<PAGE>
FORM 10-Q.-- QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
-----------------
or
[ ] 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.)
ONE SOUTH CHURCH ST., GOSHEN, N.Y. 10924
----------------------------------------
(Address of principal executive offices) (Zip Code)
(914) 294-6151
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Shares, $.01 par value 2,248,250
----------------------------- ---------
(Title of class) (outstanding at July 31, 1998)
<PAGE>
GSB FINANCIAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
INDEX
PART I. FINANCIAL INFORMATION Page
- ------ ---------------------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
June 30, 1998 (Unaudited) and September 30, 1997.............................. 2
Consolidated Statements of Income for the three and nine months ended
June 30, 1998 and 1997 (Unaudited)............................................ 3
Consolidated Statements of Cash Flows for the nine months ended June 30, 1998
and 1997 (Unaudited).......................................................... 4
Notes to Unaudited Consolidated Interim Financial Statements.................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................... 7
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings............................................................. 16
Item 6. Exhibits and Reports on Form 8-K.............................................. 16
Signatures.................................................................... 19
</TABLE>
1
<PAGE>
GSB Financial Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION
(In thousands except share and per share amounts)
<TABLE>
<CAPTION>
June 30, September 30,
------------------ ------------------
1998 1997
------------------ ------------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,364 $ 3,218
Federal funds sold 8,300 5,100
--------- ---------
Cash and cash equivalents 10,664 8,318
Investment securities available for sale 28,810 26,638
Mortgage-backed securities:
Held to maturity (estimated market values of $4,473 and
$5,766 at June 30, 1998 and September 30, 1997, respectively) 4,362 5,653
Available for sale 6,050 6,990
Loans receivable, net 75,439 65,738
Banking house and equipment 2,375 2,299
Accrued interest receivable 770 788
Prepaid expenses and other assets 617 622
--------- ---------
Total assets $ 129,087 $ 117,046
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 85,301 $ 82,983
Mortgagors' escrow deposits 365 62
Borrowings 10,000 -
Accrued expenses and other liabilities 1,264 1,368
--------- ---------
Total liabilities $ 96,930 $ 84,413
Commitments and contingent liabilities
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 June 30, 1998) 22 22
Additional paid-in capital 21,535 21,446
Retained earnings, substantially restricted 12,984 12,360
Net unrealized gain on securities available
for sale, net of taxes 771 559
Unallocated ISAP stock (1,536) -
Unallocated ESOP stock (1,619) (1,754)
--------- ---------
Total stockholders' equity $ 32,157 $ 32,633
--------- ---------
Total liabilities and stockholders' equity $ 129,087 $ 117,046
========= =========
</TABLE>
See accompanying notes to consolidated financial statement.
2
<PAGE>
GSB Financial Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF
OPERATIONS
(Unaudited)
(In thousands except shares and per share amounts)
<TABLE>
<CAPTION>
For the Quarter Ended For the Nine Months Ended
June 30, June 30,
------------------------------ ------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 1,406 $ 1,217 $ 4,066 $ 3,559
Federal funds sold 145 119 265 167
Investment securities 371 291 1,141 981
Mortgage-backed securities 165 101 556 317
---------- --------- --------- ---------
Total interest income 2,087 1,728 6,028 5,024
INTEREST EXPENSE
Deposit accounts 806 808 2,349 2,331
Other borrowings 87 - 93 24
Stock subscription interest expense - 42 - 42
---------- --------- --------- ---------
Total interest expense 893 850 2,442 2,397
Net interest income 1,194 878 3,586 2,627
Provision for loan losses 10 10 40 10
---------- --------- --------- ---------
Net interest income after provision for loan losses 1,184 868 3,546 2,617
NON-INTEREST INCOME
Service charges on deposit accounts 35 33 100 104
Other income 22 31 79 84
Net realized gains on securities - 1 - 1
Capital gains distributions - - 82 93
---------- --------- --------- ---------
Total non-interest income 57 65 261 282
NON-INTEREST EXPENSE
Salaries and employee benefits 512 421 1,461 1,168
Occupancy and equipment 75 105 242 227
Data processing expenses 44 58 132 144
Other non-interest expense 314 139 818 558
---------- --------- --------- ---------
Total non-interest expense 945 723 2,653 2,097
---------- --------- --------- ---------
Income before income taxes 296 210 1,154 802
Income tax expense 121 85 463 278
---------- --------- --------- ---------
Net income $ 175 $ 125 $ 691 $ 524
========== ========= ========= =========
Basic earnings per share $ 0.09 N/A $ 0.34 N/A
Weighted average shares outstanding-basic 2,026,670 N/A 2,059,012 N/A
Diluted earnings per share $ 0.08 N/A $ 0.33 N/A
Weighted average shares outstanding-diluted 2,063,759 N/A 2,070,024 N/A
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
GSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
---------------------------
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 691 $ 524
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 104 116
Provision for loan losses 40 10
ESOP compensation expense 255 -
Increase (decrease) other assets 24 (448)
Net amortization on investment securities - available for sale 39 55
Net amortization (accretion) on mortgage - backed
securities - held to maturity 4 2
Net amortization (accretion) on mortgage - backed
securities - available for sale 18 -
Increase (decrease) in accrued expenses and other
liabilities (225) 44,057
--------- ---------
Net cash provided by operating activities 950 44,316
--------- ---------
Cash flows from investing activities:
Purchase of mortgage-backed securities held to maturity - (405)
Purchases of mortgage-backed securities available for sale (1,000) (575)
Proceeds from principal paydowns of mortgage - backed
securities - held to maturity 1,286 866
Proceeds from principal paydowns of mortgage - backed
securities - available for sale 1,945 -
Proceeds from maturity and redemption of investment
securities - available for sale 8,411 6,147
Purchase of investment securities - available for sale (10,311) (2,904)
Net (increase) in loans (9,741) (5,184)
Capital expenditures (181) (147)
Proceeds from sale of other real estate owned - -
--------- ---------
Net cash provided (used) by investing activities (9,591) (2,202)
--------- ---------
Cash flow from financing activities:
Net (decrease) in demand, statement passbook, money
market and NOW deposit accounts 2,318 13,069
Increase in advances from borrowers for taxes
and insurance 303 165
Repayments of borrowings - (1,000)
Dividends payable (67) -
Purchase of treasury stock (1,567) -
Net increase (decrease) in other borrowings 10,000 1,000
--------- ---------
Net cash provided by (used in) financing activities 10,987 13,234
--------- ---------
Net increase (decrease) in cash and cash equivalents 2,346 55,348
Cash and cash equivalents at beginning of period 8,318 4,684
--------- ---------
Cash and cash equivalents at end of period $ 10,664 $ 60,032
Additional Disclosures:
Supplemental disclosures of cash flows information-cash paid
during period for:
Interest on other borrowings $ 93 $ 24
Income taxes 341 803
Supplemental schedule of non-cash investing activities:
Change in unrealized gains in investment securities -
available for sale 212 274
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
GSB Financial Corporation
Notes to Unaudited Consolidated Interim Financial Statements
1. Basis of Presentation
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.
The consolidated financial statements included herein at or for periods ended
June 30, 1998 and 1997, have been prepared by the Company without audit. In the
opinion of management, the quarterly unaudited financial statements include all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the consolidated financial position and results of operations
for the periods presented. Certain information and footnote disclosures normally
included in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. The Company believes that the disclosures are adequate to
make the information presented not misleading, however, the results for the
periods presented are not indicative of the results to be expected for the
entire year.
The unaudited quarterly financial statements presented herein should be read in
conjunction with the annual audited consolidated financial statements of the
Company for the fiscal year ended September 30, 1997.
Significant intercompany transactions and amounts have been eliminated.
2. Earnings Per Share
On July 9, 1997, GSB Financial Corporation completed its initial stock offering
of 2,248,250 shares of common stock. Concurrent with the offering, approximately
8% of the shares sold (179,860) were purchased by the GSB Financial Corporation
Employee Stock Ownership Plan ("ESOP") using the proceeds of a loan from the
Company to the ESOP. Through June 30, 1998, 17,986 shares were released from the
ESOP loan for allocation to plan participants. The remaining 161,874 shares have
not been committed to be released and under AICPA Statement of Position 93-6,
and these shares are not considered outstanding for purposes of calculating per
share amounts. Earnings per share (EPS) are not presented for periods prior to
July 9, 1997, as the Bank was a mutual savings bank, and had no stock
outstanding. Statement of Financial Accounting Standards No. 128 (SFAS No. 128)
is effective for financial statements issued for periods ending after December
15, 1997, including interim periods. SFAS No. 128 requires dual presentation of
basic and diluted earnings per share on the face of the income statement for all
entities with a complex capital structure and specifies
5
<PAGE>
additional disclosure requirements. Basic earnings per share excludes dilution
and is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Unvested
restricted stock is considered outstanding and included in the computation of
basic earnings per share as of the date shares are fully vested. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity, such as the Company's restricted stock and stock
options. SFAS No. 128 requires restatement of all prior period earnings per
share data presented. In accordance with Statement of Financial Accounting
Standards No. 128, "Earnings per Share," basic and diluted earnings per share
are identical.
The following sets forth certain information regarding the calculation of basic
and diluted earnings per share (EPS) calculations for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998
--------------------------------
Net Weighted Per-Share
Income Average Shares Amount
(In thousands, except share and earnings per share)
<S> <C> <C> <C>
Basic EPS $ 175 2,026,670 $ 0.09
Dilutive effect of potential common
Shares related to stock based
Compensation plans -- 37,089 --
Diluted EPS $ 175 2,063,759 $ 0.08
Nine Months Ended June 30, 1998
-------------------------------
Net Weighted Per-Share
Income Average Shares Amount
(In thousands, except share and earnings per share)
Basic EPS $ 691 2,059,012 $ 0.34
Dilutive effect of potential common
Shares related to stock based
Compensation plans -- 11,012 --
Diluted EPS $ 691 2,070,024 $ 0.33
</TABLE>
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
GSB Financial Corporation (the "Company") was formed in March 1997 to acquire
the common stock of Goshen Savings Bank (the "Bank") upon its conversion from a
mutual savings bank to a stock savings bank. On July 9, 1997, the Company
completed its initial public offering, issuing 2,248,250 shares of $0.01 par
value common stock at $10.00 per share. Net proceeds to the Company were $21.4
million after conversion costs, and $19.6 million excluding the shares acquired
by the Company's Employee Stock Ownership Plan (the "ESOP"), which were
purchased with the proceeds of a loan from the Company. All references to the
Company prior to July 9, 1997, except where otherwise indicated, are to the
Bank.
The Company's strategy is to continue to be a community oriented financial
institution offering core financial services. The Company attracts deposits from
its local community and invests those deposits principally in one-to-four family
residential mortgage 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 its local community. Management
also considers other loan types consistent with its mission to serve the local
consumer and business community.
The Bank is a federal savings bank with deposits insured by the Bank Insurance
Fund ("BIF") of the FDIC. The Bank's primary federal banking regulator is the
Office of Thrift Supervision ("OTS").
The financial condition and results of operations of the Company are primarily
dependent upon the operations of the Bank, and the earnings from securities
investments made by the Company with the portion of the net proceeds of its
stock offering retained by it. The Company's results of operations are dependent
principally on its net interest income, representing the difference between the
income earned on its loan and securities portfolios and its cost of funds,
represented principally by interest paid on its deposit accounts. Results of
operations are also affected by the Company's provision for loan losses. In
addition to net interest income, other sources of income for the Company 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. Results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government policies
and actions of regulatory authorities.
The Company's strategy is to continue to operate the Bank as a community-based
financial institution while exploring appropriate opportunities to leverage the
additional capital obtained in the Conversion. The Company is seeking to improve
its customer service delivery capability, enabling it to provide better services
to existing customers and seek to expand its customer base.
7
<PAGE>
In July 1998, the Bank completed the acquisition of property in Harriman, New
York to be used as a retail bank branch expected to open in August 1998. The
purchase included the building, surrounding land, and many improvements
necessary for opening a branch, such as a vault and teller counters. Total
investment in bank equipment and expense for the branch, including the $306,000
purchase price for the building is expected to be approximately $550,000 in
order to open for business.
In July 1998, the Bank offered to its employees, and the Company then announced,
a voluntary early termination program for certain employees. The program is
available to all employees with at least five years of service under the Bank's
pension plan and provides each employee, who voluntarily terminates employment
by December 31, 1998, and whose age plus years of service equals 75, (the "Rule
of 75") with five extra years of age credit and two extra years of service
credit under the pension plan. All employees eligible to participate under the
plan will also receive a severance payment equal to one week of salary for
officers, or one-half week of salary for non-officers, for each year of service
up to 26 years of service. Finally certain of the eligible employees will
receive post-termination retirement benefits under an existing program which the
Bank expects to terminate next year.
The costs of the early termination program cannot be determined at this time
because employees have until September 30, 1998, to elect to participate. The
Company believes that the pension plan enhancement components of the program are
likely to be funded entirely by the existing pension plan assets. President
Clifford E. Kelsey, Jr., has announced that he will be participating in the
program and terminate his employment effective December 31, 1998. The Bank
expects to record a pre-tax expense of $65,312 during the quarter ended
September 30, 1998, in connection with Mr. Kelsey's participation in the
program.
8
<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. Average balances for periods after December 31, 1997, are daily or
weekly average balances and earlier periods 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 Three Months Ended June 30,
-----------------------------------
1998 1997
---- ----
Average Interest Average Average Interest Average
Balance -------- Yield/ Balance -------- Yield/
------- Cost (5) ------- Cost (5)
-------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans receivable (1)..................... $ 73,000 $ 1,406 7.70% $ 62,758 $ 1,217 7.76%
Mortgage-backed securities............... 10,209 165 6.46 5,968 101 6.77
Investment securities.................... 24,268 371 6.12 20,199 291 5.76
Federal funds sold ...................... 11,125 145 5.21 10,752 119 4.43
-------- ------- -------- -------
Total interest-earning assets.......... 118,602 2,087 7.04 99,677 1,728 6.93
------- -------
Non-interest-earning assets.............. 5,662 6,638
-------- --------
Total assets........................... $124,264 $106,315
======== ========
Interest-bearing liabilities:
Savings accounts......................... $ 26,954 203 3.01 $ 29,641 223 3.01
Certificates of deposit.................. 38,243 480 5.02 38,335 487 5.08
Money market............................. 9,402 93 3.96 9,692 72 2.97
NOW accounts............................. 4,510 29 2.57 4,068 26 2.56
Other.................................... 6,725 88 5.23 5,514 42 3.05
-------- ------- -------- -------
Total interest-bearing liabilities..... 85,834 893 4.16 87,250 850 3.90
------- -------
Non-interest-bearing liabilities......... 5,974 7,002
-------- --------
Total liabilities...................... 91,808 94,252
Equity .................................. 32,456 12,063
-------- --------
Total liabilities and equity........... $124,264 $106,315
======== ========
Net interest income/spread (2)(3)........ $ 1,194 2.88% $ 878 3.03%
======= ===== ======= =====
Net earning assets/net interst margin (4) $ 32,768 4.03% $ 12,427 3.52%
======== ===== ======== =====
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.38x 1.14x
======= =======
</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 institutions.
(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 ("net interest margin") represents net
interest income as a percentage of average interest-earning assets.
(5) Yields for the three month periods have been annualized when appropriate.
9
<PAGE>
<TABLE>
<CAPTION>
For the Nine Months Ended June 30,
----------------------------------
1998 1997
---- ----
Average Interest Average Average Interest Average
Balance -------- Yield/ Balance -------- Yield/
------- Cost (5)(6) ------- Cost (5)(6)
----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans receivable (1)..................... $ 69,977 $ 4,066 7.75% $ 61,527 $ 3,559 7.71%
Mortgage-backed securities............... 11,425 556 6.49 6,061 317 6.97
Investment securities.................... 24,189 1,141 6.23 21,010 981 6.14
Federal funds sold ...................... 7,182 265 4.92 4,672 167 4.77
-------- ------- -------- -------
Total interest-earning assets.......... 112,773 6,028 7.11 93,270 5,024 7.16
------- -------
Non-interest-earning assets.............. 5,576 6,254
-------- --------
Total assets........................... $118,349 $ 99,524
======== ========
Interest-bearing liabilities:
Savings accounts......................... $ 26,468 592 2.98 $ 27,388 615 2.99
Certificates of deposit.................. 37,905 1,446 5.09 38,051 1,417 4.97
Money market............................. 8,922 228 3.41 10,092 226 2.99
NOW accounts............................. 4,232 82 2.58 3,828 73 2.54
Other.................................... 2,388 94 5.25 2,454 66 3.59
-------- ------- -------- -------
Total interest-bearing liabilities..... 79,915 2,442 4.07 81,813 2,397 3.91
------- -------
Non-interest-bearing liabilities......... 5,718 5,686
-------- --------
Total liabilities...................... 85,633 87,499
Equity .................................. 32,716 12,025
-------- --------
Total liabilities and equity........... $118,349 $ 99,524
======== ========
Net interest income/spread (2)(3)........ $ 3,586 3.04% $ 2,627 3.25%
======= ===== ======= =====
Net earning assets/net interst margin (4) $ 32,858 4.23% $ 11,457 3.74%
======== ===== ======== =====
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.41x 1.14x
======= =======
</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 ("net interest margin") represents net
interest income as a percentage of average interest-earning assets.
(5) Yields for the nine month periods have been annualized when appropriate.
(6) During the three months ended December 31, 1997 and 1996, the Company
received $45,000 and $55,000, respectively, in annual non-capital distributions
on its mutual fund investment which was recorded as interest earned. For purpose
of reporting the yields, spreads and net interest margin for such periods, only
one-quarter of such amounts have been taken into account so that yields, spreads
and margins are comparable to those shown in the Company's 1997 Annual Report.
If such amounts had been included in full, the interest rate spreads for the
nine months ended June 30, 1998 and 1997, would have been 3.06% and 3.27%,
respectively, and the net interest margins would have been 4.24% and 3.76%,
respectively, for such periods.
10
<PAGE>
Comparison of Financial Condition at June 30, 1998 and September 30, 1997
The Company's total assets amounted to $129.1 million at June 30, 1998 as
compared to $117.0 million at September 30, 1997. Loans, net increased $9.7
million, or 14.8%, from $65.7 million to $75.4 million due to steady loan
demand. Federal funds and investment securities available for sale increased by
$3.2 million and $2.2 million, while mortgage-backed securities decreased by
$2.2 million, respectively, during the nine months of fiscal 1998. Deposits
increased by $2.3 million to $85.3 million at June 30, 1998 as compared to $83.0
million at September 30, 1997, all of which increase occurred in the third
quarter of June 30, 1998. The increase of $3.3 million in the third quarter of
June 30, 1998, is a result of increased advertising for core deposits, and a
change in the rate structure of the money market account to be more competitive.
The merger of a local savings bank with an out of state commercial bank is also
believed to have augmented deposit inflow. Borrowings increased from zero to $10
million as the Company borrowed funds and invested the proceeds in securities to
increase leverage.
Total equity decreased to $32.2 million at June 30, 1998, from $32.6 million at
September 30, 1997. The $476,000 decrease in equity resulted from the repurchase
of 4% of outstanding stock for $1.5 million to fund the Incentive Stock Award
Plan (ISAP) and the allocation of $67,000 for the Company's first declared
dividend payable on August 3, 1998, offset by the retention of net income of
$691,000, $224,000 representing the financial statement effect of the release of
ESOP stock for allocation, and an increase of $212,000 in the net unrealized
gain on securities available for sale.
Basic earnings per share for the quarter and nine months ended June 30, 1998,
were $0.09, and $0.34, while the diluted earnings per share for the same periods
were $0.08 and $0.33 respectively, calculated in each case by dividing reported
net income by weighted average shares for the respective periods, excluding
unallocated ESOP stock.
Comparison of Operating Results.
Interest Income was $2.1 million for the third quarter of fiscal 1998 as
compared to $1.7 million for the third quarter of fiscal 1997, a $359,000 or
20.8% increase. For the nine months ended June 30, 1998, interest income
amounted to $6.0 million as compared to $5.0 million for the same period in
1997. These increases were primarily volume related as the Company invested the
proceeds of its public offering and borrowings. Interest earned on loans
increased primarily due to an increase of approximately $10.2 million and $8.5
million for the quarter and nine months ended June 30, 1998, in the average
volume of loans. The average yields on loans increased by 4 basis points when
comparing the nine month periods, principally because of customer demand for
fixed rate loans which were originated at initial interest rates higher than the
current rates on adjustable rate mortgage loans in the Company's portfolio. When
comparing the third quarter of fiscal 1998 to the third quarter of fiscal 1997,
average loan yields decreased by 6 basis points primarily because of an increase
in the refinancing of loans in the Bank's portfolio and the lower market rates
at which new loans were offered.
11
<PAGE>
Interest earned on mortgage-backed securities increased by $64,000 and
$239,000 for the quarter and nine months ended June 30, 1998. This was due to an
increase in the average balance of mortgage-backed securities by $4.2 million
and $5.4 million for the quarter and nine months ended June 30, 1998, partially
offset by a reduction in the average yield. The volume increase was partially
offset by 31 and 48 basis point declines in average yield on mortgage-backed
securities in the quarter and nine month ended comparable periods, respectively.
The decline in average yield was the result of lower market interest rates which
reduced available yields on mortgage-backed securities purchased during the
latter half of calendar year 1997 with the proceeds of the Company's stock
offering, while higher rate mortgage-backed securities purchased in past years
were gradually repaid. Interest earned on investment securities and federal
funds increased by $80,000 and $26,000, for the quarter and $160,000 and $98,000
for the nine months ended June 30, 1998, respectively. This was due to an
increase in the average balances of investment securities and federal funds by
$4.1 million and $373,000 for the quarter and $3.2 million and $2.5 million for
the nine months ended June 30, 1998 and also an increase in the average yield in
both time periods. The increase in the average yield is primarily due the
purchase of agency securities with issuer call provisions because they offered
higher yields.
Interest Expense was $893,000 for the third quarter of fiscal 1998 as compared
to $850,000 for the same quarter in fiscal 1997. Interest on borrowings which
were undertaken to improve leverage increased by $87,000 and $69,000 for the
quarter and the nine months ended June 30, 1997 to June 30,1998. The interest
expense on deposits decreased by $2,000 during the third quarter because average
interest bearing deposits decreased by $2.6 million, offset by the Bank raising
its rates on money market accounts to improve its competitive position in the
market area. Included in the third quarter of 1997 was $42,000 of stock
subscription interest expense for the stock offering. For the nine months ended
June 30, 1998, and 1997 interest expense totaled $2.4 million. An increase in
the average cost of funds by 16 basis points was offset by a decrease in the
average interest bearing liabilities by $1.9 million, to generate the equal
levels of interest expense in both periods. The decrease in the average balance
of interest bearing liabilities was caused by the stock subscriptions held
during the 1997 period.
Provision for Loan Losses was $10,000 for the third quarters in fiscal 1998 and
1997. The Company increased its provision for loan losses for the nine months
ended June 30, 1998 to $40,000 from $10,000 for the nine months ended June 30,
1997, due to increases in the loan portfolio. Non-performing loans at June 30,
1998, were $115,000, represented by one residential mortgage loan in
foreclosure. The foreclosure was completed and title to the mortgaged property
was acquired in July. The Bank has listed the property with a real estate broker
seeking to sell the property as soon as possible.
Non-interest income was $57,000 for the third quarter of fiscal 1998 as compared
to $65,000 for the same quarter in fiscal 1997. For the nine months ended June
30, 1998, non-interest income amounted to $261,000 as compared to $282,000 for
the same period in 1997. The nine month decrease of $21,000 is principally
caused by a reduction of $11,000 of capital gains distributions on the Company's
mutual fund investment.
12
<PAGE>
Non-interest expense was $945,000 for the third quarter of fiscal 1998, compared
to $723,000 for the comparable quarter in fiscal 1997. The increase of $222,000
is mostly caused by $77,000 of compensation expense in connection with the
Company's ESOP, $86,000 of expenses incurred or accrued related to operating a
public company, and $31,000 of expense related to the ISAP. Additional expenses
during the third quarter were $25,000 to start up new commercial lending
services and $20,000 for an employment relations consultant to provide
evaluation and employee goals standards for the Bank, which expenses were
partially offset by savings in operating expenses through cost controls. For the
nine months ended June 30, 1998, non-interest expense totaled $2.7 million as
compared to $2.1 million for the same period in 1997. The increase of $556,000
is mostly caused by $224,000 of compensation expense in connection with the
Company's ESOP and $231,000 of expenses incurred or accrued related to operating
a public company. An additional $64,000 increase in salaries and employee
benefits expense was due in substantial part to normal salary increases and an
increase of approximately one full-time equivalent employee. Advertising expense
increased by $12,000 as the Bank advertised for core deposit accounts and its
money market accounts, along with the expenses for starting commercial lending
and the employment consultant.
Income tax expense was $121,000 and $463,000 for the third quarter and nine
months ended June 30, 1998, as compared to $85,000 and $278,000 for the
comparable periods for 1997. For the nine months ended June 30, 1998, the
increase of $185,000 was principally caused an increase of $352,000 in income
before taxes and by a $60,000 reduction in tax expense during the quarter ended
December 31, 1996, due to a reduction in deferred tax liabilities caused by
changes in the New York State law regarding the tax bad debt deduction.
Liquidity and Capital Resources
The Company's 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 its 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.
The Bank closely monitors its liquidity position on a regular basis.
Excess short-term liquidity is invested in overnight federal funds sold. If the
Bank requires funds beyond its ability to generate them internally, additional
sources of funds are available through the use of borrowings. At June 30, 1998,
the Bank had available lines of credit with the Federal Home Loan Bank of New
York of $15.5 million. The Bank may, from time to time, use borrowings to
satisfy funding needs rather than increase the rates paid on new deposits,
because the latter could have a greater adverse effect on the overall cost of
funds. In the future, borrowings may also provide an appropriate method of
leveraging the additional capital obtained in the Conversion.
Loan commitments totaled $5.9 million at June 30, 1998, and the Bank
had $1.3 million of unused home equity lines of credit and $198,000 of unused
consumer overdraft checking lines of credit. Management anticipates that the
Bank will have sufficient funds available to meet its current loan commitments.
Certificates of deposit, which are scheduled to mature in one year or less from
June 30, 1998, totaled $34.2 million. Management anticipates that the Bank will
be able to retain substantially all of such deposits if the Bank decides to do
so to fund loans and other investments.
At June 30, 1998, the Bank exceeded all regulatory capital
requirements of the OTS applicable to it, with tangible and core capital of
$22.2 million, or 18.1% of adjusted assets and total risk-based capital of $22.4
million, or 39.6% of risk-weighted assets. The Bank was classified as "well
capitalized" at June 30, 1998 under OTS regulations.
13
<PAGE>
The Bank is subject to the minimum liquidity regulations of the OTS. At
June 30, 1998, OTS regulations required that the Bank maintain liquid assets
equal to at least 4% of its net withdrawable accounts plus short term
borrowings, measured on a monthly basis. The Bank has satisfied this requirement
throughout the period during which it has been a federal savings bank, and at
June 30, 1998 had liquid assets equal to 25.0% of net withdrawable accounts plus
short term borrowings.
The following table sets forth information regarding the regulatory
capital ratios of the Bank at June 30, 1998.
<TABLE>
<CAPTION>
Actual Minimum Capital For Classification
as Well Capitalized
Bank Amount Ratio Amount Ratio Amount Ratio
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible Capital $22,179 18.05% 1,843 1.50% - -
Tier 1 (Core) Capital 22,179 18.05% 3,686 3.00% $6,142 5.0%
Risk Based Capital:
Tier 1 22,179 39.32% - - 3,384 6.0%
Total 22,359 39.64% 4,512 8.00% 5,640 10.0%
</TABLE>
Forward-Looking Statements
When used in this report on form 10-Q, in future filings by the Company
with the Securities and Exchange Commission, in the Company's 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 the Company's actual results and
experiences to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. Some of the
risks and uncertainties that may affect operations, performance, results of the
Company's business, the interest rate sensitivity of its assets and liabilities,
and the adequacy of its loan loss allowance, 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.
14
<PAGE>
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 the Company's market area could have a
significant adverse effect on those of the Company's 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.
For these reasons, the Company cautions readers not to place undue
reliance upon any forward-looking statements. Forward-looking statements speak
only as of the date made and the Company assumes no obligation to update or
revise any such statements upon any change in applicable circumstances.
Year 2000 Compliance
The operations of the Bank are substantially dependent upon computer
data processing for its deposit accounts, loans, financial records and other
matters. Many computer systems and other equipment containing microchips will
not operate accurately after January 1, 2000. The Bank has undertaken a
comprehensive review of all systems believed to create potential risks in order
to eliminate any Year 2000 (Y2K) operating difficulties. A committee of bank
officers was formed to coordinate the effort, with letters being sent to all
applicable vendors to request information on their readiness for the Year 2000.
In June of this year, the Bank replaced all of its computer hardware
which was not Year 2000 compliant with hardware which is Year 2000 compliant as
part of a normal hardware replacement program. In addition, the Bank updated its
teller and related software so it is now Y2K compliant. The Bank's principal
account and loan processing is done through an outside major service provider,
which is now undertaking testing of its entire system, in conjunction with the
Bank, which is expected to be completed by September 30, 1998. Other key systems
such as the general ledger system have been updated and are Y2K compliant. The
Bank is maintaining regular contact with vendors to assure that system updates
are being made, and that third party processors are also prepared for the Year
2000.
Marginal costs to the Company for remediation efforts, over and above
normal equipment replacement expense, which would have been incurred anyway,
have been minimal. Total marginal compliance costs are estimated to be less than
$20,000.
The Bank has developed a contingency plan which enables the Bank to
continue to operate in an offline mode using database technology along with the
new computer hardware and software, if the Bank's outside data processor fails
to be Year 2000 compliant. However, based upon the results of testing thus far,
the Bank believes that this "most reasonably likely worst case scenario" is
unlikely to occur.
15
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
In the ordinary course of business, the Company and the Bank are subject to
legal actions which involve claims for monetary relief. Management, based on
advice of counsel, does not believe that any currently known legal actions,
individually or in the aggregate will have a material effect on its consolidated
financial condition or results of operation.
Item 2. Changes in Securities
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule*
(b) Reports on Form 8-K
None
- -------------------------------------------------------------------------------
* Submitted only with filing in electronic format.
16
<PAGE>
Exhibit 11
Computation of Net Income Per Share
<TABLE>
<CAPTION>
For the Quarter Ended
---------------------
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Net Income Per Share - Basic
Net income applicable to common stock $ 175,000 N/A
Weighted average common shares 2,026,670 N/A
Earnings per common share $ 0.09 N/A
Net Income Per Share - Diluted
Net income applicable to common stock $ 175,000 N/A
Weighted average common shares 2,026,670 N/A
Dilutive common stock options (1) 37,089 N/A
-----------
Weighted average common shares - diluted 2,063,759 N/A
Earnings per common share $ 0.08 N/A
For Nine Months Ended
---------------------
June 30, 1998 June 30, 1997
------------- -------------
Net Income Per Share - Basic
Net income applicable to common stock $ 691,000 N/A
Weighted average common shares 2,059,012 N/A
Earnings per common share $ 0.34 N/A
Net Income Per Share - Diluted
Net income applicable to common stock $ 691,000 N/A
Weighted average common shares 2,059,012 N/A
Dilutive common stock options (1) 11,012 N/A
-----------
Weighted average common shares - diluted 2,070,024 N/A
Earnings per common share $ 0.33 N/A
</TABLE>
(1) Dilutive common stock options (includes restricted stock under the Company's
ISAP plan and options under its stock option plan) are based on the treasury
stock method using average market price. The treasury stock method recognizes
the use of assumed proceeds upon the exercise of option, and the amount of
unearned compensation attributed to future services under the Company's
restricted stock plan, including any tax benefits, will be used to purchase the
Company's common stock at the average market price during the period.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of 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.
GSB Financial Corporation
Date: August 14, 1998 /s/ Clifford E. Kelsey, Jr.
Clifford E. Kelsey, Jr.
President and Chief
Executive Officer
(Principal Executive Officer)
Date: August 14, 1998 /s/ Stephen W. Dederick
Stephen W. Dederick
Chief Financial Officer
(Principal Financial and
Accounting Officer)
18
<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> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,364
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 34,860
<INVESTMENTS-CARRYING> 4,362
<INVESTMENTS-MARKET> 4,473
<LOANS> 75,439
<ALLOWANCE> 180
<TOTAL-ASSETS> 129,087
<DEPOSITS> 85,301
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,629
<LONG-TERM> 10,000
0
0
<COMMON> 21,557
<OTHER-SE> 10,600
<TOTAL-LIABILITIES-AND-EQUITY> 129,087
<INTEREST-LOAN> 4,066
<INTEREST-INVEST> 1,962
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 6,028
<INTEREST-DEPOSIT> 2,349
<INTEREST-EXPENSE> 2,442
<INTEREST-INCOME-NET> 3,586
<LOAN-LOSSES> 40
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,653
<INCOME-PRETAX> 1,154
<INCOME-PRE-EXTRAORDINARY> 1,154
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 691
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.33
<YIELD-ACTUAL> 4.23
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 170
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 180
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 180
</TABLE>
