UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 001-14910
GOUVERNEUR BANCORP, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
United States 04-3429966
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
42 Church Street, Gouverneur, New York 13642
--------------------------------------------
(Address of principal executive offices)
Issuer's telephone number (315) 287-2600
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Outstanding at
Class December 31, 2003
- ----------------------------- -----------------
Common Stock, par value $ .01 2,279,009
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
GOUVERNEUR BANCORP, INC.
FORM 10-QSB
TABLE OF CONTENTS
PART 1 - FINANCIAL INFORMATION Page
- ------------------------------ ----
Item 1. Financial Statements - Unaudited
Consolidated Statements of Financial Condition at December 31,
2003 and at September 30, 2003 4
Consolidated Statements of Income for the three months ended
December 31, 2003 and 2002 5
Consolidated Statements of Changes in Shareholders' Equity for
three months ended December 31, 2003 and 2002 6
Consolidated Statements of Cash Flows for the three months
ended December 31, 2003 and 2002 8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 12
Item 3. Controls and Procedures 18
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The financial statements presented in this Form 10-QSB, beginning on
the following page, reflect the consolidated financial condition and results of
operations of the Company and its subsidiary, Gouverneur Savings and Loan
Association (the "Bank"), operating in a mutual holding company structure.
3
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data) (Unaudited)
December 31, September 30
2003 2003
------------ ------------
Assets:
Cash and due from banks $ 1,839 $ 1,762
Interest-bearing deposits in bank 1,241 2,526
------------ ------------
Total cash and cash equivalents 3,080 4,288
Securities available-for-sale 16,691 17,473
Securities held-to-maturity (fair value of $379 at December 31,
2003 and $459 at September 30, 2003) 379 456
Loans, net of deferred fees 70,466 65,393
Less allowance for loan losses (663) (655)
------------ ------------
Loans, net 69,803 64,738
Federal Home Loan Bank stock, at cost 860 610
Premises and equipment, net 1,460 1,484
Accrued interest receivable and other assets 2,564 907
------------ ------------
Total assets $ 94,837 $ 89,956
============ ============
Liabilities:
Deposits: Non interest-bearing demand $ 733 $ 806
NOW and money market 9,311 9,409
Savings 19,179 19,157
Time 28,487 29,051
------------ ------------
Total deposits 57,710 58,423
------------ ------------
Securities sold under agreements to repurchase 5,700 5,700
Advances form Federal Home Loan Bank 11,500 6,500
Other liabilities 2,114 1,776
------------ ------------
Total liabilities 77,024 72,399
------------ ------------
Shareholders' Equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized; none issued -- --
Common stock, $.01 par value, 9,000,000 shares
authorized; 2,384,040 shares issued 24 24
Additional paid-in capital 4,590 4,577
Retained earnings 13,572 13,365
Treasury Stock, at cost, 105,031 shares at December 31, 2003
and 106,156 at September 30, 2003 (532) (537)
Accumulated other comprehensive income 499 487
Unearned common stock held by MRP (77) (85)
Unallocated common stock held by ESOP (263) (274)
------------ ------------
Total shareholders' equity 17,813 17,557
------------ ------------
Total liabilities and shareholders' equity $ 94,837 $ 89,956
============ ============
See accompanying notes to the consolidated financial statements.
4
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data) (Unaudited)
Three Months Ended
December 31,
------------
2003 2002
------------ ------------
Interest income:
- ---------------
Loans $ 1,175 $ 1,087
Securities 151 227
Other short-term investments 3 7
------------ ------------
Total interest income 1,329 1,321
Interest expense:
- ----------------
Deposits 256 364
Borrowings - short-term 28 15
Borrowings - long-term 121 146
------------ ------------
Total interest expense 405 525
------------ ------------
Net interest income 924 796
Provision for loan losses 25 40
------------ ------------
Net interest income after provision for loan losses 899 756
Non-interest income
- -------------------
Service charges 45 34
Realized gain (loss) on sales of securities (9) 6
Other 32 23
------------ ------------
Total non-interest income 68 63
Non-interest expenses
- ---------------------
Salaries and employee benefits 338 314
Directors fees 20 23
Occupancy and Equipment 81 88
Data processing 33 31
Postage and supplies 20 27
Professional fees 32 43
Foreclosed assets, net 8 20
Other 94 116
------------ ------------
Total non-interest expenses 626 662
------------ ------------
Income before income tax expense 341 157
Income tax expense 134 59
------------ ------------
Net income $ 207 $ 98
============ ============
Earnings per common share - basic $ 0.09 $ 0.04
Earnings per common share - diluted $ 0.09 $ 0.04
See accompanying notes to the consolidated financial statements.
5
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Three months ended December 31, 2003
(In thousands, except share data) (Unaudited)
Accumulated Unearned Unallocated
Additional Other common common
Common Paid In Retained Treasury Comprehensive stock held stock held
Stock Capital Earnings Stock Income By MRP by ESOP Total
-------- -------- -------- -------- -------- -------- -------- --------
Balance at
September 30, 2003 $ 24 $ 4,577 $ 13,365 $ (537) $ 487 $ (85) $ (274) $ 17,557
Comprehensive Income:
Net Income 207 207
Change in net unrealized gain on
securities available for sale, net
of taxes 12 12
--------
Total comprehensive income 219
--------
Allocation of ESOP shares (1,984 shares) 13 11 24
Amortization of MRP 8 8
Exercise of stock options (1,125 shares) 5 5
-------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2003 $ 24 $ 4,590 $ 13,572 $ (532) $ 499 $ (77) $ (263) $ 17,813
======== ======== ======== ======== ======== ======== ======== ========
6
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Three months ended December 31, 2002
(In thousands, except share data) (Unaudited)
Accumulated Unearned Unallocated
Additional Other common common
Common Paid In Retained Treasury Comprehensive stock held stock held
Stock Capital Earnings Stock Income By MRP by ESOP Total
-------- -------- -------- -------- -------- -------- -------- --------
Balance at
September 30, 2002 $ 24 $ 4,570 $ 13,025 $ (543) $ 537 $ (73) $ (312) $ 17,228
Comprehensive Income:
Net Income 98 98
Change in net unrealized gain on
securities available for sale, net
of taxes 65 65
--------
Total comprehensive income 163
--------
Allocation of ESOP shares (1,841 shares) 8 9 17
Amortization of MRP 5 5
Exercise of stock options (1,125 shares) 6 6
-------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2002 $ 24 $ 4,578 $ 13,123 $ (537) $ 602 $ (68) $ (303) $ 17,419
======== ======== ======== ======== ======== ======== ======== ========
7
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
Three Months Ended
December 31,
------------
2003 2002
-------- --------
Cash flows from operating activities:
Net Income $ 207 $ 98
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 31 37
Provision for loan losses 25 40
Net loss (gain) on sales of securities 9 (6)
Net amortization of securities 21 27
Allocated and earned shares of ESOP and MRP 32 22
Decrease (increase) in other assets (20) 112
Increase (decrease) in other liabilities 329 (29)
-------- --------
Net cash provided by operating activities 634 301
-------- --------
Cash flows from investing activities:
Net increase in loans (4,500) (1,498)
Purchase of loans (609) --
Proceeds from sales of securities AFS 4,300 507
Proceeds from maturities and principal reductions AFS 1,756 962
Purchases of securities AFS (5,283) (1,732)
Proceeds from maturities and principal reductions HTM 20 264
Additions to premises and equipment (7) (19)
Redemption (purchase) of Federal Home Loan Bank stock (250) 75
Purchase of bank owned life insurance (1,561) --
Net cash used in investing activities (6,134) (1,441)
-------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits (713) 1,203
Net increase in short-term borrowings 5,000 --
Exercise of stock options 5 6
-------- --------
Net cash provided by financing activities 4,292 1,209
-------- --------
Net increase (decrease) in cash and cash equivalents (1,208) 69
Cash and cash equivalents at beginning of period 4,288 3,047
-------- --------
Cash and cash equivalents at end of period $ 3,080 $ 3,116
======== ========
Non-cash investing activities:
Additions to foreclosed assets $ 19 $ 174
Cash paid during the period for:
Interest 398 525
Income taxes 66 18
See accompanying notes to consolidated financial statements.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Business
--------
Gouverneur Bancorp, Inc. (the Company) operates as a savings and loan
holding company. Its only subsidiary is the Bank. The consolidated
financial statements include the accounts of the Company and the Bank.
All material intercompany accounts and transactions have been
eliminated in this consolidation.
Cambray Mutual Holding Company ("Cambray MHC"), the Company's parent
mutual holding company, held 1,311,222 shares or 57.5% of the Company's
issued and outstanding common stock, and shareholders other than
Cambray MHC held 967,787 shares or 42.5% of such stock at December 31,
2003.
2. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-QSB and,
therefore, do not include information or footnotes necessary for a
complete presentation of financial position, results of operations, and
cash flows in conformity with generally accepted accounting principles.
However, in the opinion of management, all adjustments consisting of
only normal recurring adjustments or accruals which are necessary for a
fair presentation of the consolidated financial statements have been
made at and for the three months ended December 31, 2003 and 2002. The
results of operations for the three month period ended December 31,
2003 are not necessarily indicative of the results which may be
expected for an entire fiscal year or other interim periods.
3. Earnings Per Common Share
-------------------------
Basic earnings per share is calculated by dividing net income available
to common shareholders by the weighted average number of shares
outstanding during the period. Unallocated shares held by the Company's
Employee Stock Ownership Plan ("ESOP") are not included in the weighted
average number of shares outstanding. Unearned shares held by the
Company's Management Recognition Plan ("MRP") are not included in the
weighted average number of shares outstanding. Diluted earnings per
share reflects additional common shares that would have been
outstanding if dilutive potential common shares had been issued (for
example, through the exercise of common stock options), as well as any
adjustment to income that would result from the assumed issuance.
Basic and diluted earnings per common share were computed as follows:
(In thousands, except per share data)
Three Months Ended
December 31,
2003 2002
------ ------
Basic earnings per common share:
Net income $ 207 $ 98
Weighted average common shares outstanding 2,206 2,199
Basic earnings per common share $ 0.09 $ 0.04
Diluted earnings per common share:
Net income $ 207 $ 98
Weighted average common shares outstanding 2,206 2,199
Additional potentially dilutive securities
(equivalent in common stock)
Common Stock options 34 30
------ ------
Diluted weighted average common shares outstanding 2,240 2,229
Diluted earnings per common share $ 0.09 $ 0.04
9
4. Comprehensive Income
--------------------
Comprehensive income, presented in the consolidated statements of
changes in shareholders' equity, consists of net income and the net
change for the period in after-tax unrealized gains or losses on
securities available for sale. Accumulated other comprehensive income
in the consolidated statements of financial condition represents the
net unrealized gains or losses on securities available for sale as of
the reporting dates, net of related tax effect.
A summary of the unrealized gains and reclassification adjustments of
securities available for sale and the related tax effects for the
three-month periods ended December 31, 2003 and 2002 is as follows (in
thousands):
Three Months Ended
December 31,
------------
2003 2002
------ ------
Unrealized holding gains arising
during the period $ 13 $ 114
Reclassification adjustment for (gains) losses
realized in net income during period 9 (6)
------ ------
22 108
Tax effect (10) (43)
------ ------
Other comprehensive income, net of tax $ 12 $ 65
====== ======
5. Stock Option and Management Recognition Plans
---------------------------------------------
The Company has a Stock Option Plan ("SOP") and a MRP for directors,
officers and key employees. The Company accounts for stock options
granted under the SOP and MRP in accordance with the provisions of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. The Company provides
pro forma net income and pro forma earnings per share disclosures for
employee stock options grants as if the fair-value-based method defined
in Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, had been applied. The fair
value of the shares awarded, under the MRP, measured as of the grant
date, is recognized as unearned compensation (a component of
shareholders' equity) and amortized to compensation expense over the
vesting period.
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based compensation (in thousands,
except per share data):
10
Three Months Ended
December 31,
------------
2003 2002
------ ------
Net income, as reported $ 207 $ 98
Total stock-based compensation expense determined
under fair value method for all awards, net of taxes (6) (7)
Amounts included in determination of net income,
net of taxes 4 3
------ ------
Pro forma net income $ 205 $ 94
====== ======
6. Recently Issued Accounting Standards
------------------------------------
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." This
Interpretation expands the disclosures to be made by a guarantor in its
financial statements about its obligations under certain guarantees and
requires the guarantor to recognize a liability for the fair value of
an obligation assumed under certain specified guarantees. FIN 45
clarifies the requirements of FASB Statement No. 5, "Accounting for
Contingencies." In general, FIN 45 applies to contracts or
indemnification agreements that contingently require the guarantor to
make payments to the guaranteed party based on changes in an underlying
instrument that is related to an asset, liability or equity security of
the guaranteed party, which would include financial standby letters of
credit. Certain guarantee contracts are excluded from both the
disclosure and recognition requirements of this Interpretation,
including among others, guarantees related to commercial letters of
credit and loan commitments. The disclosure requirements of FIN 45
require disclosure of the nature of the guarantee, the maximum
potential amount of future payments that the guarantor could be
required to make under the guarantee and the current amount of the
liability, if any, for the guarantor's obligations under the guarantee.
The accounting recognition requirements of FIN 45 are to be applied
prospectively to guarantees issued or modified after December 31, 2002.
In April 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51." This interpretation provides new
guidance for the consolidation of variable interest entities (VIEs) and
requires such entities to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risk among
parties involved. The interpretation also adds disclosure requirements
for investors that are involved with unconsolidated VIEs. The
disclosure requirements apply to all financial statements issued after
January 31, 2003, and are effective for the first fiscal year or
interim period ending after December 31, 2003, for VIEs acquired before
February 1, 2003.
In May 2003, the Financial Accounting Standards Board issued Statement
No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity." This Statement
requires that an issuer classify a financial instrument that is within
its scope as a liability. Many of these instruments were previously
classified as equity. This Statement was effective for financial
instruments entered into or modified after May 31, 2003 and otherwise
was effective beginning July 1, 2003.
The provisions of the above interpretations and statements did not have
or are not expected to have a significant impact on the financial
condition or results of operations of the Company.
11
7. Retained Earnings
-----------------
Cambray MHC has waived receipt of past dividends of the Company. The
dividends are considered as restrictions in the retained earnings of
the Company. As of December 31, 2003, the aggregate retained earnings
restricted for cash dividends waived was $747,000.
8. Reclassification of prior year income and expense
-------------------------------------------------
Certain items in the 2002 financial statements have been reclassified
to conform to the 2003 financial statement presentation format. These
reclassifications had no effect on net income.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Gouverneur Bancorp, Inc. ("We" or the "Company") is a corporation
organized under the laws of the United States, in connection with the
reorganization of its wholly owned subsidiary, Gouverneur Savings and Loan
Association (the "Bank"), into a mutual holding company structure. The Company's
assets consist primarily of all the outstanding capital stock of the Bank and
cash of $136,000 at December 31, 2003. The Company's principal business is the
ownership of the Bank. The Company is a savings and loan holding company
registered with the Office of Thrift Supervision ("OTS") and subject to
regulation under federal banking laws and regulations. In this document,
references to the Company include the Bank, unless the context denotes
otherwise. The terms "Registrant", "we", "our" or similar terms refer to
Gouverneur Bancorp, Inc.
The Bank has been and continues to be a community oriented financial
institution offering a variety of financial services. The Bank attracts deposits
from the general public and uses those deposits together with funds borrowed
from the Federal Home Loan Bank ("FHLB"), to make loans and other investments.
Most of the loans are one to four family residential mortgages. The Bank's
deposit accounts are insured by the Savings Association Insurance Fund ("SAIF")
of the Federal Deposit Insurance Corporation ("FDIC"), and the Bank is subject
to regulation by the FDIC and the OTS.
Our profitability depends, to a large extent, on our net interest
income, which is the difference between the interest we receive on our interest
earning assets, such as loans and investments, and the interest we pay on
deposits and other interest bearing liabilities. Other categories of expenses
generally include the provision for loan losses, salaries and employee benefits
costs, net expenses on real estate owned and various categories of operational
expenses. External factors, such as general economic and competitive conditions,
particularly changes in interest rates, government policies and actions of
regulatory authorities, can have a substantial effect on profitability.
Forward-Looking Statements
When we use words or phrases like "will probably result," "we expect,"
"will continue," "we anticipate," "estimate," "project," "should cause" or
similar expressions in this 10-QSB or in any press releases, public
announcements, filings with the Securities and Exchange Commission or other
disclosures, we are making "forward-looking statements" as described in the
Private Securities Litigation Reform Act of 1995. In addition, certain
information we will provide in the future on a regular basis, such as analysis
of the adequacy of our allowance for loan losses or an analysis of interest rate
sensitivity of our assets and liabilities, is always based on predictions of the
future. From time to time, we may also publish other forward-looking statements
regarding anticipated financial performance, business prospects, and similar
matters.
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. We want you to know that a variety of
future events could cause our actual results and experience to differ materially
from what was anticipated in our forward-looking statements. Some of the risks
and uncertainties that may affect our operations, performance, development and
results, the interest rate sensitivity of our assets and liabilities, and the
adequacy of our allowance for loan losses, include:
12
o Local, regional, national or global economic conditions which could cause
an increase in loan delinquencies, a decrease in property values, or a
change in the housing turnover rate;
o Changes in market interest rates or changes in the speed at which market
interest rates change;
o Changes in laws and regulations affecting us, including changes in
accounting standards;
o Changes in competition; and
o Changes in consumer preferences.
Please do not rely unduly on any forward-looking statements, which are
valid only as of the date made. Many factors, including those described above,
could affect our financial performance and could cause our actual results or
circumstances for future periods to differ materially from what we anticipate or
project. We have no obligation to update any forward-looking statements to
reflect future events which occur after the statements are made.
Critical Accounting Policies
- ----------------------------
Note 2 to the consolidated financial statements of the Company (included in item
7 of the Annual Report on Form 10-KSB of the Company for the year ended
September 30, 2003) lists significant accounting policies used in the
development and presentation of its financial statements. This discussion and
analysis, the significant accounting policies, and other financial statement
disclosures identify and address key variables and other qualitative and
quantitative factors that are necessary for an understanding and evaluation of
the Company's results of operations.
The most significant estimate in the preparation of the Company's financial
statements is for the allowance for loan losses and the related provision for
loan losses. Please refer to the discussion of this calculation under
"Comparison of Financial Condition" below.
Comparison of Financial Condition at December 31, 2003 and September 30, 2003.
During the three months from September 30, 2003 through December 31,
2003, total assets increased $4.8 million, or 5.3% from $90.0 million to $94.8
million. Net loans increased by $5.1 million, or 7.9% from $64.7 million to
$69.8 million. This increase resulted from growth of $4.3 million in residential
real estate loans, $0.3 million in commercial real estate loans and $0.6 million
in other commercial loans combined with a decrease of $0.1 million in other
consumer loans. Our growth in real estate loans is the result of growth in each
of our offices, $1.7 million in Alexandria Bay, $1.3 million in Clayton and $1.3
million in Gouverneur. Most of these loans, booked during the quarter ended
December 31, 2003, originated in the previous quarter when demand for loans is
traditionally higher, as compared to the winter season when loan demand is
normally weak. The growth in other commercial loans was from the purchase of two
USDA guaranteed loans totaling $609,000 in October 2003. That portfolio now
totals $3.05 million. The decline in other consumer loans was the result of a
decrease in automobile loans by $0.1 million. Special low and no rate financing
arrangements offered by automobile manufacturers have also decreased demand for
the Bank's automobile loans, although we have seen more activity recently.
Our borrowed funds from FHLB, consisting of advances and securities
repurchase obligations, were $17.2 million on December 31, 2003 and $12.2
million on September 30, 2003. The increase in borrowed funds has been used to
fund the additional loan growth. We experienced a decrease in deposits of
approximately $0.7 million, or 1.2% during the quarter as deposits fell from
$58.4 million to $57.7 million. The reduction consisted of decreases of $0.1
million, $0.1 million and $0.5 million in demand deposits, NOW and money market
accounts, and in time deposits, respectively.
13
Our shareholders' equity rose by $256,000 during the quarter as net
income of $207,000, combined with increases of $32,000 in share allocation in
the ESOP and amortization in the MRP, $12,000 in the fair value (net of taxes)
of our available-for-sale securities portfolio and the issuance of $5,000 in
treasury stock. Treasury stock was used to supply the 1,125 shares needed when
one director exercised some of his vested stock options.
Non-performing assets increased to $853,000 at December 31, 2003 from
$824,000 on September 30, 2003 while the ratio of non-performing assets to total
assets decreased from 0.92% to 0.90% over the same period. Non-performing loans
decreased from 1.08% of total loans September 30, 2003 to 1.06% at December 31,
2003. A summary of the Company's non-performing assets and related ratios
follows:
Non-performing assets December 31, September 30,
2003 2003
------------ ------------
Non-accrual loans
-----------------
Residential mortgages
and home equity loans $ 235 $ 198
Commercial mortgages 83 83
Consumer other 32 85
Commercial other 172 112
------------ ------------
Total non-accrual loans 522 478
Restructured commercial mortgage 220 225
------------ ------------
Total non-performing loans 742 703
Foreclosed real estate 92 92
Other repossessed assets 19 29
------------ ------------
Total non-performing assets $ 853 $ 824
============ ============
Non-performing loans to
total loans 1.06% 1.08%
Non-performing assets to
total assets 0.90% 0.92%
All five non-accrual residential mortgages are currently in foreclosure
proceedings.
One borrower, in bankruptcy proceedings, has four loans, all
non-accrual, totaling $210,000 at December 31, 2003, comprised of an $83,000
commercial mortgage, $112,000 other commercial loan, $13,000 automobile loan and
$2,000 in unsecured credit. The $112,000 loan mentioned above and another
non-accrual loan for $60,000 comprise the commercial other loan total of
$172,000. We will be auctioning the equipment that is the collateral for the
$60,000 loan, which carries an 80% SBA guarantee, in the near future. The
Company had no loans more than 90 days delinquent and accruing at December 31,
2003 or September 30, 2003.
One loan, in the amount of $220,000 makes up the restructured other
commercial loan balance.
Management believes that these non-performing loans are adequately
secured by collateral and the SBA guarantee. Further, management is not aware of
any factors common to these loans, which caused their non-performance or any
developments that suggest an upward trend in delinquencies. Accordingly, while
we will continue to monitor asset quality, management has determined that the
loan loss allowance is appropriate at this time.
14
Comparison of Results of Operations for the Three Months Ended December 31, 2003
and 2002.
General. Our net income for the three months ended December 31, 2003
was $207,000, an increase of $109,000, or 111.2%, over our net income of $98,000
for the same period last year. The increase in net income was the combination of
the following factors:
1. our net interest income increased by $128,000, as interest income
increased $8,000 and interest expense decreased by $120,000,
2. non-interest income grew by $5,000 over last year's period,
3. the provision for loan losses decreased by $15,000 for the first
quarter of this fiscal year versus last fiscal year,
4. non-interest expenses decreased $36,000 from last year to this
year and
5. an increase of $75,000 in income taxes.
Basic and diluted earnings per share were $0.09 for this year's quarter
versus $0.04 for both measures in last year's quarter.
Interest Income. Interest income increased $8,000, or 0.60%, from the
three months ended December 31, 2002 to the three months ended December 31,
2003. A decrease of 40 basis points (0.40%) in the average interest rate earned
on interest-earning assets from 6.48% for the quarter ending December 31, 2002
to 6.08% for the quarter ending December 31, 2003 accounted for a decrease in
our interest income of $165,000, while an increase of $5.9 million in the
average balance of interest-earning assets from $80.9 million to $86.8 million
resulted in an increase of $173,000 in interest income.
Interest income on loans increased by $88,000. A decrease of 96 basis
points (0.96%) from 7.84% in last year's quarter to 6.88% in this year's quarter
in the average interest rate on loans decreased our interest income by $144,000
while an increase of $12.8 million in the average balance of loans from $55.0
million to $67.8 million resulted in an increase of $232,000 in interest income.
The decrease in the average interest rate on our securities of 35 basis
points from 3.81% in last year's quarter to 3.46% in this year's quarter
decreased interest income by $19,000, while a decrease of $6.4 million in the
average balance of securities from $23.7 million to $17.3 million decreased
interest income by $57,000, resulting in a net decrease in interest income of
$76,000. A 53 basis points (0.53%) reduction in the average interest rate on
other short-term investments decreased interest income by $2,000, while a
decrease of $0.6 million in the average balance of other short-term investments
decreased interest income by $2,000 resulting in a decrease of $4,000 in
interest income.
Interest Expense. Interest expense decreased $120,000, or 22.9%, from
the three months ended December 31, 2002 to the three months ended December 31,
2003. A decrease of 89 basis points in the average interest rate on
interest-bearing liabilities from 3.13% in last year's quarter to 2.24% in this
year's quarter accounted for a decrease in our interest expense of $145,000,
while an increase of $5.1 million in the average balance of interest-bearing
liabilities from $66.5 million to $71.6 million resulted in an increase of
$25,000 in interest expense.
The average rates we paid decreased on savings and club accounts, on
time certificates, on money market and NOW accounts and on funds we borrowed
from FHLB decreased by 121 basis points (1.21%), 74 basis points (0.74%), 48
basis points (0.48%) and 64 basis points (0.64%) respectively.
Interest expense on savings and club accounts decreased by $42,000. The
decrease in the average rate paid on savings and club accounts, from 2.24% last
year to 1.03% this year, decreased our interest expense by $57,000 while the
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increase in the average balance of savings and club accounts by $3.0 million,
from $16.3 million to $19.3 million, increased our interest expense by $15,000.
Management believes that the average balance in savings accounts increased even
as rates declined due to the decision of many depositors to place their funds in
liquid accounts which paid interest rates only marginally less than short-term
time certificates. Interest expense on time certificates decreased by $60,000.
The decrease in the average rate paid on time certificates, from 3.40% last year
to 2.66% this year, decreased our interest expense by $54,000 while the decrease
in the average balance of time certificates by $0.7 million, from $29.2 million
to $28.5 million, decreased our interest expense by $6,000. Consistent with
rates paid in our local market, time certificate rates declined as those
deposits repriced. Interest expense on money market and NOW accounts decreased
by $6,000. The decrease in the average rate paid on money market and NOW
accounts from 1.11% in the December 2002 quarter to 0.63% in the December 2003
quarter decreased our interest expense by $11,000 while the increase in the
average balance of money market and NOW accounts by $2.0 million from $7.5
million to $9.5 million increased our interest expense by $11,000.
Interest expense on funds borrowed from FHLB decreased by $12,000. The
decrease in the average interest rate on funds borrowed from FHLB from 4.77% for
the quarter ended December 31, 2002 to 4.13% for the quarter ended December 31,
2003 decreased interest expense by $23,000, while an increase of $0.9 million in
the average balance of funds borrowed from FHLB from $13.4 million in last
year's quarter to $14.3 million in this year's quarter resulted a $11,000
increase in interest expense.
Net Interest Income. The result of the increase in interest income
combined with the decrease in interest expense was a $128,000 increase in net
interest income. Our interest rate spread (the difference between the average
rate we earn and the average rate we pay) increased by 49 basis points (0.49%)
from 3.35% to 3.84%, while our net interest margin increased by 32 basis points
to 4.22% in the first quarter of fiscal 2004, from 3.90% for the first quarter
of fiscal 2003.
Average shareholders' equity represented 20.4% of average
interest-earning assets for the quarter ended December 31, 2003, while it
represented 21.4% of average interest-earning assets for the same quarter in
last year. Our ratio of average interest-earning assets to average
interest-bearing liabilities decreased from 1.22 times in fiscal 2003 to 1.21
times in fiscal 2004.
Provision for Loan Losses. The provision for loan losses results from
our analysis of the adequacy of the allowance for loan losses. If we believe
that the allowance should be higher, then we increase it, with a charge to
provision for loan losses, which is an expense on our income statement. In
determining the appropriate provision for loan losses, management considers the
level of and trend in non-performing loans, the level of and trend in net loan
charge-offs, the dollar amount and mix of the loan portfolio, as well as general
economic conditions and real estate trends in the Company's market area, which
can impact the inherent risk of loss in the Company's portfolio. Furthermore,
the OTS may disagree with our judgments regarding the risks in our loan
portfolio and could require us to increase the allowance in the future.
For the three months ended December 31, 2003, we provided $25,000 for
loan losses, compared to $40,000 in the same quarter last year. At December 31,
2003, the ratio of our loan allowance to total loans was 0.95% as compared to
1.20% on December 31, 2002. On September 30, 2003 the allowance was $655,000, or
1.01% of total loans, and we determined at the end of the quarter that the
appropriate level for the allowance was $663,000. We had charge-offs during the
quarter of $23,000 and recoveries of $6,000, so a $25,000 provision was
necessary to reach the desired level for the allowance. Our level of
non-accruing loans, loans 90 days and still accruing and restructured loans was
$742,000, or 1.06% of total loans, at December 31, 2003 as compared to $936,000,
or 1.96% of total loans, at December 31, 2002. The reduction of the ratio of the
loan loss allowance to total loans from September 2003 to December 2003 is
justified by the fact that all the growth in loans originated by the Bank was in
real estate loans, $4.3 million in residential and $0.3 million in commercial,
while other commercial and consumer loans, which have more risk than mortgages,
fell $0.2 million.
Non-interest Income. Our non-interest income was $5,000 higher in the
fiscal 2004 quarter as compared to the fiscal 2003 quarter. Service charges
increased by $11,000, loan fees increased by $1,000, gain (loss) on sale of
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securities decreased by $15,000, and ATM income increased by $6,000, while
miscellaneous income increased by $2,000 from last year.
Non-interest Expenses. Our non-interest expenses decreased by $36,000
from the 2003 quarter to the 2004 quarter. Increases in salaries and employee
benefits of $24,000 and data processing of $2,000 were more than offset by
decreases of $3,000 in director fees, $7,000 in postage and supplies, $11,000 in
professional fees, $7,000 in occupancy and equipment, $22,000 in other expense
and $12,000 foreclosed assets, net. The increase in salaries and benefits is the
result of performance increases to our employees. Director fees decreased since
there was one less meeting this year. Occupancy and equipment expenses were
reduced as depreciation expense was down by $6,000. The decrease in professional
fees represents some additional costs from our exiting independent accountants
during the transition period. Other expense decreased due to decreases of
$18,000 for advertising expense and $5,000 for telephone expense.
At December 31, 2003, we had thirty full-time and two part-time
employees, compared to twenty-nine full time and two part-time employees at the
end of December 2002.
Income tax expense. Our income tax expense increased by $75,000, or
127.1%, comparing the first quarter of fiscal 2004 to the same quarter of fiscal
2003. The increased expense was the result of higher income before income tax of
$184,000, or 117.2%.
Liquidity and Capital Resources
Our primary sources of funds are deposits, borrowings from FHLB, and
proceeds from the principal and interest payments on loans and securities.
Scheduled maturities and principal payments on loans and securities are
predictable sources of funds. We can also control the funds available from
borrowings. However, general economic conditions and interest rate conditions
can cause increases or decreases in deposit outflows and loan pre-payments,
which can also affect the level of funds we have available for investment.
In general, we manage our liquidity by maintaining a sufficient level
of short-term investments so funds are readily available for investment in loans
when needed. During the three months ended December 31, 2003, we decreased our
cash and cash equivalents by $1,208,000.
Deposits decreased by $0.7 million during the quarter ended December
31, 2003. In addition to factors within our control, such as our deposit pricing
strategies and our marketing efforts, deposit flows are affected by the level of
general market interest rates, the availability of alternate investment
opportunities, general economic conditions, and other factors outside our
control. We borrowed an additional $5.0 million from FHLB during the quarter
ended December 31, 2003 to fund the additional loan growth.
We monitor our liquidity regularly. Excess liquidity is invested in
overnight federal funds sold and other short-term investments. If we need
additional funds, we can borrow those funds, although the cost of borrowing
money is normally higher than the average cost of deposits. As a member of the
FHLB, the Bank can arrange to borrow an additional $12.3 million against our one
to four family mortgage portfolio. We have used borrowed funds to help us
leverage capital and grow the Bank, but have not needed borrowings to cover
liquidity shortfalls. In addition to borrowings, we believe that, if we need to
do so, we can attract additional deposits by increasing the rates we offer.
We had $2.5 million in outstanding commitments to make loans at
December 31, 2003, along with $2.8 million of unused home equity, commercial and
overdraft lines of credit. We anticipate that we will have enough funds to meet
our current loan commitments and to fund draws on the lines of credit through
the normal turnover of our loan and securities portfolios. At December 31, 2003,
we had $17.2 million of time certificates scheduled to mature within one year.
We anticipate that we can retain substantially all of those deposits if we need
to do so to fund loans and other investments as part of our efforts to grow and
leverage our capital.
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The Bank measures liquidity using a modified version of the formula
that was formerly required by OTS regulation. Our formula classifies investments
in a fund, secured by mostly mortgage assets, as a liquid asset since the
investment can be converted to cash with one-day notice. The OTS calculation did
not consider this investment to be liquid because of the real estate collateral.
We measure liquidity on a monthly basis and want to maintain a liquidity ratio
of between 5% and 15%. At December 31, 2003, the ratio was 18.8%. We will
continue to monitor liquidity and adjust deposit rates or pay off borrowed funds
as necessary.
The OTS has minimum capital ratio requirements applying to the Bank,
but there are no comparable minimum capital requirements that apply to us as a
savings and loan holding company. At December 31, 2003, the Bank exceeded all
regulatory capital requirements of the OTS applicable to it, with Tier I capital
of $17.1 million, or 18.1% of adjusted total assets, and risk-based capital of
$17.8 million, or 33.9% of risk-weighted assets. The Bank also had tangible
capital of $17.1 million, or 18.1% of average tangible assets. The Bank was
classified as "well capitalized" at December 31, 2003 under OTS regulations.
Item 3. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The term "disclosure
controls and procedures" is defined in Rule 13a-14(c) of the Securities Exchange
Act of 1934, "the Exchange Act". This term refers to the controls and procedures
of a company that are designed to ensure that information required to be
disclosed by a company in the reports that it files under the Exchange Act is
recorded, processed, summarized and reported within required time periods. Our
Chief Executive Officer and our Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures as of December 31, 2003,
and they have concluded that as of that date, our disclosure controls and
procedures were effective at ensuring that required information will be
disclosed on a timely basis in our reports filed under the Exchange Act.
(b) Changes in Internal Controls. There were no significant changes to our
internal controls or in other factors that could significantly affect our
internal controls subsequent to the date of their evaluation by our Chief
Executive Officer and our Chief Financial Officer, including any corrective
actions with regard to significant deficiencies and material weaknesses.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, the Company and the Bank are
subject to legal actions, which involve claims for monetary relief. Management,
based on the advice of counsel, does not believe that any currently known legal
actions, individually or in the aggregate, will have a material effect on its
consolidated financial condition or results of operation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Principal Executive Officer pursuant
to Rule 13a - 14(a) / 15d - 14(a)
31.2 Certification of Principal Financial Officer pursuant
to Rule 13a - 14(a) / 15d - 14(a)
32.1 Certification of Principal Executive Officer pursuant
to Section 1350
32.2 Certification of Chief Financial Officer pursuant to
Section 1350
(b) Reports on Form 8-K
A Report on Form 8-K was filed on December 10, 2003, pursuant to
Item 12 of that report. It announced the Company's results for the
fiscal year ended September 30, 2003, and a press release relating
to the earnings was attached thereto.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Gouverneur Bancorp, Inc.
Date: February 11, 2004 By: /s/ RICHARD F. BENNETT
--------------------------------------
Richard F. Bennett
President and Chief Executive Officer
(principal executive officer and officer
duly authorized to sign on behalf of the
registrant)
By: /s/ ROBERT J. TWYMAN
--------------------------------------
Robert J. Twyman
Vice President and Chief Financial Officer
(principal financial officer duly
authorized to sign on behalf of the
registrant)
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