provides financial services primarily to
individuals, mainly through the origination of mortgage loans on
1-4 family residences. The Association also takes in deposits in
the form of passbook savings and certificates of deposit. The
Association also invests in short and long term liquid investments
such as US Treasury and Agency securities, mortgage backed
securities, overnight Federal Funds, money market investments and
qualified thrift grade mutual funds. The balance of the
consolidated assets held by the Company includes $15.9 million in
similar short and long term liquid investments.
Regulation
The Company's primary regulator is the United States Office
of Thrift Supervision ("OTS"). The OTS regulates all thrifts and
thrift holding companies whose deposits are insured by the Savings
Association Insurance Fund ("SAIF") which is administered by the
Federal Deposit Insurance Corporation ("FDIC"). The Company, by
virtue of its state charter is also subject to the rules and
regulations of the Louisiana Office of Financial Institutions
("OFI"). These 2 agencies currently examine the Company approximately
every 18 months on an individual basis, relying on the examination
report of the other agency on cycles, alternating when it is not there
year to exam the Association.
As a public registrant the Company is also subject to the
rules and regulations of the Securities and Exchange Commission
("SEC"). The SEC monitors not only financial information on a
quarterly basis but tracks insider holdings and transactions and
generally insures that all necessary information is disseminated
to the Company's shareholders and the general public. The Company
must also follow the rules of the previously mentioned NASDAQ
stock market.
The Association is a member of the Federal Home Loan Bank of
Dallas. The Federal Home Loan Bank System is comprised of 12
regional banks which serve thrifts and banks by offering
investment opportunities and sources of funds.
Lending Activities
Loan Portfolio Composition. The following table sets forth the
composition of the Company's loan portfolio by type of loan at the
dates indicated (in thousands):
LOAN PORTFOLIO COMPOSITION
December 31,
----------------------------------------
1997 1996 1995 1994 1993
----------------------------------------
First Mortgage Loans:
One to Four
Family Residential $ 52,528 $ 42,660 $ 38,449 $ 38,236 $ 38,205
FHA and VA 358 511 675 854 1,018
Construction 99 298 - - -
Commercial
Real Estate 471 430 484 601 654
Other 123 145 146 182 418
-------- -------- --------- ------- -------
Total First
Mortgage Loans 53,579 44,044 39,754 39,873 40,295
Consumer Loans
Second Mortgage 172 273 267 350 440
Loans on Deposits 244 183 186 161 313
-------- -------- -------- -------- -------
53,995 44,500 40,207 40,384 41,048
Allowance for
Loan Losses (410) (382) (323) (345) (370)
Net Deferred Loan
Origination Costs 3 7 (4) (3) (1)
--------- --------- -------- -------- ------
Net Loans $ 53,588 $ 44,125 $ 39,888 $ 40,042 $ 40,679
====== ====== ====== ====== ======
Contractual Term to Final Maturities. The following table sets
forth certain information as of December 31, 1997 regarding the
dollar amount of loans maturing in the Company's portfolio, based
on the contractual date of the loan's final maturity, before
giving effect to net items. Demand loans and loans having no
stated maturity are reported as due in one year or less. The
amounts shown below do not reflect normal principal amortization;
rather, the balance of each loan outstanding at December 31, 1997
is shown in the appropriate year of the loan's final maturity.
The actual maturity of loans varies primarily on prepayments which
to a large extent depends on market interest rates. In general if
prevailing market rates fall below those of the portfolio,
prepayments accelerate. Conversely if market interest rates
increase above portfolio rates early pay-offs tend to decrease.
Fixed rate loans receivable as of December 31, 1997 are
scheduled to mature and adjustable rate loans are scheduled to re-
price as follows (in thousands):
Over
Under One Five Over
One to Five to Ten 10
Year Years Years Years
------ -------- ------- ------
Loans Secured by 1-4 Family
Residential:
Fixed Rate $ 76 $ 3,921 $ 7,754 $ 41,406
Other Loans Secured by
Real Estate
Fixed Rate 1 172 169 252
All Other Loans 244 - - -
------ -------- -------- ---------
$ 321 $ 4,093 $ 7,923 $ 41,658
====== ======== ======== =========
Loan Origination Activity. The table below sets forth the
Company's total loan origination and reduction experience during
the periods indicated. Historically, the Company has not
purchased or sold any loans.
December 31,
--------------------------------------
1997 1996 1995 1994 1993
--------------------------------------
Loan Originations:
1-4 family residential 14,806 8,876 6,400 6,467 3,161
Construction 577 823 - - -
Commercial real estate 75 69 - - -
Consumer 149 66 150 105 228
Other Real Estate 165 235 - - -
------- ------ ------ ------ ------
Total Loan Originations 15,756 10,000 6,550 6,572 3,389
Loan principal
repayments (6,272) (5,776) (6,727) (7,236) (9,887)
Increase (decrease)
due to other items (4) 3 23 27 49
------- ------ ------ ------- -------
Net increase
(decrease) in 9,463 4,237 (154) (637) (6,449)
Loan portfolio ===== ===== ===== ===== =======
Real Estate Lending Standards and Underwriting Policies. As of
March 19, 1993, the Company was required to adopt and maintain
written real estate lending policies that are consistent with safe
and sound banking practices. The Company is in compliance with
all such standards.
The lending activities of the Company are subject to written
underwriting standards and loan origination procedures established
by the Company's Board of Directors and management. These
standards and procedures are incorporated into the Company's
Underwriting Standards and Lending Policy which are reviewed
annually by the Board of Directors. The Underwriting Standards
dictate the manner in which loan applications are accepted and
processed. Such standards include, but are not limited to,
appraisal guidelines, disclosure requirements of Truth-In-Lending
and RESPA Laws and Regulations, credit criteria, completeness of
applications, title requirements and compliance with local codes
and ordinances. The Company requires appraisals from Board-
approved state licensed and certified appraisers. The lending
policy establishes the overall direction of the Company's lending
activities within the community and forms the basis for setting
Underwriting Standards which limit the Company's exposure to
credit risk. Such factors include minimum and maximum loan
amounts, debt to income ratios, collateral, and acceptable rates
and terms.
Briefly stated, the loan process consists of applicants
meeting with loan personnel and providing pertinent documentation,
including but not limited to, requested loan amount, property
description, security offered as collateral, intended down
payments and acceptable rate and term consistent with the
Company's then current lending policy. Upon receipt of a
favorable credit report, an appraisal is obtained with requisite
documentation to support the property's stated market value. Upon
completion the loan package is presented to the Loan Committee for
consideration. Applicants are advised of the decisions of the
Loan Committee by mail. Approved loans are assigned to one of the
Company's approved attorneys for closing. Actions of the Loan
committee are submitted to the Board of Directors for
consideration and ratification on a monthly basis.
Loan applications are accepted at all three of the Company's
offices and forwarded to the Loan Committee which meets weekly.
In general, loan applications for $300,000 or less are considered
in the ordinary course of business. Applications for loans in
excess of this amount are given consideration on a case by case
basis. On November 25, 1997, the Company began accepting a title
insurance policy in lieu of the title opinion of an approved
attorney as required for all prior loan closings.
The Company's loan portfolio consists of conventional fixed
rate mortgage loans on 1-4 family residential dwellings. The
terms of these loans vary from 5 to 30 years. In general, down
payments of 20% of the purchase price or appraised value are
required. However, the Company does make loans where the loan to
value ratio (LTV) is as high as 90%. The Company also makes loans
on residential investment property, commercial real estate and
vacant ground. Terms vary and rates tend to be slightly higher on
these types of mortgage loans than those rates for residential 1-4
properties.
The Company originates and funds construction loans which
subsequently convert to permanent, fixed rate mortgage loans.
During the construction period, the company requires payment of
interest only on the amount of principal drawn.
Loans are available to depositors of the Company secured by
passbook savings or certificate of deposit at a rate 2 percentage
points above the savings rate up to 90% of the deposited balance.
These loans are payable on demand subject to 30 days notice.
Asset Quality
General. The Company has adopted an asset classification policy
which is designed to draw attention to assets before collection
becomes a problem thus maintaining the quality of the Company's
investment as an interest earning asset. The policy also insures
the accurate reporting of the Company's assets from a valuation
standpoint.
All of the Company's assets are reviewed on a quarterly
basis. Factors taken into consideration include the asset's
payment history, the value of the underlying collateral as well as
current economic conditions, particularly in the local real estate
market. Assets displaying tendencies which might hinder full
collection of principal are classified as substandard. Such
tendencies include but are not limited to late payments on loans
or deterioration of the underlying collateral. Assets classified
as special mention are those not yet serious enough to merit the
substandard classification but do require additional attention
from management.
The Company's Watch List, comprising substandard and special
mention assets is presented to the Board quarterly and ratified.
Specific valuation allowances are allocated to those substandard
assets deemed appropriate by management. Additional general
valuation allowances are assigned to the Company's substandard and
special mention assets over and above the general valuation
allowance assigned to the loan portfolio as a whole.
Loan collection efforts in the form of past due notices
commence when loan payments are more than 15 days past due. Once
a loan reaches 30 days past due status, the Company's collection
manager initiates personal contact with the borrower. When a loan
becomes 90 days past due, the Company initiates foreclosure
proceedings. At this point, loans are placed on non-accrual
status. All interest and late charges due on such loans are
reversed in the form of reserves for uncollectible interest and
late charges.
Real estate acquired by the Company through foreclosure is
classified as real estate owned until such time as the property is
sold. Appraisals are obtained on all such real estate acquired
and the asset is booked at the lower of appraised value or cost
which includes all principal, escrow overdrafts and attorney fees.
All Real Estate Owned is considered substandard.
Delinquent Loans and Non-Performing Assets. The following
tables set forth the Company's delinquent loans and non-earning
assets as of the dates indicated. Balances are indicative of the
total principal balances of such loans rather than the actual
principal past due based on the number of payments past due. At
December 31 of the five years presented all of the Association's
delinquent loans and non performing assets were either 1-4 family
residential dwellings or loans secured by 1-4 family residential
loans.
DELINQUENT LOANS
(in thousands)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
30-89 Days $ 271 $ 175 $ 313 $ 710 $ 773
90+ Days 166 253 206 197 501
--- --- --- --- -----
Total Delinquent Loans $ 437 $ 428 $ 519 $ 907 $ 1,274
=== === === === =====
Non Performing Assets
(in thousands)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
90+ Day Delinquent Loans $ 166 $ 253 $ 206 $ 197 $ 501
Real Estate Owned - - 24 37 38
--- --- --- --- ---
Total Non Performing Assets $ 166 $ 253 $ 230 $ 234 $ 544
=== === === === ===
Non Performing Loans as
a % of Total Loans .31% .57% .51% .49% 1.23%
Non Performing Assets as
a % of Total Assets .13% .29% .27% .27% .60%
Classified Assets. The following table presents information
pertaining to the Company's Watch list of classified assets and
associated specific valuation allowances as of the dates
indicated. All substandard and special mention loans receivable
and related specific valuation allowances were on 1-4 family
residential mortgage loans.
POTENTIAL PROBLEM LOANS
(in thousands)
-----------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------
Substandard $ 1,564 $ 1,781 $ 1,900 $ 1,928 $ 1,978
Special Mention 298 346 501 606 666
------ ------ ------ ------ ------
Gross 1,862 2,127 2,401 2,534 2,644
Less Specific
Valuation Allowance (141) (160) (123) (143) (166)
----- ----- ----- ----- -----
Net $ 1,721 $ 1,967 $ 2,278 $ 2,391 $ 2,478
===== ===== ===== ===== =====
Provisions for loan losses are charged to earnings to bring
the total allowance for loan losses to a level considered
appropriate by management based on a quarterly review which is
reflective of each individual loan's performance and condition of
the underlying collateral. Management targets a certain
percentage of the entire portfolio given the current economic
conditions at which the general valuation allowance is deemed
adequate. The Company employs the reserve method of accounting
for its general and specific valuation allowances for loan losses.
The following table sets forth the Company's loan loss experience
for the years presented.
LOAN LOSS EXPERIENCE
An analysis of the allowance for loan losses as follows (dollars in
thousands):
Years Ended December 31,
------------------------------------
1997 1996 1995 1994 1993
Balance, Beginning
of Year $ 382 $ 323 $ 345 $ 370 $ 321
Provision for Losses 28 59 12 21 98
Loans Charged Off - - (34) (48) (50)
Recoveries - - 2 1
---- ---- ---- ---- ----
Balance, End of Year $ 410 $ 382 $ 323 $ 345 $ 370
=== === === === ===
Allowance for Loan
Losses as a % of
Total Loans Receivable .76% .86% .80% .85% .90%
Allowance for Loan
Losses as a % of
Non Performing Loans 246.99% 150.99% 156.80% 175.13% 73.12%
Mortgage-Backed Securities
GS Financial has invested in a portfolio of mostly fixed-
rate, mortgage-backed securities that are issued or guaranteed by
the Federal Home Loan Mortgage Corporation (FHLMC), Federal Natioal
Mortgage Association (FNMA) or Government National Mortgage Association
(GNMA). The FHLMC and FNMA are enterprises sponsored by the Federal
government while GNMA securities represent direct obligations of the
Federal government. Because of this, these securities are considered
high quality investments with minimal credit risks. The guaranteed
aspect of these investments results in yields slightly less than the
actual yields on the underlying mortgage loans.
Mortgage-backed securities represent participating interests
in pools of first mortgage loans originated and serviced by their
prospective issuers. Principal and interest payments of the
underlying mortgage loans are passed through intermediaries
including but not limited to the issuing agencies, on to investors
such as GS Financial Corp. These securities in general offer
slightly higher yields than United States Treasury obligations.
The Company invests in mortgage-backed securities with terms
varying from 5 to 30 years. These securities are subject to
variations in cash flow and yield due to the prepayment rates of
the underlying mortgage loans. While this does add interest rate
risk to the Company it is an attractive investment for the Company
from the prospective that mortgage-backed securities are highly
liquid qualified thrift investments.
On September 30, 1997 the Company reclassified all of its
mortgage-backed securities as available-for-sale pursuant to
SFAS 115. Management felt that this classification was more
appropriate considering the magnitude of the Company's investment
in these instruments and the liquidity necessary should other
investment opportunities arrive.
The following table sets forth the composition of Guaranty
Savings' mortgage-backed securities portfolio at each of the dates
indicated in thousands:
MORTGAGE-BACKED SECURITIES
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
--------------------------------------------
Available for Sale:
FNMA $ 17,054 $ 320 $ 269 $ 17,105
FHLMC 10,659 582 39 11,202
GNMA 13,935 797 318 14,414
------ ---- --- ------
$ 41,648 $ 1,699 $ 626 $ 42,721
====== ===== === ======
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
--------------------------------------------
Held to Maturity:
FNMA $ 2,980 $ 1 $ 78 $ 2,903
FHLMC 4,540 4 151 4,393
----- --- --- -----
$ 7,520 $ 5 $ 229 $ 7,296
===== === === =====
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1995 Cost Gains Losses Value
--------------------------------------------
Held to Maturity:
FNMA $ 1,772 $ 3 $ 17 $ 1,759
FHLMC 4,595 13 61 4,546
----- --- --- -----
$ 6,367 $ 16 $ 78 $ 6,305
===== === === =====
The following table sets forth the maturities of the mortgage-
backed security portfolio as of December 31, 1997 in thousands:
MORTGAGE-BACKED SECURITIES
Wtd.
Amortized Fair Avg.
December 31, 1997 Cost Value Rate
Mortgage-Backed Securities
Maturing:
In One Year or Less $ 918 $ 1,009 5.26%
After One Year Through Five Years 6,861 6,874 6.11%
After Five Years Through Ten Years 6,333 6,591 6.51%
After Ten Years 27,536 28,247 7.20%
------ ------
$ 41,648 $ 42,721
====== ======
The following table sets forth the purchases, sales and principal
repayments of the Company's mortgage-backed securities during the
periods indicated in thousands:
MORTGAGE-BACKED SECURITIES
1997 1996 1995
--------------------------------
Mortgage-Backed Securities
Balance at January 1, $ 7,520 $ 6,367 $ 6,063
Purchases 38,440 3,065 855
Repayments (4,310) (1,908) (522)
Amortizations of Premiums
/Discounts (Net) (2) (4) 1
------ ------ -----
Balance at December 31, $ 41,648 7,520 6,397
====== ===== =====
Weighted Average Yield 6.38% 5.92% 5.98%
Investment Securities
GS Financial invests in United States Treasury and Agency
issued obligations ranging in term from 3 months to 10 years. The
investment policy of the Company is reviewed periodically by
Management and ratified annually by the Board of Directors. At
present the investment policy of the Company strives to maintain a
liquid, conservative portfolio of investments keeping in mind the
cash flow and investment needs of the Company.
The Company also invests its surplus funds in a adjustable
rate mortgage-backed mutual fund (ARM Fund). Surplus funds are
those funds the Company wishes to maintain as available on demand
for investment purposes. The ARM Fund is offered by the First
Financial Trust, which is a co-operative institutional investment
group comprised of members of America's Community Bankers. At
December 31, 1997, 93.7% of the ARM Fund's assets were held in
qualified thrift investments. This strategy for the most part
supplements the Company's prior investment in money market funds
or overnight Federal Funds. The ARM Fund typically yields a rate
of return 75 to 80 basis points higher than overnight Federal
Funds.
Interest rates dictate many of the investment decisions and
policies of the Company. It shall be the policy of the Company
not to engage in speculative purchasing, selling or trading of
investments, however, certain profits may be taken from time to
time on the sale of investments. When interest rate spreads reach
acceptable levels the Company may utilize leveraged purchasing of
investment securities. Also, when anticipated earnings permit,
certain portfolio adjustments may be made to enhance the overall
portfolio yield even though losses may be recognized in doing so.
The Company's investment portfolio is classified as
available-for-sale is accordance with SFAS 115. In prior years
the Company's investment portfolio was largely classified as held-
to-maturity with only approximately 5% to 10% being classified
available for sale. That amount was determined by management as
necessary should any emergency liquidity demands arise. On
September 30, 1996, the Company sold investments classified held-
to-maturity, thus "tainting" the portfolio and forcing 100% of
the portfolio to be classified as available-for-sale. Management
felt this was in the best interest of the Company in considering
the then current interest rate environment, high loan demand,
capital strength of the company and future investment avenues
which might be pursued in light of the impending stock conversion
INVESTMENT SECURITIES
Securities available-for-sale consist of the following (in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
--------------------------------------------
U. S. Government
and Federal Agencies $ 12,380 $ 283 $ - $ 12,663
Adjustable Rate
Mortgage Mutual Fund 13,817 - 16 13,801
FHLMC Common Stock 35 1,475 - 1,510
------ ----- --- ------
$ 26,232 $ 1,758 $ 16 $ 27,974
====== ===== === ======
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
--------------------------------------------
U. S. Government
and Federal Agencies $ 21,085 $ 437 $ 4 $ 21,518
Adjustable Rate
Mortgage Mutual Fund 1,056 - 1 1,055
FHLMC Common Stock 35 958 - 993
------ ----- --- ------
$ 22,176 $ 1,395 $ 5 $ 23,566
====== ===== === ======
Securities held-to-maturity consist of the following in thousands:
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1995 Cost Gains Losses Value
--------------------------------------------
U. S. Government
and Federal Agencies $ 30,100 $ 367 $ 27 $ 30,440
------ ----- --- ------
$ 30,100 $ 367 $ 27 $ 30,440
====== ===== === ======
Securities available-for-sale consist of the following in thousands:
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1995 Cost Gains Losses Value
--------------------------------------------
U. S. Government
and Federal Agencies $ 2,182 $ 24 $ - $ 2,206
Adjustable Rate
Mortgage Mutual Fund 302 - 302
FHLMC Common Stock 35 716 - 752
------ ----- --- ------
$ 2,519 $ 740 $ - $ 3,259
===== === === =====
The following table sets forth the amount of investment
securities which mature during each of the periods indicated at
December 31, 1997 in thousands:
INVESTMENT SECURITIES
December 31, 1997
Securities
Available-for-Sale
Amortized Fair Wtg.
Cost Value Avg. Rates
Amounts Maturing in:
One Year or Less $ 14,852 $ 16,314 6.05%
After One Year
Thru Five Years 3,805 3,909 7.19%
After Five Years
Thru Ten Years 7,575 7,751 7.29%
------ ------
$ 26,232 $ 27,974
====== ======
Sources of Funds
General. Deposits have always been the primary source of the
Company's funds for lending and other investment purposes. In
1997 two significant other sources were utilized when the Company
completed its initial public offering which raised $30.8 million.
Advances from the Federal Home Loan Bank also provided the Company
with an additional source of funds as part of the Company's
leveraged investing whereby the Company was able to take advantage
of favorable interest rate spreads to borrow money and reinvest it
immediately at a rate 150 to 200 basis points higher than its
cost.
Deposits. Guaranty Savings & Homestead's deposits are attracted
principally from within its market area. Many of there depositors
are also mortgage loan customers. The Association offers both
passbook savings and certificates of deposit. Terms for
certificates vary from 3 months to 5 years while rates tend to
increase with term.
The following table shows the distribution of, and certain
other information relating to the Association's deposits:
DEPOSITS
Deposit account balances at December 31, 1997,1996, and 1995
are summarized as follows (in thousands):
Years Ending
December 31,
-------------------------------------------
1997 1996 1995
-------------------------------------------
Wtd. Wtd. Wtd.
Avg. Avg. Avg.
Balance Rate Balance Rate Balance Rate
Regular Savings
Accounts $ 22,314 3.5% $ 25,088 4.0% $ 24,120 3.2%
Certificates of
Deposit 34,508 5.2% 36,333 5.2% 36,825 4.8%
------ ------ ------
$ 56,822 $ 61,421 $ 60,945
====== ====== ======
The following table sets forth the savings cash flow of
Guaranty Savings & Homestead during the periods indicated (in
thousands):
Year Ended December 31,
------------------------
1997 1996 1995
------------------------
Increase (decrease) before
Interest Credited $ (7,482) $ (1,590) $ (5,743)
Interest Credited 2,043 2,066 2,046
----- ----- -----
Net increase (decrease) in deposits $ (5,439) $ 476 $ (3,697)
The Company attempts to control the flow of deposits by
pricing its accounts to remain generally competitive with other
financial institutions in its market area, but does not
necessarily seek to match the highest rates in the local market.
Traditionally the Association has priced its passbook savings at
or near the top of such local rates as the holders of these
accounts form the majority of its core depositors. The
Association has taken a more conservative approach in rates paid
for certificate of deposits as the Association feels these
accounts to be more rate conscious and sensitive to market
fluctuations.
The principal methods used by the Association to attract
deposits include its emphasis on personal services, competitive
interest rates and convenient office locations. Guaranty Savings
& Homestead does not advertise for deposits outside of its primary
market area. At December 31, 1997, the Association has no
deposits that were obtained through deposit brokers.
The following table presents the amount of certificates of
deposit at December 31, 1997 and the amounts at December 31, 1997
which mature during the periods indicated (in thousands).
Amount Percent
------ -------
Certificate Accounts Maturing
Under 12 months $ 26,531 76.90%
12 months to 24 months 5,586 16.20
24 months to 36 months 2,303 6.67
36 months to 48 months 6 .02
48 months to 60 months 82 .21
------ -----
Total Certificates $ 34,508 100.00%
====== ======
The following table sets forth the maturities of Guaranty
Savings & Homestead's certificates of deposits $100,000 or more at
December 31, 1997 by time remaining to maturity (in thousands).
DEPOSITS 100,000 AND OVER
(in thousands)
Maturing in 3 months or less $ 100
Maturing in 3 to 6 months 307
Maturing in 6 months to 1 year 701
-----
Total Certificates of Deposit $ 1,108
=====
Borrowings. During 1997 the Company obtained advances from the
Federal Home Loan Bank of Dallas (FHLB) as part of a limited
leveraged investment program. The Company borrows the funds which
are subsequently reinvested in mortgage-backed securities and
other investments which yield the Company anywhere from 150 to 200
over the interest charged on the advances. The advances consist
of fully amortizing advances which mature between November, 1998
and September, 2002. A summary of the advances by maturity and
interest rate are detailed as follows (in thousands):
Weighted
Maturing in the Year Average
Ending December 31, Amount Rate
------------------- ------ ---------
1998 $ 919 5.68%
1999 3,523 5.88%
2000 5,842 6.08%
2001 907 5.97%
2002 4,966 6.14%
-------
$16,157
The maximum amount of advances outstanding at any month-end
during 1997 was $17.2 million. The average balance outstanding
during 1997 was $7.4 million. Prior to 1997 the Company had no
material borrowings.
Subsidiaries
Guaranty Savings & Homestead Association is a wholly owned
subsidiary of the Company. The Company has no other subsidiaries.
Competition
Guaranty Savings & Homestead Association faces significant
competition both in attracting deposits and in originating loans.
Its most direct competition for deposits has come from commercial
banks, credit unions, other savings and loans and mortgage brokers
located in the metropolitan New Orleans market. The Association
also competes for investors' funds with short-term money market
mutual funds and issuers of corporate and government securities.
Guaranty Savings & Homestead Association does not rely on any
individual group or entity for a material portion of its deposits
or mortgage loan portfolio. The Association's primary factors in
competing in the home mortgage loan market is its efficient
personal service and attractive interest rates and terms.
Employees
The Association had 33 full-time employees at December 31,
1997. None of these employees is represented by a collective
bargaining agreement. Guaranty Savings & Homestead
Association believes that it enjoys excellent relations with its
personnel.
Regulation
Set forth below is a brief description of certain laws and
regulations which are applicable to the Company and Guaranty
Savings & Homestead Association. The description of the laws and
regulations contained elsewhere herein, does not purport to be
complete and is qualified in its entirety by reference to
applicable laws and regulations.
The Company
General. The Company, as a savings and loan holding company
within the meaning of the Home Owners' Loan Act, as amended
("HOLA"), is registered with and subject to OTS regulations,
examinations, supervision and reporting. As a subsidiary of a
savings and loan holding company, Guaranty Savings & Homestead
Association is subject to certain restrictions in its dealings
with the Company and any affiliates thereof.
Activities Restrictions. There are generally no restrictions on
the activities of a savings and loan holding company which holds
only one subsidiary savings institution. However, if the Director
of the OTS determines that there is reasonable cause to believe
that the continuation by a savings and loan holding company of an
activity constitutes a serious risk to the financial safety,
soundness or stability of its subsidiary savings institution, the
Director may impose such restrictions as deemed necessary to
address such risk, including limiting (i) payment of dividends by
the savings institution; (ii) transactions between the savings
institution and its affiliates; and (iii) any activities of the
savings institution that might create a serious risk that the
liabilities of the holding company and its affiliates may be
imposed on the savings institution. Notwithstanding the above
rules as to permissible business activities of unitary savings and
loan holding companies, if the savings institution subsidiary of
such a holding company fails to meet the qualified thrift lender
("QTL") test, as discussed under "- The Association - Qualified
Thrift Lender Test," then such unitary holding company also shall
become subject to the activities restrictions applicable to
multiple savings and loan holding companies and, unless the
savings institution re-qualifies as a QTL within one year
thereafter, shall register as, and become subject to the
restrictions applicable to, a bank holding company. See "- The
Association - Qualified Thrift Lender Test."
If the Company were to acquire control of another savings
institution, other than through merger or other business
combination with Guaranty Savings, the Company would thereupon
become a multiple savings and loan holding company. Except where
such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings institution
meets the QTL test, as set forth below, the activities of the
Company and any of its subsidiaries (other than Guaranty Savings
or other subsidiary savings institutions) would thereafter be
subject to further restrictions. Among other things, no multiple
savings and loan holding company or subsidiary thereof which is
not a savings institution shall commence or continue for a limited
period of time after becoming a multiple savings and loan holding
company or subsidiary thereof any business activity, other than:
(i)furnishing or performing management services for a subsidiary
(ii) savings institution; (ii) conducting an insurance agency or
(iii) escrow business; (iii) holding, managing, or liquidating
assets owned by or acquired from a subsidiary savings institution;
(iv) holding or managing properties used or occupied by a
subsidiary savings institution; (v) acting as trustee under deeds
of trust; (vi) those activities authorized by regulation as of
March 5, 1987 to be engaged in by multiple savings and loan
holding companies; or (vii) unless the Director of the OTS by
regulation prohibits or limits such activities for savings and
loan holding companies. Those activities described in clause
(vii) above also must be approved by the Director of the OTS prior
to being engaged in by a multiple savings and loan holding
company.
Limitations on Transactions with Affiliates. Transactions between
savings institutions and any affiliate are governed by Sections
23A and 23B of the Federal Reserve Act. An affiliate of a savings
institution is any company or entity which controls, is controlled
by or is under common control with the savings institution. In a
holding company context, the parent holding company of a savings
institution (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the
savings institution. Generally, Sections 23A and 23B (i) limit
the extent to which the savings institution or its subsidiaries
may engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such institution's capital stock and
surplus, and contain an aggregate limit on all such transactions
with all affiliates to an amount equal to 20% of such capital
stock and surplus and (ii) require that all such transactions be
on terms substantially the same, or at least as favorable, to the
institution or subsidiary as those provided to a non-affiliate.
The term "covered transaction" includes the making of loans,
purchase of assets, issuance of guarantee and other similar
transactions. In addition to the restrictions imposed by Sections
23A and 23B, no savings institution may (i) loan or otherwise
extend credit to an affiliate, except for any affiliate which
engages only in activities which are permissible for bank holding
companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except
for affiliates which are subsidiaries of the savings institution.
In addition, Sections 22(h) and (g) of the Federal Reserve
Act place restrictions on loans to executive officers, directors
and principal stockholders. Under Section 22(h), loans to a
director, an executive officer and to a greater than 10%
stockholder of a savings institution, and certain affiliated
interest of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the
savings institution's loans to one borrower limit (generally equal
to 15% of the institution's unimpaired capital and surplus).
Section 22(h) also requires that loans to directors, executive
officers and principal stockholders be made on terms substantially
the same as offered in comparable transactions to other persons
unless the loans are made pursuant to a benefit or compensation
program that (i) is widely available to employees of the
institution and (ii) does not give preference to any director,
executive officer or principal stockholder, or certain affiliated
interests of either, over other employees of the savings
institution. Section 22(h) also requires prior board approval for
certain loans. In addition, the aggregate amount of extensions of
credit by a savings institution to all insiders cannot exceed the
institution's unimpaired capital and surplus. Furthermore,
Section 22(g) places additional restrictions on loans to executive
officers. At December 31, 1997 Guaranty Savings was in compliance
with the above restrictions.
Restrictions on Acquisitions. Except under limited circumstances,
savings and loan holding companies are prohibited from acquiring,
without prior approval of the Director of the OTS, (i) control of
any other savings institution or savings and loan holding company
or substantially all the assets thereof or (ii) more than 5% of
the voting shares of a savings institution or holding company
thereof which is not a subsidiary. Except with the prior approval
of the Director of the OTS, no director or officer of a savings
and loan holding company or person owning or controlling by proxy
or otherwise more than 25% of such company's stock, may acquire
control of any savings institution, other than a subsidiary
savings institution, or of any other savings and loan holding
company.
The Director of the OTS may only approve acquisitions
resulting in the formation of a multiple savings and loan holding
company which controls savings institutions in more than one state
if (i) the multiple savings and loan holding company involved
controls a savings institution which operated a home or branch
office located in the state of the institution to be acquired as
of March 5, 1987; (ii) the acquirer is authorized to acquire
control of the savings institution pursuant to the emergency
acquisition provisions of the Federal Deposit Insurance Act
("FDIA"); or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit
institutions to be acquired by the state-chartered institutions or
savings and loan holding companies located in the state where the
acquiring entity is located (or by a holding company that controls
such state-chartered savings institutions).
Under the Bank Holding Company Act of 1956, the FRB is
authorized to approve an application by a bank holding company to
acquire control of a savings institution. In addition, a bank
holding company that controls a savings institution to merge or
consolidate the assets and liabilities of the savings institution
with, or transfer assets and liabilities to, any subsidiary bank
which is a member of the BIF with the approval of the appropriate
federal banking agency and the FRB. As a result of these
provisions, there have been a number of acquisitions of savings
institutions by bank holding companies in recent years.
Federal Securities Laws. The Company's common stock is registered
with the SEC under the Securities and Exchange Act of 1934
("Exchange Act"). The Company is subject to the information,
proxy solicitation, insider trading restrictions and other
requirements under the Exchange Act.
The Association
General. As a Louisiana chartered stock savings and loan
association, the OFI is the Association's chartering authority,
and the OTS serves as the Association's primary regulator. As
such, the OFI and the OTS have extensive authority over the
operations of Louisiana-chartered savings institutions. The
Association is subject to periodic examinations and is required to
file monthly, quarterly and annual reports with either or both
parties. The investment and lending authority of savings
institutions are prohibited from engaging in any activities not
permitted by such laws and regulations. Such regulation and
supervision is primarily intended for the protection of
depositors.
Insurance of Accounts. The deposits of Guaranty Savings and
Homestead Association are insured to the maximum permitted by the
SAIF, which is administered by the FDIC, and are backed by the
full faith and credit of the U.S. Government. As insurer, the
FDIC is authorized to conduct examinations of, and to require
reporting by, FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious threat to the
FDIC. The FDIC also has the authority to initiate enforcement
actions against savings institutions, after giving the OTS an
opportunity to take such action.
The FDIC may terminate the deposit insurance of any insured
depository institution, including Guaranty Savings and Homestead
Association, if it determines after a hearing that the institution
has engaged or is engaging in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations, or has
violated any applicable law, regulation, order or any condition
imposed by an agreement with the FDIC. It also may suspend
deposit insurance temporarily during the hearing process for the
permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the
accounts at the institution at the time of the termination, less
subsequent withdrawals, shall continue to be insured for a period
of six months to two years, as determined by the FDIC. Management
is aware of no existing circumstances which would result in
termination of the Association's deposit insurance.
Regulatory Capital Requirements. Federally insured savings
institutions are required to maintain minimum levels of regulatory
capital. Pursuant to FIRREA, the OTS has established capital
standards applicable to all savings institutions. These standards
generally must be as stringent as the comparable capital
requirements imposed on national banks. The OTS also is
authorized to impose capital requirements in excess of these
standards on individual institutions on a case-by-case basis.
Current OTS capital standards require savings institutions to
satisfy three different capital requirements. Under these
standards, savings institutions must maintain "tangible" capital
(1.5%), core capital (3.0%), and risk based capital (8.0%). Core
capital includes generally recognized capital such as common
stockholders' equity and retained earnings plus other items such
as qualifying goodwill. Tangible capital is essentially the same
but does not include qualifying supervisory goodwill. At December
31, 1997 the Association had no goodwill or other intangible
assets which are deducted in computing its tangible capital.
In determining risk-based capital, a savings institution is
allowed to include both core capital and supplementary capital.
Assets are assigned to particular risk-weighted categories and
subsequently multiplied by that particular percentage (cash equal
0%, 20% for securities, 50% for single family mortgage loans and
100% for all other loans and investments). The sum of these
calculations becomes the total of risk-weighted assets which are
then used to calculate the Association's risk-based capital ratio.
At December 31, 1997, Guaranty Savings exceeded all of its
regulatory capital requirements, with tangible, core and risk-
based capital ratios of 31.82%, 31.82% and 78.93% respectively.
Liquidity Requirements. All savings institutions are required to
maintain an average daily balance of liquid assets equal to a
certain percentage of the sum of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year
or less. As of December 31, 1997 Guaranty Savings and Homestead
Association's liquidity was 70.8% or $48.7 million in excess of
the minimum required 5%.
Capital Distributions. OTS regulations govern capital
distributions by savings institutions, which include cash
dividends, stock redemptions or repurchases, cash-out mergers,
interest payments on certain convertible debt and other
transactions charged to the capital account of a savings
institution to make capital distributions. Under these
regulations, safe harbors are created for specified levels of
capital distributions as long as the savings institution meets
their minimum required capital levels. In order to make
distributions under these safe harbors, Tier 1 and Tier 2
institutions must submit 30 day written notice to the OTS prior to
making the distribution. The Association does not anticipate
making any such distributions at the current time nor does it
expect this regulation to have any adverse impact on the
Association at any time in the future.
Community Reinvestment. Under the Community Reinvestment Act 0f
1977, as amended ("CRA"), as implemented by OTS regulations, a
savings institution has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the
credit needs of its entire community, including low and moderate
income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OTS, in
connection with its examination of a savings institution, to
assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation
of certain applications by such institution. The CRA requires
public disclosure of an institution's CRA rating and requires the
OTS to provide a written evaluation of an institution's CRA
performance utilizing a rating system which identifies four levels
of performance that may describe an institution's record of
meeting community needs: outstanding, satisfactory, needs to
improve and substantial noncompliance. The CRA also requires all
institutions to make public disclosure of their CRA ratings.
Qualified Thrift Lender Test. The Qualified Thrift Lender (QTL)
Test measures the Association's level of qualified thrift
investments compared to its total portfolio assets (total assets
less intangibles, property used by a savings association in its
business and liquidity investments in an amount not to exceed 20%
of assets). Generally, qualified thrift investments are
residential housing related assets. The Internal Revenue Service
(IRS) requires a savings institution to have at least 65% of its
assets in qualified thrift investments to qualify for tax
treatment as a building and loan association. At December 31,
1997, 99.20% of the Association's assets were invested in QTI's
which was in excess of the percentage required to qualify the
Association under the QTL test.
Year 2000. Guaranty Savings and Homestead Association employs a
service bureau, NCR Corporation of Dayton, Ohio as its data
processor. NCR has been addressing the Year 2000 issue in its
last several software releases, and it has scheduled national
testing in May, 1998 and regional testing during the summer of
1998. NCR expects to be fully Year 2000 compliant by the end of
1998. Guaranty has contacted other computer hardware and
software vendors and equipment vendors to ensure that their
products are either Year 2000 compliant now or will be by the end
of this year. The Association does not anticipate that Year 2000
expenditures will be material.
Federal Home Loan Bank System. Guaranty Savings and Homestead
Association is a member of the FHLB of Dallas. Each FHLB serves
as a reserve or central bank for its members within its assigned
region. It is funded primarily from proceeds derived from the
sale of FHLB agency issued obligations. As a member, the
Association is required to maintain stock in the FHLB of Dallas in
an amount equal to at least 1% of its aggregate unpaid residential
mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of its advances from the FHLB of
Dallas, whichever is greater. At December 31, 1997, Guaranty
Savings and Homestead Association had $857,000 in FHLB stock,
which was in compliance with this requirement.
Federal Taxation
General. The Company and Guaranty Savings are subject to the
generally applicable corporate tax provisions of the Code, and
Guaranty Savings is subject to certain additional provisions of
the Code which apply to thrift and other types of financial
institutions. The following discussion of federal taxation is
intended only to summarize certain pertinent federal income tax
matters relevant to the taxation of the Company and Guaranty
Savings and is not a comprehensive discussion of the tax rules
applicable to the Company and Guaranty Savings.
Year. The Company files a consolidated federal income tax return
on the basis of a calendar year ending on December 31.
Bad Debt Reserves. Savings institutions, such as Guaranty
Savings, which meet certain definitional tests primarily relating
to their assets and the nature of their businesses, are permitted
to establish a reserve for bad debts and to make annual additions
to the reserve. These additions may, within specified formula
limits, be deducted in arriving at the institution's taxable
income. For purposes of computing the deductible addition to its
bad debt reserve, the institution's loans are separated into
"qualifying real property loans"(ie., qualifying loans"). The
deduction with respect to non-qualifying loans must be completed
under the experience method as described below. The following
formulas may be used to compute the bad debt deduction with
respect to qualifying real property loans: (i) actual loss
experience, or (ii) a percentage of taxable income. Reasonable
additions to the reserve for losses on non-qualifying loans must
be based upon actual loss experience and would reduce the current
year's additions to the reserve for losses on qualifying real
property loans, unless that addition is also determined under the
experience method. The sum of the additions to each reserve for
each year is the institution's annual bad debt deduction.
Under the experience method, the deductible annual addition
to the institution's bad debt reserves is the amount necessary to
increase the balance of the reserve at the close of the taxable
year to the greater of (a) the amount which bears the same ratio
to loans outstanding at the close of the taxable year as the total
net bad debts sustained during the current and five preceding
taxable years bear to the sum of the loans outstanding at the
close of the six years, or (b) the lower of (i) the balance of the
reserve account at the close of the Association's "base year,"
which was its tax year ended December 31, 1987, or (ii) if the
amount of loans outstanding at the close of the taxable year is
less than the amount of loans outstanding at the close of the base
year, the amount which bears the same ratio to loans outstanding
at the close of the taxable year as the balance of the reserve at
the close of the base year bears to the amount of loans
outstanding at the close of the base year.
Under the percentage of taxable income method, the bad debt
deduction equals 8% of taxable income determined without regard to
that deduction and with certain adjustments. The availability of
the percentage of taxable income method permits a qualifying
savings institution to be taxed at a lower effective federal
income tax rate than that applicable to corporations in general.
This resulted generally in an effective federal income tax rate
payable by a qualifying savings institution fully able to use the
maximum deduction permitted under the percentage of taxable income
method, in the absence of other factors affecting taxable income,
of 31.3% exclusive of any minimum tax or environmental tax (as
compared to 34% for corporations generally). For tax years
beginning on or after January 1, 1993, the maximum corporate tax
rate was increased to 35%, which increased the maximum effective
federal income tax rate payable by a qualifying savings
institution fully able to use the maximum deduction to 32.2%. Any
savings institution at least 60% of whose assets are of 8% of
taxable income. As of December 31, 1995, over 71% of the assets
of Guaranty Savings were "qualifying assets" as defined in the
Code, and Guaranty Savings anticipates that at least 60% of its
assets will continue to be qualifying assets in the immediate
future. If this ceases to be the case, the institution may be
required to restore some portion of its bad debt reserve to
taxable income in the future.
Under the percentage of taxable income method, the bad debt
deduction for an addition to the reserve for qualifying real
property loans cannot exceed the amount necessary to increase the
balance in this reserve to an amount equal to 6% of such loans
outstanding at the end of the taxable year. The bad debt
deduction is also limited to the amount which, when added to the
addition to the reserve for losses on non-qualifying loans, equals
the amount by which 12% of deposits at the close of the year
exceeds the sum of surplus, undivided profits and reserves at the
beginning of the year. Based on experience, it is not expected
that these restrictions will be a limiting factor for Guaranty
Savings in the foreseeable future. In addition, the deduction for
qualifying real property loans is reduced by an amount equal to
all or part of the deduction for non-qualifying loans.
Pursuant to certain legislation which was recently enacted
and which will be effective for tax years beginning after 1995, a
small thrift institution (one with an adjusted basis of assets of
less than $500 million), such as Guaranty Savings, would no longer
be permitted to make additions to its tax bad debt reserve under
the percentage of taxable income method. Such institutions would
be permitted to use the experience method in lieu of deducting bad
debts only as they occur. Such legislation will require Guaranty
Savings to realize increased tax liability over a period of at
least six years, beginning in 1996. Specifically, the legislation
will require a small thrift institution to recapture (ie., take
into income) over a multi-year period the balance of its bad debt
reserves in excess of the lesser of (i) the balance of such
reserves as of the end of its last taxable year ending before 1988
or (ii) an amount that would have been the balance of such
reserves had the institution always computed its additions to its
reserves using the experience method. The recapture requirement
would be suspended for each of two successive taxable years
beginning January 1, 1996 in which Guaranty Savings originates an
amount of certain kinds of residential loans which in the
aggregate are equal to or greater than the average of the
principal amounts of such loans made by Guaranty Savings during
its six taxable years preceding 1996. It is anticipated that any
recapture of Guaranty Savings' bad debt reserves accumulated after
1987 would not have a material adverse effect on Guaranty Savings'
financial condition and results of operations.
At December 31, 1995, the federal income tax reserves of
Guaranty Savings included $5.5 million for which no federal income
tax has been provided. Because of these federal income tax
reserves and the liquidation account to be established for the
benefit of certain depositors of Guaranty Savings in connection
with the conversion of the Association to stock form, the retained
earnings of Guaranty Savings are substantially restricted.
Distributions. If Guaranty Savings were to distribute cash or
property to its sole stockholder, and the distribution was treated
as being from its accumulated bad debt reserves, the distribution
would cause Guaranty Savings to have additional taxable income. A
distribution is deemed to have been made from accumulated bad debt
reserves to the extent that (a) the reserves exceed the amount
that would have been accumulated on the basis of actual loss
experience, and (b) the distribution is a "non-qualified
distribution." A distribution with respect to stock is a non-
qualified distribution to extent that, for federal income tax
purposes, (i) it is in redemption of share, (ii) it is pursuant to
a liquidation of the institution, or (iii) in the case of a
current distribution, together with all other such distributions
during the taxable year, it exceeds the institution's current and
post-1951 accumulated earnings and profits. The amount of
additional taxable income created by a non-qualified distribution
is an amount that when reduced by the tax attributable to it is
equal to the amount of the distribution.
Minimum Tax The Code imposes an alternative minimum tax at a rate
of 20%. The alternative minimum tax generally applies to a base
of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI") and is payable
to the extent such AMTI is in excess of an exemption amount. The
Code provides that an item of tax preference is the excess of the
bad debt deduction allowable for a taxable year pursuant to the
percentage of taxable income method over the amount allowable
under the experience method. Other items of tax preference that
constitute AMTI include (a) tax-exempt interest on newly issued
(generally, issued on or after August 8, 1986) private activity
bonds other than certain qualified bonds and (b) 75% of the excess
(if any) of (i) adjusted current earnings as defined in the Code,
over (ii) AMTI (determined without regard to this preference and
prior to reduction by net operating losses).
Net Operating Loss Carryovers. A financial institution may carry
back net operating losses ("NOLs") to the preceding three taxable
years and forward to the succeeding 15 taxable years. This
provision applies to losses incurred in taxable years beginning
after 1986. At December 31, 1995, Guaranty Savings had no NOL
carryforwards for federal income tax purposes.
Capital Gains and Corporate Dividends-Received Deduction.
Corporate net capital gains are taxed at a maximum rate of 35%.
The corporate dividends-received deduction is 80% in the case of
dividends received from corporations with which a corporate
recipient does not file a consolidated tax return, and
corporations which own less than 20% of the stock of a corporation
distributing a dividend may deduct only 70% of dividends received
or accrued on their behalf. However, a corporation may deduct
100% of dividends from a member of the same affiliated group of
corporations.
Other Matters Federal legislation is introduced from time to
time that would limit the ability of individuals to deduct
interest paid on mortgage loans. Individuals are currently not
permitted to deduct interest on consumer loans. Significant
increases in tax rates or further restrictions on the
deductibility of mortgage interest could adversely affect Guaranty
Savings.
Guaranty Savings' federal income tax returns for the tax
years ended December 31, 1993 forward are open under the statute
of limitations and are subject to review by the IRS.
State Taxation
Any non-banking subsidiaries of the Association ( as well as
the Company) are subject to the Louisiana Corporation Income Tax
based on their Louisiana taxable income, as well as franchise
taxes. The Corporation Income Tax applies at graduated rates from
4% upon the first $25,000 of Louisiana taxable income to 8% on all
Louisiana taxable income in excess of $200,000. For these
purposes, "Louisiana taxable income" means net income which is
earned within or derived from sources within the State of
Louisiana, after adjustments permitted under Louisiana law
including a federal income tax deduction and an allowance for net
operating losses, if any. In addition, following the Conversion
the Association will be subject to the Louisiana Shares Tax, which
will be imposed on the assessed value of its stock. The formula
for deriving the assessed value is to calculate 15% of the sum of
20% of the company's capitalized earnings, plus (b) 80% of
the company's taxable stockholders' equity, and to subtract from
that figure 50% of the company's real and personal property
assessment. Various items may also be subtracted in calculating a
company's capitalized earnings.
Item 2. PROPERTIES
The following table sets forth certain information relating
to the Company's offices at December 31, 1997. All properties are
owned by the Company. All amounts are in thousands.
Net
Book Total
Location Value Deposits
- -------- ------- --------
3798 Veterans Blvd., Metairie $1,948 $ 50,716
2111 N. Causeway Blvd., Mandeville 360 506
3915 Canal St., New Orleans 267 5,601
----- ------
$2,575 $ 56,823
===== ======
Item 3. LEGAL PROCEEDINGS
The Company and the Association are not involved in any
pending legal proceedings other than nonmaterial legal proceedings
occurring in the ordinary course of business.
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 16, 1997, the Company commenced a proxy
solicitation of its stockholders with respect to a Special Meeting
of Stockholders held on October 15, 1997 ("Special Meeting").
There were two matters considered at the Special Meeting,
consideration of the Company's Stock Option Plan and the Company's
Recognition and Retention Plan and Trust. Both of such plans were
approved by the Company's stockholders by the vote reflected
below.
Approval of the Company's Stock Option Plan:
For Against Abstain Not Voted
--- ------- ------- ---------
2,004,167 156,935 28,180 56,316
Approval of the Company's Recognition and Retention Plan and
Trust:
For Against Abstain Not Voted
--- ------- ------- ---------
1,924,830 242,322 28,680 49,766
Part II.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information required herein, to the extent applicable, is
incorporated by reference from the front cover of the Registrant's
1997 Annual Report to Stockholders ("Annual Report").
Item 6. SELECTED FINANCIAL DATA
The information required herein is incorporated by reference
from page 7 of the Registrant's Annual Report.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required herein is incorporated by reference
from pages 8 to 11 of the Registrant's Annual Report.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required herein is incorporated by reference
from pages 12 to 35 of the Registrant's Annual Report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
Part III.
Item 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required herein is incorporated by reference
from the Registrant's definitive proxy statement for the 1997
Annual Meeting of Stockholders ("Proxy Statement").
Item 11 EXECUTIVE COMPENSATION
The information required herein is incorporated by reference
from the Registrant's Proxy Statement.
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required herein is incorporated by reference
from the Registrant's Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated by reference
from the Registrant's Proxy Statement.
Part IV.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) Documents filed as part of this Report.
(1) The following financial statements are incorporated by
reference from Item 8 hereof (see Exhibit 13):
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1997 and
1996
Consolidated Statements of Income for the Fiscal Periods
Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Changes in Shareholders'
Equity for the Fiscal Periods Ended December 31, 1997,
1996 and 1995
Consolidated Statements of Cash Flows for the Fiscal
Periods Ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(2) All schedules for which provision is made in the
applicable accounting regulation of the SEC are omitted
because of the absence of conditions under which they
are required or because the required information is
included in the consolidated financial statements and
related notes thereto.
(3) The following exhibits are filed as part of this form
10-K, and this list includes the Exhibit Index.
Exhibit Index
3.1* Articles of Incorporation of GS Financial Corp.
3.2* Bylaws of GS Financial Corp.
4.1* Stock Certificate of GS Financial Corp.
10.1** GS Financial Corp. Stock Option Plan
10.2** GS Financial Corp. Recognition and Retention Plan and Trust
Agreement for Employees and Non-Employee Directors.
10.3* Employment Agreement among GS Financial Corp. Guaranty
Savings and Homestead Association and Donald C. Scott
Dated February 25, 1997
10.4* Employment Agreement among GS Financial Corp. Guaranty
Savings and Homestead Association and Bruce A. Scott
Dated February 25, 1997
13.0 1997 Annual Report to Stockholders
21.0 Subsidiaries of the Registrant - Reference is made to
"Item 2" Business for the required information
27.0 Financial Data Schedule
Incorporated herein by reference from the Registration
Statement on Form SB-2 (Registration number 333-18841) filed by
the Registrant with the SEC on December 26, 1996, as
subsequently amended.
** Incorporated herein by reference from the definitive proxy
statement, dated September 16, 1997, filed by the Registrant with
the SEC (Commission File No. 000-22269)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities and Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GS FINANCIAL CORP.
March 28, 1998 By: /s/ Donald C. Scott
-------------------
Donald C. Scott
Chairman of the Board, President
And Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Name Title
- ---- -----
/s/ Donald C. Scott Chairman of the Board, March 28, 1998
- ------------------- President and Chief
Donald C. Scott Executive Officer
(principal executive officer)
/s/ Bruce A. Scott Executive Vice March 28, 1998
- ------------------- President and Director
Bruce A. Scott
/s/ Glenn R. Bartels Controller March 28, 1998
- ------------------- (principal financial
Glenn R. Bartels and accounting officer)
/s/ J. Scott Key Director March 28, 1998
- ----------------
J. Scott Key
/s/ M.D. Paine, Jr. Director March 28, 1998
- ------------------
M.D. Paine, Jr.
/s/ Victor Kirschman Director March 28, 1998
- --------------------
Victor Kirschman
/s/ Bradford A. Glazer Director March 28, 1998
- ----------------------
Bradford A. Glazer
/s/ Stephen L. Cory Director March 28, 1998
- -------------------
Stephen L. Cory
/s/ Albert J. Zahn, Jr. Director March 28, 1998
- -----------------------
Albert J. Zahn, Jr.
/s/ Kenneth B. Caldcleugh Director March 28, 1998
- -------------------------
Kenneth B. Caldcleugh
ANNUAL REPORT TO SHAREHOLDERS
GS FINANCIAL CORP.
1997
The Company
GS Financial Corp. (the "Company") is a thrift holding
company which was organized and incorporated under the laws of the
State of Louisiana on December 24, 1996. The Company completed its
initial public offering on April 1, 1997. The Company's primary
business is conducted through its wholly owned subsidiary,
Guaranty Savings & Homestead Association at its three locations in
the metropolitan New Orleans area. The Association provides
financial services mainly to individuals through the origination
of mortgage loans primarily on 1-4 family dwellings. The
Association also takes in savings deposits.
Market Information
The Company's stock price is reported under the symbol GSLA
on the National Association of Securities Dealers Automated
Quotation (NASDAQ) system. The Company's stock traded in the
range shown below. At December 31, 1997 the closing price was
$20.875 per share and there were approximately 1,900 shareholders.
QUARTER ENDING HIGH LOW
- ------------------ ------ ------
June 30, 1997 15.630 13.000
September 30, 1997 16.380 14.875
December 31, 1997 20.875 16.000
Notice of Annual Meeting
The Annual Meeting of Shareholders of GS Financial Corp. will
be held at the offices of Guaranty Savings & Homestead
Association, 3798 Veterans Blvd., Metairie, Louisiana on Tuesday,
April 28, 1997 at 10:00 a.m. CST.
Shareholder Services
Shareholders desiring to change the name, address or
ownership of stock, to report lost certificates, or to consolidate
accounts should contact our transfer agent:
Registrar and Transfer
P.O. Box 1010
Cranford, NJ 07016
(908) 497-2300
Investor Relations
Shareholders and others seeking financial information or
copies of the Company's financial information should contact:
Amy Forrester, Compliance Officer or, Glenn R. Bartels, Controller
GS Financial Corp.
3798 Veterans Blvd.
Metairie, LA 70002
(504) 457-6220
TO OUR SHAREHOLDERS
When the opening bell sounded on the National Association of
Securities Dealers Automated Quotation System (NASDAQ) and GS
Financial Stock was offered for sale on April 1, 1997, it marked
the beginning of the next generation of the Guaranty Savings &
Homestead Family. In years past tradition dictated that savings
and loans made home mortgage loans, commercial banks concentrated
on business lending while stock brokers counseled and offered
long-term investment products. This scenario could not be farther
from the truth in our present day. Deregulation along with a vast
secondary market has opened the home mortgage origination to
everyone from in-house mortgage brokers to the largest commercial
banks while investment products can be purchased from the internet
to the corner bank
The initial public offering of GS Financial has unveiled a
new corporate structure which offers less regulated and more
diverse investment opportunities for our company while allowing us
to protect 60 years of solid earnings. Thrifts such as Guaranty
Savings & Homestead Association are limited by Federal and State
regulations in permissible activities. GS Financial Corp. allows
us to take advantage of new investment opportunities while keeping
Guaranty Savings & Homestead as the rock solid anchor it has
always been.
Guaranty Savings & Homestead has carried us through the last
60 years by offering great personal service and no frills products
that our customers trust and understand. This has built a
tradition of steady earnings, high asset quality and strength
through abundant capital and liquid resources. Our Company makes
a long term investment in our customers. We like to refer to it
as "building a better mortgage". When you call our company on
the phone you are greeted with a live voice. Walk into our lobby
and you'll be met with a warm smile free of charge. Questions are
answered live, in person, while you wait.
The transition of our Company involved not only moving our
Main Office and opening two new branches, but also saw the
evolution of many of our internal policies and goals. New
investment strategies have enabled the Company to take advantage
of favorable fluctuations in market interest rates while at the
same time funding the rapid growth of our mortgage portfolio. Our
liquidity and strength also enabled our Company to supplement its
growth through leveraged investing. The end result of the
completion of our initial public offering and transition is
reflected in strong growth and earnings in 1997.
GS Financial Corp. is entering the 21st Century in a growth
mode supported by steady and stable earnings and high levels of
capital and liquid resources. Our new structure affords us
additional tools to be more competitive in a world of
increasingly open and competitive markets. At the same time we
haven't forgot what got us here. We will continue to be a
community oriented company whose customers are secure in their
knowledge that their investments are secure and no question
unresolved.
Sincerely,
/s/ Donald C. Scott
Donald C. Scott
Chairman of the Board and Chief Executive Officer
The following selected consolidated financial and other data of
the Company does not purport to be complete and should be read in
conjunction with, and is qualified in its entirety by, the more
detailed financial information, including the Consolidated
Financial Statements of the Company and Notes thereto, contained
elsewhere herein.
At December 31,
1997 1996 1995 1994 1993
Selected Financial
Condition:
Total Assets 131,396 87,550 86,040 88,250 90,100
Cash and Cash
Equivalents 2,612 7,591 2,355 2,620 2,883
Loans Receivable, Net 53,588 44,125 39,888 40,042 40,679
Investment Securities 27,974 23,566 33,360 35,496 37,798
Mortgage-Backed
Securities 42,721 7,520 6,367 6,063 6,112
Deposit accounts 56,822 61,421 60,945 64,642 67,432
Borrowings 16,157 - - - -
Equity 56,047 24,779 23,457 22,385 21,591
Selected Operating Data:
Interest Income 8,347 6,155 6,260 6,035 6,327
Interest Expense 3,014 2,669 2,664 2,408 2,385
Net Interest Income 5,333 3,486 3,596 3,627 3,942
Provision for Loan Losses 28 59 12 21 98
Net Interest Income after 5,305 3,427 3,584 3,606 3,844
Non-Interest Income 73 (74) 63 109 147
Non-Interest Expense (2,708) (2,747) (2,295) (2,191)(1,994)
Net Income before taxes 2,670 606 1,352 1,524 1,997
Income Tax expense 1,000 201 480 529 722
Net Income 1,670 405 872 994 1,275
Net Income per share $ 0.53 n/a n/a n/a n/a
Dividends declared per
Share $ 0.14 n/a n/a n/a n/a
Other Data:
Profitability
Average Yield on
Interest Earning Assets 7.21% 7.57% 7.52% 6.97% 7.26%
Average Cost of Interest
Bearing Liabilities 4.60 4.43 4.27 3.62 3.52
Average Interest
Rate Spread 2.61 4.29 3.25 3.35 3.74
Net Interest Margin 4.50 4.21 4.32 4.19 4.52
Interest-Earning Assets
as a % of Interest
Bearing Liabilities 176.67 134.92 133.39 130.39 128.78
Net Interest Income
after Provision for
Loan Loss as a % of
Non Interest Expense 195.90 124.75 156.17 164.58 192.77
Non Interest Expense as
a % of Average Assets 2.23 3.19 2.63 2.43 2.21
Return on Average Assets 1.38 0.47 1.00 1.10 1.42
Return on Average Equity 3.19 1.66 3.70 4.41 6.02
Capital Ratio's:
Average Equity as a %
of Total Assets 40.76% 28.30% 26.99% 25.02% 23.54%
Tangible Capital Ratio 32.61 27.72 27.35 25.90 24.30
Core Capital Ratio 32.61 27.72 27.35 25.90 24.30
Risk-Based Capital Ratio 79.41 79.19 93.60 90.00 89.40
Asset Quality Ratios:
Non Performing Loans as
a % of Total Loans 0.31% 0.57% 0.51% 0.49% 1.23%
Non Performing Assets as
a % of Total Assets 0.13 0.29 0.27 0.27 0.60
Allowance for Loan Losses
as a % of Total Loans
Receivable 0.76 0.86 0.80 0.85 0.90
Allowance for Loan Losses
as a % of Non-
Performing Loans 246.99 150.99 156.80 175.13 73.12
Net charge-offs as a %
Of Average Loans 0.00 0.00 .06 - .08
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial
condition and results of operations of GS Financial Corp. (the
"Company") and its subsidiary for the years ended December 31,
1993 through 1997 is designed to assist readers in their
understanding of the Company. This review should be read in
conjunction with the audited consolidated financial statements,
accompanying footnotes and supplemental financial data included
herein.
FINANCIAL CONDITION
ASSETS
General - Total assets of the Company increased by $43.8 million,
or 50%, from $87.6 million at December 31, 1996, to $131.4 million
at December 31, 1997. The increase was primarily due to a $35.2
million increase in mortgage-backed securities and a $9.5 million
increase in loans receivable. These increases were funded by the
$30.8 million of net proceeds from the Company's offering of
common stock in April, 1997 and an increase of $16.2 million in
advances from the Federal Home Loan Bank of Dallas.
Cash and Cash Equivalents - Cash and cash equivalents, consisting
of interest and non-interest bearing deposits decreased $5.0
million, or 65.8%, from $7.6 million at December 31, 1996, to $2.6
million at December 31, 1997. The decrease was due to the
Company's new relationship with First Financial Trust whereby
surplus funds are now maintained in an adjustable rate mortgage-
backed mutual fund. Surplus funds were previously maintained in
overnight Federal Funds. This new policy has resulted in an
increased yield of 70 to 80 basis points on the Company's surplus
cash.
Loans Receivable, Net - Loans receivable, net, increased by $9.5
million or 21.5%, from $44.1 million at December 31, 1996, to
$53.6 million at December 31, 1997. This increase was almost
exclusively in first mortgage loans on 1-4 family dwellings which
increased $9.8 million or 22.9%, from $42.7 million at December
31, 1996, to $52.5 million at December 31, 1997. This increase
was partially offset by slight decreases in FHA, VA, construction
and other loans from December 31, 1996 to December 31, 1997. The
increase in loans was funded substantially by a portion of the net
proceeds from the Company's sale of common stock in April, 1997.
Investment Securities - Investment securities increased $4.4
million or 18.6%, from $23.6 million at December 31, 1996, to
$28.0 million at December 31, 1997. This was primarily due to the
Company's change in policy of investing surplus cash in an
adjustable rate mortgaged-backed mutual fund. At December 31,
1997 93.7% of the fund's assets were invested in qualified thrift
investments.
Mortgage-Backed Securities - Mortgage-backed securities increased
$35.2 million or 469.3%, from $7.5 million at December 31, 1996,
to $42.7 million at December 31, 1997. This increase was funded
by an increase in advances from the Federal Home Loan Bank of
Dallas of $16.1 million and investment of a portion of the net
proceeds from the Company's sale of common stock in April, 1997.
The increase was also due to the adoption of a limited wholesale
growth strategy of leveraged investing.
On September 30, 1997, the Company reclassified all of its
mortgage-backed securities as available for sale. The Company was
able to take advantage of favorable market interest rate
conditions to lock in favorable yields resulting in $1.1 million
in unrealized gains on mortgage-backed securities at December 31,
1997. At December 31, 1997 and 1996, all of the Company's
mortgage-backed securities were FHLMC, FNMA, or GNMA issued
instruments. FHLMC and FNMA are enterprises sponsored by
the Federal government while GNMA securities represent
direct obligations of the Federal Government.
LIABILITIES AND STOCKHOLDERS' EQUITY
General - The Company's deposits, borrowings and equity represent
sources of funds. Of these accounts borrowings and equity
experienced significant changes from December 31, 1996 to December
31, 1997. The following discussion explains these changes.
Deposits - The Company's deposits decreased $4.6 million or 7.5%,
from $61.4 million at December 31, 1996, to $56.8 million at
December 31, 1997. Most of the reduction was due to the
withdrawal of $3.5 million in passbook savings and certificate of
deposit accounts to purchase the Company's common stock on April
1, 1997.
Borrowings - The Company's borrowings consisted entirely of fully
amortizing advances from the Federal Home Loan Bank of Dallas
which mature between November, 1998 and September, 2002. These
borrowings represent the implementation of a limited wholesale
growth strategy of leveraged investing. The Company borrows the
funds and reinvests the funds in investment and mortgage-backed
securities yielding 150 to 200 basis points higher than the cost
of the funds. The securities are generally purchased with 80%
borrowed funds and 20% of the Company's own cash.
Stockholders' Equity - Stockholders' equity increased $31.2
million or 125.8%, from $24.8 million at December 31, 1996, to
$56.0 million at December 31, 1997. The net increase was mainly
the result of the influx of $30.8 million in net proceeds from the
Company's sale of common stock on April 1, 1997. The increase in
stockholders' equity was also due to $1.7 million in net income
for the year ending December 31, 1997, and $.4 million from the
release and allocation of ESOP shares. Stockholders' equity was
also affected by the change in unrealized gain in available for
sale securities which increased $.9 million or 100%, from $.9
million at December 31, 1996, to $1.8 million at December 31,
1997. Stockholders' equity was decreased in 1997 by common stock
purchased by the Recognition and Retention Plan Trust in
the amount of $2.1 million and by dividends paid by the
Company for 1997 totaling $.5 million.
Average Balances, Net Interest Income
Average Balances, Net Interest Income, and Yields Earned and Rates Paid
For the Years Ending December 31,
-----------------------------------------------
1997 1996 1995
Avg. Avg. Avg. Avg. Avg. Avg.
Bal. Int. Rate Bal. Int. Rate Bal. Int. Rate
------ ----- ----- ------ ----- ----- ------ ----- -----
Loans 46,773 4,085 8.73% 41,443 3,760 9.07% 40,196 3,740 9.29%
Mortgage-Backed
Securities 28,854 1,841 6.38% 7,368 436 5.92% 6,267 380 6.06%
Investment Securities 25,972 1,724 6.64% 27,430 1,689 6.16% 34,227 2,028 5.93%
Other Interest
Earning Assets 14,251 697 4.89% 5,049 270 5.35% 2,561 150 5.82%
------ ----- ------ ----- ------ -----
Total Interest
Earning Assets 115,850 8,347 7.21% 81,290 6,155 7.57% 83,251 6,298 7.52%
Non Interest Earning
Assets 5,592 4864 4,096
------- ------ ------
TOTAL ASSETS 121,442 86,154 87,347
Interest Bearing
Liabilities
Passbooks 23,735 854 3.60% 23,672 833 3.52% 25,013 880 3.52%
Certificates of Deposits 34,397 1,721 5.00% 36,577 1,836 5.02% 37,397 1,784 4.74%
Borrowings 7,445 439 5.90%
------ ----- ------ ----- ------ -----
Total Interest Bearing
Liabilities 65,577 3,014 4.60% 60,249 2,669 4.43% 62,410 2,664 4.29%
Non Interest Bearing
Liabilities 3,457 1,393 1,363
------ ------ ------
TOTAL LIABILITIES 69,034 61,642 63,773
RETAINED EARNINGS 52,408 24,512 23,574
------- ------ ------
TOTAL LIABILITIES AND
RETAINED EARNINGS 121,442 86,154 87,347
Net Interest
Earning Assets 50,273 21,041 20,841
Net Interest Income 5,333 3,486 3,596
Net Interest Spread 2.61% 3.14% 3.25%
Net Interest Margin 4.60% 4.29% 4.32%
RESULTS OF OPERATIONS
General - The Company reported net income of $1.7 million, $.4
million and $.9 million for the years ended December 31, 1997,
1996 and 1995. The $1.3 million increase was primarily due to an
increase in interest income of $2.2 million from December 31, 1996
to December 31, 1997. A one-time savings deposit insurance
premium of $.4 million was the main factor in the $.5 million
decline in net income from 1995 to 1996.
Interest Income - Interest income increased $2.2 million or 36.1%,
from $6.1 million for 1996 compared to $8.3 million in 1997. The
most significant contributing factor in this increase was interest
on mortgage-backed securities which increased $1.4 million or 350%
from 1996 to 1997. This change was due to an increase in the
average balance in mortgage-backed securities $21.5 million from
1996 compared to 1997 and an increase in the yield of mortgage-
backed securities from 5.92% in 1996 to 6.38% in 1997. This
increased yield was due to a lengthening in the maturity of the
Company's portfolio of mortgage-backed securities. Longer term
instruments tend to yield higher interest rates. The Company
invested in securities in 1997 with maturities ranging from 5
years to 30 years. In past years the Company limited its
investments in mortgage-backed securities to instruments with
maturities of 10 years. While this new strategy does add interest
rate risk, the Company feels that its strong liquid and capital
position make these type investments safe.
The yield on loans receivable decreased form 9.07% in 1996 to
8.73% in 1997. This, however, was offset by an increase in the
average balance of net loans receivable of $5.4 million from 1996
to 1997 resulting in an increase in interest income from net loans
receivable of $.3 million or 7.89%, from $3.8 million in 1996,
compared to $4.1 million in 1997.
Interest income from other interest earning assets increased
$.4 million or 133%, from $.3 million for the 12 months ending
December 31, 1996, compared to $.7 million for the 12 months
ending December 31, 1997. Most of this increase was due to the
Company's temporary investment of funds from its April 1, 1997
sale of common stock in overnight Federal Funds and money market
accounts. While the yield on other interest earning assets was
down from 5.35% in 1996 to 4.89% in 1997, the decrease was
significantly offset by the increase in the average investment in
other interest earning assets.
Interest Expense - Interest expense increased $.3 million or
11.1%, from $2.7 million in 1996, compared to $3.0 million in
1997. The primary reason for the increase was the Company's
adoption of a limited wholesale growth strategy involving
leverage investing. The resulting advances from the
Federal Home Loan Bank of Dallas cost the Company $.4
million in interest expense which was non-existent in prior
years. The cost of passbook savings and certificate of
deposit funds remained essentially unchanged from 1996 to
1997.
Interest expense on passbook savings increased $.02 million
in 1997 compared to 1996. This was largely due to a slight
increase in the average balance. In the first quarter of 1997
passbook savings increased to $27.6 million as some of the funds
designated to purchase the Company's common stock was deposited in
existing customer accounts. Upon the sale of common stock
approximately $3.1 million in passbook savings funds were used to
purchase common stock.
Provision for Loan Losses -The Company had a provisions for loan
loss of $.03 million in 1997 compared to $.06 million and $.01
million for the years ending December 31, 1996 and 1995.
Provisions for loan losses are charged to earnings to bring the
total allowance for loan losses to a level considered appropriate
by management based on a quarterly review which is reflective of
each individual loan's performance and condition of the underlying
collateral. Management targets a certain percentage of the entire
mortgage portfolio given the current economic conditions at which
the general valuation allowance is deemed adequate. The
Association employs the reserve method of accounting for its
general and specific valuation allowances for loan losses. For
the twelve months ended December 31, 1997 and 1996 the above-
mentioned provisions were necessary to bring the general valuation
allowance in line with management's targets due to growth in the
mortgage portfolio.
Non-Interest Income - Non-interest income increased $.14 million
in 1997 to $.07 million, compared to $(.07) million in the twelve
months ended December 31, 1996. The one major contributing factor
to this difference was the gain on sale of investments in 1997 of
$.05 million in 1997 compared to the loss on sale of investments
in 1996 of $.1 million.
Other Expenses - Other expenses decreased $.04 million or 1.5%,
from $2.75 million for the twelve months ended December 31, 1996,
compared to $2.71 million for the twelve months ended December 31,
1997. The absence of the one time $.4 million Savings
Associations Insurance Fund (SAIF) recapitalization premium
assessed in 1996 was largely offset by an increase in
compensation and employee benefits which was due to the
implementation of the Employee Stock Ownership Plan (ESOP)
and the Management Recognition and Retention Plan. The
ESOP replaced the Company's Simplified Employee Pension
(SEP) which served as the Company's pension plan for the
last 4 years. The Company is accounting for the ESOP
expense in accordance with Statement of Position 93-6 as
published by the American Institute of Certified Public
Accountants (AICPA).
Federal Insurance premiums decreased $.1 million or 71.41%,
from $.14 million in 1996, compared to $.04 million in 1997 due to
the lowering of deposit insurance rates instituted by the Federal
Deposit Insurance Corporation for those financial institutions
belonging to the SAIF. The overall expenses increased due to the
Company's conversion from the mutual form of organization to a
stock organization. Such increases occurred in areas such as
legal fees, printing and paper costs.
INTEREST RATE/VOLUME ANALYSIS
-------------------------------------
12/31/97 to 12/31/96 12/31/96 to 12/31/95
Rate Volume Total Rate Volume Total
Interest Income
Loans (141) 466 325 (56) 76 20
MBS 34 1,371 1,405 (9) 65 56
Invest 132 (97) 35 79 (418) (339)
Other (23) 450 427 (12) 132 120
---- ----- ----- ---- ---- -----
Total 1 2,190 2,192 2 (145) (143)
Interest Expense
Passbook 19 2 21 - (47) (47)
Certificates ( 6) (109) (115) 93 (30) 63
Borrowings 439 439 - - -
---- --- --- --- ---- ---
Total 13 332 345 93 ( 77) 16
Increase/(Decrease)
in Net Interest (11) 1,858 1,847 ( 91) (68) (159)
Income
LIQUIDITY AND CAPITAL RESOURCES
Liquidity measures the Company's ability to meet its short term
obligations with ready cash. The Company is required under
Federal regulations to maintain certain levels of "liquid"
investments, specifically not less than 5% of its average daily
balance of net withdrawable deposit accounts. For its liquid
investments, the Company utilizes a combination of cash on hand,
certain money market investments and deposits in other financial
institutions as well as U.S. Government and Agency securities. As
of December 31, 1997, the Company's liquidity stood at 70.8% or
$48.7 million in excess of the minimum requirement.
Guaranty Savings & Loan Association, the Company's wholly owned
subsidiary, is required to maintain regulatory capital sufficient
to meet all three of the regulatory capital requirements, those
being tangible capital (1.5%), core capital (3.0%), and risk based
capital (8.0%). As of December 31, 1997, the Association's
tangible and core capital amounted to $35.9 million or 31.8% of
adjusted total assets, while the Association's risk based capital
was $35.9 million or 79.0% of total adjusted risk weighted assets.
Laporte, Sehrt, Romig & Hand
To The Board of Directors
GS Financial Corp. and Subsidiaries
Independent Auditor's Report
We have audited the accompanying consolidated balance sheet
of GS FINANCIAL CORP. and its wholly-owned subsidiary, GUARANTY
SAVINGS AND HOMESTEAD ASSOCIATION as of December 31, 1997 and
1996, and the related consolidated statement of income, changes in
stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of GS FINANCIAL CORP. and its wholly-owned
subsidiary, GUARANTY SAVINGS AND HOMESTEAD ASSOCIATION as of
December 31, 1997 and 1996, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally
accepted accounting principles.
A Professional Accounting Corporation
February 17, 1998
Metairie, LA.
A Professional Accounting Corporation
800 Two Lakeway Center, 3850 N. Causeway Blvd. Metairie, LA 70002
PH (504) 835-5522
FAX (504) 835-5535
GS FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
ASSETS
December 31,
-----------------
1997 1996
-----------------
CASH AND CASH EQUIVALENTS
Cash and Amounts Due from
Depository Institutions $ 376 $ 329
Interest-Bearing Deposits in Other Banks 1,186 1,212
Federal Funds Sold 1,050 6,050
Total Cash and Cash Equivalents 2,612 7,591
Securities Available-for-Sale,
at Fair Value 27,974 23,566
Mortgage-Backed Securities
Available-for-Sale, at Fair Value 42,721 -
Mortgage-Backed Securities Held-to-
Maturity - Fair Value of
$7,296 at December 31, 1996 - 7,520
Loans, Net 53,588 44,125
Accrued Interest Receivable 587 536
Premises and Equipment, Net 2,715 2,752
Real Estate Held-for-Investment 218 93
Stock in Federal Home Loan Bank, at Cost 884 728
Prepaid Income Tax - 398
Deferred Charges 46 24
Other Assets 51 217
------- ------
Total Assets $131,396 $87,550
======= ======
The accompanying notes are an integral part of these financial statements.
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
------------------
1997 1996
------------------
LIABILITIES
Deposits $ 56,822 $61,421
Advance Payments by Borrowers
for Taxes and Insurance 899 529
FHLB Advances 16,157 -
Accrued Interest - FHLB Advances 83 -
Accrued Income Tax 92 -
Deferred Income Tax 1,178 715
Other Liabilities 118 106
------ ------
Total Liabilities 75,349 62,771
STOCKHOLDERS' EQUITY
Preferred Stock - $.01 Par Value;
5,000,000 Shares Authorized - 0 -
Shares Issued and Outstanding - -
Common Stock - $.01 Par Value;
20,000,000 Shares Authorized
3,438,500 Shares Issued and Outstanding 34 -
Additional Paid-in Capital 33,658 -
Unearned ESOP Shares (2,516) -
Unearned RRP Trust Stock (2,076) -
Retained Earnings 25,089 23,862
Unrealized Gain on Securities
Available-for-Sale, Net of
Applicable Deferred Income Tax 1,858 917
------ ------
Total Stockholders' Equity 56,047 24,779
------- ------
Total Liabilities and
Stockholders' Equity $ 131,396 $87,550
======= ======
The accompanying notes are an integral part of these financial statements.
GS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
For The Years Ended
December 31,
-----------------------------------
1997 1996 1995
-----------------------------------
INTEREST INCOME
Loans Receivable $ 4,085 $ 3,760 $ 3,740
Investment Securities 1,724 1,689 2,028
Mortgage Backed Securities 1,841 436 380
Dividends on Federal Home
Loan Bank Stock 47 41 43
Other Interest Income 650 229 107
----- ----- -----
Total Interest Income 8,347 6,155 6,298
----- ----- -----
INTEREST EXPENSE
Deposits 2,575 2,669 2,653
Advances from Federal Home
Loan Bank 439 - -
----- ----- -----
Total Interest Expense 3,014 2,669 2,653
----- ----- -----
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES 5,333 3,486 3,645
PROVISION FOR LOAN LOSSES 28 59 12
----- ----- -----
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,305 3,427 3,633
----- ----- -----
NON INTEREST INCOME
Gain (Loss) on Sale of
Investments 53 (100) -
Other Income 20 26 8
----- ----- -----
Total Other Income 73 (74) 8
NON INTEREST EXPENSE
Compensation and Employee
Benefits 1,923 1,579 1,577
Advertising 33 38 37
Office Supplies, Telephone
and Postage 91 83 79
Net Occupancy Expense 308 293 258
SAIF Recapitalization Premium - 413 -
Legal Fees 35 7 10
Audit and Consulting Fees 53 56 38
Supervisory Fees 56 47 47
Federal Insurance Premiums 38 140 147
Data Processing Expense 65 67 69
Real Estate Owned Expense - Net 8 (3) (11)
Other 98 27 58
----- ----- -----
Total Other Expenses 2,708 2,747 2,289
----- ----- -----
INCOME BEFORE FEDERAL INCOME
TAX EXPENSE 2,670 606 1,352
INCOME TAX EXPENSE 1,000 201 480
----- ----- -----
NET INCOME $ 1,670 $ 405 $ 872
===== === ===
EARNINGS PER SHARE - BASIC $ .53 $ - $ -
EARNINGS PER SHARE - DILUTED $ 0.53
The accompanying notes are an integral part of these financial statements.
GS FINANCIAL CORP.CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For The Years Ended December 31, 1997, 1996, and 1995
(Dollars in Thousands)
Unrealized
Gain on Securities
Available for Sale,
Additional Unearned Unearned Net of Applicable Total
Common Paid-in ESOP RRP Trust Retained Deferred Stockholders'
Stock Capital Shares Stock Earnings Income Tax Equity
BALANCES AT
DECEMBER 31, 1994 $ - $ - $ - $ - $ 22,585 $ 254 $ 22,839
Net Income
Year Ended
December 31, 1995 872 872
Increase in
Unrealized Gain
on Securities 235 235
------ ----- ----- ----- ----- ----- ------
BALANCES AT
DECEMBER 31, 1995 23,457 489 23,946
Net Income
Year Ended
December 31, 1996 405 405
Increase in
Unrealized Gain 428 428
on Securities
BALANCE AT ------ ----- ----- ----- ------ ----- ------
DECEMBER 31, 1996 23,862 917 24,779
Common Stock
Issued in
Conversion 34 33,530 (2,751) 30,813
Common Stock
Released by 128 235 363
ESOP Trust
Common Stock
Acquired by
Recognition and
Retention Trust (2,076) (2,076)
Dividends Declared (443) (443)
Net Income
Year Ended
December 31, 1997 1,670 1,670
Increase in
Unrealized Gain
on Securities 941 941
BALANCES AT ------ ------ ----- ----- ------ ----- ------
DECEMBER 31, 1997 $ 34 $ 33,658 $ (2,516) $(2,076) $ 25,089 $ 1,858 $ 56,047
======= ========= ========== ======== ======== ======== ==========
The accompanying notes are an integral part of these financial statements.
GS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
For the Years Ended
December 31,
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,670 $ 405 $ 872
Adjustments to Reconcile Net Income
to Net Cash
Provided by Operating Activities:
Depreciation 135 125 128
Discounts Accretion Net
of Premium Amortization (8) (331) (857)
Provision for Losses 28 59 12
Loss on Sale of Loans 6 - -
Loss on Disposal of Fixed Assets - - 6
Dividend on ARM Fund (280) - -
ESOP Expense 363 - -
RRP Expense 92 - -
(Gain) Loss on Sale of Foreclosed
Real Estate 8 (7) (11)
(Gain) Loss on Sale of Investments (53) 100 -
(Increase) Decrease in Prepaid
Income Taxes 398 (376) 2
Deferred Income Tax (22) 198 19
Changes in Operating Assets
and Liabilities:
(Increase) in Accrued
Interest Receivable (51) (30) (11)
(Increase) Decrease in
Deferred Charges (22) (2) 4
Increase in Accrued Income Tax 92 - -
Increase (Decrease) in
Other Liabilities (80) (141) 281
Increase in Accrued Interest
on FHLB Advances 83 - -
(Increase) Decrease in
Other Assets 166 (174) 2
--- ----- ---
Net Cash Provided by (Used in)
Operating Activities 2,525 (174) 447
CASH FLOWS FROM INVESTING ACTIVITIES
Net Decrease in Time Deposits - - 113
Purchase of Held-to-Maturity Securities - - (31,811)
Proceeds from Maturities of Held-to
-Maturity Securities - - 34,800
Proceeds from Sale of Held-to-Maturity
Securities - 6,888 -
Purchase of Available-for-Sale
Securities (12,347) (20,458) (2,139)
Proceeds from Maturities of
Available-for-Sale Securities 10,300 25,000 2,800
Purchases of Mortgage-Backed
Securities (38,440) (3,065) (866)
Proceeds from Maturities of
Mortgage-Backed Securities 4,310 1,908 563
(Purchase) of ARM Mutual Fund (12,482) (754) (302)
Proceeds from Sales of Available-
for-Sale Securities 10,815 - -
Loan (Originations) or Principal
Repayments - Net (9,496) (4,296) 141
Purchases of Premises and Equipment (92) (201) (255)
Proceeds from Sales of Foreclosed
Real Estate 7 46 83
Investment in Foreclosed Real Estate (15) (15) (58)
Purchase of Federal Home Loan Bank Stock (110) - -
Non-Cash Dividend - FHLB (46) (41) (43)
Investment in Real Estate Held-
for-Investment (130) (4) -
----- ----- -----
Net Cash Provided by (Used in)
Investing Activities (47,726) 5,008 3,026
CASH FLOWS FROM FINANCING ACTIVITIES
Net Proceeds from Sale
of Common Stock 33,564 - -
Purchase of ESOP Shares (2,751) - -
Advances from Federal Home Loan Bank 17,320 - -
Payments on Advances from Federal
Home Loan Bank (1,163) - -
Payment of Cash Stock Dividends (443) - -
Purchase of Stock for Recognition
and Retention Plan (2,076) - -
Net Increase (Decrease) in Deposits (4,599) 476 (3,697)
Net Increase (Decrease) on
Non-Interest Bearing Deposits 370 (75) (42)
------- ------ ------
Net Cash Provided by (Used in)
Financing Activities 40,222 401 (3,739)
------ ---- -------
NET INCREASE (DECREASE)
IN CASH AND CASH (4,979) 5,235 (266)
EQUIVALENTS
CASH AND CASH EQUIVALENTS
- Beginning of Year 7,591 2,356 2,622
------ ----- -----
CASH AND CASH EQUIVALENTS
- End of Year $2,612 $7,591 $2,356
===== ===== =====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid During the Year for:
Interest $2,931 $2,679 $2,664
Income Taxes 727 270 459
Loans Transferred to Foreclosed
Real Estate During the Year 15 - 69
Premises and Equipment
(Former Branch Location) Transferred
to Real Estate Held-for-Investment
at Cost Net of Accumulated Depreciation - - 95
Unrealized Gain on Securities
Available-for-Sale Credited to
Equity Capital as a Result of the
Adoption of SFAS 115 2,815 1,390 741
The accompanying notes are an integral part of these financial statements.
NOTE A
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
GS Financial Corp. (the "Company") was organized as a
Louisiana corporation on December 24, 1996 for the purpose of
becoming the holding company of Guaranty Savings and Homestead
Association (the "Association") in anticipation of converting the
Subsidiary from a Louisiana chartered mutual savings and loan
association to a Louisiana chartered stock savings and loan
association. Other than steps related to the reorganization
described below, the Company was essentially inactive until April
1, 1997, when it acquired the Association in a business
reorganization of entities under common control in a manner
similar to a pooling of interest. The acquired Association became
a wholly owned subsidiary of the Company as part of the conversion
through the exchange of 1,000 shares of common stock which
consists of 100 percent of the outstanding stock of the
Association. The Association operates in the savings and loan
industry and as such provides financial services primarily to
individuals, mainly through the origination of loans on one to
four family residences, and the acceptance of deposits in the form
of passbook savings and certificates of deposit.
The Association is subject to competition from other
financial institutions, and is also subject to the regulations of
certain Federal and State agencies and undergoes periodic
examinations by those regulatory authorities.
The accompanying financial statements for 1997 are based on
the assumption that the companies were combined for the full year,
and the financial statements of prior years have been restated to
give effect to the combination.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include
the accounts of the Company and its wholly owned subsidiary,
Guaranty Savings and Homestead Association. In consolidation,
significant inter-company accounts, transactions, and profits have
been eliminated.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and
liabilities as of the date of the statement of financial condition
and revenues and expenses for the year. Actual results could
differ significantly from those estimates.
Material estimates that are particularly susceptible to
significant change relate to the determination of the allowance
for losses on loans and valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans.
Management independently determines the allowance for losses on
loans based on an evaluation of the loan history and the condition
of the underlying properties. In connection with the
determination of the allowances for losses on foreclosed real
estate, management obtains independent appraisals for all
properties.
While management uses available information to recognize
losses on loans and foreclosed real estate, future additions to
the allowances may be necessary based on changes in local economic
conditions. In addition, regulatory agencies, as integral part of
their examination process, periodically review the Association's
allowances for losses on loans and foreclosed real estate. Such
agencies may require the Association to recognize additions to the
allowances based on their judgments about information available to
them at the time of their examination.
All dollar amounts on the financial statements and within the
footnotes of the financial statements are in thousands, and the
zeros have been omitted.
INVESTMENT SECURITIES
Debt securities that management has the ability and intent to
hold to maturity are classified as held-to-maturity and carried at
cost, adjusted for amortization of premium and accretion of
discounts using the interest method. Other marketable securities
are classified as available-for-sale and are carried at fair
value. Unrealized gains and losses on securities available-for-
sale are recognized as direct increases or decreases in
stockholders' equity. The cost of securities sold is recognized
using the specific identification method. Premiums and discounts
are being amortized over the life of the securities as a yield
adjustment.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities represent participating interests
in pools of first mortgage loans originated and serviced by
issuers of the securities. During 1997, the Association
transferred securities from the held-to-maturity category to the
available-for-sale category. Unrealized gains and losses on
mortgage-backed securities are recognized as direct increases or
decreases in stockholders' equity. The cost of securities sold is
recognized using the specific identification method. Premiums and
discounts are being amortized over the life of the securities as a
yield adjustment.
LOANS
Loans are stated at unpaid principal balances, less the
allowance for loan losses and net deferred loan fees.
Loan origination and commitment fees, as well as certain
direct origination costs, are deferred and amortized as a yield
adjustment over the contractual lives of the related loans using
the interest method.
Loans are placed on nonaccrual when principal or interest is
delinquent for 90 days or more. Any unpaid interest previously
accrued on those loans is reversed from income, and thereafter
interest is recognized only to the extent of payments received.
A loan is considered impaired when, based on current
information and events, it is probable that a creditor will be
unable to collect all amounts due according to the contractual
terms of the loan agreement. Interest payments on impaired loans
are typically applied to principal unless collectibility of the
principal amount is fully assured, in which case interest is
recognized on the cash basis. Residential mortgage loans and
consumer installment loans are considered to be groups of smaller
balance homogeneous loans and are collectively evaluated for
impairment and are not subject to SFAS 114 measurement criteria.
The allowance for loan losses is maintained at a level which,
in management's judgment, is adequate to absorb probable losses
inherent in the loan portfolio. The amount of the allowance is
based on management's evaluation of the collectibility of the loan
portfolio, including the nature of the portfolio, credit
concentrations, trends in historical loss experience, specific
impaired loans, and economic conditions. The allowance is
increased by a provision for loan losses, which is charged to
expense, and reduced by charge-offs, net of recoveries. Changes
in the allowance relating to impaired loans are charged or
credited to the provision for loan losses.
PROPERTY AND EQUIPMENT
Office property and equipment are carried at cost.
Depreciation is computed using the straight-line method, over the
estimated useful lives of those properties and equipment acquired
prior to 1981.
Property and equipment acquired after 1986 are depreciated
under accelerated methods.
When these assets are retired or otherwise disposed of, the
cost and related accumulated depreciation or amortization is
removed from the accounts, and any resulting gain or loss is
reflected in income for the period.
FORECLOSED REAL ESTATE
Foreclosed real estate includes real estate acquired in
settlement of loans. At the time of foreclosure, foreclosed real
estate is recorded at the lower of the Association's cost or the
asset's fair value, less estimated selling costs, which becomes
the property's new basis. After foreclosure, valuations are
periodically performed by management and the real estate is
carried at the lower of cost or fair value less estimated selling
costs. Costs incurred in maintaining foreclosed real estate are
included in income (loss) or foreclosed real estate.
REAL ESTATE HELD-FOR-INVESTMENT
Real estate held-for-investment consists of a former branch
location of the Association and is carried at amortized costs.
INCOME TAXES
The Company and its wholly-owned subsidiary file a
consolidated federal income tax return on a calendar year basis.
Income taxes are provided for the tax effects of the
transactions reported in the financial statements and consist of
taxes currently due plus deferred taxes related to differences
between the basis of assets and liabilities for financial and
income tax reporting. The deferred tax assets and liabilities
represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and
liabilities are recovered or settled. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion of the
deferred tax asset will not be realized. Deferred tax assets and
liabilities are adjusted for the effect of changes in tax laws and
rates on the date of enactment.
Guaranty Savings and Homestead Association is exempt from
Louisiana income tax.
STATEMENTS OF CASH FLOWS
The Association considers all cash and amounts due from
depository institutions, interest-bearing deposits in other banks
and Federal funds sold to be cash equivalents for purposes of the
statements of cash flows.
NON-DIRECT RESPONSE ADVERTISING COSTS
The Association expenses advertising costs as incurred.
Advertising cost were $33,000, $38,000, and $37,000 at December
31, 1997, 1996, and 1995, respectively.
RECLASSIFICATIONS
Certain reclassifications of previously reported amounts have
been made to conform with 1997 presentation. Such
reclassifications had no effect on net income.
ACCOUNTING STANDARDS NOT YET ADOPTED
Statement of Financial Accounting Standards No. 130 ("SFAS
130"), "Reporting Comprehensive Income" is effective for fiscal
years beginning after December 15, 1997. This statement
establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose
financial statements. This statement requires that an enterprise
(a) classify items of other comprehensive income by their nature
in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the
equity section of a statement of financial condition.
Adoption of this pronouncement is not expected to have an
effect on the financial position and results of operations of
the Company.
Statement of Financial Accounting Standards No. 131 ("SFAS
131"), "Disclosures about Segments of an Enterprise and Related
Information" is effective for fiscal years beginning after
December 15, 1997. This statement establishes standards for the
way that public business enterprises report information about
operating segments in annual financial statements and requires
that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It
also establishes standards for related disclosures about products
and services, geographic areas, and major customers. Adoption of
this pronouncement is not expected to have an effect on the
financial position and results of operations of the Company.
NOTE B
POOLING OF INTEREST
Details of the unaudited results of operations of the
previously separate entities for the periods prior to the
combination (January 1, 1997 - March 31, 1997) follows (in
thousands):
Guaranty
Savings and
Homestead
GS Financial Association
Operating Income $ - $ 1,685
Net Income $ - $ 308
As discussed in Note A, GS Financial Corp. had essentially no
activity prior to April 1, 1997, the acquisition date. The
proforma data reflects certain estimated values and assumptions.
Proforma results of operations are not necessarily indicative of
the actual results of operations that would have occurred had the
pooling occurred at the beginning of the fiscal years, or of the
results which may occur in the future.
NOTE C
INVESTMENT SECURITIES
Securities available-for-sale consist of the following
(in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
U. S. Government
and Federal Agencies $ 12,380 $ 283 $ - $ 12,663
Adjustable Rate Mortgage
Mutual Fund 13,817 - 16 13,801
FHLMC Common Stock 35 1,475 - 1,510
------ ----- --- ------
$ 26,232 $ 1,758 $ 16 $ 27,974
====== ===== === ======
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
U. S. Government
and Federal Agencies $ 21,085 $ 437 $ 4 $ 21,518
Adjustable Rate Mortgage
Mutual Fund 1,056 - 1 1,055
FHLMC Common Stock 35 958 - 993
------ ----- --- ------
$ 22,176 $ 1,395 $ 5 $ 23,566
====== ===== === ======
The following is a summary of maturities of securities available-
for-sale (in thousands):
December 31,
1997 1996
Securities Securities
Available-for-Sale Available-for-Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
Amounts Maturing in:
One Year or Less $ 14,852 $ 16,314 $ 6,387 $ 7,356
After One Year
Thru Five Years 3,805 3,909 12,289 12,525
After Five Years
Thru Ten Years 7,575 7,751 3,501 3,685
------ ------ ------ ------
$ 26,232 $ 27,974 $ 22,177 $ 23,566
====== ====== ====== ======
The Association is holding various securities in the amount
of $3,210,000 which are callable from 1998 to 2000.
Accrued interest receivable on available-for-sale investment
securities at December 31, 1997 was $156,000. Accrued interest
receivable on available-for-sale investment securities at December
31, 1996 was $311,000.
During 1997, the Association sold investment securities
available-for-sale with a book value of $10,762,000 for
$10,815,000. This resulted in gross realized gains of $63,000,
and gross realized losses of $10,000. During 1996, the
Association sold investment securities held-to-maturity with a
book value of $6,988,000 for $6,888,000. This resulted in gross
realized gains of $0, and gross realized losses of $100,000.
During 1996, the Association transferred securities from the
held-to-maturity category to the available-for-sale category. The
amortized costs of the transferred securities was $18,650,000 and
the related unrealized gain was $185,000.
Included in other assets are two equity securities being
carried at cost of $27,000. The fair market for these securities
approximates cost.
NOTE D
MORTGAGE-BACKED SECURITIES
During 1997, the Association transferred mortgage-backed
securities from the held-to-maturity category to the available-
for-sale category. The amortized costs of the transferred
securities was $43,854,000 and the related unrealized loss was
$611,000.
Mortgage-backed securities consist of the following (in
thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
FNMA $ 17,054 $ 320 $ 269 $ 17,105
FHLMC 10,659 582 39 11,202
GNMA 13,935 797 318 14,414
------ ----- --- ------
$ 41,648 $ 1,699 $ 626 $ 42,721
====== ===== === ======
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
FNMA $ 2,980 $ 1 $ 78 $ 2,903
FHLMC 4,540 4 151 4,393
----- --- --- -----
$ 7,520 $ 5 $ 229 $ 7,296
===== === === =====
At December 31, 1997, mortgage-backed securities are
classified as available-for-sale, and are reported on the
financial statements at their fair value. At December 31, 1996,
mortgage-backed securities were classified as held-to-maturity,
and were reported on the financial statements at their amortized
cost.
The amortized cost and fair value of mortgage-backed
securities at December 31, 1997 and December 31, 1996, by
contractual maturity, are shown below (in thousands). Expected
maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations without
call or prepayment penalties.
Amortized Fair
December 31, 1997 Cost Value
Mortgage-Backed Securities Maturing:
In One Year or Less $ 918 $ 1,009
After One Year Thru Five Years 6,861 6,874
After Five Years Thru Ten Years 6,333 6,591
After Ten Years 27,536 28,247
------ ------
$ 41,648 $ 42,721
====== ======
Amortized Fair
December 31, 1996 Cost Value
Mortgage-Backed Securities Maturing:
In One Year or Less $ 87 $ 88
After One Year Thru Five Years 4,183 4,047
After Five Years Thru Ten Years 971 967
After Ten Years 2,279 2,194
----- -----
$ 7,520 $ 7,296
===== =====
There were no sales of mortgage-backed securities in 1997,
1996 or 1995.
NOTE E
LOANS
Loans at December 31, 1997, and December 31, 1996 are
summarized as follows (in thousands):
December 31,
------------
1997 1996
Loans Secured by First Mortgages
on Real Estate:
One to Four Family Residential $ 52,528 $ 42,660
FHA and VA 358 511
Construction 99 298
Commercial Real Estate 471 430
Other 123 145
------ ------
Total Real Estate Loans 53,579 44,044
Consumer Loans
Second Mortgage 172 273
Loans on Deposits 244 183
------ ------
53,995 44,500
------ ------
Allowance for Loan Losses (410) (382)
Net Deferred Loan Origination Costs 3 7
------ ------
$ 53,588 $ 44,125
====== ======
An analysis of the allowance for loan losses as follows (in
thousands):
Years Ended
December 31,
1997 1996 1995
Balance, Beginning of Year $ 382 $ 323 $ 345
Provision for Losses 28 59 12
Loans Charged Off - - (34)
------- ------ -------
Balance, End of Year $ 410 $ 382 $ 323
======= ====== =======
Fixed rate loans receivable as of December 31, 1997 are
scheduled to mature and adjustable rate loans are scheduled to
reprice as follows (in thousands):
Under One Six GT
One to Five to Ten 10
Year Years Years Years
Loans Secured by 1 - 4
Family Residential:
Fixed Rate $ 76 $ 3,921 $ 7,754 $41,406
Other Loans Secured by
Real Estate
Fixed Rate 1 172 169 252
All Other Loans 244 - - -
----- ------ ------ -------
$ 321 $ 4,093 $ 7,923 $41,658
===== ====== ====== =======
At December 31, 1997 and December 31, 1996, the Association
had loans totaling approximately $318,000, and $398,000,
respectively, for which impairment had been recognized. The
allowance for loan losses related to these loans totaled $141,000
and $160,000 at December 31, 1997 and December 31, 1996,
respectively. The amount of interest income that would have been
recorded on loans in nonaccrual status at December 31, 1996, had
such loans performed in accordance with their terms, was
approximately $19,000. Such interest foregone for the year ended
December 31, 1997 was approximately $19,000.
In the ordinary course of business, the Association has and
expects to continue to have transactions, including borrowings,
with its officers and directors. In the opinion of management,
such transactions were on substantially the same terms, including
interest rates and collateral, as those prevailing at the time of
comparable transactions with other persons and did not involve
more than a normal risk of collectibility or present any other
unfavorable features to the Association. Loans to such borrowers
are summarized as follows (in thousands):
December 31,
1997 1996
Balance, Beginning of Year $ 179 $ 224
Additions 1,087 -
Payments and Renewals (207) (45)
--------- ---------
Balance, End of Year $ 1,059 $ 179
========= =========
The Association's lending activity is concentrated within the
metropolitan New Orleans area, with its major emphasis in the
origination of permanent single-family dwelling loans. Such loans
comprise the majority of the Association's loan portfolio.
NOTE F
ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31, 1997 and December
31, 1996 consists of the following (in thousands):
December 31,
1997 1996
Loans $ 197 $ 189
Mortgage-Backed Securities 234 36
Investments and Other 156 311
------ ------
Totals $ 587 $ 536
====== ======
NOTE G
PREMISES AND EQUIPMENT
A summary of premises and equipment follows (in thousands):
December 31,
1997 1996
Land $ 781 $ 781
Buildings and Improvements 2,066 2,063
Furniture, Fixture and Equipment 473 384
------- --------
3,320 3,228
Accumulated Depreciation and
Amortization (605) (476)
------- --------
$ 2,715 $ 2,752
======= ========
Depreciation expense for the years ended December 31, 1997,
1996, and 1995 was approximately $129,000, $119,000, and $128,000,
respectively.
NOTE H
REAL ESTATE HELD-FOR-INVESTMENT
Real estate held-for-investment consists of a former branch
location as summarized below (in thousands):
December 31,
1997 1996
---------------------
Land $ 200 $ 70
Building and Improvements 118 117
------- ------
318 188
Accumulated Depreciation (100) (94)
------- ------
218 93
Allowance for Losses - -
------- ------
$ 218 $ 93
======= ======
Depreciation expense for each of the years ended December 31,
1997, 1996, and 1995 was $6,000.
The Association currently leases this property on a month-to-
month basis for $1,600 per month. Total rental income recognized
was approximately $20,000 and $15,000 for the years ended December
31, 1997 and December 31, 1996, respectively. For the year ended
December 31, 1995, the facility was not leased as it was the home
to one of the Association's branches which was closed in early
1996.
On February 12, 1998, the Board authorized the Association to
sell this property to the Company at its fair value. It is the
intention of the Company's management to hold this property for
future investment opportunities.
NOTE I
DEPOSITS
Deposit account balances at December 31, 1997, and December
31, 1996 are summarized as follows:
Years Ended December 31,
Weighted ------------------------
Average Rate at 1997 1996
----- ----- ------ ------- ------ -------
12/31/97 12/31/96 Amount Percent Amount Percent
----- ----- ------ ------- ------ -------
Balance by Interest Rate:
Regular Savings
Accounts 3.50% 4.00% $ 22,314 39.30% $ 25,088 40.85%
Certificate of
Deposit 5.18% 5.18% 34,508 60.70 36,333 59.15
------ ----- ------ -----
$ 56,822 100.00% $ 61,421 100.00%
====== ====== ====== ======
Certificate Accounts
Maturing
Under 12 months $ 26,531 76.90% $ 29,881 82.24%
12 months to 24 months 5,586 16.20 4,995 13.75
24 months to 36 months 2,303 6.67 1,328 3.65
36 months to 48 months 6 0.02 109 0.30
48 months to 60 months 82 0.21 20 0.06
------ ----- ------ -----
$ 34,508 100.00% $ 36,333 100.00%
====== ====== ====== ======
The aggregate amount of certificates with a minimum balance
of $100,000 was approximately $2,281,000 and $2,929,000 at
December 31, 1997 and 1996, respectively.
Interest expense for each of the following periods is as
follows (in thousands):
Years Ended
December 31,
1997 1996 1995
Certificates $ 1,721 $ 1,836 $ 1,773
Passbook Savings 854 833 880
----- ----- -----
$ 2,575 $ 2,669 $ 2,653
===== ===== =====
The Association held deposits of approximately $530,000 and
$1,025,000 for officers and directors at December 31, 1997 and
1996, respectively.
NOTE J
ADVANCES FROM FEDERAL HOME LOAN BANK
Pursuant to collateral agreements with the Federal Home Loan
Bank (FHLB), advances are secured by a blanket floating lien on
first mortgage loans. Total interest expense recognized in 1997
and 1996, respectively, was $439,000 and $-0-.
Advances at December 31, 1997 consisted of the following (in
thousands):
Contract Rate Advance Total
5.00% to 5.99% 4,299
6.00% to 6.99% 11,858
------
$ 16,157
======
Maturities of Advances at December 31, 1997 for each of the next
five years are as follows (in thousands):
Year Ending December 31 Amount
----------------------- ------
1998 $ 919
1999 3,523
2000 5,842
2001 907
2002 4,966
------
$ 16,157
======
NOTE K
INCOME TAX EXPENSE
The provision for income taxes for 1997, 1996 and 1995
consists of the following (in thousands):
Years Ended
December 31,
------------------
1997 1996 1995
---- ---- ----
Current Federal Tax Expense $ 978 $ 4 $ 439
Deferred Federal Tax Expense 22 197 41
------ --- ---
$ 1,000 $ 201 $ 480
====== === ===
The provision for Federal income taxes differs from that
computed by applying Federal statutory rates to income (loss)
before Federal income tax expense, as indicated in the following
analysis (in thousands):
Years Ended
December 31,
------------------
1997 1996 1995
------------------
Expected Tax Provision at a 34% Rate $ 908 $ 206 $ 460
Expected State Corporate Tax 41 - -
Effect of Tax-Exempt Income (3) (3) (2)
Effect of Net Loan and R/E/O
Losses Charged Directly to Tax
Bad Debt Reserve 38 33 36
Other 16 (35) (14)
----- --- ---
$ 1,000 $ 201 $ 480
===== === ===
Deferred tax liabilities have been provided for taxable or
deductible temporary differences related to unrealized gains on
available-for-sale securities, deferred loan costs, depreciation
and non-cash Federal Home Loan Bank dividends. Deferred tax
assets have been provided for taxable or deductible temporary
differences related to the reserves for uncollected interest and
late charges, deferred loan fees, allowance for loan losses, the
allowance for losses on foreclosed real estate and the allowance
for losses on real estate held-for-investment. The net deferred
tax assets or liabilities in the accompanying statements of
financial condition include the following components (in
thousands):
1997 1996
Deferred Tax Assets
Recognition and Retention Plan $ 31 $ -
Employee Stock Option Plan 21 -
Other 10 12
--- ---
Total Deferred Tax Assets 62 12
=== ===
1997 1996
Deferred Tax Liabilities
FHLB Stock 77 61
Market Value Adjustment
to Available-for-Sale Securities 957 473
Allowance for Loan Losses 195 188
Other 11 5
--- ---
Total Deferred Tax Liabilities 1,240 727
----- ---
Deferred Tax Liabilities
- Net of Deferred Tax Assets $1,178 $ 715
===== ===
Included in retained earnings at December 31, 1997, and
December 31, 1996 is approximately $3,832,000 and $3,282,000,
respectively, in bad debt reserves for which no deferred Federal
income tax liability has been recorded. These amounts represent
allocations of income to bad debt deductions for tax purposes
only. Reduction of these reserves for purposes other than tax
bad-debt losses or adjustments arising from carryback of net
operating losses would create income for tax purposes, which would
be subject to the then-current corporate income tax rate. The
unrecorded deferred liability on these amounts was approximately
$1,303,000 and $1,116,000 for December 31, 1997 and 1996,
respectively.
NOTE L
EMPLOYEE STOCK OWNERSHIP PLAN
During 1997, GS Financial Corp. instituted an employee stock
ownership plan (the "ESOP") that covers all employees of Guaranty
Savings and Homestead Association who have completed one year of
service and have attained the age of 21. The ESOP purchased the
statutory limit of eight percent of the shares offered in the
initial public offering of the Company (275,080 shares). This
purchase was facilitated by a loan from the Company to the ESOP in
the amount of $2,750,000. The loan is secured by a pledge of the
ESOP shares. The shares pledged as collateral are reported as
unearned ESOP shares in the statements of financial condition.
The corresponding note is to be paid back in 40 equal quarterly
payments of $103,000 on the last business day of each quarter,
beginning June 30, 1997 at the rate of 8.5%. The note payable and
the corresponding note receivable have been eliminated for
consolidation purposes.
The Association may contribute to the plan, in the form of
debt service, at the discretion of its board of directors.
Dividends received on ESOP shares are either utilized to service
the debt or credited to participant accounts at the discretion of
the trustees of the Plan. Shares are released for allocation to
plan participants based on principal and interest payments of the
note. Compensation expense is recognized based on the number of
shares allocated to plan participants and the average market price
of the stock for the current year. Released ESOP shares become
outstanding for earnings per share computations.
As compensation expense is incurred, the Unearned ESOP Shares
account is reduced based on the original cost of the stock. The
difference between the cost and average market price of shares
released for allocation is applied to Additional Paid-in Capital.
For 1997, ESOP compensation expense was approximately
$363,000. The ESOP shares as of December 31, 1997 were as
follows:
Allocated Shares 23,465
Shares Released for Allocation -
Unreleased Shares 251,615
-------
Total ESOP Shares 275,080
=======
Fair Value of Unreleased Shares
at December 31, 1997 (in thousands) $ 5,254
=======
NOTE M
PENSION PLAN
The Association established a Simplified Employee Pension
(SEP) plan in 1993, covering substantially all employees. The
plan was terminated during 1997 when the Employee Stock Ownership
Plan was implemented.
The plan (SEP) was funded prior to 1997 at 12% of total
compensation of plan participants. The total expense amounted to
$0, $140,000 and $128,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
NOTE N
RECOGNITION AND RETENTION PLAN
On October 15, 1997, the Company established a Recognition
and Retention Plan as an incentive to retain personnel of
experience and ability in key positions. The Company approved a
total of 137,540 shares of stock to be acquired for the plan, of
which 125,032 shares have been allocated for distribution to key
employees and directors. As of December 31, 1997, 120,000 shares
have been acquired.
Plan share awards are earned by recipients at a rate of 20%
of the aggregate number of shares covered by the plan over five
years. If the employment of an employee or service as a non-
employee director is terminated prior to the fifth anniversary of
the date of grant of plan share award for any reason, the
recipient shall forfeit the right to any shares subject to the
award which have not been earned. The total cost associated with
the plan is based on $17.18, the market price of the stock as of
the date on which the plan shares were granted. This cost is
being amortized over five years. For 1997, compensation expense
pertaining to the Recognition and Retention plan was $91,000.
As shares are acquired for the plan, the purchase price of
these shares is recorded as unearned compensation, a contra equity
account. As the shares are distributed, the contra equity account
is reduced.
NOTE O
STOCK OPTION PLAN
In 1997, the Company adopted a stock option plan for the
benefit of directors, officers, and other key employees. The
number of shares of common stock reserved for issuance under the
stock option plan was equal to 343,850 shares, or ten percent, of
the total number of shares of common shares sold in the Company's
initial public offering of its common stock. The option exercise
price cannot be less than the fair value of the underlying common
stock as of the date of the option grant and the maximum option
term cannot exceed ten years.
The stock option plan also permits the granting of Stock
Appreciation Rights ("SAR's"). SAR's entitle the holder to
receive, in the form of cash or stock, the increase in the fair
value of Company stock from the date of grant to the date of exercise.
No SAR's have been issued under the plan.
The following table summarizes the activity related to stock
options:
Exercise Available Options
Price for Grant Outstanding
----------------------------------
At Inception $ 17.18 343,850 -
Granted (275,079) 275,079
Canceled - -
Exercised - -
------- ------
At December 31, 1997 68,771 275,079
======= =======
In October, 1995 the FASB issued SFAS No. 123, "Accounting
for Stock-Based Compensation." SFAS No. 123 requires the
disclosure of the compensation cost for stock-based incentives
granted after January 31, 1995 based on the fair value at grant
date for awards. Applying SFAS 123 would result in pro forma net
income and earnings per share amounts as follows:
1997
----
Net Income (In thousands)
As Reported $1,670
Pro forma $1,460
Basic Diluted
----- -------
Earnings per Share
As Reported $.53 $.53
Pro forma .47 .47
The fair value of each option is estimated on the date of
grant using an option-pricing model with the following weighted-
average assumptions used for 1997 grants: dividend yields of 1.59
percent; expected volatility of 16.2 percent; risk-free interest
rate of 6.14 percent; and expected lives of 9.9 years for all
options.
NOTE P
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
(FDICIA) AND FINANCIAL INSTITUTIONS REFORM, RECOVERY AND
ENFORCEMENT ACT OF 1989 (FIRREA)
FDICIA was signed into law on December 19, 1991. Regulations
implementing the prompt corrective action provisions of FDICIA
became effective on December 19, 1992. In addition to the prompt
corrective action requirements, FDICIA includes significant
changes to the legal and regulatory environment for insured
depository institutions, including reductions in insurance
coverage for certain kinds of deposits, increased supervision by
the Federal regulatory agencies, increased reporting requirements
for insured institutions, and new regulations concerning internal
controls, accounting and operations.
FIRREA was signed into law on August 9, 1989. Regulations
for savings institutions' minimum capital requirements went into
effect on December 7, 1989. In addition to its capital
requirements, FIRREA includes provisions for changes in the
Federal regulatory structure for institutions, including a new
deposit insurance system, increased deposit insurance premiums,
and restricted investment activities with respect to
noninvestments grade corporate debt and certain other investments.
FIRREA also increases the required ratio of housing-related assets
in order to qualify as a savings institution.
The regulations require institutions to have a minimum
regulatory tangible capital equal to 1.5% of adjusted total
assets, a minimum 4% core/leverage capital ratio, a minimum 4%
tier 1 risk-based ratio, and a minimum 8% total risk-bases capital
ratio to be considered "adequately capitalized." An institution
is deemed to be "critically undercapitalized" if it has a
tangible equity ratio of 2% or less. The ability to include
qualifying supervisory goodwill for purposes of the core/leverage
capital and tangible capital was phased out by July 1, 1995.
The following table sets out the Association's various regulatory
capital categories at December 31, 1997, and December 31, 1996.
1997 1996
Dollars Percentage Dollars Percentage
(Thousands) (Thousands)
Tangible Capital $ 35,930 31.82% $ 23,862 27.26%
Tangible Equity $ 35,930 31.82% $ 23,862 27.26%
Core/Leverage Capital $ 35,930 31.82% $ 23,862 27.26%
Tier 1 Risk-Based
Capital $ 35,930 78.82% $ 23,862 78.46%
Total Risk-Based
Capital $ 35,981 78.93% $ 24,084 79.19%
As of December 31, 1997, the most recent notification from
the FDIC categorized the Association as "well capitalized" under
the regulatory framework for prompt corrective action. To be
"well capitalized", the Association must maintain minimum
leverage capital ratios and minimum amounts of capital to "risk
weighted" assets, as defined by banking regulators.
NOTE Q
REGULATORY CAPITAL
The following is a reconciliation of generally accepted
accounting principles (GAAP) net income and capital to regulatory
capital for the Association. The following reconciliation also
compares the capital requirements as computed to the minimum
capital requirements for the Association.
Net Income Capital
for the Year Ended as of
December 31, 1997 December 31, 1997
(In Thousands)
Per GAAP $ 1,126 $ 37,675
Total Assets $ 115,546
Capital Ratio 32.61%
Core/ Tier 1 Total
Tangible Tangible Leverage Risk-Based Risk-Based
Capital Equity Equity Capital Capital
Per GAAP $ 37,675 $37,675 $37,675 $37,675 $37,675
Assets Required
to be Deducted
Unrealized Gain
on Securities
Available-for-Sale (1,745) (1,745) (1,745) (1,745) (1,745)
General Valuation
Allowance - - - - 269
Regulatory Capital
Measure $35,930 $35,930 $35,930 $35,930 $36,199
Adjusted Total
Assets $115,546 $115,546 $115,546
Risk-Weighted Assets $45,584 $45,584
Capital Ratio 31.10% 31.10% 31.10% 78.82% 79.41%
Required Ratio 1.50% 2.00% 3.00% 4.00% 8.00%
Required Capital $ 1,733 $ 3,466 $ 3,647
Excess Capital $34,197 $32,464 $32,552
====== ====== ======
Net Income Capital
for the Year Ended as of
December 31, 1996 December 31, 1996
(In Thousands)
Per GAAP $ 405 $ 24,779
Total Assets $ 87,550
Capital Ratio 28.30%
Core/ Tier 1 Total
Tangible Tangible Leverage Risk-Based Risk-Based
Capital Equity Equity Capital Capital
Per GAAP $ 24,779 $24,779 $24,779 $24,779 $24,779
Assets Required
to be Deducted
Unrealized Gain
on Securities
Available-for-Sale ( 917) ( 917) ( 917) ( 917) ( 917)
General Valuation
Allowance - - - - 222
Regulatory Capital
Measure $23,862 $23,862 $23,862 $23,862 $23,862
Adjusted Total
Assets $ 87,550 $ 87,550 $ 87,550
Risk-Weighted Assets $30,412 $30,412
Capital Ratio 27.26% 27.26% 27.26% 78.46% 79.19%
Required Ratio 1.50% 2.00% 3.00% 4.00% 8.00%
Required Capital $ 1,313 $ 2,627 $ 2,434
Excess Capital $22,549 $21,235 $21,650
====== ====== ======
NOTE R
COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Association has various
outstanding commitments and contingent liabilities that are not
reflected in the accompanying financial statements.
The principal commitments of the Association consists of
outstanding mortgage loan commitments. As of December 31, 1997 and
1996, outstanding mortgage loan commitments were approximately
$2,721,000 and $259,000, respectively. These commitments normally
extended for thirty days, are for first mortgage loans at a fixed
rate ranging from 6.75% to 9%.
The chief executive officer and the executive vice-president
of the Association serve under employment contracts which were
approved by the Board of Directors on February 13, 1997. The
contracts expire February 13, 2000. The contracts were amended
effective July 1, 1997, to increase the base salaries. The
agreements cover compensation and termination.
NOTE S
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Association is a party to financial instruments with off-
balance sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments
consist of commitments to extend credit. These instruments
involve, to varying degrees, elements of credit and interest rate
risk in excess of the amounts recognized in the statements of
financial condition.
The Association's exposure to credit loss in the event of
nonperformance by the other party to these financial instruments
for commitments to extend credit is represented by the contractual
notional amount of those instruments (see Note R). The
Association uses the same credit policies making commitments as it
does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amount does
not necessarily represent future cash requirements. The
Association evaluates each customer's creditworthiness on a case-
by-case basis. The amount and type of collateral obtained varies
and is based on management's credit evaluation of the
counterparty.
NOTE T
CONCENTRATION OF CREDIT RISK
The Association's lending activity is concentrated within the
southeastern part of Louisiana. In accordance with industry
practices the Association has deposits in other financial
institutions for more than the insured limit. These deposits in
other institutions do not represent more than the normal industry
credit risk.
NOTE U
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments for which it
is practicable to estimate the value:
The carrying amount of cash and short term investments
approximate the fair value.
For investment securities and mortgage-backed securities fair
value is based on quoted market prices.
For mortgage loan receivables the fair values are based on
discounted cash flows using current rates at which similar loans
with similar maturities would be made to borrowers with similar
credit risk.
The fair value of savings deposits is calculated using
average rates in the market place at the date of the financial
statements.
For certificates of deposit, fair value is estimated based on
current rates for deposits of similar remaining maturities.
The fair value of loan commitments is estimated using fees
that would be charged to enter similar agreements, taking into
account (1) the remaining terms of the agreement, (2) the
creditworthiness of the borrowers, and (3) for fixed rate
commitments, the difference between current interest rates and
committed rates.
Estimated fair values of the financial instruments are as
follows (in thousands):
December 31, 1997 December 31, 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial Assets
Cash and Short-Term
Investment $ 2,612 $ 2,612 $ 7,591 $ 7,591
Investment Securities 27,974 27,974 23,566 23,998
Mortgage-Backed
Securities 42,721 42,721 7,520 7,295
Loans (Net of Loan
Allowance) 53,588 57,110 44,125 46,628
Financial Liabilities
Deposits $ 56,822 $ 55,544 $ 61,421 $ 63,007
Unrecognized Financial
Instruments
Commitments to Extend
Credit $ 2,361 $ 2,447 $ 259 $ 276
Unfunded Construction
Loan Commitments $ 360 $ 387 $ 211 $ 213
NOTE V
CONVERSION FROM A MUTUAL TO A STOCK ASSOCIATION
On April 1, 1997, Guaranty Savings and Homestead Association
converted from a Louisiana-chartered mutual savings and loan
association to a Louisiana-chartered stock savings and loan
association. The Company issued and sold 3,438,500 shares of
stock at $10 per share. The Company's ESOP purchased 275,080
shares, financed by a loan from the Company. The net proceeds
from the sale of this stock was $33,564,000. The costs associated
with the stock conversion was approximately $821,000.
Approximately, $15,407,000 was invested by the Company in the
Association in exchange for 1,000 shares of stock issued by the
Association as part of the conversion.
In accordance with regulations, at the time that the
Association converted from a mutual association to a stock savings
association, the Association established a liquidation account in
the amount of approximately $24,500,000. The liquidation accounts
will be maintained for the benefit of eligible account holders and
supplemental eligible account holders who continue to maintain
their accounts at the Association after the Conversion. The
liquidation accounts will be reduced annually to the extent that
eligible account holders and supplemental eligible account holders
have reduced their qualifying deposits. Subsequent increase will
not restore an eligible account holder's and supplemental eligible
account holder's interest in the liquidation account. In the
event of a complete liquidation of the Association, each eligible
account holder and supplemental eligible account holder will be
entitled to receive a distribution from the liquidation account in
an amount proportionate to the current adjusted qualifying
balances for the accounts then held. The Association may not pay
a dividend on their common stock if the dividend would bring
regulatory capital below the balance of the liquidation account.
NOTE W
EARNINGS PER COMMON SHARE
Earnings per share are computed using the weighted average
number of shares outstanding, which was 3,112,153 in 1997. During
1997, the Company declared two quarterly common stock dividends of
$.07 per share to stockholders of record as of July 22, 1997 and
October 24, 1997, respectively.
In February 1997, the FASB issued Statement No. 128,
"Earnings Per Share", effective for financial statements issued
for periods ending after December 31, 1997. This statement
establishes standards for computing and presenting earnings per
share. It replaces the presentation of primary earnings per share
with a presentation of basic earnings per share. Adoption of this
statement had no impact on the Company's computation of earnings
per share.
NOTE X
CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
GS FINANCIAL CORP.
CONDENSED FINANCIAL CONDITON
December 31, 1997
(Dollars in Thousands)
ASSETS
Cash and Cash Equivalents $ 370
Investments - Available-for-Sale at Fair Value 6,984
Mortgage-Backed - Securities - Available-for-Sale -
at Fair Value 8,442
Investment in Subsidiary 37,675
Loan Receivable 2,615
Other Assets 54
------
$ 56,140
======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued Income Tax $ 35
Deferred Tax Liability 58
Stockholders' Equity 56,047
------
$ 56,140
======
NOTE X
CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (Continued)
GS FINANCIAL CORP.
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
(Dollars in Thousands)
INTEREST INCOME
Mortgage-Backed Securities $ 394
Loans 173
Investment Securities 111
Other Interest Income 237
---
Total Interest Income 915
---
NON-INTEREST INCOME
Undistributed Earnings of Subsidiary 818
NON-INTEREST EXPENSES
General and Administrative 43
-----
INCOME BEFORE INCOME TAX 1,690
PROVISION FOR INCOME TAX 328
-----
NET INCOME $ 1,362
=====
NOTE X
CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (Continued)
GS FINANCIAL CORP.
STATEMENT OF CASH FLOWS
For The Year Ended December 31, 1997
(Dollars in Thousands)
OPERATING ACTIVITIES
Net Income $ 1,362
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Depreciation Expense 1
Equity in Undistributed Income
of Subsidiary (818)
Accretion of Investment Discount (4)
Dividend on ARM Fund (112)
Increase in Accrued Interest Receivable (50)
Increase in Accrued Income Tax 35
-----
Net Cash Provided by Operating Activities 414
INVESTING ACTIVITIES
Purchase of Fixed Assets (5)
Purchase of ARM Mutual Fund (6,882)
Purchases of Mortgage-Backed Securities
- Available-for-Sale (8,754)
Principal Paydowns on Mortgage-Backed Securities
- Available 497
Investments in Subsidiaries (15,406)
------
Net Cash Used in Investing Activities (30,550)
FINANCING ACTIVITIES
Sale of Common Stock 34
Contribution of Additional Paid-In Capital 33,530
Payment of Dividends (443)
Loan to Subsidiary for ESOP (2,615)
-------
Net Cash Provided by Financing Activities 30,506
NET INCREASE IN CASH AND CASH EQUIVALENTS 370
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR -
CASH AND CASH EQUIVALENTS - END OF YEAR $ 370
=====