FFBW, Inc. - FORM 10-Q

Attached files

file	filename
EX-32 - EXHIBIT 32 - FFBW, Inc.	tv492150_ex32.htm
EX-31.2 - EXHIBIT 31.2 - FFBW, Inc.	tv492150_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - FFBW, Inc.	tv492150_ex31-1.htm

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2018

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______________ to _______________

Commission File No. 001-38239

FFBW, Inc.

(Exact name of registrant as specified in its charter)

Federal		82-3027075
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

1360 South Moorland Road Brookfield, Wisconsin		53005
(Address of Principal Executive Offices)		(Zip Code)

(262) 542-4448

(Registrant’s telephone number)

N/A

(Former name or former address, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.

YES x NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES x NO ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨	Smaller reporting company x
(Do not check if a smaller reporting company)	Emerging growth company x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ¨ NO x

6,612,500 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding as of May 2, 2018.

FFBW, Inc.

Form 10-Q

Index

		Page
Part I. Financial Information

Item 1.	Financial Statements

	Balance Sheets as of March 31, 2018 (unaudited) and December 31, 2017	2

	Statements of Income for the Three Months Ended March 31, 2018 and 2017 (unaudited)	3

	Statements of Comprehensive Income for the Three Months Ended March 31, 2018 and 2017 (unaudited)	4

	Statements of Changes in Equity for the Three Months Ended March 31, 2018 and 2017 (unaudited)	5

	Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017 (unaudited)	6

	Notes to Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	36

Item 4.	Controls and Procedures	36

Part II. Other Information

Item 1.	Legal Proceedings	36

Item 1A.	Risk Factors	36

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36

Item 3.	Defaults upon Senior Securities	36

Item 4.	Mine Safety Disclosures	36

Item 5.	Other Information	37

Item 6.	Exhibits	37

	Signature Page	38

Part I. – Financial Information

Item 1.

Financial Statements

FFBW, Inc.

Balance Sheets

March 31, 2018 (Unaudited) and December 31, 2017

(Dollars in Thousands)

	March 31,			December 31,
	2018			2017
Assets

Cash and due from banks	$	2,610		$	3,285
Fed funds sold		6,590			8,528
Cash and cash equivalents		9,200			11,813
Available for sale securities, stated at fair value		59,953			58,012
Loans held for sale		-			109
Loans, net of allowance for loan and lease losses of $1,809 and $1,800, respectively		176,480			171,355
Premises and equipment, net		5,226			5,290
Foreclosed assets		306			619
FHLB stock, at cost		512			514
Accrued interest receivable		808			782
Cash value of life insurance		6,604			6,558
Other assets		1,514			1,429

TOTAL ASSETS	$	260,603		$	256,481

Liabilities and Equity

Deposits	$	187,140		$	182,913
Advance payments by borrowers for taxes and insurance		426			36
FHLB advances		12,750			12,750
Accrued interest payable		211			37
Other liabilities		1,037			1,256
Total liabilities	$	201,564		$	196,992

Preferred stock ($0.01 par value, 1,000,000 authorized, no shares issued or outstanding as of March 31, 2018 and December 31, 2017, respectively)	$	-		$	-
Common stock ($0.01 par value, 19,000,000 authorized, 6,612,500 issued and outstanding as of March 31, 2018 and December 31, 2017, respectively)		66			66
Additional paid in capital		28,299			28,296
Unallocated common stock of Employee Stock Ownership Plan ("ESOP") (253,023 and 256,263 shares at March 31, 2018 and December 31, 2017, respectively)		(2,531	)		(2,563	)
Retained earnings		34,060			33,937
Accumulated other comprehensive loss, net of income taxes		(855	)		(247	)
Total equity	$	59,039		$	59,489

TOTAL LIABILITIES AND EQUITY	$	260,603		$	256,481

The accompanying notes are an integral part of these financial statements.

FFBW, Inc.

Statements of Income

Three Months Ended March 31, 2018 and 2017 (Unaudited)

(Dollars in Thousands, except Per Share Data)

	Three months ended March 31,
	2018		2017

Interest and dividend income:
Loans, including fees	$	1,975	$	1,853
Securities
Taxable		340		241
Tax-exempt		23		35
Other		16		4

Total interest and dividend income		2,354		2,133

Interest Expense:
Interest-bearing deposits		346		319
Borrowed funds		53		58

Total interest expense		399		377

Net interest income		1,955		1,756
Provision for loan losses		115		51

Net interest income after provision for loan losses		1,840		1,705

Noninterest income:
Service charges and other fees		94		59
Net gain on sale of loans		39		86
Net gain on sale of securities		8		-
Increase in cash surrender value of insurance		46		50
Other noninterest income		24		4

Total noninterest income		211		199

Noninterest expense:
Salaries and employee benefits		1,053		1,012
Occupancy and equipment		251		286
Data processing		171		156
Foreclosed assets, net		46		8
Professional fees		142		110
Other		212		249

Total noninterest expense		1,875		1,821

Income before income taxes		176		83
Provision for income taxes		53		2

Net income	$	123	$	81

Earnings per share
Basic	$	0.02		N/A
Diluted	$	0.02		N/A

The accompanying notes are an integral part of these financial statements.

FFBW, Inc.

Statement of Comprehensive Income

Three Months Ended March 31, 2018 and 2017, (Unaudited)

(Dollars in Thousands)

	Three months ended March 31,
	2018			2017

Net income	$	123		$	81
Other comprehensive income:
Unrealized holding gains (losses) arising during the period		(694	)		117
Reclassification adjustment for gains realized in net income		(8	)		-
Other comprehensive income (loss) before tax effect		(702	)		117
Tax effect of other comprehensive income items		94			(41	)
Other comprehensive income (loss), net of tax		(608	)		76
Comprehensive income (loss)	$	(485	)	$	157

The accompanying notes are an integral part of these financial statements.

FFBW, Inc.

Statement of Changes in Equity

For the Three Months Ended March 31, 2018 and 2017, (Unaudited)

(Dollars in Thousands)

	Number of Shares		Common Stock		Additional Paid-In Capital		Unallocated Common Stock of ESOP			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total
Balance at December 31, 2016		-		-		-		-		$	34,123	$	(125	)	$	33,998
Net income											81		-			81
Other comprehensive income											-		76			76
Balance at March 31, 2017		-		-		-		-			34,204		(49	)		34,155

Balance at December 31, 2017		6,612,500		66		28,296		(2,563	)		33,937		(247	)	$	59,489
Net income											123		-			123
ESOP shares committed to be released (3,240 shares)						3		32								35
Other comprehensive loss											-		(608	)		(608	)
Balance at March 31, 2018		6,612,500	$	66	$	28,299	$	(2,531	)	$	34,060	$	(855	)	$	59,039

The accompanying notes are an integral part of these financial statements.

FFBW, Inc.

Statements of Cash Flows

For the Three Months Ended March 31, 2018 and 2017 (Unaudited)

(Dollars in Thousands)

	For the three months ended March 31,
	2018			2017
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income	$	123		$	81
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		115			51
Depreciation		83			122
Accretion of loan portfolio discount and deposit premium		(30	)		(93	)
Net amortization (accretion) on available for sale securities available for sale		138			142
Loss (gain) on sales and impairments of foreclosed assets		29			(12	)
Gain on sale of available for sale securities		(8	)		-
Increase in cash surrender value of life insurance		(46	)		(50	)
Accretion of discount on FHLB advances		-			(7	)
ESOP compensation		35			-
Changes in operating assets and liabilities:
Accrued interest receivable		(26	)		(16	)
Loans held for sale		109			324
Other assets		9			(3	)
Accrued interest payable		174			179
Other liabilities		(219	)		(433	)
Net cash provided by operating activities		486			285

Cash flows from investing activities:
Proceeds from sales of available for sale securities		3,435			-
Maturities, calls, paydowns on available for sale securities		1,659			1,794
Purchases of available for sale securities		(7,867	)		(250	)
Net (increase) decrease in loans		(5,427	)		867
Purchases of premises and equipment		(19	)		(191	)
Proceeds from redemption of FHLB stock		2			608
Proceeds from sale of equipment		-			-
Purchase of life insurance		-			-
Proceeds from sale of foreclosed assets		505			298
Net cash (used) provided by investing activities		(7,712	)		3,126

Cash flows from financing activities:
Net increase (decrease) in deposits		4,223			(4,105	)
Net increase in advance payments by borrowers for taxes and insurance		390			268
Net increase (decrease) in FHLB open line of credit		-			1,000
Repayments of FHLB advances		-			(2,500	)
Proceeds from FHLB advances		-			-
Net cash (used) provided in financing activities		4,613			(5,337	)
Net increase (decrease) in cash and cash equivalents		(2,613	)		(1,926	)
Cash and cash equivalents at beginning		11,813			6,911
Cash and cash equivalents at end	$	9,200		$	4,985

Supplemental Cash Flow Disclosures:
Cash paid for interest	$	225		$	197
Cash paid for income taxes		20			-
Loans transferred to foreclosed assets		221			456
Financed sales of foreclosed assets		21			-

The accompanying notes are an integral part of these financial statements.

FFBW, Inc.

Form 10-Q

Notes to Financial Statements (Unaudited – Dollars in Thousands)

Note 1 – Basis of Presentation

The accompanying unaudited consolidated financial statements of FFBW, Inc. and its wholly-owned subsidiary (collectively the “Company”) were prepared in accordance with instructions for Form 10-Q and Regulation S-X and do not include information or footnotes necessary for a complete presentation of financial condition, results of operations, comprehensive income, changes in equity and cash flows in conformity with accounting principles generally accepted in the United States of America.

In the opinion of management, all adjustments necessary for a fair presentation of the financial statements have been included. The results of operations for the three month periods ended March 31, 2018 are not necessarily indicative of the results which may be expected for the entire year. These statements should be read in conjunction with the Financial Statements and notes thereto for the year ended December 31, 2017 filed with the U.S. Securities and Exchange Commission (“SEC”) as part of FFBW, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2017.

In preparing the financial statements, the Company is required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the Company’s financial condition, results of operations, comprehensive income, changes in shareholders’ equity and cash flows for the interim periods presented. These adjustments are of a normal recurring nature and include appropriate estimated provisions.

Note 2 – Nature of Business and Summary of Significant Accounting Policies

Organization

On October 10, 2017, First Federal Bank of Wisconsin (“the Bank”) converted to a stock savings bank and is reorganized into the mutual holding company structure. The Bank issued all of its outstanding stock to a new holding company, FFBW, Inc., (the “Company”) which sold 2,950,625 shares of common stock to the public at $10.00 per share, and contributed an additional 25,000 shares to FFBW Community Foundation, representing 45% of its outstanding shares of common stock. This amount included shares purchased by the Bank’s employee stock ownership plan (“ESOP”), which purchased 3.92% of the Company’s outstanding common upon the completion of the reorganization and stock issuance. FFBW, Inc. is organized as a corporation under the laws of the United States. FFBW, MHC has been organized as a mutual holding company under the laws of the United States and owns 55% of the outstanding common stock of FFBW, Inc.

The cost of the reorganization and the issuing of the common stock were deferred and deducted from the sales proceeds of the offering. Reorganization costs of $1,394 were recognized.

At March 31, 2018, the significant assets of the Company were the capital stock of the Bank, and a loan to the First Federal Bank of Wisconsin Employee Stock Ownership Plan (“ESOP”). The liabilities of the Company were insignificant. The Company is subject to the financial reporting requirements of the Securities Exchange Act of 1934, as amended. The Company is subject to regulation and examination by the Board of Governors of the Federal Reserve System (“the Federal Reserve Board”).

First Federal Bank of Wisconsin is a community bank headquartered in Waukesha, Wisconsin that provides financial services to individuals and businesses from our offices in Waukesha, Brookfield, and the Bay View neighborhood.

Use of Estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the fair values of securities, fair value of financial instruments, the valuation of other real estate owned and the valuation of deferred income tax assets.

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash and balances due from banks and non-maturity deposits in the Federal Home Loan Bank of Chicago (FHLB). The Company may at times maintain balances at financial institutions that exceed federally insured limits. The Company has not experienced any losses in such accounts.

Available for Sale Securities

Securities classified as available for sale are those securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital requirements, and other similar factors. Securities classified as available for sale are carried at fair value. Unrealized gains or losses are reported as increases or decreases in other comprehensive income, net of the related deferred tax effect. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. Gains and losses on the sale of securities are recorded on the trade date and determined using the specific-identification method.

Declines in fair value of securities that are deemed to be other than temporary, if applicable, are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers the length of time and the extent to which fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient enough to allow for any anticipated recovery in fair value.

Loans Acquired in a Transfer

The Company acquires loans (including debt securities) individually and in groups or portfolios. These loans are initially measured at fair value with no allowance for loan losses. The Company's allowance for loan losses on all acquired loans reflect only those losses incurred subsequent to acquisition.

Certain acquired loans may have experienced deterioration of credit quality between origination and the Company's acquisition of the loans. At acquisition, the Company reviews each loan to determine whether there is evidence of deterioration of credit quality since origination and if it is probable that the Company will be unable to collect all amounts due according to the loan's contractual terms. If both conditions exist, the Company determines whether each such loan is to be accounted for individually or whether such loans will be assembled into pools of loans based on common risk characteristics (for example, credit score, loan type, and date of origination). The Company considers expected prepayments and estimates the amount and timing of undiscounted principal, interest, and other cash flows expected at acquisition for each loan and aggregated pool of loans. The excess of the loan's or pool's scheduled contractual principal and interest payments over all cash flows expected at acquisition is calculated as the nonaccretable difference. The excess of cash flows expected to be collected over the fair value of each loan or pool (accretable yield) is accreted into interest income over the remaining life of the loan or pool.

At each reporting date, the Company continues to estimate cash flows expected to be collected for each loan or pool. If expected cash flows have decreased from the acquisition date estimate, the Company recognizes an allowance for loan losses. If expected cash flows have increased from the acquisition date estimate, the Company increases the amount of accretable yield to be recognized as interest income over the remaining life of the loan or pool.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff generally are reported at their outstanding unpaid principal balances adjusted for deferred loan fees and costs, charge-offs, and an allowance for loan losses. Interest on loans is accrued and credited to income based on the unpaid principal balance. Loan-origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

The accrual of interest on loans is discontinued when, in the opinion of management, there is an indication that the borrower may be unable to make payments as they become due. When loans are placed on nonaccrual status or charged off, all unpaid accrued interest is reversed against interest income. The interest on these loans is subsequently accounted for on the cash-basis or cost-recovery method until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses

The allowance for loan losses is maintained at the level considered adequate by management to provide for losses that are probable as of the balance sheet date. The allowance for loan losses is established through a provision for loan losses charged to expense as losses are estimated to have occurred. Loan losses are charged against the allowance when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. In determining the adequacy of the allowance balance, the Company makes evaluations of the loan portfolio and related off-balance sheet commitments, considers current economic conditions and historical loss experience, and reviews specific problem loans and other factors.

When establishing the allowance for loan losses, management categorizes loans into risk categories generally based on the nature of the collateral and the basis of repayment. These risk categories and their relevant risk characteristics are as follows:

Commercial development: These loans are secured by vacant land and/or property that are in the process of improvement. Repayment of these loans can be dependent on the sale of the property to third parties or the successful completion of the improvements by the builder for the end user. Construction loans include not only construction of new structures, but loans originated to finance additions to or alterations of existing structures. Until a permanent loan originates, or payoff occurs, all commercial construction loans secured by real estate are reported in this loan pool. Development loans also have the risk that improvements will not be completed on time, or in accordance with specifications and projected costs.

Commercial real estate: These loans are primarily secured by office and industrial buildings, warehouses, small retail shopping facilities, and various special purpose properties, including restaurants. These loans are subject to underwriting standards and processes similar to commercial and industrial loans. Loans to closely held businesses are generally guaranteed in full by the owners of the business. These loans are viewed primarily as cash flow loans and the repayment of these loans is largely dependent on the successful operation of the property. The cash flows of the borrowers, however, may not behave as forecasted and collateral securing loans may fluctuate in value due to the general economic factors or conditions specific to the real estate market, such as geographic location and/or purpose type.

Commercial and industrial: Commercial and industrial loans are extended primarily to small and middle market customers. Such credits typically comprise working capital loans, asset acquisition loans, and loans for other business purposes. Loans to closely held businesses are generally guaranteed in full by the owners of the business. Commercial and industrial loans are made based primarily on the historical and projected cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of the borrowers, however, may not behave as forecasted and collateral securing loans may fluctuate in value due to economic or individual performance factors. Minimum standards and underwriting guidelines have been established for commercial and industrial loans.

1-4 family owner-occupied: These loans are generally to individuals and are underwritten by evaluating the credit history of the borrower, the ability of the borrower to meet the debt service requirements of the loan and total debt obligations, the underlying collateral, and the loan to collateral value. Also included in this category are junior liens on 1-4 family residential properties. Underwriting standards for single family loans are heavily influenced by statutory requirements, which include, but are not limited to, loan-to-value and affordability ratios, risk-based pricing strategies, and documentation requirements.

1-4 family investor-owned: These loans may be to individuals or businesses and are subject to underwriting standards and processes similar to commercial and industrial loans. These loans are viewed primarily as cash flow loans and the repayment of these loans is largely dependent on the successful operation of the property(ies). The cash flows of the borrowers, however, may not behave as forecasted and collateral securing loans may fluctuate in value due to the general economic factors or conditions specific to the real estate market, such as geographic location and/or purpose type.

Multifamily real estate: These loans include loans to finance non-farm properties with five or more units in structures primarily to accommodate households. Such credits are typically originated to finance the acquisition or refinancing of an apartment building. These loans are subject to underwriting standards and processes similar to commercial and industrial loans. Loans to closely held businesses are generally guaranteed in full by the owners of the business. These loans are viewed primarily as cash flow loans and the repayment of these loans is largely dependent on the successful operation of the subject multifamily property, with assumptions made for vacancy rates. Cash flows of the borrowers rely on the receipt of rental income from the tenants of the property who are themselves subject to fluctuations in national and local economic conditions and unemployment trends.

Consumer: These loans may take the form of installment loans, demand loans, or single payment loans, and are extended to individuals for household, family, and other personal expenditures. These loans generally include direct consumer automobile loans and credit card loans. These loans are generally smaller in size and are underwritten by evaluating the credit history of the borrower, the ability of the borrower to meet the debt service requirements of the loan and total debt obligations.

Management regularly evaluates the allowance for loan losses using the Company’s past loan loss experience, known and inherent risks in the loan portfolio, composition of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, current economic conditions, and other relevant factors. This evaluation is inherently subjective since it requires material estimates that may be susceptible to significant change.

A loan is impaired when, based on current information, it is probable that the Company will not collect all amounts due in accordance with the contractual terms of the loan agreement. Management determines whether a loan is impaired on a case-by-case basis, taking into consideration the payment status, collateral value, length and reason of any payment delays, the borrower’s prior payment record, and any other relevant factors. Large groups of smaller-balance homogeneous loans, such as residential mortgage and consumer loans, are collectively evaluated in the allowance for loan losses analysis and are not subject to impairment analysis unless such loans have been subject to a restructuring agreement. Specific allowances for impaired loans are based on discounted cash flows of expected future payments using the loan’s initial effective interest rate or the fair value of the collateral if the loan is collateral dependent.

In addition, various regulatory agencies periodically review the allowance for loan losses. These agencies may require the Company to make additions to the allowance for loan losses based on their judgments of collectability based on information available to them at the time of their examination.

Troubled Debt Restructurings

Loans are accounted for as troubled debt restructurings when a borrower is experiencing financial difficulties that lead to a restructuring of the loan, and the Company grants a “concession” to the borrower that they would not otherwise consider. These concessions include a modification of terms such as a reduction of the stated interest rate or loan balance, a reduction of accrued interest, an extension of the maturity date at an interest rate lower than a current market rate for a new loan with similar risk, or some combination thereof to facilitate repayment. Troubled debt restructurings are considered impaired loans.

Foreclosed Assets

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value, less costs to sell, at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management, and the assets are carried at the lower of carrying amount or fair value less costs to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets.

Premises and Equipment

Depreciable assets are stated at cost less accumulated depreciation. Provisions for depreciation are computed on straight-line and accelerated methods over the estimated useful lives of the assets.

Federal Home Loan Bank Stock

The Company's investment in Federal Home Loan Bank ("FHLB") stock is carried at cost, which approximates fair value. The Company is required to hold the stock as a member of the FHLB, and transfer of the stock is substantially restricted. The stock is evaluated for impairment on an annual basis.

Income Taxes

Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and income tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.

As changes in tax laws or rates are enacted, deferred income tax assets and liabilities are adjusted through the provision for income taxes. The differences relate principally to the allowances for loan losses, deferred compensation, depreciation, FHLB stock dividends and non-accrual interest. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

The tax effects from an uncertain tax position can be recognized in the financial statements only if the position is more likely than not to be sustained on audit, based on the technical merits of the position. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Based on its evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in its financial statements.

The Company's policy is to recognize interest and penalties related to income tax issues as components of income tax expense. During the periods shown, the Company did not recognize any interest or penalties related to income tax expense in its statement of income.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Advertising

Advertising costs are expensed as incurred.

Other Comprehensive Income (Loss)

Other comprehensive loss is shown on the statements of comprehensive income (loss). The Company’s accumulated other comprehensive income (loss) is composed of the unrealized loss on securities available for sale, net of tax and is shown on the statements of equity. Reclassification adjustments out of other comprehensive loss for gains realized on sales of securities available for sale comprise the entire balance of “net gain on sale of securities” on the statements of income.

Off-Balance Sheet Financial Instruments

In the ordinary course of business, the Company has entered into off-balance-sheet financial instruments consisting of commitments to extend credit, unfunded commitments under lines of credit, and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable.

Life Insurance

The Company has purchased life insurance policies on certain key executives. Life insurance is measured at the amount that could be realized under the insurance contract as of the balance sheet date, which is generally the cash surrender value of the policy.

Subsequent Events

Management has reviewed the Company’s operations for potential disclosure or financial statement impacts related to events occurring after March 31, 2018, but prior to the release of these financial statements. Based on the results of this review, no subsequent event disclosure or financial statement impacts to these financial statements are required as of May 2, 2018.

Recent Accounting Pronouncements

The Company qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). For as long as the Company is an emerging growth company, it may choose to take advantage of exemptions from various reporting requirements applicable to other public companies. An emerging growth company may elect to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies, but must make such election when the Company is first required to file a registration statement. The Company has elected to use the extended transition period described above and intends to maintain its emerging growth company status as allowed under the JOBS Act.

The following Accounting Standards Updates (ASUs) have been issued by the Financial Accounting Standards Board (FASB) and may impact the Company's financial statements in future reporting periods.

ASU No. 2016-13, “Credit Losses (Topic 326).” ASU 2016-13 requires organizations to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently assessing the impact of adopting ASU 2016-13 on its financial statements.

ASU 2016-02 “Leases.” ASU 2016-02 affects any entity that enters into a lease and is intended to increase the transparency and comparability of financial statements among organizations. The ASU requires, among other changes, a lessee to recognize on its balance sheet a lease asset and a lease liability for those leases previously classified as operating leases. The lease asset would represent the right to use the underlying asset for the lease term and the lease liability would represent the discounted value of the required lease payments to the lessor. The ASU would also require entities to disclose key information about leasing arrangements. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. Management is currently evaluating the impact that ASU 2016-02 will have on the Company’s consolidated financial position, results of operations and disclosures.

ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”. The standard makes a number of changes to the recognition and measurement standards of financial instruments, including the following changes: 1) equity securities with a readily determinable fair value will have to be measured at fair value with changes in fair value recognized in net income; 2) entities that are public business entities will no longer be required to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost; and 3) entities that are public business entities will be required to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. This standard is effective for financial statements issued for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2018. The adoption of this standard is not expected to have a material impact on our financial condition or results of operations, except that the Company will no longer disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost.

ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The amendment supersedes and replaces nearly all existing revenue recognition guidance. Under the amended guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for annual and interim periods beginning after December 15, 2018. Adoption of ASU No. 2014-04 and ASU 2015-14 is not expected to have a material impact on the Company’s financial statements, but significant disclosures to the Notes thereto will be required.

Note 3 – Earnings Per Share

Earnings per share is based on net income divided by the weighted average number of shares outstanding during the period, including allocated and committed-to-be-released Employee Stock Ownership Plan (“ESOP”) shares.

	Three Months Ended March 31,
	2018			2017^*
Net income		123			*
Basic potential common shares
Weighted average shares outstanding		6,612,500			*
Weighted average unallocated Employee Stock Ownership Plan Shares		(254,103	)		*
Basic weighted average shares outstanding		6,358,397			*
Dilutive potential common shares		-			*
Dilutve weighted average shares outstanding		6,358,397			*
Basic earnings per share	$	0.02			*
Diluted earnings per share	$	0.02			*

* Earnings per share for the three months ended March 31, 2017 is not applicable because the public offering was completed in October 2017.

Note 4 – Available for Sale Securities

Amortized costs and fair values of available for sale securities are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
March 31, 2018
Obligations of the US government and US government sponsored agencies	$	1,957	$	5	$	(6	)	$	1,956
Obligations of states and political subdivisions		9,940		48		(121	)		9,867
Mortgage-backed securities		40,011		18		(913	)		39,116
Certificates of deposit		4,000		1		(57	)		3,944
Corporate debt securities		5,127		8		(65	)		5,070
Total available for sale securities	$	61,035	$	80	$	(1,162	)	$	59,953

December 31, 2017
Obligations of the US government and US government sponsored agencies	$	2,211	$	11	$	(2	)	$	2,220
Obligations of states and political subdivisions		13,102		104		(69	)		13,137
Mortgage-backed securities		33,908		14		(455	)		33,467
Certificates of deposit		4,000		6		(9	)		3,997
Corporate debt securities		5,171		29		(9	)		5,191
Total available for sale securities	$	58,392	$	164	$	(544	)	$	58,012

Fair values of securities are estimated based on financial models or prices paid for similar securities. It is possible interest rates could change considerably, resulting in a material change in estimated fair value.

The following table presents the portion of the Company's portfolio which has gross unrealized losses, reflecting the length of time that individual securities have been in a continuous unrealized loss position:

	Less Than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
March 31, 2018
Obligations of the US government and US government sponsored agencies	$	1,179	$	(6	)	$	-	$	-		$	1,179	$	(6	)
Obligations of states and political subdivisions		4,475		(62	)		2,628		(59	)		7,103		(121	)
Mortgage-backed securities		29,212		(579	)		8,817		(334	)		38,029		(913	)
Certificates of deposit		3,693		(57	)		-		-			3,693		(57	)
Corporate debt securities		3,962		(65	)		250		-			4,212		(65	)
Total	$	42,521	$	(769	)	$	11,695	$	(393	)	$	54,216	$	(1,162	)
December 31, 2017
Obligations of the US government and US government sponsored agencies	$	235	$	(2	)	$	-	$	-		$	235	$	(2	)
Obligations of states and political subdivisions		3,180		(23	)		2,660		(46	)		5,840		(69	)
Mortgage-backed securities		22,685		(213	)		9,270		(242	)		31,955		(455	)
Certificates of deposit		2,492		(9	)		-		-			2,492		(9	)
Corporate debt securities		2,683		(8	)		250		(1	)		2,933		(9	)
Total	$	31,275	$	(255	)	$	12,180	$	(289	)	$	43,455	$	(544	)

At March 31, 2018, the investment portfolio included 28 securities available for sale, which had been in an unrealized loss position for greater than twelve months, and 98 securities available for sale, which had been in an unrealized loss position for less than twelve months. At December 31, 2017, the investment portfolio included 27 securities available for sale, which had been in an unrealized loss position for greater than twelve months, and 73 securities available for sale, which had been in an unrealized loss position for less than twelve months. It is the opinion of management that the unrealized losses are a result of fluctuations in prevailing interest rates and a decrease in market liquidity and not an impairment in the credit quality of the investment. In addition, the Company does not have the intent to sell the securities, and it is more likely than not that it will not be required to sell the securities before the recovery of the losses. Based on this information, management believes the unrealized losses are temporary in nature.

The amortized cost and fair value of available for sale securities by contractual maturity are shown below. Expected maturities will differ from contractual maturities in mortgage-backed securities since the anticipated maturities are not readily determinable. Therefore, these securities are not included in the maturity categories in the following maturity summary listed below:

	March 31, 2018
	Amortized Cost		Fair Value
Due in one year or less	$	585	$	585
Due after one year through 5 years		8,050		7,992
Due after 5 years through 10 years		5,728		5,654
Due after 10 years		6,661		6,606

Subtotal	$	21,024	$	20,837
Mortgage-backed securities		40,011		39,116

Total	$	61,035	$	59,953

Proceeds from sales of available for sale securities during the three months ended March 31, 2018 and the year ended December 31, 2017 were $3,435 and $6,856, respectively. Gross realized gains, during the three months ended March 31, 2018 and the year ended December 31, 2017 on these sales amounted to $23 and $86, respectively. Gross realized losses on these sales were $15 and $66, during the three months ended March 31, 2018 and year ended December 31, 2017, respectively.

No securities were pledged at March 31, 2018 or December 31, 2017.

Note 5 – Loans

Major classifications of loans are as follows:

				December 31,
	March 31, 2018			2017
Commercial
Development	$	3,889		$	1,498
Real estate		56,973			53,202
Commercial and industrial		9,520			10,135
Residential real estate and consumer
1-4 family owner-occupied		49,018			47,448
1-4 family investor-owned		33,285			33,658
Multifamily		30,599			31,677
Consumer		1,743			1,613
Subtotal		185,027			179,231
Deferred loan fees		(69	)		(74	)
Loans in process		(6,669	)		(6,002	)
Allowance for loan losses		(1,809	)		(1,800	)
Net loans	$	176,480		$	171,355

Analysis of the allowance for loan losses for the three months ended March 31, 2018 and 2017 follows:

Three Months Ended	Commercial		Residential real estate and consumer			Total

Balance at December 31, 2017	$	660	$	1,140		$	1,800
Provision for loan losses		78		37			115
Loans charged off		-		(106	)		(106	)
Recoveries of loans previously charged off		-		-			-
Balance at March 31, 2018	$	738	$	1,071		$	1,809


Balance at December 31, 2016	$	348	$	1,130		$	1,478
Provision for loan losses		120		(69	)		51
Loans charged off		-		(86	)		(86	)
Recoveries of loans previously charged off		-		35			35
Balance at March 31, 2017	$	468	$	1,010		$	1,478

Allowance for loan losses at March 31, 2018:	Commercial		Residential real estate and consumer		Total
Individually evaluated for impairment	$	-	$	100	$	100
Collectively evaluated for impairment		738		971		1,709
Total allowance for loan losses	$	738	$	1,071	$	1,809

Allowance for loan losses at December 31, 2017:
Individually evaluated for impairment	$	-	$	179	$	179
Collectively evaluated for impairment		660		961		1,621
Total allowance for loan losses	$	660	$	1,140	$	1,800

March 31, 2018	Commercial		Residential real estate and consumer		Total
Loans:
Individually evaluated for impairment	$	189	$	1,728	$	1,917
Collectively evaluated for impairment		70,193		112,917		183,110
Total loans	$	70,382	$	114,645	$	185,027

December 31, 2017
Loans:
Individually evaluated for impairment	$	192	$	2,112	$	2,304
Collectively evaluated for impairment		64,643		112,284		176,927
Total loans	$	64,835	$	114,396	$	179,231

Analysis for loans evaluated for impairment as of March 31, 2018 and December 31, 2017, follows:

As of March 31, 2018	Principal Balance		Recorded Investment		Related Allowance		Average Investment		Interest Recognized
Loan with related allowance for loan losses:
Residential real estate and consumer
1-4 family investor-owned	$	102	$	100	$	100	$	100	$	-

Loans with no related allowance for loan losses:
Commercial
Commercial and industrial		194		189		-		190		1
Residential real estate and consumer
1-4 family owner-occupied		1,169		1,103		-		1,110		6
1-4 family investor-owned		704		525		-		613		5
Total loans with no related allowance		2,067		1,817		-		1,913		12
Total impaired loans	$	2,169	$	1,917	$	100	$	2,013	$	12

As of December 31, 2017	Principal Balance		Recorded Investment		Related Allowance		Average Investment		Interest Recognized
Loan with related allowance for loan losses:
Residential real estate and consumer
1-4 family investor-owned	$	375	$	330	$	179	$	312	$	8

Loans with no related allowance for loan losses:
Commercial
Commercial and industrial		198		192		-		204		-
Residential real estate and consumer
1-4 family owner-occupied		1,158		1,099		-		1,443		1
1-4 family investor-owned		716		683		-		1,289		24
Total loans with no related allowance		2,072		1,974		-		2,936		25
Total impaired loans	$	2,447	$	2,304	$	179	$	3,248	$	33

As of December 31, 2017, approximately $50 is committed to one impaired loan relationship to finance costs relating to the disposal of several properties. At March 31, 2018, no additional funds are committed to be advanced in connection with impaired loans.

The Company regularly evaluates various attributes of loans to determine the appropriateness of the allowance for loan losses. The credit quality indicators monitored differ depending on the class of loan.

Commercial loans are generally evaluated using the following internally prepared ratings:

“Pass” ratings are assigned to loans with adequate collateral and debt service ability such that collectability of the contractual loan payments is highly probable.

“Special mention” ratings are assigned to loans where management has some concern that the collateral or debt service ability may not be adequate, though the collectability of the contractual loan payments is still probable.

“Substandard” ratings are assigned to loans that do not have adequate collateral and/or debt service ability such that collectability of the contractual loan payments is no longer probable.

“Doubtful” ratings are assigned to loans that do not have adequate collateral and/or debt service ability, and collectability of the contractual loan payments is unlikely.

Residential real estate and consumer loans are generally evaluated based on whether or not the loan is performing according to the contractual terms of the loan.

Information regarding the credit quality indicators most closely monitored for commercial loans by class as of March 31, 2018 and December 31, 2017, follows:

	Pass		Special Mention		Substandard		Doubtful		Totals
March 31, 2018
Development	$	3,889	$	-	$	-	$	-	$	3,889
Real estate		55,684		1,289		-		-		56,973
Commercial and industrial		8,923		484		113		-		9,520
1-4 family investor-owned		31,864		1,279		142		-		33,285
Multifamily		30,599		-		-		-		30,599
Totals	$	130,959	$	3,052	$	255	$	-	$	134,266
December 31, 2017
Development	$	1,498	$	-	$	-	$	-	$	1,498
Real estate		51,939		1,263		-		-		53,202
Commercial and industrial		9,435		586		114		-		10,135
1-4 family investor-owned		31,964		1,449		149		96		33,658
Multifamily		31,677		-		-		-		31,677
Totals	$	126,513	$	3,298	$	263	$	96	$	130,170

Information regarding the credit quality indicators most closely monitored for residential real estate and consumer loans by class as of March 31, 2018 and December 31, 2017, follows:

	Performing		Non-performing		Totals
March 31, 2018
1-4 family owner-occupied		47,915		1,103		49,018
Consumer		1,743		-		1,743
	$	49,658	$	1,103	$	50,761
December 31, 2017
1-4 family owner-occupied		46,349		1,099		47,448
Consumer		1,613		-		1,613
	$	47,962	$	1,099	$	49,061

Loan aging information as of March 31, 2018, follows:

			Loans Past Due		Loans Past Due				Nonaccrual
March 31, 2018	Current Loans		30-89 Days		90+ Days		Total Loans		Loans
Commercial
Development	$	3,889	$	-	$	-	$	3,889	$	-
Real estate		56,973		-		-		56,973		-
Commercial and industrial		9,407		-		113		9,520		113
Residential real estate and consumer
1-4 family owner-occupied		48,581		368		69		49,018		587
1-4 family investor-owned		33,143		-		142		33,285		242
Multifamily		30,599		-		-		30,599		-
Consumer		1,679		64		-		1,743		-
Total	$	184,271	$	432	$	324	$	185,027	$	942

Loan aging information as of December 31, 2017, follows:

			Loans Past Due		Loans Past Due				Nonaccrual
December 31, 2017	Current Loans		30-89 Days		90+ Days		Total Loans		Loans
Commercial
Development	$	1,498	$	-	$	-	$	1,498	$	-
Real estate		53,202		-		-		53,202		-
Commercial and industrial		9,946		75		114		10,135		114
Residential real estate and consumer
1-4 family owner-occupied		46,943		436		69		47,448		580
1-4 family investor-owned		33,209		205		244		33,658		549
Multifamily		31,677		-		-		31,677		-
Consumer		1,607		6		-		1,613		-
Total	$	178,082	$	722	$	427	$	179,231	$	1,243

There were no loans past due ninety days or more and still accruing interest as of March 31, 2018 and December 31, 2017.

When, for economic or legal reasons related to the borrower’s financial difficulties, the Company grants a concession to the borrower that the Company would not otherwise consider, the modified loan is classified as a troubled debt restructuring. Loan modifications may consist of forgiveness of interest and/or principal, a reduction of the interest rate, interest-only payments for a period of time, and/or extending amortization terms. During the three months ended and as of March 31, 2018, there was no new troubled debt restructurings. No troubled debt restructurings defaulted within 12 months of their modification date during the three months ended March 31, 2018 consisting of 1-4 family investor-owned properties. During the year ended December 31, 2017, the Company had two 1 – 4 family investor-owned properties totaling $331 default that were restructured within twelve months. $82 was charged to the allowance for loan losses relating to these properties.

Management regularly monitors impaired loan relationships. In the event facts and circumstances change, an additional provision for loan losses may be necessary.

Note 6 – Deposits

The composition of deposits are as follows:

	March 31,		December 31,
	2018		2017

Non-interest bearing checking	$	26,523	$	22,271
Interest bearing checking		4,674		4,017
Money market		54,444		54,472
Statement savings accounts		15,475		14,030
Health savings accounts		11,714		11,335
Certificates of deposit		74,310		76,788

Total	$	187,140	$	182,913

Certificates of deposit that meet or exceed the FDIC insurance limit two hundred fifty thousand dollars totaled $11,815 and $12,424 as of March 31, 2018 and December 31, 2017, respectively.

The scheduled maturities of certificates of deposit are as follows as of March 31, 2018:

2018	$	35,305
2019		24,270
2020		8,436
2021		4,730
2022		1,431
Thereafter		138

Total	$	74,310

Note 7 – FHLB Advances

FHLB advances consist of the following:

	March 31, 2018			December 31, 2017
	Rates	Amount		Rates	Amount
Fixed rate, fixed term advances	1.42% - 1.92%		4,750	1.42% - 1.92%		4,750
Fixed term advances with floating spread	1.23% - 1.92%		8,000	1.39% - 1.96%		8,000
			12,750			12,750

The following is a summary of scheduled maturities of fixed term FHLB advances as of March 31, 2018:

	Fixed Rate Advances					Adjustable Rate Advances
	Weighted Average Rate			Amount		Weighted Average Rate			Amount		Total Amount

2018		-			-		1.23	%		2,000	$	2,000
2019		1.78	%		2,750		1.42	%		2,000	$	4,750
2020		1.62	%		2,000		1.57	%		2,000	$	4,000
2021		-			-		1.92	%		2,000	$	2,000

Total		1.71	%	$	4,750		1.54	%	$	8,000	$	12,750

Actual maturities may differ from the scheduled principal maturities due to call options on the various advances. The Company has a master contract agreement with the FHLB that provides for a borrowing up to the lesser of a determined multiple of FHLB stock owned or a determined percentage of the book value of the Company’s qualifying 1-4 family, multifamily, and commercial real estate loans. The Company pledged approximately $150,024 and $135,760 of 1-4 family, multifamily, and commercial real estate loans to secure FHLB advances at March 31, 2018 and December 31, 2017, respectively. FHLB provides both fixed and floating rate advances. Floating rates are tied to short-term market rates of interest, such as LIBOR, Federal funds or Treasury Bill rates. Fixed rate advances are priced in reference to market rates of interest at the time of the advance, namely the rates that FHLB pays to borrowers at various maturities. FHLB advances are subject to a prepayment penalty if they are repaid prior to maturity. FHLB advances are also secured by $512 and $514 of FHLB stock owned by the Company at March 31, 2018 and December 31, 2017, respectively.

At March 31, 2018 and December 31, 2017, the Company’s available and unused portion of this borrowing agreement was $2,000. Additionally, the Company has a fluctuating $5,000 letter of credit under this agreement, which collateralizes certain public deposits. In addition, the Company has a $7,000 federal funds line of credit through Bankers’ Bank of Wisconsin, which was not drawn on as of March 31, 2018 or December 31, 2017. The Company also has the authority to borrow through the Federal Reserve’s Discount Window.

Note 8 – Employee Stock Ownership Plan

The Company maintains a leveraged employee stock ownership plan (“ESOP”) that covers substantially all employees. The ESOP was established in conjunction with the Company’s stock offering completed in October 2017 and operates on a plan year ending September 30. The loan to fund the acquisition of stock by the ESOP was made by the Company. The Bank makes annual contributions to the ESOP equal to the ESOP’s debt service. The ESOP shares initially were pledged as collateral for this debt. As the debt is repaid, shares are released from collateral and allocated to active participants, based on the proportion of debt service paid in the year. Because the debt is intercompany, it is eliminated in consolidation for presentation in these financial statements. The shares pledged as collateral are reported as unearned ESOP shares in the balance sheet. As shares are committed to be released from collateral and allocated to active participants, the Company reports compensation expense equal to the current market price of the shares and the shares will become outstanding for earnings-per-shares (EPS) computations. During the quarter ended March 31, 2018, 3,240 shares were committed to be released. During the quarter ended March 31, 2018, the average fair value per share of stock was $10.92 resulting in total ESOP compensation expense of $35 for the quarter ended March 31, 2018. The ESOP shares as of March 31, 2018 and December 31, 2017 were as follows:

	March 31, 2018		December 31, 2017
Shares committed to be released and allocated to participants		6,187		2,947
Total unallocated shares		253,023		256,263
Total ESOP shares		259,210		259,210

Note 9 – Regulatory Capital Ratios

The Bank is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of Common Equity Tier 1, Tier 1, and Total capital to risk-weighted assets and of Tier 1 capital to average assets. It is management's opinion, as of December 31, 2017 and as of March 31, 2018, that the Bank meets all applicable capital adequacy requirements.

As of March 31, 2018, and December 31, 2017, the Bank is categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum regulatory capital ratios as set forth in the table. There are no conditions or events since March 31, 2018 that management believes have changed the Bank's category.

The Bank's actual capital amounts and ratios are presented in the following tables:

To Be Well Capitalized

Actual

For Capital Adequacy
Purposes

Under Prompt
Corrective Action
Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

March 31, 2018

Common Equity Tier 1 capital (to risk-weighted assets)

47,699

26.10

> 8,225

> 4.50%

> 11,881

> 6.50%

Tier 1 capital (to risk-weighted assets)

47,699

26.10

> 10,967

> 6.00

> 14,622

> 8.00

Total capital (to risk-weighted assets)

49,508

27.09

> 14,622

> 8.00

> 18,278

> 10.00

Tier 1 capital (to average assets)

47,699

18.76

> 10,196

> 4.00

> 12,746

> 5.00

December 31, 2017

Common Equity Tier 1 capital (to risk-weighted assets)

47,513

26.82

> 7,973

> 4.50%

> 11,517

> 6.50%

Tier 1 capital (to risk-weighted assets)

47,513

26.82

> 10,631

> 6.00

> 14,174

> 8.00

Total capital (to risk-weighted assets)

49,313

27.83

> 14,174

> 8.00

> 17,718

> 10.00

Tier 1 capital (to average assets)

47,513

17.20

> 11,051

> 4.00

> 13,813

> 5.00

Note 10 – Fair Value Measurements

Accounting standards describe three levels of inputs that may be used to measure fair value (the fair value hierarchy). The level of an asset or liability within the fair value hierarchy is based on the lowest level of input significant to the fair value measurement of that asset or liability.

Following is a brief description of each level of the fair value hierarchy:

Level 1 - Fair value measurement is based on quoted prices for identical assets or liabilities in active markets.

Level 2 - Fair value measurement is based on: (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active; or (3) valuation models and methodologies for which all significant assumptions are or can be corroborated by observable market data.

Level 3 - Fair value measurement is based on valuation models and methodologies that incorporate at least one significant assumption that cannot be corroborated by observable market data. Level 3 measurements reflect the Company’s estimates about assumptions market participants would use in measuring fair value of the asset or liability.

Some assets and liabilities, such as available for sale securities, are measured at fair value on a recurring basis under accounting principles generally accepted in the United States. Other assets and liabilities, such as impaired loans, may be measured at fair value on a nonrecurring basis.

Following is a description of the valuation methodology used for each asset measured at fair value on a recurring or nonrecurring basis, as well as the classification of the asset within the fair value hierarchy.

Available for sale securities – Available for sale securities may be classified as Level 1 or Level 2 measurements within the fair value hierarchy. Level 1 securities include equity securities traded on a national exchange. The fair value measurement of a Level 1 security is based on the quoted price of the security. Level 2 securities include U.S. government and agency securities, obligations of states and political subdivisions, corporate debt securities, and mortgage-related securities. The fair value measurement of a Level 2 security is obtained from an independent pricing service and is based on recent sales of similar securities and other observable market data.

Information regarding the fair value of assets measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017 follows:

Recurring Fair Value Measurements Using

Assets Measured at

Quoted Prices in
Active Markets for
Identical Instruments

Significant Other
Observable Inputs

Significant
Unobservable Inputs

Fair Value

(Level 1)

(Level 2)

(Level 3)

March 31, 2018

Assets - Available for sale securities

59,953

December 31, 2017

Assets - Available for sale securities

58,012

Loans - Loans are not measured at fair value on a recurring basis. However, loans considered to be impaired may be measured at fair value on a nonrecurring basis. The fair value measurement of an impaired loan that is collateral dependent is based on the fair value of the underlying collateral. All other impaired loan measurements are based on the present value of expected future cash flows discounted at the applicable effective interest rate and, thus, are not fair value measurements. Fair value measurements of underlying collateral that utilize observable market data, such as independent appraisals reflecting recent comparable sales are considered Level 2 measurements. Other fair value measurements that incorporate estimated assumptions market participants would use to measure fair value are considered Level 3 measurements.

Foreclosed Assets – Real estate acquired through or in lieu of loan foreclosure are not measured at fair value on a recurring basis. However, foreclosed assets are initially measured at fair value (less estimated costs to sell) when they are acquired and may also be measured at fair value (less estimated costs to sell) if they become subsequently impaired. The fair value measurement for each asset may be obtained from an independent appraiser or prepared internally. Fair value measurements obtained from independent appraisers generally utilize a market approach based on sales of comparable assets and/or an income approach. Such measurements are usually considered Level 2 measurements. However, management routinely evaluates fair value measurements of independent appraisers by comparing actual selling prices to the most recent appraisals. If management determines significant adjustments should be made to the independent appraisals based on these evaluations, these measurements are considered Level 3 measurements. Fair value measurements prepared internally are based on management’s comparisons to sales of comparable assets, but include significant unobservable data and are therefore considered Level 3 measurements.

Information regarding the fair value of assets measured at fair value on a nonrecurring basis as of March 31, 2018 and December 31, 2017 follows:

			Nonrecurring Fair Value Measurements Using
	Assets Measured at		Quoted Prices in Active Markets for Identical Instruments		Significant Other Observable Inputs		Significant Unobservable Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)

As of March 31, 2018
Assets:
Loans		-		-		-		-
Foreclosed assets		306		-		-		306

As of December 31, 2017
Assets :
Loans		151		-		-		151
Foreclosed assets		619		-		-		619

The Company estimates fair value of all financial instruments regardless of whether such instruments are measured at fair value. The following methods and assumptions were used by the Company to estimate fair value of financial instruments not previously discussed.

Cash and cash equivalents - Fair value approximates the carrying value.

Loans held for sale - Fair value is based on commitments on hand from investors or prevailing market prices.

Loans - Fair value of variable rate loans that reprice frequently is based on carrying values. Fair value of other loans is estimated by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings. Fair value of impaired and other nonperforming loans is estimated using discounted expected future cash flows or the fair value of underlying collateral, if applicable.

FHLB stock - Fair value is the redeemable (carrying) value based on the redemption provisions of the Federal Home Loan Bank.

Accrued interest receivable and payable - Fair value approximates the carrying value.

Cash value of life insurance - Fair value is based on reported values of the assets.

Deposits and advance payments by borrowers for taxes and insurance - Fair value of deposits with no stated maturity, such as demand deposits, savings, and money market accounts, including advance payments by borrowers for taxes and insurance, by definition, is the amount payable on demand on the reporting date. Fair value of fixed rate time deposits is estimated using discounted cash flows applying interest rates currently being offered on similar time deposits.

FHLB advances - Fair value of fixed rate, fixed term borrowings is estimated by discounting future cash flows using the current rates at which similar borrowings would be made. Fair value of borrowings with variable rates or maturing within 90 days approximates the carrying value of these borrowings.

Off-balance-sheet instruments - Fair value is based on quoted market prices of similar financial instruments where available. If a quoted market price is not available, fair value is based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and the counterparty’s credit standing. Since the estimated fair value of off-balance-sheet instruments is not material, no amounts are presented in the following schedule.

The carrying value and estimated fair value of financial instruments at March 31, 2018 and December 31, 2017 follow:

	March 31, 2018
	Carrying Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents		9,200		9,200		-		-
Available for sale securities		59,953		-		59,953		-
Loans held for sale		-		-		-		-
Loans		176,480		-		-		176,296
Accrued interest receivable		808		808		-		-
Cash value of life insurance		6,604		-		-		6,604
FHLB stock		512		-		-		512

Financial liabilities:
Deposits		187,140		112,830		-		73,425
Advance payments by borrowers for taxes and insurance		426		426		-		-
FHLB advances		12,750		-		-		12,509
Accrued interest payable		211		211		-		-

	December 31, 2017
	Carrying Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents		11,813		11,813		-		-
Available for sale securities		58,012		-		58,012		-
Loans held for sale		109		-		109		-
Loans		171,355		-		-		171,729
Accrued interest receivable		782		782		-		-
Cash value of life insurance		6,558		-		-		6,558
FHLB stock		514		-		-		514

Financial liabilities:
Deposits		182,913		106,125		-		76,099
Advance payments by borrowers for taxes and insurance		36		36		-		-
FHLB advances		12,750		-		-		12,597
Accrued interest payable		37		37		-		-

Limitations – The fair value of a financial instrument is the current amount that would be exchanged between market participants, other than in a forced liquidation. Fair value is best determined based on quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value of other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Consequently, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

Management’s discussion and analysis of the financial condition and results of operations at and for the three months ended March 31, 2018 and 2017 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing on Part I, Item 1 of this quarterly report on Form 10-Q.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” and words of similar meaning. These forward-looking statements include, but are not limited to:

statements of our goals, intentions and expectations;

statements regarding our business plans, prospects, growth and operating strategies;

statements regarding the quality of our loan and investment portfolios; and

estimates of our risks and future costs and benefits.

These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

general economic conditions, either nationally or in our market areas, that are worse than expected;

changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;

our ability to access cost-effective funding;

fluctuations in real estate values and both residential and commercial real estate market conditions;

demand for loans and deposits in our market area;

our ability to implement and change our business strategies;

competition among depository and other financial institutions;

inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make;

adverse changes in the securities or secondary mortgage markets;

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements, including as a result of Basel III;

the impact of the Dodd-Frank Act and the implementing regulations;

changes in the quality or composition of our loan or investment portfolios;

technological changes that may be more difficult or expensive than expected;

the inability of third-party providers to perform as expected;

our ability to manage market risk, credit risk and operational risk in the current economic environment;

our ability to enter new markets successfully and capitalize on growth opportunities;

our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;

changes in consumer spending, borrowing and savings habits;

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;

our ability to retain key employees;

our compensation expense associated with equity allocated or awarded to our employees; and

changes in the financial condition, results of operations or future prospects of issuers of securities that we own.

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

Critical Accounting Policies

There are no material changes to the critical accounting policies disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017

Comparison of Financial Condition at March 31, 2018 and December 31, 2017

Total Assets. Total assets increased $4.1 million, or 1.6%, to $260.6 million at March 31, 2018 from $256.5 million at December 31, 2017. The increase resulted primarily due to the increase in loans outstanding of $5.1 million funded primarily by deposit growth as well as cash and due from banks.

Cash and due from banks. Cash and due from banks decreased $675,000, or 20.6%, to $2.6 million at March 31, 2018 from $3.3 million at December 31, 2017. The decrease resulted primarily from deploying the funds for increased loan growth.

Fed funds sold. Fed funds sold decreased $1.9 million, or 22.7%, to $6.6 million at March 31, 2018 from $8.5 million at December 31, 2017. The decrease resulted primarily from purchases of available for sale securities.

Net Loans. Net loans increased $5.1 million, or 3.0%, to $176.5 million at March 31, 2018 from $171.4 million at December 31, 2017. The increase resulted primarily from increases in commercial real estate loans of $3.8 million, or 7.1%, and commercial development loans of $2.4 million, or 159.6%.

During the quarter ended March 31, 2018, we sold $2.2 million of one- to four family, owner-occupied residential real estate loans, on a servicing-released basis. Subject to market and economic conditions, management intends to continue this sales activity in future periods to generate gain on sale of loans income and manage interest rate risk.

Available for sale securities. Available for sale securities increased $2.0 million, or 3.3%, to $60.0 million at March 31, 2018 from $58.0 million at December 31, 2017. This was a result of purchases of $7.9 million offset by sales of $3.4 million as well as maturities, normal paydowns and amortization.

FHLB stock. The FHLB repurchased $2,000 of its stock during the first three months of 2018, reducing the balance 0.4% from $514,000 at December 31, 2017 to $512,000 at March 31, 2018.

Deposits. Deposits increased $4.2 million, or 2.3%, to $187.1 million at March 31, 2018 from $182.9 million at December 31, 2017. Noninterest-bearing checking accounts increased $4.3 million, or 19.1%, to $26.5 million as of March 31, 2018 compared to $22.3 million as of December 31, 2017. Interest-bearing checking accounts increased $657,000, or 16.4%, to $4.7 million at March 31, 2018 from $4.0 million at December 31, 2017. Additionally, money market accounts decreased $28,000 to $54.4 million at March 31, 2018, compared to $54.5 million at December 31, 2017, while savings accounts increased $1.4 million to $15.4 million at March 31, 2018, compared to $14.0 million at December 31, 2017. Certificates of deposit decreased $2.5 million, or 3.2% from $76.8 million as of December 31, 2017 to $74.3 million as of March 31, 2018. Health savings accounts increased $379,000 to $11.7 million at March 31, 2018 from $11.4 million as of December 31, 2017.

Borrowings. Borrowings, consisting entirely of FHLB advances, remained consistent at $12.8 million at March 31, 2018 and December 31, 2017. The aggregate cost of outstanding advances from the FHLB was 1.66% at March 31, 2018, compared to the cost of deposits of 0.86% at that date.

Other liabilities. Other liabilities decreased $219,000, or 17.4%, to $1.0 million at March 31, 2018 from $1.3 million at December 31, 2017.

Total Equity. Total equity decreased $450,000, or 0.8%, to $59.0 million at March 31, 2018 from $59.5 million at December 31, 2017. The decrease resulted from the net unrealized loss in available for sale securities, offset in part by net income of $123,000 for the quarter.

Nonperforming Loans, Potential Problem Loans and Foreclosed Properties. We practice early identification of non-accrual and problem loans in order to minimize the Company’s risk of loss. Non-performing loans are defined as non-accrual loans and restructured loans that were 90 days or more past due at the time of their restructure, or when management determines that such classification is warranted. The accrual of interest income is generally discontinued when contractual payments have become 90 days past due or when management has serious doubts about further collectability of principal or interest. Cash receipts on non-accrual loans are used to reduce principal rather than being recorded as interest income. A TDR typically involves the granting of some concession to the borrower involving a loan modification, such as modifying the payment schedule or making interest changes. TDR loans may involve loans that have had a charge-off taken against the loan to reduce the carrying amount of the loan to fair market value as determined pursuant to ASC 310-10.

The following table identifies the various components of non-performing assets and other balance sheet information as of the dates indicated below and changes in the ALLL for the periods then ended:

	March 31, 2018 and Three Months Then Ended			December 31, 2017 and Twelve Months Then Ended			December 31, 2016 and Twelve Months Then Ended
	(in thousands)
Nonperforming assets:
Nonaccrual loans		942			1,243			2,899
Accruing loans past due 90 days or more		-			-			-
Total nonperforming loans ("NPLs")		942			1,243			2,899
Foreclosed assets		306			619			667
Total nonperforming assets ("NPAs")		1,248			1,862			3,566
Troubled Debt Restructurings ("TDRs")		1,451			1,630			5,167
Nonaccrual TDRs		873			969			2,887
Average outstanding loan balance		174,591			170,577			172,892
Loans, end of period		185,027			179,231			170,823
ALLL, at beginning of period		1,800			1,478			1,551
Loans charged off:
Commercial		-			-			-
Residential real estate and consumer		(106	)		(133	)		(917	)
Total loans charged off		(106	)		(133	)		(917	)
Recoveries of loans previously charged off:
Commercial		-			-			-
Residential real estate and consumer		-			36			-
Total recoveries of loans previous charged off		-			36			-
Net loans charged off ("NCOs'")		(106	)		(97	)		(917	)
Additions to ALLL via provision for loan losses charged to operations		115			419			844
ALLL, at end of period		1,809			1,800			1,478
Ratios:
ALLL to NCOs (annualized)		426.65	%		1855.67	%		161.18	%
NCOs (annualized) to average loans		0.24	%		0.06	%		0.53	%
ALLL to total loans		0.98	%		1.00	%		0.87	%
NPL to total loans		0.51	%		0.69	%		1.70	%
NPAs to total assets		0.48	%		0.73	%		1.48	%
Total Assets		260,603			256,481			241,555

Loans 30 to 89 days past due decreased $290,000 during the three month period ended March 31, 2018 to $432,000 compared to $722,000 at December 31, 2017, which management believes is indicative of a decreasing likelihood of loans migrating toward nonaccrual or nonperforming status in the future. We believe our credit and underwriting policies continue to support more effective lending decisions by the Company, which increases the likelihood of maintain loan quality going forward. Moreover, we believe the favorable trends regarding our nonperforming loans and nonperforming assets reflect our continued adherence to improved underwriting criteria and practices along with improvements in macroeconomic factors in our credit markets. We believe our current ALLL is adequate to cover probable losses in our current loan portfolio.

Non-performing loans of $942,000 at March 31, 2018, which included $873,000 of non-accrual troubled debt restructured loans, reflected a decrease of $301,000 from the non-performing loans balance of $1.2 million at December 31, 2017. The decrease in non-performing loans included charge offs of $106,000. These non-performing loan relationships are secured primarily by 1-4 family loans.

Our non-performing assets were $1.2 million at March 31, 2018, or 0.48% of total assets, compared to $1.9 million, or 0.74% of total assets at December 31, 2017. The decrease in non-performing assets since December 31, 2017 was primarily a result of a decrease in nonaccrual of $301,000 and foreclosed assets of $313,000. The decrease in nonaccrual included charge offs of $106,000.

Foreclosed assets decreased by $313,000, from $619,000 at December 31, 2017 to $306,000 at March 31, 2018. We continue to aggressively liquidate foreclosed assets as part of our overall credit risk strategy.

Net charge offs for the three month period ended March 31, 2018 were $106,000, compared to $51,000 for the prior year period. The ratio of annualized net charge-offs to average loans receivable was 0.24% for the three month period ended March 31, 2018, compared to 0.06% for the twelve months ended December 31, 2017. Net charge-offs increased during the current year to date period primarily a result of selling nonperforming assets.

Comparison of Operating Results for the Three Months Ended March 31, 2018 and March 31, 2017

General. We had net income of $123,000 for the three months ended March 31, 2018, compared to net income of $81,000 for the three months ended March 31, 2017, an increase of $42,000, or 51.9%. The increase in net income was the net effect of an increase in net interest income of $199,000, or 11.3%, an increase of $12,000, or 6.0%, in noninterest income, offset partially by an increase in the provision for loan losses of $64,000, or 125.5% and an increase in noninterest expense of $54,000, or 3.0%.

Interest and dividend income. Interest and dividend income increased $221,000, or 10.4%, to $2.3 million for the three months ended March 31, 2018 from $2.1 million for the three months ended March 31, 2017. The increase was primarily attributable to a $122,000 increase in interest on loans resulting from an increase of $6.8 million in the average balance of loans quarter to quarter with a 10 basis point increase in yield quarter to quarter. Additionally, we had an $87,000 increase in interest on available for sale securities, due to an increase in the average balance of available for sale securities of $12.2 million quarter to quarter with a yield increase of 11 basis points quarter to quarter.

Interest Expense. Interest expense increased $22,000, or 5.8%, to $399,000 for the three months ended March 31, 2018, from $377,000 for the three months ended March 31, 2017. Interest expense on borrowings, consisting entirely of FHLB advances, decreased $5,000, or 8.6%, to $53,000 during the three months ended March 31, 2018 from $58,000 during the three months ended March 31, 2017, as the average balance of borrowings decreased $7.0 million to $12.7 million for the three months ended March 31, 2018 from $19.7 million for the three months ended March 31, 2017, although the cost of borrowings increased 48 basis points to 1.66% for the three months ended March 31, 2018 from 1.18% for the three months ended March 31, 2017. Interest expense on interest-bearing deposits increased $27,000 quarter to quarter. The average cost of our interest-bearing deposits increased 10 basis points to 0.86% from 0.76%, while the average balance of interest-bearing deposits decreased by $8.0 million, or 4.8%, during the same period.

Net Interest Income. Net interest income increased $199,000, or 11.3%, to $2.0 million for the three months ended March 31, 2018 from $1.8 million for the three months ended March 31, 2017. Average net interest-earning assets increased $35.5 million to $67.1 million for the 2018 quarter from $31.6 million for the 2017 quarter. The increase was due primarily to the increase in loans as well as noninterest-bearing deposit accounts and equity. Our net interest rate spread decreased to 3.00% for the three months ended March 31, 2018 from 3.08% for the three months ended March 31, 2017, and our net interest margin increased to 3.25% for the 2018 quarter from 3.19% for the 2017 quarter.

Provision for Loan Losses. We recorded a provision for loan losses of $115,000 for the three months ended March 31, 2018, compared to a $51,000 provision for the three months ended March 31, 2017, an increase of $64,000, or 125.5%. The increase in the provision for loan losses in the 2018 quarter compared to the 2017 quarter was a result of charge-offs in the current quarter. The allowance for loan losses was $1.8 million, or 0.98% of total loans, at March 31, 2018, compared to $1.5 million, or 0.87% of total loans, at March 31, 2017. Classified (substandard, doubtful and loss) commercial loans decreased to $255,000 at March 31, 2018 from $635,000 at March 31, 2017. Total nonperforming loans decreased to $942,000 at March 31, 2018 from $1.7 million at March 31, 2017. Net charge-offs for the three months ended March 31, 2018 were $106,000, compared to $51,000 for the prior year period. At March 31, 2018, $618,000, or 65.6%, of the nonperforming loans were contractually current.

Noninterest Income. Noninterest income increased $12,000, or 6.0%, to $211,000 for the three months ended March 31, 2018 from $199,000 for the three months ended March 31, 2017. The increase resulted primarily from the increase in service charges and fees of $35,000, other income of $20,000 consisting primarily from the rental income from our Brookfield branch office, and net gain on sale of securities of $8,000 offset by a decrease in net gain on sale of loans of $47,000 and decrease of $4,000 in the increase in cash surrender value of insurance.

Noninterest Expense. Noninterest expense increased $54,000, or 3.0%, to $1.9 million for the three months ended March 31, 2018 from $1.8 million for the three months ended March 31, 2017. The increase was due to the increase in salaries and employee benefits of $41,000, data processing of $15,000, foreclosed assets expense of $38,000, primarily due to the sale of other real estate owned, and professional fees of $32,000 offset by a decrease in occupancy of equipment of $35,000 and other noninterest expense of $37,000, which primarily is a reduction in FDIC insurance expense.

Income Tax Expense. We recorded an income tax expense of $53,000 for the three months ended March 31, 2018 compared to an income tax expense of $2,000 for the three months ended March 31, 2017, an increase of $51,000, or 2550.0%. The increase reflected an increase of $93,000 in income before income taxes to $176,000 for the 2018 quarter compared to $83,000 for the 2017 quarter.

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Act”).

The Act amends the Internal Revenue Code to reduce corporate tax rates and modify various tax policies, credits, and deductions. The Act reduces the corporate federal tax rate from a maximum of 35% to a flat 21% rate, which is effective for the Company beginning January 1, 2018.

Analysis of Net Interest Income

Net interest income represents the difference between the income we earn on interest-earning assets and the interest expense we pay on interest-bearing liabilities. Net interest income also depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them. The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. Average balances are derived from daily average balances for all periods presented in the table. Non-accrual loans were included in the computation of average balances but have been reflected in the tables as loans carrying a zero yield. No tax-equivalent yield adjustments were made, as the effect thereof was not material. The yields set forth below include the effect of loans fees, discounts and premiums that are amortized or accreted to interest income.

	For the Three Months Ended March 31,
	2018								2017
	Average Outstanding Balance			Interest		Yield/ Rate			Average Outstanding Balance			Interest		Yield/ Rate
	(in thousands)								(in thousands)
Interest-earning assets:
Loans	$	174,591		$	1,975		4.52	%	$	167,837		$	1,853		4.42	%
Available for sale securities		59,787			363		2.43	%		47,624			276		2.32	%
Interest-bearing deposits		5,526			12		0.87	%		3,574			1		0.11	%
FHLB stock		513			4		3.12	%		935			3		1.28	%
Total interest-earning assets		240,417			2,354		3.92	%		219,970			2,133		3.88	%
Noninterest-earning assets		16,904								18,655
Allowance for loan losses		(1,810	)							(1,501	)
Total assets	$	255,511							$	237,124

Interest-bearing liabilities:
Demand accounts	$	4,230			3		0.28	%	$	4,962			6		0.48	%
Money market accounts		53,621			82		0.61	%		52,881			46		0.35	%
Savings accounts		15,606			8		0.21	%		17,035			5		0.12	%
Health savings accounts		11,579			7		0.24	%		11,667			7		0.24	%
Certificates of deposit		75,550			246		1.30	%		82,075			255		1.24	%
Total interest-bearing deposits		160,586			346		0.86	%		168,620			319		0.76	%
Borrowings		12,750			53		1.66	%		19,742			58		1.18	%
Total interest-bearing liabilities		173,336			399		0.92	%		188,362			377		0.80	%
Noninterest-bearing deposits		21,788								13,384
Other non-interest bearing liabilities		1,288								1,168
Total liabilities		196,412								202,914
Equity		59,099								34,210
Total liabilities and equity	$	255,511							$	237,124

Net interest income					1,955								1,756
Net interest rate spread							3.00	%							3.08	%
Net interest-earning assets		67,081								31,608
Net interest margin							3.25	%							3.19	%
Average of interest-earning assets to interest-bearing liabilities		139	%							117	%

Rate/Volume Analysis. The following table presents the dollar amount of changes in interest income and interest expense for the components of interest earning assets and interest-bearing liabilities that are presented in the preceding table. For each category of interest earning assets and interest-bearing liabilities, information is provided on changes attributable to: (1) changes in volume, which are changes in the average outstanding balances multiplied by the prior period rate (i.e. holding the initial rate constant); and (2) changes in rate, which are changes in average interest rates multiplied by the prior period volume (i.e. holding the initial balance constant). Changes due to both rate and volume which cannot be segregated have been allocated in proportion to the relationship of the dollar amounts of the change in each category.

	Quarters Ended March 31,
	2018 vs. 2017
	Increase (Decrease) Due to						Total Increase (Decrease)
	Volume			Rate
	(In thousands)

Interest-earning assets:
Loans	$	76		$	46		$	122
Available for sale securities		74			13			87
Interest-bearing deposits		4			7			11
FHLB Stock		(3	)		4			1
Total interest-earning assets	$	151		$	70		$	221

Interest-bearing liabilities:
Demand accounts	$	(1	)	$	(2	)	$	(3	)
Money market accounts		1			35			36
Savings accounts		(1	)		4			3
Health savings accounts		-			-			-
Certificates of deposit		(21	)		12			(9	)
Total deposits	$	(22	)	$	49		$	27

Borrowings		(29	)		24			(5	)

Total interest-bearing liabilities		(51	)		73			22

Change in net interest income	$	202		$	(3	)	$	199

Liquidity and Capital Resources. Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from maturities of securities. We also have the ability to borrow from the FHLB-Chicago. At March 31, 2018, we had $12.8 million outstanding in advances from the FHLB-Chicago. At March 31, 2018, due to the FHLB-Chicago’s repurchase of its stock, we had no available additional FHLB-Chicago advances.

Additionally, at March 31, 2018 we had a $7.0 million federal funds rate line of credit with the Bankers’ Bank of Wisconsin, of which zero was drawn at March 31, 2018.

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and cash equivalents and available for sale investment securities. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.

We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our current strategy to change our mix of deposits to become less reliant on certificates of deposit, we anticipate that we will continue to allow a significant portion of higher-costing certificates of deposit to run off at maturity. We also anticipate continued use of FHLB-Chicago advances as well as continuing to utilize non-core funding sources, such as the Certificate of Depository Registry Service (CDARS), as needed, to fund future loan growth and our operations.

At March 31, 2018, we exceeded all of our regulatory capital requirements with a Tier 1 leverage capital of $47.7 million, or 16.2% of adjusted total assets, which is above the well-capitalized required level of $14.7 million, or 5.0%; and total risk-based capital of $49.5 million, or 27.1% of risk-weighted assets, which is above the well-capitalized required level of $18.3 million, or 10.0%. Management is not aware of any conditions or events since the most recent notification that would change our category.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Not applicable, as the Registrant is a smaller reporting company.

Item 4.

Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of March 31, 2018. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Registrant’s disclosure controls and procedures were effective.

During the quarter ended March 31, 2018, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II – Other Information

Item 1.

Legal Proceedings

We are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on our financial condition or results of operations.

Item 1A.

Risk Factors

Not applicable, as the Registrant is a smaller reporting company.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a)

There were no sales of unregistered securities during the period covered by this Report.

(b)

Not applicable.

(c)

There were no issuer repurchases of securities during the period covered by this Report.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

Item 6.

Exhibits

3.1	Charter of FFBW, Inc. (1)

3.2	Bylaws of FFBW, Inc. (2)

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.0

The following materials for the quarter ended March 31, 2018, formatted in XBRL (Extensible Business Reporting Language): (i) Balance Sheets, (ii) Statements of Income, (iii) Statements of Comprehensive Income, (iv) Statements of Cash Flows, and (v) Notes to Financial Statements

(1)

Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1, as amended (Commission File No. 333-218736).

(2)

Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1, as amended (Commission File No. 333-218736).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		FFBW, INC.

Date: May 2, 2018		/s/ Edward H. Schaefer
		Edward H. Schaefer
		President and Chief Executive Officer


Date: May 2, 2018		/s/ Nikola B. Schaumberg
		Nikola B. Schaumberg
		Chief Financial Officer

FFBW, Inc. - FORM 10-Q - May 2, 2018

Attached files

FFBW, Inc. Reports