10-Q 1 form10q_23994.txt FORM 10-Q 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) 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 GSB Financial Corporation and Subsidiary CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (unaudited) (In thousands except shares and per share amounts)

See accompanying notes to consolidated financial statement. 3 GSB Financial Corporation and Subsidiary CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands except shares and per share amounts)

See accompanying notes to consolidated financial statements. 4 GSB FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

See accompanying notes to consolidated financial statements. 5 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 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 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 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.

(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 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 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. 12 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 13 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.

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. 14 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. 15 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 16

GSB FINANCIAL CORP 10-Q