================================================================================
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 June 30, 2007
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 AUGUST 2, 2007
- ----------------------------- --------------
Common Stock, par value $ .01 2,300,059
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
================================================================================
GOUVERNEUR BANCORP, INC.
FORM 10-QSB
TABLE OF CONTENTS
PAGE
----
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements - Unaudited
Consolidated Statements of Financial Condition at June 30, 2007
and at September 30, 2006 3
Consolidated Statements of Income for the three and nine months
ended June 30, 2007 and 2006 4
Consolidated Statements of Shareholders' Equity for the nine
months ended June 30, 2007 and 2006 5
Consolidated Statements of Cash Flows for the nine months ended
June 30, 2007 and 2006 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 14
Item 3. Controls and Procedures 28
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 6. Exhibits 28
SIGNATURES 29
EXHIBITS 30
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share and per share data) (Unaudited)
JUNE 30, SEPTEMBER 30,
2007 2006
------------- -------------
ASSETS:
Cash and due from banks $ 2,196 $ 2,308
Interest-bearing deposits in bank 894 162
------------- -------------
Total cash and cash equivalents 3,090 2,470
Securities available-for-sale 10,231 9,845
Securities held-to-maturity (fair value 2007: $84: 2006: $93) 83 92
Loans held for sale 2,119 2,160
Loans receivable, net of allowance for loan losses: 2007 $907: 2006 $948 106,589 105,642
Investment in Federal Home Loan Bank stock, at cost 1,757 1,773
Investment in life insurance 3,740 3,631
Premises and equipment, net 3,070 2,225
Accrued interest receivable and other assets 1,924 2,237
------------- -------------
Total assets $ 132,603 $ 130,075
============= =============
LIABILITIES:
Deposits: Non-interest-bearing demand $ 4,289 $ 3,493
NOW and money market 13,073 11,966
Savings 18,151 19,342
Time 39,493 37,662
------------- -------------
Total deposits 75,006 72,463
Advances from the Federal Home Loan Bank 34,550 35,250
Other liabilities 2,633 2,507
------------- -------------
Total liabilities 112,189 110,220
------------- -------------
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 4,886 4,847
Retained earnings 15,907 15,398
Treasury Stock, at cost, (shares 2007: 83,981: 2006: 91,956) (425) (466)
Accumulated other comprehensive income 121 234
Unearned common stock held by Management Recognition Plan - (44)
Unallocated common stock held by Employee Stock Ownership Plan (99) (138)
------------- -------------
Total shareholders' equity 20,414 19,855
------------- -------------
Total liabilities and shareholders' equity $ 132,603 $ 130,075
============= =============
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 NINE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
INTEREST INCOME:
Loans $ 1,853 $ 1,738 $ 5,584 $ 5,113
Securities-taxable 125 114 358 356
-non-taxable 18 11 43 36
Other short-term investments 24 14 49 23
------------ ------------ ------------ ------------
Total interest income 2,020 1,877 6,034 5,528
------------ ------------ ------------ ------------
INTEREST EXPENSE:
Deposits 555 466 1,605 1,170
Borrowings - short term 126 106 397 458
Borrowings - long term 305 258 892 689
------------ ------------ ------------ ------------
Total interest expense 986 830 2,894 2,317
------------ ------------ ------------ ------------
Net interest income 1,034 1,047 3,140 3,211
Provision for loan losses - 15 15 65
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 1,034 1,032 3,125 3,146
------------ ------------ ------------ ------------
NON-INTEREST INCOME:
Service charges 60 55 167 169
Realized gain on sales of securities - AFS 96 - 96 98
Realized gain (loss) on sales of loans held for sale - - - 7
Life insurance death benefit - - - 62
Earnings on investment in life insurance 37 32 109 99
Realized gain on foreclosed assets, net 6 3 23 55
Other 68 19 178 118
------------ ------------ ------------ ------------
Total non-interest income 267 109 573 608
------------ ------------ ------------ ------------
NON-INTEREST EXPENSES:
Salaries and employee benefits 433 476 1,348 1,291
Directors fees 65 18 163 119
Occupancy and equipment 140 111 402 351
Data processing 32 31 94 92
Postage and supplies 30 30 109 97
Professional fees 74 52 195 165
Other 106 108 360 302
------------ ------------ ------------ ------------
Total non-interest expenses 880 826 2,671 2,417
------------ ------------ ------------ ------------
Income before income tax expense 421 315 1,027 1,337
Income tax expense 153 106 360 447
------------ ------------ ------------ ------------
Net income $ 268 $ 209 $ 667 $ 890
============ ============ ============ ============
Earnings per common share - basic $ 0.12 $ 0.09 $ 0.29 $ 0.40
Earnings per common share - diluted $ 0.12 $ 0.09 $ 0.29 $ 0.39
See accompanying notes to consolidated financial statements
4
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Nine months ended June 30, 2007
(In thousands, except share and per 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, 2006 $ 24 $ 4,847 $ 15,398 $ (466) $ 234 $ (44) $ (138) $ 19,855
--------
Comprehensive income:
Net income 667 667
Change in unrealized gains on
securities available for sale,
net of reclassification adjustment
and tax effects (113) (113)
--------
Total comprehensive income 554
--------
Allocation of ESOP shares (7,829 shares) 55 39 94
Adoption SFAS 123(R) (44) 44 -
Amortization of MRP 27 27
Amortization of stock option grants 3 3
Exercise of stock options, 7,975 shares (2) 41 39
Cash dividends declared, $0.16 per share (158) (158)
------ ---------- -------- -------- ------------- ---------- ----------- --------
Balance at June 30, 2007 $ 24 $ 4,886 $ 15,907 $ (425) $ 121 $ - $ (99) $ 20,414
====== ========== ======== ======== ============= ========== =========== ========
5
GOUVERNEUR BANCORP, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Nine months ended June 30, 2006
(In thousands, except share and per 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, 2005 $ 24 $ 4,739 $ 14,392 $ (499) $ 272 $ (67) $ (186) $ 18,675
--------
Comprehensive income:
Net income 890 890
Change in unrealized gains on
securities available for sale,
net of reclassification adjustment
and tax effects (135) (135)
--------
Total comprehensive income 755
--------
Allocation of ESOP shares, 7,266 shares 53 36 89
Amortization of MRP shares 18 12 30
Exercise of stock options, 6,650 shares (2) 33 31
Cash dividends declared, $0.15 per share (147) (147)
------ ---------- -------- -------- ------------- ---------- ----------- --------
Balance at June 30, 2006 $ 24 $ 4,808 $ 15,135 $ (466) $ 137 $ (55) $ (150) $ 19,433
====== ========== ======== ======== ============= ========== =========== ========
See accompanying notes to consolidated financial statements
6
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
NINE MONTHS ENDED
JUNE 30,
------------------------------
2007 2006
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 667 $ 890
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 15 65
Depreciation 111 86
Write down of foreclosed real estate 6 -
Net amortization of securities premiums and discounts - 7
Net realized gains on sales of securities - AFS (96) (98)
Proceeds from sales of loans held for sale - 1,232
Net realized gains on sales of loans - (7)
Life insurance death benefit - (62)
Earnings on bank owned life insurance (109) (99)
Allocated and earned shares of SOP, ESOP and MRP 124 119
Net realized gain on sale of foreclosed assets (23) (55)
(Increase) decrease in accrued interest receivable and other assets 380 (48)
Increase (decrease) in accrued interest payable and other liabilities 201 (485)
------------- -------------
Net cash provided by operating activities 1,276 1,545
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from sales 98 192
Proceeds from maturities and principal reductions 1,656 1,116
Purchases (2,232) (521)
Securities held to maturity, proceeds from maturities 9 13
Redemptions of Federal Home Loan Bank stock 16 229
Net increase in loans (1,211) (5,329)
Proceeds from sales of foreclosed assets 240 16
Additions to premises and equipment (956) (379)
------------- -------------
Net cash used in investing activities (2,380) (4,663)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 2,543 10,214
Net repayments of FHLB advances (700) (5,150)
Exercise of stock options 39 31
Cash dividends paid (158) (147)
------------- -------------
Net cash provided by financing activities 1,724 4,948
------------- -------------
Net increase in cash and cash equivalents 620 1,830
Cash and cash equivalents - Beginning 2,470 2,666
------------- -------------
Cash and cash equivalents - Ending $ 3,090 $ 4,496
============= =============
NON-CASH INVESTING ACTI VITIES:
Additions to foreclosed assets $ 290 $ 64
CASH PAID DURING THE PERIOD FOR:
Interest 2,858 2,319
Income taxes 405 491
See accompanying notes to consolidated financial statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited 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 June 30, 2007 and September 30, 2006 and for the
three and nine-month periods ended June 30, 2007 and 2006. 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 nine-month periods ended June
30, 2007 and 2006. The results of operations for the three and
nine-month periods ended June 30, 2007 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,
2006 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 2006
consolidated financial statements, including the notes thereto included
in the Company's 2006 Annual Report on Form 10-KSB. Certain amounts for
the three-month and nine-month periods ended June 30, 2006 were
reclassified to conform to the presentation of June 30, 2007.
2. Earnings Per Common Share
Basic earnings per common share represents income available to common
shareholders divided by the weighted average number of common shares
outstanding during the period. Unearned Employee Stock Ownership Plan
("ESOP") and Management Recognition Plan ("MRP") shares 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,
as well as any adjustment to income that would result from the assumed
issuance. Potential common shares that may be issued by the Company
relate to unearned MRP shares and outstanding stock options and are
determined using the treasury stock method.
8
Basic and diluted earnings per share for the three and nine-month
periods ending June 30, 2007 and 2006 were computed as follows:
(In thousands, except per share data)
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------------- ---------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
BASIC EARNINGS PER SHARE:
Net income $ 268 $ 209 $ 667 $ 890
============ ============ ============ ============
Weighted average common shares outstanding 2,271 2,249 2,266 2,243
============ ============ ============ ============
Basic earnings per share $ 0.12 $ 0.09 $ 0.29 $ 0.40
============ ============ ============ ============
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------------- ---------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
DILUTED EARNINGS PER SHARE:
Net income $ 268 $ 209 $ 667 $ 890
============ ============ ============ ============
Weighted average common shares outstanding 2,271 2,249 2,266 2,243
Additional potentially dilutive securities
(equivalent in common stock)
common stock options and unearned MRP shares 26 29 27 27
------------ ------------ ------------ ------------
Diluted weighted average common shares outstanding 2,297 2,278 2,293 2,270
============ ============ ============ ============
Diluted earnings per share $ 0.12 $ 0.09 $ 0.29 $ 0.39
============ ============ ============ ============
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 nine-month periods ended June 30, 2007 and
2006 is as follows:
9
(In thousands)
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------------- ---------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Unrealized holding gains (losses) arising
during the period $ (63) $ (57) $ (92) $ (127)
Reclassification adjustment for gains realized in
net income during period (96) - (96) (98)
------------ ------------ ------------ ------------
(159) (57) (188) (225)
Tax effect 63 23 75 90
------------ ------------ ------------ ------------
Other comprehensive income (loss), net of tax $ (96) $ (34) $ (113) $ (135)
============ ============ ============ ============
4. Stock Option and Management Recognition Plans
The Company has a Stock Option Plan ("SOP") and a Management
Recognition Plan ("MRP") for directors, officers and key employees.
Both plans are described in Note 12 to the Company's Consolidated
Financial Statements included in its Annual Report on Form 10-KSB, for
the fiscal year ended September 30, 2006. Through September 30, 2006,
the Company accounted for its SOP using the intrinsic value method set
forth in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," ("APB No. 25") and related interpretations.
Under APB No. 25, generally, when the exercise price of the Company's
stock options equaled the market price of the underlying stock on the
date of the grant, no compensation expense was recognized. The Company
adopted SFAS No. 123R, using the modified-prospective transition
method, beginning on October 1, 2006 and, therefore, began to expense
the fair value of all options over their remaining vesting periods to
the extent the options were not fully vested as of the adoption date
and began to expense the fair value of all stock options granted
subsequent to September 30, 2006, over their vesting periods.
SFAS 123R also requires the benefits of realized tax deductions in
excess of previously recognized tax benefits on stock-based
compensation expense to be reported as a financing cash flow (none for
the three and nine month periods ended June 30, 2007) rather than an
operating cash flow, as previously required. In accordance with Staff
Accounting Bulletin ("SAB") No. 107, the Company classified share-based
compensation within non-interest expenses to correspond with the same
line item as the cash compensation paid to employees and directors.
Both employee and non-employee director options generally vest over a
five-year service period. Compensation expense recognized for all
option grants is net of estimated forfeitures and is recognized over
the awards' respective vesting periods. The fair values of all option
grants were estimated using the Black-Scholes option pricing model. We
recognize compensation expense for the fair values of these awards,
which have graded vesting, on a straight-line basis over the vesting
period of the awards. No options were granted in the nine-month periods
ending June 30, 2006 or 2007. All options granted previously have fully
vested and no further expense will be recognized.
The Company awarded 1,700 shares of stock under the MRP to one director
during the nine month period ended June 30, 2007. The aggregate expense
for these shares, which have a five-year vesting period, is expected to
be approximately $13,000 and will be expensed ratably over the vesting
period.
10
During the nine months ended June 30, 2007, the Company recorded
$31,000 of share-based compensation expense, which was comprised of
$3,000 for stock option expense and $28,000 for MRP expense. The
Company estimates it will record share-based compensation expense of
approximately $39,000 in fiscal 2007.
The following table illustrates the impact of share-based compensation
on net income and earnings per share:
Three Months Ended Nine Months Ended
June 30, 2007 June 30, 2007
--------------------------- ---------------------------
Impact of Impact of
Share-Based Share-Based
Compensation Compensation
(In thousands, except per share data) As Reported Expense As Reported Expense
----------------------------------------- ------------ ------------ ------------ ------------
Net income $ 268 $ 6 $ 667 $ 19
Earnings per share:
Basic $ 0.12 $ 0.00 $ 0.29 $ 0.01
Diluted $ 0.12 $ 0.00 $ 0.29 $ 0.01
A summary of the Company's stock option activity and related
information for its stock option plan for the nine months ended June
30, 2007, was as follows:
Weighted
Weighted Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
Options Price Term (000's)
------------ ------------ ------------ ------------
Outstanding at September 30, 2006 49,625 $ 5.62
Exercised (7,975) 4.79
------------ ------------
Outstanding at June 30, 2007 41,650 $ 5.78 2.9 years $ 241
============ ============ ============ ============
Exercisable at June 30, 2007 41,650 $ 5.78 2.9 years $ 241
============ ============ ============ ============
At September 30, 2006, there were 2,000 non-vested options having a
weighted average fair value of $3.36 per option. These options vested
on April 23, 2007, so there are no unvested options at June 30, 2007.
There will be no future expenses for these options as they have been
fully expensed.
A summary of the status of the Company's MRP shares as of June 30, 2007
and changes during the nine months ended June 30, 2007, is presented
below:
Weighted
Restricted Average
Shares Grant Date
(000's) Fair Value
------------ ------------
Non-vested at September 30, 2006 9,920 $ 12.33
Granted 1,700 12.50
Vested (800) 9.30
------------ ------------
Non-vested at June 30, 2007 10,820 $ 12.58
============ ============
11
Expected future compensation expense relating to the non-vested MRP
shares at June 30, 2007 is $110,000 and will be expensed over a
weighted average period of 3.4 years.
For purposes of pro forma disclosures, the estimated fair value of the
stock options and MRP shares were amortized to expense over their
assumed vesting periods. 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 all stock-related
compensation:
Three Months Nine Months
Ended Ended
(In thousands, except per share data) June 30, 2006 June 30, 2006
------------------------------------------------------ ------------- -------------
Net income, as reported $ 209 $ 890
Total stock-based compensation expense determined
under fair value method for all awards, net of taxes (8) (23)
Amounts included in determination of net income,
net of taxes 6 18
------------- -------------
Pro forma net income $ 207 $ 885
============= =============
Earnings per share:
Basic - as reported $ 0.09 $ 0.40
Basic - pro forma 0.09 0.39
Diluted - as reported $ 0.09 $ 0.39
Diluted - pro forma 0.09 0.39
5. Commitments and Contingencies
Outstanding letters of credit written are conditional commitments
issued by the Company to guarantee the performance by 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 six standby letters of credit totaling $203,000 as of
June 30, 2007.
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 in the event
of a default, and the enforcement of personal guarantees would be
sufficient to cover the maximum potential amount of future payments
required under the corresponding guarantees.
6. Dividend Restrictions
Cambray Mutual Holding Company ("Cambray MHC"), the Company's parent
mutual holding company, held 1,311,222 shares, or 57.0%, of the
Company's issued and outstanding common stock, and shareholders other
than Cambray MHC held 988,837 shares or 43.0% of such stock at June 30,
2007. Cambray MHC has filed a notice with the Office of Thrift
Supervision ("OTS") to waive its right to receive cash dividends during
the 2007 calendar year. The Company paid a cash dividend on March 31,
2007 to all public shareholders.
12
Cambray MHC has waived receipt of several past dividends paid by the
Company. The dividends waived are considered as a restriction on the
retained earnings of the Company. As of June 30, 2007 and September 30,
2006, the aggregate retained earnings restricted for cash dividends
waived were $1,718,000 and $1,508,000, respectively.
7. Recently Issued Accounting Standards
In September 2006, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 157,
"Fair Value Measurements," which defines fair value, establishes a
framework for measuring fair value under U.S. GAAP, and expands
disclosures about fair value measurements. SFAS No. 157 applies to
other accounting pronouncements that require or permit fair value
measurements. The new guidance is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and for
interim periods within those fiscal years. We are currently evaluating
the potential impact, if any, of the adoption of FASB Statement No. 157
on our consolidated financial position, results of operations and cash
flows.
On September 29, 2006, the FASB issued SFAS No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans,"
which amends SFAS Nos. 87 and 106 to require recognition of the
overfunded or underfunded status of pension and other postretirement
benefit plans on the balance sheet. Under SFAS 158, gains and losses,
prior service costs and credits, and any remaining transition amounts
under SFAS Nos. 87 and 106 that have not yet been recognized through
net periodic benefit cost will be recognized in accumulated other
comprehensive income, net of tax effects, until they are amortized as a
component of net periodic cost. The measurement date - the date at
which the benefit obligation and plan assets are measured - is required
to be the Company's fiscal year end. SFAS 158 is effective for publicly
held companies for fiscal years ending after December 15, 2006, except
for the measurement date provisions, which are effective for fiscal
years ending after December 15, 2008. The Company is currently
analyzing the effects of SFAS 158 but does not expect its
implementation will have a significant impact on the Company's
consolidated financial conditions or results of operations.
In February 2007, the FASB issued FASB Staff Position (FSP) FAS 158-1,
"Conforming Amendments to the Illustrations in FASB Statements No. 87,
No. 88, and No 106 and to the Related Staff Implementation Guides."
This FSP makes conforming amendments to other FASB statements and staff
implementation guides and provides technical corrections to SFAS No.
158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans." The conforming amendments in this FSP shall be
applied upon adoption of SFAS No. 158. We believe our adoption of FSP
FAS 158-1 will not have a material impact on our consolidated financial
statements or disclosures.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities-Including an amendment
of FASB Statement No. 115." SFAS No. 159 permits entities to choose to
measure many financial instruments and certain other items at fair
value. Unrealized gains and losses on items for which the fair value
option has been elected will be recognized in earnings at each
subsequent reporting date. SFAS No. 159 is effective for our Company
October 1, 2008. The Company is evaluating the impact that the adoption
of SFAS No. 159 will have on our consolidated financial statements.
In September 2006, the FASB issued FASB Staff Position AUG AIR-l,
"Accounting for Planned Major Maintenance Activities," which is
effective for fiscal years beginning after December 15, 2006. This
position statement eliminates the accrue-in-advance method of
accounting for planned major maintenance activities. We do not expect
this pronouncement to have a significant impact on the determination or
reporting of our financial results.
13
In July 2006, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes
- an interpretation of FASB Statement No. 109" (FIN 48), which
clarifies the accounting for uncertainty in tax positions. This
Interpretation requires that companies recognize in their financial
statements the impact of a tax position, if that position is more
likely than not of being sustained on audit, based on the technical
merits of the position. The provisions of FIN 48 are effective for
fiscal years beginning after December 15, 2006, with the cumulative
effect of the change in accounting principle recorded as an adjustment
to opening retained earnings. We are currently evaluating the impact of
adopting FIN 48 on our financial statements.
In May 2007, the FASB issued FASB Staff Position ("FSP") FIN 48-1
"Definition of Settlement in FASB Interpretation No. 48" (FSP FIN
48-1). FSP FIN 48-1 provides guidance on how to determine whether a tax
position is effectively settled for the purpose of recognizing
previously unrecognized tax benefits. FSP FIN 48-1 is effective
retroactively to January 1, 2007. The implementation of this standard
did not have a material impact on our consolidated financial position
or results of operations.
On September 7, 2006, the Task Force reached a conclusion on EITF Issue
No. 06-5, "Accounting for Purchases of Life Insurance - Determining the
Amount That Could Be Realized in Accordance with FASB Technical
Bulletin No. 85-4, Accounting for Purchases of Life Insurance" ("EITF
06-5"). The scope of EITF 06-5 consists of six separate issues relating
to accounting for life insurance policies purchased by entities
protecting against the loss of "key persons." The six issues are
clarifications of previously issued guidance on FASB Technical Bulletin
No. 85-4. EITF 06-5 is effective for fiscal years beginning after
December 15, 2006. The Company does not expect it to have a material
impact on the Company's consolidated financial statements.
In March 2007, the FASB ratified Emerging Issues Task Force Issue No.
06-10 "Accounting for Collateral Assignment Split-Dollar Life Insurance
Agreements" (EITF 06-10). EITF 06-10 provides guidance for determining
a liability for the postretirement benefit obligation as well as
recognition and measurement of the associated asset on the basis of the
terms of the collateral assignment agreement. EITF 06-10 is effective
for fiscal years beginning after December 15, 2007. The Company is
currently assessing the impact of EITF 06-10 on its consolidated
financial position and results of operations.
In March 2007, the FASB ratified EITF Issue No. 06-11, "Accounting for
Income Tax Benefits of Dividends on Share-Based Payment Awards." EITF
06-11 requires companies to recognize the income tax benefit realized
from dividends or dividend equivalents that are charged to retained
earnings and paid to employees for nonvested equity-classified employee
share-based payment awards as an increase to additional paid-in
capital. EITF 06-11 is effective for fiscal years beginning after
September 15, 2007. The Company does not expect EITF 06-11 will have a
material impact on its financial position, results of operations or
cash flows.
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 ("SEC") 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
addressing anticipated financial performance, business prospects, and similar
matters.
14
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:
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 Technological factors affecting our operations;
o Changes in market interest rates or changes in the speed at which market
interest rates change;
o Monetary and fiscal policies of the federal government;
o Changes in tax policies and rates by federal, state and local taxing
authorities;
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, very substantially, 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 real estate 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 of New York ("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 Deposit Insurance Fund ("DIF") of the Federal
Deposit Insurance Corporation ("FDIC"), and the Bank is subject to regulation by
the FDIC and the OTS.
15
RECENT DEVELOPMENTS
In May 2007 we decided to close the Clayton Lending Office at the end of
June 2007 when the lease expired on the rented office and merge it into the
Alexandria Bay office, which included relocating the loan officer. This office
has done very well in generating loan business over the past four years,
accumulating approximately $16 million in loans. However, these loans have been
funded by borrowings, the costs of which have doubled in the last two years.
This has greatly reduced the profitability of this office. At the same time, we
have temporarily reduced our focus on growing the loan portfolio through
increased borrowings until the spread between borrowing costs and loan rates
improves.
By January 1, 2008, the Company's stock must be eligible for a Direct
Registration System ("DRS") operated by a securities depository to meet the rule
change of the American Stock Exchange ("AMEX"). DRS enables an investor to have
securities registered in her name and to electronically transfer her securities
to her broker-dealer in order to effect a transaction without the risk and
delays associated with the use of securities certificates. Registrar & Transfer
("R&T"), our transfer agent, is a DRS eligible transfer agent and will provide
this service for our shareholders. We have completed the set-up process and our
shareholders will soon be able to use this form of registration.
There has been much public discussion about sub-prime lending and the
losses that are resulting from that practice. The Company and the Bank have not
directly engaged in any form of sub-prime lending and we have not experienced
any losses to date that would indicate that a problem might exist.
After much debate, the SEC voted on May 23rd to approve the long awaited
interpretive guidance for management on Section 404 of the Sarbanes-Oxley Act of
2002 ("Section 404"). During this meeting, the SEC concluded that smaller public
companies will be required to comply with Section 404 for periods ending after
December 15, 2007 and no further delays will be granted. The new guidance is
useful to all public filers, although particularly significant for those
non-accelerated filers who must comply with Section 404 for the first time. This
guidance provided by the SEC is the first time management will have a roadmap of
it own as it goes through the Section 404 compliance process. We are required to
file an unaudited internal control report in our 2008 annual report for the
fiscal year ending September 30, 2008, and to include an auditor's report
starting with our 2009 annual report.
The Public Company Accounting Oversight Board's ("PCAOB") Auditing
Standard No. 5, "An Audit of Internal Control Over Financial Reporting" was
approved July 25, 2007 by the SEC. It replaces the PCAOB's previous internal
control auditing standard, Auditing Standard No. 2. It is unknown at this time
what impact this standard will have.
In February 2007, the new branch office building in Gouverneur opened for
business. Some renovations will be done to the old branch office building before
the accounting staff is moved from the current executive offices building. Mr.
Bennett, President and CEO, has moved his office from the executive office
building to the new branch office building. Once the accounting personnel are
relocated to the old branch office, the executive office building, with a
carrying value of approximately $100,000, will be razed and used for additional
parking. Once the building is removed the remaining carrying value associated
with the building, and the costs of the razing, will be classified as land and
will not impact the income statement.
16
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, 2006) 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:
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.
17
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 June 30,
----------------------------------------------------------------------------------
2007 2006
--------------------------------------- ---------------------------------------
Average Yield/ Average Yield/
Balance Interest Cost (6) Balance Interest Cost (6)
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Loans, net (1) $ 108,791 $ 1,853 6.83% $ 103,946 $ 1,738 6.71%
Securities (2) 11,655 143 4.92% 11,364 125 4.41%
Other short-term investments 1,865 24 5.16% 1,196 14 4.70%
----------- ----------- ----------- -----------
Total interest-earning assets 122,311 2,020 6.62% 116,506 1,877 6.46%
----------- -----------
Non-interest-earning assets 10,423 8,854
----------- -----------
Total assets $ 132,734 $ 125,360
=========== ===========
Savings and club accounts (3) $ 18,831 48 1.02% $ 20,045 51 1.02%
Time certificates 39,343 468 4.77% 37,690 380 4.04%
NOW and money market accounts 12,783 39 1.22% 11,589 35 1.21%
Borrowings 35,329 431 4.89% 32,400 364 4.51%
----------- ----------- ----------- -----------
Total interest-bearing liabilities 106,286 986 3.72% 101,724 830 3.27%
----------- -----------
Non-interest-bearing liabilities 6,122 4,311
----------- -----------
Total liabilities 112,408 106,035
Shareholders' equity 20,326 19,325
----------- -----------
Total liabilities and
shareholders' equity $ 132,734 $ 125,360
=========== ===========
Net interest income/spread (4) $ 1,034 2.90% $ 1,047 3.19%
=========== =========== =========== ===========
Net earning assets/net interest
margin (5) $ 16,025 3.39% $ 14,782 3.60%
=========== =========== =========== ===========
Ratio of average interest-earning
Assets to average interest-
bearing liabilities 1.15x 1.15x
=========== ===========
Notes appear on following page
18
AVERAGE BALANCES, INTEREST RATES AND YIELDS (continued)
For the nine months Ended June 30,
----------------------------------------------------------------------------------
2007 2006
--------------------------------------- ---------------------------------------
Average Yield/ Average Yield/
Balance Interest Cost (6) Balance Interest Cost (6)
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Loans, net (1) $ 108,914 $ 5,584 6.85% $ 102,516 $ 5,113 6.67%
Securities (2) 11,208 401 4.78% 11,817 392 4.44%
Other short-term investments 1,282 49 5.11% 605 23 5.08%
----------- ----------- ----------- -----------
Total interest-earning assets 121,404 6,034 6.65% 114,938 5,528 6.43%
----------- -----------
Non-interest-earning assets 10,128 8,759
----------- -----------
Total assets $ 131,532 $ 123,697
=========== ===========
Savings and club accounts (3) $ 18,950 145 1.02% $ 19,811 151 1.02%
Time certificates 38,931 1,346 4.62% 33,370 918 3.68%
NOW and money market accounts 12,316 114 1.24% 11,788 101 1.15%
Borrowings 35,537 1,289 4.85% 35,395 1,147 4.33%
----------- ----------- ----------- -----------
Total interest-bearing liabilities 105,734 2,894 3.66% 100,364 2,317 3.09%
----------- -----------
Non-interest-bearing liabilities 5,609 4,264
----------- -----------
Total liabilities 111,343 104,628
Shareholders' equity 20,189 19,069
----------- -----------
Total liabilities and
shareholders' equity $ 131,532 $ 123,697
=========== ===========
Net interest income/spread (4) $ 3,140 2.99% $ 3,211 3.34%
=========== =========== =========== ===========
Net earning assets/net interest
margin (5) $ 15,670 3.46% $ 14,574 3.74%
=========== =========== =========== ===========
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) Includes advance payments by borrowers for taxes and insurance (mortgage
escrow deposits).
(4) The spread represents the difference between the weighted average yield on
interest-earning assets and the weighted average cost of interest-bearing
liabilities.
(5) The net interest margin, also known as the net yield on average
interest-earning assets, represents net interest income as a percentage of
average interest-earning assets.
(6) Yields are not computed on a tax equivalent basis. Yields and costs are
computed based upon the actual number of days in the period annualized to
a 365-day year.
19
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 ("Rate"). 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 June 30, Nine months ended June 30,
2007 vs. 2006 2007 vs. 2006
Increase (Decrease) Due To: Increase (Decrease) Due To:
--------------------------------------- ---------------------------------------
Volume Rate Total Volume Rate Total
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
INTEREST-EARNING ASSETS:
Loans $ 83 $ 32 $ 115 $ 329 142 $ 471
Securities 3 15 18 (12) 21 9
Other short-term investments 9 1 10 26 - 26
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets 95 48 143 343 163 506
----------- ----------- ----------- ----------- ----------- -----------
INTEREST-BEARING LIABILITIES:
Savings and club accounts (3) - (3) (6) - (6)
Time certificates 17 71 88 169 259 428
NOW and money market accounts 4 - 4 5 8 13
Borrowings 35 32 67 5 137 142
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities 53 103 156 173 404 577
----------- ----------- ----------- ----------- ----------- -----------
Net change in net interest income $ 42 $ (55) $ (13) $ 170 $ (241) $ (71)
=========== =========== =========== =========== =========== ===========
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2007 AND SEPTEMBER 30, 2006.
During the nine months from September 30, 2006 through June 30, 2007,
total assets increased $2.5 million, or 1.92%, from $130.1 million to $132.6
million. Net loans increased by $947,000, or 0.90%, from $105.6 million to
$106.6 million during the same period. The increase in loans resulted from
increases of $2.2 million in real estate loans and $0.2 million in other
commercial loans combined with a decrease of $1.4 million in other consumer
loans. The decrease in other consumer loans was primarily the result of a
decrease in automobile loans.
Borrowed funds from FHLB, consisting of advances and security repurchase
obligations, were $34.6 million on June 30, 2007, down from $35.3 million at
September 30, 2006. The decrease of $0.7 million in borrowed funds was the
result of an increase in deposits. Deposits increased $2.5 million, or 3.4%,
during the nine months from $72.5 million to $75.0 million. Increases in demand
deposits, NOW and money market accounts, and time deposits of $0.8 million, $1.1
million and $1.8 million, respectively, more than offset a decrease of $1.2
million in savings accounts. Brokered deposits accounted for $1.5 million of the
increase in time deposits.
20
Shareholders' equity increased by $559,000 during the first nine months of
this fiscal year, as net income of $667,000, combined with $124,000 from the
allocation and amortization of SOP, ESOP and MRP shares and $39,000 from the
exercise of stock options, more than offset the payment of a cash dividend of
$158,000 to our shareholders and a decrease of $113,000 in the unrealized gains,
net of taxes, in the available-for-sale securities portfolio. Treasury stock was
used to supply 7,975 shares needed when five individuals exercised some of their
vested stock options.
At June 30, 2007, non-performing assets were 0.48% of total assets, down
from 0.53% at September 30, 2006. Non-performing loans were 0.51% of total loans
at June 30, 2007, down from 0.64% at September 30, 2006. A summary of the
Company's non-performing assets and related ratios follows (dollars in
thousands):
June 30, September 30,
Non-performing assets 2007 2006
------------------------------------ ------------- -------------
Non-accrual loans
Residential mortgages
and home equity loans $ 94 $ 183
Commercial mortgages 446 247
Consumer other 6 22
Commercial other - -
------------- -------------
Total non-accrual loans 546 452
Residential mortgage loans over 90
days delinquent and still accruing - 228
------------- -------------
Total non-performing loans 546 680
Foreclosed real estate 85 -
Other repossessed assets 3 11
------------- -------------
Total non-performing assets $ 634 $ 691
============= =============
Non-performing loans to total loans 0.51% 0.64%
Non-performing assets to
total assets 0.48% 0.53%
The Company had no loans more than 90 days delinquent and still accruing
at June 30, 2007 and $228,000 of such loans at September 30, 2006.
At June 30, 2007, one non-accrual residential mortgage in the amount of
$70,000 and two non-accrual commercial mortgage loans totaling $446,000 were in
foreclosure proceedings.
Management believes that these non-performing loans are 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 a $41,000 decrease in the loan
loss allowance to $907,000 at June 30, 2007, is appropriate at this time based
on the history of losses in the loan portfolio over the past six years.
21
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2007 AND
2006.
General. Our net income for the three months ended June 30, 2007 was
$268,000, an increase of $59,000, or 28.23%, from last year's net income of
$209,000 for the same period. The increase in net income was the result of the
combination of the following factors:
1. net interest income decreased by $13,000 as interest income increased
$143,000, mainly due to the growth in loans, and interest expense
increased $156,000,
2. non-interest income grew by $158,000 over last year's period,
3. the provision for loan losses decreased by $15,000 for the third
quarter of this fiscal year versus last fiscal year,
4. non-interest expense increased by $54,000 in the three month period
this year compared to last year's period and
5. income taxes increased $47,000.
Basic earnings per share and diluted earnings per share were both $0.12
for this year's quarter versus $0.09 in last year's quarter.
Interest Income. Interest income increased $143,000, or 7.62%, from
$1,877,000 for the three months ended June 30, 2006 to $2,020,000 for the three
months ended June 30, 2007. An increase of 16 basis points (0.16%) in the
average interest rate earned on our interest-earning assets, from 6.46% in last
year's quarter to 6.62% in this year's quarter, resulted in an increase of
$48,000 in interest income, while a $5.8 million increase in the average balance
of interest-earning assets resulted in an increase of $95,000 in interest
income.
Interest income on loans increased by $115,000, or 6.62%, in this year's
quarter from the same period last year. The average yield on loans was 6.83% for
the three month period ending June 30, 2007, an increase of 12 basis points
(0.12%), from 6.71% for the three month period ending June 30, 2006. The
increased yield resulted in an increase of $32,000 in interest income, while an
increase of $4.9 million in the average balance of loans from $103.9 million to
$108.8 million resulted in an increase of $83,000 in interest income.
Loan growth from July 1, 2006 through June 30, 2007 was very good as
indicated by the growth by $4.9 million of the average balance of loans from the
three months ended June 30, 2006 to the three months ended June 30, 2007.
However, nearly all of the growth occurred from April 1, 2006 through December
31, 2006 since the average balance of loans for the three months ended June 30,
2007 increased only $0.1 million to $108.8 million from $108.7 million for the
three months ended December 31, 2006. This slow down in loan growth has been
deliberate as we increased our loan rates in response to an increase in funding
costs. The current interest rate environment has been characterized by an
inverted yield curve, meaning that the interest rates at the short end of the
curve, from overnight investments to one-year maturities, are higher than rates
on maturities from one to ten years. In this environment, loan arbitrage
opportunities, in which we match borrowings against mortgage loans, are no
longer as attractive as those we created in prior periods which continue to
produce income even though the spread has narrowed. We have therefore decided
not to grow the loan portfolio by growing borrowings until funding costs
stabilize and margins begin expanding, and instead, will invest available funds
in liquid assets, mainly our available for sale securities portfolio. We are
reducing our lending activity to preserve our external funding capabilities for
when margins improve. We expect that when short-term interest rates are adjusted
downward resulting in a positive yield curve, new arbitrage opportunities will
become available and we will look to grow the loan portfolio more aggressively.
22
Interest income on securities and other short-term investments increased
by $28,000, or 20.14% for the quarter ended June 30, 2007 versus the quarter
ended June 30, 2006. An increase in the yield on our securities portfolio of 51
basis points, or 0.51%, from 4.41% in last year's quarter to 4.92% in this
year's quarter resulted in an increase of $15,000 in interest income while an
increase of $0.3 million in the average balance of securities over the same
period increased interest income by $3,000. Over the same time frame, a 46 basis
point, or 0.46%, increase in the average interest rate earned on other
short-term investments increased interest income by $1,000, while an increase of
$0.7 million in the average balance of other short-term investments increased
interest income by $9,000.
Interest Expense. Interest expense increased $156,000, or 18.80%, in the
third quarter of fiscal 2007 versus the third quarter of fiscal 2006. An
increase of 45 basis points (0.45%) in the average rate we paid on
interest-bearing liabilities from 3.27% last year to 3.72% this year resulted in
an increase of $103,000 in interest expense, while an increase of $4.6 million
from $101.7 million to $106.3 million in the average balance of interest-bearing
liabilities resulted in a $53,000 increase in interest expense.
Interest expense decreased $3,000, or 5.88%, on savings and club accounts
due to a decrease of $1.2 million in the average balance from $20.0 million in
last year's quarter to $18.8 million in this year's quarter. Comparing the three
months ended June 30, 2007 to the three months ended June 30, 2006, interest
expense increased on NOW and money market accounts, time deposits and borrowed
funds by $4,000, $88,000 and $67,000, respectively. The average balance of NOW
and money market accounts increased by $1.2 million from the 2006 fiscal quarter
to the 2007 fiscal quarter resulting in a $4,000 increase in interest expense.
Over the same period, an increase of 73 basis points, or 0.73%, in the average
rate we paid on time deposits increased interest expense by $71,000, while an
increase in the average balance of time deposits of $1.7 million resulted in an
increase of $17,000 in interest expense. The cost of our borrowed funds
increased by 38 basis points, or 0.38%, from the third quarter of fiscal 2006 to
the third quarter of fiscal 2007, resulting in an increase of $32,000 in
interest expense, while an increase in the average balance of borrowed funds of
$2.9 million resulted in an increase of $35,000 in interest expense.
Net Interest Income. Our net interest income decreased by $13,000, or
1.24%, from $1,047,000 for the three month period ending June 30, 2006 to
$1,034,000 for the three month period ending June 30, 2007, as interest income
increased by $143,000 and interest expense increased by $156,000, as described
above.
Our interest rate spread (the difference between the average rate we earn
and the average rate we pay) decreased by 29 basis points, or 0.29%, from 3.19%
in last year's quarter to 2.90% in this year's quarter. Also, net interest
margin decreased by 21 basis points (0.21%) to 3.39% in the third fiscal quarter
of 2007, down from 3.60% in the corresponding quarter of 2006.
Average capital represented 16.6% of average interest-earning assets for
the quarters ended June 30, 2007 and 2006. Changes in the average capital ratio
measure changes in leverage. Since the ratio did not change, it reflects that
our leveraging remained the same. Our ratio of average interest-earning assets
to average interest-bearing liabilities was 1.15 times in both 2006 and 2007.
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.
23
For the three months ended June 30, 2007, we did not record a provision
for loan losses, compared to $15,000 in the same quarter last year. At June 30,
2007 and 2006, the ratio of our loan loss allowance to total loans was 0.85% and
0.88%, respectively. On March 31, 2007, the allowance was $921,000, or 0.86% of
total loans, and we determined at the end of the third quarter that the
appropriate level for the allowance was $907,000. We had charge-offs during the
quarter of $23,000 and recoveries of $9,000.
Our level of non-accruing loans, loans 90 days and still accruing and
restructured loans was $546,000, or 0.51% of total loans at June 30, 2007
compared to $536,000, or 0.50% of total loans at March 31, 2007. There was a
slight decrease in the ratio of the loan loss allowance to total loans from
0.86% at March 31, 2007 to 0.85% at June 30, 2007.
Non-interest Income. Our non-interest income increased $158,000 from
$109,000 in the 2006 quarter to $267,000 in the 2007 quarter. Two items,
realized gain on the sale of available for sale securities and income on the
assets of the deferred directors fees plan accounted for most of that gain with
increases of $96,000 and $43,000, respectively.
Non-interest Expenses. Non-interest expenses increased $54,000 from
$826,000 for the 2006 fiscal third quarter to $880,000 for the 2007 fiscal third
quarter. Directors fees expense increased by $47,000, of which $43,000
represents an increase in deferred fees income and $4,000 represents additional
payments to directors for meetings held this year. The increase in professional
fees by $22,000 is due to the consultant costs associated with SOX 404
implementation and occupancy and equipment cost increased $29,000 due to the new
office in Gouverneur. Offsetting these increases in part was a decrease in
salaries and employee benefits of $43,000, $37,000 of which is related to an
adjustment that was made to accrued compensation expense in last year's quarter
to reflect an increased estimate of annual employee bonuses.
At June 30, 2007 we had thirty-one full-time and four part-time employees
and on June 30, 2006 we had thirty-three full-time employees and one part-time
employee.
Income tax expense. Our income tax expense increased by $47,000, or 44.3%,
from $106,000 for the third quarter of fiscal 2006 to $153,000 for the same
quarter of fiscal 2007. The increased expense was the result of an increase in
income before income tax of $106,000, or 33.7%, from $315,000 for the first nine
months last fiscal year to $421,000 for the first nine months of this fiscal
year. Our effective tax rate was 36.3% for the three months ended June 30, 2007
compared to 33.7% for the same period in 2006. The increased effective tax rate
in the current quarter is due to a larger percentage of our pre-tax income being
taxable.
24
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 2007 AND
2006.
General. Our net income for the nine months ended June 30, 2007 was
$667,000, a decrease of $223,000, or 25.06%, from last year's $890,000. The
following operating results combined to produce the increase:
1. net interest income decreased by $71,000 as interest income increased
$506,000 and interest expense increased $577,000,
2. provision for loan losses decreased by $50,000,
3. non-interest income decreased by $35,000,
4. non-interest expenses increased $254,000 and
5. income taxes decreased by $87,000 as a result of the decrease in
pre-tax income.
Basic earnings per common share and diluted earnings per common share were
both $0.29 for the first nine months of this fiscal year and were $0.40 and
$0.39, respectively, for the first nine months of the last fiscal year.
Interest Income. Interest income increased by $506,000, or 9.15%, from
$5,528,000 for the nine months ended June 30, 2006 to $6,034,000 for the nine
months ended June 30, 2007. Average interest-earning assets increased $6.5
million, or 5.66%, from $114.9 million for the first nine months of fiscal year
2006 to $121.4 million for the same period this year. The increase was the
result of a $6.4 million increase in the average balance of loans from $102.5
million in fiscal 2006 to $108.9 million in fiscal 2007, combined with a small
increase in the average balance of securities and other investments of $0.1
million from $12.4 million last year to $12.5 million this year.
The average interest rate we earned on our interest-earning assets was 22
basis points (0.22%) higher in the first nine months this year than last year as
the average rate rose from 6.43% last year to 6.65% this year. The average rate
earned on loans increased 18 basis points (0.18%) from 6.67% last year to 6.85%
this year, while the average rate earned on securities increased by 34 basis
points, or 0.34%, from 4.44% last year to 4.78% this year, and the average rate
on other short-term investments, primarily FHLB deposits, increased by 3 basis
points (0.03%) from 5.08% to 5.11%.
The increase in the average interest rate earned on loans resulted in an
increase of $142,000 in interest income, while the increase in the average
balance of loans increased interest income by $329,000, totaling a $471,000
increase in interest income for the loan portfolio.
For securities and other short-term investments, an increase in interest
rates earned resulted in an increase in interest income of $21,000, while the
increase in the average balances increased interest income by $14,000 resulting
in a total increase of $35,000 in interest income.
Overall, the increases in the average interest rates increased interest
income by $163,000, while the increase in the volume of interest-earning assets
produced a $343,000 increase in interest income, for a total increase of
$506,000 in interest income.
Interest Expense. Interest expense increased by $577,000 from $2,317,000
for the first nine months of 2006 to $2,894,000 for the first nine months of
2007 as a result of both interest rate increases and an increase in average
interest-bearing liabilities. An increase of 57 basis points (0.57%) in the
average rate we paid on interest-bearing liabilities from 3.09% in 2006 to 3.66%
in 2007 increased interest expense by $404,000, while an increase in the average
balance of interest-bearing liabilities of $5.3 million, from $100.4 million at
June 30, 2006 to $105.7 million at June 30, 2007, resulted in additional
interest expense of $173,000.
25
Interest expense increased on NOW and money market accounts, time deposits
and borrowings by $13,000, $428,000 and $142,000, respectively, while it
decreased $6,000 on savings and club accounts for the nine months ending June
30, 2007 versus the nine months ending June 30, 2006. These changes were
comprised of the following components:
1. a decrease of $0.8 million in the average balance of savings and club
accounts, from $19.8 million to $19.0 million, resulted in a decrease
of $6,000 in interest expense,
2. the average rate we paid on NOW and money market accounts increased by
9 basis points (0.09%) from 1.15% to 1.24%, resulting in an increase
of $8,000 in interest expense, while an increase of $0.5 million, from
$11.8 million to $12.3 million in the average balance of these
accounts resulted in an increase of $5,000 in interest expense, and
3. the average interest rate on time deposits increased 94 basis points
(0.94%) from 3.68% to 4.62%, resulting in a $259,000 increase in
interest expense, while a $5.5 million increase in the average balance
of time deposits, from $33.4 million to $38.9 million, increased
interest expense by $169,000.
4. an increase of 52 basis points (0.52%), from 4.33% to 4.85% on the
average rate we paid on borrowed funds increased interest expense by
$137,000, while an increase of $0.1 million in the average amount of
those borrowings, from $35.4 million to $35.5 million, increased
interest expense by $5,000.
Net Interest Income. The net effect of the increases in interest income
and interest expense was a decrease of $71,000, or 0.02%, in net interest income
from $3,211,000 for the first nine months of the 2006 fiscal year to $3,140,000
for the first nine months of the 2007 fiscal year. Our interest rate spread (the
difference between the average rate we earn and the average rate we pay)
decreased by 35 basis points (0.35%) from 3.34% last year to 2.99% this year.
Net interest margin decreased by 28 basis points (0.28%) from 3.74% for the
first nine months of fiscal 2006, to 3.46% for the first nine months of fiscal
2007.
Average capital represented 16.6% of average interest-earning assets for
the nine months ended June 30, 2007 and June 30, 2006. Our ratio of average
interest-earning assets to average interest-bearing liabilities was 1.15 times
in both 2007 and 2006.
Provision for Loan Losses. Year to date, we had charge-offs of $73,000 and
recoveries of $17,000. We provided $15,000 for loan losses for the first nine
months of this fiscal year as compared to $65,000 for the first nine months of
the past fiscal year. At June 30, 2007 and 2006 the ratio of our loan loss
allowance to total loans was 0.85% and 0.88%, respectively. As disclosed in the
comparison of financial condition discussion, our level of non-accruing loans,
loans 90 days past due and still accruing and restructured loans was $546,000,
or 0.51% of total loans at June 30, 2007 compared to $680,000, or 0.64% of total
loans at September 30, 2006. Management believes that these loans are adequately
secured and do not require any adjustment to the allowance for loan losses.
Non-interest Income. Non-interest income was $35,000 lower for the first
nine months of this year versus the same period last year. The main reason the
decrease occurred was because of two income items we had last year, but not this
year. The first was $62,000 in death benefit income on life insurance policies
insuring a director and the second was a $7,000 gain on the sale of loans. We
also had $32,000 more in realized gain on sale of foreclosed assets in last
year's nine-month period than in this year's period. Partially offsetting these
reductions in income were increases of $44,000 in income on the deferred
directors fees plan, $10,000 in income on bank-owned life insurance and $9,000
in loan fees.
26
Non-interest Expense. Non-interest expenses increased by $254,000 for the
first nine months of fiscal 2007 compared to fiscal 2006. There were increases
in salaries and benefits of $57,000, directors fees of $44,000, occupancy and
equipment of $51,000, postage and supplies of $12,000 and professional fees of
$30,000. We also had a $58,000 increase in other non-interest expenses,
including $24,000 in contributions, $15,000 in advertising, $9,000 in ATM card
expense and $6,000 in telephone expense. The $44,000 increase in director's fees
represents the offsetting expense to the gain in income on the deferred fees
plan mentioned under non-interest income due to the increased liability to the
participants in the plan. Professional fees includes $29,000 in costs incurred
for compliance with the Sarbanes-Oxley Act of 2002, Section 404 requiring
management of public companies to assess and report on the effectiveness of
their internal controls over financial reporting. As a small business filer, we
are required to comply by September 30, 2008. We expect expenses of
approximately $40,000 will be incurred this fiscal year.
Income tax expense. Our income tax expense year-to-date decreased by
$87,000, or 19.5%, from $447,000 last year to $360,000 this year. The decreased
expense was the result of decreased income before income tax of $310,000, or
23.2%, from $1,337,000 for the first nine months last fiscal year to $1,027,000
for the first nine months of this fiscal year. Our effective tax rate was 35.1%
for the nine months ended June 30, 2007 compared to 33.4% for the same period in
2006. The effective rate was increased in part because there is no non-taxable
death benefit from life insurance this year.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of funds are deposits, borrowings from the Federal
Home Loan Bank, 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 to a certain extent. 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 nine months ended June 30, 2007, we increased our cash
and cash equivalents by $620,000. We have originated $17.3 million of new loans.
However, loans, net, after payments, charge-offs and transfers to foreclosed
real estate, increased by $947,000 over this period.
Deposits increased by $2.5 million during the nine months ended June 30,
2007. Brokered deposits accounted for $1.5 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 decreased our
borrowings by $0.7 million during this same period.
We monitor our liquidity regularly. Excess liquidity is invested in
overnight federal funds sold and other short-term investments. If we need
additional funds, we can borrow those funds, although the cost of borrowing
money is normally higher than the average cost of deposits. As a member of the
Federal Home Loan Bank of New York, the Bank can arrange to borrow an additional
$17.4 million against our one to four family first mortgage portfolio. 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.
We measure liquidity on a monthly basis and want to maintain a liquidity
ratio of between 5% and 15%. At June 30, 2007, the ratio was 5.96% as compared
to 6.04% on June 30, 2006.
OFF BALANCE SHEET ARRANGEMENTS
The Company's financial statements do not reflect off-balance sheet
arrangements that are made in the normal course of business. These off-balance
sheet arrangements consist of unfunded loans.
27
We had $2.1 million in outstanding commitments to make loans at June 30,
2007, along with $4.5 million of unused home equity, commercial and overdraft
lines of credit. We also have a commitment to sell the $2.1 million guaranteed
portion of a USDA guaranteed loan we originated. We are awaiting final USDA
approval for the sale. We anticipate that we will have enough liquid funds to
meet our current loan commitments, purchase commitments and to fund draws on the
lines of credit through the normal turnover of our loan and securities
portfolios. At June 30, 2007, we had $32.0 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.
CAPITAL RESOURCES
The OTS has minimum capital ratio requirements applying to the Bank, but
there are no comparable minimum capital requirements that apply to the Company
as a savings and loan holding company. At June 30, 2007, the Bank exceeded all
regulatory capital requirements of the OTS applicable to it, with Tier I capital
of $20.0 million, or 15.1% of adjusted total assets and with total risk-based
capital of $20.9 million, or 27.2% of risk-weighted assets. The Bank also had
tangible capital of $20.0 million, or 15.1% of average tangible assets. The Bank
was classified as "well capitalized" at June 30, 2007 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 and procedures as of June 30, 2007, and
they have concluded 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 the other factors that could significantly affect our
internal controls during the quarter ended June 30, 2007, 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 the Company's
consolidated financial condition or results of operations.
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
28
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: August 3, 2007 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)
29