FORM 10-Q.--QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File Number 0-22559
GSB FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 06-1481061
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE SOUTH CHURCH ST., GOSHEN, N.Y. 10924
(Address of principal executive offices) (Zip Code)
(914) 294-6151
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _x_ No __
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Common Shares, $.01 par value 1,984,538
----------------------------- ---------------
(Title of class) (outstanding at August 14, 2000)
<PAGE>
GSB FINANCIAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
------- --------------------- ----
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
June 30, 2000 (Unaudited) and December 31, 1999........................................................ 3
Consolidated Statements of Income for the three and six months ended
June 30, 2000 and 1999 (Unaudited)..................................................................... 4
Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and 1999 (Unaudited)...... 5
Notes to Unaudited Consolidated Interim Financial Statements........................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 7
Quantitative and Qualitative Disclosure about Market Risk.............................................. 14
PART II. OTHER INFORMATION
-------- -----------------
Item 1. Legal Proceedings...................................................................................... 14
Item 6. Exhibits and Reports on Form 8-K....................................................................... 14
Signatures............................................................................................. 18
</TABLE>
2
<PAGE>
GSB Financial Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)
(In thousands except shares and per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks ......................................... $ 3,064 $ 4,052
Federal funds sold .............................................. 100 100
--------- ---------
Cash and cash equivalents ....................................... 3,164 4,152
Investment securities available for sale ........................ 53,116 46,871
Mortgage-backed securities:
Held to maturity (estimated market values of $1,293 and
$ 1,455 at June 30, 2000 and December 31, 1999, respectively) 1,321 1,471
Available for sale ............................................ 1,759 2,004
Loans receivable, net ........................................... 120,624 115,273
Banking house and equipment ..................................... 3,159 2,768
Accrued interest receivable ..................................... 1,490 1,315
Prepaid expenses and other assets ............................... 2,233 2,162
--------- ---------
Total assets ............................................... $ 186,866 $ 176,016
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits ......................................................... $ 108,987 $ 106,256
Mortgagors' escrow deposits ..................................... 727 503
Federal funds purchased .......................................... 3,875 3,600
Borrowings ...................................................... 41,000 35,000
Accrued expenses and other liabilities .......................... 2,888 1,548
--------- ---------
Total liabilities .......................................... $ 157,477 $ 146,907
Commitments and contingent liabilities
Stockholders' Equity
Preferred stock ($0.01 par value; 500,000 shares
authorized; none issued) ..................................... -- --
Common stock ($0.01 par value; 4,500,000 shares authorized;
2,248,250 issued at June 30, 2000 and December 31, 1999) ..... 22 22
Additional paid-in capital ...................................... 21,489 21,575
Retained earnings, substantially restricted ..................... 15,085 14,518
Accumulated other comprehensive income .......................... (1,365) (1,297)
Treasury stock, at cost ......................................... (4,025) (4,052)
Unearned ISAP stock ............................................. (558) (308)
Unallocated ESOP stock .......................................... (1,259) (1,349)
--------- ---------
Total stockholders' equity ................................. $ 29,389 $ 29,109
--------- ---------
Total liabilities and stockholders' equity ................. $ 186,866 $ 176,016
========= =========
</TABLE>
See accompanying notes to consolidated financial statement.
3
<PAGE>
GSB Financial Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except shares and per share amounts)
<TABLE>
<CAPTION>
For the Quarter Ended For the Six Months Ended
June 30, June 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans ............................................. $ 2,222 $ 1,791 $ 4,375 $ 3,404
Federal funds sold ................................ 9 10 16 64
Investment securities ............................. 881 678 1,752 1,215
Mortgage-backed securities ........................ 55 88 113 195
---------- ---------- ---------- ----------
Total interest income ........................... 3,167 2,567 6,256 4,878
INTEREST EXPENSE
Deposit accounts .................................. 1,030 886 2,030 1,750
Other borrowings .................................. 659 292 1,241 458
---------- ---------- ---------- ----------
Total interest expense .......................... 1,689 1,178 3,271 2,208
Net interest income ............................... 1,478 1,389 2,985 2,670
Provision for loan losses ......................... 25 20 50 35
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 1,453 1,369 2,935 2,635
NON-INTEREST INCOME
Service charges on deposit accounts ............... 50 44 94 88
Other income ...................................... 39 33 77 61
Net realized gains on securities .................. 138 -- 138 --
---------- ---------- ---------- ----------
Total non-interest income ....................... 227 77 309 149
NON-INTEREST EXPENSE
Salaries and employee benefits .................... 467 401 894 781
Occupancy and equipment ........................... 85 79 176 173
Data processing expenses .......................... 74 67 152 143
Other non-interest expense ........................ 407 328 709 639
---------- ---------- ---------- ----------
Total non-interest expense ...................... 1,033 875 1,931 1,736
---------- ---------- ---------- ----------
Income before income taxes ........................ 647 571 1,313 1,048
Income tax expense ................................ 245 228 509 412
---------- ---------- ---------- ----------
Net income ........................................ $ 402 $ 343 $ 804 $ 636
========== ========== ========== ==========
Basic earnings per share .......................... $ 0.23 $ 0.18 $ 0.45 $ 0.33
Weighted average shares outstanding - basic ....... 1,781,024 1,895,619 1,786,620 1,910,956
Diluted earnings per share ........................ $ 0.22 $ 0.18 $ 0.44 $ 0.33
Weighted average shares outstanding - diluted ..... 1,809,568 1,911,892 1,806,227 1,925,397
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
GSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
2000 1999
------------ ------------
(In Thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................................... $ 804 $ 636
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation .................................................................... 95 86
Provision for loan losses ....................................................... 50 35
Fair value provision of ESOP & ISAP shares committed to be released ............. 166 161
Gain in maturity/redemption of investment securities available for sale ......... (138) --
Increase (decrease) other assets ................................................ (24) (700)
Net amortization on investment securities - available for sale ................. (5) 25
Net amortization (accretion) on mortgage - backed
Securities - held to maturity ................................................. (5) (7)
Net amortization (accretion) on mortgage - backed
Securities - available for sale ............................................... 2 10
Increase (decrease) in accrued expenses and other liabilities ................... 1,340 1,060
------------ ------------
Net cash provided by operating activities ....................................... 2,285 1,306
------------ ------------
Cash flows from investing activities:
Proceeds from principal paydowns of mortgage - backed
Securities - held to maturity ................................................ 154 467
Purchase of mortgage-backed securities - held to ................................ -- --
maturity
Proceeds from principal paydowns of mortgage - backed
Securities - available for sale ............................................... 136 1,376
Proceeds from maturity and redemption of investment
Securities - available for sale ............................................... 1,950 4,200
Proceeds from sale of investment securities - available for sale ................ 185 --
Purchase of investment securities - available for sale .......................... (8,355) (17,785)
Net (increase) in loans ......................................................... (5,401) (21,436)
Capital expenditures ............................................................ (486) (74)
Proceeds from sale of other real estate owned ................................... -- --
------------ ------------
Net cash provided (used) by investing activities ................................ (11,817) (33,252)
------------ ------------
Cash flow from financing activities:
Net increase (decrease) in demand, statement passbook, money
Market and NOW deposit accounts ............................................... 2,731 6,882
Proceeds from borrowings ........................................................ 6,000 20,000
Proceeds from purchased federal funds ........................................... 275 --
Dividends paid .................................................................. (238) (148)
Purchase of treasury stock ...................................................... (448) (1,276)
Increase (decrease) in advances from borrowers for taxes
And insurance ................................................................. 224 300
------------ ------------
Net cash provided by ( used in) financing activities ............................ 8,544 25,758
------------ ------------
Net increase (decrease) in cash and cash equivalents ............................ (988) (6,188)
Cash and cash equivalents at beginning of year .................................. 4,152 8,254
------------ ------------
Cash and cash equivalents at end of year ........................................ $ 3,164 $ 2,066
============ ============
Additional Disclosures:
Supplemental disclosures of cash flows information-cash paid during year for:
Interest on other borrowings ............................................... $ 1,151 $ 334
Income taxes ............................................................... 643 708
Supplemental schedule of non-cash investing activities:
Change in unrealized gains & losses in investment securities -
Available for sale ............................................................ (113) (832)
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
GSB Financial Corporation
Notes to Unaudited Consolidated Interim Financial Statements
1. Basis of Presentation
The consolidated financial statements included herein at or for periods ended
June 30, 2000 and 1999, have been prepared by the Company without audit. In the
opinion of management, the quarterly unaudited financial statements include all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the consolidated financial position and results of operations
for the periods presented. Certain information and footnote disclosures normally
included in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. The Company believes that the disclosures are adequate to
make the information presented not misleading, however, the results for the
periods presented are not necessarily indicative of the results to be expected
for the entire year.
The unaudited quarterly financial statement presented herein should be read in
conjunction with the annual audited consolidated financial statements of the
Company for the fiscal year ended December 31, 1999. Significant intercompany
transactions and amounts have been eliminated.
2. Earnings Per Share
On July 9, 1997, GSB Financial Corporation completed its initial stock offering
of 2,248,250 shares of common stock. Concurrent with the offering, approximately
8% of the shares sold (179,860) were purchased by the GSB Financial Corporation
Employee Stock Ownership Plan ("ESOP") using the proceeds of a loan from the
Company to the ESOP. Through June 30, 2000, 53,958 shares have been committed to
be released from the lien of the ESOP loan and under AICPA Statement of Position
93-6; these shares are considered outstanding for purposes of calculating per
share amounts. Basic earnings per share excludes dilution and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Unvested restricted stock is not
considered outstanding and is included in the computation of basic earnings per
share as of the date shares are fully vested. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity, such as the Company's restricted stock and stock options.
The calculations of basic and diluted earnings per share (EPS) for the periods
indicated, are included in exhibit 11 of this report.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
GSB Financial Corporation (the "Company") was formed in March 1997 to acquire
the common stock of Goshen Savings Bank (the "Bank") upon its conversion from a
mutual savings bank to a stock savings bank. On July 9, 1997, the Company
completed its initial public offering, issuing 2,248,250 shares of $0.01 par
value common stock at $10.00 per share. Net proceeds to the Company were $21.4
million after conversion costs, and $19.6 million excluding the shares acquired
by the Company's Employee Stock Ownership Plan (the "ESOP"), which were
purchased with the proceeds of a loan from the Company. All references to the
Company prior to July 9, 1997, except where otherwise indicated, are to the
Bank.
Since the conversion, we have worked to implement our strategy of operating the
Bank as a community-based financial institution offering core financial services
to individuals and businesses in strategic locations within the Hudson Valley,
while exploring appropriate opportunities to leverage the additional capital
obtained in the Conversion. The Company has improved its customer service
delivery capability, enabling it to provide better services to existing
customers and seek to expand its customer base. The Company attracts deposits
from its local communities and invests those deposits principally in one-to-four
family residential mortgage loans, commercial mortgages and other business
loans. Management seeks to maintain a high quality loan portfolio with low
levels of delinquencies and non-performing assets by concentrating on
residential mortgage loans and real estate secured business loans in its local
community. Management also considers other loan types consistent with its
mission to serve the local consumer and business community.
The Bank is a federal savings bank with deposits insured by the Bank Insurance
Fund ("BIF") of the FDIC. The Bank's primary federal banking regulator is the
Office of Thrift Supervision ("OTS").
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 and borrowings. 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. Results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government policies
and actions of regulatory authorities.
7
<PAGE>
Average Balances, Interest Rates and Yield
The following table presents, for the periods indicated, the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
Average balances are daily average balances. Non-interest-bearing checking
accounts are included in the tables as a component of non-interest-bearing
liabilities.
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
------------------------------------------------------------------------------------
2000 1999
---------------------------------------- ----------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost (5) Balance Interest Cost (5)
----------- ----------- ------------ ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans receivable (1) ...................... $ 119,557 $ 2,222 7.43% $ 98,888 $ 1,791 7.24%
Mortgage-backed securities ................ 3,283 55 6.70 5,330 88 6.60
Investment securities ..................... 52,088 881 6.77 42,103 678 6.44
Federal funds sold ........................ 542 9 6.64 1,186 10 3.37
----------- ----------- ----------- -----------
Total interest-earning assets ......... 175,470 3,167 7.22 147,507 2,567 6.96
----------- -----------
Non-interest-earning assets ............... 6,709 6,450
----------- -----------
Total assets ......................... $ 182,179 $ 153,957
=========== ===========
Interest-bearing liabilities:
Savings accounts .......................... $ 32,758 249 3.04 $ 30,625 235 3.07
Certificates of deposit ................... 44,216 560 5.07 41,746 490 4.69
Money market .............................. 16,358 179 4.38 13,572 125 3.68
NOW accounts .............................. 7,521 42 2.23 6,156 36 2.34
Other ..................................... 42,358 659 6.22 22,812 292 5.12
----------- ----------- ----------- -----------
Total interest-bearing liabilities .... 143,211 1,689 4.72 114,911 1,178 4.10
----------- -----------
Non-interest-bearing liabilities .......... 9,989 8,119
----------- -----------
Total liabilities ..................... 153,200 123,030
Equity .................................... 28,979 30,927
----------- -----------
Total liabilities and equity ......... $ 182,179 $ 153,957
=========== ===========
Net interest income/spread (2).(3) ........ $ 1,478 2.50% $ 1,389 2.86%
=========== =========== =========== ===========
Net earning assets/net interest margin (4) $ 32,259 3.37% $ 32,596 3.77%
=========== =========== =========== ===========
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.23x 1.28x
==== ====
</TABLE>
(1) Average balances include non-accrual loans. Interest on such loans is
recognized as and when received.
(2) Includes interest-bearing deposit in other financial institutions.
(3) Interest-rate spread represents the difference between average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets ("net interest margin") represents net
interest income as a percentage of average interest-earning assets.
(5) Yields for the three month periods have been annualized when appropriate.
8
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
------------------------------------------------------------------------------------
2000 1999
---------------------------------------- ----------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost (5) Balance Interest Cost (5)
----------- ----------- ------------ ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans receivable (1) ...................... $ 117,956 $ 4,375 7.42% $ 94,055 $ 3,404 7.24%
Mortgage-backed securities ................ 3,375 113 6.70 5,876 195 6.64
Investment securities ..................... 51,263 1,752 6.84 38,282 1,215 6.35
Federal funds sold ........................ 916 16 3.49 3,054 64 4.19
----------- ----------- ----------- -----------
Total interest-earning assets ......... 173,510 6,256 7.21 141,267 4,878 6.91
----------- -----------
Non-interest-earning assets ............... 6,090 6,509
----------- -----------
Total assets ......................... $ 179,600 $ 147,776
=========== ===========
Interest-bearing liabilities:
Savings accounts .......................... $ 32,247 484 3.00 $ 29,900 451 3.02
Certificates of deposit ................... 44,948 1,113 4.95 41,711 983 4.71
Money market .............................. 16,091 353 4.39 13,493 248 3.68
NOW accounts .............................. 7,154 80 2.24 5,945 68 2.29
Other ..................................... 40,758 1,241 6.09 17,889 458 5.12
----------- ----------- ----------- -----------
Total interest-bearing liabilities .... 141,198 3,271 4.63 108,938 2,208 4.05
----------- -----------
Non-interest-bearing liabilities .......... 9,459 7,663
----------- -----------
Total liabilities ..................... 150,657 116,601
Equity .................................... 28,943 31,175
----------- -----------
Total liabilities and equity ......... $ 179,600 $ 147,776
=========== ===========
Net interest income/spread (2).(3) ........ $ 2,985 2.58% $ 2,670 2.86%
=========== =========== =========== ===========
Net earning assets/net interest margin (4) $ 32,312 3.44% $ 32,329 3.78%
=========== =========== =========== ===========
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.23x 1.30x
==== ====
</TABLE>
(1) Average balances include non-accrual loans. Interest on such loans is
recognized as and when received.
(2) Includes interest-bearing deposit in other financial institutions.
(3) Interest-rate spread represents the difference between average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets ("net interest margin") represents net
interest income as a percentage of average interest-earning assets.
(5) Yields for the six month periods have been annualized when appropriate.
9
<PAGE>
Comparison of Financial Condition at June 30, 2000 and December 31, 1999
Total assets were $186.9 million at June 30, 2000 as compared to $176.0 million
at December 31, 1999, representing 6.2% growth in assets. The growth was a
result of the Company's efforts to leverage its capital, partially offset by the
use of funds to repurchase stock. Loans, net increased $5.4 million, or 4.6%,
from $115.3 million to $120.1 million. Residential loans increased by $5.1
million because of origination efforts at a time of slower residential mortgage
loan demand due to rising interest rates. Investment securities available for
sale increased by $6.2 million, while mortgage-backed securities decreased by
$395,000, since December 31, 1999. The increase in investment securities was
principally due to the purchase of securities with borrowings to increase
leverage. The decrease in mortgage-backed securities was mainly due to scheduled
principal payments. Deposits increased by $2.7 million or 2.6% to $109.0 million
at June 30, 2000 as compared to $106.3 million at December 31, 1999. The
increase includes a $2.1 million increase in deposits in the Harriman branch
during the six months. Core deposits (representing deposits other than
certificates of deposit) increased by $4.2 million to $64.8 million at June 30,
2000, as compared to $60.6 million at December 31, 1999, which is attributed to
the Company's emphasis on attracting core deposit relationships through its
advertising.
Total equity increased to $29.4 million at June 30, 2000, from $29.1 million at
December 31, 1999. The $280,000 increase in equity resulted principally from net
income of $804,000; offset by stock repurchases, dividends, and an increase in
unrealized securities losses, but increased by the net effect of various
transactions related to the Company's stock-based compensation plans. The
Company is no longer subject to the Office of Thrift Supervision rules limiting
stock repurchases. The Company is not currently engaged in stock repurchases.
Comparison of Operating Results For the Three and Six Months Ended June 30, 2000
and 1999
Interest Income was $3.2 million for the second quarter of fiscal 2000 as
compared to $2.6 million for the same period in 1999, an increase of $600,000 or
23.4%. For the six months ended June 30, 2000, interest income amounted to $6.3
million as compared to $4.9 million for the same period in 1999. The increase in
the quarterly interest income was primarily volume related due to a $28.2
million, or 18.3%, increase in average earning assets, augmented by a 26 basis
point increase in the average yield on earnings assets. The increase in the six
months interest income was primarily volume related due to a $32.2 million, or
22.8%, increase in average earning assets, augmented by a 30 basis point
increase in the average yield on earnings assets.
Our aggressive efforts to increase our loan portfolio resulted in increases of
$20.7 million for the three month period and $23.9 million for the six month
period in the average balance of loans. These increases were the principal
contributor to our $431,000 and $971,000 increases in interest income on loans
in the three and six month periods. Increases in average rates earned on loans
also had a positive, but much less significant, effect on interest income. The
yields on our loans increased as we sought to increase levels of higher-yielding
commercial loans. In addition, new residential mortgage loans were originated at
higher rates because of higher market rates, and the yields on adjustable rate
loans increased for the same reason. Interest income on investment securities
increased by $203,000 for the quarter, due to increases in the average balances
of $10.0 million for the period. Interest income on investment securities
increased by $537,000 for the six months, due to increases in the average
balances of $13.0 million for the period. The Company borrowed funds and
invested those funds in investment securities to leverage its balance sheet. The
average yield earned on investment securities increased by 33 and 49 basis
points in the comparable periods, caused by higher market interest rates and
because the purchase of callable
10
<PAGE>
government agency bonds which tend to have a higher market interest rate than
U.S. Treasury securities. Interest earned on mortgage-backed securities
decreased by $33,000 and $82,000 due to a $2.0 million and $2.5 million decrease
in the average balance of mortgage-backed securities in the comparable periods
resulting from accelerated principal payments. Interest earned on federal funds
sold decreased by $48,000 for the six months ended June 30, 2000, compared to
the same period in 1999, due to decreases in the average balances of $2.1
million. The reason for the decrease in average balances was that liquid assets
previous sold in the federal funds market were invested in loans as loan growth
exceeded the growth in deposits.
Interest Expense was $1.7 million for the quarter ended June 30, 2000 as
compared to $1.2 million for the same quarter in 1999. For the six months ended
June 30, 2000, interest expense totaled $3.3 million compared to $2.2 million
for the same period last year. The primary cause of the increases was an
increase in the average balance of borrowings undertaken to fund asset growth
and improve leverage. Borrowings, which are the Company's highest cost funding
source, increased from an average balance of $22.8 million and $17.9 million in
the quarter and six months ended June 30, 1999 to $42.4 million and $40.8
million in the comparable 2000 periods. The average cost of borrowings also
increased by 110 and 97 basis points between the respective periods due to an
increase in market rates. The $367,000 and $ 783,000 increase in interest paid
on borrowings represented more than 70% of the total $511,000 and $1.1 million
increase in interest paid.
Interest paid on deposits increased by $144,000 from the 1999 to the 2000
quarters because average interest bearing deposits increased by $8.8 million,
and the average rate paid on deposits increased by 25 basis points. Interest
paid on deposits increased for the six months ended June 30, 2000 compared to
June 30, 1999, by $280,000 because average interest bearing deposits increased
by $9.4 million, and the average rate paid on deposits increased by 20 basis
points.
Provision for Loan Losses was $25,000 for the quarter of June 30, 2000 compared
to $20,000 in the comparable quarter in 1999. The provision for the six months
ended June 30, 2000 was $50,000 compared to $35,000 for the comparable period in
1999. The provision for loan losses increased due to the increase in the loan
portfolio. There were no non-performing loans at June 30, 2000. At June 30,
2000, the allowance for loan losses was $402,000 representing 0.33% of period
end loans. Net charge-offs during the quarter were zero. The Company had one
commercial loan in the amount of $47,000 in which the borrower was in bankruptcy
at June 30, 2000, and one residential mortgage loan with a principal balance of
$19,000 which had been referred to legal counsel for foreclosure due to
nonpayment of real estate taxes, but both loans are current as to principal and
interest payments. The Company considered the status of these loans when
evaluating the appropriate provision for loan losses.
Non-interest income was $227,000 for the quarter ended June 30, 2000 as compared
to $77,000 for the same quarter in 1999. The increase of $150,000 is principally
caused by an increase of $138,000 in realized security gains in the quarter
ending June 30, 2000. Service charges on deposits increased by $6,000 due to the
emphasis on opening core deposit relationships. Other income increased by $6,000
due to ATM fees from non-customers and commission income from the sale of
non-bank investments through Salomon Smith Barney, which started an investment
center in the Bank in January. For the six months ended June 30, 2000,
non-interest income totaled $309,000 as compared to $149,000 for the same period
in 1999.
Non-interest expense was $1.0 million for the quarter ended June 30, 2000,
compared to $875,000 for the comparable quarter in 1999. The increase in
non-interest expenses for the quarter reflects
11
<PAGE>
a $66,000 increase in salaries and benefits, which is comprised mostly of an
increase of $24,000 in incentive stock awards to the officers of the Bank,
compared to the same quarter in 1999. The additional $42,000 represents
increases in annual salaries and medical expenses for the Company. The Company
estimates that $100,000 of the increase in non-interest expense represents
additional costs associated with Warwick Community Bancorp's publicly expressed
implied acquisition proposal in April 2000. In addition, the increase in the
company's stock price, which accompanied Warwick's pronouncement, also increased
the Company's recorded expense for certain stock-based compensation plans in
which recorded expense is based on current stock price. For the six months ended
June 30, 2000 non-interest expense totaled $1.9 million compared to $1.7 million
for the comparable period in 1999.
Income tax expense was $245,000 and $509,000 for the second quarter and six
months ended June 30, 2000, as compared to $228,000 and $412,000 for the
comparable period for 1999. The increases were principally caused by increases
in income before taxes.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, borrowings, proceeds from
the principal and interest payments on loans, mortgage-backed and debt
securities and capital gain distributions on its mutual fund investment. While
maturities and scheduled amortization of loans and securities are predictable
sources of funds, deposit outflows, mortgage prepayments and mortgage loan and
securities sales are greatly influenced by general interest rates, economic
conditions and competition.
The Bank closely monitors its liquidity position on a regular basis. Excess
short-term liquidity is invested in overnight federal funds sold. If the Bank
requires funds beyond its ability to generate them internally, additional funds
are available through borrowings. At June 30, 2000, the Bank had available lines
of credit with the Federal Home Loan Bank of New York of $15.8 million, with
$8.9 million outstanding as of June 30, 2000. The Bank also had Federal Home
Loan Bank borrowings of $36 million at June 30, 2000, which were not against the
line of credit. The Bank undertook these borrowings as one method of leveraging
the additional capital obtained in its conversion to stock form. The Bank may,
from time to time, use borrowings to satisfy funding needs rather than increase
the rates paid on new deposits, because the latter could have a greater adverse
effect on the overall cost of funds.
Residential mortgage loan commitments and commercial loan commitments totaled
$5.5 million, and $1.1 million at June 30, 2000, respectively, and the Bank had
$1.6 million of unused home equity lines of credit and $2.5 million and $404,000
of unused commercial line of credit and consumer overdraft checking lines of
credit, respectively. Management anticipates that the Bank will have sufficient
funds available to meet its current loan commitments. Certificates of deposit
which are scheduled to mature in one year or less from June 30, 2000, totaled
$40.8 million. Management anticipates that the Bank will be able to retain
substantially all of such deposits if the Bank decides to do so to fund loans
and other investments.
The Bank is subject to the minimum liquidity regulations of the OTS. At June 30,
2000, OTS regulations required that the Bank maintain liquid assets equal to at
least 4% of its net withdrawable accounts plus short term borrowings, measured
on a monthly basis. The Bank has satisfied this requirement throughout the
period during which it has been a federal savings bank, and for June 30, 2000,
the Bank had liquid assets equal to 5.4% of net withdrawable accounts plus short
term borrowings.
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<PAGE>
The following table sets forth information regarding the regulatory capital
ratios of the Bank at June 30, 2000.
<TABLE>
<CAPTION>
For Classification
Actual Minimum Capital as Well Capitalized
Bank Amount Ratio Amount Ratio Amount Ratio
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible Capital $ 25,532 13.77% 2,781 1.50% -- --
Tier 1 (Core) Capital 25,532 13.77% 5,562 3.00% $ 9,270 5.0%
Risk Based Capital:
Tier 1 25,532 28.52% -- -- 5,371 6.0%
Total 25,934 28.97% 7,161 8.00% 8,951 10.0%
</TABLE>
The Bank was classified as "well capitalized" at June 30, 2000 under OTS
regulations.
Forward-Looking Statements
When used in this report on form 10-Q, in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or stockholder communications, or in oral statements made with the
approval of an authorized officer, words and phrases such as " will likely
result" "are expected to," "will continue," "are estimated," "are anticipated"
and other similar expressions, are intended to identify "forward-looking
statements" under the Private Securities Litigation Reform Act. In particular,
certain information customarily disclosed by financial institutions, such as
estimates of interest rate sensitivity and the adequacy of the loan loss
allowance, are inherently forward-looking statements because, by their nature,
they represent attempts to estimate what will occur in the future.
A wide variety of factors could cause the Company's actual results and
experiences to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. Some of the
risks and uncertainties that may affect operations, performance, results of the
Company's business, the interest rate sensitivity of its assets and liabilities,
and the adequacy of its loan loss allowance, include but are not limited to: (i)
deterioration in local, regional, national or global economic conditions which
could result, among other things, in an increase in loan delinquencies, a
decrease in property values, or a change in the housing turnover rate; (ii)
changes in market interest rates or changes in the speed at which market
interest rates change; (iii) changes in laws and regulations affecting the
financial services industry; (iv) changes in competition; and (v) changes in
consumer preferences.
Furthermore, changes in the economic circumstances of individual borrowers could
have a material adverse effect on their ability to repay their loans regardless
of general economic conditions. Likewise, financial adversity experienced by any
one major business in the Company's market area could have a significant adverse
effect on those of the Company's customers who are employees of that business or
otherwise rely upon it for their economic well being. This could affect their
ability to honor their loan obligations and their ability to maintain deposit
balances.
For these reasons, the Company cautions readers not to place undue reliance upon
any forward-looking statements. Forward-looking statements speak only as of the
date made and the Company assumes no obligation to update or revise any such
statements upon any change in applicable circumstances.
13
<PAGE>
Item 3. Quantitative and Qualitative Disclosure About Market Risk
For information concerning GSB Financial Corporation's quantitative and
qualitative disclosures about market risk, refer to Item 7A of the GSB Financial
Corporation Annual Report on Form 10-K for the year ended December 31, 1999, as
filed with the Securities and Exchange Commission on March 30, 2000, and the
sections of the Annual Report to Stockholders referenced therein and included in
such report on Form 10-K, particularly the discussion at pages 9 through 11 of
the Annual Report to Stockholders under the Captions "Gap Analysis" and
"Analysis of Market Risk".
Part II - Other Information
Item 1. Legal Proceedings
In the ordinary course of business, the Company and the Bank are subject to
legal actions, which involve claims for monetary relief. Management, based on
advice of counsel, does not believe that any currently known legal actions,
individually or in the aggregate will have a material effect on its consolidated
financial condition or results of operation.
Item 2. Changes in Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders (the "Meeting") on April 27,
2000. The purpose of the Meeting was to vote on the following proposals:
1. The approval of amendments to our Stock Option Plan to provide for
accelerated vesting in the event of a hostile change of control or
retirement and to permit the grant of options without the restrictions
contained in the Stock Option Plan as it now exists;
2. The approval of amendments to our Incentive Stock Award Plan to
provide for accelerated vesting in the event of a hostile change of
control or retirement and to permit awards without the restrictions
contained in the Incentive Stock Award Plan as it now exists;
3. The election of three directors to our Board of Directors; and
4. The ratification of the appointment of Nugent & Hauessler, P.C. as our
auditors for the fiscal year ending December 31, 2000.
The results of the vote on the Proposals were as follows:
Proposal 1:
For 1,485,846
Withheld 222,671
Abstain 14,518
14
<PAGE>
Proposal 2:
For 1,487,748
Withheld 220,319
Abstain 14,968
Proposal 3: For Withhold
Clifford E. Kelsey, Jr. 1,663,058 59,977
Roy L. Lippincott 1,663,068 59,967
Herbert C. Mueller 1,663,068 59,967
In addition to Mr. Kelsey, Mr. Lippincott and Mr. Mueller, directors, Mr.
Gengel, Mr. Guarino, and Mr. Hopkins continue to serve after the meeting.
Proposal 4: For 1,686,474
Against 24,261
Abstain 12,300
Item 6. Exhibits and Reports on Form 8-K
Exhibit 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule*
(b) Reports on Form 8-K
None
----------
* Submitted only with filing in electronic format.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GSB Financial Corporation
-------------------------
Principal Executive Officers:
Date: August 14, 2000
/s/ Stephen W. Dederick
Stephen W. Dederick
Chief Financial Officer & Treasurer
(Principal Financial and
Accounting Officer)
/s/ Rolland B. Peacock III
Rolland B. Peacock III
Vice President
/s/ Barbara A. Carr
Barbara A. Carr
Secretary
16
