In June 2016, the FASB issued an Update (ASU 2016-13) to its guidance on “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (CECL) model). Under this model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date of initial recognition of that instrument. The ASU also replaces the current accounting model for purchased credit impaired loans and debt securities. The allowance for credit losses for purchased financial assets with a more-than insignificant amount of credit deterioration since origination (“PCD assets”), should be determined in a similar manner to other financial assets measured on an amortized cost basis. However, upon initial recognition, the allowance for credit losses is added to the purchase price (“gross up approach”) to determine the initial amortized cost basis. The subsequent accounting for PCD financial assets is the same expected loss model described above. Further, the ASU made certain targeted amendments to the existing impairment model for available-for-sale (AFS) debt securities. For an AFS debt security for which there is neither the intent nor a more-likely-than-not requirement to sell, an entity will record credit losses as an allowance rather than a write-down of the amortized cost basis. For public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. An entity will apply the amendments in this Update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which aligns the implementation date for nonpublic entities’ annual financial statements with the implementation date for their interim financial statements and clarifies the scope of the guidance in the amendments in ASU 2016-13. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. ASU 2019-04 clarifies or addresses stakeholders’ specific issues about certain aspects of the amendments in Update 2016-13 related to measuring the allowance for loan losses under the new guidance. The effective dates and transition requirements for the amendments related to this Update are the same as the effective dates and transition requirements in Update 2016-13. The Company is currently evaluating the potential impact on our consolidated results of operations or financial position. The initial adjustment will not be reported in earnings and therefore will not have any material impact on our consolidated results of operations, but it is expected that it will have an impact on our consolidated financial position at the date of adoption of this Update. At this time, we have not calculated the estimated impact that this Update will have on our Allowance for Loan Losses, however, we anticipate it will have a significant impact on the methodology process we utilize to calculate the allowance. A vendor has been selected and alternative methodologies are currently being considered. Data requirements and integrity are being reviewed and enhancements incorporated into standard processes. The Company is in the early stages of evaluation and implementation of the guidance.
In March 2017, the FASB issued an Update (ASU 2017-08) to its guidance on “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20) related to premium amortization on purchased callable debt securities. The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosure about a change in accounting principle. The adoption of this guidance is not expected to have a material impact on our consolidated results of operations or financial position.
In August 2018, the FASB issued an Update (ASU 2018-13) to its guidance on “Fair Value Measurement (Topic 820)”. This update modifies the disclosure requirements on fair value measurements. The following disclosure requirements were removed from Topic 820: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; (3) the valuation processes for Level 3 fair value measurements; and (4) for nonpublic entities, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period. The following disclosure requirements were modified in Topic 820: (1) in lieu of a rollforward for Level 3 fair value measurements, a nonpublic entity is required to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities; (2) for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and (3) the amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. The following disclosure requirements were added to Topic 820; however, the disclosures are not required for nonpublic entities: (1) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. In addition, the amendments eliminate at a minimum from the phrase “an entity shall disclose at a minimum” to promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of entities and their auditors when evaluating disclosure requirements. The amendments in ASU No. 2018-13 are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU No. 2018-13 and delay adoption of the additional disclosures until their effective date. The adoption of this guidance is not expected to have a material impact on our consolidated results of operations or financial position.
In August 2018, the FASB has issued an Update (ASU No. 2018-14), “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans”, that applies to all employers that sponsor defined benefit pension or other postretirement plans. The amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The following disclosure requirements were removed from Subtopic 715-20: (1) the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year; (2) the amount and timing of plan assets expected to be returned to the employer; (3) the disclosures related to the June 2001 amendments to the Japanese Welfare Pension Insurance Law; related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan; (4) for nonpublic entities, the reconciliation of the opening balances to the closing balances of plan assets measured on a recurring basis in Level 3 of the fair value hierarchy. However, nonpublic entities will be required to disclose separately the amounts of transfers into and out of Level 3 of the fair value hierarchy and purchases of Level 3 plan assets; and (5) for public entities, the effects of a one-percentage-point change in assumed health care cost trend rates on the (a) aggregate of the service and interest cost components of net periodic benefit costs and (b) benefit obligation for postretirement health care benefits. The following disclosure requirements were added to Subtopic 715-20: (1) the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates; and (2) an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The amendments also clarify the disclosure requirements in paragraph 715-20-50-3, which state that the following information for defined benefit pension plans should be disclosed: (1) the projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets; and (2) the accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets. ASU No. 2018-14 is effective for fiscal years ending after December 15, 2020, for public business entities and for fiscal years ending after December 15, 2021, for all other entities. Early adoption is permitted for all entities. The adoption of this guidance is not expected to have a material impact on our consolidated results of operations or financial position.
In April 2019, the FASB issued an Update (ASU 2019-04), Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The amendments to Topic 326 and other Topics in this Update include items related to the amendments in Update 2016-13 discussed at the June 2018 and November 2018 Credit Losses TRG meetings. The amendments clarify or address stakeholders’ specific issues about certain aspects of the amendments in Update 2016-13 on a number of different topics, including the following: Accrued Interest, Transfers between Classifications or Categories for Loans and Debt Securities, Recoveries, Consideration of Prepayments in Determining the Effective Interest Rate, Consideration of Estimated Costs to Sell When Foreclosure Is Probable, Vintage Disclosures— Line-of-Credit Arrangements Converted to Term Loans, and Contractual Extensions and Renewals. The ASU also covered a number of issues that related to hedge accounting including: Partial-Term Fair Value Hedges of Interest Rate Risk, Amortization of Fair Value Hedge Basis Adjustments, Disclosure of Fair Value Hedge Basis Adjustments, Consideration of the Hedged Contractually Specified Interest Rate under the Hypothetical Derivative Method, Scoping for Not-for-Profit Entities, Hedge Accounting Provisions Applicable to Certain Private Companies and Not-for- Profit Entities, Application of a First- Payments-Received Cash Flow Hedging Technique to Overall Cash Flows on a Group of Variable Interest Payments, and Transition Guidance For Codification Improvements specific to ASU 2016-01, the following topics were covered within ASU 2019-04: Scope Clarifications, Held-to-Maturity Debt Securities Fair Value Disclosures, Applicability of Topic 820 to the Measurement Alternative, and Remeasurement of Equity Securities at Historical Exchange Rates. ASU 2019-04 has various implementation dates dependent on a number of factors as it pertains to the above items. The Company is in the early stages of evaluation of the guidance.
| (10) | Employee Benefit Plans |
Defined Benefit Plan
The components of net periodic pension cost related to the defined benefit pension plan for the three and nine months ended March 31, 2019 and 2018 were as follows:
| | | Three months ended March 31, | | | Nine months ended March 31, | |
| (In thousands) | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
| Interest cost | | $ | 54 | | | $ | 55 | | | $ | 162 | | | $ | 165 | |
| Expected return on plan assets | | | (59 | ) | | | (62 | ) | | | (177 | ) | | | (186 | ) |
| Amortization of net loss | | | 35 | | | | 42 | | | | 105 | | | | 126 | |
| Net periodic pension cost | | $ | 30 | | | $ | 35 | | | $ | 90 | | | $ | 105 | |
The Company made a contribution of $230,000 to the defined benefit pension plan during the nine months ended March 31, 2019. It does not anticipate that it will make any additional contributions to the defined benefit pension plan during the remainder of fiscal 2019.
SERP
The Board of Directors of Bank of Greene County adopted Bank of Greene County Supplemental Executive Retirement Plan (the “SERP Plan”), effective as of July 1, 2010. The SERP Plan benefits certain key senior executives of the Bank who have been selected by the Board to participate. The SERP Plan is intended to provide a benefit from the Bank upon retirement, death or disability or voluntary or involuntary termination of service (other than “for cause”). The SERP Plan is more fully described in Note 9 of the consolidated financial statements and notes thereto for the year ended June 30, 2018.
The net periodic pension costs related to the SERP Plan for the three and nine months ended March 31, 2019 were $165,000 and $487,000, respectively, and for the three and nine months ended March 31, 2018 were $108,000 and $316,000, respectively, consisting primarily of service costs and interest costs. The total liability for the SERP Plan was $4.6 million and $3.9 million at March 31, 2019 and June 30, 2018, respectively, and is included in accrued expenses and other liabilities. The total liability for the SERP Plan includes both accumulated net periodic pension costs and participant contributions.
| (11) | Stock-Based Compensation |
Stock Option Plan
The Company’s 2008 Option Plan expired on August 19, 2018. All options were exercised prior to June 30, 2018. A summary of the Company’s stock option activity and related information for this option plan for the nine months ended March 31, 2018 was as follows:
| | | March 31, 2018 | |
| | | Shares | | | Weighted Average Exercise Price Per Share | |
| Outstanding at beginning of year | | | 37,770 | | | $ | 6.25 | |
| Exercised | | | (24,000 | ) | | $ | 6.25 | |
| Outstanding and exercisable at period end | | | 13,770 | | | $ | 6.25 | |
The intrinsic value of options both outstanding and exercisable was $419,000 at March 31, 2018. The total intrinsic value of the options exercised during the three and nine months ended March 31, 2018 was approximately $563,000 and $666,000, respectively. There were no stock options granted during the nine months ended March 31, 2018.
Phantom Stock Option Plan and Long-term Incentive Plan
The Greene County Bancorp, Inc. 2011 Phantom Stock Option and Long-term Incentive Plan (the “Plan”) was adopted effective July 1, 2011, to promote the long-term financial success of the Company and its subsidiaries by providing a means to attract, retain and reward individuals who contribute to such success and to further align their interests with those of the Company’s shareholders. The Plan is intended to provide benefits to employees and directors of the Company or any subsidiary as designated by the Compensation Committee of the Board of Directors of the Company (“Committee”). A phantom stock option represents the right to receive a cash payment on the date the award vests. The Plan is more fully described in Note 10 of the consolidated financial statements and notes thereto for the year ended June 30, 2018.
A summary of the Company’s phantom stock option activity and related information for the Plan for the three and nine months ended March 31, 2019 and 2018 is as follows:
| | | Three months ended March 31, | | | Nine months ended March 31, | |
| | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
| Number of options outstanding, beginning of period | | | 1,742,100 | | | | 1,634,160 | | | | 1,634,160 | | | | 1,522,720 | |
| Options Granted | | | - | | | | - | | | | 592,700 | | | | 594,200 | |
| Options Forfeited | | | - | | | | - | | | | - | | | | (27,000 | ) |
| Options Paid in Cash | | | (18,000 | ) | | | - | | | | (502,760 | ) | | | (455,760 | ) |
| Number of options outstanding, end of period | | | 1,724,100 | | | | 1,634,160 | | | | 1,724,100 | | | | 1,634,160 | |
| | | Three months ended March 31, | | | Nine months ended March 31, | |
| (In thousands) | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
| Cash paid out on options vested | | $ | 41 | | | $ | - | | | $ | 1,745 | | | $ | 1,187 | |
| Compensation costs recognized | | | 810 | | | | 640 | | | | 2,021 | | | | 1,460 | |
The total liability for the Plan was $3.3 million and $3.0 million at March 31, 2019 and June 30, 2018, respectively, and is included in accrued expenses and other liabilities.
| (12) | Accumulated Other Comprehensive Loss |
The components of accumulated other comprehensive loss for the three and nine months ended March 31, 2019 and 2018 are presented in the following table:
Activity for the three months ended March 31, 2019 and 2018
(In thousands) | | Unrealized gain (losses) on securities available-for-sale | | | Pension benefits | | | Total | |
| Balance at December 31, 2017 | | $ | 290 | | | $ | (1,604 | ) | | $ | (1,314 | ) |
| Other comprehensive loss before reclassification | | | (326 | ) | | | - | | | | (326 | ) |
| Amounts reclassified from accumulated other comprehensive income | | | - | | | | - | | | | - | |
| Other comprehensive loss for the three months ended March 31, 2018 | | | (326 | ) | | | - | | | | (326 | ) |
Reclassification of stranded tax effect(1) | | | 57 | | | | (316 | ) | | | (259 | ) |
| Balance at March 31, 2018 | | $ | 21 | | | $ | (1,920 | ) | | $ | (1,899 | ) |
| | | | | | | | | | | | | |
| Balance at December 31, 2018 | | $ | 113 | | | $ | (1,633 | ) | | $ | (1,520 | ) |
| Other comprehensive income before reclassification | | | 181 | | | | - | | | | 181 | |
| Amounts reclassified from accumulated other comprehensive income | | | - | | | | - | | | | - | |
| Other comprehensive income for the three months ended March 31, 2019 | | | 181 | | | | - | | | | 181 | |
Reclassification for change in accounting(2) | | | - | | | | - | | | | - | |
| Balance at March 31, 2019 | | $ | 294 | | | $ | (1,633 | ) | | $ | (1,339 | ) |
Activity for the nine months ended March 31, 2019 and 2018
(In thousands) | | Unrealized gain (losses) on securities available-for-sale | | | Pension benefits | | | Total | |
| Balance at June 30, 2017 | | $ | 612 | | | $ | (1,604 | ) | | $ | (992 | ) |
| Other comprehensive loss before reclassification | | | (648 | ) | | | - | | | | (648 | ) |
| Amounts reclassified from accumulated other comprehensive income | | | - | | | | - | | | | - | |
| Other comprehensive loss for the nine months ended March 31, 2018 | | | (648 | ) | | | - | | | | (648 | ) |
Reclassification of stranded tax effect(1) | | | 57 | | | | (316 | ) | | | (259 | ) |
| Balance at March 31, 2018 | | $ | 21 | | | $ | (1,920 | ) | | $ | (1,899 | ) |
| | | | | | | | | | | | | |
| Balance at June 30, 2018 | | $ | 10 | | | $ | (1,633 | ) | | $ | (1,623 | ) |
| Other comprehensive income before reclassification | | | 398 | | | | - | | | | 398 | |
| Amounts reclassified from accumulated other comprehensive income | | | - | | | | - | | | | - | |
| Other comprehensive income for the nine months ended March 31, 2019 | | | 398 | | | | - | | | | 398 | |
Reclassification for change in accounting(2) | | | (114 | ) | | | - | | | | (114 | ) |
| Balance at March 31, 2019 | | $ | 294 | | | $ | (1,633 | ) | | $ | (1,339 | ) |
| | (1) | Adoption of Accounting Standard Update 2018-02, reclassification from accumulated other comprehensive loss to retained earnings for stranded tax effects resulting from newly enacted Federal corporate income tax rate from 34% to 21%. |
| (2) | Adoption of ASU 2016-01 – cumulative effect of change in measurement of equity securities. |
| (13) | Revenue from Contracts with Customers |
The majority of the Company’s revenue-generating transactions are not subject to ASC Topic 606, including revenue generated from financial instruments, such as loans and investment securities which are presented in our consolidated income statements as components of net interest income. All of the Company’s revenue from contracts with customers in the scope of ASC 606 is recognized within non-interest income, with the exception of net gains and losses from sales of foreclosed real estate, which is recognized within non-interest expense. The following table presents revenues subject to ASC 606 for the three and nine months ended March 31, 2019 and 2018, respectively.
| | | For the three months ended March 31, | | | For the nine months ended March 31, | |
| (In thousands) | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
| Service charges on deposit accounts | | | | | | | | | | | | |
| Insufficient funds fees | | $ | 855 | | | $ | 839 | | | $ | 2,782 | | | $ | 2,439 | |
| Deposit related fees | | | 39 | | | | 39 | | | | 117 | | | | 116 | |
| ATM/point of sale fees | | | 66 | | | | 54 | | | | 204 | | | | 162 | |
| Total service charges | | | 960 | | | | 932 | | | | 3,103 | | | | 2,717 | |
| Interchange fee income | | | | | | | | | | | | | | | | |
| Debit card interchange fees | | | 604 | | | | 566 | | | | 1,929 | | | | 1,723 | |
| E-commerce fee income | | | | | | | | | | | | | | | | |
| E-commerce fees | | | 31 | | | | 31 | | | | 102 | | | | 104 | |
| Investment services income | | | | | | | | | | | | | | | | |
| Investment services | | | 145 | | | | 138 | | | | 396 | | | | 332 | |
| Sales of assets | | | | | | | | | | | | | | | | |
| Net (loss) gain on sale of foreclosed real estate | | | (25 | ) | | | (20 | ) | | | (34 | ) | | | 33 | |
Service Charges on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which included services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are recognized at the time the maintenance occurs. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.
Debit Card Interchange Fee Income: The Company earns interchange fees from debit cardholder transactions conducted through the Visa DPS payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to cardholder.
E-commerce income: The Company earns fees for merchant transaction processing services provided to its business customers by a third party service provider. The fees represent a percentage of the monthly transaction activity net of related costs, and are received from the service provider on a monthly basis.
Investment Services Income: The Company earns fees from investment brokerage services provided to its customers by a third-party service provider. The Company receives commissions from the third-party service provider on a monthly basis based upon customer activity for the month. The Company (i) acts as an agent in arranging the relationship between the customer and the third-party service provider and (ii) does not control the services rendered to the customers. Investment brokerage fees are presented net of related costs.
Net Gains/Losses on Sales of Foreclosed Real Estate: The Company records a gain or loss from the sale of foreclosed real estate when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of foreclosed real estate to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the foreclosed real estate asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present.
On April 16, 2019, the Board of Directors declared a cash dividend for the quarter ended March 31, 2019 of $0.10 per share on Greene County Bancorp, Inc.’s common stock. The dividend reflects an annual cash dividend rate of $0.40 per share, which was the same rate as the dividend declared during the previous quarter. The dividend will be payable to stockholders of record as of May 15, 2019, and will be paid on May 31, 2019. The MHC intends to waive its receipt of this dividend.
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operation |
Overview of the Company’s Activities and Risks
Greene County Bancorp, Inc.’s results of operations depend primarily on its net interest income, which is the difference between the income earned on Greene County Bancorp, Inc.’s loan and securities portfolios and its cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations are also affected by Greene County Bancorp, Inc.’s provision for loan losses, gains and losses from sales of securities, noninterest income and noninterest expense. Noninterest income consists primarily of fees and service charges. Greene County Bancorp, Inc.’s noninterest expense consists principally of compensation and employee benefits, occupancy, equipment and data processing, and other operating expenses. Results of operations are also significantly affected by general economic and competitive conditions, changes in interest rates, as well as government policies and actions of regulatory authorities. Additionally, future changes in applicable law, regulations or government policies may materially affect Greene County Bancorp, Inc.
To operate successfully, the Company must manage various types of risk, including but not limited to, market or interest rate risk, credit risk, transaction risk, liquidity risk, security risk, strategic risk, reputation risk and compliance risk. While all of these risks are important, the risks of greatest significance to the Company relate to market or interest rate risk and credit risk.
Market risk is the risk of loss from adverse changes in market prices and/or interest rates. Since net interest income (the difference between interest earned on loans and investments and interest paid on deposits and borrowings) is the Company’s primary source of revenue, interest rate risk is the most significant non-credit related market risk to which the Company is exposed. Net interest income is affected by changes in interest rates as well as fluctuations in the level and duration of the Company’s assets and liabilities.
Interest rate risk is the exposure of the Company’s net interest income to adverse movements in interest rates. In addition to directly impacting net interest income, changes in interest rates can also affect the amount of new loan originations, the ability of borrowers and debt issuers to repay loans and debt securities, the volume of loan repayments and refinancings, and the flow and mix of deposits.
Credit risk is the risk to the Company’s earnings and shareholders’ equity that results from customers, to whom loans have been made and to the issuers of debt securities in which the Company has invested, failing to repay their obligations. The magnitude of risk depends on the capacity and willingness of borrowers and debt issuers to repay and the sufficiency of the value of collateral obtained to secure the loans made or investments purchased.
Special Note Regarding Forward-Looking Statements
This quarterly report contains forward-looking statements. Greene County Bancorp, Inc. desires to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 and is including this statement for the express purpose of availing itself of the protections of the safe harbor with respect to all such forward-looking statements. These forward-looking statements, which are included in this Management’s Discussion and Analysis and elsewhere in this quarterly report, describe future plans or strategies and include Greene County Bancorp, Inc.’s expectations of future financial results. The words “believe,” “expect,” “anticipate,” “project,” and similar expressions identify forward-looking statements. Greene County Bancorp, Inc.’s ability to predict results or the effect of future plans or strategies or qualitative or quantitative changes based on market risk exposure is inherently uncertain. Factors that could affect actual results include but are not limited to:
| (a) | changes in general market interest rates, |
| (b) | general economic conditions, including unemployment rates and real estate values, |
| (c) | legislative and regulatory changes, |
| (d) | monetary and fiscal policies of the U.S. Treasury and the Federal Reserve, |
| (e) | changes in the quality or composition of Bank of Greene County’s loan portfolio or the consolidated investment portfolios of Bank of Greene County and Greene County Bancorp, Inc., |
| (h) | demand for financial services in Greene County Bancorp, Inc.’s market area. |
These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements, since results in future periods may differ materially from those currently expected because of various risks and uncertainties.
Non-GAAP Financial Measures
Regulation G, a rule adopted by the Securities and Exchange Commission (SEC), applies to certain SEC filings, including earnings releases, made by registered companies that contain “non-GAAP financial measures.” GAAP is generally accepted accounting principles in the United States of America. Under Regulation G, companies making public disclosures containing non-GAAP financial measures must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure (if a comparable GAAP measure exists) and a statement of the Company’s reasons for utilizing the non-GAAP financial measure as part of its financial disclosures. The SEC has exempted from the definition of “non-GAAP financial measures” certain commonly used financial measures that are not based on GAAP. When these exempted measures are included in public disclosures, supplemental information is not required. Financial institutions like the Company and its subsidiary banks are subject to an array of bank regulatory capital measures that are financial in nature but are not based on GAAP and are not easily reconcilable to the closest comparable GAAP financial measures, even in those cases where a comparable measure exists. The Company follows industry practice in disclosing its financial condition under these various regulatory capital measures in its periodic reports filed with the SEC, including period-end regulatory capital ratios for itself and its subsidiary banks, and does so without compliance with Regulation G, on the widely-shared assumption that the SEC regards such non-GAAP measures to be exempt from Regulation G. The Company uses in this Report additional non-GAAP financial measures that are commonly utilized by financial institutions and have not been specifically exempted by the SEC from Regulation G. The Company provides, as supplemental information, such non-GAAP measures included in this Report as described immediately below.
Tax-Equivalent Net Interest Income and Net Interest Margin: Net interest income, as a component of the tabular presentation by financial institutions of Selected Financial Information regarding their recently completed operations, as well as disclosures based on that tabular presentation, is commonly presented on a tax-equivalent basis. That is, to the extent that some component of the institution’s net interest income, which is presented on a before-tax basis, is exempt from taxation (e.g., is received by the institution as a result of its holdings of state or municipal obligations), an amount equal to the tax benefit derived from that component is added to the actual before-tax net interest income total. This adjustment is considered helpful in comparing one financial institution’s net interest income to that of another institution or in analyzing any institution’s net interest income trend line over time, to correct any analytical distortion that might otherwise arise from the fact that financial institutions vary widely in the proportions of their portfolios that are invested in tax-exempt securities, and that even a single institution may significantly alter over time the proportion of its own portfolio that is invested in tax-exempt obligations. Moreover, net interest income is itself a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average earning assets. For purposes of this measure as well, tax-equivalent net interest income is generally used by financial institutions, again to provide a better basis of comparison from institution to institution and to better demonstrate a single institution’s performance over time. While we present net interest income and net interest margin utilizing GAAP measures (no tax-equivalent adjustments) as a component of the tabular presentation within our disclosures, we do provide as supplemental information net interest income and net interest margin on a tax-equivalent basis.
Comparison of Financial Condition at March 31, 2019 and June 30, 2018
ASSETS
Total assets of the Company were $1.3 billion at March 31, 2019 and $1.2 billion at June 30, 2018, an increase of $122.3 million, or 10.6%. This growth is the result of the continued expansion within our existing markets, across all three of our primary banking lines - retail, commercial, and municipal. Securities available-for-sale and held-to-maturity amounted to $395.5 million at March 31, 2019 as compared to $395.4 million at June 30, 2018, an increase of $108,000. Net loans grew by $58.9 million, or 8.4%, to $763.3 million at March 31, 2019 as compared to $704.4 million at June 30, 2018.
CASH AND CASH EQUIVALENTS
Total cash and cash equivalents increased $61.9 million to $88.4 million at March 31, 2019 from $26.5 million at June 30, 2018, and was due primarily to an increase in municipal deposits resulting from tax collections. The level of cash and cash equivalents is a function of the daily account clearing needs and deposit levels as well as activities associated with securities transactions and loan funding. All of these items can cause cash levels to fluctuate significantly on a daily basis.
SECURITIES
Securities available-for-sale and held-to-maturity increased $108,000 to $395.5 million at March 31, 2019 as compared to $395.4 million at June 30, 2018. Securities purchases totaled $113.6 million during the nine months ended March 31, 2019 and consisted of $83.9 million of state and political subdivision securities, $29.3 million of mortgage-backed securities and $364,000 of other securities. Principal pay-downs and maturities during the nine months ended March 31, 2019 amounted to $113.8 million, of which $21.8 million were mortgage-backed securities, $91.0 million were state and political subdivision securities and $980,000 were other securities. At March 31, 2019, 56.1% of our securities portfolio consisted of state and political subdivision securities to take advantage of tax savings and to promote Greene County Bancorp, Inc.’s participation in the communities in which it operates. Mortgage-backed securities and asset-backed securities held within the portfolio do not contain sub-prime loans and are not exposed to the credit risk associated with such lending.
| | | March 31, 2019 | | | June 30, 2018 | |
| (Dollars in thousands) | | Balance | | | Percentage of portfolio | | | Balance | | | Percentage of portfolio | |
| Securities available-for-sale: | | | | | | | | | | | | |
| U.S. government sponsored enterprises | | $ | 5,547 | | | | 1.4 | % | | $ | 5,531 | | | | 1.4 | % |
| State and political subdivisions | | | 77,366 | | | | 19.6 | | | | 92,255 | | | | 23.4 | |
| Mortgage-backed securities-residential | | | 2,763 | | | | 0.7 | | | | 3,247 | | | | 0.8 | |
| Mortgage-backed securities-multifamily | | | 16,575 | | | | 4.2 | | | | 18,069 | | | | 4.6 | |
| Corporate debt securities | | | 1,757 | | | | 0.4 | | | | 1,704 | | | | 0.4 | |
| Total securities available-for-sale | | | 104,008 | | | | 26.3 | | | | 120,806 | | | | 30.6 | |
| Securities held-to-maturity: | | | | | | | | | | | | | | | | |
| U.S. government sponsored enterprises | | | 9,248 | | | | 2.3 | | | | 9,245 | | | | 2.3 | |
| State and political subdivisions | | | 144,208 | | | | 36.5 | | | | 136,335 | | | | 34.5 | |
| Mortgage-backed securities-residential | | | 4,861 | | | | 1.2 | | | | 6,472 | | | | 1.6 | |
| Mortgage-backed securities-multifamily | | | 130,033 | | | | 32.9 | | | | 118,780 | | | | 30.0 | |
| Corporate debt securities | | | 1,475 | | | | 0.4 | | | | 1,466 | | | | 0.4 | |
| Other securities | | | 1,631 | | | | 0.4 | | | | 2,252 | | | | 0.6 | |
| Total securities held-to-maturity | | | 291,456 | | | | 73.7 | | | | 274,550 | | | | 69.4 | |
| Total securities | | $ | 395,464 | | | | 100.0 | % | | $ | 395,356 | | | | 100.0 | % |
LOANS
Net loans receivable increased $58.9 million, or 8.4%, to $763.3 million at March 31, 2019 from $704.4 million at June 30, 2018. The loan growth experienced during the nine months ended March 31, 2019 consisted primarily of $25.3 million in commercial real estate loans, $2.1 million in commercial construction loans, $15.4 million in commercial loans, $12.4 million in residential real estate loans, and $7.2 million in multi-family real estate loans. This growth was partially offset by a decrease in residential construction loans of $3.2 million. The Company continues to experience loan growth as a result of continued growth in customer base within its newest markets in Ulster and Columbia counties, and its relationships with other financial institutions in originating loan participations. We believe that the continued low interest rate environment and strong customer satisfaction from personal service continued to enhance loan growth. If long term rates begin to rise, the Company anticipates some slowdown in new loan demand as well as refinancing activities. Bank of Greene County continues to use a conservative underwriting policy in regard to all loan originations, and does not engage in sub-prime lending or other exotic loan products. A significant decline in home values, however, in the Company’s markets could have a negative effect on the consolidated results of operations, as any such decline in home values would likely lead to a decrease in residential real estate loans and new home equity loan originations and increased delinquencies and defaults in both the consumer home equity loan and the residential real estate loan portfolios and result in increased losses in these portfolios. Updated appraisals are obtained on loans when there is a reason to believe that there has been a change in the borrower’s ability to repay the loan principal and interest, generally, when a loan is in a delinquent status. Additionally, if an existing loan is to be modified or refinanced, generally, an appraisal is ordered to ensure continued collateral adequacy.
| (Dollars in thousands) | | March 31, 2019 | | | June 30, 2018 | |
| | | Balance | | | Percentage of Portfolio | | | Balance | | | Percentage of Portfolio | |
| Residential real estate | | $ | 268,292 | | | | 34.6 | % | | $ | 255,848 | | | | 35.7 | % |
| Residential construction and land | | | 6,780 | | | | 0.9 | | | | 9,951 | | | | 1.4 | |
| Multi-family | | | 22,131 | | | | 2.9 | | | | 14,961 | | | | 2.1 | |
| Commercial real estate | | | 309,235 | | | | 39.9 | | | | 283,935 | | | | 39.7 | |
| Commercial construction | | | 41,486 | | | | 5.3 | | | | 39,366 | | | | 5.5 | |
| Home equity | | | 22,208 | | | | 2.8 | | | | 21,919 | | | | 3.1 | |
| Consumer installment | | | 5,213 | | | | 0.7 | | | | 5,017 | | | | 0.7 | |
| Commercial loans | | | 100,007 | | | | 12.9 | | | | 84,644 | | | | 11.8 | |
| Total gross loans | | | 775,352 | | | | 100.0 | % | | | 715,641 | | | | 100.0 | % |
| Allowance for loan losses | | | (12,846 | ) | | | | | | | (12,024 | ) | | | | |
| Deferred fees and costs | | | 779 | | | | | | | | 814 | | | | | |
| Total net loans | | $ | 763,285 | | | | | | | $ | 704,431 | | | | | |
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 certain identified loans on which full collectability may not be reasonably assured, considers among other matters, the estimated net realizable value or the fair value of the underlying collateral, economic conditions, payment status of the loan, historical loan loss experience and other factors that warrant recognition in providing for an allowance for loan loss. In addition, various regulatory agencies, as an integral part of their examination process, periodically review Bank of Greene County’s allowance for loan losses. Such agencies may require Bank of Greene County to recognize additions to the allowance based on their judgment about information available to them at the time of their examination. Bank of Greene County considers smaller balance residential mortgages, home equity loans and installment loans to customers as small, homogeneous loans, which are evaluated for impairment collectively based on historical loss experience. Larger balance residential and commercial mortgage and business loans are viewed individually and considered impaired if it is probable that Bank of Greene County will not be able to collect scheduled payments of principal and interest when due, according to the contractual terms of the loan agreements. The measurement of impaired loans is generally based on the fair value of the underlying collateral. Bank of Greene County charges loans off against the allowance for loan losses when it becomes evident that a loan cannot be collected within a reasonable amount of time or that it will cost the Bank more than it will receive, and all possible avenues of repayment have been analyzed, including the potential of future cash flow, the value of the underlying collateral, and strength of any guarantors or co-borrowers. Generally, consumer loans and smaller business loans (not secured by real estate) in excess of 90 days are charged-off against the allowance for loan losses, unless equitable arrangements are made. For loans secured by real estate, a charge-off is recorded when it is determined that the collection of all or a portion of a loan may not be collected and the amount of that loss can be reasonably estimated. The allowance for loan losses is increased by a provision for loan losses (which results in a charge to expense) and recoveries of loans previously charged off and is reduced by charge-offs.
Analysis of allowance for loan losses activity
| | | At or for the nine months ended March 31, | |
| (Dollars in thousands) | | 2019 | | | 2018 | |
| Balance at the beginning of the period | | $ | 12,024 | | | $ | 11,022 | |
| Charge-offs: | | | | | | | | |
| Residential real estate | | | 96 | | | | 96 | |
| Commercial real estate | | | 74 | | | | - | |
| Consumer installment | | | 284 | | | | 256 | |
| Commercial loans | | | 51 | | | | 157 | |
| Total loans charged off | | | 505 | | | | 509 | |
| | | | | | | | | |
| Recoveries: | | | | | | | | |
| Residential real estate | | | 13 | | | | - | |
| Consumer installment | | | 103 | | | | 65 | |
| Commercial loans | | | 153 | | | | - | |
| Total recoveries | | | 269 | | | | 65 | |
| | | | | | | | | |
| Net charge-offs | | | 236 | | | | 444 | |
| | | | | | | | | |
| Provisions charged to operations | | | 1,058 | | | | 1,044 | |
| Balance at the end of the period | | $ | 12,846 | | | $ | 11,622 | |
| | | | | | | | | |
| Net charge-offs to average loans outstanding (annualized) | | | 0.04 | % | | | 0.09 | % |
| Net charge-offs to nonperforming assets (annualized) | | | 10.34 | % | | | 15.80 | % |
| Allowance for loan losses to nonperforming loans | | | 429.92 | % | | | 328.58 | % |
| Allowance for loan losses to total loans receivable | | | 1.66 | % | | | 1.69 | % |
Nonaccrual Loans and Nonperforming Assets
Loans are reviewed on a regular basis to assess collectability of all principal and interest payments due. Management determines that a loan is impaired or nonperforming when it is probable at least a portion of the principal or interest will not be collected in accordance with contractual terms of the note. 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.
Generally, management places loans on nonaccrual status once the loans have become 90 days or more delinquent or sooner if there is a significant reason for management to believe the collectability is questionable and, therefore, interest on the loan will no longer be recognized on an accrual basis. The Company identifies impaired loans and measures the impairment in accordance with FASB ASC subtopic “Receivables – Loan Impairment.” Management may consider a loan impaired once it is classified as nonaccrual and when it is probable that the borrower will be unable to repay the loan according to the original contractual terms of the loan agreement or the loan is restructured in a troubled debt restructuring. It should be noted that management does not evaluate all loans individually for impairment. Generally, Bank of Greene County considers residential mortgages, home equity loans and installment loans as small, homogeneous loans, which are evaluated for impairment collectively based on historical loan experience and other factors. In contrast, large commercial mortgage, construction, multi-family, business loans and select larger balance residential mortgage loans are viewed individually and considered impaired if it is probable that Bank of Greene County will not be able to collect scheduled payments of principal and interest when due, according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the fair value of the underlying collateral. The majority of Bank of Greene County loans, including most nonaccrual loans, are small homogenous loan types adequately supported by collateral. Management considers the payment status of loans in the process of evaluating the adequacy of the allowance for loan losses among other factors. Based on this evaluation, a delinquent loan’s risk rating may be downgraded to either pass-watch, special mention, or substandard, and the allocation of the allowance for loan loss is based upon the risk associated with such designation. A loan does not have to be 90 days delinquent in order to be classified as nonperforming. Foreclosed real estate is considered to be a nonperforming asset.
Analysis of Nonaccrual Loans and Nonperforming Assets
| (Dollars in thousands) | | March 31, 2019 | | June 30, 2018 | |
| Nonaccruing loans: | | | | | | |
| Residential real estate | | $ | 1,829 | | | $ | 1,778 | |
| Commercial real estate | | | 614 | | | | 1,147 | |
| Home equity | | | 455 | | | | 298 | |
| Consumer installment | | | 7 | | | | 18 | |
| Commercial | | | 83 | | | | 276 | |
| Total nonaccruing loans | | | 2,988 | | | | 3,517 | |
| 90 days & accruing | | | | | | | | |
| Residential real estate | | | - | | | | 62 | |
| Total 90 days & accruing | | | - | | | | 62 | |
| Total nonperforming loans | | | 2,988 | | | | 3,579 | |
| Foreclosed real estate: | | | | | | | | |
| Residential real estate | | | 54 | | | | 119 | |
| Total foreclosed real estate | | | 54 | | | | 119 | |
| Total nonperforming assets | | $ | 3,042 | | | $ | 3,698 | |
| | | | | | | | | |
| Troubled debt restructuring: | | | | | | | | |
| Nonperforming (included above) | | $ | 367 | | | $ | 774 | |
| Performing (accruing and excluded above) | | | 1,374 | | | | 1,557 | |
| | | | | | | | | |
| Total nonperforming assets as a percentage of total assets | | | 0.24 | % |
| | 0.32 | % |
| Total nonperforming loans to net loans | | | 0.39 | % |
| | 0.51 | % |
The table below details additional information related to nonaccrual loans for the three and nine months ended March 31:
| | | For the three months ended March 31, | | | For the nine months ended March 31, | |
| (In thousands) | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
| Interest income that would have been recorded if loans had been performing in accordance with original terms | | $ | 31 | | | $ | 45 | | | $ | 160 | | | $ | 182 | |
| Interest income that was recorded on nonaccrual loans | | | 26 | | | | 30 | | | | 81 | | | | 95 | |
Nonperforming assets amounted to $3.0 million at March 31, 2019 and $3.7 million at June 30, 2018. Nonaccrual loans consisted primarily of loans secured by real estate at March 31, 2019 and June 30, 2018. Loans on nonaccrual status totaled $3.0 million at March 31, 2019 of which $1.5 million were in the process of foreclosure. At March 31, 2019, there were 12 residential loans in the process of foreclosure totaling $1.4 million. Included in nonaccrual loans were $1.5 million of loans which were less than 90 days past due at March 31, 2019, but have a recent history of delinquency greater than 90 days past due. These loans will be returned to accrual status once they have demonstrated a history of timely payments. Included in total loans past due were $175,000 of loans which were making payments pursuant to forbearance agreements. Under the forbearance agreements, the customers have made arrangements with the Bank to bring the loans current over a specified period of time (resulting in an insignificant delay in repayment). During this term of the forbearance agreement, the Bank has agreed not to continue foreclosure proceedings. Loans on nonaccrual status totaled $3.5 million at June 30, 2018 of which $1.9 million were in the process of foreclosure. At June 30, 2018, there were 11 residential loans in the process of foreclosure totaling $1.2 million. Included in nonaccrual loans were $1.3 million of loans which were less than 90 days past due at June 30, 2018, but have a recent history of delinquency greater than 90 days past due.
Impaired Loans
The Company identifies impaired loans and measures the impairment in accordance with FASB ASC subtopic “Receivables – Loan Impairment”. A loan is considered impaired once it is classified as nonaccrual and when it is probable that the borrower will be unable to repay the loan according to the original contractual terms of the loan agreement or the loan is restructured in a troubled debt restructuring.
The table below details additional information on impaired loans at March 31, 2019 and June 30, 2018:
| (In thousands) | | March 31, 2019 | | | June 30, 2018 | |
| Balance of impaired loans, with a valuation allowance | | $ | 2,506 | | | $ | 2,799 | |
| Allowances relating to impaired loans included in allowance for loan losses | | | 392 | | | | 482 | |
| Balance of impaired loans, without a valuation allowance | | | 1,372 | | | | 1,349 | |
| Total impaired loans | | | 3,878 | | | | 4,148 | |
| | | For the three months ended March 31, | | | For the nine months ended March 31, | |
| (In thousands) | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
| Average balance of impaired loans for the periods ended | | $ | 4,178 | | | $ | 4,033 | | | $ | 4,018 | | | $ | 3,888 | |
| Interest income recorded on impaired loans during the periods ended | | | 57 | | | | 24 | | | | 120 | | | | 73 | |
DEPOSITS
Deposits totaled $1.1 billion at March 31, 2019 and $1.0 billion at June 30, 2018, an increase of $114.5 million, or 11.2%. NOW deposits increased $151.8 million, or 29.1%, when comparing March 31, 2019 and June 30, 2018. This increase was offset by a decrease in money market deposits of $11.5 million, or 8.6%, a decrease in savings deposits of $7.3 million, or 3.4%, a decrease in certificates of deposit of $15.6 million or 30.3%, and a decrease in noninterest-bearing deposits of $2.9 million, or 2.8%, when comparing March 31, 2019 and June 30, 2018. The overall increase in deposits is primarily the result of normal fluctuations in municipal deposits complimented by an increase in retail and commercial deposits as the Company continues to expand into its newest markets. Included within certificates of deposits at June 30, 2018 were $15.0 million in brokered certificates of deposit. There were no brokered certificates of deposit at March 31, 2019.
| (In thousands) | | March 31, 2019 | | | Percentage of Portfolio | | | June 30, 2018 | | | Percentage of Portfolio | |
| Noninterest-bearing deposits | | $ | 99,824 | | | | 8.8 | % | | $ | 102,694 | | | | 10.0 | % |
| Certificates of deposit | | | 35,761 | | | | 3.1 | | | | 51,317 | | | | 5.0 | |
| Savings deposits | | | 208,839 | | | | 18.3 | | | | 216,103 | | | | 21.1 | |
| Money market deposits | | | 122,208 | | | | 10.7 | | | | 133,753 | | | | 13.0 | |
| NOW deposits | | | 673,146 | | | | 59.1 | | | | 521,367 | | | | 50.9 | |
| Total deposits | | $ | 1,139,778 | | | | 100.0 | % | | $ | 1,025,234 | | | | 100.0 | % |
BORROWINGS
At March 31, 2019, Bank of Greene County had pledged approximately $310.0 million of its residential and commercial mortgage portfolio as collateral for borrowing and irrevocable stand-by letters of credit at the Federal Home Loan Bank of New York (“FHLB”). The maximum amount of funding available from the FHLB was $248.1 million at March 31, 2019, of which $12.7 million in borrowings and $120.0 million in irrevocable stand-by letters of credit were outstanding at March 31, 2019. There were no short-term or overnight borrowings outstanding at March 31, 2019, or June 30, 2018. The $12.7 million consisted of long-term fixed rate advances with a weighted average rate of 1.67% and a weighted average maturity of 20 months. The $120.0 million of irrevocable stand-by letters of credit with the FHLB have been issued to secure municipal transactional deposit accounts, on behalf of Greene County Commercial Bank.
Bank of Greene County also pledges securities as collateral at the Federal Reserve Bank discount window for overnight borrowings. At March 31, 2019, approximately $1.8 million of collateral was available to be pledged against potential borrowings at the Federal Reserve Bank discount window. There were no balances outstanding with the Federal Reserve Bank at March 31, 2019 or June 30, 2018.
Bank of Greene County has established unsecured lines of credit with Atlantic Community Bankers Bank and another financial institution for $6.0 million and $10.0 million, respectively. At March 31, 2019 and June 30, 2018, there were no balances outstanding on these lines of credit. Greene County Bancorp, Inc. has also established an unsecured line of credit with Atlantic Community Bankers Bank for $7.5 million. At March 31, 2019 and June 30, 2018, there were no balances outstanding on this line of credit. All of these lines of credit provide for overnight borrowing and the interest rate is determined at the time of the borrowing.
Scheduled maturities of long-term borrowings at March 31, 2019 were as follows:
| | | | |
| (In thousands) | | | |
| Within the twelve months ended March 31, | | | |
| 2020 | | $ | 4,500 | |
| 2021 | | | 3,300 | |
| 2022 | | | 4,850 | |
| | | $ | 12,650 | |
EQUITY
Shareholders’ equity increased to $108.3 million at March 31, 2019 from $96.2 million at June 30, 2018, resulting primarily from net income of $13.3 million, partially offset by dividends declared and paid of $1.6 million and a decrease in other accumulated comprehensive loss of $284,000.
Selected Equity Data: | | | |
| | | March 31, 2019 | | | June 30, 2018 | |
| Shareholders’ equity to total assets, at end of period | | | 8.50 | % | | | 8.35 | % |
| Book value per share | | $ | 12.68 | | | $ | 11.27 | |
| Closing market price of common stock | | $ | 30.36 | | | $ | 33.90 | |
| | | For the nine months ended March 31, | |
| | | 2019 | | | 2018 | |
| Average shareholders’ equity to average assets | | | 8.63 | % | | | 8.38 | % |
Dividend payout ratio1 | | | 19.23 | % | | | 23.03 | % |
Actual dividends paid to net income2 | | | 12.34 | % | | | 10.61 | % |
1The dividend payout ratio has been calculated based on the dividends declared per share divided by basic earnings per share. No adjustments have been made for dividends waived by Greene County Bancorp, MHC (“MHC”), the owner of 54.0% of the Company’s shares outstanding.
2 Dividends declared divided by net income. The MHC waived its right to receive dividends declared during the three months ended March 31, 2019, and December 31, 2018 and each quarter during the nine months ended March 31, 2018. Dividends declared during the three months ended September 30, 2018 were paid to the MHC. The MHC’s ability to waive the receipt of dividends is dependent upon annual approval of its members as well as receiving the non-objection of the Federal Reserve Board.
Comparison of Operating Results for the Three and Nine Months Ended March 31, 2019 and 2018
Average Balance Sheet
The following table sets forth certain information relating to Greene County Bancorp, Inc. for the three and nine months ended March 31, 2019 and 2018. 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, are expressed both in dollars and rates. No tax equivalent adjustments were made. Average balances were based on daily averages. Average loan balances include nonperforming loans. The loan yields include net amortization of certain deferred fees and costs that are considered adjustments to yields.
| | | Three months ended March 31, | |
| | | 2019 | | | 2018 | |
| (Dollars in thousands) | | Average Outstanding Balance | | Interest Earned / Paid | | | Average Yield / Rate | | | Average Outstanding Balance | | Interest Earned / Paid | | | Average Yield / Rate | |
| Interest-earning Assets: | | | | | | | | | | | | | | | | | | |
Loans receivable, net1 | | $ | 770,123 | | | $ | 8,900 | | | | 4.62 | % | | $ | 678,911 | | | $ | 7,454 | | | | 4.39 | % |
Securities2 | | | 387,988 | | | | 2,559 | | | | 2.64 | | | | 367,269 | | | | 2,233 | | | | 2.43 | |
| Interest-bearing bank balances and federal funds | | | 39,351 | | | | 215 | | | | 2.18 | | | | 45,646 | | | | 161 | | | | 1.41 | |
| FHLB stock | | | 1,634 | | | | 34 | | | | 8.32 | | | | 1,530 | | | | 28 | | | | 7.32 | |
| Total interest-earning assets | | | 1,199,096 | | | | 11,708 | | | | 3.91 | % | | | 1,093,356 | | | | 9,876 | | | | 3.61 | % |
| Cash and due from banks | | | 13,368 | | | | | | | | | | | | 12,363 | | | | | | | | | |
| Allowance for loan losses | | | (12,701 | ) | | | | | | | | | | | (11,428 | ) | | | | | | | | |
| Other noninterest-earning assets | | | 20,753 | | | | | | | | | | | | 20,107 | | | | | | | | | |
| Total assets | | $ | 1,220,516 | | | | | | | | | | | $ | 1,114,398 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Savings and money market deposits | | $ | 326,535 | | | $ | 323 | | | | 0.40 | % | | $ | 339,216 | | | $ | 272 | | | | 0.32 | % |
| NOW deposits | | | 613,498 | | | | 1,132 | | | | 0.74 | | | | 518,463 | | | | 585 | | | | 0.45 | |
| Certificates of deposit | | | 41,654 | | | | 129 | | | | 1.24 | | | | 38,303 | | | | 82 | | | | 0.86 | |
| Borrowings | | | 20,320 | | | | 98 | | | | 1.93 | | | | 19,177 | | | | 77 | | | | 1.61 | |
| Total interest-bearing liabilities | | | 1,002,007 | | | | 1,682 | | | | 0.67 | % | | | 915,159 | | | | 1,016 | | | | 0.44 | % |
| Noninterest-bearing deposits | | | 100,046 | | | | | | | | | | | | 98,498 | | | | | | | | | |
| Other noninterest-bearing liabilities | | | 12,477 | | | | | | | | | | | | 9,805 | | | | | | | | | |
| Shareholders’ equity | | | 105,986 | | | | | | | | | | | | 90,936 | | | | | | | | | |
| Total liabilities and equity | | $ | 1,220,516 | | | | | | | | | | | $ | 1,114,398 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | | | | | $ | 10,026 | | | | | | | | | | | $ | 8,860 | | | | | |
| Net interest rate spread | | | | | | | | | | | 3.24 | % | | | | | | | | | | | 3.17 | % |
| Net earnings assets | | $ | 197,089 | | | | | | | | | | | $ | 178,197 | | | | | | | | | |
| Net interest margin | | | | | | | | | | | 3.34 | % | | | | | | | | | | | 3.24 | % |
| Average interest-earning assets to average interest-bearing liabilities | | | 119.67 | %
| | | | | | | | | | | 119.47 | % | | | | | | | | |
1Calculated net of deferred loan fees and costs, loan discounts, and loans in process.
2Includes tax-free securities, mortgage-backed securities, and asset-backed securities.
| Taxable-equivalent net interest income and net interest margin | | For the three months ended March 31, | |
| (Dollars in thousands) | | 2019 | | | 2018 | |
| Net interest income (GAAP) | | $ | 10,026 | | | $ | 8,860 | |
Tax-equivalent adjustment(1) | | | 496 | | | | 558 | |
| Net interest income (fully taxable-equivalent) | | $ | 10,522 | | | $ | 9,418 | |
| | | | | | | | | |
| Average interest-earning assets | | $ | 1,199,096 | | | $ | 1,093,356 | |
| Net interest margin (fully taxable-equivalent) | | | 3.51 | % | | | 3.45 | % |
1Net interest income on a taxable-equivalent basis includes the additional amount of interest income that would have been earned if the Company’s investment in tax-exempt securities and loans had been subject to federal and New York State income taxes yielding the same after-tax income. The rate used for this adjustment was 21% and 28.1% for federal income taxes and 3.98% and 3.62% for New York State income taxes for the three month period ended March 31, 2019 and 2018, respectively.
| | | Nine months ended March 31, | |
| | | 2019 | | | 2018 | |
| (Dollars in thousands) | | Average Outstanding Balance | | Interest Earned / Paid | | | Average Yield / Rate | | | Average Outstanding Balance | | Interest Earned / Paid | | | Average Yield / Rate | |
| Interest-earning Assets: | | | | | | | | | | | | | | | | | | |
Loans receivable, net1 | | $ | 748,324 | | | $ | 25,894 | | | | 4.61 | % | | $ | 658,906 | | | $ | 21,800 | | | | 4.41 | % |
Securities2 | | | 393,500 | | | | 7,823 | | | | 2.65 | | | | 345,361 | | | | 6,238 | | | | 2.41 | |
| Interest-bearing bank balances and federal funds | | | 16,918 | | | | 274 | | | | 2.16 | | | | 25,761 | | | | 260 | | | | 1.35 | |
| FHLB stock | | | 2,304 | | | | 120 | | | | 6.94 | | | | 1,737 | | | | 87 | | | | 6.68 | |
| Total interest-earning assets | | | 1,161,046 | | | | 34,111 | | | | 3.92 | % | | | 1,031,765 | | | | 28,385 | | | | 3.67 | % |
| Cash and due from banks | | | 10,857 | | | | | | | | | | | | 10,182 | | | | | | | | | |
| Allowance for loan losses | | | (12,421 | ) | | | | | | | | | | | (11,219 | ) | | | | | | | | |
| Other noninterest-earning assets | | | 20,026 | | | | | | | | | | | | 19,078 | | | | | | | | | |
| Total assets | | $ | 1,179,508 | | | | | | | | | | | $ | 1,049,806 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Savings and money market deposits | | $ | 331,791 | | | $ | 911 | | | | 0.37 | % | | $ | 327,188 | | | $ | 789 | | | | 0.32 | % |
| NOW deposits | | | 555,646 | | | | 2,606 | | | | 0.63 | | | | 465,022 | | | | 1,571 | | | | 0.45 | |
| Certificates of deposit | | | 42,190 | | | | 374 | | | | 1.18 | | | | 40,249 | | | | 255 | | | | 0.84 | |
| Borrowings | | | 35,079 | | | | 542 | | | | 2.06 | | | | 23,467 | | | | 280 | | | | 1.59 | |
| Total interest-bearing liabilities | | | 964,706 | | | | 4,433 | | | | 0.61 | % | | | 855,926 | | | | 2,895 | | | | 0.45 | % |
| Noninterest-bearing deposits | | | 101,587 | | | | | | | | | | | | 97,913 | | | | | | | | | |
| Other noninterest-bearing liabilities | | | 11,420 | | | | | | | | | | | | 8,015 | | | | | | | | | |
| Shareholders’ equity | | | 101,795 | | | | | | | | | | | | 87,952 | | | | | | | | | |
| Total liabilities and equity | | $ | 1,179,508 | | | | | | | | | | | $ | 1,049,806 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | | | | | $ | 29,678 | | | | | | | | | | | $ | 25,490 | | | | | |
| Net interest rate spread | | | | | | | | | | | 3.31 | % | | | | | | | | | | | 3.22 | % |
| Net earnings assets | | $ | 196,340 | | | | | | | | | | | $ | 175,839 | | | | | | | | | |
| Net interest margin | | | | | | | | | | | 3.41 | % | | | | | | | | | | | 3.29 | % |
| Average interest-earning assets to average interest-bearing liabilities | | | 120.35 | % | | | | | | | | | | | 120.54 | % | | | | | | | | |
1Calculated net of deferred loan fees and costs, loan discounts, and loans in process.
2Includes tax-free securities, mortgage-backed securities, and asset-backed securities.
| Taxable-equivalent net interest income and net interest margin | | For the nine months ended March 31, | |
| (Dollars in thousands) | | 2019 | | | 2018 | |
| Net interest income (GAAP) | | $ | 29,678 | | | $ | 25,490 | |
Tax-equivalent adjustment(1) | | | 1,455 | | | | 1,595 | |
| Net interest income (fully taxable-equivalent) | | $ | 31,133 | | | $ | 27,085 | |
| | | | | | | | | |
| Average interest-earning assets | | $ | 1,161,046 | | | $ | 1,031,765 | |
| Net interest margin (fully taxable-equivalent) | | | 3.58 | % | | | 3.50 | % |
1Net interest income on a taxable-equivalent basis includes the additional amount of interest income that would have been earned if the Company’s investment in tax-exempt securities and loans had been subject to federal and New York State income taxes yielding the same after-tax income. The rate used for this adjustment was 21% and 28.1% for federal income taxes and 3.98% and 3.62% for New York State income taxes for the nine month period ended March 31, 2019 and 2018, respectively.
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 Greene County Bancorp, Inc.’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to:
| (i) | Change attributable to changes in volume (changes in volume multiplied by prior rate); |
| (ii) | Change attributable to changes in rate (changes in rate multiplied by prior volume); and |
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.
| (Dollars in thousands) | | Three Months Ended March 31, 2019 versus 2018 | | | Nine Months Ended March 31, 2019 versus 2018 | |
| | | Increase/(Decrease) Due To | | | Total Increase/ (Decrease) | | | Increase/(Decrease) Due To | | | Total Increase/ (Decrease) | |
| | | Volume | | | Rate | | | Volume | | | Rate | |
| | | | | | | | | | | | | | | | | | | |
| Interest Earning Assets: | | | | | | | | | | | | | | | | | | |
Loans receivable, net1 | | $ | 1,040 | | | $ | 406 | | | $ | 1,446 | | | $ | 3,069 | | | $ | 1,025 | | | $ | 4,094 | |
Securities2 | | | 129 | | | | 197 | | | | 326 | | | | 924 | | | | 661 | | | | 1,585 | |
| Interest-bearing bank balances and federal funds | | | (25 | ) | | | 79 | | | | 54 | | | | (109 | ) | | | 123 | | | | 14 | |
| FHLB stock | | | 2 | | | | 4 | | | | 6 | | | | 29 | | | | 4 | | | | 33 | |
| Total interest-earning assets | | | 1,146 | | | | 686 | | | | 1,832 | | | | 3,913 | | | | 1,813 | | | | 5,726 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-Bearing Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Savings and money market deposits | | | (11 | ) | | | 62 | | | | 51 | | | | 10 | | | | 112 | | | | 122 | |
| NOW deposits | | | 121 | | | | 426 | | | | 547 | | | | 339 | | | | 696 | | | | 1,035 | |
| Certificates of deposit | | | 8 | | | | 39 | | | | 47 | | | | 13 | | | | 106 | | | | 119 | |
| Borrowings | | | 5 | | | | 16 | | | | 21 | | | | 164 | | | | 98 | | | | 262 | |
| Total interest-bearing liabilities | | | 123 | | | | 543 | | | | 666 | | | | 526 | | | | 1,012 | | | | 1,538 | |
| Net change in net interest income | | $ | 1,023 | | | $ | 143 | | | $ | 1,166 | | | $ | 3,387 | | | $ | 801 | | | $ | 4,188 | |
1 Calculated net of deferred loan fees, loan discounts, and loans in process.
2 Includes tax-free securities, mortgage-backed securities, and asset-backed securities.
GENERAL
Return on average assets and return on average equity are common methods of measuring operating results. Annualized return on average assets increased to 1.43% for the three months ended March 31, 2019 as compared to 1.32% for the three months ended March 31, 2018, and was 1.51% and 1.37% for the nine months ended March 31, 2019 and 2018, respectively. Annualized return on average equity increased to 16.44% for the three months and 17.45% for the nine months ended March 31, 2019, as compared to 16.17% for the three months and 16.36% for the nine months ended March 31, 2018. The increase in return on average assets and return on average equity was primarily the result of growth in net income resulting from growth in interest-earning assets with continued growth in loans and securities. Net income amounted to $4.4 million and $3.7 million for the three months ended March 31, 2019 and 2018, respectively, an increase of $679,000, or 18.5%, and amounted to $13.3 million and $10.8 million for the nine months ended March 31, 2019 and 2018, respectively, an increase of $2.5 million, or 23.1%. Average assets increased $106.1 million, or 9.5%, to $1.2 billion for the three months ended March 31, 2019 as compared to $1.1 billion for the three months ended March 31, 2018. Average equity increased $15.1 million, or 16.6%, to $106.0 million for the three months ended March 31, 2019 as compared to $90.9 million for the three months ended March 31, 2018. Average assets increased $129.7 million, or 12.4%, to $1.2 billion for the nine months ended March 31, 2019 as compared to $1.0 billion for the nine months ended March 31, 2018. Average equity increased $13.8 million, or 15.7%, to $101.8 million for the nine months ended March 31, 2019 as compared to $88.0 million for the nine months ended March 31, 2018.
INTEREST INCOME
Interest income amounted to $11.7 million for the three months ended March 31, 2019 as compared to $9.9 million for the three months ended March 31, 2018, an increase of $1.8 million, or 18.2%. Interest income amounted to $34.1 million for the nine months ended March 31, 2019 as compared to $28.4 million for the nine months ended March 31, 2018, an increase of $5.7 million, or 20.1%. The increase in average loan balances had the greatest impact on interest income when comparing the three and nine months ended March 31, 2019 and 2018, which were complemented by an increase in the yield on interest-earning assets. Average loan balances increased $91.2 million and $89.4 million while the yield on loans increased 23 basis points and 20 basis points when comparing the three and nine months ended March 31, 2019 and 2018, respectively. Average securities increased $20.7 million and $48.1 million and the yield on such securities increased 21 basis points and 24 basis points when comparing the three and nine months ended March 31, 2019 and 2018, respectively.
INTEREST EXPENSE
Interest expense amounted to $1.7 million for the three months ended March 31, 2019 as compared to $1.0 million for the three months ended March 31, 2018, an increase of $666,000, or 65.6%. Interest expense amounted to $4.4 million for the nine months ended March 31, 2019 as compared to $2.9 million for the nine months ended March 31, 2018, an increase of $1.5 million, or 51.7%. Increases in average balances on interest-bearing liabilities as well as an increase in rates paid contributed to the increase in overall interest expense. As illustrated in the rate/volume table, interest expense increased $123,000 and $526,000 when comparing the three and nine months ended March 31, 2019 and 2018, respectively, due to an $86.8 million and $108.8 million increase in the average balances on interest-bearing liabilities when comparing these same periods. The average rate paid on interest-bearing liabilities increased 23 basis points to 0.67% from 0.44% when comparing the three months ended March 31, 2019 and 2018, respectively, and increased 16 basis points to 0.61% from 0.45% when comparing the nine months ended March 31, 2019 and 2018.
Average deposits increased $85.7 million and $97.2 million for the three and nine months ended March 31, 2019 and 2018, respectively, as a result of continued growth across all three of our primary banking lines – retail, commercial and municipal. The average rate paid on NOW deposits increased 29 basis points when comparing the three months ended March 31, 2019 and 2018, and the average balance of such accounts grew by $95.0 million when comparing these same periods. The average rate paid on NOW deposits increased 18 basis points when comparing the nine months ended March 31, 2019 and 2018, and the average balance of such accounts increased $90.6 million when comparing these same periods. The average balance of savings and money market deposits decreased $12.7 million and increased $4.6 million when comparing the three and nine months ended March 31, 2019 and 2018, respectively. The rates paid on savings and money market deposits increased eight basis points and five basis points when comparing the three and nine months ended March 31, 2019 and 2018, respectively. The average balance of certificates of deposit increased $3.4 million and $1.9 million when comparing the three and nine months ended March 31, 2019 and 2018, respectively. The average rate paid on certificate of deposits increased 38 basis points when comparing the three months ended March 31, 2019 and 2018, and increased 34 basis points when comparing the nine months ended March 31, 2019 and 2018. This increase in the average balance and the rate paid on certificates of deposit for the three and nine months is the result of an increase in short-term brokered certificates of deposit and the promotion of a five year certificate product.
The average balance on borrowings increased $1.1 million and the rate increased 32 basis points when comparing the three months ended March 31, 2019 and 2018. The average balance on borrowings increased $11.6 million and the rate increased 47 basis points when comparing the nine months ended March 31, 2019 and 2018. With the recent increases in rates by the Federal Reserve Bank, the cost of short-term borrowings has increased dramatically and currently exceeds the average rate paid on the Company’s longer term borrowings. The increase in the average balance on borrowings was due to an increase in overnight borrowings with the Federal Home Loan Bank of New York.
NET INTEREST INCOME
Net interest income increased $1.1 million to $10.0 million for the three months ended March 31, 2019 from $8.9 million for the three months ended March 31, 2018. Net interest income increased $4.2 million to $29.7 million for the nine months ended March 31, 2019 from $25.5 million for the nine months ended March 31, 2018. These increases in net interest income were primarily the result of the growth in the average balance of interest-earning assets, with continued growth in loans and securities.
Net interest spread increased seven basis points to 3.24% for the three months ended March 31, 2019 compared to 3.17% for the three months ended March 31, 2018. Net interest margin increased 10 basis points to 3.34% for the three months ended March 31, 2019 compared to 3.24% for the three months ended March 31, 2018. Net interest spread and margin increased nine and 12 basis points to 3.31% and 3.41%, respectively, for the nine months ended March 31, 2019 compared to 3.22% and 3.29%, respectively, for the nine months ended March 31, 2018. Increases in net interest spread and margin are primarily the result of the increasing rate environment over the past two years, with repricing of the Company’s adjustable rate investment and loan products, and the reinvestment of cash flows into higher rate investments and loans. These increases have been partially offset by increases in cost of funds from both increases in deposit rates and in increased short-term borrowings.
Net interest income on a taxable-equivalent basis includes the additional amount of interest income that would have been earned if the Company’s investment in tax-exempt securities and loans had been subject to federal and New York State income taxes yielding the same after-tax income. Tax equivalent net interest margin was 3.51% and 3.45% for the three months ended March 31, 2019 and 2018, respectively, and was 3.58% and 3.50% for the nine months ended March 31, 2019 and 2018, respectively. As a result of the enactment of the Tax Cut and Jobs Act of 2018 (“TCJA”) in December 2017, which permanently reduces the maximum corporate income tax rate from 35% to 21% effective for tax years beginning after December 31, 2017, the tax benefits derived from tax-exempt securities and loans is lower for the three and nine months ended March 31, 2019 compared to March 31, 2018. However, beginning January 1, 2018, pricing of tax-exempt securities and loan originations have been adjusted to reflect the change in the corporate tax rate, thereby producing a tax-equivalent yield on these securities and loans that are comparable to yields obtained on similar taxable investments.
Due to the large portion of fixed-rate residential mortgages in the Company’s portfolio, interest rate risk is a concern and the Company will continue to monitor and adjust the asset and liability mix as much as possible to take advantage of the benefits and reduce the risks or potential negative effects of a rising rate environment. Management attempts to mitigate the interest rate risk through balance sheet composition. Several strategies are used to help manage interest rate risk such as maintaining a high level of liquid assets such as short-term federal funds sold and various investment securities and maintaining a high concentration of less interest-rate sensitive and lower-costing core deposits.
PROVISION FOR LOAN LOSSES
Management continues to closely monitor asset quality and adjust the level of the allowance for loan losses when necessary. The amount recognized for the provision for loan losses is determined by management based on its ongoing analysis of the adequacy of the allowance for loan losses. The provision for loan losses amounted to $350,000 and $345,000 for the three months ended March 31, 2019 and 2018, respectively. The provision for loan losses amounted to $1.1 million and $1.0 million for the nine months ended March 31, 2019 and 2018, respectively. The provision for loan loss was relatively unchanged between these periods despite continued loan growth as a result of the recognition of a $150,000 recovery during the nine month ended March 31, 2019. Net charge-offs amounted to $177,000 and $75,000 for the three months ended March 31, 2019 and 2018, respectively. Net charge-offs amounted to $236,000 and $444,000 for the nine months ended March 31, 2019 and 2018, respectively.
Allowance for loan losses to total loans receivable was 1.66% at March 31, 2019, and 1.68% at June 30, 2018. Nonperforming loans amounted to $3.0 million at March 31, 2019 and $3.6 million at June 30, 2018. At March 31, 2019 and June 30, 2018, respectively, nonperforming assets were 0.24% and 0.32% of total assets and nonperforming loans were 0.39% and 0.51% of net loans. The Company has not been an originator of “no documentation” mortgage loans, and the loan portfolio does not include any mortgage loans that the Company classifies as sub-prime.
NONINTEREST INCOME
| (In thousands) | | For the three months ended March 31, | | | Change from Prior Year | | | For the nine months ended March 31, | | | Change from Prior Year | |
| Noninterest income: | | 2019 | | | 2018 | | | Amount | | | Percent | | | 2019 | | | 2018 | | | Amount | | | Percent | |
| Service charges on deposit accounts | | $ | 960 | | | $ | 932 | | | $ | 28 | | | | 3.00 | % | | $ | 3,103 | | | $ | 2,717 | | | $ | 386 | | | | 14.21 | % |
| Debit card fees | | | 604 | | | | 566 | | | | 38 | | | | 6.71 | | | | 1,929 | | | | 1,723 | | | | 206 | | | | 11.96 | |
| Investment services | | | 145 | | | | 138 | | | | 7 | | | | 5.07 | | | | 396 | | | | 332 | | | | 64 | | | | 19.28 | |
| E-commerce fees | | | 31 | | | | 31 | | | | - | | | | - | | | | 102 | | | | 104 | | | | (2 | ) | | | (1.92 | ) |
| Other operating income | | | 270 | | | | 192 | | | | 78 | | | | 40.63 | | | | 673 | | | | 610 | | | | 63 | | | | 10.33 | |
| Total noninterest income | | $ | 2,010 | | | $ | 1,859 | | | $ | 151 | | | | 8.12 | % | | $ | 6,203 | | | $ | 5,486 | | | $ | 717 | | | | 13.07 | % |
Noninterest income increased $151,000, or 8.1%, and totaled $2.0 million and $1.9 million for the three months ended March 31, 2019 and 2018. Noninterest income increased $717,000, or 13.1%, and totaled $6.2 million and $5.5 million for the nine months ended March 31, 2019 and 2018. This increase was primarily due to increases in debit card fees and service charges on deposit accounts resulting from continued growth in the number of checking accounts with debit cards, as well as increased monthly or transactional service charges on deposit accounts. Investment services income also increased during the period due to higher sales volume of investment products. The increase in other operating income was primarily the result of an increase in fee income related to loans.
NONINTEREST EXPENSE
| (In thousands) | | For the three months ended March 31 | | | Change from Prior Year | | | For the nine months ended March 31, | | | Change from Prior Year | |
| Noninterest expense: | | 2019 | | | 2018 | | | Amount | | | Percent | | | 2019 | | | 2018 | | | Amount | | | Percent | |
| Salaries and employee benefits | | $ | 4,005 | | | $ | 3,455 | | | $ | 550 | | | | 15.92 | % | | $ | 1,160 | | | $ | 9,412 | | | $ | 1,748 | | | | 18.57 | % |
| Occupancy expense | | | 471 | | | | 448 | | | | 23 | | | | 5.13 | | | | 1,287 | | | | 1,159 | | | | 128 | | | | 11.04 | |
| Equipment and furniture expense | | | 112 | | | | 159 | | | | (47 | ) | | | (29.56 | ) | | | 453 | | | | 430 | | | | 23 | | | | 5.35 | |
| Service and data processing fees | | | 546 | | | | 539 | | | | 7 | | | | 1.30 | | | | 1,583 | | | | 1,566 | | | | 17 | | | | 1.09 | |
| Computer software, supplies and support | | | 260 | | | | 175 | | | | 85 | | | | 48.57 | | | | 683 | | | | 480 | | | | 203 | | | | 42.29 | |
| Advertising and promotion | | | 110 | | | | 74 | | | | 36 | | | | 48.65 | | | | 306 | | | | 241 | | | | 65 | | | | 26.97 | |
| FDIC insurance premiums | | | 117 | | | | 115 | | | | 2 | | | | 1.74 | | | | 344 | | | | 301 | | | | 43 | | | | 14.29 | |
| Legal and professional fees | | | 280 | | | | 223 | | | | 57 | | | | 25.56 | | | | 892 | | | | 683 | | | | 209 | | | | 30.60 | |
| Other | | | 585 | | | | 594 | | | | (9 | ) | | | (1.52 | ) | | | 1,986 | | | | 1,715 | | | | 271 | | | | 15.80 | |
| Total noninterest expense | | $ | 6,486 | | | $ | 5,782 | | | $ | 704 | | | | 12.18 | % | | $ | 18,694 | | | $ | 15,987 | | | $ | 2,707 | | | | 16.93 | % |
Noninterest expense increased $704,000, or 12.2%, to $6.5 million for the three months ended March 31, 2019, compared to $5.8 million for the three months ended March 31, 2018. Noninterest expense increased $2.7 million, or 16.9%, to $18.7 million for the nine months ended March 31, 2019, compared to $16.0 million for the nine months ended March 31, 2018. This increase was primarily due to an increase in salaries and employee benefits expenses, resulting from additional staffing for the addition of two new branches located in Copake and Woodstock, New York. Staffing was also increased within our lending department, customer service center and investment center. The increase is also due to costs associated with the opening of the newest branch in Woodstock, New York during the nine months ended March 31, 2019, and an increase in professional fees. Also, other noninterest expense increased as a result of a $200,000 contribution to Bank of Greene County Charitable Foundation during the nine months ended March 31, 2019.
INCOME TAXES
The provision for income taxes directly reflects the expected tax associated with the pre-tax income generated for the given year and certain regulatory requirements. The effective tax rate was 16.2% and 17.4% for the three months and nine months ended March 31, 2019, respectively, compared to 19.9% and 22.6% for the three and nine months ended March 31, 2018, respectively. The decrease in the effective tax rate for the three and nine months ended March 31, 2019 is primarily the result of the impact of the enactment of the Tax Cut and Jobs Act of 2017 (“TCJA”) in December 2017. The Company recognized a net tax benefit of $251,000 during the nine months ended March 31, 2018 as a result of the enactment of the TCJA.
The TCJA permanently reduces the maximum corporate income tax rate from 35% to 21% effective for tax years beginning after December 31, 2017. Additionally, fiscal year-end taxpayers such as Greene County Bancorp, Inc. were required to utilize a “blended rate” in calculating the effective tax rate for the fiscal year 2018 based on a ratio utilizing the number of days at the 35% tax rate and the number of days at the 21% tax rate. Greene County Bancorp, Inc.’s statutory blended rate for fiscal 2018 is approximately 28%. Effective July 1, 2018, Greene County Bancorp, Inc.’s statutory rate decreased to 21%. The statutory tax rate is impacted by the benefits derived from tax exempt bond and loan income, the Company’s real estate investment trust subsidiary income, as well as the tax benefits derived from premiums paid to the Company’s pooled captive insurance subsidiary to arrive at the effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates or prices such as interest rates, foreign currency exchange rates, commodity prices, and equity prices. Greene County Bancorp, Inc.’s most significant form of market risk is interest rate risk since the majority of Greene County Bancorp, Inc.’s assets and liabilities are sensitive to changes in interest rates. Greene County Bancorp, Inc.’s primary sources of funds are deposits and proceeds from principal and interest payments on loans, mortgage-backed securities and debt securities, with lines of credit available through the Federal Home Loan Bank and Atlantic Central Bankers Bank as needed. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit outflows, mortgage prepayments, and lending activities are greatly influenced by general interest rates, economic conditions and competition.
Bank of Greene County’s unfunded loan commitments and unused lines of credit are as follows at March 31, 2019:
| (In thousands) | | 2019 | |
| Unfunded loan commitments | | $ | 61,597 | |
| Unused lines of credit | | | 65,438 | |
| Total commitments | | $ | 127,035 | |
Greene County Bancorp, Inc. anticipates that it will have sufficient funds available to meet current loan commitments based on the level of cash and cash equivalents as well as the available-for-sale investment portfolio and borrowing capacity.
Bank of Greene County and Greene County Commercial Bank met all applicable regulatory capital requirements at March 31, 2019 and June 30, 2018. Consolidated shareholders’ equity represented 8.5% and 8.4% of total assets at March 31, 2019 and at June 30, 2018, respectively.
| (Dollars in thousands) | | Actual | | | For Capital Adequacy Purposes | | | To Be Well Capitalized Under Prompt Corrective Action Provisions | | | Capital Conservation Buffer | |
Bank of Greene County | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | | | Actual | | | Required | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2019: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total risk-based capital | | $ | 115,779 | | | | 16.3 | % | | $ | 57,005 | | | | 8.0 | % | | $ | 71,257 | | | | 10.0 | % | | | 8.248 | % | | | 2.50 | % |
| Tier 1 risk-based capital | | | 106,824 | | | | 15.0 | | | | 42,754 | | | | 6.0 | | | | 57,005 | | | | 8.0 | | | | 8.991 | | | | 2.50 | |
| Common equity tier 1 capital | | | 106,824 | | | | 15.0 | | | | 32,065 | | | | 4.5 | | | | 46,317 | | | | 6.5 | | | | 10.491 | | | | 2.50 | |
| Tier 1 leverage ratio | | | 106,824 | | | | 8.8 | | | | 48,651 | | | | 4.0 | | | | 60,814 | | | | 5.0 | | | | 4.783 | | | | 2.50 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2018: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total risk-based capital | | $ | 102,549 | | | | 15.5 | % | | $ | 53,024 | | | | 8.0 | % | | $ | 66,280 | | | | 10.0 | % | | | 7.472 | % | | | 1.875 | % |
| Tier 1 risk-based capital | | | 94,148 | | | | 14.2 | | | | 39,768 | | | | 6.0 | | | | 53,024 | | | | 8.0 | | | | 8.205 | | | | 1.875 | |
| Common equity tier 1 capital | | | 94,148 | | | | 14.2 | | | | 29,826 | | | | 4.5 | | | | 43,082 | | | | 6.5 | | | | 9.705 | | | | 1.875 | |
| Tier 1 leverage ratio | | | 94,148 | | | | 8.2 | | | | 45,789 | | | | 4.0 | | | | 57,236 | | | | 5.0 | | | | 4.225 | | | | 1.875 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Greene County Commercial Bank | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2019: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total risk-based capital | | $ | 45,518 | | | | 43.1 | % | | $ | 8,448 | | | | 8.0 | % | | $ | 10,560 | | | | 10.0 | % | | | 35.106 | % | | | 2.50 | % |
| Tier 1 risk-based capital | | | 45,518 | | | | 43.1 | | | | 6,336 | | | | 6.0 | | | | 8,448 | | | | 8.0 | | | | 37.106 | | | | 2.50 | |
| Common equity tier 1 capital | | | 45,518 | | | | 43.1 | | | | 4,752 | | | | 4.5 | | | | 6,864 | | | | 6.5 | | | | 38.606 | | | | 2.50 | |
| Tier 1 leverage ratio | | | 45,518 | | | | 9.4 | | | | 19,314 | | | | 4.0 | | | | 24,142 | | | | 5.0 | | | | 5.427 | | | | 2.50 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2018: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total risk-based capital | | $ | 40,286 | | | | 47.1 | % | | $ | 6,837 | | | | 8.0 | % | | $ | 8,546 | | | | 10.0 | % | | | 39.139 | % | | | 1.875 | % |
| Tier 1 risk-based capital | | | 40,286 | | | | 47.1 | | | | 5,128 | | | | 6.0 | | | | 6,837 | | | | 8.0 | | | | 41.139 | | | | 1.875 | |
| Common equity tier 1 capital | | | 40,286 | | | | 47.1 | | | | 3,846 | | | | 4.5 | | | | 5,555 | | | | 6.5 | | | | 42.639 | | | | 1.875 | |
| Tier 1 leverage ratio | | | 40,286 | | | | 9.1 | | | | 17,747 | | | | 4.0 | | | | 22,184 | | | | 5.0 | | | | 5.080 | | | | 1.875 | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Not applicable to smaller reporting companies.
| Item 4. | Controls and Procedures |
Under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and in timely altering them to material information relating to the Company (or its consolidated subsidiaries) required to be filed in its periodic SEC filings.
There has been no change in the Company’s internal control over financial reporting in connection with the quarterly evaluation that occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
| Part II. | Other Information |
Greene County Bancorp, Inc. and its subsidiaries are not engaged in any material legal proceedings at the present time.
Not applicable to smaller reporting companies.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
| Item 3. | Defaults Upon Senior Securities |
Not applicable
| Item 4. | Mine Safety Disclosures |
Not applicable
| b) | There were no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors during the period covered by this Form 10-Q. |
| | Exhibits |
| | | Certification of Chief Executive Officer, adopted pursuant to Rule 13a-14(a)/15d-14(a) |
| | | Certification of Chief Financial Officer, adopted pursuant to Rule 13a-14(a)/15d-14(a) |
| | | Statement of Chief Executive Officer, furnished pursuant to U.S.C. Section 1350 |
| | | Statement of Chief Financial Officer, furnished pursuant to U.S.C. Section 1350 |
| | 101 | The following materials from Greene County Bancorp, Inc. Form 10-Q for the quarter ended March 31, 2019, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Financial Condition, (iii) Consolidated Statements of Cash Flows and (iv) related notes, tagged as blocks of text. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed by the undersigned thereunto duly authorized.
Greene County Bancorp, Inc.
Date: May 9, 2019
By: /s/ Donald E. Gibson
Donald E. Gibson
President and Chief Executive Officer
Date: May 9, 2019
By: /s/ Michelle M. Plummer
Michelle M. Plummer, CPA, CGMA
Executive Vice President, Chief Financial Officer, and Chief Operating Officer
