Loans and Allowance for Credit Losses on Loans

3 Months Ended

Sep. 30, 2023

Loans and Allowance for Credit Losses on Loans [Abstract]

Loans and Allowance for Credit Losses on Loans

(4)          Loans and Allowance for Credit Losses on Loans

The Company adopted ASU 2016-13 (CECL) effective July 1, 2023. The loan segmentation has been redefined under CECL and therefore prior year tables are presented separately.

With the adoption of CECL, the Company’s revised loan segments at September 30, 2023 are as follows:

(In thousands)	September 30, 2023
Residential real estate	$	397,626
Commercial real estate		910,165
Home equity		25,467
Consumer		4,778
Commercial		110,304
Total gross loans(1)(2)		1,448,340
Allowance for credit losses on loans		(20,249	)
Loans receivable, net	$	1,428,091

(1) Loan balances include net deferred fees/cost of $62,000 at September 30, 2023.

(2) Loan balances exclude accrued interest receivable of $6.0 million at September 30, 2023, which is included in accrued interest receivable in the consolidated statement of financial condition.

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 $5.5 million at September 30, 2023, of which there were three residential loans totaling $637,000 and two commercial real estate loans totaling $1.4 million that were in process of foreclosure. Included in nonaccrual loans were $2.9 million of loans which were less than 90 days past due at September 30, 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 $5.5 million at June 30, 2023 of which three residential real estate loans totaling $625,000 and two commercial real estate loans totaling $1.4 million in the process of foreclosure. Included in nonaccrual loans were $3.1 million of loans which were less than 90 days past due at June 30, 2023, but have a recent history of delinquency greater than 90 days past due. The activity in nonperforming loans during the period included $87,000 in loan repayments, $19,000 in loans returning to performing status, $3,000 in charge-offs or transfers to foreclosed, and $138,000 of loans placed into nonperforming status.

The following table sets forth information regarding delinquent and/or nonaccrual loans at September 30, 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	$	19	$	306	$	1,877	$	2,202	$	395,424	$	397,626	$	2,816
Commercial real estate		-		233		650		883		909,282		910,165		1,307
Home equity		43		-		13		56		25,411		25,467		52
Consumer		31		21		43		95		4,683		4,778		43
Commercial loans		-		1,237		19		1,256		109,048		110,304		1,256
Total gross loans	$	93	$	1,797	$	2,602	$	4,492	$	1,443,848	$	1,448,340	$	5,474

Allowance for Credit Losses on Loans

The Company’s July 1, 2023 adoption of CECL resulted in a significant change to our methodology for estimating the allowance for credit losses.  The allowance for credit losses for the loan portfolio is established through a provision for credit losses based on the results of life of loan quantitative models, reserves associated with collateral-dependent loans evaluated individually and adjustments for the impact of current economic conditions not accounted for in the quantitative models. The discounted cash flow methodology is used to calculate the CECL reserve for the residential real estate, commercial real estate, home equity and commercial loan segments. The Company uses a four-quarter reasonable and supportable forecast period based on the one year percent change in national GDP and the national unemployment rate, as economic variables. The forecast will revert to long-term economic conditions over a four-quarter reversion period on a straight-line basis. The remaining life method will be utilized to determine the CECL reserve for the consumer loan segment. A qualitative factor framework has been developed to adjust the quantitative loss rates for asset-specific risk characteristics or current conditions at the reporting date. The Company elected to use the practical expedient to evaluate loans individually, if they are collateral dependent loans that are on nonaccrual status with a balance of $250,000 or greater, which is consistent with regulatory requirements. The fair value of the collateral dependent loan less selling expenses will be compared to the loan balance to determine if a CECL reserve is required.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for credit 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 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 credit losses, unless equitable arrangements are made. Included within consumer loan charge-offs and recoveries are deposit accounts that have been overdrawn in excess of 60 days. 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 credit losses is increased by a provision for credit 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 credit losses on loans by segment:

	Activity for the three months ended September 30, 2023
(In thousands)	Residential Real Estate		Commercial Real Estate			Home Equity		Consumer			Commercial			Total
Balance at June 30, 2023	$	2,794	$	14,839		$	46	$	332		$	3,201		$	21,212
Adoption of ASU No. 2016-13		1,182		(2,889	)		117		137			121			(1,332	)
Charge-offs		-		-			-		(122	)		(7	)		(129	)
Recoveries		-		1			-		26			9			36
Provision		317		405			25		117			(402	)		462
Balance at September 30, 2023	$	4,293	$	12,356		$	188	$	490		$	2,922		$	20,249

The allowance for credit losses on unfunded commitments as of September 30, 2023 was $1.5 million.

Credit monitoring process

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. For the commercial real estate and commercial loans, 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.” Residential real estate, home equity and consumer loans are graded as either nonperforming or performing. Nonperforming loans are loans that are generally over 90 days past due or on nonaccrual status.

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 loan repayments to a degree, are 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. 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.

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 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.

The following tables illustrate the Company’s credit quality by loan class by vintage:

	At September 30, 2023
(In thousands)	2024		2023		2022		2021		2020		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
Residential real estate
By payment activity status:
Performing	$	16,371	$	58,726	$	97,228	$	85,394	$	34,809	$	102,282	$	-	$	-	$	394,810
Non-performing		-		-		-		185		188		2,443		-		-		2,816
Total residential real estate		16,371		58,726		97,228		85,579		34,997		104,725		-		-		397,626
Current period gross charge-offs		-		-		-		-		-		-		-		-		-
Commercial real estate
By internally assigned grade:
Pass		35,352		210,920		259,041		130,106		79,698		161,347		4,705		149		881,318
Special mention		-		505		2,519		476		682		7,714		1,031		-		12,927
Substandard		-		1,160		-		440		4,458		9,862		-		-		15,920
Total commercial real estate		35,352		212,585		261,560		131,022		84,838		178,923		5,736		149		910,165
Current period gross charge-offs		-		-		-		-		-		-		-		-		-
Home equity
By payment activity status:
Performing		1,554		3,155		375		521		370		1,638		17,747		55		25,415
Non-performing		-		-		-		-		-		3		49		-		52
Total home equity		1,554		3,155		375		521		370		1,641		17,796		55		25,467
Current period gross charge-offs		-		-		-		-		-		-		-		-		-
Consumer
By payment activity status:
Performing		1,046		1,772		1,019		486		205		114		93		-		4,735
Non-performing		-		-		43		-		-		-		-		-		43
Total Consumer		1,046		1,772		1,062		486		205		114		93		-		4,778
Current period gross charge-offs		110		-		8		4		-		-		-		-		122
Commercial
By internally assigned grade:
Pass		2,811		11,945		15,785		16,265		6,276		21,202		28,097		-		102,381
Special mention		-		-		1,739		-		1		486		306		-		2,532
Substandard		-		-		-		1,274		98		986		3,033		-		5,391
Total Commercial	$	2,811	$	11,945	$	17,524	$	17,539	$	6,375	$	22,674	$	31,436	$	-	$	110,304
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	7	$	-	$	7

The Company had no loans classified doubtful or loss at September 30, 2023.

Individually Evaluated Loans

As of September 30, 2023, collateral dependent loans evaluated individually had an amortized cost basis of $5.8 million, with an allowance for credit losses on loans of $1.7 million.

Loan Modifications to Borrowers Experiencing Financial Difficulties

As previously mentioned in Note 2 Recent Accounting Pronouncements, the Company’s July 1, 2023 adoption of ASU 2022-02 eliminates the recognition and measurement of TDRs. Upon adoption of this guidance, the Company will no longer recognize an allowance for credit losses for the economic concession granted to a borrower for changes in the timing and amount of contractual cash flows when a loan is restructured. The adoption of ASU 2022-02 results in a change to reporting for loan modifications to borrowers experiencing financial difficulties. With the adoption of ASU 2022-02 these modifications require enhanced reporting on the type of modifications granted and the financial magnitude of the concessions granted. When the Company modifies a loan with financial difficulty, such modifications generally include one or a combination of the following: an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; a change in scheduled payment amount; or principal forgiveness.

There were no loans during the three months ended September 30, 2023 that were modified to borrowers experiencing financial difficulty since the adoption of ASU 2022-02 effective July 1, 2023.

Prior to the adoption of ASU 2016-13 (CECL)

Prior to July 1, 2023, the Company calculated the allowance for loan losses using the incurred loss methodology. The following tables are disclosures related to the allowance for loan losses in prior periods.

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

(In thousands)	June 30, 2023
Residential real estate:
Residential real estate	$	372,443
Residential construction and land		19,072
Multi-family		66,496
Commercial real estate:
Commercial real estate		693,436
Commercial construction		121,958
Consumer loan:
Home equity		22,752
Consumer installment		4,612
Commercial loans		108,022
Total gross loans(1)		1,408,791
Allowance for loan losses		(21,212	)
Deferred fees and cost, net		75
Loans receivable, net	$	1,387,654

(1) Loan balances exclude accrued interest receivable of $5.5 million at June 30, 2023, which is included in accrued interest receivable in the consolidated statement of financial condition.

Loan balances by internal credit quality indicator at June 30, 2023:

(In thousands)	Performing		Special Mention		Substandard		Total
Residential real estate	$	366,403	$	2,305	$	3,735	$	372,443
Residential construction and land		19,072		-		-		19,072
Multi-family		66,410		86		-		66,496
Commercial real estate		665,548		11,671		16,217		693,436
Commercial construction		121,958		-		-		121,958
Home equity		22,698		-		54		22,752
Consumer installment		4,530		-		82		4,612
Commercial loans		100,225		2,352		5,445		108,022
Total gross loans	$	1,366,844	$	16,414	$	25,533	$	1,408,791

The following table sets forth information regarding delinquent and/or nonaccrual loans at June 30, 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	$	-	$	504	$	1,604	$	2,108	$	370,335	$	372,443	$	2,747
Residential construction and land		-		-		-		-		19,072		19,072		-
Multi-family		-		-		-		-		66,496		66,496		-
Commercial real estate		-		235		652		887		692,549		693,436		1,318
Commercial construction		-		-		-		-		121,958		121,958		-
Home equity		48		-		13		61		22,691		22,752		54
Consumer installment		63		1		63		127		4,485		4,612		63
Commercial loans		-		-		19		19		108,003		108,022		1,276
Total gross loans	$	111	$	740	$	2,351	$	3,202	$	1,405,589	$	1,408,791	$	5,458

The Company had no accruing loans delinquent 90 days or more at June 30, 2023.  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 tables below detail additional information on impaired loans at the date or periods indicated:

	As of June 30, 2023						For the three months ended September 30, 2022
(In thousands)	Recorded Investment		Unpaid Principal		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential real estate	$	1,020	$	1,020	$	-	$	986	$	9
Commercial real estate		1,518		1,518		-		63		2
Home equity		-		-		-		128		-
Consumer installment		-		-		-		5		-
Commercial loans		334		334		-		344		4
Impaired loans with no allowance		2,872		2,872		-		1,526		15
With an allowance recorded:
Residential real estate		2,086		2,086		597		1,939		9
Commercial real estate		3,777		3,777		245		3,229		44
Commercial construction		-		-		-		102		-
Home equity		-		-		-		320		4
Commercial Loans		1,572		1,572		1,171		3,008		58
Impaired loans with allowance		7,435		7,435		2,013		8,598		115
Total impaired:
Residential real estate		3,106		3,106		597		2,925		18
Commercial real estate		5,295		5,295		245		3,292		46
Commercial construction		-		-		-		102		-
Home equity		-		-		-		448		4
Consumer installment		-		-		-		5		-
Commercial loans		1,906		1,906		1,171		3,352		62
Total impaired loans	$	10,307	$	10,307	$	2,013	$	10,124	$	130

Prior to the adoption of ASU 2022-02 on July 1, 2023, the Company accounted for loan modifications to borrowers experiencing financial difficulty when concessions were granted as TDRs. The following tables are disclosures related to TDRs in prior periods.

The table below details loans that have been modified as a troubled debt restructuring during the year ended June 30, 2023.

(Dollars in thousands)	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Current Outstanding Recorded Investment
For the year ended June 30, 2023
Residential real estate		2	$	778	$	778	$	778
Commercial real estate		3	$	1,428	$	1,480	$	1,470
Commercial loans		1	$	379	$	379	$	-

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 twelve months ended June 30, 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 quarter ended March 31, 2023.

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 September 30, 2022
(In thousands)	Balance at June 30, 2022		Charge-offs		Recoveries		Provision			Balance at September 30, 2022
Residential real estate	$	2,373	$	-	$	3	$	95		$	2,471
Residential construction and land		141		-		-		36			177
Multi-family		119		-		-		40			159
Commercial real estate		16,221		-		-		(829	)		15,392
Commercial construction		1,114		-		-		(70	)		1,044
Home equity		89		-		-		(45	)		44
Consumer installment		349		167		46		46			274
Commercial loans		2,355		4		7		228			2,586
Total	$	22,761	$	171	$	56	$	(499	)	$	22,147

	Allowance for Loan Losses				Loans Receivable
	Ending Balance June 30, 2023 Impairment Analysis				Ending Balance June 30, 2023 Impairment Analysis
(In thousands)	Individually Evaluated		Collectively Evaluated		Individually Evaluated		Collectively Evaluated
Residential real estate	$	597	$	2,016	$	3,106	$	369,337
Residential construction and land		-		181		-		19,072
Multi-family		-		197		-		66,496
Commercial real estate		245		12,775		5,295		688,141
Commercial construction		-		1,622		-		121,958
Home equity		-		46		-		22,752
Consumer installment		-		332		-		4,612
Commercial loans		1,171		2,030		1,906		106,116
Total	$	2,013	$	19,199	$	10,307	$	1,398,484

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)	September 30, 2023		June 30, 2023
Commercial loans	$	302	$	302
Total foreclosed real estate	$	302	$	302