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 September 30, 1999
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 2,053,238
(Title of class) (outstanding at November 12, 1999)
<PAGE>
GSB FINANCIAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
- ------- --------------------- ----
<S> <C> <C>
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
September 30, 1999 (Unaudited) and September 30, 1998......................... 3
Consolidated Statements of Income for the three and nine months ended
September 30, 1999 and 1998 (Unaudited)....................................... 4
Consolidated Statements of Cash Flows for the nine months ended September 30,
1999 and 1998 (Unaudited)..................................................... 5
Notes to Unaudited Consolidated Interim Financial Statements.................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................... 7
Item 3. Quantitative and Qualitative Disclosure about Market Risk..................... 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................. 16
Item 6. Exhibits and Reports on Form 8-K.............................................. 16
Signatures.................................................................... 31
</TABLE>
2
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GSB Financial Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)
(In thousands except shares and per share amounts)
<TABLE>
<CAPTION>
September 30, September 30,
------------- -------------
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks ...................................................... $ 3,469 $ 2,818
Federal funds sold ........................................................... 100 4,800
--------- ---------
Cash and cash equivalents .................................................... 3,569 7,618
Investment securities available for sale ..................................... 49,969 31,474
Mortgage-backed securities:
Held to maturity (estimated market values of $1,969 and
$3,965 at September 30,1999 and 1998, respectively) ...................... 1,671 3,881
Available for sale ....................................................... 2,234 5,804
Loans receivable, net ...................................................... 111,439 78,713
Banking house and equipment ................................................ 2,797 2,800
Accrued interest receivable ................................................ 1,358 949
Prepaid expenses and other assets .......................................... 1,597 696
--------- ---------
Total assets ........................................................... $ 174,634 $ 131,935
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits ................................................................... $ 103,737 $ 88,310
Mortgagors' escrow deposits ................................................ 174 126
Federal funds purchased .................................................... 4,325 --
Borrowings ................................................................. 35,000 10,000
Accrued expenses and other liabilities ..................................... 1,764 2,004
--------- ---------
Total liabilities .................................................... $ 145,000 $ 100,440
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 September 30, 1999 and September 30, 1998) 22 22
Additional paid-in capital ................................................. 21,597 21,510
Retained earnings, substantially restricted ................................ 13,869 12,825
Accumulated other comprehensive income ..................................... (636) 632
Treasury stock, at cost ................................................... (3,450) (1,529)
Unearned ISAP stock ....................................................... (368) (391)
Unallocated ESOP stock .................................................... (1,400) (1,574)
--------- ---------
Total stockholders' equity ........................................... $ 29,634 $ 31,495
--------- ---------
Total liabilities and stockholders' equity ........................... $ 174,634 $ 131,935
========= =========
</TABLE>
See accompanying notes to consolidated financial statement.
3
<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
September 30, September 30,
--------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans ............................................... $ 1,971 $ 1,478 $ 5,375 $ 4,242
Federal funds sold .................................. 7 109 71 316
Investment securities ............................... 812 441 2,027 1,145
Mortgage-backed securities .......................... 75 164 270 520
----------- ----------- ----------- -----------
Total interest income ............................. 2,865 2,192 7,743 6,223
INTEREST EXPENSE
Deposit accounts .................................... 918 850 2,668 2,421
Other borrowings .................................... 470 132 928 225
----------- ----------- ----------- -----------
Total interest expense ............................ 1,388 982 3,596 2,646
Net interest income ................................. 1,477 1,210 4,147 3,577
Provision for loan losses ........................... 20 30 55 50
----------- ----------- ----------- -----------
Net interest income after provision for loan losses . 1,457 1,180 4,092 3,527
NON-INTEREST INCOME
Service charges on deposit accounts ................. 45 39 133 105
Other income ........................................ 33 20 95 69
Net realized gains on securities .................... -- 130 -- 130
Capital gains distributions ......................... -- -- -- --
----------- ----------- ----------- -----------
Total non-interest income ......................... 78 189 228 304
NON-INTEREST EXPENSE
Salaries and employee benefits ...................... 410 470 1,191 1,442
Occupancy and equipment ............................. 82 77 255 232
Data processing expenses ............................ 71 58 214 148
Early termination expense ........................... -- 699 -- 699
Recovery FASB 106 expense ........................... -- (134) -- (134)
Other non-interest expense .......................... 333 352 972 935
----------- ----------- ----------- -----------
Total non-interest expense ........................ 896 1,522 2,632 3,322
----------- ----------- ----------- -----------
Income before income taxes .......................... 639 (153) 1,688 509
Income tax expense .................................. 256 (62) 669 203
----------- ----------- ----------- -----------
Net income .......................................... $ 383 $ (91) $ 1,019 $ 306
=========== =========== =========== ===========
Basic earnings per share ............................ $ 0.21 $ (0.05) $ 0.54 $ 0.15
Weighted average shares outstanding - basic ......... 1,848,322 1,997,403 1,889,848 2,033,542
Diluted earnings per share .......................... $ 0.21 $ (0.04) $ 0.54 $ 0.15
Weighted average shares outstanding - diluted ....... 1,866,617 2,019,651 1,905,358 2,053,677
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
GSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
-------- --------
(In Thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................................ $ 1,019 $ 306
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation ..................................................................... 130 103
Provision for loan losses ........................................................ 55 50
Fair value provision of ESOP shares committed to be released ..................... 246 270
Gain in maturity/redemption of investment securities available for sale .......... -- (130)
Increase (decrease) other assets ................................................. (872) (227)
Net amortization on investment securities - available for sale .................. 31 34
Net amortization (accretion) on mortgage - backed
Securities - held to maturity .................................................. (3) 4
Net amortization (accretion) on mortgage - backed
Securities - available for sale ................................................ 12 13
Increase (decrease) in accrued expenses and other liabilities ................... 788 611
-------- --------
Net cash provided by operating activities ........................................ 1,406 1,034
-------- --------
Cash flows from investing activities:
Proceeds from principal paydowns of mortgage - backed
Securities - held to maturity ................................................. 766 1,273
Purchase of mortgage-backed securities - held to maturity ........................ -- (1,928)
Proceeds from principal paydowns of mortgage - backed
Securities - available for sale ................................................ 2,109 2,952
Proceeds from maturity and redemption of investment
Securities - available for sale ................................................ 4,700 10,586
Proceeds from sale of investment securities - available for sale ................. -- 183
Purchase of investment securities - available for sale ........................... (24,304) (16,316)
Net (increase) in loans ......................................................... (26,742) (10,294)
Capital expenditures ............................................................. (75) (637)
Proceeds from sale of other real estate owned .................................... -- --
-------- --------
Net cash provided (used) by investing activities ................................. (43,546) (14,181)
-------- --------
Cash flow from financing activities:
Net (decrease) in demand, statement passbook, money
Market and NOW deposit accounts ................................................ 9,904 6,866
Proceeds from borrowings ......................................................... 25,000 10,000
Proceeds from purchased federal funds ............................................ 4,325 --
Dividends paid ................................................................... (231) (135)
Purchase of treasury stock ....................................................... (1,418) (2,020)
Increase (decrease) in advances from borrowers for taxes
And insurance .................................................................. (125) (68)
-------- --------
Net cash provided by ( used in) financing activities ............................. 37,455 14,643
-------- --------
Net increase (decrease) in cash and cash equivalents ............................. (4,685) 1,496
Cash and cash equivalents at beginning of year ................................... 8,254 6,122
-------- --------
Cash and cash equivalents at end of year ......................................... $ 3,569 $ 7,618
======== ========
Additional Disclosures:
Supplemental disclosures of cash flows information-cash paid during year for:
Interest on other borrowings ................................................ $ 804 $ 158
Income taxes ................................................................ 1,055 532
Supplemental schedule of non-cash investing activities:
Change in unrealized gains & losses in investment securities -
Available for sale ............................................................. (1,356) 200
</TABLE>
See accompanying notes to consolidated financial statements.
5
<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
September 30, 1999 and 1998, 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, 1998. 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 September 30, 1999, 40,468 shares have been
committed to be released from the lien of the ESOP loan and under AICPA
Statement of Position 93-6; these shares are considered outstanding for purposes
of calculating per share amounts. 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.
The calculation of basic and diluted earnings per share (EPS) calculations for
the periods indicated, are included in exhibit 11 of this report.
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 last fiscal year ended September 30, 1998. The Company has changed
its fiscal year to a calendar year in order to improve efficiency and reduce
duplication of effort. Therefore, the Company will file quarterly reports for
the quarters ended March 31, September 30, and September 30, 1999 and will end
its current fiscal year on December 31, 1999.
The Company's strategy is to continue to be a community oriented financial
institution offering core financial services to individuals and businesses in
strategic locations within the Hudson Valley, 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. The Company attracts deposits from its local communities and
invests those deposits principally in one-to-four family residential mortgage
loans and business 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 and business 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 and borrowings.
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
7
<PAGE>
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.
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 are daily 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 September 30,
----------------------------------------------------------------------
1999 1998
--------------------------------- ---------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost(5) Balance Interest Cost(5)
-------- -------- -------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans receivable (1)....................... $109,116 $1,971 7.23% $ 77,221 $1,478 7.66%
Mortgage-backed securities ................ 4,548 75 6.56 10,367 164 6.33
Investment securities...................... 48,739 812 6.67 28,763 441 6.13
Federal funds sold ........................ 1,116 7 2.69 8,530 109 5.11
-------- ------ -------- ------
Total interest-earning assets ........... 163,519 2,865 7.01 124,881 2,192 7.02
------ ------
Non-interest-earning assets................ 6,466 6,157
-------- --------
Total assets ............................ $169,985 $131,038
======== ========
Interest-bearing liabilities:
Savings accounts .......................... $ 32,513 246 3.03 $ 27,776 210 3.02
Certificates of deposit ................... 42,900 504 4.70 38,924 502 5.16
Money market .............................. 14,112 132 3.73 10,529 106 4.03
NOW accounts............................... 6,165 36 2.32 4,892 32 2.62
Other ..................................... 34,798 470 5.40 10,000 132 5.28
-------- ------ -------- ------
Total interest-bearing liabilities .... 130,488 1,388 4.26 92,121 982 4.26
------ ------
Non-interest-bearing liabilities........... 9,574 7,011
-------- --------
Total liabilities...................... 140,062 99,132
Equity .................................... 29,923 31,906
-------- --------
Total liabilities and equity .......... $169,985 $131,038
======== ========
Net interest income/spread (2)(3).......... $1,477 2.75% $1,210 2.76%
====== ==== ====== ====
Net earning assets/net interest margin (4) $ 33,031 3.61% $ 32,760 3.88%
======== ==== ======== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities . 1.25x 1.36x
====== ======
</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
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<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
----------------------------------------------------------------------
1999 1998
--------------------------------- ---------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost(5)(6) Balance Interest Cost(5)(6)
-------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans receivable (1)....................... $ 99,131 $5,375 7.23% $ 73,421 $4,242 7.70%
Mortgage-backed securities ................ 5,428 270 6.63 10,753 520 6.45
Investment securities ..................... 41,806 2,027 6.46 25,422 1,145 6.01
Federal funds sold ........................ 2,401 71 3.94 8,304 316 5.07
-------- ------ -------- ------
Total interest-earning assets ......... 148,766 7,743 6.94 117,900 6,223 7.04
------ ------
Non-interest-earning assets................ 6,439 5,796
-------- --------
Total assets .......................... $155,205 $123,696
======== ========
Interest-bearing liabilities:
Savings accounts .......................... $ 30,781 698 3.02 $ 26,908 605 3.00
Certificates of deposit ................... 42,111 1,487 4.71 38,328 1,461 5.08
Money market .............................. 13,702 379 3.69 9,511 269 3.77
NOW accounts............................... 6,019 104 2.30 4,491 86 2.55
Other ..................................... 23,587 928 5.25 5,758 225 5.21
-------- ------ -------- ------
Total interest-bearing liabilities..... 116,200 3,596 4.13 84,996 2,646 4.15
------ ------
Non-interest-bearing liabilities........... 8,306 6,244
-------- --------
Total liabilities...................... 124,506 91,240
Equity .................................... 30,699 32,456
-------- --------
Total liabilities and equity .......... $155,205 $123,696
======== ========
Net interest income/spread(2)(3) $4,147 2.81% $3,577 2.89%
====== ==== ====== ====
Net earning assets/net interest margin(4) . $ 32,566 3.72% $ 32,904 4.05%
======== ==== ======== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities.. 1.28x 1.39x
====== ======
</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.
9
<PAGE>
Comparison of Financial Condition at September 30, 1999 and September 30, 1998
The Company's total assets were $174.6 million at September 30, 1999 as compared
to $131.9 million at September 30, 1998, representing 32.4% growth in assets.
The growth was a result of the Company's efforts to leverage its capital. Loans,
net increased $32.7 million, or 41.6%, from $78.7 million to $111.4 million.
Residential loans increased by $24.1 due to aggressive loan origination efforts
at a time of steady residential mortgage loan demand. The Company also increased
its commercial mortgage and business loans by $8.7 million. Investment
securities available for sale increased by $18.5 million, while mortgage-backed
securities and federal funds decreased by $5.8 million, and $4.7 million,
respectively, since September 30, 1998. The increase in investment securities
was principally due to the purchase of securities with borrowings to increase
leverage. The decrease in mortgage-backed securities was mainly due to the
acceleration of principal payments due to the low interest rate environment.
Deposits increased by $15.4 million or 17.5% to $103.7 million at September 30,
1999 as compared to $88.3 million at September 30, 1998. The increase includes
$4.0 million of deposits in the new branch opened in September 1998, in
Harriman, New York. Core deposits (representing deposits other than certificates
of deposit) increased by $10.9 million to $59.9 million at September 30, 1999,
as compared to $49.0 million at September 30, 1998, which is attributed to the
Company's emphasis on attracting core deposit relationships through its
advertising.
Total equity decreased to $29.6 million at September 30, 1999, from $31.5
million at September 30, 1998. The $1.9 million decrease in equity resulted
principally from the repurchase of $1.9 million of the Company's stock and a
$1.3 million adverse change in the net unrealized value of securities held for
sale, partially offset by retained earnings. The Company repurchased 178,412
shares of its stock from October 1, 1998 through September 30, 1999. The Company
announced on October 21, 1999 a stock repurchase of 103,492 shares, with 16,600
shares purchased as of November 12, 1999, after which the Company has the right
to repurchase an additional 86,892 shares of its common stock.
Comparison of Operating Results.
Interest Income was $2.9 million for the third quarter of fiscal 1999 as
compared to $2.2 million for the same period in 1998, an increase of $673,000 or
30.7%. For the nine months ended September 30, 1999, interest income amounted to
$7.7 million as compared to $6.2 million for the same period in 1998. The
increase in the quarterly interest income was primarily volume related due to a
$38.6 million or 30.9%, increase in average earning assets, partially offset by
an 1 basis point decrease in the average yield on earnings assets. The increase
in the nine months interest income was also primarily volume related due to a
$30.9 million or 26.2%, increase in average earning assets, partially offset by
an 10 basis point decrease in the average yield on earnings assets.
The primary components of the increase in average earning assets were $31.9
million (for the three month periods) and $25.7 million (for the nine month
periods) increases in the average balance of loans, as a result of efforts by
the Company to leverage its capital through increased
10
<PAGE>
loan originations. The volume increases were partially offset by a 43 basis
point decline for the quarter and a 47 basis point decline for the nine month
period in the average yield earned on loans. The decline in the average yield
earned on loans was due to the declining interest rate environment in late 1998
and early 1999. The two factors combined to produce an estimated $493,000 and
$1.1 million increase in interest earned on loans for the respective periods.
Interest income on investment securities increased by $371,000 and $882,000 for
the quarter and the nine months, due to increases in the average balances of
$20.0 million and $16.4 million for the respective periods. The Company borrowed
funds and invested those funds in investment securities to leverage its balance
sheet. The average yield earned on investment securities increased by 54 and 45
basis points for the respective periods, caused by the purchase of callable
government agency bonds which tend to have a higher market interest rate than
U.S. Treasury securities. Interest earned on mortgage-backed securities
decreased by $89,000 and $250,000 due to a $5.8 million and $5.3 million
decrease in the average balance of mortgage-backed securities resulting from
accelerated principal payments and the sale of small balance mortgage-backed
securities in the latter part of 1998 to improve efficiency. Interest earned on
federal funds decreased by $102,000 and $245,000 for the quarter and nine months
ended September 30, 1999, compared to the same period in 1998, due to decreases
in the average balances of $7.4 million and $5.9 million. The reason for the
decrease in average balances was that liquid assets previous sold in the federal
funds market were invested in loans as loan growth exceeded the growth in
deposits.
Interest Expense was $1.4 million for the quarter ended September 30, 1999 as
compared to $982,000 for the same quarter in 1998. For the nine months ended
September 30, 1999, interest expense totaled $3.6 million compared to $2.6
million for the same period last year. Interest on borrowings, which were
principally undertaken to improve leverage, increased $338,000 for the quarters,
and $703,000 for the nine month periods. Borrowing costs have increased as the
Company borrowed funds to support loan growth, which out paced deposit growth.
Interest paid on deposits increased $68,000 from the 1998 to the 1999 quarter
because average interest bearing deposits increased by $13.6 million, offset by
a decrease of 30 basis points from 4.14% to 3.84% in the average rate paid on
deposits. Interest paid on deposits increased $247,000 for the nine months ended
September 30, 1999 compared to September 30, 1998, because average interest
bearing deposits increased $13.4 million, partially offset by a decrease of 23
basis points from 4.07% to 3.84% in the average rate paid on deposits. The
average rate paid on deposits declined due to a decline in the average rate paid
on certificates of deposit, which was caused by a decline in market rates. The
Company has emphasized lower cost deposit products in order to improve leverage
while reducing upward pressures on its cost of funds. Core deposits to total
deposits increased to 57.7% at September 30, 1999 compared to 55.4% at September
30, 1998.
Provision for Loan Losses was $20,000 for the quarter of September 30, 1999
compared to $30,000 in the comparable quarter in 1998. The provision for loan
losses decreased due to a reduction in charge-offs from 1998 to 1999. The
provision for the nine months ended September 30, 1999 was $55,000 compared to
$50,000 for the comparable period in 1998. The Company increased its provision
for loan losses due to increases in the loan portfolio and efforts to develop a
commercial lending portfolio. There were no non-performing loans at September
30, 1999. At September 30, 1999, the allowance for loan losses was $266,000
representing 0.24% of
11
<PAGE>
period end loans. Net charge-offs during the quarter and the nine months were
$4,000. The Company had one commercial loan in the amount of $49,000 in which
the borrower was in bankruptcy at September 30, 1999, but the loan is current.
The Company considered the status of this loan when evaluating the appropriate
provision for loan losses.
Non-interest income was $78,000 for the quarter ended September 30, 1999 as
compared to $189,000 for the same quarter in 1998. The decrease of $111,000 is
principally caused by a decrease of $130,000 in gains on the sale of securities.
Service charges on deposits increased by $6,000 and $28,000 for the quarter and
nine months due to an increase in account fees and an increase in the number of
transaction accounts opened. The increase in other income is primarily due to
implementing ATM fees for non-customers. For the nine months ended September 30,
1999, non-interest income totaled $228,000 as compared to $304,000 for the same
period in 1998.
Non-interest expense was $896,000 for the quarter ended September 30, 1999,
compared to $1.5 million for the comparable quarter in 1998. For the nine months
ended September 30, 1999 non-interest expense totaled $2.6 million compared to
$3.3 million for the comparable period in 1998. Both the quarter and nine months
ended September 30, 1998 expenses include the net expense of $565,000 for the
Company's early employment termination program and the recovery of expenses
previously accrued for post-retirement health insurance costs when the Company
reduced benefits given to existing employees. The remainder of the reduction in
non-interest expense was caused primarily by the lower salary expense due to the
effect of the early employment termination program on aggregate 1999 salaries.
This occurred even though the Company opened a new branch in September 1998 and
began to offer commercial loans. The Company worked to control costs without
sacrificing growth and diversification, thus improving its efficiency ratio.
Despite increased costs necessarily flowing from growth, the Company improved
its efficiency ratio from 77.2% (adjusted for one-time expenses and securities
gains) for the quarter ended September 30, 1998 to 58.4% for the quarter ended
September 30, 1999. The current year expenses also reflect the additional cost
for Year 2000 compliance and customer awareness during 1999.
Income tax expense was $256,000 and $669,000 for the third quarter and nine
months ended September 30, 1999, as compared to $(62,000) and $203,000 for the
comparable periods for 1998. The increases were principally caused by increases
in income before taxes.
12
<PAGE>
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, borrowings, 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 funds
are available through borrowings. At September 30, 1999, the Bank had available
lines of credit with the Federal Home Loan Bank of New York of $12.4 million,
with $9.3 million outstanding as of September 30, 1999. The Bank also had
Federal Home Loan Bank borrowings of $30 million at September 30, 1999, which
were not against the line of credit. The Bank undertook these borrowings as one
method of leveraging the additional capital obtained in its conversion to stock
form. 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.
Residential mortgage loan commitments and commercial loan commitments totaled
$6.2 million, and $182,000 at September 30, 1999, respectively, and the Bank had
$1.4 million of unused home equity lines of credit and $1.8 million and $328,000
of unused commercial line of credit and consumer overdraft checking lines of
credit, respectively. 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 September 30, 1999,
totaled $40.3 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 September 30, 1999, the Bank exceeded all regulatory capital requirements of
the OTS applicable to it, with tangible and core capital of $23.6 million, or
13.9% of adjusted assets and total risk-based capital of $23.9 million, or 28.7%
of risk-weighted assets. The Bank was classified as "well capitalized" at
September 30, 1999 under OTS regulations.
The Bank is subject to the minimum liquidity regulations of the OTS. At
September 30, 1999, 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
September 30, 1999 had liquid assets equal to 8.0% of net withdrawable accounts
plus short term borrowings.
13
<PAGE>
The following table sets forth information regarding the regulatory capital
ratios of the Bank at September 30, 1999.
<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 $23,627 13.86% 2,557 1.50% - -
Tier 1 (Core) Capital 23,627 13.86% 5,113 3.00% $8,522 5.0%
Risk Based Capital:
Tier 1 23,627 28.33% - - 5,005 6.0%
Total 23,894 28.65% 6,673 8.00% 8,341 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.
14
<PAGE>
Year 2000 Compliance
In the Company's annual report on Form 10-K, we provided information regarding
our activities to protect against the adverse effects of the Year 2000 computer
problem. Since our last 10-Q filing, we have completed the process of reviewing,
testing and upgrading our systems to make them Year 2000 compliant. Federal
banking regulators have examined the Bank several times not only for Y2K
compliance, but for the Bank's contingency planning as well. The staff has
received training in the Bank's Y2K contingency plan. Our primary data
processing provider, NCR Corporation, reports that it is qualified and has
satisfactorily completed its own internal software and hardware testing and
upgrading and has verifying that all of its vendors are likewise compliant. Our
ATM software and hardware is fully tested and Y2K compliant. However, the
Company remains reliant upon the ability of major utilities, such as electric
and telephone companies, to continue to provide service. Although plans have
been made to continue to operate in the event of a failure of core utility
service delivery systems, any such plans are necessarily temporary and if such
services as telephone or electric service are not delivered for an extended
period, operations would be adversely affected.
The Bank has taken steps prior to the end of the calendar year to maintain
sufficient liquidity so that additional customer demands for cash can be met.
However, any substantial unusual withdrawal activity caused by customer panic
could have a short-term adverse income statement effect because the cost of
alternative sources of funds, such as borrowings, is normally higher than the
cost of deposits. Regardless of Y2K, the Bank's deposits are insured up to the
maximum allowable by the Federal Deposit Insurance Corporation (FDIC).
This is a Year 2000 Readiness Disclosure under the Year 2000 Information and
Readiness Disclosure Act.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
For information concerning GSB Financial Corporation's quantitative and
qualitative disclosures about market risk, refer to Item 7A of the GSB Financial
Corporation Annual Report on Form 10-K for the year ended September 30, 1998, as
filed with the Securities and Exchange Commission on December 29, 1998, and the
sections of the Annual Report to Stockholders referenced therein and included in
such report on Form 10-K, particularly the discussion at pages 8 through 10 of
the Annual Report to Stockholders under the Captions "Gap Analysis" and
"Analysis of Market Risk".
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 10.1 - Employment Contract by and between Goshen Savings Bank and
Stephen W. Dederick dated as of July 1, 1999*
Exhibit 10.2 - Supplemental Employment Contract by and between GSB
Financial Corporation and Stephen W. Dederick dated as July 1, 1999*
Exhibit 10.3 - Schedule of Additional Employment Contracts*
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
Exhibit 10.1
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into as of
the 1st day of July, 1999, by and between Goshen Savings Bank, a stock savings
bank organized and operating under the federal laws of the United States and
having its executive office at One South Church Street, Goshen, New York 10924
(the "Bank"), and Stephen W. Dederick (the "Executive Officer"), residing at 946
Oregon Trail, Pine Bush, New York 12566.
Whereas, the Executive Officer currently serves the Bank as Senior Vice
President and Chief Financial Officer; and
Whereas, in order to secure the Executive Officer's continued services, the
Board of Directors of the Bank (the "Board") has approved this Agreement; and
Whereas, the Executive Officer is willing to continue to make his or her
services available to the Bank on the terms and conditions set forth herein; and
Whereas, the Bank recognizes that a third party may at some time in the
future pursue a Change in Control (as defined in section 9 of this Agreement) of
the Bank and that this possibility may result in the departure or distraction of
the Bank's executive officers; and
Whereas, the Bank has determined that appropriate steps should be taken to
encourage the continued attention and dedication of the Bank's executive
officers, including the Executive Officer, to their duties for the Bank without
the distraction that may arise from the possibility of a Change in Control of
the Bank; and
Whereas, the Bank believes that, by assuring certain officers, including
the Executive Officer, of reasonable financial security in the event of a Change
in Control of the Bank, such officers will be in a position to perform their
duties free from financial self interest and in the best interests of the Bank
and its shareholders; and
Whereas, for purposes of securing the Executive Officer's services for the
Bank, the Board of Directors of the Bank ("Board") has authorized the proper
officers of the Bank to enter into an employment agreement with the Executive
Officer on the terms and conditions set forth herein; and
Now, Therefore, in consideration of the mutual covenants set forth below,
the parties agree as follows:
1. Employment. The Bank continues the employment of the Executive Officer
as its Senior Vice President and Chief Financial Officer, and the Executive
Officer accepts such continued employment.
2. Assurance Period.
(a) If, during the period from the date of this Agreement until June 30,
2000, subject to extension by the Board upon review of the Executive Officer's
performance, there occurs a Change in Control, there shall automatically come
into existence an Assurance Period which shall be the period from the date of
such Change in Control through the third anniversary of the Change in Control
(the "Assurance Period"). The Assurance Period shall be part of the term of this
Agreement.
3. Compensation.
(a) In consideration for services rendered by the Executive Officer to the
Bank, the Bank shall pay to the Executive Officer a salary which, except as
otherwise provided in this Agreement, shall be at the discretion of the Board.
Salary shall be paid in accordance with the Bank's customary payroll practices
for other employees.
(b) In no event shall the Executive Officer's annual rate of salary under
this Agreement in effect immediately prior to a Change in Control be reduced
after the Change in Control, nor shall it be reduced prior to the Change in
Control in contemplation thereof.
17
<PAGE>
4. Employee Benefits Plans and Programs; Other Compensation. Except as
otherwise provided in this Agreement, the Executive Officer shall be entitled to
participate in and receive benefits under the Bank's pension plan, group life,
health and disability insurance plans, and such other employee benefit plans and
programs, as the Bank may maintain from time to time, on terms no less favorable
than any other employee. Following a Change in Control, all such benefits to the
Executive Officer shall be continued on terms and conditions substantially
identical to, and in no event less favorable than, those in effect prior to the
Change in Control, without regard to any reduction in contemplation of a Change
in Control.
5. Board Memberships and Personal Activities. The Executive Officer may
serve as a member of the board of directors of such business, community and
charitable organizations as he or she may disclose to the Board from time to
time, and he or she may engage in personal business and investment activities
for his or her own account; provided, however, that such service and personal
business and investment activities shall not (a) materially interfere with the
performance of his or her duties under this Agreement, and (b) involve entities
which either compete with the Bank or may reasonably be expected to negatively
impact on the Bank's standing and reputation in the community it serves.
6. Working Facilities and Expenses. The Executive Officer's principal place
of employment shall be at the Bank's executive offices in Orange County, New
York. The Bank shall provide the Executive Officer, at such principal place of
employment, with support services and facilities suitable to his or her position
with the Bank and necessary or appropriate in connection with the performance of
his or her assigned duties under this Agreement. The Bank shall reimburse the
Executive Officer for his or her ordinary and necessary business expenses,
including reasonable travel and entertainment expenses incurred in connection
with the performance of his or her duties under this Agreement, upon
presentation to the Bank of itemized accounts of such expenses in such form as
the Bank may reasonably require.
7. Termination. The Board may terminate the Executive Officer's employment
at any time, with or without cause, and unless such termination occurs after a
Change in Control, the Bank shall have no further obligation under this
Agreement, and the Executive Officer is not entitled to receive continued
benefits and payments after any such termination, other than as follows:
(i) His or her earned but unpaid salary through the date of
termination, payable when due but not later than thirty (30) days after the
termination.
(ii) The benefits, if any, to which the Executive Officer and his or
her family and dependents are entitled as a former Executive
Officer/employee, or family or dependents of a former Executive
Officer/employee, under the employee benefit and compensation plans,
including, without limitation, stock options, restricted stock awards, and
participation in tax-qualified stock bonus plans benefiting the Bank's
Executive Officers and employees, as in effect on the date of termination,
(iii) Payment for all unused vacation days and floating holidays
accrued through the date of termination at his or her highest annual rate
of salary for such year.
8. Death. If the Executive Officer dies during the Employment Period, this
Agreement shall terminate and the Bank shall pay to his or her designated
beneficiary(ies) the amounts and provide the benefits set forth in sections 7(b)
(i), (ii) and (iii).
9. Definition of Change in Control.
For purposes of this Agreement, a Change in Control of the Bank shall mean:
(a) the occurrence of any event upon which any "person" (as such term
is used in sections 13(d) and 14(d) of the Securities Exchange Act of 1934,
as amended (the "1934 Act")), other than (i) GSB Financial Corporation;
(ii) a trustee or other fiduciary holding securities under an employee
benefit plan maintained for the benefit of employees
18
<PAGE>
of the Bank; (iii) a corporation owned, directly or indirectly, by the
stockholders of the Bank in substantially the same proportions as their
ownership of stock of the Bank; or (iv) the Executive Officer, or any group
otherwise constituting a person in which the Executive Officer is a member,
becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated under
the 1934 Act), directly or indirectly, of securities issued by the Bank
representing twenty-five (25%) or more of the combined voting power of all
of the Bank's then outstanding securities; or
(b) the occurrence of any event upon which the individuals who on the
date this Agreement is made are members of the Board, together with their
successors as described in section 11 below, cease for any reason to
constitute a majority of the members of the Board; or
(c) the shareholders of the Bank approve either:
(i) a merger or consolidation of the Bank with any other
corporation, other than a merger or consolidation following which of
the following conditions are satisfied:
(A) (x) the members of the Board immediately prior to such
merger or consolidation constitute at least a majority of
the members of the governing body of the institution
immediately after such merger or consolidation; and (y) the
shareholders of the Bank immediately prior to such merger or
consolidation own securities of the resulting institution
immediately after such merger or consolidation representing
fifty percent (50%) or more of the combined voting power of
all such securities then outstanding in substantially the
same proportions as their ownership of voting securities of
the Bank before such merger or consolidation; and
(2) the entity which results from such merger or consolidation
expressly agrees in writing to assume and perform the Bank's
obligations under this Agreement; or
(ii) a plan of complete liquidation of the Bank or an agreement
for the sale or disposition by the Bank of all or substantially all of
its assets; or
(d) any event which would be described in sections 9(a), (b) or (c) if
the term "Parent Corporation of the Bank" were substituted for the term
"Bank" therein. Such an event shall be deemed to be a Change in Control
under the relevant provision of sections 9(a), (b) or (c).
It is understood and agreed that more than one Change in Control may occur at
the same or different times during the Employment Period and that the provisions
of this Agreement shall apply with equal force and effect with respect to each
such Change in Control. For the purpose of this section, a successor of a
director shall mean any person who is elected or nominated for election to the
Board by a majority of the directors of the Bank, who are either directors of
the Bank as of the date of this Agreement or who are themselves successors as
defined in this sentence. For the purposes of section 9(c)(i)(A), if there are
two or more mergers or consolidations which are substantially contemporaneous in
time, the consummation of which are separated in time principally for
regulatory, convenience or administrative reasons, then such mergers or
consolidations shall be deemed one transaction for the purpose of the terms
"immediately prior" and "immediately after."
10. Change in Control - Termination and Severance Benefits.
(a) In the event of a Change in Control, the Executive Officer shall have
the right to terminate employment with the Bank at any time during the Assurance
Period upon any of the following occurrences:
(i) if the Executive Officer ceases to serve in a senior officer
position with the Bank or its successor or his or her duties,
responsibilities or title are not commensurate with senior officer status;
19
<PAGE>
(ii) the Executive Officer is not afforded the same opportunities for
salary increases, bonuses, promotions, increased work responsibilities,
perquisites and similar other types of benefits afforded to other executive
officers of the successor to the Bank;
(iii) the principal office at which the Executive Officer is required
to work is relocated outside of Orange County; or
(iv) a reduction in the compensation paid to the Executive Officer
below the rate of compensation paid prior to the commencement of the
Assurance Period, or a material reduction in the benefits provided to the
Executive Officer under the Bank's program of employee benefits, compared
with the compensation and benefits that were provided to the Executive
Officer on the day before the Assurance Period commenced excluding the
effect of any reductions in compensation or benefits in contemplation of
any Change in Control, unless (i) mandated by any regulatory authority
having jurisdiction over the Bank or (ii) so reduced with the prior written
consent of the Executive Officer.
(b) If the Bank or any successor to the Bank terminates the Executive
Officer's employment with the Bank or such successor after a Change in Control
without his or her consent, or if the termination is by the Executive Officer
pursuant to section 10(a), the following benefits and amounts shall be paid or
provided to the Executive Officer:
(i) all payments and benefits set forth in section 7(i), (ii) and
(iii);
(ii) continued group life, health and disability insurance benefits as
though the Executive Officer had continued to be employed under this
Agreement through the end of the Assurance Period;
(iii) within thirty days after termination, a lump sum payment equal
to the present value of the total salary and bonuses that the Executive
Officer would have earned if he or she had worked for the Bank until the
end of the Assurance Period at the highest annual rate of salary and the
highest annual bonus paid to the Executive Officer during the two years
prior to the Change in Control; and
(iv) within thirty days after termination, a lump sum payment equal to
the present value of the difference between (a) the amount which the
Executive Officer would have been entitled to receive (for all plans in the
nature of defined benefit plans) or contributed on his or her behalf (for
all plans in the nature of defined contribution, profit sharing, incentive,
bonus or award plans) if employment had not terminated prior to the end of
the Assurance Period and (b) the amount which will be received or
contributed based on the actual termination. This provision shall encompass
pension plans, profit sharing plans, 401(k) plans, ESOPs, bonus plans,
supplemental executive retirement plans, and all other plans providing for
post-termination or salary augmentation payments to the Executive Officer
whether or not tax qualified, which were in effect on the day prior to the
Change in Control, but excluding the effect of any reductions in benefits
in contemplation of the Change in Control.
(c) In calculating payments under section 10(b), the discount rate used for
determining present value shall be 3%, compounded monthly, based upon the
scheduled due dates of the future payments in accordance with the terms of the
plans and customary practice of the Bank. Benefits to which the Executive
Officer would have been entitled had the termination not occurred shall be
determined by including full credit for years of service and attained age
through the end of the Assurance Period as though the termination had not
occurred. If applicable, benefits shall be assumed to be payable in a single
life annuity and actuarial benefits shall be based upon mortality tables under
Section 72 of the Internal Revenue Code of 1986. If any benefits or payments
would have required any payment or contribution by the Executive Officer, it
shall be assumed that the Executive Officer made the highest permissible payment
or contribution.
(d) The Executive Officer shall not be required to mitigate the amount of
any payment provided for in this section 10 by seeking other employment or
otherwise, nor shall the amount of any payment or benefit provided for in this
section 10 be reduced by any compensation earned by the Executive Officer as the
result of employment by another employer, by retirement benefits, by offset
against any amount claimed to be owed by the Executive Officer
20
<PAGE>
to the Bank or the parent corporation of the Bank, or otherwise except as
specifically provided in this Agreement. The damages incurred by the Executive
Officer due to a termination triggering the benefits described in section 10(b)
are not capable of accurate measurement on the date of this Agreement and the
benefits and payments provided for in this Agreement constitute a reasonable
estimate of all damages that would be sustained consequence due to such
termination, other than damages arising under or out of any stock option,
restricted stock or other non-qualified stock acquisition or investment plan or
program, it being understood and agreed that this Agreement does not determine
the measurement of damages under any such plan or program in respect of any
termination of employment.
11. Successors and Assigns.
(a) The Bank shall require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Bank to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Bank would be
required to perform it if no such succession had taken place.
(b) This Agreement will inure to the benefit of and be binding upon the
Executive Officer, his or her legal representatives and testate or intestate
distributes, and the Bank, their respective successors and assigns, including
any successor by merger or consolidation or a statutory receiver or any other
person or firm or corporation to which all or substantially all of the
respective assets and business of the Bank may be sold or otherwise transferred.
12. Notices. Any communication required or permitted to be given under this
Agreement, including any notice, direction, designation, consent, instruction,
objection or waiver, shall be in writing and shall be deemed to have been given
at such time as it is delivered personally, or five (5) days after mailing if
mailed, postage prepaid, by registered or certified mail, return receipt
requested, or next day mail via Federal Express or United Parcel Service
addressed to such party at the address listed below or at such other address as
one such party may by written notice specify to the other party:
If to the Executive Officer:
Stephen W. Dederick
946 Oregon Trail
Pine Bush, New York 12566
If to the Bank:
Goshen Savings Bank
One South Church Street
Goshen, New York 10924
Attention: Chairman of the Board of Directors
With a copy to:
Serchuk & Zelermyer, LLP
81 Main Street
White Plains, NY 10601
Attention: Jay L. Hack, Esq.
13. Enforcement Costs and Attorneys' Fees. The Bank shall pay to or on
behalf of the Executive Officer all reasonable costs, including reasonable legal
fees, incurred by him or her in connection with or arising out of his or her
consultation with legal counsel or in connection with or arising out of any
action, suit or proceeding in which he or she may be involved, as a result of
his or her efforts, in good faith, to defend or enforce the terms of this
Agreement, provided that the Executive Officer shall have substantially
prevailed on the merits pursuant to a
21
<PAGE>
judgment, decree or order of a court of competent jurisdiction or of an
arbitrator in an arbitration proceeding, or in a settlement. Any settlement
agreement which provides for payment of any amounts in settlement of the Bank's
obligations hereunder shall be conclusive evidence of the Executive Officer's
entitlement to payments under this section, and any such payments shall be in
addition to amounts payable pursuant to such settlement agreement, unless such
settlement agreement expressly provides otherwise.
14. Severability. A determination that any provision of this Agreement is
invalid or unenforceable shall not affect the validity or enforceability of any
other provision hereof.
15. Waiver. Failure to insist upon strict compliance with any of the terms,
covenants or conditions hereof shall not be deemed a waiver of such term,
covenant, or condition. A waiver of any provision of this Agreement must be made
in writing, designated as a waiver, and signed by the party against who its
enforcement is sought. Any waiver or relinquishment of such right or power at
any one or more times shall not be deemed a waiver or relinquishment of such
right or power at any other time or times.
16. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and all of which shall
constitute one and the same Agreement.
17. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York, and in the
absence of controlling New York law, the federal laws of the United States,
without reference to conflicts of law principles.
18. Headings and Construction. The headings of sections in this Agreement
are for convenience of reference only and are not intended to qualify the
meaning of any section. Any reference to a section number shall refer to a
section of this Agreement, unless otherwise stated.
19. Entire Agreement; Modifications. This instrument contains the entire
agreement of the parties relating to the subject matter hereof, and supersedes
in its entirety any and all prior agreements, understandings or representations
relating to the subject matter hereof between the Bank and the Executive
Officer. No modifications of this Agreement shall be valid unless made in
writing and signed by the parties hereto.
20. Required Regulatory Provisions. The following provisions are included
for the purposes of complying with various laws, rules and regulations
applicable to the Bank:
(a) Notwithstanding anything herein contained to the contrary, in no
event shall the aggregate amount of compensation payable to the Executive
Officer under section 10(b) hereof (exclusive of amounts described in
section 10(b)(i)) exceed three times the Executive Officer's average annual
total compensation for the last five consecutive calendar years to end
prior to his or her termination of employment with the Bank (or for his or
her entire period of employment with the Bank if less than five calendar
years).
(b) Notwithstanding anything contained herein to the contrary, the
Executive Officer shall have no right to receive compensation or other
benefits for any period after termination for cause. "Termination for
Cause" shall include termination of the Executive Officer due to any of the
following: (i) personal dishonesty, (ii) incompetence or intentional
failure to perform regular duties, (iii) willful misconduct or willful
violation of any law, rule or regulation (other than traffic violations or
similar offenses) or final cease and desist order, (iv) breach of fiduciary
duty involving personal profit or (v) material breach of any provision of
this Agreement.
(c) Notwithstanding anything herein contained to the contrary, any
payments to the Executive Officer by the Bank, whether pursuant to this
Agreement or otherwise, are subject to and conditioned upon their
compliance with section 18(k) of the Federal Deposit Insurance Act (the
"FDI Act"), 12 U.S.C. Section 1828(k), and any regulations promulgated
thereunder.
22
<PAGE>
(d) Notwithstanding anything herein contained to the contrary, if the
Executive Officer is suspended from office and/or temporarily prohibited
from participating in the conduct of the affairs of the Bank pursuant to a
notice served under section 8(e)(3) or 8(g)(1) of the FDI Act, 12 U.S.C.
Section 1818(e)(3) or 1818(g)(1), the Bank's obligations under this
Agreement shall be suspended as of the date of service of such notice,
unless stayed by appropriate proceedings. If the charges in such notice are
dismissed, the Bank, in its discretion, may (i) pay to the Executive
Officer all or part of the compensation withheld while the Bank's
obligations hereunder were suspended and (ii) reinstate, in whole or in
part, any of the obligations which were suspended.
(e) Notwithstanding anything herein contained to the contrary, if the
Executive Officer is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
section 8(e)(4) or 8(g)(1) of the FDI Act, 12 U.S.C. Section 1818(e)(4) or
(g)(1), all obligations of the Bank under this Agreement shall terminate as
of the effective date of the order, but vested rights and obligations of
the Bank and the Executive Officer shall not be affected.
(f) Notwithstanding anything herein contained to the contrary, if the
Bank is in default (within the meaning of section 3(x)(1) of the FDI Act,
12 U.S.C. Section 1813(x)(1)), all obligations of the Bank under this
Agreement shall terminate as of the date of default, but vested rights and
obligations of the Bank and the Executive Officer shall not be affected.
(g) Notwithstanding anything herein contained to the contrary, all
obligations of the Bank hereunder shall be terminated, except to the extent
that a continuation of this Agreement is necessary for the continued
operation of the Bank: (i) by the Director of the Office of Thrift
Supervision ("OTS") or his designee or the Federal Deposit Insurance
Corporation ("FDIC"), at the time the FDIC enters into an agreement to
provide assistance to or on behalf of the Bank under the authority
contained in section 13(c) of the FDI Act, 12 U.S.C. Section 1823(c); (ii)
by the Director of the OTS or his or her designee at the time such Director
or designee approves a supervisory merger to resolve problems related to
the operation of the Bank or when the Bank is determined by such Director
to be in an unsafe or unsound condition. The vested rights and obligations
of the parties shall not be affected.
If and to the extent that any of the provisions of this section 20 are not
required by applicable law, rule or regulation, the same shall become
inoperative as though eliminated by formal amendment of this Agreement.
IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed and
the Executive Officer has hereto set his or her hand, all as of the day and year
first above written.
---------------------------------------
Stephen W. Dederick, Executive Officer
GOSHEN SAVINGS BANK
By
----------------------------------
Thomas V. Guarino, President
23
Exhibit 10.2
SUPPLEMENTAL EMPLOYMENT AGREEMENT
This SUPPLEMENTAL EMPLOYMENT AGREEMENT (the "Agreement") is made and
entered into as of the 1st day of July, 1999, by and between GSB Financial
Corporation, a corporation organized and operating under the laws of the State
of Delaware and having an office at 1 South Church Street, Goshen, New York
10924 (the "Company"), and Stephen W. Dederick, (the "Executive Officer")
residing at 946 Oregon Trail, Pine Bush, New York 12566.
WHEREAS, pursuant to an Employment Agreement dated as of July 1, 1999 (the
"Employment Agreement") by and between Goshen Savings Bank, a stock savings bank
organized under the federal laws of the United States and a wholly owned
subsidiary of the Company (the "Bank") and the Executive Officer, the Bank
agreed, among other things, to provide the Executive Officer with certain
assurances regarding his or her continued employment in the event of a Change in
Control of the Bank or the Company; and
WHEREAS, the Board of Directors of the Company (the "Board") has determined
that it would be in the best interests of the Company and the Bank to guaranty
the assurances given by the Bank to Executive Officer in order to secure for the
Bank and itself the continued availability of the Executive Officer's services.
NOW, THEREFORE, in consideration of the mutual covenants set forth below,
the parties agree as follows:
Section 1. The Guaranty.
The Company hereby guarantees each and every obligation of the Bank to
Executive Officer pursuant to the Employment Agreement. Such guaranty shall be
effective as, when and if the Bank fails to make any payment due, or perform any
obligation, under the Employment Agreement.
Section 2. Payment in Full.
If the provisions of Section 20(a) of the Employment Agreement reduce any
amount otherwise payable to the Executive Officer, then the Company shall pay to
the Executive Officer the amount of such reduction so that the aggregate amount
payable to the Executive Officer shall be equal to the amount which would be
payable under the Employment Agreement as though Section 20(a) were not included
therein.
Section 3. Excise Tax Indemnification.
(a) This section 3 shall apply if the Executive Officer's employment with
the Bank or the Company is terminated in circumstances giving rise to liability
for excise taxes under section 4999 of the Internal Revenue Code of 1986 (the
"Code"). If for any taxable year, the Executive Officer is liable for the
payment of an excise tax under section 4999 of the Code with respect to any
payment made by the Company or the Bank to the Executive Officer, the Company
shall pay to the Executive Officer the amount necessary so that after the
payment of all excise taxes, and after the payment of all other taxes due on the
amount payable to the Executive Officer under this section, the net amount
remaining in the hands of the Executive Officer shall be the amount the
Executive Officer would have received if no excise tax had been payable. Such
amount shall be equal to X determined under the following formula:
X = E x P
------------------
1-[(FI x (1 - SLI) + SLI + M]
where
24
<PAGE>
E = the rate at which the excise tax is assessed under section 4999 of the
Code;
P = the amount with respect to which such excise tax is assessed,
determined without regard to this section 3;
FI = the highest marginal rate of income tax applicable to the Executive
Officer under the Code for the taxable year in question;
SLI = the sum of the highest marginal rates of income tax applicable to the
Executive Officer under all applicable state and local laws for the taxable year
in question;
and
M = the highest marginal rate of Medicare tax applicable to the Executive
Officer under the Code or the taxable year in question.
Any amount payable under this section shall be paid on the earlier of (i) the
date the Company or the Bank is required to withhold tax on any payment due, or
(ii) the date the tax is required to be paid by the Executive Officer.
(b) Notwithstanding anything in this section 3 to the contrary, in the
event that the Executive Officer's liability for the excise tax under section
4999 of the Code for a taxable year is subsequently determined to be different
than the amount determined by the formula (X + P) x E, where X, P and E have the
meanings provided in section 3(a), the Executive Officer or the Company, as the
case may be, shall pay to the other party at the time that the amount of such
excise tax is finally determined, an appropriate amount, plus interest, such
that the payment made under subsection 3(a), when increased by the amount of the
payment made to the Executive Officer under this subsection by the Company, or
when reduced by the amount of the payment made to the Company under this
subsection by the Executive Officer, equals the amount that should have properly
been paid to the Executive Officer under subsection 3(a). The interest paid
under this section 3(b) shall be determined at the rate provided under section
1274(b)(2)(B) of the Code. To confirm that the proper amount, if any, was paid
to the Executive Officer under this section 3, the Executive Officer shall
furnish to the Company a copy of each tax return which reflects a liability for
an excise tax payment made by the Company, at least 20 days before the date on
which such return is required to be filed with the Internal Revenue Service.
(c) The provisions of this section 3 are designed to reflect the provisions
of applicable federal, state and local tax laws in effect on the date of this
Agreement. If, after the date hereof, there shall be any change in any such
laws, this section 3 shall be deemed automatically modified to the extent
necessary to assure that the Executive Officer is fully indemnified against the
economic effects of the tax imposed under section 4999 of the Code or any
similar federal, state or local tax.
Section 4. Successors and Assigns.
This Agreement will inure to the benefit of and be binding upon Executive
Officer, his or her legal representatives and testate or intestate distributees,
and the Company its successors and assigns, including any successor by merger or
consolidation or a statutory receiver or any other person or firm or corporation
to which all or substantially all of the assets and business of the Company may
be sold or otherwise transferred.
Section 5. Notices.
Any communication required or permitted to be given under this Agreement,
including any notice, direction, designation, consent, instruction, objection or
waiver, shall be in writing and shall be deemed to have been given at such time
as it is delivered personally, or five (5) days after mailing if mailed, postage
prepaid, by registered or certified mail, return receipt requested, or next day
mail via Federal Express or United Parcel Service, addressed to such party at
the address listed below or at such other address as one such party may by
written notice specify to the other party:
25
<PAGE>
If to Executive Officer:
Stephen W. Dederick
946 Oregon Trail
Pine Bush, New York 12566
If to the Company:
GSB Financial Corporation
One South Church Street
Goshen, New York 10924
Attention: Chairman of the Board of Directors
With a copy to:
Serchuk & Zelermyer, LLP
81 Main Street
White Plains, New York 10601
Attention: Jay L. Hack, Esq.
Section 6. Enforcement Costs and Attorneys' Fees.
The Company shall pay to or on behalf of the Executive Officer all
reasonable costs, including reasonable legal fees, incurred by him or her in
connection with or arising out of the Executive Officer's consultation with
legal counsel or in connection with or arising out of any action, suit or
proceeding in which the Executive Officer may be involved, as a result of the
Executive Officer's efforts, in good faith, to defend or enforce the terms of
this Agreement, provided that the Executive Officer shall have substantially
prevailed on the merits pursuant to a judgment, decree or order of a court of
competent jurisdiction or of an arbitrator in an arbitration proceeding, or in a
settlement. Any settlement agreement which provides for payment of any amounts
in settlement of the Company's obligations hereunder shall be conclusive
evidence of the Executive Officer's entitlement to payments under this section,
and any such payments shall be in addition to amounts payable pursuant to such
settlement agreement, unless such settlement agreement expressly provides
otherwise.
Section 7. Severability.
A determination that any provision of this Agreement is invalid or
unenforceable shall not affect the validity or enforce ability of any other
provision hereof.
Section 8. Waiver.
Failure to insist upon strict compliance with any of the terms, covenants
or conditions hereof shall not be deemed a waiver of such term, covenant, or
condition. A waiver of any provision of this Agreement must be made in writing,
designated as a waiver, and signed by the party against whom its enforcement is
sought. Any waiver or relinquishment of any right or power hereunder at any one
or more times shall not be deemed a waiver or relinquishment of such right or
power at any other time or times.
Section 9. Counterparts.
26
<PAGE>
This Agreement may be executed in two (2) or more counterparts, each of
which shall be deemed an original, and all of which shall constitute one and the
same Agreement.
Section 10. Governing Law.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of New York, and in the absence of
controlling New York law, the federal laws of the United States, without
reference to conflicts of law principles.
Section 11. Headings and Construction.
The headings of sections in this Agreement are for convenience of reference
only and are not intended to qualify the meaning of any section. Any reference
to a section number shall refer to a section of this Agreement, unless otherwise
stated.
Section 12. Entire Agreement; Modifications.
This instrument contains the entire agreement of the parties relating to
the subject matter hereof, and supersedes in its entirety any and all prior
agreements, understandings or representations relating to the subject matter
hereof. No modifications of this Agreement shall be valid unless made in writing
and signed by the parties hereto.
Section 13. No Effect on Employment at Will Relationship.
The Company and Executive Officer acknowledge and confirm that nothing
contained in this agreement or in the Employment Agreement between Executive
Officer and the Bank shall change the employment relationship between the Bank
and Executive Officer to anything other than employment at will, except for the
express assurances, protections and other provisions contained in the Employment
Agreement and this Agreement, which provisions shall be deemed to supersede the
employment at will relationship.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
and the Executive Officer has hereto set his or her hand, all as of the day and
year first above written.
---------------------------------------
Stephen W. Dederick, Executive Officer
GSB FINANCIAL CORPORATION
By
----------------------------------
Thomas V. Guarino, Chairman
27
Exhibit 10.3
Schedule of Additional Employment Contracts
Pursuant to instruction 2 of Section 601 of Regulation S-K, the registrant
includes the following schedule regarding additional management employment
contracts the full text of which the registrant has omitted from this filing.
(3) Goshen Savings Bank (the "Bank") has also entered into Employment
Agreements with each of executive officers Barbara A. Carr and Rolland
B. Peacock III which are substantially identical in all material
respects to the Employment Agreement by and between the Bank and Mr.
Dederick, as filed as Exhibit 10.1 to this Form 10-Q, except as to the
parties thereto and their respective titles.
(4) GSB Financial Corporation (the "Company") has also entered into
Supplemental Employment Agreements with each of executive officers
Barbara A. Carr and Rolland B. Peacock III which are substantially
identical in all material respects to the Supplemental Employment
Agreement by and between the Company and Mr. Dederick, as filed as
Exhibit 10.2 to this Form 10-Q, except as to the parties thereto and
their respective titles.
28
Exhibit 11
Computation of Net Income Per Share
(In thousands, except share and earnings per share)
For the Quarter Ended
---------------------------------------
September 30, 1999 September 30, 1998
------------------ ------------------
Net Income Per Share - Basic
Net income applicable to common stock $ 383,000 $ (91,000)
Weighted average common shares 1,848,322 1,997,403
Earnings per common share $ 0.21 $ (0.05)
Net Income Per Share - Diluted
Net income applicable to common stock $ 383,000 $ (91,000)
Weighted average common shares 1,848,322 1,997,403
Dilutive common stock options 18,295 22,248
----------- -----------
Weighted average common shares - diluted 1,866,617 2,019,651
Earnings per common share $ 0.21 $ (0.04)
For the Nine Months Ended
---------------------------------------
September 30, 1999 September 30, 1998
------------------ ------------------
Net Income Per Share - Basic
Net income applicable to common stock $ 1,019,000 $ 306,000
Weighted average common shares 1,889,848 2,033,542
Earnings per common share $ 0.54 $ 0.15
29
<PAGE>
Net Income Per Share - Diluted
Net income applicable to common stock $ 1,019,000 $ 306,000
Weighted average common shares 1,889,848 2,033,542
Dilutive common stock options 15,510 20,135
----------- -----------
Weighted average common shares - diluted 1,905,358 2,053,677
Earnings per common share $ 0.54 $ 0.15
(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.
30
<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
Principal Executive Officers:
Date: November 15, 1999 /s/ Stephen W. Dederick
----------------------------------
Stephen W. Dederick
Chief Financial Officer & Treasurer
(Principal Financial and
Accounting Officer)
/s/ Rolland B. Peacock III
----------------------------------
Rolland B. Peacock III
Vice President
/s/ Barbara A. Carr
----------------------------------
Barbara A. Carr
Secretary
31
<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> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,469
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 52,203
<INVESTMENTS-CARRYING> 1,671
<INVESTMENTS-MARKET> 1,664
<LOANS> 111,439
<ALLOWANCE> 266
<TOTAL-ASSETS> 174,634
<DEPOSITS> 103,737
<SHORT-TERM> 29,325
<LIABILITIES-OTHER> 1,938
<LONG-TERM> 10,000
0
0
<COMMON> 21,619
<OTHER-SE> 8,015
<TOTAL-LIABILITIES-AND-EQUITY> 174,634
<INTEREST-LOAN> 5,375
<INTEREST-INVEST> 2,368
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,743
<INTEREST-DEPOSIT> 2,668
<INTEREST-EXPENSE> 3,596
<INTEREST-INCOME-NET> 4,147
<LOAN-LOSSES> 55
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,632
<INCOME-PRETAX> 1,688
<INCOME-PRE-EXTRAORDINARY> 1,688
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,019
<EPS-BASIC> 0.54
<EPS-DILUTED> 0.54
<YIELD-ACTUAL> 3.72
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 215
<CHARGE-OFFS> 5
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 266
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 266
</TABLE>
