Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2019

 

OR

 

[   ]

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

 

For the transition period from _______________ to _______________

 

Commission File No. 001-38239

 

FFBW, Inc.

(Exact name of registrant as specified in its charter)

 

Federal		82-3027075
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
1360 South Moorland Road  Brookfield, Wisconsin		53005
(Address of Principal Executive Offices)		(Zip Code)

 

(262) 542-4448

(Registrant’s telephone number)

 

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

 

 

Title of class	Trading Symbol	Name of exchange on which registered
Common Stock; $0.01 par value	FFBW	The Nasdaq Stock Market

                                                           

N/A

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

 

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

YES [X]     NO [ ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

YES [X ]     NO [ ]

 

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

Large accelerated filer [  ]	Accelerated filer [  ]
Non-accelerated filer [  ]	Smaller reporting company [X]
	Emerging growth company [X]

 

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

 

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

 

6,566,478 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding as of November 14, 2019.

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FFBW, Inc.

Form 10-Q

 

Index 

 

		Page
Part I. Financial Information
Item 1.	Financial Statements
	Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018	1
	Statements of Income for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	2
	Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	3
	Statements of Changes in Equity for the Nine Months Ended September 30, 2019 and 2018 (unaudited)	4
	Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (unaudited)	5
	Notes to Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures about Market Risk
Item 4.	Controls and Procedures
Part II. Other Information
Item 1.	Legal Proceedings
Item 1A.	Risk Factors
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.	Defaults upon Senior Securities
Item 4.	Mine Safety Disclosures
Item 5.	Other Information
Item 6.	Exhibits
	Signature Page

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		September 30,				December 31,
		2019				2018
Assets
Cash and due from banks		$	4,185			$	1,746
Fed funds sold			-				2,742
Cash and cash equivalents			4,185				4,488
Available for sale securities, stated at fair value			44,603				43,751
Loans held for sale			1,118				679
Loans, net of allowance for loan and lease losses of $2,262 and $2,118, respectively			193,307				198,694
Premises and equipment, net			4,818				5,057
Foreclosed assets			84				69
Other equity investments			730				739
Accrued interest receivable			766				768
Cash value of life insurance			7,155				7,007
Other assets			1,323				1,474
TOTAL ASSETS		$	258,089			$	262,726
Liabilities and Equity
Deposits		$	178,698			$	183,205
Advance payments by borrowers for taxes and insurance			1,125				55
FHLB advances			14,850				17,750
Accrued interest payable			840				70
Other liabilities			1,266				1,284
Total liabilities		$	196,779			$	202,364
Preferred stock ($0.01 par value, 1,000,000 authorized, no shares issued or outstanding as of September 30, 2019 and December 31, 2018, respectively)		$	-			$	-
Common stock ($0.01 par value, 19,000,000 and 19,000,000 shares authorized, 6,706,742 and 6,696,742 shares issued, 6,566,748 and 6,696,742 shares outstanding as of September 30, 2019 and December 31, 2018, respectively)			67				67
Additional paid in capital			28,580				28,326
Unallocated common stock of Employee Stock Ownership Plan ("ESOP") (233,583 and 243,303 shares at September 30, 2019 and December 31, 2018, respectively)			(2,336	)			(2,433	)
Retained earnings			36,002				34,995
Accumulated other comprehensive income (loss), net of income taxes			458				(593	)
Less treasury stock, 140,264 and 0 shares at cost, at September 30, 2019 and December 31, 2018, respectively			(1,461	)			-
Total equity		$	61,310			$	60,362
TOTAL LIABILITIES AND EQUITY		$	258,089			$	262,726

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		Three months ended September 30,								Nine months ended September 30,
		2019				2018				2019				2018
Interest and dividend income:
Loans, including fees		$	2,499			$	2,397			$	7,444			$	6,691
Securities
Taxable			285				315				842				994
Tax-exempt			5				11				11				48
Other			23				17				69				48
Total interest and dividend income			2,812				2,740				8,366				7,781
Interest Expense:
Interest-bearing deposits			631				451				1,863				1,139
Borrowed funds			88				156				267				325
Total interest expense			719				607				2,130				1,464
Net interest income			2,093				2,133				6,236				6,317
Provision for loan losses			45				111				200				415
Net interest income after provision for loan losses			2,048				2,022				6,036				5,902
Noninterest income:
Service charges and other fees			63				44				162				155
Net gain on sale of loans			82				67				250				142
Net gain (loss) on sale of securities			-				11				(3	)			20
Increase in cash surrender value of insurance			50				49				148				144
Other noninterest income			23				25				72				72
Total noninterest income			218				196				629				533
Noninterest expense:
Salaries and employee benefits			1,082				1,053				3,210				3,249
Occupancy and equipment			223				232				707				691
Data processing			172				167				516				477
Technology			74				55				231				159
Foreclosed assets, net			3				(1	)			5				36
Professional fees			110				101				326				276
Other noninterest expense			111				151				340				474
Total noninterest expense			1,775				1,758				5,335				5,362
Income before income taxes			491				460				1,330				1,073
Provision for income taxes			121				111				323				248
Net income		$	370			$	349			$	1,007			$	825
Earnings per share
Basic		$	0.06			$	0.05			$	0.16			$	0.13
Diluted		$	0.06			$	0.05			$	0.16			$	0.13

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		Three months ended September 30,								Nine months ended September 30,
		2019				2018				2019				2018
Net income		$	370			$	349			$	1,007			$	825
Other comprehensive income (loss):
Unrealized holding gains (losses) arising during the period			306				(233	)			1,438				(1,189	)
Reclassification adjustment for losses (gains) realized in net income			-				(11	)			3				(20	)
Other comprehensive income (loss) before tax effect			306				(244	)			1,441				(1,209	)
Tax effect of other comprehensive income (loss) items			(83	)			66				(390	)			296
Other comprehensive income (loss), net of tax			223				(178	)			1,051				(913	)
Comprehensive income (loss)		$	593			$	171			$	2,058			$	(88	)

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		Common Stock				Additional Paid-In Capital				Unallocated Common Stock of ESOP				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Treasury Stock				Total
Balance at December 31, 2017		$	66			$	28,296			$	(2,563	)		$	33,937			$	(247	)		$	-			$	59,489
Net income			-				-				-				825				-				-				825
ESOP shares committed to be released (9,720 shares)			-				11				97				-				-				-				108
Other comprehensive loss															-				(913	)							(913	)
Balance at September 30, 2018		$	66			$	28,307			$	(2,466	)		$	34,762			$	(1,160	)		$	-			$	59,509
Balance at December 31, 2018		$	67			$	28,326			$	(2,433	)		$	34,995			$	(593	)		$	-				60,362
Net income			-				-				-				1,007				-								1,007
ESOP shares committed to be released (9,720 shares)			-				5				97				-				-				-				102
Stock based compensation expense			-				249				-				-				-				-				249
Other comprehensive income			-				-				-				-				1,051				-				1,051
Repurchase of common stock			-				-				-				-				-				(1,461	)			(1,461	)
Balance at September 30, 2019		$	67			$	28,580			$	(2,336	)		$	36,002			$	458			$	(1,461	)		$	61,310

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		For the nine months ended September 30,
		2019				2018
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income		$	1,007			$	825
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			200				415
Depreciation			265				254
Net accretion of loan portfolio discount and deposit premium			(80	)			(87	)
Net amortization on securities available for sale			283				412
(Gain) loss on sales and impairments of foreclosed assets			(7	)			17
(Gain) loss on sale of available for sale securities			3				(20	)
Increase in cash surrender value of life insurance			(148	)			(144	)
ESOP compensation			102				108
Stock based compensation			249				-
Changes in operating assets and liabilities:
Accrued interest receivable			2				(105	)
Loans held for sale			(439	)			(91	)
Other assets			(239	)			81
Accrued interest payable			770				504
Other liabilities			(18	)			(71	)
Net cash provided by operating activities		$	1,950			$	2,098
Cash flows from investing activities:
Proceeds from sales of available for sale securities		$	4,837			$	7,625
Maturities, calls, paydowns on available for sale securities			4,027				5,496
Purchases of available for sale securities			(8,561	)			(7,867	)
Net (increase) decrease in loans			5,195				(26,855	)
Purchases of premises and equipment			(26	)			(75	)
Proceeds from redemption of FHLB stock			215				-
Purchase of FHLB stock			-				(225	)
Purchase of Bankers' Bank stock			(206	)			-
Purchase of life insurance			-				(255	)
Proceeds from sale of foreclosed assets			76				823
Net cash provided by (used in) investing activities		$	5,557			$	(21,333	)
Cash flows from financing activities:
Net increase (decrease) in deposits		$	(4,519	)		$	3,260
Net increase in advance payments by borrowers for taxes and insurance			1,070				1,143
Repayments of FHLB advances			(2,900	)			-
Proceeds from FHLB advances			-				7,000
Repurchase of common stock			(1,461	)			-
Net cash provided by (used in) financing activities		$	(7,810	)		$	11,403
Net increase (decrease) in cash and cash equivalents		$	(303	)		$	(7,832	)
Cash and cash equivalents at beginning			4,488				11,813
Cash and cash equivalents at end		$	4,185			$	3,981
Supplemental Cash Flow Disclosures:
Cash paid for interest		$	1,360			$	960
Cash paid for income taxes			343				70
Loans transferred to foreclosed assets			84				221
Financed sales of foreclosed assets			-				21

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Note 1 – Basis of Presentation

 

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

 

In the opinion of management, all adjustments necessary for a fair presentation of the financial statements have been included. The results of operations for the nine month periods ended September 30, 2019 are not necessarily indicative of the results which may be expected for the entire year. These statements should be read in conjunction with the Financial Statements and notes thereto for the year ended December 31, 2018 filed with the U.S. Securities and Exchange Commission (“SEC”) as part of FFBW, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

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

 

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

 

Organization

 

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

 

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

 

At September 30, 2019, the significant assets of the Company were the capital stock of the Bank, and a loan to the First Federal Bank of Wisconsin Employee Stock Ownership Plan (“ESOP”). The liabilities of the Company were insignificant. The Company is subject to the financial reporting requirements of the Securities Exchange Act of 1934, as amended. The Company is subject to regulation and examination by the Board of Governors of the Federal Reserve System (“the Federal Reserve Board”).

 

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

 

On September 4, 2019, the Boards of Directors of FFBW, MHC (the "MHC"), the Company and the Bank adopted a Plan of Conversion and Reorganization (the "Plan"). Pursuant to the Plan, the MHC will be merged into the Company, and the MHC will no longer exist. The Company will merge into a new Maryland corporation named FFBW, Inc. ("New FFBW'). As part of the conversion, the MHC's ownership interest of the Company will be offered for sale in a public offering. The existing publicly held shares of the Company, which represents the remaining ownership interest in the Company, will be exchanged for new shares of common stock of New FFBW.  The exchange ratio will ensure that immediately after the conversion and public offering, the public shareholders of the Company will own the same aggregate percentage of the Company's common stock that they owned immediately prior to that time (excluding shares purchased in the stock offering and cash received in lieu of fractional shares), adjusted to reflect assets held by the MHC. When the conversion and public offering are completed, all of the capital stock of the Bank will be owned by New FFBW.

 

The Plan provides for the establishment, upon the completion of the conversion, of special "liquidation accounts" for the benefit of certain depositors of the Bank in an amount equal to the MHC's ownership interest in the stockholders' equity of the Company as of the date of the latest balance sheet contained in the prospectus plus the MHC's net assets (excluding its ownership of the Company).  Following the completion of the conversion, the Company and the Bank will not be permitted to pay dividends on their capital stock if the shareholders' equity of New FFBW, or the shareholder's equity of the Bank, would be reduced below the amount of the liquidation accounts. The liquidation accounts will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits.  Subsequent increases will not restore an eligible account holder's interest in the liquidation accounts.

 

Direct costs of the conversion and public offering will be deferred and reduce the proceeds from the shares sold in the public offering. Costs of $241 have been incurred related to the conversion as of September 30, 2019.

 

The Securities and Exchange Commission declared the New FFBW's Registration Statement effective November 12, 2019.

 

 

Use of Estimates

 

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

 

Revenue Recognition

 

Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

 

The majority of the Company's revenue-generating transactions are not subject to ASC 606, including revenue all interest and dividend income generated from financial instruments. Certain noninterest income items, including loan servicing income, gain on sales of loans, gain on sales of securities, and other noninterest income have been evaluated to not fall with the scope of ASC 606. Elements of noninterest income that is within the scope of ASC 606, are as follows:

 

Service fees - The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Management reviewed the deposit account agreements, and determined that the agreements can be terminated at any time by either the Company or the account holder. Transaction fees, such as balance transfers, wires and overdraft charges are settled the day the performance obligation is satisfied. The Company's monthly service charges and maintenance fees are for services provided to the customer on a monthly basis and are considered a series of services that have the same pattern of transfer each month. The review of service charges assessed on deposit accounts included the amount of variable consideration that is a part of the monthly charges. It was found that the waiver of service charges due to insufficient funds and dormant account fees is immaterial and would not require a change in the accounting treatment for these fees under the new revenue standards. Recognition of revenue under ASC 606 did not materially change the timing or magnitude of revenue recognition.

 

Interchange fees - Customers use a Bank-issued debit card to purchase goods and services, and the Company earns interchange fees on those transactions, typically a percentage of the sale amount of the transaction. The Company records the amount due when it receives the settlement from the payment network. Payments from the payment network are received and recorded into income on a daily basis. There are no contingent debit card interchange fees recorded by the Company that could be subject to a clawback in future periods. Recognition of revenue under ASC 606 did not materially change the timing or magnitude of revenue recognition.

 

Cash and Cash Equivalents

 

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

 

Available for Sale Securities

 

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

 

 

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

 

Loans Acquired in a Transfer 

 

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

 

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

 

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

 

Loans  

 

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

 

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

 

Allowance for Loan Losses

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

Troubled Debt Restructurings 

 

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

 

Foreclosed Assets

 

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

 

Premises and Equipment

 

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

 

Other Equity Investments

 

Other Equity Investments consist of Federal Home Loan Bank (“FHLB”) stock and Bankers’ Bank stock. The Company's investment in the FHLB stock is carried at cost, which approximates fair value. The Company is required to hold the stock as a member of the FHLB, and transfer of the stock is substantially restricted. The stock is evaluated for impairment on an annual basis. The Company is required to adjust its reported value of Bankers’ Bank stock, which is considered an equity security without a readily determinable market value, if a comparable transaction is observed.

 

Income Taxes

 

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

 

 

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

 

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

 

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

 

Transfers of Financial Assets 

 

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

 

Advertising 

 

Advertising costs are expensed as incurred.

 

Other Comprehensive Income (Loss)

 

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

 

Off-Balance Sheet Financial Instruments

 

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

 

Life Insurance

 

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

 

 

Subsequent Events 

 

Management has reviewed the Company’s operations for potential disclosure or financial statement impacts related to events occurring after September 30, 2019, but prior to the release of these financial statements. Based on the results of this review, no subsequent event disclosure or financial statement impacts to these financial statements are required as of November 14, 2019.

 

Recent Accounting Pronouncements

 

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

 

The Company recently adopted the following Accounting Standards Updates (ASU) issued by the Financial Accounting Standards Board (FASB).

 

ASU No. 2014-09, "Revenue from Contracts with Customers."

 

The objective of this new standard is to provide a common revenue standard for all entities that enter into contracts with customers to transfer goods, services, or nonfinancial assets. The Company adopted this new accounting standard for the effective January 1, 2019. The Company did not identify any changes in the timing of revenue recognition when considering the amended accounting guidance, however, the Company has included additional disclosures as required by the guidance.

 

ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”

ASU No. 2018-03, “Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10)”

 

 

ASU No. 2016-01 is a wide-ranging standard with several elements that will impact most financial institutions. The standard introduces new guidance that applies to most equity investments. Under the standard, equity securities can no longer be classified as available-for-sale securities. Instead, market value fluctuations on equity securities will have to be recognized directly through net income. An entity may elect to value equity investments without a readily determinable fair value at its cost minus impairment (if any) plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer, with any changes recognized through net income. The standard also eliminates certain disclosure requirements related to financial instruments. Non-public business entities (“PBEs”) will no longer have to disclose the fair value of financial instruments measured at amortized cost in the financial statements. PBEs will still need to make this disclosure but will no longer be required to disclose the methods and significant assumptions used to determine the fair value of financial instruments measured at amortized cost. ASU 2016-01 is effective for non-PBEs for years beginning after December 15, 2018, and was effective for PBEs with fiscal years beginning after December 15, 2017.  ASU 2016-01 will require the Company to adjust its reported value of Bankers’ Bank stock, which is considered an equity security without a readily determinable market value, if a comparable transaction is observed.

 

 

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

 

ASU No. 2016-13, “Credit Losses (Topic 326).”

ASU No. 2019-04, “Codification Improvements to Topic 326.”

ASU No. 2019-05, “Financial Instruments-Credit Losses.”

 

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. The Company is currently assessing the impact of adopting ASU 2016-13 on its financial statements.

 

 

ASU No. 2016-02, “Leases (Topic 842): Amendments to the Leases Analysis.”

ASU No. 2018-10, "Codification Improvements to Topic 842."

ASU No. 2018-11, "Targeted Improvements"

 

For lessees, Topic 842 requires leases to be recognized on the balance sheet, along with disclosure of key information about leasing arrangements. Topic 842 was subsequently amended by ASU 2018-01, 2018-10 and 2018-11. The new standard establishes a right-of-use (ROU) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification expense recognition in the income statement.

 

For lessors, Topic 842 requires lessors to classify leases as sales-type, direct financing or operating leases. A lease is a sales-type lease if any one of five criteria are met, each of which indicate that the lease, in effect, transfers control of the underlying asset to the lessee. If none of those five criteria are met, but two additional criteria are both met, indicating the lessor has transferred substantially all the risks and benefits of the underlying asset to the lessee and a third party, the lease is a direct financing lease. All leases that are not sales-type or direct financing leases are operating leases.

 

The new standard is effective for the Company on January 1, 2020, with early adoption permitted. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) the new standard's effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. The Company expects to adopt the new standard on January 1, 2020 using the effective date as its date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before December 15, 2019.

 

ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement”

 

This ASU modifies the disclosure requirements on fair value measurements in Topic 820, including the removal, modification to, and addition of certain disclosure requirements. This ASU will be effective for fiscal years beginning after December 15, 2019 with early adoption permitted. The majority of the disclosure changes are to be applied on a prospective basis. The Company is currently in the process of reviewing this ASU to determine whether the modifications within will be adopted prior to the effective date. Although this ASU has a significant impact to the Company’s fair value disclosures, no additional impact to the financial statements is expected.

 

Note 3 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.

 

 

The following table presents a reconciliation of the number of shares used in the calculation of basic and diluted earnings per common share (in thousands, except share and per share data).

 

 

 

 

Note 4 Available for Sale Securities

 

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

 

 

 

 

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

 

 

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

 

 

 

 

At September 30, 2019, the investment portfolio included 15 securities available for sale, which had been in an unrealized loss position for greater than twelve months, and 8 securities available for sale, which had been in an unrealized loss position for less than twelve months. At December 31, 2018, the investment portfolio included 79 securities available for sale, which had been in an unrealized loss position for greater than twelve months, and 6 securities available for sale, which had been in an unrealized loss position for less than twelve months. Because these securities have a fixed interest rate, their fair value is sensitive to movements in market interest rates. These unrealized losses are considered temporary because the Company does not intend to sell them prior to maturity; therefore the Company expect to collect all contractually due amounts from these securities. Accordingly, these investments were reduced to their fair values through accumulated other comprehensive income, not through earnings.

 

The Company regularly assesses the securities portfolio for other-than-temporary impairment (OTTI). The assessments are based on the nature of the securities, the underlying collateral, the financial condition of the issuer, the extent and duration of the loss, our intent related to the individual securities, and the likelihood that the Company will have to sell securities prior to expected recovery. The Company did not have any impairment losses recognized in earnings for the nine months ended September 30, 2019 and September 30, 2018.

 

 

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

 

 

 

Proceeds from sales of available for sale securities during the three months ended September 30, 2019 and September 30, 2018 were $0 and $1,188, respectively. Proceeds from sales of available for sale securities during the nine months ended September 30, 2019 and September 30, 2018 were $4,837 and $7,625, respectively. Gross realized gains during the three months ended September 30, 2019 and September 30, 2018 on these sales amounted to $0 and $11, respectively, while gross realized losses on these sales were $0 and $0 during the same periods. Gross realized gains during the nine months ended September 30, 2019 and September 30, 2018 on these sales amounted to $22 and $35, respectively. Gross realized losses on these sales were $25 and $15, during the nine months ended September 30, 2019 and September 30, 2018, respectively.

 

Available for sale securities with a fair value of $1,016 and $960 were pledged securities at September 30, 2019 and December 31, 2018, respectively.

 

Note 5 Loans 

 

Major classifications of loans are as follows:

 

 

 

Analysis of the allowance for loan losses for the three and nine months ended September 30, 2019 and 2018 follows:

 

 

 

 

 

 

Analysis for loans evaluated for impairment as of September 30, 2019 and December 31, 2018, follows:

 

 

 

 

As of September 30, 2019 and December 31, 2018, no additional funds are committed to be advanced in connection with impaired loans.

 

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

 

 

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

 

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

 

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

 

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

  

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

 

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

 

Information regarding the credit quality indicators most closely monitored for commercial loans by class as of September 30, 2019 and December 31, 2018, follows:

 

 

Information regarding the credit quality indicators most closely monitored for residential real estate and consumer loans by class as of September 30, 2019 and December 31, 2018, follows:

 

 

 

Loan aging information as of September 30, 2019, follows:

 

 

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

 

 

There were no loans past due ninety days or more and still accruing interest as of September 30, 2019 and December 31, 2018.

 

When, for economic or legal reasons related to the borrower’s financial difficulties, the Company grants a concession to the borrower that the Company would not otherwise consider, the modified loan is classified as a troubled debt restructuring. Loan modifications may consist of forgiveness of interest and/or principal, a reduction of the interest rate, interest-only payments for a period of time, and/or extending amortization terms. During the nine months ended and as of September 30, 2019, there was a 1-4 family owner-occupied property totaling $83, a 1-4 family investor –owned property totaling $421, and two commercial and industrial loans totaling $748 that were new troubled debt restructurings. $0 was charged to the allowance for losses related to these loans. No troubled debt restructurings defaulted within 12 months of their modification date during the nine months ended September 30, 2019. During the year ended and as of December 31, 2018, there were two 1-4 family owner-occupied properties totaling $302, a 1-4 family investor-owned property totaling $250, and a consumer loan totaling $20 that were new troubled debt restructurings. $0 was charged to the allowance for losses related to these loans. No troubled debt restructurings defaulted within 12 months of their modification date during the year ended December 31, 2018.

 

 

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

 

Note 6 Deposits

 

The composition of deposits are as follows:

 

 

 

Certificates of deposit that meet or exceed the FDIC insurance limit of two hundred fifty thousand dollars totaled $29,540 and $30,590 as of September 30, 2019 and December 31, 2018, respectively.

 

The scheduled maturities of certificates of deposit are as follows as of September 30, 2019:

 

 

Note 7 FHLB Advances

 

FHLB advances consist of the following:

 

 

 

The following is a summary of scheduled maturities of fixed term FHLB advances as of September 30, 2019:

 

 

Actual maturities may differ from the scheduled principal maturities due to call options on the various advances. The Company has a master contract agreement with the FHLB that provides for a borrowing up to the lesser of a determined multiple of FHLB stock owned or a determined percentage of the book value of the Company’s qualifying 1-4 family, multifamily, and commercial real estate loans. The Company pledged approximately $153,474 and $158,923 of 1-4 family, multifamily, and commercial real estate loans to secure FHLB advances at September 30, 2019 and December 31, 2018, respectively. FHLB provides both fixed and floating rate advances. Floating rates are tied to short-term market rates of interest, such as LIBOR, Federal funds or Treasury Bill rates. Fixed rate advances are priced in reference to market rates of interest at the time of the advance, namely the rates that FHLB pays to borrowers at various maturities. FHLB advances are subject to a prepayment penalty if they are repaid prior to maturity. FHLB advances are also secured by $524 and $739 of FHLB stock owned by the Company at September 30, 2019 and December 31, 2018, respectively.

 

At September 30, 2019 and December 31, 2018, the Company’s available and unused portion of this borrowing agreement was $178 and $889, respectively. Additionally, the Company has a fluctuating $5,000 letter of credit under this agreement, which collateralizes certain public deposits. In addition, the Company has a $7,000 federal funds line of credit through Bankers’ Bank of Wisconsin, which was not drawn on as of September 30, 2019 or December 31, 2018. The Company also has the authority to borrow through the Federal Reserve’s Discount Window.