SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2002
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transaction period from ___________________ to ______________________
Commission File Number: 0-25165
GREENE COUNTY BANCORP, INC.
( Name of Small Business Issuer in its Charter)
United States 14-1809721
------------------- ------------------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
302 Main Street, Catskill, New York 12414
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(Address of Principal Executive Office) (Zip Code)
(518) 943-2600
---------------------
(Issuer's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
(Title of Class)
Check whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
twelve 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 / NO
---------------
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, 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-KSB
or any amendments to this Form 10-KSB. [X]
The Registrant's revenues for the fiscal year ended June 30, 2002 were
$14,389,771.
As of September 16, 2002, there were issued and outstanding 2,024,835
shares of the Registrant's common stock of which 872,519 were shares of voting
stock held by non-affiliates of the Registrant. Computed by reference to the
closing price of Common Stock of $17.60 on such date, the aggregate value of
stock held by non-affiliates was $15,356,334.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Shareholders for the fiscal year ended
June 30, 2002 (Part II).
2. Proxy Statement for the 2002 Annual Meeting of Shareholders (Part III)
PART I
ITEM 1. Business
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Greene County Bancorp, Inc. (the "Company") was organized in December of
1998 at the direction of the Board of Trustees of The Bank of Greene County
(formerly Greene County Savings Bank) (the "Bank") for the purpose of acting as
the holding company of the Bank. In 2001, the Company converted its charter from
a Delaware corporation regulated by the New York Superintendent of Banks and the
Board of Governors of the Federal Reserve System to a federal corporation
regulated by the Office of Thrift Supervision ("OTS"). At June 30, 2002, the
Company's assets consisted primarily of the outstanding capital stock of the
Bank and cash and investments of $4.5 million. At June 30, 2002, 872,519 shares
of the Company's common stock, par value $0.10 per share, were held by the
public, 128,000 shares were held as Treasury stock and 1,152,316 shares were
held by Greene County Bancorp, MHC, the Company's mutual holding company (the
"Mutual Company"). The Company's principal business is overseeing and directing
the business of the Bank and various Company investment securities.
At June 30, 2002, the Company had consolidated total assets of $220.2
million, consolidated total deposits of $183.7 million, consolidated borrowings
from Federal Home Loan Bank of $9.0 million and consolidated total equity of
$26.4 million.
The Company's administrative office is located at 302 Main Street,
Catskill, New York 12414-1317. Its telephone number is (518) 943-2600.
TTHE BANK OF GREENE COUNTY
The Bank was organized in 1889 as The Building and Loan Association of
Catskill, a New York-chartered savings and loan association. In 1974, the Bank
converted to a New York mutual savings bank under the name Greene County Savings
Bank. In conjunction with the reorganization and the offering completed in
December 1998, which resulted in the organization of the Company, (the "December
1998 Reorganization"), the Bank changed its name to The Bank of Greene County.
The Bank's deposits are insured by the Bank Insurance Fund, as administered by
the Federal Deposit Insurance Corporation ("FDIC"), up to the maximum amount
permitted by law. The Bank's principal business consists of attracting retail
deposits from the general public in the areas surrounding its branches and
investing those deposits, together with funds generated from operations and
borrowings, primarily in one- to four-family residential mortgage loans,
commercial real estate loans, consumer loans, home equity loans and commercial
business loans. In addition, the Bank invests a significant portion of its
assets in investment securities and mortgage- and asset-backed securities. The
Bank's revenues are derived principally from the interest on its mortgage,
consumer and commercial loans and securities, and servicing fees and service
charges and other fees collected on its deposit accounts. The Bank's primary
sources of funds are deposits, and principal and interest payments on loans and
investment securities and mortgage- and asset-backed securities. At June 30,
2002, the Bank had borrowed $9.0 million from the Federal Home Loan Bank.
The Bank's administrative office is located at 302 Main Street, Catskill,
New York 12414-1317. Its telephone number is (518) 943-2600.
GREENE COUNTY BANCORP, MHC
The Mutual Company was formed in December 1998 as part of the Bank's mutual
holding company reorganization. In 2001, the Mutual Company converted from a
state to a federal charter. The OTS under the new charter currently regulates
the Mutual Company. The Mutual Company owns 53.5% of the common stock of the
Company. The Mutual Company does not engage in any business activity other than
to hold the Company's common stock and to invest any liquid assets of the Mutual
Company, which amounted to $166,000 in cash and cash equivalents at June 30,
2002.
The Mutual Company's administrative office is located at 302 Main Street,
Catskill, New York 12414-1317, and its telephone number at that address is (518)
943-2600.
MARKET AREA
The Bank has been, and intends to continue to be, a community-oriented bank
offering a variety of financial services to meet the needs of the communities it
serves. The Bank currently operates six full-service banking offices in Greene
County and southern Albany County, New York. The Bank's primary deposit
gathering area is currently concentrated around the areas within Greene County
and southern Albany County where its full-service banking offices are located,
namely the towns of Catskill, Cairo, Coxsackie, Greenville, Tannersville and
Westerlo.
As of the 2000 census estimates, the County population was 48,300 persons,
indicating an overall increase in the population level of 8.0% since the last
census conducted in 1990. Greene County is primarily rural and the major
industry consists of tourism associated with the several ski facilities and
festivals located in the Catskill Mountains. The County has no concentrations of
manufacturing industry. Greene County is contiguous to the
Albany-Schenectady-Troy metropolitan statistical area. The close proximity of
Greene County to the city of Albany has made it a "bedroom" community for
persons working in the Albany capital area. Greene County and the Coxsackie
Correctional Facilities are the largest employers in the County. Other large
employers include the Hunter Mountain and Ski Windham resort areas, the
Catskill, Cairo-Durham, Greenville and Coxsackie-Athens Central School Districts
and Stiefel Labs, Inc.
COMPETITION
The Bank faces significant competition both in making loans and in
attracting deposits. The Bank's market area has a high density of financial
institutions, many of which are branches of significantly larger institutions
that have greater financial resources than the Bank, and all of which are
competitors of the Bank to varying degrees. The Bank's competition for loans
comes principally from commercial banks, savings banks, savings and loan
associations, mortgage-banking companies, credit unions, insurance companies and
other financial service companies. Its most direct competition for deposits has
historically come from commercial banks, savings banks, savings and loan
associations and credit unions. The Bank faces additional competition for
deposits from non-depository competitors such as the mutual fund industry,
securities and brokerage firms and insurance companies. Competition may also
increase as a result of the lifting of restrictions on the interstate operations
of financial institutions.
Competition is likely to increase as a result of the enactment of the
Gramm-Leach-Bliley Act of 1999, which eases restrictions on entry into the
financial services market by insurance companies and securities firms. Moreover,
to the extent that these changes permit banks, securities firms and insurance
companies to affiliate, the financial services industry could experience further
consolidation. This could result in a growing number of larger financial
institutions competing in the Bank's primary market area that offer a wider
variety of financial services than the Bank currently offers. Competition for
deposits, for the origination of loans and the provision of other financial
services may limit the Bank's growth and adversely impact its profitability in
the future.
LENDING ACTIVITIES
General
The principal lending activity of the Bank is the origination, for
retention in its portfolio, of fixed-rate and adjustable-rate mortgage loans
collateralized by one- to four-family residential real estate located within its
primary market area. To a lesser extent, the Bank also originates commercial
real estate loans, home equity loans, consumer loans and commercial business
loans. The Bank also offers a variety of line of credit products.
In an effort to manage the interest rate risk associated with its
predominantly fixed-rate loan portfolio, the Bank maintains high levels of
liquidity, and, where possible, corresponds the funding of fixed-rate
residential mortgages with FHLB advances. The Bank also seeks to attract
checking and other transaction accounts that generally have lower interest rate
costs and tend to be less interest rate sensitive when interest rates rise.
Loan Portfolio Composition
Set forth below is selected information concerning the composition of the
Bank's loan portfolio in dollar amounts and in percentages (before deductions
for deferred fees and costs, unearned discounts and allowances for losses) as of
the dates indicated.
At June 30,
2002 2001 2000
Amount Percent Amount Percent Amount Percent
--------- --------- --------- -------- -------- --------
(Dollars in thousands)
Real estate loans:
One- to four-family $98,834 76.19% $86,336 77.84% $80,696 81.54%
Commercial 8,764 6.76 5,239 4.72 4,702 4.75
Construction and land 3,003 2.31 1,979 1.78 616 0.62
Multi-family 1,657 1.28 1,213 1.09 1,253 1.27
--------- --------- --------- ------- -------- ---------
Total real estate loans 112,258 86.54 94,767 85.43 87,267 88.18
Consumer loans
Installment (1) 5,611 4.32 6,128 5.53 4,865 4.92
Home equity 6,957 5.36 6,138 5.53 4,631 4.68
Passbook 545 0.42 596 0.54 490 0.50
--------- --------- --------- ------- -------- ---------
Total consumer loans 13,113 10.10 12,862 11.60 9,986 10.10
Commercial business loans 4,356 3.36 3,291 2.97 1,707 1.72
--------- --------- --------- ------- -------- ---------
Total consumer loans and
commercial business loans 17,469 13.46 16,153 14.57 11,693 11.82
--------- --------- --------- ------- -------- ---------
Total gross loans 129,727 100.0% 110,920 100.0% 98,960 100.0%
--------- --------- ---------
Less:
Deferred fees and discounts (285) (277) (275)
Allowance for loan losses (1,069) (886) (866)
--------- --------- --------
Total loans receivable, net $128,373 $109,757 $97,819
========= ========= ========
(1) Includes direct automobile loans (on both new and used automobiles) and
personal loans.
At June 30,
2002 2001 2000
Amount Percent Amount Percent Amount Percent
------- --------- -------- -------- -------- ---------
(Dollars in thousands)
Fixed-rate loans:
Real estate loans:
One- to four-family $91,586 70.60% $77,852 70.19% $69,360 70.08%
Commercial 6,587 5.08 3,589 3.23 2,840 2.87
Construction and land 2,554 1.97 1,979 1.78 616 0.62
Multi-family 1,442 1.11 1,175 1.06 1,124 1.14
------- --------- -------- -------- -------- ---------
Total fixed-rate real estate loans 102,169 78.76 84,595 76.26 73,940 74.71
Consumer loans
Installment (1) 5,611 4.32 6,128 5.53 4,865 4.92
Home equity 6,957 5.36 6,138 5.53 4,631 4.68
Passbook 545 0.42 596 0.54 490 0.50
Commercial business loans 4,356 3.36 3,291 2.97 1,707 1.72
------- --------- ----- -------- -------- ---------
Total fixed-rate loans 119,638 92.22 100,748 90.83 85,633 86.53
------- --------- -------- -------- -------- ---------
Adjustable-rate loans Real estate loans:
One- to four-family 7,248 5.59 8,484 7.65 11,336 11.46
Commercial real estate 2,177 1.68 1,650 1.49 1,862 1.88
Construction and land 449 0.34 --- --- --- ---
Multi-family 215 0.17 38 0.03 129 0.13
-------- -------- -------- -------- -------- --------
Total adjustable-rate loans 10,089 7.78 10,172 9.17 13,327 13.47
Total gross loans 129,727 100.0% 110,920 100.0% 98,960 100.0%
------- --------- -------- -------- ------- ---------
Less:
Deferred fees and discounts (285) (277) (275)
Allowance for loan losses (1,069) (886) (866)
------- -------- --------
Total loans receivable, net $128,373 $109,757 $97,819
======== ======== ========
(1) Includes direct automobile loans (on both new and used automobiles) and
personal loans.
One- to Four-Family Residential Loans.
The Bank's primary lending activity is the origination, for retention in
the Bank's portfolio, of one- to four-family residential mortgage loans
collateralized by property located in the Bank's primary lending area.
Generally, one- to four-family residential mortgage loans are made in amounts up
to 89.9% of the appraised value of the property. However, the Bank will
originate one- to four-family residential mortgage loans with loan-to-value
ratios of up to 95%, with private mortgage insurance. Generally, residential
mortgage loans are originated for terms of up to 30 years, though in recent
years the Bank has been successful in marketing and originating such loans with
15-year terms. One- to four-family fixed-rate loans are offered with both a
monthly and bi-weekly payment feature. The Bank generally requires fire and
casualty insurance, the establishment of a mortgage escrow account for the
payment of real estate taxes, hazard and flood insurance, as well as title
insurance on all properties collateralizing real estate loans made by the Bank.
The Bank currently offers one- to four-family residential mortgage loans
with fixed and adjustable interest rates. Originations of fixed-rate loans
versus adjustable-rate loans are monitored on an ongoing basis and are affected
significantly by the level of market interest rates, customer preference, the
Bank's interest rate gap position, and loan products offered by the Bank's
competitors. Particularly, in a relatively low interest rate environment,
borrowers may prefer fixed-rate loans to adjustable-rate loans. Single-family
residential real estate loans often remain outstanding for significantly shorter
periods than their contractual terms because borrowers may refinance or prepay
loans at their option. The average length of time that the Bank's single-family
residential mortgage loans remain outstanding varies significantly depending
upon trends in market interest rates and other factors.
The Bank's adjustable-rate mortgage ("ARM") loans currently provide for
maximum rate adjustments of 150 basis points per year and 600 basis points over
the term of the loan. The Bank offers ARM loans with initial interest rates that
are below market, referred to as "teaser rates." However, in underwriting such
loans, borrowers are qualified at the full index rate. Generally, the Bank's ARM
loans adjust every year. After origination, the interest rate on such ARM loans
is reset based upon a contractual spread or margin above the average yield on
one-year United States Treasury securities, adjusted to a constant maturity (the
"U.S. Treasury Constant Maturity Index"), as published weekly by the Federal
Reserve Board.
ARM loans decrease the risk associated with changes in market interest
rates by periodically re-pricing, but involve other risks because as interest
rates increase, the underlying payments by the borrower increase, thus
increasing the potential for default by the borrower. At the same time, the
marketability of the underlying collateral may be adversely affected by higher
interest rates. Upward adjustment of the contractual interest rate is also
limited by the maximum periodic and lifetime interest rate adjustment permitted
by the terms of the ARM loans, and, therefore, is potentially limited in
effectiveness during periods of rapidly rising interest rates. At June 30, 2002,
5.59% of the Bank's loan portfolio consisted of one- to four-family residential
loans with adjustable interest rates.
The Bank originates construction to permanent loans to homeowners for the
purpose of construction of primary and secondary residences. The Bank issues a
commitment and has one closing which encompasses both the construction phase and
permanent financing. The construction phase is a maximum term of six months and
the interest charged is the rate as stated in the commitment, with loan-to-value
ratios of up to 89.9% (or up to 95% with private mortgage insurance), of the
completed project. The Bank began offering loans collateralized by undeveloped
land during fiscal year 2001. The acreage associated with such loans is limited.
These land loans generally are intended for future sites of primary or secondary
residences.
Construction lending generally involves a greater degree of risk than other
one- to four-family mortgage lending. The repayment of the construction loan is,
to a great degree, dependent upon the successful and timely completion of the
construction of the subject property. Construction delays may further impair the
borrower's ability to repay the loan.
The Bank's residential mortgage loan originations are generally obtained
from the Bank's loan representatives operating in its branch offices through
their contacts with existing or past loan customers, depositors of the Bank,
attorneys and accountants who refer loan applications from the general public,
and local realtors. The Bank has hired a loan originator who calls upon
customers during non-banking hours and at locations convenient to the customer.
All one- to four-family residential mortgage loans originated by the Bank
include "due-on-sale" clauses, which give the Bank the right to declare a loan
immediately due and payable in the event that, among other things, the borrower
sells or otherwise disposes of the real property subject to the mortgage and the
loan is not repaid.
At June 30, 2002, $98.8 million, or 76.19% of the Bank's loan portfolio,
consisted of one- to four-family residential mortgage loans. Approximately
$314,000 of such loans (representing seven loans) were included in nonperforming
loans as of that date.
Commercial Real Estate and Multifamily Loans.
At June 30, 2002, $ 8.8 million, or 6.76%, of the total loan portfolio
consisted of commercial real estate loans. Office buildings, mixed-use
properties and other commercial properties collateralize commercial real estate
loans. The Bank originates fixed- and adjustable-rate commercial mortgage loans
with maximum terms of up to 20 years. The maximum loan-to-value ratio of
commercial real estate loans is generally 75%. At June 30, 2002, the largest
commercial mortgage loan had a principal balance of $861,900 and was a
construction loan for a firehouse. The were no commercial real estate loans
included in nonperforming loans.
In underwriting commercial real estate loans, the Bank reviews the expected
net operating income generated by the real estate to ensure that it is generally
at least 110% of the amount of the monthly debt service; the age and condition
of the collateral; the financial resources and income level of the borrower; and
the borrower's business experience. The Bank's policy is to require personal
guarantees from all commercial real estate borrowers.
Loans collateralized by commercial real estate generally are larger than
one- to four-family residential loans and involve a greater degree of risk.
Commercial mortgage loans often involve large loan balances to single borrowers
or groups of related borrowers. Payments on these loans depend to a large degree
on the results of operations and management of the properties or underlying
businesses, and may be affected to a greater extent by adverse conditions in the
real estate market or the economy in general. Accordingly, the nature of
commercial real estate loans makes them more difficult for Bank management to
monitor and evaluate.
The Bank originates a limited number of multi-family loans, which totaled
$1.7 million, or 1.28% of the Bank's total loans at June 30, 2002. Multi-family
loans are generally collateralized by apartment buildings located in the Bank's
primary market area. The were no multi-family loans included in nonperforming
loans. The Bank's underwriting practices and the risks associated with
multi-family loans do not differ substantially from that of commercial real
estate loans.
Consumer Loans.
The Bank's consumer loans consist of direct loan installment on new and
used automobiles, personal loans (either secured or unsecured), home equity
loans, and other consumer loans (consisting of passbook loans, unsecured home
improvement loans and recreational vehicle loans). At June 30, 2002 consumer
loans totaled $13.1 million, or 10.10% of the total loan portfolio. Consumer
loans (other than home equity loans) are originated at fixed rates with terms to
maturity of one to five years.
Consumer loans generally have shorter terms and higher interest rates than
one- to four-family mortgage loans. In addition, consumer loans expand the
products and services offered by the Bank to better meet the financial services
needs of its customers. Consumer loans generally involve greater credit risk
than residential mortgage loans because of the difference in the underlying
collateral. Repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the outstanding loan balance because of the
greater likelihood of damage, loss or depreciation in the underlying collateral.
The remaining deficiency often does not warrant further substantial collection
efforts against the borrower beyond obtaining a deficiency judgment. In
addition, consumer loan collections depend on the borrower's personal financial
stability. Furthermore, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
that can be recovered on such loans.
The Bank's underwriting procedures for consumer loans includes an
assessment of the applicant's credit history and an assessment of the
applicant's ability to meet existing and proposed debt obligations. Although the
applicant's creditworthiness is the primary consideration, the underwriting
process also includes a comparison of the value of the collateral to the
proposed loan amount. The Bank underwrites its consumer loans internally, which
the Bank believes limits its exposure to credit risks associated with loans
underwritten or purchased from brokers and other external sources. At this time,
the Bank does not purchase loans from any external sources.
The Bank offers fixed and adjustable-rate home equity loans that are
collateralized by the borrower's residence. Home equity loans are generally
underwritten with terms not to exceed 15 years and under the same criteria that
the Bank uses to underwrite one- to four-family fixed rate loans. Home equity
loans may be underwritten with terms not to exceed 15 years and with a loan to
value ratio of 80% when combined with the principal balance of the existing
mortgage loan. The maximum amount of a home equity loan may not exceed $50,000
unless approved by the Board of Directors. The Bank appraises the property
collateralizing the loan at the time of the loan application (but not
thereafter) in order to determine the value of the property collateralizing the
home equity loans. At June 30, 2002, the outstanding balance of home equity
loans totaled $7.0 million, or 5.36% of the Bank's total loan portfolio. The
were no home equity loans included in nonperforming loans.
Commercial Business Loans.
The Bank also originates commercial business loans up to 10 years at fixed
and adjustable-rates. The Bank attributes growth in this portfolio to its
ability to offer borrowers senior management attention as well as timely and
local decision-making on commercial loan applications. The decision to grant a
commercial business loan depends primarily on the creditworthiness and cash flow
of the borrower (and any guarantors) and secondarily on the value of and ability
to liquidate the collateral which may consist of receivables, inventory and
equipment. The Bank generally requires annual financial statements, tax returns
and personal guarantees from the commercial business borrowers. The Bank also
generally requires an appraisal of any real estate that collateralizes the loan.
At June 30, 2002, the Bank had $4.4 million of commercial business loans
representing 3.36% of the total loan portfolio. On such date, the average
balance of the Bank's commercial business loans was approximately $36,300. The
largest commercial business loan had a balance of $560,000 and represented a
fire truck loan for a local fire district. At June 30, 2002, the Bank's
commercial loan portfolio included 121 loans collateralized by real estate, fire
trucks, or other equipment. The were no commercial business loans included in
nonperforming loans.
Commercial business lending generally involves greater risk than
residential mortgage lending and involves risks that are different from those
associated with residential and commercial real estate lending. Real estate
lending is generally considered to be collateral based, with loan amounts based
on predetermined loan-to-collateral values, and liquidation of the underlying
real estate collateral is viewed as the primary source of repayment in the event
of borrower default. Although commercial business loans may be collateralized by
equipment or other business assets, the liquidation of collateral in the event
of a borrower default is often an insufficient source of repayment because
equipment and other business assets may be obsolete or of limited use, among
other things. Accordingly, the repayment of a commercial business loan depends
primarily on the creditworthiness of the borrower (and any guarantors), while
liquidation of collateral is a secondary and often insufficient source of
repayment.
Loan Maturity Schedule.
The following table sets forth certain information as of June 30, 2002
regarding the amount of loans maturing or re-pricing in the Bank's portfolio.
Adjustable-rate loans are included in the period in which interest rates are
next scheduled to adjust rather than the period in which they contractually
mature, and fixed-rate loans are included in the period in which the final
contractual repayment is due. Lines of credit with no specified maturity date
are included in the category "within one year".
The following table illustrates the future maturities of such loans at June
30, 2002.
1 Year 3 Years 5 Years
Within Through Through Through Beyond
1 Year 3 Years 5 Years 10 Years 10 Years Total
-------- --------- --------- ----------- ---------- ------------
(Dollars in thousands)
Real estate loans:
One- to four-family $6,844 $1,504 $2,911 $10,258 $77,317 $98,834
Commercial 1,693 332 149 1,137 5,453 8,764
Construction and land --- --- --- 80 2,923 3,003
Multi-family 236 33 59 --- 1,329 1,657
-------- --------- ---------- ----------- ---------- ------------
Total real estate loans 8,773 1,869 3,119 11,475 87,022 112,258
Consumer loans 1,229 2,797 3,319 2,439 3,329 13,113
Commercial business loans 804 550 1,321 623 1,058 4,356
-------- --------- ---------- ----------- ---------- ------------
Total loan portfolio $10,806 $5,216 $7,759 $14,537 $91,409 $129,727
======== ========= ========== =========== ========== ============
The total amount of the above loans due after June 30, 2003 which have
predetermined interest rates is $117.1 million while the total amount of loans
due after such date which have adjustable interest rates is $1.8 million.
The following table sets forth the loan origination and repayment
activities of the Bank for the periods indicated. The Bank did not purchase or
sell any loans during the periods presented.
For the Years Ended June 30,
2002 2001 2000
---------- ---------- ---------
(Dollars in thousands)
Originations by type:
Adjustable rate loans
One- to four-family $466 $409 $541
Commercial real estate 1,398 252 51
Construction and land 449 --- ---
Multi-family 185 10 17
---------- ---------- ---------
Total adjustable rate loans 2,498 671 609
Fixed rate loans
One- to four-family 27,589 17,123 15,910
Commercial real estate 5,496 1,485 1,682
Construction and land 3,871 4,405 4,512
Multi-family 701 145 483
Installment 4,354 5,630 4,317
Home equity 3,800 3,311 1,610
Passbook 415 431 450
Commercial business 4,099 3,286 2,235
--------- ---------- ---------
Total fixed rate loans 50,325 35,816 31,199
Total loans originated 52,823 $36,487 $31,808
--------- ---------- ---------
Repayments:
One- to four-family 15,557 11,892 9,900
Commercial real estate 3,369 1,200 1,016
Construction and land 3,296 3,042 5,550
Multi-family 442 195 88
Installment 4,871 4,367 4,213
Home equity 2,981 1,804 1,668
Passbook 466 325 485
Commercial business 3,034 1,702 1,758
--------- ---------- ---------
Total repayments 34,016 24,527 24,678
--------- ---------- ---------
Net increase in loans $18,807 $11,960 $7,130
========= ========== =========
Loan Approval Procedures and Authority.
The Board of Directors establishes the lending policies and loan approval
limits of the Bank. Loan officers generally have the authority to originate
mortgage loans, consumer loans and commercial business loans up to amounts
established for each lending officer. The Executive Committee or the full Board
of Directors must approve all residential loans over $200,000.
The Board annually approves independent appraisers used by the Bank. For
larger loans, the Bank may require an environmental site assessment to be
performed by an independent professional for all non-residential mortgage loans.
It is the Bank's policy to require hazard insurance on all mortgage loans.
Loan Origination Fees and Other Income.
In addition to interest earned on loans, the Bank receives loan origination
fees. Such fees and costs vary with the volume and type of loans and commitments
made and purchased, principal repayments, and competitive conditions in the
mortgage markets, which in turn respond to the demand and availability of money.
In addition to loan origination fees, the Bank also receives other income
that consists primarily of deposit transaction account service charges, ATM fees
and late charges. The Bank also installs, maintains and services merchant
bankcard equipment for local retailers and is paid a percentage of the
transactions processed using such equipment.
Loans-to-One Borrower.
Savings banks are subject to the same loans to one borrower limits as those
applicable to national banks, which under current regulations restrict loans to
one borrower to an amount equal to 15% of unimpaired capital and unimpaired
surplus on an unsecured basis, and an additional amount equal to 10% of
unimpaired capital and unimpaired surplus if the loan is secured by readily
marketable collateral (generally, financial instruments and bullion, but not
real estate). The Bank's policy provides that loans to one borrower (or related
borrowers) should not exceed 10% of the Bank's capital and reserves.
At June 30, 2002, the largest aggregate amount loaned by the Bank to one
borrower consisted of a commercial realestate loan of $861,000 for the
construction of a firehouse. The loan comprising the lending relationship was
performing in accordance with its terms as of June 30, 2002.
DELINQUENCIES AND CLASSIFIED ASSETS
Collection Procedures.
A computer generated late notice is sent and a 2% late charge is assessed
when a payment is 15 days late. A second notice will be incorporated in the next
month's billing notice, approximately 21 days after the due date of the first
late payment. Accounts thirty days or more past due will be reviewed by the
collection manager and receive individual attention as required, including
collection letters and telephone calls. The collection manager in order to avoid
further deterioration will closely monitor accounts that have a history of
consistent late or delinquent payments. Accounts two or more payments past due
are reported to the Board of Directors for consideration of foreclosure action.
With respect to consumer loans, a late notice is sent and a late charge is
assessed 10 days (or, in the case of home equity loans, 15 days) after payment
is due. A second notice is sent 15 days (in the case of home equity loans, 25
days) thereafter. The collection manager reviews loans 30 days or more past due
individually, following up with collection letters and telephone calls. Accounts
three or more payments past due are reported to the Board of Directors and are
subject to legal action and repossession of collateral.
Loans Past Due and Non-performing Assets.
Loans are reviewed on a regular basis. Management determines that a loan is
impaired or non-performing when it is probable at least a portion of the loan
will not be collected due to an irreversible deterioration in the financial
condition of the borrower or the value of the underlying collateral. When a loan
is determined to be impaired, the measurement of the loan is based on present
value of estimated future cash flows, except that all collateral-dependent loans
are measured for impairment based on the fair value of the collateral.
Management places loans on nonaccrual status once the loans have become 90 days
or more delinquent. Nonaccrual is defined as a loan in which collectibility is
questionable and therefore interest on the loan will no longer be recognized on
an accrual basis. A loan does not have to be 90 days delinquent in order to be
classified as non-performing. Interest on nonaccrual loans is recognized on a
cash basis until such time as the borrower has brought the loan to performing
status. Other real estate owned is included in non-performing assets. At June
30, 2002, the Bank had non-performing loans of $332,867 and a ratio of
non-performing loans to total loans of 0.26%.
Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as other real estate owned ("OREO") until such time as
it is sold. When real estate is acquired through foreclosure or by deed in lieu
of foreclosure, it is recorded at its fair value, less estimated costs of
disposal. If the value of the property is less than the loan, less any related
specific loan loss provisions, the difference is charged against the allowance
for loan losses. Any subsequent write-down of OREO is charged against earnings.
At June 30, 2002, the Bank's OREO totaled $30,229 and its ratio of
non-performing assets to total assets was 0.16%.
The following table sets forth delinquencies in the Bank's loan portfolio
at June 30, 2002. When a loan is delinquent 90 days or more, the Bank fully
reverses all accrued interest thereon and ceases to accrue interest thereafter.
A loan is not removed from nonaccrual status until the loan is current and
evidence supports the borrower's ability to maintain a current status. The Bank
also had a single one- to four-family real estate loan that amounted to $51,599
classified as nonaccrual which was in the 60 to 89 days delinquent category at
June 30, 2002. For all the dates indicated, the Bank did not have any material
restructured loans.
Percentage
Dollar of loan
Number amount category
---------- ---------- ------------
60 to 89 days delinquent
Real estate:
One- to four-family 9 $547,209 80.1%
Commercial 1 33,551 4.9
Construction and land --- --- ---
Multi-family --- --- ---
Installment 7 20,140 3.0
Home equity 2 82,037 12.0
Commercial business --- --- ---
----------- ----------- ------------
Total loan delinquency 60 to 89 days 19 682,937 100.0
90 days and over delinquent
Real estate:
One- to four-family 6 262,382 93.3
Commercial --- --- ---
Construction and land --- --- ---
Multi-family --- --- ---
Home equity 5 18,886 6.7
Installment --- --- ---
Commercial business --- --- ---
----------- ----------- ------------
Total loan delinquency 90 days and over 11 281,268 100.0
Total loans delinquent over 60 days Real estate:
One- to four-family 15 809,591 84.0
Commercial 1 33,551 3.5
Construction and land --- --- ---
Multi-family --- --- ---
Installment 12 39,026 4.0
Home equity 2 82,037 8.5
Commercial business --- --- ---
---------- ----------- ------------
Total loans delinquent over 60 days 30 $964,205 100.0%
========== =========== ============
Nonaccrual Loans and Nonperforming Assets.
The following table sets forth information regarding nonaccrual loans and
other non-performing assets at the dates indicated. The Bank had no accruing
loans delinquent more than 90 days at June 30, 2002, 2001, and 2000.
At June 30,
2002 2001 2000
---------- ----------- ----------
Nonaccruing loans:
Real estate loans
One- to four-family $313,981 $660,607 $495,909
Commercial real estate --- 71,711 155,002
Installment and home equity 18,886 11,150 20,801
Commercial business --- --- ---
----------- ----------- -----------
Total nonaccruing loans 332,867 743,468 671,712
Real estate owned:
Real estate loans
One- to four-family --- --- 42,133
Commercial real estate 30,229 30,229 ---
Commercial business --- --- 109,000
----------- ----------- ----------
Total real estate owned 30,229 30,229 151,133
----------- ----------- -----------
Total non-performing assets $363,096 $773,697 $822,845
=========== =========== ===========
Total as a percentage of total assets 0.16% 0.42% 0.49%
During the year ended June 30, 2002, gross interest income of $9,700 would
have been recorded on nonaccrual loans under their original terms if the loans
had been current throughout the period. No interest income was recorded on
nonaccrual loans or on accruing loans more than 90 days delinquent during the
year ended June 30, 2002.
Classification of Assets.
Consistent with regulatory guidelines, the Bank provides for the
classification of loans and other assets considered to be of lesser quality.
Such ratings coincide with the "Substandard", "Doubtful" and "Loss"
classifications used by federal regulators in their examination of financial
institutions. Generally, an asset is considered Substandard if it is
inadequately protected by the current net worth and paying capacity of the
obligors and/or the collateral pledged. Substandard assets include those
characterized by the distinct possibility that the insured financial institution
will sustain some loss if the deficiencies are not corrected. Assets classified
as Doubtful have all the weaknesses inherent in assets classified Substandard
with the added characteristic that the weaknesses present make collection or
liquidation in full, on the basis of currently existing facts, highly
questionable and improbable. Assets classified as Loss are those considered
uncollectible and of such little value that their continuance as assets without
the establishment of a specific loss reserve and/or charge-off is not warranted.
Assets that do not currently expose the insured financial institutions to
sufficient risk to warrant classification in one of the aforementioned
categories but otherwise possess weaknesses are designated "Special Mention."
When the Bank classifies problem assets as either Substandard or Doubtful,
it establishes a valuation allowances or "loss reserves" in an amount deemed
prudent by management. General allowances represent loss allowances that have
been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When the Bank classifies problem assets as "Loss," it
is required either to establish a specific allowance for losses equal to 100% of
the amount of assets so classified, or to charge-off such amount. The Bank's
determination as to the classification of its assets and the amount of its
valuation allowance is subject to review by its regulatory agencies, which can
order the establishment of additional general or specific loss allowances. The
Bank reviews its portfolio monthly to determine whether any assets require
classification in accordance with applicable regulations. At June 30, 2002, the
Bank had $74,000 in loans classified as Substandard and no other classified
assets.
Allowance for Loan Losses.
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of the losses inherent in the loan
portfolio, the composition of the loan portfolio, specific impaired loans and
current economic conditions. Such evaluation, which includes a review of all
loans on which full collectibility may not be reasonably assured, considers
among other matters, the estimated net realizable value or the fair value of the
underlying collateral, economic conditions, historical loan loss experience and
other factors that warrant recognition in providing for the loan loss allowance.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses
and valuation of OREO. Such agencies may require the Bank to recognize additions
to the allowance based on their judgment about information available to them at
the time of their examination. The allowance for loan losses is increased by a
provision for loan losses (which results in a charge to noninterest expense) and
is reduced by net charge-offs. At June 30, 2002, the total allowance was
$1,068,734, which amounted to 0.83% of total net loans receivable and 321.07% of
nonperforming loans. Management will continue to monitor and modify the level of
the allowance for loan losses. For the year ended June 30, 2002, the Bank's
charge-offs amounted to $52,257. For the years ended June 30, 2001 and 2000, the
Bank's charge-offs amounted to $76,915 and $65,557, respectively.
The Bank may require an environmental site assessment to be performed by an
independent professional for non-residential mortgage loans. It is also the
Bank's policy to require title and hazard insurance on all mortgage loans. In
addition, the Bank may require borrowers to make payments to a mortgage escrow
account for the payment of property taxes. Any exceptions to the Bank's loan
policies must be made in accordance with the limitations set out in each policy.
Typically, the exception authority ranges from the Chief Lending Officer to the
Board of Directors, depending on the size and type of loan involved.
Analysis of the Allowance For Loan Losses.
The following table sets forth the analysis of the allowance for loan
losses for the periods indicated.
For the Years Ended June 30,
2002 2001 2000
------------ ---------- -----------
Balance at the beginning of period $886,081 $866,443 $791,897
Charge-offs:
One- to four-family real estate --- --- ---
Commercial real estate --- 26,432 ---
Installment 49,877 50,483 65,557
Home equity 2,380 --- ---
Commercial business --- --- ---
------------ ---------- -----------
Total charge-offs 52,257 76,915 65,557
Recoveries:
One- to four-family real estate --- --- ---
Installment 16,010 36,553 5,103
------------ ---------- -----------
Total recoveries 16,010 36,553 5,103
Net charge-offs 36,247 40,362 60,454
------------ ---------- -----------
Additions charged to operations 218,900 60,000 135,000
------------ ---------- -----------
Balance at end of period $1,068,734 $886,081 $866,443
============ ========== ===========
Ratio of net charge-offs to average loans outstanding 0.03% 0.04% 0.06%
Ratio of net charge-offs to nonperforming assets 9.98% 5.22% 7.35%
Allowance for loan loss to nonperforming loans 321.07% 119.18% 128.99%
Allowance for loan loss to net loans 0.83% 0.81% 0.89%
Allocation of Allowance for Loan Losses.
The following table sets forth the allocation of the allowance for loan
losses by loan category for at the dates indicated. The allowance is allocated
to each loan category based on historical loss experience and economic
conditions. The unallocated portions of the allowance represent reserves for
unused lines of credit and losses inherent in the loan portfolio.
June 30, 2002 June 30, 2001 June 30, 2000
Percent Percent Percent
of loans of loans of loans
Loan in each Loan in each Loan in each
Amount of amounts category Amount of amounts category Amount of amounts category
loan loss by to total loan loss by to loan loss by to total
allowance category loans allowance category loans allowance category loans
(Dollars in thousands)
One- to four-family $488 $98,834 76.2% $467 $86,336 77.8% $442 $80,696 81.5%
Commercial real 182 8,764 6.6 120 5,239 4.7 105 4,702 4.8
estate
Construction and land 7 3,003 2.3 13 1,979 1.8 4 616 0.6
Multi-family 18 1,657 1.3 10 1,213 1.1 22 1,253 1.3
Installment 92 5,611 4.3 100 6,128 5.5 121 4,865 4.9
Home equity 38 6,957 5.4 32 6,138 5.5 1 4,631 4.7
Passbook 1 545 0.4 1 596 0.6 1 490 0.5
Commercial business 191 4,356 3.3 136 3,291 3.0 72 1,707 1.7
Specific 24 --- --- --- --- --- --- --- ---
Unallocated 28 --- --- 7 --- --- 98 --- ---
--------- -------- --------- --------- -------- --------- --------- -------- --------
Totals $1,069 $129,727 100.0% $886 $110,920 100.0% $866 $98,960 100.0%
========= ======== ========= ========= ======== ========= ========= ======== ========
SECURITIES INVESTMENT ACTIVITIES
Given the Bank's substantial portfolio of fixed-rate residential mortgage
loans, the Bank maintains high balances of liquid investments for the purpose of
mitigating interest rate risk. The Board of Directors establishes the securities
investment policy. This policy dictates that investment decisions will be made
based on the safety of the investment, liquidity requirements, potential
returns, cash flow targets, and desired risk parameters. In pursuing these
objectives, management considers the ability of an investment to provide
earnings consistent with factors of quality, maturity, marketability and risk
diversification.
The Bank's current policies generally limit securities investments to U.S.
Government and agency securities, federal funds sold, municipal bonds, corporate
debt obligations and certain mutual funds. In addition, the Bank's policy
permits investments in mortgage-backed securities, including securities issued
and guaranteed by Fannie Mae, Freddie Mac, and GNMA, and collateralized mortgage
obligations ("CMOs"). The Bank's current securities investment strategy utilizes
a risk management approach of diversified investing among three categories:
short-, intermediate- and long-term. The emphasis of this approach is to
increase overall investment securities yields while managing interest rate risk.
The Bank will only invest in securities rated "A" or higher by at least one
nationally recognized rating agency (or securities attaining such rating as a
result of guarantees by insurance companies), with the exception of occasional
investments in smaller non-rated local bonds. The Bank does not engage in any
derivative or hedging transactions, such as interest rate swaps or caps.
At June 30, 2002, the Bank had $66.1 million in investment securities, or
30.0% of total assets. SFAS No. 115 requires the Bank to designate its
securities as held to maturity, available for sale, or trading, depending on the
Bank's ability and intent regarding its investments. As of June 30, 2002, the
entire investment securities portfolio was classified as available for sale. At
June 30, 2002, the Bank's mortgage-backed securities portfolio totaled $19.6
million, or 8.9% of total assets and the Bank's asset-backed securities
portfolio totaled $0.8 million, or 0.4% of total assets.
Book Value of Investment Securities. The following table sets forth certain
information regarding the investment securities and other interest earning
assets as of the dates indicated.
At June 30,
2001 2000 1999
---- ---- ----
Book Percent Book Percent
value of total value of Book Percent
total value of total
---------- ---------- --------- -------- -------- ---------
(Dollars in Thousands)
Investment securities, AFS
U.S. Treasuries $--- ---% $1,005 2.1% $4,684 10.4%
U.S. Government agencies 14,862 22.5 1,794 3.7 5,190 11.6
State and political subdivisions 8,811 13.3 9,420 19.3 9,904 22.1
Mortgage-backed securities 19,564 29.6 8,783 18.0 6,000 13.4
Asset-backed securities 818 1.3 3,300 6.7 4,915 11.0
Corporate debt securities 20,760 31.4 23,432 47.9 12,812 28.6
Equity securities and other 1,274 1.9 1,141 2.3 1,303 2.9
---------- ---------- --------- -------- -------- ---------
Total investment securities, AFS $66,089 100.0% $48,875 100.0% $44,808 100.0%
========== ========== ========= ======== ======== =========
Mortgage-Backed and Asset-Backed Securities.
The Bank purchases mortgage-backed securities in order to: (i) generate
positive interest rate spreads with minimal administrative expense; (ii) lower
the Bank's credit risk as a result of the guarantees provided by Freddie Mac,
Fannie Mae, and GNMA; and (iii) increase liquidity. At June 30, 2002,
mortgage-backed securities (including CMOs) totaled $19.6 million or 8.9% of
total assets, all of which were classified as available for sale. At June 30,
2002, $15.2 million of the mortgage-backed securities were adjustable rate and
$4.4 million were fixed rate. The mortgage-backed securities portfolio had
coupon rates ranging from 4.00% to 7.00%, a weighted average yield of 4.02% and
a weighted average life (including pre-payment assumptions) of 2.5 years at June
30, 2002. The estimated market value of the Bank's mortgage-backed securities at
June 30, 2002 was $19.6 million, which was $204,760 more than cost.
The pooling of mortgages and the issuance of a security with an interest
rate that is based on the interest rate on the underlying mortgages create
mortgage-backed securities. Mortgage-backed securities typically represent a
participation interest in a pool of single-family or multi-family mortgages,
although the Bank focuses its investments on mortgage-backed securities backed
by single-family mortgages. The issuers of such securities (generally U.S.
Government agencies and government sponsored enterprises, including Fannie Mae,
Freddie Mac and GNMA) pool and resell the participation interests in the form of
securities to investors, such as the Bank, and guarantee the payment of
principal and interest to these investors. Mortgage-backed securities generally
yield less than the loans that underlie such securities because of the cost of
payment guarantees and credit enhancements. In addition, mortgage-backed
securities are usually more liquid than individual mortgage loans and may be
used to collateralize certain liabilities and obligations of the Bank.
Investments in mortgage-backed securities involve a risk that actual
prepayments will be greater than estimated over the life of the security, which
may require adjustments to the amortization of any premium or accretion of any
discount relating to such instruments thereby altering the net yield on such
securities. There is also reinvestment risk associated with the cash flows from
such securities or in the event such securities are prepaid. In addition, the
market value of such securities may be adversely affected by changes in interest
rates.
Management reviews prepayment estimates periodically to ensure that
prepayment assumptions are reasonable considering the underlying collateral for
the securities at issue and current interest rates and to determine the yield
and estimated maturity of the Bank's mortgage-backed securities portfolio. Of
the Bank's $19.6 million mortgage-backed securities portfolio at June 30, 2002,
$1.4 million with a weighted average yield of 6.08% had contractual maturities
within five years, $2.9 million with a weighted average yield of 5.40% had
contractual maturities of five to ten years and the remaining $15.3 million with
a weighted average yield of 3.57% had contractual maturities more than 10 years.
However, the actual maturity of a security may be less than its stated maturity
due to prepayments of the underlying mortgages. Prepayments that are faster than
anticipated may shorten the life of the security and may result in a loss of any
premiums paid and thereby reduce the net yield on such securities. Although
prepayments of underlying mortgages depend on many factors, the difference
between the interest rates on the underlying mortgages and the prevailing
mortgage interest rates generally is the most significant determinant of the
rate of prepayments. During periods of declining mortgage interest rates,
refinancing generally increases and accelerates the prepayment of the underlying
mortgages and the related security. Under such circumstances, the Bank may be
subject to reinvestment risk because, to the extent that the Bank's securities
prepay faster than anticipated, the Bank may not be able to reinvest the
proceeds of such repayments and prepayments at a comparable rate of return.
Conversely, in a rising interest rate environment prepayments may decline,
thereby extending the estimated life of the security and depriving the Bank of
the ability to reinvest cash flows at the increased rates of interest.
At June 30, 2002, the Bank's portfolio of asset-backed securities totaled
$0.8 million, or 0.4% of total assets, all of which were classified as available
for sale. At June 30, 2002, all of the asset-backed securities were fixed rate.
The portfolio had coupon rates ranging from 6.10% to 6.85%, a weighted average
yield of 5.23% and a weighted average life (including prepayment assumptions) of
3.0 years at June 30, 2002. The estimated market value of the Bank's
asset-backed securities portfolio at June 30, 2002 was $0.8 million, which was
$13,311 more than cost at such date.
Asset-backed securities are a type of debt security collateralized by
various loans and assets including: automobile loans, equipment leases, credit
card receivables, home equity and improvement loans, manufactured housing,
student loans and other consumer loans. In the case of the Bank, its
asset-backed securities are collateralized by automobile loans and
second-mortgage loans.
Asset-backed securities provide the Bank with a broad selection of
fixed-income alternatives, most with higher credit ratings and less downgrade
risk than corporate bonds and more stable cash flows than mortgage related
securities. Prepayments and structure risk of asset-backed securities are less
of a concern than CMO securities due to the shorter maturities of the underlying
collateral promoting greater stability of payments.
Of the Bank's $0.8 million portfolio of asset-backed securities at June 30,
2002, $0.1 million with a weighted average yield of 5.76% had contractual
maturities within 5 years, no asset-backed securities held in the portfolio had
contractual maturities of 5 to 10 years, and the remaining $0.7 million with a
weighted average yield of 5.17% had contractual maturities of more than 10
years.
SOURCES OF FUNDS
General.
Deposits, repayments and prepayments of loans and securities, proceeds from
sales of securities, and proceeds from maturing securities and cash flows from
operations are the primary sources of the Bank's funds for use in lending,
investing and for other general purposes.
Deposits.
The Bank offers a variety of deposit accounts with a range of interest
rates and terms. The Bank's deposit accounts consist of savings, NOW accounts,
and money market accounts, certificates of deposit, and noninterest bearing
checking accounts. The Bank also offers IRAs.
At June 30, 2002, deposits totaled $183.7 million. At June 30, 2002, the
Bank had a total of $62.6 million in certificates of deposit, of which $49.1
million had maturities of one year or less. Although the Bank has a significant
portion of its deposits in shorter-term certificates of deposit, management
monitors activity on these accounts and, based on historical experience and the
Bank's current pricing strategy, believes it will retain a large portion of such
accounts upon maturity.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. Deposits are obtained predominantly from the areas in which the
Bank's branch offices are located. The Bank relies primarily on competitive
pricing of its deposit products and customer service and long-standing
relationships with customers to attract and retain these deposits; however,
market interest rates and rates offered by competing, financial institutions
significantly affect the Bank's ability to attract and retain deposits. The Bank
uses traditional means of advertising its deposit products, including radio,
television, and print media. It generally does not solicit deposits from outside
its market area. While the Bank accepts certificates of deposit in excess of
$100,000, they are not subject to preferential rates. The Bank does not actively
solicit such deposits, as they are more difficult to retain than core deposits.
Historically, the Bank has not used brokers to obtain deposits.
The following table sets forth the deposit activities of the Bank for the
periods indicated.
For the Years Ended June 30,
2002 2001 2000
---------- -------- ---------
(Dollars in thousands)
Opening balance $154,192 $133,460 $127,999
Deposits 664,399 512,785 333,442
Withdrawals 641,720 496,480 332,441
Interest credited 6,843 4,427 4,460
Ending balance 183,714 154,192 133,460
---------- --------- ----------
Net increase $29,522 $20,732 $5,461
========== ========= ==========
Percent increase 19.15% 15.53% 4.27%
The following tables set forth information, by various rate categories,
regarding the balance of deposits by types of deposit as of the dates indicated.
At June 30,
2002 2001 2000
Amount Percent Amount Percent Amount Percent
---------- --------- ------- ------- -------- -------
(Dollars in thousands)
Transaction and savings deposits
Demand deposits $22,067 12.0% $18,418 11.9% $12,344 9.3%
Savings deposits 70,825 38.5 57,021 37.0 53,892 40.4
NOW deposits 14,294 7.8 11,446 7.4 9,090 6.8
Money market deposits 13,883 7.6 9,194 6.0 6,189 4.6
---------- -------- -------- ------- -------- -------
Total non-certificates of deposit 121,069 65.9% 96,079 62.3 81,515 61.1
---------- -------- -------- ------- -------- -------
Certificate of deposit
0.00 - 2.99% 26,024 14.2 100 0.1 --- ---
3.00 - 3.99% 16,369 8.9 430 0.3 77 0.1
4.00 - 5.99% 20,252 11.0 57,583 37.3 51,868 38.8
6.00 - 7.99% --- --- --- --- --- ---
8.00 - and over --- --- --- --- --- ---
---------- -------- -------- ------- -------- -------
Total certificates of deposit 62,645 34.1 58,113 37.7 51,945 38.9
---------- -------- -------- ------- -------- -------
Total deposits $183,714 100.0% $154,192 100.0% $133,460 100.0%
========== ======== ======== ======= ======== =======
The following table sets forth the amount and remaining maturities of the
Bank's certificates of deposit accounts at June 30, 2001.
0.00- 3.00- 4.00- 6.00% or Percent of
2.99% 3.99% 5.99% Greater Total Total
---------- --------- --------- --------- -------- -----------
(Dollars in thousands)
Certificates of deposit
Maturity in quarter ended:
September 30, 2002 $7,319 $2,136 $7,600 $--- $17,055 27.2%
December 31, 2002 9,553 3,063 4,398 --- 17,014 27.2
March 31, 2003 3,640 2,399 2,734 --- 8,773 14.0
June 30, 2003 2,973 1,207 2,103 --- 6,283 10.0
September 30, 2003 1,741 1,326 462 --- 3,529 5.6
December 31, 2003 747 2,220 286 --- 3,253 5.2
March 31, 2004 28 1,685 254 --- 1,967 3.2
June 30, 2004 23 432 493 --- 948 1.5
September 30, 2004 --- 352 242 --- 594 1.0
December 31, 2004 --- 1,074 298 --- 1,372 2.2
March 31, 2005 --- 36 352 --- 388 0.6
June 30, 2005 --- 206 185 --- 391 0.6
Thereafter --- 233 845 --- 1,078 1.7
---------- --------- ---------- --------- ------- -----------
Total $26,024 $16,369 $20,252 $--- $62,645 100.0%
========== ========= ========== ========= ======== ===========
Percent of total 41.6% 26.1% 32.3% ---% 100.0%
Borrowed Funds.
In the event that the Bank requires funds beyond its ability to generate
them internally, additional sources of funds are available through Federal Home
Loan Bank ("FHLB"). At June 30, 2002 the Bank had available an Overnight Line of
Credit and a One-Month Overnight Repricing Line of Credit, each in the amount of
$8,512,800 with the FHLB. Residential mortgages are pledged by the Bank as
collateral to secure the Bank's line of credit and term borrowing. Interest on
the line is determined at the time of borrowing. In addition to the overnight
line of credit program, the Bank also has access to the FHLB's Term Advance
Program under which it can borrow at various terms and interest rates. The
advances are collateralized by all of the Company's stock and deposits in the
FHLB and a general lien on one- to four-family mortgage loans, certain
multi-family loans and U.S. Government Agency obligations in an aggregate amount
equal up to 133% of outstanding advances. The maximum amount that the FHLB will
advance to member institutions, including the Bank, fluctuates from time to time
in accordance with policies of the FHLB.
The following table set forth certain information regarding borrowed funds.
Balance Outstanding at June 30, 2002:
Amount Rate Maturity date
------------- --------------- --------------
$4,000,000 2.19% - fixed 01/14/2003
2,500,000 6.82% - fixed 09/02/2004
2,500,000 6.80% - fixed 10/04/2005
-------------
$9,000,000
=============
Average daily balance outstanding: $6,841,096
Maximum amount outstanding during the year $9,000,000
Weighted average interest rate during the year 5.57%
Weighted average interest at end of year 4.76%
PERSONNEL
As of June 30, 2002, the Bank had 74 full-time employees and 12 part-time
employees. The Company has no employees who are not also Bank employees. A
collective bargaining unit does not represent the employees and the Bank
considers its relationship with its employees to be good.
FEDERAL AND STATE TAXATION
Federal Taxation
General.
The Mutual Company, the Company and the Bank are subject to federal income
taxation in the same general manner as other corporations, with some exceptions
discussed below. The following discussion of federal taxation is intended only
to summarize certain pertinent federal income tax matters and is not a
comprehensive description of the tax rules applicable to these entities.
Method of Accounting.
For federal income tax purposes, the Company and the Bank currently report
income and expenses on the accrual method of accounting and use a tax year
ending June 30 for filing consolidated federal income tax returns. The Small
Business Protection Act of 1996 (the "1996 Act") eliminated the use of the
reserve method of accounting for bad debt reserves by savings institutions,
effective for taxable years beginning after 1995.
Bad Debt Reserves.
Prior to the 1996 Act, the Bank was permitted to establish a reserve for
bad debts and to make annual additions to the reserve. These additions could,
within specified formula limits, be deducted in arriving at the Bank's taxable
income. As a result of the 1996 Act, the Bank must use the specific charge off
method in computing its bad debt deduction beginning with its 1996 federal tax
return.
Taxable Distributions and Recapture.
Prior to the 1996 Act, bad debt reserves created prior to January 1, 1988
were subject to recapture into taxable income should the Bank fail to meet
certain thrift asset and definitional tests. New federal legislation eliminated
these thrift related recapture rules. However, under current law, pre-1988
reserves remain subject to recapture should the Bank redeem its common stock
pay, dividends or make distributions in excess of earnings and profits.
At June 30, 2002, the Bank's total federal pre-1988 reserve was
approximately $2.1 million. This reserve reflects the cumulative effects of
federal tax deductions by the Bank for which no federal income tax provision has
been made. A deferred tax liability has not been provided on this amount as
management does not intend to redeem stock, make distributions or take other
actions that would result in recapture of the reserve.
Minimum Tax.
The Code imposes an alternative minimum tax ("AMT") at a rate of 20% on a
base of regular taxable income plus certain tax preferences ("alternative
minimum taxable income" or "AMTI"). The AMT is payable to the extent such AMTI
is in excess of an exemption amount. For all loss years except those originating
in 2001 and 2002, net operating losses can offset no more than 90% of AMTI. For
loss years originating in 2001 and 2002, you can offset 100% of AMTI.Certain
payments of alternative minimum tax may be used as credits against regular tax
liabilities in future years. The Company and the Bank have not been subject to
the alternative minimum tax and has no such amounts available as credits for
carryover.
Net Operating Loss Carryovers.
A financial institution may carry back net operating losses to the
preceding Five taxable years and forward to the succeeding 20 taxable years. At
June 30, 2002, the Bank had no net operating loss carry forward for federal
income tax purposes.
Corporate Dividends-Received Deduction.
The Company may exclude from its income 100% of dividends received from the
Bank as a member of the same affiliated group of corporations. The Mutual
Company owns less than 80% of the outstanding Common Stock of the Company. As
such, the Mutual Company is not permitted to file a consolidated federal income
tax return with the Company and the Bank. The corporate dividends-received
deduction is 80% in the case of dividends received from corporations with which
a corporate recipient does not file a consolidated return, and corporations
which own less than 20% of the stock of a corporation distributing a dividend
may deduct only 70% of dividends received or accrued on their behalf.
State Taxation
New York State Taxation - General.
The Company and the Bank report income on a combined fiscal year basis to
New York State. The New York State franchise tax on banking corporations is
imposed in an amount equal to the greater of (a) 8.0% "entire net income"
allocable to New York State (b) 3% of "alternative entire net income" allocable
to New York State (c) 0.01% of the average value of assets allocable to New York
State or (d) $250. Entire net income is based on federal taxable income, subject
to certain modifications. Alternative entire net income is equal to entire net
income without certain modifications. The Mutual Company files a separate New
York State franchise tax return.
Bad Debt Reserves.
The Bank is allowed to utilize the reserve method of accounting for New
York State franchise tax purposes and is required to maintain two reserve
accounts: the Reserve for Losses on Nonqualifying Loans (the "NY NQL Reserve")
and the Reserve for Losses on Qualifying Real Property Loans (the "NY QRPL
Reserve"). The addition to the NY NQL Reserve must be computed under the
"experience method". The addition to the NY QRPL Reserve may be computed under
either the experience method or the "percentage of taxable income method" (the
"PTI method"). The deduction under the PTI method is equal to 32% of entire net
income (before the deduction for the bad debt reserve addition), which must
first be allocated to the NY NQL Reserve. The balance, if any, is the allowable
addition to the NY QRPL reserve, subject to a limitation based upon 6% of
Qualifying Real Property Loans ("QRPL").
Recapture of New York State Bad Debt Reserves.
If the Bank ceases to qualify as a "thrift institution" (as defined in the
New York State tax law), or fails to hold at least 60% of its assets in
"Qualifying Assets", it will no longer be entitled to use the reserve method and
must recapture into entire net income a portion of its NY QRPL Reserve. The
amount subject to recapture is generally equal to the excess of the NY QRPL
Reserve over the federal QRPL Reserve as of December 31, 1995. The amount of the
Bank's NY QRPL Reserve subject to recapture is approximately $1.8 million. Since
it is the Bank's intention to continue to qualify as a thrift institution and to
meet the 60% Qualifying Asset test, a deferred tax liability has not been
established for the $153,000 New York State tax that would result from such
failure.
Net Operating Loss Deductions.
For New York State franchise tax purposes, the Bank is not entitled to
carry back or forward net operating losses ("NOLs") incurred in taxable years
ending before January 1, 2001. NOLs incurred in taxable years beginning on or
after January 1, 2001 can be carried forward to the succeeding 20 taxable years
and carried back to the Five preceeding years, however there is a $10,000
limitation on carry-backs.
Corporate Dividends-Received Deduction.
Similar to the federal rules, the Company and the Bank file a combined New
York State franchise tax report and inter-company dividends will be eliminated.
However, the Mutual Company does not own the requisite percentage (generally 80%
or more) of the common stock of the Company necessary to file on a combined
basis with the Company. As long as the Mutual Company owns more than 50% of the
common stock of the Company, it is entitled to a full exclusion from taxation of
dividend income related to subsidiary capital. The Mutual Company is entitled to
a 50% dividends-received deduction if it owns 50% or less of the common stock of
the Company.
REGULATION
General
The Bank is a New York-chartered savings bank and the FDIC through the BIF
insures its deposit accounts up to applicable limits. The Bank is subject to
extensive regulation by the New York State Banking Department (the
"Department"), as its chartering agency, and by the FDIC, as its deposit
insurer. The Bank is required to file reports with, and is periodically examined
by, the FDIC and the New York Superintendent of Banking concerning its
activities and financial condition and must obtain regulatory approvals prior to
entering into certain transactions, including, but not limited to, mergers with
or acquisitions of other banking institutions. The Bank is a member of the FHLB
of New York and is subject to certain regulations by the Federal Home Loan Bank
System. Both the Company and the Mutual Company, as mutual savings and loan
holding companies, are subject to regulation by the OTS and are required to file
reports with the OTS. Any change in such regulations, whether by the Department,
the FDIC, or the OTS could have a material adverse impact on the Bank, the
Company, or the Mutual Company.
Certain of the regulatory requirements applicable to the Bank, the Company
and the Mutual Company are referred to below or elsewhere herein.
NEW YORK BANK REGULATION
FDIC regulations and other federal law and regulations limit the exercise
by an FDIC-insured savings bank of the lending and investment powers under the
New York State Banking Law. In particular, the applicable provisions of New York
State Banking Law and regulations governing the investment authority and
activities of an FDIC insured state-chartered savings bank have been
substantially limited by the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") and the FDIC regulations issued pursuant thereto.
The Bank derives its lending, investment and other authority primarily from
the applicable provisions of New York State Banking Law and the regulations of
the Department, as limited by FDIC regulations. Under these laws and
regulations, savings banks, including the Bank, may invest in real estate
mortgages, consumer and commercial loans, certain types of debt securities,
including certain corporate debt securities and obligations of federal, state
and local governments and agencies, certain types of corporate equity securities
and certain other assets. Under the statutory authority for investing in equity
securities, a savings bank may invest up to 7.5% of its assets in corporate
stock, with an overall limit of 5% of its assets invested in common stock.
Investment in the stock of a single corporation is limited to the lesser of 2%
of the outstanding stock of such corporation or 1% of the savings bank's assets,
except as set forth below. Such equity securities must meet certain earnings
ratios and other tests of financial performance. A savings bank's lending powers
are not subject to percentage of assets limitations, although there are limits
applicable to single borrowers. A savings bank may also, pursuant to the
"leeway" power, make investments not otherwise permitted under the New York
State Banking Law. This power permits investments in otherwise impermissible
investments of up to 1% of assets in any single investment, subject to certain
restrictions and to an aggregate limit for all such investments of up to 5% of
assets. Additionally, in lieu of investing in such securities in accordance with
and reliance upon the specific investment authority set forth in the New York
State Banking Law, savings banks are authorized to elect to invest under a
"prudent person" standard in a wider range of investment securities as compared
to the types of investments permissible under such specific investment
authority. However, in the event a savings bank elects to utilize the "prudent
person" standard, it will be unable to avail itself of the other provisions of
the New York State Banking Law and regulations, which set forth specific
investment authority. The Bank has not elected to conduct its investment
activities under the "prudent person" standard. A savings bank may also exercise
trust powers upon approval of the Department.
New York State chartered savings banks may also invest in subsidiaries
under their service corporation investment authority. A savings bank may use
this power to invest in corporations that engage in various activities
authorized for savings banks, plus any additional activities which may be
authorized by the Department. Investment by a savings bank in the stock, capital
notes and debentures of its service corporations is limited to 3% of the bank's
assets, and such investments, together with the bank's loans to its service
corporations, may not exceed 10% of the savings bank's assets. Furthermore, New
York banking regulations impose requirements on loans which a bank may make to
its executive officers and directors and to certain corporations or partnerships
in which such persons have equity interests. These requirements include, but are
not limited to, requirements that (i) certain loans must be approved in advance
by a majority of the entire board of directors and the interested party must
abstain from participating directly or indirectly in the voting on such loan,
(ii) the loan must be on terms that are not more favorable than those offered to
unaffiliated third parties, and (iii) the loan must not involve more than a
normal risk of repayment or present other unfavorable features.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
The Bank is a member of the BIF, which is administered by the FDIC. The
FDIC insures deposits up to applicable limits and such insurance is backed by
the full faith and credit of the U.S. Government. As insurer, the FDIC imposes
deposit insurance premiums and is authorized to conduct examinations of and to
require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the FDIC. The FDIC also has the
authority to initiate enforcement actions against savings banks, after giving
the Superintendent an opportunity to take such action, and may terminate the
deposit insurance if it determines that the institution has engaged or is
engaging in unsafe or unsound practices, or is in an unsafe or unsound
condition.
REGULATORY CAPITAL REQUIREMENTS
The FDIC has adopted risk-based capital guidelines for banks under their
supervision. The guidelines establish a systematic analytical framework that
makes regulatory capital requirements more sensitive to differences in risk
profiles among banking organizations. The Bank is required to maintain certain
levels of regulatory capital in relation to regulatory risk-weighted assets. The
ratio of such regulatory capital to regulatory risk-weighted assets is referred
to as the Bank's "risk-based capital ratio". Risk-based capital ratios are
determined by allocating assets and specified off-balance sheet items to four
risk-weighted categories ranging from 0% to 100%, with higher levels of capital
being required for the categories perceived as representing greater risk.
These guidelines divide Bank's capital into two tiers. The first tier
("Tier I") includes common equity, retained earnings, certain non-cumulative
perpetual preferred stock (excluding auction rate issues) and minority interests
in equity accounts of consolidated subsidiaries, less goodwill and other
intangible assets (except mortgage servicing rights and purchased credit card
relationships subject to certain limitations). Supplementary ("Tier II") capital
includes, among other items, cumulative perpetual and long-term limited-life
preferred stock, mandatory convertible securities, certain hybrid capital
instruments, term subordinated debt and the allowance for loan and lease losses,
subject to certain limitations, less required deductions. Savings banks are
required to maintain a total risk-based capital ratio of 8%, of which at least
4% must be Tier I capital.
In addition, the FDIC has established regulations prescribing a minimum
Tier I leverage ratio (Tier I capital to adjusted total assets as specified in
the regulations). These regulations provide for a minimum Tier I leverage ratio
of 3% for banks that meet certain specified criteria, including that they have
the highest examination rating and are not experiencing or anticipating
significant growth. All other banks are required to maintain a Tier I leverage
ratio of 3% plus an additional cushion of at least 100 to 200 basis points. The
FDIC may, however, set higher leverage and risk-based capital requirements on
individual institutions when particular circumstances warrant. Savings banks
experiencing or anticipating significant growth are expected to maintain capital
ratios, including tangible capital positions, well above the minimum levels.
At June 30, 2002, the Bank exceeded all regulatory capital requirements.
STANDARDS FOR SAFETY AND SOUNDNESS
The federal banking agencies have adopted a final regulation and
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") to implement the safety and soundness standards required under
federal law. The Guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The standards set forth
in the Guidelines address internal controls and information systems; internal
audit system; credit underwriting; loan documentation; interest rate risk
exposure; asset growth; compensation; fees and benefits. The agencies also
adopted additions to the Guidelines, which require institutions to examine asset
quality and earnings standards. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by federal
law. The final regulations establish deadlines for the submission and review of
such safety and soundness compliance plans.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
The FDIC has the authority to use its enforcement powers to prohibit a
savings bank from paying dividends if, in its opinion, the payment of dividends
would constitute an unsafe or unsound practice. Federal law also prohibits the
payment of dividends by a bank that will result in the bank failing to meet its
applicable capital requirements on a pro forma basis. New York law restricts the
Bank from declaring a dividend, which would reduce its capital below (i) the
amount required to be maintained by state and federal law and regulations, or
(ii) the amount of the Bank's liquidation account established in connection with
the December 1998 Reorganization. New York law also prescribes that dividends
declared by a stock savings bank in any calendar year shall not exceed the total
of its net profits for that year combined with its retained net profits of the
preceding two years, plus any required transfer to surplus or for the retirement
of any preferred stock, unless approved by the Superintendent.
PROMPT CORRECTIVE ACTION
The federal banking agencies have promulgated regulations to implement the
system of prompt corrective action required by federal law. Under the
regulations, a bank shall be deemed to be (i) "well capitalized" if it has total
risk-based capital of 10.0% or more, has a Tier I risk-based capital ratio of
6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to any written capital order or directive; (ii) "adequately capitalized"
if it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based
capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized"; (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is
less than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0%
under certain circumstances); (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a Tier I leverage capital ratio that is
less than 3.0%; and (v) "critically undercapitalized" if it has a ratio of
tangible equity to total assets that is equal to or less than 2.0%. Federal law
and regulations also specify circumstances under which a federal banking agency
may reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution to comply with supervisory actions
as if it were in the next lower category (except that the FDIC may not
reclassify a significantly undercapitalized institution as critically
undercapitalized).
Based on the foregoing, the Bank is currently classified as a "well
capitalized" savings institution.
ACTIVITES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS
Federal law generally limits the activities and equity investments of
FDIC-insured, state-chartered banks to those that are permissible for national
banks, notwithstanding state laws. Under regulations dealing with equity
investments, an insured state bank generally may not, directly or indirectly,
acquire or retain any equity investment of a type, or in an amount, that is not
permissible for a national bank. An insured state bank is not prohibited from,
among other things, (i) acquiring or retaining a majority interest in a
subsidiary; (ii) investing as a limited partner in a partnership the sole
purpose of which is the direct or indirect investment in the acquisition,
rehabilitation, or new construction of a qualified housing project, provided
that such limited partnership investments may not exceed 2% of the bank's total
assets; (iii) acquiring up to 10% of the voting stock of a company that solely
provides or reinsures directors', trustees', and officers' liability insurance
coverage or bankers' blanket bond group insurance coverage for insured
depository institutions; and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met.
Federal law and FDIC regulations permit certain exceptions to the foregoing
limitation. For example, certain state-chartered banks, such as the Bank, may
continue to invest in common or preferred stock listed on a National Securities
Exchange or the National Market System of NASDAQ, and in the shares of an
investment company registered under the Investment Company Act of 1940, as
amended. As of June 30, 2002, the Bank had no securities pursuant to this
exception.
TRANSACTIONS WITH AFFILIATES
Under current federal law, transactions between depository institutions and
their affiliates are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings bank is any company or entity that controls, is
controlled by, or is under common control with the savings bank, other than a
subsidiary. In a holding company context, at a minimum, the parent holding
companies of a savings bank and any companies that are controlled by such parent
holding company are affiliates of the savings bank. Generally, Section 23A
limits the extent to which the savings bank or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10% of such
savings bank's capital stock and surplus, and contains an aggregate limit on all
such transactions with all affiliates to an amount equal to 20% of such capital
stock and surplus. The term "covered transaction" includes the making of loans
or other extensions of credit to an affiliate; the purchase of assets from an
affiliate, the purchase of, or an investment in, the securities of an affiliate;
the acceptance of securities of an affiliate as collateral for a loan or
extension of credit to any person; or issuance of a guarantee, acceptance, or
letter of credit on behalf of an affiliate. Section 23A also establishes
specific collateral requirements for loans or extensions of credit to, or
guarantees, acceptances on letters of credit issued on behalf of an affiliate.
Section 23B requires that covered transactions and a broad list of other
specified transactions be on terms substantially the same, or no less favorable,
to the savings bank or its subsidiary as similar transactions with
nonaffiliates.
Further, Section 22(h) of the Federal Reserve Act restricts a savings bank
with respect to loans to directors, executive officers, and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who control, directly or indirectly, 10% or more of voting
securities of a savings bank, and certain related interests of any of the
foregoing, may not exceed, together with all other outstanding loans to such
persons and affiliated entities, the savings bank's total capital and surplus.
Section 22(h) also prohibits loans above amounts prescribed by the appropriate
federal banking agency to directors, executive officers, and stockholders who
control 10% or more of voting securities of a stock savings bank, and their
respective related interests, unless such loan is approved in advance by a
majority of the board of directors of the savings bank. Any "interested"
director may not participate in the voting. The loan amount (which includes all
other outstanding loans to such person) as to which such prior board of director
approval is required, is the greater of $25,000 or 5% of capital and surplus or
any loans over $500,000. Further, pursuant to Section 22(h), loans to directors,
executive officers and principal stockholders must generally be made on terms
substantially the same as offered in comparable transactions to other persons.
Section 22(g) of the Federal Reserve Act places additional limitations on loans
to executive officers.
HOLDING COMPANY REGULATION
GENERALLY.
Federal law allows a state savings bank, such as the Bank that qualifies as
a "Qualified Thrift Lender" discussed below, to elect to be treated as a savings
association for purposes of the savings and loan holding company provisions of
the Home Owners' Loan Act (the "HOLA"). Such election results in its holding
company being regulated as a savings and loan holding company by the OTS rather
than as a bank holding company by the Federal Reserve Board. The Company and the
Mutual Company have made such election by converting from a Delaware corporation
and a New York mutual holding company to a federal corporation and federal
mutual holding company, respectively, effective May 15, 2001. The Company and
the Mutual Company savings and loan holding companies are within the meaning of
HOLA. As such, the Company and the Mutual Company are registered with the OTS
and are subject to the OTS regulations, examinations, supervisions and reporting
requirements. In addition, the OTS has enforcement authority over the Company
and the Mutual Company and any nonsavings institution subsidiaries. Among other
things, this authority permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings institution. As
federal corporations, the Company and the Mutual Company are generally not
subject to state business organization law.
PERMISSIBLE ACTIVITIES.
Under the HOLA and OTS regulations and policies, a federal mid-tier holding
company such as the Company is permitted to, among other things: (i) own a
savings association or savings bank; (ii) acquire a mutual institution; (iii)
merge with or acquire another mutual holding company, one of whose subsidiaries
is a savings institution; (iv) acquire non-controlling amounts of the stock of
savings institutions and savings institution holding companies, subject to
certain restrictions; (v) invest in any corporation that a savings association
may invest in under federal law or under the law of any state where the savings
association has its home office; (vi) furnish or perform management services for
a savings institution subsidiary; (vii) hold, manage or liquidate assets owned
or acquired from a savings institution subsidiary of such company; (viii) hold
or manage properties used or occupied by a savings institution subsidiary of
such company; and (ix) act as trustee under deed or trust. In addition, a
federal mutual holding company may engage in any other activity that is
permissible for bank holding companies under the Bank Holding Company Act, or in
which multiple savings and loan companies may engage. Finally, under recently
enacted financial modernization legislation, federal mutual holding companies
may engage in any activity in which a financial holding company may engage,
including maintaining an insurance agency, escrow business and underwriting
securities and insurance. Moreover, a federal mutual holding company may engage
in the activities of a financial holding company without having to make
financial holding company election that is applicable to bank holding companies.
If a mutual holding company acquires or merges with another holding company, the
holding company acquired or the holding company resulting from such merger or
acquisition may only invest in assets and engage in activities listed above, and
has a period of two years to cease any nonconforming activities and divest of
any nonconforming investments.
HOLDING COMPANY REGULATORY CAPITAL REQUIREMENTS.
The Company, as a mutual savings and loan holding company, does not have
any regulatory capital requirements.
Mergers and Acquisitions.
The Home Owners' Loan Act prohibits a savings and loan holding company,
including the Company and Mutual Holding Company, directly or indirectly, or
through one or more subsidiaries, from acquiring another savings institution or
holding company thereof, without prior written approval of the OTS. The Home
Owners' Loan Act also prohibits a savings and loan holding company from,
directly or indirectly, acquiring more than 5% of the voting stock of another
savings association or savings and loan holding company, or from acquiring such
an institution or company by merger, consolidation, or purchase or its assets,
without the prior written approval of the OTS. In evaluating applications by
holding companies to acquire other financial institutions, the OTS considers the
financial and managerial resources and future prospects of the acquiror and the
merging institution, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving any acquisitions that would result in
multiple savings and loan holding companies controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies, and (ii) the
acquisition of a savings institution in another state if the laws of the state
or target savings institution specifically permit such acquisitions. The states
vary in the extent to which they permit interstate savings and loan holding
company acquisitions.
PAYMENT OF CASH DIVIDENDS.
OTS regulations generally do not restrict the ability of a savings and loan
holding company to pay dividends. However, federal and state law do impose
certain limitations on the payment by the Bank, the Company's principal
operating subsidiary, of cash dividends to the Company (described herein).
WAVIERS OF DIVIDENDS BY THE MUTUAL COMPANY.
OTS regulations require the Mutual Company to notify the OTS of any
proposed waiver of its right to receive dividends. 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 director's 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; and (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.
CONVERSION OF THE MUTUAL COMPANY TO STOCK FORM.
OTS regulations permit the Mutual Company to convert from the mutual to the
stock form of ownership (a "Conversion Transaction"). There can be no assurance
when, if ever, a Conversion Transaction will occur, and the Board of Directors
has no current intention to plan to undertake a Conversion Transaction. In a
Conversion Transaction a new holding company would be formed as the successor to
the Company (the "New Holding Company"), the Mutual Holding Company's corporate
existence would end, and certain depositors of the Bank would receive the right
to subscribe for additional shares of the New Holding Company. Based upon the
current OTS policy, in a Conversion Transaction, each share of Common Stock held
by the Company's public stockholders ("Minority Shareholders") would be
automatically converted into a number of shares of common stock of the New
Holding Company determined pursuant an exchange ratio that ensures that after
the Conversion Transaction, subject to any adjustment to reflect the receipt of
cash in lieu of fractional shares, the percentage of the to-be outstanding
shares of the New Holding Company issued to Minority Shareholders in exchange
for their Common Stock would be equal to the percentage of the outstanding
shares of Common Stock held by Minority Shareholders immediately prior to the
Conversion Transaction. The total number of shares held by Minority Stockholders
after the Conversion Transaction would also be affected by any purchases by such
persons in the offering that would be conducted as part of the Conversion
Transaction.
STOCK REPURCHASES.
The OTS imposes no restrictions on stock repurchases by the Company.
QUALIFIED THRIFT LENDER TEST.
In order for the Company to be regulated as a savings and loan holding
company by the OTS (rather than as a bank holding company by the Federal Reserve
Board), the Bank must qualify as a "qualified thrift lender" under OTS
regulations or satisfy the "domestic building and loan association" test under
the Internal Revenue Code. Under the qualified thrift lender test, a savings
institution is required to maintain at least 65% of its "portfolio assets"
(total assets less: (i) specified liquid assets up to 20% of total assets; (ii)
intangible, including goodwill; and (iii) the value of property used to conduct
business) in certain " qualified thrift investments" (primarily residential
mortgages and related investments, including certain mortgage-backed and related
securities) in at least nine out of each 12 month period. The Bank currently
maintains the majority of its portfolio assets in qualified thrift investments
and has met the qualified thrift lender test in each of the last 12 months.
FEDERAL SECURITIES LAW
The common stock of the Company is registered with the SEC under the
Securities Exchange Act of 1934 (the "Exchange Act"). The Company is subject to
the information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Exchange Act.
The Company common stock held by persons who are affiliates (generally
officers, directors and principal shareholders) of the Company may not be resold
without registration or unless sold in accordance with certain resale
restrictions. If the Company meets specified current public information
requirements, each affiliate of the Company is able to sell in the public
market, without registration, a limited number of shares in any three-month
period.
Sarbanes-Oxley Act of 2002
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of
2002 (the "Sarbanes-Oxley Act"). The Sarbanes-Oxley Act represents a
comprehensive revision of laws affecting corporate governance, accounting
obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all
companies with equity or debt securities registered under the Securities
Exchange Act of 1934. In particular, the Sarbanes-Oxley Act establishes: (i) new
requirements for audit committees, including independence, expertise, and
responsibilities; (ii) additional responsibilities regarding financial
statements for the Chief Executive Officer and Chief Financial Officer of the
reporting company; (iii) new standards for auditors and regulation of audits;
(iv) increased disclosure and reporting obligations for the reporting company
and their directors and executive officers; and (v) new and increased civil and
criminal penalties for violation of the securities laws. Many of the provisions
became effective immediately while other provisions become effective over a
period of 30 to 270 days and are subject to rulemaking by the Securities and
Exchange Commission. Although we anticipate that we will incur additional
expense in complying with the provisions of the Sarbanes-Oxley Act and the
resulting regulations, management does not expect that such compliance will have
a material impact on our results of operations or financial condition.
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act, as amended (the "CRA"), as
implemented by FDIC regulations, a savings bank has a continuing and affirmative
obligation, consistent with its safe and sound operation, to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA requires the FDIC, in connection with its examination of
a savings institution to assess the institution's record of meeting the credit
needs of its community and to take such record into account in its evaluation of
certain applications by such institution. The Bank's latest CRA rating was
"outstanding".
The Bank is also subject to provisions of the New York State Banking Law
which impose continuing and affirmative obligations upon banking institutions
organized in New York State to serve the credit needs of its local community
("NYCRA") which are substantially similar to those imposed by the CRA. The NYCRA
also requires the Superintendent to consider a bank's NYCRA rating when
reviewing a bank's application to engage in certain transactions, including
mergers, asset purchases and the establishment of branch offices or automated
teller machines, and provides that such assessment may serve as a basis for the
denial of any such application.
The Bank's NYCRA rating as of its latest examination was "outstanding".
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB of New York, which is one of 12 regional
FHLBs, that administers the home financing credit function of savings
institutions. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the board of directors of the FHLB. These policies and procedures are subject
to the regulation and oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of New York. At June 30, 2002, the Bank had $1,121,100 of FHLB stock. The
dividend rate from FHLB stock was 3.67% at June 30, 2002. No assurance can be
given that such dividends will continue in the future at such levels.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings institutions and to contribute to low and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
REPORTS TO SECURITY HOLDERS
The Company files annual and quarterly reports with the SEC on Forms 10-KSB
and 10-QSB, respectively. The Company also files current reports on the Form 8-K
with the SEC. Finally, the Company files preliminary and definitive proxy
materials with the SEC.
The public may read and copy any materials filed by the Company with the
SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington,
D.C. 20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The Company is an
electronic filer. The SEC maintains an Internet site that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC. The address of the site is http://www.sec.gov.
ITEM 2. PROPERTIES
------ ----------
The Bank currently conducts its business through six full-service banking
offices. Both the Company and the Bank maintain their executive offices at the
Operations Center, 302 Main Street, Catskill, New York. The following table sets
forth the Bank's offices as of June 30, 2002. The Bank's current facilities are
considered by management to be adequate for the needs of the Bank and the
Company in the foreseeable future.
Original Net Book Value
Leased Year Date of Of Property or
or Leased or Lease Leasehold
Location Owned Acquired Expiration Improvements
----------------------------------------- --------- --------------- ---------------
(Dollars in thousands)
Main Office (1)
Main & Church Streets
Catskill, NY 12414 Owned 1963 --- $245
Full Service Branches
Coxsackie Branch
Route 385
West Coxsackie, NY 12051 Owned 1974 --- $111
Cairo Branch
Main Street
Cairo, NY 12413 Owned 1988 --- $360
Greeneville Branch
Route 32
Greeneville, NY 12083 Owned 1997 --- $1,012
Tannersville Branch
Main Street
Tannersville, NY 12485 Owned 2000 --- $1,298
Westerlo Branch
Routes 141 & 143
Westerlo, NY 12193 Leased 2001 November 30, 2005 $100
Operations Center
302 Main Street
Catskill, NY 12414 Owned 1999 --- $554
(1) Includes adjacent parking lot.
ITEM 3. Legal Proceedings
------ -----------------
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business which, in
the aggregate, involve amounts which are believed by management to be immaterial
to the financial condition and results of operations of the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders
------ ---------------------------------------------------
No matters were submitted to a vote of shareholders during the fourth
quarter of the fiscal year under report.
PART II
ITEM 5. Market for Company's Common Stock and Related Security Holder Matters
------ ---------------------------------------------------------------------
The "Common Stock and Related Matters" section of the Company's Annual
Report to Shareholders is incorporated herein by reference.
ITEM 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
------ ----------------------------------------------------------------
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Company's Annual Report to Shareholders is
incorporated herein by reference.
ITEM 7. Selected Financial Data
------ -----------------------
The selected financial information for the year ended June 30, 2002 is
filed as part of the Company's Annual Report to Shareholders and is incorporated
by reference.
ITEM 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
------ ----------------------------------------------------------------
None.
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act
------ -----------------------------------------------------------------------
The "Proposal I - Election of Directors" section of the Company's
definitive Proxy Statement for the Company's 2002 Annual Meeting of Shareholders
(the "2002 Proxy Statement") is incorporated herein by reference.
ITEM 10. Executive Compensation
------- ----------------------
The "Proposal I - Election of Directors" section of the Company's 2002
Proxy Statement is incorporated herein by reference.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
------- --------------------------------------------------------------
The "Proposal I - Election of Directors" section of the Company's 2002
Proxy Statement is incorporated herein by reference.
ITEM 12. Certain Relationships and Related Transactions
------- -----------------------------------------------
The "Transactions with Certain Related Persons" section of the
Company's 2002 Proxy Statement is incorporated herein by reference.
ITEM 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
------- ----------------------------------------------------------------
(a)(1) Financial Statements
The exhibits and financial statement schedules filed as a part of this Form
10-KSB are as follows, all of which are included in the Annual Report to
Shareholders (Exhibit 13):
(A) Report of Independent Accountants
(B) Consolidated Statements of Condition
(C) Consolidated Statements of Operations
(D) Consolidated Statements of Changes in Equity
(E) Consolidated Statements of Cash Flows
(F) Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements. The remaining information appearing in the Annual Report
to Shareholders for the year ended June 30, 2002 is not deemed to be filed as
part of this report except as expressly provided herein.
(b)Reports on Form 8-K
None
(c)Exhibits
3.1 Certificate of Incorporation of Greene County Bancorp, Inc. (incorporated
herein by reference to the Company's registration statement on SB-2, file
No. 333-63681 (the "SB-2")).
3.2 Bylaws of Greene County Bancorp, Inc. (incorporated herein by reference to
the Company's SB-2)
4.0 Form of Stock Certificate of Greene County Bancorp, Inc. (incorporated
herein by reference to the Form SB-2)
10.1 Employment Agreement with J. Bruce Whittaker (incorporated herein by
reference to the Company's SB-2)
10.2 Employee Stock Ownership Plan (incorporated herein by reference to the
Company's SB-2)
13.0 Annual Report to Shareholders
21.0 Subsidiaries of the Company
23.0 Consent of Experts
99.1 Additional Exhibit
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
GREENE COUNTY BANCORP, INC.
Date: September 26, 2002 By:
------------------------------------
/s/J. Bruce Whittaker
President and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
By: By:
------------------------------ ------------------------
/s/Michelle Plummer /s/Walter H. Ingalls
Chief Financial Officer Chairman of the Board
Date: September 26, 2002 Date: September 26, 2002
By: By:
----------------------------- -------------------------
/s/Paul Slutzky /s/Raphael Klein
Director Director
Date: September 26, 2002 Date: September 26, 2002
By: By:
----------------------------- -------------------------
/s/David H. Jenkins, DVM /s/Dennis R. O'Grady
Director Director
Date: September 26, 2002 Date: September 26, 2002
By:
-----------------------------
/s/Martin C. Smith
Director
Date: September 26, 2002
Certification pursuant to Rule 13a-14
of the Securities Exchange Act of 1934, as Amended,
as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, J. Bruce Whittaker, Chief Executive Officer of Greene County Bancorp, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-KSB of Greene County
Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the period presented in
this annual report.
-------------------------------
Date: September 26, 2002 /s/J. Bruce Whittaker
Chief Executive Officer
Certification pursuant to Rule 13a-14
of the Securities Exchange Act of 1934, as Amended,
as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Michelle Plummer, Chief Financial Officer of Greene County Bancorp, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-KSB of Greene County
Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the period presented in
this annual report.
------------------------- -------------------------------
Date: September 26, 2002 /s/ Michelle Plummer
Chief Financial Officer
EXHIBIT 13
ANNUAL REPORT TO SHAREHOLDERS
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Company Percent Owned
The Bank of Greene County 100.0% owned by the Company
EXHIBIT 23
CONSENT OF EXPERTS
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-51538) of Greene County Bancorp, Inc. of our
report dated July 26, 2002 relating to the financial statements of Greene County
Bancorp, Inc., which appears in the Annual Report to Shareholders, which is
included in this Form 10-KSB.
PricewaterhouseCoopers LLP
/s/
Albany, New York
September 26, 2002
EXHIBIT 99.1
Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
---------------------------------------------------------------------
J. Bruce Whittaker, Chief Executive Officer and President and Michelle Plummer,
Chief Financial Officer and Treasurer of Greene County Bancorp, Inc. (the
"Company") each certify in his/her capacity as an officer of the Company that he
has reviewed the annual report on Form 10-KSB for the fiscal year ended June 30,
2002 and that to the best of his/her knowledge:
(1) the report fully complies with the requirements of Sections 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) the information contained in the report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: September 26, 2002 J. Bruce Whittaker,
-------------------------
Chief Executive Officer
and President
Date: September 26, 2002 Michelle Plummer,
--------------------------
Chief Financial Officer
and Treasurer