SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Fiscal Year Ended June 30, 1999
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transaction period from ___________________ to ______________________
Commission File Number: 0-25165
GREENE COUNTY BANCORP, INC.
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( Name of Small Business Issuer in its Charter)
Delaware 14-1809721
------------------------------- ----------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
302 Main Street, Catskill, New York 12414
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(Address of Principal Executive Office) (Zip Code)
(518) 943-2600
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(Issuer's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
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(Title of Class)
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
twelve 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-B is not contained in this form, 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-KSB
or any amendments to this Form 10-KSB. |X|
The Issuer's revenues for the fiscal year ended June 30, 1999 were
$10,484,960.
As of June 30, 1999, there were issued and outstanding 1,957,057 shares of
the Registrant's Common Stock. The aggregate value of the voting stock held by
non-affiliates of the Registrant, computed by reference to the closing price of
the Common Stock as of July 31, 1999, $8.375 was $7,617,038.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended June
30, 1999 (Parts II and IV).
2. Proxy Statement for the 1999 Annual Meeting of Stockholders (Part III)
<PAGE>
PART I
ITEM 1. Business
Greene County Bancorp, Inc.
Greene County Bancorp, Inc. (the "Company") was organized at the direction
of the Board of Trustees of The Bank of Greene County (formerly Greene County
Savings Bank) (the "Bank") for the purpose of acting as the holding company of
the Bank. The Company's assets consist primarily of the outstanding capital
stock of the Bank and cash and investments of $3.1 million, representing a
portion of the net proceeds from the Company's stock offering completed December
30, 1998. At June 30, 1999, 909,497 shares of the Company's common stock, par
value $0.10 per share, were held by the public, and 1,047,560 shares were held
by Greene County Bancorp, MHC, the Company's mutual holding company (the "Mutual
Company"). The Company's principal business is overseeing and directing the
business of the Bank and investing the net stock offering proceeds retained by
it.
At June 30, 1999, the Company had consolidated total assets of $152.6
million, consolidated total deposits of $128.0 million and consolidated total
equity of $23.9 million.
The Company's main office is located at 302 Main Street, Catskill, New
York 12414-1317. Its telephone number is (518) 943-2600.
The Bank of Greene County
The Bank was organized in 1889 as The Building and Loan Association of
Catskill, a New York-chartered savings and loan association. In 1974, the Bank
converted to a New York mutual savings bank under the name Greene County Savings
Bank. In conjunction with the reorganization and the offering completed in
December 1998, the Bank changed its name to The Bank of Greene County. The
Bank's deposits are insured by the Bank Insurance Fund, as administered by the
Federal Deposit Insurance Corporation ("FDIC"), up to the maximum amount
permitted by law. The Bank's principal business consists of attracting retail
deposits from the general public in the areas surrounding its branches and
investing those deposits, together with funds generated from operations and
borrowings, primarily in one- to four-family residential mortgage loans,
commercial real estate loans, consumer loans and commercial business loans. In
addition, the Bank invests a significant portion of its assets in investment
securities and mortgage- and asset-backed securities. The Bank's revenues are
derived principally from the interest on its mortgage, consumer and commercial
loans and securities, loan origination and servicing fees and service charges
and fees collected on its deposit accounts. The Bank's primary sources of funds
are deposits, and principal and interest payments on loans and investment and
mortgage- and asset-backed securities. In recent years the Bank has not had any
borrowings.
The Bank's main office is located at 302 Main Street, Catskill, New York
12414-1317. Its telephone number is (518) 943-2600.
Greene County Bancorp, MHC
The Mutual Company was formed in December 1998 as part of the Bank's
mutual holding company reorganization. The Mutual Company is a New
York-chartered mutual holding company. The Mutual Company owns 53.5% of the
common stock of the Company. The Mutual Company is subject to regulation and
supervision by the FRB, FDIC and the New York State Banking Department (the
"Department"). The Mutual Company does not engage in any business activity other
than to hold the Company's common stock and to invest any liquid assets of the
Mutual Company.
The Mutual Company's main office is located at 302 Main Street, Catskill,
New York 12414-1317, and its telephone number at that address is (518) 943-2600.
<PAGE>
Market Area
The Bank has been, and intends to continue to be, a community-oriented
bank offering a variety of financial services to meet the needs of the
communities it serves. The Bank currently operates four full service banking
offices in Greene County, New York. The Bank's primary deposit gathering area is
currently concentrated around the areas within Greene County where its full
service banking offices are located, namely the towns of Catskill, Greenville,
Cairo and Coxsackie. The Bank's primary lending area also has historically been
concentrated in Greene County, New York.
As of the 1990 census, the County population was 44,700 persons. As of the
1990 census, Greene County had the fourth largest percentage of population
growth in New York state in the ten year period ended in 1990. Greene County is
primarily rural and the major industry consists of tourism associated with the
several ski facilities and festivals located in the Catskill mountains. The
County has no concentrations of manufacturing industry. Greene County is
contiguous to the Albany-Schenectady-Troy metropolitan statistical area. The
close proximity of Greene County to the city of Albany has made it a "bedroom"
community for persons working in the Albany capital area. Greene County and the
Coxsackie Correctional Facilities are the largest employers in the County. Other
large employers include the Hunter Mountain and Ski Windham resort areas, the
Catskill, Cairo-Durham, Greenville and Coxsackie-Athens Central School Districts
and Stiefel Labs, Inc.
Competition
The Bank faces significant competition both in making loans and in
attracting deposits. The Bank's market area has a high density of financial
institutions, many of which are branches of significantly larger institutions
that have greater financial resources than the Bank, and all of which are
competitors of the Bank to varying degrees. The Bank's competition for loans
comes principally from commercial banks, savings banks, savings and loan
associations, mortgage banking companies, credit unions, insurance companies and
other financial service companies. Its most direct competition for deposits has
historically come from commercial banks, savings banks, savings and loan
associations and credit unions. The Bank faces additional competition for
deposits from non-depository competitors such as the mutual fund industry,
securities and brokerage firms and insurance companies. Competition may also
increase as a result of the lifting of restrictions on the interstate operations
of financial institutions.
Lending Activities
General. The principal lending activity of the Bank is the origination,
for retention in its portfolio, of fixed-rate and adjustable-rate mortgage loans
collateralized by one- to four-family residential real estate located within its
primary market area. To a lesser extent, the Bank also originates commercial
real estate loans, home equity loans, consumer loans and commercial business
loans.
In an effort to manage the interest rate risk associated with its
predominantly fixed-rate loan portfolio, the Bank maintains high levels of
liquidity, and, where possible, matches the funding of fixed-rate residential
mortgages with lower-costing core savings accounts. In addition, in originating
residential fixed-rate loans, the Bank has been successful in marketing and
originating such loans with 15 year terms. Currently, the substantial majority
of residential fixed-rate loans are being originated with 15 year terms.
Finally, the Bank has attempted to market to its customers shorter term maturity
features, such as fixed-rate residential mortgage loans with "bi-weekly"
mortgage payments, where the borrower makes the equivalent of an extra monthly
payment per year by paying half the monthly mortgage payment every two weeks.
The accelerated principal amortization schedules of these loans have helped
reduce the interest rate risk that is inherent in a community based bank's
residential lending portfolio. The accelerated repayment schedule results in
significant savings to the borrower and allows for a more rapid increase in home
equity.
2
<PAGE>
Loan Portfolio Composition. Set forth below is selected information
concerning the composition of the Bank's loan portfolio in dollar amounts and in
percentages (before deductions for deferred fees and costs, unearned discounts
and allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family .......... $74,512 81.14% $64,705 79.69% $61,008 79.66%
Commercial ................... 3,985 4.33 4,521 5.57 5,343 6.98
Construction and land ........ 1,654 1.80 798 .98 497 .65
Multi-family ................. 474 0.52 388 .48 388 .51
------- ------ ------- ------ ------- ------
Total real estate loans ..... 80,625 87.79 70,412 86.72 67,236 87.80
Consumer Loans:
Installment (1) .............. 4,761 5.18 4,172 5.14 3,758 4.90
Home equity .................. 4,689 5.11 4,727 5.82 4,053 5.29
Passbook ..................... 525 0.57 544 .67 507 .66
------- ------ ------- ------ ------- ------
Total consumer loans ........ 9,975 10.86 9,443 11.63 8,318 10.85
Commercial Business Loans ....... 1,230 1.35 1,336 1.65 1,032 1.35
------- ------ ------- ------ ------- ------
Total consumer and commercial
business loans .............. 11,205 12.21 10,779 13.28 9,350 12.20
------- ------ ------- ------ ------- ------
Total gross loans ........... 91,830 100.00% 81,191 100.00% 76,586 100.00%
====== ====== ======
Less:
Deferred fees and discounts (240) (203) (216)
Allowance for losses.......... (792) (728) (723)
------- ------- -------
Total loans receivable, net $90,798 $80,260 $75,647
======= ======= =======
</TABLE>
- ----------
(1) Includes direct automobile loans (on both new and used automobiles) and
personal loans.
3
<PAGE>
The following table shows the composition of the Bank's loan portfolio by
fixed- and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------
1999 1998 1997
----------------- ----------------- ------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real Estate Loans:
One- to four-family ......... $ 60,504 65.89% $ 46,028 56.69% $ 36,581 47.78%
Commercial .................. 1,399 1.52 1,436 1.77 1,744 2.28
Construction and land ....... 1,654 1.80 760 0.94 497 0.64
Multi-family ................ 332 0.36 157 0.19 135 0.18
-------- ------ -------- ------ -------- ------
Total real estate loans ... 63,889 69.57 48,381 59.59 38,957 50.88
-------- ------ -------- ------ -------- ------
Consumer Loans:
Installment (1) ............. 4,761 5.18 4,172 5.14 3,758 4.91
Home equity ................. 4,689 5.11 4,727 5.82 4,053 5.29
Passbook .................... 525 0.57 544 0.67 507 0.66
Commercial Business Loans ..... 1,230 1.35 1,336 1.65 1,032 1.35
-------- ------ -------- ------ -------- ------
Total fixed-rate loans ...... 75,094 81.78 59,160 72.87 48,307 63.09
-------- ------ -------- ------ -------- ------
Adjustable-Rate Loans:
Real estate loans:
One- to four-family ......... 14,008 15.25 18,677 23.00 24,429 31.90
Multi-family ................ 142 0.15 231 0.28 251 0.31
Commercial real estate ...... 2,586 2.82 3,085 3.80 3,599 4.70
Construction and land ....... -- -- 38 .05 -- --
-------- ------ -------- ------ -------- ------
Total adjustable rate loans 16,736 18.22 22,031 27.13 28,279 36.91
-------- ------ -------- ------ -------- ------
Total loans ............... 91,830 100.00% 81,191 100.00% 76,586 100.00%
-------- ------ -------- ------ -------- ------
Less:
Deferred fees and discounts ... (240) (203) (216)
Allowance for loan losses ..... (792) (728) (723)
-------- -------- --------
Total loans receivable, net . $ 90,798 $ 80,260 $ 75,647
======== ======== ========
</TABLE>
- ----------
(1) Includes direct automobile loans (on both new and used automobiles) and
personal loans.
One- to Four-Family Residential Loans. The Bank's primary lending activity
is the origination, for retention in the Bank's portfolio, of one- to
four-family residential mortgage loans secured by property located in the Bank's
primary lending area. Generally, one- to four-family residential mortgage loans
are made in amounts up to 80% of the lesser of the appraised value or purchase
price of the property. However, the Bank will originate one- to four-family
residential mortgage loans with loan-to-value ratios of up to 95%, with private
mortgage insurance required (except for qualifying first-time home buyers, for
whom the Bank will originate loans with 90% loan-to-value ratios without private
mortgage insurance). Generally, residential mortgage loans are originated for
terms of up to 25 years, though in recent years the Bank has been successful in
marketing and originating the substantial majority of such loans with 15-year
terms. One- to four-family fixed-rate loans are offered with both a monthly and
bi-weekly payment feature. The Bank generally requires fire and casualty
insurance, the establishment of a mortgage escrow account for the payment of
real estate taxes, hazard and flood insurance, as well as title insurance on all
properties securing real estate loans made by the Bank.
The Bank currently offers one- to four-family residential mortgage loans
with fixed and adjustable interest rates. Originations of fixed-rate loans
versus adjustable-rate loans are monitored on an ongoing basis and are affected
significantly by
4
<PAGE>
the level of market interest rates, customer preference, the Bank's interest
rate gap position, and loan products offered by the Bank's competitors.
Particularly, in a relatively low interest rate environment, borrowers may
prefer fixed-rate loans to adjustable-rate loans. Single family residential real
estate loans often remain outstanding for significantly shorter periods than
their contractual terms because borrowers may refinance or prepay loans at their
option. The average length of time that the Bank's single family residential
mortgage loans remain outstanding varies significantly depending upon trends in
market interest rates and other factors.
The Bank's adjustable-rate mortgage ("ARM") loans currently provide for
maximum rate adjustments of 150 basis points per year and 600 basis points over
the term of the loan. The Bank offers ARM loans with initial interest rates that
are below market, referred to as "teaser rates." However, in underwriting such
loans, borrowers are qualified at the full index rate. The Bank's ARM loans
adjust every year. After origination, the interest rate on such ARM loans is
reset based upon a contractual spread or margin above the average yield on
one-year United States Treasury securities, adjusted to a constant maturity (the
"U.S. Treasury Constant Maturity Index"), as published weekly by the Federal
Reserve Board.
ARM loans decrease the risk associated with changes in market interest
rates by periodically repricing, but involve other risks because as interest
rates increase, the underlying payments by the borrower increase, thus
increasing the potential for default by the borrower. At the same time, the
marketability of the underlying collateral may be adversely affected by higher
interest rates. Upward adjustment of the contractual interest rate is also
limited by the maximum periodic and lifetime interest rate adjustment permitted
by the terms of the ARM loans, and, therefore, is potentially limited in
effectiveness during periods of rapidly rising interest rates. At June 30, 1999,
15.25% of the Bank's loan portfolio consisted of one- to four-family residential
loans with adjustable interest rates.
The Bank originates construction/permanent loans to homeowners for the
purpose of construction of primary and secondary residences. The Bank issues a
commitment and has one closing which encompasses both the construction phase and
permanent financing. The construction phase is a maximum term of six months and
the interest charged is the rate as stated in the commitment, with loan-to-value
ratios of up to 80% (or up to 95% with private mortgage insurance), of the
completed project. The Bank generally does not originate loans secured by
undeveloped land.
Construction lending generally involves a greater degree of risk than
other one- to four-family mortgage lending. The repayment of the construction
loan is, to a great degree, dependent upon the successful and timely completion
of the construction of the subject property. Construction delays may further
impair the borrower's ability to repay the loan.
The Bank's residential mortgage loan originations are generally obtained
from the Bank's loan representatives operating in its branch offices through
their contacts with existing or past loan customers, depositors of the Bank,
referrals from attorneys and accountants who refer loan applications from the
general public, and local realtors.
All one- to four-family residential mortgage loans originated by the Bank
include "due-on-sale" clauses, which give the Bank the right to declare a loan
immediately due and payable in the event that, among other things, the borrower
sells or otherwise disposes of the real property subject to the mortgage and the
loan is not repaid.
At June 30, 1999, $74.5 million, or 81.14% of the Bank's loan portfolio,
consisted of one- to four-family residential mortgage loans. Approximately
$540,000 of such loans (representing 12 loans) were included in nonperforming
loans as of that date.
Commercial Real Estate and Multifamily Loans. At June 30, 1999, $3.9
million, or 4.33%, of the total loan portfolio consisted of commercial real
estate loans. Commercial real estate loans are secured by office buildings,
mixed-use properties and other commercial properties. The Bank originates fixed-
and adjustable-rate commercial mortgage loans with maximum terms of up to 20
years. The maximum loan-to-value ratio of commercial real estate loans is
generally 75%. At June 30, 1999, the largest commercial mortgage loan had a
principal balance of $434,460 and was secured by a medical arts building.
In underwriting commercial real estate loans, the Bank reviews the
expected net operating income generated by the real estate to ensure that it is
generally at least 110% of the amount of the monthly debt service; the age and
condition of the collateral; the financial resources and income level of the
borrower; and the borrower's business experience. The Bank's policy is to
require personal guarantees from all commercial real estate borrowers.
5
<PAGE>
Loans secured by commercial real estate generally are larger than one- to
four-family residential loans and involve a greater degree of risk. Commercial
mortgage loans often involve large loan balances to single borrowers or groups
of related borrowers. Payments on these loans depend to a large degree on the
results of operations and management of the properties or underlying businesses,
and may be affected to a greater extent by adverse conditions in the real estate
market or the economy in general. Accordingly, the nature of commercial real
estate loans makes them more difficult for Bank management to monitor and
evaluate.
The Bank originates a limited number of multi-family loans, which totaled
$0.7 million, or 0.74% of the Bank's total loans at June 30, 1999. Multi-family
loans are generally secured by apartment buildings and condominiums located in
the Bank's primary market area. The Bank's underwriting practices and the risks
associated with multi-family loans do not differ substantially from that of
commercial real estate loans.
Consumer Loans. The Bank's consumer loans consist of direct loans on new
and used automobiles, personal loans (either secured or unsecured), home equity
loans, and other consumer loans (consisting of passbook loans, unsecured home
improvement loans and recreational vehicle loans). At June 30, 1999, consumer
loans totaled $10.0 million, or10.86% of the total loan portfolio. Consumer
loans (other than home equity loans) are originated at fixed rates with terms to
maturity of one to five years.
Consumer loans generally have shorter terms and higher interest rates than
one- to four-family mortgage loans. In addition, consumer loans expand the
products and services offered by the Bank to better meet the financial services
needs of its customers. Consumer loans generally involve greater credit risk
than residential mortgage loans because of the difference in the underlying
collateral. Repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the outstanding loan balance because of the
greater likelihood of damage to loss of or depreciation in the underlying
collateral. The remaining deficiency often does not warrant further substantial
collection efforts against the borrower beyond obtaining a deficiency judgment.
In addition, consumer loan collections depend on the borrower's personal
financial stability. Furthermore, the application of various federal and state
laws, including federal and state bankruptcy and insolvency laws, may limit the
amount that can be recovered on such loans.
The Bank's underwriting procedures for consumer loans include an
assessment of the applicant's credit history and the ability to meet existing
and proposed debt obligations. Although the applicant's creditworthiness is the
primary consideration, the underwriting process also includes a comparison of
the value of the security, to the proposed loan amount. The Bank underwrites its
consumer loans internally, which the Bank believes limits its exposure to credit
risks associated with loans underwritten or purchased from brokers and other
external sources.
The Bank offers fixed-rate home equity loans that are secured by the
borrower's residence. Home equity loans are generally underwritten with terms
not to exceed 15 years and under the same criteria that the Bank uses to
underwrite one- to four-family fixed rate loans. Home equity loans may be
underwritten with terms not to exceed 15 years and with a loan to value ratio of
80% when combined with the principal balance of the existing mortgage loan. The
maximum amount of a home equity loan may not exceed $50,000 unless approved by
the Board of Directors. The Bank appraises the property securing the loan at the
time of the loan application (but not thereafter) in order to determine the
value of the property securing the home equity loans. At June 30, 1999, the
outstanding balance of home equity loans totaled $4.7 million, or 5.11% of the
Bank's total loan portfolio.
Commercial Business Loans. The Bank also originates commercial business
loans up to 10 years at fixed rates. The Bank attributes growth in this
portfolio to its ability to offer borrowers senior management attention as well
as timely and local decision-making on commercial loan applications. The
decision to grant a commercial business loan depends primarily on the
creditworthiness and cash flow of the borrower (and any guarantors) and
secondarily on the value of and ability to liquidate the collateral which
consists of receivables, inventory and equipment. The Bank generally requires
annual financial statements and tax returns from its commercial business
borrowers and personal guarantees from the commercial business borrowers. The
Bank also generally requires an appraisal of any real estate that secures the
loan. At June 30, 1999, the Bank had $1.2 million of commercial business loans
which represented 1.35% of the total loan portfolio. On such date, the average
balance of the Bank's commercial business loans was approximately $28,600. The
largest commercial business loan had a balance of $218,000 and represented a
loan to finance the acquisition of a fire truck. At June 30, 1999, the Bank's
commercial loan portfolio included 43 loans secured by real estate, fire trucks,
or other equipment.
6
<PAGE>
Commercial business lending generally involves greater risk than
residential mortgage lending and involves risks that are different from those
associated with residential and commercial real estate lending. Real estate
lending is generally considered to be collateral based, with loan amounts based
on predetermined loan to collateral values, and liquidation of the underlying
real estate collateral is viewed as the primary source of repayment in the event
of borrower default. Although commercial business loans may be collateralized by
equipment or other business assets, the liquidation of collateral in the event
of a borrower default is often an insufficient source of repayment because
equipment and other business assets may be obsolete or of limited use, among
other things. Accordingly, the repayment of a commercial business loan depends
primarily on the creditworthiness of the borrower (and any guarantors), while
liquidation of collateral is a secondary and often insufficient source of
repayment.
Loan Maturity Schedule. The following table sets forth certain information
as of June 30, 1999 regarding the amount of loans maturing or repricing in the
Bank's portfolio. Adjustable-rate loans are included in the period in which
interest rates are next scheduled to adjust rather than the period in which they
contractually mature, and fixed-rate loans are included in the period in which
the final contractual repayment is due.
The following table illustrates the future maturities of such loans at
June 30, 1999.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
Within through through through through Beyond
1 Year 3 Years 5 Years 10 years 20 years 20 Years Total
------ ------- ------- -------- -------- -------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family........ $13,986 $ 381 $ 691 $10,527 $36,342 $12,585 $74,512
Home equity ............... 62 553 1,122 1,782 1,170 -- 4,689
Multi-family .............. -- -- -- -- 474 -- 474
Commercial ................ 2,332 32 326 494 801 -- 3,985
Construction and land loans -- -- -- -- 750 904 1,654
------- ------- ------- ------- ------- ------- -------
Total real estate loans . $16,380 $ 966 $ 2,139 $12,803 $39,537 $13,489 $85,314
------- ------- ------- ------- ------- ------- -------
Consumer loans ............... 1,088 2,419 1,635 100 44 -- 5,286
Commercial business loans .... 450 89 543 148 -- -- 1,230
------- ------- ------- ------- ------- ------- -------
Total loan portfolio ......... $17,918 $ 3,474 $ 4,317 $13,051 $39,581 $13,489 $91,830
======= ======= ======= ======= ======= ======= =======
</TABLE>
The total amount of the above loans due after June 30, 2000 which have
predetermined interest rates is $73,911, while the total amount of loans due
after such dates which have adjustable interest rates is none.
7
<PAGE>
The following table sets forth the loan origination and repayment
activities of the Bank for the periods indicated. The Bank did not purchase or
sell any loans during the periods presented.
Years Ended June 30,
---------------------------------
1999 1998 1997
------- ------- -------
(In Thousands)
Originations by Type:
Adjustable rate:
One- to four-family .................. $ 1,214 $ 742 $ 1,856
Commercial real estate ............... 131 45 --
------- ------- -------
Total adjustable rate ............ 1,345 787 1,856
------- ------- -------
Fixed rate:
One- to four-family .................. 28,455 15,030 9,535
Commercial real estate ............... 90 150 586
Construction and land ................ 3,347 2,930 2,605
Home equity .......................... 2,227 2,064 1,996
Installment .......................... 4,782 3,194 3,785
Commercial business .................. 388 350 568
Passbook ............................. 540 492 373
------- ------- -------
Total fixed-rate ................. 39,829 24,210 19,448
------- ------- -------
Total loans originated ........... $41,174 $24,997 $21,304
------- ------- -------
Repayments:
One- to four-family .................. 19,777 12,075 9,268
Commercial real estate ............... 757 1,017 5
Construction and land ................ 2,491 2,629 3,101
Home equity .......................... 2,265 1,390 1,670
Installment .......................... 4,193 2,780 3,208
Commercial business .................. 494 46 362
Passbook ............................. 559 455 506
------- ------- -------
Total principal repayments ......... 30,536 20,392 18,120
------- ------- -------
Net increase (decrease) .............. $10,638 $ 4,605 $ 3,184
======= ======= =======
Loan Approval Procedures and Authority. The Board of Directors establishes
the lending policies and loan approval limits of the Bank. Loan officers
generally have the authority to originate mortgage loans, consumer loans and
commercial business loans up to amounts established for each lending officer.
All residential loans over $200,000, however, must be approved by the Executive
Committee or the full Board of Directors.
The Board annually approves independent appraisers used by the Bank. For
larger loans, the Bank may require an environmental site assessment to be
performed by an independent professional for all non-residential mortgage loans.
It is the Bank policy to require hazard insurance on all mortgage loans.
Loan Origination Fees and Other Income. In addition to interest earned on
loans, the Bank receives loan origination fees. Such fees and costs vary with
the volume and type of loans and commitments made and purchased, principal
repayments, and competitive conditions in the mortgage markets, which in turn
respond to the demand and availability of money.
8
<PAGE>
In addition to loan origination fees, the Bank also receives other income
that consists primarily of deposit transaction account service charges and late
charges. The Bank also collects fees for originating savings bank life insurance
on an agency basis. Finally, the Bank installs, maintains and services merchant
bankcard equipment for local retailers and is paid a percentage of the
transactions processed by such equipment.
Loans-to-One Borrower. Savings banks are subject to the same loans-to-one
borrower limits as those applicable to national banks, which under current
regulations restrict loans to one borrower to an amount equal to 15% of
unimpaired capital on an unsecured basis, and an additional amount equal to 10%
of unimpaired capital if the loan is secured by readily marketable collateral
(generally, financial instruments and bullion, but not real estate). The Bank's
policy provides that loans to one borrower (or related borrowers) should not
exceed 10% of the Bank's capital and reserves.
At June 30, 1999, the largest aggregate amount loaned by the Bank to one
borrower consisted of $483,000, which consisted of a commercial real estate loan
of $434,000 and a commercial business loan of $49,000. The loans comprising the
lending relationship were performing in accordance with their terms.
Delinquencies and Classified Assets
Collection Procedures. A computer generated late notice is sent and a 2%
late charge is assessed when a payment is 15 days late. A second notice will be
incorporated in the next month's billing notice, approximately 21 days after the
first due payment. Accounts thirty days or more past due will be reviewed by the
collection manager and receive individual attention as required, including
collection letters and telephone calls. Accounts that have a history of
consistent late or delinquent payments will be monitored closely by the
collection manager to avoid further deterioration. Accounts two or more payments
past due are reported to the Board of Directors for consideration of foreclosure
action. With respect to consumer loans, a late notice is sent and a late charge
is assessed after 10 days (or, in the case of home equity loans, 15 days) after
payment is due. A second notice is sent after 15 days (in the case of home
equity loans, 25 days) thereafter. Loans 30 days or more past due are reviewed
by the collection manager for individual attention, including collection letters
and telephone calls. Accounts three or more payments past due are reported to
the Board of Directors and are subject to legal action and repossession of
collateral.
Loans Past Due and Non-performing Assets. Loans are reviewed on a regular
basis. Management determines that a loan is impaired when it is probable that at
least a portion of the loan will not be collected due to an irreversible
deterioration in the financial condition of the borrower or the value of the
underlying collateral. When a loan is determined to be impaired, the measurement
of the loan is based on present value of estimated future cash flows, except
that all collateral-dependent loans are measured for impairment based on the
fair value of the collateral. Management places loans on nonaccrual status once
the loans have become over 90 days delinquent. Nonaccrual is defined as a loan
in which collectibility is questionable and therefore interest on the loan will
no longer be recognized on an accrual basis. Instead, such interest is
recognized on a cash basis until such time as the borrower has brought the loan
to nondelinquent status. At June 30, 1999, the Bank had non-performing loans of
$668,000, and a ratio of non-performing loans to total loans of 0.74%.
Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as real estate owned ("REO") until such time as it is
sold. When real estate is acquired through foreclosure or by deed in lieu of
foreclosure, it is recorded at its fair value, less estimated costs of disposal.
If the value of the property is less than the loan, less any related specific
loan loss provisions, the difference is charged against the allowance for loan
losses. Any subsequent write-down of REO is charged against earnings. At June
30, 1999, the Bank's REO totaled $176,850, and its ratio of non-preforming
assets to total assets was 0.56%.
9
<PAGE>
The following table sets forth delinquencies in the Bank's loan portfolio
at June 30, 1999. When a loan is delinquent 90 days or more, the Bank fully
reverses all accrued interest thereon and ceases to accrue interest thereafter.
For all the dates indicated, the Bank did not have any material restructured
loans within the meaning of SFAS 114.
<TABLE>
<CAPTION>
60-89 Days 90 Days and Over Total Delinquent Loans
------------------------------ ------------------------------ -------------------------------
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:
One- to four-family ....... 17 $ 778,729 97.8% 11 $ 413,436 67.6% 28 $1,192,165 84.7%
Multi-family .............. -- -- -- -- -- -- -- -- --
Commercial ................ 1 17,131 2.2 3 166,056 27.2 4 183,187 13.0
Construction and land loans -- -- -- -- -- -- -- -- --
Consumer ..................... -- -- -- 6 31,573 5.2 6 31,573 2.3
Commercial business .......... -- -- -- -- -- -- -- -- --
-------- ---------- ------ -------- ---------- ------ -------- ---------- ------
Total loan delinquencies 18 $ 795,860 100.00% 20 $ 611,065 100.00% 38 $1,406,925 100.00%
======== ========== ====== ======== ========== ====== ======== ========== ======
</TABLE>
10
<PAGE>
Nonaccrual Loans and Nonperforming Assets. The following table sets forth
information regarding nonaccrual loans and other non-performing assets. The Bank
had no accruing loans delinquent more than 90 days at June 30, 1999, 1998 or
1997.
June 30,
------------------------------
1999 1998 1997
------ ------ ------
(Dollars in Thousands)
Nonaccruing loans:
One- to four-family ..................... $ 487 $ 666 $ 293
Commercial real estate .................. 166 91 296
Consumer ................................ 15 20 5
Commercial business ..................... -- 107 139
------ ------ ------
Total ................................. 668 884 733
------ ------ ------
Foreclosed assets:
One- to four-family ..................... 53 -- 32
Multi-family ............................ -- -- 38
Nonfarm, nonresidential properties ...... 124 124 --
------ ------ ------
Total ................................. $ 177 $ 124 $ 70
====== ====== ======
Total non-performing assets ................ $ 845 $1,008 $ 803
====== ====== ======
Total as a percentage of total assets ...... 0.56% 0.72% 0.61%
During the year ended June 30, 1999, gross interest income of $26,685
would have been recorded on nonaccruing loans under their original terms if the
loans had been current throughout the period. No interest income was recorded on
nonaccruing loans or on accruing loans more than 90 days delinquent during the
year ended June 30, 1999.
Classification of Assets. Consistent with regulatory guidelines, the Bank
provides for the classification of loans and other assets considered to be of
lesser quality. Such ratings coincide with the "Substandard", "Doubtful" and
"Loss" classifications used by federal regulators in their examination of
financial institutions. Generally, an asset is considered Substandard if it is
inadequately protected by the current net worth and paying capacity of the
obligors and/or the collateral pledged. Substandard assets include those
characterized by the distinct possibility that the insured financial institution
will sustain some loss if the deficiencies are not corrected. Assets classified
as Doubtful have all the weaknesses inherent in assets classified Substandard
with the added characteristic that the weaknesses present make collection or
liquidation in full, on the basis of currently existing facts, highly
questionable and improbable. Assets classified as Loss are those considered
uncollectible and of such little value that their continuance as assets without
the establishment of a specific loss reserve and/or charge-off is not warranted.
Assets that do not currently expose the insured financial institution to
sufficient risk to warrant classification in one of the aforementioned
categories but otherwise possess weaknesses are designated "Special Mention."
When the Bank classifies problem assets as either Substandard or Doubtful,
it establishes general valuation allowances or "loss reserves" in an amount
deemed prudent by management. General allowances represent loss allowances that
have been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When the Bank classifies problem assets as "Loss," it
is required either to establish a specific allowance for losses equal to 100% of
the amount of assets so classified, or to charge-off such amount. The Bank's
determination as to the classification of its assets and the amount of its
valuation allowance is subject to review by its regulatory agencies, which can
order the establishment of additional general or specific loss allowances. The
Bank reviews its portfolio monthly to determine whether any assets require
classification in accordance with applicable regulations.
11
<PAGE>
On the basis of management's review of its assets, at June 30, 1999, the
Bank had classified a total of $339,000 of loans as follows:
At June 30, 1999
----------------
(In Thousands)
Special mention .................................... $ 95
Substandard ........................................ 244
Doubtful assets .................................... --
Loss assets ........................................ --
----
Total classified loans .......................... $339
====
General loss allowance ............................. $453
====
Specific loss allowance ............................ $ --
====
Charge-offs ........................................ $126
====
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in the loan portfolio, the composition of the loan portfolio, specific
impaired loans and current economic conditions. Such evaluation, which includes
a review of all loans on which full collectibility may not be reasonably
assured, considers among other matters, the estimated net realizable value or
the fair value of the underlying collateral, economic conditions, historical
loan loss experience and other factors that warrant recognition in providing for
an adequate loan loss allowance. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
allowance for loan losses and valuation of REO. Such agencies may require the
Bank to recognize additions to the allowance based on their judgment about
information available to them at the time of their examination. The allowance
for loan losses is increased by a provision for loan losses (which results in a
charge to noninterest expense) and is reduced by net charge-offs. At June 30,
1999, the total allowance was $791,897, which amounted to 0.87% of total net
loans and 118.55% of nonperforming loans. Management will continue to monitor
and modify the level of the allowance for loan losses in order to maintain it at
a level which management considers adequate to provide for potential loan
losses. For the years ended June 30, 1999, 1998 and 1997, the Bank had
charge-offs of $126,000, $126,000 and $11,000, respectively.
The Bank requires an environmental site assessment to be performed by an
independent professional for all non-residential mortgage loans. It is also the
Bank's policy to require title and hazard insurance on all mortgage loans. In
addition, the Bank may require borrowers to make payments to a mortgage escrow
account for the payment of property taxes. Any exceptions to the Bank's loan
policies must be made in accordance with the limitations set out in each policy.
Typically, the exception authority ranges from the Chief Lending Officer to the
Board of Directors, depending on the size and type of loan involved.
12
<PAGE>
Analysis of the Allowance For Loan Losses. The following table sets forth
the analysis of the allowance for loan losses for the periods indicated.
Years Ended June 30,
------------------------
1999 1998 1997
----- ----- -----
(Dollars in Thousands)
Balance at beginning of period .................... $ 728 $ 723 $ 597
----- ----- -----
Charge-offs:
One- to four-family ............................ 3 18 --
Commercial real estate ......................... -- 70 --
Consumer ....................................... 20 28 11
Commercial business ............................ 103 10 --
----- ----- -----
Total charge-offs .......................... 126 126 11
----- ----- -----
Recoveries:
One- to four-family ............................ 6 -- 12
Consumer ....................................... 4 11 --
----- ----- -----
Total recoveries ........................... 10 11 12
----- ----- -----
Net charge-offs ................................... 116 115 (1)
Additions charged to operations ................... 180 120 125
----- ----- -----
Balance at end of period .......................... $ 792 $ 728 $ 723
===== ===== =====
Ratio of net charge-offs during the period to
average loans outstanding during the period .... 0.15% 0.15% 0.01%
===== ===== =====
Ratio of net charge-offs during the period to
average non-performing assets .................. 11.33% 12.74% 0.15%
===== ===== =====
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of the allowance for loan losses by loan category for the periods
indicated. The allowance is allocated to each loan category based on historical
loss experience and economic conditions. The unallocated portions of the
allowance represent general reserves for unused lines of credit and inherent
risk associated with increased volume in lending transactions.
13
<PAGE>
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ------------------------------ ------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- ----- --------- -------- ----- --------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family .............. $ 484 $74,512 81.2% $ 318 $64,705 79.7% $ 293 $60,981 79.6%
Multi-family ..................... 10 474 0.5 1 388 0.5 1 195 0.3
Commercial real estate ........... 88 3,985 4.3 78 4,521 5.6 88 5,343 7.0
Construction and land ............ 6 1,654 1.8 2 798 1.0 1 497 0.6
Consumer ......................... 80 4,761 5.2 59 4,064 5.0 52 3,619 4.7
Commercial business .............. 55 1,230 1.3 62 1,336 1.6 45 1,032 1.3
Home equity loans ................ -- 4,689 5.1 14 4,727 5.8 12 4,053 5.3
Passbook loans ................... -- 525 0.6 5 544 0.7 5 507 0.7
Specific ......................... -- -- -- 104 108 0.1 205 359 0.5
Unallocated ...................... 69 -- -- 85 -- -- 21 -- --
------- ------- ----- ------- ------- ----- ------- ------- -----
Total allowance for loan losses $ 792 91,830 100.0% $ 728 $81,191 100.0% $ 723 $76,586 100.0%
======= ======= ===== ======= ======= ===== ======= ======= =====
</TABLE>
Securities Investment Activities
Given the Bank's substantial portfolio of fixed-rate residential mortgage
loans, the Bank maintains high balances of liquid investments for the purpose of
reducing interest rate risk. The securities investment policy is established by
the Board of Directors. This policy dictates that investment decisions will be
made based on the safety of the investment, liquidity requirements, potential
returns, cash flow targets, and desired risk parameters. In pursuing these
objectives, management considers the ability of an investment to provide
earnings consistent with factors of quality, maturity, marketability and risk
diversification.
The Bank's current policies generally limit securities investments to U.S.
Government and agency securities, federal funds sold, municipal bonds, corporate
debt obligations and mutual funds. The two mutual funds in which the Bank
invests have portfolios comprised primarily of adjustable-rate mortgage-backed
securities and were purchased by the Bank to provide interest-earning liquid
funds and an adjustable interest rate. In addition, the Bank's policy permits
investments in mortgage-backed securities, including securities issued and
guaranteed by Fannie Mae, Freddie Mac, and GNMA, and collateralized mortgage
obligations ("CMOs"). The Bank's current securities investment strategy utilizes
a risk management approach of diversified investing among three categories:
short-, intermediate- and long-term. The emphasis of this approach is to
increase overall investment securities yields while managing interest rate risk.
The Bank will only invest in securities rated A or higher by at least one
nationally recognized rating agency (or securities attaining such rating as a
result of guarantees by insurance companies), with the exception of occasional
investments in smaller non-rated local bonds. The Bank does not engage in any
derivative or hedging transactions, such as interest rate swaps or caps.
At June 30, 1999, the Bank had $49.7 million in investment securities, or
32.6% of total assets. SFAS No. 115 requires the Bank to designate its
securities as held to maturity, available for sale or trading, depending on the
Bank's ability and intent regarding its investments. As of June 30, 1999, the
entire investment securities portfolio was classified as available for sale. At
June 30, 1999, the Bank's mortgage-backed securities portfolio totaled $5.2
million, or 3.4% of total assets and the Bank's asset-backed securities
portfolio totaled $8.4 million, or 5.5% of total assets.
14
<PAGE>
Book Value of Investment Securities. The following table sets forth
certain information regarding the investment securities and other interest
earning assets as of the dates indicated.
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------
1999 1998 1997
----------------- ---------------- ----------------
Book % of Book % of Book % of
Value Total Value Total Value Total
------- ----- ------- ----- ------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities available for sale:
U.S. government securities ............... $ 7,344 14.5% $12,969 27.4% $18,532 43.2%
Federal agency obligations ............... 5,551 11.0 8,569 18.1 7,145 16.7
Corporate debt securities ................ 11,739 23.2 3,736 7.8 3,079 7.3
Municipal bonds .......................... 10,273 20.3 7,390 15.6 6,312 14.7
Equity securities ........................ 87 0.2 81 0.2 100 0.2
Mortgage-backed securities ............... 5,271 10.4 5,196 11.0 5,221 12.2
Asset-backed securities .................. 8,480 16.7 6,305 13.2 784 1.8
Mutual funds ............................. 1,115 2.2 2,353 5.0 1,644 3.8
Other .................................... -- -- 75 0.2 75 0.1
Subtotal ............................. 49,860 98.5 46,674 98.5% 42,892 100.0%
FHLB stock .................................. 766 1.5 700 1.5 -- --
------- ----- ------- ----- ------- -----
Total investment securities and FHLB stock $50,626 100.0% $47,374 100.0% $42,892 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
Investment Portfolio Maturities. The following table sets forth the
scheduled maturities, book value, market value and weighted average yields for
the Bank's investment portfolio at June 30, 1999.
<TABLE>
<CAPTION>
At June 30, 1999
--------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over Total
1 Year Year Years 10 Years Securities
Book Book Book Book Book Market
Value Value Value Value Value Value
------- ------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. government securities $ 2,727 $ 3,983 $ 634 $ -- $ 7,344 $ 7,437
Federal agency obligations 1,502 4,049 -- -- 5,551 5,515
Mortgage-backed securities -- 3,783 1,172 316 5,271 5,233
Asset-backed securities .. -- 2,905 1,286 4,289 8,480 8,445
Corporate debt securities 145 11,097 497 -- 11,739 11,478
Municipal bonds .......... 549 4,292 5,282 150 10,273 10,359
Equity securities ........ 87 -- -- -- 87 87
Mutual funds ............. 1,115 -- -- -- 1,115 1,107
FHLB stock ............... 766 -- -- -- 766 766
Other .................... -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total securities ......... $ 6,891 $30,109 $ 8,871 $ 4,755 $50,626 $50,427
======= ======= ======= ======= ======= =======
Weighted average yield ... 7.60% 6.00% 5.10% 6.40% 6.04%
======= ======= ======= ======= ======= =======
</TABLE>
15
<PAGE>
Mortgage-Backed Securities. The Bank purchases mortgage-backed securities
in order to: (i) generate positive interest rate spreads with minimal
administrative expense; (ii) lower the Bank's credit risk as a result of the
guarantees provided by Freddie Mac, Fannie Mae, and GNMA; and (iii) increase
liquidity. At June 30, 1999, mortgage-backed securities (including CMOs) totaled
$5.2 million or 3.4% of total assets, all of which were classified as available
for sale. At June 30, 1999, all of the mortgage-backed securities were fixed
rate. The mortgage-backed securities portfolio had coupon rates ranging from
5.25% to 6.5%, a weighted average yield of 5.85% and a weighted average life
(including pre-payment assumptions) of 3.2 years at June 30, 1999. The estimated
market value of the Bank's mortgage-backed securities at June 30, 1999 was $5.2
million, which was $37,500 less than cost.
Mortgage-backed securities are created by the pooling of mortgages and the
issuance of a security with an interest rate that is less than the interest rate
on the underlying mortgages. Mortgage-backed securities typically represent a
participation interest in a pool of single-family or multi-family mortgages,
although the Bank focuses its investments on mortgage-backed securities backed
by single-family mortgages. The issuers of such securities (generally U.S.
Government agencies and government sponsored enterprises, including Fannie Mae,
Freddie Mac and GNMA) pool and resell the participation interests in the form of
securities to investors, such as the Bank, and guarantee the payment of
principal and interest to these investors. Mortgage-backed securities generally
yield less than the loans that underlie such securities because of the cost of
payment guarantees and credit enhancements. In addition, mortgage-backed
securities are usually more liquid than individual mortgage loans and may be
used to collateralize certain liabilities and obligations of the Bank.
Investments in mortgage-backed securities involve a risk that actual
prepayments will be greater than estimated over the life of the security, which
may require adjustments to the amortization of any premium or accretion of any
discount relating to such instruments thereby altering the net yield on such
securities. There is also reinvestment risk associated with the cash flows from
such securities or in the event such securities are prepaid. In addition, the
market value of such securities may be adversely affected by changes in interest
rates.
Management reviews prepayment estimates periodically to ensure that
prepayment assumptions are reasonable considering the underlying collateral for
the securities at issue and current interest rates and to determine the yield
and estimated maturity of the Bank's mortgage-backed securities portfolio. Of
the Bank's $5.2 million mortgage-backed securities portfolio at June 30, 1999,
$3.8 million with a weighted average yield of 6.1% had contractual maturities
within five years, $1.2 million with a weighted average yield of 5.5% had
contractual maturities of five to ten years and the remaining $0.2 million with
a weighted average yield of 5.7% had contractual maturities more than 10 years.
However, the actual maturity of a security may be less than its stated maturity
due to prepayments of the underlying mortgages. Prepayments that are faster than
anticipated may shorten the life of the security and may result in a loss of any
premiums paid and thereby reduce the net yield on such securities. Although
prepayments of underlying mortgages depend on many factors, the difference
between the interest rates on the underlying mortgages and the prevailing
mortgage interest rates generally is the most significant determinant of the
rate of prepayments. During periods of declining mortgage interest rates,
refinancing generally increases and accelerates the prepayment of the underlying
mortgages and the related security. Under such circumstances, the Bank may be
subject to reinvestment risk because, to the extent that the Bank's securities
prepay faster than anticipated, the Bank may not be able to reinvest the
proceeds of such repayments and prepayments at a comparable rate of return.
Conversely, in a rising interest rate environment prepayments may decline,
thereby extending the estimated life of the security and depriving the Bank of
the ability to reinvest cash flows at the increased rates of interest.
At June 30, 1999, the Bank's portfolio of asset-backed securities totaled
$8.4 million, or 5.5% of total assets, all of which were classified as available
for sale. At June 30, 1999, all of the asset-backed securities were fixed rate.
The portfolio had coupon rates ranging form 5.97% to7.15%, a weighted average
yield of 6.37% and a weighted average life (including prepayment assumptions) of
5.9 years at June 30, 1999. The estimated market value of the Bank's
asset-backed securities portfolio at June 30, 1999 was $8.5 million, which was
$36,000 less than cost at such date.
Asset-backed securities are a type of debt security collateralized by
various loans and assets including: automobile loans, equipment leases, credit
card receivables, home equity and improvement loans, manufactured housing,
student loans and other consumer loans. In the case of the Bank, its
asset-backed securities are collateralized by automobile loans and
second-mortgage loans.
16
<PAGE>
Asset-backed securitizations provide the Bank with a broad selection of
fixed-income alternatives, most with higher credit ratings and less downgrade
risk than corporate bonds and more stable cash flows than mortgage related
securities. Prepayments and structure risk of asset-backed securities are less
of a concern than CMO securities due to the shorter maturities of the underlying
collateral promoting greater stability of payments.
Of the Bank's $8.4 million portfolio of asset-backed securities at June
30, 1999, $2.9 million with a weighted average yield of 6.3% had contractual
maturities within 5 years, $1.3 million with a weighted average yield of 6.3%
had contractual maturities of 5 to 10 years, and the remaining $4.2 million with
a weighted average yield of 6.5% had contractual maturities of more than 10
years.
Sources of Funds
General. Deposits, repayments and prepayments of loans and securities,
proceeds from sales of securities, and proceeds from maturing securities and
cash flows from operations are the primary sources of the Bank's funds for use
in lending, investing and for other general purposes.
Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposit accounts consist of savings, NOW
accounts, non-interest bearing checking accounts and money market accounts, and
certificates of deposit. The Bank also offers IRAs.
At June 30, 1999, deposits totaled $128.0 million. At June 30, 1999, the
Bank had a total of $52.2 million in certificates of deposit, of which $39.6
million had maturities of one year or less. Although the Bank has a significant
portion of its deposits in shorter-term certificates of deposit, management
monitors activity on these accounts and, based on historical experience and the
Bank's current pricing strategy, believes it will retain a large portion of such
accounts upon maturity.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. Deposits are obtained predominantly from the areas in which the
Bank's branch offices are located. The Bank relies primarily on competitive
pricing of its deposit products and customer service and long-standing
relationships with customers to attract and retain these deposits; however,
market interest rates and rates offered by competing financial institutions
significantly affect the Bank's ability to attract and retain deposits. The Bank
uses traditional means of advertising its deposit products, including radio,
television, and print media and it generally does not solicit deposits from
outside its market area. While certificates of deposit in excess of $100,000 are
accepted by the Bank, they are not subject to preferential rates. The Bank does
not actively solicit such deposits as they are more difficult to retain than
core deposits. Historically, the Bank has not used brokers to obtain deposits.
The following table sets forth the deposit activities of the Bank for the
periods indicated.
Years Ended
June 30,
-------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
Opening balance ................ $124,011 $117,542 $115,874
Deposits ....................... 289,926 228,799 200,355
Withdrawals .................... 291,331 227,002 203,188
Interest credited .............. 5,393 4,672 4,501
Ending balance ................. 127,999 124,011 117,542
Net increase ................... 3,988 6,469 1,668
Percent increase ............... 3.22% 5.59% 1.47%
17
<PAGE>
The following table indicates the amount of the Bank's certificates of
deposit by time remaining until maturity as of June 30, 1999.
<TABLE>
<CAPTION>
3 Months 3 to 6 7 to 12 Over
or Less Months Months 12 Months Total
------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000 $11,477 $16,256 $ 7,805 $11,123 $46,661
Certificates of deposit of $100,000 or more 1,186 1,268 1,630 1,432 5,516
------- ------- ------- ------- -------
Total certificates of deposit ............. $12,663 $17,524 $ 9,435 $12,555 $52,177
======= ======= ======= ======= =======
</TABLE>
The following tables set forth information, by various rate categories,
regarding the balance of deposits by types of deposit for the periods indicated.
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits:
Demand accounts ............... $ 9,468 7.40% $ 7,514 6.14% $ 6,345 5.48%
Savings accounts .............. 54,670 42.60 33,412 27.31 32,480 28.04
NOW accounts .................. 7,744 6.10 6,187 5.06 5,341 4.61
Money market accounts ......... 3,940 3.10 19,609 16.03 20,439 17.64
-------- ------ -------- ------ -------- ------
Total Non-Certificates ........... 75,822 59.2% 66,722 54.54% 64,605 55.77%
======== ====== ======== ====== ======== ======
Certificates:
0.00-3.99% .................... -- -- 612 0.50 490 0.42
4.00-5.99% .................... 52,084 40.70 46,733 38.20 41,974 36.23
6.00-7.99% .................... 93 0.10 8,257 6.76 8,786 7.58
8.00% and over ................ -- -- -- -- -- --
-------- ------ -------- ------ -------- ------
Total Certificates ............... 52,177 40.80 55,602 45.46 51,250 44.23
-------- ------ -------- ------ -------- ------
Total Deposits ................... $127,999 100.00% $122,324 100.00% $115,855 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
18
<PAGE>
The following table sets forth the amount and remaining maturities of the Bank's
certificates of deposit accounts at June 30, 1999.
<TABLE>
<CAPTION>
0.00- 4.00- 6.00% or Percent
3.99% 5.99% greater Total of Total
----- ----- ------- ----- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Certificate accounts maturing in quarter ending:
30-Sep-99.................................. $ -- $ 12,111 $ 52 $ 12,163 23.3%
31-Dec-99.................................. -- 12,262 -- 12,262 23.5
31-Mar-00.................................. -- 9,715 -- 9,715 18.6
30-Jun-00.................................. -- 5,480 -- 5,480 10.5
30-Sep-00.................................. -- 2,505 -- 2,505 4.8
31-Dec-00.................................. -- 3,029 -- 3,029 5.8
31-Mar-01.................................. -- 987 -- 987 1.9
30-Jun-01.................................. -- 1,428 -- 1,428 2.7
30-Sep-01.................................. -- 521 -- 521 1.0
31-Dec-01.................................. -- 719 -- 719 1.4
31-Mar-02.................................. -- 666 41 707 1.4
30-Jun-02.................................. -- 764 -- 764 1.5
Thereafter................................. -- 1,897 -- 1,897 3.6
------- --------- ------- --------- ------
Total...................................... $ -- $ 52,084 $ 93 $ 52,177 100.0%
======= ========= ======= ========= ======
Percent of total........................... --% 99.8% 0.2%
======= ========= =======
</TABLE>
Borrowed Funds. In the event that the Bank requires funds beyond its
ability to generate them in internally, additional sources of funds are
available through the use of short-term FHLB advances and two credit facilities
made available to the Bank by other financial institutions. At June 30, 1999,
the Bank had no borrowed funds.
Personnel
As of June 30, 1999, the Bank had 51 full-time employees and six part-time
employees. The employees are not represented by a collective bargaining unit and
the Bank considers its relationship with its employees to be good.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Mutual Company, the Company and the Bank are subject to
federal income taxation in the same general manner as other corporations, with
some exceptions discussed below. The following discussion of federal taxation is
intended only to summarize certain pertinent federal income tax matters and is
not a comprehensive description of the tax rules applicable to the Bank.
Method of Accounting. For federal income tax purposes, the Bank currently
reports its income and expenses on the accrual method of accounting and uses a
tax year ending December 31 for filing its consolidated federal income tax
returns. The Small Business Protection Act of 1996 (the "1996 Act") eliminated
the use of the reserve method of accounting for bad debt reserves by savings
institutions, effective for taxable years beginning after 1995.
Bad Debt Reserves. Prior to the 1996 Act, the Bank was permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving
at the Bank's taxable income. As a result of the 1996 Act, the Bank must use the
specific charge off method in computing its bad debt deduction beginning with
its 1996 Federal tax return. In addition, the federal legislation requires the
recapture (over a six year period) of the excess of tax bad debt reserves at
December 31, 1995 over those established as of December 31, 1987. The amount of
such reserve subject to recapture as of June 30, 1999, was approximately
$216,000.
19
<PAGE>
Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income should the Bank fail to meet certain thrift asset and definitional tests.
New federal legislation eliminated these thrift related recapture rules.
However, under current law, pre-1988 reserves remain subject to recapture should
the Bank make certain non-dividend distributions.
At June 30, 1999, the Bank's total federal pre-1988 reserve was
approximately $216,000. This reserve reflects the cumulative effects of federal
tax deductions by the Bank for which no Federal income tax provision has been
made.
Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a rate
of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. The Bank has
not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.
Net Operating Loss Carryovers. A financial institution may carry back net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after August 5, 1997. At June 30, 1999, the Bank had no
net operating loss carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction. The Company may exclude from its
income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The Mutual Company owns less than 80% of the
outstanding Common Stock of the Company. As such, the Mutual Company is not
permitted to file a consolidated federal income tax return with the Company and
the Bank. The corporate dividends-received deduction is 80% in the case of
dividends received from corporations with which a corporate recipient does not
file a consolidated return, and corporations which own less than 20% of the
stock of a corporation distributing a dividend may deduct only 70% of dividends
received or accrued on their behalf.
State Taxation
New York State Taxation - General. The Company and the Bank report income
on a combined calendar year basis to New York State. The New York State
franchise tax on banking corporations is imposed in an amount equal to the
greater of (a) 9% of "entire net income" allocable to New York State (b) 3% of
"alternative entire net income" allocable to New York State (c) 0.01% of the
average value of assets allocable to New York State or (d) $250. Entire net
income is based on federal taxable income, subject to certain modifications.
Alternative entire net income is equal to entire net income without certain
modifications. The Mutual Company files a separate New York State franchise tax
return.
Bad Debt Reserves. The Bank is allowed to utilize the reserve method of
accounting for New York State franchise tax purposes and is required to maintain
two reserve accounts-the Reserve for Losses on Nonqualifying Loans (the "NY NQL
Reserve") and the Reserve for Losses on Qualifying Real Property Loans (the "NY
QRPL Reserve"). The addition to the NY NQL Reserve must be computed under the
"experience method". The addition to the NY QRPL Reserve may be computed under
either the experience method or the "percentage of taxable income method" (the
"PTI method"). The deduction under the PTI method is equal to 32% of entire net
income (before the deduction for the bad debt reserve addition), which must
first be allocated to the NY NQL Reserve. The balance, if any, is the allowable
addition to the NY QRPL reserve, subject to a limitation based upon 6% of
Qualifying Real Property Loans ("QRPL"). As of December 31, 1997, the Bank's NY
QRPL Reserve was subject to this limitation.
Recapture of New York State Bad Debt Reserves. If the Bank ceases to
qualify as a "thrift institution" (as defined in the New York State tax law), or
fails to hold at least 60% of its assets in "Qualifying Assets", it will no
longer be entitled to use the reserve method and must recapture into entire net
income a portion of its NY QRPL Reserve. The amount subject to recapture is
generally equal to the excess of the NY QRPL Reserve over the federal QRPL
Reserve as of December 31, 1995. The amount of the Bank's NY QRPL Reserve
subject to recapture is approximately $1.8 million. Since it is the Bank's
intention to continue to qualify as a thrift institution and to meet the 60%
Qualifying Asset test, a deferred tax liability has not been established for the
$162,000 New York State tax that would result from such failure.
Net Operating Loss Deductions. For New York State franchise tax purposes,
the Bank is not entitled to carry back or forward net operating losses ("NOLs")
incurred in taxable years ending before January 1, 2001. NOLs incurred in
taxable
20
<PAGE>
years beginning on or after January 1, 2001 can be carried forward to the
succeeding 20 taxable years. No carryback of NOLs will be permitted.
Corporate Dividends-Received Deduction. Similar to the federal rules, the
Company and the Bank file a combined New York State franchise tax report and
intercompany dividends will be eliminated. However, the Mutual Company does not
own the requisite percentage (generally 80% or more) of the common stock of the
Company necessary to file on a combined basis with the Company. As long as the
Mutual Company owns more than 50% of the common stock of the Company, it is
eligible for a 60% dividends-received deduction. The Mutual Company is not
entitled to any dividends-received deduction if it owns 50% or less of the
common stock of the Company.
Delaware State Taxes. As a Delaware holding company not earning income in
Delaware, the Company will be exempt from Delaware corporate income tax, but is
required to file an annual report with, and pay an annual franchise tax to, the
State of Delaware.
REGULATION
General
The Bank is a New York-chartered mutual savings bank and its deposit
accounts are insured up to applicable limits by the FDIC through the BIF. The
Bank is subject to extensive regulation by the Department, as its chartering
agency; and by the FDIC, as its deposit insurer. The Bank is required to file
reports with, and is periodically examined by, the FDIC and the Superintendent
concerning its activities and financial condition and must obtain regulatory
approvals prior to entering into certain transactions, including, but not
limited to, mergers with or acquisitions of other banking institutions. The Bank
is a member of the FHLB of New York and is subject to certain regulations by the
Federal Home Loan Bank System. Both the Company and the Mutual Company, as bank
holding companies, are subject to regulation by the Federal Reserve Board and
are required to file reports with the Federal Reserve Board. Any change in such
regulations, whether by the Department, the FDIC, or the Federal Reserve Board
could have a material adverse impact on the Bank, the Company, or the Mutual
Company.
Certain of the regulatory requirements applicable to the Bank, the Company
and the Mutual Company are referred to below or elsewhere herein.
New York Bank Regulation
The exercise by an FDIC-insured savings bank of the lending and investment
powers under the New York State Banking Law is limited by FDIC regulations and
other federal law and regulations. In particular, the applicable provisions of
New York State Banking Law and regulations governing the investment authority
and activities of an FDIC insured state-chartered savings bank have been
substantially limited by the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") and the FDIC regulations issued pursuant thereto.
The Bank derives its lending, investment and other authority primarily
from the applicable provisions of New York State Banking Law and the regulations
of the Department, as limited by FDIC regulations. Under these laws and
regulations, savings banks, including the Bank, may invest in real estate
mortgages, consumer and commercial loans, certain types of debt securities,
including certain corporate debt securities and obligations of federal, state
and local governments and agencies, certain types of corporate equity securities
and certain other assets. Under the statutory authority for investing in equity
securities, a savings bank may invest up to 7.5% of its assets in corporate
stock, with an overall limit of 5% of its assets invested in common stock.
Investment in the stock of a single corporation is limited to the lesser of 2%
of the outstanding stock of such corporation or 1% of the savings bank's assets,
except as set forth below. Such equity securities must meet certain earnings
ratios and other tests of financial performance. A savings bank's lending powers
are not subject to percentage of assets limitations, although there are limits
applicable to single borrowers. A savings bank may also, pursuant to the
"leeway" power, make investments not otherwise permitted under the New York
State Banking Law. This power permits investments in otherwise impermissible
investments of up to 1% of assets in any single investment, subject to certain
restrictions and to an aggregate limit for all such investments of up to 5% of
assets. Additionally, in lieu of investing in such securities in accordance with
and reliance upon the specific investment authority set forth in the New York
State Banking Law, savings banks are authorized to elect to invest under a
"prudent person" standard in a wider range of investment securities as compared
to the types of investments permissible under such specific investment
authority. However, in the event a savings bank elects to utilize the "prudent
person" standard, it will
21
<PAGE>
be unable to avail itself of the other provisions of the New York State Banking
Law and regulations which set forth specific investment authority. The Bank has
not elected to conduct its investment activities under the "prudent person"
standard. A savings bank may also exercise trust powers upon approval of the
Department.
New York State chartered savings banks may also invest in subsidiaries
under their service corporation investment authority. A savings bank may use
this power to invest in corporations that engage in various activities
authorized for savings banks, plus any additional activities which may be
authorized by the Banking Board. Investment by a savings bank in the stock,
capital notes and debentures of its service corporations is limited to 3% of the
bank's assets, and such investments, together with the bank's loans to its
service corporations, may not exceed 10% of the savings bank's assets.
Furthermore, New York banking regulations impose requirements on loans which a
bank may make to its executive officers and directors and to certain
corporations or partnerships in which such persons have equity interests. These
requirements include, but are not limited to, requirements that (i) certain
loans must be approved in advance by a majority of the entire board of trustees
and the interested party must abstain from participating directly or indirectly
in the voting on such loan, (ii) the loan must be on terms that are not more
favorable than those offered to unaffiliated third parties, and (iii) the loan
must not involve more than a normal risk of repayment or present other
unfavorable features.
Under the New York State Banking Law, the Superintendent may issue an
order to a New York State chartered banking institution to appear and explain an
apparent violation of law, to discontinue unauthorized or unsafe practices and
to keep prescribed books and accounts. Upon a finding by the Department that any
director, trustee or officer of any banking organization has violated any law,
or has continued unauthorized or unsafe practices in conducting the business of
the banking organization after having been notified by the Superintendent to
discontinue such practices, such director, trustee or officer may be removed
from office after notice and an opportunity to be heard. The Bank does not know
of any past or current practice, condition or violation that might lead to any
proceeding by the Superintendent or the Department against the Bank or any of
its trustees or officers.
Insurance of Accounts and Regulation by the FDIC
The Bank is a member of the BIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the U.S. Government. As insurer, the FDIC
imposes deposit insurance premiums and is authorized to conduct examinations of
and to require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the FDIC. The FDIC also has the
authority to initiate enforcement actions against savings banks, after giving
the Superintendent an opportunity to take such action, and may terminate the
deposit insurance if it determines that the institution has engaged or is
engaging in unsafe or unsound practices, or is in an unsafe or unsound
condition.
In late 1995, the FDIC approved a final rule regarding deposit insurance
premiums which, effective with respect to the semi-annual premium assessment
beginning January 1, 1996, reduced deposit insurance premiums for BIF member
institutions to zero basis points (subject to an annual minimum of $2,000) for
institutions in the lowest risk category.
As a result of legislation passed in 1996, relating to the
recapitalization of the Savings Association Insurance Fund ("SAIF"), from 1997
through 1999, FDIC-insured institutions will pay an insurance premium of
approximately 1.3 basis points of their BIF-assessable deposits. Based upon
assessable deposits at June 30, 1999, the Bank would expect to pay $3,700 in
insurance premiums per quarter during 1999.
Regulatory Capital Requirements
The FDIC has adopted risk-based capital guidelines to which the Bank is
subject. The guidelines establish a systematic analytical framework that makes
regulatory capital requirements more sensitive to differences in risk profiles
among banking organizations. The Bank is required to maintain certain levels of
regulatory capital in relation to regulatory risk-weighted assets. The ratio of
such regulatory capital to regulatory risk-weighted assets is referred to as the
Bank's "risk-based capital ratio." Risk-based capital ratios are determined by
allocating assets and specified off-balance sheet items to four risk-weighted
categories ranging from 0% to 100%, with higher levels of capital being required
for the categories perceived as representing greater risk.
These guidelines divide a savings bank's capital into two tiers. The first
tier ("Tier I") includes common equity, retained earnings, certain
non-cumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity
22
<PAGE>
accounts of consolidated subsidiaries, less goodwill and other intangible assets
(except mortgage servicing rights and purchased credit card relationships
subject to certain limitations). Supplementary ("Tier II") capital includes,
among other items, cumulative perpetual and long-term limited-life preferred
stock, mandatory convertible securities, certain hybrid capital instruments,
term subordinated debt and the allowance for loan and lease losses, subject to
certain limitations, less required deductions. Savings banks are required to
maintain a total risk-based capital ratio of 8%, of which at least 4% must be
Tier I capital.
In addition, the FDIC has established regulations prescribing a minimum
Tier I leverage ratio (Tier I capital to adjusted total assets as specified in
the regulations). These regulations provide for a minimum Tier I leverage ratio
of 3% for banks that meet certain specified criteria, including that they have
the highest examination rating and are not experiencing or anticipating
significant growth. All other banks are required to maintain a Tier I leverage
ratio of 3% plus an additional cushion of at least 100 to 200 basis points. The
FDIC may, however, set higher leverage and risk-based capital requirements on
individual institutions when particular circumstances warrant. Savings banks
experiencing or anticipating significant growth are expected to maintain capital
ratios, including tangible capital positions, well above the minimum levels.
Standards for Safety and Soundness
The federal banking agencies have adopted a final regulation and
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") to implement the safety and soundness standards required under
federal law. The Guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The standards set forth
in the Guidelines address internal controls and information systems; internal
audit system; credit underwriting; loan documentation; interest rate risk
exposure; asset growth; and compensation, fees and benefits. The agencies also
adopted additions to the Guidelines which require institutions to examine asset
quality and earnings standards. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by federal
law. The final regulations establish deadlines for the submission and review of
such safety and soundness compliance plans.
Limitations on Dividends and Other Capital Distributions
The FDIC has the authority to use its enforcement powers to prohibit a
savings bank from paying dividends if, in its opinion, the payment of dividends
would constitute an unsafe or unsound practice. Federal law also prohibits the
payment of dividends by a bank that will result in the bank failing to meet its
applicable capital requirements on a pro forma basis. New York law restricts the
Bank from declaring a dividend which would reduce its capital below (i) the
amount required to be maintained by state and federal law and regulations, or
(ii) the amount of the Bank's liquidation account established in connection with
the Reorganization. The liquidation account is expected initially to total $15.7
million. New York law also prescribes that dividends declared by a stock savings
bank in any calendar year shall not exceed the total of its net profits for that
year combined with its retained net profits of the preceding two years, plus any
required transfer to surplus or for the retirement of any preferred stock,
unless approved by the Superintendent.
Prompt Corrective Action
The federal banking agencies have promulgated regulations to implement the
system of prompt corrective action required by federal law. Under the
regulations, a bank shall be deemed to be (i) "well capitalized" if it has total
risk-based capital of 10.0% or more, has a Tier I risk-based capital ratio of
6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to any written capital order or directive; (ii) "adequately capitalized"
if it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based
capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized"; (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is
less than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0%
under certain circumstances); (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a Tier I leverage capital ratio that is
less than 3.0%; and (v) "critically undercapitalized" if it has a ratio of
tangible equity to total assets that is equal to or less than 2.0%. Federal law
and regulations also specify circumstances under which a federal banking agency
may reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution to comply with supervisory actions
as if it were in the next lower category (except that the FDIC may not
reclassify a significantly undercapitalized institution as critically
undercapitalized).
23
<PAGE>
Based on the foregoing, the Bank is currently classified as a "well
capitalized" savings institution.
Activities and Investments of Insured State-Chartered Banks Acting as Principal
Federal law generally limits the activities and equity investments of
FDIC-insured, state-chartered banks to those that are permissible for national
banks, notwithstanding state laws. Under regulations dealing with equity
investments, an insured state bank generally may not, directly or indirectly,
acquire or retain any equity investment of a type, or in an amount, that is not
permissible for a national bank. An insured state bank is not prohibited from,
among other things, (i) acquiring or retaining a majority interest in a
subsidiary; (ii) investing as a limited partner in a partnership the sole
purpose of which is the direct or indirect investment in the acquisition,
rehabilitation, or new construction of a qualified housing project, provided
that such limited partnership investments may not exceed 2% of the bank's total
assets; (iii) acquiring up to 10% of the voting stock of a company that solely
provides or reinsures directors', trustees', and officers' liability insurance
coverage or bankers' blanket bond group insurance coverage for insured
depository institutions; and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met.
Federal law and FDIC regulations permit certain exceptions to the
foregoing limitation. For example, certain state-chartered banks, such as the
Bank, may continue to invest in common or preferred stock listed on a National
Securities Exchange or the National Market System of NASDAQ, and in the shares
of an investment company registered under the Investment Company Act of 1940, as
amended. As of June 30, 1999, the Bank had no securities pursuant to this
exception.
Transactions with Affiliates
Under current federal law, transactions between depository institutions
and their affiliates are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings bank is any company or entity that controls, is
controlled by, or is under common control with the savings bank, other than a
subsidiary. In a holding company context, at a minimum, the parent holding
company of a savings bank and any companies which are controlled by such parent
holding company are affiliates of the savings bank. Generally, Section 23A
limits the extent to which the savings bank or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10% of such
savings bank's capital stock and surplus, and contains an aggregate limit on all
such transactions with all affiliates to an amount equal to 20% of such capital
stock and surplus. The term "covered transaction" includes the making of loans
or other extensions of credit to an affiliate; the purchase of assets from an
affiliate, the purchase of, or an investment in, the securities of an affiliate;
the acceptance of securities of an affiliate as collateral for a loan or
extension of credit to any person; or issuance of a guarantee, acceptance, or
letter of credit on behalf of an affiliate. Section 23A also establishes
specific collateral requirements for loans or extensions of credit to, or
guarantees, acceptances on letters of credit issued on behalf of an affiliate.
Section 23B requires that covered transactions and a broad list of other
specified transactions be on terms substantially the same, or no less favorable,
to the savings bank or its subsidiary as similar transactions with
nonaffiliates.
Further, Section 22(h) of the Federal Reserve Act restricts a savings bank
with respect to loans to directors, executive officers, and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who control, directly or indirectly, 10% or more of voting
securities of a savings bank, and certain related interests of any of the
foregoing, may not exceed, together with all other outstanding loans to such
persons and affiliated entities, the savings bank's total capital and surplus.
Section 22(h) also prohibits loans above amounts prescribed by the appropriate
federal banking agency to directors, executive officers, and stockholders who
control 10% or more of voting securities of a stock savings bank, and their
respective related interests, unless such loan is approved in advance by a
majority of the board of directors of the savings bank. Any "interested"
director may not participate in the voting. The loan amount (which includes all
other outstanding loans to such person) as to which such prior board of director
approval is required, is the greater of $25,000 or 5% of capital and surplus or
any loans over $500,000. Further, pursuant to Section 22(h), loans to directors,
executive officers and principal stockholders must generally be made on terms
substantially the same as offered in comparable transactions to other persons.
Section 22(g) of the Federal Reserve Act places additional limitations on loans
to executive officers.
Holding Company Regulation
Federal Bank Holding Company Regulation. The Company, as the sole
shareholder of the Bank, and the Mutual Company, as indirect controlling
shareholder of the Bank, are bank holding companies. Bank holding companies are
subject to comprehensive regulation and regular examinations by the Federal
Reserve Board under the Bank Holding Company Act of 1956,
24
<PAGE>
as amended (the "BHCA"), and the regulations of the Federal Reserve Board. The
Federal Reserve Board also has extensive enforcement authority over bank holding
companies, including, among other things, the ability to assess civil money
penalties, to issue cease and desist or removal orders and to require that a
holding company divest subsidiaries (including its bank subsidiaries). In
general, enforcement actions may be initiated for violations of law and
regulations and unsafe or unsound practices.
The Company is subject to capital adequacy guidelines for bank holding
companies (on a consolidated basis) which are substantially similar to those of
the FDIC for the Bank. The Company's stockholders' equity exceeds these
requirements as of June 30, 1999.
Under Federal Reserve Board policy, a bank holding company must serve as a
source of strength for its subsidiary bank. Under this policy the Federal
Reserve Board may require, and has required in the past, a holding company to
contribute additional capital to an undercapitalized subsidiary bank.
Under the BHCA, a bank holding company must obtain Federal Reserve Board
approval before: (i) acquiring, directly or indirectly, ownership or control of
any voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (ii) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(iii) merging or consolidating with another bank holding company.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company, or
from engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by Federal Reserve Board regulation or order, have been
identified as activities closely related to the business of banking or managing
or controlling banks. The list of activities permitted by the Federal Reserve
Board includes, among other things, operating a savings association, mortgage
company, finance company, credit card company or factoring company; performing
certain data processing operations; providing certain investment and financial
advice; underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; selling money orders, travelers' checks and United States Savings Bonds;
real estate and personal property appraising; providing tax planning and
preparation services; and, subject to certain limitations, providing securities
brokerage services for customers.
Interstate Banking and Branching. Federal law allows the Federal Reserve
Board to approve an application of an adequately capitalized and adequately
managed bank holding company to acquire control of, or acquire all or
substantially all of the assets of, a bank located in a state other than such
holding company's home state, without regard to whether the transaction is
prohibited by the laws of any state. The Federal Reserve Board may not approve
the acquisition of the bank that has not been in existence for the minimum time
period (not exceeding five years) specified by the statutory law of the host
state. The Federal Reserve Board is prohibited from approving an application if
the applicant (and its depository institution affiliates) controls or would
control more than 10% of the insured deposits in the United States of America or
30% or more of the deposits in the target bank's home state or in any state in
which the target bank maintains a branch. Individual states continue to have
authority to limit the percentage of total insured deposits in the state which
may be held or controlled by a bank or bank holding company to the extent such
limitation does not discriminate against out-of-state banks or bank holding
companies. Individual states may also waive the 30% state-wide concentration
limit referred to above.
Additionally, beginning on June 1, 1997, the federal banking agencies were
authorized to approve interstate merger transactions without regard to whether
such transaction is prohibited by the law of any state, unless the home state of
one of the banks "opted out" by adopting a law which applies equally to all
out-of-state banks and expressly prohibits merger transactions involving
out-of-state banks. Interstate acquisitions of branches are permitted only if
the law of the state in which the branch is located permits such acquisitions.
In response to Riegle-Neal, the State of New York enacted laws allowing
interstate mergers and branching on a reciprocal basis.
Federal law authorizes the FDIC to approve interstate branching de novo by
national and state banks, respectively, only in states which specifically allow
for such branching. The appropriate federal banking agencies are required to
prescribe regulations which prohibit any out-of-state bank from using the
interstate branching authority primarily for the purpose of deposit production.
The FDIC and Federal Reserve Board have adopted such regulations. These
regulations include guidelines to ensure
25
<PAGE>
that interstate branches operated by an out-of-state bank in a host state are
reasonably helping to meet the credit needs of the communities which they serve.
Should the FDIC determination that a bank interstate branch is not reasonably
helping to meet the credit needs of the communities serviced by an interstate
branch, the FDIC is authorized to close the interstate branch or not permit the
bank to open a new branch in the state in which the bank previously opened an
interstate branch.
Dividends. The Federal Reserve Board has issued a policy statement on the
payment of cash dividends by bank holding companies, which expresses the Federal
Reserve Board's view that a bank holding company should pay cash dividends only
to the extent that the holding company's net income for the past year is
sufficient to cover both the cash dividends and a rate of earning retention that
is consistent with the holding company's capital needs, asset quality and
overall financial condition. The Federal Reserve Board also indicated that it
would be inappropriate for a company experiencing serious financial problems to
borrow funds to pay dividends. Furthermore, under the prompt corrective action
regulations adopted by the Federal Reserve Board, the Federal Reserve Board may
prohibit a bank holding company from paying any dividends if the holding
company's bank subsidiary is classified as "undercapitalized."
Bank holding companies are required to give the Federal Reserve Board
prior written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of their consolidated
net worth. The Federal Reserve Board may disapprove such a purchase or
redemption if it determines that the proposal would constitute an unsafe or
unsound practice or would violate any law, regulation, Federal Reserve Board
order, or any condition imposed by, or written agreement with, the Federal
Reserve Board. This notification requirement does not apply to any company that
meets the well-capitalized standard for commercial banks, has a safety and
soundness examination rating of at least a "2" and is not subject to any
unresolved supervisory issues.
New York State Bank Holding Company Regulation. In addition to the federal
bank holding company regulations, a bank holding company organized or doing
business in New York State also may be subject to regulation under the New York
State Banking Law. The term "bank holding company," for the purposes of the New
York State Banking Law, is defined generally to include any person, company or
trust that directly or indirectly either controls the election of a majority of
the directors or owns, controls or holds with power to vote more than 10% of the
voting stock of a bank holding company or, if the Company is a banking
institution, another banking institution, or 10% or more of the voting stock of
each of two or more banking institutions. In general, a bank holding company
controlling, directly or indirectly, only one banking institution will not be
deemed to be a bank holding company for the purposes of the New York State
Banking Law. Under New York State Banking Law, the prior approval of the Banking
Board is required before: (1) any action is taken that causes any company to
become a bank holding company; (2) any action is taken that causes any banking
institution to become or be merged or consolidated with a subsidiary of a bank
holding company; (3) any bank holding company acquires direct or indirect
ownership or control of more than 5% of the voting stock of a banking
institution; (4) any bank holding company or subsidiary thereof acquires all or
substantially all of the assets of a banking institution; or (5) any action is
taken that causes any bank holding company to merge or consolidate with another
bank holding company. Additionally, certain restrictions apply to New York State
bank holding companies regarding the acquisition of banking institutions which
have been chartered five years or less and are located in smaller communities.
Officers, directors and employees of New York State bank holding companies are
subject to limitations regarding their affiliation with securities underwriting
or brokerage firms and other bank holding companies and limitations regarding
loans obtained from its subsidiaries. Although the Company is not a bank holding
company for purposes of New York State law, any future acquisition of ownership,
control, or the power to vote 10% or more of the voting stock of another bank or
bank holding company would cause it to become such.
Mutual Holding Company Regulation. Under New York law, the Mutual Company
may exercise all powers and privileges of a New York chartered mutual savings
bank, except for the power of accepting deposits. As a bank holding company, the
Mutual Company is also authorized to exercise all powers and engage in all
activities permitted to a bank holding company under the BHCA.
Dividend Waivers by the Mutual Holding Company. It has been the policy of
many mutual holding companies to waive the receipt of dividends declared by any
savings institution subsidiary. The Federal Reserve Board imposes certain
conditions on the waiver by the Mutual Company of dividends paid on the Common
Stock. In particular, the Mutual Company is expected to be required to obtain
prior Federal Reserve Board approval before it may waive any dividends. As of
the date hereof, management does not believe that the Federal Reserve Board has
given its approval to any waiver of dividends by any mutual holding company that
has requested its approval.
26
<PAGE>
The terms of the Federal Reserve Board approval of the Reorganization are
also expected to require that the amount of any waived dividends are not to be
available for payment to Minority Stockholders and be excluded from capital for
purposes of calculating dividends payable to Minority Stockholders. Moreover,
the cumulative amount of waived dividends must be maintained in a restricted
capital account which would be added to any liquidation account of the Bank, and
would not be available for distribution to Minority Stockholders. The restricted
capital account and liquidation account amounts would not be reflected in the
Bank's financial statements or the notes thereto, but would be considered as a
notational or memorandum account of the Bank, and would be maintained in
accordance with the rules, regulations and policy of the Office of Thrift
Supervision except that such rules would be administered by the Federal Reserve
Board, and any other rules and regulations adopted by the Federal Reserve Board.
If the Mutual Company converts to stock form in the future, any waived dividends
would reduce the percentage of the converted company's shares of Common Stock
issued to Minority Stockholders in connection with any such transaction.
The Mutual Company has not to date waived dividends declared by the
Company. If the Mutual Company decides that it is in its best interest to waive
a particular dividend to be paid by the Company, and the Federal Reserve Board
approves such waiver, then the Company would pay such dividend only to Minority
Stockholders, and the amount of the dividend waived by the Mutual Company would
be treated in the manner described above. The Mutual Company's decision as to
whether or not to waive a particular dividend, if such waiver is approved by the
Federal Reserve Board, depends on a number of factors, including the Mutual
Company's capital needs, the investment alternatives available to the Mutual
Company as compared to those available to the Company, and regulatory approvals.
There can be no assurance (i) that the Mutual Company will waive dividends paid
by the Company, (ii) that the Federal Reserve Board will approve any dividend
waivers by the Mutual Company or (iii) of the terms that may be imposed by the
Federal Reserve Board on any dividend waiver.
Conversion of the Mutual Company to Stock Form. New York law, regulations
of the Department and the Plan of Reorganization permit the Mutual Company to
convert from the mutual to the capital stock form of organization (a "Conversion
Transaction"). There can be no assurance when, if ever, a Conversion Transaction
will occur, and the board of trustees has no current intention or plan to
undertake a Conversion Transaction. In a Conversion Transaction, the Mutual
Company would merge with and into the Bank or the Company, with the Bank or the
Company as the resulting entity, and certain depositors of the Bank would
receive the right to subscribe for additional shares of the resulting entity. In
a Conversion Transaction, each share of Common Stock outstanding immediately
prior to the completion of the Conversion Transaction held by persons other than
the Mutual Company would be automatically converted into and become the right to
receive a number of shares of Common Stock of the resulting entity determined
pursuant to an exchange ratio that ensures that after the Conversion
Transaction, subject to the Dividend Waiver and MHC Assets Adjustment described
below (if required by the applicable federal banking regulators) and any
adjustment to reflect the receipt of cash in lieu of fractional shares, the
percentage of the to-be outstanding shares of the resulting entity issued to
Minority Stockholders in exchange for their Common Stock would be equal to the
percentage of the outstanding shares of Common Stock held by Minority
Stockholders immediately prior to the Conversion Transaction. The total number
of shares held by Minority Stockholders after the Conversion Transaction also
would be affected by any purchases by such persons in the offering that would be
conducted as part of the Conversion Transaction.
The Dividend Waiver and MHC Assets Adjustment would adjust the percentage
of the to-be outstanding shares of the resulting entity issued in exchange for
minority shares to reflect (i) the aggregate amount of dividends waived by the
Mutual Company and (ii) assets, other than Common Stock, held by the Mutual
Company. Pursuant to the Dividend Waiver and MHC Assets Adjustment, the
percentage of the to-be outstanding shares of the resulting entity issued to
Minority Stockholders in exchange for their minority shares (the "Adjusted
Minority Ownership Percentage") is equal to the percentage of the outstanding
shares of Common Stock held by Minority Stockholders multiplied by the Dividend
Waiver Fraction. The Dividend Waiver Fraction is equal to the product of (a) a
fraction, of which the numerator is equal to the Company's stockholders' equity
at the time of the Conversion Transaction less the aggregate amount of dividends
waived by the Mutual Company, and the denominator is equal to the Company's
stockholders' equity at the time of the Conversion Transaction, and (b) a
fraction, of which the numerator is equal to the appraised pro forma market
value of the resulting entity in the Conversion Transaction minus the value of
the Mutual Company's assets other than Common Stock and the denominator is equal
to the appraised pro forma market value of the resulting entity in the
Conversion Transaction.
Federal Securities Law
The Common Stock of the Company is registered with the SEC under the
Exchange Act. The Company is subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the SEC under the
Exchange Act.
27
<PAGE>
The Company Common Stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Company may not be resold
without registration or unless sold in accordance with certain resale
restrictions. If the Company meets specified current public information
requirements, each affiliate of the Company is able to sell in the public
market, without registration, a limited number of shares in any three-month
period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to maintain
noninterest-bearing reserves at specified levels against their transaction
accounts (primarily checking, NOW and Super NOW checking accounts). At June 30,
1999, the Bank was in compliance with these reserve requirements.
Community Reinvestment Act
Under the Community Reinvestment Act, as amended (the "CRA"), as
implemented by FDIC regulations, a savings bank has a continuing and affirmative
obligation, consistent with its safe and sound operation, to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the FDIC, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The CRA requires the FDIC to provide a written evaluation
of an institution's CRA performance utilizing a four-tiered descriptive rating
system. The Bank's latest CRA rating was "outstanding."
The Bank is also subject to provisions of the New York State Banking Law
which impose continuing and affirmative obligations upon banking institutions
organized in New York State to serve the credit needs of its local community
("NYCRA") which are substantially similar to those imposed by the CRA. Pursuant
to the NYCRA, a bank must file an annual NYCRA report and copies of all federal
CRA reports with the Department. The NYCRA requires the Department to make an
annual written assessment of a bank's compliance with the NYCRA, utilizing a
four-tiered rating system, and make such assessment available to the public. The
NYCRA also requires the Superintendent to consider a bank's NYCRA rating when
reviewing a bank's application to engage in certain transactions, including
mergers, asset purchases and the establishment of branch offices or automated
teller machines, and provides that such assessment may serve as a basis for the
denial of any such application.
The Bank's NYCRA rating as of its latest examination was "outstanding."
Federal Home Loan Bank System
The Bank is a member of the FHLB of New York, which is one of 12 regional
FHLBs, that administers the home financing credit function of savings
institutions. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the board of directors of the FHLB. These policies and procedures are subject
to the regulation and oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of New York. At June 30, 1999, the Bank had $766,000 of FHLB stock. The
dividend yield from FHLB stock was 6.46% at June 30, 1999. No assurance can be
given that such dividends will continue in the future at such levels.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings institutions and to contribute to low and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
28
<PAGE>
ITEM 2. Properties
The Bank currently conducts its business through four full-service banking
offices. The following table sets forth the Bank's offices as of June 30, 1999.
The Bank's current facilities are considered by management to be adequate for
the needs of the Bank in the foreseeable future.
<TABLE>
<CAPTION>
Net Book Value
Original of Property or
Leased Year Date of Leasehold
or Leased or Lease Improvements at
Location Owned Acquired Expiration June 30, 1999
--------- ------ --------- ---------- -------------
(In Thousands)
<S> <C> <C>
Main Office: (1)
Main & Church Streets Owned 1963 -- $ 623
Catskill, New York 12414
Full Service Branches:
Route 385 Owned 1974 -- 350
West Coxsackie, NY 12051
Main Street Owned 1988 -- 500
Cairo, NY 12413
Route 32 Owned 1997 -- 176
Greenville, NY 12083
Operations Center:
302 Main Street Owned 1999 -- 547
Catskill, NY 12414
</TABLE>
- ----------
(1) Includes adjacent parking lot.
29
<PAGE>
ITEM 3. Legal Proceedings
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business which, in
the aggregate, involve amounts which are believed by management to be immaterial
to the financial condition and results of operations of the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of stockholders during the fourth
quarter of the year under report.
PART II
ITEM 5. Market for Company's Common Stock and Related Security Holder Matters
The "Common Stock and Related Matters" section of the Company's Annual
Report to Stockholders is incorporated herein by reference.
ITEM 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Company's Annual Report to Stockholders is
incorporated herein by reference.
ITEM 7. Selected Financial Data
The selected financial information for the year ended June 30, 1999 is
filed as part of the Company's Annual Report to Stockholders and is incorporated
by reference.
ITEM 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act
The "Proposal 1--Election of Directors" section of the Company's
definitive Proxy Statement for the Company's 1999 Annual Meeting of Stockholders
(the "1999 Proxy Statement") is incorporated herein by reference.
ITEM 10. Executive Compensation
The "Proposal I--Election of Directors" section of the Company's 1999
Proxy Statement is incorporated herein by reference.
30
<PAGE>
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
The "Proposal I--Election of Directors" section of the Company's 1999
Proxy Statement is incorporated herein by reference.
ITEM 12. Certain Relationships and Related Transactions
The "Transactions with Certain Related Persons" section of the Company's
1999 Proxy Statement is incorporated herein by reference.
ITEM 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements
The exhibits and financial statement schedules filed as a part of this
Form 10-KSB are as follows:
(A) Report of Independent Accountants
(B) Consolidated Statements of Condition
(C) Consolidated Statements of Operations
(D) Consolidated Statements of Changes in Equity
(E) Consolidated Statements of Cash Flows
(F) Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to
Consolidated Financial Statements.
(b) Reports on Form 8-K
None
(c) Exhibits
3.1 Certificate of Incorporation of Greene County Bancorp, Inc.
(incorporated herein by reference to the Company's registration
statement on SB-2, file No. 333-63681 (the "SB-2"))
3.2 Bylaws of Greene County Bancorp, Inc. (incorporated herein by
reference to the Company's SB-2)
4 Form of Stock Certificate of Greene County Bancorp, Inc.
(incorporated herein by reference to the Form SB-2)
10.1 Employment Agreement with J. Bruce Whittaker (incorporated herein by
reference to the Company's SB-2)
10.2 Employee Stock Ownership Plan (incorporated herein by reference to
the Company's SB-2)
31
<PAGE>
13 Annual Report to Stockholders
21 Subsidiaries of the Company
27 EDGAR Financial Data Schedule
32
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
GREENE COUNTY BANCORP, INC.
Date: September 21, 1999 By: /s/ J. Bruce Whittaker
-------------------------------------
J. Bruce Whittaker
President and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
By: /s/ Michelle Plummer By: /s/ Walter H. Ingalls
---------------------------- -------------------------------
Michelle Plummer Walter H. Ingalls
Chief Financial Officer Chairman of the Board
Date: September 21, 1999 Date: September 21, 1999
By: /s/ Richard J. Buck By: /s/ Raphael Klein
---------------------------- -------------------------------
Richard J. Buck Raphael Klein
Director Director
Date: September 21, 1999 Date: September 21, 1999
By: /s/ Paul Slutzky By: /s/ Anthony Camera, Jr.
---------------------------- -------------------------------
Paul Slutzky Anthony Camera, Jr.
Director Director
Date: September 21, 1999 Date: September 21, 1999
By: /s/ David H. Jenkins By: /s/ Dennis R. O'Grady
---------------------------- -------------------------------
David H. Jenkins, DVM Dennis R. O'Grady
Director Director
Date: September 21, 1999 Date: September 21, 1999
By: /s/ Martin C. Smith
----------------------------
Martin C. Smith
Director
Date: September 21, 1999
33
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
GREENE COUNTY BANCORP, INC.
1999 Annual Report
Growing with the Community
<PAGE>
Growing with the Community
What's a community bank all about?
It's about financing equipment for the firefighters who come to our rescue ...
loaning money to the libraries where our children learn about the world ...
sponsoring concerts where friends and neighbors gather to enjoy music and warm
summer nights ... and creating grant programs that support education, the arts,
health programs and housing for people of all means.
It's about being involved with the people and places that support us, and
growing right along with them.
The Bank of Greene County provides equipment financing and other banking
services to help the Kiskatom Volunteer Fire Department stay ready for action.
<PAGE>
GREENE COUNTY BANCORP, INC.
Corporate Profile
Greene County Bancorp, Inc., a Delaware corporation, is the parent company of
The Bank of Greene County. Consolidated assets as of June 30, 1999 were $153
million.
The Bank of Greene County was founded in 1889 as The Building and Loan
Association of Catskill. In 1974, it became the second savings & loan in New
York State to convert to a state-chartered mutual savings bank, under the name
Greene County Savings Bank. In 1998, the Bank converted to the mutual holding
company form of ownership, with the Bank changing its name to The Bank of Greene
County.
The Bank services its primary market area of Greene County, New York, through an
operations center and four banking offices.
Operations Center:
302 Main Street
Catskill NY 12414
(518) 943-2600
Branches:
Main & Church Streets
Catskill, NY 12414
(518) 943-3700
Route 385
West Coxsackie, NY 12413
(518) 731-2731
Main Street
Cairo, NY 12413
(518) 622-2662
Route 32
Greenville, NY 12083
(518) 966-5200
TABLE OF CONTENTS
Message to Our Stockholders 2
Selected Consolidated Financial and Other Data 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Selected Quarterly Financial Data (Unaudited) 18
Common Stock and Related Matters 18
Independent Auditors' Report 19
Consolidated Statements of Financial Condition 20
Consolidated Statements of Income 21
Consolidated Statements of Comprehensive Income 22
Consolidated Statements of Changes in Shareholders' Equity 23
Consolidated Statements of Cash Flows 24
Notes to Consolidated Financial Statements 25
<PAGE>
J. Bruce Whittaker, President and Chief Executive Officer
To Our Shareholders
I am pleased to report to you the results of our fiscal year including our first
six months as a publicly owned company. The past year was certainly filled with
anticipation, much hard work and many changes. Following are the financial and
operational highlights of this exciting year, which marked our conversion from
mutual to stock ownership.
TAKING OUR COMPANY PUBLIC
By far, the most significant event of the year was the completion of the Bank's
stock conversion on December 30, 1998, and the minority public offering of stock
in the bank's holding company, Greene County Bancorp, Inc. The affirmative vote
of the depositors and the successful completion of the stock offering would not
have been possible without the outstanding work of the Bank's staff in complying
with a myriad of state and federal banking regulations as well as the
requirements of the Securities and Exchange Commission. A total of $8.0 million,
net of conversion costs, was raised in the public offering.
While the Company's stock was initially traded on the NASDAQ OTC Bulletin Board,
we were successful in having our stock traded on the NASDAQ Small-Cap Market in
early July. Subsequently, the Company declared a 10% stock dividend to
shareholders of record as of July 26, 1999, payable on August 9, 1999. We
anticipate the new NASDAQ Small-Cap listing and the 10% stock dividend will
increase the visibility and liquidity of our common stock. You should be able to
follow the Company's stock in the financial section of any major newspaper.
<PAGE>
In an effort to further enhance shareholder value and support our market price,
the Company also obtained approval for and began a stock repurchase program as
of August 18, 1999. Under the stock repurchase program, subject to market
conditions, the Company expects to repurchase 5% of outstanding shares, or
107,638 shares in the open market over the next year.
FINANCIAL CONDITION AND OPERATING RESULTS
Net income for fiscal year 1999 was $867,500 as compared with $1,149,900 the
prior year, representing a $282,400 decrease. The most significant item
negatively affecting 1999 net income was the charge associated with funding of
The Bank of Greene County Charitable Foundation for $484,150. Interest income
increased by 4.2% to $9.9 million for the year ended June 30, 1999, from $9.5
million for the year ended June 30, 1998. Interest expense for the year ended
June 30, 1999, was $4.9 million as compared with $5.0 million during the 1998
fiscal year, representing a decrease of 2.0%.
Our net interest margin increased to 3.58% in fiscal 1999 from 3.52% in fiscal
1998. The primary reasons for the improvement in margin were the investment of
capital raised in the public offering, increases in the fixed-rate mortgage loan
portfolio and increases in and changes to the mix of the investment portfolio.
Noninterest income rose 24.3% to $543,000 as compared with $437,000 for the
prior year. The increase in noninterest income was largely attributable to an
increase in fee income on deposit accounts as well as increased income from the
Bank's merchant credit card processing program and mortgage appraisal fees.
Noninterest expense increased by $685,000 (21.8%), net of conversion costs, over
the prior fiscal year. Factors contributing to the increase in noninterest
expense, in addition to the Charitable Foundation charge, included several new
staff positions and promotions due to growth of the Bank, increased occupancy
expense as a result of a new operations center and service fees associated with
testing and preparing for Y2K.
Total assets increased by $12.3 million, or 8.8%, to $152.6 million at June 30,
1999, as compared with $140.3 million at June 30, 1998. The primary factor
driving the increase in assets was growth in the loan portfolio, with net loans
at June 30, 1999 totaling $90.8 million as compared with $80.3 million at June
30, 1998, an increase of $10.5 million (13.1%). Investment securities also
increased 5.5% over last year from $47.1 million at June 30, 1998, to $49.7
million at June 30, 1999.
SUPPORTING OUR COMMUNITY
As part of the conversion, the Bank established The Bank of Greene County
Charitable Foundation. The foundation was initially funded with 38,415 shares of
Company stock and $100,000 in cash. It is endowed for the purpose of supporting
housing for low- and moderate-income individuals, education, health and
wellness, social and civic services, and culture and arts. The foundation is in
the process of formulating guidelines for grants and expects to issue a request
for applications in the near future.
RETAIL BANKING GROWTH
Despite more than $3.2 million in deposits being withdrawn from the Bank to
purchase the Company's stock at the initial offering, deposits at June 30, 1999,
were up $4.0 million (3.2%) from a year ago. All sectors of the Bank's deposit
products showed increases with the most significant gains being seen in
checking, NOW accounts and student savings accounts. Installation of Telebank
24/7 telephone banking has proved to be very popular among our customers, with
activity approaching 1,000 calls per week.
In the spring of 1999, the Bank began offering overdraft protection on checking
and NOW accounts through the Bankease overdraft line of credit. Initial response
to this new product has been favorable.
The Bank has just introduced its latest retail product, the VISA check card.
While also serving as an ATM card, it allows checking and NOW customers to pay
for products and services at any retail location that accepts VISA without
having to write a check.
LENDING ACTIVITY INCREASES
Low interest rates, together with the Bank's reputation for efficient and
friendly service, created a heavy demand for mortgages. Mortgage closings for
the year ended June 30, 1999 totaled just over $22 million, a 58.0% increase
over the prior year's $13.9 million. Home equity and installment loan
originations totaled $6.4 million for the same period, up slightly from the
prior year's $6.3 million. Total net mortgages and loans outstanding were $90.8
million on June 30, 1999, as compared with $80.3 million a year ago, an increase
of 13.1%.
In addition to traditional lending products, the Bank has an established lending
program that provides low-cost financing for local municipalities and volunteer
fire departments. For the year ended June 30, 1999 municipal loan and bond
originations totaled $430,000; balances outstanding were approximately $700,000
at year-end.
MERCHANT SERVICES
Fiscal year 1999 marked our second year as an authorized agent for ACS Merchant
Services. ACS is a low-cost, efficient provider of merchant credit card
services. The Bank acts as a sales agent for ACS and provides limited customer
support as needed. This service has been well received by the local business
community. The Bank now has more than 170 merchants with over $11 million in
annual sales under contract.
<PAGE>
READY FOR THE YEAR 2000
My message to you would not be complete without a report on our path toward
readiness for Y2K. We have had a Y2K team in place for three years. With the
assistance of an outside consultant, we've addressed all areas of concern,
including mission-critical functions such as our outsourced data processing
provider, continuity of electric and fuel delivery, cash deliveries, ATM
operations, our in-house computer network (which was extensively upgraded this
summer), and other suppliers and services. We believe that we have made all
necessary internal changes and have received assurances from our outside vendors
that they are ready for the new millennium. We also have a contingency plan in
place.
To ensure that the necessary expertise is at hand should any unforeseen problems
occur, we have reached an agreement with our outside computer consultant who, in
October, will assume the position of Manager of Information Systems. He will be
instrumental in maintaining the integrity of our current software and hardware,
and implementing future enhancements to our data processing systems.
GROWING BRANCH OPERATIONS
Most recently, the Bank received regulatory approval to construct and open a
fifth branch in the Village of Tannersville (Town of Hunter), located in the
western part of Greene County. The branch will be in the heart of Northern
Catskills ski country; both Hunter Mountain and Ski Windham are just a few
minutes away.
In another effort to broaden the Bank's appeal to residents throughout the area,
off-site ATMs were installed at Columbia-Greene Community College and in a
locally owned convenience store in East Durham. The success of these machines
will be studied, and if warranted, additional machines will be deployed in our
market.
NEW OPERATING FACILITIES
Soon after we completed our stock offering last December, the Bank purchased a
6,000-plus square foot office building for use by the Bank's lending and
operations departments and executive officers. Located on Catskill's Main
Street, the 1930 art-deco building is just a short walk from our main branch.
After renovations were completed in mid-May, some 20 officers and staff members
moved from overcrowded work areas in the main office and adjacent rented
quarters into the much-needed space.
MANAGING OUR FINANCES
In recognition of the increased financial reporting requirements for the Company
and to more efficiently manage the Bank's assets, the Board of Directors created
the position of Chief Financial Officer. Michelle Plummer, CPA, who has prior
experience as an analyst and bank examiner with the Federal Reserve Bank of New
York and as a bank auditor for a national accounting firm, was recently
appointed to this position.
LOOKING FORWARD
The past year was one of unparalleled activity and expansion. Moving forward, we
anticipate much success with the opening of the Tannersville office in the
spring. This office, together with a recently added outside mortgage originator,
will help the Bank solidify its position as one of Greene County's leading
mortgage lenders. We will continue to look for other areas in which the Bank can
profitably expand its branch network. Other products and services also are
currently being explored. We will report to you on them as they develop.
On a personal note, I would like to tell you how much I've enjoyed seeing the
Bank grow and expand during my 27-year tenure. I appreciate the confidence that
our shareholders and customers have placed in us. As we go forward as a stock
organization, your management will do everything it can to continue offering
outstanding service while seeking to prudently enhance the value of your
investment.
Sincerely,
/s/ J. Bruce Whittaker
J. Bruce Whittaker
President and Chief Executive Officer
September 28, 1999
<PAGE>
OFFICERS
Left to right
Daniel Sager
Rebecca Main
Bruce Egger
Stephen Nelson
Michelle Plummer
Donald Gibson
OFFICERS
Left to right
Edmund Smith
Edna Zelasko
Ellen DeLucia
J. Bruce Whittaker
Theresa Sofia
BRANCH MANAGERS
Left to right
Arena Pucci
Kathy Proper
Nora Rubino
Trisha Lamb
<PAGE>
GREENE COUNTY BANCORP, INC.
SELECTED FINANCIAL INFORMATION
The selected data presented below as of the end of, and for each of, the years
presented were derived from the audited consolidated financial statements of
Greene County Bancorp, Inc. (the "Company"), or prior to December 30, 1998, The
Bank of Greene County (the "Bank").
<TABLE>
<CAPTION>
June 30,
(In Thousands) 1999 1998 1997
<S> <C> <C> <C>
Selected Financial Condition Data:
Total assets $152,644 $140,253 $132,506
Loans receivable, net 90,798 80,260 75,648
Mortgage-backed securities (all available for sale) 5,233 5,189 5,221
Investment securities (all available for sale) 35,984 35,565 37,581
Asset-backed securities (all available for sale) 8,445 6,324 784
Deposits 127,999 124,011 115,855
Shareholders' equity 23,922 15,730 14,406
</TABLE>
Years Ended June 30,
(In Thousands) 1999 1998 1997
Selected Operations Data:
Total interest income $9,942 $9,503 $9,297
Total interest expense 4,869 4,967 4,780
Net interest income 5,073 4,536 4,517
Provision for loan losses 180 120 125
Net interest income after provision
for loan losses 4,893 4,416 4,392
Total noninterest income 543 436 520
Total noninterest expense 4,319 3,149 2,773
Income before taxes 1,117 1,703 2,139
Income tax provision 249 553 692
Net income $ 868 $1,150 $1,447
<PAGE>
<TABLE>
<CAPTION>
At or for the Years Ended June 30,
1999 1998 1997
<S> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on average assets
(ratio of net income to average total assets) 0.58% 0.84% 1.09%
Return on average shareholders' equity
(ratio of net income to average shareholders' equity) 4.25 7.63 10.59
Ratio of operating expense to average total assets 2.90 2.31 2.08
Ratio of average interest-earning assets
to average interest-bearing liabilities 112.31 109.58 109.16
Net interest rate spread<F1> 3.14 3.15 3.26
Net interest margin<F2> 3.58 3.52 3.61
Efficiency ratio<F3> 76.90 64.90 56.45
Asset Quality Ratios:
Nonperforming assets to total assets at end of period 0.56 0.72 0.61
Nonperforming loans to total loans at end of period 0.94 1.10 0.97
Allowance for loan losses to nonperforming loans 91.94 82.17 90.04
Allowance for loan losses to loans receivable, net 0.87 0.91 0.96
Capital Ratios:
Shareholders' equity to total assets at end of period 15.68 11.22 10.87
Average shareholders' equity to average assets 13.70 11.05 10.27
Other Data:
Number of full-service offices 4 4 3
<FN>
<F1> The difference between the weighted average yield on average interest-earning assets and
the weighted average cost of average interest-bearing liabilities.
<F2> Net interest income as a percentage of average interest-earning assets.
<F3> The ratio of noninterest expense dividend by the sum of net interest income and noninterest income.
</FN>
</TABLE>
<PAGE>
GREENE COUNTY BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Special Note Regarding Forward-Looking Statements
This report contains certain "forward-looking statements". The Company desires
to take advantage of the "safe harbor" provisions of the Private Securities
Litigation Reform of 1995 and is including this statement for the express
purpose of availing itself of the protections of the safe harbor with respect to
all such forward-looking statements. These forward-looking statements, which are
included in Management's Discussion and Analysis, describe future plans or
strategies and include the Company's expectations of future financial results.
The words "believe," "expect," "anticipate," "project," and similar expressions
identify forward-looking statements. The Company's ability to predict results or
the effect of future plans or strategies or qualitative or quantitative changes
based on market risk exposure is inherently uncertain. Factors which could
effect actual results include but are not limited to (a) change in general
market interest rates, (b) general economic conditions, (c) legislative and
regulatory changes, (d) monetary and fiscal policies of the U.S. Treasury and
the Federal Reserve, (e) changes in the quality or composition of the Company's
loan and investment portfolios, (f) deposit flows, (g) competition, and (h)
demand for financial services in the Company's market area. These factors should
be considered in evaluating the forward-looking statements, and undue reliance
should not be placed on such statements, since results in future periods may
differ materially from those currently expected because of various risks and
uncertainties.
General
The Company's results of operations depend primarily on its net interest income
which is the difference between the income earned on the Company's loan and
securities portfolios and its cost of funds, consisting of the interest paid on
deposits and borrowings. Results of operations are also affected by the
Company's provision for loan losses, income and expenses pertaining to other
real estate owned, gains and losses from sales of securities, noninterest income
and noninterest expenses. Noninterest income consists primarily of fees and
service charges. The Company's noninterest expenses consist principally of
compensation and employee benefits, occupancy, equipment and data processing,
and other operating expenses. Results of operations are also significantly
affected by general economic and competitive conditions, changes in interest
rates, as well as government policies and actions of regulatory authorities.
Additionally, future changes in applicable law, regulations or government
policies may materially affect the Company.
Management of Credit Risk
Management considers credit risk to be an important risk factor affecting the
financial condition and operating results of the Company. The potential for loss
associated with this risk factor is managed through a combination of policies
approved by the Company's Board of Directors, the monitoring of compliance with
these policies, and the periodic reporting and evaluation of loans with problem
characteristics. Policies relate to the maximum amount that can be granted to a
single borrower and such borrower's related interests, the aggregate amount of
loans outstanding by type in relation to total assets and capital, loan
concentrations, loan to collateral value ratios, approval limits and other
underwriting criteria. Policies also exist with respect to performing credit
reviews by an officer not involved in loan origination, the rating of loans, the
determination of when loans should be placed in a nonperforming status, and the
factors that should be considered in establishing the Company's allowance for
loan losses.
Management of Interest Rate Risk
While the Company's loan portfolio, consisting primarily of mortgage loans
collaterized by residential real property located in its market area, is subject
to risks associated with the local economy, the Company's most significant form
of market risk is interest rate risk because the Company's assets and
liabilities are sensitive to changes in interest rates. The Company's assets
consist primarily of residential mortgage loans, which have longer maturities
than the Company's liabilities that consist primarily of deposits. The Company
does not engage in any hedging transactions, such as interest rate swaps and
caps. The Company's interest rate risk management program focuses primarily on
evaluating and managing the composition of the Company's assets and liabilities
in the context of various interest rate scenarios. Factors beyond management's
control, such as market interest rates and competition, also have an impact on
interest income and interest expense.
A principal part of the Company's business strategy is to manage interest rate
risk and to minimize the Company's exposure to changes in market interest rates.
In recent years, the Company has followed the following strategies to manage
interest rate risk: (i) investing in short-term U.S. Government securities and
federal agency obligations; (ii) maintaining a high level of liquid
interest-earning assets such as short-term federal funds sold; (iii) maintaining
a high concentration of less interest-rate sensitive and lower-costing "core
deposits"; iv) originating consumer installment loans
<PAGE>
that have up to five year terms but that have significantly shorter average
lives due to early prepayments; and (v) where possible, matching the funding
requirements for fixed-rate residential mortgages with lower-costing core
deposit accounts. By investing in short-term, liquid securities and originating
consumer installment loans with shorter average durations, the Company believes
it is better positioned to react to increases in market interest rates.
Investments in short-term securities, however, generally bear lower yields than
longer term investments. Thus, these strategies may result in lower levels of
interest income than would be obtained by investing in longer-term fixed-rate
loans.
Gap Analysis. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a Company's interest rate sensitivity "gap." An
asset or liability is deemed to be interest rate sensitive within a specific
time period if it will mature or reprice within that time period. The interest
rate sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
same time period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. Accordingly,
during a period of rising interest rates, an institution with a negative gap
position generally would not be in as favorable a position, compared with an
institution with a positive gap, to invest in higher yielding assets. The
resulting yield on the institution's assets generally would increase at a slower
rate than the increase in its cost of interest-bearing liabilities. Conversely,
during a period of falling interest rates, an institution with a negative gap
would tend to experience a repricing of its assets at a slower rate than its
interest-bearing liabilities which, consequently, would generally result in its
net interest income growing at a faster rate than an institution with a positive
gap position. At June 30, 1999, the Company's cumulative one-year gap position,
the difference between the amount of interest-earning assets maturing or
repricing within one year and interest-bearing liabilities maturing or repricing
within one year, was a negative 18.0%.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1999, which are anticipated
by the Company, based upon certain assumptions, to reprice or mature in each of
the future time periods shown (the "GAP Table"). Except as stated below, the
amount of assets and liabilities shown which reprice or mature during a
particular period were determined in accordance with the earlier of term to
repricing or the contractual maturity of the asset or liability. The table sets
forth an approximation of the projected repricing of assets and liabilities at
June 30, 1999, on the basis of contractual maturities, anticipated prepayments
and scheduled rate adjustments within the various time periods shown and
subsequent selected time intervals. The loan amounts in the table reflect
principal balances expected to be redeployed and/or repriced as a result of
contractual amortization and anticipated prepayments of adjustable-rate and
fixed-rate loans, and as a result of contractual rate adjustments on
adjustable-rate loans. The annual prepayment rate for real estate-related assets
are based on the particulars of coupon maturity of the real estate-related
assets.
Certain shortcomings are inherent in the method of analysis presented in the GAP
Table. For example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. Also, the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets such as adjustable-rate loans, have features
that restrict changes in interest rates both on a short-term basis and over the
life of the asset. Further, in the event of changes in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their adjustable-rate loans may decrease in the event of an interest
rate increase.
<PAGE>
<TABLE>
<CAPTION>
Amounts Maturing or Repricing at June 30, 1999
Up to 90 3 Months to 6 Months to 1 to 2 2 to 3 3 to 5 Over 5
(Dollars in Thousands) Days 6 Months 1 Year Years Years Years Years Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:<F1>
Loans receivable<F2> $ 3,881 $ 5,571 $ 7,435 $ 1,087 $ 2,387 $ 4,317 $66,120 $ 90,798
Investment securities 581 1,908 2,574 7,953 4,736 17,297 14,613 49,662
Federal funds sold
& interest-bearing
bank balances 4,028 -- -- -- -- -- -- 4,028
FHLB Stock 766 -- -- -- -- -- -- 766
Total interest-earning
assets $ 9,256 $ 7,479 $10,009 $ 9,040 $ 7,123 $21,614 $80,733 $145,254
Interest-bearing liabilities:
Savings deposits $ 2,642 $ 2,642 $ 5,284 $10,568 $10,568 $ -- $21,138 $ 52,842
Escrow deposits 91 91 183 366 366 -- 731 1,828
NOW deposits 387 387 774 1,549 1,549 -- 3,098 7,744
MMDA deposits 197 197 394 788 788 -- 1,576 3,940
Certificate accounts 12,663 17,524 9,435 7,951 2,697 1,907 -- 52,177
Borrowings -- -- -- -- -- -- -- --
Total interest-bearing
liabilities $15,980 $20,841 $16,070 $21,222 $15,968 $ 1,907 $26,543 $118,531
Interest sensitivity gap (6,724) (13,362) (6,061) (12,182) (8,845) 19,707 54,192
Cumulative interest
sensitivity gap (6,724) (20,086) (26,147) (38,329) (47,174) (27,477) 26,722
Cumulative interest
sensitivity gap as a
percentage of total assets (4.41%) (13.16%) (17.13%) (25.11%) (30.90%) (18.00%) 17.51%
Cumulative interest
sensitivity gap as a
percentage of total
interest-earning assets (4.63%) (13.83%) (18.00%) (26.39%) (32.48%) (18.91%) 18.40%
Cumulative interest-earning
assets as a percentage of
cumulative interest-bearing
liabilities 57.92% 45.45% 50.56% 48.28% 47.63% 70.14% 122.54%
<FN>
<F1> Interest-earning assets are included in the period in which the balances are expected to be redeployed and/or repriced
as a result of anticipated prepayments, scheduled rate adjustments and contractual maturities.
<F2> Calculated net of deferred loan fees, loan discounts and loans in process.
</FN>
</TABLE>
<PAGE>
Analysis of Net Interest Income
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income also
depends on the relative amounts of interest-earning assets and interest-bearing
liabilities and the interest rate earned or paid on them, respectively.
Average Balance Sheet. The following tables set forth certain information
relating to the Company at June 30, 1999, and for the years ended June 30, 1999
and 1998. For the periods indicated, the total dollar amount of interest income
from average interest-earning assets and the resultant yields, as well as the
interest expense on average interest-bearing liabilities, is expressed both in
dollars and rates. No tax equivalent adjustments were made. All average balances
are average monthly balances. Nonaccruing loans have been excluded from the
yield calculations in these tables.
At June 30, 1999
Actual
(Dollars in Thousands) Balance Yield/Rate
Interest-earning assets:
Loans receivable, net(1) $ 90,798 7.31%
Investment securities 49,662 5.82
Federal funds & interest-bearing
bank balances 4,028 9.06
FHLB stock 766 6.46
Total interest-earning
assets(1) $145,254 6.84%
Interest-bearing liabilities:
Savings deposits $ 54,670 3.22%
MMDA and NOW deposits 11,684 1.18
Certificate accounts 52,177 5.69
Total interest-bearing
liabilities $118,531 4.11%
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
<PAGE>
<TABLE>
<CAPTION>
Years Ended June 30,
1999 1998
Average Interest Average Interest
Outstanding Earned/ Outstanding Earned/
(Dollars in Thousands) Balance Paid Yield/Rate Balance Paid Yield/Rate
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net<F1> $ 85,938 $6,635 7.72% $ 77,873 $6,367 8.18%
Investment securities<F2> 48,034 2,893 6.02 44,280 2,743 6.19
Federal funds 7,697 365 4.74 6,713 392 5.84
FHLB stock 722 49 6.79 58 -- --
Total interest-earning assets $142,391 $9,942 6.98% $128,924 $9,502 7.37%
Interest-bearing liabilities:
Savings deposits $ 55,285 $1,781 3.22% $ 51,791 $1,812 3.50%
MMDA and NOW deposits 16,321 138 0.85 12,472 186 1.49
Certificate accounts 55,184 2,950 5.35 53,389 2,970 5.56
Borrowings -- -- -- -- -- --
Total interest-bearing
liabilities $126,790 $4,869 3.84% $117,652 $4,968 4.22%
Net interest income $5,073 $4,534
Net interest rate spread 3.14% 3.15%
Net yield on average
interest-earning assets 3.56% 3.52%
Average interest-earning assets to
average interest-bearing liabilities 112.30% 109.58%
<FN>
<F1> Calculated net of deferred loan fees, loan discounts, loans in process and loss reserves.
<F2> Includes mortgage-backed securities and asset-backed securities.
</FN>
</TABLE>
<PAGE>
Rate/Volume Analysis. The following table presents the extent to which changes
in interest rates and changes in the volume of interest-earning assets and
interest-bearing liabilities have affected the Company's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume (changes
in volume multiplied by prior rate); (ii) changes attributable to changes in
rate (changes in rate multiplied by prior volume); and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
<TABLE>
<CAPTION>
Years Ended June 30,
1999 vs. 1998 1998 vs. 1997
Increase/(Decrease) Increase/(Decrease)
Due to Total Due to Total
Increase/ Increase/
(In Thousands) Volume Rate (Decrease) Volume Rate (Decrease)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $636 $(368) $268 $391 $(199) $192
Investment securities & FHLB Stock<F1> 269 (70) 199 28 (9) 19
Federal Funds 53 (80) (27) (5) (1) (6)
Total interest-earning assets 958 (518) 440 414 (209) 205
Interest-bearing liabilities:
Savings deposits 118 (149) (31) (43) (31) (74)
MMDA and NOW deposits 47 (95) (48) 196 (162) 34
Certificate accounts 98 (118) (20) 201 27 228
Total interest-bearing liabilities 263 (362) (99) 354 (166) 188
Net interest income $695 $(156) $539 $ 60 $ (43) $ 17
<FN>
<F1> Includes mortgage-backed securities and asset-backed securities.
</FN>
</TABLE>
Comparison of Financial Condition at June 30, 1999 and June 30, 1998
Assets. Total assets increased to $152.6 million at June 30, 1999 from $140.3
million at June 30, 1998, an increase of $12.3 million or 8.8%. The growth in
assets was primarily a result of increases in the loan portfolio and the initial
public stock offering on December 30, 1998, which resulted in net proceeds of
$8.0 million after conversion costs. Initially, the net proceeds of the offering
were invested in short-term investments as well as used to fund the Bank's
Employee Stock Ownership Plan. Half of the shares purchased by the Plan were
bought in open market transactions. Also contributing to the increase in assets
was the substantial growth in the loan portfolio.
Total loans outstanding grew from $81.2 million to $91.8 million, an increase of
$10.6 million or 13.1%. Residential mortgages accounted for the majority of the
loan growth from $64.7 million at June 30, 1998, to $76.6 million at June 30,
1999, an increase of $11.9 million or 18.4%. Also contributing to the overall
growth was an increase in the installment loan portfolio to $4.8 million at June
30, 1999 from $4.2 million at June 30, 1998, a rise of $0.6 million or 14.3%.
The growth in loans was somewhat offset by commercial mortgages, which decreased
from $5.7 million at June 30, 1998, to $4.0 million at June 30, 1999, a decline
of $1.7 million or 29.8%. The decrease in the commercial loan portfolio was
primarily due to repayment and prepayment of principle. The yield on the average
loan portfolio decreased 46 basis points from 8.18% at June 30, 1998, to 7.72%
at June 30, 1999. Management believes the low interest rate environment
significantly contributed to the strong loan demand experienced during the last
fiscal year.
<PAGE>
Federal funds sold holdings decreased to $3.4 million at June 30, 1999, from
$5.8 at June 30, 1998, a decline of $2.4 million or 41.4%. The funds were
deployed to higher yielding investment securities and to fund loan portfolio
growth.
Total investment securities grew from $47.1 million at June 30, 1998 to $49.7
million at June 30, 1999, an increase of $2.6 million or 5.5%. The portfolio mix
was also reallocated during the year. U.S. Treasury securities decreased $5.8
million, U.S. government agencies decreased $3.1 million and mutual funds
decreased $1.2 million between June 30, 1998 and June 30, 1999. State and
political subdivision holdings increased $2.8 million, asset-backed securities
increased $2.1 million and corporate debt securities increased $7.7 million
between June 30, 1998, and June 30, 1999. The reason for the shift in the
portfolio mix was primarily due to the interest rate environment that saw better
yielding securities available outside the government sector.
Also, contributing to the overall increase in assets was the increase in
premises and equipment of $1.0 million. The primary acquisitions were the new
operations center, located at 302 Main Street in Catskill, just a few blocks
from the main office, and various computer equipment.
Liabilities. Total deposits amounted to $128.0 million at June 30, 1999,
compared with $124.0 million at June 30, 1998, representing an increase of $4.0
million or 3.2%. This increase occurred despite an offsetting $3.2 million in
withdrawals to fund purchases of common stock in the initial public stock
offering. Management believes the increase in the deposit inflows was primarily
a result of the expanding branch network. The Company had no borrowings
outstanding as of June 30, 1999 or 1998.
Shareholders' Equity. Total shareholders' equity was $23.9 million at June 30,
1999 as compared with $15.7 million at June 30, 1998, representing an increase
of $8.2 million or 52.3%. The increase primarily represented the net proceeds of
$8.0 million raised from the stock offering on December 30, 1998. Another item
affecting shareholders' equity was net income of approximately $867,500, which
was partially offset by unrealized losses on the available-for-sale portfolio of
approximately $118,400, net of tax.
The Company at June 30, 1999, met the regulatory requirements to be classified
as well capitalized with total capital to risk weighted asset ratio of 28% as
compared with 21% at June 30, 1998. The Tier 1 capital to risk weighted asset
ratio increased to 27% at June 30, 1999 from 20% at June 30, 1998 and the Tier 1
capital to average asset ratio increased from 11% at June 30, 1998 to 16% at
June 30, 1999.
Comparison of Operating Results for the Years Ended June 30, 1999 and June 30,
1998
General. The earnings of the Company depend primarily on its level of net
interest income, which is the difference between interest earned on the
Company's interest-earning assets, consisting primarily of residential and
commercial real estate loans, consumer loans and securities available for sale,
and the interest paid on interest-bearing liabilities, consisting primarily of
deposits. Net interest income is a function of the Company's interest rate
spread, which is the difference between the average yield earned on
interest-earning assets and the average rate paid on interest-bearing
liabilities, as well as a function of the average balance of interest-earning
assets as compared with interest-bearing liabilities. The Company's earnings
also are affected by its fees and service charges and gains on sale of loans and
securities, as well as its level of operating and other expenses, including
salaries and employee benefits, occupancy and equipment costs, data processing
expense, marketing and advertising costs, and federal deposit insurance
premiums.
Net income for the year ended June 30, 1999, decreased by $282,000 or 24.6% to
$868,000 from $1.1 million for the year ended June 30, 1998. The decrease in net
income was primarily due to an increase of $1.2 million, or 37.1%, in
noninterest expense, which more than offset an increase of $537,000, or 11.8%,
in net interest income and an increase of $107,000, or 24.4% in noninterest
income.
Interest Income. Interest income for fiscal year 1999 amounted to $9.9 million
as compared with $9.5 million for the year ended June 30, 1998, an increase of
$0.4 million, or 4.2%. The increase in interest income is a result of the
increases in the loan and investment portfolio volumes. The average balance of
the loan portfolio increased $8.1 million, or 10.4%, more than offsetting a
decrease in the average yield of 46 basis points. The investment portfolio
average balance increased by $3.8 million, or 8.5%, while the average portfolio
yield decreased by 17 basis points. The decrease in yield is consistent with the
general decreasing interest rate environment experienced during the fiscal year.
Interest Expense. Interest expense decreased to $4.9 million at June 30, 1999,
as compared with $5.0 million for year ended June 30, 1998, representing a $0.1
million, or 2.0% decrease. Interest-bearing liabilities increased by $9.1
million, or 7.8%, between June 30, 1998 and 1999, savings deposit rates
decreased by 28 basis points, MMDA and NOW account rates decreased by 64 basis
points and certificate account rates decreased by 21 basis points, based on
average balances.
<PAGE>
Net Interest Income. Net interest income for the year ended June 30, 1999
amounted to $5.1 million compared with $4.5 million for the year ended June 30,
1998, an increase of $0.6 million, or 13.3%. Increases in interest income of
$0.4 million and decreases in interest expense of $0.1 million enhanced the net
interest margin by 6 basis points to 3.58% for the year ended June 30, 1999, as
compared with 3.52% for the year ended June 30, 1998. The net interest rate
spread remained relatively constant between June 30, 1998 and 1999, as a result
of the decreasing yields on loans and investments and decreasing rates on
deposit accounts.
Provision for Loan Losses. The Bank establishes provisions for loan losses,
which are charged to operations, in order to maintain the allowance for loan
losses at a level which is deemed appropriate to absorb future charge-offs and
loans deemed uncollectible. In determining the appropriate level of the
allowance for loan losses, management considers past and anticipated loss
experience, collateral values, current and anticipated economic conditions,
volume and type of lending activities and the levels of non-performing and other
classified loans. The allowance is based on estimates and the ultimate losses
may vary from such estimates. Management of the Company assesses the allowance
for loan losses on a quarterly basis and makes provisions for loan losses in
order to maintain the adequacy of the allowance.
The provision for loan losses increased by $60,000 or 50.0%, to $180,000 for the
year ended June 30, 1999, compared with $120,000 for the year ended June 30,
1998. The increase reflected a desire by management to maintain the allowance
for loan losses at a level appropriate for recent growth in loan balances. The
ratio of nonperforming loans to total loans improved to 0.94% at June 30, 1999
from 1.10% at June 30, 1998. At June 30, 1999, the allowance for loan losses was
0.9% of total loans outstanding.
Noninterest Income. For the year ended June 30, 1999, noninterest income was
$543,000 as compared with $437,000 for the year ended June 30, 1998,
representing an increase of $106,000, or 24.3%. Contributing to the increases in
noninterest income were increased service fees on deposit accounts. Also
enhancing noninterest income was increased income from the Bank's merchant
credit card processing program and mortgage appraisal fees.
Noninterest Expense. Noninterest expense increased by $1.2 million, or 37.1%,
for the year ended June 30, 1999, compared to the prior year. The largest factor
causing the increase in noninterest expense was the nonrecurring contribution to
The Bank of Greene County Charitable Foundation of $484,000. The increase in
salary and employee benefits of $252,000, or 16.1%, was a result of filling
several new staff positions required as a result of the growth occurring within
the bank. Increases in occupancy expense of $71,000 (34.0%) and equipment and
furniture expenses of $54,000, (29.1%) were partially due to expenses incurred
while preparing the new operations center for service and equipment purchases
for Y2K upgrading. Computer fees are the basic component of service fees and are
primarily associated with the Bank's data processor NCR. A portion of the
increase in service fees was associated with upgrading and testing for Y2K
compliance.
Income Taxes. Total tax expense for the year ended June 30, 1999, was $250,000
as compared with $553,000 for the year ended June 30, 1998, a decrease of
$303,000, or 54.8% in tax expense. In addition to the decrease in net income
before tax of $586,000, income tax expense was favorably impacted by an increase
in tax-exempt income. This increase was the primary factor in lowering the
effective tax rate to 22.3% for the year ended June 30, 1999, compared with
32.5% for the year ended June 30, 1998.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits and proceeds from principal
and interest payments on loans, mortgage-backed securities and debt securities,
with a line of credit available through the Federal Home Loan Bank as needed.
While maturities and scheduled amortization of loans and securities are
predictable sources of funds, deposit outflows, mortgage prepayments, and
borrowings are greatly influenced by general interest rates, economic conditions
and competition.
<PAGE>
The Company's primary investing activities are the origination of residential
one- to four-family and commercial real estate loans, other consumer and
commercial business loans, and the purchase of mortgage-backed securities and
debt securities. During the years ended June 30, 1999 and 1998, the Company's
loan originations totaled $28.4 million and $25.0 million, respectively.
Purchases of mortgage-backed securities and debt securities totaled $21.0
million and $16.7 million for the years ended June 30, 1999 and 1998,
respectively. These activities were funded primarily by deposit growth and
principal payments on loans, mortgage-backed securities, debt and equity
securities and capital raised in the initial public offering. Loan sales did not
provide an additional source of liquidity during the years ended June 30, 1999
and 1998, as the Company generally originates loans for retention in its
portfolio.
The Company experienced a net increase in total deposits of $4.0 million and
$6.5 million for the years ended June 30, 1999 and 1998, respectively. Deposit
flows are affected by the level of interest rates, the interest rates and
products offered by local competitors, and other factors.
The Company monitors its liquidity position on a daily basis. Excess short-term
liquidity is usually invested in overnight federal funds sold. In the event the
Company requires funds beyond its ability to generate them internally,
additional sources of funds are available through the use of short-term FHLB
advances and a credit facility made available to the Company by another
financial institution. There have been no borrowings outstanding during any of
the periods presented.
Loan commitments totaled $3.8 million at June 30, 1999 and were comprised of
$0.3 million in commitments to originate adjustable rate loans and $3.5 million
in commitments to originate fixed rate loans. The Company anticipates that it
will have sufficient funds available to meet current loan commitments.
Certificates of deposit, which are scheduled to mature in one year or less from
June 30, 1999, totaled $26.1 million. Based upon the Company's experience and
its current pricing strategy, management believes that a significant portion of
such deposits will remain with the Company.
At June 30, 1999, the Bank exceeded all of its regulatory capital requirements.
The Company's most liquid assets are cash and interest-bearing demand accounts.
The levels of these assets are dependent on the Company's operating, financing,
lending and investing activities during any given period. At June 30, 1999, cash
and interest-bearing demand account totaled $6.1 million, or 4.0% of total
assets. Also at June 30, 1999, U.S. Government and agency securities and
municipal bonds due in less than one year totaled $4.8 million, or 3.1% of total
assets, and the Company's portfolio of such securities due in less than five
years totaled $21.1 million, or 13.8% of total assets.
Impact of New Accounting Standards
FASB Statement on Derivatives and Hedging Activities. In June 1998, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") SFAS No. 133 which establishes accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
No. 133 requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial condition at fair value. If certain
conditions are met, a derivative may be specifically designated as a fair value
hedge, a cash flow hedge, or a foreign currency hedge. A specific accounting
treatment applies to each type of hedge. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000 and, accordingly,
will be adopted by the Company in the fiscal year beginning on July 1, 2000. The
Company has not engaged in derivatives and hedging activities covered by the new
standard, and does not expect to begin such activities. Accordingly, SFAS No.
133 is not expected to have a material impact on the Company's consolidated
financial statements.
Capability of the Company's Data Processing to Accommodate the Year 2000
Like many financial institutions, the Company relies upon computers for the
daily conduct of its business and for data processing. There is concern that on
January 1, 2000 computers will be unable to "read" the new year and as a
consequence, there may be widespread computer malfunctions. The Company uses an
outside data processing servicer. Management developed a formal written plan to
resolve any concern about the year 2000 issue and focused on the computer
applications and hardware to ensure that they will be able to read the year
2000. Testing of mission-critical systems was completed, as well as overall
testing, and all applications which were not expected to be "Y2K Ready" have
been upgraded to compliant versions, and re-tested. The Company, in its
assessment phase, recognized that a large percentage of the hardware was not
upgradable and had to be replaced. All hardware replacement and contingency
plans were completed during the second calendar quarter of 1999.
<PAGE>
The Company has contacted each of its data processing vendors to ensure that
they will be able to provide service in light of the year 2000 issue. Direct
testing with those vendors was performed whenever participation was available.
Such vendors have represented to management that they are addressing the year
2000 issue and they expect to be able to provide the services for which the
Company has contracted. Management receives regular reports and documentation of
the efforts of the vendors and will continue to monitor this issue, reporting to
the Board of Directors on a quarterly basis. In considering the year 2000
readiness of the Company's major borrowers, management first determined that no
borrower currently has been extended credit exceeding 10% of the Company's
capital. Management has also contacted the Company's larger borrowers, and has
received assurance that date sensitivity is not an issue with such borrowers.
Finally, management has evaluated the date sensitivity of the Company's
non-information technology, such as utilities and its components (including
elevators, heating/air conditioning systems, alarms and video equipment). These
utilities and components are either not computer-driven or are expected to
function normally after year 2000.
Costs related to the year 2000 issue have been expensed as they have been
incurred, except for the costs, if any, for new hardware purchased, which has
been capitalized. Management budgeted $200,000 for updating its hardware and
software systems to ensure compliance. Other than this budgeted expenditure,
management does not expect additional material costs to be incurred in
connection with the year 2000 issue.
The costs of the project are based on management's best estimates, which were
derived using numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. There can be no guarantee, however, that these estimates will be
achieved, and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes and similar uncertainties. In
addition, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of selected financial data for the years ended June 30, 1999 and 1998
is as follows:
First Second Third Fourth
(In Thousands Except Per Share Data) Quarter Quarter Quarter Quarter
Fiscal 1999
Interest income $2,472 $2,448 $2,494 $2,528
Net interest income 1,173 1,177 1,337 1,385
Provision for losses 45 45 45 45
Income before provision for income taxes 402 (162) 479 398
Net income (loss) 249 (94) 316 397
Earnings per common share--Basic NA NA 0.15 0.17
Fiscal 1998
Interest income $2,400 $2,362 $2,380 $2,361
Net interest income 1,168 1,131 1,154 1,083
Provision for losses 15 15 45 45
Income before provision for income taxes 533 475 375 320
Net income (loss) 341 343 257 209
Earnings per common share--Basic NA NA NA NA
Earnings per common share have not been presented prior to December 30, 1999,
(the date of the public offering) as no shares were outstanding and such
information would not be meaningful.
COMMON STOCK AND RELATED MATTERS
The Company's common stock is listed on the NASDAQ Small-Cap Market under the
symbol "GCBC." As of July 31, 1999, the Company had four registered market
makers, 766 stockholders of record (excluding the number of persons or entities
holding stock in street name through various brokerage firms), and 1,957,057
shares outstanding. As of such date, Greene County Bancorp, MHC (the "Mutual
Company"), the Company's mutual holding company, held 1,047,560 shares of common
stock and stockholders other than the Mutual Company held 909,497 shares.
The following table sets forth market price and dividend information for the
Common Stock since the completion of the Company's initial public offering,
which was completed on December 30, 1998.
Cash
Fiscal Year Ended Dividends
June 30, 1999 High Low Declared
Third quarter $9 35/64 $8 13/32 --
Fourth quarter $8 55/64 $7 1/2 --
Payment of dividends on the Company's common stock is subject to determination
and declaration by the Board of Directors and depends upon a number of factors,
including capital requirements, regulatory limitations on the payment of
dividends, the Company's results of operations and financial condition, tax
considerations and general economic conditions. No assurance can be given that
dividends will be declared or, if declared, what the amount of dividends will
be, or whether such dividends, once declared, will continue.
<PAGE>
GREENE COUNTY BANCORP, INC.
INDEPENDENT AUDITORS' REPORT
[LOGO]
PricewaterhouseCoopers LLP
State Street Centre
at 80 State Street
Albany, NY 12207-2591
Telephone (518) 462 2030
Facsimile (518) 427 4499
To the Board of Directors and Shareholders
Greene County Bancorp, Inc.
In our opinion, the accompanying consolidated statements of financial condition
and the related consolidated statements of income, comprehensive income,
shareholders' equity and of cash flows present fairly, in all material respects,
the financial position of Greene County Bancorp, Inc. and its subsidiary at June
30, 1999 and 1998, and the results of their operations and their cash flows for
the years then ended in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
August 27, 1999
<PAGE>
GREENE COUNTY BANCORP, INC.
Consolidated Statements of Financial Condition
As of June 30, 1999 and 1998
1999 1998
ASSETS
Cash and due from banks $ 2,784,524 $ 2,476,032
Federal funds sold 3,351,222 5,796,051
Total cash and cash equivalents 6,135,746 8,272,083
Investment securities, at fair value 49,662,206 47,078,335
Federal Home Loan Bank stock, at cost 765,600 700,000
Loans 91,829,423 81,191,211
Less: allowance for possible loan losses (791,897) (728,478)
Unearned origination fees and costs, net (239,717) (202,771)
Net loans receivable 90,797,809 80,259,962
Premises and equipment 3,513,906 2,584,281
Accrued interest receivable 1,130,744 1,091,120
Prepaid expenses and other assets 461,162 143,600
Other real estate owned 176,850 123,548
Total assets $ 152,644,023 $ 140,252,929
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing deposits $ 9,468,291 $ 7,565,660
Interest bearing deposits 118,531,180 116,445,629
Total deposits 127,999,471 124,011,289
Accrued interest and other liabilities 436,874 509,314
Accrued income taxes 285,812 2,101
Total liabilities 128,722,157 124,522,704
Shareholders' Equity
Common stock, par value $.10 per share
authorized 4,000,000 issued and
outstanding 1,957,057 at June 30, 1999 195,706 --
Additional Paid-In Capital 8,202,655 --
Retained Earnings 16,354,339 15,487,825
Accumulated Other Comprehensive Income (118,394) 242,400
Less: Unearned ESOP shares--68,971
shares at cost (712,440)
Total shareholders' equity 23,921,866 15,730,225
Total liabilities and shareholders' equity $ 152,644,023 $ 140,252,929
The accompanying notes are an integral part of the financial statements.
<PAGE>
GREENE COUNTY BANCORP, INC.
Consolidated Statements of Income
For the Years Ended June 30, 1999 and 1998
1999 1998
Interest income:
Loans $ 6,635,055 $ 6,367,282
Investment securities 2,250,266 2,291,054
Mortgage-backed securities 279,959 110,488
Tax free securities 411,568 341,222
Interest bearing deposits and
federal funds sold 364,853 393,310
9,941,701 9,503,356
Interest expense:
Interest on deposits 4,869,240 4,967,487
Net interest income 5,072,461 4,535,869
Less: provision for loan losses 180,000 120,000
Net interest income after provision
for loan losses 4,892,461 4,415,869
Noninterest income:
Service charges on deposit accounts 305,612 251,188
Other operating income 237,647 185,479
Total other income 543,259 436,667
Noninterest expense:
Salaries and employee benefits 1,823,901 1,571,650
Occupancy expense 279,230 208,381
Equipment and furniture expense 239,514 185,476
Service fees 435,686 326,404
Charitable Foundation contribution expense 484,150 --
Office Supplies 112,957 101,497
Other 943,174 755,851
Total other expenses 4,318,612 3,149,259
Income before provision for
income taxes 1,117,108 1,703,277
Provision for income taxes:
Current 423,764 565,609
Deferred (174,170) (12,248)
Total provision for income taxes 249,594 553,361
Net income $ 867,514 $ 1,149,916
The accompanying notes are an integral part of the financial statements.
<PAGE>
GREENE COUNTY BANCORP, INC.
Consolidated Statements of Comprehensive Income
1999 1998
Net Income $ 867,514 $1,149,916
Unrealized holding gains (losses) arising
during the years ended June 30, 1999
and 1998 net of tax benefit (expense)
of $240,913 and $(115,600), respectively (381,194) 174,400
Reclassification adjustment, net of income
tax benefit $13,600 20,400 --
Total other comprehensive income (loss) (360,794) 174,400
Comprehensive Income $ 506,720 $1,324,316
The accompanying notes are an integral part of the financial statements.
<PAGE>
GREENE COUNTY BANCORP, INC.
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
Accumulated
Additional Other Unearned Total
Common Stock Paid-In Retained Comprehensive ESOP Shareholders'
Shares Amount Capital Earnings Income Shares Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1997 -- $ -- $ -- $14,337,909 $ 68,000 $ -- $14,405,909
Net income 1,149,916 1,149,916
Change in unrealized
gain on securities
available for sale,
net of applicable
deferred income taxes 174,400 174,400
Balance at June 30, 1998 -- $ -- $ -- $15,487,825 $ 242,400 $ -- $15,730,225
Balance at June 30, 1998 -- $ -- $ -- $15,487,825 $ 242,400 $ -- $15,730,225
Net proceeds from sale
of common stock 1,918,642 191,864 7,824,845 8,016,709
Issuance of common
stock to Charitable
Foundation 38,415 3,842 380,308 384,150
Capital Contribution
to Greene County
Bancorp, MHC (1,000) (1,000)
ESOP shares earned (2,498) 33,350 30,852
ESOP shares acquired (745,790) (745,790)
Net Income 867,514 867,514
Change in unrealized
gain on securities
available for sale, net
of applicable deferred
income taxes (360,794) (360,794)
Balance at June 30, 1999 1,957,057 $195,706 $8,202,655 $16,354,339 $(118,394) $(712,440) $23,921,866
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
GREENE COUNTY BANCORP, INC.
Consolidated Statements of Cash Flows
For the Years Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Net Income $ 867,514 $ 1,149,916
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 210,000 147,128
Net (accretion) amortization of security premiums and discounts 60,769 (161,533)
Provisions for loan losses 180,000 120,000
ESOP compensation expense 33,350 --
Contribution expense 384,150 --
Loss on sale of investments 34,298 --
Loss on sale of other real estate -- 2,793
Provision (credit) for deferred income taxes (174,171) (12,248)
Net change in unearned loan fees and costs 36,946 (12,848)
Net change in accrued income taxes 283,711 --
Net (increase) decrease in accrued interest receivable (39,624) (48,580)
Net (increase) decrease in prepaids and other assets (120,117) 11,571
Net (decrease) increase in other liabilities 87,879 (235,666)
Net cash provided by operating activities 1,844,705 960,533
Cash flows from investing activities:
Proceeds from maturities securities 11,792,084 7,686,731
Proceeds from sale of securities 1,282,738 --
Purchases of securities (19,119,980) (12,651,981)
Principal payments on securities 2,873,139 2,423,055
Principal payments on mortgage-backed securities 1,923,676 1,923,198
Purchases of mortgage-backed securities (1,997,793) (4,024,423)
Proceeds from maturities of mortgage-backed securities -- 325,809
Purchase of FHLB stock (65,600) --
Proceeds from sale of other real estate 126,969 179,699
Net increase in loans receivable (10,915,848) (4,971,125)
Purchases of premises and equipment (1,139,625) (1,060,217)
Net cash used by investing activities (15,240,240) (10,169,254)
Cash flows from financing activities:
Net proceeds from issuance of common stock 8,016,709 --
Purchase of unallocated ESOP shares (745,790) --
Net increase in deposits 3,988,279 6,592,734
Net cash provided by financing activities 11,259,198 6,592,734
Net decrease in cash and cash equivalents (2,136,337) (2,615,987)
Cash and cash equivalents at beginning of period 8,272,083 10,888,070
Cash and cash equivalents at end of period $ 6,135,746 $ 8,272,083
Cash paid during the period for:
Interest $ 4,869,960 $ 4,967,903
Income taxes $ 138,000 $ 833,551
Noncash investing activity:
Foreclosed loans transferred to other real estate $ 180,271 $ 252,007
Change in unrealized gain (loss) securities $ (381,194) $ 174,400
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
GREENE COUNTY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Greene County
Bancorp, Inc. (the "Company" ) and its subsidiary ,The Bank of Greene County
(the "Bank"). All material intercompany accounts and transactions have been
eliminated. The Company utilizes the accrual method of accounting for financial
reporting purposes. Amounts in the prior years' consolidated financial
statements have been reclassified whenever necessary to conform to the current
year's presentation. These reclassifications had no effect on net income or
retained earnings as previously reported.
Nature of Operations
The Bank has four full service offices and an operations center located in its
market area consisting of Greene County, New York. The Bank is primarily engaged
in the business of attracting deposits from the general public in the Bank's
market area, and investing such deposits, together with other sources of funds,
in loans and investment securities.
Reorganization and Stock Offering
Greene County Bancorp, Inc. is a Delaware corporation organized in December 1998
by The Bank of Greene County in connection with the conversion of the Bank from
a New York chartered mutual savings bank to a New York chartered stock savings
bank and reorganization to a two-tiered mutual holding company. The Company was
formed for the purpose of acquiring all of the capital stock of the Bank upon
completion of the reorganization. As part of the reorganization, the Company
issued approximately 44.5% of the shares of its common stock to eligible
depositors of the Bank and the Bank's Employee Stock Option Plan (the "ESOP")
and issued approximately 53.5% of the Company's shares of common stock to Greene
County Bancorp, MHC (the "MHC"), a New York state-chartered mutual holding
company. Concurrent with the close of the offering, the remaining 2% of the
Company's shares of common stock were issued to The Bank of Greene County
Charitable Foundation (the "Foundation"). The reorganization and offering were
completed on December 30, 1998. Prior to that date, the Company had no assets
and no liabilities. The financial statements presented for periods prior to the
reorganization are for the Bank as the predecessor entity to the Company.
Completion of the offering resulted in the issuance of 1,957,057 shares of
common stock, 1,047,560 shares (53.5%) of which were issued to the MHC, 871,082
shares (44.5%) of which were sold to eligible depositors of the Bank and issued
to the Bank's ESOP, and 38,415 shares (2%) of which were issued to the
Foundation, at $10.00 per share. Costs related to the offering, primarily
marketing fees paid to investment banking firms, professional fees, registration
fees, and printing and mailing costs, were $694,211; the net proceeds of the
offering excluding these costs amounted to $8,016,709. The Bank's ESOP acquired
36,380 shares at issuance and purchased an additional 36,380 shares in the open
market after the initial offering.
The Bank established a liquidation account, as of the date of conversion, in the
amount of $15.7 million, equal to its net worth as of the date of the latest
consolidated statements of financial condition appearing in the final
prospectus. The liquidation account is maintained for the benefit of eligible
preconversion account holders who continue to maintain their accounts at the
Bank after the date of conversion. The liquidation account will be reduced
annually to the extent that eligible account holders have reduced their
qualifying deposits as of each anniversary date. Subsequent increases will
restore an eligible account holder's interest in the liquidation account. In the
event of a complete liquidation, each eligible account holder will be entitled,
under New York State Law, to receive a distribution from the liquidation account
in an amount equal to their current adjusted account balances for all such
depositors then holding qualifying deposits in the Bank.
Charitable Foundation
As part of the reorganization and Conversion, the Company established the
Foundation which is dedicated exclusively to supporting charitable causes and
community development activities in Greene County, New York. The Foundation was
funded in December 1998 with $384,150 of common stock (38,415 shares), and
$100,000 cash contributed by the Company. A one-time charge of $484,150 is
reflected in 1999 for this contribution. The contribution will be fully tax
deductible, subject to an annual limitation based upon the Company's taxable
income.
<PAGE>
Use of Estimates
The preparation of 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 financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks,
interest-bearing deposits (with original maturity of three months or less) and
federal funds sold. Generally, federal funds are for one-day periods. The
carrying amounts reported in the balance sheet for cash and cash equivalents
approximate those assets' fair values. The amounts of interest bearing deposits
included as cash equivalents at June 30, 1999 and 1998 were approximately
$3,939,000 and $6,541,000, respectively.
Investment Securities
The Company has classified its investments in debt and equity securities as
available for sale. Available for sale securities are reported at fair value,
with net unrealized gains and losses reflected as a separate component of
shareholders' equity, net of applicable income taxes.
Realized gains or losses on investment security transactions are based on the
specific identification method and are reported under other income. Fair values
of investment securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments. Premiums and discounts are amortized and
accreted, respectively, using methods that approximate the effective yield
method over the remaining contractual maturity, adjusted for anticipated
prepayments.
Loans
Loans are carried at the lower of cost or market. Interest on loans is accrued
and credited to income based upon the principal amount outstanding. Unearned
discount on installment loans is recognized as income over the term of the loan,
principally using a method that approximates the effective yield method.
Nonrefundable loan fees and related direct costs are deferred and amortized over
the life of the loan as an adjustment to loan yield using the effective interest
method.
Fair values for variable rate loans that reprice frequently, with no significant
credit risk, are based on carrying values. Fair values for fixed rate loans are
estimated using discounted cash flows and interest rates currently being offered
for loans with similar terms to borrowers of similar credit quality. The
carrying amount of accrued interest approximates fair value.
Allowance for Possible Loan Losses
The allowance for loan losses is maintained at a level considered adequate to
provide for potential loan losses. The allowance is increased by a provision for
loan losses, charged to expense, and reduced by net charge-offs. The level of
the allowance is based on management's evaluation of the collectibility of the
loan portfolio, including the nature of the portfolio, credit concentrations,
trends in historical loss experience, specific impaired loans and economic
conditions. The Bank considers residential mortgages, home equity loans and
installment loans to customers small, homogeneous loans which are evaluated for
impairment collectively based on historical loss experience. Commercial mortgage
and business loans are considered impaired if it is probable that the Bank will
not be able to collect scheduled payments of principal and interest when due,
according to the contractual terms of the loans agreement. The measurement of
impaired loans is generally based on the present value of estimated future cash
flows, except that all collateral dependent loans are measured for impairment
based on the fair value of the collateral.
Income Recognition on Impaired and Nonaccrual Loans
The Bank generally places a loan, including impaired loans, on nonaccrual status
when it is specifically determined to be impaired or when principal and interest
is delinquent for 90 days or more. Any unpaid interest previously accrued on
these loans is reversed from income. When a loan is specifically determined to
be impaired, collection of interest and principal are generally applied as a
reduction to principal outstanding. Interest income on all other nonaccural
loans is recognized on a cash basis.
Premises and Equipment
Premises and equipment are stated at cost. Depreciation is computed using
principally the straight-line method over the estimated useful lives of the
related assets (39 years for building and improvements, 3-8 years for furniture
and equipment). Maintenance and repairs are typically charged to expense when
incurred. Gains and losses from sales or other dispositions of depreciable
property are included in current operations.
<PAGE>
Other Real Estate
Properties acquired through foreclosure, or by deed in lieu of foreclosure, are
carried at the lower of cost (fair value at the date of foreclosure) or fair
value less estimated disposal costs.
Deposits
Fair values disclosed for demand and savings deposits are equal to the carrying
amounts at the reporting date. The carrying amounts for variable rate money
market and certificates of deposit approximate fair values at the reporting
date. Fair values for fixed rate certificates of deposit are estimated using
discounted cash flows and interest rates currently being offered on similar
certificates. The carrying value of accrued interest approximates fair value.
Income Taxes
Provisions for income taxes are based on tax currently payable or refundable and
deferred income taxes on temporary differences between the tax basis of assets
and liabilities and their reported amounts in the financial statements. Deferred
tax assets and liabilities are reported in the financial statements at currently
enacted income tax rates applicable to the period in which the deferred tax
assets and liabilities are expected to be realized or settled.
Earnings Per Share
Earnings per share were not presented since the Company completed its offering
on December 30, 1998, and accordingly, such information is not meaningful.
2. Balance at Other Banks
The Bank is required to maintain certain reserves of vault cash and/or deposits
with the Federal Reserve Bank. The amount of this daily average reserve
requirement, included in cash and due from banks, was approximately $352,000 and
$269,000 at June 30, 1999 and 1998, respectively.
3. Investment Securities
Securities available-for-sale at June 30, 1999, consist of the following:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury $ 7,343,998 $ 93,362 $ -- $ 7,437,360
U.S. Government agencies 5,550,829 19,869 55,345 5,515,353
State and political subdivisions 10,272,901 175,587 89,452 10,359,036
Mortgage-backed securities 5,270,498 17,049 54,613 5,232,934
Asset-backed securities 8,480,225 1,960 37,424 8,444,761
Corporate debt securities 11,739,192 18,609 279,380 11,478,421
Total Debt securities 48,657,643 326,436 516,214 48,467,865
Equity securities and other 87,439 -- -- 87,439
Mutual funds 1,114,831 -- 7,929 1,106,902
Total Securities available for sale $49,859,913 $326,436 $524,143 $49,662,206
</TABLE>
<PAGE>
Securities available-for-sale at June 30, 1998, consist of the following:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury $12,969,356 $221,625 $ 1,216 $13,189,765
U.S. Government agencies 8,569,188 59,086 7,793 8,620,481
State and political subdivisions 7,389,943 101,296 11,652 7,479,587
Mortgage-backed securities 5,196,204 8,442 15,586 5,189,060
Asset-backed securities 6,304,752 20,227 1,296 6,323,683
Corporate debt securities 3,735,833 64,429 1,466 3,798,796
Total debt securities 44,165,276 475,105 39,009 44,601,372
Equity securities and other 81,454 -- -- 81,454
Foreign obligations 75,000 -- -- 75,000
Mutual funds 2,352,605 -- 32,096 2,320,509
Total Securities available for sale $46,674,335 $475,105 $71,105 $47,078,335
</TABLE>
The amortized cost and estimated fair value of debt securities at June 30,
1999 by contractual maturity are shown below. Expected maturities may differ
from contractual maturities, because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Amortized Estimated
Cost Fair Value
Amounts maturing in:
One year or less $ 4,923,083 $ 4,984,023
After one year through five years 27,600,097 27,515,044
After five years through ten years 8,155,167 8,054,941
After ten years 7,979,296 7,913,856
$48,657,643 $48,467,864
The Bank participates in a securities lending program with the custodian of
substantially all Bank securities. Under the terms of the agreement, the
custodian acts as an agent for the Bank and loans available securities to
borrowers. At June 30, 1999, and 1998, $1.9 million and $4.9 million,
respectively, of securities were on loan under this program.
During fiscal year 1999, proceeds from sale of available for sale securities
were $1,282,738. Gross realized losses on such sales were $34,298. There were no
realized gains. The cost of securities sold was determined using the specific
identification method. There were no sales of securities during 1998.
There were no pledged securities at June 30, 1999 or June 30, 1998.
4. Loans
Major classifications of loans at June 30, 1999 and 1998, were summarized as
follows:
1999 1998
Real estate mortgages:
Residential $76,638,646 $64,705,332
Commercial 3,985,469 5,706,421
Home equity loans 4,688,915 4,727,206
Commercial loans 1,230,945 1,336,229
Installment loans to individuals 4,760,587 4,171,688
Passbook loans to individuals 524,861 544,335
$91,829,423 $81,191,211
At June 30, 1999 and 1998, loans to officers and directors were not significant.
<PAGE>
Changes in the allowance for possible loan losses for the respective periods
ended June 30 were as follows:
1999 1998
Balance, beginning of year $ 728,478 $ 723,019
Provision charged to expense 180,000 120,000
Loans charged off (125,971) (126,224)
Recoveries 9,390 11,683
$ 791,897 $ 728,478
At June 30, 1999 and 1998, the Bank's impaired loans for which specific
valuation allowances were recorded were not significant. Nonaccrual loans
amounted to $682,000 at June 30, 1999 and $884,000 at June 30, 1998.
5. Premises and Equipment
A summary of premises and equipment at June 30, 1999 and 1998, is as follows:
1999 1998
Land $ 425,702 $ 409,702
Buildings and improvements 2,754,157 2,156,500
Furniture and equipment 2,385,538 1,859,570
Less: accumulated depreciation (2,051,491) (1,841,491)
$ 3,513,906 $ 2,584,281
6. Deposits
Major classifications of deposits at June 30, 1999 and 1998, were summarized as
follows:
1999 1998
Noninterest bearing checking $ 9,468,291 $ 7,565,563
Interest bearing deposits:
Time accounts 52,177,128 54,990,558
Savings accounts 54,669,439 51,213,316
Money market deposit accounts 3,940,326 4,055,234
NOW accounts 7,744,287 6,186,618
Total Deposits $127,999,471 $124,011,289
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $5,516,000 and $6,672,000 at June 30, 1999 and 1998,
respectively.
7. Income Taxes
The provision for income taxes consists of the following:
1999 1998
Current:
Federal $ 372,072 $ 471,448
State 51,692 94,161
Total current 423,764 565,609
Deferred (174,170) (12,248)
Total income tax expense $ 249,594 $ 553,361
The Bank's effective tax rate differs from the federal statutory rate as
follows:
1999 1998
Tax based on federal statutory rate 34.0% 34.0%
State income taxes, net of federal benefit 1.4 3.7
Tax-exempt income (11.0) (5.7)
Other, net (2.1) 0.5
Total income tax expense 22.3% 32.5%
<PAGE>
The components of the deferred tax assets and liabilities at June 30 were as
follows:
1999 1998
Deferred tax assets:
Allowance for loan losses $224,265 $184,414
Charitable contribution carryover 144,806 --
Capital loss carryover 13,697 --
Investments 51,438 --
Nonaccruing interest 13,123 34,739
Total deferred tax assets $447,329 $219,153
Deferred tax liabilities:
Depreciation $185,417 $160,069
Investments -- 219,403
ESOP Contribution 16,467 --
Total deferred tax liabilities $201,884 $379,472
A portion of the change in the net deferred tax asset related to the unrealized
gains and losses on securities available-for-sale. The related deferred tax
(benefit) expense of ($240,913) and $115,600 has been recorded directly to
shareholders' equity in 1999 and 1998, respectively.
No deferred tax asset valuation allowance was deemed required at June 30, 1999,
or 1998.
8. Commitments and Contingent Liabilities
The Bank enters into financial agreements in the normal course of business that
have off-balance sheet risk. These arrangements include commitments to extend
credit and involve, to varying degrees, elements of credit risk in excess of the
amount recognized on the statement of financial condition.
The Bank uses the same credit policies in making commitments as it does for
on-balance sheet instruments.
Contract amounts of financial instruments that represent credit risk at June 30,
1999, are as follows:
Commercial lines of credit $ 296,000
Commitments to extend credit 3,522,820
$3,818,820
Commitments to extend credit and commercial lines of 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 many of the
commitments are expected to expire without being fully drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Bank evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral, if any, required by the Bank upon the extension of
credit is based on management's credit evaluation of the customer. Commitments
to extend credit are primarily collaterallized by first liens on real estate.
Collateral on extensions of commercial lines of credit varies but may include
accounts receivable, inventory, property, plant and equipment, and income
producing commercial property.
9. Employee Benefit Plans
Defined Benefit Pension Plan
Substantially all Bank employees who have completed one year of service and
attained the age of 21 are covered by a noncontributory, multi-employer defined
benefit pension plan. Under the plan, retirement benefits are primarily a
function of both years of service and level of compensation. The Bank recognized
pension expense in the amount of $120,000 and $102,000 in 1999 and 1998,
respectively.
<PAGE>
Defined Contribution Plan
The Bank also participates in a multi-employer defined contribution plan
covering substantially all employees who have completed one year of service. The
plan includes Section 401(k) and thrift provisions as defined under the Internal
Revenue Code. The provisions permit employees to contribute up to 20% of their
total compensation on a pre-tax basis. The Bank matches 50% of the first 6% of
employee contributions. Company contributions associated with the plan amounted
to $47,000 and $56,000 in 1999 and 1998, respectively.
ESOP
All Bank employees meeting the age and service requirements are eligible to
participate in the ESOP established effective January 1, 1998 in conjunction
with the reorganization. Acquisitions of unearned ESOP shares by the Bank were
funded through a borrowing from the Company, which is repayable annually with
interest at the prime rate over ten years. Shares are committed for release upon
repayment of the borrowing and are allocated to participants based on
compensation. Participant's benefits become 100% vested after five years of
service. ESOP expense was $30,852 for year ended June 30, 1999. There were no
ESOP expenses recorded for the year ended June 30, 1998. At June 30, 1999 there
were 68,971 shares unearned. No shares have been released for allocation as of
June 30, 1999.
10. Line of Credit
At June 30, 1999, the Bank had available a line of credit from another financial
institution for $1,000,000. The line is collateralized by investment securities
with interest based on the federal funds rate. At June 30, 1999, there was no
outstanding balance on this line of credit.
11. Concentrations of Credit Risk
The Bank grants residential, consumer and commercial loans to customers
primarily located in Greene County, New York and to a limited extent in the
contiguous counties. Although the Bank has a diversified loan portfolio, a
substantial portion of its debtors' ability to honor their contracts is
dependent upon employment and other economic factors throughout Greene County.
12. Fair Value of Financial Instruments
The Company determines fair values based on quoted market values, where
available, or on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimate of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument. SFAS No. 107 "Disclosure About Fair Value of Financial Instruments,"
excludes certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company. The methods to determine
the fair value for each financial instrument are described in Note 1. The
carrying amounts and estimated fair value of financial instruments as of June
30, 1999 and 1998 are as follows:
June 30, 1999 June 30, 1998
Carrying Fair Carrying Fair
(In Thousands) Amount Value Amount Value
Cash and short-term investments $ 6,136 $ 6,136 $ 8,272 $ 8,272
Investment securities 49,662 49,662 47,078 47,078
FHLB 765 765 700 700
Net Loans 90,798 91,237 80,260 81,453
Deposits 127,999 126,372 124,011 122,427
<PAGE>
13. Regulatory Matters
The Company is subject to various regulatory capital requirements administered
by federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material impact on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classifications 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 to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of June 30, 1999, that the Company
meets all capital adequacy requirements to which it is subject.
<TABLE>
<CAPTION>
To be Well
Capitalized
For Capital Under Prompt
Actual Adequacy Purposes Action Provisions
<S> <C> <C> <C> <C> <C> <C>
(In Thousands of Dollars) Amount Ratio Amount Ratio Amount Ratio
As of June 30, 1999
Total capital (to risk weighted assets) $24,888 28% $7,091 8% $8,863 10%
Tier I capital (to risk weighted assets) $24,096 27% $3,545 4% $5,318 6%
Tier I capital (to average assets) $24,096 16% $5,984 4% $7,481 5%
</TABLE>
<TABLE>
<CAPTION>
To be Well
Capitalized
For Capital Under Prompt
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998
Total capital (to risk weighted assets) $16,216 21% $6,098 8% $7,622 10%
Tier I capital (to risk weighted assets) $15,488 20% $3,049 4% $4,574 6%
Tier I capital (to average assets) $15,488 11% $5,588 4% $6,985 5%
</TABLE>
14. Subsequent Events
The Board of Directors approved a 10% stock dividend on July 6, 1999, for
shareholders of record July 26, 1999, effective August 9, 1999.
The Board of Directors also approved a stock repurchase program on July 6, 1999,
whereby the Company may repurchase up to 107,638 shares, or approximately 5%, of
the Company's outstanding shares, at purchase prices not to exceed in the
aggregate $1.2 million.
<PAGE>
SHAREHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Shareholders will be held at 5:00 p.m. on October 27,
1999, at the Bank's main branch located at 425 Main Street in Catskill, New York
STOCK LISTING
Shares of Greene County Bancorp, Inc. are traded on the NASDAQ Small-Cap Market
under the symbol GCBC.
SPECIAL COUNSEL
Luse Lehman Gorman Pomerenk & Schick, P.C.
5335 Wisconsin Avenue, N.W., Suite 400
Washington, D.C. 20015
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP
State Street Centre
80 State Street
Albany, New York 12207
TRANSFER AGENT AND REGISTRAR
American Securities Transfer & Trust, Inc.
Denver, Colorado
303-986-5400
ANNUAL REPORT ON FORM 10-KSB
A copy of the Company's Form 10-KSB for the fiscal year ended June 30, 1999,
will be furnished without charge to shareholders upon written request to the
Secretary, Greene County Bancorp, Inc., 302 Main Street, Catskill, New York
12414.
BOARD OF DIRECTORS
Top row, left to right
Paul Slutzky
Raphael Klein
J. Bruce Whittaker
David Jenkins, DVM
Bottom row, left to right
Martin Smith
Walter Ingalls
Richard Buck
Dennis O'Grady
Not pictured
Anthony Camera
<PAGE>
[LOGO]
Operations Center: 302 Main Street, Catskill, New York 12414
Mailing Address: PO Box 470, Catskill, New York 12414
(518) 943-2600
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Company Percent Owned
- ------- -------------
The Bank of Greene County 100% owned by the Company
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 2,784,524
<INT-BEARING-DEPOSITS> 118,531,180
<FED-FUNDS-SOLD> 3,351,222
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 49,662,206
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 91,829,423
<ALLOWANCE> 791,897
<TOTAL-ASSETS> 152,644,023
<DEPOSITS> 127,999,471
<SHORT-TERM> 0
<LIABILITIES-OTHER> 722,686
<LONG-TERM> 0
0
0
<COMMON> 195,706
<OTHER-SE> 23,726,160
<TOTAL-LIABILITIES-AND-EQUITY> 152,644,023
<INTEREST-LOAN> 6,940,667
<INTEREST-INVEST> 2,941,793
<INTEREST-OTHER> 364,853
<INTEREST-TOTAL> 9,941,701
<INTEREST-DEPOSIT> 4,869,240
<INTEREST-EXPENSE> 4,869,240
<INTEREST-INCOME-NET> 5,072,461
<LOAN-LOSSES> 180,000
<SECURITIES-GAINS> 34,298
<EXPENSE-OTHER> 4,318,612
<INCOME-PRETAX> 1,117,108
<INCOME-PRE-EXTRAORDINARY> 1,117,108
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 867,514
<EPS-BASIC> 0.42
<EPS-DILUTED> 0.42
<YIELD-ACTUAL> 6.84
<LOANS-NON> 668,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 728,478
<CHARGE-OFFS> 125,971
<RECOVERIES> 9,390
<ALLOWANCE-CLOSE> 791,897
<ALLOWANCE-DOMESTIC> 791,897
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 69,000
</TABLE>
