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 March 31, 2006
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 [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
Outstanding at
Class May 5, 2006
----------------------------- -----------
Common Stock, par value $ .01 2,292,084
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
March 31, 2006 and September 30, 2005 3
Consolidated Statements of Income for the three and
six months ended March 31, 2006 and March 31, 2005. 4
Consolidated Statements of Shareholders' Equity for the
six months ended March 31, 2006 and 2005 5
Consolidated Statements of Cash Flows for the six months
ended March 31, 2006 and 2005 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 11
Item 3. Controls and Procedures 23
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits 24
SIGNATURES 25
EXHIBITS 26
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data) (Unaudited)
March 31, September 30,
2006 2005
------------ ------------
Assets:
Cash and due from banks $ 2,030 $ 2,210
Interest-bearing deposits in bank 2,887 456
------------ ------------
Total cash and cash equivalents 4,917 2,666
Securities available-for-sale 9,969 10,992
Securities held-to-maturity (fair value 2006: $100: 2005: $110) 100 109
Loans, held for sale 2,186 3,436
Loans receivable, net of allowance for loan losses 2006: $893: 2005: $869 100,550 96,740
Investment in Federal Home Loan Bank stock, at cost 1,724 1,838
Investment in life insurance 3,565 3,717
Premises and equipment, net 1,550 1,547
Accrued interest receivable and other assets 1,492 1,181
------------ ------------
Total assets $ 126,053 $ 122,226
============ ============
Liabilities:
Deposits: Non-interest-bearing demand $ 2,271 $ 2,043
NOW and money market 11,859 11,956
Savings 20,335 19,101
Time 35,823 30,864
------------ ------------
Total deposits 70,288 63,964
------------ ------------
Advances from the Federal Home Loan Bank of New York 34,700 36,750
Other liabilities 1,850 2,837
------------ ------------
Total liabilities 106,838 103,551
------------ ------------
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 4,781 4,739
Retained earnings 14,926 14,392
Treasury stock, at cost, 2006: 91,956 shares: 2005: 98,606 shares (466) (499)
Accumulated other comprehensive income 171 272
Unearned common stock held by Management Recognition Plan (59) (67)
Unallocated common stock held by Employee Stock Ownership Plan (162) (186)
------------ ------------
Total shareholders' equity 19,215 18,675
------------ ------------
Total liabilities and shareholders' equity $ 126,053 $ 122,226
============ ============
See accompanying notes to consolidated financial statements.
3
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data) (Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
--------------------------- ---------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Interest income:
- ----------------
Loans $ 1,694 $ 1,428 $ 3,375 $ 2,796
Securities - taxable 116 114 242 227
non-taxable 13 12 25 24
Other short-term investments 5 8 9 15
------------ ------------ ------------ ------------
Total interest income 1,828 1,562 3,651 3,062
------------ ------------ ------------ ------------
Interest expense:
- -----------------
Deposits 361 265 704 529
Borrowings - short term 155 80 352 129
Borrowings - long term 244 168 431 338
------------ ------------ ------------ ------------
Total interest expense 760 513 1,487 996
------------ ------------ ------------ ------------
Net interest income 1,068 1,049 2,164 2,066
Provision for loan losses 25 30 50 70
------------ ------------ ------------ ------------
Net interest income after provision for
loan losses 1,043 1,019 2,114 1,996
------------ ------------ ------------ ------------
Non-interest income:
- --------------------
Service charges 50 43 114 91
Realized gain on sales of securities - AFS 98 96 98 96
Realized gain (loss) on sales of loans held
for sale -- (17) 7 (17)
Life insurance death benefit 62 -- 62 --
Earnings on investment in life insurance 36 30 67 69
Realized gain (loss) on sales of foreclosed
assets, net 20 (3) 52 9
Other 35 38 78 74
------------ ------------ ------------ ------------
Total non-interest income 301 187 478 322
Non-interest expenses:
- ----------------------
Salaries and employee benefits 407 414 815 836
Directors fees 37 29 80 63
Occupancy and equipment 111 95 216 187
Data processing 31 35 61 70
Postage and supplies 37 25 67 51
Professional fees 52 43 113 104
Other 104 133 218 236
------------ ------------ ------------ ------------
Total non-interest expenses 779 774 1,570 1,547
------------ ------------ ------------ ------------
Income before income tax expense 565 432 1,022 771
Income tax expense 179 161 341 281
------------ ------------ ------------ ------------
Net income $ 386 $ 271 $ 681 $ 490
============ ============ ============ ============
Earnings per common share - basic $ 0.17 $ 0.12 $ 0. 30 $ 0.22
Earnings per common share - diluted $ 0.17 $ 0.12 $ 0.30 $ 0.22
See accompanying notes to consolidated financial statements
4
GOUVERNEUR BANCORP, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Six months ended March 31, 2006
(In thousands, except share data) (Unaudited)
Unearned
Accumulated Common Unallocated
Additional Other stock Common
Common Paid in Retained Treasury Comprehensive held stock held
Stock capital Earnings stock Income by MRP by ESOP Total
---------- ---------- --------- ---------- --------- --------- --------- ---------
Balance at September 30, 2005 $ 24 $ 4,739 $ 14,392 $ (499) $ 272 $ (67) $ (186) $ 18,675
Comprehensive income:
Net income 681 681
Change in net unrealized gain on
securities available for sale,
net of reclassification
adjustment and tax effects (101) (101)
---------
Total comprehensive income 580
---------
Allocation of ESOP (4,785 shares) 32 24 56
Amortization of MRP 12 8 20
Exercise of stock options (6,650
shares) (2) 33 31
Cash dividends declared,
$0.15 per share (147) (147)
---------- ---------- --------- ---------- --------- --------- --------- ---------
Balance at March 31, 2006 $ 24 $ 4,781 $ 14,926 $ (466) $ 171 $ (59) $ (162) $ 19,215
========== ========== ========= ========== ========= ========= ========= =========
See accompanying notes to consolidated financial statements
5
GOUVERNEUR BANCORP, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Six months ended March 31, 2005
(In thousands, except share data) (Unaudited)
Unearned
Accumulated Common Unallocated
Additional Other stock Common
Common Paid in Retained Treasury Comprehensive held stock held
Stock capital Earnings stock Income by MRP by ESOP Total
---------- ---------- --------- ---------- --------- --------- --------- ---------
Balance at September 30, 2004 $ 24 $ 4,642 $ 13,632 $ (511) $ 451 $ (57) $ (231) $ 17,950
Comprehensive income:
Net income 490 490
Change in net unrealized gain
on securities available
for sale, net of taxes (153) (153)
---------
Total comprehensive income 337
---------
Allocation of ESOP (4,440 shares) 43 21 64
Amortization of MRP 4 4
Exercise of stock options
(1,125 shares) 2 6 8
Cash dividends declared,
$0.14 per share (136) (136)
---------- ---------- --------- ---------- --------- --------- --------- ---------
Balance at March 31, 2005 $ 24 $ 4,687 $ 13,986 $ (505) $ 298 $ (53) $ (210) $ 18,227
========== ========== ========= ========== ========= ========= ========= =========
See accompanying notes to consolidated financial statements
6
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
Six Months Ended
March 31,
----------------------------
2006 2005
------------ ------------
Cash flows from operating activities:
Net Income $ 681 $ 490
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 50 70
Depreciation 57 60
Net amortization of securities premiums and discounts 6 13
Net realized gains on sales of securities - AFS (98) (96)
Proceeds from sales of loans held for sale 1,232 271
Net realized (gains) losses on sales of loans (7) 17
Life insurance death benefit (62) --
Earnings on bank owned life insurance (67) (69)
Allocated and earned shares of ESOP and MRP 76 68
Net realized gain on sale of foreclosed assets (52) (13)
(Increase) decrease in accrued interest receivable and other
assets 29 (50)
Increase (decrease) in accrued interest payable and other
liabilities (919) 472
------------ ------------
Net cash provided by operating activities 926 1,233
------------ ------------
Cash flows from investing activities:
Net increase in loans (3,855) (9,384)
Proceeds from sales of securities AFS 192 210
Proceeds from maturities and principal reductions of securities AFS 780 1,495
Purchases of securities AFS (25) (13)
Proceeds from maturities and principal reductions of securities HTM 9 58
Proceeds from the sale of foreclosed assets 13 116
Additions to premises and equipment (60) (170)
(Purchases) redemptions of Federal Home Loan Bank stock 114 (300)
------------ ------------
Net cash used in investing activities (2,832) (7,988)
------------ ------------
Cash flows from financing activities:
Net increase in deposits 6,323 1,299
Proceeds (repayments) from FHLB advances (2,050) 6,000
Exercise of stock options 31 8
Cash dividends paid (147) (136)
------------ ------------
Net cash provided by financing activities 4,157 7,171
------------ ------------
Net increase in cash and cash equivalents
2,251 416
Cash and cash equivalents at beginning of period 2,666 2,715
------------ ------------
Cash and cash equivalents at end of period $ 4,917 $ 3,131
============ ============
Non-cash investing activities:
Additions to foreclosed assets $ 20 $ 73
Cash paid during the period for:
Interest 1,490 935
Income taxes 335 129
See accompanying notes to consolidated financial statements.
7
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements include
the accounts of Gouverneur Bancorp, Inc. (the "Company") and Gouverneur
Savings and Loan Association (the "Bank"), the wholly owned and only
subsidiary of the Company, as of March 31, 2006 and September 30, 2005
and for the three and six month periods ended March 31, 2006 and 2005.
All material intercompany accounts and transactions have been
eliminated in this consolidation. These 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 condition, results of operations, and cash flows in
conformity with generally accepted accounting principles in the United
States of America.
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 month and the six month periods ended March
31, 2006 and 2005. The results of operations for the three month and
six month periods ended March 31, 2006 are not necessarily indicative
of the results which may be expected for an entire fiscal year or other
interim periods.
The data in the consolidated statements of condition for September 30,
2005 was derived from the Company's annual report on Form 10-KSB. That
data, along with the interim financial information presented in the
consolidated statements of financial condition, income, shareholders'
equity and cash flows should be read in conjunction with the 2005
consolidated financial statements, including the notes thereto included
in the Company's Annual Report on Form 10-KSB.
2. 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 outstanding shares. 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.
8
Basic and diluted earnings per share for the three-month and six month
periods ending March 31, 2006 and 2005 were computed as follows:
(In thousands, except per share data)
Three Months Ended Six Months Ended
March 31, March 31,
--------------------------- ---------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Basic earnings per share:
Net income $ 386 $ 271 $ 681 $ 490
Weighted average common shares outstanding 2,243 2,228 2,240 2,226
------------ ------------ ------------ ------------
Basic earnings per share $ 0.17 $ 0.12 $ 0.30 $ 0.22
============ ============ ============ ============
Diluted earnings per share:
Net income $ 386 $ 271 $ 681 $ 490
Weighted average common shares outstanding 2,243 2,228 2,240 2,226
Additional potentially dilutive securities from
common stock options 26 35 26 35
------------ ------------ ------------ ------------
Diluted weighted average common shares outstanding 2,269 2,263 2,266 2,261
============ ============ ============ ============
Diluted earnings per share $ 0.17 $ 0.12 $ 0.30 $ 0.22
============ ============ ============ ============
3. Comprehensive Income
--------------------
Comprehensive income, presented in the consolidated statements of
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 (losses) and reclassification
adjustments of securities available for sale and the related tax
effects for the three and six month periods ended March 31, 2006 and
2005 is as follows:
(In thousands)
Three Months Ended Six Months Ended
March 31, March 31,
--------------------------- ---------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Unrealized holding losses arising
during the period $ (95) $ (253) $ (70) $ (159)
Reclassification adjustment for gains
realized in Net income during period (98) (96) (98) (96)
------------ ------------ ------------ ------------
Net unrealized losses (193) (349) (168) (255)
Tax effect 77 139 67 102
------------ ------------ ------------ ------------
Other comprehensive loss, net of tax $ (116) $ (210) $ (101) $ (153)
============ ============ ============ ============
9
4. Stock Option and Management Recognition Plans
---------------------------------------------
The Company has a Stock Option Plan ("SOP") and the 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)
Three Months Ended Six Months Ended
March 31, March 31,
--------------------------- ---------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Net income, as reported $ 386 $ 271 $ 681 $ 490
Total stock-based compensation expense
determined under fair value method for
all awards, net of taxes (7) (1) (15) (3)
Amounts included in determination of net
income, net of taxes 6 1 12 2
------------ ------------ ------------ ------------
Pro forma net income $ 385 $ 271 $ 678 $ 489
============ ============ ============ ============
Earnings per share:
Basic - as reported $ 0.17 $ 0.12 $ 0.30 $ 0.22
Basic - pro forma 0.17 0.12 0.30 0.22
Diluted - as reported 0.17 0.12 0.30 0.22
Diluted - pro forma 0.17 0.12 0.30 0.22
5. Commitments and Contingencies
-----------------------------
Outstanding letters of credit written are conditional commitments
issued by the Company to guarantee the performance of a customer to a
third party. The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
standby letters of credit is represented by the contractual amount of
those instruments. The Bank uses the same credit policies in making
conditional obligations as it does for on-balance sheet instruments.
The Company had three standby letters of credit totaling $53,000 as of
March 31, 2006.
The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending other loan commitments. The
Company requires collateral and personal guarantees supporting these
letters of credit as deemed necessary. Management believes that the
proceeds obtained through a liquidation of such collateral and the
enforcement of personal guarantees would be sufficient to cover the
maximum potential amount of future payments required under the
corresponding guarantees.
10
6. Dividend Restrictions
---------------------
Cambray Mutual Holding Company ("Cambray MHC"), the Company's parent
mutual holding company, held 1,311,222 shares, or 57.2%, of the
Company's issued and outstanding common stock, and shareholders other
than Cambray MHC held 980,862 shares, or 42.8%, of such stock at March
31, 2006. Cambray MHC filed a notice with the Office of Thrift
Supervision ("OTS") to waive its right to receive cash dividends during
the 2006 calendar year. The Company announced a cash dividend to
shareholders of record as of March 15, 2006 of $0.15 per share of
common stock, which was paid on March 31, 2006 to all public
shareholders.
Cambray MHC waived receipt of the current and several past dividends
paid by the Company. The dividends are considered as restrictions in
the retained earnings of the Company. As of March 31, 2006 and
September 30, 2005, the aggregate retained earnings restricted for cash
dividends waived were $1,311,000 and $1,114,000, respectively.
7. Recently Issued Accounting Standards
------------------------------------
In December 2004, the Financial Accounting Standards Board issued
Statement No. 123(R), "Share-Based Payment". Statement No. 123(R)
revised Statement No. 123, "Accounting for Stock-Based Compensation",
and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and its related implementation guidance. Statement No.
123(R) will require compensation costs related to share-based payment
transactions to be recognized in the financial statements (with limited
exceptions). The amount of compensation cost will be measured based on
the grant-date fair value of the equity or liability instruments
issued. Compensation cost will be recognized over the period that an
employee provides service in exchange for the award. The statement is
effective for the Company as of October 1, 2006. The Company is
evaluating the impact that the adoption will have on the consolidated
financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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 Form 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, our asset
quality and the adequacy of our allowance for loan losses, include:
o Local, regional, national or global economic conditions which could
cause an increase in loan delinquencies, a decrease in property values,
or a change in the housing turnover rate;
o Changes in market interest rates or changes in the speed at which
market interest rates change;
11
o Changes in laws and regulations affecting us;
o Changes in competition; and
o Changes in consumer preferences.
Please do not rely unduly on any forward-looking statements, which are
valid only as of the date made. Many factors, including those described above,
could affect our financial performance and could cause our actual results or
circumstances for future periods to differ materially from what we anticipate or
project. We have no obligation to update any forward-looking statements to
reflect future events which occur after the statements are made.
General
The Company conducts no income generating activities other than holding
the stock of the Bank and a loan to the ESOP used to purchase shares of Company
common stock for the participants. Consequently, the net income of the Company
is derived primarily from its investment in the Bank. The Bank's net income
depends, to a large extent, on its net interest income, which is the difference
between interest earned on its interest earning assets, such as loans and
investments, and the cost of funds, consisting of interest paid on
interest-bearing liabilities, such as deposits and borrowings. The Bank's net
income is also affected by the provision for loan losses, as well as by the
amount of other income, including income from fees and service charges, net
gains and losses on sales of investments and operating expenses such as salaries
and employee benefits costs, net expenses on foreclosed assets 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.
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 made to residents
in the Bank's primary market area, southern St. Lawrence and northern Jefferson
and Lewis counties in New York State. 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.
Recent Developments
Director Larry Straw died in January 2006. The Bank will receive the
proceeds of life insurance policies on Mr. Straw's life. In this quarterly
statement we are recognizing income of $62,000 as our estimate of the death
benefit proceeds we will receive in excess of the surrender values of the
policies. Should our estimate be incorrect an adjustment to that amount will be
made when the correct amount is determined.
On April 11th, bids were received from contractors for the construction
project to expand the Bank's facilities at our main office in Gouverneur and to
provide contiguous office space and improved drive-up services. The contractor
has been selected and construction is expected to start soon, with occupancy
scheduled for November of this year.
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, 2005) lists significant accounting policies used in 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 following accounting policy is the one identified by
management to be critical to the results of operations:
12
Allowance for loan losses. The allowance for loan losses is the
estimated amount considered adequate to cover credit losses inherent in the
outstanding loan portfolio at the balance sheet date. The allowance is
established through the provision for loan losses charged against income. In
determining the allowance for loan losses, management makes significant
estimates and, accordingly, has identified this policy as probably the most
critical for the Company.
Management performs a monthly evaluation of the adequacy of the
allowance for loan losses. Consideration is given to a variety of factors in
establishing this estimate, including, but not limited to, current economic
conditions, diversification of the loan portfolio, delinquency statistics,
results of internal loan reviews, borrowers' actual or perceived financial and
managerial strengths, the adequacy of the underlying collateral (if collateral
dependent), the present value of future cash flows and other relevant factors.
This evaluation is inherently subjective, as it requires material estimates that
may be susceptible to significant change, including the amounts and timing of
future cash flows expected to be received on impaired loans.
The analysis has two components, specific and general allocations.
Collateral values discounted for market conditions and selling costs are used to
establish specific allocations. The Bank's historical loan loss experience,
delinquency rates and general economic conditions are used to establish general
allocations for the remainder of the portfolio.
Management monitors the adequacy of the allowance for loan losses on an
ongoing basis and reports its adequacy assessment quarterly to the Board of
Directors and the Audit Committee.
13
Average Balances, Interest Rates and Yields
The following table presents for the periods indicated, the average
interest-earning assets and average interest-bearing liabilities by principal
categories, the interest income or expense for each category, and the resultant
average yields earned or rates paid. No tax equivalent adjustments were made.
All average balances are daily average balances. Non-interest-bearing checking
accounts are included in the tables as a component of non-interest-bearing
liabilities.
For the three months Ended March 31,
2006 2005
------------------------------ ------------------------------
(Dollars in thousands)
Average Yield/ Average Yield/
Balance Interest Cost (6) Balance Interest Cost (6)
-------- -------- -------- -------- -------- --------
Loans, net (1) $102,468 $ 1,694 6.70% $ 87,770 $ 1,428 6.60%
Securities (2) 11,794 129 4.44% 13,346 126 3.83%
Other short-term investments 395 5 5.13% 1,307 8 2.48%
-------- -------- -------- --------
Total interest-earning assets 114,657 1,828 6.47% 102,423 1,562 6.18%
-------- --------
Non-interest-earning assets 8,730 8,566
-------- --------
Total assets $123,387 $110,989
======== ========
Savings and club accounts (3) $ 19,632 50 1.03% $ 19,600 50 1.03%
Time certificates 31,525 279 3.59% 29,466 187 2.57%
NOW and money market
accounts 11,794 32 1.10% 12,035 28 0.94%
Borrowings 37,115 399 4.36% 28,267 248 3.50%
-------- -------- -------- --------
Total interest-bearing liabilities 100,066 760 3.08% 89,368 513 2.33%
-------- --------
Non-interest-bearing liabilities 4,251 3,340
-------- --------
Total liabilities 104,317 92,708
Shareholders' equity 19,070 18,281
-------- --------
Total liabilities and
shareholders' equity $123,387 $110,989
======== ========
Net interest income/spread (4) $ 1,068 3.39% $ 1,049 3.85%
======== ======== ======== ========
Net earning assets/net interest margin (5) $ 14,591 3.78% $ 13,055 4.15%
======== ======== ======== ========
Ratio of average interest-earning
Assets to average interest-bearing
liabilities 1.15x 1.15x
======== ========
Notes appear on following page
14
Average Balances, Interest Rates and Yields (continued)
For the six months Ended March 31,
2006 2005
------------------------------ ------------------------------
(Dollars in thousands)
Average Yield/ Average Yield/
Balance Interest Cost (6) Balance Interest Cost (6)
-------- -------- -------- -------- -------- --------
Loans, net (1) $101,801 $ 3,375 6.65% $ 85,660 $ 2,796 6.55%
Securities (2) 12,044 267 4.45% 13,773 251 3.65%
Other short-term investments 310 9 5.82% 1,444 15 2.08%
-------- -------- -------- --------
Total interest-earning assets 114,155 3,651 6.41% 100,877 3,062 6.09%
-------- --------
Non-interest-earning assets 8,711 8,578
-------- --------
Total assets $122,866 $109,455
======== ========
Savings and club accounts (3) $ 19,702 100 1.02% $ 19,855 102 1.03%
Time certificates 31,209 538 3.46% 29,429 377 2.57%
NOW and money market
accounts 11,888 66 1.11% 11,882 50 0.84%
Borrowings 36,893 783 4.26% 26,780 467 3.50%
-------- -------- -------- --------
Total interest-bearing liabilities 99,692 1,487 2.99% 87,946 996 2.27%
-------- --------
Non-interest-bearing liabilities 4,230 3,319
-------- --------
Total liabilities 103,922 91,265
Shareholders' equity 18,944 18,190
-------- --------
Total liabilities and
shareholders' equity $122,866 $109,455
======== ========
Net interest income/spread (4) $ 2,164 3.42% $ 2,066 3.82%
======== ======== ======== ========
Net earning assets/net interest margin (5) $ 14,463 3.80% $ 12,931 4.11%
======== ======== ======== ========
Ratio of average interest-earning
assets to average interest-bearing
liabilities 1.15x 1.15x
======== ========
(1) Shown net of the allowance for loan losses. Average loan balances include
non-accrual loans and loan held for sale. Interest is recognized on
non-accrual loans only as and when received.
(2) Securities are included at amortized cost, with net unrealized gains or
losses on securities available for sale included as a component of
non-earning assets. Securities include FHLB stock.
(3) Include advance payments by borrowers for taxes and insurance (mortgage
escrow deposits).
(4) The spread represents the difference between the weighted average yield on
interest-earning assets and the weighted average cost of interest-bearing
liabilities.
(5) The net interest margin, also known as the net yield on average
interest-earning assets, represents net interest income as a percentage of
average interest-earning assets.
(6) Yields are not computed on a tax equivalent basis.
15
Rate Volume Analysis of Net Interest Income
One method of analyzing net interest income is to consider how changes
in average balances and average rates from one period to the next affect net
interest income. The following table shows changes in the dollar amount of
interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. It shows the amount of the change in
interest income or expense caused by either changes in outstanding balances
(volume) or changes in interest rates. The effect of a change in volume is
measured by multiplying the average rate during the first period by the volume
change between the two periods. The effect of a change in interest rates is
calculated by multiplying the change in rate between the two periods by the
average volume during the first period. Changes attributable to both rate and
volume, which cannot be segregated, have been allocated proportionately to the
change due to volume and the change due to rate.
Three months ended March 31, Six months ended March 31,
---------------------------------------- ----------------------------------------
2006 vs. 2005 2006 vs. 2005
---------------------------------------- ----------------------------------------
Increase (Decrease) Due To: Increase (Decrease) Due To:
---------------------------------------- ----------------------------------------
Volume Rate Total Volume Rate Total
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans $ 244 $ 22 $ 266 $ 536 43 $ 579
Securities (16) 19 3 (34) 50 16
Other short-term investments (8) 5 (3) (18) 12 (6)
---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning assets 220 46 266 484 105 589
---------- ---------- ---------- ---------- ---------- ----------
Interest-bearing liabilities:
Savings and club accounts -- -- -- (1) (1) (2)
Time certificates 14 78 92 24 137 161
NOW and money market accounts (1) 5 4 -- 16 16
Borrowings 88 63 151 201 115 316
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities 101 146 247 224 267 491
---------- ---------- ---------- ---------- ---------- ----------
Net change in net interest income $ 119 $ (100) $ 19 $ 260 $ (162) $ 98
========== ========== ========== ========== ========== ==========
Comparison of Financial Condition at March 31, 2006 and September 30, 2005.
Total assets at March 31, 2006 were $126.1 million, an increase of $3.9
million, or 3.2%, from $122.2 million at September 30, 2005. Net loans increased
by $3.0 million, or 3.1%, from $97.6 million to $100.6 million. The increase in
loans resulted from increases of $3.8 million in residential real estate loans,
$0.2 million in commercial real estate loans and $0.1 million in other
commercial loans, combined with a decrease of $0.3 million in other consumer
loans. The decrease in other consumer loans was mainly caused by a decrease in
automobile loans.
Borrowed funds from FHLB, consisting of advances and security
repurchase obligations, were $34.7 million on March 31, 2006, down from $36.8
million at September 30, 2005. The decrease of $2.1 million in borrowed funds
was the result of purchasing brokered deposits through the Promontory
Interfinancial Network's Certficate of Deposit Account Registry Service(R) (or
"CDARS"). This program will provide an alternative funding source along with
FHLB borrowings for loan growth when local deposit growth is not sufficient by
itself. Deposits increased $6.3 million, or 9.8%, during the six months from
$64.0 million to $70.3 million. Increases in demand deposits, savings and time
16
deposits by $0.3 million, $1.2 million and $4.9 million, respectively, more than
offset a decrease of $0.1 million in NOW and money market accounts. Deposits
purchased from the CDARS program accounted for $4.0 million of the increase in
time deposits.
Shareholders' equity increased $540,000 for the six months ended March
31, 2006, as net income of $681,000 combined with increases of $76,000 from the
allocation of ESOP and MRP shares and $31,000 from the issuance of treasury
stock for exercised options, more than offset decreases of $101,000 in the fair
value, net of taxes, in the available-for-sale securities portfolio and $147,000
for a cash dividend paid to public shareholders on March 31, 2006. Treasury
stock was used to supply the 6,650 shares we needed in the first six months of
fiscal 2006 when five directors exercised some of their vested stock options.
At March 31, 2006, non-performing assets totaled $415,000, or 0.33% of
total assets, as compared to $399,000, or 0.33% of total assets at September 30,
2005. Non-performing loans increased by $9,000 from $393,000, or 0.39% of total
loans, to $402,000, or 0.40% of total loans, over the same period. A summary of
the Company's non-performing assets and related ratios follows:
March 31, September 30,
Non-performing assets 2006 2005
--------------------- ---------- ----------
Non-accrual loans
Residential mortgages
and home equity loans $ 126 $ 115
Commercial mortgages 257 275
Consumer other 19 3
Commercial other -- --
---------- ----------
Total non-accrual loans 402 393
Restructured commercial mortgage -- --
Restructured commercial other -- --
---------- ----------
Total non-performing loans 402 393
Foreclosed real estate -- --
Other repossessed assets 13 6
---------- ----------
Total non-performing assets $ 415 $ 399
========== ==========
Non-performing loans to total loans 0.40% 0.39%
Non-performing assets to total assets 0.33% 0.33%
The Company had no loans more than 90 days delinquent and accruing at
March 31, 2006 or September 30, 2005.
One of the three non-accrual residential mortgages is currently in
foreclosure proceedings and another is in bankruptcy proceedings.
Two loans to the same borrower total the $257,000 non-accrual balance
in commercial mortgages. These loans are in foreclosure proceedings.
Management believes that each of these non-performing loans is
adequately secured by collateral. 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
17
$24,000 increase in the loan loss allowance is appropriate at this time due to
the increase in the size of our loan portfolio.
Comparison of Results of Operations for the Three Months Ended March 31, 2006
and 2005.
General. Our net income for the three months ended March 31, 2006 was
$386,000, an increase of $115,000, or 42.4%, over net income of $271,000 for the
same period last year. The increase in net income resulted from the combination
of the following factors:
1. net interest income increased by $19,000, as interest income
increased $266,000 and interest expense increased by $247,000,
2. non-interest income increased by $114,000 over last year's
period ($62,000 of which derives from life insurance income
related to the death of Director Straw),
3. the provision for loan losses decreased by $5,000 for the
second quarter of this fiscal year versus last fiscal year,
4. non-interest expense increased $5,000 in the three month
period this year compared to last year's period, and
5. income taxes increased $18,000.
Basic and diluted earnings per share were both $0.17, respectively for
this year's quarter versus $0.12 for both measures in last year's quarter.
A summary of the information shown previously in the Average Balances,
Interest Rates and Yields for three months table and in the Rate Volume Analysis
of Net Interest Income table follows:
Interest Income. Results for the three months ended March 31, 2006 show
that interest income increased by $266,000, or 17.0%, from $1,562,000 for the
three months ended March 31, 2005 to $1,828,000. Interest income increased
$220,000 due to an increase in the average balance of interest-earning assets,
primarily loans, from $102.4 million to $114.7 million, while interest income
increased $46,000 due to an increase in the average rate earned on
interest-earning assets, from 6.18% to 6.47%.
Interest income on loans increased $266,000, or 18.6%, for the second
quarter of fiscal 2006 compared to the second quarter of fiscal 2005. Loan
growth over the past year remained strong as indicated by the growth of the
average balance of loans in the first six months of the 2006 fiscal year by
$14.7 million from the first six months of the 2005 fiscal year. This growth
resulted in an increase in interest income of $244,000, while an increase of
0.10% in the average interest rate on loans increased interest income by
$22,000.
Interest income on securities and other short-term investments was
$134,000 for the three months ended March 31, 2006 and March 31, 2005.
Interest Expense. Interest expense increased by $247,000, or 48.1%,
from $513,000 for the three months ended March 31, 2005 to $760,000 for the
three months ended March 31, 2006. Interest expense increased $101,000 due to an
increase in the average balance of interest-bearing liabilities and $146,000 due
to an increase in the average rate paid on interest-bearing liabilities.
Interest-bearing liabilities increased from $89.4 million last year to $100.1
million this year, mainly as a result of additional borrowings from the FHLB.
The average rate paid on interest-bearing liabilities increased from 2.33% to
3.08% over the same period.
18
Over the past year, increases in the average balances of time
certificates by $2.0 million and borrowings by $8.8 million increased interest
expense by $14,000 and $88,000, respectively. Increases in the average rate paid
on time certificates by 1.02% and on borrowings by 0.80%, increased interest
expense by $78,000 and $63,000, respectively.
Net Interest Income. The net result of the increases in interest income
and interest expense was a $19,000 increase in net interest income. Our interest
rate spread (the difference between the average rate we earn on interest-earning
assets and the average rate we pay on interest-bearing deposits and borrowings)
decreased by 46 basis points (0.46%) from 3.85% for the three months ended March
31, 2005 to 3.39% for the three months ended March 31, 2006, while our net
interest margin (net interest income divided by average earning assets)
decreased by 37 basis points (0.37%) from 4.15% to 3.78% for the same time
frame.
Interest rate spread, the difference between the average rate we earn
on our interest-earning assets and the cost of our interest-bearing liabilities,
continues to decrease as the Federal Reserve continues to raise short-term
interest rates affecting the costs of deposits and borrowed funds. These
increases have not raised longer-term rates and the yield curve has flattened
and even inverted, at times, with 6 month and one-year treasury rates higher
than two-year treasury rates. Our growth in loans over the past few years has
helped to buffer the impact of the decrease in spread thus far. However, our
margins will continue to be squeezed as deposit and borrowing costs rise with
the shorter-term rates and mortgage rates do not ratchet up accordingly.
The ratio of average interest-earning assets to average
interest-bearing liabilities was 1.15 times for each period.
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. 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 March 31, 2006, we provided $25,000 for loan
losses, compared to $30,000 in the same quarter last year. At March 31, 2006 and
2005, the ratio of our loan allowance to total loans was 0.89% and 0.91%,
respectively. On December 31, 2005 the allowance was $873,000, or 0.86% of total
loans, and we determined at the end of the second quarter that the appropriate
level for the allowance was $893,000. We had charge-offs during the quarter of
$7,000 and recoveries of $2,000, so a $25,000 provision was necessary to reach
the desired level for the allowance. Our level of non-accruing loans, loans 90
days past due and still accruing and restructured loans was $402,000, or 0.40%
of total loans at March 31, 2006 compared to $616,000, or 0.62% of total loans
at December 31, 2005. Management feels that these loans are adequately secured
and do not require any adjustment to the allowance for loan losses at this time.
Non-interest Income. Our non-interest income increased by $114,000, or
61.0%, from $187,000 in the second quarter of fiscal 2005 to $301,000 in the
second quarter of fiscal 2006, due to $62,000 in income from life insurance
policies, as well as increases in the gain on sale of foreclosed assets, service
charges and earnings on the investment in life insurance of $23,000, $7,000 and
$5,000, respectively. Also, last year we posted a loss on the sale of loans of
$17,000 reducing non-interest income in the second quarter.
Non-interest Expenses. Non-interest expenses increased only $5,000, or
0.6%, from $774,000 during the fiscal 2005 quarter to $779,000 in the fiscal
2006 quarter. This small increase was primarily the result of a change in our
health insurance coverage eliminating the self-insured portion and resulted in a
$20,000 savings for the quarter.
19
At March 31, 2006, we had thirty-three full-time and two part-time
employees, compared to thirty-three full-time and one part-time employee at the
end of March 2005.
Income tax expense. Our income tax expense increased by $18,000 to
$179,000 from $161,000, or 11.2%, comparing the second quarter of fiscal 2006 to
the same quarter of fiscal 2005. The increased expense was the result of income
before income tax increasing by $71,000, or 16.4%, from last year's $432,000 to
this year's $503,000. In addition, the income related to life insurance policies
is tax-exempt.
Comparison of Results of Operations for the Six Months Ended March 31, 2006 and
2005.
General. Our net income for the six months ended March 31, 2006 was
$681,000, an increase of $191,000, or 39.0%, from last year's net income of
$490,000. The following operating results combined to produce the increase:
1. net interest income increased $98,000 as interest income
increased $589,000 and interest expense increased $491,000,
2. non-interest income improved by $156,000 ($62,000 of which
derives from life insurance income related to the death of
Director Straw),
3. the provision for loan losses decreased by $20,000 for the
first six months of the 2006 fiscal year versus the first six
months of the 2005 fiscal year,
4. non-interest expense increased by $23,000 and
5. income taxes increased by $60,000.
Basic and diluted earnings per share were both $0.30 for the first six
months of this fiscal year versus $0.22 for both measures for the same period
last year.
A summary of the information shown previously in the Average Balances,
Interest Rates and Yields for six months table and in the Rate Volume Analysis
of Net Interest Income table follows:
Interest Income. Interest income increased by $589,000, from $3,062,000
to $3,651,000, or 19.2%, from the six months ended March 31, 2005 to the six
months ended March 31, 2006. Average interest-earning assets increased $13.3
million, from $100.9 million to $114.2 million, or 13.2%, resulting in a
$484,000 increase in interest income, while an increase of 32 basis points
(0.32%) in the average rate earned on interest earning assets increased interest
income by $105,000 for the first six months of fiscal year 2006 as compared to
the same period last year.
Interest income on loans increased $579,000. An increase in the average
balance of loans of $16.1 million, or 18.8%, from $85.7 million last year to
$101.8 million this year resulted in an increase of $536,000 in interest income,
while an increase of 10 basis points (0.10%) in the average rate earned on loans
increased interest income by $43,000.
Interest income on securities and other short-term investments
increased by $10,000.
Interest Expense. Interest expense increased $491,000 from the first
half of 2005 to the first half of 2006. The increase in the average balance of
interest-bearing liabilities by $11.8 million, or 13.4%, from $87.9 million last
year to $99.7 million this year, resulted in an increase of $224,000 in interest
expense, while an increase in the average rate we paid on interest-bearing
20
liabilities by 72 basis points (0.72%), from 2.27% in 2005 to 2.99% in 2006,
increased interest expense by $267,000.
Interest expense increased by $316,000 on borrowings from FHLB from
fiscal 2005 to fiscal 2006. An increase in the average balance of borrowings of
$10.1 million, or 37.7%, from $26.8 million at March 31, 2005 to $36.9 million
at March 31, 2006 increased interest expense $201,000, while an increase in the
average interest rate on borrowings by 76 basis points (0.76%) from 3.50% in the
first half of last fiscal year to 4.26% for the first half of this fiscal year
increased interest expense by $115,000.
Interest expense increased by $161,000 on time certificates from the
first half of 2005 to the first half of 2006. An increase in the average balance
of time certificates by $1.8 million, or 6.1%, from $29.4 million at March 31,
2005 to $31.2 million at March 31, 2006 increased interest expense $24,000,
while an increase in the average interest rate on time certificates by 89 basis
points (0.89%) from 2.57% in the first half of last fiscal year to 3.46% for the
first half of this fiscal year increased interest expense by $137,000.
Net Interest Income. Overall, the net effect of the increase in
interest income and increase in interest expense was a $98,000 increase in net
interest income. Our interest rate spread (the difference between the average
rate we earn and the average rate we pay) decreased by 40 basis points (0.40%)
from 3.82% last year to 3.42% this year. Our net interest margin was 3.80% in
the first half of fiscal 2006, down from 4.11% in the first half of fiscal 2005.
The ratio of average interest-earning assets to average
interest-bearing liabilities was 1.15 times in both the first half of 2005 and
2006.
Provision for Loan Losses. For the six-month period ended March 31,
2006 we provided $50,000 for loan losses compared to $70,000 in the same period
ended March 31, 2005. At March 31, 2006 and 2005 the ratio of our loan loss
allowance to total loans was 0.89% and 0.91%, respectively. As disclosed in the
comparative discussion of result of operations for three months, our level of
non accruing loans, loans 90 days past due and still accruing and restructured
loans was $402,000, or 0.40% of total loans at March 31, 2006 compared to
$393,000, or 0.39% of total loans on September 30, 2005. Management feels that
these loans are adequately secured and do not require any adjustment to the
allowance for loan losses.
Non-interest Income. Our non-interest income was $156,000 higher this
year for the first six months versus the same period in 2005. The increase
resulted mostly from $62,000 in death benefit income on life insurance policies,
as well as realized gains on the sale of foreclosed assets, which increased by
$43,000, realized gain (loss) on sales of loans held for sale, which increased
by $24,000 from a $17,000 loss last year to a $7,000 gain this year and service
charges, which increased by $23,000.
Non-interest Expense. Non-interest expenses increased by $23,000 for
the first six months of fiscal 2006 compared to fiscal 2005. Increases in
directors fees, occupancy and equipment, postage and supplies and professional
fees of $17,000, $29,000, $16,000 and $9,000, respectively, were mostly offset
by decreases of $21,000 in salaries and employee benefits, $9,000 in data
processing costs and $18,000 in other expenses. The decrease in salaries and
employee benefits resulted from a change in our health insurance coverage
eliminating the self-insured portion resulting in a $40,000 savings for the
six-month period.
Due to a postponement of the implementation of Section 404 of the
Sarbanes-Oxley Act of 2002 for smaller companies, we will now have to comply
beginning on September 30, 2007. Section 404 requires the management of public
companies to assess and report on the effectiveness of their internal controls
over financial reporting. Based upon information we have received from our
independent auditors and the experience of companies who, because of their
market capitalization, have been required to comply with Section 404 earlier
than we, we anticipate that our internal and external audit and related fees
will increase as we emplace the systems, policies and procedures necessary to
21
comply with Section 404. While we cannot quantify the compliance costs at this
time, we expect that such costs will materially and permanently increase our
non-interest expense.
On April 20, 2006, The Advisory Committee on Smaller Public Companies
chartered by the SEC unanimously adopted its final report and issued that report
to the SEC on April 23. In its 33 recommendations (not unanimously adopted), the
report includes 3 primary recommendations of which the most controversial is the
need for "scaled" or "proportional" securities regulation for smaller public
companies using specific measurements to define the term "smaller public
company."
A number of the SEC commissioners have already stated they are not in
favor of "scaling" compliance for varying levels of reporting companies based on
a size measurement. If that is the case, the SEC may decide to ignore the
primary recommendations of its own Advisory Committee. The SEC has not taken or
announced that it will take any steps to "scale" compliance requirements and it
is not known at this time whether it will ever take such action.
Income tax expense. Our income tax expense increased $60,000, or 21.4%,
from $281,000 last year to $341,000 this year. The increased expense was the
result of higher income before income tax of $189,000, or 24.5%, from $771,000
for the first half of last year to $960,000 for the first half of this year. In
addition, the income related to life insurance policies is tax-exempt.
Liquidity
Our primary sources of funds are deposits, borrowings from the 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 six months ended March 31, 2006, we increased our cash
and cash equivalents by $1.8 million. We originated $14.4 million of new loans
and sold $1.2 million of USDA loans, during the six months ended March 31, 2006.
Loans, net, after payments, charge-offs and transfers to foreclosed real estate,
increased by $3.8 million during the period.
Deposits increased by $6.3 million during the six months ended March
31, 2006. Deposits purchased from the CDARS program discussed earlier in the
Comparison of Financial Condition section accounted for $4.0 million of this
increase. In addition to factors within our control, such as our deposit pricing
strategies and our marketing efforts, deposit flows are affected by the level of
general market interest rates, the availability of alternate investment
opportunities, general economic conditions, and other factors outside our
control.
We monitor our liquidity regularly. Excess liquidity is invested in
overnight federal funds sold and other short-term investments. If we need
additional funds, we can borrow those funds, although the cost of borrowing
money is normally higher than the average cost of deposits. As a member of the
FHLB, the Bank can arrange to borrow an additional $9.1 million against our one
to four family mortgages. We have recently applied for an increase in our
borrowing potential from FHLB from 30% of assets to 35% of assets. This will
increase our borrowing potential by approximately $6.3 million and provide
additional liquidity. We have used borrowed funds to help us leverage capital we
received from our stock sale, 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.
22
We measure liquidity on a monthly basis and seek to maintain a
liquidity ratio of between 5% and 15%. At March 31, 2006, the ratio was 5.5%.
Off Balance Sheet Arrangements
We had $3.1 million in outstanding commitments to make loans at March
31, 2006, along with $4.0 million of unused home equity, commercial and
overdraft lines of credit. We also have a commitment to sell the $2.2 million
guaranteed portion of a USDA guaranteed loan we originated. We are awaiting USDA
approval for the sale. 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 March 31, 2006, we had
$26.5 million, including the $4.0 million of purchased deposits from CDARS, 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.
Capital Resources
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 March 31, 2006, the Bank exceeded all
regulatory capital requirements of the OTS applicable to it, with Tier I capital
of $18.7 million, or 14.8% of adjusted total assets and with risk-based capital
of $19.6 million, or 27.0% of risk-weighted assets. The Bank also had tangible
capital of $18.7 million, or 14.8% of tangible assets. The Bank was classified
as "well capitalized" at March 31, 2006 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, or (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 an procedures as of March 31, 2006, 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 during the quarter ended March 31, 2006, including any
corrective actions with regard to significant deficiencies and material
weakness.
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 operations.
23
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of stockholders held on February 13, 2006, the Company's
stockholders (i) elected three directors, Richard F. Bennett, Timothy J. Monroe
and Joseph C. Pistolesi, each to serve for a three-year term to expire at the
annual meeting of stockholders to be held in 2009 and one director, F. Toby
Morrow to serve for a one-year term to expire at the annual meeting to be held
in 2007 and (ii) ratified the appointment of Beard Miller Company LLP as the
independent public accountants for the fiscal year ending September 30, 2006.
The terms of office of directors Richard E. Jones, Frank Langevin and Robert J.
Leader all continued after the annual meeting.
Of the 2,287,684 shares entitled to vote on proposition (i) at the meeting, a
total of 2,245,437 shares (98.15%) voted as follows:
(i) ELECTION OF DIRECTORS:
For % Withheld %
--------- ---- -------- ---
Richard F. Bennett 2,092,875 93.2 152,562 6.8
Timothy J. Monroe 2,059,429 91.7 186,008 8.3
Joseph C Pistolesi 2,065,915 92.0 179,522 8.0
F. Toby Morrow 2,061,233 91.8 184,204 8.2
Of the 2,284,234 shares entitled to vote on proposition (ii) at the meeting, a
total of 2,245,437 shares (98.15%) voted as follows:
(ii) RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS:
For % Against % Abstain %
--------- ---- ------- --- ------- ---
2,081,516 92.7 31,452 1.4 132,469 5.9
Item 6. 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 Principal Financial Officer Pursuant to
Section 1350
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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: May 11, 2006 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)
25