GS Financial 10-Q 2008
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________
Commission File Number: 0-22269
GS FINANCIAL CORP.
(Exact Name of Registrant as Specified in its Charter)
Louisiana 72-1341014__ _______
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
3798 Veterans Blvd.
Metairie, LA 70002
(Issuer’s telephone number)
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule
12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
GS FINANCIAL CORP.
PART I – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
GS FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION
The consolidated financial statements include the accounts of GS Financial Corp. (the “Company”) and its subsidiary, Guaranty Savings Bank (the “Bank”), which prior to June 2006 was known as Guaranty Savings and Homestead Association. All significant intercompany balances and transactions have been eliminated. Certain financial information for prior periods has been reclassified to conform with the current presentation.
In preparing the consolidated financial statements, the Company is required to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the financial condition, results of operations, changes in stockholders’ equity and cash flows for the interim periods presented. These adjustments are of a normal recurring nature and include appropriate estimated provisions.
Pursuant to rules and regulations of the Securities and Exchange Commission, certain financial information and disclosures have been condensed or omitted in preparing the consolidated financial statements presented in this quarterly report on Form 10-Q. The results of operations for the nine-months ended September 30, 2008 are not necessarily indicative of the results to be expected for the year ending December 31, 2008.
The balance sheet at December 31, 2007 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. These unaudited financial statements should be read in conjunction with the Company’s 2007 annual report on Form 10-K.
NOTE 2 – EARNINGS PER SHARE
Earnings per share are computed using the weighted average number of shares outstanding as prescribed in Statement of Financial Accounting Standards No. 128.
NOTE 3 – EMPLOYEE STOCK OWNERSHIP PLAN
The GS Financial Employee Stock Ownership Plan (“ESOP”) purchased 275,080 shares of the Company’s common stock on April 1, 1997 financed by a loan from the Company. The loan was secured by those shares not yet allocated to plan participants and was paid in full as of December 31, 2006. Effective January 1, 2007, the Company amended and restated its ESOP, added a 401(k) feature, and renamed the plan the “Guaranty Savings Bank 401(k) Plan” (the “401(k) Plan”). Compensation expense related to the ESOP and 401(k) plan was $29,000 and $87,000 for the three and nine-month periods ended September 30, 2008, respectively, compared to $25,000 and $128,000 for the same period ended September 30, 2007.
NOTE 4 – STOCK OPTION PLAN
On October 15, 1997, the stockholders approved the adoption of the GS Financial Corp. 1997 Stock Option Plan for the benefit of directors, officers and other key employees. Under this plan, 343,850 shares of common stock were reserved for issuance pursuant to the exercise of stock options, of which 275,076 shares became fully vested and exercisable. On October 15, 2007, the expiration date of the options, 30,000 options were exercised.
During 2005, the Company adopted SFAS No. 123(R) which replaced SFAS No. 123 and superseded APB Opinion No. 25. Because all of the stock options that had been granted were fully vested as of June 30, 2007 and expired on October 15, 2007, no stock-based compensation expense was required to be recognized.
NOTE 5 – RECOGNITION AND RETENTION PLAN
On October 15, 1997 the Company established the Recognition and Retention Plan and Trust (“RRP”) as an incentive to retain personnel of experience and ability in key positions. Stockholders approved a total of 137,540 shares of stock to be granted pursuant to the RRP. The Company acquired a total of 137,500 shares of common stock for issuance under the RRP. The Company is recognizing this expense over the ten-year vesting period based on the price of the stock ($12.50/share) when the plan was modified in September, 1998. As of September 30, 2008, of the 134,159 shares awarded, 6,627 shares have been forfeited due to termination of employment or service as a director and 120,198 have been earned and issued. Compensation expense related to the RRP was $3,000 and $12,000 for the three and nine-month periods ended September 30, 2008, respectively, compared to $30,000 and $91,000 for the same time periods ended September 30, 2007.
The purpose of this discussion and analysis is to provide information necessary to gain an understanding of the financial condition, changes in financial condition and results of operations of GS Financial Corp. (“GS Financial” or the “Company”), and its subsidiary for the quarter and nine months ended September 30, 2008. Virtually all of the Company’s operations are dependent on the operations of its subsidiary, Guaranty Savings Bank (“Guaranty” or the “Bank”). Prior to June 15, 2006 the subsidiary was known as Guaranty Savings and Homestead Association. The subsidiary had its name legally changed but remains a state-charted savings association. This discussion is presented to highlight and supplement information presented elsewhere in this quarterly report on Form 10-Q, particularly the consolidated financial statements and related notes in Item 1. This discussion and analysis should be read in conjunction with accompanying tables and the Company’s 2007 Annual Report on Form 10-K.
In addition to the historical information, this discussion includes certain forward-looking statements as that term is defined by the Private Securities Litigation Reform Act of 1995. Such statements include, but may not be limited to comments regarding (a) the potential for earnings volatility from changes in the estimated allowance for loan losses over time, (b) the expected growth rate of the loan portfolio, (c) future changes in the mix of deposits, (d) the results of net interest income simulations run by the Company to measure interest rate sensitivity, (e) the performance of Guaranty’s net interest income and net interest margin assuming certain future conditions, and (f) changes or trends in certain expense levels.
Forward-looking statements are based on numerous assumptions, certain of which may be referred to specifically in connection with a particular statement. Some of the more important assumptions include:
Because it is uncertain whether future conditions and events will confirm these assumptions, there is a risk that the Company’s future results will differ materially from what is stated or implied by such forward-looking statements. The Company cautions the reader to consider this risk.
The Company undertakes no obligation to update any forward-looking statement included in this quarterly report, whether as a result of new information, future events or developments, or for any other reason.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Total loans, net of allowance for loan losses, increased $30.9 million, or 26.0%, from year-end 2007 to the end of the third quarter of 2008. Average loans for the third quarter of 2008 were $147.9 million, up $36.6 million (32.9%) compared to the third quarter of 2007. Year-to-date average loans at September 30, 2008 totaled $137.4 million, up $32.9 million (31.5%) from the same time period in 2007. Table 1, which is based on regulatory reporting codes, shows loan balances at September 30, 2008 and at the end of the four prior quarters and average loans outstanding during each quarter.
The Bank has hired three experienced commercial loan officers, a mortgage banking manager, and a residential loan officer since the beginning of 2006. The loan growth since the beginning of 2006 reflects the economic recovery in the Bank’s market area subsequent to Hurricane Katrina, the efforts of the new loan officers, and the benefits of an expanded branch network.
All loans carry a degree of credit risk. Management’s evaluation of this risk ultimately is reflected in the estimate of probable loan losses that is reported in the Company’s financial statements as the allowance for loan losses. Changes in this ongoing evaluation over time are reflected in the provision for loan losses charged to operating expense. At September 30, 2008 the allowance for loan losses was $2.8 million, or 1.9% of total loans. Table 2 presents an analysis of the activity in the allowance for loan losses for the past five quarters. The allowance was reduced in the third quarter of 2008 as a specific reserve was assigned to a loan which was transferred to Other Real Estate owned upon foreclosure.
Tables 3 and 4 set forth the Company’s delinquent loans and nonperforming assets at September 30, 2008 and at the end of the preceding four quarters. The balances presented in Table 3 are total principal balances outstanding on the loans rather than the actual principal past due. Nonperforming assets consist of loans on non-accrual status and foreclosed assets. There were no loans 90 days delinquent and still accruing interest at the end of any of the five quarters presented.
INVESTMENT IN SECURITIES
At September 30, 2008, the Company’s total securities available-for-sale were $48.6 million, compared to $47.7 million at December 31, 2007 and $50.0 million at September 30, 2007.
Effective June 30, 2008, the Company took an other-than-temporary impairment loss on its investment in mutual funds of $430,000, net of tax. These mutual funds are invested primarily in adjustable-rate mortgage-backed securities. The substantial price declines and an analysis of the underlying assets in the funds led management to make the determination that the losses in these funds were “other-than-temporary” as of June 30, 2008.
At September 30, 2008, the net unrealized losses on the Company’s entire securities portfolio was $1.1 million or 2.2% of amortized cost, compared to net unrealized losses of $167,000, or 0.4% of amortized cost at December 31, 2007. These losses consist primarily of reductions in market value on collateralized mortgage obligations as there has been some discounting in values relating to private CMOs as a result of concerns with the overall mortgage market and also rises in long-term interest rates in the third quarter of 2008 that have adversely affected longer-term investments with fixed coupon payments. Management believes that these losses are temporary in nature and will reverse themselves when interest rates become more favorable for those types of investments.
At September 30, 2008, deposits had grown 6.7%, or $8.6 million, above the level at December 31, 2007 and were up $6.7 million, or 5.1% from the level at the end of the third quarter of 2007. Average deposits totaled $136.0 million in the third quarter of 2008, up $2.4 million (1.8%) from the second quarter of 2008 and up $7.6 million (5.9%) from the third quarter of 2007.
Table 6 presents the composition of average deposits for the quarters ended September 30, 2008, June 30, 2008 and September 30, 2007.
At September 30, 2008, the Company’s borrowings from the Federal Home Loan Bank increased $22.9 million, or 85.0%, from December 31, 2007 and $32.5 million, or 186.7%, from September 30, 2007. Average advances for the third quarter of 2008 were $49.2 million, an increase of $11.3 million, or 29.7%, from the second quarter of 2008 and an increase of $32.2 million, or 188.7%, from the prior year’s third quarter. The increases were primarily to fund loan growth. The Company is constantly evaluating its funding options to determine the most cost-effective means of funding its growth, and in the past year FHLB advances have been a cost-effective funding source.
STOCKHOLDERS’ EQUITY AND CAPITAL ADEQUACY
At September 30, 2008, stockholders’ equity totaled $27.3 million, a decrease of $815,000 from December 31, 2007. This decrease was primarily due to an increase in unrealized losses, net of tax, on investment securities of $608,000 and cash dividends paid of $386,000, partially offset by net income of $164,000 for the nine-months ended September 30, 2008.
From 1998 through 2003, the Company was regularly repurchasing shares of its common stock when shares were available at prices and amounts deemed prudent by management. Purchases from 2004 through 2006 were primarily purchases of ESOP shares which had been allocated to the accounts of terminated employees. Due to the highly capitalized condition of the Company, management believed in the past that these purchases, most of which were at a discount to book value, were an effective way to reduce capital while still enhancing shareholder value. These shares have not been retired and could potentially serve as a source of capital funding should the need arise in the future. Table 7 summarizes the repurchase of the shares of its common stock by year.
The Board of Directors at their meeting on October 21, 2008, approved the commencement of another stock repurchase program which provides for the repurchase of up to 64,250 shares, or approximately 5.0%, of GS Financial Corp.’s outstanding common stock, from time to time, in open market or privately negotiated transactions. The repurchases will be made over a one year period, or such longer amount of time as may be necessary to complete the repurchase plan.
The ratios in Table 8 indicate that the Bank remained well capitalized for regulatory compliance purposes at September 30, 2008. The regulatory capital ratios of Guaranty Savings Bank exceed the minimum required ratios, and the Bank has been categorized as “well-capitalized” in the most recent notice received from its primary regulatory agency.
LIQUIDITY AND CAPITAL RESOURCES
The objective of liquidity management is to ensure that funds are available to meet cash flow requirements of depositors and borrowers, while at the same time meeting the operating, capital and strategic cash flow needs of the Company and the Bank, all in the most cost-effective manner. The Company develops its liquidity management strategies and measures and monitors liquidity risk as part of its overall asset/liability management process.
With respect to liabilities, our liquidity management strategy focuses on growing the Bank’s base of more stable core deposits at competitive rates, while at the same time ensuring access to economical wholesale funding sources. The sections above on Deposits and Borrowings discuss changes in these liability-funding sources in the first three and nine-months of 2008.
Liquidity management as it pertains to assets primarily addresses the composition and maturity structure of the loan and investment securities portfolios and their impact on the Company’s ability to generate cash flows from scheduled payments, contractual maturities and prepayments, their use as collateral for borrowings, and possible sales on the secondary market.
Cash generated from operations is an important source of funds to meet liquidity needs. The consolidated statements of cash flows present operating cash flows and summarize all significant sources and uses of funds for the first nine-months of 2008 and 2007. The Company reported net income of $164,000 for the nine-months ended September 30, 2008, and experienced a net cash decrease of $2.9 million from operations. Certain adjustments are made to net income to reach the level of cash provided by operating activities, including non-cash expenses (depreciation, employee compensation made in the form of stock, and deferred tax provisions) and revenues (accretion of discounts and dividends received in the form of stock).
In addition, management monitors its liquidity position by tracking certain financial data. Table 9 illustrates some of the factors that the Company uses to measure liquidity. The Company remains highly liquid, though some liquidity is being utilized to fund loan growth.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income for the third quarter of 2008 increased $163,000, or 10.0%, from the second quarter of 2008, with a 6.4%, increase in average interest-earning assets and a 19 basis point reduction in the average cost of funds which was partially offset by a 3 basis point decrease in the average yield on interest-earning assets. Third quarter net interest income for 2008 was up $388,000, or 27.5%, on average interest-earning assets that increased $37.9 million, or 22.8%, from the third quarter of 2007. The year-to-year increase in net interest income is primarily attributable to the increase in interest-earning assets and the increase in net interest margin from 3.38% for the third quarter of 2007 to 3.52% for the third quarter of 2008. Tables 10 and 11 show the components of the Company’s net interest margin and the changes in those components from the second quarter of 2008 and the third quarter of 2007.
During the third quarter of 2008, interest income from interest-earning assets was up $195,000, or 6.5%, from the second quarter of 2008. This increase was primarily due to the Company’s average investment in loans which was up $11.5 million in the third quarter of 2008 compared to the second quarter of 2008 and was partially offset by a 17 basis point decrease in the average yield over the same period. The $65,000, or 10.0%, increase in investment securities interest income from the second quarter of 2008 to the third quarter of 2008 also contributed to the overall increase in interest income over the same period and was due to the purchase of additional mortgage-backed securities. Interest income from interest-earning assets was up $353,000, or 12.3%, from the third quarter of 2007. This was primarily due to $37.9 million, or 22.8%, in growth in average interest-earning assets and was partially offset by a 52 basis point decline in the yield on earning assets, which was caused by significant rate declines, particularly in short-term rates.
During the third quarter of 2008, interest expense increased $32,000, or 2.3%, from the second quarter of 2008 and decreased $35,000, or 2.4%, from the third quarter of 2007. The increase from the second quarter was driven by increases in average deposit rates and certificates of deposit maturing and repricing into higher-yielding certificates. The decrease from the third quarter of 2007 is due to an 84 basis point reduction in the overall cost of funds which was primarily driven by the refinancing of some existing higher-costing FHLB borrowings into borrowings with a lower rate, a reduction in our deposit rates as maturing certificates of deposit were renewed at lower rates particularly during the first of half of 2008, and growth in the non-interest bearing deposit base of $4.8 million (109.7%).
Net interest income for the first nine-months of 2008 increased $759,000, or 18.2%, from the first nine-months of 2007 on average interest-earning assets that were $34.0 million (20.1%) higher. Net interest margin was 3.38% for the nine-months ended September 30, 2008 and 3.42% for the same period in prior year. The average yield on interest-earning assets decreased 44 basis points and the total cost of funding interest-earning assets decreased 40 basis points compared to the first nine-months of 2007. Table 12 shows the components of the Company’s net interest margin for the first nine-months of 2008 and 2007.