GREENE COUNTY BANCORP INC annual report, FY2021

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Greene County Bancorp, Inc. — FY2021 Form 10-K

Reporting period: Fiscal year ended June 30, 2021, compared with FY2020. The filing also provides unaudited fourth-quarter results; this is not a calendar-year 2020 filing. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless noted.

Business context

Greene County Bancorp is a New York community banking holding company operating The Bank of Greene County, which gathers retail and municipal deposits and invests mainly in loans and securities. At year-end, the Bank operated 17 full-service offices. Its loan portfolio is concentrated in New York real estate and its municipal subsidiary attracts local-government deposits.

Financial performance and condition

  • Profitability: Net income rose 27.8% to $23.9 million from $18.7 million; diluted EPS was $2.81 versus $2.20. Return on average assets eased to 1.24% from 1.27%, while return on average equity increased to 17.41% from 15.56%.
  • Revenue and margins: Net interest income increased 18.5% to $53.1 million. Noninterest income rose 11.8% to $9.7 million. Net interest margin declined to 2.81% from 3.09% (tax-equivalent margin: 2.97% versus 3.26%); spread fell to 2.76% from 2.98%. Lower funding costs and growth in loans and securities supported earnings, while yields on earning assets fell.
  • Expenses and credit costs: Noninterest expense rose 12.2% to $31.2 million, led by compensation, staffing and FDIC insurance costs. Provision for loan losses was $4.0 million, slightly above $3.9 million in FY2020; net charge-offs were $0.7 million.
  • Balance sheet: Total assets increased 31.2% to $2.20 billion. Net loans rose 9.3% to $1.09 billion; deposits increased 33.6% to $2.01 billion. Securities totaled $887.8 million, up 45.5%. Cash and cash equivalents were $149.8 million, compared with $40.5 million.
  • Funding, debt and equity: Year-end borrowings were $22.6 million, including $19.6 million net subordinated notes and $3.0 million short-term bank borrowings; FY2020 borrowings were $25.5 million. The company issued $20 million of 4.75% fixed-to-floating subordinated notes due 2030, callable in 2025. Shareholders’ equity increased to $149.6 million, but declined as a share of assets to 6.8% from 7.7%. Both banking subsidiaries were reported as well-capitalized.
  • Cash flow and liquidity: Operating activities provided $27.8 million; investing activities used $417.1 million, chiefly reflecting securities purchases and loan growth; financing activities provided $498.7 million, principally from deposit growth. Management reported liquidity of 7.46% under its cash-equivalents-to-deposits-and-short-term-borrowings measure and access to additional borrowing capacity.
  • Asset quality: Nonperforming assets fell to $2.4 million, or 0.11% of assets, from $4.1 million, or 0.24%. The allowance increased to $19.7 million, or 1.77% of gross loans (1.89% excluding fully SBA-guaranteed PPP loans). However, loans rated special mention or substandard increased to $49.7 million from $32.8 million, including a rise in substandard balances.

Material changes versus FY2020

  • Growth in deposits, driven partly by stimulus-related balances and new relationships, substantially expanded assets and securities holdings. NOW deposits increased $397.4 million; municipal subsidiary deposits were $803.5 million at year-end.
  • Net loan growth was led by commercial real estate, residential real estate and multifamily loans. Commercial real estate represented 42.7% of gross loans; total real estate loans represented 82.4%.
  • PPP loans outstanding declined to $67.4 million from $99.8 million as loans were forgiven. The Bank originated $62.0 million of PPP loans in FY2021 and recognized $4.1 million of PPP fee income during the year.
  • COVID-related payment deferrals decreased sharply to 8 loans totaling $8.0 million from 706 loans totaling $193.5 million. Despite lower nonperforming assets, classified loans increased and impaired loans rose to $6.3 million from $3.3 million.
  • FY2021 fourth-quarter net income was $7.6 million, or $0.89 per diluted share, versus $4.7 million, or $0.55, in FY2020’s fourth quarter. Fourth-quarter net interest income was $14.2 million versus $12.3 million.

Outlook, risks and unusual items

  • No quantitative earnings, growth or margin guidance is provided. Management said it would continue monitoring the pandemic and described the company as well positioned on asset quality, capital and liquidity. It cautioned that COVID-19, including the Delta variant, could disrupt recovery and negatively affect borrower repayment and credit risk.
  • Interest-rate risk is material: management identified declining rates as its largest modeled net-interest-income risk. The balance sheet includes substantial fixed-rate lending and long-duration securities; rising rates could reduce securities and economic equity values, while falling rates may pressure earnings. The filing reports an estimated 20.38% decline in economic value of equity under an instantaneous 300-basis-point increase, within management’s stated limits. The company does not use derivatives to hedge.
  • Credit risks include economic conditions in the company’s local markets, commercial real estate and commercial borrower performance, and the elevated classified-loan balance. The allowance involves significant management judgment; the auditor identified its qualitative-factor component as a critical audit matter. The audit opinion on the financial statements and internal controls was unqualified.
  • Other notable items include a $40.0 million purchase of bank-owned life insurance, a new branch opened in Albany in September 2020, and the subordinated-note issuance. The company recorded no securities impairment charges and reported no material pending litigation. It stated CECL adoption was expected to affect the balance sheet, but had not yet estimated the impact; adoption was scheduled for fiscal years beginning after December 15, 2022 for the company as a smaller reporting company.
  • After year-end, the board declared a $0.13 quarterly dividend, equivalent to $0.52 annually, an 8.3% increase from the prior annual rate. Greene County Bancorp, MHC waived receipt of that dividend.

Important facts for investors to verify

  1. Whether the increase in classified commercial real estate, commercial and construction loans results in higher delinquencies, charge-offs or allowance needs; review deferred, TDR and impaired-loan detail.
  2. How durable the unusually rapid deposit growth is, including municipal and stimulus-related balances, and whether the deposit mix or funding costs change.
  3. Whether earnings can sustain growth as asset yields and net interest margin remain below FY2020 levels; assess the effects of rate changes and securities duration.
  4. The quality and expected forgiveness or repayment of the remaining $67.4 million in PPP loans and the timing of related fee recognition.
  5. The actual balance-sheet effect of CECL adoption and the company’s capital and liquidity position as rapid asset growth continues.