1895 Bancorp of Wisconsin, Inc. - FORM 10-Q

1895 Bancorp of Wisconsin, Inc. - FORM 10-Q - November 12, 2020

Attached files

Attached files

1895 Bancorp of Wisconsin, Inc. Reports

file	filename
EX-32.1 - EX-32.1 - 1895 Bancorp of Wisconsin, Inc.	d56976dex321.htm
EX-31.2 - EX-31.2 - 1895 Bancorp of Wisconsin, Inc.	d56976dex312.htm
EX-31.1 - EX-31.1 - 1895 Bancorp of Wisconsin, Inc.	d56976dex311.htm

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

☐	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)

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 ☒

4,769,952 shares of the Registrant’s common stock, par value $0.01 per share, were outstanding as of November 12, 2020.

1895 Bancorp of Wisconsin, Inc.

Form 10-Q

Table of Contents


		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements		3

	Consolidated Balance Sheets at September 30, 2020 (unaudited) and December 31, 2019		3

	Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2020 and 2019 (unaudited)		4

	Consolidated Statements of Comprehensive Income (Loss) for the Three Months and Nine Months Ended September 30, 2020 and 2019 (unaudited)		5

	Consolidated Statement of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2020 (unaudited)		6

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019 (unaudited)		8

	Notes to Financial Statements (unaudited)		9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		33

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		46

Item 4.	Controls and Procedures		46

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		47

Item 1A.	Risk Factors		47

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		47

Item 3.	Defaults Upon Senior Securities		47

Item 4.	Mine Safety Disclosures		47

Item 5.	Other Information		47

Item 6.	Exhibits		47

	SIGNATURES		49

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

1895 BANCORP OF WISCONSIN, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)


	September 30, 2020			December 31, 2019
	(unaudited)
Assets
Cash and due from banks	$	78,042		$	11,507
Fed funds sold		856			200

Cash and cash equivalents		78,898			11,707

Available for sale securities, stated at fair value		58,428			71,375
Marketable equity securities, stated at fair value		2,693			2,553
Loans held for sale		5,062			685
Loans, net of allowance for loan losses of $2,650 and $2,000 respectively		328,820			310,674
Premises and equipment, net		6,380			6,681
Mortgage servicing rights, net		1,615			2,172
Federal Home Loan Bank stock, at cost		3,032			913
Accrued interest receivable		997			963
Cash value of life insurance		13,384			13,085
Other assets		5,543			7,201

TOTAL ASSETS	$	504,852		$	428,009

Liabilities and Stockholders’ Equity
Deposits		354,985			344,596
Advance payments by borrowers for taxes and insurance		11,428			1,681
Federal Home Loan Bank advances		68,884			17,623
Accrued interest payable		208			385
Other liabilities		9,707			5,059

Total liabilities		445,212			369,344

Common stock (par value $0.01 per share) Authorized - 90,000,000 shares at September 30, 2020 and December 31, 2019 Issued - 4,876,677 at September 30, 2020 and December 31, 2019 Outstanding - 4,769,952 at September 30, 2020 and 4,876,677 at December 31, 2019		49			49
Additional paid-in capital		20,076			19,981
Unallocated common stock of Employee Stock Ownership Plan, 163,242 and 168,507 shares at September 30, 2020 and December 31, 2019, respectively		(1,632	)		(1,685	)
Less treasury stock, 124,225 and 0 shares at cost, at September 30, 2020 and December 31, 2019, respectively		(1,199	)		—
Retained earnings		41,106			40,213
Accumulated other comprehensive income, net of income taxes		1,240			107

Total stockholders’ equity		59,640			58,665

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	504,852		$	428,009

See accompanying notes to the consolidated financial statements.

1895 BANCORP OF WISCONSIN, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts) – Unaudited


	Three months ended September 30					Nine months ended September 30
	2020		2019			2020			2019
Interest and dividend income:
Loans, including fees	$	3,617	$	3,840		$	10,228		$	11,699
Securities, taxable		304		406			1,092			1,198
Other		17		133			65			289

Total interest and dividend income		3,938		4,379			11,385			13,186

Interest expense:
Interest-bearing deposits		480		1,210			1,946			3,664
Borrowed funds		207		51			516			236

Total interest expense		687		1,261			2,462			3,900

Net interest income		3,251		3,118			8,923			9,286
Provision for loan losses		500		—			500			—

Net interest income after provision for loan losses		2,751		3,118			8,423			9,286

Noninterest income:
Service charges and other fees		215		223			578			632
Loan servicing, net		252		166			112			754
Net gain on sale of loans		936		513			2,665			423
Net gain on sale of securities		1,014		—			1,022			—
Increase in cash surrender value of insurance		101		99			299			300
Net gain on death benefit		—		—			—			158
Other		241		10			312			146

Total noninterest income		2,759		1,011			4,988			2,413

Noninterest expense:
Salaries and employee benefits		2,419		2,281			6,506			7,011
Foreclosed assets, net		—		(101	)		(8	)		(86	)
Advertising and promotions		31		35			103			135
Data processing		206		171			573			574
Occupancy and equipment		319		392			1,016			1,269
FDIC assessment		31		—			81			—
Other		887		780			2,670			3,007

Total noninterest expense		3,893		3,558			10,941			11,910

Income (loss) before income taxes		1,617		571			2,470			(211	)
Income tax expense (benefit)		1,205		135			1,577			(167	)

Net income (loss)	$	412	$	436		$	893		$	(44	)

Earnings (loss) per common share:
Basic	$	0.09	$	0.09		$	0.20		$	(0.01	)

Diluted	$	0.09	$	0.09		$	0.20		$	(0.01	)

Average common shares outstanding:
Basic		4,481,625		4,704,660			4,494,234			4,702,904
Diluted		4,519,626		4,704,660			4,529,967			4,702,904

See accompanying notes to the consolidated financial statements.

1895 BANCORP OF WISCONSIN, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands) - Unaudited


	Three months ended September 30					Nine months ended September 30
	2020			2019		2020			2019
Net income (loss)	$	412		$	436	$	893		$	(44	)

Other comprehensive income (loss):
Unrealized holding gains arising during the period		233			679		2,574			2,744
Reclassification adjustment for gains realized in net income		(1,014	)		—		(1,022	)		—

Other comprehensive income (loss) before tax effect		(781	)		679		1,552			2,744
Tax effect of other comprehensive income (loss) items		(211	)		183		419			741

Other comprehensive income (loss), net of tax		(570	)		496		1,133			2,003

Comprehensive income (loss)	$	(158	)	$	932	$	2,026		$	1,959

See accompanying notes to the consolidated financial statements.

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, 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 loss		—		—			—			—			—		(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

Net income		—		—			—			—			194		—			194
Other comprehensive income		—		—			—			—			—		1,827			1,827
Repurchase of 1895 Bancorp of Wisconsin, Inc. common stock (25,476 shares repurchased)		—		—			(231	)		—			—		—			(231	)
ESOP shares committed to be released (1,755 shares)				(4	)					18								14
Stock compensation expense		—		44			—			—			—		—			44

Balance as of June 30, 2020	$	49	$	20,022		$	(406	)	$	(1,650	)	$	40,694	$	1,810		$	60,519

Net income		—		—			—			—			412		—			412
Other comprehensive loss		—		—			—			—			—		(570	)		(570	)
Repurchase of 1895 Bancorp of Wisconsin, Inc. common stock (81,249 shares repurchased)		—		—			(793	)		—			—		—			(793	)
ESOP shares committed to be released (1,755 shares)				(1	)					18								17
Stock compensation expense		—		55			—			—			—		—			55

Balance as of September 30, 2020	$	49	$	20,076		$	(1,199	)	$	(1,632	)	$	41,106	$	1,240		$	59,640

See accompanying notes to the consolidated financial statements.

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

Net loss		—		—			—		—			(9	)		—			(9	)
Other comprehensive income		—		—			—		—			—			800			800
ESOP shares committed to be released (3,511 shares)		—		(2	)		—		35			—			—			33

Balance as of June 30, 2019	$	49	$	19,978		$	—	$	(1,720	)	$	39,284		$	(76	)	$	57,515

Net income		—		—			—		—			436			—			436
Other comprehensive income		—		—			—		—			—			496			496
ESOP shares committed to be released (1,755 shares)		—		—			—		18			—			—			18

Balance as of September 30, 2019	$	49	$	19,978		$	—	$	(1,702	)	$	39,720		$	420		$	58,465

See accompanying notes to the consolidated financial statements.

1895 BANCORP OF WISCONSIN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) - Unaudited


	Nine months ended September 30,
	2020			2019
	(unaudited)
Cash flows from operating activities:
Net income (loss)	$	893		$	(44	)
Adjustments to reconcile net loss to net cash from operating activities:
Net amortization of investment securities		180			198
Depreciation		494			512
Provision for loan losses		500			—
Net loss (gain) on sale of premises and equipment		33			(96	)
Change in fair value of marketable equity securities		(315	)		—
Net gain on sale of available for sale securities		(1,022	)		—
Stock compensation expense		99			—
Impairment of mortgage servicing rights		575			—
Provision for deferred income tax		1,814			216
Originations of mortgage loans held for sale		(158,442	)		(65,629	)
Proceeds from sales of mortgage loans held for sale		156,730			62,828
Net gain on sale of mortgage loans held for sale		(2,665	)		(423	)
Gain on death benefit		—			(158	)
ESOP compensation		49			51
Net change in cash value of life insurance		(299	)		(199	)
Net gain on sale of foreclosed assets		—			(103	)
Changes in operating assets and liabilities:
Mortgage servicing rights		(18	)		(98	)
Accrued interest receivable and other assets		(609	)		698
Accrued interest payable and other liabilities		(651	)		(487	)

Net cash used in operating activities		(2,654	)		(2,734	)

Cash Flows From Investing Activities
Proceeds from sales of available for sale securities		19,283			—
Maturities, prepayments, and calls of available for sale securities		51,697			6,885
Purchases of available for sale securities		(50,517	)		(6,743	)
Net (increase) decrease in loans		(18,646	)		44,884
Net proceeds from sales of premises		—			1,627
Net capital expenditures for premises and equipment		(226	)		(1,408	)
Proceeds from life insurance policies		—			772
Proceeds from sale of foreclosed assets		—			237
Net (increase) decrease in Federal Home Loan Bank stock		(2,119	)		348

Net cash (used in) provided by investing activities		(528	)		46,602

Cash Flows From Financing Activities
Net increase (decrease) in deposits		10,389			(48,162	)
Net increase in advance payments by borrowers for taxes and insurance		9,747			10,830
Proceeds from stock offering		—			20,029
Purchase of ESOP shares		—			(1,755	)
Proceeds from issuance of Federal Home Loan Bank advances		52,000			—
Principal payments on Federal Home Loan Bank advances		(739	)		(22,377	)
Purchases of treasury stock		(1,024	)		—

Net cash provided by (used in) financing activities		70,373			(41,435	)

Net increase in cash and cash equivalents		67,191			2,433
Cash and cash equivalents at beginning of period		11,707			7,923

Cash and cash equivalents at end of period	$	78,898		$	10,356

Supplemental cash flow information:
Cash paid during the year for interest	$	2,639		$	3,853
Noncash activities:
Loans transferred to loans held for sale	$	124		$	134
1895 Bancorp of Wisconsin, Inc. common stock held by PyraMax Bank reclassified to treasury stock		175			—
Increase in net unsettled security purchases		5,122			—

See accompanying notes to the consolidated financial statements.

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.

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.

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.

Impact of COVID-19

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 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. On March 3, 2020, the Federal Open Market Committee reduced the target federal funds rate by 50 basis points to 1.00%. 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 continue to 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 may negatively impact our business, financial condition, results of operations and cash flows.

Subsequent Events

The Company has evaluated subsequent events for potential recognition and/or disclosure through the date the unaudited consolidated financial statements included in this quarterly report on Form 10-Q were issued. There were no significant subsequent events for the quarter ended September 30, 2020 through the issuance date of these unaudited consolidated financial statements that warranted adjustment to or disclosure in the unaudited consolidated financial statements.

NOTE 2 – RECENT ACCOUNTING STANDARDS

The following Accounting Standards Updates (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 fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. 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. On June 3, 2020, the FASB issued ASU 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities, updating the effective date for fiscal years beginning after December 15, 2021, and interim periods within fiscal years 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 2016-02 on the Company’s consolidated financial statements.

NOTE 3 – AVAILABLE FOR SALE SECURITIES

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


	September 30, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
Obligations of states and political subdivisions	$	7,659	$	250	$	—		$	7,909
Government-sponsored mortgage-backed securities		40,007		1,312		—			41,319
Corporate collateralized mortgage obligations		237		—		(2	)		235
Asset-backed securities		7,369		16		(7	)		7,378
Certificates of deposit		1,458		129		—			1,587

Total	$	56,730	$	1,707	$	(9	)	$	58,428


	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 $2.1 million and $3.0 million were pledged as collateral at September 30, 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.


	September 30, 2020
	Amortized Cost		Fair Value
	(in thousands)
Debt and other securities:
Due in one year or less	$	326	$	326
Due after one through 5 years		6,462		6,682
Due after 5 through 10 years		1,329		1,444
Due after 10 years		1,000		1,044

Total debt and other securities		9,117		9,496
Mortgage-related securities		40,244		41,554
Asset-backed securities		7,369		7,378

Total	$	56,730	$	58,428

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:


	September 30, 2020
	Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	(in thousands)
Asset-backed securities	$	436	$	(1	)	$	1,509	$	(6	)	$	1,945	$	(7	)
Corporate collateralized obligations		145		(2	)		—		—			145		(2	)

Total	$	581	$	(3	)	$	1,509	$	(6	)	$	2,090	$	(9	)


	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 September 30, 2020 and December 31, 2019, respectively, the Company had 5 and 30 debt securities with unrealized losses representing aggregate depreciation of approximately 0.4% 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 September 30,				Nine months ended September 30,
	2020		2019		2020		2019
	(in thousands)				(in thousands)
Proceeds from sales of securities available-for-sale	$	19,005	$	—	$	19,283	$	—

Gross realized gains		1,014		—		1,022		—
Gross realized losses		—		—		—		—

NOTE 4 – LOANS

Major classifications of loans are summarized as follows:


	September 30, 2020			December 31, 2019
	(in thousands)
Commercial:
Real estate	$	183,377		$	178,882
Land development		1,524			1,623
Other		59,793			34,072
Residential real estate:
First mortgage		59,456			65,450
Construction		2,965			2,041
Consumer:
Home equity and lines of credit		24,379			29,691
Other		421			611

Subtotal		331,915			312,370
Net deferred loan costs (fees)		(445	)		304
Allowance for loan losses		(2,650	)		(2,000	)

Loans, net	$	328,820		$	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 September 30, 2020 and December 31, 2019, respectively, the Company had transferred $28.6 million and $26.2 million 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:


	September 30, 2020
	31-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans
	(in thousands)
Commercial:
Real estate	$	—	$	—	$	—	$	183,377	$	183,377
Land development		—		—		—		1,524		1,524
Other		—		—		—		59,793		59,793
Residential real estate:
First mortgage		664		51		715		58,741		59,456
Construction		—		—		—		2,965		2,965
Consumer:
Home equity and lines of credit		28		28		56		24,323		24,379
Other		—		—		—		421		421

Total	$	692	$	79	$	771	$	331,144	$	331,915

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 September 30, 2020 or December 31, 2019.

A summary of activity in the allowance for loan losses for the three and nine months ended September 30, 2020 and September 30, 2019 is presented below:


	Commercial		Residential			Consumer			Total
	(in thousands)
Three months ended September 30, 2020
Allowance for loan losses
Beginning balance	$	1,243	$	573		$	298		$	2,114
Provision for loan losses		360		100			40			500
Loans charged-off		—		(60	)		(2	)		(62	)
Recoveries		2		88			8			98

Ending balance	$	1,605	$	701		$	344		$	2,650

Three months ended September 30, 2019
Allowance for loan losses
Beginning balance	$	1,445	$	1,172		$	570		$	3,187
Provision for loan losses		—		—			—			—
Loans charged-off		—		—			(181	)		(181	)
Recoveries		6		—			6			12

Ending balance	$	1,451	$	1,172		$	395		$	3,018

NOTE 4 – LOANS (continued)


	Commercial			Residential			Consumer			Total
	(in thousands)
Nine months ended September 30, 2020
Allowance for loan losses
Beginning balance	$	1,235		$	573		$	192		$	2,000
Provision (credit) for loan losses		360			100			40			500
Loans charged-off		—			(60	)		(7	)		(67	)
Recoveries		10			88			119			217

Ending balance	$	1,605		$	701		$	344		$	2,650

Nine months ended September, 2019
Allowance for loan losses
Beginning balance	$	1,448		$	1,250		$	564		$	3,262
Provision (credit) for loan losses		—			—			—			—
Loans charged-off		(214	)		(83	)		(186	)		(483	)
Recoveries		217			5			17			239

Ending balance	$	1,451		$	1,172		$	395		$	3,018

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


	September 30, 2020
	Commercial		Residential		Consumer		Total
	(in thousands)
Loans:
Individually evaluated for impairment	$	11,529	$	517	$	27	$	12,073
Collectively evaluated for impairment		233,165		61,904		24,773		319,842

Total loans	$	244,694	$	62,421	$	24,800	$	331,915

Allowance for loan losses:
Individually evaluated for impairment	$	—	$	—	$	5	$	5
Collectively evaluated for impairment		1,605		701		339		2,645

Total allowance for loan losses	$	1,605	$	701	$	344	$	2,650


	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

NOTE 4 – LOANS (continued)

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.

Doubtful 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 unlikely.

NOTE 4 – LOANS (continued)

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


	September 30, 2020
	Pass		Watch and Special Mention		Substandard		Total
	(in thousands)
Commercial:
Real estate	$	150,199	$	27,047	$	6,131	$	183,377
Land development		—		—		1,524		1,524
Other		43,372		12,769		3,652		59,793

Total	$	193,571	$	39,816	$	11,307	$	244,694


	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 September 30, 2020 or December 31, 2019, respectively.

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:


	September 30, 2020
	Performing		Non Performing		Total
	(in thousands)
Residential real estate:
First mortgage	$	58,182	$	1,274	$	59,456
Construction		2,965		—		2,965
Consumer:
Home equity and lines of credit		24,236		143		24,379
Other		421		—		421

Total	$	85,804	$	1,417	$	87,221

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 Nine Months Ended September 30, 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		—		—		—		48		—
Construction		—		—		—		—		—
Consumer:
Home equity and lines of credit		5		6		5		5		—
Other		—		—		—		—		—

Total impaired loans with reserve		5		6		5		53		—

Impaired loans with no reserve:
Commercial:
Real estate		6,352		6,352		NA		6,257		275
Land development		1,525		1,525		NA		169		17
Other		3,652		3,789		NA		1,983		89
Residential real estate:
First mortgages		517		641		NA		620		254
Construction		—		—		NA		—		—
Consumer:
Home equity and lines of credit		22		51		NA		24		2
Other		—		—		NA		—		—

Total impaired loans with no reserve		12,068		12,358		NA		9,053		637

Total impaired loans	$	12,073	$	12,364	$	5	$	9,106	$	637

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 September 30, 2020 and December 31, 2019.

Nonperforming loans are as follows:


	September 30, 2020		December 31, 2019
	(in thousands)
Nonaccrual loans, other than troubled debt restructurings	$	1,093	$	1,416
Nonaccrual loans, troubled debt restructurings		324		597

Total nonperforming loans (NPLs)	$	1,417	$	2,013

Troubled debt restructurings, accruing	$	435	$	466

NOTE 4 – LOANS (continued)

There were no loans modified as troubled debt restructurings during the nine months ended September 30, 2020 and year ended December 31, 2019.

The provisions of the March 2020 Coronavirus Aid, Relief and Economic Security (“CARES”) Act included an election to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for loans that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt these provisions of the CARES Act. As of September 30, 2020, the Company had 1 to 3 month deferrals of approximately $155,000 in interest, escrow, and principal payments on $16.4 million in outstanding loans.

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 nine months ended September 30, 2020 and 2019.

Information on non-accrual loans is presented below:


	September 30, 2020			December 31, 2019
	(in thousands)
Commercial:
Real estate	$	—		$	180
Land development		—			—
Other		—			—
Residential real estate:
First mortgages		1,274			1,690
Construction		—			—
Consumer:
Home equity and lines of credit		143			143
Other		—			—

Total non-accrual loans	$	1,417		$	2,013

Total non-accrual loans to total loans		0.43	%		0.64	%
Total non-accrual loans to total assets		0.28	%		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 $346.1 million and $336.7 million as of September 30, 2020 and December 31, 2019, respectively.

NOTE 5 – MORTGAGE SERVICING RIGHTS (continued)

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


	Three Months Ended September 30, 2020			Three Months Ended September 30, 2019			Nine Months Ended September 30, 2020			Nine Months Ended September 30, 2019
	(in thousands)						(in thousands)
Mortgage servicing rights beginning balance	$	1,587		$	2,263		$	2,172		$	2,103
Additions		232			77			578			406
Amortization		(199	)		(139	)		(560	)		(308	)
Increase in valuation allowance		(5	)		—			(575	)		—

Mortgage servicing rights ending balance	$	1,615		$	2,201		$	1,615		$	2,201

Fair value at beginning of period	$	1,587		$	2,891		$	2,404		$	3,371
Fair value at end of period	$	1,615		$	2,407		$	1,615		$	2,407

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 September 30, 2020, the model used discount rates ranging from 10% to 13.5%, and prepayment speeds ranging from 20.9% to 46.9%, 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 September 30, 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 September 30, 2020:
2020	$	341
2021		320
2022		299
2023		278
2024		254
Thereafter		123

Total	$	1,615

NOTE 6 – DEPOSITS

The composition of deposits is summarized below:


	September 30, 2020		December 31, 2019
	(in thousands)
Non-interest bearing checking	$	91,103	$	62,768
Interest bearing checking		28,986		25,432
Money market		86,831		65,999
Statement savings		57,334		47,981
Certificates of deposit⁽¹⁾		90,731		142,416

Total	$	354,985	$	344,596

⁽¹⁾	Included in these amounts are brokered deposits of $10.5 million and $29.6 million as of September 30, 2020 and December 31, 2019, respectively.

The Company held $9.0 million and $16.3 million in certificates of deposit which met or exceeded the FDIC insurance limit of $250,000 as of September 30, 2020 and December 31, 2019, respectively.

NOTE 6 – DEPOSITS (continued)

The scheduled maturities of certificates of deposit are presented below:


	September 30, 2020
	(in thousands)
2020	$	24,979
2021		60,238
2022		3,466
2023		639
2024		862
Thereafter		547

Total	$	90,731

NOTE 7 – FEDERAL HOME LOAN BANK ADVANCES

Federal Home Loan Bank advances consist of the following:


	September 30, 2020					December 31, 2019
	Rate			Amount		Rate			Amount
	(dollars in thousands)
Fixed rate, fixed term advances		1.41% - 1.77	%	$	24,000		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	%		594		7.47	%		623
Advance structured note, payments due monthly, maturing April 2030		1.05	%		9,604		—			—
Advance structured note, payments due monthly, maturing May 2030		1.19	%		9,686		—			—

Total				$	68,884				$	17,623

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


	September 30, 2020
	Weighted Average Rate			Amount
	(dollars in thousands)
2020		1.25	%	$	485
2021		0.95	%		12,956
2022		1.54	%		8,481
2023		1.54	%		8,507
2024		1.28	%		2,032
Thereafter		1.08	%		36,423

Total				$	68,884

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.

NOTE 7 – FEDERAL HOME LOAN BANK ADVANCES (continued)

The Company has pledged approximately $146.2 million and $125.5 million of qualifying loans as collateral for Federal Home Loan Bank advances as of September 30, 2020 and December 31, 2019, respectively. Federal Home Loan Bank advances are also secured by approximately $3.0 million and $913,000 of Federal Home Loan Bank stock held by the Company as of September 30, 2020 and December 31, 2019, respectively. The Company’s available and unused portion of this borrowing agreement totaled $76.3 million and $107.0 million as of September 30, 2020 and December 31, 2019, respectively. Additional borrowing would require additional purchase of FHLB stock.

NOTE 8 – INCOME TAXES

Income tax expense (benefit) was $1.2 million and $135,000 for the three months ended September 30, 2020 and 2019, respectively, and $1.6 million and ($167,000) for the nine months ended September 30, 2020 and 2019, respectively. Included in these amounts were $784,000 and $934,000 related to increases in our deferred tax valuation allowance for the three and nine months ended September 30, 2020. As of September 30, 2020, the deferred tax asset valuation allowance was $934,000, reducing our net deferred tax asset to $3.0 million at that date. We did not have a deferred tax asset valuation allowance at December 31, 2019.

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. The realization of deferred tax assets is dependent on the existence of taxable income of the appropriate character (e.g., ordinary or capital) within the carry-back and carry-forward periods available under tax law, which would consider future reversals of existing taxable temporary differences and taxable income in prior carryback years as permitted under tax law.

Due to recent changes in market conditions and current events related to COVID-19, the board and management continue to assess the Company’s deferred tax assets including forecasted future projected income and future reversals of existing temporary differences. As such, there may be additional deferred tax asset impairment in subsequent periods.

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 September 30, 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.

NOTE 9 – COMMITMENTS AND CONTINGENCIES (continued)

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


	September 30, 2020
	Fixed Rate		Variable Rate		Total
	(in thousands)
Commitments to extend credit	$	20,232	$	36,715	$	56,947
Standby letters of credit		23		2,150		2,173
Credit enhancement under the FHLB of Chicago Mortgage Partnership Finance Program		1,051		—		1,051
Commitments to sell loans		54,934		—		54,934
Overdraft protection program commitments		4,090		—		4,090

	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 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. Commitments to sell loans represent commitments obtained by the Company from a secondary market agency to purchase mortgages from the Company at specified interest rates and within specified periods of time.

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 $2.4 million of commitments to deliver loans through the Program as of September 30, 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 September 30, 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.

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 8, 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 include 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 $17,000 and $18,000 in compensation expense for the three months ended September 30, 2020 and September 30, 2019, respectively, and $49,000 and $51,000 for the nine months ended September 30, 2020 and September 30, 2019, respectively.

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


	September 30, 2020		December 31, 2019
	(dollars in thousands)
Shares committed to be released		5,265		7,021
Total allocated shares		7,021		—
Total unallocated shares		163,242		168,507

Total ESOP shares		175,528		175,528

Fair value of unallocated shares (based on $9.26 and $10.78 share price as of September 30, 2020 and December 31, 2019, respectively)	$	1,512	$	1,817

NOTE 11 – RELATED PARTY TRANSACTIONS

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


	September 30, 2020			December 31, 2019
	(in thousands)
Beginning balance	$	1,172		$	1,289
New loans		38			378
Repayments		(166	)		(495	)

Ending balance	$	1,044		$	1,172

Deposits from directors, executive officers, and their affiliates totaled $1.0 million and $1.7 million at September 30, 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 $6,000 and $8,000 during the three months ended September 30, 2020 and 2019, respectively, and $21,000 and $29,000 for the nine months ended September 30, 2020 and 2019, respectively.

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.

NOTE 12 – FAIR VALUE MEASUREMENTS (continued)

Mortgage servicing rights – The Company utilizes an independent valuation from a third party which uses a discounted cash flow model to estimate the fair value of mortgage servicing rights. The model utilizes prepayment assumptions to project cash flows related to the mortgage servicing rights based upon the current interest rate environment, which is then discounted to estimate an expected fair value of the mortgage servicing rights. The model considers characteristics specific to the underlying mortgage portfolio, such as: contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges and costs to service. Given the significance of the unobservable inputs utilized in the estimation process, mortgage servicing rights are classified as Level 3 within the fair value hierarchy. The Company records the mortgage servicing rights at the lower of amortized cost or fair value.

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
	September 30, 2020		Level 1		Level 2		Level 3
	(in thousands)
Marketable equity securities:	$	2,693	$	2,693	$	—	$	—
Securities available-for-sale:
Obligations of states and political subdivisions		7,909		—		7,909		—
Government-sponsored mortgage-backed securities		41,319		—		41,319		—
Corporate collateralized mortgage obligations		235		—		235		—
Asset-backed securities		7,378		—		7,378		—
Certificates of deposit		1,587		—		1,587		—

Total	$	61,121	$	2,693	$	58,428	$	—


			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	$	—

Impaired loans are measured at fair value on a non-recurring basis. Loans with a carrying amount of $5,000 and $67,000, respectively, were considered impaired and written down to their estimated fair value of $0 and $0 as of September 30, 2020 and December 31, 2019, respectively. As a result, the Company recognized a specific valuation allowance against these impaired loans totaling $5,000 and $67,000 as of September 30, 2020 and December 31, 2019, respectively.

Mortgage servicing rights are measured at fair value on a non-recurring basis. At September 30, 2020, mortgage servicing rights with a carrying value of $2.2 million were considered impaired and written down to their estimated fair value of $1.6 million. There was no impairment on mortgage servicing rights as of December 31, 2019.

There were no foreclosed assets as of September 30, 2020 and December 31, 2019.

NOTE 12 – FAIR VALUE MEASUREMENTS (continued)

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


	September 30, 2020
	Carrying Value		Level 1		Level 2		Level 3
	(in thousands)
Financial assets:
Cash and cash equivalents	$	78,898	$	78,898	$	—	$	—
Available for sale securities		58,428		—		58,428		—
Marketable equity securities stated at fair value		2,693		2,693		—		—
Loans held for sale		5,062		—		5,062		—
Loans		328,820		—		—		333,541
Accrued interest receivable		997		997		—		—
Federal Home Loan Bank stock		3,032		—		—		3,032
Cash value of life insurance		13,384		—		—		13,384
Financial liabilities:
Deposits		354,985		264,255		—		91,043
Advance payments by borrowers for taxes and insurance		11,428		11,428		—		—
Federal Home Loan Bank advances		68,884		—		70,854		—
Accrued interest payable		208		208		—		—


	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 do 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.

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 September 30, 2020 and December 31, 2019.

As of September 30, 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:


	September 30, 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)	$	48,670		9.9	%	$	19,624		4.0	%	$	24,529		5.0	%

Risk-based:
Common Equity Tier 1		48,670		15.1	%		14,518		4.5	%		20,970		6.5	%
Tier 1		48,670		15.1	%		19,357		6.0	%		25,809		8.0	%
Total		51,320		15.9	%		25,809		8.0	%		32,262		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	%

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 and nine months ended September 30, 2020 are presented in the following table.


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
	(In thousands, except per share amounts)				(In thousands, except per share amounts)
Net income (loss)	$	412	$	436	$	893	$	(44	)

Weighted shares outstanding for basic EPS
Weighted average shares outstanding		4,647		4,877		4,660		4,877
Less: Weighted average unallocated ESOP shares		165		172		166		174

Weighted average shares outstanding for basic EPS		4,482		4,705		4,494		4,703
Additional dilutive shares		38		—		36		—

Weighted average shares outstanding for dilutive EPS		4,520		4,705		4,530		4,703

Basic and diluted income (loss) per share	$	0.09	$	0.09	$	0.20	$	(0.01	)

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 salaries and employee benefits in the consolidated statements of income.

A summary of the Company’s stock option activity for the period ended September 30, 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		218,115		7.89		9.55		394,444
Exercised		—		—		—		—
Forfeited		—		—		—		—

Outstanding September 30, 2020		218,115		7.89		9.55		394,444

Options exercisable at September 30, 2020		—		—		—		—

The Company amortizes the expense related to stock options as compensation expense over the vesting period. The Company recognized $22,000 and $39,000 in stock option expense during the three and nine month period ended September 30, 2020, respectively. At September 30, 2020, the Company had $392,000 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		84,949		7.87
Vested		—		—
Forfeited		—		—

Nonvested at September 30, 2020		84,949	$	7.87

The Company amortizes the expense related to restricted stock awards as compensation expense over the vesting period. The Company recognized $33,000 and $60,000 in restricted stock option expense during the three and nine month period ended September 30, 2020, respectively. At September 30, 2020, the Company had $607,000 of unrecognized compensation expense related to restricted stock shares that is expected to be recognized over a weighted average period of five years.

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 September 30, 2020 and for the three and nine months ended September 30, 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;

•

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.

Additionally, 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.

Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to continue to have a material impact on our operations. While it is not possible to know the full universe or extent of these impacts as of the date of this filing, we are disclosing potentially material items of which we are aware.

The provisions of the CARES Act included an election to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for loans that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt these provisions of the CARES Act. As of September 30, 2020, the Company had 1 to 3 month deferrals of approximately $155,000 in interest, escrow, and principal payments on $16.4 million in outstanding loans.

The CARES Act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new loan program called the Paycheck Protection Program (“PPP”). As a qualified SBA lender, we were automatically authorized to originate PPP loans. The Company actively participated in assisting our customers with applications for resources through the program until its closing on August 8, 2020. PPP loans originated by the Company have: (a) an interest rate of 1.0%, (b) two-year and five-year loan terms to maturity; and (c) principal and interest payments deferred for ten months after the end date of the borrowers forgiveness period. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP. As of September 30, 2020, we have funded 246 PPP loans totaling $30.3 million.

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 latest Annual Report on Form 10-K under the heading “Risk Factors” and in our subsequent Quarterly Reports on Form 10-Q.

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.

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.

Deferred Tax Assets. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred tax asset will not be realized. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a regular basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to increase the valuation allowance against our deferred tax assets.

Comparison of Financial Condition at September 30, 2020 and December 31, 2019

Total Assets. Total assets increased $76.9 million, or 18.0%, to $504.9 million at September 30, 2020 from $428.0 million at December 31, 2019. The increase was primarily due to the increase in cash and cash equivalents of $67.2 million during the nine month period ended September 30, 2020 as a result of $52.0 million in proceeds from FHLB advances and an increase in noninterest bearing checking accounts of $28.3 million. Total assets were also impacted by a $12.9 million, or 18.1%, decrease in available-for-sale securities, as well as an $18.1 million, or 5.1%, increase in net loans.

Cash and Cash Equivalents. Cash and cash equivalents increased $67.2 million to $78.9 million at September 30, 2020 from $11.7 million at December 31, 2019. The increase was due primarily to the increase of $51.3 million in FHLB advances during the nine months ended September 30, 2020, a portion of which was used to fund loan growth, resulting in an $18.1 million increase in net loans for the same period. The increase in cash and cash equivalents was also due to proceeds from sales of available-for-sale securities of $19.3 million and an increase in noninterest bearing checking accounts of $28.3 million during the nine months ended September 30, 2020.

Available-for-Sale Securities. Available-for-sale securities decreased $12.9 million, or 18.1%, to $58.4 million at September 30, 2020 from $71.4 million at December 31, 2019. The decrease was due primarily to sales of available-for-sale securities of $19.3 million as well as maturities, prepayments and calls of available for sale securities totaling $51.7 million. These were offset by purchases of available for sale securities totaling $50.5 million during the nine months ended September 30, 2020.

Loans Held for Sale. Loans held for sale increased $4.4 million to $5.1 million at September 30, 2020 from $685,000 at December 31, 2019. The increase was due primarily to increased volume of first mortgage residential real estate loan originations to be sold into the secondary market as a result of the declining interest rate environment.

Net Loans. Net loans increased $18.1 million, or 5.8%, to $328.8 million at September 30, 2020 from $310.7 million at December 31, 2019. The increase was due primarily to a $30.1 million increase in commercial loans resulting from the Company’s participation in the Small Business Administration Paycheck Protection Program. The increase was offset by decreases in first mortgage residential real estate loans and consumer home equity lines of credit due to normal payment and refinancing activity.

Deposits. Deposits increased $10.4 million, or 3.0%, to $355.0 million at September 30, 2020 from $344.6 million at December 31, 2019. This increase was primarily due to an increase of noninterest bearing checking accounts of $28.3 million to $91.1 million at September 30, 2020 from $62.8 million at December 31, 2019. We continued our marketing focus to concentrate on non-maturing deposits such as savings accounts and money market accounts, which increased $9.4 million and $20.8 million, respectively. These accounts carry lower interest rates and offer more flexibility in a changing rate environment. These increases were offset by a $51.7 million decrease in certificates of deposits to $90.7 million at September 30, 2020 from $142.4 million at December 31, 2019, including a decrease in brokered certificates of deposits of $19.1 million as we replaced maturing brokered certificates with lower cost FHLB advances.

Advance Payments by Borrowers for Taxes and Insurance. Advance payments by borrowers for taxes and insurance increased $9.7 million to $11.4 million at September 30, 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 $51.3 million, or 290.9%, to $68.9 million at September 30, 2020 from $17.6 million at December 31, 2019. The increase was due to $52.0 million in proceeds from FHLB advances during the nine months ended September 30, 2020, partially offset by principal repayments on existing advances of $739,000 during the same period. The advances replaced $19.1 million in maturing brokered certificates of deposit.

Total Stockholders’ Equity. Total stockholders’ equity increased $975,000, or 1.7%, to $59.6 million at September 30, 2020 from $58.7 million at December 31, 2019. The increase was primarily due to net income of $893,000 and other comprehensive income of $1.1 million for the nine months ended September 30, 2020. The Company reclassified shares held in its deferred compensation plan to treasury stock at September 30, 2020, resulting in a reduction in total equity of $175,000. The Company also purchased treasury shares at a cost of $1.0 million under the current stock repurchase plan, resulting in a reduction in total equity of that amount.

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 September 30,
	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	$	328,550		$	3,617		4.37	%	$	338,645		$	3,840		4.54	%
Securities available-for-sale		61,059			304		1.97	%		68,511			406		2.37	%
Other interest-earning assets		68,616			17		0.10	%		21,841			133		2.44	%

Total interest-earning assets		458,225			3,938		3.42	%		428,997			4,379		4.08	%
Non-interest-earning assets		37,044								33,701

Total assets	$	495,269							$	462,698

Interest-earning liabilities:
NOW accounts	$	28,417		$	8		0.11	%	$	25,876		$	14		0.22	%
Money market accounts		82,041			103		0.50	%		68,744			212		1.23	%
Savings accounts		55,683			14		0.10	%		50,536			17		0.13	%
Certificates of deposit		97,355			355		1.45	%		178,925			967		2.16	%

Total interest-bearing deposits		263,496			480		0.72	%		324,081			1,210		1.49	%
Federal Home Loan Bank advances		69,049			207		1.19	%		11,413			51		1.79	%
Other interest-bearing liabilities		10,886			—		—			10,560			—		—

Total interest-bearing liabilities		343,431			687		0.80	%		346,054			1,261		1.46	%
Non-interest-bearing deposits		91,485								62,612
Other non-interest-bearing liabilities		4,768								4,402

Total liabilities		439,684								413,068
Total stockholders’ equity		55,585								49,630

Total liabilities and stockholders’ equity	$	495,269							$	462,698

Net interest income				$	3,251							$	3,118

Net interest-earning assets	$	114,794							$	82,943

Interest rate spread⁽¹⁾							2.62	%							2.62	%
Net interest margin⁽²⁾							2.82	%							2.91	%
Average interest-earning assets to average interest-bearing liabilities		133.43	%							123.97	%

(1)	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.


	Nine Months Ended September 30,
	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	$	322,480		$	10,228		4.24	%	$	355,770		$	11,699		4.38	%
Securities available-for-sale		66,177			1,092		2.20	%		66,931			1,198		2.39	%
Other interest-earning assets		43,638			65		0.20	%		17,289			289		2.23	%

Total interest-earning assets		432,295			11,385		3.52	%		439,990			13,186		4.00	%
Non-interest-earning assets		36,536								35,294

Total assets	$	468,831							$	475,284

Interest-earning liabilities:
NOW accounts	$	26,712		$	39		0.19	%	$	25,261		$	43		0.23	%
Money market accounts		73,759			355		0.64	%		62,990			543		1.15	%
Savings accounts		51,919			44		0.11	%		50,746			50		0.13	%
Certificates of deposit		113,004			1,508		1.78	%		194,386			3,028		2.08	%

Total interest-bearing deposits		265,394			1,946		0.98	%		333,383			3,664		1.47	%
Federal Home Loan Bank advances		55,706			516		1.24	%		18,367			236		1.71	%
Other interest-bearing liabilities		7,619			—		—			6,902			—		—

Total interest-bearing liabilities		328,719			2,462		1.00	%		358,652			3,900		1.45	%
Non-interest-bearing deposits		81,926								65,032
Other non-interest-bearing liabilities		3,907								4,021

Total liabilities		414,552								427,705
Total stockholders’ equity		54,279								47,579

Total liabilities and stockholders’ equity	$	468,831							$	475,284

Net interest income				$	8,923							$	9,286

Net interest-earning assets	$	103,576							$	81,338

Interest rate spread(1)							2.52	%							2.55	%
Net interest margin(2)							2.76	%							2.81	%
Average interest-earning assets to average interest-bearing liabilities		131.51	%							122.68	%

(1)	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.

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 September 30, 2020 vs. 2019
	Increase (Decrease) Due to						Total Increase (Decrease)
	Volume			Rate			Total Increase (Decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	(113	)		(110	)		(223	)
Securities		(41	)		(61	)		(102	)
Other		(211	)		95			(116	)

Total interest-earning assets		(365	)		(76	)		(441	)

Interest-bearing liabilities:
NOW		(2	)		8			6
Money market deposits		(53	)		162			109
Savings		(2	)		5			3
Certificates of deposit		357			255			612

Total interest-bearing deposits		300			430			730
Borrowings		(166	)		10			(156	)
Other		—			—			—

Total interest-bearing liabilities		134			440			574

Change in net interest income	$	(231	)		364			133


	Nine Months Ended September 30, 2020 vs. 2019
	Increase (Decrease) Due to						Total Increase (Decrease)
	Volume			Rate			Total Increase (Decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	(1,066	)		(405	)		(1,471	)
Securities		(14	)		(92	)		(106	)
Other		(559	)		335			(224	)

Total interest-earning assets		(1,639	)		(162	)		(1,801	)

Interest-bearing liabilities:
NOW		(3	)		7			4
Money market deposits		(119	)		307			188
Savings		(1	)		7			6
Certificates of deposit		1,133			387			1,520

Total interest-bearing deposits		1,010			708			1,718
Borrowings		(325	)		45			(280	)
Other		—			—			—

Total interest-bearing liabilities		685			753			1,438

Change in net interest income	$	(954	)		591			(363	)

Comparison of Operating Results for the Three Months Ended September 30, 2020 and 2019

General. We recorded net income of $412,000 for the three months ended September 30, 2020, compared to net income of $436,000 for the three months ended September 30, 2019, a decrease of $24,000.

Interest and Dividend Income. Interest and dividend income decreased $441,000, or 10.1%, to $3.9 million for the three months ended September 30, 2020 from $4.4 million for the three months ended September 30, 2019. The decrease was due primarily to the decreases in first mortgage residential real estate loans and consumer home equity lines of credit due to normal payment and refinancing activity. Additionally, declining interest rates during the period contributed to the decrease.

Interest Expense. Interest expense decreased $574,000, or 45.5%, to $687,000 for the three months ended September 30, 2020, from $1.3 million for the three months ended September 30, 2019, as rates on interest-bearing liabilities decreased 66 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 increased $133,000, or 4.3%, to $3.3 million for the three months ended September 30, 2020 from $3.1 million for the three months ended September 30, 2019. The rate for average interest-bearing liabilities decreased to 0.80% for the three months ended September 30, 2020, from 1.46% for the three months ended September 30, 2019. This 66 basis point decrease in the cost of funds came as the yield on interest-earning assets decreased by 66 basis points, to 3.42% for the three months ended September 30, 2020, from 4.08% for the three months ended September 30, 2019.

Provision for Loan Losses. We recorded $500,000 in provision for loan losses for the three months ended September 30, 2020, compared to no provision recorded during the three months ended September 30, 2019. The allowance for loan losses was $2.7 million, or 0.8%, of total loans, at September 30, 2020, compared to $3.0 million, or 0.9% of total loans, at September 30, 2019. Non-performing loans constituted 0.4% of total gross loans at September 30, 2020 and 0.5% of gross loans at September 30, 2019. Net recoveries for the three months ended September 30, 2020 were $36,000 compared to net charge-offs of $169,000 for the same period in 2019.

Non-interest Income. Non-interest income increased $1.7 million, or 172.9%, to $2.8 million for the three months ended September 30, 2020 from $1.0 million for the three months ended September 30, 2019. The increase was due primarily to increases in gains on sale of first mortgage residential real estate loans of $423,000 and available-for-sale securities of $1.0 million for the three months ended September 30, 2020 when compared to the same period in 2019. Further contributing to the increase was a $231,000 increase in other non-interest income during the three months ended September 30, 2020 due to an increase in the market value of marketable securities held in a Rabbi Trust.

Non-interest Expense. Non-interest expense increased $335,000, or 9.4%, to $3.9 million for the three months ended September 30, 2020 from $3.6 million for the three months ended September 30, 2019. The increase was due primarily to a $138,000 increase in salaries and employee benefits during the three months ended September 30, 2020 resulting from an increase in deferred compensation expense. Other non-interest expense also increased by $107,000 for the three months ended September 30, 2020 due to an increase in tax and accounting services.

Income Tax Expense. We recorded income tax expense of $1.2 million for the three months ended September 30, 2020, compared $135,000 in income tax expense for the three ended September 30, 2019. Due to recent changes in market conditions and current events related to COVID-19, we reduced our estimate of future taxable income causing an increase in our valuation allowance for deferred tax assets in the amount of $784,000 for the three months ended September 30, 2020.

Comparison of Operating Results for the Nine Months Ended September 30, 2020 and 2019

General. We recorded net income of $893,000 for the nine months ended September 30, 2020, compared to net loss of $44,000 for the nine months ended September 30, 2019, an increase of $937,000. The increase was due primarily to an increase in net gains on sale of first mortgage residential real estate loans, offset by a decrease in net interest income.

Interest and Dividend Income. Interest and dividend income decreased $1.8 million, or 13.7%, to $11.4 million for the nine months ended September 30, 2020 from $13.2 million for the nine months ended September 30, 2019. The decrease was due primarily to the decreases in first mortgage residential real estate loans and consumer home equity lines of credit due to normal payment and refinancing activity. Additionally, declining interest rates during the period contributed to the decrease.

Interest Expense. Interest expense decreased $1.4 million, or 36.9%, to $2.5 million for the nine months ended September 30, 2020, from $3.9 million for the nine months ended September 30, 2019, as rates on interest-bearing liabilities decreased 45 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 $363,000, or 3.9%, to $8.9 million for the nine months ended September 30, 2020 from $9.3 million for the nine months ended September 30, 2019. The rate for average interest-bearing liabilities decreased to 1.00% for the nine months ended September 30, 2020, from 1.45% for the nine months ended September 30, 2019. This 45 basis point decrease in the cost of funds came as the yield on interest-earning assets decreased by 48 basis points, to 3.52% for the nine months ended September 30, 2020, from 4.00% for the nine months ended September 30, 2019. Our net interest rate spread decreased 3 basis points to 2.52% for the nine months ended September 30, 2020, from 2.55% for the nine months ended September 30, 2019, and our net interest margin also decreased to 2.76% from 2.81%.

Provision for Loan Losses. We recorded $500,000 in provision for loan losses for the nine months ended September 30, 2020, compared to no provision recorded during the nine months ended September 30, 2019. The allowance for loan losses was $2.7 million, or 0.8%, of total loans, at September 30, 2020, compared to $3.0 million, or 0.9% of total loans, at September 30, 2019. Non-performing loans constituted 0.4% of total gross loans at September 30, 2020 and 0.5% of gross loans at September 30, 2019. Net recoveries for the nine months ended September 30, 2020 were $150,000 compared to net charge-offs of $244,000 for the same period in 2019.

Non-interest Income. Non-interest income increased $2.6 million, or 106.7%, to $5.0 million for the nine months ended September 30, 2020 from $2.4 million for the nine months ended September 30, 2019. The increase was due primarily to increases in gains on sale of first mortgage residential real estate loans of $2.2 million and available-for-sale securities of $1.0 million for the nine months ended September 30, 2020 compared to the same period in 2019. Further contributing to the increase was a $166,000 increase in other non-interest income during the nine months ended September 30, 2020 due to an increase in the market value of marketable securities held in a Rabbi Trust. The overall increase in non-interest income was partially offset by a decrease of $642,000 in loan servicing income primarily due to an impairment charge of $575,000 on mortgage servicing rights recorded during the nine months ended September 30, 2020. The impairment was based on a fair value determined by market data from independent organizations.

Non-interest Expense. Non-interest expense decreased $969,000, or 8.1%, to $10.9 million for the nine months ended September 30, 2020 from $11.9 million for the nine months ended September 30, 2019. The decrease was due primarily to a $505,000 decrease in salaries and employee benefits as a result of recent branch closings and a reduction of head count. Other non-interest expense also decreased by $337,000 for the nine months ended September 30, 2020, as 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 in 2019.

Income Tax Expense. We recorded income tax expense of $1.6 million for the nine months ended September 30, 2020, compared to an income tax benefit of $167,000 for the nine months ended September 30, 2019. Due to recent changes in market conditions and current events related to COVID-19, we reduced our estimate of future taxable income and established a valuation allowance for deferred tax assets in the amount of $934,000 for the period ended September 30, 2020.

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.

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 September 30, 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	$	13,990		24.91	%
+300		13,511		20.63	%
+200		12,836		14.60	%
+100		12,111		8.13	%
Level		11,200		—	%
-100		10,895		(2.73	)%

(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 September 30, 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	$	69,109	$	17,497		33.90	%
	300		67,698		16,086		31.17	%
	200		63,815		12,203		23.64	%
	100		58,890		7,278		14.10	%
	—		51,612		—		—	%
	(100)		51,819		207		0.40	%

(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 September 30, 2020, in the event of a 100-basis point increase in interest rates, we would have experienced a 14.10% increase in our EVE. In the event of a 200-basis point increase in interest rates at September 30, 2020, we would have experienced a 23.64% 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.

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 September 30, 2020, we had $68.9 million outstanding in advances from the FHLB. At September 30, 2020, we had $76.3 million in additional borrowing capacity at the Federal Home Loan Bank of Chicago. Additionally, at September 30, 2020, we had a $10.0 million federal funds line of credit with the BMO Harris Bank, none of which was drawn at September 30, 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 $2.7 million for the nine months ended September 30, 2020 and 2019. Net cash used in investing activities, which consists primarily of disbursements for loan originations, purchases of available for sale securities and the purchase of FHLB stock, offset by proceeds from sales of securities, maturing securities and pay downs on securities, was $529,000 for the nine months ended September 30, 2020 compared to net cash provided by investing activities of $46.6 million for the nine months ended September 30, 2019. This change in net cash related to investing activities is primarily due to an increase of $43.8 million in purchases of available for sale securities to $50.5 million during the nine months ended September 30, 2020, compared to $6.7 million for the nine months ended September 30, 2019. Further, net loans increased $18.1 million during the nine months ended September 30, 2020 whereas net loans decreased $44.9 million during the same period in 2019. Net cash provided by financing activities, consisting primarily increases of $10.4 million in deposits and $52.0 million of proceeds from the issuance of

FHLB advances, was $70.4 million for the nine months ended September 30, 2020. Net cash used in financing activities was $41.4 million for the nine months ended September 30, 2019, as $20.0 million in net proceeds from the Company’s initial public offering and $10.8 million in advance payments by borrowers for taxes and insurance were offset by $22.4 million of payments of outstanding FHLB advances and a $48.1 million decrease in deposits.

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.

Capital

The Company’s Board of Directors authorized a stock repurchase plan in the first quarter of 2020 allowing the Company to repurchase up to 109,725 shares of stock. As of September 30, 2020, the Company had repurchased 106,725 shares at an average price of $9.59 under the approved stock repurchase plan.

At September 30, 2020, we exceeded all of our regulatory capital requirements with a Tier 1 leverage capital level of $48.7 million, or 9.9% of adjusted total assets, which is above the well-capitalized required level of $24.5 million, or 5.0%, and total risk-based capital of $51.3 million, or 15.9% of risk-weighted assets, which is above the well-capitalized required level of $32.3 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.


	September 30, 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)	$	48,670		9.9	%	$	19,624		4.0	%	$	24,529		5.0	%

Risk-based:
Common Tier 1		48,670		15.1	%		14,518		4.5	%		20,970		6.5	%
Tier 1		48,670		15.1	%		19,357		6.0	%		25,809		8.0	%
Total		51,320		15.9	%		25,809		8.0	%		32,262		10.0	%

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%, are eligible to opt into a “Community Bank Leverage Ratio” framework. The framework was first available for use in PyraMax Bank’s September 30, 2020 Call Report; however, we did not elect adoption. 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 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 September 30, 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 September 30, 2020:
Long-term debt obligations	$	68,884	$	12,950	$	16,971	$	4,082	$	34,881
Operating lease obligations		41		41		—		—		—

Total	$	68,925	$	12,991	$	16,971	$	4,082	$	34,881

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.

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 September 30, 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 September 30, 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.

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 September 30, 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, as supplemented by our March 31, 2020 Quarterly Report on Form 10-Q. There are no material changes from the risk factors included within those reports.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth information in connection with repurchases of our shares of common stock during the three months ended September 30, 2020:


	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs (1)
July 1, 2020 through July 31, 2020		81,249	$	9.77		81,249		3,000
August 1, 2020 through August 31, 2020		—		—		—		3,000
September 1, 2020 through September 30, 2020		—		—		—		3,000

Total		81,249				81,249

(1)

The Board of Directors approved a stock repurchase plan in January 2020 that authorizes the repurchase of up to 109,725 shares, or approximately 5% of the Company’s then-outstanding shares of common stock, excluding shares held by 1895 Bancorp of Wisconsin, MHC. The repurchase program has no expiration date.

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))

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 September 30, 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.

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: November 12, 2020		/s/ Richard B. Hurd
		Richard B. Hurd
		President and Chief Executive Officer

Date: November 12, 2020		/s/ Richard J. Krier
		Richard J. Krier
		Chief Financial Officer (Principal Financial and Accounting Officer)

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