Business context and reporting period
Greene County Bancorp, Inc. is a New York-based bank holding company whose subsidiaries take deposits and make loans and investments, principally in the Hudson Valley. The filing is a Form 10-Q for the quarter ended March 31, 2018, covering the third quarter and first nine months of the fiscal year ending June 30, 2018. The request metadata says “2017 Q3,” but the filing itself reports 2018 periods. Financial statement amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Quarter ended March 31, 2018 | Nine months ended March 31, 2018 | Comparable 2017 period |
|---|---|---|---|
| Net income | $3.677 | $10.789 | $2.897; $8.330 |
| Diluted earnings per share | $0.43 | $1.26 | $0.34; $0.98 |
| Net interest income | $8.860 | $25.490 | $7.627; $22.445 |
| Provision for loan losses | $0.345 | $1.044 | $0.343; $1.472 |
| Noninterest income | $1.859 | $5.486 | $1.582; $4.743 |
| Noninterest expense | $5.782 | $15.987 | $5.023; $14.565 |
| Net interest margin, GAAP basis | 3.24% | 3.29% | 3.33%; 3.39% |
Net income rose 26.9% for the quarter and 29.5% for the nine months. Growth in average earning assets supported higher net interest income, while fee income also increased. Expense growth—especially salaries and benefits—partly offset revenue gains. Return on average assets was 1.32% for the quarter and 1.37% year to date; return on average equity was 16.17% and 16.36%, respectively.
Financial position, funding and cash flow
- Total assets were $1,173.8 at March 31, up 19.5% from June 30, 2017. Net loans were $678.5, up 8.7%; securities totaled approximately $395.1, up 25.3%.
- Total deposits were $1,052.2, up $192.7 (22.4%) from June 30. Management attributed much of the increase to municipal deposits, including growth and tax collections. NOW deposits rose $170.7; certificates of deposit fell $16.6, and there were no brokered deposits at period-end.
- Cash and cash equivalents increased to $74.6 from $16.3. For the nine months, operating cash flow was $14.2, investing cash outflow was $136.2, and financing cash inflow was $180.3; deposit growth was the largest financing source.
- FHLB borrowings were $18.2, all long-term, versus total borrowings of $29.6 at June 30, 2017. No short-term FHLB advances were outstanding. The $18.2 of advances had a 1.63% weighted-average rate and 25-month weighted-average maturity.
- Shareholders’ equity was $92.7, up from $83.5, while equity to assets declined to 7.89% from 8.50%. The Bank of Greene County reported a 14.4% Tier 1 risk-based capital ratio and an 8.3% Tier 1 leverage ratio; it and Greene County Commercial Bank met applicable regulatory capital requirements.
Material changes and credit quality
- Loan growth was led by commercial real estate (+$21.5), commercial loans (+$17.2), residential real estate (+$8.0) and multifamily loans (+$5.0) versus June 30, 2017. Commercial real estate represented 40.5% of gross loans.
- Nonperforming assets declined to $3.7 from $4.4; nonperforming loans were $3.5 versus $3.6. The allowance was $11.6, or 1.69% of gross loans, compared with 1.74% at June 30. Nine-month net charge-offs increased to $0.444 from $0.236.
- Special-mention loans increased by $10.4 to $11.0. Management said these loans were performing but warranted closer monitoring due to identified weaknesses in borrower cash flow. Substandard loans were $5.6; there were no loans classified doubtful or loss.
- Nonaccrual loans included $1.8 in foreclosure proceedings; twelve residential loans totaling $1.2 were in foreclosure. Total impaired loans increased to $4.2 from $3.3 at June 30.
- Unrealized losses on securities were $3.2 at March 31. Management attributed declines in fair value principally to interest rates, wider credit spreads, market illiquidity and the lower tax benefit on municipal securities; it reported no other-than-temporary impairment.
Outlook, commentary, risks and unusual items
- No specific earnings or growth guidance was provided. Management cited continued loan growth from low interest rates and customer relationships, but anticipated that higher long-term rates could slow loan demand and refinancing. It said available cash, the available-for-sale portfolio and borrowing capacity should be sufficient for current loan commitments.
- Management highlighted interest-rate risk and credit risk. A large fixed-rate residential mortgage portfolio exposes net interest income to rate changes; competition, deposit flows, economic conditions and real estate values could affect results. Management also noted that falling home values could increase delinquencies and losses.
- Municipal deposits grew materially, and $90.0 of FHLB letters of credit secured municipal transactional deposits. The company had $96.6 of unfunded loan commitments and unused lines of credit at March 31.
- The Tax Cuts and Jobs Act reduced the federal corporate rate to 21%. Revaluation of deferred tax balances produced a $0.251 discrete tax benefit in the December quarter; the company reported effective tax rates of 19.9% for the quarter and 22.6% year to date. It adopted ASU 2018-02, transferring $0.259 from accumulated other comprehensive loss to retained earnings.
- The company said CECL adoption is expected to affect financial position and significantly change its allowance methodology, but it had not estimated the impact. Revenue recognition guidance was expected to be adopted July 1, 2018; management did not expect a material change in annual revenue recognition.
- The board declared a $0.0975-per-share dividend after quarter-end, payable May 31, 2018. No material legal proceedings were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether unusually strong municipal deposit growth is sustainable and how its concentration and pricing affect funding costs.
- Whether margin compression continues as deposit rates rise, given the reported declines in net interest margin and higher deposit costs.
- Trends in special-mention and impaired loans, foreclosures, charge-offs and the adequacy of the allowance—particularly as commercial real estate and commercial lending expand.
- The sensitivity of the securities portfolio and earnings to interest rates, municipal tax treatment and unrealized valuation changes.
- The eventual CECL allowance impact, and any changes to the company’s stated expectations for adoption of revenue-recognition and other accounting standards.