(5)	Loans and Allowance for Loan Losses

Loan segments and classes at December 31, 2019 and June 30, 2019 are summarized as follows:

(In thousands)	December 31, 2019			June 30, 2019
Residential real estate:
Residential real estate	$	269,925		$	267,802
Residential construction and land		8,667			7,462
Multi-family		25,789			24,592
Commercial real estate:
Commercial real estate		360,424			329,668
Commercial construction		56,648			36,361
Consumer loan:
Home equity		22,744			23,185
Consumer installment		5,769			5,481
Commercial loans		114,220			103,554
Total gross loans		864,186			798,105
Allowance for loan losses		(13,984	)		(13,200	)
Unearned origination fees and costs, net		863			833
Loans receivable, net	$	851,065		$	785,738

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 multi-family 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 historically has been 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. Over the past few years, The Bank of Greene County has shifted more focus on the origination of commercial loans including commercial real estate. The Bank of Greene County has also formed relationships with other community banks within our region to participate in larger commercial loan relationships. These types of loans are generally considered to be riskier due to the size and complexity of the loan relationship. By entering into a participation agreement with the other bank, The Bank of Greene County can obtain the loan relationship while limiting its exposure to credit loss. Management completes its due diligence in underwriting these loans and monitors the servicing of these loans.

Loan balances by internal credit quality indicator at December 31, 2019 are shown below.

(In thousands)	Performing		Watch		Special Mention		Substandard		Total
Residential real estate	$	265,229	$	1,613	$	1,137	$	1,946	$	269,925
Residential construction and land		8,667		-		-		-		8,667
Multi-family		23,976		-		1,682		131		25,789
Commercial real estate		349,604		-		7,559		3,261		360,424
Commercial construction		51,586		-		4,960		102		56,648
Home equity		22,068		18		26		632		22,744
Consumer installment		5,743		26		-		-		5,769
Commercial loans		111,003		-		2,896		321		114,220
Total gross loans	$	837,876	$	1,657	$	18,260	$	6,393	$	864,186

Loan balances by internal credit quality indicator at June 30, 2019 are shown below.

(In thousands)	Performing		Watch		Special Mention		Substandard		Total
Residential real estate	$	264,138	$	874	$	86	$	2,704	$	267,802
Residential construction and land		7,462		-		-		-		7,462
Multi-family		22,544		137		1,835		76		24,592
Commercial real estate		318,703		616		7,435		2,914		329,668
Commercial construction		36,259		-		-		102		36,361
Home equity		22,392		20		-		773		23,185
Consumer installment		5,461		14		-		6		5,481
Commercial loans		102,103		261		1,082		108		103,554
Total gross loans	$	779,062	$	1,922	$	10,438	$	6,683	$	798,105

The Company had no loans classified doubtful or loss at December 31, 2019 or June 30, 2019. During the six months ended December 31, 2019, the Company downgraded a construction loan to special mention as a result of project cost overruns and several delinquent payments. At December 31, 2019, this loan was performing. Management continues to monitor this loan relationship closely.

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, 2019 and June 30, 2019. Loans on nonaccrual status totaled $3.4 million at December 31, 2019 of which $1.1 million were in the process of foreclosure. At December 31, 2019, there were 10 residential loans in the process of foreclosure totaling $801,000. Included in nonaccrual loans were $1.2 million of loans which were less than 90 days past due at December 31, 2019, 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 $151,000 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 $3.6 million at June 30, 2019 of which $1.6 million were in the process of foreclosure. At June 30, 2019, there were 12 residential loans in the process of foreclosure totaling $1.5 million. Included in nonaccrual loans were $1.8 million of loans which were less than 90 days past due at June 30, 2019, 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 at December 31, 2019:

(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	$	1,861	$	1,482	$	1,040	$	4,383	$	265,542	$	269,925	$	1,691
Residential construction and land		-		-		-		-		8,667		8,667		-
Multi-family		-		30		131		161		25,628		25,789		131
Commercial real estate		789		356		674		1,819		358,605		360,424		984
Commercial construction		-		-		-		-		56,648		56,648		-
Home equity		152		18		128		298		22,446		22,744		311
Consumer installment		32		26		-		58		5,711		5,769		-
Commercial loans		163		29		212		404		113,816		114,220		262
Total gross loans	$	2,997	$	1,941	$	2,185	$	7,123	$	857,063	$	864,186	$	3,379

The following table sets forth information regarding delinquent and/or nonaccrual loans at June 30, 2019:

(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	$	2,144	$	870	$	1,385	$	4,399	$	263,403	$	267,802	$	2,474
Residential construction and land		-		-		-		-		7,462		7,462		-
Multi-family		1		137		-		138		24,454		24,592		-
Commercial real estate		280		1,108		102		1,490		328,178		329,668		598
Commercial construction		-		-		-		-		36,361		36,361		-
Home equity		16		136		309		461		22,724		23,185		452
Consumer installment		32		14		6		52		5,429		5,481		6
Commercial loans		430		342		28		800		102,754		103,554		108
Total gross loans	$	2,903	$	2,607	$	1,830	$	7,340	$	790,765	$	798,105	$	3,638

The Bank of Greene County had no accruing loans delinquent more than 90 days at December 31, 2019 or June 30, 2019, 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 three and six months ended December 31:

	For the three months ended December 31,				For the six months ended December 31
(In thousands)	2019		2018		2019		2018
Interest income that would have been recorded if loans had been performing in accordance with original terms	$	53	$	58	$	154	$	129
Interest income that was recorded on nonaccrual loans		42		23		92		55

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. 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:

	At December 31, 2019						For the three months ended December 31, 2019				For the six months ended December 31, 2019
(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	$	537	$	537	$	-	$	542	$	11	$	617	$	41
Commercial real estate		370		370		-		375		5		383		12
Home equity		128		128		-		128		-		197		-
Commercial loans		173		173		-		146		1		141		1
Impaired loans with no allowance		1,208		1,208		-		1,191		17		1,338		54

With an allowance recorded:
Residential real estate		1,226		1,226		119		1,124		8		1,051		32
Multi-family		131		131		1		131		1		66		1
Commercial real estate		105		105		5		105		3		53		3
Commercial construction		102		102		7		102		-		102		-
Home equity		460		460		73		460		9		395		14
Commercial loans		159		159		12		159		3		145		4
Impaired loans with allowance		2,183		2,183		217		2,081		24		1,812		54

Total impaired:
Residential real estate		1,763		1,763		119		1,666		19		1,668		73
Multi-family		131		131		1		131		1		66		1
Commercial real estate		475		475		5		480		8		436		15
Commercial construction		102		102		7		102		-		102		-
Home equity		588		588		73		588		9		592		14
Commercial loans		332		332		12		305		4		286		5
Total impaired loans	$	3,391	$	3,391	$	217	$	3,272	$	41	$	3,150	$	108

	At June 30, 2019						For the three months ended December 31, 2018				For the six months ended December 31, 2018
(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	$	727	$	727	$	-	$	158	$	-	$	83	$	3
Commercial real estate		717		717		-		1,145		7		970		15
Home equity		309		309		-		309		-		266		-
Commercial loans		141		141		-		153		-		155		-
Impaired loans with no allowance		1,894		1,894		-		1,765		7		1,474		18

With an allowance recorded:
Residential real estate		1,420		1,420		188		1,614		13		1,757		36
Commercial real estate		-		-		-		-		-		182		-
Commercial construction		102		102		2		176		-		176		-
Home equity		348		348		59		321		5		327		9
Commercial loans		130		130		13		44		-		22		-
Impaired loans with allowance		2,000		2,000		262		2,155		18		2,464		45
Total impaired:
Residential real estate		2,147		2,147		188		1,772		13		1,840		39
Commercial real estate		717		717		-		1,145		7		1,152		15
Commercial construction		102		102		2		176		-		176		-
Home equity		657		657		59		630		5		593		9
Commercial loans		271		271		13		197		-		177		-
Total impaired loans	$	3,894	$	3,894	$	262	$	3,920	$	25	$	3,938	$	63

The table below details loans that have been modified as a troubled debt restructuring during the six months ended December 31, 2018.

(Dollars in thousands)	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Current Outstanding Recorded Investment
December 31, 2018
Commercial loans		1	$	127	$	131	$	131

There were no loans that have been modified as a troubled debt restructuring during the three and six months ended December 31, 2019. There were no loans that had been modified as a troubled debt restructuring during the twelve months prior to June 30, 2019 or 2018 which have subsequently defaulted during the three and six months ended December 31, 2019 or 2018, 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 commercial 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. Included within consumer installment loan charge-offs and recoveries are deposit accounts that have been overdrawn in excess of 60 days. With continued growth in the number of deposit accounts, charge-off activity within this category has also grown, as can be seen from the tables below. 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 allowance for loan losses is increased by a provision for loan losses (which results in a charge to expense) and recoveries of loans previously charged off and is reduced by charge-offs.

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, 2019
(In thousands)	Balance at September 30, 2019		Charge-offs		Recoveries		Provision			Balance at December 31, 2019
Residential real estate	$	1,512	$	48	$	10	$	(4	)	$	1,470
Residential construction and land		99		-		-		(6	)		93
Multi-family		205		-		-		(58	)		147
Commercial real estate		7,159		-		-		351			7,510
Commercial construction		1,291		-		-		176			1,467
Home equity		307		-		-		(37	)		270
Consumer installment		319		139		26		160			366
Commercial loans		2,552		5		6		108			2,661
Total	$	13,444	$	192	$	42	$	690		$	13,984

	Activity for the six months ended December 31, 2019
(In thousands)	Balance at June 30, 2019		Charge-offs		Recoveries		Provision			Balance at December 31, 2019
Residential real estate	$	2,026	$	101	$	10	$	(465	)	$	1,470
Residential construction and land		87		-		-		6			93
Multi-family		180		-		-		(33	)		147
Commercial real estate		7,110		-		-		400			7,510
Commercial construction		872		-		-		595			1,467
Home equity		314		-		-		(44	)		270
Consumer installment		250		248		50		314			366
Commercial loans		2,361		204		36		468			2,661
Total	$	13,200	$	553	$	96	$	1,241		$	13,984

	Allowance for Loan Losses				Loans Receivable
	Ending Balance At December 31, 2019 Impairment Analysis				Ending Balance At December 31, 2019 Impairment Analysis
(In thousands)	Individually Evaluated		Collectively Evaluated		Individually Evaluated		Collectively Evaluated
Residential real estate	$	119	$	1,351	$	1,763	$	268,162
Residential construction and land		-		93		-		8,667
Multi-family		1		146		131		25,658
Commercial real estate		5		7,505		475		359,949
Commercial construction		7		1,460		102		56,546
Home equity		73		197		588		22,156
Consumer installment		-		366		-		5,769
Commercial loans		12		2,649		332		113,888
Unallocated		-		-		-		-
Total	$	217	$	13,767	$	3,391	$	860,795

	Activity for the three months ended December 31, 2018
(In thousands)	Balance at September 30, 2018		Charge-offs		Recoveries		Provision			Balance at December 31, 2018
Residential real estate	$	2,108	$	75	$	-	$	37		$	2,070
Residential construction and land		116		-		-		(23	)		93
Multi-family		171		-		-		9			180
Commercial real estate		6,023		-		-		159			6,182
Commercial construction		957		-		-		(81	)		876
Home equity		317		-		-		5			322
Consumer installment		229		89		22		128			290
Commercial loans		2,133		-		153		95			2,381
Unallocated		254		-		-		25			279
Total	$	12,308	$	164	$	175	$	354		$	12,673

	Activity for the six months ended December 31, 2018
(In thousands)	Balance at June 30, 2018		Charge-offs		Recoveries		Provision			Balance at December 31, 2018
Residential real estate	$	2,116	$	96	$	13	$	37		$	2,070
Residential construction and land		114		-		-		(21	)		93
Multi-family		162		-		-		18			180
Commercial real estate		5,979		-		-		203			6,182
Commercial construction		950		-		-		(74	)		876
Home equity		317		-		-		5			322
Consumer installment		224		188		59		195			290
Commercial loans		2,128		-		153		100			2,381
Unallocated		34		-		-		245			279
Total	$	12,024	$	284	$	225	$	708		$	12,673

	Allowance for Loan Losses				Loans Receivable
	Ending Balance June 30, 2019 Impairment Analysis				Ending Balance June 30, 2019 Impairment Analysis
(In thousands)	Individually Evaluated		Collectively Evaluated		Individually Evaluated		Collectively Evaluated
Residential real estate	$	188	$	1,838	$	2,147	$	265,655
Residential construction and land		-		87		-		7,462
Multi-family		-		180		-		24,592
Commercial real estate		-		7,110		717		328,951
Commercial construction		2		870		102		36,259
Home equity		59		255		657		22,528
Consumer installment		-		250		-		5,481
Commercial loans		13		2,348		271		103,283
Unallocated		-		-		-		-
Total	$	262	$	12,938	$	3,894	$	794,211

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 at December 31, 2019 and June 30, 2019:

(in thousands)	December 31, 2019		June 30, 2019
Residential real estate	$	303	$	53
Total foreclosed real estate	$	303	$	53