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, 2004
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ___________________
Commission file number 001-14910
GOUVERNEUR BANCORP, INC.
(Exact name of small business issuer as specified in its charter)
United States 04-3429966
------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
42 Church Street, Gouverneur, New York 13642
(Address of principal executive offices)
Issuer's telephone number (315) 287-2600
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [_]
Outstanding at
Class December 31, 2004
----- -----------------
Common Stock, par value $ .01 2,284,234
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,
2004 and at September 30, 2004 3
Consolidated Statements of Income for the three months ended
December 31, 2004 and 2003 4
Consolidated Statements of Changes in Shareholders' Equity for
three months ended December 31, 2004 and 2003 5
Consolidated Statements of Cash Flows for the three months
ended December 31, 2004 and 2003 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 11
Item 3. Controls and Procedures 17
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 18
Item 6. Exhibits 18
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
2004 2004
------------ ------------
Assets:
Cash and due from banks $ 1,513 $ 1,817
Interest-bearing deposits in bank 1,135 898
------------ ------------
Total cash and cash equivalents 2,648 2,715
Securities available-for-sale 12,838 13,797
Securities held-to-maturity (fair value of $202 at December 31,
2004 and $248 at September 30, 2004) 199 251
Loan held for sale 2,250 -
Loans, net of deferred fees 85,143 80,914
Less allowance for loan losses (779) (755)
------------ ------------
Loans, net 84,364 80,159
Investment in Federal Home Loan Bank stock, at cost 1,350 1,150
Investment in life insurance 3,621 3,582
Premises and equipment, net 1,626 1,493
Accrued interest receivable and other assets 1,023 1,022
------------ ------------
Total assets $ 109,919 $ 104,169
============ ============
Liabilities:
Deposits: Non interest-bearing demand $ 1,381 $ 1,327
NOW and money market 11,681 10,710
Savings 19,715 20,038
Time 29,596 29,523
------------ ------------
Total deposits 62,373 61,598
------------ ------------
Advances form Federal Home Loan Bank 27,000 23,000
Other liabilities 2,278 1,621
------------ ------------
Total liabilities 91,651 86,219
------------ ------------
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 4,666 4,642
Retained earnings 13,851 13,632
Treasury stock, at cost, December 99,806 shares:
September 100,931 shares (505) (511)
Accumulated other comprehensive income 508 451
Unearned common stock held by MRP (55) (57)
Unallocated common stock held by ESOP (221) (231)
------------ ------------
Total shareholders' equity 18,268 17,950
------------ ------------
Total liabilities and shareholders' equity $ 109,919 $ 104,169
============ ============
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,
------------
2004 2003
--------- ---------
Interest income:
----------------
Loans $ 1,368 $ 1,175
Securities 125 151
Other short-term investments 7 3
--------- ---------
Total interest income 1,500 1,329
Interest expense:
-----------------
Deposits 264 256
Borrowings - short-term 49 6
Borrowings - long-term 170 143
--------- ---------
Total interest expense 483 405
--------- ---------
Net interest income 1,017 924
Provision for loan losses 40 25
--------- ---------
Net interest income after provision for loan losses 977 899
Non-interest income
-------------------
Service charges 48 45
Realized (loss) on sales of securities - (9)
Earnings on investment in life insurance 39 -
Other 36 32
--------- ---------
Total non-interest income 123 68
Non-interest expenses
---------------------
Salaries and employee benefits 422 338
Directors fees 34 20
Occupancy and Equipment 92 81
Data processing 35 33
Postage and supplies 26 20
Professional fees 61 32
Foreclosed assets, net (12) 8
Other 103 94
--------- ---------
Total non-interest expenses 761 626
--------- ---------
Income before income tax expense 339 341
Income tax expense 120 134
--------- ---------
Net income $ 219 $ 207
========= =========
Earnings per common share - basic $ 0.10 $ 0.09
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, 2004
(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, 2004 $ 24 $ 4,642 $ 13,632 $ (511) $ 451 $ (57) $ (231) $ 17,950
Comprehensive Income:
Net Income 219 219
Change in net unrealized gain on
Securities available for sale,
net of taxes 57 57
----------
Total comprehensive income 276
----------
Allocation of ESOP shares
(2,137 shares) 22 10 32
Amortization of MRP 2 2
Exercise of stock options
(1,125 shares) 2 6 8
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2004 $ 24 $ 4,666 $ 13,851 $ (505) $ 508 $ (55) $ (221) $ 18,268
========== ========== ========== ========== ========== ========== ========== ==========
5
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Three months ended December 31, 2003
(In thousands, except share data) (Unaudited)
Accumulated Unearned Unallocated
Additional Other common common
Common Paid In Retained Treasury Comprehensive stock held stock held
Stock Capital Earnings Stock Income By MRP by ESOP Total
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at
September 30, 2003 $ 24 $ 4,577 $ 13,365 $ (537) $ 487 $ (85) $ (274) $ 17,557
Comprehensive Income:
Net Income 207 207
Change in net unrealized gain on
Securities available for sale,
net of taxes 12 12
----------
Total comprehensive income 219
----------
Allocation of ESOP shares
(1,841 shares) 13 11 24
Amortization of MRP 8 8
Exercise of stock options
(1,125 shares) 5 5
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2003 $ 24 $ 4,590 $ 13,572 $ (532) $ 499 $ (77) $ (263) $ 17,813
========== ========== ========== ========== ========== ========== ========== ==========
6
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
Three Months Ended
December 31,
------------
2004 2003
---------- ----------
Cash flows from operating activities:
Net Income $ 219 $ 207
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 40 25
Depreciation 31 31
Net amortization of securities premiums and discounts 8 21
Net realized loss on sales of securities - 9
Earnings on bank owned life insurance (39) -
Allocated and earned shares of ESOP and MRP 34 32
Net realized gain on sale of foreclosed real estate (12) -
(Increase) decrease in accrued interest receivable and other assets (21) (20)
Increase (decrease) in accrued interest payable and other liabilities 620 329
---------- ----------
Net cash provided by operating activities 880 634
---------- ----------
Cash flows from investing activities:
Net increase in loans (6,536) (5,109)
Proceeds from sales of securities AFS - 4,300
Proceeds from maturities and principal reductions of securities AFS 1,051 1,756
Purchases of securities AFS (6) (5,283)
Proceeds from maturities and principal reductions of securities HTM 52 20
Additions to premises and equipment (164) (10)
Proceeds from sale of premises and equipment - 3
Proceeds from sale of foreclosed real estate 73 -
Purchases of Federal Home Loan Bank stock (200) (250)
Purchase of investment in life insurance - (1,561)
---------- ----------
Net cash used in investing activities (5,730) (6,134)
---------- ----------
Cash flows from financing activities:
Net increase (decrease) in deposits 775 (713)
Proceeds from FHLB advances 4,000 5,000
Exercise of stock options 8 5
---------- ----------
Net cash provided by financing activities 4,783 4,292
---------- ----------
Net decrease in cash and cash equivalents (67) (1,208)
Cash and cash equivalents at beginning of period 2,715 4,288
---------- ----------
Cash and cash equivalents at end of period $ 2,648 $ 3,080
========== ==========
Non-cash investing activities:
Additions to foreclosed assets $ 41 $ 19
Cash paid during the period for:
Interest 474 398
Income taxes - 66
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 December 31, 2004 and September 30, 2004 and for the three
month periods ended December 31, 2004 and 2003. 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 periods ended December 31, 2004 and 2003. The results
of operations for the three month period ended December 31, 2004 are not
necessarily indicative of the results which may be expected for an entire
fiscal year or other interim periods.
The data in the consolidated statements of condition for September 30, 2004
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 2004 consolidated financial
statements, including the notes thereto included in the Company's 2004
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 if dilutive potential common shares
had been issued, (for example, through the exercise of common stock
options), as well as any adjustment to income that would result from the
assumed issuance.
8
Basic and diluted earnings per common share for the three-month periods
ended December 31, 2004 and 2003 were computed as follows:
(In thousands, except per share data)
Three Months Ended
December 31,
2004 2003
--------- ---------
Basic earnings per common share:
Net income $ 219 $ 207
Weighted average common shares outstanding 2,224 2,206
Basic earnings per common share $ 0.10 $ 0.09
Diluted earnings per common share:
Net income $ 219 $ 207
Weighted average common shares outstanding 2,224 2,206
Additional potentially dilutive securities
(equivalent in common stock)
Common Stock options 36 34
--------- ---------
Diluted weighted average common shares outstanding 2,260 2,240
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. Accumulated other comprehensive income in the consolidated statements
of financial condition represents the net unrealized gains or losses on
securities available for sale as of the reporting dates, net of related tax
effect.
A summary of the unrealized gains (losses) and reclassification adjustments
of securities available for sale and the related tax effects for the three
month periods ended December 31, 2004 and 2003 is as follows:
(In thousands, except per share data)
Three Months Ended
December 31,
2004 2003
--------- ---------
Unrealized holding gains arising
during the period $ 94 $ 13
Reclassification adjustment for losses realized in
net income during period - 9
--------- ---------
94 22
Tax effect (37) (10)
--------- ---------
Other comprehensive income, net of tax $ 57 $ 12
========= =========
9
4. Stock Option and Management Recognition Plans
---------------------------------------------
The Company has a Stock Option Plan ("SOP") and the MRP for directors,
officers and key employees. The Company accounts for stock options granted
under the SOP and MRP in accordance with the provisions of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations. The Company provides pro forma net
income and pro forma earnings per share disclosures for employee stock
options grants as if the fair-value-based method defined in Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation", had been applied. The fair value of the shares awarded,
under the MRP, measured as of the grant date, is recognized as unearned
compensation (a component of shareholders' equity) and amortized to
compensation expense over the vesting period.
The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of
SFAS No. 123 to stock-based compensation:
(In thousands, except per share data)
Three Months Ended
December 31,
------------
2004 2003
--------- ---------
Net income, as reported $ 219 $ 207
Total stock-based compensation expense determined
under fair value method for all awards, net of taxes (2) (6)
Amounts included in determination of net income,
net of taxes 1 4
--------- ---------
Pro forma net income $ 218 $ 205
========= =========
Earnings per share:
Basic - as reported $ 0.10 $ 0.09
Basic - pro forma 0.10 0.09
Diluted - as reported $ 0.10 $ 0.09
Diluted - pro forma 0.10 0.09
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 no standby letters of credit
as of December 31, 2004.
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.
10
6. Dividend Restrictions
---------------------
Cambray Mutual Holding Company ("Cambray MHC"), the Company's parent mutual
holding company, held 1,311,222 shares, or 57.4%, of the Company's issued
and outstanding common stock, and shareholders other than Cambray MHC held
973,012 shares or 42.6% of such stock at December 31, 2004. Cambray MHC
will file a notice with the Office of Thrift Supervision ("OTS") to waive
its right to receive cash dividends during the 2005 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, 2004 and September 30, 2004, the
aggregate retained earnings restricted for cash dividends waived was
$747,000.
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 10-QSB or in any press releases, public
announcements, filings with the Securities and Exchange Commission or other
disclosures, we are making "forward-looking statements" as described in the
Private Securities Litigation Reform Act of 1995. In addition, certain
information we will provide in the future on a regular basis, such as analysis
of the adequacy of our allowance for loan losses or an analysis of interest rate
sensitivity of our assets and liabilities, is always based on predictions of the
future. From time to time, we may also publish other forward-looking statements
regarding anticipated financial performance, business prospects, and similar
matters.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements. We want you to know that a variety of future
events could cause our actual results and experience to differ materially from
what was anticipated in our forward-looking statements. Some of the risks and
uncertainties that may affect our operations, performance, development and
results, the interest rate sensitivity of our assets and liabilities, and the
adequacy of our allowance for loan losses, include:
o Local, regional, national or global economic conditions which could cause
an increase in loan delinquencies, a decrease in property values, or a
change in the housing turnover rate;
o Changes in market interest rates or changes in the speed at which market
interest rates change;
o Changes in laws and regulations affecting us, including changes in
accounting standards;
o Changes in competition; and
o Changes in consumer preferences.
Please do not rely unduly on any forward-looking statements, which are
valid only as of the date made. Many factors, including those described above,
could affect our financial performance and could cause our actual results or
circumstances for future periods to differ materially from what we anticipate or
project. We have no obligation to update any forward-looking statements to
reflect future events which occur after the statements are made.
11
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, 2004) 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.
Management performs a monthly evaluation of the adequacy of the allowance
for loan losses. Consideration is given to a variety of factors in establishing
this estimate, including, but not limited to, current economic conditions,
diversification of the loan portfolio, delinquency statistics, results of
internal loan reviews, borrowers' actual or perceived financial and managerial
strengths, the adequacy of the underlying collateral (if collateral dependent),
the present value of future cash flows and other relevant factors. This
evaluation is inherently subjective, as it requires material estimates that may
be susceptible to significant change, including the amounts and timing of future
cash flows expected to be received on impaired loans.
The analysis has two components, specific and general allocations.
Collateral values discounted for market conditions and selling costs are used to
establish specific allocations. The Bank's historical loan loss experience,
delinquency rates and general economic conditions are used to establish general
allocations for the remainder of the portfolio.
Management monitors the adequacy of the allowance for loan losses on an
ongoing basis and reports its adequacy assessment quarterly to the Board of
Directors and the Audit Committee.
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, southern St. Lawrence and
northern Jefferson and Lewis counties in New York State. The Bank's deposit
accounts are insured by the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation ("FDIC"), and the Bank is subject to
regulation by the FDIC and the OTS.
12
Comparison of Financial Condition at December 31, 2004 and September 30, 2004.
During the three months from September 30, 2004 through December 31, 2004,
total assets increased $5.7 million, or 5.5% from $104.2 million to $109.9
million. Net loans increased by $6.4 million, or 8.0% from $80.2 million to
$86.6 million. This increase resulted from growth of $3.7 million in residential
real estate loans, $2.4 million in commercial real estate loans and $0.3 million
in other consumer loans. Each of our offices grew their residential real estate
portfolio as follows; $2.0 million in Alexandria Bay, $1.4 million in Clayton
and $0.3 million in Gouverneur. One commercial real estate loan in the amount of
$2.5 million was responsible for the growth in that portfolio. The loan carries
a 90% guarantee, or $2.25 million, from the United States Department of
Agriculture, ("USDA"). The guaranteed portion will be sold in the secondary
market when we receive USDA approval. The guaranteed portion of this loan is
classified as held for sale on the consolidated statements of financial
condition at December 31, 2004.
Borrowed funds from FHLB, consisting of advances and securities repurchase
obligations, were $27.0 million on December 31, 2004 and $23.0 million on
September 30, 2004. The increase of $4.0 million in borrowed funds is consistent
with management's strategy to fund loan growth when our deposit growth is not
sufficient by itself. Deposits increased $0.8 million, or 1.3%, during the
quarter from $61.6 million to $62.4 million. Increases in demand deposits, NOW
and money market accounts and time deposits more than offset a decrease in
savings accounts.
Our shareholders' equity rose by $318,000 during the first quarter of the
fiscal year as net income of $219,000, combined with increases of $34,000 from
the allocation of ESOP and MRP shares, $57,000 in the fair value (net of taxes)
of our available-for-sale securities portfolio and the issuance of $8,000 in
treasury stock. Treasury stock was used to supply the 1,125 shares needed when
one director exercised some of his vested stock options.
Non-performing assets increased from $442,000 on September 30, 2004 to
$469,000 at December 31, 2004 while the ratio of non-performing assets to total
assets increased from 0.36% to 0.43% over the same period. Non-performing loans
increased from 0.47% of total loans at September 30, 2004 to 0.52% at December
31, 2004. A summary of the Company's non-performing assets and related ratios
follows:
Non-performing assets December 31, September 30,
2004 2004
----------- -----------
Non-accrual loans
-----------------
Residential mortgages
and home equity loans $ 150 $ 247
Commercial mortgages 226 -
Consumer other 19 5
Commercial other - -
----------- -----------
Total non-accrual loans 395 252
Restructured commercial mortgage 56 104
Restructured commercial other - 24
----------- -----------
Total non-performing loans 451 380
Foreclosed real estate - 53
Other repossessed assets 18 9
----------- -----------
Total non-performing assets $ 469 $ 442
=========== ===========
Non-performing loans to
Total loans 0.52% 0.47%
Non-performing assets to
Total assets 0.43% 0.36%
13
Five of seven non-accrual residential mortgages are currently in
foreclosure proceedings.
The restructured commercial mortgage category is comprised of one loan in
the amount $56,000 to a borrower in bankruptcy proceedings. We have been given
the right to sell the property by the court and expect to fully recover, when
the property is sold. The Company had no loans more than 90 days delinquent and
accruing at December 31, 2004 or September 30, 2004.
Two loans total the $226,000 non-accrual balance for commercial mortgages.
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 the allowance for loan losses is
appropriate at this time.
Comparison of Results of Operations for the Three Months Ended December 31, 2004
and 2003.
General. Our net income for the three months ended December 31, 2004 was
$219,000, an increase of $12,000, or 5.8%, over our net income of $207,000 for
the same period last year. The increase in net income was produced by the
combination of the following factors:
1. our net interest income increased by $93,000, as interest income
increased $171,000 and interest expense increased by $78,000,
2. non-interest income grew by $55,000 over last year's period
principally due to earnings on the investment in life insurance of
$39,000,
3. the provision for loan losses increased by $15,000 for the first
quarter of this fiscal year versus last fiscal year,
4. non-interest expenses increased $135,000 from last year to this year
principally due to the addition of personnel and
5. a decrease of $14,000 in income taxes.
Basic and diluted earnings per share were $0.10 for this year's quarter
versus $0.09 for both measures in last year's quarter.
Interest Income. Interest income increased $171,000, or 12.9%, from the
three months ended December 31, 2003 to the three months ended December 31,
2004. A decrease of 9 basis points (0.09%) in the average interest rate earned
on interest-earning assets from 6.08% for the quarter ending December 31, 2003
to 5.99% for the quarter ending December 31, 2004 accounted for a decrease in
our interest income of $64,000, while an increase of $12.6 million in the
average balance of interest-earning assets from $86.8 million to $99.4 million
resulted in an increase of $235,000 in interest income.
Interest income on loans increased by $193,000. A decrease of 39 basis
points (0.39%) from 6.88% in last year's quarter to 6.49% in this year's quarter
in the average interest rate on loans decreased our interest income by $69,000
while an increase of $15.8 million in the average balance of loans from $67.8
million to $83.6 million resulted in an increase of $262,000 in interest income.
The increase in the average interest rate on our securities of 3 basis
points, or 0.03%, from 3.46% in last year's quarter to 3.49% in this year's
quarter increased interest income by $1,000, while a decrease of $3.1 million in
the average balance of securities from $17.3 million to $14.2 million decreased
14
interest income by $27,000, resulting in a net decrease in interest income of
$26,000. A 104 basis points (1.04%) increase in the average interest rate on
other short-term investments increased interest income by $4,000.
Interest Expense. Interest expense increased $78,000, or 19.3%, from the
three months ended December 31, 2003 to the three months ended December 31,
2004. A decrease of 3 basis points in the average interest rate paid on
interest-bearing liabilities from 2.24% in last year's quarter to 2.21% in this
year's quarter accounted for a decrease in our interest expense of $33,000,
while an increase of $15.0 million in the average balance of interest-bearing
liabilities from $71.6 million to $86.6 million resulted in an increase of
$111,000 in interest expense.
The average rates we paid on time certificates, and on funds we borrowed
from FHLB decreased by 10 basis points (0.10%) and 70 basis points (0.70%)
respectively, while increasing on NOW and money market accounts by 11 basis
points (0.70%) and remaining the same on savings accounts and club accounts.
Interest expense on time certificates decreased by $1,000. The decrease in
the average rate paid on time certificates from 2.66% last year to 2.56% this
year decreased our interest expense by $7,000 while the increase in the average
balance of time certificates by $0.9 million from $28.5 million to $29.4 million
increased our interest expense by $6,000. Interest expense on NOW and money
market accounts increased by $7,000. The increase in the average rate paid on
NOW and money market accounts from 0.63% in the December 2003 quarter to 0.74%
in the December 2004 quarter increased our interest expense by $3,000 while the
increase in the average balance of NOW and money market accounts by $2.3 million
from $9.5 million to $11.8 million increased our interest expense by $4,000.
Interest expense on funds borrowed from FHLB increased by $70,000. The
decrease in the average interest rate on funds borrowed from FHLB from 4.13% for
the quarter ended December 31, 2003 to 3.43% for the quarter ended December 31,
2004 decreased interest expense by $29,000, while an increase of $11.0 million
in the average balance of funds borrowed from FHLB from $14.3 million in last
year's quarter to $25.3 million in this year's quarter resulted in a $99,000
increase in interest expense.
Net Interest Income. The result of the $171,000 increase in interest income
combined with the $78,000 increase in interest expense was a $93,000 increase in
net interest income. Our interest rate spread (the difference between the
average rate we earn and the average rate we pay) decreased by 6 basis points
(0.06%) from 3.84% to 3.78%, while our net interest margin decreased by 16 basis
points to 4.06% in the first quarter of fiscal 2004, from 4.22% for the first
quarter of fiscal 2003.
Average shareholders' equity represented 18.2% of average interest-earning
assets for the quarter ended December 31, 2004, while it represented 20.4% of
average interest-earning assets for the same quarter last year. Our ratio of
average interest-earning assets to average interest-bearing liabilities
decreased from 1.21 times in fiscal 2004 to 1.15 times in fiscal 2004.
Provision for Loan Losses. The provision for loan losses results from our
analysis of the adequacy of the allowance for loan losses. If we believe that
the allowance should be higher, then we increase it, with a charge to provision
for loan losses, which is an expense on our income statement. In determining the
appropriate provision for loan losses, management considers the level of and
trend in non-performing loans, the level of and trend in net loan charge-offs,
the dollar amount and mix of the loan portfolio, as well as general economic
conditions and real estate trends in the Company's market area, which can impact
the inherent risk of loss in the Company's portfolio. Furthermore, the OTS may
disagree with our judgments regarding the risks in our loan portfolio and could
require us to increase the allowance in the future.
For the three months ended December 31, 2004, we provided $40,000 for loan
losses, compared to $25,000 in the same quarter last year. At December 31, 2004,
the ratio of our loan allowance to total loans was 0.90% as compared to 0.95% on
December 31, 2003. On September 30, 2004 the allowance was $755,000, or 0.94% of
total loans, and we determined at the end of the quarter that the appropriate
level for the allowance was $779,000. We had charge-offs during the quarter of
$30,000 and recoveries of $14,000, so a $40,000 provision was necessary to reach
the desired level for the allowance. Our level of non-accruing loans, loans 90
days and still accruing and restructured loans was $451,000, or 0.52% of total
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loans, at December 31, 2004 as compared to $742,000, or 1.06% of total loans, at
December 31, 2003. The reduction in the ratio of the loan loss allowance to
total loans from September 2004 to December 2004 is justified by; 1) the current
level of non-performing loans and 2) the fact that most of the growth in loans
originated by the Bank were residential real estate loans, rather than
commercial and consumer loans, which have more risk and 3) the addition of a
$2.5 million USDA guaranteed loan in 2004, of which 90%, or $2.25 million, is
held for sale.
Non-interest Income. Our non-interest income was $55,000 higher in the
fiscal 2005 quarter as compared to the fiscal 2004 quarter. Income on bank owned
life insurance increased by $39,000 from last year. Also, there were no sales of
securities in the first quarter of fiscal 2005, while in the first quarter of
fiscal 2004, a loss on sales of securities of $9,000 was recognized.
Non-interest Expenses. Non-interest expenses increased by $135,000 from the
2004 fiscal quarter to the 2005 fiscal quarter. Increases in salaries and
employee benefits of $84,000, directors' fees of $14,000, occupancy and
equipment of $11,000, data processing of $2,000, postage and supplies of $6,000,
professional fees of $29,000 and $9,000 in other expense were partially offset
by a decrease of $20,000 in foreclosed assets expense. The increase in salaries
and benefits is the result of performance increases to our employees as well as
last year's hiring of a commercial loan officer and an assistant treasurer. It
also reflects an increase in the cost of health insurance benefits. Director
fees increased as the result of an increase in meeting fees, the first since
fiscal 2000, and an increase in the number of loan committee meetings. Occupancy
and equipment expenses are higher due to the addition of a computer service
contract. The increase in professional fees represents additional costs for both
our independent public accountants and our internal audit firm. Most of the
increase is the result of working to conform to the requirements of the
Sarbanes-Oxley Act of 2002, section 404 ("SOX 404"), which mandates internal
control over financial reporting. As a non-accelerated filer, we must comply
with SOX 404 by September 30, 2005, the end of our current fiscal year.
At December 31, 2004, we had thirty-two full-time and one part-time
employee, compared to thirty full time and two part-time employees at the end of
December 2003.
Income tax expense. Our income tax expense decreased by $14,000, or 10.4%,
comparing the first quarter of fiscal 2005 to the same quarter of fiscal 2004.
The decreased expense was the result of lower taxable income, as the income
earned on the investment in life insurance is non-taxable.
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, 2004, we decreased our
cash and cash equivalents by $67,000.
Deposits increased by $775,000 during the quarter ended December 31, 2004.
In addition to factors within our control, such as our deposit pricing
strategies and our marketing efforts, deposit flows are affected by the level of
general market interest rates, the availability of alternate investment
opportunities, general economic conditions, and other factors outside our
control. We borrowed an additional $4.0 million from FHLB during the quarter
ended December 31, 2004 to fund the additional loan growth.
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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 $13.8 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, 2004, the ratio is 11.3%. We will
continue to monitor liquidity and adjust deposit rates or pay off borrowed funds
as necessary.
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 unfounded loans.
We had $2.6 million in outstanding commitments to make loans at December
31, 2004, along with $3.1 million of unused home equity, commercial and
overdraft lines of credit. We also have a commitment to sell the $2.25 million
guaranteed portion of a USDA guaranteed loan we originated. We are awaiting USDA
approval for the sale. We anticipate that we will have enough funds to meet our
current loan commitments and to fund draws on the lines of credit through the
normal turnover of our loan and securities portfolios. At December 31, 2004, we
had $16.6 million of time certificates scheduled to mature within one year. We
anticipate that we can retain substantially all of those deposits if we need to
do so to fund loans and other investments as part of our efforts to grow and
leverage our capital.
Capital Resources
The OTS has minimum capital ratio requirements applying to the Bank, but
there are no comparable minimum capital requirements that apply to us as a
savings and loan holding company. At December 31, 2004, the Bank exceeded all
regulatory capital requirements of the OTS applicable to it, with Tier I capital
of $17.5 million, or 16.0% of average assets and with risk-based capital of
$18.3 million, or 28.9% of risk-weighted assets. The Bank also had tangible
capital of $17.5 million, or 16.0% of average tangible assets. The Bank was
classified as "well capitalized" at December 31, 2004 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, 2004,
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, 2004, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, the Company and the Bank are subject to
legal actions, which involve claims for monetary relief. Management, based on
the 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 9, 2005 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)
18