UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-K

☒          ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2020
OR
☐          TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transaction period from ___________________ to ______________________

Commission File Number: 0-25165


GREENE COUNTY BANCORP, INC.
(Name of registrant as specified in its Charter)

United States

14-1809721
(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)

302 Main Street, Catskill, New York

12414
(Address of Principal Executive Office)

(Zip Code)

(518) 943-2600
(Issuer’s Telephone Number including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

Title of class
Trading symbol
Name of exchange on which registered
Common Stock, $0.10 par value
GCBC
The Nasdaq Stock Market

Securities Registered Pursuant to Section 12(g) of the Act:

None
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES   ☐          NO   ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.
YES   ☐          NO   ☒

Indicate by check mark 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 past twelve 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☒

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 December 31, 2019, there were 8,536,414 shares outstanding of the Registrant’s common stock of which 2,928,262 were shares of voting stock held by non-affiliates of the Registrant. Computed by reference to the closing price of Common Stock of $28.79 on December 31, 2019, the aggregate value of stock held by non-affiliates was $84,305,000.  As of September 11, 2020, there were 8,513,414 shares outstanding of the Registrant’s common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the 2020 Annual Meeting of Shareholders are incorporated by reference into Part II and III of this Form 10-K where indicated.


GREENE COUNTY BANCORP, INC. AND SUBSIDIARIES
FORM 10-K
 
     
Index
   
 
Part I
       
 
Item 1.
   
4-23
 
Item 1A.
   
23
 
Item 1B.
   
23
 
Item 2.
   
23
 
Item 3.
   
23
 
Item 4.
   
23
           
 
Part II
       
 
Item 5.
   
24
 
Item 6.
   
25
 
Item 7.
   
26-45
 
Item 7A.
   
45-47
 
Item 8.
   
48-90
 
Item 9.
   
90
 
Item 9A.
   
90
 
Item 9B.
   
91
           
 
Part III
       
 
Item 10.
   
91
 
Item 11.
   
91
 
Item 12.
   
91
 
Item 13.
   
91
 
Item 14.
   
91
           
 
Part IV
       
 
Item 15.
   
91
 
Item 16.
   
92
       
93

PART I

ITEM 1.
Business

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This annual 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 annual 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,

(c)
economic or policy changes related to the COVID-19 pandemic,

(d)
legislative and regulatory changes,

(e)
monetary and fiscal policies of the U.S. Treasury and the Federal Reserve,

(f)
changes in the quality or composition of Greene County Bancorp, Inc.’s loan and investment portfolios,

(g)
deposit flows,

(h)
competition, and

(i)
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.
 
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 it 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.

4

Allowance for loan losses to total loans receivable:  The allowance for loan losses to total loans receivable ratio is calculated by dividing the balance in the allowance for loan losses by the gross loans outstanding at the end of the period. This ratio is utilized to show the historical relationship between the allowance for loan losses and the balances of loans at the end each period presented in conjunction with other financial information related to asset quality such as nonperforming loans, charge-offs, and classified assets to indicate the overall adequacy of the allowance for loan losses. The Company has adjusted the calculation of the allowance for loan losses to total loans receivable to exclude loans that are 100% guaranteed by the Small Business Administration as these present no credit risk to the Company.  With significant growth in SBA loans at June 30, 2020, this adjusted calculation is used to provide a better basis of comparison with other periods presented within the financial statements presented.

General

In December 2019, an outbreak of a novel strain of coronavirus (“COVID-19”) originated in Wuhan, China and has since spread to other countries, including the U.S. On March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. In addition, multiple jurisdictions in the U.S. have declared states of emergency. It is anticipated that these impacts will continue for some time. Potential impacts to the Company include disruptions or restrictions on our employees’ ability to work, lack of demand for new loans or the borrower’s ability to pay the required monthly payments. Changes to the operating environment may also be impacted. Operations include loan applications, processing or other areas requiring contact with the borrower. These changes may increase operating costs. Further impacts may include increased repurchase risk or loan defaults. The future effects of these issues are unknown.

Greene County Bancorp, MHC and Greene County Bancorp, Inc.

Greene County Bancorp, MHC was formed in December 1998 as part of The Bank of Greene County’s mutual holding company reorganization. In 2001, Greene County Bancorp, MHC converted from a state to a federal charter.  The Federal Reserve Board regulates Greene County Bancorp, MHC.  Greene County Bancorp, MHC owns 54.1% of the issued and outstanding common stock of Greene County Bancorp, Inc.  The remaining shares of Greene County Bancorp, Inc. are owned by public stockholders and The Bank of Greene County’s Employee Stock Ownership Plan. At June 30, 2020, Greene County Bancorp, Inc.’s assets consisted primarily of its investment in The Bank of Greene County and cash.  At June 30, 2020, 3,904,150 shares of Greene County Bancorp, Inc.’s common stock, par value $0.10 per share, were held by the public, including executive officers and directors, 97,926 shares were held as Treasury stock and 4,609,264 shares were held by Greene County Bancorp, MHC, Greene County Bancorp, Inc.’s mutual holding company.   Greene County Bancorp, MHC does not engage in any business activity other than to hold a majority of Greene County Bancorp, Inc.’s common stock and to invest any liquid assets of Greene County Bancorp, MHC.

Greene County Bancorp, Inc. operates as the federally chartered holding company of The Bank of Greene County, a federally chartered savings bank.  Greene County Bancorp, Inc. was organized in December of 1998 at the direction of the Board of Trustees of The Bank of Greene County (formerly Greene County Savings Bank) for the purpose of acting as the holding company of The Bank of Greene County.  In 2001, Greene County Bancorp, Inc. converted its charter from a Delaware corporation regulated by the Board of Governors of the Federal Reserve System to a federal corporation regulated by the Office of Thrift Supervision.  Effective in July 2011, the regulation of federally chartered savings and loan holding companies was transferred to the Federal Reserve Board under the Dodd-Frank Act.  Greene County Bancorp, Inc.’s principal business is overseeing and directing the business of The Bank of Greene County and monitoring its cash position.

The Bank of Greene County

The Bank of Greene County was organized in 1889 as The Building and Loan Association of Catskill, a New York-chartered savings and loan association.  In 1974, The Bank of Greene County converted to a New York mutual savings bank under the name Greene County Savings Bank.  In conjunction with the reorganization and the offering completed in December 1998, which resulted in the organization of Greene County Bancorp, Inc., Greene County Savings Bank changed its name to The Bank of Greene County.  In November 2006, The Bank of Greene County converted its charter to a federal savings bank charter.  The Bank of Greene County’s deposits are insured by the Deposit Insurance Fund, as administered by the Federal Deposit Insurance Corporation, up to the maximum amount permitted by law.

The Bank of Greene County’s principal business consists of attracting retail deposits from the general public in the areas surrounding its branches and investing those deposits, together with funds generated from operations and borrowings, primarily in residential mortgage loans, commercial real estate mortgage loans, consumer loans, home equity loans and commercial business loans.  In addition, The Bank of Greene County invests a significant portion of its assets in state and political subdivision securities and mortgage-backed securities.  The Bank of Greene County’s revenues are derived principally from the interest on its residential and commercial real estate mortgages, and to a lesser extent, from interest on consumer and commercial loans and other types of securities, as well as from servicing fees and service charges and other fees collected on its deposit accounts, and debit card fee income. Through its affiliation with Fenimore Asset Management and Infinex Corporation, The Bank of Greene County offers investment alternatives for customers, which also contributes to the Bank’s revenues.  Infinex Corporation acquired Essex National Securities LLP in 2016 allowing the Bank to rebrand these alternative investment services as Greene Investment Services.  The Bank of Greene County’s primary sources of funds are deposits, borrowings from the Federal Home Loan Bank of New York (“FHLB”), and principal and interest payments on loans and securities.

5

Greene County Commercial Bank
 
The Bank of Greene County operates a limited-purpose subsidiary, Greene County Commercial Bank.  Greene County Commercial Bank was formed in January 2004 as a New York State-chartered limited purpose commercial bank.  Greene County Commercial Bank has the power to receive deposits only to the extent of accepting for deposit the funds of the United States and the State of New York and their respective agents, authorities and instrumentalities, and local governments as defined in Section 10(a)(1) of the New York General Municipal Law.

Greene Property Holdings, Ltd.
 
The Bank of Greene County also operates a real estate investment trust, Greene Property Holdings, Ltd., Greene Property Holdings, Ltd. was formed in June 2011 as a New York corporation that elected under the Internal Revenue Code to be taxed as a real estate investment trust.  The Bank of Greene County transferred beneficial ownership of certain mortgages and notes to Greene Property Holdings, Ltd. in exchange for 100% of the common stock of Greene Property Holdings, Ltd. The Bank of Greene County continues to service these mortgage customers pursuant to a management and servicing agreement with Greene Property Holdings, Ltd.
 
Administrative offices for Greene County Bancorp, MHC, Greene County Bancorp, Inc., The Bank of Greene County, Greene County Commercial Bank, and Greene Property Holdings, Ltd. are located at 302 Main Street, Catskill, New York 12414-1317.  The telephone number is (518) 943-2600.
 
Greene Risk Management, Inc.

Greene Risk Management, Inc. was formed in December 2014 as a pooled captive insurance company subsidiary of Greene County Bancorp, Inc., incorporated in the State of Nevada.  The purpose of this company is to provide additional insurance coverage for the Company and its subsidiaries related to the operations of the Company for which insurance may not be economically feasible.

Greene Risk Management, Inc.’s administrative office is located at 101 Convention Center Drive, Suite 850, Las Vegas, NV 89109-2003.  Its telephone number is (702) 949-0110.
 
Greene County Bancorp, Inc. and Subsidiaries

(in thousands)
                       
Balance sheet data as of June 30, 2020:
 
Assets
   
Deposits
   
Borrowings
   
Equity
 
Greene County Bancorp, Inc. (consolidated)
 
$
1,676,803
   
$
1,501,075
   
$
25,484
   
$
128,805
 
The Bank of Greene County (consolidated)
   
1,673,263
     
1,503,280
     
18,484
     
130,876
 
Greene County Commercial Bank
   
674,750
     
579,269
     
-
     
62,472
 
Greene Property Holdings, Ltd.
   
578,132
     
-
     
-
     
578,132
 
Greene Risk Management, Inc.
   
4,262
     
-
     
-
     
2,700
 

Market Area

The Bank of Greene County is a community bank offering a variety of financial services to meet the needs of the communities it serves.  At June 30, 2020, The Bank of Greene County operated 16 full-service banking offices, operations center and lending center located in its market area within the Hudson Valley Region of New York State.
 
As of 2019, the Greene County population was approximately 47,000, Columbia County was approximately 60,000, Albany County was approximately 307,000 and Ulster County was approximately 179,000.  Greene County is primarily rural, and the major industry consists of tourism associated with the several ski facilities and festivals located in the Catskill Mountains.  Greene County has no concentrations of manufacturing industry.  Greene County is contiguous to the Albany-Schenectady-Troy metropolitan statistical area.  The close proximity of Greene County to the city of Albany has made it a “bedroom” community for persons working in the Albany capital area. Greene County government and the Coxsackie Correctional Facilities are the largest employers in the County.  Other large employers within the Company’s market area include the Hunter Mountain and Ski Windham resort areas, LaFarge, Columbia Memorial Hospital, Taconic Farms, Ginsberg’s Foods, and the Catskill, Cairo-Durham, Chatham, Greenville, Coxsackie-Athens, Hudson City, and Ravena-Coeymans-Selkirk Central School Districts. Albany County’s economy is dependent on state government, health care services and higher education.  Albany has also been growing in the area of technology jobs focusing on the areas of micro- and nanotechnology. Ulster County’s major industry consists of tourism with a number of state parks located within the Catskill Mountains and the Shawangunk Ridge.  As such, local employment is primarily within the services industry as well as government and health services.
 
6

Competition
 
The Bank of Greene County faces significant competition both in making loans and in attracting deposits.  The Bank of Greene County’s subsidiary Greene County Commercial Bank faces similar competition in attracting municipal deposits.  The Bank of Greene County’s market area has a high density of financial institutions, including online competitors, many of which are branches of significantly larger institutions that have greater financial resources than The Bank of Greene County, and all of which are competitors of The Bank of Greene County to varying degrees.  The Bank of Greene County’s competition for loans comes principally from commercial banks, savings banks, savings and loan associations, mortgage-banking companies, credit unions, insurance companies and other financial service companies.  The Bank of Greene County faces additional competition for deposits from non-depository competitors such as the mutual fund industry, securities and brokerage firms and insurance companies.  Competition has also increased as a result of the lifting of restrictions on the interstate operations of financial institutions.
 
Competition has increased as a result of the enactment of the Gramm-Leach-Bliley Act of 1999, which eased restrictions on entry into the financial services market by insurance companies and securities firms.  Moreover, because this legislation permits banks, securities firms and insurance companies to affiliate, the financial services industry could experience further consolidation.  This could result in a growing number of larger financial institutions competing in The Bank of Greene County’s primary market area that offer a wider variety of financial services than The Bank of Greene County currently offers.  The internet has also become a significant competitive factor for The Bank of Greene County and the overall financial services industry.  Competition for deposits, for the origination of loans and the provision of other financial services may limit The Bank of Greene County’s growth and adversely impact its profitability in the future.
 
Lending Activities

General.  The principal lending activity of The Bank of Greene County is the origination, for retention in its portfolio, of fixed-rate and adjustable-rate mortgage loans collateralized by residential and commercial real estate primarily located within its primary market area.  The Bank of Greene County also originates home equity loans, consumer loans and commercial business loans, and has increased its focus on all aspects of commercial lending.  The Bank of Greene County also offers a variety of line of credit products.
 
The Bank of Greene County continues to utilize high quality underwriting standards in originating real estate loans.  As such, it does not engage in sub-prime lending or other exotic loan products.  At the time of origination, appraisals are obtained to ensure an adequate loan-to-value ratio of the underlying collateral.  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 or an event that would indicate a significant decline in the collateral value.  Additionally, if an existing loan is to be modified or refinanced, generally, an appraisal is ordered to ensure collateral adequacy.
 
In an effort to manage the interest rate risk, The Bank of Greene County originates shorter-term consumer loans and other adjustable-rate loans, including many commercial loans, and residential mortgage loans with a 10 or 15 year term. The Bank of Greene County seeks to attract checking and other transaction accounts that generally have lower interest rate costs and tend to be less interest rate sensitive when interest rates rise to fund fixed-rate residential mortgages.
 
The loan portfolio composition and loan maturity schedule are set forth in Part II, Item 7 Management’s Discussion and Analysis of this Report.
 
Discussion regarding the credit quality of the loan portfolio is set forth in Part II, Item 7 Management’s Discussion and Analysis and in Part II, Item 8 Financial Statements and Supplementary Data, Note 4, Loans, of this Report.
 
7

Residential, Construction and Land Loans, and Multi-family Loans.  The Bank of Greene County’s primary lending activity is the origination of residential mortgage loans collateralized by property located in The Bank of Greene County’s primary market area.  Residential mortgage loans refer to loans collateralized by one to four-family residences. By contrast, multi-family loans refer to loans collateralized by multi-family units, such as apartment buildings.  For the year ended June 30, 2020, The Bank of Greene County originated residential mortgage loans with a loan-to-value ratio of 85.0% or less.  For the year ended June 30, 2020 and 2019, no residential mortgage loans were originated by The Bank of Greene County with private mortgage insurance. Generally, residential mortgage loans are originated for terms of up to 30 years. In recent years however, The Bank of Greene County has been successful in marketing and originating such loans with 10 and 15-year terms. The Bank of Greene County generally requires fire and casualty insurance, the establishment of a mortgage escrow account for the payment of real estate taxes, and hazard and flood insurance. The Bank of Greene County requires title insurance on most loans for the construction or purchase of residential properties collateralizing real estate loans made by The Bank of Greene County. Title insurance is not required on all mortgage loans, but is evaluated on a case by case basis.
 
At June 30, 2020, virtually all of The Bank of Greene County’s residential mortgage loans were conforming loans and, accordingly, were eligible for sale in the secondary mortgage market.  However, generally the residential mortgage loans originated by The Bank of Greene County are retained in its portfolio and are not sold into the secondary mortgage market.  To the extent fixed-rate residential mortgage loans are retained by The Bank of Greene County, it is exposed to increases in market interest rates, since the yields earned on such fixed-rate assets would remain fixed, while the rates paid by The Bank of Greene County for deposits and borrowings may increase, which could result in lower net interest income.
 
The Bank of Greene County currently offers residential mortgage loans with fixed and adjustable interest rates.  Originations of fixed-rate loans versus adjustable-rate loans are monitored on an ongoing basis and are affected significantly by the level of market interest rates, customer preference, The Bank of Greene County’s interest rate gap position, and loan products offered by The Bank of Greene County’s competitors.  In the current low interest rate environment, most of our borrowers prefer fixed-rate loans to adjustable-rate loans.  Residential real estate loans often remain outstanding for significantly shorter periods than their contractual terms because borrowers may refinance or prepay loans at their option.  The average length of time that The Bank of Greene County’s residential mortgage loans remain outstanding varies significantly depending upon trends in market interest rates and other factors.

The Bank of Greene County’s adjustable-rate mortgage (“ARM”) loans currently provide for maximum rate adjustments of 150 basis points per year and 600 basis points over the term of the loan.  The Bank of Greene County offers ARM loans with initial interest rates that are below market, referred to as “teaser rates.” However, in underwriting such loans, borrowers are qualified at the full index rate.  Generally, The Bank of Greene County’s ARM loans adjust annually.  After origination, the interest rate on such ARM loans is reset based upon a contractual spread or margin above the average yield on one-year United States Treasury securities, adjusted to a constant maturity, as published weekly by the Federal Reserve Board.
 
ARM loans decrease the risk associated with changes in market interest rates by periodically re-pricing, but involve other risks because as interest rates increase, the underlying payments by the borrower increase, thus increasing the potential for default by the borrower. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustment of the contractual interest rate is also limited by the maximum periodic and lifetime interest rate adjustment permitted by the terms of the ARM loans, and, therefore, is potentially limited in effectiveness during periods of rapidly rising interest rates. The Bank of Greene County’s willingness and capacity to originate and hold in portfolio fixed rate residential mortgage loans has enabled it to expand customer relationships in the current historically low long-term interest rate environment where borrowers have generally preferred fixed rate mortgage loans.  However, as noted above, to the extent The Bank of Greene County retains fixed rate residential mortgage loans in its portfolio, it is exposed to increases in market interest rates, since the yields earned on such fixed rate assets would remain fixed while the rates paid by The Bank of Greene County for deposits and borrowings may increase, which could result in lower net interest income.
 
The Bank of Greene County’s residential mortgage loans are generally originated by The Bank of Greene County’s loan representatives operating in its branch offices through their contacts with existing or past loan customers, depositors of The Bank of Greene County, attorneys and accountants who refer loan applications from the general public, and local realtors.  The Bank of Greene County has loan originators who call upon customers during non-banking hours and at locations convenient to the customer.

All residential mortgage loans originated by The Bank of Greene County include “due-on-sale” clauses, which give The Bank of Greene County the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the real property subject to the mortgage.

The Bank of Greene County originates construction-to-permanent loans to homeowners for the purpose of construction of primary and secondary residences.  The Bank of Greene County issues a commitment and has one closing which encompasses both the construction phase and permanent financing.  The construction phase is a maximum term of twelve months and the interest charged is the rate as stated in the commitment, with loan-to-value ratios of up to 85.0%, of the completed project.  The Bank of Greene County also offers loans collateralized by undeveloped land.  The acreage associated with such loans is limited.  These land loans generally are intended for future sites of primary or secondary residences.  The terms of vacant land loans generally have a ten-year maximum amortization.

8

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.  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.
 
The Bank of Greene County originates a limited number of multi-family loans. Multi-family loans are generally collateralized by apartment buildings located in The Bank of Greene County’s primary market area. The Bank of Greene County’s underwriting practices and the risks associated with multi-family loans do not differ substantially from that of commercial real estate mortgage loans.
 
Commercial Real Estate Mortgages.  We have increased our focus on commercial real estate mortgages and have developed a strong team of lenders and business development staff resulting in our continued growth in these portfolios.  Office buildings, mixed-use properties and other commercial properties collateralize commercial real estate mortgages. The Bank of Greene County originates fixed- and adjustable-rate commercial real estate mortgage loans with maximum terms of up to 25 years.
 
In underwriting commercial real estate mortgage loans, The Bank of Greene County reviews the expected net operating income generated by the real estate to ensure that it is generally at least 110% of the amount of the monthly debt service; the age and condition of the collateral; the financial resources and income level of the borrower and any guarantors; and the borrower’s business experience.  The Bank of Greene County’s policy is to require personal guarantees from all commercial real estate mortgage borrowers.

The Bank of Greene County may require an environmental site assessment to be performed by an independent professional for commercial real estate mortgage loans.  It is also The Bank of Greene County’s policy to require hazard insurance on all commercial real estate mortgage loans.  In addition, The Bank of Greene County may require borrowers to make payments to a mortgage escrow account for the payment of property taxes.  Any exceptions to The Bank of Greene County’s loan policies must be made in accordance with the limitations set out in each policy.  Typically, the exception authority ranges from the Chief Lending Officer to the Board of Directors, depending on the size and type of loan involved.
 
Loans collateralized by commercial real estate mortgages generally are larger than residential loans and involve a greater degree of risk. Commercial real estate mortgage 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 mortgage loans makes them more difficult for management to monitor and evaluate.
 
Consumer Loans.  The Bank of Greene County’s consumer loans consist of direct loans on new and used automobiles, personal loans (either secured or unsecured), home equity loans, and other consumer installment loans (consisting of passbook loans, unsecured home improvement loans, recreational vehicle loans, and deposit account overdrafts).  Consumer loans (other than home equity loans and deposit account overdrafts) are originated at fixed rates with terms to maturity of one to five years.
 
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 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.
 
The Bank of Greene County’s underwriting procedures for consumer loans include an assessment of the applicant’s credit history and an assessment of the applicant’s ability to meet existing and proposed debt obligations. Although the applicant’s creditworthiness is the primary consideration, the underwriting process also includes a comparison of the value of the collateral to the proposed loan amount. The Bank of Greene County underwrites its consumer loans internally, which The Bank of Greene County believes limits its exposure to credit risks associated with loans underwritten or purchased from brokers and other external sources.  At this time, The Bank of Greene County does not purchase loans from any external sources.
 
The Bank of Greene County offers fixed- and adjustable-rate home equity loans that are collateralized by the borrower’s residence.  Home equity loans are generally underwritten with terms not to exceed 25 years and under the same criteria that The Bank of Greene County uses to underwrite residential fixed rate loans.  Home equity loans may be underwritten with terms not to exceed 25 years and with a loan to value ratio of 80% when combined with the principal balance of the existing mortgage loan. The Bank of Greene County appraises the property collateralizing the loan at the time of the loan application (but not thereafter) in order to determine the value of the property collateralizing the home equity loans. 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.
 
9

Commercial Loans.  The Bank of Greene County also originates commercial loans with terms of up to 10 years at fixed and adjustable rates.  The Bank of Greene County attributes growth in this portfolio to its ability to offer borrowers senior management attention as well as timely and local decision-making on commercial loan applications.  The decision to grant a commercial loan depends primarily on the creditworthiness and cash flow of the borrower (and any guarantors) and secondarily on the value of and ability to liquidate the collateral, which may consist of receivables, inventory and equipment.  A mortgage may also be taken for additional collateral purposes, but is considered secondary to the other collateral for commercial business loans.  The Bank of Greene County generally requires annual financial statements, tax returns and personal guarantees from the commercial borrowers.  The Bank of Greene County also generally requires an appraisal of any real estate that collateralizes the loan.  The Bank of Greene County’s commercial loan portfolio includes loans collateralized by inventory, fire trucks, other equipment, or real estate.
 
The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and provides over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic.  The CARES act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (“PPP”).   An eligible business could apply for a PPP loan up to the greater of: (1) 2.5 times its average monthly “payroll costs”; or (2) $10.0 million.  PPP loans has: (a) an interest rate of 1.0%, (b) a 2-5 year loan term to maturity, and (c) principal and interest payments deferred for six months from the date of disbursement.  The SBA guarantees 100% of the PPP loans made to eligible borrowers.  The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and at least 60% of the loan proceeds are used for payroll expenses, with the remaining 40%, or less, of the loan proceeds used for other qualifying expenses.  The Bank of Greene County originated these loans to support local businesses.
 
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-rate 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 Approval Procedures and Authority.  The Board of Directors establishes the lending policies and loan approval limits of The Bank of Greene County.  Loan officers generally have the authority to originate mortgage loans, consumer loans and commercial business loans up to amounts established for each lending officer.  The Executive Committee or the full Board of Directors must approve all residential loans and commercial loans $1.5 million or greater.
 
The Board annually approves independent appraisers used by The Bank of Greene County.  For larger loans, The Bank of Greene County may require an environmental site assessment to be performed by an independent professional for all non-residential mortgage loans.  It is The Bank of Greene County’s policy to require hazard insurance on all mortgage loans.
 
Loan Origination Fees and Other Income.  In addition to interest earned on loans, The Bank of Greene County receives loan origination fees.  Such fees vary with the volume and type of loans and commitments made and purchased, principal repayments, and competitive conditions in the mortgage markets, which in turn respond to the demand and availability of money.
 
In addition to loan origination fees, The Bank of Greene County also receives other income that consists primarily of deposit account service charges, ATM fees, debit card fees and loan payment late charges.  The Bank of Greene County also installs, maintains and services merchant bankcard equipment for local retailers and is paid a percentage of the transactions processed using such equipment.
 
Loans to One Borrower.  Federal savings banks are subject to the same loans to one borrower limits as those applicable to national banks, which under current regulations restrict loans to one borrower to an amount equal to 15% of unimpaired capital and unimpaired surplus on an unsecured basis, and an additional amount equal to 10% of unimpaired capital and unimpaired surplus if the loan is collateralized by readily marketable collateral (generally, financial instruments and bullion, but not real estate).
 
At June 30, 2020, the largest aggregate amount loaned by The Bank of Greene County to one borrower consisted of 18 commercial mortgages with an outstanding balance of $11.7 million. This loan relationship was performing in accordance with its terms at June 30, 2020.

10

Securities Activities

Given The Bank of Greene County’s substantial portfolio of fixed-rate residential mortgage loans, The Bank of Greene County, and its subsidiary Greene County Commercial Bank, maintain high balances of liquid investments for the purpose of mitigating interest rate risk and meeting collateral requirements for municipal deposits in excess of FDIC insurance limits.  The Board of Directors establishes the securities investment policy.  This policy dictates that investment decisions will be made based on the safety of the investment, liquidity requirements, potential returns, cash flow targets, and desired risk parameters.  In pursuing these objectives, management considers the ability of an investment to provide earnings consistent with factors of quality, maturity, marketability and risk diversification.

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.  As of June 30, 2020, all mortgage-backed securities including collateralized mortgage obligations were securities of government sponsored enterprises, and no private-label mortgage-backed securities or collateralized mortgage obligations were held in the securities portfolio.  The Company’s current securities investment strategy utilizes a risk management approach of diversified investing among three categories: short-, intermediate- and long-term. The emphasis of this approach is to increase overall investment securities yields while managing interest rate risk.  The Company will only invest in high quality securities, as determined by management’s analysis at the time of purchase. The Company does not engage in any derivative or hedging transactions, such as interest rate swaps or caps.
 
Greene County Bancorp, Inc. has classified its investments in debt securities as either available-for-sale or held-to-maturity.  Available-for-sale securities are reported at fair value, with net unrealized gains and losses reflected in the accumulated other comprehensive income (loss) component of shareholders’ equity, net of applicable income taxes.  Held-to-maturity securities are those debt securities which management has the intent and the Company has the ability to hold to maturity and balances are reported at amortized cost.  The Company does not have trading securities in its portfolio.   The Company has equity securities that are reported at fair value, with net unrealized gains and losses reflected in income.
 
The estimated fair values of debt securities at June 30, 2020 by contractual maturity are set forth in Part II, Item 7 Management’s Discussion and Analysis of this Report.
 
Additional discussion of management’s decisions with respect to shifting investments among the various investment portfolios described above and the level of mortgage-backed securities is set forth in Part II, Item 7 Management’s Discussion and Analysis of this Report.
 
Discussion related to the evaluation of the portfolio for other-than-temporary impairment is set forth in Part II, Item 8 Financial Statements and Supplementary Data, Note 1, Summary of significant accounting policies, and Note 3, Securities, of this Report.
 
State and Political Subdivision Securities. The Bank of Greene County and its subsidiary Greene County Commercial Bank purchases state and political subdivision securities in order to: (i) generate positive interest rate spread with minimal administrative expense; (ii) lower credit risk as a result of purchasing general obligations which are subject to the levy of ad valorem taxes within the municipalities jurisdiction; (iii) increase liquidity, (iv) provide low cost funding to the local communities within the Company’s market area, and (v) serve as collateral for municipal deposits in excess of FDIC limits.  State and political subdivision securities purchased within New York State are exempt from taxes for both Federal and State income tax purposes.  As a result, the yield on these securities as reported within the financial statements, are lower than would be attained on other investment options. The portfolio consists of either short-term obligations, due within one year, or are serial or statutory installment bonds which require semi-annual or annual payments of principal and interest.  Prepayment risk on these securities is low as most of the bonds are non-callable.

Management believes that credit risk on its state and political subdivision securities portfolio is low.  Management analyzes each security prior to purchase and closely monitors these securities by obtaining data collected from the New York State Comptroller’s office when published annually.  Management also reviews any underlying ratings of the securities in its assessment of credit risk.

Mortgage-Backed and Asset-Backed Securities.  The Bank of Greene County and its subsidiary Greene County Commercial Bank purchases mortgage-backed securities in order to: (i) generate positive interest rate spreads with minimal administrative expense; (ii) lower The Bank of Greene County’s credit risk as a result of the guarantees provided by Freddie Mac, Fannie Mae, and GNMA or other government sponsored enterprises; and (iii) increase liquidity.  CMOs or collateralized mortgage obligations as well as other mortgage-backed securities generally are a type of mortgage-backed bond secured by the cash flow of a pool of mortgages.  CMOs have regular principal and interest payments made by borrowers separated into different payment streams, creating several bonds that repay invested capital at different rates.  The CMO bond may pay the investor at a different rate than the underlying mortgage pool.  Often bonds classified as mortgage-backed securities are considered pass-through securities and payments include principal and interest in a manner that makes them self-amortizing.  As a result there is no final lump-sum payment at maturity.  The Company does not invest in private label mortgage-backed securities due to the potential for a higher level of credit risk.
 
11

The pooling of mortgages and the issuance of a security with an interest rate that is based on the interest rates of the underlying mortgages creates mortgage-backed securities.  Mortgage-backed securities typically represent a participation interest in a pool of single-family or multi-family mortgages. The issuers of such securities (generally U.S. Government sponsored enterprises, including Fannie Mae, Freddie Mac and GNMA) pool and resell the participation interests in the form of securities to investors, such as The Bank of Greene County, and guarantee the payment of principal and interest to these investors. Mortgage-backed securities generally yield less than the loans that underlie such securities because of the cost of payment guarantees and credit enhancements. In addition, mortgage-backed securities are usually more liquid than individual mortgage loans and may be used to collateralize certain liabilities and obligations of The Bank of Greene County and its subsidiary Greene County Commercial Bank.
 
Investments in mortgage-backed securities involve a risk that actual prepayments will be greater than estimated over the life of the security, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments thereby altering the net yield on such securities. There is also reinvestment risk associated with the cash flows from such securities or in the event such securities are prepaid. In addition, the market value of such securities may be adversely affected by changes in interest rates.  The Company has attempted to mitigate credit risk by limiting purchases of mortgage-backed securities to those offered by various government sponsored enterprises.
 
Management reviews prepayment estimates periodically to ensure that prepayment assumptions are reasonable considering the underlying collateral for the securities at issue and current interest rates and to determine the yield and estimated maturity of Company’s mortgage-backed securities portfolio.   However, the actual maturity of a security may be less than its stated maturity due to prepayments of the underlying mortgages. Prepayments that are faster than anticipated may shorten the life of the security and thereby reduce the net yield on such securities. Although prepayments of underlying mortgages depend on many factors, the difference between the interest rates on the underlying mortgages and the prevailing mortgage interest rates generally is the most significant determinant of the rate of prepayments. During periods of declining mortgage interest rates, refinancing generally increases and accelerates the prepayment of the underlying mortgages and the related security. Under such circumstances, the Company may be subject to reinvestment risk because, to the extent that securities prepay faster than anticipated, the Company may not be able to reinvest the proceeds of such repayments and prepayments at a comparable rate of return.  Conversely, in a rising interest rate environment prepayments may decline, thereby extending the estimated life of the security and depriving the Company of the ability to reinvest cash flows at the increased rates of interest.
 
Asset-backed securities are a type of debt security collateralized by various loans and assets including: automobile loans, equipment leases, credit card receivables, home equity and improvement loans, manufactured housing, student loans and other consumer loans.  In the case of The Bank of Greene County, there are no asset-backed securities in the portfolio at June 30, 2020.
 
Sources of Funds
 
General.  Deposits, repayments and prepayments of loans and securities, proceeds from sales of securities, and proceeds from maturing securities and cash flows from operations are the primary sources of The Bank of Greene County’s funds for use in lending, investing and for other general purposes.  The Bank of Greene County also has several borrowing facilities available to provide additional liquidity as needed.
 
Deposits.  The Bank of Greene County and Greene County Commercial Bank offer a variety of deposit accounts with a range of interest rates and terms.  The Bank of Greene County’s deposit accounts consist of savings, NOW accounts, money market accounts, certificates of deposit and noninterest-bearing checking accounts.  The Bank of Greene County also offers Individual Retirement Accounts (IRAs). Greene County Commercial Bank offers money market accounts, certificates of deposit and noninterest-bearing checking accounts and NOW accounts.
 
The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and competition.  Deposits are obtained predominantly from the areas in which The Bank of Greene County’s branch offices are located.  The Bank of Greene County relies primarily on competitive pricing of its deposit products and customer service and long-standing relationships with customers to attract and retain these deposits; however, market interest rates and rates offered by competing financial institutions significantly affect The Bank of Greene County’s ability to attract and retain deposits.  The Bank of Greene County uses traditional means of advertising its deposit products, including radio, television, print and social media. It generally does not solicit deposits from outside its market area.  While The Bank of Greene County accepts certificates of deposit in excess of $100,000, they are not subject to preferential rates.  The Bank of Greene County does not actively solicit such deposits, as they are more difficult to retain than core deposits.  Historically, The Bank of Greene County has not used brokers to obtain deposits, but will use them to help manage the seasonality within the municipal deposit base in the most cost efficient manner.
 
12

Greene County Commercial Bank’s purpose is to attract deposits from local municipalities.  Greene County Commercial Bank had $579.3 million in deposits at June 30, 2020.
 
Borrowed Funds.  The Company maintains borrowing arrangements in the form of lines of credit through the Federal Home Loan Bank of New York (“FHLB”), the Federal Reserve Bank of New York (“FRB”), Atlantic Central Bankers Bank (“ACBB”), as well as three other depository institutions.  The Bank of Greene County may also obtain term borrowings from the FHLB and FRB.  With the exception of the line of credit with ACBB, and the other depository institution, these borrowing arrangements are secured by mortgage loans, commercial loans or investment securities.

The Company has an Irrevocable Letter of Credit Reimbursement Agreement with the FHLB, whereby upon The Bank of Greene County’s request, on behalf of Greene County Commercial Bank, an irrevocable letter of credit is issued to secure municipal transactional deposit accounts.  These letters of credit are secured by residential mortgage and commercial real estate loans.  The amount of funds available to the Company through the FHLB line of credit is reduced by any letters of credit outstanding.  At June 30, 2020, there were $70.7 million of municipal letters of credit outstanding.

Additional discussion related to borrowings is set forth in Part II, Item 7 Management’s Discussion and Analysis and in Part II, Item 8 Financial Statements and Supplementary Data, Note 7 Borrowings of this Report.
 
Personnel
 
As of June 30, 2020, The Bank of Greene County had 172 full-time employees and 14 part-time employees.  Greene County Bancorp, Inc. has no employees who are not also employees of The Bank of Greene County.  A collective bargaining group does not represent the employees, and The Bank of Greene County considers its relationship with its employees to be good.
 
Information

We make available free of charge through our website (www.tbogc.com) the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission: our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.

FEDERAL AND STATE TAXATION

Federal Taxation
 
General.  Greene County Bancorp, Inc., The Bank of Greene County, Greene County Commercial Bank and Greene Risk Management, Inc. are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below.  The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to these entities.
 
Method of Accounting.  For federal income tax purposes, Greene County Bancorp, Inc., The Bank of Greene County, Greene County Commercial Bank and Greene Risk Management currently report income and expenses on the accrual method of accounting and use a tax year ending June 30 for filing consolidated federal income tax returns.
 
Taxable Distributions and Recapture.  At June 30, 2020, The Bank of Greene County had an unrecaptured pre-1988 Federal bad debt reserve of approximately $1.8 million for which no Federal income tax provision has been made.  A deferred tax liability has not been provided on this amount as management does not intend to redeem stock, make distributions or take other actions that would result in recapture of the reserve.
 
Corporate Dividends-Received Deduction.  Greene County Bancorp, MHC owns less than 80% of the outstanding common stock of Greene County Bancorp, Inc.  Therefore, Greene County Bancorp, MHC is not permitted to join in the consolidated federal income tax return with Greene County Bancorp, Inc., The Bank of Greene County, Greene County Commercial Bank and Greene Risk Management, Inc.  Consequently, Greene County Bancorp, MHC is only eligible for a 65% dividends-received deduction in respect of dividends from Greene County Bancorp, Inc.
 
State Taxation
 
Greene County Bancorp, MHC, Greene County Bancorp, Inc., The Bank of Greene County, Greene County Commercial Bank, and Greene Property Holdings, Ltd. report income on a combined fiscal year basis to New York State. The New York State franchise tax is imposed in an amount equal to the greater of 6.5% of Business Income, 0.05% of average Business Capital or a fixed dollar amount based on New York sourced gross receipts. All intercompany dividend distributions are eliminated in the calculation of Combined Business Income.

13

REGULATION
 
General
 
The Bank of Greene County is a federally chartered savings bank and Greene County Commercial Bank is a New York-chartered bank.  The Federal Deposit Insurance Corporation (“FDIC”) through the DIF (“Deposit Insurance Fund”) insures their deposit accounts up to applicable limits.  The Bank of Greene County and Greene County Commercial Bank are subject to extensive regulation by the Office of the Comptroller of the Currency (“OCC”) and the New York State Department of Financial Services (the “Department”), respectively, as their chartering agencies, and by the FDIC, as their deposit insurer.  The Bank of Greene County and Greene County Commercial Bank are required to file reports with, and are periodically examined by the OCC and the Department, respectively, as well as the FDIC concerning their activities and financial condition, and must obtain regulatory approvals prior to entering into certain transactions, including, but not limited to, mergers with or acquisitions of other banking institutions.  The Bank of Greene County is a member of the FHLB of New York and is subject to certain regulations by the Federal Home Loan Bank System.  Both Greene County Bancorp, Inc. and Greene County Bancorp, MHC, as savings and loan holding companies, are subject to regulation and examination by the Federal Reserve Board (“FRB”) and are required to file reports with the FRB.
 
Any future laws or regulations, whether enacted by Congress or implemented by the FDIC, the OCC or the FRB, could have a material adverse impact on The Bank of Greene County, Greene County Commercial Bank, Greene County Bancorp, Inc. or Greene County Bancorp, MHC.
 
Certain of the regulatory requirements applicable to The Bank of Greene County, Greene County Commercial Bank, Greene County Bancorp, Inc. and Greene County Bancorp, MHC are referred to below or elsewhere herein.
 
Federal Banking Regulation
 
Business Activities.  A federal savings association derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and federal regulations issued thereunder. Under these laws and regulations, The Bank of Greene County may invest in mortgage loans secured by residential real estate without limitations as a percentage of assets and non-residential real estate loans which may not in the aggregate exceed 400% of capital, commercial business loans up to 20% of assets in the aggregate and consumer loans up to 35% of assets in the aggregate, certain types of debt securities and certain other assets. The Bank of Greene County also may establish subsidiaries that may engage in activities not otherwise permissible for The Bank of Greene County, including real estate investment and securities and insurance brokerage.
 
Examinations and Assessments.  The Bank of Greene County is primarily supervised by the OCC, and as such is required to file reports with and is subject to periodic examination by the OCC.  The Bank of Greene County also is required to pay assessments to the OCC to fund the agency’s operations.
 
Capital Requirements.  Federal regulations require FDIC-insured depository institutions, including federal savings associations, to meet several minimum capital standards:  a common equity Tier 1 capital to risk-based assets ratio, a Tier 1 capital to risk-based assets ratio, a total capital to risk-based assets and a Tier 1 capital to total assets leverage ratio.  The existing capital requirements were effective January 1, 2015 and are the result of a final rule implementing regulatory amendments based on recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act.
 
The capital standards require the maintenance of common equity Tier 1 capital, Tier 1 capital and Total capital to risk-weighted assets of at least 4.5%, 6% and 8%, respectively.  The regulations also establish a minimum required leverage ratio of at least 4% Tier 1 capital.  Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings.  Tier 1 capital is generally defined as common equity Tier 1 and Additional Tier 1 capital.  Additional Tier 1 capital generally includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries.  Total capital includes Tier 1 capital (common equity Tier 1 capital plus Additional Tier 1 capital) and Tier 2 capital.  Tier 2 capital is comprised of capital instruments and related surplus meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt.  Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values.  Institutions that have not exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on available-for-sale-securities).  The Bank of Greene County and Greene County Commercial Bank have exercised this one-time opt-out and therefore do not include AOCI in its regulatory capital determinations. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. On April 9, 2020, the Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation issued an interim final rule (“IFR”) to allow banking organizations to exclude from regulatory capital measures any exposures pledged as collateral for a non-recourse loan from the Federal Reserve.  Since Paycheck Protection Program Liquidity Facility (“PPPLF”) extensions of credit are non‑recourse, Paycheck Protection Program loans pledged to the PPPLF qualify for exclusion under the IFR.

14

In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, an institution’s assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests), are multiplied by a risk weight factor assigned by the regulations based on the risk deemed inherent in the type of asset.  Higher levels of capital are required for asset categories believed to present greater risk.  For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one to four-family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.
 
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements.
 
The Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”), enacted in May 2018, required the federal banking agencies, including the Office of the Comptroller of the Currency, to establish for institutions with assets of less than $10 billion a “community bank leverage ratio” of between 8% to 10%.  Institutions with capital complying with the ratio and otherwise meeting the specified requirements (including off-balance sheet exposures of 25% or less of total assets and trading assets and liabilities of 5% or less of total assets) and electing the alternative framework are considered to comply with the applicable regulatory capital requirements, including the risk-based requirements.
 
The community bank leverage ratio was established at 9% Tier 1 capital to total average assets, effective January 1, 2020.  A qualifying institution may opt in and out of the community bank leverage ratio framework on its quarterly call report.  An institution that temporarily ceases to meet any qualifying criteria is provided with a two quarter grace period to again achieve compliance.  Failure to meet the qualifying criteria within the grace period or maintain a leverage ratio of 8% or greater requires the institution to comply with the generally applicable capital requirements.

Section 4012 of the Coronavirus Aid, Relief and Economic Security Act of 2020 (the “CARES Act”) required that the community bank leverage ratio be temporarily lowered to 8%.  The federal regulators issued a rule making the reduced ratio effective April 23, 2020.  The rules also established a two quarter grace period for a qualifying community bank whose leverage ratio falls below the 8% community bank leverage ratio requirement, or fails to meet other qualifying criteria, so long as the bank maintains a leverage ratio of 7% or greater.  Another rule was issued to transition back to the 9% community bank leverage ratio by increasing the ratio to 8.5% for calendar year 2021 and to 9% thereafter.

 Prompt Corrective Action.  Under the federal Prompt Corrective Action statute, the OCC is required to take supervisory actions against undercapitalized institutions under its jurisdiction, the severity of which depends upon the institution’s level of capital.  An institution that has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a common equity Tier 1 ratio of less than 4.5% or a leverage ratio of less than 4% is considered to be “undercapitalized.”  A savings institution that has total risk-based capital of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a common equity Tier 1 ratio of less than 3.0% or a leverage ratio that is less than 3.0% is considered to be “significantly undercapitalized.”  A savings institution that has a tangible capital to assets ratio equal to or less than 2.0% is deemed to be “critically undercapitalized.”  The previously referenced final rule establishing an elective “community bank leverage ratio” regulatory capital framework provides that a qualifying institution whose capital exceeds the community bank leverage ratio and opts to use that framework will be considered “well-capitalized” for purposes of prompt corrective action.
 
Generally, the OCC is required to appoint a receiver or conservator for a federal savings association that becomes “critically undercapitalized” within specific time frames.  The regulations also provide that a capital restoration plan must be filed with the OCC within 45 days of the date that a federal savings association is deemed to have received notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.”  Any holding company of a federal savings association that is required to submit a capital restoration plan must guarantee performance under the plan in an amount of up to the lesser of 5.0% of the savings association’s assets at the time it was deemed to be undercapitalized by the OCC or the amount necessary to restore the savings association to adequately capitalized status.  This guarantee remains in place until the OCC notifies the savings association that it has maintained adequately capitalized status for each of four consecutive calendar quarters.  Institutions that are undercapitalized become subject to certain mandatory measures such as restrictions on capital distributions and asset growth.  The OCC may also take any one of a number of discretionary supervisory actions against undercapitalized federal savings associations, including the issuance of a capital directive and the replacement of senior executive officers and directors.
 
15

At June 30, 2020, The Bank of Greene County met the criteria for being considered “well capitalized,” which means that its total risk-based capital ratio exceeded 10%, its Tier 1 risk-based ratio exceeded 8.0%, its common equity Tier 1 ratio exceeded 6.5% and its leverage ratio exceeded 5.0%.
 
Loans-to-One Borrower.  A federal savings association generally may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of June 30, 2020, The Bank of Greene County was in compliance with the loans-to-one borrower limitations.
 
Qualified Thrift Lender Requirement.  As a federal savings association, The Bank of Greene County must satisfy the qualified thrift lender, or “QTL”, requirement by meeting one of two tests: the Home Owners’ Loan Act (“HOLA”) QTL test or the Internal Revenue Service (IRS) Domestic Building and Loan Association (DBLA) test.  The federal savings association may use either test to qualify and may switch from one test to the other.
 
Under the HOLA QTL test, The Bank of Greene County must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” in at least nine of the most recent 12-month period. “Portfolio assets” generally means total assets of a savings institution, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings association’s business.
 
“Qualified thrift investments” include various types of loans made for residential and housing purposes, investments related to such purposes, including certain mortgage-backed and related securities, and loans for personal, family, household and certain other purposes up to a limit of 20% of portfolio assets. “Qualified thrift investments” also include 100% of an institution’s credit card loans, education loans and small business loans. The Bank of Greene County also may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code.
 
Under the IRS DBLA test, a savings association must meet the business operations test and the 60% of assets test.  The business operations test requires that the federal savings association’s business consists primarily of acquiring the savings of the public (75% of its deposits, withdrawable shares, and other obligations must be held by the general public) and investing in loans (more than 75% of its gross income consists of interest on loans and government obligations and various other specified types of operating income that federal savings associations ordinarily earn).  For the 60% of assets test, a savings association must maintain at least 60% of its total in “qualified investments” as of the close of the taxable year or, at the option of the taxpayer, may be computed on the basis of the average assets outstanding during the taxable year.
 
A savings association that fails the qualified thrift lender test must either convert to a bank charter or operate under specified restrictions. The Bank of Greene County utilized the IRS DBLA test and satisfied the requirements of this test at and for the years ended June 30, 2020 and 2019.
 
Capital Distributions.  Federal regulations govern capital distributions by a federal savings association, which include cash dividends, stock repurchases and other transactions charged to the capital account. A savings association must file an application for approval of a capital distribution if:
 

the total capital distributions for the applicable calendar year exceed the sum of the association’s net income for that year to date plus the association’s retained net income for the preceding two years;

the association would not be at least adequately capitalized following the distribution;

the distribution would violate any applicable statute, regulation, agreement or OCC-imposed condition; or

the association is not eligible for expedited treatment of its filings.

Even if an application is not otherwise required, every savings association that is a subsidiary of a holding company must still file a notice with the OCC at least 30 days before its board of directors declares a dividend or approves a capital distribution.
 
The OCC may disapprove a notice or application if:
 

the association would be undercapitalized following the distribution;

the proposed capital distribution raises safety and soundness concerns; or

the capital distribution would violate a prohibition contained in any statute, regulation or agreement.

16

In addition, the Federal Deposit Insurance Act provides that an insured depository institution shall not make any capital distribution, if after making such distribution the institution would be undercapitalized.
 
Liquidity.  A federal savings association is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation.
 
Community Reinvestment Act and Fair Lending Laws.  All savings associations have a responsibility under the Community Reinvestment Act and related federal regulations to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In connection with its examination of a federal savings association, the OCC is required to assess the association’s record of compliance with the Community Reinvestment Act. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. An association’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications, such as branches or mergers, or in restrictions on its activities. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the OCC, as well as other federal regulatory agencies and the Department of Justice. The Bank of Greene County received a “satisfactory” Community Reinvestment Act rating in its most recent examination.
 
In June 2020, the Office of the Comptroller of the Currency published amendments to its Community Reinvestment Act regulations.  The final rule clarifies and expands the activities that qualify for Community Reinvestment Act credit, updates where activities count for such credit and, according to the agency, seeks to create a more consistent and objective method for evaluating Community Reinvestment Act performance.  The final rule is effective October 1, 2020 but compliance with the revised requirements is not mandatory until January 1, 2024 for institutions of The Bank of Greene County’s asset size.
 
Privacy Standards.  The Bank of Greene County is subject to FDIC regulations regarding the privacy protection provisions of the Gramm-Leach-Bliley Act. These regulations require The Bank of Greene County to disclose its privacy policy, including identifying with whom it shares “non-public personal information” to customers at the time of establishing the customer relationship and annually thereafter. The regulations also require The Bank of Greene County to provide its customers with initial notices that accurately reflect its privacy policies and practices. The Bank of Greene County is also required to make its privacy policies available to customers through its website. In addition, The Bank of Greene County is required to provide its customers with the ability to “opt-out” of having The Bank of Greene County share their non-public personal information with unaffiliated third parties before it can disclose such information, subject to certain exceptions.
 
Cybersecurity.  In additional to the provisions in the Gramm-Leach-Bliley Act relating to data security (discussed below), Greene County Bancorp, Inc. and its subsidiaries are subject to many federal and state laws, regulations and regulatory interpretations which impose standards and requirements related to cybersecurity. For example, in March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyber-attack. Financial institutions that fail to observe this regulatory guidance on cybersecurity may be subject to various regulatory sanctions, including financial penalties.

Anti-Money Laundering and OFAC.  Under federal law, financial institutions must maintain anti-money laundering programs that include established internal policies, procedures, and controls. Financial institutions are also prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and customer identification. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions. Law enforcement authorities have been granted increased access to financial information maintained by financial institutions. Bank regulators routinely examine institutions for compliance with these obligations and they must consider an institution’s compliance in connection with the regulatory review of applications, including applications for banking mergers and acquisitions. The U.S. Department of the Treasury’s Office of Foreign Assets Control, or “OFAC,” is responsible for helping to insure that U.S. entities do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and Acts of Congress. OFAC publishes lists of persons, organizations, and countries suspected of aiding, harboring or engaging in terrorist acts, known as Specially Designated Nationals and Blocked Persons. If The Bank of Greene County finds a name on any transaction, account or wire transfer that is on an OFAC list, The Bank of Greene County must freeze or block such account or transaction, file a suspicious activity report and notify the appropriate authorities. The U.S. Treasury Department’s Financial Crises Enforcement Network (“FinCEN”) issued a final rule in 2016 increasing customer due diligence requirements for banks, including adding a requirement to identify and verify the identity of beneficial owners of customers that are legal entities, subject to certain exclusions and exemptions. Compliance with this rule was required in May 2018.

17

Transactions with Related Parties.  A federal savings association’s authority to engage in transactions with its “affiliates” is limited by OCC regulations and by Sections 23A and 23B of the Federal Reserve Act (the “FRA”). The term “affiliates” for these purposes generally means any company that controls, is controlled by, or is under common control with an institution. Greene County Bancorp, Inc. is an affiliate of The Bank of Greene County. In general, transactions with affiliates must be on terms that are as favorable to the association as comparable transactions with non-affiliates. In addition, certain types of these transactions are restricted to an aggregate percentage of the association’s capital. Collateral in specified amounts must usually be provided by affiliates in order to receive loans from the association. In addition, OCC regulations prohibit a savings association from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary.
 
The Bank of Greene County’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the Federal Reserve Board. Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features, and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of The Bank of Greene County’s capital. In addition, extensions of credit in excess of certain limits must be approved by The Bank of Greene County’s Board of Directors.
 
Enforcement. The OCC has primary enforcement responsibility over federal savings institutions and has the authority to bring enforcement action against all “institution-affiliated parties,” including stockholders, and attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action by the OCC may range from the issuance of a capital directive or cease and desist order, to removal of officers and/or directors of the institution and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. The Federal Deposit Insurance Corporation also has the authority to terminate deposit insurance or to recommend to the Comptroller of the OCC that enforcement action be taken with respect to a particular savings institution. If action is not taken by the Director, the Federal Deposit Insurance Corporation has authority to take action under specified circumstances.
 
Standards for Safety and Soundness.  Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness to implement the safety and soundness standards required under federal law. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controls and information systems, internal audit systems, credit underwriting, loan documentation, interest rate risk exposure, asset growth, compensation, fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan.
 
Deposit Insurance.  The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor.
 
The FDIC’s assessment system is based on each institution’s total assets less tangible capital, and ranges from 1.5 to 40 basis points.  Assessments for institutions of less than $10 billion of assets are based on financial measures and supervisory ratings derived from statistical modeling estimating the institution’s probability of failure over a three year period.
 
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Neither The Bank of Greene County nor Greene County Commercial Bank believes that it is taking any action or is subject to any condition or violation that could lead to termination of its deposit insurance.
 
On September 30, 2018, the Deposit Insurance Fund Reserve Ratio reached 1.36 percent.  Because the reserve ratio has exceeded 1.35 percent, two deposit insurance assessment changes occurred under the FDIC regulations:
 

Surcharges on large banks (total consolidated assets of $10 billion or more) ended; the last surcharge on large banks was collected on December 28, 2018.
 
18


Small banks (total consolidated assets of less than $10 billion) were awarded assessment credits for the portion of their assessments that contributed to the growth in the reserve ratio from 1.15 percent to 1.35 percent, to be applied when the reserve ratio is at least 1.38 percent.
 
In January 2019, the FDIC provided notification to the Company that a credit in the amount of $177,144 was calculated for The Bank of Greene County and a credit in the amount of $91,090 was calculated for Greene County Commercial Bank.  During the fiscal year ended June 30, 2020, the FDIC offset regular deposit insurance assessments with these credits which was recorded as a credit to FDIC insurance expense in the Company’s income statement for the year ended June 30,2020.  At June 30, 2020, there were no remaining credits outstanding for The Bank of Greene County and Greene County Commercial Bank.
 
National Bank Powers Election

Effective July 1, 2019, the OCC issued a final rule, pursuant to EGRRCPA, that permits an eligible federal savings bank with total consolidated assets of $20 billion or less as of December 31, 2017, to elect to operate with national bank powers without converting to a national bank charter. The effect of the so-called “covered savings association” election is that a federal savings association generally has the same rights and privileges, including commercial lending authority, as a national bank that has its main office in the same location as the home office of the covered savings association.  The covered savings association is also subject to the same duties, liabilities and limitations applicable to a national bank, some of which are more restrictive than those applicable to federal savings banks.  A covered savings association retains its federal savings association charter and continues to be subject to the corporate governance laws and regulations applicable to such associations, including as to its bylaws, board of directors and shareholders, capital distributions and mergers.  The Bank of Greene County has not made such an election.
 
Prohibitions Against Tying Arrangements.  Federal savings associations are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.

Federal Home Loan Bank System.  The Bank of Greene County is a member of the Federal Home Loan Bank System, which consists of 11 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the Federal Home Loan Bank of New York, The Bank of Greene County is required to acquire and hold shares of capital stock in the Federal Home Loan Bank in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its borrowings from the Federal Home Loan Bank, whichever is greater. As of June 30, 2020, The Bank of Greene County was in compliance with this requirement.
 
Federal Reserve System.  The Federal Reserve Board regulations require savings associations to maintain noninterest-earning reserves against their transaction accounts, such as negotiable order of withdrawal and regular checking accounts.  In April 2020, due to a change in its approach to monetary policy, the Board of Governors of the Federal Reserve System announced an interim rule to amend Regulation D requirements and reduce reserve requirement ratios to zero. The Federal Reserve Board has indicated that it has no plans to re-impose reserve requirements, but may do so in the future if conditions warrant.    At June 30, 2020, The Bank of Greene County was in compliance with these reserve requirements.
 
Other Regulations
 
Interest and other charges collected or contracted for by The Bank of Greene County are subject to state usury laws and federal laws concerning interest rates.  The Bank of Greene County’s operations are also subject to federal laws applicable to credit transactions, such as the:
 

Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;

Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

Truth in Savings Act; and

rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
 
19

The operations of The Bank of Greene County also are subject to the:
 

Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;

Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;

The USA PATRIOT Act, which requires financial institutions to, among other things, establish broadened anti-money laundering compliance programs, and due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements that also apply to financial institutions under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and

The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.

Holding Company Regulation
 
General.  Greene County Bancorp, MHC and Greene County Bancorp, Inc. are nondiversified savings and loan holding companies within the meaning of the Home Owners’ Loan Act. As such, Greene County Bancorp, MHC and Greene County Bancorp, Inc. are registered with the FRB and are subject to FRB regulations, supervision and reporting requirements. In addition, the FRB has enforcement authority over Greene County Bancorp, Inc. and Greene County Bancorp, MHC, and their non-bank subsidiaries. Among other things, this authority permits the FRB to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution. As federal corporations, Greene County Bancorp, Inc. and Greene County Bancorp, MHC are generally not subject to state business organization laws.
 
Permitted Activities.  Pursuant to Section 10(o) of the Home Owners’ Loan Act and federal regulations and policy, a mutual holding company and a federally chartered mid-tier holding company such as Greene County Bancorp, Inc. may engage in the following activities: (i) investing in the stock of a savings association; (ii) acquiring a mutual association through the merger of such association into a savings association subsidiary of such holding company or an interim savings association subsidiary of such holding company; (iii) merging with or acquiring another holding company, one of whose subsidiaries is a savings association; (iv) investing in a corporation, the capital stock of which is available for purchase by a savings association under federal law or under the law of any state where the subsidiary savings association or associations share their home offices; (v) furnishing or performing management services for a savings association subsidiary of such company; (vi) holding, managing or liquidating assets owned or acquired from a savings subsidiary of such company; (vii) holding or managing properties used or occupied by a savings association subsidiary of such company; (viii) acting as trustee under deeds of trust; (ix) any other activity (A) that the Federal Reserve Board, by regulation, has determined to be permissible for bank holding companies under Section 4(c) of the Bank Holding Company Act of 1956, unless the Director of the Federal Reserve Board, by regulation, prohibits or limits any such activity for savings and loan holding companies; or (B) in which multiple savings and loan holding companies were authorized (by regulation) to directly engage on March 5, 1987; (x) any activity permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act, including securities and insurance underwriting; and (xi) purchasing, holding, or disposing of stock acquired in connection with a qualified stock issuance if the purchase of such stock by such savings and loan holding company is approved by the Director. If a mutual holding company acquires or merges with another holding company, the holding company acquired or the holding company resulting from such merger or acquisition may only invest in assets and engage in activities listed in (i) through (xi) above, and has a period of two years to cease any nonconforming activities and divest any nonconforming investments.
 
The Home Owners’ Loan Act prohibits a savings and loan holding company, including Greene County Bancorp, Inc. and Greene County Bancorp, MHC, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or holding company thereof, without prior written approval of the FRB. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a nonsubsidiary company engaged in activities other than those permitted by the Home Owners’ Loan Act, or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the FRB must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors.
 
20

The FRB is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies; and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.
 
Capital.  The Dodd-Frank Act required the FRB to establish minimum consolidated capital requirements for all depository institution holding companies that are as stringent as those required for the insured depository subsidiaries.  However, savings and loan holding companies of under $3 billion in consolidated assets remain exempt from consolidated regulatory capital requirements, unless the FRB determines otherwise in particular cases.

Dividends.  The FRB has issued a policy statement regarding the payment of dividends by bank holding companies that applies to savings and loan holding companies as well.  In general, the FRB’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition.  FRB guidance provides for prior regulatory review of capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition.  The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized.  These regulatory policies could affect the ability of Greene County Bancorp, Inc. to pay dividends or otherwise engage in capital distributions.

Source of Strength.  The Dodd-Frank Act extended the “source of strength” doctrine to savings and loan holding companies.  The regulatory agencies must issue regulations requiring that all bank and savings and loan holding companies serve as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.
 
Waivers of Dividends by Greene County Bancorp, MHC.  Federal regulations require Greene County Bancorp, MHC to notify the FRB of any proposed waiver of its receipt of dividends from Greene County Bancorp, Inc.  The Office of Thrift Supervision, the previous regulator for Greene County Bancorp, MHC, allowed dividend waivers where the mutual holding company’s board of directors determined that the waiver was consistent with its fiduciary duties and the waiver would not be detrimental to the safety and soundness of the institution.  The FRB has issued an interim final rule providing that, pursuant to a Dodd-Frank Act grandfathering provision, it may not object to dividend waivers under similar circumstances, but adding the requirement that a majority of the mutual holding company’s members eligible to vote have approved a waiver of dividends by the company within 12 months prior to the declaration of the dividend being waived. The MHC received the approval of its members (depositors of The Bank of Greene County) and the non-objection of the Federal Reserve Bank of Philadelphia, to waive the MHC’s receipt of quarterly cash dividends aggregating up to $0.50 per share to be declared by the Company for the four quarters ending September 30, 2020. The waiver of dividends beyond this period are subject to the MHC obtaining approval of its members at a special meeting of members and receive the non-objection of the Federal Reserve Bank of Philadelphia for such dividend waivers for the four quarters subsequent to the approval. Therefore, its ability to waive its right to receive dividends beyond this date cannot be reasonably determined at this time.

Conversion of Greene County Bancorp, MHC to Stock Form.  Federal regulations permit Greene County Bancorp, MHC to convert from the mutual form of organization to the capital stock form of organization (a “Conversion Transaction”). There can be no assurance when, if ever, a Conversion Transaction will occur, and the Board of Directors has no current intention or plan to undertake a Conversion Transaction. In a Conversion Transaction a new stock holding company would be formed as the successor to Greene County Bancorp, Inc. (the “New Holding Company”), Greene County Bancorp, MHC’s corporate existence would end, and certain depositors of The Bank of Greene County would receive the right to subscribe for additional shares of the New Holding Company. In a Conversion Transaction, each share of common stock held by stockholders other than Greene County Bancorp, MHC (“Minority Stockholders”) would be automatically converted into a number of shares of common stock of the New Holding Company determined pursuant to an exchange ratio that ensures that Minority Stockholders own the same percentage of common stock in the New Holding Company as they owned in Greene County Bancorp, Inc. immediately prior to the Conversion Transaction. Under a provision of the Dodd-Frank Act applicable to Greene County Bancorp, MHC, Minority Stockholders would not be diluted because of any dividends waived by Greene County Bancorp, MHC (and waived dividends would not be considered in determining an appropriate exchange ratio), in the event Greene County Bancorp, MHC converts to stock form.

Commercial Bank Regulation
 
Our commercial bank, Greene County Commercial Bank, derives its authority primarily from the applicable provisions of the New York Banking Law and the regulations adopted under that law. Our commercial bank is limited in its investments and the activities that it may engage in to those permissible under applicable state law and those permissible for national banks and their subsidiaries, unless those investments and activities are specifically permitted by the Federal Deposit Insurance Act or the FDIC determines that the activity or investment would pose no significant risk to the deposit insurance fund. We limit our commercial bank activities to accepting municipal deposits and acquiring municipal and other securities.
 
21

Under New York Banking Law, our commercial bank is not permitted to declare, credit or pay any dividends if its capital stock is impaired or would be impaired as a result of the dividend. In addition, the New York Banking Law provides that our commercial bank cannot declare or pay dividends in any calendar year in excess of “net profits” for such year combined with “retained net profits” of the two preceding years, less any required transfer to surplus or a fund for the retirement of preferred stock, without prior regulatory approval.
 
Our commercial bank is subject to minimum capital requirements imposed by the FDIC that are substantially similar to the capital requirements imposed on The Bank of Greene County, discussed above. Capital requirements higher than the generally applicable minimum requirements may be established for a particular bank if the FDIC determines that a bank’s capital is, or may become, inadequate in view of the bank’s particular circumstances. Failure to meet capital guidelines could subject a bank to a variety of enforcement actions, including actions under the FDIC’s prompt corrective action regulations.
 
At June 30, 2020, our commercial bank met the criteria for being considered “well-capitalized.”
 
Federal Securities Laws
 
Greene County Bancorp, Inc. common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934. Greene County Bancorp, Inc. is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
 
Greene County Bancorp, Inc. common stock held by persons who are affiliates (generally officers, directors and principal shareholders) of Greene County Bancorp, Inc. may not be resold without registration or unless sold in accordance with certain resale restrictions. If Greene County Bancorp, Inc. meets specified current public information requirements, each affiliate of Greene County Bancorp, Inc. is able to sell in the public market, without registration, a limited number of shares in any three-month period.
 
Sarbanes-Oxley Act of 2002
 
The Sarbanes-Oxley Act of 2002 was enacted to address, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information.  Under Section 302(a) of the Sarbanes-Oxley Act, the Chief Executive Officer and Chief Financial Officer of Greene County Bancorp, Inc. are required to certify that its quarterly and annual reports filed with the Securities and Exchange Commission do not contain any untrue statement of a material fact.  Rules promulgated under the Sarbanes-Oxley Act require that these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal controls; they have made certain disclosures to our auditors and the audit committee of the Board of Directors about our internal controls; and they have included information in our quarterly and annual reports about their evaluation and whether there have been significant changes in our internal controls or in other factors that could significantly affect internal controls.  Greene County Bancorp, Inc. has existing policies, procedures and systems designed to comply with these regulations, and is further enhancing and documenting such policies, procedures and systems to ensure continued compliance with these regulations.
 
Reports to Security Holders
 
Greene County Bancorp, Inc. files annual and current reports with the SEC on Forms 10-K, 10-Q and 8-K, respectively. Greene County Bancorp, Inc. also files proxy materials with the SEC.
 
The public may read and copy any materials filed by Greene County Bancorp, Inc. with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Greene County Bancorp, Inc. is an electronic filer. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of the site is http://www.sec.gov.
 
The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”)

The CARES Act, which became law on March 27, 2020, provided over $2 trillion to combat the coronavirus (COVID-19) pandemic and stimulate the economy. The law had several provisions relevant to financial institutions, including:


Allowing institutions not to characterize loan modifications relating to the COVID-19 pandemic as a troubled debt restructuring and also allowing them to suspend the corresponding impairment determination for accounting purposes.


Temporarily reducing the Community Bank Leverage Ratio (the “CBLR”) to 8%. This law also states that if a qualifying community bank falls below the CBLR, it “shall have a reasonable grace period to satisfy” the CBLR. This provision terminates on the earlier of December 31, 2020 or the date the President declares that the coronavirus emergency is terminated.

22


The ability of a borrower of a federally backed mortgage loan (VA, FHA, USDA, Freddie and Fannie) experiencing financial hardship due, directly or indirectly, to the COVID-19 pandemic to request forbearance from paying their mortgage by submitting a request to the borrower’s servicer affirming their financial hardship during the COVID-19 emergency. Such a forbearance will be granted for up to 180 days, which can be extended for an additional 180-day period upon the request of the borrower. During that time, no fees, penalties or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the mortgage contract will accrue on the borrower’s account.


The ability of a borrower of a multi-family federally backed mortgage loan that was current as of February 1, 2020, to submit a request for forbearance to the borrower’s servicer affirming that the borrower is experiencing financial hardship during the COVID-19 emergency. A forbearance will be granted for up to 30 days, which can be extended for up to two additional 30-day periods upon the request of the borrower. During the time of the forbearance, the multi-family borrower cannot evict or initiate the eviction of a tenant or charge any late fees, penalties or other charges to a tenant for late payment of rent. Additionally, a multi-family borrower that receives a forbearance may not require a tenant to vacate a dwelling unit before a date that is 30 days after the date on which the borrower provides the tenant notice to vacate and may not issue a notice to vacate until after the expiration of the forbearance.

The Paycheck Protection Program

The CARES Act provides approximately $350 billion to fund loans to eligible small businesses through the Small Business Administration’s (“SBA”) 7(a) loan guaranty program. These loans will be 100% federally guaranteed (principal and interest) through December 31, 2020. An eligible business can apply for a Paycheck Protection Program (“PPP”) loan for up to 2.5 times its average monthly “payroll costs” limited to a loan amount of $10.0 million. The proceeds of the loan can be used for payroll (excluding individual employee compensation over $100,000 per year), mortgage, interest, rent, insurance, utilities and other qualifying expenses. PPP loans will have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and 75% of the loan proceeds are used for payroll expenses, with the remaining 25% of the loan proceeds used for other qualifying expenses.
 
ITEM 1A.
Risk Factors
 
Not applicable to smaller reporting companies.
 
ITEM 1B.
Unresolved Staff Comments
 
None.
 
ITEM 2.
Properties
 
Greene County Bancorp, Inc. and The Bank of Greene County maintain their executive offices at the Administration Center, 302 Main Street, Catskill, New York.  The Bank of Greene County also has an operations center and a lending center located in Catskill, New York.  At June 30, 2020, The Bank of Greene County conducted its business through 16 full-service banking offices.  We own nine branch offices and lease seven branch offices located within Greene, Columbia, Albany and Ulster Counties. Greene County Commercial Bank conducts its business through the branch offices of The Bank of Greene County. In the opinion of management, the physical properties of our holding company and our various subsidiaries are suitable and adequate.  For more information on our properties, see Notes 1, 5 and 15 set forth in Part II, Item 8 Financial Statements and Supplementary Data, of this Report.
 
ITEM 3.
Legal Proceedings
 
Greene County Bancorp, Inc. and its subsidiaries are not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business that, in the aggregate, involve amounts that are believed by management to be immaterial to the consolidated financial condition and consolidated results of operations of Greene County Bancorp, Inc.
 
ITEM 4.
Mine Safety Disclosures
 
Not applicable.
 
23

PART II

ITEM 5.
Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Greene County Bancorp, Inc.’s common stock is listed on the NASDAQ Capital Market under the symbol “GCBC”.  As of September 6, 2020 Greene County Bancorp, Inc. had 457 stockholders of record (excluding the number of persons or entities holding stock in street name through various brokerage firms) and 8,513,414 shares outstanding.  As of such date, Greene County Bancorp, MHC (the “MHC”), Greene County Bancorp, Inc.’s mutual holding company, held 4,609,264 shares of common stock, or 54.1% of total shares outstanding.  Consequently, shareholders other than the MHC held 3,904,150 shares.

Payment of dividends on Greene County Bancorp, Inc.’s common stock is subject to determination and declaration by the Board of Directors and depends upon a number of factors, including capital requirements, regulatory limitations on the payment of dividends, Greene County Bancorp, Inc.’s results of operations, financial condition, tax considerations and general economic conditions.  No assurance can be given that dividends will be declared or, if declared, what the amount of dividends will be, or whether such dividends, once declared, will continue.  The Federal Reserve Board has adopted interim final regulations that impose significant conditions and restrictions on the ability of mutual holding companies to waive the receipt of dividends from their subsidiaries. The MHC received the approval of its members (depositors of The Bank of Greene County) and the non-objection of the Federal Reserve Bank of Philadelphia, to waive the MHC’s receipt of quarterly cash dividends aggregating up to $0.50 per share to be declared by the Company for the four quarters ending September 30, 2020. The waiver of dividends beyond this period are subject to the MHC obtaining approval of its members at a special meeting of members and receive the non-objection of the Federal Reserve Bank of Philadelphia for such dividend waivers for the four quarters subsequent to the approval. Therefore, its ability to waive its right to receive dividends beyond this date cannot be reasonably determined at this time.

On September 17, 2019, the Board of Directors of the Company adopted a stock repurchase program.  Under the repurchase program, the Company is authorized to repurchase up to 200,000 shares of its common stock.  Repurchases will be made at management’s discretion at prices management considers to be attractive and in the best interests of both the Company and its stockholders, subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses for capital, and the Company’s financial performance. At June 30, 2020, the Company had repurchased 24,400 shares.

24

ITEM 6.
Selected Financial Data

The selected financial and operational data presented below at and for the years shown was derived from the audited consolidated financial statements of Greene County Bancorp, Inc. and should be read in conjunction with the consolidated financial statements presented elsewhere in this Report.
 
(Dollars in thousands, except per share amounts)
 
2020
   
2019
   
2018
 
SELECTED FINANCIAL CONDITION DATA:
                 
Total assets
 
$
1,676,803
   
$
1,269,462
   
$
1,151,478
 
Loans receivable, net
   
993,522
     
785,738
     
704,431
 
Securities available-for-sale
   
226,709
     
122,728
     
120,806
 
Securities held-to-maturity
   
383,657
     
304,208
     
274,550
 
Equity securities
   
267
     
253
     
217
 
Deposits
   
1,501,075
     
1,120,569
     
1,025,234
 
Shareholders’ equity
   
128,805
     
112,369
     
96,191
 
AVERAGE BALANCES:
                       
Total assets
   
1,470,870
     
1,198,340
     
1,073,980
 
Interest-earning assets
   
1,450,398
     
1,180,201
     
1,056,101
 
Loans receivable, net
   
861,322
     
745,161
     
659,132
 
Securities
   
528,131
     
400,894
     
359,661
 
Deposits
   
1,318,027
     
1,052,146
     
952,753
 
Borrowings
   
15,300
     
30,192
     
22,913
 
Shareholders’ equity
   
120,387
     
103,894
     
89,540
 
SELECTED OPERATIONS DATA:
                       
Total interest income
   
53,314
     
46,308
     
38,928
 
Total interest expense
   
8,481
     
6,308
     
4,014
 
Net interest income
   
44,833
     
40,000
     
34,914
 
Provision for loan losses
   
3,905
     
1,659
     
1,530
 
Net interest income after provision for loan losses
   
40,928
     
38,341
     
33,384
 
Total noninterest income
   
8,650
     
8,361
     
7,481
 
Total noninterest expense
   
27,822
     
25,676
     
22,362
 
Income before provision for income taxes
   
21,756
     
21,026
     
18,503
 
Provision for income taxes
   
3,029
     
3,542
     
4,095
 
Net income
   
18,727
     
17,484
     
14,408
 
FINANCIAL RATIOS:
                       
Return on average assets1
   
1.27
%
   
1.46
%
   
1.34
%
Return on average shareholders’ equity2
   
15.56
     
16.83
     
16.09
 
Noninterest expenses to average total assets
   
1.89
     
2.14
     
2.08
 
Average interest-earning assets to average interest-bearing liabilities
   
118.84
     
120.31
     
120.36
 
Net interest rate spread3
   
2.98
     
3.28
     
3.23
 
Net interest margin4
   
3.09
     
3.39
     
3.31
 
Efficiency ratio5
   
52.02
     
53.09
     
52.75
 
Shareholders’ equity to total assets, at end of period
   
7.68
     
8.85
     
8.35
 
Average shareholders’ equity to average assets
   
8.18
     
8.67
     
8.34
 
Dividend payout ratio6
   
20.00
     
19.51
     
23.08
 
Actual dividends declared to net income7
   
11.95
     
11.65
     
10.59
 
Nonperforming assets to total assets, at end of period
   
0.24
     
0.29
     
0.32
 
Nonperforming loans to net loans, at end of period
   
0.41
     
0.46
     
0.51
 
Allowance for loan losses to nonperforming loans
   
402.04
     
362.84
     
335.96
 
Allowance for loan losses to total loans receivable
   
1.62
     
1.65
     
1.68
 
Book value per share8
 
$
15.13
   
$
13.16
   
$
11.27
 
Basic earnings per share
   
2.20
     
2.05
     
1.69
 
Diluted earnings per share
   
2.20
     
2.05
     
1.69
 
OTHER DATA:
                       
Closing market price of common stock
 
$
22.30
   
$
29.42
   
$
33.90
 
Number of full-service offices
   
16
     
15
     
14
 
Number of full-time equivalent employees
   
182
     
169
     
156
 


1
Ratio of net income to average total assets.
2
Ratio of net income to average shareholders’ equity.
3
The difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
4
Net interest income as a percentage of average interest-earning assets.
5
Noninterest expense divided by the sum of net interest income and noninterest income.
6
Dividends per share divided by basic earnings per share. This calculation does not take into account the waiver of dividends by Greene County Bancorp, MHC.
7
Dividends declared divided by net income.
8
Shareholders’ equity divided by outstanding shares.
 
25

ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
GENERAL

Greene County Bancorp, Inc. (the “Company”) is the holding company for The Bank of Greene County (the “Bank”), a community-based bank offering a variety of financial services to meet the needs of the communities it serves.  The Bank of Greene County is a federally chartered savings bank.  The Bank of Greene County’s principal business is attracting deposits from customers within its market area and investing those funds primarily in loans, with excess funds used to invest in securities.  At June 30, 2020, The Bank of Greene County operated 16 full-service branches, an administration office, a lending center, and an operations center in New York’s Hudson Valley Region.  In June 2004, Greene County Commercial Bank (“GCCB”) was opened for the limited purpose of providing financial services to local municipalities.  GCCB is a subsidiary of The Bank of Greene County, and is a New York State-chartered commercial bank.  Greene County Bancorp, Inc.’s stock is traded on the NASDAQ Capital Market under the symbol “GCBC.”  Greene County Bancorp, MHC is a mutual holding company that owns 54.1% of the Company’s outstanding common stock.    In June 2011, Greene Property Holdings, Ltd. was formed as a New York corporation that has elected under the Internal Revenue Code to be a real estate investment trust.  Greene Properties Holding, Ltd. is a subsidiary of The Bank of Greene County.  Certain mortgages and notes held by The Bank of Greene County were transferred to and are beneficially owned by Greene Property Holdings, Ltd.  The Bank of Greene County continues to service these loans. In December 2014, Greene Risk Management, Inc. was formed as a Nevada corporation that is operating as a pooled captive insurance company.  The purpose of this company is to provide additional insurance coverage for the Company and its subsidiaries related to the operations of the Company for which insurance may not be economically feasible.

During the second half of the fiscal year ended June 30, 2020, the novel coronavirus (“COVID-19”) had spread world-wide and the Federal and state governments have been diligently working to contain its spread.  The containment strategies implemented by local governments has had an enormous impact on the economy and may have a negative impact on borrowers’ ability to make timely loan payments as many businesses are forced to temporarily shut down.

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and provides over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic.  The CARES act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (“PPP”).  Although we were not already a qualified SBA lender, we enrolled in the PPP by completing the required documentation.   An eligible business can apply for a PPP loan up to the greater of: (1) 2.5 times its average monthly “payroll costs”; or (2) $10.0 million.  PPP loans will have: (a) an interest rate of 1.0%, (b) a 2-5 year loan term to maturity, and (c) principal and interest payments deferred for six months from the date of disbursement.  The SBA will guarantee 100% of the PPP loans made to eligible borrowers.  The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and at least 60% of the loan proceeds are used for payroll expenses, with the remaining 40%, or less, of the loan proceeds used for other qualifying expenses.  As of June 30, 2020, the Company has processed 1,267 applications totaling $99.8 million of loans under the PPP.  These PPP loans are 100% guaranteed by the SBA and we expect that most of the funds provided will be forgiven based on certain criteria established within the Act.
 
Depending upon the duration of the COVID-19 pandemic, these strategies may not be sufficient for all borrowers impacted and may ultimately result in losses to the Company.  As discussed under Asset Quality and Loan Loss Provision below, the Company has increased its allowance for loan losses during the year ended June 30, 2020 and believes that total reserves are adequate.

The Federal Reserve Board has taken a number of measures in an attempt to mitigate the impact of the coronavirus on the economy.  In addition to providing guidance to financial institutions who are working with borrowers affected by the coronavirus, the Federal Reserve Board decreased the Federal Funds benchmark rate by 100 basis points to 0.00%-0.25%, in mid-March 2020.  Although the impact to the Company from this rate decrease is minimal for the three and twelve months ended June 30, 2020, it is anticipated that it will have a negative impact on the Company’s interest rate spread and margin during the fiscal year ended June 30, 2021.

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, 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.

26

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.

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.

Management of Credit Risk

Management considers credit risk to be an important risk factor affecting the financial condition and operating results of Greene County Bancorp, Inc. The potential for loss associated with this risk factor is managed through a combination of policies approved by Greene County Bancorp, Inc.’s Board of Directors, the monitoring of compliance with these policies, and the periodic reporting and evaluation of loans with problem characteristics. Policies relate to the maximum amount that can be granted to a single borrower and such borrower’s related interests, the aggregate amount of loans outstanding by type in relation to total assets and capital, loan concentrations, loan-to-collateral value ratios, approval limits and other underwriting criteria. Policies also exist with respect to the rating of loans, determination of when loans should be placed on a nonperforming status and the factors to be considered in establishing Greene County Bancorp, Inc.’s allowance for loan losses.  Management also considers credit risk when evaluating potential and current holdings of securities.  Credit risk is a critical component in evaluating corporate debt securities.  Greene County Bancorp, Inc. has purchased municipal securities as part of its strategy based on the fact that such securities can offer a higher tax-equivalent yield than other similar investments.

Management is working with borrowers to determine best strategies to help mitigate the impact of the temporary business closures, decline in business, and loss of employment, including payment deferrals, debt consolidations and/or loan restructurings due to COVID-19. The Company has instituted a loan deferment program whereby short-term (3-6 months) deferral of principal and/or interest payments will be provided.  As of June 30, 2020, the Bank has received requests to defer 706 loans aggregating $193.5 million.   Based on guidance provided by bank regulators on March 22, 2020 regarding deferrals granted due to COVID-19, the Company will not report these loans as delinquent and will continue to recognize interest income during the deferral period.  These loans will be closely monitored to determine collectability and accrual and delinquency status will be updated as deemed appropriate.  The Company expects COVID-19 to have a negative impact on credit risk.  For further discussion regarding loan deferrals see Part II, Item 8 Financial Statements and Supplemental Data, Note 4, Loans of this Report.

FINANCIAL OVERVIEW

Net income for the year ended June 30, 2020 amounted to $18.7 million, or $2.20 per basic and diluted share, as compared to $17.5 million, or $2.05 per basic and diluted share, for the year ended June 30, 2019, an increase of $1.2 million, or 7.1%.  The increase in net income was primarily the result of increases of $4.8 million in net interest income, $289,000 in noninterest income, and $513,000 decrease in provision for income taxes which was partially offset by an increase of $2.1 million in noninterest expense and $2.2 million in provision for loan losses. The change in net interest income resulted from growth in interest-earning assets when comparing the years ended June 30, 2020 and 2019.  Growth in interest-earning assets was within both investment securities and loans. Growth in loans was primarily in commercial real estate mortgages and commercial loans which are generally higher yielding assets.  However, included in this growth were $99.8 million of SBA PPP loans, which were originated at a rate of 1.00%.

27

Net interest spread and margin decreased 30 basis points when comparing the years ended June 30, 2020 and 2019.  Net interest spread decreased to 2.98% for the year ended June 30, 2020 compared to 3.28% for the year ended June 30, 2019.  Net interest margin decreased to 3.09% for the year ended June 30, 2020 compared to 3.39% for the year ended June 30, 2019. Changes in noninterest income and noninterest expense are more fully explained within the Comparison of Operating Results for the Years Ended June 30, 2020 and 2019 contained herein.

Total assets grew $407.3 million, or 32.1%, to $1.7 billion at June 30, 2020 as compared to $1.3 billion at June 30, 2019.  Net loans increased $207.8 million, or 26.4%, to $993.5 million at June 30, 2020 as compared to $785.7 million at June 30, 2019.  Included in net loans at June 30, 2020, are $99.8 million of loan growth from SBA Paycheck Protection Program loans partially offset by deferred SBA fees related to these loans of $3.9 million.  Securities classified as available-for-sale and held-to-maturity increased $183.5 million, or 43.0%, to $610.4 million at June 30, 2020 as compared to $426.9 million at June 30, 2019.  Deposits grew $380.5 million, or 34.0%, to $1.5 billion at June 30, 2020 as compared to $1.1 billion at June 30, 2019.  Total shareholders’ equity amounted to $128.8 million and $112.4 million at June 30, 2020 and 2019, respectively, or 7.7% and 8.9% of total assets, respectively.

Comparison of Financial Condition as of June 30, 2020 and 2019

SECURITIES

Securities available-for-sale and held-to-maturity increased $183.5 million, or 43.0%, to $610.4 million at June 30, 2020 as compared to $426.9 million at June 30, 2019.  Securities purchases totaled $391.5 million during the year ended June 30, 2020 and consisted of $283.0 million of state and political subdivision securities, $100.6 million of mortgage-backed securities, $3.8 million of other securities, and $4.1 million of corporate debt securities. Principal pay-downs and maturities during the year amounted to $208.1 million, of which $48.1 million consisted of mortgage-backed securities, $144.4 million consisted of state and political subdivision securities, $12.3 million consisted of US government agency securities, and $3.3 million were other securities.

Greene County Bancorp, Inc. holds 63.5% of its securities portfolio at June 30, 2020 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.

   
At June 30,
 
   
2020
   
2019
   
2018
 
(Dollars in thousands)
 
Carrying
Amount
   
Percent
of total
   
Carrying
Amount
   
Percent
of total
   
Carrying
Amount
   
Percent
of total
 
Securities available-for-sale:
                                   
U.S. government sponsored enterprises
 
$
504
     
0.1
%
 
$
5,553
     
1.3
%
 
$
5,531
     
1.4
%
State and political subdivisions
   
177,107
     
29.0
     
96,570
     
22.6
     
92,255
     
23.4
 
Mortgage-backed securities-residential
   
15,528
     
2.5
     
2,645
     
0.6
     
3,247
     
0.8
 
Mortgage-backed securities-multi-family
   
28,910
     
4.7
     
16,410
     
3.8
     
18,069
     
4.6
 
Corporate debt securities
   
4,660
     
0.8
     
1,550
     
0.4
     
1,704
     
0.4
 
Total securities available-for-sale
   
226,709
     
37.1
     
122,728
     
28.7
     
120,806
     
30.6
 
Securities held-to-maturity:
                                               
U.S. government sponsored enterprises
   
2,000
     
0.3
     
9,249
     
2.2
     
9,245
     
2.3
 
State and political subdivisions
   
210,535
     
34.5
     
152,358
     
35.7
     
136,335
     
34.5
 
Mortgage-backed securities-residential
   
38,884
     
6.4
     
4,570
     
1.1
     
6,472
     
1.6
 
Mortgage-backed securities-multi-family
   
127,582
     
20.9
     
134,970
     
31.6
     
118,780
     
30.0
 
Corporate debt securities
   
2,593
     
0.4
     
1,478
     
0.3
     
1,466
     
0.4
 
Other securities
   
2,063
     
0.4
     
1,583
     
0.4
     
2,252
     
0.6
 
Total securities held-to-maturity
   
383,657
     
62.9
     
304,208
     
71.3
     
274,550
     
69.4
 
Total securities
 
$
610,366
     
100.0
%
 
$
426,936
     
100.0
%
 
$
395,356
     
100.0
%

28

Investment Maturity Schedule

The estimated fair value of debt securities at June 30, 2020 by contractual maturity are shown below.  Mortgage-backed securities balances are presented based on final maturity date and do not reflect the expected cash flows from monthly principal repayments.  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. No tax-equivalent adjustments were made in calculating the weighted average yield.

(Dollars in thousands)
 
In One Year
or Less
   
After One
Year
through
Five Years
   
After Five
Years
through Ten
Years
   
After Ten Years
   
Total
 
Securities available-for-sale:
                             
U.S. government sponsored enterprises
 
$
504
   
$
-
   
$
-
   
$
-
   
$
504
 
State and political subdivisions
   
173,879
     
3,183
     
45
     
-
     
177,107
 
Mortgage-backed securities-residential
   
-
     
38
     
1,266
     
14,224
     
15,528
 
Mortgage-backed securities-multi-family
   
115
     
10,517
     
16,036
     
2,242
     
28,910
 
Corporate debt securities
   
-
     
1,097
     
1,558
     
2,005
     
4,660
 
Total securities available-for-sale
   
174,498
     
14,835
     
18,905
     
18,471
     
226,709
 
Securities held-to-maturity:
                                       
U.S. government sponsored enterprises
   
2,011
     
-
     
-
     
-
     
2,011
 
State and political subdivisions
   
34,474
     
92,885
     
60,076
     
37,383
     
224,818
 
Mortgage-backed securities-residential
   
797
     
149
     
1,518
     
37,407
     
39,871
 
Mortgage-backed securities-multi-family
   
3,975
     
63,157
     
58,986
     
8,123
     
134,241
 
Corporate debt securities
   
-
     
-
     
1,510
     
960
     
2,470
 
Other securities
   
1,397
     
632
     
20
     
52
     
2,101
 
Total securities held-to-maturity
   
42,654
     
156,823
     
122,110
     
83,925
     
405,512
 
Total securities
 
$
217,152
   
$
171,658
   
$
141,015
   
$
102,396
   
$
632,221
 
Weighted Average Yield
   
1.80
%
   
2.48
%
   
2.43
%
   
2.17
%
   
2.18
%

LOANS

Net loans receivable increased $207.8 million, or 26.4%, to $993.5 million at June 30, 2020 from $785.7 million at June 30, 2019.  The loan growth experienced during the year consisted primarily of $51.7 million in commercial real estate loans, $109.6 million in commercial loans of which $99.8 million consists of SBA PPP loans, $4.4 million of residential construction and land, $38.6 million of commercial construction and $11.5 million in residential real estate loans, partially offset by a $1.1 million decrease in home equity loans, as well as an increase of $3.2 million in allowance for loan losses and an increase of $3.6 million in net deferred fees.  The Company continues to experience loan growth as a result of continued growth in its customer base within its newest markets in Ulster and Columbia counties, and its relationships with other financial institutions in originating loan participations.  We believe that the continued low interest rate environment and strong customer satisfaction from personal service continued to enhance loan growth. If long term interest 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.

29

Loan Portfolio Composition

Set forth below is selected information concerning the composition of The Bank of Greene County’s loan portfolio in dollar amounts and in percentages (before deductions for deferred fees and costs, unearned discounts and allowances for losses) as of the dates indicated.
 
   
At June 30,
 
   
2020
   
2019
   
2018
   
2017
   
2016
 
(Dollars in thousands)
 
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
 
Real estate loans:
                                                           
Residential real estate
 
$
279,332
     
27.58
%
 
$
267,802
     
33.55
%
 
$
255,848
     
35.75
%
 
$
245,331
     
38.67
%
 
$
234,992
     
44.23
%
Residential construction and land
   
11,847
     
1.17
     
7,462
     
0.93
     
9,951
     
1.39
     
7,160
     
1.13
     
5,575
     
1.05
 
Multi-family
   
25,104
     
2.48
     
24,592
     
3.08
     
14,961
     
2.09
     
9,199
     
1.45
     
3,918
     
0.74
 
Commercial real estate
   
381,415
     
37.67
     
329,668
     
41.31
     
283,935
     
39.68
     
257,964
     
40.67
     
192,678
     
36.27
 
Commercial construction
   
74,920
     
7.40
     
36,361
     
4.56
     
39,366
     
5.50
     
28,430
     
4.48
     
20,159
     
3.79
 
Total real estate loans
   
772,618
     
76.30
     
665,885
     
83.43
     
604,061
     
84.41
     
548,084
     
86.40
     
457,322
     
86.08
 
                                                                                 
Consumer loans
                                                                               
Home equity
   
22,106
     
2.18
     
23,185
     
2.91
     
21,919
     
3.06
     
21,076
     
3.32
     
20,893
     
3.93
 
Consumer installment(1)
   
4,817
     
0.48
     
5,481
     
0.69
     
5,017
     
0.70
     
4,790
     
0.76
     
4,350
     
0.82
 
Total consumer loans
   
26,923
     
2.66
     
28,666
     
3.60
     
26,936
     
3.76
     
25,866
     
4.08
     
25,243
     
4.75
 
                                                                                 
Commercial loans
   
213,119
     
21.04
     
103,554
     
12.97
     
84,644
     
11.83
     
60,381
     
9.52
     
48,725
     
9.17
 
                                                                                 
Total consumer loans and commercial loans
   
240,042
     
23.70
     
132,220
     
16.57
     
111,580
     
15.59
     
86,247
     
13.60
     
73,968
     
13.92
 
                                                                                 
Total gross loans
   
1,012,660
     
100.00
%
   
798,105
     
100.00
%
   
715,641
     
100.00
%
   
634,331
     
100.00
%
   
531,290
     
100.00
%
                                                                                 
Less:
                                                                               
Allowance for loan losses
   
(16,391
)
           
(13,200
)
           
(12,024
)
           
(11,022
)
           
(9,485
)
       
Deferred (fees) and costs
   
(2,747
)
           
833
             
814
             
878
             
959
         
                                                                                 
Total loans receivable, net
 
$
993,522
           
$
785,738
           
$
704,431
           
$
624,187
           
$
522,764
         


(1)
Includes direct automobile loans (on both new and used automobiles) and personal loans.

Loan Maturity Schedule

The following table sets forth certain information as of June 30, 2020 regarding the amount of loans maturing or re-pricing in The Bank of Greene County’s portfolio.  Adjustable-rate loans are included in the period in which interest rates are next scheduled to adjust rather than the period in which they contractually mature, and fixed-rate loans are included in the period in which the final contractual repayment is due.  Lines of credit with no specified maturity date are included in the category “within one year.”

(In thousands)
 
Within
1 Year
   
1 Year
Through
3 Years
   
3 Years
Through
5 Years
   
5 Years
Through
10 Years
   
Beyond
10 Years
   
Total
 
Residential real estate
 
$
10,706
   
$
21,992
   
$
35,856
   
$
61,323
   
$
149,455
   
$
279,332
 
Residential construction and land
   
11,517
     
29
     
90
     
211
     
-
     
11,847
 
Multi-family
   
5,719
     
5,108
     
6,544
     
7,332
     
401
     
25,104
 
Commercial real estate
   
105,947
     
66,788
     
88,901
     
97,155
     
22,624
     
381,415
 
Commercial construction
   
66,420
     
8,500
     
-
     
-
     
-
     
74,920
 
Consumer loans
   
16,178
     
1,998
     
3,457
     
5,235
     
55
     
26,923
 
Commercial loans
   
44,162
     
114,130
     
17,181
     
31,891
     
5,755
     
213,119
 
Total loan portfolio
 
$
260,649
   
$
218,545
   
$
152,029
   
$
203,147
   
$
178,290
   
$
1,012,660
 

30

The total amount of the above loans that mature or are due after June 30, 2021 that have fixed interest rates is $476.2 million while the total amount of loans that mature or are due after such date that have adjustable interest rates is $275.8 million.  The interest rate risk implications of The Bank of Greene County’s substantial preponderance of fixed-rate loans is discussed in detail above within the section Management of Interest Rate Risk.
 
Potential Problem Loans

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 and other assets 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.  Assets that do not currently expose the insured financial institutions to sufficient risk to warrant classification in one of the aforementioned categories but otherwise possess weaknesses are designated “Special Mention.”  For further discussion regarding how management determines when a loan should be classified, see Part II, Item 8 Financial Statements and Supplemental Data, Note 4, Loans of this Report.  At June 30, 2020, The Bank of Greene County had $7.3 million of loans classified as substandard, and $25.5 million of loans designated as special mention.  No loans were classified as either doubtful or loss at June 30, 2020.

The Federal Reserve Board along with the other various regulatory agencies have issued joint guidance to financial institutions who are working with borrowers affected by COVID-19.  The Company is working with borrowers, instituting a loan deferment program whereby short-term deferral of payments (3-6 months) will be provided.  As of June 30, 2020, the Bank has received requests to defer payments on 706 loans aggregating $193.5 million.  Based on guidance provided by bank regulators on March 22, 2020 regarding deferrals granted due to COVID-19, we will not report these loans as delinquent and will continue to recognize interest income during the deferral period.  These loans will be closely monitored to determine collectability and accrual and delinquency status will be updated as deemed appropriate.  For further discussion regarding loan deferrals, see Part II, Item 8 Financial Statements and Supplemental Data, Note 4, Loans of this Report.

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.  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 homogeneous 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. For further discussion and detail regarding impaired loans please refer to Part II, Item 8 Financial Statements and Supplemental Data, Note 4 Loans of this Report. 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.

31

Analysis of Nonaccrual Loans, Nonperforming Assets and Restructured Loans

The table below details additional information related to nonaccrual loans for the periods indicated:

   
At June 30,
 
(Dollars in thousands)
 
2020
   
2019
   
2018
   
2017
   
2016
 
Nonaccrual loans:
                             
Residential real estate
 
$
2,513
   
$
2,474
   
$
1,778
   
$
1,240
   
$
1,207
 
Multi-family
   
151
     
-
     
-
     
-
     
-
 
Commercial real estate
   
781
     
598
     
1,147
     
1,452
     
1,899
 
Commercial construction
   
-
     
-
     
-
     
176
     
-
 
Home equity
   
319
     
452
     
298
     
218
     
18
 
Consumer installment
   
-
     
6
     
18
     
10
     
-
 
Commercial
   
313
     
108
     
276
     
476
     
202
 
Total nonaccrual loans
   
4,077
     
3,638
     
3,517
     
3,572
     
3,326
 
                                         
Accruing loans delinquent 90 days or more:
                                       
Residential real estate
   
-
     
-
     
62
     
69
     
77
 
Total accruing loans delinquent 90 days or more
   
-
     
-
     
62
     
69
     
77
 
Foreclosed real estate:
                                       
Residential real estate
   
-
     
53
     
119
     
-
     
61
 
Residential construction & land
   
-
     
-
     
-
     
-
     
65
 
Commercial real estate
   
-
     
-
     
-
     
799
     
244
 
Total foreclosed real estate
   
-
     
53
     
119
     
799
     
370
 
                                         
Total nonperforming assets
 
$
4,077
   
$
3,691
   
$
3,698
   
$
4,440
   
$
3,773
 
                                         
Troubled debt restructuring:
                                       
Nonperforming (included above)
 
$
304
   
$
531
   
$
774
   
$
932
   
$
1,645
 
Performing (accruing and excluded above)
   
909
     
1,368
     
1,557
     
916
     
934
 
                                         
Nonperforming assets to total assets
   
0.24
%
   
0.29
%
   
0.32
%
   
0.45
%
   
0.43
%
                                         
Nonperforming loans to net loans
   
0.41
%
   
0.46
%
   
0.51
%
   
0.58
%
   
0.65
%

The table below details additional information related to nonaccrual loans:


 
For the years ended June 30,
 
(In thousands)
 
2020
   
2019
   
2018
 
Interest income that would have been recorded if loans had been performing in accordance with original terms
 
$
296
   
$
257
   
$
230
 
Interest income that was recorded on nonaccrual loans
   
193
     
146
     
125
 

Nonperforming assets amounted to $4.1 million at June 30, 2020 and $3.7 million at June 30, 2019, respectively.  Total impaired loans amounted to $3.3 million at June 30, 2020 compared to $3.9 million at June 30, 2019, a decrease of $624,000, or 16.0%.  The decrease in impaired loans was the result of partial charge-offs on residential loans.  Impaired loans include loans that have been modified in a troubled debt restructuring and are performing under the modified terms and have therefore been returned to performing status.

Loans on nonaccrual status totaled $4.1 million at June 30, 2020 of which $1.3 million were in the process of foreclosure.  At June 30, 2020, there were eight residential loans in the process of foreclosure totaling $1.0 million. Included in nonaccrual loans were $1.4 million of loans which were less than 90 days past due at June 30, 2020, 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.  There were no loans past due which were making payments pursuant to forbearance agreements as of June 30, 2020.   Under the forbearance agreements, the customers have made arrangements with The Bank of Greene County 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 of Greene County has agreed not to continue foreclosure proceedings. Loans on nonaccrual status totaled $3.6 million at June 30, 2019 of which $1.6 million were in the process of foreclosure.  At June 30, 2019, there were 12 residential loans in the process of foreclosure totaling $1.5 million.  Included in nonaccrual loans were $1.8 million of loans which were less than 90 days past due at June 30, 2019, 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 at June 30, 2019 were $175,000 of loans which were making payments pursuant to forbearance agreements.

32

The table below details additional information on impaired loans as of the dates indicated:

   
For the years ended June 30,
 
(In thousands)
 
2020
   
2019
   
2018
 
Balance of impaired loans, with a valuation allowance
 
$
1,662
   
$
2,000
   
$
2,799
 
Allowances relating to impaired loans included in allowance for loan losses
   
228
     
262
     
482
 
Balance of impaired loans, without a valuation allowance
   
1,608
     
1,894
     
1,349
 
Average balance of impaired loans for the years ended
   
3,496
     
3,982
     
3,955
 
Interest income recorded on impaired loans during the years ended
   
169
     
160
     
100
 

Impaired loans totaled $3.3 million and $3.9 million at June 30, 2020 and 2019, respectively.  The decreased in impaired loans during the period were the result of a residential mortgage loan being paid off in a short-sale and a residential mortgage loan no longer being impaired.  For additional details on impaired loans, see the table in Part II, Item 8 Financial Statements and Supplemental Data, Note 4, Loans of this Report.

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 Bank of Greene County’s allowance for loan losses.  Such agencies may require 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.  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 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. 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.

The Bank of Greene County recognizes that strategies put in place to assist borrowers through the COVID-19 pandemic may not be sufficient to fully mitigate the impact to borrowers and that it is likely that a portion of the loan portfolio will default and result in losses to the Bank of Greene County.  As a result, the Bank of Greene County has increased its provision for loan losses during the year ended June 30, 2020 by $1.3 million to reserve for these losses.  Much uncertainty remains regarding the duration of the containment strategies and the overall impact to the economy and to local businesses.  Management is closely monitoring the changes within its economic environment, stress testing the loan portfolio under various scenarios, and adjusting the allowance for loan loss as necessary to remain adequately reserved.

33

Analysis of allowance for loan losses activity

   
At or for the Years Ended June 30,
 
(Dollars in thousands)
 
2020
   
2019
   
2018
   
2017
   
2016
 
Balance at the beginning of the period
 
$
13,200
   
$
12,024
   
$
11,022
   
$
9,485
   
$
8,142
 
Charge-offs:
                                       
Residential real estate
   
102
     
287
     
141
     
90
     
-
 
Commercial real estate
   
-
     
74
     
-
     
39
     
162
 
Home equity
   
-
     
-
     
-
     
-
     
-
 
Consumer installment
   
459
     
374
     
318
     
270
     
245
 
Commercial loans
   
335
     
51
     
159
     
66
     
20
 
Total loans charged off
   
896
     
786
     
618
     
465
     
427
 
                                         
Recoveries:
                                       
Residential real estate
   
16
     
13
     
-
     
-
     
-
 
Commercial real estate
   
-
     
-
     
-
     
-
     
17
 
Consumer installment
   
130
     
137
     
85
     
88
     
78
 
Commercial loans
   
36
     
153
     
5
     
3
     
2
 
Total recoveries
   
182
     
303
     
90
     
91
     
97
 
                                         
Net charge-offs
   
714
     
483
     
528
     
374
     
330
 
                                         
Provisions charged to operations
   
3,905
     
1,659
     
1,530
     
1,911
     
1,673
 
Balance at the end of the period
 
$
16,391
   
$
13,200
   
$
12,024
   
$
11,022
   
$
9,485
 
                                         
Net charge-offs to average loans outstanding
   
0.08
%
   
0.06
%
   
0.08
%
   
0.06
%
   
0.07
%
Net charge-offs to nonperforming assets
   
17.51
     
13.09
     
14.28
     
8.42
     
8.75
 
Allowance for loan losses to nonperforming loans
   
402.04
     
362.84
     
335.96
     
302.72
     
278.72
 
Allowance for loan losses to total loans receivable
   
1.62
     
1.65
     
1.68
     
1.74
     
1.79
 
Net charge-offs to average assets
   
0.05
     
0.04
     
0.05
     
0.04
     
0.04
 

Allocation of Allowance for Loan Losses

The following table sets forth the allocation of the allowance for loan losses by loan category at the dates indicated.  The allowance is allocated to each loan category based on historical loss experience and economic conditions.

    At June 30,  

  2020     2019     2018     2017     2016  
(Dollars in thousands)
 
Amount of
loan loss
allowance
   
Percent
of loans
in each
category
to total
loans
   
Amount of
loan loss
allowance
   
Percent
of loans
in each
category
to total
loans
   
Amount of
loan loss
allowance
   
Percent
of loans
in each
category
to total
loans
   
Amount of
loan loss
allowance
   
Percent
of loans
in each
category
to total
loans
   
Amount of
loan loss
allowance
   
Percent
of loans
in each
category
to total
loans
 
Residential real estate
 
$
2,091
     
27.6
%
 
$
2,026
     
33.6
%
 
$
2,116
     
35.8
%
 
$
2,289
     
38.7
%
 
$
2,396
     
44.2
%
Residential construction and land
   
141
     
1.2
     
87
     
0.9
     
114
     
1.4
     
89
     
1.1
     
75
     
1.1
 
Multi-family
   
176
     
2.5
     
180
     
3.1
     
162
     
2.1
     
43
     
1.4
     
22
     
0.7
 
Commercial real estate
   
8,634
     
37.6
     
7,110
     
41.3
     
5,979
     
39.6
     
5,589
     
40.7
     
4,541
     
36.3
 
Commercial construction
   
2,053
     
7.4
     
872
     
4.5
     
950
     
5.5
     
687
     
4.5
     
502
     
3.8
 
Home equity
   
295
     
2.2
     
314
     
2.9
     
317
     
3.1
     
234
     
3.3
     
309
     
3.9
 
Consumer installment
   
197
     
0.5
     
250
     
0.7
     
224
     
0.7
     
231
     
0.8
     
228
     
0.8
 
Commercial loans
   
2,804
     
21.0
     
2,361
     
13.0
     
2,128
     
11.8
     
1,680
     
9.5
     
1,412
     
9.2
 
Unallocated
   
-
     
-
     
-
     
-
     
34
     
-
     
180
     
-
     
-
     
-
 
Totals
 
$
16,391
     
100.0
%
 
$
13,200
     
100.0
%
 
$
12,024
     
100.0
%
 
$
11,022
     
100.0
%
 
$
9,485
     
100.0
%

34

For further discussion and detail regarding the Allowance for Loan Loss, please refer to Part II, Item 8 Financial Statements and Supplemental Data, Note 4 Loans of this Report.
 
PREMISES AND EQUIPMENT

Premises and equipment amounted to $13.7 million and $13.3 million at June 30, 2020 and 2019, respectively.  Purchases totaled $1.1 million during the year ended June 30, 2020, consisting primarily of building improvements and equipment for a new branch located in Kinderhook-Valatie, New York and expansion to an existing lending center.  Purchases totaled $589,000 during the year ended June 30, 2019, consisting primarily of building improvements and equipment for new branches located in Woodstock, NY.  Depreciation for the year ended June 30, 2020 totaled $713,000, compared to $638,000 for the year ended June 30, 2019.  There were no disposals of premises and equipment during the fiscal years ended June 30, 2020 and 2019.

PREPAID EXPENSES AND OTHER ASSETS

Prepaid expenses and other assets, consisting primarily of accrued interest receivable and prepaid expenses, totaled $13.2 million at June 30, 2020, compared to $9.1 million at June 30, 2019, an increase of $4.1 million.  This increase was due to an increase of $822,000 in deferred taxes, accrued interest receivable of $2.4 million, and other assets of $1.5 million. The increase in accrued interest receivable was the result of the growth in interest-earning assets. The growth in other assets was the result of the adoption of ASU 2016-02 - Leases during the year ended June 30, 2020, respectively. Please refer to Part II, Item 8 Financial Statements and Supplemental Date, Note 15 Leases of this report for further discussion.

Real estate acquired as a result of foreclosure, or in-substance foreclosure, is classified as foreclosed real estate (“FRE”) until such time as it is sold.  When real estate is classified as FRE, it is recorded at its fair value, less estimated costs of disposal establishing a new cost basis. Upon transfer to FRE, if the value of the property is less than the loan, less any related specific loan loss provisions, the difference is charged against the allowance for loan losses.  Any subsequent write-down of FRE is charged against earnings.  There were no foreclosed real estate assets at June 30, 2020.  At June 30, 2019, there was one residential property with a fair value of $53,000 held in FRE.  This property was sold during the year ended June 30, 2020.

DEPOSITS

Total deposits increased to $1.5 billion at June 30, 2020 from $1.1 billion at June 30, 2019, an increase of $380.5 million, or 34.0%. This increase was primarily from continued growth in new account relationships among all of our lines of business including retail, business and municipal banking. A portion of the increase in deposits is also due to the funding of PPP loans and economic stimulus payments received by individual customers. NOW deposits increased $305.0 million, or 47.1%, and noninterest-bearing deposits increased $30.7 million, or 28.6%, money market deposits increased $19.1 million or 16.6%, and savings deposits increased $26.7 million, or 12.4% when comparing June 30, 2020 and 2019. These increases were partially offset by a slight decrease in certificates of deposit of $917,000, or 2.5%, when comparing June 30, 2020 and 2019.

   
At June 30,
 
   
2020
   
2019
   
2018
 
(Dollars in thousands)
 
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
 
Transaction and savings deposits:
                                   
Noninterest-bearing deposits
 
$
138,187
     
9.2
%
 
$
107,469
     
9.6
%
 
$
102,694
     
10.0
%
Certificates of deposit
   
35,625
     
2.4
     
36,542
     
3.3
     
51,317
     
5.0
 
Savings deposits
   
241,371
     
16.1
     
214,680
     
19.2
     
216,103
     
21.1
 
Money market deposits
   
133,970
     
8.9
     
114,915
     
10.2
     
133,753
     
13.0
 
NOW deposits
   
951,922
     
63.4
     
646,963
     
57.7
     
521,367
     
50.9
 
Total deposits
 
$
1,501,075
     
100.0
%
 
$
1,120,569
     
100.0
%
 
$
1,025,234
     
100.0
%

The amount of certificates of deposit by time remaining to maturity as of June 30, 2020 is set forth in Part II, Item 8 Financial Statements and Supplemental Data, Note 6, Deposits of this Report.

BORROWINGS

At June 30, 2020, borrowings for the Company amounted to $25.5 million.  Long term borrowings with the Federal Home Loan Bank of New York (“FHLB”), totaled $7.6 million at June 30, 2020, compared to $13.6 million at June 30, 2019. There were no overnight borrowings with the FHLB outstanding at June 30, 2020.  There were $8.0 million of overnight borrowings with the FHLB outstanding at June 30, 2019.  The Company also had $7.0 million of short-term borrowings with Atlantic Central Bankers Bank (“ACBB”) at June 30, 2020.  Effective April 9, 2020, the FRB instituted a program, the Paycheck Protection Plan Lending Facility (“PPPLF”) to provide banks additional funding for liquidity whereby the PPP loans are pledged as collateral.  The PPPLF can provide additional liquidity up to the principal balance of PPP loans on the Company’s balance sheet.  As of June 30, 2020, the Company had $10.9 million of PPPLF borrowings outstanding.

35

The Company’s borrowing agreements are discussed further within Part II, Item 8 Financial Statements and Supplemental Data, Note 7 Borrowings of this Report.

The table below details additional information related to short-term and long-term borrowings for the years ended June 30,

(Dollars in thousands)
 
2020
    2019  
Short-term borrowings
           
Average outstanding balance
 
$
3,983
   
$
15,085
 
Interest expense
   
49
     
365
 
Weighted average interest rate during the year
   
1.23
%
   
2.42
%
Weighted average interest rate at end of year
   
0.39
%
   
2.45
%
                 
Long-term borrowings
               
Average outstanding balance
 
$
11,317
   
$
15,107
 
Interest expense
   
191
     
247
 
Weighted average interest rate during the year
   
1.69
%
   
1.64
%
Weighted average interest rate at end of year
   
1.73
%
   
1.68
%

OTHER LIABILITIES

Other liabilities, consisting primarily of accrued liabilities, totaled $21.4 million at June 30, 2020, compared to $14.9 million at June 30, 2019, an increase of $6.5 million.  This increase was due primarily to increased accrued expenses for various employee benefit plans, including short-term and long-term incentive plans, and supplemental executive retirement plan.  The growth in other liabilities was also the result of the adoption of ASU 2016-02 - Leases during the year ended June 30, 2020 which totaled $1.6 million. For further information regarding these changes, see Part II, Item 8 Financial Statements and Supplemental Data, Note 10 Employee Benefits Plans and Note 11 Stock Based Compensation of this Report.

SHAREHOLDERS’ EQUITY

Shareholders’ equity increased to $128.8 million at June 30, 2020 from $112.4 million at June 30, 2019, resulting primarily from net income of $18.7 million partially offset by dividends declared and paid of $2.2 million and repurchase of stock of $631,000.  On September 17, 2019, the Board of Directors of the Company adopted a stock repurchase program.  Under the repurchase program, the Company may repurchase up to 200,000 shares of its common stock.  Repurchases are made at management’s discretion at prices management considers to be attractive and in the best interests of both the Company and its stockholders, subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses for capital, and the Company’s financial performance. As of June 30, 2020, the Company had repurchased a total of 24,400 shares of the 200,000 shares authorized by the repurchase program. The Company did not repurchase any shares during the three months ended June 30, 2020.

36

Selected Equity Data:
 
At June 30,
 
   
2020
   
2019
 
Shareholders’ equity to total assets, at end of period
   
7.68
%
   
8.85
%
Book value per share
 
$
15.13
   
$
13.16
 
Closing market price of common stock
 
$
22.30
   
$
29.42
 

   
For the years ended June 30,
 
   
2020
   
2019
 
Average shareholders’ equity to average assets
   
8.18
%
   
8.67
%
Dividend payout ratio1
   
20.00
%
   
19.51
%
Actual dividends paid to net income2
   
11.95
%
   
11.65
%


1
The 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 54.1% 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 June 30, 2020, March 31, 2020, September 30, 2019, June 30, 2019, March 31, 2019, and December 31, 2018.  Dividends declared during the three months ended December 31, 2019 and the three months ended September 30, 2018 were paid to the MHC.  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.

37

Comparison of Operating Results for the Years Ended June 30, 2020 and 2019

Average Balance Sheet

The following table sets forth certain information relating to Greene County Bancorp, Inc. for the years ended June 30, 2020 and 2019.  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 are 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.

   
Fiscal Years Ended June 30,
 
   
2020
   
2019
 
(Dollars in thousands)
 
Average
Outstanding
Balance
   
Interest
Earned/
Paid
   
Average
Yield/
Rate
   
Average
Outstanding