-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qp9kU8t1xTHd/8gGC8B6QtnH4ZzJbIyouUxkbCksS7JPV7hWOBJ13/wKqRKt+fRZ IXxgh8Bf+XsLV32beESXaA== 0001019056-99-000686.txt : 19991230 0001019056-99-000686.hdr.sgml : 19991230 ACCESSION NUMBER: 0001019056-99-000686 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991229 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOUVERNEUR BANCORP INC CENTRAL INDEX KEY: 0001063942 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 043429966 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-14910 FILM NUMBER: 99782291 BUSINESS ADDRESS: STREET 1: 42 CHURCH STREET CITY: GOUVERNEUR STATE: NY ZIP: 13642 BUSINESS PHONE: 3152872600 MAIL ADDRESS: STREET 1: 42 CHURCH STREET CITY: GOUVERNEUR STATE: NY ZIP: 13642 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1999 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 registrant as specified in its charter) UNITED STATES 04-3429966 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 42 CHURCH STREET, GOUVERNEUR, NEW YORK 13642 -------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (315) 287-2600 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Common Stock, par value $0.01 per share SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 [ ]. Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained herein, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the average of the final closing price of such stock as December 15, 1999, was approximately $4,408,853. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant.) As of December 15, 1999, there were 2,384,040 issued and outstanding shares of the Registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Part II of Form 10-K - Annual Report to Stockholders for the fiscal year ended September 30, 1999. Part III of Form 10-K - Portions of Proxy Statement for 2000 Annual Meeting of Stockholders. PART I Item 1. Description of Business GENERAL The Company's principal business is conducted through its wholly-owned subsidiary, Gouverneur Savings and Loan Association (the "Bank"), except for certain passive investments that the Company may make from time to time. The Company's business consists of gathering deposits from the general public within its market area and investing those deposits primarily in loans, debt obligations issued by the U.S. Government, its agencies, and mortgage-backed securities. The Company's principal loan type is residential one-to-four family mortgage loans. In recent years, the Company has tried to diversify its lending by increasing its level of automobile loans and commercial loans, both mortgage and non-mortgage. The increased emphasis on non-real estate lending has been a gradual process which accelerated in the most recent fiscal year. Although total real estate loans grew in fiscal 1999, real estate loans represented 80.70% of total loans at September 30, 1999, down from declined by 7.1% in 1999, and real estate loans represented 80.7% of total loans at September 30, 1999. The Company's revenues come principally from interest on loans and securities. The Company's primary sources of funds are deposits and proceeds from principal and interest payments on loans and investment securities. MARKET AREA The Company's primary market area is southern St. Lawrence County and northern Jefferson and Lewis Counties in New York. Based on 1990 census data, the Company estimates that the population of its primary market area is approximately 100,000. The Company's market area is predominantly rural with many small towns. The population of the service area works in diverse industries, including manufacturing, agriculture, retail trades, construction, mining, health care, education and government service. The largest private employers in the market area are two mining companies, one for zinc and the other for talc, and a paper mill. Fort Drum, a major military installation, is located at the southern edge of the Company's primary market area. The Company estimates that its share of the residential mortgage lending market in its market area is approximately 10%-15%. The Company estimates that its share of all bank deposits in its market area is approximately 25%. Economic and demographic conditions in the Company's market area may make implementation of the Company's operating strategy more difficult. Although precise statistical data for the Company's market area is not available because the market area spans parts of three counties, 1990 census data reflects that, as is not unusual for predominantly rural areas, per capita income and median home values are below New York State and national levels in all three counties surrounding the Company. Unemployment in each of the three counties in the Company's market area, although not at critical levels, was higher than statewide and national unemployment rates. Furthermore, population growth in the market area, if any, has been limited in recent years since an increase in population was experienced in the early 1990's related to expansion of Fort Drum. Demographic trends also reflect an aging of the local population. These conditions are believed to extend to communities adjoining the Company's market area as well. Therefore, in order to grow, the Company has made efforts to expand into adjoining communities through opening a loan production office in August 1999 to expand its customer base. The Company's main office has been located in the Town and Village of Gouverneur since it was chartered in 1892. COMPETITION The Company's principal competitors for deposits are other savings banks, savings and loan associations, commercial banks and credit unions in the Company's market area, as well as money market mutual funds, insurance companies and securities brokerage firms, many of which are substantially larger in size than the Company. The Company's competition for loans comes principally from savings banks, savings and loan associations, commercial banks, mortgage bankers, finance companies and other institutional lenders. Direct or indirect competition for loans from nationally recognized mortgage secondary market 2 lenders has increased in recent years, having the effect of both reducing the Company's market share and driving down the interest rates it can earn on residential mortgages. The Company's principal methods of competition include loan and deposit pricing, flexible underwriting which permits variation from secondary market underwriting requirements when believed appropriate, maintaining close ties with its local community, advertising and marketing programs and the types of services provided. The Company is subject to competition from other financial institutions which may have much greater financial and marketing resources. However, the Company believes it benefits from its community bank orientation as well as its relatively high core deposit base. Recent acquisitions of other banks in central New York by larger institutions may have also given the Company a competitive edge among those local residents who prefer doing business with a local Company. LENDING ACTIVITIES LOAN PORTFOLIO COMPOSITION. The Company's loans consist primarily of mortgage loans secured by one-to-four family residences. At September 30, 1999, the Company had total loans of $46.6 million, of which $33.3 million, or 71.5%, were one-to-four family first lien residential mortgage loans. The Company had an additional $771,000 of home equity loans and home equity lines of credit outstanding, or 1.7% of total loans, secured by subordinate liens on one-to-four family residences. In recent years, the Company has focused on increasing its levels of auto loans, commercial loans and commercial mortgage loans to expand its business, increase yields and improve interest rate sensitivity. At September 30, 1999, commercial loans totaled $4.4 million, of which $3.2 million were commercial mortgage loans and $1.2 million were other commercial loans. The Company also had $5.3 million of auto loans, or 11.4% of total loans, and $2.0 million of other consumer loans not secured by mortgages, or 4.4% of total loans. The remainder of the Company's loans consisted of passbook and construction loans. The Company's ratio of loans to total assets has been at least 60% at fiscal year end for at least the past five years. Interest rates earned on the Company's loans are affected by the demand for loans, the supply of money available for lending and the rates offered by competitors. These factors are in turn affected by, among other things, economic conditions, monetary policies of the federal government, and legislative tax policies. 3 LOAN PORTFOLIO COMPOSITION The following table sets forth the composition of the Company's mortgage and other loan portfolios in dollar amounts and in percentages at the dates indicated.
At September 30, ---------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ------------------- ------------------- ------------------- ------------------- -------------------- Percent Percent Percent Percent Percent Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total -------- --------- --------- --------- --------- --------- --------- -------- --------- --------- (Dollars in thousands) Real estate loans: Residential............. $ 33,320 71.50% $ 28,834 80.71% $ 28,896 81.85% $ 28,378 84.61% $ 28,406 85.49% Home equity............. 771 1.65% 835 2.34% 823 2.33% 473 1.41% 308 0.93% Commercial real estate.. 3,222 6.91% 1,578 4.42% 1,825 5.17% 2,079 6.20% 2,383 7.17% Construction............ 296 6.64% 124 0.35% 308 0.87% 142 0.42% 311 0.94% -------- ----- -------- ----- -------- ----- -------- ----- -------- ------ Total real estate loans. 37,609 80.70% 31,371 87.82% 31,852 90.22% 31,072 92.64% 31,408 94.52% Other loans: Passbook loans.......... 411 0.88% 323 0.91% 475 1.36% 439 1.31% 605 1.82% Automobile loans........ 5,306 11.38% 2,166 6.06% 1,283 3.63% 426 1.27% 239 0.72% Other consumer loans.... 2,045 4.39% 1,384 3.87% 1,613 4.57% 1,603 4.78% 976 2.94% Commercial loans........ 1,233 2.65% 477 1.34% 81 0.23% -- 0.00% -- 0.00% -------- ----- -------- ----- -------- ----- -------- ----- -------- ------ Total other loans....... 8,995 19.30% 4,350 12.18% 3,452 9.78% 2,468 7.36% 1,820 5.48% Total loans............... 46,604 100.00% 35,721 100.00% 35,304 100.00% 33,540 100.00% 33,228 100.00% -------- ====== -------- ====== -------- ====== -------- ====== -------- ====== Less: Deferred loan (costs) fees, net............ (187) 30 51 102 117 Allowance for loan losses............... 620 484 403 479 602 -------- -------- -------- -------- -------- Total loans, net......... $ 46,171 $ 35,207 $ 34,850 $ 32,959 $ 32,509 ======== ======== ======== ======== ========
4 RESIDENTIAL MORTGAGE LOANS. Substantially all of the Company's residential mortgage loan originations are fixed-rate mortgage loans with terms up to 25 years, but predominantly from 15 to 20 years. The Company has only recently begun to offer adjustable-rate mortgage loans. In recent years, with relatively low mortgage interest rates, customer preference has strongly favored fixed-rate mortgage loans. Therefore, all but $3.5 million of the Company's $33.3 million of residential mortgage loans have fixed interest rates and most of the adjustable rate loans have fixed rates for the first five years of the loan term. When underwriting residential mortgage loan applications, the Company considers the income and assets of the borrower, the borrower's prior credit history and the value of the collateral offered for the loan. In light of the nature of the local market and competitive considerations, the Company occasionally waives adverse credit circumstances related to the borrower if the loan is generally considered to be sound. In recent years, the Company has become stricter in its credit evaluations and currently experiences a residential mortgage loan application rejection rate of approximately 25%. The Company obtains independent appraisals on all residential first mortgage loans and attorneys' opinions of title are required at closing. Current surveys are generally not required because the Company believes that the cost of obtaining a survey in the local market is not justified by the risks of not having a survey. In almost all cases, the Company accepts attorney's title opinions rather than title insurance on residential mortgage loans, but has not experienced losses due to its reliance on title opinions instead of title insurance. Private mortgage insurance is required on loans with a loan to value ratio in excess of 90% and is usually required on loans with loan to value ratios between 80% and 90% depending upon other circumstances. For the past three years, real estate tax escrows have been required on all mortgage loans. Previously, tax escrows were required only on loans with loan to value ratios in excess of 85%. Although fixed-rate mortgage loans may adversely affect the Company's net interest income in periods of rising interest rates, the Company originates such loans to satisfy customer demand. Such loans are generally originated at initial interest rates which exceed the fully indexed rate on adjustable mortgage loans offered at the same time. Therefore, during periods of level interest rates, they tend to provide higher yields than adjustable loans. Fixed-rate residential mortgage loans originated by the Company generally include due-on-sale clauses which permit the Company to demand payment in full if the borrower sells the property without the Company's consent. Due-on-sale clauses are an important means of adjusting the rates of the Company's fixed-rate mortgage loan portfolio, and the Company has generally exercised its rights under these clauses. Adjustable mortgage loans are offered with interest rates that adjust annually based on the one year treasury bill index, plus 2.75%. Most of these loans have initial five year periods with a fixed interest rate which adjusts annually thereafter. Interest rate adjustments are generally limited to 2% per year for one year adjustable loans. There is normally a lifetime maximum interest rate adjustment, measured from the initial interest rate, of 5%. Credit risks on adjustable rate loans are somewhat greater than on fixed-rate loans primarily because, as interest rates rise, so do borrowers' payments, increasing the potential for default. The lack of title insurance and surveys, coupled with a more flexible approach in analyzing borrower creditworthiness, means that a portion of the Company's residential mortgage loan portfolio may not be salable at par to major secondary market purchasers. The Company may elect, in the future, to develop a secondary market lending operation which complies with secondary market criteria in order to capture loan opportunities which are now being pursued by other lenders in its marketplace. Management intends to continue to emphasize the origination of mortgage loans secured by one-to-four family residences while at the same time seeking to expand the Company's portfolio of other loan types. HOME EQUITY LOANS. The Company offers a home equity line of credit secured by a residential one-to-four family mortgage, usually a second lien. Home equity revolving credit loans have only been offered since 1994, and the Company has sought to increase its volume of these loans because they have adjustable rates of interest which improve the interest sensitivity of the Company's assets. These loans provide for an initial advance period of ten years, during which the borrower pays 1/240th of the outstanding principal balance, plus interest, each month, and can borrow, repay, and reborrow the 5 principal balance. This is followed by a repayment period of ten years, during which the balance of the loan is repaid in principal and interest installments. The Company also offers home equity junior mortgage loans which are fully advanced at closing and repayable in monthly principal and interest installments over a period generally not to exceed 10 years. Customers in the local market tend to prefer these loans to adjustable rate revolving credit home equity loans because, the Company believes, they like the stability of the fixed interest rate more than the flexibility of a line of credit. The maximum loan to value ratio, including prior liens, is 75% for junior mortgage loans. At September 30, 1999, the Company had $365,000 in outstanding advances on home equity lines of credit, $323,000 of unused home equity lines of credit and $554,000 in regular amortizing home equity loans. COMMERCIAL MORTGAGE LOANS. The Company had a portfolio of $3.2 million of commercial mortgage loans at September 30, 1999. The Company offers such loans in order to diversify risk, obtain higher yields ordinarily associated with commercial mortgage loans, and benefit from the improved interest rate sensitivity of loans with shorter terms. The Company increased its focus on this category of loans in 1998 and 1999 and more than doubled its portfolio of commercial mortgage loans during 1999. The Company offers commercial mortgage loans with loan-to-value ratios up to 70%. Although the Company offers both fixed and adjustable rate commercial mortgage loans, customers have almost all preferred fixed rate commercial mortgage loans, and thus less than 10% of the Company's commercial mortgage loans have adjustable interest rates. The Company generally requires a debt service coverage ratio of at least 120% and the personal guarantee of the principals of the borrower. The Company also requires an appraisal by an independent appraiser. Attorneys' opinions of title are used instead of title insurance for commercial mortgage loans, but the Company has not experienced losses as a result of not having title insurance. Loans secured by commercial properties generally involve a greater degree of risk than one-to-four family residential mortgage loans. Because payments on such loans are often dependent on successful operation or management of the properties, repayment may be subject, to a greater extent, to adverse conditions in the real estate market or the economy. The Company seeks to minimize these risks through its underwriting policies. The Company evaluates the qualifications and financial condition of the borrower, including credit history, profitability and expertise, as well as the value and condition of the underlying property. The factors considered by the Company include net operating income; the debt coverage ratio (the ratio of cash net income to debt service); and the loan to value ratio. When evaluating the borrower, the Company considers the financial resources and income level of the borrower, the borrower's experience in owning or managing similar property and the Company's lending experience with the borrower. The Company's policy requires borrowers to present evidence of the ability to repay the loan without having to resort to the sale of the mortgaged property. CONSTRUCTION LOANS. The Company offers residential single family construction loans to persons who intend to occupy the property upon completion of construction. The loans are combination construction-permanent loans which automatically convert to regular amortizing loans after construction is complete. The proceeds of the construction loan are advanced in stages on a percentage of completion basis as construction progresses. The loans generally provide for a construction period of not more than twelve months during which the borrower pays interest only. In recognition of the risks involved in such loans, the Company carefully monitors construction through regular inspections. At September 30, 1999, the Company had $296,000 of construction loans. Construction loan levels tend to increase during the summer because of the seasonal nature of residential construction, but even during the summer these loans generally do not represent more than 1% of the Company's loan portfolio. Occasionally, the Company makes construction loans for purposes other than the construction of the borrower's residence when appropriate opportunities arise. AUTOMOBILE LOANS. In recent years, the Company has exerted efforts to increase its level of automobile loans in order to provide improved yields, increase the interest rate sensitivity of its assets and expand its customer 6 base. Auto loans are originated both through direct contact between the Company and the borrower and through auto dealers who refer the borrowers to the Company. The Company's auto loans are originated primarily through contacts with local auto dealers, who refer customers to the Company. However, the Company underwrites the loans itself and the loan is originated in the name of the Company. The dealer is paid a flat fee for each successful referral. The Company offers auto loans for both new and used cars. The loans have fixed rates with maturities of not more than five years. At September 30, 1999, the Company had $5.3 million of auto loans, more than double the level of auto loans only one year earlier. Auto loans are offered in amounts up to 100% of the purchase price of the car. The Company evaluates the credit and repayment ability of the borrower as well as the value of the collateral in determining whether to approve a loan. OTHER CONSUMER LOANS. The Company also makes fixed-rate consumer loans either unsecured or secured by savings accounts or other consumer assets. Consumer loans generally have terms to maturity not to exceed five years, but home improvement loans are offered with terms up to 15 years, although most have terms not exceeding ten years. Other consumer loans totaled $2.3 million at September 30, 1999. The fixed-rate loans generally have a term of not more than five years and have interest rates higher than mortgage loans. The shorter terms to maturity are helpful in managing the Company's interest rate risk. Applications for these loans are evaluated based upon the borrower's ability to repay and, if applicable, the value of the collateral. COMMERCIAL LOANS. The Company offers commercial non-mortgage loans to local businesses for working capital, machinery and equipment purchases, expansion, and other business purposes. These loans generally have higher yields than mortgages loans, and include installment equipment financing with terms that generally do not exceed seven years, short term working capital loans, and commercial lines of credit with annual reviews. The Company offers fixed and adjustable rate commercial loans, with fixed rates being more popular in the current low interest rate environment. The Company had $1.2 million of such loans at September 30, 1999, compared to only $101,000 of such loans 18 months earlier. The Company is aggressively marketing such loans to businesses in its market area. The Company offers these loans in order to diversify its product offerings, maintain and seek to expand market share in light of increased competition, improve yields and improve the interest rate sensitivity of its assets. Applications for these loans are generally evaluated based upon the borrower's ability to repay the loan from ongoing operations. The loans normally present greater risks than mortgage loans because the collateral, if any, is often rapidly depreciable, easier to conceal and of limited value to other companies. Furthermore, changes in economic conditions and other factors outside the control of the Company, and often outside the control of the commercial borrowers, can often have a substantial effect on delinquencies. Therefore, the Company monitors these credits on an ongoing basis after the loan is made to be prepared to address any credit problems promptly if they occur. ORIGINATION OF LOANS. Loan originations come from a number of sources. Residential loan originations can be attributed to depositors, retail customers, telephone inquiries, advertising, the efforts of the Company's loan officers, and referrals from other borrowers, real estate brokers and builders. The Company originates loans through its own efforts and does not use mortgage brokers, mortgage bankers or other non-employee fee paid loan finders except for the referral of auto loans from local dealers. All of the Company's lending is subject to its written, nondiscriminatory underwriting standards and to loan origination procedures prescribed by the Company's Board of Directors. Loan officers have individual authority to make consumer loans up to amounts set by the Board. Any two officers can approve a mortgage loan up to $25,000. Loans from $25,000 to $100,000 must be approved by an ad hoc committee of two directors created as and when loan applications need to be reviewed. Residential loans over $100,000 and all commercial loans, whether or not secured by real estate, must be approved by the full Board of Directors. Under federal law and applicable OTS regulations, the Company may not lend more than 15% of its capital to any one borrower, with additional loans up to 10% of capital being permitted if the additional loans are secured by readily marketable collateral. At September 30, 1999, the Company's largest loan had a balance of $387,000 and was a mortgage loan secured by a first lien on residential rental units located in the Company's market area. This loan was 7 also the Company's largest loan relationship, combining all loans to a single borrower or related group of borrowers, which is substantially below its regulatory loan to one borrower limit of more than $2.0 million. The Company neither purchases nor sells loans. The Company does not service loans for other lenders and the Company has never purchased loan servicing rights. LOAN MATURITY. The following table shows the contractual maturity of the Company's loan portfolio at September 30, 1999. Loans are shown as due based on their contractual terms to maturity. Loans which have adjustable interest rates are shown as maturing when the final loan payment is due without regard to rate adjustments. The table does not show the effects of loan amortization, possible prepayments or enforcement of due-on-sale clauses. Non-performing loans are shown as being due based upon their contractual maturity without regard to acceleration due to default. Residential Commercial Mortgage(1) Mortgage Other Loans Total ----------- ---------- ----------- ------- (In thousands) Amounts due: Within 1 year ........ $ 474 $ 126 $ 1,148 $ 1,748 1 to 2 years ......... 196 18 581 795 2 to 3 years ......... 511 49 1,207 1,767 3 to 5 years ......... 5,514 332 5,341 11,187 5 to 10 years ........ 10,068 1,624 335 12,027 Over 10 years ........ 17,624 1,073 383 19,080 ------- ------- ------- ------- Total loans ............ $34,387 $ 3,222 $ 8,995 $46,604 ======= ======= ======= ======= (1) Includes home equity and construction loans. The following table shows, as of September 30, 1999, the amount of loans due after September 30, 2000, and whether they have fixed interest rates or adjustable interest rates. Fixed Adjustable Rates Rates Total ------- ---------- ------- (In thousands) Residential mortgage .............. $30,405 $ 3,508 $33,913 Commercial mortgage ............... 3,044 52 3,096 Other loans ....................... 7,847 -- 7,847 ------- ------- ------- Total ............................. $41,296 $ 3,560 $44,856 ======= ======= ======= ASSET QUALITY DELINQUENCY PROCEDURES. When a borrower fails to make a required payment on a loan, the Company attempts to cause the deficiency to be cured by contacting the borrower. Late notices are sent when a payment is more than 15 days past due and a late charge is generally assessed at that time. The Company attempts to contact personally any borrower who is more than 30 days past due. When a mortgage loan is 90 days past due, the Company sends a 30 days notice of acceleration and if the loan is not brought current by the end of that period, the loan is turned over to an attorney for collection, with foreclosure generally commenced within 30 to 60 days thereafter. A foreclosure action, if the default is not cured, generally leads to a judicial sale of the mortgaged real estate. The judicial sale is delayed if the borrower files a bankruptcy petition because the foreclosure action cannot be continued unless the Company 8 first obtains relief from the automatic stay provided by the bankruptcy Code. The Company has experienced losses due to delays caused by borrower bankruptcy filings. If the Company acquires the mortgaged property at foreclosure sale or accepts a voluntary deed in lieu of foreclosure, the acquired property is then classified as real estate owned. At September 30, 1999, the Company had $169,000 of real estate owned, represented by four single family residences. The Company seeks to dispose of these properties through real estate brokers. Due to adverse local economic conditions in the residential housing market, the disposition of real estate owned can take six months or more. When real estate is acquired in full or part satisfaction of a loan, it is recorded at the lower of the principal balance of the loan or fair value less costs of sale. Any shortfall between that amount and the carrying value of the loan is then charged to the allowance for loan losses. Subsequent changes in the value of the property are charged to the expense of real estate operations. The Company is permitted to finance sales of real estate owned by "loans to facilitate," which may involve a lower down payment or a longer repayment term or other more favorable features than generally would be granted under the Company's underwriting guidelines. At September 30, 1999, the Company had $481,000 of "loans to facilitate," all of which were current in accordance with their terms. When an automobile loan becomes 90 days past due, the Company seeks to repossess the collateral. If the default is not cured, then upon repossession the Company sells the automobile as soon as practicable by public notice and a secured party auction. The remaining balance of the loan is fully charged off when the loan is 120 days past due. When other types of non-mortgage loans become past due, the Company takes measures to cure defaults through contacts with the borrower and takes appropriate action, depending upon the borrower and the collateral, to obtain repayment of the loan. In the past, the Company has experienced high levels of delinquencies and charge-offs. As a result, in 1994, the Company hired an individual whose primary responsibility is loan collections, including regular contacts with past due borrowers in an attempt to bring their loans current. The individual was converted from part-time to full-time in 1995. The Company believes that this has reduced the level of past due loans and improved the general performance of its loan portfolio. From time to time, the Company may give concessions to borrowers with past due loans in order to assist the borrowers in repaying their loans by restructuring the loan terms. These concessions generally involve lengthening the repayment term of an existing loan in order to reduce monthly payments. The Company generally does not agree to interest rate reductions or principal forgiveness in order to restructure a loan. At September 30, 1999, the Company had $502,000 of loans outstanding in which modifications had been made in order to assist the borrower in repaying the loan. All such loans were current in accordance with their restructured terms at September 30, 1999. 9 The following table sets forth the Company's loan delinquencies by type, by amount and by percentage of type at September 30, 1999.
Loans Delinquent For: ---------------------------------------------------------------------------------------------- 60-89 Days 90 Days or More Total Delinquent Loans ------------------------------ ----------------------------- ------------------------------ (Dollars in thousands) Percent Percent Percent of Loan of Loan of Loan Number Amount Category Number Amount Category Number Amount Category ------ ------ -------- ------ ------ -------- ------ ------ -------- (Dollars in thousands) Real estate loans 35 $857 2.28% 10 $196 0.52% 45 $1,053 2.80% Other loans 7 47 0.52 5 25 0.28% 12 72 0.80% ---- ---- --- ---- --- ------ Total 42 $904 1.94% 15 $221 0.47% 57 $1,125 2.41% ==== ==== === ==== === ======
The following table sets forth information with respect to the Company's non-performing assets (which generally include loans that are delinquent for 90 days or more and real estate owned) at the dates indicated. At September 30, 1999, there were no loans other than those included in the table below with regard to which management had information about possible credit problems of the borrower that caused management to seriously doubt the ability of the borrower to comply with present loan repayment terms. At September 30, ------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (Dollars in thousands) Non-accrual loans: Real estate loans ...................... $196 $259 $553 $658 $546 Other loans ............................ 25 -- 12 39 3 ---- ---- ---- ---- ---- Total non-accrual loans .............. 221 259 565 697 549 Real estate owned ...................... 169 51 157 149 130 Total non-performing assets ............ $390 $310 $722 $846 $679 ==== ==== ==== ==== ==== Non-performing loans as a percent of total loans ........................ 0.47% 0.73% 1.60% 2.08% 1.65% Non-performing assets as a percent of total assets ....................... 0.56% 0.52% 1.31% 1.56% 1.25% It is the Company's policy to discontinue accruing interest on a loan when its fourth monthly payment is due and unpaid, unless the Company determines that the nature of the delinquency and the collateral are such that collection of the principal and interest on the loan in full is reasonably assured. When the accrual of interest is discontinued, all accrued but unpaid interest is charged against current period income. Generally, once the accrual of interest is discontinued, the Company records interest as and when received until the loan is restored to accruing status. However, if there is substantial doubt as 10 to the collectibility of the loan, amounts received are recorded as a reduction of principal until the loan is returned to accruing status. The amount of additional interest income that would have been recorded on non-accrual loans had those loans been performing in accordance with their terms was approximately $11,000 for fiscal 1999, $11,000 for fiscal 1998 and $24,000 for fiscal 1997. CLASSIFIED ASSETS. OTS regulations require that the Company classify its assets on a regular basis and establish prudent valuation allowances based on such classifications. In addition, in connection with examinations, OTS examiners have the authority to identify problem assets and, if appropriate, require that they be classified. There are three adverse classifications for problem assets: Substandard, Doubtful and Loss. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of Substandard assets, with the additional characteristics that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high probability of loss. An asset classified Loss is considered uncollectible and of such little value that its continuance as an asset on the financial statements of the Company is not warranted. Assets classified as Substandard or Doubtful require the Company to establish prudent valuation allowances. If an asset or portion thereof is classified as Loss, the Company must either establish a specific allowance for loss equal to 100% of the portion of the asset classified Loss or charge off such amount. If the Company does not agree with an examiner's classification of an asset, it may appeal this determination. On the basis of management's review of its loans and other assets at September 30, 1999, the Company had $373,000 of assets classified substandard and none classified doubtful or loss. ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risks inherent in the Company's loan portfolio and the general economy. The allowance for loan losses is maintained at an amount management considers adequate to cover loan losses which are deemed probable and can be estimated. The allowance is based upon a number of factors, including asset classifications, economic trends, industry experience and trends, industry and geographic concentrations, estimated collateral values, management's assessment of the credit risk inherent in the portfolio, historical loan loss experience and the Company's underwriting policies. The Company evaluates, on a monthly basis, all loans identified as problem loans, including all non-accrual loans and other loans where management has reason to doubt collection in full in accordance with original payment terms. The Company considers whether the allowance should be adjusted to protect against risks associated with such loans. In addition, the Company applies fixed percentages for each category of performing loans not designated as problem loans to determine an additional component of the allowance to protect against unascertainable risks inherent in any portfolio of performing loans. Finally, the Company includes an unallocated component in its allowance to address general factors and general uncertainties such as changes in economic conditions and the inherent inaccuracy of any attempt to predict future default rates and property values based upon past experience. The analysis of the adequacy of the allowance is reported to and reviewed by the Board of Directors monthly. Management believes it uses a reasonable and prudent methodology to project potential future losses in the loan portfolio, and hence assess the adequacy of the allowance for loan losses. However, any such assessment is speculative and future adjustments may be necessary if economic conditions or the Company's actual experience differ substantially from the assumptions upon which the evaluation of the allowance was based. Furthermore, state and federal regulators, in reviewing the Company's loan portfolio as part of a future regulatory examination, may request the Company to increase its allowance for loan losses, thereby negatively affecting the Company's financial condition and earnings at that time. Moreover, future additions to the allowance may be necessary based on changes in economic and real estate market conditions, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of management's control. 11 The following table analyzes activity in the Company's allowance for loan losses during the periods indicated. Year Ended September 30, ------------------------------------ 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (Dollars in thousands) Allowance, beginning of period ........ $484 $403 $479 $602 $466 Provision ............................. 162 130 250 -- 190 ---- ---- ---- ---- ---- Charge-offs: Real estate ......................... 40 87 312 154 208 Other loans ......................... 20 47 54 17 27 ---- ---- ---- ---- ---- Total charge-offs ................... 60 134 366 171 235 Recoveries: Real estate ......................... 21 66 22 38 158 Other loans ......................... 13 19 18 10 23 ---- ---- ---- ---- ---- Total recoveries .................... 34 85 40 48 181 Net charge-offs ....................... 26 49 367 123 54 ---- ---- ---- ---- ---- Allowance, end of period .............. $620 $484 $403 $479 $602 ---- ---- ---- ---- ---- Allowance as a percent of total loans.. 1.33% 1.35% 1.14% 1.43% 1.81% Allowance as a percentage of non-performing loans .................. 280.54% 186.87% 71.33% 68.72% 109.65% Ratio of net charge-offs to average loans outstanding ..................... 0.07% 0.14% 0.97% 0.38% 0.16% The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category. 12 At September 30, ---------------------------------------- 1999 1998 -------------------- ----------------- Percent Percent of Loans of Loans to Total to Total Amount Loans Amount Loans ------ -------- ------ ---------- (Dollars in thousands) ALLOWANCE ALLOCATED TO: Real estate loans .............. $481 80.70% $394 87.82% Other loans .................... 139 19.30% 90 12.18% Total allowance ................. $620 100.00% $484 100.00% ==== ========= ==== =========
At September 30, -------------------------------------------------------------------- 1997 1996 1995 -------------------- ------------------ ------------------ Percent Percent Percent of Loans of Loans of Loans to Total to Total to Total Amount Loans Amount Loans Amount Loans ------ -------- ------ -------- ------ -------- (Dollars in thousands) ALLOWANCE ALLOCATED TO: Real estate loans $ 315 90.22% $ 416 92.64% $ 576 94.52% Other loans 88 9.78% 63 7.36% 26 5.48% ----- ------- -------- ------- --------- ------- Total allowance $ 403 100.00% $ 479 100.00% $ 602 100.00% ===== ======= ======== ======= ========= =======
ENVIRONMENTAL ISSUES The Company encounters certain environmental risks in its lending activities. Under federal and state environmental laws, lenders may become liable for costs of cleaning up hazardous materials found on property securing their loans. In addition, the presence of hazardous materials may have a substantial adverse effect on the value of such property as collateral and may cause economic difficulties for the borrower, causing the loan to go into default. Although environmental risks are usually associated with loans secured by commercial real estate, risks also may exist for loans secured by residential real estate if, for example, there is nearby commercial contamination or if the residence was constructed on property formerly used for commercial purposes. The Company attempts to control its risk by requiring a phase one environmental assessment by a Company-approved engineer as part of its underwriting review for all mortgage loans other than those secured by one-to-four family residences. The Company believes its procedures regarding the assessment of environmental risk are adequate and, as of September 30, 1999, the Company was unaware of any environmental issues with respect to any of its mortgage loans which would subject it to any material liability at this time. Hidden or future environmental contamination could adversely affect the values of properties securing loans in the Company's portfolio. INVESTMENT ACTIVITIES GENERAL. The investment policy of the Company, which is approved by the Board of Directors, is based upon its asset/liability management goals and is designed primarily to provide satisfactory yields while maintaining adequate liquidity, a balance of high quality, diversified investments, and minimal risk. In recognition of the high level of fixed-rate residential mortgage loans, the Company has sought to limit its securities investments to those with adjustable rates or short terms to maturity. The investment policy is implemented by the Company's President. All securities purchases and sales are reported to the Board of Directors each month. 13 As required by SFAS 115, securities are classified into three categories: trading, held-to-maturity and available-for-sale. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value with unrealized gains and losses included in trading account activities in the statement of income. Securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost. All other securities are classified as available-for-sale. Available-for-sale securities are reported at fair value with unrealized gains and losses included, on an after-tax basis, as a separate component of accumulated other comprehensive income. The Company does not have a trading securities portfolio and has no current plans to maintain such a portfolio in the future. At September 30, 1999, the Company's securities portfolio included securities with a fair value of $13.0 million which were classified as available for sale and securities with amortized cost of $6.0 million which were classified as held to maturity. The Company classifies each security between the available for sale and held to maturity categories when the security is purchased. INVESTMENT SECURITIES. The Company's investment securities totaled $19.0 million at September 30, 1999, including $13.0 million classified as available for sale and $6.0 million classified as held to maturity. The Company invests primarily in debt securities issued by the United States Government and its agencies ($4.4 million at September 30, 1999), tax-exempt municipal securities ($2.4 million at September 30, 1999), and mortgage-backed securities issued or guaranteed by government-sponsored enterprises ($11.3 million at September 30, 1999). The Company has classified all recent purchases of investment securities as available for sale in order to maintain flexibility in managing its investments. Investment securities are purchased in order to invest funds that may be needed to make loans, to provide a source of liquidity if the need for funds arises, to manage interest rate sensitivity, and to take advantage of acceptable after-tax yields that are available when purchasing certain tax-exempt municipal securities. The Company purchases only investment grade debt securities and at September 30, 1999, none of its investment securities were in default or otherwise classified. The Company invests in mortgage-backed securities to supplement the yields on its loan portfolio. Substantially all of the mortgage-backed securities were issued, insured or guaranteed by the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) or the Government National Mortgage Association (Ginnie Mae). At September 30, 1999, the Company's mortgage-backed securities portfolio totaled $5.3 million classified as available for sale and $6.0 million classified as held to maturity. In furtherance of its asset/liability management goals and to improve its interest rate sensitivity position, the Company's recent mortgage-backed securities investments either have short terms with balloon payments at maturity or which have adjustable rates. During fiscal 1999, the Company purchased approximately $5.1 million of mortgage-backed securities with interest rates that adjust annually. These securities, all of which were classified as available for sale, were purchased with the proceeds of borrowings in a series of transactions undertaken to improve leverage. The mortgage-backed securities classified as held to maturity were generally purchased prior to the beginning of fiscal 1998 and have remaining terms to maturity which are generally not more than five years. The Company's mortgage-backed securities generally tend to have lower yields than the mortgage-backed securities held by some other financial institutions because the Company invests principally in short-term balloon or adjustable rate mortgage-backed securities which tend to have lower yields. Mortgage-backed securities are more liquid than individual mortgage loans and may be used to collateralize borrowings of the Company. However, these securities generally yield less than the loans that underlie them because of the cost of payment guarantees or credit enhancements that reduce credit risk. Mortgage-backed securities of the type held by the Company are generally weighted at 20%, rather than the 50% weighting for performing residential one-to-four family mortgage loans, in determining risk-based capital ratios. Investment securities carry a reduced credit risk as compared to loans. However, investment securities classified as available for sale are subject to the risk that a fluctuating interest rate environment could cause a material decline in the carrying value of such securities. In addition, interest rate fluctuations, real estate market changes and changes in economic conditions may 14 alter the prepayment rates on mortgage-backed securities and thus affect the value of such securities. EQUITY SECURITIES. At September 30, 1999, the Company had $887,000 in fair value of corporate equity securities represented by common stock of the Federal Home Loan Mortgage Corporation with an amortized cost of $18,000. In addition, the Company also had at September 30, 1999 a mutual fund investment classified as available for sale with a carrying value of $68,000. The mutual fund invests substantially all of its assets in mortgage-backed securities which are themselves qualified investments for the Company. Although the mutual fund does not qualify as a liquid asset because the terms to maturity of the underlying mortgage-backed securities are too long, the Company considers it a potential source of liquidity because it can be easily redeemed on a daily basis as and when funds are needed. At September 30, 1999, the Company also had $385,000 of stock in the Federal Home Loan Bank of New York which was necessary for the Company to maintain its membership in the federal home loan bank system. The stock is redeemable at par. The yield on this stock was 6.86% (annualized) for the year ended September 30, 1999. The following table sets forth certain information regarding the carrying value of the Company's available for sale and held to maturity portfolios at the dates indicated. At September 30, --------------------------------- 1999 1998 1997 ------- ------- ------- Carrying Carrying Carrying Value Value Value ------- ------- ------- (In thousands) SECURITIES AVAILABLE FOR SALE: U.S. Government securities ........... $ 4,357 $ 5,527 $ 3,007 Mortgage-backed securities ........... 5,300 258 -- Municipal securities ................. 2,359 259 -- ------- ------- ------- Total debt securities .............. 12,016 6,044 3,007 Corporate equity securities .......... 887 888 631 Mutual funds ......................... 68 3,614 4,265 ------- ------- ------- Total available-for-sale ......... 12,971 10,546 7,903 ------- ------- ------- SECURITIES HELD TO MATURITY: Mortgage-backed securities ........... 6,009 7,707 8,650 Other securities ..................... 10 10 10 ------- ------- ------- Total held-to-maturity ........... 6,019 7,717 8,660 ------- ------- ------- TOTAL SECURITIES .............. $18,990 $18,263 $16,563 ======= ======= ======= 15 The table below sets forth certain information regarding the carrying value, weighted average yields and stated maturity of the Company's securities at September 30, 1999. There were no securities (exclusive of obligations of the U.S. Government and federal agencies) issued by any one entity with a total carrying value in excess of 10% of the Company's net worth at that date.
One Year From One From Five More Than or Less to Five Years to Ten Years Ten Years Total Securities Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market Value Yield Value Yield Value Yield Value Yield Value Yield Value ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- (Dollars in thousands) U.S. Government securities .. $ -- 0.00% $ 2,454 5.73% $1,657 6.41% $ 246 6.45% $ 4,357 6.30% $ 4,357 Mortgage-backed securities .. 3,083 5.74% 6,423 5.79% 1,557 5.65% 247 5.97% 11,310 5.77% 11,248 Municipal securities ........ 386 4.44% 552 4.67% 925 6.13% 496 5.92% 2,359 5.47% 2.359 Other securities ............ 964 1.14% -- 0.00% -- 0.00% -- 0.00% 964 5.47% 964 ------- ------- ------ ----- -------- ------- Total ....................... $ 4,433 4.64% $ 9,429 5.77% $ 4,139 6.04% $ 989 6.21% $ 18,990 1.14% $ 18,928
SOURCES OF FUNDS GENERAL. The Company's primary source of funds is deposits. During 1999, the Company also used borowings as a source of funds to improve leverage. In addition, the Company derives funds for loans and investments from loan and security repayments and prepayments and revenues from operations. Scheduled payments on loans and mortgage-backed and investment securities are a relatively stable source of funds, while savings inflows and outflows and loan and mortgage-backed and investment securities prepayments are significantly influenced by general interest rates and money market conditions. In general, the Company expects that it will continue to offer the same types of deposit products but also expects that it will continue to use borrowings as an additional source of funds to further improve leverage. DEPOSITS. The Company offers several types of deposit programs to its customers, including passbook savings accounts, NOW accounts, money market deposit accounts, checking accounts and certificates of deposit. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. The Company's deposits are obtained predominantly from its primary market area. The Company relies primarily on customer service and long-standing relationships with customers to attract and retain these savings deposits; however, market interest rates and rates offered by competing financial institutions significantly affect the Company's ability to attract and retain savings deposits. The Company does not use brokers to obtain deposits and has no brokered deposits. At September 30, 1999, the Company had $45.1 million of deposits. The Company prices its deposit offerings based upon market and competitive conditions in its market area and generally prices its deposits at or above the rates offered by competitors. Pricing determinations are made weekly by a committee of officers. The Company seeks to price its deposit offerings to be competitive with other institutions in its market area. 16 The following table sets forth the distribution of the Company's deposit accounts at the dates indicated. Interest rates shown for non-time accounts are the rates in effect at September 30, 1999.
At September 30, --------------------------------------------------------------- 1999 1998 1997 ------------------ ------------------ ------------------- Percent Percent Percent Amount of Total Amount of Total Amount of Total ------ -------- ------ -------- ------ -------- (In thousands) NON-TIME ACCOUNTS: Savings and club accounts (3.0-3.5%) ................. $15,423 34.18% $17,302 37.30% $14,878 34.14% NOW and money market accounts (2.0-3.0%) ........ 6,449 14.30% 5,292 11.41% 5,742 13.18% Demand accounts .............. 184 0.41% 210 0.45% 113 0.26% Total non-time accounts ...... 22,056 48.89% 22,804 49.16% 20,733 47.58% TIME ACCOUNTS: 4.00 - 4.99% ................. 12,588 27.90% - 0.00% - 0.00% 5.00 - 5.99% ................. 10,201 22.61% 22,511 48.53% 20,651 47.39% 6.00 - 6.99% ................. 166 0.37% 410 0.89% 1,406 3.23% 7.00 - 7.99% ................. 102 0.23% 657 1.42% 786 1.80% Total time accounts .......... 23,057 51.11% 23,578 50.84% 22,843 52.42% Total deposits................. $45,113 100.00% $46,382 100.00% $43,576 100.00%
At September 30, 1999, the Company had $3.3 million in certificates of deposit with balances of $100,000 or more ("jumbo deposits"), representing 7.26% of all deposits. The following table sets forth the amount of certificates of deposit in denominations of $100,000 at September 30, 1999, and the remaining period to maturity of such deposits. Amount Due (in Thousands) ------------------------------------------------------------------- In More than 3 In More Than 6 In 3 Months up to 6 up to 12 In More than or Less Months Months 12 Months ----------- -------------- --------------- ------------ $745 $730 $846 $954 BORROWINGS. During fiscal 1999, as part of the process of leveraging its new capital, the Company incurred borrowings and invested the proceeds of such borrowings in mortgage-backed securities to improve leverage. All borrowings were from the Federal Home Loan Bank of New York. The borrowings generally had short terms of three months or less with the entire principal balance repayable at maturity. The mortgage-backed securities purchased with the proceeds of the borrowings have adjustable rates of interest which adjust annually. The average balance of outstanding borrowings during the year was $1.9 million and the average cost was 4.59%. The highest balance outstanding during the year, which was also the year end balance, was $7.4 million. SUBSIDIARY ACTIVITIES The Company is permitted to own subsidiaries for certain limited purposes, generally to engage in activities which are permissible for subsidiaries of a bank holding company. The Company has no subsidiaries except for the Bank. 17 PERSONNEL At September 30, 1999, the Company had 21 full-time and one part-time employees. The employees are not represented by a collective bargaining unit, and the Company considers its relationship with its employees to be good. REGULATION GENERAL The Bank is a federal savings association subject to extensive regulation, examination, and supervision by the OTS, as its primary federal regulator and by the FDIC, as its deposit insurer. The Bank's deposit accounts are insured up to applicable limits by the Savings Association Insurance Fund of the FDIC, and the Bank is a member of the Federal Home Loan Bank of New York. The OTS also regulates the Company as a savings and loan holding company. REGULATION OF FEDERAL SAVINGS ASSOCIATIONS BUSINESS ACTIVITIES. The Bank's powers generally come from federal law and OTS regulations, The Bank may make mortgage loans, commercial loans and consumer loans, and may invest in certain types of debt securities, and other assets. The Bank's lending and investment powers are subject to limits, including, among others, (a) a prohibition against acquiring any corporate debt security that is not rated in one of the four highest rating categories; (b) a limit of 400% of capital that can be invested in loans secured by non-residential real estate property; (c) a limit of 10% of assets that can be invested in commercial loans; (d) a limit of 35% of assets that can be invested in consumer loans, commercial paper and corporate debt securities; (e) a limit of 5% of assets which can be invested in non-conforming loans (loans in excess of limits specified in federal law); (f) a limit of the greater of 5% of assets or its total capital which can be invested in certain construction loans made for the purpose of financing what is or is expected to become residential property; and (g) a limit of 10% of assets that can be invested in personal property used for general leasing activities. The Bank may offer a variety of deposit accounts, including savings, certificate (time), demand and NOW accounts. LOANS TO ONE BORROWER. The Bank generally may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. Up to an additional 10% of unimpaired capital and surplus can be lent if the additional amount is fully secured by readily-marketable collateral. At September 30, 1999, the Bank's regulatory limit on loans to one borrower was in excess of $2.0 million. At that date, the Bank's largest aggregate loans to one borrower was approximately $375,000. QTL TEST. The Bank must meet a qualified thrift lender, or "QTL" test. Under the QTL test, the Bank must maintain at least 65% of its assets, after certain adjustments, in various types of loans made for residential and housing purposes, related investments, education, small business and credit card loans, and consumer loans and certain other loans and investments. The Bank satisfies the QTL test and the Bank anticipates that it will continue to satisfy the test in the future. If the Bank fails to satisfy the QTL test, it will have to either restrict its activities or convert to a commercial bank charter. CAPITAL REQUIREMENTS. OTS regulations require that the Bank maintain tangible capital equal to 1.5% of total assets as adjusted under the OTS regulations, core capital equal to 3% of such adjusted total assets and total capital (core capital plus supplementary capital) equal to 8% of risk-weighted assets. The Bank's capital ratios at September 30, 1999 all substantially exceeded OTS minimum capital requirements, and those requirements do not now have a material affect on the Bank. LIMITATIONS ON CAPITAL DISTRIBUTIONS. OTS regulates the amount of dividends and other capital distributions which the Bank may pay to the Company. In general, if the Bank will satisfy all OTS capital requirements both before and after the distribution, the Bank may 18 make capital distributions to the Company in any year equal to the current year's net income plus retained net income for the preceding two years. However, the Bank must notify the OTS of the distribution and the OTS may object on safety and soundness grounds. If any capital distribution will exceed these limits, or if the OTS either considers the Bank a troubled or problem institution or gives the Bank a rating in less than the two highest rating categories, then the Bank must get OTS approval before making a capital distribution. The Bank is not currently required to obtain OTS approval unless it exceeds the dollar limits, and the Bank has never paid a dividend to the Company. Therefore, the Company does not believe that the OTS capital distribution regulations will have a material affect on its operations or its ability to pay dividends to its stockholders. COMMUNITY REINVESTMENT. Under the federal Community Reinvestment Act (the "CRA"), the Bank, consistent with its safe and sound operation, must help meet the credit needs of its entire community, including low and moderate income neighborhoods The OTS periodically assesses the Bank's compliance with CRA requirements. The Bank received a "satisfactory" CRA rating in its most recent OTS examination. TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in transactions with its "Affiliates" by federal law. In general, an affiliate of the Bank is any company that controls the Bank or any other company that is controlled by a company that controls the Bank, excluding the Bank's subsidiaries other than those that are insured depository institutions. The Bank may not (a) lend to any of its affiliates that is engaged in activities that are not permissible for bank holding companies and (b) purchase the securities of any affiliate other than a subsidiary. Transactions with any individual affiliate may not exceed 10% of the capital and surplus of the Bank and aggregate transactions with all affiliates may not exceed 20%. These restrictions do not impose material limits on the Bank's business activities. The Bank's loans to insiders must be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features. The loans are also subject to maximum dollar limits and must generally be approved by the Board of Directors. The Bank may make loans to insiders on preferential terms as part of a benefit or compensation program that is widely available to employees. The Bank has no such benefit or compensation programs. INSURANCE OF DEPOSIT ACCOUNTS. The Bank pays deposit insurance premiums to the FDIC. The amount of the premium depends upon the Bank's capital ratios and supervisory rating category. At present, the Bank's capital ratios and supervisory rating are high enough that the Bank pays no regular deposit insurance premiums. However, the Bank must pay a share of the cost of the bonds issued in the late 1980s to recapitalize the now defunct Federal Savings and Loan Insurance Corporation, currently equal to approximately 0.065% of its insured deposits per year. FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the Federal Home Loan Bank of New York. The Bank uses the FHLBNY as a source for borrowing funds. The Bank must own stock in the FHLBNY at least equal to the greater of 1% of the principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year or 5% of its advances from the FHLBNY. At September 30, 1999, the Bank had $385,000 of capital stock of the FHLBNY, which satisfied this requirement and it had no FHLBNY borrowings. HOLDING COMPANY REGULATION GENERAL POWERS. The Company may engage in the following activities: (i) investing in the stock of a savings association; (ii) acquiring a mutual association through the merger of such association into a savings association subsidiary of such holding company or an interim savings association subsidiary of such holding company; (iii) merging with or acquiring another holding company, one of whose subsidiaries is a savings association; (iv) investing in a corporation, the capital stock of which is available for purchase by a savings association under federal law or under the law of any state where the subsidiary savings association or associations share their home offices; (v) furnishing or 19 performing management services for a savings association subsidiary of such company; (vi) holding, managing or liquidating assets owned or acquired from a savings association subsidiary of such company; (vii) holding or managing properties used or occupied by a savings association subsidiary of such company; (viii) acting as trustee under deeds of trust; (ix) any other activity (A) that the Federal Reserve Board, by regulation, has determined to be permissible for bank holding companies under Section 4(c) of the Bank Holding Company Act of 1956, unless the Director, by regulation, prohibits or limits any such activity for savings and loan holding companies; or (B) in which multiple savings and loan holding companies were authorized (by regulation) to directly engage on March 5, 1987; and (x) purchasing, holding, or disposing of stock acquired in connection with a qualified stock issuance if the purchase of such stock by such savings and loan holding company is approved by the Director. WAIVERS OF DIVIDENDS BY THE MUTUAL HOLDING COMPANY. Cambray Mutual Holding Company owns 55% of the stock of the Company. If Cambray MHC decides to waive its share of any dividend that the Bank is paying to its stockholders, Cambray MHC must notify the OTS. The OTS reviews dividend waiver notices on a case-by-case basis, and, in general, does not object to any such waiver if: (i) the mutual holding company's board of directors determines that such waiver is consistent with such directors' fiduciary duties to the mutual holding company's members; (ii) for as long as the savings association subsidiary is controlled by the mutual holding company, the dollar amount of dividends waived by the mutual holding company are considered as a restriction to the retained earnings of the savings association, which restriction, if material, is disclosed in the public financial statements of the savings association as a note to the financial statements; (iii) the amount of any dividend waived by the mutual holding company is available for declaration as a dividend solely to the mutual holding company, and, in accordance with SFAS 5, where the savings association determines that the payment of such dividend to the mutual holding company is probable, an appropriate dollar amount is recorded as a liability; (iv) the amount of any waived dividend is considered as having been paid by the savings association in evaluating any proposed dividend under OTS capital distribution regulations; and (v) in the event the mutual holding company converts to stock form, the appraisal submitted to the OTS in connection with the conversion application takes into account the aggregate amount of the dividends waived by the mutual holding company. CONVERSION OF THE MUTUAL HOLDING COMPANY TO STOCK FORM. OTS regulations permit the Mutual Holding Company to convert from the mutual to the capital stock form of organization. The Board of Directors has no current intention or plans for such a transaction. In general, if such a transaction is undertaken, a new company would be formed to replace the Company and 55% of its stock would be offered to the depositors of the Bank and to the public. The other current stockholders of the Company would be entitled to receive 45% of the stock of the new company in exchange for the stock of the Company. These two percentages would be adjusted to reflect any prior dividend waiver as described above. Item 2. Description of Properties The Company conducts its business through its headquarters at 42 Church Street in the Town and Village of Gouverneur. The Company owns the premises. The net book value of the premises is $70,000. The Company believes its current facilities are barely adequate for its current needs and the Board of Directors of the Bank has established a committee to explore alternatives for expansion. However, no assessment of the cost of different expansion alternatives has been made. The Company also operates a loan production office out of rented space in Alexandria Bay, New York. The book value of the premises is zero. Item 3. Legal Proceedings The Registrant's subsidiary, Gouverneur Savings and Loan Association (the "Bank"), is involved as plaintiff or defendant in various legal actions arising in the normal course of its business. While the ultimate outcome of these proceedings cannot be predicted with certainty, it is the opinion of management, after consultation with counsel representing the Bank in the proceedings, that the resolution of these proceedings should not have a material effect on the Bank's or the Registrant's results of operations. The Registrant is not a party to any litigation. 20 Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended September 30, 1999. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Information contained under the caption "Common Stock" in the 1999 Annual Report to Stockholders included as Exhibit 13 hereto is herein incorporated by this reference. Item 6. Selected Financial Data Information contained under the caption "Selected Financial Data" in the 1999 Annual Report to Stockholders included as Exhibit 13 hereto is herein incorporated by this reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Information contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 1999 Annual Report to Stockholders included as Exhibit 13 hereto is herein incorporated by this reference. Item 7A. Quantitative and Qualitative Disclosure About Market Risk Information contained under the caption "Quantitative and Qualitative Disclosure About Market Risk" in the 1999 Annual Report to Stockholders included as Exhibit 13 hereto is herein incorporated by this reference. Item 8. Financial Statements The following information appearing in the 1999 Annual Report to Stockholders included as Exhibit 13 hereto is herein incorporated by this reference. Report of Independent Public Accountants Consolidated Statements of Financial Condition as of September 30, 1999 and 1998 Consolidated Statements of Operations for the Years Ended September 30, 1999, 1998 and 1997 Consolidated Statements of Stockholders' Equity and Comprehensive Income for Years Ended September 30, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for Years Ended September 30, 1999, 1998 and 1997 Notes to Consolidated Financial Statements With the exception of the information expressly incorporated herein by reference, the Company's Annual Report to Stockholders for the year ended September 30, 1999, is not deemed filed as part of this Annual Report on Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure: None 21 PART III Item 10. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act Directors Information contained under the captions "The Election of Directors (introduction);" "The Election of Directors-The Board of Directors and Nominees;" "The Election of Directors-Nominees;" "The Election of Directors- Continuing Directors;" and "The Election of Directors-Meetings of the Board of Directors and Certain Committees" in the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on February 15, 2000, to be filed with the Commission within 120 days after the end of the fiscal year covered by this report, is incorporated herein by this reference. Executive Officers Information contained under the captions "The Election of Directors Nominees - Richard F. Bennett;" and "The Election of Directors-Executive Officers Who Are Not Directors" in the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on February 15, 2000, to be filed with the Commission within 120 days after the end of the fiscal year covered by this report, is incorporated herein by this reference. Compliance with Section 16(a) To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the fiscal year ended September 30, 1999, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10 percent beneficial owners were complied with. Item 11. Executive Compensation Information contained under the caption "Compensation" in the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on February 15, 2000, to be filed with the Commission within 120 days after the end of the fiscal year covered by this report, is incorporated herein by this reference. Item 12. Security Ownership of Certain Beneficial Owners and Management Information contained under the caption "Principal Owners of Our Common Stock" in the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on February 15, 2000, to be filed with the Commission within 120 days after the end of the fiscal year covered by this report, is incorporated herein by this reference. Item 13. Certain Relationships and Related Transactions Information contained under the caption "Compensation-Transactions With Directors and Officers" in the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on February 15, 2000, to be filed with the Commission within within 120 days after the end of the fiscal year covered by this report, is incorporated herein by this reference. Item 14. Exhibits and Reports on Form 8-K (a) Exhibits SEE INDEX TO EXHIBITS (b) Reports on Form 8-K The Company filed no reports on Form 8-K during the quarter ended September 30, 1999. 22 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GOUVERNEUR BANCORP, INC. Date: December 28, 1999 By: /s/ RICHARD F. BENNETT --------------------------------- Richard F. Bennett, President (Duly authorized representative) In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: December 28, 1999 /s/ RICHARD F. BENNETT ------------------------------------ Richard F. Bennett, President, Chief Executive Officer and Director December 28, 1999 /s/ ROBERT TWYMAN ------------------------------------ Robert Twyman, Chief Financial Officer Principal financial officer December 28, 1999 /s/ KATHLEEN MCINTOSH ------------------------------------ Kathleen McIntosh, Treasurer Principal accounting officer December 28, 1999 /s/ CHARLES GRAVES ------------------------------------ Charles Graves, director December 28, 1999 /s/ RICHARD JONES ------------------------------------ Richard Jones, Director December 28, 1999 /s/ FRANK LANGEVIN ------------------------------------ Frank Langevin, Director December 28, 1999 /s/ ROBERT LEADER ------------------------------------ Robert Leader, Director December 28, 1999 /s/ TIMOTHY MONROE ------------------------------------ Timothy Monroe, Director December 28, 1999 /s/ JOSEPH PISTOLESI ------------------------------------ Joseph Pistolesi, Director December 28, 1999 /s/ LARRY STRAW ------------------------------------ Larry Straw, Director 23 INDEX TO EXHIBITS Reference to Previous Filing, Exhibit Number Document If applicable. - -------------- -------- -------------- 3(i) Certificate of Incorporation ** 3(ii) Bylaws ** 4 Form of Stock Certificate * 10.1 Employee Stock Ownership Plan * 10.2 Stock Option Plan *** 10.3 Management Recognition Plan *** 13 1999 Annual Report to Stockholders 21 Subsidiaries of Registrant 27 Financial Data Schedule * Filed as exhibits to the Company's Form S-1 registration statement filed with the Commission on June 26, 1998 (File No. 333-57845). All of such previously filed documents are hereby incorporated herein by reference in accordance with Item 601 of Regulation S-K. ** Filed as exhibits to the Company's Pre-effective Amendment No. One to Form S-1 filed with the Commission on August 5, 1999, 1998 (File No. 333-57845). All of such previously filed documents are hereby incorporated herein by reference in accordance with Item 601 of Regulation S-K. *** Filed as exhibits to the Company's Definitive Proxy Statement on Form 14A filed with the Commission on September 9, 1999. All of such previously filed documents are hereby incorporated herein by reference in accordance with Item 601 of Regulation S-K. 24 EX-13 2 EXHIBIT 13 PRESIDENT'S MESSAGE To Our Stockholders: On behalf of the Board of Directors, Officers and employees of Gouverneur Bancorp, Inc. and its subsidiary, Gouverneur Savings & Loan Association, I am pleased to present to you this annual report, our first as a public company. During the 1999 fiscal year, Gouverneur Savings & Loan Association completed several of the most important advances in its long history. Most significantly, on March 23, 1999, we completed the reorganization of our Bank into a mutual holding company structure. As a result of the reorganization, the Bank became a wholly owned subsidiary of the Company, Gouverneur Bancorp, Inc., which in turn sold 45% of its stock to the public and the Bank's employee stock ownership plan, and 55% of its stock to Cambray Mutual Holding Company. The sale of the Company's stock raised approximately $4.1 million in new investable funds. As part of the reorganization process, your management team developed a four step plan to deploy these new funds to achieve profitability and growth, without sacrificing our long held policy of prudent and careful lending and investment. First, recognizing that loans are the Bank's highest yielding assets, we gradually added to our loan production staff to increase our lending opportunities. Second, to further increase lending, in July, we opened a loan production office in Alexandria Bay. Third, we have aggressively pursued commercial, automobile and other consumer loans, which carry higher yields than residential mortgage loans. These efforts produced a 31% increase in net loans for the 1999 fiscal year, from $35.2 million to $46.2 million. Finally, to increase our leverage, and ultimately, our profitability, we borrowed $7.4 million on favorable terms from the Federal Home Loan Bank of New York and reinvested those funds in mortgage backed securities. In fiscal 2000, we will continue to pursue new loan originations for the Bank and new markets and business diversification opportunities for both the Bank and the Company. As we grow and meet the challenges of our changing business, we assure you that Gouverneur Savings & Loan Association will remain faithful to its mission as a community based institution, serving the financial needs of the people in its North Country markets, as it has since its founding more than a century ago. We believe that prudent growth, along with the well-planned addition of new products and services, will position the Bank and the Company to best serve all of our constituencies - stockholders, borrowers, depositors and employees. We look forward to building our franchise in the new millennium and welcome your support in this endeavor. /s/ RICHARD F. BENNETT ------------------------------------- Richard F. Bennett President and Chief Executive Officer SELECTED CONSOLIDATED FINANCIAL INFORMATION SELECTED FINANCIAL CONDITION DATA: AT SEPTEMBER 30, ----------------------------------------------- 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- (In thousands) Total assets ................ $69,996 $59,337 $55,172 $54,347 $54,274 Loans receivable, net (1) .. 46,791 35,691 35,253 33,438 33,111 Allowance for loan losses ... 620 484 403 479 602 Securities available-for-sale 12,971 10,546 7,903 10,817 10,540 Securities held-to-maturity . 6,019 7,717 8,660 5,416 4,506 Cash and cash equivalents ... 3,490 4,434 2,486 3,939 2,223 Real estate owned ........... 169 51 157 149 130 Deposits .................... 45,113 46,382 43,576 43,502 44,200 Total shareholders' equity... $16,029 $11,468 $10,689 $ 9,993 $ 9,465
SELECTED OPERATIONS DATA: Year Ended September 30, ------------------------------------------ 1999 1998 1997 1996 1995 ------ ------ ------ ------ ------ (In thousands) Interest income .................................. $4,813 $4,336 $4,275 $4,338 $4,260 Interest expense ................................. 2,019 1,907 1,896 1,980 1,823 ------ ------ ------ ------ ------ Net interest income .......................... 2,794 2,429 2,379 2,358 2,437 Provision for loan losses ........................ 162 130 250 -- 190 ------ ------ ------ ------ ------ Net interest income after provision for loan losses .............. 2,632 2,299 2,129 2,358 2,247 Non-interest income .............................. 151 144 113 149 141 Non-interest expenses ............................ 1,711 1,443 1,370 1,774 1,378 ------ ------ ------ ------ ------ Income before income taxes and cumulative effect of changes in accounting principles ......................... 1,072 1,000 749 1,010 872 Income tax expense (benefit) ..................... 431 380 335 297 416 ------ ------ ------ ------ ------ Income before cumulative effect of changes in accounting principles .............. 641 620 537 452 594 ------ ------ ------ ------ ------ Net income ....................................... $ 641 $ 620 $ 537 $ 452 $ 594 ====== ====== ====== ====== ======
NOTES APPEAR ON FOLLOWING PAGE. 2 SELECTED FINANCIAL RATIOS AND OTHER DATA (2):
At or for the Year Ended September 30, -------------------------------------------------- 1999 1998 1997 1996 1995 ------- ------ ------ ------ ------ PERFORMANCE RATIOS: Return on average assets (net income to average total assets) ....................... 1.03% 1.12% 0.99% 0.92% 1.04% Return on average equity (net income to average equity) ............................. 4.84% 5.74% 5.36% 5.33% 6.13% Average interest-earning assets to average interest-bearing liabilities ................ 125.04% 121.99% 120.21% 119.11% 117.45% Net interest rate spread (3) .................. 3.81% 3.82% 3.82% 3.77% 4.21% Net interest margin (4) ....................... 4.65% 4.61% 4.56% 4.50% 4.84% Net interest income after provision for loan losses to total other expenses ......... 1.54x 1.59x 1.51x 1.33x 1.63x CAPITAL AND ASSET QUALITY RATIOS: Average equity to average total assets.......... 21.27% 19.56% 18.41% 17.22% 16.95% Total equity to assets end of period ........... 22.90% 19.33% 19.37% 18.39% 17.44% Non-performing assets to total assets .......... 0.56% 0.49% 1.31% 1.56% 1.25% Non-performing loans to total loans ............ 0.47% 0.67% 1.60% 2.08% 1.65% Allowance for loan losses to total loans........ 1.33% 1.35% 1.14% 1.43% 1.81% Allowance for loan losses to non-performing loans ........................ 280.54% 203.36% 71.33% 68.72% 109.65% OTHER DATA: Number of real estate loans outstanding ....... 1,383 1,338 1,386 1,424 1,476 Number of deposit accounts .................... 6,890 6,619 6,508 6,495 6,470 Full service offices .......................... 1 1 1 1 1
(1) Shown net of deferred fees and costs. (2) Asset quality and capital ratios are at end of period. All other ratios are based on average daily balances. (3) The net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. (4) The net interest margin, also known as the net yield on average interest-earning assets, represents net interest income as a percentage of average interest-earning assets. 3 OUR FIRST YEAR AS A PUBLIC COMPANY The 1999 fiscal year was a year of dramatic change for Gouverneur Bancorp, Inc. When the year began on October 1, 1998, we did not yet exist and our Bank, Gouverneur Savings and Loan Association, was in the middle of a mutual holding company reorganization. The depositors of the Bank had just approved the reorganization, and a stock offering was under way. However, due to a general decline in the market value of financial institution stock, and a decline in market acceptance of financial institutions, the reorganization was not completed right away. Instead, we revised the amount of stock we were offering after a reduction in the appraised value of the stock that was to be issued, and we finally completed the reorganization on March 23, 1999. We sold 1,072,818 shares of stock at $5.00 per share to the public and our employee stock ownership plan in the reorganization, representing 45% of our outstanding stock, and we issued an additional 1,311,222 shares, representing the remaining 55%, to Cambray Mutual Holding Company. The stock sale gave us approximately $4.1 million of new funds to invest, after deducting the cost of the reorganization and the proceeds from shares sold the ESOP which were purchased with funds we lent to the ESOP. The stock sale also increased our capital, which is available to support future growth. OTS regulations require that Cambray MHC own a majority of our outstanding stock. In order to dispose of that stock, OTS regulations require, in most instances, that the depositors of the Bank must approve the transaction in which the sale will occur, and then the shares must first be offered to those depositors. - --------------------------------------------------------------- Our Reorganization gave us $4.1 million of new funds to invest. - --------------------------------------------------------------- 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 other funds, to make loans and other investments. Most of the loans are one to four family residential mortgages. The Bank also makes consumer (including home equity lines of credit), commercial, and multi-family real estate and other loans. Most of the loans are in the Bank's primary market area, which is southern St. Lawrence and northern Jefferson and Lewis counties in New York State. The FDIC insures the Bank's deposit accounts, and the FDIC and the Office of Thrift Supervision both regulate the Bank. Our profitability depends, to a large extent, on our net interest income, which is the difference between the interest we receive on our interest earning assets, such as loans and investments, and the interest we pay on interest bearing liabilities. Other categories of expenses generally include the provision for loan losses, salaries and employee benefits costs, net expenses on real estate owned and various other 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. We know that our additional capital brings with it the added responsibility to a new constituency, our shareholders. We do not view our shareholders as adversaries - as a matter of fact, every director of our company is a substantial stockholder and some of our directors are also some of our largest stockholders. Our efforts are concentrated in the direction of improving our operations and increasing profitability. With that in mind, we have focused our efforts on increasing our loan portfolio. 4 Loans are our highest yielding asset category. However, banking has changed a lot in recent years. Long gone are the days of the three - six - three banker, pay three percent on deposits, lend the money out at six percent, and be on the golf links by three o'clock in the afternoon. We are faced with increasing competition from other financial institutions, loan brokers, mortgage bankers, insurance companies, brokerage firms and other companies that are chasing a limited number of loan opportunities. In order to meet the challenge of competition and grow our portfolio, we have: o Increased staffing in our loan department so loan officers can get out from behind their desks and go into the community to solicit new loans o Opened a new loan production office in Alexandria Bay to allow us to expand into a nearby geographic area with additional loan opportunities. o Aggressively sought to originate commercial and automobile loans, where our small market share allowed us more chance for expansion. [GRAPHIC CHART OMITTED] - -------------------------------------------------------------------------------- Our Loan Volume is Increasing Year-End Loan Balances Thousand 1996 1997 1998 1999 ---- ---- ---- ---- 33,438 35,253 35,691 46,791 - -------------------------------------------------------------------------------- o Sought to maintain our yields and improve interest rate sensitivity by taking advantage of the higher rates and shorter terms to maturity of commercial and automobile loans. [GRAPHIC CHART OMITTED] - -------------------------------------------------------------------------------- Maintain Interest Rate Spread Interest Rate Spread Fiscal Year 1996 1997 1998 1999 ------ ------ ------ ------ 3.77% 3.82% 3.82% 3.81% - -------------------------------------------------------------------------------- Our increase in capital cannot by itself provide sufficient funds to improve profitability to satisfactory levels. We must also leverage that capital by increasing other funding sources. Overall during fiscal 1999, our deposits declined. This decline occurred entirely during the first half of the fiscal year, and we believe it was caused by depositors who used their deposits to purchase stock. In the past six months, total deposits have been on a slow upward trend. We are working to try to accelerate that trend through outreach programs to our customers, developing deposit relationships with our new loan customers, and competitive pricing. With the stock markets continuing to move upwards, it is difficult for us to increase the level of deposits. Residents often choose to invest their discretionary funds in equity securities instead of bank deposits. Thus, we have also decided to borrow funds in order to improve leverage and we implemented a borrowing strategy during the year. The borrowings allow us to maintain a satisfactory level of more liquid securities investments while we invest most of our available funds in loans. Although we believe that we have moved down the path we need to follow to remain a successful and profitable institution, we know that much more needs to be done. We continue to exert efforts to grow our franchise, seeking to expand our market share in our existing community and reach out into adjoining communities. The following discussion of our financial condition and results of operations shows the effects of the commencement of those efforts. 5 INTRODUCTION TO FINANCIAL INFORMATION AND COMPARISONS Our current financial statements combine the assets, liabilities, income and expenses which we, Gouverneur Bancorp, Inc., own directly, as well as those which our Bank, Gouverneur Savings and Loan Association, owns. Any discussion below about periods or dates before March 23, 1999, when we completed the reorganization, includes information only about the Bank. However, when we discuss past financial information, we refer to assets, liabilities, income and expenses prior to March 23, 1999 as our own for comparative purposes. ANALYSIS OF NET INTEREST INCOME Net interest income, our primary income source, depends principally upon (i) the amount of interest-earning assets that we can maintain based upon our funding sources; (ii) the relative amounts of interest-earning assets versus interest-bearing liabilities; and (iii) the difference between the yields earned on those assets and the rates paid on those liabilities. Non-performing loans adversely affect net interest income because they must still be funded by interest-bearing liabilities, but they do not provide interest income. Furthermore, when we designate an asset as non-performing, all interest that we have already accrued but not actually received is deducted from current period income, further reducing net interest income. 6 AVERAGE BALANCES, INTEREST RATES AND YIELDS The following table presents for the periods indicated, the average interest-earning assets and average interest-bearing liabilities by principal categories, the interest income or expense for each category, and the resultant average yields earned or rates paid. No tax equivalent adjustments were made. All average balances are daily average balances. Non-interest-bearing checking accounts are included in the tables as a component of non-interest-bearing liabilities.
For the Year Ended September 30, ----------------------------------------------------------------------------------------------- 1999 1998 1997 ------------------------------ ------------------------------- ------------------------------ Average Average Average Average Yield/ Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost Balance Interest Cost ---------- -------- -------- ------- -------- -------- -------- -------- -------- Loans (1) $ 39,643 $ 3,645 9.19% $ 34,891 $ 3,256 9.33% $ 33,520 $ 3,183 9.50% Securities (2) 18,911 1,096 5.80% 16,215 998 6.15% 16,637 989 5.94% Other short-term investments 1,547 72 4.65% 1,607 82 5.10% 2,028 103 5.08% --------- ------- -------- ------- -------- ------- Total interest-earning assets 60,101 4,813 8.01% 52,713 4,336 8.23% 52,185 4,275 8.19% ------- ------- ------- Non-interest-earning assets 2,154 2,492 2,259 --------- -------- -------- Total assets $ 62,255 $ 55,205 $ 54,444 ========= ======== ======== Savings and club accounts (3) $ 16,661 569 3.42% $ 14,947 519 3.47% $ 15,115 527 3.49% Time certificates 23,408 1,246 5.32% 22,716 1,279 5.63% 22,884 1,265 5.53% NOW and money market accounts 6,069 116 1.91% 5,547 109 1.97% 5,411 104 1.92% Borrowings 1,917 88 4.59% -- -- 0.00% -- -- 0.00% Total interest-bearing liabilities 48,055 2,019 4.20% 43,210 1,907 4.41% 43,410 1,896 4.37% --------- ------- -------- ------- -------- ------- Non-interest-bearing liabilities 959 1,197 1,013 --------- -------- -------- Total liabilities 49,014 44,407 44,423 Net worth 13,241 10,798 10,021 --------- -------- -------- Total liabilities and net worth $ 62,255 $ 55,205 $ 54,444 ========= ======== ======== Net interest income/spread (4) $ 2,794 3.81% $ 2,429 3.82% $ 2,379 3.82% ======= ==== ======= ==== ======= ==== Net earning assets/net interest margin (5) $ 12,046 4.65% $ 9,503 4.61% $ 8,775 4.56% ========= ==== ======== ==== ======== ==== Ratio of average interest-earning assets to average interest-bearing liabilities 1.25x 1.22x 1.20x ==== ===== ====
(1) Shown net of the allowance for loan losses. Average loan balances include non-accrual loans. Interest is recognized on non-accrual loans only as and when received. (2) Securities are included at amortized cost, with net unrealized gains or losses on securities available for sale included as a component of non-earning assets. Securities include Federal Home Loan Bank of New York stock. (3) Includes advance payments by borrowers for taxes and insurance (mortgage escrow deposits). (4) The spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. (5) The net interest margin, also known as the net yield on average interest-earning assets, represents net interest income as a percentage of average interest-earning assets. 7 RATE/VOLUME ANALYSIS OF NET INTEREST INCOME One method of analyzing net interest income is to consider how changes in average balances and average rates from one period to the next affect net interest income. The following table shows changes in the dollar amount of interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It shows the amount of the change in interest income or expense caused by either changes in outstanding balances (volume) or changes in interest rates. The effect of a change in volume is measured by applying the average rate during the first period to the volume change between the two periods. The effect of changes in rate is measured by applying the change in rate between the two periods to the average volume during the first period. Changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
Year Ended September 30, --------------------------------------------------------- 1999 vs. 1998 1998 vs. 1997 ----------------------------- --------------------------- Increase (Decrease) Due To: Increase (Decrease) Due To: Volume Rate Total Volume Rate Total -------- --------- ------- -------- ---------- ------- (In thousands) INTEREST-EARNING ASSETS: Loans ............................ $ 441 $ (52) $ 389 $ 130 $ (57) $ 73 Securities ....................... 158 (60) 98 (26) 35 9 Other short-term investments ..... (3) (7) (10) (21) 0 (21) ----- ----- ----- ----- ----- ----- Total interest-earning assets .... 596 (119) 477 83 (22) 61 ===== ===== ===== ===== ===== ===== INTEREST-BEARING LIABILITIES: Savings and club accounts ........ 58 (8) 50 (5) (3) (8) Time certificates ................ 38 (71) (33) (9) 23 14 NOW and money market accounts .... 10 (3) 7 2 3 5 Borrowings ....................... 88 0 88 0 0 0 ----- ----- ----- ----- ----- ----- Total interest-bearing liabilities 194 (82) 112 (12) 23 11 ===== ===== ===== ===== ===== ===== Net change in net interest income $ 402 $ (37) $ 365 $ 95 $ (45) $ 50 ===== ===== ===== ===== ===== =====
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1999 AND 1998 Our total assets were $70.0 million at -------------------------- September 30, 1999, which was 18% higher than our TOTAL ASSETS UP 18% total assets of $59.3 million one year earlier. -------------------------- The increase in total assets was a result of our reorganization and our strategy to borrow money to improve leverage. These two events provided us with additional funds which we were then able to invest in additional assets. - ------------------------- The largest increase in one single asset category TOTAL LOANS UP 31% during the year was in net loans, which reached - ------------------------- $46.2 million at September 30, 1999, compared to $35.2 million one year earlier. This 31.1% increase was the result of adding new loan origination staff and opening a new loan production office in the nearby community of Alexandria Bay. That office was opened in July, 1999, and thus it contributed to our loan growth for only a part of the year. We hope that it will continue to contribute additional loan growth in the future. 8 We funded the increase in loans with the new capital and the funds we borrowed. Our increase in capital was $4.6 million during the year, and borrowed funds increased from zero to $7.4 million. Our total deposits declined by $1.3 million during the year, but this represents a decline of $1.4 million in the first half of the year, followed by a $160,000 increase during the last six months of the year. One of the important challenges we face is the need to increase deposits in future years to improve leverage without having to pay the higher costs that we must pay for borrowed funds. We experienced a slight decline during the year in the total of other interest-earning assets and other liquid assets, which includes cash and due from banks, interest-bearing deposits with other banks, securities available for sale and securities held to maturity. This decline, from $23.0 million to $22.5 million, or less than 3%, was the result of our efforts to generate new loans, which earn more interest for us than other asset categories. We need to maintain sufficient liquid assets to deal with contingencies that may occur and to address normal fluctuations in deposit levels. However, in general, we prefer to invest in higher yielding loans than in lower yielding securities if satisfactory loans are available at the time. Securities available for sale increased during the year by $2.4 million, while securities held to maturity decreased by $1.7 million. We classify all new securities purchases as available for sale, so the decline in securities held to maturity results from normal payments on those securities. The increase in securities available for sale resulted from the investment of available funds which could not be invested in loans that we found acceptable. Our new securities investments were principally mortgage-backed securities issued by the Federal National Mortgage Association (known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (known as Freddy Mac). We invested in these types of securities, rather than in government and corporate bonds, because they have higher yields. {Some of our new mortgage-backed securities also have adjustable rates, which help us manage the risk that market interest rates will change} We also increased our level of municipal securities to take advantage of tax benefits to reduce our income taxes. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998 - ------------------------ Net Income. Net income for the year ended NET INCOME UP 3.4% September 30, 1999 was $641,000, compared to net - ------------------------ income of $620,000 the previous year. The primary reason for the increase is our increase in size, and the related increase in the amount of funds we had available for investment. As we invested available funds in loans and securities, out interest income increased, while our interest expense did not increase as much. This is because some of the increase in assets was funded with capital that has no interest cost. The remainder of the increase was funded primarily with borrowings, which are our highest cost source of funds, but which have interest rates lower than the rates on the assets we purchase with the proceeds of the borrowings. The $365,000 increase in net interest income between the two years was partially offset by increases in operating expenses. These expense increases were principally the result of two factors. First, larger size requires more staff and more expense for everything from postage to mail loan payment coupons to computer data processing to handle a higher level of transactions. Second, we have had expenses of operating as a public company, from professional fees to some of the expenses of a special stockholders meeting which was held just after the end of the fiscal year. 9 - -------------------------- INTEREST INCOME. Interest income increased by INTEREST INCOME UP 11% $477,000 from $4.3 million in fiscal 1998 to $4.8 - -------------------------- million in fiscal 1999. A higher level of our interest-earning assets was the cause of the increase in interest income. During 1999, average interest-earning assets totaled $60.1 million, compared to $52.7 million during fiscal 1998. Most of this increase was in the average balance of loans as we sought to develop and capitalize on new lending opportunities. Average loans increased from $34.9 million to $39.6 million between the years, with the increase in loans being divided between residential mortgage loans, which has traditionally been our largest loan category, and other loans such as commercial mortgage loans and automobile loans which have represented a relatively small portion of our loan portfolio in past years. Overall, we estimate that the increase in the average balance of interest-earning assets resulted in an increase in interest income of approximately $596,000. The positive effect of our larger size on interest income was reduced by lower interest rates. The average yields on our two principal asset categories, loans and securities investments, both declined from fiscal 1998 to fiscal 1999. The average yield on our loans declined by 14 basis points, from 9.33% to 9.19%, while the average yield on our securities investments declined by 35 basis points from 6.15% to 5.80%. In both cases, the decline in average yields resulted from lower general market interest rate conditions. When loans and investments which had been originated or purchased a number of years ago were repaid, the proceeds were reinvested at lower current market rates. We worked to reduce the effect of these declines by diversifying our loan portfolio towards commercial mortgage loans and automobile loans which tend to have higher interest rates than residential mortgage loans. We also concentrated our new securities investments in mortgage-backed securities which tend to have higher yields than federal government and federal agency securities. Overall, we estimate that the decline in yields earned caused a $119,000 decline in interest income. INTEREST EXPENSE. Interest expense increased by $112,000 from $1.9 million in fiscal 1998 to $2.0 million in fiscal 1999. The increase was caused by factors similar to the factors which caused the increase in interest income. However, interest expense increased more slowly than interest income principally because our additional capital funded new investments without interest costs and because the cost of funds is lower than the average yield on assets. The average volume of interest-bearing liabilities increased from $43.2 million to $48.1 million when comparing fiscal 1998 and 1999. This increase, which included increases in the average balance of both deposits and borrowings, resulted from our efforts to provide funding for our increase in loans and securities investments. For the first time, we borrowed significant funds to support additional investments during 1999. Although the borrowings occurred towards the end of the year, and thus the average balance of borrowings was not that large for fiscal 1999 as a whole, we anticipate that in 2000 borrowed funds will be a more significant component of our funding sources. We estimate that the effect of the overall increase in the average volume of interest-bearing liabilities was an increase in interest expense of approximately $194,000. As in the case of interest-bearing assets, a decline in market interest rates resulted in a decline in our average cost of funds. The average cost of funds declined by 21 basis points, from 4.41% to 4.20%. The primary contributor to this decline was a decline of 31 basis points in the average cost of certificates of deposit, our largest deposit category and, with borrowed funds, our most expensive interest-bearing liability category. The average rate paid on certificates of deposit declined more rapidly than the rates paid on other 10 deposit categories because we tend to adjust our rates on new certificates of deposit regularly as market rates change, while we tend to adjust our other rates less frequently. Overall, we estimate that the decline in the cost of funds resulted in a decline of approximately $82,000 in interest expense, with the lower average rate on certificates of deposit causing $71,000 of that decline. - -------------------------------- NET INTEREST INCOME. The net effect of our NET INTEREST INCOME UP $365,000 increase in interest income and a lower - -------------------------------- increase in interest expense was a $365,000 increase in net interest income. We estimate that this increase was composed of approximately $402,000 representing an increase in net interest income caused by the effect of changes in the volume of average assets and liabilities, partially offset by approximately $37,000 representing a decline in net interest income caused by the effect of the decline in interest rates. This $37,000 decline in net interest income is also reflected in a one basis point decline in our spread, representing the difference between the average yield on our assets and the average rate paid on our liabilities. However, out net yield on average interest-earning assets, also known as net interest margin, increased 4 basis points from 4.61% to 4.65% because of the effect of the increase in capital as a no-cost funding source. 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 provision for loan losses which is an expense on our income statement. However, our assessment of the adequacy of the allowance is always speculative, based upon what we expect to occur in the future with our loan portfolio, especially default rates and the level of losses when our customers do not repay their loans. This requires estimates of many future events, such as future interest rates, the health of the local and national economy and the effects of government policies. If our predictions about the future are inaccurate, then increases in the allowance may be necessary in future periods even if the level of our loan portfolio remains the same. Furthermore, the Office of Thrift Supervision may disagree with our judgments regarding the potential risks in our loan portfolio and could require us to increase the allowance in the future. We increased our provision for loan losses from $130,000 in 1998 to $162,000 in 1999. During the year, we determined that an increase in our allowance was appropriate because of the general increase in the size of our portfolio as well as the shift in our portfolio towards more commercial mortgage loans and automobile loans which tend to present higher risks of default. Our allowance at the beginning of the year was $484,000 and we determined at the end of the year that the appropriate level for the allowance was $620,000. We had charge-offs during the year of $60,000 and recoveries of $34,000, so a $162,000 provision was necessary to reach the desired level for the allowance. NON-INTEREST INCOME. Our non-interest income increased from $144,000 in fiscal year 1998 to $151,000 in fiscal 1999. Non-interest income includes many different categories of income, varying from gains on sales of securities to income from deposit account fees and late charges on loans. Non-interest income fluctuated between the two years due to normal fluctuations in the different components of non-interest income. NON-INTEREST EXPENSES. Our non-interest expenses increased by $268,000 from $1.4 million in fiscal 1998 to $1.7 million in fiscal 1999. Non-interest expense includes most categories of expense other than interest we pay on deposits and borrowings and income tax expense. The largest category of 11 non-interest expenses is salaries and employee benefits expense, followed by building occupancy and equipment expense. The largest component of the increase in non-interest expenses was a $136,000 growth in salaries and employee benefits expense from $647,000 to $783,000. The additional salary and employee benefits expenses included the cost of new employees, including a new loan officer, who were hired to assist in the growth of our franchise; salary increases to existing employees to cover normal merit raises and the additional responsibilities resulting from our reorganization; and $19,000 for costs of our Employee Stock Ownership Plan. In order to support existing growth in our operations and also to position us for future growth, we had 21 full time equivalent employees at September 30, 1999 compared to 17 full time equivalent employees one year earlier. We believe that the increase in our loan portfolio is one of the benefits that flows from the increase in the level of employees, but there is always a lag between adding new employees and realizing the benefits of them being on staff. Our existing employee group should be able to support additional growth. We also believe that the reorganization itself caused a temporary disruption in employee productivity as we allocated employees to tasks necessary to complete the reorganization. Other categories of non-interest expenses, such as directors fees, professional fees, postage and supplies also increased in 1999 over 1998 levels due to the costs of operating a public company. In fiscal 1999 we held more board meetings to address issues related to the reorganization, we incurred professional fees related to our periodic disclosure requirements under the securities laws, and we commenced the proxy solicitation for our special meeting of stockholders which was held in October 1999. INCOME TAX EXPENSE. Our income tax expense increased from $380,000 in fiscal 1998 to $431,000 in fiscal 1999. The principal reason for the increase was an increase in income before taxes. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997. GENERAL. Our net income for the 1998 fiscal year was $620,000, an increase of $83,000, or 15.5%, over net income of $537,000 for fiscal 1997. We experienced normal fluctuations in income and expense categories, with an increase in the average balance of loans being offset by a decline in average yields earned on loans. INTEREST INCOME. Interest income increased by $61,000 from fiscal 1997 to fiscal 1998. This increase resulted principally from a $1.4 million, or 4.1%, increase in the average balance of loans. We estimate that this contributed approximately $130,000 to our interest income. However, we also had a $843,000 decline in the average balance of lower yielding securities and other short-term investments, so overall there was a $528,000 net increase in average interest-earning assets. The shift in favor of higher-yielding loans and away from lower yielding securities investments, as a result of our efforts to increase our loan portfolio, increased our average yield on interest-earning assets. This positive effect was reduced because the average yield on loans declined from 9.50% for fiscal 1997 to 9.33% for the fiscal 1998. We estimate that this reduced interest income by $57,000. The continuation of low market interest rates for residential one-to-four family mortgage loans caused the decline in loan yields as some customers refinanced their loans at lower rates and we originated new loans at lower rates. Increased competition for mortgage loans and tighter underwriting 12 standards we adopted also reduced the yields we could earn on new loans. We worked to reduce the decline in average yields by increasing our portfolio of auto loans and both mortgage and non-mortgage commercial loans. We also had a 21 basis point increase in the yield on our securities investments because during 1997 we shifted investments away from lower yielding U.S. Treasury securities in favor of higher yielding mortgage-backed securities and government agency securities. The positive effect of this strategy was limited because the yields on securities investments generally declined during fiscal 1998. The investment of stock subscription proceeds in short-term investments did not have a material effect on average balances because subscriptions were received primarily during the last ten days of the fiscal year. INTEREST EXPENSE. Interest expense increased by $11,000 from fiscal 1997 to fiscal 1998. The slight increase represented the net effect of a decline in the average balance of interest-bearing liabilities by $200,000, offset by an increase in our cost of funds of 4 basis points. We believe that competitive pressures caused the decline in the average balance because high stock market values caused more depositors to seek non-deposit investments.. Competitive pressures for deposits caused the increase in the average cost of funds. The increase was almost exclusively in certificates of deposit. The stock subscriptions we received during the last few weeks of the 1998 fiscal year represented only a small part of our interest-bearing liabilities for the year as a whole, and thus did not have a significant effect on interest expense for the year. NET INTEREST INCOME. The combined effect of the increase in interest income and the lesser increase in interest expense was a $50,000, or 2.1%, increase in net interest income. Our interest rate spread remained the same at 3.82% because the change in the mix of assets and the fluctuations in yields earned and rates paid offset each other. Our net interest margin increased by 5 basis points from 4.56% to 4.61% because we invested retained earnings without a corresponding interest cost. PROVISION FOR LOAN LOSSES. The provision for loan losses was $130,000 for fiscal 1998, compared to $250,000 for fiscal 1997. The reason for the decline in the provision for loan losses was a reduction in the level of net charge-offs from $326,000 in fiscal 1997 to $49,000 in fiscal 1998 as loan delinquencies improved. The decline in the provision was less than the decline in charge-offs net of recoveries, so the allowance for loan losses increased from $403,000 at September 30, 1997 to $484,000 at September 30, 1998. We believe this increase was appropriate because of our strategy to increase higher-risk auto loans and commercial non-mortgage loans. NON-INTEREST INCOME. Our non-interest income increased by $31,000 from $113,000 in fiscal 1997 to $144,000 in fiscal 1998, primarily because we had $23,000 of realized losses on the sale of securities during fiscal 1997 and no such losses during fiscal 1998. From time to time, we sell debt securities at a loss if we believe that we can recoup the loss by reinvesting the sale proceeds at higher yields. Other categories of non-interest income remained constant as we maintained consistent policies regarding service charges, safe deposit box rentals and other categories of non-interest income. Total service charges on deposit accounts, a significant component of non-interest income, depend on our service charge policy, the volume of deposit accounts and economic conditions which can affect sub-categories of service charges such as fees for bounced checks. These factors remained relatively constant throughout fiscal 1997 and 1998, resulting in a consistent level of service charge income. 13 NON-INTEREST EXPENSES. Non-interest expenses increased by $73,000, or 5.1%, from fiscal 1997 to fiscal 1998. Salaries and employee benefits expense increased by $38,000, or 6.2%, due to normal increases in officer and employee salaries and the addition of business development and loan officers to pursue business development, new loan opportunities and past due account collection. This increase was partially offset by a decline in deposit insurance premiums from $41,000 to $27,000 because of changes in the law at the end of fiscal 1996. Other variations in non-interest expense resulted from normal period to period fluctuations in activity. INCOME TAXES. Our income tax expense increased from $335,000 for fiscal 1997 to $380,000 for fiscal 1998. The increase corresponded to the increase in net income as our effective tax rate remained relatively constant. LIQUIDITY AND CAPITAL RESOURCES Our primary sources of funds are deposits, borrowings and proceeds from the principal and interest payments on loans and securities. Maturities and scheduled principal payments on loans and securities are predictable sources of funds. However, general economic conditions and interest rate conditions can cause increases or decreases in deposit outflows and loan prepayments which can also affect the level of funds we have available for investment. Our level of borrowings is generally at our own discretion, based upon our need for funds and the cost of deposits as an alternative source of funds. In general, we manage our liquidity by maintaining a sufficient level of short term investments so that funds are normally available for investment in loans when needed. During the year ended September 30, 1999, we reduced our cash and cash equivalents by $944,000. The primary reason for the reduction was that we invested available funds in loans and securities investments, so that our net increases in those investments exceeded the net cash we received from our stock offering minus a reduction in deposits. We originated $22.2 million of new loans during fiscal 1999. However, loans, net, after payments, charge-offs and transfers to real estate owned, increased by $11.1 million during the period. Deposits decreased by $1.3 million during the year. We believe the decrease was primarily caused by the use of deposits to purchase stock and by the cancellation of some stock subscriptions which had been carried as deposits on September 30, 1998. 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 monitor our liquidity regularly. Excess liquidity is invested in overnight federal funds sold and other short term investments. If we need additional funds, we can borrow those funds, although the cost of borrowing money is normally higher than the average cost of deposits. As a member of the Federal Home Loan Bank of New York, the Bank can arrange to borrow in excess of $10 million, but to do so it must provide appropriate collateral and satisfy other requirements for Federal Home Loan Bank borrowings. We have not needed to use borrowings to fund unanticipated deposit outflows. However, we have used borrowings in recent months to help us leverage the capital we received from our stock sale. 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 had $1.4 million of outstanding commitments to make loans at September 30, 1999, along with $766,000 of unused home equity, commercial and overdraft lines of credit. During the upcoming year, we anticipate that loan originations may exceed the amount of cash available from the net increase, if any, in deposits and the proceeds from the maturity, payment or disposition of securities. If that occurs, we may obtain additional funds to increase our loan portfolio through a variety of strategies, including reducing securities investments as a percentage of total assets, borrowing funds, or the use of wholesale or brokered deposits. At September 30, 1999, we had $17.3 million of certificates of deposit which are scheduled to mature in 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 new capital. 14 The OTS has minimum capital ratio requirements which ----------------------------------- apply to the Bank, but there are no THE BANK EXCEEDS ALL CAPITAL comparable minimum capital REQUIREMENTS AND IS CONSIDERED requirements that apply to us as a "WELL CAPITALIZED" savings and loan holding company. ----------------------------------- At September 30, 1999, the Bank substantially exceeded all regulatory capital requirements of the OTS applicable to it, and the OTS minimum capital requirements had no material adverse affect on the Bank. The Bank was classified as "well capitalized" at September 30, 1999 under OTS regulations. OTS regulations require that the Bank maintain liquid assets equal to 4% of withdrawable accounts. This ratio is measured on a monthly average basis. The Bank had a liquidity ratio of 41.3% for September 1999. YEAR 2000 COMPLIANCE As we write this annual report, we are rapidly approaching the beginning of the next millennium. By the time this annual report is circulated to our stockholders, we will have already passed that milestone. As we look towards the next calendar year and the problems that we have all heard warnings about, we believe that we have taken the steps necessary so that our computer systems, both hardware and software, and our other equipment that includes computer components, will operate properly despite the change to a new calendar year. By the time you read this, you will know whether we have succeeded. The ripple effects of Year 2000 failures throughout the world could possibly touch us in the future. For example, we have heard horror stories from consultants about oil shortages throughout the coming winter if computer systems in middle east oil producing countries break down. While we have limited ability to address these types of serious national or international problems, we have developed contingency plans to move to a manual system in the event of an emergency. We know from recent experience with a severe ice storm which shut down power that we can operate for at least five days using entirely manual systems. We have also participated in customer awareness programs to avoid large deposit withdrawals brought on by customer panic. Such panic is substantially out of our control. Non-compliance by a local utility, for example, may not only have an adverse direct effect on our ability to conduct business, but may also create local panic which could affect our liquidity. We anticipate that we will be able to satisfy customer demands for cash if necessary through the use of our liquid assets. However, we cannot predict whether an uneventful advent of the 15 Year 2000 will cause our depositors to redeposit their withdrawals at our Bank or will cause them to go on a spending spree with adverse consequences. 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 annual report 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 provide, such as analysis of the adequacy of our allowance for loan losses or an analysis of the 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 about 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 we anticipate when we make 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 the failure of our customers or major suppliers to have computers and other systems which are Year 2000 compliant; 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; 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. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK QUALITATIVE ANALYSIS. We try to avoid taking undue interest rate risk while satisfying customer demand for loans. Substantially all of our residential mortgage loans have fixed interest rates and terms of up to 25 years. Adjustable residential mortgage loans are not in demand during the current low interest 16 rate conditions and they represent only a very small part of our residential mortgage loan portfolio. Therefore, in a rising interest rate environment, we expect that the yields on our residential mortgage loan portfolio will increase relatively slowly, as loans are repaid and the payments are reinvested, while our cost of funds will rise more rapidly. In order to reduce this risk, we have adopted a multi-part strategy. First, we are working to originate higher levels of automobile loans, home equity lines of credit, and commercial loans which tend to have shorter terms or adjustable rates. Second, we have concentrated our securities investments in short-term or adjustable-rate securities. U.S. Treasury and federal agency securities are purchased with terms to maturity that generally do not exceed two years. We have concentrated our recent securities purchases in mortgage-backed securities with adjustable rates or relatively short terms with balloon payments. We also try to cushion our operations against interest rate fluctuations by preserving a loyal customer base through paying above market rates on savings and club account deposits during present periods of low interest rates. We believe this may cause our customers to be less likely to shift their funds to high rate deposit products as interest rates rise. Interest rate pricing and interest rate risk strategy objectives are implemented, in the first instance, by an internal committee which meets weekly to review and assess deposit and loan pricing. The OTS prepares a quarterly interest-rate sensitivity report for the Bank based upon its asset and liability profile which seeks to estimate the effect of interest rate changes on the net value of the Bank's assets and liabilities. This report is reviewed with the Board of the Bank quarterly QUANTITATIVE ANALYSIS. The OTS report seeks to estimate how changes in interest rates will affect the Bank's "net portfolio value." Net portfolio value, or "NPV," akin to net worth, represents the net present value of the Bank's cash flow from assets, liabilities and off balance sheet items. Each calendar quarter, the OTS calculates the Bank's estimated NPV and the estimated effect on NPV of instantaneous and permanent 1% to 3% (100 to 300 basis points) increases and decreases in market interest rates. The calculations are based upon the OTS's assumptions regarding loan prepayments rates, deposit turnover and other factors affecting the repricing of assets and liabilities. The OTS does not include in its analysis any assets held by Gouverneur Bancorp, Inc. which are not owned by the Bank. 17 The following table presents the Bank's estimated NPV at September 30, 1999, and the estimated effect on NPV of the specified interest rate changes, as calculated by the OTS. At September 30, 1999, the portfolio value of the Bank's assets as estimated by the OTS was $72.2 million.
Hypothetical Change in Estimated Estimated Change in Estimated Percentage Interest Rate Net Portfolio Value Net Portfolio Value Change in Npv(1) ------------- ------------------- ------------------- ---------------- (Dollars in thousands) +3.00% 13,022 -3,043 -19% +2.00% 14,189 -1,876 -12% +1.00% 15,251 -814 -5% 0.00% 16,065 -- -- -1.00% 16,565 +500 +3% -2.00% 17,322 +1,257 +8% -3.00% 18,212 +2,147 +13%
(1) Calculated as the amount of estimated change in NPV divided by the estimated current NPV. The above table indicates that in a rising interest rate environment, the Bank's net portfolio value should decline, while net portfolio value should increase in a declining interest rate environment. These changes in net portfolio value should be accompanied by a decline in net income during periods of rising interest rates and an increase in net income during periods of declining interest rates. However, these expected changes in net income may not occur for many reasons including, among others, the possibility that we may decide not to reduce the rates we offer on our deposits when interest rates decline in order to retain and increase our deposit base. There are shortcomings in the methodology used by the OTS to calculate changes in NPV. In order to estimate changes in NPV, the OTS makes assumptions about repayment and turnover rates which may not turn out to be correct. The NPV table assumes that the composition of the Bank's interest sensitive assets and liabilities existing at the beginning of a period remain constant over the period being measured. So, for example, the NPV analysis assumes that the ratio of adjustable versus fixed-rate loans or short-term loans versus long-term loans remains the same and that interest rates will change equally for both long term and short term assets. Therefore, although the OTS NPV analysis provides the Board of the Bank with an indication of the Bank's interest rate risk exposure, it does not provide a precise forecast of the effect of changes in market interest rates on net interest income. 18 INDEPENDENT AUDITORS' REPORT The Board of Directors Gouverneur Bancorp, Inc.: We have audited the accompanying consolidated statements of financial condition of Gouverneur Bancorp, Inc. and subsidiary as of September 30, 1999 and 1998, and the related consolidated statements of income, shareholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended September 30, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gouverneur Bancorp, Inc. and subsidiary as of September 30, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 1999, in conformity with generally accepted accounting principles. /s/ KPMG LLP November 12, 1999 Syracuse, New York
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Financial Condition September 30, 1999 and 1998 (In thousands, except share data) ASSETS 1999 1998 -------- -------- Cash and due from banks $ 1,564 1,179 Interest-bearing deposits with other banks 1,926 3,255 Securities available-for-sale, at fair value 12,971 10,546 Securities held-to-maturity (fair value of $5,957 at September 30, 1999 and $7,787 at September 30, 1998) 6,019 7,717 Loans, net of deferred fees 46,791 35,691 Less allowance for loan losses (620) (484) -------- -------- Net loans 46,171 35,207 Premises and equipment, net 278 288 Federal Home Loan Bank stock, at cost 385 379 Accrued interest receivable 469 346 Real estate owned 169 51 Other assets 44 369 -------- -------- Total assets $ 69,996 59,337 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits: Demand accounts 184 210 Savings and club accounts 15,423 17,302 Time certificates 23,057 23,578 NOW and money market accounts 6,449 5,292 -------- -------- Total deposits 45,113 46,382 Advance payments by borrowers for property taxes and insurance 151 105 Other liabilities 1,303 1,382 Securities sold under agreements to repurchase 5,900 -- Other borrowings 1,500 -- -------- -------- Total liabilities 53,967 47,869 -------- -------- Commitments and contingencies (note 11) Shareholders' Equity: Preferred stock, $.01 par value per share; authorized 1,000,000 shares, issued: none Common stock, $.01 par value per share; authorized 9,000,000 shares, issued 2,384,040 shares at September 30, 1999 24 -- Additional paid-in capital 4,553 -- Retained earnings 11,470 10,929 Accumulated other comprehensive income 390 539 Unallocated shares of Employee Stock Ownership Plan 81,534 shares at September 30, 1999 (408) -- -------- -------- Total shareholders' equity 16,029 11,468 -------- -------- Total liabilities and shareholders' equity $ 69,996 59,337 ======== ========
See accompanying notes to consolidated financial statements. 2
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Income Years ended September 30, 1999, 1998 and 1997 (In thousands) 1999 1998 1997 ----------- ----------- ----------- Interest income: Loans $ 3,645 3,256 3,183 Securities 1,096 998 989 Other short-term investments 72 82 103 ----------- ----------- ----------- Total interest income 4,813 4,336 4,275 ----------- ----------- ----------- Interest expense: Deposits 1,931 1,907 1,896 Borrowings 88 -- -- ----------- ----------- ----------- Total interest expense 2,019 1,907 1,896 ----------- ----------- ----------- Net interest income 2,794 2,429 2,379 Provision for loan losses 162 130 250 ----------- ----------- ----------- Net interest income after provision for loan losses 2,632 2,299 2,129 ----------- ----------- ----------- Non-interest income: Service charges 67 52 52 Net loss on sale of securities available for sale (18) -- (23) Other 102 92 84 ----------- ----------- ----------- Total non-interest income 151 144 113 ----------- ----------- ----------- Non-interest expenses: Salaries and employee benefits 783 647 609 Directors fees 78 59 60 Building, occupancy and equipment 203 173 163 Data processing 95 84 78 Postage and supplies 94 77 64 Professional fees 67 43 48 Real estate owned 32 101 113 Other 359 259 235 ----------- ----------- ----------- Total non-interest expenses 1,711 1,443 1,370 ----------- ----------- ----------- Income before income tax expense 1,072 1,000 872 Income tax expense 431 380 335 ----------- ----------- ----------- Net income $ 641 620 537 =========== =========== =========== Basic earnings per share (1) $ 0.15 N/A N/A Weighted average shares outstanding 2,300,271 N/A N/A
(1) Basic earnings per share represents the net income of the Company for the period from March 23, 1999 (date of reorganization) to September 30, 1999 (see note (2) (l)). See accompanying notes to consolidated financial statements. 3
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Shareholders' Equity and Comprehensive Income Years ended September 30, 1999, 1998 and 1997 (In thousands, except share data) ACCUMULATED ADDITIONAL OTHER COMMON PAID-IN RETAINED COMPREHENSIVE UNALLOCATED STOCK CAPITAL EARNINGS INCOME ESOP TOTAL ------- ---------- ------- ------------- ----------- ----- Balance at September 30, 1996 $ -- -- 9,772 221 -- 9,993 Comprehensive income: Change in net unrealized gain (loss) on securities available for sale, net of tax -- -- -- 159 -- 159 Net income -- -- 537 -- -- 537 ------- ------- ------- ------- ------- ------- Total comprehensive income 696 ------- ------- ------- ------- ------- ------- Balance at September 30, 1997 -- -- 10,309 380 -- 10,689 Comprehensive income: Change in net unrealized gain (loss) on securities available for sale, net of tax -- -- -- 159 -- 159 Net income -- -- 620 -- -- 620 ------- ------- ------- ------- ------- ------- Total comprehensive income 779 ------- ------- ------- ------- ------- ------- Balance at September 30, 1998 -- -- 10,929 539 -- 11,468 Net proceeds from issuance of 1,072,818 shares of common stock 11 4,568 -- -- -- 4,579 Common stock acquired by ESOP (85,825 shares) -- -- -- -- (429) (429) ESOP shares released or committed to be released for allocation (4,291 shares) -- (2) -- -- 21 19 Initial capital contribution and issuance of shares to Cambray MHC (1,311,222 shares) 13 (13) (100) -- -- (100) Comprehensive income: Change in net unrealized gain (loss) on securities available for sale, net of tax -- -- -- (149) -- (149) Net income -- -- 641 -- -- 641 ------- ------- ------- ------- ------- ------- Total comprehensive income 492 ------- ------- ------- ------- ------- ------- Balance at September 30, 1999 $ 24 4,553 11,470 390 (408) 16,029 ======= ======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements. 4
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows Years ended September 30, 1999, 1998 and 1997 (In thousands) 1999 1998 1997 -------- -------- -------- Cash flows from operating activities: Net income $ 641 620 537 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 66 59 58 Provision for loan losses 162 130 250 Deferred income taxes (22) (61) 134 Net losses on sales of securities 18 -- 23 Net (gains) losses on sale of real estate owned (12) 46 41 Net (accretion) amortization of premiums/discounts (13) 4 3 (Increase) decrease in accrued interest receivable (123) (51) 18 Increase (decrease) in other liabilities 52 476 (104) Decrease (increase) in other assets 325 (191) (110) -------- -------- -------- Net cash provided by operating activities 1,094 1,032 850 Cash flows from investing activities: Decrease in time deposits with other banks -- -- 500 Net increase in loans (11,277) (601) (2,350) Proceeds from sales of securities available-for-sale 504 -- 3,431 Proceeds from maturities and principle reductions of securities available-for-sale 8,662 -- 2,500 Purchases of securities available-for-sale (11,928) (2,378) (2,767) Purchases of securities held-to-maturity (711) (2,318) (4,738) Proceeds from maturities and principle reductions of securities held-to-maturity 2,502 3,256 1,486 Proceeds from sale of real estate owned 45 174 160 Additions to premises and equipment (56) (79) (32) Purchase of FHLB stock (6) (4) (37) -------- -------- -------- Net cash used by investing activities (12,265) (1,950) (1,847) -------- -------- -------- Cash flows from financing activities: Net (decrease) increase in deposits (1,269) 2,806 73 Net increase (decrease) in advance payments by borrowers for property taxes and insurance 46 60 (29) Net proceeds from short-term borrowing 7,400 -- -- Net proceeds from issuance of common stock 4,579 -- -- Purchase of shares of common stock by ESOP (429) -- -- Initial capital contribution to Cambray MHC (100) -- -- -------- -------- -------- Net cash provided by financing activities 10,227 2,866 44 -------- -------- -------- Net (decrease) increase in cash and cash equivalents (944) 1,948 (953) Cash and cash equivalents at beginning of period 4,434 2,486 3,439 -------- -------- -------- Cash and cash equivalents at end of period $ 3,490 4,434 2,486 ======== ======== ======== Supplemental disclosure of cash flow information: Non-cash investing activities: Additions to real estate owned $ 151 114 208 Cash paid during the year for: Interest 2,011 1,907 1,896 Income taxes 617 25 384 ======== ======== ========
See accompanying notes to consolidated financial statements. 5 GOUVERNEUR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 1999 and 1998 (1) BUSINESS Gouverneur Bancorp, Inc. (the "Company") operates as a savings and loan holding company. Its only subsidiary is Gouverneur Savings and Loan Association (the "Bank"). The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank. All material intercompany accounts and transactions have been eliminated in the consolidation. The Bank is organized under the laws of New York. The Bank is subject to regulation by the Office of Thrift Supervision (OTS) as a savings and loan association. The Bank's lending activity is concentrated in St. Lawrence County and surrounding areas. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) BASIS OF PRESENTATION The consolidated financial statements have been prepared in conformity with generally accepted accounting principles, and to general practice within the savings bank industry. The Company utilizes the accrual method of accounting for financial reporting purposes. (b) USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with generally accepted accounting principles 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could 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 valuation of other real estate owned acquired in connection with foreclosures. In connection with the determination of the allowance for loan losses and the valuation of other real estate owned, management obtains appraisals for properties. 6 (Continued) GOUVERNEUR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 1999 and 1998 Management believes that the allowance for loan losses is adequate and that other real estate owned is recorded at its fair value less an estimate of the costs to sell the properties. While management uses available information to recognize losses on loans and other real estate owned, future additions to the allowance or write downs of other real estate owned may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses and other real estate owned. Such agencies may require the Company to recognize additions to the allowance or write downs of other real estate owned based on their judgments about information available to them at the time of their examination which may not be currently available to management. A substantial portion of the Company's loans are secured by real estate located throughout St. Lawrence County. Accordingly, the ultimate collectibility of a substantial portion of the Company's loan portfolio and the recovery of a substantial portion of the carrying amount of other real estate owned is dependent upon market conditions in these market areas. (c) CASH AND CASH EQUIVALENTS Cash and cash equivalents include vault cash and amounts due from banks representing short-term highly liquid investments. (d) SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY The Company classifies its debt securities as either available-for-sale or held-to-maturity at the time of purchase. The Company does not hold any securities considered to be trading. Held-to-maturity securities are those debt securities the Company has the ability and intent to hold until maturity. All other debt securities are classified as available-for-sale. Equity securities are classified as available for sale. Available-for-sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and reported as a separate component of accumulated other comprehensive income in shareholders' equity. Held-to-maturity securities are recorded at amortized cost. A decline in the fair value of an available-for-sale or held-to-maturity security that is considered to be other than temporary is charged to earnings. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the interest method. Dividend and interest income are recognized when earned. Realized gains and losses on securities are based on the net proceeds and the amortized cost of the securities sold, using the specific identification method. 7 (Continued) GOUVERNEUR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 1999 and 1998 (e) LOANS Loans are reported at the principal amount outstanding, net of deferred fees. Loan fees and certain direct origination costs are netted and are amortized using the interest method over the contractual lives of the loans. Interest on loans is accrued and included in income at contractual rates applied to the principal outstanding. The accrual of interest on loans (including impaired loans) is generally discontinued and previously accrued interest is reversed when loan payments are 90 days or more past due or when, by the judgment of management, collectibility becomes uncertain. Subsequent recognition of income occurs only to the extent that payment is received. Loans are returned to an accrual status when both principal and interest are current or when in the opinion of management, the loans are expected to be fully collectible as to principal and interest. (f) ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is established through a provision charged to operations. The allowance is an amount that management believes will be adequate to absorb losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. Management's evaluation of the adequacy of the allowance for loan losses is performed on a periodic basis and takes into consideration such factors as the historical loan loss experience, changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and current economic conditions that may affect borrowers' ability to pay. Loan losses and recoveries of loans previously written-off are charged or credited to the allowance as incurred or realized, respectively. The Company estimates losses on impaired loans based on the present value of expected future cash flows (discounted at the loan's effective interest rate) or the fair value of the underlying collateral if the loan is collateral dependent. An impairment loss exists if the recorded investment in a loan exceeds the value of the loan as measured by the aforementioned methods. A loan is considered impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Generally, all commercial mortgage loans and commercial loans in a delinquent payment status (90 days or more delinquent) are considered impaired. Residential mortgage loans, consumer loans, home equity lines of credit and education loans are evaluated collectively since they are homogenous and generally carry smaller individual balances. Impairment losses are included as a component of the allowance for loan losses. The Company recognizes interest income on impaired loans using the cash basis of income recognition. Cash receipts on impaired loans are generally applied according to the terms of the loan agreement, or as a reduction of principal, based upon management judgment and the related factors discussed above. 8 (Continued) GOUVERNEUR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 1999 and 1998 (g) REAL ESTATE OWNED Real estate acquired in settlement of loans is carried at the lower of the unpaid loan balance or fair value less estimated costs to sell. Write-downs from the unpaid loan balance to fair value at the time of foreclosure are charged to the allowance for loan losses. Subsequent write-downs to fair value, net of disposal costs, are charged to other expenses. (h) PREMISES AND EQUIPMENT Land is carried at cost and buildings and improvements and furniture and equipment are carried at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the assets (3-39 years for building and improvements; 3-7 years for furniture and equipment). (i) EMPLOYEE BENEFIT PLANS The Company has a defined contribution 401(k) Retirement Plan (the Plan) for all eligible salaried employees. Employees are permitted to contribute up to 15% of base pay to the Retirement Plan, subject to certain limitations. The Company contributes 3% of each eligible employee's salary. Additional Company contributions to the Plan are determined annually by the Board of Directors. The Company sponsors a non-contributory Employee Stock Ownership Plan (ESOP) covering substantially all employees. Employer contributions are discretionary and there is no guarantee that a contribution will be made during any particular year. However, the Company will make annual contributions sufficient to cover principal and interest due under the contractual terms of the ESOP loan agreement. Contributions will be in the form of cash or Gouverneur Bancorp, Inc. securities. The number of shares allocable to Plan participants is based on employee compensation levels. The Company accounts for ESOP shares purchased in accordance with Statement of Position No. 93-6, EMPLOYERS' ACCOUNTING FOR EMPLOYEE STOCK OWNERSHIP PLANS. Accordingly, as shares are committed to be released to participants, the Company reports compensation expense equal to the current market price of the shares and the shares become outstanding for earnings per share computations. Additional Bank contributions to the Plan are determined annually by the Board of Directors. (j) INCOME TAXES Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. 9 (Continued) GOUVERNEUR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 1999 and 1998 (k) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company does not engage in the use of derivative financial instruments. The Company's off-balance sheet financial instruments are limited to commitments to extend credit. (l) EARNINGS PER 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. Prior to the mutual holding company reorganization of the Bank, which occurred on March 23, 1999, earnings per share are not applicable as neither the Company nor the Bank had shares outstanding. Earnings per share reflects earnings from March 23, 1999, to the end of the reporting period based upon the weighted average number of shares outstanding for the period. Unallocated shares held by the Company's ESOP are not included in the weighted average number of shares outstanding. (m) COMPREHENSIVE INCOME On October 1, 1998, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 130, REPORTING COMPREHENSIVE INCOME. This statement establishes standards for reporting and display of comprehensive income and its components. At the Company, comprehensive income represents net income plus other comprehensive income, which consists of the net change in unrealized gains or losses on securities available for sale for the period. Accumulated other comprehensive income represents the net unrealized gains or losses on securities available for sale as of the balance sheet dates, net of the related tax effect. Prior year consolidated financial statements have been reclassified to conform to the requirements of SFAS No. 130. (n) SEGMENT REPORTING Effective October 1, 1998, the Company adopted the provisions of SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 requires publicly-held companies to report financial and other information about key revenue-producing segments of the entity for which such information is available and is utilized by the chief operation decision maker. Specific information to be reported for individual segments includes profit or loss, certain revenue and expense items and total assets. A reconciliation of segment financial information to amounts reported in the financial statements is also provided. The Company has determined that it has no reportable segments and therefore, the adoption of SFAS No. 131 caused no significant change in the Company's reporting. 10 (Continued) GOUVERNEUR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 1999 and 1998 (o) DERIVATIVES In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. During the second quarter of 1999, the FASB issued SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133. SFAS No. 137 defers the effective date of SFAS No. 133 by one year from fiscal years beginning after June 15, 1999 to fiscal years beginning after June 15, 2000. (p) RECLASSIFICATIONS Whenever necessary prior year amounts have been reclassified to conform to the current year's classifications. (3) SECURITIES Securities are summarized as follows (in thousands): SEPTEMBER 30, 1999 ----------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- ------- Available-for-sale: U.S. Government securities $ 4,457 -- (100) 4,357 Mortgage-backed securities: FHLMC 1,318 -- (15) 1,303 FNMA 4,039 -- (42) 3,997 Municipal securities 2,412 -- (53) 2,359 Corporate equity securities 18 869 -- 887 Mutual funds 68 -- -- 68 ------- ------- ------- ------- $12,312 869 (210) 12,971 ======= ======= ======= ======= Held-to-maturity: Mortgage-backed securities: FHLMC 3,473 1 (53) 3,421 FNMA 1,243 2 (5) 1,240 GNMA 1,293 -- (7) 1,286 Other securities 10 -- -- 10 ------- ------- ------- ------- $ 6,019 3 (65) 5,957 ======= ======= ======= ======= 11 (Continued) GOUVERNEUR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 1999 and 1998 SEPTEMBER 30, 1998 ----------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- ------- Available-for-sale: U.S. Government securities $ 5,499 28 -- 5,527 Mortgage-backed securities: FHLMC 256 2 -- 258 Municipal securities 256 3 -- 259 Corporate equity securities 17 871 -- 888 Mutual funds 3,619 -- (5) 3,614 ------- ------- ------- ------- $ 9,647 904 (5) 10,546 ======= ======= ======= ======= Held-to-maturity: Mortgage-backed securities: FHLMC 4,030 42 (2) 4,070 FNMA 1,925 9 (1) 1,933 GNMA 1,752 12 -- 1,764 Other securities 10 10 -- 20 ------- ------- ------- ------- $ 7,717 73 (3) 7,787 ======= ======= ======= ======= The following table presents the carrying value and fair value of debt securities based on the earlier of call or maturity date at September 30, 1999 (in thousands): AMORTIZED FAIR COST VALUE --------- --------- Available-for-sale: Due within one year $ 387 386 Due after one year through five years 3,057 3,006 Due after five years through ten years 3,128 3,024 Due after ten years 5,654 5,600 --------- --------- $ 12,226 12,016 ========= ========= Held-to-maturity: Due within one year 355 356 Due after one year through five years 3,087 3,076 Due after five years through ten years 1,335 1,290 Due after ten years 1,242 1,235 --------- --------- $ 6,019 5,957 ========= ========= The amortized cost and fair value of mortgage-backed securities are presented by contractual maturity in the preceding table. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations without prepayment penalties. 12 (Continued) GOUVERNEUR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 1999 and 1998 Gross gains of approximately $9,000 were realized on sales of available for sale securities in 1999, $0 in 1998, and $20,000 in 1997, and gross losses of approximately $27,000, $0 and $43,000 were realized on sales of available for sale securities in 1999, 1998 and 1997, respectively. (4) LOANS RECEIVABLE Loans are summarized as follows (in thousands): 1999 1998 ---------- --------- First mortgage loans: One to four family residential $ 33,320 28,834 Commercial 3,222 1,578 Construction 296 124 36,838 30,536 ---------- --------- Other loans: Commercial and agricultural 1,233 477 Automobile 5,306 2,166 Home equity 771 835 Passbook 411 323 Other 2,045 1,384 ---------- --------- 9,766 5,185 ---------- --------- Total loans 46,604 35,721 Less: Net deferred (costs) fees (187) 30 ---------- --------- $ 46,791 35,691 ========== ========= Changes in the allowance for loan losses are summarized as follows (in thousands): 1999 1998 1997 -------- --------- -------- Balance at beginning of period $ 484 403 479 Provision charged to operations 162 130 250 Recoveries 34 85 40 Loans charged off (60) (134) (366) -------- --------- -------- Balance at end of period $ 620 484 403 ======== ========= ======== 13 (Continued) GOUVERNEUR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 1999 and 1998 Management believes it has no impaired loans at September 30, 1999 and 1998. The principal balances of loans not accruing interest amounted to approximately $221,000 and $259,000 at September 30, 1999 and 1998, respectively. The interest income foregone for non-accruing loans was approximately $11,000, $11,000, and $24,000 during the years ended September 30, 1999, 1998 and 1997, respectively. In the ordinary course of business, the Company has and expects to continue to have transactions, including borrowings, with its officers and directors. In the opinion of management, such transactions were on substantially the same terms, including interest rates and collateral, as those prevailing at the time of comparable transactions with other persons and did not involve more than a normal risk of collectibility or present any other unfavorable features to the Company. Loans to such borrowers at September 30, 1999 and 1998 were $442,000 and $290,000, respectively. (5) PREMISES AND EQUIPMENT Premises and equipment are summarized as follows (in thousands): 1999 1998 --------- --------- Land $ 30 30 Buildings and improvements 478 472 Furniture and equipment 455 405 --------- --------- 963 907 Less accumulated depreciation and amortization 685 619 --------- --------- $ 278 288 ========= ========= Depreciation and amortization expense amounted to $66,000, $59,000 and $58,000 during the years ended September 30, 1999, 1998 and 1997, respectively. 14 (Continued) GOUVERNEUR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 1999 and 1998 (6) ACCRUED INTEREST RECEIVABLE Accrued interest receivable is summarized as follows (in thousands): 1999 1998 ---------- ----------- Loans $ 276 196 Securities 193 150 ---------- ----------- $ 469 346 ========== =========== (7) DEPOSITS At September 30, 1999 and 1998, the aggregate amounts of time certificates in denominations of $100,000 or more were approximately $3,275,000 and $2,790,000, respectively. Deposit balances in excess of $100,000 are not insured by the FDIC. Contractual maturities of time certificates are summarized as follows (in thousands): SEPTEMBER 30, ------------------------ 1999 1998 ---------- ----------- Within one year $ 17,265 17,207 One through two years 4,903 4,752 Two through three years 675 1,473 Three through four years 214 146 ---------- ----------- Total time certificates $ 23,057 23,578 ========== =========== Interest expense on deposits is summarized as follows (in thousands): 1999 1998 1997 -------- --------- -------- Savings and club accounts $ 569 519 527 Time certificates 1,246 1,279 1,265 NOW accounts and money market accounts 116 109 104 -------- --------- -------- $ 1,931 1,907 1,896 ======== ========= ======== 15 (Continued) GOUVERNEUR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 1999 and 1998 (8) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWINGS The Company is a member of the Federal Home Loan Bank (FHLB). As a member, the Company is required to own capital stock in the FHLB and is authorized to apply for advances from the FHLB. The Company has also entered into repurchase agreements with the FHLB. At September 30, 1999 and 1998, securities sold under agreements to repurchase and advances from the FHLB were as follows (in thousands):
ADVANCE AMOUNT ---------------------- MATURITY DATE INTEREST RATE FIXED OR VARIABLE 1999 1998 ------------- ------------- ----------------- ----------- --------- Securities sold under agreements to repurchase: ----------------------------------------------- 10/21/99 5.34% Fixed - secured $ 1,000 -- 10/25/99 5.32% Fixed - secured 4,900 -- FHLB advances: -------------- 10/25/99 5.36% Fixed - unsecured 1,500 -- ----------- --------- $ 7,400 -- =========== =========
The collateral underlying securities sold under agreements to repurchase had a carrying value and fair value of $6,335,000 and $6,325,000, respectively, at September 30, 1999. At September 30, 1999 the Company may borrow up to an additional $16.0 million from the FHLB. Under terms of a blanket collateral agreement with FHLB, outstanding advances are collateralized by certain qualifying assets not otherwise pledged (primarily first mortgage loans). The carrying value of assets pledged as collateral for FHLB advances at September 30, 1999 was $1,500,000. (9) INCOME TAXES The components of income tax expense attributable to income from operations are (in thousands): 1999 1998 1997 ----- ----- ----- Current: Federal $ 352 356 168 State 101 85 33 ----- ----- ----- 453 441 201 ----- ----- ----- Deferred: Federal (18) (53) 106 State (4) (8) 28 ----- ----- ----- (22) (61) 134 ----- ----- ----- $ 431 380 335 ===== ===== ===== 16 (Continued) GOUVERNEUR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 1999 and 1998 Actual tax expense attributable to income before income taxes differed from "expected" tax expense, computed by applying the U.S. Federal statutory tax rate of 34% to income before income tax as follows (in thousands): 1999 1998 1997 ----------- --------- ---------- Computed "expected" tax expense $ 364 340 296 Increase (decrease) in income taxes resulting from: State taxes, net of Federal tax benefits 64 51 40 Other items, net 3 (11) (1) ----------- --------- ---------- $ 431 380 335 =========== ========= ========== Effective tax rate 40.20% 38.00% 38.42% The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are (in thousands): 1999 1998 -------- --------- Deferred tax assets: Allowance for loan losses $ 248 194 Net deferred loan fees -- 12 Deferred directors fees 22 7 Accrued expenses 50 68 Other 27 9 -------- --------- Total gross deferred tax assets 347 290 -------- --------- Deferred tax liabilities: Accumulated depreciation on premises and equipment 13 18 Accrued interest receivable 101 138 Net deferred loan costs 67 -- Unrealized gains on available-for-sale securities 269 360 Prepaid expenses 16 7 -------- --------- Total gross deferred tax liabilities 466 523 -------- --------- Net deferred tax assets (liabilities) $ (119) (233) ======== ========= 17 (Continued) GOUVERNEUR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 1999 and 1998 Realization of deferred tax assets is dependent upon the generation of future taxable income or the existence of sufficient taxable income within the carryback period. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, management considers the scheduled reversal of the deferred tax liabilities, the level of historical taxable income and projected future taxable income over the periods in which the temporary differences comprising the deferred tax assets will be deductible. Management believes that no valuation allowance is necessary. Included in retained earnings at September 30, 1999 is approximately $1,274,000 representing aggregate provisions for loan losses taken under the Internal Revenue Code. Use of these reserves to pay dividends in excess of earnings and profits or to redeem stock, or if the institution fails to qualify as a bank for Federal income tax purposes, would result in taxable income to the Bank. (10) EMPLOYEE BENEFIT PLANS The Bank adopted a 401(k) Retirement Plan (the Plan) effective July 1, 1997. The Plan covers all employees who are at least 21 years of age with one or more years of service. The Bank's basic monthly contribution to the plan is 3% of employees salary. Additional Bank contributions to the plan are determined annually by the Board of Directors. Participants may make voluntary contributions to the Plan up to 15% of their compensation. Effective August 1, 1997, the Board of Directors of the Bank voted to convert the existing profit sharing plan into the new 401(k) plan. The profit sharing plan covered substantially all of the Bank's employees and contributions were made at the Bank's discretion. In connection with establishing the Employee Stock Ownership Plan (ESOP) in 1999, the ESOP borrowed $429,000 from the Company to purchase 85,825 common shares of the Company's stock. The loan shall be repaid in essentially ten equal annual installments through 2009. The loan bears interest at a fixed rate per annum equal to the lowest prime rate quoted in the WALL STREET JOURNAL on the effective date of the Reorganization which was 7.75%. Interest payable is computed on the basis of a year of 365 days and actual days elapsed occurring in the period to which the computation relates. At September 30, 1999, 4,291 shares were released or committed to be released and 81,534 shares remained as unallocated shares. The fair value of the unallocated shares on September 30, 1999 was $397,000. Costs charged to expense for the Company's various retirement plans in 1999, 1998 and 1997 are $59,000, $40,000 and $41,000, respectively. 18 (Continued) GOUVERNEUR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 1999 and 1998 (11) COMMITMENTS AND CONTINGENCIES The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist of commitments to extend credit and involve, to varying degrees, elements of credit, market and interest rate risk in excess of the amounts recognized in the consolidated balance sheet. Credit risk represents the accounting loss that would be recognized at the reporting date if obligated counterparties failed completely to perform as contracted. Market risk represents risk that future changes in market prices make financial instruments less valuable. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's evaluation of the customer's financial position. Collateral held varies, but may include real estate, accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. Substantially all commitments to extent credit, if exercised, will represent loans secured by real estate. 19 (Continued) GOUVERNEUR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 1999 and 1998 Commitments to originate fixed and adjustable rate loans at September 30, 1999 are as follows (in thousands): Fixed rate 7.00 - 7.99% $ 196 8.00 - 8.99% 1,022 9.00 - 9.99% 15 10.00 - 10.99% 137 11.00 - 11.99% -- -------- Total fixed rate 1,370 Adjustable rate 25 -------- Total commitments to originate loans $ 1,395 ======== Unused lines of credit, which includes home equity, consumer and commercial, amounted to $766,000 at September 30, 1999. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments is represented by the contractual or notional amount of these instruments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments. The Company controls its credit risk through credit approvals, limits, and monitoring procedures. In the normal course of business, there are various outstanding legal proceedings. In the opinion of management, the aggregate amount involved in such proceedings is not material to the financial condition or results of operations of the Company. (12) CONCENTRATIONS OF CREDIT A substantial portion of the Company's loans are mortgages in Northern New York State. Accordingly, the ultimate collectibility of a substantial portion of the Company's loan portfolio is susceptible to changes in market conditions in this area. A majority of the Company's loan portfolio is secured by real estate. The Company's concentrations of credit risk are disclosed in the schedule of loan classifications. Other than general economic risks, management is not aware of any material concentrations of credit risk to any industry or individual borrower. 20 (Continued) GOUVERNEUR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 1999 and 1998 (13) REGULATORY MATTERS The Company and the Bank are subject to various regulatory capital requirements administered by Federal banking agencies. Failure to meet the minimum regulatory capital requirements can initiate certain mandatory, and possible additional discretionary actions by regulators, that if undertaken, could have a direct material affect on the Company and the consolidated financial statements. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines involving quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of: total risk-based capital and Tier I capital to risk-weighted assets (as defined in the regulations), Tier I capital to adjusted tangible assets (as defined), and tangible capital to tangible assets (as defined). As discussed in greater detail below, as of September 30, 1999, the Company and the Bank met all of the capital adequacy requirements to which it is subject. As of September 30, 1999, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank has to maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as disclosed in the table below. There are no conditions or events since the most recent notification that management believes have changed the Bank's prompt corrective action category. 21 (Continued) GOUVERNEUR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 1999 and 1998 The following is a summary of the Company's and the Bank's actual capital amounts and ratios compared to minimum capital adequacy requirements and the requirements for classification as a well capitalized institution under prompt corrective action provisions (in thousands):
TO BE CLASSIFIED AS WELL-CAPITALIZED UNDER MINIMUM CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY REQUIREMENTS ACTION PROVISIONS -------------- --------------------- ---------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- September 30, 1999 - ------------------ Total capital (to risk weighted assets): Company $16,469 46.95% $2,806 =>8.0% $3,508 =>10.0% Bank 14,638 41.73 2,806 =>8.0 3,508 =>10.0 Tier 1 Capital (to risk weighted assets): Company 15,639 44.58 1,403 =>4.0 2,105 =>6.0 Bank 13,808 39.36 1,403 =>4.0 2,105 =>6.0 Core Capital (to adjusted tangible assets): Company 15,639 22.56 2,080 =>3.0 3,467 =>5.0 Bank 13,808 19.79 2,093 =>3.0 3,488 =>5.0 Tangible Capital (to tangible assets): Company 15,639 22.56 1,040 =>1.5 -- NA Bank 13,808 19.79 1,046 =>1.5 -- NA September 30, 1998 - ------------------ Total capital (to risk weighted assets) Bank $11,250 44.1% $2,040 =>8.0% $2,550 =>10.0% Tier 1 Capital (to risk weighted assets) Bank 10,929 42.9 1,020 =>4.0 1,530 =>6.0 Core Capital (to adjusted tangible assets) Bank 10,929 18.7 1,753 =>3.0 2,921 =>5.0 Tangible Capital (to tangible assets) Bank 10,929 18.7 876 =>1.5 -- NA 22 (Continued)
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 1999 and 1998 (14) FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating fair values of financial instruments: CASH AND CASH EQUIVALENTS: The fair values are considered to approximate the carrying values, as reported in the balance sheet. SECURITIES: Fair values of securities are based on exchange quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of similar instruments. LOANS: For variable rate loans that reprice frequently and loans due on demand with no significant change in credit risk, fair values are considered to approximate carrying values. The fair values for certain mortgage loans (e.g., one-to-four family residential) and other consumer loans are based on quoted market prices of similar loans sold on the secondary market, adjusted for differences in loan characteristics. The fair values for other loans (e.g., commercial real estate and rental property mortgage loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit rating. The carrying amount of accrued interest approximates its fair value. FHLB STOCK: The carrying value of this instrument, which is redeemable at par, approximates fair value. OFF-BALANCE-SHEET INSTRUMENTS: Fair values for the Company's off-balance-sheet instruments (lines of credit and commitments to fund loans) are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The fair value of these financial instruments is immaterial and has therefore been excluded from the table below. DEPOSITS: The fair values of demand, savings, club, NOW and money market accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate time certificates are estimated using a discounted cash flow calculation that applies interest rates currently being offered on these products to a schedule of aggregated expected monthly maturities on time deposits. 23 (Continued) GOUVERNEUR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 1999 and 1998 The estimated carrying values and fair values of the Company's financial instruments are as follows (in thousands): SEPTEMBER 30, ----------------------------------------- 1999 1998 ----------------- ------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- ----- -------- ----- Financial assets: Cash, cash equivalents $ 3,490 3,490 4,434 4,434 Securities 18,990 18,928 18,263 18,333 Loans, net 46,171 46,348 35,207 35,782 FHLB stock 385 385 379 379 Financial liabilities: Deposits: Demand accounts 184 184 210 210 Savings and club accounts 15,423 15,423 17,302 17,302 Time certificates 23,057 23,090 23,578 23,600 NOW and money market accounts 6,449 6,449 5,292 5,292 Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. (15) COMPREHENSIVE INCOME A summary of unrealized gains (losses) and reclassification adjustments, net of tax, of available-for-sale securities for the years ended September 30, 1999, 1998 and 1997 follows:
1999 1998 1997 ---------- ---------- --------- Unrealized holding gains (losses) arising during the period net of tax (pre-tax amount of ($267,000), $265,000 and $242,000) $ (160) 159 145 Reclassification adjustment for losses (gains) realized in net income during the period, net of tax (pre-tax amount of $18,000, $0 and $23,000) 11 -- 14 ---------- ---------- --------- Other comprehensive (loss) income, net of tax of ($91,000), $105,000 and $109,000 $ (149) 159 159 ========== ========= ========= 24 (Continued)
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 1999 and 1998 (16) CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS Condensed financial statements for Gouverneur Bancorp, Inc. as of and for the year ended September 30, 1999 are presented below.
CONDENSED STATEMENT OF FINANCIAL CONDITION (in thousands) Assets Cash $ 1,812 Investment in bank subsidiary 14,231 ----------- Total assets $ 16,043 =========== Liabilities 14 Shareholders' equity Common stock 24 Additional paid-in capital 4,553 Retained earnings 11,470 Accumulated other comprehensive income 390 Unallocated shares of ESOP (408) ----------- Total shareholders' equity 16,029 Total liabilities and shareholders' equity $ 16,043 =========== CONDENSED STATEMENT OF INCOME (in thousands) Interest income $ 36 Other operating income 6 ----------- Income before undistributed income of subsidiary 42 Applicable income taxes 14 Equity in undistributed income of bank 613 ----------- Net income $ 641 =========== 25 (Continued)
GOUVERNEUR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 1999 and 1998 CONDENSED STATEMENT OF CASH FLOWS (in thousands) Cash flows from operating activities: Net income 641 Adjustments to reconcile net income to cash provided by operating activities: Equity in undistributed income of bank (613) Increase in liabilities 14 ------- Net cash provided by operating activities 42 Cash flows from investing activities: Purchase of Gouverneur Savings and Loan Association common stock (2,380) Funding of ESOP loan receivable (429) ------- Net cash used in investing activities (2,809) Cash flows from financing activities: Proceeds from issuance of common stock 4,579 ------- Net cash provided by financing activities 4,579 ------- Net increase in cash and cash equivalents 1,812 Cash and cash equivalents at beginning of period -- ------- Cash and cash equivalents at end of period $ 1,812 ======= 26 SHAREHOLDER INFORMATION CORPORATE OFFICES Gouverneur Bancorp, Inc. 42 Church Street Gouverneur, New York 13642 (315) 287-2600 ANNUAL MEETING OF SHAREHOLDERS The annual meeting of Gouverneur Bancorp, Inc. will be held February 15, 2000 at the Clearview Restaurant, 1180A U.S. Highway 11, Gouverneur, New York ANNUAL REPORT ON FORM 10-K For the 1999 fiscal year, Gouverneur Bancorp., Inc. will file an Annual Report on Form 10-K with the Securities and Exchange Commission. The Form 10-K is available on the World Wide Web as part of the SEC EDGAR database at www.sec.gov. Shareholders may obtain one free of charge by writing to Gouverneur Bancorp, Inc., 42 Church Street, Gouverneur, New York 13642, Attention Corporate Secretary. STOCK TRANSFER AGENT & REGISTRAR Shareholders wishing to change name, address or ownership of stock, or to report lost certificates or to consolidate accounts should contact the Company's stock registrar and transfer agent directly at: Registrar & Transfer Company 10 Commerce Drive Cranford, New Jersey 07016-3572 (800) 368-5948 COUNSEL Serchuk & Zelermyer, LLP 81 Main Street White Plains, New York 10601 INDEPENDENT AUDITORS KPMG LLP 113 South Salina Street Syracuse, New York 13202 MARKET INFORMATION FOR COMMON STOCK The Common Stock of Gouverneur Bancorp, Inc. trades on the American Stock Exchange under the symbol "GOV". At December 15, 1999, there were approximately350 shareholders of record not including the number of persons or entities holding stock in nominee or street names through various brokers and banks. Gouverneur Bancorp, Inc. common stock was issued at $5.00 per share in connection with the Company's initial public offering completed on March 23, 1999. The following table shows the range of high and low sale prices for each full quarterly period since the Company's common stock began trading on March 24,1999. Quarter Ended High Low - ------------- ---- --- June 30, 1999 $5.000 $4.063 September 30, 1999 $4.875 $4.438 DIRECTORS AND OFFICERS GOUVERNEUR BANCORP, INC. BOARD OF DIRECTORS Richard F. Bennett: PRESIDENT & CHIEF EXECUTIVE OFFICER, GOUVERNEUR BANCORP,INC. Charles E Graves: RETIRED PRESIDENT & CHIEF EXECUTIVE OFFICER, GOUVERNEUR SAVINGS & LOAN ASSOCIATION Richard E. Jones: PRINCIPAL, J&H FEED & FARM STORE Frank Langevin: RETIRED CONTRACTOR Robert J. Leader: PRINCIPAL, CASE & LEADER LLP ATTORNEYS AT LAW Timothy J. Monroe: VETERINARIAN, PRESIDENT, NORTHLAND VETERINARY HOSPITAL Joseph C. Pistolesi: OWNER, CLEARVIEW MOTEL AND RESTAURANT Larry A. Straw: PROJECT ENGINEER, CIVES, INC., STEEL FABRICATOR DIRECTORS OF GOUVERNEUR BANCORP, INC. ALSO SERVE AS DIRECTORS OF GOUVERNEUR SAVINGS & LOAN ASSOCIATION OFFICERS Richard F. Bennett: PRESIDENT & CHIEF EXECUTIVE OFFICER Robert Twyman: CHIEF FINANCIAL OFFICER 27 EX-21 3 SUBSIDIARIES OF REGISTRANT Exhibit 21 SUBSIDIARIES OF THE REGISTRANT The only subsidiary of the Registrant is Gouverneur Savings and Loan Association. EX-27 4 FINANCIAL DATA SCHEDULE
9 The Schedule contains summary financial information extracted from the financial statements for the twelve months ending September 30, 1999 and is qualified in its entirety by reference to such financial statements. 1,000 YEAR SEP-30-1999 OCT-01-1998 SEP-30-1999 1,564 1,926 0 0 12,971 6,019 5,957 46,791 620 69,996 45,113 7,400 1,454 0 0 0 24 16,005 69,996 3,645 1,096 72 4,813 1,931 2,019 2,794 162 (18) 1,711 1,072 1,072 0 0 641 0.15 0.15 4.65 221 0 0 0 484 60 34 620 620 0 0
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