Note 4. Loans

Loan segments and classes at June 30, 2016 and 2015 are summarized as follows:

	At June 30,
(In thousands)	2016			2015
Residential real estate:
Residential real estate	$	234,992		$	226,648
Residential construction and land		5,575			3,621
Multi-family		3,918			4,287
Commercial real estate:
Commercial real estate		192,678			142,323
Commercial construction		20,159			8,936
Consumer loan:
Home equity		20,893			21,019
Consumer installment		4,350			4,123
Commercial loans		48,725			39,798
Total gross loans		531,290			450,755
Allowance for loan losses		(9,485	)		(8,142	)
Deferred fees and costs		959			883
Loans receivable, net	$	522,764		$	443,496

At June 30, 2016 and 2015, loans to related parties including 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 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. 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 June 30, 2016 are shown below.

(In thousands)	Performing		Watch		Special Mention		Substandard		Total
Residential real estate	$	232,321	$	757	$	94	$	1,820	$	234,992
Residential construction and land		5,575		-		-		-		5,575
Multi-family		3,820		-		-		98		3,918
Commercial real estate		190,293		52		531		1,802		192,678
Commercial construction		20,159		-		-		-		20,159
Home equity		20,555		321		12		5		20,893
Consumer installment		4,340		10		-		-		4,350
Commercial loans		47,598		26		8		1,093		48,725
Total gross loans	$	524,661	$	1,166	$	645	$	4,818	$	531,290

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 June 30, 2016 or 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 June 30, 2016 and 2015. Loans on nonaccrual status totaled $3.3 million at June 30, 2016 of which $1.5 million were in the process of foreclosure. At June 30, 2016, there were nine residential loans in the process of foreclosure totaling $867,000. Included in nonaccrual loans were $1.9 million of loans which were less than 90 days past due at June 30, 2016, 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 $77,000 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 June 30, 2016:

(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	$	1,533	$	637	$	938	$	3,108	$	231,884	$	234,992	$	1,207
Residential construction and land		-		-		-		-		5,575		5,575		-
Multi-family		47		-		-		47		3,871		3,918		-
Commercial real estate		324		793		590		1,707		190,971		192,678		1,899
Commercial construction		-		-		-		-		20,159		20,159		-
Home equity		17		321		17		355		20,538		20,893		18
Consumer installment		34		10		-		44		4,306		4,350		-
Commercial loans		392		112		-		504		48,221		48,725		202
Total gross loans	$	2,347	$	1,873	$	1,545	$	5,765	$	525,525	$	531,290	$	3,326

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 90 days or more totaling $77,000 and $84,000 as of June 30, 2016 and 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 borrowers have made arrangements with the Bank to bring the loans 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)	2016		2015
Interest income that would have been recorded if loans had been performing in accordance with original terms	$	247	$	340
Interest income that was recorded on nonaccrual loans		142		250

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. 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.

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

	As of June 30, 2016						For the year ended June 30, 2016
(In thousands)	Recorded Investment		Unpaid Principal		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential real estate	$	266	$	266	$	-	$	243	$	5
Commercial real estate		1,024		1,231		-		1,085		29
Home equity		5		5		-		48		1
Total impaired loans with no allowance		1,295		1,502		-		1,376		35

With an allowance recorded:
Residential real estate		1,457		1,457		267		1,411		57
Commercial real estate		405		405		61		487		25
Commercial loans		85		85		2		89		5
Total impaired loans with allowance		1,947		1,947		330		1,987		87

Total impaired loans:
Residential real estate		1,723		1,723		267		1,654		62
Commercial real estate		1,429		1,636		61		1,572		54
Home equity		5		5		-		48		1
Commercial loans		85		85		2		89		5
Total impaired loans	$	3,242	$	3,449	$	330	$	3,363	$	122

	As of June 30, 2015						For the year ended June 30, 2015
(In thousands)	Recorded Investment		Unpaid Principal		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential real estate	$	432	$	432	$	-	$	508	$	27
Commercial real estate		1,206		1,412		-		1,000		45
Home equity		154		154		-		70		1
Commercial loans		-		-		-		208		14
Total impaired loans with no allowance		1,792		1,998		-		1,786		87

With an allowance recorded:
Residential real estate		1,411		1,411		263		2,176		80
Commercial real estate		895		895		187		1,675		61
Home equity		-		-		-		154		-
Commercial loans		93		93		1		348		23
Total impaired loans with allowance		2,399		2,399		451		4,353		164

Total impaired loans:
Residential real estate		1,843		1,843		263		2,684		107
Commercial real estate		2,101		2,307		187		2,675		106
Home equity		154		154		-		224		1
Commercial loans		93		93		1		556		37
Total impaired loans	$	4,191	$	4,397	$	451	$	6,139	$	251

The table below details additional information regarding loans modified as a troubled debt restructuring during the years ended June 30, 2016 and 2015:

(Dollars in thousands)	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Current Outstanding Recorded Investment
Year ended June 30, 2016 Residential real estate		-	$	-	$	-	$	-

Year ended June 30, 2015 Residential real estate		1	$	164	$	184	$	183

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 years ended June 30, 2016 or 2015, respectively.

The loan presented in the above table had been classified as a troubled debt restructuring 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 this loan, concessions consisted of additional funds advanced, interest rate reduction and extension of the maturity. At June 30, 2015, this loan was returned to accrual status as it has performed 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 identified as a troubled debt restructuring has been evaluated for impairment and the impact to the allowance for loan losses was immaterial.

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 class during and at the periods indicated. The allowance is allocated to each loan class based on historical loss experience, current economic conditions, and other considerations.

	Activity for the year ended June 30, 2016
(In thousands)	Balance June 30, 2015		Charge-offs		Recoveries		Provision			Balance June 30, 2016
Residential real estate	$	2,454	$	-	$	-	$	(58	)	$	2,396
Residential construction and land		50		-		-		25			75
Multi-family		40		-		-		(18	)		22
Commercial real estate		3,699		162		17		987			4,541
Commercial construction		233		-		-		269			502
Home equity		314		-		-		(5	)		309
Consumer installment		223		245		78		172			228
Commercial loans		1,129		20		2		301			1,412
Total	$	8,142	$	427	$	97	$	1,673		$	9,485

	Allowance for Loan Losses				Loans Receivable
	Ending Balance June 30, 2016 Impairment Analysis				Ending Balance June 30, 2016 Impairment Analysis
(In thousands)	Individually Evaluated		Collectively Evaluated		Individually Evaluated		Collectively Evaluated
Residential real estate	$	267	$	2,129	$	1,723	$	233,269
Residential construction and land		-		75		-		5,575
Multi-family		-		22		-		3,918
Commercial real estate		61		4,480		1,429		191,249
Commercial construction		-		502		-		20,159
Home equity		-		309		5		20,888
Consumer installment		-		228		-		4,350
Commercial loans		2		1,410		85		48,640
Total	$	330	$	9,155	$	3,242	$	528,048

	Activity for the year ended June 30, 2015
(In thousands)	Balance June 30, 2014		Charge-offs		Recoveries		Provision			Balance June 30, 2015
Residential real estate	$	2,731	$	390	$	6	$	107		$	2,454
Residential construction and land		42		-		-		8			50
Multi-family		59		-		-		(19	)		40
Commercial real estate		2,936		133		-		896			3,699
Commercial construction		38		-		-		195			233
Home equity		361		121		-		74			314
Consumer installment		240		236		61		158			223
Commercial loans		811		48		28		338			1,129
Unallocated		201		-		-		(201	)		-
Total	$	7,419	$	928	$	95	$	1,556		$	8,142

	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

Foreclosed real estate (FRE)

FRE consists of properties acquired through mortgage loan foreclosure proceedings or in full or partial satisfaction of loans. The following table sets forth information regarding FRE as of June 30, 2016 and 2015:

(in thousands)	2016		2015
Residential real estate	$	61	$	847
Land		65		-
Commercial real estate		244		-
Total foreclosed real estate	$	370	$	847