Note 4. Loans and Allowance for Credit Losses on Loans

 

Loan segments are summarized below as of the dates indicated:

 

 

 

At June 30, 2025 and 2024, loans to related parties including officers and directors were immaterial as a percentage of the Company’s loan portfolio.

 

Non-accrual Loans

 

Management places loans on non-accrual status once the loans have become 90 days or more delinquent. A non-accrual 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 non-accrual. Loans on non-accrual status totaled $3.1 million at June 30, 2025, of which there were one commercial real estate loan totaling $142,000, and three residential real estate loans totaling $841,000 in the process of foreclosure. Included in non-accrual loans were $1.2 million of loans which were less than 90 days past due at June 30, 2025, 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 non-accrual status totaled $3.7 million at June 30, 2024, of which there were four residential real estate loans totaling $686,000 and three commercial real estate loan totaling $1.6 million in the process of foreclosure. Included in non-accrual loans were $1.5 million of loans which were less than 90 days past due at June 30, 2024, 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.

 

The following table sets forth information regarding delinquent and/or non-accrual loans as of June 30, 2025:

 

 

The following table sets forth information regarding delinquent and/or non-accrual loans as of June 30, 2024:

 

 

Allowance for Credit Losses on Loans

 

The allowance for credit losses (“ACL”) 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 individually evaluated 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 ACL on loans 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 ACL on loans 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 non-accrual 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 an ACL on loans is required. While management uses available information to recognize losses on loans, additions or reductions to the allowance may fluctuate from one reporting period to another. These fluctuations are reflective of changes in the reasonable and supportable forecast, analysis of loans individually evaluated, and/or changes in management’s assessment of the qualitative factors.

 

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:

 

 

 

The allowance for credit losses on unfunded commitments was $1.8 million and $1.3 million as of June 30, 2025 and 2024, respectively.

Credit monitoring process

 

Management closely monitors the quality of the loan portfolio and has established a loan review process designed to help monitor any change in borrower risk during the life cycle of their loan. The Company utilizes a credit quality grading system that is used at loan inception and updated as appropriate based on an annual review process. The credit quality grade helps management make a consistent assessment of each loan relationship’s credit risk and identify any portfolio trends that could impact profitability. Consistent with regulatory guidelines, the Company provides for classification of loans, such as “Pass,” Special Mention,” “Substandard,” “Doubtful” and “Loss” classifications.

 

Commercial grading system

 

Loss

 

Loss ratings are loans that are considered uncollectible and of such little value that their continuance as active assets of the Company is not warranted. Loss rating does not necessarily mean that the loan has no recovery or salvage value, however, it is not practical or desirable to defer charging off the loan.

 

Doubtful

 

Doubtful ratings are loans that have all the weakness inherent in loans classified as 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. Doubtful ratings generally are non-performing and considered to have a high risk of default.

 

Substandard

 

Substandard ratings are loans that possess well defined weaknesses that jeopardize the orderly liquidation of debt, and are characterized by the distinct possibility that the Company will sustain some loss, if the deficiencies are not corrected. Substandard ratings are inadequately protected by the current sound worth and paying capacity of the borrower or the collateral pledged, if any.

 

Special mention

 

Special mention ratings are loans that have potential weaknesses or emerging problems which require close attention. These weaknesses, if left uncorrected, could lead to deterioration in the repayment prospects for the loan or the Company’s collateral position in the future. Special mention loans are less risky than substandard assets as no loss of principal or interest is anticipated unless, the potential problems continue for a prolonged basis.

 

Pass

 

Pass ratings are loans that do not encompass loans graded as Loss, Doubtful, Substandard, or Special mention. Pass loans range from Pass/Watch, Acceptable, Average, Satisfactory, Good and Excellent. Pass loans demonstrate sufficient cash flow to ensure full repayment of the loan with Pass ratings being determined by the quality of the collateral and equity position, stability of operations or management, and the guarantors.

 

Residential and consumer grading system

 

Residential real estate, home equity and consumer loans are graded as either non-performing or performing.

 

Non-performing

 

Non-performing loans are loans in which the borrower has not made the scheduled payments of principal or interest, and are generally loans over 90 days past due and still accruing interest, and loans on non-accrual status.

 

Performing

 

Performing loans are those loans in which the borrower is making timely payments of both principal and interest as upon the agreed loan terms.

The following tables present the amortized cost basis of the Company’s loans by class and vintage and includes gross charge-offs by loan class and vintage as of the twelve months ended June 30, 2025:

 

The following tables present the amortized cost basis of the Company’s loans by class and vintage and includes gross charge-offs by loan class and vintage as of the twelve months ended June 30, 2024:

 

 

The Company had no loans classified doubtful or loss at June 30, 2025 or June 30, 2024. During the year ended June 30, 2025, the Company upgraded 10 commercial real estate relationships and 15 commercial relationships to pass, and 10 commercial real estate relationships and 5 commercial relationships were paid-off. This was offset by 14 commercial real estate relationships and 11 commercial relationships that were downgraded to classified from pass, due to the deterioration in the borrower cash flows and financial performance during the year end June 30, 2025. During the year ended June 30, 2024, the Company downgraded to classified from pass 17 commercial real estate relationships and 9 commercial loan relationships, due to the deterioration in the borrower cash flows and financial performance. This was offset by 4 commercial real estate relationships and 1 commercial relationship that were upgraded to pass, and 7 commercial real estate relationships and 2 commercial relationships that were paid-off during the year ended June 30, 2024. Management continues to monitor classified loan relationships closely.

Individually Evaluated Loans

 

Loans individually evaluated had an amortized cost basis of $751,000 and $1.4 million, with an allowance for credit losses on loans of $549,000 and $662,000 at June 30, 2025 and 2024, respectively. At June 30, 2025, the amortized cost basis of collateral dependent loans was $751,000 for residential real estate loans. At June 30, 2024, the amortized cost basis of collateral dependent loans was $631,000 and $774,000 for commercial and residential real estate loans, respectively. The allowance for credit loss for collateral dependent loans is individually assessed based on the fair value of the collateral less costs to sell at the reporting date.

 

Loan Modifications to Borrowers Experiencing Financial Difficulties

 

When the Company modifies a loan for borrowers experiencing financial difficulty, such modifications generally include one or a combination of the following: an extension of the maturity date; a stated rate of interest not at the market rate for new debt with similar risk; a change in the scheduled payment amount; or principal forgiveness. The Company works with loan customers experiencing financial difficulty and may enter into loan modifications to achieve the best mutual outcome given the financial circumstances of the borrower.

 

The following tables present the amortized cost basis of the loans modified to borrowers experiencing financial difficulty by type of concession granted at the dates indicated:

 

 

 

The following table presents the financial effect of the modifications made to borrowers experiencing financial difficulty:

 

 

The Company closely monitors the performance of loans that have been modified. The loans that were modified during the prior twelve months ended June 30, 2025 and June 30, 2024, were all performing within their modified terms with no payment defaults.

 

The following table depicts the performance of loans that have been modified to borrowers experiencing financial difficulty that were modified in the prior twelve months at amortized cost basis:

 

 

 

Loans serving as collateral

 

Loans designated as qualified collateral and pledged for borrowing and stand-by letters of credit to the Federal Home Loan Bank of New York amounted to approximately $634.6 million and $601.6 million of its residential and commercial mortgage portfolios at June 30, 2025 and June 30, 2024, respectively.

 

Foreclosed real estate

 

Foreclosed real estate (“FRE”) consists of properties acquired through mortgage loan foreclosure proceedings, deed in lieu of foreclosure or in full or partial satisfaction of loans. At June 30, 2025 and June 30, 2024, the Company had no foreclosed real estate.