U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 
FORM 10-Q

☒ QUARTERLY REPORT UNDER SECTION 13 OF 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017

OR

☐TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT
GREENE COUNTY BANCORP, INC.
(Exact name of registrant as specified in its charter)

Commission file number  0-25165

United States
 
14-1809721
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer  Identification Number)

302 Main Street, Catskill, New York
 
12414
(Address of principal executive office)
 
(Zip code)
 
Registrant's telephone number, including area code: (518) 943-2600

Check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 ☒         NO ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES ☒         NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer   ☐
 
Accelerated filer ☐
Non-accelerated filer     ☐
 
Smaller reporting company ☒
Emerging Growth Company ☐
   

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   YES ☐      NO ☒

As of November 13, 2017, the registrant had 8,503,614 shares of common stock outstanding at $ 0.10 par value per share.
 


GREENE COUNTY BANCORP, INC.

 
INDEX
 
     
PART I.
FINANCIAL INFORMATION
 
   
Page
Item 1.
Financial Statements (unaudited)
 
 
3
 
4
 
5
 
6
 
7
 
8-28
     
Item 2.
29-41
     
Item 3.
42
     
Item 4.
42
     
PART II.
OTHER INFORMATION
 
     
Item 1.
43
     
Item 1A.
43
     
Item 2.
43
     
Item 3.
43
     
Item 4.
43
     
Item 5.
43
     
Item 6.
43
     
 
44
 
Exhibit 31.1 302 Certification of Chief Executive Officer
 
 
Exhibit 31.2 302 Certification of Chief Financial Officer
 
 
Exhibit 32.1 906 Statement of Chief Executive Officer
 
 
Exhibit 32.2 906 Statement of Chief Financial Officer
 
 
Exhibit 101 Extensible Business Reporting Language (XBRL)
 
 
2

Greene County Bancorp, Inc.
Consolidated Statements of Financial Condition
At September 30, 2017 and June 30, 2017
(Unaudited)
(In thousands, except share and per share amounts)

ASSETS
 
September 30, 2017
   
June 30, 2017
 
Total cash and cash equivalents
 
$
46,419
   
$
16,277
 
                 
Long term certificate of deposit
   
2,145
     
2,145
 
Securities available-for-sale, at fair value
   
100,809
     
91,483
 
Securities held-to-maturity, at amortized cost (fair value $231,860 at September 30, 2017; $228,452 at June 30, 2017)
   
225,694
     
223,830
 
Federal Home Loan Bank stock, at cost
   
1,575
     
2,131
 
                 
Loans
   
648,693
     
634,331
 
Allowance for loan losses
   
(11,098
)
   
(11,022
)
Unearned origination fees and costs, net
   
851
     
878
 
Net loans receivable
   
638,446
     
624,187
 
                 
Premises and equipment
   
13,559
     
13,615
 
Accrued interest receivable
   
4,374
     
4,033
 
Foreclosed real estate
   
752
     
799
 
Prepaid expenses and other assets
   
3,874
     
3,791
 
Total assets
 
$
1,037,647
   
$
982,291
 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Noninterest-bearing deposits
 
$
103,819
   
$
95,929
 
Interest-bearing deposits
   
813,750
     
763,606
 
Total deposits
   
917,569
     
859,535
 
                 
Borrowings from Federal Home Loan Bank, short-term
   
-
     
6,900
 
Borrowings from other banks, short-term
   
700
     
-
 
Borrowings from Federal Home Loan Bank, long-term
   
20,150
     
22,650
 
Accrued expenses and other liabilities
   
12,373
     
9,685
 
Total liabilities
   
950,792
     
898,770
 
                 
SHAREHOLDERS' EQUITY
               
Preferred stock, Authorized - 1,000,000 shares; Issued - None
   
-
     
-
 
Common stock, par value $.10 per share; Authorized - 12,000,000 shares; Issued – 8,611,340 shares; Outstanding – 8,503,614 shares at September 30, 2017, and 8,502,614 shares at June 30, 2017
   
861
     
861
 
Additional paid-in capital
   
10,992
     
10,990
 
Retained earnings
   
76,165
     
73,072
 
Accumulated other comprehensive loss
   
(757
)
   
(992
)
Treasury stock, at cost 107,726 shares at September 30, 2017, and 108,726 shares at June 30, 2017
   
(406
)
   
(410
)
Total shareholders’ equity
   
86,855
     
83,521
 
Total liabilities and shareholders’ equity
 
$
1,037,647
   
$
982,291
 
 
See notes to consolidated financial statements
 
3

Greene County Bancorp, Inc.
Consolidated Statements of Income
For the Three Months Ended September 30, 2017 and 2016
(Unaudited)
(In thousands, except share and per share amounts)

   
2017
   
2016
 
Interest income:
           
Loans
 
$
7,059
   
$
6,053
 
Investment securities - taxable
   
165
     
150
 
Mortgage-backed securities
   
817
     
784
 
Investment securities - tax exempt
   
1,036
     
824
 
Interest-bearing deposits and federal funds sold
   
12
     
3
 
Total interest income
   
9,089
     
7,814
 
                 
Interest expense:
               
Interest on deposits
   
809
     
606
 
Interest on borrowings
   
110
     
121
 
Total interest expense
   
919
     
727
 
                 
Net interest income
   
8,170
     
7,087
 
Provision for loan losses
   
347
     
543
 
Net interest income after provision for loan losses
   
7,823
     
6,544
 
                 
Noninterest income:
               
Service charges on deposit accounts
   
851
     
773
 
Debit card fees
   
566
     
491
 
Investment services
   
72
     
70
 
E-commerce fees
   
38
     
32
 
Other operating income
   
213
     
183
 
Total noninterest income
   
1,740
     
1,549
 
                 
Noninterest expense:
               
Salaries and employee benefits
   
2,927
     
2,668
 
Occupancy expense
   
356
     
380
 
Equipment and furniture expense
   
113
     
120
 
Service and data processing fees
   
487
     
448
 
Computer software, supplies and support
   
143
     
146
 
Advertising and promotion
   
55
     
123
 
FDIC insurance premiums
   
93
     
114
 
Legal and professional fees
   
231
     
198
 
Other
   
488
     
557
 
Total noninterest expense
   
4,893
     
4,754
 
                 
Income before provision for income taxes
   
4,670
     
3,339
 
Provision for income taxes
   
1,198
     
832
 
Net income
 
$
3,472
   
$
2,507
 
                 
Basic earnings per share
 
$
0.41
   
$
0.30
 
Basic average shares outstanding
   
8,502,734
     
8,483,179
 
Diluted earnings per share
 
$
0.41
   
$
0.30
 
Diluted average shares outstanding
   
8,531,242
     
8,497,669
 
Dividends per share
 
$
0.0975
   
$
0.0950
 
 
See notes to consolidated financial statements
 
4

Greene County Bancorp, Inc.
Consolidated Statements of Comprehensive Income
For the Three Months Ended September 30, 2017 and 2016
(Unaudited)
(In thousands)

   
2017
   
2016
 
Net Income
 
$
3,472
   
$
2,507
 
Other comprehensive income (loss):
               
Unrealized holding gains (losses) on available-for-sale securities, net of income tax expense (benefit) of $145 and ($101), respectively
   
235
     
(142
)
               
Accretion of unrealized loss on securities transferred to held-to-maturity, net of income taxes of $- and $1, respectively
   
-
     
1
 
                 
Total other comprehensive income (loss), net of taxes
   
235
     
(141
)
                 
Comprehensive income
 
$
3,707
   
$
2,366
 
 
See notes to consolidated financial statements.
 
5

Greene County Bancorp, Inc.
Consolidated Statements of Changes in Shareholders’ Equity
For the Three Months Ended September 30, 2017 and 2016
(Unaudited)
(In thousands)

   
Common
Stock
   
Additional
Paid-In
Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income
   
Treasury
Stock
   
Total
Shareholders'
Equity
 
Balance at June 30, 2016
 
$
861
   
$
10,872
   
$
63,805
   
$
(725
)
 
$
(512
)
 
$
74,301
 
Options exercised
           
30
                     
45
     
75
 
Tax benefit of stock based compensation
           
41
                             
41
 
Dividends declared
                   
(369
)
                   
(369
)
Net income
                   
2,507
                     
2,507
 
Other comprehensive loss, net of taxes
                           
(141
)
           
(141
)
Balance at September 30, 2016
 
$
861
   
$
10,943
   
$
65,943
   
$
(866
)
 
$
(467
)
 
$
76,414
 
 
   
Common
Stock
   
Additional
Paid-In
Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Loss
   
Treasury
Stock
   
Total
Shareholders'
Equity
 
Balance at June 30, 2017
 
$
861
   
$
10,990
   
$
73,072
   
$
(992
)
 
$
(410
)
 
$
83,521
 
Options exercised
           
2
                     
4
     
6
 
Dividends declared
                   
(379
)
                   
(379
)
Net income
                   
3,472
                     
3,472
 
Other comprehensive income, net of taxes
                           
235
             
235
 
Balance at September 30, 2017
 
$
861
   
$
10,992
   
$
76,165
   
$
(757
)
 
$
(406
)
 
$
86,855
 
 
See notes to consolidated financial statements.
 
6

Greene County Bancorp, Inc.
Consolidated Statements of Cash Flows
For the Three Months Ended September 30, 2017 and 2016
(Unaudited)
(In thousands)
 
   
2017
   
2016
 
Cash flows from operating activities:
           
Net Income
 
$
3,472
   
$
2,507
 
Adjustments to reconcile net income to net cash provided by operating activities
               
Depreciation
   
157
     
159
 
Deferred income tax expense
   
1,214
     
801
 
Net amortization of premiums and discounts
   
213
     
223
 
Net amortization of deferred loan costs and fees
   
134
     
118
 
Provision for loan losses
   
347
     
543
 
Losses on sale of foreclosed real estate
   
37
     
47
 
Excess tax benefit from share based compensation
   
-
     
(41
)
Net decrease in accrued income taxes
   
(647
)
   
(1,554
)
Net increase in accrued interest receivable
   
(341
)
   
(90
)
Net decrease in prepaid and other assets
   
175
     
207
 
Net increase (decrease) in other liabilities
   
1,717
     
(81
)
Net cash provided by operating activities
   
6,478
     
2,839
 
                 
Cash flows from investing activities:
               
Securities available-for-sale:
               
Proceeds from maturities
   
17,594
     
24,481
 
Purchases of securities
   
(27,125
)
   
(16,443
)
Principal payments on securities
   
571
     
620
 
Securities held-to-maturity:
               
Proceeds from maturities
   
4,137
     
3,253
 
Purchases of securities
   
(12,050
)
   
(7,648
)
Principal payments on securities
   
5,851
     
1,525
 
Net redemption of Federal Home Loan Bank Stock
   
556
     
532
 
Maturity of long term certificate of deposit
   
-
     
65
 
Net increase in loans receivable
   
(14,768
)
   
(26,786
)
Proceeds from sale of foreclosed real estate
   
38
     
39
 
Purchases of premises and equipment
   
(101
)
   
(41
)
Net cash used by investing activities
   
(25,297
)
   
(20,403
)
                 
Cash flows from financing activities
               
Net decrease in short-term advances
   
(6,200
)
   
(11,800
)
Repayment of long-term FHLB advances
   
(2,500
)
   
-
 
Payment of cash dividends
   
(379
)
   
(369
)
Proceeds from issuance of stock options
   
6
     
75
 
Excess tax benefit from share based compensation
   
-
     
41
 
Net increase in deposits
   
58,034
     
33,708
 
Net cash provided by financing activities
   
48,961
     
21,655
 
                 
Net increase  in cash and cash equivalents
   
30,142
     
4,091
 
Cash and cash equivalents at beginning of period
   
16,277
     
15,895
 
Cash and cash equivalents at end of period
 
$
46,419
   
$
19,986
 
                 
Non-cash investing activities:
               
Foreclosed loans transferred to foreclosed real estate
 
$
28
   
$
-
 
Cash paid during period for:
               
Interest
 
$
931
   
$
729
 
Income taxes
 
$
630
   
$
1,585
 
 
See notes to consolidated financial statements
 
7

Greene County Bancorp, Inc.
Notes to Consolidated Financial Statements
At and for the Three Months Ended September 30, 2017 and 2016
 
(1)
Basis of Presentation

Within the accompanying unaudited consolidated statement of financial condition, and related notes to the consolidated financial statements, June 30, 2017 data was derived from the audited consolidated financial statements of Greene County Bancorp, Inc. (the “Company”) and its wholly owned subsidiaries, The Bank of Greene County (the “Bank”) and Greene Risk Management, Inc., and the Bank’s wholly owned subsidiaries, Greene County Commercial Bank and Greene Property Holdings, Ltd.  The consolidated financial statements at and for the three months ended September 30, 2017 and 2016 are unaudited.

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X.  Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements.  To the extent that information and notes required by GAAP for complete financial statements are contained in or are consistent with the audited financial statements incorporated by reference to Greene County Bancorp, Inc.’s Annual Report on Form 10-K for the year ended June 30, 2017, such information and notes have not been duplicated herein.  In the opinion of management, all adjustments (consisting of only normal recurring items) necessary for a fair presentation of the financial position and results of operations and cash flows at and for the periods presented have been included.   Amounts in the prior year’s consolidated financial statements have been reclassified whenever necessary to conform to the current year’s presentation.  These reclassifications, if any, had no effect on net income or retained earnings as previously reported.  All material inter-company accounts and transactions have been eliminated in the consolidation. The results of operations and other data for the three months ended September 30, 2017 are not necessarily indicative of results that may be expected for the entire fiscal year ending June 30, 2018.   These consolidated financial statements consider events that occurred through the date the consolidated financial statements were issued.

CRITICAL ACCOUNTING POLICIES

Greene County Bancorp, Inc.’s critical accounting policies relate to the allowance for loan losses and the evaluation of securities for other-than-temporary impairment.  The allowance for loan losses is based on management’s estimation of an amount that is intended to absorb losses in the existing portfolio.  The allowance for loan losses is established through a provision for loan losses based on management’s evaluation of the risk inherent in the loan portfolio, the composition of the portfolio, specific impaired loans and current economic conditions.  Such evaluation, which includes a review of all loans for which full collectability may not be reasonably assured, considers among other matters, the estimated net realizable value or the fair value of the underlying collateral, economic conditions, historical loan loss experience, management’s estimate of probable credit losses and other factors that warrant recognition in providing for the allowance of loan losses.  However, this evaluation involves a high degree of complexity and requires management to make subjective judgments that often require assumptions or estimates about highly uncertain matters.  This critical accounting policy and its application are periodically reviewed with the Audit Committee and the Board of Directors. There have been no significant changes in the application of this critical accounting policy during the three months ended September 30, 2017.

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

(2)
Nature of Operations

Greene County Bancorp, Inc.’s primary business is the ownership and operation of its subsidiaries, The Bank of Greene County and Greene Risk Management, Inc.  The Bank of Greene County has 14 full-service offices, an operations center and lending center located in its market area within the Hudson Valley Region of New York State.    The Bank of Greene County is primarily engaged in the business of attracting deposits from the general public in The Bank of Greene County’s market area, and investing such deposits, together with other sources of funds, in loans and investment securities.  Greene Risk Management, Inc. is a pooled captive insurance company, which provides additional insurance coverage for the Company and its subsidiaries related to the operations of the Company for which insurance may not be economically feasible.  The Bank of Greene County also owns and operates two subsidiaries, Greene County Commercial Bank and Greene Property Holdings, Ltd. Greene County Commercial Bank’s primary business is to attract deposits from and provide banking services to local municipalities. Greene Property Holdings, Ltd.is a real estate investment trust, which holds mortgages and notes which were originated through and serviced by The Bank of Greene County.
 
8

(3)
Use of Estimates

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

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

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

(4)
Securities

Securities at September 30, 2017 consisted of the following:
 
(In thousands)
 
Amortized Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
Estimated Fair
Value
 
Securities available-for-sale:
                       
U.S. government sponsored enterprises
 
$
4,561
   
$
137
   
$
-
   
$
4,698
 
State and political subdivisions
   
67,915
     
259
     
1
     
68,173
 
Mortgage-backed securities-residential
   
4,470
     
69
     
4
     
4,535
 
Mortgage-backed securities-multi-family
   
20,167
     
723
     
16
     
20,874
 
Corporate debt securities
   
2,262
     
75
     
2
     
2,335
 
Total debt securities
   
99,375
     
1,263
     
23
     
100,615
 
Equity securities
   
62
     
132
     
-
     
194
 
Total securities available-for-sale
   
99,437
     
1,395
     
23
     
100,809
 
Securities held-to-maturity:
                               
U.S. government sponsored enterprises
   
6,000
     
-
     
59
     
5,941
 
State and political subdivisions
   
120,168
     
3,714
     
136
     
123,746
 
Mortgage-backed securities-residential
   
8,136
     
339
     
-
     
8,475
 
Mortgage-backed securities-multi-family
   
88,879
     
2,453
     
150
     
91,182
 
Corporate debt securities
   
1,000
     
-
     
2
     
998
 
Other securities
   
1,511
     
20
     
13
     
1,518
 
Total securities held-to-maturity
   
225,694
     
6,526
     
360
     
231,860
 
Total securities
 
$
325,131
   
$
7,921
   
$
383
   
$
332,669
 
 
9

Securities at June 30, 2017 consisted of the following:

(In thousands)
 
Amortized Cost
   
Gross Unrealized
Gains
   
Gross Unrealized
Losses
   
Estimated
Fair Value
 
Securities available-for-sale:
                       
U.S. government sponsored enterprises
 
$
4,566
   
$
151
   
$
-
   
$
4,717
 
State and political subdivisions
   
57,885
     
227
     
-
     
58,112
 
Mortgage-backed securities-residential
   
4,868
     
72
     
27
     
4,913
 
Mortgage-backed securities-multi-family
   
20,344
     
483
     
62
     
20,765
 
Asset-backed securities
   
1
     
-
     
-
     
1
 
Corporate debt securities
   
2,765
     
29
     
3
     
2,791
 
Total debt securities
   
90,429
     
962
     
92
     
91,299
 
Equity securities
   
62
     
122
     
-
     
184
 
Total securities available-for-sale
   
90,491
     
1,084
     
92
     
91,483
 
Securities held-to-maturity:
                               
U.S. government sponsored enterprises
   
6,000
     
-
     
53
     
5,947
 
State and political subdivisions
   
115,805
     
3,434
     
95
     
119,144
 
Mortgage-backed securities-residential
   
10,798
     
274
     
2
     
11,070
 
Mortgage-backed securities-multi-family
   
88,702
     
1,259
     
199
     
89,762
 
Corporate debt securities
   
1,000
     
-
     
5
     
995
 
Other securities
   
1,525
     
21
     
12
     
1,534
 
Total securities held-to-maturity
   
223,830
     
4,988
     
366
     
228,452
 
Total securities
 
$
314,321
   
$
6,072
   
$
458
   
$
319,935
 

Greene County Bancorp, Inc.’s current policies generally limit securities investments to U.S. Government and securities of government sponsored enterprises, federal funds sold, municipal bonds, corporate debt obligations and certain mutual funds.  In addition, the Company’s policies permit investments in mortgage-backed securities, including securities issued and guaranteed by Fannie Mae, Freddie Mac, and GNMA, and collateralized mortgage obligations issued by these entities.  At September 30, 2017, all mortgage-backed securities including collateralized mortgage obligations were securities of government sponsored enterprises, no private-label mortgage-backed securities or collateralized mortgage obligations were held in the securities portfolio.  The Company’s investments in state and political subdivisions securities generally are municipal obligations that are general obligations supported by the general taxing authority of the issuer, and in some cases are insured.  The obligations issued by school districts are supported by state aid.  Primarily, these investments are issued by municipalities within New York State.

The following table shows fair value and gross unrealized losses, aggregated by security category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2017.

   
Less Than 12 Months
   
More Than 12 Months
   
Total
 
(In thousands, except number of securities)
 
Fair
Value
   
Unrealized
Losses
   
Number of
Securities
   
Fair
Value
   
Unrealized
Losses
   
Number of
Securities
   
Fair
Value
   
Unrealized
Losses
   
Number of
Securities
 
Securities available-for-sale:
                                                     
State and political subdivisions
 
$
149
   
$
1
     
1
   
$
-
   
$
-
     
-
   
$
149
   
$
1
     
1
 
Mortgage-backed securities-residential
   
490
     
4
     
1
     
-
     
-
     
-
     
490
     
4
     
1
 
Mortgage-backed securities-multi-family
   
2,986
     
16
     
2
     
-
     
-
     
-
     
2,986
     
16
     
2
 
Corporate debt securities
   
261
     
1
     
2
     
499
     
1
     
1
     
760
     
2
     
3
 
Total securities available-for-sale
   
3,886
     
22
     
6
     
499
     
1
     
1
     
4,385
     
23
     
7
 
Securities held-to-maturity:
                                                                       
U.S. government sponsored enterprises
   
3,958
     
42
     
1
     
1,983
     
17
     
1
     
5,941
     
59
     
2
 
State and political subdivisions
   
10,455
     
81
     
74
     
2,526
     
55
     
28
     
12,981
     
136
     
102
 
Mortgage-backed securities-multi-family
   
13,660
     
125
     
12
     
1,421
     
25
     
2
     
15,081
     
150
     
14
 
Corporate debt securities
   
998
     
2
     
2
     
-
     
-
     
-
     
998
     
2
     
2
 
Other securities
   
595
     
1
     
2
     
453
     
12
     
1
     
1,048
     
13
     
3
 
Total securities held-to-maturity
   
29,666
     
251
     
91
     
6,383
     
109
     
32
     
36,049
     
360
     
123
 
Total securities
 
$
33,552
   
$
273
     
97
   
$
6,882
   
$
110
     
33
   
$
40,434
   
$
383
     
130
 
 
10

The following table shows fair value and gross unrealized losses, aggregated by security category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2017.

   
Less Than 12 Months
   
More Than 12 Months
   
Total
 
(In thousands, except number of securities)
 
Fair
Value
   
Unrealized
Losses
   
Number of
Securities
   
Fair
Value
   
Unrealized
Losses
   
Number of
Securities
   
Fair
Value
   
Unrealized
Losses
   
Number of
Securities
 
Securities available-for-sale:
                                                     
Mortgage-backed securities-residential
 
$
1,164
   
$
27
     
1
   
$
-
   
$
-
     
-
   
$
1,164
   
$
27
     
1
 
Mortgage-backed securities-multi-family
   
6,488
     
62
     
4
     
-
     
-
     
-
     
6,488
     
62
     
4
 
Corporate debt securities
   
760
     
3
     
2
     
-
     
-
     
-
     
760
     
3
     
2
 
Total securities available for sale
   
8,412
     
92
     
7
     
-
     
-
     
-
     
8,412
     
92
     
7
 
Securities held to maturity:
                                                                       
U.S. government sponsored enterprises
   
5,947
     
53
     
2
     
-
     
-
     
-
     
5,947
     
53
     
2
 
State and political subdivisions
   
8,976
     
76
     
64
     
514
     
19
     
6
     
9,490
     
95
     
70
 
Mortgage-backed securities-residential
   
1,864
     
2
     
1
     
-
     
-
     
-
     
1,864
     
2
     
1
 
Mortgage-backed securities-multi-family
   
23,823
     
199
     
15
     
-
     
-
     
-
     
23,823
     
199
     
15
 
Corporate debt securities
   
995
     
5
     
1
     
-
     
-
     
-
     
995
     
5
     
1
 
Other securities
   
467
     
11
     
1
     
74
     
1
     
1
     
541
     
12
     
2
 
Total securities held to maturity
   
42,072
     
346
     
84
     
588
     
20
     
7
     
42,660
     
366
     
91
 
Total securities
 
$
50,484
   
$
438
     
91
   
$
588
   
$
20
     
7
   
$
51,072
   
$
458
     
98
 

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

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

For debt securities, credit-related OTTI is recognized in earnings while noncredit related OTTI on securities not expected to be sold is recognized in other comprehensive income/loss (“OCI”).  Credit-related OTTI is measured as the difference between the present value of an impaired security’s expected cash flows and its amortized cost basis.  Noncredit-related OTTI is measured as the difference between the fair value of the security and its amortized cost less any credit-related losses recognized.  For securities classified as held-to-maturity, the amount of OTTI recognized in OCI is accreted to the credit-adjusted expected cash flow amounts of the securities over future periods.  For equity securities, the entire amount of OTTI is recognized in earnings.  Management evaluated securities considering the factors as outlined above, and based on this evaluation the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2017.  Management believes that the reasons for the decline in fair value are due to interest rates, widening credit spreads and market illiquidity at the reporting date.

There were no transfers of securities available-for-sale to held-to-maturity during the three months ended September 30, 2017 or 2016. During the three months ended September 30, 2017 and 2016, there were no sales of securities and no gains or losses were recognized.  There was no other-than-temporary impairment loss recognized during the three months ended September 30, 2017 and 2016.
 
11

The estimated fair values of debt securities at September 30, 2017, by contractual maturity are shown below.  Expected maturities may differ from contractual maturities, because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

(In thousands)

Available-for-sale debt securities
 
Amortized Cost
   
Fair Value
 
Within one year
 
$
69,916
   
$
70,248
 
After one year through five years
   
4,822
     
4,958
 
After five years through ten years
   
-
     
-
 
After ten years
   
-
     
-
 
Total available-for-sale debt securities
   
74,738
     
75,206
 
Mortgage-backed and asset-backed securities
   
24,637
     
25,409
 
Equity securities
   
62
     
194
 
Total available-for-sale securities
   
99,437
     
100,809
 
                 
Held-to-maturity debt securities
               
Within one year
   
17,851
     
18,085
 
After one year through five years
   
60,032
     
61,409
 
After five years through ten years
   
38,678
     
39,787
 
After ten years
   
12,118
     
12,922
 
Total held-to-maturity debt securities
   
128,679
     
132,203
 
Mortgage-backed
   
97,015
     
99,657
 
Total held-to-maturity securities
   
225,694
     
231,860
 
Total securities
 
$
325,131
   
$
332,669
 

At September 30, 2017 and June 30, 2017, respectively, securities with an aggregate fair value of $319.1 million and $305.7 million were pledged as collateral for deposits in excess of FDIC insurance limits for various municipalities placing deposits with Greene County Commercial Bank.  At September 30, 2017 and June 30, 2017, securities with an aggregate fair value of $2.3 million and $2.8 million, respectively, were pledged as collateral for potential borrowings at the Federal Reserve Bank discount window.  Greene County Bancorp, Inc. did not participate in any securities lending programs during the quarters ended September 30, 2017 or 2016.

Federal Home Loan Bank Stock

Federal law requires a member institution of the Federal Home Loan Bank (“FHLB”) system to hold stock of its district FHLB according to a predetermined formula.  This stock is restricted in that it can only be sold to the FHLB or to another member institution, and all sales of FHLB stock must be at par.  As a result of these restrictions, FHLB stock is carried at cost.  FHLB stock is held as a long-term investment and its value is determined based on the ultimate recoverability of the par value.  Impairment of this investment is evaluated quarterly and is a matter of judgment that reflects management’s view of the FHLB’s long-term performance, which includes factors such as the following: its operating performance; the severity and duration of declines in the fair value of its net assets related to its capital stock amount; its commitment to make payments required by law or regulation and the level of such payments in relation to its operating performance; the impact of legislative and regulatory changes on the FHLB, and accordingly, on the members of the FHLB; and its liquidity and funding position.  After evaluating these considerations, Greene County Bancorp, Inc. concluded that the par value of its investment in FHLB stock will be recovered and, therefore, no other-than-temporary impairment charge was recorded during the three months ended September 30, 2017 or 2016.
 
12

(5)
Loans and Allowance for Loan Losses

Loan segments and classes at September 30, 2017 and June 30, 2017 are summarized as follows:
 
(In thousands)
 
September 30, 2017
   
June 30, 2017
 
Residential real estate:
           
Residential real estate
 
$
247,557
   
$
245,331
 
Residential construction and land
   
7,986
     
7,160
 
Multi-family
   
9,216
     
9,199
 
Commercial real estate:
               
Commercial real estate
   
261,462
     
257,964
 
Commercial construction
   
31,140
     
28,430
 
Consumer loan:
               
Home equity
   
21,058
     
21,076
 
Consumer installment
   
4,795
     
4,790
 
Commercial loans
   
65,479
     
60,381
 
Total gross loans
   
648,693
     
634,331
 
Allowance for loan losses
   
(11,098
)
   
(11,022
)
Deferred fees and costs
   
851
     
878
 
Loans receivable, net
 
$
638,446
   
$
624,187
 

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

When The Bank of Greene County classifies problem assets as either Substandard or Doubtful, it generally establishes a specific valuation allowance or “loss reserve” in an amount deemed prudent by management.  General allowances represent loss allowances that have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular loans.  When The Bank of Greene County identifies problem loans as being impaired, it is required to evaluate whether the Bank will be able to collect all amounts due either through repayments or the liquidation of the underlying collateral.  If it is determined that impairment exists, the Bank is required either to establish a specific allowance for losses equal to the amount of impairment of the assets, or to charge-off such amount.  The Bank of Greene County’s determination as to the classification of its loans and the amount of its valuation allowance is subject to review by its regulatory agencies, which can order the establishment of additional general or specific loss allowances.  The Bank of Greene County reviews its portfolio monthly to determine whether any assets require classification in accordance with applicable regulations.

The Bank primarily has four segments within its loan portfolio that it considers when measuring credit quality: residential real estate loans, commercial real estate loans, consumer loans and commercial loans.  The residential real estate portfolio consists of residential, construction, and multi-family loan classes. Commercial real estate loans consist of commercial real estate and commercial construction loan classes. Consumer loans consist of home equity loan and consumer installment loan classes. The inherent risk within the loan portfolio varies depending upon each of these loan types.

The Bank of Greene County’s primary lending activity is the origination of residential mortgage loans, including home equity loans, which are collateralized by residences.   Generally, residential mortgage loans are made in amounts up to 89.9% of the appraised value of the property.  However, The Bank of Greene County will originate residential mortgage loans with loan-to-value ratios of up to 95.0%, with private mortgage insurance.  In the event of default by the borrower, The Bank of Greene County will acquire and liquidate the underlying collateral. By originating the loan at a loan-to-value ratio of 89.9% or less or obtaining private mortgage insurance, The Bank of Greene County limits its risk of loss in the event of default.  However, the market values of the collateral may be adversely impacted by declines in the economy.  Home equity loans may have an additional inherent risk if The Bank of Greene County does not hold the first mortgage.  The Bank of Greene County may stand in a secondary position in the event of collateral liquidation resulting in a greater chance of insufficiency to meet all obligations.
 
13

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

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

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

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

Loan balances by internal credit quality indicator at September 30, 2017 are shown below.

(In thousands)
 
Performing
   
Watch
   
Special Mention
   
Substandard
   
Total
 
Residential real estate
 
$
244,334
   
$
1,169
   
$
91
   
$
1,963
   
$
247,557
 
Residential construction and land
   
7,986
     
-
     
-
     
-
     
7,986
 
Multi-family
   
8,356
     
-
     
773
     
87
     
9,216
 
Commercial real estate
   
248,918
     
-
     
10,572
     
1,972
     
261,462
 
Commercial construction
   
30,964
     
-
     
-
     
176
     
31,140
 
Home equity
   
20,400
     
-
     
-
     
658
     
21,058
 
Consumer installment
   
4,763
     
23
     
-
     
9
     
4,795
 
Commercial loans
   
64,230
     
17
     
49
     
1,183
     
65,479
 
Total gross loans
 
$
629,951
   
$
1,209
   
$
11,485
   
$
6,048
   
$
648,693
 
 
14

Loan balances by internal credit quality indicator at June 30, 2017 are shown below.

(In thousands)
 
Performing
   
Watch
   
Special Mention
   
Substandard
   
Total
 
Residential real estate
 
$
242,592
   
$
813
   
$
91
   
$
1,835
   
$
245,331
 
Residential construction and land
   
7,160
     
-
     
-
     
-
     
7,160
 
Multi-family
   
9,110
     
-
     
-
     
89
     
9,199
 
Commercial real estate
   
255,090
     
419
     
404
     
2,051
     
257,964
 
Commercial construction
   
28,254
     
-
     
-
     
176
     
28,430
 
Home equity
   
20,858
     
-
     
-
     
218
     
21,076
 
Consumer installment
   
4,770
     
10
     
-
     
10
     
4,790
 
Commercial loans
   
59,030
     
-
     
60
     
1,291
     
60,381
 
Total gross loans
 
$
626,864
   
$
1,242
   
$
555
   
$
5,670
   
$
634,331
 

The Company had no loans classified doubtful or loss at September 30, 2017 or June 30, 2017.  The $10.9 million increase in loans designated as special mention at September 30, 2017 compared to June 30, 2017 represented loans which, based on updated annual review, indicated weaknesses in borrowers’ cash flow, warranting management’s closer monitoring.  At September 30, 2017, all of these loans were performing and management believes that the identified weaknesses do not expose the Company to sufficient risk to warrant a classification of substandard.

Nonaccrual Loans

Management places loans on nonaccrual status once the loans have become 90 days or more delinquent.  A nonaccrual loan is defined as a loan in which collectability is questionable and therefore interest on the loan will no longer be recognized on an accrual basis.  A loan is not placed back on accrual status until the borrower has demonstrated the ability and willingness to make timely payments on the loan.  A loan does not have to be 90 days delinquent in order to be classified as nonaccrual.   Nonaccrual loans consisted primarily of loans secured by real estate at September 30, 2017 and June 30, 2017.  Loans on nonaccrual status totaled $3.3 million at September 30, 2017 of which $1.6 million were in the process of foreclosure. At September 30, 2017, there were twelve residential loans in the process of foreclosure totaling $1.1 million.  Included in nonaccrual loans were $1.4 million of loans which were less than 90 days past due at September 30, 2017, but have a recent history of delinquency greater than 90 days past due. These loans will be returned to accrual status once they have demonstrated a history of timely payments.  Included in total loans past due were $228,000 of loans which were making payments pursuant to forbearance agreements. Under the forbearance agreements, the customers have made arrangements with the Bank to bring the loans current over a specified period of time (resulting in an insignificant delay in repayment).  During this term of the forbearance agreement, the Bank has agreed not to continue foreclosure proceedings.  Loans on nonaccrual status totaled $3.6 million at June 30, 2017 of which $1.6 million were in the process of foreclosure. At June 30, 2017, there were twelve residential loans in the process of foreclosure totaling $967,000. Included in nonaccrual loans were $1.9 million of loans which were less than 90 days past due at June 30, 2017, but have a recent history of delinquency greater than 90 days past due.

The following table sets forth information regarding delinquent and/or nonaccrual loans at September 30, 2017:

(In thousands)
 
30-59
days
past due
   
60-89
days past
due
   
90 days
or more
past due
   
Total
past due
   
Current
   
Total
Loans
   
Loans on
Non-
accrual
 
Residential real estate
 
$
1,704
   
$
1,036
   
$
967
   
$
3,707
   
$
243,850
   
$
247,557
   
$
1,371
 
Residential construction and land
   
-
     
-
     
-
     
-
     
7,986
     
7,986
     
-
 
Multi-family
   
-
     
-
     
-
     
-
     
9,216
     
9,216
     
-
 
Commercial real estate
   
170
     
747
     
391
     
1,308
     
260,154
     
261,462
     
1,051
 
Commercial construction
   
-
     
-
     
176
     
176
     
30,964
     
31,140
     
176
 
Home equity
   
115
     
38
     
176
     
329
     
20,729
     
21,058
     
333
 
Consumer installment
   
48
     
23
     
9
     
80
     
4,715
     
4,795
     
9
 
Commercial loans
   
-
     
178
     
293
     
471
     
65,008
     
65,479
     
370
 
Total gross loans
 
$
2,037
   
$
2,022
   
$
2,012
   
$
6,071
   
$
642,622
   
$
648,693
   
$
3,310
 
 
15

The following table sets forth information regarding delinquent and/or nonaccrual loans at June 30, 2017:

(In thousands)
 
30-59
days
past due
   
60-89
days
past due
   
90 days
or more
past due
   
Total
past due
   
Current
   
Total Loans
   
Loans on
Non-
accrual
 
Residential real estate
 
$
2,088
   
$
515
   
$
935
   
$
3,538
   
$
241,793
   
$
245,331
   
$
1,240
 
Residential construction and land
   
-
     
-
     
-
     
-
     
7,160
     
7,160
     
-
 
Multi-family
   
-
     
-
     
-
     
-
     
9,199
     
9,199
     
-
 
Commercial real estate
   
74
     
1,070
     
540
     
1,684
     
256,280
     
257,964
     
1,452
 
Commercial construction
   
-
     
176
     
-
     
176
     
28,254
     
28,430
     
176
 
Home equity
   
220
     
186
     
33
     
439
     
20,637
     
21,076
     
218
 
Consumer installment
   
22
     
10
     
10
     
42
     
4,748
     
4,790
     
10
 
Commercial loans
   
18
     
186
     
202
     
406
     
59,975
     
60,381
     
476
 
Total gross loans
 
$
2,422
   
$
2,143
   
$
1,720
   
$
6,285
   
$
628,046
   
$
634,331
   
$
3,572
 

The Bank of Greene County had accruing loans delinquent more than 90 days totaling $68,000 and $69,000 at September 30, 2017 and June 30, 2017, respectively.  The loans delinquent more than 90 days and accruing consist of loans that are well collateralized and the borrowers have demonstrated the ability and willingness to pay.  The borrower has made arrangements with the Bank to bring the loan current within a specified time period and has made a series of payments as agreed.

The table below details additional information related to nonaccrual loans for the three months ended September 30:

(In thousands)
 
2017
   
2016
 
Interest income that would have been recorded if loans had been performing in accordance with original terms
 
$
78
   
$
80
 
Interest income that was recorded on nonaccrual loans
   
34
     
28
 

Impaired Loan Analysis

The Company identifies impaired loans and measures the impairment in accordance with FASB ASC subtopic “Receivables – Loan Impairment.”  Management may consider a loan impaired once it is classified as nonaccrual and when it is probable that the borrower will be unable to repay the loan according to the original contractual terms of the loan agreement or the loan is restructured in a troubled debt restructuring.  It should be noted that management does not evaluate all loans individually for impairment.  Generally, The Bank of Greene County considers residential mortgages, home equity loans and installment loans as small, homogeneous loans, which are evaluated for impairment collectively based on historical loan experience and other factors.  In contrast, large commercial mortgage, construction, multi-family, business loans and select larger balance residential mortgage loans are reviewed individually and considered impaired if it is probable that The Bank of Greene County will not be able to collect scheduled payments of principal and interest when due, according to the contractual terms of the loan agreement.  The measurement of impaired loans is generally based on the fair value of the underlying collateral.  The majority of The Bank of Greene County loans, including most nonaccrual loans, are small homogenous loan types adequately supported by collateral.  Management considers the payment status of loans in the process of evaluating the adequacy of the allowance for loan losses among other factors.  Based on this evaluation, a delinquent loan’s risk rating may be downgraded to either pass-watch, special mention, or substandard, and the allocation of the allowance for loan loss is based upon the risk associated with such designation.  Loans that have been modified as a troubled debt restructuring are included in impaired loans.  The measurement of impairment is generally based on the discounted cash flows based on the original rate of the loan before the restructuring, unless it is determined that the restructured loan is collateral dependent.  If the restructured loan is deemed to be collateral dependent, impairment is based on the fair value of the underlying collateral.
 
16

The tables below detail additional information on impaired loans at the date or periods indicated:

   
At September 30, 2017
   
For the three months ended
September 30, 2017
 
(In thousands)
 
Recorded
Investment
   
Unpaid
Principal
   
Related
Allowance
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
With no related allowance recorded:
                   
Commercial real estate
 
$
805
   
$
805
   
$
-
   
$
807
   
$
8
 
Home equity
   
181
     
181
     
-
     
183
     
-
 
Commercial loans
   
370
     
370
     
-
     
245
     
-
 
Total impaired loans with no allowance
   
1,356
     
1,356
     
-
     
1,235
     
8
 
                                         
With an allowance recorded:
                                       
Residential real estate
   
1,706
     
1,706
     
335
     
1,536
     
11
 
Commercial real estate
   
425
     
425
     
108
     
430
     
-
 
Commercial construction
   
176
     
176
     
22
     
176
     
-
 
Home equity
   
325
     
325
     
63
     
325
     
3
 
Total impaired loans with allowance
   
2,632
     
2,632
     
528
     
2,467
     
14
 
                                         
Total impaired:
                                       
Residential real estate
   
1,706
     
1,706
     
335
     
1,536
     
11
 
Commercial real estate
   
1,230
     
1,230
     
108
     
1,237
     
8
 
Commercial construction
   
176
     
176
     
22
     
176
     
-
 
Home equity
   
506
     
506
     
63
     
508
     
3
 
Commercial loans
   
370
     
370
     
-
     
245
     
-
 
Total impaired loans
 
$
3,988
   
$
3,988
   
$
528
   
$
3,702
   
$
22
 

   
At June 30, 2017
   
For the three months ended
September 30, 2016
 
(In thousands)
 
Recorded
Investment
   
Unpaid
Principal
   
Related
Allowance
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
With no related allowance recorded:
                   
Residential real estate
 
$
-
   
$
-
   
$
-
   
$
375
   
$
-
 
Commercial real estate
   
809
     
809
     
-
     
1,021
     
10
 
Home equity
   
186
     
186
     
-
     
5
     
-
 
Commercial loans
   
186
     
186
     
-
     
-
     
-
 
Total impaired loans with no allowance
   
1,181
     
1,181
     
-
     
1,401
     
10
 
                                         
With an allowance recorded:
                                       
Residential real estate
   
1,455
     
1,455
     
278
     
1,345
     
12
 
Commercial real estate
   
440
     
440
     
135
     
402
     
4
 
Commercial construction
   
176
     
176
     
23
     
-
     
-
 
Commercial loans
   
-
     
-
     
-
     
83
     
2
 
Total impaired loans with allowance
   
2,071
     
2,071
     
436
     
1,830
     
18
 
                                         
Total impaired loans:
                                       
Residential real estate
   
1,455
     
1,455
     
278
     
1,720
     
12
 
Commercial real estate
   
1,249
     
1,249
     
135
     
1,423
     
14
 
Commercial construction
   
176
     
176
     
23
     
-
     
-
 
Home equity
   
186
     
186
     
-
     
5
     
-
 
Commercial loans
   
186
     
186
     
-
     
83
     
2
 
Total impaired loans
 
$
3,252
   
$
3,252
   
$
436
   
$
3,231
   
$
28
 
 
17

The table below details loans that have been modified as a troubled debt restructuring during the three months ended September 30, 2017 or 2016.

(Dollars in thousands)
 
Number of
Contracts
   
Pre-Modification
Outstanding
Recorded
Investment
   
Post-Modification
Outstanding
Recorded
Investment
   
Current
Outstanding
Recorded
Investment
 
September 30, 2017
                       
Home equity
   
1
   
$
325
   
$
325
   
$
325
 
                                 
September 30, 2016
                               
None
                               

There were no loans that had been modified as a troubled debt restructuring during the twelve months prior to June 30, 2017 or 2016 which have subsequently defaulted during the three months ended September 30, 2017 or 2016, respectively.

Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses based on management’s evaluation of the risk inherent in the loan portfolio, the composition of the loan portfolio, specific impaired loans and current economic conditions.  Such evaluation, which includes a review of certain identified loans on which full collectability may not be reasonably assured, considers among other matters, the estimated net realizable value or the fair value of the underlying collateral, economic conditions, payment status of the loan, historical loan loss experience and other factors that warrant recognition in providing for the loan loss allowance.  In addition, various regulatory agencies, as an integral part of their examination process, periodically review The Bank of Greene County’s allowance for loan losses.  Such agencies may require The Bank of Greene County to recognize additions to the allowance based on their judgment about information available to them at the time of their examination. The Bank of Greene County considers smaller balance residential mortgages, home equity loans, commercial loans and installment loans to customers as small, homogeneous loans, which are evaluated for impairment collectively based on historical loss experience.  Larger balance residential, commercial mortgage and business loans are viewed individually and considered impaired if it is probable that The Bank of Greene County will not be able to collect scheduled payments of principal and interest when due, according to the contractual terms of the loan agreements.  The measurement of impaired loans is generally based on the fair value of the underlying collateral.  The Bank of Greene County charges loans off against the allowance for credit losses when it becomes evident that a loan cannot be collected within a reasonable amount of time or that it will cost the Bank more than it will receive, and all possible avenues of repayment have been analyzed, including the potential of future cash flow, the value of the underlying collateral, and strength of any guarantors or co-borrowers.  Generally, consumer loans and smaller business loans (not secured by real estate) in excess of 90 days are charged-off against the allowance for loan losses, unless equitable arrangements are made.   For loans secured by real estate, a charge-off is recorded when it is determined that the collection of all or a portion of a loan may not be collected and the amount of that loss can be reasonably estimated.

The following tables set forth the activity and allocation of the allowance for loan losses by loan category during and at the periods indicated.  The allowance is allocated to each loan category based on historical loss experience and economic conditions.


   
Activity for the three months ended September 30, 2017
 
(In thousands)
 
Balance at
June 30, 2017
   
Charge-offs
   
Recoveries
   
Provision
   
Balance at
September 30, 2017
 
Residential real estate
 
$
2,289
   
$
44
   
$
-
   
$
(169
)
 
$
2,076
 
Residential construction and land
   
89
     
-
     
-
     
4
     
93
 
Multi-family
   
43
     
-
     
-
     
33
     
76
 
Commercial real estate
   
5,589
     
-
     
-
     
170
     
5,759
 
Commercial construction
   
687
     
-
     
-
     
63
     
750
 
Home equity
   
234
     
-
     
-
     
81
     
315
 
Consumer installment
   
231
     
88
     
18
     
42
     
203
 
Commercial loans
   
1,680
     
157
     
-
     
225
     
1,748
 
Unallocated
   
180
     
-
     
-
     
(102
)
   
78
 
Total
 
$
11,022
   
$
289
   
$
18
   
$
347
   
$
11,098
 
 
18

   
Allowance for Loan Losses
   
Loans Receivable
 
   
Ending Balance At
September 30, 2017
Impairment Analysis
   
Ending Balance At
September 30, 2017
Impairment Analysis
 
(In thousands)
 
Individually
Evaluated
   
Collectively
Evaluated
   
Individually
Evaluated
   
Collectively
Evaluated
 
Residential real estate
 
$
335
   
$
1,741
   
$
1,706
   
$
245,851
 
Residential construction and land
   
-
     
93
     
-
     
7,986
 
Multi-family
   
-
     
76
     
-
     
9,216
 
Commercial real estate
   
108
     
5,651
     
1,230
     
260,232
 
Commercial construction
   
22
     
728
     
176
     
30,964
 
Home equity
   
63
     
252
     
506
     
20,552
 
Consumer installment
   
-
     
203
     
-
     
4,795
 
Commercial loans
   
-
     
1,748
     
370
     
65,109
 
Unallocated
   
-
     
78
     
-
     
-
 
Total
 
$
528
   
$
10,570
   
$
3,988
   
$
644,705
 
 
   
Activity for the three months ended September 30, 2016
 
(In thousands)
 
Balance at
June 30, 2016
   
Charge-offs
   
Recoveries
   
Provision
   
Balance at
September 30, 2016
 
Residential real estate
 
$
2,396
   
$
-
   
$
-
   
$
(154
)
 
$
2,242
 
Residential construction and land
   
75
     
-
     
-
     
(12
)
   
63
 
Multi-family
   
22
     
-
     
-
     
(4
)
   
18
 
Commercial real estate
   
4,541
     
-
     
-
     
440
     
4,981
 
Commercial construction
   
502
     
-
     
-
     
126
     
628
 
Home equity
   
309
     
-
     
-
     
(58
)
   
251
 
Consumer installment
   
228
     
72
     
17
     
(5
)
   
168
 
Commercial loans
   
1,412
     
-
     
3
     
77
     
1,492
 
Unallocated
   
-
     
-
     
-
     
133
     
133
 
Total
 
$
9,485
   
$
72
   
$
20
   
$
543
   
$
9,976
 
 
   
Allowance for Loan Losses
   
Loans Receivable
 
   
Ending Balance At
June 30, 2017
Impairment Analysis
   
Ending Balance At
June 30, 2017
Impairment Analysis
 
(In thousands)
 
Individually Evaluated
   
Collectively Evaluated
   
Individually Evaluated
   
Collectively Evaluated
 
Residential real estate
 
$
278
   
$
2,011
   
$
1,455
   
$
243,876
 
Residential construction and land
   
-
     
89
     
-
     
7,160
 
Multi-family
   
-
     
43
     
-
     
9,199
 
Commercial real estate
   
135
     
5,454
     
1,249
     
256,715
 
Commercial construction
   
23
     
664
     
176
     
28,254
 
Home equity
   
-
     
234
     
186
     
20,890
 
Consumer installment
   
-
     
231
     
-
     
4,790
 
Commercial loans
   
-
     
1,680
     
186
     
60,195
 
Unallocated
   
-
     
180
     
-
     
-
 
Total
 
$
436
   
$
10,586
   
$
3,252
   
$
631,079
 
 
19

Foreclosed real estate (FRE)

FRE consists of properties acquired through mortgage loan foreclosure proceedings or in full or partial satisfaction of loans. The following table sets forth information regarding FRE at September 30, 2017 and June 30, 2017:

(in thousands)
 
September 30, 2017
   
June 30, 2017
 
Commercial real estate
 
$
752
   
$
799
 
Total foreclosed real estate
 
$
752
   
$
799
 

(6)
Fair Value Measurements and Fair Value of Financial Instruments

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique.  Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sale transaction on the dates indicated.  The estimated fair value amounts have been measured at September 30, 2017 and June 30, 2017 and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates.  As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-end.

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities.  Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.

 
The FASB ASC Topic on “Fair Value Measurement” established a fair value hierarchy that prioritized the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
 
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
 
Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
 
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).
 
An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

For assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used are as follows:
 
         
Fair Value Measurements Using
 
         
Quoted Prices In
Active Markets For
Identical Assets
   
Significant Other
Observable Inputs
   
Significant
Unobservable Inputs
 
(In thousands)
 
September 30, 2017
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets:
                       
U.S. Government sponsored enterprises
 
$
4,698
   
$
-
   
$
4,698
   
$
-
 
State and political subdivisions
   
68,173
     
-
     
68,173
     
-
 
Mortgage-backed securities-residential
   
4,535
     
-
     
4,535
     
-
 
Mortgage-backed securities-multi-family
   
20,874
     
-
     
20,874
     
-
 
Corporate debt securities
   
2,335
     
2,335
     
-
     
-
 
Equity securities
   
194
     
194
     
-
     
-
 
Securities available-for-sale
 
$
100,809
   
$
2,529
   
$
98,280
   
$
-
 
 
20

         
Fair Value Measurements Using
 
         
Quoted Prices
In Active Markets For
Identical Assets
   
Significant
Other Observable
Inputs
   
Significant
Unobservable Inputs
 
(In thousands)
 
June 30, 2017
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets:
                       
U.S. Government sponsored enterprises
 
$
4,717
   
$
-
   
$
4,717
   
$
-
 
State and political subdivisions
   
58,112
     
-
     
58,112
     
-
 
Mortgage-backed securities-residential
   
4,913
     
-
     
4,913
     
-
 
Mortgage-backed securities-multi-family
   
20,765
     
-
     
20,765
     
-
 
Asset-backed securities
   
1
     
1
     
-
     
-
 
Corporate debt securities
   
2,791
     
2,791
     
-
     
-
 
Equity securities
   
184
     
184
     
-
     
-
 
Securities available-for-sale
 
$
91,483
   
$
2,976
   
$
88,507
   
$
-
 

Certain investments that are actively traded and have quoted market prices have been classified as Level 1 valuations.  Other available-for-sale investment securities have been valued by reference to prices for similar securities or through model-based techniques in which all significant inputs are observable and, therefore, such valuations have been classified as Level 2.

In addition to disclosures of the fair value of assets on a recurring basis, FASB ASC Topic on “Fair Value Measurement” requires disclosures for assets and liabilities measured at fair value on a nonrecurring basis, such as impaired assets, in the period in which a re-measurement at fair value is performed.  Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain impairment amounts for collateral-dependent loans calculated as required by the “Receivables –Loan Impairment” subtopic of the FASB ASC when establishing the allowance for credit losses. Impaired loans are those loans in which the Company has measured impairment based on the fair value of the loan’s collateral or the discounted value of expected future cash flows. Fair value is generally determined based upon market value evaluations by third parties of the properties and/or estimates by management of working capital collateral or discounted cash flows based upon expected proceeds. These appraisals may include up to three approaches to value: the sales comparison approach, the income approach (for income-producing property), and the cost approach. Management modifies the appraised values, if needed, to take into account recent developments in the market or other factors, such as, changes in absorption rates or market conditions from the time of valuation and anticipated sales values considering management’s plans for disposition. Such modifications to the appraised values could result in lower valuations of such collateral. Estimated costs to sell are based on current amounts of disposal costs for similar assets. These measurements are classified as Level 3 within the valuation hierarchy. Impaired loans are subject to nonrecurring fair value adjustment upon initial recognition or subsequent impairment. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance.

Fair values for foreclosed real estate are initially recorded based on market value evaluations by third parties, less costs to sell (“initial cost basis”). Any write-downs required when the related loan receivable is exchanged for the underlying real estate collateral at the time of transfer to foreclosed real estate are charged to the allowance for loan losses. Values are derived from appraisals, similar to impaired loans, of underlying collateral or discounted cash flow analysis. Subsequent to foreclosure, valuations are updated periodically and assets are marked to current fair value, not to exceed the initial cost basis. In the determination of fair value subsequent to foreclosure, management also considers other factors or recent developments, such as, changes in absorption rates and market conditions from the time of valuation and anticipated sales values considering management’s plans for disposition. Either change could result in adjustment to lower the property value estimates indicated in the appraisals. These measurements are classified as Level 3 within the fair value hierarchy.

                     
Fair Value Measurements Using
 
(In thousands)
 
Recorded
Investment
   
Related
Allowance
   
Fair Value
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
September 30, 2017
                                   
Impaired loans
 
$
2,286
   
$
528
   
$
1,758
   
$
-
   
$
-
   
$
1,758
 
Foreclosed real estate
   
752
     
-
     
752
     
-
     
-
     
752
 
                                                 
June 30, 2017
                                               
Impaired loans
 
$
1,822
   
$
436
   
$
1,386
   
$
-
   
$
-
   
$
1,386
 
Foreclosed real estate
   
799
     
-
     
799
     
-
     
-
     
799
 
 
21

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Level 3 inputs were utilized to determine fair value:

                       
(Dollars in thousands)
 
Fair Value
 
Valuation Technique
Unobservable Input
 
Range
   
Weighted
Average
 
September 30, 2017
                     
Impaired Loans
 
$
1,220
 
Appraisal of collateral(1)
Appraisal adjustments(2)
   
26.58%-31.86
%
   
28.34
%
             
Liquidation expenses(3)
   
4.09%-7.26
%
   
5.15
%
     
538
 
Discounted cash flow
Discount rate
   
4.19%-6.63
%
   
5.36
%
Foreclosed real estate
   
752
 
Appraisal of collateral(1)
Appraisal adjustments(2)
   
0.00-0.00
%
   
0.00
%
             
Liquidation expenses(3)
   
11.53%-18.80
%
   
16.62
%
June 30, 2017
                           
Impaired loans
 
$
845
 
Appraisal of collateral(1)
Appraisal adjustments(2)
   
25.00%-42.52
%
   
28.46
%
             
Liquidation expenses(3)
   
3.45%-7.38
%
   
5.93
%
     
541
 
Discounted cash flow
Discount rate
   
4.19%-6.63
%
   
5.36
%
Foreclosed real estate
   
799
 
Appraisal of collateral(1)
Appraisal adjustments(2)
   
0.00-0.00
%
   
0.00
%
           
Liquidation expenses(3)
   
11.64%-17.92
%    
16.29
%
 
(1)
Fair value is generally determined through independent third-party appraisals of the underlying collateral, which generally includes various Level 3 inputs which are not observable.
(2)
Appraisals may be adjusted downwards by management for qualitative factors such as economic conditions.  Higher downward adjustments are caused by negative changes to the collateral or conditions in the real estate market, actual offers or sales contracts received or age of the appraisal.
(3)
Appraisals are adjusted downwards by management for qualitative factors such as the estimated costs to liquidate the collateral.

The carrying amounts reported in the statements of financial condition for cash and cash equivalents, accrued interest receivable and accrued interest payable approximate their fair values.  Fair values of securities are based on quoted market prices (Level 1), where available, or matrix pricing (Level 2), which is a mathematical technique, used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.  The carrying amount of Federal Home Loan Bank stock approximates fair value due to its restricted nature.  Fair values for variable rate loans that reprice frequently, with no significant credit risk, are based on carrying value.  Fair value for fixed rate loans are estimated using discounted cash flows and interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.  Fair values disclosed for demand and savings deposits are equal to carrying amounts at the reporting date.  The carrying amounts for variable rate money market deposits approximate fair values at the reporting date.  Fair values for fixed rate certificates of deposit are estimated using discounted cash flows and interest rates currently being offered in the market on similar certificates.  Fair value for Federal Home Loan Bank long term borrowings are estimated using discounted cash flows and interest rates currently being offered on similar borrowings.  The carrying value of short-term Federal Home Loan Bank borrowings approximates its fair value.

The fair value of commitments to extend credit is estimated based on an analysis of the interest rates and fees currently charged to enter into similar transactions, considering the remaining terms of the commitments and the credit-worthiness of the potential borrowers.  At September 30, 2017 and June 30, 2017, the estimated fair values of these off-balance sheet financial instruments were immaterial, and are therefore excluded from the table below.
 

22

The carrying amounts and estimated fair value of financial instruments are as follows:

(In thousands)
 
September 30, 2017
   
Fair Value Measurements Using
 
   
Carrying
Amount
   
Fair Value
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Cash and cash equivalents
 
$
46,419
   
$
46,419
   
$
46,419
   
$
-
   
$
-
 
Long term certificate of deposit
   
2,145
     
2,145
     
2,145
     
-
     
-
 
Securities available-for-sale
   
100,809
     
100,809
     
2,529
     
98,280
     
-
 
Securities held-to-maturity
   
225,694
     
231,860
     
-
     
231,860
     
-
 
Federal Home Loan Bank stock
   
1,575
     
1,575
     
-
     
1,575
     
-
 
Net loans
   
638,446
     
643,851
     
-
     
-
     
643,851
 
Accrued interest receivable
   
4,374
     
4,374
     
-
     
4,374
     
-
 
Deposits
   
917,569
     
917,730
     
-
     
917,730
     
-
 
Borrowings
   
20,850
     
20,708
     
-
     
20,708
     
-
 
Accrued interest payable
   
80
     
80
     
-
     
80
     
-
 

(In thousands)
 
June 30, 2017
   
Fair Value Measurements Using
 
   
Carrying
Amount
   
Fair Value
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Cash and cash equivalents
 
$
16,277
   
$
16,277
   
$
16,277
   
$
-
   
$
-
 
Long term certificate of deposit
   
2,145
     
2,145
     
2,145
     
-
     
-
 
Securities available-for-sale
   
91,483
     
91,483
     
2,976
     
88,507
     
-
 
Securities held-to-maturity
   
223,830
     
228,452
     
-
     
228,452
     
-
 
Federal Home Loan Bank stock
   
2,131
     
2,131
     
-
     
2,131
     
-
 
Net loans
   
624,187
     
629,690
     
-
     
-
     
629,690
 
Accrued interest receivable
   
4,033
     
4,033
     
-
     
4,033
     
-
 
Deposits
   
859,535
     
859,715
     
-
     
859,715
     
-
 
Borrowings
   
29,550
     
29,411
     
-
     
29,411
     
-
 
Accrued interest payable
   
92
     
92
     
-
     
92
     
-
 

(7)
Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period.  Diluted earnings per share is computed in a manner similar to that of basic earnings per share except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares that would have been outstanding under the treasury stock method if all potentially dilutive common shares (such as stock options) issued became vested during the period.  There were no anti-dilutive securities or contracts outstanding during the three months ended September 30, 2017 and 2016.

   
For the three months ended September 30,
 
   
2017
   
2016
 
             
Net Income
 
$
3,472,000
   
$
2,507,000
 
Weighted Average Shares – Basic
   
8,502,734
     
8,483,179
 
Effect of Dilutive Stock Options
   
28,508
     
14,490
 
Weighted Average Shares - Dilute
   
8,531,242
     
8,497,669
 
                 
Earnings per share - Basic
 
$
0.41
   
$
0.30
 
Earnings per share - Diluted
 
$
0.41
   
$
0.30
 
 
23

(8)
Dividends

On July 18, 2017, the Board of Directors declared a cash dividend for the quarter ended June 30, 2017 of $0.0975 per share on Greene County Bancorp, Inc.’s common stock.  The dividend reflects an annual cash dividend rate of $0.39 per share, compared to an annual cash dividend rate of $0.38 declared during the previous quarter.  The dividend was payable to stockholders of record as of August 15, 2017, and was paid on August 31, 2017.  The MHC waived its right to receive dividends declared on its shares of the Company’s common stock for the quarter ended June 30, 2017.

(9)
Impact of Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standard Update (“ASU) (ASU 2014-09) to amend its guidance on “Revenue from Contracts with Customers (Topic 606).  The objective of the ASU is to align the recognition of revenue with the transfer of promised goods or services provided to customers in an amount that reflects the consideration which the entity expects to be entitled in exchange for those goods or services.  This ASU will replace most existing revenue recognition guidance under GAAP when it becomes effective. In August 2015, the FASB issued an amendment (ASU 2015-14) which defers the effective date of this new guidance by one year. More detailed implementation guidance on Topic 606 was issued in March 2016 (ASU 2016-08), April 2016 (ASU 2016-10), May 2016 (ASU 2016-12), December 2016 (ASU 2016-20), February 2017 (ASU 2017-05), and September 2017 (ASU-2017-13) and the effective date and transition requirements for these ASUs are the same as the effective date and transition requirements of ASU 2014-09.  The amendments in ASU 2014-09 are effective for public business entities for annual periods, beginning after December 15, 2017.  The adoption of this guidance is not expected to have a material impact on our consolidated results of operations or financial position.

In August 2014, the FASB issued an amendment (ASU 2014-14) to its guidance on “Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40)”.  The objective of the ASU is to reduce the diversity in how creditors classify government-guaranteed mortgage loans, including FHA or VA guaranteed loans, upon foreclosure, to provide more decision-useful information about a creditor’s foreclosed mortgage loans that are expected to be recovered, at least in part, through government guarantees.  The amendments in this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Public entities would be permitted to elect to early adopt for annual reporting periods beginning after December 15, 2016.  The adoption of this guidance is not expected to have a material impact on our consolidated results of operations or financial position.

In January 2016, the FASB issued an Update (ASU 2016-01) to its guidance on “Financial Instruments (Subtopic 825-10)”.  This amendment addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.  These amendments require equity securities to be measured at fair value with changes in the fair value to be recognized through net income. The amendments also simplify the impairment assessment of equity investments without readily determinable fair values by requiring assessment for impairment qualitatively at each reporting period.  For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  Early adoption of the amendments in this Update is not permitted.  The adoption of this guidance is not expected to have a material impact on our consolidated results of operations or financial position.

In February 2016, the FASB issued an Update (ASU 2016-02) to its guidance on “Leases (Topic 842)”.  The new leases standard applies a right-of-use (ROU) model that requires a lessee to record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset and a liability to make lease payments. For leases with a term of 12 months or less, a practical expedient is available whereby a lessee may elect, by class of underlying asset, not to recognize an ROU asset or lease liability. The new leases standard requires a lessor to classify leases as either sales-type, direct financing or operating, similar to existing U.S. GAAP. Classification depends on the same five criteria used by lessees plus certain additional factors. The subsequent accounting treatment for all three lease types is substantially equivalent to existing U.S. GAAP for sales-type leases, direct financing leases, and operating leases. However, the new standard updates certain aspects of the lessor accounting model to align it with the new lessee accounting model, as well as with the new revenue standard under Topic 606. Lessees and lessors are required to provide certain qualitative and quantitative disclosures to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The amendments are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The adoption of this ASU will result in a gross up of the Consolidated Statements of Financial Condition for right-of-use assets and associated lease liabilities for operating leases in which the Company is the lessee.  The Company is evaluating the significance and other effects of adoption on the consolidated financial statements and related disclosures. The adoption of this guidance is not expected to have a material impact on our consolidated results of operations. Branch building leases have been reviewed and are considered immaterial to the financial statements; there are no equipment leases to consider.

In March 2016, the FASB issued an Update (ASU 2016-09) to its guidance on “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”.  This amendment is intended to simplify the accounting for stock compensation.  The areas for simplification in this Update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  For public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. The adoption of this guidance did not have a material impact on our consolidated results of operations or financial position.
 
24

In June 2016, the FASB issued an Update (ASU 2016-13) to its guidance on “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (CECL) model). Under this model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date of initial recognition of that instrument. The ASU also replaces the current accounting model for purchased credit impaired loans and debt securities. The allowance for credit losses for purchased financial assets with a more-than insignificant amount of credit deterioration since origination (“PCD assets”), should be determined in a similar manner to other financial assets measured on an amortized cost basis. However, upon initial recognition, the allowance for credit losses is added to the purchase price (“gross up approach”) to determine the initial amortized cost basis. The subsequent accounting for PCD financial assets is the same expected loss model described above. Further, the ASU made certain targeted amendments to the existing impairment model for available-for-sale (AFS) debt securities. For an AFS debt security for which there is neither the intent nor a more-likely-than-not requirement to sell, an entity will record credit losses as an allowance rather than a write-down of the amortized cost basis.  For public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. An entity will apply the amendments in this Update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach).  The Company is currently evaluating the potential impact on our consolidated results of operations or financial position. The initial adjustment will not be reported in earnings and therefore will not have any material impact on our consolidated results of operations, but it is expected that it will have an impact on our consolidated financial position at the date of adoption of this Update.  At this time, we have not calculated the estimated impact that this Update will have on our Allowance for Loan Losses, however, we anticipate it will have a significant impact on the methodology process we utilize to calculate the allowance.  Alternative methodologies and software vendors are currently being considered.  Data requirements and integrity are being reviewed and enhancements incorporated into standard processes.  The Company is in the early stages of evaluation and implementation of the guidance.

In August 2016, the FASB issued an Update (ASU 2016-15) which clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are intended to reduce diversity in practice. The amendment covers the following cash flows: Cash payments for debt prepayment or extinguishment costs will be classified in financing activities.  Upon settlement of zero-coupon bonds and bonds with insignificant cash coupons, the portion of the payment attributable to imputed interest will be classified as an operating activity, while the portion of the payment attributable to principal will be classified as a financing activity.  Cash paid by an acquirer that isn’t soon after a business combination for the settlement of a contingent consideration liability will be separated between financing activities and operating activities. Cash payments up to the amount of the contingent consideration liability recognized at the acquisition date will be classified in financing activities; any excess will be classified in operating activities. Cash paid soon after the business combination will be classified in investing activities.  Cash proceeds received from the settlement of insurance claims will be classified on the basis of the related insurance coverage (that is, the nature of the loss). Cash proceeds from lump-sum settlements will be classified based on the nature of each loss included in the settlement. Cash proceeds received from the settlement of corporate-owned life insurance (COLI) and bank-owned life insurance (BOLI) policies will be classified as cash inflows from investing activities. Cash payments for premiums on COLI and BOLI may be classified as cash outflows for investing, operating, or a combination of both. A transferor’s beneficial interest obtained in a securitization of financial assets will be disclosed as a noncash activity, and cash received from beneficial interests will be classified in investing activities. Distributions received from equity method investees will be classified using either a cumulative earnings approach or a look- through approach as an accounting policy election.  The ASU contains additional guidance clarifying when an entity should separate cash receipts and cash payments and classify them into more than one class of cash flows (including when reasonable judgment is required to estimate and allocate cash flows) versus when an entity should classify the aggregate amount into one class of cash flows on the basis of predominance.  The amendments are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period.  The Company is currently evaluating the potential impact of adoption of this ASU on our consolidated results of operations or financial position.

In November 2016, the FASB issued an Update (ASU 2016-18) to its guidance on “Statement of Cash Flows (Topic 230) Restricted Cash” addresses diversity in practice from entities classifying and presenting transfers between cash and restricted cash as operating, investing or financing activities or as a combination of those activities in the statement of cash flows.  The ASU requires entities to show the changes in the total cash, cash equivalents, restricted cash and restricted cash equivalents in the Statement of Cash Flows.  As a result, transfers between such categories will no longer be presented in the Statement of Cash Flows.  ASU 2016-18 is effective for the fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  Early adoption is permitted provided all amendments are adopted in the same period.  Management is evaluating the effect that this guidance will have on consolidated financial statements and disclosures.
 
25

In March 2017, the FASB issued an Update (ASU 2017-07) to its guidance on “Compensation - Retirement Benefits (Topic 715)” to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost.  ASU 2017-07 requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described.  If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed.  The amendments in this Update are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods.  Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance.  That is, early adoption should be within the first interim period if an employer issues interim financial statements.  Disclosures of the nature of and reason for the change in accounting principle are required in the first interim and annual periods of adoption.  The amendments in this Update should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit costs in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net period pension cost and net periodic postretirement benefit in assets. The adoption of this guidance is not expected to have a material impact on our consolidated results of operations or financial position.

In March 2017, the FASB issued an Update (ASU 2017-08) to its guidance on “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20) related to premium amortization on purchased callable debt securities. The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium.  Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.  For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  Early adoption is permitted, including adoption in an interim period.  If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.  An entity should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.  Additionally, in the period of adoption, an entity should provide disclosure about a change in accounting principle.  The adoption of this guidance is not expected to have a material impact on our consolidated results of operations or financial position.

In May 2017, the FASB issued an Update (ASU 2017-09) to its guidance on “Compensation - Stock Compensation (Topic 718)” such that an entity must apply modification accounting to changes in the terms or conditions of a share-based payment award unless all of the following criteria are met:  (1) The fair value of the modified award is the same as the fair value of the original award immediately before the modification. The standard indicates that if the modification does not affect any of the inputs to the valuation technique used to value the award, the entity is not required to estimate the value immediately before and after the modification. (2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the modification. (3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the modification.  The amendments are effective for all entities for fiscal years beginning after December 15, 2017, including interim periods within those years.  Early adoption is permitted, including adoption in an interim period.  The Company is currently evaluating the potential impact of adoption of this ASU on our consolidated results of operations or financial position.

(10)
Employee Benefit Plans
 
Defined Benefit Plan

The components of net periodic pension cost related to the defined benefit pension plan for the three months ended September 30, 2017 and 2016 were as follows:

   
Three months ended September 30,
 
(In thousands)
 
2017
   
2016
 
Interest cost
 
$
55
   
$
54
 
Expected return on plan assets
   
(62
)
   
(69
)
Amortization of net loss
   
42
     
49
 
Net periodic pension cost
 
$
35
   
$
34
 
 
26

The Company does not anticipate that it will make any additional contributions to the defined benefit pension plan during fiscal 2018.

SERP

The Board of Directors of The Bank of Greene County adopted The Bank of Greene County Supplemental Executive Retirement Plan (the “SERP Plan”), effective as of July 1, 2010. The SERP Plan benefits certain key senior executives of the Bank who have been selected by the Board to participate. The SERP Plan is intended to provide a benefit from the Bank upon retirement, death or disability or voluntary or involuntary termination of service (other than “for cause”).  The SERP Plan is more fully described in Note 9 of the consolidated financial statements and notes thereto for the year ended June 30, 2017.

The net periodic pension costs related to the SERP Plan for the three months ended September 30, 2017 and 2016 were $101,000 and $77,000, respectively, consisting primarily of service costs and interest costs. The total liability for the SERP Plan was $3.2 million and $2.9 million at September 30, 2017 and June 30, 2017, respectively, and is included in accrued expenses and other liabilities.  The total liability for the SERP Plan includes both accumulated net periodic pension costs and participant contributions.

(11)
Stock-Based Compensation

At September 30, 2017, Greene County Bancorp, Inc. had two stock-based compensation plans, which are described more fully in Note 10 of the consolidated financial statements and notes thereto for the year ended June 30, 2017.

Stock Option Plan

At September 30, 2017 and 2016, all granted shares related to the 2008 Option Plan were fully vested, with no remaining compensation cost to be recognized.  A summary of the Company’s stock option activity and related information for its option plan for the three months ended September 30, 2017 and 2016 is as follows:

   
2017
   
2016
 
   
Shares
   
Weighted Average
Exercise Price
Per Share
   
Shares
   
Weighted Average
Exercise Price
Per Share
 
Outstanding at beginning of year
   
37,770
   
$
6.25
     
64,770
   
$
6.25
 
Exercised
   
(1,000
)
 
$
6.25
     
(12,000
)
 
$
6.25
 
Outstanding at period end
   
36,770
   
$
6.25
     
52,770
   
$
6.25
 
Exercisable at period end
   
36,770
   
$
6.25
     
52,770
   
$
6.25
 

The intrinsic value of options both outstanding and exercisable was $875,000 at September 30, 2017 and $550,000 at September 30, 2016.

The following table presents stock options outstanding and exercisable at September 30, 2017:

Options Outstanding and Exercisable
 
Range of
Exercise Prices
   
Number
Outstanding
   
Weighted Average Remaining
Contractual Life
   
Weighted Average
Exercise Price
 
$
6.25
     
36,770
     
1.00
   
$
6.25
 

The total intrinsic value of the options exercised during the three months ended September 30, 2017 and 2016, was approximately $23,000 and $206,000, respectively. There were no stock options granted during the three months ended September 30, 2017 or 2016.

Phantom Stock Option Plan and Long-term Incentive Plan

The Greene County Bancorp, Inc. 2011 Phantom Stock Option and Long-term Incentive Plan (the “Plan”) was adopted effective July 1, 2011, to promote the long-term financial success of the Company and its subsidiaries by providing a means to attract, retain and reward individuals who contribute to such success and to further align their interests with those of the Company’s shareholders. The Plan is intended to provide benefits to employees and directors of the Company or any subsidiary as designated by the Compensation Committee of the Board of Directors of the Company (“Committee”).   A phantom stock option represents the right to receive a cash payment on the date the award vests. The Plan is more fully described in Note 10 of the consolidated financial statements and notes thereto for the year ended June 30, 2017.
 
27

A summary of the Company’s phantom stock option activity and related information for its option plan for the three months ended September 30, 2017 and 2016 is as follows:

   
2017
   
2016
 
Number of options outstanding at beginning of year
   
1,522,720
     
1,352,554
 
Options granted
   
594,200
     
578,200
 
Options paid in cash
   
(3,000
)
   
-
 
Number of options outstanding at period end
   
2,113,920
     
1,930,754
 

(In thousands)
 
2017
   
2016
 
Cash paid out on options vested
 
$
7
   
$
-
 
Compensation expense recognized
   
360
     
241
 

The total liability for the long-term incentive plan was $2.4 million and $2.0 million at September 30, 2017 and June 30, 2017, respectively, and is included in accrued expenses and other liabilities.

(12)
Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss at September 30, 2017 and June 30, 2017 are presented in the following table:

(In thousands)
           
Accumulated other comprehensive loss:
 
September 30, 2017
   
June 30, 2017
 
Unrealized gain on available-for-sale securities, net of tax
 
$
847
   
$
612
 
Net losses and past service liability for defined benefit plan, net of tax
   
(1,604
)
   
(1,604
)
Accumulated other comprehensive loss
 
$
(757
)
 
$
(992
)

(13)
Subsequent events

On October 17, 2017, the Board of Directors declared a cash dividend for the quarter ended September 30, 2017 of $0.0975 per share on Greene County Bancorp, Inc.’s common stock.  The dividend reflects an annual cash dividend rate of $0.39 per share, which was the same rate as the dividend declared during the previous quarter.  The dividend will be payable to stockholders of record as of November 15, 2017, and will be paid on November 30, 2017.  The MHC intends to waive its receipt of this dividend.

On October 16, 2017, The Bank of Greene County opened its newest full-service branch location at 179 County Route 7A, Copake, New York.
 
28

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operation

Overview of the Company’s Activities and Risks

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

To operate successfully, the Company must manage various types of risk, including but not limited to, market or interest rate risk, credit risk, transaction risk, liquidity risk, security risk, strategic risk, reputation risk and compliance risk.  While all of these risks are important, the risks of greatest significance to the Company relate to market or interest rate risk and credit risk.

Market risk is the risk of loss from adverse changes in market prices and/or interest rates.  Since net interest income (the difference between interest earned on loans and investments and interest paid on deposits and borrowings) is the Company’s primary source of revenue, interest rate risk is the most significant non-credit related market risk to which the Company is exposed.  Net interest income is affected by changes in interest rates as well as fluctuations in the level and duration of the Company’s assets and liabilities.

Interest rate risk is the exposure of the Company’s net interest income to adverse movements in interest rates.  In addition to directly impacting net interest income, changes in interest rates can also affect the amount of new loan originations, the ability of borrowers and debt issuers to repay loans and debt securities, the volume of loan repayments and refinancings, and the flow and mix of deposits.

Credit risk is the risk to the Company’s earnings and shareholders’ equity that results from customers, to whom loans have been made and to the issuers of debt securities in which the Company has invested, failing to repay their obligations.  The magnitude of risk depends on the capacity and willingness of borrowers and debt issuers to repay and the sufficiency of the value of collateral obtained to secure the loans made or investments purchased.

Special Note Regarding Forward-Looking Statements

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

These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements, since results in future periods may differ materially from those currently expected because of various risks and uncertainties.
 
29

Non-GAAP Financial Measures

Regulation G, a rule adopted by the Securities and Exchange Commission (SEC), applies to certain SEC filings, including earnings releases, made by registered companies that contain “non-GAAP financial measures.”  GAAP is generally accepted accounting principles in the United States of America.  Under Regulation G, companies making public disclosures containing non-GAAP financial measures must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure (if a comparable GAAP measure exists) and a statement of the Company’s reasons for utilizing the non-GAAP financial measure as part of its financial disclosures.  The SEC has exempted from the definition of “non-GAAP financial measures” certain commonly used financial measures that are not based on GAAP.  When these exempted measures are included in public disclosures, supplemental information is not required. Financial institutions like the Company and its subsidiary banks are subject to an array of bank regulatory capital measures that are financial in nature but are not based on GAAP and are not easily reconcilable to the closest comparable GAAP financial measures, even in those cases where a comparable measure exists. The Company follows industry practice in disclosing its financial condition under these various regulatory capital measures, including period-end regulatory capital ratios for itself and its subsidiary banks, in its periodic reports filed with the SEC, and does so without compliance with Regulation G, on the widely-shared assumption that the SEC regards such non-GAAP measures to be exempt from Regulation G.  The Company uses in this Report additional non-GAAP financial measures that are commonly utilized by financial institutions and have not been specifically exempted by the SEC from Regulation G. The Company provides, as supplemental information, such non-GAAP measures included in this Report as described immediately below.

Tax-Equivalent Net Interest Income and Net Interest Margin: Net interest income, as a component of the tabular presentation by financial institutions of Selected Financial Information regarding their recently completed operations, as well as disclosures based on that tabular presentation, is commonly presented on a tax-equivalent basis.  That is, to the extent that some component of the institution's net interest income, which is presented on a before-tax basis, is exempt from taxation (e.g., is received by the institution as a result of its holdings of state or municipal obligations), an amount equal to the tax benefit derived from that component is added to the actual before-tax net interest income total.  This adjustment is considered helpful in comparing one financial institution's net interest income to that of another institution or in analyzing any institution’s net interest income trend line over time, to correct any analytical distortion that might otherwise arise from the fact that financial institutions vary widely in the proportions of their portfolios that are invested in tax-exempt securities, and that even a single institution may significantly alter over time the proportion of its own portfolio that is invested in tax-exempt obligations.  Moreover, net interest income is itself a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average earning assets.  For purposes of this measure as well, tax-equivalent net interest income is generally used by financial institutions, again to provide a better basis of comparison from institution to institution and to better demonstrate a single institution’s performance over time. While we present net interest income and net interest margin utilizing GAAP measures (no tax-equivalent adjustments) as a component of the tabular presentation within our disclosures, we do provide as supplemental information net interest income and net interest margin on a tax-equivalent basis.
 
30

Comparison of Financial Condition at September 30, 2017 and June 30, 2017

ASSETS

Total assets of the Company were $1.0 billion at September 30, 2017 as compared to $982.3 million at June 30, 2017, an increase of $55.4 million, or 5.6%.  Securities available-for-sale and held-to-maturity amounted to $326.5 million, at September 30, 2017 as compared to $315.3 million, at June 30, 2017, an increase of $11.2 million, or 3.6%.   Net loans grew by $14.2 million, or 2.3%, to $638.4 million at September 30, 2017 as compared to $624.2 million at June 30, 2017.

CASH AND CASH EQUIVALENTS

Total cash and cash equivalents increased $30.1 million to $46.4 million at September 30, 2017 from $16.3 million at June 30, 2017.  The level of cash and cash equivalents is a function of the daily account clearing needs and deposit levels as well as activities associated with securities transactions and loan funding.  All of these items can cause cash levels to fluctuate significantly on a daily basis.

SECURITIES

Securities available-for-sale and held-to-maturity increased $11.2 million, or 3.6%, to $326.5 million at September 30, 2017 as compared to $315.3 million at June 30, 2017.  Securities purchases totaled $39.2 million during the three months ended September 30, 2017 and consisted of $35.7 million of state and political subdivision securities and $3.5 million of mortgage-backed securities. Principal pay-downs and maturities during the three months amounted to $28.1 million, of which $6.4 million were mortgage-backed securities, $500,000 were corporate debt securities, and $21.2 million were state and political subdivision securities. At September 30, 2017, 57.7% of our securities portfolio consisted of state and political subdivision securities to take advantage of tax savings and to promote Greene County Bancorp, Inc.’s participation in the communities in which it operates. Mortgage-backed securities and asset-backed securities held within the portfolio do not contain sub-prime loans and are not exposed to the credit risk associated with such lending.

   
September 30, 2017
   
June 30, 2017
 
(Dollars in thousands)
 
Balance
   
Percentage
of portfolio
   
Balance
   
Percentage
of portfolio
 
Securities available-for-sale:
                       
U.S. government sponsored enterprises
 
$
4,698
     
1.4
%
 
$
4,717
     
1.5
%
State and political subdivisions
   
68,173
     
20.9
     
58,112
     
18.4
 
Mortgage-backed securities-residential
   
4,535
     
1.4
     
4,913
     
1.5
 
Mortgage-backed securities-multifamily
   
20,874
     
6.4
     
20,765
     
6.6
 
Asset-backed securities
   
-
     
0.0
     
1
     
0.0
 
Corporate debt securities
   
2,335
     
0.7
     
2,791
     
1.0
 
Total debt securities
   
100,615
     
30.8
     
91,299
     
29.0
 
Equity securities
   
194
     
0.1
     
184
     
0.1
 
Total securities available-for-sale
   
100,809
     
30.9
     
91,483
     
29.1
 
Securities held-to-maturity:
                               
U.S. government sponsored enterprises
   
6,000
     
1.8
     
6,000
     
1.9
 
State and political subdivisions
   
120,168
     
36.8
     
115,805
     
36.7
 
Mortgage-backed securities-residential
   
8,136
     
2.5
     
10,798
     
3.4
 
Mortgage-backed securities-multifamily
   
88,879
     
27.2
     
88,702
     
28.1
 
Corporate debt securities
   
1,000
     
0.3
     
1,000
     
0.3
 
Other securities
   
1,511
     
0.5
     
1,525
     
0.5
 
Total securities held-to-maturity
   
225,694
     
69.1
     
223,830
     
70.9
 
Total securities
 
$
326,503
     
100.0
%
 
$
315,313
     
100.0
%

LOANS

Net loans receivable increased $14.2 million, or 2.3%, to $638.4 million at September 30, 2017 from $624.2 million at June 30, 2017.  The loan growth experienced during the three months consisted primarily of $3.5 million in commercial real estate loans, $2.7 million in commercial construction loans, $5.1 million in commercial loans and $2.2 million in residential real estate loans.  We believe that the continued low interest rate environment and strong customer satisfaction from personal service continued to enhance loan growth. If long term rates begin to rise, the Company anticipates some slowdown in new loan demand as well as refinancing activities.  The Bank of Greene County continues to use a conservative underwriting policy in regard to all loan originations, and does not engage in sub-prime lending or other exotic loan products.  A significant decline in home values, however, in the Company’s markets could have a negative effect on the consolidated results of operations, as any such decline in home values would likely lead to a decrease in residential real estate loans and new home equity loan originations and increased delinquencies and defaults in both the consumer home equity loan and the residential real estate loan portfolios and result in increased losses in these portfolios.  Updated appraisals are obtained on loans when there is a reason to believe that there has been a change in the borrower’s ability to repay the loan principal and interest, generally, when a loan is in a delinquent status.  Additionally, if an existing loan is to be modified or refinanced, generally, an appraisal is ordered to ensure continued collateral adequacy.
 
31

(Dollars in thousands)
 
September 30, 2017
   
June 30, 2017
 
   
Balance
   
Percentage of
Portfolio
   
Balance
   
Percentage of
Portfolio
 
Residential real estate
 
$
247,557
     
38.2
%
 
$
245,331
     
38.7
%
Residential construction and land
   
7,986
     
1.2
     
7,160
     
1.1
 
Multi-family
   
9,216
     
1.4
     
9,199
     
1.4
 
Commercial real estate
   
261,462
     
40.3
     
257,964
     
40.7
 
Commercial construction
   
31,140
     
4.8
     
28,430
     
4.5
 
Home equity
   
21,058
     
3.2
     
21,076
     
3.3
 
Consumer installment
   
4,795
     
0.7
     
4,790
     
0.8
 
Commercial loans
   
65,479
     
10.2
     
60,381
     
9.5
 
Total gross loans
   
648,693
     
100.0
%
   
634,331
     
100.0
%
Allowance for loan losses
   
(11,098
)
           
(11,022
)
       
Deferred fees and costs
   
851
             
878
         
Total net loans
 
$
638,446
           
$
624,187
         

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is established through a provision for loan losses based on management’s evaluation of the risk inherent in the loan portfolio, the composition of the loan portfolio, specific impaired loans and current economic conditions.  Such evaluation, which includes a review of certain identified loans on which full collectability may not be reasonably assured, considers among other matters, the estimated net realizable value or the fair value of the underlying collateral, economic conditions, payment status of the loan, historical loan loss experience and other factors that warrant recognition in providing for an allowance for loan loss.  In addition, various regulatory agencies, as an integral part of their examination process, periodically review The Bank of Greene County’s allowance for loan losses.  Such agencies may require The Bank of Greene County to recognize additions to the allowance based on their judgment about information available to them at the time of their examination.  The Bank of Greene County considers smaller balance residential mortgages, home equity loans and installment loans to customers as small, homogeneous loans, which are evaluated for impairment collectively based on historical loss experience.  Larger balance residential and commercial mortgage and business loans are viewed individually and considered impaired if it is probable that The Bank of Greene County will not be able to collect scheduled payments of principal and interest when due, according to the contractual terms of the loan agreements.  The measurement of impaired loans is generally based on the fair value of the underlying collateral. The Bank of Greene County charges loans off against the allowance for loan losses when it becomes evident that a loan cannot be collected within a reasonable amount of time or that it will cost the Bank more than it will receive, and all possible avenues of repayment have been analyzed, including the potential of future cash flow, the value of the underlying collateral, and strength of any guarantors or co-borrowers.  Generally, consumer loans and smaller business loans (not secured by real estate) in excess of 90 days are charged-off against the allowance for loan losses, unless equitable arrangements are made.  For loans secured by real estate, a charge-off is recorded when it is determined that the collection of all or a portion of a loan may not be collected and the amount of that loss can be reasonably estimated. The allowance for loan losses is increased by a provision for loan losses (which results in a charge to expense) and recoveries of loans previously charged off and is reduced by charge-offs.
 
32

Analysis of allowance for loan losses activity

   
At or for the three months ended September 30,
 
(Dollars in thousands)
 
2017
   
2016
 
Balance at the beginning of the period
 
$
11,022
   
$
9,485
 
Charge-offs:
               
Residential real estate
   
44
     
-
 
Consumer installment
   
88
     
72
 
Commercial loans
   
157
     
-
 
Total loans charged off
   
289
     
72
 
                 
Recoveries:
               
Consumer installment
   
18
     
17
 
Commercial loans
   
-
     
3
 
Total recoveries
   
18
     
20
 
                 
Net charge-offs
   
271
     
52
 
                 
Provisions charged to operations
   
347
     
543
 
Balance at the end of the period
 
$
11,098
   
$
9,976
 
                 
Net charge-offs to average loans outstanding (annualized)
   
0.17
%
   
0.04
%
Net charge-offs to nonperforming assets (annualized)
   
26.25
%
   
4.54
%
Allowance for loan losses to nonperforming loans
   
328.54
%
   
232.11
%
Allowance for loan losses to total loans receivable
   
1.71
%
   
1.79
%

Nonaccrual Loans and Nonperforming Assets

Loans are reviewed on a regular basis to assess collectability of all principal and interest payments due.  Management determines that a loan is impaired or nonperforming when it is probable at least a portion of the principal or interest will not be collected in accordance with contractual terms of the note.  When a loan is determined to be impaired, the measurement of the loan is based on present value of estimated future cash flows, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral.

Generally, management places loans on nonaccrual status once the loans have become 90 days or more delinquent or sooner if there is a significant reason for management to believe the collectability is questionable and, therefore, interest on the loan will no longer be recognized on an accrual basis.  The Company identifies impaired loans and measures the impairment in accordance with FASB ASC subtopic “Receivables – Loan Impairment.”  Management may consider a loan impaired once it is classified as nonaccrual and when it is probable that the borrower will be unable to repay the loan according to the original contractual terms of the loan agreement or the loan is restructured in a troubled debt restructuring.  It should be noted that management does not evaluate all loans individually for impairment.  Generally, The Bank of Greene County considers residential mortgages, home equity loans and installment loans as small, homogeneous loans, which are evaluated for impairment collectively based on historical loan experience and other factors.  In contrast, large commercial mortgage, construction, multi-family, business loans and select larger balance residential mortgage loans are viewed individually and considered impaired if it is probable that The Bank of Greene County will not be able to collect scheduled payments of principal and interest when due, according to the contractual terms of the loan agreement.  The measurement of impaired loans is generally based on the fair value of the underlying collateral.  The majority of The Bank of Greene County loans, including most nonaccrual loans, are small homogenous loan types adequately supported by collateral.  Management considers the payment status of loans in the process of evaluating the adequacy of the allowance for loan losses among other factors.  Based on this evaluation, a delinquent loan’s risk rating may be downgraded to either pass-watch, special mention, or substandard, and the allocation of the allowance for loan loss is based upon the risk associated with such designation. A loan does not have to be 90 days delinquent in order to be classified as nonperforming.  Foreclosed real estate is considered to be a nonperforming asset.
 
33

Analysis of Nonaccrual Loans and Nonperforming Assets

(Dollars in thousands)
 
September 30, 2017
   
June 30, 2017
 
Nonaccruing loans:
           
Residential real estate
 
$
1,371
 
 
$
1,240
 
Commercial real estate
   
1,051
     
1,452
 
Commercial construction
   
176
     
176
 
Home equity
   
333
     
218
 
Consumer installment
   
9
     
10
 
Commercial
   
370
     
476
 
Total nonaccruing loans
   
3,310
     
3,572
 
90 days & accruing
               
Residential real estate
   
68
     
69
 
Total 90 days & accruing
   
68
     
69
 
Total nonperforming loans
   
3,378
     
3,641
 
Foreclosed real estate:
               
Commercial real estate
   
752
     
799
 
Total foreclosed real estate
   
752
     
799
 
Total nonperforming assets
 
$
4,130
 
 
$
4,440
 
                 
Troubled debt restructuring:
               
Nonperforming (included above)
 
$
598
 
 
$
932
 
Performing (accruing and excluded above)
   
1,563
     
916
 
                 
Total nonperforming assets as a percentage of total assets
   
0.40
 
%
 
0.45
%
Total nonperforming loans to net loans
   
0.53
 
%
 
0.58
%

The table below details additional information related to nonaccrual loans for the three months ended September 30:

(In thousands)
 
2017
   
2016
 
Interest income that would have been recorded if loans had been performing in accordance with original terms
 
$
78
   
$
80
 
Interest income that was recorded on nonaccrual loans
   
34
     
28
 

Nonperforming assets amounted to $4.1 million at September 30, 2017 and $4.4 million at June 30, 2017, a decrease of $310,000 or 7.0%. Loans on nonaccrual status totaled $3.3 million at September 30, 2017 of which $1.6 million were in the process of foreclosure. At September 30, 2017, there were twelve residential loans in the process of foreclosure totaling $1.1 million.  Included in nonaccrual loans were $1.4 million of loans which were less than 90 days past due at September 30, 2017, but have a recent history of delinquency greater than 90 days past due. These loans will be returned to accrual status once they have demonstrated a history of timely payments.  Included in total loans past due were $228,000 of loans which were making payments pursuant to forbearance agreements.   Under the forbearance agreements, the customers have made arrangements with the Bank to bring the loans current over a specified period of time (resulting in an insignificant delay in repayment).  During this term of the forbearance agreement, the Bank has agreed not to continue foreclosure proceedings.  While the Bank makes every reasonable effort to work with the borrowers to collect amounts due, the number of loans in process of foreclosure has grown substantially over the past several years.  Loans on nonaccrual status totaled $3.6 million at June 30, 2017 of which $1.6 million were in the process of foreclosure.  Included in nonaccrual loans were $1.9 million of loans which were less than 90 days past due at June 30, 2017, but have a recent history of delinquency greater than 90 days past due. These loans will be returned to accrual status once they have demonstrated a history of timely payments.  Included in total loans past due were $179,000 of loans which were making payments pursuant to forbearance agreements.

Impaired Loans

The Company identifies impaired loans and measures the impairment in accordance with FASB ASC subtopic “Receivables – Loan Impairment”.  A loan is considered impaired when it is probable that the borrower will be unable to repay the loan according to the original contractual terms of the loan agreement or the loan is restructured in a troubled debt restructuring.
 
34

The table below details additional information on impaired loans at September 30, 2017 and June 30, 2017:

(In thousands)
 
September 30, 2017
   
June 30, 2017
 
Balance of impaired loans, with a valuation allowance
 
$
2,632
   
$
2,071
 
Allowances relating to impaired loans included in allowance for loan losses
   
528
     
436
 
Balance of impaired loans, without a valuation allowance
   
1,356
     
1,181
 
Total impaired loans
   
3,988
     
3,252
 

   
For the three months ended September 30,
 
(In thousands)
 
2017
   
2016
 
Average balance of impaired loans for the periods ended
 
$
3,593
   
$
3,231
 
Interest income recorded on impaired loans during the periods ended
   
21
     
28
 

DEPOSITS

Total deposits increased to $917.6 million at September 30, 2017 from $859.5 million at June 30, 2017, an increase of $58.1 million, or 6.8%. Noninterest-bearing deposits increased $7.9 million, or 8.2%, NOW deposits increased $66.6 million, or 17.0%, and money market deposits increased $2.3 million, or 1.9%, when comparing September 30, 2017 and June 30, 2017. These increases were partially offset by decreases of savings deposits of $3.6 million, or 1.8%, and certificates of deposit of $15.2 million, or 28.2%, when comparing September 30, 2017 and June 30, 2017. These increases were the result of a $62.9 million increase in municipal deposits at Greene County Commercial Bank, primarily from continued growth in new account relationships as well as tax collection.  Included within certificates of deposits at June 30, 2017 were $15.0 million in brokered certificates of deposit. These brokered certificates of deposit matured during the three months ended September 30, 2017 and were not renewed.

(In thousands)
 
September 30, 2017
   
Percentage
of Portfolio
   
June 30, 2017
   
Percentage
of Portfolio
 
Noninterest-bearing deposits
 
$
103,819
     
11.3
%
 
$
95,929
     
11.2
%
Certificates of deposit
   
38,582
     
4.2
     
53,742
     
6.3
 
Savings deposits
   
193,716
     
21.1
     
197,288
     
22.9
 
Money market deposits
   
122,117
     
13.3
     
119,806
     
13.9
 
NOW deposits
   
459,335
     
50.1
     
392,770
     
45.7
 
Total deposits
 
$
917,569
     
100.0
%
 
$
859,535
     
100.0
%

BORROWINGS

At September 30, 2017, The Bank of Greene County had pledged approximately $272.1 million of its residential and commercial mortgage portfolio as collateral for borrowing and irrevocable stand-by letters of credit at the Federal Home Loan Bank of New York (“FHLB”).  The maximum amount of funding available from the FHLB was $223.8 million at September 30, 2017, of which $20.2 million in borrowings and $55.0 million in irrevocable stand-by letters of credit were outstanding at September 30, 2017.  There were no short-term or overnight borrowings outstanding at September 30, 2017. The $20.2 million consisted of long-term fixed rate  advances with a weighted average rate of 1.62% and a weighted average maturity of 28 months.  The $55.0 million of irrevocable stand-by letters of credit with the FHLB have been issued to secure municipal transactional deposit accounts, on behalf of Greene County Commercial Bank.

The Bank of Greene County also pledges securities as collateral at the Federal Reserve Bank discount window for overnight borrowings.  At September 30, 2017, approximately $2.3 million of collateral was available to be pledged against potential borrowings at the Federal Reserve Bank discount window. There were no balances outstanding with the Federal Reserve Bank at September 30, 2017 or June 30, 2017.

The Bank of Greene County has established unsecured lines of credit with Atlantic Central Bankers Bank and another financial institution for $6.0 million and $5.0 million, respectively. At September 30, 2017 and June 30, 2017, there were no balances outstanding on either of these lines of credit. Greene County Bancorp, Inc. has also established an unsecured line of credit with Atlantic Central Bankers Bank for $7.5 million.  At September 30, 2017 there was an outstanding balance of $700,000, and at June 30, 2017, there was no balance outstanding on this line of credit. All of these lines of credit provide for overnight borrowing and the interest rate is determined at the time of the borrowing.
 
35

Scheduled maturities of long-term borrowings at September 30, 2017 were as follows:

(In thousands)
     
Within the twelve months ended September 30,
     
2018
 
$
3,000
 
2019
   
4,500
 
2020
   
6,000
 
2021
   
1,800
 
2022
   
4,850
 
   
$
20,150
 

EQUITY

Shareholders’ equity increased to $86.9 million at September 30, 2017 from $83.5 million at June 30, 2017, as net income of $3.5 million and a $235,000 decrease in other accumulated comprehensive loss were partially offset by dividends declared and paid of $379,000.  Other changes in equity, an increase of $6,000, were the result of options exercised with the Company’s 2008 Stock Option Plan.

Selected Equity Data:
     
   
September 30, 2017
   
June 30, 2017
 
Shareholders’ equity to total assets, at end of period
   
8.37
%
   
8.50
%
                 
Book value per share
 
$
10.21
   
$
9.82
 
Closing market price of common stock
 
$
30.05
   
$
27.20
 

   
For the three months ended September 30,
 
   
2017
   
2016
 
Average shareholders’ equity to average assets
   
8.57
%
   
8.70
%
Dividend payout ratio1
   
23.78
%
   
31.67
%
Actual dividends paid to net income2
   
10.92
%
   
14.72
%

1The dividend payout ratio has been calculated based on the dividends declared per share divided by basic earnings per share.  No adjustments have been made for dividends waived by Greene County Bancorp, MHC (“MHC”), the owner of 54.2% of the Company’s shares outstanding.
2 Dividends declared divided by net income.  The MHC waived its right to receive dividends declared during the three months ended September 30, 2017 and 2016.  The MHC’s ability to waive the receipt of dividends is dependent upon annual approval of its members as well as receiving the non-objection of the Federal Reserve Board.
 
36

Comparison of Operating Results for the Three Months Ended September 30, 2017 and 2016

Average Balance Sheet

The following table sets forth certain information relating to Greene County Bancorp, Inc. for the three months ended September 30, 2017 and 2016.  For the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, are expressed both in dollars and rates.  No tax equivalent adjustments were made.  Average balances were based on daily averages.  Average loan balances include nonperforming loans.  The loan yields include net amortization of certain deferred fees and costs that are considered adjustments to yields.

   
2017
   
2016
 
(Dollars in thousands)
 
Average
Outstanding
Balance
 
Interest
Earned / Paid
   
Average
Yield / Rate
   
Average
Outstanding
Balance
 
Interest
Earned / Paid
   
Average
Yield /
Rate
 
Interest-earning Assets:
                                   
Loans receivable, net1
 
$
639,251
 
 
$
7,059
     
4.42
%
 
$
542,670
 
 
$
6,053
     
4.46
%
Securities2
   
328,888
     
1,989
     
2.42
     
301,908
     
1,733
     
2.30
 
Interest-bearing bank balances and federal funds
   
4,911
     
12
     
0.98
     
1,099
     
3
     
1.09
 
FHLB stock
   
1,986
     
29
     
5.84
     
2,859
     
25
     
3.50
 
Total interest-earning assets
   
975,036
     
9,089
     
3.73
%
   
848,536
     
7,814
     
3.68
%
Cash and due from banks
   
9,296
                     
7,866
                 
Allowance for loan losses
   
(11,066
)
                   
(9,579
)
               
Other noninterest-earning assets
   
18,789
                     
18,232
                 
Total assets
 
$
992,055
                   
$
865,055
                 
                                                 
Interest-Bearing Liabilities:
                                               
Savings and money market deposits
 
$
318,309
 
 
$
256
     
0.32
%
 
$
291,468
 
 
$
232
     
0.32
%
NOW deposits
   
412,856
     
463
     
0.45
     
309,748
     
297
     
0.38
 
Certificates of deposit
   
43,637
     
90
     
0.83
     
42,819
     
77
     
0.72
 
Borrowings
   
28,349
     
110
     
1.55
     
48,792
     
121
     
0.99
 
Total interest-bearing liabilities
   
803,151
     
919
     
0.46
%
   
692,827
     
727
     
0.42
%
Noninterest-bearing deposits
   
96,052
                     
88,285
                 
Other noninterest-bearing liabilities
   
7,801
                     
8,667
                 
Shareholders' equity
   
85,051
                     
75,276
                 
Total liabilities and equity
 
$
992,055
                   
$
865,055
                 
                                                 
Net interest income
       
 
$
8,170
                 
 
$
7,087
         
Net interest rate spread
                   
3.27
%
                   
3.26
%
Net earnings assets
 
$
171,885
                   
$
155,709
                 
Net interest margin
                   
3.35
%
                   
3.34
%
Average interest-earning assets to average interest-bearing liabilities
   
121.40
%
                 
122.47
%
             
 

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

Taxable-equivalent net interest income and net interest margin

   
For the three months ended September 30,
 
(Dollars in thousands)
 
2017
   
2016
 
Net interest income (GAAP)
 
$
8,170
   
$
7,087
 
Tax-equivalent adjustment(1)
   
647
     
520
 
Net interest income (fully taxable-equivalent)
 
$
8,817
   
$
7,607
 
                 
Average interest-earning assets
 
$
975,036
   
$
848,536
 
Net interest margin (fully taxable-equivalent)
   
3.62
%
   
3.59
%

1Net interest income on a taxable-equivalent basis includes the additional amount of interest income that would have been earned if the Company’s investment in tax-exempt securities and loans had been subject to federal and New York State income taxes yielding the same after-tax income. The rate used for this adjustment was 34% for federal income taxes and 3.32% for New York State income taxes.
 
37

Rate / Volume Analysis

The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected Greene County Bancorp, Inc.’s interest income and interest expense during the periods indicated.  Information is provided in each category with respect to:
(i)
Change attributable to changes in volume (changes in volume multiplied by prior rate);
(ii)
Change attributable to changes in rate (changes in rate multiplied by prior volume); and
(iii)
The net change.
 
The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

   
Three months ended September 30,
2017 versus 2016
 
   
Increase/(Decrease)
Due To
   
Total
 
                Increase/  
(Dollars in thousands)
 
Volume
   
Rate
   
(Decrease)
 
Interest-earning Assets:
                 
Loans receivable, net1
 
$
1,061
   
$
(55
)
 
$
1,006
 
Securities2
   
162
     
94
     
256
 
Interest-bearing bank balances and federal funds
   
9
     
-
     
9
 
FHLB stock
   
(9
)
   
13
     
4
 
Total interest-earning assets
   
1,223
     
52
     
1,275
 
                         
Interest-Bearing Liabilities:
                       
Savings and money market deposits
   
24
     
0
     
24
 
NOW deposits
   
107
     
59
     
166
 
Certificates of deposit
   
1
     
12
     
13
 
Borrowings
   
(63
)
   
52
     
(11
)
Total interest-bearing liabilities
   
69
     
123
     
192
 
Net change in net interest income
 
$
1,154
   
$
(71
)
 
$
1,083
 


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

GENERAL

Return on average assets and return on average equity are common methods of measuring operating results.  Annualized return on average assets increased to 1.40% from 1.16% for the three months ended September 30, 2017 and 2016, respectively.  Annualized return on average equity increased to 16.33% for the three months ended September 30, 2017 as compared to 13.32% for the three months ended September 30, 2016.  The increase in return on average assets and average equity was primarily the result of an increase in net interest income resulting from growth in earning assets, resulting in higher net income.  Net income amounted to $3.5 million and $2.5 million for the three months ended September 30, 2017 and 2016, respectively.  Average assets increased $127.0 million, or 14.7%, to $992.1 million for the three months ended September 30, 2017 as compared to $865.1 million for the three months ended September 30, 2016.  Average equity increased $9.8 million, or 13.0%, to $85.1 million for the three months ended September 30, 2017 as compared to $75.3 million for the three months ended September 30, 2016.
 
38

INTEREST INCOME

Interest income amounted to $9.1 million for the three months ended September 30, 2017 as compared to $7.8 million for the three months ended September 30, 2016, an increase of $1.3 million, or 16.7%.  The increase in average loan and securities balances had the greatest impact on interest income when comparing the three months ended September 30, 2017 and 2016, which was offset by a decrease in the yield on loans during the September 30, 2017 quarter. Average loan balances increased $96.6 million while the yield on loans decreased four basis points when comparing the three months ended September 30, 2017 and 2016.   Average securities increased $27.0 million and the yield on such securities increased 12 basis points when comparing the three months ended September 30, 2017 and 2016.

INTEREST EXPENSE

Interest expense amounted to $919,000 for the three months ended September 30, 2017 as compared to $727,000 for the three months ended September 30, 2016, an increase of $192,000 or 26.4%.  Increases in the average balances on interest-bearing liabilities and an increase in the rate paid contributed to the increase in interest expense.  As illustrated in the rate/volume table, interest expense increased $69,000 due to a $110.4 million increase in the average balances on interest-bearing liabilities.  The rate paid on interest-bearing liabilities increased four basis points to 0.46% for the three months ended September 30, 2017 compared to 0.42% for the three months ended September 30, 2016.  The average balance of NOW deposits grew by $103.2 million when comparing the three months ended September 30, 2017 and 2016. The average balance of savings and money market deposits increased $26.8 million and average balance of certificates of deposit increased $818,000 when comparing the three months ended September 30, 2017 and 2016. The average balance on borrowings decreased $20.5 million, and the rate increased 56 basis points when comparing the three months ended September 30, 2017 and 2016.

NET INTEREST INCOME

Net interest income increased $1.1 million to $8.2 million for the three months ended September 30, 2017 from $7.1 million for the three months ended September 30, 2016.  Net interest spread increased one basis point to 3.27% as compared to 3.26% when comparing the three months ended September 30, 2017 and 2016, respectively.  Net interest margin increased one basis point to 3.35% for the three months ended September 30, 2017 as compared to 3.34% for the three months ended September 30, 2016.  The growth in average loan and securities balances, led to an increase in net interest income when comparing the three months ended September 30, 2017 and 2016.

Net interest income on a taxable-equivalent basis includes the additional amount of interest income that would have been earned if the Company’s investment in tax-exempt securities and loans had been subject to federal and New York State income taxes yielding the same after-tax income. Tax equivalent net interest margin was 3.62% and 3.59% for the three months ended September 30, 2017 and 2016, respectively.

Due to the large portion of fixed-rate residential mortgages in the Company’s portfolio, interest rate risk is a concern and the Company will continue to monitor and adjust the asset and liability mix as much as possible to take advantage of the benefits and reduce the risks or potential negative effects of a rising rate environment.  Management attempts to mitigate the interest rate risk through balance sheet composition.  Several strategies are used to help manage interest rate risk such as maintaining a high level of liquid assets such as short-term federal funds sold and various investment securities and maintaining a high concentration of less interest-rate sensitive and lower-costing core deposits.

PROVISION FOR LOAN LOSSES

Management continues to closely monitor asset quality and adjust the level of the allowance for loan losses when necessary.  The amount recognized for the provision for loan losses is determined by management based on its ongoing analysis of the adequacy of the allowance for loan losses.  The provision for loan losses amounted to $347,000 and $543,000 for the three months ended September 30, 2017 and 2016, respectively.  The level of provision was higher for the three months ended September 30, 2016 as the result of strong growth in commercial real estate and commercial loans; this growth has slowed during the three months ended September 30, 2017.  Net charge-offs amounted to $271,000 and $52,000 for the three months ended September 30, 2017 and 2016, respectively, an increase of $219,000.

Allowance for loan losses to total loans receivable was 1.71% at September 30, 2017, and 1.74% at June 30, 2017.  Nonperforming loans amounted to $3.4 million and $3.6 million at September 30, 2017 and June 30, 2017, respectively. At September 30, 2017 and June 30, 2017, respectively, nonperforming assets were 0.40% and 0.45% of total assets and nonperforming loans were 0.53% and 0.58% of net loans.   The Company has not been an originator of “no documentation” mortgage loans, and the loan portfolio does not include any mortgage loans that the Company classifies as sub-prime.
 
39

NONINTEREST INCOME

   
For the three months
ended September 30,
   
Change from Prior Year
 
Noninterest income:
 
2017
   
2016
   
Amount
   
Percent
 
Service charges on deposit accounts
 
$
851
   
$
773
   
$
78
     
10.09
%
Debit card fees
   
566
     
491
     
75
     
15.27
 
Investment services
   
72
     
70
     
2
     
2.86
 
E-commerce fees
   
38
     
32
     
6
     
18.75
 
Other operating income
   
213
     
183
     
30
     
16.39
 
Total noninterest income
 
$
1,740
   
$
1,549
   
$
191
     
12.33
%

Noninterest income increased $191,000, or 12.3%, and totaled $1.7 million and $1.5 million for the three months ended September 30, 2017 and 2016, primarily due to increases in service charges and debit card fees resulting from continued growth in the number of checking accounts with debit cards, and increases in loan fee income which is included in other operating income.

NONINTEREST EXPENSE

   
For the three months
ended September 30,
   
Change from Prior Year
 
Noninterest expense:
 
2017
   
2016
   
Amount
   
Percent
 
Salaries and employee benefits
 
$
2,927
   
$
2,668
   
$
259
     
9.71
%
Occupancy expense
   
356
     
380
     
(24
)
   
(6.32
)
Equipment and furniture expense
   
113
     
120
     
(7
)
   
(5.83
)
Service and data processing fees
   
487
     
448
     
39
     
8.71
 
Computer software, supplies and support
   
143
     
146
     
(3
)
   
(2.05
)
Advertising and promotion
   
55
     
123
     
(68
)
   
(55.28
)
FDIC insurance premiums
   
93
     
114
     
(21
)
   
(18.42
)
Legal and professional fees
   
231
     
198
     
33
     
16.67
 
Other
   
488
     
557
     
(69
)
   
(12.39
)
Total noninterest expense
 
$
4,893
   
$
4,754
   
$
139
     
2.92
%

Noninterest expense increased $139,000, or 2.9%, to $4.9 million for the three months ended September 30, 2017 as compared to $4.8 million for the three months ended September 30, 2016. This increase was primarily due to an increase in salaries and employee benefits expenses, resulting from additional staffing for a new branch scheduled to open in the second quarter of fiscal 2018. Staffing was also increased within our lending department and customer service center.  The increase is also due to higher service and data processing fees resulting from costs associated with offering more services to customers through online banking.  Partially offsetting the aforementioned increases were decreases in advertising and promotional fees, occupancy expense, FDIC insurance premiums and other operating expenses.

INCOME TAXES

The provision for income taxes directly reflects the expected tax associated with the pre-tax income generated for the given year and certain regulatory requirements.  The effective tax rate was 25.7% for the three months ended September 30, 2017, compared to 24.9% for the three months ended September 30, 2016.   The effective tax rate is impacted by the benefits derived from tax exempt bond and loan income, the Company’s real estate investment trust subsidiary income, as well as the tax benefits derived from premiums paid to the Company’s pooled captive insurance subsidiary.

LIQUIDITY AND CAPITAL RESOURCES

Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates or prices such as interest rates, foreign currency exchange rates, commodity prices, and equity prices.  Greene County Bancorp, Inc.’s most significant form of market risk is interest rate risk since the majority of Greene County Bancorp, Inc.’s assets and liabilities are sensitive to changes in interest rates.  Greene County Bancorp, Inc.’s primary sources of funds are deposits and proceeds from principal and interest payments on loans, mortgage-backed securities and debt securities, with lines of credit available through the Federal Home Loan Bank and Atlantic Central Bankers Bank as needed.  While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit outflows, mortgage prepayments, and lending activities are greatly influenced by general interest rates, economic conditions and competition.
 
40

The Bank of Greene County’s unfunded loan commitments and unused lines of credit are as follows at September 30, 2017:

(In thousands)
 
2017
 
Unfunded loan commitments
 
$
40,619
 
Unused lines of credit
   
58,265
 
Total commitments
 
$
98,884
 

Greene County Bancorp, Inc. anticipates that it will have sufficient funds available to meet current loan commitments based on the level of cash and cash equivalents as well as the available-for-sale investment portfolio and borrowing capacity.

The Bank of Greene County and Greene County Commercial Bank met all applicable regulatory capital requirements at September 30, 2017 and June 30, 2017.  Consolidated shareholders’ equity represented 8.4% of total assets at September 30, 2017 and 8.5% at June 30, 2017.

(Dollars in thousands)
 
Actual
   
For Capital
Adequacy Purposes
   
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
   
Capital
Conservation Buffer
 
The Bank of Greene County
 
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
   
Actual
   
Required
 
                                                 
As of September 30, 2017:
                                               
                                                 
Total risk-based capital
 
$
92,092
     
15.6
%
 
$
47,187
     
8.0
%
 
$
58,983
     
10.0
%
   
7.613
%
   
1.875
%
Tier 1 risk-based capital
   
84,615
     
14.4
     
35,390
     
6.0
     
47,187
     
8.0
     
8.346
     
1.875
 
Common equity tier 1 capital
   
84,615
     
14.4
     
26,542
     
4.5
     
38,339
     
6.5
     
9.846
     
1.875
 
Tier 1 leverage ratio
   
84,615
     
8.5
     
39,618
     
4.0
     
49,522
     
5.0
     
4.543
     
1.875
 
                                                                 
As of June 30, 2017:
                                                               
                                                                 
Total risk-based capital
 
$
87,719
     
15.8
%
 
$
44,433
     
8.0
%
 
$
55,542
     
10.0
%
   
7.794
%
   
1.250
%
Tier 1 risk-based capital
   
80,671
     
14.5
     
33,325
     
6.0
     
44,433
     
8.0
     
8.525
     
1.250
 
Common equity tier 1 capital
   
80,671
     
14.5
     
24.994
     
4.5
     
36,102
     
6.5
     
10.024
     
1.250
 
Tier 1 leverage ratio
   
80,671
     
8.5
     
38,056
     
4.0
     
47,571
     
5.0
     
4.479
     
1.250
 
                                                                 
Greene County Commercial Bank
                                                               
                                                                 
As of September 30, 2017:
                                                               
                                                                 
Total risk-based capital
 
$
31,176
     
40.7
%
 
$
6,128
     
8.0
%
 
$
7,660
     
10.0
%
   
32.701
%
   
1.875
%
Tier 1 risk-based capital
   
31,176
     
40.7
     
4,596
     
6.0
     
6,128
     
8.0
     
34.701
     
1.875
 
Common equity tier 1 capital
   
31,176
     
40.7
     
3,447
     
4.5
     
4,979
     
6.5
     
36.201
     
1.875
 
Tier 1 leverage ratio
   
31,176
     
9.2
     
13,503
     
4.0
     
16,879
     
5.0
     
5.235
     
1.875
 
                                                                 
As of June 30, 2017:
                                                               
                                                                 
Total risk-based capital
 
$
30,095
     
40.1
%
 
$
6,011
     
8.0
%
 
$
7,514
     
10.0
%
   
32.053
%
   
1.250
%
Tier 1 risk-based capital
   
30,095
     
40.1
     
4,508
     
6.0
     
6,011
     
8.0
     
34.053
     
1.250
 
Common equity tier 1 capital
   
30,095
     
40.1
     
3,381
     
4.5
     
4,884
     
6.5
     
35.550
     
1.250
 
Tier 1 leverage ratio
   
30,095
     
9.6
     
12,508
     
4.0
     
15,635
     
5.0
     
5.624
     
1.250
 
 
41

Item 3.
Quantitative and Qualitative Disclosures About Market Risk

Not applicable to smaller reporting companies.

Item 4.
Controls and Procedures

Under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the  Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and in timely altering them to material information relating to the Company (or its consolidated subsidiaries) required to be filed in its periodic SEC filings.

There has been no change in the Company's internal control over financial reporting in connection with the quarterly evaluation that occurred during the Company's last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
 
42

Part II.
Other Information

  Item 1.
Legal Proceedings
Greene County Bancorp, Inc. and its subsidiaries are not engaged in any material legal proceedings at the present time.

Item 1A.
Risk Factors
Not applicable to smaller reporting companies.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
a)
Not applicable
b)
Not applicable
c)
Not applicable

Item 3.
Defaults Upon Senior Securities
Not applicable

Item 4.
Mine Safety Disclosures
Not applicable

Item 5.
Other Information
a)
Not applicable
b)
There were no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors during the period covered by this Form 10-Q.

Item 6.
Exhibits

 
Exhibits
 
 
Certification of Chief Executive Officer, adopted pursuant to Rule 13a-14(a)/15d-14(a)
 
Certification of Chief Financial Officer, adopted pursuant to Rule 13a-14(a)/15d-14(a)
 
Statement of Chief Executive Officer, furnished pursuant to U.S.C. Section 1350
 
Statement of Chief Financial Officer, furnished pursuant to U.S.C. Section 1350
 
101
The following materials from Greene County Bancorp, Inc. Form 10-Q for the quarter ended September 30, 2017, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Financial Condition, (iii) Consolidated Statements of Cash Flows and (iv) related notes, tagged as blocks of text.
 
43

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed by the undersigned thereunto duly authorized.

Greene County Bancorp, Inc.

Date:  November 13, 2017

By: /s/ Donald E. Gibson

Donald E. Gibson
President and Chief Executive Officer

Date:  November 13, 2017

By: /s/ Michelle M. Plummer

Michelle M. Plummer, CPA
Executive Vice President, Chief Financial Officer, and Chief Operating Officer
 
 
44