FORM 10-Q.--QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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 November 13, 2000)
<PAGE>
GSB FINANCIAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
September 30, 2000 (Unaudited) and December 31, 1999.............. 3
Consolidated Statements of Income for the three and nine
months ended September 30, 2000 and 1999
(Unaudited)....................................................... 4
Consolidated Statements of Cash Flows for the nine months
ended September 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
Item 3. Quantitative and Qualitative Disclosure about Market Risk......... 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 15
Item 6. Exhibits and Reports on Form 8-K.................................. 15
Signatures........................................................ 18
2
<PAGE>
GSB Financial Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)
(In thousands except shares and per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
---------------------------------
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks ............................................................... $ 3,732 $ 4,052
Federal funds sold .................................................................... 100 100
--------- ---------
Cash and cash equivalents ............................................................. 3,832 4,152
Investment securities available for sale .............................................. 51,973 46,871
Mortgage-backed securities:
Held to maturity (estimated market values of $1,200 and
$ 1,455 at September 30, 2000 and December 31, 1999, respectively) ................ 1,203 1,471
Available for sale .................................................................. 1,634 2,004
Loans receivable, net ................................................................. 125,671 115,273
Banking house and equipment ........................................................... 3,283 2,768
Accrued interest receivable ........................................................... 1,596 1,315
Prepaid expenses and other assets ..................................................... 2,125 2,162
--------- ---------
Total assets ..................................................................... $ 191,317 $ 176,016
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits .............................................................................. $ 110,215 $ 106,256
Mortgagors' escrow deposits ........................................................... 198 503
Federal funds purchased ................................................................ 6,075 3,600
Borrowings ............................................................................ 42,000 35,000
Accrued expenses and other liabilities ................................................ 2,899 1,548
--------- ---------
Total liabilities ................................................................ $ 161,387 $ 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 September 30, 2000 and December 31, 1999) ...................... 22 22
Additional paid-in capital ............................................................ 21,522 21,575
Retained earnings, substantially restricted ........................................... 15,269 14,518
Accumulated other comprehensive income ................................................ (1,130) (1,297)
Treasury stock, at cost ............................................................... (4,025) (4,052)
Unearned ISAP stock ................................................................... (514) (308)
Unallocated ESOP stock ................................................................ (1,214) (1,349)
--------- ---------
Total stockholders' equity ....................................................... $ 29,930 $ 29,109
--------- ---------
Total liabilities and stockholders' equity ....................................... $ 191,317 $ 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 Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans ....................................................... $ 2,337 $ 1,971 $ 6,712 $ 5,375
Federal funds sold .......................................... 6 7 22 71
Investment securities ....................................... 939 812 2,691 2,027
Mortgage-backed securities .................................. 51 75 164 270
---------- ---------- ---------- ----------
Total interest income ..................................... 3,333 2,865 9,589 7,743
INTEREST EXPENSE
Deposit accounts ............................................ 1,082 918 3,112 2,668
Other borrowings ............................................ 748 470 1,989 928
---------- ---------- ---------- ----------
Total interest expense .................................... 1,830 1,388 5,101 3,596
Net interest income ......................................... 1,503 1,477 4,488 4,147
Provision for loan losses ................................... 25 20 75 55
---------- ---------- ---------- ----------
Net interest income after provision for loan losses ......... 1,478 1,457 4,413 4,092
NON-INTEREST INCOME
Service charges on deposit accounts ......................... 50 45 144 133
Other income ................................................ 40 33 117 95
Net realized gains on securities ............................ -- -- 138 --
---------- ---------- ---------- ----------
Total non-interest income ................................. 90 78 399 228
NON-INTEREST EXPENSE
Salaries and employee benefits .............................. 456 410 1,350 1,191
Occupancy and equipment ..................................... 89 82 265 255
Data processing expenses .................................... 72 71 224 214
Other non-interest expense .................................. 469 333 1,178 972
---------- ---------- ---------- ----------
Total non-interest expense ................................ 1,086 896 3,017 2,632
---------- ---------- ---------- ----------
Income before income taxes .................................. 482 639 1,795 1,688
Income tax expense .......................................... 178 256 687 669
---------- ---------- ---------- ----------
Net income .................................................. $ 304 $ 383 $ 1,108 $ 1,019
========== ========== ========== ==========
Basic earnings per share .................................... $ 0.17 $ 0.21 $ 0.62 $ 0.54
Weighted average shares outstanding - basic ................. 1,790,363 1,848,322 1,787,877 1,889,848
Diluted earnings per share .................................. $ 0.17 $ 0.21 $ 0.61 $ 0.54
Weighted average shares outstanding - diluted ............... 1,832,435 1,866,617 1,814,172 1,905,358
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
GSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
2000 1999
-------- --------
(In Thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) .......................................................................... $ 1,108 $ 1,019
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation ............................................................................... 144 130
Provision for loan losses .................................................................. 75 55
Fair value provision of ESOP & ISAP shares committed to be released ........................ 352 246
Gain in maturity/redemption of investment securities available for sale .................... (138) --
Increase (decrease) other assets ........................................................... (355) (872)
Net amortization on investment securities - available for sale ............................ (9) 31
Net amortization (accretion) on mortgage - backed
Securities - held to maturity ............................................................ (7) (3)
Net amortization (accretion) on mortgage - backed
Securities - available for sale .......................................................... 3 12
Increase (decrease) in accrued expenses and other liabilities .............................. 1,351 788
-------- --------
Net cash provided by operating activities .................................................. 2,524 1,406
-------- --------
Cash flows from investing activities:
Proceeds from principal paydowns of mortgage - backed
Securities - held to maturity ........................................................... 275 766
Purchase of mortgage-backed securities - held to maturity .................................. -- --
Proceeds from principal paydowns of mortgage - backed
Securities - available for sale .......................................................... 408 2,109
Proceeds from maturity and redemption of investment
Securities - available for sale .......................................................... 3,550 4,700
Proceeds from sale of investment securities - available for sale ........................... 185 --
Purchase of investment securities - available for sale ..................................... (8,454) (24,304)
Net (increase) in loans .................................................................... (10,473) (26,742)
Capital expenditures ....................................................................... (659) (75)
Proceeds from sale of other real estate owned .............................................. -- --
-------- --------
Net cash provided (used) by investing activities ........................................... (15,168) (43,546)
-------- --------
Cash flow from financing activities:
Net increase (decrease) in demand, statement passbook, money
Market and NOW deposit accounts .......................................................... 3,959 9,904
Proceeds from borrowings ................................................................... 7,000 25,000
Proceeds from purchased federal funds ...................................................... 2,475 4,325
Dividends paid ............................................................................. (357) (231)
Purchase of treasury stock ................................................................. (448) (1,418)
Increase (decrease) in advances from borrowers for taxes
And insurance ............................................................................ (305) (125)
-------- --------
Net cash provided by ( used in) financing activities ....................................... 12,324 37,455
-------- --------
Net increase (decrease) in cash and cash equivalents ....................................... (320) (4,685)
Cash and cash equivalents at beginning of year ............................................. 4,152 8,254
-------- --------
Cash and cash equivalents at end of year ................................................... $ 3,832 $ 3,569
-------- --------
Additional Disclosures:
Supplemental disclosures of cash flows information-cash paid during year for:
Interest on other borrowings .......................................................... $ 1,854 $ 804
Income taxes .......................................................................... 934 1,055
Supplemental schedule of non-cash investing activities:
Change in unrealized gains & losses in investment securities -
Available for sale ....................................................................... 111 (1,356)
</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
September 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 September 30, 2000, 58,455 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.
On August 16, 2000, the Company entered into an agreement to merge with
Berkshire Bancorp Inc. When and if the Company and Berkshire Bancorp consummate
the merger, our stockholders will receive, for each share of our common stock,
either $20.75 per share or, in the alternative, at their election, 0.6027 shares
of Berkshire Bancorp common stock. The stock component of the transaction will
represent 50.1% of the total consideration, while the cash component will
represent 49.9%, subject to possible increase in the stock component up to 60%
of the total if a higher number of our stockholders elect to receive stock. The
right of our stockholders to elect to receive stock or cash is subject to
allocation procedures if the stockholders electing to receive stock do not
represent between 50.1% and 60% of our outstanding common stock.
7
<PAGE>
The completion of the transaction with Berkshire Bancorp is subject to many
conditions, including the receipt of approval, waiver or non-objection from
federal and state bank regulatory authorities. Applications or notices have been
filed with the Federal Reserve, the FDIC, the Office of Thrift Supervision and
the New York State Banking Department to obtain required approvals, waivers and
non-objections. In addition, we must obtain approval by our stockholders and the
stockholders of Berkshire Bancorp. We anticipate that the merger will consummate
in the first quarter of 2001.
If we complete the merger, we will cease to operate as a separate entity and we
will cease to separately file reports under Section 13 of the Securities
Exchange Act of 1934. Our operations will be combined with the operations of
Berkshire Bancorp for financial statement purposes
The expenses we have incurred and will incur in connection with the negotiation
and consummation of the proposed merger with Berkshire Bancorp are treated as
expenses for financial statement purposes when they are incurred. Therefore, we
anticipate that the proposed merger will have an adverse effect on current
period earnings until the merger is completed or abandoned. In addition, most of
the expenses of the proposed merger are not deductible to us for tax purposes.
Therefore, each dollar of merger-related expense has a greater adverse effect on
net income than other normal expenses, which are tax deductible.
8
<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 September 30,
----------------------------------------
2000 1999
---- ----
Average Interest Average Average Interest Average
Balance -------- Yield/ Balance -------- Yield/
------- Cost (5) ------- Cost (5)
-------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans receivable (1) ................................... $123,544 $ 2,337 7.57% $109,116 $ 1,971 7.23%
Mortgage-backed securities ............................. 3,032 51 6.76 4,548 75 6.56
Investment securities .................................. 54,392 939 6.90 48,739 812 6.67
Federal funds sold ..................................... 968 6 2.64 1,116 7 2.69
-------- -------- -------- --------
Total interest-earning assets ...................... 181,936 3,333 7.33 163,519 2,865 7.01
-------- --------
Non-interest-earning assets ............................ 7,502 6,466
-------- --------
Total assets ...................................... $189,438 $169,985
Interest-bearing liabilities:
Savings accounts ....................................... $ 33,332 253 3.04 $ 32,513 246 3.03
Certificates of deposit ................................ 44,157 592 5.36 42,900 504 4.70
Money market ........................................... 17,232 191 4.44 14,112 132 3.73
NOW accounts ........................................... 8,251 46 2.26 6,165 36 2.32
Borrowings ............................................. 45,345 748 6.60 34,798 470 5.40
-------- -------- -------- --------
Total interest-bearing liabilities ................. 148,317 1,830 4.94 130,488 1,388 4.26
-------- --------
Non-interest-bearing liabilities ....................... 11,577 9,574
-------- --------
Total liabilities .................................. 159,894 140,062
Equity ................................................. 29,544 29,923
-------- --------
Total liabilities and equity ...................... $189,438 $169,985
======== ========
Net interest income/spread(2)(3) ....................... $ 1,503 2.39% $ 1,477 2.75%
======== ==== ======== ====
Net earning assets/net interest margin(4) .............. $ 33,619 3.30% $ 33,031 3.61%
======== ==== ======== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.23x 1.25x
==== ====
</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.
(5) Yields for the three month periods have been annualized when appropriate.
9
<PAGE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
----------------------------------------
2000 1999
---- ----
Average Interest Average Average Interest Average
Balance -------- Yield/ Balance -------- Yield/
------- Cost (5) ------- Cost (5)
-------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans receivable (1) ................................... $119,813 $ 6,712 7.47% $ 99,131 $ 5,375 7.23%
Mortgage-backed securities ............................. 3,261 164 6.71 5,428 270 6.63
Investment securities .................................. 52,308 2,691 6.86 41,806 2,027 6.46
Federal funds sold ..................................... 933 22 3.24 2,401 71 3.94
-------- -------- -------- --------
Total interest-earning assets ...................... 176,315 9,589 7.25 148,766 7,743 6.94
-------- --------
Non-interest-earning assets ............................ 6,615 6,439
-------- --------
Total assets ...................................... $182,930 $155,205
Interest-bearing liabilities:
Savings accounts ....................................... $ 32,296 736 3.04 $ 30,781 698 3.02
Certificates of deposit ................................ 44,686 1,705 5.09 42,111 1,487 4.71
Money market ........................................... 16,474 544 4.41 13,702 379 3.69
NOW accounts ........................................... 7,522 127 2.24 6,019 104 2.30
Borrowings ............................................. 42,284 1,989 6.27 23,587 928 5.25
-------- -------- -------- --------
Total interest-bearing liabilities ................. 143,262 5,101 4.75 116,200 3,596 4.13
-------- --------
Non-interest-bearing liabilities ....................... 10,469 8,306
-------- --------
Total liabilities .................................. 153,731 124,506
Equity ................................................. 29,199 30,699
-------- --------
Total liabilities and equity ...................... $182,930 $155,205
======== ========
Net interest income/spread (2)(3) ...................... $ 4,488 2.50% $ 4,147 2.81%
======== ==== ======== ====
Net earning assets/net interest margin (4) ............. $ 33,053 3.39% $ 32,566 3.72%
======== ==== ======== ====
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 nine month periods have been annualized when appropriate.
10
<PAGE>
Comparison of Financial Condition at September 30, 2000 and December 31, 1999
Total assets were $191.3 million at September 30, 2000 as compared to $176.0
million at December 31, 1999, representing 8.7% 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 $10.4 million, or
9.0%, from $115.3 million to $125.7 million. Residential loans increased by $9.1
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 $5.1 million, while mortgage-backed securities decreased by
$638,000, 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 $4.0 million or 3.7% to $110.2 million
at September 30, 2000 as compared to $106.3 million at December 31, 1999. The
increase includes a $2.6 million increase in deposits in the Harriman branch
during the nine months. Core deposits (representing deposits other than
certificates of deposit) increased by $5.6 million to $66.2 million at September
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 $29.9 million at September 30, 2000, from $29.1
million at December 31, 1999. The $821,000 increase in equity resulted
principally from net income of $1.1 million and a decrease of $167,000 in
unrealized securities losses; offset by stock repurchases, dividends, and an
increase by the net reduction in capital caused by transactions related to the
Company's stock-based compensation plans.
Comparison of Operating Results For the Three and Nine Months Ended September
30, 2000 and 1999
Interest Income was $3.3 million for the third quarter of fiscal 2000 as
compared to $2.9 million for the same period in 1999, an increase of $468,000 or
16.3%. For the nine months ended September 30, 2000, interest income amounted to
$9.6 million as compared to $7.7 million for the same period in 1999. The
quarter to quarter increase in interest income was primarily volume related due
to a $18.4 million, or 11.3%, increase in average earning assets, augmented by a
32 basis point increase in the average yield on earnings assets. The increase in
the nine months interest income was also primarily volume related due to a $27.5
million, or 18.5%, increase in average earning assets, augmented by a 31 basis
point increase in the average yield on earnings assets.
Our aggressive efforts to increase our loan portfolio resulted in increases of
$14.4 million for the three month period and $20.7 million for the nine month
period in the average balance of loans. These increases were the principal
contributor to our $366,000 and $1.3 million increases in interest income on
loans in the three and nine 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 $127,000 for the quarter, primarily due to
increases in the average balances of $5.7 million for the period. Interest
income on investment securities increased by $664,000 for the nine months,
primarily due to increases in the average balances of $10.5 million for the
period. The Company borrowed funds and invested those funds in investment
securities to leverage its balance sheet. The average yield during the first
nine months of 2000 earned on investment
11
<PAGE>
securities increased by 23 and 40 basis points in the comparable periods, caused
by higher market interest rates and because the Company purchased callable
government agency bonds which tend to have a higher market interest rate than
U.S. Treasury securities. Interest earned on mortgage-backed securities
decreased by $24,000 and $106,000 due to a $1.5 million and $2.2 million
decrease in the average balance of mortgage-backed securities in the comparable
periods resulting from principal payments. Interest earned on federal funds sold
decreased by $49,000 for the nine months ended September 30, 2000, compared to
the same period in 1999, due to decreases in the average balances of $1.5
million. The reason for the decrease in average balances was that liquid assets
previously sold in the federal funds market were invested in loans as loan
growth exceeded the growth in deposits.
Interest Expense was $1.8 million for the quarter ended September 30, 2000 as
compared to $1.4 million for the same quarter in 1999. For the nine months ended
September 30, 2000, interest expense totaled $5.1 million compared to $3.6
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 of $34.8 million and $23.6 million in the
quarter and nine months ended September 30, 1999 to $45.3 million and $42.3
million in the comparable 2000 periods. The average cost of borrowings also
increased by 120 and 102 basis points between the respective periods due to an
increase in market rates. The $278,000 and $ 1.1 million increase in interest
paid on borrowings represented more than 60% of the total $442,000 and $1.5
million increase in interest paid.
Interest paid on deposits increased by $164,000 from the 1999 to the 2000
quarters because average interest bearing deposits increased by $7.3 million,
and the average rate paid on deposits increased by 36 basis points. Interest
paid on deposits increased by $444,000 for the nine months ended September 30,
2000 compared to the same period in 1999, because average interest bearing
deposits increased by $8.2 million, and the average rate paid on deposits
increased by 28 basis points.
Provision for Loan Losses was $25,000 for the quarter ended September 30, 2000
compared to $20,000 in the comparable quarter in 1999. The provision for the
nine months ended September 30, 2000 was $75,000 compared to $55,000 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 September
30, 2000. At September 30, 2000, the allowance for loan losses was $428,000
representing 0.34% of period end loans. Net charge-offs and recoveries during
the quarter were $1,000. The Company had one commercial loan in the amount of
$47,000 in which the borrower was in bankruptcy at September 30, 2000. That loan
is current as to principal and interest payments. The Company considers the
status of all problem loans when evaluating the appropriate provision for loan
losses.
Non-interest income was $90,000 for the quarter ended September 30, 2000 as
compared to $78,000 for the same quarter in 1999. Service charges on deposits
increased by $5,000 due to the emphasis on developing core deposit
relationships. Other income increased by $7,000 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 nine months ended September 30, 2000, non-interest income
totaled $399,000 as compared to $228,000 for the same period in 1999. The
increase of $171,000 is principally caused by an increase of $138,000 in
realized security gains in the nine months ending September 30, 2000.
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Non-interest expense was $1.1 million for the quarter ended September 30, 2000,
compared to $896,000 for the comparable quarter in 1999. The quarterly earnings
reflect $135,000 (or $80,000 after tax) of expenses related to the announcement
of the merger with Berkshire Bancorp. The increase in non-interest expenses for
the quarter reflects a $46,000 increase in salaries and benefits, which is
comprised mostly of an increase of $9,000 in incentive stock awards to the
officers of the Bank and $16,000 of ESOP expenses, compared to the same quarter
in 1999. The additional $21,000 represents increases in annual salaries and
medical expenses for the Company. For the nine months ended September 30, 2000
non-interest expense totaled $3.0 million compared to $2.6 million for the
comparable period in 1999. The Company estimates that $235,000 (or $141,000
after tax) of the increase in non-interest expense represents additional costs
associated with both Warwick Community Bancorp's publicly expressed implied
acquisition proposal in April 2000 and expenses related to the proposed merger
with Berkshire Bancorp. In addition, the increase in the company's stock price,
which followed both Warwick's announcement and our announcement of the proposed
merger, increased the Company's expense for certain stock-based compensation
plans in which expense is based on current stock price.
Income tax expense was $178,000 and $687,000 for the third quarter and nine
months ended September 30, 2000, as compared to $256,000 and $669,000 for the
comparable period for 1999. The decrease in the third quarter was principally
caused by the decrease in income before taxes. The nine month increase was
principally caused by the increase 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 September 30, 2000, the Bank had available
lines of credit with the Federal Home Loan Bank of New York of $15.8 million,
with $12.1 million outstanding as of September 30, 2000. The Bank also had
Federal Home Loan Bank borrowings of $36 million at September 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
$4.0 million, and $4.6 million at September 30, 2000, respectively, and the Bank
had $1.5 million of unused home equity lines of credit and $2.4 million and
$430,000 of unused commercial line of credit and consumer overdraft checking
lines of credit, respectively. Management anticipates that the Bank will have
sufficient funds available to meet its current loan commitments. Certificates of
deposit which are scheduled to mature in one year or less from September 30,
2000, totaled $41.9 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
September 30, 2000, OTS regulations required that the Bank maintain liquid
assets equal to at least 4% of its net withdrawable
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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 September 30, 2000, the Bank had liquid assets
equal to 4.6% of net withdrawable accounts plus short term borrowings.
The following table sets forth information regarding the regulatory capital
ratios of the Bank at September 30, 2000.
<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 $26,105 13.73% 2,841 1.50% -- --
Tier 1 (Core) Capital 26,105 13.73% 5,583 3.00% $ 9,471 5.0%
Risk Based Capital:
Tier 1 26,105 28.31% -- -- 5,514 6.0%
Total 26,443 28.77% 7,352 8.00% 9,190 10.0%
</TABLE>
The Bank was classified as "well capitalized" at September 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.
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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.
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 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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GSB Financial Corporation
Principal Executive Officers:
Date: November 13, 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
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