Loans and Allowance for Loan Losses

9 Months Ended

Mar. 31, 2023

Loans and Allowance for Loan Losses [Abstract]

(5) Loans and Allowance for Loan Losses

Loan segments and classes at March 31, 2023 and June 30, 2022 are summarized as follows:

(In thousands)	March 31, 2023			June 30, 2022
Residential real estate:
Residential real estate	$	374,840		$	360,824
Residential construction and land		17,567			15,298
Multi-family		67,251			63,822
Commercial real estate:
Commercial real estate		702,768			595,635
Commercial construction		108,854			83,748
Consumer loan:
Home equity		21,011			17,877
Consumer installment		4,411			4,512
Commercial loans		112,745			110,271
Total gross loans		1,409,447			1,251,987
Allowance for loan losses		(21,155	)		(22,761	)
Deferred fees and cost, net		29			129
Loans receivable, net	$	1,388,321		$	1,229,355

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 Company 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.”

When the Company 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 Company identifies problem loans as being impaired, it is required to evaluate whether the Company 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 Company 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 Company’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 Company reviews its portfolio quarterly to determine whether any assets require classification in accordance with applicable regulations.

The Company 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.

Residential mortgage loans, including home equity loans, which are collateralized by residences are generally made in amounts up to 85.0% of the appraised value of the property. In the event of default by the borrower the Company will acquire and liquidate the underlying collateral. By originating the loan at a loan-to-value ratio of 85.0% or less, the Company 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 Company does not hold the first mortgage. The Company 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 Company completes inspections during the construction phase prior to any disbursements. The Company 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 Company 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. The Company has 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 Company 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 March 31, 2023 are shown below.

(In thousands)	Performing		Special Mention		Substandard		Total
Residential real estate	$	369,272	$	1,826	$	3,742	$	374,840
Residential construction and land		17,567		-		-		17,567
Multi-family		67,163		88		-		67,251
Commercial real estate		677,929		8,642		16,197		702,768
Commercial construction		108,854		-		-		108,854
Home equity		20,956		-		55		21,011
Consumer installment		4,386		-		25		4,411
Commercial loans		106,722		289		5,734		112,745
Total gross loans	$	1,372,849	$	10,845	$	25,753	$	1,409,447

Loan balances by internal credit quality indicator at June 30, 2022 are shown below.

(In thousands)	Performing		Special Mention		Substandard		Total
Residential real estate	$	355,474	$	28	$	5,322	$	360,824
Residential construction and land		15,297		-		1		15,298
Multi-family		63,730		92		-		63,822
Commercial real estate		555,451		13,777		26,407		595,635
Commercial construction		83,748		-		-		83,748
Home equity		17,369		-		508		17,877
Consumer installment		4,500		-		12		4,512
Commercial loans		104,364		996		4,911		110,271
Total gross loans	$	1,199,933	$	14,893	$	37,161	$	1,251,987

The Company had no loans classified doubtful or loss at March 31, 2023 or June 30, 2022. During the quarter ended March 31, 2023, the Company upgraded one commercial loan relationship from special mention to pass, one large relationship from substandard to special mention, and one relationship from substandard to pass due to improvements in borrower cash flows and improving financial performance. There were also loan payoffs during the quarter ended March 31, 2023, comprised of seven commercial real estate loans that were classified as substandard. This was offset by two commercial real estate loan relationships and one commercial loan relationship downgraded to substandard, and two commercial real estate loan relationship downgraded to special mention during the current quarter. At March 31, 2023, these loans were all performing. Management continues to monitor these loan relationships 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. Loans on nonaccrual status totaled $4.7 million at March 31, 2023, of which there were four residential loans totaling $675,000 that were in process of foreclosure. Included in nonaccrual loans were $4.0 million of loans which were less than 90 days past due at March 31, 2023, 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. Loans on nonaccrual status totaled $6.3 million at June 30, 2022 of which $528,000 were in the process of foreclosure. At June 30, 2022, there were three residential loans in the process of foreclosure totaling $426,000 and one commercial real estate loan for $102,000 in the process of foreclosure. Included in nonaccrual loans were $4.4 million of loans which were less than 90 days past due at June 30, 2022, but have a recent history of delinquency greater than 90 days past due. The decrease in nonperforming loans during the period was primarily due to $1.3 million in loan repayments, $134,000 in loans returning to performing status, and $508,000 in charge-offs or transfers to foreclosed, partially offset by $293,000 of loans placed into nonperforming status.

The following table sets forth information regarding delinquent and/or nonaccrual loans at March 31, 2023:

(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	$	2,608	$	140	$	687	$	3,435	$	371,405	$	374,840	$	2,650
Residential construction and land		-		-		-		-		17,567		17,567		-
Multi-family		-		-		-		-		67,251		67,251		-
Commercial real estate		1,517		-		20		1,537		701,231		702,768		709
Commercial construction		-		-		-		-		108,854		108,854		-
Home equity		66		-		13		79		20,932		21,011		55
Consumer installment		64		44		-		108		4,303		4,411		-
Commercial loans		1,406		-		19		1,425		111,320		112,745		1,278
Total gross loans	$	5,661	$	184	$	739	$	6,584	$	1,402,863	$	1,409,447	$	4,692

The following table sets forth information regarding delinquent and/or nonaccrual loans at June 30, 2022:

(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	$	66	$	1,676	$	592	$	2,334	$	358,490	$	360,824	$	2,948
Residential construction and land		-		1		-		1		15,297		15,298		1
Multi-family		-		-		-		-		63,822		63,822		-
Commercial real estate		-		385		1,147		1,532		594,103		595,635		1,269
Commercial construction		-		-		-		-		83,748		83,748		-
Home equity		3		-		179		182		17,695		17,877		188
Consumer installment		22		17		-		39		4,473		4,512		7
Commercial loans		-		28		19		47		110,224		110,271		1,904
Total gross loans	$	91	$	2,107	$	1,937	$	4,135	$	1,247,852	$	1,251,987	$	6,317

The Company had no accruing loans delinquent 90 days or more at March 31, 2023 and June 30, 2022. 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.

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 Company 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 or nonaccrual loans that are over $250 thousand and all trouble debt restructured loans are reviewed individually and considered impaired if it is probable that the Company 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 Company’s loans, including most nonaccrual loans, are small homogeneous 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:

	At March 31, 2023						For the three months ended March 31, 2023				For the nine months ended March 31, 2023
(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	$	768	$	768	$	-	$	775	$	-	$	895	$	2
Commercial real estate		1,528		1,528		-		755		17		369		25
Home equity		-		-		-		43		-		100		-
Consumer installment		4		4		-		4		-		4		1
Commercial loans		337		337		-		338		4		341		12
Impaired loans with no allowance		2,637		2,637		-		1,915		21		1,709		40

With an allowance recorded:
Residential real estate		2,415		2,415		595		2,421		7		2,221		14
Commercial real estate		3,168		3,168		459		3,851		48		3,696		121
Home equity		-		-		-		-		-		107		4
Commercial loans		1,578		1,578		764		1,839		5		2,479		32
Impaired loans with allowance		7,161		7,161		1,818		8,111		60		8,503		171

Total impaired:
Residential real estate		3,183		3,183		595		3,196		7		3,116		16
Commercial real estate		4,696		4,696		459		4,606		65		4,065		146
Home equity		-		-		-		43		-		207		4
Consumer installment		4		4		-		4		-		4		1
Commercial loans		1,915		1,915		764		2,177		9		2,820		44
Total impaired loans	$	9,798	$	9,798	$	1,818	$	10,026	$	81	$	10,212	$	211

	At June 30, 2022						For the three months ended March 31, 2022				For the nine months ended March 31, 2022
(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	$	990	$	990	$	-	$	846	$	3	$	577	$	13
Commercial real estate		67		67		-		71		1		351		9
Home equity		128		128		-		128		-		128		-
Consumer Installment		5		5		-		2		1		1		1
Commercial loans		346		346		-		224		3		168		5
Impaired loans with no allowance		1,536		1,536		-		1,271		8		1,225		28

With an allowance recorded:
Residential real estate		1,953		1,953		588		2,159		10		1,612		43
Commercial real estate		3,698		3,698		1,118		1,864		75		1,085		93
Commercial construction		102		102		1		102		-		102		-
Home equity		320		320		44		320		4		321		10
Commercial loans		3,162		3,162		596		3,336		29		3,349		116
Impaired loans with allowance		9,235		9,235		2,347		7,781		118		6,469		262

Total impaired:
Residential real estate		2,943		2,943		588		3,005		13		2,189		56
Commercial real estate		3,765		3,765		1,118		1,935		76		1,436		102
Commercial construction		102		102		1		102		-		102		-
Home equity		448		448		44		448		4		449		10
Consumer Installment		5		5		-		2		1		1		1
Commercial loans		3,508		3,508		596		3,560		32		3,517		121
Total impaired loans	$	10,771	$	10,771	$	2,347	$	9,052	$	126	$	7,694	$	290

The table below details loans that have been modified as a troubled debt restructuring during the periods indicated.

(Dollars in thousands)	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Current outstanding Recorded Investment
For the nine months ended March 31, 2023
Residential real estate		2	$	778	$	778	$	778
Commercial real estate		3	$	1,428	$	1,481	$	1,476
Commercial loans		1	$	379	$	379	$	-

For the year ended June 30, 2022
Consumer Installment		1	$	5	$	5	$	5

There were no loans that had been modified as a troubled debt restructuring during the twelve months prior to June 30, 2022 or 2021, which have subsequently defaulted during the nine months ended March 31, 2023 or 2022. There was one commercial loan in the amount of $379,000 that had been modified as a troubled debt restructuring during the three months ended September 30, 2022 that subsequently defaulted during the three months ended March 31, 2023.

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 Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgment about information available to them at the time of their examination. The Company disaggregates its loan portfolio as noted in the below allowance for loan losses tables to evaluate for impairment collectively based on historical loss experience. The Company evaluates nonaccrual loans that are over $250 thousand and all trouble debt restructured loans individually for impairment, if it is probable that the Company will not be able to collect scheduled payments of principal and interest when due, according to the contractual terms of the loan agreements. Loans that are guaranteed, such as SBA loans, are excluded from the homogeneous pool of loans and no allowance is allocated to this segment of the portfolio. The measurement of impaired loans is generally based on the fair value of the underlying collateral. The Company 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 Company 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. 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 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 three months ended March 31, 2023
(In thousands)	Balance at December 31, 2022		Charge-offs		Recoveries		Provision			Balance at March 31, 2023
Residential real estate	$	2,492	$	-	$	-	$	146		$	2,638
Residential construction and land		193		-		-		(21	)		172
Multi-family		167		-		-		32			199
Commercial real estate		15,450		9		-		(1,869	)		13,572
Commercial construction		1,100		-		-		380			1,480
Home equity		38		-		-		11			49
Consumer installment		284		117		27		51			245
Commercial loans		2,565		103		12		326			2,800
Total	$	22,289	$	229	$	39	$	(944	)	$	21,155

	Activity for the nine months ended March 31, 2023
(In thousands)	Balance at June 30, 2022		Charge-offs		Recoveries		Provision			Balance at March 31, 2023
Residential real estate	$	2,373	$	-	$	5	$	260		$	2,638
Residential construction and land		141		-		-		31			172
Multi-family		119		-		-		80			199
Commercial real estate		16,221		9		-		(2,640	)		13,572
Commercial construction		1,114		-		-		366			1,480
Home equity		89		-		-		(40	)		49
Consumer installment		349		421		102		215			245
Commercial loans		2,355		114		30		529			2,800
Total	$	22,761	$	544	$	137	$	(1,199	)	$	21,155

	Allowance for Loan Losses				Loans Receivable
	Ending Balance At March 31, 2023 Impairment Analysis				Ending Balance At March 31, 2023 Impairment Analysis
(In thousands)	Individually Evaluated		Collectively Evaluated		Individually Evaluated		Collectively Evaluated
Residential real estate	$	595	$	2,043	$	3,183	$	371,657
Residential construction and land		-		172		-		17,567
Multi-family		-		199		-		67,251
Commercial real estate		459		13,113		4,696		698,072
Commercial construction		-		1,480		-		108,854
Home equity		-		49		-		21,011
Consumer installment		-		245		4		4,407
Commercial loans		764		2,036		1,915		110,830
Total	$	1,818	$	19,337	$	9,798	$	1,399,649

	Activity for the three months ended March 31, 2022
(In thousands)	Balance at December 31, 2021		Charge-offs		Recoveries		Provision			Balance at March 31, 2022
Residential real estate	$	1,981	$	-	$	3	$	22		$	2,006
Residential construction and land		115		-		-		2			117
Multi-family		76		-		-		10			86
Commercial real estate		15,616		-		-		276			15,892
Commercial construction		1,250		-		-		(121	)		1,129
Home equity		89		-		-		(2	)		87
Consumer installment		280		144		32		95			263
Commercial loans		2,277		-		1		(119	)		2,159
Total	$	21,684	$	144	$	36	$	163		$	21,739

	Activity for the nine months ended March 31, 2022
(In thousands)	Balance at June 30, 2021		Charge-offs		Recoveries		Provision			Balance at March 31, 2022
Residential real estate	$	2,012	$	-	$	10	$	(16	)	$	2,006
Residential construction and land		106		-		-		11			117
Multi-family		186		-		-		(100	)		86
Commercial real estate		13,049		-		-		2,843			15,892
Commercial construction		1,535		-		-		(406	)		1,129
Home equity		165		-		-		(78	)		87
Consumer installment		267		355		89		262			263
Commercial loans		2,348		107		3		(85	)		2,159
Total	$	19,668	$	462	$	102	$	2,431		$	21,739

	Allowance for Loan Losses				Loans Receivable
	Ending Balance June 30, 2022 Impairment Analysis				Ending Balance June 30, 2022 Impairment Analysis
(In thousands)	Individually Evaluated		Collectively Evaluated		Individually Evaluated		Collectively Evaluated
Residential real estate	$	588	$	1,785	$	2,943	$	357,881
Residential construction and land		-		141		-		15,298
Multi-family		-		119		-		63,822
Commercial real estate		1,118		15,103		3,765		591,870
Commercial construction		1		1,113		102		83,646
Home equity		44		45		448		17,429
Consumer installment		-		349		5		4,507
Commercial loans		596		1,759		3,508		106,763
Total	$	2,347	$	20,414	$	10,771	$	1,241,216

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:

(in thousands)	March 31, 2023		June 30, 2022
Residential real estate	$	-	$	68
Commercial real estate		160		-
Commercial loans		302		-
Total foreclosed real estate	$	462	$	68