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Table of Contents

 

 

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, 2020

OR

 

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. 001-38778

 

 

1895 Bancorp of Wisconsin, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Federal   83-3178316

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

7001 West Edgerton Avenue

Greenfield, Wisconsin

  53220
(Address of Principal Executive Offices)   (Zip Code)

(414) 421-8200

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

  

Trading

Symbol(s)

  

Name of each exchange

on which registered

Common Stock, par value $0.01 per share    BCOW    The NASDAQ Stock Market, LLC

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  ☒    NO  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    YES  ☒    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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

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 Exchange Act).    YES  ☐    NO  ☒

4,876,677 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding as of March 31, 2020.

 

 

 

 


Table of Contents

1895 Bancorp of Wisconsin, Inc.

Form 10-Q

Table of Contents

 

         Page  

PART I. FINANCIAL INFORMATION

 

Item 1.

 

Financial Statements

     1  
  Consolidated Balance Sheets at March 31, 2020 (unaudited) and December 31, 2019      1  
  Consolidated Statements of Operations for the Three Months Ended March 31, 2020 and 2019 (unaudited)      2  
  Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2020 and 2019 (unaudited)      3  
  Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2020 (unaudited)      4  
  Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019 (unaudited)      5  
  Notes to Financial Statements (unaudited)      6  

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      29  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     39  

Item 4.

 

Controls and Procedures

     39  

PART II. OTHER INFORMATION

 

Item 1.

 

Legal Proceedings

     40  

Item 1A.

 

Risk Factors

     40  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     41  

Item 3.

 

Defaults Upon Senior Securities

     41  

Item 4.

 

Mine Safety Disclosures

     41  

Item 5.

 

Other Information

     41  

Item 6.

 

Exhibits

     41  
 

SIGNATURES

     42  


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1.

Financial Statements

1895 BANCORP OF WISCONSIN, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

 

     March 31,
2020
    December 31,
2019
 
     (unaudited)        
Assets     

Cash and due from banks

   $ 40,460     $ 11,507  

Fed funds sold

     1,448       200  
  

 

 

   

 

 

 

Cash and cash equivalents

     41,908       11,707  

Available for sale securities, stated at fair value

     66,905       71,375  

Marketable equity securities, stated at fair value

     2,044       2,553  

Loans held for sale

     1,248       685  

Loans, net of allowance for loan losses of $2,008 and $2,000 respectively

     302,968       310,674  

Premises and equipment, net

     6,616       6,681  

Mortgage servicing rights, net

     1,936       2,172  

Federal Home Loan Bank stock, at cost

     2,503       913  

Accrued interest receivable

     970       963  

Cash value of life insurance

     13,184       13,085  

Other assets

     7,629       7,201  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 447,911     $ 428,009  
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Deposits

     324,222       344,596  

Advance payments by borrowers for taxes and insurance

     5,422       1,681  

Federal Home Loan Bank advances

     55,614       17,623  

Accrued interest payable

     372       385  

Other liabilities

     3,610       5,059  
  

 

 

   

 

 

 

Total liabilities

     389,240       369,344  
  

 

 

   

 

 

 

Common stock, $0.01 par value, 90,000,000 shares authorized, 4,876,677 shares issued as of March 31, 2020 and December 31, 2019, respectively

     49       49  

Additional paid-in capital

     19,982       19,981  

Unallocated common stock of Employee Stock Ownership Plan, 166,752 and 168,507 shares at March 31, 2020 and December 31, 2019, respectively

     (1,668     (1,685

Less treasury stock, 17,500 and 0 shares at cost, at March 31, 2020 and December 31, 2019, respectively

     (175     —    

Retained earnings

     40,500       40,213  

Accumulated other comprehensive income (loss), net of income taxes

     (17     107  
  

 

 

   

 

 

 

Total stockholders’ equity

     58,671       58,665  
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 447,911     $ 428,009  
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

1


Table of Contents

1895 BANCORP OF WISCONSIN, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts) - Unaudited

 

     Three months ended
March 31,
 
     2020     2019  

Interest and dividend income:

  

Loans, including fees

   $ 3,413     $ 3,988  

Securities, taxable

     407       392  

Other

     41       65  
  

 

 

   

 

 

 

Total interest and dividend income

     3,861       4,445  
  

 

 

   

 

 

 

Interest expense:

    

Interest-bearing deposits

     850       1,180  

Borrowed funds

     110       123  
  

 

 

   

 

 

 

Total interest expense

     960       1,303  
  

 

 

   

 

 

 

Net interest income

     2,901       3,142  

Provision for loan losses

     —         —    
  

 

 

   

 

 

 

Net interest income after provision for loan losses

     2,901       3,142  
  

 

 

   

 

 

 

Noninterest income:

    

Service charges and other fees

     203       186  

Loan servicing, net

     (14     222  

Net gain on sale of loans

     654       124  

Net gain on sale of securities

     7        

Increase in cash surrender value of insurance

     99       100  

Other

     (343     118  
  

 

 

   

 

 

 

Total noninterest income

     606       750  
  

 

 

   

 

 

 

Noninterest expense:

    

Salaries and employee benefits

     1,684       2,427  

Foreclosed assets, net

     (9     7  

Advertising and promotions

     32       56  

Data processing

     183       206  

Occupancy and equipment

     373       458  

FDIC assessment

     19       93  

Other

     791       1,325  
  

 

 

   

 

 

 

Total noninterest expense

     3,073       4,572  
  

 

 

   

 

 

 

Income (loss) before income taxes

     434       (680

Income tax expense (benefit)

     147       (209
  

 

 

   

 

 

 

Net income (loss)

   $ 287     $ (471
  

 

 

   

 

 

 

Earnings per common share:

    

Basic

   $ 0.06     $ (0.10
  

 

 

   

 

 

 

Diluted

   $ 0.06     $ (0.10
  

 

 

   

 

 

 

Average common shares outstanding:

    

Basic

     4,704,660       4,701,149  

Diluted

     4,705,531       4,701,149  

See accompanying notes to the consolidated financial statements.

 

2


Table of Contents

1895 BANCORP OF WISCONSIN, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands) - Unaudited

 

     Three months ended
March 31,
 
     2020     2019  

Net income (loss)

   $ 287     $ (471
  

 

 

   

 

 

 

Other comprehensive income (loss):

    

Unrealized holding gains (losses) arising during the period

     (163     969  

Reclassification adjustment for gains realized in net income

     (7     —    
  

 

 

   

 

 

 

Other comprehensive income (loss) before tax effect

     (170     969  

Tax effect of other comprehensive income (loss) items

     (46     262  
  

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (124     707  
  

 

 

   

 

 

 

Comprehensive income

   $ 163     $ 236  
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

3


Table of Contents

1895 BANCORP OF WISCONSIN, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands) - Unaudited

 

     Common
stock
     Additional
paid-in
capital
     Treasury
Stock
    Unallocated
common
stock of
ESOP
    Retained
earnings
    Accumulated
other
comprehensive
income (loss)
    Total  

Balance as of January 1, 2019

   $ —        $ —        $ —       $ —       $ 39,764     $ (1,583   $ 38,181  

Net loss

     —          —          —         —         (471     —         (471

Other comprehensive income

     —          —          —         —         —         707       707  

Net proceeds from stock offering (4,876,677 shares issued)

     49        19,980        —         —         —         —         20,029  

Purchase of ESOP (175,528 shares purchased)

     —          —          —         (1,755     —         —         (1,755
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2019

   $ 49      $ 19,980      $ —       $ (1,755   $ 39,293     $ (876   $ 56,691  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of January 1, 2020

   $ 49      $ 19,981      $ —       $ (1,685   $ 40,213     $ 107     $ 58,665  

Net income

     —          —          —         —         287       —         287  

1895 Bancorp of Wisconsin, Inc. common stock held by PyraMax Bank reclassified to treasury stock

     —          —          (175     —         —         —         (175

Other comprehensive income

     —          —          —         —         —         (124     (124

ESOP shares committed to be released (1,755 shares)

     —          1        —         17       —         —         18  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2020

   $ 49      $ 19,982      $ (175   $ (1,668   $ 40,500     $ (17   $ 58,671  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

4


Table of Contents

1895 BANCORP OF WISCONSIN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) - Unaudited

 

     Three months ended
March 31,
 
     2020     2019  
     (unaudited)  

Cash flows from operating activities:

    

Net income (loss)

   $ 287     $ (471

Adjustments to reconcile net loss to net cash from operating activities:

    

Net amortization of investment securities

     68       63  

Depreciation

     167       172  

Net (gain) loss on sale of premises and equipment

     33       (97

Change in fair value of equity securities

     324       —    

Net gain on sale of available for sale securities

     (7     —    

Provision for (benefit from) deferred income tax

     186       (203

Originations of mortgage loans held for sale

     (27,365     (17,201

Proceeds from sales of mortgage loans held for sale

     27,580       16,863  

Net gain on sale of mortgage loans held for sale

     (654     (124

ESOP compensation

     18       —    

Net change in cash value of life insurance

     (99     (100

Changes in operating assets and liabilities:

    

Mortgage servicing rights

     236       (14

Accrued interest receivable and other assets

     (566     (106

Accrued interest payable and other liabilities

     (1,462     80  
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (1,254     (1,138
  

 

 

   

 

 

 

Cash Flows From Investing Activities

    

Proceeds from sales of available for sale securities

     279       —    

Maturities, prepayments, and calls of available for sale securities

     3,961       1,942  

Net decrease in loans

     7,582       9,747  

Net capital receipts (expenditures) for premises and equipment

     (135     396  

Cash paid, net of cash received for sale of branch

     —         (3,490

Net decrease (increase) in Federal Home Loan Bank stock

     (1,590     277  
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     10,097       8,872  
  

 

 

   

 

 

 

Cash Flows From Financing Activities

    

Net (decrease) increase in deposits

     (20,374     3,018  

Net increase in advance payments by borrowers for taxes and insurance

     3,741       3,093  

Proceeds from stock offering

     —         18,274  

Proceeds from issuance of Federal Home Loan Bank advances

     38,000       —    

Principal payments on Federal Home Loan Bank advances

     (9     (5,359
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     21,358       19,026  
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     30,201       26,760  

Cash and cash equivalents at beginning of period

     11,707       7,923  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 41,908     $ 34,683  
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Cash paid during the year for interest

   $ 952     $ 1,172  

Noncash activities:

    

Loans transferred to loans held for sale

   $ 124     $ —    

1895 Bancorp of Wisconsin, Inc. common stock held by PyraMax Bank reclassified to treasury stock

     175       —    
On January 4, 2019, the Company sold its West Mitchell Street branch. The sale consisted of premises and equipment and related deposit accounts at the branch. The Company received a premium of $114. In conjunction with the sale, the values of assets and liabilities were as follows:

 

Cash

     $ 3,490  

Premises and equipment

       686  

Deposits

       4,290  

See accompanying notes to the consolidated financial statements.

 

5


Table of Contents

NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION

1895 Bancorp of Wisconsin, Inc. (the “Company,” “we” or “our”) was incorporated under federal law on January 8, 2019 as part of the mutual holding company reorganization of PyraMax Bank, FSB (“PyraMax Bank”), for the purpose of becoming the savings and loan holding company of PyraMax Bank. The Company completed its stock offering in connection with the mutual holding company reorganization of PyraMax Bank on January 8, 2019. The Company sold 2,145,738 shares of common stock at $10.00 per share in its subscription offering for gross proceeds of approximately $21.5 million, including 175,528 shares purchased by the Company’s employee stock ownership plan. In connection with the reorganization, the Company also issued 48,767 shares of common stock to 1895 Bancorp of Wisconsin Community Foundation, Inc. and 2,682,172 shares of common stock to 1895 Bancorp of Wisconsin, MHC, the federally-chartered mutual holding company. Shares of the Company’s common stock began trading on January 9, 2019 on the Nasdaq Capital Market under the trading symbol “BCOW.”

PyraMax Bank is a stock savings bank headquartered in Greenfield, Wisconsin. PyraMax Bank operates as a full-service financial institution, providing a full range of financial services, including the granting of commercial, residential, and consumer loans and acceptance of deposits from individual customers and small businesses in the metropolitan Milwaukee, Wisconsin, area. PyraMax Bank is subject to competition from other financial and nonfinancial institutions providing financial products. In addition, PyraMax Bank is subject to the regulations of certain regulatory agencies and undergoes periodic examination by those regulatory agencies.

The accompanying unaudited interim financial statements and the notes thereto have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). In the opinion of management, the accompanying unaudited interim financial statements contain all normal recurring adjustments necessary to present fairly the financial positions results of operations, changes in equity and cash flows for the periods presented.

The accompanying unaudited financial statements and related notes should be read in conjunction with the audited annual financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission on March 30, 2020.

In preparing financial statements in conformity with GAAP, 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. 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, financial instruments and mortgage servicing rights, and the valuation of deferred income tax assets. Actual results could differ from those estimates.

The Company has evaluated subsequent events for potential recognition and/or disclosure through the date of the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q were issued. On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a global pandemic, which continues to spread throughout the United States and around the world. The declaration of a global pandemic indicates that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The outbreak of COVID-19 could adversely impact a broad range of industries in which the Company’s customers operate and impair their ability to fulfill their financial obligations to the Company. On March 3, 2020, the Federal Open Market Committee reduced the target federal funds rate by 50 basis points to 1.00% to 1.25%. This rate was further reduced to a target range of 0% to 0.25% on March 16, 2020. These reductions in interest rates and other effects of the COVID-19 outbreak may adversely affect the Company’s financial condition and results of operations. As a result of the spread of the COVID-19 coronavirus, economic uncertainties have arisen which are likely to negatively impact its business, financial condition, results of operations and cash flows.

On April 5, 2012, the Jumpstart Our Business Startups Act (the “JOBS Act”) was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies and define an “emerging growth company.” As an emerging growth company, the Company may delay adoption of new or revised financial accounting standards until such date that the standards are required to be adopted by non-issuer companies. If such standards would not apply to non-issuer companies, no deferral would be applicable. The Company intends to take advantage of the benefits of the extended transition periods allowed under the JOBS Act.

Accordingly, the Company’s financial statements may not be comparable to those of public companies that adopt new or revised financial accounting standards as of an earlier date. The effective dates of the following recent accounting standards reflect those that relate to non-issuer companies.

 

6


Table of Contents

NOTE 2 – RECENT ACCOUNTING STANDARDS

The following ASUs have been issued by the FASB and may impact the Company’s financial statements in future reporting periods:

ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments (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, 2021. Early adoption will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. On November 15, 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, amending the effective date for this standard. ASU 2016-13 will be effective for reporting periods beginning after December 15, 2022. Management has elected to defer adoption to the new effective date and is currently evaluating the impact of adopting ASU 2016-13 on the Company’s consolidated financial statements.

ASU 2016-02, Leases (Topic 842). This ASU affects any entity that enters into a lease, and is intended to increase the transparency and comparability of financial reporting. 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 will represent the right to use the underlying asset for the lease term, and the lease liability will represent the discounted value of the required lease payments to the lessor. The ASU will 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. On November 15, 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, amending the effective date for this standard. ASU 2016-02 will be effective for reporting periods beginning after December 15, 2021. Management has elected to defer adoption to the new effective date and is currently evaluating the impact of adopting ASU 2016-02 on the Company’s consolidated financial statements.

 

7


Table of Contents

NOTE 3 – AVAILABLE FOR SALE SECURITIES

The amortized costs and fair values of securities available-for-sale were as follows:

 

     March 31, 2020  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     (in thousands)  

Obligations of states and political subdivisions

   $ 9,485      $ 57      $ (77    $ 9,465  

Government-sponsored mortgage-backed securities

     53,213        507        (485      53,235  

Corporate collateralized mortgage obligations

     271        —          (39      232  

Asset-backed securities

     2,253        —          (68      2,185  

Certificates of deposit

     1,707        81        —          1,788  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 66,929      $ 645      $ (669    $ 66,905  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2019  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     (in thousands)  

Obligations of states and political subdivisions

   $ 9,779      $ 67      $ (20    $ 9,826  

Government-sponsored mortgage-backed securities

     56,975        416        (357      57,034  

Corporate collateralized mortgage obligations

     284        5        —          289  

Asset-backed securities

     2,484        —          (19      2,465  

Certificates of deposit

     1,707        54        —          1,761  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 71,229      $ 542      $ (396    $ 71,375  
  

 

 

    

 

 

    

 

 

    

 

 

 

Available for sale securities with a carrying value of $2,683 and $2,956 were pledged as collateral at March 31, 2020 and December 31, 2019, respectively.

The amortized costs and fair values of securities available-for-sale, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. In addition, expected maturities will differ from contractual maturities for mortgage-backed securities and asset-backed securities, as the expected repayment terms may be less than the underlying mortgage pool contractual maturities. Therefore, these securities are not included in the maturity categories in the maturity summary below.

 

     March 31, 2020  
     Amortized
Cost
     Fair
Value
 
     (in thousands)  

Debt and other securities:

     

Due in one year or less

   $ 577      $ 578  

Due after one through 5 years

     6,874        6,924  

Due after 5 through 10 years

     2,411        2,458  

Due after 10 years

     1,330        1,293  
  

 

 

    

 

 

 

Total debt and other securities

     11,192        11,253  

Mortgage-related securities

     53,484        53,467  

Asset-backed securities

     2,253        2,185  
  

 

 

    

 

 

 

Total

   $ 66,929      $ 66,905  
  

 

 

    

 

 

 

 

8


Table of Contents

NOTE 3 – AVAILABLE FOR SALE SECURITIES (continued)

 

Gross unrealized losses on securities available-for-sale and the fair values of the related securities, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position were as follows:

 

     March 31, 2020  
       Less than 12 months         12 months or longer       Total  
     Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
 
     (in thousands)  

Obligations of states and political subdivisions

   $ 5,018      $ (49   $ 317      $ (28   $ 5,335      $ (77

Government-sponsored mortgage-backed securities

     18,543        (322     12,631        (163     31,174        (485

Asset-backed securities

     2,138        (68     47        —         2,185        (68

Corporate collateralized obligations

     231        (39     —          —         231        (39
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 25,930      $ (478   $ 12,995      $ (191   $ 38,925      $ (669
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     December 31, 2019  
     Less than 12 months     12 months or longer     Total  
     Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
 
     (in thousands)  

Obligations of states and political subdivisions

   $ 2,052      $ (14   $ 667      $ (6   $ 2,719      $ (20

Government-sponsored mortgage-backed securities

     15,830        (106     16,747        (251     32,577        (357

Asset-backed securities

     2,394        (18     71        (1     2,465        (19
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 20,276      $ (138   $ 17,485      $ (258   $ 37,761      $ (396
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

At March 31, 2020 and December 31, 2019, respectively, the Company had 36 and 30 debt securities with unrealized losses representing aggregate depreciation of approximately 1.7% and 1.0% from their respective amortized cost bases. These unrealized losses relate principally to changes in interest rates and were not caused by changes in the financial condition of the issuers, the quality of any underlying assets or applicable credit enhancements. In analyzing whether unrealized losses on debt securities are other-than-temporary, management considers whether the securities are issued by a government body or agency, whether a rating agency has downgraded the securities, industry analysts’ reports, the financial condition and performance of the issuer and the quality of any underlying assets or credit enhancements. As management has the intent and ability to hold these debt securities to projected recovery, none of these declines are deemed to be other-than-temporary.

The following table provides a summary of the proceeds from sales of securities available-for-sale, as well as gross gains and losses, for the periods presented:

 

     Three Months ended
March 31,
 
     2020      2019  
     (in thousands)  

Proceeds from sales of securities available-for-sale

   $ 279      $ —    

Gross realized gains

     7        —    

Gross realized losses

     —          —    

 

9


Table of Contents

NOTE 4 – LOANS

Major classifications of loans are summarized as follows:

 

     March 31,
2020
     December 31,
2019
 
     (in thousands)  

Commercial:

     

Real estate

   $ 179,799      $ 178,882  

Land development

     1,598        1,623  

Other

     33,449        34,072  

Residential real estate:

     

First mortgage

     58,493        65,450  

Construction

     1,793        2,041  

Consumer:

     

Home equity and lines of credit

     29,005        29,691  

Other

     532        611  
  

 

 

    

 

 

 

Subtotal

     304,669        312,370  

Net deferred loan fees

     307        304  

Allowance for loan losses

     (2,008      (2,000
  

 

 

    

 

 

 

Loans, net

   $ 302,968      $ 310,674  
  

 

 

    

 

 

 

The Company provides several types of loans to its customers, including commercial, residential, construction and consumer loans. Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to one borrower or to multiple borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. While the Company’s credit risks are geographically concentrated within the metropolitan Milwaukee, Wisconsin area, there are no concentrations with individual borrowers or groups of related borrowers.

During the normal course of business, the Company may transfer a portion of a loan as a participation loan to another financial institution in order to manage portfolio risk. In order to be eligible for sales treatment, all cash flows from the loan must be divided proportionately, and rights of each loan holder must have the same priority, the loan holders must have no recourse to the transferor other than standard representations and warranties, and no loan holder can have the right to pledge or exchange the entire loan. As of March 31, 2020 and December 31, 2019, respectively, the Company had transferred $27,750 and $26,153 in participation loans which were eligible for sales treatment to other financial institutions, all of which were being serviced by the Company.

An analysis of past due loans is presented below:

 

     March 31, 2020  
     31-89 Days
Past Due
     90 Days or
More Past
Due
     Total Past
Due
     Current      Total Loans  
     (in thousands)  

Commercial:

              

Real estate

   $ 371      $ —        $ 371      $ 179,428      $ 179,799  

Land development

     —          —          —          1,598        1,598  

Other

     —          —          —          33,449        33,449  

Residential real estate:

              

First mortgage

     1,295        227        1,522        56,971        58,493  

Construction

     —          —          —          1,793        1,793  

Consumer:

              

Home equity and lines of credit

     28        7        35        28,970        29,005  

Other

     —          —          —          532        532  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,694      $ 234      $ 1,928      $ 302,741      $ 304,669  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

10


Table of Contents

NOTE 4 – LOANS (continued)

 

     December 31, 2019  
     31-89 Days
Past Due
     90 Days or
More Past
Due
     Total Past
Due
     Current      Total
Loans
 
     (in thousands)  

Commercial:

              

Real estate

   $ —        $ 180      $ 180      $ 178,702      $ 178,882  

Land development

     —          —          —          1,623        1,623  

Other

     148        —          148        33,924        34,072  

Residential real estate:

              

First mortgage

     1,059        537        1,596        63,854        65,450  

Construction

     —          —          —          2,041        2,041  

Consumer:

              

Home equity and lines of credit

     13        —          13        29,678        29,691  

Other

     —          —          —          611        611  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,220      $ 717      $ 1,937      $ 310,433      $ 312,370  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no loans 90 days or more past due and accruing interest as of March 31, 2020 or December 31, 2019.

A summary of activity in the allowance for loan losses for the three months ended March 31, 2020 and 12 months ended December 31, 2019 is presented below:

 

     Commercial      Residential      Consumer      Total  
     (in thousands)  

Three months ended March 31, 2020

           

Allowance for loan losses

           

Beginning balance

   $ 1,235      $ 573      $ 192      $ 2,000  

Provision (credit) for loan losses

     —          —          —          —    

Loans charged-off

     —          —          (5      (5

Recoveries

     6        —          7        13  
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 1,241      $ 573      $ 194      $ 2,008  
  

 

 

    

 

 

    

 

 

    

 

 

 

Three months ended March 31, 2019

           

Allowance for loan losses

           

Beginning balance

   $ 1,448      $ 1,250      $ 564      $ 3,262  

Provision (credit) for loan losses

     —          —          —          —    

Loans charged-off

     —          (37      (1      (38

Recoveries

     196        —          6        202  
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 1,644      $ 1,213      $ 569      $ 3,426  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

11


Table of Contents

NOTE 4 – LOANS (continued)

 

A summary of the allowance for loan losses for loans evaluated individually and collectively for impairment is presented below:

 

     March 31, 2020  
     Commercial      Residential      Consumer      Total  
     (in thousands)  

Loans:

           

Individually evaluated for impairment

   $ 6,693      $ 661      $ 32      $ 7,386  

Collectively evaluated for impairment

     208,153        59,625        29,505        297,283  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 214,846      $ 60,286      $ 29,537      $ 304,669  
  

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for loan losses:

           

Individually evaluated for impairment

   $ —        $ 62      $ 5      $ 67  

Collectively evaluated for impairment

     1,241        511        189        1,941  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance for loan losses

   $ 1,241      $ 573      $ 194      $ 2,008  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2019  
     Commercial      Residential      Consumer      Total  
     (in thousands)  

Loans:

           

Individually evaluated for impairment

   $ 6,931      $ 1,078      $ 32      $ 8,041  

Collectively evaluated for impairment

     207,646        66,413        30,270        304,329  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 214,577      $ 67,491      $ 30,302      $ 312,370  
  

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for loan losses:

           

Individually evaluated for impairment

   $ —        $ 62      $ 5      $ 67  

Collectively evaluated for impairment

     1,235        511        187        1,933  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance for loan losses

   $ 1,235      $ 573      $ 192      $ 2,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

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

Watch and 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.

 

12


Table of Contents

NOTE 4 – LOANS (continued)

 

A summary of the Company’s internal risk ratings of loans is presented below:

 

     March 31, 2020  
     Pass      Watch and
Special
Mention
     Substandard      Total  
     (in thousands)  

Commercial:

           

Real estate

   $ 169,812      $ 4,627      $ 5,360      $ 179,799  

Land development

     —          1,598        —          1,598  

Other

     25,603        7,045        801        33,449  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 195,415      $ 13,270      $ 6,161      $ 214,846  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2019  
     Pass      Watch and
Special
Mention
     Substandard      Total  
     (in thousands)  

Commercial:

           

Real estate

   $ 168,834      $ 4,418      $ 5,630      $ 178,882  

Land development

     —          1,623        —          1,623  

Other

     27,522        5,517        1,033        34,072  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 196,356      $ 11,558      $ 6,663      $ 214,577  
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no loans rated Doubtful or Loss as of March 31, 2020 and December 31, 2019.

Residential real estate and consumer loans are generally evaluated based on whether or not loans are performing in accordance with their contractual terms. Information regarding the credit quality indicators most closely monitored for residential real estate and consumer loans is presented below:

 

     March 31, 2020  
     Performing      Non
Performing
     Total  
     (in thousands)  

Residential real estate:

        

First mortgage

   $ 57,012      $ 1,481      $ 58,493  

Construction

     1,793        —          1,793  

Consumer:

        

Home equity and lines of credit

     28,865        140        29,005  

Other

     532        —          532  
  

 

 

    

 

 

    

 

 

 

Total

   $ 88,202      $ 1,621      $ 89,823  
  

 

 

    

 

 

    

 

 

 

 

13


Table of Contents

NOTE 4 – LOANS (continued)

 

     December 31, 2019  
     Performing      Non
Performing
     Total  
     (in thousands)  

Residential real estate:

        

First mortgages

   $ 63,760      $ 1,690      $ 65,450  

Construction

     2,041        —          2,041  

Consumer:

        

Home equity and lines of credit

     29,548        143        26,691  

Other

     611        —          611  
  

 

 

    

 

 

    

 

 

 

Total

   $ 95,960      $ 1,833      $ 97,793  
  

 

 

    

 

 

    

 

 

 

Information regarding impaired loans is presented below:

 

     As of and for the Three Months Ended March 31, 2020  
     Recorded
Investment
     Unpaid
Principal
     Reserve      Average
Investment
     Interest
Recognized
 
     (in thousands)  

Impaired loans with reserve:

              

Commercial:

              

Real estate

   $ —        $ —        $ —        $ —        $ —    

Land development

     —          —          —          —          —    

Other

     —          —          —          —          —    

Residential real estate:

              

First mortgages

     62        62        62        62        —    

Construction

     —          —          —          —          —    

Consumer:

              

Home equity and lines of credit

     5        6          5        5        —    

Other

     —                 —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with reserve

     67        68        67        67        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans with no reserve:

              

Commercial:

              

Real estate

     5,838        5838        NA        5,855        67  

Land development

     —          —          NA        —          —    

Other

     855        855        NA        835        17  

Residential real estate:

              

First mortgages

     599        870        NA        720        85  

Construction

     —          —          NA        —          —    

Consumer:

              

Home equity and lines of credit

     27        56        NA        27        1  

Other

     —          —          NA        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with no reserve

     7,319        7,619        NA        7,437        170  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 7,386      $ 7,687      $ 67      $ 7,504      $ 170  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

14


Table of Contents

NOTE 4 – LOANS (continued)

 

     As of and for the Year Ended December 31, 2019  
     Recorded
Investment
     Unpaid
Principal
     Reserve      Average
Investment
     Interest
Recognized
 
     (in thousands)  

Impaired loans with reserve:

              

Commercial:

              

Real estate

   $ —        $ —        $ —        $ —        $ —    

Land development

     —          —          —          —          —    

Other

     —          —          —          —          —    

Residential real estate:

              

First mortgages

     62        62        62        43        —    

Construction

     —          —          —          —          —    

Consumer:

              

Home equity and lines of credit

     5        6        5        16        —    

Other

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with reserve

     67        68        67        59        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans with no reserve:

              

Commercial:

              

Real estate

     5,840        5,840        NA        1,824        87  

Land development

     —          —          NA        126        —    

Other

     1,091        1,091        NA        488        23  

Residential real estate:

              

First mortgages

     1,016        1,350        NA        1,056        18  

Construction

     —          —          NA        —          —    

Consumer:

              

Home equity and lines of credit

     27        56        NA        29        —    

Other

     —          —          NA        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with no reserve

     7,974        8,337        NA        3,523        128  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 8,041      $ 8,405      $ 67      $ 3,582      $ 128  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Management regularly monitors impaired loan relationships. In the event facts and circumstances change, additional reserves may be necessary.

There were no additional funds committed to impaired loans as of March 31, 2020 and December 31, 2019.

Nonperforming loans are as follows:

 

     March 31,
2020
     December 31,
2019
 
     (in thousands)  

Nonaccrual loans, other than troubled debt restructurings

   $ 1,211      $ 1,416  

Nonaccrual loans, troubled debt restructurings

     410        597  
  

 

 

    

 

 

 

Total nonperforming loans (NPLs)

   $ 1,621      $ 2,013  
  

 

 

    

 

 

 

Restructured loans, accruing

   $ 442      $ 466  
  

 

 

    

 

 

 

 

15


Table of Contents

There were no loans modified as troubled debt restructurings during the three months ended March 31, 2020 and year ended December 31, 2019. As of April 30, 2020, we have approximately $18.3 million of loans where customers asked us to forebear approximately $461,000 of principal, interest or escrow payments from 1 month to 3 months in time. Any modifications or forbearances permitted to COVID-19 affected borrowers, per regulatory guidance, are not required to be recorded as TDRs.

The Company considers a troubled debt restructuring in default if it becomes past due more than 90 days. There were no troubled debt restructurings within the past twelve months for which there was a default during the three months ended March 31, 2020 and 2019.

Information on non-accrual loans is presented below:

 

     March 31,
2020
    December 31,
2019
 
     (in thousands)  

Commercial:

    

Real estate

   $ —       $ 180  

Land development

     —         —    

Other

     —         —    

Residential real estate:

    

First mortgages

     1,481       1,690  

Construction

     —         —    

Consumer:

    

Home equity and lines of credit

     140       143  

Other

     —         —    
  

 

 

   

 

 

 

Total non-accrual loans

   $  1,621     $  2,013  
  

 

 

   

 

 

 

Total non-accrual loans to total loans

     0.53     0.64

Total non-accrual loans to total assets

     0.36     0.47

NOTE 5 – MORTGAGE SERVICING RIGHTS

Loans serviced for others are not included in the balance sheets. The unpaid principal balance of mortgage loans serviced for others was $335,251 and $336,722 as of March 31, 2020 and December 31, 2019, respectively.

 

16


Table of Contents

NOTE 5 – MORTGAGE SERVICING RIGHTS (continued)

 

A summary of activity in the Company’s mortgage servicing rights is presented below:

 

     Three Months
Ended March 31,
2020
     Three Months
Ended March 31,
2019
 
     (in thousands)  

Mortgage servicing rights beginning balance

   $  2,172      $  2,103  

Additions

     99        79  

Amortization

     (118      (65

Valuation Allowance

     (217      —    
  

 

 

    

 

 

 

Mortgage servicing rights ending balance

   $  1,936      $  2,117  

Fair value at beginning of period

   $  2,404     

Fair value at end of period

   $  1,958     

The estimated fair value of mortgage servicing rights was determined using a valuation model that calculates the present value of expected future servicing and ancillary income, net of expected servicing costs. The model incorporates various assumptions such as discount rates, prepayment speeds and ancillary income and servicing costs. As of March 31, 2020, the model used discount rates ranging from 10% to 14%, and prepayment speeds ranging from 15% to 46%, respectively, both of which were based on market data from independent organizations.

The following table summarizes the estimated future amortization expense for mortgage servicing rights for the periods indicated. The projections of amortization expense are based on existing asset balances as of March 31, 2020. The actual amortization expense the Company recognizes in any given period may vary significantly depending on changes in interest rates, market conditions and regulatory requirements.

 

     (in thousands)  

Estimated future amortization as of March 31, 2020:

  

2020

     409  

2021

     383  

2022

     358  

2023

     333  

2024

     305  

Thereafter

     148  
  

 

 

 

Total

   $  1,936  
  

 

 

 

NOTE 6 – DEPOSITS

The composition of deposits is summarized below:

 

     March 31,
2020
     December 31,
2019
 
     (in thousands)  

Non-interest bearing checking

   $ 60,155      $ 62,768  

Interest bearing checking

     24,905        25,432  

Money market

     68,055        65,999  

Statement savings

     48,963        47,981  

Certificates of deposit

     122,144        142,416  
  

 

 

    

 

 

 

Total

   $  324,222      $  344,596  
  

 

 

    

 

 

 

The Company held $15,142 and $16,260 in certificates of deposit which met or exceeded the FDIC insurance limit of $250 as of March 31, 2020 and December 31, 2019, respectively.

 

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NOTE 6 – DEPOSITS (continued)

 

The scheduled maturities of certificates of deposit are presented below:

 

     March 31, 2020  
     (in thousands)  

2020

   $ 91,241  

2021

     26,189  

2022

     3,178  

2023

     603  

2024

     661  

Thereafter

     272  
  

 

 

 

Total

   $  122,144  
  

 

 

 

NOTE 7 – FEDERAL HOME LOAN BANK ADVANCES

Federal Home Loan Bank advances consist of the following:

 

     March 31, 2020      December 31, 2019  
     Rate     Amount      Rate     Amount  
     (dollars in thousands)  

Fixed rate, fixed term advances

     1.41% - 1.62   $  20,000        1.41   $ 7,000  

Putable advance, maturing Oct 2029 first put option date Nov 2020

     1.03     10,000        1.03     10,000  

Putable advance, maturing Feb 2030 first put option date Feb 2023

     0.98     5,000        —         —    

Putable advance, maturing Mar 2030 first put option date Mar 2025

     0.89     10,000        —         —    

Advance structured note, payments due monthly, maturing Feb 2030

     7.47     614        7.47     623  

Advance structured note, payments due monthly, maturing April 2030

     1.05     10,000        —         —    
    

 

 

      

 

 

 

Total

     $  55,614        $  17,623  
    

 

 

      

 

 

 

The scheduled maturities of Federal Home Loan Bank advances are presented below:

 

     March 31, 2020  
     Weighted
Average Rate
    Amount  
     (dollars in thousands)  

2020

     1.33   $ 664  

2021

     1.40     8,002  

2022

     1.34     7,516  

2023

     1.36     7,530  

2024

     1.37     1,044  

Thereafter

     1.12     30,858  
  

 

 

   

 

 

 

Total

     $  55,614  
    

 

 

 

Actual maturities may differ from scheduled maturities due to call options on various Federal Home Loan Bank advances.

The Company maintains a master contract agreement with the Federal Home Loan Bank, which provides for borrowing up to the lesser of 22.22 times the value of the Federal Home Loan Bank stock owned, a determined percentage of the book value of the Company’s qualifying real estate loans, or a determined percentage of the Company’s assets. The Federal Home Loan Bank provides both fixed and floating rate advances. Floating rates are tied to short-term market rates of interest such as the London InterBank Offered Rate, federal funds or Treasury bill rates. Federal Home Loan Bank advances are subject to a prepayment penalty if they are repaid prior to maturity. The Company has pledged approximately $120,114 and $125,483 of qualifying loans as collateral for Federal Home Loan Bank advances as of March 31, 2020 and December 31, 2019, respectively. Federal Home Loan Bank

 

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advances are also secured by approximately $2,503 and $913 of Federal Home Loan Bank stock held by the Company as of March 31, 2020 and December 31, 2019, respectively. The Company’s available and unused portion of this borrowing agreement totaled $63,643 and $107,019 as of March 31, 2020 and December 31, 2019, respectively. Additional borrowing would require additional stock purchase.

NOTE 8 – INCOME TAXES

Deferred tax assets are deferred tax consequences attributable to deductible temporary differences and carryforwards. After the deferred tax asset has been measured using the applicable enacted tax rate and provisions of the enacted tax law, it is then necessary to assess the need for a valuation allowance. A valuation allowance is needed when, based on the weight of the available evidence, it is more likely than not that some portion of the deferred asset will not be realized. As required by generally accepted accounting principles, available evidence is weighted heavily on cumulative losses, with less weight placed on future projected profitability. Realization of the deferred tax asset is dependent on whether there will be sufficient future taxable income of the appropriate character in the period during which deductible temporary differences reverse or within the carryforward periods available under tax law.

NOTE 9 – COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company may be involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the Company’s financial statements. No material legal proceedings existed at March 31, 2020.

In the normal course of business, the Company is party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These instruments include commitments to extend credit and commitments to sell loans. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized on the balance sheets.

The Company’s exposure to credit losses is represented by the contractual, or notional, amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments. As some of the commitments are expected to expire without being drawn upon, and some of the commitments may not be drawn upon to the total extent of the commitment, the notional amount of these commitments does not necessarily represent future cash requirements of the Company.

 

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NOTE 9 – COMMITMENTS AND CONTINGENCIES (continued)

 

The contractual amounts of off-balance-sheet credit-related financial instruments are summarized below:

 

     March 31, 2020  
     Fixed
Rate
     Variable
Rate
     Total  
     (in thousands)  

Commitments to extend credit

   $ 19,534      $ 33,702      $ 53,236  

Standby letters of credit

     23        2,125        2,148  

Credit enhancement under the FHLB of Chicago Mortgage Partnership Finance Program

     857        —          857  

Commitments to sell loans

     57,026        —          57,026  

Overdraft protection program commitments

     4,076        —          4,076  
     December 31, 2019  
     Fixed
Rate
     Variable
Rate
     Total  
     (in thousands)  

Commitments to extend credit

   $ 21,745      $ 36,108      $ 57,853  

Standby letters of credit

     —          —          —    

Credit enhancement under the FHLB of Chicago Mortgage Partnership Finance Program

     841        —          841  

Commitments to sell loans

     10,917        —          10,917  

Overdraft protection program commitments

     4,129        —          4,129  

Commitments to extend credit and commitments to sell loans are agreements to lend to a customer at fixed or variable rates, as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The amount of collateral obtained upon extension of credit is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable; inventory; property, plant and equipment; real estate; and stocks and bonds.

Standby letters of credit are conditional lending commitments issued by the Company to guarantee the performance of a customer to a third party. Generally, all standby letters of credit have expiration dates within one year. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company generally holds collateral supporting these commitments. Standby letters of credit are not reflected in the financial statements, since recording the fair value of these guarantees would not have a significant impact on the financial statements.

The Company participates in the Federal Home Loan Bank of Chicago Mortgage Partnership Finance Program (the “Program”). In addition to entering into forward commitments to sell mortgage loans to a secondary market agency, the Company enters into firm commitments to deliver loans to the Federal Home Loan Bank of Chicago through the Program. Under the Program, loans are funded by the Federal Home Loan Bank of Chicago, and the Company receives an agency fee reported as a component of gain on sale of loans. The Company had $12,906 of commitments to deliver loans through the Program as of March 31, 2020. Once delivered to the Program, the Company provides a contractually agreed-upon credit enhancement and performs servicing of the loans. Under the credit enhancement, the Company is liable for losses on loans delivered through the Program after application of any mortgage insurance and a contractually agreed-upon credit enhancement provided by the Program, subject to an agreed-upon maximum. The Company receives a fee for this credit enhancement. The Company records a liability for expected losses in excess of anticipated credit enhancement fees. As of March 31, 2020 and December 31, 2019, the Company had no liability outstanding related to the Program.

Unfunded commitments under overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit may or may not require collateral and may or may not contain a specific maturity date.

 

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NOTE 10 – EMPLOYEE STOCK OWNERSHIP PLAN

The Company established a tax qualified Employee Stock Ownership Plan (“ESOP”) for the benefit of its employees in conjunction with the Reorganization, effective January 1, 2019. Eligible employees become 20% vested in their accounts after 1 year of service, 40% vested after 2 years of service, 60% vested after 3 years of service, 80% vested after 4 years of service, and 100% vested after 5 or more years of service, or earlier, upon death, disability or attainment of normal retirement age.

The ESOP purchased 175,528 shares of the Company’s common stock, which was funded by a loan from the Company. Unreleased ESOP shares collateralize the loan payable, and the cost of the shares is recorded as contra-equity account in the stockholders’ equity of the Company. Shares are to be released as debt payments are made by the ESOP to the loan. The ESOP’s sources of repayment of the loan can included dividends, if any, on the unallocated stock held by the ESOP, and discretionary contributions from the Company to the ESOP and earnings thereon.

Compensation expense for the ESOP is recorded at an amount equal to the shares allocated by the ESOP multiplied by the average fair market value of the shares during the period. The Company recognizes compensation expense ratably over the year based upon the Company’s estimate of the number of shares expected to be allocated by the ESOP. Unearned compensation applicable to the ESOP is reflected as a reduction of stockholders’ equity in the consolidated balance sheet. The difference between the average fair market value and the cost of the shares allocated by the ESOP is recorded as an adjustment to stockholders’ equity. The Company recognized $18 and $17 in compensation expense for the three months ended March 31, 2020 and March 31, 2019, respectively.

The following table provides the allocated and unallocated shares of common stock associated with the ESOP.

 

     March 31,
2020
     December 31,
2019
 
     (dollars in thousands)  

Shares committed to be released

     1,755        7,021  

Total allocated shares

     7,021        —    

Total unallocated shares

     166,752        168,507  
  

 

 

    

 

 

 

Total ESOP shares

     175,528        175,528  
  

 

 

    

 

 

 

Fair value of unallocated shares (based on $7.89 and $10.78 share price as of March 31, 2020 and December 31, 2019, respectively)

   $ 1,316      $ 1,817  
  

 

 

    

 

 

 

NOTE 11 – RELATED PARTY TRANSACTIONS

A summary of loans to directors, executive officers, and their affiliates follows:

 

     March 31,
2020
     December 31,
2019
 
     (in thousands)  

Beginning balance

   $  1,172      $  1,289  

New loans

     4        378  

Repayments

     (77      (495
  

 

 

    

 

 

 

Ending balance

   $  1,099      $  1,172  
  

 

 

    

 

 

 

Deposits from directors, executive officers, and their affiliates totaled $1,238 and $1,686 at March 31, 2020 and December 31, 2019, respectively.

The Company utilizes the services of law firms in which certain of the Company’s directors are partners. Fees paid to the firms for these services were $7 and $12 during the three months ended March 31, 2020 and 2019, respectively.

 

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NOTE 12 – FAIR VALUE MEASUREMENTS

ASC Topic 820, Fair Value Measurements and Disclosures defines fair values, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This accounting standard applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements. The standard also emphasizes that fair value (i.e., the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date), among other things, is based on exit price versus entry price, should include assumptions about risk such as nonperformance risk in liability fair values, and is a market-based measurement, not an entity-specific measurement. When considering the assumptions that market participants would use in pricing an asset or liability, this accounting standard establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

The fair value hierarchy prioritizes inputs used to measure fair value into three broad levels.

Level 1 inputs – In general, fair values determined by Level 1 inputs use quoted market prices in active markets for identical assets or liabilities that we have the ability to access.

Level 2 inputs – Fair values determined by Level 2 inputs use inputs other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets where there are few transactions and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs – Level 3 inputs are unobservable inputs for the asset or liability and include situations where there is little, if any, market activity for the asset or liability.

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

Some assets and liabilities, such as securities available-for-sale, 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 Company’s valuation methodology and significant inputs used for each asset and liability measured at fair value on a recurring or nonrecurring basis.

Securities – Marketable equity securities and securities available-for-sale 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 measurements of Level 1 securities are based on the quoted market price of those securities. 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 measurements of Level 2 securities are obtained from independent pricing services and are based on recent sales of similar securities and other observable market data.

Impaired loans – Loans are not measured at fair value on a recurring basis. However, loans determined to be impaired may be measured at fair value on a nonrecurring basis. The fair value measurements of collateral-dependent impaired loans are based on the fair values of the underlying collateral. Independent appraisals are obtained to determine the fair values of underlying collateral, and generally utilize one or more valuation methodologies, typically includes comparable sales and income approaches. Management routinely evaluates the fair value measurements of independent appraisers and adjusts those valuations based on differences noted between actual selling prices of collateral and the most recently appraised value. Such adjustments are usually significant, which results in a Level 3 classification. All other impaired loan measurements are based on the present value of expected future cash flows discounted at the applicable effective interest rate and are not considered fair value measurements.

 

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NOTE 12 – FAIR VALUE MEASUREMENTS (continued)

 

Assets measured at fair value on a recurring basis are summarized below, along with the level of the fair value hierarchy of the inputs utilized to determine such fair value.

 

            Recurring Fair Value
Measurements Using
 
     March 31, 2020      Level 1      Level 2      Level 3  
     (in thousands)  

Marketable equity securities:

   $ 2,044      $  2,044      $ —        $  —    

Securities available-for-sale:

           

Obligations of states and political subdivisions

     9,465        —          9,465        —    

Government-sponsored mortgage-backed securities

     53,235        —          53,235        —    

Corporate collateralized mortgage obligations

     232        —          232        —    

Asset-backed securities

     2,185        —          2,185        —    

Certificates of deposit

     1,788        —          1,788        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $  68,949      $  2,044      $  66,905      $  —    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

            Recurring Fair Value
Measurements Using
 
     December 31, 2019      Level 1      Level 2      Level 3  
     (in thousands)  

Marketable equity securities:

   $ 2,553      $  2,553      $ —        $  —    

Securities available-for-sale:

           

Obligations of states and political subdivisions

     9,826        —          9,826        —    

Government-sponsored mortgage-backed securities

     57,034        —          57,034        —    

Corporate collateralized mortgage obligations

     289        —          289        —    

Asset-backed securities

     2,465        —          2,465        —    

Certificates of deposit

     1,761        —          1,761        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $  73,928      $  2,553      $  71,375      $  —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Loans with a carrying amount of $67 and $67, respectively, were considered impaired and written down to their estimated fair value of $0 and $0 as of March 31, 2020 and December 31, 2019, respectively. As a result, the Company recognized a specific valuation allowance against these impaired loans totaling $67 and $67 as of March 31, 2020 and December 31, 2019, respectively. There were no foreclosed assets as of March 31, 2020 and December 31, 2019.

 

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Table of Contents

NOTE 12 – FAIR VALUE MEASUREMENTS (continued)

 

The carrying values and estimated fair values of financial instruments are presented below:

 

     March 31, 2020  
     Carrying
Value
     Level 1      Level 2      Level 3  
     (in thousands)  

Financial assets:

           

Cash and cash equivalents

   $ 41,908      $ 41,908      $ —        $ —    

Available for sale securities

     66,905        —          66,905        —    

Marketable equity securities stated at fair value

     2,044        2,044        —          —    

Loans held for sale

     1,248        —          1,248        —    

Loans

     302,968        —          —          308,381  

Accrued interest receivable

     970        970        —          —    

Federal Home Loan Bank stock

     2,503        —          —          2,503  

Cash value of life insurance

     13,184        —          —          13,184  

Financial liabilities:

           

Deposits

     324,222        202,078        —          122,785  

Advance payments by borrowers for taxes and insurance

     5,422        5,422        —          —    

Federal Home Loan Bank advances

     55,614        —          —          56,398  

Accrued interest payable

     372        372        —          —    

 

     December 31, 2019  
     Carrying
Value
     Level 1      Level 2      Level 3  
     (in thousands)  

Financial assets:

           

Cash and cash equivalents

   $ 11,707      $ 11,707      $ —        $ —    

Available for sale securities

     71,375        —          71,375        —    

Marketable equity securities stated at fair value

     2,553        2,553        —          —    

Loans held for sale

     685        —          685        —    

Loans

     310,674        —          —          310,993  

Accrued interest receivable

     963        963        —          —    

Federal Home Loan Bank stock

     913        —          —          913  

Cash value of life insurance

     13,085        —          —          13,085  

Financial liabilities:

           

Deposits

     344,596        202,180        —          142,708  

Advance payments by borrowers for taxes and insurance

     1,681        1,681        —          —    

Federal Home Loan Bank advances

     17,623        —          —          17,976  

Accrued interest payable

     385        385        —          —    

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 or 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.

Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates to not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters that could affect the estimates. Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business.

 

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NOTE 12 – FAIR VALUE MEASUREMENTS (continued)

 

Deposits with no stated maturities are defined as having a fair value equivalent to the amount payable on demand. This prohibits adjusting fair value derived from retaining those deposits for an expected future period of time. This component, commonly referred to as a deposit base intangible, is neither considered in the above amounts, nor is it recorded as an intangible assets on the balance sheets. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

NOTE 13 – EQUITY AND REGULATORY MATTERS

PyraMax Bank is subject to various regulatory capital requirements administered by federal and state 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 Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, PyraMax 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 their components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require PyraMax 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 that PyraMax Bank met all applicable capital adequacy requirements as of March 31, 2020 and December 31, 2019.

As of March 31, 2020 and December 31, 2019, PyraMax Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, PyraMax Bank must maintain minimum regulatory capital ratios as set forth in the table below. PyraMax Bank’s actual and required capital amounts and ratios are presented below:

 

     March 31, 2020  
     Actual     For Capital Adequacy
Purposes
    To Be Well Capitalized Under
Prompt Corrective Action
Provisions
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  
     (dollars in thousands)  

PyraMax Bank

  

Leverage (Tier 1)

   $  46,634        10.9   $  17,147        4.0   $  21,434        5.0

Risk-based:

               

Common Equity Tier 1

     46,634        13.8     15,206        4.5     21,964        6.5

Tier 1

     46,634        13.8     20,275        6.0     27,033        8.0

Total

     48,642        14.4     27,033        8.0     33,791        10.0

 

     December 31, 2019  
     Actual     For Capital Adequacy
Purposes
    To Be Well Capitalized Under
Prompt Corrective Action
Provisions
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  
     (dollars in thousands)  

PyraMax Bank

  

Leverage (Tier 1)

   $  46,316        10.7   $  17,392        4.0   $  21,740        5.0

Risk-based:

               

Common Equity Tier 1

     46,316        13.5     15,391        4.5     22,232        6.5

Tier 1

     46,316        13.5     20,522        6.0     27,362        8.0

Total

     48,316        14.1     27,362        8.0     34,203        10.0

 

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NOTE 14 – EARNINGS PER SHARE

Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding, adjusted for weighted average unallocated ESOP shares, during the applicable period, excluding outstanding participating securities. Participating securities include non-vested restricted stock awards and restricted stock units, though no actual shares of common stock related to restricted stock units are issued until the settlement of such units, to the extent holders of these securities receive non-forfeitable dividends or dividend equivalents at the same rate as holders of the Company’s common stock. Diluted earnings per share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method. Antidilutive options are disregarded in earnings per share calculations.

Earnings per common share for the three months ended March 31, 2020 and the three months ended March 31, 2019 are presented in the following table.

 

     Three months ended
March 31, 2020
     Three months ended
March 31, 2019
 
     (In thousands, except per share amounts)  

Net income (loss)

   $ 287      $ (471
  

 

 

    

 

 

 

Weighted shares outstanding for basic EPS

     

Weighted average shares outstanding

     4,877        4,877  

Less: Weighted average unallocated ESOP shares

     172        176  
  

 

 

    

 

 

 

Weighted average shares outstanding for basic EPS

     4,705        4,701  

Additional dilutive shares

     1        —      
  

 

 

    

 

 

 

Weighted average shares outstanding for dilutive EPS

     4,706        4,701  
  

 

 

    

 

 

 

Basic and diluted income (loss) per share

   $ 0.06      $ (0.10
  

 

 

    

 

 

 

 

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NOTE 15 – STOCK BASED COMPENSATION

Stock-Based Compensation Plan

On March 27, 2020, the Company’s stockholders approved the 1895 Bancorp of Wisconsin, Inc. 2020 Equity Incentive Plan (the “2020 Equity Incentive Plan”). A total of 238,467 stock options and 95,387 restricted shares were approved for award. The stock options granted to employees and non-employee directors under this plan vest in five installments with the first installment vesting on the first anniversary of the date of grant. The exercise price for all stock options granted is equal to the quoted NASDAQ market close price on the date that the awards were granted and expire ten years after the grant date, if not exercised. The restricted stock awards granted to employees and non-employee directors under this plan vest in five installments with the first installment vesting on the first anniversary of the date of grant.

Accounting for Stock-Based Compensation Plan

The fair value of stock options granted is estimated on the grant date using a Black-Scholes pricing model. The fair value of restricted shares is equal to the quoted NASDAQ market closing price on the date of grant. The fair value of stock grants is recognized as compensation expense on a straight-line basis over the vesting period of the grants. Compensation expense is included in compensation, payroll taxes and other employee benefits in the consolidated statements of income.

A summary of the Company’s stock option activity for the period ended March 31, 2020 is presented below.

 

Stock Options    Shares      Weighted
Average
Exercise Price
     Weighted
Average
Remaining in
Contractual
Term (Years)
     Aggregate
Intrinsic
Value
 

Outstanding December 31, 2019

     —        $ —          —          —    

Granted

     59,615        7.88           —    

Exercised

     —          —          —          —    

Forfeited

     —          —          —          —    
  

 

 

          

 

 

 

Outstanding March 31, 2020

     59,615        7.88        9.93        —    
  

 

 

          

 

 

 

Options exercisable at March 31, 2020

     59,615        7.88        9.93        —    
  

 

 

          

 

 

 

The Company amortizes the expense related to stock options as compensation expense over the vesting period. No expense for the stock options granted was recognized during the period ended March 31, 2020. At March 31, 2020, the Company had $118 in estimated unrecognized compensation costs related to outstanding stock options that is expected to be recognized over a weighted average period of five years.

 

Restricted Stock    Shares      Weighted Average
Grant Date Fair
Value
 

Nonvested at December 31, 2019

     —        $ —    

Granted

     23,845        7.88  

Vested

     —          —    

Forfeited

     —          —    
  

 

 

    

 

 

 

Nonvested at March 31, 2020

     23,845      $ 7.88  
  

 

 

    

 

 

 

The Company amortizes the expense related to restricted stock awards as compensation expense over the vesting period. No expense for the restricted stock awards was recognized during the period ended March 31, 2020. At March 31, 2020, the Company had $188 of unrecognized compensation expense related to restricted stock shares that is expected to be recognized over a weighted average period of five years.

 

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NOTE 16 – SUBSEQUENT EVENT

On April 24, 2020 the Board of Directors authorized grants of restricted stock awards and incentive stock options to certain officers and employees. A total of 60,104 restricted shares and 150,500 incentive stock options were granted under the 2020 Equity Incentive Plan. These restricted stock awards and incentive stock options vest in five equal annual installments beginning on the first anniversary of the grant date. The Company approximates $770 of unrecognized compensation expense related to stock compensation plans to be amortized over the vesting period of five years.

 

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Item 2.

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

General

Management’s discussion and analysis of financial condition and results of operations at March 31, 2020 and for the three months ended March 31, 2020 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 in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Cautionary Note Regarding Forward-Looking Statements

This report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “contemplate,” “continue,” “target” 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 our current beliefs and expectations 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. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Quarterly Report.

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;

 

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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.

The outbreak of Coronavirus Disease 2019 (“COVID-19”) will continue to adversely impact a broad range of industries in which the Company’s customers operate and impair their ability to fulfill their financial obligations to the Company. The World Health Organization has declared COVID-19 to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections.

Notwithstanding any actions by national, state and local governments to mitigate the impact of COVID-19 or by the Company to address the adverse impacts of COVID-19, there can be no assurance that any of the foregoing activities will be successful in mitigating or preventing significant adverse effects on the Company. The Company may also incur additional costs to remedy damages caused by such disruptions, which could adversely affect its financial condition and results of operations.

Because of the above and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Additional factors that may affect our results are discussed in our Annual Report on Form 10-K under the heading “Risk Factors.”

Critical Accounting Policies

The discussion and analysis of the financial condition and results of operations are based on our financial statements, which are prepared in conformity with generally accepted accounting principles used in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.

The Jumpstart Our Business Startups Act (the “JOBS Act”) contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards.

The following represent our critical accounting policies:

Allowance for Loan Losses. The allowance for loan losses is the estimated amount considered necessary to cover inherent, but unconfirmed, credit losses in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses which is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of our most critical accounting policies.

Management performs a quarterly evaluation of the allowance for loan losses. Consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change.

 

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The analysis has two components, specific and general allowances. The specific allowance is for unconfirmed losses related to loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral, adjusted for market conditions and selling expenses. If the fair value of the loan is less than the loan’s carrying value, a charge is recorded for the difference. The general allowance, which is for loans reviewed collectively, is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations.

This analysis establishes historical loss percentages and qualitative factors that are applied to the loan groups to determine the amount of the allowance for loan losses necessary for loans that are reviewed collectively. The qualitative component is critical in determining the allowance for loan losses as certain trends may indicate the need for changes to the allowance for loan losses based on factors beyond the historical loss history. Not incorporating a qualitative component could misstate the allowance for loan losses. Actual loan losses may be significantly more than the allowances we have established which could result in a material negative effect on our financial results.

Fair Value. The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The Company estimates the fair value of a financial instrument and any related asset impairment using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, the Company estimates fair value. These estimates are subjective in nature and any imprecision in estimating these factors can impact the amount of gain or loss recorded. A more detailed description of the fair values measured at each level of the fair value hierarchy and the methodology utilized by the Company can be found in Note 12 of the Notes to Financial Statements.

Comparison of Financial Condition at March 31, 2020 and December 31, 2019

Total Assets. Total assets increased $19.9 million, or 4.6%, to $447.9 million at March 31, 2020 from $428.0 million at December 31, 2019. The increase was primarily due to the increase in cash and cash equivalents of $30.2 million during the three month period ended March 31, 2020. Total assets were also impacted by a $4.5 million, or 6.3%, decrease in available-for-sale securities, as well as a $7.7 million decrease in net loans. Additionally, total assets increased due to the $1.6 million, or 174.1%, increase in Federal Home Loan Bank of Chicago (“FHLB”) stock purchased by the Company.

Cash and Cash Equivalents. Cash and cash equivalents increased $30.2 million, or 258.0%, to $41.9 million at March 31, 2020 from $11.7 million at December 31, 2019. The increase was due primarily to the increase of $38.0 million in FHLB advances during the three months ended March 31, 2020. The increase in cash and cash equivalents due to FHLB advances was partially offset by a decrease in available-for-sale securities of $4.5 million for the same period.

Available-for-Sale Securities. Available-for-sale securities decreased $4.5 million, or 6.3%, to $66.9 million at March 31, 2020 from $71.4 million at December 31, 2019. The decrease was due primarily to maturities, prepayments and calls of available for sale securities totaling $4.0 million.

Loans Held for Sale. Loans held for sale increased $563,000, or 82.2%, to $1.2 million at March 31, 2020 from $685,000 at December 31, 2019. The increase was due primarily to additional first mortgage residential real estate loan balances being sold into the secondary market as a result of the falling interest rate environment.

Net Loans. Net loans decreased $7.7 million, or 2.5%, to $303.0 million at March 31, 2020 from $310.7 million at December 31, 2019. The decrease was due primarily to the decrease in first mortgage residential real estate loans transferred to loans held for sale and a decrease in home equity lines of credit due to normal payment and refinancing activity.

 

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Deposits. Deposits decreased $20.4 million, or 5.9%, to $324.2 million at March 31, 2020 from $344.6 million at December 31, 2019. This decrease was primarily due to a $20.3 million decrease in certificates of deposits to $122.1 million at March 31, 2020 from $142.4 million at December 31, 2019. Brokered certificates of deposits decreased $13.0 million as we replaced maturing brokered certificates with lower cost FHLB advances. Consumer and business certificates of deposit decreased $7.3 million as we changed our marketing focus to concentrate on non-maturing deposits such as savings accounts and money market accounts, which increased $982,000 and $2.1 million, respectively. These accounts carry lower interest rates and offer more flexibility in a changing rate environment.

Advance Payments by Borrowers for Taxes and Insurance. Advance payments by borrowers for taxes and insurance increased $3.7 million, or 222.5%, to $5.4 million at March 31, 2020 from $1.7 million at December 31, 2019. The increase was due to normal seasonal activity.

Borrowings. Borrowings, consisting entirely of FHLB advances, increased $38.0 million, or 215.6%, to $55.6 million at March 31, 2020 from $17.6 million at December 31, 2019. The increase was due to the $38.0 million in proceeds from the issuance of lower cost FHLB advances during the three months ended March 31, 2020, partially offset by principal repayments on existing advances of $9,000 during the same period. The advances replaced $13.0 million in maturing brokered certificates of deposit.

Total Equity. Total equity increased $6,000, or 0.01%, to $58.7 million at March 31, 2020 from $58.7 million at December 31, 2019. The Company reclassified shares purchased by PyraMax Bank in its deferred compensation plan to treasury stock at March 31, 2020, resulting in a reduction in total equity of $175,000. The change in total equity was also impacted by net income of $287,000 and other comprehensive income of $163,000 for the three months ended March 31, 2020.

 

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Average Balances and Yields

The following tables present information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances have been calculated using daily balances. Nonaccrual loans are included in average balances only. Loan fees are included in interest income on loans and are not material.

 

     Three Months Ended March 31,  
     2020     2019  
     Average
Outstanding
Balance
    Interest and
Dividends
     Yield/Cost
Rate
    Average
Outstanding
Balance
    Interest and
Dividends
     Yield/Cost
Rate
 
     (Dollars in thousands)  

Interest-earning assets:

              

Loans

   $ 309,937     $ 3,413        4.42   $ 370,284     $ 3,988        4.37

Securities available-for-sale

     69,878       407        2.34     65,063       392        2.44

Other interest-earning assets

     16,053       41        1.01     12,264       65        2.16
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     395,868       3,861        3.91     447,611       4,445        4.03

Non-interest-earning assets

     34,950            37,288       
  

 

 

        

 

 

      

Total assets

   $ 430,818          $ 485,484       
  

 

 

        

 

 

      

Interest-earning liabilities:

              

NOW accounts

   $ 25,606     $ 19        0.30   $ 24,900     $ 17        0.27

Money market accounts

     67,449       151        0.90     57,118       140        0.99

Savings accounts

     47,892       16        0.13     50,655       16        0.13

Certificates of deposit

     131,841       664        2.02     201,424       1,007        2.03
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing deposits

     272,788       850        1.25     334,097       1,180        1.43

Federal Home Loan Bank advances

     32,012       110        1.37     29,669       123        1.68

Other interest-bearing liabilities

     3,819       —          —         3,285       —          —    
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     308,619       960        1.25     367,051       1,303        1.44

Non-interest-bearing deposits

     66,740            70,564       

Other non-interest-bearing liabilities

     2,784            2,781       
  

 

 

        

 

 

      

Total liabilities

     378,143            440,396       

Total stockholders’ equity

     52,675            45,088       
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 430,818          $ 485,484       
  

 

 

        

 

 

      

Net interest income

     $ 2,901          $ 3,142     
    

 

 

        

 

 

    

Net interest-earning assets

   $ 87,249          $ 80,560       
  

 

 

        

 

 

      

Interest rate spread(1)

          2.66          2.59

Net interest margin(2)

          2.93          2.81

Average interest-earning assets to average interest-bearing liabilities

     128.27          121.95     

 

(1)

Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.

(2)

Net interest margin represents net interest income divided by average total interest-earning assets.

 

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Table of Contents

Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in average rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior period average rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.

 

     Three Months Ended March 31,
2020 vs. 2019
 
     Increase (Decrease) Due to      Total
Increase
(Decrease)
 
     Volume      Rate  
     (Dollars in thousands)  

Interest-earning assets:

        

Loans

   $ (667      93        (574

Securities

     27        (12      15  

Other

     35        (60      (25
  

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     (605      21        (584
  

 

 

    

 

 

    

 

 

 

Interest-bearing liabilities:

        

NOW

     —          (2      (2

Money market deposits

     (21      10        (11

Savings

     —          —          —    

Certificates of deposit

     350        (7      343  
  

 

 

    

 

 

    

 

 

 

Total interest-bearing deposits

     329        1        330  

Borrowings

     (11      24        13  

Other

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

     318        25        343  
  

 

 

    

 

 

    

 

 

 

Change in net interest income

   $ (287      46        (241
  

 

 

    

 

 

    

 

 

 

Comparison of Operating Results for the Three Months Ended March 31, 2020 and 2019

General. We recorded net income of $287,000 for the three months ended March 31, 2020, compared to net loss of $471,000 for the three months ended March 31, 2019, an increase of $758,000. The increase was due primarily to an increase in net gains on sale of first mortgage residential real estate loans and a decrease in non-interest expense.

Interest and Dividend Income. Interest and dividend income decreased $584,000, or 13.1%, to $3.9 million for the three months ended March 31, 2020 from $4.4 million for the three months ended March 31, 2019. The decrease was due primarily to the decrease in net loans during the period.

Interest Expense. Interest expense decreased $343,000, or 26.4%, to $960,000 for the three months ended March 31, 2020, from $1.3 million for the three months ended March 31, 2019, as rates on interest-bearing liabilities decreased 19 basis points due to the declining interest rate environment and the Company’s shift from certificates of deposits into lower cost FHLB advances as sources of funding during the 2020 period.

Net Interest Income. Net interest income decreased $241,000, or 7.7%, to $2.9 million for the three months ended March 31, 2020 from $3.1 million for the three months ended March 31, 2019. The rate for average interest-bearing liabilities decreased to 1.25% for the three months ended March 31, 2020, from 1.44% for the three months ended March 31, 2019. This 19 basis point decrease in the cost of funds came as the yield on interest-earning assets decreased by 12 basis points, to 3.91% for the three months ended March 31, 2020, from 4.03% for the three months ended March 31, 2019. Our net interest rate spread increased to 2.66% for the three months ended March 31, 2020, from 2.59% for the three months ended March 31, 2019, and our net interest margin increased to 2.93% from 2.81% over the same period due to a $51.7 million, or 11.6%, reduction in average total interest-earning assets outstanding and the cost of funds on interest-bearing liabilities decreasing seven basis points more than the yield on interest-earning assets.

 

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Provision for Loan Losses. We recorded no provision for loan losses for the three months ended March 31, 2020 and 2019, respectively. The allowance for loan losses was $2.0 million, or 0.7%, of total loans, at March 31, 2020, compared to $3.4 million, or 0.9% of total loans, at March 31, 2019. Non-performing loans constituted 0.5% of total gross loans at March 31, 2020 and 0.5% of gross loans at March 31, 2019. Net recoveries for the three months ended March 31, 2020 were $8,000 compared to net recoveries of $164,000 for the 2019 period.

Non-interest Income. Non-interest income decreased $144,000, or 19.3%, to $606,000 for the three months ended March 31, 2020 from $750,000 for the three months ended March 31, 2019. The decrease was due primarily to the decrease of other non-interest income to ($343,000) for the three months ended March 31, 2020 from $118,000 for the three months ended March 31, 2019. This decrease was attributable to a $324,000 increase in unrealized losses on marketable securities and a decrease in net gains on the sale of premises and equipment for the 2020 period. Mortgage servicing rights decreased $236,000, or 106.3%, to ($14,000) for the three months ended March 31, 2020 from $222,000 for the three months ended March 31, 2020 due to a valuation allowance on mortgage servicing rights of $217,000. The decrease was offset by gains realized on the sale of first mortgage residential real estate loans, which increased $530,000, or 427.4%, to $654,000 for the three months ended March 31, 2020 from $124,000 for the three months ended March 31, 2019.

Non-interest Expense. Non-interest expense decreased $1.5 million, or 32.8%, to $3.1 million for the three months ended March 31, 2020 from $4.6 million for the three months ended March 31, 2019. The reduction was due primarily to a $743,000 reduction in salaries and employee benefits during the three months ended March 31, 2020 as group insurance costs and accruals for discretionary incentive decreased $230,000 and unrealized loss on marketable equity securities held by the deferred compensation plan increased $324,000. Other non-interest expense also decreased by $534,000 for the three months ended March 31, 2020 as in 2019 the Company recognized $588,000 in consulting fees incurred in connection with the conversion and initial public stock offering, as well as expenses associated with the establishment and funding of our charitable foundation.

Income Tax Expense. We recorded income tax expense of $147,000 for the three months ended March 31, 2020, compared to an income tax benefit of $209,000 for the three months ended March 31, 2019.

Management of Market Risk

General. Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. Our Asset/Liability Committee is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our board of directors.

Our asset/liability management strategy attempts to manage the impact of changes in interest rates on net interest income, our primary source of earnings. Among the techniques we use to manage interest rate risk are:

 

   

originating commercial real estate and commercial loans, which tend to have shorter terms and higher interest rates than owner occupied one- to four-family residential real estate loans, and which generate customer relationships that can result in larger non-interest-bearing checking accounts;

 

   

selling substantially all of our conforming and eligible jumbo, longer-term, fixed-rate one- to four-family residential real estate loans and retaining the non-conforming and shorter-term, fixed-rate and adjustable-rate one- to four-family residential real estate loans that we originate, subject to market conditions and periodic review of our asset/liability management needs; and

 

   

reducing our dependence on jumbo and brokered certificates of deposit to support lending and investment activities and increasing our reliance on core deposits, including checking accounts and savings accounts, which are less interest rate sensitive than certificates of deposit.

Our board of directors is responsible for the review and oversight of our executive management team and other essential operational staff which are responsible for our asset/liability analysis. These officers act as an asset/liability committee and are charged with developing and implementing an asset/liability management plan, and they meet at least quarterly to review pricing and liquidity needs and assess our interest rate risk. We currently utilize a third-party modeling program, prepared on a quarterly basis, to evaluate our sensitivity to changing interest rates, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors.

 

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We do not engage in hedging activities, such as engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage-backed securities.

The table below sets forth, as of March 31, 2020, the calculation of the estimated changes in our net interest income that would result from the designated immediate changes in the United States Treasury yield curve.

 

Change in Interest

Rates (basis points) (1)

   Net Interest Income
Year 1 Forecast
     Year 1 Change
from Level
 
     (Dollars in thousands)         

+400

   $ 11,619        6.57

+300

     11,825        8.46

+200

     11,764        7.90

+100

     11,637        6.73

Level

     10,903       

-100

     10,422        (4.41 )% 

 

(1)

Assumes an immediate uniform change in interest rates at all maturities.

Economic Value of Equity. We monitor interest rate risk through the use of a simulation model that estimates the amounts by which the fair value of our assets and liabilities (our economic value of equity or “EVE”) would change in the event of a range of assumed changes in market interest rates. The quarterly reports developed in the simulation model assist us in identifying, measuring, monitoring and controlling interest rate risk to ensure compliance within our policy guidelines.

The table below sets forth, as of March 31, 2020, the estimated changes in our EVE that would result from the designated instantaneous changes in market interest rates. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.

 

            Estimated Increase (Decrease) in EVE  

Basis Point (“bp”) Change in Interest Rates(1)

   Estimated EVE(2)      Amount      Percent  
     (Dollars in thousands)  

400

   $ 60,170      $ 923        1.56

300

     63,035        3,788        6.39

200

     63,314        4,067        6.86

100

     62,369        3,122        5.27

—  

     59,247        —         

(100)

     57,878        (1,369      (2.31 )% 

 

(1)

Assumes an instantaneous uniform change in interest rates at all maturities.

(2)

EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.

The table above indicates that at March 31, 2020, in the event of a 100-basis point increase in interest rates, we would have experienced a 5.27% increase in our EVE. In the event of a 200-basis point increase in interest rates at March 31, 2020, we would have experienced a 6.86% increase in our EVE.

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in EVE require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the EVE table presented assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the EVE table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on EVE and will differ from actual results.

 

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EVE calculations also may not reflect the fair values of financial instruments. For example, decreases in market interest rates can increase the fair values of our loans, deposits and borrowings.

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. At March 31, 2020, we had $55.6 million outstanding in advances from the FHLB. At March 31, 2020, we had $63.6 million in additional borrowing capacity at the Federal Home Loan Bank of Chicago. Additionally, at March 31, 2020, we had a $10.0 million federal funds line of credit with the BMO Harris Bank, none of which was drawn at March 31, 2020.

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.

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash used in operating activities was $1.4 million for the three months ended March 31, 2020. Net cash used by operating activities was $1.1 million for the three months ended March 31, 2019. Net cash provided by investing activities, which consists primarily of disbursements for loan originations and the purchase of investment securities, offset by principal collections on loans, proceeds from the sale of loans and the sale of securities, and proceeds from maturing securities and pay downs on securities, was $10.2 million for the three months ended March 31, 2020. Net cash provided by investing activities was $8.9 million for the three months ended March 31, 2019, primarily due to a net decrease in loans of $9.7 million and maturities, prepayments and calls of securities available for sale of $1.9 million, offset by $3.5 million in cash paid, net of cash received, for the sale of branch. Net cash provided by financing activities, consisting primarily of activity in deposit accounts and FHLB advances, was $21.4 million for the three months ended March 31, 2020, as a $20.4 million decrease in deposits was offset by $38.0 million of proceeds from the issuance of FHLB advances. Net cash provided by financing activities was $19.0 million for the three months ended March 31, 2019, as $18.3 million in net proceeds from the Company’s initial public offering were offset by $5.4 million of payments of outstanding FHLB advances.

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 increase core deposits, along with the continued use of FHLB advances as well as brokered certificates of deposit as needed, to fund loan growth.

At March 31, 2020, we exceeded all of our regulatory capital requirements with a Tier 1 leverage capital level of $46.6 million, or 10.9% of adjusted total assets, which is above the well-capitalized required level of $21.4 million, or 5.0%, and total risk-based capital of $48.6 million, or 14.4% of risk-weighted assets, which is above the well-capitalized required level of $33.8 million, or 10.0%. Management is not aware of any conditions or events since the most recent notification that would change our category. For additional information, see Note 13 of the Notes to Financial Statements.

 

     March 31, 2020  
     Actual     For Capital Adequacy
Purposes
    To Be Well Capitalized
Under Prompt Corrective
Action Provisions
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  
     (dollars in thousands)  

Leverage (Tier 1)

   $ 46,634        10.9   $ 17,147        4.0   $ 21,434        5.0

Risk-based:

               

Common Tier 1

     46,634        13.8     15,206        4.5     21,964        6.5

Tier 1

     46,634        13.8     20,275        6.0     27,033        8.0

Total

     48,642        14.4     27,033        8.0     33,791        10.0

 

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In accordance with the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies have adopted, effective January 1, 2020, a final rule whereby financial institutions and financial institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater than 9%, will be eligible to opt into a “Community Bank Leverage Ratio” framework. The framework will first be available for use in PyraMax Bank’s March 31, 2020 Call Report. Qualifying community banking organizations that elect to use the community bank leverage ratio framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the agencies’ capital rules and will be considered to have met the “well capitalized” ratio requirements under the Prompt Corrective Action statutes. The agencies reserved the authority to disallow the use of the Community Bank Leverage Ratio by a financial institution or holding company based on the risk profile of the organization. The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and implementing rules temporarily reduced the community bank leverage ratio to 8%, to be gradually increased back to 9% by 2022. The implementing rules also provide that, during the same time period, if a qualifying community banking organization falls no more than 1% below the community bank leverage ratio, it will have a two-quarter grace period to satisfy the community bank leverage ratio.

Off-Balance Sheet Arrangements and Contractual Obligations

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our potential future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. For additional information, see Note 9 of the Notes to Financial Statements.

Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for premises and equipment, agreements with respect to borrowings and deposits, and agreements with respect to securities.

The following tables present contractual obligations at March 31, 2020 and December 31, 2019.

 

            Payments Due by Period  

Contractual Obligations

   Total      Less Than
One Year
     One to Three
Years
     Three to Five
Years
     More Than
Five Years
 
     (Dollars in thousands)  

At March 31, 2020:

              

Long-term debt obligations

   $ 55,614      $ 913      $ 22,021      $ 2,085      $ 30,595  

Operating lease obligations

     82        75        7        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 55,696      $ 988      $ 22,028      $ 2,085      $ 30,595  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2019:

              

Long-term debt obligations

   $ 17,623      $ 39      $ 7,088      $ 102      $ 10,394  

Operating lease obligations

     113        93        20        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 17,736      $ 132      $ 7,108      $ 102      $ 10,394  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impact of Inflation and Changing Prices

The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles in the United States of America which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

 

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

 

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, 2020. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended March 31, 2020, 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.

 

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PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

We are not involved in any pending legal proceedings as a plaintiff or defendant other than routine legal proceedings occurring in the ordinary course of business, and at March 31, 2020, we were not involved in any legal proceedings, the outcome of which would be material to our financial condition or results of operations.

 

Item 1A.

Risk Factors

In addition to the other information set forth in the Form 10-Q, you should carefully consider the risk factors that appeared under Item 1A “Risk Factors” disclosed in the Company’s December 31, 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission. There are no material changes from the risk factors included within the Company’s 2019 Annual Report, other than the risks described below.

The recent global coronavirus outbreak may pose risks and could harm business and results of operations of the Company.

In December 2019, a coronavirus (COVID-19) outbreak was reported in China, and, in March 2020, the President of the United States declared the COVID-19 outbreak in the United States a national emergency. The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. Since the COVID-19 outbreak, more than 22 million people have filed claims for unemployment, and stock markets have declined in value and, in particular, bank stocks have significantly declined in value. In response to the COVID-19 outbreak, the Federal Reserve Board has reduced the benchmark fed funds rate to a target range of 0% to 0.25%, and the yields on 10 and 30-year treasury notes have declined to historic lows. Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and recently passed legislation has provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. Finally, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. We may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened.

As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

 

demand for our products and services may decline, making it difficult to grow assets and income;

 

if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

 

collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

 

as the result of the decline in the Federal Reserve Board’s target federal funds rate, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;

 

a prolonged weakness in economic conditions resulting in a reduction of future projected earnings could result in our recording a valuation allowance against our current outstanding deferred tax assets;

 

Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs;

 

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the Company may experience branch closures, work stoppages, interruptions in critical services provided by third party vendors, or the loss or unavailability of key employees due to the pandemic; and

 

there may be increasing or protracted volatility in the price of the Company’s common stock.

Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3.

Defaults Upon Senior Securities

None.

 

Item 4.

Mine Safety Disclosures

Not applicable.

 

Item 5.

Other Information

None.

 

Item 6.

Exhibits

 

Exhibit
Number

  

Description

3.1    Charter of 1895 Bancorp of Wisconsin, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Registration Statement on Form S-1, as amended (Commission File No. 333-227223))
3.2    Bylaws of 1895 Bancorp of Wisconsin, Inc. (incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form S-1, as amended (Commission File No. 333-227223))
10.1    1895 Bancorp of Wisconsin, Inc. 2020 Equity Incentive Plan (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement filed on February 21, 2020 (Commission File No. 001-38778)
31.1    Certification of Chief Executive Officer Pursuant to Section 312 of the Sarbanes-Oxley Act of 2002
31.2    Certification of Chief Financial Officer Pursuant to Section 312 of the Sarbanes-Oxley Act of 2002
32.1    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, 2020, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements *

 

*

Furnished, not filed.

 

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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.

 

      1895 BANCORP OF WISCONSIN, INC.
Date: May 15, 2020       /s/ Richard B. Hurd                                                                 
      Richard B. Hurd
      President and Chief Executive Officer
Date: May 15, 2020       /s/ Richard J. Krier                                                                  
      Richard J. Krier
     

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

42