On behalf of the Board of Directors, Officers and employees of Gouverneur Bancorp, Inc and its subsidiary, Gouverneur Savings and Loan Association, I am pleased to present to you our 2004 annual report.

We achieved a milestone in our history in fiscal 2004 when our assets reached $100.0 million and we closed the books at $104.2 million, a 15.8 % increase over the 2003 assets of $ 90.0 million. In this era of low interest rates the mortgage market has been very active and combined with the addition of the two offices in Alexandria Bay and Clayton, have produced growth in that portfolio of $14.9 million or 30.6%.

Mortgages at year-end now total $63.6 million. Consumer loans continue to decline both in volume and as a percentage of our loans due primarily to the decrease in auto lending. We have reported previously that the low rate, no rate and other incentive programs offered by the auto manufacturers have substantially impacted our ability to grow or maintain that segment of the portfolio. In fiscal 2003 balances in the consumer category stood at $9.2 million, whereas at fiscal year end 2004 those balances have declined to $8.9 million, a 3.26% decrease. Commercial loans have been a small part of our lending, as we were not actively pursuing growth in that area. However, with the hiring Thomas Penn as Vice President and Commercial Loan Officer in August 2004, we expect growth in our commercial loan portfolio. Mr. Penn will be responsible for maintaining the current loans and developing new relationships in our expanded market.

Our investment portfolio has continued to decline from $17.9 million in 2003 to $14.0 million in 2004, or 27.9%, as we have invested those funds in loans, due primarily to the strong loan demand and the greater rate of return. Deposits have also increased through this period by $3.2 million to $61.6 million or 5.5%. However, the loan growth greatly exceeded the deposit growth and we increased our borrowings from the Federal Home Loan Bank of New York, in accordance with management's strategy to help fund loan growth, from $12.2 million in 2003 to $23.0 million in 2004, an 88.5% increase.

The current low rate environment has resulted in a significant decrease in our cost of funding and contributes greatly to the improvement in our net return. The average cost of interest-bearing funds in fiscal 2003 was 2.81% and for fiscal 2004 was 2.17%. However we continue to monitor this area closely and anticipate that the cost of funding will increase in the future and earnings may be adversely impacted for the near term.

To help offset this we have been developing a loan portfolio that has more adjustable rate characteristics. Loans that have adjustable rates now total $31.9 million, an increase of $10.5 million, or 49.1 %, from $21.4 million at the end of fiscal 2003 and are now 39.8 % of the total loan portfolio. Non Interest Income increased $113,000 to $463,000 or 32.3%, the majority of that coming from investment of $3.5 million in bank owned life insurance, and we continue to explore additional programs to enhance that source of revenue.

Non Interest Expense increased $0.1 million from $2.6 million to $2.7 million, or 3.85%. The increase is due primarily to the increase in employee salaries and benefits. In addition to the commercial loan officer we have also added an Assistant Treasurer to the accounting area. We needed to address three elements in this department - (i) the increased volume of work due to our growth, (ii) the additional burden of complying with the Sarbanes-Oxley Act and (iii) management succession planning.

The return on average assets increased to 0.89% from the 0.68% we reported for fiscal 2003 as a result of increasing net income from $592,000 to $860,000, representing a 45.3 % improvement from the prior year. The increased earnings improved the diluted earnings per share from $0.26 in fiscal 2003 to $0.38 in fiscal 2004. The company paid a $0.26 per share dividend to all shareholders during the fiscal year ending September 2004. Shareholders equity increased from $17.6 million to $18.0 million a 2.27% increase over fiscal 2003 and book value increased from $7.71 per common share to $7.86 per common share based on 2,283,109 shares issued and outstanding at September 30, 2004.

 Over the winter months, we will be working with an architect to finalize plans for an addition to the main office facility to accommodate the current staff and allow for additional growth and to improve services through an expanded drive-up facility. We have completed the acquisition and site clearing on the two adjoining properties in preparation for the construction.

I extend my sincere appreciation to you, our stockholders, for your continued support of our endeavors, and I especially want to thank the Board of Directors and staff who have worked diligently with me to achieve our success. We look forward to continuing to grow our franchise.

Richard Bennett
President and CEO

© Gouverneur Savings 888.817.0020
INTERmoNETary System - Information: 888.739.1937
Revised: Thursday, April 28, 2005