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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2023

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to

Commission File No. 000-56606

GOUVERNEUR BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

Maryland
(Statement or Other Jurisdiction of
Incorporation or Organization)

37-2102925
(I.R.S. Employer
Identification No.)

42 Church Street, Gouverneur, New York
(Address of Principal Executive Offices)

13642
(Zip Code)

(315) 287-2600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading symbol(s)

Name of each exchange on which registered

None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer

Accelerated filer  

Non-accelerated filer

Smaller reporting company  

Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes    No

The number of shares outstanding of the issuer’s common stock, as of February 09, 2024:  1,107,134 shares.

GOUVERNEUR BANCORP, INC.

Table of Contents

Page No.

PART I.

FINANCIAL INFORMATION

3

Item 1.

Financial Statements (Unaudited)

3

Consolidated Statements of Financial Condition at December 31, 2023 and September 30, 2023

3

Consolidated Statements of Earnings for the Three Months Ended December 31, 2023 and 2022

4

Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended December 31, 2023 and 2022

5

Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended December 31, 2023 and 2022

6

Consolidated Statements of Cash Flows for the Three Months Ended December 30, 2023 and 2022

7

Notes to Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

45

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

54

Item 4.

Controls and Procedures

56

PART II.

OTHER INFORMATION

57

Item 1.

Legal Proceedings

57

Item 1A.

Risk Factors

57

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

57

Item 3.

Defaults Upon Senior Securities

57

Item 4.

Mine Safety Disclosures

57

Item 5.

Other Information

57

Item 6.

Exhibits

58

SIGNATURES

59

2

PART I – FINANCIAL INFORMATION

Item 1.Financial Statements - Unaudited

GOUVERNEUR BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In thousands, except share and per share data)

    

December 31, 

    

September 30, 

2023

2023

Assets:

 

  

 

  

Cash and due from banks

$

6,576

$

9,306

Interest-bearing deposits in bank

 

1,503

 

1,101

Total cash and cash equivalents

 

8,079

 

10,407

Time Deposits in other financial institutions

 

491

 

484

Securities available-for-sale, at fair value

 

49,402

 

46,624

Acquired loans, net of discount at December 31, 2023: $948 and September 30, 2023: $992

 

30,527

 

32,174

Loans receivable, net of allowance for credit losses: December 31, 2023: $1,061 and September 30, 2023: $623

 

94,084

 

93,253

Loans receivable, net

 

124,611

 

125,427

Investments in restricted stock, at cost

 

1,150

 

1,471

Bank owned life insurance

 

7,021

 

6,984

Premises and equipment, net

 

3,016

 

3,073

Foreclosed real estate, net

 

74

 

101

Core deposit intangible

 

1,976

 

2,080

Goodwill

 

4,237

 

4,237

Accrued interest receivable and other assets

 

4,888

 

4,997

Total assets

$

204,945

$

205,885

Liabilities:

 

  

 

  

Deposits: Non-interest-bearing demand

$

19,199

$

25,052

NOW and money market

 

48,494

 

42,625

Savings and club

 

63,716

 

66,570

Time certificates

 

28,918

 

24,531

Total deposits

 

160,327

 

158,778

Advances from the Federal Home Loan Bank

 

7,000

 

13,990

Advanced payments from borrowers for taxes and insurance

 

1,292

 

443

Accrued interest payable and other liabilities

 

4,267

 

7,566

Total liabilities

 

172,886

 

180,777

Shareholders' Equity:

 

  

 

  

Preferred stock, $.01 par value: December 31, 2023: 25,000,000 shares authorized; none issued

 

 

September 30, 2023: 1,000,000 shares authorized; none issued

Common stock, $.01 par value: December 31, 2023: 75,000,000 shares authorized; 1,107,134 shares issued

 

 

September 30, 2023: 9,000,000 shares authorized; 2,031,377 shares issued

11

24

Additional paid-in capital

 

6,487

 

5,035

Unearned common stock held by employee stock ownership plan

(unallocated shares December 31, 2023: 53,989: September 30, 2023: 0)

(540)

Retained earnings

 

27,992

 

28,242

Accumulated other comprehensive loss

 

(1,891)

 

(4,123)

Treasury Stock, at cost, (shares December 31, 2023: 0: September 30, 2023: 352,231)

 

 

(4,070)

Total shareholders' equity

 

32,059

 

25,108

Total liabilities and shareholders' equity

$

204,945

$

205,885

See accompanying notes to consolidated financial statements.

3

GOUVERNEUR BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share data) (Unaudited)

    

Three Months Ended

December 31, 

    

2023

    

2022

Interest income:

 

  

 

  

Loans, net

$

1,601

$

1,482

Net swap income (expense) on loan hedge

 

 

27

Securities-taxable

 

357

 

337

Securities-non-taxable

 

146

 

145

Other short-term investments

 

24

 

23

Total interest income

 

2,128

 

2,014

Interest expense:

 

  

 

  

Deposits

 

243

 

55

Net swap (income) expense on deposit hedge

(31)

Borrowings – short term and long term

 

131

 

6

Net swap income on borrowing hedge

 

(50)

 

Total interest expense

 

324

 

30

Net interest income

 

1,804

 

1,984

Provision for credit losses

 

 

Loans

68

15

Unfunded commitments

2

Net interest income after provision for credit losses

 

1,734

 

1,969

Non-interest income:

 

  

 

  

Service charges

 

87

 

92

Realized loss on sales of securities – AFS

 

 

(342)

Realized gain on swap unwound

 

75

 

343

Earnings on investment in life insurance

 

38

 

36

Earnings on deferred fees plan

 

12

 

28

Unrealized loss on swap agreements

 

(143)

 

(436)

Earnings on MPF and MAP programs

 

10

 

10

Other non-interest income

 

68

 

79

Total non-interest income (loss), net

 

147

 

(190)

Non-interest expenses:

 

  

 

  

Salaries and employee benefits

 

863

 

802

Directors fees

 

86

 

71

Earnings on deferred fees plan

 

12

 

28

Building, occupancy and equipment

 

238

 

241

Data processing

 

106

 

109

Postage and supplies

 

24

 

45

Professional fees

 

150

 

106

Intangibles & deposit premium amortization

 

104

 

115

Foreclosed assets, net

 

4

 

23

Other non-interest expense

 

193

 

229

Total non-interest expenses

 

1,780

 

1,769

Income before income tax expense

 

101

 

10

Income tax benefit

 

(17)

 

(36)

Net income

$

118

$

46

Earnings per common share – basic

$

0.11

$

0.02

Earnings per common share – diluted

$

0.11

$

0.02

See accompanying notes to consolidated financial statements

4

GOUVERNEUR BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share data) (Unaudited)

    

Three Months Ended

December 31, 

    

2023

    

2022

Net Income

$

118

$

46

Other comprehensive income net of tax:

 

  

 

  

Unrealized gain on securities:

 

  

 

  

Unrealized holding gain arising during period

 

2,766

 

1,306

Tax expense

 

581

 

274

Unrealized holding gain, net of deferred taxes

2,185

1,032

Post-retirement benefit

 

59

 

47

Tax expense

 

12

 

10

Post-retirement benefit, net of deferred taxes

47

37

Total other comprehensive income

 

2,232

 

1,069

Total comprehensive income

$

2,350

$

1,115

See accompanying notes to consolidated financial statements

5

GOUVERNEUR BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Three Months Ended December 31, 2023 and 2022

(In thousands, except share and per share data) (Unaudited)

    

  

    

  

    

Unearned

  

    

  

    

Accumulated

    

  

Additional

Common

Other

Total

Common

Paid-in

Stock

Retained

Treasury

Comprehensive

Shareholder’s

    

Stock

    

Capital

    

held by ESOP

Earnings

    

Stock

    

Income (Loss)

    

Equity

Balance at September 30, 2022

$

24

$

5,035

$

$

28,128

$

(4,070)

$

(4,288)

$

24,829

Comprehensive income:

 

  

 

  

 

 

  

 

  

 

  

 

  

Net income

 

 

 

 

46

 

 

 

46

Net pension and postretirement benefit costs, net of taxes

 

 

 

 

 

 

37

 

37

Change in unrealized gain (losses) on securities available-for-sale, net of reclassification adjustment and tax effects

 

 

 

 

 

 

1,032

 

1,032

Total comprehensive income

 

 

 

 

  

 

  

 

  

 

1,115

Balance at December 31, 2022

$

24

$

5,035

$

$

28,174

$

(4,070)

$

(3,219)

$

25,944

Balance at September 30, 2023

$

24

$

5,035

$

$

28,242

$

(4,070)

$

(4,123)

$

25,108

Comprehensive income:

 

  

 

  

 

 

  

 

  

 

  

 

  

Net income

 

 

 

 

118

 

 

 

118

Net pension and postretirement benefit costs, net of taxes

 

 

 

 

 

 

47

 

47

Change in unrealized gain (losses) on securities available-for-sale, net of reclassification adjustment and tax effects

 

 

 

 

 

 

2,185

 

2,185

Total comprehensive income

 

 

 

 

 

  

 

  

 

2,350

Net proceeds from stock offering and holding company conversion

4,932

4,932

Common stock issued in stock offering (1,107,134 shares)

11

(11)

Cancellation of common stock (2,031,377 shares)

(20)

20

Cancellation of treasury stock (352,231 shares)

(4)

(4,066)

4,070

Purchase of ESOP shares (57,845 shares)

578

(578)

ESOP shares committed to be released (3,856 shares)

(1)

38

37

Adoption of ASU 2016-13 Current Expected Credit Losses

(368)

(368)

Balance at December 31, 2023

$

11

$

6,487

$

(540)

$

27,992

$

$

(1,891)

$

32,059

See accompanying notes to consolidated financial statements

6

GOUVERNEUR BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

    

Three Months Ended

December 31, 

    

2023

    

2022

Cash flows from operating activities:

 

  

 

  

Net Income

$

118

$

46

Adjustments to reconcile net income to net cash provided by operating activities:

 

  

 

  

Provision for credit loss

 

70

 

15

Net amortization of deferred fees on loans

 

18

 

27

Net amortization of securities premiums and discounts

(167)

(173)

Depreciation

 

64

 

54

Net realized losses on securities available for sale

 

 

342

Net amortization of core deposits intangible

 

104

 

116

Loss on subsequent write-downs of REOs

23

Net realized gains on sale of foreclosed assets

(1)

ESOP committed to be released

37

Earnings on investment in life insurance

(38)

(36)

Increase in accrued interest receivable and other assets

 

(485)

 

(293)

Decrease in accrued interest payable and other liabilities

 

(3,238)

 

(160)

Net cash used in operating activities

 

(3,517)

 

(40)

Cash flows from investing activities:

 

  

 

  

 Securities available for sale:

 

  

 

  

Proceeds from sales of securities Available for Sale (AFS)

 

 

1,889

Proceeds from maturities and principal reductions of securities (AFS)

 

959

 

801

Purchases of securities (AFS)

 

(811)

 

(1,977)

 (Purchases) redemptions of FHLB stock

 

321

 

(158)

 Net decrease in loans receivable

 

387

 

519

 Additions to premises and equipment

 

(7)

 

(63)

 Proceeds from the sale of foreclosed assets

 

 

1

Net cash provided by investing activities

 

849

 

1,012

Cash flows from financing activities:

 

  

 

  

Net increase (decrease) in deposits

 

1,549

 

(13,622)

Net increase (decrease) in short-term borrowings

(6,990)

3,700

Advance payments by borrowers for Property Taxes and Insurance, net

 

849

 

779

Net stock offering proceeds

4,932

Net cash provided by (used in) financing activities

 

340

 

(9,143)

Net decrease in cash and cash equivalents

 

(2,328)

 

(8,171)

Cash and cash equivalents – Beginning of Year

 

10,407

 

14,344

Cash and cash equivalents – End of Year

$

8,079

$

6,173

Supplemental disclosures:

 

  

 

  

Cash paid during the year for interest

$

348

$

37

Write-downs on foreclosed assets through the allowance for loan losses

 

(27)

 

See accompanying notes to consolidated financial statements.

7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1:  Basis of Presentation

The accompanying consolidated financial statements include the accounts of Gouverneur Bancorp, Inc. and Gouverneur Savings and Loan Association (the “Bank”), the wholly owned and only direct subsidiary of  Bancorp, and GS&L Municipal Bank, the wholly owned and only subsidiary of the Bank, (collectively referred to as the “Company”) as of December 31, 2023 (unaudited) and September 30, 2023 and for the three-month periods ended December 31, 2023 and 2022 (unaudited).  All material intercompany accounts and transactions have been eliminated in this consolidation.  These statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with generally accepted accounting principles in the United States of America.

Bancorp is a Maryland corporation that was incorporated in June 2023 to be the successor to Gouverneur Bancorp, Inc., a federally chartered corporation (the “Mid-Tier Holding Company”), upon completion of the second-step conversion of the Bank from the two-tier mutual holding company structure to the stock holding company structure.  Cambray Mutual Holding Company was the former mutual holding company for the Mid-Tier Holding Company prior to the completion of the second-step conversion.  In conjunction with the second-step conversion, each of Cambray Mutual Holding Company and the Mid-Tier Holding Company merged out of existence and now cease to exist.  The second-step conversion was completed on October 31, 2023, at which time the Company sold, for gross proceeds of $7.2 million, a total of 723,068 shares of common stock at $10.00 per share, including 57,845 shares sold to the Bank’s employee stock ownership plan.  As part of the second-step conversion, each of the existing outstanding shares of Mid-Tier Holding Company common stock owned by persons other than Cambray Mutual Holding Company was converted into 0.5334 shares of Bancorp common stock.  As a result of the second-step conversion, all share information has been subsequently revised to reflect the 0.5334 exchange ratio, unless otherwise noted.

On September 16, 2022, the Bank completed its acquisition of Citizens Bank of Cape Vincent (“CBCV”), Cape Vincent, New York, a commercial bank with full-service offices in the villages of Cape Vincent, Chaumont and LaFargeville. At the effective time of the merger, CBCV was merged with and into Gouverneur Savings and Loan Association and each CBCV stockholder became entitled to receive $1,056.11 in cash for each share of CBCV common stock that they held at the effective time of the merger.

In conjunction with the acquisition of CBCV, The Bank formed the limited purpose GS&L Municipal Bank in order to continue to hold CBCV’s roughly $24,187,000 in municipal deposits and continue to compete for such deposits in the future. GS&L Municipal Bank is a limited purpose commercial bank that is a wholly owned subsidiary of the Bank and operates under the same regulatory and operating framework as the Bank. The formation of GS&L Municipal Bank included an initial $2.5 million contribution from the Bank.

GS&L Municipal Bank is a New York chartered limited purpose commercial bank organized in September 2022 to solicit municipal deposits from local government entities such as towns, cities, school districts, fire districts and other municipalities. The Bank views GS&L Municipal Bank as a source of low cost and stable source of funds that will further the Bank’s commitment to the communities in which the Bank operates.

In the opinion of management, all adjustments, consisting of only normal recurring adjustments or accruals, which are necessary for a fair presentation of the consolidated financial statements have been made at and for the three-month periods ended December 31, 2023 and 2022.  The results of operations for the three-month periods ended December 31, 2023 are not necessarily indicative of the results which may be expected for an entire fiscal year or other periods.

The data in the consolidated statements of financial condition for September 30, 2023 was derived from the Company’s audited consolidated financial statements for the year ended September 30, 2023.  That data, along with the interim

8

financial information presented in the consolidated statements of financial condition, earnings, comprehensive income, shareholders’ equity and cash flows should be read in conjunction with the Company’s audited financial statements for the year ended September 30, 2023, including the notes thereto.  Certain amounts for the three-month periods ended December 31, 2022 were reclassified to conform to the presentation of December 31, 2023.

Note 2:  Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements of the Company include the accounts of Bancorp and its wholly-owned subsidiary, the Bank, and the Bank’s wholly owned subsidiary, GS&L Municipal Bank. All intercompany accounts and transactions have been eliminated in consolidation.

At December 31, 2023, GS&L Municipal Bank held $28.6 million of the Bank’s $49.4 million investment securities portfolio and $20.4 million of the Bank’s deposits.

All significant intercompany accounts and transactions have been eliminated in consolidation.  

Use of Estimates in Preparation of Financial Statements

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses. In connection with the determination of the estimated loan losses, management obtains independent appraisals for significant properties.

The Company’s loans are generally secured by specific items of collateral including real property, consumer assets, and business assets. Although the Company has a diversified portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent on local economic conditions. While management uses available information to recognize losses on loans and foreclosed assets, further reductions in the carrying amounts of loans and foreclosed assets may be necessary, based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans and foreclosed assets. Such agencies may require the Company to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans and foreclosed assets may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.

The Company’s significant accounting policies followed in the preparation of the unaudited consolidated financial statements are disclosed in note 2 of the audited financial statements and notes for the year ended September 30, 2023 and are contained in the Company’s Annual Report on Form 10-K. There have been no significant changes to the application of significant accounting policies since September 30, 2023, except for the following:

On October 1, 2023, the Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASC 326). This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL required an estimate of credit losses for the remaining estimated life of the financial asset using historical experience,

9

current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses.

In addition, CECL made changes to the accounting for available for sale debt securities. One such change is to require that credit losses be presented as an allowance rather than as a write-down on available for sale debt securities if management does not intend to sell and does not believe that it is more likely than not that the Company will be required to sell.

The Company adopted ASC 326 and all related subsequent amendments thereto effective October 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. The transition adjustment of the adoption of CECL included an increase in the allowance for credit losses on loans of $436,000, which is presented as a reduction to net loans outstanding, and an increase in the allowance for credit losses on unfunded loan commitments of $29,000, which is recorded within Other Liabilities. The Company recorded a net decrease to retained earnings of $368,000 as of October 1, 2023 for the cumulative effect of adopting CECL, which reflects the transition adjustments noted above, net of the applicable deferred tax assets recorded. Results for reporting periods beginning after October 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards (“Incurred Loss”).

The Company adopted ASC 326 using the prospective transition approach for purchased credit deteriorated (“PCD”) assets that were previously classified as purchased credit impaired (“PCI”) under ASC 310-30. The Company did not have any PCD assets that were previously classified as purchased credit impaired. Therefore, upon adoption of ASC 326, the Company determined that an allowance for credit losses on PCD assets was not deemed material.

The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to October 1, 2023. As of December 31, 2023, the Company did not have any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined that an allowance for credit losses on available for sale securities was not deemed material.

10

The following table illustrates the impact on the allowance for credit losses from adoption of ASC 326:

October 1, 2023

September 30, 2023

As Reported Under

Pre-ASC 326

Impact of ASC

(dollars in thousands)

ASC 326

Adoption September

326 Adoption

Assets:

    

  

    

  

    

  

    

Held to maturity securities, at amortized cost

$

$

$

Allowance for credit losses on held to maturity securities:

Mortgaged-backed securities

$

$

$

Loans, at amortized cost

Allowance for credit losses on loans:

Residential mortgages

$

779

$

527

$

252

MAP & MPF secondary market mortgages

 

14

 

14

 

Commercial mortgages

160

55

105

Commercial loans - secured

31

4

27

Commercial loans - unsecured

2

(2)

Consumer loans

75

21

54

Allowance for credit losses on loans

$

1,059

$

623

$

436

Liabilities:

 

  

 

  

 

  

Allowance for credit losses for unfunded commitments

$

29

$

$

29

Allowance for Credit Losses – Held to Maturity Securities

Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type. There was no accrued interest receivable on held-to-maturity debt securities at December 31, 2023 which would be excluded from the estimate of credit losses.

The estimate of expected credit losses is primarily based on ratings assigned to the securities by debt rating agencies and the average of the annual historical loss rates associated with those ratings. The loss rates are multiplied by the remaining lives of each individual security to arrive at a lifetime expected loss amount. Management classifies the held-to-maturity portfolio into the following major security types: mortgage-backed securities.

All the mortgage-backed securities held by the Company are issued by government-sponsored corporations. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. As a result, no allowance for credit losses was recorded on held to maturity securities at December 31, 2023.

Allowance for Credit Losses – Available for Sale Securities

For available for sale securities, management evaluates all investments in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings.

If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, performance on any underlying collateral, downgrades in the ratings of the security

11

by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specifically related to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess is recorded as an allowance for credit loss, limited by the amount that the fair value is less that the amortized cost basis. Any amount of unrealized loss that has not been recorded through an allowance for credit loss is recognized in other comprehensive income.

Changes in the allowance for credit loss are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance for credit loss when management believes an available for sale security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At December 31, 2023, there was no allowance for credit loss related to the available for sale portfolio.  

Accrued interest receivable on available for sale debt securities totaled $243,000 at December 31, 2023 and was excluded from the estimate of credit losses.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts and deferred fees and costs. Accrued interest receivable related to loans totaled $378,000 at December 31, 2023 and was reported in accrued interest receivable on the consolidated balance sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using methods that approximate a level yield without anticipating prepayments.

The accrual of interest is generally discontinued when a loan becomes 90 days past due and is not well collateralized and in the process of collection, or when management believes, after considering economic and business conditions and collection efforts, that the principal or interest will not be collectible in the normal course of business. Past due status is based on contractual terms of the loan. A loan is considered to be past due when a scheduled payment has not been received 30 days after the contractual due date.

All accrued interest is reversed against interest income when a loan is placed on nonaccrual status. Interest received on such loans is accounted for using the cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, there is a sustained period of repayment performance, and future payments are reasonably assured.

Allowance for Credit Losses – Loans.

The allowance for credit losses is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

12

The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Company has identified the following portfolio segments and calculates the allowance for credit losses for each using a discounted cash flow and remaining life methodology. The segments using a discounted cash flow methodology are as follows:

Real Estate Residential

-1-4 family residential construction loans
-Other construction loans and all land development and other land loans
-Revolving, open-end loans secured by 1-4 family residential properties and extended under lines of credit
-Secured by first liens
-Secured by junior liens

Real Estate Commercial

-Commercial and industrial loans – commercial mortgage
-Loans secured by owner-occupied, nonfarm nonresidential properties
-Loans secured by other nonfarm nonresidential properties
-Loans secured by multifamily (5 or more) properties

Commercial Secured

-Loans to finance agricultural production and other loans to farmers
-Commercial and industrial loans
-Obligations (other than securities and leases) of states and political subdivisions in the US

Commercial Unsecured

-Commercial and industrial loans – unsecured
-Unsecured other loans

Consumer

-Other revolving credit plans
-Automobile loans
-Other consumer loans

The discounted cash flow method calculates the expected cash flows to be received over the life of each individual loan in a pool.

The segment using a remaining life methodology is below:

Commercial Unsecured

-Other loans (commercial overdraft loans)

Consumer

-Other loans (consumer overdraft loans)

13

The remaining life methodology uses average annual charge-off rates and the remaining life of the loan to estimate the allowance for credit losses. The average annual charge-off rate is applied to the amortization adjusted remaining life of the loan to determine the unadjusted lifetime historical charge-off rate.

Additionally, the allowance for credit losses calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments may increase or reduce reserve levels and include adjustments for lending management experience and risk tolerance, asset quality and portfolio trends, loan review and audit results, loan portfolio growth, industry concentrations, trends in underlying collateral, external factors and economic conditions not already captured.

Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting dated unadjusted for selling costs as appropriate.    

                                                             

Allowance for Credit Losses – Unfunded Commitments

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off—balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.

The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to provision for unfunded commitments in the Company’s income statements. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets.

Revenue Recognition

The majority of the Company’s revenue stream is generated from interest income on loans and deposits which are outside the scope of “Revenue from Contracts with Customers” (Topic 606). 

  

The Company’s sources of income that fall within the scope of Topic 606 include service charges on deposits, interchange fees and gains and losses on sales of other real estate, all of which are presented as components of noninterest income. On the following page is a summary of the revenue streams that fall within the scope of Topic 606.  

 

Service charges on deposits, ATM, and interchange fees – Fees from these services are either transaction-based, for which the performance obligations are satisfied when the individual transaction is processed, or set periodic service charges, for which the performance obligations are satisfied over the period the service is provided. Transaction-based fees are recognized at the time the transaction is processed, and periodic service charges are recognized over the service period.  

Gains and losses on sales of other real estate – The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of the executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. 

14

Recently Issued Accounting Standards

On October 1, 2023, the Company adopted ASU 2019-12, Income Taxes Topic 740. This update simplifies and improves accounting for income taxes by eliminating certain exceptions to the general rules and clarifying or amending other current guidance. The scope of FASB ASC Subtopic 740-10, Income Taxes -Overall, has been amended to require that, if a franchise (or similar tax) is partially based on income, (1) deferred tax assets and liabilities should be recognized and accounted for pursuant to FASB ASC 740, as should the amount of current tax expense that is based on income, and (2) any incremental amount incurred should be recorded as a non-income-based tax. Note that under the amended guidance, the effect of potentially paying a non-income-based tax in future years need not be considered in evaluating the realizability of deferred tax assets. The amendments in this ASU were effective for the Company for the fiscal year beginning October 1, 2023.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). The amendments in this update provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments (1) apply to contract modifications that replace a reference rate affected by reference rate reform, (2) provide exceptions to existing guidance related to changes to the critical terms of a hedging relationship due to reference rate reform (3) provide optional expedients for fair value hedging relationships, cash flow hedging relationships, and net investment hedging relationships, and (4) provide a onetime election to sell, transfer, or both sell and transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform and that are classified as held to maturity before January 1, 2020. The amendments in this ASU are effective for all entities as of March 12, 2020 through December 31, 2022. The amendments for contract modifications can be elected to be applied as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020. The amendments for existing hedging relationships can be elected to be applied as of the beginning of the interim period that includes March 12, 2020 and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform to clarify that all derivative instruments affected by changes to the interest rates used for discounting, margining or contract price alignment are in scope of Topic 848. ASU 2021-01 expands the scope of ASU 2020-04 by allowing an entity to apply the optional expedients, by stating that a change to the interest rate used for margining, discounting or contract price alignment for a derivative is not considered to be a change to the critical terms of the hedging relationship that requires dedesignation. The Company has signed an amended agreement with Federal Home Loan Bank of New York for the transition to SOFR which began July 1, 2023.

Note 3:  Earnings Per Common Share

Basic earnings per common share represent income available to common shareholders divided by the weighted average number of common shares outstanding during the period.  Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Unallocated common shares held by the ESOP are not included in the weighted-average number of common shares outstanding for purposes of calculating basic earnings per common share until they are committed to be released.

15

The table below sets forth the computation of basic and diluted earnings per common share for the three-month periods ending December 31, 2023 and 2022 (In thousands, except per share data) (unaudited).

    

Three Months Ended

December 31, 

Basic earnings per share:

    

2023

    

2022

Net income

$

118

$

46

Weighted average common shares outstanding used to calculate basic and diluted earnings per common share

 

1,050

 

2,031

Basic and diluted earnings per common share

$

0.11

$

0.02

There were no dilutive or antidilutive shares at December 31, 2023 or 2022.

Note 4:  Comprehensive Income (Loss)

Comprehensive income (loss), presented in the consolidated statements of shareholders’ equity, consists of net income and the net change for the period in after-tax unrealized gains or losses on securities available for sale and post-retirement benefits.

The following table shows the components of accumulated other comprehensive loss at December 31, 2023 (unaudited) and September 30, 2023:

December 31, 

September 30,

2023

2023

(In thousands)

Accumulated Other Comprehensive Loss by Component

    

Unrealized Loss for Other Postretirement Obligations

$

(266)

    

$

(326)