GREENE COUNTY BANCORP INC - Quarter Report: 2014 December (Form 10-Q)

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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

☒ QUARTERLY REPORT UNDER SECTION 13 OF 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2014

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT

GREENE COUNTY BANCORP, INC.

(Exact name of registrant as specified in its charter)

Commission file number  0-25165

United States		14-1809721
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer  Identification Number)

302 Main Street, Catskill, New York		12414
(Address of principal executive office)		(Zip code)

Registrant's telephone number, including area code: (518) 943-2600

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer   ☐	Accelerated filer ☐
Non-accelerated filer     ☐	Smaller reporting company ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes: ☐   No: ☒

As of February 13, 2015, the registrant had 4,222,357shares of common stock outstanding at $ 0.10 par value per share.

 

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GREENE COUNTY BANCORP, INC.

INDEX

PART I.	FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements (unaudited)
	*   Consolidated Statements of Financial Condition	3
	*   Consolidated Statements of Income	4
	*   Consolidated Statements of Comprehensive Income	6
	*   Consolidated Statements of Changes in Shareholders’ Equity	7
	*   Consolidated Statements of Cash Flows	8
	*   Notes to Consolidated Financial Statements	9-29
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30-43
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44
Item 4.	Controls and Procedures	44
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3.	Defaults Upon Senior Securities	45
Item 4.	Mine Safety Disclosures	45
Item 5.	Other Information	45
Item 6.	Exhibits	45
	Signatures	46
	Exhibit 31.1 302 Certification of Chief Executive Officer
	Exhibit 31.2 302 Certification of Chief Financial Officer
	Exhibit 32.1 906 Statement of Chief Executive Officer
	Exhibit 32.2 906 Statement of Chief Financial Officer
	Exhibit 101 Extensible Business Reporting Language (XBRL)

 

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Greene County Bancorp, Inc.

Consolidated Statements of Financial Condition

As of December 31, 2014 and June 30, 2014

(Unaudited)

(In thousands, except share and per share amounts)

ASSETS		December 31, 2014				June 30, 2014
Total cash and cash equivalents		$	14,869			$	13,809
Long term certificate of deposit			250				250
Securities available for sale, at fair value			69,071				56,151
Securities held to maturity, at amortized cost (fair value $181,981at December 31, 2014; $181,932 at June 30, 2014)			181,065				181,946
Federal Home Loan Bank stock, at cost			3,230				1,561
Loans			429,628				405,841
Allowance for loan losses			(7,796	)			(7,419	)
Unearned origination fees and costs, net			884				887
Net loans receivable			422,716				399,309
Premises and equipment			14,355				14,307
Accrued interest receivable			2,937				2,710
Foreclosed real estate			581				473
Prepaid expenses and other assets			3,348				3,645
Total assets		$	712,422			$	674,161
LIABILITIES AND SHAREHOLDERS’ EQUITY
Noninterest bearing deposits		$	66,348			$	67,446
Interest bearing deposits			516,833				522,128
Total deposits			583,181				589,574
Borrowings from Federal Home Loan Bank, short-term			43,500				3,150
Borrowings from Federal Home Loan Bank, long-term			15,500				14,500
Accrued expenses and other liabilities			5,777				5,737
Total liabilities			647,958				612,961
SHAREHOLDERS' EQUITY
Preferred stock, Authorized - 1,000,000 shares; Issued - None			-				-
Common stock, par value $.10 per share; Authorized - 12,000,000 shares; Issued - 4,305,670 shares; Outstanding 4,218,857 shares at December 31, 2014, and 4,213,757 shares at June 30, 2014			431				431
Additional paid-in capital			11,239				11,208
Retained earnings			54,198				51,305
Accumulated other comprehensive loss			(749	)			(1,050	)
Treasury stock, at cost 86,813 shares at December 31, 2014, and 91,913 shares at June 30, 2014			(655	)			(694	)
Total shareholders’ equity			64,464				61,200
Total liabilities and shareholders’ equity		$	712,422			$	674,161

See notes to consolidated financial statements

 

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Consolidated Statements of Income

For the Six Months Ended December 31, 2014 and 2013

(Unaudited)

(In thousands, except share and per share amounts)

		2014				2013
Interest income:
Loans		$	9,783			$	9,124
Investment securities - taxable			277				333
Mortgage-backed securities			1,446				1,294
Investment securities - tax exempt			1,132				1,018
Interest bearing deposits and federal funds sold			10				8
Total interest income			12,648				11,777
Interest expense:
Interest on deposits			1,001				1,099
Interest on borrowings			124				61
Total interest expense			1,125				1,160
Net interest income			11,523				10,617
Provision for loan losses			716				821
Net interest income after provision for loan losses			10,807				9,796
Noninterest income:
Service charges on deposit accounts			1,446				1,331
Debit card fees			844				775
Investment services			189				192
E-commerce fees			53				51
Other operating income			377				317
Total noninterest income			2,909				2,666
Noninterest expense:
Salaries and employee benefits			4,757				4,257
Occupancy expense			668				619
Equipment and furniture expense			253				262
Service and data processing fees			842				654
Computer software, supplies and support			339				207
Advertising and promotion			132				136
FDIC insurance premiums			192				192
Legal and professional fees			592				455
Other			998				781
Total noninterest expense			8,773				7,563
Income before provision for income taxes			4,943				4,899
Provision for income taxes			1,357				1,420
Net income		$	3,586			$	3,479
Basic earnings per share		$	0.85			$	0.83
Basic average shares outstanding			4,215,738				4,199,349
Diluted earnings per share		$	0.84			$	0.82
Diluted average shares outstanding			4,246,793				4,237,766
Dividends per share		$	0.36			$	0.35

 

See notes to consolidated financial statements

 

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Greene County Bancorp, Inc.

Consolidated Statements of Income

For the Three Months Ended December 31, 2014 and 2013

(Unaudited)

(In thousands, except share and per share amounts)

		2014				2013
Interest income:
Loans		$	4,944			$	4,626
Investment securities - taxable			134				167
Mortgage-backed securities			741				644
Investment securities - tax exempt			580				508
Interest bearing deposits and federal funds sold			8				6
Total interest income			6,407				5,951
Interest expense:
Interest on deposits			500				549
Interest on borrowings			63				33
Total interest expense			563				582
Net interest income			5,844				5,369
Provision for loan losses			305				508
Net interest income after provision for loan losses			5,539				4,861
Noninterest income:
Service charges on deposit accounts			730				655
Debit card fees			429				386
Investment services			87				87
E-commerce fees			25				25
Other operating income			169				163
Total noninterest income			1,440				1,316
Noninterest expense:
Salaries and employee benefits			2,390				2,063
Occupancy expense			344				296
Equipment and furniture expense			177				149
Service and data processing fees			388				318
Computer software, supplies and support			106				93
Advertising and promotion			51				69
FDIC insurance premiums			101				103
Legal and professional fees			379				250
Other			560				410
Total noninterest expense			4,496				3,751
Income before provision for income taxes			2,483				2,426
Provision for income taxes			672				701
Net income		$	1,811			$	1,725
Basic earnings per share		$	0.43			$	0.41
Basic average shares outstanding			4,217,118				4,203,985
Diluted earnings per share		$	0.43			$	0.41
Diluted average shares outstanding			4,248,175				4,240,216
Dividends per share		$	0.180			$	0.175

See notes to consolidated financial statements

 

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Greene County Bancorp, Inc.

Consolidated Statements of Comprehensive Income

For the Six Months Ended December 31, 2014 and 2013

(Unaudited)

(In thousands)

		2014				2013
Net Income		$	3,586			$	3,479
Other comprehensive income (loss):
Unrealized holding gains (losses) on available for sale securities, net of income taxes of $89 and ($434), respectively			142				(688	)
Accretion of unrealized loss on securities transferred to held to maturity, net of income taxes of $100 and $27, respectively(1)			159				43
Total other comprehensive income (loss), net of taxes			301				(645	)
Comprehensive income		$	3,887			$	2,834

(1)

The accretion of the unrealized holding losses in accumulated other comprehensive income at the date of transfer partially offsets the amortization of the difference between the par value and fair value of the investment securities at the date of transfer, and is an adjustment of interest income.

Greene County Bancorp, Inc.

Consolidated Statements of Comprehensive Income

For the Three Months Ended December 31, 2014 and 2013

(Unaudited)

(In thousands)

		2014				2013
Net Income		$	1,811			$	1,725
Other comprehensive income (loss):
Unrealized holding gains (losses) on available for sale securities, net of income taxes of $77 and ($77), respectively			124				(123	)
Accretion of unrealized loss on securities transferred to held to maturity, net of income taxes of $34 and $26, respectively(1)			54				41
Total other comprehensive income (loss), net of taxes			178				(82	)
Comprehensive income		$	1,989			$	1,643

(1)

The accretion of the unrealized holding losses in accumulated other comprehensive income at the date of transfer partially offsets the amortization of the difference between the par value and fair value of the investment securities at the date of transfer, and is an adjustment of interest income.

See notes to consolidated financial statements.

 

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Greene County Bancorp, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

For the Six Months Ended December 31, 2014 and 2013

(Unaudited)

(In thousands)

		Common  Stock				Additional  Paid-In  Capital				Retained  Earnings				Accumulated  Other  Comprehensive  Income				Treasury  Stock				Total Shareholders'  Equity
Balance at June 30, 2013		$	431			$	11,168			$	46,112			$	(750	)		$	(853	)		$	56,108
Options exercised							(13	)											120				107
Tax benefit of stock based compensation							27																27
Dividends declared1											(668	)											(668	)
Net income											3,479												3,479
Other comprehensive loss, net of taxes															(645	)							(645	)
Balance at December 31, 2013		$	431			$	11,182			$	48,923			$	(1,395	)		$	(733	)		$	58,408
		Common  Stock				Additional  Paid-In  Capital				Retained  Earnings				Accumulated  Other  Comprehensive  Loss				Treasury  Stock				Total  Shareholders'  Equity
Balance at June 30, 2014		$	431				11,208			$	51,305			$	(1,050	)		$	(694	)		$	61,200
Options exercised							25												39				64
Tax benefit of stock based compensation							6																6
Dividends declared1											(693	)											(693	)
Net income											3,586												3,586
Other comprehensive income, net of taxes															301								301
Balance at December 31, 2014		$	431			$	11,239			$	54,198			$	(749	)		$	(655	)		$	64,464

 

(1)

Dividends declared were $0.36 per share and $0.35 per share for the six months ended December 31, 2014 and 2013. This is based on total number of shares outstanding.  However, Greene County Bancorp, MHC, the owner of 54.6% of the Company’s shares outstanding waived its right to receive dividends during the six months ended December 31, 2014 and 2013.  The MHC’s ability to waive the receipt of dividends is dependent upon annual approval of its members as well as receiving the non-objection of the Federal Reserve Board.

See notes to consolidated financial statements.

 

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Greene County Bancorp, Inc.

Consolidated Statements of Cash Flows

For the Six Months Ended December 31, 2014 and 2013

(Unaudited)

(In thousands)

		2014				2013
Cash flows from operating activities:
Net Income		$	3,586			$	3,479
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation			260				341
Deferred income tax benefit			(1,542	)			(1,567	)
Net amortization of premiums and discounts			627				969
Net amortization of deferred loan costs and fees			182				179
Provision for loan losses			716				821
Loss (gain) on foreclosed real estate			92				(5	)
Excess tax benefit from share-based payment arrangements			(6	)			(27	)
Net increase in accrued income taxes			2,837				2,909
Net increase in accrued interest receivable			(227	)			(91	)
Net increase in prepaid and other assets			(1,264	)			(309	)
Net increase (decrease) in other liabilities			122				(36	)
Net cash provided by operating activities			5,383				6,663
Cash flows from investing activities:
Securities available for sale:
Proceeds from maturities			2,250				515
Purchases of securities			(18,941	)			-
Principal payments on securities			3,805				4,383
Securities held to maturity:
Proceeds from maturities			9,822				14,864
Purchases of securities			(12,266	)			(11,107	)
Principal payments on securities			3,155				4,528
Net redemption of Federal Home Loan Bank Stock			(1,669	)			(1,152	)
Net increase in loans receivable			(24,807	)			(29,061	)
Proceeds from sale of foreclosed real estate			302				105
Purchases of premises and equipment			(308	)			(346	)
Net cash used by investing activities			(38,657	)			(17,271	)
Cash flows from financing activities
Net increase in short-term FHLB advances			40,350				21,100
Proceeds from long-term FHLB advances			1,000				4,500
Payment of cash dividends			(693	)			(668	)
Proceeds from issuance of stock options			64				107
Excess tax benefit from share-based payment arrangements			6				27
Net decrease in deposits			(6,393	)			(9,004	)
Net cash provided by financing activities			34,334				16,062
Net increase in cash and cash equivalents			1,060				5,454
Cash and cash equivalents at beginning of period			13,809				6,222
Cash and cash equivalents at end of period		$	14,869			$	11,676
Non-cash investing activities:
Foreclosed loans transferred to foreclosed real estate		$	502				404
Available for sale securities transferred at fair value to held to maturity			-				11,735
Cash paid during period for:
Interest		$	1,131			$	1,156
Income taxes		$	62			$	78

 

See notes to consolidated financial statements

 

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Greene County Bancorp, Inc.

Notes to Consolidated Financial Statements

As of and for the Six and Three Months Ended December 31, 2014 and 2013

 

The accompanying unaudited consolidated statement of financial condition as of June 30, 2014 was derived from the audited consolidated financial statements of Greene County Bancorp, Inc. (the “Company”) and its wholly owned subsidiary, The Bank of Greene County (the “Bank”) and the Bank’s wholly owned subsidiary, Greene County Commercial Bank and Greene Property Holdings, Ltd.  The consolidated financial statements at and for the six and three months ended December 31, 2014 and 2013 are unaudited.

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X.  Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements.  To the extent that information and notes required by GAAP for complete financial statements are contained in or are consistent with the audited financial statements incorporated by reference to Greene County Bancorp, Inc.’s Annual Report on Form 10-K for the year ended June 30, 2014, such information and notes have not been duplicated herein.  In the opinion of management, all adjustments (consisting of only normal recurring items) necessary for a fair presentation of the financial position and results of operations and cash flows at and for the periods presented have been included.   Amounts in the prior year’s consolidated financial statements have been reclassified whenever necessary to conform to the current year’s presentation.  These reclassifications, if any, had no effect on net income or retained earnings as previously reported.  All material inter-company accounts and transactions have been eliminated in the consolidation. The results of operations and other data for the six and three months ended December 31, 2014 are not necessarily indicative of results that may be expected for the entire fiscal year ending June 30, 2015.   These consolidated financial statements consider events that occurred through the date the consolidated financial statements were issued.

CRITICAL ACCOUNTING POLICIES

Greene County Bancorp, Inc.’s critical accounting policies relate to the allowance for loan losses and the evaluation of securities for other-than-temporary impairment.  The allowance for loan losses is based on management’s estimation of an amount that is intended to absorb losses in the existing loan portfolio.  The allowance for loan losses is established through a provision for loan losses based on management’s evaluation of the risk inherent in the loan portfolio, the composition of the portfolio, specific impaired loans and current economic conditions.  Such evaluation, which includes a review of all loans for which full collectibility may not be reasonably assured, considers among other matters, the estimated net realizable value or the fair value of the underlying collateral, economic conditions, historical loan loss experience, management’s estimate of probable credit losses and other factors that warrant recognition in providing for the allowance of loan losses.  However, this evaluation involves a high degree of complexity and requires management to make subjective judgments that often require assumptions or estimates about highly uncertain matters.  This critical accounting policy and its application are periodically reviewed with the Audit Committee and the Board of Directors.

Securities are evaluated for other-than-temporary impairment by performing periodic reviews of individual securities in the investment portfolio.  Greene County Bancorp, Inc. makes an assessment to determine whether there have been any events or economic circumstances to indicate that a security on which there is an unrealized loss is impaired on an other-than-temporary basis.  The Company considers many factors, including the severity and duration of the impairment; the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value; recent events specific to the issuer or industry; and for debt securities, intent to sell the security, the likelihood to be required to sell the security before it recovers the entire amortized cost, external credit ratings and recent downgrades.  The Company is required to record other-than-temporary impairment charges through earnings, if it has the intent to sell, or will more likely than not be required to sell an impaired debt security before a recovery of its amortized cost basis.  In addition, the Company is required to record other-than-temporary impairment charges through earnings for the amount of credit losses, regardless of the intent or requirement to sell.  Credit loss is measured as the difference between the present value of an impaired debt security’s cash flows and its amortized cost basis.  Non-credit related impairment must be recorded as decreases to accumulated other comprehensive income as long as the Company has no intent or requirement to sell an impaired security before a recovery of amortized cost basis.

 

Greene County Bancorp, Inc. has two wholly-owned subsidiaries, The Bank of Greene County and Greene Risk Management, Inc.  Greene Risk Management, Inc. was formed on December 30, 2014 as a pooled captive insurance company subsidiary, incorporated in the State of Nevada, to provide additional insurance coverage for the Company and its subsidiaries related to the operations of the Company for which insurance may not be economically feasible.

 

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Greene County Bancorp, Inc.’s primary business is the ownership and operation of its banking subsidiaries.  The Bank of Greene County has twelve full-service offices and an administrative office, operations center and lending center located in its market area within the Hudson Valley Region of New York State.    The Bank of Greene County is primarily engaged in the business of attracting deposits from the general public in The Bank of Greene County’s market area, and investing such deposits, together with other sources of funds, in loans and investment securities.  The Bank of Greene County has two subsidiaries, Greene County Commercial Bank and Greene Property Holdings, Ltd.  Greene County Commercial Bank’s primary business is to attract deposits from and provide banking services to local municipalities. Greene Property Holdings, Ltd.is a real estate investment trust, which holds mortgages and notes which were originated through and serviced by The Bank of Greene County.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could materially differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the assessment of other-than-temporary security impairment.

While management uses available information to recognize losses on loans, future additions to the allowance for loan losses (the “Allowance”) may be necessary, based on changes in economic conditions, asset quality or other factors.  In addition, various regulatory authorities, as an integral part of their examination process, periodically review the Allowance.  Such authorities may require the Company to recognize additions to the Allowance based on their judgments of information available to them at the time of their examination.

Greene County Bancorp, Inc. makes an assessment to determine whether there have been any events or economic circumstances to indicate that a security on which there is an unrealized loss is impaired on an other-than-temporary basis.  The Company considers many factors including the severity and duration of the impairment; the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value; recent events specific to the issuer or industry; and for debt securities, intent to sell the security, whether it is more likely than not we will be required to sell the security before recovery, whether loss of the entire amortized cost is expected, external credit ratings and recent downgrades.  Securities on which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value.

 

(4)	Securities

 

Securities at December 31, 2014 consisted of the following:

 

(In thousands) Securities available for sale:		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
U.S. government sponsored enterprises		$	8,623			$	230			$	-			$	8,853
State and political subdivisions			20,260				16				3				20,273
Mortgage-backed securities-residential			8,558				181				15				8,724
Mortgage-backed securities-multi-family			26,092				199				106				26,185
Asset-backed securities			14				-				2				12
Corporate debt securities			4,553				306				15				4,844
Total debt securities			68,100				932				141				68,891
Equity securities			62				118				-				180
Total securities available for sale			68,162				1,050				141				69,071
Securities held to maturity:
U.S. government sponsored enterprises			2,000				-				83				1,917
State and political subdivisions			93,968				745				79				94,634
Mortgage-backed securities-residential			20,185				964				-				21,149
Mortgage-backed securities-multi-family			64,058				872				1,490				63,440
Other securities			854				-				13				841
Total securities held to maturity			181,065				2,581				1,665				181,981
Total securities		$	249,227			$	3,631			$	1,806			$	251,052

 

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Securities at June 30, 2014 consisted of the following:

(In thousands)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
Securities available for sale:
U.S. government sponsored enterprises		$	10,648			$	250			$	-			$	10,898
State and political subdivisions			1,324				23				-				1,347
Mortgage-backed securities-residential			9,345				213				13				9,545
Mortgage-backed securities-multi-family			29,268				89				339				29,018
Asset-backed securities			15				-				2				13
Corporate debt securities			4,811				375				16				5,170
Total debt securities			55,411				950				370				55,991
Equity securities			62				98				-				160
Total securities available for sale			55,473				1,048				370				56,151
Securities held to maturity:
U.S. government sponsored enterprises			2,000				-				102				1,898
State and political subdivisions			91,634				787				204				92,217
Mortgage-backed securities-residential			22,785				1,150				-				23,935
Mortgage-backed securities-multi-family			64,605				759				2,381				62,983
Other securities			922				1				24				899
Total securities held to maturity			181,946				2,697				2,711				181,932
Total securities		$	237,419			$	3,745			$	3,081			$	238,083

 

Greene County Bancorp, Inc.’s current policies generally limit securities investments to U.S. Government and securities of government sponsored enterprises, federal funds sold, municipal bonds, corporate debt obligations and certain mutual funds.  In addition, the Company’s policies permit investments in mortgage-backed securities, including securities issued and guaranteed by Fannie Mae, Freddie Mac, and GNMA, and collateralized mortgage obligations.  The Company’s investments in mortgage-backed securities include pass-through securities and collateralized mortgage obligations issued and guaranteed by Fannie Mae, Freddie Mac, and GNMA.  As of December 31, 2014 and June 30, 2014, no private-label mortgage-backed securities or collateralized mortgage obligations were held in the securities portfolio.  The Company’s investments in state and political subdivisions securities generally are municipal obligations that are general obligations supported by the general taxing authority of the issuer, and in some cases are insured.  The obligations issued by school districts are supported by state aid.  Primarily, these investments are issued by municipalities within New York State.

The following table shows fair value and gross unrealized losses, aggregated by security category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2014.

 

		Less Than 12 Months											More Than 12 Months											Total
(In thousands, except number of securities)		Fair Value				Unrealized Losses			Number of Securities				Fair Value				Unrealized Losses				Number of Securities			Fair Value				Unrealized Losses			Number of Securities
Securities available for sale:
State and political subdivisions		$	801			$	3			1			$	-			$	-				-		$	801			$	3			1
Mortgage-backed securities-residential			4,031				15			2				-				-							4,031				15			2
Mortgage-backed securities-multi-family			3,801				41			3				6,734				65				3			10,535				106			6
Asset-backed securities			-				-			-				12				2				1			12				2			1
Corporate debt securities			764				15			3				-				-				-			764				15			3
Total securities available for sale			9,397				74			9				6,746				67				4			16,143				141			13
Securities held to maturity:
U.S. government sponsored enterprises			1,917				83			1				-				-				-			1,917				83			1
State and political subdivisions			5,658				73			26				288				6				6			5,946				79			32
Mortgage-backed securities-multi-family			26,832				1,095			7				11,726				395				5			38,558				1,490			12
Other securities			210				2			2				411				11				1			621				13			3
Total securities held to maturity			34,617				1,253			36				12,425				412				12			47,042				1,665			48
Total securities		$	44,014			$	1,327			45			$	19,171			$	479				16		$	63,185			$	1,806			61

 

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The following table shows fair value and gross unrealized losses, aggregated by security category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2014.

		Less Than 12 Months											More Than 12 Months											Total
(In thousands, except number of securities)		Fair Value				Unrealized Losses			Number of Securities				Fair Value				Unrealized Losses				Number of Securities			Fair Value				Unrealized Losses			Number of Securities
Securities available for sale:
Mortgage-backed securities-residential		$	4,302			$	13			2			$	-			$	-				-		$	4,302			$	13			2
Mortgage-backed securities-multi-family			4,448				5			3				19,404				334				7			23,852				339			10
Asset-backed securities			-				-			-				13				2				1			13				2			1
Corporate debt securities			767				16			2				-				-				-			767				16			2
Total securities available for sale			9,517				34			7				19,417				336				8			28,934				370			15
Securities held to maturity:
U.S. government sponsored enterprises			1,898				102			1				-				-				-			1,898				102			1
State and political subdivisions			6,693				175			34				1,815				29				11			8,508				204			45
Mortgage-backed securities-multi-family			26,522				1,617			7				15,440				764				6			41,962				2,381			13
Other securities			130				2			2				401				22				2			531				24			4
Total securities held to maturity			35,243				1,896			44				17,656				815				19			52,899				2,711			63
Total securities		$	44,760			$	1,930			51			$	37,073			$	1,151				27		$	81,833			$	3,081			78

When the fair value of a held to maturity or available for sale security is less than its amortized cost basis, an assessment is made as to whether other-than-temporary impairment (“OTTI”) is present.  The Company considers numerous factors when determining whether a potential OTTI exists and the period over which the debt security is expected to recover.  The principal factors considered are (1) the length of time and the extent to which the fair value has been less than the amortized cost basis, (2) the financial condition of the issuer (and guarantor, if any) and adverse conditions specifically related to the security, industry or geographic area, (3) failure of the issuer of the security to make scheduled interest or principal payments, (4) any changes to the rating of the security by a rating agency, and (5) the presence of credit enhancements, if any, including the guarantee of the federal government or any of its agencies.

For debt securities, OTTI is considered to have occurred if (1) the Company intends to sell the security, (2) it is more likely than not the Company will be required to sell the security before recovery of its amortized cost basis, or (3) if the present value of expected cash flows is not sufficient to recover the entire amortized cost basis.  In determining the present value of expected cash flows, the Company discounts the expected cash flows at the effective interest rate implicit in the security at the date of acquisition.  In estimating cash flows expected to be collected, the Company uses available information with respect to security prepayment speeds, default rates and severity.  In determining whether OTTI has occurred for equity securities, the Company considers the applicable factors described above and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

For debt securities, credit-related OTTI is recognized in income while noncredit related OTTI on securities not expected to be sold is recognized in other comprehensive income (“OCI”).  Credit-related OTTI is measured as the difference between the present value of an impaired security’s expected cash flows and its amortized cost basis.  Noncredit-related OTTI is measured as the difference between the fair value of the security and its amortized cost less any credit-related losses recognized.  For securities classified as held to maturity, the amount of OTTI recognized in OCI is accreted to the credit-adjusted expected cash flow amounts of the securities over future periods.  For equity securities, the entire amount of OTTI is recognized in income.  Management evaluated securities considering the factors as outlined above, and based on this evaluation the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2014.  Management believes that the reasons for the decline in fair value are due to interest rates and widening credit spreads at the end of the quarter.

During the six and three months ended December 31, 2014 and 2013, there were no sales of securities and no gains or losses were recognized.  There was no other-than-temporary impairment loss recognized during the six and three months ended December 31, 2014 and 2013.

 

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The estimated fair values of debt securities at December 31, 2014, by contractual maturity are shown below.  Expected maturities may differ from contractual maturities, because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

(In thousands)

Available for sale debt securities		Amortized Cost				Fair Value
Within one year		$	23,138			$	23,165
After one year through five years			5,681				5,981
After five years through ten years			4,617				4,824
After ten years			-				-
Total available for sale debt securities			33,436				33,970
Mortgage-backed and asset-backed securities			34,664				34,921
Equity securities			62				180
Total available for sale securities			68,162				69,071
Held to maturity debt securities
Within one year			26,623				26,658
After one year through five years			42,642				43,013
After five years through ten years			19,448				19,573
After ten years			8,109				8,148
Total held to maturity debt securities			96,822				97,392
Mortgage-backed			84,243				84,589
Total held to maturity securities			181,065				181,981
Total securities		$	249,227			$	251,052

As of December 31, 2014 and June 30, 2014, respectively, securities with an aggregate fair value of $217.1 million and $210.0 million were pledged as collateral for deposits in excess of FDIC insurance limits for various municipalities placing deposits with Greene County Commercial Bank.  As of December 31, 2014 and June 30, 2014, securities with an aggregate fair value of $4.8 million and $5.2 million, respectively, were pledged as collateral for potential borrowings at the Federal Reserve Bank discount window.  Greene County Bancorp, Inc. did not participate in any securities lending programs during the six and three months ended December 31, 2014 or 2013.

Federal Home Loan Bank Stock

Federal law requires a member institution of the Federal Home Loan Bank (“FHLB”) system to hold stock of its district FHLB according to a predetermined formula.  This stock is restricted in that it can only be sold to the FHLB or to another member institution, and all sales of FHLB stock must be at par.  As a result of these restrictions, FHLB stock is carried at cost.  FHLB stock is held as a long-term investment and its value is determined based on the ultimate recoverability of the par value.  Impairment of this investment is evaluated quarterly and is a matter of judgment that reflects management’s view of the FHLB’s long-term performance, which includes factors such as the following:   its operating performance; the severity and duration of declines in the fair value of its net assets related to its capital stock amount; its commitment to make payments required by law or regulation and the level of such payments in relation to its operating performance; the impact of legislative and regulatory changes on the FHLB, and accordingly, on the members of the FHLB; and its liquidity and funding position.  After evaluating these considerations, Greene County Bancorp, Inc. concluded that the par value of its investment in FHLB stock will be recovered and, therefore, no other-than-temporary impairment charge was recorded during the six and three months ended December 31, 2014 or 2013.

 

Management closely monitors the quality of the loan portfolio and has established a loan review process designed to help grade the quality and profitability of the Company’s loan portfolio.  The credit quality grade helps management make a consistent assessment of each loan relationship’s credit risk. Consistent with regulatory guidelines, The Bank of Greene County provides for the classification of loans considered being of lesser quality.  Such ratings coincide with the “Substandard,” “Doubtful” and “Loss” classifications used by federal regulators in their examination of financial institutions. Generally, an asset is considered Substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. Substandard assets include those characterized by the distinct possibility that the insured financial institution will sustain some loss if the deficiencies are not corrected. Assets classified as Doubtful have all the weaknesses inherent in assets classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable. Assets classified as Loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a full loss reserve and/or charge-off is not warranted. Assets that do not currently expose the Company to sufficient risk to warrant classification in one of the aforementioned categories but otherwise possess weaknesses are designated “Special Mention.”   Management also maintains a listing of loans designated “Watch.” These loans represent borrowers with declining earnings, strained cash flow, increasing leverage and/or weakening market fundamentals that indicate above average risk.

 

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When The Bank of Greene County classifies problem assets as either Substandard or Doubtful, it generally establishes a specific valuation allowance or “loss reserve” in an amount deemed prudent by management.  General allowances represent loss allowances that have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular loans.  When The Bank of Greene County identifies problem loans as being impaired, it is required to evaluate whether the Bank will be able to collect all amounts due either through repayments or the liquidation of the underlying collateral.  If it is determined that impairment exists, the Bank is required either to establish a specific allowance for losses equal to the amount of impairment of the assets, or to charge-off such amount.  The Bank of Greene County’s determination as to the classification of its loans and the amount of its valuation allowance is subject to review by its regulatory agencies, which can order the establishment of additional general or specific loss allowances.  The Bank of Greene County reviews its portfolio monthly to determine whether any assets require classification in accordance with applicable regulations.

The Bank primarily has four segments within its loan portfolio that it considers when measuring credit quality: real estate loans, home equity, consumer installment and commercial loans.  The real estate portfolio consists of residential, nonresidential, and construction loan classes. The inherent risk within the loan portfolio varies depending upon each of these loan types.

The Bank of Greene County’s primary lending activity is the origination of residential mortgage loans, including home equity loans, which are collateralized by residences.   Generally, residential mortgage loans are made in amounts up to 89.9% of the appraised value of the property.  However, The Bank of Greene County will originate residential mortgage loans with loan-to-value ratios of up to 95.0%, with private mortgage insurance.  In the event of default by the borrower, The Bank of Greene County will acquire and liquidate the underlying collateral. By originating the loan at a loan-to-value ratio of 89.9% or less or obtaining private mortgage insurance, The Bank of Greene County limits its risk of loss in the event of default.  However, the market values of the collateral may be adversely impacted by declines in the economy.  Home equity loans may have an additional inherent risk if The Bank of Greene County does not hold the first mortgage.  The Bank of Greene County may stand in a secondary position in the event of collateral liquidation resulting in a greater chance of insufficiency to meet all obligations.

Construction lending generally involves a greater degree of risk than other residential mortgage lending.  The repayment of the construction loan is, to a great degree, dependent upon the successful and timely completion of the construction of the subject property within specified cost limits.  The Bank of Greene County completes inspections during the construction phase prior to any disbursements.  The Bank of Greene County limits its risk during the construction as disbursements are not made until the required work for each advance has been completed.  Construction delays may further impair the borrower’s ability to repay the loan.

Loans collateralized by nonresidential mortgage loans, and multi-family loans, such as apartment buildings generally are larger than residential loans and involve a greater degree of risk. Commercial mortgage loans often involve large loan balances to single borrowers or groups of related borrowers. Payments on these loans depend to a large degree on the results of operations and management of the properties or underlying businesses, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. Accordingly, the nature of nonresidential mortgage loans makes them more difficult for management to monitor and evaluate.

Consumer loans generally have shorter terms and higher interest rates than residential mortgage loans. In addition, consumer loans expand the products and services offered by The Bank of Greene County to better meet the financial services needs of its customers.  Consumer loans generally involve greater credit risk than residential mortgage loans because of the difference in the nature of the underlying collateral.  Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance because of the greater likelihood of damage, loss or depreciation in the underlying collateral. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections depend on the borrower’s personal financial stability.  Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

Commercial lending generally involves greater risk than residential mortgage lending and involves risks that are different from those associated with residential and nonresidential mortgage lending. Real estate lending is generally considered to be collateral-based, with loan amounts based on fixed loan-to-collateral values, and liquidation of the underlying real estate collateral is viewed as the primary source of repayment in the event of borrower default. Although commercial loans may be collateralized by equipment or other business assets, the liquidation of collateral in the event of a borrower default is often an insufficient source of repayment because equipment and other business assets may be obsolete or of limited use, among other things. Accordingly, the repayment of a commercial loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary and often insufficient source of repayment.

 

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Loan balances by internal credit quality indicator as of December 31, 2014 are shown below.

(In thousands)		Performing				Watch				Special Mention				Substandard				Total
Residential mortgage		$	223,094			$	599			$	98			$	2,971			$	226,762
Nonresidential mortgage			122,660				-				1,752				2,831				127,243
Residential construction and land			3,651				-				-				-				3,651
Commercial construction			5,686				-				-				-				5,686
Multi-family			4,347				-				-				109				4,456
Home equity			20,818				33				-				221				21,072
Consumer installment			4,105				-				-				-				4,105
Commercial loans			35,410				4				356				883				36,653
Total gross loans		$	419,771			$	636			$	2,206			$	7,015			$	429,628

Loan balances by internal credit quality indicator as of June 30, 2014 are shown below.

 

(In thousands)		Performing				Watch				Special Mention				Substandard				Total
Residential mortgage		$	223,772			$	221			$	99			$	3,281			$	227,373
Nonresidential mortgage			109,281				-				1,789				2,996				114,066
Residential construction and land			3,005				-				-				-				3,005
Commercial construction			1,558				-				-				-				1,558
Multi-family			3,946				-				-				113				4,059
Home equity			20,239				-				-				339				20,578
Consumer installment			4,208				-				-				-				4,208
Commercial loans			29,686				-				385				923				30,994
Total gross loans		$	395,695			$	221			$	2,273			$	7,652			$	405,841

The Company had no loans classified Doubtful or Loss at December 31, 2014 or June 30, 2014.

Management places loans on nonaccrual status once the loans have become 90 days or more delinquent.  A nonaccrual loan is defined as a loan in which collectability is questionable and therefore interest on the loan will no longer be recognized on an accrual basis.  A loan is not placed back on accrual status until the borrower has demonstrated the ability and willingness to make timely payments on the loan.  A loan does not have to be 90 days delinquent in order to be classified as nonaccrual.   Nonaccrual loans consisted primarily of loans secured by real estate at December 31, 2014 and June 30, 2014.  While the Bank makes every reasonable effort to work with the borrowers to collect amounts due, the number of loans in process of foreclosure has remained historically high over the past several years.  These high levels have been the result of adverse changes within the economy and increases in local unemployment.   These levels are also due in part to the extended length of time required to meet all of the legal requirements mandated by New York state law prior to a foreclosure sale, which may be in excess of two years. Loans on nonaccrual status totaled $5.8 million at December 31, 2014 of which $2.8 million were in the process of foreclosure.  Included in nonaccrual loans were $3.3 million of loans which were less than 90 days past due at December 31, 2014, but have a recent history of delinquency greater than 90 days past due. These loans will be returned to accrual status once they have demonstrated a history of timely payments.  Included in total loans past due were $489,000 of loans which were making payments pursuant to forbearance agreements.  Under the forbearance agreements, the customers have made arrangements with the Bank to bring the loans current over a specified period of time (resulting in an insignificant delay in repayment).  During this term of the forbearance agreement, the Bank has agreed not to continue foreclosure proceedings.  Loans on nonaccrual status totaled $5.9 million at June 30, 2014 of which $3.0 million were in the process of foreclosure.  Included in nonaccrual loans were $922,000 of loans which were less than 90 days past due at June 30, 2014, but have a recent history of delinquency greater than 90 days past due.

 

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The following table sets forth information regarding delinquent and/or nonaccrual loans as of December 31, 2014:

 

(In thousands)		30-59 days past due				60-89 days past due				90 days or more past due				Total past due				Current				Total Loans				Loans on Non- accrual
Residential mortgage		$	1,088			$	616			$	1,646			$	3,350			$	223,412			$	226,762			$	2,080
Nonresidential mortgage			865				1,576				939				3,380				123,863				127,243				3,103
Residential construction and land			-				-				-				-				3,651				3,651				-
Commercial construction			-				-				-				-				5,686				5,686				-
Multi-family			-				-				-				-				4,456				4,456				-
Home equity			304				33				221				558				20,514				21,072				221
Consumer installment			70				-				-				70				4,035				4,105				-
Commercial loans			720				102				200				1,022				35,631				36,653				418
Total gross loans		$	3,047			$	2,327			$	3,006			$	8,380			$	421,248			$	429,628			$	5,822

The following table sets forth information regarding delinquent and/or nonaccrual loans as of June 30, 2014:

 

(In thousands)		30-59 days past due				60-89 days past due				90 days or more past due				Total past due				Current				Total Loans				Loans on Non- accrual
Residential mortgage		$	1,047			$	290			$	1,938			$	3,275			$	224,098			$	227,373			$	2,473
Nonresidential mortgage			-				504				2,688				3,192				110,874				114,066				2,775
Residential construction and land			-				-				-				-				3,005				3,005				-
Commercial construction			-				-				-				-				1,558				1,558				-
Multi-family			-				-				-				-				4,059				4,059				-
Home equity			260				-				339				599				19,979				20,578				339
Consumer installment			51				-				-				51				4,157				4,208				-
Commercial loans			509				123				278				910				30,084				30,994				312
Total gross loans		$	1,867			$	917			$	5,243			$	8,027			$	397,814			$	405,841			$	5,899

The Bank of Greene County had accruing loans delinquent more than 90 days as of December 31, 2014 totaling $465,000 and had accruing loans delinquent more than 90 days as of June 30, 2014 totaling $266,000.    The loans delinquent more than 90 days and accruing consist of loans that are well collateralized and the borrowers have demonstrated the ability and willingness to pay.  The borrower has made arrangements with the Bank to bring the loan current within a specified time period and has made a series of payments as agreed.

The table below details additional information related to nonaccrual loans for the six and three months ended December 31:

		For the six months ended December 31,								For the three months ended December 31
(In thousands)		2014				2013				2014				2013
Interest income that would have been recorded if loans had been performing in accordance with original terms		$	199			$	208			$	71			$	83
Interest income that was recorded on nonaccrual loans			85				64				39				35

 

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The Company identifies impaired loans and measures the impairment in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) subtopic “Receivables – Loan Impairment.”  Management may consider a loan impaired once it is classified as nonaccrual and when it is probable that the borrower will be unable to repay the loan according to the original contractual terms of the loan agreement or the loan is restructured in a troubled debt restructuring.  It should be noted that management does not evaluate all loans individually for impairment.  The Bank of Greene County considers residential mortgages, home equity loans, smaller commercial loans and installment loans as small, homogeneous loans, which are evaluated for impairment collectively based on historical loan experience and other factors.  In contrast, large commercial mortgage, construction, multi-family and commercial loans are viewed individually and considered impaired if it is probable that The Bank of Greene County will not be able to collect scheduled payments of principal and interest when due, according to the contractual terms of the loan agreement.  The measurement of impaired loans is generally based on the fair value of the underlying collateral.  The majority of The Bank of Greene County loans, including most nonaccrual loans, are small homogenous loan types adequately supported by collateral.  Management considers the payment status of loans in the process of evaluating the adequacy of the allowance for loan losses among other factors.  Loans that are either delinquent a minimum of 60 days or are on nonaccrual status, and are not individually evaluated for impairment, are either designated as Special Mention or Substandard, and the allocation of the allowance for loan loss is based upon the risk associated with such designation.  Loans that have been modified as a troubled debt restructuring are included in impaired loans.  The measurement of impairment is generally based on the discounted cash flows based on the original rate of the loan before the restructuring, unless it is determined that the restructured loan is collateral dependent.  If the restructured loan is deemed to be collateral dependent, impairment is based on the fair value of the underlying collateral.

The tables below detail additional information on impaired loans at the date or periods indicated:

 

		As of December 31, 2014												For the six months ended December 31, 2014								For the three months ended December 31, 2014
(In thousands)		Recorded Investment				Unpaid Principal				Related Allowance				Average Recorded Investment				Interest Income Recognized				Average Recorded Investment				Interest Income Recognized
With no related allowance recorded:
Residential mortgage		$	671			$	671			$	-			$	672			$	13			$	672			$	10
Nonresidential mortgage			453				453				-				457				13				455				6
Home equity			-				-				-				80				-				64				-
			1,124				1,124				-				1,209				26				1,191				16
With an allowance recorded:
Residential mortgage			2,124				2,124				363				2,669				47				2,450				16
Nonresidential mortgage			2,416				2,803				333				2,476				42				2,429				-
Home equity			200				200				90				200				-				200				-
Commercial loans			599				599				3				600				20				599				10
			5,339				5,726				789				5,945				109				5,678				26
Total impaired:
Residential mortgage			2,795				2,795				363				3,341				60				3,122				26
Nonresidential mortgage			2,869				3,256				333				2,933				55				2,884				6
Home equity			200				200				90				280				-				264				-
Commercial loans			599				599				3				600				20				599				10
		$	6,463			$	6,850			$	789			$	7,154			$	135			$	6,869			$	42