<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 March 31, 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
---------------------------------------------------
(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 April 30, 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
March 31, 1998 (Unaudited) and September 30, 1997............................. 2
Consolidated Statements of Income for the three and six months ended
March 31, 1998 and 1997 (Unaudited)........................................... 3
Consolidated Statements of Cash Flows for the six months ended March 31, 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.................................................................... 6
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings............................................................. 12
Item 6. Exhibits and Reports on Form 8-K.............................................. 12
Signatures.................................................................... 14
</TABLE>
1
<PAGE>
GSB Financial Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands except share and per share amounts)
<TABLE>
<CAPTION>
March 31, September 30,
------------------------------------------
1998 1997
------------------ ----------------
<S> <C> <C>
ASSETS (unaudited)
Cash and due from banks $ 2,980 $ 3,218
Federal funds sold 6,400 5,100
--------- ---------
Cash and cash equivalents 9,380 8,318
Investment securities available for sale 22,987 26,638
Mortgage-backed securities:
Held to maturity (estimated market values of $4,832 and
$ 5,766 at March 31,1998 and September 30, 1997, respectively) 4,713 5,653
Available for sale 6,335 6,990
Loans receivable, net 71,640 65,738
Banking house and equipment 2,291 2,299
Accrued interest receivable 734 788
Prepaid expenses and other assets 775 622
--------- ---------
Total assets $ 118,855 $ 117,046
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 81,961 $ 82,983
Mortgagors' escrow deposits 186 62
Borrowings 2,000 --
Accrued expenses and other liabilities 1,255 1,368
--------- ---------
Total liabilities $ 85,402 $ 84,413
Commitments and contigent 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 March 31, 1998) 22 22
Additional paid-in capital 21,502 21,446
Retained earnings, substantially restricted
Net unrealized gain on securities available
for sale, net of taxes 12,876 12,360
717 559
Unallocated ESOP stock (1,664) (1,754)
--------- ---------
Total stockholders' equity $ 33,453 $ 32,633
--------- ---------
Total liabilities and stockholders' equity $ 118,855 $ 117,046
========= =========
</TABLE>
See accompanying notes to consolidated financial statement.
<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 Six Months Ended
March 31, March 31,
------------------------------ --------------------------
1998 1997 1998 1997
---- ---- ---- ----
INTEREST INCOME
<S> <C> <C> <C> <C>
Loans $ 1,358 $ 1,187 $ 2,660 $ 2,342
Federal funds sold 63 27 120 49
Investment securities 332 304 770 690
Mortgage-backed securities 192 103 391 216
---------- ---------- ---------- ----------
Total interest income 1,945 1,621 3,941 3,297
INTEREST EXPENSE
Deposit accounts 765 759 1,543 1,523
Other borrowings 6 8 6 24
Stock subscription interest expense -- -- -- --
---------- ---------- ---------- ----------
Total interest expense 771 767 1,549 1,547
Net interest income 1,174 854 2,392 1,750
Provision for loan losses 10 -- 30 --
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 1,164 854 2,362 1,750
NON-INTEREST INCOME
Service charges on deposit accounts 31 34 65 71
Other income 26 21 57 52
Net realized gains on securities -- -- -- --
Capital gains distributions -- -- 82 93
---------- ---------- ---------- ----------
Total non-interest income 57 55 204 216
NON-INTEREST EXPENSE
Salaries and employee benefits 470 400 959 755
Occupancy and equipment 81 87 167 169
Data processing expenses 45 35 88 86
Other non-interest expense 260 215 494 364
---------- ---------- ---------- ----------
Total non-interest expense 856 737 1,708 1,374
---------- ---------- ---------- ----------
Income before income taxes 365 172 858 592
Income tax expense 144 68 342 193
---------- ---------- ---------- ----------
Net income $ 221 $ 104 $ 516 $ 399
========== ========== ========== ==========
Basic earnings per share $ 0.11 N/A $ 0.25 N/A
Weighted average shares outstanding-basic 2,077,433 N/A 2,075,184 N/A
Diluted earnings per share $ 0.11 N/A $ 0.25 N/A
Weighted average shares outstanding-diluted 2,078,264 N/A 2,075,344 N/A
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
GSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended March 31,
--------------------------
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 516 $ 399
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 73 74
Provision for loan losses 30 --
ESOP compensation expense 146 --
Increase (decrease) other assets (97) (201)
Net amortization on investment securities -
available for sale 34 38
Net amortization (accretion) on mortgage - backed
securities - held to maturity 3 --
Net amortization (accretion) on mortgage - backed
securities - available for sale 9 --
Increase (decrease) in accrued expenses and other
liabilities (200) (180)
------- -------
Net cash provided by operating activities 514 130
------- -------
Cash flows from investing activities:
Proceeds from principal paydowns of mortgage - backed
securities - held to maturity 937 549
Proceeds from principal paydowns of mortgage - backed
securities - available for sale 673 --
Proceeds from maturity and redemption of investment
securities - available for sale 5,900 4,520
Purchase of investment securities - available for sale (2,066) (2,899)
Net (increase) in loans (5,932) (3,008)
Capital expenditures (65) (110)
Proceeds from sale of other real estate owned -- --
------- -------
Net cash provided (used) by investing activities (553) (948)
------- -------
Cash flow from financing activities:
Net (decrease) in demand, statement passbook, money
market and NOW deposit accounts (1,023) (941)
Increase in advances from borrowers for taxes
and insurance 124 51
Net increase (decrease) in other borrowings 2,000 --
------- -------
Net cash provided by ( used in) financing activities 1,101 (890)
------- -------
Net increase (decrease) in cash and cash equivalents 1,062 (1,708)
Cash and cash equivalents at beginning of year 8,318 4,684
------- -------
Cash and cash equivalents at end of year $ 9,380 $ 2,976
======= =======
Additional Disclosures:
Supplemental disclosures of cash flows information-cash paid
during year for:
Interest on other borrowings $ -- $ 24
Income taxes 114 421
Supplemental schedule of non-cash investing activities:
Change in unrealized gains in investment securities -
available for sale 160 (20)
</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
March 31, 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 statement 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 March 31, 1998, 13,489 shares were released from
the ESOP loan for allocation to plan participants. The remaining 166,371 shares
have not been committed to be released and under AICPA Statement of Position
93-6, and these shares will not be 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
5
<PAGE>
structure and specifies 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 they 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 March 31, 1998
---------------------------------
Net Weighted Per-Share
Income Average Shares Amount
(In thousands, except share and earnings per share)
<S> <C> <C> <C>
Basic EPS $ 221 2,077,433 $ 0.11
Dilutive effect of potential common
Shares related to stock based
Compensation plans -- 831 --
Diluted EPS $ 221 2,078,264 $ 0.11
Six Months Ended March 31, 1998
-------------------------------
Net Weighted Per-Share
Income Average Shares Amount
(In thousands, except share and earnings per share)
Basic EPS $ 516 2,075,184 $ 0.25
Dilutive effect of potential common
Shares related to stock based
Compensation plans -- 160 --
Diluted EPS $ 516 2,075,344 $ 0.25
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results 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 savings bank
offering a variety of 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
savings bank 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>
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 Three Months Ended March 31,
------------------------------------
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) ...............$ 69,963 $ 1,358 7.76% $ 61,512 $ 1,187 7.72%
Mortgage-backed securities ......... 11,698 192 6.57 5,988 103 6.88
Investment securities .............. 23,173 332 5.73 21,538 304 5.65
Federal funds sold ................. 5,221 63 4.83 1,542 27 7.00
---------- --------- -------- -------
Total interest-earning assets ..... 110,055 1,945 7.07 90,580 1,621 7.16
--------- -------
Non-interest-earning assets ........ 5,564 4,907
---------- --------
Total assets ......................$ 115,619 $ 95,487
========== ========
Interest-bearing liabilities:
Savings accounts ...................$ 25,974 191 2.94 $ 26,533 196 2.95
Certificates of deposit ............ 37,804 479 5.07 37,972 464 4.89
Money market ....................... 8,580 69 3.22 10,142 76 3.00
NOW accounts ....................... 4,063 26 2.56 3,679 23 2.50
Other .............................. 445 6 5.39 405 8 7.90
---------- --------- -------- -------
Total interest-bearing liabilities 76,866 771 4.01 78,731 767 3.90
--------- -------
Non-interest-bearing liabilities ... 5,734 4,669
---------- --------
Total liabilities ................. 82,600 83,400
Equity ............................. 33,019 12,087
---------- --------
Total liabilities and equity ......$ 115,619 $ 95,487
========== ========
Net interest income/spread (2).(3) . $ 1,174 3.06% $ 854 3.26%
========= ==== ======= ====
Net earning assets/net
interest margin (4).... ...........$ 33,189 4.27% $ 11,849 3.77%
========== ==== ======== ====
Ratio of average interest-earning
assets to average interest-bearing
liabilities........................ 1.43x 1.15x
==== ====
</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.
8
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended March 31,
----------------------------------
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) $ 68,465 $2,660 7.77% $60,911 $2,342 7.69%
Mortgage-backed securities 12,033 390 6.50 6,108 216 7.07
Investment securities 24,150 770 6.19 21,415 690 6.19
Federal funds sold 5,211 120 4.61 1,632 49 6.00
-------- ------ ------- ------
Total interest-earning assets 109,859 3,941 7.13 90,066 3,297 7.26
------ ------
Non-interest-earning assets 5,533 6,062
-------- -------
Total assets $115,392 $96,128
======== =======
Interest-bearing liabilities:
Savings accounts $ 26,168 389 2.97 $26,261 392 2.99
Certificates of deposit 37,737 966 5.12 37,910 930 4.91
Money market 8,682 135 3.11 10,292 154 2.99
NOW accounts 4,093 53 2.59 3,708 47 2.54
Other 220 6 5.45 924 24 5.19
-------- ------ ------- ------
Total interest-bearing liabilities 76,900 1,549 4.03 79,095 1,547 3.91
------ ------
Non-interest-bearing liabilities 5,647 5,027
-------- -------
Total liabilities 82,547 84,122
Equity 32,845 12,006
-------- -------
Total liabilities and equity $115,392 $96,128
======== =======
Net interest income/spread(2).(3) $2,392 3.10% $1,750 3.35%
====== ==== ====== ====
Net earning assets/net interest margin(4) $ 32,959 4.31% $10,971 3.82%
======== ==== ======= ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.43x 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 six 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 six months ended March 31, 1998
and 1997, would have been 3.15% and 3.41%, respectively, and the net
interest margins would have been 4.35% and 3.89%, respectively, for such
periods.
9
<PAGE>
Comparison of Financial Condition at March 31, 1998 and September 30, 1997
The Company's total assets amounted to $118.9 million at March 31, 1998 as
compared to $117.0 million at September 30, 1997. Loans, net increased $5.9
million, or 9.0%, from $65.7 million to $71.6 million due to steady loan demand.
Federal funds increased by $1.3 million, while investment securities available
for sale and mortgage-backed securities decreased by $3.7 million and $1.6
million, respectively, during the first two quarters of fiscal 1998, primarily
to fund the new loans and a decline of $1.0 million in deposits. The decline in
deposits during the six months ended March 31, 1998, is believed to have
resulted from competitive pressures, principally related to the strong stock
market and low interest rate conditions which are believed to have caused some
customers to seek non-deposit investments with higher returns. Deposits totaled
$82.0 million at March 31, 1998 as compared to $83.0 million at September 30,
1997. Borrowings increased by $2 million from September 30, 1997 to March 31,
1998, as the Bank borrowed funds as part of the process of leveraging the
additional capital raised in its Conversion.
Total equity increased to $33.5 million at March 31, 1998, from $32.6 million at
September 30, 1997. The $820,000 increase in equity included the retention of
net income of $516,000, and $146,000 representing the financial statement effect
of the release of ESOP stock for allocation, and a increase of $158,000 in the
net unrealized gain on securities available for sale.
Basic and diluted earnings per share for the first quarter of fiscal 1998 were
both $0.11, and both $0.25 for the six months ended March 31, 1998, calculated
by dividing reported net income by weighted average shares for the respective
periods, excluding unallocated ESOP stock.
Comparison of Operating Results.
Interest Income was $1.9 million for the second quarter of fiscal 1998 as
compared to $1.6 million for the second quarter of fiscal 1997, a $324,000 or
20.0% increase. For the six months ended March 31, 1998, interest income
amounted to $3.9 million as compared to $3.3 million for the same period in
1997. Average earning assets for the quarter ended March 31, 1998, increased by
$19.5 million over average earning assets for the comparable period last year.
The increase was primarily volume related as the Company invested the proceeds
of its public offering. Interest earned on loans increased primarily due to an
increase of approximately $8.5 million and $7.6 million for the quarter and six
months ended March 31, 1998, in the average volume of loans, coupled with a
slight increase in average yield on loans. This increase in average yield
resulted principally from 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.
Interest earned on mortgage-backed securities increased by $89,000 and $175,000
for the quarter and six months ended March 31, 1998. This was due to an increase
in the average balance of mortgage-backed securities by $5.7 million and $5.9
million for the quarter and six months ended March 31, 1998. The volume increase
was partially offset by 31 and 57 basis point declines in average yield on
mortgage-backed securities in the quarter and six 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
10
<PAGE>
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 $28,000 and $36,000, for the quarter and $80,000
and $71,000 for the six months ended March 31, 1998, respectively. This was due
to an increase in the average balances of investment securities and federal
funds by $1.6 million and $3.7 million for the quarter and $2.7 million and $3.6
million for the six months ended March 31, 1998.
Interest Expense was $771,000 for the second quarter of fiscal 1998 as compared
to $767,000 for the same quarter in fiscal 1997. For the six months ended March
31, 1998, and 1997 interest expense totaled $1.5 million. When comparing the
second quarters of fiscal 1997 and 1998, the average cost of funds of increased
by 11 basis points, substantial offset by a reduction in average
interest-bearing liabilities of $1.9 million. Average interest bearing
liabilities declined when comparing the quarter ended March 31, 1998, with the
comparable quarter the prior year in part because of competition for deposits.
Management also believes that part of the decline may represent deposits which
were withdrawn and used to purchase stock of the Company in the Conversion. The
increase in the average cost of funds was caused principally by a 18 basis point
increase in the average rate paid on certificates of deposit as competition for
deposits in the local market caused upward pressure on short term certificate of
deposit rates
Provision for Loan Losses. The Company increased its provision for loan losses
from zero for the quarter and six months ended March 31, 1997 to $10,000 and
$30,000 for the quarter and six months ended March 31, 1998 due to increases in
the loan portfolio. At March 31, 1997, the allowance for loan losses represented
147.8% of non-performing loans and 0.24% of total loans. Non-performing loans at
March 31, 1998 were $115,000, or 0.16% of total loans, and were represented by
one residential mortgage loan on which a foreclosure action has been commenced
and the borrower has filed a bankruptcy petition.
Non-interest income was $57,000 for the second quarter of fiscal 1998 as
compared to $55,000 for the same quarter in fiscal 1997. For the six months
ended March 31, 1998, non-interest income amounted to $204,000 as compared to
$216,000 for the same period in 1997. The six month decrease of $12,000 is
principally caused by a reduction of $11,000 of capital gains distributions on
the Company's mutual fund investment.
Non-interest expense was $856,000 for the second quarter of fiscal 1998,
compared to $737,000 for the comparable quarter in fiscal 1997. The increase of
$119,000 is mostly caused by $74,000 of compensation expense in connection with
the Company's ESOP and $77,000 of expenses incurred or accrued related to
operating a public company, offset by savings in operating expenses through cost
controls. For the six months ended March 31, 1998 non-interest expense totaled
$1.7 million as compared to $1.4 million for the same period in 1997. The
increase of $334,000 is mostly caused by $147,000 of compensation expense in
connection with the Company's ESOP and $145,000 of expenses incurred or accrued
related to operating a public company. An additional $57,000 increase in
salaries and employee benefits expense was due in substantial part to normal
salary increases and an increase of approximately two full-time equivalent
employees.
Income tax expense was $144,000 and $342,000 for the second quarter and six
months ended March 31, 1998, as compared to $68,000 and $193,000 for the
comparable periods for 1997. For the six months ended March 31, 1998, the
increase of $149,000 was principally
11
<PAGE>
caused an increase of $266,000 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 March 31, 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 $4.5 million at March 31, 1998, and the Bank
had $1.2 million of unused home equity lines of credit and $195,000 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
March 31, 1998, totaled $34.5 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 March 31, 1998, the Bank exceeded all regulatory capital
requirements of the OTS applicable to it, with tangible and core capital of
$21.9 million, or 19.7% of adjusted assets and total risk-based capital of $22.1
million, or 39.7% of risk-weighted assets. The Bank was classified as "well
capitalized" at March 31, 1998 under OTS regulations.
The Bank is subject to the minimum liquidity regulations of the OTS. At
March 31, 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
March 31, 1998 had liquid assets equal to 25.0% of net withdrawable accounts
plus short term borrowings.
12
<PAGE>
The following table sets forth information regarding the regulatory
capital ratios of the Bank at March 31, 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 $21,918 19.68% 1,670 1.50% - -
Tier 1 (Core) Capital 21,918 19.68% 3,341 3.00% $5,568 5.0%
Risk Based Capital:
Tier 1 21,918 39.40% - - 3,338 6.0%
Total 22,088 39.70% 4,451 8.00% 5,563 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.
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.
13
<PAGE>
Year 2000 Compliance
The Company is continuing the process of evaluating its computer
software and hardware for Year 2000 compliance. The Bank is also investigating
vendors in connection with its planned replacement of the software and hardware
for its retail delivery system to assure that the new system will be Year 2000
compliant. The replacement of the hardware and software, which the Bank is
undertaking regardless of the Year 2000 issue, should serve to facilitate the
avoidance of Year 2000 problems without incurring additional expenses in
connection with the Bank's core systems over and above those which would be
incurred as part of a normal replacement program.
14
<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 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders (the "Meeting") on February
25, 1998. The purpose of the Meeting was to vote on the following proposals:
1. The election of two directors for terms of three years each;
2. The approval of the Company's Stock Option Plan;
3. The approval of the company's Incentive Stock Award Plan;
4. The ratification of the appointment of Nugent & Hauessler,
P.C. as independent auditors of the Company for the year
ending September 30, 1998.
With respect to Proposal 1, all of the directors nominated by the Company were
elected at the Meeting. In addition, Proposals 2, 3 and 4 were approved at the
Meeting. The voting results for the Proposals were as follows:
Proposal 1: Gene Gengel For 1,999,705
Withheld 87,113
Thomas V. Guarino For 1,999,705
Withheld 87,113
Proposal 2: For 1,260,910
Against 262,292
Abstain 11,179
Non-Vote 552,437
15
<PAGE>
Proposal 3: For 1,239,833
Against 285,220
Abstain 10,029
Non-Vote 551,736
Proposal 4: For 2,043,836
Against 33,869
Abstain 9,113
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
---------------------
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Net Income Per Share - Basic
- ----------------------------
Net income applicable to common stock $ 221,000 N/A
Weighted average common shares 2,077,433 N/A
Earnings per common share $ 0.11 N/A
Net Income Per Share - Diluted
- ------------------------------
Net income applicable to common stock $ 221,000 N/A
Weighted average common shares 2,077,433 N/A
Dilutive common stock options (1) 831 N/A
-----------
Weighted average common shares - diluted 2,078,264 N/A
Earnings per common share $ 0.11 N/A
For Six Months Ended
--------------------
March 31, 1998 March 31, 1997
-------------- --------------
Net Income Per Share - Basic
- ----------------------------
Net income applicable to common stock $ 516,000 N/A
Weighted average common shares 2,075,184 N/A
Earnings per common share $ 0.25 N/A
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Net Income Per Share - Diluted
- ------------------------------
Net income applicable to common stock $ 516,000 N/A
Weighted average common shares 2,075,184 N/A
Dilutive common stock options (1) 160 N/A
-----------
Weighted average common shares - diluted 2,075,344 N/A
Earnings per common share $ 0.25 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.
18
<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: May 15, 1998 /s/ Clifford E. Kelsey, Jr.
Clifford E. Kelsey, Jr.
President and Chief
Executive Officer
(Principal Executive Officer)
Date: May 15, 1998 /s/ Stephen W. Dederick
Stephen W. Dederick
Chief Financial Officer
(Principal Financial and
Accounting Officer)
19
<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> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,980
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 29,322
<INVESTMENTS-CARRYING> 4,713
<INVESTMENTS-MARKET> 4,832
<LOANS> 71,640
<ALLOWANCE> 170
<TOTAL-ASSETS> 118,855
<DEPOSITS> 81,961
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,441
<LONG-TERM> 2,000
0
0
<COMMON> 21,524
<OTHER-SE> 11,929
<TOTAL-LIABILITIES-AND-EQUITY> 118,855
<INTEREST-LOAN> 2,660
<INTEREST-INVEST> 1,281
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 3,941
<INTEREST-DEPOSIT> 1,543
<INTEREST-EXPENSE> 1,549
<INTEREST-INCOME-NET> 2,392
<LOAN-LOSSES> 30
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,708
<INCOME-PRETAX> 858
<INCOME-PRE-EXTRAORDINARY> 858
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 516
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
<YIELD-ACTUAL> 4.31
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 158
<CHARGE-OFFS> 0
<RECOVERIES> 2
<ALLOWANCE-CLOSE> 170
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 170
</TABLE>
