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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
[ ] 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.)
1 South Church Street, Goshen, New York 10924
(Address of principal executive office-zip code)
Telephone (914) 294-6151
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
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 twelve 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K. [ X ]
As of March 27, 2000 the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $19.2 million based upon the reported
closing price on that date as quoted of the NASDAQ National Market System.
As of March 27, 2000, 1,984,538 shares of Registrant's common stock were
outstanding.
Documents Incorporated by Reference:
(1) The Annual Report to Shareholders for the fiscal year ended December 31,
1999 (Items 5 through 8 of Part II) and
(2) The definitive Proxy Statement dated March 16, 2000 to be distributed on
behalf of the Board of Directors of Registrant in connection with the
Annual Meeting of Shareholders to be held on April 27, 2000 which was filed
with the Securities and Exchange Commission on or about March 17, 2000.
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Item 1 - Business
BUSINESS OF THE COMPANY
General
GSB Financial Corporation (the "Company") was organized as a Delaware
corporation on March 17, 1997, at the direction of Goshen Savings Bank (the
"Bank") in order to acquire all the common stock of the Bank to be issued upon
its conversion (the "Conversion") from the mutual to the stock form of
ownership. The Conversion was consummated on July 9, 1997, at which time the
Company sold 2,248,250 shares of its common stock at a price of $10.00 per share
and paid $10.7 million, representing one-half the net proceeds from its sale of
stock, to the Bank in exchange for all shares of stock of the Bank to be issued
in the Conversion. The Company thereupon became a savings and loan holding
company, and subsequently registered as such with the Office of Thrift
Supervision (the " OTS").
Eight percent of the shares sold by the Company were purchased by the
Company's Employee Stock Ownership Plan (the "ESOP") using the proceeds of a
loan from the Company to pay the purchase price. Therefore, after deducting
expenses of the Conversion, the $10.7 million paid to the Bank and the $1.8
million represented by the promissory note from the ESOP, there remained $8.9
million of net proceeds available for investment directly by the Company.
After the Conversion, the Company's business has consisted of directing,
planning and co-ordinating the business activities of the Bank and investing the
net proceeds of the Conversion available for investment by it. The Bank's
business has continued to consist of gathering deposits from the general public
within its market area and investing those deposits primarily in one-to-four
family residential first mortgage loans, debt obligations issued by the U.S.
Government, its agencies and business corporations, and mortgage-backed
securities. To a lesser extent, the Bank also makes home equity lines of credit
and other second mortgage loans on one-to-four family residential properties,
commercial mortgage loans, construction loans, commercial business loans and
consumer loans. The net proceeds retained by the Company have been invested
principally in mortgage-backed, government, agency and corporate securities and
federal funds sold.
In the future, the Company may acquire or organize other operating
subsidiaries, including other financial institutions, or it may merge with or
acquire other financial institutions and financial services related companies,
although there are no current arrangements, understandings or agreements
regarding any such expansion. The Company neither owns nor leases any property
but instead uses the premises, equipment and furniture of the Bank. The Company
does not presently intend to employ any persons other than certain officers of
the Bank who will not be separately compensated by the Company. The Company may
utilize the support staff of the Bank from time to time, if needed. Additional
employees may be hired as appropriate if the Company expands its business.
References herein to the business activities, financial condition and
operations of the Company prior to July 9, 1997, refer to the Bank, while
references to the Company on or after that date refer to both the Company and
the Bank as consolidated, except to the extent the context otherwise indicates.
Market Area
The Company's market area is the Village of Goshen, and Village of
Harriman, New York and their surrounding communities, representing most of
Orange County, New York. The Village of Goshen is the
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county seat of Orange County and lies 60 miles northwest of New York City. The
Village of Harriman is located in the southern portion of Orange County, closer
to New York City and approximately 8 miles from Rockland County. The Bank has
also recently announced that it intends to open a branch in Bloomingburg, just
over the border between Orange and Sullivan Counties. Although predominantly
rural with many small towns, many residents of the market area work in New York
City and other communities to the south and east, commuting by train or
automobile. They tend to reside in our market area due to lower housing costs
and the quieter, more rural atmosphere. Principal occupations of residents in
the community include retail trades, manufacturing, professional services
(including health, education and other professional fields) and government
administration.
The Company's market area is the fastest growing county in the Hudson
Valley Region. The population grew in Orange County by more than 72,000
residents since 1980. This growth was primarily due to the rising housing prices
closer to New York City, coupled with an abundance of vacant land in Orange
County, led to a boom in housing construction. As the economy throughout the
region declined in the late 1980s and early 1990s, communities within the market
area continued to experience growth, but more slowly. The conversion of Stewart
International Airport, 12 miles to the northeast of Goshen, into a full-service
commercial airport in 1990, gave the Company's market area an additional boost.
The privatization of Stewart International Airport has been approved, to be run
by National Express Group, which is intended to increase the marketing of the
airport and expand business and development in the area. However, the health of
the economy in the New York City metropolitan area has, and will continue to
have, a direct effect on the economic well being of residents and businesses in
the Company's market area.
Competition
The Company's principal competitors for deposits are savings banks, savings
and loan associations, commercial banks and credit unions in the Company's
market area, money market mutual funds, insurance companies, brokerage firms and
other financial institutions, many of which are substantially larger in size
than the Company. The Company's competition for loans comes principally from
savings banks, savings and loan associations, commercial banks, mortgage
bankers, finance companies and other institutional lenders. The Company's
principal methods of competition include loan and deposit pricing, maintaining
close ties with its local community, advertising and marketing programs and the
types of services provided.
The Company is subject to competition from other financial institutions,
which may have much greater financial and marketing resources. However, the
Company believes it benefits from its community bank orientation as well as its
relatively high core deposit base. The relative economic stability of the
Company's lending area is reflected in the small number of mortgage
delinquencies experienced by the Company.
Lending Activities
Loan Portfolio Composition. The Company's loan portfolio, representing
65.5% of total assets, consists primarily of conventional first mortgage loans
secured by one-to-four family residences. At December 31, 1999, the Company had
total loans receivable of $115.3 million, of which $99.3 million, or 85.9%, were
owner-occupied one-to-four family residential first mortgage loans. The
remainder consisted of $3.2 million of home equity lines of credit and other
loans secured by junior liens on one-to-four family owner-occupied residential
properties, or 2.7% of total loans; $9.6 million of commercial mortgage loans,
or 8.3% of total loans; $924,000 of construction loans, or 0.8% of total loans;
$762,000 of consumer loans which are not secured by real estate, or 0.7% of
total loans; and $1.8 million of commercial business loans, or 1.6% of total
loans. The Company's loan portfolio, after remaining relatively constant
throughout 1994,
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1995 and 1996, grew by 11.9% during 1997, 19.7% during 1998 and by 36.0% during
1999. This growth was a deliberate result of aggressive marketing of the Bank's
loan products throughout Orange County. Although the Company is seeking to
expand its non-residential first mortgage lending, the residential first
mortgage loans have continued to represent the largest, and an increasing,
component of the loan portfolio.
Interest rates on loans are affected by the demand for loans, the supply of
money available for lending and the rates offered by competitors. These factors
are in turn affected by, among other things, economic conditions, monetary
policies of the federal government, and legislative tax policies. The Company
seeks to compete successfully for loan opportunities in its market area through
hands-on local originations, community involvement, responsiveness to customer
and community needs, competitive pricing, and low origination fees.
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Loan Portfolio Composition Table
The following table sets forth the composition of the Company's loan portfolio
in dollar amounts and in percentages of the respective portfolios at the dates
indicated:
<TABLE>
<CAPTION>
At December 31, At September 30,
------------------------------------------------- ---------------------
1999 1998 1998
------------------------------------------------- ---------------------
Percent Percent Percent
Of Of Of
Amount Total Amount Total Amount Total
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans: (Dollars in thousands)
One- to four-family(1) ... $ 99,282 85.9% $ 76,366 89.8% $ 73,324 93.0%
Construction ............. 924 0.8 759 0.9 478 0.6
Home equity .............. 3,153 2.7 2,704 3.2 2,365 3.0
Commercial real estate ... 9,617 8.3 3,373 4.0 1,820 2.3
--------- --------- --------- --------- --------- ---------
Total mortgage loans .. 112,976 97.7 83,202 97.9 77,987 98.9
Other loans:
Commercial business ...... 1,818 1.6 1,024 1.2 170 0.2
Consumer ................. 688 0.6 617 0.8 605 0.8
Savings account loans .... 74 0.1 110 0.1 115 0.1
--------- --------- --------- --------- --------- ---------
Total other loans ..... 2,580 2.3 1,751 2.1 890 1.1
--------- --------- --------- --------- --------- ---------
Total loans receivable 115,556 100.0% 84,953 100.0% 78,877 100.0%
Less:
Deferred loan fees ....... (68) (15) (3)
Allowances for loan losses 351 215 167
--------- --------- ---------
Loans receivable, net .... $ 115,273 $ 84,753 $ 78,713
========= ========= =========
Mortgage loan summary:
Fixed rate loans ......... $ 86,145 76.3% $ 55,145 44.4% $ 47,831 61.3%
Adjustable-rate loans .... 26,831 23.7 28,057 55.6 30,156 38.7
--------- --------- --------- --------- --------- ---------
Total mortgage loans ..... $ 112,976 100.0% $ 83,202 100.0% $ 77,987 100.0%
========= ========= ========= ========= ========= =========
<CAPTION>
At September 30,
-----------------------------------------------------------------
1997 1996 1995
-----------------------------------------------------------------
Percent Percent
Of Of
Amount Total Amount Total Amount Total
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family(1) ... $59,301 89.9% $52,579 89.3% $52,017 89.6%
Construction ............. 1,377 2.1 1,003 1.7 352 0.6
Home equity .............. 2,314 3.5 2,197 3.8 2,122 3.7
Commercial real estate ... 2,073 3.2 2,255 3.8 2,660 4.6
------- --------- ------- --------- ------- ---------
Total mortgage loans .. 65,065 98.7 58,034 98.6 57,151 98.5
Other loans:
Commercial business ...... 36 0.0 15 0.0 20 0.0
Consumer ................. 630 1.0 675 1.1 669 1.1
Savings account loans .... 174 0.3 148 0.3 209 0.4
------- --------- ------- --------- ------- ---------
Total other loans ..... 840 1.3 838 1.4 898 1.5
------- --------- ------- --------- ------- ---------
Total loans receivable 65,905 100.0% 58,872 100.0% 58,049 100.0%
Less:
Deferred loan fees ....... 28 22 16
Allowances for loan losses 139 123 114
------- ------- -------
Loans receivable, net .... $65,738 $58,727 $57,919
======= ======= =======
Mortgage loan summary:
Fixed rate loans ......... $28,864 44.4% $17,885 30.8% $11,074 19.4%
Adjustable-rate loans .... 36,201 55.6 40,149 69.2 46,077 80.6
------- --------- ------- --------- ------- ---------
Total mortgage loans ..... $65,065 100.0% $58,034 100.0% $57,151 100.0%
======= ========= ======= ========= ======= =========
</TABLE>
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Residential Mortgage Loans. The primary focus of the Company's lending
activities are mortgage loans secured by first liens on one-to-four family
owner-occupied or rental residential real estate. At December 31, 1999,
approximately $100.2 million, or 86.7%, of the Company's total loan portfolio
consisted of such loans. The Company offers both adjustable rate mortgages
("ARMs") and fixed-rate mortgage loans. The relative proportions of fixed-rate
loans versus ARMs originated by the Company depends principally upon current
customer preference, which is generally driven by general economic and interest
rate conditions and the pricing offered by the Company's competitors. At
December 31, 1999, approximately 20.3% of the Company's residential one-to-four
family owner-occupied first mortgage portfolio were ARMs and approximately 79.7%
were fixed rate loans. The percentage represented by fixed rate loans has
increased from 61.7% at September 30, 1998, to 79.7% at December 31, 1999,
principally due to customer preference for fixed-rate loans during current
periods of low interest rates. The ARMs generally carry annual caps and
life-of-the-loan ceilings, which limit interest rate adjustments.
The Company's residential loan underwriting criteria are generally
comparable to those required by the Federal National Mortgage Association
("FNMA") and other major secondary market loan purchasers. Generally, ARM credit
risks are somewhat greater than fixed-rate loans primarily because, as interest
rates rise, the borrowers' payments rise, increasing the potential for default.
The Bank's teaser rate ARMs (ARMs with low initial interest rates that are not
based upon the index plus the margin for determining future rate adjustments)
were underwritten based on the payment due at the fully-indexed rate.
In addition to verifying income and assets of borrowers, the Company
obtains independent appraisals on all residential first mortgage loans and title
insurance is required at closing. Private mortgage insurance is required on all
loans with a loan to value ratio in excess of 80% and the Company requires real
estate tax escrows on such loans. Real estate tax escrows are voluntary on
residential mortgage loans with loan to value ratios of 80% or less.
Fixed-rate residential mortgage loans are generally originated by the
Company for terms of 15 to 30 years. Although 30 year fixed-rate mortgage loans
may adversely affect the Company's net interest income in periods of rising
interest rates, the Company originates such loans to satisfy customer demand.
Such loans are generally originated at initial interest rates which exceed the
fully indexed rate on ARMs offered at the same time. Fixed-rate residential
mortgage loans originated by the Company generally include due-on-sale clauses,
which permit the Company to demand payment in full if the borrower sells the
property without the Company's consent. Due-on-sale clauses are an important
means of adjusting the rates of the Company's fixed-rate mortgage loan
portfolio, and the Company will generally exercise its rights under these
clauses if necessary to maintain market yields.
The Company has offered ARMs since the early 1980s. ARMs originated in
recent years have interest rates that adjust annually based upon the movement of
the one year treasury bill constant maturity index, plus a margin of from 2% to
2.75%. These loans generally have a maximum interest rate adjustment of 2% per
year, with a lifetime maximum interest rate adjustment, measured from the
initial interest rate, of 5.5% or 6%.
The Company offers residential single family construction loans to persons
who intend to occupy the property upon completion of construction. Upon
completion of construction, these loans are automatically converted into
permanent residential mortgage loans and classified as such. The proceeds of the
construction loan are advanced in stages on a percentage of completion basis as
construction progresses. The loans generally provide for a construction period
of not more than six months during which the borrower pays interest only. In
recognition of the risks involved in such loans, the Company carefully monitors
construction through regular inspections and the borrower
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must qualify for the permanent mortgage loan before the construction loan is
made. At December 31, 1999, the Company had 15 construction loans with an
aggregate outstanding principal balance of $924,000. The Company's delinquency
experience with its construction loans has been favorable. At the end of each
fiscal year since September 30, 1992, the Company had no non-performing
construction loans.
Home Equity Loans. The Company makes home equity loans, representing loans
secured by junior mortgages on one-to-four family owner-occupied residences.
These loans are of two types. The Company offers a home equity line of credit
secured by a residential mortgage, normally a second lien. These loans have
adjustable rates of interest and generally provide for an initial advance period
of five or ten years, during which the borrower pays interest only, or interest
plus a nominal principal amount, and can borrow, repay, and reborrow the
principal balance. This is followed by a repayment period, generally ten years,
during which the balance of the loan is repaid in principal and interest
installments. The Company also offers regular amortizing home equity loans.
These loans are fully advanced at closing and repayable in monthly principal and
interest installments over a period not to exceed 10 years. Second mortgage
loans are limited to a maximum loan to value ratio, including prior liens, of
not more than 80%. At December 31, 1999, the Company had $1.5 million in
outstanding advances on home equity lines of credit and $1.6 million in regular
amortizing home equity loans.
Commercial Mortgage Loans. The Company originates fixed and adjustable rate
mortgage loans secured by office buildings, retail establishments, and other
types of commercial property, almost always secured by property located in the
Company's market area or adjoining communities. For the past 15 months, the
Company has concentrated on increasing its commercial mortgage loan portfolio.
At December 31, 1999, the Company's commercial mortgage loan portfolio was $9.6
million, or 8.3% of total loans, compared to $1.8 million only 15 months
earlier. At December 31, 1999, the Company's largest such loan was a
participation loan with a local savings bank in which the Company's
participation was $1.5 million, or 30% of the total loan. The loan is secured by
unimproved land with subdivision approval in Rockland County. With the recent
expansion of commercial lending activities, larger balance originations could
occur in the future.
The Company makes commercial mortgage loans with loan to value ratios up to
80%, terms up to 20 years, and amortization periods up to 20 years. At December
31, 1999, $3.2 million of the Company's commercial mortgage loans had adjustable
rates and $6.4 million had fixed rates.
Loans secured by commercial properties generally involve a greater degree
of risk than one-to-four family residential mortgage loans. Because payments on
such loans are often dependent on successful operation or management of the
properties, repayment may be subject, to a greater extent, to adverse conditions
in the real estate market or the economy. The Company seeks to minimize these
risks through its underwriting policies. In reaching its decision on whether to
make a commercial mortgage loan, the Company considers the qualifications and
financial condition of the borrower, including credit history, profitability and
expertise, as well as the value and condition of the underlying property. The
factors considered by the Company include the net operating income of the
mortgaged premises before debt service and depreciation; the debt coverage ratio
(the ratio of net earnings to debt service); and the ratio of loan amount to
appraised value.
The Company generally requires a debt service coverage ratio of at least
120% and the personal guarantee of the borrower. The Company also requires an
appraisal on the property conducted by an independent appraiser and title
insurance. When evaluating the qualifications of the borrower for a commercial
mortgage loan, the Company considers the financial resources and income level of
the borrower, the borrower's experience in owning or managing similar property
and
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the Company's lending experience with the borrower. The Company's underwriting
policies require that the borrower be able to demonstrate management skills and
the ability to maintain the property from current rental income or from the
borrower's operations on the property. The Bank's policy requires borrowers to
present evidence of the ability to repay the mortgage and a history of making
mortgage payments on a timely basis. In making its assessment of the
creditworthiness of the borrower, the Bank generally reviews the financial
statements and credit history of the borrower, as well as other related
documentation.
Consumer Loans. The Company also makes short-term fixed-rate consumer loans
either unsecured or secured by savings accounts, automobiles or other consumer
assets. Consumer loans, excluding these secured by real estate, totaled
$762,000, or 0.7% of total loans, at December 31, 1999. These loans generally
have an average term of not more than five years and have interest rates higher
than mortgage loans. The shorter terms to maturity are helpful in managing the
Company's interest rate risk. These loans are generally underwritten based upon
the borrower's ability to repay and the value of the collateral for the loan.
Collateral value, except for loans secured by bank deposits or marketable
securities, is a secondary consideration because personal property collateral
generally rapidly depreciates in value, is difficult to repossess, and rarely
generates close to full value at a forced sale.
Commercial Business Loans. The Company has diversified its lending to
include business loans in its communities. Business loans at December 31, 1999,
totaled $1.8 million representing 1.6% of total loans, compared to only
$170,000, only 15 months earlier.
The Company intends to pursue additional commercial non-mortgage loans in
the future in order to diversify its loan offering and expand its customer base.
Commercial non-mortgage loans are more likely to have both shorter terms to
maturity and adjustable interest rates when compared to residential first
mortgage loans, and also generally have higher yields. The Company intends to
offer such loans on both an unsecured and a secured basis, with the secured
loans having collateral such as machinery, equipment, accounts receivable, other
business assets or marketable securities.
Commercial business loans are generally perceived as having greater risks
that residential first mortgage loans because historically they have higher
default rates. The collateral often declines rapidly in value or is difficult to
sell when not part of a successful ongoing business. In order to protect against
these risks, the Company markets it commercial non-mortgage loans principally to
businesses within its local market area where the Company has substantial
knowledge and expertise regarding local business and economic conditions. The
Company also requires personal guaranties of business principals as additional
support for these loans.
Origination of Loans. Loan originations come from a number of sources.
Residential loan originations result from advertising, the efforts of the
Company's loan officers, and in-house loan originators, and referrals from other
borrowers, real estate brokers and builders. The Company originates loans
through its own efforts and does not use mortgage brokers, mortgage bankers or
other fee paid loan finders. The Company does not originate loans independent of
the Bank, except for the loan made to the Company's ESOP, which was used to
purchase stock in the Conversion. The ESOP loan is not recorded as an asset on
the Company's consolidated financial statements and is excluded throughout this
discussion of the Company's lending business.
All of the Bank's lending is subject to its written, nondiscriminatory
underwriting standards and to loan origination procedures prescribed by the
Bank's Board of Directors. Officers of the Bank have the authority to approve
loans at differing levels established by the Board of Directors based
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upon the position and expertise of the officer. The Board of Directors must
approve all loans over $500,000, in advance. All other loans are reviewed by the
Bank's ad hoc loan committee after approval.
As a federal savings bank, the aggregate amount that the Bank may lend to
any one borrower is generally limited to 15% of unimpaired capital and surplus
(25% if the security for such loan has a "readily ascertainable" value or 30%
for certain residential development loans). At December 31, 1999, 15% of the
Bank's capital and surplus was approximately $3.7 million. On that date, the
Bank's largest aggregate loan relationship was $1.8 million, represented by
three loans to affiliated borrowers. One of the three component loans, a
participation loan with a balance owed to the Bank at December 31, 1999 of
$990,000, is secured by mixed use commercial property in Goshen. The two related
loans include a residential mortgage loan on the primary residence of a
principal of the commercial loan borrower and a mortgage loan on a vacant land
with infrastructure improvements and subdivision approval. The Bank had four
other loan relationships at December 31, 1999 with balances in excess of $1.0
million. The second relationship, is a participation loan with another savings
bank in the amount of $1.5 million, secured by vacant land with subdivision
approval in Rockland County. The other relationship, in the amount of $1.4
million, includes the participation loan mentioned above in the amount of
$990,000, and a residential mortgage loan and home equity loan to another
principal of the commercial loan borrower and a mortgage loan on a mixed used
commercial property in Goshen. The other relationship, in the amount of $1.2
million, includes two participation loans on property in Rockland County. The
other relationship in the amount of $1.1 million is secured by commercial
property in Orange County. At December 31, 1999, the Bank had 29 loans
outstanding with principal balances in excess of $250,000 compared to 7 at
September 30, 1998, and an additional 42 loans with principal balances from
$200,000 to $250,000, as compared to 18 as of September 30, 1998. None of these
loans was past due 90 days or more on December 31, 1999 or otherwise classified
as non-performing.
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The following table sets forth the Bank's loan originations, loan sales and
principal repayments for the periods indicated.
<TABLE>
<CAPTION>
3 Months
Year Ended Ended Year Ended Year Ended
December 31, December 31, September 30, September 30,
1999 1998 1998 1997
--------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Total loans, beginning of period $ 84,953 $ 78,877 $ 65,905 $ 58,872
--------- --------- --------- ---------
Loans originated:
Residential 1 to 4 family (1) .. 35,821 5,321 18,208 10,017
Commercial real estate ......... 9,663 1,580 -- 17
Construction loans ............. 2,607 487 1,846 2,092
Commercial business loans ...... 2,633 938 -- --
Consumer loans ................. 761 128 699 1,127
--------- --------- --------- ---------
Total loans originated ..... 51,485 8,454 20,753 13,253
Loans purchased ................ -- -- -- --
Loans sold ..................... -- -- -- --
Principal repayments ........... (20,878) (2,366) (7,666) (6,206)
Total charge-offs .............. (4) (12) (115) (14)
--------- --------- --------- ---------
Net loan activity .............. 30,603 6,076 12,972 7,033
--------- --------- --------- ---------
Total loans, end of period ... $ 115,556 $ 84,953 $ 78,877 $ 65,905
========= ========= ========= =========
</TABLE>
(1) Includes home equity loans secured by junior liens on one-to-four family
owner-occupied residences.
The Company does not purchase loans. Prior to fiscal 1995, the Company sold
part of its fixed rate residential mortgage loan production to FNMA and retained
the right to service those loans. At December 31, 1999, the Company's portfolio
of loans serviced for FNMA totaled $5.5 million. The Company did not service
loans for any other investors at that date. The Company has never purchased loan
servicing rights.
Loan Maturity. The following table shows the contractual maturity of the
Company's loan portfolio at December 31, 1999. Loans are shown as due based on
their contractual terms to maturity. Loans which have adjustable or renegotiable
interest rates are shown as maturing in the period during which the final loan
payment is due without regard to rate adjustments. The table does not reflect
the effects of loan amortization, possible prepayments or enforcement of
due-on-sale clauses. Non-performing loans are shown as being due based upon
their contractual maturity without regard to acceleration due to default.
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<TABLE>
<CAPTION>
At December 31, 1999
---------------------------------------------------------------------------
One- to Total
Four- Home Commercial Other Loans
Family Equity Real Estate Loans Receivable
--------- --------- ----------- --------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Contractual maturity:
Within 1 year ............... $ 84 $ -- $ 2,230 $ 1,212 $ 3,526
After 1 year:
1 to 3 years ............. 449 16 766 415 1,646
3 to 5 years ............. 496 81 2,270 688 3,535
5 to 10 years ............ 4,830 1,690 2,514 239 9,273
Over 10 years ............ 94,347 1,366 1,837 26 97,576
--------- --------- --------- --------- ---------
Total due after one year . $ 100,122 $ 3,153 $ 7,387 $ 1,368 $ 112,030
--------- --------- --------- --------- ---------
Total amounts due ........... $ 100,206 $ 3,153 $ 9,617 $ 2,580 $ 115,556
========= ========= ========= =========
Less:
Deferred loan fees, net ..... (68)
Allowance for loan losses ... 351
---------
Loans receivable, net ....... $ 115,273
=========
</TABLE>
The following table sets forth at December 31, 1999, the dollar amount of
loans due after December 31, 2000, and whether such loans have fixed interest
rates or adjustable interest rates.
Due After December 31, 2000
----------------------------------------
Fixed Adjustable Total
-------- ---------- --------
(In Thousands)
Mortgage loans:
One- to four-family .......... $ 79,732 $ 20,390 $100,122
Home equity ................. 1,649 1,504 3,153
Commercial real estate ....... 5,933 1,454 7,387
Other loans .................... 1,296 72 1,368
-------- -------- --------
Total loans receivable ......... $ 88,610 $ 23,420 $112,030
======== ======== ========
Asset Quality
Delinquency Procedures. When a borrower fails to make a required payment on
a loan, the Company attempts to cause the deficiency to be cured by contacting
the borrower. Late notices are sent when a payment is more than 15 days past due
and a late charge is generally assessed at that time. The Company attempts to
contact personally any borrower who is more than 30 days past due. In most
cases, deficiencies are cured promptly. All loans past due 60 days or more, and
all loans in which the borrower is delinquent in the payment of real estate
taxes regardless of payment status, are added to a watch list and an employee
contacts the borrower on a regular basis to seek to cure the delinquency. If a
loan becomes past due 90 days, the Company refers the matter to an attorney, who
first seeks to obtain payment without litigation and, if unsuccessful, generally
commences a foreclosure action or other appropriate legal action to collect the
loan. A foreclosure action, if the default is not cured, generally leads to a
judicial sale of the mortgaged real estate. The judicial sale is normally
delayed if the borrower files a bankruptcy petition because the foreclosure
action cannot be continued unless the Company first obtains relief from the
automatic stay provided by the Bankruptcy Code.
If the Company acquires the mortgaged property at foreclosure sale or
accepts a voluntary deed in lieu of foreclosure, the Company then classifies the
property as Real Estate Owned ("REO") until the Company sells it. At December
31, 1999, the Company had no REO. When the Company acquires REO, the Company
records the property at the lower of the principal balance of the loan or fair
value of the property less costs of sale and the Company charges to the
allowance for loan losses
-11-
<PAGE>
any shortfall between the recorded value of the property and the carrying value
of the loan. Thereafter, the Company reflects changes in the value of the REO as
a valuation allowance. The Company may finance sales of REO by "loans to
facilitate," which involve a lower down payment, a longer repayment term or
other more favorable features than the Company would grant under its regular
underwriting guidelines. Currently, the Company has no "loans to facilitate."
The following table sets forth information with respect to the Company's
non-performing assets (which generally include loans that are delinquent for 90
days or more and real estate owned) at the dates indicated.
<TABLE>
<CAPTION>
At December 31, At September 30,
------------------------ ------------------------------------------------------
1999 1998 1998 1997 1996 1995
--------- --------- --------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-accrual loans:
Loans in non-accrual status:
One- to four-family ........... $ -- $ 92 $ -- $ -- $ 16 $ 157
Home equity ................... -- -- -- -- -- --
Commercial real estate ........ -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total mortgage loans ....... -- -- -- -- 16 157
--------- --------- --------- --------- --------- ---------
Consumer loans ................ -- -- -- -- --
Total non-accrual .......... -- -- -- -- 16 157
--------- --------- --------- --------- --------- ---------
Accruing Loans delinquent
90 days or more:
Mortgage loans ................ -- -- -- -- -- 68
Home equity ................... -- -- -- -- -- --
Other loans ................... -- -- 4 -- -- --
--------- --------- --------- --------- --------- ---------
Total ...................... -- -- 4 -- -- 68
--------- --------- --------- --------- --------- ---------
Total non-performing loans ...... -- -- 4 -- 16 225
Foreclosed and in substance
foreclosed real estate .......... -- -- 94 -- -- --
--------- --------- --------- --------- --------- ---------
Total non-performing assets ..... $ -- $ 92 $ 98 $ -- $ 16 $ 225
========= ========= ========= ========= ========= =========
Ratio of non-performing loans to
total loans 0.00% 0.11% 0.01% 0.00% 0.03% 0.39%
Ratio of non-performing assets to
total assets ................. 0.00% 0.07% 0.07% 0.00% 0.02% 0.22%
</TABLE>
At December 31, 1999, management had identified as a potential problem loan
one commercial line of credit loan with a principal balance of $48,000, in which
the borrower has filed Chapter 11 bankruptcy. Although the loan is secured by
inventory and receivables, and guaranteed by the principal of the borrower some
loss may occur. Management believes that the allowance for loan losses is
adequate to cover the loss, if any, on such loan. At December 31, 1999, there
were no other loans not included in the table above with regard to which
management had information about possible credit problems of the borrower that
caused management to seriously doubt the ability of the borrower to comply with
present loan repayment terms.
It is the Company's policy to discontinue accruing interest on a loan when
it becomes 90 days or more delinquent unless the Company determines that the
nature of the delinquency and the collateral are such that collection of the
principal and interest on the loan in full is reasonably assured. Once the
accrual of interest is discontinued, the Company records interest as and when
received until the loan is restored to accruing status.
In each of the past three fiscal years, interest which the Company did not
accrue for nonaccrual loans was less than $5,000.
-12-
<PAGE>
Classified Assets. OTS regulations require that federal savings banks
classify their assets on a regular basis and establish prudent valuation
allowances based on such classifications. In addition, in connection with
examinations of savings associations, OTS examiners have authority to identify
problem assets and, if appropriate, require them to be classified. OTS
regulations provide for three adverse classifications for problem assets:
Substandard, Doubtful and Loss. Substandard assets have one or more defined
weaknesses and are characterized by the distinct possibility that the Bank will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of Substandard assets, with the additional characteristics that
the weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
probability of loss. An asset classified Loss is considered uncollectible and of
such little value that its continuance as an asset of the Bank is not warranted.
The regulations have also created a Special Mention category, consisting of
assets which do not currently expose the Bank to a sufficient degree of risk to
warrant classifications, but do possess credit deficiencies or potential
weaknesses deserving management's close attention.
Assets classified as Substandard or Doubtful require the Bank to establish
prudent valuation allowances. If an asset or portion thereof is classified as
Loss, the Bank must either establish a specific allowance for loss equal to 100%
of the portion of the asset classified Loss or charge off such amount. If the
Bank does not agree with an examiner's classification of an asset, it may appeal
this determination to the District Director of the OTS. On the basis of
management's review of its loans at December 31, 1999, the Bank had one loan in
the amount of $48,000 classified as substandard, and no loans categorized by
management as "Special Mention."
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in the Company's loan portfolio and the general economy. The
allowance for loan losses is maintained at an amount management considers
adequate to cover loan losses which are deemed probable and can be estimated.
The allowance is based upon a number of factors, including asset
classifications, economic trends, industry experience and trends, industry and
geographic concentrations, estimated collateral values, management's assessment
of the credit risk inherent in the portfolio, historical loan loss experience
and the Company's underwriting policies. The Company evaluates on a loan by loan
basis each calendar quarter all loans which are at least sixty days past due or
for which there are unpaid real estate taxes and considers whether the allowance
should be adjusted to protect against risks associated with such loans. The
analysis of the adequacy of the allowance is reported to and reviewed by the
Board of Directors quarterly. Although management believes it uses the best
information available to make determinations with respect to the allowance for
loan losses, future adjustments may be necessary if economic conditions and the
Company's actual experience differ substantially from the conditions and
experience used in the assumptions upon which the initial determinations are
based.
While the Company believes that it has established an adequate allowance
for loan losses based upon its low level of prior charge-offs, there can be no
assurance that regulators, in reviewing the Company's loan portfolio as part of
a future regulatory examination, will not request the Company to materially
increase its allowance for loan losses, thereby negatively affecting the
Company's financial condition and earnings at that time. Moreover, no assurance
can be made that future additions to the allowance will not be necessary based
on changes in economic and real estate market conditions, further information
obtained regarding existing loans, identification of additional problem loans
and other factors, both within and outside of management's control. The
directors of the Bank and the Company have reviewed the provision for loan
losses and the allowance for loan losses and the assumptions utilized by
management as to their reasonableness and adequacy.
-13-
<PAGE>
The following table analyzes activity in the Company's allowance for loan
losses during the fiscal years indicated.
<TABLE>
<CAPTION>
At December 31, At September 30,
----------------- -----------------------------------------
1999 1998 1998 1997 1996 1995
----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Allowance, beginning of period ...... $ 215 $ 167 $ 139 $ 123 $ 114 $ 106
Provision:
Residential 1-4 family ........ 32 10 70 5 -- 15
Commercial real estate ........ 53 25 -- -- -- --
Consumer and Business ......... 55 25 -- 15 24 14
----- ----- ----- ----- ----- -----
Total provision ............. 140 60 70 20 24 29
Charge-offs:
Residential 1-4 family ........ -- -- (43) -- -- --
Consumer ...................... (5) (12) -- (14) (18) (22)
----- ----- ----- ----- ----- -----
Total charge-offs .......... (5) (12) (43) (14) (18) (22)
----- ----- ----- ----- ----- -----
Recoveries:
Residential 1-4 family ........ -- -- -- -- -- --
Consumer ...................... 1 -- 1 10 3 1
----- ----- ----- ----- ----- -----
Total recoveries ........... 1 -- 1 10 3 1
----- ----- ----- ----- ----- -----
Net (charge-offs) recoveries ........ (4) (12) (42) (4) (15) (21)
----- ----- ----- ----- ----- -----
Allowance, end of period ............ $ 351 $ 215 $ 167 $ 139 $ 123 $ 114
===== ===== ===== ===== ===== =====
Allowance as a percent of total loans 0.30% 0.25% 0.21% 0.21% 0.21% 0.19%
</TABLE>
-14-
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. The allocation of the allowance
to each category is not necessarily indicative of future losses and does not
restrict the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
At December 31, At September 30,
-------------------------------------- ----------------------------------------
1999 1998 1998 1997
----------------- ---------------- ---------------- ---------------
Percent Percent Percent Percent
Of Loans Of Loans of Loans Of Loans
to Total To Total to Total To Total
Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Allowance allocated to:
Residential 1-4 family $163 89.45% $131 93.97% $121 96.56% $117 95.58%
Commercial real estate 96 8.32% 43 3.97% 18 2.31% -- 3.15%
Commercial business ... 60 1.57% 15 1.21% -- -- -- --
Consumer and other .... 32 0.66% 26 0.85% 28 1.13% 22 1.27%
---- ------ ---- ------ ---- ------ ---- ------
Total allowance ....... $351 100.00% $215 100.00% $167 100.00% $139 100.00%
==== ====== ==== ====== ==== ====== ==== ======
</TABLE>
Environmental Issues
The Company encounters certain environmental risks in its lending
activities. Under federal and state environmental laws, lenders may become
liable for costs of cleaning up hazardous materials found on property securing
their loans. In addition, the presence of hazardous materials may have a
substantial adverse effect on the value of such property as collateral and may
cause economic difficulties for the borrower, causing the loan to go into
default. Although environmental risks are usually associated with loans secured
by commercial real estate, risks also may exist for loans secured by residential
real estate if, for example, there is nearby commercial contamination or if the
residence was constructed on property formerly used for commercial purposes.
Environmental risk questionnaires are required for all commercial mortgages.
Upon, review of the questionnaire further environmental assessment may be
required. The Company attempts to control its risk by requiring a phase one
environmental assessment for all loans over $500,000 by a Company-approved
engineer as part of its underwriting review for all mortgage loans other than
those secured by one-to-three family residences.
The Company believes its procedures regarding the assessment of
environmental risk are adequate and, as of December 31, 1999, the Company was
unaware of any environmental issues with respect to any of its mortgage loans
which are believed to expose the Company or any collateral for any of its loans
to any material liability at this time. However, no assurance can be given that
the values of properties securing loans in the Company's portfolio will not be
adversely affected by unforeseen environmental risks.
Investment Activities
General. The investment policy of the Company and the Bank, approved by the
Boards of Directors, is based upon asset/liability management goals and is
designed primarily to provide satisfactory yields while maintaining adequate
liquidity, a balance of high quality, diversified
-15-
<PAGE>
investments, and minimal risk. The investment policy is implemented by the
Senior Vice President & Chief Financial Officer.
As required by SFAS 115, securities are classified into three categories:
trading, held-to-maturity and available-for-sale. Securities that are bought and
held principally for the purpose of selling them in the near term are classified
as trading securities and are reported at fair value with unrealized gains and
losses included in trading account activities in the statement of earnings.
Securities that the Company has the positive intent and ability to hold to
maturity are classified as held-to-maturity and reported at amortized cost. All
other securities are classified as available-for-sale. Available-for-sale
securities are reported at fair value with unrealized gains and losses included,
on an after-tax basis, as a separate component of retained earnings. The Company
has not had a trading securities portfolio since 1994 and has no current plans
to maintain such a portfolio. At December 31, 1999, $46.9 million of investment
securities were classified as available-for-sale and none were classified as
held to maturity. At December 31, 1999, $1.5 million of mortgage-backed
securities were classified as held to maturity with a fair value of $1.5
million, and $2.0 million were classified as available for sale.
Investment Securities. The Company's investment securities portfolio
totaled $46.9 million at December 31, 1999. It is the policy of the Company to
invest in debt securities issued by the United States Government, its agencies,
municipalities and corporations. In order to benefit from higher yields, the
Company invests in callable government agency debt securities, which totaled
$37.7 million, or 80.5% of investment securities, at December 31, 1999. The
Company also invests in the Institutional Investors Capital Appreciation Fund,
Inc. ("IICAF"), a mutual fund which invests principally in common stocks of
companies listed on the New York Stock Exchange that have paid regular dividends
for at least ten consecutive fiscal years. At December 31, 1999, the Company's
investment in IICAF shares totaled $2.8 million.
At December 31, 1999, the Bank had an investment of $2.1 million in stock
of the FHLBNY, which investment was necessary for the Bank to maintain its
membership in the FHLBNY and to utilize FHLBNY borrowing facilities. If the Bank
increases its FHLBNY borrowings, the Bank may have to increase its investment in
FHLBNY stock because the Bank must own FHLBNY stock at least equal to 5% of its
borrowings. The Bank's yield on FHLBNY stock was 6.81% for the fiscal year ended
December 31, 1999.
Mortgage-Backed Securities. The Company invests in mortgage-backed
securities to supplement the yields on its loan portfolio. At December 31, 1999,
the Company's mortgage-backed securities portfolio totaled $3.5 million, of
which $1.5 million was classified as held to maturity and $2.0 million was
classified as available for sale. The Company's most recent purchases of
mortgage-backed securities have been classified as available for sale and the
Company expects that it will continue to so classify future purchases to
maintain flexibility. At December 31, 1999, all of the Company's mortgage-backed
securities were issued or guaranteed by FNMA, FHLMC or GNMA. The Company's
mortgage-backed securities portfolio had a weighted average yield of 6.45% at
December 31, 1999.
Mortgage-backed securities generally have higher yields than investment
securities because of the longer terms and the uncertainties associated with the
timing of mortgage repayments. In addition, mortgage-backed securities are more
liquid than individual mortgage loans and may be used to collateralize
borrowings of the Company. However, these securities generally yield less than
the loans that underlie them because of the cost of payment guarantees or credit
enhancements that reduce credit risk. Mortgage-backed securities of the type
held by the Bank are generally weighted
-16-
<PAGE>
at 20%, rather than the 50% weighting for performing residential one-to-four
family mortgage loans, in determining the Bank's regulatory risk-based capital
ratios.
While investment and mortgage-backed securities carry a reduced credit risk
as compared to loans, such securities remain subject to the risk that a
fluctuating interest rate environment, along with other factors such as the
geographic distribution of the underlying mortgage loans, may alter the
prepayment rate of such mortgage loans and so affect both the prepayment speed,
and value, of such securities.
-17-
<PAGE>
The following table sets forth certain information regarding the amortized
cost and fair value of the Company's available for sale and held to maturity
securities portfolios at the dates indicated.
<TABLE>
<CAPTION>
At December 31, At September 30,
-------------------------------------------- --------------------------------------------
1999 1998 1998 1997
-------------------- -------------------- --------------------- --------------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value
--------- ------- --------- ------- --------- ------- --------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Available for Sale:
U.S. Treasury securities ....... $ -- $ -- $ 1,001 $ 1,003 $ 1,001 $ 1,006 $ 3,497 $ 3,505
U.S. Government agencies ....... 40,743 37,709 20,769 20,758 18,274 18,462 7,123 7,163
Corporate debt obligations ..... 4,051 4,051 6,827 6,918 8,338 8,468 11,879 11,942
Mortgage-backed securities ..... 2,084 2,004 4,401 4,397 5,797 5,804 6,994 6,990
Other securities ............... -- -- -- -- -- -- 400 400
------- ------- ------- ------- ------- ------- ------- -------
Total ..................... 46,878 43,764 32,998 33,076 33,410 33,740 29,893 30,000
------- ------- ------- ------- ------- ------- ------- -------
FHLBNY stock ................... 2,050 2,050 704 704 704 704 638 638
Corporate equity securities .... 2,112 3,061 2,112 3,233 2,112 2,834 2,165 2,990
------- ------- ------- ------- ------- ------- ------- -------
Total equity securities ... 4,162 5,111 2,816 3,937 2,816 3,538 2,803 3,628
------- ------- ------- ------- ------- ------- ------- -------
Total available for ....... 51,040 48,875 35,814 37,013 36,226 37,278 32,696 33,628
------- ------- ------- ------- ------- ------- ------- -------
Securities Held to Maturity:
Mortgage-backed securities ..... 1,471 1,455 2,427 2,452 3,881 3,965 5,653 5,766
------- ------- ------- ------- ------- ------- ------- -------
Total held to maturity ......... 1,471 1,455 2,427 2,452 3,881 3,965 5,653 5,766
------- ------- ------- ------- ------- ------- ------- -------
Total Securities ............... $52,511 $50,330 $38,241 $39,465 $40,107 $41,243 $38,349 $39,394
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
-18-
<PAGE>
The table below sets forth information regarding the carrying value,
weighted average yields and stated maturity of the Company's securities at
December 31, 1999. There were no securities (exclusive of obligations of the
U.S. Government and federal agencies) issued by any one entity with a total
carrying value in excess of 10% of the Company's equity at December 31, 1999.
<TABLE>
<CAPTION>
At December 31, 1999
-------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years
------------------- ------------------ ------------------ -------------------
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- ------- -------- ------- -------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government agency .... $ 955 6.38% $ 1,000 6.03% $ 5,004 6.95% $33,784 6.95%
Corporate debt obligations . 3,553 7.20% 498 6.00% -- -- -- --
Mortgage-backed securities . -- -- 801 5.95% 380 6.73% 2,374 6.57%
FHLBNY stock ............... -- -- -- -- -- -- 2,050 6.75%
Other equity securities .... -- -- -- -- -- -- 2,112 1.47%
------- ------- ------- -------
Total ........ $ 4,508 7.03% $ 2,299 6.00% $ 5,384 6.93% $40,320 6.63%
======= ======= ======= =======
<CAPTION>
Total Securities
------------------------------
Carrying Average Market
Value Yield Value
-------- ------- ------
<S> <C> <C> <C>
U.S. Government agency .... $40,743 6.91% $37,709
Corporate debt obligations . 4,051 7.05% 4,051
Mortgage-backed securities . 3,555 6.45% 3,459
FHLBNY stock ............... 2,050 6.75% 2,050
Other equity securities .... 2,112 1.47% 3,061
------- -------
Total ........ $52,511 6.66% $50,330
======= =======
</TABLE>
Sources of Funds
General. The Company's primary source of funds is deposits. In addition,
the Company derives funds for loans and investments from loan and security
repayments and prepayments, from net revenues from operations and, to a lesser
extent, from borrowings. Scheduled payments on loans and mortgage-backed and
investment securities are a relatively stable source of funds, while savings
inflows and outflows and prepayments of loans, mortgage-backed securities and
investment securities are less predictable and significantly influenced by
general interest rates and money market conditions. The Company uses borrowings
to compensate for reductions in other sources of funds.
Deposits. The Company offers several types of deposit programs to its
customers, including passbook and statement savings accounts, NOW accounts,
money market deposit accounts, checking accounts and certificates of deposit.
Deposit account terms vary according to the minimum balance required, the time
periods the funds must remain on deposit and the interest rate, among other
factors. The Company's deposits are obtained predominantly from its local market
area. The Company relies primarily on customer service and long-standing
relationships with customers to attract and retain these savings deposits;
however, market interest rates and rates offered by competing financial
institutions significantly affect the Company's ability to attract and retain
savings deposits. The Company does not use brokers to obtain deposits. At
December 31, 1999, the Company had $106.3 million of deposits outstanding.
The Company prices its deposit offerings based upon market and competitive
conditions in its market area. Beginning in fiscal 1996, the Company took steps
to decrease its cost of funds by moderating the rates it offered on certificates
of deposit. However, after the conversion of Goshen Savings Bank in July 1997,
the Company took a more aggressive posture towards deposit pricing in order to
increase deposits and leverage the additional capital obtained in the
conversion. This new pricing policy involved the creation of a tier pricing
structure for money market deposit accounts, with a premium rate offered for
higher balance accounts. In addition, the Company modified its approach to
certificate of deposit pricing to move its rates to slightly above the average
market rates, but not reaching the highest market rates, offered in the local
market. The Bank opened its third deposit-taking office in September 1998 in
Harriman, New York as part of the expansion of the
-19-
<PAGE>
Company's business and to seek additional deposits for further leveraging of the
Company's capital. The Bank has recently announced that it intends to open a new
branch in Bloomingburg, just over the border between Orange and Sullivan
Counties in a leased facility located in an office building. Subject to the
regulatory review process and the satisfactory progress of the construction of
the facility, the Bank expects to open the new branch in the summer.
-20-
<PAGE>
The following table sets forth the distribution of the Company's deposit
accounts at the dates indicated. Interest rates shown for non-time accounts
are the rates in effect at December 31, 1999.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------
1999 1998
--------------------- ---------------------
Percent of Percent of
Amount Total Amount Total
-------- -------- -------- --------
(Dollars in Thousands)
Non-time accounts:
Savings accounts (3.00%) ............ $ 30,923 29.10% $ 28,634 30.52%
NOW accounts (2.25%) ................ 7,058 6.64% 5,871 6.26%
Checking accounts ................... 6,750 6.35% 5,341 5.69%
Money market accounts (3.00% - 4.90%) 15,848 14.92% 12,275 13.08%
-------- -------- -------- --------
Total non-time accounts ....... 60,579 57.01% 52,121 55.55%
-------- -------- -------- --------
Time accounts:
3.00-3.99% .......................... 46 0.04% 165 0.18%
4.00-4.99% .......................... 33,177 31.23% 21,254 22.65%
5.00-5.99% .......................... 12,244 11.52% 19,760 21.06%
6.00-6.99% .......................... 19 0.02% 268 0.28%
7.00-7.99% .......................... 191 0.18% 265 0.28%
-------- -------- -------- --------
Total time accounts ........... 45,677 42.99% 41,712 44.45%
-------- -------- -------- --------
Total deposits ......... $106,256 100.00% $ 93,833 100.00%
======== ======== ======== ========
<CAPTION>
At September 30,
-----------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Non-time accounts:
Savings accounts (3.00%) ............ $ 28,089 31.81% $ 26,839 31.65% $ 26,805 32.12%
NOW accounts (2.25%) ................ 4,932 5.58% 4,136 4.87% 3,636 4.36%
Checking accounts ................... 4,981 5.64% 4,869 4.70% 4,206 5.04%
Money market accounts (3.00% - 4.90%) 10,958 12.41% 8,892 12.82% 10,457 12.53%
-------- -------- -------- -------- -------- --------
Total non-time accounts ....... 48,960 55.44% 44,736 54.04% 45,104 54.05%
-------- -------- -------- -------- -------- --------
Time accounts:
3.00-3.99% .......................... 122 0.14% 208 0.42% 501 0.60%
4.00-4.99% .......................... 19,703 22.31% 8,394 29.75% 25,479 30.53%
5.00-5.99% .......................... 18,998 21.51% 28,861 14.27% 9,736 11.67%
6.00-6.99% .......................... 264 0.30% 509 1.12% 2,291 2.75%
7.00-7.99% .......................... 263 0.30% 275 0.40% 331 0.40%
-------- -------- -------- -------- -------- --------
Total time accounts ........... 39,350 44.56% 38,247 45.96% 38,338 45.95%
-------- -------- -------- -------- -------- --------
Total deposits ......... $ 88,310 100.00% $ 82,983 100.00% $ 83,442 100.00%
======== ======== ======== ======== ======== ========
</TABLE>
The following table sets forth the deposit flows at the Company during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended 3 Months Ended Year Ended
December 31, December 31, September 30,
1999 1998 1998 1997
------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C>
Net deposits (withdrawals) ........ $ 8,798 $ 4,662 $ 2,128 $(3,587)
Interest credited ................. 3,625 861 3,199 3,128
------- ------- ------- -------
Net increase (decrease) in deposits $12,423 $ 5,523 $ 5,327 $ (459)
======= ======= ======= =======
</TABLE>
-21-
<PAGE>
At December 31, 1999, the Company had $3.1 million in certificates of
deposit with balances of $100,000 or more ("jumbo deposits"), representing 2.9%
of all deposits, as follows:
Original Interest
Term Rate (1) Balance
---- -------- -------
(In Thousands)
1-3 months ................. 3.60% $ 201
4-6 months ................. 4.70% 1,148
6-12 months ................ 4.95% 635
Over twelve months ......... 5.10% 371
------
$3,129
======
(1) Interest rate offered as of December 31, 1999.
Borrowings. The Company had borrowings of $38.6 million outstanding as of
December 31, 1999. During fiscal year ended December 31, 1999, the Company
increased borrowings by $28.6 million, of which, $20.0 million were used to
purchase investment securities and $8.6 million were used to fund loan growth
that exceeded deposit growth. These borrowings were done to increase funds
available for investment and improve the leveraging of our capital. Most of the
borrowings either have short terms of can be called at the option for the
lender. The maximum borrowings outstanding at any time during fiscal 1999 were
$39.8 million. To a limited extent, the Company has in the past relied upon
borrowed funds or repurchase agreements to supplement its available funds.
Subsidiary Activities
As a federal savings bank, the Bank may invest up to 2% of its assets in
subsidiaries, with an additional investment of 1% of assets if the investment
serves primarily community, inner city and community development. The Bank may
also invest an unlimited amount in operating subsidiaries engaged solely in
activities which a federal savings bank may engage in directly. The Company is
permitted, as a unitary savings and loan holding company, to invest in
subsidiaries without limits as to the activities in which the subsidiary engages
and without limit as to the amount invested. The sole active subsidiary of the
Company is the Bank. The Bank has no subsidiaries.
Personnel
At December 31, 1999, the Bank had 31 full-time and 8 part-time employees.
The Company did not have any employees who were not also employees of the Bank.
The employees are not represented by a collective bargaining unit, and the
Company considers its relationship with its employees to be good.
Regulation
The following is a summary of the principal statutes and regulations which
affect the Company and the Bank. The Bank, as a federally chartered, FDIC
insured, savings bank, derives its powers principally from federal law and is
subject to comprehensive regulation of virtually every aspect of its business
operations. The following summary is not complete discussion of all regulation
affecting the Company or the Bank.
General Bank Regulation. The Bank's primary federal bank regulator is the
Office of Thrift Supervision ("OTS"). The Bank is also subject to regulation by
the FDIC as the insurer of its deposits. The Bank must file periodic reports
with the OTS. The OTS regularly examines the Bank. As a result of these
examinations, the regulators may require that the Bank adjust its loan
classifications or allowance for loan losses, take other actions to correct
deficiencies found during the examinations, or cease engaging in certain
activities. The Bank is permitted to open deposit-taking branches throughout the
United States, regardless of local laws regarding branching.
-22-
<PAGE>
The OTS may institute enforcement action against the Bank for violations of
law or for unsafe and unsound banking practices. Enforcement actions can include
the issuance of cease and desist orders, the commencement of removal proceedings
in which an employee, officer or director can be removed from involvement with
the Bank, the assessment of civil monetary penalties, and injunctive relief. The
FDIC may terminate the insurance of deposits, after notice and hearing, upon a
finding that an institution has engaged in unsafe and unsound practices, cannot
continue operations because it is in an unsafe and unsound condition, or has
violated any applicable law, regulation, rule, order or condition imposed by the
OTS or FDIC. The FDIC may instead impose less severe sanctions. Neither the OTS
nor the FDIC has ever instituted any enforcement action against the Bank.
Federal law and OTS regulations limit the percentage of the Bank's assets
that can be invested in certain investments. For example, commercial, corporate
and business loans, other than those secured by real estate collateral, are
limited in the aggregate to 10% of assets. The purchase of below investment
grade debt securities is prohibited. Loans secured by non-residential real
property cannot, in the aggregate, exceed 400% of capital. Consumer loans not
secured by residential real estate are generally limited, in the aggregate, to
35% of total assets. Loans secured by residential real property, and many other
types of loans and investments, are not subject to any percentage of asset
limits. Generally, the Bank may not lend more than 15% of unimpaired capital and
surplus to one borrower, which equates to a lending limit of $3.7 million, with
an additional 10% of unimpaired capital and surplus being permitted if secured
by certain readily marketable collateral. The Bank is in compliance with all
these limits. The Bank's largest loan to one borrower at December 31, 1999 was
represented by three related loans in the aggregate amount of $1.8 million
secured by commercial and residential real estate in the Bank's market area.
The OTS also imposes a semi-annual assessment on all OTS regulated
institutions to defer the cost of OTS regulation. The Bank's most recent
semi-annual OTS assessment was $19,636.
The Company is a unitary savings and loan holding company, and its sole
FDIC-insured subsidiary, the Bank, is a qualified thrift lender ("QTL",
discussed in more detail below). Therefore, the Company generally has broad
authority to engage in all types of business activities in which businesses can
engage. If the Company were to acquire another insured institution as a separate
subsidiary or if the Bank fails to remain a QTL, the Company's activities will
be limited to those permitted of multiple savings and loan holding companies. In
general, a multiple savings and loan holding company (or subsidiary thereof that
is not an insured institution) may, subject to OTS approval in most cases,
engage in activities comparable to those permitted for bank holding companies,
certain insurance activities, and certain activities related to the operations
of its FDIC-insured subsidiaries.
Capital Requirements. The Bank is subject to minimum capital requirements
imposed by the OTS. The Bank must maintain (i) tangible capital of at least 1.5%
of tangible assets, (ii) core capital of at least 3.0% of adjusted tangible
assets, and (iii) total capital requirement of at least 8.0% of risk-weighted
assets. Under current law and regulations, there are no capital requirements
directly applicable to the Company. The Bank substantially exceeds all minimum
capital standards imposed by the OTS. At December 31, l999, the Bank had a
tangible capital ratio of 14.1%, a core capital ratio of 14.1% and a risk based
capital ratio of 28.8%.
The OTS has the authority to require that an institution take prompt
corrective action to solve problems if the institution is undercapitalized,
significantly undercapitalized or critically undercapitalized. Because of the
Bank's high capital ratios, the Bank does not anticipate that the prompt
corrective action regulations will have a material effect on it.
Deposit Insurance Premiums. The FDIC's deposit insurance premiums are
assessed through a risk-based system under which all insured depository
institutions are placed into one of nine categories and assessed insurance
premiums based upon their level of capital and supervisory evaluation. Under the
system, institutions classified as well capitalized and considered healthy pay
the lowest premium. The Bank is in this category and currently pays negligible
deposit insurance premiums. However, the Bank pays an annual assessment of
approximately 0.013% of insured deposits to defray a portion of the cost of the
bonds sold by a federal agency to finance a portion of the savings and loan
bailout in the late 1980's. If the Bank's capital ratios substantially
deteriorate or if the Bank is found to be otherwise unhealthy, the deposit
insurance premiums payable by the Bank could increase.
-23-
<PAGE>
Dividend Restrictions. The Bank must notify the OTS at least 30 days in
advance of declaring a dividend to the Company. If the amount of the dividend
would exceed net income in the current year plus net income for the two
preceding calendar years, or if after the dividend the Bank would not be
adequately capitalized, OTS approval is required before the dividend may be
paid. OTS approval is also required if the OTS has not rated the Bank in the two
highest categories in the three principal examination rating systems or has
notified the Bank that it is a problem institution; or if the payment of the
dividend would violate any other statute, regulation, agreement with the OTS or
any condition imposed by the OTS.
The Bank's capital level, examination ratings and other related
circumstances are such that advance approval from the OTS would not currently be
required to pay a dividend to the Company unless the dividend exceeded the net
income measure discussed above.
Qualified Thrift Lenders. If the Bank fails to remain a QTL, as defined
below, it must either convert to a national bank charter or be subject to
restrictions on its activities specified by law and the OTS regulations, which
restrictions would generally limit activities to those permitted for national
banks. Also, three years after the savings institution ceases to be a QTL, it
would be prohibited from retaining any investment or engaging in any activity
not permissible for a national bank and would be required to repay any
outstanding borrowings from any Federal Home Loan Bank.
A savings institution will be a QTL if its qualified thrift investments
equal or exceed 65% of its portfolio assets on a monthly average basis in nine
of every 12 months. Qualified thrift investments include, among others, (i)
certain housing-related loans and investments (notably including residential one
to four family mortgage loans), (ii) certain federal government and agency
obligations, (iii) loans to purchase or construct churches, schools, nursing
homes and hospitals (subject to certain limitations), (iv) consumer loans
(subject to certain limitations), (v) shares of stock issued by any Federal Home
Loan Bank, and (vi) shares of stock issued by the FHLMC or the FNMA (subject to
certain limitations). The Bank satisfied the QTL test at December 31, 1999 and
for every month during 1998 and 1999.
Community Reinvestment Act. Under the Community Reinvestment Act (the
"CRA"), as implemented by OTS regulations, the Bank has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The Bank is periodically examined by the OTS for compliance with
the CRA. The Bank's CRA performance is evaluated based upon the lending,
investment and service activities of the Bank. The Bank received a
"satisfactory" CRA rating in its last CRA examination.
Federal Reserve Regulation. Under Federal Reserve Board regulations, the
Bank must maintain reserves against its transaction accounts (primarily
interest-bearing checking accounts) and non-personal time deposits. The effect
of the reserve requirements is to compel the Bank to maintain certain
low-yielding reserve deposits, which are not available for investment in higher
yielding assets. However, at the present time, the Bank's normal levels of vault
cash and other cash-equivalent assets are sufficient so that the reserve
requirements do not have a material adverse effect on the Bank. The balances
maintained to meet the reserve requirements may be used to satisfy liquidity
requirements imposed by the OTS. The Bank is in compliance with its reserve
requirements.
Taxation. The Company pays federal and New York State income taxes on its
income. The Bank, as a savings institution, was permitted a deduction under
former law for the creation of a reserve for bad debts. In August 1996, the
Internal Revenue Code (the "Code") was amended to abolish the percentage method
of calculating the tax bad debt deduction, which, in general, had permitted
savings institutions to deduct 8% of their taxable income as a reserve for bad
debts. The Bank had not been eligible to use the percentage method because its
retained earnings and surplus exceeded 12% of deposits, so the abolition should
not have a material effect on current operations. Furthermore, the change in the
Code also requires savings institutions to recapture, over a period of six to
eight years, any additions to their tax bad debt reserves since 1988. The Bank
had already provided, as a provision for deferred taxes in accordance with SFAS
No. 109, for the tax consequences of the Bank's post-1987 additions to the tax
bad debt reserve. Therefore, the recapture requirement should not have a
material financial statement impact.
-24-
<PAGE>
Item 2
Properties
The Bank conducts its business through its headquarters in Goshen, a nearby
public accommodation drive-up facility, a branch opened in March 1997 at an
elder care facility in Goshen and a branch opened in September, 1998, at a
former office of a commercial bank in Harriman. The elder care facility is
operated by a non-profit corporation of which Director Clifford Kelsey is a
director. The Company does not have separate facilities and operates out of the
Bank's headquarters. The following table sets forth certain information
regarding the Bank's deposit-taking offices.
<TABLE>
<CAPTION>
Owned/ Approximate Net Book
Location Date acquired Leased Square Feet Value
(In Thousands)
<S> <C> <C> <C> <C>
One South Church Street, Goshen, 1971 Owned 10,680 2,214
NY 10924 with adjacent drive-up
facility at 50 South Church Street
214 Harriman Drive March 1997 Leased 105 28
Goshen, NY 10924
80 Route 17M September 1998 Owned 1,623 526
Harriman, NY 10926
</TABLE>
Item 3
Legal Proceedings
In the ordinary course of its operations, the Bank is a party to routine
litigation involving claims incidental to the savings bank business. Management
believes that no litigation, threatened or pending, to which the Company or the
Bank or their assets is or may become a party, poses a substantial likelihood of
potential loss or exposure which would have a material adverse effect on the
financial condition or results of operations of the Company or the Bank.
Item 4
Submission of Matters to a Vote of Security Holders
None
-25-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The following information included in the Annual Report to Shareholders for
the fiscal year ended December 31, 1999, (the "Annual Report"), is incorporated
herein by reference: "STOCKHOLDERS' INFORMATION- Common Stock", which appears on
page 51 of the Annual Report.
ITEM 6. SELECTED FINANCIAL DATA
The following information included in the Annual Report is incorporated
herein by reference: "SELECTED CONSOLIDATED FINANCIAL INFORMATION" which appears
on pages 1 and 2 of the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information included in the Annual Report is incorporated
herein by reference: "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS", which appears on pages 3 through 18 of the
Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The following information included in the Annual Report is incorporated
herein by reference: "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Gap Analysis" AND "- Analysis of Market
Risk", which appear on pages 8 through 11 of the Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following information included in the Annual Report is incorporated
herein by reference: The consolidated statements of financial condition of GSB
Financial Corporation and Subsidiary as of December 31, 1999 and 1998 and
September 30, 1998, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the year ended December 31, 1999
and the three months ended December 31, 1998 and the years in the two-year
period September 30, 1998, together with the related notes and the independent
auditors' report thereon, all of which appears on pages 20 through 50 of the
Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following information included in the Proxy Statement under the major
heading "INFORMATION CONCERNING THE BOARD OF DIRECTORS AND EXECUTIVE OFFICERS"
is incorporated herein by reference: "Director Nominated for a Term Expiring In
2003," "Directors Whose Terms Will Continue Beyond the Meeting," "Board of
Directors- Biographical Information," and "Executive Officers Who Are Not
Directors," which appears on pages 8 through 10 of the definitive Proxy
Statement dated March 16, 2000 and filed with the Securities and Exchange
Commission on or about that date (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information included which appears under the captions "Director
Compensation," "Executive Compensation," "Compensation Committee Report on
Executive Compensation," "Option Grants During the Year," "Stockholder Return
Performance Presentation," "Transactions with Directors and Officers,"
"Employment and Retention Agreements" and "Pension Plan" of the Proxy Statement
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information included under the Caption "Stock Ownership By Directors,
Executive Officers and Certain Other Holders", in the Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information included under the caption "Transactions with Directors and
Officers" in the Proxy Statement is incorporated herein by reference.
-26-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
a) 1. Financial Statements
The following financial statements are included in the Company's Annual
Report to Shareholders for the year ended December 31, 1999 and are incorporated
herein by this reference:
Consolidated Statements of Condition at December 31, 1999 and 1998 and September
30, 1998
Consolidated Statements of Operations for the years ended December 31, 1999 and
September 30, 1998, 1997 and for the three months ended December 31, 1998
Consolidated Statements of Equity for the years ended December 31, 1999 and
September 30, 1998, 1997
Consolidated Statements of Cash Flows for the years ended December 31, 1999 and
September 30, 1998, 1997 and for the three months ended December 31, 1998
Notes to Consolidated Financial Statements
Report of Independent Accountants
The remaining information appearing in the Annual Report to Stockholders is not
deemed to be filed as a part of this report, except as expressly provided
herein.
2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not applicable
or the required information is shown in the Consolidated Financial Statements or
Notes thereto.
(b) Reports on Form 8-K filed during the last quarter of fiscal 1999
None
(c) Exhibits Required by Securities and Exchange Commission Regulation S-K
TABLE OF EXHIBITS
Exhibit
Number
3.1 Certificate of Incorporation of GSB Financial Corporation *
3.2 By laws of GSB Financial Corporation.*
4.1 Form of Stock Certificate of GSB Financial Corporation.*
10.1 Employment Contract by and between Goshen Savings Bank and Stephen W.
Dederick dated as of July 1, 1999.****
10.2 Supplemental Employment Contract by and between GSB Financial
Corporation and Stephen W. Dederick dated as July 1, 1999.****
10.3 Schedule of Additional Employment Contracts.****
-27-
<PAGE>
10.4 Schedule of Additional Supplementary Retention Agreements.***
10.13 GSB Financial Corporation Employee Stock Ownership Plan.**
10.14 GSB Financial Corporation Employee Stock Ownership Plan Loan and
Security Agreement.**
13.1 1999 Annual Report to security holders
21.1 Subsidiaries of the Registrant
27 Financial Data Schedule
* Previously filed as an exhibit to the Registration Statement on Form S-1 No.
333-23573 of GSB Financial Corporation, filed with the Securities and Exchange
Commission on March 19, 1997
** Previously filed as an exhibit to the Report on Form 10K for the year ended
September 30, 1997 as filed with the Securities and Exchange Commission on
December 29, 1998.
*** Revised from exhibit as filed with 1997 Form 10K to reflect retirement of
one of the named persons.
**** Previously filed as an exhibit to the 10Q for the quarter ended September
30, 1999 as filed with the Securities and Exchange Commission on November 15,
1999.
-28-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in Goshen, New York on
March 30, 2000.
GSB FINANCIAL CORPORATION
By: /s/Stephen W. Dederick
------------------------
Stephen W. Dederick,
Chief Financial Officer & Treasurer
(duly authorized officer)
By: /s/Rolland B. Peacock III
-------------------------
Rolland B. Peacock III
Vice President
By: /s/Barbara A. Carr
-------------------------
Barbara A. Carr
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Name and Signature Title Date
- ------------------ ----- ----
/s/Stephen W. Dederick Principal Financial and March 30, 2000
- -------------------------- Accounting Officer
Stephen W. Dederick
/s/Herbert C. Mueller Director March 30, 2000
- --------------------------
Herbert C. Mueller
/s/Stephen O. Hopkins Director March 30, 2000
- --------------------------
Stephen O. Hopkins
/s/Thomas V. Guarino Chairman and Director March 30, 2000
- --------------------------
Thomas V. Guarino
/s/Gene J. Gengel Director March 30, 2000
- --------------------------
Gene J. Gengel
/s/Roy Lippincott Director March 30, 2000
- --------------------------
Roy L. Lippincott
/s/Clifford E. Kelsey, Jr. Director March 30, 2000
- --------------------------
Clifford E. Kelsey, Jr.
-29-
<PAGE>
TABLE OF EXHIBITS
Exhibit
Number
3.1 Certificate of Incorporation of GSB Financial Corporation *
3.2 By laws of GSB Financial Corporation.*
4.1 Form of Stock Certificate of GSB Financial Corporation.*
10.1 Employment Contract by and between Goshen Savings Bank and Stephen W.
Dederick dated as of July 1, 1999.****
10.2 Supplemental Employment Contract by and between GSB Financial
Corporation and Stephen W. Dederick dated as July 1, 1999.****
10.3 Schedule of Additional Employment Contracts.****
10.4 Schedule of Additional Supplementary Retention Agreements.***
10.13 GSB Financial Corporation Employee Stock Ownership Plan.**
10.14 GSB Financial Corporation Employee Stock Ownership Plan Loan and
Security Agreement.**
13.1 1999 Annual Report to security holders
21.1 Subsidiaries of the Registrant
27 Financial Data Schedule
* Previously filed as an exhibit to the Registration Statement on Form S-1 No.
333-23573 of GSB Financial Corporation, filed with the Securities and Exchange
Commission on March 19, 1997
** Previously filed as an exhibit to the Report on Form 10K for the year ended
September 30, 1997 as filed with the Securities and Exchange Commission on
December 29, 1998.
*** Revised from exhibit as filed with 1997 Form 10K to reflect retirement of
one of the named persons.
**** Previously filed as an exhibit to the 10Q for the quarter ended September
30, 1999 as filed with the Securities and Exchange Commission on November 15,
1999.
-30-
EX - 13.1
Annual Report
To Our Stockholders
It is my distinct pleasure to report to you the record year that GSB
Financial Corporation and its principal subsidiary, Goshen Savings Bank, have
achieved during fiscal year 1999. I am also proud to inform you of the progress
and the growth momentum we have established in our journey to become the premier
community bank in our region. Your Board of Directors, Executive Officers,
Officers and Employees have worked diligently to build your company into a
strong and vibrant financial institution that is expanding its delivery of
financial products and services in the Hudson Valley region of New York State.
During 1998, our organization began the process to change the
organizational culture of our principal subsidiary, Goshen Savings Bank. The
restructuring program was very well received by our employees and it allowed us
to attract new employees with skill sets that complemented our existing staff,
while we significantly reduced our cost structure to deliver banking and
financial services. During 1999, this new culture began to take hold and a
strong team effort led by our Executive Management Team emerged. Their efforts,
and the support of the communities we serve, have resulted in record earnings
and record growth of both assets and deposits.
Net income in 1999 was $1.8 million or $0.94 per share, compared to
$625,000 or $0.31 per share for the year ended December 31, 1998. This
represented a 183.2% increase in net income and a 203.2% increase in earnings
per share. Even if we exclude unusual non-recurring items, 1999 net income as
adjusted of $1.6 million was 65.7% higher than adjusted net income in calendar
1998 of $964,000. Earnings per share increased 77.1% when comparing adjusted
1999 to the adjusted 1998 amounts.
Our Bank grew consistently throughout 1999 and at year end we had grown our
loan portfolio by $30.5 million, or 36.0%, and our deposits grew by $12.4
million, or 13.2%. Total asset growth was $39.1 million, or 28.5%.
Through our restructuring efforts and our increased investment in
technology, we were able to achieve these outstanding results with increased
efficiency. Despite the increased costs associated with the growth of both
assets and deposits, the Company improved its efficiency ratio from 72.0% for
the year ended December 31, 1998 to 58.1% for the year ended December 31, 1999.
We have continued to pursue our mission to offer core financial services to
individuals and business in strategic locations within the Hudson Valley Region
of New
<PAGE>
York State. During 1999 we expanded the breadth of our products and services by
the addition of the following:
- Expanded ATM network from regional to national usage.
- GSB Easy Access - 24 X 7 phone banking services.
- MasterMoney debit cards.
- Merchant services for commercial customers.
- Effective January 2000, we opened a Salomon Smith Barney Investment
Center at the main office, to offer non-bank financial products to our
customers and the community.
We have built the platform from which we will continue to introduce new
products and services while maintaining the personal delivery system for which a
true community bank prides itself. We are a community- based bank, and we intend
to remain one.
The Board of Directors and Management are continuing to explore strategic
initiations to build upon the solid foundation we have established. We
remain focused on efficiently expanding our franchise and its services to
better serve our customers and our communities while returning increased
value to you, our stockholders. The new millennium will present many new
challenges in the financial services industry. I am very confident that GSB
Financial Corporation has the personnel, the experience, the skills, the
financial strength, and the desire to capitalize on these new challenges. I
look forward to sharing future successes with you, our valued stockholders,
and I thank you for your support.
Sincerely,
Thomas V. Guarino
Chairman of the Board
GSB Financial Corporation
<PAGE>
SELECTED FINANCIAL INFORMATION
Set forth below are selected consolidated financial and other data of GSB
Financial Corporation (the "Company"). This financial data is derived in part
from, and should be read in conjunction with, the Financial Statements and Notes
to Consolidated Financial Statements of the Company presented elsewhere in this
Annual Report. In the opinion of management of the Company, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement
of results for or as of the periods indicated have been included.
Selected Financial Condition Data(9):
<TABLE>
<CAPTION>
At December 31, At September 30,
------------------- -----------------------------------------
1999 1998 1998 1997 1996 1995
-------- -------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total assets ............. $176,016 $136,954 $131,935 $117,046 $ 96,323 $101,041
Loans receivable, net (1) 115,273 84,752 78,713 65,738 58,727 57,919
Mortgage-backed securities 3,475 6,824 9,685 12,643 6,474 4,404
Investment securities (2) 46,871 32,616 31,474 26,638 23,081 27,844
Cash and cash equivalents 4,152 8,254 7,618 8,318 4,684 7,195
Deposits ................. 106,256 93,833 88,310 82,983 83,442 88,093
Borrowings ............... 38,600 10,000 10,000 -- -- 1,000
Total equity ............. 29,109 31,367 31,495 32,633 11,747 11,097
</TABLE>
Selected Operations Data(9):
<TABLE>
<CAPTION>
Year Ended
December 31, Year Ended September 30,
----------------- -------------------------------------
1999 1998 1998 1997 1996 1995
------- ------- ------- ------- ------- -------
(unaudited) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income ................................. $10,709 $ 8,487 $ 8,220 $ 7,078 $ 6,235 $ 5,715
Interest expense ................................ 5,099 3,638 3,424 3,226 3,448 3,289
------- ------- ------- ------- ------- -------
Net interest income ....................... 5,610 4,849 4,796 3,852 2,787 2,426
Provision for loan losses ....................... 140 110 70 20 24 29
------- ------- ------- ------- ------- -------
Net interest income after
Provision for loan losses ............ 5,470 4,739 4,726 3,832 2,763 2,397
Non-interest income ............................. 622 604 450 343 721 450
Non-interest expense ............................ 3,251 4,301 4,175 2,979 2,575 2,931
------- ------- ------- ------- ------- -------
Income (loss) before income taxes and cumulative
effect of changes in accounting principles ...... 2,841 1,042 1,001 1,196 909 (84)
Income tax expense (benefit) .................... 1,071 417 401 440 351 (16)
------- ------- ------- ------- ------- -------
Income (loss) before cumulative effect of changes
in accounting principles .................. 1,770 625 600 756 558 (68)
Cumulative effect of changes
in accounting principles (3) .............. -- -- -- -- -- (394)
------- ------- ------- ------- ------- -------
Net income (loss) .................... $ 1,770 $ 625 $ 600 $ 756 $ 558 $ (462)
======= ======= ======= ======= ======= =======
Basic earnings per share .................. $ 0.94 $ 0.31 $ 0.29 $ 0.37 N/A N/A
Diluted earnings per share ................ $ 0.94 $ 0.31 $ 0.29 $ 0.37 N/A N/A
</TABLE>
Notes appear on following page.
-1-
<PAGE>
Selected Financial Ratios and Other Data (4),(9):
<TABLE>
<CAPTION>
Year Ended
December 31, Year Ended September 30,
------------------ ----------------------------------------
1999 1998 1998 1997 1996 1995
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets (net income
to average total assets) .............. 1.10% 0.50% 0.49% 0.71% 0.56% (0.46)%
Return on average equity (net income
to average equity) .................... 5.82 1.94 1.85 4.54 4.88 (4.04)
Average interest-earnings assets to
average interest-bearing liabilities .. 126.78 137.12 139.56 119.66 109.57 109.91
Net interest rate spread (5) .............. 2.76 2.92 2.97 3.25 2.71 2.27
Net interest margin (6) ................... 3.65 4.04 4.14 3.89 3.08 2.62
Net interest income after provision
for loan losses to total other expenses 1.55x 1.27x 1.13x 1.29x 1.07x 0.82x
Efficiency ratio(8) ....................... 58.09 72.03 71.54 69.60 82.10 93.60
Capital and Asset Quality Ratios:
Average equity to average total assets .... 19.00 25.51 26.75 15.61 11.53 11.40
Total equity to assets end of period ...... 16.44 22.90 23.87 27.88 12.20 10.98
Book value per share ...................... 14.39 14.45 14.24 14.51 N/A N/A
Non-performing assets to total assets ..... -- 0.07 0.07 -- 0.02 0.22
Non-performing loans to total loans ....... -- 0.11 .001 -- 0.03 0.39
Allowance for loan losses to total loans .. 0.30 0.25 0.21 0.21 0.21 0.20
Allowance for loan losses to
Non-performing loans .................. NM(7) 23.37x 41.75x NM(7) 7.69x 0.51x
Other Data:
Full service offices .................. 3 3 3 2 1 1
</TABLE>
(1) Shown net of deferred fees and the allowance for loan losses.
(2) At December 31, 1999, $1.5 million of the Company's mortgage-backed
securities are classified as held to maturity and $2.0 million are
classified as available for sale. All investment securities are classified
as available for sale. See Notes 3, 4, 5 and 6 of Notes to Financial
Statements.
(3) Reflects the recognition, in one lump sum, of the transition obligation for
post-retirement pension benefits recognized in accordance with Statement of
Financial Accounting Standards ("SFAS") 106. See Note 14 of Notes to
Financial Statements.
(4) Asset quality and capital ratios are at end of period. Other ratios are
based upon daily average balances, except all ratios 1997 and earlier are
based on month end average balances.
(5) The net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(6) The net interest margin, also known as the net yield on average
interest-earning assets, represents net interest income as a percentage of
average interest-earning assets.
(7) Not Meaningful. The denominator (non-performing loans) is zero.
(8) The efficiency ratio represented non-interest expense as a percentage of
the sum of the net interest income and non-interest income excluding any
gains or losses on sales of assets and non-recurring items.
(9) The year ended December 31, 1998, are presented for comparison purposes.
-2-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
On July 9, 1997, Goshen Savings Bank converted from a mutual to a stock
form savings bank. As part of the conversion, we sold 2,248,250 shares of our
common stock at $10.00 per share. Net proceeds from the sale were $21.4 million,
including proceeds from the sale of stock to our Employee Stock Ownership Plan
which we financed with a loan from us. From the net proceeds, we paid $10.7
million to the Bank in exchange for all of its common stock
Our profitability depends principally on net interest income, which is the
difference between the income earned on loans and investments and our cost of
funds, principally interest paid on deposits. Results of operations are also
affected by our provision for loan losses. Other sources of income 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.
General economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory authorities, can
also have a significant effect on our profitability. For example, an increase in
interest rates may increase the rates we must pay to keep our deposits, thus
increasing our cost of operations. An economic recession in our community could
make it harder for our customers to repay their loans and cause an increase in
defaults. Although we now face substantial competition throughout Orange County,
an increase in competition could drive down our interest rate spread by lowering
loan rates while increasing deposit rates.
Goshen Savings Bank is a federal savings bank with deposits insured by the
FDIC. The Bank's primary federal banking regulator is the Office of Thrift
Supervision ("OTS"). In this annual report, references to the business
activities, financial condition and operations prior to July 9, 1997, refer to
the Bank, while references to the periods after that date refer to both the GSB
Financial Corporation and the Bank as consolidated, except to the extent that
the context otherwise indicates.
Management Restructuring
Eleven of our employees, including four executive officers, participated in
the voluntary early termination program and retired effective December 31, 1998.
We accrued the entire estimated $699,000 cost of the program during the quarter
ended September 30, 1998.
Since January 1999, our senior management team has consisted of three
executive officers. Rolly Peacock is responsible for retail banking and
commercial lending; Steve Dederick is responsible for internal operations,
finance and investments; and Barbara Carr is responsible for residential
mortgage lending and human resources. For technical regulatory reasons, Chairman
of the Board Thomas Guarino has been designated as President of the Bank, but he
continues his other business activities on a full time basis and is not involved
in the day to day management of the Bank.
Management Strategy
Our strategy is to continue to operate the Bank as a community-based bank
in strategic locations offering core financial services while exploring
appropriate opportunities to leverage our capital. The Bank obtains deposits
from its local communities and invests those deposits principally in one-to-four
family residential mortgage loans and, to a lesser degree, in commercial,
consumer and other 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. The Bank opened a new branch office
in Harriman, New York in September 1998, to expand its customer base. We have
also increased our commercial lending activities to augment the other services
we offer. We have worked to improve our customer service delivery capability to
both provide better services to existing customers and facilitate expanding our
-3-
<PAGE>
customer base. We have expanded our ATM network, and started offering phone
banking, debit cards and merchant services to help grow our business. These
services allow us to satisfy more of our customer's financial needs and also
generate fee income from non-customers. Beginning in the Year 2000, we will also
be offering a wide range of non-bank financial products through a Salomon Smith
Barney Investment Center at our main office.
At December 31, 1999, 86.7% of our loan portfolio were first mortgage loans
on owner-occupied one-to-four family residential real estate, 2.7% were junior
mortgage home equity loans (including lines of credit), and 8.3% were mortgage
loans secured by commercial properties. We also invest in debt securities. We
focus on callable government agency securities to increase yields, and we
control risks by investing in securities rated in the three highest grades by a
nationally recognized rating agency.
Analysis of Net Interest Income
Net interest income, our principal source of income, is the difference
between the income on interest-earning assets and the expense of
interest-bearing liabilities. Net interest income depends principally on (i) the
dollar amount of interest-earning assets that we can maintain; (ii) the relative
amounts of interest-earning assets versus interest-bearing liabilities; and
(iii) the difference between the yields earned on those assets and the rates
paid on those liabilities. Non-performing loans affect net interest income
because they do not provide interest income but still must be funded with
deposits or borrowings. Furthermore, when a loan becomes non-performing, all
accrued but unpaid interest is deducted from current period income, further
reducing net interest income.
Our efforts and strategies to leverage our new capital have a direct effect
on net interest income. The following is a general discussion of the
relationship between strategic actions taken and net interest income. Further
specific information is provided below in the discussion comparing our financial
condition and results of operations in fiscal December 31, 1999, versus fiscal
December 31, 1998. The Company has changed it fiscal year to a calendar year in
order to improve efficiency and reduce duplication of effort.
Cost of Funds Management. In order to assist in the leveraging of the
additional capital raised in the Conversion, we have adjusted our deposit
pricing strategies to make deposit products more attractive. This has been done
to increase funds available for investment and improve the leveraging of our
capital. Management does not seek to lead the market in pricing deposits, but
instead seeks to combine above average but not extreme pricing with local
community service to attract deposit customers. To assist in maintaining a
satisfactory spread, we have emphasized core deposits, which grew, $8.5 million,
or 68.1%, of the total deposit growth during 1999. Certificates of deposit of
$100,000 or more represented only $3.1 million, or 2.9% of total deposits, at
December 31, 1999.
Investing the Additional Capital from the Conversion. After the Conversion,
we had approximately $19.6 million of additional funds to invest, equal to the
amount raised in the Conversion minus expenses and minus our loan to the ESOP.
These funds were first invested principally in government, agency, corporate and
mortgage-backed bonds and federal funds sold. Since the new capital provides
funds for investment without any interest cost, such investments increase net
interest income. In addition, we have also borrowed money and invested it in
securities to improve leverage. However, investments in securities and federal
funds sold reduce reported spread because they tend to have lower yields than
loans, our highest yielding asset category.
Increasing the Deposit Base. We continue to explore opportunities to
leverage our capital through expansion of our deposit-taking network. The Bank
opened a new branch in Harriman, New York in September 1998. This location was
already outfitted as a bank branch, which reduced costs, and allowed us to
expand to an adjoining community. Further expansion through additional branches
is under consideration. New branches may require that we temporarily offer
higher than market rate deposits to capture market share. At the same time, we
will incur the costs of the new branch before that branch has become profitable.
Other growth strategies, such as borrowing money to increase funds available for
investment, tend to increase the average cost of funds because borrowed money
generally has a higher rate of interest than deposits. We cannot assure you that
we will be able to satisfactorily leverage our capital, and even if we can do
so, we may not be able to maintain our current asset mix or average asset
yields.
-4-
<PAGE>
We have aggressively sought to increase our deposits through increased
advertising and changing the terms of our money market accounts. Deposits
increased by $12.4 million or 13.2%, during fiscal 1999 from $93.8 million to
$106.3 million. Core deposit accounts increased by $8.5 million during the year
as we emphasized account relationships with our customers. We also believe that
customers of local commercial banks are disenchanted with the service they are
receiving, giving us opportunities to increase our customers within our existing
and nearby markets.
Expanding the Loan Portfolio. Obtaining additional funds through deposits
and borrowings is only half of the equation. We must also find appropriate
investment opportunities that provide satisfactory spreads. In order to do so,
we have increased advertising for loans while also increasing our staff of loan
originators. In addition, in order to increase average loan yields at a time of
low residential mortgage rates, we have begun to develop a commercial loan
portfolio. Our portfolio of $11.4 million in commercial mortgage loans and other
commercial loans at December 31, 1999 more than doubled during the year. It is a
small but increasing portfolio which provides opportunities not only for higher
yields and better interest rate sensitivity, but also the potential for
commercial demand deposits, which provide low-cost funds for investment.
Borrowed Funds. Borrowings increased to fund loan growth and improve
leverage through Federal Home Loan Bank of NY ("FHLB") advances. Borrowings were
$38.6 million at December 31,1999, an increase of $28.6 million from $10.0
million at December 31, 1998. $20.0 million of the borrowings were used to
purchase investment securities and $8.6 million were used to fund loan growth.
-5-
<PAGE>
Average Balances, Interest Rates and Yield
The following tables presents for the periods indicated, the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are 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 Year Ended December 31,
-----------------------------------------------------------
1999 1998
--------------------------- ----------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans receivable (1) ...................... $102,715 $ 7,432 7.24% $ 75,290 $ 5,780 7.68%
Mortgage-backed securities ................ 4,999 333 6.66 10,192 674 6.61
Investment securities ..................... 43,827 2,867 6.54 26,433 1,630 6.17
Federal funds sold ........................ 2,129 77 3.62 8,211 404 4.92
-------- -------- -------- --------
Total interest-earning assets ......... 153,670 10,709 6.97 120,126 8,488 7.07
-------- --------
Non-interest-earning assets ............... 6,545 6,032
-------- --------
Total assets ......................... $160,215 $126,158
======== ========
Interest-bearing liabilities:
Savings accounts .......................... $ 30,899 $ 933 3.02 $ 27,171 816 3.00
Certificates of deposit ................... 42,866 2,023 4.72 38,919 1,973 5.07
Money market .............................. 13,879 528 3.80 10,058 378 3.76
NOW accounts .............................. 6,044 141 2.33 4,632 115 2.48
Other ..................................... 27,521 1,474 5.36 6,827 357 5.23
-------- -------- -------- --------
Total interest-bearing liabilities .... 121,209 5,099 4.21 87,607 3,639 4.15
-------- --------
Non-interest-bearing liabilities .......... 8,570 6,368
-------- --------
Total liabilities ..................... 129,779 93,975
Equity .................................... 30,436 32,183
-------- --------
Total liabilities and equity ......... $160,215 $126,158
======== ========
Net interest income/spread (2)(3) ........ $ 5,610 2.76% $ 4,849 2.92%
======== ==== ======== ====
Net earning assets/net interest margin (4) $ 32,461 3.65% $ 32,519 4.04%
======== ==== ======== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.27x 1.37x
===== =====
</TABLE>
(1) Average balances include non-accrual loans. Interest on such loans is
recognized when received.
(2) Includes interest-bearing deposits 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 represents net interest income as a
percentage of average interest-earning assets.
-6-
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended September 30,
-----------------------------------------------------------
1998 1997
--------------------------- ----------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans receivable (1) ...................... $ 71,803 $ 5,544 7.72% $ 62,520 $ 4,833 7.73%
Mortgage-backed ........................... 11,158 720 6.45 7,045 474 6.73
Investment securities ..................... 25,342 1,575 6.21 21,626 1,332 6.16
Federal funds sold ........................ 7,522 381 5.07 7,868 439 5.58
-------- -------- -------- --------
Total interest-earning assets ......... 115,825 8,220 7.10 99,059 7,078 7.15
-------- --------
Non-interest-earning assets ............... 5,722 7,566
-------- --------
Total assets ......................... $121,547 $106,625
======== ========
Interest-bearing liabilities:
Savings accounts .......................... $ 26,798 $ 803 3.00 $ 27,976 825 2.95
Certificates of deposit ................... 38,162 1,948 5.10 38,084 1,907 5.01
Money market .............................. 9,327 334 3.58 9,856 295 2.99
NOW accounts .............................. 4,398 114 2.59 3,931 101 2.57
Other ..................................... 4,307 225 5.22 2,938 98 3.34
-------- -------- -------- --------
Total interest-bearing liabilities .... 82,992 3,424 4.13 82,785 3,226 3.90
-------- --------
Non-interest-bearing liabilities .......... 6,044 7,198
-------- --------
Total liabilities ..................... 89,036 89,983
Equity .................................... 32,511 16,642
-------- --------
Total liabilities and equity ......... $121,547 $106,625
======== ========
Net interest income/spread (2) (3) ........ $ 4,796 2.97% $ 3,852 3.25%
======== ==== ======== ====
Net earning assets/net interest margin (4) $ 32,833 4.14% $ 16,274 3.89%
======== ==== ======== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.40x 1.20x
===== =====
</TABLE>
(1) Average balances include non-accrual loans. Interest on such loans is
recognized when received.
(2) Includes interest-bearing deposits 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 represents net interest income as a
percentage of average interest-earning assets.
-7-
<PAGE>
Rate/Volume Analysis of Net Interest Income
One method of analyzing changes in net interest income is to consider how
changes in average balance and changes in average rate earned or paid affect
interest income or expense. The following table shows the dollar amount of
changes in interest income and interest expense for major components of
interest-earning assets and interest-bearing liabilities. It distinguishes
between the changes caused by increases or decreases in average balances and
changes caused by increases or decreases in average interest rates. The effect
of an increase or decrease in volume is measured by changes in average balance
between two periods multiplied by rate earned or paid during the first period.
The effect of an increase or decrease in rate between two periods is measured by
changes in rate between the two periods multiplied by average volume for the
first period. Changes attributable to both rate and volume, which cannot be
segregated, have been allocated proportionately to the change due to volume and
the change due to rate.
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended September 30,
---------------------------- ----------------------------
1999 vs. 1998 1998 vs. 1997
---------------------------- ----------------------------
Increase (Decrease) Due to: Increase (Decrease) Due to:
---------------------------- ----------------------------
Rate Volume Total Rate Volume Total
------- ------- ------ ------- ------- ------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable ...................... $ (349) $ 2,001 $ 1,652 $ (6) $ 717 $ 711
Mortgage-backed securities ............ 5 (346) (341) (20) 266 246
Investment securities ................. 105 1,132 1,237 12 231 243
Federal funds ......................... (86) (241) (327) (39) (19) (58)
------- ------- ------- ------- ------- -------
Total interest-earning assets .... (325) 2,546 2,221 (53) 1,195 1,142
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Savings accounts ...................... 4 113 117 13 (35) (22)
Certificates of deposit ............... (142) 192 50 37 4 41
Money market .......................... 5 145 150 56 (17) 39
NOW accounts .......................... (7) 33 26 1 12 13
Other ................................. 9 1,108 1,117 70 57 127
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities (131) 1,591 1,460 177 21 198
------- ------- ------- ------- ------- -------
Net change in net interest income ..... $ (194) $ 955 $ 761 $ (230) $ 1,174 $ 944
======= ======= ======= ======= ======= =======
</TABLE>
Management of Interest Rate Risk
Our interest rate risk policy is to avoid taking undue interest rate risk
while continuing to satisfy customer demand for loans. Management seeks to
limit, but not eliminate, interest rate risk by offering adjustable rate loans.
However, during periods of low interest rates when customers prefer fixed-rate
loan products, such as during the past few years, originating adjustable rate
residential mortgage loans has been very difficult. Instead, we have been making
fixed-rate loans, often at interest rates higher than those which must be
offered to attract borrowers willing to accept adjustable rate loans. To balance
against the interest rate risk, which accompanies the making of such loans, we
market other loan products with shorter terms or adjustable rates, such as
variable rate based home equity loan products, commercial non-mortgage loans and
consumer loans.
-8-
<PAGE>
Interest rate pricing and policy are implemented, in the first instance, by
the Bank's Asset/Liability Committee, consisting of Bank officers. The committee
meets weekly to review the pricing of the Bank's loan and deposit products. The
Board of Directors of the Bank receives and reviews a report on the Bank's
estimated interest rate sensitivity every quarter. When appropriate, based upon
our need to manage interest rate risk, we may shift our investment emphasis
between different types of loans and securities, or we may seek to lengthen the
maturities of our liabilities. We also seek to cushion ourselves against
interest rate fluctuations by preserving a loyal customer base with core
deposits that are less prone to gravitate to high rate deposit products as
interest rates rise. For example, at September 30, 1995, 1996, 1997, and 1998,
the Bank had passbook and statement savings deposits of $27.2 million, $26.8
million, $26.8 million, and $28.1 million respectively, reflecting a significant
level of deposits with interest rates that did not change materially for more
than four years.
Gap Analysis. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest
sensitive" and by monitoring our estimated interest sensitivity "gap." An asset
or liability is said to be interest sensitive within a specific time period if
it will mature or its interest rate will adjust based on market conditions
(known as repricing) within that time period. The interest sensitivity gap is
defined as the difference between the amount of interest-earning assets
estimated to mature or reprice within a specific time period and the amount of
interest-bearing liabilities estimated to mature or reprice within that same
time period. At December 31, 1999, we estimate that our one year gap position,
the difference between the estimated amount of interest-earning assets maturing
or repricing within one year and interest-bearing liabilities maturing or
repricing within one year, as a percentage of total assets, was a negative 6.8%,
as shown on the table below.
A gap is considered positive for any period when the amount of
interest-sensitive assets exceeds the amount of interest sensitive liabilities
estimated to reprice within such period. A gap is considered negative when the
amount of interest sensitive liabilities exceeds the amount of interest
sensitive assets estimated to reprice within a given period. When market
interest rates increase, the net interest income of an institution with a
positive gap for the period of the increase would expect an increase in net
interest income as its cost of funds rises more slowly than the yields on its
assets. Net interest income of such an institution would be expected to be
negatively affected during a period of falling interest rates. The effect would
be expected to be the reverse for an institution with a negative gap. However,
the repricing of most assets and liabilities is discretionary and depends, in
part, on customer preference. Thus, for example, during periods of rising
interest rates, loan customers may delay the sales of their homes, resulting in
reduced loan turnover. At the same time, deposit customers with low-rate
savings, demand and NOW accounts may switch those deposits into higher rate
accounts as the higher rate accounts become more attractive.
The following table shows the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1999, which we
estimate, based upon certain assumptions, will reprice within the time periods
shown. Except as stated below, the amount of assets and liabilities shown which
reprice or mature during a particular period were determined based on the
earlier of the scheduled maturity or next scheduled interest rate adjustment of
the asset or liability. Fixed-rate mortgage loans are included in the table
without regard to scheduled principal payments or assumed voluntary prepayments.
Although such assets are normally repaid more quickly due to regular
amortization payments and voluntary prepayment, these assumptions are used
during this period of low interest rates as a conservative approach to analyzing
our ability to reprice our assets. Federal funds sold are assumed to be
immediately interest sensitive.
We have assumed that 70% of savings accounts, money market accounts and NOW
accounts are core deposits and therefore are expected to reprice beyond five
years. We have assumed that the remainder of such deposits will reprice evenly
over the first five years. Certificates of deposit are included based upon their
contractual maturities.
Estimates of loan prepayment rates and deposit turnover rates can have a
significant impact on our estimated gap. While we believe that the assumptions
used to prepare the following table are reasonable, there can be no assurance
that such estimates will approximate actual future loan repayment and deposit
withdrawal activity.
-9-
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999
-------------------------------------------------------------------------------------
Less Three
Than Months Over One Over Three Over Five More
Three Through Through Through Through Than
Months One Year Three Years Five Years Ten Years Ten Years Total
-------- -------- ----------- ---------- --------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans receivable ........................... $ 16,566 $ 8,192 $ 2,493 $ 3,539 $ 8,436 $ 76,330 $115,556
Mortgage backed securities ................. 222 598 1,202 343 233 957 3,555
Federal funds sold ......................... 1,251 -- -- -- -- -- 1,251
Investment securities ...................... 32,712 12,746 3,498 -- -- -- 48,956
-------- -------- -------- -------- -------- -------- --------
Total interest-earning assets .............. 50,751 21,536 7,193 3,882 8,669 77,287 169,318
======== ======== ======== ======== ======== ======== ========
Interest-bearing liabilities:
NOW accounts ............................... 106 317 847 847 4,941 -- 7,058
Savings accounts ........................... 464 1,391 3,711 3,711 21,646 -- 30,923
Money market accounts ...................... 238 713 1,902 1,902 11,093 -- 15,848
Certificates of deposits ................... 19,985 21,954 3,537 201 -- -- 45,677
Borrowings ................................. 34,600 4,000 -- -- -- -- 38,600
-------- -------- -------- -------- -------- -------- --------
Total interest-bearing liabilities ......... 55,393 28,375 9,997 6,661 37,680 -- 138,106
-------- -------- -------- -------- -------- -------- --------
Interest-earning assets less
Interest-bearing liabilities ............... $ (4,642) $ (6,839) $ (2,804) $ (2,779) $(29,011) $ 77,287 $ 31,212
======== ======== ======== ======== ======== ======== ========
Cumulative interest sensitivity gap ........ $ (4,642) $(11,481) $(14,285) $(17,064) $(46,075) $ 31,212
======== ======== ======== ======== ======== ========
Cumulative gap to total assets ............. (2.64)% (6.52)% (8.12)% (9.69)% (26.18)% 17.73%
======== ======== ======== ======== ======== ========
Cumulative gap to interest-earning assets .. (2.74)% (6.78)% (8.44)% (10.08)% (27.21)% 18.43%
======== ======== ======== ======== ======== ========
Cumulative interest-earning assets to
cumulative interest-bearing liabilities .... 91.62% 86.29% 84.77% 83.01% 66.64% 122.60%
======== ======== ======== ======== ======== ========
</TABLE>
Analysis of Market Risk.
Interest rate pricing and interest rate risk strategy objectives are
implemented, in the first instance, by an internal committee which meets weekly
to review and assess deposit and loan pricing. The OTS prepares a quarterly
interest-rate sensitivity report for the Bank based upon its asset and liability
profile which seeks to estimate the effect of interest rate changes on the net
value of the Bank's assets and liabilities. This report is reviewed with the
Board of the Bank quarterly
The OTS report seeks to estimate how changes in interest rates will affect
the Bank's "net portfolio value." Net portfolio value, or "NPV," akin to net
worth, represents the net present value of the Bank's cash flow from assets,
liabilities and off balance sheet items. Each calendar quarter, the OTS
calculates the Bank's estimated NPV and the estimated effect on NPV of
instantaneous and permanent 1% to 3% (100 to 300 basis points) increases and
decreases in market interest rates. The calculations are based upon the OTS's
assumptions regarding loan prepayments rates, deposit turnover and other factors
affecting the repricing of assets and liabilities.
The following table presents the Bank's estimated NPV at December 31, 1999,
and the estimated effect on NPV of the specified interest rate changes, as
calculated by the OTS. At December 31, 1999, the portfolio value of the Bank's
assets as estimated by the OTS was $25.8 million.
-10-
<PAGE>
<TABLE>
<CAPTION>
Estimated NPV as a
Estimated Percentage of
Hypothetical Change in Estimated Estimated Change in Percentage Change Portfolio Value of
Interest Rate Net Portfolio Value Net Portfolio Value in NPV(1) Assets
------------- ------------------- ------------------- --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
+3.00% $ 12,762 $ (13,005) (50)% 8.1%
+2.00% 17,232 (8,534) (33) 10.6
+1.00% 21,705 (4,062) (16) 12.9
0.00% 25,766 -- -- 14.8
-1.00% 28,613 2,846 11 16.1
-2.00% 30,091 4,325 17 16.7
-3.00% 30,595 4,828 19 16.8
</TABLE>
(1) Calculated as the amount of estimated change in NPV divided by the
estimated current NPV.
The OTS does not include in its analysis any assets held by GSB Financial
Corporation which are not owned by the Bank. In general, assets held directly by
the Company tend to have shorter terms that the Bank's loan portfolio, and thus
we believe that if the Company's assets were included in the OTS analysis, the
change in net portfolio value caused by changes in interest rates would be less
pronounced. Furthermore, the Company has additional portfolio equity of
approximately $5.7 million excluded from the OTS analysis. If included, the
percentage changes in the table would be less because of the higher capital
base.
The above table indicates that in a rising interest rate environment, the
Bank's net portfolio value should decline, while net portfolio value should
increase in a declining interest rate environment. These changes in net
portfolio value should be accompanied by a decline in net income during periods
of rising interest rates and an increase in net income during periods of
declining interest rates. However, these expected changes in net income may not
occur for many reasons including, among others, the possibility that we may
decide not to reduce the rates we offer on our deposits when interest rates
decline in order to retain and increase our deposit base.
There are shortcomings in the methodology used by the OTS to calculate
changes in NPV. In order to estimate changes in NPV, the OTS makes assumptions
about repayment and turnover rates which may not turn out to be correct. The NPV
table assumes that the composition of the Bank's interest sensitive assets and
liabilities existing at the beginning of a period remain constant over the
period being measured. So, for example, the NPV analysis assumes that the ratio
of adjustable versus fixed-rate loans or short-term loans versus long-term loans
remains the same and that interest rates will change equally for both long term
and short term assets. Therefore, although the OTS NPV analysis provides the
Board of the Bank with an indication of the Bank's interest rate risk exposure,
it does not provide a precise forecast of the effect of changes in market
interest rates on net interest income.
We recognize that our net income could be adversely affected by rising
interest rates. This is primarily a result of the high level of fixed rate
mortgage loans in the Company's portfolio because customer prefer fixed rate
residential mortgage loans in the low interest rate environment we have
experienced in recent times. We are trying to address this issue by
strengthening core deposits, which tend to be less interest sensitive, while
also originating commercial business loans, commercial mortgage loans and
consumer loans which tend to be more interest sensitive.
-11-
<PAGE>
Comparison of Financial Condition at December 31, 1999 and December 31, 1998
Total assets increased by $39.1 million, or 28.5%, to $176.0 million at December
31, 1999 from $137.0 million at December 31, 1998. The principal components of
the increase were:
o an increase in loans, net by $30.5 million, or 36.0%, to $115.3
million at December 31, 1999; and
o an increase in investment securities available for sale by $14.3
million, or 43.7%, to $46.9 million at December 31, 1999.
The asset increases were a consequence of management's plan to increase leverage
and continue the process of deploying our capital. In order to implement this
plan, we:
o increased advertising to attract both additional deposits and
additional loans;
o borrowed funds to increase the level of funds available for
investment;
o generally repriced deposit offerings to bring rates to slightly above
average rates offered in the local market.
We funded the increase in assets primarily with:
o a $3.3 million decrease in mortgage-backed securities;
o a $12.4 million, or 13.2%, increase in deposits; and
o a $28.6 million increase in borrowings.
Total equity decreased by $2.4 million to $29.1 million at December 31, 1999
from $31.4 million at December 31, 1998. The primary cause of the decrease in
equity was the repurchase of 147,612 shares of common stock for $2.0 million,
combined with dividends of $333,000, and a $2.0 million decrease in the net
unrealized gain on securities available for sale. These reductions in equity
were partially offset by net income of $1.8 million, a $180,000 increase in
equity resulting from the release of ESOP stock for allocation. At December 31,
1999, we had the right, pursuant to a notice previously filed with the Office of
Thrift Supervision, to repurchase an additional 56,492 shares of our common
stock without further regulatory approval or notice being required.
Comparison of Operating Results for the Years Ended December 31, 1999 and
December 31, 1998
General. Net income for the year ended December 31, 1999 was $1.8 million,
or $0.94 per share, as compared to $625,000, or $0.31 per share, for the year
ended December 31, 1998. This represents a 183.2% increase in net income and a
203.2% increase in earnings per share. The 1998 results included a $699,000
expense for an early employment termination program and a related $134,000
recovery upon the termination of some post-retirement health benefits. The 1999
results included a $288,000 one-time settlement credit relating to the defined
benefit pension expense. Excluding the three one-time items, 1999 net income, as
adjusted, of $1.6 million was 65.7% higher than adjusted net income in calendar
1998 of $964,000. Earnings per share increased 77.1% when comparing adjusted
1999 to the adjusted 1998 amounts.
Interest Income. For the year ended December 31, 1999, interest income was
$10.7 million as compared to $8.5 million for 1998, a $2.2 million, or 26.2%,
increase. The primary cause for the increase was a higher level of interest
earned on loans and investment securities due to increases in volume. The
average volume of loans increased by $27.4 million. We estimate that this
increase resulted in a $2.0 million increase in interest income. The average
yield on loans decreased due to the lower interest rates environment in late
1998 and early 1999, declining by 44 basis points from 1998 to 1999. The yield
on adjustable rate mortgages decreased due to a decline in the one year Treasury
bill index during this period. The decrease in the yield on adjustable rate
mortgage loans was partially offset by fixed rate mortgage loans, which were
originated at rates slightly higher than the fully indexed rates on adjustable
rate loans. Efforts to increase the levels of other loan types with higher
yields, such as commercial loans and home equity junior mortgage loans, had not
yet generated material increases in these loan categories by the end of 1999.
-12-
<PAGE>
Interest earned on investment securities increased by $1.2 million from
1998 to 1999, because of an increase in the average balance of investment
securities by $17.4 million. This increase was primarily due to our leveraging
program discussed above. We also concentrated our new security investments in
callable government agency securities, which generally have higher yields than
treasury securities. This was the principal reason that our average yield on
investment securities increased by 37 basis points from fiscal 1998 to 1999.
Interest Expense. Interest expense increased $1.5 million from $3.6 million
in 1998 to $5.1 million in 1999. The primary cause of the increase was a $20.7
million increase in the average balance of borrowings and a $12.9 million
increase in the average balance of interest-bearing deposits. In both cases, the
increases were the result of deliberate actions by the Company to increase
funding sources to support additional asset growth. The increase in borrowings,
when compared to the increase in deposits, had a greater effect on the level of
interest income for two reasons. First, the dollar amount of the borrowings
increase was higher. Second, borrowings are our highest cost funding source, and
a shift in the mix of liabilities towards borrowings would tend to increase our
cost of funds even if there is no change in market interest rates.
Our cost of funds increased by 6 basis points from 1998 to 1999, primarily
because of the new borrowings. The average cost of our certificates of deposit
declined by 35 basis points from 1998 to 1999 due to lower interest rate
conditions in late 1998 and early 1999. The effect of the declining interest
rates was partially offset by our more aggressive deposit pricing strategies
discussed above. In addition, the increase in market interest rates during the
latter part of 1999 is likely to put upward pressure on our cost of funds in
2000.
Net Interest Income. Net interest income before the provision for loan
losses increased by $761,000 from fiscal 1998 to fiscal 1999, representing the
net effect of the $2.2 million increase in interest income and the $1.5 million
increase in interest expense. The overall increase in net interest income was
primarily a result of growth. Average interest-earning assets and average
interest-bearing liabilities both increased by approximately $33.5 million. The
effect of this increase was partially offset by a decrease in our spread. Spread
decreased due to a number of factors, including the lower interest environment
for new loans and refinancing of existing loans, the need to improve deposit
pricing, the generally higher rates paid on borrowings when compared to
deposits, and pressures exerted by generally lower market interest rate
conditions. Net interest margin decreased from 4.04% to 3.65% for these reasons
and also because of a reduction in capital as a zero cost funding source.
During 1999 and 1998, non-performing assets were at low levels and changes
in the level of average non-performing assets did not have a material effect on
the change in net interest income.
Provision for Loan Losses. We increased our provision for loan losses for
the year ended December 31, 1999 to $140,000 from $110,000 for the year ended
December 31, 1998, due to increases in the loan portfolio and efforts to develop
a commercial lending portfolio. There were no non-performing loans at December
31, 1999. At December 31, 1999, the allowance for loan losses was $351,000
representing 0.30 of period end loans. Net charge-offs during 1999 were $4,000.
We had one commercial loan in the amount of $ 48,000 in which the borrower was
in bankruptcy at December 31, 1999, but the loan is current. We considered the
status of this loan when evaluating the appropriate provision for loan losses.
We periodically review our loan portfolio, level of charge-offs and
recoveries, general economic conditions and other factors to determine whether
the allowance for loan losses is at a level which management believes is
adequate. Any determination of the adequacy of the allowance for loan losses is
necessarily speculative based upon estimates of the future performance of the
loan portfolio. Although we maintain the allowance at a level which we consider
to be adequate to provide for potential losses, there can be no assurance that
such losses will not exceed the current estimated amounts. As a result, higher
provisions for loan losses may be necessary in future periods, which would
adversely affect operating results.
Non-interest income. For the year ended December 31, 1999, non-interest
income amounted to $622,000 as compared to $604,000 for the same period in 1998.
The increase of $18,000 was principally caused by an increase of $99,000 in
capital gains distributions on our mutual fund investment, $45,000 increase of
other income and a $30,000 increase in service charges on deposits, partially
offset by a decrease in securities gains of $156,000.
-13-
<PAGE>
The mutual fund pays regular dividends and traditionally pays a capital gain
dividend each year in December. The amount of the capital gain dividend depends
upon the market value of the securities owned by the fund and the timing of its
securities trading activities, which, when market conditions are favorable,
result in realized gains which are distributed each December.
Non-interest expense. For the year ended December 31, 1999, non-interest
expense totaled $3.3 million as compared to $4.3 million for the same period in
1998. The 1998 expenses included $565,000 for the early employment termination
expense net of the recovery for the reduction in the post-retirement health
benefits. The remainder of the reduction in non-interest expense was caused
primarily by the lower salary and benefit expenses of $274,000 due to the effect
of the early employment termination program on aggregate 1999 salaries, and a
one-time settlement credit relating to the defined benefit pension of $288,000.
The increase in occupancy and equipment expense of $27,000 is mostly attributed
to the opening of the Harriman branch in September 1998, and the related
expenses of the new office for the full year in 1999. The increase in data
processing expense of $62,000 is comprised of the processing cost of the new
branch office, upgrades and improvements to the data processing systems to
improve customer service and expenses relating to Y2K compliance.
Income Tax Expense. Income tax expense increased from $417,000 in fiscal
1998 to $1.1 million in fiscal 1999. The increase was primarily the result of
the increase in net income before taxes by $1.8 million. Most of our income is
taxable under both Federal and New York State income tax laws.
Comparison of Operating Results for the Years Ended September 30, 1998 and
September 30, 1997
General. Net income for the year ended September 30, 1998 was $600,000, as
compared to $756,000 for the year ended September 30, 1997. The decrease in net
income resulted principally from the accrual of $699,000 of expenses ($419,000
after tax) related to the implementation of a voluntary employment termination
program that was partially offset by the termination of the post-retirement
health care and life insurance plan of $134,000.
Interest Income. For the year ended September 30, 1998, interest income was
$8.2 million as compared to $7.1 million for 1997, a $1.1 million, or 16.1%,
increase. The increase was primarily volume related as we invested the proceeds
of our public offering, increased deposits and borrowed funds to increase
leverage. Interest earned on loans increased primarily due to an increase of
approximately $9.3 million in the average volume of loans. We estimate that the
increase in the average balance of loans resulted in a $717,000 increase in
interest income. The average yield on loans remained relatively constant,
declining by only one basis point from fiscal 1997 to fiscal 1998. The yield on
adjustable rate mortgages decreased due to a decline in the one year Treasury
bill index during this period. The decrease in the yield on adjustable rate
mortgage loans was partially offset by fixed rate mortgage loans, which were
originated at rates slightly higher than the fully indexed rates on adjustable
rate loans. Efforts to increase the levels of other loan types with higher
yields, such as commercial loans and home equity junior mortgage loans, had not
yet yielded material increases in these loan categories by the end of fiscal
1998.
Interest earned on investment securities increased by $243,000 from fiscal
1997 to fiscal 1998, because of an increase in the average balance of investment
securities by $3.7 million. This increase was primarily due to our leveraging
program discussed above. We also concentrated our new security investments in
callable government agency securities and mortgage-backed securities, which
generally have higher yields than treasury securities. This was the principal
reason that our average yield on investment securities increased by 5 basis
points from fiscal 1997 to 1998.
Interest Expense. Interest expense increased $198,000 from $3.2 million in
fiscal 1997 to $3.4 million in fiscal 1998. The principal cause of the increase
was $225,000 of interest on borrowings in fiscal 1998, compared to $24,000 of
interest on borrowings in fiscal 1997. However, in fiscal 1997 we had $74,000 of
interest expense on stock subscriptions pending the completion of our stock
offering, compared to no similar expense in 1998.
-14-
<PAGE>
The average cost of funds increased by 23 basis points from fiscal 1997 to
fiscal 1998, primarily due to the combined effect of the borrowings, which had
higher rates than deposits, and the pricing strategies discussed above which
increased the rates on certain deposit categories. In addition, there was a
$207,000 increase in the average balance of interest-bearing liabilities from
fiscal 1997 to fiscal 1998. For fiscal 1998, interest expense on deposits was
$3.2 million as compared to $3.1 million for 1997. The primary reason for the
increase was an increase in the average rates paid on money market deposit
accounts of 59 basis points and on certificates of deposit of 9 basis points.
The average balance of interest-bearing deposits declined by $1.2 million from
fiscal 1997 to fiscal 1998, although this decline was entirely during the first
two quarters of fiscal 1998. By the end of fiscal 1998, total deposits had
increased by $5.3 million during the year as the increase in rates offered and
more advertising began to be reflected in increased deposit volume.
Net Interest Income. Net interest income before the provision for loan
losses increased by $944,000 from fiscal 1997 to fiscal 1998, representing the
net effect of the $1.1 million increase in interest income and the $198,000
increase in interest expense. The overall increase in net interest income was
reflected in an increase in net average earning assets of $16.6 million, from
$16.3 million at September 30, 1997 to $32.8 million at September 30, 1998,
partially offset by decrease in spread of 28 basis points. Spread decreased due
to a number of factors, including the investment of available funds in
securities and federal funds sold pending reinvestment in loans, the need to
improve deposit pricing, the generally higher rates paid on borrowings when
compared to deposits, and pressures exerted by generally lower market interest
rate conditions. However, net interest margin increased from 3.89% to 4.14% due
to a $15.9 million increase in average equity as a non-interest-bearing funding
source from an average of $16.6 million in 1997 to $32.5 million in 1998.
During both fiscal 1998 and 1997, non-performing assets were at low levels
and changes in the level of average non-performing assets from fiscal 1997 to
fiscal 1998 did not have a material effect on the change in net interest income.
Provision for Loan Losses. We increased our provision for loan losses for
the year ended September 30, 1998 to $70,000 from $20,000 for the year ended
September 30, 1997, due to increases in the loan portfolio and the charge-off of
a portion of a residential mortgage loan that was foreclosed during 1998.
Non-performing loans at September 30, 1998, totaled $4,000, represented by one
consumer loan. We also had $94,000 of real estate owned at fiscal year end 1998,
represented by one residential real estate parcel which was then being marketed
and which was sold during the quarter ended December 31, 1998 at no further
loss.
We periodically review our loan portfolio, level of charge-offs and
recoveries, general economic conditions and other factors to determine whether
the allowance for loan losses is at a level which management believes is
adequate. Any determination of the adequacy of the allowance for loan losses is
necessarily speculative based upon estimates of the future performance of the
loan portfolio. Although we maintain the allowance at a level which we consider
to be adequate to provide for potential losses, there can be no assurance that
such losses will not exceed the current estimated amounts. As a result, higher
provisions for loan losses may be necessary in future periods, which would
adversely affect operating results.
Non-interest income. For the year ended September 30, 1998, non-interest
income amounted to $450,000 as compared to $343,000 for the same period in 1997.
The increase of $107,000 was principally caused by an increase of $129,000 in
securities gains, partially offset by a reduction of $11,000 in capital gains
distributions on our mutual fund investment. The mutual fund pays regular
dividends and traditionally pays a capital gain dividend each year in December.
The amount of the capital gain dividend depends upon the market value of the
securities owned by the fund and the timing of its securities trading
activities, which, depending upon market conditions, result in realized gains
which are distributed each December.
Non-interest expense. For the year ended September 30, 1998, non-interest
expense totaled $4.2 million as compared to $3.0 million for the same period in
1997. The increase of $1.2 million is principally caused by the $699,000 of
expense for the voluntary early employment termination program and $344,000 of
compensation expense in connection with our ESOP and Incentive Stock Award Plan.
The voluntary early employment termination program was offered to certain
qualifying employees permitting them to receive severance payments
-15-
<PAGE>
and enhanced post-termination benefits if they terminated employment by December
31, 1998. Eleven employees of the Bank, including four executive officers,
elected to terminate employment under the program and filed their elections
prior to the end of fiscal 1998. We recorded the entire expense of the program
during the fourth quarter of fiscal 1998. In connection with the program, we
also revised our employee benefits programs to curtail post-retirement health
insurance benefits, although employees electing to participate in the
termination program retained certain post-retirement health benefits. The
reduction in post-retirement health benefits allowed us to recover $134,000
previously accrued for anticipated post-retirement health benefit costs.
The $344,000 of ESOP and ISAP expense includes $180,000 of contributions by
the Bank to the ESOP to pay principal on our loan to the ESOP and $107,000
representing the amount required to be recorded as an expense under accounting
rules because the market value of the stock on the date it was released from the
lien of the ESOP loan was higher than its cost, which was 100% financed by the
ESOP loan. The principal payments on the ESOP loan are $45,000 per calendar
quarter. Interest on the ESOP loan payable to us is eliminated when the
financial statements of Goshen Savings Bank and GSB Financial Corporation are
consolidated. ISAP expense of $57,000 represented expense accruals for the
gradual vesting of ISAP shares, which were awarded to officers and directors
during fiscal 1998. We also operated as a publicly traded savings and loan
holding company incorporated in Delaware throughout 1998, compared to less than
three months during 1997. As a result, expenses related to operating as a public
company were $241,000 higher in 1998 than in 1997, and were represented by
expenses such as fees for additional board and committee meetings, legal fees
related to securities matters and stockholder meetings, additional accounting
fees associated with public reporting requirements under the Securities Exchange
Act of 1934, proxy solicitation expense, and other items. Marketing and
advertising expense also increased by $28,000 due to the implementation of a
more aggressive advertising campaign to solicit deposits and loans.
Income Tax Expense. Income tax expense decreased from $440,000 in fiscal
1997 to $401,000 in fiscal 1998. The decrease was primarily the result of the
decline in net income before taxes by 195,000. Most of our income is taxable
under both Federal and New York State income tax laws. Tax-exempt municipal
bonds are not a material income-producing factor.
Liquidity and Capital
Our primary sources of funds are deposits, borrowed funds, proceeds from
the principal and interest payments on loans, mortgage-backed and debt
securities and capital gain distributions on our 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.
Our primary investing activity is the origination of residential
one-to-four family mortgage loans and commercial loans and the purchase of debt
securities. We originated $51.5 million of loans in fiscal 1999, $20.8 million
in fiscal 1998 and $13.3 million of loans in fiscal 1997, respectively. Loans,
net, after payments and charge-offs, increased by $30.6 million, $13.0 million,
and $7.0 million, respectively, while investment and mortgage-backed securities,
excluding the effect of unrealized gains and losses, increased by $14.3 million,
$1.8 million and $9.0 million, during those three years. In general, if funds
are available at times when they are not needed to make loans, we invest them on
a short term basis in securities or federal funds sold, and then when loan
opportunities arise, we gradually shift funds into loans. However, we always
invest a portion of our assets in liquid assets such as federal funds sold, bank
deposits and short term securities so that funds will be available when needed
for unanticipated loan demand, deposit outflows, or other cash flow needs.
Deposits and borrowings increased by $41.0 million, or 39.5%, during 1999.
The increase had two components; $28.6 million in new borrowings and a $12.4
million increase in deposits. Deposits and borrowings increased by $15.3
million, or 18.5%, during fiscal 1998, likewise consisting of $10.0 million in
new borrowings and a $5.3 million increase in deposits. These increases in both
periods were caused by implementation of our capital leveraging strategies.
-16-
<PAGE>
We regularly monitor our liquidity. We invest excess short-term liquidity
in overnight federal funds sold. If we need more funds than we can generate
internally, we can borrow those funds. At December 31, 1999, we had lines of
credit with the Federal Home Loan Bank of New York of $15.8 million, with $8.6
million outstanding. We also had additional Federal Home Loan Bank borrowings of
$30.0 million at December 31, 1999, which were not against the line of credit.
At December 31, 1999, we had $4.3 million of outstanding commitments to
make loans and our customers had $4.0 million of unused lines of credit which
they could borrow from us. Management anticipates that we will have sufficient
funds available to meet our obligations to fund these loans. Certificates of
deposit scheduled to mature in one year or less from December 31, 1999, totaled
$41.9 million. Management anticipates that we will be able to retain
substantially all of such deposits if we decide to do so to fund loans and other
investments.
At December 31, 1999, the Bank exceeded all regulatory capital requirements
of the OTS applicable to it, with tangible and core capital of $24.5 million, or
14.1% of adjusted assets and total risk-based capital of $24.9 million, or 28.8%
of risk-weighted assets. The Bank was classified as "well capitalized" at
December 31, 1999 under OTS regulations.
The Bank must satisfy minimum liquidity regulations of the OTS, which
require liquid assets equal to at least 4% of net withdrawable accounts plus
short term borrowings, measured on a monthly basis. The Bank satisfies this
requirement, and for December 1999 had a liquidity ratio of 7.8%.
Year 2000 Compliance
We experienced no material Y2K related problems at the century date
rollover and for leap year, February 29, 2000. There were no computer related
problems and our customers did not withdraw an excessive amount of funds. The
Bank increased its supply of cash on hand before year end to meet customer
demand, which did not materialize, so the excess funds were moved back into
interest earning assets as quickly as possible.
Impact of Inflation and Changing Prices
Our Financial Statements have been prepared using generally accepted
accounting principals, which require that we measure our financial position and
operating results in historical dollars without considering the changes in the
purchasing power of money over time due to inflation. Inflation increases our
operating costs, such as salaries, building and equipment expense, insurance and
most other categories of non-interest expenses. However, unlike industrial
companies, most of our assets and liabilities are monetary in nature. As a
result, changes in interest rates have a greater impact on our performance than
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services, although interest rates
generally increase during periods when the rate of inflation is increasing and
decrease during periods of decreasing inflation.
-17-
<PAGE>
Forward-Looking Statements
When used in this Annual Report, 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; (v)
changes in consumer preferences; (vi) changes in Federal Reserve monetary
policy; and (vii) the results of the national elections this year.
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.
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<PAGE>
GSB FINANCIAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report ............................................ 20
Consolidated Statements of Financial Condition at December 31, 1999
and December 31, 1998 and September 30, 1998 ............................ 21
Consolidated Statements of Operations for the Year Ended
December 31, 1999, the Three Months Ended December 31, 1998 and the
Years Ended September 30, 1998 and 1997 ................................. 22
Consolidated Statements of Equity for the Year Ended December 31, 1999,
the Three Months Ended December 31, 1998 and the Years
Ended September 30, 1998 and 1997 ....................................... 23
Consolidated Statements of Cash Flows for the Year Ended
December 31, 1999, the Three Months Ended December 31, 1998 and the
Years Ended September 30, 1998 and 1997 ................................. 24-25
Notes to Consolidated Financial Statements .............................. 26-50
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<PAGE>
[LETTERHEAD OF NUGENT & HAEUSSLER, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
GSB Financial Corporation
1 South Church Street
Goshen, New York 10924
We have audited the accompanying consolidated statements of financial condition
of GSB Financial Corporation and Subsidiaries (the "Company") as of December 31,
1999 and 1998, and September 30, 1998 and 1997, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
year ended December 31, 1999, the three months ended December 31, 1998 and the
years ended December 31, 1998 and the years ended September 30, 1998 and 1997.
These consolidated financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of GSB Financial
Corporation and Subsidiaries at December 31, 1999 and 1998 and at September 30,
1998, and the results of their operations changes in stockholders' equity and
their cash flows for the year ended December 31, 1999, the three months ended
December 31, 1998 and the years ended September 30, 1998 and 1997, in conformity
with generally accepted accounting principles.
Respectfully submitted,
/s/ NUGENT & HAEUSSLER, P.C.
- ----------------------------
NUGENT & HAEUSSLER, P.C.
January 18, 2000
Montgomery, New York
-20-
<PAGE>
GSB Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands except share and per share amounts)
<TABLE>
<CAPTION>
Year Ended
Year Ended December 31, September 30,
---------------------- -------------
1999 1998 1998
--------- --------- ---------
<S> <C> <C> <C>
ASSETS
Cash and due from banks ........................................... $ 4,052 $ 1,679 $ 2,818
Federal funds sold ................................................ 100 6,575 4,800
--------- --------- ---------
Cash and cash equivalents ......................................... 4,152 8,254 7,618
Investment securities available for sale (Note 3 and 4) ........... 46,871 32,616 31,474
Mortgage-backed securities:
Held to maturity (estimated market values of $1,455 and $2,452 at
December 31, 1999 and 1998 respectively and $3,965 at September
30, 1998) (Note 5) ............................................ 1,471 2,427 3,881
Available for sale (Note 6) ..................................... 2,004 4,397 5,804
Loans receivable, net (Note 7 and 8) .............................. 115,273 84,753 78,713
Banking house and equipment (Note 9) .............................. 2,768 2,852 2,800
Accrued interest receivable (Note 10) ............................. 1,315 854 949
Other real estate owned, net ...................................... -- -- 94
Prepaid expenses and other assets ................................. 2,162 801 602
--------- --------- ---------
Total assets ................................................. $ 176,016 $ 136,954 $ 131,935
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits (Note 11) ................................................ $ 106,256 $ 93,833 $ 88,310
Mortgagors' escrow deposits ....................................... 503 299 126
Borrowings (Note 12) .............................................. 38,600 10,000 10,000
Accrued expenses and other liabilities ............................ 1,548 1,455 2,004
--------- --------- ---------
Total liabilities ............................................ $ 146,907 $ 105,587 $ 100,440
--------- --------- ---------
Commitments and contingent liabilities (Note 16)
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, 1999 and 1998 respectively and
at September 30, 1998) ......................................... 22 22 22
Additional paid-in capital ........................................ 21,575 21,524 21,510
Retained earnings, substantially restricted ....................... 14,518 13,081 12,825
Accumulated other comprehensive income ............................ (1,297) 720 632
Unallocated ESOP stock (Note 14) .................................. (1,349) (1,529) (1,574)
Unearned ISAP stock (Note 14) .................................... (308) (367) (391)
Treasury stock .................................................... (4,052) (2,084) (1,529)
--------- --------- ---------
Total stockholders' equity ................................... $ 29,109 $ 31,367 $ 31,495
--------- --------- ---------
Total liabilities and stockholders' equity ................... $ 176,016 $ 136,954 $ 131,935
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
-21-
<PAGE>
GSB Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year For the Three Months For the Years
Ended December 31, Ended December 31, Ended September 30,
------------------ -------------------- -------------------------------
1999 1998 1998 1997
----------- ----------- ----------- -----------
(In thousands except share and per share amounts)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans ................................................ $ 7,432 $ 1,538 $ 5,544 $ 4,833
Federal funds sold ................................... 77 88 381 439
Investment securities ................................ 2,867 485 1,575 1,332
Mortgage-backed securities ........................... 333 153 720 474
----------- ----------- ----------- -----------
Total interest income .............................. 10,709 2,264 8,220 7,078
INTEREST EXPENSE
Deposit accounts (Note 11) ........................... 3,625 861 3,199 3,128
Other borrowings (Note 12) ........................... 1,474 132 225 24
Stock subscription interest expense .................. -- -- -- 74
----------- ----------- ----------- -----------
Total interest expense ............................. 5,099 993 3,424 3,226
Net interest income .................................. 5,610 1,271 4,796 3,852
Provision for loan losses (Note 8) ................... 140 60 70 20
----------- ----------- ----------- -----------
Net interest income after provision for loan losses .. 5,470 1,211 4,726 3,832
NON-INTEREST INCOME
Service charges on deposit accounts .................. 179 44 139 139
Other income ......................................... 139 25 99 110
Net realized gains on securities ..................... -- 27 130 1
Capital gains distributions .......................... 304 205 82 93
----------- ----------- ----------- -----------
Total non-interest income .......................... 622 301 450 343
NON-INTEREST EXPENSE
Salaries and employee benefits ....................... 1,621 488 1,931 1,657
Occupancy and equipment .............................. 339 79 319 361
Data processing expenses ............................. 280 70 236 246
Early termination expense (Note 13) .................. -- -- 699 --
Recovery of post-retirement FASB 106 expense (Note 14) (288) -- (134) --
Other non-interest expense ........................... 1,299 341 1,124 715
----------- ----------- ----------- -----------
Total non-interest expense ......................... 3,251 978 4,175 2,979
----------- ----------- ----------- -----------
Income before income taxes ........................... 2,841 534 1,001 1,196
Income tax expense (Note 15) ......................... 1,071 214 401 440
----------- ----------- ----------- -----------
Net income ........................................... $ 1,770 $ 320 $ 600 $ 756
=========== =========== =========== ===========
Basic earnings per share ............................. $ 0.94 $ 0.16 $ 0.29 $ 0.37
Weighted average shares outstanding - basic .......... 1,874,670 1,944,564 2,043,484 2,068,444
Diluted earnings per share ........................... $ 0.94 $ 0.16 $ 0.29 $ 0.37
Weighted average shares outstanding - diluted ........ 1,888,566 1,964,330 2,059,981 2,068,444
</TABLE>
See accompanying notes to consolidated financial statements.
-22-
<PAGE>
GSB Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Retained Accumulated
Earnings Common Unearned other
Shares Additional Substan- Stock Incentive Treasury Comprehensive
Outstanding Common Paid-In tially Acquired Stock Stock, Income,
Common Stock Capital Restricted By ESOP Award Plan at Cost Net Total
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1996 -- -- -- $11,604.00 -- -- -- $ 143 $ 11,747
-------------------------------------------------------------------------------------------------
Net income -- -- -- 756 -- -- -- -- 756
Sale of common stock 2,248,250 22 21,424 -- -- -- -- -- 21,446
Acquisition of ESOP stock -- -- -- -- (1,799) -- -- -- (1,799)
ESOP shares committed to be
Released -- -- 22 -- 45 -- -- -- 67
Change in net unrealized gain on
Investment securities available
for sale, net of income taxes -- -- -- -- -- -- -- 416 416
Comprehensive Income
--------------------------------------------------------------------------------------------------
Balance at September 30, 1997 2,248,250 22 21,446 12,360 (1,754) $0 $0 $559 $32,633
-------------------------------------------------------------------------------------------------
Net income -- -- -- 600 -- -- -- -- 600
Dividends paid -- -- -- (135) -- -- -- -- (135)
Acquisition of treasury stock -- -- -- -- -- -- (2,020) -- (2,020)
ESOP shares committed to be
Released -- -- 107 -- 180 -- -- -- 287
Change in net unrealized gain on
Investment securities available
for sale, net of income taxes -- -- -- -- -- -- 73 73
Comprehensive Income
Grant of restricted stock under
ISAP -- -- (43) -- -- (448) 491 -- --
Amortization of unearned
ISAP compensation -- -- -- -- -- 57 -- -- 57
-------------------------------------------------------------------------------------------------
Balance at September 30, 1998 2,248,250 $ 22 $21,510 $12,825 $ (1,574) $ (391) $ (1,529) $ 632 $ 31,495
=================================================================================================
Net income -- -- -- 320 -- -- -- -- 320
Dividends paid -- -- -- (64) -- -- -- -- (64)
Acquisition of treasury stock -- -- -- -- -- -- (555) -- (555)
ESOP shares committed to be
Released -- -- 14 -- 45 -- -- 59
Change in net unrealized gain on
Investment securities available
for sale, net of income taxes -- -- -- -- -- -- 88 88
Comprehensive Income
Grant of restricted stock under
ISAP -- -- -- -- -- -- -- -- --
Amortization of unearned
ISAP compensation -- -- -- -- -- 24 -- -- 24
-------------------------------------------------------------------------------------------------
Balance at December 31, 1998 2,248,250 $ 22 $21,524 $13,081 $ (1,529) $ (367) $ (2,084) $ 720 $ 31,367
=================================================================================================
Net income -- -- -- 1,770 -- -- -- -- 1,770
Dividends paid -- -- -- (333) -- -- -- -- (333)
Acquisition of treasury stock -- -- -- -- -- -- (2,012) -- (2,012)
ESOP shares committed to be
Released -- -- 62 -- 180 -- -- -- 242
Change in net unrealized gain on
Investment securities available
for sale, net of income taxes -- -- -- -- -- -- (2,017) (2,017)
Comprehensive Income
Grant of restricted stock under
ISAP -- -- (11) -- -- (33) 44 -- --
Amortization of unearned
ISAP compensation -- -- -- -- -- 92 -- -- 92
-------------------------------------------------------------------------------------------------
Balance at December 31, 1999 2,248,250 $ 22 $21,575 $14,518 $ (1,349) $ (308) $ (4,052) $(1,297) $ 29,109
=================================================================================================
<CAPTION>
Comprehensive
Income
---------------
<S>
Balance at September 30, 1996
Net income $756
Sale of common stock
Acquisition of ESOP stock
ESOP shares committed to be
Released
Change in net unrealized gain on
Investment securities available
for sale, net of income taxes 416
-----------
Comprehensive Income $1,172
===========
Balance at September 30, 1997
Net income $600
Dividends paid
Acquisition of treasury stock
ESOP shares committed to be
Released
Change in net unrealized gain on
Investment securities available
for sale, net of income taxes 73
-----------
Comprehensive Income $673
===========
Grant of restricted stock under
ISAP
Amortization of unearned
ISAP compensation
Balance at September 30, 1998
Net income $320
Dividends paid
Acquisition of treasury stock
ESOP shares committed to be
Released
Change in net unrealized gain on
Investment securities available
for sale, net of income taxes 88
-----------
Comprehensive Income $408
===========
Grant of restricted stock under
ISAP
Amortization of unearned
ISAP compensation
Balance at December 31, 1998
Net income $1,770
Dividends paid
Acquisition of treasury stock
ESOP shares committed to be
Released
Change in net unrealized gain on
Investment securities available
for sale, net of income taxes (2,017)
-----------
Comprehensive Income (247)
===========
Grant of restricted stock under
ISAP
Amortization of unearned
ISAP compensation
Balance at December 31, 1999
</TABLE>
See accompanying notes to consolidated financial statements.
-23-
<PAGE>
GSB Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months
Year Ended Ended Years Ended
December 31, December 31, September 30,
------------ ------------ ------------------------
1999 1998 1998 1997
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................... $ 1,770 $ 320 $ 600 $ 756
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation .................................................... 171 44 143 157
Provision for loan losses ....................................... 140 60 70 20
Fair value provision of ESOP & ISAP shares committed to be
Released ....................................................... 314 84 343 67
Gain on sale of mortgage-backed securities-held to maturity ..... -- (27) -- --
Gain on maturity/redemption of investment securities -
available for sale ............................................ -- -- (130) (1)
Net (increase) decrease in other assets ......................... (954) (104) (234) (314)
Net amortization on investment securities - available for sale . 43 15 55 72
Net amortization (accretion) on mortgage - backed
securities - held to maturity .................................. (1) (4) 5 1
Net amortization (accretion) on mortgage - backed
securities - available for sale ................................ 16 6 17 2
Increase (decrease) in accrued expenses and other liabilities .. 573 (608) 589 18
-------- -------- -------- --------
Net cash provided by operating activities ....................... 2,072 (214) 1,458 778
-------- -------- -------- --------
Cash flows from investing activities:
Purchases of mortgage - backed securities
held to maturity .............................................. -- -- -- (405)
Purchases of mortgage - backed securities
available for sale ............................................ -- -- (1,928) (7,108)
Proceeds from principal paydowns of mortgage - backed
securities - held to maturity ................................ 968 880 1,765 1,225
Proceeds from principal paydowns of mortgage - backed
securities - available for sale ............................... 2,307 1,390 3,106 111
Proceeds from maturity and redemption of investment
securities - available for sale ............................... 6,741 3,500 11,486 9,173
Purchase of investment securities - available for sale .......... (24,324) (4,500) (16,316) (12,111)
Proceeds from sale of investment securities
available for sale ............................................ -- -- 183 --
Proceeds from sale of mortgage-backed securities-held to maturity -- 605 -- --
Net (increase) decrease in loans .............................. (30,661) (6,099) (13,045) (7,032)
Capital expenditures ............................................ (87) (96) (644) (194)
Proceeds from sale of other real estate owned ................... -- 94 -- --
-------- -------- -------- --------
Net cash provided (used) by investing activities ................ (45,056) (4,226) (15,393) (16,341)
-------- -------- -------- --------
</TABLE>
(continued on next page)
-24-
<PAGE>
GSB Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<S> <C> <C> <C> <C>
Cash flow from financing activities:
Net increase (decrease) in demand, statement passbook, money
market and NOW deposit accounts .................................. 12,423 5,523 5,326 (459)
Proceeds from borrowings .......................................... 25,000 -- 10,000 2,000
Repayments of borrowings .......................................... -- -- -- (2,000)
Proceeds from issuance of common stock ............................ -- -- -- 22,483
Conversion costs .................................................. -- -- -- (1,036)
Purchase of ESOP stock ............................................ -- -- -- (1,799)
Proceeds of purchased federal funds ............................... 3,600 -- -- --
Purchase of treasury stock ........................................ (2,013) (555) (2,020) --
Dividends ......................................................... (332) (65) (135) --
Increase (decrease) in advances from borrowers for taxes
and insurance .................................................... 204 173 64 8
-------- -------- -------- --------
Net cash provided by ( used in) financing activities .............. 38,882 5,076 13,235 19,197
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents .............. (4,102) 636 (700) 3,634
Cash and cash equivalents at beginning of year .................... 8,254 7,618 8,318 4,684
-------- -------- -------- --------
Cash and cash equivalents at end of year .......................... $ 4,152 $ 8,254 $ 7,618 $ 8,318
======== ======== ======== ========
Additional Disclosures:
Supplemental disclosures of cash flows information-cash paid during
year for:
Interest on other borrowings ................................. $ 1,335 $ 132 $ 158 $ 24
Income taxes ................................................. 1,445 -- 579 935
Supplemental schedule of non-cash investing activities:
Reduction in loans receivable resulting from the transfer
to real estate owned ............................................ -- -- 115 --
Change in unrealized gains in investment securities -
available for sale ............................................... (2,017) 88 73 416
</TABLE>
See accompanying notes to consolidated financial statements.
-25-
<PAGE>
GSB Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
A. Organization
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. In July 1998, GSB Financial started a
wholly-owned subsidiary (GSB Investment Services, Inc.) to make available,
through an independent provider, investment advisory and full brokerage
services. To date, the principal operations of GSB Financial Corporation and
subsidiaries (the "Company") have been those of the Bank.
The Bank provides banking services to individual and corporate customers,
with its business activities concentrated in Orange County, New York.
A substantial portion of the Bank's loans are secured by real estate
located in Orange County in New York State. Accordingly, the ultimate
collectability of a substantial portion of the Bank's loan portfolio is
dependent upon market conditions in that market area. In addition, other real
estate owned, if any is also generally located in Orange County in New York
State.
The following is a description of the more significant policies the Company
follows in preparing and presenting its consolidated financial statements:
B. Basis of Financial Statement Presentation
The accompanying consolidated financial statement includes the accounts of
GSB Financial and its wholly owned subsidiaries, Goshen Savings Bank and GSB
Investment Services, Inc. The consolidated financial statements have been
prepared in conformity with generally accepted accounting principles.
Significant intercompany transactions and amounts have been eliminated.
C. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties.
While management uses available information to recognize losses on loans
and foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the Bank's
allowance for losses on loans and foreclosed real estate. Such agencies may
require the Bank to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination.
Because of these factors, it is reasonably possible that the allowance for
losses on loans and
-26-
<PAGE>
GSB Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
foreclosed real estate may change materially in the near term.
D. Cash and Cash Equivalents.
For purposes of the statements of cash flows, cash and cash equivalents
include cash on hand and in banks, interest-earning deposits and Federal funds
sold with original maturities of ninety days or less.
E. Investment and Mortgage-Backed Securities.
Securities Held to Maturity
Government, federal agency, and corporate debt securities that management
has the positive intent and ability to "hold until maturity" are stated at cost,
adjusted for premium amortization and discount accretion, computed on a
straight-line basis over the life of the note to maturity. This method of
amortization differs from the interest method and results in immaterial
differences for reporting purposes.
Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans originated and serviced by issuers of the
securities. Mortgage-backed securities are carried at unpaid principal balances,
adjusted for unamortized premiums and unearned discounts. Premiums and discounts
are amortized on a straight-line basis over the life of the pools to maturity.
This method of amortization differs from the interest method and results in
immaterial differences for reporting purposes.
Securities Available for Sale
Securities to be held for indefinite periods of time including securities
that management intends to use as part of its asset-liability strategy, or that
may be sold in response to changes in interest rates, changes in prepayment
risk, or other similar factors are classified as "available for sale" and are
recorded at fair value with the unrealized appreciation or depreciation, net of
taxes reported separately as a component of equity.
Trading Securities
"Trading securities" include debt securities and equity securities
purchased in connection with the Company's securities trading activities, if
any, and as such are expected to be sold in the near term. The Company has not
held any trading securities during any of the periods covered by these financial
statements.
Gains and losses on the sale of securities are determined using the
specific identification method.
F. Loans Receivable and Allowance for Loan Losses
Loans receivable are stated at the amount of unpaid principal, less net
deferred loan fees and the allowance for loan losses. The allowance for loan
losses is established through a provision for loan losses charged to expense.
Loans are charged against the allowance for loan losses when management believes
that the collectability of the principal is unlikely. The allowance is an amount
that management believes will be adequate to absorb losses on existing loans
that may become uncollectable, based on evaluations of the collectability of
loans and prior loan loss experience. The evaluations take into consideration
such factors as changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans and current economic
conditions that may affect the borrowers' ability to pay.
Accrual of interest is discontinued on a loan when management believes that
the borrowers' financial condition is such that collection of interest is
doubtful. This generally occurs when payment of principal or interest is past
due three months or more and there is no insurance or guaranty as to payment.
A loan is considered impaired when, based on current information and
events, it is probable that the
-27-
<PAGE>
GSB Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company will be unable to collect all amounts due according to the contractual
terms of the loan agreement. The Company measures impairment of a loan based on
the present value of expected future cash flows discounted at the loan's
effective interest rate or at the loan's observable market price, or the fair
value of the collateral if the loan is collateral dependent. If the measure of
the impaired loan is less than the recorded investment in the loan, the Company
records a valuation allowance to recognize the impairment, with a corresponding
charge to bad debt expense. These rules regarding impaired loans apply to all
loans that are identified for evaluation of impairment, except for, among
others, large groups of smaller-balance homogenous loans, such as residential
mortgage loans and consumer installment loans, that are collectively evaluated
for impairment and loans that are measured at fair value or the lower of cost or
fair value.
An insignificant payment delay, which is defined by the Company as up to 90
days, will not cause a loan to be classified as impaired. In addition, a loan is
not considered impaired when payments are delayed but the Company expects to
collect all amounts due, including accrued interest for the period of delay.
The Company does not aggregate impaired loans for evaluation purposes.
Payments received on impaired loans are applied first to accrued interest, if
any, and then to principal.
G. Banking House and Equipment.
Land is carried at cost. Banking house, furniture, fixtures and equipment
are carried at cost, less depreciation. Depreciation is calculated using the
straight-line method based upon the estimated useful lives of the related
assets. Maintenance and repairs are expensed as incurred while major additions
and improvements are capitalized. Gains and losses on dispositions are included
in current operations.
H. Real Estate Owned.
Real estate owned includes assets received from foreclosure and
in-substance foreclosures. The Company classifies a loan as an in-substance
foreclosure when the Company has taken possession of the collateral regardless
of whether formal foreclosure proceedings have taken place.
Foreclosed assets, including in-substance foreclosures, are recorded on an
individual asset basis at net realizable value which is the lower of fair value
minus estimated costs to sell or "cost" (defined as the fair value at initial
foreclosure). When a property is acquired or identified as in-substance
foreclosure, the excess of the loan balance over fair value is charged to the
allowance for loan losses. Subsequent write-downs to carry the property at fair
value less costs to sell are included in non-interest expense. Costs incurred to
develop or improve properties are capitalized, while holding costs are charged
to expense.
The Company had no real estate owned from foreclosure or in-substance
foreclosure at December 31, 1999 and none in 1998.
I. Income Taxes
The company recognizes deferred tax assets and liabilities to reflect the
anticipated future tax consequences of the differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized as income or
expense in the period that the change in tax rates is enacted.
-28-
<PAGE>
GSB Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
J. Off-Balance-Sheet Risk
In the normal course of business, the Company is a party to certain
financial instruments with off-balance-sheet risk such as commitments to extend
credit and unused lines of credit. The Company's policy is to record such
instruments when funded.
K. Earnings Per Share.
Earnings per share is calculated based upon the weighted average number of
shares outstanding from the date of the Conversion, July 9, 1997 through
December 31, 1999, adjusted for common stock equivalents that have a dilutive
effect on the per share data. The weighted average number of shares outstanding
for the period ending December 31, 1999 and 1998, and September 30, 1998 were
1,874,670, 1,944,564 and 2,043,484, respectively.
L. Advertising.
Advertising costs are generally charged to operations in the year incurred.
Advertising expense was $115,623, $31,138 and $99,936, $72,101 for the periods
ended December 31, 1999, 1998 and September 30, 1998, 1997, respectively.
M. Comprehensive Income
The Company adopted SFAS No. 130 "Reporting Comprehensive Income" in 1998.
All comparative financial statements provided for earlier periods have been
reclassified to reflect application of the provisions of this Statement.
Comprehensive income includes net income and all other changes in equity
during a period except those resulting from investment by owners and
distributions to owners. Other comprehensive income includes revenues, expenses,
gains, and losses that under generally accepted accounting principles are
included in comprehensive income but excluded from net income.
Comprehensive income and accumulated other comprehensive income are
reported net of related income taxes. Accumulated other comprehensive income for
the Company consists solely of unrealized holding gains or losses on
available-for-sale securities.
N. Accounting Pronouncements
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities" which establishes requirements for the
proper accounting, reporting and financial statement presentation of derivative
instruments and hedging activities. Derivative instruments must be reflected in
a company's financial statements separate from any hedging or similar
transaction designed to reduce the risks of owning the derivative instrument. We
do not invest in derivative instruments and we have no plans to do so in the
foreseeable future. Therefore, SFAS 133 is not expected to have any effect on
the financial disclosure or our financial condition. SFAS 133 also permits
certain reclassifications of securities among the trading, available for sale
and held to maturity classifications. We do not intend to reclassify any
securities pursuant to SFAS 133. In May 1999, this statement was delayed by the
FASB to fiscal years beginning after June 15, 2000.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." SFAS No. 134 conforms the
subsequent accounting for securities retained after the securitization of
mortgage loans by
-29-
<PAGE>
GSB Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
a mortgage banking enterprise with the subsequent accounting for securities
retained after the securitization of other types of assets by a nonmortgage
banking enterprise. SFAS No. 134 is effective for fiscal years beginning after
December 15, 1998 and will not impact the Company's accounting or disclosure.
O. Reclassification.
Amounts in the prior periods' financial statements are reclassified
whenever necessary to conform to current period presentations.
NOTE 2. CONVERSION TO STOCK OWNERSHIP.
On July 9, 1997, GSB Financial sold 2,248,250 shares of common stock at
$10.00 per share to depositors and employees of the Bank and to the Company's
Employee Stock Ownership Plan (the "ESOP"). Net proceeds from the sale of stock
of GSB Financial, after deducting conversion expenses of approximately $1.0
million, were $21.4 million and are reflected as common stock and additional
paid-in-capital in the accompanying September 30, 1998 consolidated statement of
financial conditions. The Company utilized $10.7 million of the net proceeds to
acquire all of the capital stock of the Bank.
As part of the conversion, the Bank established a liquidation account for
the benefit of eligible depositors who continue to maintain their deposit
accounts in the Bank after conversion. In the unlikely event of a complete
liquidation of the Bank, each eligible depositor will be entitled to receive a
liquidation distribution from the liquidation account in the proportionate
amount of the then current adjusted balance for deposit accounts held before
distribution may be made with respect to the Bank's capital stock. The Bank may
not declare or pay a cash dividend to GSB Financial on, or repurchase any of its
capital stock if the effect thereof would cause the retained earnings of the
Bank to be reduced below the amount required for the liquidation account. Except
for such restrictions, the existence of the liquidation account does not
restrict the use or application of retained earnings.
The Bank's capital exceeds all of the fully phased-in capital regulatory
requirements. The Office of Thrift Supervision ("OTS") regulations provide that
an institution that exceeds all fully phased-in capital requirements before and
after a proposed capital distribution could, after prior notice but without the
approval by the OTS, make capital distributions during the calendar year of up
to 100% of its net income to date during the calendar year plus the amount that
would reduce by one-half its "surplus capital ratio" (the excess capital over
its fully phased-in capital requirements) at the beginning of the calendar year.
Unlike the Bank, GSB Financial is not subject to these regulatory
restrictions on the payment of dividends to its stockholders.
-30-
<PAGE>
GSB Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENT SECURITIES - AVAILABLE FOR SALE.
The following is a summary of securities available for sale:
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
United States Government Agencies $40,743 $ -- $ 3,034 $37,709
Corporate Debt Obligations ...... 4,051 5 5 4,051
Equity Securities ............... 4,162 949 -- 5,111
------- ------- ------- -------
$48,956 $ 954 $ 3,039 $46,871
======= ======= ======= =======
<CAPTION>
December 31, 1998
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
United States Treasury .......... $ 1,001 $ 2 $ -- $ 1,003
United States Government Agencies 20,769 45 56 20,758
Corporate Debt Obligations ...... 6,827 91 -- 6,918
Equity Securities ............... 2,816 1,121 -- 3,937
------- ------- ------- -------
$31,413 $ 1,259 $ 56 $32,616
======= ======= ======= =======
<CAPTION>
September 30, 1998
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
United States Treasury .......... $ 1,001 $ 5 $ -- $ 1,006
United States Government Agencies 18,274 188 -- 18,462
Corporate Debt Obligations ...... 8,338 130 -- 8,468
Foreign Debt Obligations ........ -- -- -- --
Equity Securities ............... 2,816 722 -- 3,538
------- ------- ------- -------
$30,429 $ 1,045 $ -- $31,474
======= ======= ======= =======
</TABLE>
The amortized cost and approximate fair value of securities available for sale
at December 31, 1999, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because certain issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
-31-
<PAGE>
GSB Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
---------------------------------------
Amortized Cost Estimated Fair Value
-------------- --------------------
(In Thousands)
Due within one year ................. $ 4,508 $ 4,445
Due one year to five years .......... 1,498 1,458
Due five years to ten years ......... 5,004 4,755
Due over ten years .................. 37,946 36,213
------- -------
Total ............................... $48,956 $46,871
======= =======
Proceeds from the sale of securities available for sale were approximately
$0, and $0 during December 31, 1999, and the three months ended December 31,
1998 and $183,000 during the year ended September 30, 1998, respectively, which
resulted in gross realized gains of approximately $0 and $0 and $130,000,
respectively.
NOTE 4. FEDERAL HOME LOAN BANK STOCK.
As a member of the Federal Home Loan Bank ("FHLB") system, the Bank is
required to maintain a minimum investment in FHLB stock. The current investment
exceeds the required level at December 31, 1999. Any excess may be redeemed by
the Bank or called by the FHLB at par. At its discretion, the FHLB may declare
dividends on this stock. The Bank has $2.1 million invested in FHLB stock at
December 31, 1999, which is included in Equity Securities in Note 3 and is
carried at cost due to the fact that it is classified as a non-marketable
restricted investment.
NOTE 5. MORTGAGE BACKED SECURITIES - HELD TO MATURITY.
Mortgage backed securities held to maturity at December 31, 1999 and 1998,
and September 30, 1998, consists of Federal National Mortgage Association
("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC") and Government
National Mortgage Association ("GNMA") securities and are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gains Losses Value
--------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Mortgage Backed Securities ...... $ 1,471 $ 5 $ 21 $ 1,455
======= ======= ======= =======
<CAPTION>
December 31, 1998
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gains Losses Value
--------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Mortgage Backed Securities ...... $ 2,427 $ 32 $ 7 $ 2,452
======= ======= ======= =======
</TABLE>
-32-
<PAGE>
GSB Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
September 30, 1998
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gains Losses Value
--------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Mortgage Backed Securities ...... $ 3,881 $ 91 $ 7 $ 3,965
======= ======= ======= =======
</TABLE>
The amortized cost and approximate fair market value of mortgage backed
securities held to maturity at December 31, 1999, by contractual maturity, are
shown below. Actual maturities will differ from contractual maturities because
borrowers may prepay the underlying loans or issuers may have the right to call
or prepay obligations with or without call or prepayment penalties.
December 31, 1999
------------------------------------
Amortized Cost Estimated Fair Value
-------------- --------------------
(In Thousands)
Due within one year ...................... $ -- $ --
Due one year to five years ............... 801 783
Due five to ten years .................... -- --
Due after ten years ...................... 670 672
------ ------
Total .................................... $1,471 $1,455
====== ======
Proceeds from the mortgage backed securities held to maturity were
approximately $0, and $605,000 during December 31, 1999, and the three months
ended December 31, 1998 and $0 during the year ended September 30, 1998,
respectively, which resulted in gross realized gains of approximately $0 and
$27,000 and $0, respectively.
NOTE 6. MORTGAGE BACKED SECURITIES - AVAILABLE FOR SALE.
Mortgage backed securities available for sale at December 31, 1999 and
1998, and September 30, 1998, consists of FNMA, FHLMC and GNMA securities and
are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gains Losses Value
--------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Mortgage Backed Securities ...... $ 2,084 $ -- $ 80 $ 2,004
======= ======= ======= =======
<CAPTION>
December 31, 1998
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gains Losses Value
--------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Mortgage Backed Securities ...... $ 4,401 $ 12 $ 16 $ 4,397
======= ======= ======= =======
</TABLE>
-33-
<PAGE>
GSB Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
September 30, 1998
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gains Losses Value
--------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Mortgage Backed Securities ...... $ 5,797 $ 29 $ 22 $ 5,804
======= ======= ======= =======
</TABLE>
The amortized cost and approximate fair market value of mortgage backed
securities available for sale at December 31, 1999, by contractual maturity, are
shown below. Actual maturities will differ from contractual maturities because
borrowers may prepay the underlying loans or issuers may have the right to call
or prepay obligations with or without call or prepayment penalties.
December 31, 1999
------------------------------------
Amortized Cost Estimated Fair Value
-------------- --------------------
(In Thousands)
Due within one year ...................... $ -- $ --
Due one year to five years ............... -- --
Due five to ten years .................... 380 376
Due after ten years ...................... 1,704 1,628
------ ------
Total .................................... $2,084 $2,004
====== ======
NOTE 7. LOANS RECEIVABLE, NET.
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
Year Three Months Year
Ended Ended Ended
December 31, December 31, September 30,
------------ ------------ -------------
1999 1998 1998
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
Loans Secured by Real Estate
One to four family residential ........ $ 100,206 $ 77,094 $ 73,802
Commercial real estate ................ 9,617 3,404 1,820
Home equity loans ..................... 3,153 2,704 2,365
--------- --------- ---------
Total Loans Secured by Real Estate 112,976 83,202 77,987
--------- --------- ---------
Other Loans
Loans on savings accounts ............. 74 110 115
Property improvement loans ............ 162 108 103
Commercial loan ....................... 1,818 1,024 170
Consumer and other loans .............. 526 509 502
--------- --------- ---------
Total Other loans ................ 2,580 1,751 890
--------- --------- ---------
Total Loans Receivable ........... 115,556 84,953 78,877
Less:
Deferred loan fees ............... (68) (15) (3)
Allowance for losses-loans ....... 351 215 167
--------- --------- ---------
Loans Receivable, Net ............ $ 115,273 $ 84,753 $ 78,713
========= ========= =========
</TABLE>
-34-
<PAGE>
GSB Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the past the Bank sold loans to the Federal National Mortgage
Association, with the Bank retaining the servicing for such loans. The Bank sold
no loans during the period ended December 31, 1999 and 1998, and September 30,
1998. As a result of sales in prior years, loans, which are serviced by the
Bank, which are not included in the statement of condition, were $5.5 million,
$5.8 million and $6.0 million for the respective time periods.
NOTE 8. ALLOWANCE FOR LOAN LOSSES.
Activity in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
Year Three Months Year Year
Ended Ended Ended Ended
December 31, December 31, September 30, September 30,
------------ ------------ ------------- -------------
1999 1998 1998 1997
---------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Balance at Beginning of Year $ 215 $ 167 $ 139 $ 123
Provision charged to
operations ............. 140 60 70 20
Loans charged off
Real Estate ............ -- -- (43) --
Other loans ............ (5) (12) -- (14)
Recoveries
Real Estate ............ -- -- -- --
Other loans ............ 1 -- 1 10
---------- ---------- ---------- ----------
Balance at End of Year ..... $ 351 $ 215 $ 167 $ 139
========== ========== ========== ==========
</TABLE>
The following table sets forth information with regard to non-accrual
loans:
<TABLE>
<CAPTION>
At December 31, At September 30,
--------------------------- ----------------
1999 1998 1998
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Loans in non-accrual status ............. $ -- $ 92 $ --
========== ========== ==========
</TABLE>
There were no troubled debt restructuring at December 31, 1999, and 1998
and September 30, 1998.
Accumulated interest on non-accrual loans, as shown above, collected and
recognized as interest income for the years ended December 31, 1999, and 1998,
was not material to equity or total interest income.
NOTE 9. BANKING HOUSE AND EQUIPMENT.
Banking House and equipment at December 31, 1999 and 1998, and September
30, 1998 are summarized by major classification as follows:
December 31, September 30,
------------------- --------------
1999 1998 1998
------ ------ ------
(In Thousands)
Land ................................ $1,187 $1,187 $1,187
Buildings and improvements .......... 1,271 1,290 1,274
Furniture, fixtures and equipment ... 310 375 339
------ ------ ------
Banking House and Equipment, Net $2,768 $2,852 $2,800
====== ====== ======
-35-
<PAGE>
GSB Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bank records depreciation expense directly against the cost of the
related asset and does not utilize an accumulated depreciation account. Amounts
charged to depreciation expense were $171,000 and $44,000 for the year ended
December 31, 1999 and the three months ended December 31, 1998, respectively,
and $143,000 for the year ended September 30, 1998.
NOTE 10. ACCRUED INTEREST RECEIVABLE.
A summary of accrued interest receivable as of December 31, 1999 and 1998,
and September 30, 1998 are as follows:
At December 31, At September 30,
------------------- ----------------
1999 1998 1998
------ ------ ------
(In Thousands)
Securities available for sale ........ $ 773 $ 408 $ 517
Investment securities held to maturity 8 13 21
Loans receivable ..................... 534 433 411
------ ------ ------
Total Accrued Interest Receivable .... $1,315 $ 854 $ 949
====== ====== ======
NOTE 11. DEPOSITS.
Deposits are summarized as follows:
At December 31, At September 30,
------------------------- ----------------
1999 1998 1998
Amount Amount Amount
-------- -------- --------
(In Thousands)
TYPE OF ACCOUNTS
Savings Accounts ............ $ 30,923 $ 28,634 $ 28,089
Certificates of deposit ..... 45,677 41,712 39,350
Money market accounts ....... 15,848 12,275 10,958
Now accounts ................ 7,058 5,871 4,932
Demand accounts ............. 6,750 5,341 4,981
-------- -------- --------
$106,256 $ 93,833 $ 88,310
======== ======== ========
The approximate contractual maturities of certificates of deposit accounts
for the twelve month periods subsequent to December 31, 1999, are as follows:
Twelve month periods ended
December 31,
-----------------------------------------------
(In Thousands)
2000................. $ 41,939
2001................. 3,384
2002................. 153
2003................. --
2004................. 201
--------
$ 45,677
========
-36-
<PAGE>
GSB Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1999 and 1998, the aggregate of time deposit accounts with
balances equal to or in excess of $100,000 was approximately $3.1 million and
$2.7 million. Deposits in excess of $100,000 are not Federally insured.
Interest expense on deposits accounts is summarized as follows:
<TABLE>
<CAPTION>
Year Three Months Year Year
Ended Ended Ended Ended
December 31, December 31, September 30, September 30,
------------ ------------ ------------- -------------
1999 1998 1998 1997
---------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Savings .................... $ 927 $ 211 $ 803 $ 822
Certificates of deposit .... 2,023 512 1,948 1,907
Money market accounts ...... 528 109 334 295
Now accounts ............... 141 29 114 101
Escrow ..................... 6 -- -- 3
---------- ---------- ---------- ----------
$ 3,625 $ 861 $ 3,199 $ 3,128
========== ========== ========== ==========
</TABLE>
NOTE 12. BORROWINGS.
Securities sold to Federal Home Loan Bank under agreements to repurchase at
December 31, 1999 are as follows:
Amount Rate Maturity
------ ---- --------
$ 2,000,000 5.40% 12/13/2007
$ 2,000,000 5.12% 04/02/2008
$ 2,000,000 5.29% 04/28/2008
$ 2,000,000 5.23% 05/13/2008
$ 2,000,000 5.60% 12/20/2009
-----------
$10,000,000
===========
Total interest expense on the borrowings under repurchase agreements for
the year ended December 31, 1999 amounted to $526,000 and $132,000 and
$225,000 for the three months ended and the year ended December 31, 1998
and September 30, 1998, respectively. The borrowings are secured by
government agency bonds with a carrying value of approximately $11.4
million. The securities used as collateral for the repurchase agreements
are being held in safekeeping at the FHLB.
Information relating to borrowings under Federal Home Loan Bank of NY
advance and line of credit agreements is summarized as follows:
Average balance during the year............................. $ 17,521,000
Average Interest Rates During the Year...................... 5.41%
Maximum Month-End Balance During the Year................... $ 29,825,000
Total interest expense on the advance and line of credit borrowings for the
year ended December 31, 1999 amounted to $948,000, there were no advances
or line of credit borrowings before 1999.
-37-
<PAGE>
GSB Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bank has a line of credit available with the Federal Home Loan Bank of
New York of $15.8 million, as of December 31, 1999, the Bank had
outstanding borrowing of $8.6 million.
NOTE 13. EARLY RETIREMENT AND EMPLOYEE TERMINATION BENEFITS
On July 15, 1998 the Board of Directors adopted and offered to eighteen
eligible employees a voluntary early retirement and employee termination
program. The eligible employees were required to notify the Bank in writing by
September 30, 1998 their acceptance or rejection of the program. Eleven
employees accepted the program, of which four were executive officers. The
voluntary program expense consists of enhanced retirement benefits and severance
pay, which amounted to $699,000.00. This amount has been recorded as an expense
in the Statement of Operations for the year ended September 30, 1998, and as an
accrued liability within the Statement of Condition of September 30, 1998.
NOTE 14. EMPLOYEE BENEFITS.
Retirement Plans:
A. Pension Plan
The Bank has a non-contributory defined benefit pension plan covering
substantially all of its employees. Current and past service pension costs are
funded as accrued. The Bank has recorded pension expense for this period in
accordance with SFAS #87.
The following table sets forth the plan's funded status as of December 31,
1999 and September 30, 1998:
<TABLE>
<CAPTION>
December 31, September 30,
1999 1998
------- -------
(In Thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation ................................... $ 1,077 $ 3,615
======= =======
Projected benefit obligation for service rendered to date ........ $(1,205) $(3,732)
Plan assets at fair value ........................................ 1,343 3,495
------- -------
Plan assets in excess of projected benefit ....................... 138 (237)
Unrecognized net (gain) loss from past experience
different from that assumed and effects of changes in
assumptions ...................................................... (137) --
Prior service cost not yet recognized in net periodic pension cost 5 7
Amount contributed during year ................................... 60 --
------- -------
(Accrued) prepaid pension cost ................................... $ 66 $ (230)
======= =======
</TABLE>
-38-
<PAGE>
GSB Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net pension cost for December 31, 1999 and September 30, 1998 included the
following components:
December 31, September 30,
1999 1998
----- -----
(In Thousands)
Service Costs - Benefits
Earned during the period ......................... $ 42 $ 87
Interest cost on projected benefit obligation .... 83 209
Return on plan assets ............................ (76) (282)
Amortization of unrecognized transition asset .... -- (17)
Amortization of unrecognized loss ................ -- --
Amortization of past service liability ........... 3 4
Curtailment credit ............................... -- (186)
Settlement charge (credit) ....................... (288) --
Termination benefits ............................. -- 665
----- -----
Total Pension Expense ............................ $(236) $ 480
===== =====
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefits obligation were 7.75% and 5.50% respectively for December 31,
1999 and 6.50% and 4.50% respectively for September 30, 1998.
B. Profit Sharing Plan
The Bank maintains a profit sharing trust retirement plan (a defined
contribution plan) which covers all eligible employees and includes an
employees' thrift savings plan established under the provisions of Internal
Revenue Code Section 401(k). Profit sharing contributions will be made as a
matching of the employee's voluntary before-tax contributions up to a maximum of
three percent of the individual employees' salary. The employer may, from time
to time, change the plan to provide for a different matching contribution.
Employees will be notified of any change made. The Bank's contributions to the
profit sharing retirement plan amounted to $60,291 for December 31, 1999 and
$30,227, $26,569 for the fiscal years ended September 30, 1998, 1997,
respectively.
The Bank has every intention of continuing to offer the plan to all
eligible employees. However, the Bank reserves the right to change, amend,
modify, or even terminate the plan, if necessary. Termination of the plan is
unlikely, but should it happen, the eligible employees will receive the full
value of their plan accounts.
C. Other Retirement Benefits
In addition to pension benefits, the Bank provides certain health care and
life insurance benefits for retired employees and their spouses. The
post-retirement health care and life insurance benefits plan was terminated for
persons retiring after December 31, 1998. Eligible employees retired on or
before that date will have benefits paid through the plan under the agreed upon
terms existing at the employee's retirement date. In terminating this plan, the
Bank recovered $134,000 of accrued Post-Retirement Benefit costs.
-39-
<PAGE>
GSB Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a reconciliation of the funded status of the plan at
December 31, 1999 and September 30, 1998:
December 31, September 30,
1999 1998
---- ----
(In Thousands)
Accumulated Postretirement Benefit
Obligation
Retirees ..................................... $685 $769
Active employees fully eligible for benefits . -- --
Other active employees ....................... -- --
---- ----
Total ........................................ 685 769
Unrecognized gain (loss) ..................... -- --
---- ----
Accrued postretirement benefits .............. $685 $769
==== ====
The components of the net periodic postretirement benefit costs are as
follows:
December 31, September 30,
1999 1998
---- ----
(In Thousands)
Service cost ..................................... $ -- $ 20
Interest cost .................................... 48 70
Amortization of unrecognized gain (loss) ......... -- 2
Curtailment credit ............................... -- (147)
---- ----
Total net periodic benefit (credit)/cost ......... $ 48 $(55)
==== ====
A discount rate of 7.25%, an annual rate of salary increases of 5.0% and a
7.5% increase in the assumed health care costs reducing linearly to 5% in the
year 2005, were used to determine the APBO at December 31, 1999 and a discount
rate of 7.75%, an annual rate of salary increases of 5.5% and a 7.5% increase in
the assumed health care costs reducing linearly to 5.0% in the year 2005, were
used to determine the APBO at September 30, 1998.
D. Employee Stock Ownership Plan
Concurrently with the Conversion, the Company adopted an Employee Stock
Ownership Plan (the "ESOP") for substantially all employees. The ESOP purchased
179,860 shares for the Company's stock in the Conversion at a cost of $1,798,600
using the proceeds of a loan provided by the Company. The terms of the loan call
for level principal payments in 40 quarterly installments commencing September
30, 1997, with interest at 7.75% per annum.
Shares purchased by the ESOP were initially pledged as collateral for the
ESOP loan and are allocated among participants annually based proportionately on
the repayment of the ESOP loan and the relative compensation of the
participants. The cost of unallocated shares held in the suspense account is
reflected as a reduction of stockholders' equity.
-40-
<PAGE>
GSB Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company accounts for the ESOP in accordance with the American Institute
of Certified Public Accountant's Statement of Position No. 93-6 "Employees'
Accounting For Stock Ownership Plans" (SOP 93-6). Accordingly, the shares
pledged as collateral are reported as unallocated ESOP shares in shareholders'
equity. As shares are released from collateral, the Company reports compensation
expense equal to the average market price of the shares (during the applicable
service period), and the shares become outstanding for earnings per share
computations. Unallocated ESOP shares are not included in the earnings per share
computations. The Company recorded approximately $243,000 of compensation
expense under the ESOP during the year ended December 31, 1999. The ESOP shares
as of December 31, 1999 were as follows:
Allocated Shares ........................................ 10,908
Shares released for allocation .................... 17,986
Unallocated share ................................. 134,895
---------
163,789
---------
Market Value of unallocated
Shares at December 31, 1999 ...................... 1,618,740
=========
E. Stock Option Plan
The Company's Stock Option Plan for Outside Directors, Officers and
Employees (Stock Option Plan) was approved by the shareholders at the annual
meeting held on February 25, 1998. The purpose of the Stock Option Plan is to
promote the growth and profitability of the Company by providing eligible
directors, certain key officers and employees of the Company, and its affiliates
with an incentive to achieve corporate objectives, and by allowing the Company
to attract and retain individuals of outstanding competence by offering such
individuals and equity interest in the Company.
The Stock Option Plan may grant options not to exceed 224,825 shares, the
shares necessary to fund the Stock Option Plan with Treasury Stock acquisitions.
An option will entitle the holder to purchase one share of common stock at an
exercise price equal to the fair market value on the date of grant, and expire
on the last day of the ten-year period commencing on the date on which the
option was granted. Options under the plan will be designated as either an
Incentive Stock Option or a Non-Qualified Stock Option.
On February 25, 1998, 67,446 shares were awarded at an exercise price of
$15.88 per share, and on April 9, 1998, 10,500 shares were awarded at an
exercise price of $16.75 per share and on May 13, 1999, 8,000 shares were
awarded at an exercise price of $13.00 per share. These shares have a ten-year
term and vest at a rate of 20% per year from their respective grant dates.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plan. Accordingly, no compensation cost has been
recognized for its stock option plans. SFAS No. 123 requires Companies not using
a fair value based method of accounting for employee stock options or similar
plans, to provide pro forma disclosure of net income and earnings per share as
if that method of accounting had been applied. The fair value of each option is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions; the May 13, 1999 grant used an
expected volatility of 37.0%; risk free interest rate of 5.87%, the grants
awarded in fiscal year 1998 used an expected volatility of 37.0% and a risk free
interest rate of 5.17% for the February 25, 1998 grant and 4.93% for the April
9, 1998 grant. The expected lives of the grants are estimated to be seven years.
Pro forma disclosures for the Company for the year ending December 31, 1999, the
three months ended December 31, 1998 and the year ended September 30, 1998 is as
follows:
-41-
<PAGE>
GSB Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
December 31, September 30,
---------------------------- -------------
1999 1998 1998
--------- --------- ---------
Net Income
As Reported .............. $ 1,770 $ 320 $ 600
Pro Forma ................ 1,676 298 551
Earnings Per Share:
As Reported .............. $ 0.94 $ 0.16 $ 0.29
Pro Forma ................ 0.89 0.15 0.27
Because the Company's stock options have characteristics significantly
different from those of traded options for which the Black-Scholes model was
developed, and because changes in the subjective input assumptions can
materially affect the fair value estimate, the existing models, in management's
opinion, do not necessarily provide a reliable single measure of the fair value
of its employee stock options.
A summary of the status of the Company's stock option plans as of December 31,
1999 and changes during the year on that date is presented below:
Weighted Average
Options Shares Exercise Price
------ --------------
Outstanding January 1, 1999 .................. 77,946 $15.99
Granted ...................................... 8,000 $13.00
Exercised .................................... -
Cancelled
Outstanding at Year-End ....................... 85,946 $15.71
Exercisable at Year-End ....................... 17,189 $15.71
Estimated weighted average of fair value of
options granted on February 25, 1998 .......... $9.54
Estimated weighted average of fair value of
options granted on April 9, 19998 ............. $9.52
Estimated weighted average of fair value of
options granted on May 13, 1999 ............... $6.77
F. Incentive Stock Award Plan
On February 25, 1998, the Company's stockholders approved the GSB Financial
Corporation Incentive Stock Award Plan ("ISAP"). The purpose of the plan is to
promote the long-term interests of the company and its stockholders by providing
a stock based compensation program to attract and retain officers and directors.
Under ISAP, 89,930 shares of authorized shares are reserved for the issuance
under the plan.
On February 25, 1998, April 9, 1998, and May 13, 1999, 22,480, 13,000
shares and 2,500 shares, respectively, were awarded under the ISAP. In
connection with the acceptance of the voluntary early termination program by
four executive officers, 7,304 shares of the April 9, 1998 ISAP award were
forfeited. At December 31, 1999, there were 39,726 ISAP awards outstanding, that
vest at 20% annually. The fair market value of the shares awarded under the plan
was $481,000 at the grant dates, and is being amortized to compensation expense
on a straight-line basis over the five year vesting periods. Compensation
expense of $92,000, $24,000 and $57,000 was recorded in the year ended December
31, 1999, the three months ended December 31, 1998,and the year ended September
30, 1998, respectively. The remaining unearned
-42-
<PAGE>
GSB Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
compensation cost of $308,000, $367,000 and $391,000 are shown as a reduction of
shareholders' equity at December 31, 1999 and 1998 and September 30, 1998.
NOTE 15. INCOME TAXES.
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
Year Three Months Year Year
Ended Ended Ended Ended
December 31, December 31, September 30, September 30,
------------ ------------ ------------- -------------
1999 1998 1998 1997
------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C>
Current tax:
Expense .............. $ 980 $ 410 $ 532 $ 922
Deferred tax:
Expense (benefit) .... 91 (196) (131) (482)
------ ------ ------ ------
Income tax expense ... $1,071 $ 214 $ 401 $ 440
====== ====== ====== ======
</TABLE>
Income tax expense for financial reporting purposes is less than the amount
computed by applying the statutory federal income tax rate of 34% to income
taxes for the reasons noted in the table below:
<TABLE>
<CAPTION>
Year Three Months Year Year
Ended Ended Ended Ended
December 31, December 31, September 30, September 30,
------------ ------------ ------------- -------------
1999 1998 1998 1997
------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C>
Expense at statutory
federal tax rate ....... $ 966 $ 182 $ 340 $ 407
Tax-exempt income ...... -- -- -- (2)
State income taxes,
net of federal
tax benefit ......... 177 32 69 83
Other, net ............. (72) -- (8) (48)
------ ------ ------ ------
Income tax expense ..... $1,071 $ 214 $ 401 $ 440
====== ====== ====== ======
Effective tax rate 37.7% 40.1% 40.1% 36.8%
</TABLE>
-43-
<PAGE>
GSB Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1999,
and1998 and September 30, 1998, and 1997 are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
--------------- ----------------
1999 1998 1998 1997
----- ----- ----- -----
(In Thousands)
<S> <C> <C> <C> <C>
Deferred tax assets:
Post retirement employees benefits .............. $ 316 $ 317 $ 308 $ 340
Allowance for loan losses ....................... 136 74 67 55
Mark to market securities tax ................... 389 459 289 330
Accrued pension costs ........................... -- 95 92 --
Other ........................................... 70 34 25 56
----- ----- ----- -----
Total deferred tax assets ....................... 911 979 781 781
----- ----- ----- -----
Deferred tax liabilities:
Depreciation .................................... 35 27 25 32
Prepaid pension costs ........................... 27 -- -- 104
Tax bad debt reserves over the base year ........ 23 35 35 55
----- ----- ----- -----
Total deferred tax liabilities .................. 85 62 60 191
Net deferred tax asset at the end of period ..... 826 917 721 590
Net deferred tax asset at the beginning of period 917 721 590 108
----- ----- ----- -----
Deferred tax benefit for the period ............. $ 91 $(196) $(131) $(482)
===== ===== ===== =====
</TABLE>
In addition to the deferred tax amounts described above, the Company also
had a deferred tax asset of approximately $866,000 and deferred tax liability of
approximately $499,000, $420,000 and $372,000 at December 31, 1999, and 1998 and
September 30, 1998 and 1997, respectively, related to the net unrealized losses
and gains on securities available for sale.
The Bank, as a qualifying thrift institution under IRS guidelines, was
entitled to a special deduction for additions to a tax bad debt reserve made on
or before December 31, 1987. The Bank's aggregate reserve at December 31, 1987
was $921,000. This reserve is not required to be recaptured, despite subsequent
changes in the tax laws, so long as the Bank remains a qualified thrift
institution for IRS purposes. Hence, no deferred tax liability has been recorded
under SFAS No. 109 for potential recapture of this reserve.
NOTE 16. COMMITMENTS AND CONTINGENCIES.
A. Legal Proceedings
The Company may, from time to time, be a defendant in legal proceedings
relating to the conduct of its business. In the best judgment of management, the
consolidated financial position of the Company will not be affected materially
by the outcome of any pending legal proceedings.
B. Lease Commitments
The Company leases approximately 105 square feet in an elder care facility
in Goshen, New York, as a branch office at an annual rental of $2,400
terminating on September 30, 2002.
In addition, the Bank has an agreement for data processing services through
February of 2001.
-44-
<PAGE>
GSB Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Approximate annual payments associated with the data processing agreement are
estimated to be $225,000.
C. Off-Balance Sheet Financing
The Bank is a party to certain financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit.
Those instruments involve, to varying degrees, elements of credit risk in excess
of the amount recognized on the statement of financial condition. The contract
amounts of those instruments reflect the extent of involvement the Bank has in
particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the commitments to extend credit is represented by the
contractual notional amount of those instruments. The Bank uses the same credit
policies in making commitments as it does for on-balance-sheet instruments.
Unless otherwise noted, the Bank does not require collateral or other
security to support off-balance-sheet financial instruments with credit risk.
D. Commitments Pending
Contract amounts of financial instruments that represent credit risk are as
follows:
(Unaudited) (Unaudited)
December 31, 1999 December 31, 1998
----------------- -----------------
(In Thousands)
Commitments Pending
Mortgage Loans ..................... $ 3,721 $ 8,070
Equity Line of Credit:
Available Draw .................... 1,310 1,637
Commitments ....................... 87 158
Commercial Loans .................. 505 1,554
Available Draw .................... 2,303 469
Overdraft Checking ................. 349 209
------- -------
$ 8,275 $12,097
======= =======
The breakdown of fixed rate loan commitments and the corresponding interest
rate range for the periods of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
December 31, 1999 December 31, 1998
----------------- -----------------
(In Thousands)
<S> <C> <C>
First Mortgage Loans ......................... $3,721 $8,070
Home Equity Loans ............................ 27 105
Commercial Loans ............................. 425 1,414
------ ------
Total Fixed Rate Loan Commitments ............ $4,173 $9,589
====== ======
Fixed Rate Commitment Interest Rate .......... 6.38% to 10.25% 6.50% to 8.50%
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being fully drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's credit worthiness on a case-by-case basis. The amount of
-45-
<PAGE>
GSB Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
collateral, if any, required by the Bank upon the extension of credit is based
on management's credit evaluation of the customer. Mortgage and construction
loan commitments are secured by a first lien on real estate. Collateral on
extensions of credit for commercial loans varies but may include accounts
receivable, inventory, property, plant and equipment and income producing
commercial property.
NOTE 17. REGULATORY CAPITAL REQUIREMENTS.
OTS capital regulations require savings institutions to maintain minimum
levels of regulatory capital. Under the regulations in effect at December 31,
1999, the Bank was required to maintain a minimum ratio of tangible capital to
total assets of 1.5%; a minimum leverage ratio of core (Tier 1) capital to total
adjusted tangible assets of 3.0%; and a minimum ratio of total capital (core
capital and supplementary capital) to risk-weighted assets of 8%, of which 4.0%
must be core (Tier 1) capital.
The prompt corrective action regulations define specific capital categories
based on institution's capital ratios. The capital categories in declining order
are "well capitalized", "adequately capitalized", "undercapitalized",
"significantly undercapitalized", and "critically undercapitalized". The OTS is
required to take certain supervisory actions with respect to an undercapitalized
institution. Such actions could have a direct material effect on an
institution's financial statements. Generally an institution is considered well
capitalized if it has a core (Tier 1) capital ratio of at least 5.0% (based on
average total assets; a core (Tier 1) risk-based capital ratio of at least 6.0%;
and a total risk-based capital of at least 10.0%.
Management believes that, at December 31, 1999, the Bank meets all capital
adequacy requirements to which it is subject.
The Bank's actual capital amounts and ratios at December 31, 1999, compared
to the OTS minimum capital adequacy requirements and the OTS requirements for
classification as a well capitalized institution are summarized below. OTS
capital regulations apply to the Bank only, the OTS does not impose minimum
capital requirements on the Company.
<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 ....... $24,525 14.05% 2,618 1.50% -- --
Tier 1 (Core) Capital... 24,525 14.05% 5,235 3.00% $ 8,725 5.0%
Risk Based Capital:
Tier 1 ................. 24,525 28.39% -- -- 5,182 6.0%
Total .................. 24,876 28.80% 6,910 8.00% 8,637 10.0%
</TABLE>
NOTE 18. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS.
Fair value estimates are made at a specific point in time and are based on
existing on and off-balance sheet financial instruments. Such estimates are
generally subjective in nature and dependent upon a number of significant
assumptions associated with each financial instrument or group of financial
instruments, including estimates of discount rates, risks associated with
specific financial instruments, estimates of future cash flows, and relevant
available market information. Changes in assumptions could significantly affect
the estimates. In addition, fair value estimates do not reflect the value of
anticipated future business, premiums or discounts that
-46-
<PAGE>
GSB Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
could result form offering for sale at one time the Bank's entire holdings of a
particular financial instrument, or the tax consequences of realizing gains or
losses on the sale of financial instruments.
The significant assumptions utilized by the Company in estimating the fair
value of its financial instruments are as follows:
Cash and short-term investments. Cash and short-term investments are by
definition short-term and do not present any unanticipated credit issues.
Therefore, the carrying amount is a reasonable estimate of fair value.
Securities. The estimated fair values of securities by type are provided in
Note 3 to the financial statements. These are based on quoted market prices,
when available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
Mortgage-backed securities The fair value of mortgage-backed securities is
estimated based on bid prices published in financial newspapers or bid
quotations received from securities dealers.
Loans. The Bank's management has determined that the carrying amount of the
loan portfolio approximates the estimated fair value. Quoted market prices are
not available for the loan portfolio. The cost of determining the fair values of
the loan portfolio would be excessive.
Deposits. Under SFAS 107, the fair value of deposits with no stated
maturity is equal to the amount payable on demand. Therefore, the fair value
estimates for these deposits do not reflect the benefits that the Bank receives
from the low-cost, long-term funding they provide. These benefits are
significant. Quoted market prices are not available for fixed rate time
deposits. The estimated fair value of these financial instruments has not been
determined through an independent valuation because the cost to do so would be
excessive. Management feels that the carrying amount of fixed rate deposits are
reasonable estimates of the fair values of these financial instruments.
Off-Balance Sheet Instruments. The estimated fair value of commitments to
extend credit is estimated using fees currently charged for similar arrangements
adjusted for changes in interest rates and credit risk that has occurred
subsequent to origination. Because the Company believes that the credit risk
associated with available but undisbursed commitments would essentially offset
the fees that could be recognized under similar arrangements, and because the
commitments are either short term in nature or subject to immediate repricing,
no fair value has been assigned to these off-balance sheet commitments.
The following is a summary of the carrying values and estimated fair values
of the Company's financial instruments at December 31, 1999 and September 30,
1998:
<TABLE>
<CAPTION>
December 31, 1999 September 30, 1998
----------------------------- ------------------------------
Carrying Estimated Fair Carrying Estimated Fair
Amount Value Amount Value
-------- -------------- -------- --------------
(In Thousands)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and Cash Equivalents ... $ 4,152 $ 4,152 $ 7,618 $ 7,618
Securities Available for Sale 46,871 46,871 31,474 31,474
Mortgage Backed Securities-
Held to Maturity ............ 1,471 1,455 3,881 3,965
Available for Sale .......... 2,004 2,004 5,804 5,804
Loans Receivable ............ 78,713 78,713 78,713 78,713
Financial Liabilities:
Deposits .................... 106,256 106,256 88,310 88,310
</TABLE>
-47-
<PAGE>
GSB Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. PARENT COMPANY FINANCIAL INFORMATION.
GSB Financial began operations on July 9, 1997, in conjunction with the
Bank's mutual-to-stock conversion and GSB Financial's initial public offering of
its common stock. GSB Financial's statement of financial condition as of
December 31, 1999 and December 31, 19998 and September 30, 1998. The related
statements of operations and cash flows for the year ended December 31, 1999 and
the three months ended December 31, 1998 and the year ended September 30, 1998
are as follows:
Statement of Financial Condition
<TABLE>
<CAPTION>
Three Months
Year Ended Ended Year Ended
December 31, December 31, September 30,
1999 1998 1998
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Assets:
Cash and due from banks ......................................... $ 1,254 $ 1,644 $ 1,255
Investment securities available for sale ........................ 3,261 4,503 5,547
Mortgage-backed securities available for sale ................... 0 275 766
Loans, net ...................................................... 1,349 1,529 1,574
Accrued interest receivable ..................................... 39 48 132
Equity in net assets of subsidiaries ............................ 23,512 23,107 22,796
Other Assets .................................................... 154 374 18
-------- -------- --------
Total Assets .................................................. $ 29,569 $ 31,480 $ 32,088
======== ======== ========
Liabilities and Stockholders' Equity
Liabilities:
Accrued expenses and other liabilities .......................... $ 318 $ 254 $ 606
-------- -------- --------
Stockholders' Equity
Preferred stock, $.01 par value; authorized 500,000 shares ...... $ -- $ -- $ --
Common stock, $.01 par value; authorized 4,500,000; 2,248,250
shares issued at September 30, 1997 .......................... 22 22 22
Additional paid-in capital ...................................... 21,402 21,424 21,553
Retained earnings ............................................... 12,362 12,284 11,858
Net unrealized loss on securities available for sale (net of tax) (142) (11) 12
Treasury stock .................................................. (4,393) (2,493) (1,963)
-------- -------- --------
Total Stockholders' Equity .................................... 29,251 31,226 31,482
-------- -------- --------
Total Liabilities and Stockholders' Equity .................... $ 29,569 $ 31,480 $ 32,088
======== ======== ========
</TABLE>
-48-
<PAGE>
GSB Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statement of Operations
<TABLE>
<CAPTION>
Three Months
Year Ended Ended Year Ended
December 31, December 31, September 30,
1999 1998 1998
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Interest Income ................................................ $ 414 $ 98 $ 520
Non-interest expense ........................................... 402 95 378
------ ------ ------
Income before income taxes and equity in undistributed
earnings of subsidiaries ................................... 12 3 142
Income tax expense ............................................. 5 1 58
------ ------ ------
Income before equity in undistributed earnings of subsidiaries 7 2 84
Equity in undistributed earnings of subsidiaries ............... 1,763 318 516
------ ------ ------
Net Income ................................................ $1,770 $ 320 $ 600
====== ====== ======
</TABLE>
Statement of Cash Flows
<TABLE>
<CAPTION>
Three Months
Year Ended Ended Year Ended
December 31, December 31, September 30,
1999 1998 1998
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ...................................................................... $ 1,770 $ 320 $ 600
Equity in undistributed earnings of subsidiaries ................................ (1,763) (318) (516)
Fair value provision of ISAP shares committed to be released .................... 92 24 57
Increase (decrease) in accrued interest receivable .............................. 9 85 47
Increase in other assets ........................................................ 309 (289) (24)
Net amortization on investment securities-available for sale .................... 22 5 34
Net amortization on mortgage-backed securities available for sale ............... -- 1 8
Increase in accrued expenses and other liabilities .............................. 61 (355) 510
------- ------- -------
Net cash provided (used) by operating activities ........................... 500 (527) 716
------- ------- -------
Cash flows from investing activities:
Purchase of investment securities-available for sale ............................ $(1,000) $ (500) $(2,000)
Investment in common stock subsidiaries ......................................... -- -- (50)
Proceeds from principal paydowns of mortgage-backed securities-available for sale 275 490 1,235
Proceeds from maturity and redemption of investment securities-available for sale 2,000 1,500 1,600
Net (increase) decrease in loans to ESOP ........................................ 180 45 180
------- ------- -------
Net cash provided (used) by investing activities ........................... 1,455 1,535 965
------- ------- -------
Cash flows from financing activities:
Purchase of treasury stock ...................................................... (2,012) (555) (2,020)
Dividends ....................................................................... (333) (64) (135)
------- ------- -------
Net cash provided by (used in) financing activities ........................ (2,345) (619) (2,155)
------- ------- -------
Net increase (decrease) in cash and cash equivalents ............................ (390) 389 (474)
Cash and cash equivalents at beginning of year .................................. 1,644 1,255 1,729
------- ------- -------
Cash and cash equivalents at end of year ........................................ $ 1,254 $ 1,644 $ 1,255
======= ======= =======
</TABLE>
-49-
<PAGE>
GSB Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Year Ended December 31, 1999 Quarter Quarter Quarter Quarter
- ---------------------------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C>
Quarterly Operating Data
Interest income $2,311 $2,567 $2,865 $2,966
Interest expense 1,030 1,178 1,388 1,503
------ ------ ------ ------
Net interest income 1,281 1,389 1,477 1,463
Provision for loan losses 15 20 20 85
Other non-interest income 72 77 78 394
Non-interest expense 861 875 896 619
------ ------ ------ ------
Income before taxes 477 571 639 1,153
Income tax expense 184 228 256 402
------ ------ ------ ------
Net income $ 293 $ 343 $ 383 $ 751
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth Dec. 98
Year Ended September 30, 1998 Quarter Quarter Quarter Quarter Quarter
- ----------------------------- ------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Quarterly Operating Data
Interest income $ 1,996 $ 1,945 $ 2,087 $ 2,192 $ 2,264
Interest expense 778 771 893 982 993
------- ------- ------- ------- -------
Net interest income 1,218 1,174 1,194 1,210 1,271
Provision for loan losses 20 10 10 30 60
Other non-interest income 147 57 57 189 301
Non-interest expense 852 856 945 1,522 978
------- ------- ------- ------- -------
Income before taxes 493 365 296 (153) 534
Income tax expense 198 144 121 (62) 214
------- ------- ------- ------- -------
Net income $ 295 $ 221 $ 175 $ (91) $ 320
======= ======= ======= ======= =======
</TABLE>
-50-
<PAGE>
STOCKHOLDERS' INFORMATION
CORPORATE OFFICE TRANSFER AGENT AND REGISTRAR
GSB Financial Corporation Registrar and Transfer Company
1 South Church Street 10 Commerce Drive
Goshen, New York 10924 Cranford, NJ 07016-3572
(914) 294-6151
SPECIAL COUNSEL
COMMON STOCK Serchuk & Zelermyer, LLP
81 Main Street
The common stock of GSB White Plains, NY 10601
Financial Corporation is
traded on the NASDAQ INDEPENDENT AUDITORS
Stock Market under the
symbol "GOSB" Nugent and Haeussler, P.C.
101 Bracken Road
Montgomery, NY 12549
The approximate number of
stockholders of record was
424 at March 3, 2000.
FORM 10K
GSB Financial Corporation common stock
was issued at $10.00 per share in GSB Financial Corporation will file an
connection with the Company's initial Annual Report on Form 10K for fiscal
public offering on July 9, 1997. The year 1999. Stockholders may obtain a
following table shows the range of high copy free of charge by Writing to:
and low sale prices for each quarterly
period since the Company began trading Barbara A. Carr, Secretary
in July. GSB Financial Corporation
1 South Church Street
Goshen, NY 10924
1999 High Low Dividend
---- ---- --- --------
December 31, 1999 $12.75 $11.63 $ 0.05
September 30, 1999 $14.50 $13.00 $ 0.04
June 30, 1999 $14.25 $12.75 $ 0.04
March 31, 1999 $14.63 $13.75 $ 0.03
1998
----
December 31, 1998 $14.50 $10.69 $ 0.03
September 30, 1998 $17.00 $ 8.31 $ 0.03
June 30, 1998 $17.75 $16.50 $ 0.03
March 31, 1998 $17.50 $15.25 --
1997
----
December 31, 1997 $18.94 $14.50 --
September 30, 1997 $17.13 $14.00 --
-51-
<PAGE>
GSB FINANCIAL CORPORATION and GOSHEN SAVINGS BANK DIRECTORS
THOMAS V. GUARINO
Chairman of the Board
GSB Financial Corp. and
President, Goshen Savings Bank
and President, Hudson Valley
Investment Advisors, Inc.
CLIFFORD E. KELSEY, JR.
Retired President and Chief Executive Officer,
GSB Financial Corp. and
Goshen Savings Bank
HERBERT C. MUELLER
Retired Veterinarian
ROY L. LIPPINCOTT
Retired President Lippincott Funeral
Home Inc. and Lippincott Funeral Chapel
STEPHEN O. HOPKINS
Representative American La France
Corp. and S.V.I. Trucks
GENE J. GENGEL
Executive Director,
Inspire - the CP Center
GSB FINANCIAL CORPORATION
OFFICERS
STEPHEN W. DEDERICK
Chief Financial Officer and Treasurer
ROLLAND B. PEACOCK, III
Vice President
BARBARA A. CARR
Secretary
-52-
<PAGE>
GOSHEN SAVINGS BANK - OFFICERS
THOMAS V. GUARINO
President
STEPHEN W. DEDERICK
Senior Vice President and Chief Financial Officer
ROLLAND B. PEACOCK, III
Senior Vice President and Senior Lending Officer
BARBARA A. CARR
Vice President and Senior Mortgage Officer
JENNIFER A. TERPSTRA
Operating Officer and Senior Marketing Officer
SUZANNE WATTERS
Assistant Vice President and Security Officer
CHRISTOPHER P. CURCIO
Assistant Vice President
FRANCES COUGHLIN
Branch Manager - Harriman
AMY CUNNINGHAM
Accounting Manager
-53-
EX - 21
Subsidiaries of the Registrant
Exhibit 21.1
Goshen Savings Bank, a federally-chartered savings bank, and GSB Investment
Services, Inc., a New York corporation, are wholly-owned subsidiaries of the
Registrant. The Registrant has no other subsidiaries.
<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> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,052
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 48,875
<INVESTMENTS-CARRYING> 1,471
<INVESTMENTS-MARKET> 1,455
<LOANS> 115,273
<ALLOWANCE> 351
<TOTAL-ASSETS> 176,016
<DEPOSITS> 106,256
<SHORT-TERM> 28,600
<LIABILITIES-OTHER> 2,051
<LONG-TERM> 10,000
0
0
<COMMON> 21,597
<OTHER-SE> 7,512
<TOTAL-LIABILITIES-AND-EQUITY> 176,016
<INTEREST-LOAN> 7,432
<INTEREST-INVEST> 3,277
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 10,709
<INTEREST-DEPOSIT> 3,625
<INTEREST-EXPENSE> 5,099
<INTEREST-INCOME-NET> 5,610
<LOAN-LOSSES> 140
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,251
<INCOME-PRETAX> 2,841
<INCOME-PRE-EXTRAORDINARY> 2,841
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,770
<EPS-BASIC> 0.94
<EPS-DILUTED> 0.94
<YIELD-ACTUAL> 3.65
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 215
<CHARGE-OFFS> 5
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 351
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 351
</TABLE>
