Note 4. Loans

Loan segments and classes at June 30, 2013 and 2012 are summarized as follows:


		At June 30,
(In thousands)		2013		2012
Real estate mortgages:
Residential	$	212,526	$	193,378
Nonresidential		91,482		80,794
Construction and land		6,214		4,190
Multifamily		5,511		5,522
Total real estate mortgages		315,733		283,884
Home equity loans		20,371		22,808
Consumer installment		4,078		4,070
Commercial loans		25,657		21,688
Total gross loans		365,839		332,450
Allowance for loan losses		(7,040)		(6,177)
Deferred fees and costs		627		478
Total net loans	$	359,426	$	326,751

At June 30, 2013 and 2012, loans to officers and directors were immaterial as a percentage of our loan portfolio.

Credit Quality Indicators

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 June 30, 2013 are shown below.


(In thousands)		Performing		Watch		Special Mention		Substandard		Total
Residential mortgage	$	207,606	$	294	$	302	$	4,324	$	212,526
Nonresidential mortgage		87,509		-		2,197		1,776		91,482
Residential construction and land		2,691		-		-		-		2,691
Commercial construction		2,466		-		-		1,057		3,523
Multi-family		4,785		-		-		726		5,511
Home equity		20,099		221		23		28		20,371
Consumer installment		4,073		5		-		-		4,078
Commercial loans		24,454		-		516		687		25,657
Total gross loans	$	353,683	$	520	$	3,038	$	8,598	$	365,839

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 and 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 June 30, 2013 or 2012.

Nonaccrual Loans

Management places loans on nonaccrual status once the loans have become 90 days or more delinquent. A nonaccrual loan is defined as a loan in which collectability is questionable and therefore interest on the loan will no longer be recognized on an accrual basis. A loan is not placed back on accrual status until the borrower has demonstrated the ability and willingness to make timely payments on the loan. A loan does not have to be 90 days delinquent in order to be classified as nonaccrual. Nonaccrual loans consisted primarily of loans secured by real estate at June 30, 2013 and 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 $6.3 million at June 30, 2013 of which $4.9 million were in the process of foreclosure. Included in nonaccrual loans, were $781,000 of loans which were less than 90 days past due at June 30, 2013, but have a recent history of delinquency greater than 90 days past due. These loans will be returned to accrual status once they have demonstrated a history of timely payments. Included in total loans past due were $1.5 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. Loans on nonaccrual status totaled $6.9 million at June 30, 2012 of which $3.5 million were in the process of foreclosure. Included in nonaccrual loans, $1.3 million were less than 90 days past due at June 30, 2012, but have a recent history of delinquency greater than 90 days past due.

The following table sets forth information regarding delinquent and/or nonaccrual loans as of June 30, 2013:


(In thousands)		30-59 days past due		60-89 days past due		90 days or more past due		Total past due		Current		Total Loans		Loans on Non-accrual
Residential mortgage	$	100	$	1,420	$	3,875	$	5,395	$	207,131	$	212,526	$	3,599
Nonresidential mortgage		472		1,193		1,655		3,320		88,162		91,482		2,018
Residential construction and land		-		38		-		38		2,653		2,691		-
Commercial construction		-		-		-		-		3,523		3,523		-
Multi-family		-		144		463		607		4,904		5,511		463
Home equity		42		470		28		540		19,831		20,371		51
Consumer installment		34		5		-		39		4,039		4,078		-
Commercial loans		138		583		82		803		24,854		25,657		195
Total gross loans	$	786	$	3,853	$	6,103	$	10,742	$	355,097	$	365,839	$	6,326

The following table sets forth information regarding delinquent and/or nonaccrual loans as of June 30, 2012:


(In thousands)		30-59 days past due		60-89 days past due		90 days or more past due		Total past due		Current		Total Loans		Loans on Non-accrual
Residential mortgage	$	99	$	1,674	$	3,850	$	5,623	$	187,755	$	193,378	$	4,206
Nonresidential mortgage		424		1,088		1,041		2,553		78,241		80,794		1,868
Residential construction and land		-		-		-		-		2,156		2,156		-
Commercial construction		-		-		-		-		2,034		2,034		-
Multi-family		-		-		431		431		5,091		5,522		431
Home equity		52		-		100		152		22,656		22,808		60
Consumer installment		76		4		24		104		3,966		4,070		25
Commercial loans		3		596		257		856		20,832		21,688		303
Total gross loans	$	654	$	3,362	$	5,703	$	9,719	$	322,731	$	332,450	$	6,893

The Bank of Greene County had accruing loans delinquent 90 days or more as of June 30, 2013 totaling $559,000 and had accruing loans delinquent more than 90 days as of June 30, 2012 totaling $124,000. The loans delinquent more than 90 days and accruing consist of loans that are well collateralized and the borrowers have demonstrated the ability and willingness to pay. The borrowers have made arrangements with the Bank to bring the loan current within a specified time period and have made a series of payments as agreed.

The table below details additional information related to nonaccrual loans:


		For the years ended June 30,
(In thousands)		2013		2012		2011
Interest income that would have been recorded if loans had been performing in accordance with original terms	$	433	$	550	$	529
Interest income that was recorded on nonaccrual loans		158		277		226

Impaired Loan Analysis

The Company identifies impaired loans and measures the impairment in accordance with FASB ASC subtopic “Receivables – Loan Impairment.” Management may consider a loan impaired once it is classified as nonaccrual and when it is probable that the borrower will be unable to repay the loan according to the original contractual terms of the loan agreement or the loan is restructured in a troubled debt restructuring. It should be noted that management does not evaluate all loans individually for impairment. Generally, The Bank of Greene County considers residential mortgages, home equity loans and installment loans as small, homogeneous loans, which are evaluated for impairment collectively based on historical loan experience and other factors. In contrast, large commercial mortgage, construction, multi-family, business loans and select larger balance residential mortgage loans are reviewed individually and considered impaired if it is probable that The Bank of Greene County will not be able to collect scheduled payments of principal and interest when due, according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the fair value of the underlying collateral. The majority of The Bank of Greene County loans, including most nonaccrual loans, are small homogenous loan types adequately supported by collateral. Management considers the payment status of loans in the process of evaluating the adequacy of the allowance for loan losses among other factors. Loans that are either delinquent a minimum of 60 days or are on nonaccrual status, and are not individually evaluated for impairment, are either designated as Special Mention or Substandard, and the allocation of the allowance for loan loss is based upon the risk associated with such designation.

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


		As of June 30, 2013						For the year ended June 30, 2013
(In thousands)		Recorded Investment		Unpaid Principal		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential mortgage	$	852	$	852	$	-	$	272	$	14
Nonresidential mortgage		783		783		-		1,146		66
Commercial loans		-		-		-		81		17
		1,635		1,635		-		1,499		97
With an allowance recorded:
Residential mortgage		2,582		2,632		520		2,604		77
Nonresidential mortgage		1,339		1,339		305		1,182		33
Commercial construction		1,057		1,057		331		1,066		50
Multi-family		463		463		16		850		26
Home equity		-		-		-		193		4
Commercial loans		610		610		7		575		37
		6,051		6,101		1,179		6,470		227

Residential mortgage		3,434		3,484		520		2,876		91
Nonresidential mortgage		2,122		2,122		305		2,328		99
Commercial construction		1,057		1,057		331		1,066		50
Multi-family		463		463		16		850		26
Home equity		-		-		-		193		4
Commercial loans		610		610		7		656		54
	$	7,686	$	7,736	$	1,179	$	7,969	$	324


		As of June 30, 2012						For the year ended June 30, 2012
(In thousands)		Recorded Investment		Unpaid Principal		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential mortgage	$	213	$	276	$	-	$	213	$	-
Nonresidential mortgage		1,148		1,148		-		814		58
Multi-family		433		433		-		145		11
		1,794		1,857		-		1,172		69
With an allowance recorded:
Residential mortgage		200		200		10		129		6
Nonresidential mortgage		648		648		208		651		21
Commercial construction		1,075		1,075		365		357		23
Multi-family		428		428		155		431		24
Commercial loans		562		562		35		542		35
		2,913		2,913		773		2,110		109

Residential mortgage		413		476		10		342		6
Nonresidential mortgage		1,796		1,796		208		1,465		79
Commercial construction		1,075		1,075		365		357		23
Multi-family		861		861		155		576		35
Commercial loans		562		562		35		542		35
	$	4,707	$	4,770	$	773	$	3,282	$	178

The table below details loans that have been modified as a troubled debt restructuring during the year ended June 30, 2013.


(Dollars in thousands)	Number of Contracts	Pre-Modification Outstanding Recorded Investment	Post-Modification Outstanding Recorded Investment	Current Outstanding Recorded Investment
Residential mortgage	4	$836	$742	$739
Nonresidential mortgage	2	625	657	657

These loans have been classified as troubled debt restructurings due to concessions granted to the debtors that The Bank of Greene County would not otherwise consider as a result of financial difficulties of the borrowers. For these loans, concessions consisted of any combination of the following: additional funds were advanced, the interest rate was reduced and/or the term extended. At June 30, 2013, two of the six loans were returned to accrual status but the remaining loans modified during the period as a troubled debt restructuring are 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, these loans will be returned to accrual status. These loans identified as a troubled debt restructuring have been evaluated for impairment and the impact to the allowance for loan loss was immaterial.

The table below details loans that have been modified as a troubled debt restructuring during the year ended June 30, 2012.


(Dollars in thousands)	Number of Contracts	Pre-Modification Outstanding Recorded Investment	Post-Modification Outstanding Recorded Investment	Current Outstanding Recorded Investment
Residential mortgage	2	$246	$156	$154

There were no troubled debt restructurings that subsequently defaulted within twelve months of their modification during the years ended June 30, 2013 or 2012.

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 year ended June 30, 2013


(In thousands)		Balance June 30, 2012		Charge-offs		Recoveries		Provision		Balance June 30, 2013
Residential mortgage	$	2,163	$	421	$	-	$	885	$	2,627
Nonresidential mortgage		2,076		233		-		633		2,476
Residential construction and land		19		-		-		18		37
Commercial construction		407		-		-		(15)		392
Multi-family		337		-		-		(198)		139
Home equity		187		-		-		88		275
Consumer installment		207		246		88		173		222
Commercial loans		645		71		-		235		809
Unallocated		136		-		-		(73)		63
Total	$	6,177	$	971	$	88	$	1,746	$	7,040


		Allowance for Loan Losses				Loans Receivable
		Ending Balance June 30, 2013 Impairment Analysis				Ending Balance June 30, 2013 Impairment Analysis
(In thousands)		Individual Evaluated		Collectively Evaluated		Individual Evaluated		Collectively Evaluated
Residential mortgage	$	520	$	2,107	$	3,434	$	209,092
Nonresidential mortgage		305		2,171		2,122		89,360
Residential construction and land		-		37		-		2,691
Commercial construction		331		61		1,057		2,466
Multi-family		16		123		463		5,048
Home equity		-		275		-		20,371
Consumer installment		-		222		-		4,078
Commercial loans		7		802		610		25,047
Unallocated		-		63		-		-
Total	$	1,179	$	5,861	$	7,686	$	358,153

Activity for the year ended June 30, 2012


(In thousands)		Balance June 30, 2011		Charge-offs		Recoveries		Provision		Balance June 30, 2012
Residential mortgage	$	1,767	$	208	$	7	$	597	$	2,163
Nonresidential mortgage		1,859		212		-		429		2,076
Residential construction and land		27		-		-		(8)		19
Commercial construction		89		-		-		318		407
Multi-family		410		-		-		(73)		337
Home equity		186		-		-		1		187
Consumer installment		203		280		82		202		207
Commercial loans		528		67		2		182		645
Unallocated		-		-		-		136		136
Total	$	5,069	$	767	$	91	$	1,784	$	6,177


		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