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
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended
or
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from October 1, 1998 to December 31, 1998
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 2,163,450
(Title of class) (outstanding at January 31, 1999)
<PAGE>
GSB FINANCIAL CORPORATION
FORM 10-Q
For the Quarter Ended December 31, 1998
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
December 31, 1998 (Unaudited) and September 30, 1998................ 2
Consolidated Statements of Income for the three months ended
December 31, 1998 and 1997 (Unaudited).............................. 3
Consolidated Statements of Cash Flows for the three months
ended December 31, 1998 and 1997 (Unaudited)........................ 4
Notes to Unaudited Consolidated Interim Financial Statements........ 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................... 13
Item 6. Exhibits and Reports on Form 8-K.................................... 13
Signatures.......................................................... 15
1
<PAGE>
GSB Financial Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)
(In thousands except shares and per share amounts)
<TABLE>
<CAPTION>
December 31, September 30,
-----------------------------
1998 1998
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks ................................. $ 1,679 $ 2,818
Federal funds sold ...................................... 6,575 4,800
--------- ---------
Cash and cash equivalents ............................... 8,254 7,618
Investment securities available for sale ................ 32,616 31,474
Mortgage-backed securities:
Held to maturity (estimated market values of $2,452 and
$3,965 at December 31,1998 and September 30, 1998,
respectively) ....................................... 2,427 3,881
Available for sale .................................... 4,397 5,804
Loans receivable, net ................................... 84,752 78,713
Banking house and equipment ............................. 2,852 2,800
Accrued interest receivable ............................. 854 949
Prepaid expenses and other assets ....................... 802 696
--------- ---------
Total assets ....................................... $ 136,954 $ 131,935
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits ................................................ $ 93,833 $ 88,310
Mortgagors' escrow deposits ............................. 299 126
Borrowings .............................................. 10,000 10,000
Accrued expenses and other liabilities .................. 1,455 2,004
--------- ---------
Total liabilities .................................. $ 105,587 $ 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 December 31, 1998
and September 30, 1998) .............................. 22 22
Additional paid-in capital .............................. 21,524 21,510
Retained earnings, substantially restricted ............. 13,081 12,825
Net unrealized gain on securities available
for sale, net of taxes ................................ 720 632
Treasury stock, at cost ................................. (2,084) (1,529)
Unearned ISAP stock ..................................... (367) (391)
Unallocated ESOP stock .................................. (1,529) (1,574)
--------- ---------
Total stockholders' equity ......................... $ 31,367 $ 31,495
--------- ---------
Total liabilities and stockholders' equity ......... $ 136,954 $ 131,935
========= =========
</TABLE>
2
<PAGE>
GSB Financial Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except shares and per share amounts)
For the Quarter Ended
December 31,
-----------------------
1998 1997
---------- ----------
INTEREST INCOME
Loans ............................................. $ 1,538 $ 1,302
Federal funds sold ................................ 88 57
Investment securities ............................. 485 438
Mortgage-backed securities ........................ 153 199
---------- ----------
Total interest income ........................... 2,264 1,996
INTEREST EXPENSE
Deposit accounts .................................. 861 778
Other borrowings .................................. 132 --
---------- ----------
Total interest expense .......................... 993 778
Net interest income ............................... 1,271 1,218
Provision for loan losses ......................... 60 20
---------- ----------
Net interest income after provision for loan losses 1,211 1,198
NON-INTEREST INCOME
Service charges on deposit accounts ............... 44 34
Other income ...................................... 25 30
Net realized gains on securities .................. 27 --
Capital gains distributions ....................... 205 82
---------- ----------
Total non-interest income ....................... 301 146
NON-INTEREST EXPENSE
Salaries and employee benefits .................... 488 489
Occupancy and equipment ........................... 79 86
Data processing expenses .......................... 70 43
Other non-interest expense ........................ 341 234
---------- ----------
Total non-interest expense ...................... 978 852
---------- ----------
Income before income taxes ........................ 534 492
Income tax expense ................................ 214 197
---------- ----------
Net income ........................................ $ 320 $ 295
========== ==========
Basic earnings per share .......................... $ 0.16 $ 0.14
Weighted average shares outstanding (basic) ....... 1,944,564 2,072,984
Diluted earnings per share ........................ $ 0.16 $ 0.14
Weighted average shares outstanding (fully diluted) 1,964,330 2,072,984
3
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GSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31,
1998 1997
------- -------
(In Thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................... $ 320 $ 295
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation .................................................... 44 40
Provision for loan losses ....................................... 60 20
ESOP compensation expense ....................................... 84 73
Gain on sale of mortgage-backed securities-held to maturity ..... (27) --
Increase (decrease) other assets ................................ (104) (7)
Net amortization on investment securities -
available for sale ............................................ 15 20
Net amortization (accretion) on mortgage - backed
Securities - held to maturity ................................. (4) 1
Net amortization (accretion) on mortgage - backed
Securities - available for sale ............................... 6 4
Increase (decrease) in accrued expenses and other
Liabilities ................................................... (608) (22)
------- -------
Net cash provided by operating activities ....................... (214) 424
------- -------
Cash flows from investing activities:
Proceeds from principal paydowns of mortgage - backed
Securities - held to maturity ................................ 880 492
Proceeds from principal paydowns of mortgage - backed
Securities - available for sale ............................... 1,390 154
Proceeds from maturity and redemption of investment
Securities - available for sale ............................... 3,500 900
Purchase of investment securities - available for sale .......... (4,500) --
Proceeds from sale of mortgage-backed securities-held to maturity 605 --
Net (increase) in loans ........................................ (6,099) (2,751)
Capital expenditures ............................................ (96) (6)
Proceeds from sale of other real estate owned ................... 94 --
------- -------
Net cash provided (used) by investing activities ................ (4,226) (1,211)
------- -------
Cash flow from financing activities:
Net (decrease) in demand, statement passbook, money
Market and NOW deposit accounts ............................... 5,523 (1,540)
Dividends paid .................................................. (65) --
Purchase of treasury stock ...................................... (555) --
Increase in advances from borrowers for taxes
And insurance ................................................. 173 132
Net increase in other borrowings ................................ -- --
------- -------
Net cash provided by ( used in) financing activities ............ 5,076 (1,408)
------- -------
Net increase (decrease) in cash and cash equivalents ............ 636 (2,195)
Cash and cash equivalents at beginning of year .................. 7,618 8,318
------- -------
Cash and cash equivalents at end of year ........................ $ 8,254 $ 6,123
======= =======
Additional Disclosures:
Supplemental disclosures of cash flows
information-cash paid during year for:
Interest on other borrowings ............................... $ 132 $ --
Income taxes ............................................... -- 47
Supplemental schedule of non-cash investing
activities:
Change in unrealized gains in investment securities -
available for sale ............................................ 88 (48)
</TABLE>
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
December 31, 1998 and 1997, have been prepared by the Company without audit. In
the opinion of management, the quarterly unaudited financial statements include
all adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the consolidated financial position and results of operations
for the periods presented. Certain information and footnote disclosures normally
included in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. The Company believes that the disclosures are adequate to
make the information presented not misleading, however, the results for the
periods presented are not indicative of the results to be expected for the
entire year.
The unaudited quarterly financial statement presented herein should be read in
conjunction with the annual audited consolidated financial statements of the
Company for the fiscal year ended September 30, 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 December 31, 1998, 26,979 shares have been
committed to be released and under AICPA Statement of Position 93-6, these
shares will be considered outstanding for purposes of calculating per share
amounts. SFAS No. 128 requires dual presentation of basic and diluted earnings
per share on the face of the income statement for all entities with a complex
capital structure and specifies additional disclosure requirements. Basic
earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Unvested restricted stock is considered outstanding
and included in the computation of basic earnings per share as of the date
shares are fully vested. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity, such as the
Company's restricted stock and stock options. SFAS No. 128 requires restatement
of all prior period earnings per share data
5
<PAGE>
presented. In accordance with Statement of Financial Accounting Standards No.
128, "Earnings per Share," basic and diluted earnings per share are identical.
The following sets forth certain information regarding the calculation of basic
and diluted earnings per share (EPS) calculations for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended December 31, 1998
------------------------------------
Net Weighted Per-Share
Income Average Shares Amount
(In thousands, except share and earnings per share)
<S> <C> <C> <C>
Basic EPS $ 320 1,944,564 $0.16
Dilutive effect of potential common
Shares related to stock based
Compensation plans -- 19,766 --
Diluted EPS $ 320 1,964,330 $0.16
</TABLE>
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.
This report is a transition report for the three month period ending December
31, 1998. 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 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 business 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
6
<PAGE>
in its local community. Management also considers other loan types consistent
with its mission to serve the local consumer and business community.
The Bank is a federal savings bank with deposits insured by the Bank Insurance
Fund ("BIF") of the FDIC. The Bank's primary federal banking regulator is the
Office of Thrift Supervision ("OTS").
The financial condition and results of operations of the Company are primarily
dependent upon the operations of the Bank, and the earnings from securities
investments made by the Company with the portion of the net proceeds of its
stock offering retained by it. The Company's results of operations are dependent
principally on its net interest income, representing the difference between the
income earned on its loan and securities portfolios and its cost of funds,
represented principally by interest paid on its deposit accounts. Results of
operations are also affected by the Company's provision for loan losses. In
addition to net interest income, other sources of income for the Company include
deposit account fees, loan and loan servicing fees, gains on the sale of
securities, capital gain distributions on mutual fund investments, and fees for
banking services such as safe deposit boxes. The largest category of
non-interest expense is compensation and benefits expense. Other principal
categories of non-interest expense include occupancy expense, data processing
costs, advertising and marketing expenses, and insurance costs. Results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government policies
and actions of regulatory authorities.
The Company's strategy is to continue to operate the Bank as a community-based
financial institution while exploring appropriate opportunities to leverage the
additional capital obtained in the Conversion. The Company is seeking to improve
its customer service delivery capability, enabling it to provide better services
to existing customers and seek to expand its customer base.
7
<PAGE>
Average Balances, Interest Rates and Yield
The following table presents for the periods indicated, the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
Average balances for periods after December 31, 1997, are daily or weekly
average balances and for earlier periods are monthly average balances.
Non-interest-bearing checking accounts are included in the tables as a component
of non-interest-bearing liabilities.
<TABLE>
<CAPTION>
For the Three Months Ended December 31,
1998 1997
Average Interest Average Average Interest Average
Balance -------- Yield/ Balance -------- Yield/
------- Cost(5)(6) ------- Cost(5)(6)
--------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans receivable (1) .................................... $ 80,837 $ 1,538 7.61% $ 67,000 1,302 7.77%
Mortgage-backed securities .............................. 8,526 153 7.18 12,360 199 6.44
Investment securities ................................... 29,434 457 6.31 25,106 438 6.44
Federal funds sold ...................................... 7,934 88 4.44 5,201 57 4.38
-------- -------- -------- --------
Total interest-earning assets ....................... 126,731 2,236 7.08 109,667 1,996 7.16
-------- --------
Non-interest-earning assets ............................. 6,731 5,502
-------- --------
Total assets ....................................... $133,462 $115,169
======== ========
Interest-bearing
liabilities:
Savings accounts ........................................ $ 27,841 211 3.03 $ 26,358 198 3.00
Certificates of deposit ................................. 40,670 512 5.04 37,672 487 5.17
Money market ............................................ 11,682 109 3.73 8,781 66 3.01
NOW accounts ............................................ 5,050 29 2.30 4,122 27 2.62
Other ................................................... 10,000 132 5.28 0 0 0.00
-------- -------- -------- --------
Total interest-bearing liabilities .................. 95,243 993 4.17 76,933 778 4.05
-------- --------
Non-interest-bearing liabilities ....................... 6,845 5,561
-------- --------
Total liabilities ................................... 102,088 82,494
Equity .................................................. 31,374 32,675
-------- --------
Total liabilities and equity ....................... $133,462 $115,169
======== ========
Net interest income/spread (2)(3) ....................... $ 1,243 2.91% $ 1,218 3.11%
======== ======== ======== =======
Net earning assets/net interest margin (4) .............. $ 31,488 3.95% $ 32,734 4.32%
========= ======== ======== =======
Ratio of average interest-earning assets
to average interest-bearing liabilities ............. 1.33x 1.43x
======== ========
</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 three month periods have been annualized when appropriate.
(6) During the three months ended December 31, 1998 and 1997, the Company
received $28,000 and $45,000, respectively, in annual non-capital
distributions on its mutual fund investment which was recorded as interest
earned. For purpose of reporting the yields, spreads and net interest
margin for such periods, only one-quarter of such amounts have been taken
into account so that yields, spreads and margins are comparable to those
shown in the Company's 1998 Annual Report. If such amounts had been
included in full for the respective fiscal quarters, the interest rate
spreads for the three months ended December 31, 1998 and 1997, would have
been 2.98% and 3.23%, respectively, and the net interest margins would have
been 4.01% and 4.44%, respectively, for such periods.
8
<PAGE>
Comparison of Financial Condition at December 31, 1998 and September 30, 1998
The Company's total assets amounted to $137.0 million at December 31, 1998 as
compared to $131.9 million at September 30, 1998. Loans, net increased $6.0
million, or 7.7%, from $78.7 million to $84.8 million due to steady residential
mortgage loan demand along with new commercial mortgage and business loans of
$2.4 million originated during the quarter as the Company sought to expand its
portfolio of such loans. Federal funds and investment securities available for
sale increased by $1.8 million and $1.1 million, respectively, while
mortgage-backed securities decreased by $2.9 million, during the quarter ended
December 31, 1998. The decrease in mortgage-backed securities was partially due
to the sale of approximately $550,000 in small balance GNMA securities, and
accelerated principal paid payments due to the low interest rate environment.
Deposits increased by $5.5 million or 6.3% to $93.8 million at December 31, 1998
as compared to $88.3 million at September 30, 1998. Included in this gain are
deposits of $1.5 million 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 quarter of $3.2 million or 57.2% of the
quarterly gain is attributed to the Company's emphasis in attracting core
deposit relationships through its advertising.
Total equity decreased to $31.4 million at December 31, 1998, from $31.5 million
at September 30, 1998. The $127,000 decrease in equity resulted principally from
the repurchase of $555,000 of the Company's stock and the allocation of $65,000
for the Company's declared dividend payable, offset by net income of $320,000,
$70,000 representing the balance sheet effect of ESOP stock allocations and ISAP
stock vesting, and an increase of $88,000 in the net unrealized gain on
securities available for sale. At December 31, 1998, the Company had the right
to repurchase, based on a previously announced approval from the Office of
Thrift Supervision, an additional 34,612 shares of its common stock.
Basic earnings per share for the quarters ended December 31, 1998, and 1997,
were $0.16 and $0.14, while diluted earnings per share for the same periods were
$0.16 and $0.14 respectively, calculated in each case by dividing reported net
income by applicable weighted average shares for the respective periods,
excluding unallocated ESOP stock.
Comparison of Operating Results for the Three Months Ended December 31, 1998 and
1997
Interest Income was $2.3 million for the quarter ended December 31, 1998,
compared to $2.0 million for the same period in 1997, an increase of $268,000 or
13.4%. The increase in interest income was primarily volume related due to an
increase in average earning assets by $17.1 million or 15.6%, offset by a
decrease in the average yield on earning assets by 8 basis points.
The primary cause for the increase in average earning assets was a $13.8 million
increase in the average balance of loans, which was partially offset by a 16
basis point decline in the average yield earned on loans. The two factors
combined to produce an estimated $236,000 increase in interest earned on loans.
Interest earned on mortgage-backed securities decreased by $46,000 due to a $3.8
million decrease in the average balance of mortgage-backed
9
<PAGE>
securities due to accelerated principal payments, and the sale of small balance
mortgage-backed securities to improve efficiency. Interest earned on federal
funds increased by $31,000 due to an increase in the average balance by $2.7
million and a 6 basis point increase in the average yield. Interest income on
investment securities increased by $19,000 due to a net increase in the average
balance of $4.3 million, as the Company invested excess funds in investment
securities pending the availability of satisfactory loan opportunities. The
increase was substantially offset by a 13 basis point decrease in the average
yield, caused by the lower market interest rates in the comparable periods. The
net increase was primarily funded by the Company's leverage program of $10.0
million, offset by the redeployment of maturities and calls of investments of $
5.7 million into the loan portfolio in the comparable periods.
Interest Expense was $993,000 for the quarter ended December 31, 1998 as
compared to $778,000 for the same quarter in 1997. The increase in interest
expense was primarily volume related due to the increase of $18.3 million or
23.8% of interest-bearing liabilities along with a 12 basis point increase in
the average cost of funds between the comparable quarters. Interest on
borrowings which were undertaken to improve leverage increased by $132,000 for
the quarter ended December 31, 1997 to December 31,1998. Interest paid on
deposits increased by $83,000 from the 1997 to the 1998 quarter, because average
interest bearing deposits increased by $8.3 million, offset by a slight decrease
in the in average rate paid on deposits. The average balance in money market
accounts increased by $2.9 million or 33.0% for the comparable quarters combined
with an increase in spread by 72 basis points due the restructuring of the
account with tiered pricing and increased advertising along with other core
deposits. The average balance of certificates of deposit increased by $3.0
million, offset by a 13 point decrease in the average rate paid for the
comparable quarters due to the gradual turnover of certificates of deposits at
lower rates due to low market interest rate conditions.
Provision for Loan Losses was $60,000 for the quarter of December 31, 1998
compared to $20,000 in the comparable quarter in 1997. The Company increased its
provision for loan losses due to increases in the loan portfolio and efforts to
develop a commercial lending portfolio. Non-performing loans at December 31,
1998, were $92,000, or 0.11% of total loans, and were represented by one
residential mortgage.
Non-interest income was $301,000 for the quarter ended December 31, 1998 as
compared to $146,000 for the same quarter in 1997. The increase of $155,000 is
principally caused by an increase of $123,000 in capital gains distributions on
the Company's mutual fund investment, which are distributed in December each
year. The Company recognized a gain of $27,000 on the sale of mortgage-backed
securities with small individual balances during the quarter ended December 31,
1998.
Non-interest expense was $978,000 for the quarter ended December 31, 1998,
compared to $852,000 for the comparable quarter in 1997. The increase of
$126,000 is mostly caused by $24,000 of compensation expense in connection with
the Company's ISAP which was approved by the shareholders at the 1997 Annual
meeting, $27,000 of computer expenses and $12,000 of marketing and promotion
expense related to opening the new branch in late September 1998. Non-interest
expenses during the December 31, 1998 quarter included $9,000 of other real
estate expense on a foreclosed property that was sold during the quarter. The
Company also incurred approximately $26,000 in compensation expense during the
1998 quarter due to temporary staff duplication resulting from the Company's
voluntary
10
<PAGE>
early termination program. During the quarter ended December 31, 1998, the
Company hired new employees to allow for a smooth transition while continuing to
incur salary expense for employees who retired at the end of the quarter.
Income tax expense was $214,000 for the quarter ended December 31, 1998,
compared to $197,000 for the comparable quarter in 1997. The increase of $17,000
was principally caused by the increase in the income before taxes of $42,000.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, proceeds from the principal
and interest payments on loans, mortgage-backed and debt securities and capital
gain distributions on its mutual fund investment. While maturities and scheduled
amortization of loans and securities are predictable sources of funds, deposit
outflows, mortgage prepayments and mortgage loan and securities sales are
greatly influenced by general interest rates, economic conditions and
competition.
The Bank closely monitors its liquidity position on a regular basis. Excess
short-term liquidity is invested in overnight federal funds sold. If the Bank
requires funds beyond its ability to generate them internally, additional
sources of funds are available through the use of borrowings. At December 31,
1998, the Bank had available lines of credit with the Federal Home Loan Bank of
New York of $12.4 million. The Bank may, from time to time, use borrowings to
satisfy funding needs rather than increase the rates paid on new deposits,
because the latter could have a greater adverse effect on the overall cost of
funds. The Bank had outstanding Federal Home Loan Bank borrowings of $10.0
million at the end of the quarter, which were not against the line of credit.
The Bank undertook these borrowings to provide an appropriate method of
leveraging the additional capital obtained in its conversion to stock form.
Loan commitments totaled $9.8 million at December 31, 1998, and the Bank
had $1.6 million of unused home equity lines of credit and $209,000 of unused
consumer overdraft checking lines of credit. Management anticipates that the
Bank will have sufficient funds available to meet its current loan commitments.
Certificates of deposit, which are scheduled to mature in one year or less from
December 31, 1998, totaled $35.6 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 December 31, 1998, the Bank exceeded all regulatory capital requirements
of the OTS applicable to it, with tangible and core capital of $22.5 million, or
17.2% of adjusted assets and total risk-based capital of $22.7 million, or
35.17% of risk-weighted assets. The Bank was classified as "well capitalized" at
December 31, 1998 under OTS regulations.
The Bank is subject to the minimum liquidity regulations of the OTS. At
December 31, 1998, OTS regulations required that the Bank maintain liquid assets
equal to at least 4% of its net withdrawable accounts plus short term
borrowings, measured on a monthly basis. The Bank has satisfied this requirement
throughout the period during which it has been a federal savings bank, and at
December 31, 1998 had liquid assets equal to 18.0% 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 December 31, 1998.
Actual Minimum Capital For Classification as
Well Capitalized
Bank Amount Ratio Amount Ratio Amount Ratio
(Dollars in Thousands)
Tangible Capital $22,518 17.19% 1,965 1.50% -- --
Tier 1 (Core) Capital 22,518 17.19% 3,929 3.00% $ 6,549 5.0%
Risk Based Capital:
Tier 1 22,518 34.84% -- -- 3,878 6.0%
Total 22,733 35.17% 5,170 8.00% 6,461 10.0%
Forward-Looking Statements
When used in this report on form 10Q, in our future filings with the
Securities and Exchange Commission, in our press releases or other public or
stockholder communications, or in oral statements made with the approval of an
authorized officer, words and phrases such as " will likely result" "are
expected to," "will continue," "are estimated," "are anticipated" and other
similar expressions, are intended to identify "forward-looking statements" under
the Private Securities Litigation Reform Act. In particular, certain information
customarily disclosed by financial institutions, such as estimates of interest
rate sensitivity and the adequacy of the loan loss allowance, are inherently
forward-looking statements because, by their nature, they represent attempts to
estimate what will occur in the future.
A wide variety of factors could cause our actual results and experiences to
differ materially from the anticipated results or other expectations expressed
in our forward-looking statements. Some of the risks and uncertainties that may
affect our financial condition or results of operations include but are not
limited to: (i) deterioration in local, regional, national or global economic
conditions which could result, among other things, in an increase in loan
delinquencies, a decrease in property values, or a change in the housing
turnover rate; (ii) changes in market interest rates or changes in the speed at
which market interest rates change; (iii) changes in laws and regulations
affecting the financial services industry; (iv) changes in competition; and (v)
changes in consumer preferences. Year 2000 non-compliance by any business
providing services to us could have a negative effect on our ability to operate
profitably.
Furthermore, changes in the economic circumstances of individual borrowers
could have a material adverse effect on their ability to repay their loans
regardless of general economic conditions. Likewise, financial adversity
experienced by any one major business in our market area could have a
significant adverse effect on those of our customers who are employees of that
business or otherwise rely upon it for their economic well being. This could
affect their ability to honor their loan obligations and their ability to
maintain deposit balances.
For these reasons, we caution readers not to place undue reliance upon any
forward-looking statements. Forward-looking statements speak only as of the date
made and we assume no obligation to update or revise any such statements upon
any change in applicable circumstances.
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 those disclosures were prepared, we have continued to test our
software and hardware systems to confirm that they will operate properly after
December 31, 1999. Nothing new has come to the attention of the Company which
would lead it to believe that it will have problems with internal systems or
with any external computer data processing functions. 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 intends to take appropriate 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.
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.
13
<PAGE>
Exhibit 11
Computation of Net Income Per Share
(In thousands, except share and earnings per share)
<TABLE>
<CAPTION>
For the Quarter Ended
---------------------
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Net Income Per Share - Basic
Net income applicable to common stock $ 320,000 $ 295,000
Weighted average common shares 1,944,564 2,072,984
Earnings per common share $ 0.16 $ 0.14
Net Income Per Share - Diluted
Net income applicable to common stock $ 320,000 $ 295,000
Weighted average common shares 1,944,564 2,072,984
Dilutive common stock options (1) 19,766 0
---------- ----------
Weighted average common shares - diluted 1,964,330 2,072,984
Earnings per common share $ 0.16 $ 0.14
</TABLE>
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: February 16, 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
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1998
<CASH> 1,679
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,575
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 37,013
<INVESTMENTS-CARRYING> 2,427
<INVESTMENTS-MARKET> 2,452
<LOANS> 84,752
<ALLOWANCE> 215
<TOTAL-ASSETS> 136,954
<DEPOSITS> 93,833
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,488
<LONG-TERM> 0
0
0
<COMMON> 21,546
<OTHER-SE> 11,457
<TOTAL-LIABILITIES-AND-EQUITY> 136,954
<INTEREST-LOAN> 1,538
<INTEREST-INVEST> 726
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,264
<INTEREST-DEPOSIT> 861
<INTEREST-EXPENSE> 993
<INTEREST-INCOME-NET> 1,271
<LOAN-LOSSES> 60
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 978
<INCOME-PRETAX> 534
<INCOME-PRE-EXTRAORDINARY> 534
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 320
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
<YIELD-ACTUAL> 3.95
<LOANS-NON> 0
<LOANS-PAST> 92
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 167
<CHARGE-OFFS> 12
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 215
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 215
</TABLE>
