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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended September 30, 1998
[ ] 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 0-22559
GSB FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 06-1481061
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 South Church Street, Goshen, New York 10924
(Address of principal executive office-zip code)
Telephone (914) 294-6151
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding twelve 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K. [X]
As of December 16, 1998 the aggregate market value of the voting stock held
by non-affiliates of the Registrant was $30.1 million based upon the reported
closing price on that date as quoted of the NASDAQ National Market System.
As of December 16, 1998, 2,170,450 shares of Registrant's common stock were
outstanding.
Documents Incorporated by Reference:
(1) The Annual Report to Shareholders for the fiscal year ended September 30,
1998 (Items 5 through 8 of Part II) and
(2) The definitive Proxy Statement dated December 28, 1998 to be distributed on
behalf of the Board of Directors of Registrant in connection with the
Annual Meeting of Shareholders to be held on January 27, 1999 which was
filed with the Securities and Exchange Commission on or about December 28,
1998.
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Item 1 - Business
BUSINESS OF THE COMPANY
General
GSB Financial Corporation (the "Company") was organized as a Delaware
corporation on March 17, 1997, at the direction of Goshen Savings Bank (the
"Bank") in order to acquire all the common stock of the Bank to be issued upon
its conversion (the "Conversion") from the mutual to the stock form of
ownership. The Conversion was consummated on July 9, 1997, at which time the
Company sold 2,248,250 shares of its common stock at a price of $10.00 per share
and paid $10.7 million, representing one-half the net proceeds from its sale of
stock, to the Bank in exchange for all shares of stock of the Bank to be issued
in the Conversion. The Company thereupon became a savings and loan holding
company, and subsequently registered as such with the Office of Thrift
Supervision (the "OTS").
Eight percent of the shares sold by the Company were purchased by the
Company's Employee Stock Ownership Plan (the "ESOP") using the proceeds of a
loan from the Company to pay the purchase price. Therefore, after deducting
expenses of the Conversion, the $10.7 million paid to the Bank and the $1.8
million represented by the promissory note from the ESOP, there remained $8.9
million of net proceeds available for investment directly by the Company.
After the Conversion, the Company's business has consisted of directing,
planning and co-ordinating the business activities of the Bank and investing the
net proceeds of the Conversion available for investment by it. The Company has
recently formed a separate subsidiary which makes available, through an
independent third party, certain investment advisory and brokerage services. The
Bank's business has continued to consist of gathering deposits from the general
public within its market area and investing those deposits primarily in
one-to-four family residential first mortgage loans, debt obligations issued by
the U.S. Government, its agencies and business corporations, and mortgage-backed
securities. To a lesser extent, the Bank also makes home equity lines of credit
and other second mortgage loans on one-to-four family residential properties,
commercial mortgage loans, construction loans, commercial business loans and
consumer loans. The net proceeds retained by the Company have been invested
principally in mortgage-backed, government, agency and corporate securities and
federal funds sold.
In the future, the Company may acquire or organize other operating
subsidiaries, including other financial institutions, or it may merge with or
acquire other financial institutions and financial services related companies,
although there are no current arrangements, understandings or agreements
regarding any such expansion. The Company neither owns nor leases any property
but instead uses the premises, equipment and furniture of the Bank. The Company
does not presently intend to employ any persons other than certain officers of
the Bank who will not be separately compensated by the Company. The Company may
utilize the support staff of the Bank from time to time, if needed. Additional
employees may be hired as appropriate if the Company expands its business.
References herein to the business activities, financial condition and
operations of the Company prior to July 9, 1997, refer to the Bank, while
references to the Company on or after that date refer to both the Company and
the Bank as consolidated, except to the extent the context otherwise indicates.
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Market Area
The Company's market area is the Village of Goshen, and Village of
Harriman, New York and their surrounding communities, representing most of
Orange County, New York. The Village of Goshen is the county seat of Orange
County and lies 60 miles northwest of New York City. The Village of Harriman is
located in the southern portion of Orange County, closer to New York City and
approximately 8 miles from Rockland County. Although predominantly rural with
many small towns, many residents of the market area work in New York City and
other communities to the south and east, commuting by train or automobile. They
tend to reside in Orange County due to lower housing costs and the quieter, more
rural atmosphere. Principal occupations of residents in the community include
retail trades, manufacturing, professional services (including health, education
and other professional fields) and government administration.
The Company's market area grew significantly in population during the 1980s
as rising housing prices closer to New York City, coupled with an abundance of
vacant land in Orange County, led to a boom in housing construction. As the
economy throughout the region declined in the late 1980s and early 1990s,
communities within the market area continued to experience growth, but more
slowly. According to 1990 U.S. census data, approximately 18% of the residents
of Goshen and its surrounding zip code area who were over 5 years of age resided
outside Orange County only five years earlier. The conversion of Stewart
International Airport, 12 miles to the northeast of Goshen, into a full-service
commercial airport in 1990, gave the Company's market area an additional boost.
However, the health of the economy in the New York City metropolitan area has,
and will continue to have, a direct effect on the economic well being of
residents and businesses in the Company's market area.
Competition
The Company's principal competitors for deposits are savings banks, savings
and loan associations, commercial banks and credit unions in the Company's
market area, money market mutual funds, insurance companies, brokerage firms and
other financial institutions, many of which are substantially larger in size
than the Company. The Company's competition for loans comes principally from
savings banks, savings and loan associations, commercial banks, mortgage
bankers, finance companies and other institutional lenders. The Company's
principal methods of competition include loan and deposit pricing, maintaining
close ties with its local community, advertising and marketing programs and the
types of services provided.
The Company is subject to competition from other financial institutions,
which may have much greater financial and marketing resources. However, the
Company believes it benefits from its community bank orientation as well as its
relatively high core deposit base. The relative economic stability of the
Company's lending area is reflected in the small number of mortgage
delinquencies experienced by the Company.
Lending Activities
Loan Portfolio Composition. The Company's loan portfolio, representing
59.7% of total assets, consists primarily of conventional first mortgage loans
secured by one-to-four family residences. At September 30, 1998, the Company had
total loans receivable of $78.7 million, of which $71.6 million, or 90.7%, were
owner-occupied one-to-four family residential first mortgage loans. The
remainder consisted of $2.4 million of home equity lines of credit and other
loans secured by junior liens on one-to-four family owner-occupied residential
properties, or 3.0% of total loans; $1.8 million of commercial mortgage loans,
or 2.3% of total loans; $1.8 million of loans secured by one-to-four family
residential property used for rental purposes, or 2.3% of total loans; $478,000
of construction loans, or 0.6% of total loans; $720,000 of
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consumer loans which are not secured by real estate, or 0.9% of total loans; and
$170,000 of commercial business loans, or 0.2% of total loans. The Company's
loan portfolio, after remaining relatively constant throughout 1994, 1995 and
1996, grew by 11.9% during 1997 and by 19.7% during 1998. This growth was a
deliberate result of aggressive marketing of the Bank's loan products throughout
Orange County. Although the Company is seeking to expand its non-residential
first mortgage lending, the residential first mortgage loans have continued to
represent the largest, and an increasing, component of the loan portfolio.
Interest rates on loans are affected by the demand for loans, the supply of
money available for lending and the rates offered by competitors. These factors
are in turn affected by, among other things, economic conditions, monetary
policies of the federal government, and legislative tax policies. The Company
seeks to compete successfully for loan opportunities in its market area through
hands-on local originations, community involvement, responsiveness to customer
and community needs, competitive pricing, and low origination fees.
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Loan Portfolio Composition Table
The following table sets forth the composition of the Company's loan portfolio
in dollar amounts and in percentages of the respective portfolios at the dates
indicated:
<TABLE>
<CAPTION>
At September 30,
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1998 1997 1996 1995 1994
------------------ ------------------- ------------------ ----------------- ----------------
Percent Percent Percent Percent Percent
of Of Of of of
Amount Total Amount Total Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
(Dollars in thousands)
One- to
four-family(1) . $ 71,560 90.7 $ 57,365 87.0% $ 50,377 85.6% $ 49,552 85.4% $ 49,279 86.0%
Construction ..... 478 0.6 1,377 2.1 1,003 1.7 352 0.6 1,316 2.3
One-to-four-family
Rental property .. 1,764 2.3 1,936 2.9 2,202 3.7 2,465 4.2 2,406 4.2
Home equity ...... 2,365 3.0 2,314 3.5 2,197 3.8 2,122 3.7 2,141 3.7
Commercial real
estate ......... 1,820 2.3 2,073 3.2 2,255 3.8 2,660 4.6 1,402 2.5
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total mortgage
loans .......... $ 77,987 98.9% $ 65,065 98.7% 58,034 98.6 57,151 98.5 56,544 98.7
Other loans:
Commercial
business ....... 170 0.2 36 0.0 15 0.0 20 0.0 26 0.0
Consumer ......... 605 0.8 630 1.0 675 1.1 669 1.1 544 1.0
Savings account
loans .......... 115 0.1 174 0.3 148 0.3 209 0.4 176 0.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total other
loans ........ $ 890 1.1 $ 840 1.3 838 1.4 898 1.5 746 1.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans
receivable ... 78,877 100.0% 65,905 100.0% 58,872 100.0% 58,049 100.0% 57,290 100.0%
Less:
Deferred loan
fees ........... (3) 28 22 16 13
Allowances for
loan losses .... 167 139 123 114 106
-------- -------- -------- -------- --------
Loans
receivable, net $ 78,713 $ 65,738 $ 58,727 $ 57,919 $ 57,171
======== ======== ======== ======== ========
Mortgage loan
summary:
Fixed rate loans . $ 47,831 61.3% $ 28,864 44.4% $ 17,885 30.8% $ 11,074 19.4% $ 12,544 22.2%
Adjustable-rate
loans .......... $ 30,156 38.7 $ 36,201 55.6 40,149 69.2 46,077 80.6 44,000 77.8
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total mortgage
loans .......... $ 77,987 100.0% $ 65,065 100.0% $ 58,034 100.0% $ 57,151 100.0% $ 56,544 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
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Residential Mortgage Loans. The primary focus of the Company's lending
activities are mortgage loans secured by first liens on one-to-four family
owner-occupied or rental residential real estate. At September 30, 1998,
approximately $73.8 million, or 93.6%, of the Company's total loan portfolio
consisted of such loans. The Company offers both adjustable rate mortgages
("ARMs") and fixed-rate mortgage loans. The relative proportions of fixed-rate
loans versus ARMs originated by the Company depends principally upon current
customer preference, which is generally driven by general economic and interest
rate conditions and the pricing offered by the Company's competitors. At
September 30, 1998, approximately 38.3% of the Company's residential one-to-four
family owner-occupied first mortgage portfolio were ARMs and approximately 61.7%
were fixed rate loans. The percentage represented by fixed rate loans has
increased from 44.4% at September 30, 1997, to 61.7% at September 30, 1998,
principally due to customer preference for fixed-rate loans during current
periods of low interest rates. The ARMs generally carry annual caps and
life-of-the-loan ceilings, which limit interest rate adjustments.
The Company's residential loan underwriting criteria are generally
comparable to those required by the Federal National Mortgage Association
("FNMA") and other major secondary market loan purchasers. Generally, ARM credit
risks are somewhat greater than fixed-rate loans primarily because, as interest
rates rise, the borrowers' payments rise, increasing the potential for default.
The Bank's teaser rate ARMs (ARMs with low initial interest rates that are not
based upon the index plus the margin for determining future rate adjustments)
were underwritten based on the payment due at the fully-indexed rate.
In addition to verifying income and assets of borrowers, the Company
obtains independent appraisals on all residential first mortgage loans and title
insurance is required at closing. Private mortgage insurance is required on all
loans with a loan to value ratio in excess of 80% and the Company requires real
estate tax escrows on such loans. Real estate tax escrows are voluntary on
residential mortgage loans with loan to value ratios of 80% or less.
Fixed-rate residential mortgage loans are generally originated by the
Company for terms of 15 or 30 years. Although 30 year fixed-rate mortgage loans
may adversely affect the Company's net interest income in periods of rising
interest rates, the Company originates such loans to satisfy customer demand.
Such loans are generally originated at initial interest rates which exceed the
fully indexed rate on ARMs offered at the same time. Fixed-rate residential
mortgage loans originated by the Company generally include due-on-sale clauses,
which permit the Company to demand payment in full if the borrower sells the
property without the Company's consent. Due-on-sale clauses are an important
means of adjusting the rates of the Company's fixed-rate mortgage loan
portfolio, and the Company will generally exercise its rights under these
clauses if necessary to maintain market yields.
The Company has offered ARMs since the early 1980s. In the early years, the
Company's ARMs provided for interest rate adjustments based upon the Contract
Interest Rate Index (the "CIRI") and the Monthly Median Cost of Funds Index (the
"COFI"), both as originally published by the Federal Home Loan Bank Board. These
indexes have proved to be unsatisfactory because the COFI generally reacts
slowly to interest rate changes and the CIRI no longer reflects the same spread
against market interest rates due to changes in mortgage lending patterns. As a
result, at September 30, 1998, the Company had approximately $7.0 million of
ARMs based upon the COFI and CIRI with current interest rates from 3.80% to
7.00%. ARMs originated in recent years have interest rates that adjust annually
based upon the movement of the one year treasury bill constant maturity index,
plus a margin of from 2% to 2.75%. These loans generally have a maximum interest
rate adjustment of 2% per year, with a lifetime maximum interest rate
adjustment, measured from the initial interest rate, of 5.5% or 6%.
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The Company offers residential single family construction loans to persons
who intend to occupy the property upon completion of construction. Upon
completion of construction, these loans are automatically converted into
permanent residential mortgage loans and classified as such. The proceeds of the
construction loan are advanced in stages on a percentage of completion basis as
construction progresses. The loans generally provide for a construction period
of not more than six months during which the borrower pays interest only. In
recognition of the risks involved in such loans, the Company carefully monitors
construction through regular inspections and the borrower must qualify for the
permanent mortgage loan before the construction loan is made. At September 30,
1998, the Company had 10 construction loans with an aggregate outstanding
principal balance of $478,000. The Company's delinquency experience with its
construction loans has been favorable. At the end of each fiscal year since
September 30, 1992, the Company had no non-performing construction loans.
Home Equity Loans. The Company makes home equity loans, representing loans
secured by junior mortgages on one-to-four family owner-occupied residences.
These loans are of two types. The Company offers a home equity line of credit
secured by a residential mortgage, normally a second lien. These loans have
adjustable rates of interest and generally provide for an initial advance period
of five or ten years, during which the borrower pays interest only, or interest
plus a nominal principal amount, and can borrow, repay, and reborrow the
principal balance. This is followed by a repayment period, generally ten years,
during which the balance of the loan is repaid in principal and interest
installments. The Company also offers regular amortizing home equity loans.
These loans are fully advanced at closing and repayable in monthly principal and
interest installments over a period not to exceed 10 years. Second mortgage
loans are limited to a maximum loan to value ratio, including prior liens, of
not more than 80%. At September 30, 1998, the Company had $1.2 million in
outstanding advances on home equity lines of credit and $1.2 million in regular
amortizing home equity loans.
Commercial Mortgage Loans. The Company originates fixed and adjustable rate
mortgage loans secured by office buildings, retail establishments, and other
types of commercial property, almost always secured by property located in the
Company's market area. The Company may make or participate in loans in areas
adjoining its market area. At September 30, 1998, the Company's commercial
mortgage loan portfolio was $1.8 million, or 2.3% of total loans. At September
30, 1998, the Company's largest such loan was a participation loan with a local
savings bank in which the Company's participation was $472,000, or 44% of the
total loan. The loan is secured by a mixed use office and retail center located
in the Village of Goshen. With the recent expansion of commercial lending
activities, larger balance originations could occur in the future.
The Company makes commercial mortgage loans with loan to value ratios up to
75%, terms up to 15 years, and amortization periods up to 15 years. At September
30, 1998, $1.0 million of the Company's commercial mortgage loans had adjustable
rates and $799,000 had fixed rates.
Loans secured by commercial properties generally involve a greater degree
of risk than one-to-four family residential mortgage loans. Because payments on
such loans are often dependent on successful operation or management of the
properties, repayment may be subject, to a greater extent, to adverse conditions
in the real estate market or the economy. The Company seeks to minimize these
risks through its underwriting policies. In reaching its decision on whether to
make a commercial mortgage loan, the Company considers the qualifications and
financial condition of the borrower, including credit history, profitability and
expertise, as well as the value and condition of the underlying property. The
factors considered by the Company include the net operating income of the
mortgaged premises before debt service and depreciation; the debt coverage ratio
(the ratio of net earnings to debt service); and the ratio of loan amount to
appraised value.
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The Company generally requires a debt service coverage ratio of at least
120% and the personal guarantee of the borrower. The Company also requires an
appraisal on the property conducted by an independent appraiser and title
insurance. When evaluating the qualifications of the borrower for a commercial
mortgage loan, the Company considers the financial resources and income level of
the borrower, the borrower's experience in owning or managing similar property
and the Company's lending experience with the borrower. The Company's
underwriting policies require that the borrower be able to demonstrate
management skills and the ability to maintain the property from current rental
income or from the borrower's operations on the property. The Bank's policy
requires borrowers to present evidence of the ability to repay the mortgage and
a history of making mortgage payments on a timely basis. In making its
assessment of the creditworthiness of the borrower, the Bank generally reviews
the financial statements and credit history of the borrower, as well as other
related documentation.
Consumer Loans. The Company also makes short-term fixed-rate consumer loans
either unsecured or secured by savings accounts, automobiles or other consumer
assets. Consumer loans, excluding these secured by real estate, totaled
$720,000, or 0.9% of total loans, at September 30, 1998. These loans generally
have an average term of not more than five years and have interest rates higher
than mortgage loans. The shorter terms to maturity are helpful in managing the
Company's interest rate risk. These loans are generally underwritten based upon
the borrower's ability to repay and the value of the collateral for the loan.
Collateral value, except for loans secured by bank deposits or marketable
securities, is a secondary consideration because personal property collateral
generally rapidly depreciates in value, is difficult to repossess, and rarely
generates close to full value at a forced sale.
Commercial Business Loans. The Company has diversified its lending to
include business loans in its communities. Business loans at September 30, 1998,
totaled $170,000 compared to $36,000 at September 30, 1997, representing 0.2% of
total loans for fiscal 1998.
The Company intends to pursue additional commercial non-mortgage loans in
the future in order to diversify its loan offering and expand its customer base.
Commercial non-mortgage loans generally have shorter terms to maturity and
adjustable interest rates when compared to residential first mortgage loans, and
also generally have higher yields. The Company intends to offer such loans on
both an unsecured and a secured basis, with the secured loans having collateral
such as machinery, equipment, accounts receivable, other business assets or
marketable securities.
Commercial mortgage loans are generally perceived as having greater risks
that residential first mortgage loans because historically they have higher
default rates. The collateral often declines rapidly in value or is difficult to
sell when not part of a successful ongoing business. In order to protect against
these risks, the Company markets it commercial non-mortgage loans principally to
businesses within its local market area where the Company has substantial
knowledge and expertise regarding local business and economic conditions. The
Company also requires personal guaranties of business principals as additional
support for these loans.
Origination of Loans. Loan originations come from a number of sources.
Residential loan originations can be attributed to advertising, the efforts of
the Company's loan officers, and in-house loan originators, and referrals from
other borrowers, real estate brokers and builders. The Company has increased its
staff of loan originators to increase its originations. The Company originates
loans through its own efforts and does not use mortgage brokers, mortgage
bankers or other fee paid loan finders. The Company does not originate loans
independent of the Bank, except for the loan made to
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the Company's ESOP, which was used to purchase stock in the Conversion. The ESOP
loan is not recorded as an asset on the Company's consolidated financial
statements and is excluded throughout this discussion of the Company's lending
business.
All of the Bank's lending is subject to its written, nondiscriminatory
underwriting standards and to loan origination procedures prescribed by the
Bank's Board of Directors. Officers of the Bank have the authority to approve
loans at differing levels established by the Board of Directors based upon the
position and expertise of the officer. Loans over $500,000, of which the Bank
had none at September 30, 1998, must be approved in advance by the Bank's Board
of Directors. All other loans are reviewed by the Bank's ad hoc loan committee
after approval.
As a federal savings bank, the aggregate amount of loans that the Bank is
permitted to make to any one borrower is generally limited to 15% of unimpaired
capital and surplus (25% if the security for such loan has a "readily
ascertainable" value or 30% for certain residential development loans). At
September 30, 1998, 15% of the Bank's capital and surplus was approximately $3.4
million. On that date, the Bank's largest aggregate loan relationship was
$746,000, represented by three loans to affiliated borrowers. One of the three
component loans, a participation loan with a balance owed to the Bank at
September 30, 1998 of $472,000, is the Bank's largest loan and is secured by
mixed use commercial property in Goshen. The two related loans include a
residential mortgage loan on the primary residence of a principal of the
commercial loan borrower and a mortgage loan on a small mixed-use commercial
property to a related entity. The Bank had two other loan relationships at
September 30, 1998 with balances in excess of $500,000. One relationship, in the
amount of $627,000, includes a commercial mortgage loan on medical offices in
the amount of $389,000 and a residential mortgage loan to a principal of the
commercial loan borrower. The other relationship, in the amount of $619,000,
includes the same mortgage loan on the medical facility, a residential mortgage
loan on another principal's home, and a small overdraft checking line of credit.
At September 30, 1998, the Bank had seven loans outstanding with principal
balances in excess of $250,000 and an additional 18 loans with principal
balances from $200,000 to $250,000. None of these loans were past due 90 days or
more on September 30, 1998 or otherwise classified as non-performing.
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The following table sets forth the Bank's loan originations, loan sales and
principal repayments for the periods indicated.
Year Ended September 30,
--------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Total loans, beginning of period . $ 65,905 $ 58,872 $ 58,049
-------- -------- --------
Loans originated:
Residential 1 to 4 family (1) .... 18,208 10,017 6,198
Commercial real estate ........... -- 17 334
Construction loans ............... 1,846 2,092 1,652
Consumer loans ................... 699 1,127 2,030
-------- -------- --------
Total loans originated ....... 20,753 13,253 10,214
Loans purchased .................. -- -- --
Loans sold ....................... -- -- --
Principal repayments ............. (7,666) (6,206) (9,373)
Total charge-offs ................ (115) (14) (18)
-------- -------- --------
Net loan activity ................ 12,972 7,033 823
-------- -------- --------
Total loans, end of period ..... $ 78,877 $ 65,905 $ 58,872
======== ======== ========
(1) Includes home equity loans secured by junior liens on one-to-four family
owner-occupied residences.
The Company does not purchase loans. Prior to fiscal 1995, the Company sold
part of its fixed rate residential mortgage loan production to FNMA and retained
the right to service those loans. At September 30, 1998, the Company's portfolio
of loans serviced for FNMA totaled $6.0 million. The Company did not service
loans for any other investors at that date. The Company has never purchased loan
servicing rights.
Loan Maturity. The following table shows the contractual maturity of the
Company's loan portfolio at September 30, 1998. Loans are shown as due based on
their contractual terms to maturity. Loans which have adjustable or renegotiable
interest rates are shown as maturing in the period during which the final loan
payment is due without regard to rate adjustments. The table does not reflect
the effects of loan amortization, possible prepayments or enforcement of
due-on-sale clauses. Non-performing loans are shown as being due based upon
their contractual maturity without regard to acceleration due to default.
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<TABLE>
<CAPTION>
At September 30, 1998
-----------------------------------------------------------------
One- to Total
Four- Home Commercial Other Loans
Family Equity Real Estate Loans Receivable
------ ------ ----------- ----- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Contractual maturity:
Within 1 year .................. $ 54 $ -- $ -- $ 133 $ 187
After 1 year:
1 to 3 years ................ 541 -- 510 371 1,422
3 to 5 years ................ 751 290 -- 277 1,318
5 to 10 years ............... 2,664 538 287 74 3,563
Over 10 years ............... 69,792 1,537 1,023 35 72,387
-------- -------- -------- -------- --------
Total due after one year .... $ 73,748 $ 2,365 $ 1,820 $ 757 $ 78,690
-------- -------- -------- -------- --------
Total amounts due .............. $ 73,802 $ 2,365 $ 1,820 $ 890 $ 78,877
======== ======== ======== ========
Less:
Deferred loan fees, net ........ (3)
Allowance for loan losses ...... 167
--------
Loans receivable, net .......... $ 78,713
========
</TABLE>
The following table sets forth at September 30, 1998, the dollar amount of
loans due after September 30, 1999, and whether such loans have fixed interest
rates or adjustable interest rates.
Due After September 30, 1999
---------------------------------
Fixed Adjustable Total
----- ---------- -----
(In Thousands)
Mortgage loans:
One- to four-family ............. $45,779 $27,969 $73,748
Home equity ..................... 1,209 1,156 2,365
Commercial real estate .......... 799 1,021 1,820
Other loans ....................... 690 67 757
------- ------- -------
Total loans receivable ............ $48,477 $30,213 $78,690
======= ======= =======
Asset Quality
Delinquency Procedures. When a borrower fails to make a required payment on
a loan, the Company attempts to cause the deficiency to be cured by contacting
the borrower. Late notices are sent when a payment is more than 15 days past due
and a late charge is generally assessed at that time. The Company attempts to
contact personally any borrower who is more than 30 days past due. In most
cases, deficiencies are cured promptly. All loans past due 60 days or more, and
all loans in which the borrower is delinquent in the payment of real estate
taxes regardless of payment status, are added to a watch list and a Bank
employee of the Company contacts the borrower on a regular basis to seek to cure
the delinquency. If a loan becomes past due 90 days, the Company refers the
matter to an attorney, who first seeks to obtain payment without litigation and,
if unsuccessful, generally commences a foreclosure action or other appropriate
legal action to collect the loan. A foreclosure action, if the default is not
cured, generally leads to a judicial sale of the mortgaged real estate. The
judicial sale is normally delayed if the borrower files a bankruptcy petition
because the foreclosure action cannot be continued unless the Company first
obtains relief from the automatic stay provided by the Bankruptcy Code.
If the Company acquires the mortgaged property at foreclosure sale or
accepts a voluntary deed in lieu of foreclosure, the acquired property is then
classified as Real Estate Owned ("REO") until it is sold. At September 30, 1998,
the Company had REO consisting of one property totaling $94,000, which was sold
in November 1998. When REO is acquired, the property is recorded at the lower of
the principal balance of the loan or fair value less costs of sale of the
property and any shortfall
-11-
<PAGE>
between the recorded value of the property and the carrying value of the loan is
charged to the allowance for loan losses. Thereafter, changes in the value of
the REO are reflected as a valuation allowance. The Company is permitted to
finance sales of REO by "loans to facilitate," which may involve a lower down
payment or a longer repayment term or other more favorable features than
generally would be granted under the Company's underwriting guidelines.
Currently, the Company has no "loans to facilitate."
The following table sets forth information with respect to the Company's
non-performing assets (which generally include loans that are delinquent for 90
days or more and real estate owned) at the dates indicated.
At September 30,
-------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
Non-accrual loans:
Loans in non-accrual status:
One- to four-family ............ $ -- $ -- $ 16 $157 $ 42
Home equity .................... -- -- -- -- --
Commercial real estate ......... -- -- -- -- --
---- ----- ---- ---- ----
Total mortgage loans ........ $ -- -- 16 157 42
---- ----- ---- ---- ----
Consumer loans ................. -- -- -- --
Total non-accrual ........... $ -- -- 16 157 42
---- ----- ---- ---- ----
Accruing Loans delinquent 90
days or more:
Mortgage loans ................. -- -- -- 68 160
Home equity .................... -- -- -- -- 51
Other loans .................... 4 -- -- -- 4
---- ----- ---- ---- ----
Total ....................... 4 -- -- 68 215
---- ----- ---- ---- ----
Total non-performing loans ....... 4 -- 16 225 257
Foreclosed and in substance
foreclosed real estate ........ 94 -- -- -- --
---- ----- ---- ---- ----
Total non-performing assets ...... $ 98 $ -- $ 16 $225 $257
==== ===== ==== ==== ====
Ratio of non-performing loans to
total loans ................... 0.01% 0.00% 0.03% 0.39% 0.45%
Ratio of non-performing assets to
total assets .................. 0.07% 0.00% 0.02% 0.22% 0.26%
At September 30, 1998, management had identified as a potential problem
loan one residential mortgage loan with a principal balance of $92,000, which
was then 59 days past due. Although management has been advised that the
property is likely to be sold at a price which would involve no loss to the
Company, lack of a prompt sale could necessitate foreclosure proceedings.
Management believes that the allowance for loan losses is adequate to cover the
loss, if any, on such loan. At September 30, 1998, there were no other loans
other than those included in the table above with regard to which management had
information about possible credit problems of the borrower that caused
management to seriously doubt the ability of the borrower to comply with present
loan repayment terms.
It is the Company's policy to discontinue accruing interest on a loan when
it becomes 90 days or more delinquent unless the Company determines that the
nature of the delinquency and the collateral are such that collection of the
principal and interest on the loan in full is reasonably assured. Once the
accrual of interest is discontinued, the Company records interest as and when
received until the loan is restored to accruing status.
-12-
<PAGE>
For the years ended September 30, 1998, 1997 and 1996, the amount of
interest income that would have been recorded on non-accrual loans was $0, $0,
and $1,400, respectively, if such loans had been performing inaccordance with
their terms, of which $0, $0, and $1,400 was actually collected by the Company
and recorded as income during each such period. Interest earned on loans 90 days
or more delinquent and still accruing interest amounted to $95, $0, and $0 for
such periods, respectively.
Classified Assets. OTS regulations require that federal savings banks
classify their assets on a regular basis and establish prudent valuation
allowances based on such classifications. In addition, in connection with
examinations of savings associations, OTS examiners have authority to identify
problem assets and, if appropriate, require them to be classified. OTS
regulations provide for three adverse classifications for problem assets:
Substandard, Doubtful and Loss. Substandard assets have one or more defined
weaknesses and are characterized by the distinct possibility that the Bank will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of Substandard assets, with the additional characteristics that
the weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
probability of loss. An asset classified Loss is considered uncollectible and of
such little value that its continuance as an asset of the Bank is not warranted.
The regulations have also created a Special Mention category, consisting of
assets which do not currently expose the Bank to a sufficient degree of risk to
warrant classifications, but do possess credit deficiencies or potential
weaknesses deserving management's close attention.
Assets classified as Substandard or Doubtful require the Bank to establish
prudent valuation allowances. If an asset or portion thereof is classified as
Loss, the Bank must either establish a specific allowance for loss equal to 100%
of the portion of the asset classified Loss or charge off such amount. If the
Bank does not agree with an examiner's classification of an asset, it may appeal
this determination to the District Director of the OTS. On the basis of
management's review of its loans at September 30, 1998, the Bank had no
classified assets and no loans categorized by management as "Special Mention."
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in the Company's loan portfolio and the general economy. The
allowance for loan losses is maintained at an amount management considers
adequate to cover loan losses which are deemed probable and can be estimated.
The allowance is based upon a number of factors, including asset
classifications, economic trends, industry experience and trends, industry and
geographic concentrations, estimated collateral values, management's assessment
of the credit risk inherent in the portfolio, historical loan loss experience
and the Company's underwriting policies. The Company evaluates on a loan by loan
basis each calendar quarter all loans which are at least sixty days past due or
for which there are unpaid real estate taxes and considers whether the allowance
should be adjusted to protect against risks associated with such loans. The
analysis of the adequacy of the allowance is reported to and reviewed by the
Board of Directors quarterly. Although management believes it uses the best
information available to make determinations with respect to the allowance for
loan losses, future adjustments may be necessary if economic conditions and the
Company's actual experience differ substantially from the conditions and
experience used in the assumptions upon which the initial determinations are
based.
While the Company believes that it has established an adequate allowance
for loan losses based upon its low level of prior charge-offs, there can be no
assurance that regulators, in reviewing the Company's loan portfolio as part of
a future regulatory examination, will not request the Company to materially
increase its allowance for loan losses, thereby negatively affecting the
-13-
<PAGE>
Company's financial condition and earnings at that time. Moreover, no assurance
can be made that future additions to the allowance will not be necessary based
on changes in economic and real estate market conditions, further information
obtained regarding existing loans, identification of additional problem loans
and other factors, both within and outside of management's control. The
directors of the Bank and the Company have reviewed the provision for loan
losses and the allowance for loan losses and the assumptions utilized by
management as to their reasonableness and adequacy.
The following table analyzes activity in the Company's allowance for loan
losses during the fiscal years indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Allowance, beginning of period ........ $ 139 $ 123 $ 114 $ 106 $ 91
Provision:
Residential 1-4 family ............. 70 5 -- 15 20
Commercial real estate ............. -- -- -- -- --
Consumer ........................... -- 15 24 14 5
----- ----- ----- ----- -----
Total provision .................. 70 20 24 29 25
Charge-offs:
Residential 1-4 family ............. (43) -- -- -- --
Consumer ........................... -- (14) (18) (22) (14)
----- ----- ----- ----- -----
Total charge-offs ............... (43) (14) (18) (22) (14)
----- ----- ----- ----- -----
Recoveries:
Residential 1-4 family ............. -- -- -- -- --
Consumer ........................... 1 10 3 1 4
----- ----- ----- ----- -----
Total recoveries ................ 1 10 3 1 4
----- ----- ----- ----- -----
Net (charge-offs) recoveries .......... (42) (4) (15) (21) (10)
----- ----- ----- ----- -----
Allowance, end of period .............. $ 167 $ 139 $ 123 $ 114 $ 106
===== ===== ===== ===== =====
Allowance as a percent of total loans . 0.21% 0.21% 0.21% 0.19% 0.19%
</TABLE>
-14-
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. The allocation of the allowance
to each category is not necessarily indicative of future losses and does not
restrict the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------------------------
1998 1997 1996 1995
---------------------------------------------------------------------------------
Percent Percent Percent Percent
of Loans Of Loans of Loans Of Loans
to Total To Total to Total To Total
Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Allowance allocated to:
Residential 1-4 family ................ $139 96.56% $117 95.58% $112 94.75% $112 93.87%
Commercial real estate ................ -- 2.31% -- 3.15% -- 3.83% -- 4.58%
Consumer and other .................... 28 1.13% 22 1.27% 11 1.42% 2 1.55%
---- ------ ---- ------ ---- ------ ---- ------
Total allowance ....................... $167 100.00% $139 100.00% $123 100.00% $114 100.00%
==== ====== ==== ====== ==== ====== ==== ======
</TABLE>
Environmental Issues
The Company encounters certain environmental risks in its lending
activities. Under federal and state environmental laws, lenders may become
liable for costs of cleaning up hazardous materials found on property securing
their loans. In addition, the presence of hazardous materials may have a
substantial adverse effect on the value of such property as collateral and may
cause economic difficulties for the borrower, causing the loan to go into
default. Although environmental risks are usually associated with loans secured
by commercial real estate, risks also may exist for loans secured by residential
real estate if, for example, there is nearby commercial contamination or if the
residence was constructed on property formerly used for commercial purposes. The
Company attempts to control its risk by requiring a phase one environmental
assessment by a Company-approved engineer as part of its underwriting review for
all mortgage loans other than those secured by one-to-three family residences.
The Company believes its procedures regarding the assessment of
environmental risk are adequate and, as of September 30, 1998, the Company was
unaware of any environmental issues with respect to any of its mortgage loans
which are believed to expose the Company or any collateral for any of its loans
to any material liability at this time. However, no assurance can be given that
the values of properties securing loans in the Company's portfolio will not be
adversely affected by unforeseen environmental risks.
Investment Activities
General. The investment policy of the Company and the Bank, approved by the
Boards of Directors, is based upon asset/liability management goals and is
designed primarily to provide satisfactory yields while maintaining adequate
liquidity, a balance of high quality, diversified investments, and minimal risk.
The investment policy is implemented by the Chief Executive Officer.
-15-
<PAGE>
As required by SFAS 115, securities are classified into three categories:
trading, held-to-maturity and available-for-sale. Securities that are bought and
held principally for the purpose of selling them in the near term are classified
as trading securities and are reported at fair value with unrealized gains and
losses included in trading account activities in the statement of earnings.
Securities that the Company has the positive intent and ability to hold to
maturity are classified as held-to-maturity and reported at amortized cost. All
other securities are classified as available-for-sale. Available-for-sale
securities are reported at fair value with unrealized gains and losses included,
on an after-tax basis, as a separate component of retained earnings. The Company
has not had a trading securities portfolio since 1994 and has no current plans
to maintain such a portfolio in the future. At September 30, 1998, $31.5 million
of investment securities were classified as available-for-sale and none were
classified as held to maturity. At September 30, 1998, $3.9 million of
mortgage-backed securities were classified as held to maturity with a fair value
of $4.0 million, and $5.8 million were classified as available for sale.
Investment Securities. The Company's investment securities portfolio
totaled $31.5 million at September 30, 1998. It is the policy of the Company to
invest in debt securities issued by the United States Government, its agencies,
municipalities and corporations. In order to benefit from higher yields, the
Company invests in callable government agency debt securities, which totaled
$18.5 million, or 58.7% of investment securities, at September 30, 1998. Such
securities have greater risks than U.S. Government securities because of the
greater possibility that the corporate obligor, compared to the U.S. Government,
will default in payment of the obligation. To control risks, the Company limits
its investment in corporate debt securities to those rated in the three highest
grades by a nationally recognized rating organization. The Company also invests
in the Institutional Investors Capital Appreciation Fund, Inc. ("IICAF"), a
mutual fund which invests principally in common stocks of companies listed on
the New York Stock Exchange that have paid regular dividends for at least ten
consecutive fiscal years. At September 30, 1998, the Company's investment in
IICAF shares totaled $2.7 million.
At September 30, 1998, the Bank had an investment of $704,000 in stock of
the FHLBNY, which investment was necessary for the Bank to maintain its
membership in the FHLBNY and to utilize FHLBNY borrowing facilities. If the Bank
increases its FHLBNY borrowings, the Bank may have to increase its investment in
FHLBNY stock because the Bank must own FHLBNY stock at least equal to 5% of its
borrowings. The Bank's yield on FHLBNY stock was 7.21% for the fiscal year ended
September 30, 1998.
Mortgage-Backed Securities. The Company invests in mortgage-backed
securities to supplement the yields on its loan portfolio. At September 30,
1998, the Company's mortgage-backed securities portfolio totaled $9.7 million,
of which $3.9 million was classified as held to maturity and $5.8 million was
classified as available for sale. The Company's most recent purchases of
mortgage-backed securities have been classified as available for sale and the
Company expects that it will continue to so classify future purchases to
maintain flexibility. At September 30, 1998, all of the Company's
mortgage-backed securities were issued or guaranteed by FNMA, FHLMC or GNMA. The
Company's mortgage-backed securities portfolio had a weighted average yield of
6.70% at September 30, 1998.
Mortgage-backed securities generally have higher yields than investment
securities because of the longer terms and the uncertainties associated with the
timing of mortgage repayments. In addition, mortgage-backed securities are more
liquid than individual mortgage loans and may be used to collateralize
borrowings of the Company. However, these securities generally yield less than
the loans that underlie them because of the cost of payment guarantees or credit
enhancements that reduce credit risk. Mortgage-backed securities of the type
held by the Bank are generally weighted
-16-
<PAGE>
at 20%, rather than the 50% weighting for performing residential one-to-four
family mortgage loans, in determining the Bank's regulatory risk-based capital
ratios.
While investment and mortgage-backed securities carry a reduced credit risk
as compared to loans, such securities remain subject to the risk that a
fluctuating interest rate environment, along with other factors such as the
geographic distribution of the underlying mortgage loans, may alter the
prepayment rate of such mortgage loans and so affect both the prepayment speed,
and value, of such securities.
-17-
<PAGE>
The following table sets forth certain information regarding the amortized
cost and fair value of the Company's available for sale, and held to maturity
securities portfolios at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---------- ------- --------- ------- --------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities Available for Sale:
U.S. Treasury securities ...................... $ 1,001 $ 1,006 $ 3,497 $ 3,505 $ 4,718 $ 4,715
U.S. Government agencies ...................... 18,274 18,462 7,123 7,163 2,967 2,984
Corporate debt obligations .................... 8,338 8,468 11,879 11,942 12,043 12,075
Mortgage-backed securities .................... 5,797 5,804 6,994 6,990 -- --
Other securities .............................. -- -- 400 400 506 504
------- ------- ------- ------- ------- -------
Total ........................... 33,410 33,740 29,893 30,000 20,234 20,278
------- ------- ------- ------- ------- -------
FHLBNY stock .................................. 704 704 638 638 599 599
Corporate equity securities ................... 2,002 2,204 2,112 2,834 2,165 2,990
------- ------- ------- ------- ------- -------
Total equity securities ......... 2,816 3,538 2,803 3,628 2,601 2,803
------- ------- ------- ------- ------- -------
Total available for
sale ............................ 36,226 37,278 32,696 33,628 22,835 23,081
------- ------- ------- ------- ------- -------
Securities Held to Maturity:
Mortgage-backed securities .................... 3,881 3,965 5,653 5,766 6,474 6,529
------- ------- ------- ------- ------- -------
Total held to maturity .......... 3,881 3,965 5,653 5,766 6,474 6,529
------- ------- ------- ------- ------- -------
Total Securities ................ $40,107 $41,243 $38,349 $39,394 $29,309 $29,610
======= ======= ======= ======= ======= =======
</TABLE>
The table below sets forth certain information regarding the carrying
value, weighted average yields and stated maturity of the Company's securities
at September 30, 1998. There were no securities (exclusive of obligations of the
U.S. Government and federal agencies) issued by any one entity with a total
carrying value in excess of 10% of the Company's equity at September 30, 1998.
<TABLE>
<CAPTION>
At September 30, 1998
-------------------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Securities
----------------- ----------------- ------------------ -------------------- ----------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
-------- ------- -------- ------- -------- ------- -------- ------- -------- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
securities ... $ 1,001 5.99% $ -- -- $ -- -- $ -- -- $ 1,001 5.99% $ 1,006
U.S. Government
agency ....... -- -- 1,000 7.10% 6,978 6.66% 10,296 6.83% 18,274 6.78% 18,462
Corporate debt
obligations .. 2,203 6.26% 6,135 7.24% -- -- -- -- 8,338 6.98% 8,468
Mortgage-backed
securities ... 345 5.00% 3,402 6.40% 1,317 7.14% 4,614 6.93% 9,678 6.70% 9,769
FHLBNY stock ... -- -- -- -- -- -- 704 7.21% 704 7.21% 704
Other equity
securities ... -- -- -- -- -- -- 2,112 6.87% 2,112 6.87% 2,834
------- ------- ------- ------- ------- -------
Total ...... $ 3,549 6.06% $10,537 6.96% $ 8,295 6.74% $17,726 6.87% $40,107 6.79% $41,243
======= ======= ======= ======= ======= =======
</TABLE>
-18-
<PAGE>
Sources of Funds
General. The Company's primary source of funds is deposits. In addition,
the Company derives funds for loans and investments from loan and security
repayments and prepayments, from net revenues from operations and, to a lesser
extent, from borrowings. Scheduled payments on loans and mortgage-backed and
investment securities are a relatively stable source of funds, while savings
inflows and outflows and loan and mortgage-backed and investment securities
prepayments are significantly influenced by general interest rates and money
market conditions. Borrowings are occasionally used to compensate for reductions
in other sources of funds.
Deposits. The Company offers several types of deposit programs to its
customers, including passbook and statement savings accounts, NOW accounts,
money market deposit accounts, checking accounts and certificates of deposit.
Deposit account terms vary according to the minimum balance required, the time
periods the funds must remain on deposit and the interest rate, among other
factors. The Company's deposits are obtained predominantly from its Orange
County market area. The Company relies primarily on customer service and
long-standing relationships with customers to attract and retain these savings
deposits; however, market interest rates and rates offered by competing
financial institutions significantly affect the Company's ability to attract and
retain savings deposits. The Company does not pay premium rates for certificates
of deposit in excess of $100,000 nor does the Company use brokers to obtain
deposits. At September 30, 1998, the Company had $88.3 million of deposits
outstanding.
The Company prices its deposit offerings based upon market and competitive
conditions in its market area. Beginning in fiscal 1996, the Company took steps
to decrease its cost of funds by moderating the rates it offered on certificates
of deposit. However, after the conversion of Goshen Savings Bank in July 1997,
the Company took a more aggressive posture towards deposit pricing in order to
increase deposits and leverage the additional capital obtained in the
conversion. This new pricing policy involved the creation of a tier pricing
structure for money market deposit accounts, with a premium rate offered for
higher balance accounts. In addition, the Company modified its approach to
certificate of deposit pricing to move its rates to slightly above the average
market rates, but not reaching the highest market rates, offered in the local
market. Furthermore, the Bank also opened its third deposit-taking office in
September 1998 in Harriman, New York as part of the expansion of the Company's
business and to seek additional deposits for further leveraging of the Company's
capital.
-19-
<PAGE>
The following table sets forth the distribution of the Company's deposit
accounts at the dates indicated. Interest rates shown for non-time accounts are
the rates in effect at September 30, 1998.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-time accounts:
Savings accounts (3.00%) ....................... $28,089 31.81% $26,839 31.65% $26,805 32.12%
NOW accounts (2.50%) ........................... 4,932 5.58% 4,136 4.87% 3,636 4.36%
Checking accounts .............................. 4,981 5.64% 4,869 4.70% 4,206 5.04%
Money market accounts (3.00% - 4.50%) .......... 10,958 12.41% 8,892 12.82% 10,457 12.53%
------- ------ ------- ------ ------- ------
Total non-time accounts ..................... 48,960 55.44% 44,736 54.04% 45,104 54.05%
------- ------ ------- ------ ------- ------
Time accounts:
3.00-3.99% ..................................... 122 0.14% 208 0.42% 501 0.60%
4.00-4.99% ..................................... 19,703 22.31% 8,394 29.75% 25,479 30.53%
5.00-5.99% ..................................... 18,998 21.51% 28,861 14.27% 9,736 11.67%
6.00-6.99% ..................................... 264 0.30% 509 1.12% 2,291 2.75%
7.00-7.99% ..................................... 263 0.30% 275 0.40% 331 0.40%
------- ------ ------- ------ ------- ------
Total time accounts ......................... 39,350 44.56% 38,247 45.96% 38,338 45.95%
------- ------ ------- ------ ------- ------
Total deposits .......................... $88,310 100.00% $82,983 100.00% $83,442 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
The following table sets forth the deposit flows at the Company during the
periods indicated.
Year Ended September 30,
---------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Net deposits (withdrawals) ............... $ 2,128 $(3,587) $(8,016)
Interest credited ........................ 3,199 3,128 3,365
------- ------- -------
Net increase (decrease) in deposits ...... $ 5,327 $ (459) $(4,651)
======= ======= =======
At September 30, 1998, the Company had $2.4 million in certificates of
deposit with balances of $100,000 or more ("jumbo deposits"), representing 2.7%
of all deposits, as follows:
Original Interest
Term Rate (1) Balance
---- -------- -------
(In Thousands)
1-3 months ............................. 3.60% $ 201
4-6 months ............................. 4.70% 1,148
6-12 months ............................ 4.95% 635
Over twelve months ..................... 5.10% 371
------
$2,355
======
(1) Interest rate offered as of September 30, 1998.
-20-
<PAGE>
Borrowings. To a limited extend, the Company has in the past relied upon
borrowed funds or repurchase agreements to supplement its available funds. The
Company has borrowed funds, either through direct borrowings or through the sale
of securities under agreements to repurchase, on an infrequent basis when the
cost of borrowings was attractive when compared to the rate required to be paid
on deposits plus the deposit insurance premium required to be paid.
The Company had borrowing of $10.0 million outstanding as of September 30,
1998, which were to provide a method of leveraging the additional capital
obtained in the Conversion. The Company had no borrowings at September 30, 1997.
The maximum borrowings outstanding at any time during fiscal 1997 were $2
million.
Subsidiary Activities
As a federal savings bank, the Bank may invest up to 2% of its assets in
subsidiaries, with an additional investment of 1% of assets if the investment
serves primarily community, inner city and community development. The Bank may
also invest an unlimited amount in operating subsidiaries engaged solely in
activities which a federal savings bank may engage in directly. The Company is
permitted, as a unitary savings and loan holding company, to invest in
subsidiaries without limits as to the activities in which the subsidiary engages
and without limit as to the amount invested. Neither the Bank nor the Company
have any subsidiaries.
Personnel
At September 30, 1998, the Bank employed 34 full-time and 7 part-time
employees. The Company did not have any employees who were not also employees of
the Bank. The employees are not represented by a collective bargaining unit, and
the Company considers its relationship with its employees to be good.
Regulation
The following is a summary of certain statutes and regulations affecting
the Company and the Bank. The Bank, as a federally chartered, FDIC insured,
savings bank, derives its powers principally from federal law and is subject to
comprehensive regulation of virtually every aspect of its business operations.
The following summary is selective and should not be considered to be a complete
discussion of all regulation affecting the Company or the Bank.
General Bank Regulation. The Bank's primary federal bank regulator is the
Office of Thrift Supervision ("OTS"). The Bank is also subject to regulation by
the FDIC as the insurer of its deposits. The Bank must file periodic reports
with the OTS and is regularly examined by the OTS and the FDIC. As a result of
these examinations, the Bank can be required to adjust its loan classifications
or allowance for loan losses, take other actions to correct deficiencies found
during the examinations, or cease engaging in certain activities. The Bank is
generally permitted to open deposit-taking branches throughout the United
States, regardless of local laws regarding branching.
The OTS may institute enforcement action against the Bank for violations of
law or for unsafe and unsound banking practices. Enforcement actions can include
the issuance of cease and desist orders, the commencement of removal proceedings
in which an employee, officer or director can be removed from involvement with
the Bank, the assessment of civil monetary penalties, and injunctive relief. The
FDIC may terminate the insurance of deposits, after notice and hearing, upon a
-21-
<PAGE>
finding that an institution has engaged in unsafe and unsound practices, cannot
continue operations because it is in an unsafe and unsound condition, or has
violated any applicable law, regulation, rule, order or condition imposed by the
OTS or FDIC. The FDIC may instead impose less severe sanctions. Neither the OTS
nor the FDIC have ever instituted any enforcement action against the Bank.
Federal law and OTS regulations limit the percentage of the Bank's assets
that can be invested in certain investments. For example, commercial, corporate
and business loans, other than those secured by real estate collateral, are
limited in the aggregate to 10% of assets. The purchase of below investment
grade debt securities is prohibited. Loans secured by non-residential real
property cannot, in the aggregate, exceed 400% of capital. Consumer loans not
secured by residential real estate are generally limited, in the aggregate, to
35% of total assets. Loans secured by residential real property, and many other
types of loans and investments, are not subject to any percentage of asset
limit. Generally, the Bank may not lend more than 15% of unimpaired capital and
surplus to one borrower, which equates to a lending limit of $3.4 million, with
an additional 10% of unimpaired capital and surplus being permitted if secured
by certain readily marketable collateral. The Bank is in compliance with all
these limits. The Bank's largest loan, to one borrower at September 30, 1998 was
represented by three related loans in the aggregate amount of $746,000 loan
secured by commercial and residential real estate in the Bank's market area.
The OTS also imposes a semi-annual assessment on all OTS regulated
institutions to defer the cost of OTS regulation. The Bank's most recent
semi-annual OTS assessment was $17,674.
The Company is a unitary savings and loan holding company, and its sole
FDIC-insured subsidiary, the Bank, is a qualified thrift lender ("QTL",
discussed in more detail below). Therefore, the Company generally has broad
authority to engage in all types of business activities in which business can
engage. If the Company were to acquire another insured institution as a separate
subsidiary or if the Bank fails to remain a QTL, the Company's activities will
be limited to those permitted of multiple savings and loan holding companies. In
general, a multiple savings and loan holding company (or subsidiary thereof that
is not an insured institution) may, subject to OTS approval in most cases,
engage in activities comparable to those permitted for bank holding companies,
certain insurance activities, and certain activities related to the operations
of its FDIC-insured subsidiaries.
Capital Requirements. The Bank is subject to minimum capital requirements
imposed by the OTS. The Bank must maintain (i) tangible capital of at least 1.5%
of tangible assets, (ii) core capital of at least 3.0% of adjusted tangible
assets, and (iii) total capital requirement of at least 8.0% of risk-weighted
assets. Under current law and regulations, there are no capital requirements
directly applicable to the Company. The Bank substantially exceeds all minimum
capital standards imposed by the OTS. At September 30, l998, the Bank had a
tangible capital ratio of 17.8%, a core capital ratio of 17.8% and a risk based
capital ratio of 37.4%.
The OTS has the authority to require that an institution take prompt
corrective action to solve problems if the institution is undercapitalized,
significantly undercapitalized or critically undercapitalized. Because of the
Bank's high capital ratios, the prompt corrective action regulations are not
expected to have an effect on the Bank.
Deposit Insurance Premiums. The FDIC's deposit insurance premiums are
assessed through a risk-based system under which all insured depository
institutions are placed into one of nine categories and assessed insurance
premiums based upon their level of capital and supervisory evaluation. Under the
system, institutions classified as well capitalized and considered healthy pay
-22-
<PAGE>
the lowest premium. The Bank is in this category and currently pays negligible
deposit insurance premiums. However, the Bank pays an annual assessment of
approximately 0.013% of insured deposits to defray a portion of the cost of the
bonds sold by a federal agency to finance a portion of the savings and loan
bailout in the late 1980's. If the Bank's capital ratios substantially
deteriorate or if the Bank is found to be otherwise unhealthy, the deposit
insurance premiums payable by the Bank could increase.
Dividend Restrictions. OTS regulations impose limits on dividends or
other capital distributions by savings institutions based on capital levels and
net income. An institution, such as the Bank, that meets or exceeds all of its
capital requirements (both before and after giving effect to the distribution)
and is not in need of more than normal supervision, may make capital
distributions during a calendar year of up to the greater of (i) 100% of net
income for the current calendar year plus 50% of its capital surplus (capital in
excess of regulatory requirements) or (ii) 75% of its net income over the most
recent four quarters. Any additional capital distributions require prior
regulatory approval.
The Bank's capital levels exceed regulatory minimums to such an extent that
the substantive restrictions on dividends are not expected to have a material
effect on the Bank. However, OTS regulations also impose procedural
restrictions. The OTS must receive at least 30 days' written notice before
making any capital distributions. All such capital distributions are subject to
the OTS' right to object to a distribution on safety and soundness grounds. The
OTS has proposed regulations that would eliminate the notice requirement for the
highest rated institutions so that advance notice would not be required for most
normal dividends. The Bank expects that it will not be required to give notice
under normal circumstances if the new proposal is adopted in its current form.
Qualified Thrift Lenders. If the Bank fails to remain a QTL, as defined
below, it must either convert to a national bank charter or be subject to
restrictions on its activities specified by law and the OTS regulations, which
restrictions would generally limit activities to those permitted for national
banks. Also, three years after the savings institution ceases to be a QTL, it
would be prohibited from retaining any investment or engaging in any activity
not permissible for a national bank and would be required to repay any
outstanding borrowings from any Federal Home Loan Bank.
A savings institution will be a QTL if its qualified thrift investments
equal or exceed 65% of its portfolio assets on a monthly average basis in nine
of every 12 months. Qualified thrift investments include, among others, (i)
certain housing-related loans and investments (notably including residential one
to four family mortgage loans), (ii) certain federal government and agency
obligations, (iii) loans to purchase or construct churches, schools, nursing
homes and hospitals (subject to certain limitations), (iv) consumer loans
(subject to certain limitations), (v) shares of stock issued by any Federal Home
Loan Bank, and (vi) shares of stock issued by the FHLMC or the
-23-
<PAGE>
FNMA (subject to certain limitations). The Bank satisfied the QTL test at
September 30, 1998 and for every month during fiscal 1998.
Community Reinvestment Act. Under the Community Reinvestment Act (the
"CRA"), as implemented by OTS regulations, the Bank 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 Bank is periodically examined by the OTS for compliance with
the CRA. The Bank's CRA performance is evaluated based upon the lending,
investment and service activities of the Bank. The Bank received a
"satisfactory" CRA rating in its last CRA examination.
Federal Reserve Regulation. Under Federal Reserve Board regulations, the
Bank must maintain reserves against its transaction accounts (primarily
interest-bearing checking accounts) and non-personal time deposits. The effect
of the reserve requirements is to compel the Bank to maintain certain
low-yielding reserve deposits which are not available for investment in higher
yielding assets. However, at the present time, the Bank's normal levels of vault
cash and other cash-equivalent assets are sufficient so that the reserve
requirements do not have a material adverse effect on the Bank. The balances
maintained to meet the reserve requirements may be used to satisfy liquidity
requirements imposed by the OTS. The Bank is in compliance with its reserve
requirements.
Taxation. The Company pays federal and New York State income taxes on its
income. The Bank, as a savings institution, was permitted a deduction under
former law for the creation of a reserve for bad debts. In August 1996, the
Internal Revenue Code (the "Code") was amended to abolish the percentage method
of calculating the tax bad debt deduction, which, in general, had permitted
savings institutions to deduct 8% of their taxable income as a reserve for bad
debts. The Bank had not been eligible to use the percentage method because its
retained earnings and surplus exceeded 12% of deposits, so the abolition should
not have a material effect on current operations. Furthermore, the change in the
Code also requires savings institutions to recapture, over a period of six to
eight years, any additions to their tax bad debt reserves since 1988. The Bank
had already provided, as a provision for deferred taxes in accordance with SFAS
No. 109, for the tax consequences of the Bank's post-1987 additions to the tax
bad debt reserve. Therefore, the recapture requirement should not have a
material financial statement impact.
-24-
<PAGE>
Item 2
Properties
The Bank conducts its business through its headquarters in Goshen, a nearby
public accommodation drive-up facility, and a branch opened in March 1997 at an
elder care facility in Goshen and a branch opened in September, 1998, at a
former office of a commercial bank in Harriman. The elder care facility is
operated by a non-profit corporation of which President Clifford Kelsey is a
director. The Company does not have separate facilities and operates out of the
Bank's headquarters. The following table sets forth certain information
regarding the Bank's deposit-taking offices.
<TABLE>
<CAPTION>
Owned/ Approximate Net Book
Location Date acquired Leased Square Feet Value
(In Thousands)
<S> <C> <C> <C> <C>
One South Church Street, Goshen, 1971 Owned 10,680 2,337
NY 10924 with adjacent drive-up
facility at 50 South Church Street
214 Harriman Drive March 1997 Leased 105 33
Goshen, NY 10924
80 Route 17M September 1998 Owned 1,623 430
Harriman, NY 10926
</TABLE>
Item 3
Legal Proceedings
In the ordinary course of its operations, the Company is a party to routine
litigation involving claims incidental to the savings bank business. Management
believes that no current litigation, threatened or pending, to which the Company
or its assets is or may become a party, poses a substantial likelihood of
potential loss or exposure which would have a material adverse effect on the
financial condition or results of operations of the Bank or the Company.
Item 4
Submission of Matters to a Vote of Security Holders
None
-25-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The following information included in the Annual Report to Shareholders for
the fiscal year ended September 30, 1998, (the "Annual Report"), is incorporated
herein by reference: "STOCKHOLDERS' INFORMATION- Common Stock", which appears on
page 53 of the Annual Report.
ITEM 6. SELECTED FINANCIAL DATA
The following information included in the Annual Report is incorporated
herein by reference: "SELECTED CONSOLIDATED FINANCIAL INFORMATION" which appears
on pages 1 and 2 of the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information included in the Annual Report is incorporated
herein by reference: "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS", which appears on pages 3 through 18 of the
Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The following information included in the Annual Report is incorporated
herein by reference: "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Gap Analysis" AND "- Analysis of Market
Risk", which appear on pages 8 through 10 of the Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following information included in the Annual Report is incorporated
herein by reference: The consolidated statements of financial condition of GSB
Financial Corporation and Subsidiary as of September 30, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period September 30, 1998,
together with the related notes and the independent auditors' report thereon,
all of which appears on pages 20 through 52 of the Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following information included in the Proxy Statement under the major
heading "INFORMATION CONCERNING THE BOARD OF DIRECTORS AND EXECUTIVE OFFICERS"
is incorporated herein by reference: "Director Nominated for a Term Expiring In
2002," "Directors Whose Terms Will Continue Beyond the Meeting," "Board of
Directors- Biographical Information," and "Executive Officers Who Are Not
Directors," which appears on pages 2 through 4 of the definitive Proxy Statement
dated December 28, 1998 and filed with the Securities and Exchange Commission on
or about that date (the "Proxy Statement").
-26-
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The information included which appears under the captions "Director
Compensation," "Executive Compensation," "Compensation Committee Report on
Executive Compensation," "Option Grants in Last Fiscal Year," "Stockholder
Return Performance Presentation," "Transactions with Directors and Officers,"
"Retention Agreements" "The Enhanced Voluntary Termination Program," and
"Pension Plan" of the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information included under the Caption "Voting Securities and Certain
Holders Thereof", in the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information included under the caption "Transactions With Directors
and Officers" in the Proxy Statement is incorporated herein by reference.
-27-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
The following financial statements are included in the Company's Annual
Report to Shareholders for the year ended September 30, 1998 and are
incorporated herein by this reference:
Consolidated Statements of Condition at September 30, 1997 and 1998
Consolidated Statements of Operations for the years ended September 30, 1998,
1997 and 1996
Consolidated Statements of Equity for the years ended September 30, 1998, 1997
and 1996
Consolidated Statements of Cash Flows for the years ended September 30, 1998,
1997 and 1996
Notes to Consolidated Financial Statements
Report of Independent Accountants
The remaining information appearing in the Annual Report to Stockholders is not
deemed to be filed as a part of this report, except as expressly provided
herein.
2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not applicable
or the required information is shown in the Consolidated Financial Statements or
Notes thereto.
(b) Reports on Form 8-K filed during the last quarter of fiscal 1997
None
(c) Exhibits Required by Securities and Exchange Commission Regulation S-K
TABLE OF EXHIBITS
Exhibit
Number
3.1 Certificate of Incorporation of GSB Financial Corporation *
3.2 By laws of GSB Financial Corporation.*
<PAGE>
4.1 Form of Stock Certificate of GSB Financial Corporation.*
10.1 Employee Retention Agreement between Goshen Savings Bank and Stephen W.
Dederick.**
10.2 Schedule of Additional Employee Retention Agreements.***
10.3 Supplementary Retention Agreement between GSB Financial Corporation and
Stephen W. Dederick.**
10.4 Schedule of Additional Supplementary Retention Agreements.***
10.5 Employment Agreement between Goshen Savings Bank and Richard C.
Durland.**
10.6 Employment Agreement between GSB Financial Corporation and Richard C.
Durland.**
10.7 Employment Agreement between Goshen Savings Bank and Clifford E. Kelsey,
Jr. **
10.8 Employment Agreement between GSB Financial Corporation and Clifford E.
Kelsey, Jr.**
10.9 Employment Agreement between Goshen Savings Bank and Diane D. King.**
10.10 Employment Agreement between GSB Financial Corporation and Diane D.
King.**
10.11 Employment Agreement between Goshen Savings Bank and Jenny M. Ford.**
10.12 Employment Agreement between GSB Financial Corporation and Jenny M.
Ford.**
10.13 GSB Financial Corporation Employee Stock Ownership Plan.**
10.14 GSB Financial Corporation Employee Stock Ownership Plan Loan and Security
Agreement.**
10.15 Supplementary Schedule of Additional Employee Retention Agreement.
13.1 1998 Annual Report to security holders
21.1 Subsidiaries of the Registrant
27 Financial Data Schedule
<PAGE>
* Previously filed as an exhibit to the Registration Statement on Form S-1 No.
333-23573 of GSB Financial Corporation, filed with the Securities and Exchange
Commission on March 19, 1997
** Previously filed as an exhibit to the Report on Form 10K for the year ended
September 30, 1997 as filed with the Securities and Exchange Commission on
December 29, 1998.
*** Revised from exhibit as filed with 1997 Form 10K to reflect retirement of
one of the named persons
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Goshen, New York on
December 29, 1998.
GSB FINANCIAL CORPORATION
By: /s/ Clifford E. Kelsey, Jr.
--------------------------------------
Clifford E. Kelsey, Jr., President and
Chief Executive Officer
(duly authorized officer)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name and Signature Title Date
<S> <C> <C>
/s/ Clifford E. Kelsey, Jr. President, Chief Executive Officer December 29, 1998
- ----------------------------- and Director (principal executive officer)
Clifford E. Kelsey, Jr.
/s/ Richard C. Durland Executive Vice President, December 29, 1998
- ----------------------------- Treasurer and Director
Richard C. Durland
/s/ Stephen W. Dederick Principal Financial and December 29, 1998
- ----------------------------- Accounting Officer
Stephen W. Dederick
/s/ Herbert C. Mueller Director December 29, 1998
- -----------------------------
Herbert C. Mueller
/s/ Stephen O. Hopkins Director December 29, 1998
- -----------------------------
Stephen O. Hopkins
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Thomas V. Guarino Chairman and Director December 29, 1998
- -----------------------------
Thomas V. Guarino
/s/ Gene J. Gengel Director December 29, 1998
- -----------------------------
Gene J. Gengel
/s/ Roy L. Lippincott Director December 29, 1998
- -----------------------------
Roy L. Lippincott
</TABLE>
TABLE OF EXHIBITS
3.1 Certificate of Incorporation of GSB Financial Corporation *
3.2 By laws of GSB Financial Corporation.*
4.1 Form of Stock Certificate of GSB Financial Corporation.*
10.1 Employee Retention Agreement between Goshen Savings Bank and Stephen W.
Dederick.**
10.2 Schedule of Additional Employee Retention Agreements.***
10.3 Supplementary Retention Agreement between GSB Financial Corporation and
Stephen W. Dederick.**
10.4 Schedule of Additional Supplementary Retention Agreements.***
10.5 Employment Agreement between Goshen Savings Bank and Richard C.
Durland.**
10.6 Employment Agreement between GSB Financial Corporation and Richard C.
Durland.**
10.7 Employment Agreement between Goshen Savings Bank and Clifford E. Kelsey,
Jr. **
10.8 Employment Agreement between GSB Financial Corporation and Clifford E.
Kelsey, Jr.**
10.9 Employment Agreement between Goshen Savings Bank and Diane D. King.**
10.10 Employment Agreement between GSB Financial Corporation and Diane D.
King.**
<PAGE>
10.11 Employment Agreement between Goshen Savings Bank and Jenny M. Ford.**
10.12 Employment Agreement between GSB Financial Corporation and Jenny M.
Ford.**
10.13 GSB Financial Corporation Employee Stock Ownership Plan.**
10.14 GSB Financial Corporation Employee Stock Ownership Plan Loan and Security
Agreement.**
10.15 Supplementary Schedule of Additional Employee Retention Agreement.
13.1 1998 Annual Report to security holders
21.1 Subsidiaries of the Registrant
27 Financial Data Schedule
* Previously filed as an exhibit to the Registration Statement on Form S-1 No.
333-23573 of GSB Financial Corporation, filed with the Securities and Exchange
Commission on March 19, 1997
** Previously filed as an exhibit to the Report on Form 10K for the year ended
September 30, 1997 as filed with the Securities and Exchange Commission on
December 29, 1998.
*** Revised from exhibit as filed with 1997 Form 10K to reflect retirement of
one of the named persons
EXHIBIT 10.2
Schedule of Additional Employee Retention Agreements
In addition to the Employee Retention Agreement referenced in Exhibit 10.1,
Goshen Savings Bank has executed Employee Retention Agreements with two
additional employees. With the exception of the name and address of each
individual, all the Employee Retention Agreements are identical and there are no
material details which differ from the agreement included as Exhibit 10.1. In
accordance with SEC Rule 12b-31 and Instruction 2 to Item 601 of Regulation S-K,
the following schedule identifies the two other employees.
1. Barbara Carr
2. Jennifer Terpstra
Note that the agreement with Richard Burch referenced in Exhibit 10.2 of
the Registrant's report on Form 10-K for the year ended September 30, 1997 is no
longer effective, as Mr. Burch has retired.
EXHIBIT 10.4
Schedule of Additional Supplementary Retention Agreements
In addition to the Supplementary Retention Agreement referenced in exhibit
10.3, GSB Financial Corporation has executed Supplementary Retention Agreements
with two additional employees. With the exception of the name and address of
each individual, all the Supplementary Retention Agreements are identical and
there are no material details which differ from the agreement included as
Exhibit 10.1. In accordance with SEC Rule 12b-31 and Instruction 2 to Item 601
of Regulation S-K, the following schedule identifies the two other employees.
1. Barbara Carr
2. Jennifer Terpstra
Note that the agreement with Richard Burch referenced in Exhibit 10.4 of
the Registrant's report on Form 10-K for the year ended September 30, 1997 is no
longer effective, as Mr. Burch has retired.
EXHIBIT 10.15
Schedule of Additional Employee Retention Agreement
Goshen Savings Bank has executed a Retention Agreement with Rolland B.
Peacock, III, an executive officer. With the exception of the name and address
of Mr. Peacock, all this agreement is identical to, and there are no material
details which differ from, the agreement referenced in Exhibit 10.1. This
exhibit is prepared in accordance with SEC Rule 12b-31 and Instruction 2 to Item
601 of Regulation S-K.
To Our Stockholders
On behalf of the Directors, Officers and Employees of GSB Financial
Corporation and its subsidiaries, Goshen Savings Bank and GSB Investment
Services, Inc., I am pleased to bring you this 1998 Annual Report, our first
full year as a public company. Your Board of Directors and Management Team are
working diligently to put your company in a position to move forward into the
next millennium as a strong and vibrant institution serving the financial needs
of our communities.
It is the mission of our Company to offer core financial services to
individuals and businesses in strategic locations within the Hudson Valley
Region of New York State. During the past year we have made great progress in
pursuit of this goal. In April we added key staff to begin a commercial lending
and business deposit presence in our market area. This new line of business is
off to a strong start in its first year of operation, and in December we added
more depth to our staff in this area, to support greater growth. In July, we
formed GSB Investment Services, Inc. as a wholly owned subsidiary to provide
investment and financial planning services to our customer base. In July, we
offered a voluntary early termination program to all employees with more than 5
years of service, and restructured our post-retirement employee benefits. The
program was very well received by our employees, therefore allowing us to
restructure and significantly reduce our costs in delivering banking and
financial services. Furthermore it provides an opportunity to attract new
employees with the skill sets that will complement our present staff and will
enable us to gain a competitive advantage in our market place. In September, we
successfully opened a full service bank branch in Harriman, New York. This
strategically located branch office will make it easier to deliver our banking
and financial services in southern Orange County, which continues to show strong
growth characteristics. We also overhauled our computer delivery system to
increase effectiveness and become Y2K compliant. In June, we declared our first
dividend as a public company to our stockholders.
As you can see we have begun the process of investing the new capital
raised during our public offering. We are also exploring a number of
possibilities for expansion of our franchise and the related leveraging of the
new capital. In preparation for potential expansion, your Board of Directors and
Management Team is investigating opportunities to improve and expand
<PAGE>
the services available to our customers to further satisfy the banking and
financial service needs of the communities we serve.
We are a community-based bank, and we intend to remain one. Throughout our
market area, a number of banks have consolidated or have been acquired by out of
area institutions. We believe that this gives us additional marketing
opportunities to expand our customer base in Orange County.
Net income in 1998 was $600,000, a decline from net income of $756,000 in
1997. However, the principal reason for this decline was the accrual of
$699,000, a non-recurring expense in connection with the voluntary early
termination program for existing employees, which has allowed us to restructure
our management team and move forward into the future. Without this expense and a
related benefit from revising our post-retirement benefits program, net income
would have been approximately $939,000, an increase of 24.2% over 1997.
I want to take this opportunity to thank our retiring President, Cliff
Kelsey, who has been with us for more than 30 years. He has been an important
component of our success as a leader of our bank and community. We will continue
to value his good counsel, as he remains a member of our Board of Directors.
Likewise, we want to thank our other officers and employees who will be leaving
us on December 31, for their dedication and faithful service.
We must never forget that a profitable business is always a partnership of
many interested persons. We are pleased that you, our stockholders have joined
us in that partnership. We invite you to become our customers, bring us your
business, send us business and help us grow even stronger and more profitable
than we have been during the 1998 fiscal year. I look forward to our journey to
become the premier community bank in our region.
Sincerely,
Thomas V. Guarino
Chairman of the Board
GSB Financial Corporation
<PAGE>
SELECTED FINANCIAL INFORMATION
Set forth below are selected consolidated financial and other data of GSB
Financial Corporation (the "Company"). This financial data is derived in part
from, and should be read in conjunction with, the Financial Statements and Notes
to Consolidated Financial Statements of the Company presented elsewhere in this
Annual Report. In the opinion of management of the Company, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement
of results for or as of the periods indicated have been included.
Selected Financial Condition Data:
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- ------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Total assets ................... $131,935 $117,046 $96,323 $101,041 $100,222
Loans receivable, net (1) ...... 78,713 65,738 58,727 57,919 57,171
Mortgage-backed securities (2) . 9,685 12,643 6,474 4,404 2,226
Investment securities (2) ...... 31,474 26,638 23,081 27,844 34,714
Cash and cash equivalents ...... 7,618 8,318 4,684 7,195 2,370
Deposits ....................... 88,310 82,983 83,442 88,093 86,396
Borrowings ..................... 10,000 -- -- 1,000 2,000
Total equity ................... 31,495 32,633 11,747 11,097 11,508
</TABLE>
Selected Operations Data:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Interest income ................................. $ 8,220 $ 7,078 $ 6,235 $ 5,715 $ 5,747
Interest expense ................................ 3,424 3,226 3,448 3,289 2,689
------- ------- ------- ------- -------
Net interest income ........................... 4,796 3,852 2,787 2,426 3,058
Provision for loan losses ....................... 70 20 24 29 25
------- ------- ------- ------- -------
Net interest income after
Provision for loan losses ................... 4,726 3,832 2,763 2,397 3,033
Non-interest income ............................. 450 343 721 450 377
Non-interest expense ............................ 4,175 2,979 2,575 2,931 2,798
------- ------- ------- ------- -------
Income (loss) before income taxes and cumulative
effect of changes in accounting principles .... 1,001 1,196 909 (84) 612
Income tax expense (benefit) .................... 401 440 351 (16) 301
------- ------- ------- ------- -------
Income (loss) before cumulative effect of changes
in accounting principles ...................... 600 756 558 (68) 311
Cumulative effect of changes
in accounting principles (3) .................. -- -- -- (394) --
------- ------- ------- ------- -------
Net income (loss) ......................... $ 600 $ 756 $ 558 $ (462) $ 311
======= ======= ======= ======= =======
</TABLE>
Notes appear on following page.
<PAGE>
Selected Financial Ratios and Other Data (4):
<TABLE>
<CAPTION>
At or for the Year Ended September 30,
-----------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets (net income
to average total assets) .............. 0.49% 0.71% 0.56% (0.46)% 0.31%
Return on average equity (net income
to average equity) .................... 1.85 4.54 4.88 (4.04) 2.72
Average interest-earnings assets to
average interest-bearing liabilities .. 139.56 119.66 109.57 109.91 112.69
Net interest rate spread (5) ............ 2.97 3.25 2.71 2.27 2.85
Net interest margin (6) ................. 4.14 3.89 3.08 2.62 3.21
Net interest income after provision
for loan losses to total other expenses 1.13x 1.29x 1.07x 0.82x 1.08x
Capital and Asset Quality Ratios:
Average equity to average total assets .. 26.75 15.61 11.53 11.40 11.34
Total equity to assets end of period .... 23.87 27.88 12.20 10.98 11.48
Non-performing assets to total assets ... 0.07 -- 0.02 0.22 0.26
Non-performing loans to total loans ..... 0.01 -- 0.03 0.39 0.45
Allowance for loan losses to total loans 0.21 0.21 0.21 0.20 0.19
Allowance for loan losses to
non-performing loans .................. 41.75x NM(7) 7.69x 0.51x 0.41x
Other Data:
Number of real estate loans outstanding 1,064 983 876 913 951
Number of deposit accounts ............ 10,865 11,047 11,695 12,556 12,106
Full service offices .................. 3 2 1 1 1
</TABLE>
(1) Shown net of deferred fees and the allowance for loan losses.
(2) At September 30, 1998, $3.9 million of the Company's mortgage-backed
securities are classified as held to maturity and $5.8 million are classified as
available for sale. All investment securities are classified as available for
sale. See Notes 3, 4, 5 and 6 of Notes to Financial Statements. For 1994,
investment securities include $2.2 million of trading securities.
(3) Reflects the recognition, in one lump sum, of the transition obligation for
post-retirement pension benefits recognized in accordance with Statement of
Financial Accounting Standards ("SFAS") 106. See Note 14 of Notes to Financial
Statements.
(4) Asset quality and capital ratios are at end of period. Other ratios are
based upon month end average balances.
(5) The net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(6) The net interest margin, also known as the net yield on average
interest-earning assets, represents net interest income as a percentage of
average interest-earning assets.
(7) Not Meaningful. The denominator (non-performing loans) is zero.
- 2 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
On July 9, 1997, Goshen Savings Bank converted from a mutual to a stock
form savings bank. As part of the Conversion, we sold 2,248,250 shares of our
common stock at $10.00 per share. Net proceeds from the sale were $21.4 million,
including proceeds from the sale of stock to our Employee Stock Ownership Plan
which we financed with a loan from us. From the net proceeds, we paid $10.7
million to the Bank in exchange for all of its common stock
Our profitability depends principally on net interest income, which is the
difference between the income earned on loans and investments and our cost of
funds, principally interest paid on deposits. Results of operations are also
affected by our provision for loan losses. Other sources of income include
deposit account fees, loan and loan servicing fees, gains on the sale of
securities, capital gain distributions on mutual fund investments, and fees for
banking services such as safe deposit boxes. The largest category of
non-interest expense is compensation and benefits expense. Other principal
categories of non-interest expense include occupancy expense, data processing
costs, advertising and marketing expenses, and insurance costs.
General economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory authorities can
also have a significant effect on our profitability. For example, an increase in
interest rates may increase the rates we must pay to keep our deposits, thus
increasing our cost of operations. An economic recession in our community could
make it harder for our customers to repay their loans and cause an increase in
defaults. Although we now face substantial competition throughout Orange County,
an increase in competition could drive down our interest rate spread by lowering
loan rates while increasing deposit rates.
Goshen Savings Bank is a federal savings bank with deposits insured by the
FDIC. The Bank's primary federal banking regulator is the Office of Thrift
Supervision ("OTS"). In this annual report, references to the business
activities, financial condition and operations prior to July 9, 1997, refer to
the Bank, while references to the periods after that date refer to both the GSB
Financial Corporation and the Bank as consolidated, except to the extent that
the context otherwise indicates.
Management Restructuring
During the summer of 1998, we offered a voluntary early employment
termination program to those of our employees who had at least five years of
service under our pension plan. Employees had until September 30, 1998 to decide
whether to participate in the program, and if they elected to do so, their
employment would terminate on or before December 31, 1998. Those employees
electing to participate in the program were entitled to receive certain enhanced
pension benefits, severance payments and other related benefits. Eleven of our
employees, including four executive officers, elected to participate in the
program and filed their election by September 30. We then accrued the entire
estimated $699,000 cost of the program during the quarter ended September 30,
1998.
Although we recognize that this program will cause us to lose over 100
years of valuable executive officer experience, we believe that, in the long
run, we can reduce salary expense by combining the responsibilities of executive
officers and redistributing those responsibilities in a more efficient manner.
Beginning in January 1999, our senior management team will consist of three
executive officers. Rolly Peacock will be responsible for retail banking and
commercial lending; Steve Dederick will be responsible for internal operations,
finance and investments, and Barbara Carr will be responsible for residential
mortgage lending and human resources. They have already begun to take over
responsibility for these areas and control the day to day operations of the Bank
as a three member management team. For technical regulatory reasons, Chairman of
the Board Thomas Guarino has been designated as President of the Bank, but he
continues his other business activities on a full time basis and will not be
involved in the day to day management of the Bank.
- 3 -
<PAGE>
Management Strategy
Our strategy is to continue to operate the Bank as a community-based bank
in strategic locations offering core financial services while exploring
appropriate opportunities to leverage the additional capital obtained in the
Conversion. The Bank obtains deposits from its local communities and invests
those deposits principally in one-to-four family residential mortgage loans and,
to a lesser degree, in consumer, commercial and other loans. Management seeks to
maintain a high quality loan portfolio with low levels of delinquencies and
non-performing assets by concentrating on residential mortgage loans. In fiscal
1998, we started a wholly-owned subsidiary (GSB Investment Services, Inc.) to
make available, through an independent provider, investment advisory and full
brokerage services. The Bank also opened a new branch office in Harriman, New
York in September 1998, to expand its customer base. We have also increased our
commercial lending activities to augment the other services we offer. We are
also working to improve our customer service delivery capability to both provide
better services to existing customers and facilitate expanding our customer
base.
At September 30, 1998, 91.3% of our loan portfolio were first mortgage
loans on owner-occupied one-to-four family residential real estate, 3.0% were
junior mortgage home equity loans (including lines of credit), and 2.3% were
first mortgage loans secured on one-to-four family rental properties. We also
invest in debt securities. We focus on callable government agency securities and
mortgage-backed securities to increase yields, and we control risks by investing
in securities rated in the three highest grades by a nationally recognized
rating agency.
Analysis of Net Interest Income
Net interest income, our principal source of income, is the difference
between the income on interest-earning assets and the expense of
interest-bearing liabilities. Net interest income depends principally on (i) the
dollar amount of interest-earning assets that we can maintain; (ii) the relative
amounts of interest-earning assets versus interest-bearing liabilities; and
(iii) the difference between the yields earned on those assets and the rates
paid on those liabilities. Non-performing loans affect net interest income
because they do not provide interest income but still must be funded with
deposits or borrowings. Furthermore, when a loan becomes non-performing, all
accrued but unpaid interest is deducted from current period income, further
reducing net interest income.
Our efforts and strategies to leverage our new capital have a direct effect
on net interest income. The following is a general discussion of the
relationship between strategic actions taken and net interest income. Further
specific information is provided below in the discussion comparing our financial
condition and results of operations in fiscal 1998, when we were a stock company
for the entire year, versus 1997 when we were a stock company for less than
three months.
Cost of Funds Management. During fiscal 1996, the Bank worked to reduce its
cost of funds and adopted a number of deposit pricing programs to do so. Since
the Conversion, in order to assist in the leveraging of the additional capital
raised in the Conversion, we have adjusted our deposit pricing strategies to
make deposit products more attractive. This has been done to increase funds
available for investment and improve the leveraging of our capital. Management
does not seek to lead the market in pricing deposits, but instead seeks to
combine above average but not extreme pricing with local community service to
attract deposit customers. However, we continue not to offer premium rates for
certificates of deposit of $100,000 or more, resulting in a low level of such
deposits. Certificates of deposit of $100,000 or more represented only $2.4
million, or 2.7% of total deposits, at September 30, 1998.
Investing the Additional Capital from the Conversion. After the Conversion,
we had approximately $19.6 million of additional funds to invest, equal to the
amount raised in the Conversion minus expenses and minus our loan to the ESOP.
These funds were first invested principally in government, agency, corporate and
mortgage-backed bonds and federal funds sold. Since the new capital provides
funds for investment without any interest cost, such investments increase net
interest income. Those investments in securities and federal funds sold have
reduced reported spread because they tend to have lower yields than loans, our
highest yielding asset category. However, net interest margin has increased
because the capital generates interest income without corresponding interest
expense.
- 4 -
<PAGE>
Increasing the Deposit Base. We continue to explore opportunities to
leverage our capital through expansion of our deposit-taking network. The Bank
opened a new branch in Harriman, New York in September 1998. This location was
already outfitted as a bank branch, which reduced costs, and allowed us to
expand to an adjoining community. Further expansion through additional branches
is under consideration, but there is no present agreement to do so. New branches
may require that we temporarily offer higher than market rate deposits to
capture market share. At the same time, we will incur the costs of the new
branch before that branch has become profitable. Other growth strategies, such
as borrowing money to increase funds available for investment, tend to increase
the average cost of funds because borrowed money generally has a higher rate of
interest than deposits. We cannot assure you that we will be able to
satisfactorily leverage our capital, and even if we can do so, we may not be
able to maintain our current asset mix or average asset yields.
We have aggressively sought to increase our deposits through increased
advertising and changing the terms of our money market accounts. Deposits
increased by $5.3 million or 6.4%, during fiscal 1998 from $83.0 million to
$88.3 million. Money market accounts increased by $2.1 million during the year
as we changed the pricing of such accounts to make them more attractive for
large balance depositors. We also believe that the customers of another local
savings bank, which has recently merged, are disenchanted with the results of
the merger, giving us opportunities to increase our customers within our
existing and nearby markets.
Expanding the Loan Portfolio. Obtaining additional funds through deposits
and borrowings is only half of the equation. We must also find appropriate
investment opportunities that provide satisfactory spreads. In order to do so,
we have increased advertising for loans while also increasing our staff of loan
originators. In addition, in order to increase average loan yields at a time of
low residential mortgage rates, we have begun to develop a commercial loan
portfolio. The portfolio is small but increasing, and provides opportunities not
only for higher yields and better interest rate sensitivity, but also the
potential for commercial demand deposits, which provide low-cost funds for
investment.
- 5 -
<PAGE>
Average Balances, Interest Rates and Yield
The following table presents for the periods indicated, the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are monthly average balances. Non-interest-bearing checking
accounts are included in the tables as a component of non-interest-bearing
liabilities.
<TABLE>
<CAPTION>
For the Year Ended September 30,
-------------------------------------------------------------------------------------
1998 1997 1996
-------------------------- -------------------------- -------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
-------- -------- ------- -------- -------- ------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans receivable (1)........................ $ 71,803 $5,544 7.72% $ 62,520 $4,833 7.73% $57,794 $4,328 7.49%
Mortgage-backed securities ................. 11,158 720 6.45 7,045 474 6.73 6,334 396 6.25
Investment securities....................... 25,342 1,575 6.21 21,626 1,332 6.16 24,136 1,388 5.75
Federal funds sold ......................... 7,522 381 5.07 7,868 439 5.58 2,310 123 5.32
-------- ------ -------- ------ ------- ------
Total interest-earning assets ............ 115,825 8,220 7.10 99,059 7,078 7.15 90,574 6,235 6.88
------ ------ ------
Non-interest-earning assets ................ 5,722 7,566 8,505
-------- -------- -------
Total assets ............................. $121,547 $106,625 $99,079
======== ======== =======
Interest-bearing liabilities:
Savings accounts ........................... $ 26,798 $ 803 3.00 $27,976 825 2.95 $27,154 814 3.00
Certificates of deposit .................... 38,162 1,948 5.10 38,084 1,907 5.01 40,284 2,130 5.29
Money market ............................... 9,327 334 3.58 9,856 295 2.99 10,800 333 3.08
Now accounts................................ 4,398 114 2.59 3,931 101 2.57 3,376 88 2.61
Other ...................................... 4,307 225 5.22 2,938 98 3.34 1,051 83 7.90
-------- ------ -------- ------ ------- ------
Total interest-bearing liabilities........ 82,992 3,424 4.13 82,785 3,226 3.90 82,665 3,448 4.17
------ ------ ------
Non-interest-bearing liabilities. .......... 6,044 7,198 4,987
-------- -------- -------
Total liabilities......................... 89,036 89,983 87,652
Equity ..................................... 32,511 16,642 11,427
Total liabilities and equity ............. $121,547 $106,625 $99,079
======== ======== =======
Net interest income/spread (2).(3).......... $4,796 2.97% $3,852 3.25% $2,787 2.71%
====== ==== ====== ==== ====== ====
Net earning assets/net interest margin (4).. $ 32,833 4.14% $ 16,274 3.89% $ 7,909 3.08%
======== ==== ======== ==== ======= ====
Ratio of average interest-earning assets
to average interest-bearing liabilities... 1.40x 1.20x 1.10x
==== ==== ====
</TABLE>
(1) Average balances include non-accrual loans. Interest on such loans is
recognized as and when received.
(2) Includes interest-bearing deposit in other financial institution.
(3) Interest-rate spread represents the difference between average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
- 6 -
<PAGE>
Rate/Volume Analysis of Net Interest Income
One method of analyzing changes in net interest income is to consider how
changes in average balance and changes in average rate earned or paid affect
interest income or expense. The following table shows the dollar amount of
changes in interest income and interest expense for major components of
interest-earning assets and interest-bearing liabilities. It distinguishes
between the changes caused by increases or decreases in average balances and
changes caused by increases or decreases in average interest rates. The effect
of an increase or decrease in volume is measured by changes in average balance
between two periods multiplied by rate earned or paid during the first period.
The effect of an increase or decrease in rate between two periods is measured by
changes in rate between the two periods multiplied by average volume for the
first period. Changes attributable to both rate and volume, which cannot be
segregated, have been allocated proportionately to the change due to volume and
the change due to rate.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
Increase (Decrease) Due to: Increase (Decrease) Due to:
--------------------------- ---------------------------
Rate Volume Total Rate Volume Total
------- ------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable ............................... $ (6) 717 $ 711 $ 143 $ 362 $ 505
Mortgage-backed securities ..................... (20) 266 246 32 46 78
Investment securities .......................... 12 231 243 94 (150) (56)
Federal funds .................................. (39) (19) (58) 6 310 316
------- ------- ------- ------- ------- -------
Total interest-earning assets .............. (53) 1,195 1,142 275 568 843
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Savings accounts ............................... 13 (35) (22) (13) 24 11
Certificates of deposit ........................ 37 4 41 (110) (113) (223)
Money market ................................... 56 (17) 39 (10) (28) (38)
NOW accounts ................................... 1 12 13 (1) 14 13
Other .......................................... 70 57 127 (69) 84 15
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities ......... 177 21 198 (203) (19) (222)
------- ------- ------- ------- ------- -------
Net change in net interest income .............. $ (230) $ 1,174 $ 944 $ 478 $ 587 $ 1,065
======= ======= ======= ======= ======= =======
</TABLE>
Management of Interest Rate Risk
Our interest rate risk policy is to avoid taking undue interest rate risk
while continuing to satisfy customer demand for loans. Management seeks to
limit, but not eliminate, interest rate risk by offering adjustable rate loans.
However, during periods of low interest rates when customers prefer fixed-rate
loan products, such as during the past few years, originating adjustable rate
residential mortgage loans has been very difficult. Instead, we have been making
fixed-rate loans, often at interest rates higher than those which must be
offered to attract borrowers willing to accept adjustable rate loans. To balance
against the interest rate risk, which accompanies the making of such loans, we
market other loan products with shorter terms or adjustable rates, such as
variable rate based home equity loan products, commercial non-mortgage loans and
consumer loans.
- 7 -
<PAGE>
Interest rate pricing and policy are implemented, in the first instance, by
the Bank's Asset/Liability Committee, consisting of Bank officers. The committee
meets weekly to review the pricing of the Bank's loan and deposit products. The
Board of Directors of the Bank receives and reviews a report on the Bank's
estimated interest rate sensitivity every quarter. When appropriate, based upon
our need to manage interest rate risk, we may shift our investment emphasis
between different types of loans and securities, or we may seek to lengthen the
maturities of our liabilities. We also seek to cushion ourselves against
interest rate fluctuations by preserving a loyal customer base with core
deposits that are less prone to gravitate to high rate deposit products as
interest rates rise. For example, at September 30, 1995, 1996, 1997, and 1998,
the Bank had passbook and statement savings deposits of $27.2 million, $26.8
million, $26.8 million, and $28.1 million respectively, reflecting a significant
level of deposits with interest rates that did not change materially for more
than four years.
Gap Analysis. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest
sensitive" and by monitoring our estimated interest sensitivity "gap." An asset
or liability is said to be interest sensitive within a specific time period if
it will mature or its interest rate will adjust based on market conditions
(known as repricing) within that time period. The interest sensitivity gap is
defined as the difference between the amount of interest-earning assets
estimated to mature or reprice within a specific time period and the amount of
interest-bearing liabilities estimated to mature or reprice within that same
time period. At September 30, 1998, our one year gap position, the difference
between the estimated amount of interest-earning assets maturing or repricing
within one year and interest-bearing liabilities maturing or repricing within
one year, as a percentage of total assets, was estimated to be a positive 10.5%,
as shown on the table below.
A gap is considered positive for any period when the amount of
interest-sensitive assets exceeds the amount of interest sensitive liabilities
estimated to reprice within such period. A gap is considered negative when the
amount of interest sensitive liabilities exceeds the amount of interest
sensitive assets estimated to reprice within a given period. When market
interest rates increase, the net interest income of an institution with a
positive gap for the period of the increase would expect an increase in net
interest income as its cost of funds rises more slowly than the yields on its
assets. Net interest income of such an institution would be expected to be
negatively affected during a period of falling interest rates. The effect would
be expected to be the reverse for an institution with a negative gap. However,
the repricing of most assets and liabilities is discretionary and depends, in
part, on customer preference. Thus, for example, during periods of rising
interest rates, loan customers may delay the sales of their homes, resulting in
reduced loan turnover. At the same time, deposit customers with low-rate
savings, demand and NOW accounts may switch those deposits into higher rate
accounts as the higher rate accounts become more attractive.
The following table shows the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1998, which we
estimate, based upon certain assumptions, will reprice within the time periods
shown. Except as stated below, the amount of assets and liabilities shown which
reprice or mature during a particular period were determined based on the
earlier of the scheduled maturity or next scheduled interest rate adjustment of
the asset or liability. Fixed-rate mortgage loans are included in the table
without regard to scheduled principal payments or assumed voluntary prepayments.
Although such assets are normally repaid more quickly due to regular
amortization payments and voluntary prepayment, these assumptions are used
during this period of low interest rates as a conservative approach to analyzing
our ability to reprice our assets. Federal funds sold are assumed to be
immediately interest sensitive.
We have assumed that 70% of savings accounts, money market accounts and NOW
accounts are core deposits and therefore are expected to reprice beyond five
years. We have assumed that the remainder of such deposits will reprice evenly
over the first five years. Certificates of deposit are included based upon their
contractual maturities.
Estimates of loan prepayment rates and deposit turnover rates can have a
significant impact on our estimated gap. While we believe that the assumptions
used to prepare the following table are reasonable, there can be no assurance
that such estimates will approximate actual future loan repayment and deposit
withdrawal activity.
- 8 -
<PAGE>
<TABLE>
<CAPTION>
At September 30, 1998
---------------------------------------------------------------------------------------
Less Three
Than Months Over One Over Three Over Five More
Three Through Through Through Through Than
Months One Year Three Years Five Years Ten Years Ten Years Total
------- ------- ------- ------- --------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans receivable.......................... $ 2,546 $26,577 $ 3,091 $ 1,742 $ 1,784 $43,137 $ 78,877
Mortgage backed securities................ 1,061 1,774 2,125 1,875 1,588 1,255 9,678
Federal funds sold........................ 5,929 -- -- -- -- -- 5,929
Investment securities .................... 6,316 14,907 9,206 -- -- -- 30,429
------- ------- ------- ------- --------- ------- --------
Total interest-earning assets ............ 15,852 43,258 14,422 3,617 3,372 44,392 124,913
======= ======= ======= ======= ========= ======= ========
Interest-bearing liabilities:
NOW accounts.............................. 74 222 592 592 3,452 -- 4,932
Savings accounts ......................... 421 1,264 3,371 3,371 19,662 -- 28,089
Money market accounts.................... 164 493 1,315 1,315 7,671 -- 10,958
Certificates of deposits.................. 13,422 19,858 6,022 48 -- -- 39,350
Borrowings................................ -- 10,000 - -- -- -- 10,000
------- ------- ------- ------- --------- ------- --------
Total interest-bearing liabilities........ 14,081 31,837 11,300 5,326 30,785 -- 93,329
------- ------- ------- ------- --------- ------- --------
Interest-earning assets less
Interest-bearing liabilities .......... $ 1,771 $11,421 $ 3,122 $(1,709) $ (27,413) $44,392 $ 31,584
======= ======= ======= ======= ========= ======= ========
Cumulative interest sensitivity gap... $ 1,771 $13,192 $16,314 $14,605 $(12,808) $31,584
======= ======= ======= ======= ========= =======
Cumulative gap to total assets........ 1.34% 10.00% 12.37% 11.07% (9.91)% 23.94%
======= ======= ======= ======= ========= =======
Cumulative gap to interest-earning assets. 1.41% 10.50% 12.98% 11.62% (10.19)% 25.28%
======= ======= ======= ======= ========= =======
Cumulative interest-earning assets to
cumulative interest-bearing liabilities... 112.58% 128.73% 128.51% 123.35% 86.28% 133.84%
======= ======= ======= ======= ========= =======
</TABLE>
Analysis of Market Risk. In addition to the gap analysis set forth above,
we have prepared the following table which shows the expected maturity, weighted
average interest rate and fair value of our on balance sheet financial
instruments at September 30, 1998. Asset and liability maturities are based upon
the same assumptions set forth above with respect to the gap analysis table and
fair values are based upon the assumptions set forth in Note 19 of the
accompanying Notes to Financial Statements. In any rapidly changing interest
rate scenario, consumer preferences often shift dramatically, and unpredictably.
For example, in an increasing interest rate environment, some borrowers may seek
to refinance adjustable rate loans into fixed rates in order to lock in fixed
rates before interest rates go even higher, while new home purchasers may seek
adjustable rate loans in the belief that interest rates will go back down.
Consumer preferences can have a substantial affect on the accuracy of
projections of changes in future income or value when such projections are based
upon interest rate sensitivity analysis. Therefore, although we consider
interest rate sensitivity to be an important component of our analysis of
product offerings and pricing, other factors, such as maintaining a satisfactory
spread, are also important. Please do not place undue emphasis on interest rate
sensitivity analysis.
- 9 -
<PAGE>
<TABLE>
<CAPTION>
At September 30, 1998
--------------------------------------------------------------------------
One to Two to More than Total
To One Two Three Three Book Fair
Year Years Years Years Value Value
---------- ---------- ---------- ------- ------- -------
Financial Assets (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents ......................... $ 5,929 $ -- $ -- $ 1,689 $ 7,618 $ 7,618
Weighted average interest rate .................. 5.50% -- -- -- 4.28%
Investment securities available for sale .......... 3,204 5,640 1,495 17,274 27,613 27,936
Weighted average interest rate .................. 6.17% 6.49% 6.75% 7.04% 6.81%
Mortgage-backed securities available for sale ..... -- -- -- 5,797 5,797 5,804
Weighted average interest rate .................. -- -- -- 6.54% 6.54%
Mortgage-backed securities held to maturity ....... 345 579 676 2,281 3,881 3,965
Weighted average interest rate .................. 5.00% 6.99% 5.89% 7.50% 6.94%
Federal Home Loan Bank stock ...................... .- -- -- 704 704 704
Weighted average interest rate .................. .- -- -- 7.21% 7.21%
Equity securities ................................. -- -- -- 2,112 2,112 2,834
Weighted average interest rate .................. .- -- -- 6.87% 6.87%
Real estate loans - fixed-rate .................... 1,856 594 1,035 44,346 47,831 47,831
Weighted average interest rate .................. 7.30% 7.36% 9.80% 7.59% 7.62%
Real estate loans - adjustable-rate ............... 26,928 481 793 1,954 30,156 30,156
Weighted average interest rate .................. 7.41% 7.51% 6.40% 7.64% 7.40%
Consumer loans .................................... 339 69 119 363 890 890
Weighted average interest rate .................. 10.38% 11.53% 10.84% 10.45% 10.56%
Deposits:
Savings accounts .................................. 1,685 1,685 1,686 23,033 28,089 28,089
Weighted average interest rate .................. 3.00% 3.00% 3.00% 3.00% 3.00%
Certificates of deposit ........................... 33,280 5,396 626 48 39,350 39,350
Weighted average interest rate .................. 4.98% 5.22% 5.10% 5.10% 5.01%
Money market accounts ............................. 657 657 658 8,986 10,958 10,958
Weighted average interest rate .................. 4.07% 4.07% 4.07% 4.07% 4.07%
Now accounts ...................................... 296 296 296 4,044 4,932 4,932
Weighted average interest rate .................. 2.25% 2.25% 2.25% 2.25% 2.25%
Demand accounts ................................... -- -- -- 4,981 4,981 4,981
Weighted average interest rate .................. -- -- -- -- --
</TABLE>
- 10 -
<PAGE>
Comparison of Financial Condition at September 30, 1998 and September 30, 1997
Total assets increased by $14.9 million, or 12.7%, to $131.9 million at
September 30, 1998 from $117.0 million at September 30, 1997. The principal
components of the increase were:
o an increase in loans, net by $13.0 million, or 19.7%, from $65.7 at
September 30, 1997 to $78.7 million at September 30, 1998; and
o an increase in investment securities available for sale increased by
$4.8 million, or 18.2% to $31.5 million at September 30, 1998.
The asset increases were a consequence of management's plan to increase leverage
and continue the process of deploying our capital. In order to implement this
plan, we:
o increased advertising to attract both additional deposits and
additional loans;
o added an additional employee to concentrate on the origination of
residential mortgage loans through direct contacts with borrowers,
real estate agents, builders and other potential loan sources;
o borrowed funds to increase the level of funds available for
investment;
o restructured deposit pricing for money market accounts to attract
large balance accounts by offering higher rates on such accounts; and
o generally repriced deposit offerings to bring rates to slightly above
average rates offered in the local market.
We funded the increase in assets primarily with:
o a $3.0 million decrease in mortgage-backed securities to $9.7 million
at September 30, 1998 from $12.6 million at September 30, 1997;
o a $5.3 million, or 6.4%, increase in deposits to $88.3 million at
September 30, 1998 as compared to $83.0 million at September 30, 1997,
all of which occurred during the third and fourth quarters of fiscal
1998; and
o an increase in borrowings from zero to $10 million.
Total equity decreased by $1.1 million to $31.5 million at September 30, 1998
from $32.6 million at September 30, 1997. The primary cause of the decrease in
equity was the repurchase of 126,230 shares of common stock for $2.0 million,
combined with dividends of $135,000. These reductions in equity were partially
offset by net income of $600,000, a $287,000 increased in equity resulting from
the release of ESOP stock for allocation, and a $73,000 increase in the net
unrealized gain on securities available for sale. At September 30, 1998, we had
the right, pursuant to a notice previously filed with the Office of Thrift
Supervision, to repurchase an additional 76,112 shares of our common stock
without further regulatory approval or notice being required.
Comparison of Operating Results for the Years Ended September 30, 1998 and
September 30, 1997
General. Net income for the year ended September 30, 1998 was $600,000, as
compared to $756,000 for the year ended September 30, 1997. The decrease in net
income resulted principally from the accrual of $699,000 of expenses ($419,000
after tax) related to the implementation of a voluntary employment termination
program that was partially offset by the termination of the post-retirement
health care and life insurance plan of $134,000.
Interest Income. For the year ended September 30, 1998, interest income was
$8.2 million as compared to $7.1 million for 1997, a $1.1 million, or 16.1%,
increase. The increase was primarily volume related as we invested the proceeds
of our public offering, increased deposits and borrowed funds to increase
leverage. Interest earned on loans increased primarily due to an increase of
approximately $9.3 million in the average volume of loans. We estimate that the
increase in the average balance of loans resulted in a $717,000 increase in
interest income. The average yield on loans remained relatively constant,
declining by only one basis point from fiscal 1997 to fiscal 1998. The yield on
adjustable rate mortgages decreased due to a decline in the one year Treasury
bill index during this period. The decrease in the yield on adjustable rate
mortgage loans was partially offset by fixed rate
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mortgage loans, which were originated at rates slightly higher than the fully
indexed rates on adjustable rate loans. Efforts to increase the levels of other
loan types with higher yields, such as commercial loans and home equity junior
mortgage loans, had not yet yielded material increases in these loan categories
by the end of fiscal 1998.
Interest earned on investment securities increased by $243,000 from fiscal
1997 to fiscal 1998, because of an increase in the average balance of investment
securities by $3.7 million. This increase was primarily due to our leveraging
program discussed above. We also concentrated our new security investments in
callable government agency securities and mortgage-backed securities, which
generally have higher yields than treasury securities. This was the principal
reason that our average yield on investment securities increased by 5 basis
points from fiscal 1997 to 1998.
Interest Expense. Interest expense increased $198,000 from $3.2 million in
fiscal 1997 to $3.4 million in fiscal 1998. The principal cause of the increase
was $225,000 of interest on borrowings in fiscal 1998, compared to $24,000 of
interest on borrowings in fiscal 1997. However, in fiscal 1997 we had $74,000 of
interest expense on stock subscriptions pending the completion of our stock
offering, compared to no similar expense in 1998.
The average cost of funds increased by 23 basis points from fiscal 1997 to
fiscal 1998, primarily due to the combined effect of the borrowings, which had
higher rates than deposits, and the pricing strategies discussed above which
increased the rates on certain deposit categories. In addition, there was a
$207,000 increase in the average balance of interest-bearing liabilities from
fiscal 1997 to fiscal 1998. For fiscal 1998, interest expense on deposits was
$3.2 million as compared to $3.1 million for 1997. The primary reason for the
increase was an increase in the average rates paid on money market deposit
accounts of 59 basis points and on certificates of deposit of 9 basis points.
The average balance of interest-bearing deposits declined by $1.2 million from
fiscal 1997 to fiscal 1998, although this decline was entirely during the first
two quarters of fiscal 1998. By the end of fiscal 1998, total deposits had
increased by $5.3 million during the year as the increase in rates offered and
more advertising began to be reflected in increased deposit volume.
Net Interest Income. Net interest income before the provision for loan
losses increased by $944,000 from fiscal 1997 to fiscal 1998, representing the
net effect of the $1.1 million increase in interest income and the $198,000
increase in interest expense. The overall increase in net interest income was
reflected in an increase in net average earning assets of $16.6 million, from
$16.3 million at September 30, 1997 to $32.8 million at September 30, 1998,
partially offset by decrease in spread of 28 basis points. Spread decreased due
to a number of factors, including the investment of available funds in
securities and federal funds sold pending reinvestment in loans, the need to
improve deposit pricing, the generally higher rates paid on borrowings when
compared to deposits, and pressures exerted by generally lower market interest
rate conditions. However, net interest margin increased from 3.89% to 4.14% due
to a $15.9 million increase in average equity as a non-interest-bearing funding
source from an average of $16.6 million in 1997 to $32.5 million in 1998.
During both fiscal 1998 and 1997, non-performing assets were at low levels
and changes in the level of average non-performing assets from fiscal 1997 to
fiscal 1998 did not have a material effect on the change in net interest income.
Provision for Loan Losses. We increased our provision for loan losses for
the year ended September 30, 1998 to $70,000 from $20,000 for the year ended
September 30, 1997, due to increases in the loan portfolio and the charge-off of
a portion of a residential mortgage loan that was foreclosed during 1998.
Non-performing loans at September 30, 1998, totaled $4,000, represented by one
consumer loan. We also had $94,000 of real estate owned at fiscal year end 1998,
represented by one residential real estate parcel which was then being marketed
and which was sold during the quarter ended December 31, 1998 at no further
loss.
We periodically review our loan portfolio, level of charge-offs and
recoveries, general economic conditions and other factors to determine whether
the allowance for loan losses is at a level which management believes is
adequate. Any determination of the adequacy of the allowance for loan losses is
necessarily speculative based upon estimates of the future performance of the
loan portfolio. Although we maintain the allowance at a level which we consider
to be adequate to provide for potential losses, there can be no assurance that
such losses will not exceed
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the current estimated amounts. As a result, higher provisions for loan losses
may be necessary in future periods, which would adversely affect operating
results.
Non-interest income. For the year ended September 30, 1998, non-interest
income amounted to $450,000 as compared to $343,000 for the same period in 1997.
The increase of $107,000 was principally caused by an increase of $129,000 in
securities gains, partially offset by a reduction of $11,000 in capital gains
distributions on our mutual fund investment. The mutual fund pays regular
dividends and traditionally pays a capital gain dividend each year in December.
The amount of the capital gain dividend depends upon the market value of the
securities owned by the fund and the timing of its securities trading
activities, which, depending upon market conditions, result in realized gains
which are distributed each December.
Non-interest expense. For the year ended September 30, 1998, non-interest
expense totaled $4.2 million as compared to $3.0 million for the same period in
1997. The increase of $1.2 million is principally caused by the $699,000 of
expense for the voluntary early employment termination program and $344,000 of
compensation expense in connection with our ESOP and Incentive Stock Award Plan.
The voluntary early employment termination program was offered to certain
qualifying employees permitting them to receive severance payments and enhanced
post-termination benefits if they terminated employment by December 31, 1998.
Eleven employees of the Bank, including four executive officers, elected to
terminate employment under the program and filed their elections prior to the
end of fiscal 1998. We recorded the entire expense of the program during the
fourth quarter of fiscal 1998. In connection with the program, we also revised
our employee benefits programs to curtail post-retirement health insurance
benefits, although employees electing to participate in the termination program
retained certain post-retirement health benefits. The reduction in
post-retirement health benefits allowed us to recover $134,000 previously
accrued for anticipated post-retirement health benefit costs.
The $344,000 of ESOP and ISAP expense includes $180,000 of contributions by
the Bank to the ESOP to pay principal on our loan to the ESOP and $107,000
representing the amount required to be recorded as an expense under accounting
rules because the market value of the stock on the date it was released from the
lien of the ESOP loan was higher than its cost, which was 100% financed by the
ESOP loan. The principal payments on the ESOP loan are $45,000 per calendar
quarter. Interest on the ESOP loan payable to us is eliminated when the
financial statements of Goshen Savings Bank and GSB Financial Corporation are
consolidated. ISAP expense of $57,000 represented expense accruals for the
gradual vesting of ISAP shares, which were awarded to officers and directors
during fiscal 1998. We also operated as a publicly traded savings and loan
holding company incorporated in Delaware throughout 1998, compared to less than
three months during 1997. As a result, expenses related to operating as a public
company were $241,000 higher in 1998 than in 1997, and were represented by
expenses such as fees for additional board and committee meetings, legal fees
related to securities matters and stockholder meetings, additional accounting
fees associated with public reporting requirements under the Securities Exchange
Act of 1934, proxy solicitation expense, and other items. Marketing and
advertising expense also increased by $28,000 due to the implementation of a
more aggressive advertising campaign to solicit deposits and loans.
Income Tax Expense. Income tax expense decreased from $440,000 in fiscal
1997 to $401,000 in fiscal 1998. The decrease was primarily the result of the
decline in net income before taxes by 195,000. Most of our income is taxable
under both federal and New York State income tax laws. Tax-exempt municipal
bonds are not a material income-producing factor.
Comparison of Financial Condition at September 30, 1997 and September 30, 1996
Total assets at September 30, 1997 were $117.0 million compared to $96.3
million at September 30, 1996, an increase of $20.7 million, or 21.5%. The
increase resulted principally from the net proceeds from the Conversion of $19.6
million, excluding the ESOP loan. Due to the active solicitation of new
residential mortgage loans, we increased loans, net by $7.0 million, or 11.9%,
from $58.7 million at September 30, 1996 to $65.7 million at September 30, 1997.
We invested the remainder of the net proceeds of the Conversion principally in
investment and mortgage-backed securities available for sale, which increased
$3.6 million and $7.0 million, respectively, at September 30, 1997 compared to
September 30, 1996. Total deposits decreased by $459,000 from $83.4 million at
September 30, 1996 to $83.0 million as of September 30, 1997. Management
believes the decrease in deposits
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resulted principally from the use of deposits by some customers to purchase
stock in the Conversion. The Bank opened a new branch in March 1997, which had
total deposits of $2.1 million at September 30, 1997. Such deposits partially
offset the decline from deposits used to purchase stock.
Total equity increased to $32.6 million at September 30, 1997, from $11.7
million at September 30, 1996. Included in the equity is an increase of $19.7
million representing the net proceeds from the initial public offering after
deducting unallocated ESOP stock, and an increase of $416,000 in the net
unrealized gain on securities available for sale.
Comparison of Operating Results for the Years Ended September 30, 1997 and
September 30, 1996
General. Net income in fiscal 1997 was $756,000, compared to $558,000 in
fiscal 1996. The improvement resulted principally from an increase in net
interest income of $1.1 million, caused by an increase in the yield on
interest-earning assets, an increase in the volume of interest-earning assets
and a decrease in the cost of funds. This improvement was offset by a decrease
in non-interest income of $378,000 and an increase in both non-interest expenses
of $404,000 and income tax expense of $89,000.
Interest Income. Interest income increased by $843,000, or 13.5%, from $6.2
million in fiscal 1996 to $7.1 million in fiscal 1997. The average balance of
interest-earning assets during the fiscal 1997 increased by $8.5 million, or
9.4%, compared to fiscal 1996. This increase was caused principally by the
effect of investing (a) in excess of $50 million of stock subscriptions received
by the Bank pending consummation of the Conversion and (b) the additional
capital received when our stock was sold. The Bank invested stock subscriptions
in federal funds sold, which was the principal reason for an increase in the
average balance of federal funds sold from $2.3 million in fiscal 1996 to $7.9
million in fiscal 1997. The average balance of loans increased by $4.7 million,
or 8.2%, in fiscal 1997 compared to fiscal 1996, as management actively pursued
an increase in loan originations. The average balance of investment securities
declined by $2.5 million from fiscal 1996 to 1997 as the proceeds from maturing
investment securities were redeployed into higher-yielding loans in the early
part of the year, to be replenished after the Conversion. Accompanying these
increases in average volume was an overall increase in average yield of 27 basis
points, including an increase in the average rate earned on loans of 24 basis
points to 7.73% from 7.49% as adjustable mortgage loans reached fully indexed
rates and new mortgage loans tended to be fixed-rate loans with slightly higher
interest rates. Yields on other asset categories also increased due to higher
market rates on federal funds sold and security investments.
Interest Expense. Interest expense decreased $222,000 from $3.4 million in
fiscal 1996 to $3.2 in fiscal 1997. The principal cause for the decrease was a
decrease of 27 basis points in the average cost of funds in fiscal 1997,
represented principally by a decline in the rate paid on certificates of deposit
as low market interest rates combined with our efforts to reduce our cost of
funds. The average balances of interest-bearing liabilities increased by
$120,000 due to the stock subscriptions received in the Conversion. Subscription
funds earned interest at the rates paid on the accounts into which the depositor
deposited the funds, or 3% if not held in a customer deposit account. Thus, the
increase in deposits was represented by increases in the volume of low cost
deposit categories while the average volume of certificates of deposit, our
highest costing deposits, declined by $2.2 million, and the average rate paid on
such deposits declined by 28 basis points. Interest expense during fiscal 1997
included $74,000 of interest paid at the 3% rate on stock subscriptions not
deposited into customer accounts.
Net Interest Income. Net interest income before the provision for loan
losses increased by $1.1 million from fiscal 1996 to fiscal 1997, representing
the net effect of the $843,000 increase in interest income and the $222,000
decrease in interest expense. The increase in net interest income was reflected
in an increase in our spread by 54 basis point from 2.71% to 3.25%.
During both fiscal 1997 and 1996, non-performing assets were at low levels
and changes in the level of average non-performing assets from fiscal 1996 to
fiscal 1997 did not have a material effect on the change in net interest income.
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Provision for Loan Losses. From fiscal 1996 to fiscal 1997, the provision
for loan losses was reduced by $3,500 from $23,500 to $20,000. The decrease
resulted from management's assessment of the adequacy of the allowance for loan
losses, the level of non-performing, delinquent and classified loans, and our
historical experience. Throughout 1996 and 1997, we had low levels of
non-performing, delinquent and classified loans, and net charge-offs amounted to
only $15,000 in fiscal 1996 and $4,000 in fiscal 1997. All charge-offs during
both periods were on non-real estate secured consumer loans. More than 85% of
our loans in fiscal 1996 and 1997 were secured by first mortgages on
owner-occupied one-to-four family residences. These loans, when compared to
unsecured loans or commercial mortgage loans, tend to have lower default rates
and, even after default, tend to result in lower charge-offs as a percentage of
total loan amount. Therefore, the provision for loan losses in both years
represented principally the replenishment of amounts charged against the
allowance.
Non-Interest Income. Non-interest income was $343,000 in 1997, compared to
$721,000 in 1996. The $378,000 decrease was principally because during fiscal
1996, we recovered $232,000 of the reserve created in fiscal 1995 for possible
losses related to the closing of our correspondent bank, Nationar, compared to a
$9,000 additional recovery in 1997. The net realized gains on securities sold
declined by $114,000 between the periods because we did not sell any investment
securities during 1997. We also experienced a $26,000 decline in capital gain
distributions on our mutual fund investments from fiscal 1996 to 1997.
Non-Interest Expense. Non-interest expense increased by $404,000 from $2.6
million in 1996 to $3.0 million in fiscal 1997. Salaries and benefits expense
increased by $150,000 due to $83,000 of benefits expense in connection with our
ESOP and $67,000 representing the combined effect of normal salary increases,
promotions and an increase in staff by approximately two full time equivalent
employees. The $83,000 of ESOP expense corresponded to $45,000 contributed to
the ESOP in the form of principal payments on the ESOP loan, an additional
$22,000 representing the amount required to be recorded as an expense under
accounting rules due to an increase in the market value of the stock released
from the lien of the ESOP loan, and $16,000 in administrative expense related to
the ESOP. Fiscal 1997 also included a $50,000 expense for costs related to the
removal of environmental contamination on property adjoining the Bank's main
office. Furthermore, from the completion of the Conversion to the end of fiscal
1997, we incurred or accrued $79,000 of expenses related to operating a public
company and holding the first annual meeting of stockholders.
Income Tax Expense. Income tax expense increased from $351,000 in fiscal
1996 to $440,000 in fiscal 1997. The increase was principally the result of the
increase in our income before taxes from $909,000 in fiscal 1996 to $1.2 million
in fiscal 1997. Our effective tax rate declined from 38.6% in fiscal 1996 to
36.8% in fiscal 1997 principally due to a reduction in deferred tax liabilities
caused by changes in New York State law regarding the tax bad debt deduction.
Liquidity and Capital
Our primary sources of funds are deposits, proceeds from the principal and
interest payments on loans, mortgage-backed and debt securities and capital gain
distributions on our mutual fund investment. While maturities and scheduled
amortization of loans and securities are predictable sources of funds, deposit
outflows, mortgage prepayments and mortgage loan and securities sales are
greatly influenced by general interest rates, economic conditions and
competition.
Our primary investing activity is the origination of residential
one-to-four family mortgage loans and the purchase of mortgage-backed and debt
securities. In 1998, 1997 and 1996, we originated $20.8 million, $13.3 million
and $10.2 million of loans, respectively. Loans, net, after payments and
charge-offs, increased by $13.0 million, $7.0 million, and $808,000 during those
same three years, respectively, while investment and mortgage-backed securities,
excluding the effect of unrealized gains and losses, increased by $1.8 million,
$9.0 million and decreased by $2.9 million, respectively. In general, if funds
are available at times when they are not needed to make loans, they are invested
on a short term basis in securities or federal funds sold, and then when loan
opportunities arise, funds are gradually shifted into loans. However, a portion
of our assets are always invested in liquid assets such as federal funds
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sold, bank deposits and short term securities so that funds will be available
when needed for unanticipated loan demand, deposit outflows, or other cash flow
needs.
Deposits and borrowings increased by $15.3 million, or 18.5%, from
September 30, 1997 to September 30, 1998. The increase had two components -
$10.0 million in new borrowings and a $5.3 million increase in deposits. These
increases were caused by implementation of our capital leveraging strategies.
Deposits declined by $459,000 from September 30, 1996 to September 30, 1997.
Deposits decreased from 1996 to 1997 principally because interest credited on
deposits was more than offset by withdrawals to purchase our stock. Deposit
flows are also affected by the level of interest rates, the interest rates and
products offered by the local competitors, and other factors.
We regularly monitor our liquidity. Excess short-term liquidity is invested
in overnight federal funds sold. If we need more funds than we can generate
internally, we can borrow those funds. At September 30, 1998, the Bank had
unused lines of credit with the Federal Home Loan Bank of New York of $15.5
million. The Bank also had outstanding Federal Home Loan Bank borrowings of
$10.0 million at the end of fiscal year 1998, which were not against the line of
credit. The Bank undertook these borrowings to provide an appropriate method of
leveraging the additional capital obtained in the Conversion.
At September 30, 1998, we had $4.4 million of outstanding commitments to
make loans and our customers had $2.3 million of unused lines of credit which
they could borrow from us. Management anticipates that we will have sufficient
funds available to meet our obligations to fund these loans. Certificates of
deposit scheduled to mature in one year or less from September 30, 1998, totaled
$33.3 million. Management anticipates that we will be able to retain
substantially all of such deposits if we decide to do so to fund loans and other
investments.
At September 30, 1998, the Bank exceeded all regulatory capital
requirements of the OTS applicable to it, with tangible and core capital of
$22.1 million, or 17.8% of adjusted assets and total risk-based capital of $22.3
million, or 37.4% of risk-weighted assets. The Bank was classified as "well
capitalized" at September 30, 1998 under OTS regulations.
The Bank must satisfy minimum liquidity regulations of the OTS, which
require liquid assets equal to at least 5% of net withdrawable accounts plus
short term borrowings, measured on a monthly basis. The Bank satisfies this
requirement, and at September 30, 1998 had a liquidity ratio of 17.9%.
Year 2000 Compliance
As is now well known due to extensive media coverage, many computer
hardware and software systems as well as computerized components of non-computer
systems may be unable to process information and perform their functions
properly beginning January 1, 2000. In order to avoid business disruption as a
result of non-compliant systems, we have adopted a multi-faceted approach to
protecting our business operations. We have appointed an officer of the Bank to
spearhead the Year 2000 compliance effort and our Board of Directors reviews
that effort on a monthly basis.
We have identified four principal areas in which Year 2000 risks may exist,
requiring checking, testing and verification. First, there are general utility
systems, such as the electric and telephone utilities, which must operate
satisfactorily so we, as well as other businesses, can function properly.
Although we have verified that these systems claim to be preparing for Year 2000
compliance, we can't test them because they are independent businesses with
which we have no special contractual relationship. It is worthy to note that our
main office has back-up generator power, which will allow us to continue on-site
operation if electric service is interrupted. However, any interruption in
electrical, telephone, mail or other similar service would make long-term
operations difficult because of the need for communications lines to our data
processing centers, telephone lines to service our customers, and mail service
to receive loan payments. Back-up manual transmission of data by disks and tapes
will be possible on an interim basis if local outages prevent normal data
transmission.
The second area for consideration is non-information technology systems
within our offices, such as vaults, security systems, heating systems and the
like. Most of these systems have already been tested and have been found to
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not have Year 2000 compliance problems, generally either because the systems are
manual or are mechanical without material computerized parts. Final testing of
these systems is expected to be complete by March 1999.
The third, and perhaps most difficult area of compliance, is in our
computerized data processing, record keeping, accounting and service delivery
software and hardware. During the past few years, we have been aware of the
problem of Year 2000 compliance and as systems have been gradually replaced, we
have taken appropriate steps to assure that new software and hardware will
operate properly. We recently worked with NCR Corporation, our primary data
processing servicer, to convert to a new data processing system developed to be
Year 2000 compliant. Working in conjunction with other users of the system, we
have tested various dates and scenarios to assure that the system will operate
properly, including actually changing system dates and processing actual
transactions and reports. All the tests were satisfactory. NCR has also
undergone Year 2000 compliance testing by bank regulators and the results of
that testing have been reviewed by the Board of Directors.
All data processing terminals were replaced during fiscal 1998 as part of
our process of updating obsolete and fully depreciated equipment and improving
our system for delivering services to customers. The new computers and related
software are all Year 2000 compliant. Our mortgage origination software is
scheduled to be upgraded as part of the normal upgrading process to improve
functionality in early 1999. The designer has represented that the new system is
Year 2000 compliant and other existing users have confirmed this. Likewise, we
are scheduled to change our ATM servicer during March 1999, which will provide
Year 2000 compliance as well as improved customer service. Other software
systems have been tested and are already Year 200 compliant, with additional
normal upgrades scheduled for 1999.
Fourth, Year 2000 compliance problems of other businesses may have an
adverse effect on their financial condition, which could have ripple effects on
our business. Loans to businesses are a relatively small part of our loan
portfolio, so we do not believe that business interruptions of customers are
likely to have direct material effects on our operations. However, if local
businesses are adversely affected by Year 2000 compliance, this could affect
their employees, making it more difficult for them to repay their loans, or
requiring them to reduce savings in order to have funds to live pending
resumption of satisfactory employment. There is little that we can do to address
these risks because they are primarily out of our control.
The costs of Year 2000 compliance have not been significant because we have
endeavored to integrate the need for compliance with our normal upgrading and
improvement of hardware and software to prepare to meet the business challenges
of the new millennium. Compliance costs are thus far insubstantial, and involve
predominately the additional staffing costs associated with running necessary
after-hours testing. We recognize, however, that Year 2000 compliance requires
the co-operation of many vendors, some of which are not within our control. The
most reasonably likely worst case scenario seems to be that either one of our
local utility companies, or a company servicing the NCR data center, will not be
able to perform and we, or NCR, will not be able to be up and running normally.
If this occurs, we will be required to operate using manual systems until other
service providers are operating satisfactorily. On a short term basis, manual
systems may be satisfactory, but if outages extend for longer periods of time,
customer service may be adversely affected, loan payments to us may be delayed,
and additional staffing or overtime is likely to be required.
Impact of Inflation and Changing Prices
Our Financial Statements have been prepared using Generally Accepted
Accounting Principals, which require that we measure our financial position and
operating results in historical dollars without considering the changes in the
purchasing power of money over time due to inflation. Inflation increases our
operating costs, such as salaries, building and equipment expense, insurance and
most other categories of non-interest expenses. However, unlike industrial
companies, most of our assets and liabilities are monetary in nature. As a
result, changes in interest rates have a greater impact on our performance than
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services, although interest rates
generally increase during periods when the rate of inflation is increasing and
decrease during periods of decreasing inflation.
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Impact of New Accounting Standards
Stock-Based Compensation. In November 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" ("SFAS 123"). SFAS 123 permits us to
choose either a new fair value method or the current intrinsic value method of
accounting for stock-based compensation plans, such as our stock option plan and
our incentive stock award plan, but not our ESOP. If the intrinsic value method
is used, we must disclose net earnings and earnings per share computed as if we
had used the fair value method. We have decided to account for compensation
expenses of our stock option plan and incentive stock award plan using the
intrinsic value method and have used that method for all awards under both
plans.
Pensions and Other Post-Retirement Benefits. In February 1998, the FASB
issued SFAS 132, "Employers' Disclosures About Pensions and Other
Post-Retirement Benefits," which standardizes the disclosure rules for pension
and other post-retirement benefits for fiscal years beginning after December 15,
1997. Disclosures regarding pensions and other non-pension post-retirement
benefits have been combined. SFAS 132 addresses disclosure issues only and does
not require any substantive change in the measurement or recognition of
liabilities arising out of the benefits covered by it. Hence, the implementation
of SFAS 132 will have no effect on our financial condition or results of
operations.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities" which establishes requirements for the
proper accounting, reporting and financial statement presentation of derivative
instruments and hedging activities. Derivative instruments must be reflected in
a company's financial statements separate from any hedging or similar
transaction designed to reduce the risks of owning the derivative instrument. We
do not invest in derivative instruments and we have no plans to do so in the
foreseeable future. Therefore, SFAS 133 is not expected to have any effect on
the financial disclosures or our financial condition. SFAS 133 also permits
certain reclassifications of securities among the trading, available for sale
and held to maturity classifications. We do not intend to reclassify any
securities pursuant to SFAS 133.
Forward-Looking Statements
When used in this Annual Report, in our future filings with the Securities
and Exchange Commission, in our press releases or other public or stockholder
communications, or in oral statements made with the approval of an authorized
officer, words and phrases such as " will likely result" "are expected to,"
"will continue," "are estimated," "are anticipated" and other similar
expressions, are intended to identify "forward-looking statements" under the
Private Securities Litigation Reform Act. In particular, certain information
customarily disclosed by financial institutions, such as estimates of interest
rate sensitivity and the adequacy of the loan loss allowance, are inherently
forward-looking statements because, by their nature, they represent attempts to
estimate what will occur in the future.
A wide variety of factors could cause our actual results and experiences to
differ materially from the anticipated results or other expectations expressed
in our forward-looking statements. Some of the risks and uncertainties that may
affect our financial condition or results of operations include but are not
limited to: (i) deterioration in local, regional, national or global economic
conditions which could result, among other things, in an increase in loan
delinquencies, a decrease in property values, or a change in the housing
turnover rate; (ii) changes in market interest rates or changes in the speed at
which market interest rates change; (iii) changes in laws and regulations
affecting the financial services industry; (iv) changes in competition; and (v)
changes in consumer preferences. Year 2000 non-compliance by any business
providing services to us could have a negative effect on our ability to operate
profitably.
Furthermore, changes in the economic circumstances of individual borrowers
could have a material adverse effect on their ability to repay their loans
regardless of general economic conditions. Likewise, financial adversity
experienced by any one major business in our market area could have a
significant adverse effect on those of our customers who are employees of that
business or otherwise rely upon it for their economic well being. This could
affect their ability to honor their loan obligations and their ability to
maintain deposit balances.
- 18 -
<PAGE>
For these reasons, we caution readers not to place undue reliance upon any
forward-looking statements. Forward-looking statements speak only as of the date
made and we assume no obligation to update or revise any such statements upon
any change in applicable circumstances.
- 19 -
<PAGE>
GSB FINANCIAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report ........................................................................21
Consolidated Statements of Condition at September 30, 1998 and 1997..................................22
Consolidated Statements of Operations for the Years Ended September 30, 1998, 1997 and 1996..........23
Consolidated Statements of Equity for the Years Ended September 30, 1998, 1997 and 1996..............24
Consolidated Statements of Cash Flows for the Years Ended September 30, 1998, 1997 and 1996.......25-26
Notes to Consolidated Financial Statements .......................................................27-53
</TABLE>
- 20 -
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
GSB Financial Corporation
1 South Church Street
Goshen, New York 10924
We have audited the accompanying consolidated statements of financial
condition of GSB Financial Corporation and Subsidiaries (the "Company") as of
September 30, 1998 and 1997, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the years
in the three year period ended September 30, 1998. These consolidated financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated 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 consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of GSB
Financial Corporation and Subsidiaries at September 30, 1998 and 1997, and the
results of their operations, changes in stockholders' equity and their cash
flows for each of the years in the three year period ended September 30, 1998,
in conformity with generally accepted accounting principles.
Respectfully submitted,
- ---------------------------
NUGENT & HAEUSSLER, P.C.
October 27, 1998
Montgomery, New York
- 21 -
<PAGE>
GSB Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands except shares and per share amounts)
<TABLE>
<CAPTION>
September 30,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks ......................................... $ 2,818 $ 3,218
Federal funds sold .............................................. 4,800 5,100
--------- ---------
Cash and cash equivalents ....................................... 7,618 8,318
Investment securities available for sale (Note 3 and 4) ......... 31,474 26,638
Mortgage-backed securities:
Held to maturity (estimated market values of $3,965 and
$5,766 at September 30, 1998 and 1997, respectively) (Note 5) 3,881 5,653
Available for sale (Note 6) ................................... 5,804 6,990
Loans receivable, net (Note 7 and 8) ............................ 78,713 65,738
Banking house and equipment (Note 9) ............................ 2,800 2,299
Accrued interest receivable (Note 10) ........................... 949 788
Other real estate owned, net .................................... 94 --
Prepaid expenses and other assets ............................... 602 622
--------- ---------
Total assets ................................................ $ 131,935 $ 117,046
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits (Note 11) ............................................ $ 88,310 $ 82,983
Mortgagors' escrow deposits ................................... 126 62
Borrowings (Note 12) .......................................... 10,000 --
Accrued expenses and other liabilities ........................ 2,004 1,368
--------- ---------
Total liabilities ........................................... $ 100,440 $ 84,413
--------- ---------
Commitments and contingent liabilities (Note 17)
Stockholders' Equity
Preferred stock ($0.01 par value; 500,000 shares
authorized; none issued) .................................... -- --
Common stock ($0.01 par value; 4,500,000 shares
authorized; 2,248,250 issued at September 30, 1998) ......... 22 22
Additional paid-in capital .................................... 21,510 21,446
Retained earnings, substantially restricted ................... 12,825 12,360
Net unrealized gain on securities available
for sale, net of taxes ...................................... 632 559
Unallocated ESOP stock (Note 14) .............................. (1,574) (1,754)
Unearned ISAP stock (Note 14) ................................. (391) --
Treasury stock ................................................ (1,529) --
--------- ---------
Total stockholders' equity .................................. $ 31,495 $ 32,633
--------- ---------
Total liabilities and stockholders' equity .................. $ 131,935 $ 117,046
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
- 22 -
<PAGE>
GSB Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended September 30,
----------------------------------------
1998 1997 1996
----------- ----------- -----------
(In thousands except shares and per share amounts)
<S> <C> <C> <C>
INTEREST INCOME
Loans ................................................ $ 5,544 $ 4,833 $ 4,328
Federal funds sold ................................... 381 439 123
Investment securities ................................ 1,575 1,332 1,388
Mortgage-backed securities ........................... 720 474 396
----------- ----------- -----------
Total interest income .............................. 8,220 7,078 6,235
INTEREST EXPENSE
Deposit accounts (Note 11) ........................... 3,199 3,128 3,365
Other borrowings (Note 12) ........................... 225 24 83
Stock subscription interest expense .................. -- 74 --
----------- ----------- -----------
Total interest expense ............................. 3,424 3,226 3,448
Net interest income .................................. 4,796 3,852 2,787
Provision for loan losses (Note 8) ................... 70 20 24
----------- ----------- -----------
Net interest income after provision for loan losses .. 4,726 3,832 2,763
NON-INTEREST INCOME
Service charges on deposit accounts .................. 139 139 147
Other income ......................................... 99 101 108
Net realized gains on securities ..................... 130 1 115
Capital gains distributions .......................... 82 93 119
Nationar recovery .................................... -- 9 232
----------- ----------- -----------
Total non-interest income .......................... 450 343 721
NON-INTEREST EXPENSE
Salaries and employee benefits ....................... 1,931 1,657 1,507
Occupancy and equipment .............................. 319 361 333
Data processing expenses ............................. 236 246 223
Early termination expense (Note 13) .................. 699 -- --
Recovery of post-retirement FASB 106 expense (Note 14) (134) -- --
Other non-interest expense ........................... 1,124 715 512
----------- ----------- -----------
Total non-interest expense ......................... 4,175 2,979 2,575
----------- ----------- -----------
Income before income taxes ........................... 1,001 1,196 909
Income tax expense (Note 15) ......................... 401 440 351
----------- ----------- -----------
Net income ........................................... $ 600 $ 756 $ 558
=========== =========== ===========
Basic earnings per share ............................. $ 0.29 $ 0.37 N/A
Weighted average shares outstanding - basic .......... 2,043,484 2,068,444 N/A
Diluted earnings per share ........................... $ 0.29 $ 0.37 N/A
Weighted average shares outstanding - diluted ........ 2,059,981 2,068,444 N/A
</TABLE>
See accompanying notes to consolidated financial statements.
- 23 -
<PAGE>
GSB Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except shares and per share amounts)
<TABLE>
<CAPTION>
Unearned
Retained Common Incentive Unrealized
Shares Additional Earnings Stock Stock Treasury Gain on
Outstanding Common Paid-In Substantially Acquired Award Stock, Securities,
Common Stock Capital Restricted by ESOP Plan at Cost net of tax Total
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995 ... -- -- -- $11,046 -- -- -- $ 51 $11,097
------------------------------------------------------------------------------------------------
Net Income ...................... -- -- -- 558 -- -- -- -- 558
Change in net unrealized gain on
Investment securities available
for sale, net of income taxes . -- -- -- -- -- -- -- 92 92
------------------------------------------------------------------------------------------------
Balance at September 30, 1996 ... -- -- -- 11,604 -- -- -- 143 11,747
------------------------------------------------------------------------------------------------
Net Income ...................... -- -- -- 756 -- -- -- -- 756
Sale of common stock ............ 2,248,250 22 21,424 -- -- -- -- -- 21,446
Acquisition of ESOP Stock ....... -- -- -- -- (1,799) -- -- -- (1,799)
ESOP Shares committed to be
Released ...................... -- -- 22 -- 45 -- -- -- 67
Change in net unrealized gain on
investment securities available
for sale, net of income taxes . -- -- -- -- -- -- -- 416 416
------------------------------------------------------------------------------------------------
Balance at September 30, 1997 ... 2,248,250 22 21,446 12,360 (1,754) -- -- 559 32,633
------------------------------------------------------------------------------------------------
Net Income ...................... -- -- -- 600 -- -- -- -- 600
Dividends Paid .................. -- -- -- (135) -- -- -- -- (135)
Acquisition of Treasury Stock ... -- -- -- -- -- -- (2,020) -- (2,020)
ESOP Shares committed to be
Released ...................... -- -- 107 -- 180 -- -- -- 287
Change in net unrealized gain on
Investment securities available
for sale, net of income taxes . -- -- -- -- -- -- -- 73 73
Grant of Restricted Stock under
ISAP .......................... -- -- (43) -- -- (448) 491 -- --
Amortization of unearned
ISAP compensation ............. -- -- -- -- -- 57 -- -- 57
------------------------------------------------------------------------------------------------
Balance at September 30, 1998 ... 2,248,250 $ 22 $21,510 $12,825 $(1,574) $(391) $(1,529) $632 $31,495
================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
- 24 -
<PAGE>
GSB Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------------
1998 1997 1996
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................................................... $ 600 $ 756 $ 558
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation ................................................................ 143 157 142
Provision for loan losses ................................................... 70 20 24
Fair value provision of ESOP & ISAP shares committed to be
Released .................................................................. 343 67 --
Provision for Nationar loss contingency ..................................... -- -- (232)
Net loss on sale of other real estate owned ................................. -- -- (5)
Gain on maturity/redemption of investment securities -
available for sale ........................................................ (130) (1) (115)
Net (increase) decrease in other assets ..................................... (234) (314) 256
Net amortization on investment securities - available for sale ............. 55 72 222
Net amortization (accretion) on mortgage - backed
securities - held to maturity ............................................. 5 1 2
Net amortization (accretion) on mortgage - backed
securities - available for sale ........................................... 17 2 --
Increase (decrease) in accrued expenses and other liabilities .............. 589 18 262
-------- -------- --------
Net cash provided by operating activities ................................... 1,458 778 1,114
-------- -------- --------
Cash flows from investing activities:
Purchases of mortgage - backed securities
held to maturity .......................................................... -- (405) (3,653)
Purchases of mortgage - backed securities
available for sale ........................................................ (1,928) (7,108) --
Proceeds from principal paydowns of mortgage - backed
securities - held to maturity ............................................ 1,765 1,225 1,581
Proceeds from principal paydowns of mortgage - backed
securities - available for sale ........................................... 3,106 111 --
Proceeds from maturity and redemption of investment
securities - available for sale ........................................... 11,486 9,173 11,511
Purchase of investment securities - held to maturity ........................ -- --
Purchase of investment securities - avail for sale .......................... (16,316) (12,111) (7,401)
Proceeds from sale of investment securities
available for sale ........................................................ 183 -- 702
Net (increase) decrease in loans .......................................... (13,045) (7,032) (988)
Capital expenditures ........................................................ (644) (194) (78)
Proceeds from sale of other real estate owned ............................... -- -- 165
-------- -------- --------
Net cash provided (used) by investing activities ............................ (15,393) (16,341) 1,839
-------- -------- --------
</TABLE>
- 25 -
<PAGE>
GSB Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<S> <C> <C> <C>
Cash flow from financing activities:
Net increase (decrease) in demand, statement passbook, money
market and NOW deposit accounts ........................................... 5,326 (459) (4,651)
Proceeds from borrowings .................................................... 10,000 2,000 --
Repayments of borrowings .................................................... -- (2,000) (1,000)
Proceeds from issuance of common stock ...................................... -- 22,483 --
Conversion costs ............................................................ -- (1,036) --
Purchase of ESOP stock ...................................................... -- (1,799) --
Purchase of treasury stock .................................................. (2,020) -- --
Dividends ................................................................... (135) -- --
Increase (decrease) in advances from borrowers for taxes
and insurance ............................................................. 64 8 (45)
-------- -------- --------
Net cash provided by ( used in) financing activities ........................ 13,235 19,197 (5,696)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ........................ (700) 3,634 (2,743)
Cash and cash equivalents at beginning of year .............................. 8,318 4,684 7,427
-------- -------- --------
Cash and cash equivalents at end of year .................................... $ 7,618 $ 8,318 $ 4,684
======== ======== ========
Additional Disclosures:
Supplemental disclosures of cash flows information-cash paid during year for:
Interest on other borrowings .............................................. $ 158 $ 24 $ 83
Income taxes .............................................................. 579 935 120
Supplemental schedule of non-cash investing activities:
Reduction in loans receivable resulting from the transfer
to real estate owned ...................................................... 115 -- 157
Transfers of investment securities - held to maturity to
investment securities - available for sale ............................... -- -- 20,913
Change in unrealized gains in investment securities -
available for sale ........................................................ 73 416 92
</TABLE>
- 26 -
<PAGE>
GSB Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
A. Organization
GSB Financial Corporation ("GSB Financial") was incorporated under Delaware
law in March 1997 as a holding company to purchase 100% of the common stock of
Goshen Savings Bank (the "Bank"). On July 9, 1997, GSB Financial completed its
initial public offering of 2,248,250 shares of common stock in connection with
the conversion of the Bank from a mutual form institution to a stock savings
bank (the "Conversion"). Concurrently with the Conversion, GSB Financial
acquired all of the Bank's common stock. In July 1998, GSB Financial started a
wholly-owned subsidiary (GSB Investment Services, Inc.) to make available,
through an independent provider, investment advisory and full brokerage
services. To date, the principal operations of GSB Financial Corporation and
subsidiaries (the "Company") have been those of the Bank.
The Bank provides banking services to individual and corporate customers,
with its business activities concentrated in Orange County, New York.
During fiscal 1998, GSB Financial announced its intentions to repurchase
5%, or 112,412 shares, of its outstanding common stock. GSB Financial has
repurchased 36,300 shares of its common stock through September 30, 1998. In
addition, the Company purchased 4%, or 89,930 shares, to fund its ISAP Plan as
approved at the annual meeting on February 25, 1998. Total common stock
purchases amounted to $2.0 million, as illustrated in the accompanying
Consolidated Statement of Changes in Stockholders' Equity.
A substantial portion of the Bank's loans are secured by real estate
located in Orange County in New York State. Accordingly, the ultimate
collectability of a substantial portion of the Bank's loan portfolio is
dependent upon market conditions in that market area. In addition, other real
estate owned, if any is also generally located in Orange County in New York
State.
The following is a description of the more significant policies the Company
follows in preparing and presenting its consolidated financial statements:
B. Basis of Financial Statement Presentation
The accompanying consolidated financial statement includes the accounts of
GSB Financial and its wholly owned subsidiaries, Goshen Savings Bank and GSB
Investment Services, Inc. The consolidated financial statements have been
prepared in conformity with generally accepted accounting principles.
Significant intercompany transactions and amounts have been eliminated.
C. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties.
- 27 -
<PAGE>
GSB Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 an integral part of their examination process, periodically review the Bank's
allowance for losses on loans and foreclosed real estate. Such agencies may
require the Bank to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination.
Because of these factors, it is reasonably possible that the allowance for
losses on loans and foreclosed real estate may change materially in the near
term.
D. Cash and Cash Equivalents.
For purposes of the statements of cash flows, cash and cash equivalents
include cash on hand and in banks, interest-earning deposits and Federal funds
sold with original maturities of ninety days or less.
E. Investment and Mortgage-Backed Securities.
Securities Held to Maturity
Government, federal agency, and corporate debt securities that management
has the positive intent and ability to "hold until maturity" are stated at cost,
adjusted for premium amortization and discount accretion, computed on a
straight-line basis over the life of the note to maturity. This method of
amortization differs from the interest method and results in immaterial
differences for reporting purposes.
Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans originated and serviced by issuers of the
securities. Mortgage-backed securities are carried at unpaid principal balances,
adjusted for unamortized premiums and unearned discounts. Premiums and discounts
are amortized on a straight-line basis over the life of the pools to maturity.
This method of amortization differs from the interest method and results in
immaterial differences for reporting purposes.
Securities Available for Sale
Securities to be held for indefinite periods of time including securities
that management intends to use as part of its asset-liability strategy, or that
may be sold in response to changes in interest rates, changes in prepayment
risk, or other similar factors are classified as "available for sale" and are
recorded at fair value with the unrealized appreciation or depreciation, net of
taxes reported separately as a component of equity.
Trading Securities
The third classification are "trading securities" which include debt
securities and equity securities purchased in connection with the Bank's trading
activities and as such are expected to be sold in the near term. There are no
investments in trading securities on the books of the Bank at September 30, 1998
and 1997.
Gains and losses on the sale of securities are determined using the
specific identification method.
F. Reclassification of Investment Securities.
In November 1995, the Financial Accounting Standards Board released its
special report, "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities". This special report
contained a provision that allowed entities to, as of November 15, 1995, but no
later than December 31, 1995, to reassess the appropriateness of the
classifications of all securities held at that time. At the Board of Trustees
meeting December 14, 1995, approval was granted to management to reclassify
"all" investment securities as available for sale and such reclassification was
recorded effective December 29, 1995.
- 28 -
<PAGE>
GSB Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
G. Loans Receivable and Allowance for Loan Losses
Loans receivable are stated at the amount of unpaid principal, less net
deferred loan fees and the allowance for loan losses. The allowance for loan
losses is established through a provision for loan losses charged to expense.
Loans are charged against the allowance for loan losses when management believes
that the collectability of the principal is unlikely. The allowance is an amount
that management believes will be adequate to absorb losses on existing loans
that may become uncollectable, based on evaluations of the collectability of
loans and prior loan loss experience. The evaluations take into consideration
such factors as changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans and current economic
conditions that may affect the borrowers' ability to pay.
Accrual of interest is discontinued on a loan when management believes that
the borrowers' financial condition is such that collection of interest is
doubtful. This generally occurs when payment of principal or interest is past
due three months or more and there is no insurance or guaranty as to payment.
Effective January 1, 1995, the Bank adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan. "Under the provision of SFAS No. 114, 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. SFAS No. 114 requires creditors to
measure impairment of a loan based on the present value of expected future cash
flows discounted at the loan's effective interest rate or at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. If the measure of the impaired loan is less than the
recorded investment in the loan, a creditor shall recognize an impairment by
recording a valuation allowance with a corresponding charge to bad debt expense.
This statement also applies to restructured loans and eliminates the requirement
to classify loans that are in-substance foreclosures as foreclosed assets except
for loans where the creditor has physical possession of the underlying
collateral, but not legal title. Effective January 1, 1996, the Bank also
adopted SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures," which amends SFAS No. 114 to allow a creditor to
use existing methods for recognizing interest income on impaired loans. SFAS No.
114 is applicable to all loans that are identified for evaluation of impairment,
except for, among other, large groups of smaller-balance homogenous loans, such
as residential mortgage loans and consumer installment loans, that are
collectively evaluated for impairment and loans that are measured at fair value
or the lower of cost or fair value.
An insignificant payment delay, which is defined by the Bank as up to 90
days, will not cause a loan to be classified as impaired. In addition, a loan is
not considered impaired when payments are delayed but the Bank expects to
collect all amounts due, including accrued interest for the period of delay. All
loans identified as impaired are evaluated independently.
The Bank does not aggregate impaired loans for evaluation purposes. Payments
received on impaired loans are applied first to accrued interest, if any, and
then to principal.
H. Banking House and Equipment.
Land is carried at cost. Banking house, furniture, fixtures and equipment
are stated at cost, less depreciation. Depreciation is calculated using the
straight-line method based upon the estimated useful lives of the related
assets. Maintenance and repairs are expensed as incurred while major additions
and improvements are capitalized. Gains and losses on dispositions are included
in current operations.
- 29 -
<PAGE>
GSB Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
I. Real Estate Owned.
Real estate owned includes assets received from foreclosure and
in-substance foreclosures. In accordance with SFAS No. 114, a loan is classified
as an in-substance foreclosure when the Company has taken possession of the
collateral regardless of whether formal foreclosure proceedings have taken
place. Prior to the adoption of SFAS No. 114 and SFAS No. 118, in-substance
foreclosed properties included those properties where the borrower had little or
no remaining equity in the property considering its fair value; where repayment
was only expected to come from the operation of sale of the property; and where
the borrower had effectively abandoned control of the property or it was
doubtful that the borrower would be able to rebuild equity in the property.
Foreclosed assets, including in-substance foreclosures, are recorded on an
individual asset basis at net realizable value which is the lower of fair value
minus estimated costs to sell or "cost" (defined as the fair value at initial
foreclosure). When a property is acquired or identified as in-substance
foreclosure, the excess of the loan balance over fair value is charged to the
allowance for loan losses. Subsequent write-downs to carry the property at fair
value less costs to sell are included in non-interest expense. Costs incurred to
develop or improve properties are capitalized, while holding costs are charged
to expense.
The Company had one real estate owned from foreclosure or in-substance
foreclosure at September 30, 1998 and none in 1997.
J. Income Taxes
In February 1992, the Financial Accounting Standards Board issued SFAS No.
109, "Accounting for Income Taxes." Under the asset and liability method of SFAS
No. 109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect of deferred tax assets and liabilities of a change in tax rates is
recognized as income or expense in the period that includes the enactment date.
K. Off-Balance-Sheet Risk
In the normal course of business, the Bank is a party to certain financial
instruments with off-balance-sheet risk such as commitments to extend credit and
unused lines of credit. The Bank's policy is to record such instruments when
funded.
L. Earnings Per Share.
Earnings per share is calculated based upon the weighted average number of
shares outstanding from the date of conversion, July 9, 1997 through September
30, 1998 adjusted for common stock equivalents that have a dilutive effect on
the per share data. The weighted average number of shares outstanding for the
period ending September 30, 1998 and1997 were 2,043,484 and 2,068,444,
respectively.
- 30 -
<PAGE>
GSB Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
M. Advertising.
Advertising costs are generally charged to operations in the year incurred.
Advertising expense was $99,936, $72,101 and $60,412 for the years ended
September 30, 1998, 1997 and 1996, respectively.
N. Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
and SFAS No. 131 "Disclosures About Segments of an Enterprise and Related
Information". Both of these statements are effective for periods beginning after
December 15, 1997 and restatement of financial statements or information for
earlier periods provided for comparative purposes is required. The provisions of
these statements will not affect the Company's results of operations of
financial condition.
In February 1998, the FASB issued SFAS No. 132 "Employees' Disclosures
about Pensions and Other Post-Retirement Benefits". This statement revises and
supersedes the disclosure requirements for pensions and other post retirement
benefit plans originally issued within SFAS No. 87 "Employers Accounting for
Pensions", SFAS No. 88 "Employers' Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits" and SFAS No. 106
"Employers' Accounting for Post-retirement Benefits Other than Pensions". SFAS
No. 132 does not address measurement or recognition for pension and other
post-retirement benefit plans. The statement is effective for fiscal years
beginning after December 15, 1997. Restatement of disclosures for earlier
periods provided for comparative purposes is required unless the information is
not readily available, in which case the notes to the financial statements
should include all information and description of the information is not
available. The provision of this statement will not affect the Company's results
of operations or financial condition.
O. Year 2000 Readiness - Summary of Significant
The Company has a year 2000 project plan as part of its overall Safety and
Soundness Plan. The Company is complying with all assessment, testing,
remeditions and contingency plans, as well as adhering to the critical date
time-line established to enable the Bank to become year 2000 ready.
P. Reclassification.
Amounts in the prior periods' financial statements are reclassified
whenever necessary to conform to current period presentations.
NOTE 2. Conversion to Stock Ownership.
On July 9, 1997, GSB Financial sold 2,248,250 shares of common stock at
$10.00 per share to depositors and employees of the Bank and to the Company's
Employee Stock Ownership Plan (the "ESOP"). Net proceeds from the sale of stock
of GSB Financial, after deducting conversion expenses of approximately $1.0
million, were $21.4 million and are reflected as common stock and additional
paid-in-capital in the accompanying September 30, 1998 consolidated statement of
financial conditions. The Company utilized $10.7 million of the net proceeds to
acquire all of the capital stock of the Bank.
- 31 -
<PAGE>
GSB Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As part of the conversion, the Bank established a liquidation account for
the benefit of eligible depositors who continue to maintain their deposit
accounts in the Bank after conversion. In the unlikely event of a complete
liquidation of the Bank, each eligible depositor will be entitled to receive a
liquidation distribution from the liquidation account in the proportionate
amount of the then current adjusted balance for deposit accounts held before
distribution may be made with respect to the Bank's capital stock. The Bank may
not declare or pay a cash dividend to GSB Financial on, or repurchase any of its
capital stock if the effect thereof would cause the retained earnings of the
Bank to be reduced below the amount required for the liquidation account. Except
for such restrictions, the existence of the liquidation account does not
restrict the use or application of retained earnings.
The Bank's capital exceeds all of the fully phased-in capital regulatory
requirements. The Office of Thrift Supervision ("OTS") regulations provide that
an institution that exceeds all fully phased-in capital requirements before and
after a proposed capital distribution could, after prior notice but without the
approval by the OTS, make capital distributions during the calendar year of up
to 100% of its net income to date during the calendar year plus the amount that
would reduce by one-half its "surplus capital ratio" (the excess capital over
its fully phased-in capital requirements) at the beginning of the calendar year.
Unlike the Bank, GSB Financial is not subject to these regulatory
restrictions on the payment of dividends to its stockholders.
NOTE 3. INVESTMENT SECURITIES - AVAILABLE FOR SALE.
A summary comparison of securities available for sale as of September 30,
1998 and 1997 is as follows:
September 30, 1998
------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In Thousands)
United States Treasury.............. $ 1,001 $ 5 $ -- $ 1,006
United States Government Agencies .. 18,274 188 -- 18,462
Corporate Debt Obligations ......... 8,338 130 -- 8,468
Foreign Debt Obligations ........... -- -- -- --
Equity Securities................... 2,816 722 -- 3,538
------- ------ ---- --------
$30,429 $1,045 $ -- $31,474
======= ====== ==== ========
September 30, 1997
------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In Thousands)
United States Treasury ............. $ 3,497 $ 8 $ -- $ 3,505
United States Government Agencies .. 7,123 44 4 7,163
Corporate Debt Obligations ......... 11,879 74 11 11,942
Municipal Debt Obligations ......... 400 -- -- 400
Foreign Debt Obligations ........... 2,803 825 -- 3,628
------- ------ ---- -------
Equity Securities.... .............. $25,702 $ 951 $ 15 $26,638
======= ====== ==== =======
- 32 -
<PAGE>
The amortized cost and approximate fair value of securities available for
sale at September 30, 1998 and 1997, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because certain
issuers may have the right to call or prepay obligations with or without call or
prepayment penalties.
September 30, 1998
-------------------------
Amortized Estimated
Cost Fair Value
--------- ----------
(In Thousands)
Due within one year.................................. $ 3,204 $ 3,211
Due one year to five years .......................... 7,135 7,281
Due five years to ten years ......................... 6,978 7,023
Due over ten years................................... 13,112 13,959
------- -------
Total................................................ $30,429 $31,474
======= =======
September 30, 1997
-------------------------
Amortized Estimated
Cost Fair Value
--------- ----------
(In Thousands)
Due within one year.................................. $ 7,793 $ 7,812
Due one year to five years .......................... 12,475 12,552
Due over five years.................................. 5,434 6,274
------- -------
Total................................................ $25,702 $26,638
======= =======
Proceeds from the sale of securities available for sale were approximately
$183,000 and $0 during the years ended September 30, 1998 and 1997 respectively,
which resulted in gross realized gains of approximately $130,000 and $0,
respectively, and gross realized losses of approximately $0 and $0,
respectively. There were no sales of securities available for sale during the
year ended September 30, 1997.
NOTE 4. FEDERAL HOME LOAN BANK STOCK.
As a member of the Federal Home Loan Bank ("FHLB") system, the Bank is
required to maintain a minimum investment in FHLB stock. The current investment
exceeds the required level at September 30, 1998. Any excess may be redeemed by
the Bank or called by the FHLB at par. At its discretion, the FHLB may declare
dividends on this stock. The Bank has $704,000 invested in FHLB stock at
September 30, 1998, which is included in Equity Securities in Note 3 and is
carried at cost due to the fact that it is classified as a non-marketable
restricted investment.
NOTE 5. MORTGAGE BACKED SECURITIES - HELD TO MATURITY.
Mortgage backed securities held to maturity at September 30, 1998 and 1997,
consists of Federal National Mortgage Association ("FNMA"), Federal Home Loan
Mortgage Corporation ("FHLMC") and Government National Mortgage Association
("GNMA") securities and are summarized as follows:
September 30, 1998
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
(In Thousands)
Mortgage Backed Securities .. $3,881 $ 91 $ 7 $3,965
====== ==== === ======
- 33 -
<PAGE>
September 30, 1997
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
(In Thousands)
Mortgage Backed Securities .. $5,653 $115 $ 2 $5,766
====== ==== === ======
The amortized cost and approximate fair market value of mortgage backed
securities held to maturity at September 30, 1998, and 1997, by contractual
maturity, are shown below. Expected maturities will differ from contractual
maturities because certain issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
September 30, 1998
--------------------------------------
Amortized Cost Estimated Fair Value
-------------- --------------------
(In Thousands)
Due within one year ................... $ 345 $ 344
Due one year to five years ............ 1,868 1,914
Due five to ten years ................. 318 328
Due after ten years ................... 1,350 1,379
------ ------
Total ................................. $3,881 $3,965
====== ======
September 30, 1997
--------------------------------------
Amortized Cost Estimated Fair Value
-------------- --------------------
(In Thousands)
Due within one year ................... $ 212 $ 212
Due one year to five years ............ 2,623 2,648
Due five to ten years ................. 688 700
Due after ten years ................... 2,130 2,206
------ ------
Total ................................. $5,653 $5,766
====== ======
NOTE 6. MORTGAGE BACKED SECURITIES - AVAILABLE FOR SALE.
Mortgage backed securities available for sale at September 30, 1998, and
1997 consists of FNMA, FHLMC and GNMA securities and are summarized as follows:
September 30, 1998
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
(In Thousands)
Mortgage Backed Securities .. $5,797 $ 29 $22 $5,804
====== ==== === ======
- 34 -
<PAGE>
September 30, 1997
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
(In Thousands)
Mortgage Backed Securities .. $6,994 $ 5 $ 9 $6,990
====== ==== === ======
The amortized cost and approximate fair market value of mortgage backed
securities available for sale at September 30, 1998, and 1997 by contractual
maturity, are shown below. Expected maturities will differ from contractual
maturities because certain issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
September 30, 1998
--------------------------------------
Amortized Cost Estimated Fair Value
-------------- --------------------
(In Thousands)
Due within one year ................... $ -- $ --
Due one year to five years ............ 1,534 1,536
Due five to ten years ................. 999 1,010
Due after ten years.................... 3,264 3,258
------ ------
Total ................................. $5,797 $5,804
====== ======
September 30, 1997
--------------------------------------
Amortized Cost Estimated Fair Value
-------------- --------------------
(In Thousands)
Due within one year ................... $ -- $ --
Due one year to five years ............ 1,486 1,482
Due five to ten years ................. 3,008 3,008
Due after ten years ................... 2,500 2,500
------ ------
Total ................................. $6,994 $6,990
====== ======
NOTE 7. LOANS RECEIVABLE, NET.
Loans receivable are summarized as follows:
September 30,
------------------------
1998 1997
-------- --------
(In Thousands)
Loans Secured by Real Estate
One to four family residential .................. $ 72,038 $ 58,742
One to four family rental property .............. 1,764 1,936
Commercial real estate .......................... 1,820 2,073
- 35 -
<PAGE>
Home equity line of credit loans ................ 2,365 2,314
-------- --------
Total Loans Secured by Real Estate ......... 77,987 65,065
-------- --------
Other Loans
Loans on savings accounts ....................... 115 174
Property improvement loans ...................... 103 104
Commercial loan ................................. 170 36
Consumer and other loans ........................ 502 526
-------- --------
Total Other loans .......................... 890 840
-------- --------
Total Loans Receivable ..................... 78,877 65,905
Less:
Deferred loan fees ......................... (3) 28
Allowance for losses-loans ................. 167 139
-------- --------
Loans Receivable, Net ...................... $ 78,713 $ 65,738
======== ========
The Bank entered into an agreement with the Federal National Mortgage
Association to sell on a loan-by-loan basis, with the Bank retaining the
servicing for such loans. The Bank sold no loans during the year ended September
30, 1998 and 1997. As a result of sales in prior years, loans which are serviced
by the Bank, which are not included in the statement of condition, were $6.0
million, $6.8 million and $7.4 million at September 30, 1998, 1997, 1996,
respectively.
NOTE 8. ALLOWANCE FOR LOAN LOSSES.
Activity in the allowance for loan losses for the years ended September 30,
1998, 1997 and 1996 is summarized as follows:
Years Ended September 30,
-----------------------------
1998 1997 1996
----- ----- -----
(In Thousands)
Balance at Beginning of Year ............... $ 139 $ 123 $ 114
Provision charged to operations ............ 70 20 24
Loans charged off
Real Estate ............................ (43) -- --
Other loans ............................ -- (14) (18)
Recoveries
Real Estate ............................ -- -- --
Other loans ............................ 1 10 3
----- ----- -----
Balance at End of Year ..................... $ 167 $ 139 $ 123
===== ===== =====
The following table sets forth information with regard to non-accrual
loans:
September 30,
---------------------
1998 1997
---- ----
(In Thousands)
Loans in non-accrual status .......................... $ -- $ --
==== ====
There were no troubled debt restructuring at September 30, 1998, and 1997.
- 36 -
<PAGE>
Accumulated interest on non-accrual loans, as shown above, collected and
recognized as interest income for the years ended September 30, 1998, and 1997,
was not material to equity or total interest income.
NOTE 9. BANKING HOUSE AND EQUIPMENT.
Banking House and equipment at September 30, 1998 and 1997 are summarized
by major classification as follows:
September 30,
1998 1997
------- -------
(In Thousands)
Land................................................. $ 1,187 $ 1,112
Buildings and improvements .......................... 1,274 948
Furniture, fixtures and equipment ................... 339 239
------- -------
Banking House and Equipment, Net................ $ 2,800 $ 2,299
======= =======
The Bank records depreciation expense directly against the cost of the
related asset and does not utilize an accumulated depreciation account. Amounts
charged to depreciation expense were $ 143,184 and $156,874 for the years ended
September 30, 1998 and 1997, respectively.
NOTE 10. ACCRUED INTEREST RECEIVABLE.
A summary of accrued interest receivable as of September 30, 1998 and 1997
is as follows:
September 30,
1998 1997
---- ----
(In Thousands)
Securities available for sale ........................ $517 $421
Investment securities held to maturity ............... 21 16
Loans receivable ..................................... 411 351
---- ----
Total Accrued Interest Receivable .................... $949 $788
==== ====
NOTE 11. DEPOSITS.
Deposits are summarized as follows:
September 30,
-------------------------------------------
1998 1997
------------------- -------------------
No. of No. of
Accounts Amount Accounts Amount
------- ------- ------- -------
(In Thousands)
TYPE OF ACCOUNTS
Savings Accounts ............... 4,741 $28,089 4,846 $26,839
Certificates of deposit ........ 2,334 39,350 2,369 38,247
Money market accounts .......... 410 10,958 403 8,892
Now accounts.................... 760 4,932 679 4,136
Demand accounts ................ 2,620 4,981 2,750 4,869
------- ------- ------- -------
10,865 $88,310 11,047 $82,983
======= ======= ======= =======
- 37 -
<PAGE>
The approximate contractual maturities of certificates of deposit accounts
for the twelve month periods subsequent to September 30, 1998, are as follows:
Twelve month periods ended
September 30,
-------------
(In Thousands)
1999 .............................................................. $33,280
2000 .............................................................. 5,396
2001 .............................................................. 626
2002 .............................................................. 48
2003 .............................................................. --
-------
$39,350
=======
The approximate contractual maturities of certificate of deposit accounts
for the twelve month periods subsequent to September 30, 1997, are as follows:
Twelve month periods ended September 30,
----------------------------------------
(In Thousands)
1998 ............................................................. $34,719
1999 ............................................................. 2,684
2000 ............................................................. 780
2001 ............................................................. 41
2002 ............................................................. 23
-------
$38,247
=======
At September 30, 1998 and 1997, the aggregate of time deposit accounts with
balances equal to or in excess of $100,000 was approximately $2.4 million and
$1.8 million. Deposits in excess of $100,000 are not Federally insured.
Interest expense on deposits for the years ended September 30, 1998, 1997,
and 1996 is summarized as follows:
Years Ended September 30,
--------------------------
1998 1997 1996
------ ------ ------
(In Thousands)
Savings ........................................ $ 803 $ 822 $ 811
Certificates of deposit ........................ 1,948 1,907 2,130
Money market accounts .......................... 334 295 333
Now accounts ................................... 114 101 88
Escrow ......................................... 0 3 3
------ ------ ------
$3,199 $3,128 $3,365
====== ====== ======
- 38 -
<PAGE>
NOTE 12. REPURCHASE AGREEMENTS AND BORROWED FUNDS.
Securities sold to Federal Home Loan Bank under agreements to repurchase at
September 30, 1998 are as follows:
AMOUNT RATE MATURITY
------ ---- --------
$ 2,000,000 5.07% 03/12/2008
$ 2,000,000 5.12% 04/03/2008
$ 2,000,000 5.29% 04/28/2008
$ 2,000,000 5.23% 05/13/2008
$ 2,000,000 5.08% 06/18/2008
-----------
$10,000,000
===========
Information relating to borrowings under repurchase agreements is
summarized as follows:
Average balance during the year ............................. $ 4,307,000
Average Interest Rates During the Year .................... 5.22%
Maximum Month-End Balance During the Year ................. $10,000,000
Securities Underlying Agreement at Year-End:
Amortized cost ......................................... $11,247,727
Estimated Market Value ................................. $11,360,553
Total interest expense on the borrowings under repurchase agreements for
the year ended September 30, 1998 amounted to $225,000.
The Bank has a line of credit available with the Federal Home Loan Bank of
New York and as of September 30, 1998, the Bank could borrow up to $15.5
million. There were no amounts outstanding under this line of credit at
September 30, 1998.
There were no borrowings during the year ended September 30,1997, and
maximum borrowings during the year ended September 30, 1997, was $2 million and
interest related to these borrowings amounted to $24,160.
NOTE 13. EARLY RETIREMENT AND EMPLOYEE TERMINATION BENEFITS
On July 15, 1998 the Board of Directors adopted and offered to eighteen
eligible employees a voluntary early retirement and employee termination
program. The eligible employees were required to notify the Bank in writing by
September 30, 1998 their acceptance or rejection of the program. Eleven
employees accepted the program, of which four were executive officers. The
voluntary program expense consists of enhanced retirement benefits and severance
pay, which amounted to $699,000.00. This amount has been recorded as an expense
in the Statement of Operations for the year ended September 30, 1998, and as an
accrued liability within the Statement of Condition of September 30, 1998.
- 39 -
<PAGE>
NOTE 14. EMPLOYEE BENEFITS.
Retirement Plans:
A. Pension Plan
The Bank has a non-contributory defined benefit pension plan covering
substantially all of its employees. Current and past service pension costs are
funded as accrued. The Bank has recorded pension expense for this period in
accordance with SFAS #87.
The following table sets forth the plan's funded status as of September 30,
1998 and 1997:
<TABLE>
<CAPTION>
September 30,
------- -------
1998 1997
------- -------
(In Thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation ................................... $ 3,615 $ 2,317
======= =======
Projected benefit obligation for service rendered to date ........ $(3,732) $(2,874)
Plan assets at fair value ........................................ 3,495 3,557
------- -------
Plan assets in excess of projected benefit ....................... (237) 683
Unrecognized net (gain) loss from past experience
different from that assumed and effects of changes in
assumptions
-- (397)
Prior service cost not yet recognized in net periodic pension cost 7 16
Unrecognized net asset being recognized over 11.81
years
-- (53)
------- -------
(Accrued) prepaid pension cost ................................... $ (230) $ 249
======= =======
</TABLE>
Net pension cost for 1998 and 1997 included the following components:
September 30,
1998 1997
---- ----
(In Thousands)
Service Costs - Benefits
Earned during the period ............................... $ 87 $ 103
Interest cost on projected benefit obligation .......... 209 194
Return on plan assets .................................. (282) (233)
Amortization of unrecognized transition asset .......... (17) (17)
Amortization of unrecognized loss ...................... -- --
Amortization of past service liability ................. 4 4
Curtailment credit ..................................... (186) --
Termination benefits ................................... 665 --
----- -----
Total Pension Expense .................................. $ 480 $ 51
===== =====
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefits obligation for both years were 5.0% and 5.5% respectively.
The expected long-term rate of return on assets was 8.0%.
- 40 -
<PAGE>
B. Profit Sharing Plan
The Bank maintains a profit sharing trust retirement plan (a defined
contribution plan) which covers all eligible employees and includes an
employees' thrift savings plan established under the provisions of Internal
Revenue Code Section 401(k). Profit sharing contributions will be made as a
matching of the employee's voluntary before-tax contributions up to a maximum of
three percent of the individual employees' salary. The employer may, from time
to time, change the plan to provide for a different matching contribution.
Employees will be notified of any change made. The Bank's contributions to the
profit sharing retirement plan amounted to $30,227, $26,569 and $28,295 for the
fiscal years ended September 30, 1998, 1997 and 1996, respectively.
The Bank has every intention of continuing to offer the plan to all
eligible employees. However, the Bank reserves the right to change, amend,
modify, or even terminate the plan, if necessary. Termination of the plan is
unlikely, but should it happen, the eligible employees will receive the full
value of their plan accounts.
C. Other Retirement Benefits
In addition to pension benefits, the Bank provides certain health care and
life insurance benefits for retired employees and their spouses. The
post-retirement health care and life insurance benefits plan is being terminated
on December 31, 1998. Eligible employees retired on or before that date will
have benefits paid through the plan under the agreed upon terms existing at the
employees retirement date. Beginning January 1, 1999 there will be no health
care or life insurance payments made for employees retiring from that date
forward. In terminating this plan the Bank recovered $134,000 of accrued
Post-Retirement Benefit costs.
SFAS No. 106, issued in December 1990, requires that the cost of
postretirement benefits other than pensions be recognized on an accrual basis as
employees perform services to earn the benefits. This is a significant change
from the prevalent current practice of accounting for these benefits on a
pay-as-you-go (cash) basis. The cumulative postretirement benefit obligation
(APBO) at the date of adoption (the "transition obligation") may be recognized
in income as the cumulative effect of an accounting change in the period of
adoption or over future periods as a component of the postretirement benefit
cost. During the year ended September 30, 1995, the Bank adopted SFAS No. 106.
The following is a reconciliation of the funded status of the plan at
September 30, 1998 and 1997:
September 30,
----------------------
1998 1997
------- -------
(In Thousands)
Accumulated Postretirement Benefit
Obligation
Retirees ........................................ $ 769 $ 308
Active employees fully eligible for
benefits ...................................... -- 418
Other active employees .......................... -- 358
------- -------
Total ........................................... 769 1,084
Unrecognized gain (loss) ........................ -- (236)
------- -------
Accrued postretirement benefits ................. $ 769 $ 848
======= =======
- 41 -
<PAGE>
The components of the net periodic postretirement benefit costs are as
follows:
Years ended September 30,
-------------------------
1998 1997
----- -----
(In Thousands)
Service cost .......................................... $ 20 $ 19
Interest cost ......................................... 70 73
Amortization of unrecognized gain (loss) .............. 2 7
Curtailment credit .................................... (147) --
----- -----
Total net periodic benefit (credit)/cost .............. $ (55) $ 99
===== =====
A discount rate of 7.25%, an annual rate of salary increases of 5.0% and a
7.5% increase in the assumed health care costs reducing linearly to 5% in the
year 2005, were used to determine the APBO at September 30, 1998 and a discount
rate of 7.75%, an annual rate of salary increases of 5.5% and a 7.5% increase in
the assumed health care costs reducing linearly to 5.0% in the year 2005, were
used to determine the APBO at September 30, 1997.
- 42 -
<PAGE>
D. Employee Stock Ownership Plan
Concurrently with the conversion, the Company adopted an Employee Stock
Ownership Plan (the "ESOP") for substantially all employees. The ESOP purchased
179,860 shares for the Company's stock in the conversion at a cost of $1,798,600
using the proceeds of a loan provided by the Company. The terms of the loan call
for level principal payments in 40 quarterly installments commencing September
30, 1997, with interest at 7.75% per annum.
Shares purchased by the ESOP will initially be pledged as collateral for
the ESOP loan and will be allocated among participants annually based
proportionately on the repayment of the ESOP loan and the relative compensation
of the participants. The cost of unallocated shares held in the suspense account
is reflected as a reduction of stockholders' equity.
The Company accounts for the ESOP in accordance with the American Institute
of Certified Public Accountant's Statement of Position No. 93-6 "Employees'
Accounting For Stock Ownership Plans" (SOP 93-6). Accordingly, the shares
pledged as collateral are reported as unallocated ESOP shares in shareholders'
equity. As shares are released from collateral, the Company reports compensation
expense equal to the average market price of the shares (during the applicable
service period), and the shares become outstanding for earnings per share
computations. Unallocated ESOP shares are not included in the earnings per share
computations. The Company recorded approximately $287,000 of compensation
expense under the ESOP during the year ended September 30, 1998. The ESOP shares
as of September 30, 1998 were as follows:
Allocated Shares ........................................... 8,993
Shares released for allocation ....................... 13,490
Unallocated share .................................... 157,377
---------
179,860
---------
Market Value of unallocated
Shares at September 30, 1998 ........................ 1,957,376
=========
E. Stock Option Plan
The Company's Stock Option Plan for Outside Directors, Officers and
Employees (Stock Option Plan) was approved by the shareholders at the annual
meeting held on February 25, 1998. The purpose of the Stock Option Plan is to
promote the growth and profitability of the Company by providing eligible
directors, certain key officers and employees of the Company, and its affiliates
with an incentive to achieve corporate objectives, and by allowing the Company
to attract and retain individuals of outstanding competence by offering such
individuals and equity interest in the Company.
The Stock Option Plan may grant options not to exceed 224,825 shares, the
shares necessary to fund the Stock Option Plan with Treasury Stock acquisitions.
An option will entitle the holder to purchase one share of common stock at an
exercise price equal to the fair market value on the date of grant, and expire
on the last day of the ten-year period commencing on the date on which the
option was granted. Options under the plan will be designated as either an
Incentive Stock Option or a Non-Qualified Stock Option.
On February 25, 1998, 67,446 shares were awarded at an exercise price of
$15.88 per share, and on April 9, 1998, 10,500 shares were awarded at an
exercise price of $16.75 per share. These shares have a ten-year term and vest
at a rate of 20% per year from their respective grant dates.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plan. Accordingly, no compensation cost has been
recognized for its stock option plans. SFAS No. 123 requires Companies not using
a fair value based method of accounting for employee stock options or similar
plans, to provide pro forma disclosure of net income and earnings per share as
if that method of accounting had been applied. The fair value of each option is
estimated on the date of grant using the Black-Scholes option-pricing
- 43 -
<PAGE>
model with the following weighted-average assumptions used for grants in fiscal
1998: expected volatility of 37.0%; risk free interest rate of 5.17% for the
February 25, 1998 grant and 4.93% for the April 9,1998 grant; and expected lives
of 7 years. Pro forma disclosures for the Company for the year ending September
30, 1998 is as follows:
(In thousands, except per share data)
Net Income
As Reported .............................................. $600
Pro Forma ................................................ 551
Earnings Per Share:
As Reported .............................................. $.29
Pro Forma ................................................ 27
Because the Company's employee stock options have characteristics significantly
different from those of traded options for which the Black-Scholes model was
developed, and because changes in the subjective input assumptions can
materially affect the fair value estimate, the existing models, in management's
opinion, do not necessarily provide a reliable single measure of the fair value
of its employee stock options.
A summary of the status of the Company's stock option plans as of September 30,
1998 and changes during the year on that date is presented below:
Weighted Average
Shares Exercise Price
------ --------------
Options
Outstanding October 1 .......................... --
Granted ........................................ 77,946 $15.99
Exercised ...................................... --
Cancelled
Outstanding at Year-End .......................... 77,946
Exercisable at Year-End .......................... --
Estimated weighted average of fair value of
options granted on February 25, 1998 ............. 9.54
Estimated weighted average of fair value of
options granted on April 9, 1998 ................. 9.52
F. Incentive Stock Award Plan
On February 25, 1998, the Company's stockholders approved the GSB Financial
Corporation Incentive Stock Award Plan ("ISAP"). The purpose of the plan is to
promote the long-term interests of the company and its stockholders by providing
a stock based compensation program to attract and retain officers and directors.
Under ISAP, 89,930 shares of authorized shares are reserved for the issuance
under the plan.
On February 25, 1998 and April 9, 1998, 22,480 shares and 13,000 shares,
respectively, were awarded under the ISAP. In connection with the acceptance of
the voluntary early termination program by four executive officers, which
resulted in the forfeiture of ISAP awards made to them totaling 7,304 shares. At
September 30, 1998, there were 28,176 ISAP awards outstanding. The shares vest
in five equal installments commencing one year from the date of grant. The fair
market value of the shares awarded under the plan was $448,000 at the grant
dates, and is being amortized to compensation expense on a straight-line basis
over the five year vesting periods. Compensation expense of $57,000 was recorded
in fiscal 1998, with the remaining unearned compensation cost of $391,000 shown
as a reduction of shareholders' equity at September 30, 1998.
- 44 -
<PAGE>
NOTE 15. INCOME TAXES.
The components of income tax expense are as follows:
Years Ended September 30,
-------------------------------------
1998 1997 1996
----- ----- -----
(In Thousands)
Current tax:
Expense ........................ $ 532 $ 922 $ 395
Deferred tax :
Expense (benefit) .............. (131) (482) (44)
----- ----- -----
Income tax expense ............. $ 401 $ 440 $ 351
===== ===== =====
Income tax expense for financial reporting purposes is less than the amount
computed by applying the statutory federal income tax rate of 34% to income
taxes for the reasons noted in the table below:
Years Ended September 30,
-------------------------------
1998 1997 1996
----- ----- -----
(In Thousands)
Expense at statutory federal tax rate . $ 340 $ 407 $ 309
Tax-exempt income ..................... -- (2) (2)
State income taxes, net of federal tax
benefit ............................. 69 83 60
Other, net ............................ (8) (48) (16)
----- ----- -----
Income tax expense .................... $ 401 $ 440 $ 351
===== ===== =====
Effective tax rate .................... 40.1% 36.8% 38.6%
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at September 30, 1998, 1997
and 1996 are as follows:
September 30,
---------------------------
1998 1997 1996
----- ----- -----
(In Thousands)
Deferred tax assets:
Post retirement employees benefits ............ $ 308 $ 340 $ 314
Allowance for loan losses ..................... 67 55 51
Mark to market securities tax ................. 289 330 83
Accrued pension costs ......................... 92 -- --
Other ......................................... 25 56 24
----- ----- -----
Total deferred tax assets ..................... 781 781 472
----- ----- -----
Deferred tax liabilities:
Depreciation .................................. 25 32 88
Prepaid pension costs ......................... -- 104 121
Tax bad debt reserves over the base year ...... 35 55 155
----- ----- -----
Total deferred tax liabilities ................ 60 191 364
Net deferred tax asset at the end of year ..... 721 590 108
Net deferred tax asset at the beginning of year 590 108 64
----- ----- -----
Deferred tax benefit for the year ............. $(131) $(482) $ (44)
===== ===== =====
- 45 -
<PAGE>
In addition to the deferred tax amounts described above, the Bank also had
a deferred tax liability of approximately $420,000, $372,000 and $103,000 at
September 30, 1998, 1997 and 1996, respectfully, related to the net unrealized
gain on securities available for sale.
The Bank, as a qualifying thrift institution under IRS guidelines, was
entitled to a special deduction for additions to a tax bad debt reserve made on
or before December 31, 1987. The Bank's aggregate reserve at December 31, 1987
was $921,000. This reserve is not required to be recaptured, despite subsequent
changes in the tax laws, so long as the Bank remains a qualified thrift
institution for IRS purposes. Hence, no deferred tax liability has been recorded
under SFAS No. 109 for potential recapture of this reserve.
NOTE 16. NATIONAR LIQUIDATION.
On February 6, 1995, the Superintendent of Banks of the State of New York
took possession of, and closed, Nationar, which was then the Bank's principal
correspondent bank. Nationar was wholly-owned by various savings banks and
provided commercial banking and other services, principally to savings banks and
savings and loan associations.
When Nationar was closed, the Bank had various deposits with and
investments in Nationar. During the year ended September 30, 1995, the Bank
recorded a provision for losses on Nationar matters of $278,623 based upon
management's judgment of the losses, which would be suffered as Nationar was
liquidated. Of the provision, $232,223 was allocated to a demand deposit balance
of the Bank at Nationar and $46,400 was allocated to Nationar debentures and
stock owned by the Bank. Losses in the actual liquidation of Nationar were less
than anticipated, and by virtue of payments actually received, $10,969 and
$9,375 of the reserves were reversed during the years ended September 30, 1998
and 1997 respectively.
NOTE 17. COMMITMENTS AND CONTINGENCIES.
A. Legal Proceedings
The Company may, from time to time, be a defendant in legal proceedings
relating to the conduct of its business. In the best judgment of management, the
consolidated financial position of the Company will not be affected materially
by the outcome of any pending legal proceedings.
B. Lease Commitments
The Company leases approximately 105 square feet in an elder care facility
in Goshen, New York, as a branch office at an annual rental of $2,400
terminating on September 30, 1999.
In addition, the Bank has an agreement for data processing services through
February of 2001. Approximate annual payments associated with the data
processing agreement are estimated to be $225,000.
- 46 -
<PAGE>
C. Off-Balance Sheet Financing
The Bank is a party to certain financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit.
Those instruments involve, to varying degrees, elements of credit risk in excess
of the amount recognized on the statement of financial condition. The contract
amounts of those instruments reflect the extent of involvement the Bank has in
particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the commitments to extend credit is represented by the
contractual notional amount of those instruments. The Bank uses the same credit
policies in making commitments as it does for on-balance-sheet instruments.
Unless otherwise noted, the Bank does not require collateral or other
security to support off-balance-sheet financial instruments with credit risk.
D. Commitments Pending
Contract amounts of financial instruments that represent credit risk are as
follows:
(Unaudited) (Unaudited)
September 30, 1998 September 30, 1997
------------------ ------------------
(In Thousands)
Commitments Pending
Mortgage Loans ....................... $2,990 $2,991
Equity Line of Credit:
Available Draw ..................... 1,545 1,071
Commitments ........................ 190 95
Commercial Loans ................... 1,222 --
Available Draw ..................... 529 --
Overdraft Checking ................... 206 192
------ ------
$6,682 $4,349
====== ======
The breakdown of fixed rate loan commitments and the corresponding interest
rate range for the periods of September 30, 1998 and 1997 are as follows:
(Unaudited) (Unaudited)
September 30, 1998 September 30, 1997
------------------ ------------------
(In Thousands)
First Mortgage Loans.................. $2,990 $2,991
Home Equity Loans..................... 120 45
------ ------
Total Fixed Rate Loan Commitments..... $3,110 $3,036
====== ======
Fixed Rate Commitment Interest Rate... 6.75% to 8.25% 7.50% to 9.00%
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 fully drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
if any required by the Bank upon the extension of credit is based on
management's credit evaluation of the customer. Mortgage and construction loan
commitments are secured by a first lien on real estate. Collateral on extensions
of credit for commercial loans varies but may include accounts receivable,
inventory, property, plant and equipment and income producing commercial
property.
- 47 -
<PAGE>
E. Environmental Contingency
Subsequent to the audit date of September 30, 1996, the Bank determined
that there were underground oil tanks on the Village of Goshen property that had
contaminated the soil on the Bank's property. This resulted in the Bank, with
the assistance of the Village, to properly plan for the removal of both the
tanks and the contaminated soil to correct this environmental problem. During
the year ended September 30, 1997, the tanks were removed and the contaminated
soil was properly disposed of under the direction of the Department of
Environmental Conservation at a cost of approximately $50,000.
NOTE 18. REGULATORY CAPITAL REQUIREMENTS.
OTS capital regulations require savings institutions to maintain minimum
levels of regulatory capital. Under the regulations in effect at September 30,
1998, the Bank was required to maintain a minimum ratio of tangible capital to
total assets of 1.5%; a minimum leverage ratio of core (Tier 1) capital to total
adjusted tangible assets of 3.0%; and a minimum ratio of total capital (core
capital and supplementary capital) to risk-weighted assets of 8%, of which 4.0%
must be core (Tier 1) capital.
The prompt corrective action regulations define specific capital categories
based on institutions capital ratios. The capital categories in declining order
are "well capitalized", "adequately capitalized", "undercapitalized",
"significantly undercapitalized", and "critically undercapitalized". The OTS is
required to take certain supervisory actions with respect to an undercapitalized
institution. Such actions could have a direct material effect on an
institution's financial statements. Generally an institution is considered well
capitalized if it has a core (Tier 1) capital ratio of at least 5.0% (based on
average total assets; a core (Tier 1) risk-based capital ratio of at least 6.0%;
and a total risk-based capital of at least 10.0%.
Management believes that, as at September 30, 1998, the Bank meets all
capital adequacy requirements to which it is subject.
The Bank's actual capital amounts and ratios as of September 30, 1998,
compared to the OTS minimum capital adequacy requirements and the OTS
requirements for classification as a well capitalized institution are summarized
below. OTS capital regulations apply to the Bank only.
<TABLE>
<CAPTION>
For Classification
Actual Minimum Capital as Well Capitalized
--------------- --------------- -------------------
Bank Amount Ratio Amount Ratio Amount Ratio
------- ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible Capital............. $22,140 17.79% 1,867 1.50% -- --
Tier 1 (Core) Capital........ 22,140 17.79% 3,733 3.00% $6,222 5.0%
Risk Based Capital:
Tier 1....................... 22,140 37.15% -- -- 3,576 6.0%
Total........................ 22,307 37.43% 4,768 8.00% 5,959 10.0%
</TABLE>
NOTE 19. FAIR VALUE OF FINANCIAL INSTRUMENTS.
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires the Bank to disclose estimated fair values for its financial
instruments. Whenever possible, quoted market prices are used to estimate the
fair value of a financial instrument. An active market does not exist, however,
for many financial instruments. As a result, fair value estimates are made, as
of a specific date, based on judgments regarding future expected cash flows,
current economic conditions, risk factors and other characteristics of the
financial instrument. These estimates are subjective in nature and involve
uncertainties. Changes in these judgments often have a material impact on the
fair value estimates. In addition, since these estimates are made as of a
- 48 -
<PAGE>
specific date, they are susceptible to material changes in the near future. The
information presented is based on pertinent information available to management
as of each period presented. Although management is not aware of any factors,
other than changes in interest rates, that would significantly affect the
estimated fair values, the current estimated value of these instruments may have
changed significantly since that point in time.
While these estimated fair value amounts are designed to represent
estimates of the amounts at which these instruments could be exchanged in a
current transaction between willing parties (excluding the value of customer
relationships), many of the Bank's financial instruments lack an available
trading market as characterized by willing parties engaged in an exchange
transaction. In addition, it is the Bank's intent to hold most of its financial
instruments to maturity, therefore, it is not probable that the fair values
shown will be realized in a current transaction. The estimated fair values
disclosed do not reflect the value of assets and liabilities that are not
considered financial instruments. In addition, the value of long-term
relationships with depositors (core deposit intangibles) and other customers are
not reflected. The value of these items is significant.
The following describes the methodology and assumptions used to estimate
fair value of financial instruments required by SFAS 107.
Cash and short-term investments. Cash and short-term investments are by
definition short-term and do not present any unanticipated credit issues.
Therefore, the carrying amount is a reasonable estimate of fair value.
Securities. The estimated fair values of securities by type are provided in
Note 3 to the financial statements. These are based on quoted market prices,
when available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
Mortgage-backed securities The fair value of mortgage-backed securities is
estimated based on bid prices published in financial newspapers or bid
quotations received from securities dealers.
Loans. The Bank's management has determined that the carrying amount of the
loan portfolio approximates the estimated fair value. Quoted market prices are
not available for the loan portfolio. The cost of determining the fair values of
the loan portfolio would be excessive.
Deposits. Under SFAS 107, the fair value of deposits with no stated
maturity is equal to the amount payable on demand. Therefore, the fair value
estimates for these products do not reflect the benefits that the Bank receives
from the low-cost, long-term funding they provide. These benefits are
significant. Quoted market prices are not available for fixed rate time
deposits. The estimated fair value of these financial instruments has not been
determined through an independent valuation because the cost to do so would be
excessive. Management feels that the carrying amount of fixed rate deposits are
reasonable estimates of the fair values of these financial instruments.
Off-Balance Sheet Instruments. The estimated fair value of commitments to
extend credit is estimated using fees currently charged for similar arrangements
adjusted for changes in interest rates and credit risk that has occurred
subsequent to origination. Because the Bank believes that the credit risk
associated with available but undisbursed commitments would essentially offset
the fees that could be recognized under similar arrangements, and because the
commitments are either short term in nature or subject to immediate repricing,
no fair value has been assigned to these off-balance sheet commitments.
- 49 -
<PAGE>
The following is a summary of the carrying values and estimated fair values
of the Company's financial instruments at September 30, 1998 and September 30,
1997:
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
------------------------- --------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and Cash Equivalents ......... $ 7,618 $ 7,618 $ 8,318 $ 8,318
Securities Available for Sale...... 31,474 31,474 26,638 26,638
Mortgage Backed Securities-
Held to Maturity .................. 3,881 3,965 5,653 5,766
Available for Sale ................ 5,804 5,804 6,990 6,990
Loans Receivable .................. 78,713 78,713 65,738 65,738
Financial Liabilities:
Deposits .......................... 88,310 88,310 82,983 82,983
</TABLE>
- 50 -
<PAGE>
NOTE 20. PARENT COMPANY FINANCIAL INFORMATION.
GSB Financial began operations on July 9, 1997, in conjunction with the
Bank's mutual-to-stock conversion and GSB Financial's initial public offering of
its common stock. GSB Financial's statement of financial condition as of
September 30, 1998 and 1997, and related statements of operations and cash flows
for September 30, 1998, and the period July 9, 1997 to September 30, 1997, are
as follows:
Statement of Financial Condition as of September 30,
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Assets:
Cash and due from banks ......................................... $ 1,255 $ 1,729
Investment securities available for sale ........................ 5,547 5,146
Mortgage-backed securities available for sale ................... 766 2,009
Loans, net ...................................................... 1,574 1,754
Accrued interest receivable ..................................... 132 178
Equity in net assets of subsidiaries ............................ 22,667 21,905
Other Assets .................................................... 18 6
-------- --------
Total Assets .................................................. $ 31,959 $ 32,727
======== ========
Liabilities and Stockholders' Equity
Liabilities:
Accrued expenses and other liabilities .......................... $ 606 $ 94
-------- --------
Stockholders' Equity
Preferred stock, $.01 par value; authorized 500,000 shares ...... $ 0 $ 0
Common stock, $.01 par value; authorized 4,500,000:
2,248,250 shares issued at September 30, 1997 ................. 22 22
Additional paid-in capital ...................................... 21,424 21,424
Retained earnings ............................................... 11,858 11,196
Net unrealized loss on securities available for sale (net of tax) 12 (9)
Treasury stock .................................................. (1,963) --
-------- --------
Total Stockholders' Equity .................................... 31,353 32,633
-------- --------
Total Liabilities and Stockholders' Equity .................... $ 31,959 $ 32,727
======== ========
</TABLE>
- 51 -
<PAGE>
Statement of Operations for the Year Ended September 30,1998
and for the Period from Inception (July 9, 1997) Through September 30, 1997
---------------------------------------------------------------------------
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Interest Income ................................................................. $520 $102
Non-interest expense ............................................................ 378 79
---- ----
Income before income taxes and equity in undistributed earnings of subsidiaries 142 23
Income tax expense .............................................................. 58 9
---- ----
Income before equity in undistributed earnings of subsidiaries ................ 84 14
Equity in undistributed earnings of subsidiaries ................................ 516 742
---- ----
Net Income ................................................................. $600 $756
---- ----
</TABLE>
Statement of Cash Flows for the Year Ended September 30, 1998
And for the Period from Inception (July 9, 1997) through September 30, 1997.
----------------------------------------------------------------------------
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income ...................................................... $ 600 $ 756
Adjustments to reconcile net income to net cash provided by
operating activities
Equity in undistributed earnings of subsidiaries ................ (516) (742)
Fair value provision of ISAP shares committed to be released .... 57
Increase (decrease) in accrued interest receivable .............. 47 (179)
Increase in other assets ........................................ (24) --
Net amortization on investment securities-available for sale .... 34 9
Net amortization on mortgage-backed securities available for sale 8 1
Increase in accrued expenses and other liabilities .............. 510 94
-------- --------
Net cash provided (used) by operating activities ........... 716 (61)
-------- --------
Cash flows from investing activities:
Purchase of investment securities-available for sale ............ $ (2,000) $ (5,169)
Purchase of mortgage-backed securities-available for sale ....... -- (2,011)
Investment in common stock subsidiaries ......................... (50) (10,723)
Proceeds from principal paydowns of mortgage-backed securities--
available for sale ............................................ 1,235 --
Proceeds from maturity and redemption of investment securities --
available for sale ............................................ 1,600 --
Net (increase) decrease in loans to ESOP ........................ 180 (1,754)
-------- --------
Net cash provided (used) by investing activities ........... 965 (19,657)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock .......................... -- 21,447
Purchase of treasury stock ...................................... (2,020) --
Dividends ....................................................... (135) --
-------- --------
Net cash provided by (used in) financing activities ........ (2,155) 21,447
-------- --------
Net increase (decrease) in cash and cash equivalents ............ (474) 1,729
Cash and cash equivalents at beginning of year .................. 1,729 --
-------- --------
Cash and cash equivalents at end of year ........................ $ 1,255 $ 1,729
======== ========
</TABLE>
- 52 -
<PAGE>
NOTE 21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Year Ended September 30, 1998 Quarter Quarter Quarter Quarter
- ----------------------------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C>
Quarterly Operating Data
Interest income ............................... $ 1,996 $ 1,945 $ 2,087 $ 2,192
Interest expense .............................. 778 771 893 982
------- ------- ------- -------
Net interest income ........................... 1,218 1,174 1,194 1,210
Provision for loan losses ..................... 20 10 10 30
Other non-interest income ..................... 147 57 57 189
Non-interest expense .......................... 852 856 945 1,522
------- ------- ------- -------
Income before taxes ........................... 493 365 296 (153)
Income tax expense ............................ 198 144 121 (62)
------- ------- ------- -------
Net income .................................... $ 295 $ 221 $ 175 $ (91)
======= ======= ======= =======
</TABLE>
- 53 -
<PAGE>
STOCKHOLDERS' INFORMATION
CORPORATE OFFICE TRANSFER AGENT AND REGISTRAR
GSB Financial Corporation Registrar and Transfer Company
1 South Church Street 10 Commerce Drive
Goshen, New York 10924 Cranford, NJ 07016-3572
(914) 294-6151
SPECIAL COUNSEL
COMMON STOCK Serchuk & Zelermyer, LLP
81 Main Street
The common stock of GSB White Plains, NY 10601
Financial Corporation is
traded on the NASDAQ INDEPENDENT AUDITORS
Stock Market under the
symbol "GOSB" Nugent and Haeussler, P.C.
101 Bracken Road
Montgomery, NY 12549
The approximate number of
stockholders of record was
471 at December 14, 1998.
GSB Financial Corporation common stock was
issued at $10.00 per share in connection with the
Company's initial public offering on July 9, 1997.
The following table shows the range of high and
low sale prices for each quarterly period since
the Company began trading in July.
1998 High Low Dividend
---- ---- --- --------
First Quarter $18.94 $14.50 --
Second Quarter $17.50 $15.25 --
Third Quarter $17.75 $16.50 $ 0.03
Fourth Quarter $17.00 $ 8.31 $ 0.03
1997
----
Fourth Quarter $17.13 $14.00 --
FORM 10K
GSB Financial Corporation will file an Annual
Report on Form 10K for fiscal year 1998.
Stockholders may obtain a copy free of charge by
Writing to:
Barbara A. Carr
GSB Financial Corporation
1 South Church Street
Goshen, NY 10924
- 54 -
<PAGE>
GSB FINANCIAL CORPORATION and
GOSHEN SAVINGS BANK
DIRECTORS
THOMAS V. GUARINO
Chairman of the Board
GSB Financial Corp. and
President, Hudson Valley
Investment Advisors, Inc.
CLIFFORD E. KELSEY, JR.
President and Chief Executive Officer,
GSB Financial Corp. and
Goshen Savings Bank
RICHARD C. DURLAND
Executive Vice President and Treasurer,
GSB Financial Corp. and
Goshen Savings Bank
HERBERT C. MUELLER
Retired Veterinarian
ROY L. LIPPINCOTT
Retired President Lippincott Funeral
Home Inc. and Lippincott Funeral Chapel
STEPHEN O. HOPKINS
Representative R.D. Murray Fire
Apparatus and S.V.I. Trucks
GENE J. GENGEL
Executive Director,
Orange County Cerebral Palsy Assoc.
Rehabilitation Center
GSB FINANCIAL CORPORATION
OFFICERS
CLIFFORD E. KELSEY *
President and Chief Executive Officer
RICHARD C. DURLAND *
Executive Vice President and Treasurer
STEPHEN W. DEDERICK
Chief Financial Officer and Treasurer
ROLLAND B. PEACOCK, III
Vice President
BARBARA A. CARR
Secretary
DIANE D. KING *
Senior Vice President and Assistant Treasurer
JENNY M. FORD *
Vice President and Secretary
GOSHEN SAVINGS BANK -- OFFICERS
CLIFFORD E. KELSEY, JR. *
President and Chief Executive Officer
RICHARD C. DURLAND *
Executive Vice President and Treasurer
STEPHEN W. DEDERICK
Senior Vice President and Chief Financial Officer
ROLLAND B. PEACOCK, III
Senior Vice President and Senior Lending Officer
DIANE D. KING *
Senior Vice President and Assistant Treasurer
JENNY M. FORD *
Vice President and Secretary
BARBARA A. CARR
Assistant Vice President and Senior Mortgage Officer
JENNIFER A. TERPSTRA
Operating Officer and Senior Marketing Officer
SUZANNE WATTERS
Assistant Vice President and Security Officer
CHRISTOPHER P. CURCIO
Assistant Vice President
FRANCES COUGHLIN
Branch Manager - Harriman
* Officers retiring as of
December 31, 1998.
- 55 -
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Goshen Savings Bank, a federally-chartered savings bank, and GSB Investment
Services, Inc., a New York corporation, are wholly-owned subsidiaries of the
Registrant. The Registrant has no other subsidiaries.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM "THE
CONSOLIDATED FINANCIAL STATEMENTS" AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,818
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 37,278
<INVESTMENTS-CARRYING> 3,881
<INVESTMENTS-MARKET> 3,965
<LOANS> 78,713
<ALLOWANCE> 167
<TOTAL-ASSETS> 131,935
<DEPOSITS> 88,310
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,130
<LONG-TERM> 10,000
0
0
<COMMON> 21,532
<OTHER-SE> 9,963
<TOTAL-LIABILITIES-AND-EQUITY> 131,935
<INTEREST-LOAN> 5,544
<INTEREST-INVEST> 2,676
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 8,220
<INTEREST-DEPOSIT> 3,199
<INTEREST-EXPENSE> 3,424
<INTEREST-INCOME-NET> 4,796
<LOAN-LOSSES> 70
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,175
<INCOME-PRETAX> 1,001
<INCOME-PRE-EXTRAORDINARY> 1,001
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 600
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.29
<YIELD-ACTUAL> 4.14
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 139
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 167
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 167
</TABLE>
