Gouverneur Bancorp (GOVB) 10-Q 2024 Q1 Quarterly report

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

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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.

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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.

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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

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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.

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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)

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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. 

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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.

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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)
Tax Effect		55		69
Net Unrealized Loss for Other Postretirement Obligations		(211)		(257)
Unrealized Loss on Available-for-Sale Securities, net		(2,127)		(4,890)
Tax Effect		447		1,024
Net Unrealized Loss on Available-for-Sale Securities		(1,680)		(3,866)
Total Comprehensive Loss	$	(1,891)	$	(4,123)

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Note 5:  Investment Securities

The amortized cost of debt securities and their approximate fair value at December 31, 2023 (unaudited) is represented in the table on the table below:

			Gross		Gross		Allowance
	Amortized		Unrealized		Unrealized		for Credit		Fair
	Cost		Gains		Losses		Losses		Value
AVAILABLE FOR SALE
U.S. Government Treasuries	$	3,789	$	—	$	(25)	$	—	$	3,764
U.S. Government Agencies		12,103		1		(76)		—		12,028
Mortgaged-Backed Securities		8,437		2		(374)		—		8,065
Municipal Securities		24,824		222		(1,891)		—		23,155
SBA Securities		2,375		24		(9)		—		2,390
	$	51,528	$	249	$	(2,375)	$	—	$	49,402

The amortized cost of debt securities and their approximate fair value at September 30, 2023 is represented in the table below.

			Gross		Gross		Allowance
	Amortized		Unrealized		Unrealized		for Credit		Fair
	Cost		Gains		Losses		Losses		Value
AVAILABLE FOR SALE
U.S. Government Treasuries	$	3,766	$	—	$	(86)	$	—	$	3,680
U.S. Government Agencies		12,025		—		(363)		—		11,662
Mortgaged-Backed Securities		8,726		1		(812)		—		7,915
Municipal Securities		24,571		2		(3,578)		—		20,995
SBA Securities		2,426		—		(54)		—		2,372
	$	51,514	$	3	$	(4,893)	$	—	$	46,624

The amortized cost and fair value of debt securities, by contractual maturity, at December 31, 2023 (unaudited) is as shown below. Expected maturities will differ from contractual maturities call or prepay obligations with or without call or prepayment penalties.

	Debt Securities
	Available-for-Sale
	Amortized
	Cost		Fair Value
		(In Thousands)
Due Within One Year	$	6,521	$	6,506
Due After One Year Through Five Years		13,382		13,345
Due After Five Years Through Ten Years		5,382		5,190
Due After Ten Years		15,431		13,906
		40,716		38,947
Mortgage-Backed & SBA Securities		10,812		10,455
	$	51,528	$	49,402

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The amortized cost and fair value of debt securities, by contractual maturity, at September 30, 2023 is as shown below.

	Debt Securities
	Available-for-Sale
	Amortized
	Cost		Fair Value
	(In Thousands)
Due Within One Year	$	6,585	$	6,548
Due After One Year Through Five Years		13,789		13,474
Due After Five Years Through Ten Years		4,437		4,127
Due After Ten Years		15,551		12,188
		40,362		36,337
Mortgage-Backed & SBA Securities		11,152		10,287
	$	51,514	$	46,624

The realized gains and losses from the sale of available-for-sale investments for the three-month periods ending December 31, 2023 and 2022 (unaudited) is as shown on the table below:

	Three Months Ended
	December 31,
	2023		2022
Proceeds	$	—	$	1,889
Cost		—		(2,231)
Net Realized Gains (Losses)	$	—	$	(342)
Gross Realized Gains	$	—	$	—
Gross Realized Losses		—		(342)
Net Realized Gains (Losses)	$	—	$	(342)

Information pertaining to securities with gross unrealized losses at December 31, 2023 (unaudited), aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are as follows:

	Less than Twelve months				Over Twelve Months				Total
	Gross				Gross				Gross
	Unrealized				Unrealized				Unrealized
	Losses		Fair Value		Losses		Fair Value		Losses		Fair Value
	(In Thousands)
December 31, 2023
Securities Available-for-Sale:
US Treasuries & Agencies	$	69	$	9,292	$	32	$	6,294	$	101	$	15,586
Mortgage-backed & SBA Securities		380		8,261		3		337		383		8,598
Municipal Securities		10		1,809		1,881		8,943		1,891		10,752
	$	459	$	19,362	$	1,916	$	15,574	$	2,375	$	34,936

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Information pertaining to securities with gross unrealized losses at September 30, 2023 aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are as follows:

	Less than Twelve months				Over Twelve Months				Total
	Gross				Gross				Gross
	Unrealized				Unrealized				Unrealized
	Losses		Fair Value		Losses		Fair Value		Losses		Fair Value
	(In Thousands)
September 30, 2023
Securities Available-for-Sale:
US Treasuries & Agencies	$	368	$	9,143	$	81	$	6,199	$	449	$	15,342
Mortgage-backed & SBA Securities		852		9,899		14		340		866		10,239
Municipal Securities		480		11,357		3,098		8,061		3,578		19,418
	$	1,700	$	30,399	$	3,193	$	14,600	$	4,893	$	44,999

In management’s opinion, the unrealized losses primarily reflect changes in interest rates subsequent to the acquisition of specific securities. The Company had 53 and 106 securities in an unrealized loss position of less than twelve months at December 31, 2023 and September 30, 2023, respectively which included 39 and 74 securities acquired from Citizens Bank of Cape Vincent in September 2022, and 74 and 76 securities in an unrealized loss position of 12 months or more at December 31, 2023 and September 30, 2023, respectively. Because the unrealized losses are due to current interest rate levels relative to the Company’s cost and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell these investments before recovery of its amortized cost, which may be at maturity, the Company does not consider the unrealized losses to be credit losses at December 31, 2023 and the Company does not consider these investments to be other-than temporarily impaired at September 30, 2023.

NOTE 6 — LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

The components of loans receivable at December 31, 2023 (unaudited) are as shown on the table below:

	As of December 31, 2023
	Originated		Acquired		Total Loans
	(In Thousands)
Real Estate Mortgages
Residential	$	77,125	$	26,952	$	104,077
Commercial		8,024		3,204		11,228
Construction		1,664		—		1,664
Home Equity		1,719		—		1,719
Other Loans:
Commercial Non-Mortgage		1,059		284		1,343
Automobile		2,934		209		3,143
Passbook		204		219		423
Consumer		1,990		607		2,597
Total Loans		94,719		31,475		126,194
Net Deferred Loan Costs		426		—		426
Net Discounts on Acquired Loans		—		(948)		(948)
Allowance for Credit Losses		(1,061)		—		(1,061)
Loans, Net	$	94,084	$	30,527	$	124,611

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The components of loans receivable at September 30, 2023 are as shown on the table below:

	Year Ended September 30,
	2023
	Originated		Acquired		Total Loans
	(In Thousands)
Real Estate Mortgages:
Residential	$	74,918	$	27,333	$	102,251
Commercial		7,647		3,843		11,490
Construction		2,265		—		2,265
Home Equity		2,552		411		2,963
Other Loans:
Commercial Non-Mortgage		1,046		455		1,501
Automobile		2,793		234		3,027
Passbook		43		224		267
Consumer		2,175		666		2,841
Total Loans		93,439		33,166		126,605
Net Deferred Loan Costs		437		—		437
Net Discounts on Acquired Loans		—		(992)		(992)
Allowance for Loan Losses		(623)		—		(623)
Loans, Net	$	93,253	$	32,174	$	125,427

The outstanding principal balance and the related carrying amount of the Company’s loans acquired in the Citizens Bank of Cape Vincent acquisition were as shown on the table below at December 31, 2023 (unaudited) and September 30, 2023:

	December 31, 2023		September 30, 2023
	(in thousands)
Acquired Credit Impaired Loans
Outstanding Principal Balance	$	—	$	—
Carrying Amount	$	—	$	—
Acquired Non-Credit Impaired Loans
Outstanding Principal Balance	$	31,475	$	33,166
Carrying Amount	$	30,527	$	32,174
Total Acquired Loans
Outstanding Principal Balance	$	31,475	$	33,166
Carrying Amount	$	30,527	$	32,174

The Company had not acquired any loans with deteriorated credit quality as of December 31, 2023 and September 30, 2023. The Company did acquire a commercial secured performing loan which has been classified as substandard to ensure proper oversight and monitoring of the credit. The credit has performed in accordance with its modified terms for over two years. This loan was restructured in the fourth quarter of fiscal 2023. Proceeds paid off current principal and interest due in the amount of $505,000. The borrower retained the same interest rate of 6.00% and received a 5-year callable note with 25-year amortization in exchange for extra real estate collateral. A $108,000 second position, commercial mortgage was placed on the guarantor’s primary residence behind the Bank’s first position residential mortgage. The restructuring enhances the Bank’s loan-to-value position while providing the borrower with a lower payment than the original contractual terms. The capitalization of interest, interest rate below market terms, and extension of the maturity date were concessions made to the borrower in exchange for additional collateral. The loan remains in non-accrual. Interest income on a restructured loan is accrued once the borrower demonstrates the ability to pay under the restructured terms for sustained period of repayment performance, which is generally six consecutive months. This loan has a fair value adjustment as a result of purchase price accounting of $103,000 at December 31, 2023.

20

The Company sells first mortgage loans to third parties in the ordinary course of business, principally to the FHLB, a large purchaser of loans. These serviced loans are not included in the balances of the accompanying statements of financial condition, but the Company continues to collect the principal and interest payments for a servicing fee. At December 31, 2023 and September 30, 2023, the total outstanding principal balance on serviced loans was $12.1 million, and $12.4 million, respectively.  Citizens Bank of Cape Vincent did not sell residential mortgage loans to third parties.

The tables below present, by portfolio segment, the changes in the allowance for credit losses and the recorded investment in loans for the three months ended December 31, 2023 and 2022 (unaudited) and the year ended September 30, 2023.

Allowance for loan losses and recorded investment in loans for the three months ended December 31, 2023 was as follows:

	Real Estate		Real Estate		Commercial		Commercial
	Residential		Commercial		Secured		Unsecured		Consumer		Total
	(In Thousands)
Allowance for Credit Losses:
Beginning Balance	$	541	$	55	$	4	$	2	$	21	$	623
Charge-offs		(62)		—		—		—		(6)		(68)
Recoveries		—		—		—		—		2		2
Transfer		—		(3)		(3)		—		6		—
Provisions		68		—		—		—		—		68
Adoption of new accounting standard		252		105		27		(2)		54		436
Ending Balance	$	799	$	157	$	28	$	—	$	77	$	1,061
Ending Balance: Individually
Evaluated	$	—	$	—	$	—	$	—	$	—	$	—
Ending Balance: Collectively
Evaluated	$	799	$	157	$	28	$	—	$	77	$	1,061
Loans Receivable:
Ending Balance	$	107,460	$	11,228	$	1,330	$	13	$	6,163	$	126,194
Ending Balance: Individually
Evaluated	$	—	$	696	$	—	$	—	$	—	$	696
Ending Balance: Collectively
Evaluated	$	107,460	$	10,532	$	1,330	$	13	$	6,163	$	125,498

Allowance for loan losses and recorded investment in loans for the three months ended December 31, 2022 was as follows:

	Real Estate		Real Estate		Commercial		Commercial
	Residential		Commercial		Secured		Unsecured		Consumer		Total
	(In Thousands)
Beginning Balance	$	548	$	55	$	4	$	1	$	13	$	621
Charge-offs		—		—		—		—		(4)		(4)
Recoveries		1		—		—		—		1		2
Transfer		(3)		—		—		—		3		—
Provisions		15		—		—		—		—		15
Ending Balance	$	561	$	55	$	4	$	1	$	13	$	634
Ending Balance: Individually
Evaluated	$	85	$	—	$	—	$	—	$	—	$	85
Ending Balance: Collectively	$	476	$	55	$	4	$	1	$	13	$	549

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Allowance for loan losses and recorded investment in loans for the year ended September 30, 2023 was as follows:

	Real Estate		Real Estate		Commercial		Commercial
	Residential		Commercial		Secured		Unsecured		Consumer		Total
	(In Thousands)
Loans Receivable:
Ending Balance	$	107,479	$	11,490	$	1,501	$	—	$	6,135	$	126,605
Less: Acquired Loans		27,744		3,843		455		—		1,124		33,166
Ending Balance: Individually
Evaluated	$	—	$	298	$	—	$	—	$	—	$	298
Ending Balance: Collectively
Evaluated	$	79,735	$	7,349	$	1,046	$	—	$	5,011	$	93,141

The following table presents performing and nonperforming real estate loans based on payment activity as of December 31, 2023 and September 30, 2023. Real estate loans include residential and commercial mortgages, construction loans and home equity loans. Payment activity is reviewed by management on a quarterly basis to determine how loans are performing. Loans are considered to be nonperforming when the number of days delinquent is greater than 89 days. The loan may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally twelve consecutive months of current payments with no past due occurrences.

Prior to October 1, 2023, nonperforming loans also include certain loans that have been modified in troubled debt restructuring (“TDR”) where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six consecutive months. Performing and nonperforming real estate loans as of December 31, 2023 and September 30, 2023 were as follows:

	As of December 31,		As of September 30,
	2023		2023
	(In Thousands)
Performing	$	117,497	$	118,269
Nonperforming		1,191		700
Total	$	118,688	$	118,969

Credit quality indicators as of December 31, 2023 and September 30, 2023 are as follows:

Internally assigned grade as a subsection of the “Pass” credit risk profile:

1 — Good

Loans to an individual or a well-established business in excellent financial condition with strong liquidity and a history of consistently high levels of earnings and cash flow and debt service capacity. Supported by high quality financial statements (including recent statements and sufficient historical fiscal statements), borrower has excellent repayment history and possesses a documented source of repayment. Industry conditions are favorable and business borrower’s management is well qualified with sufficient debt.  Borrower and/or key personnel exhibit unquestionable character. Good loans may be characterized by high quality liquid collateral and very strong personal guarantors.

22

2 — Satisfactory

Loans to borrowers with many of the same qualities as a good loan, however, certain characteristics are not as strong (i.e. cyclical nature of earnings, lower quality financial statements, less liquid collateral, less favorable industry trends, etc.). Borrower still has good credit, will exhibit financial strength, excellent repayment history, and good present and future earnings potential. The primary source of repayment is readily apparent with strong secondary sources of repayment available. Management is capable, with sufficient depth, and character of borrower is well established.

3 — Acceptable

Loans to borrowers of average strength with acceptable financial condition (businesses fall within acceptable tolerances of other similar companies represented in the RMA annual statement studies), with satisfactory record of earnings and sufficient historical and projected cash flow to service the debt. Business borrower’s management is capable and reliable. Borrower has satisfactory repayment history, and primary and secondary sources of repayment can be clearly identified. Acceptable loans may exhibit some deficiency or vulnerability to changing economic or industry conditions.

4 — Watch

Loans in this category have a chance of resulting in a loss. Characteristics of this level of assets include, but are not limited to; the borrower has only a fair credit rating with minimal recent credit problems, cash flow is currently adequate to meet the required debt repayments, but will not be sufficient in the event of significant adverse developments, borrower has limited access to alternative sources of finance, possibly at unfavorable terms, some management weaknesses exist, collateral, generally required, is sufficient to make likely the recovery of the value of the loan in the event of default, but liquidating the collateral may be difficult or expensive. In addition, the guarantor would achieve this credit rating if it borrowed individually from the Bank.

5 — Special Mention

Loans in this category are usually made to well establish businesses with local operations. Special Mention loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. Special mention category is not to be used as a means of avoiding a clear decision to classify a loan or pass it without criticism. Neither should it include loans listed merely “for the record” when uncertainties and complexities, perhaps coupled with large size, create some reservations about the loan. If weaknesses or evidence of imprudent handling cannot be identified, inclusion of such loans in Special Mention is not justified. Special mention loans have characteristics which corrective management action would remedy. Loans in this category should remain for a relatively short period of time.

6 — Substandard

Loans classified as substandard are inadequately protected by the current sound net worth or paying capacity of the borrower or the collateral pledged, if any. Loans in this category have well defined weaknesses that jeopardize the repayment. Loans which might be included in the category have potential for problems due to weakening economic or market conditions. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. Substandard loans may include loans which are likely to require liquidation of collateral to effect repayment, and other loans where the character or ability to repay has become suspect. Loss potential, while existing in the aggregate amount of the substandard assets, does not have to exist in individual assets classified substandard.

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7 — Doubtful

Loans classified as doubtful have all the weaknesses in those classified as substandard with the added characteristics that the weaknesses make collection or liquidation in full on the basis of current existing facts, conditions, and value highly questionable and improbable. Although possibility of loss is extremely high, classification of these loans as loss has been deferred to specific pending factors or events, which may strengthen the loan value (i.e., possibility of additional collateral, injection of capital, collateral liquidation, debt structure, economic recovery, etc.).

8 — Loss

Loans classified as loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.

The information for each of the credit quality indicators is updated on a quarterly basis in conjunction with the determination of the adequacy of the allowance for loan losses.

Credit risk profile for originated loans held in portfolio by internally assigned grade as of December 31, 2023:

	Pass		Special Mention		Substandard		Doubtful		Total
	(In Thousands)
Mortgage Loans on Real Estate
Residential, One to Four Family	$	78,789	$	—	$	—	$	—	$	78,789
Home Equity		1,719		—		—		—		1,719
Commercial		7,728		—		296		—		8,024
Total Mortgage Loans on Real Estate		88,236		—		296		—		88,532
Commercial		1,059		—		—		—		1,059
Consumer		5,128		—		—		—		5,128
Total Loans	$	94,423	$	—	$	296	$	—	$	94,719

Credit risk profile for acquired loans held in portfolio by internally assigned grade as of December 31, 2023:

	Pass		Special Mention		Substandard		Doubtful		Total
	(In Thousands)
Mortgage Loans on Real Estate
Residential, One to Four Family	$	26,952	$	—	$	—	$	—	$	26,952
Home Equity		—		—		—		—		—
Commercial		2,636		168		400		—		3,204
Total Mortgage Loans on Real Estate		29,588		168		400		—		30,156
Commercial		256		28		—		—		284
Consumer		1,035		—		—		—		1,035
Total Loans	$	30,879	$	196	$	400	$	—	$	31,475

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Credit risk profile for originated loans held in portfolio by internally assigned grade as of September 30, 2023:

	Pass		Special Mention		Substandard		Doubtful		Total
	(In Thousands)
Mortgage Loans on Real Estate
Residential, One to Four Family	$	77,183	$	—	$	—	$	—	$	77,183
Home Equity		2,552		—		—		—		2,552
Commercial		7,349		—		298		—		7,647
Total Mortgage Loans on Real Estate		87,084		—		298		—		87,382
Commercial		1,046		—		—		—		1,046
Consumer		5,011		—		—		—		5,011
Total Loans	$	93,141	$	—	$	298	$	—	$	93,439

Credit risk profile for acquired loans by internally assigned grade as of September 30, 2023:

	Pass		Special Mention		Substandard		Doubtful		Total
	(In Thousands)
Mortgage Loans on Real Estate
Residential, One to Four Family	$	27,333	$	—	$	—	$	—	$	27,333
Home Equity		411		—		—		—		411
Commercial		3,231		210		402		—		3,843
Total Mortgage Loans on Real Estate		30,975		210		402		—		31,587
Commercial		423		32		—		—		455
Consumer		1,124		—		—		—		1,124
Total Loans	$	32,522	$	242	$	402	$	—	$	33,166

Aging Analysis of Past Due Financing Receivables by Class

Following are tables which include an aging analysis of the recorded investment of past due financing receivables as of December 31, 2023 and September 30, 2023. Also included are loans that are greater than 89 days past due as to interest and principal still accruing, because they are (1) well secured and in the process of collection or (2) real estate loans or loans exempt under regulatory rules from being classified as nonaccruals.

An aged analysis of past due financing receivables by class of financing receivable for originated loans held in portfolio as of December 31, 2023 are as follows:

					90 Days or						Total		90 Days or
	30 – 59 Days		60 – 89 Days		Greater		Total				Financing		Greater and
	Past Due		Past Due		Past Due		Past Due		Current		Receivable		Still accruing
	(In Thousands)
Residential Mortgage	$	411	$	220	$	143	$	774	$	79,734	$	80,508	$	—
Commercial Mortgage		—		46		66		112		7,912		8,024		—
Commercial		—		—		—		—		1,059		1,059		—
Consumer		—		2		—		2		5,126		5,128		—
Total Originated Loans	$	411	$	268	$	209	$	888	$	93,831	$	94,719	$	—

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An aged analysis of past due financing receivable by class of financing receivable for acquired loans as of December 31, 2023 are as follows:

					90 Days or						Total		90 Days or
	30 – 59 Days		60 – 89 Days		Greater		Total				Financing		Greater and
	Past Due		Past Due		Past Due		Past Due		Current		Receivable		Still accruing
	(In Thousands)
Residential Mortgage	$	111	$	59	$	—	$	170	$	26,782	$	26,952	$	—
Commercial Mortgage		—		—		—		—		3,204		3,204		—
Commercial		—		—		—		—		284		284		—
Consumer		55		18		—		73		962		1,035		—
Total Acquired Loans	$	166	$	77	$	—	$	243	$	31,232	$	31,475	$	—

An aged analysis of past due financing receivables by class of financing receivable for originated loans held in portfolio and loans held for sale as of September 30, 2023, are as follows:

													90 Days or
					Greater						Total		Greater
	30 – 59 Days		60 – 89 Days		90 Days or		Total				Financing		and Still
	Past Due		Past Due		Past Due		Past Due		Current		Receivable		accruing
	(In Thousands)
Residential Mortgage	$	810	$	5	$	138	$	953	$	78,782	$	79,735	$	—
Commercial Mortgage		—		—		66		66		7,581		7,647		—
Commercial		—		—		—		—		1,046		1,046		—
Consumer		84		11		—		95		4,916		5,011		—
Total Originated Loans	$	894	$	16	$	204	$	1,114	$	92,325	$	93,439	$	—

An aged analysis of past due financing receivables by class of financing receivable for acquired loans as of September 30, 2023, are as follows:

													90 Days or
					Greater						Total		Greater
	30 – 59 Days		60 – 89 Days		90 Days or		Total				Financing		and Still
	Past Due		Past Due		Past Due		Past Due		Current		Receivable		accruing
	(In Thousands)
Residential Mortgage	$	33	$	—	$	62	$	95	$	27,649	$	27,744	$	—
Commercial Mortgage		—		—		—		—		3,843		3,843		—
Commercial		—		—		—		—		455		455		—
Consumer		—		—		—		—		1,124		1,124		—
Total Acquired Loans	$	33	$	—	$	62	$	95	$	33,071	$	33,166	$	—

Modifications Made to Borrowers Experiencing Financial Difficulty

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a probability of default/loss given default model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.

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Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification.

There were no loans made to borrowers experiencing financial difficulty during the quarter ended December 31, 2023.

Impaired Loans

There were no recorded investment balances for impaired financing receivables at September 30, 2023.

Troubled Debt Restructurings (“TDR”)

There were two new loans modified as TDR during the fiscal year ended September 30, 2023. The Company acquired a commercial secured performing loan which has been classified as substandard to ensure proper oversight and monitoring of the credit. The credit has performed in accordance with its modified terms for over two years.  This loan was restructured in the fourth quarter of fiscal 2023. Proceeds paid off current principal and interest due in the amount of $505,000. The borrower retained the same interest rate of 6.00% and received a 5-year callable note with 25-year amortization in exchange for extra real estate collateral. A $108,000 second position, commercial mortgage was placed on the guarantor’s primary residence behind the Bank’s first position residential mortgage. The other loan modified as a TDR during fiscal year 2023 was a one-to-four-family adjustable-rate residential loan with a pre-modified balance of $11,000 and a 7.25% interest rate. Proceeds paid off current principal, taxes and closing costs when this loan modified into a fixed-rate one-to-four-family residential loan with a balance of $16,000 and a 6.50% interest rate. The maturity date of September 2023 was extended to October 2028 under the new terms. There were no TDR’s in payment default that were previously classified as a TDR in the previous twelve months. At September 30, 2023 there were no commitments to lend additional funds to any borrower whose loan terms had been modified in a troubled debt restructuring.

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Vintage Analysis

The following table presents the Company’s recorded investment in loans by credit quality indicators by year of origination as of December 31, 2023:

	Term Loans by Fiscal Year of Origination
(in thousands)	2024		2023		2022		2021		2020		Prior		Revolving		Total
Real Estate - Residential
Pass	$	1,917	$	11,162	$	15,844	$	19,055	$	9,566	$	48,197	$	1,719	$	107,460
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
Total Real Estate - Residential	$	1,917	$	11,162	$	15,844	$	19,055	$	9,566	$	48,197	$	1,719	$	107,460
Current period gross write-offs	$	62	$	—	$	—	$	—	$	—	$	—	$	—	$	62
Real Estate - Commercial
Pass	$	221	$	2,227	$	711	$	2,354	$	1,981	$	2,871	$	—	$	10,365
Special Mention		—		—		—		—		—		168		—		168
Substandard		—		430		—		199		66		—		—		695
Doubtful		—		—		—		—		—		—		—		—
Total Real Estate - Commercial	$	221	$	2,657	$	711	$	2,553	$	2,047	$	3,039	$	—	$	11,228
Current period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial - Secured
Pass	$	88	$	428	$	86	$	216	$	268	$	216	$	—	$	1,302
Special Mention		—		—		—		—		—		28		—		28
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
Total Commercial - Secured	$	88	$	428	$	86	$	216	$	268	$	244	$	—	$	1,330
Current period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial - Unsecured
Pass	$	2	$	—	$	—	$	—	$	—	$	11	$	—	$	13
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
Total Commercial - Unsecured	$	2	$	—	$	—	$	—	$	—	$	11	$	—	$	13
Current period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Consumer
Pass	$	752	$	2,607	$	1,374	$	747	$	367	$	316	$	—	$	6,163
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
Total Consumer	$	752	$	2,607	$	1,374	$	747	$	367	$	316	$	—	$	6,163
Current period gross write-offs	$	6	$	—	$	—	$	—	$	—	$	—	$	—	$	6

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Nonaccrual Loans

The following table is a summary of the Company’s nonaccrual loans by major categories for the periods indicated:

	CECL						Incurred Loss
	December 31, 2023						September 30, 2023
	Nonaccrual loans		Nonaccrual loans		Total Nonaccrual
(in thousands)	with No Allowance		with an Allowance		Loans		Nonaccrual Loans
Real Estate - Residential	$	—	$	602	$	602	$	153
Real Estate - Commercial		—		466		466		468
Commercial - Secured		—		—		—		—
Commercial - Unsecured		—		—		—		—
Consumer		—		18		18		9
Total Loans	$	—	$	1,086	$	1,086	$	630

The Company recognized no interest income on nonaccrual loans during the three months ended December 31, 2023 or 2022.

The following table represents the accrued interest receivable written off by reversing interest income during the three months ended December 31, 2023:

	For the Three Months
	Ended December 31, 2023
	(in thousands)
Real Estate - Residential	$	12
Real Estate - Commercial		9
Commercial - Secured		—
Commercial - Unsecured		—
Consumer		1
Total Loans	$	22

NOTE 7: GOODWILL AND INTANGIBLE ASSETS

The goodwill and intangible assets arising from the acquisition of Citizens Bank of Cape Vincent is accounted for in accordance with the accounting guidance in FASB ASC Topic 350 for Intangibles — Goodwill and Other. The Company recorded goodwill of $4.2 million and core deposit intangibles of $2.5 million in connection with the acquisition. As of December 31, 2023 (unaudited) and September 30, 2023, intangible assets consisted of $2.0 million and $2.1 million, respectively, of core deposit intangibles, which are amortized over an estimated useful life of ten years.

The Company performs its annual impairment evaluation on September 30 or more frequently if events and circumstances indicate that the fair value is less than its carrying value.

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Goodwill and core deposit intangibles at December 31, 2023 (unaudited) and September 30, 2023 are summarized as follows:

	Three Months Ended December 31,						Year ended September 30,
	2023						2023
	Gross				Net		Gross				Net
	Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying
	Amount		Amortization		Amount		Amount		Amortization		Amount
	(In Thousands)
Goodwill	$	4,237	$	—	$	4,237	$	4,237	$	—	$	4,237
Core Deposit Intangible		2,080		104		1,976		2,542		462		2,080
	$	6,317	$	104	$	6,213	$	6,779	$	462	$	6,317

No impairments of goodwill were recognized for the fiscal year ended September 30, 2023. Amortization expense for other intangible assets was $104,000 and $462,000 for the three months ending December 31, 2023 and the fiscal year ended September 30, 2023, respectively, as well as the estimated aggregate amortization expense for each of the five succeeding fiscal years as summarized below:

Fiscal Year Ended
September 30,
(in thousands)
2024	$	416
2025		370
2026		323
2027		277
2028		231
	$	1,617

NOTE 8 — FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET CREDIT RISK

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and to sell loans. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition.

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on- balance sheet instruments.

A summary of financial instrument commitments at December 31, 2023 (unaudited) and September 30, 2023 is shown below.

	December 31,		September 30,
	2023		2023
	(in thousands)
Commitments to Grant Loans	$	1,671	$	1,089
Unfunded Commitments Under Lines of Credit	$	5,890	$	6,022

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may

30

require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.

The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the customer and generally consists of real estate.

Commitments and Contingencies

Outstanding letters of credit written are conditional commitments issued by the Company to guarantee the performance by a customer to a third party.  The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for standby letters of credit is represented by the contractual amount of those instruments.  The Bank uses the same credit policies in making conditional obligations as it does for on-balance sheet instruments.  The Company had four standby letters of credit totaling $176,000 as of December 31, 2023.

The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments.  The Company requires collateral and personal guarantees supporting these letters of credit as deemed necessary.  Management believes that the proceeds obtained through a liquidation of such collateral in the event of a default, and the enforcement of personal guarantees would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees.

Unfunded Commitments

The Company maintains an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable (i.e. commitment cannot be canceled at any time). The allowance for off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the allowance for credit losses on loans, and are discussed within this note. The allowance for credit losses for unfunded loan commitments of $31,000 at December 31, 2023 is separately classified on the balance sheet within Other Liabilities.

The following table presents the balance and activity in the allowance for credit losses for unfunded loan commitments for the three months ended December 31, 2023.

	Total Allowance for Credit
	Losses - Unfunded
(in thousands)	Commitments
Balance, September 30, 2023	$	—
Adjustment to allowance for unfunded commitments for adoption of ASU 2016-13		29
Provision for unfunded commitments		2
Balance, December 31, 2023	$	31

NOTE 9 — REGULATORY CAPITAL REQUIREMENTS

The Bank is subject to regulatory capital requirements administered by banking regulators. Failure to meet minimum capital requirements can trigger certain mandatory — and possibly additional discretionary — actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital

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guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

U.S. Basel III Capital Rules

In July 2013, the Federal Reserve Board approved final rules (the “U.S. Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S. banking organizations and implementing the Basel Committee on Banking Supervision’s December 2010 framework for strengthening international capital standards. The U.S. Basel III Capital Rules substantially revised the risk-based capital requirements applicable to bank holding companies and depository institutions.

The minimum regulatory capital requirements established by the U.S. Basel III Capital Rules became effective for the Bank on January 1, 2016 and become fully phased in on January 1, 2019. The U.S. Basel III Capital Rules require the Bank to:

● Meet a minimum Common Equity Tier 1 Capital ratio of 4.50% of risk-weighted assets and a minimum Tier 1 Capital of 6.00% of risk-weighted assets;

● Continue to require a minimum Total Capital ratio of 8.00% of risk-weighted assets and a minimum Tier 1 Leverage Capital ratio of 4.00% of average assets;

● Maintain a “capital conservation buffer” of 2.50% above the minimum risk-based capital requirements, which must be maintained to avoid restrictions on capital distributions and certain discretionary bonus payments; and

● Comply with a revised definition of capital to improve the ability of regulatory capital instruments to absorb losses. Certain non-qualifying capital instruments, including cumulative preferred stock and TruPS, will be excluded as a component of Tier 1 capital for institutions of the Company’s size.

The U.S. Basel III Capital Rules use a standardized approach for risk weightings that expand the risk- weightings for assets and off-balance sheet exposures from the previous 0%, 20%, 50% and 100% categories to a much larger and more risk-sensitive number of categories, depending on the nature of the assets and off- balance sheet exposures, resulting in higher risk weights for a variety of asset categories.

The capital conservation buffer at December 31, 2023 and September 30, 2023 is 2.50%. The Bank exceeded these “well-capitalized” and “capital conservation buffer” ratios for all periods presented.

As of December 31, 2023 and September 30, 2023, the Bank’s capital levels meet the fully phased-in minimum capital requirements, including the new capital conservation buffers, as prescribed in the U.S. Basel III Capital Rules.

As of December 31, 2023 and September 30, 2023, the most recent notification from Federal Deposit Insurance Corporation (“FDIC”) categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since the most recent notification that management believes have changed the Bank’s prompt corrective action category.

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There are no comparable minimum capital requirements that apply to the Company as a savings and loan holding company. The Bank’s actual and required capital amounts and ratios are presented in the table below:

										Minimum to be Well
										Capitalized Under Prompt
					Minimum Capital					Corrective Action
	Actual				Requirement					Provisions
	Amount ($)		Ratio (%)		Amount ($)			Ratio (%)		Amount ($)			Ratio (%)
	(In Thousands)
As of December 31, 2023 (unaudited)
Total Capital (to Risk-Weighted Assets)	$	25,877	23.0	≥	$	8,998	≥	8.0	≥	$	11,248	≥	10.0
Tier 1 Capital (to Risk-Weighted Assets)		24,786	22.0	≥		6,749	≥	6.0	≥		8,998	≥	8.0
Tier 1 Common Equity (to Risk-Weighted Assets)		24,786	22.0	≥		5,062	≥	4.5	≥		7,311	≥	6.5
Tier 1 Leverage Ratio (to Adjusted Total Assets)		24,786	12.3	≥		8,059	≥	4.0	≥		10,074	≥	5.0
Capital Conservation Buffer on Tier 1 Common Equity		25,877	15.0	≥		7,874	≥	7.0	≥		N/A	≥	N/A
As of September 30, 2023
Total Capital (to Risk-Weighted Assets)	$	21,906	19.4	≥	$	9,020	≥	8.0	≥	$	11,275	≥	10.0
Tier 1 Capital (to Risk-Weighted Assets)		21,283	18.9	≥		6,765	≥	6.0	≥		9,019	≥	8.0
Tier 1 Common Equity (to Risk-Weighted Assets)		21,283	18.9	≥		5,074	≥	4.5	≥		7,329	≥	6.5
Tier 1 Leverage Ratio (to Adjusted Total Assets)		21,283	10.6	≥		8,022	≥	4.0	≥		10,027	≥	5.0
Capital Conservation Buffer on Tier 1 Common Equity		21,906	11.4	≥		7,892	≥	7.0	≥		N/A	≥	N/A

GS&L Municipal Bank’s actual and required capital amounts and ratios are as follows:

										Minimum to be Well
										Capitalized Under Prompt
					Minimum Capital					Corrective Action
	Actual				Requirement					Provisions
	Amount ($)		Ratio (%)		Amount ($)			Ratio (%)		Amount ($)			Ratio (%)
	(In Thousands)
As of December 31, 2023 (unaudited)
Total Capital (to Risk-Weighted Assets)	$	13,260	184.8	≥	$	574	≥	8.0	≥	$	718	≥	10.0
Tier 1 Capital (to Risk-Weighted Assets)		13,260	184.8	≥		431	≥	6.0	≥		574	≥	8.0
Tier 1 Common Equity (to Risk-Weighted Assets)		13,260	184.8	≥		323	≥	4.5	≥		466	≥	6.5
Tier 1 Leverage Ratio (to Adjusted Total Assets)		13,260	39.2	≥		1,355	≥	4.0	≥		1,693	≥	5.0
Capital Conservation Buffer on Tier 1 Common Equity		13,260	176.8	≥		502	≥	7.0	≥		N/A	≥	N/A
As of September 30, 2023
Total Capital (to Risk-Weighted Assets)	$	13,053	245.8	≥	$	425	≥	8.0	≥	$	531	≥	10.0
Tier 1 Capital (to Risk-Weighted Assets)		13,053	245.8	≥		319	≥	6.0	≥		425	≥	8.0
Tier 1 Common Equity (to Risk-Weighted Assets)		13,053	245.8	≥		239	≥	4.5	≥		345	≥	6.5
Tier 1 Leverage Ratio (to Adjusted Total Assets)		13,053	37.4	≥		1,394	≥	4.0	≥		1,743	≥	5.0
Capital Conservation Buffer on Tier 1 Common Equity		13,053	237.8	≥		372	≥	7.0	≥		N/A	≥	N/A

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NOTE 10 — RETAINED EARNINGS

Cambray Mutual Holding Company (“Cambray”) received full dividends paid by the Company on shares owned in fiscal year 2023. The total cumulative dividends waived by Cambray was $6,384,000 as of September 30, 2023. The dividends waived by Cambray were considered a restriction on the retained earnings of the Company.

NOTE 11 — INTEREST RATE DERIVATIVES

Derivative instruments are entered into primarily as a risk management tool of the Company. It has entered into several interest rate swap agreements whereby it pays a fixed rate and receives a variable rate on a notional amount. It did so to hedge the cost of certain borrowings and to increase the interest rate sensitivity of certain assets. Financial derivatives are recorded at fair value as other assets or liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as a part of a hedging relationship. For a fair value hedge, changes in the fair value of the derivative instrument and changes in the fair value of the hedged asset or liability are currently recognized in current year earnings. Amounts recognized in earnings as noninterest loss for the three months ended December 31, 2023 and 2022 were $(143,000) and $(436,000), respectively. The gain/loss is the result of the swaps market value fluctuations with long-term bond rates and projected short-term rates. See Note 12 for further discussion on the fair value of the interest rate derivative.

On December 9, 2022, the Company unwound two off-balance sheet swaps, $6.0 million in notional value, for a realized gain of approximately $343,000. On December 14, 2022, the Company sold four investments totaling $2.0 million for a total loss of approximately $342,000, which closely matched the realized gain on the unwound swaps. $2.0 million was reinvested into two new securities.

On December 29, 2023, the Company unwound two off-balance sheet swaps, $2.5 million in notional value, for a realized gain of approximately $75,000.

Information about interest rate swap agreements at December 31, 2023 (unaudited) and September 30, 2023 is as shown on the following table:

			Weighted				Estimated
			Average Rate		Weighted		Fair Value
	Notional		Contract		Average Rate		(Liability)
	Amount		Pay Rate		Received Rate		Asset
	(In Thousands)						(In Thousands)
December 31, 2023 (unaudited)
Interest Rate Swaps on Mortgage Loans	$	—	0.00	%	0.00	%	$	—
Interest Rate Swaps on FHLB Borrowings and Bank Deposits	$	3,000	1.56	%	5.64	%	$	106
September 30, 2023
Interest Rate Swaps on Mortgage Loans	$	—	—	%	—	%	$	—
Interest Rate Swaps on FHLB Borrowings and Bank Deposits	$	5,500	2.04	%	5.35	%	$	250

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The following table is a summary of the fair value of outstanding derivatives and their presentation in the consolidated statements of financial condition as of December 31, 2023 (unaudited) and September 30, 2023:

	As of December 31,		As of September 30,
	2023		2023
	(unaudited)
	(In Thousands)
Fair Value Hedge – Interest Rate Swap
Accrued Interest Receivable and Other Assets	$	106	$	250

The notional amount of interest rate swap agreements entered into, that were outstanding at December 31, 2023 (unaudited) and September 30, 2023, mature as follows for the years ended September 30:

	December 31,		September 30,
	2023		2023
	(unaudited)
	(in thousands)
2024	$	—	$	—
2025		3,000		4,500
2026		—		1,000
	$	3,000	$	5,500

NOTE 12 — FAIR VALUE MEASUREMENTS

Determination of Fair Value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic of FASB ASC 820, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

Recent fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value, a reasonable point within the range, is most representative of fair value under current market conditions.

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Fair Value Hierarchy

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

● Level 1 — Valuation is based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

● Level 2 — Valuation is based on inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

● Level 3 — Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities, liquid mortgage products, active listed equities and most money market securities. Such instruments are generally classified within Level 1 or Level 2 of the fair value hierarchy. As required by this guidance, the Company does not adjust the quoted price for such instruments.

The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include most investment- grade and high-yield corporate bonds, less liquid mortgage products, less liquid equities, state, municipal and provincial obligations, and certain physical commodities. Such instruments are generally classified within Level 2 of the fair value hierarchy.

The Company utilizes interest rate swap agreements based on the Secured Overnight Financing Rate (SOFR). The Company generally determines the fair value of its interest rate swap agreements using externally developed pricing models based on market observable inputs and therefore classifies such valuations as Level 2.

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions. Valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used.

Individually evaluated loans are evaluated and valued at the time the loan is identified as not having risk characteristics common with other loans within its pool. In these instances, impairment is measured on a case-by-case basis.  The fair value of the loan is determined using either present value of the expected future cash flows discounted at the loan’s effective interest rate or, for collateral dependent loans, the fair value of the collateral less the selling, administrative costs, and other expenses necessary to liquidate the collateral. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable. Market value is measured based on the value of the collateral securing these loans and is classified at a level 3 in the fair value hierarchy.  The value of business equipment, inventory and accounts receivable collateral is based on the net book value on the business’ financial statements and, if necessary, discounted based on management’s review and analysis. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation and/or management’s

36

expertise and knowledge of the client’s business. Individually evaluated loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified previously.

Foreclosed properties are adjusted to fair value upon transfer of the loans to foreclosed properties. Subsequently, foreclosed properties are carried at the lower of carrying value or fair value. The estimated fair value for foreclosed properties included in Level 3 is determined by independent market-based appraisals and other available market information, less costs to sell, that may be reduced further based on market expectations or an executed sales agreement. If fair value of the collateral deteriorates subsequent to initial recognition, the Company records the foreclosed properties as a nonrecurring Level 3 adjustment. Valuation techniques are consistent with those techniques applied in prior periods.

The following table present the assets required to be measured and reported on a recurring basis on the Company’s Consolidated Statements of Financial Condition at their fair value as of December 31, 2023 (unaudited) and September 30, 2023 by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

			Quoted Prices in
			Active Markets
			for Identical		Significant Other		Significant
	Total		Assets/Liabilities		Observable		Unobservable
	Fair Value		(Level 1 )		Inputs (Level 2)		Inputs (Level 3)
	(In Thousands)
December 31, 2023 (unaudited)
U.S. Government Treasuries	$	3,764	$	—	$	3,764	$	—
U.S. Government Agencies		12,028		—		12,028		—
Mortgaged-Backed Securities		8,065		—		8,065		—
Municipal Securities		23,155		—		23,155		—
SBA Securities		2,390		—		2,390		—
Available-for-Sale Securities	$	49,402	$	—	$	49,402	$	—
Interest Rate Swap Derivative	$	106	$	—	$	106	$	—
September 30, 2023
U.S. Government Treasuries	$	3,680	$	—	$	3,680	$	—
U.S. Government Agencies		11,662		—		11,662		—
Mortgaged-Backed Securities		7,915		—		7,915		—
Municipal Securities		20,995		—		20,995		—
SBA Securities		2,372		—		2,372		—
Available-for-Sale Securities	$	46,624	$	—	$	46,624	$	—
Interest Rate Swap Derivative	$	250	$	—	$	250	$	��

Certain assets and liabilities may be required to be measured at fair value on a nonrecurring basis in periods subsequent to their initial recognition. Generally, nonrecurring valuation is the result of the application of other accounting pronouncements which require assets and liabilities to be assessed for impairment or recorded at the lower of cost or fair value.

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Fair values of assets and liabilities measured on a nonrecurring basis at December 31, 2023 (unaudited) and September 30, 2023  are shown on the following table:

			Quoted Prices in
			Active Markets
			for Identical		Significant Other		Significant
	Total		Assets/Liabilities		Observable		Unobservable
	Fair Value		(Level 1 )		Inputs (Level 2)		Inputs (Level 3)
	(In Thousands)
December 31, 2023 (unaudited)
Foreclosed Real Estate, Net	$	74	$	—	$	—	$	74
September 30, 2023
Foreclosed Real Estate, Net	$	101	$	—	$	—	$	101

The table below presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Level 3 inputs were used to determine fair value at December 31, 2023 (unaudited) and at September 30, 2023.

	Valuation Techniques	Unobservable Inputs	Weighted Average Range
Individually Evaluated Loans	Appraisal of Collateral	Appraisal Adjustments	25% - 25% (25%)
	(Sales Approach)	Costs to Sell	6% - 10% (8%)
	Discounted Cash Flow
Foreclosed Assets	Appraisal of Collateral	Appraisal Adjustments	25% - 25% (25%)
	(Sales Approach)	Costs to Sell	6% - 10% (8%)

Accounting guidance requires disclosures of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate their fair values. Certain financial instruments and all non-financial instruments are excluded from the scope of the guidance.

The estimated fair values of financial instruments at December 31, 2023 (unaudited) and at September 30, 2023 are as follows:

	December 31, 2023
	Carrying Value		Fair Value
	(unaudited)
	(In Thousands)
Financial Assets
Cash and due from banks	$	6,576	$	6,576
Interest bearing deposits with banks		1,503		1,503
Time deposits in other financial institutions		491		491
Available for sale debt securities		49,402		49,402
Acquired loans		30,527		30,527
Portfolio loans, net of deferred fees		94,084		76,452
Investment in restricted stock		1,150		1,150
Accrued interest receivable		627		627
Interest rate swap derivative		106		106
Financial Liabilities
Deposits	$	160,327	$	121,731
Accrued interest payable		13		13

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Accounting guidance requires disclosures of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate their fair values. Certain financial instruments and all non-financial instruments are excluded from the scope of the guidance.

The estimated fair values of financial instruments at September 30, 2023 are as follows:

	September 30, 2023
	Carrying Value		Fair Value
	(In Thousands)
Financial Assets
Cash and due from banks	$	9,306	$	9,306
Interest bearing deposits with banks		1,101		1,101
Time deposits in other financial institutions		484		484
Available for sale debt securities		46,624		46,624
Acquired loans		32,174		32,174
Portfolio loans, net of deferred fees		93,253		69,608
Investment in restricted stock		1,471		1,471
Accrued interest receivable		630		630
Interest rate swap derivative		250		250
Financial Liabilities
Deposits	$	158,778	$	119,212
Accrued interest payable		67		67

The methods and assumptions that were used to estimate the fair value of financial assets and financial liabilities that are measured at fair value on a recurring and non-recurring basis have been previously disclosed. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below:

Cash and due from banks — Due to their short -term nature, the carrying amount of cash and due from banks approximates fair value and is categorized in Level 1 of the fair value hierarchy.

Interest bearing deposits with banks — Due to their short -term nature, the carrying amount of interest- bearing deposits in other financial institutions approximates fair value and is categorized in Level 1 of the fair value hierarchy.

Time deposits in other financial institutions — Fair values are calculated based on market prices of similar securities and, therefore, are classified as Level 2 within the valuation hierarchy.

Available for sale securities — For those available for sale debt securities where quoted prices are unavailable, fair values are calculated based on market prices of similar securities and, therefore, are classified as Level 2 within the valuation hierarchy.

Held to maturity debt securities — The fair value is estimated using quoted market prices or by pricing models and is categorized as Level 2 of the fair value hierarchy.

Loans receivable — The fair value loans is estimated by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and is categorized in Level 3 of the fair value hierarchy. Acquired loans (impaired and non-impaired) are initially recorded at their acquisition-date fair values using Level 3 inputs. Fair values are based on a discounted cash flow methodology that involves assumptions and judgments as to credit risk, expected life time losses, environmental factors, collateral values, discount rates, expected payments and expected prepayments.

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Investments in restricted stock — No secondary market exists for FHLB or ACBB stock. The stock is bought and sold at par and management believes the carrying amount approximates fair value and is categorized in Level 2 of the fair value hierarchy.

Accrued interest receivable — Due to their short -term nature, the carrying amount approximates fair value and is categorized in Level 1 of the fair value hierarchy.

Deposits — Fair value of deposits with no stated maturity, such as demand deposits, savings, and money market accounts, is estimated using discounted cash flows applying short term interest rates currently offered on FHLB advances. Fair value of fixed rate time deposits is estimated using discounted cash flows applying interest rates currently offered on similar time deposits. Deposits are categorized in Level 2 of the fair value hierarchy.

Accrued interest payable — Due to their short-term nature, the carrying amount approximates fair value and is categorized in Level 1 of the fair value hierarchy.

Interest Rate Swap Derivative — Fair values are calculated based on market prices of similar securities and, therefore, are classified as Level 2 within the valuation hierarchy.

NOTE 13 — LEASES

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration.

The leases in which the Company is the lessee include real estate property for a branch office facility under a noncancelable operating lease arrangement, whose maturity date was November 2023 at which point, it automatically renewed for a three-year term at the end of that renewal. The Bank also leases a postage machine which will expire in June 2025 and a copier which will expire in June 2026.

All of the Company’s leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated statements of financial condition. Topic 842 requires the Company to recognize a right-of-use (“ROU”) asset and corresponding lease liability included in other assets and other liabilities, respectively, on the Company’s consolidated statements of financial condition.

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The Company’s real estate lease agreements include an option to renew at the Company’s discretion. Future maturities of lease liabilities with initial or remaining terms of one year or more as of December 31, 2023 are as follows:

	(unaudited)
2024	$	17,000
2025		21,000
2026		14,000
2027		13,000
2028		13,000
	$	78,000

Lease expense for the branch office amounted to $4,000 for the three months ended December 31, 2023. Lease expense for the equipment was approximately $1,000 for the three months ended December 31, 2023. The following tables present information about the Company’s leases and of and for the three months ended December 31, 2023:

Right to use assets	$	61,000
Lease liability	$	61,000
Weighted average remaining lease term, in years:		4.33
For the quarter ended December 31, 2023:
Operating lease expense:	$	5,000
Short-term lease expense:		—
Total lease expense:	$	5,000
Cash paid for amounts included in measurement of lease liabilities:	$	5,000

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NOTE 14 — PARENT COMPANY FINANCIAL INFORMATION

Gouverneur Bancorp, Inc.
CONDENSED STATEMENTS OF FINANCIAL CONDITION PARENT COMPANY ONLY
As of December 31, 2023 (unaudited) and September 30, 2023
	December 31, 2023		September 30, 2023
	(unaudited)
	(In Thousands, Except Share and Per Share Amounts)
Assets
Cash and Cash Equivalents:
Cash and due from banks	$	2,453	$	19
Interest bearing deposits with banks		253		4,575
Total Cash and Cash Equivalents		2,706		4,594
ESOP loan receivable		522		—
Accrued interest receivable and other assets		113		11
Investment in subsidiary		29,466		23,865
Total Assets	$	32,807	$	28,470
Liabilities and Stockholders' Equity
Accrued interest payable and other liabilities		748		3,362
Total Liabilities		748		3,362
Stockholders' 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
Retained earnings		27,992		28,242
Treasury Stock, at cost, (shares December 31, 2023: 0: September 30, 2023: 352,231)		—		(4,070)
Accumulated other comprehensive loss		(1,891)		(4,123)
Unearned common stock held by employee stock ownership plan		(540)		—
Total Stockholders' Equity		32,059		25,108
Total Liabilities and Stockholders' Equity	$	32,807	$	28,470
See notes to consolidated financial statements

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Gouverneur Bancorp, Inc.
CONDENSED STATEMENTS OF EARNINGS - PARENT COMPANY ONLY
For the Three Months Ended December 31, 2023 and 2022 (unaudited)
	Three Months Ended December 31,
	2023		2022
	(unaudited)
	(In Thousands, except per share data)
Interest Income:
Loans receivable, including fees	$	8	$	—
Total Interest Income		8		—
Net Interest Income		8		—
Non-interest Income:
Earnings (loss) on deferred fees plan		(6)		—
Earnings from subsidiaries		179		58
Total Non-interest Income		173		58
Non-interest Expenses:
Directors' fees		14		—
Earnings (losses) on deferred fees plan		(6)		—
Professional fees		34		—
Other		21		12
Total Non-interest Expenses		63		12
Income before Income Tax Expense		118		46
Income Tax Expense (Benefit)		—		—
Net Income	$	118	$	46
Basic and Diluted Earnings Per Share	$	0.11	$	0.02
See notes to consolidated financial statements

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Gouverneur Bancorp, Inc.
CONDENSED STATEMENTS OF CASH FLOWS - PARENT ONLY
	Three Months Ended December 31,
	2023		2022
	(unaudited)
	(In Thousands)
Cash Flows from Operating Activities:
Net income	$	118	$	46
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Equity in undistributed net earnings of subsidiaries		(179)		(59)
ESOP committed to be released		37		—
Change in other Assets		(3,115)		224
Change in other Liabilities		(3,159)		(242)
Net Used in Provided by Operating Activities		(6,298)		(31)
Cash Flows from Investing Activities:
ESOP loan issued		(578)		—
Net decrease in loans receivable		56		—
Net Cash Used in Investing Activities		(522)		—
Cash Flows from Financing Activities:
Net stock offering proceeds		4,932		—
Net Cash Provided by Financing Activities		4,932		—
Net Decrease in Cash and Cash Equivalents		(1,888)		(31)
Cash and Cash Equivalents - Beginning of Year		4,594		107
Cash and Cash Equivalents - End of Year	$	2,706	$	76

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Statements contained in this report that are not historical facts may constitute forward-looking statements (within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended), which involve significant risks and uncertainties. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of invoking these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by the use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “plan,” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain and actual results may differ from those predicted. The Company undertakes no obligation to update these forward-looking statements in the future.

The Company cautions readers of this report that a number of important factors could cause the Company’s actual results to differ materially from those expressed in forward-looking statements. Factors that could cause actual results to differ from those predicted and could affect the future prospects of the Company include, but are not limited to: (i) general economic conditions, either nationally or in our market areas, that are worse than expected including as a result of employment levels and labor shortages, and the effects of inflation, a potential recession or slowed economic growth caused by supply chain disruptions or otherwise; (ii) changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses; (iii) our ability to access cost-effective funding; (iv) fluctuations in real estate values and both residential and commercial real estate market conditions; (v) demand for loans and deposits in our market area; (vi) deposit outflows and our ability to successfully manage liquidity; (vii) our ability to implement and change our business strategies; (viii) competition among depository and other financial institutions; (ix) inflation and changes in the interest rate environment that reduce our margins and yields, the fair value of financial instruments or our level of loan originations or prepayments on loans we have made and make; (x) adverse changes in the securities or secondary mortgage markets; (xi) changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements and insurance premiums; (xii) changes in the quality or composition of our loan or investment portfolios; (xiii) technological changes that may be more difficult or expensive than expected; (xiv) the inability of third-party providers to perform as expected; (xv) our ability to manage market risk, credit risk and operational risk in the current economic environment; (xvi) our ability to enter new markets successfully and to capitalize on growth opportunities; (xvii) our ability to ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire, including those recently acquired from Citizens Bank of Cape Vincent, and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; (xviii) changes in consumer spending, borrowing and savings habits; (xix)  changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board; (xx) our ability to attract and retain key employees; and (xxi) changes in financial condition, results of operations or future prospects of issuers of securities that we own.

Critical Accounting Policies

We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. We consider these accounting policies to be our critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Actual results could differ from these judgments and estimates under different conditions, resulting in a change that could have a material impact on the carrying values of our assets and liabilities and our results of operations.

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Acquired Loans

The Company has determined that there was no evidence of deterioration in credit quality since origination in loans acquired from Citizens Bank of Cape Vincent and that it was probable, at the acquisition date, that the Company will be able to collect all contractually required payments receivable.

Allowance for Credit Losses

We consider the allowance for credit losses to be a critical accounting policy. Note 2 to the Company’s Consolidated Financial Statements for the quarter ended December 31, 2023 discusses significant accounting policies, including the allowance for credit losses and the adoption of ASC 326, which changes the methodology under which management calculates its reserve for loans and investment securities, now referred to as the allowance for credit losses. Please refer to Note 2 to the Company’s Consolidated Financial Statements for detail regarding the Company’s adoption of ASU 206-13: Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and the allowance for credit losses. Although we believe that we use the best information available to establish the allowance for credit losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation.

Our financial results are affected by the changes in and the level of the allowance for credit losses. This process involves our analysis of complex internal and external variables, and it requires that we exercise judgement to estimate an appropriate allowance for credit losses. As a result of the uncertainty associated with this subjectivity, we cannot assure the precision of the amount reserved, should we experience sizeable loan losses in any particular period. For example, changes in the financial condition of individual borrowers, economic conditions, or the condition of various markets in which collateral may be sold could require us to significantly decrease or increase the level of the allowance for credit losses. Such an adjustment could materially affect net income as a result of the change in provision for credit losses. We also have approximately $1.2 million as of December 31, 2023 in non-performing assets consisting of non-performing loans and two properties held in other real estate owned. We continue to assess the collectability of these loans and update our appraisals on these loans as appropriate.

To determine the total allowance for credit losses, management estimates the reserves needed for each segment of the portfolio, including loans analyzed individually and loans analyzed on a pooled basis. The allowance for loan losses consists of amounts applicable to: (1) the commercial portfolio; (2) the real estate portfolio; and (3) the consumer portfolio.

Management monitors differences between estimated and actual credit losses. This monitoring process includes periodic assessments by senior management of loan portfolios and the models used to estimate the expected credit losses in those portfolios. Additions to the allowance for credit losses are made by changes to the provision for loan losses. Credit exposures deemed to be uncollectible are charged against the allowance for loan losses. Recoveries of previously charged off amounts are credited to the allowance for credit losses.

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Specific Allowances for Identified Problem Loans

We establish a specific allowance when loans are determined to not share common risk characteristics with pooled loans. Loss is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral less estimated selling expenses. Factors in identifying a specific problem loan include: (1) the strength of the customer’s personal or business cash flows; (2) the availability of other sources of repayment; (3) the amount due or past due; (4) the type and value of collateral; (5) the strength of our collateral position; (6) the estimated cost to sell the collateral; and (7) the borrower’s effort to cure the delinquency. In addition, for loans secured by real estate, we consider the extent of any past due and unpaid property taxes applicable to the property serving as collateral on the mortgage.

General Valuation Allowance on the Remainder of the Loan Portfolio

We establish a general allowance for loans that share common risk characteristics to recognize the expected lifetime credit losses associated with lending activities, but which, unlike specific allowances, has not been allocated to particular problem assets. This general valuation allowance is determined by segregating the loans by loan category and using historical experience, current conditions, and reasonable and supportable forecasts to estimate the expected lifetime credit losses inherent. The allowance may be adjusted for significant factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary market area, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of  the portfolio, duration of  the current business cycle and bank regulatory examination results. The applied loss factors are re-evaluated quarterly to ensure their relevance in the current real estate environment.

Although we believe that we use the best information available to establish the allowance for credit losses, future adjustments to the allowance for credit losses may be necessary and any material increase in the allowance for credit losses may adversely affect our financial condition and results of operations.

Furthermore, while we believe we have established our allowance for credit losses in conformity with accounting principles generally accepted in the United States of America, as an integral part of their examination process, regulators will periodically review our allowance for credit losses. The regulators may have judgments different than management’s, and we may determine to increase our allowance as a result of these regulatory reviews.

Fair Value Measurements

We follow the guidance of FASB ASC 820, Fair Value Measurements and Disclosures. This guidance permits entities to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This guidance clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Under this guidance, fair value measurements are not adjusted for transaction costs. The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

Goodwill

Goodwill represents the excess cost of the acquisition of Citizens Bank of Cape Vincent over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. When calculating goodwill in accordance with FASB ASC 805-30-55-3, we evaluate whether the fair value of equity of the acquired company is a more reliable measure than the fair

47

value of the equity interests transferred. We consider the assumptions required to calculate the fair value of equity of an acquired company using discounted cash flow models (income approach) and/or change of control premium models (market approach) which are generally based on a higher level of market participant inputs and therefore a lower level of subjectivity when compared to the assumptions required to calculate the fair value of equity interests transferred under a fair value pricing model. As a result, we consider the calculation of the fair value of the equity of an acquired company to be more reliable than the calculation of the fair value of the equity interests transferred. Goodwill is assessed at least annually for impairment and any such impairment will be recognized in the period identified. Goodwill is not amortized but is evaluated annually for impairment.

Comparison of Financial Condition at December 31, 2023 and September 30, 2023

Total assets decreased by $940,000, or 0.46%, to $204.9 million at December 31, 2023 from $205.9 million at September 30, 2023. The decrease in assets was primarily due to decreases in cash and cash equivalents of $2.3 million and acquired loans of $1.7 million, partially offset by an increase in originated loans of $1.3 million and an increase in securities available for sale of $2.8 million.

Cash and cash equivalents decreased by $2.3 million, or 22.37%, to $8.1 million at December 31, 2023 from $10.4 million at September 30, 2023. The decrease in cash and cash equivalents can be primarily attributed to a repayment of Federal Home Loan Bank borrowings of $7.0 million, partially offset by an increase in deposits of $1.5 million.

Loans receivable, net of the allowance for credit losses, decreased by $816,000, or 0.65%, to $124.6 million at December 31, 2023 from $125.4 million at September 30, 2023. The decrease in loans receivable, net of the allowance for credit losses, was primarily due a decrease in net loans acquired from Citizens Bank of Cape Vincent of $1.7 million and the transition adjustment of the adoption of CECL, which resulted in an increase in the allowance for credit losses on loans of $436,000, partially offset by an increase in newly originated loans of $1.3 million.

Securities available for sale increased by $2.8 million, or 5.96%, to $49.4 million at December 31, 2023 from $46.6 million at September 30, 2023. The increase was primarily due to an increase in the market value on the portfolio, partially offset by principal paydowns and maturities.

Foreclosed real estate decreased to $74,000 at December 31, 2023 from $101,000 at September 30, 2023 due to the write-down of a foreclosed property.

Total deposits increased by $1.5 million, or 0.98%, to $160.3 million at December 31, 2023 from $158.8 million at September 30, 2023. The increase in deposits can primarily be attributed to a $4.4 million increase in time deposits, partially offset by a $2.8 million decrease in non-maturing deposits. The increase in time deposits can primarily be attributed to an increase in offering rates as market rates have increased. Uninsured deposits, which are the portion of deposit accounts that exceed the FDIC insurance limit, currently set at $250,000 per insured account, were approximately $38.6 million at December 31, 2023 and $42.3 million at September 30, 2023. Municipal deposits held at GS&L Municipal Bank accounted for approximately $18.0 million and $17.5 million of the uninsured deposits at December 31, 2023 and September 30, 2023, respectively. At December 31, 2023, we had $57.4 million in available liquidity with the Federal Home Loan Bank of New York and $8.1 million in cash and cash equivalents, which was sufficient to cover 100% of our uninsured and uncollateralized deposits. Municipal deposits held by GS&L Municipal Bank are fully collateralized by available for sale government and collateralized mortgage obligation securities.

Federal Home Loan Bank advances decreased to $7.0 million at December 31, 2023 from $14.0 million at September 30, 2023. The decrease in advances was primarily due to principal maturities, increase in total deposits and increase in the bank’s internal accounts from the net stock offering proceeds.

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Shareholders’ equity increased by $7.0 million, or 27.68%, to $32.1 million at December 31, 2023 from $25.1 million at September 30, 2023. The increase in shareholders’ equity was primarily a result of the completion of the second-step conversion 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. There was also a $2.2 million increase to the market value adjustment on the securities portfolio included in the accumulated other comprehensive income component.

Results of Operations for the Three Months Ended December 31, 2023 and 2022

Financial Highlights

Net income for the three months ended December 31, 2023 was $118,000 compared to net income of $46,000 for the three months ended December 31, 2022. Net income for the three months ended December 31, 2023 was higher than the three months ended December 31, 2022 primarily due to a $293,000 increase in the unrealized loss on interest rate swap agreements as of December 31, 2023. The Company also recognized $342,000 in realized losses on sales of securities which closely matched the realized gain of $343,000 on swaps unwound for the three months ended December 31, 2022.

Net Interest Income

Net interest income totaled $1.8 million for the three months ended December 31, 2023, as compared to $2.0 million for the three months ended December 31, 2022. The decrease in net interest income of $180,000, or 9.07%, was primarily due to an increase in deposit interest expense of $219,000 and an increase in borrowing interest expense of $125,000, partially offset by $50,000 of income earned on the swap agreements hedged against borrowings.

Interest income increased by $114,000, or 5.66%, for the three months ended December 31, 2023 due to an increase in market rates resulting in higher interest rates on loan originations and loan repricing.

Interest expense increased by $294,000, or 980.00%, due to the increase in interest expense on deposits and Federal Home Loan Bank borrowings offset by the income earned on swap agreements hedged against certain borrowings.

Net interest margin decreased by 32 basis points, to 3.98% compared to 4.30% for the three months ended December 31, 2023 driven primarily by an increase in interest bearing liability costs resulting from the increase in market rates over the prior year.

Provision for Credit Losses

Management recorded loan loss provisions of $68,000 on loans and $2,000 on unfunded commitments and $15,000 on loans for the three months ended December 31, 2023 and 2022, respectively. The increase in provision level was primarily attributed to expected charge-offs of residential mortgages. Although the COVID-19 pandemic and the resulting recession has impacted the local economy, we have not experienced any significant deterioration of our borrowers’ ability to keep current in accordance with the terms of their obligations. Based on a review of the loans that were in the loan portfolio at December 31, 2023, management believes that the allowance is maintained at a level that represents its best estimate of inherent credit losses in the loan portfolio that were both probable and reasonably estimable.

Non-performing loans were $1.1 million and $630,000 at December 31, 2023 and September 30, 2023, respectively. At December 31, 2023, non-performing loans consisted primarily of residential and commercial mortgage loans. Non-performing loans included troubled debt restructurings of 435,000 at September 30, 2023.  

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Non-Interest Income

The following table sets forth a summary of non-interest income (loss) for the periods indicated:

	Three Months Ended December 31,				Change
	2023		2022		Amount		Percent
	(Dollars in thousands)
	(unaudited)
Service charges	$	87	$	92	$	(5)	5.43	%
Realized loss on sales of securities - AFS		—		(342)		342	100.00	%
Realized gain on swap unwound		75		343		(268)	78.13	%
Earnings on investment in life insurance		38		36		2	5.56	%
Earnings on deferred fees plan		12		28		(16)	57.14	%
Unrealized loss on swap agreement		(143)		(436)		293	67.20	%
Earnings on MPF & MAP programs		10		10		—	—	%
Other non-interest income		68		79		(11)	13.92	%
Total non-interest income (loss), net	$	147	$	(190)		337

The increase in total non-interest income was primarily due to the reduction in the unrealized loss on swap agreements resulting from fluctuations with long term bond rates and projected short-term rates. The unrealized loss on swap agreements was $143,000 at December 31, 2023 compared to an unrealized loss of $436,000 at December 31, 2022. For the three months ended December 31, 2022, the Company unwound two off-balance sheet swaps for a realized gain of $343,000 and sold four investments for a loss of $342,000.

Non-Interest Expense

The following table sets forth an analysis of non-interest expense for the periods indicated:

	Three Months Ended December 31,				Change
	2023		2022		Amount		Percent
	(Dollars in thousands)
	(unaudited)
Salaries and employee benefits	$	863	$	802	$	61	7.61	%
Directors fees		86		71		15	21.13	%
Earnings on deferred fees plan		12		28		(16)	(57.14)	%
Building, occupancy and equipment		238		241		(3)	(1.24)	%
Data processing		106		109		(3)	(2.75)	%
Postage and supplies		24		45		(21)	(46.67)	%
Professional fees		150		106		44	41.51	%
Foreclosed assets, net		4		23		(19)	(82.61)	%
Intangibles & deposit premium expense		104		115		(11)	(9.57)	%
Other non-interest expense		193		229		(36)	(15.72)	%
Total non-interest expense	$	1,780	$	1,769	$	11

The increase in total noninterest expense included a $44,000 increase in professional fees from December 31, 2022 to December 31, 2023, due to the Bank’s second step conversion, which was completed during the first quarter of fiscal year 2024.

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Income Taxes

The Company recorded income tax benefit of $17,000 for the three months ended December 31, 2023 and income tax benefit of $36,000 for the three months ended December 31, 2022. The decrease in income tax benefit resulted from an increase in pre-tax book income. The Company’s effective income tax rates were (17.36)% and (360.00)% for the three months ended December 31, 2023 and 2022, respectively.

Asset Quality

Non-performing loans were $1.1 million and $630,000 at December 31, 2023 and September 30, 2023, respectively. At December 31, 2023, non-performing loans consisted primarily of residential and commercial mortgage loans. Non-performing loans included troubled debt restructurings of $435,000 at September 30, 2023.

From time to time, as part of our loss mitigation strategy, we may renegotiate the loan terms based on the economic or legal reasons related to the borrower’s financial difficulties. There were no loans modified to borrowers experiencing financial difficulty during the three months ended December 31, 2023. Loans modified to borrowers experiencing financial difficulty may be considered to be non-performing and if so are placed on non-accrual, except for those that have established a sufficient performance history (generally a minimum of six consecutive months of performance) under the terms of the restructured loan.

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Average Balances and Yields

The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated.  No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances only. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Deferred loan fees totaled $426,000 and $554,000 for the three months ended December 31, 2023 and 2022, respectively.  

	For the Three Months Ended December 31,
	2023						2022
	Average						Average
	Outstanding				Average		Outstanding				Average
	Balance		Interest		Yield/Rate		Balance		Interest		Yield/Rate
	(Dollars in thousands)
	(unaudited)
Interest-earning assets(1):
Loans	$	125,054	$	1,601	5.08	%	$	124,947	$	1,509	4.79	%
Securities		53,224		503	3.75	%		55,745		482	3.43	%
Other short term investments		1,690		24	5.63	%		2,421		23	3.77	%
Total interest-earning assets		179,968		2,128	4.69	%		183,113		2,014	4.36	%
Noninterest-earning assets		24,842						22,576
Total assets	$	204,810					$	205,689
Interest-bearing liabilities(1):
Regular savings and club deposits		66,972		22	0.13	%		84,457		26	0.12	%
Money market and NOW deposits(2)		47,234		23	0.19	%		52,714		(25)	(0.19)	%
Certificates of deposit		26,789		198	2.93	%		19,875		23	0.46	%
Total interest-bearing deposits		140,995		243	0.68	%		157,046		24	0.06	%
Federal Home Loan Bank advances and other borrowings(3)		9,729		81	3.30	%		572		6	4.16	%
Total interest-bearing liabilities		150,724		324	0.85	%		157,618		30	0.08	%
Noninterest-bearing demand deposits		22,974						22,040
Other noninterest-bearing liabilities		1,978						820
Total liabilities		175,676						180,478
Total shareholders’ equity		29,134						25,211
Total liabilities and shareholders’ equity	$	204,810					$	205,689
Net interest income			$	1,804					$	1,984
Net interest rate spread(4)					3.84	%					4.28	%
Net interest-earning assets(5)	$	29,244					$	25,495
Net interest margin(6)					3.98	%					4.30	%
Average interest-earning assets to interest-bearing liabilities					1.19	x					1.16	x

(1) The following table provides a reconciliation of the impact of swap agreements in the table above with respect to the following items:

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	For the Three Months Ended December 31,
	2023		2022
	(Dollars in thousands)
Interest on loans, net of deferred fees	$	1,601	$	1,509
Impact of swap agreements		—		27
Interest on loans, excluding impact of swap agreements	$	1,601	$	1,482
Interest on money market and NOW deposit accounts	$	23	$	(25)
Impact of swap agreements		—		(31)
Interest on deposits, excluding impact of swap agreements	$	23	$	6
Interest on borrowings	$	81	$	6
Impact of swap agreements		(50)		—
Interest on borrowings, excluding impact of swap agreements	$	131	$	6

(2) Interest on money market and NOW deposit accounts includes net interest on swap agreements hedged against deposits.

(3) Interest on Federal Home Loan Bank advances includes net interest on swap agreements hedged against borrowing.

(4) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.

(5) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(6) Net interest margin represents net interest income divided by average total interest-earning assets.

Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume. There were no out-of-period items or adjustments required to be excluded from the table below.

	Three Months Ended December 31, 2023
	Compared to
	Three Months Ended December 31, 2022
	Increase (Decrease) Due to			Total Increase
	Volume		Rate	(Decrease)
	(In thousands)
Interest-earning assets:
Loans	1		91	92
Securities	(23)		44	21
Other short term investments	(8)		9	1
Total interest-earning assets	(30)		144	114
Interest-bearing liabilities:
Regular savings and club deposits	(6)		2	(4)
Money market and NOW deposits	2		46	48
Certificates of deposit	11		164	175
Total deposits	7		212	219
Federal Home Loan Bank advances and other borrowings	75		—	75
Total interest-bearing liabilities	82		212	294
		���		—
Change in net interest income	(112)		(68)	(180)

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Liquidity and Capital Resources

Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans and proceeds from sales and maturities of securities. We also rely on borrowings from the Federal Home Loan Bank as supplemental sources of funds. At December 31, 2023, there were $7.0 million in outstanding advances from the Federal Home Loan Bank and we had the ability to borrow $57.4 million. Additionally, at December 31, 2023, we had a line of credit with the Federal Reserve Discount Window totaling $5.0 million and a second line of credit with Atlantic Community Banker’s Bank totaling $4.0 million. At December 31, 2023, there were no outstanding balances under any of these additional credit facilities.

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. Our most liquid assets are cash and cash equivalents and available-for-sale investment securities. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period.

Our cash flows are comprised of three primary classifications: cash flows from operating activities; investing activities and financing activities. Net cash used in operating activities was $3.5 million and $40,000 for the three months ended December 31, 2023 and 2022. Net cash provided by investing activities, which consists primarily of disbursements for loan originations and purchases and the purchase of securities available-for-sale, offset by principal collections on loans, proceeds from sales, maturities and principal payments received on securities available-for-sale, was $0.8 million and $1.0 million for the three months ended December 31, 2023 and 2022. Net cash provided by (used in) financing activities, consisting primarily of activity in deposit accounts and Federal Home Loan Bank advances, was $0.3 million for the three months ended December 31, 2023 and was $(9.1) million for the three months ended December 31, 2022.

We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. We have no material commitments for capital expenditures as of December 31, 2023. Our current strategy is to increase core deposits and utilize FHLB advances and brokered deposits to fund loan growth. We did not have any brokered deposits as of December 31, 2023 or September 30, 2023.

Bancorp is a separate legal entity from the Bank and must provide for its own liquidity to pay its operating expenses and other financial obligations and to fund repurchases of shares of common stock. Bancorp’s primary source of income is dividends received from the Bank. The amount of dividends that the Bank may declare and pay to Bancorp is governed by applicable bank regulations. At December 31, 2023 and September 30, 2023, Bancorp (on an unconsolidated basis) had liquid assets of $2.7 million and $4.6 million, respectively.

At December 31, 2023 and September 30, 2023, the Bank exceeded all of its regulatory capital requirements. Management is not aware of any conditions or events that would change the Bank’s categorization as well-capitalized.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate risk is defined as the exposure to current and future earnings and capital that arises from adverse movements in interest rates. Depending on a bank’s asset/liability structure, adverse movements in interest rates could be either rising or falling interest rates. For example, a bank with predominantly long-term fixed-rate assets and short-term liabilities could have an adverse earnings exposure to a rising rate environment. Conversely, a short-term or variable-rate asset base funded by longer-term liabilities could be negatively affected by falling rates. This is referred to as re-pricing or maturity mismatch risk.

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Interest rate risk also arises from changes in the slope of the yield curve (yield curve risk), from imperfect correlations in the adjustment of rates earned and paid on different instruments with otherwise similar re-pricing characteristics (basis risk), and from interest rate related options embedded in our assets and liabilities (option risk).

Our objective is to manage our interest rate risk by determining whether a given movement in interest rates affects our net interest income and the market value of our portfolio equity in a positive or negative way and to execute strategies to maintain interest rate risk within established limits. The results at December 31, 2023 indicate the level of risk within the parameters of our model. Our management believes that the December 31, 2023 results indicate a profile that reflects interest rate risk exposures in both rising and declining rate environments for both net interest income and economic value.

Economic value of equity, or “EVE,” is an economic concept that gauges the impact of interest rate changes on fair market values of assets, liabilities, and equity. EVE captures the change in economic value of Gouverneur Savings and Loan Association even though that change may not be reflected in our accounting books and records. EVE shows management the “capital at risk” of Gouverneur Savings and Loan Association based on the underlying values of all components of the balance sheet. As a measure of interest rate risk it is separate and distinct from earnings at risk. EVE is a measure of long-term interest rate risk and earnings at risk is a measure of short-term interest rate risk.

The table below sets forth, as of December 31, 2023, the calculation of the estimated changes in our net interest income that would result from the designated immediate changes in the United States Treasury yield curve.

At December 31, 2023
Change in Interest Rates	Net Interest Income	Year 1 Change
(basis points)(1)	Year 1 Forecast	from Level
	(Dollars in thousands)
+400	7,069	(255)
+300	7,115	(209)
+200	7,180	(144)
+100	7,244	(80)
Level	7,324	—
-100	7,263	(61)
-200	7,119	(205)
-300	6,868	(456)
-400	6,670	(654)

(1) Assumes an immediate uniform change in interest rates at all maturities.

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The tables below set forth, as of December 31, 2023, the calculation of the estimated changes in our EVE that would result from the designated immediate changes in the United States Treasury yield curve.

At December 31, 2023
Change in Interest	Estimated	Estimated Increase (Decrease) in			EVE as a Percentage of Present
Rates (basis points)(1)	EVE(2)	EVE			Value of Assets(3)
							Increase
					EVE		(Decrease)
		Amount	Percent		Ratio(4)		(basic points)
		(Dollars in thousands)
+400	37,475	(15,524)	(29.29)	%	24.06	%	(4.24)	%
+300	41,222	(11,777)	(22.22)	%	25.31	%	(2.99)	%
+200	44,285	(8,714)	(16.44)	%	26.10	%	(2.20)	%
+100	47,523	(5,476)	(10.33)	%	26.84	%	(1.46)	%
—	52,999	—	—		28.30	%	—
-100	57,842	4,843	9.14	%	29.22	%	0.92	%
-200	58,707	5,708	10.77	%	28.52	%	0.22	%
-300	56,932	3,933	7.42	%	26.87	%	(1.43)	%
-400	54,123	1,124	2.12	%	24.83	%	(3.47)	%

(1) Assumes an immediate uniform change in interest rates at all maturities.

(2) EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.

(3) Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.

(4) EVE ratio represents EVE divided by the present value of assets.

ITEM 4.CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure (1) that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms; and (2) that they are alerted in a timely manner about material information relating to the Company required to be filed in its periodic Securities and Exchange Commission filings.

During the quarter ended December 31, 2023, there were no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

The Company is involved in various legal actions and claims, from time to time, arising in the normal course of business. In the opinion of management, these legal actions and claims are not expected to have a material adverse impact on the Company’s financial condition.

ITEM 1A.RISK FACTORS

For information regarding the Company’s risk factors, refer to the “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the year ended September 30, 2023, filed with the Securities and Exchange Commission on December 26, 2023. As of December 31, 2023, the risk factors of the Company have not changed materially from those disclosed in the Form 10-K.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.OTHER INFORMATION

During the fiscal quarter ended December 31, 2023, none of our directors or officers informed us of the adoption of or termination of a “Rule 10b5-1 trading agreement” or non-Rule 10b5-1 trading agreement, as those terms are defined in item 408 of Regulation S-K.

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ITEM 6.EXHIBITS

Exhibit No.	Description
3.1	Articles of Incorporation of Gouverneur Bancorp, Inc. (Incorporated by reference to Exhibit 3.1 to Gouverneur Bancorp, Inc.’s Registration Statement on Form S-1 (Registration No. 333-272548)
3.2	Bylaws of Gouverneur Bancorp, Inc. (Incorporated by reference to Exhibit 3.2 to Gouverneur Bancorp, Inc.’s Registration Statement on Form S-1 (Registration No. 333-272548)
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of Gouverneur Bancorp, Inc.
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Gouverneur Bancorp, Inc.
32.0	Certification of Chief Executive Officer and Chief Financial Officer of Gouverneur Bancorp, Inc. Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.0	The following materials from the Company’s Quarterly Report to Stockholders on Form 10-Q for the quarter ended December 31, 2023, inline formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Financial Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholder’s Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.
104.0	Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		GOUVERNEUR BANCORP, INC.
Date:	February 12, 2024	By:	/s/ Charles C. Van Vleet, Jr.
			Charles C. Van Vleet, Jr.
			President and Chief Executive Officer
			(Principal Executive Officer)
Date:	February 12, 2024	By:	/s/ Kimberly A. Adams
			Kimberly A. Adams
			Vice President and Chief Financial Officer
			(Principal Financial and Accounting Officer)

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