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GCBC > SEC Filings for GCBC > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for GREENE COUNTY BANCORP INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for GREENE COUNTY BANCORP INC


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation

Overview of the Company's Activities and Risks

Greene County Bancorp, Inc.'s results of operations depend primarily on its net interest income, which is the difference between the income earned on Greene County Bancorp, Inc.'s loan and securities portfolios and its cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations are also affected by Greene County Bancorp, Inc.'s provision for loan losses, gains and losses from sales of securities, noninterest income and noninterest expense. Noninterest income consists primarily of fees and service charges. Greene County Bancorp, Inc.'s noninterest expense consists principally of compensation and employee benefits, occupancy, equipment and data processing, and other operating expenses. Results of operations are also significantly affected by general economic and competitive conditions, changes in interest rates, as well as government policies and actions of regulatory authorities. Additionally, future changes in applicable law, regulations or government policies may materially affect Greene County Bancorp, Inc.

To operate successfully, the Company must manage various types of risk, including but not limited to, market or interest rate risk, credit risk, transaction risk, liquidity risk, security risk, strategic risk, reputation risk and compliance risk. While all of these risks are important, the risks of greatest significance to the Company relate to market or interest rate risk and credit risk.

Market risk is the risk of loss from adverse changes in market prices and/or interest rates. Since net interest income (the difference between interest earned on loans and investments and interest paid on deposits and borrowings) is the Company's primary source of revenue, interest rate risk is the most significant non-credit related market risk to which the Company is exposed. Net interest income is affected by changes in interest rates as well as fluctuations in the level and duration of the Company's assets and liabilities.

Interest rate risk is the exposure of the Company's net interest income to adverse movements in interest rates. In addition to directly impacting net interest income, changes in interest rates can also affect the amount of new loan originations, the ability of borrowers and debt issuers to repay loans and debt securities, the volume of loan repayments and refinancings, and the flow and mix of deposits.

Credit risk is the risk to the Company's earnings and shareholders' equity that results from customers, to whom loans have been made and to the issuers of debt securities in which the Company has invested, failing to repay their obligations. The magnitude of risk depends on the capacity and willingness of borrowers and debt issuers to repay and the sufficiency of the value of collateral obtained to secure the loans made or investments purchased.


Special Note Regarding Forward-Looking Statements

This quarterly report contains forward-looking statements. Greene County Bancorp, Inc. desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and is including this statement for the express purpose of availing itself of the protections of the safe harbor with respect to all such forward-looking statements. These forward-looking statements, which are included in this Management's Discussion and Analysis and elsewhere in this quarterly report, describe future plans or strategies and include Greene County Bancorp, Inc.'s expectations of future financial results. The words "believe," "expect," "anticipate," "project," and similar expressions identify forward-looking statements. Greene County Bancorp, Inc.'s ability to predict results or the effect of future plans or strategies or qualitative or quantitative changes based on market risk exposure is inherently uncertain. Factors that could affect actual results include but are not limited to:
(a) changes in general market interest rates,

(b) general economic conditions, including unemployment rates and real estate values,

(c) legislative and regulatory changes,

(d) monetary and fiscal policies of the U.S. Treasury and the Federal Reserve,

(e) changes in the quality or composition of The Bank of Greene County's loan portfolio or the consolidated investment portfolios of The Bank of Greene County and Greene County Bancorp, Inc.,

(f) deposit flows,

(g) competition, and

(h) demand for financial services in Greene County Bancorp, Inc.'s market area.

These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements, since results in future periods may differ materially from those currently expected because of various risks and uncertainties.

Comparison of Financial Condition as of September 30, 2012 and June 30, 2012

ASSETS

Total assets of the Company were $600.9 million at September 30, 2012 as compared to $590.7 million at June 30, 2012, an increase of $10.2 million, or 1.7%. Securities available for sale and held to maturity amounted to $220.8 million, or 36.7% of assets, at September 30, 2012 as compared to $233.9 million, or 39.6% of assets, at June 30, 2012, a decrease of $13.1 million or 5.6%. Net loans grew by $9.2 million or 2.8% to $336.0 million at September 30, 2012 as compared to $326.8 million at June 30, 2012.

CASH AND CASH EQUIVALENTS

Total cash and cash equivalents increased to $22.9 million at September 30, 2012 as compared to $7.7 million at June 30, 2012, an increase of $15.2 million. The level of cash and cash equivalents is a function of the daily account clearing needs and deposit levels as well as activities associated with securities transactions and loan funding. All of these items can cause cash levels to fluctuate significantly on a daily basis. Historically, we have experienced incrased levels of cash at September 30 due to the collection of local school taxes.


SECURITIES

Securities, including both available-for-sale and held-to-maturity issues, decreased $13.1 million, or 5.6%, to $220.8 million at September 30, 2012 as compared to $233.9 million at June 30, 2012. Securities purchases totaled $3.5 million during the quarter ended September 30, 2012 and consisted of $2.4 million of state and political subdivision securities, and $1.1 million of mortgage-backed securities. Principal pay-downs and maturities amounted to $16.6 million, of which $9.0 million were mortgage-backed securities, $4.6 million were state and political subdivision securities, $2.0 million were U.S. Treasury securities, and $1.0 million were U.S. government agency securities. Greene County Bancorp, Inc. holds 29.4% of the securities portfolio at September 30, 2012 in state and political subdivision securities to take advantage of tax savings and to promote Greene County Bancorp, Inc.'s participation in the communities in which it operates. Mortgage-backed securities and asset-backed securities held within the portfolio do not contain sub-prime loans and are not exposed to the credit risk associated with such lending.

                                                                 Carrying Value at
(Dollars in thousands)                          September 30, 2012                  June 30, 2012
                                                           Percentage                      Percentage
                                               Balance     of portfolio        Balance     of portfolio
Securities available-for-sale:
 U.S. government sponsored enterprises          16,492               7.5 %   $  17,398               7.4 %
 State and political subdivisions                4,653               2.1         4,899               2.1
 Mortgage-backed securities-residential         14,358               6.5        19,106               8.2
 Mortgage-backed securities-multifamily         40,763              18.5        40,663              17.4
 Asset-backed securities                            19               0.0            19               0.0
 Corporate debt securities                       5,407               2.4         5,316               2.3
Total debt securities                           81,692              37.0        87,401              37.4
 Equity securities and other                       132               0.1           127               0.1
Total securities available-for-sale             81,824              37.1        87,528              37.5
Securities held-to-maturity:
 U.S. treasury securities                        9,022               4.1        11,029               4.7
 U.S. government sponsored enterprises             998               0.4           998               0.4
 State and political subdivisions               60,254              27.3        62,212              26.6
 Mortgage-backed securities-residential         44,745              20.2        48,101              20.5
 Mortgage-backed securities-multifamily         23,592              10.7        23,673              10.1
 Other securities                                  359               0.2           376               0.2
Total securities held-to-maturity              138,970              62.9       146,389              62.5
Total securities                           $   220,794             100.0 %   $ 233,917             100.0 %

LOANS

Net loans receivable increased to $336.0 million at September 30, 2012 from $326.8 million at June 30, 2012, an increase of $9.2 million, or 2.8%. The loan growth experienced during the quarter primarily consisted of $2.4 million in nonresidential real estate loans, $4.5 million in residential mortgage loans, $561,000 in home equity loans, $1.3 million in construction loans, $205,000 in multi-family mortgage loans and $580,000 in non-mortgage loans, and was partially offset by a $359,000 increase in the allowance for loan loss. The continued low interest rate environment and strong customer satisfaction from personal service continued to enhance loan growth. If long term rates begin to rise, the Company anticipates some slow down in new loan demand as well as refinancing activities. The Bank of Greene County continues to use a conservative underwriting policy in regard to all loan originations, and does not engage in sub-prime lending or other exotic loan products. A significant decline in home values, however, in the Company's markets could have a negative effect on the consolidated results of operations, as any such decline in home values would likely lead to a decrease in residential real estate loans and new home equity loan originations and increased delinquencies and defaults in both the consumer home equity loan and the residential real estate loan portfolios and result in increased losses in these portfolios. Updated appraisals are obtained on loans when there is a reason to believe that there has been a change in the borrower's ability to repay the loan principal and interest, generally, when a loan is in a delinquent status. Additionally, if an existing loan is to be modified or refinanced, generally, an appraisal is ordered to ensure continued collateral adequacy.

                                   September 30, 2012                  June 30, 2012
                                                 Percentage                      Percentage
(Dollars in thousands)            Balance      of Portfolio       Balance      of Portfolio

Real estate mortgages:
  Residential                 $   197,907              57.9 %   $ 193,378              58.2 %
  Nonresidential                   83,189              24.3        80,794              24.3
  Construction and land             5,493               1.6         4,190               1.2
  Multi-family                      5,727               1.7         5,522               1.7
Total real estate mortgages       292,316              85.5       283,884              85.4
Home equity loans                  23,369               6.8        22,808               6.9
Consumer installment                4,221               1.2         4,070               1.2
Commercial loans                   22,117               6.5        21,688               6.5
Total gross loans                 342,023             100.0 %     332,450             100.0 %
Deferred fees and costs               525                             478
Allowance for loan losses          (6,536 )                        (6,177 )
Total net loans               $   336,012                       $ 326,751

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risk inherent in the loan portfolio, the composition of the loan portfolio, specific impaired loans and current economic conditions. Such evaluation, which includes a review of all loans on which full collectability may not be reasonably assured, considers among other matters, the estimated net realizable value or the fair value of the underlying collateral, economic conditions, payment status of the loan, historical loan loss experience and other factors that warrant recognition in providing for an allowance for loan loss. In addition, various regulatory agencies, as an integral part of their examination process, periodically review The Bank of Greene County's allowance for loan losses. Such agencies may require The Bank of Greene County to recognize additions to the allowance based on their judgment about information available to them at the time of their examination. The Bank of Greene County considers residential mortgages, home equity loans and installment loans to customers as small, homogeneous loans, which are evaluated for impairment collectively based on historical loss experience. Commercial mortgage and business loans are viewed individually and considered impaired if it is probable that The Bank of Greene County will not be able to collect scheduled payments of principal and interest when due, according to the contractual terms of the loan agreements. The measurement of impaired loans is generally based on the fair value of the underlying collateral. The allowance for loan losses is increased by a provision for loan losses (which results in a charge to expense) and recoveries of loans previously charged off and is reduced by charge-offs.


Analysis of allowance for loan losses activity

(Dollars in thousands)                                                    Three months ended
                                                                    September 30,      September 30,
                                                                          2012               2011

Balance at the beginning of the period                             $        6,177      $       5,069
Charge-offs:
   Residential real estate mortgages                                           39                 24
   Nonresidential mortgage                                                    ---                 33
   Consumer installment                                                        69                 51
   Commercial loans                                                           ---                ---
Total loans charged off                                                       108                108

Recoveries:
   Consumer installment                                                        23                 18
   Commercial loans                                                           ---                ---
Total recoveries                                                               23                 18

Net charge-offs                                                                85                 90

Provisions charged to operations                                              444                474
Balance at the end of the period                                   $        6,536      $       5,453

Ratio of annualized net charge-offs to average loans outstanding             0.10 %             0.12 %
Ratio of annualized net charge-offs to nonperforming assets                  4.80 %             4.79 %
Allowance for loan losses to nonperforming loans                            94.86 %            75.05 %
Allowance for loan losses to total loans receivable                          1.91 %             1.75 %

Nonaccrual Loans and Nonperforming Assets

Management places loans on nonaccrual status once the loans have become 90 days or more delinquent or sooner if there is a significant reason for management to believe the collectability is questionable and, therefore, interest on the loan will no longer be recognized on an accrual basis. The Company identifies impaired loans and measures the impairment in accordance with FASB ASC subtopic "Receivables - Loan Impairment." Management may consider a loan impaired once it is classified as nonaccrual and when it is probable that the borrower will be unable to repay the loan according to the original contractual terms of the loan agreement or the loan is restructured in a troubled debt restructuring. It should be noted that management does not evaluate all loans individually for impairment. The Bank of Greene County considers residential mortgages, home equity loans and installment loans as small, homogeneous loans, which are evaluated for impairment collectively based on historical loan experience and other factors. In contrast, large commercial mortgage, construction, multi-family and business loans are viewed individually and considered impaired if it is probable that The Bank of Greene County will not be able to collect scheduled payments of principal and interest when due, according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the fair value of the underlying collateral. The majority of The Bank of Greene County loans, including most nonaccrual loans, are small homogenous loan types adequately supported by collateral. Management considers the payment status of loans in the process of evaluating the adequacy of the allowance for loan losses among other factors. Loans that are either delinquent a minimum of 60 days or are on nonaccrual status, and are not individually considered impaired, are either designated as Special Mention or Substandard, and the allocation of the allowance for loan loss is based upon the risk associated with such designation. For further discussion and detail regarding the Allowance for Loan Losses and impaired loans please refer to Note (5) Credit Quality of Loans and Allowance for Loan Losses. A loan does not have to be 90 days delinquent in order to be classified as nonperforming. Foreclosed real estate is considered to be a nonperforming asset.

Analysis of Nonaccrual Loans and Nonperforming Assets

                                                                 At September       At June 30,
                                                                30, 2012                2012
(Dollars In thousands)
Nonaccrual loans:
   Real estate mortgages:
      Residential                                              $        3,669     $       4,206
      Nonresidential                                                    1,844             1,868
      Construction and land                                               ---               ---
      Multifamily                                                         611               431
   Home equity loans                                                      386                60
   Consumer installment loans                                              21                25
   Commercial loans                                                       237               303
Total nonaccrual loans                                                  6,768             6,893
Accruing loans delinquent 90 days or more
   Residential                                                             83                83
   Home Equity                                                             39                41
Total accruing loans delinquent 90 days or more                           122               124
Foreclosed real estate:
   Residential                                                            ---                60
   Nonresidential                                                         200               200
Foreclosed real estate                                                    200               260
Total nonperforming assets                                     $        7,090     $       7,277

Total nonperforming assets as a percentage of total assets               1.18 %            1.23 %
Total nonperforming loans to net loans                                   2.05 %            2.15 %

The table below details additional information related to nonaccrual loans for the three months ended September 30:

(In thousands)                              2012  2011
Interest income that would have been
recorded if loans had been performing in
accordance with original terms              $344  $379
Interest income that was recorded on
nonaccrual loans                              54    67

The Company identifies impaired loans and measures the impairment in accordance with FASB ASC subtopic "Receivables - Loan Impairment". A loan is considered impaired when it is probable that the borrower will be unable to repay the loan according to the original contractual terms of the loan agreement or the loan is restructured in a troubled debt restructuring.

The table below details additional information on impaired loans as of the dates indicated:

(In thousands)                            September    June
                                           30, 2012     30,
                                                       2012
Balance of impaired loans, with a
valuation allowance                          $6,144  $2,913
Allowances relating to impaired loans
included in allowance for loan losses         1,227     773
Balance of impaired loans, without a
valuation allowance                           1,802   1,794
Average balance of impaired loans for the
quarter ended                                 7,740   3,282
Interest income recorded on impaired
loans during the quarter ended                   35     178

Nonperforming assets amounted to $7.1 million at September 30, 2012 and $7.3 million as of June 30, 2012, a decrease of approximately $187,000 or 2.6%, and total impaired loans amounted to $7.9 million at September 30, 2012 compared to $4.7 million at June 30, 2012, an increase of $3.2 million or 68.1%. This growth has been the result of adverse changes within the economy and increases in local unemployment. Loans on nonaccrual status totaled $6.8 million at September 30, 2012 of which $3.8 million were in the process of foreclosure. Included in nonaccrual loans, $1.4 million were less than 90 days past due at September 30, 2012, but have a recent history of delinquency greater than 90 days past due. These loans will be returned to accrual status once they have demonstrated a history of timely payments. Included in total loans past due, were $587,000 of loans which were making payments pursuant to forbearance agreements. Under the forbearance agreements, the customers have made arrangements with the Bank to bring the loans current over a specified period of time (resulting in an insignificant delay in repayment). During this term of the forbearance agreement, the Bank has agreed not to continue foreclosure proceedings. While the Bank makes every reasonable effort to work with the borrowers to collect amounts due, the number of loans in process of foreclosure has grown substantially over the past several years. The growth in nonperforming assets is also due in part to the extended length of time required to meet all of the legal requirements mandated by New York State law prior to a foreclosure sale, which may be in excess of two years.

DEPOSITS

Total deposits increased to $536.1 million at September 30, 2012 from $511.9 million at June 30, 2012, an increase of $24.2 million, or 4.7%. This increase was primarily the result of an increase of $32.6 million in balances at the Greene County Commercial Bank due primarily to the annual collection of taxes by several local school districts. Interest bearing checking accounts (NOW accounts) increased $20.6 million, or 11.5%, to $199.6 million at September 30, 2012 as compared to $179.0 million at June 30, 2012. Money market deposits increased $13.6 million between June 30, 2012 and September 30, 2012. Partially offsetting these increases were a decreases in noninterest bearing deposits of $3.8 million from $52.8 million at June 30, 2012 to $49.0 million at September 30, 2012, and in certificates of deposit of $4.8 million from $72.0 million at June 30, 2012 to $67.2 million at September 30, 2012.

(Dollars in thousands)
                                               At
                                             September
                                                   30,        Percentage             At             Percentage
                                              2012          of Portfolio       June 30, 2012      of Portfolio

Noninterest bearing deposits               $    48,993               9.1 %   $        52,783              10.3 %
Certificates of deposit                         67,183              12.5              72,045              14.1
Savings deposits                               131,556              24.6             132,822              25.9
Money market deposits                           88,815              16.6              75,265              14.7
NOW deposits                                   199,596              37.2             179,022              35.0
Total deposits                             $   536,143             100.0 %   $       511,937             100.0 %

BORROWINGS

At September 30, 2012, The Bank of Greene County had pledged approximately $166.9 million of its residential mortgage portfolio as collateral for borrowing at the Federal Home Loan Bank ("FHLB"). The maximum amount of funding available from the FHLB through either overnight advances or term borrowings was $136.9 million at September 30, 2012, of which $7.0 million in term borrowings were outstanding at September 30, 2012. There were no overnight borrowings outstanding at September 30, 2012. Interest rates on overnight borrowings are determined at the time of borrowing. Term borrowings consisted of $2.0 million of fixed rate, fixed term advances with a weighted average rate of 3.86% and a weighted average maturity of 9 months. The remaining $5.0 million of borrowing, which carried a 3.64% interest rate and a maturity of 12 months at September 30, 2012, is unilaterally convertible by the FHLB under certain market interest rate scenarios, including three-month LIBOR at or above 7.50%, into replacement advances for the same or lesser principal amount based on the then current market rates. If the Bank chooses not to accept the replacement funding, the Bank must repay this convertible advance, including any accrued interest, on the interest payment date.

The Bank also pledges securities as collateral at the Federal Reserve Bank discount window for overnight borrowings. At September 30, 2012, approximately $5.4 million of collateral was available to be pledged against potential borrowings at the Federal Reserve Bank discount window. There were no balances outstanding with the Federal Reserve Bank at September 30, 2012.

The Bank of Greene County has established an unsecured line of credit with Atlantic Central Bankers Bank for $6.0 million. The line of credit provides for overnight borrowing and the interest rate is determined at the time of the borrowing. At September 30, 2012 and 2011 there were no balances outstanding . . .

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