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Loans and Allowance for Loan Losses

6 Months Ended

Dec. 31, 2019

Note 6: Loans and Allowance for Loan

osses

Classes of loans include:


	December 31, 2019			June 30, 2019
Real estate loans :
One- to four-family, including home equity loans	$	127,679		$	129,290
Multi-family		102,756			104,663
Commercial		148,299			143,367
Home equity lines of credit		8,867			8,938
Construction		18,749			16,113
Commercial		82,692			84,246
Consumer		7,355			7,136

Total loans		496,397			493,753
Less:
Unearned fees and discounts, net		(306	)		(349	)
Allowance for loan losses		6,222			6,328

Loans, net	$	490,481		$	487,774

The Company believes that sound loans are a necessary and desirable means of employing funds available for investment. Recognizing the Company’s obligations to its depositors and to the communities it serves, authorized personnel are expected to seek to develop and make sound, profitable loans that resources permit and that opportunity affords. The Company maintains lending policies and procedures designed to focus our lending efforts on the types, locations, and duration of loans most appropriate for our business model and markets. The Company’s lending activity includes the origination of

one-

to four-family residential mortgage loans, multi-family loans, commercial real estate loans, commercial business loans, home equity lines of credit, and to a lesser extent, consumer loans (consisting primarily of automobile loans), construction loans and land loans. The primary lending market includes the Illinois counties of Vermilion, Iroquois, Champaign and Kankakee, as well as the adjacent counties in Illinois and Indiana. The Company also has a loan production and wealth management office in Osage Beach, Missouri, which serves the Missouri counties of Camden, Miller, and Morgan. Generally, loans are collateralized by assets, primarily real estate, of the borrowers and guaranteed by individuals. The loans are expected to be repaid from cash flows of the borrowers or from proceeds from the sale of selected assets of the borrowers.

Management reviews and approves the Company’s lending policies and procedures on a routine basis. Management routinely (at least quarterly) reviews our allowance for loan losses and reports related to loan production, loan quality, concentrations of credit, loan delinquencies and

non-performing

and potential problem loans. Our underwriting standards are designed to encourage relationship banking rather than transactional banking. Relationship banking implies a primary banking relationship with the borrower that includes, at minimum, an active deposit banking relationship in addition to the lending relationship. The integrity and character of the borrower are significant factors in our loan underwriting. As a part of underwriting, tangible positive or negative evidence of the borrower’s integrity and character are sought out. Additional significant underwriting factors beyond location, duration, the sound and profitable cash flow basis underlying the loan and the borrower’s character are the quality of the borrower’s financial history, the liquidity of the underlying collateral and the reliability of the valuation of the underlying collateral.

The Company’s policies and loan approval limits are established by the Board of Directors. The loan officers generally have authority to approve

one-

to four-family residential mortgage loans up to $100,000, other secured loans up to $50,000, and unsecured loans up to $10,000. Managing Officers (those with designated loan approval authority), generally have authority to approve

one-

to four-family residential mortgage loans up to $375,000, other secured loans up to $375,000, and unsecured loans up to $100,000. In addition, any two individual officers may combine their loan authority limits to approve a loan. Our Loan Committee may approve

one-

to four-family residential mortgage loans, commercial real estate loans, multi-family real estate loans and land loans up to $2,000,000 in aggregate loans, and unsecured loans up to $500,000. All loans above these limits must be approved by the Operating Committee, consisting of the Chairman and at least four other Board members. At no time is a borrower’s total borrowing relationship to exceed our regulatory lending limit. Loans to related parties, including executive officers and the Company’s directors, are reviewed for compliance with regulatory guidelines and the Board of Directors at least annually.

The Company conducts internal loan reviews that validate the loans against the Company’s loan policy quarterly for mortgage, consumer, and small commercial loans on a sample basis, and all larger commercial loans on an annual basis. The Company also receives independent loan reviews performed by a third party on larger commercial loans to be performed annually. In addition to compliance with our policy, the third party loan review process reviews the risk assessments made by our credit department, lenders and loan committees. Results of these reviews are presented to management and the Board of Directors.

The Company’s lending can be summarized into six primary areas:

one-

to four-family residential mortgage loans, commercial real estate and multi-family real estate loans, home equity lines of credits, real estate construction, commercial business loans, and consumer loans.

One-

to four-family Residential Mortgage Loans

The Company offers

one-

to four-family residential mortgage loans that conform to Fannie Mae and Freddie Mac underwriting standards (conforming loans) as well as

non-conforming

loans. In recent years there has been an increased demand for long-term fixed-rate loans, as market rates have dropped and remained near historic lows. As a result, the Company has sold a substantial portion of the fixed-rate

one-

to four-family residential mortgage loans with terms of 15 years or greater. Generally, the Company retains fixed-rate

one-

to four-family residential mortgage loans with terms of less than 15 years, although this has represented a small percentage of the fixed-rate loans originated in recent years due to the favorable long-term rates for borrowers.

The Company offers USDA Rural Development loans and sells the servicing. The Company also offers FHA and VA loans that are originated through a nationwide wholesale lender.

In addition, the Company also offers home equity loans that are secured by a second mortgage on the borrower’s primary or secondary residence. Home equity loans are generally underwritten using the same criteria used to underwrite

one-

to four-family residential mortgage loans.

one-

to four-family residential mortgage and home equity loan underwriting are subject to specific regulations, the Company typically underwrites its

one-

to four-family residential mortgage and home equity loans to conform to widely accepted standards. Several factors are considered in underwriting including the value of the underlying real estate and the debt to income ratio and credit history of the borrower.

Commercial Real Estate and Multi-Family Real Estate Loans

Commercial real estate mortgage loans are primarily secured by office buildings, owner-occupied businesses, strip mall centers, churches and farm loans secured by real estate. In underwriting commercial real estate and multi-family real estate loans, the Company considers a number of factors, which include the projected net cash flow to the loan’s debt service requirement, the age and condition of the collateral, the financial resources and income level of the borrower and the borrower’s experience in owning or managing similar properties. Personal guarantees are typically obtained from commercial real estate and multi-family real estate borrowers. In addition, the borrower’s financial information on such loans is monitored on an ongoing basis by requiring periodic financial statement updates. The repayment of these loans is primarily dependent on the cash flows of the underlying property. However, the commercial real estate loan generally must be supported by an adequate underlying collateral value. The performance and the value of the underlying property may be adversely affected by economic factors or geographical and/or industry specific factors. These loans are subject to other industry guidelines that are closely monitored by the Company.

Home Equity Lines of Credit

In addition to traditional

one-

to four-family residential mortgage loans and home equity loans, the Company offers home equity lines of credit that are secured by the borrower’s primary or secondary residence. Home equity lines of credit are generally underwritten using the same criteria used to underwrite

one-

to four-family residential mortgage loans. As home equity lines of credit underwriting is subject to specific regulations, the Company typically underwrites its home equity lines of credit to conform to widely accepted standards. Several factors are considered in underwriting including the value of the underlying real estate and the debt to income ratio and credit history of the borrower.

Commercial Business Loans

The Company originates commercial

non-mortgage

business (term) loans and lines of credit. These loans are generally originated to small- and

medium-sized

companies in the Company’s primary market area. Commercial business loans are generally used for working capital purposes or for acquiring equipment, inventory or furniture, and are primarily secured by business assets other than real estate, such as business equipment and inventory, accounts receivable or stock. The Company also offers agriculture loans that are not secured by real estate.

The commercial business loan portfolio consists primarily of secured loans. When making commercial business loans, the Company considers the financial statements, lending history and debt service capabilities of the borrower, the projected cash flows of the business and the value of any collateral. The cash flows of the underlying borrower, however, may not perform consistently with historical or projected information. Further, the collateral securing loans may fluctuate in value due to individual economic or other factors. Loans are typically guaranteed by the principals of the borrower. The Company has established minimum standards and underwriting guidelines for all commercial loan types.

Real Estate Construction Loans

The Company originates construction loans for

one-

to four-family residential properties and commercial real estate properties, including multi-family properties. The Company generally requires that a commitment for permanent financing be in place prior to closing the construction loan. The repayment of these loans is typically through permanent financing following completion of the construction. Real estate construction loans are inherently more risky than loans on completed properties as the unimproved nature and the financial risks of construction significantly enhance the risks of commercial real estate loans. These loans are closely monitored and subject to other industry guidelines.

Consumer Loans

Consumer loans consist of installment loans to individuals, primarily automotive loans. These loans are underwritten utilizing the borrower’s financial history, including the Fair Isaac Corporation (“FICO”)

credit scoring and information as to the underlying collateral. Repayment is expected from the cash flow of the borrower. Consumer loans may be underwritten with terms up to seven years, fully amortized. Unsecured loans are limited to twelve months.

Loan-to-value

ratios vary based on the type of collateral. The Company has established minimum standards and underwriting guidelines for all consumer loan collateral types.

Loan Concentration

The loan portfolio includes a concentration of loans secured by commercial real estate properties amounting to $264,384,000 and $260,888,000 as of December 31, 2019 and June 30, 2019, respectively. Generally, these loans are collateralized by multi-family and nonresidential properties. The loans are expected to be repaid from cash flows or from proceeds from the sale of the properties of the borrower.

Purchased Loans and Loan Participations

The Company’s loans receivable included purchased loans of $4,293,000 and $4,844,000 at December 31, 2019 and June 30, 2019, respectively. All of these purchased loans are secured by single family homes located out of our primary market area, but still primarily in the Midwest. The Company’s loans receivable also include commercial loan participations of $26,626,000 and $29,524,000 at December 31, 2019 and June 30, 2019, respectively, of which $9,341,000 and $12,025,000, at December 31, 2019 and June 30, 2019 were outside our primary market area.

Allowance for Loan Losses

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of the three month and six month periods ended December 31, 2019 and 2018 and the year ended June 30, 2019:


	Three Months Ended December 31, 2019 Real Estate Loans
	One- to Four-Family			Multi-Family			Commercial			Home Equity Lines of Credit
Allowance for loan losses:
Balance, beginning of period	$	990		$	1,602		$	1,657		$	90
Provision charged to expense		14			(40	)		28			—
Losses charged off		(13	)		—			—			—
Recoveries		—			—			—			—

Balance, end of period	$	991		$	1,562		$	1,685		$	90

Ending balance: individually evaluated for impairment	$	—		$	—		$	—		$	—

Ending balance: collectively evaluated for impairment	$	991		$	1,562		$	1,685		$	90

Loans:
Ending balance	$	127,679		$	102,756		$	148,299		$	8,867

Ending balance: individually evaluated for impairment	$	1,470		$	—		$	6		$	18

Ending balance: collectively evaluated for impairment	$	126,209		$	102,756		$	148,293		$	8,849


	Three Months Ended December 31, 2019 (Continued)
	Construction			Commercial			Consumer			Total
Allowance for loan losses:
Balance, beginning of period	$	204		$	1,664		$	70		$	6,277
Provision charged to expense		13			(54	)		9			(30	)
Losses charged off		—			—			(13	)		(26	)
Recoveries		—			—			1			1

Balance, end of period	$	217		$	1,610		$	67		$	6,222

Ending balance: individually evaluated for impairment	$	—		$	—		$	—		$	—

Ending balance: collectively evaluated for impairment	$	217		$	1,610		$	67		$	6,222

Loans:
Ending balance	$	18,749		$	82,692		$	7,355		$	496,397

Ending balance: individually evaluated for impairment	$	—		$	48		$	8		$	1,550

Ending balance: collectively evaluated for impairment	$	18,749		$	82,644		$	7,347		$	494,847


	Six Months Ended December 31, 2019 Real Estate Loans
	One- to Four-Family			Multi-Family			Commercial			Home Equity Lines of Credit
Allowance for loan losses:
Balance, beginning of period	$	1,031		$	1,642		$	1,623		$	89
Provision charged to expense		(30	)		(80	)		62			1
Losses charged off		(13	)		—			—			—
Recoveries		3			—			—			—

Balance, end of period	$	991		$	1,562		$	1,685		$	90

Ending balance: individually evaluated for impairment	$	—		$	—		$	—		$	—

Ending balance: collectively evaluated for impairment	$	991		$	1,562		$	1,685		$	90

Loans:
Ending balance	$	127,679		$	102,756		$	148,299		$	8,867

Ending balance: individually evaluated for impairment	$	1,470		$	—		$	6		$	18

Ending balance: collectively evaluated for impairment	$	126,209		$	102,756		$	148,293		$	8,849


	Six Months Ended December 31, 2019 (Continued)
	Construction			Commercial			Consumer			Total
Allowance for loan losses:
Balance, beginning of period	$	213		$	1,659		$	71		$	6,328
Provision charged to expense		4			(63	)		22			(84	)
Losses charged off		—			—			(28	)		(41	)
Recoveries		—			14			2			19

Balance, end of period	$	217		$	1,610		$	67		$	6,222

Ending balance: individually evaluated for impairment	$	—		$	—		$	—		$	—

Ending balance: collectively evaluated for impairment	$	217		$	1,610		$	67		$	6,222

Loans:
Ending balance	$	18,749		$	82,692		$	7,355		$	496,397

Ending balance: individually evaluated for impairment	$	—		$	48		$	8		$	1,550

Ending balance: collectively evaluated for impairment	$	18,749		$	82,644		$	7,347		$	494,847


	Year Ended June 30, 2019 Real Estate Loans
	One- to Four-Family			Multi-Family			Commercial			Home Equity Lines of Credit
Allowance for loan losses:
Balance, beginning of year	$	997		$	1,650		$	1,604		$	91
Provision charged to expense		29			(8	)		19			13
Losses charged off		(17	)		—			—			(15	)
Recoveries		22			—			—			—

Balance, end of year	$	1,031		$	1,642		$	1,623		$	89

Ending balance: individually evaluated for impairment	$	13		$	—		$	—		$	—

Ending balance: collectively evaluated for impairment	$	1,018		$	1,642		$	1,623		$	89

Loans:
Ending balance	$	129,290		$	104,663		$	143,367		$	8,938

Ending balance: individually evaluated for impairment	$	1,722		$	—		$	18		$	22

Ending balance: collectively evaluated for impairment	$	127,568		$	104,663		$	143,349		$	8,916


	Year Ended June 30, 2019 (Continued)
	Construction		Commercial		Consumer			Total
Allowance for loan losses:
Balance, beginning of year	$	168	$	1,373	$	62		$	5,945
Provision charged to expense		45		286		23			407
Losses charged off		—		—		(18	)		(50	)
Recoveries		—		—		4			26

Balance, end of year	$	213	$	1,659	$	71		$	6,328

Ending balance: individually evaluated for impairment	$	—	$	—	$	10		$	23

Ending balance: collectively evaluated for impairment	$	213	$	1,659	$	61		$	6,305

Loans:
Ending balance	$	16,113	$	84,246	$	7,136		$	493,753

Ending balance: individually evaluated for impairment	$	—	$	60	$	29		$	1,851

Ending balance: collectively evaluated for impairment	$	16,113	$	84,186	$	7,107		$	491,902


	Three Months Ended December 31, 2018 Real Estate Loans
	One- to Four-Family		Multi-Family			Commercial			Home Equity Lines of Credit
Allowance for loan losses:
Balance, beginning of period	$	1,012	$	1,656		$	1,644		$	91
Provision charged to expense		11		12			160			12
Losses charged off		—		—			—			—
Recoveries		—		—			—			—

Balance, end of period	$	1,023	$	1,668		$	1,804		$	103

Ending balance: individually evaluated for impairment	$	—	$	—		$	2		$	15

Ending balance: collectively evaluated for impairment	$	1,023	$	1,668		$	1,802		$	88

Loans:
Ending balance	$	130,800	$	108,391		$	158,226		$	8,913

Ending balance: individually evaluated for impairment	$	1,458	$	1,200		$	38		$	38

Ending balance: collectively evaluated for impairment	$	129,342	$	107,191		$	158,188		$	8,875


	Three Months Ended December 31, 2018 (Continued)
	Construction		Commercial			Consumer			Total
Allowance for loan losses:
Balance, beginning of period	$	169	$	1,547		$	62		$	6,181
Provision charged to expense		1		(66	)		8			138
Losses charged off		—		—			(3	)		(3	)
Recoveries		—		—			3			3

Balance, end of period	$	170	$	1,481		$	70		$	6,319

Ending balance: individually evaluated for impairment	$	—	$	6		$	—		$	23

Ending balance: collectively evaluated for impairment	$	170	$	1,475		$	70		$	6,296

Loans:
Ending balance	$	12,447	$	74,231		$	7,293		$	500,301

Ending balance: individually evaluated for impairment	$	—	$	6		$	3		$	2,743

Ending balance: collectively evaluated for impairment	$	12,447	$	74,225		$	7,290		$	497,558


	Six Months Ended December 31, 2018 Real Estate Loans
	One- to Four-Family		Multi-Family			Commercial			Home Equity Lines of Credit
Allowance for loan losses:
Balance, beginning of period	$	997	$	1,650		$	1,604		$	91
Provision charged to expense		25		18			200			12
Losses charged off		—		—			—			—
Recoveries		1		—			—			—

Balance, end of period	$	1,023	$	1,668		$	1,804		$	103

Ending balance: individually evaluated for impairment	$	—	$	—		$	2		$	15

Ending balance: collectively evaluated for impairment	$	1,023	$	1,668		$	1,802		$	88

Loans:
Ending balance	$	130,800	$	108,391		$	158,226		$	8,913

Ending balance: individually evaluated for impairment	$	1,458	$	1,200		$	38		$	38

Ending balance: collectively evaluated for impairment	$	129,342	$	107,191		$	158,188		$	8,875


	Six Months Ended December 31, 2018 (Continued)
	Construction		Commercial			Consumer			Total
Allowance for loan losses:
Balance, beginning of period	$	168	$	1,373		$	62		$	5,945
Provision charged to expense		2		108			10			375
Losses charged off		—		—			(5	)		(5	)
Recoveries		—		—			3			4

Balance, end of period	$	170	$	1,481		$	70		$	6,319

Ending balance: individually evaluated for impairment	$	—	$	6		$	—		$	23

Ending balance: collectively evaluated for impairment	$	170	$	1,475		$	70		$	6,296

Loans:
Ending balance	$	12,447	$	74,231		$	7,293		$	500,301

Ending balance: individually evaluated for impairment	$	—	$	6		$	3		$	2,743

Ending balance: collectively evaluated for impairment	$	12,447	$	74,225		$	7,290		$	497,558

Management’s opinion as to the ultimate collectability of loans is subject to estimates regarding future cash flows from operations and the value of property, real and personal, pledged as collateral. These estimates are affected by changing economic conditions and the economic prospects of borrowers.

The allowance for loan losses represents an estimate of the amount of losses believed inherent in our loan portfolio at the balance sheet date. The allowance calculation involves a high degree of estimation that management attempts to mitigate through the use of objective historical data where available. Loan losses are charged against the allowance for loan losses when management believes the uncollectability of the loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Overall, we believe the reserve to be consistent with prior periods and adequate to cover the estimated losses in our loan portfolio.

The Company’s methodology for assessing the appropriateness of the allowance for loan losses consists of two key elements: (1) specific allowances for estimated credit losses on individual loans that are determined to be impaired through the Company’s review for identified problem loans; and (2) a general allowance based on estimated credit losses inherent in the remainder of the loan portfolio.

The specific allowance is measured by determining the present value of expected cash flows, the loan’s observable market value, or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expense. Factors used 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 the 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, the Company also considers the extent of any past due and unpaid property taxes applicable to the property serving as collateral on the mortgage.

The Company establishes a general allowance for loans that are not deemed impaired to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, has not been allocated to particular problem assets. The general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages based on the Company’s historical loss experience and management’s evaluation of the collectability of the loan portfolio. In certain instances, the historical loss experience could be adjusted if similar risks are not inherent in the remaining portfolio. The allowance is then 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: (1) Management’s assumptions regarding the minimal level of risk for a given loan category, and includes amounts for anticipated losses which may not be reflected in our current loss history experience; (2) changes in lending policies and procedures, including changes in underwriting standards, and

charge-off

and recovery practices not considered elsewhere in estimating credit losses; (3) changes in international, national, regional and local economics and business conditions and developments that affect the collectability of the portfolio, including the conditions of various market segments; (4) changes in the nature and volume of the portfolio and in the terms of loans; (5) changes in the experience, ability, and depth of the lending officers and other relevant staff; (6) changes in the volume and severity of past due loans, the volume of

non-accrual

loans, the volume of troubled debt restructured and other loan modifications, and the volume and severity of adversely classified loans; (7) changes in the quality of the loan review system; (8) changes in the value of the underlying collateral for collateral-dependent loans; (9) the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and (10) the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio. The applied loss factors are

re-evaluated

quarterly to ensure their relevance in the current environment.

Although the Company’s policy allows for a general valuation allowance on certain smaller-balance, homogenous pools of loans classified as substandard, the Company has historically evaluated every loan classified as substandard, regardless of size, for impairment as part of the review for establishing specific allowances. The Company’s policy also allows for general valuation allowance on certain smaller-balance, homogenous pools of loans which are loans criticized as special mention or watch. A separate general allowance calculation is made on these loans based on historical measured weakness, and which is no less than twice the amount of the general allowance calculated on the

non-classified

loans.

There have been no changes to the Company’s accounting policies or methodology from the prior periods.

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. All loans are graded at inception of the loan. Subsequently, analyses are performed on an annual basis and grade changes are made as necessary. Interim grade reviews may take place if circumstances of the borrower warrant a more timely review. The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans. Under the Company’s risk rating system, the Company classifies problem and potential problem loans as “Watch,” “Substandard,” “Doubtful,” and “Loss.” The Company uses the following definitions for risk ratings:

Pass –

Loans classified as pass are well protected by the ability of the borrower to pay or by the value of the asset or underlying collateral.

Watch –

Loans classified as watch have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.

Substandard –

Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of any pledged collateral. Loans so classified have a well defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful –

Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Loss –

Loans classified as loss are the portion of the loan that is considered uncollectible so that its continuance as an asset is not warranted. The amount of the loss determined will be

charged-off.

Risk characteristics applicable to each segment of the loan portfolio are described as follows.

Residential

One-

to Four-Family and Equity Lines of Credit Real Estate:

The residential

one-

to four-family real estate loans are generally secured by owner-occupied

one-

to four-family residences. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans can be impacted by economic conditions within the Company’s market areas that might impact either property values or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Commercial and Multi-family Real Estate:

Commercial and multi-family real estate loans typically involve larger principal amounts, and repayment of these loans is generally dependent on the successful operations of the property securing the loan or the business conducted on the property securing the loan. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Company’s market areas.

Construction Real Estate:

Construction real estate loans are usually based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment of these loans may include permanent loans, sales of developed property, or an interim loan commitment from the Company until permanent financing is obtained. These loans are considered to be higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Company’s market areas.

Commercial:

The commercial portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations.

Consumer:

The consumer loan portfolio consists of various term loans such as automobile loans and loans for other personal purposes. Repayment for these types of loans will come from a borrower’s income sources that are typically independent of the loan purpose. Credit risk is driven by consumer economic factors (such as unemployment and general economic conditions in the Company’s market area) and the creditworthiness of a borrower.

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity:


	Real Estate Loans
	One- to Four- Family		Multi-Family		Commercial		Home Equity Lines of Credit		Construction		Commercial		Consumer		Total
December 31, 2019:
Pass	$	126,043	$	102,482	$	146,929	$	8,713	$	18,749	$	80,208	$	7,347	$	490,471
Watch		—		—		1,090		137		—		1,575		—		2,802
Substandard		1,636		274		280		17		—		909		8		3,124
Doubtful		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—

Total	$	127,679	$	102,756	$	148,299	$	8,867	$	18,749	$	82,692	$	7,355	$	496,397


	Real Estate Loans
	One- to Four- Family		Multi-Family		Commercial		Home Equity Lines of Credit		Construction		Commercial		Consumer		Total
June 30, 2019:
Pass	$	127,386	$	104,504	$	142,076	$	8,918	$	16,113	$	81,906	$	7,107	$	488,010
Watch		—		—		1,040		—		—		1,375		—		2,415
Substandard		1,904		159		251		20		—		965		19		3,318
Doubtful		—		—		—		—		—		—		10		10
Loss		—		—		—		—		—		—		—		—

Total	$	129,290	$	104,663	$	143,367	$	8,938	$	16,113	$	84,246	$	7,136	$	493,753

The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all instances, loans are placed on

non-accrual

or are

charged-off

at an earlier date if collection of principal and interest is considered doubtful.

All interest accrued but not collected for loans that are placed on

non-accrual

charged-off

are reversed against interest income. The interest on these loans is accounted for on a cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The following tables present the Company’s loan portfolio aging analysis:


	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater		Total Past Due		Current		Total Loans Receivable		Total Loans 90 Days Past Due & Accruing
December 31, 2019:
Real estate loans:
One- to four-family	$	1,261	$	319	$	334	$	1,914	$	125,765	$	127,679	$	296
Multi-family		—		—		—		—		102,756		102,756		—
Commercial		890		110		—		1,000		147,299		148,299		—
Home equity lines of credit		498		—		—		498		8,369		8,867		—
Construction		—		—		—		—		18,749		18,749		—
Commercial		217		274		78		569		82,123		82,692		30
Consumer		83		44		—		127		7,228		7,355		—

Total	$	2,949	$	747	$	412	$	4,108	$	492,289	$	496,397	$	326


	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater		Total Past Due		Current		Total Loans Receivable		Total Loans 90 Days Past Due & Accruing
June 30, 2019:
Real estate loans:
One- to four-family	$	1,515	$	255	$	481	$	2,251	$	127,039	$	129,290	$	226
Multi-family		422		—		—		422		104,241		104,663		—
Commercial		74		6		12		92		143,275		143,367		—
Home equity lines of credit		—		26		20		46		8,892		8,938		—
Construction		—		—		—		—		16,113		16,113		—
Commercial		291		—		60		351		83,895		84,246		—
Consumer		99		—		29		128		7,008		7,136		—

Total	$	2,401	$	287	$	602	$	3,290	$	490,463	$	493,753	$	226

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC

310-10-35-16),

when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a

case-by-case

basis, taking into consideration all of the circumstances surrounding the loans and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Impairment is measured on a

loan-by-loan

basis by either the present value of the expected future cash flows, the loan’s observable market value, or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. Significantly restructured loans are considered impaired in determining the adequacy of the allowance for loan losses.

The Company actively seeks to reduce its investment in impaired loans. The primary tools to work through impaired loans are settlements with the borrowers or guarantors, foreclosure of the underlying collateral, or restructuring. Included in certain loan categories in the impaired loans are $1.5 million in troubled debt restructurings that were classified as impaired.

The following tables present impaired loans:


							Three Months Ended December 31, 2019						Six Months Ended December 31, 2019
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized		Interest on Cash Basis		Average Investment in Impaired Loans		Interest Income Recognized		Interest on Cash Basis
December 31, 2019:
Loans without a specific valuation allowance
Real estate loans:
One- to-four family	$	1,470	$	1,470	$	—	$	1,486	$	15	$	15	$	1,496	$	29	$	30
Multi-family		—		—		—		—		—		—		—		—		—
Commercial		6		6		—		11		—		—		12		—		—
Home equity line of credit		18		18		—		18		—		—		20		—		—
Construction		—		—		—		—		—		—		—		—		—
Commercial		48		48		—		52		—		—		54		—		—
Consumer		8		8		—		10		—		—		10		—		—
Loans with a specific valuation allowance
Real estate loans:
One- to-four family		—		—		—		—		—		—		—		—		—
Multi-family		—		—		—		—		—		—		—		—		—
Commercial		—		—		—		—		—		—		—		—		—
Home equity line of credit		—		—		—		—		—		—		—		—		—
Construction		—		—		—		—		—		—		—		—		—
Commercial		—		—		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—		—		—
Total:
Real estate loans:
One- to-four family		1,470		1,470		—		1,486		15		15		1,496		29		30
Multi-family		—		—		—		—		—		—		—		—		—
Commercial		6		6		—		11		—		—		12		—		—
Home equity line of credit		18		18		—		18		—		—		20		—		—
Construction		—		—		—		—		—		—		—		—		—
Commercial		48		48		—		52		—		—		54		—		—
Consumer		8		8		—		10		—		—		10		—		—

	$	1,550	$	1,550	$	—	$	1,577	$	15	$	15	$	1,592	$	29	$	30


							Year Ended June 30, 2019
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized		Interest on Cash Basis
June 30, 2019:
Loans without a specific valuation allowance
Real estate loans:
One- to four-family	$	1,676	$	1,676	$	—	$	1,718	$	63	$	71
Multi-family		—		—		—		1		—		—
Commercial		18		18		—		34		—		—
Home equity line of credit		22		22		—		24		1		2
Construction		—		—		—		—		—		—
Commercial		60		60		—		63		6		6
Consumer		19		19		—		24		2		2
Loans with a specific allowance
Real estate loans:
One- to four-family		46		46		13		47		1		1
Multi-family		—		—		—		—		—		—
Commercial		—		—		—		—		—		—
Home equity line of credit		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Commercial		—		—		—		—		—		—
Consumer		10		10		10		11		1		1
Total:
Real estate loans:
One- to four-family		1,722		1,722		13		1,765		64		72
Multi-family		—		—		—		1		—		—
Commercial		18		18		—		34		—		—
Home equity line of credit		22		22		—		24		1		2
Construction		—		—		—		—		—		—
Commercial		60		60		—		63		6		6
Consumer		29		29		10		35		3		3

	$	1,851	$	1,851	$	23	$	1,922	$	74	$	83


							Three Months Ended December 31, 2018						Six Months Ended December 31, 2018
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized		Interest on Cash Basis		Average Investment in Impaired Loans		Interest Income Recognized		Interest on Cash Basis
December 31, 2018:
Loans without a specific valuation allowance
Real estate loans:
One- to-four family	$	1,458	$	1,458	$	—	$	1,467	$	16	$	16	$	1,477	$	32	$	34
Multi-family		1,200		1,200		—		1,204		21		21		1,207		42		42
Commercial		36		36		—		40		—		—		41		—		—
Home equity line of credit		23		23		—		24		1		—		25		1		1
Construction		—		—		—		—		—		—		—		—		—
Commercial		—		—		—		—		—		—		—		—		—
Consumer		3		3		—		3		—		—		3		—		—
Loans with a specific valuation allowance
Real estate loans:
One- to-four family		—		—		—		—		—		—		—		—		—
Multi-family		—		—		—		—		—		—		—		—		—
Commercial		2		2		2		2		—		—		3		—		—
Home equity line of credit		15		15		15		15		—		—		15		—		—
Construction		—		—		—		—		—		—		—		—		—
Commercial		6		6		6		8		—		—		8		—		—
Consumer		—		—		—		—		—		—		—		—		—
Total:
Real estate loans:
One- to-four family		1,458		1,458		—		1,467		16		16		1,477		32		34
Multi-family		1,200		1,200		—		1,204		21		21		1,207		42		42
Commercial		38		38		2		42		—		—		44		—		—
Home equity line of credit		38		38		15		39		1		—		40		1		1
Construction		—		—		—		—		—		—		—		—		—
Commercial		6		6		6		8		—		—		8		—		—
Consumer		3		3		—		3		—		—		3		—		—

	$	2,743	$	2,743	$	23	$	2,763	$	38	$	37	$	2,779	$	75	$	77

Interest income recognized on impaired loans includes interest accrued and collected on the outstanding balances of accruing impaired loans as well as interest cash collections on

non-accruing

impaired loans for which the ultimate collectability of principal is not uncertain.

The following table presents the Company’s nonaccrual loans at December 31, 2019 and June 30, 2019:


	December 31, 2019		June 30, 2019
Mortgages on real estate:
One- to four-family	$	191	$	414
Multi-family		—		—
Commercial		6		18
Home equity lines of credit		17		20
Construction		—		—
Commercial		48		60
Consumer		8		29

Total	$	270	$	541

At December 31, 2019 and June 30, 2019, the Company had a number of loans that were modified in troubled debt restructurings (TDR’s) and impaired. The modification of terms of such loans included one or a combination of the following: an extension of maturity, a reduction of the stated interest rate or a permanent reduction of the recorded investment in the loan.

The following table presents the recorded balance, at original cost, of troubled debt restructurings, as of December 31, 2019 and June 30, 2019. With the exception of two

one-

to four-family residential loan

for $4,000, all were performing according to the terms of the restructuring as of December 31, 2019, and with the exception of

three

one-

to four-family residential loans totaling $8,000,

one

home equity line of credit for $20,000, and

one

consumer loan for $2,000, all were performing according to the terms of restructuring as of June 30, 2019. As of December 31, 2019, all loans listed were on nonaccrual except for ten

one-

to four-family residential loans totaling $1.3

million,

and one home equity line of credit for $1,000. All loans listed as of June 30, 2019 were on nonaccrual except for

ten

one-

to four-family residential loans totaling $1.3 million, and

one

home equity line of credit for $1,000.


	December 31, 2019		June 30, 2019
Real estate loans
One- to four-family	$	1,437	$	1,475
Multi-family		—		—
Commercial		2		6
Home equity lines of credit		18		22

Total real estate loans		1,457		1,503

Construction		—		—
Commercial		—		—
Consumer		—		2

Total	$	1,457	$	1,505

Modifications

During the six month period ended December 31, 2019,

no loans were

modified.

During the year ended June 30, 2019, the Company modified one

one-

to four-family loan in the amount of $159,000.

During the six month period ended December 31, 2018, no loans were modified.

TDR’s with Defaults

The Company had three TDRs,

all

one-

to four-family residential loans

totaling $134,000 that were in default as of December 31, 2019 and

that

were

restructured in prior periods. No restructured loans were in foreclosure at December 31, 2019. The Company had

six

TDRs,

four

one-

to four-family residential loans for $144,000,

one

home equity line of credit for $20,000, and

one

consumer loan for $2,000 that were in default as of June 30, 2019, and were restructured in prior years.

restructured loans were in foreclosure at June 30, 2019. The Company defines a default as any loan that becomes 90 days or more past due.

Specific loss allowances are included in the calculation of estimated future loss ratios, which are applied to the various loan portfolios for purposes of estimating future losses.

Management considers the level of defaults within the various portfolios, as well as the current economic environment and outlook in the real estate and collateral markets when evaluating qualitative adjustments used to determine the adequacy of the allowance for loan losses. We believe the qualitative adjustments more accurately reflect collateral values in light of the sales and economic conditions that we have recently observed.

We may obtain physical possession of real estate collateralizing a residential mortgage loan or home equity loan via foreclosure or

in-substance

repossession. As of December 31, 2019, the carrying value of foreclosed residential real estate properties as a result of obtaining physical possession was $213,000. In addition, as of December 31, 2019, we had residential mortgage loans and home equity loans with a carrying value of $33,000 collateralized by residential real estate property for which formal foreclosure proceedings were in process.