UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2007
Commission file number 001-14910
GOUVERNEUR BANCORP, INC.
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(Name of small business issuer as specified in its charter)
UNITED STATES 04-3429966
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
42 Church Street, Gouverneur New York 13642
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(Address of principal executive offices)
Issuer's telephone number (315) 287-2600
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per share American Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. YES [X] NO [ ].
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
Gouverneur Bancorp, Inc.'s revenues for the fiscal year ended September 30, 2007
were $8,826,000.
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the average of the final closing price of
such stock on December 11, 2007, was approximately $7,009,000. (The exclusion
from such amount of the market value of the shares owned by any person shall not
be deemed an admission by the registrant that such person is an affiliate of the
registrant.)
As of December 11, 2007, there were 2,300,059 issued and outstanding shares of
the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB-Annual Report to Stockholders for the fiscal year ended
September 30, 2007. Part III of Form 10-KSB-Portions of Proxy Statement for 2008
Annual Meeting of Stockholders.
Transitional Small Business Disclosure Format. YES [ ] NO [X]
PART I
Item 1. Description of Business
General
Gouverneur Bancorp, Inc. ("We" or the "Company") is a corporation
organized under the laws of the United States. The Company's assets consist
primarily of all the outstanding capital stock of its wholly owned subsidiary,
Gouverneur Savings and Loan Association (the "Bank") and its principal business
is the ownership of the Bank. At September 30, 2007, Cambray Mutual Holding
Company ("Cambray MHC"), the Company's parent mutual holding company, held
1,311,222 shares or 57.0% of the Company's issued and outstanding common stock,
and shareholders other than Cambray MHC held 988,837 shares, or 43.0% of the
issued and outstanding common stock. The Company is a savings and loan holding
company registered with the Office of Thrift Supervision ("OTS") and subject to
regulation under federal banking laws and regulation. In this document,
references to the Company include the Bank, unless the context denotes
otherwise, and references to the "Registrant" refer to the Company.
The Company's business consists of gathering deposits from the general
public within its market area and investing those deposits primarily in loans,
debt obligations issued by the U.S. Government and its agencies, and
mortgaged-backed securities. The Company's loans are mainly residential mortgage
loans secured by one-to-four family residences with the balance of the portfolio
composed of commercial mortgage loans, other consumer loans (mostly automobile
loans), and other non-real estate commercial loans.
The Company's revenues come principally from interest on loans and
securities. The Company's primary sources of funds are deposits, borrowings from
the Federal Home Loan Bank of New York ("FHLB") and proceeds from principal and
interest payments on loans and securities. At September 30, 2007, the Company
had $132.6 million in assets, $76.2 million in deposits, $33.2 million in
borrowings from the FHLB and $20.4 million in total equity, as compared with
last year's balances of $130.1 million, $72.5 million, $35.3 million and $19.9
million, respectively. Net loans increased by $0.5 million, or 0.5%, from $105.6
million on September 30, 2006 to $106.1 million on September 30, 2007.
The Company's offices are located at 42 Church Street, Gouverneur, New
York 13642. Our telephone number is (315) 287-2600.
Forward-Looking Statements
When we use words or phrases like "will probably result," "we expect,"
"will continue," "we anticipate," "estimate," "project," "should cause," or
similar expressions in this annual report or in any press releases, public
announcements, filings with the Securities and Exchange Commission (the "SEC")
or other disclosures, we are making "forward-looking statements" as described in
the Private Securities Litigation Reform Act of 1995. In addition, certain
information we provide, such as analysis of the adequacy of our allowance for
loan losses or an analysis of the interest rate sensitivity of our assets and
liabilities, is always based on predictions of the future. From time to time, we
may also publish other forward-looking statements about anticipated financial
performance, business prospects, transactions and similar matters.
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. We want you to know that a variety of
future events could cause our actual results and experience to differ materially
from what we anticipate when we make our forward-looking statements. Some of the
risks and uncertainties that may affect our operations, performance,
profitability and results, the interest rate sensitivity of our assets and
liabilities, and the adequacy of our allowance for loan losses, include, without
limitation: (i) local, regional, national or global economic conditions which
could cause an increase in loan delinquencies, a decrease in property values, or
a change in the housing turnover rate; (ii) changes in the market interest rates
2
or changes in the speed at which market interest rates change; (iii) changes in
laws and regulations affecting us; (iv) changes in competition; and (v) changes
in consumer preferences.
Please do not rely unduly on any forward-looking statements, which are
valid only as of the date made. Many factors, including those described above,
could affect our financial performance and could cause our actual results or
circumstances for future periods to differ materially from what we anticipate or
project. We have no obligation to update any forward-looking statements to
reflect future events which occur after the statements are made.
Market Area
The Bank, a community oriented financial institution, which was
chartered in 1892, has been headquartered in the Town and Village of Gouverneur
since its formation. The Bank's deposits are insured, up to the applicable
limits, by the Federal Deposit Insurance Corporation ("FDIC"). Through the
Bank's two full service branch offices the Company services a primary market
area consisting of southern St. Lawrence County and northern Jefferson and Lewis
Counties in New York State. The Company estimates that the population in this
market area is approximately 100,000. The Company's market area is predominately
rural with many small towns. The population works in diverse industries,
including manufacturing, agriculture, retail trades, construction, mining,
health care, education and government service.
The largest private employers in the market area are a mining company,
a paper mill and a regional drug store chain combined with its warehouse and
distribution center. One area paper mill recently re-opened and now employs
about 92 people. Another local paper mill remains out of production with no
signs of opening. Two years ago, a zinc mining operation re-opened and currently
has approximately 220 employees. This has provided an economic lift to the
community since the mine is located squarely within the Bank's market area.
Fort Drum, a major military installation, is located at the southern
edge of the Company's primary market area. The market area for our Alexandria
Bay office is dominated by tourist related businesses along the St. Lawrence
River. The two largest resort hotels are year round businesses, while most
others are seasonal and service the expanded spring and summer population. Most
of the full-time residents are employed in Watertown, NY, the largest city in
the Company's three-county market area, with a population of about 30,000, and
the county seat for Jefferson County. The New York State Department of
Transportation and Jefferson County offices are both located in Watertown and
are major employers. There are several small to medium sized manufacturers,
including a paper mill in Watertown. Watertown provides the major retail
shopping center for the three counties and also attracts shoppers from Canada
who enter the United States via the Thousand Islands Bridge and travel
approximately 30 miles to Watertown.
Economic and demographic conditions in the Company's market area pose
significant challenges for the Company. Per capita income and median home values
in our market area are below New York State and national levels. Unemployment in
each of the three counties in the Company's market area is higher than statewide
and national unemployment rates. Furthermore, the local population is showing
little or no growth, as the 2001 Census showed less than a 1.0% increase in the
area since 1990, versus the statewide increase of 5.5%. These conditions are
believed to extend to communities adjoining the Company's market area as well.
Competition
The Company's principal competitors for deposits are other savings and
loan associations, savings banks, commercial banks and credit unions in the
Company's market area, as well as money market mutual funds, insurance companies
and securities and brokerage firms, many of which are substantially larger in
size with larger financial and marketing resources than the Company. The
Company's competition for loans comes principally from savings banks, savings
and loan associations, commercial banks, mortgage bankers, finance companies and
other institutional lenders, many of whom operate through the internet, as well
as traditional retail offices. Direct or indirect competition for loans from
3
nationally recognized secondary market lenders has increased in recent years,
having the effect of both reducing the Company's market share and driving down
the interest rates it can earn on residential mortgages. The Company's principal
methods of competition include loan and deposit pricing, flexible underwriting
which permits variation from secondary market underwriting requirements when
believed appropriate, maintaining close ties with its local community,
advertising and marketing programs, local decision making and personalized
services. Recent acquisitions of other banks in northern New York by larger
institutions may have also given the Company an edge in the competition for
those local residents who prefer doing business with a local financial
institution.
Lending Activities
Loan Arbitrage Growth Strategy. During fiscal 2007, we decided to
reduce our loan arbitrage growth strategy due to the narrow interest margin
between borrowing costs and loan rates. We did manage to grow the loan portfolio
slightly, but we were able to reduce both borrowed funds and brokered deposits
at the same time and thus fund the growth with local deposits.
Loan Portfolio Composition. The Company's loans consist primarily of
mortgage loans secured by one-to-four family residences. At September 30, 2007,
the Company had total gross loans of $106.2 million, an increase of $0.5
million, or 0.5%, from $105.7 million at September 30, 2006. At fiscal year end
$88.7 million, or 83.5%, were one-to-four family residential mortgage loans. The
small increase resulted from our strategy to slow loan growth until borrowing
costs decrease and arbitrage margins improve. Recently, the Fed decreased
overnight fed funds rates by a total of 75 basis points and borrowings rates
have adjusted accordingly. Now that borrowing costs are reduced, we may activate
our growth strategy to increase the loan portfolio by borrowing additional funds
from the FHLB or by purchasing brokered deposits.
We continue to originate mortgages on vacation home properties to
buyers who often live and work outside of our geographic area. These loans
generally have higher values than inland residences in the region and help to
diversify the risk on our portfolio, since those loans are not directly tied to
the local economy. However, we have been unable to establish substantial deposit
relationships with most of these seasonal home borrowers, and consequently we
borrowed funds from the FHLB to support this lending activity. Our combined
Alexandria Bay/Clayton residential mortgage loan portfolio increased $0.5
million, from $51.9 million at September 30, 2006 to $52.4 million to September
30, 2007. The Bank's home office in Gouverneur increased residential mortgage
loans by $1.8 million, from $34.5 million to $36.3 million over the same period.
Total real estate loans, including commercial mortgages, increased to $96.1
million, or 90.5% of total loans this year from $93.9 million, or 88.9% last
year.
The Company's portfolio of other consumer loans, for the most part auto
loans, decreased by $1.9 million from last year's total of $10.4 million to $8.5
million this year, as automobile loans decreased by $1.2 million and other
consumer loans decreased by $0.7 million. During fiscal 2007, we increased rates
on automobile loans, resulting in a decrease in this portfolio, as part of our
strategy to slow loan growth overall, as discussed above. Consumer loans
represent 8.0% of total loans this year versus 9.8% last year. The Company's
ratio of net loans to total assets decreased from 81.2% at September 30, 2006 to
80.0% at September 30, 2007.
We also deliberately slowed the growth of commercial loans. At
September 30, 2007, we had $7.4 million in commercial mortgages and $1.6 million
in other commercial loans, as compared to $7.5 million and $1.4 million,
respectively, at September 30, 2006.
Interest rates earned on the Company's loans are affected by the demand
for loans, the supply of money available for lending and the rates offered by
competitors. These factors are in turn affected by, among other things, economic
conditions, monetary and budgetary policies of the federal government, and
legislative tax policies.
4
Loan Portfolio Composition
The following table sets forth the composition of the Company's
mortgage and other loan portfolios in dollar amounts and in percentages at the
dates indicated.
At September 30,
---------------------------------------------------------------------------------------------------------
2007 2006 2005 2004 2003
------------------ ------------------ ------------------ ------------------ -----------------
Percent Percent Percent Percent Percent
of of of of of
Amount total Amount total Amount total Amount total Amount total
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(dollars in thousands)
Real estate loans:
Residential mortgages
including home
equities And
construction loans .. $ 88,672 83.53% $ 86,416 81.77% $ 78,616 81.24% $ 63,580 79.26% $ 48,660 74.98%
Commercial mortgages .. 7,406 6.98% 7,512 7.11% 6,472 6.69% 4,108 5.12% 3,624 5.58%
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total real estate loans . 96,078 90.51% 93,928 88.88% 85,088 87.93% 67,688 84.38% 52,,284 80.56%
Other loans:
Consumer other .......... 8,506 8.01% 10,369 9.81% 10,489 10.84% 8,909 11.11% 9,234 14.23%
Commercial other ........ 1,570 1.48% 1,382 1.31% 1,188 1.23% 3,618 4.51% 3,378 5.21%
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total other loans ....... 10,076 9.49% 11,751 11.12% 11,677 12.07% 12,527 15.62% 12,612 19.44%
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total gross loans ....... 106,154 100.00% 105,679 100.00% 96,765 100.00% 80,215 100.00% 64,896 100.00%
-------- ======= -------- ======= -------- ======= -------- ======= -------- =======
Deferred loan fees and
costs, net ........... 888 911 844 699 497
-------- -------- -------- -------- --------
Allowance for loan
losses ............... (911) (948) (869) (755) (655)
-------- -------- -------- -------- --------
Loans, net .............. $106,131 $105,642 $ 96,740 $ 80,159 $ 64,738
======== ======== ======== ======== ========
5
Residential Mortgage Loans
Residential - First lien. Approximately 55% of the Company's residential
mortgage loan portfolio is first lien, fixed-rate mortgage loans with terms up
to 25 years, but predominantly for 15 to 20 years. The Company also offers
adjustable-rate mortgage loans. The adjustable-rate residential mortgage
portfolio was $36.5 million at year-end, or 41.1% of the Company's $88.7 million
in residential mortgage loans, compared to September 30, 2006 when $35.6
million, or 41.2% of the $86.4 million in residential loans were adjustable rate
loans. Customer preference has strongly favored fixed rate mortgage loans. We
have been able to add more adjustable rate loans with our 5/1 ARM loan in which
the rate is fixed for the first five years of the term and thereafter adjusts
annually. While we have decided not to compete with the secondary fixed rate
mortgage market, we have been able to compete with the adjustable rate market
and increase our residential mortgage loan portfolio.
There has been much public discussion about sub-prime lending and the
losses that are resulting from that practice. The Company and the Bank have not
engaged in any sub-prime lending and we have not experienced any losses to date
that would indicate that a problem might exist.
When underwriting residential mortgage loan applications, the Company
considers the income and assets of the borrower, the borrower's prior credit
history and the value of the collateral security for the loan. In light of the
nature of the local market and competitive considerations, the Company
occasionally waives adverse credit information related to the borrower if the
loan is generally considered to be sound. The Company believes it has adopted
prudent policies and procedures for underwriting and generally experiences a
declination rate between twenty-five and thirty percent on all residential
mortgage applications.
The Company obtains independent appraisals on all residential first
mortgage loans and attorneys' opinions of title are required at closing. Current
surveys are generally not required because the Company believes that the cost of
obtaining a survey in the local market is not justified by the minimal risks
involved. In most cases, the Company accepts the attorney's title opinion rather
than requiring title insurance on residential mortgage loans. This practice has
not resulted in losses. Private mortgage insurance is required on loans with a
loan to value ratio in excess of 85%. We require real estate tax escrows on
first-lien mortgage loans.
Although fixed-rate mortgage loans may adversely affect the Company's net
interest income in periods of rising interest rates, the Company originates such
loans to satisfy customer demand. Such loans are generally originated at higher
interest rates than those offered on adjustable rate mortgage loans originated.
Therefore, during periods of level or declining interest rates, these loans tend
to provide higher yields than adjustable loans. Since we hold in our portfolio
all of the fixed rate mortgage loans we originate, we price them higher than
fixed rate mortgage loans sold in the secondary market. Selling the loans in the
secondary market eliminates the interest rate risk and credit risk associated
with those loans. We retain those risks and price the loans accordingly. This
pricing policy makes the adjustable rate loans more attractive to the customer
and has helped to increase the size of that portfolio, as it increased from
23.9% of the residential mortgage portfolio at September 30, 2002 to 41.1% at
September 30, 2007. Fixed-rate residential mortgage loans originated by the
Company generally include due-on-sale clauses permitting the Company to demand
payment in full if the borrower sells the property without the Company's
consent. Due-on-sale clauses are an important means of adjusting the rates of
the Company's fixed-rate mortgage loan portfolio, and the Company has generally
exercised its rights under these clauses.
Adjustable rate mortgage loans are offered with interest rates that adjust
annually based on the one-year treasury bill index, plus 2.75%. Most of these
loans have initial five-year periods with a fixed interest rate, after which the
rate adjusts annually. Interest rate adjustments are generally limited to 2% per
year for one-year adjustable loans. There is normally a lifetime maximum
interest rate adjustment, measured from the initial interest rate, of 6%. Credit
6
risks on adjustable rate loans are somewhat greater than on fixed-rate loans
primarily because, as interest rates rise, so do borrowers' payments, increasing
the potential for default.
The Company has enrolled in FHLB's Mortgage Partnership Funding program.
This is a secondary market program similar to the Federal Home Loan Mortgage
Corporation ("Freddie Mac") and Federal National Mortgage Association ("Fannie
Mae") secondary market programs. We are under no obligation to sell existing
mortgages, and have not sold any loans to date. However, we do want to position
the Company to compete with other lenders in our market area and may use this
program to offer longer-term lower rate mortgages and to provide a source of
funds to originate additional loans. Management intends to continue to emphasize
the origination of mortgage loans secured by one-to-four family residences while
at the same time seeking to expand the Company's portfolio of other loan types.
Home Equity Loans. The Company offers a home equity line of credit secured
by a residential one-to-four family mortgage, usually a second lien. The Company
has sought to increase its volume of these revolving credit loans because the
adjustable rates help improve the interest rate sensitivity of the Company's
assets. These loans, which are offered at prime rate, provide for an initial
advance period of ten years, during which the borrower pays 1/240th of the
outstanding principal balance, plus interest, each month, and can borrow, repay,
and re-borrow the principal balance. This is followed by a repayment period of
ten years, during which the balance of the loan is repaid in principal and
interest installments.
The Company also offers home equity junior mortgage loans that are fully
advanced at closing and repayable in monthly principal and interest installments
over a period generally not to exceed 10 years.
The maximum loan to value ratio, including prior liens, is 80% for junior
mortgage loans. At September 30, 2007, the Company had $5.1 million in
outstanding advances on home equity lines of credit, $4.1 million of unused home
equity lines of credit and $0.2 million in regular amortizing home equity loans,
as compared to $6.8 million, $3.6 million and $0.1 million, respectively, at
September 30, 2006.
Construction Loans. The company offers residential single-family
construction loans primarily to persons who intend to occupy the property upon
completion of construction. The loans automatically convert to regular
amortizing loans after construction is complete. Proceeds of the construction
loan are advanced in stages as construction is completed. The loans generally
provide for a construction period of not more than twelve months during which
the borrower pays interest only. In recognition of the risks involved in such
loans, the Company carefully monitors the construction through regular
inspections. At September 30, 2007, the Company had $2.1 million of outstanding
construction loans. Construction loan levels tend to increase during the summer
because of the seasonal nature of residential construction, but even during the
summer these loans generally do not represent more than 3% of the Company's loan
portfolio. Occasionally, the Company makes construction loans for purposes other
than the construction of the borrower's residence, when appropriate
opportunities arise.
Commercial Mortgage Loans
The Company has been offering commercial mortgage loans to diversify risk
and obtain the higher yield normally associated with this type of loan as
compared with residential mortgage loans. This portfolio involves greater risk,
more complex underwriting and more administration than residential real estate
loans.
The Company offers commercial mortgage loans with loan-to value ratios up
to 70%. The Company offers both fixed and adjustable rate commercial mortgage
loans, with 79.4% of the Company's commercial mortgage loan balances at
September 30, 2007 having fixed interest rates, an increase from last year's
71.1%. However, a number of the loans are five-year balloon mortgages. This
results in a weighted average life for the fixed rate portfolio of approximately
4.7 years.
7
The Company generally requires a debt service coverage ratio of at least
120% and the personal guarantee of the principals of the borrower as additional
security. The Company also requires an appraisal by an independent appraiser.
Loans secured by commercial properties generally involve a greater degree
of risk than one-to-four family residential mortgage loans. Because payments on
such loans are often dependent on successful operation or management of the
properties, repayment may be subject to a greater extent to adverse conditions
in the real estate market or the economy. We feel that the additional risk
associated with this type of lending is acceptable since the Bank's strong
capital position is more than sufficient to absorb losses, and because we seek
to minimize these risks through our underwriting policies. The Company evaluates
the qualifications and financial condition of the borrower, including credit
history, profitability and expertise, as well as the value and condition of the
underlying property. The factors considered by the Company include net operating
income; the debt coverage ratio (the ratio of cash net income plus interest to
debt service); and the loan to value ratio. When evaluating the borrower, the
Company considers the financial resources and income level of the borrower, the
borrower's experience in owning or managing similar property and the Company's
lending experience with the borrower. The Company's policy requires borrowers to
present evidence of the ability to repay the loan without having to resort to
the sale of the mortgaged property.
Other Consumer Loans
Automobile Loans. The Company has tried to increase its level of
automobile loans in order to increase the interest rate sensitivity of its
assets and expand its customer base. Auto loans are originated both through
direct contact between the Company and the borrower and indirectly through auto
dealers who refer the borrowers to the Company. However, the Company underwrites
the loans itself and the loan is originated in the name of the Company. The
dealer is paid a flat fee for each successful referral.
The Company offers auto loans for both new and used cars. The loans have
fixed rates with maturities of not more than five and a half years. At September
30, 2007, the Company had $5.7 million of auto loans, 16.2% lower than the level
one year earlier. This was mainly due to the rate increase on automobile loans
as part of our strategy to reduce loan growth. Principal is repaid quickly on
auto loans because the maximum term is 66 months. That makes it necessary to add
new loans to maintain portfolio level. Auto loans are offered in amounts up to
100% of the purchase price of the car. The Company evaluates the credit and
repayment ability of the borrower as well as the value of the collateral in
determining whether to approve a loan.
Other Consumer Loans. The Company also makes fixed-rate consumer loans
either unsecured or secured by savings accounts or other consumer assets.
Consumer loans generally have terms not exceeding five years. Other consumer
loans, not including automobile loans, totaled $2.8 million at September 30,
2007, down $0.7 million from $3.5 million at September 30, 2006. Other consumer
loans generally have higher interest rates than mortgage loans. The shorter
terms to maturity are helpful in managing the Company's interest rate risk.
Applications for these loans are evaluated based upon the borrower's ability to
repay and the value of any collateral.
Other Commercial Loans
The Company offers commercial non-mortgage loans to local businesses for
working capital, machinery and equipment purchases, expansion, and other
business purposes. These loans generally have higher yields than mortgage loans,
and include installment equipment financing with terms that generally do not
exceed seven years, short-term working capital loans, and commercial lines of
credit with annual reviews. The Company had $1.6 million of such loans on
September 30, 2007, compared to $1.4 million on September 30, 2006.
8
Applications for these loans are generally evaluated based up the
borrower's ability to repay the loan from ongoing operations. The loans normally
present greater risks than mortgage loans because the collateral, if any, is
often rapidly depreciable, easier to conceal and of limited value to other
companies. Furthermore, changes in economic conditions and other factors outside
the control of the Company, and often outside the control of the commercial
borrowers, can often have a substantial effect on delinquencies. Therefore, the
Company monitors these accounts on an ongoing basis after making the loan to be
able to address any credit problems promptly if they occur.
Origination of loans. Loan originations come from a number of sources.
Residential loan originations develop from depositors, retail customers,
telephone inquiries, advertising, the efforts of the Company's loan officers,
and referrals from other borrowers, real estate brokers and builders. The
Company originates loans through its own efforts and does not use mortgage
brokers, mortgage bankers or other non-employee fee paid loan finders except for
the referral of auto loans from local dealers.
All of the Company's lending is subject to its written, nondiscriminatory
underwriting standards and to loan origination procedures prescribed by the
Company's Board of Directors. Loan officers have individual authority to make
secured and unsecured loans up to amounts set by the Board. Residential loans in
excess of $250,000, ($200,000 for non-residential loans), up to $400,000 require
loan committee approval. Loans exceeding $400,000 must be approved by the
Executive Committee of the Board of Directors.
The Company has not purchased loan servicing rights but may engage in such
activities in the future.
The following table shows the contractual maturity of the Company's loan
portfolio at September 30, 2007. Loans are shown as due based on their
contractual terms to maturity. Adjustable rate loans are shown as maturing when
the final loan payment is due without regard to rate adjustments. The table does
not show the effects of loan amortization, possible prepayments or enforcement
of due-on-sale clauses. Non-performing loans are shown as being due based upon
their contractual maturity without regard to acceleration due to default.
Residential Commercial Consumer Commercial
mortgage mortgage other other Total
------------ ------------ ------------ ------------ ------------
(in thousands)
Amount due:
Within 1 year $ 1,840 $ 10 $ 435 $ 39 $ 2,324
1 to 2 years 350 297 1,095 93 1,835
2 to 3 years 773 1,841 2,030 317 4,961
3 to 5 years 2,095 3,454 4,290 1,044 10,883
5 to 10 years 9,321 806 653 49 10,829
over 10 years 74,293 998 3 28 75,322
------------ ------------ ------------ ------------ ------------
Total loans $ 88,672 $ 7,406 $ 8,506 $ 1,570 $ 106,154
============ ============ ============ ============ ============
The following table shows, as of September 30, 2007, the amount of loans
due after September 30, 2008, and whether they have fixed interest rates or
adjustable interest rates.
9
Fixed Adjustable
Rates Rates Total
------------ ------------ ------------
(In thousands)
Residential mortgage $ 50,373 $ 36,459 $ 86,832
Commercial mortgage 5,874 1,522 7,396
Consumer other 7,770 302 8,072
Commercial other 1,191 339 1,530
------------ ------------ ------------
Total $ 65,208 $ 38,622 $ 103,830
============ ============ ============
Asset Quality
Delinquency Procedures. When a borrower fails to make a required payment
on a mortgage loan, the Company attempts to cure the deficiency by contacting
the borrower. Late notices are sent when a payment is more than fifteen days
past due and a late charge is generally assessed at that time. The Company
attempts to contact personally any borrower who is more than 30 days past due.
When a mortgage loan is 90 days past due, the Company sends a 30 days notice of
acceleration and if the loan is not brought current by the end of that period,
the loan is turned over to an attorney for collection, with foreclosure
generally commenced within 30 to 60 days thereafter. A foreclosure action, if
the default is not cured, generally leads to a judicial sale of the mortgaged
real estate. If the borrower files a bankruptcy petition, the judicial sale is
delayed and the foreclosure action cannot be continued until the Company obtains
relief from the automatic stay provided by the bankruptcy code.
If the Company acquires the mortgaged property at foreclosure sale or
accepts a voluntary deed in lieu of foreclosure, the acquired property is then
classified as foreclosed real estate. At September 30, 2007, the Company had one
property valued at $85,000 in foreclosed real estate. The Company seeks to
dispose of these properties through real estate brokers. The disposition of
foreclosed real estate can take six months or more. When real estate is acquired
in full or partial satisfaction of a loan, it is initially recorded at the fair
value less estimated costs to sell at the date of foreclosure, establishing a
new cost basis. Write-downs from the unpaid loan balance to fair value at the
time of foreclosure are charged to the allowance for loan losses. Subsequent
revenue and expenses from operations and changes in the valuation allowance are
charged to other expense. The Company is permitted to finance sales of
foreclosed real estate by "loans to facilitate", which may involve a lower down
payment or a longer repayment term or other more favorable features than
generally would be granted under the Company's underwriting guidelines. At
September 30, 2007, the Company had fourteen "loans to facilitate," totaling
$337,000, of which one loan in the amount of $15,000 was not current in
accordance with its terms.
Late notices are sent on all consumer loans when a payment is more than 10
days past due. When an automobile loan becomes 60 days past due, the Company
seeks to repossess the collateral. If the default is not cured, then upon
repossession the Company sells the automobile as soon as practicable by public
notice and auction. The remaining balance of the loan is fully charged off when
the loan is 120 days past due. When other types of non-mortgage loans become
past due, the Company takes measures to cure defaults through contacts with the
borrower and takes appropriate action, depending upon the borrower and the
collateral, to obtain repayment of the loan. The Company had one repossessed
asset in the amount of $3,000 at September 30, 2007.
The following table sets forth the Company's loan delinquencies by type,
by amount and by percentage of each loan category at September 30, 2007.
10
Loans Delinquent For:
-------------------------------------------------------------------------------------------------------------
60-89 Days 90 Days or More (1) Total Delinquent Loans
----------------------------------- ---------------------------------- ----------------------------------
(Dollars in thousands)
Percent Percent Percent
of loan of loan of loan
No. Amount Category No. Amount category No. Amount category
--------- ---------- -------- ---------- ---------- -------- ---------- ---------- --------
Residential mortgage 14 $ 438 0.49% 12 $ 424 0.48% 26 $ 862 0.97%
Commercial mortgage -- -- 0.00% 1 249 3.36% 1 249 3.36%
Consumer other 10 88 1.03% 1 1 0.01% 11 89 1.04%
Commercial other -- -- 0.00% -- -- 0.00% -- -- 0.00%
--------- ---------- ---------- ---------- ---------- ----------
Total 24 $ 526 0.50% 14 $ 674 0.63% 38 $ 1,200 1.13%
========= ========== ========== ========== ========== ==========
(1) These loans are included as non-accrual loans or as residential mortgage
loans over 90 days delinquent and still accruing in the following table on
non-performing assets.
The following table presents information with respect to the Company's
non-performing assets (which generally include loans that are delinquent for 90
days or more, restructured loans and foreclosed real estate) at the dates
indicated.
11
At September 30,
--------------------------------------------------------------
2007 2006 2005 2004 2003
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Non-accrual loans:
Residential mortgage $ 127 $ 183 $ 115 $ 247 $ 198
Commercial mortgage 249 247 275 -- 83
Consumer other 1 22 3 5 85
Commercial other -- -- -- -- 112
---------- ---------- ---------- ---------- ----------
Total non-accrual loans 377 452 393 252 478
Restructured commercial mortgage -- -- -- 104 225
Restructured commercial other -- -- -- 24 --
Residential mortgage loans over 90
days delinquent and still accruing 297 228 -- -- --
---------- ---------- ---------- ---------- ----------
Total non-performing loans 674 680 393 380 703
Foreclosed real estate 85 -- -- 53 92
Other repossessed assets 3 11 6 9 29
---------- ---------- ---------- ---------- ----------
Total non-performing assets $ 762 $ 691 $ 399 $ 442 $ 824
========== ========== ========== ========== ==========
Non-performing loans as a percent
of total gross loans 0.63% 0.64% 0.39% 0.47% 1.08%
Non-performing assets as a percent
of total assets 0.57% 0.53% 0.33% 0.42% 0.92%
Allowance for loan losses as a
percent of non-performing loans 135.16% 139.41% 221.12% 198.68% 93.17%
The Company had eight residential mortgage loans totaling $297,000
which were more than 90 days delinquent and accruing interest at September 30,
2007, six residential mortgage loans totaling $228,000 which were more than 90
days delinquent and accruing interest at September 30, 2006, but no such loans
at September 30, 2005, 2004 or 2003.
During fiscal 2007, the Bank's non-performing assets increased from
$691,000 to $762,000. Non-performing loans decreased by $6,000 to $674,000 at
September 30, 2007 from $680,000 at September 30, 2006, represented 0.63% of
total loans versus 0.64% a year earlier. During fiscal 2007, we incurred $13,800
in losses associated with the $680,000 of non-performing loans at September 30,
2006. Currently, two of the four residential non-accrual mortgages are in
foreclosure proceedings and one is in bankruptcy proceedings.
Management believes that these non-performing loans are adequately
secured by collateral. Further, management is not aware of any factors common to
these loans, which caused their non-performance or any developments that suggest
an upward trend in delinquencies. Management determined that a $15,000 provision
for loan losses was appropriate for 2007 due to the reduced growth of the loan
portfolio.
12
At September 30, 2007, there were no loans other than those included in
the table above with regard to which management had information about possible
credit problems of the borrower that caused management to seriously doubt the
ability of the borrower to comply with the present loan repayment terms. The
Bank's ratio of non-performing assets to total assets was below 1% for the
eleventh straight year.
It is the Company's policy to discontinue accruing interest on a loan
when its fourth monthly payment is due and unpaid, unless the Company determines
that the nature of the delinquency and the collateral are such that collection
of the principal and interest on the loan is reasonably assured. When the
accrual of interest is discontinued, unpaid interest credited to the current
period income is reversed and unpaid interest accrued in prior periods is
charged against the allowance for loan losses. Generally, once the accrual of
interest is discontinued, the Company records interest as and when received
until the loan is restored to accruing status. However, if there is substantial
doubt as the collectibility of the loan, amounts received are recorded as a
reduction of principal until the loan is returned to accruing status.
The amount of additional interest income that would have been recorded
on non-accrual loans had those loans been performing in accordance with their
terms was approximately $44,000 for fiscal 2007 and $28,000 for fiscal 2006.
Classified Assets. OTS regulations require that the Company classify
its assets on a regular basis and establish prudent valuation allowances based
on such classifications. In addition, in connection with examinations, OTS
examiners have the authority to identify problem assets and, if appropriate,
require that they be classified. There are three adverse classifications for
problem assets: Substandard, Doubtful and Loss. Substandard assets have one or
more defined weaknesses and are characterized by the distinct possibility that
the Company will sustain some loss if the deficiencies are not corrected.
Doubtful assets have the weaknesses of substandard assets, with the additional
characteristics that the weaknesses make collection or liquidation in full on
the basis of currently existing facts, conditions and values questionable, and
there is a high probability of loss. An asset classified as Loss is considered
not collectible and of such little value that its continuance as an asset on the
financial statements of the Company is not warranted.
Assets classified as Substandard or Doubtful require the Company to
establish prudent valuation allowances. If an asset or portion thereof is
classified as Loss, the Company must either establish a specific allowance for
loss equal to 100% of the portion of the asset classified Loss or charge off
such amount. If the Company does not agree with an examiner's classification of
an asset it may appeal this determination. On the basis of management's review
of its loans and other assets at September 30, 2007, the Company had $574,000 of
assets classified as Substandard and none classified as Doubtful or Loss.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in the Company's loan portfolio. The allowance for loan losses is
maintained at an amount management considers appropriate to cover loan losses
deemed probable by our estimates. The allowance is based upon a number of
factors, including asset classifications, economic trends, industry experience
and trends, industry and geographic concentrations, estimated collateral values,
management's assessment of the credit risk inherent in the portfolio, historical
loan loss experience and the Company's underwriting policies. The Company
evaluates, on a monthly basis, all loans identified as problem loans, including
all non-accrual loans and other loans where management has reason to doubt
collection in full in accordance with original payment terms. The Company
considers whether the allowance should be adjusted to protect against risks
associated with such loans. In addition, the Company applies a percentage, for
each category of performing loans not designated as problem loans, to determine
an additional component of the allowance to protect against unascertainable
risks inherent in any portfolio of performing loans.
13
The analysis of the adequacy of the allowance is reported to and
reviewed by the Board of Directors quarterly. Management believes it uses a
reasonable and prudent methodology to project losses in the loan portfolio, and
hence assess the adequacy of the allowance for loan losses. However, any such
assessment is only an informed estimate and future adjustments may be necessary
if economic conditions or the Company's actual experience differ substantially
from the assumptions upon which the evaluation of the allowance was based.
Furthermore, state and federal regulators, in reviewing the Company's loan
portfolio as part of a future regulatory examination, may request the Company to
increase its allowance for loan losses, thereby negatively affecting the
Company's financial condition and earnings at that time. Moreover, future
additions to the allowance may be necessary based on changes in economic and
real estate market conditions, new information regarding existing loans,
identification of additional problem loans and other factors, both within and
outside of management's control.
The following table analyzes activity in the Company's allowance for
loan losses during the periods indicated. Loans in the consumer other category
are primarily automobile loans.
At September 30,
--------------------------------------------------------------
2007 2006 2005 2004 2003
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Allowance, beginning of period $ 948 $ 869 $ 755 $ 655 $ 671
---------- ---------- ---------- ---------- ----------
Provision for loan losses 15 100 140 135 95
---------- ---------- ---------- ---------- ----------
Charge-offs:
Residential mortgage & home equity 24 9 15 -- 33
Commercial mortgage -- -- -- -- 18
Consumer other 51 42 58 63 85
Commercial other -- -- 6 58 52
---------- ---------- ---------- ---------- ----------
Total charge-offs 75 51 79 121 188
---------- ---------- ---------- ---------- ----------
Recoveries:
Residential mortgage & home equity 7 15 15 9 16
Commercial mortgage -- -- -- -- --
Consumer other 16 15 38 18 51
Commercial other -- -- -- 59 10
---------- ---------- ---------- ---------- ----------
Total recoveries 23 30 53 86 77
---------- ---------- ---------- ---------- ----------
Net charge-offs 52 21 26 35 111
---------- ---------- ---------- ---------- ----------
Allowance, end of period $ 911 $ 948 $ 869 $ 755 $ 655
========== ========== ========== ========== ==========
Allowance as a percent of total gross
loans 0.86% 0.90% 0.90% 0.94% 1.01%
Ratio of net charge-offs to average
loans outstanding 0.05% 0.02% 0.03% 0.05% 0.19%
The following table analyzes the allocation of the Company's allowance
for loan losses to specific loan categories during the periods indicated. In
2007, 2006 and 2005 categories were added for commercial mortgages and
commercial other loans. For prior years, the amount allocated to consumer other
loans included both categories of commercial loans.
14
At September 30,
-------------------------------------------------
2007 2006
----------------------- -----------------------
Percent Percent
of Loans of Loans
to Total to Total
Amount Loans Amount Loans
---------- ---------- ---------- ----------
(Dollars in thousands)
Allowance allocated to:
Residential mortgages $ 450 83.53% $ 516 81.77%
Commercial mortgages 146 6.98% 139 7.11%
Consumer other 223 8.01% 254 9.81%
Commercial other 92 1.48% 39 1.31%
---------- ---------- ---------- ----------
Total allowance $ 911 100.00% $ 948 100.00%
========== ========== ========== ==========
At September 30,
---------------------------------------------------------------------------
2005 2004 2003
----------------------- ----------------------- -----------------------
Percent Percent Percent
of Loans of Loans of Loans
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Allowance allocated to:
Residential mortgages $ 440 81.24% $ 446 84.38% $ 382 80.56%
Commercial mortgages 139 6.69% -- 0.00% -- 0.00%
Consumer other 252 10.84% 309 15.62% 273 19.44%
Commercial other 38 1.23% -- 0.0% -- 0.0%
---------- ---------- ---------- ---------- ---------- ----------
Total allowance $ 869 100.00% $ 755 100.00% $ 655 100.00%
========== ========== ========== ========== ========== ==========
15
Environmental Issues
The Company encounters certain environmental risks in its lending
activities. Under federal and state environmental laws, lenders may become
liable for costs of cleaning up hazardous materials found on property securing
their loans. In addition, the presence of hazardous materials may have a
substantial adverse effect on the value of such property as collateral and may
cause economic difficulties for the borrower, causing the loan to go into
default. Although environmental risks are usually associated with loans secured
by commercial real estate, risks may also exist for loans secured by residential
real estate if, for example, there is nearby commercial contamination or if the
residence was constructed on property formerly used for commercial purposes. The
Company attempts to control its risk by requiring a phase one environmental
assessment by a Company approved engineer as part of its underwriting review for
commercial mortgage loans when management deems such review to be necessary
based on the history of the property.
The Company believes its procedures regarding the assessment of
environmental risk are adequate. As of September 30, 2007, the Company was
unaware of any environmental issues with respect to any of its mortgage loans
that would subject it to any material liability. Hidden or future environmental
contamination could adversely affect the values of properties securing loans in
the Company's portfolio.
Investment Activities
General. The Company develops an annual investment plan approved by the
Board of Directors. The Company recognizes that imbedded in the mortgage
portfolio are inherent prepayment and extension risks. Among the goals of the
investment plan are to develop a securities portfolio that may offset some of
the risks of the loan portfolio. Investments are well diversified and are of
high quality. The price risk of the investment portfolio is governed by
parameters of the investment plan. In addition to price risk, the plan also
develops goals for portfolio yield and cash flow. Individual security purchases
are analyzed in terms of how they fit with the goals of the investment plan. The
Company's President implements the investment plan. All security purchases and
sales are reported to the Board of Directors each month. An update of the
progress made versus the investment plan is also reported to the Board's Asset
Liability Committee on a quarterly basis, at which time recommendations may be
made to alter the plan if conditions warrant.
The Company primarily employs a strategy of investing in short and
intermediate term fixed rate securities and may from time to time invest in
longer-term fixed rate securities. The Company has de-emphasized investments in
adjustable rate securities because of the high level of adjustable rate loans in
its mortgage portfolio. The Company may elect to increase or decrease its
interest rate sensitivity depending upon, among other things, the level of
interest rates. The investment portfolio would change based upon the Company's
desired interest rate risk position.
Our investment portfolio does not include sub-prime or other high-risk
derivative securities.
As required by Statement of Financial Accounting Standards ("SFAS")
115, securities are classified into three categories: trading, held-to-maturity
and available-for-sale. Securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading securities
and are reported at fair value with unrealized gains and losses included in
trading account activities in the statement of income. Securities that the
Company has the positive intent and ability to hold to maturity are classified
as held-to-maturity and reported at amortized cost. All other securities are
classified as available-for-sale. Available-for-sale securities are reported at
fair value with unrealized gains and losses included, on an after-tax basis, as
a separate component of accumulated other comprehensive income. The Company does
not have a trading securities portfolio and has no current plans to maintain
such a portfolio in the future. The Company classifies each security in either
the available-for-sale or the held-to-maturity categories when the security is
purchased.
16
Investment Securities. The fair value of the Company's investment
securities portfolio totaled $9.9 million at September 30, 2007, including $9.8
million classified as available-for-sale and $0.1 million classified as held-to
maturity. The Company invests primarily in debt securities issued by the United
States Government and its agencies ($4.5 million at September 30, 2007) and
mortgage-backed securities issued or guaranteed by government-sponsored
enterprises ($2.4 million at September 30, 2007). For the past few years, the
Company has classified all purchases of securities as available-for-sale in
order to maintain flexibility in managing its investments. Investment securities
are purchased in order to invest funds that many may be needed to make loans in
the future, to provide a source of liquidity if the need for funds arises, to
manage interest rate sensitivity, and to take advantage of acceptable after tax
yields that are available when purchasing certain tax-exempt municipal
securities. The Company purchases only investment grade debt securities and at
September 30, 2007, none of its investment securities were in default or
otherwise classified.
The Company invests in mortgage-backed securities to supplement the
yields on its loan portfolio and to help satisfy our Qualified Thrift Lender
("QTL") test, as described on page 22 of this report. More than ninety percent
of the mortgage-backed securities were issued, and are insured or guaranteed by
Fannie Mae, Freddie Mac or the Government National Mortgage Association ("Ginnie
Mae"). At September 30, 2007, the Company's mortgage-backed securities portfolio
contained $2.4 million classified as available-for-sale and $0.1 million
classified as held-to maturity.
Mortgage-backed securities are more liquid than individual mortgage
loans and may be used to collateralize borrowings of the Company. However, these
securities generally yield less than the loans that underlie them because of the
cost of payment guarantees or credit enhancements that reduce credit risk.
Mortgage-backed securities of the type held by the Company are generally
weighted at 20%, rather than the 50% weighting for performing residential
one-to-four family mortgage loans, in determining risk-based capital ratios.
Investment securities carry a reduced credit risk as compared to loans.
However, investment securities classified as available-for-sale are subject to
the risk that a fluctuating interest rate environment could cause a material
decline in the carrying value of such securities. In addition, interest rate
fluctuations, real estate market changes and changes in economic conditions may
alter the prepayment rates on the mortgage loans underlying the mortgage-backed
securities and thus affect the value of such securities resulting in a decline
in shareholders' equity.
At September 30, 2007, the Company had gross unrealized losses of
$75,000 on available for sale securities and none on held to maturity
securities. In management's opinion, the unrealized losses primarily reflect
changes in interest rates subsequent to the acquisition of the securities rather
than a deterioration of the issuer's ability to repay the debt, and as such, are
considered to be a temporary impairment of the securities.
Equity Securities. At September 30, 2007, the Company owned, in its
available for sale portfolio, corporate equity securities represented by Freddie
Mac preferred stock with a fair value of $349,000 and a cost of $6,000.
At September 30, 2007, the Bank also had $1,694,000 of stock in the
FHLB, down from $1,773,000 at September 30, 2006. The stock is redeemable at
par. The Bank is required to hold FHLB stock equal to approximately 5% of
advances from the FHLB to maintain its membership in the FHLB system. The yield
on this stock was 7.07% (annualized) for the year ended September 30, 2007.
The following table sets forth certain information regarding the
carrying values of the Company's available for sale and held to maturity
portfolios at the dates indicated.
17
At September 30,
------------------------------------
2007 2006 2005
---------- ---------- ----------
Carrying Carrying Carrying
Value Value Value
---------- ---------- ----------
(Dollars in thousands)
Securities Available for Sale:
U.S. Government and
federal agency
securities $ 4,468 $ 4,781 $ 4,968
Mortgage-backed securities 2,412 3,241 4,123
Municipal securities 2,376 1,268 1,276
---------- ---------- ----------
Total debt securities 9,256 9,290 10,367
Equity securities 349 492 503
Mutual funds 179 63 122
---------- ---------- ----------
Total available for sale 9,784 9,845 10,992
---------- ---------- ----------
Securities Held to Maturity:
Mortgage-backed securities 81 92 109
---------- ---------- ----------
Total held to maturity 81 92 109
---------- ---------- ----------
Total Securities $ 9,865 $ 9,937 $ 11,101
========== ========== ==========
The table below sets forth certain information regarding the carrying
value, weighted average yields and stated maturity of the Company's securities
at September 30, 2007. There were no securities (exclusive of obligations of the
U.S. Government and federal agencies) issued by any one entity with the total
carrying value in excess of 10% of the Company's shareholders' equity at that
date.
One year From one From five More than
or less (1) to five years to ten years Ten years Total securities
------------------ ------------------ ------------------ ------------------ ------------------
Carrying Ave. Carrying Ave. Carrying Ave. Carrying Ave. Carrying Ave. Fair
Value Yield Value Yield Value Yield Value Yield Value Yield Value
-------- ------- -------- ------- -------- ------- -------- ------- -------- ------- --------
(Dollars in thousands)
U.S. Gov't sec. $ 502 5.78% $ 1,011 4.85% $ 1,288 4.58% $ 1,667 4.17% $ 4,468 4.62% $ 4,468
Mortgage-back
sec.(1) -- 0.00% 539 3.69% 425 7.26% 1,529 5.33% 2,493 5.30% 2,493
Municipal sec. -- 0.00% 511 3.36% 962 3.62% 903 3.87% 2,376 3.66% 2,376
Other sec. (2) 528 3.65% -- 0.00% -- 0.00% -- 0.00% 528 3.65% 528
-------- -------- -------- -------- -------- --------
Total $ 1,030 4.69% $ 2,061 4.16% $ 2,675 4.66% $ 4,099 4.54% $ 9,865 4.51% $ 9,865
======== ======== ======== ======== ======== ========
(1) Mortgage-backed securities are included based upon final maturity date.
Actual maturities will differ due to scheduled monthly payments and due to
the rights of the borrowers of the underlying loans to prepay their
obligations without penalty.
(2) Includes equity securities and mutual funds, which have no maturity.
18
Sources of Funds
General. The Company's primary source of funds is deposits. The Company
has incurred borrowings to fund additional loans and investments, and may do so
again in the future. In addition, the Company derives funds for loans and
investments from loans and security repayments and prepayments and revenues from
operations. Scheduled payments on loans and mortgage-backed and investment
securities are relatively stable sources of funds, while savings inflows and
outflows and loan and mortgage-backed and investment securities prepayments are
significantly influenced by general interest rates and money market conditions.
In general, the Company expects that it will continue to offer the same types of
deposit products but also expects that it will continue to use FHLB advances as
a source of funds to fund loan growth and maximize the return on the Company's
common stock.
Deposits. The Company offers several types of deposit programs to its
customers, including savings accounts, NOW accounts, money market deposit
accounts, checking accounts and certificates of deposit. Deposit account terms
vary according to the minimum balance required, the time periods the funds must
remain on deposit and the interest rate, among other factors. The Company's
deposits are obtained predominantly from its primary market area. The Company
relies primarily on customer service and long-standing relationships with
customers to attract and retain these savings deposits; however, market interest
rates and rates offered by competing financial institutions significantly affect
the Company's ability to attract and retain savings deposits. The Company began
using brokers to obtain deposits during the 2006 fiscal year and, at September
30, 2007, had $3.7 million in brokered deposits as compared to $4.0 million at
September 30, 2006. At September 30, 2007, the Company had $76.2 million in
deposits, including the brokered deposits, as compared to $72.5 million in
deposits at September 30, 2006.
We generally price our deposit rates to be competitive with other
institutions in our market area. Pricing determinations are made weekly by a
committee of officers.
The following table sets forth the distribution of the Company's
deposit accounts at the dates indicated. The interest rates shown for non-time
accounts are the rates in effect at September 30, 2007.
19
At September 30,
--------------------------------------------------------------------------------------------
2007 2006 2005
---------------------------- ---------------------------- ----------------------------
Percent Percent Percent
Amount of total Amount of total Amount of total
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in thousands)
Non-time accounts:
Savings and club accounts
(1.05%) $ 17,617 23.11% $ 19,342 26.69% $ 19,101 29.86%
NOW and money market
accounts (0.49 - 3.49%) 13,162 17.27% 11,966 16.52% 11,956 18.69%
Non-interest bearing
Demand accounts 5,708 7.49% 3,493 4.82% 2,043 3.19%
------------ ------------ ------------ ------------ ------------ ------------
Total non-time deposits 36,487 47.87% 34,801 48.03% 33,100 51.74%
------------ ------------ ------------ ------------ ------------ ------------
Time accounts:
1.00 - 1.99% -- 0.00% -- 0.00% 2,786 4.36%
2.00 - 2.99% 430 0.57% 1,249 1.73% 9,903 15.48%
3.00 - 3.99% 1,680 2.20% 12,583 17.36% 12,777 19.98%
4.00 - 4.99% 21,987 28.84% 16,350 22.56% 5,398 8.44%
5.00 - 5.99% 15,645 20.52% 7,480 10.32% -- 0.00%
------------ ------------ ------------ ------------ ------------ ------------
Total time deposits 39,742 52.13% 37,662 51.97% 30,864 48.26%
------------ ------------ ------------ ------------ ------------ ------------
Total deposits $ 76,229 100.00% $ 72,463 100.00% $ 63,964 100.00%
============ ============ ============ ============ ============ ============
During the 2007 fiscal year movement of savings and club accounts into
time deposits accounted for some of the growth in time deposits. The growth of
non-interest-bearing demand accounts, as well as NOW and money market accounts,
mainly the result of relationships with commercial loan accounts, resulted in an
increase in non-time deposits despite a reduction of the category as a percent
of total deposits.
At September 30, 2007, the Company had $7,586,000 in certificates of
deposit with balances of $100,000 or more ("jumbo deposits"), representing 9.95%
of all deposits.
The following table sets forth the amount of certificates of deposit in
denominations of $100,000 at September 30, 2007, and the remaining period to
maturity of such deposits.
Amount Due (in thousands)
In More Than In More Than
In 3 Months 3 up to 6 6 up to 12 In More Than
Or Less Months Months 12 Months Total
-------- -------- -------- --------- --------
$ 2,804 $ 709 $ 2,936 $ 1,137 $ 7,586
Brokered deposits. We continue to use brokered deposits as another
source of funding since deposit growth has not been sufficient by itself. At
September 30, 2007 and 2006 we had $3.7 million and $4.0 million, respectively.
Brokered deposits represent 4.86% of total deposits with an average cost of
5.30% at September 30, 2007. Pricing on these deposits is similar in cost to the
costs of borrowed funds, which is currently higher than the cost of retail
deposits.
20
Borrowings. During fiscal 2007, we reduced borrowings by $2.1 million.
All outstanding borrowings are from the FHLB and generally have terms of one to
ten years with the entire principal balance repayable at the earlier of call
date or maturity. The average balance of FHLB outstanding borrowings payable
during 2007 was $35.1 million and the weighted average cost was 4.86%. The
highest balance outstanding during the year was $36.9 million and the balance at
September 30, 2007 was $33.2 million. In 2006, the average balance of loans
payable to the FHLB was $34.8 million at a weighted average cost of 4.43%. The
highest outstanding balance during the 2006 fiscal year was $38.8 million and
the balance at September 30, 2006 was $35.3 million.
Subsidiary Activities
The Company is allowed to own subsidiaries for certain limited
purposes, as permitted under OTS regulations. The Company has no subsidiaries
except for the Bank.
Personnel
At September 30, 2007, the Company had thirty-two full-time and two
part-time employee, as compared to thirty-three full-time and one part-time
employees on September 30, 2006. A collective bargaining unit does not represent
employees, and the Company considers its relationship with its employees to be
good.
Regulation
General
The Bank is a federal savings association subject to extensive
regulation, examination, and supervision by the OTS, as its primary federal
regulator and by the FDIC as its deposit insurer. The Bank's deposit accounts
are insured up to applicable limits by the Deposit Insurance Fund of the FDIC,
and the Bank is a member of the FHLB. The OTS regulates the Company and Cambray
MHC as savings and loan holding companies. The following discussion is not, and
does not purport to be, a complete description of the laws and regulation
applicable to the Company and the Bank. Any change in such laws or regulations
by the OTS, the FDIC or Congress could materially adversely affect the Company
and the Bank.
Regulation of Federal Savings Associations
Business Activities. The Bank's lending, investment and deposit powers
come from the Home Owners' Loan Act, as amended (the "HOLA") and OTS
regulations. These powers are also governed to some extent, by the FDIC under
the Federal Deposit Insurance Act and FDIC regulations. The Bank may make
residential and commercial mortgage loans, commercial loans and consumer loans,
and may invest in certain types of debt securities, and other assets. The HOLA
and OTS regulations limit the amounts that the Bank may invest in various
categories of loans, securities and other investments and such limits are
generally calculated as percentages of the Bank's assets or capital. The Bank
may offer a variety of deposit accounts, including savings, certificate (time),
demand and NOW accounts. The Bank may also establish subsidiaries to engage in
financially related activities such as insurance and securities brokerage.
Branching. Subject to certain limitations, HOLA and OTS regulations
permit federally-chartered savings associations to establish branches in any
state of the United States. This authority preempts any state law purporting to
regulate branching by federal savings associations.
Loans to One Borrower. Under the HOLA, federal savings associations are
subject to the limits applicable to national banks on loans to a single borrower
or a related group of borrowers. The Bank generally may not make a loan or
21
extend credit to a single or related group of borrowers in excess of 15% of its
unimpaired capital and surplus. Up to an additional 10% of unimpaired capital
and surplus can be lent if the additional amount is fully secured by readily
marketable collateral. At September 30, 2007, the Bank's regulatory limit on
loans to one borrower was in excess of $3.0 million. At that date, the Bank's
largest aggregate of loans to one borrower was $2,339,000.
QTL Test. The HOLA requires the Bank to meet a Qualified Thrift Lender,
or QTL test. Under the QTL test the Bank must maintain at least 65% of its
assets, after certain adjustments, in various types of loans made for
residential and housing purposes, related investments, education, small business
and credit card loans, and consumer loans and certain other loans and
investments. The Bank satisfies the QTL test and the Bank anticipates that it
will continue to satisfy the test in the future. If the Bank fails to satisfy
the QTL test it will have to either restrict its activities or convert to a
commercial bank charter.
Capital Requirements. OTS regulations require that the Bank maintain
tangible capital equal to 1.5% of total assets as adjusted under the OTS
regulations, core capital equal to 3% of such adjusted total assets and total
capital (core capital plus supplementary capital) equal to 8% of risk-weighted
assets. The Bank's capital ratios at September 30, 2007 all substantially
exceeded OTS minimum capital requirements.
Limitations on Capital Distributions. OTS regulates the amount of
dividends and other capital distributions that the Bank may pay to the Company.
In general, if the Bank will satisfy all OTS capital requirements both before
and after the distribution, the Bank may make capital distributions to the
Company in any year equal to the current year's net income plus retained net
income for the preceding two years. However, because it is a savings and loan
holding company subsidiary, the Bank must notify the OTS of the distribution and
the OTS may object on safety and soundness grounds.
If any capital distribution will exceed these limits, or if the OTS
either considers the Bank a troubled or problem institution or gives the Bank a
rating in less than the two highest rating categories, then the Bank must get
OTS approval before making a capital distribution. The Bank is not currently
required to obtain OTS approval unless it exceeds the dollar limits, and the
Bank has never paid a dividend to the Company that exceeds the dollar limits.
Therefore, the Company does not believe that the OTS capital distribution
regulations will have a material affect on its operations or its ability to pay
dividends to its stockholders.
Community Reinvestment Act and Fair Lending Laws. Under the federal
Community Reinvestment Act (the "CRA"), the Bank, consistent with its safe and
sound operation, must help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The OTS periodically assesses
the Bank's compliance with CRA requirements. The Bank received a "satisfactory"
CRA rating in its most recent OTS examination. The Bank must also comply with
the Equal Credit Opportunity Act, which prohibits creditors from discrimination
in their lending practices on bases specified in these statutes. The OTS and the
Justice Department may take enforcement action against institutions that fail to
comply with Fair Lending Laws.
Transactions With Related Parties. The Bank is authorized by federal
law to engage in transactions with its affiliates. In general, an affiliate of
the Bank is any company that controls the Bank or any other company that is
controlled by a company that controls the Bank, excluding the Bank's
subsidiaries other than those that are insured depository institutions. The Bank
may not (a) lend to any of its affiliates that is engaged in activities that are
not permissible for bank holding companies and (b) purchase the securities of
any affiliate other than a subsidiary. Transactions with any individual
affiliate may not exceed 10% of the capital and surplus of the Bank and
aggregate transactions with all affiliates may not exceed 20%. These
restrictions do not impose material limits on the Bank's business activities.
22
The Bank's loans to insiders must be made on terms that are
substantially the same as, and follow credit underwriting procedures that are
not less stringent than, those prevailing for comparable transactions with
unaffiliated persons and that do not involve more than the normal risk of
repayment or present other unfavorable features. The loans are also subject to
maximum dollar limits and must generally be approved by the Board of Directors.
The Bank may make loans to insiders on preferential terms as part of a benefit
or compensation program that is widely available to employees. The Bank has no
such benefit or compensation programs.
Enforcement. The OTS has primary enforcement responsibility over
federal savings associations. This enforcement authority includes, among other
things, the ability to assess civil money penalties, to issue cease and desist
orders and to remove directors and officers. In general, these enforcement
actions may be initiated in response to violations of laws and regulations and
to unsafe or unsound practices.
Standards for Safety and Soundness. The OTS has adopted guidelines
prescribing safety and soundness standards. These guidelines establish general
standards relating to internal controls and information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, asset quality, earnings standards, compensation, fees and benefits. In
general, the guidelines require appropriate systems and practices to identify
and manage the risks and exposures specified in the guidelines. The OTS may
order an institution that has been given notice that it is not satisfying these
safety and soundness standards to submit a compliance plan and if an institution
fails to do so, the OTS may issue an order directing action to correct the
deficiency and may issue an order directing other action. If an institution
fails to comply with such an order, the OTS may seek to enforce such order in
judicial proceedings and to impose civil money penalties.
Real Estate Lending Standards. OTS regulations generally require each
savings association to establish and maintain written internal real estate
lending standards that are consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its real
estate lending activities. The standards also must be consistent with
accompanying OTS guidelines, which include loan-to-value ratios for the
different types of real estate loans.
Prompt Corrective Regulatory Action. Under the OTS prompt corrective
action regulations, savings associations are categorized as well-capitalized,
adequately capitalized, undercapitalized, or critically undercapitalized. The
OTS may, and in some cases must, take supervisory action against
undercapitalized savings associations. At September 30, 2007, the Bank met the
criteria for being considered well-capitalized.
Federal Reserve System. The Bank is subject to provisions of the
Federal Reserve Act ("FRA") and the regulations of the Board of Governors of the
Federal Reserve System ("FRB") pursuant to which depositary institutions may be
required to maintain non-interest-earning reserves against their deposit
accounts and certain other liabilities. Currently, reserves must be maintained
against transaction accounts (primarily NOW and regular checking accounts). The
Bank complies with these requirements. The balances maintained to meet the
reserve requirements imposed by the FRB may be used to satisfy liquidity
requirements imposed by the OTS. FHLB System members are also authorized to
borrow from the Federal Reserve discount window, but FRB regulations require
such institutions to exhaust all FHLB sources before borrowing from a Federal
Reserve Bank.
Privacy Regulations. OTS regulations generally require the Bank to
disclose its privacy policy, including identifying with whom it shares a
customer's "non-public personal information," to customers at the time of
establishing the customer relationship and annually thereafter. In addition we
must provide our customers with the ability to "opt-out" of having their
personal information shared with unaffiliated third parties and not to disclose
account numbers or access codes to non-affiliated third parties for marketing
purposes. We believe that the Bank's privacy policy complies with the
regulations.
23
The USA PATRIOT Act. The Bank is subject to the USA PATRIOT Act, which
gives the federal government new powers to address terrorist threats through
enhanced domestic security measures, expanded surveillance powers, increased
information sharing, and broadened anti-money laundering requirements. The USA
PATRIOT Act imposes affirmative obligations on financial institutions, including
the Bank, which include establishing anti-money laundering programs providing
for: (i) internal policies, procedures and controls; (ii) designation of an
anti-money laundering compliance officer; (iii) ongoing employee training
programs; and (iv) an independent audit function to test the anti-money
laundering program. The OTS must consider the Bank's effectiveness in combating
money laundering when ruling on merger and other applications.
Prohibitions Against Tying Arrangements. Federal savings associations
are prohibited, subject to some exceptions, from extending credit to or offering
any other service, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or its affiliates or not obtain services of a
competitor of the institution.
Insurance of Deposit Accounts. The Bank pays deposit insurance premiums
to the FDIC. The amount of the premium depends upon the Bank's capital ratios
and supervisory rating category. At present the Bank's capital ratios and
supervisory rating are high enough that the Bank pays no regular deposit
insurance premiums. However, the Bank must pay a share of the cost of the bonds
issued in the late 1980s to recapitalize the now defunct Federal Savings and
Loan Insurance Corporation, currently equal to approximately 0.01% of its
insured deposits per year.
Federal Home Loan Bank System. The Bank is a member of the FHLB and
uses it as a source for borrowing funds. The Company must own stock in the FHLB
at least equal to the greater of 1% of the principal amount of its unpaid
residential mortgage loans and similar obligations at the beginning of each year
or 5% of its advances from the FHLB. At September 30, 2007, we had $1,694,000 of
capital stock of the FHLB, which satisfied this requirement, and we had FHLB
borrowings totaling $33.2 million.
Interagency Guidance on Nontraditional Mortgage Product Risks. On
October 4, 2006, the OTS and other federal bank regulatory authorities published
the Interagency Guidance on Nontraditional Mortgage Product Risks (the
"Nontraditional Mortgage Product Guidance"). The Nontraditional Mortgage Product
Guidance describes sound practices for managing risk, as well as marketing,
originating and servicing nontraditional mortgage products, which include, among
other things, interest only loans. The Nontraditional Mortgage Product Guidance
sets forth supervisory expectations with respect to loan terms and underwriting
standards, portfolio and risk management practices and consumer protection. For
example, the Nontraditional Mortgage Product Guidance indicates that originating
interest only loans with reduced documentation is considered a layering of risk
and that institutions are expected to demonstrate mitigating factors to support
their underwriting decision and the borrower's repayment capacity. Specifically,
the Nontraditional Mortgage Product Guidance indicates that a lender may accept
a borrower's statement as to the borrower's income without obtaining
verification only if there are mitigating factors that clearly minimize the need
for direct verification of repayment capacity and that, for many borrowers,
institutions should be able to readily document income.
Holding Company Regulation
General Powers. The Company is a unitary savings and loan holding
company within the meaning of the HOLA. As such, the Company is registered with
the OTS and is subject to OTS regulation, examination, supervision and reporting
requirements. The OTS has enforcement authority over the Company and any
non-savings institution subsidiaries it may form or acquire. Among other things,
this authority permits the OTS to restrict or prohibit activities that it
determines may pose a serious risk to the Bank. As a unitary savings and loan
24
holding company, the Company is not restricted as to the types of business
activities in which it may engage, provided that the Bank continues to meet the
QTL test. Upon any non-supervisory acquisition by the Company of another savings
association or savings bank, the Company would become a multiple savings and
loan holding company (if the acquired institution is held as a separate
subsidiary) and would be limited primarily to activities permissible for bank
holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject
to the prior approval of the OTS, and activities authorized by OTS regulation.
Waivers of dividends by the Mutual Holding Company. Cambray MHC owns
57.0% of the issued and outstanding common stock of the Company. If Cambray MHC
decides to waive its share of any dividend that the Bank is paying to its
shareholders, Cambray MHC must notify the OTS. The OTS reviews dividend waiver
notices on a case-by-case basis, and, in general, does not object to any such
waiver if: (i) the mutual holding company board of directors determines that
such waiver is consistent with such directors' fiduciary duties to the mutual
holding company's members, (ii) for as long as the savings association
subsidiary is controlled by the mutual holding company, the dollar amount of
dividends waived by the mutual holding company are considered as a restriction
to the retained earnings of the savings association, which restriction, if
material, is disclosed in the public financial statements of the savings
association as a note to the financial statements; (iii) the amount of any
dividend waived by the mutual holding company is available for declaration as a
dividend solely to the mutual holding company, and, in accordance with SFAS 5,
where the savings association determines that the payment of such dividend to
the mutual holding company is probable, an appropriate dollar amount is recorded
as a liability. Cambray MHC has elected to waive the dividends totaling
$1,927,000 as of September 30, 2007.
Conversion of the Mutual Holding Company to Stock Form. OTS regulations
permit the Mutual Holding Company to convert from the mutual to the capital
stock form of organization. The Board of Directors has no current intention or
plans for such a transaction. In general, if such a transaction is undertaken, a
new company would be formed to replace the Company and 57.0% of its stock would
be offered to the depositors of the Bank and to the public. The other current
stockholders of the Company would be entitled to receive 43.0% of the stock of
the new company in exchange for the stock of the Company.
Federal Securities Law
The common stock of the Company is registered with the SEC under the
Securities Exchange Act of 1934 (the "Exchange Act"). The Company is subject to
the information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Exchange Act.
Sarbanes Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"), enacted on
July 30, 2002, represents a comprehensive revision of laws affecting corporate
governance, accounting obligations and corporate reporting. Specifically, the
Sarbanes-Oxley Act: (i) creates a new federal accounting oversight body; (ii)
revamps auditor independence rules; (iii) enacts new corporate responsibility
and governance measures; (iv) enhances disclosures by public companies, their
directors and executive officers; (v) strengthens the powers and resources of
the SEC; and (vi) imposes new criminal and civil penalties for securities fraud
and related wrongful conduct. The Company is subject to the Sarbanes-Oxley Act.
The SEC has adopted regulations to implement the Sarbanes-Oxley Act,
including: new standards of independence for directors who serve on the
Company's Audit Committee; disclosure requirements as to whether at least one
member of the Company's Audit Committee qualifies as a "financial expert" as
defined in the SEC regulations and whether the Company has adopted a code of
ethics applicable to its chief executive officer, chief financial officer or
those persons performing similar functions; and disclosure requirements
25
regarding the operations of board nominating committees and the means, if any,
by which security holders may communicate with directors. We have incurred, and
expect that we will continue to incur, increased professional fees and other
expenses associated with compliance with the Sarbanes-Oxley Act.
Recently Enacted Laws and Regulations
Deposit Insurance Reform Legislation
On February 8, 2006, the President signed The Federal Deposit Insurance
Reform Act of 2005 (the Reform Act) into law. The Reform Act, as supplemented by
The Federal Deposit Insurance Reform Conforming Amendments Act of 2005, which
the President signed into law on February 15, 2006, amends the Federal Deposit
Insurance Act to effect several deposit insurance reforms. The Reform Act: (i)
merges the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund
(SAIF) into a new fund, the Deposit Insurance Fund (DIF), effective March 31,
2006; (ii) increases the coverage limit for retirement accounts to $250,000 and
indexes the coverage limit for retirement accounts to inflation, as with the
general deposit insurance coverage limit, effective April 1, 2006; (iii) gives
the FDIC greater flexibility to set the Designated Reserve Ratio (DRR); (iv)
grants the FDIC Board the discretion to price deposit insurance according to
risk for all insured institutions regardless of the level of the DRR; and (v)
grants a one-time initial assessment credit to recognize institutions' past
contributions to the fund. The FDIC has enacted amendments to its regulations
effective as of October 12, 2006, which implement the Reform Act. The Company
does not anticipate that the Reform Act will effect its deposit insurance
premium assessment presently, although it may in the future.
Executive Officer and Director Compensation Disclosure
The SEC has adopted amendments to its regulations, effective November
7, 2006, that substantially change the disclosure requirements for executive and
director compensation, related person transactions, director independence and
related governance matters, and security ownership of officers and directors,
for companies subject to the periodic and beneficial ownership informational
reporting rules under the Exchange Act. The executive and director compensation
disclosure rules require small business filers such as the Company, to provide
expanded tabular and accompanying narrative disclosure of compensation paid to
the Chief Executive Officer and the two most highly paid executive officers
other than the Chief Executive Officer, outstanding option and restricted stock
awards to these individuals at year-end, and compensation paid to directors. The
Company will be required to comply with these rules in its Proxy Statement and
report on Form 10-KSB for its fiscal year ending September 30, 2007.
Item 2. Description of Properties
The Company conducts its business through its headquarters at 42 Church
Street, the new branch office building at 20 John Street and an adjacent
building at 26 John Street in the Town and Village of Gouverneur and a full
service branch office in the Town of Alexandria. The net book value of these
four premises at September 30, 2007 is $2,752,000. As of June 19, 2007, the
Company no longer operates a loan production office in Clayton, New York.
Item 3. Legal Proceedings
The Bank is involved as plaintiff or defendant in various legal actions
arising in the normal course of its business. While the ultimate outcome of
these proceedings cannot be predicted with certainty, it is the opinion of
management, after consultation with counsel representing the Bank in the
proceedings, that the resolution of these proceedings should not have a material
26
effect on the Bank's or the Registrant's results of operations and financial
condition. The Registrant is not a party to any litigation.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended September 30,
2007.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information contained under the caption "Common Stock" in the 2007
Annual Report to Stockholders included as Exhibit 13 hereto is herein
incorporated by this reference.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Information contained under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the 2007 Annual
Report to Stockholders included as Exhibit 13 hereto is herein incorporated by
this reference.
27
Item 7. Financial Statements
The following information appearing in the 2007 Annual Report to
Stockholders included as Exhibit 13 hereto is herein incorporated by this
reference.
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition as of September 30, 2007
and 2006.
Consolidated Statements of Income for the Years Ended September 30,
2007 and 2006.
Consolidated Statements of Shareholders' Equity for the Years Ended
September 30, 2007 and 2006.
Consolidated Statements of Cash Flows for the Years Ended September 30,
2007 and 2006.
Notes to Consolidated Financial Statements
With the exception of the information expressly incorporated herein by
reference, the Company's Annual Report to Stockholders for the year ended
September 30, 2007, is not deemed filed as part of this Annual Report on Form
10-KSB.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure:
None
Item 8A. Control and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The term
"disclosure controls and procedures" is defined in Rule 13a - 14(c) of the
Exchange Act. This term refers to the controls and procedures of a company that
are designed to ensure that information required to be disclosed by a company in
the reports that it files under the Exchange Act is recorded, processed,
summarized and reported within required time periods. Our Chief Executive
Officer and our Chief Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures as of September 30, 2007, and they have
concluded that as of that date, our disclosure controls and procedures were
effective at ensuring that required information will be disclosed on a timely
basis in our reports filed under the Exchange Act.
(b) Changes in Internal Controls. There were no significant changes to
our internal controls or other factors that could significantly affect our
internal controls during the quarter ended September 30, 2007, including any
corrective actions with regard to significantly deficiencies and material
weaknesses.
Item 8B. Other Information
None
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
Directors
Information contained under the caption "The Election of Directors
(introduction);" "The Election of Directors - The Board of Directors and
Nominees;" "The Election of Directors - Nominees;" "The Election of Directors -
Continuing Directors;" and "The Election of Directors - Meetings of the Board of
Directors and Certain Committees" in the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held on February 11, 2008, to be filed with
28
the Commission within 120 days after the end of the fiscal year covered by this
report is incorporated herein by this reference.
Executive Officers
Information contained under the caption "The Election of Directors -
Continuing Directors;" and "The Election of Directors - Executive Officers Who
Are Not Directors" in the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on February 11, 2008, to be filed with the Commission
within 120 days after the end of the fiscal year covered by this report, is
incorporated herein by this reference.
Compliance with Section 16(a)
To the Company's knowledge, based upon a review of all reports
furnished to the Company during fiscal year 2007, all Section 16(a) filing
requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with by such persons, except for Mr. Bennett who
filed a Form 4 in an untimely manner, in connection with a block of shares which
were sold from his spouse's IRA.
Code of Ethics
The Company had adopted a Code of Ethics for adherence by its Chief
Executive Officer, Chief Financial Officer and Treasurer to promote honest and
ethical conduct; full, fair and proper disclosure of financial information in
the Company's periodic reports; and compliance with applicable laws, rules, and
regulations. The text of the Company's Code of Ethics was previously filed as an
exhibit and is posted and available on the Bank's website
(http://www.gouverneurbank.com), under the link `Investor Relations', and is
incorporated by reference herein.
We will provide to any person without charge, upon request, a copy of
our Code of Ethics. Any such request should be directed to our Corporate
Secretary, Gouverneur Bancorp, Inc., 42 Church Street, Gouverneur, New York
13642.
Item 10. Executive Compensation
Information contained under the caption "Compensation" in the
definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
February 11, 2008, to be filed with the Commission within 120 days after the end
of the fiscal year covered by this report, is incorporated herein by this
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Information contained under the caption "Principal Owners of Our Common
Stock" in the definitive Proxy Statement for the Annual Meeting of Stockholders
to be held on February 11, 2008, to be filed with the Commission within 120 days
after the end of the fiscal year covered by this report is incorporated herein
by this reference.
Item 12. Certain Relationships and Related Transactions
Information contained under the caption "Compensation - Transactions
With Directors and Officers" in the definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on February 11, 2008, to be filed with the
Commission within 120 days after the end of the fiscal year covered by this
report, is incorporated herein by this reference.
29
Item 13. Exhibits
See Index to Exhibits.
Item 14. Principal Accountant Fees and Services
Information contained under the caption "Independent Auditors' Fees -
Audit Fees"; "Independent Auditors' Fees - Audit-Related Fees"; "Independent
Auditors' Fees - Tax Fees"; and "Independent Auditors' Fees - All other Fees" in
the definitive Proxy Statement for the Annual Meeting of Stockholders to be held
on February 11, 2008, to be filed with the Commission within 120 days after the
end of the fiscal year covered by this report, is incorporated herein by this
reference.
Information contained under the caption "Report of the Audit Committee -
Pre-Approval Policies and Procedures" in the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held on February 11, 2008, to be filed with
the Commission within 120 days after the end of the fiscal year covered by this
report, is incorporated herein by this reference.
30
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
hereunto duly authorized.
Gouverneur Bancorp, Inc.
Date: December 19, 2007 By: /s/ Richard F. Bennett
-------------------------------------
Richard F. Bennett, President
(Duly authorized representative)
In accordance with the Exchange Act this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date:
December 19, 2007 /s/ Frank Langevin
-------------------------------------
Frank Langevin, Chairman of the Board
December 19, 2007 /s/ Richard F. Bennett
-------------------------------------
Richard F. Bennett, President,
Chief Executive Officer and Director
December 19, 2007 /s/ Robert J. Twyman
-------------------------------------
Robert J. Twyman, Vice President and
Chief Financial Officer, principal
financial and accounting officer
December 19, 2007 /s/ Charles VanVleet
-------------------------------------
Charles VanVleet, Sr. Vice President
and Secretary
December 19, 2007 /s/ Richard Jones
-------------------------------------
Richard Jones, Director
December 19, 2007 /s/ Robert Leader
-------------------------------------
Robert Leader, Director
December 19, 2007 /s/ Timothy Monroe
-------------------------------------
Timothy Monroe, Director
December 19,2007 /s/ F. Toby Morrow
-------------------------------------
F. Toby Morrow, Director
December 19, 2007 /s/ Joseph Pistolesi
-------------------------------------
Joseph Pistolesi, Director
31
INDEX TO EXHIBITS
Reference to Previous Filing,
Exhibit Number Document if applicable.
-------------- -------- --------------
3(1) Certificate of Incorporation **
3(11) Bylaws **
4 Form of Stock Certificate *
10.1 Employee Stock Ownership Plan *
10.2 Stock Option Plan ***
10.3 Management Recognition Plan ***
13 2007 Annual Report to Stockholders
14 Code of Ethics for the President ****
and Chief Executive Officer, Chief
Financial Officer, and Treasurer
21 Subsidiaries of Registrant
31.1 Certification of Principal Executive Officer
pursuant to Exchange Act Rules 13a - 15(e) and
15(d) - 15(e)
31.2 Certification of Principal Financial Officer
pursuant to Exchange Act Rules 13a - 15(e) and
15(d) - 15(e)
32.1 Certification of Principal Executive Officer
pursuant to Section 1350
32.2 Certification of Principal Financial Officer
pursuant to Section 1350
*Filed as exhibits to the Company's Form S-1 registration statement
filed with the Commission on June 26, 1998 (File No.333-57845). All of such
previously filed documents are hereby incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
**Filed as exhibits to the Company's Pre-effective Amendment No. One to
Form S-1 filed with the Commission on August 5, 1999, 1998 (File No. 333-57845).
All of such previously filed documents are hereby incorporated herein by
reference in accordance with Item 601 of Regulation S-K.
***Filed as exhibits to the Company's Definitive Proxy Statement on
Form 14A filed with the Commission on September 9, 1999. All of such previously
filed documents are hereby incorporated herein by reference in accordance with
Item 601 of Regulation S-K.
****Filed as an exhibit to the Company's Form 10-KSB for the year ended
September 30, 2003, as filed with the Commission on December 23, 2003. The
previously filed document is hereby incorporated by reference in accordance with
Item 601 of Regulation S-K.
32