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Loans Receivable

6 Months Ended

Jun. 30, 2020

Note 3 - Loans Receivable

Loans receivable at June 30, 2020 and December 31, 2019 are summarized as follows:

	June 30, 2020		December 31, 2019
	(In Thousands)
Mortgage loans:
Residential real estate:
One- to four-family	$	467,346	$	480,280
Multi-family		598,924		584,859
Home equity		16,409		18,071
Construction and land		48,850		37,033
Commercial real estate		244,775		236,703
Consumer		860		832
Commercial loans		56,639		30,253
	$	1,433,803	$	1,388,031

The Company provides several types of loans to its customers, including residential, construction, commercial and consumer loans. Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to one borrower or to multiple borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. While the Company's credit risks are geographically concentrated in the Milwaukee metropolitan area, there are no concentrations with individual or groups of related borrowers. While the real estate collateralizing these loans is primarily residential in nature, it ranges from owner-occupied single family homes to large apartment complexes.

Qualifying loans receivable totaling $1.08 billion and 1.07 billion at June 30, 2020 and December 31, 2019, respectively, were pledged as collateral against $574.0 million and $470.0 million in outstanding Federal Home Loan Bank of Chicago ("FHLB") advances under a blanket security agreement at June 30, 2020 and December 31, 2019.

Certain of the Company's executive officers, directors, employees, and their related interests have loans with the Bank. Loans outstanding to such parties were approximately $6.4 million as of June 30, 2020 and $6.3 million as of December 31, 2019. None of these loans were past due or considered impaired as of June 30, 2020 or December 31, 2019.

As of June 30, 2020 and December 31, 2019, there were no loans 90 or more days past due and still accruing interest.

An analysis of past due loans receivable as of June 30, 2020 and December 31, 2019 follows:

	As of June 30, 2020
	1-59 Days Past Due⁽¹⁾			60-89 Days Past Due⁽²⁾		90 Days or Greater		Total Past Due		Current⁽³⁾		Total Loans
	(In Thousands)
Mortgage loans:
Residential real estate:
One- to four-family		$	2,452	$	12	$	3,446	$	5,910	$	461,436	$	467,346
Multi-family			-		-		356		356		598,568		598,924
Home equity			29		6		40		75		16,334		16,409
Construction and land			-		-		-		-		48,850		48,850
Commercial real estate			-		-		67		67		244,708		244,775
Consumer			-		-		-		-		860		860
Commercial loans			39		-		-		39		56,600		56,639
Total		$	2,520	$	18	$	3,909	$	6,447	$	1,427,356	$	1,433,803

	As of December 31, 2019
	1-59 Days Past Due⁽¹⁾			60-89 Days Past Due⁽²⁾		90 Days or Greater		Total Past Due		Current⁽³⁾		Total Loans
	(In Thousands)
Mortgage loans:
Residential real estate:
One- to four-family		$	1,179	$	638	$	3,969	$	5,786	$	474,494	$	480,280
Multi-family			-		-		360		360		584,499		584,859
Home equity			-		10		-		10		18,061		18,071
Construction and land			-		-		-		-		37,033		37,033
Commercial real estate			-		-		303		303		236,400		236,703
Consumer			-		-		-		-		832		832
Commercial loans			6		-		-		6		30,247		30,253
Total		$	1,185	$	648	$	4,632	$	6,465	$	1,381,566	$	1,388,031

⁽¹⁾Includes $226,000 and $53,000 at June 30, 2020 and December 31, 2019, respectively, which are on non-accrual status.

⁽²⁾Includes $12,000 and $291,000 at June 30, 2020 and December 31, 2019, respectively, which are on non-accrual status.

⁽³⁾Includes $1.4 million and $2.0 million at June 30, 2020 and December 31, 2019, respectively, which are on non-accrual status.

A summary of the activity for the six months ended June 30, 2020 and 2019 in the allowance for loan losses follows:

	One- to Four- Family			Multi-Family			Home Equity			Construction and Land		Commercial Real Estate		Consumer			Commercial			Total
	(In Thousands)
Six months ended June 30, 2020
Balance at beginning of period	$	4,907		$	4,138		$	201		$	610	$	2,145	$	14		$	372		$	12,387
Provision (credit) for loan losses		754			1,728			12			542		1,972		25			252			5,285
Charge-offs		(7	)		(5	)		(13	)		-		-		(1	)		(8	)		(34	)
Recoveries		61			9			18			1		7		-			-			96
Balance at end of period	$	5,715		$	5,870		$	218		$	1,153	$	4,124	$	38		$	616		$	17,734

Six months ended June 30, 2019
Balance at beginning of period	$	5,742		$	4,153		$	325		$	400	$	2,126		$	20		$	483		$	13,249
Provision (credit) for loan losses		(449	)		154			(54	)		12		(214	)		(3	)		(96	)		(650	)
Charge-offs		(25	)		(1	)		(8	)		-		-			(5	)		-			(39	)
Recoveries		35			9			12			-		1			-			-			57
Balance at end of period	$	5,303		$	4,315		$	275		$	412	$	1,913		$	12		$	387		$	12,617

A summary of the activity for the three months ended June 30, 2020 and 2019 in the allowance for loan losses follows:

	One- to Four- Family			Multi-Family			Home Equity			Construction and Land		Commercial Real Estate		Consumer		Commercial			Total
	(In Thousands)
Three months ended June 30, 2020
Balance at beginning of period	$	4,714		$	4,301		$	239		$	687	$	2,803	$	23	$	459		$	13,226
Provision (credit) for loan losses		988			1,568			(20	)		466		1,318		15		165			4,500
Charge-offs		(1	)		(5	)		(13	)		-		-		-		(8	)		(27	)
Recoveries		14			6			12			-		3		-		-			35
Balance at end of period	$	5,715		$	5,870		$	218		$	1,153	$	4,124	$	38	$	616		$	17,734

Three months ended June 30, 2019
Balance at beginning of period	$	5,181		$	4,331		$	276		$	353	$	2,005		$	7		$	408		$	12,561
Provision (credit) for loan losses		101			(20	)		(7	)		59		(92	)		10			(21	)		30
Charge-offs		(1	)		(1	)		-			-		-			(5	)		-			(7	)
Recoveries		22			5			6			-		-			-			-			33
Balance at end of period	$	5,303		$	4,315		$	275		$	412	$	1,913		$	12		$	387		$	12,617

A summary of the allowance for loan loss for loans evaluated individually and collectively for impairment by collateral class as of June 30, 2020 follows:

	One- to Four- Family		Multi- Family		Home Equity		Construction and Land		Commercial Real Estate		Consumer		Commercial		Total
	(In Thousands)
Allowance related to loans individually evaluated for impairment	$	27	$	-	$	-	$	-	$	-	$	-	$	-	$	27
Allowance related to loans collectively evaluated for impairment		5,688		5,870		218		1,153		4,124		38		616		17,707
Balance at end of period	$	5,715	$	5,870	$	218	$	1,153	$	4,124	$	38	$	616	$	17,734

Loans individually evaluated for impairment	$	7,478	$	639	$	77	$	-	$	343	$	-	$	-	$	8,537
Loans collectively evaluated for impairment		459,868		598,285		16,332		48,850		244,432		860		56,639		1,425,266
Total gross loans	$	467,346	$	598,924	$	16,409	$	48,850	$	244,775	$	860	$	56,639	$	1,433,803

A summary of the allowance for loan loss for loans evaluated individually and collectively for impairment by collateral class as of December 31, 2019 follows:

	One- to Four-Family		Multi- Family		Home Equity		Construction and Land		Commercial Real Estate		Consumer		Commercial		Total
	(In Thousands)
Allowance related to loans individually evaluated for impairment	$	32	$	-	$	-	$	-	$	7	$	-	$	-	$	39
Allowance related to loans collectively evaluated for impairment		4,875		4,138		201		610		2,138		14		372		12,348
Balance at end of period	$	4,907	$	4,138	$	201	$	610	$	2,145	$	14	$	372	$	12,387

Loans individually evaluated for impairment	$	8,725	$	667	$	84	$	-	$	581	$	-	$	-	$	10,057
Loans collectively evaluated for impairment		471,555		584,192		17,987		37,033		236,122		832		30,253		1,377,974
Total gross loans	$	480,280	$	584,859	$	18,071	$	37,033	$	236,703	$	832	$	30,253	$	1,388,031

The following table presents information relating to the Company’s internal risk ratings of its loans receivable as of June 30, 2020 and December 31, 2019:

	One to Four- Family		Multi-Family		Home Equity		Construction and Land		Commercial Real Estate		Consumer		Commercial		Total
	(In Thousands)
At June 30, 2020
Substandard	$	7,478	$	639	$	265	$	-	$	343	$	-	$	732	$	9,457
Watch		8,685		-		6		3,494		5,090		-		1,380		18,655
Pass		451,183		598,285		16,138		45,356		239,342		860		54,527		1,405,691
	$	467,346	$	598,924	$	16,409	$	48,850	$	244,775	$	860	$	56,639	$	1,433,803

At December 31, 2019
Substandard	$	8,725	$	668	$	285	$	-	$	581	$	-	$	754	$	11,013
Watch		5,975		-		3		-		1,412		-		847		8,237
Pass		465,580		584,191		17,783		37,033		234,710		832		28,652		1,368,781
	$	480,280	$	584,859	$	18,071	$	37,033	$	236,703	$	832	$	30,253	$	1,388,031

Factors that are important to managing overall credit quality include sound loan underwriting and administration, systematic monitoring of existing loans and commitments, effective loan review on an ongoing basis, early identification of potential problems, an allowance for loan losses, and sound non-accrual and charge-off policies. Our underwriting policies require an officers' loan committee review and approval of all loans in excess of $500,000. A member of the credit department, independent of the loan originator, performs a loan review for all loans. Our ability to manage credit risk depends in large part on our ability to properly identify and manage problem loans. To do so, we maintain a loan review system under which our credit management personnel review non-owner occupied one- to four-family, multi-family, construction and land, and commercial real estate loans that individually, or as part of an overall borrower relationship exceed $1.0 million in potential exposure and review commercial loans that individually, or as part of an overall borrower relationship exceed $200,000 in potential exposure. Loans meeting these criteria are reviewed on an annual basis, or more frequently, if the loan renewal is less than one year. With respect to this review process, management has determined that pass loans include loans that exhibit acceptable financial statements, cash flow and leverage. Watch loans have potential weaknesses that deserve management's attention, and if left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the credit. Substandard loans are considered inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged. These loans generally have a well-defined weakness that may jeopardize liquidation of the debt and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Finally, a loan is considered to be impaired when it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. Management has determined that all non-accrual loans and loans modified under troubled debt restructurings meet the definition of an impaired loan.

The Company's procedures dictate that an updated valuation must be obtained with respect to underlying collateral at the time a loan is deemed impaired. Updated valuations may also be obtained upon transfer from loans receivable to real estate owned based upon the age of the prior appraisal, changes in market conditions or known changes to the physical condition of the property.

Estimated fair values are reduced to account for sales commissions, broker fees, unpaid property taxes and additional selling expenses to arrive at an estimated net realizable value. The adjustment factor is based upon the Company's actual experience with respect to sales of real estate owned over the prior two years. In situations in which we are placing reliance on an appraisal that is more than one year old, an additional adjustment factor is applied to account for downward market pressure since the date of appraisal. The additional adjustment factor is based upon relevant sales data available for our general operating market as well as company-specific historical net realizable values as compared to the most recent appraisal prior to disposition.

With respect to multi-family income-producing real estate, appraisals are reviewed and estimated collateral values are adjusted by updating significant appraisal assumptions to reflect current real estate market conditions. Significant assumptions reviewed and updated include the capitalization rate, rental income and operating expenses. These adjusted assumptions are based upon recent appraisals received on similar properties as well as on actual experience related to real estate owned and currently under Company management.

The following tables present data on impaired loans at June 30, 2020 and December 31, 2019.

	As of June 30, 2020
	Recorded Investment		Unpaid Principal		Reserve		Cumulative Charge-Offs
	(In Thousands)
Total Impaired with Reserve
One- to four-family	$	212	$	212	$	27	$	-
Multi-family		-		-		-		-
Home equity		-		-		-		-
Construction and land		-		-		-		-
Commercial real estate		-		-		-		-
Consumer		-		-		-		-
Commercial		-		-		-		-
		212		212		27		-
Total Impaired with no Reserve
One- to four-family		7,266		8,283		-		1,017
Multi-family		639		1,456		-		817
Home equity		77		77		-		-
Construction and land		-		-		-		-
Commercial real estate		343		343		-		-
Consumer		-		-		-		-
Commercial		-		-		-		-
		8,325		10,159		-		1,834
Total Impaired
One- to four-family		7,478		8,495		27		1,017
Multi-family		639		1,456		-		817
Home equity		77		77		-		-
Construction and land		-		-		-		-
Commercial real estate		343		343		-		-
Consumer		-		-		-		-
Commercial		-		-		-		-
	$	8,537	$	10,371	$	27	$	1,834

	As of December 31, 2019
	Recorded Investment		Unpaid Principal		Reserve		Cumulative Charge-Offs
	(In Thousands)
Total Impaired with Reserve
One- to four-family	$	217	$	217	$	32	$	-
Multi-family		-		-		-		-
Home equity		-		-		-		-
Construction and land		-		-		-		-
Commercial real estate		7		416		7		409
Consumer		-		-		-		-
Commercial		-		-		-		-
		224		633		39		409
Total Impaired with no Reserve
One- to four-family		8,508		9,531		-		1,023
Multi-family		667		1,491		-		824
Home equity		84		84		-		-
Construction and land		-		-		-		-
Commercial real estate		574		574		-		-
Consumer		-		-		-		-
Commercial		-		-		-		-
		9,833		11,680		-		1,847
Total Impaired
One- to four-family		8,725		9,748		32		1,023
Multi-family		667		1,491		-		824
Home equity		84		84		-		-
Construction and land		-		-		-		-
Commercial real estate		581		990		7		409
Consumer		-		-		-		-
Commercial		-		-		-		-
	$	10,057	$	12,313	$	39	$	2,256

The difference between a loan’s recorded investment and the unpaid principal balance represents a partial charge-off resulting from a confirmed loss when the value of the collateral securing the loan is below the loan balance and management’s assessment that the full collection of the loan balance is not likely.

The following tables present data on impaired loans for the six months ended June 30, 2020 and 2019.

	Six months ended June 30,
	2020				2019
	Average Recorded Investment		Interest Paid		Average Recorded Investment		Interest Paid
	(In Thousands)
Total Impaired with Reserve
One- to four-family	$	215	$	8	$	353	$	11
Multi-family		-		-		348		16
Home equity		-		-		85		5
Construction and land		-		-		-		-
Commercial real estate		-		-		13		-
Consumer		-		-		-		-
Commercial		-		-		-		-
		215		8		799		32
Total Impaired with no Reserve
One- to four-family		7,361		189		6,727		213
Multi-family		650		34		935		41
Home equity		79		2		46		2
Construction and land		-		-		-		-
Commercial real estate		346		8		380		9
Consumer		-		-		-		-
Commercial		-		-		11		1
		8,436		233		8,099		266
Total Impaired
One- to four-family		7,576		197		7,080		224
Multi-family		650		34		1,283		57
Home equity		79		2		131		7
Construction and land		-		-		-		-
Commercial real estate		346		8		393		9
Consumer		-		-		-		-
Commercial		-		-		11		1
	$	8,651	$	241	$	8,898	$	298

When a loan is considered impaired, interest payments received are treated as interest income on a cash basis as long as the remaining book value of the loan (i.e., after charge-off of all identified losses) is deemed to be fully collectible. If the remaining book value is not deemed to be fully collectible, all payments received are applied to unpaid principal. Determination as to the ultimate collectability of the remaining book value is supported by an updated credit department evaluation of the borrower’s financial condition and prospects for repayment, including consideration of the borrower’s sustained historical repayment performance and other relevant factors.

The determination as to whether an allowance is required with respect to impaired loans is based upon an analysis of the value of the underlying collateral and/or the borrower’s intent and ability to make all principal and interest payments in accordance with contractual terms. The evaluation process is subject to the use of significant estimates and actual results could differ from estimates. This analysis is primarily based upon third party appraisals and/or a discounted cash flow analysis. In those cases in which no allowance has been provided for an impaired loan, the Company has determined that the estimated value of the underlying collateral exceeds the remaining outstanding balance of the loan. Of the total $8.3 million of impaired loans as of June 30, 2020 for which no allowance has been provided, 1.8 million in net charge-offs have been recorded to reduce the unpaid principal balance to an amount that is commensurate with the loans’ net realizable value, using the estimated fair value of the underlying collateral. To the extent that further deterioration in property values continues, the Company may have to reevaluate the sufficiency of the collateral servicing these impaired loans which may result in additional provisions to the allowance for loans losses or charge-offs.

At June 30, 2020, total impaired loans included $3.9 million of troubled debt restructurings. Troubled debt restructurings involve granting concessions to a borrower experiencing financial difficulty by modifying the terms of the loan in an effort to avoid foreclosure. The vast majority of debt restructurings include a modification of terms to allow for an interest only payment and/or reduction in interest rate. The restructured terms are typically in place for six to twelve months. At December 31, 2019, total impaired loans included $4.0 million of troubled debt restructurings.

The following presents data on troubled debt restructurings:

		As of June 30, 2020
		Accruing				Non-accruing					Total
		Amount		Number		Amount			Number		Amount			Number
	(Dollars in Thousands)

One- to four-family		$	2,737		2		$	591		4		$	3,328		6
Multi-family			-		-			282		2			282		2
Commercial real estate			276		1			-		-			276		1
		$	3,013		3		$	873		6		$	3,886		9

		As of December 31, 2019
		Accruing				Non-accruing					Total
		Amount		Number		Amount			Number		Amount			Number
	(Dollars in Thousands)

One- to four-family		$	2,740		2		$	685		5		$	3,425		7
Multi-family			-		-			308		2			308		2
Commercial real estate			278		1			7		1			285		2
		$	3,018		3		$	1,000		8		$	4,018		11

At June 30, 2020, $3.9 million in loans had been modified in troubled debt restructurings and $873,000 of these loans were included in the non-accrual loan total. The remaining $3.0 million, while meeting the internal requirements for modification in a troubled debt restructuring, were current with respect to payments under their original loan terms at the time of the restructuring and, therefore, continued to be included with accruing loans. Provided these loans perform in accordance with the modified terms, they will continue to be accounted for on an accrual basis.

All loans that have been modified in a troubled debt restructuring are considered to be impaired. As such, an analysis has been performed with respect to all of these loans to determine the need for a valuation reserve. When a loan is expected to perform in accordance with the restructured terms and ultimately return to and perform under contract terms, a valuation allowance is established for an amount equal to the excess of the present value of the expected future cash flows under the original contract terms as compared with the modified terms, including an estimated default rate. When there is doubt as to the borrower’s ability to perform under the restructured terms or ultimately return to and perform under market terms, a valuation allowance is established equal to the impairment when the carrying amount exceeds fair value of the underlying collateral. As a result of the impairment analysis, no valuation allowance was recorded as of June 30, 2020 with respect to the $3.9 million in troubled debt restructurings. As of December 31, 2019, a $7,000 valuation allowance had been established with respect to the $4.0 million in troubled debt restructurings.

After a troubled debt restructuring reverts to market terms, a minimum of six consecutive contractual payments must be received prior to consideration for a return to accrual status. If an updated credit department review indicates no other evidence of elevated credit risk, the loan is returned to accrual status at that time.

The following presents troubled debt restructurings by concession type:

		As of June 30, 2020
	Performing in accordance with modified terms					In Default				Total
	Amount			Number		Amount		Number		Amount		Number
	(Dollars in Thousands)
Interest reduction and principal forbearance		$	3,572		6	$	-		-	$	3,572		6
Interest reduction			314		3		-		-		314		3
		$	3,886		9	$	-		-	$	3,886		9

		As of December 31, 2019
	Performing in accordance with modified terms					In Default				Total
	Amount			Number		Amount		Number		Amount		Number
	(Dollars in Thousands)
Interest reduction and principal forbearance		$	3,246		6	$	448		2	$	3,694		8
Interest reduction			324		3		-		-		324		3
		$	3,570		9	$	448		2	$	4,018		11

There were no loans modified as troubled debt restructurings during the three or six months ended June 30, 2020 and June 30, 2019.

There were no troubled debt restructurings within the past twelve months for which there was a default during the three or six months ended June 30, 2020 and June 30, 2019.

The provisions of the CARES Act included an election to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt these provisions of the CARES Act. At June 30, 2020, the Company had approximately $121.8 million in outstanding loans subject to interest and principal deferrals agreements.

The following table presents data on non-accrual loans as of June 30, 2020 and December 31, 2019:

	June 30, 2020			December 31, 2019
	(Dollars in Thousands)
Non-accrual loans:
Residential real estate:
One- to four-family	$	4,753		$	5,985
Multi-family		639			667
Home equity		77			70
Construction and land		-			-
Commercial real estate		67			303
Commercial		-			-
Consumer		-			-
Total non-accrual loans	$	5,536		$	7,025
Total non-accrual loans to total loans receivable		0.39	%		0.51	%
Total non-accrual loans to total assets		0.25	%		0.35	%