falseQ20001847360--12-31YesYesAmounts related to periods prior to the date of our July 14, 2021 mutual-to-stock conversion (the “Conversion”) have not been restated to give the retroactive recognition to the exchange ratio applied to the previously outstanding shares in the Conversion (1.3163) (See Note 1). Refer to Note 14 Earnings (Loss) Per Share for retroactive recognition given to the exchange ratio applied in the Conversion for the three months and six months ended June 30, 2021.Amounts related to periods prior to the date of Conversion (July 2021) have not been restated to give the retroactive recognition to the exchange ratio applied in the Conversion (1.3163) (See Note 1).Amounts related to periods prior to the date of Conversion (July 2021) have been restated to give the retroactive recognition to the exchange ratio applied in the Conversion (1.3163) (See Note 1)Includes 2,105 shares vested under a nonqualified stock option inducement award to the Company’s President and Chief Operating Officer.Includes 263 shares vested under a restricted stock inducement award to the Company’s President and Chief Operating Officer.Includes 7,238 shares surrendered by employees to cover payroll tax costs related to the vested shares. 0001847360 2021-12-31 0001847360 2022-06-30 0001847360 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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 June 30, 2022
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. 001-40609
 
 
1895 Bancorp of Wisconsin, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
 
 
Maryland
  
61-1993378
(State or Other Jurisdiction of
Incorporation or Organization)
  
(I.R.S. Employer
Identification No.)
7001 West Edgerton Avenue
Greenfield, Wisconsin
  
53220
(Address of Principal Executive Offices)
  
(Zip Code)
(414)
421-8200
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
  
Trading
Symbol(s)
  
Name of each exchange
on which registered
Common Stock, par value $0.01 per share
  
BCOW
  
The NASDAQ Stock Market, LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.    YES  ☒    NO  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    YES  ☒    NO  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule
12b-2
of the Exchange Act. (Check one)
 
Large accelerated filer   ☐    Accelerated filer   ☐
Non-accelerated filer   ☒    Smaller reporting company   ☒
     Emerging growth company   ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).    YES  ☐    NO  ☒
6,372,641 shares of the Registrant’s common stock, par value $0.01 per share, were outstanding as of July 28, 2022.
 
 
 
1895 Bancorp of Wisconsin, Inc.
Form
10-Q
Table of Contents
 
         Page  
 
Item 1.
   Financial Statements      1  
  Consolidated Balance Sheets at June 30, 2022 (unaudited) and December 31, 2021      1  
  Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2022 and 2021 (unaudited)      2  
  Consolidated Statements of Comprehensive (Loss) Income for the Three and Six Months Ended June 30, 2022 and 2021 (unaudited)      3  
  Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2022 and 2021 (unaudited)      4  
  Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021 (unaudited)      5  
  Notes to Consolidated Financial Statements (unaudited)      6  
Item 2.
   Management’s Discussion and Analysis of Financial Condition and Results of Operations      30  
Item 3.
   Quantitative and Qualitative Disclosures About Market Risk      43  
Item 4.
   Controls and Procedures      43  
 
Item 1.
   Legal Proceedings      43  
Item 1A.
   Risk Factors      43  
Item 2.
   Unregistered Sales of Equity Securities and Use of Proceeds      43  
Item 3.
   Defaults Upon Senior Securities      43  
Item 4.
   Mine Safety Disclosures      43  
Item 5.
   Other Information      43  
Item 6.
   Exhibits      44  
  SIGNATURES      44  
 
PART I – FINANCIAL INFORMATION
 
Item 1.
Financial Statements
1895 BANCORP OF WISCONSIN, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
 
    
June 30,
2022
    
December 31,
2021
  
              
    
(unaudited)
        
Assets
         
Cash and due from banks
    $ 19,102     $ 65,300  
Fed funds sold
      1,119       1,503  
    
 
 
    
 
 
  
Cash and cash equivalents
      20,221       66,803  
Marketable equity securities, stated at fair value
      2,867       3,544  
Available-for-sale
securities, stated at fair value
      126,676       112,440  
Loans held for sale
      262       1,183  
Loans, net of allowance for loan losses of $3,132 and $2,858 at June 30, 2022 and December 31, 2021, respectively
      349,619       323,789  
Premises and equipment, net
      5,685       5,864  
Mortgage servicing rights, net
      1,939       2,036  
Federal Home Loan Bank (FHLB) stock, at cost
      3,032       3,032  
Accrued interest receivable
      1,027       948  
Cash value of life insurance
      14,101       13,892  
Other assets
      10,197       6,108  
    
 
 
    
 
 
  
TOTAL ASSETS
    $ 535,626     $ 539,639  
    
 
 
    
 
 
  
Liabilities and Stockholders’ Equity
                 
Deposits
    $ 383,062     $ 384,501  
Advance payments by borrowers for taxes and insurance
      7,739       1,860  
FHLB advances
      57,435       55,442  
Accrued interest payable
      128       109  
Other liabilities
      6,296       6,834  
    
 
 
    
 
 
  
TOTAL LIABILITIES
      454,660       448,746  
    
 
 
    
 
 
  
Preferred stock, $0.01 par value, 10,000,000 shares authorized at June 30, 2022 and December 31, 2021
      —         —    
Common stock (par value $0.01 per share)
Authorized – 90,000,000 shares at June 30, 2022 and December 31, 2021
Issued – 6,402,704 at June 30, 2022 and 6,402,571 at December 31, 2021
(includes 80,967 and 97,128 unvested shares, respectively)
Outstanding – 6,372,641 at June 30, 2022 and 6,372,508 at December 31, 2021
(includes 80,967 and 97,128 unvested shares, respectively)
      64       64  
Additional
paid-in
capital
      52,855       52,805  
Unallocated common stock of Employee Stock Ownership Plan (ESOP), 463,658 and 377,077 shares at June 30, 2022 and December 31, 2021, respectively
      (4,401 )      (3,432 ) 
Less treasury stock at cost, 30,063 shares at June 30, 2022 and December 31, 2021
      (301 )      (301 ) 
Retained earnings
      41,319       41,615  
Accumulated other comprehensive (loss) income, net of income taxes
      (8,570 )      142  
    
 
 
    
 
 
  
Total stockholders’ equity
      80,966       90,893  
    
 
 
    
 
 
  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
    $ 535,626     $ 539,639  
    
 
 
    
 
 
  
See accompanying notes to the unaudited consolidated financial statements.
 
1
1895 BANCORP OF WISCONSIN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts) – Unaudited
 
    
Three months ended

June 30
    
Six months ended

June 30
  
    
2022
    
2021
    
2022
    
2021
  
Interest and dividend income:
                                 
Loans, including fees
    $ 3,009     $ 3,125     $ 6,299     $ 6,418  
Securities, taxable
      566       335       1,114       603  
Other
      92       51       139       107  
    
 
 
    
 
 
    
 
 
    
 
 
  
Total interest and dividend income
      3,667       3,511       7,552       7,128  
    
 
 
    
 
 
    
 
 
    
 
 
  
Interest expense:
                                 
Interest-bearing deposits
      187       193       356       449  
Borrowed funds
      181       200       350       400  
Other interest-bearing liabilities
      2       —         4       —    
    
 
 
    
 
 
    
 
 
    
 
 
  
Total interest expense
      370       393       710       849  
    
 
 
    
 
 
    
 
 
    
 
 
  
Net interest income
      3,297       3,118       6,842       6,279  
Provision for loan losses
      105       —         210       —    
    
 
 
    
 
 
    
 
 
    
 
 
  
Net interest income after provision for loan losses
      3,192       3,118       6,632       6,279  
    
 
 
    
 
 
    
 
 
    
 
 
  
Noninterest income:
                                 
Service charges and other fees
      257       249       493       470  
Loan servicing, net
      171       193       348       767  
Net gain on sale of loans
      106       347       184       913  
Net gain on sale of securities
      —         —         —         12  
Increase in cash surrender value of insurance
      105       101       209       201  
Unrealized (loss) gain on marketable equity securities
      (522 )      241       (733 )      372  
Other
      1       3       7       8  
    
 
 
    
 
 
    
 
 
    
 
 
  
Total noninterest income
      118       1,134       508       2,743  
    
 
 
    
 
 
    
 
 
    
 
 
  
Noninterest expense:
                                 
Salaries and employee benefits
      2,034       2,698       4,318       5,153  
Advertising and promotions
      99       14       113       32  
Data processing
      209       208       410       405  
Occupancy and equipment
      330       361       684       734  
FDIC assessment
      36       35       62       68  
Other
      976       1,045       2,041       2,058  
    
 
 
    
 
 
    
 
 
    
 
 
  
Total noninterest expense
      3,684       4,361       7,628       8,450  
    
 
 
    
 
 
    
 
 
    
 
 
  
(Loss) income before income taxes
      (374 )      (109 )      (488 )      572  
Income tax (benefit) expense
      (133 )      (58 )      (192 )      102  
    
 
 
    
 
 
    
 
 
    
 
 
  
Net (loss) income
    $ (241 )    $ (51 )    $ (296 )    $ 470  
    
 
 
    
 
 
    
 
 
    
 
 
  
(Loss) earnings per common share:
                                 
Basic
(1)
    $ (0.04 )    $ (0.01 )    $ (0.05 )    $ 0.10  
    
 
 
    
 
 
    
 
 
    
 
 
  
Diluted
(1)
    $ (0.04 )    $ (0.01 )    $ (0.05 )    $ 0.10  
    
 
 
    
 
 
    
 
 
    
 
 
  
Average common shares outstanding:
                                 
Basic
(1)
      5,843,104       4,599,878       5,858,449       4,594,314  
Diluted
(1)
      5,843,104       4,599,878       5,858,449       4,656,037  
 
(1)
 
Amounts related to periods prior to the date of our July 14, 2021
mutual-to-stock
conversion (the “Conversion”) have not been restated to give the retroactive recognition to the exchange ratio applied to the previously outstanding shares in the Conversion (1.3163) (See Note 1). Refer to Note 14 Earnings
(
Loss)
Per Share for retroactive recognition given to the exchange ratio applied in the Conversion for the three months and six months ended June 30, 2021.
See accompanying notes to the unaudited consolidated financial statements.
 
2
1895 BANCORP OF WISCONSIN, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands) - Unaudited
 
                                 
    
Three months ended

June 30
    
Six months ended

June 30
  
    
2022
    
2021
    
2022
    
2021
  
Net (loss) income
    $ (241 )    $ (51 )    $ (296 )    $ 470  
    
 
 
    
 
 
    
 
 
    
 
 
  
Other comprehensive (loss) income:
                                 
Unrealized holding (losses) gains arising during the period
      (4,791 )      447       (11,934 )      (354 ) 
Reclassification adjustment for gains realized in net income
      —         —         —         (12 ) 
    
 
 
    
 
 
    
 
 
    
 
 
  
Other comprehensive (loss) income before tax effect
      (4,791 )      447       (11,934 )      (366 ) 
Tax effect of other comprehensive (loss) income items
      1,294       (120 )      3,222       99  
    
 
 
    
 
 
    
 
 
    
 
 
  
Other comprehensive (loss) income, net of tax
      (3,497 )      327       (8,712 )      (267 ) 
    
 
 
    
 
 
    
 
 
    
 
 
  
Comprehensive (loss) income
    $ (3,738 )    $ 276     $ (9,008 )    $ 203  
    
 
 
    
 
 
    
 
 
    
 
 
  
See accompanying notes to the unaudited consolidated financial statements.
 
3
1895 BANCORP OF WISCONSIN, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands) - Unaudited
 
    
Common stock
     
Additional paid-

in capital
    
Unallocated
common stock of
ESOP
    
Treasury
Stock
    
Retained
earnings
    
Accumulated
other
comprehensive
income (loss)
    
Total
  
Balance as of March 31, 2022
    $ 64      $ 52,852     $ (3,900 )    $ (301 )    $ 41,560     $ (5,073 )    $ 85,202  
Net loss
      —          —         —         —         (241 )      —         (241 ) 
Other comprehensive loss
      —          —         —         —         —         (3,497 )      (3,497 ) 
ESOP shares committed to be released (9,865 shares)
      —          7       44       —         —         —         51  
Purchase of ESOP shares
      —          —         (545 )      —         —         —         (545 ) 
Retirement of common stock
      —          (64 )      —         —         —         —         (64 ) 
Stock compensation expense
      —          60       —         —         —         —         60  
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Balance as of June 30, 2022
    $ 64      $ 52,855     $ (4,401 )    $ (301 )    $ 41,319     $ (8,570 )    $ 80,966  
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Balance as of March 31, 2021
    $ 49      $ 20,180     $ (1,597 )    $ (1,228 )    $ 42,051     $ 544     $ 59,999  
Net loss
      —          —         —         —         (51 )      —         (51 ) 
Other comprehensive income
      —          —         —         —         —         327       327  
ESOP shares committed to be released (1,755 shares)
(1)
      —          13       17       —         —         —         30  
Retirement of common stock
      —          (70 )      —         —         —         —         (70 ) 
Stock compensation expense
      —          65       —         —         —         —         65  
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Balance as of June 30, 2021
    $ 49      $ 20,188     $ (1,580 )    $ (1,228 )    $ 42,000     $ 871     $ 60,300  
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Balance as of January 1, 2022
    $ 64      $ 52,805     $ (3,432 )    $ (301 )    $ 41,615     $ 142     $ 90,893  
Net loss
      —          —         —         —         (296 )      —         (296 ) 
Other comprehensive loss
      —          —         —         —         —         (8,712 )      (8,712 ) 
Reimbursement of stock offering costs
      —          1       —         —         —         —         1  
Purchase of ESOP shares
      —          —         (1,062 )      —         —         —         (1,062 ) 
ESOP shares committed to be released (14,798 shares)
      —          8       93       —         —         —         101  
Retirement of common stock
      —          (78 )      —         —         —         —         (78 ) 
Stock compensation expense
      —          119       —         —         —         —         119  
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Balance as of June 30, 2022
    $ 64      $ 52,855     $ (4,401 )    $ (301 )    $ 41,319     $ (8,570 )    $ 80,966  
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Balance as of January 1, 2021
    $ 49      $ 20,134     $ (1,615 )    $ (1,228 )    $ 41,530     $ 1,138     $ 60,008  
Net income
      —          —         —         —         470       —         470  
Other comprehensive loss
      —          —         —         —         —         (267 )      (267 ) 
Purchase of treasury stock
      —          —         —         (15 )      —                 (15 ) 
ESOP shares committed to be released (3,510 shares)
(1)
      —          16       35       —         —         —         51  
Issuance of treasury stock – stock compensation plan
      —          (15 )      —         15       —         —         —    
Retirement of common stock
      —          (70 )      —         —         —         —         (70 ) 
Stock compensation expense
      —          123       —         —         —         —         123  
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Balance as of June 30, 2021
    $ 49      $ 20,188     $ (1,580 )    $ (1,228 )    $ 42,000     $ 871     $ 60,300  
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
 
(1)
 
Amounts related to periods prior to the date of Conversion (July 2021) have not been restated to give the retroactive recognition to the exchange ratio applied in the Conversion (1.3163) (See Note 1).
See accompanying notes to the unaudited consolidated financial statements.
 
4
1895 BANCORP OF WISCONSIN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) - Unaudited
 
    
Six months ended
June 30,
  
    
2022
    
2021
  
    
(unaudited)
  
Cash flows from operating activities:
                 
Net (loss) income
    $ (296 )    $ 470  
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
                 
Net amortization of investment securities
      90       15  
Depreciation
      310       331  
Provision for loan losses
      210       —    
Net change in fair value of marketable equity securities
      733       (372 ) 
Net gain on sale of available for sale securities
      —         (12 ) 
Stock compensation expense
      119       123  
Adjustment to mortgage servicing rights valuation
      —         (369 ) 
(Benefit from) provision for deferred income tax
      (192 )      102  
Originations of mortgage loans held for sale
      (13,760 )      (67,969 ) 
Proceeds from sales of mortgage loans held for sale
      14,865       70,026  
Net gain on sale of mortgage loans held for sale
      (184 )      (913 ) 
ESOP compensation
      101       51  
Net change in cash value of life insurance
      (209 )      (201 ) 
Changes in operating assets and liabilities:
                 
Net change in mortgage servicing rights
      97       66  
Accrued interest receivable and other assets
      (831 )      (1,492 ) 
Accrued interest payable and other liabilities
      (520 )      667  
    
 
 
    
 
 
  
Net cash provided by operating activities
      533       523  
    
 
 
    
 
 
  
Cash Flows From Investing Activities
                 
Proceeds from sales of available for sale securities
      —         1,018  
Maturities, prepayments, and calls of available for sale securities
      10,879       5,116  
Purchases of available for sale securities
      (37,139 )      (39,218 ) 
Net change in marketable equity securities
      (56 )      —    
Net increase in loans
      (26,040 )      (1,830 ) 
Net capital expenditures for premises and equipment
      (131 )      (94 ) 
    
 
 
    
 
 
  
Net cash used in investing activities
      (52,487 )      (35,008 ) 
    
 
 
    
 
 
  
Cash Flows From Financing Activities
                 
Net (decrease) increase in deposits
      (1,439 )      86,336  
Net increase in advance payments by borrowers for taxes and insurance
      5,879       6,430  
Proceeds from issuance of Federal Home Loan Bank advances
      10,000       —    
Principal payments on Federal Home Loan Bank advances
      (8,007 )      (4,975 ) 
Reimbursement of stock offering costs
      1       —    
Purchases of treasury stock
      —         (15 ) 
Purchase of ESOP shares
      (1,062 )      —    
    
 
 
    
 
 
  
Net cash provided by financing activities
      5,372       87,776  
    
 
 
    
 
 
  
Net (decrease) increase in cash and cash equivalents
      (46,582 )      53,219  
Cash and cash equivalents at beginning of period
      66,803       92,526  
    
 
 
    
 
 
  
Cash and cash equivalents at end of period
    $ 20,221     $ 145,817  
    
 
 
    
 
 
  
Supplemental cash flow information:
                 
Cash paid during the year for interest
    $ 691     $ 902  
Noncash activities:
                 
Retirement of common stock
    $ 78     $ 70  
Issuance of treasury stock – stock compensation plans
      —         15  
See accompanying notes to the unaudited consolidated financial statements.
 
5
1895 BANCORP OF WISCONSIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION
1895 Bancorp of Wisconsin, Inc., a Maryland corporation (the “Company” or “New 1895 Bancorp”) was formed to serve as the stock holding company for PyraMax Bank, FSB (the “Bank”) as part of the
mutual-to-stock
conversion of 1895 Bancorp of Wisconsin, MHC. Upon completion of the conversion, which occurred on July 14, 2021, 1895 Bancorp of Wisconsin, MHC and 1895 Bancorp of Wisconsin, a federal corporation (“Old 1895 Bancorp”), ceased to exist and New 1895 Bancorp became the successor corporation to Old 1895 Bancorp. The conversion was accomplished by the merger of 1895 Bancorp of Wisconsin, MHC with and into Old 1895 Bancorp followed by the merger of Old 1895 Bancorp with and into New 1895 Bancorp. The shares of New 1895 Bancorp common stock that were offered for sale in connection with the conversion represented the majority ownership interest in Old 1895 Bancorp owned by 1895 Bancorp of Wisconsin, MHC. On July 14, 2021, public stockholders of Old 1895 Bancorp received 1.3163 shares of common stock of New 1895 Bancorp in exchange for each of their shares of Old 1895 Bancorp common stock. The shares of Old 1895 Bancorp common stock owned by 1895 Bancorp of Wisconsin, MHC were canceled at that time. The conversion and offering were completed on July 14, 2021, and New 1895 Bancorp was organized as a fully public stock holding company, with 100% of the common stock being held by the public. The consolidated financial statements and other financial information contained in these consolidated financial statements are for New 1895 Bancorp.
The cost of the reorganization and the issuing of the common stock totaling $2.0 million were deferred and deducted from the sales proceeds of the offering.
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 consolidated 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 consolidated financial statements contain all normal recurring adjustments necessary to present fairly the financial position, results of operations, changes in stockholder’s equity and cash flows as of and for the periods presented. Certain amounts from prior periods have been reclassified to conform with current period presentation.
The accompanying unaudited consolidated financial statements and related notes should be read in conjunction with the audited annual consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2021, as filed with the Securities and Exchange Commission on March 29, 2022.
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 value of investment 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.
 
6
NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION (continued)
 
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 recent accounting standards in Note 2 reflect those that relate to
non-issuer
companies.
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.
On July 29, 2022, the Company announced the Board of Directors of the Company had adopted a stock repurchase program. Under the repurchase program, the Company may repurchase up to 5% of the current outstanding shares. The program is subject to regulatory
non-objection.
There were no additional significant subsequent events for the quarter ended June 30, 2022 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 Financial Accounting Standards Board (“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. In November 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 fiscal years beginning after December 15, 2022. In March 2022, the FASB issued ASU
2022-02—Financial
Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminates the accounting guidance for TDRs by creditors in Subtopic
310-40,
Receivables—Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, ASU
2022-02
requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic
326-20,
Financial Instruments—Credit Losses—Measured at Amortized Cost in the vintage disclosures required by paragraph
326-20-50-6.
ASU
No. 2022-02
is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The amendments should be applied prospectively, however, an entity has the option to apply a modified retrospective transition method related to the recognition and measurement of TDRs, which would result in a cumulative effect adjustment to retained earnings in the period of adoption. Management has elected to defer adoption of ASC
2016-13,
as well as ASU
2022-02,
until January 1, 2023. The Company has implemented and is currently testing and evaluating a third-party software solution to assist with the adoption of ASU
2016-13.
The impact of adopting ASU
2016-13
on the Company’s consolidated financial statements is still being quantified. Management will continue to progress on its implementation project plan and improve the Company’s approach throughout the deferral period.
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.
 
7
NOTE 2 – RECENT ACCOUNTING STANDARDS (continued)
 
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 D
ates for Cert
ain Entities, updating the effective date for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company adopted ASC 842 on January 1, 2022. The cumulative effect did not have a material impact on the Company’s statements of operations. Where the Company is a lessee, the Company recorded an initial increase in both assets and liabilities of $529,000 to reflect the right of use asset and the lease liability.​​​​​​​
NOTE 3 –
AVAILABLE-FOR-SALE
SECURITIES
The amortized costs and fair values of securities
available-for-sale
were as follows:
 
                                                                                                                 
    
June 30, 2022
  
    
Amortized
Cost
     
Gross
Unrealized
Gains
     
Gross
Unrealized
Losses
     
Fair Value
  
                             
    
(in thousands)
  
U.S. Treasury notes
   
$
29,555
 
   
$
—  
 
   
$
(2,227
) 
   
$
27,328
 
Obligations of states and political subdivisions
   
 
21,418
 
   
 
17
 
   
 
(2,889
) 
   
 
18,546
 
Government-sponsored mortgage-backed securities
   
 
80,261
 
   
 
19
 
   
 
(6,579
) 
   
 
73,701
 
Asset-backed securities
   
 
5,723
 
   
 
—  
 
   
 
(71
) 
   
 
5,652
 
Certificates of deposit
   
 
1,459
 
   
 
—  
 
   
 
(10
) 
   
 
1,449
 
    
 
 
     
 
 
     
 
 
     
 
 
  
Total
   
$
138,416
 
   
$
36
 
   
$
(11,776
) 
   
$
126,676
 
    
 
 
     
 
 
     
 
 
     
 
 
  
 
                                                                                                             
    
December 31, 2021
  
    
Amortized
Cost
     
Gross
Unrealized
Gains
     
Gross
Unrealized
Losses
     
Fair Value
  
                             
    
(in thousands)
  
U.S. Treasury notes
   
$
19,501
 
   
$
8
 
   
$
(25
) 
   
$
19,484
 
Obligations of states and political subdivisions
   
 
20,758
 
   
 
207
 
   
 
(205
) 
   
 
20,760
 
Government-sponsored mortgage-backed securities
   
 
64,049
 
   
 
563
 
   
 
(463
) 
   
 
64,149
 
Asset-backed securities
   
 
6,479
 
   
 
45
 
   
 
(1
) 
   
 
6,523
 
Certificates of deposit
   
 
1,459
 
   
 
65
 
   
 
—  
 
   
 
1,524
 
    
 
 
     
 
 
     
 
 
     
 
 
  
Total
   
$
112,246
 
   
$
888
 
   
$
(694
) 
   
$
112,440
 
    
 
 
     
 
 
     
 
 
     
 
 
  
Available-for-sale
securities with a carrying value of $4.1 million and $1.8 million were pledged as collateral at June 30, 2022 and December 31, 2021, 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.​​​​​​​
 
8
NOTE 3 –
AVAILABLE-FOR-SALE
SECURITIES (continued)
 
    
June 30, 2022
  
    
Amortized Cost
     
Fair Value
  
               
    
(in thousands)
  
Debt and other securities:
                  
Due in one year or less
    $ 1,790      $ 1,783  
Due after one through 5 years
      20,892        19,646  
Due after 5 through 10 years
      18,661        16,772  
Due after 10 years
      11,089        9,122  
    
 
 
     
 
 
  
Total debt and other securities
      52,432        47,323  
Mortgage-related securities
      80,261        73,701  
Asset-backed securities
      5,723        5,652  
    
 
 
     
 
 
  
Total
    $ 138,416      $ 126,676  
    
 
 
     
 
 
  
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:
 
                                                                                                                                                       
    
June 30, 2022
  
    
Less than 12 months
    
12 months or longer
    
Total
  
    
Fair Value
     
Unrealized
Loss
    
Fair Value
     
Unrealized
Loss
    
Fair Value
     
Unrealized
Loss
  
                                         
    
(in thousands)
  
U.S. Treasury notes
   
$
27,328
 
   
$
(2,227
) 
  
$
—  
 
   
$
—  
 
  
$
27,328
 
   
$
(2,227
) 
Obligations of states and political subdivisions
   
 
14,506
 
   
 
(2,102
) 
  
 
3,433
 
   
 
(787
) 
  
 
17,939
 
   
 
(2,889
) 
Government-sponsored mortgage-backed securities
   
 
67,633
 
   
 
(5,849
) 
  
 
4,724
 
   
 
(730
) 
  
 
72,357
 
   
 
(6,579
) 
Asset-backed securities
   
 
5,345
 
   
 
(71
) 
  
 
—  
 
   
 
—  
 
  
 
5,345
 
   
 
(71
) 
Certificates of deposit
   
 
1,234
 
   
 
(10
) 
  
 
—  
 
   
 
—  
 
  
 
1,234
 
   
 
(10
) 
    
 
 
     
 
 
    
 
 
     
 
 
    
 
 
     
 
 
  
Total
   
$
116,046
 
   
$
(10,259
) 
  
$
8,157
 
   
$
(1,517
) 
  
$
124,203
 
   
$
(11,776
) 
    
 
 
     
 
 
    
 
 
     
 
 
    
 
 
     
 
 
  
 
                                                                                                                                                       
    
December 31, 2021
  
    
Less than 12 months
    
12 months or longer
    
Total
  
    
Fair
Value
     
Unrealized
Loss
    
Fair Value
     
Unrealized
Loss
    
Fair Value
     
Unrealized
Loss
  
                                         
    
(in thousands)
  
U.S. Treasury notes
   
$
12,971
 
   
$
(25
) 
  
$
—  
 
   
$
—  
 
  
$
12,971
 
   
$
(25
) 
Obligations of states and political subdivisions
   
 
5,414
 
   
 
(82
) 
  
 
4,105
 
   
 
(123
) 
  
 
9,519
 
   
 
(205
) 
Government-sponsored mortgage-backed securities
   
 
39,392
 
   
 
(463
) 
  
 
—  
 
   
 
—  
 
  
 
39,392
 
   
 
(463
) 
Asset-backed securities
   
 
808
 
   
 
(1
) 
  
 
—  
 
   
 
—  
 
  
 
808
 
   
 
(1
) 
    
 
 
     
 
 
    
 
 
     
 
 
    
 
 
     
 
 
  
Total
   
$
58,585
 
   
$
(571
) 
  
$
4,105
 
   
$
(123
) 
  
$
62,690
 
   
$
(694
) 
    
 
 
     
 
 
    
 
 
     
 
 
    
 
 
     
 
 
  
At June 30, 2022 and December 31, 2021, respectively, the Company had 90 and 24 debt securities with unrealized losses representing aggregate depreciation of approximately 9.3% and 1.1%, respectively, from their respective amortized cost basis. 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 June 30,
     
Six months ended June 30,
  
    
2022
     
2021
     
2022
     
2021
  
                             
    
(in thousands)
     
(in thousands)
  
Proceeds from sales of securities
available-for-sale
    $ —        $ —        $ —        $ 1,018  
    
 
 
     
 
 
     
 
 
     
 
 
  
Gross realized gains
    $ —        $ —        $ —        $ 12  
Gross realized losses
      —          —          —          —    
    
 
 
     
 
 
     
 
 
     
 
 
  
Net realized gains
    $ —        $ —        $ —        $ 12  
    
 
 
     
 
 
     
 
 
     
 
 
  
 
9
NOTE 4 – LOANS
Major classifications of loans are summarized as follows:
 
    
June 30,
2022
     
December 31,
2021
  
               
    
(in thousands)
  
Commercial:
                  
Real estate
    $ 205,402      $ 185,223  
Land development
      —          1,400  
Other
      42,858        38,160  
Residential real estate:
                  
First mortgage
      83,165        80,661  
Construction
      3,726        3,388  
Consumer:
                  
Home equity and lines of credit
      16,592        17,032  
Other
      145        128  
    
 
 
     
 
 
  
Subtotal
      351,888        325,992  
Net deferred loan costs
      863        655  
Allowance for loan losses
      (3,132 )       (2,858 ) 
    
 
 
     
 
 
  
Loans, net
    $ 349,619      $ 323,789  
    
 
 
     
 
 
  
Deposit accounts in an overdrawn position and reclassified as loans totaled $26,000 and $106,000 at June 30, 2022 and December 31, 2021, respectively.
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 June 30, 2022 and December 31, 2021, respectively, the Company had transferred $34.9 million and $32.1 million in participation loans which were eligible for sales treatment to other financial institutions, all of which continue to be serviced by the Company.
An analysis of past due loans is presented below:
 
    
June 30, 2022
  
    
30-89 Days

Past Due
     
90 Days or
More Past
Due
     
Total Past
Due
     
Current
Loans
     
Total
Loans
  
                                    
    
(in thousands)
  
Commercial:
                                             
Real estate
    $ —        $ —        $ —        $ 205,402      $ 205,402  
Land development
      —          —          —          —          —    
Other
      —          —          —          42,858        42,858  
Residential real estate:
                                             
First mortgage
      69        —          69        83,096        83,165  
Construction
      —          —          —          3,726        3,726  
Consumer:
                                             
Home equity and lines of credit
      27        —          27        16,565        16,592  
Other
      —          —          —          145        145  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 96      $ —        $ 96      $ 351,792      $ 351,888  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
10
NOTE 4 – LOANS (continued)
 
    
December 31, 2021
  
    
30-89 Days

Past Due
     
90 Days or
More Past
Due
     
Total
Past Due
     
Current
     
Total
Loans
  
                                    
    
(in thousands)
  
Commercial:
                                             
Real estate
    $ —        $ —        $ —        $ 185,223      $ 185,223  
Land development
      —          —          —          1,400        1,400  
Other
      33        —          33        38,127        38,160  
Residential real estate:
                                             
First mortgage
      342        —          342        80,319        80,661  
Construction
      —          —          —          3,388        3,388  
Consumer:
                                             
Home equity and lines of credit
      —          —          —          17,032        17,032  
Other
      —          —          —          128        128  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 375      $ —        $ 375      $ 325,617      $ 325,992  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
There were no loans 90 days or more past due and accruing interest as of June 30, 2022 or December 31, 2021, respectively.
A summary of activity in the allowance for loan losses for the three and six months ended June 30, 2022 and June 30, 2021, respectively, is presented below:
 
    
Commercial
     
Residential
     
Consumer
     
Total
  
                             
    
(in thousands)
  
Three months ended June 30, 2022
                                    
Allowance for loan losses
                                    
Beginning balance
    $ 1,814      $ 745      $ 458      $ 3,017  
Provision for loan losses
      105        —          —          105  
Loans
charged-off
      —          —          (1 )       (1 ) 
Recoveries
      5        —          6        11  
    
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance
    $ 1,924      $ 745      $ 463      $ 3,132  
    
 
 
     
 
 
     
 
 
     
 
 
  
Three months ended June 30, 2021
                                    
Allowance for loan losses
                                    
Beginning balance
    $ 1,614      $ 745      $ 340      $ 2,699  
Provision for loan losses
      —          —          —          —    
Loans
charged-off
      —          —          (1 )       (1 ) 
Recoveries
      4        —          30        34  
    
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance
    $ 1,618      $ 745      $ 369      $ 2,732  
    
 
 
     
 
 
     
 
 
     
 
 
  
 
    
Commercial
     
Residential
     
Consumer
     
Total
  
                             
    
(in thousands)
  
Six months ended June 30, 2022
                                    
Allowance for loan losses
                                    
Beginning balance
    $ 1,657      $ 745      $ 456      $ 2,858  
Provision for loan losses
      210        —          —          210  
Loans
charged-off
      —          —          (4 )       (4 ) 
Recoveries
      57        —          11        68  
    
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance
    $ 1,924      $ 745      $ 463      $ 3,132  
    
 
 
     
 
 
     
 
 
     
 
 
  
Six months ended June 30, 2021
                                    
Allowance for loan losses
                                    
Beginning balance
    $ 1,609      $ 745      $ 349      $ 2,703  
Provision for loan losses
      —          —          —          —    
Loans
charged-off
      —          —          (17 )       (17 ) 
Recoveries
      9        —          37        46  
    
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance
    $ 1,618      $ 745      $ 369      $ 2,732  
    
 
 
     
 
 
     
 
 
     
 
 
  
 
11
NOTE 4 – LOANS (continued)
 
A summary of the allowance for loan losses for loans evaluated individually and collectively for impairment is presented below:
 
    
June 30, 2022
  
    
Commercial
     
Residential
     
Consumer
     
Total
  
                             
    
(in thousands)
  
Loans:
                                    
Individually evaluated for impairment
    $ 4,009      $ 1,192      $ 35      $ 5,236  
Collectively evaluated for impairment
      244,251        85,699        16,702        346,652  
    
 
 
     
 
 
     
 
 
     
 
 
  
Total loans
    $ 248,260      $ 86,891      $ 16,737      $ 351,888  
    
 
 
     
 
 
     
 
 
     
 
 
  
Allowance for loan losses:
                                    
Individually evaluated for impairment
    $ —        $ —        $ —        $ —    
Collectively evaluated for impairment
      1,924        745        463        3,132  
    
 
 
     
 
 
     
 
 
     
 
 
  
Total allowance for loan losses
    $ 1,924      $ 745      $ 463      $ 3,132  
    
 
 
     
 
 
     
 
 
     
 
 
  
 
    
December 31, 2021
  
    
Commercial
     
Residential
     
Consumer
     
Total
  
                             
    
(in thousands)
  
Loans:
                                    
Individually evaluated for impairment
    $ 4,833      $ 1,357      $ 37      $ 6,227  
Collectively evaluated for impairment
      219,950        82,692        17,123        319,765  
    
 
 
     
 
 
     
 
 
     
 
 
  
Total loans
    $ 224,783      $ 84,049      $ 17,160      $ 325,992  
    
 
 
     
 
 
     
 
 
     
 
 
  
Allowance for loan losses:
                                    
Individually evaluated for impairment
    $ —        $ —        $ —        $ —    
Collectively evaluated for impairment
      1,657        745        456        2,858  
    
 
 
     
 
 
     
 
 
     
 
 
  
Total allowance for loan losses
    $ 1,657      $ 745      $ 456      $ 2,858  
    
 
 
     
 
 
     
 
 
     
 
 
  
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.
 
12
NOTE 4 – LOANS (continued)
 
A summary of the Company’s internal risk ratings of loans is presented below:
 
    
June 30, 2022
  
    
Pass
     
Watch and
Special
Mention
     
Substandard
     
Total
  
                             
    
(in thousands)
  
Commercial:
                                    
Real estate
    $ 196,641      $ 5,188      $ 3,573      $ 205,402  
Land development
      —          —          —          —    
Other
      40,556        1,866        436        42,858  
    
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 237,197      $ 7,054      $ 4,009      $ 248,260  
    
 
 
     
 
 
     
 
 
     
 
 
  
 
    
December 31, 2021
  
    
Pass
     
Watch and
Special
Mention
     
Substandard
     
Total
  
                             
    
(in thousands)
  
Commercial:
                                    
Real estate
    $ 172,172      $ 8,963      $ 4,088      $ 185,223  
Land development
      1,400        —          —          1,400  
Other
      37,414        1        745        38,160  
    
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 210,986      $ 8,964      $ 4,833      $ 224,783  
    
 
 
     
 
 
     
 
 
     
 
 
  
There were no loans rated Doubtful or Loss as of June 30, 2022 or December 31, 2021, respectively.
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. Management determines that a loan is impaired or
non-performing
when it is probable at least a portion of the loan will not be collected in accordance with the original terms due to a deterioration in the financial condition of the borrower or the value of the underlying collateral if the loan is collateral dependent. Information regarding the credit quality indicators most closely monitored for residential real estate and consumer loans is presented below:
 
    
June 30, 2022
  
    
Performing
     
Non
Performing
     
Total
  
                      
    
(in thousands)
  
Residential real estate:
                           
First mortgage
    $ 82,383      $ 782      $ 83,165  
Construction
      3,726        —          3,726  
Consumer:
                           
Home equity and lines of credit
      16,557        35        16,592  
Other
      145        —          145  
    
 
 
     
 
 
     
 
 
  
Total
    $ 102,811      $ 817      $ 103,628  
    
 
 
     
 
 
     
 
 
  
 
13
NOTE 4 – LOANS (continued)
 
    
December 31, 2021
  
    
Performing
     
Non
Performing
     
Total
  
                      
    
(in thousands)
  
Residential real estate:
                           
First mortgage
    $ 79,722      $ 939      $ 80,661  
Construction
      3,388        —          3,388  
Consumer:
                           
Home equity and lines of credit
      16,954        78        17,032  
Other
      128        —          128  
    
 
 
     
 
 
     
 
 
  
Total
    $ 100,192      $ 1,017      $ 101,209  
    
 
 
     
 
 
     
 
 
  
Information regarding impaired loans is presented below:
 
    
As of and for the Six Months Ended June 30, 2022
  
    
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 mortgage
      —          —          —          —          —    
Construction
      —          —          —          —          —    
Consumer:
                                             
Home equity and lines of credit
      —          —          —          —          —    
Other
      —          —          —          —          —    
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total impaired loans with reserve
      —          —          —          —          —    
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Impaired loans with no reserve:
                                             
Commercial:
                                             
Real estate
      3,573        3,573        NA        3,785        71  
Land development
      —          —          NA        —          —    
Other
      436        436        NA        505        62  
Residential real estate:
                                             
First mortgage
      1,192        1,412        NA        1,271        32  
Construction
      —          —          NA        —          —    
Consumer:
                                             
Home equity and lines of credit
      35        40        NA        36        1  
Other
      —          —          NA        —          —    
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total impaired loans with no reserve
      5,236        5,461        NA        5,597        166  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total impaired loans
    $ 5,236      $ 5,461      $ —        $ 5,597      $ 166  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
14
NOTE 4 – LOANS (continued)
 
    
As of and for the Year Ended December 31, 2021
  
    
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 mortgage
      —          —          —          —          —    
Construction
      —          —          —          —          —    
Consumer:
                                             
Home equity and lines of credit
      —          —          —          —          —    
Other
      —          —          —          —          —    
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total impaired loans with reserve
      —          —          —          —          —    
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Impaired loans with no reserve:
                                             
Commercial:
                                             
Real estate
      4,088        4,089        NA        5,615        213  
Land development
      —          —          NA        734        33  
Other
      745        796        NA        1,478        35  
Residential real estate:
                                             
First mortgage
      1,357        1,572        NA        914        34  
Construction
      —          —          NA        —          —    
Consumer:
                                             
Home equity and lines of credit
      37        41        NA        17        22  
Other
      —          —          NA        —          —    
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total impaired loans with no reserve
      6,227        6,498        NA        8,758        337  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total impaired loans
    $ 6,227      $ 6,498      $ —        $ 8,758      $ 337  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
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 June 30, 2022 and December 31, 2021, respectively.
Nonperforming loans are as follows:
 
    
June 30,
2022
     
December 31,
2021
  
               
    
(in thousands)
  
Nonaccrual loans, other than troubled debt restructurings
    $ 630      $ 826  
Nonaccrual loans, troubled debt restructurings
      187        191  
    
 
 
     
 
 
  
Total nonperforming loans
    $ 817      $ 1,017  
    
 
 
     
 
 
  
Troubled debt restructurings, accruing
    $ 410      $ 418  
    
 
 
     
 
 
  
 
15
NOTE 4 – LOANS (continued)
 
There were no loans modified as troubled debt restructurings during the six months ended June 30, 2022 and year ended December 31, 2021, respectively.
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, 2021 or (ii) 60 days after the end of the
COVID-19
national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt these provisions of the CARES Act. As of June 30, 2022, the Company had 1 to 3 month deferrals of approximately $251,000 in interest, escrow, and principal payments on $5.7 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 six months ended June 30, 2022 and 2021.
Information on
non-accrual
loans is presented below:
 
    
June 30,
2022
    
December 31,
2021
  
              
    
(in thousands)
  
Commercial:
                 
Real estate
    $ —       $ —    
Land development
      —         —    
Other
      —         —    
Residential real estate:
                 
First mortgage
      782       939  
Construction
      —         —    
Consumer:
                 
Home equity and lines of credit
      35       78  
Other
      —         —    
    
 
 
    
 
 
  
Total
non-accrual
loans
    $ 817     $ 1,017  
    
 
 
    
 
 
  
Total
non-accrual
loans to total loans
      0.23 %      0.31 % 
Total
non-accrual
loans to total assets
      0.15 %      0.19 % 
NOTE 5 – MORTGAGE SERVICING RIGHTS
Loans serviced for others are not included in the Company’s consolidated balance sheets. The unpaid principal balance of mortgage loans serviced for others was $317.5 million and $332.9 million as of June 30, 2022 and December 31, 2021, respectively.
A summary of activity in the Company’s mortgage servicing rights is presented below:
 
    
Three Months
Ended June 30,
2022
     
Three Months
Ended June 30,
2021
     
Six Months
Ended June 30,
2022
     
Six Months
Ended June 30,
2021
  
                             
    
(in thousands)
     
(in thousands)
  
Mortgage servicing rights beginning balance
    $ 1,988      $ 2,147      $ 2,036      $ 1,806  
Additions
      20        117        47        320  
Amortization
      (69 )       (155 )       (144 )       (386 ) 
Decrease in valuation allowance
      —          —          —          369  
    
 
 
     
 
 
     
 
 
     
 
 
  
Mortgage servicing rights ending balance
    $ 1,939      $ 2,109      $ 1,939      $ 2,109  
    
 
 
     
 
 
     
 
 
     
 
 
  
Fair value at beginning of period
    $ 2,811      $ 2,153      $ 2,477      $ 1,806  
Fair value at end of period
    $ 3,273      $ 2,361      $ 3,273      $ 2,361  
 
16
NOTE 5 – MORTGAGE SERVICING RIGHTS (continued)
 
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 June 30, 2022, the model used discount rates ranging from 9.5% to 13%, and prepayment speeds ranging from 11.3% to 26.8%, respectively, both of which were based on market data from independent organizations. As of June 30, 2021 the model used discount rates ranging from 10% to 13.5%, and prepayment speeds ranging from 12.8% to 35.8%, 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 annual periods indicated. The projections of amortization expense are based on existing asset balances as of June 30, 2022. 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 June 30, 2022:
         
2022
    $ 127  
2023
      234  
2024
      208  
2025
      186  
2026
      164  
Thereafter
      1,020  
    
 
 
  
Total
    $ 1,939  
    
 
 
  
NOTE 6 – DEPOSITS
The composition of deposits is summarized below:
 
    
June 30,
2022
     
December 31,
2021
  
               
    
(in thousands)
  
Non-interest
bearing checking
    $ 102,998      $ 106,664  
Interest bearing checking
      34,016        37,467  
Money market
      95,878        94,823  
Statement savings
      67,456        64,954  
Certificates of deposit
      82,714        80,593  
    
 
 
     
 
 
  
Total
    $ 383,062      $ 384,501  
    
 
 
     
 
 
  
The Company held $8.4 million and $10.0 million in certificates of deposit which met or exceeded the FDIC insurance limit of $250,000 as of June 30, 2022 and December 31, 2021, respectively. The Company did not hold any brokered deposits as of June 30, 2022 and December 31, 2021.
As of June 30, 2022, the scheduled maturities of certificates of deposit for the annual periods are presented below:
 
    
(in thousands)
  
2022
    $ 38,552  
2023
      33,484  
2024
      1,209  
2025
      8,823  
2026
      347  
Thereafter
      299  
    
 
 
  
Total
    $ 82,714  
    
 
 
  
 
17
NOTE 7 – FEDERAL HOME LOAN BANK ADVANCES
 
Federal Home Loan Bank advances consist of the following:
 
    
June 30, 2022
     
December 31, 2021
  
    
Rate
    
Amount
     
Rate
    
Amount
  
                           
    
(dollars in thousands)
  
Fixed rate, fixed term advance, maturing Feb 2022
      N/A     $ —        1.62 %    $ 6,500  
Fixed rate, fixed term advance, maturing Feb 2023
      1.62 %      6,500        1.62 %      6,500  
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        0.98 %      5,000  
Putable advance, maturing Mar 2030 first put option date Mar 2025
      0.89 %      10,000        0.89 %      10,000  
Putable advance, maturing Mar 2032 first put option date Mar 2027
      1.74 %      10,000        —         —    
Advance structured note, payments due monthly, maturing Feb 2030
      —         —          7.47 %      542  
Advance structured note, payments due monthly, maturing April 2030
      1.05 %      7,922        1.05 %      8,405  
Advance structured note, payments due monthly, maturing May 2030
      1.19 %      8,013        1.19 %      8,495  
            
 
 
             
 
 
  
Total
            $ 57,435              $ 55,442  
            
 
 
             
 
 
  
The scheduled maturities and required principal payments of Federal Home Loan Bank advances are presented below:
 
    
June 30, 2022
  
    
Weighted
Average Rate
    
Amount
  
              
    
(dollars in thousands)
  
2022
      1.12 %    $ 971  
2023
      1.50 %      8,457  
2024
      1.12 %      1,979  
2025
      1.12 %      2,002  
2026
      1.12 %      2,024  
Thereafter
      1.17 %      42,002  
            
 
 
  
Total
            $ 57,435  
            
 
 
  
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 federal funds or Treasury bill rates. Federal Home Loan Bank advances are subject to a prepayment penalty if they are repaid prior to maturity.
The Company has pledged qualifying loans of $232.5 million and $232.7 million as collateral for Federal Home Loan Bank advances as of June 30, 2022 and December 31, 2021, respectively. Collateral values to borrow against were approximately $158.8 million and $147.5 million as of June 30, 2022 and December 31, 2021, respectively. Federal Home Loan Bank advances are also secured by approximately $3.0 million of Federal Home Loan Bank stock held by the Company as of June 30, 2022 and December 31, 2021. The Company’s available and unused portion of this borrowing agreement totaled $85.4 million and $90.9 million as of June 30, 2022 and December 31, 2021, respectively. Additional borrowing would require additional stock purchase.
Additionally, at June 30, 2022 the Company had a $15.0 million federal funds rate line of credit with the BMO Harris Bank, none of which was drawn at June 30, 2022. The Company also had a $10.4 million line of credit at the Federal Reserve based on pledged commercial real estate loans of approximately $13.3 million at June 30, 2022. The Company had not drawn on the Federal Reserve line as of June 30, 2022.
 
18
NOTE 8 – INCOME TAXES
Income tax (benefit) expense was ($133,000) and ($58,000) for the three months ended June 30, 2022 and 2021, respectively, and ($192,000) and $102,000 for the six months ended June 30, 2022 and 2021, respectively.
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 available tax planning strategies. As of June 30, 2022, and December 31, 2021, the deferred tax valuation allowance was $934,000, reducing our net deferred tax asset to $7.2 million and $3.8 million at each respective date.
Due to recent changes in market conditions and current events related to
COVID-19,
the board and management continue to assess their deferred tax assets including forecasted future projected income and available tax planning strategies. 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 June 30, 2022.
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.
The contractual amounts of
off-balance-sheet
credit-related financial instruments are summarized below:
 
    
June 30, 2022
  
    
Fixed Rate
     
Variable Rate
     
Total
  
                      
    
(in thousands)
  
Commitments to extend credit
    $ 16,740      $ 62,575      $ 79,315  
Standby letters of credit
      —          150        150  
Credit enhancement under the FHLB of Chicago Mortgage Partnership Finance Program
      1,309        —          1,309  
Commitments to sell loans
      3,012        —          3,012  
Overdraft protection program commitments
      3,932        —          3,932  
 
    
December 31, 2021
  
    
Fixed Rate
     
Variable Rate
     
Total
  
                      
    
(in thousands)
  
Commitments to extend credit
    $ 21,586      $ 56,921      $ 78,507  
Standby letters of credit
      —          175        175  
Credit enhancement under the FHLB of Chicago Mortgage Partnership Finance Program
      1,214        —          1,214  
Commitments to sell loans
      5,410        —          5,410  
Overdraft protection program commitments
      3,993        —          3,993  
 
19
NOTE 9
– COMMITMENTS AND CONTINGENCIES (continued)
 
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 $2.2 million of commitments to deliver loans through the Program as of June 30, 2022. 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 June 30, 2022, and December 31, 2021, 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, effective January 1, 2019, in connection with the mutual holding company reorganization and organization of Old 1895 Bancorp. 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.
On January 8, 2019, the ESOP purchased 175,528 shares (231,047 shares adjusted for the conversion) of the Company’s common stock, which was funded by a loan from Old 1895 Bancorp. 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.
As part of the
mutual-to-stock
conversion and stock offering completed on July 14, 2021, the ESOP refinanced the aforementioned loan with New 1895 Bancorp, enabling the ESOP to purchase an aggregate of 283,360 additional shares of common stock. During the six months ended June 30, 2022, the ESOP purchased 96,446 additional shares at an average price of $10.95. As of June 30, 2022, the ESOP had purchased 283,360 of the additional shares at an average price of $10.90.
 
20
NOTE 10 – EMPLOYEE STOCK OWNERSHIP PLAN (continued)
 
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 $51,000 and $30,000 in compensation expense for the three months ended June 30, 2022 and June 30, 2021, respectively, and $101,000 and $51,000 for the six months ended June 30, 2022 and June 30, 2021, respectively.
The following table provides the allocated and unallocated shares of common stock associated with the ESOP.
 
    
June 30, 2022
     
December 31, 2021
  
               
    
(dollars in thousands)
  
Shares committed to be released
      9,865        22,401  
Total allocated shares
      37,640        15,239  
Total unallocated shares
      463,658        377,077  
    
 
 
     
 
 
  
Total ESOP shares
      511,163        414,717  
    
 
 
     
 
 
  
Fair value of unallocated shares (based on $10.25 and $10.99 share price as of June 30, 2022 and December 31, 2021, respectively)
    $ 4,752      $ 4,144  
    
 
 
     
 
 
  
NOTE 11 – RELATED PARTY TRANSACTIONS
A summary of loans to directors, executive officers, and their affiliates follows:
 
    
June 30,

2022
     
December 31,

2021
  
               
    
(in thousands)
  
Beginning balance
    $ 932      $ 1,034  
Adjustments due to changes in directors, executive officers, and/or principal stockholders
      —          202  
New loans
      4        53  
Repayments
      (56 )       (357 ) 
    
 
 
     
 
 
  
Ending balance
    $ 880      $ 932  
    
 
 
     
 
 
  
Deposits from directors, executive officers, and their affiliates totaled $1.1 million at June 30, 2022 and December 31, 2021, 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 immaterial for the three and six months ended June 30, 2022 and 2021, 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).
 
21
NOTE 12 – FAIR VALUE MEASUREMENTS (continued)
 
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 GAAP. 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. Treasury notes, 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
– The Company does not record loans at fair value on a recurring basis. However, periodically, a loan is considered impaired and is reported at fair value of the underlying collateral, less estimated costs to sell, if repayment is expected solely from the collateral. Independent appraisals are obtained to determine the fair values of underlying collateral, and generally utilize one or more valuation methodologies, which typically include 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.
Rate lock commitments
– Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. Accordingly, such commitments, along with any related fees received from potential borrowers, are recorded at fair value in other assets or liabilities, with changes in fair value recorded in the net gain or loss on sale of mortgage loans. Fair value is based on fees currently charged to enter into similar agreements for fixed-rate commitments and also considers the difference between current levels of interest rates and the committed rates. While there are Level 2 and 3 inputs used in the valuation models, the Company has determined that one or more of the inputs significant in the valuation of both of the mortgage banking derivatives fall within Level 3 of the fair value hierarchy. The change in fair value is recorded through an adjustment to the statement of operations, within mortgage banking income.
 
22
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
  
    
June 30, 2022
     
Level 1
     
Level 2
     
Level 3
  
                             
    
(in thousands)
  
Marketable equity securities
   
$
2,867
 
   
$
2,867
 
   
$
—  
 
   
$
—  
 
Securities
available-for-sale:
                                    
U.S. Treasury notes
   
 
27,328
 
   
 
—  
 
   
 
27,328
 
   
 
—  
 
Obligations of states and political subdivisions
   
 
18,546
 
   
 
—  
 
   
 
18,546
 
   
 
—  
 
Government-sponsored mortgage-backed securities
   
 
73,701
 
   
 
—  
 
   
 
73,701
 
   
 
—  
 
Asset-backed securities
   
 
5,652
 
   
 
—  
 
   
 
5,652
 
   
 
—  
 
Certificates of deposit
   
 
1,449
 
   
 
—  
 
   
 
1,449
 
   
 
—  
 
    
 
 
     
 
 
     
 
 
     
 
 
  
Total
   
$
129,543
 
   
$
2,867
 
   
$
126,676
 
   
$
—  
 
    
 
 
     
 
 
     
 
 
     
 
 
  
 
                                                                                                                 
           
Recurring Fair Value Measurements Using
  
    
December 31, 2021
     
Level 1
     
Level 2
     
Level 3
  
                             
    
(in thousands)
  
Marketable equity securities
   
$
3,544
 
   
$
3,544
 
   
$
—  
 
   
$
—  
 
Securities
available-for-sale:
                                    
U.S. Treasury notes
   
 
19,484
 
   
 
—  
 
   
 
19,484
 
   
 
—  
 
Obligations of states and political subdivisions
   
 
20,760
 
   
 
—  
 
   
 
20,760
 
   
 
—  
 
Government-sponsored mortgage-backed securities
   
 
64,149
 
   
 
—  
 
   
 
64,149
 
   
 
—  
 
Asset-backed securities
   
 
6,523
 
   
 
—  
 
   
 
6,523
 
   
 
—  
 
Certificates of deposit
   
 
1,524
 
   
 
—  
 
   
 
1,524
 
   
 
—  
 
    
 
 
     
 
 
     
 
 
     
 
 
  
Total
   
$
115,984
 
   
$
3,544
 
   
$
112,440
 
   
$
—  
 
    
 
 
     
 
 
     
 
 
     
 
 
  
Impaired loans are measured at fair value on a
non-recurring
basis. There were no loans that were considered impaired with a specific valuation allowance as of June 30, 2022 and December 31, 2021.
Mortgage servicing rights are measured at fair value on a
non-recurring
basis. There was no impairment on mortgage servicing rights as of June 30, 2022 and December 31, 2021.
 
23
NOTE 12 – FAIR VALUE MEASUREMENTS (continued)
 
The carrying values and estimated fair values of financial instruments are presented below:
 
    
June 30, 2022
  
    
Carrying Value
     
Level 1
     
Level 2
     
Level 3
  
                             
    
(in thousands)
  
Financial assets:
                                    
Cash and cash equivalents
    $ 20,221      $ 20,221      $ —        $ —    
Available-for-sale
securities
      126,676        —          126,676        —    
Marketable equity securities
      2,867        2,867        —          —    
Loans held for sale
      262        —          262        —    
Loans
      349,619        —          —          331,153  
Rate lock commitments
      17        —          —          17  
Accrued interest receivable
      1,027        1,027        —          —    
Federal Home Loan Bank stock
      3,032        —          —          3,032  
Cash value of life insurance
      14,101        —          —          14,101  
Financial liabilities:
                                    
Deposits
      383,062        300,347        —          81,348  
Advance payments by borrowers for taxes and insurance
      7,739        7,739        —          —    
Federal Home Loan Bank advances
      57,435        —          —          54,130  
Accrued interest payable
      128        128        —          —    
 
    
December 31, 2021
  
    
Carrying Value
     
Level 1
     
Level 2
     
Level 3
  
                             
    
(in thousands)
  
Financial assets:
                                    
Cash and cash equivalents
    $ 66,803      $ 66,803      $ —        $ —    
Available-for-sale
securities
      112,440        —          112,440        —    
Marketable equity securities
      3,544        3,544        —          —    
Loans held for sale
      1,183        —          1,183        —    
Loans
      323,789        —          —          323,182  
Rate lock commitments
      30        —          —          30  
Accrued interest receivable
      948        948        —          —    
Federal Home Loan Bank Stock
      3,032        —          —          3,032  
Cash value of life insurance
      13,892        —          —          13,892  
Financial liabilities:
                                    
Deposits
      384,501        303,908        —          80,473  
Advance payments by borrowers for taxes and insurance
      1,860        1,860        —          —    
Federal Home Loan Bank advances
      55,442        —          —          55,981  
Accrued interest payable
      109        109        —          —    
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.
 
24
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. The Company is exempt from consolidated capital requirements as those requirements do not apply to certain small bank holding companies with consolidated assets under $3 billion.
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. PyraMax Bank met all applicable capital adequacy requirements as of June 30, 2022 and December 31, 2021, respectively.
As of June 30, 2022, and December 31, 2021, 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:
 
    
June 30, 2022
  
    
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)
    $ 64,385        11.8 %    $ 21,897        4.0 %    $ 27,371        5.0 % 
Risk-based:
                                                    
Common Equity Tier 1
      64,385        17.0 %      17,017        4.5 %      24,579        6.5 % 
Tier 1
      64,385        17.0 %      22,689        6.0 %      30,252        8.0 % 
Total
      67,516        17.9 %      30,252        8.0 %      37,814        10.0 % 
 
    
December 31, 2021
  
    
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)
    $ 65,179        11.9 %    $ 21,838        4.0 %    $ 27,298        5.0 % 
Risk-based:
                                                    
Common Equity Tier 1
      65,179        19.4 %      15,124        4.5 %      21,846        6.5 % 
Tier 1
      65,179        19.4 %      20,166        6.0 %      26,888        8.0 % 
Total
      68,037        20.2 %      26,888        8.0 %      33,610        10.0 % 
 
25
NOTE 14 – EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share is computed by dividing net (loss) 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. For the three and six months ended June 30, 2022, 169,167 and 179,938 average shares, respectively, were excluded from the computation of diluted EPS because the effect would be antidilutive. For the three and six months ended June 30, 2021, 149,020 and 11,436 (196,155 and 15,053 shares adjusted for conversion) average shares were excluded from the computation of diluted EPS because the effect would be antidilutive.
Earnings (loss) per common share for the three and six months ended June 30, 2022 and 2021 are presented in the following table.
 
    
Three months ended June 30,
  
    
2022
     
2021
(1)
     
2021
(2)
  
                      
    
(In thousands, except per share amounts)
  
Net (loss) income
    $ (241 )     $ (51 )     $ (51 ) 
    
 
 
     
 
 
     
 
 
  
Weighted shares outstanding for basic EPS
                           
Weighted average shares outstanding
      6,289        4,759        6,264  
Less: Weighted average unallocated ESOP shares
      446        159        209  
    
 
 
     
 
 
     
 
 
  
Weighted average shares outstanding for basic EPS
      5,843        4,600        6,065  
Additional dilutive shares
      —          —          —    
    
 
 
     
 
 
     
 
 
  
Weighted average shares outstanding for dilutive EPS
      5,843        4,600        6,065  
    
 
 
     
 
 
     
 
 
  
Basic (loss) income per share
    $ (0.04 )     $ (0.01 )     $ (0.01 ) 
    
 
 
     
 
 
     
 
 
  
Diluted (loss) income per share
    $ (0.04 )     $ (0.01 )     $ (0.01 ) 
    
 
 
     
 
 
     
 
 
  
 
    
Six months ended June 30,
  
    
2022
     
2021
(1)
     
2021
(2)
  
                      
    
(In thousands, except per share amounts)
  
Net (loss) income
    $ (296 )     $ 470      $ 470  
    
 
 
     
 
 
     
 
 
  
Weighted shares outstanding for basic EPS
                           
Weighted average shares outstanding
      6,282        4,754        6,247  
Less: Weighted average unallocated ESOP shares
      424        160        210  
    
 
 
     
 
 
     
 
 
  
Weighted average shares outstanding for basic EPS
      5,858        4,594        6,047  
Additional dilutive shares
      —          62        81  
    
 
 
     
 
 
     
 
 
  
Weighted average shares outstanding for dilutive EPS
      5,858        4,656        6,128  
    
 
 
     
 
 
     
 
 
  
Basic (loss) income per share
    $ (0.05 )     $ 0.10      $ 0.08  
    
 
 
     
 
 
     
 
 
  
Diluted (loss) income per share
    $ (0.05 )     $ 0.10      $ 0.08  
    
 
 
     
 
 
     
 
 
  
 
(1)
 
Amounts related to periods prior to the date of Conversion (July 2021) have not been restated to give the retroactive recognition to the exchange ratio applied in the Conversion (1.3163) (See Note 1).
(2)
 
Amounts related to periods prior to the date of Conversion (July 2021) have been restated to give the retroactive recognition to the exchange ratio applied in the Conversion (1.3163) (See Note 1)
 
26
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 (313,894 stock options adjusted for the conversion) stock options and 95,387 (125,557 shares adjusted for the conversion) 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 operations. The following assumptions were used in estimating the fair value of options granted during the six months ended June 30, 2022 and June 30, 2021:
 
    
For the Six Months Ended
  
    
June 30,

2022
    
June 30,
2021
  
Dividend yield
      0.00 %      0.00 % 
Risk-free interest rate
      3.06 %      0.96 % 
Expected volatility
      24.64 %      24.64 % 
Weighted average expected life
      6.5       6.5  
Weighted average per share value of options
    $ 3.25     $ 2.76  
Assumptions are used in estimating the fair value of stock options granted. The weighted average expected life of the stock options represent the period of time that the options are expected to be outstanding and is based on the historical results from the previous awards. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility is based on the actual volatility of 1895 Bancorp of Wisconsin, Inc. stock for the weighted average life time period prior to issuance date.
 
27
NOTE 15 – STOCK BASED COMPENSATION (continued)
 
A summary of the Company’s stock option activity for the six months ended June 30, 2022 is presented below.
 
Stock Options
   
Shares
     
Weighted
Average
Exercise Price
     
Weighted
Average
Remaining in
Contractual
Term (Years)
     
Aggregate
Intrinsic
Value
  
Outstanding December 31, 2021
      300,720      $ 6.19        8.40      $ 1,443,067  
Granted
      18,955        10.00        6.50        —    
Exercised
      —          —          —          —    
Forfeited
      —          —          —          —    
    
 
 
                       
 
 
  
Outstanding June 30, 2022
      319,675        6.42        8.03      $ 1,209,321  
    
 
 
                       
 
 
  
Options exercisable at June 30, 2022
      112,824        6.09        7.86      $ 463,999  
    
 
 
                       
 
 
  
The following table summarizes information about the Company’s nonvested stock option activity for the six months ended June 30, 2022:
 
Stock Options
   
Shares
     
Weighted Average
Grant Date Fair
Value
  
Nonvested at December 31, 2021
      248,043      $ 1.58  
Granted
      18,955        3.25  
Vested
(1)
      (60,147 )       1.56  
Forfeited
      —          —    
    
 
 
     
 
 
  
Nonvested at June 30, 2022
      206,851      $ 1.74  
    
 
 
     
 
 
  
 
(1)
Includes 2,105 shares vested under a nonqualified stock option inducement award to the Company’s President and Chief Operating Officer.
The Company amortizes the expense related to stock options as compensation expense over the vesting period. The Company recognized $24,000 and $26,000 in stock option expense during the three months ended June 30, 2022 and 2021. Additionally, the Company recognized $47,000 and $48,000 in stock option expense during the six months ended June 30, 2022 and 2021, respectively.
At June 30, 2022, the Company had $337,000 in estimated unrecognized compensation costs related to outstanding stock options that is expected to be recognized over a weighted average period of 3.33 years.
The following table summarizes information about the Company’s restricted stock activity for the six months ended June 30, 2022:
 
Restricted Stock
   
Shares
     
Weighted Average
Grant Date Fair
Value
  
Nonvested at December 31, 2021
      97,128      $ 6.25  
Granted
      7,371        10.00  
Vested
(1)(2)
      (23,532 )       6.20  
Forfeited
      —          —    
    
 
 
     
 
 
  
Nonvested at June 30, 2022
      80,967      $ 6.60  
    
 
 
     
 
 
  
 
(1)
 
Includes 263 shares vested under a restricted stock inducement award to the Company’s President and Chief Operating Officer.
(2)
 
Includes 7,238 shares surrendered by employees to cover payroll tax costs related to the vested shares.
The Company amortizes the expense related to restricted stock awards as compensation expense over the vesting period. The Company recognized $36,000 and $39,000 in restricted stock expense during the three months ended June 30, 2022 and 2021, respectively. Additionally, the Company recognized $72,000 and $75,000 in restricted stock shares expense during the six months ended June 30, 2022 and 2021, respectively. At June 30, 2022, the Company had $500,000 of unrecognized compensation expense related to restricted stock shares that is expected to be recognized over a weighted average period of 3.26 years.
 
28
NOTE 16 – LEASES
The Company has operating leases consisting primarily of real estate leases. The Company leases real estate property for bank branches and office space with terms extending through 2028. As of June 30, 2022, the Company reported $490,000 of
right-of-use
asset and $490,000 lease liability in its consolidated balance sheet under other assets and other liabilities, respectively. The Company’s average remaining maturity for its leases is 5.75 years and its average discount rate is 1.79%.
At June 30, 2022, the Company was obligated under noncancelable operating leases for office space and other commitments. Rent expense under operating leases, included in net occupancy and equipment expense, was $19,000 and $38,000 for the three and six months ended June 30, 2022, respectively, and $21,000 and $41,000 for the three and six months ended June 30, 2021, respectively.
Rent commitments were as follows as of June 30, 2022:
 
    
(in thousands)
  
2022
    $ 43  
2023
      87  
2024
      89  
2025
      91  
2026
      93  
Thereafter
      112  
    
 
 
  
Amounts representing interest
      (25 ) 
    
 
 
  
Total
    $ 490  
    
 
 
  
 
29
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 June 30, 2022 and for the three and six months ended June 30, 2022 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 consolidated 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;
 
•  
the actual or anticipated impacts of military conflict, terrorism or other geopolitical events;
 
•  
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 or will 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;
 
•  
a failure in or breach of our operational or security systems or infrastructure, including cyberattacks;
 
•  
the inability of third-party providers to perform as expected;
 
30
•  
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
COVID-19
will continue to adversely impact a broad range of industries in which the Company’s customers operate and will continue to impair their ability to fulfill their financial obligations to the Company.
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. Government action in response to the
COVID-19
pandemic, including restrictions on individual and business activities and vaccination mandates, may affect our business and operations, including our workforce, human capital resources and infrastructure. 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. 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.
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 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.
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, 2021 or (ii) 60 days after the end of the
COVID-19
national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt these provisions of the CARES Act. As of June 30, 2022, the Company had 1 to 3 month deferrals of approximately $251,000 in interest, escrow, and principal payments on $5.7 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 is actively participating in assisting our customers with applications for resources through the program. PPP loans will 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 six months from the date of disbursement. 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 part of the first round of this program, the Bank had funded 246 PPP loans totaling $30.3 million, with no outstanding balance remaining as of June 30, 2022.
On December 27, 2020, the Relief Act became law and provided an additional $284 billion for the PPP, as well as extending the PPP through June 30, 2021. As of June 30, 2022, we had funded 143 second round PPP loans totaling $10.5 million, of which $10.2 million had been forgiven as of June 30, 2022.
 
31
Because of the above and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Additional factors that may affect our results are discussed in our Annual Report on Form
10-K
under the heading “Risk Factors.”
Critical Accounting Policies
As a result of the complex and dynamic nature of the Company’s business, management must exercise judgment in selecting and applying the most appropriate accounting policies for its various areas of operations. The policy decision process not only ensures compliance with the current accounting principles generally accepted in the United States of America (“GAAP”), but also reflects management’s discretion with regard to choosing the most suitable methodology for reporting the Company’s financial performance. It is management’s opinion that the accounting estimates covering certain aspects of the business have more significance than others due to the relative importance of those areas to overall performance, or the level of subjectivity in the selection process. These estimates affect the reported amounts of assets and liabilities as well as disclosures of revenues and expenses during the reporting period. Actual results could meaningfully differ from these estimates. Management believes that the critical accounting estimates include the allowance for loan losses, determination of fair value for financial instruments, and valuation of deferred income taxes. A summary of the accounting policies used by management is disclosed in Note 1, “Summary of Significant Accounting Policies” in the most recent Form
10-K
(fiscal year ended December 31, 2021) filed with the Securities and Exchange Commission (“SEC”) on March 29, 2022.
Comparison of Financial Condition at June 30, 2022 and December 31, 2021
Total Assets.
 Total assets decreased $4.0 million, or 0.7%, to $535.6 million at June 30, 2022 from $539.6 million at December 31, 2021. This decrease was primarily due to a $46.6 million decrease in cash and cash equivalents, partially offset by a $25.8 million increase in loans held for investment, a $14.2 million increase in
available-for-sale
investment securities and a $4.1 million increase in other assets.
Cash and Cash Equivalents.
Cash and cash equivalents decreased $46.6 million, or 69.7%, to $20.2 million at June 30, 2022 from $66.8 million at December 31, 2021. This decrease was primarily due to the purchase of $37.1 million in
available-for-sale
securities, $26.0 million of net loan growth, $13.8 million in originations of loans held for sale and $8.0 million in principal payments on FHLB advances. These decreases were partially offset by $10.0 million from the issuance of an FHLB advance, $14.9 million from the sale of mortgage loans held for sale, $10.9 million from maturities, prepayments and calls of
available-for-sale
securities and a $5.9 million increase in advance payments by borrowers for taxes and insurance.
Available-for-Sale
Securities.
 Available-for-sale
securities increased $14.2 million, or 12.7%, to $126.7 million at June 30, 2022, from $112.4 million at December 31, 2021. The increase was primarily due to purchases of securities totaling $37.1 million during the six months ended June 30, 2022, partially offset by maturities, prepayments and calls of securities totaling $10.9 million and a reduction in the unrealized gain held within the portfolio of $11.9 million, resulting in an unrealized loss of $11.7 million at June 30, 2022. The increase in securities purchases was the result of management’s strategy, implemented in the fourth quarter of 2021, to invest a significant portion of the Company’s liquidity that was held in cash and cash equivalents into securities with higher yields to increase future earnings, while maintaining a high degree of liquidity.
Loans Held for Sale.
 Loans held for sale decreased $921,000, or 77.9%, to $262,000 at June 30, 2022, from $1.2 million at December 31, 2021. This decrease was due primarily to a decrease in the volume of first mortgage residential real estate loan originations to be sold into the secondary market as a result of the changing interest rate environment. Mortgage loan originations and sales were $13.8 million and $14.9 million, respectively, during the first six months of 2022 compared to $68.0 million and $70.0 million, respectively, for the same period in 2021.
Net Loans.
 Net loans held for investment increased $25.8 million, or 8.0%, to $349.6 million at June 30, 2022, from $323.8 million at December 31, 2021. The increase in loans is consistent with the Company’s long-term loan growth strategy.
Other Assets.
Other assets increased $4.1 million, or 66.9%, from $6.1 million at December 31, 2021 to $10.2 million at June 30, 2022. This increase was primarily due to a $3.4 million increase in deferred tax assets, which was primarily the result of the increase in unrealized losses on available for sale securities. Other assets also increased as a result of a $490,000 increase in right of use lease assets as a result of the adoption of ASU
2016-02
in the first quarter of 2022, and a $312,000 increase in prepaid expenses, which was primarily due to the payment of annual insurance premiums in the first quarter of 2022.
 
32
Deposits.
 Deposits decreased $1.4 million, or 0.4%, to $383.1 million at June 30, 2022, from $384.5 million at December 31, 2021. This decrease was primarily due to a $3.7 million decrease in noninterest bearing checking accounts and a $3.5 million decrease in interest bearing checking accounts. These decreases were partially offset by a $2.5 million increase in statement savings accounts, a $2.1 million increase in certificates of deposit and a $1.1 million increase in money market accounts.
Advance Payments by Borrowers for Taxes and Insurance.
 Advance payments by borrowers for taxes and insurance increased $5.9 million to $7.7 million at June 30, 2022 from $1.8 million at December 31, 2021. The increase was due to normal seasonal activity.
Borrowings.
Borrowings, consisting entirely of FHLB advances, increased $2.0 million, or 3.6%, to $57.4 million at June 30, 2022, from $55.4 million at December 31, 2021. The increase was due to an advance of $10.0 million borrowed during the quarter ended June 30, 2022, partially offset by maturities and principal repayments on existing advances of $8.0 million.
Total Stockholders’ Equity.
 
Total stockholders’ equity decreased $9.9 million to $81.0 million at June 30, 2022, from $90.9 million at December 31, 2021. The decrease was primarily due to an $11.9 million increase in net unrealized losses on
available-for-sale
securities, which net of taxes, resulted in a $8.7 million decrease in stockholders’ equity. The increase in net unrealized losses on available-for-sale securities resulted primarily from changes in market interest rates.
 
33
Average Balances and Yields
The following table presents 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 June 30,
  
    
2022
    
2021
  
    
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
(1)
    $ 339,448     $ 3,009        3.59 %    $ 336,634     $ 3,125        3.76 % 
Securities
available-for-sale
      128,204       566        1.79 %      79,527       335        1.71 % 
Other interest-earning assets
      36,623       92        1.02 %      76,263       51        0.27 % 
  
 
 
    
 
 
       
 
 
    
 
 
     
Total interest-earning assets
      504,275       3,667        2.95 %      492,424       3,511        2.89 % 
Non-interest-earning
assets
      35,778            34,658       
  
 
 
         
 
 
       
Total assets
    $ 540,053          $ 527,082       
  
 
 
         
 
 
       
Interest-earning liabilities:
               
NOW accounts
    $ 36,367     $ 9        0.10 %    $ 33,596     $ 10        0.12 % 
Money market accounts
      96,782       73        0.31 %      98,513       61        0.25 % 
Savings accounts
      67,690       8        0.05 %      65,042       8        0.05 % 
Certificates of deposit
      84,240       97        0.47 %      81,329       114        0.57 % 
  
 
 
    
 
 
       
 
 
    
 
 
     
Total interest-bearing deposits
      285,079       187        0.27 %      278,480       193        0.28 % 
Federal Home Loan Bank advances
      57,802       181        1.27 %      65,009       200        1.25 % 
Other interest-bearing liabilities
      7,144       2        0.12 %      7,733       —          —    
  
 
 
    
 
 
       
 
 
    
 
 
     
Total interest-bearing liabilities
      350,025       370        0.43 %      351,222       393        0.45 % 
Non-interest-bearing
deposits
      103,148            90,099       
Other
non-interest-bearing
liabilities
      6,142            7,733       
  
 
 
         
 
 
       
Total liabilities
      459,315            449,054       
Total stockholders’ equity
      80,738            78,028       
  
 
 
         
 
 
       
Total liabilities and stockholders’ equity
    $ 540,053          $ 527,082       
  
 
 
         
 
 
       
Net interest income
      $ 3,297          $ 3,118     
    
 
 
         
 
 
     
Net interest-earning assets
    $ 154,250          $ 141,202       
  
 
 
         
 
 
       
Interest rate spread
(2)
           2.52 %           2.44 % 
Net interest margin
(3)
           2.65 %           2.57 % 
Average interest-earning assets to average interest-bearing liabilities
      144.07 %           140.20 %      
 
(1)
 
Includes loan fees (expense) of $20,000 and ($8,000) for the three months ended June 30, 2022 and 2021, respectively.
(2)
 
Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(3)
 
Net interest margin represents net interest income divided by average total interest-earning assets.
 
34
    
Six Months Ended June 30,
  
    
2022
    
2021
  
    
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
(1)
    $ 334,612     $ 6,299        3.80 %    $ 334,682     $ 6,418        3.87 % 
Securities
available-for-sale
      131,090       1,114        1.71 %      69,905       603        1.74 % 
Other interest-earning assets
      38,656       139        0.73 %      81,634       107        0.26 % 
  
 
 
    
 
 
       
 
 
    
 
 
     
Total interest-earning assets
      504,358       7,552        3.02 %      486,221       7,128        2.96 % 
Non-interest-earning
assets
      34,700            33,537       
  
 
 
         
 
 
       
Total assets
    $ 539,058          $ 519,758       
  
 
 
         
 
 
       
Interest-earning liabilities:
               
NOW accounts
    $ 36,430     $ 16        0.09 %    $ 32,720     $ 19        0.11 % 
Money market accounts
      96,746       144        0.30 %      100,285       140        0.28 % 
Savings accounts
      67,049       17        0.05 %      63,532       18        0.06 % 
Certificates of deposit
      82,614       179        0.44 %      82,809       272        0.66 % 
  
 
 
    
 
 
       
 
 
    
 
 
     
Total interest-bearing deposits
      282,839       356        0.25 %      279,346       449        0.32 % 
Federal Home Loan Bank advances
      56,293       350        1.25 %      66,544       400        1.21 % 
Other interest-bearing liabilities
      5,424       4        0.17 %      6,480       —          —    
  
 
 
    
 
 
       
 
 
    
 
 
     
Total interest-bearing liabilities
      344,556       710        0.42 %      352,370       849        0.49 % 
Non-interest-bearing
deposits
      104,585            76,819       
Other
non-interest-bearing
liabilities
      6,474            5,436       
  
 
 
         
 
 
       
Total liabilities
      455,615            434,625       
Total stockholders’ equity
      83,443            85,133       
  
 
 
         
 
 
       
Total liabilities and stockholders’ equity
    $ 539,058          $ 519,758       
  
 
 
         
 
 
       
Net interest income
      $ 6,842          $ 6,279     
    
 
 
         
 
 
     
Net interest-earning assets
    $ 159,802          $ 133,851       
  
 
 
         
 
 
       
Interest rate spread
(2)
           2.60 %           2.47 % 
Net interest margin
(3)
           2.74 %           2.60 % 
Average interest-earning assets to average interest-bearing liabilities
      146.38 %           137.99 %      
 
(1)
 
Includes loan fees (expense) of $124,000 and ($49,000) for the six months ended June 30, 2022 and 2021, respectively.
(2)
 
Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(3)
 
Net interest margin represents net interest income divided by average total interest-earning assets.
 
35
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. There were
no out-of-period items
or adjustments included within the following table.
 
36
    
Three Months Ended June 30,
2022 vs. 2021
  
    
Increase (Decrease) Due to
     
Total
Increase
(Decrease)
  
    
Volume
     
Rate
  
                      
    
(Dollars in thousands)
  
Interest-earning assets:
         
Loans
    $ 26      $ (142 )     $ (116 ) 
Securities
      214        17        231  
Other
      (10 )       51        41  
  
 
 
     
 
 
     
 
 
  
Total interest-earning assets
      230        (74 )       156  
  
 
 
     
 
 
     
 
 
  
Interest-bearing liabilities:
         
NOW
      (1 )       2        1  
Money market deposits
      1        (13 )       (12 ) 
Savings
      —          —          —    
Certificates of deposit
      (4 )       21        17  
  
 
 
     
 
 
     
 
 
  
Total interest-bearing deposits
      (4 )       10        6  
Borrowings
      23        (4 )       19  
Other
      —          (2 )       (2 ) 
  
 
 
     
 
 
     
 
 
  
Total interest-bearing liabilities
      19        4        23  
  
 
 
     
 
 
     
 
 
  
Change in net interest income
    $ 249        (70 )       179  
  
 
 
     
 
 
     
 
 
  
 
    
Six Months Ended June 30,
2022 vs. 2021
  
    
Increase (Decrease) Due to
     
Total
Increase
(Decrease)
  
    
Volume
     
Rate
  
                      
    
(Dollars in thousands)
  
Interest-earning assets:
         
Loans
    $ (1 )     $ (118 )     $ (119 ) 
Securities
      520        (9 )       511  
Other
      (14 )       46        32  
  
 
 
     
 
 
     
 
 
  
Total interest-earning assets
      505        (81 )       424  
  
 
 
     
 
 
     
 
 
  
Interest-bearing liabilities:
         
NOW
      (3 )       6        3  
Money market deposits
      5        (9 )       (4 ) 
Savings
      (1 )       2        1  
Certificates of deposit
      1        92        93  
  
 
 
     
 
 
     
 
 
  
Total interest-bearing deposits
      2        91        93  
Borrowings
      64        (14 )       50  
Other
      —          (4 )       (4 ) 
  
 
 
     
 
 
     
 
 
  
Total interest-bearing liabilities
      66        73        139  
  
 
 
     
 
 
     
 
 
  
Change in net interest income
    $ 571      $ (8 )     $ 563  
  
 
 
     
 
 
     
 
 
  
Comparison of Operating Results for the Three Months Ended June 30, 2022 and 2021
Net Loss.
 We recorded a net loss of $241,000 for the three months ended June 30, 2022, an increase of $190,000 from a net loss of $51,000 recorded for the three months ended June 30, 2021. This increase was primarily due to a $1.0 million decrease in
non-interest
income, which was partially offset by a $678,000 decrease in noninterest expense, a $74,000 increase in net interest income after provision for loan losses and a $75,000 increase in income tax benefit.
 
37
Interest and Dividend Income.
Interest and dividend income increased $156,000, or 4.4%, to $3.7 million for the three months ended June 30, 2022, from $3.5 million for the three months ended June 30, 2021. The increase was due primarily to an increase in interest earned on taxable securities, which increased $231,000, or 69.0% from $335,000 in the second quarter of 2021 to $566,000 in the second quarter of 2022. This increase was primarily due to the Company’s strategy to deploy excess liquidity into securities, which resulted in the average outstanding balance of securities increasing $48.7 million, or 61.3%, from $79.5 million for the second quarter of 2021 to $128.2 million for the second quarter of 2022. Offsetting the increase in interest earned on taxable securities, was a $116,000 decrease in interest and fees earned on loans. This decrease was primarily due to a decrease in the yield earned on loans, which decreased from 3.76% in the second quarter of 2021 to 3.59% in the second quarter of 2022. The decrease in the loan yield was primarily due to a decrease in fees collected on PPP loans between the two periods.
Interest Expense.
Interest expense decreased $23,000, or 5.9%, to $370,000 for the three months ended June 30, 2022, from $393,000 for the three months ended June 30, 2021. This decrease was primarily due to a decline in interest expense on FHLB advances, which declined $19,000 from $200,000 in the second quarter of 2021 to $181,000 in the second quarter of 2022. This decrease was primarily the result of a $7.2 million decrease in average FHLB advances outstanding.
Net Interest Income.
 Net interest income increased $179,000, or 5.7%, to $3.3 million for the three months ended June 30, 2022, from $3.1 million for the three months ended June 30, 2021. This increase was due to a $156,000 increase in interest income and a $23,000 decrease in interest expense. Our net interest rate spread increased 8 basis points to 2.52% for the three months ended June 30, 2022, from 2.44% for the three months ended June 30, 2021. Our net interest margin also increased 8 basis points to 2.65% from 2.57% over the same period.
Provision for Loan Losses.
 
Provision for loan losses for the three months ended June 30, 2022 was $105,000 compared to no provision for the three months ended June 30, 2021. The allowance for loan losses was $3.1 million, or 0.89%, of total loans (and 0.89% excluding PPP loans), at June 30, 2022, compared to $2.9 million, or 0.88% of total loans (and 0.89% excluding PPP loans), at December 31, 2021. Nonaccrual loans constituted 0.23% of total gross loans (and 0.23% excluding PPP loans) at June 30, 2022, compared to 0.31% of gross loans at December 31, 2021 (and 0.32% excluding PPP loans). Net recoveries for the three months ended June 30, 2022 were $10,000 compared to net charge-offs of $33,000 for the three months ended June 30, 2021. The increase in provision was primarily due to the increase in loans outstanding.
Non-interest
Income
.
 Non-interest
income decreased $1.0 million, or 89.6%, to $118,000 for the three months ended June 30, 2022, from $1.1 million for the three months ended June 30, 2021. The decrease was primarily the result of a $763,000 decline in the market value of marketable equity securities and a $241,000 decrease in net gain on sale of loans. The decrease in the market value of marketable equity securities was due to a decrease in the market value of mutual funds held in our deferred compensation plan. The decrease in the net gain on sale of loans was primarily due to the decrease in the sale of mortgage loans held for sale, which decreased $21.6 million, from $29.6 million in the second quarter of 2021 to $8.0 million in the second quarter of 2022.
Non-interest
Expense.
 
Non-interest
expense decreased $677,000, or 15.5%, to $3.7 million for the three months ended June 30, 2022 from $4.4 million for the three months ended June 30, 2021. This decrease was primarily due to a $664,000 decrease in salaries and employee benefits. The decrease in salaries and benefits was due primarily to a $763,000 decrease in the market value of mutual funds held in our deferred compensation plan, offset in part by a $94,000 increase in salaries.
Income Tax Benefit.
 
We recorded an income tax benefit of $133,000 for the three months ended June 30, 2022, compared to an income tax benefit of $58,000 for the three months ended June 30, 2021. The increase in income tax benefit was primarily due to a decrease in income before taxes during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021.
Comparison of Operating Results for the Six Months Ended June 30, 2022 and 2021
Net (Loss) Income.
 We recorded net loss of $296,000 for the six months ending June 30, 2022, compared to net income of $470,000 recorded for the six months ending June 30, 2021. This decrease was primarily due to a $2.2 million decrease in
non-interest
income, which was partially offset by an $822,000 decrease in noninterest expense, a $353,000 increase in net interest income after provision for loan losses and a $294,000 decrease in income tax expense.
 
 
38
Interest and Dividend Income.
Interest and dividend income increased $424,000, or 5.9%, to $7.6 million for the six months ending June 30, 2022, from $7.1 million for the six months ending June 30, 2021. The increase was due primarily to an increase in interest earned on taxable securities, which increased $511,000, or 84.7% from $603,000 in the first six months of 2021 to $1.1 million in the first six months of 2022. This increase was primarily due to the Company’s strategy to deploy excess liquidity into securities, which resulted in the average outstanding balance of securities increasing $61.2 million, or 87.5%, from $69.9 million for the first six months of 2021 to $131.1 million for the same period of 2022. This increase was partially offset by a $119,000 decrease in interest and fees on loans. This decrease was primarily the result of a 7 basis point reduction in the yield earned on loans from 3.87% for the first six months of 2021 to 3.80% for the same period in 2022.
Interest Expense.
Interest expense decreased $139,000, or 16.4%, to $710,000 for the six months ended June 30, 2022, from $849,000 for the six months ended June 30, 2021. This decrease was primarily due to a decline in the cost of our interest-bearing deposits, which decreased 7 basis points from 0.32% for the first six months of 2021 to 0.25% for the same period in 2022. This decline was primarily due to the low interest rate environment.
Net Interest Income.
 Net interest income increased $563,000, or 9.0%, to $6.8 million for the six months ended June 30, 2022 from $6.3 million for the six months ended June 30, 2021. Our net interest rate spread increased 13 basis points to 2.60% for the six months ended June 30, 2022, from 2.47% for the six months ended June 30, 2021 while our net interest margin increased 14 basis points to 2.74% from 2.60% over the same period.
Provision for Loan Losses.
 
Provision for loan losses for the six months ended June 30, 2022 was $210,000 compared to no provision for the six months ended June 30, 2021. Net recoveries for the six months ended June 30, 2022 were $64,000 compared to net recoveries of $29,000 for the six months ended June 30, 2021. The increase in provision was primarily due to the increase in loans outstanding.
Non-interest
Income
.
 Non-interest
income decreased $2.2 million, or 81.5%, to $508,000 for the six months ended June 30, 2022 from $2.7 million for the six months ended June 30, 2021. This decrease was due primarily to a $1.1 million decline in the market value of marketable equity securities, a $729,000 decrease in net gains on the sale of loans and a $419,000 decrease in loan servicing fees. The decrease in the market value of marketable equity securities was due to a decrease in the market value of mutual funds held in our deferred compensation plan. The decrease in the net gain on sale of loans was primarily due to the decrease in the sale of mortgage loans held for sale, which decreased $55.1 million, from $70.0 million in the first six months of 2021 to $14.9 million in the same period of 2022. The decrease in loan servicing fees was primarily due to the reversal of a $369,000 impairment previously recorded against the value of mortgage servicing rights in the first six months of 2021. The value of mortgage servicing rights increased as a result of an increase in market interest rates.
Non-interest
Expense.
 
Non-interest
expense decreased $822,000, or 9.7%, to $7.6 million for the six months ended June 30, 2022 from $8.5 million for the six months ended June 30, 2021. This decrease was primarily due to an $835,000 decrease in salaries and employee benefits. The decrease in salaries and employee benefits primarily resulted from a $1.1 million decline in the market value of marketable equity securities held in our deferred compensation plan, offset in part by a $135,000 increase in incentive bonus expense and a $69,000 increase in salary expense.
Income Tax Expense.
We recorded an income tax benefit of $192,000 for the six months ended June 30, 2022, compared to an income tax expense of $102,000 for the six months ended June 30, 2021. The decrease in income tax expense was primarily due to a decrease in income before taxes during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021.
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.
 
39
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 June 30, 2022, 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
    $ 13,815        4.48 % 
+300
      13,637        3.14 % 
+200
      13,472        1.88 % 
+100
      13,328        0.79 % 
Level
      13,223        —   % 
-100
      13,223        0.01 % 
 
(1)
Assumes an immediate uniform change in interest rates at all maturities.
Economic Value of Equity
.
We also 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 June 30, 2022, 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.
 
40
           
Estimated Increase (Decrease) in EVE
  
Basis Point (“bp”) Change
in Interest Rates
(1)
   
Estimated EVE
(2)
     
Amount
     
Percent
  
                      
    
(Dollars in thousands)
  
+400
    $ 61,629      $ (9,188 )       (12.97 %) 
+300
      63,670        (7,147 )       (10.09 %) 
+200
      65,710        (5,107 )       (7.21 %) 
+100
      67,968        (2,849 )       (4.02 %) 
Level
      70,817        —          —   % 
-100
      70,850        33        0.05 % 
 
(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 June 30, 2022, in the event of a
100-basis
point increase in interest rates, we would have experienced a 4.02% decrease in our EVE. In the event of a
200-basis
point increase in interest rates at June 30, 2022, we would have experienced a 7.21% decrease 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 June 30, 2022, we had $57.4 million outstanding in advances from the FHLB. At June 30, 2022, we had $85.4 million in additional borrowing capacity at the Federal Home Loan Bank of Chicago. Additionally, at June 30, 2022, we had a $15.0 million federal funds line of credit with the BMO Harris Bank, none of which was drawn at June 30, 2022. The Company also had a $10.4 million line of credit at the Federal Reserve based on pledged commercial real estate loans of approximately $13.3 million at June 30, 2022. The Company had not drawn on the Federal Reserve line as of June 30, 2022.
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 provided by operating activities was $533,000 for the six months ended June 30, 2022, as compared to net cash provided by operating activities of $523,000 for the six months ended June 30, 2021. Net cash used in investing activities, which consists primarily of disbursements for loan originations and the purchase of
available-for-sale
securities, offset by proceeds from maturing securities and pay downs on securities, was $52.5 million for the six months ended June 30, 2022, as compared to $35.0 million for the six months ended June 30, 2021. Net cash provided by financing activities, consisting primarily of increases in borrowings and advance payments by borrowers for taxes and insurance, was $5.4 million for the six months ended June 30, 2022, as compared to $87.8 million of cash provided by financing activities during the six months ended June 30, 2021. The primary source of the difference in cash provided by financing activities was $94.8 million in initial subscriptions from the stock offering in 2021, of which the Company retained $35.4 million.
 
 
41
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
At June 30, 2022, PyraMax Bank exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of $64.5 million, or 11.8% of adjusted total assets, which is above the well-capitalized required level of $27.4 million, or 5.0%. The Bank had total risk-based capital of $67.6 million, or 17.9% of risk-weighted assets, which is above the well-capitalized required level of $37.8 million, or 10.0%. Management is not aware of any conditions or events since the most recent notification that would change our category. For additional information, see Note 13 of the Notes to Financial Statements.
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.
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.
 
42
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 June 30, 2022. 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 June 30, 2022, 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 June 30, 2022, 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, 2021 Annual Report on Form
10-K
filed with the Securities and Exchange Commission. There are no material changes from the risk factors included in the Annual Report on Form
10-K.
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
None.
 
Item 3.
Defaults Upon Senior Securities
None.
 
Item 4.
Mine Safety Disclosures
Not applicable.
 
Item 5.
Other Information
None.
 
43
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. 333-254135))
    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. 333-254135))
  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 June 30, 2022, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive (Loss) Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements *
104.0    The cover page of this Quarterly Report on Form
10-Q
for the quarterly period ended June 30, 2022, formatted in XBRL (contained in Exhibit 101.0) *
 
*
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: August 12, 2022      
/s/ Richard B. Hurd
      Richard B. Hurd
      Chief Executive Officer
Date: August 12, 2022      
/s/ Steven T. Klitzing
      Steven T. Klitzing
     
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
 
 
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