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1895 Bancorp of Wisconsin, Inc. /MD/ - Quarter Report: 2023 September (Form 10-Q)

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2023

 

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

 

6,109,644 shares of the Registrant’s common stock, par value $0.01 per share, were outstanding as of October 31, 2023.

 


 

1895 Bancorp of Wisconsin, Inc.

Form 10-Q

 

Table of Contents

 

 

 

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

 

Financial Statements

 

1

 

 

 

 

 

 

 

Consolidated Balance Sheets at September 30, 2023 (unaudited) and December 31, 2022

 

1

 

 

 

 

 

 

 

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)

 

2

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)

 

3

 

 

 

 

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)

 

4

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022 (unaudited)

 

5

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

6

 

 

 

 

 

Item 2.

 

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

 

38

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

52

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

52

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

52

 

 

 

 

 

Item 1A.

 

Risk Factors

 

52

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities

 

52

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

52

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

52

 

 

 

 

 

Item 5.

 

Other Information

 

52

 

 

 

 

 

Item 6.

 

Exhibits

 

53

 

 

 

 

 

 

 

SIGNATURES

 

54

 

 


 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

1895 Bancorp of Wisconsin, Inc.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

 

 

 

September 30,
2023

 

 

December 31,
2022

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

23,241

 

 

$

26,029

 

Fed funds sold

 

 

3,362

 

 

 

2,315

 

Cash and cash equivalents

 

 

26,603

 

 

 

28,344

 

 

 

 

 

 

 

 

Marketable equity securities, stated at fair value

 

 

3,286

 

 

 

2,924

 

Available-for-sale securities, stated at fair value

 

 

104,641

 

 

 

114,492

 

Loans held for sale

 

 

410

 

 

 

125

 

Loans, net of deferred costs

 

 

386,296

 

 

 

362,777

 

Allowance for credit losses for loans

 

 

(3,614

)

 

 

(3,203

)

  Total loans, net of deferred loan costs and allowance for credit losses

 

 

382,682

 

 

 

359,574

 

Premises and equipment, net

 

 

5,240

 

 

 

5,451

 

Mortgage servicing rights, net

 

 

1,751

 

 

 

1,860

 

Federal Home Loan Bank (FHLB) stock, at cost

 

 

4,787

 

 

 

3,429

 

Accrued interest receivable

 

 

1,349

 

 

 

1,257

 

Cash value of life insurance

 

 

13,919

 

 

 

14,316

 

Other assets

 

 

9,908

 

 

 

11,244

 

TOTAL ASSETS

 

$

554,576

 

 

$

543,016

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Deposits

 

$

386,973

 

 

$

387,721

 

Advance payments by borrowers for taxes and insurance

 

 

10,264

 

 

 

1,029

 

FHLB advances

 

 

78,499

 

 

 

71,464

 

Accrued interest payable

 

 

1,099

 

 

 

291

 

Other liabilities

 

 

7,582

 

 

 

7,149

 

TOTAL LIABILITIES

 

 

484,417

 

 

 

467,654

 

Preferred stock, $0.01 par value, 10,000,000 shares authorized at September 30, 2023
    and December 31, 2022

 

 

 

 

 

 

Common stock (par value $0.01 per share) Authorized - 90,000,000 shares at
   September 30, 2023 and December 31, 2022; Issued –
6,154,164 at
   September 30, 2023 and
6,236,168 at December 31, 2022 (includes 162,690 and
   
211,349 unvested shares, respectively); Outstanding – 6,124,646 at
   September 30, 2023 and
6,206,105 at December 31, 2022 (includes 162,690 and
   
211,349 unvested shares, respectively)

 

 

62

 

 

 

62

 

Additional paid-in capital

 

 

49,907

 

 

 

49,931

 

Unallocated common stock of Employee Stock Ownership Plan (ESOP), 439,037 and
   
453,792 shares at September 30, 2023 and December 31, 2022, respectively

 

 

(4,167

)

 

 

(4,307

)

Less treasury stock at cost, 29,518 shares at September 30, 2023 and 30,063 shares at December 31, 2022

 

 

(295

)

 

 

(301

)

Retained earnings

 

 

36,175

 

 

 

41,468

 

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

 

 

(11,523

)

 

 

(11,491

)

Total stockholders’ equity

 

 

70,159

 

 

 

75,362

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

554,576

 

 

$

543,016

 

 

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
September 30,

 

 

Nine months ended
September 30,

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Interest and dividend income:

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

4,423

 

 

$

3,563

 

 

$

12,487

 

 

$

9,862

 

Securities, taxable

 

 

656

 

 

 

613

 

 

 

1,847

 

 

 

1,727

 

Other

 

 

292

 

 

 

139

 

 

 

767

 

 

 

279

 

Total interest and dividend income

 

 

5,371

 

 

 

4,315

 

 

 

15,101

 

 

 

11,868

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

 

1,832

 

 

 

196

 

 

 

4,111

 

 

 

551

 

Borrowed funds

 

 

586

 

 

 

200

 

 

 

1,733

 

 

 

550

 

Other interest-bearing funds

 

 

1

 

 

 

2

 

 

 

4

 

 

 

7

 

Total interest expense

 

 

2,419

 

 

 

398

 

 

 

5,848

 

 

 

1,108

 

Net interest income

 

 

2,952

 

 

 

3,917

 

 

 

9,253

 

 

 

10,760

 

Provision for credit losses

 

 

75

 

 

 

 

 

 

225

 

 

 

210

 

Net interest income after provision for credit losses

 

 

2,877

 

 

 

3,917

 

 

 

9,028

 

 

 

10,550

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

Service charges and other fees

 

 

235

 

 

 

229

 

 

 

699

 

 

 

722

 

Loan servicing, net

 

 

172

 

 

 

167

 

 

 

502

 

 

 

515

 

Net gain on sale of loans

 

 

73

 

 

 

83

 

 

 

141

 

 

 

266

 

Net (loss) on sale of securities

 

 

(1,925

)

 

 

 

 

 

(1,925

)

 

 

 

Increase in cash surrender value of insurance

 

 

107

 

 

 

108

 

 

 

324

 

 

 

317

 

Unrealized gain (loss) on marketable equity securities

 

 

(158

)

 

 

(159

)

 

 

287

 

 

 

(892

)

Other

 

 

113

 

 

 

51

 

 

 

278

 

 

 

58

 

Total noninterest income

 

 

(1,383

)

 

 

479

 

 

 

306

 

 

 

986

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

2,264

 

 

 

2,687

 

 

 

7,792

 

 

 

7,738

 

Unrealized gain (loss) on marketable equity securities

 

 

(158

)

 

 

(159

)

 

 

287

 

 

 

(892

)

Advertising and promotions

 

 

54

 

 

 

33

 

 

 

124

 

 

 

146

 

Data processing

 

 

225

 

 

 

221

 

 

 

672

 

 

 

630

 

Occupancy and equipment

 

 

285

 

 

 

326

 

 

 

922

 

 

 

1,010

 

FDIC assessment

 

 

61

 

 

 

36

 

 

 

182

 

 

 

99

 

Other

 

 

979

 

 

 

1,107

 

 

 

2,864

 

 

 

3,149

 

Total noninterest expense

 

 

3,710

 

 

 

4,251

 

 

 

12,843

 

 

 

11,880

 

(Loss) income before income taxes

 

 

(2,216

)

 

 

145

 

 

 

(3,509

)

 

 

(344

)

Income tax expense (benefit)

 

 

1,425

 

 

 

21

 

 

 

1,001

 

 

 

(172

)

Net (loss) income

 

$

(3,641

)

 

$

124

 

 

$

(4,510

)

 

$

(172

)

Loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.66

)

 

$

0.02

 

 

$

(0.81

)

 

$

(0.03

)

Diluted(1)

 

$

(0.66

)

 

$

0.02

 

 

$

(0.81

)

 

$

(0.03

)

Average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

5,534,711

 

 

 

5,810,185

 

 

 

5,538,509

 

 

 

5,842,184

 

Diluted(1)

 

 

5,534,711

 

 

 

5,983,241

 

 

 

5,538,509

 

 

 

5,842,184

 

 

See accompanying notes to the unaudited consolidated financial statements.

(1) Diluted loss per share and average shares outstanding excludes all common shares if their effect is anti-dilutive.

2


 

1895 Bancorp of Wisconsin, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands) - Unaudited

 

 

Three months ended
September 30,

 

 

Nine months ended
September 30,

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net (loss) income

 

$

(3,641

)

 

$

124

 

 

$

(4,510

)

 

$

(172

)

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding (losses) arising during the
   period on available-for-sale securities

 

 

(2,357

)

 

 

(4,549

)

 

 

(1,969

)

 

 

(16,483

)

Net realized losses on available-for-sale securities included in income

 

 

1,925

 

 

 

 

 

 

1,925

 

 

 

 

Other comprehensive (loss) before tax effect

 

 

(432

)

 

 

(4,549

)

 

 

(44

)

 

 

(16,483

)

Tax effect of other comprehensive (loss) income items

 

 

116

 

 

 

1,228

 

 

 

12

 

 

 

4,451

 

Other comprehensive (loss), net of tax

 

 

(316

)

 

 

(3,321

)

 

 

(32

)

 

 

(12,032

)

Comprehensive (loss)

 

$

(3,957

)

 

$

(3,197

)

 

$

(4,542

)

 

$

(12,204

)

 

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 Stockholders' Equity

 

Balance as of June 30, 2022

$

64

 

 

$

52,855

 

 

$

(4,401

)

 

$

(301

)

 

$

41,319

 

 

$

(8,570

)

 

$

80,966

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

124

 

 

 

 

 

 

124

 

Other comprehensive (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,321

)

 

 

(3,321

)

ESOP shares committed to be released (4,892 shares)

 

 

 

 

2

 

 

 

47

 

 

 

 

 

 

 

 

 

 

 

 

49

 

Repurchase and cancellation of common stock-stock repurchase program (184,270 shares)

 

(1

)

 

 

(1,994

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,995

)

Stock compensation expense

 

 

 

 

80

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

80

 

Balance as of September 30, 2022

$

63

 

 

$

50,943

 

 

$

(4,354

)

 

$

(301

)

 

$

41,443

 

 

$

(11,891

)

 

$

75,903

 

Balance as of June 30, 2023

$

62

 

 

$

49,964

 

 

$

(4,214

)

 

$

(295

)

 

$

39,816

 

 

$

(11,207

)

 

$

74,126

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,641

)

 

 

 

 

 

(3,641

)

Other comprehensive (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(316

)

 

 

(316

)

ESOP shares committed to be released (4,973 shares)

 

 

 

 

(16

)

 

 

47

 

 

 

 

 

 

 

 

 

 

 

 

31

 

Repurchase and cancellation of common stock-stock repurchase program (32,107 shares)

 

 

 

 

(238

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(238

)

Stock options exercised (3,159 shares)

 

 

 

 

19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19

 

Stock compensation expense

 

 

 

 

178

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

178

 

Balance as of September 30, 2023

$

62

 

 

$

49,907

 

 

$

(4,167

)

 

$

(295

)

 

$

36,175

 

 

$

(11,523

)

 

$

70,159

 

Balance as of January 1, 2022

$

64

 

 

$

52,805

 

 

$

(3,432

)

 

$

(301

)

 

$

41,615

 

 

$

142

 

 

$

90,893

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(172

)

 

 

 

 

 

(172

)

Other comprehensive (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,033

)

 

 

(12,033

)

Reimbursement of stock offering costs

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

Purchase of 96,446 shares by ESOP

 

 

 

 

 

 

 

(1,062

)

 

 

 

 

 

 

 

 

 

 

 

(1,062

)

ESOP shares committed to be released (14,757 shares)

 

 

 

 

11

 

 

 

140

 

 

 

 

 

 

 

 

 

 

 

 

151

 

Repurchase and retirement of shares-stock repurchase program (184,270 shares)

 

(1

)

 

 

(1,994

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,995

)

Purchase and retirement of common stock

 

 

 

 

(81

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(81

)

Stock compensation expense

 

 

 

 

200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

200

 

Balance as of September 30, 2022

$

63

 

 

$

50,943

 

 

$

(4,354

)

 

$

(301

)

 

$

41,443

 

 

$

(11,891

)

 

$

75,903

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2023

$

62

 

 

$

49,931

 

 

$

(4,307

)

 

$

(301

)

 

$

41,468

 

 

$

(11,491

)

 

$

75,362

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,510

)

 

 

 

 

 

(4,510

)

Other comprehensive (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(32

)

 

 

(32

)

Cumulative effect of change in accounting principle due to adoption of ASU 2016-13

 

 

 

 

 

 

 

 

 

 

 

 

 

(783

)

 

 

 

 

 

(783

)

ESOP shares committed to be released (14,755 shares)

 

 

 

 

(31

)

 

 

140

 

 

 

 

 

 

 

 

 

 

 

 

109

 

Repurchase and cancellation of common stock-stock repurchase program (59,410 shares)

 

 

 

 

(470

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(470

)

Sale of common stock by Rabbi Trust

 

 

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

6

 

Purchase and retirement of common stock

 

 

 

 

(57

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(57

)

Stock options exercised (3,159 shares)

 

 

 

 

19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19

 

Stock compensation expense

 

 

 

 

515

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

515

 

Balance as of September 30, 2023

$

62

 

 

$

49,907

 

 

$

(4,167

)

 

$

(295

)

 

$

36,175

 

 

$

(11,523

)

 

$

70,159

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

4

 


1895 BANCORP OF WISCONSIN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) - Unaudited

 

Nine months ended September 30,

 

2023

 

 

2022

 

Cash flows from operating activities

 

 

 

 

 

Net loss

$

(4,510

)

 

$

(172

)

Adjustments to reconcile net loss to net cash from operating activities

 

 

 

 

 

Net amortization of investment securities

 

54

 

 

 

121

 

Depreciation

 

373

 

 

 

464

 

Provision for credit losses

 

225

 

 

 

210

 

Gain on sale of other real estate owned

 

(110

)

 

 

 

Net change in fair value of marketable equity securities

 

(287

)

 

 

892

 

Net loss on sale of available for sale securities

 

1,925

 

 

 

 

Stock compensation expense

 

515

 

 

 

200

 

Deferred income tax expense (benefit)

 

1,001

 

 

 

(172

)

Originations of mortgage loans held for sale

 

(8,948

)

 

 

(19,006

)

Proceeds from sales of mortgage loans held for sale

 

8,804

 

 

 

20,416

 

Net gain on sale of mortgage loans held for sale

 

(141

)

 

 

(266

)

ESOP compensation

 

109

 

 

 

151

 

Net change in cash value of life insurance

 

(324

)

 

 

(317

)

Changes in operating assets and liabilities

 

 

 

 

 

Net change in mortgage servicing rights

 

109

 

 

 

146

 

Accrued interest receivable and other assets

 

548

 

 

 

(907

)

Accrued interest payable and other liabilities

 

333

 

 

 

(6

)

Net cash (used in) provided by operating activities

 

(324

)

 

 

1,754

 

Cash flows from investing activities

 

 

 

 

 

Proceeds from sales of available-for-sale securities

 

19,495

 

 

 

 

Maturities, prepayments, and calls of available-for-sale securities

 

9,747

 

 

 

14,561

 

Purchases of available-for-sale securities

 

(21,413

)

 

 

(37,139

)

Purchase of marketable equity securities

 

(81

)

 

 

(71

)

Net (increase) in loans

 

(23,501

)

 

 

(31,486

)

Net (increase) in FHLB stock, net

 

(1,358

)

 

 

(174

)

Proceeds from cash value life insurance death benefits

 

720

 

 

 

 

Proceeds from sale of other real estate owned

 

699

 

 

 

 

Distribution of marketable equity securities

 

12

 

 

 

 

Net capital expenditures for premises and equipment

 

(751

)

 

 

(162

)

Net cash used in investing activities

 

(16,431

)

 

 

(54,471

)

Cash flows from financing activities

 

 

 

 

 

Net (decrease) in deposits

 

(748

)

 

 

(5,203

)

Net increase in advance payments by borrowers for taxes and insurance

 

9,235

 

 

 

8,365

 

Proceeds from the issuance of Federal Home Loan Bank advances

 

100,500

 

 

 

10,000

 

Principal payments on Federal Home Loan Bank advances

 

(93,465

)

 

 

(8,491

)

Reimbursement of stock offering costs

 

 

 

 

2

 

Stock options exercised

 

19

 

 

 

 

Repurchase and cancellation of common stock

 

(470

)

 

 

(1,995

)

Purchase and retirement of common stock

 

(57

)

 

 

 

Purchases of ESOP shares

 

 

 

 

(1,062

)

Net cash provided by financing activities

 

15,014

 

 

 

1,616

 

Net (decrease) in cash and cash equivalents

 

(1,741

)

 

 

(51,101

)

Cash and cash equivalents at beginning of period

 

28,344

 

 

 

66,803

 

Cash and cash equivalents at end of period

$

26,603

 

 

$

15,702

 

Supplemental cash flow information

 

 

 

 

 

Cash paid during the year for interest

$

5,039

 

 

$

1,075

 

Noncash activities

 

 

 

 

 

Loans transferred to held for sale

 

 

 

 

325

 

 

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 stockholders' 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, 2022, as filed with the Securities and Exchange Commission on March 30, 2023.

 

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 credit 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.

 

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.

6


 

 

NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION (continued)

 

Subsequent Events

 

Management has reviewed the Company's operations for potential disclosure or financial statement impacts related to events occurring after September 30, 2023, but prior to the release of the unaudited consolidated financial statements contained in this quarterly report on Form 10-Q were issued.

 

On November 6, 2023, Richard Hurd and the Boards of Directors of the Company and the Bank agreed that Mr. Hurd would step down as an Executive Vice President of each entity, effective immediately, but remain on the Boards of Directors. The Boards of Directors determined that, as part of this arrangement and in recognition of Mr. Hurd’s long-standing contributions to the Company and the Bank, Mr. Hurd would receive a lump sum payment in the fourth quarter of 2023 in an amount equal to what he otherwise would have received under his employment agreement through the remainder of its term (December 2024), or $163,000. In addition, the employment agreement between the Bank and Mr. Hurd became null and void on November 6, 2023, except for those post-termination obligations contained in Section 11 of the employment agreement.

 

There were no additional subsequent event disclosures or financial statement impacts related to events occurring after September 30, 2023 that warranted adjustment to or disclosure in these unaudited consolidated financial statements.

 

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

 

On January 1, 2023, we adopted Accounting Standards Update ("ASU") 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), using the modified retrospective approach, as further described in the section below titled Recently Adopted Accounting Standards. Adoption of the standard resulted in changes to our available-for-sale securities and allowance for credit losses policies, as presented below. Refer to Note 1 to the Consolidated Financial Statements in our 2022 Annual Report on Form 10-K regarding additional significant accounting policies, including accounting policies in effect prior to the adoption of ASU 2016-13.

Credit Losses for Available-for-Sale Debt Securities

For available-for-sale ("AFS") debt securities where fair value is less than amortized cost, the security is considered impaired when amounts are deemed uncollectible or when the Company intends, or more likely than not will be required, to sell the AFS debt security before recovery of the amortized cost basis.

On a quarterly basis the Company evaluates the AFS debt securities for impairment. Securities that are in an unrealized loss position are reviewed to determine if a securities credit loss exists based on certain quantitative and qualitative factors. The primary factors considered in evaluating whether an impairment exists include: (a) the extent to which the fair value is less than the amortized cost basis, (b) the financial condition, credit rating and future prospects of the issuer, (c) whether the debtor is current on contractually obligated interest and principal payments, and (d) whether the Company intends to sell the security and whether it is more likely than not that the Company will not be required to sell the security.

If a determination is made that an AFS debt security is impaired, the Company will estimate the amount of the unrealized loss that is attributable to credit and all other non-credit related factors. The credit related component will be recognized as a provision for credit losses on securities through an allowance for credit losses. The provision for credit losses on securities will be limited to the difference between the security’s amortized cost basis and fair value. Any future changes may be reversed, limited to the amount previously expensed, in the period they occur. The non-credit related component will be recorded as an adjustment to accumulated other comprehensive income, net of tax.

Allowance for Credit Losses

Under the current expected credit loss (“CECL”) model, the allowance for credit losses ("ACL") on financial assets is a valuation allowance estimated at each balance sheet date in accordance with GAAP that is deducted from the financial assets’ amortized cost basis to present the net amount expected to be collected on the financial assets. The CECL model also applies to certain off-balance sheet credit exposures.

The Company estimates the allowance for credit losses on loans based on the underlying assets’ amortized cost basis, which is the amount at which the financing receivable is originated or acquired, adjusted for applicable accretion or amortization of premium, discount, net deferred fees or costs, collection of cash, and charge-offs. In the event that collection of principal becomes uncertain, the Company has policies in place to write-off accrued interest receivable by reversing interest income at the time of this determination.

 

7


 

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Therefore, the Company has made a policy election to exclude accrued interest from the amortized cost basis and therefore excludes it from the measurement of the allowance for credit losses.

 

Expected credit losses are reflected in the allowance for credit losses through a charge to provision for credit losses. The Company’s estimate of the allowance for credit losses reflects credit losses currently expected over the remaining contractual life of the assets. When the Company deems all or a portion of a financial asset to be uncollectible, the appropriate amount is written off and the allowance for credit losses is reduced by the same amount. The Company applies judgment to determine when a financial asset is deemed uncollectible. When available information confirms that specific financial assets, or portions thereof, are uncollectible, these amounts are charged off against the allowance for credit losses. Subsequent recoveries, if any, are credited to the allowance for credit losses when received.

The Company measures the allowance for credit losses of financial assets on a collective portfolio segment basis when the financial assets share similar risk characteristics. The Company has identified the following portfolio segments of financial assets with similar risk characteristics for measuring expected credit losses: commercial real estate, residential real estate – first mortgage, residential real estate – construction, consumer – home equity and lines of credit and other consumer loans. The Company further segments the commercial loan portfolios by risk rating and the residential and consumer loan portfolios by delinquency.

The Company utilizes the weighted average remaining maturity methodology to measure the ACL. This methodology incorporates both quantitative and qualitative information to assess lifetime expected credit losses at the portfolio segment level. The quantitative component includes the calculation of loss rates that are based on historical lookback periods. The Company calculates a loss rate based on historical loan level loss experience for portfolio segments with similar risk characteristics. The historical loss rate is adjusted for select macroeconomic variables that consider both historical trends as well as forecasted trends. The Company measures expected credit losses of these financial assets by applying loss rates to the amortized cost basis of each asset taking into consideration amortization, prepayment and default assumptions.

The Company considers qualitative adjustments to expected credit loss estimates for information not already captured in the loss estimation process. Qualitative factor adjustments may increase or decrease management’s estimate of expected credit losses. Adjustments will not be made for information that has already been considered and included in the quantitative component. Qualitative loss factors are based on management's judgment of company, market, industry or business specific data, changes in loan composition, performance trends, regulatory changes, uncertainty of macroeconomic forecasts, and other asset specific risk characteristics.

Collateral Dependent Financial Assets

For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable and where the borrower is experiencing financial difficulty, the allowance for credit losses is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. Fair value is generally calculated based on the value of the underlying collateral less estimated costs to sell.

Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

Financial assets include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The Company’s exposure to loan credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.

The Company records an allowance for credit losses on off-balance sheet credit exposures through a charge to provision for credit losses for off-balance sheet credit exposures. The allowance for credit losses on off-balance sheet credit exposures is estimated by portfolio segment at each balance sheet date under the CECL model using the same methodologies as portfolio loans, taking into consideration management’s assumption of the likelihood that funding will occur, and is included in other liabilities on the Company’s Consolidated Balance Sheets.

8


 

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Recently Adopted Accounting Standards

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. In March 2022, the Financial Accounting Standards Board ("FASB") issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminates the accounting guidance for 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. The Company adopted ASU 2016-13 and ASU 2022-02 as of January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. The adoption of ASU 2016-13 resulted in an initial increase of $412,000 to the allowance for credit losses for loans and the establishment of a $665,000 allowance for credit losses for unfunded loan commitments. The allowance for credit losses for unfunded loan commitments is included in other liabilities on the Company's Consolidated Balance Sheets. The after-tax cumulative-effect adjustment of $783,000 was recorded in retained earnings as of January 1, 2023.

9


 

NOTE 3 – AVAILABLE-FOR-SALE SECURITIES

 

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

 

 

September 30, 2023

 

 

Amortized Cost

 

 

Gross Unrealized Gains

 

 

Gross Unrealized Losses

 

 

Fair Value

 

 

(in thousands)

 

U.S. Treasury notes

 

$

8,235

 

 

$

 

 

$

(1,093

)

 

$

7,142

 

Obligations of states and political subdivisions

 

 

19,850

 

 

 

 

 

 

(3,939

)

 

 

15,911

 

Government-sponsored mortgage-backed securities

 

 

87,519

 

 

 

 

 

 

(10,704

)

 

 

76,815

 

Asset-backed securities

 

 

3,827

 

 

 

5

 

 

 

(25

)

 

 

3,807

 

Certificates of deposit

 

 

995

 

 

 

 

 

 

(29

)

 

 

966

 

Total

 

$

120,426

 

 

$

5

 

 

$

(15,790

)

 

$

104,641

 

 

 

December 31, 2022

 

 

Amortized Cost

 

 

Gross Unrealized Gains

 

 

Gross Unrealized Losses

 

 

Fair Value

 

 

(in thousands)

 

U.S. Treasury notes

 

$

29,597

 

 

$

 

 

$

(2,970

)

 

$

26,627

 

Obligations of states and political subdivisions

 

 

21,379

 

 

 

6

 

 

 

(3,729

)

 

 

17,656

 

Government-sponsored mortgage-backed securities

 

 

73,235

 

 

$

 

 

 

(8,968

)

 

 

64,267

 

Asset-backed securities

 

 

4,563

 

 

$

 

 

 

(46

)

 

 

4,517

 

Certificates of deposit

 

 

1,459

 

 

$

 

 

 

(34

)

 

 

1,425

 

Total

 

$

130,233

 

 

$

6

 

 

$

(15,747

)

 

$

114,492

 

 

The fair value of available-for-sale securities that were pledged as collateral at September 30, 2023 and December 31, 2022, were $7.8 million and $3.6 million, respectively.

 

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

 

 

September 30, 2023

 

 

Amortized Cost

 

 

Fair Value

 

 

(in thousands)

 

Debt and other securities:

 

 

 

 

 

 

Due in one year or less

 

$

1,080

 

 

$

1,064

 

Due after one through 5 years

 

 

8,229

 

 

 

7,312

 

Due after 5 through 10 years

 

 

16,657

 

 

 

13,352

 

Due after 10 years

 

 

3,114

 

 

 

2,291

 

Total debt and other securities

 

 

29,080

 

 

 

24,019

 

Mortgage-related securities

 

 

87,519

 

 

 

76,815

 

Asset-backed securities

 

 

3,827

 

 

 

3,807

 

Total

 

$

120,426

 

 

$

104,641

 

 

10


 

NOTE 3 – AVAILABLE-FOR-SALE SECURITIES (continued)

 

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

 

 

September 30, 2023

 

 

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

 

$

 

 

$

 

 

$

7,142

 

 

$

(1,093

)

 

$

7,142

 

 

$

(1,093

)

Obligations of states and political
   subdivisions

 

 

339

 

 

 

(1

)

 

 

15,572

 

 

 

(3,938

)

 

 

15,911

 

 

 

(3,939

)

Government-sponsored mortgage-backed
   securities

 

 

20,958

 

 

 

(279

)

 

 

55,857

 

 

 

(10,425

)

 

 

76,815

 

 

 

(10,704

)

Asset-backed securities

 

 

 

 

 

 

 

 

1,928

 

 

 

(25

)

 

 

1,928

 

 

 

(25

)

Certificates of deposit

 

 

 

 

 

 

 

 

966

 

 

 

(29

)

 

 

966

 

 

 

(29

)

Total

 

$

21,297

 

 

$

(280

)

 

$

81,465

 

 

$

(15,510

)

 

$

102,762

 

 

$

(15,790

)

 

 

December 31, 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

 

$

 

 

$

 

 

$

26,627

 

 

$

(2,970

)

 

$

26,627

 

 

$

(2,970

)

Obligations of states and political
   subdivisions

 

 

5,088

 

 

 

(396

)

 

 

12,145

 

 

 

(3,333

)

 

 

17,233

 

 

 

(3,729

)

Government-sponsored mortgage-backed
   securities

 

 

19,084

 

 

 

(1,310

)

 

 

45,183

 

 

 

(7,658

)

 

 

64,267

 

 

 

(8,968

)

Asset-backed securities

 

 

4,517

 

 

 

(46

)

 

 

 

 

 

 

 

 

4,517

 

 

 

(46

)

Certificates of deposit

 

 

1,425

 

 

 

(34

)

 

 

 

 

 

 

 

 

1,425

 

 

 

(34

)

Total

 

$

30,114

 

 

$

(1,786

)

 

$

83,955

 

 

$

(13,961

)

 

$

114,069

 

 

$

(15,747

)

 

At September 30, 2023 and December 31, 2022, respectively, the Company had 81 and 92 debt securities with unrealized losses representing aggregate depreciation of approximately 13.3% and 12.1%, 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.

 

On August 29, 2023, the Company executed the sale of $21.4 million in U.S. Treasury available-for-sale securities for a pre-tax loss of $1.9 million. Proceeds from the sale were used to purchase approximately $21.4 million of U.S. government sponsored mortgage-backed securities, which were classified as available-for-sale upon purchase.

 

The following is a summary of the proceeds from sales of securities available-for-sale, as well as gross gains and losses, for each of the periods listed below:

 

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

(in thousands)

 

 

(in thousands)

 

Proceeds from sales of securities available-for-sale

 

$

19,495

 

 

$

 

 

$

19,495

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross realized gains

 

$

 

 

$

 

 

$

 

 

$

 

Gross realized losses

 

 

(1,925

)

 

 

 

 

 

(1,925

)

 

 

 

Net realized loss

 

$

(1,925

)

 

$

 

 

$

(1,925

)

 

$

 

 

11


 

 

NOTE 4 – LOANS

 

Major classifications of loans, reported at amortized cost, are summarized as follows:

 

 

September 30,
2023

 

 

December 31,
2022

 

 

(in thousands)

 

Commercial:

 

 

 

 

 

 

Real estate

 

$

221,653

 

 

$

210,858

 

Land development

 

 

 

 

 

 

Other

 

 

45,682

 

 

 

43,708

 

Residential real estate:

 

 

 

 

 

 

First mortgage

 

 

95,361

 

 

 

85,444

 

Construction

 

 

2,707

 

 

 

3,248

 

Consumer:

 

 

 

 

 

 

Home equity and lines of credit

 

 

19,897

 

 

 

18,590

 

Other

 

 

165

 

 

 

99

 

Subtotal (1)

 

 

385,465

 

 

 

361,947

 

Net deferred loan costs

 

 

831

 

 

 

830

 

Allowance for credit losses for loans

 

 

(3,614

)

 

 

(3,203

)

Loans, net

 

$

382,682

 

 

$

359,574

 

 

(1) Totals do not include accrued interest receivable, which was $987,000 and $874,000 at September 30, 2023 and December 31, 2022, respectively, which is recorded separately on the Company’s Consolidated Balance Sheets.

 

Deposit accounts in an overdrawn position and reclassified as loans totaled $25,000 and $98,000 at September 30, 2023 and December 31, 2022, 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.

 

The Company also purchases loan participations from other financial institutions. The outstanding balance of loans purchased are included in the totals above and totaled $39.4 million as of September 30, 2023 and $31.6 million as of December 31, 2022. In addition, the amount available for future draws totaled $57.5 million at September 30, 2023. Loans purchased are primarily comprised of commercial real estate and other commercial loans.

 

During the normal course of business, the Company may transfer a portion of a loan as a participation loan to another financial institution in order to manage portfolio risk. In order to be eligible for sales treatment, all cash flows from the loan must be divided proportionately, and rights of each loan holder must have the same priority, the loan holders must have no recourse to the transferor other than standard representations and warranties, and no loan holder can have the right to pledge or exchange the entire loan. As of September 30, 2023 and December 31, 2022, respectively, the Company had transferred $29.8 million and $30.3 million in participation loans which were eligible for sales treatment to other financial institutions, all of which continue to be serviced by the Company.

 

 

12


 

NOTE 4 – LOANS (continued)

 

A summary of activity in the allowance for credit losses for loans and the allowance for credit losses for unfunded loan commitments for the three and nine months ended September 30, 2023 and in the allowance for loan losses for the three and nine months ended September 30, 2022, is presented below:

 

 

Commercial

 

 

Residential

 

 

Consumer

 

 

Total

 

 

(in thousands)

 

Three months ended September 30, 2023

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses for loans

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,632

 

 

$

831

 

 

$

180

 

 

$

3,643

 

Provision for credit losses

 

 

(26

)

 

 

(8

)

 

 

(2

)

 

 

(36

)

Loans charged-off

 

 

 

 

 

 

 

 

(1

)

 

 

(1

)

Recoveries

 

 

4

 

 

 

 

 

 

4

 

 

 

8

 

Ending balance

 

$

2,610

 

 

$

823

 

 

$

181

 

 

$

3,614

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses for unfunded loan commitments(2)

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

771

 

 

$

27

 

 

$

 

 

$

798

 

Provision for credit losses

 

 

132

 

 

 

(21

)

 

 

 

 

 

111

 

Loans charged-off

 

 

 

 

 

 

 

 

 

 

 

 

Recoveries

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

903

 

 

$

6

 

 

$

 

 

$

909

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Allowance for credit losses for loans and unfunded loan commitments

 

$

3,513

 

 

$

829

 

 

$

181

 

 

$

4,523

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,924

 

 

$

745

 

 

$

463

 

 

$

3,132

 

Provision for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

Loans charged-off

 

 

 

 

 

 

 

 

(1

)

 

 

(1

)

Recoveries

 

 

4

 

 

 

 

 

 

45

 

 

 

49

 

Ending balance

 

$

1,928

 

 

$

745

 

 

$

507

 

 

$

3,180

 

 

13


 


NOTE 4 – LOANS (continued)

 

Commercial

 

 

Residential

 

 

Consumer

 

 

Total

 

 

(in thousands)

 

Nine months ended September 30, 2023

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses for loans

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,944

 

 

$

752

 

 

$

507

 

 

$

3,203

 

Provision for credit losses

 

 

(14

)

 

 

(4

)

 

 

(1

)

 

 

(19

)

CECL Adoption Adjustment(1)

 

 

666

 

 

 

75

 

 

 

(329

)

 

$

412

 

Loans charged-off

 

 

 

 

 

 

 

 

(8

)

 

 

(8

)

Recoveries

 

 

14

 

 

 

 

 

 

12

 

 

 

26

 

Ending balance

 

$

2,610

 

 

$

823

 

 

$

181

 

 

$

3,614

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses for unfunded loan commitments(2)

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

 

 

$

 

 

$

 

 

$

 

Provision for credit losses

 

 

263

 

 

 

(19

)

 

 

 

 

 

244

 

CECL Adoption Adjustment(1)

 

 

640

 

 

 

25

 

 

 

 

 

$

665

 

Loans charged-off

 

 

 

 

 

 

 

 

 

 

 

 

Recoveries

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

903

 

 

$

6

 

 

$

 

 

$

909

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Allowance for credit losses for loans and unfunded loan commitments

 

$

3,513

 

 

$

829

 

 

$

181

 

 

$

4,523

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,657

 

 

$

745

 

 

$

456

 

 

$

2,858

 

Provision for loan losses

 

 

210

 

 

 

 

 

 

 

 

 

210

 

Loans charged-off

 

 

 

 

 

 

 

 

(5

)

 

 

(5

)

Recoveries

 

 

61

 

 

 

 

 

 

56

 

 

 

117

 

Ending balance

 

$

1,928

 

 

$

745

 

 

$

507

 

 

$

3,180

 

 

(1) On January 1, 2023, the Company adopted ASU 2016-13 ("CECL"). See Note 2 for additional information regarding the adoption of ASU 2016-13.

(2) The allowance for credit losses for unfunded loan commitments is included in other liabilities on the Company's Consolidated Balance Sheets.

14


 

NOTE 4 – LOANS (continued)

 

The provision for credit losses is determined by the Company as the amount that is to be added to the ACL accounts to bring the ACL to a level that, in management's judgment, is necessary to absorb expected credit losses over the lives of the respective financial instruments. The following table presents the components of the provision for credit losses:

 

 

Three months ended September 30,

 

 

2023

 

 

2022

 

 

(in thousands)

 

Provision for credit losses for:

 

 

 

 

 

 

Loans

 

$

(36

)

 

$

 

Unfunded loan commitments

 

 

111

 

 

N/A

 

Total

 

$

75

 

 

$

 

 

 

Nine months ended September 30,

 

 

2023

 

 

2022

 

 

(in thousands)

 

Provision for credit losses for:

 

 

 

 

 

 

Loans

 

$

(19

)

 

$

210

 

Unfunded loan commitments

 

 

244

 

 

N/A

 

Total

 

$

225

 

 

$

210

 

 

The Company regularly evaluates various attributes of loans to determine the appropriateness of the allowance for credit losses. The credit quality indicators monitored differ depending on the class of loan. The credit quality indicators for commercial real estate and other commercial loans are based on the following ratings:

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

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.

Residential real estate and consumer loans are generally evaluated based on whether or not the loan is performing or in nonaccrual status. Refer to Note 1 to the Consolidated Financial Statements in our 2022 Annual Report on Form 10-K, filed with the SEC on March 30, 2023, for additional information on our nonaccrual policy.

15


 

NOTE 4 – LOANS (continued)

 

The following table presents the amortized cost basis of our loans by credit quality indicator and origination year, at September 30, 2023:

 

 

September 30, 2023

 

 

2023

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

2018 and Prior

 

 

Revolving Lines of Credit

 

 

Revolving Lines of Credit Converted to Term Loans

 

 

Total Loans

 

 

(in thousands)

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Pass

 

$

15,107

 

 

$

72,575

 

 

$

40,954

 

 

$

41,305

 

 

$

10,238

 

 

$

34,911

 

 

$

22

 

 

$

-

 

 

$

215,112

 

     Watch and special mention

 

 

-

 

 

 

233

 

 

 

-

 

 

 

-

 

 

 

452

 

 

 

238

 

 

 

-

 

 

 

-

 

 

 

923

 

     Substandard

 

 

-

 

 

 

3,286

 

 

 

604

 

 

 

-

 

 

 

291

 

 

 

1,437

 

 

 

-

 

 

 

-

 

 

 

5,618

 

Total commercial real estate

 

 

15,107

 

 

 

76,094

 

 

 

41,558

 

 

 

41,305

 

 

 

10,981

 

 

 

36,586

 

 

 

22

 

 

 

-

 

 

 

221,653

 

Other commercial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Pass

 

 

14,082

 

 

 

13,563

 

 

 

5,740

 

 

 

1,231

 

 

 

138

 

 

 

1,684

 

 

 

5,586

 

 

 

-

 

 

 

42,024

 

     Watch and special mention

 

 

-

 

 

 

-

 

 

 

227

 

 

 

184

 

 

 

29

 

 

 

56

 

 

 

1,868

 

 

 

-

 

 

 

2,364

 

     Substandard

 

 

-

 

 

 

252

 

 

 

445

 

 

 

-

 

 

 

-

 

 

 

130

 

 

 

467

 

 

 

-

 

 

 

1,294

 

Total other commercial loans

 

 

14,082

 

 

 

13,815

 

 

 

6,412

 

 

 

1,415

 

 

 

167

 

 

 

1,870

 

 

 

7,921

 

 

 

-

 

 

 

45,682

 

Total commercial loans

 

 

29,189

 

 

 

89,909

 

 

 

47,970

 

 

 

42,720

 

 

 

11,148

 

 

 

38,456

 

 

 

7,943

 

 

 

-

 

 

 

267,335

 

Residential real estate - first mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Performing

 

 

12,817

 

 

 

13,917

 

 

 

31,957

 

 

 

16,012

 

 

 

3,058

 

 

 

16,930

 

 

 

-

 

 

 

-

 

 

 

94,691

 

     Nonaccrual

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

670

 

 

 

-

 

 

 

-

 

 

 

670

 

Total residential real estate - first mortgage

 

 

12,817

 

 

 

13,917

 

 

 

31,957

 

 

 

16,012

 

 

 

3,058

 

 

 

17,600

 

 

 

-

 

 

 

-

 

 

 

95,361

 

Residential real estate - construction:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Performing

 

 

298

 

 

 

736

 

 

 

1,673

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,707

 

     Nonaccrual

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total residential real estate - construction

 

 

298

 

 

 

736

 

 

 

1,673

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,707

 

Total residential real estate

 

 

13,115

 

 

 

14,653

 

 

 

33,630

 

 

 

16,012

 

 

 

3,058

 

 

 

17,600

 

 

 

-

 

 

 

-

 

 

 

98,068

 

Consumer - home equity and lines of credit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Performing

 

 

19

 

 

 

59

 

 

 

147

 

 

 

113

 

 

 

172

 

 

 

1,306

 

 

 

17,249

 

 

 

801

 

 

 

19,866

 

     Nonaccrual

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

31

 

 

 

-

 

 

 

-

 

 

 

31

 

Total consumer - home equity and lines of credit

 

 

19

 

 

 

59

 

 

 

147

 

 

 

113

 

 

 

172

 

 

 

1,337

 

 

 

17,249

 

 

 

801

 

 

 

19,897

 

Consumer - other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Performing

 

 

106

 

 

 

49

 

 

 

-

 

 

 

8

 

 

 

2

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

165

 

     Nonaccrual

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total consumer - other

 

 

106

 

 

 

49

 

 

 

-

 

 

 

8

 

 

 

2

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

165

 

Total consumer

 

 

125

 

 

 

108

 

 

 

147

 

 

 

121

 

 

 

174

 

 

 

1,337

 

 

 

17,249

 

 

 

801

 

 

 

20,062

 

Total loans

 

$

42,429

 

 

$

104,670

 

 

$

81,747

 

 

$

58,853

 

 

$

14,380

 

 

$

57,393

 

 

$

25,192

 

 

$

801

 

 

$

385,465

 

 

16


 

NOTE 4 – LOANS (continued)

 

A summary of the credit quality indicators, at amortized cost, prior to the adoption of CECL is presented below:

 

 

December 31, 2022

 

 

Pass

 

 

Watch and Special Mention

 

 

Substandard

 

 

Total

 

 

(in thousands)

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

$

206,655

 

 

$

2,932

 

 

$

1,271

 

 

$

210,858

 

Land development

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

41,569

 

 

 

35

 

 

 

2,104

 

 

 

43,708

 

Total

 

$

248,224

 

 

$

2,967

 

 

$

3,375

 

 

$

254,566

 

 

There were no commercial loans rated Doubtful or Loss as of December 31, 2022.

 

 

December 31, 2022

 

 

Performing

 

 

Non-Performing

 

 

Total

 

 

(in thousands)

 

Residential real estate:

 

 

 

 

 

 

 

 

 

First mortgage

 

$

84,730

 

 

$

714

 

 

$

85,444

 

Construction

 

 

3,248

 

 

 

 

 

 

3,248

 

Consumer:

 

 

 

 

 

 

 

 

 

Home equity and lines of credit

 

 

18,535

 

 

 

55

 

 

 

18,590

 

Other

 

 

99

 

 

 

 

 

 

99

 

Total

 

$

106,612

 

 

$

769

 

 

$

107,381

 

 

The following tables present gross charge-offs of our loans for each portfolio class, by origination year, that occurred during the three and nine months ended September 30, 2023. Refer to Note 1 to the Consolidated Financial Statements in our 2022 Annual Report on Form 10-K for additional information on our charge-off policy.

 

 

For the three months ended September 30, 2023

 

 

2023

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

2018 and Prior

 

 

Revolving Lines of Credit

 

 

Revolving Lines of Credit Converted to Term Loans

 

 

Total Loans

 

 

(in thousands)

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Real estate

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

     Land development

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

     Other

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total commercial loans

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     First mortgage

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

     Construction

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total residential real estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Home equity and lines of credit

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

     Other

 

 

1

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1

 

Total consumer

 

 

1

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1

 

Total current period charge-offs

 

$

1

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

1

 

 

17


 


NOTE 4 – LOANS (continued)

 

For the nine months ended September 30, 2023

 

 

2023

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

2018 and Prior

 

 

Revolving Lines of Credit

 

 

Revolving Lines of Credit Converted to Term Loans

 

 

Total Loans

 

 

(in thousands)

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Real estate

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

     Land development

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

     Other

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total commercial loans

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     First mortgage

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

     Construction

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total residential real estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Home equity and lines of credit

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

     Other

 

 

1

 

 

 

3

 

 

 

1

 

 

 

1

 

 

 

-

 

 

 

2

 

 

 

-

 

 

 

-

 

 

 

8

 

Total consumer

 

 

1

 

 

 

3

 

 

 

1

 

 

 

1

 

 

 

-

 

 

 

2

 

 

 

-

 

 

 

-

 

 

 

8

 

Total current period charge-offs

 

$

1

 

 

$

3

 

 

$

1

 

 

$

1

 

 

$

-

 

 

$

2

 

 

$

-

 

 

$

-

 

 

$

8

 

 

18


 

NOTE 4 – LOANS (continued)

 

An analysis of past due loans, net of amortized costs, is presented below:

 

 

September 30, 2023

 

 

Loans Past Due 30-89 Days

 

 

Loans Past Due 90+ Days

 

 

Total Past Due

 

 

Current Loans

 

 

Total Loans

 

 

(in thousands)

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

$

 

 

$

 

 

$

 

 

$

221,653

 

 

$

221,653

 

Land development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

45,682

 

 

 

45,682

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First mortgage

 

 

 

 

 

55

 

 

 

55

 

 

 

95,306

 

 

 

95,361

 

Construction

 

 

 

 

 

 

 

 

 

 

 

2,707

 

 

 

2,707

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity and lines of credit

 

 

 

 

 

 

 

 

 

 

 

19,897

 

 

 

19,897

 

Other

 

 

 

 

 

 

 

 

 

 

 

165

 

 

 

165

 

        Total

 

 

 

 

 

55

 

 

$

55

 

 

$

385,410

 

 

$

385,465

 

 

 

December 31, 2022

 

 

Loans Past Due 30-89 Days

 

 

Loans Past Due 90+ Days

 

 

Total Past Due

 

 

Current Loans

 

 

Total Loans

 

 

(in thousands)

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

$

1,732

 

 

$

 

 

$

1,732

 

 

$

209,126

 

 

$

210,858

 

Land development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

43,708

 

 

 

43,708

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First mortgage

 

 

181

 

 

 

63

 

 

 

244

 

 

 

85,200

 

 

 

85,444

 

Construction

 

 

 

 

 

 

 

 

 

 

 

3,248

 

 

 

3,248

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity and lines of credit

 

 

72

 

 

 

21

 

 

 

93

 

 

 

18,497

 

 

 

18,590

 

Other

 

 

2

 

 

 

 

 

 

2

 

 

 

97

 

 

 

99

 

        Total

 

$

1,987

 

 

$

84

 

 

$

2,071

 

 

$

359,876

 

 

$

361,947

 

 

There were no loans 90 days or more past due and accruing interest as of September 30, 2023 or December 31, 2022, respectively.

 

 

19


 

NOTE 4 – LOANS (continued)

 

The following table presents the amortized cost of our loans on nonaccrual status as of September 30, 2023 and December 31, 2022. All loans that were 90 days or more past due were on nonaccrual status as of September 30, 2023 and December 31, 2022.

 

 

September 30,
2023

 

 

December 31,
2022

 

 

(in thousands)

 

Commercial:

 

 

 

 

 

 

Real estate

 

$

 

 

$

 

Land development

 

 

 

 

 

 

Other

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

First mortgage

 

 

670

 

 

 

714

 

Construction

 

 

 

 

 

 

Consumer:

 

 

 

 

 

 

Home equity and lines of credit

 

 

31

 

 

 

55

 

Other

 

 

 

 

 

 

Total nonaccrual loans

 

$

701

 

 

$

769

 

Total nonaccrual loans to total loans

 

 

0.18

%

 

 

0.21

%

Total nonaccrual loans to total assets

 

 

0.13

%

 

 

0.14

%

 

The Company had $701,000 of loans that were in nonaccrual status as of September 30, 2023, with no related allowance for credit losses. During the nine months ended September 30, 2023, there was no interest earned on nonaccrual loans and no accrued interest was reversed on nonaccrual loans.

 

At September 30, 2023, the Company held loans that were individually evaluated for impairment due to financial difficulties experienced by the borrower and for which the repayment, on the basis of our assessment, is expected to be provided substantially through the sale or operation of the collateral. The ACL for these collateral dependent loans is primarily based on the fair value of the underlying collateral at the reporting date. The following describes the type of collateral that secure collateral dependent loans:

Commercial real estate loans are primarily secured by office and industrial buildings and warehouses.
Commercial and industrial loans are primarily secured by accounts receivable, inventory and equipment.
One-to-four-family mortgages are primarily secured by first liens on residential real estate.
Home equity loans are primarily secured by first and junior loans on residential real estate.

 

The table below summarizes collateral dependent loans and the related ACL at September 30, 2023 for which the borrower is experiencing financial difficulty:

 

 

Loans

 

 

ACL

 

 

(in thousands)

 

Commercial:

 

 

 

 

 

 

Real estate

 

$

5,800

 

 

$

 

Land development

 

 

 

 

 

 

Other

 

 

1,293

 

 

 

 

Residential real estate:

 

 

 

 

 

 

First mortgage

 

 

870

 

 

 

 

Construction

 

 

 

 

 

 

Consumer:

 

 

 

 

 

 

Home equity and lines of credit

 

 

31

 

 

 

 

Other

 

 

 

 

 

 

        Total

 

$

7,994

 

 

 

 

 

 

 

20


 

NOTE 4 – LOANS (continued)

 

A summary of the allowance for loan losses for loans evaluated individually and collectively for impairment, at amortized cost, prior to the adoption of CECL is presented below:

 

 

December 31, 2022

 

 

Commercial

 

 

Residential

 

 

Consumer

 

 

Total

 

 

(in thousands)

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

3,525

 

 

$

917

 

 

$

55

 

 

$

4,497

 

Collectively evaluated for impairment

 

 

251,041

 

 

 

87,775

 

 

 

18,634

 

 

 

357,450

 

Total loans

 

$

254,566

 

 

$

88,692

 

 

$

18,689

 

 

$

361,947

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

 

$

 

 

$

 

 

$

 

Collectively evaluated for impairment

 

 

1,944

 

 

 

752

 

 

 

507

 

 

 

3,203

 

Total allowance for loan losses

 

$

1,944

 

 

$

752

 

 

$

507

 

 

$

3,203

 

 

 

 

21


 

NOTE 4 – LOANS (continued)

 

Information regarding impaired loans, at amortized cost, prior to the adoption of CECL is presented below:

 

 

As of and for the Year Ended December 31, 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

 

$

1,422

 

 

$

1,470

 

 

NA

 

 

$

3,952

 

 

$

177

 

Land development

 

 

 

 

 

 

 

NA

 

 

 

 

 

 

 

Other

 

 

2,103

 

 

 

2,103

 

 

NA

 

 

 

1,325

 

 

 

110

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First mortgage

 

 

917

 

 

 

1,138

 

 

NA

 

 

 

1,011

 

 

 

55

 

Construction

 

 

 

 

 

 

 

NA

 

 

 

 

 

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity and lines of credit

 

 

55

 

 

 

60

 

 

NA

 

 

 

37

 

 

 

2

 

Other

 

 

 

 

 

 

 

NA

 

 

 

 

 

 

 

Total impaired loans
with no reserve

 

 

4,497

 

 

 

4,771

 

 

NA

 

 

 

6,325

 

 

 

344

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total impaired loans

 

$

4,497

 

 

$

4,771

 

 

$

 

 

$

6,325

 

 

$

344

 

 

The adoption of ASU 2022-02 eliminated troubled debt restructurings (TDR's) recognition and measurement guidance, as well as all TDR related disclosures. Refer to Note 2 for additional information. TDRs were loan modifications where concessions were granted to borrowers experiencing financial difficulties. The Company did not modify any loans for borrowers that are experiencing financial difficulty and did not have any previous modifications that were made during the past 12 months that experienced a payment default during the three and nine months ended September 30, 2023.

 

At December 31, 2022, the Company had $538,000 of TDR's, of which $183,000 was on nonaccrual status. There were no loan modifications that were classified as a TDR during the year ended December 31, 2022.

 

 

22


 

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 $287.3 million and $304.3 million as of September 30, 2023 and December 31, 2022, respectively.

 

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

 

 

Three Months Ended September 30, 2023

 

 

Three Months Ended September 30, 2022

 

 

Nine Months Ended September 30, 2023

 

 

Nine Months Ended September 30, 2022

 

 

(in thousands)

 

 

(in thousands)

 

Mortgage servicing rights beginning balance

 

$

1,777

 

 

$

1,939

 

 

$

1,860

 

 

$

2,036

 

Additions

 

 

19

 

 

 

10

 

 

 

36

 

 

 

57

 

Amortization

 

 

(45

)

 

 

(59

)

 

 

(145

)

 

 

(203

)

Mortgage servicing rights ending balance

 

$

1,751

 

 

$

1,890

 

 

$

1,751

 

 

$

1,890

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value at beginning of period

 

$

3,317

 

 

$

3,273

 

 

$

3,376

 

 

$

2,477

 

Fair value at end of period

 

$

3,347

 

 

$

3,335

 

 

$

3,347

 

 

$

3,335

 

 

The estimated fair value of mortgage servicing rights was determined using a valuation model that calculates the present value of expected future servicing and ancillary income, net of expected servicing costs. The model incorporates various assumptions such as discount rates, prepayment speeds and ancillary income and servicing costs. As of September 30, 2023, the model used discount rates ranging from 10.1% to 13.0%, and prepayment speeds ranging from 6.9% to 36.7%, both of which were based on market data from independent organizations. As of September 30, 2022 the model used discount rates ranging from 9.5% to 13.0%, and prepayment speeds ranging from 7.7% to 38.2%.

 

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 September 30, 2023. 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.

 

Estimated future amortization as of September 30, 2023:

 

(in thousands)

 

2023

 

$

53

 

2024

 

 

203

 

2025

 

 

186

 

2026

 

 

181

 

2027

 

 

146

 

Thereafter

 

 

982

 

Total

 

$

1,751

 

 

23


 

NOTE 6 – DEPOSITS

 

The composition of deposits is summarized below:

 

 

September 30,
2023

 

 

December 31, 2022

 

 

(in thousands)

 

Non-interest bearing checking

 

$

72,410

 

 

$

92,465

 

Interest bearing checking

 

 

29,837

 

 

 

32,514

 

Money market

 

 

86,747

 

 

 

121,215

 

Statement savings

 

 

48,779

 

 

 

61,969

 

Certificates of deposit

 

 

149,200

 

 

 

79,558

 

Total

 

$

386,973

 

 

$

387,721

 

 

Certificates of deposit that met or exceeded the FDIC insurance limit of $250,000 totaled $29.9 million and $8.9 million as of September 30, 2023 and December 31, 2022, respectively. The Company did not hold any brokered deposits as of September 30, 2023 or December 31, 2022.

 

As of September 30, 2023, the scheduled maturities of certificates of deposit for the annual periods are presented below:

 

 

(in thousands)

 

2023

 

$

33,186

 

2024

 

 

95,170

 

2025

 

 

8,418

 

2026

 

 

12,061

 

2027

 

 

298

 

Thereafter

 

 

67

 

Total

 

$

149,200

 

 

24


 

NOTE 7 – FEDERAL HOME LOAN BANK ADVANCES

 

A summary of Federal Home Loan Bank advances follows:

 

 

September 30, 2023

 

 

December 31, 2022

 

 

Rate

 

 

Amount

 

 

Rate

 

 

Amount

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate, fixed term advance, maturing Feb 2023

 

 

 

 

 

 

 

 

1.62

%

 

 

6,500

 

Fixed rate, fixed term advance, maturing July 2027

 

 

2.90

%

 

 

5,000

 

 

 

2.90

%

 

 

5,000

 

Putable advance, maturing July 2029, first option date January 2023

 

 

 

 

 

 

 

 

1.68

%

 

 

5,000

 

Putable advance, maturing February 2030, first option date February 2023

 

 

 

 

 

 

 

 

0.98

%

 

 

5,000

 

Putable advance, maturing October 2029, first put option date July 2023

 

 

 

 

 

 

 

 

2.96

%

 

 

5,000

 

Putable advance, maturing February 2028, first option date November 2023

 

 

3.82

%

 

 

5,000

 

 

 

 

 

 

 

Putable advance, maturing May 2028, first option date November 2023

 

 

3.16

%

 

 

5,000

 

 

 

 

 

 

 

Putable advance, maturing January 2028, first option date January 2024

 

 

3.44

%

 

 

5,000

 

 

 

 

 

 

 

Putable advance, maturing February 2028, first option date February 2024

 

 

3.63

%

 

 

5,000

 

 

 

 

 

 

 

Putable advance, maturing March 2028, first option date March 2024

 

 

3.47

%

 

 

5,000

 

 

 

 

 

 

 

Putable advance, maturing May 2026, first option date May 2024

 

 

3.92

%

 

 

2,500

 

 

 

 

 

 

 

Putable advance, maturing May 2028, first option date May 2024

 

 

3.51

%

 

 

2,500

 

 

 

 

 

 

 

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

 

 

0.89

%

 

 

10,000

 

 

 

0.89

%

 

 

10,000

 

Putable advance, maturing Mar 2032, first put option date March 2027

 

 

1.74

%

 

 

10,000

 

 

 

1.74

%

 

 

10,000

 

Advance structured note, payments due monthly, maturing April 2030

 

 

1.05

%

 

 

6,701

 

 

 

1.05

%

 

 

7,435

 

Advance structured note, payments due monthly, maturing May 2030

 

 

1.19

%

 

 

6,798

 

 

 

1.19

%

 

 

7,529

 

SOFR Floater advance, maturing October 2023

 

 

5.56

%

 

 

5,000

 

 

 

4.54

%

 

 

5,000

 

SOFR Floater advance, maturing October 2024

 

 

5.61

%

 

 

5,000

 

 

 

4.59

%

 

 

5,000

 

Total

 

 

 

$

78,499

 

 

 

 

 

$

71,464

 

 

The scheduled maturities and required principal payments of Federal Home Loan Bank advances are presented below:

 

 

September 30, 2023

 

 

Weighted Average Rate

 

 

Amount

 

 

(dollars in thousands)

 

 2023

 

 

5.16

%

 

$

5,491

 

 2024

 

 

4.34

%

 

 

6,980

 

 2025

 

 

1.12

%

 

 

2,002

 

 2026

 

 

2.67

%

 

 

4,524

 

 2027

 

 

2.38

%

 

 

7,047

 

Thereafter

 

 

2.44

%

 

 

52,455

 

Total

 

 

2.78

%

 

$

78,499

 

 

Actual maturities may differ from scheduled maturities due to call options on various FHLB advances.

The Company maintains a master contract agreement with the FHLB, which provides for borrowing up to the lesser of 22.22 times the value of the FHLB 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 FHLB provides both fixed and floating rate advances. Floating rates are tied to short-term market rates of interest such as the Secured Overnight Financing Rate ("SOFR"), federal funds or Treasury bill rates. FHLB advances are subject to a prepayment penalty if they are repaid prior to maturity. The Company has pledged qualifying real estate and commercial and industrial loans with collateral values of approximately $170.7 million at September 30, 2023 and $172.4 million at December 31, 2022. FHLB advances were also secured by approximately $4.8 million and $3.4 million of FHLB stock held by the Company as of September 30, 2023 and December 31, 2022, respectively. The Company’s available and unused portion of this borrowing agreement totaled $91.1 million and $100.0 million as of September 30, 2023 and December 31, 2022, respectively. Additional borrowing would require additional stock purchase.

Additionally, at September 30, 2023 we had a $12.0 million federal funds rate line of credit with the BMO Harris Bank, none of which was drawn at September 30, 2023. The Company also had an $9.5 million line of credit at the Federal Reserve based on pledged commercial real estate loans of approximately $12.7 million at September 30, 2023. The Company had not drawn on the Federal Reserve line as of September 30, 2023. The Company also has the ability to participate in the Federal Reserve's new Bank Term Funding Program as needed.

25


 

NOTE 8 – INCOME TAXES

 

Income tax expense (benefit) was $1.4 million and $21,000 for the three months ended September 30, 2023 and 2022 and $1.0 million and ($172,000) for the nine months ended September 30, 2023 and 2022, respectively.

 

On July 5, 2023, the Wisconsin legislature enacted 2023 Wisconsin Act 19 (the "Act"). The Act contains a provision that provides financial institutions with a state tax-exemption for interest, fees and penalties earned on qualifying loans. For the exemption to apply, the loan must be $5 million or less, for primarily a business or agricultural purpose, and made to borrowers residing or located in Wisconsin. The exemption first applies to taxable years beginning after December 31, 2022, and applies to loans on the books as of January 1, 2023 and to new loans made after January 1, 2023, that meet the qualifications. The Company currently projects that its Wisconsin state taxable income will be significantly reduced and/or eliminated in the future as a result of this provision. Also a result of this provision, the Company reversed $98,000 in income tax benefits which had been recorded during the first two quarters of 2023 and increased the valuation allowance for deferred tax assets by $1.8 million, resulting in a one-time $1.9 million increase in tax expense in the third quarter of 2023.

 

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 September 30, 2023, and December 31, 2022, the deferred tax valuation allowance was $3.3 million and $934,000, respectively, reducing our net deferred tax assets to $7.6 million and $8.3 million at each respective date. The increase in the valuation allowance was primarily due to the $1.8 million increase as a result of the Act and $592,000 in tax benefits generated during the nine months ended September 30, 2023, which are not expected to be realized.

 

The board and management continue to assess the deferred tax assets in light of recent changes in market conditions, forecasted future projected income and available tax planning strategies. As such, there may be additional deferred tax asset impairment in subsequent periods.

 

 

 

26


 

NOTE 9 – COMMITMENTS AND CONTINGENCIES

 

In the normal course of business, the Company may be involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the Company’s financial statements. No material legal proceedings existed at September 30, 2023.

 

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.

 

ASU 2016-13 requires that we establish an allowance for credit losses for off-balance sheet credit exposures, including unfunded loan commitments, that meet certain requirements. The allowance for credit losses for off-balance sheet credit exposures is estimated by portfolio segment at each balance sheet date under the CECL model using the same methodologies as portfolio loans, also taking into consideration management’s assumption of the likelihood that funding will occur. The allowance for credit losses for off-balance sheet credit exposures is included in other liabilities on the Company’s Consolidated Balance Sheets. Additional provisions for expected losses occur through a charge to the provision for credit losses. The adoption of the ASU 2016-13 resulted in the establishment of a $665,000 allowance for credit losses for unfunded loan commitments, based on $41.1 million in outstanding loan commitments that are expected to fund. At September 30, 2023, the allowance for credit losses for unfunded commitments was $909,000 and there was $55.2 million in outstanding commitments to extend credit that were expected to fund.

 

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

 

 

September 30, 2023

 

 

Fixed Rate

 

 

Variable Rate

 

 

Total

 

 

(in thousands)

 

Commitments to extend credit

 

$

1,474

 

 

$

96,768

 

 

$

98,242

 

Standby letters of credit

 

 

 

 

 

150

 

 

 

150

 

Credit enhancement under the FHLB of Chicago Mortgage Partnership Finance Program

 

 

1,027

 

 

 

 

 

 

1,027

 

Commitments to sell loans

 

 

1,220

 

 

 

 

 

 

1,220

 

Overdraft protection program commitments

 

 

3,789

 

 

 

 

 

 

3,789

 

 

 

December 31, 2022

 

 

Fixed Rate

 

 

Variable Rate

 

 

Total

 

 

(in thousands)

 

Commitments to extend credit

 

$

3,391

 

 

$

80,631

 

 

$

84,022

 

Standby letters of credit

 

 

 

 

 

150

 

 

 

150

 

Credit enhancement under the FHLB of Chicago Mortgage Partnership Finance Program

 

 

894

 

 

 

 

 

 

894

 

Commitments to sell loans

 

 

1,292

 

 

 

 

 

 

1,292

 

Overdraft protection program commitments

 

 

3,881

 

 

 

 

 

 

3,881

 

 

27


 

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 $1 million in outstanding commitments to deliver loans through the Program as of September 30, 2023. Once delivered to the Program, the Company provides a contractually agreed-upon credit enhancement and performs servicing of the loans. Under the credit enhancement, the Company is liable for losses on loans delivered through the Program after application of any mortgage insurance and a contractually agreed-upon credit enhancement provided by the Program, subject to an agreed-upon maximum. The Company receives a fee for this credit enhancement. The Company records a liability for expected losses in excess of anticipated credit enhancement fees. As of September 30, 2023, and December 31, 2022, 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.

 

28


 

NOTE 10 – EMPLOYEE STOCK OWNERSHIP PLAN

 

The Company established a tax qualified Employee Stock Ownership Plan (“ESOP”) for the benefit of its employees, in conjunction with our 2019 reorganization. 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 2021 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. The ESOP completed the purchase of all the additional 283,360 shares at an average price of $10.90 in the second quarter of 2022.

 

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 $31,000 and $49,000 in compensation expense for the three months ended September 30, 2023 and September 30, 2022, respectively, and $109,000 and $151,000 in compensation expense for the nine months ended September 30, 2023 and 2022, respectively.

 

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

 

 

September 30,
2023

 

 

December 31,
2022

 

 

(dollars in thousands)

 

Shares committed to be released

 

 

14,755

 

 

 

19,730

 

Total allocated shares

 

 

55,900

 

 

 

36,170

 

Total unallocated shares

 

 

439,037

 

 

 

453,792

 

Total ESOP shares

 

 

509,692

 

 

 

509,692

 

Fair value of unallocated shares (based on $7.05 and $10.00 share
   price as of September 30, 2023 and December 31, 2022, respectively)

 

$

3,095

 

 

$

4,538

 

 

29


 

NOTE 11 – RELATED PARTY TRANSACTIONS

 

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

 

 

September 30,
2023

 

 

December 31, 2022

 

 

(in thousands)

 

Beginning balance

 

$

1,015

 

 

$

932

 

Adjustments due to changes in directors, executive officers, and/or principal
   stockholders

 

 

(167

)

 

 

 

New loans

 

 

217

 

 

 

169

 

Repayments

 

 

(51

)

 

 

(86

)

Ending balance

 

$

1,014

 

 

$

1,015

 

 

Deposits from directors, executive officers, and their affiliates totaled $681,000 and $583,000 at September 30, 2023 and December 31, 2022, 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 nine months ended September 30, 2023 and 2022, respectively.

 

NOTE 12 – FAIR VALUE MEASUREMENTS

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

 

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

 

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

 

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

 

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

 

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

 

Some assets and liabilities, such as securities available-for-sale, are measured at fair value on a recurring basis under GAAP. Other assets and liabilities, such as collateral dependent loans, may be measured at fair value on a nonrecurring basis.

 

30


 

NOTE 12 – FAIR VALUE MEASUREMENTS (continued)

 

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.

 

Collateral dependent loans – The Company does not record loans at fair value on a recurring basis. However, individually evaluated loans are reported at the 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.

 

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.

 

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

 

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

 

 

 

 

 

Recurring Fair Value Measurements Using

 

 

September 30,
2023

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

(in thousands)

 

Marketable equity securities

 

$

3,286

 

 

$

3,286

 

 

$

 

 

$

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury notes

 

 

7,142

 

 

 

 

 

 

7,142

 

 

 

 

Obligations of states and political subdivisions

 

 

15,911

 

 

 

 

 

 

15,911

 

 

 

 

Government-sponsored mortgage-backed securities

 

 

76,815

 

 

 

 

 

 

76,815

 

 

 

 

Asset-backed securities

 

 

3,807

 

 

 

 

 

 

3,807

 

 

 

 

Certificates of deposit

 

 

966

 

 

 

 

 

 

966

 

 

 

 

Total

 

$

107,927

 

 

$

3,286

 

 

$

104,641

 

 

$

 

 

31


 

NOTE 12 – FAIR VALUE MEASUREMENTS (continued)

 

 

 

 

 

Recurring Fair Value Measurements Using

 

 

December 31,
2022

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

(in thousands)

 

Marketable equity securities

 

$

2,924

 

 

$

2,924

 

 

$

 

 

$

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury notes

 

 

26,627

 

 

 

 

 

 

26,627

 

 

 

 

Obligations of states and political subdivisions

 

 

17,656

 

 

 

 

 

 

17,656

 

 

 

 

Government-sponsored mortgage-backed securities

 

 

64,267

 

 

 

 

 

 

64,267

 

 

 

 

Asset-backed securities

 

 

4,517

 

 

 

 

 

 

4,517

 

 

 

 

Certificates of deposit

 

 

1,425

 

 

 

 

 

 

1,425

 

 

 

 

Total

 

$

117,416

 

 

$

2,924

 

 

$

114,492

 

 

$

 

 

Individually evaluated collateral dependent loans are measured at fair value on a non-recurring basis. There were no individually evaluated collateral dependent loans with a specific valuation allowance as of September 30, 2023 and December 31, 2022.

 

Mortgage servicing rights are measured at fair value on a non-recurring basis. There was no impairment on mortgage servicing rights as of September 30, 2023 and December 31, 2022.

 

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

 

 

September 30, 2023

 

 

Carrying Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

(in thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

26,603

 

 

$

26,603

 

 

$

 

 

$

 

Available-for-sale securities

 

 

104,641

 

 

 

 

 

 

104,641

 

 

 

 

Marketable equity securities

 

 

3,286

 

 

 

3,286

 

 

 

 

 

 

 

Loans held for sale

 

 

410

 

 

 

 

 

 

410

 

 

 

 

Loans, net

 

 

382,682

 

 

 

 

 

 

 

 

 

353,717

 

Rate lock commitments

 

 

6

 

 

 

 

 

 

 

 

 

6

 

Accrued interest receivable

 

 

1,349

 

 

 

1,349

 

 

 

 

 

 

 

Federal Home Loan Bank Stock

 

 

4,787

 

 

 

 

 

 

 

 

 

4,787

 

Cash value of life insurance

 

 

13,919

 

 

 

 

 

 

 

 

 

13,919

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

386,973

 

 

 

237,772

 

 

 

 

 

 

147,476

 

Advance payments by borrowers for taxes and insurance

 

 

10,264

 

 

 

10,264

 

 

 

 

 

 

 

Federal Home Loan Bank advances

 

 

78,499

 

 

 

 

 

 

 

 

 

74,667

 

Accrued interest payable

 

 

1,099

 

 

 

1,099

 

 

 

 

 

 

 

 

32


 

NOTE 12 – FAIR VALUE MEASUREMENTS (continued)

 

 

December 31, 2022

 

 

Carrying Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

(in thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

28,344

 

 

$

28,344

 

 

$

 

 

$

 

Available-for-sale securities

 

 

114,492

 

 

 

 

 

 

114,492

 

 

 

 

Marketable equity securities

 

 

2,924

 

 

 

2,924

 

 

 

 

 

 

 

Loans held for sale

 

 

125

 

 

 

 

 

 

125

 

 

 

 

Loans, net

 

 

359,574

 

 

 

 

 

 

 

 

 

335,987

 

Rate lock commitments

 

 

6

 

 

 

 

 

 

 

 

 

6

 

Accrued interest receivable

 

 

1,257

 

 

 

1,257

 

 

 

 

 

 

 

Federal Home Loan Bank Stock

 

 

3,429

 

 

 

 

 

 

 

 

 

3,429

 

Cash value of life insurance

 

 

14,316

 

 

 

 

 

 

 

 

 

14,316

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

387,721

 

 

 

308,162

 

 

 

 

 

 

78,418

 

Advance payments by borrowers for taxes and insurance

 

 

1,029

 

 

 

1,029

 

 

 

 

 

 

 

Federal Home Loan Bank advances

 

 

71,464

 

 

 

 

 

 

 

 

 

69,633

 

Accrued interest payable

 

 

291

 

 

 

291

 

 

 

 

 

 

 

 

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.

 

Deposits with no stated maturities are defined as having a fair value equivalent to the amount payable on demand. This prohibits adjusting the 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 asset 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.

 

33


 

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 consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's 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 the Bank to maintain minimum amounts and ratios (set forth in the table below) of Common Equity Tier 1, Tier 1 and Total capital to risk-weighted assets, and of Tier 1 capital to average assets. The Bank met all applicable capital adequacy requirements as of September 30, 2023 and December 31, 2022.

 

As of September 30, 2023, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum regulatory capital ratios as set forth in the table below. There are no conditions or events since September 30, 2023 that management believes have changed the capital category of the Bank.

 

The Bank’s actual and required capital amounts and ratios are presented below:

 

 

September 30, 2023

 

 

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)

 

$

62,191

 

 

 

11.1

%

 

$

22,440

 

 

 

4.0

%

 

$

28,051

 

 

 

5.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk-based:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1

 

 

62,191

 

 

 

15.0

%

 

 

18,624

 

 

 

4.5

%

 

 

26,901

 

 

 

6.5

%

Tier 1

 

 

62,191

 

 

 

15.0

%

 

 

24,831

 

 

 

6.0

%

 

 

33,104

 

 

 

8.0

%

Total

 

 

66,714

 

 

 

16.1

%

 

 

33,109

 

 

 

8.0

%

 

 

41,386

 

 

 

10.0

%

 

 

December 31, 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)

 

$

65,497

 

 

 

11.9

%

 

$

22,086

 

 

 

4.0

%

 

$

27,608

 

 

 

5.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk-based:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1

 

 

65,497

 

 

 

16.6

%

 

 

17,711

 

 

 

4.5

%

 

 

25,583

 

 

 

6.5

%

Tier 1

 

 

65,497

 

 

 

16.6

%

 

 

23,615

 

 

 

6.0

%

 

 

31,486

 

 

 

8.0

%

Total

 

 

68,700

 

 

 

17.5

%

 

 

31,486

 

 

 

8.0

%

 

 

39,358

 

 

 

10.0

%

 

On July 29, 2022, the Company adopted a stock repurchase program. On August 26, 2022, the Company received a non-objection letter from the Federal Reserve Bank of Chicago ("FRB") permitting the Company to repurchase 319,766 shares of its common stock, which represented 5% of the shares outstanding at the time discussions were held with the FRB. The Company began purchasing shares on September 1, 2022 and as of June 7, 2023, the Company had repurchased all 319,766 shares for a total purchase price of $3.4 million.

 

On April 28, 2023, the Company adopted a second stock repurchase program. On June 9, 2023, the Company received a non-objection letter from the FRB permitting the Company to repurchase 621,522 shares of its common stock, which represented 10% of the shares outstanding at the time discussions were held with the FRB. The Company began purchasing shares on June 15, 2023 and as of September 30, 2023, the Company had repurchased 36,562 shares for a total purchase price of $270,000.

 

34


 

NOTE 14 – EARNINGS (LOSS) PER SHARE

 

Basic earnings (loss) per 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. 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 nine months ended September 30, 2023, 111,145 and 35,507 shares, respectively were excluded, based on average share price, from the computation of diluted earnings per share ("EPS") because the effect would be antidilutive. For the three and nine months ended September 30, 2022, zero and 182,457 average shares, respectively, were excluded from the computation of diluted EPS because the effect would be antidilutive.

 

Earnings (loss) per common share for the three and nine months ended September 30, 2023 and 2022 are presented in the following tables.

 

 

Three months ended September 30,

 

2023

 

 

2022

 

 

 

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(3,641

)

 

$

124

 

 

 

 

 

 

 

 

 

 

Weighted shares outstanding for basic EPS

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

5,976,208

 

 

 

6,271,370

 

 

Less: Weighted average unallocated ESOP shares

 

 

441,497

 

 

 

461,185

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding for basic EPS

 

 

5,534,711

 

 

 

5,810,185

 

 

Additional dilutive shares(1)

 

 

 

 

 

173,056

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding for dilutive EPS

 

 

5,534,711

 

 

 

5,983,241

 

 

 

 

 

 

 

 

 

 

Basic (loss) earnings per share

 

$

(0.66

)

 

$

0.02

 

 

Diluted (loss) earnings per share(1)

 

$

(0.66

)

 

$

0.02

 

 

 

 

Nine months ended September 30,

 

2023

 

 

2022

 

 

 

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

Net (loss)

 

$

(4,510

)

 

$

(172

)

 

 

 

 

 

 

 

 

 

Weighted shares outstanding for basic EPS

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

5,984,897

 

 

 

6,278,914

 

 

Less: Weighted average unallocated ESOP shares

 

 

446,388

 

 

 

436,730

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding for basic EPS

 

 

5,538,509

 

 

 

5,842,184

 

 

Additional dilutive shares (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding for dilutive EPS

 

 

5,538,509

 

 

 

5,842,184

 

 

 

 

 

 

 

 

 

 

Basic (loss) per share

 

$

(0.81

)

 

$

(0.03

)

 

Diluted (loss) per share (1)

 

$

(0.81

)

 

$

(0.03

)

 

 

(1) For the three and nine months ended September 30, 2023 and the nine months ended September 30, 2022, the effect of stock options was anti-dilutive due to the net loss and therefore no dilutive shares are included in the weighted average shares outstanding or diluted loss calculations.

35


 

NOTE 15 – STOCK BASED COMPENSATION

 

Stock-Based Compensation Plans

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. As of September 30, 2023, no shares of common stock remained available for grant as stock options, restricted stock or restricted stock units under the 2020 Equity Incentive Plan. 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.

 

On August 26, 2022, the Company’s shareholders approved the 1895 Bancorp of Wisconsin, Inc. 2022 Equity Incentive Plan (the “2022 Equity Incentive Plan”). A total of 354,200 stock options and 141,680 restricted shares were approved for award. As of September 30, 2023, 44,455 shares of common stock remain available for grant as stock options and 21,382 shares remain available for grant as restricted stock or stock units under the 2022 Equity Incentive Plan. 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.

 

Assumptions are used in estimating the fair value of stock options granted. The weighted average expected life of the stock options represents 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 lifetime period prior to issuance date. The following assumptions were used in estimating the fair value of options granted during the nine months ended September 30, 2023 and September 30, 2022, respectively:

 

 

For the Nine Months Ended

 

 

September 30,
2023

 

 

September 30,
2022

 

 

 

 

 

 

 

 

Dividend yield

 

 

0.00

%

 

 

0.00

%

Risk-free interest rate

 

 

3.59

%

 

 

3.13

%

Expected volatility

 

 

24.64

%

 

 

24.64

%

Weighted average expected life (years)

 

 

6.5

 

 

 

6.5

 

Weighted average per share value of options

 

$

3.37

 

 

$

3.25

 

 

 

 

36


 

NOTE 15 – STOCK BASED COMPENSATION (continued)

 

A summary of the Company’s stock option activity for the nine months ended September 30, 2023 is presented below.

 

Stock Options

 

Shares

 

 

Weighted Average Exercise Price

 

 

Weighted Average Remaining in Contractual Term (Years)

 

 

Aggregate Intrinsic Value

 

Outstanding December 31, 2022

 

656,130

 

 

$

8.27

 

 

 

8.69

 

 

$

1,122,214

 

Granted

 

3,000

 

 

 

9.94

 

 

 

6.50

 

 

 

21

 

Exercised

 

 

3,159

 

 

 

5.96

 

 

N/A

 

 

N/A

 

Forfeited

 

 

55,861

 

 

 

8.09

 

 

N/A

 

 

N/A

 

Outstanding September 30, 2023

 

 

600,110

 

 

 

8.30

 

 

7.74

 

 

254,168

 

Options exercisable at September 30, 2023

 

182,637

 

 

 

6.51

 

 

6.13

 

 

162,565

 

 

The following table summarizes information about the Company’s nonvested stock option activity for the nine months ended September 30, 2023:

 

Stock Options

 

Shares

 

 

Weighted Average Grant Date Fair Value

 

Nonvested at December 31, 2022

 

 

543,306

 

 

$

2.82

 

Granted

 

3,000

 

 

 

3.37

 

Vested(1)

 

 

(76,130

)

 

 

1.96

 

Forfeited

 

 

(52,703

)

 

 

8.09

 

Nonvested at September 30, 2023

 

 

417,473

 

 

 

3.01

 

 

(1)
Includes 2,106 shares vested under a nonqualified stock option inducement award to the Company’s President and Chief Executive Officer.

 

The Company amortizes the expense related to stock options as compensation expense over the vesting period. The Company recognized $79,000 and $33,000 in stock option expense during the three months ended September 30, 2023 and 2022, respectively and $228,000 and $80,000 in stock option expense during the nine months ended September 30, 2023 and 2022, respectively.

 

At September 30, 2023, the Company had $1.1 million in estimated unrecognized compensation costs related to outstanding stock options that is expected to be recognized over a weighted average period of 3.75 years.

 

The following table summarizes information about the Company’s restricted stock activity for the nine months ended September 30, 2023:

 

Restricted Stock

 

Shares

 

 

Weighted Average Grant Date Fair Value

 

Nonvested at December 31, 2022

 

 

211,349

 

 

$

8.71

 

Granted

 

 

 

 

 

 

Vested(1)(2)

 

 

(30,274

)

 

 

7.08

 

Forfeited

 

 

(18,385

)

 

 

8.15

 

Nonvested at September 30, 2023

 

 

162,690

 

 

$

9.08

 

 

(1)
Includes 263 shares vested under a restricted stock inducement award to the Company’s President and Chief Executive Officer.
(2)
Includes 7,368 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 $99,000 and $47,000 in restricted stock expense during the three months ended September 30, 2023 and 2022, respectively and recognized $287,000 and $120,000 in restricted stock expense during the nine months ended September 30, 2023 and 2022, respectively. At September 30, 2023, the Company had $1.2 million of unrecognized compensation expense related to restricted stock shares that is expected to be recognized over a weighted average period of 3.7 years.

37


 

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

 

General

 

Management’s discussion and analysis of financial condition and results of operations at September 30, 2023 and for the three and nine months ended September 30, 2023 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:

inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments, including our mortgage servicing rights asset, or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made or will make;
our ability to maintain liquidity, primarily through deposits, in light of recent events in the banking industry;
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 credit losses;
our ability to manage market risk, credit risk and operational risk;
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;
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, capital requirements and insurance premiums;
changes in the quality or composition of our loan or investment portfolios;
technological changes that may be more difficult or expensive than expected;
the inability of third-party providers to perform as expected;
a failure in or breach of our operational or security systems or infrastructure, including cyberattacks;
the actual or anticipated impacts of military conflict, terrorism or other geopolitical events;

38


 

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 have acquired or may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;
our ability to retain key employees;
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, including the effects of our adoption of the Current Expected Credit Loss ("CECL") accounting standard, which we implemented on January 1, 2023;
our compensation expense associated with equity allocated or awarded to our employees;
changes in the financial condition, results of operations or future prospects of issuers of securities that we own.

 

Because of these 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 under the heading "Risk Factors" in our most recent Annual Report on Form 10-K (fiscal year ended December 31, 2022) filed with the Securities and Exchange Commission (“SEC”) on March 30, 2023, as updated by our subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Except as required by applicable law or regulation, we do not undertake, and we specifically disclaim any obligation, to release publicly the results of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events. Accordingly, you should not place undue reliance on forward-looking statements.

 

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 credit 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 Company's most recent Form 10-K (fiscal year ended December 31, 2022) filed with the Securities and Exchange Commission (“SEC”) on March 30, 2023.

 

On January 1, 2023 we adopted ASU 2016-13, Financial Instruments - Credit Losses. This guidance replaced the incurred loss methodology, which was used to calculate the allowance for loan losses as described in the Consolidated Financial Statements in our 2022 Annual Report on Form 10-K, with an expected lifetime loss methodology, as described in Note 2 to the Consolidated Financial Statements.

During 2023, we did not substantively change any material aspect of our overall methodologies and processes used in developing the remaining critical accounting estimates from those described in the Consolidated Financial Statements in our 2022 Annual Report on Form 10-K, other than those related to the adoption of ASU 2016-13.

 

Comparison of Financial Condition at September 30, 2023 and December 31, 2022

 

Total Assets. Total assets increased $11.6 million, or 2.1%, to $554.6 million at September 30, 2023 from $543.0 million at December 31, 2022. This increase was primarily due to a $23.5 million net increase in loans, partially offset by a $9.9 million decrease in available-for-sale securities, a $1.7 million decrease in cash and cash equivalents and a $1.3 million decrease in other assets.

 

Cash and Cash Equivalents. Cash and cash equivalents decreased $1.7 million, or 6.0%, to $26.6 million at September 30, 2023 from $28.3 million at December 31, 2022. This decrease was primarily due to $93.5 million in principal payments on FHLB advances, a $23.5 million net increase in loans, $21.4 million for the purchase of available-for-sale securities and $8.9 million in

39


 

originations of loans held for sale. These decreases were partially offset by $100.5 million of additional FHLB advances, $19.5 million in proceeds from the sale of available-for-sale securities, $9.7 million from maturities, payments and calls of available-for-sale securities, a $9.2 million net increase in advance payments by borrowers for taxes and insurance and $8.8 million from the sale of mortgage loans held for sale.

 

Available-for-Sale Securities. Available-for-sale securities decreased $9.9 million, or 8.6%, to $104.6 million at September 30, 2023, from $114.5 million at December 31, 2022. This decrease was primarily due to maturities, payments and calls of securities totaling $9.7 million. The net unrealized loss on available-for-sale securities held in the portfolio was $15.8 million at September 30, 2023.

 

During the third quarter of 2023, the Company completed its balance sheet repositioning strategy related to its investment portfolio. This strategy included the sale of $21.4 million in book value of its lower-yielding U.S. Treasury securities. Proceeds of $19.5 million from the sale of these securities were redeployed into approximately $21.4 million of U.S. government sponsored mortgage-backed securities, which were classified as available-for-sale upon purchase. The purchased securities have a positive spread differential of approximately 456 basis points compared to the securities that were sold, which is expected to result in approximately $1.0 million in additional pre-tax earnings, on an annualized basis. The pre-tax loss on the sale of securities was $1.9 million, which the Company estimates will be recouped within approximately two years. The effective duration of the securities sold was 2.7 years, while the effective duration of the securities purchased is 1.7 years.

 

Loans Held for Sale. Loans held for sale increased $285,000, to $410,000 at September 30, 2023. The volume of loans originated and sold remains relatively low, as a result of the changing interest rate environment and lower inventory of housing available in our market. Mortgage loan originations and sales were $8.9 million and $8.8 million, respectively, during the first nine months of 2023 compared to $19.0 million and $20.4 million, respectively, for the same period in 2022.

 

Loans. Loans held for investment, net of deferred costs, increased $23.5 million, or 6.5%, to $386.3 million at September 30, 2023, from $362.8 million at December 31, 2022. The majority of this growth was the result of a $10.8 million increase in commercial real estate loans, to $221.7 million, and a $9.9 million increase in first mortgage residential real estate loans, to $95.4 million. Also contributing to this growth was a $2.0 million increase in non-real estate commercial loans which grew to $45.7 million during this period. The growth in the level of commercial real estate and other commercial loans is consistent with the Company’s long-term loan strategy to increase these types of loans within our portfolio. The Company also purchases loan participations from other financial institutions. The outstanding balance of loans purchased are included in the totals above and totaled $39.4 million as of September 30, 2023 and $31.6 million as of December 31, 2022. Loans purchased are primarily comprised of commercial real estate and other commercial loans. The increase in first mortgage loans is primarily due to an increase in adjustable rate mortgages, as a result of the current interest rate environment and the impact on fixed rate mortgage rates, the majority of which the Company retained on its books.

 

Allowance for Credit Losses. On January 1, 2023, the Company adopted ASU 2016-13 which replaced the incurred loss methodology, which was previously used to calculate the allowance for loan losses, with an expected lifetime loss methodology ("CECL"), as described in Note 2 to the Consolidated Financial Statements. The adoption of ASU 2016-13 resulted in an initial increase of $412,000 to the allowance for credit losses for loans ("ACL for loans") and the establishment of a $665,000 allowance for credit losses for unfunded loan commitments ("ACL for unfunded loan commitments"). The ACL for loans is included as a separate line item on the Company's Consolidated Balance Sheets and the ACL for unfunded loan commitments is included in other liabilities. The total allowance for credit losses was $4.5 million at September 30, 2023.

 

The ACL for loans was $3.6 million, or 0.94%, of loans, net of deferred costs, at September 30, 2023 compared to an allowance for loan losses of $3.2 million, or 0.88% of loans, net of deferred costs, at December 31, 2022. The increase in the ACL for loans was primarily the result of the $412,000 increase related to the adoption of ASU 2016-13, a $19,000 negative provision for credit losses and $18,000 in net recoveries. The ACL for unfunded loan commitments was $909,000 at September 30, 2023. The increase in the ACL for unfunded loan commitments was primarily the result of the $665,000 increase related to the adoption of ASU 2016-13 and a $244,000 provision for credit losses. The additional provision was due to a $14.1 million increase in unfunded loan commitments which are expected to fund from $41.1 million at December 31, 2022 to $55.2 million at September 30, 2023. Nonaccrual loans represented 0.18% of total loans at September 30, 2023, compared to 0.21% of total loans at December 31, 2022. Net recoveries for the nine months ended September 30, 2023 were $18,000 compared to net recoveries of $112,000 for the nine months ended September 30, 2022.

 

Other Assets. Other assets decreased $1.3 million, or 11.6%, from $11.2 million at December 31, 2022 to $9.9 million at September 30, 2023. This decrease was primarily due to a $700,000 decrease in net deferred tax assets as a result of changes in Wisconsin tax law in July 2023 and a $600,000 decrease in other real estate owned as a result of the sale of the former branch facility in West Allis, Wisconsin.

 

40


 

FHLB Stock. FHLB stock increased $1.4 million, or 41.2%, from $3.4 million at December 31, 2022 to $4.8 million at September 30, 2023. This increase was primarily due to the net increase in FHLB advances and the requirement by FHLB to hold additional stock as a result of the increased level of advances.

 

Deposits. Deposits decreased $748,000, or 0.2%, to $387.0 million at September 30, 2023, from $387.7 million at December 31, 2022. During this period, money market accounts decreased $34.5 million, or 28.5%, noninterest bearing checking accounts decreased $20.1 million, or 21.7%, and savings accounts decreased $13.2 million, or 21.3%. These decreases were partially offset by a $69.6 million, or 87.4%, increase in certificates of deposit. As market rates have increased, there has been a shift in our deposit mix from noninterest bearing checking accounts, negotiable order of withdrawal ("NOW") accounts, savings accounts and money market accounts to higher rate certificates of deposits. The decrease in noninterest bearing and money market deposits was partially due to the use of these funds by our commercial customers to fund their operations, as their borrowing cost have increased during the current interest rate environment. The Company continues to build upon its banking relationships with its core customers, including deposits, and in attracting new relationships.

 

Advance Payments by Borrowers for Taxes and Insurance. Advance payments by borrowers for taxes and insurance increased $9.3 million to $10.3 million at September 30, 2023 from $1.0 million at December 31, 2022. The increase was due to normal seasonal activity.

 

FHLB Advances. FHLB advances increased $7.0 million, or 9.8%, to $78.5 million at September 30, 2023, from $71.5 million at December 31, 2022. The increase in FHLB advances was primarily used to partially fund outgoing cash flows from the decrease in deposits and the increase in net loans.

 

Total Stockholders’ Equity. Total stockholders’ equity decreased $5.2 million to $70.2 million at September 30, 2023, from $75.4 million at December 31, 2022. The decrease was primarily due to a $5.3 million decrease in retained earnings. The decrease in retained earnings was primarily the result of a net loss of $4.5 million for the nine months ended September 30, 2023 and the adoption of ASU 2016-13 on January 1, 2023, which had a $783,000 negative impact on retained earnings. The Company also purchased 59,410 shares of its common stock during the nine months ended September 30, 2023 under its stock repurchase plans which resulted in a $470,000 reduction in stockholders' equity.

 

41


 

Average Balances and Yields

 

The following tables present information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing

liabilities, and the resulting annualized average yields and costs for the three and nine months ended September 30, 2023 and 2022. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or

liabilities, respectively, for the periods presented. Average balances have been calculated using daily balances. Nonaccrual loans are included in average balances only. Loan fees are included in interest income on loans and are not material.

 

 

Three Months Ended September 30,

 

 

2023

 

 

2022

 

 

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)

 

$

384,328

 

 

$

4,423

 

 

 

4.57

%

 

$

352,651

 

 

$

3,563

 

 

 

4.01

%

Securities available-for-sale

 

 

106,003

 

 

 

656

 

 

 

2.45

%

 

 

124,578

 

 

 

613

 

 

 

1.95

%

Other interest-earning assets

 

 

20,136

 

 

 

292

 

 

 

5.75

%

 

 

22,264

 

 

 

139

 

 

 

2.48

%

Total interest-earning
   assets

 

 

510,467

 

 

 

5,371

 

 

 

4.17

%

 

 

499,493

 

 

 

4,315

 

 

 

3.43

%

Non-interest-earning assets

 

 

36,860

 

 

 

 

 

 

 

 

 

35,090

 

 

 

 

 

 

 

Total assets

 

$

547,327

 

 

 

 

 

 

 

 

$

534,583

 

 

 

 

 

 

 

Interest-earning liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

29,328

 

 

$

67

 

 

 

0.90

%

 

$

35,186

 

 

$

10

 

 

 

0.12

%

Money market accounts

 

 

89,069

 

 

 

473

 

 

 

2.11

%

 

 

93,344

 

 

 

79

 

 

 

0.34

%

Savings accounts

 

 

50,037

 

 

 

5

 

 

 

0.04

%

 

 

67,977

 

 

 

9

 

 

 

0.05

%

Certificates of deposit

 

 

135,141

 

 

 

1,287

 

 

 

3.78

%

 

 

80,213

 

 

 

98

 

 

 

0.49

%

Total interest-bearing deposits

 

 

303,575

 

 

 

1,832

 

 

 

2.39

%

 

 

276,720

 

 

 

196

 

 

 

0.28

%

Federal Home Loan Bank advances

 

 

82,537

 

 

 

586

 

 

 

2.82

%

 

 

57,435

 

 

 

200

 

 

 

1.38

%

Other interest-bearing liabilities

 

 

9,843

 

 

 

1

 

 

 

0.05

%

 

 

9,910

 

 

 

2

 

 

 

0.08

%

Total interest-bearing
   liabilities

 

 

395,955

 

 

 

2,419

 

 

 

2.42

%

 

 

344,065

 

 

 

398

 

 

 

0.46

%

Non-interest-bearing deposits

 

 

72,289

 

 

 

 

 

 

 

 

 

105,359

 

 

 

 

 

 

 

Other non-interest-bearing liabilities

 

 

8,287

 

 

 

 

 

 

 

 

 

6,597

 

 

 

 

 

 

 

Total liabilities

 

 

476,531

 

 

 

 

 

 

 

 

 

456,021

 

 

 

 

 

 

 

Total stockholders’ equity

 

 

70,796

 

 

 

 

 

 

 

 

 

78,562

 

 

 

 

 

 

 

Total liabilities and
   stockholders’ equity

 

$

547,327

 

 

 

 

 

 

 

 

$

534,583

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

2,952

 

 

 

 

 

 

 

 

$

3,917

 

 

 

 

Net interest-earning assets

 

$

114,512

 

 

 

 

 

 

 

 

$

155,428

 

 

 

 

 

 

 

Interest rate spread(2)

 

 

 

 

 

 

 

 

1.75

%

 

 

 

 

 

 

 

 

2.97

%

Net interest margin(3)

 

 

 

 

 

 

 

 

2.29

%

 

 

 

 

 

 

 

 

3.11

%

Average interest-earning assets to
   average interest-bearing
   liabilities

 

 

128.92

%

 

 

 

 

 

 

 

 

145.17

%

 

 

 

 

 

 

 

(1)
Includes loan (expense) fees of ($34,000) and $20,000 for the three months ended September 30, 2023 and 2022, 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.

 

42


 

 

Nine Months Ended September 30,

 

 

2023

 

 

2022

 

 

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)

 

$

375,817

 

 

$

12,487

 

 

 

4.44

%

 

$

340,626

 

 

$

9,862

 

 

 

3.87

%

Securities available-for-sale

 

 

110,193

 

 

 

1,847

 

 

 

2.24

%

 

 

128,920

 

 

 

1,727

 

 

 

1.79

%

Other interest-earning assets

 

 

17,393

 

 

 

767

 

 

 

5.89

%

 

 

33,193

 

 

 

279

 

 

 

1.12

%

Total interest-earning
   assets

 

 

503,403

 

 

 

15,101

 

 

 

4.01

%

 

 

502,739

 

 

 

11,868

 

 

 

3.16

%

Non-interest-earning assets

 

 

36,935

 

 

 

 

 

 

 

 

 

34,827

 

 

 

 

 

 

 

Total assets

 

$

540,338

 

 

 

 

 

 

 

 

$

537,566

 

 

 

 

 

 

 

Interest-earning liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

30,709

 

 

$

178

 

 

 

0.78

%

 

$

36,016

 

 

$

26

 

 

 

0.10

%

Money market accounts

 

 

102,209

 

 

 

1,545

 

 

 

2.02

%

 

 

95,612

 

 

 

223

 

 

 

0.31

%

Savings accounts

 

 

54,055

 

 

 

20

 

 

 

0.05

%

 

 

67,358

 

 

 

25

 

 

 

0.05

%

Certificates of deposit

 

 

104,948

 

 

 

2,368

 

 

 

3.02

%

 

 

81,813

 

 

 

277

 

 

 

0.45

%

Total interest-bearing deposits

 

 

291,921

 

 

 

4,111

 

 

 

1.88

%

 

 

280,799

 

 

 

551

 

 

 

0.26

%

Federal Home Loan Bank advances

 

 

84,436

 

 

 

1,733

 

 

 

2.74

%

 

 

56,673

 

 

 

550

 

 

 

1.30

%

Other interest-bearing liabilities

 

 

6,502

 

 

 

4

 

 

 

0.09

%

 

 

6,919

 

 

 

7

 

 

 

0.13

%

Total interest-bearing
   liabilities

 

 

382,859

 

 

 

5,848

 

 

 

2.04

%

 

 

344,391

 

 

 

1,108

 

 

 

0.43

%

Non-interest-bearing deposits

 

 

77,321

 

 

 

 

 

 

 

 

 

104,787

 

 

 

 

 

 

 

Other non-interest-bearing
   liabilities

 

 

7,441

 

 

 

 

 

 

 

 

 

6,515

 

 

 

 

 

 

 

Total liabilities

 

 

467,621

 

 

 

 

 

 

 

 

 

455,693

 

 

 

 

 

 

 

Total stockholders’ equity

 

 

72,717

 

 

 

 

 

 

 

 

 

81,873

 

 

 

 

 

 

 

Total liabilities and
   stockholders’ equity

 

$

540,338

 

 

 

 

 

 

 

 

$

537,566

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

9,253

 

 

 

 

 

 

 

 

$

10,760

 

 

 

 

Net interest-earning assets

 

$

120,544

 

 

 

 

 

 

 

 

$

158,348

 

 

 

 

 

 

 

Interest rate spread(2)

 

 

 

 

 

 

 

 

1.97

%

 

 

 

 

 

 

 

 

2.73

%

Net interest margin(3)

 

 

 

 

 

 

 

 

2.46

%

 

 

 

 

 

 

 

 

2.86

%

Average interest-earning
   assets to average interest-bearing
   liabilities

 

 

131.49

%

 

 

 

 

 

 

 

 

145.98

%

 

 

 

 

 

 

 

(1)
Includes loan (expense) fees of ($89,000) and $352,000 for the nine months ended September 30, 2023 and 2022, 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.

 

43


 

 

Rate/Volume Analysis

 

The following tables present 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.

 

 

Three Months Ended September 30,
2023 vs. 2022

 

 

Increase (Decrease) Due to

 

 

 

 

 

Volume

 

 

Rate

 

 

Total
Increase
(Decrease)

 

 

(Dollars in thousands)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

Loans

 

$

338

 

 

$

522

 

 

$

860

 

Securities

 

 

(59

)

 

 

102

 

 

 

43

 

Other

 

 

(12

)

 

 

165

 

 

 

153

 

Total interest-earning assets

 

 

267

 

 

 

789

 

 

 

1,056

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

NOW

 

 

1

 

 

 

(58

)

 

 

(57

)

Money market deposits

 

 

4

 

 

 

(398

)

 

 

(394

)

Savings

 

 

1

 

 

 

3

 

 

 

4

 

Certificates of deposit

 

 

(109

)

 

 

(1,080

)

 

 

(1,189

)

Total interest-bearing deposits

 

 

(103

)

 

 

(1,533

)

 

 

(1,636

)

Borrowings

 

 

(114

)

 

 

(272

)

 

 

(386

)

Other

 

 

 

 

 

1

 

 

 

1

 

Total interest-bearing liabilities

 

 

(217

)

 

 

(1,804

)

 

 

(2,021

)

Change in net interest income

 

$

50

 

 

$

(1,015

)

 

$

(965

)

 

 

Nine Months Ended September 30,
2023 vs. 2022

 

 

Increase (Decrease) Due to

 

 

 

 

 

Volume

 

 

Rate

 

 

Total
Increase
(Decrease)

 

 

(Dollars in thousands)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

Loans

 

$

1,081

 

 

$

1,544

 

 

$

2,625

 

Securities

 

 

(164

)

 

 

284

 

 

 

120

 

Other

 

 

(62

)

 

 

550

 

 

 

488

 

Total interest-earning assets

 

 

855

 

 

 

2,378

 

 

 

3,233

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

NOW

 

 

3

 

 

 

(155

)

 

 

(152

)

Money market deposits

 

 

(17

)

 

 

(1,305

)

 

 

(1,322

)

Savings

 

 

4

 

 

 

1

 

 

 

5

 

Certificates of deposit

 

 

(99

)

 

 

(1,992

)

 

 

(2,091

)

Total interest-bearing deposits

 

 

(109

)

 

 

(3,451

)

 

 

(3,560

)

Borrowings

 

 

(361

)

 

 

(822

)

 

 

(1,183

)

Other

 

 

1

 

 

 

2

 

 

 

3

 

Total interest-bearing liabilities

 

 

(469

)

 

 

(4,271

)

 

 

(4,740

)

Change in net interest income

 

$

386

 

 

$

(1,893

)

 

$

(1,507

)

 

44


 

 

Comparison of Operating Results for the Three Months Ended September 30, 2023 and 2022

 

Net Income (Loss). We recorded a net loss of $3.6 million for the three months ended September 30, 2023, compared to net income of $124,000 for the three months ended September 30, 2022. The loss was primarily due to a $1.9 million pre-tax loss on the sale of securities as a result of the implementation of the Company's balance sheet repositioning strategy related to its investment securities portfolio, a $1.4 million increase in income tax expense, a significant portion of which was due to the change in Wisconsin tax law in July 2023, and a $1.0 million decrease in net interest income after provision for credit losses, partially offset by a $541,000 decrease in noninterest expense.

 

Interest and Dividend Income. Interest and dividend income increased $1.1 million, or 25.6%, to $5.4 million for the three months ended September 30, 2023, from $4.3 million for the three months ended September 30, 2022. The increase was due primarily to an $860,000 increase in interest and fees on loans. The increase in interest and fees earned on loans was primarily due to a $31.6 million increase in the average amount of loans outstanding, from $352.7 million in the third quarter of 2022 to $384.3 million in the third quarter of 2023, and a 56 basis point increase in the yield earned on loans, from 4.01% for the third quarter of 2022 to 4.57% in the third quarter of 2023. The increase in the yield earned on loans during the third quarter of 2023 was primarily due to increases in market rates. The increase in loans is consistent with the Company's strategy to grow the loan portfolio.

 

Interest Expense. Interest expense increased $2.0 million, or 502.5%, to $2.4 million for the three months ended September 30, 2023, from $398,000 for the three months ended September 30, 2022. This increase was primarily due to a $1.6 million increase in interest expense on deposits and a $386,000 increase in interest expense on FHLB advances. The increase in interest expense on deposits was primarily due to a 211 basis point increase in the average rate paid on deposits and a $26.9 million increase in average interest-bearing deposits outstanding from the third quarter of 2022 to the third quarter of 2023. The increase in interest expense on deposits was primarily due to the increase in market rates of interest and a shift in our deposit mix. As market rates increased, many of our deposit customers transferred funds from noninterest bearing checking accounts and lower rate deposit accounts into higher rate certificates of deposit. The average balance of noninterest bearing checking accounts decreased $33.1 million, or 31.4%, NOW accounts decreased $5.9 million, or 16.6%, savings accounts decreased $17.9 million, or 26.4%, and money market accounts decreased $4.3 million, or 4.6%, respectively, from the third quarter of 2022 to the third quarter of 2023. During the same period, the average balance of certificates of deposits increased $54.9 million, or 68.5%. Interest expense on certificates of deposit increased $1.2 million from the third quarter of 2022 to the third quarter of 2023 as a result of the increase in average balance and also a 329 basis point increase in the average rate paid on these accounts.

 

Interest expense on FHLB advances increased $386,000, or 193.0%, from $200,000 for the third quarter of 2022 to $586,000 for the third quarter of 2023. This increase was primarily due to a 144 basis point increase in the average rate paid on the advances from 1.38% in the third quarter of 2022 to 2.82% in the third quarter of 2023 and a $25.1 million, or 43.7%, increase in the average balance outstanding, from $57.4 million in the third quarter of 2022 to $82.5 million in the third quarter of 2023. The increase in the average rate paid on FHLB advances was primarily due to the increase in market interest rates.

 

Net Interest Income. Net interest income decreased $965,000, or 24.7%, to $3.0 million for the three months ended September 30, 2023, from $3.9 million for the three months ended September 30, 2022. This decrease was primarily due to a $2.0 million increase in interest expense partially offset by a $1.1 million increase in interest and dividend income. Our net interest rate spread decreased 122 basis points to 1.75% for the three months ended September 30, 2023, from 2.97% for the three months ended September 30, 2022. Our net interest margin decreased 82 basis points to 2.29%, from 3.11% over the same period.

 

Provision for Credit Losses. The provision for credit losses was $75,000 for the three months ended September 30, 2023, compared to no provision for the three months ended September 30, 2022. The increase in provision was primarily due to an increase in unfunded loan commitments and continued growth in the loan portfolio.

 

Noninterest Income. Noninterest income decreased $1.9 million, from $479,000 for the three months ended September 30, 2022 to a net loss of $1.4 million for the three months ended September 30, 2023. The decrease was primarily the result of a $1.9 million loss on the sale of available-for-sale securities. The loss on sale of securities was the result of the implementation of the company's balance sheet repositioning strategy which was executed in the third quarter of 2023. This strategy included the sale of $21.4 million in book value of its lower-yielding U.S. Treasury securities. Proceeds of $19.5 million from the sale of these securities were redeployed into approximately $21.4 million of U.S. government sponsored mortgage-backed securities, which were classified as available-for-sale upon purchase. The purchased securities have a positive spread differential of approximately 456 basis points compared to the securities that were sold, which is expected to result in $1.0 million in additional pre-tax earnings, on an annualized basis. The Company estimates that the $1.9 million loss on the sale of securities will be recouped within approximately two years. The effective duration of the securities sold was 2.7 years, while the effective duration of the securities purchased is 1.7 years.

 

45


 

During the third quarter of 2023, the Company sold its former branch facility in West Allis, which was closed in December 2019. The sale resulted in a net gain of $110,000.

 

Noninterest Expense. Noninterest expense decreased $541,000, or 12.9%, to $3.7 million for the three months ended September 30, 2023 from $4.2 million for the three months ended September 30, 2022. This decrease was primarily due to a $423,000 decrease in salaries and benefits expense. The decrease in salaries and benefits expense was primarily due to a reduction in the number of full-time equivalent employees from 106 at September 30, 2022 to 90 at September 30, 2023. The reduction in FTE's was the a result of cost savings initiatives implemented by the Company, including the review of all open positions prior to rehiring and also a reduction-in-force ("RIF") that was implemented in April 2023. The RIF resulted in the termination of five employees and a $575,000 reduction in annual salaries and benefits expense. As part of the RIF, we eliminated the majority of our IT staff and outsourced our network administration to an external third party. The projected annual cost for these IT related services is expected to be $257,000. In addition, we have significantly adjusted our bonus program for 2023 (to be paid in 2024), which is projected to result in a $558,000 reduction in salaries and benefits expense for 2023. This includes the elimination of projected bonuses for our three executive officers as well as a reduction in bonuses for other positions. Partially offsetting these decreases, was a $98,000 increase in stock based compensation expense. The increase in stock based compensation expense was primarily related to the issuance of stock options and awards granted in the third quarter of 2022 under the 2022 Equity Incentive Plan.

 

Income Tax Expense. We recorded income tax expense of $1.4 million for the three months ended September 30, 2023, compared to $21,000 for the three months ended September 30, 2022. The increase in income tax expense was primarily due to the increased loss before taxes during the three months ended September 30, 2023 as compared to income before taxes for the three months ended September 30, 2022. Also contributing to this increase was the impact of the change in Wisconsin tax law in July 2023, retroactive to January 2023, which resulted in a $98,000 reduction in tax benefits previously booked for the six months ended June 30, 2023 and a $1.8 increase in the valuation allowance for deferred tax assets.

 

Comparison of Operating Results for the Nine Months Ended September 30, 2023 and 2022

 

Net Income (Loss). We recorded a net loss of $4.5 million for the nine months ended September 30, 2023, compared to a net loss of $172,000 for the nine months ended September 30, 2022. The increased loss was primarily due to a $1.5 million decrease in net interest income after provision for credit losses, a $680,000 decrease in noninterest income, a $963,000 increase in noninterest expense and a $1.2 million increase in income tax expense.

 

Interest and Dividend Income. Interest and dividend income increased $3.2 million, or 26.9%, to $15.1 million for the nine months ended September 30, 2023, from $11.9 million for the nine months ended September 30, 2022. The increase was due primarily to a $2.6 million increase in interest and fees on loans and a $488,000 increase in interest on other interest earning assets. The increase in interest and fees earned on loans was primarily due to a $35.2 million, or 10.3%, increase in the average amount of loans outstanding, from $340.6 million for the nine months ended September 30, 2022 to $375.8 million for the nine months ended September 30, 2023, and a 57 basis point increase in the yield earned on loans, from 3.87% for nine months ended September 30, 2022 to 4.44% for the nine months ended September 30, 2023. The increase in the yield earned on loans during the nine months ended September 30, 2023 was primarily due to increases in market rates. The increase in loans is consistent with the Company's strategy to grow the loan portfolio. The increase in interest earned on other interest earning assets, the majority of which is comprised of fed funds sold and FHLB stock, was primarily due to a 477 basis point increase in yield, from 1.12% for the nine months ended September 30, 2022 to 5.89% for the nine months ended September 30, 2023, partially offset by a $15.8 million decrease in the average balance outstanding, from $33.2 million for the nine months ended September 30, 2022 to $17.4 million for the nine months ended September 30, 2023.

 

Interest Expense. Interest expense increased $4.7 million, or 427.3%, to $5.8 million for the nine months ended September 30, 2023, from $1.1 million for the nine months ended September 30, 2022. This increase was primarily due to a $3.6 million increase in interest expense on deposits and a $1.2 million increase in interest expense on FHLB advances. The increase in interest expense on deposits was primarily due to a 162 basis point increase in the average rate paid on deposits and a $11.1 million increase in average deposits outstanding from the first nine months of 2022 to the first nine months of 2023. The increase in interest expense on deposits was primarily due to the increase in market rates of interest and also a shift in our deposit mix. As market rates increased, many of our deposit customers transferred funds from noninterest bearing checking accounts and lower rate NOW and savings accounts, into higher rate money market accounts and certificates of deposit. The average balance of noninterest bearing checking accounts decreased $27.5 million, or 26.2%, NOW accounts decreased $5.3 million, or 14.7%, and savings accounts decreased $13.3 million, or 19.7%, respectively, from the first nine months of 2022 to the first nine months of 2023. During the same period, the average balance of money market accounts and certificates of deposits increased $6.6 million, or 6.9%, and $23.1 million, or 28.3%, respectively. Interest expense on money market accounts increased $1.3 million, or 592.8%, from the first nine months of 2022 to the first nine months of 2023 as a result of the increase in average balances outstanding and also a 171 basis point increase in the average rate paid on these accounts. Interest expense on certificates of deposit increased $2.1 million, or 754.9%, from the first nine months of 2022 to

46


 

the first nine months of 2023 as a result of the increase in average balances outstanding and also a 257 basis point increase in the average rate paid on these accounts.

 

Interest expense on FHLB advances increased $1.2 million, or 218.2%, from $550,000 for the first nine months of 2022 to $1.7 million for the first nine months of 2023. This increase was primarily due to a 144 basis point increase in the average rate paid on the advances from 1.30% in the first nine months of 2022 to 2.74% in the first nine months of 2023 and a $27.7 million, or 48.9%, increase in the average balance outstanding, from $56.7 million in the first nine months of 2022 to $84.4 million in the first nine months of 2023. The increase in the average rate paid on FHLB advances was primarily due to the changes in market interest rates.

 

Net Interest Income. Net interest income decreased $1.5 million, or 13.9%, to $9.3 million for the nine months ended September 30, 2023 and 2022, from $10.8 million for the nine months ended September 30, 2022. This decrease was primarily due to a $4.7 million increase in interest expense partially offset by a $3.2 million increase in interest and dividend income. Our net interest rate spread decreased 76 basis points to 1.97% for the nine months ended September 30, 2023, from 2.73% for the nine months ended September 30, 2022. Our net interest margin decreased 40 basis points to 2.46%, from 2.86% over the same period.

 

Provision for Credit Losses. The provision for credit losses was $225,000 for the nine months ended September 30, 2023, compared to a $210,000 provision for the nine months ended September 30, 2022. The increase in provision was primarily due to continued growth in the loan portfolio and an increase in unfunded loan commitments.

 

Noninterest Income. Noninterest income decreased $680,000, or 69.0%, to $306,000 for the nine months ended September 30, 2023, from $986,000 for the nine months ended September 30, 2022. The decrease was primarily the result of a $1.9 million loss on the sale of available-for-sale securities. The loss on sale of securities was the result of the implementation of the company's balance sheet repositioning strategy which was executed in the third quarter of 2023. This strategy included the sale of $21.4 million in book value of its lower-yielding U.S. Treasury securities. Proceeds of $19.5 million from the sale of these securities were redeployed into approximately $21.4 million of U.S. government sponsored mortgage-backed securities, which were classified as available-for-sale upon purchase. The purchased securities have a positive spread differential of approximately 456 basis points compared to the securities that were sold, which is expected to result in $1.0 million in additional pre-tax earnings, on an annualized basis. The Company estimates that the $1.9 million loss on the sale of securities will be recouped within approximately two years. The effective duration of the securities sold was 2.7 years, while the effective duration of the securities purchased is 1.7 years. This decrease was partially offset by a $1.2 million increase in income (loss) associated with changes in the market value of equity securities, from an unrealized loss of $892,000 for the nine months ended September 30, 2022, to an unrealized gain of $287,000 for the nine months ended September 30, 2023. The increase in the market value of marketable equity securities was due to an increase in the market value of mutual funds held in our deferred compensation plan. We record an offsetting amount for the change in the market of equity securities in noninterest expense. Also offsetting the decrease, was a $220,000 increase in other noninterest income. This increase was primarily due to the $110,000 gain on the sale of the West Allis facility and a $157,000 gain from the collection of benefits from a bank owned life insurance policy.

 

Noninterest Expense. Noninterest expense increased $963,000, or 8.1%, to $12.8 million for the first nine months of 2023 from $11.9 million for the first nine months of 2022. This increase was primarily due to a $1.2 million increase the market value of mutual funds held in our deferred compensation plan. We record an offsetting amount for the change in the market of equity securities in noninterest income. This increase was partially offset by a $285,000 decrease in other noninterest expenses, which are primarily due to cost savings initiatives that the Company has implemented. The majority of these savings were related to a $201,000 reduction in professional and consulting services, a $43,000 reduction in business development expenses and a $41,000 reduction in insurance expense.

 

The Company has also taken a number of cost savings initiatives to reduce salary and benefits related expenses. In April 2023, a reduction-in-force ("RIF") was implemented which resulted in the termination of five employees and a $575,000 reduction in annual salaries and benefits expense. Severance costs related to the RIF were $418,000. As part of the RIF, we eliminated the majority of our IT staff and outsourced our network administration to an external third party. The projected annual cost for these IT related services is expected to be $257,000. In addition to the RIF, the Company has continued its initiative to review all open positions prior to rehiring. As a result of these actions, we have eliminated 16 full-time equivalent positions, from 106 at September 30, 2022 to 90 at September 30, 2023. The reduction in staff is projected to result in a $1.8 million reduction in salaries and benefits expense on an annual basis. In addition, we are significantly adjusting our bonus program for 2023 (to be paid in 2024), which is projected to result in a $558,000 reduction in salaries and benefits expense for 2023. This includes the elimination of projected bonuses for our three executive officers as well as a reduction in bonuses for other positions. The impact of these cost savings initiatives related to salaries and benefits, was offset by $418,000 in severance costs related to the RIF and a $315,000 increase in stock-based compensation expense. The increase in stock based compensation expense was primarily due to the issuance of stock options and awards granted in the third quarter of 2022 under the 2022 Equity Incentive Plan.

 

47


 

Income Tax (Benefit) Expense. We recorded income tax expense of $1.0 million for the first nine months of 2023, compared to an income tax benefit of $172,000 for the first nine months of 2022. The increase in income tax expense was primarily due to an increase in the loss before taxes during the first nine months of 2023 as compared to the first nine months of 2022. Also contributing to this increase was the impact of the change in Wisconsin tax law in July 2023, retroactive to January 2023, which resulted in a $98,000 reduction in tax benefits previously booked during the six months ended June 30, 2023 and a $1.8 million increase in the valuation allowance for deferred tax assets.

 

 

Management of Market Risk

 

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

 

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

originating commercial real estate and commercial loans, which tend to have shorter terms and higher interest rates than owner occupied one- to four-family residential real estate loans, and which generate customer relationships that can result in larger non-interest-bearing checking accounts;
selling substantially all of our conforming and eligible jumbo, longer-term, fixed-rate one- to four-family residential real estate loans and retaining the non-conforming and shorter-term, fixed-rate and adjustable-rate one- to four-family residential real estate loans that we originate, subject to market conditions and periodic review of our asset/liability management needs; and
reducing our dependence on jumbo and brokered certificates of deposit to support lending and investment activities and increasing our reliance on core deposits, including checking accounts and savings accounts, which are less interest rate sensitive than certificates of deposit.

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

48


 

The table below sets forth, as of September 30, 2023, 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

 

$

9,895

 

 

 

(16.33

)%

 +300

 

 

10,584

 

 

 

(10.50

)%

 +200

 

 

11,202

 

 

 

(5.27

)%

 +100

 

 

11,503

 

 

 

(2.73

)%

Level

 

 

11,826

 

 

 

%

 -100

 

 

11,789

 

 

 

(0.31

)%

 -200

 

 

11,579

 

 

 

(2.09

)%

 -300

 

 

11,336

 

 

 

(4.15

)%

 -400

 

 

10,943

 

 

 

(7.46

)%

(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 September 30, 2023, the estimated changes in our EVE that would result from the designated instantaneous changes in market interest rates. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.

 

 

 

 

Estimated Increase (Decrease) in EVE

 

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

 

Estimated EVE(2)

 

 

Amount

 

 

Percent

 

 

(Dollars in thousands)

 

+400

 

$

49,232

 

 

$

(20,034

)

 

 

(28.92

)%

+300

 

 

54,088

 

 

 

(15,178

)

 

 

(21.91

)%

+200

 

 

59,319

 

 

 

(9,947

)

 

 

(14.36

)%

+100

 

 

64,056

 

 

 

(5,210

)

 

 

(7.52

)%

Level

 

 

69,266

 

 

 

 

 

 

 

-100

 

 

73,313

 

 

 

4,047

 

 

 

5.84

%

-200

 

 

76,262

 

 

 

6,996

 

 

 

10.10

%

-300

 

 

77,461

 

 

 

8,195

 

 

 

11.83

%

-400

 

 

75,951

 

 

 

6,685

 

 

 

9.65

%

(1)
Assumes an instantaneous uniform change in interest rates at all maturities.
(2)
EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.

 

The table above indicates that at September 30, 2023, in the event of a 100-basis point increase in interest rates, we would have experienced a 7.52% decrease in our EVE and in the event of a 100-basis point decrease in interest rates, we would have experienced a 5.84% increase in our EVE. In the event of a 200-basis point increase in interest rates at September 30, 2023, we would have experienced a 14.36% decrease in our EVE and in the event of a 200-basis point decrease in interest rates, we would have experienced a 10.10% increase in our EVE.

 

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

49


 

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, FHLB advances, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from maturities of securities. At September 30, 2023, we had $78.5 million outstanding in advances from the FHLB. At September 30, 2023, we had $91.1 million in additional borrowing capacity at the Federal Home Loan Bank of Chicago, based on the level of qualifying real estate loans currently pledged to the FHLB. Additionally, at September 30, 2023, we had a $12.0 million federal funds line of credit with the BMO Harris Bank, none of which was drawn at September 30, 2023. The Company also had an $9.5 million line of credit at the Federal Reserve based on pledged commercial real estate loans of approximately $12.7 million at September 30, 2023. The Company had not drawn on the Federal Reserve line as of September 30, 2023. We also have the ability to participate in the Federal Reserve's new Bank Term Funding Program as needed.

 

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

 

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash used in operating activities was $324,000 for the nine months ended September 30, 2023, as compared to $1.8 million net cash provided by operating activities for the nine months ended September 30, 2022. Net cash used in operating activities for the nine months ended September 30, 2023 primarily consisted of the origination of $8.9 million in mortgage loans held for sale and a net loss of $4.5 million, partially offset by $8.8 million in proceeds from the sale of mortgage loans held for sale and a $1.9 million net loss on the sale of available-for-sale securities. Net cash provided by operating activities for the nine months ended September 30, 2022 primarily consisted of $20.4 million in proceeds from the sale of mortgage loans held for sale, partially offset by $19.0 million in originations of mortgage loans held for sale. Net cash used in investing activities was $16.4 million for the nine months ended September 30, 2023, as compared to $54.5 million for the nine months ended September 30, 2022. Net cash used in investment activities during the nine months ended September 30, 2023 consisted primarily of a $23.5 million net increase in loans, $21.4 million for the purchase of available-for-sale securities and a $1.4 million increase in FHLB stock, partially offset by $19.5 million from proceeds from the sale of available-for-sale securities and $9.7 million from maturities, calls and payments on available-for-sale securities. Net cash used in investment activities during the nine months ended September 30, 2022 consisted primarily of the purchase of $37.1 million of available-for-sale securities and a $31.5 million net increase in loans, partially offset by $14.6 million from maturities, calls and payments on available-for-sale securities. Net cash provided by financing activities was $15.0 million for the nine months ended September 30, 2023, as compared to $1.6 million for the nine months ended September 30, 2022. Net cash provided by financing activities for the first nine months of 2023 primarily resulted from borrowings of $100.5 million of FHLB advances and a $9.2 million increase in advance payments by borrowers for taxes and insurance, partially offset by $93.5 million in principal payments on FHLB advances. Net cash provided by financing activities for the first nine months of 2022 primarily resulted from borrowings of $10.0 million of FHLB advances and a $8.4 million increase in advance payments by borrowers for taxes and insurance, partially offset by $8.5 million in principal payments on FHLB advances, a $5.2 million decrease in deposits, $2.0 million to repurchase the company's common stock and $1.1 million to purchase additional shares for the company's ESOP.

 

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 September 30, 2023, PyraMax Bank exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of $62.2 million, or 11.1% of adjusted total assets, which is above the well-capitalized required level of $28.1 million, or 5.0%. The Bank had total risk-based capital of $66.7 million, or 16.1% of risk-weighted assets, which is above the well-capitalized required level of $41.4 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.

 

50


 

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 as the 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.

 

51


 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

Item 4. Controls and Procedures

 

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2023. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

 

There were no changes in the Company’s internal control over financial reporting in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the third quarter of 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

We are not involved in any pending legal proceedings as a plaintiff or defendant other than routine legal proceedings occurring in the ordinary course of business, and at September 30, 2023, 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, 2022 Annual Report on Form 10-K and March 31, 2023 Quarterly Report on Form 10-Q as filed with the Securities and Exchange Commission.

 

Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities

 

Common Stock Repurchases. The following table presents information regarding shares of our common stock repurchased during the three months ended September 30, 2023.

 

Period

 

Total Number of Shares (or Units) Purchases (1)

 

 

Weighted Average Price Paid per Share (or Unit)

 

 

Total Number of Shares (or Units) Purchased as Part of a Publicly Announced Plans or Programs

 

 

Maximum Number of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs

 

 

 

 

 

 

 

 

 

 

July 1 to July 31, 2023

 

 

6,151

 

 

 

7.73

 

 

 

6,151

 

 

 

610,916

 

August 1 to August 31, 2023

 

 

14,761

 

 

 

7.38

 

 

 

14,761

 

 

 

596,155

 

September 1 to September 30, 2023

 

 

11,195

 

 

 

7.15

 

 

 

11,195

 

 

 

584,960

 

 

On July 29, 2022, the Company adopted a stock repurchase program. On August 26, 2022, the Company received a non-objection letter from the FRB permitting the Company to repurchase 319,766 shares of its common stock, which represented 5% of the shares outstanding at the time discussions were held with the FRB. The Company began purchasing shares on September 1, 2022 and as of June 7, 2023, the Company had repurchased all 319,766 shares for a total purchase price of $3.4 million.

 

On April 28, 2023, the Company adopted a second stock repurchase program. On June 9, 2023, the Company received a non-objection letter from the FRB permitting the Company to repurchase 621,522 shares of its common stock, which represented 10% of the shares outstanding at the time discussions were held with the FRB. The Company began purchasing shares on June 15, 2023 and as of September 30, 2023, the Company had repurchased 36,562 shares for a total purchase price of $270,000.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

52


 

Item 6. Exhibits

 

Exhibit

Number

Description

3.1

Articles of Incorporation 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 September 30, 2023, formatted in iXBRL (Inline 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 September 30, 2023, formatted in iXBRL (contained in Exhibit 101.0) *

_____________

* Furnished, not filed.

53


 

SIGNATURES

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

 

 

 

1895 BANCORP OF WISCONSIN, INC.

 

 

 

 

 

 

Date: November 9, 2023

 

/s/ David R. Ball

 

 

David R. Ball

 

 

President and Chief Executive Officer

 

 

 

 

 

 

Date: November 9, 2023

 

/s/ Steven T. Klitzing

 

 

Steven T. Klitzing

 

 

Executive Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

 

54