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Loans and Allowance for Loan Losses

6 Months Ended

Dec. 31, 2022

Note 6:

Loans and Allowance for Loan Losses

Classes of loans include:


	December 31, 2022			June 30, 2022
Real estate loans:
One- to four-family, including home equity loans	$	150,711		$	132,474
Multi-family		100,147			88,247
Commercial		192,015			167,375
Home equity lines of credit		6,926			6,987
Construction		36,595			41,254
Commercial		72,360			80,418
Consumer		9,486			8,981

Total loans		568,240			525,736
Less:
Unearned fees and discounts, net		(201	)		(247	)
Allowance for loan losses		7,166			7,052

Loans, net	$	561,275		$	518,931

The Company had loans held for sale included in the

one-

to four-family real estate loans totaling $0 and $227,000 as of December 31, 2022 and June 30, 2022.

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 credit 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.

Interest on loans is accrued based upon the principal amount outstanding. In the event that collection of principal becomes uncertain, the Company has policies in place to reverse accrued interest in a timely manner. Therefore, the Company has made a policy election to exclude accrued interest from the measurement of ACL. 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

or 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 Company’s policies and loan approval limits are established by the Board of Directors. The structure of the Company’s loan approval process is based on progressively larger lending authorities granted to loan officers, loan committees, and ultimately the Board of Directors through its Operating Committee, consisting of the Chairman and up to 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 Association 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 loan review process reviews the risk assessments made by our credit department, lenders and loan committees. Results of these reviews are presented to management, Audit Committee 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 also offers USDA (USDA Rural Development) and FHA 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.

Commercial business loans also included Small Business Administration (SBA) Paycheck Protection Program (PPP) loans which were covered by a 100% government guaranty. As of December 31, 2022 and June 2022, the Company had no PPP loans, compared to 43 PPP loans totaling $8.0 million at December 31, 2021.

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 $322,406,000 and $290,972,000 as of December 31, 2022 and June 30, 2022, 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 $696,000 and $1,570,000 at December 31, 2022 and June 30, 2022, 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 $38,589,000 and $29,972,000 at December 31, 2022 and June 30, 2022, respectively, of which $21,551,000 and $13,234,000, at December 31, 2022 and June 30, 2022 were outside our primary market area.

Allowance for Credit Losses

The following tables present the activity in the allowance for credit losses and the recorded investment in loans based on portfolio segment as of December 31, 2022 and June 30, 2022, and activity in the allowance for credit losses and allowance for loan losses for the three-month and

six-month

periods ended December 31, 2022 and 2021 and the year ended June 30, 2022:


	Three Months Ended December 31, 2022
	Real Estate Loans
	One-to Four-Family		Multi-Family		Commercial		Home Equity Lines of Credit
Allowance for credit losses:
Balance, beginning of period	$	1,537	$	1,284	$	2,386	$	94
Provision charged to expense		185		118		6		7
Losses charged off		—		—		—		—
Recoveries		—		—		—		—

Balance, end of period	$	1,722	$	1,402	$	2,392	$	101

Loans:
Ending balance	$	150,711	$	100,147	$	192,015	$	6,926


	Three Months Ended December 31, 2022 (Continued)
	Construction		Commercial			Consumer			Total
Allowance for credit losses:
Balance, beginning of period	$	549	$	1,090		$	83		$	7,023
Provision charged to expense		36		(227	)		17			142
Losses charged off		—		—			(9	)		(9	)
Recoveries		—		8			2			10

Balance, end of period	$	585	$	871		$	93		$	7,166

Loans:
Ending balance	$	36,595	$	72,360		$	9,486		$	568,240


	Six Months Ended December 31, 2022
	Real Estate Loans
	One-to Four-Family		Multi-Family			Commercial		Home Equity Lines of Credit
Allowance for credit losses:
Balance, beginning of period (prior to adoption of ASU 2016-13)	$	1,028	$	1,375		$	1,985	$	70
Impact of adopting ASU 2016-13		382		(140	)		385		33
Provision charged to expense		311		167			22		(2	)
Losses charged off		—		—			—		—
Recoveries		1		—			—		—

Balance, end of period	$	1,722	$	1,402		$	2,392	$	101

Loans:
Ending balance	$	150,711	$	100,147		$	192,015	$	6,926


	Six Months Ended December 31, 2022 (Continued)
	Construction			Commercial			Consumer			Total
Allowance for credit losses:
Balance, beginning of period (prior to adoption of ASU 2016-13)	$	489		$	2,025		$	80		$	7,052
Impact of adopting ASU 2016-13		192			(818	)		13			47
Provision charged to expense		(96	)		(344	)		17			75
Losses charged off		—			(4	)		(21	)		(25	)
Recoveries		—			12			4			17

Balance, end of period	$	585		$	871		$	93		$	7,166

Loans:
Ending balance	$	36,595		$	72,360		$	9,486		$	568,240


	Year Ended June 30, 2022 Real Estate Loans
	One-to Four-Family			Multi-Family			Commercial		Home Equity Lines of Credit
Allowance for loan losses:
Balance, beginning of year	$	967		$	1,674		$	1,831	$	67
Provision charged to expense		100			(299	)		154		3
Losses charged off		(40	)		—			—		—
Recoveries		1			—			—		—

Balance, end of year	$	1,028		$	1,375		$	1,985	$	70

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

Ending balance: collectively evaluated for impairment	$	1,028		$	1,375		$	1,985	$	70

Loans:
Ending balance	$	132,474		$	88,247		$	167,375	$	6,987

Ending balance: individually evaluated for impairment	$	1,350		$	—		$	—	$	—

Ending balance: collectively evaluated for impairment	$	131,124		$	88,247		$	167,375	$	6,987



	Year Ended June 30, 2022 (Continued)
	Construction		Commercial		Consumer			Total
Allowance for loan losses:
Balance, beginning of year	$	258	$	1,740	$	62		$	6,599
Provision charged to expense		231		265		38			492
Losses charged off		—		—		(27	)		(67	)
Recoveries		—		20		7			28

Balance, end of year	$	489	$	2,025	$	80		$	7,052

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

Ending balance: collectively evaluated for impairment	$	489	$	2,025	$	80		$	7,052

Loans:
Ending balance	$	41,254	$	80,418	$	8,981		$	525,736

Ending balance: individually evaluated for impairment	$	—	$	35	$	—		$	1,385

Ending balance: collectively evaluated for impairment	$	41,254	$	80,383	$	8,981		$	524,351


	Three Months Ended December 31, 2021
	Real Estate Loans
	One-to Four-Family		Multi-Family			Commercial		Home Equity Lines of Credit
Allowance for loan losses:
Balance, beginning of period	$	974	$	1,562		$	1,916	$	63
Provision charged to expense		108		(162	)		46		(1	)
Losses charged off		—		—			—		—
Recoveries		—		—			—		—

Balance, end of period	$	1,082	$	1,400		$	1,962	$	62

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

Ending balance: collectively evaluated for impairment	$	1,082	$	1,400		$	1,962	$	62

Loans:
Ending balance	$	125,406	$	86,790		$	164,879	$	6,168

Ending balance: individually evaluated for impairment	$	1,083	$	—		$	—	$	—

Ending balance: collectively evaluated for impairment	$	124,323	$	86,790		$	164,879	$	6,168


	Three Months Ended December 31, 2021 (Continued)
	Construction			Commercial			Consumer			Total
Allowance for loan losses:
Balance, beginning of period	$	321		$	1,571		$	63		$	6,470
Provision charged to expense		(22	)		(57	)		12			(76	)
Losses charged off		—			—			(8	)		(8	)
Recoveries		—			7			2			9

Balance, end of period	$	299		$	1,521		$	69		$	6,395

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

Ending balance: collectively evaluated for impairment	$	299		$	1,521		$	69		$	6,395

Loans:
Ending balance	$	26,474		$	80,403		$	7,991		$	498,111

Ending balance: individually evaluated for impairment	$	—		$	41		$	12		$	1,136

Ending balance: collectively evaluated for impairment	$	26,474		$	80,362		$	7,979		$	496,975


	Six Months Ended December 31, 2021
	Real Estate Loans
	One-to Four-Family		Multi-Family			Commercial		Home Equity Lines of Credit
Allowance for loan losses:
Balance, beginning of period	$	967	$	1,674		$	1,831	$	67
Provision charged to expense		114		(274	)		131		(5	)
Losses charged off		—		—			—		—
Recoveries		1		—			—		—

Balance, end of period	$	1,082	$	1,400		$	1,962	$	62

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

Ending balance: collectively evaluated for impairment	$	1,082	$	1,400		$	1,962	$	62

Loans:
Ending balance	$	125,406	$	86,790		$	164,879	$	6,168

Ending balance: individually evaluated for impairment	$	1,083	$	—		$	—	$	—

Ending balance: collectively evaluated for impairment	$	124,323	$	86,790		$	164,879	$	6,168



	Six Months Ended December 31, 2021 (Continued)
	Construction		Commercial			Consumer			Total
Allowance for loan losses:
Balance, beginning of period	$	258	$	1,740		$	62		$	6,599
Provision charged to expense		41		(231	)		21			(203	)
Losses charged off		—		—			(18	)		(18	)
Recoveries		—		12			4			17

Balance, end of period	$	299	$	1,521		$	69		$	6,395

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

Ending balance: collectively evaluated for impairment	$	299	$	1,521		$	69		$	6,395

Loans:
Ending balance	$	26,474	$	80,403		$	7,991		$	498,111

Ending balance: individually evaluated for impairment	$	—	$	41		$	12		$	1,136

Ending balance: collectively evaluated for impairment	$	26,474	$	80,362		$	7,979		$	496,975

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 credit losses (ACL) represents the Company’s best estimate of the reserve necessary to adequately account for probable losses expected over the remaining contractual life of the assets. The provision for credit losses is the charge against current earnings that is determined by the Company as the amount needed to maintain an adequate allowance for credit losses. In determining the adequacy of the allowance for credit losses, and therefore the provision to be charged to current earnings, the Company relies on a sound credit review and approval process. The review process is directed by the overall lending policy and is intended to identify, at the earliest possible stage, borrowers who might be facing financial difficulty.

The Company adopted ASU

2016-13,

effective July 1, 2022, and utilizes the CECL cohort methodology analysis which relies on segmenting the loan portfolio into pools with similar risks, tracking the performance of the pools over time, and using the data to determine pool loss experience.

The ACL 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 and is established through provision for credit losses charged to current earnings. The ACL is increased by the provision for losses on loans charged to expense and reduced by loans charged off, net of recoveries. Loans are charged off in the period deemed uncollectible, based on management’s analysis of expected cash flows (for

non-collateral

dependent loans) or collateral value (for collateral-dependent loans). Subsequent recoveries of loans previously charged off, if any, are credited to the allowance when received.

Management estimates the ACL balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Adjustments may be made to historical loss information for differences identified in current loan-specific risk characteristics, such as differences in underwriting standards or terms; lending review systems; experience, ability, or depth of lending management and staff; portfolio growth and mix; delinquency levels and trends; as well as for changes in environmental conditions, such as changes in economic activity or employment, industry economic conditions, property values, or other relevant factors.

The allowance for credit losses on most loans is measured on a collective (pool) basis for loans with similar risk characteristics. The Company estimates the appropriate level of allowance for credit losses for collateral-dependent loans by evaluating them separately.

The specific allowance for collateral-dependent loans that are evaluated separately is measured by determining 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 collateral-dependent 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 segmenting the loan portfolio into pools with similar risks and collecting data to determine pool loss experience. Factors considered by the Company in evaluating the overall adequacy of the allowance include historical net loan losses, the level and composition of nonaccrual, past due and troubled debt restructurings, trends in volumes and terms of loans, effects of changes in risk selection and underwriting standards or lending practices, lending staff changes, concentrations of credit, industry conditions and the current economic conditions in the region where the Company operates. In addition, a forecast, using reasonable and supportable future conditions, is prepared that is used to estimate expected changes to existing and historical conditions in the current period.

Prior to the July 1, 2022, adoption of ASU

2016-13,

the allowance for loan and lease losses (ALLL) represented management’s best estimate of probable losses in the existing loan portfolio at the end of the reporting period. Integral to the methodology for determining the adequacy of the ALLL was portfolio segmentation and impairment measurement. Under the Company’s methodology, loans were first segmented into 1) those comprising large groups of homogeneous loans which are collectively evaluated for impairment and 2) all other loans which are individually evaluated. Those loans in the second category were further segmented utilizing a defined grading system which involves categorizing loans by severity of risk based on conditions that may affect the ability of the borrowers to repay their debt, such as current financial information, collateral valuations, historical payment experience, credit documentation, public information, and current trends. Loans were considered impaired if, based on current information and events, it was considered probable that the Company would be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement, and was generally based on the fair value, less estimated costs to sell, of the loan’s collateral. If the loan was not collateral-dependent, the measurement of impairment was based on the present value of expected future cash flows discounted at the historical effective interest rate, or the observable market price of the loan. Impairment identified through this evaluation process was a component of the ALLL. If a loan was not considered impaired, it was grouped together with loans having similar characteristics (i.e., the same risk grade), and an ALLL was based upon a quantitative factor (historical average charge-offs) and qualitative factors such as certain management assumptions, changes in lending policies; national, regional, and local economic conditions; changes in mix and volume of portfolio; experience, ability, and depth of lending management and staff; entry to new markets; levels and trends of delinquent, nonaccrual, special mention, and classified loans; concentrations of credit; changes in collateral values; agricultural economic conditions; and regulatory risk.

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 risk rating category and year of origination as of December 31, 2022 and the risk rating category and class of loan as of June 30, 2022 (in thousands):


Risk Rating	2022		2021		2020		2019		2018		Prior Years		Total
One- to Four-Family
Pass	$	56,939	$	31,118	$	19,034	$	6,418	$	9,056	$	27,276	$	149,841
Special Mention		—		—		—		—		343		—		343
Substandard		7		103		62		330		—		25		527

Total	$	56,946	$	31,221	$	19,096	$	6,748	$	9,399	$	27,301	$	150,711

Multi-Family
Pass	$	38,276	$	10,879	$	14,848	$	9,008	$	3,233	$	23,654	$	99,898
Special Mention		—		—		—		—		—		—		—
Substandard		—		—		—		249		—		—		249

Total	$	38,276	$	10,879	$	14,848	$	9,257	$	3,233	$	23,654	$	100,147

Commercial Real Estate
Pass	$	66,609	$	31,172	$	33,044	$	6,064	$	19,839	$	32,368	$	189,096
Special Mention		—		—		—		—		—		—		—
Substandard		—		—		883		83		—		1,953		2,919

Total	$	66,609	$	31,172	$	33,927	$	6,147	$	19,839	$	34,321	$	192,015

Home Equity Line of Credit
Pass	$	2,215	$	1,378	$	842	$	834	$	540	$	1,117	$	6,926
Special Mention		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—

Total	$	2,215	$	1,378	$	842	$	834	$	540	$	1,117	$	6,926

Construction
Pass	$	19,491	$	10,351	$	6,753	$	—	$	—	$	—	$	36,595
Special Mention		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—

Total	$	19,491	$	10,351	$	6,753	$	—	$	—	$	—	$	36,595

Commercial Business
Pass	$	18,779	$	18,672	$	12,010	$	8,585	$	1,992	$	7,894	$	67,932
Special Mention		—		—		30		—		—		—		30
Substandard		—		—		1,142		60		3,192		4		4,398

Total	$	18,779	$	18,672	$	13,182	$	8,645	$	5,184	$	7,898	$	72,360

Consumer
Pass	$	5,355	$	2,287	$	1,245	$	409	$	136	$	46	$	9,478
Special Mention		—		—		—		—		—		—		—
Substandard		—		—		—		—		8		—		8

Total	$	5,355	$	2,287	$	1,245	$	409	$	144	$	46	$	9,486

Total Loans
Pass	$	207,664	$	105,857	$	87,776	$	31,318	$	34,796	$	92,355	$	559,766
Special Mention		—		—		30		—		343		—		373
Substandard		7		103		2,087		722		3,200		1,982		8,101

Total	$	207,671	$	105,960	$	89,893	$	32,040	$	38,339	$	94,337	$	568,240


	Real Estate Loans
	One-to Four- Family		Multi-Family		Commercial		Home Equity Lines of Credit		Construction		Commercial		Consumer		Total
June 30, 2022:
Pass	$	130,950	$	87,993	$	164,424	$	6,987	$	41,254	$	73,226	$	8,970	$	513,804
Watch		—		—		—		—		—		—		—		—
Substandard		1,524		254		2,951		—		—		7,192		11		11,932
Doubtful		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—

Total	$	132,474	$	88,247	$	167,375	$	6,987	$	41,254	$	80,418	$	8,981	$	525,736

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, 2022:
Real estate loans:
One- to four-family	$	611	$	1,483	$	190	$	2,284	$	148,427	$	150,711	$	62
Multi-family		—		—		—		—		100,147		100,147		—
Commercial		—		47		—		47		191,968		192,015		—
Home equity lines of credit		—		21		—		21		6,905		6,926		—
Construction		—		—		—		—		36,595		36,595		—
Commercial		54		170		61		285		72,075		72,360		60
Consumer		22		14		—		36		9,450		9,486		—

Total	$	687	$	1,735	$	251	$	2,673	$	565,567	$	568,240	$	122


	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, 2022:
Real estate loans:
One- to four-family	$	374	$	144	$	1,174	$	1,692	$	130,782	$	132,474	$	47
Multi-family		—		—		—		—		88,247		88,247		—
Commercial		—		—		—		—		167,375		167,375		—
Home equity lines of credit		—		—		—		—		6,987		6,987		—
Construction		—		—		—		—		41,254		41,254		—
Commercial		—		—		—		—		80,418		80,418		—
Consumer		78		21		—		99		8,882		8,981		—

Total	$	452	$	165	$	1,174	$	1,791	$	523,945	$	525,736	$	47

Since the Company adopted ASU

2016-13,

effective July 1, 2022, the allowance for credit losses on most loans is measured on a collective (pool) basis for loans with similar risk characteristics, while some collateral-dependent loans are selected to be evaluated individually. At June 30, 2022, four collateral-dependent

one-

to four-family loans were individually evaluated, but none were determined to require a specific reserve.

In accordance with the impairment accounting guidance (ASC

310-10-35-16),

which was in effect for the Company prior to the adoption of ASU

2016-13

on July 1, 2022, a loan is considered impaired when based on current information and events, it is probable the Association 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.

The following tables present impaired loans as of June 30, 2022 and December, 2021:


							Year Ended June 30, 2022
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized		Interest on Cash Basis
June 30, 2022:
Loans without a specific valuation allowance
Real estate loans:
One- to four-family	$	1,350	$	1,350	$	—	$	1,361	$	15	$	13
Multi-family		—		—		—		—		—		—
Commercial		—		—		—		—		—		—
Home equity line of credit		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Commercial		35		35		—		40		4		4
Consumer		—		—		—		—		—		—
Loans with a specific 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
Multi-family	$	1,350	$	1,350	$	—	$	1,361	$	15	$	13
Commercial		—		—		—		—		—		—
Home equity line of credit		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Commercial		—		—		—		—		—		—
Consumer		35		35		—		40		4		4
		—		—		—		—		—		—

	$	1,385	$	1,385	$	—	$	1,401	$	19	$	17


							Three Months Ended December 31, 2021						Six Months Ended December 31, 2021
	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, 2021:
Loans without a specific valuation allowance Real estate loans:
One- to-four family	$	1,083	$	1,083	$	—	$	1,085	$	6	$	4	$	1,087	$	10	$	8
Multi-family		—		—		—		—		—		—		—		—		—
Commercial		—		—		—		—		—		—		—		—		—
Home equity line of credit		—		—		—		—		—		—		—		—		—
Construction		—		—		—		—		—		—		—		—		—
Commercial		41		41		—		42		1		1		43		2		2
Consumer		12		12		—		14		—		—		14		—		—
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		1,083		1,083		—		1,085		6		4		1,087		10		8
Multi-family		—		—		—		—		—		—		—		—		—
Commercial		—		—		—		—		—		—		—		—		—
Home equity line of credit		—		—		—		—		—		—		—		—		—
Construction		—		—		—		—		—		—		—		—		—
Commercial		41		41		—		42		1		1		43		2		2
Consumer		12		12		—		14		—		—		14		—		—

	$	1,136	$	1,136	$	—	$	1,141	$	7	$	5	$	1,144	$	12	$	10

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 amortized cost basis of loans on nonaccrual status and of nonaccrual loans individually evaluated for which no allowance was recorded at December 31, 2022 and June 30, 2022:


	December 31, 2022				June 30, 2022
	Nonaccrual with no Allowance for Credit Losses		Nonaccrual		Nonaccrual
Mortgages on real estate:
One- to four-family	$	129	$	129	$	1,127
Multi-family		—		—		—
Commercial		—		—		—
Home equity lines of credit		—		—		—
Construction loans		—		—		—
Commercial business loans		—		—		—
Consumer loans		—		—		—

Total	$	129	$	129	$	1,127

At December 31, 2022 and June 30, 2022, the Company had a number of loans that were modified in troubled debt restructurings (TDR’s). 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, 2022 and June 30, 2022. All TDRs were performing according to the terms of the restructuring and were accruing as of December 31, 2022 and as of June 2022.


	December 31, 2022		June 30, 2022
Real estate loans
One- to four-family	$	206	$	962
Multi-family		—		—
Commercial		—		—
Home equity lines of credit		—		—

Total real estate loans		206		962

Construction		—		—
Commercial		30		36
Consumer		—		—

Total	$	236	$	998

Modifications

During the

six-month

period ended December 31, 2022, no loans were modified.

During the year ended June 30, 2022, no loans were modified.

During the

six-month

period ended December 31, 2021, no loans were modified.

COVID-19

Modifications

Under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) that was signed into law on March 27, 2020, certain

COVID-19

loan modifications are not designated as TDRs. The CARES Act allows the Company to presume a loan modification is not a TDR if it is (1) related to

COVID-19;

(2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (a) 60 days after the date of termination of the National Emergency or (b) December 31, 2020. This relief was extended by the Economic Aid Act, which was included in the Consolidated Appropriations Act, until the earlier of 60 days after the national emergency termination date or January 1, 2022. In 2020 and 2021, the Company made

COVID-19

modifications to allow our borrowers to pay interest only for up to six months. As of December 31, 2022, all of these loans have returned to principal and interest payments or paid off.

TDR’s with Defaults

The Company had no TDRs in default and no restructured loans in foreclosure as of December 31, 2022 or as of June 30, 2022. 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, 2022, we did not have any foreclosed residential real estate properties as a result of obtaining physical possession. As of December 31, 2022, we did not have any residential mortgage loans and home equity loans collateralized by residential real estate property for which formal foreclosure proceedings were in process.