(5)	Loans and Allowance for Loan Losses

Loan segments and classes at December 31, 2015 and June 30, 2015 are summarized as follows:

(In thousands)	December 31, 2015			June 30, 2015
Residential real estate:
Residential real estate	$	229,698		$	226,648
Residential construction and land		5,212			3,621
Multi-family		4,443			4,287
Commercial real estate:
Commercial real estate		163,110			142,323
Commercial construction		12,761			8,936
Consumer loan:
Home equity		21,165			21,019
Consumer installment		4,097			4,123
Commercial loans		45,442			39,798
Total gross loans		485,928			450,755
Allowance for loan losses		(8,611	)		(8,142	)
Deferred fees and costs		887			883
Loans receivable, net	$	478,204		$	443,496

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 Company 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: residential real estate loans, commercial real estate loans, consumer loans and commercial loans. The residential real estate portfolio consists of residential, construction, and multifamily loan classes. Commercial real estate loans consist of commercial real estate and commercial construction loan classes. Consumer loans consist of home equity loan and consumer installment loan classes. Commercial loans consist of installment loans and lines of credit issued to business. 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 89.9% 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 89.9% 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 commercial real estate, and multi-family dwellings, such as apartment buildings generally are larger than residential loans and involve a greater degree of risk. Commercial real estate 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 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 commercial real estate 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, 2015 are shown below.

(In thousands)	Performing		Watch		Special Mention		Substandard		Total
Residential real estate	$	227,712	$	307	$	95	$	1,584	$	229,698
Residential construction and land		5,212		-		-		-		5,212
Multi-family		4,342		-		-		101		4,443
Commercial real estate		160,310		429		540		1,831		163,110
Commercial construction		12,761		-		-		-		12,761
Home equity		21,146		-		14		5		21,165
Consumer installment		4,089		4		-		4		4,097
Commercial loans		44,109		-		821		512		45,442
Total gross loans	$	479,681	$	740	$	1,470	$	4,037	$	485,928

Loan balances by internal credit quality indicator as of June 30, 2015 are shown below.

(In thousands)	Performing		Watch		Special Mention		Substandard		Total
Residential real estate	$	224,195	$	638	$	97	$	1,718	$	226,648
Residential construction and land		3,621		-		-		-		3,621
Multi-family		4,182		-		-		105		4,287
Commercial real estate		138,468		-		986		2,869		142,323
Commercial construction		8,936		-		-		-		8,936
Home equity		20,731		-		15		273		21,019
Consumer installment		4,117		6		-		-		4,123
Commercial loans		38,334		-		844		620		39,798
Total gross loans	$	442,584	$	644	$	1,942	$	5,585	$	450,755

The Company had no loans classified Doubtful or Loss at December 31, 2015 or June 30, 2015.

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 December 31, 2015 and June 30, 2015. Loans on nonaccrual status totaled $3.6 million at December 31, 2015, of which $1.3 million were in the process of foreclosure. Included in nonaccrual loans were $1.7 million of loans which were less than 90 days past due at December 31, 2015, 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 $671,000 of loans which were making payments pursuant to forbearance agreements. Under the forbearance agreements, the customers have made arrangements with the Bank to bring the loans current over a specified period of time (resulting in an insignificant delay in repayment). During this term of the forbearance agreement, the Bank has agreed not to continue foreclosure proceedings. Loans on nonaccrual status totaled $4.6 million at June 30, 2015 of which $1.2 million were in the process of foreclosure. Included in nonaccrual loans were $2.6 million of loans which were less than 90 days past due at June 30, 2015, 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 December 31, 2015:

(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 real estate	$	1,279	$	-	$	946	$	2,225	$	227,473	$	229,698	$	961
Residential construction and land		-		-		-		-		5,212		5,212		-
Multi-family		96		-		-		96		4,347		4,443		-
Commercial real estate		604		-		1,004		1,608		161,502		163,110		2,353
Commercial construction		-		-		-		-		12,761		12,761		-
Home equity		256		-		5		261		20,904		21,165		19
Consumer installment		83		4		-		87		4,010		4,097		4
Commercial loans		125		-		75		200		45,242		45,442		282
Total gross loans	$	2,443	$	4	$	2,030	$	4,477	$	481,451	$	485,928	$	3,619

The following table sets forth information regarding delinquent and/or nonaccrual loans as of June 30, 2015:

(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 real estate	$	1,233	$	329	$	785	$	2,347	$	224,301	$	226,648	$	1,087
Residential construction and land		28		-		-		28		3,593		3,621		-
Multi-family		-		-		-		-		4,287		4,287		-
Commercial real estate		339		1		1,132		1,472		140,851		142,323		2,964
Commercial construction		-		-		-		-		8,936		8,936		-
Home equity		244		-		33		277		20,742		21,019		169
Consumer installment		25		6		-		31		4,092		4,123		-
Commercial loans		-		-		175		175		39,623		39,798		388
Total gross loans	$	1,869	$	336	$	2,125	$	4,330	$	446,425	$	450,755	$	4,608

The Bank of Greene County had accruing loans delinquent more than 90 days totaling $81,000 and $84,000 as of December 31, 2015 and June 30, 2015, respectively. 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 borrower has made arrangements with the Bank to bring the loan current within a specified time period and has made a series of payments as agreed.

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

	For the six months ended December 31,				For the three months ended December 31
(In thousands)	2015		2014		2015		2014
Interest income that would have been recorded if loans had been performing in accordance with original terms	$	159	$	199	$	58	$	71
Interest income that was recorded on nonaccrual loans		99		85		50		39

Impaired Loan Analysis

The Company identifies impaired loans and measures the impairment in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) subtopic “Receivables – Loan Impairment.” Management may consider a loan impaired once it is classified as nonaccrual and when it is probable that the borrower will be unable to repay the loan according to the original contractual terms of the loan agreement or the loan is restructured in a troubled debt restructuring. It should be noted that management does not evaluate all loans individually for impairment. The Bank of Greene County considers residential mortgages, home equity loans, smaller commercial loans and installment loans as small, homogeneous loans, which are evaluated for impairment collectively based on historical loan experience and other factors. In contrast, large commercial mortgage, construction, multi-family and commercial loans are viewed individually and considered impaired if it is probable that The Bank of Greene County will not be able to collect scheduled payments of principal and interest when due, according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the fair value of the underlying collateral. The majority of The Bank of Greene County loans, including most nonaccrual loans, are small homogenous loan types adequately supported by collateral. Management considers the payment status of loans in the process of evaluating the adequacy of the allowance for loan losses among other factors. Loans that are either delinquent a minimum of 60 days or are on nonaccrual status, and are not individually 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. Loans that have been modified as a troubled debt restructuring are included in impaired loans. The measurement of impairment is generally based on the discounted cash flows based on the original rate of the loan before the restructuring, unless it is determined that the restructured loan is collateral dependent. If the restructured loan is deemed to be collateral dependent, impairment is based on the fair value of the underlying collateral.

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

	As of December 31, 2015						For the six months ended December 31, 2015				For the three months ended December 31, 2015
(In thousands)	Recorded Investment		Unpaid Principal		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential real estate	$	124	$	124	$	-	$	267	$	2	$	185	$	-
Commercial real estate		1,030		1,236		-		1,143		17		1,086		11
Home equity		5		5		-		90		1		46		-
Impaired loans with no allowance		1,159		1,365		-		1,500		20		1,317		11

With an allowance recorded:
Residential real estate		1,376		1,376		260		1,393		28		1,382		14
Commercial real estate		413		413		60		566		12		461		6
Commercial loans		89		89		2		91		3		89		2
Impaired loans with allowance		1,878		1,878		322		2,050		43		1,932		22

Total impaired:
Residential real estate		1,500		1,500		260		1,660		30		1,567		14
Commercial real estate		1,443		1,649		60		1,709		29		1,547		17
Home equity		5		5		-		90		1		46		-
Commercial loans		89		89		2		91		3		89		2
Total impaired loans	$	3,037	$	3,243	$	322	$	3,550	$	63	$	3,249	$	33

	As of June 30, 2015						For the six months ended December 31, 2014				For the three months ended December 31, 2014
(In thousands)	Recorded Investment		Unpaid Principal		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential real estate	$	432	$	432	$	-	$	672	$	13	$	672	$	10
Commercial real estate		1,206		1,412		-		457		13		455		6
Home equity		154		154		-		80		-		64		-
Impaired loans with no allowance		1,792		1,998		-		1,209		26		1,191		16

With an allowance recorded:
Residential real estate		1,411		1,411		263		2,669		47		2,450		16
Commercial real estate		895		895		187		2,476		42		2,429		-
Home equity		-		-		-		200		-		200		-
Commercial loans		93		93		1		600		20		599		10
Impaired loans with allowance		2,399		2,399		451		5,945		109		5,678		26

Total impaired:
Residential mortgage		1,843		1,843		263		3,341		60		3,122		26
Nonresidential mortgage		2,101		2,307		187		2,933		55		2,884		6
Home equity		154		154		-		280		-		264		-
Commercial loans		93		93		1		600		20		599		10
Total impaired loans	$	4,191	$	4,397	$	451	$	7,154	$	135	$	6,869	$	42

The table below details loans that have been modified as a troubled debt restructuring during the six and three month periods ended December 31, 2015 and 2014.

(Dollars in thousands)	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Current Outstanding Recorded Investment
Six months ended December 31, 2015
Residential real estate		-	$	-	$	-	$	-

Six months ended December 31, 2014
Residential real estate		1	$	164	$	184	$	184

Three months ended December 31, 2015
Residential real estate		-	$	-	$	-	$	-

Three months ended December 31, 2014
Residential real estate		1	$	164	$	184	$	184

There were no loans that had been modified as a troubled debt restructuring during the twelve months prior to June 30, 2015 or 2014 which have subsequently defaulted during the six and three months ended December 31, 2015 or 2014, respectively.

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 considers smaller balance residential mortgages, home equity loans, commercial loans and installment loans to customers as small, homogeneous loans, which are evaluated for impairment collectively based on historical loss experience. Larger balance residential, commercial mortgage and business loans are viewed individually and considered impaired if it is probable that The Bank of Greene County will not be able to collect scheduled payments of principal and interest when due, according to the contractual terms of the loan agreements. The measurement of impaired loans is generally based on the fair value of the underlying collateral. The 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 and economic conditions.

	Activity for the three months ended December 31, 2015
(In thousands)	Balance at September 30, 2015		Charge-offs		Recoveries		Provision			Balance at December 31, 2015
Residential real estate	$	2,386	$	-	$	-	$	6		$	2,392
Residential construction and land		62		-		-		8			70
Multi-family		25		-		-		-			25
Commercial real estate		3,814		148		-		354			4,020
Commercial construction		162		-		-		169			331
Home equity		319		-		-		(14	)		305
Consumer installment		240		65		15		(2	)		188
Commercial loans		1,252		-		-		20			1,272
Unallocated		206		-		-		(198	)		8
Total	$	8,466	$	213	$	15	$	343		$	8,611

	Activity for the six months ended December 31, 2015
(In thousands)	Balance at June 30, 2015		Charge-offs		Recoveries		Provision			Balance at December 31, 2015
Residential real estate	$	2,454	$	-	$	-	$	(62	)	$	2,392
Residential construction and land		50		-		-		20			70
Multi-family		40		-		-		(15	)		25
Commercial real estate		3,699		162		17		466			4,020
Commercial construction		233		-		-		98			331
Home equity		314		-		-		(9	)		305
Consumer installment		223		143		40		68			188
Commercial loans		1,129		-		-		143			1,272
Unallocated		-		-		-		8			8
Total	$	8,142	$	305	$	57	$	717		$	8,611

	Allowance for Loan Losses				Loans Receivable
	Ending Balance December 31, 2015 Impairment Analysis				Ending Balance December 31, 2015 Impairment Analysis
(In thousands)	Individually Evaluated		Collectively Evaluated		Individually Evaluated		Collectively Evaluated
Residential real estate	$	260	$	2,132	$	1,500	$	228,198
Residential construction and land		-		70		-		5,212
Multi-family		-		25		-		4,443
Commercial real estate		60		3,960		1,443		161,667
Commercial construction		-		331		-		12,761
Home equity		-		305		5		21,160
Consumer installment		-		188		-		4,097
Commercial loans		2		1,270		89		45,353
Unallocated		-		8		-		-
Total	$	322	$	8,289	$	3,037	$	482,891

	Activity for the three months ended December 31, 2014
(In thousands)	Balance at September 30, 2014		Charge-offs		Recoveries		Provision			Balance at December 31, 2014
Residential real estate	$	2,647	$	168	$	-	$	110		$	2,589
Residential construction and land		41		-		-		10			51
Multi-family		45		-		-		(1	)		44
Commercial real estate		3,164		-		-		303			3,467
Commercial construction		109		-		-		39			148
Home equity		376		-		-		(4	)		372
Consumer installment		243		66		5		62			244
Commercial loans		831		6		6		50			881
Unallocated		264		-		-		(264	)		-
Total	$	7,720	$	240	$	11	$	305		$	7,796

	Activity for the six months ended December 31, 2014
(In thousands)	Balance at June 30, 2014		Charge-offs		Recoveries		Provision			Balance at December 31, 2014
Residential real estate	$	2,731	$	242	$	-	$	100		$	2,589
Residential construction and land		42		-		-		9			51
Multi-family		59		-		-		(15	)		44
Commercial real estate		2,936		-		-		531			3,467
Commercial construction		38		-		-		110			148
Home equity		361		-		-		11			372
Consumer installment		240		121		24		101			244
Commercial loans		811		6		6		70			881
Unallocated		201		-		-		(201	)		-
Total	$	7,419	$	369	$	30	$	716		$	7,796

	Allowance for Loan Losses				Loans Receivable
	Ending Balance June 30, 2015 Impairment Analysis				Ending Balance June 30, 2015 Impairment Analysis
(In thousands)	Individually Evaluated		Collectively Evaluated		Individually Evaluated		Collectively Evaluated
Residential real estate	$	263	$	2,191	$	1,843	$	224,805
Residential construction and land		-		50		-		3,621
Multi-family		-		40		-		4,287
Commercial real estate		187		3,512		2,101		140,222
Commercial construction		-		233		-		8,936
Home equity		-		314		154		20,865
Consumer installment		-		223		-		4,123
Commercial loans		1		1,128		93		39,705
Unallocated		-		-		-		-
Total	$	451	$	7,691	$	4,191	$	446,564