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10-K - FORM10KJUNE302011 - GREENE COUNTY BANCORP INCform10kjune302011.htm
EX-21 - EXHIBIT21JUNE302011 - GREENE COUNTY BANCORP INCexhibit21june302011.htm
EX-23 - EXHIBIT23JUNE302011 - GREENE COUNTY BANCORP INCexhibit23june302011.htm
EX-31.1 - EXHIBIT31ONEJUNE302011 - GREENE COUNTY BANCORP INCexhibit31onejune302011.htm
EX-31.2 - EXHIBIT31TWOJUNE302011 - GREENE COUNTY BANCORP INCexhibit31twojune302011.htm
EX-32.2 - EXHIBIT32TWOJUNE302011 - GREENE COUNTY BANCORP INCexhibit32twojune302011.htm
EX-32.1 - EXHIBIT32ONEJUNE302011 - GREENE COUNTY BANCORP INCexhibit32onejune302011.htm

 
 

 

GREENE COUNTY BANCORP, INC.
2011 ANNUAL REPORT

ONE COMMUNITY BANK
Many Communities

About the cover: While the majestic Hudson River divides Greene and Columbia counties, the Rip Van Winkle Bridge just as scenically connects them.  The Bank of Greene County also connects with people and businesses on both sides of the river with its unique brand of community banking

ABOUT OUR COMPANY

Greene County Bancorp, Inc. is the parent company of The Bank of Greene County and its subsidiary, Greene County Commercial Bank.  The Company’s consolidated assets as of June 30, 2011, were $547.5 million.

The Bank of Greene County was founded in 1889 as The Building and Loan Association of Catskill.  In 1974, the Bank changed to a New York State-chartered mutual savings bank, under the name Greene County Savings Bank.  In 1998, the Bank converted to the mutual holding company form of ownership, with the Bank changing its name to The Bank of Greene County.  A commercial bank subsidiary, Greene County Commercial Bank, was formed in June 2004.  In 2006, The Bank of Greene County converted to a federally chartered savings bank.

The Bank serves Greene, Albany and Columbia counties in New York State through administrative and lending/operations centers in Catskill, and twelve banking offices in Catskill-Main Street, Catskill-Commons, Cairo, Chatham, Coxsackie, Germantown, Greenport, Greenville, Hudson, Ravena, Tannersville and Westerlo.  As part of its mission, the Bank tries to foster a sense of community through personal service, local decision-making and participation with customers in community activities.

FINANCIAL HIGHLIGHTS


 
At or for the Years Ended June 30,
           
(In thousands)
2011
2010
2009
2008
2007
Total assets
$547,525
$495,323
$460,536
$379,608
$325,826
Loans receivable, net
301,046
295,582
267,902
238,440
207,280
Securities available-for-sale
90,117
89,805
98,271
96,692
87,184
Securities held-to-maturity
124,177
77,520
63,336
15,457
---
Deposits
469,897
421,732
398,729
321,431
284,176
Shareholders’ equity
48,081
44,503
40,264
36,267
35,415
Net interest income
19,713
17,717
15,730
12,190
10,543
Provision for loan losses
1,628
1,273
2,018
581
279
Total noninterest income
4,793
4,614
6,097
4,577
3,941
Total noninterest expense
14,855
13,609
13,557
12,301
11,037
Provision for income taxes
2,732
2,564
2,167
1,165
909
Net income
5,291
4,885
4,085
2,720
2,259

Branch and Office Locations listed and map of service area

 
 

 


Fellow Shareholders:
 
Picture Caption: President and Chief Executive Officer Donald Gibson outside the recently renovated Greene County Courthouse on Main Street in Catskill.
 
One true measure of a great company is consistency – the ability to perform at a high level year after year, in good times and bad.  Consistency is a reliable sig of fundamental strength based on sound strategies.
 
With that in mind, I am especially please to report that Greene County Bancorp, Inc. produced record earnings for the third consecutive year in fiscal 2011.  In addition, also for the third consecutive year, we ended fiscal 2011 with record high levels of deposits, loans, assets and capital.
 
These accomplishments become compelling when you consider that they came on the heels of a national economic crisis in 2008 – a period in which many banks struggled, and even failed.
 
As I noted last year, our consistently solid results are proof positive that the long-term strategic focus established by Management and the Board of Directors is bearing fruit.  We will continue on this course – one that has served us well and positioned the Company to create ongoing shareholder value – adjusting specifics as circumstances warrant.
 
[NET INCOME CHART]                                                      [NET LOANS CHART]                                                      [DEPOSITS CHART]
 
Record Earnings Highlight 2011 Financial & Business Performance
 
Net income for fiscal year 2011 was a record $5.3 million, compared to $4.9 million the prior year, an increase of 8.2%.  Total assets reached a record high of $547.5 million at June 30, 2011, up $52.2 million, or 10.5%, over $495.3 million at June 30, 2010.
 
These strong results were driven by solid performance throughout the Company.  Net interest income increased $2.0 million to $19.7 million for fiscal year 2011, compared to $17.7 million for the prior year.  Our net interest margin decreased by 6 basis points to 3.85% in fiscal 2011, versus 3.91% for the year ended June 30, 2010.
 
Our investment in people, new branches, new products and technology continue to help us grow – and grow more efficiently - significantly contributing to the bottom line.  We reduced our ratio of noninterest expenses to average assets again this year.  The ratio finished at 2.78% for fiscal year-end 2011, versus 2.87% for fiscal year-end 2010.
 
Lending continued to grow.  However, the growth pattern established over the last several years slowed due to the difficult economic environment.  Net loans outstanding totaled $301.0 million at June 30, 2011, an increase of $5.4 million, or 1.8%, over the prior year-end’s $295.6 million.
 
Responding to homeowners working through tough economic times, we recently introduced a new residential mortgage product name “Fast Finish Mortgage.”  It’s designed to attract new customers who want to eliminate their debt in 10 years or less.  Features include low closing costs, no escrow requirement and no prepayment penalties.  We also attached innovative marketing incentives, such as a free Apple® iPad upon closing.  The Fast Finish Mortgage has proven to be very popular; we believe it will help us gain market share and grow our loan portfolio.
 
We continued to focus on commercial lending during the fiscal year and successfully developed new or expanded customer relationships. Total commercial and commercial real estate loans outstanding at June 30, 2011, amounted to $82.6 million, versus $70.4 million at the end of fiscal 2010, an increase of $12.2 million, or 17.3%.
 
As the loan portfolio grows, we continue to closely monitor asset quality and adjust the level of our allowance for loan losses when necessary. As a result, the provision for loan losses amounted to $1.6 million and $1.3 million for the years ended June 30, 2011 and 2010, respectively, an increase of $355,000, or 27.9%. The allowance for loan losses to total loans receivable was 1.66% as of June 30, 2011, compared to 1.34% as of June 30, 2010. Nonperforming loans to total loans was 2.09% and 1.33% at June 30, 2011 and 2010, respectively.
 
In addition to a growing loan portfolio, our investment portfolio increased to $214.3 million at the end of fiscal 2011, up $47.0 million from $167.3 million at the end of fiscal year 2010.
 
Increased deposits were the primary funding source for both our loan and investment portfolio growth. For the fiscal years 2011 and 2010, total deposits were $469.9 million and $421.7 million, respectively, an increase of $48.2 million.
 
We remain focused on our long-term strategy of growing core deposits across the retail, commercial and municipal customer segments. Core deposits now constitute over 80.0% of total deposits.
 
The Company’s capital ratios remain strong, with total shareholders’ equity of $48.1 million as of June 30, 2011, representing 8.8% of total assets.
 
Recognition of Our Strengths and Safety
 
We proudly accepted several awards last year, recognizing the Company’s solid performance.
 
USBanker – Top 200 Community Banks. For the second consecutive year, our Company was included on this list of top banks from across the nation.  USBanker magazine ranked community with less than $2.0 billion in assets (at December 31, 2010) by average return on equity for the three years ended December 31, 2008, 2009 and 2010. Picture caption cover of USBanker magazine.
 
BauerFinancial, Inc. - 5-Star Superior Rating..  Both the Bank of Greene County and Greene County Commercial Bank earned top “5-Star Superior” ratings for financial strength and safety from BauerFinancial, Inc., the nation’s leading independent bank research firm
 
Seifried & Brew, LLC – Ranked Our Bank One of the Safest in the U.S.  The Bank of Greene County was ranked one of the safest banks in the nation, according to Seifried & Brew, LLC, a community bank risk management firm. The ranking recognizes and honors community banks whose policies and practices reflect the highest level of safety and soundness.
 

 
Capital Strategies
 
We continue to evaluate various long-term capital maximization strategies. Among them, we look at modeling opportunities for acquiring other banks and other bank branches on a regular basis. After careful analysis – and after considering the prevailing economic conditions – we did not identify any such opportunities that we believed would be in the best interests of our shareholders.
 
Instead, we focused on other aspects of our long-term strategy: infrastructure upgrades, organic asset growth combined with organic branch growth, review of additional common stock buybacks and continuing cash dividends.
 
An example of last year’s infrastructure improvements was a major upgrade to our communications systems.  Converting our network to fiber optics and wireless technology enabled us to significantly increase communication speed, improve security and operate in a more cost-efficient manner.
 
Although we did not acquire any branches in fiscal 2011, we did officially open the doors to our twelfth branch on October 30, 2010. The 1,500-square-foot de novo branch on Route 9G in Germantown, NY, adds an important strategic location to our growing footprint in Columbia County. As this report was being prepared, we had already attracted over 650 new relationships, far exceeding our original deposit projections.
 
We appreciate the warm welcome received in German-town, and look forward to participating in and enhancing the financial vitality of our new community.
 
Continuing Traditions of Giving and Inclusion
 
The Bank of Greene County Charitable Foundation contributed over $68,000 to dozens of local non-profit organizations in fiscal 2011. Since 1998, the Foundation has distributed over $600,000 in support of education, health and wellness, social and civic services, and cultural, arts and recreation programs. It’s just one of the ways we help improve the quality of life in our communities.
 
I hope you will be able to attend our Annual Shareholder Meeting Brunch, which will be held at 10am on Saturday, November 5, 2011, at Columbia-Greene Community College in Hudson, NY.
 
As always, I would like to thank my fellow shareholders for your confidence and support, and I welcome your comments and suggestions at any time.
 
In closing, I would like to convey my heartfelt thanks to our directors and staff for their contributions to the Company’s success. We would not have come so far without your hard work and dedication. I am especially grateful for your enthusiastic support as we continue the journey.
 
Sincerely,
 
/s/ Donald E. Gibson
 
Donald E. Gibson
 
President & Chief Executive Officer
 
ONE COMMUNITY BANK – MANY COMMUNITIES
 
Our Latest Addition – Germantown NY
 
It’s a well-traveled conundrum in the financial services industry: At what point does a community bank serve so many communities it stops behaving like a community Bank?
 
For The Bank of Greene County, the answer to that question is simple: Never!
 
“We will never allow ourselves to become the bank of who from where? ”  says Don Gibson, President and CEO. “Geographically, we build off synergies between our branches, spacing them so they support one another, but without overlap. As important, we only go where there’s a real need and where we can fully engage the local community.”
 
The Bank has stayed true to this strategy in building its network of 12 branches over the last 47 years. The newest office, which opened in Germantown, NY, in October 2010, is a prime example.  A big bank had recently abandoned the quiet little Hudson River town. “That opened the door for us, but it didn’t guarantee there was a need. So we did something unique,” says Gibson. “We ‘presold’ the community before the branch even opened.”
 
Gibson and his team hit the pavement in and around Germantown, testing the waters with local governments, school districts, businesses and community organizations. In many cases, they secured commitments – well before ever hanging a shingle.
 
The geography also made sense. Germantown expanded the Bank’s presence in Columbia County, joining three sister branches and filling a void in the southwest corner of the county. The branch is conveniently located on Route 9G, the area’s main north-south thoroughfare, near the town park and a small group of essential service businesses.
 
“It was the best branch opening we ever had,” adds Gibson. “We set up tents in the parking lot so community groups could have tables, the local firefighters hosted a chicken barbecue for our guests…the place was mobbed. Local police had to come over to direct traffic.”  One community bank with many communities? “We’ve proven it can be done,” says Gibson, “and we’ll never enter a market unless we know that we can offer people a local, hometown touch.”
 

 
 

 

Client Profile
 
OTTO’S MARKET – A Germantown Favorite
 
It’s a slice of Americana from bygone days that predate grocery super centers and big-box behemoths. A little general store where the shelves are meticulously stocked with familiar essentials as well as homegrown specialties – from Tide detergent to hand-crafted potato chips made by a local couple.
 
Otto’s Market is the brainchild of Otto Leuschel, who as a 6-year-old boy set up “shop” in the attic of his family’s home, using Mom’s empty grocery packaging to fill his shelves. Many decades later, he’s come down from the attic by way of Whole Foods Market and his packages are empty no more.
 
“As a rural market, we want to be all things to all people,” says Otto. “I should have everything on your list, but we also have the best of natural foods, and local products you won’t find anywhere else. I come from a background that emphasizes high-quality foods with fewer additives and less adulteration.”
 
Otto worked at Whole Foods for 17 years, starting out in the cheese department of a Houston store and rising to Vice President of the Northeast Region. And he has not a single regret. “Whole Foods is a great company and I have nothing but good things to say about them. The company kind of outgrew me,” says Otto. “I just wanted a simpler life with less email, less time on a cell phone, less technology…and more people interaction and hands-on product management.”
 
At first, Otto thought raising chickens might be the answer. Already a part-time resident of the Hudson Valley, he began combing the area for a farm he could buy. When he heard the old Central Market in Germantown was for sale, he went to have a look. “The minute I walked in, I knew it was what I wanted to do,” he says. “I figured it might be easier than raising chickens!”
 
To finance his vision, Otto settled on The Bank of Greene County after interviewing several other institutions. “I chose them mostly because all decisions are made locally. When I first went to pitch my idea, I was impressed that Perry Lasher, the head of commercial lending, and Don Gibson, the CEO, were both there.”
 
Picture Caption: Guess which one’s the grocer?  President and CEO Donald Gibson of The Bank of Greene County visits with Otto Leuschel, owner of Otto’s Market in Germantown.
 
Otto’s Market opened in December 2008, and the Bank has been involved from the start. “Most of the people I’ve met at The Bank of Greene County are still there,” adds Otto. “When you interact with them, you see their professionalism, and that they’re happy with their company. I found those qualities similar to the culture at Whole Foods, something I’m also trying to create in my own business.”
 

 
 

 

Client Profile
 
FINGAR INSURANCE –
 
A Family Affair & Community Cornerstone
 
With a history spanning 80 years and four generations, many things have changed at Fingar Insurance – and at the same time, many things have not. The agency was founded in 1931 by Luther Fingar, who primarily sold life insurance. Luther’s son Peter took over in the mid-1950s and expanded the agency’s property and casualty insurance business. Peter then passed the baton to sons Gregory and Mark, who own and operate the business today.
 
“My daughter and Mark’s daughter both work for us now, so they’re the fourth generation,” says Greg Fingar. “We’re kicking the can down the road, if you will, in a positive way.”
 
Picture Caption:  This Insurance family includes bankers. Left to right, standing: Mark Fingar, Nina Fingar and Peter Fingar, all part of Fingar Insurance, flanked by Brian Stickles, Credit Analyst at The Bank of Greene County. Seated: Greg Fingar (left) with Perry Lasher, Vice President for Commercial Lending at The Bank of Greene County.
 
Fingar Insurance currently has offices in Germantown, Hudson and Catskill, NY. It’s recognized as one of the leading insurance agencies in Columbia and Greene counties. “We’re probably 95% property and casualty insurance today, both personal and commercial lines,” says Greg. “We still sell some life insurance, but it’s a lot different than the business my grandfather started.”
 
One thing that isn’t much different is the personal service and local touch that enable Fingar to compete with larger companies marketing aggressively online. “Competition from the Internet is challenging for us,” says Greg. “Our focus has to be that we’re right here and when you have a problem we get things done. We have about a 94% customer retention ratio, compared to one of the big-name companies at 56%.”
 
The initial rates people receive over the Internet often don’t last very long once the policies get properly priced, resulting in the low retention rate, adds Greg. “We pride ourselves on providing accurate information and great service.”
 
Not surprisingly, those same qualities are why Greg and his brother Mark choose to do business with The Bank of Greene County. “One of my real pet peeves is service,” says Greg. “With The Bank of Greene County, I can pick up the phone at 4:30 on a Friday afternoon and have a chat with the bank president. That’s something I’ve never had with any other bank. Their interest rates are good, the people are friendly, and with the opening of Germantown they have branches in all the places we have offices. That’s a big convenience.”
 

 
 

 

Client Profile
 
TOWN OF GERMANTOWN – A Riverside Gem
 
Perched on the east bank of the Hudson River in Columbia County, Germantown is surrounded by orchards, small farms and wooded hills. It’s an outpost of rural America, suggestive of simpler times, and home to more than 2,000 residents. “People move to Germantown because of its rural setting, proximity to the Hudson River and the easy access to New York City, Boston and Philadelphia,” says Town Supervisor Roy Brown. “Not to mention a beautiful view of the Catskill Mountains.”
 
The town’s small size – only about 12 square miles – and low-key demeanor do not diminish its spunk. An economic development committee actively promotes local businesses, a town park offers a range of recreational activities and a boat launch gives residents easy access to the river.
 
One of the driving forces behind all of this is Supervisor Brown. When Roy heard a local bank might be coming to Germantown – taking over a spot once occupied by a big bank that had departed – his ears perked up.
 
“The town was interested in changing banks, looking to get more return on its accounts,” says Roy. “When The Bank of Greene County began talking about opening a branch in Germantown, we became very interested and talked with them prior to their move. Now, we’ve been with them since they opened here.”
 
Roy is all about keeping things local, which factored into the town’s decision about where to bank. “Most of the banks in Columbia County have changed they may have branches in the county, but none of them are headquartered around here,” says Roy. “I’ve always believed in shopping local, and The Bank of Greene County, to me, is the only local bank in Columbia County.”
 
Picture Caption:  You can call me Roy. Everyone’s on a first-name basis at the German-town branch. Joining Town Supervisor Roy Brown (middle, light jacket) are Kres Bjornsson, Vice President for Municipal Banking & Commercial Services; Beth Hansen, Branch Manager; and Don MacCormack, Municipal & Commercial Services Representative, all from The Bank of Greene County.
 
Of course, money was a factor as well. “I also like that The Bank of Greene County provides a better return on our deposits,” adds Roy. “In the current economy, every dollar earned helps our budget go further.”
 
The Bank has also won business from Germantown’s school district and fire company. “I’ve been very impressed,” says Roy. “The Bank transformed a vacant property into a welcoming, open facility, and the staff is very helpful and friendly. They always take the time to ask how your day is going. It’s nice to be recognized when you walk in!”


 
 

 

SELECTED FINANCIAL INFORMATION

The selected financial and operational data presented below at and for the years shown was derived from the audited consolidated financial statements of Greene County Bancorp, Inc. and should be read in conjunction with the consolidated financial statements presented elsewhere in this Annual Report.

 
                                  At or for the Years Ended June 30,
 
(Dollars in  thousands, except per share amounts)
2011
2010
2009
 
SELECTED FINANCIAL CONDITION DATA:
     
 
Total assets
$547,525
$495,323
$460,536
 
Loans receivable, net
301,046
295,582
267,902
 
Securities available-for-sale
90,117
89,805
98,271
 
Securities held-to-maturity
124,177
77,520
63,336
 
Deposits
469,897
421,732
398,729
 
Shareholders' equity
48,081
44,503
40,264
         
 
AVERAGE BALANCES:
     
 
Total assets
533,971
473,966
435,745
 
Earning assets
512,303
452,634
413,846
 
Loans receivable, net
297,505
281,835
258,199
 
Securities
193,267
156,209
142,978
 
Deposits
468,906
409,240
375,039
 
Borrowings
16,298
19,849
20,249
 
Shareholders' equity
46,214
42,460
37,934
         
 
SELECTED OPERATIONS DATA:
     
 
Total interest income
24,224
23,083
22,482
 
Total interest expense
4,511
5,366
6,752
 
Net interest income
19,713
17,717
15,730
 
Provision for loan losses
1,628
1,273
2,018
 
Net interest income after provision for loan losses
18,085
16,444
13,712
 
Total noninterest income
4,793
4,614
6,097
 
Total noninterest expense
14,855
13,609
13,557
 
Income before provision for income taxes
8,023
7,449
6,252
 
Provision for income taxes
2,732
2,564
2,167
 
Net income
5,291
4,885
4,085
         
 
FINANCIAL RATIOS:
     
 
Return on average assets1
0.99%
1.03%
0.94%
 
Return on average shareholders’ equity2
11.45
11.50
10.77
 
Noninterest expenses to average total assets
2.78
2.87
3.11
 
Average interest earning assets to average interest
   bearing liabilities
116.89
116.35
115.97
 
Net interest rate spread3
3.70
3.72
3.54
 
Net interest margin4
3.85
3.91
3.80
 
Efficiency ratio5
60.62
60.95
62.11
 
Shareholders’ equity to total assets, at end of period
8.78
8.98
8.74
 
Average shareholders’ equity to average assets
8.65
8.96
8.71
 
Dividend payout ratio6
70.31
57.56
68.00
 
Actual dividends declared to net income7
31.13
25.34
29.94
 
Nonperforming assets to total assets, at end of period
1.23
0.79
0.64
 
Selected Financial Information Continued…
                                     At or for the Years Ended June 30,
   
2011
2010
2009
 
Nonperforming loans to net loans, at end of period
2.09%
1.33%
1.01%
 
Allowance for loan losses to non-performing loans
80.54
102.63
126.06
 
Allowance for loan losses to total loans receivable
1.66
1.34
1.26
 
Book value per share8
$11.60
$10.80
$9.81
 
Basic earnings per share
1.28
1.19
1.00
 
Diluted earnings per share
1.27
1.18
0.99
 
OTHER DATA:
     
 
Closing market price of common stock
$17.69
$16.00
$14.50
 
Number of full-service offices
12
11
11
 
Number of full-time equivalent employees
122
114
117

 
   1 Ratio of net income to average total assets.
   2 Ratio of net income to average shareholders’ equity.
 
 3 The difference between the weighted average yield on interest earning assets and the weighted average    cost of interest bearing liabilities.
   4 Net interest income as a percentage of average interest earning assets.
   5 Noninterest expense divided by the sum of net interest income and noninterest income.
 
6 Dividends per share divided by basic earnings per share. This calculation does not take into account the waiver of dividends by Greene County Bancorp, MHC.
   7 Dividends declared divided by net income.
   8 Shareholders’ equity divided by outstanding shares reduced by unearned ESOP shares.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

This Annual Report contains forward-looking statements.  Greene County Bancorp, Inc. desires to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 and is including this statement for the express purpose of availing itself of the protections of the safe harbor with respect to all such forward-looking statements.  These forward-looking statements, which are included in this Management’s Discussion and Analysis and elsewhere in this Annual Report, describe future plans or strategies and include Greene County Bancorp, Inc.’s expectations of future financial results.   The words “believe,” “expect,” “anticipate,” “project,” and similar expressions identify forward-looking statements.  Greene County Bancorp, Inc.’s ability to predict results or the effect of future plans or strategies or qualitative or quantitative changes based on market risk exposure is inherently uncertain.  Factors that could affect actual results include but are not limited to:
(a)  
changes in general market interest rates,
(b)  
general economic conditions,
(c)  
legislative and regulatory changes,
(d)  
monetary and fiscal policies of the U.S. Treasury and the Federal Reserve,
(e)  
changes in the quality or composition of Greene County Bancorp, Inc.’s loan and investment portfolios,
(f)  
deposit flows,
(g)  
competition, and
(h)  
demand for financial services in Greene County Bancorp, Inc.’s market area.
These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements, since results in future periods may differ materially from those currently expected because of various risks and uncertainties.

Information

We make available free of charge through our website the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission: our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.


MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

Greene County Bancorp, Inc. (the “Company”) is the holding company for The Bank of Greene County (the “Bank”), which is a community-based bank offering a variety of financial services to meet the needs of the communities it serves.  The Bank of Greene County is a federally chartered savings bank.  The Bank of Greene County’s principal business is attracting deposits from customers within its market area and investing those funds primarily in loans, with excess funds used to invest in securities.  The Bank of Greene County currently operates twelve full service branches, an administration office and an operations center in New York’s Greene, Albany, and Columbia counties.  In June 2004, Greene County Commercial Bank (“GCCB”) was opened for the limited purpose of servicing local municipalities.  GCCB is a subsidiary of The Bank of Greene County, and is a New York State-chartered commercial bank.  Greene County Bancorp, Inc.’s stock is traded on the NASDAQ Capital Market under the symbol “GCBC.”  Greene County Bancorp, MHC is a mutual holding company that owns 55.6% of Greene County Bancorp, Inc.’s outstanding common stock.    In June 2011, Greene Properties Holding, Ltd. was formed as a New York corporation that has elected under the Internal Revenue Code to be a real estate investment trust.  Greene Properties Holding, Ltd. is a subsidiary of The Bank of Greene County.  Certain mortgages and notes currently held by The Bank of Greene County will be transferred and beneficially owned by Greene Property Holding, Ltd.  The Bank of Greene County will continue to service these loans.

Greene County Bancorp, Inc.’s results of operations, like many other financial institutions, depend primarily on its net interest income, which is the difference between the income earned on Greene County Bancorp, Inc.’s loan and securities portfolios and the cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations can also be affected by Greene County Bancorp, Inc.’s provision for loan losses, income and expense pertaining to foreclosed real estate owned, gains and losses from sales of securities, noninterest income and noninterest expense.  Noninterest income consists primarily of fees and service charges.  Noninterest expense consists principally of salaries and employee benefits, occupancy, equipment and data processing, and other operating expenses. Results of operations are also significantly affected by general economic and competitive conditions, changes in interest rates, as well as government policies and actions of regulatory authorities. Additionally, future changes in applicable law, regulations or government policies may materially affect Greene County Bancorp, Inc. and its related entities.

Critical Accounting Policies

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

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

Management of Credit Risk

Management considers credit risk to be an important risk factor affecting the financial condition and operating results of Greene County Bancorp, Inc. The potential for loss associated with this risk factor is managed through a combination of policies approved by Greene County Bancorp, Inc.’s Board of Directors, the monitoring of compliance with these policies, and the periodic reporting and evaluation of loans with problem characteristics. Policies relate to the maximum amount that can be granted to a single borrower and such borrower’s related interests, the aggregate amount of loans outstanding by type in relation to total assets and capital, loan concentrations, loan-to-collateral value ratios, approval limits and other underwriting criteria. Policies also exist with respect to the rating of loans, determination of when loans should be placed on a nonperforming status and the factors to be considered in establishing Greene County Bancorp, Inc.’s allowance for loan losses.  Management also considers credit risk when evaluating potential and current holdings of securities.  Credit risk is a critical component in evaluating corporate debt securities. Typically, we will not purchase a security below Standard & Poor’s “A-” rating and will consider selling a security if it falls into a lower category while in the securities portfolio.  Greene County Bancorp, Inc. has purchased municipal securities as part of its strategy based on the fact such securities can offer a higher tax-equivalent yield than other similar investments.

Management of Interest Rate Risk

While Greene County Bancorp, Inc.’s loan portfolio, consisting primarily of mortgage loans collateralized by residential real property located in its market area, is subject to risks associated with the local economy, Greene County Bancorp, Inc.’s most significant form of market risk is interest rate risk because most of Greene County Bancorp, Inc.’s assets and liabilities are sensitive to changes in interest rates.  Greene County Bancorp, Inc.’s assets consist primarily of residential mortgage loans, which have longer maturities than Greene County Bancorp, Inc.’s liabilities, which consist primarily of deposits.  Greene County Bancorp, Inc. does not engage in any derivative-based hedging transactions, such as interest rate swaps and caps.  Due to the complex nature and additional risk often associated with derivative hedging transactions, such as counterparty risk, it is Greene County Bancorp, Inc.’s policy to continue its strategy of mitigating interest rate risk through balance sheet composition. Greene County Bancorp, Inc.’s interest rate risk management program focuses primarily on evaluating and managing the composition of Greene County Bancorp, Inc.’s assets and liabilities in the context of various interest rate scenarios.  Factors beyond management’s control, such as market interest rates and competition, also have an impact on interest income and interest expense.

In recent years, Greene County Bancorp, Inc. has followed the following strategies to manage interest rate risk:
(i)   maintaining a high level of liquid interest earning assets such as short-term federal funds sold and
       various investment securities;
(ii)  maintaining a high concentration of less interest-rate sensitive and lower-costing core deposits;
(iii) originating consumer installment loans that have up to five year terms but that have significantly
       shorter average lives due to early prepayments;
(iv)           originating adjustable rate commercial and home equity loans; and
(v) where possible, matching the funding requirements for fixed-rate residential mortgages with
       lower-costing core deposit accounts.

By investing in liquid securities, which can be sold to take advantage of interest rate shifts, and originating consumer installment loans with shorter average durations, Greene County Bancorp, Inc. believes it is better positioned to react to changes in market interest rates.  Investments in short-term securities, however, generally bear lower yields than longer-term investments.  Greene County Bancorp, Inc. also attempts to offset interest rate risk by investing in adjustable rate securities, which will increase or decrease at periodic intervals based on a current interest rate. Thus, these strategies may result in lower levels of interest income than would be obtained by investing in longer-term fixed-rate investments.

Gap Analysis.  The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring a company’s interest rate sensitivity “gap.”  An asset or liability is deemed to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest earning assets maturing or repricing within a specific time period and the amount of interest bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. Accordingly, during a period of rising interest rates, an institution with a negative gap position generally would not be in as favorable a position, compared with an institution with a positive gap, to invest in higher yielding assets. The resulting yield on the institution’s assets generally would increase at a slower rate than the increase in its cost of interest bearing liabilities. Conversely, during a period of falling interest rates, an institution with a negative gap would tend to experience a repricing of its assets at a slower rate than its interest bearing liabilities which, consequently, would generally result in its net interest income growing at a faster rate than an institution with a positive gap position. At June 30, 2011, Greene County Bancorp, Inc.’s cumulative one-year and three-year gap positions, the difference between the amount of interest earning assets maturing or repricing within one year and three years and interest bearing liabilities maturing or repricing within one year and three years, as a percentage of total interest earning assets were negative 2.92% and negative 0.84% respectively.

Certain shortcomings are inherent in this method of analysis. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. It should also be noted that interest-bearing core deposit categories, which have no stated maturity date, have an assumed decay rate applied to create a cash flow on those deposit categories for gap purposes.  Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets such as adjustable-rate loans have features that restrict changes in interest rates both on a short-term basis and over the life of the asset. Further, in the event of changes in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of many borrowers to service their adjustable-rate loans may decrease in the event of an interest rate increase.

The following table presents Greene County Bancorp, Inc.’s net portfolio value (“NPV”).  The NPV table indicates the market value of assets less the market value of liabilities at each specific rate shock environment.  The net portfolio value can be viewed as a form of the mark-to-market net worth of the statement of financial condition.  These calculations were based upon assumptions believed to be fundamentally sound, although they may vary from assumptions utilized by other financial institutions.  The information set forth below is based on data that included all financial instruments as of June 30, 2011.  Assumptions made by Greene County Bancorp, Inc. relate to interest rates, loan prepayment rates, core deposit duration, and the market values of certain assets and liabilities under the various interest rate scenarios.  Actual maturity dates were used for fixed rate loans and certificate accounts.  Securities were scheduled at either maturity date or next scheduled call date based upon judgment of whether the particular security would be called based upon the current interest rate environment, as it existed on June 30, 2011.  Variable rate loans were scheduled as of their next scheduled interest rate repricing date.  Additional assumptions made in the preparation of the NPV table include prepayment rates on loans and mortgage-backed securities. For each interest bearing core deposit category, a discounted cash flow based upon the decay of each category was calculated and a discount rate applied based on the FHLB fixed rate advance term nearest the average life of the category.  The noninterest bearing category does not use a decay assumption, and the 24 month FHLB advance rate was used as the discount rate.  The NPV at “Par” represents the difference between Greene County Bancorp, Inc.’s estimated value of assets and value of liabilities assuming no change in interest rates.  The NPV for a decrease of 100, 200 and 300 basis points have been excluded since they would not be meaningful in the interest rate environment as of June 30, 2011.

The following sets forth Greene County Bancorp, Inc.’s NPV as of June 30, 2011.

Changes in
         
market interest rates
 
$ Change
% Change
NPV as a % of assets
(Basis Points)
Company NPV
From Par
From Par
NPV Ratio1
Change 2
           
(Dollars In thousands)
         
+300 bp
$40,893
($28,398)
(40.98)%
  7.92%
(440) bps
+200 bp
  53,354
   (15,937)
(23.00)%
10.01%
(232) bps
+100 bp
  62,869
     (6,422)
  (9.27)%
11.47%
 (86) bps
PAR
  69,291
           0
  0.00%
12.33%
   0 bps

______________________________
1 Calculated as the estimated NPV divided by the present value of total assets.
2 Calculated as the excess (deficiency) of the NPV ratio assuming the indicated change in interest rates over the estimated NPV ratio assuming no change in interest rates.

As also indicated with the gap analysis, certain shortcomings are inherent in the methodology used in the above interest rate risk measurements.  Modeling changes in NPV require the making of certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates.

FINANCIAL OVERVIEW

Net income for the year ended June 30, 2011 amounted to $5.3 million or $1.28 per basic and $1.27 per diluted share as compared to $4.9 million or $1.19 per basic and $1.18 per diluted share for the year ended June 30, 2010, an increase of $400,000, or 8.2%.  The increase in net income was primarily the result of an increase of $2.0 million in net interest income, which was partially offset by a $1.2 million increase in noninterest expense.   The increase in net interest income was the result of growth in the average balances of interest earning assets complemented by a decrease in interest rates paid on interest bearing deposits, which was partially offset by growth in the average balances of interest bearing deposits and a decrease in the yield on interest earning assets.    The increase in noninterest expense was primarily the result of a $1.2 million increase in salaries and employee benefits and that partially due to an increase in the number of employees as a result of opening a new branch office in Germantown, NY as well as an increase in the amount accrued for bonuses to be paid to employees based on the strong overall performance and attainment of strategic objectives in the fiscal year ended June 30, 2011.

Total assets grew $52.2 million or 10.5% to $547.5 million at June 30, 2011 as compared to $495.3 million at June 30, 2010.  Net loans increased $5.4 million or 1.8% to $301.0 million at June 30, 2011 as compared to $295.6 million at June 30, 2010.  Securities classified as both available for sale and held to maturity increased $47.0 million to $214.3 million at June 30, 2011 as compared to $167.3 million at June 30, 2010.  The increase in securities was the result of growth in deposits during the fiscal year ended June 30, 2011, primarily within Greene County Commercial Bank.   Deposits grew $48.2 million to $469.9 million at June 30, 2011 as compared to $421.7 million at June 30, 2010.  Of this growth in deposits, $28.7 million consisted of growth in deposits with Greene County Commercial Bank, and represented deposits by local municipalities.   It is required that securities be pledged as collateral for these deposits in excess of FDIC insurance limits for these municipalities.   The remaining $19.5 million in deposit growth was the result of an increase in retail deposits at The Bank of Greene County, and was due to continued growth in newer branches within our recently expanded market area.   Total shareholders’ equity amounted to $48.1 million at June 30, 2011, or 8.8% of total assets compared to $44.5 million at June 30, 2010, or 9.0% of total assets.

 
 

 

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2011 AND JUNE 30, 2010

Securities

Securities increased to $214.3 million at June 30, 2011 from $167.3 million at June 30, 2010, an increase of $47.0 million.  The increase in the portfolio was the result of $104.8 million of securities purchases during the fiscal year ended June 30, 2011.  Purchases consisted of $11.1 million of U.S. Treasury securities, $18.9 million of U.S. government sponsored enterprise bonds, $53.9 million of mortgage-backed securities, and $20.9 million of state and political subdivision securities.  This increase was partially offset by the sale of securities issued by U.S. government sponsored enterprise and mortgage-backed securities totaling $7.7 million, and maturities and principal repayments of $48.4 million, of which $16.7 million were mortgage-backed securities, $17.4 million were state and political subdivision securities and $14.3 million were U.S. government sponsored enterprise securities.   Sales of securities resulted in gross realized gains of $233,000 during the year ended June 30, 2011.    During fiscal 2010, the proceeds from sales of available-for-sale securities were $1.8 million, the gross realized gains were $32,000 and the gross realized losses were $37,000.    During fiscal 2011, a write-down of $2,000 was recognized for other-than-temporary impairment on a held-to-maturity security.
 
 
During the year ended June 30, 2011 and 2010, the Company invested $8.7 million and $4.0 million, respectively, in a nonstandard type of mortgage-backed security called DUS bonds, which are bonds issued under a program originally initiated by Fannie Mae called the Delegated Underwriting and Servicing Program with underlying collateral in multi-family housing.  They offer a yield maintenance provision, which helps protect the value of the investment in a declining or low interest rate environment.  However, due to the yield maintenance provision, the Company paid a significant amount of premium when acquiring these investments.  Further, these securities offer less interest rate sensitivity, especially in a declining rate environment.  Total DUS bonds held by the Company were $32.6 million at June 30, 2011.    Mortgage-backed securities, including “DUS” bonds, accounted for $126.8 million of the $214.3 million of securities held in the Company’s securities portfolio at June 30, 2011.   Within the portfolio, the book value of adjustable rate mortgage-backed securities totaled $667,000 at June 30, 2011.  The fair value of mortgage-backed securities that mature in ten years or less amounted to $76.0 million which helps to offset the interest rate sensitivity of longer term fixed rate loans such as residential mortgage loans.

At June 30, 2011, unrealized gains and losses on the securities, including both available-for-sale and held-to-maturity, amounted to a net gain of $4.0 million as compared to a net gain of $4.5 million at June 30, 2010.  Management believes that as of June 30, 2011, none of the unrealized losses in the portfolio were the result of other-than-temporary impairment, but rather were associated with the changing interest rate environment, widening credit spreads and market illiquidity at the end of the fiscal year.  Management’s process for evaluating securities for other-than-temporary impairment is discussed within Note 1 Summary of significant accounting policies in the Notes to Consolidated Financial Statements.

Greene County Bancorp, Inc. holds 19.6% of the securities portfolio at June 30, 2011, in state and political subdivision securities to take advantage of tax savings and to promote Greene County Bancorp, Inc.’s participation in the communities in which it operates.  Greene County Bancorp, Inc. continues to operate a niche market of financing for fire trucks and firehouses through either bond purchases or loans.

 
 

 


 
Carrying Value at June 30,
(Dollars In thousands)
        2011
        2010
 
 
Balance
Percentage
of portfolio
 
Balance
Percentage
of portfolio
 
Securities available-for-sale:
       
  U.S. government sponsored enterprise
$25,703
12.0%
$22,176
13.3%
  State and political subdivisions
7,062
3.3
8,749
5.2
  Mortgage-backed securities-residential
28,914
13.5
25,883
15.5
  Mortgage-backed securities-multifamily
21,096
9.8
25,932
15.5
  Asset-backed securities
23
0.0
32
0.0
  Corporate debt securities
7,206
3.3
6,931
4.1
Total debt securities
90,004
41.9
89,703
53.6
  Equity securities and other
113
0.1
102
0.1
Total securities available-for-sale
90,117
42.0
89,805
53.7
Securities held-to-maturity:
       
  U.S. treasury securities
11,062
5.1
---
---
  U.S. government sponsored enterprise
997
0.5
7,004
4.2
  State and political subdivisions
34,933
16.3
29,821
17.8
  Mortgage-backed securities-residential
57,347
26.8
36,277
21.7
  Mortgage-backed securities-multifamily
19,434
9.1
4,058
2.4
  Other securities
404
0.2
360
0.2
Total securities held-to-maturity
124,177
58.0
77,520
46.3
Total securities
$214,294
100.0%
$167,325
100.0%

Loans

Total net loans increased to $301.0 million at June 30, 2011 from $295.6 million at June 30, 2010, an increase of $5.4 million or 1.8%.  The Bank of Greene County continued to have strong demand for the nonresidential mortgage loan and commercial loan products offered, however, demand for residential mortgage loans has slowed.  Real estate loans increased $4.8 million, or 1.9%, between June 30, 2011 and 2010.  Nonresidential mortgage loans increased $9.3 million which were partially offset by a $913,000 decrease in residential mortgage loans and a $3.6 million decrease in construction and land loans.  The Bank of Greene County has attempted to maintain a policy of not offering the lowest mortgage rates while providing superior customer service and maintenance of loans in its portfolio.  Consumers are willing to pay a slight premium for such service and consistency.  Frequent changes in loan processors when their loans are sold in the secondary market have become tiresome for many consumers and they look for an institution that will not sell their loans.  However, as a result of this policy some consumers who are primarily interested in the lowest rate have refinanced their mortgages with other financial institutions.
 
 
The Bank of Greene County has successfully marketed its products and services to local businesses and as such has seen an increase in nonresidential mortgage loans, which have increased to $63.9 million at June 30, 2011 from $54.6 million at June 30, 2010, an increase of $9.3 million or 17.0%.  Other commercial loans have increased to $18.8 million at June 30, 2011 as compared to $15.8 million at June 30, 2010.  The Bank of Greene County has been successful in marketing both deposit and loan products to the local business community by emphasizing efforts to provide the best local service.  The Bank of Greene County has invested in technology and staff in order to offer the same products and services as the larger regional financial institutions, but with better customer service and local decision making.

Home equity loans decreased $1.0 million to $25.6 million at June 30, 2011 as compared to $26.6 million at June 30, 2010.

As a result of the changes discussed above, residential real estate mortgages represented 59.4% and 61.0% of the portfolio at June 30, 2011 and 2010, respectively.  The portfolio has shifted more toward nonresidential mortgage loans and commercial business loans, which are generally higher yielding loans with greater risk and are primarily adjustable rate, helping to lessen interest rate risk.  The Bank of Greene County continues to use a conservative underwriting policy in regard to all loan originations, and does not engage in sub-prime lending or other higher-risk loans such as option ARM products.  The Bank requires a down payment and, if certain loan-to-value ratios are not met for residential mortgages, then private mortgage insurance (“PMI”) is required.  Most other loan products require some form of collateral in addition to the borrower meeting certain credit quality standards.

It should be noted however that the Company is subject to the effects of any downturn, and especially, a significant decline in home values in the Company’s markets could have a negative effect on the results of operations.  A significant decline in home values would likely lead to a decrease in residential real estate loans and new home equity loan originations and increased delinquencies and defaults in both the consumer home equity loan and the residential real estate loan portfolios which would result in increased losses in these portfolios.  As of June 30, 2011, declines in home values have been modest in the Company’s market area.


   
At June 30,
 
(Dollars In thousands)
 
2011
   
2010
 
   
Balance
   
Percentage
of portfolio
   
Balance
   
Percentage
of portfolio
 
                         
Real estate mortgages:
                       
   Residential
  $ 181,612       59.4 %   $ 182,525       61.0 %
   Nonresidential
    63,860       20.9       54,586       18.3  
   Construction and land
    5,745       1.9       9,357       3.1  
   Multifamily
    6,048       2.0       6,035       2.0  
Total real estate mortgages
    257,265       84.2       252,503       84.4  
Home equity loans
    25,559       8.4       26,602       8.9  
Consumer installment
    4,008       1.3       4,285       1.4  
Commercial loans
    18,788       6.1       15,810       5.3  
Total gross loans
    305,620       100.0 %     299,200       100.0 %
Deferred fees and costs
    495               406          
Allowance for loan losses
    (5,069 )             (4,024 )        
Total net loans
  $ 301,046             $ 295,582          

Allowance for loan losses

The allowance for loan losses is established through a provision for loan losses based on management’s evaluation of the risk inherent in the loan portfolio, the composition of the 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, payment status of the loan, historical loan loss experience and other factors that warrant recognition in providing for an allowance for loan loss.  In addition, various regulatory agencies, as an integral part of their examination process, periodically review The Bank of Greene County’s allowance for loan losses and valuation of foreclosed real estate (“FRE”).  Such agencies may require The Bank of Greene County to recognize additions to the allowance based on their judgment about information available to them at the time of their examination.  The Bank of Greene County considers residential mortgages, home equity loans and installment loans to customers as small, homogeneous loans, which are generally evaluated for impairment collectively based on historical loss experience.  Commercial mortgage and business loans are reviewed individually and considered impaired if it is probable that The Bank of Greene County will not be able to collect scheduled payments of principal and interest when due, according to the contractual terms of the loan agreements.  The measurement of impaired loans is generally based on the fair value of the underlying collateral. The allowance for loan losses is increased by a provision for loan losses (which results in a charge to expense) and recoveries of loans previously charged off and is reduced by net charge-offs.
 
 




Analysis of the Allowance for Loan Losses
 
At of For the years ended June 30,
 
(Dollars In thousands)
 
2011
   
2010
 
Balance at the beginning of the period
  $ 4,024     $ 3,420  
Charge-offs:
               
     Residential real estate mortgages
    140       149  
     Nonresidential mortgages
    106       230  
     Multifamily real estate mortgages
    200       57  
     Consumer installment
    232       264  
     Commercial loans
    9       110  
Total loans charged off
    687       810  
Recoveries:
               
     Nonresidential mortgages
    ---       20  
     Consumer installment
    95       103  
     Commercial loans
    9       18  
Total recoveries
    104       141  
Net charge-offs
    583       669  
                 
Provisions charged to operations
    1,628       1,273  
Balance at the end of the period
  $ 5,069     $ 4,024  
Ratio of net charge-offs to average loans outstanding
    0.20 %     0.24 %
Ratio of net charge-offs to average assets
    0.11 %     0.14 %
Ratio of net charge-offs to nonperforming assets
    8.65 %     17.06 %
Allowance for loan losses to nonperforming loans
    80.54 %     102.63 %
Allowance for loan losses to total loans
    1.66 %     1.34 %

Nonaccrual loans and Nonperforming assets

Management places loans on nonaccrual status once the loans have become 90 days or more delinquent or sooner if there is a significant reason for management to believe the collectability is questionable and, therefore, interest on the loan will no longer be recognized on an accrual basis.    The Company identifies impaired loans and measures the impairment in accordance with FASB ASC subtopic “Receivables – Loan Impairment.”  Management may consider a loan impaired once it is classified as nonaccrual and when it is probable that the borrower will be unable to repay the loan according to the original contractual terms of the loan agreement or the loan is restructured in a troubled debt restructuring.  It should be noted that management does not evaluate all loans individually for impairment.  The Bank of Greene County considers residential mortgages, home equity loans and installment loans as small, homogeneous loans, which are evaluated for impairment collectively based on historical loan experience and other factors.  In contrast, large commercial mortgage, construction, multi-family and business loans are reviewed individually and considered impaired if it is probable that The Bank of Greene County will not be able to collect scheduled payments of principal and interest when due, according to the contractual terms of the loan agreement.  The measurement of impaired loans is generally based on the fair value of the underlying collateral.  The majority of The Bank of Greene County loans, including most nonaccrual loans, are small homogenous loan types adequately supported by collateral.  As a result, the level of impaired loans may only be a portion of the nonaccrual loans.  Loans that are delinquent or slow paying may not be impaired, especially small homogenous loan types, due to collateral adequacy.  Management considers the payment status of loans in the process of evaluating the adequacy of the allowance for loan losses among other factors.  Loans that are either delinquent a minimum of 60 days or are on nonaccrual status, and are not individually considered impaired, are either designated as Special Mention or Substandard, and the allocation of the allowance for loan loss is based upon the risk associated with such designation.  For further discussion and detail regarding the Allowance for Loan Losses and impaired loans please refer to Note 4 Loans in the Notes to Consolidated Financial Statements. A loan does not have to be 90 days delinquent in order to be classified as nonperforming.  Foreclosed real estate is considered to be nonperforming.  The Bank of Greene County had no accruing loans delinquent more than 90 days at June 30, 2011 or 2010.

The following table sets forth information regarding nonaccrual loans and other nonperforming assets.

 
                         At June 30,
(Dollars In thousands)
2011
2010
Nonaccrual loans:
   
     Real estate mortgages:
   
           Residential
$3,074
$2,001
           Nonresidential
2,171
1,095
           Construction and land
238
13
           Multifamily
577
594
     Home equity loans
49
197
     Commercial loans
144
3
     Installment loans
41
18
Total nonaccrual loans
6,294
3,921
Accruing loans delinquent 90 days or more
---
---
Foreclosed real estate:
   
     Residential
363
---
     Nonresidential
80
---
Foreclosed real estate
443
---
Total nonperforming assets
$6,737
$3,921
     
Total nonperforming assets as a percentage of total assets
1.23%
0.79%
Total nonperforming loans to net loans
2.09%
1.33%

The table below details information on impaired loans as of June 30:
(In thousands)
2011
2010
Balance of impaired loans, with a valuation allowance
$2,235
$---
Allowance relating to impaired loans included in allowance for loan losses
466
---
Balance of impaired loans, without a valuation allowance
675
212
Average balance of impaired loans for the fiscal year ended
3,050
212
Interest income recorded on impaired loans during the fiscal year ended
35
7

The table below details information related to nonaccrual loans as of June 30:
(In thousands)
2011
2010
Nonaccrual Loans
$6,294
$3,921
Interest income that would have been recorded if loans had been performing in accordance with original terms
529
354
Interest income that was recorded on nonaccrual loans during the fiscal year ended
226
146

Nonperforming assets amounted to $6.7 million at June 30, 2011 and $3.9 million as of June 30, 2010, an increase of approximately $2.8 million or 71.8% and total impaired loans amounted to $2.9 million at June 30, 2011.  It should be noted that total impaired loans increased $2.7 million to $2.9 million at June 30, 2011 compared to $212,000 at June 30, 2010.  Impaired loans at June 30, 2011 consisted of ten loans secured primarily by real estate.  An allowance has been established against each loan, as appropriate (see table above). The growth in impaired loans has been the result of adverse changes within the economy and increases in local unemployment.  A charge-off of $137,000 was recognized during the year ended June 30, 2011 to write down an impaired loan to its fair value.  This loan has subsequently been transferred to foreclosed real estate during the year ended June 30, 2011.  Loans on nonaccrual status totaled $6.3 million at June 30, 2011 of which $3.0 million were in the process of foreclosure and an additional $1.0 million were making payments pursuant to forbearance agreements.  Under the forbearance agreement, each customer has made arrangements with the Bank to bring the loan current over a specified period of time (resulting in an insignificant delay in repayment).  During this period, the Bank has agreed not to continue foreclosure proceedings.  Of the remaining $2.3 million in nonaccrual loans, $1.6 million were less than 90 days past due, or were current at June 30, 2011, but have a recent history of delinquency greater than 90 days past due.   These loans will be returned to accrual status once they have demonstrated a history of timely payments.  While the Bank makes every reasonable effort to work with the borrowers to collect amounts due, the number of loans in process of foreclosure has grown substantially over the past several years.  The growth in nonperforming assets was also due in part to the extended length of time required to meet all of the legal requirements mandated by New York State law prior to a foreclosure sale, which may be in excess of two years.  The majority of The Bank of Greene County loans, including most nonaccrual loans as of June 30, 2011, are small homogenous loan types adequately supported by collateral.  As a result, the level of impaired loans may only be a portion of nonaccrual loans.  Loans that are delinquent or slow paying may not be impaired, especially small homogenous loan types, due to collateral adequacy.  These loans are included in total non-performing assets.

Premises and equipment

Premises and equipment amounted to $15.4 million at June 30, 2011 as compared to $14.8 million at June 30, 2010, an increase of $600,000 or 4.1%.    The net increase was a result of the acquisition of assets totaling $1.3 million, primarily consisting of the purchase and renovation of a new branch office in Germantown, NY during the fiscal year ended June 30, 2011, partially offset by depreciation of $737,000.

Other assets

Other assets, consisting primarily of accrued interest receivable, foreclosed real estate and prepaid expenses, totaled $4.9 million at June 30, 2011, compared to $5.1 million at June 30, 2010, a decrease of $207,000.  During the fiscal year ended June 30, 2010, the Bank of Greene County prepaid FDIC insurance premiums through December 31, 2012.  At June 30, 2010, the balance of prepaid FDIC insurance premiums was $1.7 million, and decreased to $1.2 million at June 30, 2011.   At June 30, 2011, foreclosed real estate totaled $443,000 and consisted of two properties which were recorded at their fair value less cost to sell at the time of foreclosure.   There was no foreclosed real estate at June 30, 2010.

Deposits

Total deposits increased to $469.9 million at June 30, 2011 as compared to $421.7 million at June 30, 2010, an increase of $48.2 million or 11.4%.  Savings deposits increased $16.7 million or 17.5% to $111.9 million at June 30, 2011 as compared to $95.2 million at June 30, 2010.   Interest bearing checking accounts (NOW accounts) increased $22.0 million or 18.1% to $143.4 million at June 30, 2011 as compared to $121.4 million at June 30, 2010.  Money market deposits increased $9.9 million or 15.5% to $73.8 million at June 30, 2011 as compared to $63.9 million at June 30, 2010.  Noninterest bearing deposits increased $5.1 million or 11.5% to $49.3 million at June 30, 2011 as compared to $44.2 million at June 30, 2010.  Certificates of deposit decreased by $5.4 million or 5.6% to $91.5 million at June 30, 2011 as compared to $96.9 million at June 30, 2010.   Interest rates have declined during fiscal 2011 and 2010, and as these certificates of deposit mature they continue to reprice at these lower interest rates.  The decline in these interest rates have not had a significant impact on the balances held in certificates of deposits due in part to the recent volatility in the stock and bond markets and investors’ reluctance to move money into these markets.

 
At June 30,
(Dollars in  thousands)
2011
             2010
 
 
Balance
Percentage
of portfolio
 
Balance
Percentage
of portfolio
Noninterest bearing deposits
$49,313
10.5%
$44,239
10.5%
Certificates of deposit
91,549
19.5
96,909
23.0
Savings deposits
111,851
23.8
95,249
22.6
Money market deposits
73,795
15.7
63,899
15.1
NOW deposits
143,389
30.5
121,436
28.8
Total deposits
$469,897
100.0%
$421,732
100.0%




 
 

 


Borrowings
 
 
Total borrowings from the Federal Home Loan Bank (“FHLB”) increased $200,000 to $26.3 million at June 30, 2011 compared to $26.1 million at June 30, 2010.  Borrowings from overnight advances increased $5.2 million to $14.3 million at June 30, 2011 from $9.1 million at June 30, 2010.    These short term advances were utilized to fund growth in interest-earning assets.  Term borrowings decreased $5.0 million to $12.0 million at June 30, 2011 from $17.0 million at June 30, 2010 as a result of repayments at maturity.  The Company’s borrowing agreements are discussed further within Note 7 Borrowings in the Notes to Consolidated Financial Statements.

Shareholders’ equity

Shareholders’ equity increased to $48.1 million at June 30, 2011 from $44.5 million at June 30, 2010, as net income of $5.3 million was partially offset by other comprehensive loss of $604,000 and dividends declared and paid of $1.6 million.  Other changes in equity, totaling a net increase of $538,000, were the result of activities associated with the various stock-based compensation plans of the Company, including the 2000 and 2008 Stock Option Plans and ESOP.



 
 

 

COMPARISON OF OPERATING RESULTS
FOR THE YEARS ENDED JUNE 30, 2011 AND JUNE 30, 2010

Net Interest Income
Net interest income, the primary contributor to earnings, represents the difference between income on interest earning assets and expense on interest bearing liabilities.  Net interest income also depends on the volume of interest earning assets and interest bearing liabilities and the interest rate earned or paid on them, respectively.  Net interest income for the fiscal year ended June 30, 2011 amounted to $19.7 million as compared to $17.7 million for the fiscal year ended June 30, 2010, an increase of $2.0 million, or 11.3%.

Average Balance Sheet
The following table sets forth certain consolidated information relating to Greene County Bancorp, Inc. for the years ended June 30, 2011 and 2010.  For the periods indicated, the total dollar amount of interest income from average interest earning assets and the resultant yields, as well as the interest expense on average interest bearing liabilities, are expressed both in dollars and rates.  No tax equivalent adjustments were made.  Average balances were based on daily averages. Average loan balances include non-performing loans.  The loan yields include net amortization of certain deferred fees and costs that are considered adjustments to yields.
 
 
 (Dollars in thousands)
2011
2010
 
                     Average
              Interest
                Average
                  Average
              Interest
               Average
 
                    Outstanding
               Earned/
               Yield/
                    Outstanding
              Earned/
                Yield/
 
                   Balance
             Paid
               Rate
                 Balance
              Paid
                Rate
Interest earning assets:
           
   Loans receivable, net1
$302,027
17,897
5.93%
$285,535
$17,247
6.04%
   Securities2
193,267
6,205
    3.21   
156,209
5,735
                  3.67
   Federal funds
3,617
7
                   0.19
2,556
3
                  0.12
   Interest bearing bank balances
11,957
35
                   0.29
6,843
20
                  0.29
   FHLB stock
1,435
80
                   5.57
1,491
78
                  5.23
       Total interest earning assets
512,303
24,224
  4.73%
452,634
23,083
  5.10%
Cash and due from banks
7,167
   
6,505
   
Allowance for loan losses
(4,522)
   
(3,700)
   
Other non-interest earning assets
19,023
   
18,527
   
Total Assets
$533,971
   
$473,966
   
Interest bearing liabilities:
           
   Savings and money market deposits
$172,997
1,141
  0.66%
$148,632
1,169
  0.79%
   NOW deposits
153,246
986
                      0.64
124,060
1,480
                      1.19
   Certificates of deposit
95,749
1,853
                      1.93
96,480
2,081
                      2.16
   Borrowings
16,298
531
                      3.26
19,849
636
                      3.20
      Total interest bearing liabilities
438,290
4,511
  1.03%
389,021
5,366
  1.38%
Non-interest bearing deposits
46,914
   
40,068
   
Other non-interest bearing liabilities
2,553
   
2,417
   
Shareholders’ equity
46,214
   
42,460
   
Total liabilities and equity
$533,971
   
$473,966
   
             
Net interest income
 
$19,713
   
$17,717
 
             
Net interest rate spread
   
3.70%
   
3.72%
             
Net interest margin
   
3.85%
   
3.91%
             
Average interest earning assets to
           
     average interest bearing liabilities
116.89%
   
116.35%
   

_______________________________________
1Calculated net of deferred loan fees, loan costs, and loans in process.
2Includes tax-free securities, mortgage-backed securities and asset-backed securities.

 
 

 

Rate / Volume Analysis

The following table presents the extent to which changes in interest rates and changes in the volume of interest earning assets and interest bearing liabilities have affected Greene County Bancorp, Inc.’s interest income and interest expense during the periods indicated.  Information is provided in each category with respect to:

(i)  
Change attributable to changes in volume (changes in volume multiplied by prior rate);
(ii)  
Change attributable to changes in rate (changes in rate multiplied by prior volume); and
(iii)  
The net change.

The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

(In thousands)
2011 versus 2010
2010 versus 2009
             
 
Increase/(Decrease)
                          Total
Increase/(Decrease)
                    Total
 
Due to
 Increase/
Due to
                       Increase/
Interest earning assets:
Volume
Rate
                      (Decrease)
Volume
Rate
(Decrease)
   Loans receivable, net1
$972
($322)
$650
$1,523
($505)
$1,018
   Securities2
1,248
(778)
470
535
(938)
(403)
   Federal funds
2
2
4
(7)
(10)
(17)
   Interest bearing bank balances
15
0
15
18
(28)
(10)
   FHLB stock
(3)
5
2
3
10
13
Total interest earning assets
2,234
(1,093)
1,141
2,072
(1,471)
601
             
Interest bearing liabilities:
           
   Savings and money market deposits
179
(207)
(28)
231
(432)
(201)
   NOW deposits
294
(788)
(494)
125
(634)
(509)
   Certificates of deposit
(15)
(213)
(228)
34
(680)
(646)
   Borrowings
(117)
12
(105)
(13)
(17)
(30)
Total interest bearing liabilities
341
(1,196)
(855)
377
(1,763)
(1,386)
             
Net interest income
$1,893
$103
$1,996
$1,695
$292
$1,987

______________________________
1 Calculated net of deferred loan fees, loan costs, and loans in process.
2 Includes tax-free securities, mortgage-backed securities and asset-backed securities.

As the above table shows, net interest income for the fiscal year ended June 30, 2011 has been affected most significantly by the increase in the volume of loans and securities complemented by the decrease in rates paid on deposit accounts.  Despite the positive effects on net interest income from increased volume and lower cost of funds, earning assets have shifted to a higher concentration of securities which generally provide a lower return than loans, and has resulted in a decrease in both net interest spread and net interest margin.  Net interest spread decreased 2 basis points to 3.70% for the fiscal year ended June 30, 2011 as compared to 3.72% for the fiscal year ended June 30, 2010.  Net interest margin decreased 6 basis points to 3.85% for the fiscal year ended June 30, 2011 as compared to 3.91% for the fiscal year ended June 30, 2010.

Interest income

Interest income for the fiscal year ended June 30, 2011 amounted to $24.2 million as compared to $23.1 million for the fiscal year ended June 30, 2010, an increase of $1.1 million or 4.8%.  This increase was a result of the growth in interest earning assets partially offset by a decrease in yield on these assets.  Interest income is derived from loans, securities and other interest earning assets.  Total average interest earning assets increased to $512.3 million for fiscal 2011 as compared to $452.6 million for fiscal 2010, an increase of $59.7 million or 13.2%.   The yield earned on such assets decreased 37 basis points to 4.73% for fiscal 2011 as compared to 5.10% for fiscal 2010.

Interest income earned on loans amounted to $17.9 million for the year ended June 30, 2011 as compared to $17.2 million for the year ended June 30, 2010.  Average loans outstanding increased $16.5 million, or 5.8%, to $302.0 million for fiscal 2011 as compared to $285.5 million for fiscal 2010.  The yield on such loans decreased 11 basis points to 5.93% for fiscal 2011 as compared to 6.04% for fiscal 2010.    The decrease in yield on loans continues to be impacted by several decreases in the Prime Rate during fiscal 2009.  Approximately 25.5% of the loan portfolio is adjustable rate, of which a large portion is tied to the Prime Rate.  However, many of these loans have interest rate floors, which are intended to lessen the impact of any future interest rate reductions within this portfolio.

Interest income earned on securities (excluding FHLB stock) increased to $6.2 million for fiscal 2011 as compared to $5.7 million for fiscal 2010.  The average balance of securities increased $37.1 million, or 23.8%, to $193.3 million for the year ended June 30, 2011 as compared to $156.2 million for the year ended June 30, 2010.  The average yield on such securities decreased 46 basis points to 3.21% for fiscal 2011 as compared to 3.67% for fiscal 2010.  Purchases for the year ended June 30, 2011 consisted primarily of $11.1 million of U.S. Treasury securities, $18.9 million of U.S. government sponsored enterprises bonds, $53.9 million of mortgage-backed securities, and $20.9 million of state and political subdivision securities.  No adjustments were made to tax-effect the income for the state and political subdivision securities, which often carry a lower yield because of the offset expected from income tax benefits gained from holding such securities.

Interest income earned on federal funds and interest bearing deposits amounted to $42,000 for the year ended June 30, 2011 as compared to $23,000 for the year ended June 30, 2010, an increase of $19,000 or 82.6%.  The primary factor that contributed to this increase was an increase in average balances of $6.2 million.  Dividends on FHLB stock increased to $80,000 for fiscal 2011 as compared to $78,000 for fiscal 2010.
 
 
Interest expense

Interest expense for the fiscal year ended June 30, 2011 amounted to $4.5 million as compared to $5.4 million for the fiscal year ended June 30, 2010, a decrease of $855,000, or 15.9%.  This decrease was the result of a decrease in the average rate paid on deposits, which was partially offset by growth in interest bearing liabilities.  Interest expense includes interest on deposits as well as borrowings. The rate paid on such liabilities decreased 35 basis points to 1.03% for fiscal 2011 as compared to 1.38% for fiscal 2010.   Total average interest bearing liabilities increased to $438.3 million for fiscal 2011 as compared to $389.0 million for fiscal 2010, an increase of $49.3 million, or 12.7%.

Interest expense paid on savings and money market accounts amounted to $1.1 million for the year ended June 30, 2011 as compared to $1.2 million for the year ended June 30, 2010, a decrease of $28,000, or 2.4%. The rate paid on savings and money market accounts decreased 13 basis points to 0.66% for fiscal 2011 as compared to 0.79% for fiscal 2010.  The average balance of savings and money market accounts increased by $24.4 million to $173.0 million for the year ended June 30, 2011 as compared to $148.6 million for the year ended June 30, 2010.

Interest expense paid on NOW accounts amounted to $1.0 million for the year ended June 30, 2011 as compared to $1.5 million for the year ended June 30, 2010.  The average balance of NOW accounts increased to $153.2 million for fiscal 2011 as compared to $124.1 million for fiscal 2010, an increase of $29.1 million.  The average rate paid on NOW accounts decreased 55 basis points to 0.64% for fiscal 2011 as compared to 1.19% for fiscal 2010.

Interest expense paid on certificates of deposit amounted to $1.9 million for the year ended June 30, 2011 as compared to $2.1 million for the year ended June 30, 2010, a decrease of $228,000.  The average rate paid on certificates of deposit decreased 23 basis points to 1.93% for fiscal 2011 as compared to 2.16% for fiscal 2010.  The average balance on certificates of deposit decreased to $95.7 million for the year ended June 30, 2011 as compared to $96.5 million for the year ended June 30, 2010.  Market interest rates have declined throughout fiscal 2010 and 2011.

Interest expense on borrowings amounted to $531,000 for fiscal 2011 as compared to $636,000 for fiscal 2010, as the average balance of borrowings decreased to $16.3 million from $19.8 million when comparing the years ended June 30, 2011 and 2010.  The rate paid on such borrowings increased 6 basis points to 3.26% for fiscal 2011 as compared to 3.20% for fiscal 2010.

Provision for loan losses

Management continues to closely monitor asset quality and adjust the level of the allowance for loan losses when necessary.   The provision for loan losses amounted to $1.6 million and $1.3 million for the years ended June 30, 2011 and 2010, respectively, an increase of $355,000 or 27.9%.  The increase in the level of provision was partially a result of the shift to a greater level of nonresidential mortgage loans and commercial loans, and an increase in the amount of nonperforming assets, primarily in residential mortgages and nonresidential mortgage loans. The nonresidential mortgage loan and commercial loan portfolio has grown as a percent of total loans from 23.6% at June 30, 2010 to 27.0% at June 30, 2011.   Generally, commercial loans are considered to have greater credit risk, and require a higher level of allowance for loan loss.   Nonperforming assets amounted to $6.7 million and $3.9 million at June 30, 2011 and 2010, respectively, an increase of $2.8 million or 71.8%.  Of this increase, $1.1 million was in residential mortgage loans, $1.1 million was in nonresidential mortgage loans, and $141,000 was in commercial loans. Net charge-offs amounted to $583,000 and $669,000 for the years ended June 30, 2011 and 2010, respectively. Foreclosed assets increased $443,000 from June 30, 2010 to June 30, 2011.  The increase in the level of nonperforming assets reflects the decline in the overall economy. As a result, the level of allowance for loan losses to total loans receivable has been increased to 1.66% as of June 30, 2011 as compared to 1.34% as of June 30, 2010.  At June 30, 2011 and 2010, nonperforming assets were 1.23% and 0.79%, respectively, of total assets and nonperforming loans were 2.09% and 1.33%, respectively, of total loans.   The Company has not been an originator of “no documentation” mortgage loans and the loan portfolio does not include any mortgage loans that the Company classifies as sub-prime.

Noninterest income

Noninterest income increased to $4.8 million from $4.6 million, an increase of $179,000, when comparing the years ended June 30, 2011 and 2010.   The Company recorded a net gain on sale of investments during the year ended June 30, 2011 totaling $233,000 and a net loss on sale of investments during the year ended June 30, 2010 totaling $5,000.  The Company also recognized a write-down of an other-than-temporary impairment of securities of $2,000 during the year ended June 30, 2011.  Excluding these items, noninterest income decreased $57,000 when comparing the years ended June 30, 2011 and 2010.  Service charges on deposits decreased $351,000 when comparing the years ended June 30, 2011 and 2010 as a result of changes to the overdraft protection program implemented during the year.  Partially offsetting this decrease was an increase in debit card fees which increased $190,000 when comparing the years ended June 30, 2011 and 2010 as a result of a higher volume of transactions due to growth in the number of checking accounts with debit cards.  Other operating income increased $84,000 when comparing the years ended June 30, 2011 and 2010 largely due to higher loan related fees including late fees.

Noninterest expense

Noninterest expense totaled $14.9 million and $13.6 million for the years ended June 30, 2011 and 2010, respectively. The increase was primarily the result of a $1.2 million increase in salaries and employee benefits that was partially due to an increase in the number of employees as a result of opening a new branch office October 2010 in Germantown, NY as well as an increase in the amount accrued for bonuses to be paid to employees based on the strong overall performance and attainment of strategic objectives for the fiscal year ended June 30, 2011.

Contributing to the increase in noninterest expense was a $144,000 increase in service and data processing fees when comparing June 30, 2011 and 2010 resulting from increased charges related to debit card activity and the associated Visa rewards program.

Legal and professional fees increased $67,000 to $745,000 for the year ended June 30, 2011 compared to $678,000 for the year ended June 30, 2010.  This increase was the result of increased legal expenses related to loans in the process of foreclosure and increased fees for consulting services related to the implementation of strategic objectives.

Other operating expenses increased $35,000 when comparing the years ended June 30, 2011 and 2010 as a result of net expenses incurred during fiscal 2011 on foreclosed real estate.

Partially offsetting these increases in expense were decreases in equipment and furniture expense as well as computer supplies and support expense.  Equipment and furniture expense decreased $120,000 to $549,000 for the year ended June 30, 2011 compared to $669,000 for the year ended June 30, 2010.   This was primarily the result of the discontinuation of depreciation on assets that became fully depreciated during fiscal 2011.    Computer supplies and support expense decreased $63,000 to $278,000 for the year ended June 30, 2011 compared to $341,000 for the year ended June 30, 2010 resulting from renegotiated contracts related to our core processing system.

Provision for income taxes

The provision for income taxes directly reflects the expected tax associated with the pretax income generated for the given year and certain regulatory requirements.  The most significant items affecting the effective rate include tax-exempt income as a percent of total income, state income taxes, and tax benefits associated with stock compensation.  The effective rate for fiscal 2011 was 34.1% as compared to 34.4% the prior year.

LIQUIDITY AND CAPITAL RESOURCES

Greene County Bancorp, Inc.’s primary sources of funds are deposits and proceeds from principal and interest payments on loans and securities, as well as lines of credit and term borrowing facilities available through the Federal Home Loan Bank as needed.  While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit outflows, mortgage prepayments, and borrowings are greatly influenced by general interest rates, economic conditions and competition.

Greene County Bancorp, Inc.’s primary investing activities are the origination of residential one- to four-family and nonresidential mortgage loans, other consumer and commercial business loans, and the purchase of securities.  Loan originations exceeded repayments by $7.8 million and $29.2 million and purchases of securities totaled $104.8 million and $54.0 million for the years ended June 30, 2011 and 2010, respectively.  These activities were funded primarily through deposit growth, an increase in overnight borrowings, and principal payments on loans and securities.  Loan sales did not provide an additional source of liquidity during the years ended June 30, 2011 and 2010, as Greene County Bancorp, Inc. originated loans for retention in its portfolio.

Greene County Bancorp, Inc. experienced a net increase in total deposits of $48.2 million and $23.0 million for the years ended June 30, 2011 and 2010, respectively.  The level of interest rates and products offered by local competitors are some factors affecting deposit flows.  The Company continues to benefit from consolidation of other depository institutions within its market area and has successfully launched several marketing campaigns aimed at different segments of the market.

Greene County Bancorp, Inc. monitors its liquidity position on a daily basis.  Excess short-term liquidity is usually invested in overnight federal funds.  In the event Greene County Bancorp, Inc. requires funds beyond its ability to generate them internally, additional sources of funds are available through the use of FHLB advance programs made available to The Bank of Greene County.  During fiscal year 2011, The Bank of Greene County’s maximum borrowing from FHLB reached $31.0 million and the minimum amounted to $12.0 million.  The $26.3 million borrowing at June 30, 2010 consisted of $14.3 million in overnight borrowings, $7.0 million in term borrowings with maturities ranging between 2011 through 2015, and a $5.0 million loan which matures in October 24, 2013, and is convertible to current rates if certain conditions are met, including three-month LIBOR at or above 7.5%.  The liquidity position can be significantly impacted on a daily basis by funding needs associated with Greene County Commercial Bank.  These funding needs are also impacted by the collection of taxes for the municipalities using the services of Greene County Commercial Bank.


The Bank of Greene County’s unfunded loan commitments are as follows at June 30, 2011:

(In thousands)
 
Nonresidential mortgage loan commitments
$4,666
Residential mortgage loan commitments
3,274
Construction and land loan commitments
1,065
Unused portion of overdraft lines of credit
726
Unused portion of home equity lines of credit
8,429
Unused portion of commercial lines of credit
5,997
Commercial loan commitments
776
Total commitments
$24,933

Greene County Bancorp, Inc. anticipates that it will have sufficient funds available to meet current loan commitments.  Certificate of deposits scheduled to mature in one year or less from June 30, 2011, totaled $71.9 million.  Based upon Greene County Bancorp, Inc.’s experience and its current pricing strategy, management believes that a significant portion of such deposits will remain with Greene County Bancorp, Inc.

At June 30, 2011 and 2010, The Bank of Greene County and Greene County Commercial Bank exceeded all of their regulatory capital requirements, as illustrated in Note 17. Regulatory Matters in the Notes to Consolidated Financial Statements.  Shareholders’ equity represented 8.8% of total consolidated assets at June 30, 2011, and 9.0% at June 30, 2010.

Greene County Bancorp, Inc.’s most liquid assets are cash and cash equivalent accounts.  The levels of these assets are dependent on Greene County Bancorp, Inc.’s operating, financing, lending and investing activities during any given period.  At June 30, 2011, cash and cash equivalents totaled $10.0 million, or 1.8% of total assets.
 
 
The following table sets forth a summary of selected financial data at and for the fiscal quarter ends for the years ended June 30, 2011 and 2010.   Closing market price information is stated at the quarter end dates indicated.  During the fiscal year ended June 30, 2011 and 2010, the MHC waived its right to receive dividends.


 
First
Second
Third
Fourth
(In thousands, except per share data)
Quarter
Quarter
Quarter
Quarter
         
FISCAL 2011
       
Loans receivable, net
$299,394
$296,165
$296,651
$301,046
Deposits
463,444
465,854
498,849
469,897
         
Interest income
5,976
6,066
5,999
6,183
Interest expense
1,179
1,171
1,079
1,082
Net interest income
4,797
4,895
4,920
5,101
Provisions of loan losses
353
483
343
449
Noninterest income
1,100
1,361
1,102
1,230
Noninterest expense
3,528
3,717
3,816
3,794
Income before provision for income taxes
2,016
2,056
1,863
2,088
Net income
1,324
1,352
1,239
1,376
Earnings per common share - Basic
0.32
0.33
0.30
0.33
Earnings per common share – Diluted
0.32
0.33
0.30
0.33
Market price (NASDAQ:GCBC)
       
  High
17.25
19.96
19.81
18.95
  Low
15.01
16.57
17.31
17.20
  Close
16.75
19.47
18.00
17.69
Cash Dividends
0.175
0.375
0.175
0.175
         
FISCAL 2010
       
Loans receivable, net
$276,164
$283,387
$287,971
$295,582
Deposits
409,371
399,234
415,927
421,732
         
Interest income
5,656
5,730
5,897
5,800
Interest expense
1,417
1,382
1,283
1,284
Net interest income
4,239
4,348
4,614
4,516
Provisions of loan losses
248
429
307
289
Noninterest income
1,203
1,237
1,086
1,090
Noninterest expense
3,384
3,303
3,531
3,393
Income before provision for income taxes
1,810
1,853
1,862
1,924
Net income
1,184
1,216
1,226
1,259
Earnings per common share - Basic
0.29
0.29
0.30
0.31
Earnings per common share – Diluted
0.29
0.29
0.30
0.30
Market price (NASDAQ:GCBC)
       
  High
15.00
16.00
15.55
18.31
  Low
13.50
14.25
14.46
14.33
  Close
14.30
15.38
14.51
16.00
Cash Dividends
0.17
0.17
0.17
0.175
         

COMMON STOCK AND RELATED MATTERS

Greene County Bancorp, Inc.’s common stock is listed on the NASDAQ Capital Market under the symbol “GCBC”.  As of September 9, 2011 Greene County Bancorp, Inc. had ten registered market makers, 548 stockholders of record (excluding the number of persons or entities holding stock in street name through various brokerage firms) and 4,145,282 shares outstanding.  As of such date, Greene County Bancorp, MHC (the “MHC”), Greene County Bancorp, Inc.’s mutual holding company, held 2,304,632 shares of common stock or 55.6% of total shares outstanding.  Consequently, shareholders other than the MHC held 1,841,196 shares.

Payment of dividends on Greene County Bancorp, Inc.’s common stock is subject to determination and declaration by the Board of Directors and depends upon a number of factors, including capital requirements, regulatory limitations on the payment of dividends, Greene County Bancorp, Inc.’s results of operations, financial condition, tax considerations and general economic conditions.  No assurance can be given that dividends will be declared or, if declared, what the amount of dividends will be, or whether such dividends, once declared, will continue.  During the fiscal year ended June 30, 2011 and 2010, the MHC waived its right to receive dividends.  The MHC’s ability to waive its right to receive dividends is dependent upon regulatory approval.  The MHC has received regulatory approval to continue to waive the right to receive dividends through December 31, 2011.   With recent changes in regulations as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, it is anticipated that the MHC will no longer be able to waive its right to receive dividends.


IMPACT OF INFLATION AND CHANGING PRICES

The consolidated financial statements of Greene County Bancorp, Inc. and notes thereto, presented elsewhere herein, have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation.  The impact of inflation is reflected in the increased cost of Greene County Bancorp, Inc.’s operations.  Unlike most industrial companies, nearly all the assets and liabilities of Greene County Bancorp, Inc. are monetary.  As a result, interest rates have a greater impact on Greene County Bancorp, Inc.’s performance than do the effects of general levels of inflation.  Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.


IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

Recent accounting pronouncements which may impact the Company’s financial statements are discussed within Note 1 Summary of significant accounting policies in the Notes to Consolidated Financial Statements.

IMPACT OF RECENT REGULATORY CHANGES

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The Dodd-Frank Act resulted in sweeping changes in the regulation of financial institutions aimed at strengthening the sound operation of the financial services sector. The Dodd-Frank Act’s provisions that have received the most public attention generally have been those applying to or more likely to affect larger institutions. However, it contains numerous other provisions that will affect all banks and bank holding companies, many of which are addressed below. The Dodd-Frank Act includes provisions that, among other things, will:
 
 
Change the assessment base for Federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminate the ceiling on the size of the Deposit Insurance Fund (the “DIF”), and increase the floor applicable to the size of the DIF.
 
 
Make permanent the $250,000 limit on deposits for Federal deposit insurance, and provide unlimited Federal deposit insurance until January 1, 2013 for non-interest bearing demand transaction accounts at all insured depository institutions.

 
 
Repeal the Federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.
 
 
Centralize responsibility for consumer financial protection by creating a new agency responsible for implementing, examining, and enforcing compliance with Federal consumer financial laws.
 
 
Restrict the preemption of state law by Federal law and disallow subsidiaries and affiliates of national banks from availing themselves of such preemption.
 
 
Apply the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies.

 
 
Require the OCC to seek to make its capital requirements for national banks countercyclical.
 
 
Impose comprehensive regulation of the over-the-counter derivatives market, which would include certain provisions that would effectively prohibit insured depository institutions from conducting certain derivatives businesses in the institution itself.

 
 
Implement corporate governance revisions, including with regard to executive compensation and proxy access by stockholders, that apply to all public companies, including financial institutions like the Company.
 
 
Amend the Electronic Fund Transfer Act to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.

 
 
Increase the authority of the Federal Reserve to examine us and any of our non-bank subsidiaries.

Compliance with some of these provisions is expected to increase our Bank’s expenses, decreasing its revenues, and changing the activities in which it chooses to engage. The environment in which banking organizations will operate after the financial crisis, including legislative and regulatory changes affecting capital, liquidity, supervision, permissible activities, corporate governance and compensation, changes in fiscal policy and steps to eliminate government support for banking organizations, may have long-term effects on the business model and profitability of banking organizations that cannot now be foreseen. The specific impact of the Dodd-Frank Act on our current activities or new financial activities we may consider in the future, our financial performance, and the markets in which we operate will depend on the manner in which the relevant agencies develop and implement the required rules and the reaction of market participants to these regulatory developments.

In February 2011, the FDIC issued a final rule that changes the deposit insurance assessment base from total domestic deposits to average total assets minus average tangible equity, as required by the Dodd-Frank Act, effective April 1, 2011.  As a result of this change, Greene County Bancorp, Inc. expects that premiums paid during fiscal 2012 will be lower than in fiscal 2011 (based on rates established by the FDIC effective April 1, 2011).

 
 

 


MANAGEMENT’S REPORT ON INTERNAL CONTROL
 
OVER FINANCIAL REPORTING
 
The management of Greene County Bancorp, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Greene County Bancorp Inc.’s internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published consolidated financial statements.
 
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
 
Greene County Bancorp, Inc.’s management assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2011. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment, we believe that, as of June 30, 2011, the Company’s internal control over financial reporting was effective based on those criteria.
 
 
 
/s/ Donald E. Gibson
   
 /s/ Michelle M. Plummer
   
Donald E. Gibson
   
Michelle M. Plummer, CPA
   
President and Chief Executive Officer
   
Executive Vice President, Chief Operating Officer and Chief Financial Officer
   

 
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
of Greene County Bancorp, Inc.

We have audited the accompanying consolidated statements of financial condition of Greene County Bancorp, Inc. and Subsidiaries (“the Company”) as of June 30, 2011 and 2010, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the years then ended. Greene County Bancorp, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Greene County Bancorp, Inc. and Subsidiaries as of June 30, 2011 and 2010, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.


/s/ ParenteBeard LLC                                           
Harrisburg, Pennsylvania
September 28, 2011









 
 

 

Greene County Bancorp, Inc.
Consolidated Statements of Financial Condition
 (In thousands, except share and per share amounts)
 
June 30
ASSETS
2011
 
2010
Cash and due from banks
$9,245
 
$9,253
Federal funds sold
721
 
390
    Total cash and cash equivalents
9,966
 
9,643
       
Long term certificate of deposit
---
 
1,000
Securities available for sale, at fair value
90,117
 
89,805
Securities held to maturity, at amortized cost
124,177
 
77,520
Federal Home Loan Bank stock, at cost
1,916
 
1,866
       
Loans
305,620
 
299,200
  Allowance for loan losses
(5,069)
 
(4,024)
  Unearned origination fees and costs, net
495
 
406
    Net loans receivable
301,046
 
295,582
       
Premises and equipment
15,407
 
14,804
Accrued interest receivable
2,716
 
2,731
Foreclosed real estate
443
 
---
Prepaid expenses and other assets
1,737
 
2,372
               Total assets
$547,525
 
$495,323
       
LIABILITIES AND SHAREHOLDERS’ EQUITY
     
LIABILITIES
     
Noninterest bearing deposits
$49,313
 
$44,239
Interest bearing deposits
420,584
 
377,493
    Total deposits
469,897
 
421,732
       
Borrowings from FHLB, short term
14,300
 
9,100
Borrowings from FHLB, long term
12,000
 
17,000
Accrued expenses and other liabilities
3,247
 
2,988
                Total liabilities
499,444
 
450,820
       
SHAREHOLDERS’ EQUITY
     
Preferred stock,
     
  Authorized   -   1,000,000 shares; Issued - None
---
 
---
Common stock, par value $.10 per share;
     
   Authorized  - 12,000,000 shares
     
   Issued          -   4,305,670 shares
     
   Outstanding -   4,145,828 shares at June 30, 2011
     
                            4,118,912 shares at June 30, 2010;
431
 
431
Additional paid-in capital
11,001
 
10,666
Retained earnings
37,336
 
33,692
Accumulated other comprehensive income
519
 
1,123
Treasury stock, at cost 159,842 shares at June 30, 2011
     
                                     186,758 shares at June 30, 2010
(1,206)
 
(1,409)
               Total shareholders’ equity
48,081
 
44,503
               Total liabilities and shareholders’ equity
$547,525
 
$495,323
See notes to consolidated financial statements.
     



 
 

 

Greene County Bancorp, Inc.
Consolidated Statements of Income
 (In thousands, except share and per share amounts)
 
Years Ended June 30,
 
2011
 
2010
Interest income:
     
    Loans
$17,897
 
$17,247
    Investment securities – taxable
1,150
 
1,087
    Mortgage-backed securities
3,959
 
3,680
    Investment securities – tax exempt
1,176
 
1,046
    Interest bearing deposits and federal funds sold
42
 
23
Total interest income
24,224
 
23,083
       
Interest expense:
     
    Interest on deposits
3,980
 
4,730
    Interest on borrowings
531
 
636
Total interest expense
4,511
 
5,366
       
Net interest income
19,713
 
17,717
Provision for loan losses
1,628
 
1,273
Net interest income after provision for loan losses
18,085
 
16,444
       
Noninterest income:
     
    Service charges on deposit accounts
2,330
 
2,681
    Debit card fees
1,267
 
1,077
    Investment services
304
 
289
    E-commerce fees
109
 
104
    Net gain (loss) on sale of available-for-sale securities
233
 
(5)
    Other than temporary impairment of available-for-sale security
(2)
 
---
    Other operating income
552
 
468
Total noninterest income
4,793
 
4,614
       
Noninterest expense:
     
    Salaries and employee benefits
8,134
 
6,973
    Occupancy expense
1,278
 
1,276
    Equipment and furniture expense
549
 
669
    Service and data processing fees
1,486
 
1,342
    Computer supplies and support
278
 
341
    Advertising and promotion
336
 
308
    FDIC insurance premiums
558
 
566
    Legal and professional fees
745
 
678
    Other
1,491
 
1,456
Total noninterest expense
14,855
 
13,609
       
Income before provision for income taxes
8,023
 
7,449
Provision for income taxes
2,732
 
2,564
Net income
$5,291
 
$4,885
       
Basic EPS
$1.28
 
$1.19
Basic average shares outstanding
4,134,736
 
4,112,232
Diluted EPS
$1.27
 
$1.18
Diluted average shares outstanding
4,165,230
 
4,134,841
Dividends per share
$0.900
 
$0.685
See notes to consolidated financial statements.

 
 

 

Greene County Bancorp, Inc.
Consolidated Statements of Comprehensive Income
(In thousands)
 
Years ended June 30,
 
2011
 
2010
Net income
$5,291
 
$4,885
Other comprehensive income (loss):
     
  Securities:
     
       
  Unrealized holding (loss) gain,
     
    and 2010, net of income taxes of ($291) and $352, respectively
(461)
 
558
       
  Accretion of unrealized loss on securities transferred to held-to-maturity,
     
    net of income taxes of $28 and $40, respectively
44
 
63
       
  Reclassification adjustment for (gain) loss on sale of available-for-sale securities
     
    realized in net income, net of income taxes of ($92) and $2, respectively
(141)
 
3
       
  Reclassification adjustment for loss on write-down of held-to-maturity securities
     
    realized in net income, net of income taxes of $1 and $0, respectively
1
 
---
       
 
(557)
 
624
Pension benefits:
     
   Change in pension benefits, net of income taxes of $29 and $183, respectively
(47)
 
(293)
       
Total other comprehensive income (loss)
(604)
 
331
       
Comprehensive income
$4,687
 
$5,216
       

See notes to consolidated financial statements.

 
 

 

Greene County Bancorp, Inc.
Consolidated Statements of Changes in Shareholders’ Equity
For the Years Ended June 30, 2011 and 2010
(In thousands)

       
Accumulated
 
 
   
Additional
 
Other
 
Total
 
Common
Paid – In
Retained
Comprehensive
Treasury
Shareholders’
 
Stock
Capital
Earnings
Income (Loss)
Stock
Equity
Balance at June 30, 2009
$431
$10,508
$30,045
   $792
($1,512)
$40,264
             
Stock options exercised
 
       (66)
   
    103
         37
               
Stock based compensation
 
      224
     
      224
             
Dividends declared
   
  (1,238)
   
   (1,238)
             
Net income
   
   4,885
   
   4,885
             
Total other comprehensive income, net of taxes
     
    331
 
      331
Balance at June 30, 2010
$431
$10,666
$33,692
$1,123
($1,409)
$44,503
               
Stock options exercised
 
      109
   
    203
       312
             
Tax benefit of stock based compensation
 
         3
     
          3
             
Stock based compensation
 
     223
     
      223
             
Dividends declared
   
   (1,647)
   
   (1,647)
             
Net income
   
   5,291
   
    5,291
             
Total other comprehensive loss, net of taxes
     
    (604)
 
      (604)
Balance at June 30, 2011
$431
$11,001
$37,336
  $519
($1,206)
$48,081
 
See notes to consolidated financial statements.


 
 

 

Greene County Bancorp, Inc.
Consolidated Statements of Cash Flows
(In thousands)
 
Years Ended June 30,
 
2011
 
2010
Cash flows from operating activities:
     
Net Income
$5,291
 
$4,885
Adjustments to reconcile net income to net cash provided by operating activities:
     
     Depreciation
737
 
922
     Deferred income tax (benefit) expense
(140)
 
719
     Net amortization of premiums and discounts
1,031
 
836
     Net amortization of deferred loan costs and fees
231
 
187
     Provision for loan losses
1,628
 
1,273
     Stock option compensation
223
 
224
     Other than temporary impairment of available-for-sale security
2
 
---
     Net (gain) loss on sale of available-for-sale securities
(233)
 
5
     Loss on sale of foreclosed real estate
---
 
8
     Excess tax benefit from share-based payment arrangements
(3)
 
---
     Net decrease (increase) in accrued interest receivable
15
 
(283)
     Net decrease (increase) in prepaid expenses and other assets
417
 
(1,682)
     Net increase in accrued income taxes
152
 
245
     Net increase (decrease) in other liabilities
773
 
(744)
          Net cash provided by operating activities
10,124
 
6,595
       
Cash flows from investing activities:
     
   Securities available-for-sale:
     
     Proceeds from maturities
9,911
 
15,715
     Proceeds from sale of securities
7,729
 
1,820
     Purchases of securities
(30,309)
 
(18,587)
     Principal payments on securities
11,175
 
10,035
   Securities held-to-maturity:
     
     Proceeds from maturities
21,813
 
15,314
     Purchases of securities
(74,522)
 
(35,385)
     Principal payments on securities
5,525
 
5,547
   Net purchase of Federal Home Loan Bank Stock
(50)
 
(371)
   Proceeds from maturity of long term certificate of deposit
1,000
 
---
   Net increase in loans receivable
(7,766)
 
(29,205)
   Proceeds from sale of premises and equipment
---
 
12
   Proceeds from sale of foreclosed real estate
---
 
272
   Purchases of premises and equipment
(1,340)
 
(464)
          Net cash used by investing activities
(56,834)
 
(35,297)
       
Cash flows from financing activities:
     
     Net increase in short-term FHLB advances
5,200
 
9,100
     Proceeds of long-term borrowings from FHLB
---
 
2,000
     Repayment of long-term borrowings from FHLB
(5,000)
 
(4,000)
     Payment of dividends
(1,647)
 
(1,238)
     Proceeds from stock options exercised
312
 
37
     Excess tax benefits from share-based payment arrangements
3
 
---
     Net increase in deposits
48,165
 
23,003
          Net cash provided by financing activities
47,033
 
28,902
       
Net increase in cash and cash equivalents
323
 
200
Cash and cash equivalents at beginning of year
9,643
 
9,443
Cash and cash equivalents at end of year
$9,966
 
$9,643


Consolidated Statement of Cash Flows continued….
     
Cash paid during year for:
     
     Interest
$4,522
 
$5,371
     Income taxes
$2,721
 
$1,623
       
Non-cash investing activities:
     
     Loans transferred to foreclosed real estate
$443
 
$65
See notes to consolidated financial statements.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Summary of significant accounting policies

Basis of Presentation

The consolidated financial statements include the accounts of Greene County Bancorp, Inc. (the “Company”) and its subsidiary, The Bank of Greene County (the “Bank”) and the Bank’s subsidiary Greene County Commercial Bank.  All material inter-company accounts and transactions have been eliminated.  Amounts in the prior year’s consolidated financial statements have been reclassified whenever necessary to conform to the current year’s presentation. These reclassifications had no effect on net income or shareholders’ equity as previously reported.  The accompanying consolidated financial statements have been prepared in conformity with generally accepted in the United States of America accounting principles (“GAAP”).  These consolidated financial statements consider events that occurred through the date the consolidated financial statements were issued.

Nature of Operations

Greene County Bancorp, Inc.’s primary business is the ownership and operation of its subsidiaries.  The Bank of Greene County has eleven full-service offices and an operations center located in its market area consisting of Greene County, Columbia County and southern Albany County, New York.    The Bank of Greene County is primarily engaged in the business of attracting deposits from the general public in The Bank of Greene County’s market area, and investing such deposits, together with other sources of funds, in loans and investment securities.  Greene County Commercial Bank’s primary business is to attract deposits from, and provide banking services, to local municipalities.

Charter

Greene County Bancorp, Inc. and the parent mutual holding company (the “MHC”) are federally chartered and, effective July 2011, regulated by the Federal Reserve.  The Bank of Greene County, subsidiary of Greene County Bancorp, Inc., is also federally chartered and, effective July 2011, regulated by the Office of the Comptroller of the Currency (the “OCC”).  These changes are due to the passage of the Dodd-Frank Act.

The Bank of Greene County’s subsidiary, Greene County Commercial Bank is a New York State-chartered financial institution.

As a financial institution subsidiary of Greene County Bancorp, Inc., The Bank of Greene County must maintain at least 65% of its “portfolio assets” (total assets minus goodwill and other intangible assets, office property and specified liquid investments up to 20% of total assets) in certain “qualified thrift investments” (primarily loans to purchase, refinance, construct, improve or repair domestic residential housing, home equity loans, securities backed by or representing an interest in mortgages on domestic residential housing, and Federal Home Loan Bank stock) in at least 9 months out of every 12 month period.  A savings institution that fails the qualified thrift lender test is subject to certain operating restrictions and may be required to convert to a bank charter.  At June 30, 2011 and for the year ended, The Bank of Greene County satisfied the requirement of the qualified thrift lender test.

Use of Estimates

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

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

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


Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, amounts due from banks, interest bearing deposits at other financial institutions, investments (with original maturity of three months or less), and overnight federal funds sold.  The amounts of interest bearing deposits included as cash equivalents at June 30, 2011 and 2010 were $1,013,000 and $2,982,000, respectively.

Securities

Greene County Bancorp, Inc. has classified its investments in debt and equity securities as either available-for-sale or held-to-maturity.  Available-for-sale securities are reported at fair value, with net unrealized gains and losses reflected in the accumulated other comprehensive income (loss) component of shareholders’ equity, net of applicable income taxes.  Held-to-maturity securities are those debt securities which management has the intent and the Company has the ability to hold to maturity and are reported at amortized cost.  The Company does not have trading securities in its portfolio.

Realized gains or losses on security transactions are reported in earnings and computed using the specific identification cost basis.  Fair values of securities are based on quoted market prices, where available.  Valuation of securities is further described in Note 16.  Amortization of bond premiums and accretion of bond discounts are amortized over the expected life of the securities using the interest method.

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

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

For debt securities, credit-related OTTI is recognized in income while noncredit related OTTI on securities not expected to be sold is recognized in other comprehensive income (“OCI”).  Credit-related OTTI is measured as the difference between the present value of an impaired security’s expected cash flows and its amortized cost basis.  Noncredit-related OTTI is measured as the difference between the fair value of the security and its amortized cost less any credit-related losses recognized.  For securities classified as held to maturity, the amount of OTTI recognized in OCI is accreted to the credit-adjusted expected cash flow amounts of the securities over future periods.  For equity securities, the entire amount of OTTI is recognized in earnings.

Loans

Loans are stated at unpaid principal balances, less the allowance for loan losses and net deferred loan origination fees and costs.  Interest on loans is accrued and credited to income based upon the principal amount outstanding.  Unearned discount on installment loans is recognized as income over the term of the loan, principally using a method that approximates the effective yield method.  Nonrefundable loan fees and related direct costs are deferred and amortized over the life of the loan as an adjustment to loan yield using the effective interest method.

Allowance for Loan Losses

The allowance for loan losses is maintained by a provision for loan losses charged to expense, reduced by net charge-offs and increased by recoveries of loans previously charged off.  The level of the allowance is based on management’s evaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, payment status of the loan and economic conditions.  The Bank of Greene County considers residential mortgages, home equity loans and installment loans to customers as small, homogeneous loans, which are evaluated for impairment collectively based on historical loss experience.  Nonresidential mortgage and business loans are reviewed individually and considered impaired if it is probable that The Bank of Greene County will not be able to collect scheduled payments of principal and interest when due, according to the contractual terms of the loan agreements.  The measurement of impaired loans is generally based on the fair value of the underlying collateral, less estimated costs to sell.  The majority of The Bank of Greene County loans, including most nonaccrual loans, are small homogenous loan types adequately supported by collateral.  As a result, the level of impaired loans may only be a portion of nonaccrual loans.  Loans that are delinquent or slow paying may not be impaired, especially small homogenous loan types, due to collateral adequacy.  Management considers the payment status of loans in the process of evaluating the adequacy of the allowance for loan losses among other factors.  Loans that are either delinquent a minimum of 60 days or are on nonaccrual status, and are not individually considered impaired, are either designated as Special Mention or Substandard, and the allocation of the allowance for loan loss is based upon the risk associated with such designation.

Income Recognition on Impaired and Nonaccrual loans

The Bank of Greene County generally places a loan, including impaired loans, on nonaccrual status when it is specifically determined to be impaired or when principal and interest is delinquent for 90 days or more.  Any unpaid interest previously accrued on these loans is reversed from income.  When a loan is specifically determined to be impaired, collection of interest and principal are generally applied as a reduction to principal outstanding.  Interest income on all nonaccrual loans is recognized on a cash basis.

Foreclosed Real Estate (FRE)

FRE consists of properties acquired through mortgage loan foreclosure proceedings or in full or partial satisfaction of loans.  FRE is initially recorded at fair value (less estimated costs to sell) at the date the collateral is acquired establishing a new cost basis and any difference is charged to the allowance for loan losses at this time.  Subsequently, management reviews the value of such collateral and write-downs, if any, are charged to expense.  All expenses and income related to FRE are included in consolidated results of operations.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation.  Depreciation is computed using principally the straight-line method over the estimated useful lives of the related assets (39 years for building and improvements, 3-8 years for furniture and equipment).  Maintenance and repairs are typically charged to expense when incurred.  Gains and losses from sales or other dispositions of premises and equipment are included in consolidated results of operations.  Leasehold improvements are amortized over the lesser of the related terms of the leases or their useful life.

Treasury Stock

Common stock repurchases are recorded at cost and then held as treasury stock for subsequent issuance.  From time to time, Greene County Bancorp, Inc. may repurchase shares of common stock if, in its judgment, such shares are an attractive investment, in view of the current price at which the common stock is trading relative to Greene County Bancorp, Inc.’s earnings per share, book value per share and general market and economic factors.  Common stock may also be acquired in order to have shares available for issuance under the Stock Option Plans.  See Note 10 to the consolidated financial statements, Stock-based Compensation Plans, for more information regarding these plans.  No purchases of treasury stock were made during fiscal 2011 or 2010.

Federal Home Loan Bank Stock

Federal law requires a member institution of the Federal Home Loan Bank (“FHLB”) system to hold stock of its district FHLB according to a predetermined formula.  This stock is restricted in that it can only be sold to the FHLB or to another member institution, and all sales of FHLB stock must be at par.  As a result of these restrictions, FHLB stock is carried a cost.  FHLB stock is held as a long-term investment and its value is determined based on the ultimate recoverability of the par value.  Impairment of this investment is evaluated quarterly and is a matter of judgment that reflects management’s view of the FHLB’s long-term performance, which includes factors such as the following: its operating performance; the severity and duration of declines in the fair value of its net assets related to its capital stock amount; its commitment to make payments required by law or regulation and the level of such payments in relation to its operating performance; the impact of legislative and regulatory changes on the FHLB, and accordingly, on the members of the FHLB; and its liquidity and funding position.  After evaluating these considerations, Greene County Bancorp, Inc. concluded that the par value of its investment in FHLB stock will be recovered and, therefore, no other-than-temporary impairment charge was recorded during the fiscal years ended June 30, 2011 or 2010.

Advertising

Greene County Bancorp, Inc. follows a policy of charging the costs of advertising to expense as incurred.  Advertising costs included in other operating expenses were $336,000 and $308,000 for the years ended June 30, 2011 and 2010, respectively.


Transfers of Financial Assets

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered.  Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of the right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Off-Balance Sheet Credit Related Financial Instruments

In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under lines of credit.  Such financial instruments are recorded when they are funded.

Income Taxes

Provisions for income taxes are based on taxes currently payable or refundable and deferred income taxes on temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements.  Deferred tax assets and liabilities are reported at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled.

Earnings Per Share (EPS)

Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding during the period.  Diluted earnings per share is computed in a manner similar to that of basic earnings per share except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares that would have been outstanding under the treasury stock method if all potentially dilutive common shares (such as stock options) issued became vested during the period.  Unallocated common shares held by the ESOP are not included in the weighted-average number of common shares outstanding for either the basic or diluted earnings per share calculations.

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

In November 2008, the SEC released a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board (“IASB”). Under the proposed roadmap, the Company may be required to prepare financial statements in accordance with IFRS as early as 2015. The SEC will make a determination in 2011 regarding the mandatory adoption of IFRS. The Company is currently assessing the impact that this potential change would have on its consolidated financial statements, and it will continue to monitor the development of the potential implementation of IFRS.

In January 2010, the FASB issued amendments to its guidance on “Fair Value Measurements and Disclosures – Overall Subtopic”  The amendment requires new disclosures as follows:  (1) For transfers in and out of Level 1 and 2 fair value measurements, a reporting entity should disclose separately the amounts of significant transfers and describe the reasons for the transfers, and (2) for the reconciliation for value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number).  The amendment also clarifies existing disclosure requirements relating to the level of disaggregation of each class of assets or liabilities within a line item in the statement of financial position and the inputs and valuation techniques utilized to measure fair value for both recurring and nonrecurring fair value measurements.  Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3.  The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements.  Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  The adoption of these amendments did not and are not expected to have a material effect on our consolidated results of operations or financial position.
 
In April 2011, the FASB issued additional guidance regarding “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring”.  This additional guidance clarifies which loan modifications constitute troubled debt restructurings.  It is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. This new guidance is to be effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption.  The adoption of these amendments is not expected to have a material effect on our consolidated results of operations or financial position.
 
 
In May 2011, the FASB has issued amendments to its guidance on Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the IASB (the Boards) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in these amendments, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs.  The amendments are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted.
 
 
In June 2011, the FASB issued an amendment to its guidance on Comprehensive Income which has eliminated the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity and will require it be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement format would include the traditional income statement and the components and total other comprehensive income as well as total comprehensive income. In the two statement approach, the first statement would be the traditional income statement which would be immediately followed by a separate statement which includes the components of other comprehensive income, total other comprehensive income and total comprehensive income.  The amendments in this ASU will be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The adoption of these amendments are not expected to have an effect on our consolidated results of operations or financial position.
 

Note 2.  Balances at other banks

The Bank of Greene County is required to maintain certain reserves of vault cash and/or deposits with the Federal Reserve Bank.  The amount of this reserve requirement, included in cash and due from banks, was $613,000 and $541,000 at June 30, 2011 and 2010, respectively.


 
 

 

Note 3.  Securities

Securities at June 30, 2011 consisted of the following:

 
 
Gross
Gross
Estimated
 
Amortized
Unrealized
Unrealized
Fair
(In thousands)
Cost
Gains
Losses
Value
Securities available-for-sale:
       
  U.S. government sponsored enterprises
$25,909
$171
$377
$25,703
  State and political subdivisions
6,819
243
---
7,062
  Mortgage-backed securities-residential
28,214
773
73
28,914
  Mortgage-backed securities-multi-family
20,184
912
---
21,096
  Asset-backed securities
24
---
1
23
  Corporate debt securities
6,881
325
---
7,206
Total debt securities
88,031
2,424
451
90,004
  Equity securities and other
67
46
---
113
Total securities available-for-sale
88,098
2,470
451
90,117
Securities held-to-maturity:
       
  U.S. treasury securities
11,062
70
---
11,132
  U.S. government sponsored enterprises
997
30
---
1,027
  State and political subdivisions
34,933
200
9
35,124
  Mortgage-backed securities-residential
57,347
1,737
35
59,049
  Mortgage-backed securities-multi-family
19,434
47
14
19,467
  Other securities
404
2
---
406
Total securities held-to-maturity
124,177
2,086
58
126,205
Total securities
$212,275
$4,556
$509
$216,322

Securities at June 30, 2010 consisted of the following:
 
 
Gross
Gross
Estimated
 
Amortized
Unrealized
Unrealized
Fair
(In thousands)
Cost
Gains
Losses
Value
Securities available-for-sale:
       
  U.S. government sponsored enterprises
$21,942
$234
$---
$22,176
  State and political subdivisions
8,392
357
---
8,749
  Mortgage-backed securities-residential
24,838
1,045
---
25,883
  Mortgage-backed securities-multi-family
24,623
1,309
---
25,932
  Asset-backed securities
33
---
1
32
  Corporate debt securities
6,907
97
73
6,931
Total debt securities
86,735
3,042
74
89,703
  Equity securities and other
67
35
---
102
Total securities available-for-sale
86,802
3,077
74
89,805
Securities held-to-maturity:
       
  U.S. government sponsored enterprises
7,004
64
---
7,068
  State and political subdivisions
29,821
25
---
29,846
  Mortgage-backed securities-residential
36,277
1,362
---
37,639
  Mortgage-backed securities-multi-family
4,058
11
---
4,069
  Other securities
360
---
---
360
Total securities held-to-maturity
77,520
1,462
---
78,982
Total securities
$164,322
$4,539
$74
$168,787


 
 

 


The following table shows fair value and gross unrealized losses, aggregated by security category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2011.
 
Less Than 12 Months
           More Than 12 Months
   Total
 
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
(In thousands)
Value
Losses
Value
Losses
Value
Losses
Securities available-for-sale:
           
  U.S. government sponsored enterprises
$13,446
$377
$---
$---
$13,446
$377
  Mortgage-backed security-residential
6,571
73
---
---
6,571
73
  Asset-backed securities
---
---
22
1
22
1
Total securities available-for-sale
20,017
450
22
1
20,039
451
Securities held-to-maturity:
           
  State and political subdivisions
1,610
9
---
---
1,610
9
  Mortgage-backed securities-residential
7,680
35
---
---
7,680
35
  Mortgage-backed securities-multifamily
10,670
14
---
---
10,670
14
Total securities held-to-maturity
19,960
58
---
---
19,960
58
Total securities
$39,977
$508
$22
$1
$39,999
$509

The following table shows fair value and gross unrealized losses, aggregated by security category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2010.  There were no unrealized losses on securities held-to-maturity at June 30, 2010.

 
 
Less Than 12 Months
           More Than 12 Months
   Total
 
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
(In thousands)
Value
Losses
Value
Losses
Value
Losses
Securities available-for-sale:
           
  Asset-backed securities
$---
$---
$32
$1
$32
$1
  Corporate debt securities
---
---
2,492
73
2,492
73
Total securities
$---
$---
$2,524
$74
$2,524
$74

At June 30, 2011, there were 33 securities which have been in a continuous unrealized loss position for less than 12 months and 1 security with a continuous unrealized loss position of more than 12 months.  Management evaluated these securities considering the factors as outlined in Note 1 of these consolidated financial statements, and based on this evaluation, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2011.  Management believes that the reasons for the decline in fair value are due to interest rates, widening credit spreads and market illiquidity at the end of the fiscal year.

The following table presents realized gains and losses on securities for the years ended June 30, 2011 and 2010:

(In thousands)
2011
2010
Gross realized gains on sale of available-for-sale securities
$233
$32
Gross realized losses on sale of available-for-sale securities
---
(37)
Other-than-temporary impairment losses
(2)
---
Net realized gains (losses)
$231
($5)
     


 
 

 

The estimated fair value of debt securities, including mortgage-backed securities at June 30, 2011, by contractual maturity are shown below.  Expected maturities may differ from contractual maturities, because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

   
                      After
                     After
   
 
                        In
                      One Year
Five Years
After
 
 
One Year
                      Through
                      Through
                     Ten
 
 
                        Or Less
Five Years
                       Ten Years
                     Years
Total
(Dollars In thousands)
         
Securities available-for-sale:
         
  U.S. Government sponsored enterprises
$---
$18,345
$5,454
1,904
$25,703
  State and political subdivisions
1,390
5,315
357
---
7,062
  Mortgage-backed securities-residential
50
1,676
5,862
21,326
28,914
  Mortgage-backed securities-multi-family
3,403
17,693
---
---
21,096
  Asset-backed securities
---
---
---
23
23
  Corporate debt securities
1,290
2,151
3,765
---
7,206
Total debt securities
6,133
45,180
15,438
23,253
90,004
  Equity securities
---
---
---
113
113
Total securities available-for-sale
6,133
45,180
15,438
23,366
90,117
Securities held-to-maturity:
         
  U.S. treasury securities
2,008
9,124
---
---
11,132
  U.S. government sponsored enterprises
---
1,027
---
---
1,027
  State and political subdivisions
10,899
13,591
5,296
5,338
35,124
  Mortgage-backed securities-residential
---
4,629
23,235
31,185
59,049
  Mortgage-backed securities-multi-family
424
2,298
16,745
---
19,467
  Other securities
20
3
---
383
406
Total securities held-to-maturity
13,351
30,672
45,276
36,906
126,205
Total securities
$19,484
$75,852
$60,714
$60,272
$216,322
Weighted average yield
2.60%
2.72%
3.78%
3.52%
3.23%

As of June 30, 2011 and 2010, securities with an aggregate fair value of $161.3 million and $117.1 million, respectively, were pledged as collateral for deposits in excess of FDIC insurance limits for various municipalities placing deposits with Greene County Commercial Bank.  At June 30, 2011 and 2010, securities with an aggregate fair value of $6.7 million and $6.9 million, respectively, were pledged as collateral for potential borrowings at the Federal Reserve Bank discount window.  Greene County Bancorp, Inc. did not participate in any securities lending programs during the fiscal years ended June 30, 2011 or 2010.

Note 4.  Loans

Major loan segments and classes at June 30, 2011 and 2010 are summarized as follows:
 
                               At June 30,
(Dollars In thousands)
2011
2010
Real estate mortgages:
   
   Residential
$181,612
$182,525
   Nonresidential
63,860
54,586
   Construction and land
5,745
9,357
   Multifamily
6,048
6,035
Total real estate mortgages
257,265
252,503
Home equity loans
25,559
26,602
Consumer installment
4,008
4,285
Commercial loans
18,788
15,810
Total gross loans
305,620
299,200
Allowance for loan losses
(5,069)
(4,024)
Deferred fees and costs
495
406
Total net loans
$301,046
$295,582

At June 30, 2011 and 2010, loans to officers and directors were not significant.

Credit Quality Indicators

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

When The Bank of Greene County classifies problem assets as either Substandard or Doubtful, it generally establishes a valuation allowance or "loss reserve" in an amount deemed prudent by management.  General allowances represent loss allowances that have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets.  When The Bank of Greene County identifies problem assets as being impaired, it is required either to establish a specific allowance for losses equal to the amount of impairment of the assets, or confirming a loss event has taken place, to charge-off such amount.  The Bank of Greene County'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 of Greene County reviews its portfolio monthly to determine whether any assets require classification in accordance with applicable regulations.

The inherent risk within the loan portfolio varies depending upon the loan type.   The Bank of Greene County’s primary lending activity is the origination of residential mortgage loans, including home equity loans, which are collateralized by residences.   Generally, residential mortgage loans are made in amounts up to 80.0% of the appraised value of the property.  However, The Bank of Greene County will originate residential mortgage loans with loan-to-value ratios of up to 95.0%, with private mortgage insurance.  In the event of default by the borrower, The Bank of Greene County will acquire and liquidate the underlying collateral. By originating the loan at a loan-to-value ratio of 80% or less, The Bank of Greene County limits its risk of loss in the even of default.  However, the market values of the collateral may be adversely impacted by declines in the economy.  Home equity loans may have an additional inherent risk if The Bank of Greene County does not hold the first mortgage.  The Bank of Greene County may stand in a secondary position in the event of collateral liquidation resulting in a greater chance of insufficiency to meet all obligations.

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

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

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

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

Loan balances by internal credit quality indicator as of June 30, 2011 are shown below.
(In thousands)
Performing
Watch
Special Mention
Substandard
Total
Residential mortgage
$176,615
$1,782
$95
$3,120
$181,612
Nonresidential mortgage
59,633
1,017
602
2,608
63,860
Residential construction & land
3,718
---
---
13
3,731
Commercial construction
1,789
---
---
225
2,014
Multi-family
5,036
---
434
578
6,048
Home equity
25,446
64
---
49
25,559
Consumer installment
3,960
7
---
41
4,008
Commercial loans
17,149
274
680
685
18,788
Total gross loans
$293,346
$3,144
$1,811
$7,319
$305,620

Loan balances by internal credit quality indicator as of June 30, 2010 are shown below.
(In thousands)
Performing
Watch
Special Mention
Substandard
Total
Residential mortgage
$178,851
$1,591
$97
$1,986
$182,525
Nonresidential mortgage
50,343
740
2,408
1,095
54,586
Residential construction & land
6,688
---
---
13
6,701
Commercial construction
2,656
---
---
---
2,656
Multi-family
5,441
---
---
594
6,035
Home equity
26,300
105
---
197
26,602
Consumer installment
4,249
18
---
18
4,285
Commercial loans
14,253
717
837
3
15,810
Total gross loans
$288,781
$3,171