FORM 10-Q.--QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 2,079,838
- ----------------------------- ---------------------
(Title of class) (outstanding at July 31, 1999)
<PAGE>
GSB FINANCIAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
- ------- --------------------- ----
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
June 30, 1999 (Unaudited) and September 30, 1998.............................. 2
Consolidated Statements of Income for the three and six months ended
June 30, 1999 and 1998 (Unaudited)............................................ 3
Consolidated Statements of Cash Flows for the six months ended June 30, 1999
and 1998 (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
Item 3. Quantitative and Qualitative Disclosure about Market Risk..................... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................. 14
Item 6. Exhibits and Reports on Form 8-K.............................................. 14
Signatures.................................................................... 17
</TABLE>
1
<PAGE>
GSB Financial Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)
(In thousands except shares and per share amounts)
<TABLE>
<CAPTION>
June 30, September 30,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks ................................................ $ 1,966 $ 2,818
Federal funds sold ..................................................... 100 4,800
--------- ---------
Cash and cash equivalents .............................................. 2,066 7,618
Investment securities available for
sale ........................................................................ 44,825 31,474
Mortgage-backed securities:
Held to maturity (estimated market values of $1,969 and
$ 3,965 at June 30,1999 and September 30, 1998, respectively) ...... 1,967 3,881
Available for sale ................................................... 2,979 5,804
Loans receivable, net .................................................. 106,153 78,713
Banking house and equipment ........................................... 2,840 2,800
Accrued interest receivable ............................................ 1,122 949
Prepaid expenses and other assets ...................................... 1,234 696
--------- ---------
Total assets ...................................................... $ 163,186 $ 131,935
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits .................................................................... $ 100,715 $ 88,310
Mortgagors' escrow deposits ............................................ 599 126
Federal funds purchased ................................................ 3,000 --
Borrowings ............................................................. 27,000 10,000
Accrued expenses and other liabilities ................................. 1,962 2,004
--------- ---------
Total liabilities ................................................. $ 133,276 $ 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 June 30, 1999 and September 30, 1998) 22 22
Additional paid-in capital ............................................. 21,580 21,510
Retained earnings, substantially restricted ............................ 13,568 12,825
Accumulated other comprehensive income ................................. (111) 632
Treasury stock, at cost ................................................ (3,308) (1,529)
Unearned ISAP stock .................................................... (402) (391)
Unallocated ESOP stock ................................................. (1,439) (1,574)
--------- ---------
Total stockholders' equity ........................................ $ 29,910 $ 31,495
--------- ---------
Total liabilities and stockholders' equity ........................ $ 163,186 $ 131,935
========= =========
</TABLE>
See accompanying notes to consolidated financial statement.
2
<PAGE>
GSB Financial Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except shares and per share amounts)
<TABLE>
<CAPTION>
For the Quarter Ended For the Six Months Ended
June 30, June 30,
--------------------------------- ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans ........................................................... $ 1,791 $ 1,406 $ 3,404 $ 2,764
Federal funds sold .............................................. 10 145 64 208
Investment securities ........................................... 678 371 1,215 704
Mortgage-backed securities ...................................... 88 165 195 356
---------- ---------- ---------- ----------
Total interest income ......................................... 2,567 2,087 4,878 4,032
INTEREST EXPENSE
Deposit accounts ................................................ 886 806 1,750 1,571
Other borrowings ................................................ 292 87 458 93
---------- ---------- ---------- ----------
Total interest expense ........................................ 1,178 893 2,208 1,664
Net interest income ............................................. 1,389 1,194 2,670 2,368
Provision for loan losses ....................................... 20 10 35 20
---------- ---------- ---------- ----------
Net interest income after provision for loan losses ............. 1,369 1,184 2,635 2,348
NON-INTEREST INCOME
Service charges on deposit accounts ............................. 44 35 88 67
Other income .................................................... 33 22 61 48
Net realized gains on securities ................................ -- -- -- --
Capital gains distributions ..................................... -- -- -- --
---------- ---------- ---------- ----------
Total non-interest income ..................................... 77 57 149 115
NON-INTEREST EXPENSE
Salaries and employee benefits .................................. 401 512 781 982
Occupancy and equipment ......................................... 79 75 173 156
Data processing expenses ........................................ 67 44 143 89
Other non-interest expense ...................................... 328 314 639 574
---------- ---------- ---------- ----------
Total non-interest expense .................................... 875 945 1,736 1,801
---------- ---------- ---------- ----------
Income before income taxes ...................................... 571 296 1,048 662
Income tax expense .............................................. 228 121 412 265
---------- ---------- ---------- ----------
Net income ...................................................... $ 343 $ 175 $ 636 $ 397
========== ========== ========== ==========
Basic earnings per share ........................................ $ 0.18 $ 0.09 $ 0.33 $ 0.20
Weighted average shares outstanding - basic ..................... 1,895,619 2,026,670 1,910,956 2,051,911
Diluted earnings per share ...................................... $ 0.18 $ 0.08 $ 0.33 $ 0.19
Weighted average shares outstanding - diluted ................... 1,911,892 2,063,759 1,925,397 2,070,971
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
GSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
-------- --------
(In Thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................ $ 636 $ 397
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ................................................. 86 64
Provision for loan losses .................................... 35 20
Fair value provision of ESOP shares committed to be released . 161 182
Increase (decrease) other assets ............................. (700) 32
Net amortization on investment securities - available for sale 25 19
Net amortization (accretion) on mortgage - backed
Securities - held to maturity .............................. (7) 3
Net amortization (accretion) on mortgage - backed
Securities - available for sale ............................ 10 14
Increase (decrease) in accrued expenses and other
Liabilities ................................................ 1,060 (204)
-------- --------
Net cash provided by operating activities .................... 1,306 527
-------- --------
Cash flows from investing activities:
Proceeds from principal paydowns of mortgage -
backed Securities - held to maturity ...................... 467 794
Purchase of mortgage-backed securities - held to maturity .... -- (1,000)
Proceeds from principal paydowns of mortgage - backed
Securities - available for sale ............................ 1,376 1,791
Proceeds from maturity and redemption of investment
Securities - available for sale ............................ 4,200 7,511
Purchase of investment securities - available for sale ....... (17,785) (10,311)
Net (increase) in loans ..................................... (21,436) (6,990)
Capital expenditures ......................................... (74) (175)
Proceeds from sale of other real estate owned ................ -- --
-------- --------
Net cash provided (used) by investing activities ............. (33,252) (8,380)
Cash flow from financing activities:
Net (decrease) in demand, statement passbook, money
Market and NOW deposit accounts ............................ 6,882 3,858
Proceeds from borrowings ..................................... 20,000 10,000
Dividends paid ............................................... (148) (68)
Purchase of treasury stock ................................... (1,276) (1,567)
Increase (decrease) in advances from borrowers for taxes
And insurance .............................................. 300 172
-------- --------
Net cash provided by ( used in) financing activities 25,758 12,395
-------- --------
Net increase (decrease) in cash and cash equivalents ......... (6,188) 4,542
Cash and cash equivalents at beginning of year ............... 8,254 6,122
-------- --------
Cash and cash equivalents at end of year ..................... $ 2,066 $ 10,664
======== ========
Additional Disclosures:
Supplemental disclosures of cash flows
information-cash paid during year for:
Interest on other borrowings ............................ $ 334 $ 93
Income taxes ............................................ 708 294
Supplemental schedule of non-cash investing
activities:
Change in unrealized gains & losses in investment
securities -
Available for sale ......................................... (832) 259
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
GSB Financial Corporation
Notes to Unaudited Consolidated Interim Financial Statements
1. Basis of Presentation
GSB Financial Corporation ("GSB Financial") was incorporated under Delaware law
in March 1997 as a holding company to purchase 100% of the common stock of
Goshen Savings Bank (the "Bank"). On July 9, 1997, GSB Financial completed its
initial public offering of 2,248,250 shares of common stock in connection with
the conversion of the Bank from a mutual form institution to a stock savings
bank (the "Conversion"). Concurrently with the Conversion, GSB Financial
acquired all of the Bank's common stock.
The consolidated financial statements included herein at or for periods ended
June 30, 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 June 30, 1999, 31,475 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.
5
<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, June 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. 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. Results of
operations are also affected by the Company's provision for loan losses. In
addition to net interest income, other sources of income for the Company include
deposit account fees, loan and loan servicing fees, gains on the sale of
securities, capital gain distributions on mutual fund investments, and fees for
banking services such as safe deposit boxes. The largest category of
non-interest expense is compensation and benefits expense. Other principal
categories of non-interest expense include occupancy expense, data processing
costs, advertising and marketing expenses, and insurance costs. Results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government policies
and actions of regulatory authorities.
The Company's strategy is to continue to operate the Bank as a community-based
financial institution while exploring appropriate opportunities to leverage the
additional capital obtained in the Conversion. The Company is seeking to improve
its customer service delivery capability, enabling it to provide better services
to existing customers and seek to expand its customer base.
6
<PAGE>
Average Balances, Interest Rates and Yield
The following table presents, for the periods indicated, the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
Average balances 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 June 30,
-----------------------------------
1999 1998
---- ----
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) .................................... $ 98,888 $ 1,791 7.24% $ 73,000 1,406 $7.70%
Mortgage-backed securities .............................. 5,330 88 6.60 10,209 165 6.46
Investment securities ................................... 42,103 678 6.44 24,268 371 6.12
Federal funds sold ...................................... 1,186 10 3.37 11,125 145 5.21
------- ------- --------
Total interest-earning assets ....................... 147,507 2,567 6.96 118,602 2,087 7.04
------- -----
Non-interest-earning assets ............................. 6,450 5,662
-------- --------
Total assets ....................................... $153,957 $124,264
======== ========
Interest-bearing
liabilities:
Savings accounts ........................................ $ 30,625 235 3.07 $ 26,954 203 3.01
Certificates of deposit ................................. 41,746 489 4.69 38,243 480 5.02
Money market ............................................ 13,572 125 3.68 9,402 93 3.96
NOW accounts ............................................ 6,156 36 2.34 4,510 29 2.57
Other ................................................... 22,812 293 5.14 6,725 88 5.23
------- ------- ---- ------ --- ----
Total interest-bearing liabilities .................. 114,911 1,178 4.10 85,834 893 4.16
------- -----
Non-interest-bearing liabilities ........................ 8,119 5,974
-------- --------
Total liabilities ................................... 123,030 91,808
Equity .................................................. 30,927 32,456
-------- --------
Total liabilities and equity ....................... $153,957 $124,264
======== ========
Net interest income/spread (2)(3) ....................... $ 1,389 2.86% $ 1,194 2.88%
======== ==== ======== ====
Net earning assets/net interest margin (4) .............. $ 32,596 3.77% $ 32,768 4.03%
======== ==== ======== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities ............. 1.28x 1.38x
==== ====
</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.
7
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
1999 1998
---- ----
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) .............................. $ 94,055 $ 3,404 7.24% $ 71,490 $ 2,764 7.73%
Mortgage-backed securities ........................ 5,876 195 6.65 10,949 356 6.50
Investment securities ............................. 38,282 1,215 6.35 23,724 704 5.93
Federal funds sold ................................ 3,054 64 4.19 8,189 208 5.08
-------- ------- -------- -------
Total interest-earning assets ................ 141,267 4,878 6.91 114,352 4,032 7.05
------- -------
Non-interest-earning assets ....................... 6,509 5,613
-------- --------
Total assets ................................. $147,776 $119,965
======== ========
Interest-bearing
liabilities:
Savings accounts .................................. $ 29,900 451 3.02 $ 26,467 394 2.98
Certificates of deposit ........................... 41,711 983 4.71 38,025 959 5.04
Money market ...................................... 13,493 248 3.67 8,993 162 3.60
NOW accounts ...................................... 5,945 68 2.28 4,288 55 2.57
Other ............................................. 17,889 458 5.12 3,602 94 5.22
------- ------- -------- -------
Total interest-bearing liabilities ............ 108,937 2,208 4.05 81,375 1,664 4.09
------- -------
Non-interest-bearing liabilities .................. 7,664 5,854
-------- --------
Total liabilities
116,601 87,229
Equity ............................................ 31,175 32,736
-------- --------
Total liabilities and equity ................. $147,776 $119,965
======== ========
Net interest income/spread (2)(3) ............... $ 2,670 2.86% $ 2,368 2.96%
== == ======= ==== ======= ====
Net earning assets/net interest margin (4) ........ $ 32,330 3.78% $ 32,977 4.14%
== ======== ==== ======== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities ....... 1.30x 1.41x
======= =======
</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.
8
<PAGE>
Comparison of Financial Condition at June 30, 1999 and September 30, 1998
The Company's total assets were $163.2 million at June 30, 1999 as compared to
$131.9 million at September 30, 1998, representing 23.7% growth in assets.
Loans, net increased $27.4 million, or 34.9%, from $78.7 million to $106.2
million. Residential loans increased by $19.5 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 $7.9 million. Investment
securities available for sale increased by $13.4 million, while mortgage-backed
securities and federal funds decreased by $4.7 million each, 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 $12.4
million or 14.0% to $100.7 million at June 30, 1999 as compared to $88.3 million
at September 30, 1998. The increase includes $3.1 million of deposits in the new
branch opened in September 1998, in Harriman, New York. The growth in core
deposits (representing deposits other than certificates of deposit) during the
period was $9.3 million or 75.0% of the period gain, which is attributed to the
Company's emphasis on attracting core deposit relationships through its
advertising.
Total equity decreased to $29.9 million at June 30, 1999, from $31.5 million at
September 30, 1998. The $1.6 million decrease resulted principally from the
repurchase of $1.8 million of the Company's stock. The Company repurchased
112,412 shares of its stock from October 1, 1998 through June 30, 1999. The
Company's third stock repurchase was announced May 28, 1999, with 56,000 shares
purchased as of June 30, 1999, after which the Company had the right to
repurchase an additional 50,792 shares of its common stock.
Comparison of Operating Results.
Interest Income was $2.6 million for the second quarter of fiscal 1999 as
compared to $2.1 million for the same period in 1998, an increase of $480,000 or
23.0%. For the six months ended June 30, 1999, interest income amounted to $4.9
million as compared to $4.0 million for the same period in 1998. The increase in
the quarterly interest income was primarily volume related due to a $28.9
million or 24.4%, increase in average earning assets, partially offset by an 8
basis point decrease in the average yield on earnings assets. The increase in
the six months interest income was primarily volume related due to a $26.9
million or 23.5%, increase in average earning assets, partially offset by an 14
basis point decrease in the average yield on earnings assets.
The primary cause for the increase in average earning assets were $25.9 million
and $22.6 million increases in the average balance of loans for the three and
six month periods, as a result of efforts by the Company to leverage its capital
through increased loan origination's. The volume increases were partially offset
by a 46 basis point decline for the quarter and a 49 basis point decline for the
six 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
$385,000 and $640,000 increase in interest earned on loans for the respective
periods. Interest income on investment securities increased by $307,000 and
$511,000 for the quarter and the six months, due to increases in the average
balances of $17.8 million and $14.6 million for the respective periods, as 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 32 and 42 basis points for the respective periods, caused by the
9
<PAGE>
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 $77,000 and $161,000 due to a $4.9 million and $5.1
million decrease in the average balance of mortgage-backed securities due to
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 $135,000 and $144,000 for the quarter and six months
ended June 30, 1999, compared to the same period in 1998, due to decreases in
the average balances of $10.0 million and $5.1 million. The reason for the
decrease in average balances was that loan growth exceeded the growth in
deposits.
Interest Expense was $1.2 million for the quarter ended June 30, 1999 as
compared to $893,000 for the same quarter in 1998. For the six months ended June
30, 1999, interest expense totaled $2.2 million compared to $1.7 million for the
same period last year. Interest on borrowings which were principally undertaken
to improve leverage increased $205,000 for the quarters, and $365,000 for the
six month periods. Interest paid on deposits increased $80,000 from the 1998 to
the 1999 quarters because average interest bearing deposits increased by $13.0
million, offset by a decrease of 23 basis points from 4.07% to 3.84% in the
average rate paid on deposits. Interest paid on deposits increased $180,000 for
the six months ended June 30, 1999 compared to June 30, 1998, because average
interest bearing deposits increased $13.3 million, partially offset by a
decrease of 20 basis points from 4.04% to 3.84% in the average rate paid on
deposits. The Company has emphasized lower cost deposit products in order to
improve leverage while reducing upward pressures on its cost of funds.
Provision for Loan Losses was $20,000 for the quarter of June 30, 1999 compared
to $10,000 in the comparable quarter in 1998. The provision for the six months
ended June 30, 1999 was $35,000 compared to $20,000 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 June 30, 1999. At June 30, 1999, the allowance
for loan losses was $250,000 representing 0.24% of period end loans. Net
charge-offs during the quarter and the six months were zero. After June 30,
1999, the Company was advised that one of its commercial loan borrowers filed a
Chapter 11 bankruptcy petition. The loan, in the principal amount of $50,000, is
guaranteed by the principals of the borrower. The loan was current on June 30.
Non-interest income was $77,000 for the second quarter of fiscal 1999 as
compared to $57,000 for the same quarter in fiscal 1998. For the six months
ended June 30, 1999, non-interest income amounted to $149,000 as compared to
$115,000 for the same period in 1998. The increases in both periods are mainly
due to service fee income from new transaction accounts and ATM fees for
non-customers.
Non-interest expense was $875,000 for the quarter ended June 30, 1999, compared
to $945,000 for the comparable quarter in 1998. Non-interest expense for the six
month ended June 30, 1999 was $1.7 million compared to $1.8 million for the
comparable period in 1998. The Company worked to control costs without
sacrificing growth and diversification, thus improving its efficiency ratio. The
primary cost reduction was a $111,000 and a $201,000 reduction in salary and
benefits expense for the quarter and six months ended June 30, 1999 compared to
the same periods in 1998, due to the Voluntary Early Employment Termination
Program, in which 11 employees participated at December 31, 1998. The program
allowed the Company not to increase
10
<PAGE>
its full time equivalent employees, while it opened a new branch in September
1998 and began to offer commercial loans. Increases in the other expense items
are attributed to the new branch and commercial lending and other increased
costs necessarily flowing from growth. The Company improved its efficiency ratio
from 73.1% for the six months ended June 30, 1998 to 62.4% for the six months
ended June 30, 1999.
Income tax expense was $228,000 and $412,000 for the second quarter and six
months ended June 30, 1999, as compared to $121,000 and $265,000 for the
comparable periods for 1998. The increases were principally caused by increases
in income before taxes.
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 June 30, 1999, the Bank had available lines
of credit with the Federal Home Loan Bank of New York of $12.4 million, with $6
million outstanding as of June 30, 1999. The Bank also had Federal Home Loan
Bank borrowings of $24 million at June 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
$4.8 million, and $615,000 at June 30, 1999, respectively, and the Bank had $1.6
million of unused home equity lines of credit and $1.7 million and $294,000 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 June 30, 1999, totaled
$38.8 million. Management anticipates that the Bank will be able to retain
substantially all of such deposits if the Bank decides to do so to fund loans
and other investments. . At June 30, 1999, the Bank exceeded all regulatory
capital requirements of the OTS applicable to it, with tangible and core capital
of $23.3 million, or 14.7% of adjusted assets and total risk-based capital of
$23.5 million, or 29.7% of risk-weighted assets. The Bank was classified as
"well capitalized" at June 30, 1999 under OTS regulations.
The Bank is subject to the minimum liquidity regulations of the OTS. At June 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 June 30, 1999 had
liquid assets equal to 8.6% of net withdrawable accounts plus short term
borrowings.
11
<PAGE>
The following table sets forth information regarding the regulatory capital
ratios of the Bank at June 30, 1999.
Actual Minimum Capital For Classification
as Well Capitalized
Bank Amount Ratio Amount Ratio Amount Ratio
(Dollars in Thousands)
Tangible Capital $23,261 14.70% 2,374 1.50% -- --
Tier 1 (Core) Capital 23,261 14.70% 4,749 3.00% $ 7,914 5.0%
Risk Based Capital:
Tier 1 23,261 29.35% -- -- 4,755 6.0%
Total 23,511 29.67% 6,340 8.00% 7,924 10.0%
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.
12
<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. 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
internal and external ATM software from our new ATM service provider 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.
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".
13
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
In the ordinary course of business, the Company and the Bank are subject to
legal actions, which involve claims for monetary relief. Management, based on
advice of counsel, does not believe that any currently known legal actions,
individually or in the aggregate will have a material effect on its consolidated
financial condition or results of operation.
Item 2. Changes in Securities
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule*
(b) Reports on Form 8-K
None
- ----------
* Submitted only with filing in electronic format.
14
<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: August 13, 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
Exhibit 11
Computation of Net Income Per Share
(In thousands, except share and earnings per share)
For the Quarter Ended
---------------------
June 30, 1999 June 30, 1998
------------- -------------
Net Income Per Share - Basic
- ----------------------------
Net income applicable to common stock $ 343,000 $ 175,000
Weighted average common shares 1,895,619 2,026,670
Earnings per common share $ 0.18 $ 0.09
Net Income Per Share - Diluted
- ------------------------------
Net income applicable to common stock $ 343,000 $ 175,000
Weighted average common shares 1,895,619 2,026,670
Dilutive common stock options 16,273 37,089
---------- ----------
Weighted average common shares - diluted 1,911,892 2,063,759
Earnings per common share $ 0.18 $ 0.08
For the Six Months Ended
------------------------
June 30, 1999 June 30, 1998
------------- -------------
Net Income Per Share - Basic
- ----------------------------
Net income applicable to common stock $ 636,000 $ 397,000
Weighted average common shares 1,910,956 2,051,911
Earnings per common share $ 0.33 $ 0.20
15
<PAGE>
Net Income Per Share - Diluted
- ------------------------------
Net income applicable to common stock $ 636,000 $ 397,000
Weighted average common shares 1,910,956 2,051,911
Dilutive common stock options 14,441 19,060
---------- ----------
Weighted average common shares - diluted 1,925,397 2,070,971
Earnings per common share $ 0.33 $ 0.19
(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.
16
<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> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,966
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 47,804
<INVESTMENTS-CARRYING> 1,967
<INVESTMENTS-MARKET> 1,969
<LOANS> 106,153
<ALLOWANCE> 250
<TOTAL-ASSETS> 163,186
<DEPOSITS> 100,715
<SHORT-TERM> 20,000
<LIABILITIES-OTHER> 2,561
<LONG-TERM> 10,000
0
0
<COMMON> 21,602
<OTHER-SE> 8,308
<TOTAL-LIABILITIES-AND-EQUITY> 163,186
<INTEREST-LOAN> 3,404
<INTEREST-INVEST> 1,474
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<INTEREST-TOTAL> 4,878
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<NET-INCOME> 636
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<YIELD-ACTUAL> 3.78
<LOANS-NON> 0
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