News Column

GREENE COUNTY BANCORP INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operation

February 14, 2014

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. 27



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Comparison of Financial Condition as of December 31, 2013 and June 30, 2013

ASSETS

Total assets of the Company were $652.7 million at December 31, 2013 as compared to $633.6 million at June 30, 2013, an increase of $19.1 million, or 3.0%. Securities available for sale and held to maturity amounted to $231.0 million, or 35.4% of assets, at December 31, 2013 as compared to $246.2 million, or 38.9% of assets, at June 30, 2013, a decrease of $15.2 million, or 6.2%. Net loans grew by $27.7 million, or 7.7%, to $387.1 million at December 31, 2013 as compared to $359.4 million at June 30, 2013.



CASH AND CASH EQUIVALENTS

Total cash and cash equivalents increased $5.5 million to $11.7 million at December 31, 2013 from $6.2 million at June 30, 2013. 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, including available-for-sale and held-to-maturity issues, decreased $15.2 million, or 6.2%, to $231.0 million at December 31, 2013 as compared to $246.2 million at June 30, 2013. Securities purchases totaled $11.1 million during the six months ended December 31, 2013 and consisted of state and political subdivision securities. Principal pay-downs and maturities during the six months amounted to $24.3 million, of which $8.9 million were mortgage-backed securities, $9.9 million were state and political subdivision securities, and $5.5 million were U.S. Treasury securities. Greene County Bancorp, Inc. held 37.1% of its securities portfolio at December 31, 2013 in 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. December 31, 2013 June 30, 2013 Percentage Percentage (Dollars in thousands) Balance of Portfolio Balance of Portfolio Securities available for sale: U.S. government sponsored enterprises $ 12,872 5.6 % $ 12,989 5.3 % State and political subdivisions 1,348 0.6 1,858 0.7 Mortgage-backed securities-residential 5,913 2.6 7,533 3.1 Mortgage-backed securities-multifamily 26,810 11.6 41,919 17.0 Asset-backed securities 15 0.0 16 0.0 Corporate debt securities 5,179 2.2 5,176 2.1 Total debt securities 52,137 22.6 69,491 28.2 Equity securities 164 0.1 153 0.1 Total securities available for sale 52,301 22.7 69,644 28.3 Securities held to maturity: U.S. treasury securities - - 5,500 2.2 U.S. government sponsored enterprises 3,000 1.3 2,999 1.2 State and political subdivisions 84,417 36.5 82,801 33.7 Mortgage-backed securities-residential 25,191 10.9 29,077 11.8 Mortgage-backed securities-multifamily 64,989 28.1 55,086 22.4 Other securities 1,061 0.5 1,056 0.4 Total securities held to maturity 178,658 77.3 176,519 71.7 Total securities $ 230,959 100.0 % $ 246,163 100.0 % During the six and three months ended December 31, 2013, $11.7 million of securities available-for-sale were transferred to held-to-maturity and included primarily mortgage-backed securities. These securities were transferred at fair value which reflected a net unrealized loss of $805,000. This unrealized loss is being accreted to other comprehensive income over the remaining average lives of these securities. During the six and three months ended December 31, 2013, there were no sales of securities and no gains or losses were recognized. During the six and three months ended December 31, 2012, a gain on sale of $10,000 was recognized on a security that was previously written off as other-than-temporarily impaired. There was no other-than-temporary impairment loss recognized during the six and three months ended December 31, 2013 and 2012. 28



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LOANS

Net loans receivable increased $27.7 million, or 7.7%, to $387.1 million at December 31, 2013 from $359.4 million at June 30, 2013. The loan growth experienced during the six months consisted primarily of $11.4 million in nonresidential real estate loans, $13.3 million in residential mortgage loans, $692,000 in construction loans, $243,000 in home equity loans, $189,000 in consumer loans and $2.6 million in commercial loans, and was partially offset by an $817,000 decrease in multi-family mortgage loans. The continued low interest rate environment and we believe 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. (Dollars in thousands) December 31, 2013 June 30, 2013 Percentage of Percentage of Real estate mortgages: Balance Portfolio Balance Portfolio Residential mortgage $ 225,833 57.4 % $ 212,526 58.1 % Nonresidential mortgage 102,827 26.1 91,482 25.0 Construction and land 6,906 1.8 6,214 1.7 Multi-family 4,694 1.2 5,511 1.5 Total real estate mortgages 340,260 86.5 315,733 86.3 Home equity 20,614 5.2 20,371 5.6 Consumer installment 4,267 1.1 4,078 1.1 Commercial loans 28,297 7.2 25,657 7.0 Total gross loans 393,438 100.0 % 365,839 100.0 %

Deferred fees and costs 816 627 Allowance for loan losses (7,171 ) (7,040 ) Total net loans $ 387,083$ 359,426 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 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. 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 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. 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. 29



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Analysis of allowance for loan losses activity

At or for the six months ended December 31, (Dollars in thousands) 2013 2012 Balance at the beginning of the period $ 7,040 $



6,177

Charge-offs:

Residential real estate mortgages 282 273 Nonresidential mortgage 87 20 Multi-family 24 - Home equity 8 - Consumer installment 120 132 Commercial loans 205 15 Total loans charged off 726 440 Recoveries: Consumer installment 32 42 Commercial loans 4 - Total recoveries 36 42 Net charge-offs 690 398 Provisions charged to operations 821



985

Balance at the end of the period $ 7,171 $



6,764

Net charge-offs to average loans outstanding 0.37 % 0.24 % Net charge-offs to nonperforming assets 20.14 % 11.03 % Allowance for loan losses to nonperforming loans 114.70 % 95.60 % Allowance for loan losses to total loans receivable 1.82 %



1.91 %

Nonaccrual Loans and Nonperforming Assets

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. 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 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 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. Loans that are either delinquent a minimum of 60 days or are on nonaccrual status, and are not individually considered impaired, are either designated as Special Mention or Substandard, and the allocation of the allowance for loan loss is based upon the risk associated with such designation. For further discussion and detail regarding the Allowance for Loan Losses and impaired loans please refer to Note (5) Credit Quality of Loans and Allowance for Loan Losses. 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. 30



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Analysis of Nonaccrual Loans and Nonperforming Assets

At December At June 30, (Dollars in thousands) 31, 2013 2013 Nonaccrual loans: Residential $ 3,427$ 3,599 Nonresidential 1,945 2,018 Multi-family 0 463 Home equity loans 270 51 Consumer installment 23 -- Commercial loans 314 195 Total nonaccrual loans 5,979 6,326 90 days & accruing Residential 273 559 Total 90 days & accruing 273 559 Real Estate Owned: Residential 404 100 Nonresidential 196 196 Total real estate owned 600 296 Total nonperforming assets $ 6,852$ 7,181 Troubled debt restructuring: Nonperforming (included above) $ 2,444$ 1,518 Performing (accruing and excluded above) 2,060



1,261

Total nonperforming assets as a percentage of total assets 1.05 % 1.13 % Total nonperforming loans to net loans 1.62



% 1.92 %

The table below details additional information related to nonaccrual loans for the six and three months ended December 31:

For the six months For the three months ended December 31, ended December 31 (In thousands) 2013 2012 2013 2012 Interest income that would have been recorded if loans had been performing in accordance with original terms $ 208$ 275$ 83$ 125 Interest income that was recorded on nonaccrual loans 64 126 35 72 The Company identifies impaired loans and measures the impairment in accordance with FASB ASC subtopic "Receivables - Loan Impairment". A loan is considered impaired when it is probable that the borrower will be unable to repay the loan according to the original contractual terms of the loan agreement or the loan is restructured in a troubled debt restructuring. The table below details additional information on impaired loans as of the dates indicated: December June 30, (In thousands) 31, 2013 2013



Balance of impaired loans, with a valuation allowance $ 6,426

$ 6,051 Allowances relating to impaired loans included in allowance for loan losses

1,066



1,179

Balance of impaired loans, without a valuation allowance 798 1,635 For the six months For the three months ended December 31, ended December 31 (In thousands) 2013 2012 2013 2012 Average balance of impaired loans for the periods ended $ 7,881$ 7,788$ 7,699$ 8,477 Interest income recorded on impaired loans during the periods ended 105 182 46 105 31



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Nonperforming assets amounted to $6.9 million at December 31, 2013 and $7.2 million as of June 30, 2013, a decrease of approximately $329,000 or 4.6%, and total impaired loans amounted to $7.2 million at December 31, 2013 compared to $7.7 million at June 30, 2013, a decrease of $462,000 or 6.0%. The decrease in nonperforming assets resulted from an increase in the level of charge-off activity during the period which totaled $726,000 for the six months ended December 31, 2013, loans returned to performing status of $485,000 and the payoff of $1.8 million in nonperforming loans. This activity was partially offset by the addition of $2.5 million in loans being added to nonperforming status during the six months ended December 31, 2013. Loans on nonaccrual status totaled $6.0 million at December 31, 2013 of which $3.8 million were in the process of foreclosure. Included in nonaccrual loans were $1.7 million of loans which were less than 90 days past due at December 31, 2013, 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 $346,000 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. The growth in nonperforming assets is also due in part to the extended length of time required to meet all of the legal requirements mandated by New York State law prior to a foreclosure sale, which may be in excess of two years.



DEPOSITS

Total deposits decreased $9.0 million, or 1.6%, to $549.4 million at December 31, 2013 from $558.4 million at June 30, 2013. Certificates of deposits decreased $5.8 million, or 10.3%, to $50.4 million at December 31, 2013 from $56.2 million at June 30, 2013. With the continued low interest rate environment, certificates of deposit continue to decline. Savings deposits decreased $2.6 million, or 1.6%, and money market deposits decreased $1.8 million, or 2.1%, when comparing these same periods. These decreases were partially offset by a $1.3 million or 2.2% increase in noninterest bearing deposits to $59.2 million at December 31, 2013 from $57.9 million at June 30, 2013. Of the overall net decrease, $4.6 million was a decrease in municipal deposits held at the commercial bank subsidiary. These deposits tend to fluctuate throughout the year based on tax collection dates and the usage of these assessments by the municipalities during their fiscal year. The Company has strategically maintained a complementary mix of municipalities with differing fiscal year end dates, and closely monitors the cash flows of these municipal accounts to ensure that the volatility of these deposits is minimized. At December 31, 2013, municipal deposits comprised 26.5% of total deposits. At December Percentage of At June Percentage of (In thousands) 31, 2013 Portfolio 30, 2013 Portfolio Noninterest bearing deposits $ 59,198 10.8 % $ 57,926 10.4 % Certificates of deposit 50,384 9.2 56,181 10.1 Savings deposits 157,442 28.6 160,004 28.6 Money market deposits 83,892 15.3 85,685 15.3 NOW deposits 198,519 36.1 198,643 35.6 Total deposits $ 549,435 100.0 % $ 558,439 100.0 % BORROWINGS At December 31, 2013, The Bank of Greene County had pledged approximately $198.9 million of its residential mortgage portfolio as collateral for borrowing at the Federal Home Loan Bank ("FHLB"). The maximum amount of funding available from the FHLB through either overnight advances or term borrowings was $163.1 million at December 31, 2013, of which $8.5 million in long-term borrowings were outstanding at December 31, 2013. There were $31.7 million of overnight borrowings outstanding at December 31, 2013. Interest rates on overnight borrowings are determined at the time of borrowing. Long-term borrowings consisted of fixed rate, fixed term advances with a weighted average rate of 1.5% and a weighted average maturity of 59 months. The Bank has recently increased its level of long-term borrowing to strengthen its overall interest rate risk position, to help mitigate against rising interest rates. The Bank also pledges securities as collateral at the Federal Reserve Bank discount window for overnight borrowings. At December 31, 2013, approximately $5.2 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 December 31, 2013. The Bank of Greene County has established an unsecured line of credit with Atlantic Central Bankers Bank for $6.0 million and an additional $5.0 million with another depository institution. These lines of credit provide for overnight borrowing and the interest rate is determined at the time of the borrowing. At December 31, 2013 and 2012 there were no balances outstanding with Atlantic Central Bankers Bank or the other depository institution, and there was no activity during the six months ended December 31, 2013 and 2012. Scheduled maturities of term borrowings at December 31, 2013 were as follows: (In thousands) Fiscal year end 2017 500 Due after 2018 8,000 $ 8,500 EQUITY Shareholders' equity increased to $58.4 million at December 31, 2013 from $56.1 million at June 30, 2013, as net income of $3.5 million was partially offset by dividends declared and paid of $668,000, and a $645,000 increase in accumulated other comprehensive loss. Other changes in equity, totaling a $134,000 increase, were the result of options exercised with the Company's 2008 Stock Option Plan. 32



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Comparison of Operating Results for the Three and Six Months Ended December 31, 2013 and 2012

Average Balance Sheet The following table sets forth certain information relating to Greene County Bancorp, Inc. for the six and three months ended December 31, 2013 and 2012. 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 non-performing loans. The loan yields include net amortization of certain deferred fees and costs that are considered adjustments to yields. Six Months Ended December 31, 2013 and 2012 2013 2012 Average Interest Average Interest Outstanding Earned / Average



Outstanding Earned / Average (Dollars in thousands) Balance

Paid Yield / Rate Balance Paid Yield / Rate Interest Earning Assets: Loans receivable, net1 $ 380,121$ 9,124 4.80 % $ 343,212$ 9,168 5.34 % Securities2 240,851 2,621 2.18 229,444 3,017 2.63 Interest bearing bank balances and federal funds 4,163 8 0.38 12,340 22 0.36 FHLB stock 1,347 24 3.56 1,326 31 4.68 Total interest earning assets 626,482 11,777 3.76 % 586,322 12,238 4.17 % Cash and due from banks 6,356 8,050 Allowance for loan losses (6,972 ) (6,417 ) Other non-interest earning assets 16,902 17,705 Total assets $ 642,768$ 605,660 Interest-Bearing Liabilities: Savings and money market deposits $ 250,341$ 471 0.38 % $ 224,245$ 561 0.50 % NOW deposits 208,296 454 0.44 194,201 498 0.51 Certificates of deposit 52,918 174 0.66 67,775 278 0.82 Borrowings 13,701 61 0.89 11,723 139 2.37 Total interest bearing liabilities 525,256 1,160 0.44 % 497,944 1,476 0.59 % Non-interest bearing deposits 58,281 50,558 Other non-interest bearing liabilities 2,189 3,485 Shareholders' equity 57,042 53,673 Total liabilities and equity $ 642,768$ 605,660 Net interest income $ 10,617$ 10,762 Net interest rate spread 3.32 % 3.58 % Net earnings assets $ 101,226$ 88,378 Net interest margin 3.39 % 3.67 % Average interest earning assets to average interest bearing liabilities 119.27 % 117.75 %

-------------------------------------------------------------------------------- 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. 33



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Index Three Months Ended December 31, 2013 and 2012 2013 2012 Average Interest Average Interest Outstanding Earned / Average Outstanding Earned / Average (Dollars in thousands) Balance Paid Yield / Rate Balance Paid Yield / Rate Interest Earning Assets: Loans receivable, net1 $ 388,126$ 4,626 4.77 % $ 349,120$ 4,590 5.26 % Securities2 236,807 1,305 2.20 231,515 1,481 2.56 Interest bearing bank balances and federal funds 7,668 6 0.31 22,959 18 0.30 FHLB stock 1,322 14 4.24 1,177 18 6.12 Total interest earning assets 633,923 5,951 3.76 % 604,771 6,107 4.04 % Cash and due from banks 6,507 8,588 Allowance for loan losses (6,964 ) (6,577 ) Other non-interest earning assets 16,860 17,345 Total assets $ 650,326$ 624,127 Interest-Bearing Liabilities: Savings and money market deposits $ 250,270$ 233 0.37 % $ 234,131$ 287 0.49 % NOW deposits 217,749 232 0.43 207,212 259 0.50 Certificates of deposit 51,540 84 0.65 65,874 127 0.77 Borrowings 13,140 33 1.00 8,402 64 3.05 Total interest bearing liabilities 532,699 582 0.44 % 515,619 737 0.57 % Non-interest bearing deposits 57,890 51,430 Other non-interest bearing liabilities 2,114 2,801 Shareholders' equity 57,623 54,277 Total liabilities and equity $ 650,326$ 624,127 Net interest income $ 5,369 5,370 Net interest rate spread 3.32 % 3.47 % Net earnings assets $ 101,224$ 89,152 $ Net interest margin 3.39 % 3.55 % Average interest earning assets to average interest bearing liabilities 119.00 % 117.29 %

-------------------------------------------------------------------------------- 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. 34



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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. Six Months Ended December 31, Three Months Ended December 31, (Dollars in thousands) 2013 versus 2012 2013 versus 2012 Increase/(Decrease) Total Increase/(Decrease) Total Due To Increase/ Due To Increase/ Volume Rate (Decrease) Volume Rate (Decrease) Interest Earning Assets: Loans receivable, net1 $ 932$ (976 )$ (44 )$ 486$ (450 ) $ 36 Securities2 143 (539 ) (396 ) 34 (211 ) (177 ) Interest bearing bank balances and federal funds (15 ) 1 (14 ) (12 ) 1 (11 ) FHLB stock - (7 ) (7 ) 2 (6 ) (4 ) Total interest earning assets 1,060 (1,521 ) (461 ) 510 (666 ) (156 ) Interest-Bearing Liabilities: Savings and money market deposits 58 (148 ) (90 ) 19 (73 ) (54 ) NOW deposits 32 (76 ) (44 ) 12 (39 ) (27 ) Certificates of deposit (55 ) (49 ) (104 ) (25 ) (18 ) (43 ) Borrowings 20 (98 ) (78 ) 25 (56 ) (31 ) Total interest bearing liabilities 55 (371 ) (316 ) 31 (186 ) (155 ) Net change in net interest income $ 1,005$ (1,150 )$ (145 )$ 479$ (480 ) $ (1 )

-------------------------------------------------------------------------------- 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 decreased to 1.08% for the six months ended December 31, 2013 as compared to 1.13% for the six months ended December 31, 2012, and was 1.06% and 1.07% for the three months ended December 31, 2013 and 2012, respectively. Annualized return on average equity increased to 12.20% for the six months and 11.97% for the three months ended December 31, 2013 as compared to 12.79% for the six months and 12.30% for the three months ended December 31, 2012. The decrease in return on average assets and return on average equity was primarily the result of growth in both average assets and average equity with minimal growth in net income. Net income amounted to $3.5 million and $3.4 million for the six months ended December 31, 2013 and 2012, respectively, an increase of $46,000 or 1.3% and amounted to $1.7 million for the three months ended December 31, 2013 and 2012, respectively, an increase of $56,000 or 3.4%. Average assets increased $37.1 million, or 6.1% to $642.8 million for the six months ended December 31, 2013 as compared to $605.7 million for the six months ended December 31, 2012. Average equity increased $3.3 million, or 6.1%, to $57.0 million for the six months ended December 31, 2013 as compared to $53.7 million for the six months ended December 31, 2012. Average assets increased $26.2 million, or 4.2% to $650.3 million for the three months ended December 31, 2013 as compared to $624.1 million for the three months ended December 31, 2012. Average equity increased $3.3 million, or 6.1% to $57.6 million for the quarter ended December 31, 2013 as compared to $54.3 million for the three months ended December 31, 2012. 35



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INTEREST INCOME

Interest income amounted to $11.8 million and $6.0 million for the six and three months ended December 31, 2013, respectively, as compared to $12.2 million and $6.1 million for the six and three months ended December 31, 2012, respectively. Interest income decreased $461,000, and $156,000 when comparing the six and three months ended December 31, 2013 and 2012. The decrease was the result of a decline in yields on interest earning assets of 41 basis points and 28 basis points when comparing the six and three months ended December 31, 2013 and 2012, respectively, offset by increases in average earning asset balances of $40.2 million and $29.2 million for these same periods. Average loan balances increased $36.9 million while the yield on loans decreased 54 basis points when comparing the six months ended December 31, 2013 and 2012, and average securities increased $11.4 million while the yield on such securities decreased 45 basis points when comparing these same periods. Average loan balances increased $39.0 million while the yield on loans decreased 49 basis points when comparing the three months ended December 31, 2013 and 2012, and average securities increased $5.3 million while the yield on such securities decreased 36 basis points when comparing these same periods.



INTEREST EXPENSE

Interest expense amounted to $1.2 million and $582,000 for the six and three months ended December 31, 2013, respectively, as compared to $1.5 million and $737,000 for the six and three months ended December 31, 2012, respectively. Interest expense decreased $316,000 and $155,000 when comparing the six and three months ended December 31, 2013 and 2012. Decreases in rates on interest bearing liabilities contributed to the decrease in overall interest expense. As illustrated in the rate/volume table, interest expense was reduced $371,000 due to a 15 basis point decrease in the average rate on interest bearing liabilities when comparing the six months ended December 31, 2013 and 2012, and was reduced $186,000 due to a 13 basis point decrease in the average rate on interest bearing liabilities when comparing the three months ended December 31, 2013 and 2012. The average rate paid on NOW deposits decreased 7 basis points when comparing the six and three months ended December 31, 2013 and 2012. The average balance of such accounts increased by $14.1 million when comparing the six months ended December 31, 2013 and 2012, and increased by $10.5 million when comparing the three months ended December 31, 2013 and 2012. The average balance of certificates of deposit decreased by $14.9 million and the average rate paid decreased by 16 basis points when comparing the six months ended December 31, 2013 and 2012. The average balance of certificates of deposit decreased by $14.3 million and the average rate paid decreased by 12 basis points when comparing the three months ended December 31, 2013 and 2012. The average balance of savings and money market deposits increased by $26.1 million when comparing the six months ended December 31, 2013 and 2012 and increased by $16.1 million when comparing the three months ended December 31, 2013 and 2012. The average rate paid on savings and money markets decreased 12 basis points when comparing the six and three month ended December 31, 2013 and 2012. The average balance of borrowings increased $2.0 million and $4.7 million when comparing the six and three months ended December 31, 2013 and 2012. The rate paid on these borrowings decreased 148 basis points and 205 basis points when comparing the same periods. NET INTEREST INCOME Net interest income decreased $145,000 to $10.6 million for the six months ended December 31, 2013 from $10.8 million for the six months ended December 31, 2012. Net interest spread decreased 26 basis points to 3.32% as compared to 3.58% when comparing the six months ended December 31, 2013 and 2012, respectively. Net interest margin decreased 28 basis points to 3.39% for the six months ended December 31, 2013 as compared to 3.67% for the six months ended December 31, 2012. Net interest income totaled $5.4 million for the three months ended December 31, 2013 and 2012. Net interest spread decreased 15 basis points to 3.32% as compared to 3.47% when comparing the three months ended December 31, 2013 and 2012, respectively. Net interest margin decreased 16 basis points to 3.39% for the three months ended December 31, 2013 as compared to 3.55% for the three months ended December 31, 2012. The continued decline in rates, partially offset by growth in interest earning asset balances has resulted in the narrowing of the spread and margin when comparing the six and three months ended December 31, 2013 and 2012. 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. 36



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Index

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 $821,000 and $985,000 for the six months ended December 31, 2013 and 2012, respectively, and was $508,000 and $541,000 for the three months ended December 31, 2013 and 2012, respectively. The level of allowance for loan losses to total loans receivable decreased to 1.82% as of December 31, 2013 as compared to 1.92% as of June 30, 2013. Nonperforming loans amounted to $6.3 million and $6.9 million at December 31, 2013 and June 30, 2013, respectively. Net charge-offs amounted to $690,000 and $398,000 for the six months ended December 31, 2013 and 2012, respectively, an increase of $292,000. Net charge-offs amounted to $365,000 and $313,000 for the three months ended December 31, 2013 and 2012, respectively, and increase of $52,000. At December 31, 2013, nonperforming assets were 1.05% of total assets and nonperforming loans were 1.62% 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.



NONINTEREST INCOME

Noninterest income increased $91,000, or 3.5%, to $2.7 million for the six months ended December 31, 2013 as compared to $2.6 million for the six months ended December 31, 2012, primarily due to an increase in debit card fees resulting from continued growth in the number of checking accounts with debit cards. Noninterest income increased $20,000, or 1.5%, for the three months ended December 31, 2013 as compared to December 31, 2012 and totaled $1.3 million for both periods. When comparing the three months ended December 31, 2013 and 2012, the increase in debit cards fees was offset by a decrease in service charges on deposit accounts.



NONINTEREST EXPENSE

Noninterest expense increased $144,000, or 1.9%, when comparing the six months ended December 31, 2013 and 2012 and totaled $7.5 million and $7.4 million, respectively. The increase was primarily due to an increase in salaries and employee benefits of $184,000 resulting from expenses recognized for the Company's phantom stock option plan as well as various other employee benefits, and was partially offset by a decrease in medical benefits resulting from the implementation of a self-insurance plan during 2013 that are covered under a stop loss policy. The increase was also due to a $114,000 increase in legal and professional fees resulting from an increase in consulting services utilized during the six months ended December 31, 2013. This increase was partially offset by a $155,000 decrease in service and data processing fees due to lower debit card processing fees resulting from the renegotiation of the contract between the Company and its vendor which provided for reduced fees during the six months ended December 31, 2013. It is expected that these fees will increase in subsequent periods as these incentives have expired. Noninterest expense remained unchanged when comparing the three months ended December 31, 2013 and 2012 and total $3.7 million for both periods. Similar to results for the six months ended December 31, 2013, salaries and employee benefits increased $63,000 and legal and professional fees increased $66,000 and service and data processing fees decrease $94,000 when comparing the three months ended December 31, 2013 and 2012.



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 29.0% and 28.9% for the six and three months ended December 31, 2013, compared to 30.4% and 29.8% for the six and three months ended December 31, 2012. The effective tax rate has continued to decline as a result of purchases of tax exempt bonds and loans as well as continued loan growth within the Company's real estate investment trust 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. Mortgage loan commitments, including construction and land loan commitments, totaled $13.7 million at December 31, 2013. The unused portion of overdraft lines of credit amounted to $714,000, the unused portion of home equity lines of credit amounted to $7.3 million, and the unused portion of commercial lines of credit and commercial loan commitments amounted to $11.9 million at December 31, 2013. 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. 37



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The Bank of Greene County and Greene County Commercial Bank met all applicable regulatory capital requirements at December 31, 2013 and June 30, 2013. Consolidated shareholders' equity represented 8.9% of total assets at December 31, 2013 and 8.9% of total assets of June 30, 2013.


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Source: Edgar Glimpses


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