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, 2008
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 1, 2008
----------------------------- --------------
Common Stock, par value $ .01 2,299,384
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 June 30, 2008
and at September 30, 2007 3
Consolidated Statements of Income for the three and nine months
ended June 30, 2008 and 2007 4
Consolidated Statements of Shareholders' Equity for the nine
months ended June 30, 2008 and 2007 5
Consolidated Statements of Cash Flows for the nine months ended
June 30, 2008 and 2007 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 29
Item 6. Exhibits 29
SIGNATURES 29
EXHIBITS 30
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements - Unaudited
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share and per share data) (Unaudited)
June 30, September 30,
2008 2007
------------ ------------
Assets:
Cash and due from banks $ 1,847 $ 2,381
Interest-bearing deposits in bank 5,248 1,499
------------ ------------
Total cash and cash equivalents 7,095 3,880
Securities available-for-sale 9,731 9,784
Securities held-to-maturity (fair value 2008: $76: 2007: $81) 75 81
Loans held for sale -- 2,105
Loans receivable, net of allowance for loan losses: 2008 $864: 2007 $911 106,908 106,131
Investment in Federal Home Loan Bank stock, at cost 1,462 1,694
Investment in life insurance 3,895 3,778
Premises and equipment, net 3,241 3,059
Accrued interest receivable and other assets 2,202 2,077
------------ ------------
Total assets $ 134,609 $ 132,589
============ ============
Liabilities:
Deposits: Non-interest-bearing demand $ 7,554 $ 5,708
NOW and money market 14,662 13,162
Savings 17,453 17,617
Time 43,124 39,742
------------ ------------
Total deposits 82,793 76,229
Advances from the Federal Home Loan Bank 27,950 33,150
Other liabilities 3,045 2,780
------------ ------------
Total liabilities 113,788 112,159
------------ ------------
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 4,969 4,910
Retained earnings 16,447 16,024
Treasury Stock, at cost, (shares 2008: 84,656: 2007: 83,981) (439) (425)
Accumulated other comprehensive loss (137) (18)
Unallocated common stock held by Employee Stock Ownership Plan (43) (85)
------------ ------------
Total shareholders' equity 20,821 20,430
------------ ------------
Total liabilities and shareholders' equity $ 134,609 $ 132,589
============ ============
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,
---------------------------- ----------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Interest income:
- ----------------
Loans $ 1,752 $ 1,853 $ 5,425 $ 5,584
Securities-taxable 97 125 336 358
-non-taxable 33 18 85 43
Other short-term investments 20 24 64 49
------------ ------------ ------------ ------------
Total interest income 1,902 2,020 5,910 6,034
------------ ------------ ------------ ------------
Interest expense:
- -----------------
Deposits 557 555 1,695 1,605
Borrowings - short term 10 126 149 397
Borrowings - long term 303 305 917 892
------------ ------------ ------------ ------------
Total interest expense 870 986 2,761 2,894
------------ ------------ ------------ ------------
Net interest income 1,032 1,034 3,149 3,140
Provision for loan losses -- -- -- 15
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 1,032 1,034 3,149 3,125
------------ ------------ ------------ ------------
Non-interest income:
- --------------------
Service charges 108 60 307 167
Realized gain (loss) on sales of securities - AFS -- 96 (1) 96
Earnings on investment in life insurance 40 37 117 109
Realized gain on foreclosed assets, net -- 6 -- 23
Other 48 68 82 178
------------ ------------ ------------ ------------
Total non-interest income 196 267 505 573
------------ ------------ ------------ ------------
Non-interest expenses:
- ----------------------
Salaries and employee benefits 449 433 1,389 1,348
Directors fees 36 65 52 163
Occupancy and equipment 113 140 361 402
Data processing 35 32 104 94
Postage and supplies 30 30 107 109
Professional fees 113 74 239 195
Other 107 106 347 360
------------ ------------ ------------ ------------
Total non-interest expenses 883 880 2,599 2,671
------------ ------------ ------------ ------------
Income before income tax expense 345 421 1,055 1,027
Income tax expense 118 153 352 360
------------ ------------ ------------ ------------
Net income $ 227 $ 268 $ 703 $ 667
============ ============ ============ ============
Earnings per common share - basic $ 0.10 $ 0.12 $ 0.31 $ 0.29
Earnings per common share - diluted $ 0.10 $ 0.12 $ 0.31 $ 0.29
See accompanying notes to consolidated financial statements
4
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Nine months ended June 30, 2008
(In thousands, except share and per share data) (Unaudited)
Accumulated Unallocated
Additional Other Common
Common Paid-in Retained Treasury Comprehensive Stock held
Stock Capital Earnings Stock Loss by ESOP Total
----------- ---------- ---------- ---------- ------------ ------------ ----------
Balance at September 30, 2007 $ 24 $ 4,910 $ 16,024 $ (425) $ (18) $ (85) $ 20,430
----------
Comprehensive income:
Net income 703 703
Net pension and postretirement
benefit costs, net of taxes 8 8
Change in net unrealized gain
on securities available for
sale, net of reclassification
adjustment and taxes (127) (127)
----------
Total comprehensive income 584
----------
Allocation of ESOP shares
(8,436 shares) 34 42 76
Cumulative effect of adoption
of new accounting principle
on October 1, 2007
EITF Issue No. 06-4 (121) (121)
Amortization of MRP 25 25
Purchases of treasury stock
(2,140 shares) (20) (20)
Exercise of stock options
(1,125 shares) 6 6
Cash dividends declared,
$0.16 per share (159) (159)
----------- ---------- ---------- ---------- ------------ ------------ ----------
Balance at June 30, 2008 $ 24 $ 4,969 $ 16,447 $ (439) $ (137) $ (43) $ 20,821
=========== ========== ========== ========== ============ ============ ==========
5
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 taxes (113) (113)
---------
Total comprehensive income 554
---------
Allocation of ESOP shares
(7,829 shares) 55 39 94
Adoption of 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
========= ========== ======== ========= =========== =========== ========== =========
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,
----------------------------
2008 2007
------------ ------------
Cash flows from operating activities:
Net Income $ 703 $ 667
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses -- 15
Net amortization of deferred fees on loans 113 107
Depreciation 94 111
Write down of foreclosed real estate -- 6
Net amortization of securities premiums and discounts 3 --
Net realized (gains) losses on sales of securities - AFS 1 (96)
Principal payments on loans held for sale 20 41
Proceeds from sales of loans held for sale 2,085 --
Earnings on bank owned life insurance (117) (109)
Allocated and earned shares of SOP, ESOP and MRP 101 124
Net realized gain on sale of foreclosed assets -- (23)
(Increase) decrease in accrued interest receivable and other assets (152) 380
Increase in accrued interest payable and other liabilities 242 201
------------ ------------
Net cash provided by operating activities 3,093 1,424
------------ ------------
Cash flows from investing activities:
Securities available for sale:
Proceeds from sales 163 98
Proceeds from maturities and principal reductions 1,766 1,656
Purchases (2,092) (2,232)
Securities held to maturity, proceeds from maturities 6 9
Redemptions of Federal Home Loan Bank stock 232 16
Net increase in loans (1,032) (1,359)
Proceeds from sales of foreclosed assets 164 240
Additions to premises and equipment (276) (956)
------------ ------------
Net cash provided by (used in) investing activities (1,069) (2,528)
------------ ------------
Cash flows from financing activities:
Net increase in deposits 6,564 2,543
Net repayments of FHLB advances (5,200) (700)
Exercise of stock options 6 39
Cash dividends paid (159) (158)
Purchase of treasury stock (20) --
------------ ------------
Net cash provided by financing activities 1,191 1,724
------------ ------------
Net increase in cash and cash equivalents 3,215 620
Cash and cash equivalents - Beginning 3,880 2,470
------------ ------------
Cash and cash equivalents - Ending $ 7,095 $ 3,090
============ ============
Non-cash investing activities:
Additions to foreclosed assets $ 142 $ 290
Cash paid during the period for:
Interest 3,172 2,858
Income taxes 423 405
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, 2008 and September 30, 2007 and for the
three and nine-month periods ended June 30, 2008 and 2007. 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, 2008 and 2007. The results of operations for the three and
nine-month periods ended June 30, 2008 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 financial 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. Certain amounts for the three-month and nine-month periods
ended June 30, 2007 were reclassified to conform to the presentation of
June 30, 2008.
2. Earnings Per Common Share
-------------------------
Basic earnings per common share represent 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 reflect 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, 2008 and 2007 were computed as follows:
(In thousands, except per share data)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- -------------------------
Basic earnings per share: 2008 2007 2008 2007
----------- ----------- ----------- -----------
Net income $ 227 $ 268 $ 703 $ 667
=========== =========== =========== ===========
Weighted average common shares outstanding 2,284 2,271 2,281 2,266
=========== =========== =========== ===========
Basic earnings per share $ 0.10 $ 0.12 $ 0.31 $ 0.29
=========== =========== =========== ===========
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- -------------------------
Diluted earnings per share: 2008 2007 2008 2007
----------- ----------- ----------- -----------
Net income $ 227 $ 268 $ 703 $ 667
=========== =========== =========== ===========
Weighted average common shares outstanding 2,284 2,271 2,281 2,266
Additional potentially dilutive securities
(equivalent in common stock)
common stock options and unearned MRP shares 17 26 20 27
----------- ----------- ----------- -----------
Diluted weighted average common shares outstanding 2,301 2,297 2,301 2,293
=========== =========== =========== ===========
Diluted earnings per share $ 0.10 $ 0.12 $ 0.31 $ 0.29
=========== =========== =========== ===========
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 nine months ended June 30, 2008, it also includes the
amortization of certain pension and postretirement benefit costs
previously recorded in accumulated other comprehensive income in
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 158 "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans". Accumulated other comprehensive income (loss) 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 No. 158, as of the
reporting dates, net of related tax effects.
The components of other comprehensive income (loss) and related tax
effects for the three and nine month periods ended June 30, 2008 and
2007 are as follows:
9
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------- -----------------------
(In thousands)
2008 2007 2008 2007
---------- ---------- ---------- ----------
Unrealized holding losses arising
during the period $ (224) $ (63) $ (212) $ (92)
Reclassification adjustment for (gains) losses
realized in net income during the period -- (96) 1 (96)
Net pension and postretirement benefit costs (20) -- 13 --
---------- ---------- ---------- ----------
(244) (159) (198) (188)
Tax effect 98 63 79 75
---------- ---------- ---------- ----------
Other comprehensive loss, net of tax $ (146) $ (96) $ (119) $ (113)
========== ========== ========== ==========
The following table shows the components of accumulated other
comprehensive income (loss) at June 30, 2008 and September 30, 2007:
June 30, September 30,
2008 2007
---------- ----------
(In thousands)
Pension and postretirement benefit costs, net of taxes of $127 at
June 30, 2008 and $133 at September 30, 2007 $ (191) $ (199)
Unrealized holding gains on available for sale securities, net of
taxes of $36 at June 30, 2008 and $121 at September 30, 2007 54 181
---------- ----------
$ (137) $ (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 Notes 2 and 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. 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 vesting periods.
SFAS No. 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, 2008) 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
10
the awards' respective 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 $3,000 for the nine months ended June 30, 2008 and
2007. No options were granted in the nine-month periods ending June 30,
2008 or 2007.
The Company awarded no shares of stock under the MRP during the nine
month period ended June 30, 2008. During the nine months ended June 30,
2008, the Company recorded $25,000 of share-based compensation expense,
which was for previously issued MRP shares. The Company estimates it
will record share-based compensation expense of approximately $33,000
in fiscal 2008.
The following tables illustrate the impact of share-based compensation
on net income and earnings per share:
Three Months Ended
------------------------------------------------------------
June 30, 2008 June 30, 2007
---------------------------- ----------------------------
Impact of Impact of
Share-Based Share-Based
(In thousands, except Compensation Compensation
per share data) As Reported Expense As Reported Expense
------------------------ ------------ ------------ ------------ ------------
Net income $ 227 $ 5 $ 268 $ 6
Earnings per share:
Basic $ 0.10 $ 0.00 $ 0.12 $ 0.00
Diluted $ 0.10 $ 0.00 $ 0.12 $ 0.00
Nine months Ended
------------------------------------------------------------
June 30, 2008 June 30, 2007
---------------------------- ----------------------------
Impact of Impact of
Share-Based Share-Based
(In thousands, except Compensation Compensation
per share data) As Reported Expense As Reported Expense
------------------------ ------------ ------------ ------------ ------------
Net income $ 703 $ 15 $ 667 $ 19
Earnings per share:
Basic $ 0.31 $ 0.01 $ 0.29 $ 0.01
Diluted $ 0.31 $ 0.01 $ 0.29 $ 0.01
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 $186,000 as of
June 30, 2008.
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.
11
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 988,162 shares or 43.0% of such stock at June 30,
2008. 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. The Company paid a cash dividend on March 31,
2008 to all public shareholders.
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, 2008 and September 30,
2007, the aggregate retained earnings restricted for cash dividends
waived were $2,137,000 and $1,927,000, respectively.
7. Recently Issued Accounting Standards
------------------------------------
In September 2006, the FASB 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", or EITF 06-4. EITF 06-4 requires that a
liability be recorded during the service period when a split-dollar
life insurance arrangement continues after participants' employment or
retirement. The required accrued liability is based on either the
post-employment benefit cost for the continuing life insurance or based
on the future death benefit, depending on the contractual terms of the
underlying agreement. We adopted EITF 06-4 on October 1, 2007 and
recorded a cumulative effect adjustment of $121,000 as a reduction of
retained earnings effective October 1, 2007. Compensation expense for
the nine months ended June 30, 2008 was $25,000 and is expected to be
$33,000 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. This new pronouncement
will impact the Company's accounting for business combinations
completed beginning October 1, 2009.
In September 2006, the 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.
Generally Accepted Accounting Principles, and expands disclosures about
fair value measurements. SFAS No. 157 applies to other accounting
12
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 financial position,
results of operations and cash flows.
In February 2008, the FASB issued FASB Staff Position (FSP) 157-2,
"Effective Date of FASB Statement No. 157," that permits 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 applied
Statement 157 in interim or annual financial statements prior to the
issuance of FSP 157-2.The Company is currently evaluating the impact,
if any, that the adoption of FSP 157-2 will have on the Company's
operating income or net earnings.
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. The Company is continuing to evaluate the
impact of this statement.
In March 2008, the FASB issued Statement No. 161, "Disclosures about
Derivative Instruments and Hedging Activities--an amendment of FASB
Statement No. 133" ("Statement 161"). Statement 161 requires entities
that utilize derivative instruments to provide qualitative disclosures
about their objectives and strategies for using such instruments, as
well as any details of credit-risk-related contingent features
contained within derivatives. Statement 161 also requires entities to
disclose additional information about the amounts and location of
derivatives located within the financial statements, how the provisions
of SFAS 133 has been applied, and the impact that hedges have on an
entity's financial position, financial performance, and cash flows.
Statement 161 is effective for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged.
The Company is currently evaluating the potential impact the new
pronouncement will have on its financial statements.
In February 2008, the FASB issued a FASB Staff Position ("FSP") FAS
140-3, "Accounting for Transfers of Financial Assets and Repurchase
Financing Transactions." This FSP addresses the issue of whether or not
these transactions should be viewed as two separate transactions or as
one "linked" transaction. The FSP includes a "rebuttable presumption"
that presumes linkage of the two transactions unless the presumption
can be overcome by meeting certain criteria. The FSP will be effective
for fiscal years beginning after November 15, 2008 and will apply only
to original transfers made after that date; early adoption will not be
allowed. The Company is currently evaluating the potential impact the
new pronouncement will have on its financial statements.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally
Accepted Accounting Principles." This Statement identifies the sources
of accounting principles and the framework for selecting the principles
used in the preparation of financial statements. This Statement is
effective 60 days following the SEC's approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, "The Meaning
of Present Fairly in Conformity with Generally Accepted Accounting
Principles." The Company is currently evaluating the potential impact
the new pronouncement will have on its financial statements.
13
In April 2008, the FASB issued FASB Staff Position ("FSP") FAS 142-3,
"Determination of the Useful Life of Intangible Assets." This FSP
amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset under FASB Statement No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). The intent of this FSP is to improve
the consistency between the useful life of a recognized intangible
asset under SFAS 142 and the period of expected cash flows used to
measure the fair value of the asset under SFAS 141R, and other GAAP.
This FSP is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those
fiscal years. Early adoption is prohibited. The Company does not expect
this pronouncement will have a material impact on its financial
statements.
In May 2008, the FASB issued FASB Staff Position (FSP) APB 14-1,
"Accounting for Convertible Debt Instruments That May Be Settled in
Cash upon Conversion (Including Partial Cash Settlement)" which
clarifies the accounting for convertible debt instruments that may be
settled in cash (including partial cash settlement) upon conversion.
The FSP requires issuers to account separately for the liability and
equity components of certain convertible debt instruments in a manner
that reflects the issuer's nonconvertible debt borrowing rate when
interest cost is recognized. The FSP requires bifurcation of a
component of the debt, classification of that component in equity and
the accretion of the resulting discount on the debt to be recognized as
part of interest expense. The FSP requires retrospective application to
the terms of instruments as they existed for all periods presented. The
FSP is effective for fiscal years beginning after December 15, 2008,
and interim periods within those years. Early adoption is not
permitted. The Company is currently evaluating the potential impact the
new pronouncement will have on its financial statements.
In June 2008, the FASB issued FASB Staff Position (FSP) EITF 03-6-1,
"Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities." This FSP clarifies that all
outstanding unvested share-based payment awards that contain rights to
nonforfeitable dividends participate in undistributed earnings with
common shareholders. Awards of this nature are considered participating
securities and the two-class method of computing basic and diluted
earnings per share must be applied. This FSP is effective for fiscal
years beginning after December 15, 2008. The Company does not expect
this pronouncement will have a material impact on its financial
statements.
In June 2008, the FASB ratified EITF Issue No. 07-5, "Determining
Whether an Instrument (or an Embedded Feature) Is Indexed to an
Entity's Own Stock" (EITF 07-5). EITF 07-5 provides that an entity
should use a two step approach to evaluate whether an equity-linked
financial instrument (or embedded feature) is indexed to its own stock,
including evaluating the instrument's contingent exercise and
settlement provisions. It also clarifies the impact of foreign currency
denominated strike prices and market-based employee stock option
valuation instruments on the evaluation. EITF 07-5 is effective for
fiscal years beginning after December 15, 2008. The Company does not
expect this pronouncement will have a material 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 ("SEC") or
other disclosures, we are making "forward-looking statements" as described in
the Private Securities Litigation Reform Act of 1995. In addition, certain
14
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.
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
15
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.
Recent Developments
On June 30, 2008, the Company issued a press release announcing that its Board
of Directors approved a 1-for-100 reverse stock split that will allow the
Company to terminate the registration of its common stock with the SEC and
result in the delisting of the Company's shares on the American Stock Exchange.
The reverse stock split, which will be effected at the record shareholder level,
will be immediately followed by a 100-for-1 forward stock split so that
shareholders holding 100 or more shares will not be affected by the transaction.
Under the terms of the proposed transaction, each 100 shares of the Company's
common stock will be converted into one share of common stock. Shareholders of
record owning fewer than 100 shares of the Company's common stock will be
entitled to receive, in lieu of fractional shares, $10.00 in cash for each
pre-reverse stock split share held at the effective time of the reverse stock
split.
The proposed transaction is anticipated to reduce the number of Company
shareholders of record to fewer than 300, which will allow the Company to
deregister its common stock and suspend its reporting obligations under the
federal securities laws. In addition, the common stock of the Company will be
de-listed from the American Stock Exchange, although the Company anticipates
that its common stock will be quoted on the OTC Bulletin Board or in the pink
sheets, to the extent market makers continue to make a market in its shares.
The proposed split transaction is subject to a regulatory notice filing as well
as the approval of the Company's shareholders. Shareholders will be asked to
approve the split transaction at a special meeting of shareholders, currently
expected to be held in September 2008. Subject to regulatory clearance of the
Company's filings relating to the split transaction and subject to shareholder
approval, it is anticipated that the proposed transaction will become effective
during the third or fourth quarter of the 2008 calendar year, at which time the
Company will terminate the registration of its common stock with the SEC and
de-list its common stock from the American Stock Exchange.
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
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.
16
The allowance consists of specific, general and unallocated components.
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. The unallocated component reflects the inherent imprecision in
calculating the allowance.
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,
2008 2007
------------------------------------ ------------------------------------
(Dollars in thousands)
Average Yield/ Average Yield/
Balance Interest Cost (6) Balance Interest Cost (6)
---------- ---------- ---------- ---------- ---------- ----------
Loans, net (1) $ 106,262 $ 1,752 6.63% $ 108,791 $ 1,853 6.83%
Securities (2) 10,800 130 4.84% 11,655 143 4.92%
Other short-term investments 4,208 20 1.91% 1,865 24 5.16%
---------- ---------- ---------- ----------
Total interest-earning assets 121,270 1,902 6.31% 122,311 2,020 6.62%
---------- ----------
Non-interest-earning assets 10,561 10,423
---------- ----------
Total assets $ 131,831 $ 132,734
========== ==========
Savings and club accounts (3) $ 17,661 45 1.02% $ 18,831 48 1.02%
Time certificates 43,149 481 4.48% 39,343 468 4.77%
NOW and money market accounts 14,229 31 0.88% 12,783 39 1.22%
Borrowings 28,100 313 4.48% 35,329 431 4.89%
---------- ---------- ---------- ----------
Total interest-bearing liabilities 103,139 870 3.39% 106,286 986 3.72%
---------- ----------
Non-interest-bearing liabilities 7,913 6,122
---------- ----------
Total liabilities 111,052 112,408
Shareholders' equity 20,779 20,326
---------- ----------
Total liabilities and
shareholders' equity $ 131,831 $ 132,734
========== ==========
Net interest income/spread (4) $ 1,032 2.92% $ 1,034 2.90%
========== ========== ========== ==========
Net earning assets/net interest margin (5) $ 18,131 3.42% $ 16,025 3.39%
========== ========== ========== ==========
Ratio of average interest-earning
Assets to average interest-bearing liabilities 1.18x 1.15x
========== ==========
Notes appear on following page
18
Average Balances, Interest Rates and Yields (continued)
For the nine months Ended June 30,
2008 2007
------------------------------------ ------------------------------------
(Dollars in thousands)
Average Yield/ Average Yield/
Balance Interest Cost (6) Balance Interest Cost (6)
---------- ---------- ---------- ---------- ---------- ----------
Loans, net (1) $ 106,994 $ 5,425 6.77% $ 108,914 $ 5,584 6.85%
Securities (2) 11,007 421 5.11% 11,208 401 4.78%
Other short-term investments 3,137 64 2.73% 1,282 49 5.11%
---------- ---------- ---------- ----------
Total interest-earning assets 121,138 5,910 6.52% 121,404 6,034 6.65%
---------- ----------
Non-interest-earning assets 10,512 10,128
---------- ----------
Total assets $ 131,650 $ 131,532
========== ==========
Savings and club accounts (3) $ 17,747 135 1.02% $ 18,950 145 1.02%
Time certificates 41,428 1,447 4.67% 38,931 1,346 4.62%
NOW and money market accounts 13,351 113 1.13% 12,316 114 1.24%
Borrowings 30,941 1,066 4.60% 35,537 1,289 4.85%
---------- ---------- ---------- ----------
Total interest-bearing liabilities 103,467 2,761 3.56% 105,734 2,894 3.66%
---------- ----------
Non-interest-bearing liabilities 7,557 5,609
---------- ----------
Total liabilities 111,024 111,343
Shareholders' equity 20,626 20,189
---------- ----------
Total liabilities and
shareholders' equity $ 131,650 $ 131,532
========== ==========
Net interest income/spread (4) $ 3,149 2.96% $ 3,140 2.99%
========== ========== ========== ==========
Net earning assets/net interest margin (5) $ 17,671 3.47% $ 15,670 3.46%
========== ========== ========== ==========
Ratio of average interest-earning
assets to average interest-bearing liabilities 1.17x 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,
2008 vs. 2007 2008 vs. 2007
Increase (Decrease) Due To: Increase (Decrease) Due To:
-------------------------------------------- --------------------------------------------
Volume Rate Total Volume Rate Total
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in thousands)
Interest-earning assets:
Loans $ (45) $ (56) $ (101) $ (96) $ (63) $ (159)
Securities (11) (2) (13) (3) 23 20
Other short-term investments 17 (21) (4) 34 (19) 15
------------ ------------ ------------ ------------ ------------ ------------
Total interest-earning assets $ (39) $ (79) $ (118) $ (65) $ (59) $ (124)
------------ ------------ ------------ ------------ ------------ ------------
Interest-bearing liabilities:
Savings and club accounts (3) -- (3) (10) -- (10)
Time certificates 43 (30) 13 86 15 101
NOW and money market accounts 4 (12) (8) 6 (7) (1)
Borrowings (84) (34) (118) (159) (64) (223)
------------ ------------ ------------ ------------ ------------ ------------
Total interest-bearing liabilities (40) (76) (116) (77) (56) (133)
------------ ------------ ------------ ------------ ------------ ------------
Net change in net interest income $ 1 $ (3) $ (2) $ 12 $ (3) $ 9
============ ============ ============ ============ ============ ============
Comparison of Financial Condition at June 30, 2008 and September 30, 2007.
During the nine months from September 30, 2007 through June 30, 2008,
total assets increased $2.0 million, or 1.51%, from $132.6 million to $134.6
million. Net loans increased by $0.8 million, or 0.75%, from $106.1 million to
$106.9 million during the same period. The increase in net loans resulted from
increases in commercial real estate loans and other commercial loans more than
offsetting decreases in residential real estate loans and consumer loans.
Borrowed funds from the FHLB, consisting of advances and security
repurchase obligations, were $28.0 million on June 30, 2008, down from $33.2
million at September 30, 2007. Deposits increased $6.6 million, or 8.66%, during
the nine months from $76.2 million to $82.8 million and replaced the decrease of
$5.2 million in borrowed funds. Increases in demand deposits, NOW and money
market accounts, and time deposits of $1.9 million, $1.5 million and $3.4
million, respectively, more than offset a decrease of $0.2 million in savings
accounts. Brokered deposits decreased $0.7 million from $3.7 million at
September 30, 2007 to $3.0 million at June 30, 2008.
20
Shareholders' equity increased $391,000 for the nine months ended June
30, 2008. The increase resulted from net income of $703,000 combining with an
increase of $76,000 on ESOP shares earned, amortization of $25,000 on MRP
shares, an $8,000 recognition of pension and postretirement benefit costs, a
$6,000 increase as 1,125 treasury shares were issued when one director exercised
vested stock options, a decrease of $159,000 for a cash dividend paid on March
31, 2008, a $127,000, net of taxes, decrease in unrealized gains on securities
available-for-sale, a decrease of $20,000 for the purchase of treasury shares
and a cumulative effect adjustment to retained earnings of $121,000 related to
the adoption of EITF No. 06-4 which decreased shareholders' equity.
At June 30, 2008, non-performing assets were 0.58% of total assets,
slightly up from 0.57% at September 30, 2007. Non-performing loans were 0.67% of
total loans at June 30, 2008, up from 0.63% at September 30, 2007. A summary of
the Company's non-performing assets and related ratios follows (dollars in
thousands):
June 30, September 30,
Non-performing assets 2008 2007
--------------------- ------------ ------------
Non-accrual loans
Residential mortgages
and home equity loans $ 270 $ 127
Commercial mortgages 442 249
Consumer other -- 1
Commercial other -- --
------------ ------------
Total non-accrual loans 712 377
Residential mortgage loans over 90
days delinquent and still accruing -- 297
------------ ------------
Total non-performing loans 712 674
Foreclosed real estate 41 85
Other repossessed assets 25 3
------------ ------------
Total non-performing assets $ 778 $ 762
============ ============
Non-performing loans to total loans 0.67% 0.63%
Non-performing assets to
total assets 0.58% 0.57%
The Company had no loans more than 90 days delinquent and still
accruing at June 30, 2008 and $297,000 of such loans at September 30, 2007.
At June 30, 2008, four of eight non-accrual residential mortgages
totaling $167,000, and two non-accrual commercial mortgage loans totaling
$442,000 are 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 $47,000 decrease in the loan
loss allowance to $864,000 at June 30, 2008 from September 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, 2008 and
2007.
General. Our net income for the three months ended June 30, 2008 was
$227,000, a decrease of $41,000, or 15.3%, from last year's net income of
$268,000 for the same period. Last year's net income benefited from a $60,000
after tax gain on the sale of Freddie Mac stock, that isn't present in this
year's results.
Basic earnings per share and diluted earnings per share were both $0.10
for this year's quarter versus $0.12 in last year's quarter.
Interest Income. Interest income decreased $118,000, or 5.84%, from
$2,020,000 for the three months ended June 30, 2007 to $1,902,000 for the three
months ended June 30, 2008. A decrease of 31 basis points (0.31%) in the average
interest rate earned on our interest-earning assets, from 6.62% in last year's
quarter to 6.31% in this year's quarter, resulted in a decrease of $79,000 in
interest income, while a $1.0 million decrease in the average balance of
interest-earning assets resulted in a decrease of $39,000 in interest income.
Interest income on loans decreased by $101,000, or 5.45%, in this
year's quarter from the same period last year. The average yield on loans was
6.63% for the three month period ending June 30, 2008, a decrease of 20 basis
points (0.20%), from 6.83% for the three month period ending June 30, 2007. The
decreased yield resulted in a decrease of $56,000 in interest income, while a
decrease of $2.5 million in the average balance of loans from $108.8 million to
$106.3 million resulted in a decrease of $45,000 in interest income.
In January 2008, we re-activated the loan arbitrage program to increase
loan originations, especially in the vacation home market, and planned to fund
the loans with additional borrowings through the FHLB. We have not experienced a
surge in loan activity since lowering our lending rates. Buyers are scarce and
may be waiting for real estate prices to stabilize and commodity markets to
settle before making such commitments. Loan growth from June 30, 2007 through
June 30, 2008 was flat as indicated by the decrease of $2.5 million in the
average balance of loans from June 30, 2007 to June 30, 2008. Most of the
decrease represents the sale of loans held for sale of $2.1 million from last
year to this year. Unlike last year when the slow down in loan growth was
deliberate, we have been unable to increase loan production in response to a
decrease in lending rates. We still feel the current interest rate environment
provides an opportunity to profit from loan arbitrage. However, the favorable
market fundamentals may dissipate before the demand re-appears.
Interest income on securities decreased by $13,000, or 9.09% for the
quarter ended June 30, 2008 versus the quarter ended June 30, 2007. A decrease
in the yield on our securities portfolio of 8 basis points, or 0.08%, from 4.92%
in last year's quarter to 4.84% in this year's quarter resulted in a decrease of
$2,000 in interest income while a decrease of $0.9 million in the average
balance of securities over the same period decreased interest income by $11,000.
Over the same time frame, a 325 basis point, or 3.25%, decrease in the average
interest rate earned on other short-term investments decreased interest income
by $21,000, while an increase of $2.3 million in the average balance of other
short-term investments increased interest income by $17,000.
Interest Expense. Interest expense decreased $116,000, or 11.76%, in
the third quarter of fiscal 2008 versus the third quarter of fiscal 2007. An
decrease of 33 basis points (0.33%) in the average rate we paid on
interest-bearing liabilities from 3.72% last year to 3.39% this year resulted in
a decrease of $76,000 in interest expense, while a decrease of $3.2 million from
$106.3 million to $103.1 million in the average balance of interest-bearing
liabilities resulted in a $40,000 decrease in interest expense.
Interest expense on time deposits increased $13,000 from $468,000 for
the quarter ending June 30, 2007 to $481,000 for the quarter ending June 30,
2008. A decrease of 29 basis points, or 0.29%, in the average rate we paid on
time deposits decreased interest expense by $30,000, while an increase in the
average balance of time deposits of $3.8 million resulted in an increase of
$43,000 in interest expense. Comparing the three months ended June 30, 2008 to
the three months ended June 30, 2007, interest expense decreased on savings and
club accounts, NOW and money market accounts and borrowed funds by $3,000,
22
$8,000 and $118,000, respectively. Interest expense decreased $3,000, or 6.25%,
on savings and club accounts due to a decrease of $1.1 million in the average
balance from $18.8 million in last year's quarter to $17.7 million in this
year's quarter. The average balance of NOW and money market accounts increased
by $1.4 million from the 2007 fiscal quarter to the 2008 fiscal quarter
resulting in a $4,000 increase in interest expense, while a decrease in the
average rate by 34 basis points (0.34%) reduced interest expense by $12,000. The
cost of our borrowed funds decreased by 41 basis points, or 0.41%, from the
third quarter of fiscal 2007 to the third quarter of fiscal 2008, resulting in a
decrease of $34,000 in interest expense, while a decrease in the average balance
of borrowed funds by $7.2 million resulted in a decrease of $84,000 in interest
expense.
Net Interest Income. Our net interest income decreased by $2,000, or
0.19%, from $1,034,000 for the three month period ending June 30, 2007 to
$1,032,000 for the three month period ending June 30, 2008, as interest income
decreased by $118,000 and interest expense decreased by $116,000, as described
above.
Our interest rate spread (the difference between the average rate we
earn and the average rate we pay) increased by 2 basis points, or 0.02%, from
2.90% in last year's quarter to 2.92% in this year's quarter. Also, net interest
margin increased by 3 basis points (0.03%) to 3.42% in the third fiscal quarter
of 2008, up from 3.39% in the corresponding quarter of 2007.
Average capital represented 17.1% of average interest-earning assets
for the quarter ended June 30, 2008 compared to 16.6% at June 30, 2007. Our
ratio of average interest-earning assets to average interest-bearing liabilities
was 1.18 times at June 30, 2008 and 1.15 times at June 30, 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.
For the three months ended June 30, 2008 and 2007, we did not record a
provision for loan losses. At June 30, 2008 and 2007, the ratio of our loan loss
allowance to total loans was 0.81% and 0.85%, respectively. On March 31, 2008,
the allowance was $882,000, or 0.84% of total loans, and we determined at the
end of the third quarter that the appropriate level for the allowance was
$864,000. We had charge-offs during the quarter of $24,000 and recoveries of
$6,000.
Our level of non-accruing loans, loans 90 days and still accruing and
restructured loans was $712,000, or 0.67% of total loans at June 30, 2008
compared to $711,000, or 0.68% of total loans at March 31, 2008. There was a
decrease in the ratio of the loan loss allowance to total loans from 0.84% at
March 31, 2008 to 0.81% at June 30, 2008.
Non-interest Income. Our non-interest income decreased $71,000 from
$267,000 in the 2007 quarter to $196,000 in the 2008 quarter. Service charge
income increased $48,000 as the result of an overdraft privilege program
implemented last year. Offsetting this increase in part was a decrease in the
value of the investments in the deferred fees plan of $35,000. Realized gain on
the sale of available for sale securities more than accounted for reduction in
this year's quarter as we recognized a $96,000 gain last year and no gain this
year. We have been selling some Freddie Mac stock each year since 2000 and have
booked profit totaling $820,000 over the last nine years. Unlike last year's
quarter, we have not sold any stock due to the dramatic price decrease in the
stock, which has fallen from over $60 per share to the current price of less
than $5 per share due to the current condition of the housing market. We
currently own 5,920 shares at a cost of less than $1 per share. Should the stock
become worthless, we would post a loss of less than $6,000. We will continue to
hold the stock as we expect that it will recover some of the lost value when the
economy improves.
23
Non-interest Expenses. Non-interest expenses increased $3,000 from
$880,000 for the 2007 fiscal third quarter to $883,000 for the 2008 fiscal third
quarter. Salaries and employee benefits are up $16,000, or 3.7% from last year's
quarter. Professional fees increased by $39,000 due to the consultant costs
associated with the reverse stock split transaction both before and after the
decision by the Board of Directors to pursue this option. Offsetting these
increases in part was a decrease in directors' fees expense of $29,000,
resulting primarily from a $35,000 loss in the value of the investments in the
deferred fees plan, and a decrease of $27,000 in occupancy and equipment costs
from eliminating the former administrative offices and the Clayton lending
office.
At June 30, 2008 we had thirty-two full-time and four part-time
employees and on June 30, 2007 we had thirty-one full-time employees and four
part-time employees.
Income tax expense. Our income tax expense decreased by $35,000, or
22.88%, from $153,000 for the third quarter of fiscal 2007 to $118,000 for the
same quarter of fiscal 2008. The decreased expense was the result of a decrease
in income before income tax of $76,000, or 18.05%, from $421,000 for the third
quarter of last fiscal year to $345,000 for the third quarter of this fiscal
year. Our effective tax rate was 34.2% for the three months ended June 30, 2008
compared to 36.3% for the same period in 2007. The decreased effective tax rate
in the current quarter is due to a larger percentage of our pre-tax income being
non-taxable.
Comparison of Results of Operations for the Nine Months Ended June 30, 2008 and
2007.
General. Our net income for the nine months ended June 30, 2008 was
$703,000, an increase of $36,000, or 5.40%, from last year's $667,000. The
following operating results combined to produce the increase:
1. net interest income increased by $9,000 as interest income
decreased $124,000 and interest expense decreased $133,000,
2. provision for loan losses decreased by $15,000,
3. non-interest income decreased by $68,000,
4. non-interest expenses decreased $72,000 and
5. income taxes decreased by $8,000 as a result of an increase in
non-taxable income.
Basic earnings per common share and diluted earnings per common share
were both $0.31 for the first nine months of this fiscal year and $0.29 for the
first nine months of the last fiscal year.
Interest Income. Interest income decreased by $124,000, or 2.06%, from
$6,034,000 for the nine months ended June 30, 2007 to $5,910,000 for the nine
months ended June 30, 2008. While average interest-earning assets decreased only
$0.3 million, or 0.25%, from $121.4 million for the first nine months of fiscal
year 2007 to $121.1 million for the same period this year, it resulted in a
decrease of $65,000 in interest income as the average balance of loans decreased
$1.9 million while the average balance of other short-term investments increased
by $1.8 million. Changes in rates for interest earning assets resulted in a
decrease of $59,000 in interest income.
The average interest rate we earned on our interest-earning assets was
13 basis points (0.13%) lower in the first nine months of this year over last
year as the average rate fell from 6.65% last year to 6.52% this year. The
average rate earned on loans decreased 8 basis points (0.08%) from 6.85% last
year to 6.77% this year, while the average rate earned on securities increased
by 33 basis points, or 0.33%, from 4.78% last year to 5.11% this year, and the
average rate on other short-term investments, primarily FHLB deposits, decreased
by 238 basis points (2.38%) from 5.11% to 2.73%.
24
The decrease in the average interest rate earned on loans resulted in a
decrease of $63,000 in interest income, while the decrease in the average
balance of loans decreased interest income by $96,000, totaling a $159,000
decrease in interest income for the loan portfolio.
For securities and other short-term investments, the changes in
interest rates earned resulted in an increase in interest income of $4,000,
while the increase in the average balances increased interest income by $31,000
resulting in a total increase of $35,000 in interest income.
Interest Expense. Interest expense decreased by $133,000 from
$2,894,000 for the first nine months of 2007 to $2,761,000 for the first nine
months of 2008 as a result of both an overall interest rate decrease and a
decrease in average interest-bearing liabilities. A decrease of 10 basis points
(0.10%) in the average rate we paid on interest-bearing liabilities from 3.66%
in 2007 to 3.56% in 2008 decreased interest expense by $56,000, while a decrease
in the average balance of interest-bearing liabilities of $2.2 million, from
$105.7 million at June 30, 2007 to $103.5 million at June 30, 2008, resulted in
a decrease in interest expense of $77,000.
Interest expense increased on time certificates by $101,000, or 7.50%,
from $1,346,000 for the nine months ended June 30, 2007 to $1,447,000 for the
nine months ended June 30, 2008. An increase in the average rate paid on time
certificates from 4.62% for the first three quarters in the 2007 fiscal year to
4.67% for the first three quarters of the 2008 fiscal year increased interest
expense by $15,000, while an increase $2.5 million in the average balance of
time certificates over the same time frame increased interest expense by
$86,000.
Interest expense decreased on savings and club accounts and on
borrowings by $10,000 and $223,000, respectively, as
1. a decrease of $1.2 million in the average balance of savings
and club accounts, from $19.0 million to $17.8 million,
resulted in a decrease of $10,000 in interest expense,
2. a decrease of 25 basis points (0.25%), from 4.85% to 4.60% on
the average rate we paid on borrowed funds decreased interest
expense by $64,000, while a decrease of $4.6 million in the
average amount of those borrowings, from $35.5 million to
$30.9 million, decreased interest expense by $159,000.
Net Interest Income. The net effect of the increases in interest income
and interest expense was an increase of $9,000, or 0.29%, in net interest income
from $3,140,000 for the first nine months of the 2007 fiscal year to $3,149,000
for the first nine months of the 2008 fiscal year. Our interest rate spread (the
difference between the average rate we earn and the average rate we pay)
decreased by 3 basis points (0.03%) from 2.99% last year to 2.96% this year. Net
interest margin increased by 1 basis point (0.01%) from 3.46% for the first nine
months of fiscal 2007, to 3.47% for the first nine months of fiscal 2008.
Average capital represented 17.02% and 16.63% of average
interest-earning assets for the nine months ended June 30, 2008 and June 30,
2007, respectively. Our ratio of average interest-earning assets to average
interest-bearing liabilities was 1.17 times and 1.15 times in 2008 and 2007,
respectively.
Provision for Loan Losses. Year to date, we had charge-offs of $57,000
and recoveries of $15,000. We recorded no provision for loan losses for the
first nine months of this fiscal year as compared to $15,000 for the first nine
months of the past fiscal year. At June 30, 2008 and 2007 the ratio of our loan
loss allowance to total loans was 0.81% and 0.85%, 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
$712,000, or 0.67% of total loans at June 30, 2008 compared to $674,000, or
25
0.63% of total loans at September 30, 2007. 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 $68,000 lower for the
first nine months of this year versus the same period last year. Service charge
income increased by $140,000, but that was more than offset by decreases of
$126,000 in the market value of the underlying plan assets in the deferred
directors' fees plan and $97,000 in gain/loss on the sale of available for sale
securities. Service charge income increased as the result of an overdraft
privilege program implemented last year.
Non-interest Expense. Non-interest expenses decreased by $72,000 to
$2,599,000 for the first nine months of fiscal 2008 compared to $2,671,000 for
the first nine months of fiscal 2007. Increases of $41,000 in salaries and
employee benefits, $44,000 in professional fees and $10,000 in data processing
costs were more than offset by decreases of $111,000 in directors' fees, $41,000
in occupancy and equipment costs and $13,000 in other non-interest expense were
primarily responsible for the decrease in non-interest expenses. The decrease in
directors' fees was the result of a $126,000 decrease in the market value of the
underlying plan assets in the deferred directors fees plan. Professional fees
increased due to the consultant costs associated with the split transaction both
before and after the decision by the Board of Directors to pursue this option.
Income tax expense. Our income tax expense year-to-date decreased by
$8,000, or 2.22%, from $360,000 last year to $352,000 this year. The decreased
expense was the result of increased non-taxable income. Our effective tax rate
was 33.4% for the nine months ended June 30, 2008 compared to 35.1% for the same
period in 2007.
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, 2008, we increased our cash
and cash equivalents by $3.2 million. We have originated $20.4 million of new
loans for the first nine months of this fiscal year. However, loans, net, after
payments, charge-offs and transfers to foreclosed real estate, increased by $1.0
million over this period.
Deposits increased by $6.6 million during the nine months ended June
30, 2008, including a decrease in brokered deposits of $0.7 million. 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 from FHLB by $5.2 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
$23.7 million against our one to four family first mortgage portfolio. We have
used borrowed funds to help us leverage capital, but have not needed borrowings
to cover liquidity shortfalls. In addition to borrowings, we believe that, if
needed, we can attract additional deposits by increasing the rates we offer.
We measure liquidity on a monthly basis and strive to maintain a
liquidity ratio of between 5% and 15%. At June 30, 2008, the ratio was 9.92% as
compared to 5.96% on June 30, 2007.
26
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 $2.1 million in outstanding commitments to make loans at June
30, 2008, along with $6.1 million of unused home equity, commercial and
overdraft lines of credit. 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, 2008, we had $28.2 million of time certificates
scheduled to mature within one year. We anticipate that we can retain
substantially all of those deposits if we need to do so to fund loans and other
investments as part of our efforts to grow and leverage our capital.
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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, 2008, the Bank
exceeded all regulatory capital requirements of the OTS applicable to it, with
Tier I capital of $20.6 million, or 15.3% of adjusted total assets and with
total risk-based capital of $21.5 million, or 27.9% of risk-weighted assets. The
Bank also had tangible capital of $20.6 million, or 15.3% of average tangible
assets. The Bank was classified as "well capitalized" at June 30, 2008 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, 2008, 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, 2008, including any
corrective actions with regard to significant deficiencies and material
weakness.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, the Company and the Bank are
subject to legal actions, which involve claims for monetary relief. Management,
based on the advice of counsel, does not believe that any currently known legal
actions, individually or in the aggregate, will have a material effect on 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
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 11, 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)
29