UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended September 30, 1999
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 001-14910
GOUVERNEUR BANCORP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
UNITED STATES 04-3429966
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
42 CHURCH STREET, GOUVERNEUR, NEW YORK 13642
--------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (315) 287-2600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common Stock, par value $0.01 per share
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 [ ].
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the average of the final closing price of
such stock as December 15, 1999, was approximately $4,408,853. (The exclusion
from such amount of the market value of the shares owned by any person shall not
be deemed an admission by the registrant that such person is an affiliate of the
registrant.)
As of December 15, 1999, there were 2,384,040 issued and outstanding shares of
the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-K - Annual Report to Stockholders for the fiscal year ended
September 30, 1999.
Part III of Form 10-K - Portions of Proxy Statement for 2000 Annual Meeting of
Stockholders.
<PAGE>
PART I
Item 1. Description of Business
GENERAL
The Company's principal business is conducted through its wholly-owned
subsidiary, Gouverneur Savings and Loan Association (the "Bank"), except for
certain passive investments that the Company may make from time to time. The
Company's business consists of gathering deposits from the general public within
its market area and investing those deposits primarily in loans, debt
obligations issued by the U.S. Government, its agencies, and mortgage-backed
securities. The Company's principal loan type is residential one-to-four family
mortgage loans. In recent years, the Company has tried to diversify its lending
by increasing its level of automobile loans and commercial loans, both mortgage
and non-mortgage. The increased emphasis on non-real estate lending has been a
gradual process which accelerated in the most recent fiscal year. Although total
real estate loans grew in fiscal 1999, real estate loans represented 80.70% of
total loans at September 30, 1999, down from declined by 7.1% in 1999, and real
estate loans represented 80.7% of total loans at September 30, 1999.
The Company's revenues come principally from interest on loans and
securities. The Company's primary sources of funds are deposits and proceeds
from principal and interest payments on loans and investment securities.
MARKET AREA
The Company's primary market area is southern St. Lawrence County and
northern Jefferson and Lewis Counties in New York. Based on 1990 census data,
the Company estimates that the population of its primary market area is
approximately 100,000. The Company's market area is predominantly rural with
many small towns. The population of the service area works in diverse
industries, including manufacturing, agriculture, retail trades, construction,
mining, health care, education and government service. The largest private
employers in the market area are two mining companies, one for zinc and the
other for talc, and a paper mill. Fort Drum, a major military installation, is
located at the southern edge of the Company's primary market area. The Company
estimates that its share of the residential mortgage lending market in its
market area is approximately 10%-15%. The Company estimates that its share of
all bank deposits in its market area is approximately 25%.
Economic and demographic conditions in the Company's market area may
make implementation of the Company's operating strategy more difficult. Although
precise statistical data for the Company's market area is not available because
the market area spans parts of three counties, 1990 census data reflects that,
as is not unusual for predominantly rural areas, per capita income and median
home values are below New York State and national levels in all three counties
surrounding the Company. Unemployment in each of the three counties in the
Company's market area, although not at critical levels, was higher than
statewide and national unemployment rates. Furthermore, population growth in the
market area, if any, has been limited in recent years since an increase in
population was experienced in the early 1990's related to expansion of Fort
Drum. Demographic trends also reflect an aging of the local population. These
conditions are believed to extend to communities adjoining the Company's market
area as well. Therefore, in order to grow, the Company has made efforts to
expand into adjoining communities through opening a loan production office in
August 1999 to expand its customer base.
The Company's main office has been located in the Town and Village of
Gouverneur since it was chartered in 1892.
COMPETITION
The Company's principal competitors for deposits are other savings
banks, savings and loan associations, commercial banks and credit unions in the
Company's market area, as well as money market mutual funds, insurance companies
and securities brokerage firms, many of which are substantially larger in size
than the Company. The Company's competition for loans comes principally from
savings banks, savings and loan associations, commercial banks, mortgage
bankers, finance companies and other institutional lenders. Direct or indirect
competition for loans from nationally recognized mortgage secondary market
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lenders has increased in recent years, having the effect of both reducing the
Company's market share and driving down the interest rates it can earn on
residential mortgages. The Company's principal methods of competition include
loan and deposit pricing, flexible underwriting which permits variation from
secondary market underwriting requirements when believed appropriate,
maintaining close ties with its local community, advertising and marketing
programs and the types of services provided.
The Company is subject to competition from other financial institutions
which may have much greater financial and marketing resources. However, the
Company believes it benefits from its community bank orientation as well as its
relatively high core deposit base. Recent acquisitions of other banks in central
New York by larger institutions may have also given the Company a competitive
edge among those local residents who prefer doing business with a local Company.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The Company's loans consist primarily of
mortgage loans secured by one-to-four family residences. At September 30, 1999,
the Company had total loans of $46.6 million, of which $33.3 million, or 71.5%,
were one-to-four family first lien residential mortgage loans. The Company had
an additional $771,000 of home equity loans and home equity lines of credit
outstanding, or 1.7% of total loans, secured by subordinate liens on one-to-four
family residences. In recent years, the Company has focused on increasing its
levels of auto loans, commercial loans and commercial mortgage loans to expand
its business, increase yields and improve interest rate sensitivity. At
September 30, 1999, commercial loans totaled $4.4 million, of which $3.2 million
were commercial mortgage loans and $1.2 million were other commercial loans. The
Company also had $5.3 million of auto loans, or 11.4% of total loans, and $2.0
million of other consumer loans not secured by mortgages, or 4.4% of total
loans. The remainder of the Company's loans consisted of passbook and
construction loans. The Company's ratio of loans to total assets has been at
least 60% at fiscal year end for at least the past five years.
Interest rates earned on the Company's loans are affected by the demand
for loans, the supply of money available for lending and the rates offered by
competitors. These factors are in turn affected by, among other things, economic
conditions, monetary policies of the federal government, and legislative tax
policies.
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LOAN PORTFOLIO COMPOSITION
The following table sets forth the composition of the Company's mortgage and
other loan portfolios in dollar amounts and in percentages at the dates
indicated.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------- ------------------- ------------------- ------------------- --------------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
-------- --------- --------- --------- --------- --------- --------- -------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential............. $ 33,320 71.50% $ 28,834 80.71% $ 28,896 81.85% $ 28,378 84.61% $ 28,406 85.49%
Home equity............. 771 1.65% 835 2.34% 823 2.33% 473 1.41% 308 0.93%
Commercial real estate.. 3,222 6.91% 1,578 4.42% 1,825 5.17% 2,079 6.20% 2,383 7.17%
Construction............ 296 6.64% 124 0.35% 308 0.87% 142 0.42% 311 0.94%
-------- ----- -------- ----- -------- ----- -------- ----- -------- ------
Total real estate loans. 37,609 80.70% 31,371 87.82% 31,852 90.22% 31,072 92.64% 31,408 94.52%
Other loans:
Passbook loans.......... 411 0.88% 323 0.91% 475 1.36% 439 1.31% 605 1.82%
Automobile loans........ 5,306 11.38% 2,166 6.06% 1,283 3.63% 426 1.27% 239 0.72%
Other consumer loans.... 2,045 4.39% 1,384 3.87% 1,613 4.57% 1,603 4.78% 976 2.94%
Commercial loans........ 1,233 2.65% 477 1.34% 81 0.23% -- 0.00% -- 0.00%
-------- ----- -------- ----- -------- ----- -------- ----- -------- ------
Total other loans....... 8,995 19.30% 4,350 12.18% 3,452 9.78% 2,468 7.36% 1,820 5.48%
Total loans............... 46,604 100.00% 35,721 100.00% 35,304 100.00% 33,540 100.00% 33,228 100.00%
-------- ====== -------- ====== -------- ====== -------- ====== -------- ======
Less:
Deferred loan (costs)
fees, net............ (187) 30 51 102 117
Allowance for loan
losses............... 620 484 403 479 602
-------- -------- -------- -------- --------
Total loans, net......... $ 46,171 $ 35,207 $ 34,850 $ 32,959 $ 32,509
======== ======== ======== ======== ========
</TABLE>
4
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RESIDENTIAL MORTGAGE LOANS. Substantially all of the Company's
residential mortgage loan originations are fixed-rate mortgage loans with terms
up to 25 years, but predominantly from 15 to 20 years. The Company has only
recently begun to offer adjustable-rate mortgage loans. In recent years, with
relatively low mortgage interest rates, customer preference has strongly favored
fixed-rate mortgage loans. Therefore, all but $3.5 million of the Company's
$33.3 million of residential mortgage loans have fixed interest rates and most
of the adjustable rate loans have fixed rates for the first five years of the
loan term.
When underwriting residential mortgage loan applications, the Company
considers the income and assets of the borrower, the borrower's prior credit
history and the value of the collateral offered for the loan. In light of the
nature of the local market and competitive considerations, the Company
occasionally waives adverse credit circumstances related to the borrower if the
loan is generally considered to be sound. In recent years, the Company has
become stricter in its credit evaluations and currently experiences a
residential mortgage loan application rejection rate of approximately 25%.
The Company obtains independent appraisals on all residential first
mortgage loans and attorneys' opinions of title are required at closing. Current
surveys are generally not required because the Company believes that the cost of
obtaining a survey in the local market is not justified by the risks of not
having a survey. In almost all cases, the Company accepts attorney's title
opinions rather than title insurance on residential mortgage loans, but has not
experienced losses due to its reliance on title opinions instead of title
insurance. Private mortgage insurance is required on loans with a loan to value
ratio in excess of 90% and is usually required on loans with loan to value
ratios between 80% and 90% depending upon other circumstances. For the past
three years, real estate tax escrows have been required on all mortgage loans.
Previously, tax escrows were required only on loans with loan to value ratios in
excess of 85%.
Although fixed-rate mortgage loans may adversely affect the Company's
net interest income in periods of rising interest rates, the Company originates
such loans to satisfy customer demand. Such loans are generally originated at
initial interest rates which exceed the fully indexed rate on adjustable
mortgage loans offered at the same time. Therefore, during periods of level
interest rates, they tend to provide higher yields than adjustable loans.
Fixed-rate residential mortgage loans originated by the Company generally
include due-on-sale clauses which permit the Company to demand payment in full
if the borrower sells the property without the Company's consent. Due-on-sale
clauses are an important means of adjusting the rates of the Company's
fixed-rate mortgage loan portfolio, and the Company has generally exercised its
rights under these clauses.
Adjustable mortgage loans are offered with interest rates that adjust
annually based on the one year treasury bill index, plus 2.75%. Most of these
loans have initial five year periods with a fixed interest rate which adjusts
annually thereafter. Interest rate adjustments are generally limited to 2% per
year for one year adjustable loans. There is normally a lifetime maximum
interest rate adjustment, measured from the initial interest rate, of 5%. Credit
risks on adjustable rate loans are somewhat greater than on fixed-rate loans
primarily because, as interest rates rise, so do borrowers' payments, increasing
the potential for default.
The lack of title insurance and surveys, coupled with a more flexible
approach in analyzing borrower creditworthiness, means that a portion of the
Company's residential mortgage loan portfolio may not be salable at par to major
secondary market purchasers. The Company may elect, in the future, to develop a
secondary market lending operation which complies with secondary market criteria
in order to capture loan opportunities which are now being pursued by other
lenders in its marketplace. Management intends to continue to emphasize the
origination of mortgage loans secured by one-to-four family residences while at
the same time seeking to expand the Company's portfolio of other loan types.
HOME EQUITY LOANS. The Company offers a home equity line of credit
secured by a residential one-to-four family mortgage, usually a second lien.
Home equity revolving credit loans have only been offered since 1994, and the
Company has sought to increase its volume of these loans because they have
adjustable rates of interest which improve the interest sensitivity of the
Company's assets. These loans provide for an initial advance period of ten
years, during which the borrower pays 1/240th of the outstanding principal
balance, plus interest, each month, and can borrow, repay, and reborrow the
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principal balance. This is followed by a repayment period of ten years, during
which the balance of the loan is repaid in principal and interest installments.
The Company also offers home equity junior mortgage loans which are
fully advanced at closing and repayable in monthly principal and interest
installments over a period generally not to exceed 10 years. Customers in the
local market tend to prefer these loans to adjustable rate revolving credit home
equity loans because, the Company believes, they like the stability of the fixed
interest rate more than the flexibility of a line of credit.
The maximum loan to value ratio, including prior liens, is 75% for
junior mortgage loans. At September 30, 1999, the Company had $365,000 in
outstanding advances on home equity lines of credit, $323,000 of unused home
equity lines of credit and $554,000 in regular amortizing home equity loans.
COMMERCIAL MORTGAGE LOANS. The Company had a portfolio of $3.2 million
of commercial mortgage loans at September 30, 1999. The Company offers such
loans in order to diversify risk, obtain higher yields ordinarily associated
with commercial mortgage loans, and benefit from the improved interest rate
sensitivity of loans with shorter terms. The Company increased its focus on this
category of loans in 1998 and 1999 and more than doubled its portfolio of
commercial mortgage loans during 1999.
The Company offers commercial mortgage loans with loan-to-value ratios
up to 70%. Although the Company offers both fixed and adjustable rate commercial
mortgage loans, customers have almost all preferred fixed rate commercial
mortgage loans, and thus less than 10% of the Company's commercial mortgage
loans have adjustable interest rates.
The Company generally requires a debt service coverage ratio of at
least 120% and the personal guarantee of the principals of the borrower. The
Company also requires an appraisal by an independent appraiser. Attorneys'
opinions of title are used instead of title insurance for commercial mortgage
loans, but the Company has not experienced losses as a result of not having
title insurance.
Loans secured by commercial properties generally involve a greater
degree of risk than one-to-four family residential mortgage loans. Because
payments on such loans are often dependent on successful operation or management
of the properties, repayment may be subject, to a greater extent, to adverse
conditions in the real estate market or the economy. The Company seeks to
minimize these risks through its underwriting policies. The Company evaluates
the qualifications and financial condition of the borrower, including credit
history, profitability and expertise, as well as the value and condition of the
underlying property. The factors considered by the Company include net operating
income; the debt coverage ratio (the ratio of cash net income to debt service);
and the loan to value ratio. When evaluating the borrower, the Company considers
the financial resources and income level of the borrower, the borrower's
experience in owning or managing similar property and the Company's lending
experience with the borrower. The Company's policy requires borrowers to present
evidence of the ability to repay the loan without having to resort to the sale
of the mortgaged property.
CONSTRUCTION LOANS. The Company offers residential single family
construction loans to persons who intend to occupy the property upon completion
of construction. The loans are combination construction-permanent loans which
automatically convert to regular amortizing loans after construction is
complete. The proceeds of the construction loan are advanced in stages on a
percentage of completion basis as construction progresses. The loans generally
provide for a construction period of not more than twelve months during which
the borrower pays interest only. In recognition of the risks involved in such
loans, the Company carefully monitors construction through regular inspections.
At September 30, 1999, the Company had $296,000 of construction loans.
Construction loan levels tend to increase during the summer because of the
seasonal nature of residential construction, but even during the summer these
loans generally do not represent more than 1% of the Company's loan portfolio.
Occasionally, the Company makes construction loans for purposes other than the
construction of the borrower's residence when appropriate opportunities arise.
AUTOMOBILE LOANS. In recent years, the Company has exerted efforts to
increase its level of automobile loans in order to provide improved yields,
increase the interest rate sensitivity of its assets and expand its customer
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base. Auto loans are originated both through direct contact between the Company
and the borrower and through auto dealers who refer the borrowers to the
Company. The Company's auto loans are originated primarily through contacts with
local auto dealers, who refer customers to the Company. However, the Company
underwrites the loans itself and the loan is originated in the name of the
Company. The dealer is paid a flat fee for each successful referral.
The Company offers auto loans for both new and used cars. The loans
have fixed rates with maturities of not more than five years. At September 30,
1999, the Company had $5.3 million of auto loans, more than double the level of
auto loans only one year earlier. Auto loans are offered in amounts up to 100%
of the purchase price of the car. The Company evaluates the credit and repayment
ability of the borrower as well as the value of the collateral in determining
whether to approve a loan.
OTHER CONSUMER LOANS. The Company also makes fixed-rate consumer loans
either unsecured or secured by savings accounts or other consumer assets.
Consumer loans generally have terms to maturity not to exceed five years, but
home improvement loans are offered with terms up to 15 years, although most have
terms not exceeding ten years. Other consumer loans totaled $2.3 million at
September 30, 1999. The fixed-rate loans generally have a term of not more than
five years and have interest rates higher than mortgage loans. The shorter terms
to maturity are helpful in managing the Company's interest rate risk.
Applications for these loans are evaluated based upon the borrower's ability to
repay and, if applicable, the value of the collateral.
COMMERCIAL LOANS. The Company offers commercial non-mortgage loans to
local businesses for working capital, machinery and equipment purchases,
expansion, and other business purposes. These loans generally have higher yields
than mortgages loans, and include installment equipment financing with terms
that generally do not exceed seven years, short term working capital loans, and
commercial lines of credit with annual reviews. The Company offers fixed and
adjustable rate commercial loans, with fixed rates being more popular in the
current low interest rate environment. The Company had $1.2 million of such
loans at September 30, 1999, compared to only $101,000 of such loans 18 months
earlier. The Company is aggressively marketing such loans to businesses in its
market area. The Company offers these loans in order to diversify its product
offerings, maintain and seek to expand market share in light of increased
competition, improve yields and improve the interest rate sensitivity of its
assets.
Applications for these loans are generally evaluated based upon the
borrower's ability to repay the loan from ongoing operations. The loans normally
present greater risks than mortgage loans because the collateral, if any, is
often rapidly depreciable, easier to conceal and of limited value to other
companies. Furthermore, changes in economic conditions and other factors outside
the control of the Company, and often outside the control of the commercial
borrowers, can often have a substantial effect on delinquencies. Therefore, the
Company monitors these credits on an ongoing basis after the loan is made to be
prepared to address any credit problems promptly if they occur.
ORIGINATION OF LOANS. Loan originations come from a number of sources.
Residential loan originations can be attributed to depositors, retail customers,
telephone inquiries, advertising, the efforts of the Company's loan officers,
and referrals from other borrowers, real estate brokers and builders. The
Company originates loans through its own efforts and does not use mortgage
brokers, mortgage bankers or other non-employee fee paid loan finders except for
the referral of auto loans from local dealers.
All of the Company's lending is subject to its written,
nondiscriminatory underwriting standards and to loan origination procedures
prescribed by the Company's Board of Directors. Loan officers have individual
authority to make consumer loans up to amounts set by the Board. Any two
officers can approve a mortgage loan up to $25,000. Loans from $25,000 to
$100,000 must be approved by an ad hoc committee of two directors created as and
when loan applications need to be reviewed. Residential loans over $100,000 and
all commercial loans, whether or not secured by real estate, must be approved by
the full Board of Directors.
Under federal law and applicable OTS regulations, the Company may not
lend more than 15% of its capital to any one borrower, with additional loans up
to 10% of capital being permitted if the additional loans are secured by readily
marketable collateral. At September 30, 1999, the Company's largest loan had a
balance of $387,000 and was a mortgage loan secured by a first lien on
residential rental units located in the Company's market area. This loan was
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also the Company's largest loan relationship, combining all loans to a single
borrower or related group of borrowers, which is substantially below its
regulatory loan to one borrower limit of more than $2.0 million.
The Company neither purchases nor sells loans. The Company does not
service loans for other lenders and the Company has never purchased loan
servicing rights.
LOAN MATURITY. The following table shows the contractual maturity of
the Company's loan portfolio at September 30, 1999. Loans are shown as due based
on their contractual terms to maturity. Loans which have adjustable interest
rates are shown as maturing when the final loan payment is due without regard to
rate adjustments. The table does not show the effects of loan amortization,
possible prepayments or enforcement of due-on-sale clauses. Non-performing loans
are shown as being due based upon their contractual maturity without regard to
acceleration due to default.
Residential Commercial
Mortgage(1) Mortgage Other Loans Total
----------- ---------- ----------- -------
(In thousands)
Amounts due:
Within 1 year ........ $ 474 $ 126 $ 1,148 $ 1,748
1 to 2 years ......... 196 18 581 795
2 to 3 years ......... 511 49 1,207 1,767
3 to 5 years ......... 5,514 332 5,341 11,187
5 to 10 years ........ 10,068 1,624 335 12,027
Over 10 years ........ 17,624 1,073 383 19,080
------- ------- ------- -------
Total loans ............ $34,387 $ 3,222 $ 8,995 $46,604
======= ======= ======= =======
(1) Includes home equity and construction loans.
The following table shows, as of September 30, 1999, the amount of
loans due after September 30, 2000, and whether they have fixed interest rates
or adjustable interest rates.
Fixed Adjustable
Rates Rates Total
------- ---------- -------
(In thousands)
Residential mortgage .............. $30,405 $ 3,508 $33,913
Commercial mortgage ............... 3,044 52 3,096
Other loans ....................... 7,847 -- 7,847
------- ------- -------
Total ............................. $41,296 $ 3,560 $44,856
======= ======= =======
ASSET QUALITY
DELINQUENCY PROCEDURES. When a borrower fails to make a required
payment on a loan, the Company attempts to cause the deficiency to be cured by
contacting the borrower. Late notices are sent when a payment is more than 15
days past due and a late charge is generally assessed at that time. The Company
attempts to contact personally any borrower who is more than 30 days past due.
When a mortgage loan is 90 days past due, the Company sends a 30 days notice of
acceleration and if the loan is not brought current by the end of that period,
the loan is turned over to an attorney for collection, with foreclosure
generally commenced within 30 to 60 days thereafter. A foreclosure action, if
the default is not cured, generally leads to a judicial sale of the mortgaged
real estate. The judicial sale is delayed if the borrower files a bankruptcy
petition because the foreclosure action cannot be continued unless the Company
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first obtains relief from the automatic stay provided by the bankruptcy Code.
The Company has experienced losses due to delays caused by borrower bankruptcy
filings.
If the Company acquires the mortgaged property at foreclosure sale or
accepts a voluntary deed in lieu of foreclosure, the acquired property is then
classified as real estate owned. At September 30, 1999, the Company had $169,000
of real estate owned, represented by four single family residences. The Company
seeks to dispose of these properties through real estate brokers. Due to adverse
local economic conditions in the residential housing market, the disposition of
real estate owned can take six months or more. When real estate is acquired in
full or part satisfaction of a loan, it is recorded at the lower of the
principal balance of the loan or fair value less costs of sale. Any shortfall
between that amount and the carrying value of the loan is then charged to the
allowance for loan losses. Subsequent changes in the value of the property are
charged to the expense of real estate operations. The Company is permitted to
finance sales of real estate owned by "loans to facilitate," which may involve a
lower down payment or a longer repayment term or other more favorable features
than generally would be granted under the Company's underwriting guidelines. At
September 30, 1999, the Company had $481,000 of "loans to facilitate," all of
which were current in accordance with their terms.
When an automobile loan becomes 90 days past due, the Company seeks to
repossess the collateral. If the default is not cured, then upon repossession
the Company sells the automobile as soon as practicable by public notice and a
secured party auction. The remaining balance of the loan is fully charged off
when the loan is 120 days past due. When other types of non-mortgage loans
become past due, the Company takes measures to cure defaults through contacts
with the borrower and takes appropriate action, depending upon the borrower and
the collateral, to obtain repayment of the loan.
In the past, the Company has experienced high levels of delinquencies
and charge-offs. As a result, in 1994, the Company hired an individual whose
primary responsibility is loan collections, including regular contacts with past
due borrowers in an attempt to bring their loans current. The individual was
converted from part-time to full-time in 1995. The Company believes that this
has reduced the level of past due loans and improved the general performance of
its loan portfolio.
From time to time, the Company may give concessions to borrowers with
past due loans in order to assist the borrowers in repaying their loans by
restructuring the loan terms. These concessions generally involve lengthening
the repayment term of an existing loan in order to reduce monthly payments. The
Company generally does not agree to interest rate reductions or principal
forgiveness in order to restructure a loan. At September 30, 1999, the Company
had $502,000 of loans outstanding in which modifications had been made in order
to assist the borrower in repaying the loan. All such loans were current in
accordance with their restructured terms at September 30, 1999.
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The following table sets forth the Company's loan delinquencies by
type, by amount and by percentage of type at September 30, 1999.
<TABLE>
<CAPTION>
Loans Delinquent For:
----------------------------------------------------------------------------------------------
60-89 Days 90 Days or More Total Delinquent Loans
------------------------------ ----------------------------- ------------------------------
(Dollars in thousands)
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans 35 $857 2.28% 10 $196 0.52% 45 $1,053 2.80%
Other loans 7 47 0.52 5 25 0.28% 12 72 0.80%
---- ---- --- ---- --- ------
Total 42 $904 1.94% 15 $221 0.47% 57 $1,125 2.41%
==== ==== === ==== === ======
</TABLE>
The following table sets forth information with respect to the
Company's non-performing assets (which generally include loans that are
delinquent for 90 days or more and real estate owned) at the dates indicated. At
September 30, 1999, there were no loans other than those included in the table
below with regard to which management had information about possible credit
problems of the borrower that caused management to seriously doubt the ability
of the borrower to comply with present loan repayment terms.
At September 30,
-------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
Non-accrual loans:
Real estate loans ...................... $196 $259 $553 $658 $546
Other loans ............................ 25 -- 12 39 3
---- ---- ---- ---- ----
Total non-accrual loans .............. 221 259 565 697 549
Real estate owned ...................... 169 51 157 149 130
Total non-performing assets ............ $390 $310 $722 $846 $679
==== ==== ==== ==== ====
Non-performing loans as a percent
of total loans ........................ 0.47% 0.73% 1.60% 2.08% 1.65%
Non-performing assets as a percent
of total assets ....................... 0.56% 0.52% 1.31% 1.56% 1.25%
It is the Company's policy to discontinue accruing interest on a loan
when its fourth monthly payment is due and unpaid, unless the Company determines
that the nature of the delinquency and the collateral are such that collection
of the principal and interest on the loan in full is reasonably assured. When
the accrual of interest is discontinued, all accrued but unpaid interest is
charged against current period income. Generally, once the accrual of interest
is discontinued, the Company records interest as and when received until the
loan is restored to accruing status. However, if there is substantial doubt as
10
<PAGE>
to the collectibility of the loan, amounts received are recorded as a reduction
of principal until the loan is returned to accruing status.
The amount of additional interest income that would have been recorded
on non-accrual loans had those loans been performing in accordance with their
terms was approximately $11,000 for fiscal 1999, $11,000 for fiscal 1998 and
$24,000 for fiscal 1997.
CLASSIFIED ASSETS. OTS regulations require that the Company classify
its assets on a regular basis and establish prudent valuation allowances based
on such classifications. In addition, in connection with examinations, OTS
examiners have the authority to identify problem assets and, if appropriate,
require that they be classified. There are three adverse classifications for
problem assets: Substandard, Doubtful and Loss. Substandard assets have one or
more defined weaknesses and are characterized by the distinct possibility that
the Company will sustain some loss if the deficiencies are not corrected.
Doubtful assets have the weaknesses of Substandard assets, with the additional
characteristics that the weaknesses make collection or liquidation in full on
the basis of currently existing facts, conditions and values questionable, and
there is a high probability of loss. An asset classified Loss is considered
uncollectible and of such little value that its continuance as an asset on the
financial statements of the Company is not warranted.
Assets classified as Substandard or Doubtful require the Company to
establish prudent valuation allowances. If an asset or portion thereof is
classified as Loss, the Company must either establish a specific allowance for
loss equal to 100% of the portion of the asset classified Loss or charge off
such amount. If the Company does not agree with an examiner's classification of
an asset, it may appeal this determination. On the basis of management's review
of its loans and other assets at September 30, 1999, the Company had $373,000 of
assets classified substandard and none classified doubtful or loss.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in the Company's loan portfolio and the general economy. The
allowance for loan losses is maintained at an amount management considers
adequate to cover loan losses which are deemed probable and can be estimated.
The allowance is based upon a number of factors, including asset
classifications, economic trends, industry experience and trends, industry and
geographic concentrations, estimated collateral values, management's assessment
of the credit risk inherent in the portfolio, historical loan loss experience
and the Company's underwriting policies. The Company evaluates, on a monthly
basis, all loans identified as problem loans, including all non-accrual loans
and other loans where management has reason to doubt collection in full in
accordance with original payment terms. The Company considers whether the
allowance should be adjusted to protect against risks associated with such
loans. In addition, the Company applies fixed percentages for each category of
performing loans not designated as problem loans to determine an additional
component of the allowance to protect against unascertainable risks inherent in
any portfolio of performing loans. Finally, the Company includes an unallocated
component in its allowance to address general factors and general uncertainties
such as changes in economic conditions and the inherent inaccuracy of any
attempt to predict future default rates and property values based upon past
experience.
The analysis of the adequacy of the allowance is reported to and
reviewed by the Board of Directors monthly. Management believes it uses a
reasonable and prudent methodology to project potential future losses in the
loan portfolio, and hence assess the adequacy of the allowance for loan losses.
However, any such assessment is speculative and future adjustments may be
necessary if economic conditions or the Company's actual experience differ
substantially from the assumptions upon which the evaluation of the allowance
was based. Furthermore, state and federal regulators, in reviewing the Company's
loan portfolio as part of a future regulatory examination, may request the
Company to increase its allowance for loan losses, thereby negatively affecting
the Company's financial condition and earnings at that time. Moreover, future
additions to the allowance may be necessary based on changes in economic and
real estate market conditions, new information regarding existing loans,
identification of additional problem loans and other factors, both within and
outside of management's control.
11
<PAGE>
The following table analyzes activity in the Company's allowance for
loan losses during the periods indicated.
Year Ended September 30,
------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
Allowance, beginning of period ........ $484 $403 $479 $602 $466
Provision ............................. 162 130 250 -- 190
---- ---- ---- ---- ----
Charge-offs:
Real estate ......................... 40 87 312 154 208
Other loans ......................... 20 47 54 17 27
---- ---- ---- ---- ----
Total charge-offs ................... 60 134 366 171 235
Recoveries:
Real estate ......................... 21 66 22 38 158
Other loans ......................... 13 19 18 10 23
---- ---- ---- ---- ----
Total recoveries .................... 34 85 40 48 181
Net charge-offs ....................... 26 49 367 123 54
---- ---- ---- ---- ----
Allowance, end of period .............. $620 $484 $403 $479 $602
---- ---- ---- ---- ----
Allowance as a percent of total loans.. 1.33% 1.35% 1.14% 1.43% 1.81%
Allowance as a percentage of
non-performing loans .................. 280.54% 186.87% 71.33% 68.72% 109.65%
Ratio of net charge-offs to average
loans outstanding ..................... 0.07% 0.14% 0.97% 0.38% 0.16%
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. The allocation of the allowance
to each category is not necessarily indicative of future losses and does not
restrict the use of the allowance to absorb losses in any category.
12
<PAGE>
At September 30,
----------------------------------------
1999 1998
-------------------- -----------------
Percent Percent
of Loans of Loans
to Total to Total
Amount Loans Amount Loans
------ -------- ------ ----------
(Dollars in thousands)
ALLOWANCE ALLOCATED TO:
Real estate loans .............. $481 80.70% $394 87.82%
Other loans .................... 139 19.30% 90 12.18%
Total allowance ................. $620 100.00% $484 100.00%
==== ========= ==== =========
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------------
1997 1996 1995
-------------------- ------------------ ------------------
Percent Percent Percent
of Loans of Loans of Loans
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ALLOWANCE ALLOCATED TO:
Real estate loans $ 315 90.22% $ 416 92.64% $ 576 94.52%
Other loans 88 9.78% 63 7.36% 26 5.48%
----- ------- -------- ------- --------- -------
Total allowance $ 403 100.00% $ 479 100.00% $ 602 100.00%
===== ======= ======== ======= ========= =======
</TABLE>
ENVIRONMENTAL ISSUES
The Company encounters certain environmental risks in its lending
activities. Under federal and state environmental laws, lenders may become
liable for costs of cleaning up hazardous materials found on property securing
their loans. In addition, the presence of hazardous materials may have a
substantial adverse effect on the value of such property as collateral and may
cause economic difficulties for the borrower, causing the loan to go into
default. Although environmental risks are usually associated with loans secured
by commercial real estate, risks also may exist for loans secured by residential
real estate if, for example, there is nearby commercial contamination or if the
residence was constructed on property formerly used for commercial purposes. The
Company attempts to control its risk by requiring a phase one environmental
assessment by a Company-approved engineer as part of its underwriting review for
all mortgage loans other than those secured by one-to-four family residences.
The Company believes its procedures regarding the assessment of
environmental risk are adequate and, as of September 30, 1999, the Company was
unaware of any environmental issues with respect to any of its mortgage loans
which would subject it to any material liability at this time. Hidden or future
environmental contamination could adversely affect the values of properties
securing loans in the Company's portfolio.
INVESTMENT ACTIVITIES
GENERAL. The investment policy of the Company, which is approved by the
Board of Directors, is based upon its asset/liability management goals and is
designed primarily to provide satisfactory yields while maintaining adequate
liquidity, a balance of high quality, diversified investments, and minimal risk.
In recognition of the high level of fixed-rate residential mortgage loans, the
Company has sought to limit its securities investments to those with adjustable
rates or short terms to maturity. The investment policy is implemented by the
Company's President. All securities purchases and sales are reported to the
Board of Directors each month.
13
<PAGE>
As required by SFAS 115, securities are classified into three
categories: trading, held-to-maturity and available-for-sale. Securities that
are bought and held principally for the purpose of selling them in the near term
are classified as trading securities and are reported at fair value with
unrealized gains and losses included in trading account activities in the
statement of income. Securities that the Company has the positive intent and
ability to hold to maturity are classified as held-to-maturity and reported at
amortized cost. All other securities are classified as available-for-sale.
Available-for-sale securities are reported at fair value with unrealized gains
and losses included, on an after-tax basis, as a separate component of
accumulated other comprehensive income. The Company does not have a trading
securities portfolio and has no current plans to maintain such a portfolio in
the future. At September 30, 1999, the Company's securities portfolio included
securities with a fair value of $13.0 million which were classified as available
for sale and securities with amortized cost of $6.0 million which were
classified as held to maturity. The Company classifies each security between the
available for sale and held to maturity categories when the security is
purchased.
INVESTMENT SECURITIES. The Company's investment securities totaled
$19.0 million at September 30, 1999, including $13.0 million classified as
available for sale and $6.0 million classified as held to maturity. The Company
invests primarily in debt securities issued by the United States Government and
its agencies ($4.4 million at September 30, 1999), tax-exempt municipal
securities ($2.4 million at September 30, 1999), and mortgage-backed securities
issued or guaranteed by government-sponsored enterprises ($11.3 million at
September 30, 1999). The Company has classified all recent purchases of
investment securities as available for sale in order to maintain flexibility in
managing its investments. Investment securities are purchased in order to invest
funds that may be needed to make loans, to provide a source of liquidity if the
need for funds arises, to manage interest rate sensitivity, and to take
advantage of acceptable after-tax yields that are available when purchasing
certain tax-exempt municipal securities. The Company purchases only investment
grade debt securities and at September 30, 1999, none of its investment
securities were in default or otherwise classified.
The Company invests in mortgage-backed securities to supplement the
yields on its loan portfolio. Substantially all of the mortgage-backed
securities were issued, insured or guaranteed by the Federal National Mortgage
Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie
Mac) or the Government National Mortgage Association (Ginnie Mae). At September
30, 1999, the Company's mortgage-backed securities portfolio totaled $5.3
million classified as available for sale and $6.0 million classified as held to
maturity.
In furtherance of its asset/liability management goals and to improve
its interest rate sensitivity position, the Company's recent mortgage-backed
securities investments either have short terms with balloon payments at maturity
or which have adjustable rates. During fiscal 1999, the Company purchased
approximately $5.1 million of mortgage-backed securities with interest rates
that adjust annually. These securities, all of which were classified as
available for sale, were purchased with the proceeds of borrowings in a series
of transactions undertaken to improve leverage. The mortgage-backed securities
classified as held to maturity were generally purchased prior to the beginning
of fiscal 1998 and have remaining terms to maturity which are generally not more
than five years.
The Company's mortgage-backed securities generally tend to have lower
yields than the mortgage-backed securities held by some other financial
institutions because the Company invests principally in short-term balloon or
adjustable rate mortgage-backed securities which tend to have lower yields.
Mortgage-backed securities are more liquid than individual mortgage
loans and may be used to collateralize borrowings of the Company. However, these
securities generally yield less than the loans that underlie them because of the
cost of payment guarantees or credit enhancements that reduce credit risk.
Mortgage-backed securities of the type held by the Company are generally
weighted at 20%, rather than the 50% weighting for performing residential
one-to-four family mortgage loans, in determining risk-based capital ratios.
Investment securities carry a reduced credit risk as compared to loans.
However, investment securities classified as available for sale are subject to
the risk that a fluctuating interest rate environment could cause a material
decline in the carrying value of such securities. In addition, interest rate
fluctuations, real estate market changes and changes in economic conditions may
14
<PAGE>
alter the prepayment rates on mortgage-backed securities and thus affect the
value of such securities.
EQUITY SECURITIES. At September 30, 1999, the Company had $887,000 in
fair value of corporate equity securities represented by common stock of the
Federal Home Loan Mortgage Corporation with an amortized cost of $18,000. In
addition, the Company also had at September 30, 1999 a mutual fund investment
classified as available for sale with a carrying value of $68,000. The mutual
fund invests substantially all of its assets in mortgage-backed securities which
are themselves qualified investments for the Company. Although the mutual fund
does not qualify as a liquid asset because the terms to maturity of the
underlying mortgage-backed securities are too long, the Company considers it a
potential source of liquidity because it can be easily redeemed on a daily basis
as and when funds are needed.
At September 30, 1999, the Company also had $385,000 of stock in the
Federal Home Loan Bank of New York which was necessary for the Company to
maintain its membership in the federal home loan bank system. The stock is
redeemable at par. The yield on this stock was 6.86% (annualized) for the year
ended September 30, 1999.
The following table sets forth certain information regarding the
carrying value of the Company's available for sale and held to maturity
portfolios at the dates indicated.
At September 30,
---------------------------------
1999 1998 1997
------- ------- -------
Carrying Carrying Carrying
Value Value Value
------- ------- -------
(In thousands)
SECURITIES AVAILABLE FOR SALE:
U.S. Government securities ........... $ 4,357 $ 5,527 $ 3,007
Mortgage-backed securities ........... 5,300 258 --
Municipal securities ................. 2,359 259 --
------- ------- -------
Total debt securities .............. 12,016 6,044 3,007
Corporate equity securities .......... 887 888 631
Mutual funds ......................... 68 3,614 4,265
------- ------- -------
Total available-for-sale ......... 12,971 10,546 7,903
------- ------- -------
SECURITIES HELD TO MATURITY:
Mortgage-backed securities ........... 6,009 7,707 8,650
Other securities ..................... 10 10 10
------- ------- -------
Total held-to-maturity ........... 6,019 7,717 8,660
------- ------- -------
TOTAL SECURITIES .............. $18,990 $18,263 $16,563
======= ======= =======
15
<PAGE>
The table below sets forth certain information regarding the carrying
value, weighted average yields and stated maturity of the Company's securities
at September 30, 1999. There were no securities (exclusive of obligations of the
U.S. Government and federal agencies) issued by any one entity with a total
carrying value in excess of 10% of the Company's net worth at that date.
<TABLE>
<CAPTION>
One Year From One From Five More Than
or Less to Five Years to Ten Years Ten Years Total Securities
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government securities .. $ -- 0.00% $ 2,454 5.73% $1,657 6.41% $ 246 6.45% $ 4,357 6.30% $ 4,357
Mortgage-backed securities .. 3,083 5.74% 6,423 5.79% 1,557 5.65% 247 5.97% 11,310 5.77% 11,248
Municipal securities ........ 386 4.44% 552 4.67% 925 6.13% 496 5.92% 2,359 5.47% 2.359
Other securities ............ 964 1.14% -- 0.00% -- 0.00% -- 0.00% 964 5.47% 964
------- ------- ------ ----- -------- -------
Total ....................... $ 4,433 4.64% $ 9,429 5.77% $ 4,139 6.04% $ 989 6.21% $ 18,990 1.14% $ 18,928
</TABLE>
SOURCES OF FUNDS
GENERAL. The Company's primary source of funds is deposits. During
1999, the Company also used borowings as a source of funds to improve leverage.
In addition, the Company derives funds for loans and investments from loan and
security repayments and prepayments and revenues from operations. Scheduled
payments on loans and mortgage-backed and investment securities are a relatively
stable source of funds, while savings inflows and outflows and loan and
mortgage-backed and investment securities prepayments are significantly
influenced by general interest rates and money market conditions. In general,
the Company expects that it will continue to offer the same types of deposit
products but also expects that it will continue to use borrowings as an
additional source of funds to further improve leverage.
DEPOSITS. The Company offers several types of deposit programs to its
customers, including passbook savings accounts, NOW accounts, money market
deposit accounts, checking accounts and certificates of deposit. Deposit account
terms vary according to the minimum balance required, the time periods the funds
must remain on deposit and the interest rate, among other factors. The Company's
deposits are obtained predominantly from its primary market area. The Company
relies primarily on customer service and long-standing relationships with
customers to attract and retain these savings deposits; however, market interest
rates and rates offered by competing financial institutions significantly affect
the Company's ability to attract and retain savings deposits. The Company does
not use brokers to obtain deposits and has no brokered deposits. At September
30, 1999, the Company had $45.1 million of deposits.
The Company prices its deposit offerings based upon market and
competitive conditions in its market area and generally prices its deposits at
or above the rates offered by competitors. Pricing determinations are made
weekly by a committee of officers. The Company seeks to price its deposit
offerings to be competitive with other institutions in its market area.
16
<PAGE>
The following table sets forth the distribution of the Company's
deposit accounts at the dates indicated. Interest rates shown for non-time
accounts are the rates in effect at September 30, 1999.
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------
1999 1998 1997
------------------ ------------------ -------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
NON-TIME ACCOUNTS:
Savings and club accounts
(3.0-3.5%) ................. $15,423 34.18% $17,302 37.30% $14,878 34.14%
NOW and money market
accounts (2.0-3.0%) ........ 6,449 14.30% 5,292 11.41% 5,742 13.18%
Demand accounts .............. 184 0.41% 210 0.45% 113 0.26%
Total non-time accounts ...... 22,056 48.89% 22,804 49.16% 20,733 47.58%
TIME ACCOUNTS:
4.00 - 4.99% ................. 12,588 27.90% - 0.00% - 0.00%
5.00 - 5.99% ................. 10,201 22.61% 22,511 48.53% 20,651 47.39%
6.00 - 6.99% ................. 166 0.37% 410 0.89% 1,406 3.23%
7.00 - 7.99% ................. 102 0.23% 657 1.42% 786 1.80%
Total time accounts .......... 23,057 51.11% 23,578 50.84% 22,843 52.42%
Total deposits................. $45,113 100.00% $46,382 100.00% $43,576 100.00%
</TABLE>
At September 30, 1999, the Company had $3.3 million in certificates of
deposit with balances of $100,000 or more ("jumbo deposits"), representing 7.26%
of all deposits.
The following table sets forth the amount of certificates of deposit in
denominations of $100,000 at September 30, 1999, and the remaining period to
maturity of such deposits.
Amount Due (in Thousands)
-------------------------------------------------------------------
In More than 3 In More Than 6
In 3 Months up to 6 up to 12 In More than
or Less Months Months 12 Months
----------- -------------- --------------- ------------
$745 $730 $846 $954
BORROWINGS. During fiscal 1999, as part of the process of leveraging
its new capital, the Company incurred borrowings and invested the proceeds of
such borrowings in mortgage-backed securities to improve leverage. All
borrowings were from the Federal Home Loan Bank of New York. The borrowings
generally had short terms of three months or less with the entire principal
balance repayable at maturity. The mortgage-backed securities purchased with the
proceeds of the borrowings have adjustable rates of interest which adjust
annually. The average balance of outstanding borrowings during the year was $1.9
million and the average cost was 4.59%. The highest balance outstanding during
the year, which was also the year end balance, was $7.4 million.
SUBSIDIARY ACTIVITIES
The Company is permitted to own subsidiaries for certain limited
purposes, generally to engage in activities which are permissible for
subsidiaries of a bank holding company. The Company has no subsidiaries except
for the Bank.
17
<PAGE>
PERSONNEL
At September 30, 1999, the Company had 21 full-time and one part-time
employees. The employees are not represented by a collective bargaining unit,
and the Company considers its relationship with its employees to be good.
REGULATION
GENERAL
The Bank is a federal savings association subject to extensive
regulation, examination, and supervision by the OTS, as its primary federal
regulator and by the FDIC, as its deposit insurer. The Bank's deposit accounts
are insured up to applicable limits by the Savings Association Insurance Fund of
the FDIC, and the Bank is a member of the Federal Home Loan Bank of New York.
The OTS also regulates the Company as a savings and loan holding company.
REGULATION OF FEDERAL SAVINGS ASSOCIATIONS
BUSINESS ACTIVITIES. The Bank's powers generally come from federal law
and OTS regulations, The Bank may make mortgage loans, commercial loans and
consumer loans, and may invest in certain types of debt securities, and other
assets. The Bank's lending and investment powers are subject to limits,
including, among others, (a) a prohibition against acquiring any corporate debt
security that is not rated in one of the four highest rating categories; (b) a
limit of 400% of capital that can be invested in loans secured by
non-residential real estate property; (c) a limit of 10% of assets that can be
invested in commercial loans; (d) a limit of 35% of assets that can be invested
in consumer loans, commercial paper and corporate debt securities; (e) a limit
of 5% of assets which can be invested in non-conforming loans (loans in excess
of limits specified in federal law); (f) a limit of the greater of 5% of assets
or its total capital which can be invested in certain construction loans made
for the purpose of financing what is or is expected to become residential
property; and (g) a limit of 10% of assets that can be invested in personal
property used for general leasing activities. The Bank may offer a variety of
deposit accounts, including savings, certificate (time), demand and NOW
accounts.
LOANS TO ONE BORROWER. The Bank generally may not make a loan or extend
credit to a single or related group of borrowers in excess of 15% of its
unimpaired capital and surplus. Up to an additional 10% of unimpaired capital
and surplus can be lent if the additional amount is fully secured by
readily-marketable collateral. At September 30, 1999, the Bank's regulatory
limit on loans to one borrower was in excess of $2.0 million. At that date, the
Bank's largest aggregate loans to one borrower was approximately $375,000.
QTL TEST. The Bank must meet a qualified thrift lender, or "QTL" test.
Under the QTL test, the Bank must maintain at least 65% of its assets, after
certain adjustments, in various types of loans made for residential and housing
purposes, related investments, education, small business and credit card loans,
and consumer loans and certain other loans and investments. The Bank satisfies
the QTL test and the Bank anticipates that it will continue to satisfy the test
in the future. If the Bank fails to satisfy the QTL test, it will have to either
restrict its activities or convert to a commercial bank charter.
CAPITAL REQUIREMENTS. OTS regulations require that the Bank maintain
tangible capital equal to 1.5% of total assets as adjusted under the OTS
regulations, core capital equal to 3% of such adjusted total assets and total
capital (core capital plus supplementary capital) equal to 8% of risk-weighted
assets. The Bank's capital ratios at September 30, 1999 all substantially
exceeded OTS minimum capital requirements, and those requirements do not now
have a material affect on the Bank.
LIMITATIONS ON CAPITAL DISTRIBUTIONS.
OTS regulates the amount of dividends and other capital distributions
which the Bank may pay to the Company. In general, if the Bank will satisfy all
OTS capital requirements both before and after the distribution, the Bank may
18
<PAGE>
make capital distributions to the Company in any year equal to the current
year's net income plus retained net income for the preceding two years. However,
the Bank must notify the OTS of the distribution and the OTS may object on
safety and soundness grounds.
If any capital distribution will exceed these limits, or if the OTS
either considers the Bank a troubled or problem institution or gives the Bank a
rating in less than the two highest rating categories, then the Bank must get
OTS approval before making a capital distribution. The Bank is not currently
required to obtain OTS approval unless it exceeds the dollar limits, and the
Bank has never paid a dividend to the Company. Therefore, the Company does not
believe that the OTS capital distribution regulations will have a material
affect on its operations or its ability to pay dividends to its stockholders.
COMMUNITY REINVESTMENT. Under the federal Community Reinvestment Act
(the "CRA"), the Bank, consistent with its safe and sound operation, must help
meet the credit needs of its entire community, including low and moderate income
neighborhoods The OTS periodically assesses the Bank's compliance with CRA
requirements. The Bank received a "satisfactory" CRA rating in its most recent
OTS examination.
TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in
transactions with its "Affiliates" by federal law. In general, an affiliate of
the Bank is any company that controls the Bank or any other company that is
controlled by a company that controls the Bank, excluding the Bank's
subsidiaries other than those that are insured depository institutions. The Bank
may not (a) lend to any of its affiliates that is engaged in activities that are
not permissible for bank holding companies and (b) purchase the securities of
any affiliate other than a subsidiary. Transactions with any individual
affiliate may not exceed 10% of the capital and surplus of the Bank and
aggregate transactions with all affiliates may not exceed 20%. These
restrictions do not impose material limits on the Bank's business activities.
The Bank's loans to insiders must be made on terms that are
substantially the same as, and follow credit underwriting procedures that are
not less stringent than, those prevailing for comparable transactions with
unaffiliated persons and that do not involve more than the normal risk of
repayment or present other unfavorable features. The loans are also subject to
maximum dollar limits and must generally be approved by the Board of Directors.
The Bank may make loans to insiders on preferential terms as part of a benefit
or compensation program that is widely available to employees. The Bank has no
such benefit or compensation programs.
INSURANCE OF DEPOSIT ACCOUNTS. The Bank pays deposit insurance premiums
to the FDIC. The amount of the premium depends upon the Bank's capital ratios
and supervisory rating category. At present, the Bank's capital ratios and
supervisory rating are high enough that the Bank pays no regular deposit
insurance premiums. However, the Bank must pay a share of the cost of the bonds
issued in the late 1980s to recapitalize the now defunct Federal Savings and
Loan Insurance Corporation, currently equal to approximately 0.065% of its
insured deposits per year.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the Federal Home
Loan Bank of New York. The Bank uses the FHLBNY as a source for borrowing funds.
The Bank must own stock in the FHLBNY at least equal to the greater of 1% of the
principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year or 5% of its advances from the FHLBNY.
At September 30, 1999, the Bank had $385,000 of capital stock of the FHLBNY,
which satisfied this requirement and it had no FHLBNY borrowings.
HOLDING COMPANY REGULATION
GENERAL POWERS. The Company may engage in the following activities: (i)
investing in the stock of a savings association; (ii) acquiring a mutual
association through the merger of such association into a savings association
subsidiary of such holding company or an interim savings association subsidiary
of such holding company; (iii) merging with or acquiring another holding
company, one of whose subsidiaries is a savings association; (iv) investing in a
corporation, the capital stock of which is available for purchase by a savings
association under federal law or under the law of any state where the subsidiary
savings association or associations share their home offices; (v) furnishing or
19
<PAGE>
performing management services for a savings association subsidiary of such
company; (vi) holding, managing or liquidating assets owned or acquired from a
savings association subsidiary of such company; (vii) holding or managing
properties used or occupied by a savings association subsidiary of such company;
(viii) acting as trustee under deeds of trust; (ix) any other activity (A) that
the Federal Reserve Board, by regulation, has determined to be permissible for
bank holding companies under Section 4(c) of the Bank Holding Company Act of
1956, unless the Director, by regulation, prohibits or limits any such activity
for savings and loan holding companies; or (B) in which multiple savings and
loan holding companies were authorized (by regulation) to directly engage on
March 5, 1987; and (x) purchasing, holding, or disposing of stock acquired in
connection with a qualified stock issuance if the purchase of such stock by such
savings and loan holding company is approved by the Director.
WAIVERS OF DIVIDENDS BY THE MUTUAL HOLDING COMPANY. Cambray Mutual
Holding Company owns 55% of the stock of the Company. If Cambray MHC decides to
waive its share of any dividend that the Bank is paying to its stockholders,
Cambray MHC must notify the OTS. The OTS reviews dividend waiver notices on a
case-by-case basis, and, in general, does not object to any such waiver if: (i)
the mutual holding company's board of directors determines that such waiver is
consistent with such directors' fiduciary duties to the mutual holding company's
members; (ii) for as long as the savings association subsidiary is controlled by
the mutual holding company, the dollar amount of dividends waived by the mutual
holding company are considered as a restriction to the retained earnings of the
savings association, which restriction, if material, is disclosed in the public
financial statements of the savings association as a note to the financial
statements; (iii) the amount of any dividend waived by the mutual holding
company is available for declaration as a dividend solely to the mutual holding
company, and, in accordance with SFAS 5, where the savings association
determines that the payment of such dividend to the mutual holding company is
probable, an appropriate dollar amount is recorded as a liability; (iv) the
amount of any waived dividend is considered as having been paid by the savings
association in evaluating any proposed dividend under OTS capital distribution
regulations; and (v) in the event the mutual holding company converts to stock
form, the appraisal submitted to the OTS in connection with the conversion
application takes into account the aggregate amount of the dividends waived by
the mutual holding company.
CONVERSION OF THE MUTUAL HOLDING COMPANY TO STOCK FORM. OTS regulations
permit the Mutual Holding Company to convert from the mutual to the capital
stock form of organization. The Board of Directors has no current intention or
plans for such a transaction. In general, if such a transaction is undertaken, a
new company would be formed to replace the Company and 55% of its stock would be
offered to the depositors of the Bank and to the public. The other current
stockholders of the Company would be entitled to receive 45% of the stock of the
new company in exchange for the stock of the Company. These two percentages
would be adjusted to reflect any prior dividend waiver as described above.
Item 2. Description of Properties
The Company conducts its business through its headquarters at 42 Church
Street in the Town and Village of Gouverneur. The Company owns the premises. The
net book value of the premises is $70,000. The Company believes its current
facilities are barely adequate for its current needs and the Board of Directors
of the Bank has established a committee to explore alternatives for expansion.
However, no assessment of the cost of different expansion alternatives has been
made. The Company also operates a loan production office out of rented space in
Alexandria Bay, New York. The book value of the premises is zero.
Item 3. Legal Proceedings
The Registrant's subsidiary, Gouverneur Savings and Loan Association
(the "Bank"), is involved as plaintiff or defendant in various legal actions
arising in the normal course of its business. While the ultimate outcome of
these proceedings cannot be predicted with certainty, it is the opinion of
management, after consultation with counsel representing the Bank in the
proceedings, that the resolution of these proceedings should not have a material
effect on the Bank's or the Registrant's results of operations. The Registrant
is not a party to any litigation.
20
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended September 30,
1999.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information contained under the caption "Common Stock" in the 1999
Annual Report to Stockholders included as Exhibit 13 hereto is herein
incorporated by this reference.
Item 6. Selected Financial Data
Information contained under the caption "Selected Financial Data" in
the 1999 Annual Report to Stockholders included as Exhibit 13 hereto is herein
incorporated by this reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Information contained under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the 1999 Annual
Report to Stockholders included as Exhibit 13 hereto is herein incorporated by
this reference.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Information contained under the caption "Quantitative and Qualitative
Disclosure About Market Risk" in the 1999 Annual Report to Stockholders included
as Exhibit 13 hereto is herein incorporated by this reference.
Item 8. Financial Statements
The following information appearing in the 1999 Annual Report to
Stockholders included as Exhibit 13 hereto is herein incorporated by this
reference.
Report of Independent Public Accountants Consolidated Statements of
Financial Condition as of September 30, 1999 and 1998
Consolidated Statements of Operations for the Years Ended September 30,
1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for Years Ended September 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for Years Ended September 30,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
With the exception of the information expressly incorporated herein by
reference, the Company's Annual Report to Stockholders for the year ended
September 30, 1999, is not deemed filed as part of this Annual Report on Form
10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure: None
21
<PAGE>
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Directors
Information contained under the captions "The Election of Directors
(introduction);" "The Election of Directors-The Board of Directors and
Nominees;" "The Election of Directors-Nominees;" "The Election of Directors-
Continuing Directors;" and "The Election of Directors-Meetings of the Board of
Directors and Certain Committees" in the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held on February 15, 2000, to be filed with
the Commission within 120 days after the end of the fiscal year covered by this
report, is incorporated herein by this reference.
Executive Officers
Information contained under the captions "The Election of Directors
Nominees - Richard F. Bennett;" and "The Election of Directors-Executive
Officers Who Are Not Directors" in the definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on February 15, 2000, to be filed with the
Commission within 120 days after the end of the fiscal year covered by this
report, is incorporated herein by this reference.
Compliance with Section 16(a)
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended September 30, 1999, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10 percent beneficial owners were complied with.
Item 11. Executive Compensation
Information contained under the caption "Compensation" in the
definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
February 15, 2000, to be filed with the Commission within 120 days after the end
of the fiscal year covered by this report, is incorporated herein by this
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information contained under the caption "Principal Owners of Our Common
Stock" in the definitive Proxy Statement for the Annual Meeting of Stockholders
to be held on February 15, 2000, to be filed with the Commission within 120 days
after the end of the fiscal year covered by this report, is incorporated herein
by this reference.
Item 13. Certain Relationships and Related Transactions
Information contained under the caption "Compensation-Transactions With
Directors and Officers" in the definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on February 15, 2000, to be filed with the Commission
within within 120 days after the end of the fiscal year covered by this report,
is incorporated herein by this reference.
Item 14. Exhibits and Reports on Form 8-K
(a) Exhibits
SEE INDEX TO EXHIBITS
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended
September 30, 1999.
22
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GOUVERNEUR BANCORP, INC.
Date: December 28, 1999 By: /s/ RICHARD F. BENNETT
---------------------------------
Richard F. Bennett, President
(Duly authorized representative)
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Date:
December 28, 1999 /s/ RICHARD F. BENNETT
------------------------------------
Richard F. Bennett, President,
Chief Executive Officer and Director
December 28, 1999 /s/ ROBERT TWYMAN
------------------------------------
Robert Twyman, Chief Financial Officer
Principal financial officer
December 28, 1999 /s/ KATHLEEN MCINTOSH
------------------------------------
Kathleen McIntosh, Treasurer
Principal accounting officer
December 28, 1999 /s/ CHARLES GRAVES
------------------------------------
Charles Graves, director
December 28, 1999 /s/ RICHARD JONES
------------------------------------
Richard Jones, Director
December 28, 1999 /s/ FRANK LANGEVIN
------------------------------------
Frank Langevin, Director
December 28, 1999 /s/ ROBERT LEADER
------------------------------------
Robert Leader, Director
December 28, 1999 /s/ TIMOTHY MONROE
------------------------------------
Timothy Monroe, Director
December 28, 1999 /s/ JOSEPH PISTOLESI
------------------------------------
Joseph Pistolesi, Director
December 28, 1999 /s/ LARRY STRAW
------------------------------------
Larry Straw, Director
23
<PAGE>
INDEX TO EXHIBITS
Reference to
Previous Filing,
Exhibit Number Document If applicable.
- -------------- -------- --------------
3(i) Certificate of Incorporation **
3(ii) Bylaws **
4 Form of Stock Certificate *
10.1 Employee Stock Ownership Plan *
10.2 Stock Option Plan ***
10.3 Management Recognition Plan ***
13 1999 Annual Report to Stockholders
21 Subsidiaries of Registrant
27 Financial Data Schedule
* Filed as exhibits to the Company's Form S-1 registration statement filed with
the Commission on June 26, 1998 (File No. 333-57845). All of such previously
filed documents are hereby incorporated herein by reference in accordance with
Item 601 of Regulation S-K.
** Filed as exhibits to the Company's Pre-effective Amendment No. One to Form
S-1 filed with the Commission on August 5, 1999, 1998 (File No. 333-57845). All
of such previously filed documents are hereby incorporated herein by reference
in accordance with Item 601 of Regulation S-K.
*** Filed as exhibits to the Company's Definitive Proxy Statement on Form 14A
filed with the Commission on September 9, 1999. All of such previously filed
documents are hereby incorporated herein by reference in accordance with Item
601 of Regulation S-K.
24
PRESIDENT'S MESSAGE
To Our Stockholders:
On behalf of the Board of Directors, Officers and employees of
Gouverneur Bancorp, Inc. and its subsidiary, Gouverneur Savings & Loan
Association, I am pleased to present to you this annual report, our first as a
public company.
During the 1999 fiscal year, Gouverneur Savings & Loan Association
completed several of the most important advances in its long history. Most
significantly, on March 23, 1999, we completed the reorganization of our Bank
into a mutual holding company structure. As a result of the reorganization, the
Bank became a wholly owned subsidiary of the Company, Gouverneur Bancorp, Inc.,
which in turn sold 45% of its stock to the public and the Bank's employee stock
ownership plan, and 55% of its stock to Cambray Mutual Holding Company. The sale
of the Company's stock raised approximately $4.1 million in new investable
funds.
As part of the reorganization process, your management team developed a
four step plan to deploy these new funds to achieve profitability and growth,
without sacrificing our long held policy of prudent and careful lending and
investment. First, recognizing that loans are the Bank's highest yielding
assets, we gradually added to our loan production staff to increase our lending
opportunities. Second, to further increase lending, in July, we opened a loan
production office in Alexandria Bay. Third, we have aggressively pursued
commercial, automobile and other consumer loans, which carry higher yields than
residential mortgage loans. These efforts produced a 31% increase in net loans
for the 1999 fiscal year, from $35.2 million to $46.2 million. Finally, to
increase our leverage, and ultimately, our profitability, we borrowed $7.4
million on favorable terms from the Federal Home Loan Bank of New York and
reinvested those funds in mortgage backed securities.
In fiscal 2000, we will continue to pursue new loan originations for
the Bank and new markets and business diversification opportunities for both the
Bank and the Company. As we grow and meet the challenges of our changing
business, we assure you that Gouverneur Savings & Loan Association will remain
faithful to its mission as a community based institution, serving the financial
needs of the people in its North Country markets, as it has since its founding
more than a century ago. We believe that prudent growth, along with the
well-planned addition of new products and services, will position the Bank and
the Company to best serve all of our constituencies - stockholders, borrowers,
depositors and employees.
We look forward to building our franchise in the new millennium and
welcome your support in this endeavor.
/s/ RICHARD F. BENNETT
-------------------------------------
Richard F. Bennett
President and Chief Executive Officer
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
SELECTED FINANCIAL CONDITION DATA:
AT SEPTEMBER 30,
-----------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(In thousands)
Total assets ................ $69,996 $59,337 $55,172 $54,347 $54,274
Loans receivable, net (1) .. 46,791 35,691 35,253 33,438 33,111
Allowance for loan losses ... 620 484 403 479 602
Securities available-for-sale 12,971 10,546 7,903 10,817 10,540
Securities held-to-maturity . 6,019 7,717 8,660 5,416 4,506
Cash and cash equivalents ... 3,490 4,434 2,486 3,939 2,223
Real estate owned ........... 169 51 157 149 130
Deposits .................... 45,113 46,382 43,576 43,502 44,200
Total shareholders' equity... $16,029 $11,468 $10,689 $ 9,993 $ 9,465
<TABLE>
<CAPTION>
SELECTED OPERATIONS DATA:
Year Ended September 30,
------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income .................................. $4,813 $4,336 $4,275 $4,338 $4,260
Interest expense ................................. 2,019 1,907 1,896 1,980 1,823
------ ------ ------ ------ ------
Net interest income .......................... 2,794 2,429 2,379 2,358 2,437
Provision for loan losses ........................ 162 130 250 -- 190
------ ------ ------ ------ ------
Net interest income after
provision for loan losses .............. 2,632 2,299 2,129 2,358 2,247
Non-interest income .............................. 151 144 113 149 141
Non-interest expenses ............................ 1,711 1,443 1,370 1,774 1,378
------ ------ ------ ------ ------
Income before income taxes and
cumulative effect of changes in
accounting principles ......................... 1,072 1,000 749 1,010 872
Income tax expense (benefit) ..................... 431 380 335 297 416
------ ------ ------ ------ ------
Income before cumulative effect of
changes in accounting principles .............. 641 620 537 452 594
------ ------ ------ ------ ------
Net income ....................................... $ 641 $ 620 $ 537 $ 452 $ 594
====== ====== ====== ====== ======
</TABLE>
NOTES APPEAR ON FOLLOWING PAGE.
2
<PAGE>
SELECTED FINANCIAL RATIOS AND OTHER DATA (2):
<TABLE>
<CAPTION>
At or for the Year Ended September 30,
--------------------------------------------------
1999 1998 1997 1996 1995
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS:
Return on average assets (net income to
average total assets) ....................... 1.03% 1.12% 0.99% 0.92% 1.04%
Return on average equity (net income to
average equity) ............................. 4.84% 5.74% 5.36% 5.33% 6.13%
Average interest-earning assets to average
interest-bearing liabilities ................ 125.04% 121.99% 120.21% 119.11% 117.45%
Net interest rate spread (3) .................. 3.81% 3.82% 3.82% 3.77% 4.21%
Net interest margin (4) ....................... 4.65% 4.61% 4.56% 4.50% 4.84%
Net interest income after provision for
loan losses to total other expenses ......... 1.54x 1.59x 1.51x 1.33x 1.63x
CAPITAL AND ASSET QUALITY RATIOS:
Average equity to average total assets.......... 21.27% 19.56% 18.41% 17.22% 16.95%
Total equity to assets end of period ........... 22.90% 19.33% 19.37% 18.39% 17.44%
Non-performing assets to total assets .......... 0.56% 0.49% 1.31% 1.56% 1.25%
Non-performing loans to total loans ............ 0.47% 0.67% 1.60% 2.08% 1.65%
Allowance for loan losses to total loans........ 1.33% 1.35% 1.14% 1.43% 1.81%
Allowance for loan losses to
non-performing loans ........................ 280.54% 203.36% 71.33% 68.72% 109.65%
OTHER DATA:
Number of real estate loans outstanding ....... 1,383 1,338 1,386 1,424 1,476
Number of deposit accounts .................... 6,890 6,619 6,508 6,495 6,470
Full service offices .......................... 1 1 1 1 1
</TABLE>
(1) Shown net of deferred fees and costs.
(2) Asset quality and capital ratios are at end of period. All other ratios
are based on average daily balances.
(3) The net interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted average
cost of interest-bearing liabilities.
(4) The net interest margin, also known as the net yield on average
interest-earning assets, represents net interest income as a percentage of
average interest-earning assets.
3
<PAGE>
OUR FIRST YEAR AS A PUBLIC COMPANY
The 1999 fiscal year was a year of dramatic change for Gouverneur
Bancorp, Inc. When the year began on October 1, 1998, we did not yet exist and
our Bank, Gouverneur Savings and Loan Association, was in the middle of a mutual
holding company reorganization. The depositors of the Bank had just approved the
reorganization, and a stock offering was under way. However, due to a general
decline in the market value of financial institution stock, and a decline in
market acceptance of financial institutions, the reorganization was not
completed right away. Instead, we revised the amount of stock we were offering
after a reduction in the appraised value of the stock that was to be issued, and
we finally completed the reorganization on March 23, 1999.
We sold 1,072,818 shares of stock at $5.00 per share to the public and
our employee stock ownership plan in the reorganization, representing 45% of our
outstanding stock, and we issued an additional 1,311,222 shares, representing
the remaining 55%, to Cambray Mutual Holding Company. The stock sale gave us
approximately $4.1 million of new funds to invest, after deducting the cost of
the reorganization and the proceeds from shares sold the ESOP which were
purchased with funds we lent to the ESOP. The stock sale also increased our
capital, which is available to support future growth. OTS regulations require
that Cambray MHC own a majority of our outstanding stock. In order to dispose of
that stock, OTS regulations require, in most instances, that the depositors of
the Bank must approve the transaction in which the sale will occur, and then the
shares must first be offered to those depositors.
- ---------------------------------------------------------------
Our Reorganization gave us $4.1 million of new funds to invest.
- ---------------------------------------------------------------
The Bank has been and continues to be a community oriented financial
institution offering a variety of financial services. The Bank attracts deposits
from the general public and uses those deposits, together with other funds, to
make loans and other investments. Most of the loans are one to four family
residential mortgages. The Bank also makes consumer (including home equity lines
of credit), commercial, and multi-family real estate and other loans. Most of
the loans are in the Bank's primary market area, which is southern St. Lawrence
and northern Jefferson and Lewis counties in New York State. The FDIC insures
the Bank's deposit accounts, and the FDIC and the Office of Thrift Supervision
both regulate the Bank.
Our profitability depends, to a large extent, on our net interest
income, which is the difference between the interest we receive on our interest
earning assets, such as loans and investments, and the interest we pay on
interest bearing liabilities. Other categories of expenses generally include the
provision for loan losses, salaries and employee benefits costs, net expenses on
real estate owned and various other categories of operational expenses. External
factors, such as general economic and competitive conditions, particularly
changes in interest rates, government policies and actions of regulatory
authorities, can have a substantial effect on profitability.
We know that our additional capital brings with it the added
responsibility to a new constituency, our shareholders. We do not view our
shareholders as adversaries - as a matter of fact, every director of our company
is a substantial stockholder and some of our directors are also some of our
largest stockholders. Our efforts are concentrated in the direction of improving
our operations and increasing profitability. With that in mind, we have focused
our efforts on increasing our loan portfolio.
4
<PAGE>
Loans are our highest yielding asset category. However, banking has
changed a lot in recent years. Long gone are the days of the three - six - three
banker, pay three percent on deposits, lend the money out at six percent, and be
on the golf links by three o'clock in the afternoon. We are faced with
increasing competition from other financial institutions, loan brokers, mortgage
bankers, insurance companies, brokerage firms and other companies that are
chasing a limited number of loan opportunities. In order to meet the challenge
of competition and grow our portfolio, we have:
o Increased staffing in our loan department so loan officers can get
out from behind their desks and go into the community to solicit
new loans
o Opened a new loan production office in Alexandria Bay to allow us
to expand into a nearby geographic area with additional loan
opportunities.
o Aggressively sought to originate commercial and automobile loans,
where our small market share allowed us more chance for expansion.
[GRAPHIC CHART OMITTED]
- --------------------------------------------------------------------------------
Our Loan Volume is Increasing
Year-End Loan Balances
Thousand
1996 1997 1998 1999
---- ---- ---- ----
33,438 35,253 35,691 46,791
- --------------------------------------------------------------------------------
o Sought to maintain our yields and improve interest rate
sensitivity by taking advantage of the higher rates and shorter
terms to maturity of commercial and automobile loans.
[GRAPHIC CHART OMITTED]
- --------------------------------------------------------------------------------
Maintain Interest Rate Spread
Interest Rate Spread
Fiscal Year
1996 1997 1998 1999
------ ------ ------ ------
3.77% 3.82% 3.82% 3.81%
- --------------------------------------------------------------------------------
Our increase in capital cannot by itself provide sufficient funds to
improve profitability to satisfactory levels. We must also leverage that capital
by increasing other funding sources. Overall during fiscal 1999, our deposits
declined. This decline occurred entirely during the first half of the fiscal
year, and we believe it was caused by depositors who used their deposits to
purchase stock. In the past six months, total deposits have been on a slow
upward trend. We are working to try to accelerate that trend through outreach
programs to our customers, developing deposit relationships with our new loan
customers, and competitive pricing.
With the stock markets continuing to move upwards, it is difficult for
us to increase the level of deposits. Residents often choose to invest their
discretionary funds in equity securities instead of bank deposits. Thus, we have
also decided to borrow funds in order to improve leverage and we implemented a
borrowing strategy during the year. The borrowings allow us to maintain a
satisfactory level of more liquid securities investments while we invest most of
our available funds in loans.
Although we believe that we have moved down the path we need to follow
to remain a successful and profitable institution, we know that much more needs
to be done. We continue to exert efforts to grow our franchise, seeking to
expand our market share in our existing community and reach out into adjoining
communities. The following discussion of our financial condition and results of
operations shows the effects of the commencement of those efforts.
5
<PAGE>
INTRODUCTION TO FINANCIAL INFORMATION AND COMPARISONS
Our current financial statements combine the assets, liabilities,
income and expenses which we, Gouverneur Bancorp, Inc., own directly, as well as
those which our Bank, Gouverneur Savings and Loan Association, owns. Any
discussion below about periods or dates before March 23, 1999, when we completed
the reorganization, includes information only about the Bank. However, when we
discuss past financial information, we refer to assets, liabilities, income and
expenses prior to March 23, 1999 as our own for comparative purposes.
ANALYSIS OF NET INTEREST INCOME
Net interest income, our primary income source, depends principally
upon (i) the amount of interest-earning assets that we can maintain based upon
our funding sources; (ii) the relative amounts of interest-earning assets versus
interest-bearing liabilities; and (iii) the difference between the yields earned
on those assets and the rates paid on those liabilities. Non-performing loans
adversely affect net interest income because they must still be funded by
interest-bearing liabilities, but they do not provide interest income.
Furthermore, when we designate an asset as non-performing, all interest that we
have already accrued but not actually received is deducted from current period
income, further reducing net interest income.
6
<PAGE>
AVERAGE BALANCES, INTEREST RATES AND YIELDS
The following table presents for the periods indicated, the average
interest-earning assets and average interest-bearing liabilities by principal
categories, the interest income or expense for each category, and the resultant
average yields earned or rates paid. No tax equivalent adjustments were made.
All average balances are daily average balances. Non-interest-bearing checking
accounts are included in the tables as a component of non-interest-bearing
liabilities.
<TABLE>
<CAPTION>
For the Year Ended September 30,
-----------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------- ------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
---------- -------- -------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans (1) $ 39,643 $ 3,645 9.19% $ 34,891 $ 3,256 9.33% $ 33,520 $ 3,183 9.50%
Securities (2) 18,911 1,096 5.80% 16,215 998 6.15% 16,637 989 5.94%
Other short-term investments 1,547 72 4.65% 1,607 82 5.10% 2,028 103 5.08%
--------- ------- -------- ------- -------- -------
Total interest-earning assets 60,101 4,813 8.01% 52,713 4,336 8.23% 52,185 4,275 8.19%
------- ------- -------
Non-interest-earning assets 2,154 2,492 2,259
--------- -------- --------
Total assets $ 62,255 $ 55,205 $ 54,444
========= ======== ========
Savings and club accounts (3) $ 16,661 569 3.42% $ 14,947 519 3.47% $ 15,115 527 3.49%
Time certificates 23,408 1,246 5.32% 22,716 1,279 5.63% 22,884 1,265 5.53%
NOW and money market accounts 6,069 116 1.91% 5,547 109 1.97% 5,411 104 1.92%
Borrowings 1,917 88 4.59% -- -- 0.00% -- -- 0.00%
Total interest-bearing liabilities 48,055 2,019 4.20% 43,210 1,907 4.41% 43,410 1,896 4.37%
--------- ------- -------- ------- -------- -------
Non-interest-bearing liabilities 959 1,197 1,013
--------- -------- --------
Total liabilities 49,014 44,407 44,423
Net worth 13,241 10,798 10,021
--------- -------- --------
Total liabilities and net worth $ 62,255 $ 55,205 $ 54,444
========= ======== ========
Net interest income/spread (4) $ 2,794 3.81% $ 2,429 3.82% $ 2,379 3.82%
======= ==== ======= ==== ======= ====
Net earning assets/net
interest margin (5) $ 12,046 4.65% $ 9,503 4.61% $ 8,775 4.56%
========= ==== ======== ==== ======== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.25x 1.22x 1.20x
==== ===== ====
</TABLE>
(1) Shown net of the allowance for loan losses. Average loan balances include
non-accrual loans. Interest is recognized on non-accrual loans only as and
when received.
(2) Securities are included at amortized cost, with net unrealized gains or
losses on securities available for sale included as a component of
non-earning assets. Securities include Federal Home Loan Bank of New York
stock.
(3) Includes advance payments by borrowers for taxes and insurance (mortgage
escrow deposits).
(4) The spread represents the difference between the weighted average yield on
interest-earning assets and the weighted average cost of interest-bearing
liabilities.
(5) The net interest margin, also known as the net yield on average
interest-earning assets, represents net interest income as a percentage of
average interest-earning assets.
7
<PAGE>
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
One method of analyzing net interest income is to consider how changes
in average balances and average rates from one period to the next affect net
interest income. The following table shows changes in the dollar amount of
interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. It shows the amount of the change in
interest income or expense caused by either changes in outstanding balances
(volume) or changes in interest rates. The effect of a change in volume is
measured by applying the average rate during the first period to the volume
change between the two periods. The effect of changes in rate is measured by
applying the change in rate between the two periods to the average volume during
the first period. Changes attributable to both rate and volume, which cannot be
segregated, have been allocated proportionately to the change due to volume and
the change due to rate.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
----------------------------- ---------------------------
Increase (Decrease) Due To: Increase (Decrease) Due To:
Volume Rate Total Volume Rate Total
-------- --------- ------- -------- ---------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans ............................ $ 441 $ (52) $ 389 $ 130 $ (57) $ 73
Securities ....................... 158 (60) 98 (26) 35 9
Other short-term investments ..... (3) (7) (10) (21) 0 (21)
----- ----- ----- ----- ----- -----
Total interest-earning assets .... 596 (119) 477 83 (22) 61
===== ===== ===== ===== ===== =====
INTEREST-BEARING LIABILITIES:
Savings and club accounts ........ 58 (8) 50 (5) (3) (8)
Time certificates ................ 38 (71) (33) (9) 23 14
NOW and money market accounts .... 10 (3) 7 2 3 5
Borrowings ....................... 88 0 88 0 0 0
----- ----- ----- ----- ----- -----
Total interest-bearing liabilities 194 (82) 112 (12) 23 11
===== ===== ===== ===== ===== =====
Net change in net interest income $ 402 $ (37) $ 365 $ 95 $ (45) $ 50
===== ===== ===== ===== ===== =====
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1999 AND 1998
Our total assets were $70.0 million at --------------------------
September 30, 1999, which was 18% higher than our TOTAL ASSETS UP 18%
total assets of $59.3 million one year earlier. --------------------------
The increase in total assets was a result of our
reorganization and our strategy to borrow money to
improve leverage. These two events provided us
with additional funds which we were then able to
invest in additional assets.
- ------------------------- The largest increase in one single asset category
TOTAL LOANS UP 31% during the year was in net loans, which reached
- ------------------------- $46.2 million at September 30, 1999, compared to
$35.2 million one year earlier. This 31.1%
increase was the result of adding new loan
origination staff and opening a new loan
production office in the nearby community of
Alexandria Bay. That office was opened in July,
1999, and thus it contributed to our loan growth
for only a part of the year. We hope that it will
continue to contribute additional loan growth in
the future.
8
<PAGE>
We funded the increase in loans with the new capital and the funds we
borrowed. Our increase in capital was $4.6 million during the year, and borrowed
funds increased from zero to $7.4 million. Our total deposits declined by $1.3
million during the year, but this represents a decline of $1.4 million in the
first half of the year, followed by a $160,000 increase during the last six
months of the year. One of the important challenges we face is the need to
increase deposits in future years to improve leverage without having to pay the
higher costs that we must pay for borrowed funds.
We experienced a slight decline during the year in the total of other
interest-earning assets and other liquid assets, which includes cash and due
from banks, interest-bearing deposits with other banks, securities available for
sale and securities held to maturity. This decline, from $23.0 million to $22.5
million, or less than 3%, was the result of our efforts to generate new loans,
which earn more interest for us than other asset categories. We need to maintain
sufficient liquid assets to deal with contingencies that may occur and to
address normal fluctuations in deposit levels. However, in general, we prefer to
invest in higher yielding loans than in lower yielding securities if
satisfactory loans are available at the time.
Securities available for sale increased during the year by $2.4
million, while securities held to maturity decreased by $1.7 million. We
classify all new securities purchases as available for sale, so the decline in
securities held to maturity results from normal payments on those securities.
The increase in securities available for sale resulted from the investment of
available funds which could not be invested in loans that we found acceptable.
Our new securities investments were principally mortgage-backed securities
issued by the Federal National Mortgage Association (known as Fannie Mae) and
the Federal Home Loan Mortgage Corporation (known as Freddy Mac). We invested in
these types of securities, rather than in government and corporate bonds,
because they have higher yields. {Some of our new mortgage-backed securities
also have adjustable rates, which help us manage the risk that market interest
rates will change} We also increased our level of municipal securities to take
advantage of tax benefits to reduce our income taxes.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
- ------------------------ Net Income. Net income for the year ended
NET INCOME UP 3.4% September 30, 1999 was $641,000, compared to net
- ------------------------ income of $620,000 the previous year. The primary
reason for the increase is our increase in size,
and the related increase in the amount of funds we
had available for investment. As we invested
available funds in loans and securities, out
interest income increased, while our interest
expense did not increase as much. This is because
some of the increase in assets was funded with
capital that has no interest cost. The remainder
of the increase was funded primarily with
borrowings, which are our highest cost source of
funds, but which have interest rates lower than
the rates on the assets we purchase with the
proceeds of the borrowings.
The $365,000 increase in net interest income between the two years was
partially offset by increases in operating expenses. These expense increases
were principally the result of two factors. First, larger size requires more
staff and more expense for everything from postage to mail loan payment coupons
to computer data processing to handle a higher level of transactions. Second, we
have had expenses of operating as a public company, from professional fees to
some of the expenses of a special stockholders meeting which was held just after
the end of the fiscal year.
9
<PAGE>
- -------------------------- INTEREST INCOME. Interest income increased by
INTEREST INCOME UP 11% $477,000 from $4.3 million in fiscal 1998 to $4.8
- -------------------------- million in fiscal 1999. A higher level of our
interest-earning assets was the cause of the
increase in interest income. During 1999, average
interest-earning assets totaled $60.1 million,
compared to $52.7 million during fiscal 1998. Most
of this increase was in the average balance of
loans as we sought to develop and capitalize on
new lending opportunities. Average loans increased
from $34.9 million to $39.6 million between the
years, with the increase in loans being divided
between residential mortgage loans, which has
traditionally been our largest loan category, and
other loans such as commercial mortgage loans and
automobile loans which have represented a
relatively small portion of our loan portfolio in
past years. Overall, we estimate that the increase
in the average balance of interest-earning assets
resulted in an increase in interest income of
approximately $596,000.
The positive effect of our larger size on interest income was reduced
by lower interest rates. The average yields on our two principal asset
categories, loans and securities investments, both declined from fiscal 1998 to
fiscal 1999. The average yield on our loans declined by 14 basis points, from
9.33% to 9.19%, while the average yield on our securities investments declined
by 35 basis points from 6.15% to 5.80%. In both cases, the decline in average
yields resulted from lower general market interest rate conditions. When loans
and investments which had been originated or purchased a number of years ago
were repaid, the proceeds were reinvested at lower current market rates. We
worked to reduce the effect of these declines by diversifying our loan portfolio
towards commercial mortgage loans and automobile loans which tend to have higher
interest rates than residential mortgage loans. We also concentrated our new
securities investments in mortgage-backed securities which tend to have higher
yields than federal government and federal agency securities. Overall, we
estimate that the decline in yields earned caused a $119,000 decline in interest
income.
INTEREST EXPENSE. Interest expense increased by $112,000 from $1.9
million in fiscal 1998 to $2.0 million in fiscal 1999. The increase was caused
by factors similar to the factors which caused the increase in interest income.
However, interest expense increased more slowly than interest income principally
because our additional capital funded new investments without interest costs and
because the cost of funds is lower than the average yield on assets.
The average volume of interest-bearing liabilities increased from $43.2
million to $48.1 million when comparing fiscal 1998 and 1999. This increase,
which included increases in the average balance of both deposits and borrowings,
resulted from our efforts to provide funding for our increase in loans and
securities investments. For the first time, we borrowed significant funds to
support additional investments during 1999. Although the borrowings occurred
towards the end of the year, and thus the average balance of borrowings was not
that large for fiscal 1999 as a whole, we anticipate that in 2000 borrowed funds
will be a more significant component of our funding sources. We estimate that
the effect of the overall increase in the average volume of interest-bearing
liabilities was an increase in interest expense of approximately $194,000.
As in the case of interest-bearing assets, a decline in market interest
rates resulted in a decline in our average cost of funds. The average cost of
funds declined by 21 basis points, from 4.41% to 4.20%. The primary contributor
to this decline was a decline of 31 basis points in the average cost of
certificates of deposit, our largest deposit category and, with borrowed funds,
our most expensive interest-bearing liability category. The average rate paid on
certificates of deposit declined more rapidly than the rates paid on other
10
<PAGE>
deposit categories because we tend to adjust our rates on new certificates of
deposit regularly as market rates change, while we tend to adjust our other
rates less frequently. Overall, we estimate that the decline in the cost of
funds resulted in a decline of approximately $82,000 in interest expense, with
the lower average rate on certificates of deposit causing $71,000 of that
decline.
- -------------------------------- NET INTEREST INCOME. The net effect of our
NET INTEREST INCOME UP $365,000 increase in interest income and a lower
- -------------------------------- increase in interest expense was a $365,000
increase in net interest income. We estimate
that this increase was composed of
approximately $402,000 representing an
increase in net interest income caused by the
effect of changes in the volume of average
assets and liabilities, partially offset by
approximately $37,000 representing a decline
in net interest income caused by the effect
of the decline in interest rates. This
$37,000 decline in net interest income is
also reflected in a one basis point decline
in our spread, representing the difference
between the average yield on our assets and
the average rate paid on our liabilities.
However, out net yield on average
interest-earning assets, also known as net
interest margin, increased 4 basis points
from 4.61% to 4.65% because of the effect of
the increase in capital as a no-cost funding
source.
PROVISION FOR LOAN LOSSES. The provision for loan losses results from
our analysis of the adequacy of the allowance for loan losses. If we believe
that the allowance should be higher, then we increase it with a provision for
loan losses which is an expense on our income statement. However, our assessment
of the adequacy of the allowance is always speculative, based upon what we
expect to occur in the future with our loan portfolio, especially default rates
and the level of losses when our customers do not repay their loans. This
requires estimates of many future events, such as future interest rates, the
health of the local and national economy and the effects of government policies.
If our predictions about the future are inaccurate, then increases in the
allowance may be necessary in future periods even if the level of our loan
portfolio remains the same. Furthermore, the Office of Thrift Supervision may
disagree with our judgments regarding the potential risks in our loan portfolio
and could require us to increase the allowance in the future.
We increased our provision for loan losses from $130,000 in 1998 to
$162,000 in 1999. During the year, we determined that an increase in our
allowance was appropriate because of the general increase in the size of our
portfolio as well as the shift in our portfolio towards more commercial mortgage
loans and automobile loans which tend to present higher risks of default. Our
allowance at the beginning of the year was $484,000 and we determined at the end
of the year that the appropriate level for the allowance was $620,000. We had
charge-offs during the year of $60,000 and recoveries of $34,000, so a $162,000
provision was necessary to reach the desired level for the allowance.
NON-INTEREST INCOME. Our non-interest income increased from $144,000 in
fiscal year 1998 to $151,000 in fiscal 1999. Non-interest income includes many
different categories of income, varying from gains on sales of securities to
income from deposit account fees and late charges on loans. Non-interest income
fluctuated between the two years due to normal fluctuations in the different
components of non-interest income.
NON-INTEREST EXPENSES. Our non-interest expenses increased by $268,000
from $1.4 million in fiscal 1998 to $1.7 million in fiscal 1999. Non-interest
expense includes most categories of expense other than interest we pay on
deposits and borrowings and income tax expense. The largest category of
11
<PAGE>
non-interest expenses is salaries and employee benefits expense, followed by
building occupancy and equipment expense.
The largest component of the increase in non-interest expenses was a
$136,000 growth in salaries and employee benefits expense from $647,000 to
$783,000. The additional salary and employee benefits expenses included the cost
of new employees, including a new loan officer, who were hired to assist in the
growth of our franchise; salary increases to existing employees to cover normal
merit raises and the additional responsibilities resulting from our
reorganization; and $19,000 for costs of our Employee Stock Ownership Plan. In
order to support existing growth in our operations and also to position us for
future growth, we had 21 full time equivalent employees at September 30, 1999
compared to 17 full time equivalent employees one year earlier. We believe that
the increase in our loan portfolio is one of the benefits that flows from the
increase in the level of employees, but there is always a lag between adding new
employees and realizing the benefits of them being on staff. Our existing
employee group should be able to support additional growth. We also believe that
the reorganization itself caused a temporary disruption in employee productivity
as we allocated employees to tasks necessary to complete the reorganization.
Other categories of non-interest expenses, such as directors fees,
professional fees, postage and supplies also increased in 1999 over 1998 levels
due to the costs of operating a public company. In fiscal 1999 we held more
board meetings to address issues related to the reorganization, we incurred
professional fees related to our periodic disclosure requirements under the
securities laws, and we commenced the proxy solicitation for our special meeting
of stockholders which was held in October 1999.
INCOME TAX EXPENSE. Our income tax expense increased from $380,000 in
fiscal 1998 to $431,000 in fiscal 1999. The principal reason for the increase
was an increase in income before taxes.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997.
GENERAL. Our net income for the 1998 fiscal year was $620,000, an
increase of $83,000, or 15.5%, over net income of $537,000 for fiscal 1997. We
experienced normal fluctuations in income and expense categories, with an
increase in the average balance of loans being offset by a decline in average
yields earned on loans.
INTEREST INCOME. Interest income increased by $61,000 from fiscal 1997
to fiscal 1998. This increase resulted principally from a $1.4 million, or 4.1%,
increase in the average balance of loans. We estimate that this contributed
approximately $130,000 to our interest income. However, we also had a $843,000
decline in the average balance of lower yielding securities and other short-term
investments, so overall there was a $528,000 net increase in average
interest-earning assets.
The shift in favor of higher-yielding loans and away from lower
yielding securities investments, as a result of our efforts to increase our loan
portfolio, increased our average yield on interest-earning assets. This positive
effect was reduced because the average yield on loans declined from 9.50% for
fiscal 1997 to 9.33% for the fiscal 1998. We estimate that this reduced interest
income by $57,000. The continuation of low market interest rates for residential
one-to-four family mortgage loans caused the decline in loan yields as some
customers refinanced their loans at lower rates and we originated new loans at
lower rates. Increased competition for mortgage loans and tighter underwriting
12
<PAGE>
standards we adopted also reduced the yields we could earn on new loans. We
worked to reduce the decline in average yields by increasing our portfolio of
auto loans and both mortgage and non-mortgage commercial loans. We also had a 21
basis point increase in the yield on our securities investments because during
1997 we shifted investments away from lower yielding U.S. Treasury securities in
favor of higher yielding mortgage-backed securities and government agency
securities. The positive effect of this strategy was limited because the yields
on securities investments generally declined during fiscal 1998.
The investment of stock subscription proceeds in short-term investments
did not have a material effect on average balances because subscriptions were
received primarily during the last ten days of the fiscal year.
INTEREST EXPENSE. Interest expense increased by $11,000 from fiscal
1997 to fiscal 1998. The slight increase represented the net effect of a decline
in the average balance of interest-bearing liabilities by $200,000, offset by an
increase in our cost of funds of 4 basis points. We believe that competitive
pressures caused the decline in the average balance because high stock market
values caused more depositors to seek non-deposit investments.. Competitive
pressures for deposits caused the increase in the average cost of funds. The
increase was almost exclusively in certificates of deposit. The stock
subscriptions we received during the last few weeks of the 1998 fiscal year
represented only a small part of our interest-bearing liabilities for the year
as a whole, and thus did not have a significant effect on interest expense for
the year.
NET INTEREST INCOME. The combined effect of the increase in interest
income and the lesser increase in interest expense was a $50,000, or 2.1%,
increase in net interest income. Our interest rate spread remained the same at
3.82% because the change in the mix of assets and the fluctuations in yields
earned and rates paid offset each other. Our net interest margin increased by 5
basis points from 4.56% to 4.61% because we invested retained earnings without a
corresponding interest cost.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $130,000
for fiscal 1998, compared to $250,000 for fiscal 1997. The reason for the
decline in the provision for loan losses was a reduction in the level of net
charge-offs from $326,000 in fiscal 1997 to $49,000 in fiscal 1998 as loan
delinquencies improved. The decline in the provision was less than the decline
in charge-offs net of recoveries, so the allowance for loan losses increased
from $403,000 at September 30, 1997 to $484,000 at September 30, 1998. We
believe this increase was appropriate because of our strategy to increase
higher-risk auto loans and commercial non-mortgage loans.
NON-INTEREST INCOME. Our non-interest income increased by $31,000 from
$113,000 in fiscal 1997 to $144,000 in fiscal 1998, primarily because we had
$23,000 of realized losses on the sale of securities during fiscal 1997 and no
such losses during fiscal 1998. From time to time, we sell debt securities at a
loss if we believe that we can recoup the loss by reinvesting the sale proceeds
at higher yields. Other categories of non-interest income remained constant as
we maintained consistent policies regarding service charges, safe deposit box
rentals and other categories of non-interest income. Total service charges on
deposit accounts, a significant component of non-interest income, depend on our
service charge policy, the volume of deposit accounts and economic conditions
which can affect sub-categories of service charges such as fees for bounced
checks. These factors remained relatively constant throughout fiscal 1997 and
1998, resulting in a consistent level of service charge income.
13
<PAGE>
NON-INTEREST EXPENSES. Non-interest expenses increased by $73,000, or
5.1%, from fiscal 1997 to fiscal 1998. Salaries and employee benefits expense
increased by $38,000, or 6.2%, due to normal increases in officer and employee
salaries and the addition of business development and loan officers to pursue
business development, new loan opportunities and past due account collection.
This increase was partially offset by a decline in deposit insurance premiums
from $41,000 to $27,000 because of changes in the law at the end of fiscal 1996.
Other variations in non-interest expense resulted from normal period to period
fluctuations in activity.
INCOME TAXES. Our income tax expense increased from $335,000 for fiscal
1997 to $380,000 for fiscal 1998. The increase corresponded to the increase in
net income as our effective tax rate remained relatively constant.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of funds are deposits, borrowings and proceeds from
the principal and interest payments on loans and securities. Maturities and
scheduled principal payments on loans and securities are predictable sources of
funds. However, general economic conditions and interest rate conditions can
cause increases or decreases in deposit outflows and loan prepayments which can
also affect the level of funds we have available for investment. Our level of
borrowings is generally at our own discretion, based upon our need for funds and
the cost of deposits as an alternative source of funds.
In general, we manage our liquidity by maintaining a sufficient level
of short term investments so that funds are normally available for investment in
loans when needed. During the year ended September 30, 1999, we reduced our cash
and cash equivalents by $944,000. The primary reason for the reduction was that
we invested available funds in loans and securities investments, so that our net
increases in those investments exceeded the net cash we received from our stock
offering minus a reduction in deposits. We originated $22.2 million of new loans
during fiscal 1999. However, loans, net, after payments, charge-offs and
transfers to real estate owned, increased by $11.1 million during the period.
Deposits decreased by $1.3 million during the year. We believe the
decrease was primarily caused by the use of deposits to purchase stock and by
the cancellation of some stock subscriptions which had been carried as deposits
on September 30, 1998. In addition to factors within our control, such as our
deposit pricing strategies and our marketing efforts, deposit flows are affected
by the level of general market interest rates, the availability of alternate
investment opportunities, general economic conditions, and other factors outside
our control.
We monitor our liquidity regularly. Excess liquidity is invested in
overnight federal funds sold and other short term investments. If we need
additional funds, we can borrow those funds, although the cost of borrowing
money is normally higher than the average cost of deposits. As a member of the
Federal Home Loan Bank of New York, the Bank can arrange to borrow in excess of
$10 million, but to do so it must provide appropriate collateral and satisfy
other requirements for Federal Home Loan Bank borrowings. We have not needed to
use borrowings to fund unanticipated deposit outflows. However, we have used
borrowings in recent months to help us leverage the capital we received from our
stock sale. In addition to borrowings, we believe that, if we need to do so, we
can attract additional deposits by increasing the rates we offer. We had $1.4
million of outstanding commitments to make loans at September 30, 1999, along
with $766,000 of unused home equity, commercial and overdraft lines of credit.
During the upcoming year, we anticipate that loan originations may exceed the
amount of cash available from the net increase, if any, in deposits and the
proceeds from the maturity, payment or disposition of securities. If that
occurs, we may obtain additional funds to increase our loan portfolio through a
variety of strategies, including reducing securities investments as a percentage
of total assets, borrowing funds, or the use of wholesale or brokered deposits.
At September 30, 1999, we had $17.3 million of certificates of deposit which are
scheduled to mature in one year. We anticipate that we can retain substantially
all of those deposits if we need to do so to fund loans and other investments as
part of our efforts to grow and leverage our new capital.
14
<PAGE>
The OTS has minimum
capital ratio requirements which -----------------------------------
apply to the Bank, but there are no THE BANK EXCEEDS ALL CAPITAL
comparable minimum capital REQUIREMENTS AND IS CONSIDERED
requirements that apply to us as a "WELL CAPITALIZED"
savings and loan holding company. -----------------------------------
At September 30, 1999, the Bank
substantially exceeded all
regulatory capital requirements of
the OTS applicable to it, and the
OTS minimum capital requirements
had no material adverse affect on
the Bank. The Bank was classified
as "well capitalized" at September
30, 1999 under OTS regulations.
OTS regulations require that the Bank maintain liquid assets equal to
4% of withdrawable accounts. This ratio is measured on a monthly average basis.
The Bank had a liquidity ratio of 41.3% for September 1999.
YEAR 2000 COMPLIANCE
As we write this annual report, we are rapidly approaching the
beginning of the next millennium. By the time this annual report is circulated
to our stockholders, we will have already passed that milestone. As we look
towards the next calendar year and the problems that we have all heard warnings
about, we believe that we have taken the steps necessary so that our computer
systems, both hardware and software, and our other equipment that includes
computer components, will operate properly despite the change to a new calendar
year. By the time you read this, you will know whether we have succeeded.
The ripple effects of Year 2000 failures throughout the world could
possibly touch us in the future. For example, we have heard horror stories from
consultants about oil shortages throughout the coming winter if computer systems
in middle east oil producing countries break down. While we have limited ability
to address these types of serious national or international problems, we have
developed contingency plans to move to a manual system in the event of an
emergency. We know from recent experience with a severe ice storm which shut
down power that we can operate for at least five days using entirely manual
systems.
We have also participated in customer awareness programs to avoid large
deposit withdrawals brought on by customer panic. Such panic is substantially
out of our control. Non-compliance by a local utility, for example, may not only
have an adverse direct effect on our ability to conduct business, but may also
create local panic which could affect our liquidity. We anticipate that we will
be able to satisfy customer demands for cash if necessary through the use of our
liquid assets. However, we cannot predict whether an uneventful advent of the
15
<PAGE>
Year 2000 will cause our depositors to redeposit their withdrawals at our Bank
or will cause them to go on a spending spree with adverse consequences.
FORWARD-LOOKING STATEMENTS
When we use words or phrases like "will probably result," "we expect,"
"will continue," "we anticipate," "estimate," "project," "should cause" or
similar expressions in this annual report or in any press releases, public
announcements, filings with the Securities and Exchange Commission or other
disclosures, we are making "forward-looking statements" as described in the
Private Securities Litigation Reform Act of 1995. In addition, certain
information we provide, such as analysis of the adequacy of our allowance for
loan losses or an analysis of the interest rate sensitivity of our assets and
liabilities, is always based on predictions of the future. From time to time, we
may also publish other forward-looking statements about anticipated financial
performance, business prospects, and similar matters.
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. We want you to know that a variety of
future events could cause our actual results and experience to differ materially
from what we anticipate when we make our forward-looking statements. Some of the
risks and uncertainties that may affect our operations, performance, development
and results, the interest rate sensitivity of our assets and liabilities, and
the adequacy of our allowance for loan losses, include:
o local, regional, national or global economic conditions which could
cause an increase in loan delinquencies, a decrease in property values,
or a change in the housing turnover rate;
o the failure of our customers or major suppliers to have computers and
other systems which are Year 2000 compliant;
o changes in market interest rates or changes in the speed at which
market interest rates change;
o changes in laws and regulations affecting us;
o changes in competition; and
o changes in consumer preferences.
Please do not rely unduly on any forward-looking statements, which are
valid only as of the date made. Many factors, including those described above,
could affect our financial performance and could cause our actual results or
circumstances for future periods to differ materially from what we anticipate or
project. We have no obligation to update any forward-looking statements to
reflect future events which occur after the statements are made.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
QUALITATIVE ANALYSIS. We try to avoid taking undue interest rate risk
while satisfying customer demand for loans. Substantially all of our residential
mortgage loans have fixed interest rates and terms of up to 25 years. Adjustable
residential mortgage loans are not in demand during the current low interest
16
<PAGE>
rate conditions and they represent only a very small part of our residential
mortgage loan portfolio. Therefore, in a rising interest rate environment, we
expect that the yields on our residential mortgage loan portfolio will increase
relatively slowly, as loans are repaid and the payments are reinvested, while
our cost of funds will rise more rapidly.
In order to reduce this risk, we have adopted a multi-part strategy.
First, we are working to originate higher levels of automobile loans, home
equity lines of credit, and commercial loans which tend to have shorter terms or
adjustable rates. Second, we have concentrated our securities investments in
short-term or adjustable-rate securities. U.S. Treasury and federal agency
securities are purchased with terms to maturity that generally do not exceed two
years. We have concentrated our recent securities purchases in mortgage-backed
securities with adjustable rates or relatively short terms with balloon
payments. We also try to cushion our operations against interest rate
fluctuations by preserving a loyal customer base through paying above market
rates on savings and club account deposits during present periods of low
interest rates. We believe this may cause our customers to be less likely to
shift their funds to high rate deposit products as interest rates rise.
Interest rate pricing and interest rate risk strategy objectives are
implemented, in the first instance, by an internal committee which meets weekly
to review and assess deposit and loan pricing. The OTS prepares a quarterly
interest-rate sensitivity report for the Bank based upon its asset and liability
profile which seeks to estimate the effect of interest rate changes on the net
value of the Bank's assets and liabilities. This report is reviewed with the
Board of the Bank quarterly
QUANTITATIVE ANALYSIS. The OTS report seeks to estimate how changes in
interest rates will affect the Bank's "net portfolio value." Net portfolio
value, or "NPV," akin to net worth, represents the net present value of the
Bank's cash flow from assets, liabilities and off balance sheet items. Each
calendar quarter, the OTS calculates the Bank's estimated NPV and the estimated
effect on NPV of instantaneous and permanent 1% to 3% (100 to 300 basis points)
increases and decreases in market interest rates. The calculations are based
upon the OTS's assumptions regarding loan prepayments rates, deposit turnover
and other factors affecting the repricing of assets and liabilities. The OTS
does not include in its analysis any assets held by Gouverneur Bancorp, Inc.
which are not owned by the Bank.
17
<PAGE>
The following table presents the Bank's estimated NPV at September 30,
1999, and the estimated effect on NPV of the specified interest rate changes, as
calculated by the OTS. At September 30, 1999, the portfolio value of the Bank's
assets as estimated by the OTS was $72.2 million.
<TABLE>
<CAPTION>
Hypothetical Change in Estimated Estimated Change in Estimated Percentage
Interest Rate Net Portfolio Value Net Portfolio Value Change in Npv(1)
------------- ------------------- ------------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
+3.00% 13,022 -3,043 -19%
+2.00% 14,189 -1,876 -12%
+1.00% 15,251 -814 -5%
0.00% 16,065 -- --
-1.00% 16,565 +500 +3%
-2.00% 17,322 +1,257 +8%
-3.00% 18,212 +2,147 +13%
</TABLE>
(1) Calculated as the amount of estimated change in NPV divided by the estimated
current NPV.
The above table indicates that in a rising interest rate environment,
the Bank's net portfolio value should decline, while net portfolio value should
increase in a declining interest rate environment. These changes in net
portfolio value should be accompanied by a decline in net income during periods
of rising interest rates and an increase in net income during periods of
declining interest rates. However, these expected changes in net income may not
occur for many reasons including, among others, the possibility that we may
decide not to reduce the rates we offer on our deposits when interest rates
decline in order to retain and increase our deposit base.
There are shortcomings in the methodology used by the OTS to calculate
changes in NPV. In order to estimate changes in NPV, the OTS makes assumptions
about repayment and turnover rates which may not turn out to be correct. The NPV
table assumes that the composition of the Bank's interest sensitive assets and
liabilities existing at the beginning of a period remain constant over the
period being measured. So, for example, the NPV analysis assumes that the ratio
of adjustable versus fixed-rate loans or short-term loans versus long-term loans
remains the same and that interest rates will change equally for both long term
and short term assets. Therefore, although the OTS NPV analysis provides the
Board of the Bank with an indication of the Bank's interest rate risk exposure,
it does not provide a precise forecast of the effect of changes in market
interest rates on net interest income.
18
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Gouverneur Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Gouverneur Bancorp, Inc. and subsidiary as of September 30, 1999 and 1998,
and the related consolidated statements of income, shareholders' equity and
comprehensive income and cash flows for each of the years in the three-year
period ended September 30, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gouverneur Bancorp, Inc. and
subsidiary as of September 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
November 12, 1999
Syracuse, New York
<PAGE>
<TABLE>
<CAPTION>
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
September 30, 1999 and 1998
(In thousands, except share data)
ASSETS 1999 1998
-------- --------
<S> <C> <C>
Cash and due from banks $ 1,564 1,179
Interest-bearing deposits with other banks 1,926 3,255
Securities available-for-sale, at fair value 12,971 10,546
Securities held-to-maturity (fair value of $5,957 at
September 30, 1999 and $7,787 at September 30, 1998) 6,019 7,717
Loans, net of deferred fees 46,791 35,691
Less allowance for loan losses (620) (484)
-------- --------
Net loans 46,171 35,207
Premises and equipment, net 278 288
Federal Home Loan Bank stock, at cost 385 379
Accrued interest receivable 469 346
Real estate owned 169 51
Other assets 44 369
-------- --------
Total assets $ 69,996 59,337
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand accounts 184 210
Savings and club accounts 15,423 17,302
Time certificates 23,057 23,578
NOW and money market accounts 6,449 5,292
-------- --------
Total deposits 45,113 46,382
Advance payments by borrowers for property
taxes and insurance 151 105
Other liabilities 1,303 1,382
Securities sold under agreements to repurchase 5,900 --
Other borrowings 1,500 --
-------- --------
Total liabilities 53,967 47,869
-------- --------
Commitments and contingencies (note 11)
Shareholders' Equity:
Preferred stock, $.01 par value per share; authorized
1,000,000 shares, issued: none
Common stock, $.01 par value per share; authorized
9,000,000 shares, issued 2,384,040 shares at
September 30, 1999 24 --
Additional paid-in capital 4,553 --
Retained earnings 11,470 10,929
Accumulated other comprehensive income 390 539
Unallocated shares of Employee Stock Ownership Plan
81,534 shares at September 30, 1999 (408) --
-------- --------
Total shareholders' equity 16,029 11,468
-------- --------
Total liabilities and shareholders' equity $ 69,996 59,337
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
Years ended September 30, 1999, 1998 and 1997
(In thousands)
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Loans $ 3,645 3,256 3,183
Securities 1,096 998 989
Other short-term investments 72 82 103
----------- ----------- -----------
Total interest income 4,813 4,336 4,275
----------- ----------- -----------
Interest expense:
Deposits 1,931 1,907 1,896
Borrowings 88 -- --
----------- ----------- -----------
Total interest expense 2,019 1,907 1,896
----------- ----------- -----------
Net interest income 2,794 2,429 2,379
Provision for loan losses 162 130 250
----------- ----------- -----------
Net interest income after
provision for loan losses 2,632 2,299 2,129
----------- ----------- -----------
Non-interest income:
Service charges 67 52 52
Net loss on sale of securities available for sale (18) -- (23)
Other 102 92 84
----------- ----------- -----------
Total non-interest income 151 144 113
----------- ----------- -----------
Non-interest expenses:
Salaries and employee benefits 783 647 609
Directors fees 78 59 60
Building, occupancy and equipment 203 173 163
Data processing 95 84 78
Postage and supplies 94 77 64
Professional fees 67 43 48
Real estate owned 32 101 113
Other 359 259 235
----------- ----------- -----------
Total non-interest expenses 1,711 1,443 1,370
----------- ----------- -----------
Income before income tax expense 1,072 1,000 872
Income tax expense 431 380 335
----------- ----------- -----------
Net income $ 641 620 537
=========== =========== ===========
Basic earnings per share (1) $ 0.15 N/A N/A
Weighted average shares outstanding 2,300,271 N/A N/A
</TABLE>
(1) Basic earnings per share represents the net income of the Company for the
period from March 23, 1999 (date of reorganization) to September 30, 1999
(see note (2) (l)).
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity and Comprehensive Income
Years ended September 30, 1999, 1998 and 1997
(In thousands, except share data)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE UNALLOCATED
STOCK CAPITAL EARNINGS INCOME ESOP TOTAL
------- ---------- ------- ------------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1996 $ -- -- 9,772 221 -- 9,993
Comprehensive income:
Change in net unrealized gain (loss) on
securities available for sale, net of tax -- -- -- 159 -- 159
Net income -- -- 537 -- -- 537
------- ------- ------- ------- ------- -------
Total comprehensive income 696
------- ------- ------- ------- ------- -------
Balance at September 30, 1997 -- -- 10,309 380 -- 10,689
Comprehensive income:
Change in net unrealized gain (loss) on
securities available for sale, net of tax -- -- -- 159 -- 159
Net income -- -- 620 -- -- 620
------- ------- ------- ------- ------- -------
Total comprehensive income 779
------- ------- ------- ------- ------- -------
Balance at September 30, 1998 -- -- 10,929 539 -- 11,468
Net proceeds from issuance of 1,072,818
shares of common stock 11 4,568 -- -- -- 4,579
Common stock acquired by ESOP
(85,825 shares) -- -- -- -- (429) (429)
ESOP shares released or committed to be released
for allocation (4,291 shares) -- (2) -- -- 21 19
Initial capital contribution and
issuance of shares to Cambray MHC
(1,311,222 shares) 13 (13) (100) -- -- (100)
Comprehensive income:
Change in net unrealized gain (loss)
on securities available for sale, net of tax -- -- -- (149) -- (149)
Net income -- -- 641 -- -- 641
------- ------- ------- ------- ------- -------
Total comprehensive income 492
------- ------- ------- ------- ------- -------
Balance at September 30, 1999 $ 24 4,553 11,470 390 (408) 16,029
======= ======= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended September 30, 1999, 1998 and 1997
(In thousands)
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 641 620 537
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 66 59 58
Provision for loan losses 162 130 250
Deferred income taxes (22) (61) 134
Net losses on sales of securities 18 -- 23
Net (gains) losses on sale of real estate owned (12) 46 41
Net (accretion) amortization of premiums/discounts (13) 4 3
(Increase) decrease in accrued interest receivable (123) (51) 18
Increase (decrease) in other liabilities 52 476 (104)
Decrease (increase) in other assets 325 (191) (110)
-------- -------- --------
Net cash provided by operating activities 1,094 1,032 850
Cash flows from investing activities:
Decrease in time deposits with other banks -- -- 500
Net increase in loans (11,277) (601) (2,350)
Proceeds from sales of securities available-for-sale 504 -- 3,431
Proceeds from maturities and principle
reductions of securities available-for-sale 8,662 -- 2,500
Purchases of securities available-for-sale (11,928) (2,378) (2,767)
Purchases of securities held-to-maturity (711) (2,318) (4,738)
Proceeds from maturities and principle
reductions of securities held-to-maturity 2,502 3,256 1,486
Proceeds from sale of real estate owned 45 174 160
Additions to premises and equipment (56) (79) (32)
Purchase of FHLB stock (6) (4) (37)
-------- -------- --------
Net cash used by investing activities (12,265) (1,950) (1,847)
-------- -------- --------
Cash flows from financing activities:
Net (decrease) increase in deposits (1,269) 2,806 73
Net increase (decrease) in advance payments by
borrowers for property taxes and insurance 46 60 (29)
Net proceeds from short-term borrowing 7,400 -- --
Net proceeds from issuance of common stock 4,579 -- --
Purchase of shares of common stock by ESOP (429) -- --
Initial capital contribution to Cambray MHC (100) -- --
-------- -------- --------
Net cash provided by financing activities 10,227 2,866 44
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (944) 1,948 (953)
Cash and cash equivalents at beginning of period 4,434 2,486 3,439
-------- -------- --------
Cash and cash equivalents at end of period $ 3,490 4,434 2,486
======== ======== ========
Supplemental disclosure of cash flow information:
Non-cash investing activities:
Additions to real estate owned $ 151 114 208
Cash paid during the year for:
Interest 2,011 1,907 1,896
Income taxes 617 25 384
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
(1) BUSINESS
Gouverneur Bancorp, Inc. (the "Company") operates as a savings and loan
holding company. Its only subsidiary is Gouverneur Savings and Loan
Association (the "Bank"). The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary, the Bank.
All material intercompany accounts and transactions have been eliminated
in the consolidation.
The Bank is organized under the laws of New York. The Bank is subject to
regulation by the Office of Thrift Supervision (OTS) as a savings and
loan association. The Bank's lending activity is concentrated in St.
Lawrence County and surrounding areas.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, and to
general practice within the savings bank industry. The Company
utilizes the accrual method of accounting for financial reporting
purposes.
(b) USE OF ESTIMATES
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of
the allowance for loan losses and the valuation of other real
estate owned acquired in connection with foreclosures. In
connection with the determination of the allowance for loan losses
and the valuation of other real estate owned, management obtains
appraisals for properties.
6 (Continued)
<PAGE>
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
Management believes that the allowance for loan losses is adequate
and that other real estate owned is recorded at its fair value
less an estimate of the costs to sell the properties. While
management uses available information to recognize losses on loans
and other real estate owned, future additions to the allowance or
write downs of other real estate owned may be necessary based on
changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses and
other real estate owned. Such agencies may require the Company to
recognize additions to the allowance or write downs of other real
estate owned based on their judgments about information available
to them at the time of their examination which may not be
currently available to management.
A substantial portion of the Company's loans are secured by real
estate located throughout St. Lawrence County. Accordingly, the
ultimate collectibility of a substantial portion of the Company's
loan portfolio and the recovery of a substantial portion of the
carrying amount of other real estate owned is dependent upon
market conditions in these market areas.
(c) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include vault cash and amounts due from
banks representing short-term highly liquid investments.
(d) SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY
The Company classifies its debt securities as either
available-for-sale or held-to-maturity at the time of purchase.
The Company does not hold any securities considered to be trading.
Held-to-maturity securities are those debt securities the Company
has the ability and intent to hold until maturity. All other debt
securities are classified as available-for-sale. Equity securities
are classified as available for sale.
Available-for-sale securities are recorded at fair value.
Unrealized holding gains and losses, net of the related tax
effect, on available-for-sale securities are excluded from
earnings and reported as a separate component of accumulated other
comprehensive income in shareholders' equity.
Held-to-maturity securities are recorded at amortized cost.
A decline in the fair value of an available-for-sale or
held-to-maturity security that is considered to be other than
temporary is charged to earnings.
Premiums and discounts are amortized or accreted over the life of
the related security as an adjustment to yield using the interest
method. Dividend and interest income are recognized when earned.
Realized gains and losses on securities are based on the net
proceeds and the amortized cost of the securities sold, using the
specific identification method.
7 (Continued)
<PAGE>
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
(e) LOANS
Loans are reported at the principal amount outstanding, net of
deferred fees. Loan fees and certain direct origination costs are
netted and are amortized using the interest method over the
contractual lives of the loans.
Interest on loans is accrued and included in income at contractual
rates applied to the principal outstanding. The accrual of
interest on loans (including impaired loans) is generally
discontinued and previously accrued interest is reversed when loan
payments are 90 days or more past due or when, by the judgment of
management, collectibility becomes uncertain. Subsequent
recognition of income occurs only to the extent that payment is
received. Loans are returned to an accrual status when both
principal and interest are current or when in the opinion of
management, the loans are expected to be fully collectible as to
principal and interest.
(f) ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision
charged to operations. The allowance is an amount that management
believes will be adequate to absorb losses on existing loans that
may become uncollectible, based on evaluations of the
collectibility of loans and prior loan loss experience.
Management's evaluation of the adequacy of the allowance for loan
losses is performed on a periodic basis and takes into
consideration such factors as the historical loan loss experience,
changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans and current
economic conditions that may affect borrowers' ability to pay.
Loan losses and recoveries of loans previously written-off are
charged or credited to the allowance as incurred or realized,
respectively.
The Company estimates losses on impaired loans based on the
present value of expected future cash flows (discounted at the
loan's effective interest rate) or the fair value of the
underlying collateral if the loan is collateral dependent. An
impairment loss exists if the recorded investment in a loan
exceeds the value of the loan as measured by the aforementioned
methods. A loan is considered impaired when it is probable that
the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement. Generally, all
commercial mortgage loans and commercial loans in a delinquent
payment status (90 days or more delinquent) are considered
impaired. Residential mortgage loans, consumer loans, home equity
lines of credit and education loans are evaluated collectively
since they are homogenous and generally carry smaller individual
balances. Impairment losses are included as a component of the
allowance for loan losses. The Company recognizes interest income
on impaired loans using the cash basis of income recognition. Cash
receipts on impaired loans are generally applied according to the
terms of the loan agreement, or as a reduction of principal, based
upon management judgment and the related factors discussed above.
8 (Continued)
<PAGE>
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
(g) REAL ESTATE OWNED
Real estate acquired in settlement of loans is carried at the
lower of the unpaid loan balance or fair value less estimated
costs to sell. Write-downs from the unpaid loan balance to fair
value at the time of foreclosure are charged to the allowance for
loan losses. Subsequent write-downs to fair value, net of disposal
costs, are charged to other expenses.
(h) PREMISES AND EQUIPMENT
Land is carried at cost and buildings and improvements and
furniture and equipment are carried at cost less accumulated
depreciation. Depreciation is computed on the straight-line method
over the estimated useful lives of the assets (3-39 years for
building and improvements; 3-7 years for furniture and equipment).
(i) EMPLOYEE BENEFIT PLANS
The Company has a defined contribution 401(k) Retirement Plan (the
Plan) for all eligible salaried employees. Employees are permitted
to contribute up to 15% of base pay to the Retirement Plan,
subject to certain limitations. The Company contributes 3% of each
eligible employee's salary. Additional Company contributions to
the Plan are determined annually by the Board of Directors.
The Company sponsors a non-contributory Employee Stock Ownership
Plan (ESOP) covering substantially all employees. Employer
contributions are discretionary and there is no guarantee that a
contribution will be made during any particular year. However, the
Company will make annual contributions sufficient to cover
principal and interest due under the contractual terms of the ESOP
loan agreement. Contributions will be in the form of cash or
Gouverneur Bancorp, Inc. securities. The number of shares
allocable to Plan participants is based on employee compensation
levels. The Company accounts for ESOP shares purchased in
accordance with Statement of Position No. 93-6, EMPLOYERS'
ACCOUNTING FOR EMPLOYEE STOCK OWNERSHIP PLANS. Accordingly, as
shares are committed to be released to participants, the Company
reports compensation expense equal to the current market price of
the shares and the shares become outstanding for earnings per
share computations. Additional Bank contributions to the Plan are
determined annually by the Board of Directors.
(j) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
the period that includes the enactment date.
9 (Continued)
<PAGE>
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
(k) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company does not engage in the use of derivative financial
instruments. The Company's off-balance sheet financial instruments
are limited to commitments to extend credit.
(l) EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income
available to common shareholders by the weighted average number of
shares outstanding during the period. Prior to the mutual holding
company reorganization of the Bank, which occurred on March 23,
1999, earnings per share are not applicable as neither the Company
nor the Bank had shares outstanding. Earnings per share reflects
earnings from March 23, 1999, to the end of the reporting period
based upon the weighted average number of shares outstanding for
the period. Unallocated shares held by the Company's ESOP are not
included in the weighted average number of shares outstanding.
(m) COMPREHENSIVE INCOME
On October 1, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 130,
REPORTING COMPREHENSIVE INCOME. This statement establishes
standards for reporting and display of comprehensive income and
its components. At the Company, comprehensive income represents
net income plus other comprehensive income, which consists of the
net change in unrealized gains or losses on securities available
for sale for the period. Accumulated other comprehensive income
represents the net unrealized gains or losses on securities
available for sale as of the balance sheet dates, net of the
related tax effect. Prior year consolidated financial statements
have been reclassified to conform to the requirements of SFAS No.
130.
(n) SEGMENT REPORTING
Effective October 1, 1998, the Company adopted the provisions of
SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION. SFAS No. 131 requires publicly-held companies
to report financial and other information about key
revenue-producing segments of the entity for which such
information is available and is utilized by the chief operation
decision maker. Specific information to be reported for individual
segments includes profit or loss, certain revenue and expense
items and total assets. A reconciliation of segment financial
information to amounts reported in the financial statements is
also provided. The Company has determined that it has no
reportable segments and therefore, the adoption of SFAS No. 131
caused no significant change in the Company's reporting.
10 (Continued)
<PAGE>
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
(o) DERIVATIVES
In June 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES, which establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging
activities.
During the second quarter of 1999, the FASB issued SFAS No. 137,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -
DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133. SFAS No.
137 defers the effective date of SFAS No. 133 by one year from
fiscal years beginning after June 15, 1999 to fiscal years
beginning after June 15, 2000.
(p) RECLASSIFICATIONS
Whenever necessary prior year amounts have been reclassified to
conform to the current year's classifications.
(3) SECURITIES
Securities are summarized as follows (in thousands):
SEPTEMBER 30, 1999
-----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
Available-for-sale:
U.S. Government securities $ 4,457 -- (100) 4,357
Mortgage-backed securities:
FHLMC 1,318 -- (15) 1,303
FNMA 4,039 -- (42) 3,997
Municipal securities 2,412 -- (53) 2,359
Corporate equity securities 18 869 -- 887
Mutual funds 68 -- -- 68
------- ------- ------- -------
$12,312 869 (210) 12,971
======= ======= ======= =======
Held-to-maturity:
Mortgage-backed securities:
FHLMC 3,473 1 (53) 3,421
FNMA 1,243 2 (5) 1,240
GNMA 1,293 -- (7) 1,286
Other securities 10 -- -- 10
------- ------- ------- -------
$ 6,019 3 (65) 5,957
======= ======= ======= =======
11 (Continued)
<PAGE>
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
SEPTEMBER 30, 1998
-----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
Available-for-sale:
U.S. Government securities $ 5,499 28 -- 5,527
Mortgage-backed securities:
FHLMC 256 2 -- 258
Municipal securities 256 3 -- 259
Corporate equity securities 17 871 -- 888
Mutual funds 3,619 -- (5) 3,614
------- ------- ------- -------
$ 9,647 904 (5) 10,546
======= ======= ======= =======
Held-to-maturity:
Mortgage-backed securities:
FHLMC 4,030 42 (2) 4,070
FNMA 1,925 9 (1) 1,933
GNMA 1,752 12 -- 1,764
Other securities 10 10 -- 20
------- ------- ------- -------
$ 7,717 73 (3) 7,787
======= ======= ======= =======
The following table presents the carrying value and fair value of debt
securities based on the earlier of call or maturity date at September 30,
1999 (in thousands):
AMORTIZED FAIR
COST VALUE
--------- ---------
Available-for-sale:
Due within one year $ 387 386
Due after one year through five years 3,057 3,006
Due after five years through ten years 3,128 3,024
Due after ten years 5,654 5,600
--------- ---------
$ 12,226 12,016
========= =========
Held-to-maturity:
Due within one year 355 356
Due after one year through five years 3,087 3,076
Due after five years through ten years 1,335 1,290
Due after ten years 1,242 1,235
--------- ---------
$ 6,019 5,957
========= =========
The amortized cost and fair value of mortgage-backed securities are
presented by contractual maturity in the preceding table. Expected
maturities will differ from contractual maturities because borrowers may
have the right to prepay obligations without prepayment penalties.
12 (Continued)
<PAGE>
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
Gross gains of approximately $9,000 were realized on sales of available
for sale securities in 1999, $0 in 1998, and $20,000 in 1997, and gross
losses of approximately $27,000, $0 and $43,000 were realized on sales of
available for sale securities in 1999, 1998 and 1997, respectively.
(4) LOANS RECEIVABLE
Loans are summarized as follows (in thousands):
1999 1998
---------- ---------
First mortgage loans:
One to four family residential $ 33,320 28,834
Commercial 3,222 1,578
Construction 296 124
36,838 30,536
---------- ---------
Other loans:
Commercial and agricultural 1,233 477
Automobile 5,306 2,166
Home equity 771 835
Passbook 411 323
Other 2,045 1,384
---------- ---------
9,766 5,185
---------- ---------
Total loans 46,604 35,721
Less:
Net deferred (costs) fees (187) 30
---------- ---------
$ 46,791 35,691
========== =========
Changes in the allowance for loan losses are summarized as follows (in
thousands):
1999 1998 1997
-------- --------- --------
Balance at beginning of period $ 484 403 479
Provision charged to
operations 162 130 250
Recoveries 34 85 40
Loans charged off (60) (134) (366)
-------- --------- --------
Balance at end of period $ 620 484 403
======== ========= ========
13 (Continued)
<PAGE>
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
Management believes it has no impaired loans at September 30, 1999 and
1998.
The principal balances of loans not accruing interest amounted to
approximately $221,000 and $259,000 at September 30, 1999 and 1998,
respectively. The interest income foregone for non-accruing loans was
approximately $11,000, $11,000, and $24,000 during the years ended
September 30, 1999, 1998 and 1997, respectively.
In the ordinary course of business, the Company has and expects to
continue to have transactions, including borrowings, with its officers
and directors. In the opinion of management, such transactions were on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time of comparable transactions with other
persons and did not involve more than a normal risk of collectibility or
present any other unfavorable features to the Company. Loans to such
borrowers at September 30, 1999 and 1998 were $442,000 and $290,000,
respectively.
(5) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows (in thousands):
1999 1998
--------- ---------
Land $ 30 30
Buildings and improvements 478 472
Furniture and equipment 455 405
--------- ---------
963 907
Less accumulated depreciation and
amortization 685 619
--------- ---------
$ 278 288
========= =========
Depreciation and amortization expense amounted to $66,000, $59,000 and
$58,000 during the years ended September 30, 1999, 1998 and 1997,
respectively.
14 (Continued)
<PAGE>
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
(6) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows (in thousands):
1999 1998
---------- -----------
Loans $ 276 196
Securities 193 150
---------- -----------
$ 469 346
========== ===========
(7) DEPOSITS
At September 30, 1999 and 1998, the aggregate amounts of time
certificates in denominations of $100,000 or more were approximately
$3,275,000 and $2,790,000, respectively. Deposit balances in excess of
$100,000 are not insured by the FDIC.
Contractual maturities of time certificates are summarized as follows (in
thousands):
SEPTEMBER 30,
------------------------
1999 1998
---------- -----------
Within one year $ 17,265 17,207
One through two years 4,903 4,752
Two through three years 675 1,473
Three through four years 214 146
---------- -----------
Total time certificates $ 23,057 23,578
========== ===========
Interest expense on deposits is summarized as follows (in thousands):
1999 1998 1997
-------- --------- --------
Savings and club accounts $ 569 519 527
Time certificates 1,246 1,279 1,265
NOW accounts and money
market accounts 116 109 104
-------- --------- --------
$ 1,931 1,907 1,896
======== ========= ========
15 (Continued)
<PAGE>
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
(8) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWINGS
The Company is a member of the Federal Home Loan Bank (FHLB). As a
member, the Company is required to own capital stock in the FHLB and is
authorized to apply for advances from the FHLB. The Company has also
entered into repurchase agreements with the FHLB.
At September 30, 1999 and 1998, securities sold under agreements to
repurchase and advances from the FHLB were as follows (in thousands):
<TABLE>
<CAPTION>
ADVANCE AMOUNT
----------------------
MATURITY DATE INTEREST RATE FIXED OR VARIABLE 1999 1998
------------- ------------- ----------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Securities sold under agreements to repurchase:
-----------------------------------------------
10/21/99 5.34% Fixed - secured $ 1,000 --
10/25/99 5.32% Fixed - secured 4,900 --
FHLB advances:
--------------
10/25/99 5.36% Fixed - unsecured 1,500 --
----------- ---------
$ 7,400 --
=========== =========
</TABLE>
The collateral underlying securities sold under agreements to repurchase
had a carrying value and fair value of $6,335,000 and $6,325,000,
respectively, at September 30, 1999. At September 30, 1999 the Company
may borrow up to an additional $16.0 million from the FHLB. Under terms
of a blanket collateral agreement with FHLB, outstanding advances are
collateralized by certain qualifying assets not otherwise pledged
(primarily first mortgage loans). The carrying value of assets pledged as
collateral for FHLB advances at September 30, 1999 was $1,500,000.
(9) INCOME TAXES
The components of income tax expense attributable to income from
operations are (in thousands):
1999 1998 1997
----- ----- -----
Current:
Federal $ 352 356 168
State 101 85 33
----- ----- -----
453 441 201
----- ----- -----
Deferred:
Federal (18) (53) 106
State (4) (8) 28
----- ----- -----
(22) (61) 134
----- ----- -----
$ 431 380 335
===== ===== =====
16 (Continued)
<PAGE>
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
Actual tax expense attributable to income before income taxes differed
from "expected" tax expense, computed by applying the U.S. Federal
statutory tax rate of 34% to income before income tax as follows (in
thousands):
1999 1998 1997
----------- --------- ----------
Computed "expected" tax expense $ 364 340 296
Increase (decrease) in income
taxes resulting from:
State taxes, net of
Federal tax benefits 64 51 40
Other items, net 3 (11) (1)
----------- --------- ----------
$ 431 380 335
=========== ========= ==========
Effective tax rate 40.20% 38.00% 38.42%
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are (in
thousands):
1999 1998
-------- ---------
Deferred tax assets:
Allowance for loan losses $ 248 194
Net deferred loan fees -- 12
Deferred directors fees 22 7
Accrued expenses 50 68
Other 27 9
-------- ---------
Total gross deferred tax assets 347 290
-------- ---------
Deferred tax liabilities:
Accumulated depreciation on premises
and equipment 13 18
Accrued interest receivable 101 138
Net deferred loan costs 67 --
Unrealized gains on available-for-sale
securities 269 360
Prepaid expenses 16 7
-------- ---------
Total gross deferred tax
liabilities 466 523
-------- ---------
Net deferred tax assets
(liabilities) $ (119) (233)
======== =========
17 (Continued)
<PAGE>
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
Realization of deferred tax assets is dependent upon the generation of
future taxable income or the existence of sufficient taxable income
within the carryback period. A valuation allowance is provided when it is
more likely than not that some portion of the deferred tax assets will
not be realized. In assessing the need for a valuation allowance,
management considers the scheduled reversal of the deferred tax
liabilities, the level of historical taxable income and projected future
taxable income over the periods in which the temporary differences
comprising the deferred tax assets will be deductible.
Management believes that no valuation allowance is necessary.
Included in retained earnings at September 30, 1999 is approximately
$1,274,000 representing aggregate provisions for loan losses taken under
the Internal Revenue Code. Use of these reserves to pay dividends in
excess of earnings and profits or to redeem stock, or if the institution
fails to qualify as a bank for Federal income tax purposes, would result
in taxable income to the Bank.
(10) EMPLOYEE BENEFIT PLANS
The Bank adopted a 401(k) Retirement Plan (the Plan) effective July 1,
1997. The Plan covers all employees who are at least 21 years of age with
one or more years of service. The Bank's basic monthly contribution to
the plan is 3% of employees salary. Additional Bank contributions to the
plan are determined annually by the Board of Directors. Participants may
make voluntary contributions to the Plan up to 15% of their compensation.
Effective August 1, 1997, the Board of Directors of the Bank voted to
convert the existing profit sharing plan into the new 401(k) plan. The
profit sharing plan covered substantially all of the Bank's employees and
contributions were made at the Bank's discretion.
In connection with establishing the Employee Stock Ownership Plan (ESOP)
in 1999, the ESOP borrowed $429,000 from the Company to purchase 85,825
common shares of the Company's stock. The loan shall be repaid in
essentially ten equal annual installments through 2009. The loan bears
interest at a fixed rate per annum equal to the lowest prime rate quoted
in the WALL STREET JOURNAL on the effective date of the Reorganization
which was 7.75%. Interest payable is computed on the basis of a year of
365 days and actual days elapsed occurring in the period to which the
computation relates. At September 30, 1999, 4,291 shares were released or
committed to be released and 81,534 shares remained as unallocated
shares. The fair value of the unallocated shares on September 30, 1999
was $397,000.
Costs charged to expense for the Company's various retirement plans in
1999, 1998 and 1997 are $59,000, $40,000 and $41,000, respectively.
18 (Continued)
<PAGE>
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
(11) COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments consist of commitments to extend
credit and involve, to varying degrees, elements of credit, market and
interest rate risk in excess of the amounts recognized in the
consolidated balance sheet. Credit risk represents the accounting loss
that would be recognized at the reporting date if obligated
counterparties failed completely to perform as contracted. Market risk
represents risk that future changes in market prices make financial
instruments less valuable.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since some of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the
Company upon extension of credit, is based on management's evaluation of
the customer's financial position. Collateral held varies, but may
include real estate, accounts receivable, inventory, property, plant and
equipment and income-producing commercial properties. Substantially all
commitments to extent credit, if exercised, will represent loans secured
by real estate.
19 (Continued)
<PAGE>
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
Commitments to originate fixed and adjustable rate loans at September 30,
1999 are as follows (in thousands):
Fixed rate
7.00 - 7.99% $ 196
8.00 - 8.99% 1,022
9.00 - 9.99% 15
10.00 - 10.99% 137
11.00 - 11.99% --
--------
Total fixed rate 1,370
Adjustable rate 25
--------
Total commitments to originate loans $ 1,395
========
Unused lines of credit, which includes home equity, consumer and
commercial, amounted to $766,000 at September 30, 1999.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for loan commitments is
represented by the contractual or notional amount of these instruments.
The Company uses the same credit policies in making commitments as it
does for on-balance sheet instruments. The Company controls its credit
risk through credit approvals, limits, and monitoring procedures.
In the normal course of business, there are various outstanding legal
proceedings. In the opinion of management, the aggregate amount involved
in such proceedings is not material to the financial condition or results
of operations of the Company.
(12) CONCENTRATIONS OF CREDIT
A substantial portion of the Company's loans are mortgages in Northern
New York State. Accordingly, the ultimate collectibility of a substantial
portion of the Company's loan portfolio is susceptible to changes in
market conditions in this area. A majority of the Company's loan
portfolio is secured by real estate.
The Company's concentrations of credit risk are disclosed in the schedule
of loan classifications. Other than general economic risks, management is
not aware of any material concentrations of credit risk to any industry
or individual borrower.
20 (Continued)
<PAGE>
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
(13) REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by Federal banking agencies. Failure to meet
the minimum regulatory capital requirements can initiate certain
mandatory, and possible additional discretionary actions by regulators,
that if undertaken, could have a direct material affect on the Company
and the consolidated financial statements. Under the regulatory capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines
involving quantitative measures of assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification under the prompt
corrective action guidelines are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts and
ratios of: total risk-based capital and Tier I capital to risk-weighted
assets (as defined in the regulations), Tier I capital to adjusted
tangible assets (as defined), and tangible capital to tangible assets (as
defined). As discussed in greater detail below, as of September 30, 1999,
the Company and the Bank met all of the capital adequacy requirements to
which it is subject.
As of September 30, 1999, the Bank was categorized as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Bank has to maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as disclosed in
the table below. There are no conditions or events since the most recent
notification that management believes have changed the Bank's prompt
corrective action category.
21 (Continued)
<PAGE>
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
The following is a summary of the Company's and the Bank's actual capital
amounts and ratios compared to minimum capital adequacy requirements and
the requirements for classification as a well capitalized institution
under prompt corrective action provisions (in thousands):
<TABLE>
<CAPTION>
TO BE CLASSIFIED AS
WELL-CAPITALIZED UNDER
MINIMUM CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY REQUIREMENTS ACTION PROVISIONS
-------------- --------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
September 30, 1999
- ------------------
Total capital (to risk
weighted assets):
Company $16,469 46.95% $2,806 =>8.0% $3,508 =>10.0%
Bank 14,638 41.73 2,806 =>8.0 3,508 =>10.0
Tier 1 Capital (to risk
weighted assets):
Company 15,639 44.58 1,403 =>4.0 2,105 =>6.0
Bank 13,808 39.36 1,403 =>4.0 2,105 =>6.0
Core Capital (to adjusted
tangible assets):
Company 15,639 22.56 2,080 =>3.0 3,467 =>5.0
Bank 13,808 19.79 2,093 =>3.0 3,488 =>5.0
Tangible Capital (to tangible
assets):
Company 15,639 22.56 1,040 =>1.5 -- NA
Bank 13,808 19.79 1,046 =>1.5 -- NA
September 30, 1998
- ------------------
Total capital (to risk
weighted assets) Bank $11,250 44.1% $2,040 =>8.0% $2,550 =>10.0%
Tier 1 Capital (to risk
weighted assets) Bank 10,929 42.9 1,020 =>4.0 1,530 =>6.0
Core Capital (to adjusted
tangible assets) Bank 10,929 18.7 1,753 =>3.0 2,921 =>5.0
Tangible Capital (to
tangible assets) Bank 10,929 18.7 876 =>1.5 -- NA
22 (Continued)
</TABLE>
<PAGE>
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments:
CASH AND CASH EQUIVALENTS: The fair values are considered to
approximate the carrying values, as reported in the balance sheet.
SECURITIES: Fair values of securities are based on exchange quoted
market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of
similar instruments.
LOANS: For variable rate loans that reprice frequently and loans
due on demand with no significant change in credit risk, fair
values are considered to approximate carrying values. The fair
values for certain mortgage loans (e.g., one-to-four family
residential) and other consumer loans are based on quoted market
prices of similar loans sold on the secondary market, adjusted for
differences in loan characteristics. The fair values for other
loans (e.g., commercial real estate and rental property mortgage
loans) are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar
terms to borrowers of similar credit rating. The carrying amount
of accrued interest approximates its fair value.
FHLB STOCK: The carrying value of this instrument, which is
redeemable at par, approximates fair value.
OFF-BALANCE-SHEET INSTRUMENTS: Fair values for the Company's
off-balance-sheet instruments (lines of credit and commitments to
fund loans) are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing. The fair value
of these financial instruments is immaterial and has therefore
been excluded from the table below.
DEPOSITS: The fair values of demand, savings, club, NOW and money
market accounts are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). Fair
values for fixed-rate time certificates are estimated using a
discounted cash flow calculation that applies interest rates
currently being offered on these products to a schedule of
aggregated expected monthly maturities on time deposits.
23 (Continued)
<PAGE>
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
The estimated carrying values and fair values of the Company's financial
instruments are as follows (in thousands):
SEPTEMBER 30,
-----------------------------------------
1999 1998
----------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
Financial assets:
Cash, cash equivalents $ 3,490 3,490 4,434 4,434
Securities 18,990 18,928 18,263 18,333
Loans, net 46,171 46,348 35,207 35,782
FHLB stock 385 385 379 379
Financial liabilities:
Deposits:
Demand accounts 184 184 210 210
Savings and club
accounts 15,423 15,423 17,302 17,302
Time certificates 23,057 23,090 23,578 23,600
NOW and money
market accounts 6,449 6,449 5,292 5,292
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore, cannot
be determined with precision. Changes in assumptions could significantly
affect the estimates.
(15) COMPREHENSIVE INCOME
A summary of unrealized gains (losses) and reclassification adjustments,
net of tax, of available-for-sale securities for the years ended
September 30, 1999, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ---------
<S> <C> <C> <C>
Unrealized holding gains (losses) arising
during the period net of tax (pre-tax
amount of ($267,000), $265,000 and
$242,000) $ (160) 159 145
Reclassification adjustment for losses
(gains) realized in net income during
the period, net of tax (pre-tax
amount of $18,000, $0 and $23,000) 11 -- 14
---------- ---------- ---------
Other comprehensive (loss) income, net
of tax of ($91,000), $105,000 and $109,000 $ (149) 159 159
========== ========= =========
24 (Continued)
</TABLE>
<PAGE>
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
(16) CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
Condensed financial statements for Gouverneur Bancorp, Inc. as of and for
the year ended September 30, 1999 are presented below.
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF FINANCIAL CONDITION (in thousands)
<S> <C>
Assets
Cash $ 1,812
Investment in bank subsidiary 14,231
-----------
Total assets $ 16,043
===========
Liabilities 14
Shareholders' equity
Common stock 24
Additional paid-in capital 4,553
Retained earnings 11,470
Accumulated other comprehensive income 390
Unallocated shares of ESOP (408)
-----------
Total shareholders' equity 16,029
Total liabilities and shareholders' equity $ 16,043
===========
CONDENSED STATEMENT OF INCOME (in thousands)
Interest income $ 36
Other operating income 6
-----------
Income before undistributed income of
subsidiary 42
Applicable income taxes 14
Equity in undistributed income of bank 613
-----------
Net income $ 641
===========
25 (Continued)
</TABLE>
<PAGE>
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
CONDENSED STATEMENT OF CASH FLOWS (in thousands)
Cash flows from operating activities:
Net income 641
Adjustments to reconcile net income to
cash provided by operating activities:
Equity in undistributed income of bank (613)
Increase in liabilities 14
-------
Net cash provided by operating
activities 42
Cash flows from investing activities:
Purchase of Gouverneur Savings and
Loan Association common stock (2,380)
Funding of ESOP loan receivable (429)
-------
Net cash used in investing
activities (2,809)
Cash flows from financing activities:
Proceeds from issuance of common stock 4,579
-------
Net cash provided by
financing activities 4,579
-------
Net increase in cash and cash equivalents 1,812
Cash and cash equivalents at beginning
of period --
-------
Cash and cash equivalents at end of period $ 1,812
=======
26
<PAGE>
SHAREHOLDER INFORMATION
CORPORATE OFFICES
Gouverneur Bancorp, Inc.
42 Church Street
Gouverneur, New York 13642
(315) 287-2600
ANNUAL MEETING OF SHAREHOLDERS
The annual meeting of Gouverneur Bancorp, Inc. will be held February 15, 2000
at the Clearview Restaurant, 1180A U.S. Highway 11, Gouverneur, New York
ANNUAL REPORT ON FORM 10-K
For the 1999 fiscal year, Gouverneur Bancorp., Inc. will file an Annual Report
on Form 10-K with the Securities and Exchange Commission. The Form 10-K is
available on the World Wide Web as part of the SEC EDGAR database at
www.sec.gov. Shareholders may obtain one free of charge by writing to Gouverneur
Bancorp, Inc., 42 Church Street, Gouverneur, New York 13642, Attention Corporate
Secretary.
STOCK TRANSFER AGENT & REGISTRAR
Shareholders wishing to change name, address or ownership of stock, or to report
lost certificates or to consolidate accounts should contact the Company's stock
registrar and transfer agent directly at:
Registrar & Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016-3572
(800) 368-5948
COUNSEL
Serchuk & Zelermyer, LLP
81 Main Street
White Plains, New York 10601
INDEPENDENT AUDITORS
KPMG LLP
113 South Salina Street
Syracuse, New York 13202
MARKET INFORMATION FOR COMMON STOCK
The Common Stock of Gouverneur Bancorp, Inc. trades on the American Stock
Exchange under the symbol "GOV".
At December 15, 1999, there were approximately350 shareholders of record not
including the number of persons or entities holding stock in nominee or street
names through various brokers and banks.
Gouverneur Bancorp, Inc. common stock was issued at $5.00 per share in
connection with the Company's initial public offering completed on March 23,
1999. The following table shows the range of high and low sale prices for each
full quarterly period since the Company's common stock began trading on March
24,1999.
Quarter Ended High Low
- ------------- ---- ---
June 30, 1999 $5.000 $4.063
September 30, 1999 $4.875 $4.438
DIRECTORS AND OFFICERS
GOUVERNEUR BANCORP, INC.
BOARD OF DIRECTORS
Richard F. Bennett: PRESIDENT & CHIEF EXECUTIVE OFFICER, GOUVERNEUR BANCORP,INC.
Charles E Graves: RETIRED PRESIDENT & CHIEF EXECUTIVE OFFICER, GOUVERNEUR
SAVINGS & LOAN ASSOCIATION
Richard E. Jones: PRINCIPAL, J&H FEED & FARM STORE
Frank Langevin: RETIRED CONTRACTOR
Robert J. Leader: PRINCIPAL, CASE & LEADER LLP ATTORNEYS AT LAW
Timothy J. Monroe: VETERINARIAN, PRESIDENT, NORTHLAND VETERINARY HOSPITAL
Joseph C. Pistolesi: OWNER, CLEARVIEW MOTEL AND RESTAURANT
Larry A. Straw: PROJECT ENGINEER, CIVES, INC., STEEL FABRICATOR
DIRECTORS OF GOUVERNEUR BANCORP, INC. ALSO SERVE AS DIRECTORS OF GOUVERNEUR
SAVINGS & LOAN ASSOCIATION
OFFICERS
Richard F. Bennett: PRESIDENT & CHIEF EXECUTIVE OFFICER
Robert Twyman: CHIEF FINANCIAL OFFICER
27
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
The only subsidiary of the Registrant is Gouverneur Savings and Loan
Association.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The Schedule contains summary financial information extracted from the financial
statements for the twelve months ending September 30, 1999 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 1,564
<INT-BEARING-DEPOSITS> 1,926
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,971
<INVESTMENTS-CARRYING> 6,019
<INVESTMENTS-MARKET> 5,957
<LOANS> 46,791
<ALLOWANCE> 620
<TOTAL-ASSETS> 69,996
<DEPOSITS> 45,113
<SHORT-TERM> 7,400
<LIABILITIES-OTHER> 1,454
<LONG-TERM> 0
0
0
<COMMON> 24
<OTHER-SE> 16,005
<TOTAL-LIABILITIES-AND-EQUITY> 69,996
<INTEREST-LOAN> 3,645
<INTEREST-INVEST> 1,096
<INTEREST-OTHER> 72
<INTEREST-TOTAL> 4,813
<INTEREST-DEPOSIT> 1,931
<INTEREST-EXPENSE> 2,019
<INTEREST-INCOME-NET> 2,794
<LOAN-LOSSES> 162
<SECURITIES-GAINS> (18)
<EXPENSE-OTHER> 1,711
<INCOME-PRETAX> 1,072
<INCOME-PRE-EXTRAORDINARY> 1,072
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 641
<EPS-BASIC> 0.15
<EPS-DILUTED> 0.15
<YIELD-ACTUAL> 4.65
<LOANS-NON> 221
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 484
<CHARGE-OFFS> 60
<RECOVERIES> 34
<ALLOWANCE-CLOSE> 620
<ALLOWANCE-DOMESTIC> 620
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
