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Note 4 - Loans Receivable

12 Months Ended

Dec. 31, 2020

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

NOTE 4 – LOANS RECEIVABLE

Loans receivable are as follows:

December 31,

2020

2019

One-to-four family residential real estate
$ 41,691 $ 55,750

Multi-family mortgage
452,241 563,750

Nonresidential real estate
108,658 134,674

Construction and land
499 —

Commercial loans and leases
405,057 418,343

Consumer
1,812 2,211

1,009,958 1,174,728

Net deferred loan origination costs
371 912

Allowance for loan losses
(7,751 ) (7,632 )

Loans, net
$ 1,002,578 $ 1,168,008

Loan Origination/Risk Management. The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. The Company reviews and approves these policies and procedures on a periodic basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and potential problem loans via trend and risk rating migration. The Company requires title insurance insuring the priority of our lien on real estate collateral, fire and extended coverage casualty insurance, and, if appropriate, flood insurance, in order to protect our security interest in the underlying real property collateral.

The majority of the loans the Company originates are commercial-related loans, such as multi-family, nonresidential real estate, commercial loans and leases, and construction and land loans. In addition, we originated one-to-four family residential mortgage loans and consumer loans until December 31, 2017. We also occasionally purchase and sell loan participations. The following briefly describes our principal loan products.

The Company originates real estate loans principally secured by first liens, both non-owner occupied and owner occupied commercial real estate. The non-owner occupied commercial real estate properties are predominantly multi-family apartment buildings, office buildings, light industrial buildings, shopping centers and mixed-use developments and, to a much lesser extent, more specialized properties such as nursing homes and other healthcare facilities.

Multi-family mortgage loans generally are secured by multi-family rental properties such as apartment buildings, including subsidized apartment units. In general, loan amounts range between $500,000 and $5.0 million at December 31, 2020. Approximately 51.4% of the collateral is located outside of our primary market area; however, we do not have a concentration in any single market in excess of 25% of our loan portfolio outside of our primary market area. In underwriting multi-family mortgage loans, the Company considers a number of factors, which include the projected net cash flow to the loan’s debt service requirement (generally requiring a minimum ratio of 120%), the age and condition of the collateral, the financial resources and income level of the borrower, the borrower’s experience in owning or managing similar properties and, proximity to diverse employment opportunities. Multi-family mortgage loans are generally originated in amounts up to 80% of the appraised value of the property securing the loan. Personal guarantees are usually obtained on multi-family mortgage loans if the borrower/property owner is a legal entity.

Loans secured by multi-family mortgages generally involve a greater degree of credit risk as a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family mortgages typically depends upon the successful operation of the related real estate property. If the cash flow from the project is reduced below acceptable thresholds, the borrower’s ability to repay the loan may be impaired.

The Company emphasizes nonresidential real estate loans with initial principal balances between $500,000 and $5.0 million. Substantially all of our nonresidential real estate loans are secured by properties located in our primary market area. The Company’s nonresidential real estate loans are generally written as three- or five-year adjustable-rate mortgages or mortgages with balloon maturities of three or five years. Amortization on these loans is typically based on 20- to 30-year schedules. The Company also originates some 15-year fixed-rate, fully amortizing loans.

In the underwriting of nonresidential real estate loans, the Company generally lends up to 80% of the property’s appraised value. Decisions to lend are based on the economic viability of the property as the primary source of repayment and the creditworthiness of the borrower. In evaluating a proposed commercial real estate loan, we emphasize the ratio of the property’s projected net cash flow to the loan’s debt service requirement (generally requiring a minimum ratio of 120%), computed after deduction for a vacancy factor and property expenses we deem appropriate. Personal guarantees are usually pursued and obtained from nonresidential real estate borrowers.

Nonresidential real estate loans generally carry higher interest rates and have shorter terms and typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment of loans secured by income-producing properties typically depends on the successful operation of the related real estate project and thus may be subject to a greater extent to adverse conditions in the real estate market and in the general economy.

The Company makes various types of secured and unsecured commercial loans to customers in our market area for the purpose of financing equipment acquisition, expansion, working capital and other general business purposes. The terms of these loans generally range from less than one year to five years. The loans are either negotiated on a fixed-rate basis or carry adjustable interest rates indexed to (i) a lending rate that is determined internally, or (ii) a short-term market rate index.

Commercial credit decisions are based upon our assessment of the borrower’s cash flow, proposed collateral, business and credit history and any additional positive or negative credit risk factors. The Company determines the borrower’s ability to repay in accordance with the proposed terms of the loans and we assess the risks involved. An evaluation is made of the borrower to determine character and capacity to manage. Personal guarantees of the principals are pursued and usually obtained. In addition to evaluating the loan borrower’s financial statements, we consider the adequacy of the primary and secondary sources of repayment for the loan. Independent reports of the borrower’s credit history supplement our analysis of the borrower’s creditworthiness and at times are supplemented with inquiries to other banks and trade investigations. Moreover, certain assets listed on personal financial statements are verified. Proposed collateral for a secured transaction also is analyzed to determine its marketability. Commercial business loans generally have higher interest rates because they have a higher risk of default since their repayment generally depends on the successful operation of the borrower’s business and the sufficiency of any collateral. Pricing of commercial loans is based primarily on the credit risk of the borrower, with due consideration given to borrowers with appropriate deposit relationships.

The Company also lends money to small and mid-size leasing companies for equipment financing leases. Generally, commercial leases are secured by an assignment by the leasing company of the lease payments and by a secured interest in the equipment being leased. In most cases, the lessee acknowledges our security interest in the leased equipment and agrees to send lease payments directly to us. Consequently, the Company underwrites lease loans by examining the creditworthiness of the lessee rather than the lessor. Lease loans generally are non-recourse to the leasing company.

Generally, the Company’s commercial leases are secured primarily by technology equipment, medical equipment, material handling equipment and other capital equipment. Lessees tend to be publicly-traded companies with investment-grade rated debt or companies that have not issued public debt and therefore do not have a public debt rating. Typically, commercial leases to these lessees have a maximum maturity of five years and a maximum outstanding credit exposure of $10.0 million to any single entity. In addition, the Company will originate commercial finance leases to lessees with below investment-grade public debt ratings and have a maximum outstanding credit exposure of $10.0 million to any single entity. Lease loans are almost always fully amortizing, with fixed interest rates.

Although the Company does not actively originate construction and land loans presently, construction and land loans generally consist of land acquisition loans to help finance the purchase of land intended for further development, including single-family homes, multi-family housing and commercial income property, development loans to builders in our market area to finance improvements to real estate, consisting mostly of single-family subdivisions, typically to finance the cost of utilities, roads, sewers and other development costs.

Until December 31, 2017, the Company offered conforming and non-conforming, fixed-rate and adjustable-rate residential mortgage loans with maturities of up to 30 years and maximum loan amounts generally of up to $2.5 million. One-to-four family residential mortgage loans were generally underwritten according to Fannie Mae guidelines, and loans that conformed to such guidelines are referred to as “conforming loans.” Private mortgage insurance is required for first mortgage loans with loan-to-value ratios in excess of 80%.

The ability of the Company’s borrowers to repay their loans, and the value of the collateral securing such loans, could be adversely impacted by economic weakness in its local markets as a result of unemployment, declining real estate values, or increased residential, office, industrial and retail shopping vacancies due to changes in business conditions. This not only could result in the Company experiencing charge-offs and/or nonperforming assets, but also could necessitate an increase in the provision for loan losses. These events, if they were to recur, would have an adverse impact on the Company’s results of operations and its capital.

The following tables present the balance in the allowance for loan losses and the loans receivable by portfolio segment and based on impairment method:

Allowance for loan losses

Loan Balances

Individually evaluated for impairment

Collectively evaluated for impairment

Total

Individually evaluated for impairment

Collectively evaluated for impairment

Total

December 31, 2020

One-to-four family residential real estate
$ — $ 518 $ 518 $ 1,718 $ 39,973 $ 41,691

Multi-family mortgage
— 4,062 4,062 520 451,721 452,241

Nonresidential real estate
28 1,541 1,569 296 108,362 108,658

Construction and land — 12 12 — 499 499

Commercial loans and leases
— 1,536 1,536 — 405,057 405,057

Consumer
— 54 54 — 1,812 1,812

$ 28 $ 7,723 $ 7,751 $ 2,534 $ 1,007,424 1,009,958

Net deferred loan origination costs
371

Allowance for loan losses
(7,751 )

Loans, net
$ 1,002,578

Allowance for loan losses

Loan Balances

Individually evaluated for impairment

Collectively evaluated for impairment

Total

Individually evaluated for impairment

Collectively evaluated for impairment

Total

December 31, 2019

One-to-four family residential real estate
$ — $ 675 $ 675 $ 1,835 $ 53,915 $ 55,750

Multi-family mortgage
— 3,676 3,676 620 563,130 563,750

Nonresidential real estate
— 1,176 1,176 288 134,386 134,674

Commercial loans and leases
— 2,065 2,065 — 418,343 418,343

Consumer
— 40 40 — 2,211 2,211

$ — $ 7,632 $ 7,632 $ 2,743 $ 1,171,985 1,174,728

Net deferred loan origination costs
912

Allowance for loan losses
(7,632 )

Loans, net
$ 1,168,008

The following table presents the activity in the allowance for loan losses by portfolio segment:

Beginning balance
Provision for (recovery of) loan losses
Loans charged off
Recoveries
Ending balance

December 31, 2020

One-to-four family residential real estate
$ 675 $ (185 ) $ (9 ) $ 37 $ 518

Multi-family mortgage
3,676 292 — 94 4,062

Nonresidential real estate
1,176 393 — — 1,569

Construction and land
— 12 — — 12

Commercial loans and leases
2,065 (533 ) — 4 1,536

Consumer
40 76 (62 ) — 54

$ 7,632 $ 55 $ (71 ) $ 135 $ 7,751

December 31, 2019

One-to-four family residential real estate
$ 699 $ 123 $ (222 ) $ 75 $ 675

Multi-family mortgage
3,991 (346 ) — 31 3,676

Nonresidential real estate
1,476 (217 ) (83 ) — 1,176

Construction and land
4 (4 ) — — —

Commercial loans and leases
2,272 4,226 (4,443 ) 10 2,065

Consumer 28 43 (31 ) — 40

$ 8,470 $ 3,825 $ (4,779 ) $ 116 $ 7,632

Impaired loans

The following tables present loans individually evaluated for impairment by class of loans:

Loan Balance

Recorded Investment

Partial Charge- off

Allowance for Loan Losses Allocated

Average Investment in Impaired Loans

Interest Income Recognized

December 31, 2020

With no related allowance recorded

One-to-four family residential real estate
$ 2,069 $ 1,718 $ 363 $ — $ 1,782 $ 42

Multi-family mortgage - Illinois
520 520 — — 594 31

2,589 2,238 363 — 2,376 73

With an allowance recorded - nonresidential real estate
280 296 — 28 289 —

$ 2,869 $ 2,534 $ 363 $ 28 $ 2,665 $ 73

December 31, 2019

With no related allowance recorded

One-to-four family residential real estate
$ 2,168 $ 1,835 $ 339 $ — $ 2,208 $ 51

Multi-family mortgage - Illinois
620 620 — — 637 37

Nonresidential real estate
280 288 — — 589 2

$ 3,068 $ 2,743 $ 339 $ — $ 3,434 $ 90

Nonaccrual loans

The following tables present the recorded investment in nonaccrual and loans 90 days or more past due still on accrual by class of loans:

Loan Balance Recorded Investment
Loans Past Due Over 90 Days, still accruing

December 31, 2020

One-to-four family residential real estate
$ 946 $ 925 $ —

Nonresidential real estate
280 296 —

$ 1,226 $ 1,221 $ —

December 31, 2019

One-to-four family residential real estate
$ 598 $ 512 $ —

Nonresidential real estate
280 288 —

Commercial loans and leases
47 — 47

$ 925 $ 800 $ 47

Nonaccrual loans and impaired loans are defined differently. Some loans may be included in both categories, and some may only be included in one category. Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

The Company’s reserve for uncollected loan interest was $133,000 and $81,000 at December 31, 2020 and 2019, respectively. When a loan is on non-accrual status and the ultimate collectability of the total principal of an impaired loan is in doubt, all payments are applied to principal under the cost recovery method. Alternatively, when a loan is on non-accrual status but there is doubt concerning only the ultimate collectability of interest, contractual interest is credited to interest income only when received, under the cash basis method pursuant to the provisions of FASB ASC 310–10, as applicable. In all cases, the average balances are calculated based on the month–end balances of the financing receivables within the period reported pursuant to the provisions of FASB ASC 310–10, as applicable.

Past Due Loans

The following tables present the aging of the recorded investment of loans by class of loans:

30-59 Days Past Due

60-89 Days Past Due

90 Days or Greater Past Due

Total Past Due

Loans Not Past Due

Total

December 31, 2020

One-to-four family residential real estate loans:

Owner occupied
$ 252 $ 211 $ 834 $ 1,297 $ 32,078 $ 33,375

Non-owner occupied
3 132 91 226 8,090 8,316

Multi-family mortgage:

Illinois
86 — — 86 221,943 222,029

Other
— — — — 230,212 230,212

Nonresidential real estate
— — 296 296 108,362 108,658

Construction and land — — — — 499 499

Commercial loans and leases:

Commercial
4,886 — — 4,886 72,809 77,695

Asset-based
— — — — 1,740 1,740

Equipment finance:

Government
2,468 — — 2,468 100,272 102,740

Investment-rated
618 225 — 843 86,417 87,260

Other
853 2,487 — 3,340 132,282 135,622

Consumer
6 5 — 11 1,801 1,812

$ 9,172 $ 3,060 $ 1,221 $ 13,453 $ 996,505 $ 1,009,958

30-59 Days Past Due

60-89 Days Past Due

90 Days or Greater Past Due

Total Past Due

Loans Not Past Due

Total

December 31, 2019

One-to-four family residential real estate loans:

Owner occupied
$ 777 $ 340 $ 507 $ 1,624 $ 43,365 $ 44,989

Non-owner occupied
280 15 — 295 10,466 10,761

Multi-family mortgage:

Illinois
981 302 — 1,283 246,680 247,963

Other
— — — — 315,787 315,787

Nonresidential real estate
— — 288 288 134,386 134,674

Commercial loans and leases:

Commercial
— — — — 133,976 133,976

Asset-based
— — — — 11,738 11,738

Equipment finance:

Government
— — — — 33,555 33,555

Investment-rated
826 — 47 873 101,015 101,888

Other
543 136 — 679 136,507 137,186

Consumer
24 37 — 61 2,150 2,211

$ 3,431 $ 830 $ 842 $ 5,103 $ 1,169,625 $ 1,174,728

U.S. Small Business Administration Paycheck Protection Program

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was passed by Congress and signed into law on March 27, 2020. The CARES Act established the Paycheck Protection Program ("PPP"), designed to provide a direct incentive for small businesses to keep their workers on the payroll. Under the most recently published guidance, the U.S. Small Business Administration ("SBA") will forgive PPP loans if all employee retention criteria are met, and the funds are used for eligible expenses. For the year ended December 31, 2020, we allocated approximately $11 million to the PPP based on the expected 100% guaranty of the SBA.

The following table presents the PPP activity:

Number of loans

Originated

Balance

For the Year Ended December 31, 2020

Paycheck protection program loan originations
315 $ 11,160

December 31, 2020

Paycheck protection program loans
290 $ 10,180

COVID-19 Loan Forbearance Programs

Section 4013 of the CARES Act provides that a qualified loan modification is exempt by law from classification as a Troubled Debt Restructuring ("TDR") pursuant to US GAAP. In addition, the Revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working With Customers Affected by the Coronavirus (“OCC Bulletin 2020-50”) provides more limited circumstances in which a loan modification is not subject to classification as a TDR and also defined the circumstances where the borrower’s loan is reported as current on loan payments. Pursuant to these new capabilities, we developed several loan forbearance programs to assist borrowers with managing cash flows disrupted due to COVID-19.

Our Apartment and Commercial Real Estate COVID-19 Qualified Limited Forbearance Agreement permitted borrowers who qualified under Section 4013 of the CARES Act to make an election to pay scheduled interest and escrow payments (if applicable) for a four-month period beginning in April 2020, and pay all deferred principal payments by December 2020.

Our Small Investment Property COVID-19 Qualified Limited Forbearance Agreement permitted borrowers with loan balances under $750,000 who qualified under Section 4013 of the CARES Act to make an election to pay scheduled interest and escrow payments (if applicable) for a four-month period beginning in April 2020, and pay all deferred principal payments by December 2020. In addition, the borrower could elect to defer the May 2020 loan payment entirely, with all deferred interest amounts due by December 2020 and all deferred principal amounts due by June 30, 2021.

CARES Act Section 4013 and OCC Bulletin 2020-35 forbearance agreements are available to qualified commercial loan and commercial finance borrowers, and to commercial equipment lessees.

For residential mortgage and consumer loans, relief under CARES Act Section 4013 or OCC Bulletin 2020-35 forbearance agreements are available to qualified borrowers with terms consistent with secondary residential mortgage market standards established by Fannie Mae.

The following table summarizes the remaining loan forbearance modifications at December 31, 2020:

Principal

Remaining Amounts

Number of loans

Balance

Deferred

Small Investment Property COVID-19 Qualified Limited Forbearance Agreement

Multi-family mortgage
8 $ 3,092 $ 17

Nonresidential real estate
10 3,363 22

Apartment and Commercial Real Estate COVID-19 Qualified Limited Forbearance Agreement

Nonresidential real estate
2 2,480 6

One-to-four family residential real estate
10 1,402 8

30 $ 10,337 $ 53

Troubled Debt Restructurings

The Company evaluates loan extensions or modifications not qualified under Section 4013 of the CARES Act or under OCC Bulletin 2020-35 in accordance with FASB ASC 340-10 with respect to the classification of the loan as a TDR.

Under ASC 340-10, if the Company grants a loan extension or modification to a borrower experiencing financial difficulties for other than an insignificant period of time that includes a below–market interest rate, principal forgiveness, payment forbearance or other concession intended to minimize the economic loss to the Company, the loan extension or loan modification is classified as a TDR. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal then due and payable, management measures any impairment on the restructured loan in the same manner as for impaired loans as noted above.

The Company had no TDRs at December 31, 2020 and 2019. During the years ending December 31, 2020 and 2019, there were no loans modified and classified as TDRs. During the years ending December 31, 2020 and 2019, there were no TDR loans that subsequently defaulted within twelve months of their modification.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

To determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, including current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans based on credit risk.

This analysis includes non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a monthly basis. The Company uses the following definitions for risk ratings:

Special Mention. A Special Mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard. Loans categorized as substandard continue to accrue interest, but exhibit a well-defined weakness or weaknesses that may jeopardize the liquidation of the debt. The loans continue to accrue interest because they are well secured and collection of principal and interest is expected within a reasonable time. The risk rating guidance published by the Office of the Comptroller of the Currency clarifies that a loan with a well-defined weakness does not have to present a probability of default for the loan to be rated Substandard, and that an individual loan’s loss potential does not have to be distinct for the loan to be rated Substandard.

Nonaccrual. An asset classified Nonaccrual has all the weaknesses inherent in one classified 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.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered “Pass” rated loans.

Based on the most recent analysis performed, the risk category of loans by class of loans are as follows:

Pass

Special Mention

Substandard

Nonaccrual

Total

December 31, 2020

One-to-four family residential real estate loans:

Owner occupied
$ 32,089 $ - $ 452 $ 834 $ 33,375

Non-owner occupied
8,164 27 34 91 8,316

Multi-family mortgage:

Illinois
222,029 — — — 222,029

Other
230,212 — — — 230,212

Nonresidential real estate
106,280 1,998 84 296 108,658

Construction and land 499 — — — 499

Commercial loans and leases:

Commercial
72,809 — 4,886 — 77,695

Asset-based
1,740 — — — 1,740

Equipment finance:

Government
102,740 — — — 102,740

Investment-rated
87,260 — — — 87,260

Other
134,617 — 1,005 — 135,622

Consumer
1,802 5 5 — 1,812

$ 1,000,241 $ 2,030 $ 6,466 $ 1,221 $ 1,009,958

Pass

Special Mention

Substandard

Nonaccrual

Total

December 31, 2019

One-to-four family residential real estate loans:

Owner occupied
$ 43,908 $ 36 $ 533 $ 512 $ 44,989

Non-owner occupied
10,696 30 35 — 10,761

Multi-family mortgage:

Illinois
247,757 — 206 — 247,963

Other
315,787 — — — 315,787

Nonresidential real estate
134,134 162 90 288 134,674

Commercial loans and leases:

Commercial
125,630 8,346 — — 133,976

Asset-based
11,738 — — — 11,738

Equipment finance:

Government
33,555 — — — 33,555

Investment-rated
101,381 507 — — 101,888

Other
136,289 761 136 — 137,186

Consumer
2,153 5 53 — 2,211

$ 1,163,028 $ 9,847 $ 1,053 $ 800 $ 1,174,728