Overview of the Company’s Activities and Risks
The Company's results of operations depend primarily on its net interest income, which is the difference between the income earned on the Company's loan and securities portfolios and its cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations are also affected by the Company's provision for loan losses, noninterest income and noninterest expense. Noninterest income consists primarily of fees and service charges. The Company's noninterest expense consists principally of compensation 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 the Company. To operate successfully, the Company must manage various types of risk, including but not limited to, market or interest rate risk, credit risk, transaction risk, liquidity risk, security risk, strategic risk, reputation risk and compliance risk. While all of these risks are important, the risks of greatest significance to the Company relate to market or interest rate risk and credit risk. Market risk is the risk of loss from adverse changes in market prices and/or interest rates. Since net interest income (the difference between interest earned on loans and investments and interest paid on deposits and borrowings) is the Company's primary source of revenue, interest rate risk is the most significant non-credit related market risk to which the Company is exposed. Net interest income is affected by changes in interest rates as well as fluctuations in the level and duration of the Company's assets and liabilities. Interest rate risk is the exposure of the Company's net interest income to adverse movements in interest rates. In addition to directly impacting net interest income, changes in interest rates can also affect the amount of new loan originations, the ability of borrowers and debt issuers to repay loans and debt securities, the volume of loan repayments and refinancing, and the flow and mix of deposits. Credit risk is the risk to the Company's earnings and shareholders' equity that results from customers, to whom loans have been made and to the issuers of debt securities in which the Company has invested, failing to repay their obligations. The magnitude of risk depends on the capacity and willingness of borrowers and debt issuers to repay and the sufficiency of the value of collateral obtained to secure the loans made or investments purchased. Operational risk is the risk to current or anticipated earnings or capital arising from inadequate or failed internal processes or systems, the misconduct or errors of people, and adverse external events. Operational losses result from internal fraud; external fraud; employment practices and workplace safety, clients, products, and business practices; damage to physical assets; business disruption and system failures; and execution, delivery, and process management.
Special note regarding forward-looking statements
This quarterly 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 quarterly report, describe future plans or strategies and include Greene County Bancorp, Inc.'sexpectations of future financial results. The words "believe," "expect," "anticipate," "project," and similar expressions identify forward-looking statements. Greene County Bancorp, Inc.'sability 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 developments,
(d) the monetary and fiscal policies of the
e) changes in the quality or composition of
and investment portfolios,
(f) deposit flows, (g) competition, and
(h) the demand for financial services in
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. 29
Non-GAAP Financial Measures
Regulation G, a rule adopted by the
Securities and Exchange Commission(SEC), applies to certain SECfilings, including earnings releases, made by registered companies that contain "non-GAAP financial measures." GAAP is generally accepted accounting principles in the United States of America. Under Regulation G, companies making public disclosures containing non-GAAP financial measures must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure (if a comparable GAAP measure exists) and a statement of the Company's reasons for utilizing the non-GAAP financial measure as part of its financial disclosures. The SEChas exempted from the definition of "non-GAAP financial measures" certain commonly used financial measures that are not based on GAAP. When these exempted measures are included in public disclosures, supplemental information is not required. Financial institutions like the Company and its subsidiary banks are subject to an array of bank regulatory capital measures that are financial in nature but are not based on GAAP and are not easily reconcilable to the closest comparable GAAP financial measures, even in those cases where a comparable measure exists. The Company follows industry practice in disclosing its financial condition under these various regulatory capital measures, including period-end regulatory capital ratios for itself and its subsidiary banks, in its periodic reports filed with the SEC, and it does so without compliance with Regulation G, on the widely-shared assumption that the SECregards such non-GAAP measures to be exempt from Regulation G. The Company uses in this Report additional non-GAAP financial measures that are commonly utilized by financial institutions and have not been specifically exempted by the SECfrom Regulation G. The Companyprovides, as supplemental information, such non-GAAP measures included in this Report as described immediately below. Tax-Equivalent Net Interest Income and Net Interest Margin: Net interest income, as a component of the tabular presentation by financial institutions of Selected Financial Information regarding their recently completed operations, as well as disclosures based on that tabular presentation, is commonly presented on a tax-equivalent basis. That is, to the extent that some component of the institution's net interest income, which is presented on a before-tax basis, is exempt from taxation (e.g., is received by the institution as a result of its holdings of state or municipal obligations), an amount equal to the tax benefit derived from that component is added to the actual before-tax net interest income total. This adjustment is considered helpful in comparing one financial institution's net interest income to that of another institution or in analyzing any institution's net interest income trend line over time, to correct any analytical distortion that might otherwise arise from the fact that financial institutions vary widely in the proportions of their portfolios that are invested in tax-exempt securities, and that even a single institution may significantly alter over time the proportion of its own portfolio that is invested in tax-exempt obligations. Moreover, net interest income is itself a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average interest-earning assets. For purposes of this measure as well, tax-equivalent net interest income is generally used by financial institutions, again to provide a better basis of comparison from institution to institution and to better demonstrate a single institution's performance over time. While we present net interest income and net interest margin utilizing GAAP measures (no tax-equivalent adjustments) as a component of the tabular presentation within our disclosures, we do provide as supplemental information net interest income and net interest margin on a tax-equivalent basis.
Critical accounting policies
The Company's critical accounting policies relate to the allowance for loan losses. 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.
Comparison of the financial situation at
Total assets of the Company were
$2.6 billionat September 30, 2022and $2.6 billionat June 30, 2022, an increase of $12.5 million, or 0.49%. Securities available-for-sale and held-to-maturity decreased $83.4 million, or 7.1%, to $1.1 billionat September 30, 2022as compared to $1.2 billionat June 30, 2022. Net loans receivable increased $98.5 million, or 8.0%, to $1.3 billionat September 30, 2022from $1.2 billionat June 30, 2022. 30
CASH AND CASH EQUIVALENTS
Total cash and cash equivalents decreased
$2.1 millionto $66.9 millionat September 30, 2022from $69.0 millionat June 30, 2022. The level of cash and cash equivalents is a function of the daily account clearing needs and deposit levels as well as activities associated with securities transactions and loan funding. All of these items can cause cash levels to fluctuate significantly on a daily basis. SECURITIES Securities available-for-sale and held-to-maturity decreased $83.4 million, or 7.1%, to $1.1 billionat September 30, 2022as compared to $1.2 billionat June 30, 2022. The decrease was the result of utilizing maturing investments to fund loan growth during the quarter and an increase in unrealized loss on securities of $9.0 million. Securities purchases totaled $43.5 millionduring the three months ended September 30, 2022and consisted of state and political subdivision securities. Principal pay-downs and maturities during the three months ended September 30, 2022amounted to $117.2 million, primarily consisting of $14.4 millionof mortgage-backed securities, $102.0 millionof state and political subdivision securities, and $810,000of collateralized mortgage obligations. At September 30, 2022, 62.8% of our securities portfolio consisted of state and political subdivision securities to take advantage of tax savings and to promote Company's participation in the communities in which it operates. Mortgage-backed securities and asset-backed securities, which represent 28.2% of our securities portfolio at September 30, 2022, do not contain sub-prime loans and are not exposed to the credit risk associated with such lending. September 30, 2022
Percentage of Percentage of (Dollars in thousands) Balance portfolio Balance portfolio Securities available-for-sale: U.S. Government sponsored enterprises
$ 10,6641.0 % $ 11,3190.9 % U.S. Treasury securities 17,626 1.6 18,427 1.6 State and political subdivisions 188,904 17.4 248,076 21.2 Mortgage-backed securities-residential 27,168 2.5 29,897 2.6 Mortgage-backed securities-multifamily 73,236 6.7 83,709 7.2 Corporate debt securities 16,005 1.5 16,634 1.4 Total securities available-for-sale 333,603 30.7 408,062 34.9 Securities held-to-maturity: U.S. treasury securities 33,644 3.1 33,623 2.9 State and political subdivisions 493,463 45.4 493,897 42.2 Mortgage-backed securities-residential 40,901 3.8 42,461 3.6 Mortgage-backed securities-multifamily 164,925 15.2 171,921 14.7 Corporate debt securities 19,895 1.8 19,900 1.7 Other securities 41 0.0 50 0.0 Total securities held-to-maturity 752,869 69.3 761,852 65.1 Total securities $ 1,086,472100.0 % $ 1,169,914100.0 % LOANS Net loans receivable increased $98.5 million, or 8.0%, to $1.3 billionat September 30, 2022from $1.2 billionat June 30, 2022. The loan growth experienced during the quarter consisted primarily of $82.0 millionin commercial real estate loans, $7.3 millionin residential real estate loans, $2.9 millionin commercial loans, $3.3 millionin multi-family loans, $1.6 millionin home equity loans, and $2.9 millionin residential construction and land loans. This growth was partially offset by a $2.1 milliondecrease in commercial construction loans. The Company continues to experience loan growth as a result of continued growth in its customer base and its relationships with other financial institutions in originating loan participations. The Company continues to use a conservative underwriting policy in regard to all loan originations, and does not engage in sub-prime lending or other exotic loan products. Updated appraisals are obtained on loans when there is a reason to believe that there has been a change in the borrower's ability to repay the loan principal and interest, generally, when a loan is in a delinquent status. Additionally, if an existing loan is to be modified or refinanced, generally, an appraisal is ordered to ensure continued collateral adequacy. 31
Index September 30, 2022 June 30, 2022 (Dollars in thousands) Percentage of Percentage of Balance Portfolio Balance Portfolio Residential real estate
$ 368,14227.3 % $ 360,82428.8 % Residential construction and land 18,226 1.4 15,298 1.2 Multi-family 67,088 5.0 63,822 5.1 Commercial real estate 677,622 50.2 595,635 47.6 Commercial construction 81,599 6.0 83,748 6.7 Home equity 19,520 1.4 17,877 1.4 Consumer installment 4,546 0.3 4,512 0.4 Commercial loans 113,186 8.4 110,271 8.8 Total gross loans 1,349,929 100.0 % 1,251,987 100.0 % Allowance for loan losses (22,147 ) (22,761 ) Deferred fees and costs, net 69 129 Total net loans $ 1,327,851 $ 1,229,355ALLOWANCE 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 certain identified loans on 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, 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 Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgment about information available to them at the time of their examination. The Company disaggregates its loan portfolio as noted in the below allocation of allowance for loan losses table to evaluate for impairment collectively based on historical loss experience. The Company evaluates nonaccrual loans that are over $250 thousandand all trouble debt restructured loans individually for impairment, if it is probable that the Company 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 Company charges loans off against the allowance for loan losses when it becomes evident that a loan cannot be collected within a reasonable amount of time or that it will cost the Company more than it will receive, and all possible avenues of repayment have been analyzed, including the potential of future cash flow, the value of the underlying collateral, and strength of any guarantors or co-borrowers. Generally, consumer loans and smaller business loans (not secured by real estate) in excess of 90 days are charged-off against the allowance for loan losses, unless equitable arrangements are made. For loans secured by real estate, a charge-off is recorded when it is determined that the collection of all or a portion of a loan may not be collected and the amount of that loss can be reasonably estimated. 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 charge-offs. 32
Analysis of Loan Loss Provision Activity
At or for the three months ended September 30, (Dollars in thousands) 2022 2021 Balance at the beginning of the period
$ 22,761 $ 19,668Charge-offs: Consumer installment 167 104 Commercial loans 4 97 Total loans charged off 171 201 Recoveries: Residential real estate 3 - Consumer installment 46 37 Commercial loans 7 1 Total recoveries 56 38 Net charge-offs 115 163 Provisions (benefit) charged to operations (499 ) 988 Balance at the end of the period $
Net charge-offs to average loans outstanding (annualized) 0.04 % 0.06 % Net charge-offs to nonperforming assets (annualized) 8.47 % 33.20 % Allowance for loan losses to nonperforming loans 407.79 % 1078.58 % Allowance for loan losses to total loans receivable 1.64 % 1.83 %
Non-accumulated loans and non-performing assets
Loans are reviewed on a regular basis to assess collectability of all principal and interest payments due. Management determines that a loan is impaired or nonperforming when it is probable at least a portion of the principal or interest will not be collected in accordance with contractual terms of the note. When a loan is determined to be impaired, the measurement of the loan is based on present value of estimated future cash flows, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. Generally, 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. A loan does not have to be 90 days delinquent in order to be classified as nonperforming. Foreclosed real estate is considered to be a nonperforming asset. For further discussion and detail regarding impaired loans please refer to Part I, Financial Statements (unaudited), Note 5 Loans and Allowance for Loan Losses of this Report. 33
Analysis of non-current loans and non-performing assets
(Dollars in thousands) September 30, 2022 June 30, 2022 Nonaccruing loans: Residential real estate $ 2,733
$ 2,948Residential construction and land - 1 Commercial real estate 796 1,269 Home equity 187 188 Consumer installment - 7 Commercial 1,715 1,904 Total nonaccruing loans $ 5,431 $ 6,317Foreclosed real estate: Residential real estate - 68 Total foreclosed real estate - 68 Total nonperforming assets $
Troubled debt restructuring: Nonperforming (included above) $ 3,187
$ 2,707Performing (accruing and excluded above) 2,296 2,336 Total nonperforming assets as a percentage of total assets 0.21 % 0.25 % Total nonperforming loans to net loans 0.41 % 0.50 %
Nonperforming assets amounted to
$5.4 millionand $6.4 millionat September 30, 2022and June 30, 2022, respectively. Loans on nonaccrual status totaled $5.4 millionat September 30, 2022of which $480,000were in the process of foreclosure. At September 30, 2022, there were four residential loans totaling $378,000and one commercial real estate loan for $102,000in the process of foreclosure. Included in nonaccrual loans were $4.7 millionof loans which were less than 90 days past due at September 30, 2022, but have a recent history of delinquency greater than 90 days past due. These loans will be returned to accrual status once they have demonstrated a history of timely payments. Included in total loans past due were $1.2 millionof loans which were making payments pursuant to forbearance agreements. Under the forbearance agreements, the customers have made arrangements with the Bank to bring the loans current over a specified period of time (resulting in an insignificant delay in repayment). During this term of the forbearance agreement, the Bank has agreed not to continue foreclosure proceedings. Loans on nonaccrual status totaled $6.3 millionat June 30, 2022of which $528,000were in the process of foreclosure. At June 30, 2022, there were three residential loans in the process of foreclosure totaling $426,000and one commercial real estate loan totaling $102,000in the process of foreclosure. Included in nonaccrual loans were $4.4 millionof loans which were less than 90 days past due at June 30, 2022, but have a recent history of delinquency greater than 90 days past due.
The Company identifies impaired loans and measures the impairment in accordance with FASB ASC subtopic "Receivables - Loan Impairment." A loan is considered impaired 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. The table below details additional information on impaired loans at
September 30, 2022and June 30, 2022: (In thousands) September 30, 2022 June 30, 2022 Balance of impaired loans, with a valuation allowance $ 8,494 $ 9,235
Allowances for impaired loans included in allowance for loan losses
2,647 2,347 Balance of impaired loans, without a valuation allowance 1,540 1,536 Total impaired loans 10,034 10,771 34
Index For the three months ended September 30, (In thousands) 2022 2021
Average impaired loan balance for periods ended
Interest income recognized on impaired loans during the periods ended
130 61 Residential real estate average balance of impaired loans with a valuation allowance amounted to
$1.9 millionfor the three months ended September 30, 2022, as compared to $2.0 millionfor the three months ended June 30, 2022, a decrease of $100,000. The decrease in residential real estate impaired loans was the result of continued pay downs by the borrowers with no significant changes in relationships moving in or out of impairment status. Commercial real estate average balance of impaired loans with a valuation allowance amounted to $3.2 millionfor the three months ended September 30, 2022, as compared to $3.7 millionfor the three months ended June 30, 2022, a decrease of $500,000. The decrease was primarily the result of one loan paying off during the quarter end September 30, 2022. DEPOSITS Deposits totaled $2.3 billionat September 30, 2022and $2.2 billionat June 30, 2022, an increase of $114.3 million, or 5.2%. NOW deposits increased $108.6 million, or 7.3%, and certificates of deposits increased $31.1 million, or 76.2%, when comparing September 30, 2022and June 30, 2022. Included within certificates of deposits at September 30, 2022were $40.0 millionin brokered certificates of deposit. Money market deposits decreased $14.4 million, or 9.1%, savings deposits decreased $6.5 million, or 1.9%, and noninterest-bearing deposits decreased $4.5 million, or 2.4% when comparing September 30, 2022and June 30, 2022. Deposits increased during the three months ended September 30, 2022as a result of an increase in municipal deposits at Greene County Commercial Bank, primarily from tax collection, and new account relationships. Major classifications of deposits at September 30, 2022and June 30, 2022are summarized as follows: Percentage of Percentage of (In thousands) September 30, 2022 Portfolio June 30, 2022 Portfolio Noninterest-bearing deposits $ 183,186 7.9 % $ 187,6978.5 % Certificates of deposit 71,882 3.1 40,801 1.9 Savings deposits 337,234 14.5 343,731 15.5 Money market deposits 143,217 6.1 157,623 7.1 NOW deposits 1,591,344 68.4 1,482,752 67.0 Total deposits $ 2,326,863 100.0 % $ 2,212,604100.0 % BORROWINGS At September 30, 2022, the Bank had pledged approximately $509.3 millionof its residential and commercial mortgage portfolio as collateral for borrowing and irrevocable stand-by letters of credit at the Federal Home Loan Bank of New York("FHLB"). The maximum amount of funding available from the FHLB was $358.4 millionat September 30, 2022, of which there were no borrowings and 125.0 million irrevocable stand-by letters of credit outstanding at September 30, 2022. There were $23.4 millionand $123.7 millionin short-term overnight borrowings at September 30, 2022and June 30, 2022, respectively. Interest rates on short term borrowings are determined at the time of borrowing. There were no long-term fixed rate, fixed term advances at September 30, 2022and June 30, 2022. The $125.0 millionof irrevocable stand-by letters of credit with the FHLB have been issued to secure municipal transactional deposit accounts, on behalf of Greene County Commercial Bank. The Bank also pledges securities and certificates of deposit as collateral at the Federal Reserve Bankdiscount window for overnight borrowings. At September 30, 2022, approximately $16.7 millionof collateral was available to be pledged against potential borrowings at the Federal Reserve Bankdiscount window. There were no balances outstanding with the Federal Reserve Bankat September 30, 2022. The Bank has established unsecured lines of credit with Atlantic Central Bankers Bankfor $15.0 millionand two other financial institutions for $50.0 million. The Company has also established an unsecured line of credit with Atlantic Central Bankers Bankfor $7.5 million. The lines of credit provide for overnight borrowing and the interest rate is determined at the time of the borrowing. There were no borrowings outstanding with these lines of credit for both the Company and the Bank at September 30, 2022and June 30, 2022. On September 17, 2020, the Company entered into Subordinated Note Purchase Agreements with 14 qualified institutional investors, issued at 4.75% Fixed-to-Floating Rate due September 17, 2030, in the aggregate principal amount of $20.0 million, carried net of issuance costs of $424,000amortized over a period of 60 months. These notes are callable on September 15, 2025. At September 30, 2022, there were $19.8 millionof these Subordinated Note Purchases Agreements outstanding, net of issuance costs. 35
September 15, 2021, the Company entered into Subordinated Note Purchase Agreements with 18 qualified institutional investors, issued at 3.00% Fixed-to-Floating Rate due September 15, 2031, in the aggregate principal amount of $30.0 million, carried net of issuance costs of $499,000amortized over a period of 60 months. These notes are callable on September 15, 2026. At September 30, 2022, there were $29.6 millionof these Subordinated Note Purchases Agreements outstanding, net of issuance costs.
Shareholders' equity increased to
$159.6 millionat September 30, 2022from $157.7 millionat June 30, 2022, resulting primarily from net income of $9.0 million, partially offset by dividends declared and paid of $546,000and an increase in other accumulated comprehensive loss of $6.6 millionas unrealized loss on available for sale securities increased during the current quarter. On September 17, 2019, the Board of Directors of the Company adopted a stock repurchase program. Under the repurchase program, the Company may repurchase up to 200,000 shares of its common stock. Repurchases will be made at management's discretion at prices management considers to be attractive and in the best interests of both the Company and its stockholders, subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses for capital, and the Company's financial performance. For the three months ending September 30, 2022, the Company did not repurchase any shares.
Data on selected stocks:
September 30, 2022 June 30, 2022 Shareholders' equity to total assets, at end of period 6.18 % 6.13 % Book value per share $ 18.75 $ 18.53 Closing market price of common stock $ 57.27 $ 45.29 For the three months ended September 30, 2022 2021 Average shareholders' equity to average assets 6.32 % 6.88 % Dividend payout ratio1 13.21 % 15.48 % Actual dividends paid to net income2 6.04 %
1The dividend payout ratio has been calculated based on the dividends declared per share divided by basic earnings per share. No adjustments have been made for dividends waived by
Greene County Bancorp, MHC("MHC"), the owner of 54.1% of the Company's shares outstanding. 2 Dividends declared divided by net income. The MHC waived its right to receive dividends declared during the three months ended September 30, 2021; December 31, 2021, March 31, 2022and September 30, 2022. Dividends declared during the three months ended March 31, 2021and June 30, 2022were paid to the MHC. The MHC's ability to waive the receipt of dividends is dependent upon annual approval of its members as well as receiving the non-objection of the Federal Reserve Board.
Comparison of operating results for the three months ended
Average Balance Sheet The following table sets forth certain information relating to the Company for the three months ended
September 30, 2022and 2021. 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 nonperforming loans. The loan yields include net amortization of certain deferred fees and costs that are considered adjustments to yields. 36
Index Three months ended September 30, 2022 2021 Average Interest Average Average Interest Outstanding Earned / Yield / Outstanding Earned / Average Yield / (Dollars in thousands) Balance Paid Rate Balance Paid Rate Interest-earning Assets: Loans receivable, net1
$ 1,314,095 $ 13,3824.07 % $ 1,104,588 $ 12,0674.37 % Securities non-taxable 698,137 3,077 1.76 579,382 2,091 1.44 Securities taxable 433,522 2,120 1.96 367,704 1,401 1.52 Interest-bearing bank balances and federal funds 5,471 27 1.97 103,211 42 0.16 FHLB stock 3,254 34 4.18 1,091 12 4.40 Total interest-earning assets 2,454,479 18,640 3.04 % 2,155,976 15,613 2.90 % Cash and due from banks 12,907 12,160 Allowance for loan losses (23,046 ) (19,725 ) Other noninterest-earning assets 90,701 74,896 Total assets $ 2,535,041 $ 2,223,307Interest-Bearing Liabilities: Savings and money market deposits $ 499,168 $ 2030.16 % $ 447,543 $ 2060.18 % NOW deposits 1,499,209 1,586 0.42 1,355,499 565 0.17 Certificates of deposit 69,788 221 1.27 34,738 77 0.89 Borrowings 94,129 796 3.38 27,526 366 5.32 Total interest-bearing liabilities 2,162,294 2,806 0.52 % 1,865,306 1,214 0.26 % Noninterest-bearing deposits 184,216 181,990 Other noninterest-bearing liabilities 28,213 23,027 Shareholders' equity 160,318 152,984 Total liabilities and equity $ 2,535,041 $ 2,223,307Net interest income $ 15,834 $ 14,399Net interest rate spread 2.52 % 2.64 % Net earnings assets $ 292,185 $ 290,670Net interest margin 2.58 % 2.67 % Average interest-earning assets to average interest-bearing liabilities 113.51 % 115.58 %
1Calculated net of deferred loan fees and costs, loan discounts, and loans in process. For the three months ended Taxable-equivalent net interest income and net interest margin September 30, (Dollars in thousands) 2022 2021 Net interest income (GAAP)
$ 15,834 $ 14,399Tax-equivalent adjustment(1) 1,125 766 Net interest income (fully taxable-equivalent) $
Average interest-earning assets
$ 2,454,479 $ 2,155,976Net interest margin (fully taxable-equivalent) 2.76 % 2.81 % 1Net interest income on a taxable-equivalent basis includes the additional amount of interest income that would have been earned if the Company's investment in tax-exempt securities and loans had been subject to federal and New York Stateincome taxes yielding the same after-tax income. The rate used for this adjustment was 21% for federal income taxes and 4.44% for New York Stateincome taxes for the periods ended September 30, 2022and 2021, respectively. 37
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 the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to:
(i) Variation attributable to variations in volume (variations in volume multiplied by
(ii) Change attributable to rate changes (rate changes multiplied by
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. Three months ended September 30, 2022 versus 2021 Increase/(Decrease) Total Due To Increase/ (Dollars in thousands) Volume Rate (Decrease) Interest-earning Assets: Loans receivable, net1
$ 2,182 $ (867 ) $ 1,315Securities non-taxable 473 513 986 Securities taxable 275 444 719 Interest-bearing bank balances and federal funds (73 ) 58 (15 ) FHLB stock 23 (1 ) 22 Total interest-earning assets 2,880 147 3,027 Interest-Bearing Liabilities: Savings and money market deposits 21 (24 ) (3 ) NOW deposits 69 952 1,021 Certificates of deposit 101 43 144 Borrowings 606 (176 ) 430 Total interest-bearing liabilities 797 795 1,592 Net change in net interest income $ 2,083$
1 Calculated net of deferred loan fees, loan discounts and outstanding loans.
Return on average assets and return on average equity are common methods of measuring operating results. Annualized return on average assets increased to 1.43% from 1.28% for the three months ended
September 30, 2022and 2021, respectively. Annualized return on average equity increased to 22.55% for the three months ended September 30, 2022as compared to 18.60% for the three months ended September 30, 2021. The increase in average assets and average equity was primarily the result of net income outpacing growth in the balance sheet. Net income amounted to $9.0 millionand $7.1 millionfor the three months ended September 30, 2022and 2021, respectively. Average assets increased $311.7 million, or 14.0%, to $2.5 billionfor the three months ended September 30, 2022as compared to $2.2 billionfor the three months ended September 30, 2021. Average equity increased $7.3 million, or 4.8%, to $160.3 millionfor the three months ended September 30, 2022as compared to $153.0 millionfor the three months ended September 30, 2021.
Interest income amounted to
$18.6 millionfor the three months ended September 30, 2022as compared to $15.6 millionfor the three months ended September 30, 2021, an increase of $3.0 million, or 19.4%. The increase in average balances on loans and securities had the greatest impact on interest income. The rates on securities also increased during the quarter contributing to higher interest income. Average loan balances increased $209.5 millionoffset by the decrease in the average yield on loans of 30 basis points when comparing the three months ended September 30, 2022and 2021. Average security balances increased $184.6 million, and the average yield on such securities increased 37 basis points when comparing the three months ended September 30, 2022and 2021. 38
Interest expense amounted to
$2.8 millionfor the three months ended September 30, 2022as compared to $1.2 millionfor the three months ended September 30, 2021, an increase of $1.6 millionor 131.1%. The increase in average balances on interest bearing NOW deposits and borrowings had the greatest impact on expense. The average cost of NOW deposits, certificates of deposit and borrowings also increased during the quarter contributing to higher interest expense. Cost of interest-bearing liabilities increased 26 basis points when comparing the three months ended September 30, 2022and 2021. The cost of NOW deposits increased 25 basis points, the cost of certificates of deposit increased 38 basis points, and the cost of savings and money market deposits decreased 2 basis points when comparing the three months ended September 30, 2022and 2021. The increase in the cost of interest-bearing liabilities was also due to growth in the average balance of interest-bearing liabilities of $297.0 million, most notably due to an increase in NOW deposits of $143.7 million, an increase in average savings and money market deposits of $51.6 million, an increase in average borrowings of $66.6 million, and an increase in average certificates of deposits of $35.1 million, when comparing the three months ended September 30, 2022and 2021. Yields on interest-earning assets and costs of interest-bearing deposits increased for the quarter ended September 30, 2022, as the Federal Reserve Boardraised interest rates during the first three quarters of calendar year 2022. NET INTEREST INCOME Net interest income increased $1.4 millionto $15.8 millionfor the three months ended September 30, 2022from $14.4 millionfor the three months ended September 30, 2021. The increase in net interest income was the result of growth in the average balance of interest-earning assets, which increased $298.5 millionwhen comparing the three months ended September 30, 2022and 2021, and increases in interest rates on interest-earning assets, which increased 14 basis points when comparing the three months ended September 30, 2022and 2021. Net interest rate spread and net interest margin both decreased when comparing the three months ended September 30, 2022and 2021. Net interest rate spread decreased 12 basis points to 2.52% for the three months ended September 30, 2022compared to 2.64% for the three months ended September 30, 2021. Net interest margin decreased 9 basis points to 2.58% for the three months ended September 30, 2022compared to 2.67% for the three months ended September 30, 2021. When comparing the three months ended September 30, 2022to the three months ended June 30, 2022, net interest rate spread increased 5 basis points and net interest margin increased 8 basis points. The net interest rate spread and net interest margin decreased when compared to the prior year quarter ended September 30, 2021, but improved compared to the most recent quarter ended June 30, 2022. During the current quarter, certain loans and securities repriced at higher yields reflecting the higher rate environment, as the interest rates earned on new balances have increased from the historic low levels. The additional income earned on these assets was partially offset by higher rates paid on deposits. Net interest income on a taxable-equivalent basis includes the additional amount of interest income that would have been earned if the Company's investment in tax-exempt securities and loans had been subject to federal and New York Stateincome taxes yielding the same after-tax income. Tax equivalent net interest margin was 2.76% and 2.81% for the three months ended September 30, 2022and 2021, respectively. Due to the large portion of fixed-rate residential mortgages in the Company's portfolio, the Company closely monitors its interest rate risk, and the Company will continue to monitor and adjust the asset and liability mix as much as possible to take advantage of the benefits and reduce the risks or potential negative effects of changes in interest rates. Management attempts to mitigate the interest rate risk through balance sheet composition. Several strategies are used to help manage interest rate risk such as maintaining a high level of liquid assets such as short-term federal funds sold and various investment securities and maintaining a high concentration of less interest-rate sensitive and lower-costing core deposits. The Federal Reserve Boardhas taken a number of measures in an attempt to slow inflation. The Federal Reserve Boardchanged their Monetary Policy to raise rates in the recent three quarters. The rise in the federal funds rate will have a positive impact to the Company's interest spread and margin as the rates on new loans and securities purchased are at a higher rate than in the prior year.
PROVISION FOR LOAN LOSSES
Provision for loan losses amounted to a benefit of
$499,000and a charge of $988,000for the three months ended September 30, 2022and 2021, respectively. The benefit for the three months ended September 30, 2022was due to a decrease in the balance and reserve percentage on loans adversely classified, partially offset by the growth in gross loans. The Company instituted a loan deferral program in response to the COVID-19 pandemic whereby deferral of principal and/or interest payments have been provided and correspond to the length of the National Emergency as defined under the CARES Act and extended under the Consolidated Appropriations Act which was signed into law on December 27, 2020. The program ended during the quarter ended March 31, 2022and therefore the Company has zero loans on payment deferral as of September 30, 2022, compared to $7.1 million, related to six loans, at September 30, 2021. Loans classified as substandard or special mention totaled $45.5 millionat September 30, 2022and $52.1 millionat June 30, 2022, a decrease of $6.6 million. Reserves on loans classified as substandard or special mention totaled $7.0 millionat September 30, 2022compared to $9.6 millionat June 30, 2022, a decrease of $2.6 million. There were no loans classified as doubtful or loss at September 30, 2022or June 30, 2022. Allowance for loan losses to total loans receivable was 1.64% at September 30, 2022compared to 1.82% at June 30, 2022. 39
Net charge-offs amounted to
$115,000and $163,000for the three months ended September 30, 2022and 2021, respectively, a decrease of $48,000. There were no significant charge offs in each loan segment during the quarter ended September 30, 2022. Nonperforming loans amounted to $5.4 millionand $6.3 millionat September 30, 2022and June 30, 2022, respectively. The decrease in nonperforming loans during the period was primarily due to $543,000in loan repayments, $134,000in loans returning to performing status, $7,000in charge-offs, and $286,000in principal payments received, partially offset by $83,000of loans placed into nonperforming status. At September 30, 2022nonperforming assets were 0.21% of total assets compared to 0.25% at June 30, 2022. Nonperforming loans were 0.41% and 0.50% of net loans at September 30, 2022and June 30, 2022, respectively. NONINTEREST INCOME For the three months ended Change from (Dollars in thousands) September 30, Prior Year Noninterest income: 2022 2021 Amount Percent Service charges on deposit accounts $ 1,217 $ 1,069 $ 14813.8 % Debit card fees 1,142 1,083 59 5.4 Investment services 180 213 (33 ) (15.5 ) E-commerce fees 26 33 (7 ) (21.2 ) Bank owned life insurance 340 301 39 13.0 Other operating income 193 230 (37 ) (16.1 ) Total noninterest income $ 3,098 $ 2,929 $ 1695.8 % Noninterest income increased $169,000, or 5.8%, to $3.1 millionfor the three months ended September 30, 2022compared to $2.9 millionfor the three months ended September 30, 2021. The increase was primarily due to an increase in debit card fees and service charges on deposit accounts resulting from continued growth in the number of checking accounts with debit cards, the number of deposit accounts, and the income from bank owned life insurance. NONINTEREST EXPENSE For the three months ended Change from (Dollars in thousands) September 30, Prior Year Noninterest expense: 2022 2021 Amount Percent Salaries and employee benefits $ 5,428 $ 4,737 $ 69114.6 % Occupancy expense 524 505 19 3.8 Equipment and furniture expense 158 156 2 1.3 Service and data processing fees 702 638 64 10.0 Computer software, supplies and support 381 378 3 0.8 Advertising and promotion 76 101 (25 ) (24.8 ) FDIC insurance premiums 242 220 22 10.0 Legal and professional fees 451 396 55 13.9 Other 835 830 5 0.6 Total noninterest expense $ 8,797 $ 7,961
Noninterest expense increased
$836,000or 10.5%, to $8.8 millionfor the three months ended September 30, 2022compared to $8.0 millionfor the three months ended September 30, 2021. The increase in noninterest expense during the three months ended September 30, 2022was primarily due to an increase in salaries and employee benefits expense due to new positions created during the year to support the bank's growth.
Provision for income taxes reflects the expected tax associated with the pre-tax income generated for the given year and certain regulatory requirements. The effective tax rate was 15.0% for the three months ended
September 30, 2022and 15.1% for the three months ended September 30, 2021. The statutory tax rate is impacted by the benefits derived from tax-exempt bond and loan income, the Company's real estate investment trust subsidiary income, income received on the bank owned life insurance, as well as the tax benefits derived from premiums paid to the Company's pooled captive insurance subsidiary to arrive at the effective tax rate. 40
CASH AND CAPITAL RESOURCES
Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates or prices such as interest rates, foreign currency exchange rates, commodity prices, and equity prices. The Company's most significant form of market risk is interest rate risk since the majority of Company's assets and liabilities are sensitive to changes in interest rates. The Company's primary sources of funds are deposits and proceeds from principal and interest payments on loans, mortgage-backed securities and debt securities, with lines of credit available through the
Federal Home Loan Bankand Atlantic Central Bankers Bankas needed. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit outflows, mortgage prepayments, and lending activities are greatly influenced by general interest rates, economic conditions and competition. At September 30, 2022, the Company had $66.9 millionin cash and cash equivalents, representing 2.6% of total assets, and had $299.2 millionavailable in unused lines of credit.
Cash equivalents/(deposits plus short term borrowings)
2.85% (cash equivalents plus unsecured securities)/(deposits plus short-term borrowings)
8.63% (Cash equivalents plus unsecured securities plus additional borrowing capacity)/(deposits plus short-term borrowings)
The Company’s unfunded loan commitments and undrawn lines of credit are as follows at
(In thousands) Unfunded loan commitments
$ 147,171Unused lines of credit 90,083 Standby letters of credit 889 Total commitments $ 238,143The Company anticipates that it will have sufficient funds available to meet current loan commitments based on the level of cash and cash equivalents as well as the available-for-sale investment portfolio and borrowing capacity.
Risk participation agreements
Risk participation agreements ("RPAs") are guarantees issued by the Company to other parties for a fee, whereby the Company agrees to participate in the credit risk of a derivative customer of the other party. Under the terms of these agreements, the "participating bank" receives a fee from the "lead bank" in exchange for the guarantee of reimbursement if the customer defaults on an interest rate swap. The interest rate swap is transacted such that any and all exchanges of interest payments (favorable and unfavorable) are made between the lead bank and the customer. In the event that an early termination of the swap occurs and the customer is unable to make a required close out payment, the participating bank assumes that obligation and is required to make this payment. RPAs in which the Company acts as the lead bank are referred to as "participations-out," in reference to the credit risk associated with the customer derivatives being transferred out of the Company. Participations-out generally occur concurrently with the sale of new customer derivatives. The Company had no participations-out at
September 30, 2022or June 30, 2022. RPAs where the Company acts as the participating bank are referred to as "participations-in," in reference to the credit risk associated with the counterparty's derivatives being assumed by the Company. The Company's maximum credit exposure is based on its proportionate share of the settlement amount of the referenced interest rate swap. Settlement amounts are generally calculated based on the fair value of the swap plus outstanding accrued interest receivables from the customer. There was no credit exposure associated with risk participations-in as of September 30, 2022and June 30, 2022due to the recent rise in interest rate. The RPAs participations-ins are spread out over four financial institution counterparties and terms range between 5 to 14 years. 41
The Bank of Greene Countyand its wholly-owned subsidiary, Greene County Commercial Bank, met all applicable regulatory capital requirements at September 30, 2022and June 30, 2022. To Be Well For Capital Capitalized Under (Dollars in Adequacy Prompt Corrective Capital Conservation thousands) Actual Purposes Action Provisions Buffer The Bank of Greene County Amount Ratio Amount Ratio Amount Ratio Actual Required As of September 30, 2022: Total risk-based capital $ 231,45815.8 % $ 117,1158.0 % $ 146,39410.0 % 7.81 % 2.50 % Tier 1 risk-based capital 213,112 14.6 87,836 6.0 117,115 8.0 8.56 2.50 Common equity tier 1 capital 213,112 14.6 65,877 4.5 95,156 6.5 10.06 2.50 Tier 1 leverage ratio 213,112 8.3 102,161 4.0 127,702 5.0 4.34 2.50 As of June 30, 2022: Total risk-based capital $ 221,23616.0 % $ 110,2948.0 % $ 137,86710.0 % 8.05 % 2.50 % Tier 1 risk-based capital 203,935 14.8 82,720 6.0 110,294 8.0 8.79 2.50 Common equity tier 1 capital 203,935 14.8 62,040 4.5 89,614 6.5 10.29 2.50 Tier 1 leverage ratio 203,935 8.1 100,193 4.0 125,242 5.0 4.14 2.50 Greene County Commercial Bank As of September 30, 2022: Total risk-based capital $ 101,26242.3 % $ 19.1748.0 % $ 23,96710.0 % 34.25 % 2.50 % Tier 1 risk-based capital 101,262 42.3 14,380 6.0 19,174 8.0 36.25 2.50 Common equity tier 1 capital 101,262 42.3 10,785 4.5 15,579 6.5 37.75 2.50 Tier 1 leverage ratio 101,262 9.0 44,928 4.0 56,160 5.0 5.02 2.50 As of June 30, 2022: Total risk-based capital $ 94,40841.5 % $ 18,1958.0 % $ 22,74410.0 % 33.51 % 2.50 % Tier 1 risk-based capital 94,408 41.5 13,646 6.0 18,195 8.0 35.51 2.50 Common equity tier 1 capital 94,408 41.5 10,235 4.5 14,783 6.5 37.01 2.50 Tier 1 leverage ratio 94,408 8.1 46,874 4.0
58,593 5.0 4.06 2.50
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