UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 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 February 6, 2008
- ----------------------------- ----------------
Common Stock, par value $ .01 2,300,399
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
GOUVERNEUR BANCORP, INC.
FORM 10-QSB
TABLE OF CONTENTS
PART 1 - FINANCIAL INFORMATION Page
- ------------------------------ ----
Item 1. Financial Statements - Unaudited
Consolidated Statements of Financial Condition at December 31,
2007 and at September 30, 2007 3
Consolidated Statements of Income for the three months ended
December 31, 2007 and 2006 4
Consolidated Statements of Changes in Shareholders' Equity for
three months ended December 31, 2007 and 2006 5
Consolidated Statements of Cash Flows for the three months
ended December 31, 2007 and 2006 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 13
Item 3. Controls and Procedures 22
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 23
Item 6. Exhibits 23
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)
December 31, September 30,
2007 2007
------------- -------------
Assets:
Cash and due from banks $ 1,810 $ 2,381
Interest-bearing deposits in bank 1,523 1,499
------------- -------------
Total cash and cash equivalents 3,333 3,880
Securities available-for-sale 9,755 9,784
Securities held-to-maturity (fair value of $79 at December 31,
2007 and $81 at September 30, 2007) 78 81
Loans held for sale 2,090 2,105
Loans, net of deferred fees 107,065 107,042
Less allowance for loan losses (894) (911)
------------- -------------
Loans, net 106,171 106,131
Investment in Federal Home Loan Bank stock, at cost 1,674 1,694
Investment in life insurance 3,816 3,778
Bank premises and equipment, net 3,185 3,059
Accrued interest receivable and other assets 2,093 2,077
------------- -------------
Total assets $ 132,195 $ 132,589
============= =============
Liabilities:
Deposits: Non interest-bearing demand $ 4,592 $ 5,708
NOW and money market 12,589 13,162
Savings 17,600 17,617
Time 40,669 39,742
------------- -------------
Total deposits 75,450 76,229
Advances from Federal Home Loan Bank 32,700 33,150
Accrued interest payable and other liabilities 3,499 2,780
------------- -------------
Total liabilities 111,649 112,159
------------- -------------
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 4,931 4,910
Retained earnings 16,142 16,024
Treasury stock, at cost, December, 83,641 shares; September, 83,981 shares (425) (425)
Accumulated other comprehensive income (54) (18)
Unallocated common stock held by ESOP (72) (85)
------------- -------------
Total shareholders' equity 20,546 20,430
------------- -------------
Total liabilities and shareholders' equity $ 132,195 $ 132,589
============= =============
See accompanying notes to the consolidated financial statements.
3
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data) (Unaudited)
Three Months Ended
December 31,
------------------------------
2007 2006
------------- -------------
Interest income:
- ----------------
Loans $ 1,842 $ 1,853
Securities-taxable 121 120
-non-taxable 25 12
Other short-term investments 25 9
------------- -------------
Total interest income 2,013 1,994
------------- -------------
Interest expense:
- -----------------
Deposits 568 518
Borrowings - short-term 106 139
Borrowings - long-term 299 290
------------- -------------
Total interest expense 973 947
------------- -------------
Net interest income 1,040 1,047
Provision for loan losses -- 15
------------- -------------
Net interest income after provision for loan losses 1,040 1,032
------------- -------------
Non-interest income
- -------------------
Service charges 102 52
Earnings on investment in life insurance 38 34
Other 19 63
------------- -------------
Total non-interest income 159 149
------------- -------------
Non-interest expenses
- ---------------------
Salaries and employee benefits 454 454
Directors fees 12 52
Occupancy and Equipment 123 100
Data processing 35 31
Postage and supplies 32 35
Professional fees 65 59
Expense on foreclosed assets, net 5 3
Other 112 117
------------- -------------
Total non-interest expenses 838 851
------------- -------------
Income before income tax expense 361 330
Income tax expense 122 114
------------- -------------
Net income $ 239 $ 216
============= =============
Earnings per common share - basic $ 0.10 $ 0.10
Earnings per common share - diluted $ 0.10 $ 0.09
See accompanying notes to the consolidated financial statements.
4
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Three months ended December 31, 2007
(In thousands, except share data) (Unaudited)
Accumulated Unearned
Additional Other common
Common Paid-In Retained Treasury Comprehensive stock held
Stock Capital Earnings Stock Income (Loss) by ESOP Total
---------- ---------- ---------- ---------- ------------ ---------- ----------
Balance at
September 30, 2007 $ 24 $ 4,910 $ 16,024 $ (425) $ (18) $ (85) $ 20,430
----------
Comprehensive Income:
Net Income 239 239
Net pension and
postretirement benefit
costs, net of taxes 9 9
Change in net unrealized
gain on Securities available
for sale, net of taxes (45) (45)
----------
Total comprehensive income 203
----------
Allocation of ESOP shares, 2,674 shares 13 13 26
Adoption of EITF Issue No. 06-4 (121) (121)
Amortization of MRP 8 8
---------- ---------- ---------- ---------- ------------ ---------- ----------
Balance at December 31, 2007 $ 24 $ 4,931 $ 16,142 $ (425) $ (54) $ (72) $ 20,546
========== ========== ========== ========== ============ ========== ==========
5
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Three months ended December 31, 2006
(In thousands, except share data) (Unaudited)
Accumulated Unearned Unallocated
Additional Other Common Common
Common Paid-In Retained Treasury Comprehensive stock held stock held
Stock Capital Earnings Stock Income By MRP by ESOP Total
---------- ---------- ---------- ---------- ------------ ---------- ---------- ----------
Balance at
September 30, 2006 $ 24 $ 4,847 $ 15,398 $ (466) $ 234 $ (44) $ (138) $ 19,855
----------
Comprehensive Income:
Net Income 216 216
Change in net unrealized
gain on Securities
available for sale,
net of taxes 12 12
----------
Total comprehensive
income 228
----------
Allocation of ESOP shares
(2,482 shares) 19 13 32
Amortization of stock
options (800 options) 2 2
Amortization of MRP 5 3 8
Exercise of stock
options (5,675 shares) (2) 29 27
---------- ---------- ---------- ---------- ------------ ---------- ---------- ----------
Balance at
December 31, 2006 $ 24 $ 4,871 $ 15,614 $ (437) $ 246 $ (41) $ (125) $ 20,152
========== ========== ========== ========== ============ ========== ========== ==========
6
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
Three Months Ended
December 31,
----------------------------
2007 2006
------------ ------------
Cash flows from operating activities:
Net Income $ 239 $ 216
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses -- 15
Net amortization of deferred fees on loans 34 32
Depreciation 30 24
Earnings on investment in life insurance (38) (34)
Stock-based compensation expense 34 42
(Increase) decrease in accrued interest receivable and other assets (42) 498
Increase in accrued interest payable and other liabilities 643 378
------------ ------------
Net cash provided by operating activities 900 1,171
------------ ------------
Cash flows from investing activities:
Securities available for sale:
Proceeds from maturities and principal reductions 390 511
Purchases (436) (5)
Securities held to maturity - proceeds from maturities 3 3
Proceeds from sales of foreclosed assets 93 20
(Purchases) redemptions of Federal Home Loan Bank stock 20 (23)
Net increase in loans (132) (1,892)
Additions to premises and equipment (156) (476)
------------ ------------
Net cash used by investing activities (218) (1,862)
------------ ------------
Cash flows from financing activities:
Net (decrease) increase in deposits (779) 956
Net proceeds (repayments) from FHLB advances (450) 500
Exercise of stock options -- 27
------------ ------------
Net cash (used) provided by financing activities (1,229) 1,483
------------ ------------
Net increase (decrease) in cash and cash equivalents (547) 792
Cash and cash equivalents at beginning of period 3,880 2,470
------------ ------------
Cash and cash equivalents at end of period $ 3,333 $ 3,262
============ ============
Non-cash investing activities:
Foreclosed assets received in settlement of loans $ 73 $ 135
Cash paid during the period for:
Interest 1,016 910
Income taxes paid 13 14
See accompanying notes to consolidated financial statements.
7
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 December 31, 2007 and September 30,
2007 and for the three-month periods ended December 31, 2007 and 2006.
All material intercompany accounts and transactions have been
eliminated in this consolidation. These statements were prepared in
accordance with accounting principles generally accepted in the United
States of America ("GAAP") for interim financial information and with
instructions for Form 10-QSB and Article 10 of Regulation S-X.
Accordingly, they do not include all information or footnotes necessary
for a complete presentation of financial statements in conformity with
GAAP.
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 periods ended December 31, 2007 and
2006. The results of operations for the three-month period ended
December 31, 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 statement of condition for September 30,
2007 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 2007
consolidated financial statements, including the notes thereto included
in the Company's 2007 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 shares outstanding. Diluted earnings per
share reflects additional common shares that would have been
outstanding assuming the issuance of unearned MRP shares and the
exercise of common stock options, as well as any resulting adjustment
to net income.
8
Basic and diluted earnings per common share for the three-month periods
ended December 31, 2007 and 2006 were computed as follows:
(In thousands, except per share data)
Three Months Ended
December 31,
----------------------------
2007 2006
------------ ------------
Basic earnings per common share:
Net income $ 239 $ 216
Weighted average common shares outstanding 2,278 2,262
Basic earnings per common share $ 0.10 $ 0.10
Diluted earnings per common share:
Net income $ 239 $ 216
Weighted average common shares outstanding 2,278 2,262
Additional potentially dilutive securities
(equivalent in common stock)
Common Stock options and unearned MRP shares 24 30
------------ ------------
Diluted weighted average common shares outstanding 2,302 2,292
------------ ------------
Diluted earnings per common share $ 0.10 $ 0.09
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. For the three months ended December 31, 2007, it also
includes the amortization of certain pension and postretirement costs
previously recorded in accumulated other comprehensive income in
accordance with SFAS No. 158 "Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans". Accumulated other
comprehensive income in the consolidated statements of financial
condition represents the net unrealized gains or losses on securities
available for sale and pension and postretirement benefit costs related
to SFAS 158, as of the reporting dates, net of related tax effects.
The components of other comprehensive income and related tax effects
for the three-month periods ended December 31, 2007 and 2006 are as
follows:
Three Months Ended
December 31,
----------------------------
2007 2006
------------ ------------
(In thousands)
Unrealized holding gains (losses) on available for sale securities $ (75) $ 19
Net pension and postretirement benefit costs 15 --
------------ ------------
(60) 19
Tax effect (24) (7)
------------ ------------
Other comprehensive income, net of tax $ (36) $ 12
============ ============
9
The following table shows the components of accumulated other
comprehensive income at December 31, 2007 and September 30, 2007:
December 31, September 30,
2007 2007
------------ ------------
(In thousands)
Pension and postretirement benefit costs, net of taxes of $126 at
December 31, 2007 and $133 at September 30, 2007 $ (189) $ (199)
Unrealized holding gains on available for sale securities, net of
net of taxes of $90 at December 31, 2007 and $121 at
September 30, 2007 135 181
------------ ------------
$ (54) $ (18)
============ ============
4. Stock Option and Management Recognition Plans
---------------------------------------------
The Company has a Stock Option Plan ("SOP") and 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, 2007.
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 "Share Based Payment",
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 requisite service 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 months ended December 31, 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
options grants is net of estimated forfeitures and is recognized over
the awards' respective requisite vesting periods. The fair values of
all option grants were estimated using the Black-Scholes option pricing
model. The Company recognizes compensation expense for the fair values
of these awards, which have graded vesting, on a straight-line basis
over the requisite vesting period of the awards. Stock option
compensation expense was $0 and $2,000 for the three months ended
December 31, 2007 and 2006. No options were granted in the three-month
periods ending December 31, 2006 or 2007.
The Company awarded no shares of stock under the MRP during the quarter
ended December 31, 2007. During the three months ended December 31,
2007, the Company recorded $8,000 of share-based compensation expense,
which was for MRP shares. The Company estimates it will record
share-based compensation expense of approximately $33,000 in fiscal
2008.
10
The following table illustrates the impact of share-based compensation
on net income and earnings per share:
Three Months Ended
December 31, 2007 December 31, 2006
---------------------------- ----------------------------
Impact of Impact of
Share-Based Share-Based
Compensation Compensation
(In thousands, except per share data) As Reported Expense As Reported Expense
------------------------------------- ------------ ------------ ------------ ------------
Net income $ 239 $ 5 $ 216 $ 6
Earnings per share:
Basic $ 0.10 $ 0.00 $ 0.10 $ 0.00
Diluted $ 0.10 $ 0.00 $ 0.09 $ 0.00
5. Commitments and Contingencies
-----------------------------
Outstanding letters of credit written are conditional commitments
issued by the Bank to guarantee the performance by a customer to a
third party. The Bank'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 Bank had six standby letters of credit totaling $203,000 as of
December 31, 2007.
The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending other loan commitments. The Bank
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 989,177 shares or 43.0% of such stock at December
31, 2007. Cambray MHC has filed a notice with the Office of Thrift
Supervision ("OTS") to waive its right to receive cash dividends during
the 2008 calendar year.
Cambray MHC waived receipt of several past dividends paid by the
Company. The dividends waived are considered a restriction on the
retained earnings of the Company. As of December 31, 2007 and September
30, 2007, the aggregate retained earnings restricted for cash dividends
waived was $1,927,000.
7. Recently Issued Accounting Standards
------------------------------------
In September 2006, the FASB's Emerging Issues Task Force (EITF) issued
EITF Issue No. 06-4, "Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split Dollar Life
Insurance Arrangements" ("EITF 06-4"). EITF 06-4 requires the
recognition of a liability related to the postretirement benefits
covered by an endorsement split-dollar life insurance arrangement. The
consensus highlights that the employer (who is also the policyholder)
has a liability for the benefit it is providing to its employee. As
such, if the policyholder has agreed to maintain the insurance policy
in force for the employee's benefit during his or her retirement, then
the liability recognized during the employee's active service period
should be based on the future cost of insurance to be incurred during
11
the employee's retirement. Alternatively, if the policy holder has
agreed to provide the employee with a death benefit, then the liability
for the future death benefit should be recognized by following the
guidance in SFAS No. 106 or Accounting Principals Board (APB) Opinion
No. 12, as appropriate. For transition, an entity can choose to apply
the guidance using either of the following approaches: (a) a change in
accounting principle through retrospective application to all periods
presented or (b) a change in accounting principle through a
cumulative-effect adjustment to the balance in retained earnings at the
beginning of the year of adoption. This EITF is effective for fiscal
years beginning after December 15, 2007, with early adoption permitted.
The Company elected to adopt EITF 06-4 on October 1, 2007 which
resulted in an increase in liabilities, and a decrease in retained
earnings, of $121,000. Compensation expense for the quarter ended
December 31, 2007 was $9,000 and is expected to be $34,000 for the year
ended September 30, 2008 related to the adoption of EITF 06-4.
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. The Company adopted FIN 48 on October 1,
2007. The impact of adopting FIN 48 did not have a material effect on
our financial statements.
FASB statement No. 141 (R) "Business Combinations" was issued in
December of 2007. This Statement establishes principles and
requirements for how the acquirer of a business recognizes and measures
in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree.
The Statement also provides guidance for recognizing and measuring the
goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination.
The guidance will become effective as of the beginning of a company's
fiscal year beginning after December 15, 2008. The Company believes
that this new pronouncement will have an immaterial impact on the
Company's financial statements in future periods.
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.
In December 2007, the FASB issued proposed FASB Staff Position (FSP)
157-b, "Effective Date of FASB Statement No. 157," that would permit a
one-year deferral in applying the measurement provisions of Statement
No. 157 to non-financial assets and non-financial liabilities
(non-financial items) that are not recognized or disclosed at fair
value in an entity's financial statements on a recurring basis (at
least annually). Therefore, if the change in fair value of a
non-financial item is not required to be recognized or disclosed in the
financial statements on an annual basis or more frequently, the
effective date of application of Statement 157 to that item is deferred
until fiscal years beginning after November 15, 2008 and interim
periods within those fiscal years. This deferral does not apply,
however, to an entity that applies Statement 157 in interim or annual
financial statements before proposed FSP 157-b is finalized. The
Company is currently evaluating the impact, if any, that the adoption
of FSP 157-b will have on the Company's operating income or net
earnings.
12
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities." This statement permits
entities to choose to measure many financial instruments and certain
other items at fair value. An entity shall report unrealized gains and
losses on items for which the fair value option has been elected in
earnings at each subsequent reporting date. This statement is effective
as of the beginning of an entity's first fiscal year that begins on or
before November 15, 2007, provided the entity also elects to apply the
provisions of SFAS No. 157. The Company is continuing to evaluate the
impact of this statement.
FASB statement No. 160 "Noncontrolling Interests in Consolidated
Financial Statements--an amendment of ARB No. 51" was issued in
December of 2007. This Statement establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. The guidance will become effective as
of the beginning of a company's fiscal year beginning after December
15, 2008. The Company believes that this new pronouncement will have an
immaterial impact on the Company's financial statements in future
periods.
Staff Accounting Bulletin No. 110 (SAB 110) amends and replaces
Question 6 of Section D.2 of Topic 14, "Share-Based Payment," of the
Staff Accounting Bulletin series. Question 6 of Section D.2 of Topic 14
expresses the views of the staff regarding the use of the "simplified"
method in developing an estimate of expected term of "plain vanilla"
share options and allows usage of the "simplified" method for share
option grants prior to December 31, 2007. SAB 110 allows public
companies which do not have historically sufficient experience to
provide a reasonable estimate to continue use of the "simplified"
method for estimating the expected term of "plain vanilla" share option
grants after December 31, 2007. SAB 110 is effective January 1, 2008.
Staff Accounting Bulletin No. 109 (SAB 109), "Written Loan Commitments
Recorded at Fair Value Through Earnings" expresses the views of the
staff regarding written loan commitments that are accounted for at fair
value through earnings under generally accepted accounting principles.
To make the staff's views consistent with current authoritative
accounting guidance, the SAB revises and rescinds portions of SAB No.
105, "Application of Accounting Principles to Loan Commitments."
Specifically, the SAB revises the SEC staff's views on incorporating
expected net future cash flows related to loan servicing activities in
the fair value measurement of a written loan commitment. The SAB
retains the staff's views on incorporating expected net future cash
flows related to internally-developed intangible assets in the fair
value measurement of a written loan commitment. The staff expects
registrants to apply the views in Question 1 of SAB 109 on a
prospective basis to derivative loan commitments issued or modified in
fiscal quarters beginning after December 15, 2007. The Company does not
expect SAB 109 to have a material impact on its financial statements.
In June 2007, the Emerging Issues Task Force (EITF) reached a consensus
on Issue No. 06-11, "Accounting for Income Tax Benefits of Dividends on
Share-Based Payment Awards" ("EITF 06-11"). EITF 06-11 states that an
entity should recognize a realized tax benefit associated with
dividends on nonvested equity shares, nonvested equity share units and
outstanding equity share options charged to retained earnings as an
increase in additional paid in capital. The amount recognized in
additional paid in capital should be included in the pool of excess tax
benefits available to absorb potential future tax deficiencies on
share-based payment awards. EITF 06-11 should be applied prospectively
to income tax benefits of dividends on equity-classified share-based
payment awards that are declared in fiscal years beginning after
December 15, 2007. The Company expects that EITF 06-11 will not have an
impact on its 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
13
disclosures, we are making "forward-looking statements" as described in the
Private Securities Litigation Reform Act of 1995. In addition, certain
information we will provide in the future on a regular basis, such as analysis
of the adequacy of our allowance for loan losses or an analysis of interest rate
sensitivity of our assets and liabilities, is always based on predictions of the
future. From time to time, we may also publish other forward-looking statements
regarding anticipated financial performance, business prospects, and similar
matters.
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. We want you to know that a variety of
future events could cause our actual results and experience to differ materially
from what was anticipated in our forward-looking statements. Some of the risks
and uncertainties that may affect our operations, performance, development and
results, the interest rate sensitivity of our assets and liabilities, and the
adequacy of our allowance for loan losses, include:
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 Fluctuations in loan demand and deposit flows;
o Changes in market interest rates or changes in the speed at which
market interest rates change;
o Changes in laws and regulations affecting us, including changes in
accounting standards and legal compliance requirements;
o Changes in competition, including non-bank investments; 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 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, which includes 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 of the Federal
Deposit Insurance Corporation ("FDIC"), and the Bank is subject to regulation by
the FDIC and the OTS.
14
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, 2007) lists significant accounting policies used in the
development and presentation of its financial statements. This discussion and
analysis, the significant accounting policies, and other financial statement
disclosures identify and address key variables and other qualitative and
quantitative factors that are necessary for an understanding and evaluation of
the Company's results of operations. The 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 of 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.
The allowance for loan losses is established through a provision for
loan losses based on management's evaluation of the risks inherent in the
Company's loan portfolio. The allowance for loan losses is maintained at an
amount management considers adequate to cover loan losses deemed probable by our
estimates. The allowance is based upon a number of factors, including asset
classifications, economic trends, industry experience and trends, industry and
geographic concentrations, estimated collateral values, management's assessment
of the credit risk inherent in the portfolio, historical loan loss experience,
the Company's underwriting policies and other relevant factors. The Company
evaluates, on a monthly basis, all loans identified as problem loans, including
all non-accrual loans and other loans where management has reason to doubt
collection in full in accordance with original payment terms. The Company
considers whether the allowance should be adjusted to protect against risks
associated with such loans. In addition, the Company applies a percentage, for
each category of performing loans not designated as problem loans, to determine
an additional component of the allowance to protect against unascertainable
risks inherent in any portfolio of performing loans.
The analysis of the adequacy of the allowance is reported to and
reviewed by the Board of Directors quarterly. Management believes it uses a
reasonable and prudent methodology to project losses in the loan portfolio, and
hence assess the adequacy of the allowance for loan losses. However, any such
assessment is only an informed estimate and future adjustments may be necessary
if economic conditions or the Company's actual experience differ substantially
from the assumptions upon which the evaluation of the allowance was based.
Furthermore, state and federal regulators, in reviewing the Company's loan
portfolio as part of a future regulatory examination, may request the Company to
increase its allowance for loan losses, thereby negatively affecting the
Company's financial condition and earnings at that time. Moreover, future
additions to the allowance may be necessary based on changes in economic and
real estate market conditions, new information regarding existing loans,
identification of additional problem loans and other factors, both within and
outside of management's control.
15
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 December 31,
----------------------------------------------------------------------------------------
2007 2006
------------------------------------------ ------------------------------------------
(Dollars in thousands)
Average Yield/ Average Yield/
Balance Interest Cost (6) Balance Interest Cost (6)
------------ ------------ ---------- ------------ ------------ ----------
Loans, net (1) $ 108,492 $ 1,842 6.74% $ 108,687 $ 1,853 6.76%
Securities (2) 11,231 146 5.16% 11,117 132 4.71%
Other short-term investments 2,335 25 4.25% 711 9 5.02%
------------ ------------ ------------ ------------
Total interest-earning assets 122,058 2,013 6.54% 120,515 1,994 6.56%
------------ ------------
Non-interest-earning assets 10,461 9,823
------------ ------------
Total assets $ 132,519 $ 130,338
============ ============
Savings and club accounts (3) $ 18,280 $ 47 1.02% $ 19,254 $ 50 1.03%
Time certificates 39,659 480 4.80% 38,367 430 4.45%
NOW and money
market accounts 12,975 41 1.25% 12,078 38 1.25%
Borrowings 33,902 405 4.74% 35,421 429 4.81%
------------ ------------ ------------ ------------
Total interest-bearing liabilities 104,816 973 3.68% 105,120 947 3.57%
------------ ------------
Non-interest-bearing liabilities 7,264 5,205
------------ ------------
Total liabilities 112,080 110,325
Shareholders' equity 20,439 20,013
------------ ------------
Total liabilities and
shareholders' equity $ 132,519 $ 130,338
============ ============
Net interest income/spread (4) $ 1,040 2.86% $ 1,047 2.99%
============ ========== ============ ==========
Net earning assets/net interest
margin (5) $ 17,242 3.38% $ 15,395 3.45%
============ ========== ============ ==========
Ratio of average interest-earning
assets to average interest-bearing
liabilities 1.16x 1.15x
============ ============
Notes appear on following page
16
(1) Shown net of the allowance for loan losses. Average loan balances include
non-accrual loans and loans 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.
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.
For the three months ended December 31,
2007 vs. 2006
Increase (Decrease) Due To:
-------------------------------------------
Volume Rate Total
------------ ------------ ------------
(Dollars in thousands)
Interest-earning assets:
Loans $ (4) $ (7) $ (11)
Securities 1 13 14
Other short-term investments 18 (2) 16
------------ ------------ ------------
Total interest-earning assets 15 4 19
------------ ------------ ------------
Interest-bearing liabilities:
Savings and club accounts (3) -- (3)
Time certificates 15 35 50
NOW and money market accounts 3 -- 3
Borrowings (18) (6) (24)
------------ ------------ ------------
Total interest-bearing liabilities (3) 29 26
------------ ------------ ------------
Net change in net interest income $ 18 $ (25) $ (7)
============ ============ ============
17
Comparison of Financial Condition at December 31, 2007 and September 30, 2007.
During the three months from September 30, 2007 through December 31,
2007, total assets decreased $0.4 million, or 0.3%, from $132.6 million to
$132.2 million. Net loans increased by $0.1 million, or 0.1%, from $106.1
million to $106.2 million. This slight increase resulted from our strategy to
deliberately reduce loan growth due to the narrow margins between loan rates and
borrowing costs over the past year.
Deposits decreased $779,000, or 1.0%, during the fiscal quarter from
$76.2 million at September 30, 2007 to $75.5 million at December 31, 2007.
Non-interest-bearing demand accounts, NOW and money market accounts and savings
account balances decreased, but were partially offset by an increase in time
deposits.
Borrowed funds from the FHLB, consisting of advances and securities
repurchase obligations, were $32.7 million on December 31, 2007 and $33.2
million on September 30, 2007.
Shareholders' equity increased $116,000 during the first quarter of the
fiscal year. This was the result of net income of $239,000 combined with
increases of $26,000 on Employee Stock Ownership Plan shares earned, $8,000 of
amortization of MRP shares and the recognition of pension and postretirement
costs of $9,000. Partially offsetting the increases were a $45,000 decrease in
unrealized gains on securities available-for-sale, net of taxes and a charge of
$121,000 to retained earnings related to the adoption of EITF Issue No. 06-4.
Non-performing assets increased from $762,000 on September 30, 2007 to
$1,190,000 at December 31, 2007, while the ratio of non-performing assets to
total assets increased from 0.57% to 0.90% over the same period. Non-performing
loans increased from $674,000, or 0.63% of total loans at September 30, 2007 to
$1,122,000, or 1.06% at December 31, 2007, due primarily to the addition of one
loan in the amount of $486,000 to non-accrual loans. A summary of the Company's
non-performing assets and related ratios follows:
Non-performing assets December 31, September 30,
2007 2007
------------- -------------
Non-accrual loans
-----------------
Residential mortgages
and home equity loans $ 849 $ 127
Commercial mortgages 250 249
Consumer other 23 1
Commercial other -- --
------------- -------------
Total non-accrual loans 1,122 377
Residential mortgage loans over 90
days delinquent and still accruing -- 297
------------- -------------
Total non-performing loans 1,122 674
Foreclosed real estate 68 85
Other repossessed assets -- 3
------------- -------------
Total non-performing assets $ 1,190 $ 762
============= =============
Non-performing loans as a
percent of total gross loans 1.06% 0.63%
Non-performing assets as a
percent of total assets 0.90% 0.57%
18
Five of twelve non-accrual residential mortgages are currently in
foreclosure proceedings including the loan mentioned above for $486,000.
A commercial mortgage loan in the amount of $250,000 is in foreclosure
proceedings.
The Company had no loans more than 90 days delinquent and still
accruing at December 31, 2007.
Management feels that the increase in non-performing residential
mortgages may be in part related to higher energy costs precipitated by the more
than tripling of oil prices on the world market in the past two years. These
increases for both heating fuel and gasoline are impacting all residents and
especially those on limited incomes. We suspect there also has been an increase
in delinquencies related to energy prices. Management believes that the
non-performing loans are adequately secured by collateral. Further, management
is not aware of any other factors common to these loans, which caused their
non-performance. Accordingly, while we will continue to monitor asset quality,
management has determined that the allowance for loan losses is appropriate at
this time.
Comparison of Results of Operations for the Three Months Ended December 31, 2007
and 2006.
General. Our net income for the three months ended December 31, 2007
was $239,000, an increase of $23,000, or 10.6%, over our net income of $216,000
for the same period last year. The increase in net income was the result of the
following factors:
1. Net interest income decreased by $7,000, as interest income
increased $19,000 and interest expense increased by $26,000,
2. non-interest income increased by $10,000 from last year's
period,
3. the provision for loan losses decreased by $15,000,
4. non-interest expenses decreased $13,000, and
5. an increase of $8,000 in income taxes.
Basic and diluted earnings per share were each $0.10 for the three
months ended December 31, 2007 and $0.10 and $0.09 respectively, for the three
months ended December 31, 2006.
Interest Income. An analysis of the information shown previously in the
Average Balances, Interest Rates and Yields table and in the Rate Volume
Analysis of Net interest Income table follows:
1. Results show that interest income increased by $19,000, or
1.0%, from $1,994,000 for the three months ended December 31,
2006 to $2,013,000 for the three months ended December 31,
2007. Interest income increased $15,000 due to an increase in
the average balance of interest-earning assets, from $120.5
million to $122.1 million, and total interest income increased
$4,000 despite the decrease in the average rate earned on
interest-earning assets from 6.56% to 6.54%.
2. Interest income on loans decreased $11,000, or 0.6%, for the
first three months of fiscal 2008, as compared to the first
three months of fiscal 2007. A decrease of $195,000 in the
average balance of loans accounted for a decrease in interest
income of $4,000, while a decrease of 0.02% in the average
rate on loans decreased interest income $7,000.
3. Interest income on securities and other short-term investments
increased by $30,000 from $141,000 for the three months ended
December 31, 2006 to $171,000 for the three months ended
December 31, 2007. An increase of $1,738,000 in the average
balance of securities and other short-term investments
19
increased interest income by $19,000, while a net increase in
the average interest rate on securities and other short-term
investments increased interest income by $11,000.
Interest Expense. An analysis of the information shown previously in
the Average Balances, Interest Rates and Yields table and in the Rate Volume
Analysis of Net interest Income table follows:
1. Interest expense increased by $26,000, or 2.7%, from $947,000
for the first quarter of fiscal 2007 to $973,000 for the first
quarter of fiscal 2008. Interest expense decreased $3,000 due
to a decrease in the average balance of interest-bearing
liabilities. Over the same time frame, interest expense
increased by $29,000 due to an increase in the average rate
paid on interest-bearing liabilities from 3.57% to 3.68%.
2. The average balance of time certificates increased $1.3
million, from $38.4 million for the quarter ended December 31,
2006 to $39.7 million for the quarter ended December 31, 2007
resulting in an increase of $15,000 in interest expense.
Interest expense on time certificates increased $35,000 as the
average interest rate increased from 4.45% for the three
months ended December 31, 2006 to 4.80% for the three months
ended December 31, 2007. Brokered CDs decreased from $5.6
million at December 31, 2006 to $3.3 million at December 31,
2007, as time deposits from our local customers increased by
$3.6 million. Over the same period, a decrease of $1.5 million
in the average balance of borrowings from $35.4 million to
$33.9 million resulted in a decrease in interest expense of
$18,000, while a decrease in the average rate paid on
borrowings from 4.81% to 4.74% decreased interest expense by
$6,000.
Net Interest Income. Net interest income decreased by $7,000, or 0.7%,
in the first three months of fiscal 2008 versus the first three months of fiscal
2007. The decrease in net interest income represents the difference between the
$19,000 increase in interest income and the $26,000 increase in interest
expense. The Average Balances, Interest Rates and Yields table shows that spread
continues to decrease even though the Federal Reserve has lowered interest rates
three times for a total of 1.0% since September 18, 2007. Our borrowing rates
have decreased as compared to last year, but it will take time for deposit
rates, including brokered deposits, to ratchet down. We believe our spread has
bottomed out and that it will slowly begin to grow as borrowings mature and
price to the current yield curve. We have decided to re-activate our loan
arbitrage program, that is, we will seek to increase loan origination activity
and borrow additional funds from FHLB to fund the loans. We feel the spread
between loan rates and borrowing rates has improved enough to support this
activity. However, the results of the first quarter of the 2008 fiscal year show
that the average interest rate on interest-earning assets decreased by 2 basis
points, while the average interest rate on interest-bearing liabilities
increased by 11 basis points, thereby reducing spread by 13 basis points when
compared to the first quarter of fiscal 2007.
Average shareholders' equity represented 16.7% of average
interest-earning assets for the quarter ended December 31, 2007 while it
represented 16.6% of average interest-earning assets for the same quarter last
year. Our ratio of average interest-earning assets to average interest-bearing
liabilities was 1.16 times in the first quarter of fiscal 2008 and 1.15 times
for the first quarter of fiscal 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 or lower, then we adjust it, with a charge
or credit to provision for loan losses, which is an expense on our income
statement. In determining the appropriate provision for loan losses, management
considers the level of and trend in non-performing loans, the level of, and
trend in, net loan charge-offs, the dollar amount and mix of the loan portfolio,
as well as general economic conditions and real estate trends in the Company's
market area, which can impact the inherent risk of loss in the Company's
portfolio. Furthermore, the OTS may disagree with our judgments regarding the
risks in our loan portfolio and could require us to increase the allowance in
the future.
For the three months ended December 31, 2007, we recorded no provision
for loan losses, compared to $15,000 in the same quarter last year. At December
31, 2007, the ratio of our loan allowance to total gross loans was 0.84% as
compared to 0.87% on December 31, 2006. On September 30, 2007 the allowance was
20
$911,000, or 0.86% of total gross loans, and we determined for the quarter ended
December 31, 2007 that the appropriate level for the allowance was $894,000. We
had charge-offs during the quarter of $21,000 and recoveries of $4,000, so no
provision was necessary to reach the desired level for the allowance. Our level
of non-accruing loans, along with loans 90 days delinquent and still accruing
interest was $1,122,000, or 1.06% of total loans, at December 31, 2007 as
compared to $674,000, or 0.63% of total loans, at September 30, 2007.
Non-interest Income. Our non-interest income was $10,000 higher in the
first quarter of fiscal 2008 as compared to the same quarter in fiscal 2007
mostly due to an increase in service charges of $50,000 offset by a $42,000
decrease in the market value of the underlying plan assets in the deferred
directors fees plan.
Non-interest Expense. Non-interest expense decreased by $13,000 from
the quarter ended December 31, 2006 to the quarter ended December 31, 2007. Over
that period, occupancy and equipment expense increased by $23,000 while
directors' fees decreased by $40,000, accounting for most of the change.
Occupancy and equipment costs increased due to the addition of the new office in
Gouverneur. The old administration building was vacated at the end of November
so we will see some offset going forward. Directors' fees were decreased mostly
due to the decrease in the market value of the underlying plan assets in the
deferred directors fees plan for the quarter ended December 31, 2007 as compared
to the quarter ending December 31, 2006.
At December 31, 2007, we had thirty-two full-time and four part-time
employees, compared to thirty-two full-time and three part-time employees at the
end of December 2006.
Income tax expense. Our income tax expense increased by $8,000, or
7.0%, comparing the first quarter of fiscal 2008 to the same quarter of fiscal
2007. The increased expense was the result of an increase in income before taxes
of $31,000 over the same period, an increase of 9.4%.
Liquidity and Capital Resources
Our primary sources of funds are deposits, borrowings from FHLB, and
proceeds from the principal and interest payments on loans and securities.
Scheduled maturities and principal payments on loans and securities are
predictable sources of funds. We can also control the funds available from
borrowings. However, general economic conditions and interest rate conditions
can cause increases or decreases in deposit outflows and loan pre-payments,
which can also affect the level of funds we have available for investment.
In general, we manage our liquidity by maintaining a sufficient level
of short-term investments so funds are readily available for investment in loans
when needed. During the three months ended December 31, 2007, we decreased our
cash and cash equivalents by $547,000.
Deposits decreased by $779,000 during the quarter ended December 31,
2007. 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 reduced borrowings from FHLB by $450,000 during the quarter ended
December 31, 2007 and decreased brokered CDs by $421,000 over the 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
FHLB, the Bank can arrange to borrow an additional $18.4 million against our one
to four family mortgage portfolio. We have used borrowed funds to help us
leverage capital and grow the Bank, but have not needed borrowings to cover
liquidity shortfalls. In addition to borrowings, we believe that, if we need to
do so, we can attract additional deposits by increasing the rates we offer.
We measure liquidity on a monthly basis and want to maintain a
liquidity ratio of between 5% and 15%. At December 31, 2007, the ratio is 7.3%.
We will continue to monitor liquidity.
21
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.
We had $0.8 million in outstanding commitments to make loans at
December 31, 2007, along with $5.8 million of unused home equity, commercial and
overdraft lines of credit. We also had a commitment to sell the $2.1 million
guaranteed portion of a USDA guaranteed loan we originated. The loan sold in
January 2008 after we received 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 December 31, 2007, we had $31.7 million of time certificates
scheduled to mature within one year including brokered CDs. 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 December 31, 2007, the Bank exceeded all
regulatory capital requirements of the OTS applicable to it, with Tier I capital
of $20.2 million, or 15.2% of average assets and with total risk-based capital
of $21.0 million, or 27.2% of risk-weighted assets. The Bank also had tangible
capital of $20.2 million, or 15.2% of average tangible assets. The Bank was
classified as "well capitalized" at December 31, 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 December 31, 2007,
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 December 31, 2007, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
22
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 advise of counsel, does not believe that any currently known legal
actions, individually or in the aggregate, will have a material effect on its
consolidated financial condition or results of operation.
Item 6. Exhibits
31.1 Certification of Principal Executive Officer pursuant to Rule
13a - 14(a) / 15d - 14(a)
31.2 Certification of Principal Financial Officer pursuant to Rule
13a - 14(a) / 15d - 14(a)
32.1 Certification of Principal Executive Officer pursuant to
Section 1350
32.2 Certification of Chief Financial Officer pursuant to Section
1350
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Gouverneur Bancorp, Inc.
Date: February 8, 2008 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)
23