NOTE 4.  LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES

Loans receivable at June 30, 2026 and December 31, 2025 are summarized as follows:

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At June 30, 2026 and December 31, 2025, real estate loans totaling $84.7 million and $87.5 million, respectively, were pledged as collateral to the Federal Home Loan Bank of Dallas for borrowings under a blanket lien agreement.

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Accrued interest receivable on the Company’s loans totaled $662,000 and $715,000 at June 30, 2026 and December 31, 2025, respectively. Accrued interest receivable is excluded from the Company’s estimate of the allowance for credit losses.

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The following describes the general risk characteristics of each segment of the loan portfolio disclosed in this note:

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One- to four-family residential – This category primarily consists of loans secured by residential real estate located in our market. The performance of these loans may be adversely affected by, among other factors, unemployment rates, local residential real estate market conditions and the interest rate environment. Generally, these loans are for longer terms than commercial and construction loans.

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Commercial real estate – This category generally consists of loans secured by retail and industrial use buildings, hotels, strip shopping centers and other properties used for commercial purposes. The performance of these loans may be adversely affected by, among other factors, conditions specific to the relevant industry, the real estate market for the property type and geographic region where the property or borrower is located.

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Construction and land – This category consists of loans to finance the ground-up construction and/or improvement of residential and commercial properties and loans secured by land. The performance of these loans is generally dependent upon the successful completion of improvements and/or land development for the end user, the sale of the property to a third party, or a secondary source of cash flow from the owners. The successful completion of planned improvements and development may be adversely affected by changes in the estimated property value upon completion of construction, projected costs and other conditions leading to project delays.

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Multi-family residential – This category consists of loans secured by apartment or residential buildings with five or more units used to accommodate households on a temporary or permanent basis. The performance of multi-family loans is generally dependent on the receipt of rental income from the tenants who occupy the subject property. The occupancy rate of the subject property and the ability of the tenants to pay rent may be adversely affected by the location of the subject property and local economic conditions.

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Commercial and industrial – This category primarily consists of secured and unsecured loans to small and mid-sized businesses to fund operations or purchase non-real estate assets. Secured loans are primarily secured by accounts receivable, inventory, equipment and certain other business assets. The performance of these loans may be adversely affected by, among other factors, conditions specific to the relevant industry, fluctuations in the value of the collateral and individual performance factors related to the borrower.

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Consumer – This category consists of loans to individuals for household, family and other personal use. The performance of these loans may be adversely affected by national and local economic conditions, unemployment rates and other factors affecting the borrower’s income available to service the debt.

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The following tables outline the changes in the allowance for credit losses for the three and six months ended June 30, 2026 and 2025.

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During the six months ended June 30, 2026, the primary drivers of the change in the allowance for credit losses were declines in outstanding loan balances and loan commitments, conversions of construction loans to amortizing real estate loans, and a decline in the amount of classified commercial real estate loans. During the six months ended June 30, 2025, the changes in the allowance for credit losses were largely driven by conversions of construction loans to amortizing real estate loans and a decline in the estimated allowance for credit losses on individually evaluated loans.

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The allowance for credit losses is established through a provision for credit losses charged to earnings. Loans, or portions of loans, are charged off against the allowance in the period that such loans, or portions thereof, are deemed uncollectible. Subsequent recoveries, if any, are credited to the allowance. The Company groups loans and unfunded lending commitments with similar risk characteristics into pools or segments and collectively evaluates each pool to estimate the allowance for credit losses. For each loan pool, the Company uses the remaining life method to calculate its credit loss estimate. Loans are individually evaluated for credit losses when they do not share similar risk characteristics with our identified loan pools. The allowance for credit losses reflects the Company’s estimate of current expected credit losses (“CECL”) over the full life of the financial assets.

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Loans are individually evaluated for credit losses when they do not share similar risk characteristics with our identified loan pools. Generally, management considers loans rated as substandard for individual analysis or when we have identified certain unique characteristics that impact the risk of credit loss. These characteristics include, but are not limited to, the creditworthiness of the borrower, the reliability of the primary source of repayment, the quality of the collateral, the size of the loan or relationship, and the industry of the borrower. The allowance for credit losses on individually evaluated, collateral-dependent loans is based on a comparison of the recorded investment in the loan with the fair value of the underlying collateral. Alternatively, we estimate credit losses on individual loans by comparing the loan’s recorded investment to the loan’s estimated fair value based on discounted cash flows or an observable market price.

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The following tables outline the allowance for credit losses and the balance of loans by method of loss evaluation at June 30, 2026 and December 31, 2025.

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At June 30, 2026 and December 31, 2025, all loans individually evaluated for credit losses, except for a construction and land loan, were considered collateral-dependent financial assets. Loans are considered collateral-dependent and individually evaluated when, based on management’s assessment as of the reporting date, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following describes the types of collateral that secure collateral dependent loans:

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The construction and land loan balance reported as individually evaluated for credit losses as of December 31, 2025 represents amounts that will be re-paid by grant proceeds from the Federal Home Loan Bank of Dallas.

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A summary of current and past due loans as of June 30, 2026 and December 31, 2025 follows:

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Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due based on contractual terms of the loan.

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A summary of total non-accrual loans and accruing loans 90 days or more past due as of June 30, 2026 and December 31, 2025 follows:

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The Company was not committed to lend any additional funds on non-accrual loans at June 30, 2026 or December 31, 2025. The Company does not recognize interest income while loans are on non-accrual status. All payments received while on non-accrual status are applied against the principal balance of non-accrual loans.

At June 30, 2026 and December 31, 2025, the Company had no outstanding loans for which formal foreclosure proceedings were in process.

Occasionally loans are modified to assist borrowers experiencing financial difficulty. We consider modifications such as term extensions, principal forgiveness, payment delays or alternate payment schedules, and alternate interest rate terms. At June 30, 2026 and December 31, 2025, loans with modifications for borrowers experiencing financial difficulty totaled $662,000 and $719,000, respectively. At June 30, 2026 and December 31, 2025, all loans with modifications for borrowers experiencing financial difficulty were one- to four-family residential loans and totaled less than 1.0% of total one- to four-family residential loans at such dates.

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During the six months ended June 30, 2026, the Company did not grant any loan modifications to borrowers experiencing financial difficulty that resulted in a more than minor change in the timing or amount of contractual cash flows. During the year ended December 31, 2025, the Company granted two loan modifications to borrowers experiencing financial difficulty that resulted in a more than minor change in the timing or amount of contractual cash flows. The Company consolidated the debt of two related borrowers into a new residential mortgage loan totaling $131,000 to extend the maturity date and lower the monthly payment. The second modification in 2025 involved altering the payment schedule for a $101,000 residential mortgage loan to comply with the borrower’s bankruptcy plan. The loan modified because of bankruptcy defaulted after modification, but was brought current as of June 30, 2026 with a balance of $88,000. The other loan modified in 2025 for borrowers experiencing financial difficulty has performed in accordance with the terms after modification. The Company was not committed to lend any additional funds to borrowers with modified terms and experiencing financial difficulty at June 30, 2026 or December 31, 2025.

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Loans are categorized by credit quality indicators 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. Credit quality classifications follow regulatory guidelines and can generally be described as follows:

Pass – Loans in this category have strong asset quality and liquidity along with a multi-year track record of profitability.

Special Mention – Loans classified as special mention 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 institution’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 the collateral pledged, if any. 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 have been identified as uncollectible and are generally charged-off in the period identified.

The information for each of the credit quality indicators is updated at least quarterly in conjunction with the determination of the adequacy of the allowance for credit losses.

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The following tables present the Company’s loan portfolio by credit quality classification and origination year as of June 30, 2026 and December 31, 2025. The Company uses the latter of origination or renewal date to classify term loans into vintages. The gross charge-offs presented in the tables that follow are for the six months ended June 30, 2026 and year ended December 31, 2025.

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