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Credit Quality of Loans and Allowance for Loan Losses
6 Months Ended
Dec. 31, 2012
Loans [Abstract]  
Credit Quality of Loans and Allowance for Loan Losses

(5)         Credit Quality of Loans and Allowance for Loan Losses

 

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

 

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

 

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

 

The Bank of Greene County's primary lending activity is the origination of residential mortgage loans, including home equity loans, which are collateralized by residences.   Generally, residential mortgage loans are made in amounts up to 80.0% of the appraised value of the property.  However, The Bank of Greene County will originate residential mortgage loans with loan-to-value ratios of up to 95.0%, with private mortgage insurance.  In the event of default by the borrower, The Bank of Greene County will acquire and liquidate the underlying collateral. By originating the loan at a loan-to-value ratio of 80% or less or obtaining private mortgage insurance, The Bank of Greene County limits its risk of loss in the event of default.  However, the market values of the collateral may be adversely impacted by declines in the economy.  Home equity loans may have an additional inherent risk if The Bank of Greene County does not hold the first mortgage.  The Bank of Greene County may stand in a secondary position in the event of collateral liquidation resulting in a greater chance of insufficiency to meet all obligations.

 

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

 

Loans collateralized by nonresidential mortgage loans, and multi-family loans, such as apartment buildings generally are larger than residential loans and involve a greater degree of risk. Commercial 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 nonresidential mortgage loans makes them more difficult for management to monitor and evaluate.

 

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

 

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

 

Loan balances by internal credit quality indicator as of December 31, 2012 are shown below.

 

(in thousands)

Performing

Watch

Special Mention

Substandard

Total

Residential mortgage

$200,322

$385

$543

$3,601

$204,851

Nonresidential mortgage

 83,719

 -

 128

 2,410

 86,257

Residential construction & land

 3,059

 -

 -

 -

 3,059

Commercial construction

 2,052

 -

 370

 1,066

 3,488

Multi-family

 4,135

 -

 767

 731

 5,633

Home equity

 22,281

 -

 -

 386

 22,667

Consumer installment

 4,284

 -

 -

 22

 4,306

Commercial loans

 22,216

 38

 306

 891

 23,451

Total gross loans

$342,068

$423

$2,114

$9,107

$353,712

 

Loan balances by internal credit quality indicator as of June 30, 2012 are shown below.

(in thousands)

Performing

Watch

Special Mention

Substandard

Total

Residential mortgage

$188,446

$-

$557

$4,375

$193,378

Nonresidential mortgage

77,761

-

588

2,445

80,794

Residential construction & land

2,156

-

-

-

2,156

Commercial construction

669

-

290

1,075

2,034

Multi-family

4,185

-

780

557

5,522

Home equity

22,708

-

-

100

22,808

Consumer installment

4,044

1

-

25

4,070

Commercial loans

20,045

39

762

842

21,688

Total gross loans

$320,014

$40

$2,977

$9,419

$332,450

 

.The Company had no loans classified Doubtful or Loss at December 31, 2012 or June 30, 2012.

 

 

Nonaccrual Loans

 

Management places loans on nonaccrual status once the loans have become 90 days or more delinquent.  Nonaccrual is defined as a loan in which collectability is questionable and therefore interest on the loan will no longer be recognized on an accrual basis.  A loan is not placed back on accrual status until the borrower has demonstrated the ability and willingness to make timely payments on the loan.    A loan does not have to be 90 days delinquent in order to be classified as nonaccrual.   Nonaccrual loans consisted primarily of loans secured by real estate at December 31, 2012 and June 30, 2012.  While the Bank makes every reasonable effort to work with the borrowers to collect amounts due, the number of loans in process of foreclosure has grown substantially over the past several years.  This growth has been the result of adverse changes within the economy and increases in local unemployment.   The growth is also due in part to the extended length of time required to meet all of the legal requirements mandated by New York state law prior to a foreclosure sale, which may be in excess of two years.   Loans on nonaccrual status totaled $6.7 million at December 31, 2012 of which $3.2 million were in the process of foreclosure.  Included in nonaccrual loans, were $2.4 million of loans which were less than 90 days past due at December 31, 2012, but have a recent history of delinquency greater than 90 days past due.   These loans will be returned to accrual status once they have demonstrated a history of timely payments.  Included in total loans past due, were $1.1 million of loans which were making payments pursuant to forbearance agreements.  Under the forbearance agreements, the customers have made arrangements with the Bank to bring the loans current over a specified period of time (resulting in an insignificant delay in repayment).  During this term of the forbearance agreement, the Bank has agreed not to continue foreclosure proceedings.

 

 

 

This loan has been classified as troubled debt restructurings due to concessions granted to the debtor that The Bank of Greene County would not otherwise consider as a result of financial difficulties of the borrower.  For this loan, additional funds were advanced, the interest rate was reduced and the term extended.   At December 31, 2012, this loan was not in default but is currently included in non-accrual loans.  If the borrower performs under the terms of the modification, and the ultimate collectability of all amounts contractually due under the modified terms is not in doubt, this loan will be returned to accrual status.   This loan identified as a troubled debt restructuring has been evaluated for impairment and the impact to the allowance for loan loss was immaterial.

 

There were no troubled debt restructurings modified within the last twelve months that subsequently defaulted.

 

Allowance for Loan Losses

 

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

 

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

 

Activity for the three months ended December 31, 2012

(In thousands)

Balance September 30, 2012

Charge-offs

Recoveries

Provision

Balance December 31, 2012

Residential mortgage

$2,350

$234

$-

$313

$2,429

Nonresidential mortgage

 2,104

 20

 -

 162

 2,246

Residential construction & land

 43

 -

 -

 -

 43

Commercial construction

 364

 -

 -

 27

 391

Multi-family

 293

 -

 -

 (7)

 286

Home equity

 369

 -

 -

 (8)

 361

Consumer installment

 257

 62

 18

 68

 281

Commercial loans

 684

 15

 -

 58

 727

Unallocated

 72

 -

 -

 (72)

 -

Total

$6,536

$331

$18

$541

$6,764

 

Activity for the six months ended December 31, 2012

(In thousands)

Balance June 30, 2012

Charge-offs

Recoveries

Provision

Balance December 31, 2012

Residential mortgage

$2,163

$273

$-

$539

$2,429

Nonresidential mortgage

 2,076

 20

 -

 190

 2,246

Residential construction & land

 19

 -

 -

 24

 43

Commercial construction

 407

 -

 -

 (16)

 391

Multi-family

 337

 -

 -

 (51)

 286

Home equity

 187

 -

 -

 174

 361

Consumer installment

 207

 132

 42

 164

 281

Commercial loans

 645

 15

 -

 97

 727

Unallocated

 136

 -

 -

 (136)

 -

Total

$6,177

$440

$42

$985

$6,764

 

 

 

Allowance for Loan Loss

Loans Receivable

 

Ending Balance December 31, 2012 Impairment Analysis

Ending Balance December 31, 2012 Impairment Analysis

(In thousands)

Individually Evaluated

Collectively Evaluated

Individually Evaluated

Collectively Evaluated

Residential mortgage

$303

$2,126

$2,816

$202,035

Nonresidential mortgage

 341

 1,905

 2,349

 83,908

Residential construction & land

 -

 43

 -

 3,059

Commercial construction

 303

 88

 1,066

 2,422

Multi-family

 142

 144

 888

 4,745

Home equity

 74

 287

 386

 22,281

Consumer installment

 -

 281

 -

 4,306

Commercial loans

 3

 724

 688

 22,763

Unallocated

 -

 -

 -

 -

Total

$1,166

$5,598

$8,193

$345,519

 

 

Activity for the three months ended December 31, 2011

(In thousands)

Balance September 30, 2011

Charge-offs

Recoveries

Provision

Balance December 31, 2011

Residential mortgage

$2,059

$34

$4

$118

$2,147

Nonresidential mortgage

1,920

179

-

206

1,947

Residential construction & land

28

-

-

3

31

Commercial construction

54

-

-

24

78

Multi-family

412

-

-

(4)

408

Home equity

221

-

-

(4)

217

Consumer installment

202

67

16

82

233

Commercial loans

557

-

2

(3)

556

Total

$5,453

$280

$22

$422

$5,617

 

Activity for the six months ended December 31, 2011

(In thousands)

Balance June 30, 2011

Charge-offs

Recoveries

Provision

Balance December 31, 2011

Residential mortgage

$1,767

$58

$4

$434

$2,147

Nonresidential mortgage

1,859

212

-

300

1,947

Residential construction & land

27

-

-

4

31

Commercial construction

89

-

-

(11)

78

Multi-family

410

-

-

(2)

408

Home equity

186

-

-

31

217

Consumer installment

203

118

34

114

233

Commercial loans

528

-

2

26

556

Total

$5,069

$388

$40

$896

$5,617

 

 

 

Allowance for Loan Loss

Loans Receivable

 

Ending Balance June 30, 2012 Impairment Analysis

Ending Balance June 30, 2012 Impairment Analysis

(In thousands)

Individually Evaluated

Collectively Evaluated

Individually Evaluated

Collectively Evaluated

Residential mortgage

$10

$2,153

$413

$192,965

Nonresidential mortgage

208

1,868

1,796

78,998

Residential construction & land

-

19

-

2,156

Commercial construction

365

42

1,075

959

Multi-family

155

182

861

4,661

Home equity

-

187

-

22,808

Consumer installment

-

207

-

4,070

Commercial loans

35

610

562

21,126

Unallocated

-

136

-

-

Total

$773

$5,404

$4,707

$327,743